Western Asset Municipal Defined Opportunity Trust Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
|
Virginia — continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Virginia State Small Business Financing Authority Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bon Secours Mercy Health, Series A, Refunding
|
|
|
4.000
|
%
|
|
|
12/1/49
|
|
|
$
|
600,000
|
|
|
$
|
657,612
|
|
|
Senior Lien, Elizabeth River Crossings OpCo LLC Project
|
|
|
5.000
|
%
|
|
|
7/1/23
|
|
|
|
1,775,000
|
|
|
|
1,855,832
|
(a)
|
|
Total Virginia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900,652
|
|
|
Washington — 1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Port of Seattle, WA, Intermediate Lien Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 2019
|
|
|
5.000
|
%
|
|
|
4/1/34
|
|
|
|
750,000
|
|
|
|
895,403
|
(a)
|
|
Series A
|
|
|
5.000
|
%
|
|
|
5/1/36
|
|
|
|
500,000
|
|
|
|
575,085
|
(a)
|
|
Washington State Health Care Facilities Authority Revenue, Commonspirit Health, Series B, Refunding
|
|
|
5.000
|
%
|
|
|
8/1/26
|
|
|
|
300,000
|
|
|
|
344,976
|
(b)(c)
|
|
Washington State HFC, Non-Profit Housing Revenue, Heron’s Key, Series
A
|
|
|
6.000
|
%
|
|
|
7/1/25
|
|
|
|
675,000
|
|
|
|
688,250
|
(d)
|
|
Washington State, GO, Series R, 2018D, Refunding
|
|
|
5.000
|
%
|
|
|
8/1/33
|
|
|
|
1,000,000
|
|
|
|
1,261,100
|
|
|
Total Washington
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,764,814
|
|
|
West Virginia — 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
West Virginia University Revenue, West Virginia Projects, Series B, Refunding
|
|
|
5.000
|
%
|
|
|
10/1/29
|
|
|
|
400,000
|
|
|
|
507,476
|
(b)(c)
|
|
Wisconsin — 1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mount Pleasant, WI, Tax Increment Revenue, Series A
|
|
|
5.000
|
%
|
|
|
4/1/43
|
|
|
|
750,000
|
|
|
|
921,825
|
|
|
Public Finance Authority, WI, Limited Obligation Pilot Revenue, American Dream @ Meadowlands Project, Series
2017
|
|
|
5.000
|
%
|
|
|
12/1/27
|
|
|
|
750,000
|
|
|
|
662,843
|
(d)
|
|
Public Finance Authority, WI, Revenue, Series A, AGM
|
|
|
5.000
|
%
|
|
|
7/1/44
|
|
|
|
1,000,000
|
|
|
|
1,152,950
|
|
|
Total Wisconsin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,737,618
|
|
|
Total Investments before Short-Term Investments (Cost —
$227,580,575)
|
|
|
|
243,075,799
|
|
|
Short-Term Investments — 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds — 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indiana — 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indiana State Finance Authority Hospital Revenue, Parkview Health System Obligated Group, Series D, LOC - Wells Fargo
Bank N.A.
|
|
|
0.060
|
%
|
|
|
11/1/39
|
|
|
|
300,000
|
|
|
|
300,000
|
(h)(i)
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
15
|
Schedule of investments
(unaudited) (cont’d)
May 31, 2020
Western Asset Municipal Defined Opportunity Trust Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
|
Maryland — 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maryland State HEFA Revenue, University of Maryland Medical System, Series D, LOC - TD Bank N.A.
|
|
|
0.060
|
%
|
|
|
7/1/41
|
|
|
$
|
500,000
|
|
|
$
|
500,000
|
(h)(i)
|
|
Total Municipal Bonds (Cost — $800,000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
|
Money Market Funds — 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dreyfus Government Cash Management, Institutional Shares (Cost — $45,132)
|
|
|
0.095
|
%
|
|
|
|
|
|
|
45,132
|
|
|
|
45,132
|
|
|
Total Short-Term Investments (Cost — $845,132)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
845,132
|
|
|
Total Investments — 99.6% (Cost — $228,425,707)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
243,920,931
|
|
|
Other Assets in Excess of Liabilities — 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
895,136
|
|
|
Total Net Assets — 100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
244,816,067
|
|
|
*
|
Non-income producing security.
|
|
(a)
|
Income from this issue is considered a preference item for purposes of calculating the alternative minimum tax (“AMT”).
|
|
(b)
|
Maturity date shown represents the mandatory tender date.
|
|
(c)
|
Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published
reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.
|
|
(d)
|
Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors.
|
|
(e)
|
All or a portion of this security is held at the broker as collateral for open futures contracts.
|
|
(f)
|
Securities traded on a when-issued or delayed delivery basis.
|
|
(g)
|
The coupon payment on these securities is currently in default as of May 31, 2020.
|
|
(h)
|
Variable rate demand obligations (“VRDOs”) have a demand feature under which the Fund can tender them back to the issuer or liquidity provider on no
more than 7 days notice. The interest rate generally resets on a daily or weekly basis and is determined on the specific interest rate reset date by the Remarketing Agent, pursuant to a formula specified in official documents for the VRDO, or set at
the highest rate allowable as specified in official documents for the VRDO. VRDOs are benchmarked to the Securities Industry and Financial Markets Association (“SIFMA”) Municipal Swap Index. The SIFMA Municipal Swap Index is compiled from
weekly interest rate resets of tax-exempt VRDOs reported to the Municipal Securities Rulemaking Board’s Short-term Obligation Rate Transparency System.
|
|
(i)
|
Maturity date shown is the final maturity date. The security may be sold back to the issuer before final maturity.
|
See Notes to Financial Statements.
