Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-05542
Name of Fund: BlackRock Income Trust, Inc. (BKT)
Fund Address: 100 Bellevue Parkway, Wilmington, DE 19809
Name and address of agent for service: John M. Perlowski, Chief Executive Officer, BlackRock Income
Trust, Inc., 55 East 52nd Street, New York, NY 10055
Registrant’s telephone number, including area code: (800) 882-0052, Option 4
Date of fiscal year end: 08/31/2016
Date of reporting period: 08/31/2016
Table of Contents
Item 1 – Report to Stockholders
Table of Contents
AUGUST 31, 2016
|
ANNUAL REPORT
|
|
BlackRock Core Bond Trust (BHK)
BlackRock Corporate High Yield Fund, Inc. (HYT)
BlackRock Income Trust, Inc. (BKT)
| Not FDIC Insured • May Lose Value • No Bank Guarantee |
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| 2 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| The Markets in Review |
Dear Shareholder,
Uneven economic outlooks and the divergence of monetary policies across regions have been the overarching themes driving financial markets over the past couple of years. In the latter half of 2015, investors were focused largely on the timing of the Federal Reserve’s (the “Fed”) decision to end its near-zero interest rate policy. The Fed ultimately hiked rates in December, while, in contrast, the European Central Bank and the Bank of Japan increased stimulus, even introducing negative interest rates. The U.S. dollar had strengthened considerably, causing profit challenges for U.S. companies that generate revenues overseas, and pressuring emerging market currencies and commodities prices. Also during this time period, oil prices collapsed due to excess global supply. China showed signs of slowing economic growth and declining confidence in the country’s policymakers stoked worries about the potential impact on the global economy. Risk assets (such as equities and high yield bonds) struggled as volatility increased.
The elevated market volatility spilled over into 2016, but as the first quarter wore on, fears of a global recession began to fade, allowing markets to calm and risk assets to rebound. Central bank stimulus in Europe and Japan, combined with a more tempered outlook for rate hikes in the United States, helped bolster financial markets. A softening in U.S. dollar strength brought relief to U.S. exporters and emerging market economies, and oil prices rebounded as the world’s largest producers agreed to reduce supply.
Volatility spiked in late June when the United Kingdom shocked investors with its vote to leave the European Union. Uncertainty around how the British exit might affect the global economy and political landscape drove investors to high-quality assets, pushing already low global yields to even lower levels. However, risk assets recovered swiftly in July as economic data suggested that the consequences had thus far been contained to the United Kingdom.
With a number of factors holding interest rates down — central bank accommodation, an aging population in need of income, and institutions such as insurance companies and pension plans needing to meet liabilities — assets offering decent yield have become increasingly scarce. As a result, income-seeking investors have stretched into riskier assets despite high valuations in many sectors.
Market volatility touched a year-to-date low in August, which may be a signal that investors have become complacent given persistent macro risks: Geopolitical turmoil continues to loom. A surprise move from the Fed — i.e., raising rates sooner than expected — has the potential to roil markets. And perhaps most likely to stir things up — the U.S. presidential election.
At BlackRock, we believe investors need to think globally, extend their scope across a broad array of asset classes and be prepared to adjust accordingly as market conditions change over time. We encourage you to talk with your financial advisor and visit blackrock.com for further insight about investing in today’s markets.
Sincerely,
Rob Kapito
President, BlackRock Advisors, LLC
Rob Kapito
President, BlackRock Advisors, LLC
| Total Returns as of August 31, 2016 | ||||||||
| 6-month | 12-month | |||||||
| U.S. large cap equities |
13.60 | % | 12.55 | % | ||||
| U.S. small cap equities |
20.87 | 8.59 | ||||||
| International equities |
10.35 | (0.12 | ) | |||||
| Emerging market equities |
22.69 | 11.83 | ||||||
| 3-month Treasury bills |
0.17 | 0.23 | ||||||
| U.S. Treasury securities |
2.22 | 7.35 | ||||||
| U.S. investment grade bonds |
3.68 | 5.97 | ||||||
| Tax-exempt municipal |
3.35 | 7.03 | ||||||
| U.S. high yield bonds |
15.56 | 9.12 | ||||||
| Past performance is no guarantee of future results. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. | ||||||||
| THIS PAGE NOT PART OF YOUR FUND REPORT | 3 |
Table of Contents
| Trust Summary as of August 31, 2016 | BlackRock Core Bond Trust | |||
| Trust Overview | ||
BlackRock Core Bond Trust’s (BHK) (the “Trust”) investment objective is to provide current income and capital appreciation. The Trust seeks to achieve its investment objective by investing at least 75% of its managed assets in bonds that are investment grade quality at the time of investment. The Trust’s investments will include a broad range of bonds, including corporate bonds, U.S. government and agency securities and mortgage-related securities. The Trust may invest up to 25% of its total managed assets in bonds that at the time of investment are rated Ba/BB or below by Moody’s Investors Service, Inc. (“Moody’s”), Fitch Ratings (“Fitch”) or another nationally recognized rating agency or bonds that are unrated but judged to be of comparable quality by the investment adviser. The Trust may invest directly in such securities or synthetically through the use of derivatives.
