NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AAA' long-term ratings and assigned 'F1' short-term ratings on Variable Rate Demand Preferred Shares (VRDP Shares) issued by two municipal closed-end funds managed by BlackRock Advisors, LLC (the Funds) and listed below.
BlackRock Virginia Municipal Bond Trust (NYSE MKT LLC: BHV)
--VRDP Shares, $11,600,000 of Series W-7, due July 2042, with a liquidation preference of $100,000 per share
--Long-term rating affirmed at 'AAA';
--Short-term rating assigned at 'F1'.
BlackRock Maryland Municipal Bond Trust (NYSE MKT LLC: BZM)
--VRDP Shares, $16,000,000 of Series W-7, due July 2042, with a liquidation preference of $100,000 per share
--Long-term rating affirmed at 'AAA';
--Short-term rating assigned at 'F1'.
Fitch is assigning the short-term ratings in connection with the June 2015 expiration of the Special Rate Period on the VRDP Shares issued by the two Funds, which has been in effect for approximately three years. During the term of the Special Rate Period, Citibank N.A. ('A+/F1') remained the liquidity provider; however, the VRDP Shares were not subject to optional or mandatory tender events and were not remarketed by a remarketing agent pursuant to such events. However, with the expiration of the Special Rate Period, the VRDP Shares can once again be made available for purchase by qualified third party investors.
KEY RATING DRIVERS
The 'AAA' long-term ratings of the VRDP Shares primarily reflect:
--Sufficient asset coverage provided to the VRDP Shares as calculated per the Funds' over-collateralization (OC) tests;
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the Funds' operations;
--The capabilities of BlackRock as investment advisor.
The 'F1' short-term ratings of the VRDP Shares primarily reflect:
--The credit strength of the VRDP Shares' liquidity provider Citibank, N.A. ('A+/F1');
--The terms and conditions of the VRDP Shares purchase agreement.
Holder(s) of VRDP Shares and the Funds have mutually elected not to extend the Special Rate Period past the June 24, 2015 expiration date. Therefore, as of June 24, 2015, the VRDP Shares will revert to remarketable securities available for purchase by qualified third party investors and benefitting from an unconditional and irrevocable purchase obligation by liquidity provider Citibank, N.A., upon optional or mandatory tender events.
Fitch assigns the short-term rating to the VRDP Shares based on the financial strength of Citibank, N.A. ('A+/F1', Outlook Stable).
The Funds are non-diversified, closed-end funds, regulated by the Investment Company Act of 1940. Each Fund invests a significant portion of its total net assets in municipal bond securities rated at least investment grade. Each Fund also invests a significant portion of its total net assets in securities the interest of which is exempt from both federal and applicable state income taxes.
As of June 11, 2015, BHV had approximately $39.6 million in assets. Total leverage consisted of approximately $11.6 million of the Series W-7 VRDP Shares, and $3 million of tender option bond obligations.
As of June 11, 2015, BZM had approximately $48 million in assets. Total leverage consisted of approximately $16 million of the Series W-7 VRDP Shares, and $1.5 million of tender option bond obligations.
As of May 15, 2015, each Fund's asset coverage ratio for the VRDP Shares, as calculated in accordance with the 'AAA' Fitch total and net OC tests (Fitch OC Tests) outlined in Fitch's criteria, was in excess of 100%. This is the minimum threshold required under the terms of the VRDP Shares.
As of May 15, 2015, asset coverage for BHV and BZM, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage of 225% required by the Funds' governing documents for the VRDP Shares.
As of June 11, 2015, the effective leverage ratio was 36.65% for BHV and 36.1% for BZM. These effective leverage ratios are below the 45% maximum effective leverage ratio allowed by the Funds' governing documents for the VRDP Shares (46% if the increase in the ratio is due exclusively to asset market value volatility).
In the event of breaches of any of the above thresholds, the Funds are required to restore compliance per structural protections described below.
Compliance with the Fitch OC, asset coverage and effective leverage thresholds is tested periodically. The Fund's investment advisor is expected to cure any breach by altering the composition of the portfolio toward assets with lower discount factors (for Fitch OC breaches), or by reducing leverage in a sufficient amount (for all other breaches) within a pre-specified time period.