|
|
|
|
|
16
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
|
|
|
|
Abbreviation(s) used in this schedule:
|
|
|
|
|
AGM
|
|
— Assured Guaranty Municipal Corporation — Insured Bonds
|
|
|
|
|
BAM
|
|
— Build America Mutual — Insured Bonds
|
|
|
|
|
CAB
|
|
— Capital Appreciation Bonds
|
|
|
|
|
CDA
|
|
— Communities Development Authority
|
|
|
|
|
COP
|
|
— Certificates of Participation
|
|
|
|
|
CSCE
|
|
— Charter School Credit Enhancement
|
|
|
|
|
CWA
|
|
— Clean Water Act
|
|
|
|
|
DFA
|
|
— Development Finance Agency
|
|
|
|
|
EDA
|
|
— Economic Development Authority
|
|
|
|
|
GO
|
|
— General Obligation
|
|
|
|
|
GTD
|
|
— Guaranteed
|
|
|
|
|
HEFA
|
|
— Health & Educational Facilities Authority
|
|
|
|
|
HFC
|
|
— Housing Finance Commission
|
|
|
|
|
IDA
|
|
— Industrial Development Authority
|
|
|
|
|
IDR
|
|
— Industrial Development Revenue
|
|
|
|
|
ISD
|
|
— Independent School District
|
|
|
|
|
LOC
|
|
— Letter of Credit
|
|
|
|
|
MFA
|
|
— Municipal Finance Authority
|
|
|
|
|
MTA
|
|
— Metropolitan Transportation Authority
|
|
|
|
|
NATL
|
|
— National Public Finance Guarantee Corporation — Insured Bonds
|
|
|
|
|
PCFA
|
|
— Pollution Control Financing Authority
|
|
|
|
|
PEA
|
|
— Public Energy Authority
|
|
|
|
|
PFA
|
|
— Public Facilities Authority
|
|
|
|
|
PSF
|
|
— Permanent School Fund
|
|
|
|
|
USD
|
|
— Unified School District
|
At
May 31, 2020, the Fund had the following open futures contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Contracts
|
|
|
Expiration
Date
|
|
|
Notional
Amount
|
|
|
Market
Value
|
|
|
Unrealized
Appreciation
|
|
|
Contracts to Sell:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Ultra Long-Term Bonds
|
|
|
37
|
|
|
|
9/20
|
|
|
$
|
8,107,537
|
|
|
$
|
8,067,156
|
|
|
$
|
40,381
|
|
See Notes to Financial
Statements
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
17
|
Statement of assets and liabilities (unaudited)
May 31, 2020
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments, at value (Cost — $228,425,707)
|
|
$
|
243,920,931
|
|
|
Interest receivable
|
|
|
3,120,116
|
|
|
Prepaid expenses
|
|
|
10,477
|
|
|
Total Assets
|
|
|
247,051,524
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Payable for securities purchased
|
|
|
1,252,341
|
|
|
Distributions payable
|
|
|
719,826
|
|
|
Investment management fee payable
|
|
|
122,390
|
|
|
Payable to broker — net variation margin on open futures contracts
|
|
|
93,656
|
|
|
Directors’ fees payable
|
|
|
2,421
|
|
|
Accrued expenses
|
|
|
44,823
|
|
|
Total Liabilities
|
|
|
2,235,457
|
|
|
Total Net Assets
|
|
$
|
244,816,067
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
Par value ($0.001 par value; 12,200,435 shares issued and outstanding; 100,000,000 shares authorized)
|
|
$
|
12,200
|
|
|
Paid-in capital in excess of par value
|
|
|
233,346,872
|
|
|
Total distributable earnings (loss)
|
|
|
11,456,995
|
|
|
Total Net Assets
|
|
$
|
244,816,067
|
|
|
|
|
|
Shares Outstanding
|
|
|
12,200,435
|
|
|
|
|
|
Net Asset Value
|
|
|
$20.07
|
|
See Notes to Financial
Statements.
|
|
|
|
|
18
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
Statement of operations (unaudited)
For the
Six Months Ended May 31, 2020
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
Interest
|
|
$
|
4,566,502
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
754,306
|
|
|
Directors’ fees
|
|
|
44,206
|
|
|
Audit and tax fees
|
|
|
24,147
|
|
|
Legal fees
|
|
|
22,737
|
|
|
Transfer agent fees
|
|
|
21,984
|
|
|
Fund accounting fees
|
|
|
17,152
|
|
|
Shareholder reports
|
|
|
8,532
|
|
|
Stock exchange listing fees
|
|
|
6,285
|
|
|
Custody fees
|
|
|
2,268
|
|
|
Insurance
|
|
|
2,172
|
|
|
Interest expense
|
|
|
149
|
|
|
Miscellaneous expenses
|
|
|
4,799
|
|
|
Total Expenses
|
|
|
908,737
|
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(8,014)
|
|
|
Net Expenses
|
|
|
900,723
|
|
|
Net Investment Income
|
|
|
3,665,779
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments and Futures Contracts (Notes 1, 3 and 4):
|
|
|
|
|
|
Net Realized Loss From:
|
|
|
|
|
|
Investment transactions
|
|
|
(1,507,457)
|
|
|
Futures contracts
|
|
|
(2,822,983)
|
|
|
Net Realized Loss
|
|
|
(4,330,440)
|
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
|
Investments
|
|
|
(7,697,399)
|
|
|
Futures contracts
|
|
|
40,381
|
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
(7,657,018)
|
|
|
Net Loss on Investments and Futures Contracts
|
|
|
(11,987,458)
|
|
|
Decrease in Net Assets From Operations
|
|
$
|
(8,321,679)
|
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
19
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended May 31, 2020 (unaudited)
and the Year Ended November 30, 2019
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
3,665,779
|
|
|
$
|
9,196,589
|
|
|
Net realized loss
|
|
|
(4,330,440)
|
|
|
|
(165,925)
|
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
(7,657,018)
|
|
|
|
11,563,534
|
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
(8,321,679)
|
|
|
|
20,594,198
|
|
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(4,318,954)
|
|
|
|
(11,189,624)
|
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(4,318,954)
|
|
|
|
(11,189,624)
|
|
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
|
Reinvestment of distributions (1,576 and 18,001 shares issued, respectively)
|
|
|
33,206
|
|
|
|
377,154
|
|
|
Increase in Net Assets From Fund Share Transactions
|
|
|
33,206
|
|
|
|
377,154
|
|
|
Increase (Decrease) in Net Assets
|
|
|
(12,607,427)
|
|
|
|
9,781,728
|
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
257,423,494
|
|
|
|
247,641,766
|
|
|
End of period
|
|
$
|
244,816,067
|
|
|
$
|
257,423,494
|
|
See Notes to Financial
Statements.
