Notice is hereby given that a joint special meeting of shareholders (the Special
Meeting) of BlackRock MuniHoldings Investment Quality Fund (NYSE Ticker: MFL) (MFL) and BlackRock Municipal Income Fund, Inc. (NYSE Ticker: MUI) (MUI or the Acquiring Fund, and together with MFL, the
Funds, and each, a Fund) will be held on February 4, 2022 at [·] (Eastern time) for the following purposes:
The Reorganization is
contingent upon the completion of the Acquiring Fund VMTP Refinancing. If the Acquiring Fund VMTP Refinancing is not completed prior to the Closing Date of the Reorganization, then the Reorganization will not be consummated.
If the Reorganization is not consummated, then each Fund would continue to exist and operate on a standalone basis.
The Funds are soliciting the vote of their common shareholders on Proposal 1(A) and Proposal 2
through the joint proxy statement/prospectus.
Each Fund is separately soliciting the votes
of its respective preferred shareholders on each proposal through a separate proxy statement and not through the joint proxy statement/prospectus.
Because of our concerns regarding the coronavirus disease (COVID-19) pandemic, the Special Meeting will be held in a virtual meeting format only.
Shareholders will not have to travel to attend the Special Meeting but will be able to view the meeting live, have a meaningful opportunity to participate, including the ability to ask questions of management, and cast their votes by accessing a web
link.
The officers or trustees of each Fund named as proxies by shareholders may participate in the
Special Meeting by remote communications, including, without limitation, by means of a conference telephone or similar communications equipment by means of which all persons participating in the Special Meeting can hear and be heard by each other,
and the participation of such officers or trustees in the Special Meeting pursuant to any such communications system shall constitute presence at the Special Meeting.
JOHN M. PERLOWSKI
This Proxy Statement is furnished to you as a holder of (i) Variable Rate Demand Preferred Shares (VRDP Shares and the holders
thereof, VRDP Holders) of BlackRock MuniHoldings Investment Quality Fund (NYSE Ticker: MFL) (MFL or the Target Fund) and/or (ii) Variable Rate Muni Term Preferred Shares (VMTP Shares and the
holders thereof, VMTP Holders) of BlackRock Municipal Income Fund, Inc. (NYSE Ticker: MUI) (MUI or the Acquiring Fund and together with MFL, the Funds, and each, a Fund) in connection with
the solicitation of proxies by each Funds Board of Trustees or Board of Directors, as applicable (the Board, the members of which are referred to as Board Members). The proxies will be voted at the joint special meeting
of the shareholders of each Fund and at any and all adjournments, postponements and delays thereof (the Special Meeting). The Special Meeting will be held on February 4, 2022 at [·] (Eastern time) to consider the proposals set forth below and discussed in greater detail elsewhere in this Proxy Statement. Because of our concerns regarding the coronavirus
disease (COVID-19) pandemic, the Special Meeting will be held in a virtual meeting format only. Shareholders will not have to travel to attend the Special Meeting, but will be able to view the meeting live, have a meaningful opportunity to
participate, including the ability to ask questions of management, and cast their votes by accessing a web link. If you are unable to attend the Special Meeting or any adjournment or postponement thereof, the Board of your Fund recommends that you
vote your preferred shares, by completing and returning the enclosed proxy card or by recording your voting instructions by telephone or via the internet. The approximate mailing date of this Proxy Statement and accompanying form of proxy is
December [10], 2021.
It is expected that the effective date of the
Reorganization (the Closing Date) will be sometime during the [last quarter of 2021], but they may be at a different time as described herein. The term Combined Fund refers to the Acquiring Fund as the surviving Fund after
the consummation of the Reorganization.
The Reorganization is contingent
upon the completion of the Acquiring Fund VMTP Refinancing. If the Acquiring Fund VMTP Refinancing is not completed prior to the Closing Date, then the Reorganization will not be consummated.
If the Reorganization is not consummated, then each Fund would continue to
exist and operate on a standalone basis.
The Board of each Fund has
determined that including these proposals applicable to preferred shareholders of the Funds in one Proxy Statement will reduce costs and is in the best interest of each Funds shareholders.
Distribution to the shareholders of this Proxy Statement and the accompanying
materials will commence on or about [·], 2021.
Shareholders of record of each Fund as of the close of business on December 7, 2021 (the Record Date) are entitled to notice of and to
vote at the Special Meeting or any adjournment or postponement thereof.
Shareholders of each Fund are entitled to one vote for each common share or VRDP Share or VMTP Share, as applicable (each, a Share), held,
with no Shares having cumulative voting rights. Preferred shareholders of each Fund will have equal voting rights with the common shareholders of such Fund with respect to the proposals that require the vote of the Funds VRDP Shares or VMTP
Shares, as applicable, and common shares as a single class. The quorum and voting requirements for each Fund are described in the section herein entitled Vote Required and Manner of Voting Proxies.
This Proxy Statement is only being delivered to the preferred shareholders of
each Fund. Each Fund is separately soliciting the votes of its respective common shareholders on each of the foregoing proposals that require the vote of the common shareholders and preferred shareholders as a single class through a separate joint
proxy statement/prospectus and not through this Proxy Statement
MFL is
formed as a Massachusetts business trust. The Acquiring Fund is formed as a Maryland corporation. Each of MFL and the Acquiring Fund is a diversified, closed-end management investment company registered under the 1940 Act. The Reorganization seeks
to achieve certain economies of scale and other operational efficiencies by combining two funds that have similar investment objectives and similar investment strategies, policies and restrictions.
Assuming the Reorganization receives the necessary approvals, the Acquiring
Fund will acquire substantially all of the assets and assume substantially all of the liabilities of MFL in exchange solely for newly issued common shares and VRDP Shares of the Acquiring Fund in the form of book-entry interests. The Acquiring Fund
will list the newly issued common shares on the New York Stock Exchange (NYSE). Such newly issued Acquiring Fund Shares will be distributed to MFL shareholders (although cash may be distributed in lieu of fractional common shares) and
MFL will terminate its registration under the 1940 Act and liquidate, dissolve and terminate in accordance with its Declaration of Trust and Massachusetts law. The Acquiring Fund will continue to operate after the Reorganization as a registered,
diversified, closed-end management investment company with the investment objective, investment strategies, investment policies and investment restrictions described in this Proxy Statement.
The Fund(s) in which you owned Shares on the Record Date is named on the proxy card. If you owned Shares
in both Funds on the Record Date, you will receive more than one proxy card. Even if you plan to attend the Special Meeting, please sign, date and return EACH proxy card you receive or, if you provide voting instructions by telephone or via the
Internet, please vote on each proposal affecting EACH Fund you own. If you vote by telephone or via the Internet, you will be asked to enter a unique code that has been assigned to you, which is printed on your proxy card(s). This code is designed
to confirm your identity, provide access into the voting website and confirm that your voting instructions are properly recorded.
All properly executed proxies received prior to the Special Meeting will be voted in accordance with the instructions marked thereon or otherwise as
provided therein. On any matter coming before the Special Meeting as to which a shareholder has specified a choice on that shareholders proxy, the Shares will be voted accordingly. If a proxy card is properly executed and returned and no
choice is specified with respect to a proposal, the Shares will be voted FOR the proposal. Shareholders who execute proxies or provide voting instructions by telephone or via the Internet may revoke them with respect to a proposal at any
time before a vote is taken on the proposal by filing with the applicable Fund a written notice of revocation (addressed to the Secretary of the Fund at the principal executive offices of the Fund at the New York address provided herein), by
delivering a duly executed proxy bearing a later date or by attending the Special Meeting and voting by ballot, in all cases prior to the exercise of the authority granted in the proxy card. Merely attending the Special Meeting, however, will not
revoke any previously executed proxy. If you hold Shares through a bank or other intermediary, please consult your bank or intermediary regarding your ability to revoke voting instructions after such instructions have been provided.
For information regarding how to access the Special Meeting, please contact Georgeson LLC, the firm assisting us in the
solicitation of proxies, toll free at 1-888-505-9118.
This Proxy Statement sets forth
concisely the information that preferred shareholders of each Fund should know before voting on the proposals set forth herein. Please read it carefully and retain it for future reference. Copies of each Funds most recent annual report and
semi-annual report can be obtained on a website maintained by BlackRock, Inc. (BlackRock) at www.blackrock.com. In addition, each Fund will furnish, without charge, a copy of its most recent annual report or semi-annual report to any
shareholder upon request. Any such request should be directed to BlackRock by calling (800) 882-0052 or by writing to the respective Fund at 100 Bellevue Parkway, Wilmington, Delaware 19809. The annual and semi-annual reports of each Fund are
available on the EDGAR Database on the SECs website at www.sec.gov. The address of the principal executive offices of the Funds is 100 Bellevue Parkway, Wilmington, Delaware 19809, and the telephone number is (800) 882-0052.
Each Fund is subject to the informational requirements of the Securities Exchange Act of 1934
(the Exchange Act) and the 1940 Act and, in accordance therewith, files reports, proxy statements, proxy materials and other information with the Securities and Exchange Commission (the SEC). Materials filed with the SEC can
be downloaded from the SECs website at www.sec.gov. You may also request copies of these materials, upon payment at the prescribed rates of a duplicating fee, by electronic request to the SECs e-mail address (publicinfo@sec.gov).
Reports, proxy statements and other information concerning the Funds may also be inspected at the offices of the NYSE, 20 Broad Street, New York, New York 10005.
BlackRock updates performance information and certain other data for the Funds on a monthly basis on its website in the Closed-End Funds section of
www.blackrock.com as well as certain other material information as necessary from time to time. Investors and others are advised to check the website for updated performance information and the release of other material information about the Funds.
References to BlackRocks website are intended to allow investors public access to information regarding the Funds and do not, and are not intended to, incorporate BlackRocks website in this Proxy Statement.
Please note that only one copy of shareholder documents, including annual or semi-annual
reports and proxy materials, may be delivered to two or more shareholders of the Funds who share an address, unless the Funds have received instructions to the contrary. This practice is commonly called householding and it is intended to
reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. To request a separate copy of any shareholder document or for
instructions as to how to request a separate copy of these documents or as to how to request a single copy if multiple copies of these documents are received, shareholders should contact the respective Fund at the address and phone number set forth
above.
The common shares of BlackRock Municipal Income Fund, Inc. are listed on the NYSE
under the ticker symbol MUI and will continue to be so listed after the completion of the Reorganization. The common shares of BlackRock MuniHoldings Investment Quality Fund are listed on the NYSE under the ticker symbol MFL.
The preferred shares of each Fund are not listed on any exchange and have not been registered under the Securities Act of 1933 (the Securities Act), or any state securities laws, and unless so registered under the Securities Act, may not
be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws.
Accordingly, the VRDP Shares to be issued in the Reorganizations are expected to be issued only to holders of VRDP Shares of MFL that are qualified institutional buyers (as defined in Rule 144A under the Securities Act) in accordance
with the exemption from the registration requirements of the Securities Act provided by Section 4(a)(2) of the Securities Act and are subject to restrictions on transfer.
PROPOSAL 2 ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganization described under Proposal
1: Reorganization of the Funds, the common shareholders and the VMTP Holders of the Acquiring Fund are being asked to approve the issuance of additional Acquiring Fund common shares.
Please see Information about the Common Shares of the Funds for
information about the Funds common shares.
In the Reorganization,
the Acquiring Fund will acquire substantially all of the assets of MFL and assume substantially all of the liabilities of MFL in exchange for newly issued Acquiring Fund common shares, with a par value of $0.001 per share, and newly issued Acquiring
Fund VRDP Shares, with a par value of $[0.001] per share and liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the MFL VRDP Shares up to and including the day immediately preceding the
Closing Date if such dividends have not been paid prior to the Closing Date). The Acquiring Fund will list the newly issued common shares on the NYSE. MFL will distribute Acquiring Fund Shares received by it pro rata to MFL shareholders (although
cash may be paid in lieu of any fractional common shares). The newly-issued Acquiring Fund Shares will be issued in the form of book-entry interests. Such distribution of Acquiring Fund Shares to MFL shareholders will be accomplished by opening new
accounts on the books of the Acquiring Fund in the names of the shareholders of MFL and transferring to those shareholder accounts Acquiring Fund Shares.
The Acquiring Fund will continue to operate after the Reorganization as a registered, diversified, closed-end management investment company with the
investment objective, investment strategies, investment policies and investment restrictions described in this Proxy Statement. As a result of the Reorganization, however, a shareholder of each Fund may hold a reduced percentage of ownership in the
larger Combined Fund than such shareholder did in any of the individual Funds before the Reorganizations.
If the Issuance with respect to the Reorganization is not approved, the Investment Advisor may, in connection with ongoing management of each Fund and
its product line, recommend alternative proposals to the Board of that Fund.
The Board of the Acquiring Fund recommends that the Acquiring Fund VMTP Holders vote FOR the Issuance at the Special Meeting.
The Issuance contemplated by Proposal 2 requires the affirmative vote of the
holders of a majority of the outstanding Acquiring Fund common shares and Acquiring Fund VMTP Shares present at the Special Meeting or represented by proxy voting as a single class.
Subject to the requisite approval of the shareholders of each Fund with respect
to the Reorganization and the completion of the Acquiring Fund VMTP Refinancing prior to the Closing Date of the Reorganization, as well as certain consents, confirmations and/or waivers from various third parties, including the liquidity provider
with respect to the outstanding MFL VRDP Shares, it is expected that the Closing Date of the Reorganization will be sometime during the [last quarter of 2021], but it may be at a different time as described herein.
The affirmative vote of shareholders representing at least a majority of the
outstanding Acquiring Fund common shares and Acquiring VMTP Shares present at the Special Meeting or represented by proxy, voting together as a single class, is required to approve the Issuance. For additional information regarding voting
requirements, see Vote Required and Manner of Voting Proxies.
26
INFORMATION ABOUT THE PREFERRED SHARES OF THE FUNDS
MFLs Declaration of Trust authorizes the issuance of an unlimited number
of common shares, par value $0.10 per share, and 1,000,000 preferred shares. The Acquiring Funds charter [authorizes the issuance of [·] million shares, par value
$[·] per share, all of which were initially classified as common shares.] The Board of the Acquiring Fund is authorized, however, to reclassify any unissued common shares
to preferred shares without the approval of its common shareholders.
Upon
the Closing Date of the Reorganization, MFL VRDP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VRDP Share, par value $[0.001] per share and
with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the MFL VRDP Shares up to and including the day immediately preceding the Closing Date of the Reorganization if such dividends have
not been paid prior to the Closing Date), in exchange for each MFL VRDP Share held by the MFL VRDP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VRDP Shares may be of the same series as the Acquiring Funds VRDP
Shares issued in connection with the Acquiring Fund VMTP Refinancing or a substantially identical series. No fractional Acquiring Fund VRDP Shares will be issued. MFL VRDP Holders will receive the same number of Acquiring Fund VRDP Shares, with
terms substantially identical to the outstanding MFL VRDP Shares, held by such holders immediately prior to the closing of the Reorganization, with the only significant difference being that the outstanding VRDP Shares of MFL have a mandatory
redemption date of [October 1, 2041], and the newly issued Acquiring VRDP Shares are expected to have a mandatory redemption date of 30 years after the completion of the Acquiring Fund VMTP Refinancing and its issuance of VRDP Shares.
The terms of the Acquiring Fund VRDP Shares to be issued in connection with the
Reorganization will be substantially identical to the terms of the Acquiring Funds VRDP Shares to be issued in connection with the Acquiring Fund VMTP Refinancing and will rank on parity with such Acquiring Fund VRDP Shares as to the payment
of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The newly issued Acquiring Fund VRDP Shares will be subject to the same Special Rate Period (including the terms thereof)
applicable to the Acquiring Fund VRDP Shares outstanding as of the Closing Date of the Reorganization. Such Special Rate Period is expected to terminate on [·], 2022,
unless extended. The Reorganization will not result in any changes to the terms of the Acquiring Funds VRDP Shares outstanding as of the Closing Date. MFL has issued VRDP Shares, $100,000 liquidation value per share. In connection with the
Reorganization, and assuming that the Acquiring Fund VMTP Refinancing is completed prior to the Closing Date of the Reorganizations, the Acquiring Fund expects to issue 2,746 additional VRDP Shares to MFL VRDP Holders. Following the completion of
the Reorganization, the Combined Fund is expected to have 5,617 VRDP Shares outstanding.
Set forth below is information about each Funds outstanding preferred shares as of [·], 2021.
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Fund
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Title of
Class
|
|
Amount
Authorized
|
|
Amount
Authorized
Under Each
Series
|
|
Amount
Held by
Fund for
its Own
Account
|
|
Amount
Outstanding
Exclusive of
Amount
Shown
in
Previous
Column
|
|
Issue Date
|
|
Mandatory/
Term
Redemption
Date
|
Target Fund (MFL)
|
|
VRDP Shares
|
|
[·]
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|
Series W-7 [·]
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|
0
|
|
[·]
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|
[11/29/2012]
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[10/1/2041]
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Acquiring Fund (MUI)
|
|
VMTP Shares
|
|
2,871
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|
Series W-7 2,871
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|
0
|
|
[·]
|
|
[3/22/2012]
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|
[3/30/2022]
|
The outstanding preferred shares of each Fund
are fully paid and non-assessable and have no preemptive or cumulative voting rights.
Below is a table that details, as of September 21, 2021, (i) each Funds current leverage attributable to preferred shares as a percentage of
its total net assets and (ii) the Combined Funds leverage attributable to preferred shares on a pro
27
forma basis as a percentage of its total net assets assuming the Reorganization was consummated as of September 21, 2021.
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Fund
|
|
Title of Class
|
|
Shares
Outstanding
|
|
Liquidation
Preference
Per Share
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|
|
Aggregate
Liquidation
Preference
|
|
|
Total
Managed
Assets
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|
|
As
Percentage
of Net
Assets
|
|
Target Fund (MFL)
|
|
VRDP Shares
|
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2,746
|
|
$
|
100,000
|
|
|
|
274,600,000
|
|
|
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952,731,331
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|
|
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47.3
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%
|
Acquiring Fund (MUI)
|
|
VMTP Shares
|
|
2,871
|
|
$
|
100,000
|
|
|
|
287,100,000
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|
|
|
995,796,326
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|
|
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46.6
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%
|
Pro forma Combined Fund (MFL into MUI)
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|
VRDP Shares
|
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5,617
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$
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100,000
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|
|
|
561,700,000
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|
|
|
1,948,527,657
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|
|
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46.9
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%
|
MFL has issued VRDP Shares, $100,000
liquidation value per share. The Acquiring Fund has issued VMTP Shares, and following the Acquiring Fund VMTP Refinancing, the Acquiring Fund will issue, VRDP Shares, $100,000 liquidation value per share, with substantially identical terms to those
of the outstanding MFL VRDP Shares, except that the newly issued Acquiring Fund VRDP Shares are expected to have a mandatory redemption date of [30 years] after the completion of the Acquiring Fund VMTP Refinancing and its issuance of VRDP Shares.
The outstanding VRDP Shares of MFL have a mandatory redemption date of [October 1, 2041]. The outstanding VRDP Shares of MFL are currently in a one-year special rate period that will end on [·], 2022, unless extended (the Special Rate Period). The Acquiring Fund VRDP Shares to be issued in connection with the Acquiring Fund VMTP Refinancing will also be
subject to a special rate period, and the terms of the Acquiring Fund VRDP Shares during such special rate period will be substantially identical to the terms of the Special Rate Period for the outstanding MFL VRDP Shares. The terms of the Acquiring
Fund VRDP Shares issued in the Reorganization will be substantially identical to the terms of MFLs VRDP Shares as of the Closing Date of the Reorganization.
The VRDP Shares and VMTP Shares were offered to qualified institutional buyers in private transactions exempt from registration under the Securities
Act.
The annualized dividend rates for the preferred shares for each
Funds most recent fiscal year end were as follows:
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|
|
Fund
|
|
Rate
|
Target Fund (MFL)
|
|
1.80%
|
Acquiring Fund (MUI)
|
|
1.03%
|
If the Reorganization Agreement is approved by
MFL shareholders, prior to the Closing Date of the Reorganization, it is expected that the Acquiring Fund will issue VRDP Shares with terms substantially identical to the terms of the outstanding MFL VRDP Shares and use the proceeds from such
issuance to redeem all outstanding VMTP Shares of the Acquiring Fund. The Acquiring Fund VRDP Shares that will be issued in connection with the Acquiring Fund VMTP Refinancing will have the same $100,000 liquidation preference per share, dividend
period, dividend payment date, voting rights, redemption provisions, remarketing procedures, mandatory purchase events, mandatory tender events, transfer restrictions and covenants with respect to effective leverage, asset coverage and eligible
investments, mechanism for determining the applicable dividend rate and maximum rate, and the same liquidity provider, remarketing agent and tender and paying agent as the outstanding MFL VRDP Shares. The Acquiring Fund VRDP Shares will also be
subject to a special rate period and the terms of the Acquiring Funds VRDP Shares during such special rate period will be substantially identical to the terms of the Special Rate Period for the outstanding MFL VRDP Shares, including the same
mechanism for determining the applicable dividend rate and maximum rate, redemption premiums and transfer restrictions. If the Acquiring Fund VMTP Refinancing is not completed prior to the Closing Date of the Reorganization, then the Reorganization
will not be consummated. The terms of the Acquiring Funds VRDP Shares may change from time to time, subject to Board approval.
In connection with the Reorganization, and assuming that the Acquiring Fund VMTP Refinancing is completed prior to the Closing Date of the
Reorganization, the Acquiring Fund expects to issue [·] additional VRDP Shares to MFL VRDP Holders. Following the completion of the Reorganization, the Combined Fund is
expected to have [·] VRDP Shares outstanding. Assuming the Reorganization is approved by shareholders, and the Acquiring Fund VMTP Refinancing is completed prior to the
Closing Date of the Reorganization, upon the Closing Date of the
28
Reorganization, MFL VRDP Holders will receive on a one-for-one basis one newly issued Acquiring Fund VRDP Share,
par value $[0.001] per share and with a liquidation preference of $100,000 per share (plus any accumulated and unpaid dividends that have accrued on the MFL VRDP Shares up to and including the day immediately preceding the Closing Date of the
Reorganization if such dividends have not been paid prior to the Closing Date), in exchange for each MFL VRDP Share held by the MFL VRDP Holders immediately prior to the Closing Date. The newly issued Acquiring Fund VRDP Shares may be of the same
series as the Acquiring Funds VRDP Shares issued in connection with the Acquiring Fund VMTP Refinancing or a substantially identical series. No fractional Acquiring Fund VRDP Shares will be issued. The terms of the Acquiring Fund VRDP Shares
to be issued in connection with the Reorganization will be substantially identical to the terms of the Acquiring Funds VRDP Shares to be issued in connection with the Acquiring Fund VMTP Refinancing and will rank on parity with such Acquiring
Fund VRDP Shares as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Acquiring Fund. The newly issued Acquiring Fund VRDP Shares will be subject to the same special rate
period (including the terms thereof) applicable to the Acquiring Fund VRDP Shares outstanding as of the Closing Date of the Reorganization. Such special rate period is expected to terminate on [·], 2022, unless extended. The Reorganization will not result in any changes to the terms of the Acquiring Funds VRDP Shares outstanding as of the Closing Date.
The Acquiring Fund VRDP Shares to be issued in the Acquiring Fund VMTP
Refinancing and in the Reorganization will have terms that are substantially identical to the terms of the outstanding MFL VRDP Shares, except that the newly issued Acquiring Fund VRDP Shares are expected to have a mandatory redemption date of [30
years] after the completion of the Acquiring Fund VMTP Refinancing and its issuance of VRDP Shares. The outstanding VRDP Shares of MFL have a mandatory redemption date of [October 1, 2041]. A Fund may designate any succeeding subsequent rate period
of the VRDP Shares as a special rate period subject to the restrictions and requirements set forth in the governing instrument for such Funds VRDP Shares. During a special rate period, a Fund may choose to modify the terms of the
VRDP Shares as permitted by the governing instrument for such Funds VRDP Shares, including, for example, special provisions relating to the calculation of dividends and the redemption of the VRDP Shares. The outstanding VRDP Shares of MFL are
currently in a one-year Special Rate Period that will end on [·], 2022, unless extended.. The Acquiring Fund VRDP Shares to be
issued in connection with the Acquiring Fund VMTP Refinancing and in the Reorganization will also be subject to a special rate period, and the terms of the Acquiring Fund VRDP Shares during such special rate period will be substantially identical to
the terms of the Special Rate Period for the outstanding MFL VRDP Shares.
Description of the VRDP Shares of MFL
MFLs VRDP Shares have the benefit of an unconditional demand feature pursuant to a purchase agreement provided by [Bank of America, N.A.] acting
as liquidity provider to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon the occurrence of certain events (the Liquidity Facility). MFL entered into a fee
agreement with the liquidity provider (the Fee Agreement) in connection with the Liquidity Facility that require a per annum liquidity fee payable to the liquidity provider. The Fee Agreement between MFL and the liquidity provider is
scheduled to expire, unless renewed or terminated in advance, on [August 31, 2022].
The Liquidity Facility requires the liquidity provider to purchase all of MFLs VRDP Shares tendered for sale that were not successfully
remarketed. MFL is required to redeem its VRDP Shares owned by the liquidity provider after six months of continuous, unsuccessful remarketing. Upon the occurrence of the first unsuccessful remarketing, MFL is required to segregate liquid assets to
fund the redemption.
In the event the VRDP Shares Purchase Agreement (the
Purchase Agreement) for MFL is not renewed, and MFL does not arrange for a Purchase Agreement with an alternate liquidity provider, MFLs VRDP Shares will be subject to mandatory purchase by the liquidity provider prior to the
termination of the Purchase Agreement. There is no assurance MFL will replace such redeemed VRDP Shares with any other preferred shares or other form of leverage.
[Except during the Special Rate Period (as defined and described below),] VRDP Holders have the right to give notice on any business day to tender
MFLs VRDP Shares for remarketing in seven days, the VRDP Shares are subject to a mandatory tender for remarketing upon the occurrence of certain events, and should a remarketing be unsuccessful, the dividend rate for such VRDP Shares will
reset to a maximum rate as defined in the governing documents of the
29
VRDP Shares. MFLs VRDP Shares are also subject to certain restrictions on transfer outside of the remarketing process. Except during the Special Rate Period, MFL may incur remarketing fees
at the annual rate of [0.10]% on the aggregate principal amount of the MFLs VRDP Shares.
MFL is required to redeem its VRDP Shares on [October 1, 2041], the mandatory redemption date for such VRDP Shares, unless earlier redeemed or
repurchased. Six months prior to the mandatory redemption date, MFL is required to begin to segregate liquid assets with its custodian to fund the redemption. In addition, MFL is required to redeem certain of its outstanding VRDP Shares if it fails
to maintain certain asset coverage, basic maintenance amount or leverage requirements.
Subject to certain conditions, MFLs VRDP Shares may be redeemed, in whole or in part, at any time at the option of MFL. The redemption price per
VRDP Share is equal to the liquidation value per VRDP Share plus any outstanding unpaid dividends.
[Except during the Special Rate Period,] dividends on MFLs VRDP Shares are payable monthly at a variable rate set weekly by the remarketing
agent. Such dividend rates are generally based upon a spread over a base rate and cannot exceed a maximum rate. In the event of a failed remarketing, the dividend rate of the VRDP Shares will be reset to a maximum rate. The maximum rate is
determined based on, among other things, the long-term preferred share rating assigned to the VRDP Shares and the length of time that the VRDP Shares fail to be remarketed. The maximum rate of the VRDP Shares will not exceed [15]% per annum,
exclusive of any applicable gross-up payments or increased dividend payment relating to the inclusion in any dividend of net capital gains or ordinary income taxable for regular U.S. federal income tax
purposes. At the date of issuance, the VRDP Shares of MFL were assigned a long-term rating of Aaa from Moodys and AAA from Fitch. Subsequent to the issuance of the VRDP Shares, Moodys completed a review of its methodology for rating
securities issued by registered closed-end funds. As of September 21, 2021, the VRDP Shares of MFL were assigned a long-term rating of Aa1 from Moodys under its new ratings methodology. The VRDP
Shares of MFL were assigned a long-term rating of AA from Fitch.
[The
short-term ratings on the VRDP Shares were withdrawn by Moodys, Fitch and/or S&P at the commencement of the Special Rate Period, as described below.] The short-term ratings on MFLs VRDP Shares are directly related to the short-term
ratings of the liquidity provider for such VRDP Shares. Changes in the credit quality of the liquidity provider could cause a change in the short-term credit ratings of the VRDP Shares. [Except during the Special Rate Period,] a change in the
short-term credit rating of the liquidity provider or the VRDP Shares may adversely affect the dividend rate paid on such VRDP Shares, although the dividend rate paid on the VRDP Shares is not directly related to the short-term rating. The liquidity
provider may be terminated prior to the scheduled termination date if the liquidity provider fails to maintain short-term debt ratings in one of the two highest rating categories.
MFLs VRDP Shares are senior in priority to MFLs common shares,
respectively, as to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of MFL. MFLs VRDP Shares will rank on parity with other preferred shares of MFL as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of MFL. The 1940 Act prohibits the declaration of any dividend on MFLs common shares or the repurchase of MFLs common shares if MFL fails
to maintain the asset coverage of at least 200% of the liquidation preference of the outstanding VRDP Shares. In addition, pursuant to the VRDP Shares governing instruments, MFL is restricted from declaring and paying dividends on classes of
shares ranking junior to or on parity with the VRDP Shares or repurchasing such shares if MFL fails to declare and pay dividends on the VRDP Shares, redeem any VRDP Shares required to be redeemed under the VRDP Shares governing instruments or
comply with the basic maintenance amount requirement of the agencies rating the VRDP Shares.
MFLs VRDP Holders have voting rights equal to MFLs common shareholders (one vote per Share) and will vote together with such common
shareholders (one vote per Share) as a single class. However, MFLs VRDP Holders, voting as a separate class, are also entitled to elect two Board Members for MFL. In addition, the 1940 Act requires that along with approval by shareholders that
might otherwise be required, the approval of a 1940 Act Majority of the VRDP Holders of MFL, voting separately as a class, would be required to (a) adopt any plan of reorganization that would adversely affect the VRDP Shares of MFL,
(b) change MFLs sub-classification as a closed-end management investment company or change its fundamental investment restrictions or (c) change its
business so as to cease to be an investment company.
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[On [October 22, 2015], MFL commenced a special rate period ending [April 18, 2018] with respect to its
VRDP Shares (the Special Rate Period). This Special Rate Period was extended and is currently set to expire on [April 15, 2022]. The VRDP Holders and the applicable Fund may mutually agree to extend the Special Rate Period prior to the
expiration of the Special Rate Period. If the Special Rate Period is not extended, the VRDP Shares will revert to remarketable securities upon the termination of the Special Rate Period and will be remarketed and available for purchase by qualified
institutional investors. The Liquidity Facility remains in effect for the duration of the Special Rate Period and the VRDP Shares are still subject to mandatory redemption by the applicable Fund on their respective mandatory redemption date.
However, the VRDP Shares will not be remarketed or subject to optional or mandatory tender events during such time. The short-term ratings of the VRDP Shares were withdrawn by Moodys, Fitch and/or S&P upon the commencement of the Special
Rate Period. Short-term ratings may be re-assigned upon the termination of the Special Rate Period.
During the Special Rate Period, MFL is required to maintain the same asset coverage, basic maintenance amount and leverage requirements for the VRDP
Shares as was required prior to the Special Rate Period.
During the
Special Rate Period, MFL will pay nominal fees to the liquidity provider and remarketing agent, but will instead pay dividends monthly based on the sum of Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Index and a
percentage per annum based on the long-term ratings assigned to the VRDP Shares (Ratings Spread).]
As of September 21, 2021, the MFL VRDP Shares were assigned long-term ratings of Aa1 from Moodys and AA from Fitch. The annualized dividend
rate of the MFL VRDP Shares for the fiscal year ended August 31, 2021 was 0.91%
The Ratings Spread will increase in the event the VRDP Shares are rated below Aaa/AA by all of the rating agencies rating the VRDP Shares at the time
such Ratings Spread is determined, up to a maximum of 4.00% in the event the VRDP Shares are either rated below Baa3/BBB- by at least one of the rating agencies then rating the VRDP Shares or not rated by any
rating agency.
Under MFLs Fee Agreement with the liquidity provider,
to the extent the liquidity provider together with certain affiliates individually or in the aggregate own at least 20% of the outstanding VRDP Shares and MFL has not failed to pay dividends on the VRDP Shares for two years, the liquidity provider
agreed to enter into and maintain a voting trust agreement and convey into the voting trust the right to vote all of its VRDP Shares owned by it or such affiliates, with respect to: (i) the election of the two members of the Board for which
VRDP Holders are entitled to vote under the 1940 Act and all other rights given to VRDP Holders with respect to the election of the Board; (ii) the conversion of MFL from a closed-end management
investment company to an open-end fund, or to change the Funds classification from diversified to non-diversified; (iii) the deviation from a policy in
respect of concentration of investments in any particular industry or group of industries as recited in MFLs registration statement; and (iv) borrowing money, issuing senior securities, underwriting securities issued by other persons,
purchasing or selling real estate or commodities or making loans to other persons other than in accordance with the recitals of policy with respect thereto in MFLs registration statement.
If the Special Rate Period is not extended, the VRDP Shares will revert back to
remarketable securities and will be remarketed and available for purchase by qualified institutional investors. There is no assurance that the VRDP Shares will be remarketed or purchased by investors after the termination of the Special Rate Period.
If the VRDP Shares are not remarketed or purchased, then a failed remarketing will occur. As described above, in the event of a failed remarketing, the dividend rate of the VRDP Shares will be reset to the maximum rate and the VRDP Shares that have
not been remarketed are required to be purchased by the liquidity provider and subject to redemption by MFL after six months of continuous, unsuccessful remarketing.
Description of the VMTP Shares of the Acquiring Fund
If the Reorganization Agreement is approved by MFL shareholders, prior to the Closing Date of the Reorganization, it is expected that the Acquiring
Fund will issue VRDP Shares with terms substantially identical to the terms of the outstanding MFL VRDP Shares and use the proceeds from such issuance to redeem all of outstanding VMTP Shares of the Acquiring Fund.
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The Acquiring Funds VMTP Shares may be redeemed, in whole or in part, at any time at the option of
the Acquiring Fund. The redemption price per VMTP Share is equal to the liquidation preference per share plus any outstanding unpaid dividends. The Acquiring Fund is required to redeem its VMTP Shares on the term redemption date of the VMTP Shares,
unless earlier redeemed or repurchased or unless extended. Six months prior to the term redemption date of the VMTP Shares, the Acquiring Fund is required to begin to segregate liquid assets with the Acquiring Funds custodian to fund the
redemption. In addition, the Acquiring Fund is required to redeem certain of its outstanding VMTP Shares if it fails to comply with certain asset coverage, basic maintenance amount or leverage requirements.
Dividends on the Acquiring Funds VMTP Shares are declared daily and
payable monthly based on the sum of the SIFMA Municipal Swap Index and a percentage per annum based on the long-term ratings assigned to such VMTP Shares by the ratings agencies then rating the Acquiring Funds VMTP Shares. At the date of
issuance, the Acquiring Funds VMTP Shares were assigned long-term ratings of [Aaa] from Moodys and [AAA] from Fitch. Subsequent to the issuance of the Acquiring Funds VMTP Shares, Moodys completed a review of its methodology
for rating securities issued by registered closed-end funds. As of September 21, 2021, the Acquiring Funds VMTP Shares were assigned a long-term rating of Aa2 from Moodys under its
new rating methodology. The Acquiring Funds VMTP Shares were assigned a long-term rating of AA from Fitch. The dividend rate on the Acquiring Funds VMTP Shares is subject to
a step-up spread if the Acquiring Fund fails to comply with certain provisions, including, among other things, the timely payment of dividends, redemptions
or gross-up payments, and complying with certain asset coverage and leverage requirements. For the fiscal year ended April 30, 2021, the dividend rate of the Acquiring Fund VMTP Shares was
1.03%.
The Acquiring Funds VMTP Shares are subject to certain
restrictions on transfer, and the Acquiring Fund may also be required to register its VMTP Shares for sale under the Securities Act under certain circumstances. In addition, amendments to the Acquiring Funds VMTP Shares governing
documents generally require the consent of the holders of VMTP Shares.
The
Acquiring Funds VMTP Shares rank prior to the Acquiring Funds common shares as to the payment of dividends by the Acquiring Fund and distribution of assets upon dissolution or liquidation of the Acquiring Fund. The 1940 Act prohibits the
declaration of any dividend on the Acquiring Funds common shares or the repurchase of the Acquiring Funds common shares if the Acquiring Fund fails to maintain asset coverage of at least 200% of the liquidation preference of the
Acquiring Funds outstanding VMTP Shares. In addition, pursuant to the VMTP Shares governing instruments, the Acquiring Fund is restricted from declaring and paying dividends on classes of shares ranking junior to or on parity with the
Acquiring Funds VMTP Shares or repurchasing such shares if the Acquiring Fund fails to declare and pay dividends on the VMTP Shares, redeem any VMTP Shares required to be redeemed under the VMTP Shares governing instruments or comply
with the basic maintenance amount requirement of the ratings agencies rating the VMTP Shares.
The holders of the Acquiring Funds VMTP Shares have voting rights equal to the voting rights of the holders of the Acquiring Funds common
shares (one vote per share) and will vote together with holders of the Acquiring Funds common shares (one vote per share) as a single class on certain matters. However, the holders of the Acquiring Funds VMTP Shares, voting as a separate
class, are also entitled to elect two trustees to the Board of the Acquiring Fund. The holders of the Acquiring Funds VMTP Shares are also entitled to elect the Acquiring Funds full board of directors if dividends on the VMTP Shares are
not paid for a period of two years. The holders of the Acquiring Funds VMTP Shares are also generally entitled to a separate class vote to amend the VMTP Shares governing documents. In addition, the 1940 Act requires the approval of the
holders of a majority of any outstanding VMTP Shares, voting as a separate class, to (a) adopt any plan of reorganization that would adversely affect the VMTP Shares, (b) change the Acquiring
Funds sub-classification as a closed-end investment company or change its fundamental investment restrictions or (c) change its business
so as to cease to be an investment company.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Comparison of Risks
The Because of their similar investment objectives and investment strategies,
each Fund is subject to similar investment risks. With respect to the differences in risks, those risks of MFL that are not shared with the Acquiring Fund are generally as a result of differences in the Funds principal investment strategies
described above under SummaryInvestment Objective and Policies.
Each Fund utilizes leverage through the issuance of either VRDP Shares or VMTP Shares and TOBs. See The Acquiring Funds
InvestmentsLeverage; General Risks of Investing in the Acquiring FundLeverage Risk; and General Risks of Investing in the Acquiring FundTender Option Bond Risk. MFL currently leverages its assets
through the use of VRDP Shares and TOBs. The Acquiring Fund currently leverages its assets through the issuance of VMTP Shares and TOBs and is expected to continue to leverage its assets after the Closing Date of the Reorganization through the use
of VRDP Shares and TOBs. Please see Information about the Preferred Shares of the Funds for additional information about the preferred shares of each Fund.
In the normal course of business, each Fund invests in securities and enters into transactions where risks exist due to fluctuations in the market
(market risk) or failure of the issuer of a security to meet all its obligations (issuer credit risk). The value of securities held by the Funds may decline in response to certain events, including those directly involving the issuers whose
securities are owned by the Funds; conditions affecting the general economy; overall market changes; pandemics, epidemics and other global health events; local, regional or global political, social or economic instability; and currency and interest
rate and price fluctuations. Similar to issuer credit risk, the Funds may be exposed to counterparty credit risk, or the risk that an entity with which the Funds have unsettled or open transactions may fail to or be unable to perform on its
commitments.
The Combined Fund will be managed in accordance with the same
investment objective and investment strategies and policies, and subject to the same risks, as the Acquiring Fund. Risk is inherent in all investing. An investment in the common shares of the Acquiring Fund should not be considered a complete
investment program. Each shareholder should take into account the Acquiring Funds investment objective as well as the shareholders other investments when considering an investment in the Acquiring Fund. You may lose part or all of your
investment in the Acquiring Fund or your investment may not perform as well as other similar investments.
MFL VRDP Shares will be subject to the same risks that currently apply to the Acquiring Fund VMTP Shares and will apply to the Acquiring Fund VRDP
Shares, assuming the Acquiring Fund VMTP Refinancing is completed.
General Risks of Investing in the Acquiring Fund
Municipal Bond Market Risk. Economic exposure to the municipal securities market involves certain risks. The Acquiring Funds economic
exposure to municipal securities includes municipal securities in the Acquiring Funds portfolio and municipal securities to which the Acquiring Fund is exposed through the ownership of residual interests in municipal TOBs (TOB
Residuals). The municipal market is one in which dealer firms make markets in bonds on a principal basis using their proprietary capital, and during the financial crisis of 2007-2009 these firms capital was severely constrained. As a
result, some firms were unwilling to commit their capital to purchase and to serve as a dealer for municipal securities. Certain municipal securities may not be registered with the SEC or any state securities commission and will not be listed on any
national securities exchange. The amount of public information available about the municipal securities to which the Acquiring Fund is economically exposed is generally less than that for corporate equities or bonds, and the investment performance
of the Acquiring Fund may therefore be more dependent on the analytical abilities of the Investment Advisor than would be a fund investing solely in stocks or taxable bonds. The secondary market for municipal securities, particularly the below
investment grade securities to which the Acquiring Fund may be economically exposed, also tends to be less well-developed or liquid than many other securities markets, which may adversely affect the Acquiring Funds ability to sell such
securities at attractive prices or at prices approximating those at which the Acquiring Fund currently values them.
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In addition, many state and municipal governments that issue securities are under significant economic
and financial stress and may not be able to satisfy their obligations. The ability of municipal issuers to make timely payments of interest and principal may be diminished during general economic downturns and as governmental cost burdens are
reallocated among federal, state and local governments. The taxing power of any governmental entity may be limited by provisions of state constitutions or laws and an entitys credit will depend on many factors, including the entitys tax
base, the extent to which the entity relies on federal or state aid, and other factors which are beyond the entitys control. In addition, laws enacted in the future by Congress or state legislatures or referenda could extend the time for
payment of principal and/or interest, or impose other constraints on enforcement of such obligations or on the ability of municipalities to levy taxes. Issuers of municipal securities might seek protection under the bankruptcy laws. In the event of
bankruptcy of such an issuer, holders of municipal securities could experience delays in collecting principal and interest and such holders may not, in all circumstances, be able to collect all principal and interest to which they are entitled. To
enforce its rights in the event of a default in the payment of interest or repayment of principal, or both, the Acquiring Fund may take possession of and manage the assets securing the issuers obligations on such securities, which may increase
the Acquiring Funds operating expenses. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for
purposes of the income tests applicable to regulated investment companies (RICs).
Municipal Securities Risks. Municipal securities risks include the ability of the issuer to repay the obligation, the relative lack of
information about certain issuers of municipal securities, and the possibility of future legislative changes which could affect the market for and the value of municipal securities. These risks include:
General Obligation Bonds Risks. General obligation bonds are typically
secured by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or
laws, and an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries,
economic limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets
or other factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers
maintenance of its tax base.
Revenue Bonds Risks. Revenue or
special obligation bonds are typically payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the
user of the facility being financed. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such
revenue source. Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities
generally, including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the
rights of others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments
which, until completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Private Activity Bonds Risks. The Acquiring Fund may invest in certain tax-exempt securities classified as private activity bonds. These bonds may subject certain investors in the Acquiring Fund to the federal alternative minimum tax.
Moral Obligation Bonds Risks. Municipal bonds may also include
moral obligation bonds, which are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal
obligation of the state or municipality in question.
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Municipal Notes Risks. Municipal notes are shorter term municipal debt obligations. They may
provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the Acquiring Fund may
lose money.
Municipal Lease Obligations Risks. Also included within
the general category of municipal bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations
in a lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are
subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses
which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although
non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be
insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid.
The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative
governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the
bankruptcy laws. In the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all
circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers
obligations on such securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however,
the failure to pay would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated
investment company under the Code, may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Acquiring Fund is subject to certain limitations on its
investments and on the nature of its income.
Liquidity of
Investments. Certain municipal securities in which the Acquiring Fund invests may lack an established secondary trading market or are otherwise considered illiquid. Liquidity of a security relates to the ability to easily dispose of the security
and the price to be obtained and does not generally relate to the credit risk or likelihood of receipt of cash at maturity. Illiquid securities may trade at a discount from comparable, more liquid investments.
The financial markets in general, and certain segments of the municipal
securities markets in particular, have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and substantially below traditional
measures of intrinsic value. During such periods some securities could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any time.
Tax-Exempt Status Risk. In
making investments, the Acquiring Fund and the Investment Advisor will rely on the opinion of issuers bond counsel and, in the case of derivative securities, sponsors counsel, on the tax-exempt
status of interest on municipal obligations and payments under tax-exempt derivative securities. Neither the Acquiring Fund nor the Investment Advisor will independently review the bases for those tax
opinions. If any of those tax opinions are ultimately determined to be incorrect or if events occur after the security is acquired that impact the securitys tax-exempt status, the Acquiring Fund and its
shareholders could be subject to substantial tax liabilities. An assertion by the Internal Revenue Service (the IRS) that a portfolio security is not exempt from U.S. federal income tax (contrary to indications from the issuer) could
affect the Acquiring Funds and its shareholders income tax liability for the current or past years and could create liability for information reporting penalties. In addition, an IRS assertion of
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taxability may cause the Acquiring Fund to be ineligible to pay exempt-interest dividends or may impair the liquidity and the fair market value of the securities.
Taxability Risk. The Acquiring Fund intends to minimize the payment of
taxable income to shareholders by investing in tax-exempt or municipal securities in reliance at the time of purchase on an opinion of bond counsel to the issuer that the interest paid on those securities will
be excludable from gross income for U.S. federal income tax purposes. Such securities, however, may be determined to pay, or have paid, taxable income subsequent to the Acquiring Funds acquisition of the securities. In that event, the IRS may
demand that the Acquiring Fund pay U.S. federal income taxes on the affected interest income, and, if the Acquiring Fund agrees to do so, the Acquiring Funds yield could be adversely affected. In addition, the treatment of dividends previously
paid or to be paid by the Acquiring Fund as exempt interest dividends could be adversely affected, subjecting the Acquiring Funds shareholders to increased U.S. federal income tax liabilities. Federal tax legislation may limit the
types and volume of bonds the interest on which qualifies for a federal income tax-exemption. As a result, current legislation and legislation that may be enacted in the future may affect the availability of
municipal bonds for investment by the Fund. In addition, future laws, regulations, rulings or court decisions may cause interest on municipal securities to be subject, directly or indirectly, to U.S. federal income taxation or interest on state
municipal securities to be subject to state or local income taxation, or the value of state municipal securities to be subject to state or local intangible personal property tax, or may otherwise prevent the Acquiring Fund from realizing the full
current benefit of the tax-exempt status of such securities. Any such change could also affect the market price of such securities, and thus the value of an investment in the Acquiring Fund.
