Fitch Ratings affirms the 'AAA/F1' ratings assigned to variable rate demand preferred shares (VRDP Shares) issued by the following municipal closed-end funds:
BlackRock MuniYield California Quality Fund, Inc. (NYSE: MCA)
--$166,500,000 of VRDP Shares, series W-7, due May 2041, with a liquidation preference of $100,000 per share.
BlackRock MuniYield Michigan Quality Fund, Inc. (NYSE: MIY)
--$144,600,000 of VRDP Shares, series W-7, due May 2041, with a liquidation preference of $100,000 per share.
BlackRock MuniYield New York Quality Fund, Inc. (NYSE: MYN)
--$247,700,000 of VRDP Shares, series W-7, due May 2041, with a liquidation preference of $100,000 per share.
BlackRock MuniYield New Jersey Fund, Inc. (NYSE: MYJ)
--$102,200,000 of VRDP Shares, series W-7, due May 2041, with a liquidation preference of $100,000 per share.
KEY RATING DRIVERS
The 'F1' short-term rating primarily reflects:
--The credit strength of the VRDP Shares liquidity provider Citibank, N.A. ('A/F1', Outlook Stable);
--The terms and conditions of the VRDP Shares purchase agreement (the purchase agreement).
The 'AAA' long-term rating primarily reflects:
--Sufficient asset coverage provided to the VRDP Shares as calculated per the fund's asset coverage tests;
--The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;
--The legal and regulatory parameters that govern the fund's operations.
Both the short- and long-term ratings also reflect the capabilities of BlackRock Advisors, LLC. as investment advisor.
TENDER AND REMARKETING
The VRDP Shares benefit from a feature giving investors the right to tender the securities with a seven-day notice for remarketing. The VRDP Shares are also subject to a mandatory tender for remarketing upon the occurrence of certain events, such as non-payment of dividends by the fund, announcement of a special rate period, among others. VRDP Shares that are unsuccessfully remarketed are purchased by the liquidity provider.
The VRDP Shares have a 30-year mandatory final maturity and pay an adjustable dividend rate set weekly by the remarketing agent Citigroup Global Markets, Inc. (or any subsequent replacement). Should any weekly remarketing be unsuccessful, the dividend rate will reset to a maximum rate as defined in transactional documents.
The Bank of New York Mellon (rated 'AA-/F1+' by Fitch) serves as the tender and paying agent, and as such, provides remarketing results to the holders of VRDP Shares, tender and deliver non-clearing VRDP Shares from holders to the liquidity provider, and notifies the holders of VRDP Shares of a non-renewal or termination of the purchase agreement, among other duties.
The VRDP Shares are supported by a purchase agreement (renewed on an annual basis) to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon occurrence of certain events. The agreement requires the liquidity provider to purchase all VRDP Shares tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP Shares 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 ratings below 'F2' (or equivalent).
The purchase of VRDP Shares pursuant to the purchase agreement is unconditional and irrevocable, and as such the short-term ratings assigned to the VRDP Shares are directly linked to the short-term creditworthiness of the liquidity provider.
As of Feb. 26, 2012, the fund's pro forma asset coverage ratios, as calculated in accordance with the Fitch total and net over-collateralization tests per the 'AAA' rating guidelines outlined in Fitch's criteria, were in excess of 100%, which is the minimum threshold required under the VRDP Shares' transactional documents.
As of the same date, the fund's asset coverage ratio for the VRDP Shares, as calculated in accordance with the Investment Company Act of 1940, were in excess of the minimum asset coverage threshold of 225% as currently set by the terms of the fee agreement between each fund and the liquidity provider and the VRDP Shares' transactional documents.
Each fund has also covenanted with the liquidity provider to maintain an effective leverage ratios for both VRDP Shares and floating-rate certificates of tender option bonds below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility). Each fund's Effective Leverage Ratio is currently below 45%.
In the event of asset coverage decline, the VRDP Shares' transactional documents require a fund to reduce leverage in order to restore compliance with the particular test(s) breaching the required threshold(s).
The funds are non-diversified, closed-end management investment companies regulated by the Investment Company Act of 1940. The funds seek 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, 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 $3.513 trillion of assets under management as of Dec. 31, 2011.
The ratings assigned to the VRDP Shares may be sensitive to material changes in the leverage composition, portfolio credit quality, portfolio diversification or market risk of the fund, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
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 rating of the VRDP Shares to 'F2,' absent other mitigants. However a downgrade of the liquidity provider below 'F2' would not necessarily result in a further corresponding downgrade given the acceleration features in the transaction documents for the VRDP Shares that would result in a mandatory tender of the VRDP Shares 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 ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain and BlackRock Advisors, LLC.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 16, 2011);
--'2012 Outlook: Closed-End Fund Leverage' (Dec. 19, 2011);
--'Closed-End Funds: Derivatives Under Review' (Nov. 16, 2011);
--'Primer: CEF Variable-Rate Demand Preferred Shares' (Oct. 27, 2011).
Applicable Criteria and Related Research:
Rating Closed-End Fund Debt and Preferred Stock
2012 Outlook: Closed-End Fund Leverage
Closed-End Funds: Derivatives Under Review (Increased Use and Limited Transparency Are Key Considerations)
Primer: CEF Variable-Rate Demand Preferred Shares (Closed-End Fund VRDPs Target Short-Term, Money Market Investors)