|
|
|
|
|
20
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended November 30,
unless
otherwise noted:
|
|
|
|
|
20201,2
|
|
|
20191
|
|
|
20181
|
|
|
20171
|
|
|
20161
|
|
|
20151
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
|
$21.10
|
|
|
|
$20.33
|
|
|
|
$21.09
|
|
|
|
$21.53
|
|
|
|
$22.59
|
|
|
|
$22.90
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.30
|
|
|
|
0.75
|
|
|
|
0.93
|
|
|
|
1.00
|
|
|
|
1.04
|
|
|
|
1.11
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(0.98)
|
|
|
|
0.94
|
|
|
|
(0.71)
|
|
|
|
(0.35)
|
|
|
|
(1.05)
|
|
|
|
(0.41)
|
|
|
Total income (loss) from operations
|
|
|
(0.68)
|
|
|
|
1.69
|
|
|
|
0.22
|
|
|
|
0.65
|
|
|
|
(0.01)
|
|
|
|
0.70
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.35)
|
3
|
|
|
(0.85)
|
|
|
|
(0.98)
|
|
|
|
(1.09)
|
|
|
|
(1.05)
|
|
|
|
(1.01)
|
|
|
Net realized gains
|
|
|
—
|
|
|
|
(0.07)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total distributions
|
|
|
(0.35)
|
|
|
|
(0.92)
|
|
|
|
(0.98)
|
|
|
|
(1.09)
|
|
|
|
(1.05)
|
|
|
|
(1.01)
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
|
$20.07
|
|
|
|
$21.10
|
|
|
|
$20.33
|
|
|
|
$21.09
|
|
|
|
$21.53
|
|
|
|
$22.59
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
|
$19.51
|
|
|
|
$21.17
|
|
|
|
$19.82
|
|
|
|
$21.37
|
|
|
|
$22.08
|
|
|
|
$23.87
|
|
|
Total return, based on NAV4,5
|
|
|
(3.21)
|
%
|
|
|
8.45
|
%
|
|
|
1.05
|
%
|
|
|
3.06
|
%
|
|
|
(0.16)
|
%
|
|
|
3.11
|
%
|
|
Total return, based on Market Price6
|
|
|
(6.21)
|
%
|
|
|
11.61
|
%
|
|
|
(2.76)
|
%
|
|
|
1.81
|
%
|
|
|
(3.10)
|
%
|
|
|
8.15
|
%
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (millions)
|
|
|
$245
|
|
|
|
$257
|
|
|
|
$248
|
|
|
|
$256
|
|
|
|
$261
|
|
|
|
$274
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.72
|
%7
|
|
|
0.70
|
%
|
|
|
0.71
|
%
|
|
|
0.70
|
%
|
|
|
0.70
|
%
|
|
|
0.70
|
%
|
|
Net expenses
|
|
|
0.72
|
7,8
|
|
|
0.70
|
|
|
|
0.71
|
|
|
|
0.70
|
|
|
|
0.70
|
|
|
|
0.70
|
|
|
Net investment income
|
|
|
2.92
|
7
|
|
|
3.61
|
|
|
|
4.47
|
|
|
|
4.65
|
|
|
|
4.60
|
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
23
|
%
|
|
|
33
|
%
|
|
|
39
|
%
|
|
|
10
|
%
|
|
|
15
|
%
|
|
|
2
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended May 31, 2020 (unaudited).
|
|
3
|
The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both.
Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year.
|
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
5
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of
less than one year are not annualized.
|
|
6
|
The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no
guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
8
|
Reflects fee waivers and/or expense reimbursements.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
21
|
Notes to financial statements (unaudited)
1. Organization and significant accounting policies
Western Asset Municipal Defined Opportunity Trust Inc. (the “Fund”) was incorporated in Maryland on January 15, 2009 and is registered as a non-diversified,
limited term, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is to provide high current
income exempt from federal income tax and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return. There can be no
assurance the Fund’s investment objectives will be achieved. On April 1, 2020, the Board of Directors of the Fund approved amendments to the Fund’s bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange Commission’s website at www.sec.gov.
As a fundamental
policy, the Fund seeks to achieve its primary investment objective by investing, under normal market conditions, at least 80% of its net assets in investment grade municipal securities, the interest on which is exempt from federal income tax. The
Fund may invest up to 20% of its net assets in municipal securities rated below investment grade (commonly known as “high yield” or “junk” bonds) at the time of purchase by at least one nationally recognized statistical rating
organization or which, if unrated, we deemed to be of comparable quality. For credit ratings purposes, pre-refunded bonds are deemed to be unrated. The subadviser determines the credit quality of pre-refunded bonds based on the quality of the escrowed collateral and such other factors as the subadviser deems appropriate.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these
estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government,
municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or
broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts
are valued daily at the settlement price established by the board of trade or exchange on which they are traded. If independent third party pricing services are unable to
|
|
|
|
|
22
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the
market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When
reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net
asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of
Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to
the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third
party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of
possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity;
and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security;
the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions;
information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable
companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the
policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are
reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach
and/or income approach, depending on the type of security and the
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
23
|
Notes to financial statements
(unaudited) (cont’d)
particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable
securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure
hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
•
|
|
Level 1 — quoted prices in active markets for identical investments
|
|
•
|
|
Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
•
|
|
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Municipal Bonds†
|
|
|
—
|
|
|
$
|
243,075,799
|
|
|
|
—
|
|
|
$
|
243,075,799
|
|
|
Short-Term Investments†:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal Bonds
|
|
|
—
|
|
|
|
800,000
|
|
|
|
—
|
|
|
|
800,000
|
|
|
Money Market Funds
|
|
$
|
45,132
|
|
|
|
—
|
|
|
|
—
|
|
|
|
45,132
|
|
|
Total Short-Term Investments
|
|
|
45,132
|
|
|
|
800,000
|
|
|
|
—
|
|
|
|
845,132
|
|
|
Total Investments
|
|
$
|
45,132
|
|
|
$
|
243,875,799
|
|
|
|
—
|
|
|
$
|
243,920,931
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts
|
|
$
|
40,381
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
40,381
|
|
|
Total
|
|
$
|
85,513
|
|
|
$
|
243,875,799
|
|
|
|
—
|
|
|
$
|
243,961,312
|
|
|
†
|
See Schedule of Investments for additional detailed categorizations.
|
(b) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain
exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain percentage of the contract
amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received
|
|
|
|
|
24
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
by the Fund each day, depending on the daily fluctuation in the value of the contract. For certain futures, including
foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and
the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the
amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(c) Securities traded on a when-issued and delayed delivery basis. The Fund may trade securities on a when-issued or delayed delivery basis. In
when-issued and delayed delivery transactions, the securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time
of entering into the transaction.