No assurance can be given that the Trust’s investment objective will be achieved.
| Trust Information | ||
| Symbol on New York Stock Exchange (“NYSE”) |
BHK | |
| Initial Offering Date |
November 27, 2001 | |
| Current Distribution Rate on Closing Market Price as of August 31, 2016 ($14.33)1 |
5.44% | |
| Current Monthly Distribution per Common Share2 |
$0.065 | |
| Current Annualized Distribution per Common Share2 |
$0.780 | |
| Economic Leverage as of August 31, 20163 |
26% |
| 1 | Current distribution rate on closing market price is calculated by dividing the current annualized distribution per share by the closing market price. The current distribution rate may consist of income, net realized gains and/or a tax return of capital. Past performance does not guarantee future results. |
| 2 | The distribution rate is not constant and is subject to change. |
| 3 | Represents reverse repurchase agreements outstanding as a percentage of total managed assets, which is the total assets of the Trust (including any assets attributable to borrowings) minus the sum of liabilities (other than borrowings representing financial leverage). For a discussion of leveraging techniques utilized by the Trust, please see The Benefits and Risks of Leveraging on page 10. |
| Performance and Portfolio Management Commentary | ||
The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.
| 4 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| BlackRock Core Bond Trust |
| Market Price and Net Asset Value Per Share Summary | ||||||||||
| 8/31/16 | 8/31/15 | Change | High | Low | ||||||||||||||||
| Market Price |
$ | 14.33 | $ | 12.63 | 13.46 | % | $ | 14.34 | $ | 12.34 | ||||||||||
| Net Asset Value |
$ | 15.25 | $ | 14.29 | 6.72 | % | $ | 15.28 | $ | 13.74 | ||||||||||
| Market Price and Net Asset Value History For the Past Five Years | ||||||||||
| Overview of the Trust’s Total Investments |
| ANNUAL REPORT | AUGUST 31, 2016 | 5 |
Table of Contents
| Trust Summary as of August 31, 2016 | BlackRock Corporate High Yield Fund, Inc. | |||
| Trust Overview |
BlackRock Corporate High Yield Fund, Inc.’s (HYT) (the “Trust”) primary investment objective is to provide shareholders with current income. The Trust’s secondary investment objective is to provide shareholders with capital appreciation. The Trust seeks to achieve its objectives by investing primarily in a diversified portfolio of fixed income securities which are rated below investment grade or, if unrated, are considered by the investment adviser to be of comparable quality. The Trust may invest directly in fixed income securities or synthetically through the use of derivatives.
No assurance can be given that the Trust’s investment objectives will be achieved.
| Trust Information | ||
| Symbol on NYSE |
HYT | |
| Initial Offering Date |
May 30, 2003 | |
| Current Distribution Rate on Closing Market Price as of August 31, 2016 ($10.88)1 |
7.72% | |
| Current Monthly Distribution per Common Share2 |
$0.07 | |
| Current Annualized Distribution per Common Share2 |
$0.84 | |
| Economic Leverage as of August 31, 20163 |
29% |
| 1 | Current distribution rate on closing market price is calculated by dividing the current annualized distribution per share by the closing market price. The current distribution rate may consist of income, net realized gains and/or a tax return of capital. Past performance does not guarantee future results. |
| 2 | The distribution rate is not constant and is subject to change. |
| 3 | Represents bank borrowings as a percentage of total managed assets, which is the total assets of the Trust (including any assets attributable to borrowings) minus the sum of liabilities (other than borrowings representing financial leverage). For a discussion of leveraging techniques utilized by the Trust, please see The Benefits and Risks of Leveraging on page 10. |
| Performance and Portfolio Management Commentary |
The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.