Alternative Minimum Tax Risk. The Acquiring Fund expects that a portion
of the interest or income it produces will be includable in alternative minimum taxable income. Exempt interest dividends also are likely to be subject to state and local income taxes. Distributions of any capital gain or other taxable income will
be taxable to shareholders. The Acquiring Fund may not be a suitable investment for investors who are subject to the federal alternative minimum tax or who would become subject to such tax by purchasing shares of the Acquiring Fund. The suitability
of an investment in the Acquiring Fund will depend upon a comparison of the after tax yield likely to be provided from the Acquiring Fund with that from comparable tax-exempt investments not subject to the
alternative minimum tax, and from comparable fully taxable investments, in light of each such investors tax position. Special considerations apply to corporate investors.
Nonpayment Risk. Municipal bonds, like other debt obligations, are
subject to the risk of nonpayment. The ability of issuers of municipal securities to make timely payments of interest and principal may be adversely impacted in general economic downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Such nonpayment would result in a reduction of income to the Acquiring Fund and could result in a reduction in the value of the municipal security experiencing nonpayment and a potential
decrease in the net asset value of the Acquiring Fund.
Fixed Income
Securities Risks. Fixed income securities in which the Acquiring Fund may invest are generally subject to the following risks:
Interest Rate Risk. The market value of bonds and other fixed-income securities changes in response to interest rate changes and other factors.
Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Acquiring Fund may be subject to a greater risk of rising interest rates due to the
current period of historically low interest rates, including the Federal Reserves recent lowering of the target for the federal funds rate to a range of 0%-0.25% as part of its efforts to ease the
economic effects of the coronavirus pandemic. The magnitude of these fluctuations in the market price of bonds and other fixed-income securities is generally greater for those securities with longer maturities. Fluctuations in the market price of
the Acquiring Funds investments will not affect interest income derived from instruments already owned by the Acquiring Fund, but will be reflected in the Acquiring Funds NAV. The Acquiring Fund may lose money if short-term or long-term
interest rates rise sharply in a manner not anticipated by the Acquiring Funds management. To the extent the Acquiring Fund invests in debt securities that may be prepaid at the option of the obligor (such as mortgage-related securities), the
sensitivity of such securities to changes in interest rates may increase (to the detriment of the Acquiring Fund) when interest rates rise. Moreover, because rates on certain floating rate debt securities typically reset only periodically, changes
in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the NAV of the Acquiring Fund to the extent that it invests in floating rate debt
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securities. These basic principles of bond prices also apply to U.S. Government securities. A security backed by the full faith and credit of the U.S. Government is guaranteed only as
to its stated interest rate and face value at maturity, not its current market price. Just like other fixed-income securities, government-guaranteed securities will fluctuate in value when interest rates change.
The Acquiring Funds use of leverage, as described below, will tend to
increase the Acquiring Funds interest rate risk. The Acquiring Fund may utilize certain strategies, including taking positions in futures or interest rate swaps, for the purpose of reducing the interest rate sensitivity of fixed income
securities held by the Acquiring Fund and decreasing the Acquiring Funds exposure to interest rate risk. The Acquiring Fund is not required to hedge its exposure to interest rate risk and may choose not to do so. In addition, there is no
assurance that any attempts by the Acquiring Fund to reduce interest rate risk will be successful or that any hedges that the Acquiring Fund may establish will perfectly correlate with movements in interest rates.
The Acquiring Fund may invest in variable and floating rate debt instruments,
which generally are less sensitive to interest rate changes than longer duration fixed rate instruments, but may decline in value in response to rising interest rates if, for example, the rates at which they pay interest do not rise as much, or as
quickly, as market interest rates in general. Conversely, variable and floating rate instruments generally will not increase in value if interest rates decline. The Acquiring Fund also may invest in inverse floating rate debt securities, which may
decrease in value if interest rates increase, and which also may exhibit greater price volatility than fixed rate debt obligations with similar credit quality. To the extent the Acquiring Fund holds variable or floating rate instruments, a decrease
(or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities, which may adversely affect the NAV of the Acquiring Funds common shares.
Issuer Risk. The value of fixed income securities may decline for a
number of reasons which directly relate to the issuer, such as management performance, financial leverage, reduced demand for the issuers goods and services, historical and prospective earnings of the issuer and the value of the assets of the
issuer.
Credit Risk. Credit risk is the risk that one or more fixed
income securities in the Acquiring Funds 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. Credit risk is increased when a portfolio
security is downgraded or the perceived creditworthiness of the issuer deteriorates. To the extent the Acquiring Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which only invests
in investment grade securities. In addition, to the extent the Acquiring Fund uses credit derivatives, such use will expose it to additional risk in the event that the bonds underlying the derivatives default. The degree of credit risk depends on
the issuers financial condition and on the terms of the securities. If rating agencies lower their ratings of municipal securities in the Acquiring Funds portfolio, the value of those securities could decline, which could jeopardize
rating agencies ratings of Acquiring Fund VMTP Shares or the Combined Funds VRDP Shares, as applicable. Because a significant source of income for the Acquiring Fund is the interest and principal payments on the municipal securities in
which it invests, any default by an issuer of a municipal security could have a negative impact on the Acquiring Funds ability to pay dividends on common shares or any VMTP Shares or VRDP Shares then outstanding and could result in the
redemption of some or all of any VMTP Shares or VRDP Shares then outstanding.
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 Acquiring Fund to reinvest in lower yielding securities, resulting in a possible decline in the Acquiring Funds 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). For premium bonds (bonds acquired at prices that exceed their par or principal value) purchased by the Acquiring Fund, prepayment risk may be enhanced.
Reinvestment Risk. Reinvestment risk is the risk that income from
the Acquiring Funds portfolio will decline if the Acquiring Fund invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below the Acquiring Fund portfolios current earnings rate.
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Duration and Maturity Risk. The Investment Advisor may seek to adjust the portfolios
duration or maturity based on its assessment of current and projected market conditions and all factors that the Investment Advisor deems relevant. In comparison to maturity (which is the date on which the issuer of a debt instrument is obligated to
repay the principal amount), duration is a measure of the price volatility of a debt instrument as a result in changes in market rates of interest, based on the weighted average timing of the instruments expected principal and interest
payments. Specifically, duration measures the anticipated percentage change in NAV that is expected for every percentage point change in interest rates. The two have an inverse relationship. Duration can be a useful tool to estimate anticipated
price changes to a fixed pool of income securities associated with changes in interest rates. For example, a duration of five years means that a 1% decrease in interest rates will increase the NAV of the portfolio by approximately 5%; if interest
rates increase by 1%, the NAV will decrease by 5%. However, in a managed portfolio of fixed income securities having differing interest or dividend rates or payment schedules, maturities, redemption provisions, call or prepayment provisions and
credit qualities, actual price changes in response to changes in interest rates may differ significantly from a duration-based estimate at any given time. Actual price movements experienced by a portfolio of fixed income securities will be affected
by how interest rates move (i.e., changes in the relationship of long-term interest rates to short-term interest rates and in the relationship of interest rates for highly rated securities and rates for below investment grade securities), the
magnitude of any move in interest rates, actual and anticipated prepayments of principal through call or redemption features, the extension of maturities through restructuring, the sale of securities for portfolio management purposes, the
reinvestment of proceeds from prepayments on and from sales of securities, and credit quality-related considerations whether associated with financing costs to lower credit quality borrowers or otherwise, as well as other factors. Accordingly, while
duration maybe a useful tool to estimate potential price movements in relation to changes in interest rates, investors are cautioned that duration alone will not predict actual changes in the net asset or market value of the Acquiring Funds
shares and that actual price movements in the Acquiring Funds portfolio may differ significantly from duration-based estimates. Duration differs from maturity in that it takes into account a securitys yield, coupon payments and its
principal payments in addition to the amount of time until the security finally matures. As the value of a security changes over time, so will its duration. Prices of securities with longer durations tend to be more sensitive to interest rate
changes than securities with shorter durations. In general, a portfolio of securities with a longer duration can be expected to be more sensitive to interest rate changes than a portfolio with a shorter duration. Any decisions as to the targeted
duration or maturity of any particular category of investments or of the Acquiring Funds portfolio generally will be made based on all pertinent market factors at any given time. The Acquiring Fund may incur costs in seeking to adjust the
portfolios average duration or maturity. There can be no assurances that the Investment Advisors assessment of current and projected market conditions will be correct or that any strategy to adjust the portfolios duration or
maturity will be successful at any given time.
Leverage Risk. The
use of leverage creates an opportunity for increased common share net investment income dividends, but also creates risks for the common shareholders. The Acquiring Fund cannot assure you that the use of leverage, if employed, will result in a
higher yield on the common shares. Any leveraging strategy the Acquiring Fund employs may not be successful. Leverage involves risks and special considerations for common shareholders, including:
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the likelihood of greater volatility of NAV, market price and dividend rate of the common shares than a comparable portfolio without leverage;
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the risk that fluctuations in interest rates or dividend rates on any leverage that the Acquiring Fund must pay will reduce the return to the common shareholders;
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the effect of leverage in a declining market, which is likely to cause a greater decline in the NAV of the common shares than if the Acquiring Fund were not leveraged, which may result in a greater decline in the market
price of the common shares;
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when the Acquiring Fund uses financial leverage, the investment advisory fee payable to the Investment Advisor will be higher than if the Acquiring Fund did not use leverage; and
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leverage may increase operating costs, which may reduce total return.
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Any decline in the NAV of the Acquiring Funds investments will be borne entirely by the common
shareholders. Therefore, if the market value of the Acquiring Funds portfolio declines, leverage will result in a greater decrease in NAV to the common shareholders than if the Acquiring Fund were not leveraged. This greater NAV decrease will
also tend to cause a greater decline in the market price for the common shares. While the Acquiring Fund may from time to time consider reducing any outstanding leverage in response to actual or anticipated changes in interest rates in an effort to
mitigate the increased volatility of current income and NAV associated with leverage, there can be no assurance that the Acquiring Fund will actually reduce any outstanding leverage in the future or that any reduction, if undertaken, will benefit
the common shareholders. Changes in the future direction of interest rates are very difficult to predict accurately. If the Acquiring Fund were to reduce any outstanding leverage based on a prediction about future changes to interest rates,
and that prediction turned out to be incorrect, the reduction in any outstanding leverage would likely operate to reduce the income and/or total returns to common shareholders relative to the circumstance where the Acquiring Fund had not reduced any
of its outstanding leverage. The Acquiring Fund may decide that this risk outweighs the likelihood of achieving the desired reduction to volatility in income and share price if the prediction were to turn out to be correct, and determine not to
reduce any of its outstanding leverage as described above.
The Acquiring
Fund currently utilizes leverage through the issuance of VMTP Shares (see Information about the Preferred Shares of the Funds) and investments in TOB Residuals (see Tender Option Bond Risk). The Combined Fund intends to
utilize leverage through the issuance of VRDP Shares (see Information about the Preferred Shares of the Funds) and investments in TOB Residuals (see Tender Option Bond Risk). The use of TOB Residuals may require the
Acquiring Fund to segregate or designate on its books and records assets to cover its obligations. While the segregated or earmarked assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use
of leverage may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring Funds leveraged
exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets.
Certain types of leverage used by the Acquiring Fund may result in the Acquiring Fund being subject to covenants relating to asset coverage and
portfolio composition requirements. The Acquiring Fund may be subject to certain restrictions on investments imposed by guidelines of one or more rating agencies, which issue ratings for the VMTP Shares or VRDP Shares issued by the Acquiring Fund or
the governing instrument for the Acquiring Fund VMTP Shares or VRDP Shares. These guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those imposed by the 1940 Act. The Investment Advisor does not
believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with the Acquiring Funds investment objective and policies.
While there are any preferred shares of the Acquiring Fund outstanding, the
Acquiring Fund may not declare any cash dividend or other distribution on its common shares, unless at the time of such declaration, (i) all accrued preferred shares dividends have been paid and (ii) the value of the Acquiring Funds
total assets (determined after deducting the amount of such dividend or other distribution), less all liabilities and indebtedness of the Acquiring Fund, is at least 200% (as required by the 1940 Act) of the liquidation preference of the outstanding
preferred shares (expected to equal the aggregate original purchase price of the outstanding preferred shares plus any accrued and unpaid dividends thereon, whether or not earned or declared on a cumulative basis). This limitation on the Acquiring
Funds ability to make distributions on its common shares could in certain circumstances impair the ability of the Acquiring Fund to maintain its qualification for taxation as a regulated investment company under the Code. The Acquiring Fund
may, however, to the extent possible, purchase or redeem preferred shares from time to time to maintain compliance with such asset coverage requirements and may pay special dividends to the holders of the preferred shares in certain circumstances in
connection with any such impairment of the Acquiring Funds status as a regulated investment company under the Code.
In addition to the foregoing, the use of leverage treated as indebtedness of the Acquiring Fund for U.S. federal income tax purposes may reduce the
amount of Acquiring Fund dividends that are otherwise eligible for the dividends received deduction in the hands of corporate shareholders.
The Acquiring Fund may utilize leverage through investment derivatives. The use of certain derivatives will require the Acquiring to segregate assets
to cover its obligations. While the segregated assets may be invested in liquid assets, they may not be used for other operational purposes. Consequently, the use of leverage may limit the Acquiring
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Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay Acquiring Fund expenses, to maintain assets in an amount sufficient to cover the Acquiring
Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets.
The Acquiring Fund may invest in the securities of other investment companies. Such investment companies may also be leveraged, and will therefore be
subject to the leverage risks described above. This additional leverage may in certain market conditions reduce the NAV of the Acquiring Funds common shares and the returns to the common shareholders.
Tender Option Bond Risk. The Acquiring Fund currently leverages its
assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB Residuals in which the Acquiring Fund may invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is
exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. There is no
assurance that the Acquiring Funds strategy of using TOB Residuals to leverage its assets will be successful.
TOB Residuals represent beneficial interests in a special purpose trust formed for the purpose of holding municipal bonds contributed by one or more
funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term floating rate interests (TOB Floaters), which are sold to third-party investors, and TOB Residuals, which are generally issued
to the fund(s) that transferred municipal bonds to the TOB Trust. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement provided by a third-party
bank or other financial institution (the TOBs Liquidity Provider) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB Residuals, is paid the residual cash flow from the TOB
Trust. As result, distributions on TOB Residuals will bear an inverse relationship to short-term municipal bond interest rates. Distributions on the TOB Residuals paid to the Acquiring Fund will be reduced or, in the extreme, eliminated as
short-term municipal interest rates rise and will increase when short-term municipal interest rates fall. The amount of such reduction or increase is a function, in part, of the amount of TOB Floaters sold by the TOB Trust relative to the amount of
the TOB Residuals that it sells. The greater the amount of TOB Floaters sold relative to the TOB Residuals, the more volatile the distributions on the TOB Residuals will be. Short-term interest rates are at historic lows and may be more likely to
rise in the current market environment.
The municipal bonds transferred to
a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of
principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for
reimbursement of any payments of principal and interest made by the credit enhancement provider.
Any economic leverage achieved through the Acquiring Funds investment in TOB Residuals will increase the possibility that common share long-term
returns will be diminished if the cost of the TOB Floaters issued by a TOB Trust exceeds the return on the securities in the TOB Trust. If the income and gains earned on municipal securities owned by a TOB Trust that issues TOB Residuals to the
Acquiring Fund are greater than the payments due on the TOB Floaters issued by the TOB Trust, the Acquiring Funds returns will be greater than if it had not invested in the TOB Residuals.
Although the Acquiring Fund generally would unwind a TOB transaction rather
than try to sell a TOB Residual, if it did try to sell a TOB Residual, its ability to do so would depend on the liquidity of the TOB Residual. TOB Residuals have varying degrees of liquidity based, among other things, upon the liquidity of the
underlying securities deposited in the TOB Trust. The market price of TOB Residuals is more volatile than the underlying municipal bonds due to leverage.
The leverage attributable to the Acquiring Funds use of TOB Residuals may be called away on relatively short notice and therefore may
be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as defined in the TOB Trust agreements. Upon the occurrence of a
termination event, a TOB Trust would be liquidated with the proceeds applied
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first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB
Floaters would be paid before the TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be paid pro rata.
The Acquiring Fund may invest in a TOB Trust on either a non-recourse or recourse basis. If the Acquiring Fund invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the
Acquiring Fund is required to reimburse the TOBs Liquidity Provider the balance, if any, of the amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). As a result, if the Acquiring Fund
invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall.
The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued
but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals may also require the Acquiring Fund to earmark or segregate liquid
assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. While the segregated assets may be invested in liquid securities, they may not be used for other operational purposes.
Consequently, the use of leverage through TOB Residuals may limit the Acquiring Funds flexibility and may require that the Acquiring Fund sell other portfolio investments to pay the Acquiring Funds expenses, to maintain assets in an
amount sufficient to cover the Acquiring Funds leveraged exposure or to meet other obligations at a time when it may be disadvantageous to sell such assets. Future regulatory requirements or SEC guidance may necessitate more onerous
contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
The Acquiring Fund structures and sponsors the TOB Trusts in which
it holds TOB Residuals and has certain duties and responsibilities, which may give rise to certain additional risks including, but not limited to, compliance, securities law and operational risks.
The SEC and various federal banking and housing agencies adopted credit risk
retention rules for securitizations (the Risk Retention Rules). The Risk Retention Rules require the sponsor of a TOB Trust to retain at least 5% of the credit risk of the underlying assets supporting the TOB Trusts municipal
bonds. The Risk Retention Rules may adversely affect the Acquiring Funds ability to engage in TOB Trust transactions or increase the costs of such transactions in certain circumstances.
TOB Trusts constitute an important component of the municipal bond market. Any
modifications or changes to the rules governing TOB Trusts may adversely impact the municipal market and the Acquiring Fund, including through reduced demand for and liquidity of municipal bonds and increased financing costs for municipal issuers.
The ultimate impact of any potential modifications on the TOB market and the overall municipal market is not yet certain.
Please see The Acquiring Funds InvestmentsLeverageTender Option Bonds for additional information.
Insurance Risk. With respect to an insured municipal security, insurance
guarantees that interest payments on the municipal security will be made on time and that the principal will be repaid when the security matures. Insurance is expected to protect the Acquiring Fund against losses caused by a municipal security
issuers failure to make interest and principal payments. However, insurance does not protect the Acquiring Fund or its shareholders against losses caused by declines in a municipal securitys value. Also, the Acquiring Fund cannot be
certain that any insurance company will make the payments it guarantees. Certain significant providers of insurance for municipal securities incurred significant losses as a result of exposure to sub-prime
mortgages and other lower credit quality investments that experienced defaults or otherwise suffered extreme credit deterioration during the financial crisis of 2007-2009. These losses have reduced the insurers capital and called into question
their continued ability to perform their obligations under such insurance if they are called upon to do so in the future. While an insured municipal security will typically be deemed to have the rating of its insurer, if the insurer of a municipal
security suffers a downgrade in its credit rating or the market discounts the value of the insurance provided by the insurer, the rating of the underlying municipal security will be more relevant and the value of the municipal security would more
closely, if not entirely, reflect such rating. The Acquiring Fund may lose money on its investment if the insurance company does not make payments it guarantees. If a municipal securitys insurer fails to fulfill its obligations or loses its
credit rating, the value of the security could drop.
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Yield and Ratings Risk. The yields on debt obligations are dependent on a variety of factors,
including general market conditions, conditions in the particular market for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and the ratings of the issue. The ratings of Moodys,
S&P and Fitch, which are described in Appendix C, represent their respective opinions as to the quality of the obligations which they undertake to rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may have different market prices. Subsequent to its purchase by the Acquiring Fund, a rated security may cease to be rated. The Investment Advisor will consider such an event
in determining whether the Acquiring Fund should continue to hold the security.
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, the Investment Advisor 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 Acquiring Fund invests in lower grade securities that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective will be more
dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
High Yield Securities Risk. Subject to its investment policies, the Acquiring Fund may invest in securities rated, at the time of
investment, below investment grade quality such as those rated Ba or below by Moodys, BB or below by S&P or Fitch, or securities comparably rated by other rating agencies or in unrated securities determined by the Investment Advisor to be
of comparable quality. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the capacity to pay interest and repay principal in accordance with the terms of the
security and generally involve greater price volatility than securities in higher rating categories. Often the protection of interest and principal payments with respect to such securities may be very moderate and issuers of such securities 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 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 Acquiring Fund to sell certain securities or could result in lower prices than those used in calculating the Acquiring Funds NAV.
The prices of fixed-income 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. The investor receives this higher coupon 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 Moodys, S&P, Fitch 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 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, the Investment Advisor 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 Acquiring Fund invests in lower grade securities
that have not been rated by a rating agency, the Acquiring Funds ability to achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in
rated securities.
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Unrated Securities Risk. Because the Acquiring Fund may purchase securities that are not rated by
any rating organization, the Investment Advisor may, after assessing their credit quality, internally assign ratings to certain of those securities in categories similar to those of rating organizations. Some unrated securities may not have an
active trading market or may be difficult to value, which means the Acquiring Fund might have difficulty selling them promptly at an acceptable price. To the extent that the Acquiring Fund invests in unrated securities, the Acquiring Funds
ability to achieve its investment objective will be more dependent on the Investment Advisors credit analysis than would be the case when the Acquiring Fund invests in rated securities.
Zero-Coupon Securities Risk. Municipal bonds may include zero-coupon bonds. Zero-coupon securities are bonds that are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity at a rate of interest reflecting the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon security is
entitled to receive the par value of the security.
While interest payments
are not made on zero-coupon securities, holders of such securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect
of owning instruments that do not make current interest payments is that a fixed yield is earned not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of
earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability
to reinvest at higher rates in the future. For this reason, some of these securities may be subject to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest
currently. Longer term zero-coupon bonds are more exposed to interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating
its need for cash to meet debt service, but also require a higher rate of return to attract investors who are willing to defer receipt of cash.
The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and accounting purposes prior to the receipt of cash
payments. Zero-coupon securities may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at regular intervals.
Further, to maintain its qualification for pass-through treatment under the
federal tax laws, the Acquiring Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to leverage itself by
borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon securities.
In addition to the above-described risks, there are certain other risks related
to investing in zero-coupon securities. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the
Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Acquiring Funds portfolio.
Variable Rate Demand Obligations Risk. Variable rate demand obligations
(VRDOs) are floating rate securities that combine an interest in a long-term municipal bond with a right to demand payment before maturity from a bank or other financial institution. If the bank or financial institution is unable to pay,
the Acquiring Fund may lose money.
Indexed and Inverse Securities
Risk. Investments in inverse floaters, residual interest TOBs and similar instruments expose the Acquiring Fund to the same risks as investments in fixed income securities and derivatives, as well as other risks, including those associated with
leverage and increased volatility. An investment in these securities typically will involve greater risk than an investment in a fixed rate security. Distributions on inverse floaters, residual interest TOBs and similar instruments will typically
bear an inverse relationship to short-term interest rates and typically will be reduced or, potentially, eliminated as interest rates rise. Inverse floaters, residual interest TOBs and similar instruments will underperform the market for fixed rate
securities in a rising interest rate environment. Inverse floaters may be considered to be leveraged to the extent that their interest rates vary by a magnitude that exceeds the magnitude of the change in a reference rate of interest (typically a
short-term interest rate). The leverage inherent in inverse
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floaters is associated with greater volatility in their market values. Investments in inverse floaters, residual interest TOBs and similar instruments that have fixed income securities underlying
them will expose the Acquiring Fund to the risks associated with those fixed income securities and the values of those investments may be especially sensitive to changes in prepayment rates on the underlying fixed income securities.
When-Issued, Forward Commitment and Delayed Delivery Transactions Risk.
The Acquiring Fund may purchase securities on a when-issued basis (including on a forward commitment or TBA (to be announced) basis) and may purchase or sell those securities for delayed delivery. When-issued and delayed delivery
transactions occur when securities are purchased or sold by the Acquiring Fund with payment and delivery taking place in the future to secure an advantageous yield or price. Securities purchased on a when-issued or delayed delivery basis may expose
the Acquiring Fund to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Acquiring Fund will not accrue income with respect to a when-issued or delayed delivery
security prior to its stated delivery date. Purchasing securities on a when-issued or delayed delivery basis can involve the additional risk that the price or yield available in the market when the delivery takes place may not be as favorable as
that obtained in the transaction itself.
Repurchase Agreements
Risk. Repurchase agreements typically involve the acquisition by the Acquiring Fund of fixed income securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the
Acquiring Fund will sell the securities back to the institution at a fixed time in the future. The Acquiring Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation.
In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Acquiring Fund could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying
security during the period in which the Acquiring Fund seeks to enforce its rights thereto; possible lack of access to income on the underlying security during this period; and expenses of enforcing its rights. While repurchase agreements involve
certain risks not associated with direct investments in fixed income securities, the Acquiring Fund follows procedures approved by the Board that are designed to minimize such risks. The value of the collateral underlying the repurchase agreement
will be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Acquiring Fund generally will seek to liquidate such
collateral. However, the exercise of the Acquiring Funds right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Acquiring Fund could suffer a loss.
Securities
Lending Risk. The Acquiring Fund may lend securities to financial institutions. Securities lending involves exposure to certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and
accounting process), gap risk (i.e., the risk of a mismatch between the return on cash collateral reinvestments and the fees the Acquiring Fund has agreed to pay a borrower), and credit, legal, counterparty and market risk. If a
securities lending counterparty were to default, the Acquiring Fund would be subject to the risk of a possible delay in receiving collateral or in recovering the loaned securities, or to a possible loss of rights in the collateral. In the event a
borrower does not return the Acquiring Funds securities as agreed, the Acquiring Fund may experience losses if the proceeds received from liquidating the collateral do not at least equal the value of the loaned security at the time the
collateral is liquidated, plus the transaction costs incurred in purchasing replacement securities. This event could trigger adverse tax consequences for the Acquiring Fund. The Acquiring Fund could lose money if its short-term investment of the
collateral declines in value over the period of the loan. Substitute payments for dividends received by the Acquiring Fund for securities loaned out by the Acquiring Fund will generally not be considered qualified dividend income. The securities
lending agent will take the tax effects on shareholders of this difference into account in connection with the Acquiring Funds securities lending program. Substitute payments received on tax-exempt
securities loaned out will generally not be tax-exempt income.
Restricted and Illiquid Securities Risk. The Acquiring Fund may invest in illiquid or less liquid investments or investments in which no
secondary market is readily available or which are otherwise illiquid, including private placement securities. The Acquiring Fund may not be able to readily dispose of such investments at prices that approximate those at which the Acquiring Fund
could sell such investments if they were more widely-traded and, as a result of such illiquidity, the Acquiring Fund 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 investments, thereby adversely affecting the Acquiring Funds NAV and ability to make dividend distributions. The financial
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markets have in recent years experienced periods of extreme secondary market supply and demand imbalance, resulting in a loss of liquidity during which market prices were suddenly and
substantially below traditional measures of intrinsic value. During such periods, some investments could be sold only at arbitrary prices and with substantial losses. Periods of such market dislocation may occur again at any
time.
Restricted securities are securities that
may not be sold to the public without an effective registration statement under the Securities Act, or that may be sold only in a privately negotiated transaction or pursuant to an exemption from registration. For example, Rule 144A under the
Securities Act provides an exemption from the registration requirements of the Securities Act for the resale of certain restricted securities to qualified institutional buyers, such as the Acquiring Fund. However, an insufficient number of qualified
institutional buyers interested in purchasing the Rule 144A-eligible securities that the Acquiring Fund holds could affect adversely the marketability of certain Rule 144A securities, and the Acquiring Fund might be unable to dispose of such
securities promptly or at reasonable prices. When registration is required to sell a security, the Acquiring Fund may be obligated to pay all or part of the registration expenses and considerable time may pass before the Acquiring Fund is permitted
to sell a security under an effective registration statement. If adverse market conditions develop during this period, the Acquiring Fund might obtain a less favorable price than the price that prevailed when the Acquiring Fund decided to sell. The
Acquiring Fund may be unable to sell restricted and other illiquid investments at opportune times or prices.
Investment Companies Risk. Subject to the limitations set forth in the 1940 Act and the Acquiring Funds governing documents or as
otherwise permitted by the SEC, the Acquiring Fund may acquire shares in other affiliated and unaffiliated investment companies, including exchange-traded funds (ETFs) and business development companies (BDCs). The market
value of the shares of other investment companies may differ from their NAV. As an investor in investment companies, including ETFs or BDCs, the Acquiring Fund would bear its ratable share of that entitys expenses, including its investment
advisory and administration fees, while continuing to pay its own advisory and administration fees and other expenses. As a result, shareholders will be absorbing duplicate levels of fees with respect to investments in other investment companies,
including ETFs or BDCs.
The securities of other investment companies,
including ETFs or BDCs, in which the Acquiring Fund may invest may be leveraged. As a result, the Acquiring Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment
companies, including ETFs or BDCs, that use leverage may expose the Acquiring Fund to higher volatility in the market value of such securities and the possibility that the Acquiring Funds long-term returns on such securities (and, indirectly,
the long-term returns of the Acquiring Funds common shares) will be diminished.
ETFs are generally not actively managed and may be affected by a general decline in market segments relating to its index. An ETF typically invests in
securities included in, or representative of, its index regardless of their investment merits and does not attempt to take defensive positions in declining markets.
Strategic Transactions and Derivatives Risk. The Acquiring Fund may engage in various derivative transactions or portfolio strategies
(Strategic Transactions) for duration management and other investment and risk management purposes, including to attempt to protect against possible changes in the market value of the Acquiring Funds portfolio resulting from trends
in the securities markets and changes in interest rates or to protect the Acquiring Funds unrealized gains in the value of its portfolio securities, to facilitate the sale of portfolio securities for investment purposes or to establish a
position in the securities markets as a temporary substitute for purchasing particular securities or to enhance income or gain. Derivatives are financial contracts or instruments whose value depends on, or is derived from, the value of an underlying
asset, reference rate or index (or relationship between two indices). The Acquiring Fund also may use derivatives to add leverage to the portfolio and/or to hedge against increases in the Acquiring Funds costs associated with any leverage
strategy that it may employ. The use of Strategic Transactions to enhance current income may be particularly speculative.
Strategic Transactions involve risks. The risks associated with Strategic Transactions include (i) the imperfect correlation between the value of
such instruments and the underlying assets, (ii) the possible default of the counterparty to the transaction, (iii) illiquidity of the derivative instruments, and (iv) high volatility losses caused by unanticipated market movements,
which are potentially unlimited. Although both over-the-counter (OTC) and exchange-traded derivatives markets may experience a lack of liquidity, OTC non-standardized derivative transactions are generally less liquid than exchange-traded instruments. The illiquidity of the derivatives markets may be due to various factors,
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including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system
failures. In addition, daily limits on price fluctuations and speculative position limits on exchanges on which the Acquiring Fund may conduct its transactions in derivative instruments may prevent prompt liquidation of positions, subjecting the
Acquiring Fund to the potential of greater losses. Furthermore, the Acquiring Funds ability to successfully use Strategic Transactions depends on the Investment Advisors ability to predict pertinent securities prices, interest rates,
currency exchange rates and other economic factors, which cannot be assured. The use of Strategic Transactions may result in losses greater than if they had not been used, may require the Acquiring Fund to sell or purchase portfolio securities at
inopportune times or for prices other than current market values, may limit the amount of appreciation the Acquiring Fund can realize on an investment or may cause the Acquiring Fund to hold a security that it might otherwise sell. Additionally,
segregated or earmarked liquid assets, amounts paid by the Acquiring Fund as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to the Acquiring Fund for investment purposes.
Exchange-traded derivatives and OTC derivative transactions submitted for
clearing through a central counterparty have become subject to minimum initial and variation margin requirements set by the relevant clearinghouse, as well as possible margin requirements mandated by the SEC or the CFTC. The CFTC and federal banking
regulators also have imposed margin requirements on non-cleared OTC derivatives, and the SEC has finalized its non-cleared margin requirements for security-based swaps,
which are expected to go into effect in late 2021 after a compliance period. Applicable margin requirements may increase the overall costs for the Acquiring Fund.
Many OTC derivatives are valued on the basis of dealers pricing of these instruments. However, the price at which dealers value a particular
derivative and the price that the same dealers would actually be willing to pay for such derivative should the Acquiring Fund wish or be forced to sell such position may be materially different. Such differences can result in an overstatement of the
Acquiring Funds NAV and may materially adversely affect the Acquiring Fund in situations in which the Acquiring Fund is required to sell derivative instruments.
While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the
derivative and the underlying security, and there can be no assurance that the Acquiring Funds hedging transactions will be effective.
Derivatives may give rise to a form of leverage and may expose the Acquiring Fund to greater risk and increase its costs. Recent legislation calls for
new regulation of the derivatives markets. The extent and impact of the regulation is not yet known and may not be known for some time. New regulation may make derivatives more costly, may limit the availability of derivatives, or may otherwise
adversely affect the value or performance of derivatives.
On
October 28, 2020, the SEC adopted new regulations governing the use of derivatives by registered investment companies (Rule 18f-4). The Acquiring Fund will be required to implement and comply
with Rule 18f-4 by August 19, 2022. Once implemented, Rule 18f-4 will impose limits on the amount of derivatives a fund can enter into, eliminate the asset
segregation framework currently used by funds to comply with Section 18 of the 1940 Act, treat derivatives as senior securities and require funds whose use of derivatives is more than a limited specified exposure amount to establish and
maintain a comprehensive derivatives risk management program and appoint a derivatives risk manager.
In addition, other future regulatory developments may impact the Trusts ability to invest or remain invested in certain derivatives. Legislation
or regulation may also change the way in which the Trust itself is regulated. The Advisor cannot predict the effects of any new governmental regulation that may be implemented on the ability of the Trust to use swaps or any other financial
derivative product, and there can be no assurance that any new governmental regulation will not adversely affect the Trusts ability to achieve its investment objective.
The Acquiring Funds use of derivative instruments involves risks
different from, and possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are subject to a number of risks such as credit risk, currency risk, leverage risk, liquidity risk,
correlation risk, index risk and volatility as described below:
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Credit Riskthe risk that the counterparty in a derivative transaction will be unable to honor its financial obligation to the Acquiring Fund, or the risk that the reference entity in a derivative will not
be able to honor its financial obligations. In particular, derivatives traded in over-the-counter (OTC) markets often are not guaranteed by an Exchange (as
defined herein) or clearing corporation and often do not require payment of margin, and to the extent that the Acquiring Fund has unrealized gains in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk
that its counterparties will become bankrupt or otherwise fail to honor their obligations.
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Currency Riskthe risk that changes in the exchange rate between two currencies will adversely affect the value (in U.S. dollar terms) of an investment.
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Leverage Riskthe risk associated with certain types of investments or trading strategies (such as, for example, borrowing money to increase the amount of investments) that relatively small market movements
may result in large changes in the value of an investment. Certain transactions in derivatives (such as futures transactions or sales of put options) involve substantial leverage risk and may expose the Acquiring Fund to potential losses that exceed
the amount originally invested by the Acquiring Fund. When the Acquiring Fund engages in such a transaction, the Acquiring Fund will deposit in a segregated account, or earmark on its books and records, liquid assets with a value at least equal to
the Acquiring Funds exposure, on a mark-to-market basis, to the transaction (as calculated pursuant to requirements of the SEC). Such segregation or earmarking
will ensure that the Acquiring Fund has assets available to satisfy its obligations with respect to the transaction, but will not limit the Acquiring Funds exposure to loss.
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Liquidity Riskthe risk that certain securities may be difficult or impossible to sell at the time that the Acquiring Fund would like or at the price that the Acquiring Fund as seller believes the security
is currently worth. There can be no assurances that, at any specific time, either a liquid secondary market will exist for a derivative or the Acquiring Fund will otherwise be able to sell such instrument at an acceptable price. It may, therefore,
not be possible to close a position in a derivative without incurring substantial losses, if at all. The absence of liquidity may also make it more difficult for the Acquiring Fund to ascertain a market value for such instruments. Although both OTC
and exchange-traded derivatives markets may experience a lack of liquidity, certain derivatives traded in OTC markets, including indexed securities, swaps and OTC options, involve substantial illiquidity risk. The illiquidity of the derivatives
markets may be due to various factors, including congestion, disorderly markets, limitations on deliverable supplies, the participation of speculators, government regulation and intervention, and technical and operational or system failures. In
addition, the liquidity of a secondary market in an exchange-traded derivative contract may be adversely affected by daily price fluctuation limits established by the exchanges which limit the amount of fluctuation in an exchange-traded
contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open positions. Prices have in the past moved beyond the
daily limit on a number of consecutive trading days. If it is not possible to close an open derivative position entered into by the Acquiring Fund, the Acquiring Fund would continue to be required to make daily cash payments of variation margin in
the event of adverse price movements. In such a situation, if the Acquiring Fund has insufficient cash, it may have to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so.
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Correlation Riskthe risk that changes in the value of a derivative will not match the changes in the value of the portfolio holdings that are being hedged or of the particular market or security to which
the Acquiring Fund seeks exposure through the use of the derivative. There are a number of factors which may prevent a derivative instrument from achieving the desired correlation (or inverse correlation) with an underlying asset, rate or index,
such as the impact of fees, expenses and transaction costs, the timing of pricing, and disruptions or illiquidity in the markets for such derivative instrument.
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Index Riskif the derivative is linked to the performance of an index, it will be subject to the risks
associated with changes in that index. If the index changes, the Acquiring Fund could receive lower interest payments or experience a reduction in the value of the derivative to below the price that the Acquiring Fund paid for such derivative.
Certain indexed securities, including inverse securities (which move in an opposite direction to the
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index), may create leverage, to the extent that they increase or decrease in value at a rate that is a multiple of the changes in the applicable index.
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Volatility Riskthe risk that the Acquiring Funds use of derivatives may reduce income or gain and/or increase volatility. Volatility is defined as the characteristic of a security, an index or a
market to fluctuate significantly in price over a defined time period. The Acquiring Fund could suffer losses related to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited.
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When a derivative is used as a hedge against a position that
the Acquiring Fund holds, any loss generated by the derivative generally should be substantially offset by gains on the hedged investment, and vice versa. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. Hedges
are sometimes subject to imperfect matching between the derivative and the underlying security, and there can be no assurances that the Acquiring Funds hedging transactions will be effective. The Acquiring Fund could also suffer losses related
to its derivative positions as a result of unanticipated market movements, which losses are potentially unlimited. BlackRock Advisors, LLC (the Investment Advisor) may not be able to predict correctly the direction of securities prices,
interest rates and other economic factors, which could cause the Acquiring Funds derivatives positions to lose value. In addition, some derivatives are more sensitive to interest rate changes and market price fluctuations than other
securities. The possible lack of a liquid secondary market for derivatives and the resulting inability of the Acquiring Fund to sell or otherwise close a derivatives position could expose the Acquiring Fund to losses and could make derivatives more
difficult for the Acquiring Fund to value accurately.
When engaging in a
hedging transaction, the Acquiring Fund may determine not to seek to establish a perfect correlation between the hedging instruments utilized and the portfolio holdings being hedged. Such an imperfect correlation may prevent the Acquiring Fund from
achieving the intended hedge or expose the Acquiring Fund to a risk of loss. The Acquiring Fund may also determine not to hedge against a particular risk because it does not regard the probability of the risk occurring to be sufficiently high as to
justify the cost of the hedge or because it does not foresee the occurrence of the risk. It may not be possible for the Acquiring Fund to hedge against a change or event at attractive prices or at a price sufficient to protect the assets of the
Acquiring Fund from the decline in value of the portfolio positions anticipated as a result of such change. The Acquiring Fund may also be restricted in its ability to effectively manage the portion of its assets that are segregated or earmarked to
cover its obligations. In addition, it may not be possible to hedge at all against certain risks.
If the Acquiring Fund invests in a derivative instrument it could lose more than the principal amount invested. Moreover, derivatives raise certain
tax, legal, regulatory and accounting issues that may not be presented by investments in securities, and there is some risk that certain issues could be resolved in a manner that could adversely impact the performance of the Acquiring Fund.
The Acquiring Fund is not required to use derivatives or other portfolio
strategies to seek to increase return or to seek to hedge its portfolio and may choose not to do so. Also, suitable derivative transactions may not be available in all circumstances and there can be no assurances that the Acquiring Fund will engage
in these transactions to reduce exposure to other risks when that would be beneficial. Although the Investment Advisor seeks to use derivatives to further the Acquiring Funds investment objective, there is no assurance that the use of
derivatives will achieve this result.
Options Risk. There are
several risks associated with transactions in options on securities and indexes. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a
given transaction not to achieve its objective. In addition, a liquid secondary market for particular options, whether traded OTC or on a recognized securities exchange (e.g., NYSE), separate trading boards of a securities exchange or through
a market system that provides contemporaneous transaction pricing information (an exchange) may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed
by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the Office of the Comptroller of the Currency (OCC) may not at all times be adequate to handle current trading volume; or one or more
exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in
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which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the OCC as a result of trades
on that exchange would continue to be exercisable in accordance with their terms.
Futures Transactions and Options Risk. The primary risks associated with the use of futures contracts and options are (a) the imperfect
correlation between the change in market value of the instruments held by the Acquiring Fund and the price of the futures contract or option; (b) possible lack of a liquid secondary market for a futures contract and the resulting inability to
close a futures contract when desired; (c) losses caused by unanticipated market movements, which are potentially unlimited; (d) the Investment Advisors inability to predict correctly the direction of securities prices, interest
rates, currency exchange rates and other economic factors; and (e) the possibility that the counterparty will default in the performance of its obligations.
Investment in futures contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the price of the
security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than the price of
the hedged security, the Acquiring Fund will experience either a loss or gain on the futures contract which is not completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Acquiring Fund may
purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Acquiring Fund may purchase or
sell fewer futures contracts if the volatility of the price of the hedged securities is historically lower than that of the futures contracts.
The particular securities comprising the index underlying a securities index financial futures contract may vary from the securities held by the
Acquiring Fund. As a result, the Acquiring Funds ability to hedge effectively all or a portion of the value of its securities through the use of such financial futures contracts will depend in part on the degree to which price movements in the
index underlying the financial futures contract correlate with the price movements of the securities held by the Acquiring Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the
Acquiring Funds investments as compared to those comprising the securities index and general economic or political factors. In addition, the correlation between movements in the value of the securities index may be subject to change over time
as additions to and deletions from the securities index alter its structure. The correlation between futures contracts on U.S. Government securities and the securities held by the Acquiring Fund may be adversely affected by similar factors and the
risk of imperfect correlation between movements in the prices of such futures contracts and the prices of securities held by the Acquiring Fund may be greater. The trading of futures contracts also is subject to certain market risks, such as
inadequate trading activity, which could at times make it difficult or impossible to liquidate existing positions.
The Acquiring Fund may liquidate futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no
assurances, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close out a futures position. In the event of adverse price movements, the Acquiring Fund would
continue to be required to make daily cash payments of variation margin. In such situations, if the Acquiring Fund has insufficient cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it
may be disadvantageous to do so. The inability to close out futures positions also could have an adverse impact on the Acquiring Funds ability to hedge effectively its investments in securities. The liquidity of a secondary market in a futures
contract may be adversely affected by daily price fluctuation limits established by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached
in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. The Acquiring Fund
will enter into a futures position only if, in the judgement of the Investment Advisor, there appears to be an actively traded secondary market for such futures contracts.
The successful use of transactions in futures and related options also depends on the ability of the Investment Advisor to forecast correctly the
direction and extent of interest rate movements within a given time frame. To the extent interest rates remain stable during the period in which a futures contract or option is held by the Acquiring Fund or such rates move in a direction opposite to
that anticipated, the Acquiring Fund may realize a loss on the Strategic
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Transaction which is not fully or partially offset by an increase in the value of portfolio securities. As a result, the Acquiring Funds total return for such period may be less than if it
had not engaged in the Strategic Transaction.
Because of low initial
margin deposits made upon the opening of a futures position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There
is also the risk of loss by the Acquiring Fund of margin deposits in the event of bankruptcy of a broker with which the Acquiring Fund has an open position in a financial futures contract. Because the Acquiring Fund will engage in the purchase and
sale of futures contracts for hedging purposes or to seek to enhance the Acquiring Funds return, any losses incurred in connection therewith may, if the strategy is successful, be offset in whole or in part by increases in the value of
securities held by the Acquiring Fund or decreases in the price of securities the Acquiring Fund intends to acquire.
The amount of risk the Acquiring Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of
the option purchased.
Counterparty Risk. The Acquiring Fund will be
subject to credit risk with respect to the counterparties to the derivative contracts purchased by the Acquiring Fund. Because derivative transactions in which the Acquiring Fund may engage may involve instruments that are not traded on an exchange
or cleared through a central counterparty but are instead traded between counterparties based on contractual relationships, the Acquiring Fund is subject to the risk that a counterparty will not perform its obligations under the related contracts.
If a counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Acquiring Fund may experience significant delays in obtaining any recovery in bankruptcy or other reorganization proceedings. The
Acquiring Fund may obtain only a limited recovery, or may obtain no recovery, in such circumstances. Although the Acquiring Fund intends to enter into transactions only with counterparties that the Investment Advisor believes to be creditworthy,
there can be no assurances that, as a result, a counterparty will not default and that the Acquiring Fund will not sustain a loss on a transaction. In the event of the counterpartys bankruptcy or insolvency, the Acquiring Funds
collateral may be subject to the conflicting claims of the counterpartys creditors, and the Acquiring Fund may be exposed to the risk of a court treating the Acquiring Fund as a general unsecured creditor of the counterparty, rather than as
the owner of the collateral.
The counterparty risk for cleared derivatives
is generally lower than for uncleared OTC derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties performance under the
contract as each party to a trade looks only to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurances that a clearing organization, or its members, will satisfy its
obligations to the Acquiring Fund, or that the Acquiring Fund would be able to recover the full amount of assets deposited on its behalf with the clearing organization in the event of the default by the clearing organization or the Acquiring
Funds clearing broker. In addition, cleared derivative transactions benefit from daily marking-to-market and settlement, and segregation and minimum capital
requirements applicable to intermediaries. Uncleared OTC derivative transactions generally do not benefit from such protections. This exposes the Acquiring Fund to the risk that a counterparty will not settle a transaction in accordance with its
terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the Acquiring Fund to suffer a loss. Such counterparty risk is accentuated for
contracts with longer maturities where events may intervene to prevent settlement, or where the Acquiring Fund has concentrated its transactions with a single or small group of counterparties.
In addition, the Acquiring Fund is subject to the risk that issuers of the
instruments in which it invests and trades may default on their obligations under those instruments, and that certain events may occur that have an immediate and significant adverse effect on the value of those instruments. There can be no
assurances that an issuer of an instrument in which the Acquiring Fund invests will not default, or that an event that has an immediate and significant adverse effect on the value of an instrument will not occur, and that the Acquiring Fund will not
sustain a loss on a transaction as a result.
