Fitch Rates BlackRock Closed-End Fund VMTP
(The following statement was released by the rating agency)Fitch Ratings-New York-17 March 2021:
Fitch Ratings has assigned a 'AA' long-term rating to the $52.0 million of Series W-7 Variable Rate Muni Term Preferred Shares (VMTP shares) issued by municipal closed-end fund BlackRock Municipal Income Investment Trust (BBF) in connection with the planned fund reorganizations described below.
The assigned rating is driven by changes to Fitch's rating criteria for closed-end funds (CEFs), rather than by any fundamental changes to the fund's credit profile.
KEY RATING DRIVERS
The assigned rating follows the publication of Fitch's updated "Closed-End Funds and Market Value Structures Rating Criteria" on Dec. 4, 2020, and primarily reflects the following criteria changes:
--No assets can be eligible to receive credit at the 'AAA' rating level. Effectively, this institutes a rating cap on the ratings of obligations backed by market value exposures, including CEFs, under the criteria report;
--Only certain assets can be eligible for credit at the 'AA' rating level. Assets that will continue to receive credit at the 'AA' rating level include:
-Certain high-quality government securities;
-Certain high-quality municipal and corporate bonds.
--Recalibration of applicable discount factors (DFs) at each rating level;
The ratings remain supported by:
--Sufficient asset coverage at the 'AA' level provided to the VMTP shares as calculated per over- collateralization (OC) tests of BBF;
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern BBF's operations;
--The capabilities of BlackRock Advisors, LLC as investment advisor.
BlackRock Advisors, LLC has announced planned CEF reorganizations scheduled to close in the second quarter of 2021, whereby target funds BlackRock Strategic Municipal Trust (BSD), BlackRock MuniYield Investment Quality Fund (MFT) and BBF are expected to be reorganized into acquiring fund BlackRock Municipal Income Trust II (BLE). To facilitate these reorganizations, today, BBF has issued the VMTP shares to refinance the outstanding Series W-7 Variable Rate Demand Preferred Shares (VRDP shares). Today Fitch marks the VRDP shares Paid in Full.
Upon closing of the planned reorganizations, substantially all the assets and liabilities of the target funds are expected to become assets and liabilities of BLE. The reorganizations have been approved by the requisite shareholders of each fund. Upon the closing of the reorganizations, holders of the VMTP shares of target funds BSD, MFT, and BBF are expected to receive one VMTP share of a planned upsized issuance by BLE for each VMTP share held immediately prior to the reorganizations, having substantially the same terms. At that point Fitch expects to mark the VMTP shares of the three target funds, including today's VMTP issuance by BBF as Paid in Full.
BBF is a closed-end management investment company regulated by the Investment Company Act of 1940 (the Act). Historically, BBF has invested in municipal securities that are exempt from regular federal income taxes, and has invested a significant portion of total net assets in securities rated at least investment grade.
PREFERRED SHARE ASSET COVERAGE
As of the review date, the asset coverage ratios for BBF, as calculated in accordance with the 'AA' Fitch total and net overcollateralization (OC) tests (Fitch OC Tests) outlined in Fitch's criteria, were in excess of 100%, which is the minimum threshold required under the terms of the VMTP shares.
As of the review date, the Minimum Asset Coverage ratios for BBF, as calculated in accordance with the Act, were in excess of 225%, which is the Minimum Asset Coverage threshold required under the terms of the VMTP shares.
As of the review date, the Effective Leverage Ratios for BBF, calculated by including both VMTP shares and tender option bonds (TOBs), were below 45%, which is the maximum leverage threshold allowed under the terms of the VMTP shares (the threshold is 46% if the increase in the ratio is due solely to fluctuations in the market value of a fund's portfolio securities).
The impact of the TOBs' leverage is captured under the Fitch OC Tests and the Effective Leverage Ratio but not under the Minimum Asset Coverage ratio as calculated in accordance with the Act.
In the event of asset coverage declines, the VMTP shares' governing documents require BBF to cure any breach by reducing leverage in a sufficient amount within a pre-specified time period. For Fitch OC Tests, the fund can also cure any breach within a pre-specified time period by altering the composition of the portfolio toward assets with lower discount factors.
Compliance with the Fitch OC threshold under the Basic Maintenance Amount is tested every five business days for the VMTP shares. Failure to cure a breach by the allotted cure date requires the redemption of sufficient preferred shares to restore the total and net OC ratios to 100%. The time allowed for BBF to restore compliance is consistent with Fitch's 60-business day criteria guideline. Minimum asset coverage compliance is tested every five business days for the VMTP shares. Failure to cure a breach of the minimum asset coverage requirement by the allotted cure date results in mandatory redemption of sufficient preferred shares to restore asset coverage to 225%.
Compliance with the effective leverage ratio is tested daily for the VMTP shares. A breach of the effective leverage ratio threshold requires BBF to redeem a sufficient number of preferred shares, and/or reduce the amount of TOBs the fund has outstanding in order to restore compliance. The time allowed for BBF to restore compliance is consistent with Fitch's 60-business day criteria guideline.
BlackRock Advisors, LLC, a subsidiary of BlackRock, Inc., is the investment advisor to BBF, responsible for overall investment strategies and their implementation.
BlackRock, Inc. and its affiliates had approximately $8.7 trillion of assets under management as of Dec. 31, 2020.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
--Rating upgrades are not currently envisioned for the 'AA' rated VMTP shares issued by BBF, as Fitch criteria effectively caps closed end fund ratings at 'AA'.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
--The ratings assigned to the VMTP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of BBF, as described above;
--A material adverse deviation from Fitch guidelines for any key rating driver could result in a downgrade of the ratings;
--BBF has the ability to assume economic leverage through speculative derivative transactions that may not be captured by the fund's minimum asset coverage test or effective leverage ratio. The Fitch OC Tests would capture such economic leverage.
--BBF does not currently engage in speculative derivative activities, and Fitch's analysis assumes the fund does not envision engaging in material amounts of such activity in the future. Any material speculative derivative exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated securities.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579]
SOURCES OF INFORMATION
The sources of information used to assess this rating were the public domain and BlackRock Advisors, LLC.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
BlackRock Municipal Income Investment Trust
---- ; Long Term Rating; New Rating; AA
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