| 6 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| BlackRock Corporate High Yield Fund, Inc. |
| Market Price and Net Asset Value Per Share Summary | ||||||||||
| 8/31/16 | 8/31/15 |
Change | High | Low | ||||||||||||||||
| Market Price |
$ | 10.88 | $ | 9.97 | 9.13 | % | $ | 10.93 | $ | 9.13 | ||||||||||
| Net Asset Value |
$ | 11.79 | $ | 12.06 | (2.24 | )% | $ | 12.06 | $ | 10.13 | ||||||||||
| Market Price and Net Asset Value History For the Past Five Years | ||||||||||
| Overview of the Trust’s Total Investments |
| ANNUAL REPORT | AUGUST 31, 2016 | 7 |
Table of Contents
| Trust Summary as of August 31, 2016 | BlackRock Income Trust, Inc. | |||
| Trust Overview |
BlackRock Income Trust, Inc.’s (BKT) (the “Trust”) investment objective is to manage a portfolio of high-quality securities to achieve both preservation of capital and high monthly income. The Trust seeks to achieve its investment objective by investing at least 65% of its assets in mortgage-backed securities. The Trust invests at least 80% of its assets in securities that are (i) issued or guaranteed by the U.S. government or one of its agencies or instrumentalities or (ii) rated at the time of investment either AAA by S&P or Aaa by Moody’s. The Trust may invest directly in such securities or synthetically through the use of derivatives.
No assurance can be given that the Trust’s investment objective will be achieved.
| Trust Information | ||
| Symbol on NYSE |
BKT | |
| Initial Offering Date |
July 22, 1988 | |
| Current Distribution Rate on Closing Market Price as of August 31, 2016 ($6.60)1 |
4.82% | |
| Current Monthly Distribution per Common Share2 |
$0.0265 | |
| Current Annualized Distribution per Common Share2 |
$0.3180 | |
| Economic Leverage as of August 31, 20163 |
26% |
| 1 | Current distribution rate on closing market price is calculated by dividing the current annualized distribution per share by the closing market price. The current distribution rate may consist of income, net realized gains and/or a tax return of capital. Past performance does not guarantee future results. |
| 2 | The distribution rate is not constant and is subject to change. |
| 3 | Represents reverse repurchase agreements outstanding as a percentage of total managed assets, which is the total assets of the Trust (including any assets attributable to borrowings) minus the sum of liabilities (other than borrowings representing financial leverage). For a discussion of leveraging techniques utilized by the Trust, please see the Benefits and Risks of Leveraging on page 10. |
| Performance and Portfolio Management Commentary |
The views expressed reflect the opinions of BlackRock as of the date of this report and are subject to change based on changes in market, economic or other conditions. These views are not intended to be a forecast of future events and are no guarantee of future results.
| 8 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| BlackRock Income Trust, Inc. |
| Market Price and Net Asset Value Per Share Summary | ||||||||||
| 8/31/16 | 8/31/15 | Change | High | Low | ||||||||||||||||
| Market Price |
$ | 6.60 | $ | 6.30 | 4.76 | % | $ | 6.66 | $ | 6.26 | ||||||||||
| Net Asset Value |
$ | 6.96 | $ | 7.08 | (1.69 | )% | $ | 7.10 | $ | 6.92 | ||||||||||
| Market Price and Net Asset Value History For the Past Five Years | ||||||||||
| Overview of the Trust’s Total Investments |
| ANNUAL REPORT | AUGUST 31, 2016 | 9 |
Table of Contents
| The Benefits and Risks of Leveraging |
| Derivative Financial Instruments |
| 10 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| BlackRock Core Bond Trust (BHK) (Percentages shown are based on Net Assets) |
| Portfolio Abbreviations |
| ADS | American Depositary Shares | EUR | Euro | OTC |
Over-the-Counter | |||||
| AUD | Australian Dollar | EURIBOR | Euro Interbank Offered Rate | PIK |
Payment-in-Kind | |||||
| CAD | Canadian Dollar | GBP | British Pound | RB |
Revenue Bonds | |||||
| CHF | Swiss Franc | GO | General Obligation Bonds | SEK |
Swedish Krona | |||||
| CDO | Collateralized Debt Obligation | JPY | Japanese Yen | SGD |
Singapore Dollar | |||||
| CLO | Collateralized Loan Obligation | LIBOR |
London Interbank Offered Rate |
SIFMA |
Securities Industry and Financial Markets Association | |||||
| CR | Custodian Receipt | LOC |
Letter of Credit |
TBA |
To Be Announced | |||||
| DIP | Debtor-In-Possession | MXN |
Mexican Peso |
USD |
U.S. Dollar | |||||
| ETF | Exchange-Traded Fund | NOK |
Norwegian Krone |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 11 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 12 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 13 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 14 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 15 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 16 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 17 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 18 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 19 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 20 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 21 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 22 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 23 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
See Notes to Financial Statements.