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Swaps Risk. Swaps are a type of derivative. Swap agreements involve the risk that the party with
which the Acquiring Fund has entered into the swap will default on its obligation to pay the Acquiring Fund and the risk that the Acquiring Fund will not be able to meet its obligations to pay the other party to the agreement. In order to seek to
hedge the value of the Acquiring Funds portfolio, to hedge against increases in the Acquiring Funds cost associated with interest payments on any outstanding borrowings or to seek to increase the Acquiring Funds return, the
Acquiring Fund may enter into swaps, including interest rate swap, total return swap and/or credit default swap transactions. In interest rate swap transactions, there is a risk that yields will move in the direction opposite of the direction
anticipated by the Acquiring Fund, which would cause the Acquiring Fund to make payments to its counterparty in the transaction that could adversely affect Acquiring Fund performance. In addition to the risks applicable to swaps generally (including
counterparty risk, high volatility, liquidity risk and credit risk), credit default swap transactions involve special risks because they are difficult to value, are highly susceptible to liquidity and credit risk, and generally pay a return to the
party that has paid the premium only in the event of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
Historically, swap transactions have been individually negotiated non-standardized transactions entered into in OTC markets and have not been subject to the same type of government regulation as exchange-traded instruments. However, since the global financial crisis, the OTC
derivatives markets have recently become subject to comprehensive statutes and regulations. In particular, in the United States, the Dodd-Frank Act requires that certain derivatives with U.S. persons must be executed on a regulated market and a
substantial portion of OTC derivatives must be submitted for clearing to regulated clearinghouses. As a result, swap transactions entered into by the Acquiring Fund may become subject to various requirements applicable to swaps under the Dodd-Frank
Act, including clearing, exchange-execution, reporting and recordkeeping requirements, which may make it more difficult and costly for the Acquiring Fund to enter into swap transactions and may also render certain strategies in which the Acquiring
Fund might otherwise engage impossible or so costly that they will no longer be economical to implement. Furthermore, the number of counterparties that may be willing to enter into swap transactions with the Acquiring Fund may also be limited if the
swap transactions with the Acquiring Fund are subject to the swap regulation under the Dodd-Frank Act.
Credit default and total return swap agreements may effectively add leverage to the Acquiring Funds portfolio because, in addition to its managed
assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap. Total return swap agreements are subject to the risk that a counterparty will default on its payment obligations to the Acquiring Fund thereunder.
The Acquiring Fund is not required to enter into swap transactions for hedging purposes or to enhance income or gain and may choose not to do so. In addition, the swaps market is subject to a changing regulatory environment. It is possible that
regulatory or other developments in the swaps market could adversely affect the Acquiring Funds ability to successfully use swaps.
Over-the-Counter Trading Risk. The derivative instruments that
may be purchased or sold by the Acquiring Fund may include instruments not traded on an exchange. The risk of nonperformance by the counterparty to an instrument may be greater than, and the ease with which the Acquiring Fund can dispose of or enter
into closing transactions with respect to an instrument may be less than, the risk associated with an exchange traded instrument. In addition, significant disparities may exist between bid and asked prices for derivative
instruments that are not traded on an exchange. Derivative instruments not traded on exchanges also are not subject to the same type of government regulation as exchange traded instruments, and many of the protections afforded to participants in a
regulated environment may not be available in connection with the transactions. Because derivatives traded in OTC markets generally are not guaranteed by an exchange or clearing corporation, to the extent that the Acquiring Fund has unrealized gains
in such instruments or has deposited collateral with its counterparties, the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations.
Certain derivatives traded in OTC markets, including indexed securities, swaps
and OTC options, involve substantial liquidity risk. The absence of liquidity may make it difficult or impossible for the Acquiring Fund to sell such instruments promptly at an acceptable price. The absence of liquidity may also make it more
difficult for the Acquiring Fund to ascertain a market value for such instruments. The Acquiring Fund will, therefore, acquire illiquid OTC instruments (i) if the agreement pursuant to which the instrument is purchased contains a formula price
at which the instrument may be terminated or sold, or (ii) for which the Investment Advisor anticipates the Acquiring Fund can receive on each business day at least two independent bids or offers, unless a quotation from only one dealer is
available, in which case that dealers quotation may be used. Because derivatives traded in OTC markets are not
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guaranteed by an exchange or clearing corporation and generally do not require payment of margin, to the extent that the Acquiring Fund has unrealized gains in such instruments or has deposited
collateral with its counterparties the Acquiring Fund is at risk that its counterparties will become bankrupt or otherwise fail to honor its obligations. The Acquiring Fund will attempt to minimize these risks by engaging in transactions in
derivatives traded in OTC markets only with financial institutions that have substantial capital or that have provided the Acquiring Fund with a third-party guaranty or other credit enhancement.
Legal and Regulatory Risk. At any time after the date hereof,
legislation or additional regulations may be enacted that could negatively affect the assets of the Acquiring Fund. Changing approaches to regulation may have a negative impact on the securities in which the Acquiring Fund invests. Legislation or
regulation may also change the way in which the Acquiring Fund itself is regulated. There can be no assurance that future legislation, regulation or deregulation will not have a material adverse effect on the Acquiring Fund or will not impair the
ability of the Acquiring Fund to achieve its investment objective. In addition, as new rules and regulations resulting from the passage of the Dodd-Frank Act are implemented and new international capital and liquidity requirements are introduced
under the Basel III Accords, the market may not react the way the Investment Advisor expects. Whether the Acquiring Fund achieves its investment objective may depend on, among other things, whether the Investment Advisor correctly forecasts market
reactions to this and other legislation. In the event the Investment Advisor incorrectly forecasts market reaction, the Acquiring Fund may not achieve its investment objective.
Dodd-Frank Act Risk. Title VII of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010 (the Dodd-Frank Act) (the Derivatives Title) imposed a substantially new regulatory structure on derivatives markets, with particular emphasis on swaps (which were subject to oversight by the
CFTC) and security-based swaps (which were subject to oversight by the SEC). The regulatory framework covers a broad range of swap market participants, including banks, non-banks, credit unions, insurance
companies, broker-dealers and investment advisers. Prudential regulators were granted authority to regulate margining of swaps and security-based swaps of banks and bank-related entities.
Although the CFTC and the prudential regulators have adopted and have begun
implementing required regulations, the SEC rules were not finalized until December 2019 and firms have until October 2021 to come into compliance.
Current regulations for swaps require the mandatory central clearing and mandatory exchange trading of particular types of interest rate swaps and
index credit default swaps (together, Covered Swaps). The Fund is required to clear its Covered Swaps through a clearing broker, which requires, among other things, posting initial margin and variation margin to the Funds clearing
broker in order to enter into and maintain positions in Covered Swaps.
Covered Swaps generally are required to be executed through a swap execution facility (SEF), which can involve additional transaction fees.
Additionally, under the Dodd-Frank Act, swaps (and both swaps and
security-based swaps entered into with banks) are subject to margin requirements and swap dealers are required to collect margin from the Fund and post variation margin to the Fund with respect to such derivatives. Specifically, regulations are now
in effect that require swap dealers to post and collect variation margin (comprised of specified liquid instruments and subject to a required haircut) in connection with trading of OTC swaps with the Fund. Shares of investment companies (other than
certain money market funds) may not be posted as collateral under these regulations. Requirements for posting of initial margin in connection with OTC swaps (as well as security-based swaps in addition to OTC swaps where the dealer is a bank or
subsidiary of a bank holding company) will be phased-in through September 2021. The CFTC has not yet adopted capital requirements for swap dealers. As uncleared capital requirements for swap dealers and
uncleared capital and margin requirements for security-based swaps are phased in and implemented, such requirements may make certain types of trades and/or trading strategies more costly. There may be market dislocations due to uncertainty during
the implementation period of any new regulation and the Investment Advisor cannot know how the derivatives market will adjust to the CFTCs new capital regulations and to the new SEC regulations governing security-based swaps.
In addition, regulations adopted by global prudential regulators that are now
in effect require certain bank- regulated counterparties and certain of their affiliates to include in qualified financial contracts, including many derivatives contracts as well as repurchase agreements and securities lending
agreements, terms that delay or restrict the rights of
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counterparties to terminate such contracts, foreclose upon collateral, exercise other default rights or restrict transfers of affiliate credit enhancements (such as guarantees) in the event that
the bank-regulated counterparty and/or its affiliates are subject to certain types of resolution or insolvency proceedings.
Regulation as a Commodity Pool. The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund
that is advised by the investment adviser either (i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself
as providing investment exposure to such instruments. To the extent the Acquiring Fund uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such
instruments. Accordingly, the Investment Advisor has claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Investment
Advisor is not, therefore, subject to registration or regulation as a commodity pool operator under the CEA in respect of the Acquiring Fund.
Legal, Tax and Regulatory Risks. Legal, tax and regulatory changes could occur that may have material adverse effects on the Acquiring Fund. For
example, the regulatory and tax environment for derivative instruments in which the Acquiring Fund may participate is evolving, and such changes in the regulation or taxation of derivative instruments may have material adverse effects on the value
of derivative instruments held by the Acquiring Fund and the ability of the Acquiring Fund to pursue its investment strategies.
To qualify for the favorable U.S. federal income tax treatment generally accorded to RICs, the Acquiring Fund must, among other things, derive in each
taxable year at least 90% of its gross income from certain prescribed sources and distribute for each taxable year at least 90% of its investment company taxable income (generally, ordinary income plus the excess, if any, of net
short-term capital gain over net long-term capital loss) and at least 90% of its net tax-exempt interest income, if any. If for any taxable year the Acquiring Fund does not qualify as a RIC, all of its taxable
income for that year (including its net capital gain) would be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions would be taxable as ordinary dividends to the extent of the
Acquiring Funds current and accumulated earnings and profits.
The
Biden presidential administration has called for significant changes to U.S. fiscal, tax, trade, healthcare, immigration, foreign, and government regulatory policy. In this regard, there is significant uncertainty with respect to legislation,
regulation and government policy at the federal level, as well as the state and local levels. Recent events have created a climate of heightened uncertainty and introduced new and
difficult-to-quantify macroeconomic and political risks with potentially far-reaching implications. There has been a
corresponding meaningful increase in the uncertainty surrounding interest rates, inflation, foreign exchange rates, trade volumes and fiscal and monetary policy. To the extent the U.S. Congress or the current presidential administration implements
changes to U.S. policy, those changes may impact, among other things, the U.S. and global economy, international trade and relations, unemployment, immigration, corporate taxes, healthcare, the U.S. regulatory environment, inflation and other areas.
Although the Acquiring Fund cannot predict the impact, if any, of these changes to the Acquiring Funds business, they could adversely affect the Acquiring Funds business, financial condition, operating results and cash flows. Until the
Acquiring Fund knows what policy changes are made and how those changes impact the Acquiring Funds business and the business of the Acquiring Funds competitors over the long-term, the Acquiring Fund will not know if, overall, the
Acquiring Fund will benefit from them or be negatively affected by them.
The rules dealing with U.S. federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the
U.S. Treasury Department. The Acquiring Fund cannot predict how any changes in the tax laws might affect its investors or the Acquiring Fund itself. New legislation, U.S. Treasury regulations, administrative interpretations or court decisions, with
or without retroactive application, could significantly and negatively affect the Acquiring Funds ability to qualify as a RIC or the U.S. federal income tax consequences to its investors and itself of such qualification, or could have other
adverse consequences. You are urged to consult with your tax advisor with respect to the status of legislative, regulatory or administrative developments and proposals and their potential effect on an investment in the Acquiring Funds shares.
1940 Act Regulation. The Acquiring Fund is a registered closed-end management investment company and as such is subject to regulations under the 1940 Act. Generally speaking, any contract or provision thereof that is made, or
53
where performance involves a violation of the 1940 Act or any rule or regulation thereunder is unenforceable by either party unless a court finds otherwise.
LIBOR Risk. The Acquiring Fund may be exposed to financial instruments
that are tied to the London Interbank Offered Rate (LIBOR) to determine payment obligations, financing terms, hedging strategies or investment value. The Acquiring Funds investments may pay interest at floating rates based on LIBOR
or may be subject to interest caps or floors based on LIBOR. The Acquiring Fund may also obtain financing at floating rates based on LIBOR. Derivative instruments utilized by the Acquiring Fund may also reference LIBOR.
The United Kingdoms Financial Conduct Authority announced a phase out of
LIBOR such that after December 31, 2021, all sterling, euro, Swiss franc and Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings will
cease to be published or will no longer be representative, and after June 30, 2023, the overnight, 1- month, 3-month,
6-month and 12-month U.S. dollar LIBOR settings will cease to be published or will no longer be representative. The Acquiring Fund may have investments linked to other
interbank offered rates, such as the Euro Overnight Index Average (EONIA), which may also cease to be published. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to
converting certain securities and transactions to a new reference rate (e.g., the Secured Overnight Financing Rate (SOFR), which is intended to replace the U.S. dollar LIBOR).
Neither the effect of the LIBOR transition process nor its ultimate success can
yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based
instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate
LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments.
In addition, a liquid market for newly issued instruments that use a reference rate other than LIBOR still may be developing. There may also be challenges for the Acquiring Fund to enter into hedging transactions against such newly issued
instruments until a market for such hedging transactions develops. All of the aforementioned may adversely affect the Acquiring Funds performance or NAV.
Risks Associated with Recent Market Events. Stresses associated with the 2008 financial crisis in the United States and global economies peaked
approximately a decade ago, but periods of unusually high volatility in the financial markets and restrictive credit conditions, sometimes limited to a particular sector or a geography, continue to recur. Some countries, including the United States,
have adopted and/or are considering the adoption of more protectionist trade policies, a move away from the tighter financial industry regulations that followed the financial crisis, and/or substantially reducing corporate taxes. The exact shape of
these policies is still being considered, but the equity and debt markets may react strongly to expectations of change, which could increase volatility, especially if the markets expectations are not borne out. A rise in protectionist trade
policies, and the possibility of changes to some international trade agreements, could affect the economies of many nations in ways that cannot necessarily be foreseen at the present time. In addition, geopolitical and other risks, including
environmental and public health, may add to instability in world economies and markets generally. Economies and financial markets throughout the world are becoming increasingly interconnected. As a result, whether or not the Acquiring Fund invests
in securities of issuers located in or with significant exposure to countries experiencing economic, political and/or financial difficulties, the value and liquidity of the Acquiring Funds investments may be negatively affected by such events.
An outbreak of respiratory disease caused by a novel coronavirus was first
detected in China in December 2019 and has now developed into a global pandemic. This pandemic has resulted in closing borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to
supply chains and customer activity, as well as general concern and uncertainty. Disruptions in markets can adversely impact the Acquiring Fund and its investments. Further, certain local markets have been or may be subject to closures, and there
can be no certainty regarding whether trading will continue in any local markets in which the Acquiring Fund may invest, when any resumption of trading will occur or, once such markets resume trading, whether they will face further closures. Any
suspension of trading in markets in which the Acquiring Fund invests will have an impact on the Acquiring Fund and its investments and will impact the Acquiring Funds ability to purchase or sell securities in such market. The
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outbreak could also impair the information technology and other operational systems upon which the Acquiring Funds service providers, including BlackRock, rely, and could otherwise disrupt
the ability of employees of the Acquiring Funds service providers to perform critical tasks relating to the Acquiring Fund. The impact of this outbreak has adversely affected the economies of many nations and the entire global economy and may
impact individual issuers and capital markets in ways that cannot be foreseen. In the past, governmental and quasi-governmental authorities and regulators through the world have at times responded to major economic disruptions with a variety of
fiscal and monetary policy changes, including direct capital infusions into companies and other issuers, new monetary policy tools, and lower interest rates. An unexpected or sudden reversal of these policies, or the ineffectiveness of such
policies, is likely to increase market volatility, which could adversely affect the Acquiring Funds investments. Public health crises caused by the outbreak may exacerbate other pre-existing political,
social and economic risks in certain countries or globally. Other infectious illness outbreaks that may arise in the future could have similar or other unforeseen effects. The duration of this outbreak or others and their effects cannot be
determined with certainty.
Market Disruption and Geopolitical Risk.
The occurrence of events similar to those in recent years, such as the aftermath of the war in Iraq, instability in Afghanistan, Pakistan, Egypt, Libya, Syria, Russia, Ukraine and the Middle East, new and ongoing epidemics and pandemics of
infectious diseases and other global health events, natural/environmental disasters, terrorist attacks in the United States and around the world, social and political discord, debt crises (such as the Greek crisis), sovereign debt downgrades,
increasingly strained relations between the United States and a number of foreign countries, including traditional allies, such as certain European countries, and historical adversaries, such as North Korea, Iran, China and Russia, and the
international community generally, new and continued political unrest in various countries, such as Venezuela and Spain, the exit or potential exit of one or more countries from the European Union (the EU) or the European Monetary Union
(the EMU), continued changes in the balance of political power among and within the branches of the U.S. government, among others, may result in market volatility, 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 coronavirus pandemic has led to illiquidity and volatility in the municipal bond markets and may lead to downgrades in the credit quality of certain municipal
issuers.
China and the United States have each recently imposed tariffs on
the other countrys products. These actions may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or
large segments of Chinas export industry, which could have a negative impact on the Acquiring Funds performance. U.S. companies that source material and goods from China and those that make large amounts of sales in China would be
particularly vulnerable to an escalation of trade tensions. Uncertainty regarding the outcome of the trade tensions and the potential for a trade war could cause the U.S. dollar to decline against safe haven currencies, such as the Japanese yen and
the euro. Events such as these and their consequences are difficult to predict and it is unclear whether further tariffs may be imposed or other escalating actions may be taken in the future.
The decision made in the British referendum of June 23, 2016 to leave the
EU, an event widely referred to as Brexit, has led to volatility in the financial markets of the United Kingdom (UK) and more broadly across Europe and may also lead to weakening in consumer, corporate and financial
confidence in such markets. Pursuant to an agreement between the UK and the EU, the UK left the EU on January 31, 2020. The UK and EU have reached an agreement effective January 1, 2021 on the terms of their future trading relationship
relating principally to the trading of goods; however, negotiations are ongoing for matters not covered by the agreement, such as the trade of financial services. The longer term economic, legal, political and social framework to be put in place
between the UK and the EU remains unclear at this stage and ongoing political and economic uncertainty and periods of exacerbated volatility in both the UK and in wider European markets may continue for some time. In particular, the decision made in
the British referendum may lead to a call for similar referendums in other European jurisdictions which may cause increased economic volatility in the European and global markets. This uncertainty may have an adverse effect on the economy generally
and on the ability of the Acquiring Fund and its investments to execute their respective strategies and to receive attractive returns. In particular, currency volatility may mean that the returns of the Acquiring Fund and its investments are
adversely affected by market movements and may make it more difficult, or more expensive, if the Acquiring Fund elects to execute currency hedges. Potential decline in the value of the British Pound and/or the Euro against other currencies, along
with the potential downgrading of the UKs sovereign credit rating, may also have an impact on the performance of portfolio companies or investments located in the UK or Europe. In light of the above,
55
no definitive assessment can currently be made regarding the impact that Brexit will have on the Acquiring Fund, its investments or its organization more generally.
The occurrence of any of these above events could have a significant adverse
impact on the value and risk profile of the Acquiring Funds portfolio. The Acquiring Fund does not know how long the securities markets may be affected by similar events and cannot predict the effects of similar events in the future on the
U.S. economy and securities markets. There can be no assurance that similar events and other market disruptions will not have other material and adverse implications.
Cybersecurity incidents affecting particular companies or industries may adversely affect the economies of particular countries of the world in which
the Acquiring Fund invests.
Regulation and Government Intervention
Risk. The U.S. Government and the Federal Reserve, as well as certain foreign governments, recently have taken unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced
extreme volatility, such as implementing stimulus packages, providing liquidity in fixed-income, commercial paper and other markets, and providing tax breaks, among other actions. Such actions may have unintended and adverse consequences, such as
causing or contributing to an increased risk of inflation. See Inflation Risk. The reduction or withdrawal of Federal Reserve or other U.S. or non-U.S. governmental support could negatively affect
financial markets generally and reduce the value and liquidity of certain securities. Additionally, with the cessation of certain market support activities, the Acquiring Fund may face a heightened level of interest rate risk as a result of a rise
or increased volatility in interest rates.
Federal, state, and other
governments, their regulatory agencies or self-regulatory organizations may take actions that affect the regulation of the issuers in which the Acquiring Fund invests. Legislation or regulation may also change the way in which the Acquiring Fund is
regulated. Such legislation or regulation could limit or preclude the Acquiring Funds ability to achieve its investment objective.
In the aftermath of the global financial crisis, there appears to be a renewed popular, political and judicial focus on finance related consumer
protection. Financial institution practices are also subject to greater scrutiny and criticism generally. In the case of transactions between financial institutions and the general public, there may be a greater tendency toward strict interpretation
of terms and legal rights in favor of the consuming public, particularly where there is a real or perceived disparity in risk allocation and/or where consumers are perceived as not having had an opportunity to exercise informed consent to the
transaction. In the event of conflicting interests between retail investors holding common shares of a closed-end investment company such as the Acquiring Fund and a large financial institution, a court may
similarly seek to strictly interpret terms and legal rights in favor of retail investors. The Acquiring Fund may be affected by governmental action in ways that are not foreseeable, and there is a possibility that such actions could have a
significant adverse effect on the Acquiring Fund and its ability to achieve its investment objective.
Potential Conflicts of Interest of the Investment Advisor and Others. The investment activities of BlackRock, Inc. (BlackRock), the
ultimate parent company of the Investment Advisor, and its affiliates (including BlackRock and its subsidiaries (collectively, the Affiliates)), and their respective directors, officers or employees, in the management of, or their
interest in, their own accounts and other accounts they manage, may present conflicts of interest that could disadvantage the Acquiring Fund and its shareholders. BlackRock and its Affiliates provide investment management services to other funds and
discretionary managed accounts that may follow investment programs similar to that of the Acquiring Fund. Subject to the requirements of the 1940 Act, BlackRock and its Affiliates intend to engage in such activities and may receive compensation from
third parties for their services. Neither BlackRock nor any Affiliate is under any obligation to share any investment opportunity, idea or strategy with the Acquiring Fund. As a result, BlackRock and its Affiliates may compete with the Acquiring
Fund for appropriate investment opportunities. The results of the Acquiring Funds investment activities, therefore, may differ from those of an Affiliate and of other accounts managed by BlackRock or an Affiliate and it is possible that the
Acquiring Fund could sustain losses during periods in which one or more Affiliates and other accounts achieve profits on their trading for proprietary or other accounts. BlackRock has adopted policies and procedures designed to address potential
conflicts of interests.
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Market and Selection Risk. Market risk is the possibility that the market values of securities
owned by the Acquiring Fund will decline. There is a risk that equity and/or bond markets will go down in value, including the possibility that such markets will go down sharply and unpredictably.
Stock markets are volatile, and the price of equity securities fluctuates based
on changes in a companys financial condition and overall market and economic conditions. An adverse event, such as an unfavorable earnings report, may depress the value of a particular common stock held by the Acquiring Fund. 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 Acquiring Fund 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.
The prices of fixed income securities tend to fall as interest rates rise, and
such declines tend to be greater among fixed income securities with longer maturities. Market risk is often greater among certain types of fixed income securities, such as zero-coupon bonds that do not make
regular interest payments but are instead bought at a discount to their face values and paid in full upon maturity. As interest rates change, these securities often fluctuate more in price than securities that make regular interest payments and
therefore subject the Acquiring Fund to greater market risk than a fund that does not own these types of securities.
When-issued and delayed delivery transactions are subject to changes in market conditions from the time of the commitment until settlement, which may
adversely affect the prices or yields of the securities being purchased. The greater the Acquiring Funds outstanding commitments for these securities, the greater the Acquiring Funds exposure to market price fluctuations.
Selection risk is the risk that the securities that the Acquiring Funds
management selects will underperform the equity and/or bond market, the market relevant indices or other funds with similar investment objectives and investment strategies.
Defensive Investing Risk. For defensive purposes, the Acquiring Fund may allocate assets into cash or short-term fixed income securities. In
doing so, the Acquiring Fund may succeed in avoiding losses but may otherwise fail to achieve its investment objective. Further, the value of short-term fixed income securities may be affected by changing interest rates and by changes in credit
ratings of the investments. If the Acquiring Fund holds cash uninvested it will be subject to the credit risk of the depository institution holding the cash.
Decision-Making Authority Risk. Investors have no authority to make decisions or to exercise business discretion on behalf of the Acquiring
Fund, except as set forth in the Acquiring Funds governing documents. The authority for all such decisions is generally delegated to the Board, which in turn, has delegated the
day-to-day management of the Acquiring Funds investment activities to the Investment Advisor, subject to oversight by the Board.
Management Risk. The Acquiring Fund is subject to management risk
because it is an actively managed investment portfolio. The Investment Advisor and the individual portfolio managers will apply investment techniques and risk analyses in making investment decisions for the Acquiring Fund, but there can be no
guarantee that these will produce the desired results. The Acquiring Fund may be subject to a relatively high level of management risk because the Acquiring Fund may invest in derivative instruments, which may be highly specialized instruments that
require investment techniques and risk analyses different from those associated with equities and bonds.
Valuation Risk. The Acquiring Fund is subject to valuation risk, which is the risk that one or more of the securities in which the Acquiring
Fund invests are valued at prices that the Acquiring Fund is unable to obtain upon sale due to factors such as incomplete data, market instability or human error. The Investment Advisor may use an independent pricing service or prices provided by
dealers to value securities at their market value. Because the secondary markets for certain investments may be limited, such instruments may be difficult to value. When market quotations are not available, the Investment Advisor may price such
investments pursuant to a number of methodologies, such as computer-based analytical modeling or individual security evaluations. These methodologies generate approximations of market values, and there may be significant professional disagreement
about the best methodology for a particular type of financial instrument or different methodologies that might be used under different circumstances. In the absence of an actual market transaction, reliance on such methodologies is essential, but
may introduce significant
57
variances in the ultimate valuation of the Acquiring Funds investments. Technological issues and/or errors by pricing services or other third-party service providers may also impact the
Acquiring Funds ability to value its investments and the calculation of the Acquiring Funds NAV.
When market quotations are not readily available or are deemed to be inaccurate or unreliable, the Acquiring Fund values its investments at fair value
as determined in good faith pursuant to policies and procedures approved by the Board. Fair value is defined as the amount for which assets could be sold in an orderly disposition over a reasonable period of time, taking into account the nature of
the asset. Fair value pricing may require determinations that are inherently subjective and inexact about the value of a security or other asset. As a result, there can be no assurance that fair value priced assets will not result in future
adjustments to the prices of securities or other assets, or that fair value pricing will reflect a price that the Acquiring Fund is able to obtain upon sale, and it is possible that the fair value determined for a security or other asset will be
materially different from quoted or published prices, from the prices used by others for the same security or other asset and/or from the value that actually could be or is realized upon the sale of that security or other asset. For example, the
Acquiring Funds NAV could be adversely affected if the Acquiring Funds determinations regarding the fair value of the Acquiring Funds investments were materially higher than the values that the Acquiring Fund ultimately realizes
upon the disposal of such investments. Where market quotations are not readily available, valuation may require more research than for more liquid investments. In addition, elements of judgment may play a greater role in
valuation in such cases than for investments with a more active secondary market because there is less reliable objective data available. The Acquiring Fund prices its shares daily and therefore all assets, including assets valued at fair value, are
valued daily.
Reliance on the Investment Advisor Risk. The
Acquiring Fund is dependent upon services and resources provided by the Investment Advisor, and therefore the Investment Advisors parent, BlackRock. The Investment Advisor is not required to devote its full time to the business of the
Acquiring Fund and there is no guarantee or requirement that any investment professional or other employee of the Investment Advisor will allocate a substantial portion of his or her time to the Acquiring Fund. The loss of one or more individuals
involved with the Investment Advisor could have a material adverse effect on the performance or the continued operation of the Acquiring Fund.
Reliance on Service Providers Risk. The Acquiring Fund must rely upon the performance of service providers to perform certain functions, which
may include functions that are integral to the Acquiring Funds operations and financial performance. Failure by any service provider to carry out its obligations to the Acquiring Fund in accordance with the terms of its appointment, to
exercise due care and skill or to perform its obligations to the Acquiring Fund at all as a result of insolvency, bankruptcy or other causes could have a material adverse effect on the Acquiring Funds performance and returns to common
shareholders. The termination of the Acquiring Funds relationship with any service provider, or any delay in appointing a replacement for such service provider, could materially disrupt the business of the Acquiring Fund and could have a
material adverse effect on the Acquiring Funds performance and returns to common shareholders.
Information Technology Systems Risk. The Acquiring Fund is dependent on the Investment Advisor for certain management services as well as
back-office functions. The Investment Advisor depends on information technology systems in order to assess investment opportunities, strategies and markets and to monitor and control risks for the Acquiring Fund. It is possible that a failure of
some kind which causes disruptions to these information technology systems could materially limit the Investment Advisors ability to adequately assess and adjust investments, formulate strategies and provide adequate risk control. Any such
information technology-related difficulty could harm the performance of the Acquiring Fund. Further, failure of the back-office functions of the Investment Advisor to process trades in a timely fashion could prejudice the investment performance of
the Acquiring Fund.
Cyber Security Risk. With the increased use of
technologies such as the Internet to conduct business, the Acquiring Fund is susceptible to operational, information security and related risks. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber-attacks
include, but are not limited to, gaining unauthorized access to digital systems (e.g., through hacking or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing
operational disruption. Cyber-attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on
websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the Investment Advisor and other service providers (including, but not limited to, fund accountants, custodians,
transfer agents and administrators), and the issuers of securities in which the Acquiring Fund invests, have the ability to cause
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disruptions and impact business operations, potentially resulting in financial losses, interference with the Acquiring Funds ability to calculate its NAV, impediments to trading, the
inability of shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, substantial
costs may be incurred in order to prevent any cyber incidents in the future. While the Acquiring Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber-attacks, there are inherent
limitations in such plans and systems including the possibility that certain risks have not been identified. Furthermore, the Acquiring Fund cannot control the cyber security plans and systems put in place by service providers to the Acquiring Fund
and issuers in which the Acquiring Fund invests. As a result, the Acquiring Fund or its shareholders could be negatively impacted.
Misconduct of Employees and of Service Providers Risk. Misconduct or misrepresentations by employees of the Investment Advisor or the Acquiring
Funds service providers could cause significant losses to the Acquiring Fund. Employee misconduct may include binding the Acquiring Fund to transactions that exceed authorized limits or present unacceptable risks and unauthorized trading
activities, concealing unsuccessful trading activities (which, in any case, may result in unknown and unmanaged risks or losses) or making misrepresentations regarding any of the foregoing. Losses could also result from actions by the Acquiring
Funds service providers, including, without limitation, failing to recognize trades and misappropriating assets. In addition, employees and service providers may improperly use or disclose confidential information, which could result in
litigation or serious financial harm, including limiting the Acquiring Funds business prospects or future marketing activities. Despite the Investment Advisors due diligence efforts, misconduct and intentional misrepresentations may be
undetected or not fully comprehended, thereby potentially undermining the Investment Advisors due diligence efforts. As a result, no assurances can be given that the due diligence performed by the Investment Advisor will identify or prevent
any such misconduct.
Inflation Risk. Inflation risk is the risk
that the value of assets or income from investment will be worth less in the future, as inflation decreases the value of money. As inflation increases, the real value of the common shares and distributions on those shares can decline. In addition,
during any periods of rising inflation, interest rates on any borrowings by the Acquiring Fund would likely increase, which would tend to further reduce returns to the common shareholders.
Deflation Risk. Deflation risk is the risk that prices throughout the
economy decline over time, which may have an adverse effect on the market valuation of companies, their assets and their revenues. In addition, deflation may have an adverse effect on the creditworthiness of issuers and may make issuer default more
likely, which may result in a decline in the value of the Acquiring Funds portfolio.
Portfolio Turnover Risk. The Acquiring Funds annual portfolio turnover rate may vary greatly from year to year, as well as within a given
year. Portfolio turnover rate is not considered a limiting factor in the execution of investment decisions for the Acquiring Fund. A higher portfolio turnover rate results in correspondingly greater brokerage commissions and other transactional
expenses that are borne by the Acquiring Fund. High portfolio turnover may result in an increased realization of net short-term capital gains by the Acquiring Fund which, when distributed to common shareholders, will be taxable as ordinary income.
Additionally, in a declining market, portfolio turnover may create realized capital losses.
Anti-Takeover Provisions Risk. The Agreement and Declaration of Trust and Bylaws of the Acquiring Fund include provisions that could limit the
ability of other entities or persons to acquire control of the Acquiring Fund or convert the Acquiring Fund to open-end status or to change the composition of the Board.
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A DESCRIPTION OF THE FUNDS
MFL is organized as a Massachusetts business trust pursuant to its Declaration
of Trust governed by the laws of the State of Massachusetts. The Acquiring Fund is formed as a Maryland corporation pursuant to its charter (the Charter) and governed by the laws of State of Maryland. Each of MFL and the Acquiring Fund
is a diversified, closed-end management investment company registered under the 1940 Act. Each Funds principal office is located at 100 Bellevue Parkway, Wilmington, Delaware 19809, and each Funds
telephone number is (800) 882-0052.
MFL was organized as a Massachusetts business trust pursuant to a Declaration of Trust governed by the laws of the State of Massachusetts on
September 8, 1997, and commenced operations on September 26, 1997.
The Acquiring Fund was formed as a Maryland corporation governed by the laws of the State of Maryland on May 15, 2003, and commenced operations on
August 1, 2003. On October 1, 2021, the Acquiring Fund changed its name from BlackRock Muni Duration Fund, Inc. to BlackRock Municipal Income Fund, Inc.
The Acquiring Fund common shares are listed on the NYSE as MUI.
MFLs common shares are listed on the NYSE as MFL.
The
Acquiring Fund has an April 30 fiscal year end. MFL has an August 31 fiscal year end.
MFL has VRDP Shares outstanding and the Acquiring Fund has VMTP Shares outstanding. Each Funds preferred shares are not listed on a national
stock exchange and have not been registered under the Securities Act, or any state securities laws, and unless so registered, may not be offered, sold, assigned, transferred, pledged, encumbered or otherwise disposed of except pursuant to an
exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. Please see Information about the Preferred Shares of the Funds for additional information.
The Board of Trustees/Directors and Officers
The Board of Trustees of MFL and the Board of Directors of the Acquiring Fund
(each, a Board and together, the Boards) currently consists of thirteen individuals (each, a Board Member), eleven of whom are not interested persons of each Fund as defined in the 1940 Act (the
Independent Board Members). The registered investment companies advised by the Investment Advisor or its affiliates (the BlackRock-Advised Funds) are organized into one complex of
closed-end funds and open-end non-index fixed-income funds (the BlackRock Fixed-Income Complex), one complex of open-end equity, multi-asset, index and money market funds (the BlackRock Multi-Asset Complex) and one complex of exchange-traded funds (each, a BlackRock Fund Complex). Each Fund is included
in the BlackRock Fixed-Income Complex. The Board Members also oversee as Board members the operations of the other closed-end registered investment companies included in the BlackRock Fixed-Income Complex.
Certain biographical and other information relating to the Board Members
and officers of each Fund is set forth below, including their year of birth, their principal occupation for at least the last five years, the length of time served, the total number of investment companies overseen in the BlackRock Fund Complexes
and any public directorships or trusteeships.
Please refer to the below
table which identifies the Board Members and sets forth certain biographical information about the Board Members for each Fund.
60
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number
of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company
or
Investment
Company
Directorships
Held
During Past
Five Years(5)
|
Independent Board Members(2)
|
|
|
|
|
|
|
|
|
|
Richard E. Cavanagh
1946
|
|
Co-Chair of the Board and Board Member (Since 2007)
|
|
Director, The Guardian Life Insurance Company of America since 1998; Board Chair, Volunteers of America (a not-for-profit organization) from
2015 to 2018 (board member since 2009); Director, Arch Chemicals (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since
2008 and Director thereof since 1996; Faculty Member/Adjunct Lecturer, Harvard University since 2007 and Executive Dean from 1987 to 1995; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from
1995 to 2007.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
|
|
|
|
|
Karen P. Robards
1950
|
|
Co-Chair of the Board and Board Member (Since 2007)
|
|
Principal of Robards & Company, LLC (consulting and private investing) since 1987; Co-founder and Director of the Cooke Center for Learning and Development (a not-for-profit organization) since 1987; Director of Enable Injections, LLC (medical devices) since 2019; Investment Banker at Morgan Stanley from 1976 to
1987.
|
|
[·] RICs consisting of [·] Portfolios
|
|
Greenhill & Co., Inc.; AtriCure, Inc. (medical devices) from 2000 until 2017
|
|
|
|
|
|
Michael J. Castellano
1946
|
|
Board Member (Since 2011)
|
|
Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging Religious (non-profit) from 2009
to June 2015 and since 2017; Director, National Advisory Board of Church Management at Villanova University since 2010; Trustee, Domestic Church Media Foundation since 2012; Director, CircleBlack Inc. (financial technology company) since 2015.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
|
|
|
|
|
Cynthia L. Egan
1955
|
|
Board Member (Since 2016)
|
|
Advisor, U.S. Department of the Treasury from 2014 to 2015; President, Retirement Plan Services, for T. Rowe Price Group, Inc. from 2007 to 2012; executive positions within Fidelity Investments from 1989 to 2007.
|
|
[·] RICs consisting of [·] Portfolios
|
|
Unum (insurance); The Hanover Insurance Group (insurance); Envestnet (investment platform) from 2013 until 2016
|
|
|
|
|
|
Frank J. Fabozzi
1948
|
|
Board Member (Since 2007)
|
|
Editor of The Journal of Portfolio Management since 1986; Professor of Finance, EDHEC Business School (France) since 2011; Visiting Professor, Princeton University for the 2013 to 2014 academic year and Spring 2017 semester;
Professor in the Practice of Finance, Yale University School of Management from 1994 to 2011 and currently a Teaching Fellow in Yales Executive Programs; Board Member, BlackRock Equity-Liquidity Funds from 2014 to 2016; affiliated professor
Karlsruhe Institute of Technology from 2008 to 2011; Visiting Professor Rutgers University for the Spring 2019 semester; Visiting Professor, New York University for the 2019 academic year.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
|
|
|
|
|
Lorenzo A. Flores
1964
|
|
Board Member (Since 2021)
|
|
Vice Chairman, Kioxia, Inc. since 2019; Chief Financial Officer, Xilinx, Inc. from 2016 to 2019; Corporate Controller, Xilinx, Inc. from 2008 to 2016.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
61
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s)
During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company or
Investment
Company
Directorships
Held During
Past Five
Years(5)
|
Stayce D. Harris
1959
|
|
Board
Member
(Since
2021)
|
|
Lieutenant General, Inspector General, Office of the Secretary of the United States Air Force from 2017 to 2019; Lieutenant General, Assistant Vice Chief of Staff and Director, Air Staff, United States Air Force from 2016 to 2017;
Major General, Commander, 22nd Air Force, AFRC, Dobbins Air Reserve Base, Georgia from 2014 to 2016; Pilot, United Airlines from 1990 to 2020.
|
|
[·] RICs, consisting of [·] Portfolios
|
|
The Boeing Company
|
|
|
|
|
|
J. Phillip Holloman
1955
|
|
Board
Member
(Since
2021)
|
|
President and Chief Operating Officer, Cintas Corporation from 2008 to 2018.
|
|
[·] RICs, consisting of [·] Portfolios
|
|
PulteGroup, Inc. (home construction); Rockwell Automation Inc. (industrial automation)
|
|
|
|
|
|
R. Glenn Hubbard
1958
|
|
Board
Member
(Since
2007)
|
|
Dean, Columbia Business School from 2004 to 2019; Faculty member, Columbia Business School since 1988.
|
|
[·] RICs consisting of [·] Portfolios
|
|
ADP (data and information services); Metropolitan Life Insurance Company (insurance); KKR Financial Corporation (finance) from 2004 until 2014
|
|
|
|
|
|
W. Carl Kester
1951
|
|
Board
Member
(Since
2007)
|
|
George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008; Deputy Dean for Academic Affairs from 2006 to 2010; Chairman of the Finance Unit, from 2005 to 2006; Senior Associate Dean and
Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
|
|
|
|
|
Catherine A. Lynch
1961
|
|
Board
Member
(Since
2016)
|
|
Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury Management, The George Washington University from
1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
|
Interested Board
Members(5)
|
|
|
|
|
|
Robert Fairbairn
1965
|
|
Board
Member
(Since
2018)
|
|
Vice Chairman of BlackRock, Inc. since 2019; Member of BlackRocks Global Executive and Global Operating Committees; Co-Chair of BlackRocks Human Capital Committee; Senior
Managing Director of BlackRock, Inc. from 2010 to 2019; oversaw BlackRocks Strategic Partner Program and Strategic Product Management Group from 2012 to 2019; Member of the Board of Managers of BlackRock Investments, LLC from 2011 to 2018;
Global Head of BlackRocks Retail and iShares® businesses from 2012 to 2016.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
62
|
|
|
|
|
|
|
|
|
Name and Year of
Birth(1)
|
|
Position(s)
Held
(Length of
Service) (3)
|
|
Principal Occupation(s) During Past Five Years
|
|
Number of
BlackRock-
Advised
Registered
Investment
Companies
(RICs)
Consisting
of
Investment
Portfolios
(Portfolios)
Overseen(4)
|
|
Other Public
Company or
Investment
Company
Directorships
Held During
Past Five
Years(5)
|
John M. Perlowski
1964
|
|
Board
Member
(Since
2015),
President
and
Chief
Executive
Officer
(Since
2010)
|
|
Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Accounting and Product Services since 2009; Advisory Director of Family Resource Network (charitable foundation) since 2009.
|
|
[·] RICs consisting of [·] Portfolios
|
|
None
|
(1)
|
|
The address of each Board Member is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055.
|
(2)
|
|
Each Independent Board Member holds office until his or her successor is elected and qualifies, or until his or her earlier death, resignation, retirement or removal as provided by each Funds by-laws or charter or statute, or until December 31 of the year in which he or she turns 75. Board Members who are interested persons, as defined in the 1940 Act, serve until their successor is
elected and qualifies or until their earlier death, resignation, retirement or removal as provided by each Funds bylaws or statute, or until December 31 of the year in which they turn 72. The Board may determine to extend the terms of
Independent Board Members on a case-by-case basis, as appropriate.
|
(3)
|
|
Date shown is the earliest date a person has served for the Funds covered by this Joint Proxy Statement/Prospectus. Following the combination of Merrill Lynch Investment Managers, L.P. (MLIM) and BlackRock,
Inc. in September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. Certain Independent Board Members first became members of the boards of other legacy MLIM or legacy
BlackRock funds as follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi, 1988; R. Glenn Hubbard, 2004; W. Carl Kester, 1995; and Karen P. Robards, 1998. Certain other Independent Board Members became members of the boards of the closed-end funds in the BlackRock Fixed-Income Complex as follows: Michael J. Castellano, 2011; Cynthia L. Egan, 2016; and Catherine A. Lynch, 2016.
|
(4)
|
|
Dr. Fabozzi, Dr. Kester, Ms. Lynch and Mr. Perlowski are also trustees of the BlackRock Credit Strategies Fund and BlackRock Private Investments Fund.
|
(5)
|
|
Mr. Fairbairn and Mr. Perlowski are both interested persons, as defined in the 1940 Act, of each Fund based on their positions with BlackRock, Inc. and its affiliates. Mr. Fairbairn and
Mr. Perlowski are also board members of the BlackRock Multi-Asset Complex.
|
The Investment Advisor
BlackRock Advisors, LLC serves as the investment adviser for each Fund and is expected to continue to serve as investment adviser for the Combined
Fund. The Investment Advisor is responsible for the management of each Funds portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of each Fund.
Each Fund entered into an Investment Management Agreement with the Investment
Advisor to provide investment advisory services. For such services, MFL currently pays the Investment Advisor a monthly fee at an annual contractual investment advisory fee rate of 0.55% of the average daily value of its net assets. The Acquiring
Fund currently pays the Investment Advisor a monthly fee at an annual contractual investment advisory fee rate of 0.55% of an aggregate of (i) its average daily value of its net assets, and (ii) the proceeds of any outstanding debt
securities or borrowings used for leverage. For purposes of calculating these fees, net assets means the total assets of the applicable Fund minus the sum of its accrued liabilities (other than money borrowed for investment purposes,
including liabilities represented by TOB Trusts and the liquidation preference of any outstanding preferred shares).
Each Fund and the Investment Advisor have entered into the Fee Waiver Agreement, pursuant to which the Investment Advisor has contractually agreed to
waive the management fee with respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and ETFs managed by the Investment Advisor or its affiliates that have a contractual fee, through
June 30, 2023. In addition, effective December 1, 2019, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the
63
amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through its investment in money market funds advised by the Investment Advisor or its affiliates, through
June 30, 2023. The Fee Waiver Agreement may be continued from year to year thereafter, provided that such continuance is specifically approved by the Investment Advisor and each Fund (including by a majority of each Funds Independent
Board Members). Neither the Investment Advisor nor the Funds are obligated to extend the Fee Waiver Agreement. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by each Fund (upon the vote of a majority
of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor.
Based on a pro forma Broadridge peer expense universe for the Combined Fund, the estimated total annual fund expense ratio (excluding
investment-related expenses and taxes) is expected to be in the [second] quartile and contractual investment advisory fee rate and actual investment advisory fee rate over total assets are each expected to be in the [first] quartile.
There can be no assurance that future expenses of the Combined Fund will not
increase or that any expense savings for any Fund will be realized as a result of the Reorganization.
A discussion regarding the basis for the approval of the Investment Management Agreement by the Board of each Fund is provided in such Funds Form
N-CSR for MFLs fiscal year ended August 31, 2021 and for the Acquiring Funds semi-annual fiscal period ended October 31, 2021 available at www.sec.gov or by visiting www.blackrock.com.
The Investment Advisor is located at 100 Bellevue Parkway, Wilmington,
Delaware 19809 and is a wholly owned subsidiary of BlackRock. BlackRock is one of the worlds largest publicly-traded investment management firms. As of [·], 2021,
BlackRocks assets under management were approximately $[·]. BlackRock has over 25 years of experience managing closed-end
products and, as of [·], 2021, advised a registered closed-end family of [70] exchange-listed active funds with approximately $[52
billion] in assets.
BlackRock is a global leader in investment management,
risk management and advisory services for institutional and retail clients. BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors
through BlackRock Solutions®. Headquartered in New York City, as of [·], 2021, the firm had approximately
[16,000] employees in more than [39] countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa.
Portfolio Management
MFL is managed by a team of investment professionals led by Theodore R. Jaeckel,
Jr., CFA and Walter OConnor. Messrs. Jaeckel and OConnor are MFLs portfolio managers and are responsible for the day-to-day management of MFLs
portfolio and the selection of its investments. Messrs. Jaeckel and OConnor have been members of MFLs portfolio management team since 2006.
The Acquiring Fund is managed by a team of investment professionals led by Michael Kalinoski and Michael Perilli. Messrs. Kalinoski and Perilli are the
Acquiring Funds portfolio managers and are responsible for the day-to-day management of the Acquiring Funds portfolio and the selection of its investments.
Messrs. Kalinoski and Perilli have been members of the Acquiring Funds portfolio management team since 2017.
64
The biography of each portfolio manager of the Funds are set forth below:
|
|
|
Portfolio Manager
|
|
Biography
|
Theodore R. Jaeckel, Jr.
|
|
Managing Director of BlackRock since 2006; Managing Director of Merrill Lynch Investment Managers, L.P. (MLIM) from 2005 to 2006; Director of MLIM from 1997 to 2005.
|
|
|
Walter OConnor, CFA
|
|
Managing Director of BlackRock since 2006; Managing Director of MLIM from 2003 to 2006; Director of MLIM from 1998 to 2003.
|
|
|
Michael Kalinoski
|
|
Director of BlackRock since 2006; Director of Merrill Lynch Investment Managers, L.P. (MLIM) from 1999 to 2006.
|
|
|
Michael Perilli, CFA
|
|
Director of BlackRock since 2021; Vice President of BlackRock from 2017 to 2020; Associate of BlackRock from 2008 to 2016.
|
Following the Reorganization, it is expected
that the Combined Fund will be managed by a team of investment professionals led by [Messrs. Kalinoski and Perilli].
