Fitch Affirms BlackRock Muni CEF Preferred Shares on Reorganization
BlackRock MuniHoldings New Jersey Quality Fund, Inc. (MUJ)
--\\$237,100,000 of VRDP Shares, Series W-7, final mandatory redemption July 2041, affirmed at 'AAA'. The liquidity provider is Bank of America, N.A.;
BlackRock MuniYield Pennsylvania Quality Fund (MPA)
--\\$82,600,000 of VRDP Shares, Series W-7, final mandatory redemption June 2041, affirmed at 'AAA'. The liquidity provider is Citibank, N.A.
The VRDP Shares noted above are in a Special Rate Period that will end on April 19, 2017 for the MUJ VRDP Shares and on June 24, 2015 for the MPA VRDP Shares. During this time, Bank of America, N.A. will remain the liquidity provider for the MUJ VRDP Shares and Citibank, N.A. will remain the liquidity provider for the MPA VRDP Shares. However, during the Special Rate Period the VRDP Shares will not be subject to optional or mandatory tender events and will not be remarketed by a remarketing agent pursuant to such events.
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 over-collateralization (OC) tests of MUJ and MPA;
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the operations of MUJ and MPA;
--The capabilities of BlackRock Advisors, LLC as investment advisor.
FUTURE REMARKETINGS
At the conclusion of the Special Rate Periods described above, holder(s) of VRDP Shares and the Funds may mutually elect to extend the Special Rate Period. If the Special Rate Period is, however, not extended, the VRDP Shares will revert to remarketable securities available for purchase by qualified third party investors. At that point, the VRDP Shares are expected to benefit from an unconditional and irrevocable purchase obligation by a liquidity provider upon optional or mandatory tender events, similar to other Fitch-rated VRDP Shares issued by Blackrock closed-end funds.
If the Special Rate Period is not extended, Fitch would expect to assign a short-term rating to the VRDP Shares based on the ratings of the liquidity provider. Currently Fitch rates Bank of America, N.A. 'A/F1', Outlook Negative and Citibank, N.A. 'A/F1', Outlook Stable. However, any designated liquidity provider or its rating may be subject to change in the future, which could result in a change to Fitch's short-term rating on the VRDP Shares.
FUND REORGANIZATION
Today, BlackRock Advisors, LLC announced the closing of two closed-end fund reorganizations, whereby BlackRock MuniYield New Jersey Quality Fund, Inc. (MJI) is reorganized into MUJ and The BlackRock Pennsylvania Strategic Municipal Trust (BPS) is reorganized into MPA. As a result of the reorganizations, substantially all the assets and liabilities of MJI have become assets and liabilities of MUJ and substantially all the assets and liabilities of BPS have become assets and liabilities of MPA. The reorganizations have been approved, as applicable, by the common and preferred shareholders of the acquiring and target funds.
Today, MUJ has issued an additional \\$64.4 million of Series W-7 VRDP Shares, increasing the amount outstanding from \\$172.7 million to \\$237.1 million. Also today, MPA has issued an additional \\$16.3 million of Series W-7 VRDP Shares, increasing the amount outstanding from \\$66.3 million to \\$82.6 million.
Upon the closing of MJI's reorganization with MUJ, holders of the VRDP Shares of target fund MJI that were previously rated 'AAA' by Fitch received, for each VRDP Share held immediately prior to the reorganization, one VRDP Share of the additional issuance by MUJ having substantially the same terms.
Also upon the closing of BPS's reorganization with MPA, holders of the VRDP Shares of target fund BPS that were previously rated 'AAA' by Fitch received, for each VRDP Share held immediately prior to the reorganization, one VRDP Share of the additional issuance by MPA having substantially the same terms. Fitch now marks the VRDP MJI and BPS as Paid in Full.
FUND PROFILES
MUJ and MPA are closed-end management investment companies regulated by the Investment Company Act of 1940. MUJ invests in municipal securities that are exempt from regular federal and New Jersey income taxes. MPA invests in municipal securities that are exempt from regular federal and Pennsylvania income taxes. The Funds invest a significant portion of their total net assets in securities rated at least investment grade.
FUND LEVERAGE
As of April 2, 2015, MUJ had approximately \\$777.6 million in managed assets including the impact of the MJI acquisition on a pro forma consolidated basis. Total leverage on a pro forma consolidated basis was \\$289.9 million, consisting of approximately \\$237.1 million of VRDP Shares and \\$52.8 million of tender option bond obligations.
Also as of April 2, 2015, MPA had approximately \\$337.3 million in managed assets including the impact of the BPS acquisition on a pro forma consolidated basis. Total leverage on a pro forma consolidated basis was \\$121.3 million, consisting of approximately \\$82.6 million of VRDP Shares and \\$38.7 million of tender option bond obligations.
ASSET COVERAGE
As of April 2, 2015, each Fund's pro-forma Fitch total and net overcollateralization tests (Fitch OC Tests) outlined in Fitch's criteria at the 'AAA' level were in excess of 100%. This is the minimum threshold required under the terms of the VRDP Shares.
Each Fund's pro-forma asset coverage ratios calculated in accordance with the Investment Company Act of 1940 was in excess of the minimum asset coverage of 225% required by the governing documents for the VRDP Shares.
Each Fund's pro-forma effective leverage ratios were 37.3% for MUJ and 36% for MPA. These effective leverage ratios are below the 45% maximum effective leverage ratio allowed by the governing documents of the VRDP Shares.
In the event of breaches to any of the above thresholds, the Funds are required to restore compliance per structural protections described below.
STRUCTURAL PROTECTIONS
Compliance with the Fitch OC, asset coverage and effective leverage thresholds is tested periodically. For the Fitch OC test, the fund manager is expected to cure any breach by altering the composition of the portfolio toward assets with lower discount factors. For the asset coverage test, the fund manager is expected to cure any breach by reducing leverage in a sufficient amount within a pre-specified time period. In the case of an effective leverage breach for VRDP Shares, the Liquidity Provider has the option to institute actions to require the Fund to remedy the breach pursuant to a covenant with the Liquidity Provider.
For the Fitch OC, asset coverage and effective leverage tests, the total market value exposure (i.e. valuation, cure and redemption) is consistent with Fitch's 60 business day criteria guideline.
STRESS TESTS
Fitch performed various stress tests on the Funds to assess the strength of the structural protections available to the VRDP Shares compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the pro forma leverage and portfolio composition for each of MUJ and MPA migrated to the outer limits of its operating and investment guidelines.
Only under remote circumstances, such as increasing either Fund's issuer concentration, while simultaneously migrating the portfolios to a mix of 80% 'BBB', 10+ years to maturity 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 permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms of MUJ and MPA as consistent with an 'AAA' long-term rating.
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 \\$4.65 trillion of assets under management as of Dec. 31, 2014.
RATINGS SENSITIVITIES
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 minimum asset coverage and the effective leverage ratio are set forth in the fee agreement and the purchase agreement and are renewed on a periodic basis. Any future changes to these terms that weaken the structural protections may have negative rating implications.
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 exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated securities.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end funds, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.
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