Purchasing such securities involves risk of loss if the value of the securities declines prior to settlement. These
securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(d)
Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to
counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of
default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its
trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and
changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such
instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law,
the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
25
|
Notes to financial statements
(unaudited) (cont’d)
agreement, with certain of its derivative counterparties that govern
over-the-counter derivatives and provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or
termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related
contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables
and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA Master Agreements do not result in an offset of
reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearinghouse for exchange
traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged to cover obligations of
the Fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of May 31, 2020, the Fund did not have any open OTC derivative transactions with credit related contingent features in a net liability position.
(e) Security transactions and investment income. Security transactions are accounted for on a
trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is
recorded on the accrual basis. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest
income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(f) Distributions to
shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The actual source of the Fund’s monthly distributions may be
from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. The Fund intends to satisfy conditions that will enable
interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized
gains, if any, are taxable and are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which
may differ from GAAP.
|
|
|
|
|
26
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
(g) Compensating balance arrangements. The Fund
has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(h) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue
Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements
imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
Management has analyzed
the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of November 30, 2019, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state
income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
(i) Reclassification. GAAP requires that certain components of net assets be reclassified to
reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners
Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company, LLC (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason,
Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays an investment management fee,
calculated daily and paid monthly, at an annual rate of 0.60% of the Fund’s average daily Managed Assets. “Managed Assets” means the total assets of the Fund (including assets financed through the creation of tender option bond
trusts) minus the sum of accrued liabilities (other than Fund liabilities representing financial leverage).
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives
from the Fund.
During the six months ended May 31, 2020, fees waived and/or expenses reimbursed amounted to $8,014.
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
|
27
|
Notes to financial statements
(unaudited) (cont’d)
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
The Fund is permitted to purchase or sell securities, typically short-term variable rate demand obligations, from or to certain other affiliated funds or portfolios
under specified conditions outlined in procedures adopted by the Board of Directors. The procedures have been designed to provide assurance that any purchase or sale of securities by the Fund from or to another fund or portfolio that is, or could be
considered, an affiliate by virtue of having a common investment manager or subadviser (or affiliated investment manager or subadviser), common Directors and/or common officers complies with Rule 17a-7 under
the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. For the six months ended May 31, 2020, such purchase and sale transactions (excluding accrued interest) were $13,800,000 and
$26,400,000, respectively.
3. Investments
During the six months ended May 31, 2020, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
|
|
|
|
|
|
|
Purchases
|
|
$
|
62,043,881
|
|
|
Sales
|
|
|
56,920,241
|
|
At May 31, 2020, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of
investments for federal income tax purposes were substantially as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
|
|
|
Securities
|
|
$
|
228,425,707
|
|
|
$
|
18,160,790
|
|
|
$
|
(2,665,566)
|
|
|
$
|
15,495,224
|
|
|
Futures contracts
|
|
|
—
|
|
|
|
40,381
|
|
|
|
—
|
|
|
|
40,381
|
|
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at May 31, 2020.
|
|
|
|
|
|
|
ASSET DERIVATIVES1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Futures contracts2
|
|
$
|
40,381
|
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized
depreciation.
|
|
2
|
Includes cumulative appreciation (depreciation) of futures contracts as reported in the Schedule of Investments. Only variation margin is reported within the
receivables and/or payables on the Statement of Assets and Liabilities.
|
|
|
|
|
|
28
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Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
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The following tables provide information about the effect of derivatives and hedging activities on the Fund’s
Statement of Operations for the six months ended May 31, 2020. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional
information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest
Rate Risk
|
|
|
Futures contracts
|
|
$
|
(2,822,983)
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest
Rate Risk
|
|
|
Futures contracts
|
|
$
|
40,381
|
|
During the six months ended May 31, 2020, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
|
|
Average Market
Value
|
|
|
Futures contracts (to sell)
|
|
$
|
6,193,179
|
|
5. Distributions subsequent to May 31, 2020
The following distributions have been
declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
|
5/21/2020
|
|
|
6/1/2020
|
|
|
$
|
0.0590
|
|
|
6/23/2020
|
|
|
7/1/2020
|
|
|
$
|
0.0515
|
|
|
7/24/2020
|
|
|
8/3/2020
|
|
|
$
|
0.0515
|
|
|
8/24/2020
|
|
|
9/1/2020
|
|
|
$
|
0.0515
|
|
6. Stock repurchase program
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s
outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes
may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the six months ended May 31, 2020, the Fund did not repurchase any shares.
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|
|
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Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
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29
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Notes to financial statements
(unaudited) (cont’d)
7. Deferred capital losses
As of
November 30, 2019, the Fund had deferred capital losses of $165,541, which have no expiration date, that will be available to offset future taxable capital gains.
8. Other matters
On February 18, 2020, Franklin Resources, Inc. (“Franklin
Resources”) and Legg Mason announced that they have entered into a definitive agreement for Franklin Resources to acquire Legg Mason in an all-cash transaction. As part of this transaction, LMPFA and the
subadviser(s), each currently a subsidiary of Legg Mason, would become a subsidiary of Franklin Resources. The transaction is subject to approval by Legg Mason’s shareholders and customary closing conditions, including receipt of applicable
regulatory approvals. Subject to such approvals and the satisfaction of the other conditions, the transaction is expected to be consummated later this year.
Under the Investment Company Act of 1940, consummation of the transaction will result in the automatic termination of the Fund’s management contract, and any related subadvisory contract(s), where applicable.
Therefore, the Fund’s Board has approved new management and subadvisory contracts that have been presented to the shareholders of the Fund for their approval.
* * *
The outbreak of the respiratory illness
COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic
fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the
Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services
provided to the Fund by its service providers.
* * *
The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or
“LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. Plans are underway to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the nature of any replacement
rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot yet be determined.
* * *
On May 21, 2020, the Fund announced that, effective as of the date of the announcement, the Fund’s current investment policy regarding tender option bond (“TOB”) transactions was
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30
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Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
|
being updated. In a TOB transaction, the Fund transfers securities (typically municipal bonds or other municipal securities) into a special purpose entity, referred to as a TOB trust. The TOB
trust generally issues floating rate notes to third parties and residual interest TOBs to the Fund. The net proceeds of the sale of the floating rate notes, after expenses, are received by the Fund and may be invested in additional securities.