Other Service Providers
The professional service providers for the Funds are or will be as follows:
|
|
|
Service
|
|
Service Providers to the Funds
|
Accounting Agent
|
|
State Street Bank and Trust Company
|
Custodian
|
|
State Street Bank and Trust Company
|
Transfer Agent, Dividend Disbursing Agent and Registrar
|
|
Computershare Trust Company, N.A.
|
Liquidity Provider to MFL VRDP Shares
|
|
Bank of America, N.A.
|
Remarketing Agent to MFL VRDP Shares
|
|
BofA Securities, Inc.
|
Tender and Paying Agent to MFL VRDP Shares;
Redemption and Paying Agent to Acquiring Fund VMTP Shares
|
|
The Bank of New York Mellon
|
Independent Registered Public Accounting Firm
|
|
Deloitte & Touche LLP
|
Fund Counsel
|
|
Willkie Farr & Gallagher LLP
|
Counsel to the Independent Board Members
|
|
Stradley Ronon Stevens & Young, LLP
|
It is not anticipated that the Reorganization
will result in any change in the organizations providing services to the Acquiring Fund as set forth above. As a result of the Reorganization, the service providers to the Acquiring Fund are anticipated to be the service providers to the Combined
Fund.
Accounting Agent
State Street Bank and Trust Company provides certain administration and
accounting services to the Funds pursuant to an Administration and Fund Accounting Services Agreement (the Administration Agreement). Pursuant to the Administration Agreement, State Street Bank and Trust Company provides the Funds with,
among other things, customary fund accounting services, including computing each Funds NAV and maintaining books, records and other documents relating to each Funds financial and portfolio transactions, and customary fund administration
services, including assisting the Funds with regulatory filings, tax compliance and other oversight activities. For these and other services it provides to the Funds, State Street Bank and Trust Company is paid a monthly fee from the Funds at an
annual rate ranging from [0.0075% to 0.015]% of each Funds managed assets, along with an annual fixed fee ranging from [$0 to $10,000] for the services it provides to the Funds.
Custody of Assets
The custodian of the assets of each Fund is State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110. The custodian is responsible for, among other things, receipt of and disbursement of funds from each Funds accounts, establishment of segregated accounts as necessary, and transfer, exchange
and delivery of Fund portfolio securities.
65
Transfer Agent, Dividend Disbursing Agent and Registrar
Computershare Trust Company, N.A., 150 Royall Street, Canton, Massachusetts
02021, serves as each Funds transfer agent with respect to such Funds common shares.
VRDP Shares Liquidity Provider
Bank of America, N.A. New York, New York 10036, serves as the liquidity provider for MFL VRDP Shares and is expected to serve as the liquidity provider
for the VRDP Shares of the Acquiring Fund to be issued in connection with the Acquiring Fund VMTP Refinancing and the VRDP Shares of the Combined Fund.
VRDP Shares Remarketing Agent
BofA Securities Inc. New York, New York 10036, serves as the remarketing agent for MFL and the Acquiring Fund VRDP Shares and is expected serve as the
remarketing agent for the VRDP Shares of the Acquiring Fund to be issued in connection with the Acquiring Fund VMTP Refinancing and the VRDP Shares of the Combined Fund.
VRDP Shares Tender and Paying Agent; VMTP Shares Redemption and Paying Agent
The Bank of New York Mellon, One Wall Street, New York, New York 10286, acts as
the tender agent, transfer agent and registrar, dividend disbursing agent and paying agent and redemption price disbursing agent with respect to the MFL VRDP Shares and is expected to serve in such capacity with respect to the Acquiring Fund VRDP
Shares to be issued in connection with the Acquiring Fund VMTP Refinancing and the VRDP Shares of the Combined Fund. The Bank of New York Mellon also serves as the redemption agent, transfer agent and registrar, dividend disbursing agent and paying
agent and redemption price disbursing agent with respect to the Acquiring Fund VMTP Shares.
66
THE ACQUIRING FUNDS INVESTMENTS
Investment Objective and Policies
The Acquiring Funds investment objective is to provide common stockholders
with high current income exempt from federal income taxes. The Acquiring Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including assets acquired from the sale of preferred stock) plus the amount of any
borrowings for investment purposes, in a portfolio of municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays
interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax)
(MUI Municipal Bonds). The Acquiring Funds investment objective and its policy of investing at least 80% of its net assets (including assets acquired from the sale of preferred stock) plus the amount of any borrowings for
investment purposes, in MUI Municipal Bonds are fundamental policies that may not be changed without the approval of a majority of the outstanding common stock and the outstanding preferred stock, including the Acquiring Funds outstanding
Series W-7 Variable Rate Muni Term Preferred Shares (VMTP Shares), voting together as a single class, and of the holders of a majority of the outstanding preferred stock, including the VMTP Shares,
voting as a separate class. A majority of the outstanding means (1) 67% or more of the stock present at a meeting, if the holders of more than 50% of the outstanding stock are present or represented by proxy, or (2) more than 50% of the
outstanding stock, whichever is less.
There can be no assurance that the
Acquiring Funds investment objective will be realized.
The Acquiring
Fund may invest in certain tax exempt securities classified as private activity bonds (or industrial development bonds, under pre-1986 law) (PABs) (in general, bonds that benefit non-governmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The percentage of the Acquiring Funds total assets invested in PABs will vary from time to time. The
Acquiring Fund has not established any limit on the percentage of its portfolio that may be invested in PABs. The Fund expects that a portion of the interest or income it produces will be includable in alternative minimum taxable income.
Under normal market conditions, the Acquiring Fund invests at least 75% of its
total assets in a portfolio of MUI Municipal Bonds that are commonly referred to as investment grade securities, which are obligations rated at the time of purchase within the four highest quality ratings as determined by either
Moodys Investor Service Inc. (Moodys) (currently Aaa, Aa, A and Baa), S&P Global Ratings (S&P) (currently AAA, AA, A and BBB) or Fitch Ratings (Fitch) (currently AAA, AA, A and BBB) or, if
unrated, are deemed to be of comparable quality by the investment adviser, at the time of investment. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F- 1+ through F-3 for Fitch. In the case of tax exempt commercial paper, the investment grade rating categories are A- 1+ through A-3 for S&P, Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations ranked in
the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and
Prime-3 for Moodys and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of MUI Municipal Bonds with respect to the foregoing requirements, the Investment
Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular MUI Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancement. If
unrated, such securities will possess creditworthiness comparable, in the opinion of the Investment Advisor, to other obligations in which the Acquiring Fund may invest.
The Acquiring Fund may invest up to 25% of its total assets in MUI Municipal Bonds that are rated below Baa by Moodys or below BBB by S&P or
Fitch or, if unrated, are considered by the Investment Advisor to possess similar credit characteristics. Such securities, sometimes referred to as high yield or junk bonds, are predominantly speculative with respect to the
capacity to pay interest and repay principal in accordance with the terms of the security and generally involve a greater volatility of price than securities in higher rating categories. The Acquiring Fund does not intend to purchase MUI Municipal
Bonds that are in default or which the Investment Advisor believes will soon
67
be in default. Below investment grade securities and comparable unrated securities involve substantial risk of loss, are considered speculative with respect to the issuers ability to pay
interest and any required redemption or principal payments and are susceptible to default or decline in market value due to adverse economic and business developments.
The Acquiring Fund may invest 25% or more of its total assets in tax exempt securities of issuers in the industries comprising the same economic
sector, such as hospitals or life care facilities and transportation-related issuers. However, the Acquiring Fund will not invest 25% or more of its total assets in any one of the industries comprising an economic sector. In addition, a substantial
part of the Acquiring Funds portfolio may be comprised of securities credit enhanced by banks, insurance companies or companies with similar characteristics. Emphasis on these sectors may subject the Acquiring Fund to certain risks.
If a percentage restriction on investment policies is adhered to at the time a
transaction is effected, later changes in percentage resulting from changing values will not be considered a violation.
The value of bonds and other fixed income obligations may fall when interest rates rise and rise when interest rates fall. In general, bonds and other
fixed income obligations with longer maturities will be subject to greater volatility resulting from interest rate fluctuations than will similar obligations with shorter maturities. Duration measures the sensitivity of a securitys
price to changes in interest rates. Unlike final maturity, duration takes account of all payments made over the life of the security. Typically, with a 1% change in interest rates, an investments value may be expected to move in the opposite
direction approximately 1% for each year of its duration. The greater a portfolios duration, the greater the change in the portfolios value in response to changes in interest rates. The Investment Advisor increases or reduces the
Acquiring Funds portfolio duration based on its interest rate outlook. When the Investment Advisor expects interest rates to fall, it attempts to maintain a longer portfolio duration. When the Investment Advisor expects interest rates to
increase, it attempts to shorten the portfolios duration. Generally, as is the case with any investment grade fixed income obligations, MUI Municipal Bonds with longer maturities tend to produce higher yields. Under normal market conditions,
however, such yield-to-maturity increases tend to decline in the longer maturities (i.e., the slope of the yield curve flattens). At the same time, due to their longer
exposure to interest rate risk, prices of longer term obligations are subject to greater market fluctuations as a result of changes in interest rates. Based on the foregoing premises, the Investment Advisor believes that the yield and price
volatility characteristics of an intermediate duration portfolio generally offer an attractive trade-off between return and risk. There may be market conditions, however, where an intermediate duration
portfolio may be less attractive due to the fact that the MUI Municipal Bond yield curve changes from time to time depending on supply and demand forces, monetary and tax policies and investor expectations. As a result, there may be situations where
investments in individual MUI Municipal Bonds with longer durations may be more attractive than individual intermediate duration MUI Municipal Bonds.
For temporary periods or to provide liquidity, the Acquiring Fund has the authority to invest as much as 20% of its total assets in tax exempt and
taxable money market obligations with a maturity of one year or less (such short-term obligations being referred to herein as Temporary Investments). In addition, the Acquiring Fund reserves the right as a defensive measure to invest
temporarily a greater portion of its assets in Temporary Investments, when, in the opinion of the Investment Advisor, prevailing market or financial conditions warrant. Taxable money market obligations will yield taxable income.
The Acquiring Fund also may invest in variable rate demand obligations
(VRDOs) and VRDOs in the form of participation interests (Participating VRDOs) in variable rate tax exempt obligations held by a financial institution. The Acquiring Funds hedging strategies are not fundamental policies
and may be modified by the Board without the approval of the Acquiring Funds stockholders. The Acquiring Fund is also authorized to invest in indexed and inverse floating obligations for hedging purposes and to seek to enhance return.
Certain MUI Municipal Bonds may be entitled to the benefits of letters of
credit or similar credit enhancements issued by financial institutions. In such instances, the Board of Directors of the Acquiring Fund and the Investment Advisor will take into account, in assessing the quality of such bonds, both the
creditworthiness of the issuer of such bonds and the creditworthiness of the financial institution that provides the credit enhancement.
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The Acquiring Fund may invest in securities not issued by or on behalf of a state or territory or by an
agency or instrumentality thereof, if the Acquiring Fund receives an opinion of counsel to the issuer that such securities pay interest that is excludable from gross income for federal income tax purposes
(Non-Municipal Tax Exempt Securities). Non-Municipal Tax Exempt Securities could include trust certificates, partnership interests or other instruments
evidencing interest in one or more long-term MUI Municipal Bonds. Non-Municipal Tax Exempt Securities also may include securities issued by other investment companies that invest in MUI Municipal Bonds, to the
extent such investments are permitted by the Acquiring Funds investment restrictions and applicable law. Non-Municipal Tax Exempt Securities are subject to the same risks associated with an investment in
MUI Municipal Bonds as well as many of the risks associated with investments in derivatives. While the Acquiring Fund receives opinions of legal counsel to the effect that the income from the Non-Municipal Tax
Exempt Securities in which the Acquiring Fund invests is excludable from gross income for federal income tax purposes to the same extent as the underlying MUI Municipal Bonds, the Internal Revenue Service (IRS) has not issued a ruling on
this subject. Were the IRS to issue an adverse ruling or take an adverse position with respect to the taxation of these types of securities, there is a risk that the interest paid on such securities would be deemed taxable at the federal level.
The Acquiring Fund ordinarily does not intend to realize significant investment
income not exempt from federal income tax. From time to time, the Acquiring Fund may realize taxable capital gains. Interest received on certain otherwise tax exempt securities that are classified as private activity bonds (in general,
bonds that benefit non-governmental entities) may be subject to a federal alternative minimum tax. The percentage of the Acquiring Funds total assets invested in private activity bonds will
vary from time to time. Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income tax exemption. As a result, this legislation and legislation that may be enacted in the future may affect
the availability of MUI Municipal Bonds for investment by the Acquiring Fund.
Risk
Factors and Special Considerations Relating to MUI Municipal Bonds
The
risks and special considerations involved in investment in MUI Municipal Bonds vary with the types of instruments being acquired. Investments in Non-Municipal Tax Exempt Securities may present similar risks,
depending on the particular product. Certain instruments in which the Acquiring Fund may invest may be characterized as derivative instruments. See Description of MUI Municipal Bonds and Hedging
TransactionsFinancial Futures Transactions and Options.
The
value of MUI Municipal Bonds generally may be affected by uncertainties in the municipal markets as a result of legislation or litigation, including legislation or litigation that changes the taxation of MUI Municipal Bonds or the rights of MUI
Municipal Bond holders in the event of a bankruptcy. Municipal bankruptcies are rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear. Further, the application of state law to MUI Municipal Bond issuers
could produce varying results among the states or among MUI Municipal Bond issuers within a state. These uncertainties could have a significant impact on the prices of the MUI Municipal Bonds in which the Acquiring Fund invests.
Description of MUI Municipal Bonds
Set forth below is a detailed description of the MUI Municipal Bonds and
Temporary Investment in which the Acquiring Fund invests. Information with respect to ratings assigned to tax exempt obligations that the Acquiring Fund may purchase is set forth in Appendix C Description of Bond Ratings.
Obligations are included within the term MUI Municipal Bonds if the interest paid thereon is excluded from gross income for federal income tax purposes in the opinion of bond counsel to the issuer.
MUI Municipal Bonds include debt obligations issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities, refunding of outstanding obligations and obtaining funds for general operating expenses and loans to other public institutions and facilities. In addition, certain
types of PABs are issued by or on behalf of public authorities to finance various privately owned or operated facilities, including among other things, airports, public ports, mass commuting facilities, multi-family housing projects, as well as
facilities for water supply, gas, electricity, sewage or solid waste disposal and other specialized facilities. Other types of PABs, the proceeds of which are used for the construction, equipment or improvement of privately operated industrial or
69
commercial facilities, may constitute MUI Municipal Bonds. The interest on MUI Municipal Bonds may bear a fixed rate or be payable at a variable or floating rate. The two principal
classifications of MUI Municipal Bonds are general obligation bonds and revenue bonds, which latter category includes PABs.
The Acquiring Fund has not established any limit on the percentage of its portfolio that may be invested in PABs. The Acquiring Fund may not be a
suitable investment for investors who are already subject to the federal alternative minimum tax or who would become subject to the federal alternative minimum tax as a result of an investment in the Acquiring Funds common stock.
General Obligation Bonds. General obligation bonds are typically secured
by the issuers pledge of its faith, credit and taxing power for the repayment of principal and the payment of interest. The taxing power of any governmental entity may be limited, however, by provisions of its state constitution or laws, and
an entitys creditworthiness will depend on many factors, including potential erosion of its tax base due to population declines, natural disasters, declines in the states industrial base or inability to attract new industries, economic
limits on the ability to tax without eroding the tax base, state legislative proposals or voter initiatives to limit ad valorem real property taxes and the extent to which the entity relies on federal or state aid, access to capital markets or other
factors beyond the states or entitys control. Accordingly, the capacity of the issuer of a general obligation bond as to the timely payment of interest and the repayment of principal when due is affected by the issuers maintenance
of its tax base.
Revenue Bonds. Revenue or special obligation bonds
are typically payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special excise tax or other specific revenue sources such as payments from the user of the facility
being financed. Accordingly, the timely payment of interest and the repayment of principal in accordance with the terms of the revenue or special obligation bond is a function of the economic viability of such facility or such revenue source.
Revenue bonds issued by state or local agencies to finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal securities generally,
including that the underlying properties may not generate sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of
others with an interest in the properties, may pay interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until
completed and rented, do not generate income to pay interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds.
Municipal Notes. Municipal notes are shorter term municipal debt
obligations. They may provide interim financing in anticipation of tax collection, bond sales or revenue receipts. If there is a shortfall in the anticipated proceeds, repayment on the note may be delayed or the note may not be fully repaid, and the
Acquiring Fund may lose money.
Municipal Commercial Paper.
Municipal commercial paper is generally unsecured and issued to meet short-term financing needs. The lack of security presents some risk of loss to the Acquiring Fund since, in the event of an issuers bankruptcy, unsecured creditors are repaid
only after the secured creditors out of the assets, if any, that remain.
PABs. The Acquiring Fund may purchase municipal bonds classified as PABs. Interest received on certain PABs is treated as an item of tax
preference for purposes of the federal alternative minimum tax and may impact the overall tax liability of certain investors in the Acquiring Fund. PABs, formerly referred to as industrial development bonds, are issued by, or on behalf of,
states, municipalities or public authorities to obtain funds to provide privately operated housing facilities, airport, mass transit or port facilities, sewage disposal, solid waste disposal or hazardous waste treatment or disposal facilities and
certain local facilities for water supply, gas or electricity. Other types of PABs, the proceeds of which are used for the construction, equipment, repair or improvement of privately operated industrial or commercial facilities, may constitute
municipal bonds, although the federal tax laws may place substantial limitations on the size of such issues. Such bonds are secured primarily by revenues derived from loan repayments or lease payments due from the entity which may or may not be
guaranteed by a parent company or otherwise secured. PABs generally are not secured by a pledge of the taxing power of the issuer of such bonds. Therefore, an investor should be aware that repayment of such bonds generally depends on the revenues of
a private entity and be aware of the risks that such an investment may entail. The continued ability of an entity to generate sufficient revenues for the payment of principal and interest on such bonds will be affected by many factors including the
size of the entity, capital structure, demand for its products or services, competition, general economic conditions, government regulation and the entitys dependence on revenues for the operation of the particular facility being financed.
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Moral Obligation Bonds. Municipal bonds may also include moral obligation bonds, which
are normally issued by special purpose public authorities. If an issuer of moral obligation bonds is unable to meet its obligations, the repayment of such bonds becomes a moral commitment but not a legal obligation of the state or municipality in
question.
Municipal Lease Obligations. Also included within the
general category of municipal bonds are certificates of participation (COPs) issued by government authorities or entities to finance the acquisition or construction of equipment, land and/or facilities. COPs represent participations in a
lease, an installment purchase contract or a conditional sales contract (hereinafter collectively called lease obligations) relating to such equipment, land or facilities. Municipal leases, like other municipal debt obligations, are
subject to the risk of non-payment. Although lease obligations do not constitute general obligations of the issuer for which the issuers unlimited taxing power is pledged, a lease obligation is
frequently backed by the issuers covenant to budget for, appropriate and make the payments due under the lease obligation. However, certain lease obligations contain non-appropriation clauses
which provide that the issuer has no obligation to make lease or installment purchase payments in future years unless money is appropriated for such purpose on a yearly basis. Although
non-appropriation lease obligations are secured by the leased property, disposition of the property in the event of foreclosure might prove difficult and the value of the property may be
insufficient to issue lease obligations. Certain investments in lease obligations may be illiquid. The ability of issuers of municipal leases to make timely lease payments may be adversely impacted in general economic downturns and as relative
governmental cost burdens are allocated and reallocated among federal, state and local governmental units. Such non-payment would result in a reduction of income to the Acquiring Fund, and could result in a
reduction in the value of the municipal lease experiencing non-payment and a potential decrease in the NAV of the Acquiring Fund. Issuers of municipal lease obligations might seek protection under the
bankruptcy laws. In the event of bankruptcy of such an issuer, the Acquiring Fund could experience delays and limitations with respect to the collection of principal and interest on such municipal leases and the Acquiring Fund may not, in all
circumstances, be able to collect all principal and interest to which it is entitled. To enforce its rights in the event of a default in lease payments, the Acquiring Fund might take possession of and manage the assets securing the issuers
obligations on such securities, which may increase the Acquiring Funds operating expenses and adversely affect the NAV of the Acquiring Fund. When the lease contains a non-appropriation clause, however,
the failure to pay would not be a default and the Acquiring Fund would not have the right to take possession of the assets. Any income derived from the Acquiring Funds ownership or operation of such assets may not be tax-exempt or may fail to generate qualifying income for purposes of the income tests applicable to regulated investment companies. In addition, the Acquiring Funds intention to qualify as a regulated
investment company under the Internal Revenue Code of 1986, may limit the extent to which the Acquiring Fund may exercise its rights by taking possession of such assets, because as a regulated investment company the Acquiring Fund is subject to
certain limitations on its investments and on the nature of its income.
Zero-Coupon Bonds. Municipal bonds may include zero-coupon bonds. Zero-coupon bonds are securities that
are sold at a discount to par value and do not pay interest during the life of the security. The discount approximates the total amount of interest the security will accrue and compound over the period until maturity at a rate of interest reflecting
the market rate of the security at the time of issuance. Upon maturity, the holder of a zero-coupon bond is entitled to receive the par value of the security.
While interest payments are not made on such securities, holders of such
securities are deemed to have received income (phantom income) annually, notwithstanding that cash may not be received currently. The effect of owning instruments that do not make current interest payments is that a fixed yield is earned
not only on the original investment but also, in effect, on all discount accretion during the life of the obligations. This implicit reinvestment of earnings at a fixed rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the zero-coupon bond, but at the same time eliminates the holders ability to reinvest at higher rates in the future. For this reason, some of these securities may be subject
to substantially greater price fluctuations during periods of changing market interest rates than are comparable securities that pay interest currently. Longer term zero-coupon bonds are more exposed to
interest rate risk than shorter term zero-coupon bonds. These investments benefit the issuer by mitigating its need for cash to meet debt service, but also require a higher rate of return to attract investors
who are willing to defer receipt of cash.
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The Acquiring Fund accrues income with respect to these securities for U.S. federal income tax and
accounting purposes prior to the receipt of cash payments. Zero-coupon bonds may be subject to greater fluctuation in value and less liquidity in the event of adverse market conditions than comparably rated securities that pay cash interest at
regular intervals.
Further, to maintain its qualification for pass-through
treatment under the federal tax laws, the Acquiring Fund is required to distribute income to its shareholders and, consequently, may have to dispose of other, more liquid portfolio securities under disadvantageous circumstances or may have to
leverage itself by borrowing in order to generate the cash to satisfy these distributions. The required distributions may result in an increase in the Acquiring Funds exposure to zero-coupon bonds.
In addition to the above-described risks, there are certain other risks related
to investing in zero-coupon bonds. During a period of severe market conditions, the market for such securities may become even less liquid. In addition, as these securities do not pay cash interest, the
Acquiring Funds investment exposure to these securities and their risks, including credit risk, will increase during the time these securities are held in the Acquiring Funds portfolio.
Pre-Refunded Municipal
Securities. The principal of, and interest on, pre-refunded municipal securities are no longer paid from the original revenue source for the securities. Instead, the source of such payments is typically an
escrow fund consisting of U.S. Government securities. The assets in the escrow fund are derived from the proceeds of refunding bonds issued by the same issuer as the pre-refunded municipal securities. Issuers
of municipal securities use this advance refunding technique to obtain more favorable terms with respect to securities that are not yet subject to call or redemption by the issuer. For example, advance refunding enables an issuer to refinance debt
at lower market interest rates, restructure debt to improve cash flow or eliminate restrictive covenants in the indenture or other governing instrument for the pre-refunded municipal securities.
However, except for a change in the revenue source from which principal and
interest payments are made, the pre-refunded municipal securities remain outstanding on their original terms until they mature or are redeemed by the issuer.
Variable Rate Demand Obligations. Municipal bonds may include Variable
Rate Demand Obligations (VRDOs), which are tax-exempt obligations that contain a floating or variable interest rate adjustment formula and right of demand on the part of the holder thereof to
receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that because of default or insolvency the demand feature of VRDOs may not be honored. The
interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par
value of the VRDOs on the adjustment date. The adjustments typically are based upon [SIFMA Municipal Swap Index] or some other appropriate interest rate adjustment index. The Acquiring Fund may invest in all types of
tax-exempt instruments currently outstanding or to be issued in the future which satisfy its short-term maturity and quality standards. VRDOs that contain an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest on a notice period exceeding seven days may be deemed to be illiquid securities.
Indexed and Inverse Floating Rate Securities. The Acquiring Fund may invest in MUI Municipal Bonds (and
Non-Municipal Tax-Exempt Securities) that yield a return based on a particular index of value or interest rates. For example, the Acquiring Fund may invest in MUI
Municipal Bonds that pay interest based on an index of MUI Municipal Bond interest rates. The principal amount payable upon maturity of certain MUI Municipal Bonds also may be based on the value of the index. To the extent the Acquiring Fund invests
in these types of MUI Municipal Bonds, the Acquiring Funds return on such MUI Municipal Bonds will be subject to risk with respect to the value of the particular index. Interest and principal payable on the MUI Municipal Bonds may also be
based on relative changes among particular indices. Also, the Acquiring Fund may invest in so-called inverse floating rate bonds or residual interest bonds on which the interest rates
vary inversely with a short-term floating rate (which may be reset periodically by a Dutch auction, a remarketing agent, or by reference to a short-term tax-exempt interest rate index). The Acquiring Fund may
purchase synthetically created inverse floating rate bonds evidenced by custodial or trust receipts. Generally, income on inverse floating rate bonds will decrease when short-term interest rates increase, and will increase when short-term interest
rates decrease. Such securities have the effect of providing a degree of investment leverage, since they may increase or decrease in value in response to changes, as an illustration, in market
72
interest rates at a rate which is a multiple (typically two) of the rate at which fixed rate long-term tax-exempt securities increase or decrease in
response to such changes. As a result, the market values of such securities will generally be more volatile than the market values of fixed rate tax-exempt securities. To seek to limit the volatility of these
securities, the Acquiring Fund may purchase inverse floating rate bonds with shorter-term maturities or limitations on the extent to which the interest rate may vary. Certain investments in such obligations may be illiquid. See The Acquiring
Funds InvestmentsLeverageTender Option Bond Transactions.
When-Issued Securities, Delayed Delivery Securities and Forward Commitments. The Acquiring Fund may purchase or sell securities that it is
entitled to receive on a when-issued basis. The Acquiring Fund may also purchase or sell securities on a delayed delivery basis. The Acquiring Fund may also purchase or sell securities through a forward commitment. These transactions involve the
purchase or sale of securities by the Acquiring Fund at an established price with payment and delivery taking place in the future. The purchase will be recorded on the date the Acquiring Fund enters into the commitment and the value of the
securities will thereafter be reflected in the Acquiring Funds NAV. The Acquiring Fund has not established any limit on the percentage of its assets that may be committed in connection with these transactions. At the time the Acquiring Fund
enters into a transaction on a when-issued basis, it will segregate or designate on its books and records cash or liquid assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when-issued basis will
be issued or that a security purchased or sold through a forward commitment will be delivered. A default by a counterparty may result in the Acquiring Fund missing the opportunity of obtaining a price considered to be advantageous. The value of
securities in these transactions on the delivery date may be more or less than the Acquiring Funds purchase price. The Acquiring Fund may bear the risk of a decline in the value of the security in these transactions and may not benefit from an
appreciation in the value of the security during the commitment period.
If
deemed advisable as a matter of investment strategy, the Acquiring Fund may dispose of or renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to the
Acquiring Fund on the settlement date. In these cases the Acquiring Fund may realize a taxable capital gain or loss.
When the Acquiring Fund engages in when-issued, delayed delivery or forward commitment transactions, it relies on the other party to consummate the
trade. Failure of such party to do so may result in the Acquiring Funds incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase securities, and any subsequent fluctuations in their market value, is taken into
account when determining the market value of the Acquiring Fund starting on the day the Acquiring Fund agrees to purchase the securities. The Acquiring Fund does not earn interest on the securities it has committed to purchase until they are paid
for and delivered on the settlement date.
Call Rights. The
Acquiring Fund may purchase a MUI Municipal Bond issuers right to call all or a portion of such MUI Municipal Bond for mandatory tender for purchase (a Call Right). A holder of a Call Right may exercise such right to require a
mandatory tender for the purchase of related MUI Municipal Bonds, subject to certain conditions. A Call Right that is not exercised prior to maturity of the related MUI Municipal Bond will expire without value. The economic effect of holding both
the Call Right and the related MUI Municipal Bond is identical to holding a MUI Municipal Bond as a non-callable security. Certain investments in such obligations may be illiquid.
Yields. Yields on MUI Municipal Bonds are dependent on a variety of
factors, including the general condition of the money market and of the municipal bond market, the size of a particular offering, the financial condition of the issuer, the maturity of the obligation and the rating of the issue. The ability of the
Acquiring Fund to achieve its investment objective is also dependent on the continuing ability of the issuers of the securities in which the Acquiring Fund invests to meet their obligations for the payment of interest and principal when due. There
are variations in the risks involved in holding municipal bonds, both within a particular classification and between classifications, depending on numerous factors. Furthermore, the rights of owners of municipal bonds and the obligations of the
issuer of such municipal bonds may be subject to applicable bankruptcy, insolvency and similar laws and court decisions affecting the rights of creditors generally and to general equitable principles, which may limit the enforcement of certain
remedies.
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High Yield or Junk Bonds. The Acquiring Fund may invest up to 25% of its
total assets in municipal bonds that are rated, at the time of investment, Ba/BB or B by Moodys, S&P or Fitch or that are unrated but judged to be of comparable quality by the Investment Advisor. Information with respect to ratings
assigned to tax exempt obligations that the Acquiring Fund may purchase is set forth in Appendix C Description of Bond Ratings. MUI Municipal Bonds of below investment grade quality (Ba/BB or below) are commonly
known as junk bonds. Securities rated below investment grade are judged to have speculative characteristics with respect to their interest and principal payments. Such securities may 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.
Hedging Transactions
The Acquiring Fund may hedge all or a portion of its portfolio investments against fluctuations in interest rates through the use of options and
certain financial futures contracts and options thereon. While the Acquiring Funds use of hedging strategies is intended to reduce the volatility of the net asset value of the Acquiring Funds shares of common stock, the net asset value
of the Acquiring Funds shares of common stock will fluctuate. No assurance can be given that the Acquiring Funds hedging transactions will be effective. The Acquiring Fund only may engage in hedging activities from time to time and may
not necessarily be engaging in hedging activities when movements in interest rates occur. The Acquiring Fund has no obligation to enter into hedging transactions and may choose not to do so.
Financial Futures Transactions and Options. The
Acquiring Fund is authorized to purchase and sell certain exchange traded financial futures contracts (financial futures contracts) in order to hedge its investments in MUI Municipal Bonds against declines in value, and to hedge against
increases in the cost of securities it intends to purchase or to seek to enhance the Acquiring Funds return. However, any transactions involving financial futures or options (including puts and calls associated therewith) will be in accordance
with the Acquiring Funds investment policies and limitations. A financial futures contract obligates the seller of a contract to deliver and the purchaser of a contract to take delivery of the type of financial instrument covered by the
contract, or in the case of index-based futures contracts to make and accept a cash settlement, at a specific future time for a specified price. To hedge its portfolio, the Acquiring Fund may take an investment position in a futures contract which
will move in the opposite direction from the portfolio position being hedged. A sale of financial futures contracts may provide a hedge against a decline in the value of portfolio securities because such depreciation may be offset, in whole or in
part, by an increase in the value of the position in the financial futures contracts. A purchase of financial futures contracts may provide a hedge against an increase in the cost of securities intended to be purchased because such appreciation may
be offset, in whole or in part, by an increase in the value of the position in the futures contracts.
Distributions, if any, of net long term capital gains from certain transactions in futures or options are taxable at long term capital gains rates for
federal income tax purposes.
Futures Contracts. A futures contract
is an agreement between two parties to buy and sell a security or, in the case of an index-based futures contract, to make and accept a cash settlement for a set price on a future date. A majority of transactions in futures contracts, however, do
not result in the actual delivery of the underlying instrument or cash settlement, but are settled through liquidation, i.e., by entering into an offsetting transaction. Futures contracts have been designed by boards of trade which have been
designated contracts markets by the Commodity Futures Trading Commission (CFTC).
The purchase or sale of a futures contract differs from the purchase or sale of a security in that no price or premium is paid or received. Instead, an
amount of cash or securities acceptable to the broker and the relevant contract market, which varies, but is generally about 5% of the contract amount, must be deposited with the broker. This amount is known as initial margin and
represents a good faith deposit assuring the performance of both the purchaser and seller under the futures contract. Subsequent payments to and from the broker, called variation margin, are required to be made on a daily
basis as the price of the futures contract fluctuates making the long and short positions in the futures contract more or less valuable, a process known as marking to the market. At any time prior to the settlement date of the futures
contract, the position may be closed out by taking an opposite position that will operate to terminate the position in the futures contract. A final determination of variation margin is then made, additional cash is required to be paid to or
released by the broker and the purchaser realizes a loss or gain. In addition, a nominal commission is paid on each completed sale transaction.
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The Acquiring Fund deals in financial futures contracts based on a long term municipal bond index
developed by the Chicago Board of Trade (CBT) and The Bond Buyer (the Municipal Bond Index). The Municipal Bond Index is comprised of 40 tax exempt municipal revenue and general obligation bonds. Each bond included in the
Municipal Bond Index must be rated A or higher by Moodys or S&P and must have a remaining maturity of 19 years or more. Twice a month new issues satisfying the eligibility requirements are added to, and an equal number of old issues are
deleted from, the Municipal Bond Index. The value of the Municipal Bond Index is computed daily according to a formula based on the price of each bond in the Municipal Bond Index, as evaluated by six dealer-to-dealer brokers.
The
Municipal Bond Index futures contract is traded only on the CBT. Like other contract markets, the CBT assures performance under futures contracts through a clearing corporation, a nonprofit organization managed by the exchange membership which is
also responsible for handling daily accounting of deposits or withdrawals of margin.
The Acquiring Fund may also purchase and sell financial futures contracts on U.S. Government securities as a hedge against adverse changes in interest
rates as described below. With respect to U.S. Government securities, currently there are financial futures contracts based on long term U.S. Treasury bonds, U.S. Treasury notes, Government National Mortgage Association (GNMA)
Certificates and three-month U.S. Treasury bills. The Acquiring Fund may purchase and write call and put options on futures contracts on U.S. Government securities and purchase and sell Municipal Bond Index futures contracts in connection with its
hedging strategies.
The Acquiring Fund also may engage in other futures
contracts transactions such as futures contracts on other municipal bond indices that may become available if the Investment Advisor should determine that there is normally a sufficient correlation between the prices of such futures contracts and
the MUI Municipal Bonds in which the Acquiring Fund invests to make such hedging appropriate.
Futures Strategies. The Acquiring Fund may sell a financial futures contract (i.e., assume a short position) in anticipation of a decline
in the value of its investments in MUI Municipal Bonds resulting from an increase in interest rates or otherwise. The risk of decline could be reduced without employing futures as a hedge by selling such MUI Municipal Bonds and either reinvesting
the proceeds in securities with shorter maturities or by holding assets in cash. This strategy, however, entails increased transaction costs in the form of dealer spreads and typically would reduce the average yield of the Acquiring Funds
portfolio securities as a result of the shortening of maturities. The sale of futures contracts provides an alternative means of hedging against declines in the value of its investments in MUI Municipal Bonds. As such values decline, the value of
the Acquiring Funds positions in the futures contracts will tend to increase, thus offsetting all or a portion of the depreciation in the market value of the Acquiring Funds MUI Municipal Bond investments that are being hedged. While the
Acquiring Fund will incur commission expenses in selling and closing out futures positions, commissions on futures transactions are lower than transaction costs incurred in the purchase and sale of MUI Municipal Bonds. In addition, the ability of
the Acquiring Fund to trade in the standardized contracts available in the futures markets may offer a more effective defensive position than a program to reduce the average maturity of the portfolio securities due to the unique and varied credit
and technical characteristics of the municipal debt instruments available to the Acquiring Fund. Employing futures as a hedge also may permit the Acquiring Fund to assume a defensive posture without reducing the yield on its investments beyond any
amounts required to engage in futures trading.
When the Acquiring Fund
intends to purchase MUI Municipal Bonds, the Acquiring Fund may purchase futures contracts as a hedge against any increase in the cost of such MUI Municipal Bonds resulting from a decrease in interest rates or otherwise, that may occur before such
purchases can be effected. Subject to the degree of correlation between the MUI Municipal Bonds and the futures contracts, subsequent increases in the cost of MUI Municipal Bonds should be reflected in the value of the futures held by the Acquiring
Fund. As such purchases are made, an equivalent amount of futures contracts will be closed out. Due to changing market conditions and interest rate forecasts, however, a futures position may be terminated without a corresponding purchase of
portfolio securities.
Call Options on Futures Contracts. The
Acquiring Fund may also purchase and sell exchange traded call and put options on financial futures contracts. The purchase of a call option on a futures contract is analogous to the purchase of a call option on an individual security. Depending on
the pricing of the option compared to either the futures contract upon which it is based or the price of the underlying debt securities, it may or may not be less risky than
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ownership of the futures contract or underlying debt securities. Like the purchase of a futures contract, the Acquiring Fund will purchase a call option on a futures contract to hedge against a
market advance when the Fund is not fully invested.
The writing of a call
option on a futures contract constitutes a partial hedge against declining prices of the securities which are deliverable upon exercise of the futures contract. If the futures price at expiration is below the exercise price, the Acquiring Fund will
retain the full amount of the option premium which provides a partial hedge against any decline that may have occurred in the Funds portfolio holdings.
Put Options on Futures Contracts. The purchase of a put option on a futures contract is analogous to the purchase of a protective put option on
portfolio securities. The Acquiring Fund will purchase a put option on a futures contract to hedge the Funds portfolio against the risk of rising interest rates.
The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the securities which are deliverable upon
exercise of the futures contract. If the futures price at expiration is higher than the exercise price, the Acquiring Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of MUI
Municipal Bonds which the Acquiring Fund intends to purchase.
The writer
of an option on a futures contract is required to deposit initial and variation margin pursuant to requirements similar to those applicable to futures contracts. Premiums received from the writing of an option will be included in initial margin. The
writing of an option on a futures contract involves risks similar to those relating to futures contracts.
Under regulations of the CFTC, the futures trading activity described herein will not result in the Acquiring Fund being deemed a commodity
pool and the Acquiring Fund need not be operated by a person registered with the CFTC as a commodity pool operator.
When the Acquiring Fund purchases a futures contract, or writes a put option or purchases a call option thereon, an amount of cash, cash equivalents
(e.g., high grade commercial paper and daily tender adjustable notes) or liquid securities will be segregated, so that the amount so segregated plus the amount of initial and variation margin held in the account of its broker equals the
market value of the futures contracts, thereby ensuring that the use of such futures contract is unleveraged. It is not anticipated that transactions in futures contracts will have the effect of increasing portfolio turnover.
Risk Factors in Futures Transactions and Options. Investment in futures
contracts involves the risk of imperfect correlation between movements in the price of the futures contract and the price of the security being hedged. The hedge will not be fully effective when there is imperfect correlation between the movements
in the prices of two financial instruments. For example, if the price of the futures contract moves more or less than the price of the hedged security, the Acquiring Fund will experience either a loss or gain on the futures contract which is not
completely offset by movements in the price of the hedged securities. To compensate for imperfect correlations, the Acquiring Fund may purchase or sell futures contracts in a greater dollar amount than the hedged securities if the volatility of the
hedged securities is historically greater than the volatility of the futures contracts. Conversely, the Acquiring Fund may purchase or sell fewer futures contracts if the volatility of the price of the hedged securities is historically less than
that of the futures contracts.
The particular municipal bonds comprising
the index underlying the Municipal Bond Index financial futures contract may vary from the bonds held by the Acquiring Fund. As a result, the Acquiring Funds ability to hedge effectively all or a portion of the value of its MUI Municipal Bonds
through the use of such financial futures contracts will depend in part on the degree to which price movements in the index underlying the financial futures contract correlate with the price movements of the MUI Municipal Bonds held by the Acquiring
Fund. The correlation may be affected by disparities in the average maturity, ratings, geographical mix or structure of the Acquiring Funds investments as compared to those comprising the Municipal Bond Index and general economic or political
factors. In addition, the correlation between movements in the value of the Municipal Bond Index may be subject to change over time as additions to and deletions from the Municipal Bond Index alter its structure. The correlation between futures
contracts on U.S. Government securities and the MUI Municipal Bonds held by the Acquiring Fund may be adversely affected by similar factors and the risk of imperfect correlation between movements in the prices of such futures contracts and
76
the prices of MUI Municipal Bonds held by the Acquiring Fund may be greater. Municipal Bond Index futures contracts were approved for trading in 1986. Trading in such futures contracts may tend
to be less liquid than trading in other futures contracts. The trading of futures contracts also is subject to certain market risks, such as inadequate trading activity, which could at times make it difficult or impossible to liquidate existing
positions.
The Acquiring Fund expects to liquidate a majority of the
futures contracts it enters into through offsetting transactions on the applicable contract market. There can be no assurance, however, that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may
not be possible to close out a futures position. In the event of adverse price movements, the Acquiring Fund would continue to be required to make daily cash payments of variation margin. In such situations, if the Acquiring Fund has insufficient
cash, it may be required to sell portfolio securities to meet daily variation margin requirements at a time when it may be disadvantageous to do so. The inability to close out futures positions also could have an adverse impact on the Acquiring
Funds ability to hedge effectively its investments in MUI Municipal Bonds. The liquidity of a secondary market in a futures contract may be adversely affected by daily price fluctuation limits established by commodity exchanges
which limit the amount of fluctuation in a futures contract price during a single trading day. Once the daily limit has been reached in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation of open
futures positions. Prices have in the past moved beyond the daily limit on a number of consecutive trading days. The Acquiring Fund will enter into a futures position only if, in the judgment of the Investment Advisor, there appears to be an
actively traded secondary market for such futures contracts.
The
successful use of transactions in futures and related options also depends on the ability of the Investment Advisor to forecast correctly the direction and extent of interest rate movements within a given time frame. To the extent interest rates
remain stable during the period in which a futures contract or option is held by the Acquiring Fund or such rates move in a direction opposite to that anticipated, the Acquiring Fund may realize a loss on the hedging transaction which is not fully
or partially offset by an increase in the value of portfolio securities. As a result, the Acquiring Funds total return for such period may be less than if it had not engaged in the hedging transaction.
Because of low initial margin deposits made upon the opening of a futures
position, futures transactions involve substantial leverage. As a result, relatively small movements in the price of the futures contracts can result in substantial unrealized gains or losses. There is also the risk of loss by the Acquiring Fund of
margin deposits in the event of bankruptcy of a broker with whom the Acquiring Fund has an open position in a financial futures contract. Because the Acquiring Fund will engage in the purchase and sale of futures contracts for hedging purposes or to
seek to enhance the Acquiring Funds return, any losses incurred in connection therewith should, if the hedging strategy is successful, be offset in whole or in part by increases in the value of securities held by the Acquiring Fund or
decreases in the price of securities the Acquiring Fund intends to acquire.
The amount of risk the Acquiring Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related
transaction costs. In addition to the correlation risks discussed above, the purchase of an option on a futures contract also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of
the option purchased.
Temporary Investments
The Acquiring Fund may invest in short term tax exempt and taxable securities
subject to the limitations set forth above. The tax exempt money market securities may include municipal notes, municipal commercial paper, municipal bonds with a remaining maturity of less than one year, variable rate demand notes and
participations therein. Municipal notes include tax anticipation notes, bond anticipation notes, revenue anticipation notes and grant anticipation notes. Anticipation notes are sold as interim financing in anticipation of tax collection, bond sales,
government grants or revenue receipts. Municipal commercial paper refers to short term unsecured promissory notes generally issued to finance short term credit needs. The taxable money market securities in which the Fund may invest as Temporary
Investments consist of U.S. Government securities, U.S. Government agency securities, domestic bank or savings institution certificates of deposit and bankers acceptances, short term corporate debt securities such as commercial paper and
repurchase agreements. These Temporary Investments must have a stated maturity not in excess of one year from the date of purchase. The Acquiring Fund may not invest in any security issued by a commercial bank or a savings institution unless the
bank or institution is organized and operating in the United States,
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has total assets of at least one billion dollars and is a member of the Federal Deposit Insurance Corporation (FDIC), except that up to 10% of total assets may be invested in
certificates of deposit of smaller institutions if such certificates are fully insured by the FDIC.
Interest Rate Swap Transactions
In order to seek to hedge the value of the Acquiring Fund against interest rate fluctuations, to hedge against increases in the Acquiring Funds
costs associated with the dividend payments on any preferred stock, including the AMPS, or to seek to increase the Acquiring Funds return, the Fund may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve
swaps (MMD Swaps) or Bond Market Association Municipal Swap Index swaps (BMA Swaps). To the extent that the Acquiring Fund enters into these transactions, the Fund expects to do so 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 Acquiring Fund anticipates purchasing at a later date. The Acquiring Fund may enter into these
transactions primarily as a hedge or for duration or risk management rather than as a speculative investment. However, the Acquiring Fund also may invest in MMD Swaps and BMA Swaps to seek to enhance return or gain or to increase the Acquiring
Funds yield, for example, during periods of steep interest rate yield curves (i.e., wide differences between short term and long term interest rates).
The Acquiring Fund may purchase and sell BMA Swaps in the BMA swap market. In a BMA Swap, the Acquiring Fund exchanges with another party their
respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments linked to the Bond Market Association Municipal Swap Index). Because the underlying index is a tax exempt index, BMA Swaps
may reduce cross-market risks incurred by the Acquiring Fund and increase the Acquiring Funds ability to hedge effectively. BMA Swaps are typically quoted for the entire yield curve, beginning with a seven day floating rate index out to 30
years. The duration of a BMA Swap is approximately equal to the duration of a fixed rate MUI Municipal Bond with the same attributes as the swap (e.g., coupon, maturity, call feature).
The Acquiring Fund also may purchase and sell MMD Swaps, also known as MMD rate
locks. An MMD Swap permits the Acquiring Fund to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to
protect against any increase in the price of securities to be purchased at a later date. By using an MMD Swap, the Acquiring Fund can create a synthetic long or short position, allowing the Acquiring Fund to select the most attractive part of the
yield curve. An MMD Swap is a contract between the Acquiring Fund and an MMD Swap provider pursuant to which the parties agree to make payments to each other on a notional amount, contingent upon whether the Municipal Market Data AAA General
Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if the Acquiring Fund buys an MMD Swap and the Municipal Market Data AAA General Obligation Scale is below the specified level on the
expiration date, the counterparty to the contract will make a payment to the Acquiring Fund equal to the specified level minus the actual level, multiplied by the notional amount of the contract. If the Municipal Market Data AAA General Obligation
Scale is above the specified level on the expiration date, the Acquiring Fund will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the notional amount of the contract.
In connection with investments in BMA and MMD Swaps, there is a risk that
municipal yields will move in the opposite direction than anticipated by the Acquiring Fund, which would cause the Fund to make payments to its counterparty in the transaction that could adversely affect the Funds performance.