| 24 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
| Notes to Schedule of Investments |
| (a) | Non-income producing security. |
| (b) | Variable rate security. Rate as of period end. |
| (c) | Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration to qualified institutional investors. |
| (d) | All or a portion of security has been pledged as collateral in connection with outstanding reverse repurchase agreements. |
| (e) | Payment-in-kind security which may pay interest/dividends in additional par/shares and/or in cash. Rates shown are the current rate and possible payment rates. |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 25 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
| (f) | When-issued security. |
| (g) | Perpetual security with no stated maturity date. |
| (h) | Convertible security. |
| (i) | Issuer filed for bankruptcy and/or is in default |
| (j) | Amount is less than $500. |
| (k) | Zero-coupon bond. |
| (l) | During the year ended August 31, 2016, investments in issuers considered to be affiliates of the Trust for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows: |
| Affiliate | Shares Held at August 31, 2015 |
Net Activity |
Shares Held at August 31, 2016 |
Value at August 31, 2016 |
Income | |||||||||||||||
| BlackRock Liquidity Funds, TempFund, Institutional Class |
9,920,365 | 3,006,544 | 12,926,909 | $ | 12,926,909 | $ | 43,746 | |||||||||||||
| (m) | Current yield as of period end. |
| • | For Trust compliance purposes, the Trust’s industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by the investment adviser. These definitions may not apply for purposes of this report, which may combine such industry sub-classifications for reporting ease. |
Reverse Repurchase Agreements
| Counterparty | Interest Rate |
Trade Date |
Maturity Date1 |
Face Value | Face Value Including Accrued Interest |
Type of Underlying Collateral |
Remaining Contractual Maturity of the Agreements | |||||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith, Inc. |
0.22 | % | 6/02/15 | Open | $ | 1,323,000 | $ | 1,326,687 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith, Inc. |
0.22 | % | 6/02/15 | Open | 830,000 | 832,313 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 546,875 | 549,031 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 518,150 | 520,192 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 994,500 | 998,420 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 355,781 | 357,184 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 1,014,125 | 1,018,122 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 971,438 | 975,267 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 4,831,250 | 4,850,293 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 718,875 | 721,709 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Barclays Capital, Inc. |
0.55 | % | 12/17/15 | Open | 2,973,750 | 2,985,471 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Credit Suisse Securities (USA) LLC |
0.65 | % | 12/17/15 | Open | 950,950 | 955,380 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Credit Suisse Securities (USA) LLC |
0.65 | % | 12/17/15 | Open | 1,454,375 | 1,461,150 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Credit Suisse Securities (USA) LLC |
0.65 | % | 12/17/15 | Open | 1,104,687 | 1,109,833 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,713,750 | 1,721,610 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 3,131,250 | 3,145,612 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,228,500 | 1,234,135 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 2,028,510 | 2,037,814 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,693,125 | 1,700,891 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 4,342,500 | 4,362,418 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,822,500 | 1,830,859 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 2,036,475 | 2,045,816 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,909,860 | 1,918,620 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,835,000 | 1,843,416 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,435,225 | 1,441,808 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 2,019,250 | 2,028,512 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 2,175,000 | 2,184,976 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 2,002,725 | 2,011,911 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 1,448,563 | 1,455,207 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 12/17/15 | Open | 4,725,000 | 4,746,672 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 4,884,000 | 4,906,487 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 3,995,000 | 4,013,394 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 2,857,000 | 2,870,154 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 3,930,000 | 3,948,094 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 3,529,000 | 3,545,248 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 7,342,000 | 7,375,804 | Capital Trusts | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.65 | % | 12/18/15 | Open | 3,698,000 | 3,715,026 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 2/11/16 | Open | 687,375 | 689,843 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Deutsche Bank AG |
0.36 | % | 4/22/16 | Open | 24,156,250 | 24,179,782 | U.S. Treasury Obligations | Open/Demand1 | ||||||||||||||||
See Notes to Financial Statements.
