|
|
Notes to Financial Statements (Unaudited)
|
|
1. Organization and Significant Accounting
Policies:
BlackRock Muni New York Intermediate Duration Fund, Inc.
(MNE), BlackRock MuniYield Arizona Fund, Inc. (MZA), BlackRock MuniYield California Fund, Inc. (MYC), BlackRock
MuniYield Investment Fund (MYF) and BlackRock MuniYield New Jersey Fund, Inc. (MYJ) (collectively, the Funds or
individually as a Fund) are registered under the 1940 Act, as non-diversified, closed-end management investment companies. MNE, MZA, MYC
and MYJ are organized as Maryland corporations. MYF is organized as a Massachusetts business trust. The Funds financial statements are prepared
in conformity with accounting principles generally accepted in the United States of America (US GAAP), which may require management to make
estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Boards of Directors and
the Board of Trustees of the Funds are collectively referred to throughout this report as the Board of Directors or the Board,
and the directors/trustees thereof are collectively referred to throughout this report as Directors. The Funds determine and make available
for publication the NAVs of their Common Shares on a daily basis.
The following is a summary of significant accounting policies
followed by the Funds:
Valuation:
US GAAP defines fair value as the price the
Funds would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The
Funds determine the fair values of their financial instruments at market value using independent dealers or pricing services under policies approved by
the Board. The BlackRock Global Valuation Methodologies Committee (the Global Valuation Committee) is the committee formed by management to
develop global pricing policies and procedures and to provide oversight of the pricing function for the Funds for all financial
instruments.
Municipal investments (including commitments to purchase such
investments on a when-issued basis) are valued on the basis of prices provided by dealers or pricing services. In determining the value of
a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers,
pricing matrixes, market transactions in comparable investments and information with respect to various relationships between investments. Financial
futures contracts traded on exchanges are valued at their last sale price. Investments in open-end registered investment companies are valued at NAV
each business day. Short-term securities with remaining maturities of 60 days or less may be valued at amortized cost, which approximates fair
value.
Exchange-traded options are valued at the mean between the last
bid and ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued
at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior days price will be used, unless
it is determined that the prior days price no longer reflects the fair value of the option. Over-the-counter (OTC) are valued by an
independent pricing service using a mathematical model, which incorporates a number of market data factors, such as the trades and prices of the
underlying instruments.
In the event that application of these methods of valuation
results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available,
the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair
value (Fair Value Assets). When determining the price for Fair Value Assets, the Global Valuation Committee, or its delegate, seeks to
determine the price that each Fund might reasonably expect to receive from the current sale of that asset in an arms-length transaction. Fair
value determinations shall be based upon all available factors that the Global Valuation Committee, or its delagate, deems relevant consistent with the
principles of fair value measurement, which include the market approach, income approach and/or in the case of recent investments, the cost approach,
as appropriate. A market approach generally consists of using comparable market transactions. The income approach generally is used to discount future
cash flows to present value and adjusted for liquidity as appropriate. These factors include but are not limited to: (i) attributes specific to the
investment or asset; (ii) the principal market for the investment or asset; (iii) the customary participants in the principal market for the investment
or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably available; (v) quoted prices for similar investments
or assets in active markets; and (vi) other factors, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss
severities, credit risks, recovery rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments,
the fair values may differ from the values that would have been used had an active market existed. The Global Valuation Committee, or its delegate,
employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of
the Funds pricing vendors, a regular review of key inputs and assumptions, transactional back-testing or disposition analysis to compare
unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any
market related activity. The pricing of all Fair Value Assets is subsequently reported to the Board or a committee thereof on a quarterly
basis.
Zero-Coupon Bonds:
The Funds may invest in zero-coupon
bonds, which are normally issued at a significant discount from face value and do not provide for periodic interest payments. Zero-coupon bonds may
experience greater volatility in market value than similar maturity debt obligations which provide for regular interest payments.