The Acquiring Fund has no obligation to enter into BMA or MMD Swaps and may not
do so. The net amount of the excess, if any, of the Acquiring Funds obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and the Acquiring Fund will segregate liquid securities having an
aggregate net asset value at least equal to the accrued excess.
Credit Default Swap
Agreements
The Acquiring Fund may enter into credit default swap
agreements for hedging purposes or to seek to increase its return. The credit default swap agreement may have as reference obligations one or more securities that are not
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currently held by the Acquiring Fund. The protection buyer in a credit default contract may be obligated to pay the protection seller an upfront or a periodic stream of
payments over the term of the contract, provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional value) of the swap in exchange
for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount (the difference between the market value of the reference obligation and its par
value), if the swap is cash settled. The Acquiring Fund may be either the buyer or seller in the transaction. If the Acquiring Fund is a buyer and no credit event occurs, the Acquiring Fund may recover nothing if the swap is held through its
termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have
significantly decreased. As a seller, the Acquiring Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap, which typically is between six (6) months and three years, provided that there is no
credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased.
As the seller, the Acquiring Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Acquiring Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if the Acquiring Fund
had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. The Acquiring Fund will enter into credit default swap agreements
only with counterparties who are rated investment grade quality by at least one nationally recognized statistical rating organization at the time of entering into such transaction or whose creditworthiness is believed by the Investment Advisor to be
equivalent to such rating. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation
received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A seller of a credit default swap or similar
instrument is exposed to many of the same risks of leverage since, if a credit event occurs, the seller may be required to pay the buyer the full notional value of the contract net of any amounts owed by the buyer related to its delivery of
deliverable obligations.
The Funds obligations under a credit
default swap agreement will be accrued daily (offset against any amounts owing to the Fund). The Fund will at all times segregate with its custodian in connection with each such transaction liquid securities or cash with a value at least equal to
the Funds exposure (any accrued but unpaid net amounts owed by the Fund to any counterparty), on a marked-to-market basis (as calculated pursuant to requirements
of the Securities and Exchange Commission). Such segregation will ensure that the Fund has assets available to satisfy its obligations with respect to the transaction and will avoid any potential leveraging of the Funds portfolio. Such
segregation will not limit the Funds exposure to loss.
VRDOs and Participating
VRDOs
VRDOs are tax exempt obligations that contain a floating or
variable interest rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the
possibility that because of default or insolvency the demand feature of VRDOs and Participating VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon the Public Securities Association
Index or some other appropriate interest rate adjustment index. The Acquiring Fund may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short term maturity and quality standards.
Participating VRDOs provide the Acquiring Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from the financial institution upon a specified number of days notice, not to
exceed seven days. In addition, the Participating VRDO is backed by an irrevocable letter of credit or guaranty of the financial institution. The Acquiring Fund would have an undivided interest in the underlying obligation and thus participate on
the same basis as the financial institution in such obligation except that the financial institution typically retains fees out of the interest
79
paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. The Acquiring Fund has been advised by its counsel that the Acquiring
Fund should be entitled to treat the income received on Participating VRDOs as interest from tax exempt obligations as long as the Acquiring Fund does not invest more than 20% of its total assets in such investments and certain other conditions are
met. It is contemplated that the Acquiring Fund will not invest more than 20% of its assets in Participating VRDOs.
VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. The Board may adopt guidelines and delegate to the Investment Advisor the daily function of determining and monitoring liquidity of such VRDOs. The Board, however, will retain sufficient
oversight and will be ultimately responsible for such determinations.
The
Temporary Investments, VRDOs and Participating VRDOs in which the Acquiring Fund may invest will be in the following rating categories at the time of purchase:
MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and
Prime-1 through Prime-3 for commercial paper (as determined by Moodys), SP-1 through
SP-2 for notes and A-1 through A-3 for VRDOs and commercial paper (as determined by S&P), or
F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated, must be of comparable quality in the opinion of the
Investment Advisor. In addition, the Acquiring Fund reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the Investment Advisor, market conditions warrant.
Repurchase Agreements
The Acquiring Fund may invest in securities pursuant to repurchase agreements.
Repurchase agreements may be entered into only with a member bank of the Federal Reserve System or a primary dealer or an affiliate thereof, in U.S. Government securities. Under such agreements, the bank or primary dealer or an affiliate thereof
agrees, upon entering into the contract, to repurchase the security at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations
during such period. In repurchase agreements, the prices at which the trades are conducted do not reflect accrued interest on the underlying obligations. Such agreements usually cover short periods, such as under one week. Repurchase agreements may
be construed to be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. In a repurchase agreement, the Acquiring Fund will require the seller to provide additional collateral if the market value
of the securities falls below the repurchase price at any time during the term of the repurchase agreement. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not
owned by the Acquiring Fund but only constitute collateral for the sellers obligation to pay the repurchase price. Therefore, the Acquiring Fund may suffer time delays and incur costs or possible losses in connection with the disposition of
the collateral. In the event of a default under such a repurchase agreement, instead of the contractual fixed rate of return, the rate of return to the Acquiring Fund shall be dependent upon intervening fluctuations of the market value of such
security and the accrued interest on the security. In such event, the Acquiring Fund would have rights against the seller for breach of contract with respect to any losses arising from market fluctuations following the failure of the seller to
perform.
In general, for federal income tax purposes, repurchase
agreements are treated as collateralized loans secured by the securities sold. Therefore, amounts earned under such agreements will not be considered tax exempt interest. The treatment of purchase and sales contracts is less certain.
Short Sales
The Acquiring Fund may make short sales of securities. A short sale is a
transaction in which the Acquiring Fund sells a security it does not own in anticipation that the market price of that security will decline. The Acquiring Fund may make short sales both as a form of hedging to offset potential declines in long
positions in similar securities and in order to seek to enhance return.
When the Acquiring Fund makes a short sale, it must borrow the security sold short and deliver collateral to the broker-dealer through which it made
the short sale to cover its obligation to deliver the security upon conclusion of the sale.
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The Acquiring Fund 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 Acquiring Funds obligation to replace the borrowed security will be
secured by collateral deposited with the broker-dealer, usually cash or liquid securities similar to those borrowed. The Acquiring Fund also will be required to segregate similar collateral with its custodian to the extent, if any, necessary so that
the value of both collateral amounts in the aggregate is at all times equal to at least 100% of 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 any payments received by the Acquiring Fund on such security, the Fund 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 Acquiring Fund replaces the borrowed security, the Acquiring Fund will incur a loss. Conversely, if the price declines, the Acquiring Fund will realize a gain. Any gain will be decreased, and any loss increased, by the
transaction costs described above. Although the Acquiring Funds gain is limited to the price at which it sold the security short, its potential loss is theoretically unlimited.
The Acquiring Fund also may make short sales against the box. These
transactions will involve either short sales of securities retained in the Funds portfolio or securities which it has the right to acquire without the payment of further consideration.
Lending of Securities
The Acquiring Fund may lend portfolio securities to certain borrowers determined
to be creditworthy by the Investment Advisor, including to borrowers affiliated with the Investment Advisor. The borrowers provide collateral that is maintained in an amount at least equal to the current market value of the securities loaned. No
securities loan will be made on behalf of the Acquiring Fund if, as a result, the aggregate value of all securities loans of the Acquiring Fund exceeds one-third of the value of the Acquiring Funds total
assets (including the value of the collateral received). The Acquiring Fund may terminate a loan at any time and obtain the return of the securities loaned. The Acquiring Fund receives the value of any interest or cash or non-cash distributions paid on the loaned securities.
With respect to loans that are collateralized by cash, the borrower may be entitled to receive a fee based on the amount of cash collateral. The
Acquiring Fund is compensated by the difference between the amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the Acquiring Fund is compensated by a fee paid by the
borrower equal to a percentage of the market value of the loaned securities. Any cash collateral received by the Acquiring Fund for such loans, and uninvested cash, may be invested, among other things, in a private investment company managed by an
affiliate of the Investment Advisor or in registered money market funds advised by the Investment Advisor or its affiliates; such investments are subject to investment risk.
The Acquiring Fund conducts its securities lending pursuant to an exemptive
order from the SEC permitting it to lend portfolio securities to borrowers affiliated with the Acquiring Fund and to retain an affiliate of the Acquiring Fund as lending agent. To the extent that the Acquiring Fund engages in securities lending,
BlackRock Investment Management, LLC (BIM), an affiliate of the Investment Advisor, acts as securities lending agent for the Acquiring Fund, subject to the overall supervision of the Investment Advisor. BIM administers the lending
program in accordance with guidelines approved by the Board. Pursuant to the current securities lending agreement, BIM may lend securities only when the difference between the borrower rebate rate and the risk free rate exceeds a certain level (such
securities, the specials only securities).
To the extent that
the Acquiring Fund engages in securities lending, the Acquiring Fund retains a portion of securities lending income and remits a remaining portion to BIM as compensation for its services as securities lending agent.
Securities lending income is equal to the total of income earned from the
reinvestment of cash collateral (and excludes collateral investment expenses as defined below), and any fees or other payments to and from borrowers of securities. As securities lending agent, BIM bears all operational costs directly related to
securities lending. The
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Acquiring Fund is responsible for expenses in connection with the investment of cash collateral received for securities on loan in a private investment company managed by an affiliate of the
Investment Advisor (the collateral investment expenses), however, BIM has agreed to cap the collateral investment expenses the Acquiring Fund bears to an annual rate of 0.04% of the daily net assets of such private investment company. In
addition, in accordance with the exemptive order, the investment adviser to the private investment company will not charge any advisory fees with respect to shares purchased by the Acquiring Fund. Such shares also will not be subject to a sales
load, redemption fee, distribution fee or service fee.
Pursuant to the
current securities lending agreement, the Acquiring Fund retains 82% of securities lending income (which excludes collateral investment expenses).
In addition, commencing the business day following the date that the aggregate securities lending income earned across the BlackRock Fixed-Income
Complex in a calendar year exceeds the breakpoint dollar threshold applicable in the given year set forth in the securities lending agreement, the Acquiring Fund, pursuant to the current securities lending agreement, will receive for the remainder
of that calendar year securities lending income in an amount equal to 85% of securities lending income (which excludes collateral investment expenses).
Investment in Other Investment Companies
The Acquiring Fund may invest in other investment companies whose investment objectives and policies are consistent with those of the Fund. In
accordance with the 1940 Act, the Acquiring Fund may invest up to 10% of its total assets in securities of other investment companies. In addition, under the 1940 Act, the Acquiring Fund may not own more than 3% of the total outstanding voting stock
of any investment company and not more than 5% of the value of the Acquiring Funds total assets may be invested in securities of any investment company. The Acquiring Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to invest in affiliated registered money market funds and in an affiliated private investment company without regard to such limitations, provided however, that in all cases the Acquiring Funds aggregate investment of
cash in shares of such investment companies shall not exceed 25% of the Acquiring Funds total assets at any time. If the Acquiring Fund acquires shares in investment companies, stockholders would bear both their proportionate share of expenses
in the Acquiring Fund (including management and advisory fees) and, indirectly, the expenses of such investment companies (including management and advisory fees).
Leverage
The Acquiring Fund currently leverages its assets through the use of preferred shares and tender option bonds. The Acquiring Fund currently does not
intend to borrow money or issue debt securities. Although it has no present intention to do so, the Acquiring Fund reserves the right to borrow money from banks or other financial institutions, or issue debt securities, in the future if it believes
that market conditions would be conducive to the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. Any such leveraging will not be fully achieved until the proceeds resulting
from the use of leverage have been invested in accordance with the Acquiring Funds investment objective and policies.
The use of leverage can create risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common
shares will be more volatile than if leverage were not used. Changes in the value of the Acquiring Funds portfolio, including securities bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is
a net decrease or increase in the value of the Acquiring Funds investment portfolio, leverage will decrease or increase, as the case may be, the NAV per common share to a greater extent than if the Acquiring Fund did not utilize leverage. A
reduction in the Acquiring Funds NAV may cause a reduction in the market price of its shares. During periods in which the Acquiring Fund is using leverage, the fee paid to the Investment Advisor for advisory services will be higher than if the
Acquiring Fund did not use leverage, because the fees paid will be calculated on the basis of the Acquiring Funds managed assets, which includes the proceeds from leverage. Any leveraging strategy the Acquiring Fund employs may not be
successful. See RisksLeverage Risk. The Acquiring Fund currently leverages its assets through tender option bonds transactions. See RisksTender Option Bond Risk for details about the risks associated with
the Acquiring Funds use of TOB Residuals.
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Certain types of leverage the Acquiring Fund may use may result in the Acquiring Fund being subject to
covenants relating to asset coverage and portfolio composition requirements. The Acquiring Fund may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies, which may issue
ratings for any short-term debt securities or preferred shares issued by the Acquiring Fund. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those
imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will impede it from managing the Acquiring Funds portfolio in accordance with its investment objective and policies if the Acquiring Fund were
to utilize leverage.
Under the 1940 Act, the Acquiring Fund is not
permitted to issue senior securities if, immediately after the issuance of such senior securities, the Acquiring Fund would have an asset coverage ratio (as defined in the 1940 Act) of less than 300% with respect to senior securities representing
indebtedness (i.e., for every dollar of indebtedness outstanding, the Acquiring Fund is required to have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for
every dollar of preferred shares outstanding, the Acquiring Fund is required to have at least two dollars of assets). The 1940 Act also provides that the Acquiring Fund may not declare distributions or purchase its stock (including through tender
offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or 200%, as applicable. Under the 1940 Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if
(i) repaid within 60 days, (ii) not extended or renewed and (iii) not in excess of 5% of the total assets of the Acquiring Fund.
Effects of Leverage
Assuming that leverage will represent approximately 39.2% of the Combined Funds total managed assets and that the Combined Fund will bear
expenses relating to that leverage at an average annual rate of 0.95%, the income generated by the Combined Funds portfolio (net of estimated expenses) must exceed 0.37% in order to cover the expenses specifically related to the Combined
Funds estimated use of leverage. Of course, these numbers are merely estimates used for illustration. Actual leverage expenses 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 SEC. 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 securities held in the Combined Funds 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 Combined Fund. The table further reflects the use of
leverage representing 39.2% of the Combined Funds total managed assets and the Combined Funds currently projected annual leverage expenses of 0.95%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return (net of expenses)
|
|
|
(10
|
)%
|
|
|
(5
|
)%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
Common Share Total Return
|
|
|
(17.0
|
)%
|
|
|
(8.8
|
)%
|
|
|
(0.6
|
)%
|
|
|
7.6
|
%
|
|
|
15.8
|
%
|
Common Share total return is composed of two
elements: the Common Share dividends paid by the Combined Fund (the amount of which is largely determined by the net investment income e of the Combined Fund) and gains or losses on the value of the securities the Combined Fund owns. As required by
SEC rules, the table assumes that the Combined Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, a total return of 0% assumes that the tax-exempt interest the
Combined Fund receives on its municipal bonds investments is entirely offset by losses in the value of those securities.
Preferred Shares
The Acquiring Fund has leveraged its portfolio by issuing VMTP Shares, and the Combined Fund is expected to leverage its portfolio by issuing VRDP
Shares as a result of the Acquiring Fund VMTP Refinancing. Under the 1940 Act, the Acquiring Fund is not permitted to issue preferred shares if, immediately after such issuance, the liquidation value of the Acquiring Funds outstanding
preferred shares exceeds 50% of its assets (including the proceeds from the issuance) less liabilities other than borrowings (i.e., the value of the Acquiring Funds assets must be at least 200% of the liquidation value of its
outstanding preferred shares). In addition, the Acquiring Fund would not be permitted to declare any cash dividend or other distribution on its common shares unless, at the time of such declaration, the value
83
of the Acquiring Funds assets less liabilities other than borrowings is at least 200% of such liquidation value. Please see Information about the Preferred Shares of the Funds
for a description of the Acquiring Funds VMTP Shares and Information about the ReorganizationDescription of VRDP Shares to Be Issued by the Acquiring Fund for a description of the Combined Funds VRDP Shares.
For tax purposes, the Acquiring Fund is currently required to allocate tax-exempt interest income, net capital gain and other taxable income, if any, between its common shares and preferred shares outstanding in proportion to total dividends paid to each class for the year in which or
with respect to which tax-exempt income, the net capital gain or other taxable income is paid. If net capital gain or other taxable income is allocated to preferred shares, instead of solely tax-exempt income, the Acquiring Fund will likely have to pay higher total dividends to preferred shareholders or make special payments to preferred shareholders to compensate them for the increased tax liability.
This would reduce the total amount of dividends paid to the common shareholders but would increase the portion of the dividend that is tax-exempt. If the increase in dividend payments or the special payments
to preferred shareholders are not entirely offset by a reduction in the tax liability of, and an increase in the tax-exempt dividends received by, the common shareholders, the advantage of the Acquiring
Funds leveraged structure to common shareholders will be reduced.
Tender Option Bonds
The Acquiring Fund currently leverages its assets through the use of TOB Residuals, which are derivative interests in municipal bonds. The TOB
Residuals in which the Acquiring Fund will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by the Acquiring Fund. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on fixed rate
municipal bonds with comparable credit quality.
TOB Residuals represent
beneficial interests in a TOB Trust formed for the purpose of holding municipal bonds contributed by one or more funds. A TOB Trust typically issues two classes of beneficial interests: TOB Floaters, which are sold to third-party investors, and TOB
Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. The Fund may invest in both TOB Floaters and TOB Residuals. TOB Floaters may have first priority on the cash flow from the municipal bonds held
by the TOB Trust and are enhanced with a liquidity support arrangement from a third-party TOBs Liquidity Provider (defined below) which allows holders to tender their position at par (plus accrued interest). The Acquiring Fund, as a holder of TOB
Residuals, is paid the residual cash flow from the TOB Trust. The Acquiring Fund contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale of the TOB Floaters, less certain transaction costs, and
typically will invest the cash to purchase additional municipal bonds or other investments permitted by its investment policies. If the Acquiring Fund ever purchases all or a portion of the TOB Floaters sold by the TOB Trust, it may surrender those
TOB Floaters together with a proportionate amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other BlackRock-advised Funds (as defined below) may contribute municipal bonds to a TOB Trust into which the Acquiring Fund has contributed municipal
bonds. If multiple BlackRock-advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will generally be shared among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a TOB Trust typically are high grade
municipal bonds. In certain cases, when municipal bonds transferred are lower grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the
TOB Trust by a credit enhancement provider. The TOB Trust would be responsible for the payment of the credit enhancement fee and the Acquiring Fund, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and
interest made by the credit enhancement provider.
The TOB Residuals held
by the Acquiring Fund generally provide the Acquiring Fund with the right to cause the holders of a proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, the Acquiring Fund may
withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a tender option bond transaction, in effect, creates exposure for the Acquiring Fund to the entire return of the
84
municipal bonds in the TOB Trust, with a net cash investment by the Acquiring Fund that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive or negative
impact of the municipal bonds return within the Acquiring Fund (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB Floaters it
issues.
The Acquiring Fund may invest in highly leveraged TOB Residuals. A
TOB Residual generally is considered highly leveraged if the principal amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to the Acquiring Funds use of TOB Residuals may
be called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of the Acquiring Fund upon the occurrence of termination events, as
defined in the TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and
the TOBs Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., the Acquiring Fund) whereas in other termination events, the holders of TOB Floaters and the TOB
Residual holders would be paid pro rata.
TOB Trusts are typically
supported by a liquidity facility provided by a TOBs Liquidity Provider that allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the TOBs Liquidity Provider to
purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
The Acquiring Fund may invest in a TOB Trust on either a non-recourse or recourse basis. When the Acquiring Fund invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the
liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If the Acquiring Fund invests in a TOB Trust on a
recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which the Acquiring Fund is required to reimburse the TOBs Liquidity Provider the amount of any Liquidation Shortfall. As a result,
if the Acquiring Fund invests in a recourse TOB Trust, the Acquiring Fund will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-advised Funds participate in any such TOB Trust, these losses will be shared
ratably, in proportion to their participation in the TOB Trust.
Under
accounting rules, municipal bonds of the Acquiring Fund that are deposited into a TOB Trust are investments of the Acquiring Fund and are presented on the Acquiring Funds Schedule of Investments and outstanding TOB Floaters issued by a TOB
Trust are presented as liabilities in the Acquiring Funds Statement of Assets and Liabilities. Interest income from the underlying municipal bonds is recorded by the Acquiring Fund on an accrual basis. Interest expense incurred on the TOB
Floaters and other expenses related to remarketing, administration, trustee and other services to a TOB Trust are reported as expenses of the Acquiring Fund. In addition, under accounting rules, loans made to a TOB Trust sponsored by the Acquiring
Fund may be presented as loans of the Acquiring Fund in the Acquiring Funds financial statements even if there is no recourse to the Acquiring Funds assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities or remarketing provisions
that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the TOB Trust, the holder of
the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The perceived reliability and creditworthiness, of many major financial
institutions, some of which sponsor and/or provide liquidity support to TOB Trusts increases the risk associated with TOB Floaters. This in turn may reduce the desirability of TOB Floaters as investments, which could impair the viability or
availability of TOB Trusts.
85
The use of TOB Residuals will require the Acquiring Fund to earmark or segregate liquid assets in an
amount equal to any TOB Floaters, plus any accrued but unpaid interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, the Acquiring Fund that are not owned by the Acquiring Fund. The use of TOB Residuals may also
require the Acquiring Fund to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. The Acquiring Fund reserves the right to modify its asset
segregation policies in the future to the extent that such changes are in accordance with applicable regulations or interpretations. Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements,
which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit the Acquiring Funds ability to enter into or manage TOB Trust transactions.
See Risk Factors and Special ConsiderationsGeneral Risks of
Investing in the Acquiring FundTender Option Bond Risk for a description of the risks involved with a TOB issuer.
Credit Facility
The Acquiring Fund is permitted to leverage its portfolio by entering into one or more credit facilities. If the Acquiring Fund enters into a credit
facility, the Acquiring Fund may be required to prepay outstanding amounts or incur a penalty rate of interest upon the occurrence of certain events of default. The Acquiring Fund would also likely have to indemnify the lenders under the credit
facility against liabilities they may incur in connection therewith. In addition, the Acquiring Fund expects that any credit facility would contain covenants that, among other things, likely would limit the Acquiring Funds ability to pay
distributions in certain circumstances, incur additional debt, change certain of its investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the
1940 Act. The Acquiring Fund may be required to pledge its assets and to maintain a portion of its assets in cash or high-grade securities as a reserve against interest or principal payments and expenses. The Acquiring Fund expects that any credit
facility would have customary covenant, negative covenant and default provisions. There can be no assurance that the Acquiring Fund will enter into an agreement for a credit facility, or one on terms and conditions representative of the foregoing,
or that additional material terms will not apply. In addition, if entered into, a credit facility may in the future be replaced or refinanced by one or more credit facilities having substantially different terms or by the issuance of preferred
shares.
Derivatives
The Acquiring Fund may
enter into derivative transactions that have economic leverage embedded in them. Derivative transactions that the Acquiring Fund may enter into and the risks associated with them are described elsewhere in this Proxy Statement and are also referred
to as Strategic Transactions. The Acquiring Fund cannot assure you that investments in derivative transactions that have economic leverage embedded in them will result in a higher return on its common shares.
To the extent the terms of such transactions obligate the Acquiring Fund to
make payments, the Acquiring Fund may earmark or segregate cash or liquid assets in an amount at least equal to the current value of the amount then payable by the Acquiring Fund under the terms of such transactions or otherwise cover such
transactions in accordance with applicable interpretations of the staff of the SEC. If the current value of the amount then payable by the Acquiring Fund under the terms of such transactions is represented by the notional amounts of such
investments, the Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such notional amounts, and if the current value of the amount then payable by the Acquiring Fund under the terms of such
transactions is represented by the market value of the Acquiring Funds current obligations, the Acquiring Fund would segregate or earmark cash or liquid assets having a market value at least equal to such current obligations. To the extent the
terms of such transactions obligate the Acquiring Fund to deliver particular securities to extinguish the Acquiring Funds obligations under such transactions the Acquiring Fund may cover its obligations under such transactions by
either (i) owning the securities or collateral underlying such transactions or (ii) having an absolute and immediate right to acquire such securities or collateral without additional cash consideration (or, if additional cash consideration
is required, having earmarked or segregated an appropriate amount of cash or liquid assets). Such earmarking, segregation or cover is intended to provide the Acquiring Fund with available assets to satisfy its obligations under such transactions. As
a result of such earmarking, segregation or cover, the Acquiring Funds obligations under such transactions will not be considered senior securities representing indebtedness for purposes of the 1940 Act, or considered borrowings subject to the
Acquiring Funds limitations on borrowings discussed above, but may create leverage for the Acquiring Fund. To the extent that the Acquiring Funds obligations under such transactions are not so earmarked, segregated or covered, such
obligations may be considered senior securities representing indebtedness under the 1940 Act and therefore subject to the 300% asset coverage requirement.
86
These earmarking, segregation or cover requirements can result in the Acquiring Fund maintaining
securities positions it would otherwise liquidate, segregating or earmarking assets at a time when it might be disadvantageous to do so or otherwise restrict portfolio management. Effective August 19, 2022, these requirements will be replaced
by the requirements under the newly adopted Rule 18f-4 as described in this prospectus. See RisksStrategic Transactions and Derivatives.
Borrowings
The Acquiring Fund is authorized to borrow money in amounts of up to 5% of the value of its total assets at the time of such borrowings; provided,
however, that the Acquiring Fund is authorized to borrow moneys in amounts of up to 33 1/3% of the value of its total assets at the time of such borrowings to finance the repurchase of its own common stock pursuant to tender offers or otherwise to
redeem or repurchase shares of preferred stock, or for temporary, extraordinary or emergency purposes, including the payment of dividends and the settlement of securities transactions which otherwise might require untimely dispositions of portfolio
securities.
Investment Restrictions
Each Fund has adopted certain investment restrictions that are
fundamental, meaning such investment restrictions cannot be changed without approval by holders of a majority of the Funds outstanding voting securities as defined in the 1940 Act. As defined in the 1940 Act, this
phrase means the vote of (1) 67% or more of the voting securities present at a meeting, if the holders of more than 50% of the outstanding voting securities are present or represented by proxy, or (2) more than 50% of the outstanding voting
securities, whichever is less. Each Fund has also adopted certain non-fundamental investment restrictions. The investment restrictions of the Funds are similar, although there are some differences, and are set
forth in Appendix B to this Proxy Statement.
Each Fund is currently
classified as a diversified fund under the 1940 Act. This means that the Fund may not purchase securities of an issuer (other than (i) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and
(ii) securities of other investment companies) if, with respect to 75% of its total assets, (a) more than 5% of the Funds total assets would be invested in securities of that issuer or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer. With respect to the remaining 25% of its total assets, the Fund can invest more than 5% of its assets in one issuer. Under the 1940 Act, a fund cannot change its classification from diversified to non-diversified without shareholder approval.
Each Funds VRDP Shares or VMTP Shares, as applicable, are assigned long-term ratings by Moodys and Fitch. In order to maintain the required
ratings, each Fund is required to comply with certain investment quality, diversification and other guidelines established by Moodys and Fitch. Such guidelines may be more restrictive than the restrictions set forth above. Each Fund does not
anticipate that such guidelines would have a material adverse effect on its ability to achieve its investment objective. Moodys and Fitch receive fees in connection with their ratings issuances. Each Fund is also subject to certain covenants
and requirements under the terms of the VRDP Shares or VMTP Shares, as applicable, and related documents, including the terms of the liquidity facility supporting the VRDP Shares. Such requirements may be more restrictive than the restrictions set
forth above. Each Fund does not anticipate that such requirements would have a material adverse effect on its ability to achieve its investment objective. Please see Information about the Preferred Shares of the Funds for additional
information.
87
THE TARGET FUNDS INVESTMENT OBJECTIVES AND POLICIES
Investment Objective and Policies
MFL seeks as a fundamental investment objective to provide shareholders with
current income exempt from federal income tax and to provide shareholders with the opportunity to own shares the value of which is exempt from Florida intangible personal property tax. The investment objective of MFL is a fundamental policy that may
not be changed without a vote of a majority of MFLs outstanding voting securities.
MFL seeks to achieve its investment objective by investing primarily in a portfolio of long-term, investment grade municipal obligations, the interest
on which, in the opinion of bond counsel to the issuer, is exempt from federal income tax (MFL Municipal Bonds). At all times, at least 80% of MFLs total assets is invested in MFL Municipal Bonds, except during interim periods
pending investment of the net proceeds of public offerings of its securities and during temporary defensive periods. At times, MFL may seek to hedge its portfolio through the use of futures and options transactions to reduce volatility in the net
asset value of its Common Shares. Under normal circumstances, at least 80% of MFLs total assets will be invested in municipal obligations with remaining maturities of one year or more. MFL may invest directly in such securities or
synthetically through the use of derivatives. There can be no assurance that MFLs investment objective will be realized.
MFL may invest in certain tax-exempt securities classified as private activity bonds (or industrial
development bonds, under pre-1986 law) (PABs) (in general, bonds that benefit nongovernmental entities) that may subject certain investors in the Fund to an alternative minimum tax. The percentage
of MFLs total assets invested in PABs will vary from time to time.
The investment grade MFL Municipal Bonds in which MFL will primarily invest are those MFL Municipal Bonds that are rated at the date of purchase in the
four highest rating categories of S&P, Moodys or Fitch or, if unrated, are considered to be of comparable quality by the Investment Advisor. In the case of long-term debt, the investment grade rating categories are AAA through BBB for
S&P and Fitch and Aaa through Baa for Moodys. In the case of short-term notes, the investment grade rating categories are SP-1+ through SP-2 for S&P, MIG-1 through MIG-3 for Moodys and F-1+ through F-3 for Fitch. In the case of tax-exempt commercial paper, the investment grade rating categories are A-1+ through A-3 for S&P,
Prime-1 through Prime-3 for Moodys and F-1+ through F-3 for Fitch. Obligations
ranked in the lowest investment grade rating category (BBB, SP-2 and A-3 for S&P; Baa, MIG-3 and Prime-3 for Moodys; and BBB and F-3 for Fitch), while considered investment grade, may have certain speculative characteristics. There may be sub-categories or gradations indicating relative standing within the rating categories set forth above. In assessing the quality of MFL Municipal Bonds with respect to the foregoing requirements, the Investment
Advisor takes into account the nature of any letters of credit or similar credit enhancement to which particular MFL Municipal Bonds are entitled and the creditworthiness of the financial institution that provided such credit enhancements.
MFL may invest up to 20% of its managed assets in securities that are rated
below investment grade, or are considered by the Investment Advisor to be of comparable quality, at the time of purchase, subject to MFLs other investment policies. Bonds of below investment grade quality are regarded as having predominantly
speculative characteristics with respect to the issuers capacity to pay interest and repay principal. Such securities are sometimes referred to as high yield or junk bonds.
All percentage and ratings limitations on securities in which MFL may invest
apply at the time of making an investment and shall not be considered violated if an investment rating is subsequently downgraded to a rating that would have precluded MFLs initial investment in such security. In the event that MFL disposes of
a portfolio security subsequent to its being downgraded, MFL may experience a greater risk of loss than if such security had been sold prior to such downgrade.
MFL intends to invest primarily in long-term MFL Municipal Bonds with maturities of more than ten years. However, MFL also may invest in intermediate
term MFL Municipal Bonds with maturities of between three years and ten years. MFL also may invest from time to time in short-term MFL Municipal Bonds with maturities of less than three years. The average maturity of MFLs portfolio securities
will vary based upon the Investment Advisors assessment of economic and market conditions.
88
MFL may invest in short-term, tax-exempt securities, short-term
U.S. Government securities, repurchase agreements or cash. Such short-term securities or cash will not exceed 20% of its total assets except during interim periods pending investment of the net proceeds of public offerings of MFLs securities
or in anticipation of the repurchase or redemption of MFLs securities and temporary periods when, in the opinion of the Investment Advisor, prevailing market or financial conditions warrant. MFL also may invest in variable rate demand
obligations (VRDOs) and VRDOs in the form of participation interests (Participating VRDOs) in variable rate tax-exempt obligations held by a financial institution. MFLs hedging
strategies are not fundamental policies and may be modified by the Board of Trustees of MFL without the approval of MFLs stockholders. MFL is also authorized to invest in indexed and inverse floating rate obligations for hedging purposes and
to seek to enhance return.
MFL may invest in securities not issued by or
on behalf of a state or territory or by an agency or instrumentality thereof, if MFL nevertheless believes such securities pay interest that is excludable from gross income for federal income tax purposes
(Non-Municipal Tax-Exempt Securities). Non-Municipal Tax-Exempt Securities
could include trust certificates, partnership interests or other instruments evidencing interest in one or more long-term MFL Municipal Bonds. Non-Municipal Tax-Exempt
Securities also may include securities issued by other investment companies that invest in MFL Municipal Bonds, to the extent such investments are permitted by MFLs investment restrictions and applicable law, including the 1940 Act. Non-Municipal Tax-Exempt Securities are subject to the same risks associated with an investment in MFL Municipal Bonds as well as many of the risks associated with investments
in derivatives. For purposes of MFLs investment objective and policies, Non-Municipal Tax-Exempt Securities that pay interest that is exempt from federal income
taxes will be considered MFL Municipal Bonds.
MFL ordinarily
does not intend to realize significant investment income not exempt from federal income tax. From time to time, MFL may realize taxable capital gains.
Federal tax legislation has limited the types and volume of bonds the interest on which qualifies for a federal income
tax-exemption. As a result, this legislation and legislation that may be enacted in the future may affect the availability of Municipal Bonds for investment by MFL.
The State of Florida repealed the Florida Intangible Tax as of January 2007. As
a result, on September 12, 2008, the Board of Trustees of MFL voted unanimously to approve MFL investing in MFL Municipal Bonds regardless of geographic location. If Florida were to reinstate the Florida Intangible Tax or adopt a state income
tax, however, MFL would be required to realign its portfolio such that at substantially all of its assets would be invested in Florida MFL Municipal Bonds or obtain shareholder approval to amend MFLs fundamental investment objective to remove
references to the Florida Intangible Tax. There can be no assurance that the State of Florida will not reinstate the Florida Intangible Tax or adopt a state income tax in the future. There can also be no assurance that the reinstatement of the
Florida Intangible Tax or the adoption of a state income tax will not have a material adverse effect on MFL or will not impair the ability of MFL to achieve its investment objectives.
MFL may hedge all or a portion of its portfolio investments against
fluctuations in interest rates through the use of options and certain financial futures contracts and options thereon. MFL may purchase and sell futures contracts and exchange-listed and over-the-counter put and call options on futures contracts as a hedging strategy. In order to seek to hedge the value of MFL against interest rate fluctuations, to hedge against increases in MFLs costs
associated with the dividend payments on any preferred shares or to seek to increase MFLs return, MFL may enter into interest rate swap transactions such as Municipal Market Data AAA Cash Curve swaps or Bond Market Association Municipal Swap
Index swaps. MFL may enter into credit default swap agreements for hedging purposes or to seek to increase its return.
Description of Municipal Bonds
See The Acquiring Funds InvestmentsDescription of Municipal Bonds for additional information regarding the types of municipal
bonds in which MFL invests.
89
Tender Option Bond Transactions
MFL currently leverages its assets through the use of residual interest municipal tender option bonds (TOB Residuals), which are derivative
interests in municipal bonds. The TOB Residuals in which MFL will invest pay interest or income that, in the opinion of counsel to the issuer of such TOB Residuals, is exempt from regular U.S. federal income tax. No independent investigation will be
made to confirm the tax-exempt status of the interest or income paid by TOB Residuals held by MFL. Although volatile, TOB Residuals typically offer the potential for yields exceeding the yields available on
fixed rate municipal bonds with comparable credit quality.
TOB Residuals
represent beneficial interests in a special purpose trust formed for the purpose of holding municipal bonds contributed by one or more funds (a TOB Trust). A TOB Trust typically issues two classes of beneficial interests: short-term
floating rate interests (TOB Floaters), which are sold to third-party investors, and TOB Residuals, which are generally issued to the fund(s) that transferred municipal bonds to the TOB Trust. MFL may invest in both TOB Floaters and TOB
Residuals. TOB Floaters may have first priority on the cash flow from the municipal bonds held by the TOB Trust and are enhanced with a liquidity support arrangement from a third-party TOBs Liquidity Provider (defined below) which allows holders to
tender their position at par (plus accrued interest). MFL, as a holder of TOB Residuals, is paid the residual cash flow from the TOB Trust. MFL contributes municipal bonds to the TOB Trust and is paid the cash received by the TOB Trust from the sale
of the TOB Floaters, less certain transaction costs, and typically will invest the cash to purchase additional municipal bonds or other investments permitted by its investment policies. If MFL ever purchases all or a portion of the TOB Floaters sold
by the TOB Trust, it may surrender those TOB Floaters together with a proportionate amount of TOB Residuals to the TOB Trust in exchange for a proportionate amount of the municipal bonds owned by the TOB Trust.
Other funds advised by the Investment Advisor (BlackRock-Advised
Funds) may contribute municipal bonds to a TOB Trust into which MFL has contributed municipal bonds. If multiple BlackRock-Advised Funds participate in the same TOB Trust, the economic rights and obligations under the TOB Residual will
generally be shared among the funds ratably in proportion to their participation in the TOB Trust.
The municipal bonds transferred to a TOB Trust typically are high grade municipal bonds. In certain cases, when municipal bonds transferred are lower
grade municipal bonds, the TOB Trust transaction includes a credit enhancement feature that provides for the timely payment of principal and interest on the bonds to the TOB Trust by a credit enhancement provider. The TOB Trust would be responsible
for the payment of the credit enhancement fee and MFL, as a TOB Residual holder, would be responsible for reimbursement of any payments of principal and interest made by the credit enhancement provider.
The TOB Residuals held by MFL generally provide MFL with the right to cause the
holders of a proportional share of the TOB Floaters to tender their notes to the TOB Trust at par plus accrued interest. Thereafter, MFL may withdraw a corresponding share of the municipal bonds from the TOB Trust. As a result, a TOB transaction, in
effect, creates exposure for MFL to the entire return of the municipal bonds in the TOB Trust, with a net cash investment by MFL that is less than the value of the municipal bonds in the TOB Trust. This multiplies the positive or negative impact of
the municipal bonds return within MFL (thereby creating leverage). The leverage within a TOB Trust depends on the value of the municipal bonds deposited in the TOB Trust relative to the value of the TOB Floaters it issues.
MFL may invest in highly leveraged TOB Residuals. A TOB Residual generally is
considered highly leveraged if the principal amount of the TOB Floaters issued by the related TOB Trust exceeds 75% of the principal amount of the municipal bonds owned by the TOB Trust.
The leverage attributable to MFLs use of TOB Residuals may be
called away on relatively short notice and therefore may be less permanent than more traditional forms of leverage. The TOB Trust may be collapsed without the consent of MFL upon the occurrence of termination events, as defined in the
TOB Trust agreements. Upon the occurrence of a termination event, a TOB Trust would be liquidated with the proceeds applied first to any accrued fees owed to the trustee of the TOB Trust, the remarketing agent of the TOB Floaters and the TOBs
Liquidity Provider. Upon certain termination events, the holders of the TOB Floaters would be paid before the TOB Residual holders (i.e., MFL) whereas in other termination events, the holders of TOB Floaters and the TOB Residual holders would be
paid pro rata.
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TOB Trusts are typically supported by a liquidity facility provided by a TOBs Liquidity Provider that
allows the holders of the TOB Floaters to tender their TOB Floaters in exchange for payment of par plus accrued interest on any business day (subject to the non-occurrence of a termination event). The tendered
TOB Floaters are remarketed by a remarketing agent. In the event of a failed remarketing, the TOB Trust may draw upon a loan from the TOBs Liquidity Provider to purchase the tendered TOB Floaters. Any loans made by the TOBs Liquidity Provider will
be secured by the purchased TOB Floaters held by the TOB Trust and will be subject to an increased interest rate based on number of days the loan is outstanding.
MFL may invest in a TOB Trust on either a non-recourse or recourse basis. When MFL invests in TOB Trusts on a non-recourse basis, and the TOBs Liquidity Provider is required to make a payment under the liquidity facility, the TOBs Liquidity Provider will typically liquidate all or a portion of the municipal bonds held in
the TOB Trust and then fund the balance, if any, of the Liquidation Shortfall. If MFL invests in a TOB Trust on a recourse basis, it will typically enter into a reimbursement agreement with the TOBs Liquidity Provider pursuant to which MFL is
required to reimburse the TOBs Liquidity Provider the amount of any Liquidation Shortfall. As a result, if MFL invests in a recourse TOB Trust, MFL will bear the risk of loss with respect to any Liquidation Shortfall. If multiple BlackRock-Advised
Funds participate in any such TOB Trust, these losses will be shared ratably, in proportion to their participation in the TOB Trust.
Under accounting rules, municipal bonds of MFL that are deposited into a TOB Trust are investments of MFL and are presented on MFLs Schedule of
Investments and outstanding TOB Floaters issued by a TOB Trust are presented as liabilities in MFLs Statement of Assets and Liabilities. Interest income from the underlying municipal bonds is recorded by MFL on an accrual basis. Interest
expense incurred on the TOB Floaters and other expenses related to remarketing, administration, trustee and other services to a TOB Trust are reported as expenses of MFL. In addition, under accounting rules, loans made to a TOB Trust sponsored by
MFL may be presented as loans of MFL in MFLs financial statements even if there is no recourse to MFLs assets.
For TOB Floaters, generally, the interest rate earned will be based upon the market rates for municipal bonds with maturities or remarketing provisions
that are comparable in duration to the periodic interval of the tender option. Since the tender option feature has a shorter term than the final maturity or first call date of the underlying municipal bonds deposited in the TOB Trust, the holder of
the TOB Floaters relies upon the terms of the agreement with the financial institution furnishing the liquidity facility as well as the credit strength of that institution. The risk associated with TOB Floaters, however, may be increased in the
current market environment as a result of recent downgrades to the credit ratings, and thus the perceived reliability and creditworthiness, of many major financial institutions, some of which sponsor and/or provide liquidity support to TOB Trusts.
This in turn may reduce the desirability of TOB Floaters as investments, which could impair the viability or availability of TOB Trusts.
The use of TOB Residuals will require MFL to earmark or segregate liquid assets in an amount equal to any TOB Floaters, plus any accrued but unpaid
interest due on the TOB Floaters, issued by TOB Trusts sponsored by, or on behalf of, MFL that are not owned by MFL. The use of TOB Residuals may also require MFL to earmark or segregate liquid assets in an amount equal to loans provided by the TOBs
Liquidity Provider to the TOB Trust to purchase tendered TOB Floaters. MFL reserves the right to modify its asset segregation policies in the future to the extent that such changes are in accordance with applicable regulations or interpretations.
Future regulatory requirements or SEC guidance may necessitate more onerous contractual or regulatory requirements, which may increase the costs or reduce the degree of potential economic benefits of TOB Trust transactions or limit MFLs
ability to enter into or manage TOB Trust transactions.
When-Issued and Forward
Commitment Securities
MFL may purchase municipal bonds on a
when-issued basis and may purchase or sell municipal bonds on a forward commitment basis. 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 and forward commitment securities may be sold prior to the settlement date, but MFL expects to enter into when-issued and forward commitment securities only
with the intention of actually receiving or delivering the securities, as the case may be. If MFL 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 can incur a gain or loss.
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At the time MFL enters into a transaction on a when-issued basis, it will segregate or designate on its
books and records cash or liquid assets with a value not less than the value of the when-issued securities.
There can be no assurance that a security purchased on a when issued basis will be issued or that a security purchased or sold through a forward
commitment will be delivered. A default by a counterparty may result in MFL missing the opportunity of obtaining a price considered to be advantageous. The value of securities in these transactions on the delivery date may be more or less than
MFLs purchase price. MFL may bear the risk of a decline in the value of the security in these transactions and may not benefit from an appreciation in the value of the security during the commitment period.
If deemed advisable as a matter of investment strategy, MFL may dispose of or
renegotiate a commitment after it has been entered into, and may sell securities it has committed to purchase before those securities are delivered to MFL on the settlement date. In these cases MFL may realize a taxable capital gain or loss.
When MFL engages in when-issued, delayed delivery or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of such party to do so may result in MFLs incurring a loss or missing an opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a commitment to purchase
securities, and any subsequent fluctuations in their market value, is taken into account when determining the market value of MFL starting on the day MFL agrees to purchase the securities. MFL does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement date.
Other Investment Companies
MFL may invest up to 10% of its total assets in securities of other open- or closed- end investment companies that invest primarily in municipal bonds
of the types in which MFL may invest directly. Under the 1940 Act, MFL may invest up to 10% of its total assets in the aggregate in shares of other investment companies and up to 5% of its total assets in any one investment company, provided the
investment does not represent more than 3% of the voting stock of the acquired investment company at the time such shares are purchased. MFL generally expects to invest in other investment companies either during periods when it has large amounts of
uninvested cash or during periods when there is a shortage of attractive, high- yielding municipal bonds available in the market. As a shareholder in an investment company, MFL will bear its ratable share of that investment companys expenses,
and would remain subject to payment of MFLs advisory and other fees and expenses with respect to assets so invested. The Investment Advisor will take expenses into account when evaluating the investment merits of an investment in an investment
company relative to available municipal bond investments. In addition, the securities of other investment companies may be leveraged and will therefore be subject to leverage risks. 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 MFL. In addition, to the extent that MFL invests in
other investment companies, MFL will be dependent upon the investment and research abilities of persons other than the Investment Advisor. MFL treats its investments in such open- or closed-end investment
companies as investments in municipal bonds.
VRDOs and Participating VRDOs
VRDOs are tax exempt obligations that contain a floating or variable interest
rate adjustment formula and right of demand on the part of the holder thereof to receive payment of the unpaid principal balance plus accrued interest upon a short notice period not to exceed seven days. There is, however, the possibility that
because of default or insolvency the demand feature of VRDOs and Participating VRDOs may not be honored. The interest rates are adjustable at intervals (ranging from daily to up to one year) to some prevailing market rate for similar investments,
such adjustment formula being calculated to maintain the market value of the VRDOs, at approximately the par value of the VRDOs on the adjustment date. The adjustments typically are based upon the Public Securities Association Index or some other
appropriate interest rate adjustment index. MFL may invest in all types of tax exempt instruments currently outstanding or to be issued in the future which satisfy its short term maturity and quality standards.
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Participating VRDOs provide MFL with a specified undivided interest (up to 100%) of the underlying
obligation and the right to demand payment of the unpaid principal balance plus accrued interest on the Participating VRDOs from the financial institution upon a specified number of days notice, not to exceed seven days. In addition, the
Participating VRDO is backed by an irrevocable letter of credit or guaranty of the financial institution. MFL would have an undivided interest in the underlying obligation and thus participate on the same basis as the financial institution in such
obligation except that the financial institution typically retains fees out of the interest paid on the obligation for servicing the obligation, providing the letter of credit and issuing the repurchase commitment. MFL has been advised by its
counsel that MFL should be entitled to treat the income received on Participating VRDOs as interest from tax exempt obligations as long as MFL does not invest more than 20% of its total assets in such investments and certain other conditions are
met. It is contemplated that MFL will not invest more than 20% of its assets in Participating VRDOs.
VRDOs that contain an unconditional right of demand to receive payment of the unpaid principal balance plus accrued interest on a notice period
exceeding seven days may be deemed to be illiquid securities. The Board may adopt guidelines and delegate to the Investment Advisor the daily function of determining and monitoring liquidity of such VRDOs. The Board, however, will retain sufficient
oversight and will be ultimately responsible for such determinations.