The residual interest TOBs are inverse floating rate debt instruments (“inverse floaters”), as the return on those bonds is inversely related
to changes in a specified interest rate. Distributions on any inverse floaters paid to the Fund will be reduced or, in the extreme, eliminated as short-term interest rates rise and will increase when such interest rates fall. Floating rate notes
issued by a TOB trust may be senior to the inverse floaters held by the Fund. The value and market for inverse floaters can be volatile, and inverse floaters can have limited liquidity. Investments in inverse floaters issued in TOB transactions are
derivative instruments and, therefore, are also subject to the risks generally applicable to investments in derivatives.
The Fund may enter into TOB
transactions on either a non-recourse or recourse basis. If the Fund invests in a TOB trust on a recourse basis, it will bear the risk of loss with respect to any liquidation of the TOB trust. The Fund will
look through to the underlying securities held by a TOB trust for purposes of calculating compliance with the Fund’s investment policies. TOB transactions create leverage to the extent the Fund invests the net proceeds of the floating rate
notes in additional securities. The Fund currently intends to segregate or earmark liquid assets or otherwise cover its obligations with respect to its investments in TOB trusts. TOB transactions expose the Fund to leverage and credit risk, and
generally involve greater risk than investments in fixed rate municipal bonds, including the risk of loss of principal.
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|
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Western Asset Municipal Defined Opportunity Trust Inc. 2020 Semi-Annual Report
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31
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Board approval of new management and new subadvisory agreements (unaudited)
Background
On March 9, 2020, during a
telephonic meeting of the Boards of Directors (each, a “Board” and each Board member, a “Director” or a “Board Member”) of the closed-end funds under the Board’s purview
(each, a “Fund” and together, the “Funds”), Board Members discussed with management of Legg Mason, Inc. (“Legg Mason”) and certain representatives of Franklin Resources, Inc. and its subsidiaries (together,
“Franklin Templeton”) the acquisition of Legg Mason by Franklin Templeton (the “Transaction”) and Franklin Templeton’s plans and intentions regarding the Funds and Legg Mason’s asset management business, including the
preservation and continued investment autonomy of the investment advisory businesses conducted by Legg Mason’s separate investment advisory subsidiaries and the combination of Legg Mason’s and Franklin Templeton’s distribution
resources. The Board of each Fund was advised that the Transaction, if completed, would constitute a change of control under the Investment Company Act of 1940, as amended (the “1940 Act”), that would result in the termination of the
current management agreement between each Fund and Legg Mason Partners Fund Advisor, LLC (the “Manager”) (the “Current Management Agreements”) and the current subadvisory agreements with each Fund’s subadviser or subadvisers
(each, a “Subadviser” and together, the “Subadvisers”) (the “Current Subadvisory Agreements”).
At
meetings held on April 1, 2020 the Board of each Fund, including a majority of the Board Members who are not “interested persons” of the Fund or the Manager as defined in the 1940 Act (the “Independent Board Members”),
approved the new management agreement between each Fund and the Manager (each, a “New Management Agreement”) and each new subadvisory agreement between each Fund’s Manager and its Subadviser or Subadvisers relating to the Fund (each,
a “New Subadvisory Agreement”).1 (The New Management Agreement for a
Fund and the New Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the “New Agreements,” the Current Management Agreement for a Fund and the Current Subadvisory Agreement or Agreements for the Fund are
referred to, collectively, as the “Current Agreements,” and the Manager and the Subadviser or Subadvisers for a Fund are referred to, collectively, as the “Advisers.”)
At these meetings, which included meetings of the full Board of each Fund and separate meetings of the Independent Board Members, the Board considered, among other things, whether it would be in the best interests
of each Fund and its respective shareholders to approve the New Agreements, and the anticipated impacts of the Transaction on the Funds
|
1
|
This meeting was held telephonically in reliance on an exemptive order issued by the Securities and Exchange Commission on March 13, 2020. Reliance on the
exemptive order is necessary and appropriate due to circumstances related to current or potential effects of COVID-19. All Board Members participating in the telephonic meeting were able to hear each other
simultaneously during the meeting. Reliance on the exemptive order requires Board Members, including a majority of the Independent Board Members, to ratify actions taken pursuant to the exemptive order by vote cast at the next in-person meeting.
|
|
|
|
|
|
32
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Western Asset Municipal Defined Opportunity Trust Inc.
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and their shareholders. To assist the Board of each Fund in its consideration of the New Agreements, Franklin Templeton provided materials and information about Franklin Templeton, including its
financial condition and asset management capabilities and organization, Legg Mason provided materials and information about Legg Mason, including performance and expense comparison data and profitability information by Fund and with respect to the
Legg Mason fund complex as a whole, and Franklin Templeton and Legg Mason provided materials and information about the proposed Transaction between Legg Mason and Franklin Templeton.
Before and during the April 1, 2020 meetings, the Board of each Fund sought certain information as it deemed necessary and appropriate. In connection with their consideration of the New Agreements, the
Independent Board Members worked with their independent legal counsel to prepare requests for additional information that were submitted to Franklin Templeton and Legg Mason. The requests for information of the Board of each Fund sought information
relevant to the Board’s consideration of the New Agreements and other anticipated impacts of the Transaction on the Funds and their shareholders. Franklin Templeton and Legg Mason provided documents and information in response to these requests
for information. Following their review of this information, the Independent Board Members requested additional information from Franklin Templeton and Legg Mason. Franklin Templeton and Legg Mason provided further information in response to these
requests, which the Board of each Fund reviewed. Senior management representatives from Franklin Templeton and Legg Mason participated in a portion of each of these meetings and addressed various questions raised by the Board of each Fund.
At the April 1, 2020 meeting of the Board of each Fund, representatives of Legg Mason and Franklin Templeton made presentations to, and responded
to questions from, the Board. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to consider the New Agreements.
Board Approval of New Management Agreements and New Subadvisory Agreements
Each Fund’s Board’s evaluation of the New Agreements reflected the information provided specifically in connection with their review of the New Agreements, as well as, where relevant, information that was
previously furnished to the Board in connection with the most recent renewal of the Current Agreements at in-person meetings held on November 14, 2019 and at other Board meetings throughout the prior
year.