Forward Commitments and When-Issued Delayed Delivery
Securities:
The Funds may purchase securities on a when-issued basis and may purchase or sell securities on a forward commitment basis. Settlement
of such transactions normally occurs within a month or more after the purchase or sale commitment is made. The Funds may purchase securities under such
conditions with the intention of actually acquiring them, but may enter into a separate agreement to sell the securities before the settlement date.
Since the value of securities purchased may fluctuate prior to settlement,
SEMI-ANNUAL REPORT
|
JANUARY 31, 2013
|
45
|
|
|
Notes to Financial Statements (continued)
|
|
the Funds may be required to pay more at settlement than the
security is worth. In addition, the Funds are not entitled to any of the interest earned prior to settlement. When purchasing a security on a delayed
delivery basis, the Funds assume the rights and risks of ownership of the security, including the risk of price and yield fluctuations. In the event of
default by the counterparty, the Funds maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions, which is
shown in the Schedules of Investments.
Municipal Bonds Transferred to TOBs:
The Funds leverage
their assets through the use of TOBs. A TOB is a special purpose entity established by a third party sponsor, into which a fund, or an agent on behalf
of a fund, transfers municipal bonds into a trust (TOB Trust). Other funds managed by the investment advisor may also contribute municipal
bonds to a TOB into which a Fund has contributed bonds. A TOB typically issues two classes of beneficial interests: short-term floating rate
certificates (TOB Trust Certificates), which are sold to third party investors, and residual certificates (TOB Residuals),
which are generally issued to the participating funds that contributed the municipal bonds to the TOB Trust. If multiple funds participate in the same
TOB, the rights and obligations under the TOB Residual will be shared among the funds ratably in proportion to their participation.
The TOB Residuals held by a Fund include the right of a Fund (1)
to cause the holders of a proportional share of the TOB Trust Certificates to tender their certificates at par plus accrued interest upon the
occurrence of certain mandatory tender events defined in the TOB agreements, and (2) to transfer, subject to a specified number of days prior
notice, a corresponding share of the municipal bonds from the TOB to a Fund. The TOB may also be collapsed without the consent of a Fund, as the TOB
Residual holder, upon the occurrence of certain termination events as defined in the TOB agreements. Such termination events may include the bankruptcy
or default of the municipal bond, a substantial downgrade in credit quality of the municipal bond, the inability of the TOB to obtain renewal of the
liquidity support agreement, a substantial decline in market value of the municipal bond and a judgment or ruling that interest on the municipal bond
is subject to federal income taxation. Upon the occurrence of a Termination Event, the TOB would generally be liquidated in full with the proceeds
typically applied first to any accrued fees owed to the trustee, remarketing agent and liquidity provider, and then to the holders of the TOB Trust
Certificates up to par plus accrued interest owed on the TOB Trust Certificates, with the balance paid out to the TOB Residual holder. During the six
months ended January 31, 2013, no TOBs in which the Funds participated were terminated without the consent of the Funds.
The cash received by the TOB from the sale of the TOB Trust
Certificates, less transaction expenses, is paid to a Fund. The Fund typically invests the cash received in additional municipal bonds. Each
Funds transfer of the municipal bonds to a TOB Trust is accounted for as a secured borrowing; therefore, the municipal bonds deposited into a TOB
are presented in the Funds Schedules of Investments and the TOB Trust Certificates are shown in other liabilities in the Statements of Assets and
Liabilities. The carrying amount of the Funds payable to the holders of the TOB Trust Certificates, as reported in Statements of Assets and
Liabilities as TOB Trust Certificates, approximates its fair value.
The Funds may invest in TOBs on either a non-recourse or recourse
basis. TOB Trusts are typically supported by a liquidity facility provided by a bank or other financial institution (the Liquidity
Provider) that allows the holders of the TOB Trust Certificates to tender their certificates in exchange for payment from the Liquidity Provider
of par plus accrued interest on any business day prior to the occurrence of the termination events described above. When a Fund invests in TOBS on a
non-recourse basis, and the Liquidity Provider is required to make a payment under the liquidity facility due to a termination event, the Liquidity
Provider will typically liquidate all or a portion of the municipal securities held in the TOB Trust and then fund, on a net basis, the balance, if
any, of the amount owed under the liquidity facility over the liquidation proceeds (the Liquidation Shortfall). If a Fund invests in a TOB
on a recourse basis, the Fund will typically enter into a reimbursement agreement with the Liquidity Provider where the Fund is required to repay the
Liquidity Provider the amount of any Liquidation Shortfall. As a result, a Fund investing in a recourse TOB will bear the risk of loss with respect to
any Liquidation Shortfall. If multiple funds participate in any such TOB, these losses will be shared ratably in proportion to their participation. The
recourse TOB Trusts, if any, are identified in the Schedules of Investments.