The
Temporary Investments, VRDOs and Participating VRDOs in which MFL may invest will be in the following rating categories at the time of purchase: MIG-1/VMIG-1 through MIG-3/VMIG-3 for notes and VRDOs and Prime-1 through Prime-3 for commercial paper (as
determined by Moodys), SP-1 through SP-2 for notes and A-1 through A-3 for VRDOs
and commercial paper (as determined by S&P), or F-1 through F-3 for notes, VRDOs and commercial paper (as determined by Fitch). Temporary Investments, if not rated,
must be of comparable quality in the opinion of the Investment Advisor. In addition, MFL reserves the right to invest temporarily a greater portion of its assets in Temporary Investments for defensive purposes, when, in the judgment of the
Investment Advisor, market conditions warrant.
Tax-Exempt Preferred Shares
MFL may also invest up to 10% of its total assets in preferred interests of other investment funds that pay dividends that are exempt from regular
federal income tax, including the alternative minimum tax, and New York State and New York City personal income taxes. A portion of such dividends may be capital gain distributions subject to federal capital gains tax. Such funds
in turn invest in municipal bonds and other assets that generally pay interest or make distributions that are exempt from regular federal income tax, including the alternative minimum tax, and New York State and New York City personal
income taxes, such as revenue bonds issued by state or local agencies to fund the development of low-income, multi-family housing. Investment in such tax-exempt
preferred shares involves many of the same issues as investing in other open- or closed-end investment companies as discussed above. These investments also have additional risks, including liquidity risk, the
absence of regulation governing investment practices, capital structure and leverage, affiliated transactions and other matters, and concentration of investments in particular issuers or industries. Revenue bonds issued by state or local agencies to
finance the development of low-income, multi-family housing involve special risks in addition to those associated with municipal bonds generally, including that the underlying properties may not generate
sufficient income to pay expenses and interest costs. Such bonds are generally non-recourse against the property owner, may be junior to the rights of others with an interest in the properties, may pay
interest that changes based in part on the financial performance of the property, may be prepayable without penalty and may be used to finance the construction of housing developments which, until completed and rented, do not generate income to pay
interest. Increases in interest rates payable on senior obligations may make it more difficult for issuers to meet payment obligations on subordinated bonds. MFL will treat investments in tax-exempt preferred
shares as investments in municipal bonds.
Temporary Investments
During temporary defensive periods (e.g., times when, in the Investment
Advisors opinion, temporary imbalances of supply and demand or other temporary dislocations in the tax-exempt bond market adversely affect the price at which long-term or intermediate-term municipal
bonds are available), and in order to keep cash on hand fully invested, MFL may invest in excess of 20% of its total assets in liquid, short-term investments including high quality, short-term securities which may be either tax-exempt or taxable and securities of other open- or closed-end
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investment companies that invest primarily in municipal bonds of the type in which MFL may invest directly. MFL intends to invest in taxable short-term investments only in the event that suitable
tax-exempt temporary investments are not available at reasonable prices and yields.
Short-term taxable fixed income investments include, without limitation, the following:
(1) 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 the Government National Mortgage Association, 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 the Tennessee Valley Authority, whose securities are supported by the right of the agency to borrow from the U.S. Treasury; (c) the Federal National Mortgage
Association, 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.
(2) 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 MFL may not be fully insured by the Federal Deposit Insurance Corporation.
(3) Repurchase agreements, which involve purchases of debt securities. At the time MFL 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 MFL 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 MFL to invest temporarily available cash. MFL 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 MFL may invest. MFL expects to enter into repurchase agreements with registered securities dealers or
domestic banks that, in the opinion of the Investment Advisor, present minimal credit risk. Repurchase agreements may be considered loans to the seller, collateralized by the underlying securities. The risk to MFL 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 MFL 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, MFL could incur a loss of both principal and interest. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of MFL to liquidate the collateral could be delayed or impaired because of certain provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term unsecured promissory notes, including variable rate master demand notes
issued by corporations to finance their current operations. Master demand notes are direct lending arrangements between MFL and a corporation. There is no secondary market for such notes. However, they are redeemable by MFL at any time. The
Investment Advisor will consider the financial condition of the corporation (e.g., earning power, cash flow and other liquidity ratios) and will continuously monitor the corporations ability to meet all of its financial obligations,
because MFLs liquidity might be impaired if the corporation were unable to pay principal and interest on demand. MFLs investment policies provide that its 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.
Tax-exempt temporary investments include various obligations issued by state and local governmental issuers,
such as tax-exempt notes (bond anticipation notes, tax anticipation notes and revenue anticipation notes or other such
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municipal bonds maturing in three years or less from the date of issuance) and municipal commercial paper. Short-term tax-exempt fixed income securities
include, without limitation, the following:
Bond Anticipation Notes
(BANs) are usually general obligations of state and local governmental issuers which are sold to obtain interim financing for projects that will eventually be funded through the sale of long-term debt obligations or bonds. The ability of
an issuer to meet its obligations on its BANs is primarily dependent on the issuers access to the long-term municipal bond market and the likelihood that the proceeds of such bond sales will be used to pay the principal and interest on the
BANs.
Tax Anticipation Notes (TANs) are issued by state and
local governments to finance the current operations of such governments. Repayment is generally to be derived from specific future tax revenues. TANs are usually general obligations of the issuer. A weakness in an issuers capacity to raise
taxes due to, among other things, a decline in its tax base or a rise in delinquencies could adversely affect the issuers ability to meet its obligations on outstanding TANs.
Revenue Anticipation Notes (RANs) are issued by governments or
governmental bodies with the expectation that future revenues from a designated source will be used to repay the notes. In general, they also constitute general obligations of the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely affect an issuers ability to meet its obligations on outstanding RANs. In addition, the possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and interest on RANs.
Construction Loan Notes are issued to provide construction financing for specific projects. Frequently, these notes are redeemed with funds obtained
from the Federal Housing Administration.
Bank Notes are notes issued by
local government bodies and agencies to commercial banks as evidence of borrowings. The purposes for which the notes are issued are varied but they are frequently issued to meet short-term working capital or capital-project needs. These notes may
have risks similar to the risks associated with TANs and RANs.
Tax-Exempt Commercial Paper (municipal paper) represents very short-term unsecured, negotiable promissory notes, issued by states, municipalities and their agencies. Payment of principal and interest on
issues of municipal paper may be made from various sources, to the extent the funds are available therefrom. Maturities on municipal paper generally will be shorter than the maturities of TANs, BANs or RANs. There is a limited secondary market for
issues of municipal paper.
Certain municipal bonds may carry variable or
floating rates of interest whereby the rate of interest is not fixed but varies with changes in specified market rates or indices, such as a bank prime rate or tax-exempt money market indices.
While the various types of notes described above as a group represent the major
portion of the tax-exempt note market, other types of notes are available in the marketplace and MFL may invest in such other types of notes to the extent permitted under its investment objective, policies and
limitations. Such notes may be issued for different purposes and may be secured differently from those mentioned above.
Strategic Transactions and Other Management Techniques
MFL may use a variety of other investment management techniques and instruments. MFL may purchase and sell futures contracts, enter into various
interest rate transactions and may purchase and sell exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts
(collectively, Strategic Transactions). These Strategic Transactions may be used for duration management and other risk management to attempt to protect against possible changes in the market value of MFLs portfolio resulting from
trends in the debt securities markets and changes in interest rates, to protect MFLs unrealized gains in the value of its portfolio securities, to facilitate the sale of such securities for investment purposes, to establish a position in the
securities markets as a temporary substitute for purchasing particular securities and to enhance income or gain.
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There is no particular strategy that requires use of one technique rather than another as the decision to
use any particular strategy or instrument is a function of market conditions and the composition of the portfolio. The ability of MFL to use Strategic Transactions successfully will depend on the Investment Advisors ability to predict
pertinent market movements as well as sufficient correlation among the instruments, which cannot be assured. Strategic Transactions subject MFL to the risk that, if the Investment Advisor incorrectly forecasts market values, interest rates or other
applicable factors, MFLs performance could suffer. Certain of these Strategic Transactions, such as investments in inverse floating rate securities and credit default swaps, may provide investment leverage to MFLs portfolio. MFL is not
required to use derivatives or other portfolio strategies to seek to hedge its portfolio and may choose not to do so.
The use of Strategic Transactions may result in losses greater than if they had not been used, may require MFL to sell or purchase portfolio securities
at inopportune times or for prices other than current market values, may limit the amount of appreciation MFL can realize on an investment or may cause MFL to hold a security that it might otherwise sell. In addition, because of the leveraged nature
of the common shares, Strategic Transactions will result in a larger impact on the net asset value of the common shares than would be the case if the common shares were not leveraged. Furthermore, MFL may only engage in Strategic Transactions from
time to time and may not necessarily be engaging in hedging activities when movements in interest rates occur.
Inasmuch as any obligations of MFL that arise from the use of Strategic Transactions will be covered by segregated or earmarked liquid assets or
offsetting transactions, MFL and the Investment Advisor believe such obligations do not constitute senior securities and, accordingly, will not treat such transactions as being subject to its borrowing restrictions. Additionally, segregated or
earmarked liquid assets, amounts paid by MFL as premiums and cash or other assets held in margin accounts with respect to Strategic Transactions are not otherwise available to MFL for investment purposes.
For so long as the VRDP Shares are rated by a rating agency, MFLs use of
options and certain financial futures and options thereon will be subject to such rating agencys guidelines and limitations on such transactions. In order to maintain ratings on the VRDP Shares from one or more rating agencies, MFL may be
required to limit its use of Strategic Transactions in accordance with the specified guidelines of the applicable rating agencies.
Certain federal income tax requirements may restrict or affect the ability of MFL to engage in Strategic Transactions. In addition, the use of certain
Strategic Transactions may give rise to taxable income and have certain other consequences.
Interest Rate Transactions. MFL may enter into interest rate swaps and the purchase or sale of interest rate caps and floors. MFL
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 MFL anticipates
purchasing at a later date. MFL will ordinarily use these transactions as a hedge or for duration or risk management although it is permitted to enter into them to enhance income or gain. MFLs investment policies provide that it will not sell
interest rate caps or floors that it does not own.
Interest rate swap
transactions include Municipal Market Data AAA Cash Curve swaps (MMD Swaps) or Securities Industry and Financial Markets Association Municipal Swap Index swaps (SIFMA Swaps). In a SIFMA Swap, MFL exchanges with another party
their respective commitments to pay or receive interest (e.g., an exchange of fixed rate payments for floating rate payments linked to the SIFMA Municipal Swap Index). Because the underlying index is a
tax-exempt index, SIFMA Swaps may reduce cross-market risks incurred by MFL and increase MFLs ability to hedge effectively. SIFMA Swaps are typically quoted for the entire yield curve, beginning with a
seven day floating rate index out to 30 years. The duration of a SIFMA Swap is approximately equal to the duration of a fixed-rate municipal bond with the same attributes as the swap (e.g., coupon, maturity, call feature).
MFL may also purchase and sell MMD Swaps, also known as MMD rate locks. An MMD
Swap permits MFL to lock in a specified municipal interest rate for a portion of its portfolio to preserve a return on a particular investment or a portion of its portfolio as a duration management technique or to protect against any increase in the
price of securities to be purchased at a later date. By using an MMD Swap, MFL can create a synthetic long or short position, allowing MFL to select the most attractive part of the yield curve. An MMD Swap is a contract between MFL and an MMD Swap
provider pursuant to which the parties agree to make payments to each other on a notional amount,
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contingent upon whether the Municipal Market Data AAA General Obligation Scale is above or below a specified level on the expiration date of the contract. For example, if MFL buys an MMD Swap and
the Municipal Market Data AAA General Obligation Scale is below the specified level on the expiration date, the counterparty to the contract will make a payment to MFL equal to the specified level minus the actual level, multiplied by the notional
amount of the contract. If the Municipal Market Data AAA General Obligation Scale is above the specified level on the expiration date, MFL will make a payment to the counterparty equal to the actual level minus the specified level, multiplied by the
notional amount of the contract.
MFLs investment policies provide
that it will not enter into MMD Swaps if, as a result, more than 50% of its assets would be required to cover its potential obligations under its hedging and other investment transactions.
In connection with investments in SIFMA and MMD Swaps, there is a risk that
municipal yields will move in the opposite direction than anticipated by MFL, which would cause MFL to make payments to its counterparty in the transaction that could adversely affect MFLs performance.
MFL has no obligation to enter into SIFMA Swaps or MMD Swaps and may elect not
to do so. The net amount of the excess, if any, of MFLs obligations over its entitlements with respect to each interest rate swap will be accrued on a daily basis, and MFL will segregate or designate on its books and records liquid assets
having an aggregate net asset value at least equal to the accrued excess.
If there is a default by the other party to an uncleared interest rate swap transaction, generally MFL will have contractual remedies pursuant to the
agreements related to the transaction. With respect to interest rate swap transactions cleared through a central clearing counterparty, a clearing organization will be substituted for the counterparty and will guarantee the parties performance
under the swap agreement. However, there can be no assurances that the clearing organization will satisfy its obligation to MFL or that MFL would be able to recover the full amount of assets deposited on its behalf with the clearing organization in
the event of the default by the clearing organization or MFLs clearing broker. Certain U.S. federal income tax requirements may limit MFLs ability to engage in interest rate swaps. Distributions attributable to transactions in interest
rate swaps generally will be taxable as ordinary income to shareholders.
Credit Default Swap Agreements. MFL may enter into credit default swap agreements for hedging purposes or to seek to increase its return. The
credit default swap agreement may have as reference obligations one or more securities that are not currently held by MFL. The protection buyer in a credit default contract may be obligated to pay the protection seller an
upfront or a periodic stream of payments over the term of the contract provided that no credit event on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the par value (full notional
value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. MFL may be either
the buyer or seller in the transaction. If MFL is a buyer and no credit event occurs, MFL may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full
notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, MFL generally receives an upfront payment or a fixed rate of income
throughout the term of the swap, which typically is between six months and three years, provided that there is no credit event. If a credit event occurs, generally the seller must pay the buyer the full notional value of the swap in exchange for an
equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. As the seller, MFL would effectively add leverage to its portfolio because, in addition to its total net assets, MFL would be subject
to investment exposure on the notional amount of the swap.
Credit default
swap agreements involve greater risks than if MFL had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. MFL will enter
into credit default swap agreements only with counterparties the Investment Advisor believes to be creditworthy at the time they enter into such transactions. A buyer generally also will lose its investment and recover nothing should no credit event
occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments previously received, may be less than the full
notional value it pays to the buyer, resulting in a
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loss of value to the seller. MFLs obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to MFL).
MFL will at all times segregate or designate on its books and records in
connection with each such transaction liquid assets or cash with a value at least equal to MFLs exposure (any accrued but unpaid net amounts owed by MFL to any counterparty) on a
marked-to- market basis (as calculated pursuant to requirements of the SEC). If MFL is a seller of protection in a credit default swap transaction, it will segregate or
designate on its books and records in connection with such transaction liquid assets or cash with a value at least equal to the full notional amount of the contract. Such segregation or designation will ensure that MFL has assets available to
satisfy its obligations with respect to the transaction and will avoid any potential leveraging of MFLs portfolio. Such segregation or designation will not limit MFLs exposure to loss.
Futures Contracts and Options on Futures Contracts. MFL may also enter
into contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of debt securities or indices or prices thereof, other financial indices and U.S. government debt securities or options on the
above. MFL will ordinarily engage in such transactions only for bona fide hedging, risk management (including duration management) and other portfolio management purposes. However, MFL is also permitted to enter into such transactions for non-hedging purposes to enhance income or gain, in accordance with the rules and regulations of the CFTC.
The CFTC subjects advisers to registered investment companies to regulation by the CFTC if a fund that is advised by the investment adviser either
(i) invests, directly or indirectly, more than a prescribed level of its liquidation value in CFTC-regulated futures, options and swaps (CFTC Derivatives), or (ii) markets itself as providing investment exposure to such
instruments. To the extent MFL uses CFTC Derivatives, it intends to do so below such prescribed levels and will not market itself as a commodity pool or a vehicle for trading such instruments. Accordingly, The Investment Advisor has
claimed an exclusion from the definition of the term commodity pool operator under the Commodity Exchange Act (CEA) pursuant to Rule 4.5 under the CEA. The Investment Advisor is not, therefore, subject to registration or
regulation as a commodity pool operator under the CEA in respect of MFL.
Calls on Securities Indices and Futures Contracts. MFL may sell or purchase call options (calls) on municipal bonds and indices
based upon the prices of future contracts and debt securities that are traded on U.S. and foreign securities exchanges and in the over-the- counter markets. A call 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 MFL must be
covered as long as the call is outstanding (i.e., MFL must own the securities or futures contract subject to the call or other securities acceptable for applicable escrow requirements). A call sold by MFL exposes MFL 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 MFL to hold a security of futures contract which it might otherwise have sold. The
purchase of a call gives MFL the right to buy a security, futures contract or index at a fixed price. Calls on futures on municipal bonds must also be covered by deliverable securities or the futures contract or by liquid high grade debt securities
segregated to satisfy MFLs obligations pursuant to such instruments.
Puts on Securities, Indices and Futures Contracts. MFL may purchase put options (puts) that relate to municipal bonds (whether or
not it holds such securities in its portfolio), indices or futures contracts. MFL may also sell puts on municipal bonds, indices or futures contracts on such securities if MFLs contingent obligations on such puts are secured by segregating or
designating liquid assets on MFLs books and records. MFLs investment policies provide that it will not sell puts if, as a result, more than 50% of MFLs assets would be required to cover its potential obligations under its hedging
and other investment transactions. In selling puts, there is a risk that MFL may be required to buy the underlying security at a price higher than the current market price.
Counterparty Credit Standards. To the extent that MFL engages in principal transactions, including, but not limited to, over-the-counter options, forward currency transactions, swap transactions, repurchase and reverse repurchase agreements and the purchase and sale of bonds and other fixed
income securities, it must rely on the creditworthiness of its counterparties under such transactions. In certain instances, the credit risk of a counterparty is increased by the lack of a central clearing house for certain transactions, including
certain swap contracts. In the event of the insolvency of a counterparty, MFL may not be able to recover its assets, in full or at all, during the insolvency process. Counterparties to investments may have no obligation to make markets in such
investments and may have
98
the ability to apply essentially discretionary margin and credit requirements. Similarly, MFL will be subject to the risk of bankruptcy of, or the inability or refusal to perform with respect to
such investments by, the counterparties with which it deals. The Investment Advisor will seek to minimize MFLs exposure to counterparty risk by entering into such transactions with counterparties the Investment Advisor believes to be
creditworthy at the time it enters into the transaction. Certain option transactions and Strategic Transactions may require MFL to provide collateral to secure its performance obligations under a contract, which would also entail counterparty credit
risk.
Restricted and Illiquid Securities
Certain of MFLs investments may be illiquid. Illiquid securities are
subject to legal or contractual restrictions on disposition or lack of an established secondary trading market. The sale of restricted and illiquid securities often requires more time and results in higher brokerage charges or dealer discounts and
other selling expenses than does the sale of securities eligible for trading on national securities exchanges or in the over-the-counter markets. Restricted securities
may sell at a price lower than similar securities that are not subject to restrictions on resale.
Repurchase Agreements
MFL may invest in securities pursuant to repurchase agreements. Repurchase agreements may be entered into only with a member bank of the Federal
Reserve System or a primary dealer or an affiliate thereof, in U.S. Government securities. Under such agreements, the bank or primary dealer or an affiliate thereof agrees, upon entering into the contract, to repurchase the security at a mutually
agreed upon time and price, thereby determining the yield during the term of the agreement. This results in a fixed rate of return insulated from market fluctuations during such period. In repurchase agreements, the prices at which the trades are
conducted do not reflect accrued interest on the underlying obligations. Such agreements usually cover short periods, such as under one week. Repurchase agreements may be construed to be collateralized loans by the purchaser to the seller secured by
the securities transferred to the purchaser. In a repurchase agreement, MFL will require the seller to provide additional collateral if the market value of the securities falls below the repurchase price at any time during the term of the repurchase
agreement. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities are not owned by MFL but only constitute collateral for the sellers obligation to pay the repurchase
price. Therefore, MFL may suffer time delays and incur costs or possible losses in connection with the disposition of the collateral. In the event of a default under such a repurchase agreement, instead of the contractual fixed rate of return, the
rate of return to MFL shall be dependent upon intervening fluctuations of the market value of such security and the accrued interest on the security. In such event, MFL would have rights against the seller for breach of contract with respect to any
losses arising from market fluctuations following the failure of the seller to perform.
In general, for federal income tax purposes, repurchase agreements are treated as collateralized loans secured by the securities sold.
Therefore, amounts earned under such agreements will not be considered tax exempt interest. The treatment of purchase and sales contracts is less certain.
Reverse Repurchase Agreements
MFL 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 MFL with an agreement by MFL to repurchase the securities at an agreed upon price, date and interest payment. At the time MFL enters into a reverse repurchase agreement, it may
establish and maintain a segregated account with the custodian containing, or designate on its books and records, cash and/or liquid assets having a value not less than the repurchase price (including accrued interest). If MFL establishes and
maintains such a segregated account, or earmarks such assets as described, a reverse repurchase agreement will not be considered a senior security under the 1940 Act and therefore will not be considered a borrowing by MFL; however, under certain
circumstances in which MFL does not establish and maintain such segregated account, or earmark such assets on its books and records, such reverse repurchase agreement will be considered a borrowing for the purpose of MFLs limitation on
borrowings. The use by MFL 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. MFLs use of leverage through
reverse repurchase agreements will be subject to MFLs policy with respect to the use of leverage. 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 MFL has sold but is obligated to repurchase.
99
Also, reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by MFL 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 MFLs obligation to repurchase the securities and MFLs use of the proceeds of the reverse
repurchase agreement may effectively be restricted pending such decision. Also, MFL 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.
MFL also may effect simultaneous purchase and sale transactions that are
known as sale-buybacks. A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty that purchases the security is entitled to receive any principal or interest payments made on the
underlying security pending settlement of MFLs repurchase of the underlying security.
Leverage
MFL currently leverages its assets through the use of preferred shares and tender option bonds. MFL currently does not intend to borrow money or issue
debt securities. Although it has no present intention to do so, MFL reserves the right to borrow money from banks or other financial institutions, or issue debt securities, in the future if it believes that market conditions would be conducive to
the successful implementation of a leveraging strategy through borrowing money or issuing debt securities or preferred shares. Any such leveraging will not be fully achieved until the proceeds resulting from the use of leverage have been invested in
accordance with MFLs investment objective and policies.
The use of
leverage can create risks. When leverage is employed, the NAV and market price of the common shares and the yield to holders of common shares will be more volatile than if leverage were not used. Changes in the value of MFLs portfolio,
including securities bought with the proceeds of leverage, will be borne entirely by the holders of common shares. If there is a net decrease or increase in the value of MFLs investment portfolio, leverage will decrease or increase, as the
case may be, the NAV per common share to a greater extent than if MFL did not utilize leverage. A reduction in MFLs NAV may cause a reduction in the market price of its shares. During periods in which MFL is using leverage, the fee paid to the
Investment Advisor for advisory services will be higher than if MFL did not use leverage, because the fees paid will be calculated on the basis of MFLs managed assets, which includes the proceeds from leverage. Any leveraging strategy MFL
employs may not be successful. See RisksLeverage Risk. MFL currently leverages its assets through tender option bonds transactions. See RisksTender Option Bond Risk for details about the risks associated with
MFLs use of TOB Residuals.
Certain types of leverage MFL may use may
result in MFL being subject to covenants relating to asset coverage and portfolio composition requirements. MFL may be subject to certain restrictions on investments imposed by one or more lenders or by guidelines of one or more rating agencies,
which may issue ratings for any short-term debt securities or preferred shares issued by MFL. The terms of any borrowings or rating agency guidelines may impose asset coverage or portfolio composition requirements that are more stringent than those
imposed by the 1940 Act. The Investment Advisor does not believe that these covenants or guidelines will impede it from managing MFLs portfolio in accordance with its investment objective and policies if MFL were to utilize leverage.
Under the 1940 Act, MFL is not permitted to issue senior securities if,
immediately after the issuance of such senior securities, MFL would have an asset coverage ratio (as defined in the 1940 Act) of less than 300% with respect to senior securities representing indebtedness (i.e., for every dollar of
indebtedness outstanding, MFL is required to have at least three dollars of assets) or less than 200% with respect to senior securities representing preferred shares (i.e., for every dollar of preferred shares outstanding, MFL is required to
have at least two dollars of assets). The 1940 Act also provides that MFL may not declare distributions or purchase its stock (including through tender offers) if, immediately after doing so, it will have an asset coverage ratio of less than 300% or
200%, as applicable. Under the 1940 Act, certain short-term borrowings (such as for cash management purposes) are not subject to these limitations if (i) repaid within 60 days, (ii) not extended or renewed and (iii) not in excess of
5% of the total assets of MFL.
100
Effects of Leverage
Assuming that leverage will represent approximately 39.2% of the Combined Funds total managed assets and that the Combined Fund will bear
expenses relating to that leverage at an average annual rate of 0.95%, the income generated by the Combined Funds portfolio (net of estimated expenses) must exceed 0.37% in order to cover the expenses specifically related to the Combined
Funds estimated use of leverage. Of course, these numbers are merely estimates used for illustration. Actual leverage expenses 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 SEC. 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 securities held in the Combined Funds 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 Combined Fund. The table further reflects the use of
leverage representing 39.2% of the Combined Funds total managed assets and the Combined Funds currently projected annual leverage expenses of 0.95%.
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|
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|
|
|
|
|
|
|
|
|
|
|
Assumed Portfolio Total Return (net of expenses)
|
|
|
(10
|
)%
|
|
|
(5
|
)%
|
|
|
0
|
%
|
|
|
5
|
%
|
|
|
10
|
%
|
Common Share Total Return
|
|
|
(17.0
|
)%
|
|
|
(8.8
|
)%
|
|
|
(0.6
|
)%
|
|
|
7.6
|
%
|
|
|
15.8
|
%
|
Common Share total return is composed of two
elements: the Common Share dividends paid by the Combined Fund (the amount of which is largely determined by the net investment income of the Combined Fund) and gains or losses on the value of the securities the Combined Fund owns. As required by
SEC rules, the table assumes that the Combined Fund is more likely to suffer capital losses than to enjoy capital appreciation. For example, a total return of 0% assumes that the tax-exempt interest the
Combined Fund receives on its municipal bonds investments is entirely offset by losses in the value of those securities.
Borrowings
MFL reserves the right to borrow funds to the extent permitted as described under the below caption Investment Restrictions. The
proceeds of borrowings may be used for any valid purpose including, without limitation, liquidity, investments and repurchases of shares of MFL. Borrowing is a form of leverage and, in that respect, entails risks comparable to those associated with
the issuance of preferred shares.
101
INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS
General
Common shareholders of each Fund are entitled to share pro rata in dividends
declared by such Funds Board as payable to holders of the Funds common shares and in the net assets of the Fund available for distribution to holders of the common shares. Common shareholders do not have preemptive or conversion rights
(except as the Trustees may determine with respect to MFL) and each Funds common shares are not redeemable. Voting rights are substantially identical for the common shareholders of each Fund. Common shareholders of each Fund are entitled to
one vote for each Share held by them and do not have any preemptive or preferential right to purchase or subscribe to any Shares of such Fund. Each Funds common shares do not have cumulative voting rights, which means that the holders of more
than 50% of a Funds common shares voting for the election of Board Members can elect all of the Board Members standing for election by such holders, and, in such event, the holders of the Funds remaining common shares will not be able to
elect any Board Members. The outstanding MFL and Acquiring Fund common shares are fully paid and non-assessable, except that the Board of the Acquiring Fund has the power to cause common shareholders to pay
certain expenses of the Acquiring Fund by setting off charges due from common shareholders from declared but unpaid dividends or distributions owed the common shareholders and/or by reducing the number of common shares owned by each respective
common shareholder. Whenever preferred shares, including VRDP Shares or VMTP Shares, as applicable, are outstanding, a Fund may not declare a dividend or distribution to common shareholders (other than a distribution paid in shares of, or in
options, warrants or rights to subscribe for or purchase, common shares or other shares, if any, ranking junior to the preferred shares of the Fund) or call for redemption, redeem, purchase or otherwise acquire for consideration any common shares
(except by conversion into or exchange for shares of the Fund ranking junior to the preferred shares) unless all accumulated dividends on preferred shares have been paid and the Fund has redeemed the full number of any preferred shares required to
be redeemed, and unless asset coverage (as defined in the 1940 Act) with respect to preferred shares at the time of declaration of such dividend or distribution or at the time of such purchase would be at least 200% after giving effect to the
dividend or distribution or purchase price.
Purchase and Sale
of Common Shares
Purchase and sale procedures for the common shares of
each of the Funds are identical. Each Fund has its common shares listed on the NYSE. Investors typically purchase and sell common shares of the Funds through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the
broker-dealer. Alternatively, investors may purchase or sell common shares of each of the Funds through privately negotiated transactions with existing common shareholders. Set forth below is information about each Funds common shares as of [·], 2021.
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Fund
|
|
Title of Class
|
|
|
Amount
Authorized
|
|
|
Amount
Held by
Fund
for its
Own
Account
|
|
|
Amount
Outstanding
Exclusive of
Amount
Shown in
Previous
Column
|
|
Target Fund (MFL)
|
|
|
Common Shares
|
|
|
|
Unlimited
|
|
|
|
0
|
|
|
|
[
|
·]
|
Acquiring Fund (MUI)
|
|
|
Common Shares
|
|
|
|
199,984,329
|
|
|
|
0
|
|
|
|
[
|
·]
|
Common Share Price Data
The following tables set forth the high and low market prices for common shares
of each Fund on the NYSE for each full quarterly period within each Funds two most recent fiscal years and each full quarter since the beginning of each Funds current fiscal year, along with the NAV and discount or premium to NAV for
each quotation.
102
|
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|
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
Target Fund
(MFL)
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
8/31/21
|
|
$
|
15.21
|
|
|
$
|
14.58
|
|
|
$
|
15.57
|
|
|
$
|
15.39
|
|
|
|
(2.30
|
)%
|
|
|
(5.30
|
)%
|
5/31/21
|
|
$
|
14.69
|
|
|
$
|
13.95
|
|
|
$
|
15.26
|
|
|
$
|
14.89
|
|
|
|
(3.70
|
)%
|
|
|
(6.30
|
)%
|
2/28/21
|
|
$
|
14.62
|
|
|
$
|
13.79
|
|
|
$
|
15.46
|
|
|
$
|
14.89
|
|
|
|
(5.40
|
)%
|
|
|
(7.40
|
)%
|
11/30/20
|
|
$
|
13.99
|
|
|
$
|
13.08
|
|
|
$
|
14.95
|
|
|
$
|
14.52
|
|
|
|
(6.40
|
)%
|
|
|
(9.90
|
)%
|
8/31/20
|
|
$
|
13.98
|
|
|
$
|
12.83
|
|
|
$
|
14.97
|
|
|
$
|
14.27
|
|
|
|
(6.60
|
)%
|
|
|
(10.10
|
)%
|
5/31/20
|
|
$
|
14.07
|
|
|
$
|
10.16
|
|
|
$
|
15.34
|
|
|
$
|
13.52
|
|
|
|
(8.30
|
)%
|
|
|
(24.90
|
)%
|
2/28/20
|
|
$
|
13.97
|
|
|
$
|
13.17
|
|
|
$
|
15.41
|
|
|
$
|
14.66
|
|
|
|
(9.30
|
)%
|
|
|
(10.20
|
)%
|
11/30/19
|
|
$
|
13.78
|
|
|
$
|
11.96
|
|
|
$
|
14.75
|
|
|
$
|
14.74
|
|
|
|
(6.60
|
)%
|
|
|
(18.90
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquiring
Fund (MUI)
|
|
|
Market Price
|
|
|
NAV
|
|
|
Premium/(Discount) to NAV
|
|
Period Ended
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
10/31/21
|
|
|
$
|
[·]
|
|
|
$
|
[·]
|
|
|
$
|
[·]
|
|
|
$
|
[·]
|
|
|
|
[
|
·]%
|
|
|
[
|
·]%
|
|
7/31/21
|
|
|
$
|
16.11
|
|
|
$
|
15.14
|
|
|
$
|
16.29
|
|
|
$
|
16.09
|
|
|
|
(1.10
|
)%
|
|
|
(5.90
|
)%
|
|
4/30/21
|
|
|
$
|
15.28
|
|
|
$
|
14.66
|
|
|
$
|
16.16
|
|
|
$
|
15.98
|
|
|
|
(5.45
|
)%
|
|
|
(8.26
|
)%
|
|
1/31/21
|
|
|
$
|
15.01
|
|
|
$
|
14.01
|
|
|
$
|
16.26
|
|
|
$
|
15.67
|
|
|
|
(7.69
|
)%
|
|
|
(10.59
|
)%
|
|
10/31/20
|
|
|
$
|
14.65
|
|
|
$
|
13.96
|
|
|
$
|
16.06
|
|
|
$
|
15.81
|
|
|
|
(8.78
|
)%
|
|
|
(11.70
|
)%
|
|
7/31/20
|
|
|
$
|
14.22
|
|
|
$
|
12.87
|
|
|
$
|
15.95
|
|
|
$
|
14.87
|
|
|
|
(10.85
|
)%
|
|
|
(13.45
|
)%
|
|
4/30/20
|
|
|
$
|
14.93
|
|
|
$
|
11.84
|
|
|
$
|
16.19
|
|
|
$
|
14.84
|
|
|
|
(7.78
|
)%
|
|
|
(20.22
|
)%
|
|
1/31/20
|
|
|
$
|
14.77
|
|
|
$
|
14.02
|
|
|
$
|
16.19
|
|
|
$
|
15.81
|
|
|
|
(8.77
|
)%
|
|
|
(11.32
|
)%
|
|
10/31/19
|
|
|
$
|
14.72
|
|
|
$
|
12.81
|
|
|
$
|
16.08
|
|
|
$
|
15.83
|
|
|
|
(8.46
|
)%
|
|
|
(19.08
|
)%
|
For the periods shown in the tables above, the
common shares of each Fund traded at a discount.
The table below sets
forth the market price, NAV, and the premium/discount to NAV of each Fund as of September 21, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Market
Price
|
|
|
NAV
|
|
|
Premium/
(Discount)
to NAV
|
|
Target Fund (MFL)
|
|
$
|
14.89
|
|
|
$
|
15.33
|
|
|
|
(2.9
|
)%
|
Acquiring Fund (MUI)
|
|
$
|
15.97
|
|
|
$
|
16.08
|
|
|
|
(0.7
|
)%
|
To the extent MFLs common shares are
trading at a wider discount (or a narrower premium) than the Acquiring Fund at the time of the Reorganization, MFLs common shareholders would have the potential for an economic benefit by the narrowing of the discount or widening of the
premium. To the extent MFLs common shares are trading at a narrower discount (or wider premium) than the Acquiring Fund at the time of the Reorganization, MFLs common shareholders may be negatively impacted if the Reorganization is
consummated. Acquiring Fund common shareholders would only benefit from a premium/discount perspective to the extent the post-Reorganization discount (or premium) of the Acquiring Fund common shares improves.
There can be no assurance that, after the Reorganization, common shares of the
Combined Fund will trade at, above or below NAV. Upon consummation of the Reorganization, the Combined Fund common shares may trade at a price that is less than the current market price of Acquiring Fund common shares. In the Reorganization, common
shareholders of MFL will receive Acquiring Fund common shares based on the relative NAVs (not the market values) of the respective Funds common shares. The market value of the common shares of the Combined Fund may be less than the market
value of the common shares of a Fund prior to the Reorganization.
103
Common Share Dividend History
During the two most recent fiscal years, each Fund has made monthly cash
distributions to holders of the Funds common shares and the aggregate amount of distributions declared during this period by the Acquiring Fund and MFL was $[·] and
$[·] per common share, respectively. Whenever preferred shares, including VRDP Shares, are outstanding, a Fund may not declare a dividend or distribution to common
shareholders (other than a distribution in common shares of the Fund) or purchase its common shares unless all accumulated dividends on preferred shares have been paid, and unless asset coverage (as defined in the 1940 Act) with respect to preferred
shares at the time of declaration of such dividend or distribution or at the time of such purchase would be at least 200% after giving effect to the dividend or distribution or purchase price.
Record Holders of Common Shares
As of December 7, 2021, each Fund had the following number of common
shareholders:
|
|
|
|
|
Title of Class
|
|
Number of
MFL
Record Holders
|
|
Number of
MUI
Record Holders
|
Common Stock
|
|
[·]
|
|
[·]
|
104
EXPENSE TABLE FOR COMMON SHAREHOLDERS
The purpose of the comparative fee table below is to assist shareholders of
each Fund in understanding the various costs and expenses of investing in common shares of each Fund and Combined Fund. The information in the table reflects the fees and expenses incurred by MFL during the
12-month period ended February 28, 2021 (unaudited) and the Acquiring Fund during the 12-month period ended April 30, 2021 (audited) and the pro forma
expenses for the 12-month period ended April 30, 2021 for the Combined Fund assuming the Reorganization took place on May 1, 2020.
There can be no assurance that future expenses of the Combined Fund will not
increase or that any expense savings for any Fund will be realized. The scenarios presented illustrate the pro forma effects on operating expenses for all possible combinations.
|
|
|
|
|
|
|
|
|
Target Fund
(MFL)
|
|
Acquiring Fund
(MUI)
|
|
Combined Fund
(MFL into MUI)
|
Shareholder Transaction Expenses
|
Maximum Sales Load (as a percentage of the offering price) imposed on purchases of common shares(1)
|
|
[None]
|
|
[None]
|
|
[None]
|
Dividend Reinvestment Plan Fees(2)
|
|
[$0.02 per
share for
open market
purchases of
common shares]
|
|
[$0.02 per
share for
open market
purchases of
common shares]
|
|
[$0.02 per
share for
open market
purchases of
common shares]
|
Annual Total Expenses (as a percentage of average net assets attributable to common
shares)
|
Investment Management Fees(3)(4)
|
|
0.91%
|
|
0.89%
|
|
0.89%
|
Other Expenses(5)
|
|
0.10%
|
|
0.09%
|
|
0.06%
|
Interest Expense(6)
|
|
0.79%
|
|
0.60%
|
|
0.60%
|
Total Annual Fund Operating Expenses(5)(6)
|
|
1.80%
|
|
1.58%
|
|
1.55%
|
(1)
|
|
No sales load will be charged in connection with the issuance of Acquiring Fund common shares as part of the Reorganization. Common shares are not available for purchase from the Funds but may be purchased on the NYSE
through a broker-dealer subject to individually negotiated commission rates. Common shares purchased in the secondary market may be subject to brokerage commissions or other charges.
|
(2)
|
|
The Reinvestment Plan Agents fees for the handling of the reinvestment of dividends will be paid by the Fund. However, each participant will pay a $[0.02] per share fee incurred in connection with open-market
purchases, which will be deducted from the value of the dividend. You will also be charged a $[2.50] sales fee and a $[0.15] per share sold brokerage commission fee if you direct the Reinvestment Plan Agent to sell your common shares held in a
dividend reinvestment account. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. See Automatic Dividend Reinvestment Plan for additional information.
|
(3)
|
|
MFL currently pays the Investment Advisor a monthly fee at an annual contractual investment advisory fee rate of 0.55% of the average daily value of its net assets. The Acquiring Fund currently pays the Investment
Advisor a monthly fee at an annual contractual investment advisory fee rate of 0.55% of an aggregate of (i) its average daily value of its net assets, and (ii) the proceeds of any outstanding debt securities or borrowings used for
leverage. For purposes of calculating these fees, net assets means the total assets of the applicable Fund minus the sum of its accrued liabilities (other than money borrowed for investment purposes, including liabilities represented by
tender option bond trusts (TOB Trust) and the liquidation preference of any outstanding preferred shares).
|
(4)
|
|
Each Fund and the Investment Advisor have entered into a fee waiver agreement (the Fee Waiver Agreement), pursuant to which the Investment Advisor has contractually agreed to waive the management fee with
respect to any portion of each Funds assets attributable to investments in any equity and fixed-income mutual funds and exchange-traded funds managed by the Investment Advisor or its affiliates that have a contractual fee, through
June 30, 2023. In addition, pursuant to the Fee Waiver Agreement, the Investment Advisor has contractually agreed to waive its management fees by the amount of investment advisory fees each Fund pays to the Investment Advisor indirectly through
its investment in money market funds managed by the Investment Advisor or its affiliates, through June 30, 2023. The Fee Waiver Agreement may be terminated at any time, without the payment of any penalty, only by the Funds (upon the vote of a
majority of the Independent Board Members or a majority of the outstanding voting securities of each Fund), upon 90 days written notice by each Fund to the Investment Advisor.
|
(5)
|
|
The total expense table includes interest expense associated with the Funds investments in TOBs (also known as
inverse floaters). Although such interest expense is actually paid by special purpose vehicles in which the Funds invest, they are recorded on the Funds financial statements for accounting purposes. The total expense table also
includes, in interest expense, dividends associated with the Funds VRDP
|
105
|
Shares and VMTP Shares, as applicable, because the VRDP Shares and VMTP Shares, as applicable, are considered debt of the Funds for financial reporting purposes.
|
Each Fund uses leverage to seek to enhance its returns to common shareholders.
This leverage generally takes two forms: the issuance of preferred shares and investment in TOBs. Both forms of leverage benefit common shareholders if the cost of the leverage is lower than the returns earned by a Fund when it invests the proceeds
from the leverage. In order to help you better understand the costs associated with the Funds leverage strategy, the Total Annual Fund Operating Expenses (excluding interest expense) for the Funds are presented below:
|
|
|
|
|
Target Fund
(MFL)
|
|
Acquiring Fund
(MUI)
|
|
Pro forma
Combined Fund
(MFL into MUI)
|
1.01%
|
|
0.98%
|
|
0.95%
|
The following example is intended to help you
compare the costs of investing in the common shares of the Combined Fund pro forma if the Reorganization is completed with the costs of investing in MFL and the Acquiring Fund without the Reorganization. An investor in common shares would pay
the following expenses on a $1,000 investment, assuming (1) the Total Annual Fund Operating Expenses for each Fund set forth in the total expenses table above and (2) a 5% annual return throughout the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
Target Fund (MFL)
|
|
$
|
18
|
|
|
$
|
57
|
|
|
$
|
97
|
|
|
$
|
212
|
|
Acquiring Fund (MUI)
|
|
$
|
16
|
|
|
$
|
50
|
|
|
$
|
86
|
|
|
$
|
188
|
|
Pro forma Combined Fund (MFL into MUI)
|
|
$
|
16
|
|
|
$
|
49
|
|
|
$
|
84
|
|
|
$
|
185
|
|
The examples set forth above assume common
shares of each Fund were owned as of the completion of the Reorganization and the reinvestment of all dividends and distributions and uses a 5% annual rate of return as mandated by SEC regulations. The examples should not be considered a
representation of past or future expenses or annual rates of return. Actual expenses or annual rates of return may be more or less than those assumed for purposes of the examples.
Common shareholders of the Acquiring Fund and MFL will indirectly bear a
portion of the costs of the Reorganization. The expenses of the Reorganization are estimated to be approximately $438,816 for the Acquiring Fund and $415,990 for MFL. The Acquiring Fund will bear approximately $353,291 of its estimated
Reorganization expenses and MFL will bear $373,448 of its estimated Reorganization expenses, with any costs in excess of such amounts to be borne by the Investment Advisor. Additionally, for the Acquiring Fund, the costs of the Acquiring Fund VMTP
Refinancing are estimated to be approximately $[·]. The Acquiring Fund VMTP Refinancing costs will be amortized over the life of the VRDP Shares by the Combined Fund. The
actual costs associated with the Reorganization may be more or less than the estimated costs discussed herein.
VMTP Holders and VRDP Holders, as applicable, are not expected to bear any costs of the Reorganization.
106
CAPITALIZATION TABLE
The Board of each Fund may authorize separate classes of shares together with
such designation of preferences, rights, voting powers, restrictions, limitations, qualifications or terms as may be determined from time to time by the Board of such Fund. The table below sets forth the capitalization of the Funds as of
August 31, 2021 and the pro forma capitalization of the Combined Fund assuming the Reorganization was consummated as of August 31, 2021.
Capitalization of each Fund as of August 31, 2021 and pro forma capitalization of the Combined Fund assuming the
Reorganization is consummated (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target Fund
(MFL)
|
|
|
Acquiring Fund
(MUI)
|
|
|
Adjustments
|
|
|
Pro forma
Combined
Fund (MFL
into MUI)
|
|
Net Assets Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares(1)
|
|
$
|
582,803,788
|
|
|
$
|
617,973,710
|
|
|
$
|
(5,022,572
|
)(2)
|
|
$
|
1,195,754,926
|
|
VRDP/VMTP Shares
|
|
$
|
274,600,000
|
|
|
$
|
287,100,000
|
|
|
|
|
|
|
$
|
5617,00,000
|
|
Shares Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
37,896,208
|
|
|
|
38,296,266
|
|
|
|
(1,651,555
|
)(3)
|
|
|
74,540,919
|
|
VRDP/VMTP Shares
|
|
|
2,746
|
|
|
|
2,871
|
|
|
|
|
|
|
|
5,617
|
|
NAV per Common Share
|
|
$
|
15.38
|
|
|
$
|
16.14
|
|
|
|
|
|
|
$
|
16.04
|
|
Liquidation Preference per VRDP/VMTP Shares
|
|
$
|
100,000.00
|
|
|
$
|
100,000.00
|
|
|
|
|
|
|
$
|
100,000.00
|
|
(1)
|
|
Based on the number of outstanding common shares as of August 31, 2021.
|
(2)
|
|
Reflects non-recurring aggregate estimated Reorganization expenses of $433,018, of which $236,951 was attributable to MFL and $196,067 was attributable to MUI. The actual costs
associated with the Reorganization may be more or less than the estimated costs discussed herein. Additionally, for the Acquiring Fund, the costs of the Acquiring Fund VMTP Refinancing are estimated to be $[·]. These costs will be amortized over the life of the VRDP Shares by the Combined Fund. Reflects UNII of $4,295,834, of which $1,028,545 was attributable to MFL and $3,267,289 was
attributable to MUI.
|
(3)
|
|
Reflects adjustments due to differences in per common share NAV.
|
107
FINANCIAL HIGHLIGHTS
BlackRock MuniHoldings Investment Quality Fund (MFL)
The Financial Highlights table is intended to help you understand MFLs
financial performance for the periods shown. Certain information reflects the financial results for a single common share of MFL. The total returns in the table represent the rate an investor would have earned or lost on an investment in MFL
(assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, MFLs independent registered public accounting firm. Financial statements for the fiscal
year ended August 31, 2021 and the Report of the Independent Registered Public Accounting Firm thereon appear in MFLs Annual Report for the fiscal year ended August 31, 2021, which is available upon request.