Among other things, the Board Members considered:
|
(i)
|
the reputation, experience, financial strength and resources of Franklin Templeton and its investment advisory subsidiaries;
|
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
|
33
|
Board approval of new management and new subadvisory agreements (unaudited) (cont’d)
|
(ii)
|
that Franklin Templeton has informed the Board of each Fund that it intends to maintain the investment autonomy of the Legg Mason investment advisory
subsidiaries;
|
|
(iii)
|
that Franklin Templeton and Legg Mason have informed the Board of each Fund that, following the Transaction, there is not expected to be any diminution
in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and have represented that there are not
expected to be any changes in the portfolio management personnel managing the Funds as a result of the Transaction;
|
|
(iv)
|
that Franklin Templeton and Legg Mason have informed the Board of each Fund regarding transition plans, including Legg Mason’s provision of
retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templeton’s provision of long-term retention mechanisms for certain personnel following the closing;
|
|
(v)
|
that there are not expected to be any changes to any Fund’s custodian or other service providers as a result of the Transaction;
|
|
(vi)
|
that Franklin Templeton has informed the Board of each Fund that it has no present intention to alter currently effective expense waivers and
reimbursements after their expiration, and, while it reserves the right to do so in the future, it would consult with the applicable Fund’s Board before making any changes;
|
|
(vii)
|
that Franklin Templeton does not expect to propose any changes to the investment objective(s) of any Fund or any changes to the principal investment
strategies of any Fund as a result of the Transaction;
|
|
(viii)
|
the potential benefits to Fund shareholders from being part of a combined fund family with Franklin Templeton-sponsored funds and access to a broader
array of investment opportunities;
|
|
(ix)
|
that Franklin Templeton and Legg Mason will each derive benefits from the Transaction and that, as a result, they have a financial interest in the
matters that were being considered;
|
|
(x)
|
the fact that each Fund’s contractual management fee rates will remain the same and will not increase by virtue of the New Agreements;
|
|
(xi)
|
the terms and conditions of the New Agreements, including that each New Agreement is identical to its corresponding Current Agreement except for their
respective dates of execution, effectiveness and termination;
|
|
|
|
|
|
34
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
|
(xii)
|
the support expressed by the current senior management team at Legg Mason for the Transaction and Legg Mason’s recommendation that the Board of
each Fund approve the New Agreements;
|
|
(xiii)
|
that the Current Agreements, except in the case of newer Funds, are the product of multiple years of review and negotiation and information received and
considered by the applicable Fund’s Board in the exercise of their business judgment during those years, and that within the past six-months the Board of each Fund had performed a full review of and
approved the Current Agreements as required by the 1940 Act and had determined in the exercise of the Board Members’ business judgment that each applicable Adviser had the capabilities, resources and personnel necessary to provide the services
provided to each Fund, and that the management and subadvisory fees paid by or in respect of the Fund, taking into account any applicable agreed-upon fee reductions, represented reasonable compensation to the applicable Adviser in light of the
services provided, the costs to the Adviser of providing those services, the fees and other expenses paid by similar funds, and such other matters as the Board Members considered relevant in the exercise of their business judgment, and represented
an appropriate sharing between Fund shareholders and the Advisers of any economies of scale in the management of the Fund at current and anticipated asset levels;
|
|
(xiv)
|
that the Current Agreements were considered and approved as recently as November 2019, except in the case of one Fund, which is currently in the initial
term of its agreement;
|
|
(xv)
|
that the Funds will not bear the costs of obtaining shareholder approval of the New Agreements, including proxy solicitation costs, legal fees and the
costs of printing and mailing the proxy statement, regardless of whether the Transaction is consummated; and
|
|
(xvi)
|
that under the a definitive agreement between Legg Mason and Franklin Templeton (the “Transaction Agreement”), Franklin Templeton has
acknowledged that Legg Mason had entered into the Transaction Agreement in reliance upon the benefits and protections provided by Section 15(f) of the 1940 Act, and that, in furtherance of the foregoing, Franklin Templeton agreed to use
reasonable best efforts to conduct its business so that (a) for a period of not less than three years after the closing of the Transaction no more than 25% of the members of the Board of any Fund shall be “interested persons” (as
defined in the 1940 Act) of any investment adviser for a Fund, and (b) for a period of not less than two years after the closing, neither Franklin Templeton nor any of its affiliates shall impose an “unfair burden” (within the meaning
of the 1940 Act, including any interpretations or no-action letters of the Securities and Exchange Commission) on any Fund as a result of the transactions contemplated by the Transaction Agreement or any
express or implied terms, conditions or understandings applicable thereto.
|
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
|
35
|
Board approval of new management and new subadvisory agreements (unaudited) (cont’d)
Certain of these considerations are discussed in more detail below.
In their deliberations, the Board Members considered information received in connection with the most recent approval or continuation of each Current Agreement in
addition to information provided by Franklin Templeton and Legg Mason in connection with their evaluation of the terms and conditions of the New Agreements. In connection with the most recent approval or continuation of each Current Agreement, and
in connection with their review of each New Agreement, the Board Members did not identify any particular information that was all-important or controlling, and each Board Member may have attributed different
weights to the various factors. The Board Members evaluated all information available to them on a Fund-by-Fund basis with respect to their consideration of the Current
Agreements and the New Agreements, and their determinations were made separately in respect of each Fund.
The information provided and presentations
made to the Board of each Fund encompassed each Fund and all other Funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions rendered by the Manager for each Fund, both of which
functions are encompassed by the New Management Agreement for the Fund, as well as the advisory functions rendered by the Subadviser(s) pursuant to the New Subadvisory Agreement(s) for the Fund. The Independent Board Members of each Fund considered
the New Management Agreement and the New Subadvisory Agreement(s) separately in the course of their review. In doing so, they considered the respective roles and compensation of the Manager and the Subadviser(s) in providing services to the Fund.
The Independent Board Members were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Board Members
of each Fund received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the New Agreements for the Fund. The Independent Board Members of each Fund, including Western Asset Municipal Defined
Opportunity Trust Inc. (the “Western Asset Fund”), reviewed the proposed approval of the New Agreements for the Fund on multiple occasions with their independent legal counsel in private sessions at which no representatives of Franklin
Templeton, Legg Mason, or the Manager or Subadviser(s) for the Fund were present.
