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Fitch Expects to Rate VRDP Shares of 4 BlackRock Muni Funds 'AAA/F1+'; Rating Watch Negative

^{Published on 2011-04-12 11:30:40 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings expects to assign 'AAA' long-term ratings and 'F1+'short-term ratings to variable rate demand preferred shares (VRDPs) to be issued by the following municipal closed-end funds managed by BlackRock Advisors, LLC. The short-term rating is on Rating Watch Negative.

BlackRock MuniYield California Quality Fund, Inc. (NYSE: MCA)

--Up to $166,500,000 of VRDP Shares, series W-7, due April 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield Michigan Quality Fund, Inc. (NYSE: MIY)

--Up to $144,600,000 of VRDP Shares, series W-7, due April 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield New York Quality Fund, Inc. (NYSE: MYN)

--Up to $247,700,000 of VRDP Shares, series W-7, due April 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield New Jersey Fund, Inc. (NYSE: MYJ)

--Up to $102,200,000 of VRDP Shares, series W-7, due April 2041, with a liquidation preference of $100,000 per share.

The expected 'F1+', Rating Watch Negative short-term ratings address the following:

--The credit strength of Citibank, N.A. (rated 'A+/F1+', Rating Watch Negative by Fitch) as the liquidity provider, and its obligation to repurchase VRDPs following an unsuccessful remarketing upon option or mandatory tender, as well as following mandatory purchase events. Given that the short-term ratings assigned to the VRDPs are directly linked to the short-term credit quality of Citibank, N.A., any change in the Rating Watch status of Citibank will be reflected in the expected ratings assigned to the VRDPs.

--The integrity of the terms and legal structure of the liquidity purchase agreement.

--Timely payment of dividends based on the sufficiency of asset coverage as calculated per the Fitch overcollateralization (OC) tests.

--Parameters for repayment of the VRDPs by the funds should the shares be purchased and continue to be held by the liquidity provider for a continuous period of six months.

--The capabilities of BlackRock Advisors, LLC, as investment adviser.

The expected 'AAA' long-term ratings address the following:

--Sufficient asset coverage provided to the VRDPs by the funds' managed assets as calculated per the Fitch 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 and

--Both the short- and long-term expected ratings are also based on the capabilities of BlackRock Advisors, LLC, as investment adviser.

The VRDPs are expected to have a 30-year final maturity and pay an adjustable dividend rate set through weekly remarketings by the remarketing agent Citigroup Global Capital Markets, Inc. (or any subsequent replacement). The VRDPs are expected to have an unconditional demand feature allowing investors the right to tender the securities on a weekly basis, or upon occurrence of certain tender events, to the liquidity provider Citibank, N.A. (or any subsequent replacement). Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate formula calculated by multiplying the greater of SIFMA Municipal Swap Index or Libor by an Applicable Percentage (based on the long-term ratings then assigned to the VRDPs) plus an Applicable Spread (based on the lapsed time of failed remarketings). The Bank of New York Mellon (rated 'AA-/F1+' by Fitch) is expected to serve as the tender and paying agent, and as such, will provide remarketing results to the holders of VRDPs, tender and deliver non-clearing VRDPs from holders to the liquidity provider, and notify the holders of VRDPs of non-renewal and termination of the purchase agreement, among other duties.

Fitch expects to finalize its ratings on the VRDPs on the targeted closing date in late April 2011. The proceeds from the sale of the VRDPs are expected to be used to redeem in full the funds' outstanding Auction Market Preferred Shares (AMPS). Although the exact issuance size of the VRDPs has not yet been determined, Fitch expects asset coverage levels to be consistent with Fitch's criteria for an 'AAA' (and by extension 'F1+'). Should the issuance size or terms of the VRDPs materially differ from the expectation, this could result in different ultimate rating conclusions than the current expected ratings.

As of March 25, 2011, the funds had the following assets and pro forma leverage outstanding:

--MCA: assets of approximately $810 million and leverage of approximately $346 million, or 43% of managed assets. Pro forma leverage consisted approximately of $166.5 million of VRDPs and $179 million of floating rate certificates of tender option bonds.

--MIY: assets of approximately $415 million and leverage of approximately $161 million, or 39% of managed assets. Pro forma leverage consisted approximately of $144.6 million of VRDPs and $16 million of floating rate certificates of tender option bonds.

--MYN: assets of approximately $826 million and leverage of approximately $326 million, or 39% of managed assets. Pro forma leverage consisted approximately of $247.7 million of VRDPs and $78 million of floating rate certificates of tender option bonds.

--MYJ: assets of approximately $311 million and leverage of approximately $111 million, or 36% of managed assets. Pro forma leverage consisted approximately of $102.2 million of VRDPs and $9 million of floating rate certificates of tender option bonds.

At the time of the expected ratings, the funds' pro forma asset coverage ratios, as calculated in accordance with the Fitch total and net OC tests per the 'AAA' rating guidelines outlined in Fitch's applicable criteria, were in excess of 100%, which are the minimum asset coverage amounts deemed consistent with an 'AAA' rating. The Fitch OC tests calculate asset coverage available to the VRDPs based on the discounted market price loss expectations, the diversification of the fund's assets, and the use of structural and economic leverage. Should any such asset coverage tests decline below 100% (as tested weekly) and not be cured within the pre-specified timeframe of 10 business days, the governing documents would require the fund to reduce leverage in a sufficient amount to restore compliance with the applicable asset coverage tests within 60 calendar days.