Please see next page for Financial Highlights Table
108
MFL Financial Highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Net asset value, beginning of year
|
|
$
|
14.75
|
|
|
$
|
14.94
|
|
|
$
|
14.09
|
|
|
$
|
14.91
|
|
|
$
|
15.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
|
|
|
0.60
|
|
|
|
0.57
|
|
|
|
0.59
|
|
|
|
0.71
|
|
|
|
0.78
|
|
Net realized and unrealized gain (loss)
|
|
|
0.61
|
|
|
|
(0.21
|
)
|
|
|
0.90
|
|
|
|
(0.76
|
)
|
|
|
(0.87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) from investment operations
|
|
|
1.21
|
|
|
|
0.36
|
|
|
|
1.49
|
|
|
|
(0.05
|
)
|
|
|
(0.09
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions to Common Shareholders from net investment income(b)
|
|
|
(0.58
|
)
|
|
|
(0.55
|
)
|
|
|
(0.64
|
)
|
|
|
(0.77
|
)
|
|
|
(0.86
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
15.38
|
|
|
$
|
14.75
|
|
|
$
|
14.94
|
|
|
$
|
14.09
|
|
|
$
|
14.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
14.88
|
|
|
$
|
13.45
|
|
|
$
|
13.60
|
|
|
$
|
12.73
|
|
|
$
|
15.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Applicable to Common Shareholders(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on net asset value
|
|
|
8.56
|
%
|
|
|
2.85
|
%
|
|
|
11.42
|
%
|
|
|
(0.05
|
)%
|
|
|
(0.34
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based on market price
|
|
|
15.18
|
%
|
|
|
3.02
|
%
|
|
|
12.27
|
%
|
|
|
(10.42
|
)%
|
|
|
0.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets Applicable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1.54
|
%
|
|
|
2.19
|
%
|
|
|
2.67
|
%
|
|
|
2.51
|
%
|
|
|
2.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed
|
|
|
1.48
|
%
|
|
|
2.11
|
%
|
|
|
2.58
|
%
|
|
|
2.41
|
%
|
|
|
2.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization
of offering costs(d)(e)
|
|
|
0.94
|
%
|
|
|
0.93
|
%
|
|
|
0.94
|
%
|
|
|
0.94
|
%
|
|
|
0.95
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income to Common Shareholders
|
|
|
3.97
|
%
|
|
|
3.90
|
%
|
|
|
4.15
|
%
|
|
|
4.91
|
%
|
|
|
5.22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets applicable to Common Shareholders, end of year (000)
|
|
$
|
582,796
|
|
|
$
|
558,929
|
|
|
$
|
566,341
|
|
|
$
|
534,075
|
|
|
$
|
564,383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
VRDP Shares outstanding at $100,000 liquidation value, end of year (000)
|
|
$
|
274,600
|
|
|
$
|
274,600
|
|
|
$
|
274,600
|
|
|
$
|
274,600
|
|
|
$
|
274,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset coverage per VRDP Shares at $100,000 liquidation value, end of year
|
|
$
|
312,234
|
|
|
$
|
303,543
|
|
|
$
|
306,242
|
|
|
$
|
294,492
|
|
|
$
|
305,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of year (000)
|
|
$
|
89,313
|
|
|
$
|
91,534
|
|
|
$
|
95,978
|
|
|
$
|
114,546
|
|
|
$
|
123,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
39
|
%
|
|
|
44
|
%
|
|
|
52
|
%
|
|
|
22
|
%
|
|
|
16
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Based on average Common Shares outstanding.
|
(b)
|
|
Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
|
(c)
|
|
Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and
assumes the reinvestment of distributions at actual reinvestment prices.
|
(d)
|
|
Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares. See Note 4 and Note 10 of the Notes to Financial Statements for details.
|
(e)
|
|
The total expense ratio after fees waived and/or reimbursed and excluding interest expense, fees, amortization of offering costs, liquidity and remarketing fees as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2021
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Expense ratios
|
|
|
0.93
|
%
|
|
|
0.92
|
%
|
|
|
0.93
|
%
|
|
|
0.93
|
%
|
|
|
0.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
BlackRock Municipal Income Fund, Inc. (MUI)
The Financial Highlights table is intended to help you understand the Acquiring
Funds financial performance for the periods shown. Certain information reflects the financial results for a single common share of the Acquiring Fund. The total returns in the table represent the rate an investor would have earned or lost on
an investment in the Acquiring Fund (assuming reinvestment of all dividends and/or distributions, if applicable). The information shown has been audited by Deloitte & Touche LLP, the Acquiring Funds independent registered public
accounting firm. Financial statements for the fiscal year ended April 30, 2021 and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquiring Funds Annual Report for the fiscal year ended
April 30, 2021, which is available upon request.
Please see next
page for Financial Highlights Table
110
The Acquiring Fund (MUI) Financial Highlights
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Year Ended April 30,
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2021
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2020
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2019
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2018
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2017
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Net asset value, beginning of year
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$
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14.62
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$
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15.40
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$
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14.93
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$
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15.17
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$
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16.16
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Net investment income(a)
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0.64
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0.56
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0.56
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0.59
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0.65
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Net realized and unrealized gain (loss)
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1.48
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(0.81
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)
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0.47
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(0.23
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)
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(0.83
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Net increase (decrease) from investment operations
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2.12
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(0.25
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)
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1.03
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0.36
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(0.18
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Distributions to Common Shareholders(b)
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From net investment income
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(0.63
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)
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(0.53
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(0.53
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)
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(0.60
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)
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(0.67
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From net realized gain
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(0.03
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)
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(0.00
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)(c)
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(0.14
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)
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Total distributions to Common Shareholders
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(0.63
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)
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(0.53
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(0.56
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)
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(0.60
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)
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(0.81
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Net asset value, end of year
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$
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16.11
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$
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14.62
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$
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15.40
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$
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14.93
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$
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15.17
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Market price, end of year
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$
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15.09
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$
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13.13
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$
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13.85
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$
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13.01
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$
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13.96
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Total Return Applicable to Common Shareholders(d)
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Based on net asset value
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15.08
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%
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(1.41
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)%
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7.68
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%
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2.76
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%
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(0.69
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)%
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Based on market price
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20.02
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%
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(1.56
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)%
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11.13
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%
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(2.69
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)%
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(2.77
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)%
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Ratios to Average Net Assets Applicable to Common Shareholders
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Total expenses
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1.58
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%
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2.31
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%
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2.63
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%
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2.17
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%
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1.90
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%
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Total expenses after fees waived and/or reimbursed
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1.58
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%
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2.31
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%
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2.63
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%
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2.17
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%
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1.89
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%
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Total expenses after fees waived and/or reimbursed and excluding interest expense, fees, and amortization
of offering costs(e)
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0.98
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%
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0.97
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%
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1.01
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%
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0.97
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%
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0.96
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%
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Net investment income to Common Shareholders
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4.05
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%
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3.59
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%
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3.73
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%
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3.87
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%
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4.12
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%
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Supplemental Data
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Net assets applicable to Common Shareholders, end of year (000)
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$
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617,032
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$
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559,934
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$
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589,887
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$
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571,769
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$
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580,945
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VMTP Shares outstanding at $100,000 liquidation value, end of year (000)
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$
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287,100
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$
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287,100
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$
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287,100
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$
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287,100
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$
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287,100
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Asset coverage per VMTP Shares at $100,000 liquidation value, end of year
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$
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314,919
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$
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295,031
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$
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305,464
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$
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299,153
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$
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302,349
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Borrowings outstanding, end of year (000)
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$
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93,069
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$
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92,014
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$
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93,421
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$
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79,136
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$
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58,337
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Portfolio turnover rate
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13
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%
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20
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%
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24
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%
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34
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%
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12
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%
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(a)
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Based on average Common Shares outstanding.
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111
(b)
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Distributions for annual periods determined in accordance with U.S. federal income tax regulations.
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(c)
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Amount is greater than $(0.005) per share.
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(d)
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Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and
assumes the reinvestment of distributions at actual reinvestment prices.
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(e)
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Interest expense, fees and amortization of offering costs related to TOB Trusts and/or VMTP Shares.
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112
Submission of Shareholder Proposals
To be considered for presentation at a shareholders meeting, rules promulgated by the SEC generally require that, among other things, a
shareholders proposal must be received at the offices of the relevant Fund a reasonable time before solicitation is made. In addition, each Funds bylaws provide for advance notice provisions, which require shareholders to give timely
notice in proper written form to the Secretary of the Fund. Shareholders should review each Funds bylaws for additional information regarding the Funds advance notice provisions. The bylaws of MFL were filed with the SEC on
September 9, 2010 on Form 8-K and the bylaws of the Acquiring Fund were filed with the SEC on November 2, 2021 on Form 8-K. Shareholders may obtain copies of
such documents as described on pages [iv-v] of this Proxy Statement.
125
The timely submission of a proposal does not necessarily mean that such proposal will be included. Any
shareholder who wishes to submit a proposal for consideration at a meeting of such shareholders Fund should send such proposal to the relevant Fund at 40 East 52nd Street, New York, New York 10022.
Shareholder Communications
Shareholders who want to communicate with the Board or any individual Board
Member should write to the attention of the Secretary of their Fund, 40 East 52nd Street, New York, NY 10022. Shareholders may communicate with the Boards electronically by sending an e-mail to
closedendfundsbod@blackrock.com. The communication should indicate that you are a Fund shareholder. If the communication is intended for a specific Board Member and so indicates, it will be sent only to that Board Member. If a
communication does not indicate a specific Board Member, it will be sent to the Chair of the Governance Committee and the outside counsel to the Independent Board Members for further distribution as deemed appropriate by such persons.
Additionally, shareholders with complaints or concerns regarding accounting
matters may address letters to the CCO of their respective Fund 40 East 52nd Street, New York, NY 10022. Shareholders who are uncomfortable submitting complaints to the CCO may address letters directly to the Chair of the Audit Committee of the
Board that oversees the Fund. Such letters may be submitted on an anonymous basis.
Expense of Proxy Solicitation
The cost of preparing, printing and mailing the enclosed proxy, accompanying notice and this Proxy Statement, and costs in connection with the
solicitation of proxies will be borne by the Funds. Additional out-of-pocket costs, such as legal expenses and auditor fees, incurred in connection with the preparation
of this Proxy Statement, also will be borne by the Funds. Costs that are borne by the Funds collectively will be allocated among the Funds on the basis of a combination of their respective net assets and number of shareholder accounts, except when
direct costs can reasonably be attributed to one or more specific Fund(s).
Solicitation is being made primarily by the mailing of this Notice and Proxy Statement with its enclosures on or about [·], 2021, but may also be made by mail, telephone, fax, e-mail or the Internet by officers or employees of the Investment Advisor, or by
dealers and their representatives. Brokerage houses, banks and other fiduciaries may be requested to forward proxy solicitation material to their principals to obtain authorization for the execution of proxies. Shareholders of the Funds whose shares
are held by nominees such as brokers can vote their proxies by contacting their respective nominee. The Funds will reimburse brokerage firms, custodians, banks and fiduciaries for their expenses in forwarding this Proxy Statement and proxy materials
to the beneficial owners of each Funds Shares. The Funds and the Investment Advisor have retained Georgeson LLC to assist with the distribution of proxy materials and the solicitation and tabulation of proxies. It is anticipated that Georgeson
LLC will be paid approximately $[·] and $[·] by MFL and the Acquiring Fund, respectively,
for such services (including reimbursements of out-of-pocket expenses) with respect to the solicitation of proxies from the common shares, the VRDP Shares and the VMTP
Shares. Georgeson LLC may solicit proxies personally and by mail, telephone, fax, e-mail or the Internet. Each Funds portion of the foregoing expenses is not subject to any cap or voluntary agreement to
waive fees and/or reimburse expenses that may otherwise apply to that Fund.
If You Plan to Attend the Special Meeting
Attendance at the Special Meeting will be limited to each Funds shareholders as of the Record Date and valid proxyholders. Each shareholder will
be asked to present valid photographic identification, such as a valid drivers license or passport. Shareholders holding Shares in brokerage accounts or by a bank or other nominee will be required to show satisfactory proof of ownership of
Shares in a Fund, such as a voting instruction form (or a copy thereof) or a letter from the shareholders bank, broker or other nominee or a brokerage statement or account statement reflecting share ownership as of the Record Date. Cameras,
recording devices and other electronic devices will not be permitted at the Special Meeting.
If you are a registered shareholder, you may vote your Shares in person by ballot at the Special Meeting. If you hold your Shares in a brokerage
account or through a broker, bank or other nominee, you will not be able to vote in person at the Special Meeting, unless you have previously requested and obtained a legal proxy from your broker, bank or other nominee and present it at
the Special Meeting.
126
Privacy Principles of the Funds
The Funds are committed to maintaining the privacy of shareholders and to
safeguarding their non-public personal information. The following information is provided to help you understand what personal information the Funds collect, how we protect that information, and why in certain
cases we may share such information with select other parties.
The Funds
do not receive any non-public personal information relating to their shareholders who purchase shares through their broker-dealers. In the case of shareholders who are record holders of a Fund, the Fund
receives personal non-public information on account applications or other forms. With respect to these shareholders, the Funds also have access to specific information regarding their transactions in each
Fund.
The Funds do not disclose any
non-public personal information about their shareholders or former shareholders to anyone, except as permitted by law or as is necessary in order to service our shareholders accounts (for example, to a
transfer agent).
The Funds restrict access to non-public personal information about their shareholders to BlackRock employees with a legitimate business need for the information. The Funds maintain physical, electronic and procedural safeguards designed to
protect the non-public personal information of our shareholders.
Incorporation by Reference
The financial statements of the Acquiring Fund for the fiscal year ended April 30, 2021 are incorporated by reference herein to the Acquiring
Funds annual report filed on Form N-CSR on July 6, 2021.
The financial statements of MFL for the fiscal year ended August 31, 2021
are incorporated by reference herein to MFLs annual report filed on Form N-CSR on November 3, 2021.
See Financial Statements. The financial statements have been
audited by Deloitte & Touche LLP, independent registered public accounting firm, as set forth in their report thereon and incorporated herein by reference. Such financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and auditing.
Adjournments and Postponements
Failure of a quorum to be present at the Special Meeting may necessitate adjournment. The Board of each Fund may, prior to the Special Meeting being
convened, postpone such meeting from time to time to a date not more than 120 days after the original record date. The chair of the Special Meeting may adjourn the meeting from time to time to reconvene at the same or some other place, and notice
need not be given of any such adjourned meeting if the time and place, if any, thereof and the means of remote communications, if any, by which shareholders and proxy holders may be deemed to be present [in person] and vote at such adjourned meeting
are announced at the meeting at which the adjournment is taken. At the adjourned meeting, each Fund may transact any business which might have been transacted at the original meeting. Any adjourned meeting may be held as adjourned one or more times
without further notice not later than one hundred and twenty (120) days after the record date. If after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting in accordance with the requirements of
each Funds Bylaws shall be given to each shareholder of record entitled to vote at the meeting and each other shareholder entitled to notice of the meeting.
Please vote promptly by signing and dating each enclosed proxy card, and if received by mail, returning it (them) in the accompanying postage paid
return envelope OR by following the enclosed instructions to provide voting instructions by telephone or via the Internet.
127
BlackRock is independent in ownership and governance, with no single majority stockholder and a majority
of independent directors.
By Order of the Boards,
Janey Ahn
Secretary of the Funds
[·], 2021
128
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
[·], 2021
In order to consummate the reorganization contemplated herein (the
Reorganization) and in consideration of the promises and the covenants and agreements hereinafter set forth, and intending to be legally bound, BlackRock MuniHoldings Investment Quality Fund, a registered diversified closed-end investment company, File No. 811-08349 (the Target Fund) and BlackRock Municipal Income Fund, Inc., a registered diversified closed-end
investment company, File No. 811-21348 (the Acquiring Fund and together with the Target Fund, the Funds), each hereby agree as follows:
1.
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REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
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The Acquiring Fund represents and warrants to, and agrees with, the Target Fund that:
(a) The Acquiring Fund is a corporation duly organized,
validly existing and in good standing in conformity with the laws of the State of Maryland and has the power to own all of its assets and to carry out this Agreement. The Acquiring Fund has all necessary federal, state and local authorizations to
carry on its business as it is now being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment Company Act of 1940, as amended (the 1940 Act)
as a diversified, closed-end management investment company and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Acquiring Fund has full power and authority to
enter into and perform its obligations under this Agreement subject:
(i) in the case of the consummation of the Reorganization, to the approval of this Agreement and the transactions
contemplated herein, including amendments to the Statement of Preferences (as defined below) in connection with the issuance of additional Acquiring Fund VRDP Shares (as defined in Section 1(o) herein) in the Reorganization by the holders of
the Acquiring Fund VMTP Shares (Acquiring Fund VMTP Holders) voting as a separate class, and
(ii) in the case of the issuance of additional Acquiring Fund Common Shares (as defined in Section 1(o)
herein) in connection with the Reorganization to the approval of such issuance of additional Acquiring Fund Common Shares by the common shareholders of the Acquiring Fund (Acquiring Fund Common Shareholders and together with the
Acquiring Fund VMTP Holders, the Acquiring Fund Shareholders) and the Acquiring Fund VMTP Holders voting as a single class, in each case as described in Sections 9(a) and (b) hereof.
(d) The execution, delivery and performance of this
Agreement have been duly authorized by all necessary action of the Acquiring Funds Board of Directors, and this Agreement constitutes a valid and binding contract of the Acquiring Fund enforceable against the Acquiring Fund in accordance with
its terms, subject to the effects of bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(e) The Acquiring Fund has provided or made available
(including by electronic format) to the Target Fund the most recent audited annual financial statements of the Acquiring Fund, which have been prepared in accordance with generally accepted accounting principles in the United States of America
(US GAAP) consistently applied and have been audited by Deloitte & Touche LLP, each Funds independent registered public accounting firm, and such statements fairly present the financial condition and the results of
operations of the Acquiring Fund as of the respective dates indicated and the results of operations and changes in net assets for the periods indicated, and there are no liabilities of the Acquiring Fund whether actual or contingent and whether or
not determined or determinable as of such date that are required to be disclosed but are not disclosed in such statements.
A-1
(f) An unaudited statement of assets, capital and liabilities of the Acquiring
Fund and an unaudited schedule of investments of the Acquiring Fund, each as of the Valuation Time (as defined in Section 3(e) herein) (together, the Acquiring Fund Closing Financial Statements), will be provided or made
available (including by electronic format) to the Target Fund, at or prior to the Closing Date (as defined in Section 7(a) herein), for the purpose of determining the number of Acquiring Fund Shares (as defined in Section 1(o) herein) to
be issued to the Target Fund shareholders (the Target Fund Shareholders) pursuant to Section 3 of this Agreement; the Acquiring Fund Closing Financial Statements will fairly present the financial position of the Acquiring
Fund as of the Valuation Time in conformity US GAAP consistently applied.
(g) There are no material legal, administrative or other proceedings pending or, to the knowledge of the Acquiring Fund,
threatened against it which assert liability on the part of the Acquiring Fund or which materially affect its financial condition or its ability to consummate the Reorganization other than as have been disclosed to the Target Fund and/or in the N-14 Registration Statement (as defined in Section 1(l) herein). The Acquiring Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation
of any provisions of any federal, state or local law or regulation or administrative ruling relating to any aspect of its business.
(h) There are no material contracts outstanding to which the Acquiring Fund is a party that have not been disclosed in the N-14 Registration Statement or that will not otherwise be disclosed to the Target Fund prior to the Valuation Time.
(i) The Acquiring Fund is not obligated under any provision of its charter or By-laws,
each as amended to the date hereof, and is not a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance under this Agreement, except insofar as
the Funds have mutually agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
(j) The Acquiring Fund has no known liabilities of a material amount, contingent or otherwise, other than those shown on the
Acquiring Funds Annual Report for the fiscal year ended April 30, 2021, those incurred since the date thereof in the ordinary course of its business as an investment company, and those incurred in connection with the Reorganization. As of
the Valuation Time, the Acquiring Fund will advise the Target Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of such time, except to the extent disclosed in
the Acquiring Fund Closing Financial Statements or to the extent already known by the Target Fund.
(k) No consent, approval, authorization or order of any court or government authority is required for the consummation by the
Acquiring Fund of the Reorganization, except such as may be required under the Securities Act of 1933, as amended (the 1933 Act), the Securities Exchange Act of 1934, as amended (the 1934 Act) and the 1940 Act
or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico) or the rules of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The registration statement filed by the Acquiring Fund
on Form N-14, which includes the proxy statement for the common shareholders of the Target Fund and the Acquiring Fund with respect to the transactions contemplated herein (the Joint Proxy
Statement/Prospectus), and any supplement or amendment thereto or to the documents included or incorporated by reference therein (collectively, as so amended or supplemented, the N-14
Registration Statement), on its effective date, at the time of the shareholder meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they were made, not
A-2
misleading; provided, however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the
N-14 Registration Statement made in reliance upon and in conformity with information furnished by the Acquiring Fund for use in the N-14 Registration Statement.
(m) The proxy statement for the holders of the Acquiring
Fund VMTP Shares (Acquiring Fund VMTP Holders) and holders of the Target Fund VRDP Shares (as defined in section 2(o) herein) (the Target Fund VRDP Holders) with respect to the transactions contemplated herein,
and any supplement or amendment thereto (the Preferred Shares Proxy Statement) or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this Agreement and on the
Closing Date, insofar as it relates to the Acquiring Fund, (i) complied or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did not or will not
contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading; provided,
however, that the representations and warranties in this subsection only shall apply to statements in or omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished by the Acquiring
Fund for use in the Preferred Shares Proxy Statement.
(n) The Acquiring Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local tax
returns which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in
which the Closing Date occurs. All tax liabilities of the Acquiring Fund have been adequately provided for on its books, and no tax deficiency or liability of the Acquiring Fund has been asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Acquiring Fund is authorized to issue
199,981,458 shares of common stock, par value $0.10 per share (the Acquiring Fund Common Shares), 12,800 shares of preferred stock of Auction Market Preferred Stock, par value $0.10, classified into six separate series (Series TH28,
Series M76, Series T7, Series W7, Series TH7 and Series F7), consisting of 1,500, 2,000, 2,700, 2,000, 2,700 and 2,000 shares respectively, and each with a liquidation preference $25,000 per share plus an amount equal to accumulated but unpaid
dividends (whether not earned or declared) thereon, 2,871 shares of preferred stock of Series W-7 VMTP Shares, par value $0.10 per share and liquidation preference $100,000 per share (the Acquiring
Fund VMTP Shares), and 2,871 shares of preferred stock of Series W-7 Variable Rate Demand Preferred Shares, par value $0.10 per share and liquidation preference $100,000 per share (the
Acquiring Fund VRDP Shares and together with the Acquiring Fund VMTP Shares and the Acquiring Fund Common Shares, the Acquiring Fund Shares). Each outstanding Acquiring Fund Share is fully paid and
nonassessable, and has the voting rights provided by the Acquiring Funds charter, By-laws and applicable law.
(p) The books and records of the Acquiring Fund made available to the Target Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions with respect to the operations of the Acquiring Fund.
(q) The Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to this Agreement will have been duly
authorized and, when issued and delivered pursuant to this Agreement, will be legally and validly issued and will be fully paid and nonassessable and will have full voting rights, except as provided by the Acquiring Funds charter or applicable
law, and no holder of Acquiring Fund Common Shares or Acquiring Fund VRDP Shares will have any preemptive right of subscription or purchase in respect thereof.
(r) At or prior to the Closing Date, the Acquiring Fund Common Shares to be transferred to the Target Fund for distribution to
the Target Fund Shareholders on the Closing Date will be duly qualified for offering to the public in all states of the United States in which the sale of shares of the Funds presently are qualified, and there will be a sufficient number of such
Acquiring Fund Common Shares registered under the 1933 Act and, as may be necessary, with each pertinent state securities commission to permit the transfers contemplated by this Agreement to be consummated.
(s) At or prior to the Closing Date, the Acquiring Fund
will have obtained any and all regulatory, board and shareholder approvals necessary to issue the Acquiring Fund Shares to the Target Fund Shareholders.
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(t) The Acquiring Fund has elected to qualify and has qualified as a regulated
investment company (RIC) within the meaning of Section 851 of the Internal Revenue Code of 1986, as amended (the Code) for each of its taxable years since its inception, and the Acquiring Fund has satisfied
the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
2.
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REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND.
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The Target Fund represents and warrants to, and agrees with, the Acquiring Fund that:
(a) The Target Fund is a business trust duly formed,
validly existing and in good standing in conformity with the laws of the Commonwealth of Massachusetts and has the power to own all of its assets and to carry out this Agreement. The Target Fund has all necessary federal, state and local
authorizations to carry on its business as it is now being conducted and to carry out this Agreement.
(b) The Target Fund is duly registered under the 1940 Act as a diversified, closed-end
management investment company, and such registration has not been revoked or rescinded and is in full force and effect.
(c) The Target Fund has full power and authority to enter into and perform its obligations under this Agreement subject, in the
case of consummation of the Reorganization, to the approval and adoption of this Agreement by the Target Fund Shareholders as described in Section 8(a) hereof. The execution, delivery and performance of this Agreement have been duly authorized
by all necessary action of the Target Funds Board of Trustees and this Agreement constitutes a valid and binding contract of the Target Fund enforceable against the Target Fund in accordance with its terms, subject to the effects of
bankruptcy, insolvency, moratorium, fraudulent conveyance and similar laws relating to or affecting creditors rights generally and court decisions with respect thereto.
(d) The Target Fund has provided or made available
(including by electronic format) to the Acquiring Fund the most recent audited annual financial statements of the Target Fund which have been prepared in accordance with US GAAP consistently applied and have been audited by [·], and such statements fairly present the financial condition and the results of operations of the Target Fund as of the respective dates indicated and the results of
operations and changes in net assets for the periods indicated, and there are no liabilities of the Target Fund whether actual or contingent and whether or not determined or determinable as of such date that are required to be disclosed but are not
disclosed in such statements.
(e) An unaudited
statement of assets, capital and liabilities of the Target Fund and an unaudited schedule of investments of the Target Fund, each as of the Valuation Time (together, the Target Fund Closing Financial Statements), will be provided
or made available (including by electronic format) to the Acquiring Fund at or prior to the Closing Date, for the purpose of determining the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders pursuant to Section 3 of
this Agreement; the Target Fund Closing Financial Statements will fairly present the financial position of the Target Fund as of the Valuation Time in conformity with US GAAP consistently applied.
(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Target Fund, threatened against it which assert liability on the part of the Target Fund or which materially affect its financial condition or its ability to consummate the Reorganization other than as
have been disclosed to the Acquiring Fund. The Target Fund is not charged with or, to the best of its knowledge, threatened with any violation or investigation of any possible violation of any provisions of any federal, state or local law or
regulation or administrative ruling relating to any aspect of its business.
(g) There are no material contracts outstanding to which the Target Fund is a party that have not been disclosed in the N-14 Registration Statement or will not otherwise be disclosed to the Acquiring Fund prior to the Valuation Time.
(h) The Target Fund is not obligated under any provision of its Declaration of Trust or
By-laws, each as amended to the date hereof, or a party to any contract or other commitment or obligation, and is not subject to any order or decree, which would be violated by its execution of or performance
under this Agreement, except insofar as the Funds have mutually agreed to amend such contract or other commitment or obligation to cure any potential violation as a condition precedent to the Reorganization.
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(i) The Target Fund has no known liabilities of a material amount, contingent or
otherwise, other than those shown on the Target Funds Annual Report for the fiscal year ended August 31, 2021, those incurred since the date thereof in the ordinary course of its business as an investment company and those incurred in
connection with the Reorganization. As of the Valuation Time, the Target Fund will advise the Acquiring Fund of all known liabilities, contingent or otherwise, whether or not incurred in the ordinary course of business, existing or accrued as of
such time, except to the extent disclosed in the Target Fund Closing Financial Statements or to the extent already known by the Acquiring Fund.
(j) At both the Valuation Time and the Closing Date, the Target Fund will have full right, power and authority to sell, assign,
transfer and deliver the Target Fund Investments. As used in this Agreement, the term Target Fund Investments shall mean (i) the investments of the Target Fund shown on the schedule of its investments as of the Valuation Time
furnished to the Acquiring Fund; and (ii) all other assets owned by the Target Fund as of the Valuation Time, other than cash held in liability reserves in amounts necessary to pay taxes and expenses as provided in Section 6(a)(ii) and
Section 6(c)(iv) of this Agreement, respectively, and distributions, if any, as provided in Section 3(c) and Section 9(l) of this Agreement. At the Closing Date, subject only to the obligation to deliver the Target Fund Investments as
contemplated by this Agreement, the Target Fund will have good and marketable title to all of the Target Fund Investments, and the Acquiring Fund will acquire all of the Target Fund Investments free and clear of any encumbrances, liens or security
interests and without any restrictions upon the transfer thereof (except those imposed by the federal or state securities laws and those imperfections of title or encumbrances as do not materially detract from the value or use of the Target Fund
Investments or materially affect title thereto).
(k) No consent, approval, authorization or order of any court or governmental authority is required for the consummation by the
Target Fund of the Reorganization, except such as may be required under the 1933 Act, the 1934 Act and the 1940 Act or state securities laws (which term as used herein shall include the laws of the District of Columbia and Puerto Rico) or the rules
of the New York Stock Exchange, each of which will have been obtained on or prior to the Closing Date.
(l) The N-14 Registration Statement, on its effective date, at the time of the Target
Fund Shareholders meeting called to vote on this Agreement and on the Closing Date, insofar as it relates to the Target Fund (i) complied or will comply in all material respects with the provisions of the 1933 Act, the 1934 Act and the 1940 Act
and the rules and regulations thereunder and (ii) did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading; and the Joint Proxy Statement/Prospectus included therein did not or will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the
statements therein, not misleading; provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with information furnished by the Target Fund for use in the N-14 Registration Statement.
(m) The Preferred Shares Proxy Statement for the Target
Fund VRDP Holders with respect to the transactions contemplated herein, and any supplement or amendment thereto or to the documents included or incorporated by reference therein, at the time of the shareholder meeting called to vote on this
Agreement and on the Closing Date, insofar as it relates to the Target Fund, (i) complied or will comply in all material respects with the provisions of the 1934 Act and the 1940 Act and the rules and regulations thereunder and (ii) did
not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this subsection shall apply only to statements in or omissions from the Preferred Shares Proxy Statement made in reliance upon and in conformity with information furnished
by the Target Fund for use in the Preferred Shares Proxy Statement.
(n) The Target Fund has filed, or intends to file, or has obtained extensions to file, all federal, state and local tax returns
which are required to be filed by it, and has paid or has obtained extensions to pay, all federal, state and local taxes shown on said returns to be due and owing and all assessments received by it, up to and including the taxable year in which the
Closing Date occurs. All tax liabilities of the Target Fund have been adequately provided
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for on its books, and no tax deficiency or liability of the Target Fund has been asserted and no question with respect thereto has been raised by the Internal Revenue Service or by any state or
local tax authority for taxes in excess of those already paid, up to and including the taxable year in which the Closing Date occurs.
(o) The Target Fund is authorized to issue an unlimited number of common shares of beneficial interest, par value $0.10 per
share (the Target Fund Common Shares) and 1,000,000 preferred shares of beneficial interest, par value $0.10 per share. The Target Funds outstanding preferred shares consists of 2,746 Series
W-7 Variable Rate Demand Preferred Shares liquidation preference $100,000 per share (Target Fund VRDP Shares and together with Target Fund Common Shares, the Target Fund
Shares). Each outstanding Target Fund Share is duly and validly issued and is fully paid and nonassessable, and has the voting rights provided by the Target Funds Declaration of Trust and applicable law. The Target Fund has no
outstanding preferred shares other than 2,746 Target Fund VRDP Shares; no outstanding options, warrants or other rights to subscribe for or purchase any shares of the Target Fund; and no outstanding securities convertible into shares of the Target
Fund. All of the issued and outstanding Target Fund Common Shares will, at the time of the Closing, be held by the persons and in the amounts set forth in the records of the Target Funds transfer agent as provided in Section 7(d).
(p) All of the issued and outstanding Target Fund Shares
were offered for sale and sold in conformity with all applicable federal and state securities laws.
(q) The Target Fund will not sell or otherwise dispose of any of the Acquiring Fund Shares to be received in the Reorganization,
except in distribution to the Target Fund Shareholders as provided in Section 3 of this Agreement.
(r) The books and records of the Target Fund made available to the Acquiring Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions with respect to the operations of the Target Fund.
(s) The Target Fund has elected to qualify and has qualified as a RIC within the meaning of Section 851 of the Code for
each of its taxable years since its inception, and the Target Fund has satisfied the distribution requirements imposed by Section 852 of the Code to maintain RIC status for each of its taxable years.
(a) Subject to receiving the requisite approvals of the Target Fund Shareholders and the Acquiring Fund Shareholders, the
Acquiring Funds issuance of 2,746 Acquiring Fund VRDP Shares and the redemption by the Acquiring Fund of all outstanding Acquiring Fund VMTP Shares with the proceeds from such issuance of Acquiring Fund VRDP Shares (the Acquiring Fund
VMTP Refinancing) and to the other terms and conditions contained herein, and in accordance with the applicable law, the Target Fund agrees to convey, transfer and deliver to the Acquiring Fund and the Acquiring Fund agrees to acquire from
the Target Fund, on the Closing Date, all of the Target Fund Investments (including interest accrued as of the Valuation Time on debt instruments held by the Target Fund), and assume substantially all of the liabilities of the Target Fund, in
exchange for that number of Acquiring Fund Shares provided in Section 4 of this Agreement, provided however that if, pursuant to the provisions of paragraph (c) of this Section 3 and paragraph (l) of Section 9 hereof,
(i) the Target Fund determines to make any portion of the UNII Distributions (as defined in Section 3(c) herein) to the Target Fund Common Shareholders (as defined below) after the Closing Date, the Target Fund Investments to be conveyed,
transferred and delivered to the Acquiring Fund hereunder will exclude the amounts required for the payment of such portion of the UNII Distributions and the liabilities to be assumed by the Acquiring Fund shall not include such undistributed amount
of such UNII Distributions, or (ii) the Target Fund determines that the Acquiring Fund will pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII
Distributions after the Closing Date, then the Target Fund Investments to be conveyed, transferred and delivered to the Acquiring Fund hereunder will include the amounts required for the payment of such portion of the UNII Distributions and the
liabilities to be assumed by the Acquiring Fund shall include such undistributed amount of such UNII Distributions. The existence of the Acquiring Fund shall continue unaffected and unimpaired by the Reorganization and it shall be governed by the
laws of Maryland.
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(b) If the investment adviser determines that the portfolios of the Target Fund
and the Acquiring Fund, when aggregated, would contain investments exceeding certain percentage limitations imposed upon the Acquiring Fund with respect to such investments or that the disposition of certain assets is necessary to ensure that the
resulting portfolio will meet the Acquiring Funds investment objective, policies and restrictions, as set forth in the Joint Proxy Statement/Prospectus, a copy of which has been delivered (including by electronic format) to the Target Fund,
the Target Fund, if requested by the Acquiring Fund, will dispose of a sufficient amount of such investments as may be necessary to avoid violating such limitations as of the Closing Date. Notwithstanding the foregoing, nothing herein will require
the Target Fund to dispose of any portion of its assets if, in the reasonable judgment of the Target Funds Board of Trustees or investment adviser, such disposition would create more than an insignificant risk that the Reorganization would not
be treated as a reorganization described in Section 368(a) of the Code or would otherwise not be in the best interests of the Target Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to holders of Target Fund Common Shares (Target Fund Common Shareholders) entitled to such dividends (i) all of its investment company taxable income to and including the
Closing Date, if any (computed without regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross
income under Section 103(a) of the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Target Fund may pay amounts in respect of such distributions
(UNII Distributions) in one or more distributions to Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date. In addition, the Acquiring Fund may pay amounts in respect of such UNII
Distributions on behalf of the Target Fund to the Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent out of cash or other short-term liquid assets maturing prior to the payment date of the
UNII Distributions acquired from the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
(d) Pursuant to this Agreement, as soon as practicable,
and in no event more than 48 hours, exclusive of Sundays and holidays, after the Closing Date, the Target Fund will distribute all Acquiring Fund Common Shares and Acquiring Fund VRDP Shares received by it to its shareholders in exchange for their
Target Fund Common Shares and Target Fund VRDP Shares, respectively. Such distributions shall be accomplished by the opening of shareholder accounts on the share ledger records of the Acquiring Fund in the names of and in the amounts due to the
Target Fund Shareholders based on their respective holdings in the Target Fund as of the Valuation Time.
(e) The Valuation Time shall be at the close of business of the New York Stock Exchange on the business day immediately
preceding the Closing Date, or such earlier or later day and time as may be mutually agreed upon in writing by the Funds (the Valuation Time).
(f) The Target Fund will pay or cause to be paid to the Acquiring Fund any interest the Target Fund receives on or after the
Closing Date with respect to any of the Target Fund Investments transferred to the Acquiring Fund hereunder.
(g) Recourse for liabilities assumed from the Target Fund by the Acquiring Fund in the Reorganization will be limited to the net
assets acquired by the Acquiring Fund. The known liabilities of the Target Fund, as of the Valuation Time, shall be confirmed to the Acquiring Fund pursuant to Section 2(i) of this Agreement.
(h) The Target Fund will be terminated as soon as
practicable following the Closing Date by terminating its registration under the 1940 Act and dissolving and terminating under the laws of the Commonwealth of Massachusetts applicable to business trusts and will withdraw its authority to do business
in any state where it is registered.
(i) For U.S.
federal income tax purposes, the parties to this Agreement intend that (i) the Reorganization qualify as a reorganization within the meaning of Section 368(a) of the Code, (ii) this Agreement constitutes a plan of reorganization
within the meaning of U.S. Treasury Regulations Section 1.368-2(g), and (iii) the parties to this Agreement will each be a party to such reorganization within the meaning of Section 368(b) of
the Code.
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4.
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ISSUANCE AND VALUATION OF ACQUIRING FUND SHARES IN THE REORGANIZATION.
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(a) A number of Acquiring Fund Common Shares with an aggregate net asset value equal to the value of the Target Fund Investments
(including interest accrued as of the Valuation Time on debt instruments held by the Target Fund) acquired in the Reorganization determined as hereinafter provided, reduced by the amount of liabilities of the Target Fund assumed by the
Acquiring Fund in the Reorganization, shall be issued by the Acquiring Fund to the Target Fund in exchange for such Target Fund Investments, which shall be determined as set forth below. The value of each Funds net assets shall be calculated
net of the liquidation preference (including accumulated and unpaid dividends) of all outstanding preferred shares of such Fund.
(b) A number of Acquiring Fund VRDP Shares equal to the number of Target Fund VRDP Shares outstanding immediately prior to the
Closing Date, with the terms described in the Preferred Shares Proxy Statement, shall be issued by the Acquiring Fund to the Target Fund. No fractional Acquiring Fund VRDP Shares will be issued. The value of each Acquiring Fund VRDP Share issued to
the Target Fund in exchange for a Target Fund VRDP Share will be the liquidation preference of $100,000 plus any accumulated and unpaid dividends that have accrued on such Target Fund VMTP Share up to and including the day immediately preceding the
Closing Date. The Target Fund may pay any such accumulated and unpaid dividends prior to the Closing Date.
(c) The net asset value of the Acquiring Fund and the Target Fund, the values of their assets, the amounts of their liabilities,
and the liquidation preference (including accumulated and unpaid dividends) of the Target Fund VRDP Shares and the Acquiring Fund VRDP Shares shall be determined as of the Valuation Time in accordance with the regular procedures of the Acquiring
Fund or such other valuation procedures as shall be mutually agreed by the parties, and no adjustment will be made to the net asset value or liquidation preference so determined of any Fund to take into account differences in realized and unrealized
gains and losses.
Such valuation and determination shall be made by the
Acquiring Fund in cooperation with the Target Fund and shall be confirmed by the Acquiring Fund to the Target Fund. The net asset value per share of the Acquiring Fund Common Shares and the liquidation preference (including accumulated and unpaid
dividends) per share of the Acquiring Fund VRDP Shares shall be determined in accordance with such procedures.
For purposes of determining the net asset value per share of Target Fund Common Shares and the Acquiring Fund Common Shares, the value of the
securities held by the applicable Fund plus any cash or other assets (including interest accrued but not yet received) minus all liabilities (including accrued expenses) and the aggregate liquidation value of the outstanding Target Fund VRDP Shares
or Acquiring Fund VRDP Shares, as the case may be, shall be divided by the total number of Target Fund Common Shares or Acquiring Fund Common Shares, as the case may be, outstanding at such time.
(d) The Acquiring Fund shall issue to each Target Fund
Common Shareholder book-entry interests for the Acquiring Fund Common Shares registered in the name of such Target Fund Common Shareholder on the basis of each such holders proportionate interest in the aggregate net asset value of the Target
Fund Common Shares.
(e) The Acquiring Fund shall
issue to each Target Fund VRDP Holder book-entry interests for the Acquiring Fund VRDP Shares registered in the name of such Target Fund VRDP Holder on a one-for-one
basis for each holders holdings of the Target Fund VRDP Shares. The Target Fund VRDP Holders shall not receive, or be entitled to, any payment or other consideration in connection with or as a result of the Reorganization other than as
provided in this Agreement. In connection with such issuance, the Acquiring Fund shall amend the Acquiring Fund VRDP Shares Statement of Preferences of Variable Rate Demand Preferred Shares (the Statement of Preferences),
Notice of Special Rate Period, share certificates representing such Acquiring Fund VRDP Shares, and such other agreements, instruments or documents relating to the Acquiring Fund VRDP Shares, in each case as of the Closing Date and only to the
extent necessary or applicable to such agreement, instrument or document, to reflect the authorization and issuance of additional Acquiring Fund VRDP Shares in connection with the Reorganization.
(f) No fractional shares of Acquiring Fund Common Shares
will be issued to holders of Target Fund Common Shares unless such shares are held in a Dividend Reinvestment Plan account. In lieu thereof, the Acquiring Funds transfer agent will aggregate all fractional Acquiring Fund Common Shares to be
issued in connection with the Reorganization (other than those issued to a Dividend Reinvestment Plan account) and sell the resulting full shares
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on the New York Stock Exchange at the current market price for Acquiring Fund Common Shares for the account of all holders of such fractional interests, and each such holder will receive such
holders pro rata share of the proceeds of such sale upon issuance of book-entry interests representing Acquiring Fund Common Shares.
(a) The Target Fund and the Acquiring Fund will bear expenses incurred in connection with the Reorganization, including but not
limited to, costs related to the preparation and distribution of materials distributed to each Funds Board of Trustees or Board of Directors, as applicable (the Board), expenses incurred in connection with the preparation of
this Agreement, the preparation and filing of any documents required by such Funds state of organization, the preparation and filing of the N-14 Registration Statement and the Preferred Shares Proxy
Statement with the U.S. Securities and Exchange Commission (SEC), the printing and distribution of the Joint Proxy Statement/Prospectus, the Preferred Shares Proxy Statement and any other materials required to be distributed to
shareholders, the SEC, state securities commission and secretary of state filing fees and legal and audit fees in connection with the Reorganization, fees incurred in obtaining the requisite consents of rating agencies, counterparties or service
providers to the preferred shares, legal fees incurred in connection with amending the transaction documents for the preferred shares, which may include the legal fees of counterparties and service providers to the extent applicable, fees and
expenses incurred in connection with the Acquiring Fund VMTP Refinancing, legal fees incurred preparing each Funds board materials, attending each Funds board meetings and preparing the minutes, rating agency fees associated with the
ratings of the preferred shares in connection with the Reorganization, audit fees associated with each Funds financial statements, stock exchange fees, transfer agency fees, rating agency fees, portfolio transfer taxes (if any) and any similar
expenses incurred in connection with the Reorganization, which will be borne directly by the respective Fund incurring the expense or allocated among the Funds based upon any reasonable methodology approved by the Boards of the Funds, provided, that
the Acquiring Funds investment adviser may bear all or any portion of the reorganization expenses of each Fund as set forth in the N-14 Registration Statement. Neither the Funds nor the investment
adviser will pay any expenses of shareholders arising out of or in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no party shall be liable to any other party for any damages
resulting therefrom, including, without limitation, consequential damages, and each Fund shall be responsible, on a proportionate total assets basis, for all expenses incurred in connection with the Reorganization.
6.
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COVENANTS OF THE FUNDS.
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(a) COVENANTS OF EACH FUND.
(i) Each Fund covenants to operate its business as presently conducted between the date hereof and the Closing
Date, except to the extent that the Target Fund is required or permitted to dispose of assets prior to the Closing Date pursuant to Section 3(b) of this Agreement.
(ii) Each of the Funds agrees that by the Closing Date all of its U.S. federal and other tax returns and reports
required to be filed on or before such date shall have been filed and all taxes shown as due on said returns either have been paid or adequate liability reserves have been provided for the payment of such taxes.
(iii) The intention of the parties is
that the transaction contemplated by this Agreement will qualify as a reorganization within the meaning of Section 368(a) of the Code. Neither the Acquiring Fund nor the Target Fund shall take any action or cause any action
to be taken (including, without limitation, the filing of any tax return) that is inconsistent with such treatment or results in the failure of the transaction to qualify as a reorganization within the meaning of Section 368(a) of the Code. At
or prior to the Closing Date, the Acquiring Fund and the Target Fund will take such action, or cause such action to be taken, as is reasonably necessary to enable Willkie Farr & Gallagher LLP (Willkie), counsel to the
Funds, to render the tax opinion required herein (including, without limitation, each partys execution of representations reasonably requested by and addressed to Willkie).
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(iv) In connection with this covenant, the Funds agree to
cooperate with each other in filing any tax return, amended return or claim for refund, determining a liability for taxes or a right to a refund of taxes or participating in or conducting any audit or other proceeding in respect of taxes. The
Acquiring Fund agrees to retain for a period of ten (10) years following the Closing Date all returns, schedules and work papers and all material records or other documents relating to tax matters of the Target Fund for each of such Funds
taxable periods ending on or before the Closing Date.
(v) The Acquiring Fund VRDP Shares to be transferred to the Target Fund for distribution to the Target Fund VRDP
Holders on the Closing Date shall only be distributed to the Target Fund VRDP Holders in accordance with an available exemption from registration under the 1933 Act, in a manner not involving any public offering within the meaning of
Section 4(a)(2) of the 1933 Act.
(vi) Each Fund shall use reasonable efforts to obtain all requisite consents and approvals necessary to
consummate the Reorganization.
(b) COVENANTS OF THE
ACQUIRING FUND.
(i) The Acquiring
Fund will file the N-14 Registration Statement and the Preferred Shares Proxy Statement with the SEC and will use its best efforts to provide that the N-14 Registration
Statement becomes effective as promptly as practicable. Each Fund agrees to cooperate fully with the other, and each will furnish to the other the information relating to itself to be set forth in the N-14
Registration Statement and the Preferred Shares Proxy Statement as required by the 1933 Act, the 1934 Act and the 1940 Act, and the rules and regulations thereunder and the state securities laws.
(ii) The Acquiring Fund has no plan or
intention to sell or otherwise dispose of the Target Fund Investments following the consummation of the Reorganization, except for dispositions made in the ordinary course of business.
(iii) Following the consummation of the
Reorganization, the Acquiring Fund will continue its business as a diversified, closed-end management investment company registered under the 1940 Act.
(iv) The Acquiring Fund shall use
reasonable efforts to cause the Acquiring Fund Common Shares to be issued in the Reorganization to be approved for listing on the New York Stock Exchange prior to the Closing Date.
(v) The Acquiring Fund agrees to mail to
its shareholders of record entitled to vote at the special meeting of shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy
Statement/Prospectus (but only to the Acquiring Fund Common Shareholders) and the Preferred Shares Proxy Statement (but only to the Acquiring Fund VMTP Holders), each of which complies in all material respects with the applicable provisions of
Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and regulations, respectively, thereunder.