Nature, Extent and Quality of the Services under
the New Agreements
The Board of each Fund received and considered information regarding the nature, extent and quality of services provided to the
Fund by the Manager and the Subadviser(s) under the Current Agreements. In evaluating the nature, quality and extent of the services to be provided by the Advisers under the New Agreements, the Board Members considered,
|
|
|
|
|
36
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
among other things, the expected impact, if any, of the Transaction on the operations, facilities, organization and personnel of each Adviser, and that Franklin Templeton and Legg Mason have
advised the Board of each Fund that, following the Transaction, there is not expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and that there are not expected to be any changes in portfolio management personnel as a result of the Transaction. In this regard, the Board of each Fund took into account that Franklin
Templeton and Legg Mason have informed the Board regarding Legg Mason’s provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templeton’s provision of long-term retention
mechanisms for certain personnel following the closing. The Board of each Fund has received information at regular meetings throughout the past year related to the services rendered by the Manager in its management of the Fund’s affairs and the
Manager’s role in coordinating the activities of the Fund’s other service providers. Each Fund’s Board’s evaluation of the services provided by the Manager and the Subadviser(s) took into account the Board Members’ knowledge
gained as Board Members of other Funds in the Legg Mason fund complex, including knowledge gained regarding the scope and quality of the investment management and other capabilities of the Manager and the Subadviser(s), and the quality of the
Manager’s administrative and other services. The Board of each Fund observed that the scope of services provided by the Manager and the Subadviser(s), and the undertakings required of the Manager and Subadviser(s) in connection with those
services, including maintaining and monitoring their own and the Fund’s compliance programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory, market and other developments. The Board of
each Fund has received and reviewed on a regular basis information from the Manager and the Subadviser(s) regarding the Fund’s compliance policies and procedures established pursuant to Rule 38a-1 under
the 1940 Act, and took that information into account in its evaluation of the New Agreements. The Board of each Fund also considered the risks associated with the Fund borne by the Advisers and their affiliates (such as entrepreneurial, operational,
reputational, litigation and regulatory risk), as well as the risk management processes of the Manager and Subadviser(s).
The Board of each Fund
considered information provided by Franklin Templeton regarding its business and operating structure, scale of operation, leadership and reputation, distribution capabilities, and financial condition (pre- and
post-closing).
The Board of each Fund also reviewed the qualifications, backgrounds and responsibilities of the senior personnel of the Manager and the
Subadviser(s) and the team of investment professionals primarily responsible for the day-to-day portfolio management of the Fund. The Board of each Fund noted in
particular that following the Transaction, Franklin Templeton is expected to have resources that will provide it with substantial capacity to
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
|
37
|
Board approval of new management and new subadvisory agreements (unaudited) (cont’d)
invest across the business. The Board of each Fund also considered the financial resources of Legg Mason and Franklin Templeton and the importance of having a Fund
manager with, or with access to, significant organizational and financial resources.
The Board also considered the benefits to each Fund of being part
of a larger combined organization with greater financial resources following the Transaction, particularly during periods of market disruptions and volatility. In addition, the Board also considered Franklin Templeton’s significant experience
in dealing with issues unique to the management of closed-end funds.
The Board of each Fund also considered the
policies and practices of the Manager and the Subadvisers regarding the selection of brokers and dealers and the execution of portfolio transactions for the Fund.
The Board of each Fund received performance information for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc.
(“Broadridge”), an independent provider of investment company data, based on classifications provided by Thomson Reuters Lipper (“Lipper”). The Board of each Fund was provided with a description of the methodology used to
determine the similarity of the Fund with the funds included in the Performance Universe. It was noted that while the Board of each Fund has found the Broadridge data generally useful they recognized its limitations, including that the data may vary
depending on the end date selected and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. It was also noted that the Board of each Fund has received and discussed with
management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and against the Fund’s peers. In addition, the Board of each Fund considered the Fund’s performance in light of
overall financial market conditions. Where a Fund’s performance was below the median during one or more specified periods, the Fund’s Board noted the explanations from the Advisers concerning the Fund’s relative performance versus the
peer group for the various periods
Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg
Mason, the Board Members of each Fund determined that the Transaction was not expected to affect adversely the nature, extent and quality of services provided by each Adviser and that the Transaction was not expected to have an adverse effect on the
ability of the Advisers to provide those services, and the Board of each Fund, including the Western Asset Fund, concluded that, overall, the nature, extent and quality of services expected to be provided, including performance, under the New
Agreements for the Fund were sufficient for approval.
|
|
|
|
|
38
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
Management Fees and
Expense Ratios
The Board of each Fund considered that it had reviewed the Fund’s management fee and total expense ratio at the November 2019
contract renewal meeting. The Board of each Fund considered that the New Management Agreement does not change any Fund’s management fee rate or the computation method for calculating such fees, and that there is no present intention to alter
expense waiver and reimbursement arrangements that are currently in effect. The Board of each Fund noted that by their terms none of the current expense waiver and reimbursement arrangements would expire before December 2020 and that Franklin
Templeton had indicated that it would consult with the applicable Fund’s Board before making any changes to the Fund’s current expense waiver and reimbursement arrangements.
The Board of each Fund reviewed and considered the contractual management fee and the actual management fees paid by the Fund to the Manager in light of the nature, extent and quality of the management and
subadvisory services to be provided by the Manager and the Subadviser(s). The Board of each Fund also noted that the compensation paid to the Subadviser(s) is the responsibility and expense of the Manager, or in some cases another Subadviser, and
not the Fund. In addition, the Board of each Fund received and considered information provided by Broadridge comparing the contractual management fee and the actual management fee for the Fund, as well as the total actual expenses for the Fund, with
those of funds in both the relevant expense group and a broader group of funds, each selected by Broadridge based on classifications provided by Lipper. It was noted that, while the Board of each Fund has found the Broadridge data generally useful,
it recognized its limitations, including that the data may vary depending on the selection of the peer group. The Board of each Fund also considered the overall management fee, the fees of each Subadviser and the portion of the management fee
retained by the Manager after payment of the subadvisory fees, in each case in light of the services rendered for those amounts. The Board of each Fund also received an analysis of Legg Mason complex-wide management fees for Funds with a similar
strategy provided by the Manager, which, among other things, set out a framework of fees based on asset classes.
The Board of each Fund reviewed
information regarding fees charged by the Manager and/or the Subadviser(s) to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts. The Manager reviewed with the Board
of each Fund the differences in services provided to these different types of accounts, including that the Fund is provided with certain administrative services, office facilities, and Fund officers (including the Fund’s chief executive, chief
financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board of each Fund considered the fee comparisons in light of the differences in
management of these different types of accounts and the differences in associated risks borne by the Advisers.
|
|
|
|
|
Western Asset Municipal Defined Opportunity Trust Inc.
|
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39
|
Board approval of new management and new subadvisory agreements (unaudited) (cont’d)
In evaluating the costs of the services to be provided by the Advisers under the New Agreements, the Board Members considered, among other things, whether
management fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members determined that the
Transaction would not increase the total fees payable by any Fund for management services.