For Fitch OC tests and asset coverage tests, the total market value exposure (i.e. valuation, cure and redemption) is approximately 60 business days. For effective leverage tests, the exposure period is approximately 45 business days for VRDP Shares.
An effective leverage breach for remarketable VRDP Shares would be a breach of the fee agreement and, at the option of the liquidity provider, may result in mandatory tender of VRDP Shares for remarketing (see VRDP Purchase Obligation section below for additional details).
VRDP PURCHASE OBLIGATION
The short-term ratings assigned to the VRDP Shares of BHV and BZM are directly linked to the short-term creditworthiness of Citibank, N.A. ('A+/F1').
The VRDP Shares are supported by a purchase agreement to ensure full and timely repayment of all tendered VRDP Shares plus any accumulated and unpaid dividends. The purchase agreement is unconditional and irrevocable.
The VRDP Shares' purchase agreement requires Citibank, N.A. as Liquidity Provider to purchase all VRDP Shares of the applicable series tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP Shares of the applicable series if the Fund has not obtained an alternate purchase agreement prior to the termination of the purchase agreement being replaced or following the downgrade of the liquidity provider's rating below 'F2' (or equivalent).
Citibank, N.A.'s role as liquidity provider under the fee agreement relating to the purchase obligation has a scheduled termination date. Subsequent to the scheduled termination date, the fee agreement can be extended with Citibank, N.A., or a new liquidity provider may be selected. Any future changes to the terms of the fee agreements with Citibank, N.A. or a prospective replacement that weaken the structural protections discussed above may have negative rating implications.
Fitch performed various stress tests on the Funds to assess the strength of the structural protections available to the VRDP Shares compared to the stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the Funds' leverage and portfolio composition migrated to the outer limits of the Funds' operating and investment guidelines.
Only under remote circumstances, such as increasing the Funds' issuer concentration, while simultaneously migrating the portfolios to a mix of 80% long-term 'BBB' bonds and 20% high yield bonds, did the asset coverage available to the VRDP Shares fall below the 'AAA' long-term rating level, and instead passed at an 'AA' long-term rating level.
Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the Funds' permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms as consistent with an 'AAA' long-term rating.
Short-term ratings assigned to the remarketable VRDP Shares were not subject to the above stress tests as these are linked directly to the short-term rating of the liquidity provider.
THE FUND ADVISOR
BlackRock Advisors, LLC, a subsidiary of BlackRock, Inc., is the advisor to the Funds, responsible for the overall investment strategies and their implementation. BlackRock, Inc. and its affiliates had approximately $4.8 trillion of assets under management as of March 31, 2015.
The ratings assigned to the VRDP Shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the Funds, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
Certain terms relevant to key VRDP structural protections, including the minimum asset coverage and the effective leverage ratio are set forth in the fee agreements and purchase agreements between the applicable Funds and liquidity provider, and are renewed on a periodic basis. As noted above, any future changes to these terms that weaken the structural protections may have negative rating implications.
The short-term ratings assigned to the VRDP Shares may also be sensitive to changes in the financial condition of the liquidity provider. A downgrade of the liquidity provider to 'F2' would result in a downgrade of the short-term ratings of the VRDP Shares to 'F2,' absent other mitigants. A downgrade below 'F2', on the other hand, would not necessarily result in a further downgrade given the features in the transactions that would trigger a mandatory tender of the VRDP Shares for remarketing or a purchase by the liquidity provider in the event of a failed remarketing.
The Funds have the ability to assume economic leverage through derivative transactions which may not be captured by the Funds' minimum asset coverage test or effective leverage ratio. The Funds do not currently engage in speculative derivative activities and Fitch's analysis assumes the Funds do not envision engaging in material amounts of such activity in the future. Any material derivative exposure in the future could have potential negative rating implications if it adversely affects asset coverage available to rated securities.
Additional information is available on www.fitchratings.com
The sources of information used to assess this rating were the public domain and BlackRock Advisors, LLC.
Opt-in to receive Fitch's forthcoming research on closed-end funds:
Rating Closed-End Fund Debt and Preferred Stock (pub. 04 Sep 2014)
Dodd-Frank Rating Information Disclosure Form