(vi) The Acquiring Fund shall use reasonable efforts to cause the Acquiring Fund VRDP Shares to be issued in
connection with the Reorganization to be rated no lower than the rating assigned to the Acquiring Fund VRDP Shares immediately prior to the Closing Date by the rating agencies then rating the Acquiring Fund VRDP Shares.
(vii) The Acquiring Fund shall use
reasonable efforts to amend or enter into the following documents to reflect the authorization and issuance of additional Acquiring Fund VRDP Shares in connection with the Reorganization: (1) the Articles Supplementary; (2) the Notice of
Special Rate Period for the Acquiring Fund VRDP Shares; (3) share certificates representing Acquiring Fund VRDP Shares; (4) the VRDP Shares Fee Agreement for the Acquiring Fund VRDP Shares; (5) the VRDP Shares Purchase Agreement for
the Acquiring Fund VRDP Shares; (6) the VRDP Shares Remarketing Agreement for the Acquiring Fund VRDP Shares; (7) the Tender and Paying Agent Agreement for the Acquiring Fund VRDP
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Shares; and (8) such other agreements, instruments or documents relating to the Acquiring Fund VRDP Shares, in each case by the Closing Date and only to the extent necessary or applicable to
such agreement, instrument or document.
(viii) Upon the approval of this Agreement by the requisite shareholders of the Funds, the Acquiring Fund agrees
to use reasonable efforts to consummate the Acquiring Fund VMTP Refinancing prior to the Closing Date.
(c) COVENANTS OF THE TARGET FUND.
(i) The Target Fund agrees that following the consummation of the Reorganization, following the payment of any
portion of the UNII Distribution to be paid to Target Fund Common Shareholders by the Target Fund in accordance with Sections 3(c) and 9(l) hereof following the Closing, it will dissolve in accordance with Massachusetts law and any other applicable
law, it will not make any distributions of any Acquiring Fund Common Shares other than to its shareholders and without first paying or adequately providing for the payment of all of its respective liabilities not assumed by the Acquiring Fund, and
on and after the Closing Date it shall not conduct any business except in connection with its termination.
(ii) The Target Fund undertakes that if the Reorganization is consummated, it will file an application pursuant
to Section 8(f) of the 1940 Act for an order declaring that the Target Fund has ceased to be a registered investment company.
(iii) The Target Fund shall mail to its shareholders of record entitled to vote at the special meeting of
shareholders at which action is to be considered regarding this Agreement, in sufficient time to comply with requirements as to notice thereof, the Joint Proxy Statement/Prospectus (but only to the Target Fund Common Shareholders) and the Preferred
Shares Proxy Statement (but only to the Target Fund VRDP Holders), each of which complies in all material respects with the applicable provisions of Section 14(a) of the 1934 Act and Section 20(a) of the 1940 Act, and the rules and
regulations, respectively, thereunder.
(iv) After the Closing Date, the Target Fund shall prepare, or cause its agents to prepare, any U.S. federal,
state or local tax returns required to be filed by such Target Fund with respect to its final taxable year ending with its complete liquidation and dissolution and for any prior periods or taxable years and further shall cause such tax returns to be
duly filed with the appropriate taxing authorities. Notwithstanding the aforementioned provisions of this subsection, any expenses incurred by the Target Fund (other than for payment of taxes) in connection with the preparation and filing of said
tax returns after the Closing Date shall be borne by such Target Fund to the extent such expenses have been accrued by such Target Fund in the ordinary course without regard to the Reorganization; any excess expenses shall be paid from a liability
reserve established to provide for the payment of such expenses.
(v) Upon the request of the Acquiring Fund, the Target Fund shall use reasonable efforts to perform the
following actions by the Closing Date or such later time as may be agreed to by the Acquiring Fund: (a) terminate the VRDP Shares Fee Agreement, the VRDP Shares Purchase Agreement, the VRDP Remarketing Agreement and the Tender and Paying Agent
Agreement and such other agreements, instruments or documents related to the Target Fund VRDP Shares, (b) withdraw the ratings assigned to the Target Fund VRDP Shares, (c) cancel the share certificates representing Target Fund VRDP Shares,
and (d) withdraw or deregister the Target Fund VRDP Shares from The Depository Trust Company.
(a) The closing of the Reorganization (the Closing) shall occur prior to the opening of the NYSE at the
offices of Willkie, 787 Seventh Avenue, New York, New York 10019, or at such other time or location as may be mutually agreed to by the Funds, on the next full business day following the Valuation Time to occur after the satisfaction or waiver of
all of the conditions set forth in Sections 8 and 9 of this Agreement (other than the conditions that relate to actions to be taken, or documents to be delivered at the Closing, it being understood that the occurrence of the Closing shall remain
subject to the satisfaction or waiver of such conditions at Closing), or at such other time and date as may be mutually agreed to by the Funds (such date, the Closing Date).
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(b) On the Closing Date, the Target Fund shall deliver the Target Fund Investments
to the Acquiring Fund, and the Acquiring Fund shall issue the Acquiring Fund Shares as provided in this Agreement. To the extent that any Target Fund Investments, for any reason, are not transferable on the Closing Date, the Target Fund shall cause
such Target Fund Investments to be transferred to the Acquiring Funds account with its custodian at the earliest practicable date thereafter.
(c) The Target Fund will deliver to the Acquiring Fund on the Closing Date confirmation or other adequate evidence as to the tax
basis of the Target Fund Investments delivered to the Acquiring Fund hereunder.
(d) On the Closing Date, the Target Fund shall deliver or make available to (including by electronic format) the Acquiring Fund
a list of the names and addresses of all of the Target Fund Common Shareholders of record immediately prior to the Closing Date and the number of Target Fund Common Shares owned by each such Target Fund Common Shareholder, certified to the best of
its knowledge and belief by the transfer agent for the Target Fund Common Shares or by the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, or Secretary or any
Assistant Secretary.
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CONDITIONS OF THE TARGET FUND.
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The obligations of the Target Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been approved by at
least two-thirds of the members of the Board of the Target Fund and by the affirmative vote of the Target Fund Common Shareholders and the Target Fund VRDP Holders, voting as a single class, representing a
majority of the outstanding shares entitled to vote on this Agreement, and by the affirmative vote of the Target Fund VRDP Holders, voting as a separate class, representing a 1940 Act Majority (as defined below) of the outstanding VRDP Shares
entitled to vote on this Agreement. A 1940 Act Majority means the affirmative vote of either (i) 67% or more of the class or classes of Target Fund Shares entitled to vote on such proposal present at the Target Funds
shareholder meeting where this Agreement shall be approved, if the holders of more than 50% of the outstanding class or classes of Target Fund Shares entitled to vote on such proposal are present or represented by proxy or (ii) more than 50% of
the outstanding class or classes of Target Fund Shares entitled to vote on such proposal, whichever is less.
(b) That the Acquiring Fund shall have delivered (including in electronic format) to the Target Fund (i) a copy of the
resolutions approving this Agreement and the issuance of additional Acquiring Fund Shares in connection with the Reorganization adopted by the Board of the Acquiring Fund, (ii) a certificate setting forth the vote of the Acquiring Fund VMTP
Holders, voting as a separate class, approving this Agreement, and the vote of the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, approving the issuance of additional Acquiring Fund Common Shares in
connection with the Reorganization, and (iii) a certificate certifying that the Acquiring Fund has received all requisite consents and approvals necessary to consummate the Reorganization, each certified by the Acquiring Funds Secretary
or any Assistant Secretary.
(c) That the Acquiring
Fund shall have provided or made available (including by electronic format) to the Target Fund the Acquiring Fund Closing Financial Statements, together with a schedule of the Acquiring Funds investments, all as of the Valuation Time,
certified on the Acquiring Funds behalf by its Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed by the Acquiring Funds Chief Executive
Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the
financial position of the Acquiring Fund since the date of the Acquiring Funds most recent Annual or Semi-Annual Report, as applicable, other than changes in its portfolio securities since that date or changes in the market value of its
portfolio securities.
(d) That the Acquiring Fund
shall have furnished to the Target Fund a certificate signed by the Acquiring Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any
A-12
Assistant Treasurer, dated as of the Closing Date, certifying that, as of the Valuation Time and as of the Closing Date, all representations and warranties of the Acquiring Fund made in this
Agreement are true and correct in all material respects with the same effect as if made at and as of such dates, and that the Acquiring Fund has complied with all of the agreements and satisfied all of the conditions on its part to be performed or
satisfied at or prior to each of such dates.
(e) That there shall not be any material litigation pending with respect to the matters contemplated by this Agreement.
(f) That the Target Fund shall have received the opinion
of Miles & Stockbridge P.C., special Maryland counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is validly
existing as a corporation under the laws of the State of Maryland and in good standing under the laws of the State of Maryland and has the corporate power to conduct its business as described in the definitive Joint Proxy Statement/Prospectus filed
with the SEC pursuant to Rule 424(b) under the 1933 Act.
(ii) The Acquiring Fund has the corporate power and authority to execute and deliver the Agreement and to
perform all of its obligations under the Agreement under the applicable laws of the State of Maryland. The execution and delivery of the Agreement and the consummation by the Acquiring Fund of the transactions contemplated hereby have been duly
authorized by all requisite corporate action on the part of the Acquiring Fund under the laws of the State of Maryland and the Acquiring Funds charter.
(iii) (iii) The execution and delivery by the Acquiring Fund of this Agreement did not, and the performance of
the Acquiring Funds obligations under the Agreement will not violate, the Acquiring Funds charter or By-laws.
(iv) Neither the execution, delivery or performance by the Acquiring Fund of the Agreement nor the compliance by
the Acquiring Fund with the terms and provisions thereof will violate any provision of law of the State of Maryland applicable to the Acquiring Fund.
(v) (v) Assuming that the Acquiring Fund Shares will be issued and delivered in accordance with the terms of
this Agreement, the Acquiring Fund Shares to be issued and delivered to the Target Fund Shareholders as provided by this Agreement are duly authorized and upon such delivery will be validly issued and fully paid and
non-assessable, and no shareholder of the Acquiring Fund has, as such holder, any preemptive rights to acquire, purchase or subscribe for any securities of the Acquiring Fund under the Acquiring Funds
charter, By-laws or the Maryland General Corporation Law.
(g) That the Target Fund shall have received the opinion of Willkie, counsel to the Acquiring Fund, dated as of the Closing
Date, addressed to the Target Fund, that substantively provides the following:
(i) The Acquiring Fund is registered with the SEC as a closed-end
management investment company under the 1940 Act.
(ii) To the best of such counsels knowledge, no governmental approval, which has not been obtained and is
not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Acquiring Fund, or the enforceability of the Agreement against the Acquiring Fund.
(iii) Neither the execution, delivery or
performance by the Acquiring Fund of the Agreement nor the compliance by the Acquiring Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
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(h) That the Target Fund shall have obtained an opinion from counsel for the
Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in Section 368(a) of the Code.
(i) That all proceedings taken by the Acquiring
Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Target Fund.
(j) That the N-14 Registration Statement shall have become effective under the 1933 Act,
and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Acquiring Fund, be contemplated by the SEC.
(k) That the liquidity provider for the Target Fund VRDP Shares shall have consented to this Agreement.
(l) That the Acquiring Fund VMTP Refinancing shall have
been consummated prior to the Closing Date.
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CONDITIONS OF THE ACQUIRING FUND.
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The obligations of the Acquiring Fund hereunder shall be subject to the following conditions:
(a) That this Agreement shall have been approved by the
Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund VMTP Holders, voting as a separate class, of the majority percent of the outstanding Acquiring Fund VMTP Shares.
(b) That the issuance of additional Acquiring Fund
Common Shares in connection with the Reorganization shall have been approved by the Board of the Acquiring Fund and by the affirmative vote of the Acquiring Fund Common Shareholders and the Acquiring Fund VMTP Holders, voting as a single class, of a
majority of shares present or represented by proxy.
(c) The Target Fund shall have delivered (including in electronic format) to the Acquiring Fund (i) a copy of the
resolutions approving this Agreement adopted by the Board of the Target Fund, (ii) a certificate setting forth the vote of the Target Fund Common Shareholders and the Target Fund VRDP Holders, voting as a single class, approving this Agreement,
and the vote of the Target Fund VRDP Holders, voting as a separate class, approving this Agreement, and (iii) a certificate certifying that the Target Fund has received all requisite consents and approvals necessary to consummate the
Reorganization, each certified by the Target Funds Secretary or any Assistant Secretary.
(d) That the Target Fund shall have provided or made available (including by electronic format) to the Acquiring Fund the Target
Fund Closing Financial Statements, together with a schedule of the Target Funds investments with their respective dates of acquisition and tax costs, all as of the Valuation Time, certified on the Target Funds behalf by its Chief
Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, and a certificate signed the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer,
Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation Time and as of the Closing Date there has been no material adverse change in the financial position of the Target Fund since the date of the
Target Funds most recent Annual Report or Semi-Annual Report, as applicable, other than changes in the Target Fund Investments since that date or changes in the market value of the Target Fund Investments.
(e) That the Target Fund shall have furnished to the
Acquiring Fund a certificate signed by the Target Funds Chief Executive Officer, President, any Vice President, Chief Financial Officer, Treasurer or any Assistant Treasurer, dated as of the Closing Date, certifying that as of the Valuation
Time and as of the Closing Date all representations and warranties of the Target Fund made in this Agreement are true and correct in all material respects with the same effect as if made at and as of such dates and the Target Fund has complied with
all of the agreements and satisfied all of the conditions on its part to be performed or satisfied at or prior to such dates.
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(f) That there shall not be any material litigation pending with respect to the
matters contemplated by this Agreement.
(g) That
the Acquiring Fund shall have received the opinion of Morgan, Lewis & Bockius LLP, special Massachusetts counsel to the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that substantively provides the following:
(i) The Target Fund is validly
existing as a voluntary association with transferable shares commonly referred to a Massachusetts business trust under the laws of the Commonwealth of Massachusetts and is in good standing with the office of the Secretary of the Commonwealth of
Massachusetts.
(ii) The Target Fund
has the power and authority under its Declaration of Trust and the laws of the Commonwealth of Massachusetts applicable to business trusts to execute and deliver the Agreement and perform all of its obligations under the Agreement. The execution and
delivery of the Agreement and the consummation by the Target Fund of the transactions contemplated thereby have been duly authorized by all necessary action on the part of the Target Fund under the laws of the Commonwealth of Massachusetts
applicable to business trusts and the Target Funds Declaration of Trust.
(iii) The Agreement has been duly executed and delivered by the Target Fund.
(iv) The execution and delivery by the
Target Fund of the Agreement did not, and the performance of the Target Funds obligations under the Agreement, will not violate the Declaration of Trust or the By-laws of the Target Fund.
(v) Neither the execution, delivery or
performance by the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will violate any provision of any applicable law of the Commonwealth of Massachusetts applicable to business trusts.
(h) That the Target Fund shall have received the opinion
of Willkie, counsel to the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund, that substantively provides the following:
(i) The Target Fund is registered with the SEC as a closed-end
management investment company under the 1940 Act.
(ii) To the best of such counsels knowledge, no governmental approval, which has not been obtained and is
not in full force and effect, is required to authorize, or is required in connection with, the execution or delivery of the Agreement by the Target Fund, or the enforceability of the Agreement against the Target Fund.
(iii) Neither the execution, delivery or
performance by the Target Fund of the Agreement nor the compliance by the Target Fund with the terms and provisions thereof will contravene any provision of applicable federal securities law of the United States of America.
(i) That the Acquiring Fund shall have obtained an
opinion from counsel for the Target Fund, dated as of the Closing Date, addressed to the Acquiring Fund, that the consummation of the transactions set forth in this Agreement complies with the requirements of a reorganization as described in
Section 368(a) of the Code.
(j) That all
proceedings taken by the Target Fund and its counsel in connection with the Reorganization and all documents incidental thereto shall be satisfactory in form and substance to the Acquiring Fund.
(k) That the
N-14 Registration Statement shall have become effective under the 1933 Act and no stop order suspending such effectiveness shall have been instituted or, to the knowledge of the Target Fund, be contemplated by
the SEC.
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(l) That prior to the Closing Date, the Target Fund shall have declared a dividend
or dividends which, together with all such previous dividends, shall have the effect of distributing to the Target Fund Common Shareholders entitled to such dividends (i) all of its investment company taxable income to and including the Closing
Date, if any (computed without regard to any deduction for dividends paid), (ii) all of its net capital gain, if any, recognized to and including the Closing Date and (iii) the excess of its interest income excludable from gross income
under Section 103(a) of the Code, if any, over its deductions disallowed under Sections 265 and 171(a)(2) of the Code for the period to and including the Closing Date. The Target Fund may pay amounts in respect of such UNII Distributions in one
or more distributions to Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date. In addition, the Acquiring Fund may pay amounts in respect of such UNII Distributions on behalf of the Target Fund to the
Target Fund Common Shareholders entitled to receive such UNII Distributions after the Closing Date as an agent of the Target Fund out of cash or other short-term liquid assets maturing prior to the payment date of the UNII Distributions acquired
from the Target Fund in the Reorganization, segregated for this purpose and maintained in an amount at least equal to the remaining payment obligations in respect of the UNII Distributions.
(m) That the liquidity provider, remarketing agent,
tender and paying agent and the rating agencies for the Acquiring Fund VRDP Shares shall have consented to any amendments to the Statement of Preferences, the Notice of Special Rate Period for the Acquiring Fund VRDP Shares, share certificates
representing Acquiring Fund VRDP Shares and such other agreements, instruments or documents relating to the Acquiring Fund VRDP Shares that are necessary to reflect the issuance of additional Acquiring Fund VMTP Shares in connection with the
Reorganization, but only to the extent such consent is required under the Related Documents (as defined in the Statement of Preferences).
(n) That the Acquiring Fund VMTP Refinancing shall have been consummated prior to the Closing Date.
10.
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TERMINATION, POSTPONEMENT AND WAIVERS.
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(a) Notwithstanding anything contained in this Agreement to the contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after adoption thereof by the shareholders of the Target Fund and the Acquiring Fund) prior to the Closing Date, or the Closing Date may be postponed, (i) by mutual consent of the Boards
of the Acquiring Fund and the Target Fund; (ii) by the Board of the Target Fund if any condition of the Target Funds obligations set forth in Section 8 of this Agreement has not been fulfilled or waived by such Board; and
(iii) by the Board of the Acquiring Fund if any condition of the Acquiring Funds obligations set forth in Section 9 of this Agreement has not been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement
have not been consummated by [], this Agreement automatically shall terminate on that date, unless a later date is mutually agreed to by the Boards of the Acquiring Fund and the Target Fund.
(c) In the event of termination of this Agreement
pursuant to the provisions hereof, the same shall become void and have no further effect, and there shall not be any liability on the part of any Fund or its respective directors, trustees, officers, agents or shareholders in respect of this
Agreement other than with respect to Section 11 and payment by each Fund of its respective expenses incurred in connection with the Reorganization.
(d) At any time prior to the Closing Date, any of the terms or conditions of this Agreement may be waived by the Board of the
Acquiring Fund or the Target Fund (whichever is entitled to the benefit thereof), if, in the judgment of such Board after consultation with its counsel, such action or waiver will not have a material adverse effect on the benefits intended under
this Agreement to the shareholders of their respective Fund, on behalf of which such action is taken.
(e) The respective representations and warranties contained in Sections 1 and 2 of this Agreement shall expire with, and be
terminated by, the consummation of the Reorganization, and neither the Funds, nor any of their respective officers, directors, trustees, agents or shareholders shall have any liability with respect to such representations or warranties after the
Closing Date. This provision shall not protect any officer, director, trustee, agent or shareholder of either of the Funds against any liability to the entity for which that officer, director, trustee,
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agent or shareholder so acts or to its shareholders, to which that officer, director, trustee, agent or shareholder otherwise would be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of his or her duties in the conduct of such office.
(f) If any order or orders of the SEC with respect to this Agreement shall be issued prior to the Closing Date and shall impose
any terms or conditions which are determined by action of the Boards of the Acquiring Fund and the Target Fund to be acceptable, such terms and conditions shall be binding as if a part of this Agreement without further vote or approval of the Target
Fund Shareholders and the Acquiring Fund Shareholders unless such terms and conditions shall result in a change in the method of computing the number of Acquiring Fund Shares to be issued to the Target Fund Shareholders, in which event, unless such
terms and conditions shall have been included in the proxy solicitation materials furnished to the Target Fund Shareholders prior to the meeting at which the Reorganization shall have been approved, this Agreement shall not be consummated and shall
terminate unless the Target Fund promptly shall call a special meeting of the Target Fund Shareholders at which such conditions so imposed shall be submitted for approval.
(a) Each party (an Indemnitor) shall indemnify and hold the other and its officers, directors, trustees,
agents and persons controlled by or controlling any of them (each an Indemnified Party) harmless from and against any and all losses, damages, liabilities, claims, demands, judgments, settlements, deficiencies, taxes, assessments,
charges, costs and expenses of any nature whatsoever (including reasonable attorneys fees) including amounts paid in satisfaction of judgments, in compromise or as fines and penalties, and counsel fees reasonably incurred by such Indemnified
Party in connection with the defense or disposition of any claim, action, suit or other proceeding, whether civil or criminal, before any court or administrative or investigative body in which such Indemnified Party may be or may have been involved
as a party or otherwise or with which such Indemnified Party may be or may have been threatened (collectively, the Losses) arising out of or related to any claim of a breach of any representation, warranty or covenant made herein
by the Indemnitor; provided, however, that no Indemnified Party shall be indemnified hereunder against any Losses arising directly from such Indemnified Partys (i) willful misfeasance, (ii) bad faith, (iii) gross
negligence or (iv) reckless disregard of the duties involved in the conduct of such Indemnified Partys position.
(b) The Indemnified Party shall use its best efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought hereunder. The Indemnified Party shall give written notice to Indemnitor within the earlier of ten (10) days of receipt of written notice to the Indemnified Party or
thirty (30) days from discovery by the Indemnified Party of any matters which may give rise to a claim for indemnification or reimbursement under this Agreement. The failure to give such notice shall not affect the right of the Indemnified
Party to indemnity hereunder unless such failure has materially and adversely affected the rights of the Indemnitor. At any time after ten (10) days from the giving of such notice, the Indemnified Party may, at its option, resist, settle or
otherwise compromise, or pay such claim unless it shall have received notice from the Indemnitor that the Indemnitor intends, at the Indemnitors sole cost and expense, to assume the defense of any such matter, in which case the Indemnified
Party shall have the right, at no cost or expense to the Indemnitor, to participate in such defense. If the Indemnitor does not assume the defense of such matter, and in any event until the Indemnitor states in writing that it will assume the
defense, the Indemnitor shall pay all costs of the Indemnified Party arising out of the defense until the defense is assumed; provided, however, that the Indemnified Party shall consult with the Indemnitor and obtain indemnitors
prior written consent to any payment or settlement of any such claim. The Indemnitor shall keep the Indemnified Party fully apprised at all times as to the status of the defense. If the Indemnitor does not assume the defense, the Indemnified Party
shall keep the Indemnitor apprised at all times as to the status of the defense. Following indemnification as provided for hereunder, the Indemnitor shall be subrogated to all rights of the Indemnified Party with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
(a) All covenants, agreements, representations and warranties made under this Agreement and any certificates delivered pursuant
to this Agreement shall be deemed to have been material and relied upon by each of the parties, notwithstanding any investigation made by them or on their behalf.
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(b) All notices hereunder shall be sufficiently given for all purposes hereunder
if in writing and delivered personally or sent by registered mail or certified mail, postage prepaid. Notice to the Target Fund shall be addressed to BlackRock MuniHoldings Investment Quality Fund c/o BlackRock Advisors, LLC, 40 East 52nd Street,
New York, New York 10022, Attention: Janey Ahn, Secretary of the Target Fund or at such other address as the Target Fund may designate by written notice to the Acquiring Fund. Notice to the Acquiring Fund shall be addressed to BlackRock Municipal
Income Fund, Inc. c/o BlackRock Advisors, LLC, 40 East 52nd Street New York, New York 10022, Attention: Janey Ahn, Secretary of the Acquiring Fund, or at such other address and to the attention of such other person as the Acquiring Fund may
designate by written notice to the Target Fund. Any notice shall be deemed to have been served or given as of the date such notice is delivered personally or mailed.
(c) This Agreement supersedes all previous correspondence and oral communications between the Funds regarding the
Reorganization, constitutes the only understanding with respect to the Reorganization, may not be changed except by a letter of agreement signed by each Fund and shall be governed by and construed in accordance with the laws of the State of New York
applicable to agreements made and to be performed in said state.
(d) This Agreement may be amended or modified by the parties hereto prior to the Closing Date, by action taken or authorized by
their respective Boards at any time before or after adoption of this Agreement and approval of the Reorganization by the Target Fund Shareholders or the Acquiring Fund Shareholders, but, after any such adoption and approval, no amendment or
modification shall be made which by law requires further approval by shareholders without such further approval. This Agreement may not be amended or modified except by an instrument in writing signed on behalf of each of the Funds.
(e) This Agreement is not intended to confer upon any
person other than the parties hereto (or their respective successors and assigns) any rights, remedies, obligations or liabilities hereunder. If any provision of this Agreement shall be held or made invalid by statute rule, regulation, decision of a
tribunal or otherwise, the remainder of this Agreement shall not be affected thereby and, to such extent, the provisions of this Agreement shall be deemed severable provided that this Agreement shall be deemed modified to give effect to the fullest
extent permitted under applicable law to the intentions of the party as reflected by this Agreement prior to the invalidity of such provision.
(f) The parties hereto are put on notice that the Declaration of Trust of the Target Fund is on file with the Secretary of the
Commonwealth of Massachusetts and it is expressly agreed that the obligations of the Funds hereunder shall not be binding upon any of their respective directors, trustees, shareholders, nominees, officers, agents, or employees personally, but shall
bind only the property of the respective Fund. The execution and delivery of this Agreement has been authorized by the Boards of the Acquiring Fund and the Target Fund and signed by an authorized officer of each of the Acquiring Fund and the Target
Fund, acting as such, and neither such authorization by such Board nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind
only the trust property of each Fund.
(g) This
Agreement may be executed in any number of counterparts, each of which, when executed and delivered, shall be deemed to be an original but all such counterparts together shall constitute but one instrument.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be executed and delivered by their
duly authorized officers as of the day and year first written above.
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BLACKROCK MUNICIPAL INCOME FUND, INC.
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By:
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Name:
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Title:
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BLACKROCK MUNIHOLDINGS INVESTMENT QUALITY FUND
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By:
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Name:
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Title:
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APPENDIX B
FUNDAMENTAL AND NON-FUNDAMENTAL
INVESTMENT RESTRICTIONS
Acquiring Fund (MUI)
The following are fundamental investment restrictions of the Acquiring Fund and
may not be changed without the approval of the holders of a majority of the Acquiring Funds outstanding common shares and outstanding preferred shares, voting together as a single class, and a majority of the outstanding preferred shares,
voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67% of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are
represented or (ii) more than 50% of the outstanding shares of each class of shares). The Acquiring Fund may not:
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1.
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Make investments for the purpose of exercising control or management;
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2.
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Purchase or sell real estate, commodities or commodity contracts except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests
therein or issued by entities that invest in real estate or interests therein, and the Fund may purchase and sell financial futures contracts and options thereon;
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3.
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Issue senior securities or borrow money except as permitted by Section 18 of the 1940 Act;
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4.
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Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in selling portfolio securities;
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5.
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Make loans to other persons, except (i) the Fund shall not be deemed to be making a loan to the extent that the Fund purchases Municipal Bonds or other debt instruments or enters into repurchase agreements or any
similar instruments and (ii) the Fund may lend its portfolio securities in an amount not in excess of 33 1/3% of its total assets, taken at market value, provided that such loans shall be
made in accordance with the guidelines set forth in the Funds prospectus; or
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6.
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Invest more than 25% of its total assets (taken at market value at the time of each investment) in the securities of issuers in a single industry; provided that, for purposes of this restriction, tax-exempt securities of issuers that are states, municipalities or their political subdivisions are not considered to be the securities of issuers in any single industry.
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In addition to the foregoing fundamental investment policies, the Acquiring
Fund is also subject to the following non-fundamental restrictions and policies, which may be changed by the Board without shareholder approval. The Acquiring Fund may not:
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a)
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Purchase securities of other investment companies, except to the extent that such purchases are permitted by applicable law. Applicable law currently prohibits the Fund from purchasing the securities of other investment
companies except if immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company is owned by the Fund, (ii) 5% of the Funds total assets, taken at market value, would be invested in any one such company,
(iii) 10% of the Funds total assets, taken at market value, would be invested in such securities and provided that the Fund, together with other investment companies having the same investment adviser and companies controlled by such
companies, owns not more than 10% of the total outstanding stock of any one closed-end investment company;
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b)
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Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in investment
restriction (3) above or except as may be necessary in connection with transactions described under The Acquiring Funds InvestmentsInvestment Objectives and Policies of the Joint Proxy Statement/Prospectus; or
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B-1
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c)
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Purchase any securities on margin, except that the Fund may obtain such short term credit as may be necessary for the clearance of purchases and sales of portfolio securities (the deposit or payment by the Fund of
initial or variation margin in connection with financial futures contracts and options thereon is not considered the purchase of a security on margin).
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If a percentage restriction on the investment policies or the investment or use of assets set forth above is adhered to at the time a transaction is
effected, later changes in percentage resulting from changing values will not be considered a violation.
The Acquiring Fund is currently classified as a diversified fund under the 1940 Act. This means that the Acquiring Fund may not purchase
securities of an issuer (other than (i) obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities and (ii) securities of other investment companies) if, with respect to 75% of its total assets,
(a) more than 5% of the Acquiring Funds total assets would be invested in securities of that issuer or (b) the Acquiring Fund would hold more than 10% of the outstanding voting securities of that issuer. With respect to the remaining
25% of its total assets, the Acquiring Fund can invest more than 5% of its assets in one issuer. Under the 1940 Act, the Acquiring Fund cannot change its classification from diversified
to non-diversified without shareholder approval.
Target Fund (MFL)
The following are fundamental investment restrictions of MFL and may not be changed without the approval of the holders of a majority of MFLs
outstanding common shares and outstanding preferred shares, voting together as a single class, and a majority of the outstanding preferred shares, voting as a separate class (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of each class of shares represented at a meeting at which more than 50% of the outstanding shares of each class of shares are represented or (ii) more than 50% of the outstanding shares of each class of shares). MFL may not:
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1.
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Make investments for the purpose of exercising control or management;
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2.
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Purchase or sell real estate, commodities or commodity contracts; provided, that the Fund may invest in securities secured by real estate or interests therein or issued by companies that invest in real estate or
interests therein, and the Fund may purchase and sell financial futures contracts and options thereon;
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3.
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Issue senior securities or borrow money except as permitted by Section 18 of the 1940 Act;
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4.
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Underwrite securities of other issuers except insofar as the Fund may be deemed an underwriter under the Securities Act of 1933, as amended, in selling portfolio securities;
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5.
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Make loans to other persons, except that the Fund may purchase Florida Municipal Bonds, Municipal Bonds and other debt securities and enter into repurchase agreements in accordance with its investment objective,
policies and limitations; or
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6.
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Invest more than 25% of its total assets (taken at market value at the time of each investment) in securities of issuers in a single industry; provided, that for purposes of this restriction, states, municipalities and
their political subdivisions are not considered to be part of any industry.
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For purposes of restriction (6), the exception for states, municipalities and the political subdivisions applies only to
tax-exempt securities issued by such entities.
In addition to the foregoing fundamental investment policies, MFL is also subject to the following
non-fundamental restrictions and policies, which may be changed by the Board without shareholder approval. MFL may not:
B-2
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1.
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Purchase securities of other investment companies, except to the extent that such purchases are permitted by applicable law. Applicable law currently prohibits a Fund from purchasing the securities of other investment
companies except if immediately thereafter not more than (i) 3% of the total outstanding voting stock of such company is owned by the Fund, (ii) 5% of the Funds total assets, taken at market value, would be invested in any one such company,
(iii) 10% of the Funds total assets, taken at market value, would be invested in such securities, and (iv) the Fund, together with other investment companies having the same investment adviser and companies controlled by such companies,
owns not more than 10% of the total outstanding stock of any one closed-end investment company;
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2.
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Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any securities owned or held by the Fund except as may be necessary in connection with borrowings mentioned in investment
restriction (3) above or except as may be necessary in connection with transactions in financial futures contracts and options thereon;
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3.
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Purchase any securities on margin, except that a Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities (the deposit or payment by a Fund of initial
or variation margin in connection with financial futures contracts and options thereon is not considered the purchase of a security on margin); or
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4.
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Make short sales of securities or maintain a short position or invest in put, call, straddle or spread options, except that the Fund may write, purchase and sell options and futures on Florida Municipal Bonds, Municipal
Bonds, U.S. Government obligations and related indices or otherwise in connection with bona fide hedging activities and may purchase and sell Call Rights to require mandatory tender for the purchase of related Florida Municipal Bonds and Municipal
Bonds.
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If a percentage restriction on the investment
policies or the investment or use of assets set forth above is adhered to at the time a transaction is effected, later changes in percentage resulting from changing values will not be considered a violation.
B-3
APPENDIX C
DESCRIPTION OF BOND RATINGS
A Description of Moodys Investors Service, Inc.s (Moodys)
Global Rating Scales
Ratings assigned on Moodys global long-term
and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project
finance vehicles, and public sector entities. Moodys defines credit risk as the risk that an entity may not meet its contractual financial obligations as they come due and any estimated financial loss in the event of default or impairment. The
contractual financial obligations addressed by Moodys ratings are those that call for, without regard to enforceability, the payment of an ascertainable amount, which may vary based upon standard sources of variation (e.g., floating interest
rates), by an ascertainable date. Moodys rating addresses the issuers ability to obtain cash sufficient to service the obligation, and its willingness to pay. Moodys ratings do not address
non-standard sources of variation in the amount of the principal obligation (e.g., equity indexed), absent an express statement to the contrary in a press release accompanying an initial rating. Long-term
ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial loss suffered in the event of
default or impairment. Short-term ratings are assigned for obligations with an original maturity of thirteen months or less and reflect both on the likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment. Moodys issues ratings at the issuer level and instrument level on both the long-term scale and the short-term scale. Typically, ratings are made publicly available although private and
unpublished ratings may also be assigned.
Moodys differentiates
structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial corporate, financial institution, and public sector entities) on the global long-term scale by adding (sf) to all structured finance ratings. The addition of (sf) to
structured finance ratings should eliminate any presumption that such ratings and fundamental ratings at the same letter grade level will behave the same. The (sf) indicator for structured finance security ratings indicates that otherwise similarly
rated structured finance and fundamental securities may have different risk characteristics. Through its current methodologies, however, Moodys aspires to achieve broad expected equivalence in structured finance and fundamental rating
performance when measured over a long period of time.
Description of Moodys
Global Long-Term Rating Scale
Aaa
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Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
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Aa
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Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
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A
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Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
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Baa
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Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
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Ba
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Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
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B
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Obligations rated B are considered speculative and are subject to high credit risk.
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Caa
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Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
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Ca
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Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
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C
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Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
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C-1
Note: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in
the lower end of that generic rating category. Additionally, a (hyb) indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
By their terms, hybrid securities allow for the omission of scheduled
dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that could result in impairment. Together
with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Description of Moodys Global Short-Term Rating Scale
P-1
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Ratings of Prime-1 reflect a superior ability to repay short-term obligations.
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P-2
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Ratings of Prime-2 reflect a strong ability to repay short-term obligations.
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P-3
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Ratings of Prime-3 reflect an acceptable ability to repay short-term obligations.
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NP
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Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
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Description of Moodys U.S. Municipal Short-Term Debt and Demand Obligation Ratings
Description of Moodys Short-Term Obligation Ratings
Moodys uses the global short-term Prime rating scale for commercial paper
issued by U.S. municipalities and nonprofits. These commercial paper programs may be backed by external letters of credit or liquidity facilities, or by an issuers self-liquidity.
For other short-term municipal obligations, Moodys uses one of two other
short-term rating scales, the Municipal Investment Grade (MIG) and Variable Municipal Investment Grade (VMIG) scales discussed below.
Moodys uses the MIG scale for U.S. municipal cash flow notes, bond anticipation notes and certain other short-term obligations, which typically
mature in three years or less. Under certain circumstances, Moodys uses the MIG scale for bond anticipation notes with maturities of up to five years.
MIG Scale
MIG 1
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This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
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MIG 2
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This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
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MIG 3
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This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
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SG
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This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
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Description of Moodys Demand Obligation Ratings
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned. The components are a long-term rating and a short-term demand obligation rating. The long-term rating addresses the issuers ability to meet scheduled principal and interest
payments. The short-term demand obligation rating addresses the ability of the
C-2
issuer or the liquidity provider to make payments associated with the purchase-price-upon-demand feature (demand feature) of the VRDO. The short-term demand obligation rating uses the
VMIG scale. VMIG ratings with liquidity support use as an input the short-term Counterparty Risk Assessment of the support provider, or the long-term rating of the underlying obligor in the absence of third party liquidity support. Transitions of
VMIG ratings of demand obligations with conditional liquidity support differ from transitions on the Prime scale to reflect the risk that external liquidity support will terminate if the issuers long-term rating drops below investment grade.
Moodys typically assigns the VMIG short-term demand obligation
rating if the frequency of the demand feature is less than every three years. If the frequency of the demand feature is less than three years but the purchase price is payable only with remarketing proceeds, the short-term demand obligation rating
is NR.
VMIG Scale
VMIG 1
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This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment
of purchase price upon demand.
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VMIG 2
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This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
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VMIG 3
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This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely
payment of purchase price upon demand.
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SG
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This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have a sufficiently strong short-term rating or may lack the
structural or legal protections necessary to ensure the timely payment of purchase price upon demand.
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Description of S&P Global Ratings (S&P), a Division of S&P Global Inc., Issue Credit Ratings
An S&P issue credit rating is a forward-looking opinion about the
creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program (including ratings on medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and takes into account the currency in which the obligation is denominated. The opinion reflects S&Ps view of the
obligors capacity and willingness to meet its financial commitments as they come due, and this opinion may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
Issue credit ratings can be either long-term or short-term. Short-term issue
credit ratings are generally assigned to those obligations considered short-term in the relevant market, typically with an original maturity of no more than 365 days. Short-term issue credit ratings are also used to indicate the creditworthiness of
an obligor with respect to put features on long-term obligations. S&P would typically assign a long-term issue credit rating to an obligation with an original maturity of greater than 365 days. However, the ratings S&P assigns to certain
instruments may diverge from these guidelines based on market practices. Medium-term notes are assigned long-term ratings.
Issue credit ratings are based, in varying degrees, on S&Ps analysis of the following considerations:
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The likelihood of paymentthe capacity and willingness of the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
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The nature and provisions of the financial obligation, and the promise S&P imputes; and
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The protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors
rights.
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C-3
An issue rating is an assessment of default risk but may incorporate an assessment of relative seniority
or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and
subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
Long-Term Issue Credit Ratings*
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AAA
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An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitments on the obligation is extremely strong.
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AA
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An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its financial commitments on the obligation is very strong.
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A
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An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligors capacity to meet
its financial commitments on the obligation is still strong.
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BBB
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An obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken the obligors capacity to meet its financial commitments
on the obligation.
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BB, B, CCC, CC, and C
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Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and
C the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse conditions.
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BB
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An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions that could lead
to the obligors inadequate capacity to meet its financial commitments on the obligation.
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B
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An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitments on the obligation. Adverse business,
financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitments on the obligation.
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CCC
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An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitments on the obligation.
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CC
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An obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred but S&P expects default to be a virtual certainty, regardless of the
anticipated time to default.
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C
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An obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared with obligations that are rated higher.
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D
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An obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an
obligation are not made on the date due, unless S&P believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The
D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is
lowered to D if it is subject to a distressed debt restructuring.
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C-4
*
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Ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the rating categories.
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Short-Term Issue Credit Ratings
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A-1
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A short-term obligation rated A-1 is rated in the highest category by S&P. The obligors capacity to meet its financial commitments on the obligation is strong. Within
this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitments on these obligations is extremely strong.
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A-2
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A short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating
categories. However, the obligors capacity to meet its financial commitments on the obligation is satisfactory.
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A-3
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A short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to weaken an
obligors capacity to meet its financial commitments on the obligation.
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B
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A short-term obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing
uncertainties that could lead to the obligors inadequate capacity to meet its financial commitments.
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C
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A short-term obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitments on the
obligation.
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D
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A short-term obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used when payments on an
obligation are not made on the date due, unless S&P believes that such payments will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business days. The D
rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to
D if it is subject to a distressed debt restructuring.
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Description of S&Ps Municipal Short-Term Note
Ratings
An S&P U.S. municipal note rating reflects S&Ps
opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most likely receive a long-term debt
rating. In determining which type of rating, if any, to assign, S&Ps analysis will review the following considerations:
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Amortization schedulethe larger the final maturity relative to other maturities, the more likely it will be treated as a note; and
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Source of paymentthe more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
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S&Ps municipal short-term note rating symbols are as
follows:
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SP-1
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Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
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SP-2
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Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
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C-5
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SP-3
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Speculative capacity to pay principal and interest.
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D
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D is assigned upon failure to pay the note when due, completion of a distressed debt restructuring, or the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a
virtual certainty, for example due to automatic stay provisions.
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Description of Fitch Ratings
(Fitchs) Credit Ratings Scales
Fitch Ratings
publishes opinions on a variety of scales. The most common of these are credit ratings, but the agency also publishes ratings, scores and other relative opinions relating to financial or operational strength. For example, Fitch also provides
specialized ratings of servicers of residential and commercial mortgages, asset managers and funds. In each case, users should refer to the definitions of each individual scale for guidance on the dimensions of risk covered in each assessment.
Fitchs credit ratings relating to issuers are an opinion on the relative
ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings relating to securities and obligations of an issuer can include a
recovery expectation. Credit ratings are used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The agencys credit ratings cover the global spectrum of
corporate, sovereign financial, bank, insurance, and public finance entities (including supranational and sub-national entities) and the securities or other obligations they issue, as well as structured
finance securities backed by receivables or other financial assets.
The
terms investment grade and speculative grade have established themselves over time as shorthand to describe the categories AAA to BBB (investment grade) and BB to D (speculative
grade). The terms investment grade and speculative grade are market conventions and do not imply any recommendation or endorsement of a specific security for investment purposes. Investment grade categories indicate relatively low to moderate credit
risk, while ratings in the speculative categories either signal a higher level of credit risk or that a default has already occurred.
For the convenience of investors, Fitch may also include issues relating to a rated issuer that are not and have not been rated on its web page. Such
issues are also denoted as NR.
Credit ratings express risk in
relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss. For information about the historical performance of ratings please refer to Fitchs Ratings
Transition and Default studies which detail the historical default rates and their meaning. The European Securities and Markets Authority also maintains a central repository of historical default rates.
Fitchs credit ratings do not directly address any risk other than credit
risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market considerations. However, in terms of payment obligation on the rated liability, market
risk may be considered to the extent that it influences the ability of an issuer to pay upon a commitment.
Ratings nonetheless do not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a
commitment (for example, in the case of index-linked bonds).
In the
default components of ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instruments
documentation. In limited cases, Fitch may include additional considerations (i.e. rate to a higher or lower standard than that implied in the obligations documentation).
The primary credit rating scales can be used to provide a rating of privately
issued obligations or certain note issuance programs or for private ratings. In this case the rating is not published, but only provided to the issuer or its agents in the form of a rating letter.
C-6
The primary credit rating scales may also be used to provide ratings for a more narrow scope, including
interest strips and return of principal or in other forms of opinions such as credit opinions or rating assessment services. Credit opinions are either a notch- or category-specific view using the primary rating scale and omit one or more
characteristics of a full rating or meet them to a different standard. Credit opinions will be indicated using a lower case letter symbol combined with either an * (e.g. bbb+*) or (cat) suffix to denote the opinion status.
Credit opinions will be point-in-time typically but may be monitored if the analytical group believes information will be sufficiently available. Rating assessment
services are a notch-specific view using the primary rating scale of how an existing or potential rating may be changed by a given set of hypothetical circumstances. While credit opinions and rating assessment services are point-in-time and are not monitored, they may have a directional watch or outlook assigned, which can signify the trajectory of the credit profile.
Description of Fitchs Long-Term Corporate Finance Obligations Rating Scales
Ratings of individual securities or financial obligations of a corporate issuer
address relative vulnerability to default on an ordinal scale. In addition, for financial obligations in corporate finance, a measure of recovery given default on that liability is also included in the rating assessment. This notably applies to
covered bonds ratings, which incorporate both an indication of the probability of default and of the recovery given a default of this debt instrument. On the contrary, Ratings of
debtor-in-possession (DIP) obligations incorporate the expectation of full repayment.
The relationship between the issuer scale and obligation scale assumes a
generic historical average recovery. Individual obligations can be assigned ratings higher, lower, or the same as that entitys issuer rating or issuer default rating (IDR), based on their relative ranking, relative vulnerability to
default or based on explicit Recovery Ratings.
As a result, individual
obligations of entities, such as corporations, are assigned ratings higher, lower, or the same as that entitys issuer rating or IDR, except DIP obligation ratings that are not based off an IDR. At the lower end of the ratings scale, Fitch
publishes explicit Recovery Ratings in many cases to complement issuer and obligation ratings.
Fitch long-term obligations rating scales are as follows:
AAA
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Highest Credit Quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is
highly unlikely to be adversely affected by foreseeable events.
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AA
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Very High Credit Quality. AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
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A
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High Credit Quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse
business or economic conditions than is the case for higher ratings.
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BBB
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Good Credit Quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic
conditions are more likely to impair this capacity.
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BB
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Speculative. BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial
alternatives may be available to allow financial commitments to be met.
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B
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Highly Speculative. B ratings indicate that material credit risk is present.
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CCC
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Substantial Credit Risk. CCC ratings indicate that substantial credit risk is present.
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CC
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Very High Levels of Credit Risk. CC ratings indicate very high levels of credit risk.
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C
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Exceptionally High Levels of Credit Risk. C indicates exceptionally high levels of credit risk.
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C-7
Within rating categories, Fitch may use modifiers. The modifiers + or - may be
appended to a rating to denote relative status within major rating categories.
For example, the rating category AA has three notch-specific rating levels (AA+; AA; AA; each a
rating level). Such suffixes are not added to AAA ratings and ratings below the CCC category. For the short-term rating category of F1, a + may be appended.
Description of Fitchs Short-Term Ratings Assigned to Issuers and Obligations
A short-term issuer or obligation rating is based in all cases on the short-term
vulnerability to default of the rated entity and relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss severity. Short-term
ratings are assigned to obligations whose initial maturity is viewed as short term based on market convention. Typically, this means up to 13 months for corporate, sovereign, and structured obligations and up to 36 months for obligations
in U.S. public finance markets.
Fitch short-term ratings are as follows:
F1
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Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added + to denote any exceptionally strong credit feature.
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F2
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Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial commitments.
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F3
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Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate.
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B
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Speculative Short-Term Credit Quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse changes in financial and economic conditions.
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C
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High Short-Term Default Risk. Default is a real possibility.
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RD
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Restricted Default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial obligations. Typically applicable to entity ratings only.
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D
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Default. Indicates a broad-based default event for an entity, or the default of a short-term obligation.
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C-8