Interest income, including amortization and accretion of premiums
and discounts, from the underlying municipal bonds is recorded by the Funds on an accrual basis. Interest expense incurred on the secured borrowing and
other expenses related to remarketing, administration and trustee services to a TOB are shown as interest expense, fees and amortization of offering
costs in the Statements of Operations. The TOB Trust Certificates have interest rates that generally reset weekly and their holders have the option to
tender such certificates to the TOB for redemption at par at each reset date. At January 31, 2013, the aggregate value of the underlying municipal
bonds transferred to TOBs, the related liability for TOB Trust Certificates and the range of interest rates on the liability for TOB Trust Certificates
were as follows:
|
|
|
|
Underlying
Municipal
Bonds
Transferred
to TOBs
|
|
Liability for
TOB Trust
Certificates
|
|
Range of
Interest
Rates
|
MNE
|
|
|
|
$
|
12,364,571
|
|
|
$
|
6,208,399
|
|
|
0.10% 0.16%
|
MZA
|
|
|
|
$
|
7,706,322
|
|
|
$
|
3,330,000
|
|
|
0.10% 0.11%
|
MYC
|
|
|
|
$
|
243,339,364
|
|
|
$
|
113,024,796
|
|
|
0.09% 0.24%
|
MYF
|
|
|
|
$
|
175,977,858
|
|
|
$
|
87,413,872
|
|
|
0.09% 0.35%
|
MYJ
|
|
|
|
$
|
63,972,029
|
|
|
$
|
34,049,339
|
|
|
0.10% 0.35%
|
For the six months ended January 31, 2013, the Funds average
TOB Trust Certificates outstanding and the daily weighted average interest rates, including fees, were as follows:
|
|
|
|
Average TOB
Trust
Certificates
Outstanding
|
|
Daily Weighted
Average
Interest Rate
|
MNE
|
|
|
|
$
|
6,208,399
|
|
|
|
0.69
|
%
|
MZA
|
|
|
|
$
|
3,330,000
|
|
|
|
0.69
|
%
|
MYC
|
|
|
|
$
|
116,096,627
|
|
|
|
0.68
|
%
|
MYF
|
|
|
|
$
|
86,445,962
|
|
|
|
0.75
|
%
|
MYJ
|
|
|
|
$
|
27,483,819
|
|
|
|
0.72
|
%
|
46
|
SEMI-ANNUAL REPORT
|
JANUARY 31, 2013
|
|
|
Notes to Financial Statements (continued)
|
|
Should short-term interest rates rise, the Funds investments
in TOBs may adversely affect the Funds net investment income and dividends to Common Shareholders. Also, fluctuations in the market value of
municipal bonds deposited into the TOB Trust may adversely affect the Funds NAVs per share.
Segregation and Collateralization:
In cases in which the
1940 Act and the interpretive positions of the Securities and Exchange Commission (SEC) require that the Funds either deliver collateral or
segregate assets in connection with certain investments (e.g., TOBs and financial futures contracts), the Funds will, consistent with SEC rules and/or
certain interpretive letters issued by the SEC, segregate collateral or designate on their books and records cash or liquid securities having a market
value at least equal to the amount that would otherwise be required to be physically segregated. Furthermore, based on requirements and agreements with
certain exchanges and third party broker-dealers, each Fund engaging in such transactions may have requirements to deliver/deposit securities to/with
an exchange or broker-dealer as collateral for certain investments.
