N@N

Fitch Rates VRDPs of 7 BlackRock Muni Funds 'AAA/F1+'; Rating Watch Negative

_{//business-finance.news-articles.net/content/201 .. ock-muni-funds-aaa-f1-rating-watch-negative.html}
^{Published in Business and Finance on Thursday, May 19th 2011 at 11:05 GMT by Market Wire}  

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

BlackRock MuniEnhanced Fund, Inc. (NYSE: MEN)
--$142,500,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield Investment Fund (NYSE: MYF)
--$59,400,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield Quality Fund III, Inc. (NYSE: MYI)
--$356,400,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield Arizona Fund, Inc. (NYSE AMEX: MZA)
--$37,300,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield Michigan Quality Fund II, Inc. (NYSE: MYM)
--$87,300,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield California Fund, Inc. (NYSE: MYC)
--$105,900,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

BlackRock MuniYield Pennsylvania Quality Fund (NYSE: MPA)
--$66,300,000 of VRDPs, series W-7, due June 1, 2041, with a liquidation preference of $100,000 per share.

The closing date for the VRDPs is May 19, 2011. The funds will use proceeds from the sale of the VRDPs to redeem in full the funds' outstanding auction market preferred shares (AMPS).

The '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 optional 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 or Rating Watch status of Citibank will be reflected in the 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.

The '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;
--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 legal and regulatory parameters that govern the funds' operations;
--Both the short- and long-term ratings are also based on the capabilities of BlackRock Advisors, LLC, as investment adviser.

The VRDPs have a 30-year final maturity and pay an adjustable dividend rate set weekly by the remarketing agent, Citigroup Global Markets, Inc. (or any subsequent replacement). The VRDPs have an unconditional demand feature allowing investors the right to tender the securities on a weekly basis, or upon occurrence of certain tender events, for remarketing by the remarketing agent. In the event no remarketing occurs or VRDPs are not successfully remarketed, such shares will be purchased by the liquidity provider, Citibank N.A. (or any subsequent replacement) and the dividend rate for all VRDPs 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) serves 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.

The funds had the following assets as of April 21, 2011 and effective leverage balances as of VRDP issuance:

--MEN: assets of approximately $507 million and leverage of approximately $204 million, or 40% of managed assets. Pro forma leverage consisted of approximately $143 million of VRDPs and $62 million of floating rate certificates of tender option bonds.

--MYF: assets of approximately $290 million and leverage of approximately $121 million, or 42% of managed assets. Pro forma leverage consisted of approximately $59 million of VRDPs and $62 million of floating rate certificates of tender option bonds.

--MYI: assets of approximately $1,407 million and leverage of approximately $552 million, or 39% of managed assets. Pro forma leverage consisted of approximately $356 million of VRDPs and $196 million of floating rate certificates of tender option bonds.

--MZA: assets of approximately $98 million and leverage of approximately $39 million, or 40% of managed assets. Pro forma leverage consisted of approximately $37 million of VRDPs and $2 million of floating rate certificates of tender option bonds.

--MYM: assets of approximately $255 million and leverage of approximately $96 million, or 38% of managed assets. Pro forma leverage consisted of approximately $87 million of VRDPs and $9 million of floating rate certificates of tender option bonds.

--MYC: assets of approximately $504 million and leverage of approximately $215 million, or 43% of managed assets. Pro forma leverage consisted of approximately $106 million of VRDPs and $109 million of floating rate certificates of tender option bonds.

--MPA: assets of approximately $265 million and leverage of approximately $102 million, or 39% of managed assets. Pro forma leverage consisted approximately of $66 million of VRDPs and $36 million of floating rate certificates of tender option bonds.

Each fund's issuance of VRDPs is 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. unconditionally agrees 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 unconditional and irrevocable, and as such, the short-term rating 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 each purchase agreement has an initial term of 364 days. If the purchase agreement for each fund's VRDPs 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 subject to mandatory tender if the short-term rating of the liquidity provider is downgraded below 'F2' by Fitch or equivalent and the VRDPs must be purchased by the liquidity provider by the 15th day prior to the termination date of the purchase agreement due to such downgrade (such termination date to be not less 16 days or more than 30 days following such downgrade) if the fund has not obtained and delivered to the tender and paying agent an alternate purchase agreement. The VRDPs of a fund are also subject to mandatory tender if the fund is unable to make a scheduled payment of dividends, the fund provides an alternate purchase agreement prior to 15 days before termination of a purchase agreement, the fund fails to pay the applicable fee to the liquidity provider, or if the fund is unable to cure a breach to the Effective Leverage Ratio within 60 days and the liquidity provider provides written notice to the fund and the tender and paying agent that the failure to cure such a breach constitutes a mandatory tender event, among others.

At the time of the assignment of the 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 assignment of the ratings, the funds' pro forma asset coverage ratio for the 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' transactional 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 and the liquidity provider provides written notice to the fund and the tender and paying agent that the failure to cure such a breach constitutes a mandatory tender event, all of its VRDPs must be tendered by the holders thereof.

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 primarily address the funds' structural protections and available asset coverage.

The funds are non-diversified, closed-end management investment companies regulated by the Investment Company Act of 1940. Each fund seeks to provide shareholders with as high a level of current income exempt from federal income taxes, as well as income taxes of the states of Arizona for MZA, Michigan for MYM, California for MYC, and Pennsylvania for MPA, as is consistent with its investment policies, by investing primarily in portfolios of qualified municipal obligations.

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, Inc., which had approximately $3.6 trillion of assets under management as of March 31, 2011.

The ratings 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:
--'CLOs and CEFs: A Comparison of Leveraged Loan Investment Vehicles', dated April 26, 2011;
--'Tax-Exempt Closed-End Funds Weather Price Declines', dated Feb. 2, 2011;
--'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 ]
Tax-Exempt Closed-End Funds Weather Price Declines (Asset Coverage Remains Strong)
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=601825 ]
CLOs and CEFs: A Comparison of Leveraged Loan Investment Vehicles
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=622909 ]
Closed-End Fund Debt and Preferred Stock Rating Criteria
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=462492 ]

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE [ WWW.FITCHRATINGS.COM ]. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.