Also at the time of the expected rating, the funds' pro forma asset coverage ratio for the expected VRDPs, as calculated in accordance with the Investment Company Act of 1940, was in excess of 225%, which is the minimum asset coverage required by the funds' governing documents (Minimum Asset Coverage Test). Should the Minimum Asset Coverage Test decline below its threshold amount, the governing documents' mandatory redemption provisions would require the fund to reduce the leverage in a sufficient amount to restore compliance with the applicable asset coverage test(s). The funds have also instituted an Effective Leverage Test for both VRDPs and floating-rate certificates of tender option bonds requiring each fund to maintain an effective leverage ratio lower than 45%. If any fund does not cure a breach of its Effective Leverage Test within 60 days, all of its VRDPs must be mandatorily tendered by the holders thereof.

The VRDPs are expected to be supported by a purchase agreement to ensure full and timely repayment of liquidation preference plus any accumulated and unpaid dividends to holders upon occurrence of certain events. Pursuant to the agreement, Citibank, N.A. is expected to unconditionally agree to purchase all VRDPs tendered for sale that were not successfully remarketed on a revolving basis, or upon mandatory purchase events described in the transaction documents. The purchase of VRDPs pursuant to the purchase agreement is expected to be unconditional and irrevocable, and as such, the expected short-term rating to be assigned to the VRDPs is directly linked to the short-term creditworthiness of the liquidity provider, including any Rating Watch status associated with such provider.

The liquidity provider's obligation under the purchase agreement is expected to have a term of two years. If the purchase agreement is not renewed and a replacement liquidity provider is not found 15 days prior to the agreement's expiration date, a mandatory purchase event will occur and the liquidity provider will be obligated to purchase all outstanding VRDPs on the business day prior to the expiration date of the purchase agreement. In addition, the VRDPs for a given fund are expected to be subject to mandatory tender if the short-term rating of the liquidity provider is downgraded below 'F2' by Fitch or equivalent, if the fund is unable to make a scheduled payment of dividends, or if the fund is unable to cure a breach to the Effective Leverage Ratio within 60 days, among others.

For purposes of calculating Fitch OC tests, Fitch will deem VRDPs to be outstanding until shares are redeemed by the fund. Put another way, Fitch will continue to include as fund leverage any VRDPs that have failed their remarketing and are held by the liquidity provider. This is intended to reflect the fact that such issuance still remains an obligation of the fund. Each fund is expected to redeem VRDPs that have been purchased by the liquidity provider under its purchase obligation if such shares have been held by the liquidity provider for a continuous period of six months. During this period, the fund will instruct their custodian to segregate eligible portfolio assets into a sub-account as to ensure that at the conclusion of the six month period, the sub-account will accumulate assets with a market value equal to at least 110% of the liquidation preference of VRDPs held by the liquidity provider. Fitch expects to maintain long- and short-term ratings on VRDPs purchased by the liquidity provider during this period, at which point both ratings will address the funds' structural protections and available asset coverage as opposed to the purchase obligation of the liquidity provider.

The funds are non-diversified, closed-end management investment company regulated by the Investment Company Act of 1940. The funds seeks to provide shareholders with high current income exempt from federal income taxes as well as income taxes of the state of California for MCA, Michigan for MIY, New York for MYN, and New Jersey for MYJ, by investing primarily in a portfolio of qualified municipal obligations. Under normal circumstances, the funds expect to invest primarily in assets that are rated at least 'BBB' by Fitch or equivalent.

BlackRock Advisors LLC is the funds' investment adviser, responsible for the funds' overall investment strategy and implementation. BlackRock Advisors, LLC is a wholly owned subsidiary of BlackRock, which had approximately $3.561 trillion of assets under management as of Dec. 31, 2010.

The ratings, once formally assigned to the VRDPs, may be sensitive to material changes in the leverage composition, credit quality of portfolio assets or market risk profile of the funds. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch. Furthermore, the short-term ratings assigned to the VRDPs may be sensitive to changes in the financial condition of the liquidity provider. For example, absent other mitigants, a downgrade of the liquidity provider to 'F1' would result in a downgrade of the short-term rating of the VRDPs to 'F1'. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the short-term rating of the VRDPs, given the acceleration features in the transaction which would result in a mandatory tender of the VRDPs for purchase by the liquidity provider. 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 ].

Additional information is available at [ www.fitchratings.com ].

The sources of information used to assess this rating were the public domain and BlackRock Advisors, LLC.

Applicable Criteria and Related Research:

--'Fitch Launches 'CEF Updates' for Closed-End Fund's, dated Nov. 8, 2010;

--'Closed-End Funds: Evolving Use of Leverage and Derivatives' dated Sept. 27, 2010;

--'Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market', dated Aug. 31, 2010;

--'Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations', dated March 18, 2010;

--'Closed-End Fund Debt and Preferred Stock Rating Criteria', dated Aug. 17, 2009.

Applicable Criteria and Related Research:

Closed-End Funds: Evolving Use of Leverage and Derivatives

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=559525 ]

Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=552106 ]

Closed-End Funds: Fitch Clarifies Criteria for Make-Whole Amounts and Other Prepayment Obligations

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=504986 ]

Closed-End Fund Debt and Preferred Stock Rating Criteria

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]

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