Investment Transactions and Investment Income:
For
financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and
losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend dates. Interest income,
including amortization and accretion of premiums and discounts on debt securities, is recognized on the accrual basis.
Dividends and Distributions:
Dividends from net investment
income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. The character and timing of dividends and
distributions are determined in accordance with federal income tax regulations, which may differ from US GAAP. Dividends and distributions to Preferred
Shareholders are accrued and determined as described in Note 7.
Income Taxes:
It is each Funds policy to comply with
the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of
their taxable income to their shareholders. Therefore, no federal income tax provision is required.
Each Fund files US federal and various state and local tax
returns. No income tax returns are currently under examination. The statute of limitations on the Funds US federal tax returns remains open for
each of the four years ended July 31, 2012. The statutes of limitations on each Funds state and local tax returns may remain open for an
additional year depending upon the jurisdiction. Management does not believe there are any uncertain tax positions that require recognition of a tax
liability.
Recent Accounting Standards:
In December 2011, the
Financial Accounting Standards Board (the FASB) issued guidance that will expand current disclosure requirements on the offsetting of
certain assets and liabilities. The new disclosures will be required for investments and derivative financial instruments subject to master netting or
similar agreements, which are eligible for offset in the Statements of Assets and Liabilities and will require an entity to disclose both gross and net
information about such investments and transactions in the financial statements. In January 2013, the FASB issued guidance that clarifies which
investments and transactions are subject to the offsetting disclosure requirements. The scope of the disclosure requirements for offsetting will be
limited to derivative instruments, repurchase agreements and reverse repurchase agreements, and securities borrowing and securities lending
transactions. The guidance is effective for financial statements with fiscal years beginning on or after January 1, 2013, and interim periods within
those fiscal years. Management is evaluating the impact of this guidance on the Funds financial statement disclosures.
Deferred Compensation Plan:
Under the Deferred Compensation
Plan (the Plan) approved by each Funds Board, the independent Directors (Independent Directors) may defer a portion of
their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common
shares of certain other BlackRock Closed-End Funds selected by the Independent Directors. This has the same economic effect for the Independent
Directors as if the Independent Directors had invested the deferred amounts directly in certain other BlackRock Closed-End Funds.
The Plan is not funded and obligations thereunder represent
general unsecured claims against the general assets of each Fund. Deferred compensation liabilities are included in officers and directors
fees payable in the Statements of Assets and Liabilities and will remain as a liability of the Funds until such amounts are distributed in accordance
with the Plan.
Other:
Expenses directly related to a Fund are charged to
that Fund. Other operating expenses shared by several funds are pro rated among those funds on the basis of relative net assets or other appropriate
methods.
The Funds have an arrangement with the custodians whereby fees may
be reduced by credits earned on uninvested cash balances, which, if applicable, are shown as fees paid indirectly in the Statements of Operations. The
custodians impose fees on overdrawn cash balances, which can be offset by accumulated credits earned or may result in additional custody
charges.
2. Derivative Financial Instruments:
The Funds engage in various portfolio investment strategies using
derivative contracts both to increase the returns of the Funds and/or to economically hedge, or protect, their exposure to certain risks such as
interest rate risk. These contracts may be transacted on an exchange or OTC.
Losses may arise if the value of the contract decreases due to an
unfavorable change in the market rates or values of the underlying instrument or if the counterparty does not perform under the contract. The
Funds maximum risk of loss from counterparty credit risk on OTC derivatives is generally the aggregate unrealized gain netted against any
collateral pledged by/posted to the counterparty. For OTC options purchased, the Funds bear the risk of loss in the amount of the premiums paid plus
the positive change in market values net of any collateral
SEMI-ANNUAL REPORT
|
JANUARY 31, 2013
|
47
|
|
|
Notes to Financial Statements (continued)
|
|
received on the options should the counterparty fail to
perform under the contracts. Counterparty risk related to exchange-traded financial futures contracts and options is deemed to be minimal due to the
protection against defaults provided by the exchange on which these contracts trade.