Taking all of the above into consideration, as well as the
factors identified below, the Board of each Fund, including the Western Asset Fund, determined that the management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services to be provided to
the Fund under the New Agreements.
Profitability and Economies of Scale
The Board of each Fund received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board of each Fund also received profitability information
with respect to the Legg Mason fund complex as a whole. In addition, the Board of each Fund received information with respect to the Manager’s allocation methodologies used in preparing this profitability data. It was noted that the allocation
methodologies had been previously reviewed by an outside consultant. The profitability of the Manager and its affiliates was considered by each Fund’s Board not to be excessive in light of the nature, extent and quality of the services provided
to the Fund, including the Western Asset Fund.
The Board of each Fund received and considered information concerning whether the Advisers realize
economies of scale as the Fund’s assets grow. In conjunction with their most recent or prior deliberations concerning the Current Agreements, the Board Members have noted that advisory or management fee reductions had been implemented for
certain Funds, as well as expense limitations, and that after taking those reductions and expense limitations into account, the Board Members had determined that the total fees for management services, and administrative services for the applicable
Funds, were reasonable in light of the services provided to the Funds, including the Western Asset Fund, and that any economies of scale were being shared appropriately.
The Board Members noted that Franklin Templeton and Legg Mason expected to realize cost savings from the Transaction based on synergies of operations, primarily at the holding company distribution level, as well as
to benefit from possible growth of the Funds resulting from enhanced distribution capabilities. The Board of each Fund took into account that cost synergies were not the primary driver of the Transaction. However, they noted that other factors could
also affect profitability and potential economies of scale, and that it was not possible to predict with any degree of certainty how the Transaction would affect the Advisers’ profitability from their relationship with the Funds, nor to
quantify at this time any
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Western Asset Municipal Defined Opportunity Trust Inc.
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possible future economies of scale. The Board Members noted they will have the opportunity to periodically re-examine such profitability and any economies
of scale going forward.
Other Benefits to the Advisers
The Board of each Fund considered other benefits received by the Manager, the Subadviser(s) and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional
products and services to Fund shareholders. In light of the costs of providing investment management and other services to the Funds and the ongoing commitment of the Manager and the Subadviser(s) to the Funds, the Board of each Fund considered that
the ancillary benefits that the Manager, the Subadviser(s) and their affiliates received as a result of their relationship with the Fund, including the Western Asset Fund, were reasonable. In evaluating the
fall-out benefits to be received by the Advisers under the New Agreements, the Board Members considered whether the Transaction would have an impact on the fall-out
benefits received by virtue of the Current Agreements.
The Board of each Fund considered that Franklin Templeton may derive reputational and other
benefits from its ability to use the Legg Mason investment affiliates’ names in connection with operating and marketing the Funds. The Board of each Fund considered that the Transaction, if completed, would significantly increase Franklin
Templeton’s assets under management and expand Franklin Templeton’s investment capabilities.
Conclusion
After consideration of the factors described above as well as other factors, and in the exercise of their business judgment, the Board Members, including the
Independent Board Members, concluded that the New Agreements, including the fees payable thereunder, were fair and reasonable to each Fund and that entering into the New Agreements for each Fund, including the Western Asset Fund, was in the best
interests of the Fund’s shareholders, and they voted to approve the New Agreements for each Fund and to recommend that the Fund’s shareholders approve the New Agreements.
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Western Asset Municipal Defined Opportunity Trust Inc.
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Additional shareholder information (unaudited)
Results of annual meeting of shareholders
The Annual Meeting of Shareholders of Western Asset Municipal Defined Opportunity Trust Inc. was held on March 20, 2020 for the purpose of considering and
voting upon proposals presented at the Meeting. The following table provides information concerning the matter voted upon at the Meeting:
Election of Directors
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Nominees
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For
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Against
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Paolo M. Cucchi
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10,628,504
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752,106
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Nisha Kumar
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10,731,569
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649,041
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Jane Trust
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10,790,475
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590,135
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At May 31, 2020, in addition to Paolo M. Cucchi, Nisha Kumar and Jane Trust, the other Directors of the Fund were as follows:
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
William R. Hutchinson
Eileen A. Kamerick
Ratification of Selection of
Independent Registered Public Accountants
To ratify the selection of PricewaterhouseCoopers LLP (“PwC”) as independent registered public
accountants of the Fund for the fiscal year ended November 30, 2020.
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For
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Against
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Abstain
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11,152,896
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42,495
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185,219
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Western Asset Municipal Defined Opportunity Trust Inc.
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Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and
return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stock- holders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s
Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare
Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined
as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date
is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal
to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close
of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading
day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders;
except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common
Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the
Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day
prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the
Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e.,
opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such
withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.
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Western Asset Municipal Defined Opportunity Trust Inc.
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Dividend reinvestment plan
(unaudited) (cont’d)
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage
charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage
commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost
averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite
advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean
that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in
writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any
fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your
account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at
1-888-888-0151.
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Western Asset Municipal Defined Opportunity Trust Inc.
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Western Asset
Municipal Defined Opportunity Trust Inc.
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Directors
Robert D.
Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen*
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
Robert I. Frenkel
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
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Western Asset Municipal Defined Opportunity Trust Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadviser
Western Asset Management Company, LLC
Custodian
The Bank of New York
Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
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Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett LLP
425 Lexington
Avenue
New York, NY 10017
New York Stock Exchange Symbol
MTT
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*
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Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer.
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Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end
funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and
maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
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Personal information included on applications or other forms;
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Account balances, transactions, and mutual fund holdings and positions;
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Bank account information, legal documents, and identity verification documentation;
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Online account access user IDs, passwords, security challenge question responses; and
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt,
payment history, etc.).
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How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law. The Funds may disclose information about you to:
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Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to
government regulators;
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Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;
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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and
service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;
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The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations
to government regulators;
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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NOT PART OF THE SEMI-ANNUAL REPORT
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Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’
behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them
to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as
permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be
required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will
remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they
will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data
security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event
of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications
or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In
order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the
Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at
www.leggmason.com, or contact the Funds at 1-888-777-0102.
Revised April 2018
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NOT PART OF THE SEMI-ANNUAL REPORT
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Western Asset Municipal Defined Opportunity Trust Inc.
Western Asset Municipal Defined Opportunity Trust Inc.
620 Eighth
Avenue
49th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at
market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission
(“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the
SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at
1-888-777-0102.
Information on
how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to
vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102,
(2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Municipal
Defined Opportunity Trust Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
WASX011870 7/20 SR20- 3918