The Funds may mitigate counterparty risk by procuring collateral
and through netting provisions included within an International Swaps and Derivatives Association, Inc. master agreement (ISDA Master
Agreement) implemented between a Fund and each of its respective counterparties. An ISDA Master Agreement allows each Fund to offset with each
separate counterparty certain derivative financial instruments payables and/or receivables with collateral held. The amount of collateral moved
to/from applicable counterparties is generally based upon minimum transfer amounts of up to $500,000. To the extent amounts due to the Funds from their
counterparties are not fully collateralized, contractually or otherwise, the Funds bear the risk of loss from counterparty non-performance. See Note 1
Segregation and Collateralization for information with respect to collateral practices. In addition, the Funds manage counterparty risk by
entering into agreements only with counterparties that they believe have the financial resources to honor their obligations and by monitoring the
financial stability of those counterparties.
Certain ISDA Master Agreements allow counterparties to OTC
derivatives to terminate derivative contracts prior to maturity in the event the Funds net assets decline by a stated percentage or the Funds
fail to meet the terms of their ISDA Master Agreements, which would cause the Funds to accelerate payment of any net liability owed to the
counterparty.
Financial Futures Contracts:
The Funds purchase or sell
financial futures contracts and options on financial futures contracts to gain exposure to, or economically hedge against, changes in interest rates
(interest rate risk). Financial futures contracts are agreements between the Funds and a counterparty to buy or sell a specific quantity of an
underlying instrument at a specified price and at a specified date. Depending on the terms of the particular contract, financial futures contracts are
settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the
settlement date. Pursuant to the contract, the Funds agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin and are recorded by the Funds as unrealized appreciation or
depreciation. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the
time it was opened and the value at the time it was closed. The use of financial futures contracts involves the risk of an imperfect correlation in the
movements in the price of financial futures contracts, interest rates and the underlying assets.
Options:
The Funds purchase and write call and put options
to increase or decrease their exposure to underlying instruments (including interest rate risk) and/or, in the case of options written, to generate
gains from options premiums. A call option gives the purchaser (holder) of the option the right (but not the obligation) to buy, and obligates the
seller (writer) to sell (when the option is exercised), the underlying instrument at the exercise or strike price at any time or at a specified time
during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at the exercise or
strike price at any time or at a specified time during the option period. When the Funds purchase (write) an option, an amount equal to the premium
paid (received) by the Funds is reflected as an asset (liability). The amount of the asset (liability) is subsequently marked-to-market to reflect the
current market value of the option purchased (written).When an instrument is purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the instrument acquired or deducted from (or added to) the proceeds of the instrument
sold. When an option expires (or the Funds enter into a closing transaction), the Funds realize a gain or loss on the option to the extent of the
premiums received or paid (or gain or loss to the extent the cost of the closing transaction exceeds the premiums received or paid). When the Funds
write a call option, such option is covered, meaning that the Funds hold the underlying instrument subject to being called by the option
counterparty. When the Funds write a put option, such option is covered by cash in an amount sufficient to cover the obligation.
In purchasing and writing options, the Funds bear the risk of an
unfavorable change in the value of the underlying instrument or the risk that the Funds may not be able to enter into a closing transaction due to an
illiquid market. Exercise of a written option could result in the Funds purchasing or selling a security at a price different from the current market
value.
Derivative Financial
Instruments Categorized by Risk Exposure:
|
|
Fair Values of Derivative
Financial Instruments as of January 31, 2013
|
|
|
|
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
MYC
|
|
|
|
|
Statements of Assets
and
Liabilities Location
|
|
Value
|
Interest rate contracts
|
|
|
|
|
Net unrealized appreciation
1
|
|
|
$
|
100,619
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
MNE
|
|
|
|
|
|
Statements of Assets
and Liabilities Location
|
|
|
Value
|
Interest rate contracts
|
|
|
|
|
Net unrealized depreciation
1
|
|
|
$
|
(775
|
)
|
1
|
|
Includes cumulative appreciation/depreciation on financial futures
contracts as reported in the Schedules of Investments. Only current days variation margin is reported within the Statements of Assets and
Liabilities.
|
48
|
SEMI-ANNUAL REPORT
|
JANUARY 31, 2013
|