| 26 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
Reverse Repurchase Agreements (concluded)
| Counterparty | Interest Rate |
Trade Date |
Maturity Date1 |
Face Value | Face Value Including Accrued Interest |
Type of Underlying Collateral |
Remaining Contractual Maturity of the Agreements | |||||||||||||||||
| BNP Paribas Securites Corp. |
0.46 | % | 5/03/16 | Open | $ | 1,397,975 | $ | 1,400,119 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||
| BNP Paribas Securites Corp. |
0.46 | % | 5/03/16 | Open | 850,025 | 851,328 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||||
| BNP Paribas Securites Corp. |
0.46 | % | 5/03/16 | Open | 1,398,375 | 1,400,519 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||||
| BNP Paribas Securites Corp. |
0.46 | % | 5/03/16 | Open | 871,500 | 872,836 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||||
| BNP Paribas Securites Corp. |
0.52 | % | 5/06/16 | Open | 14,850,000 | 14,871,491 | U.S. Treasury Obligations | Open/Demand1 | ||||||||||||||||
| BNP Paribas Securites Corp. |
0.75 | % | 5/18/16 | Open | 837,000 | 838,831 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Credit Suisse Securities (USA) LLC |
0.75 | % | 6/27/16 | Open | 1,503,288 | 1,505,292 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Nomura Securities International, Inc. |
0.35 | % | 6/28/16 | Open | 31,762,500 | 31,779,484 | U.S. Treasury Obligations | Open/Demand1 | ||||||||||||||||
| BNP Paribas Securites Corp. |
0.53 | % | 6/29/16 | Open | 82,044,375 | 82,126,397 | U.S. Treasury Obligations | Open/Demand1 | ||||||||||||||||
| RBC Capital Markets, LLC |
0.64 | % | 6/30/16 | Open | 2,859,500 | 2,862,703 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| Deutsche Bank AG |
(3.00 | )% | 7/29/16 | Open | 278,602 | 277,882 | Corporate Bonds | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.60 | % | 8/10/16 | 9/14/16 | 24,013,000 | 24,021,405 | U.S. Government Sponsored Agency Securities | Up to 30 Days | ||||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith, Inc. | 0.59 | % | 8/10/16 | 9/14/16 | 15,810,000 | 15,815,441 | U.S. Government Sponsored Agency Securities | Up to 30 Days | ||||||||||||||||
| Total |
$ | 287,689,754 | $ | 288,238,889 | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| 1 Certain agreements have no stated maturity and can be terminated by either party at any time. | ||||||||||||||||||||||||
| Derivative Financial Instruments Outstanding as of Period End |
Futures Contracts
| Contracts Long (Short) |
Issue | Expiration | Notional Value |
Unrealized (Depreciation) |
||||||||||||||||||||||||||||
| (117) | 90 Day Euro Future | September 2016 | USD | 28,991,137 | $ | 2,575 | ||||||||||||||||||||||||||
| 322 | 2-Year U.S. Treasury Note | December 2016 | USD | 70,296,625 | (362 | ) | ||||||||||||||||||||||||||
| 1,134 | 5-Year U.S. Treasury Note | December 2016 | USD | 137,497,500 | (145,903 | ) | ||||||||||||||||||||||||||
| (457) | 10-Year U.S. Treasury Note | December 2016 | USD | 59,831,297 | 129,307 | |||||||||||||||||||||||||||
| 21 | 10-Year U.S. Ultra Long Treasury Note | December 2016 | USD | 3,031,875 | (8,325 | ) | ||||||||||||||||||||||||||
| (39) | Long U.S. Treasury Bond | December 2016 | USD | 6,644,625 | (9,750 | ) | ||||||||||||||||||||||||||
| 139 | Ultra Long U.S. Treasury Bond | December 2016 | USD | 26,058,156 | 23,375 | |||||||||||||||||||||||||||
| 303 | 90 Day Euro Future | December 2017 | USD | 74,901,600 | (69,313 | ) | ||||||||||||||||||||||||||
| (303) | 90 Day Euro Future | December 2018 | USD | 74,806,913 | 40,279 | |||||||||||||||||||||||||||
| Total | $ | (38,117 | ) | |||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
Forward Foreign Currency Exchange Contracts
| Currency Purchased |
Currency Sold |
Counterparty | Settlement Date |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||
| EUR | 165,000 | USD | 186,378 | BNP Paribas S.A. | 9/06/16 | $ | (2,303 | ) | ||||||||||||||||
| EUR | 300,000 | USD | 338,108 | Standard Chartered Bank | 9/06/16 | (3,427 | ) | |||||||||||||||||
| USD | 739,364 | EUR | 664,000 | Royal Bank of Scotland PLC | 9/06/16 | (1,397 | ) | |||||||||||||||||
| USD | 9,264,320 | EUR | 8,320,000 | Royal Bank of Scotland PLC | 9/06/16 | (17,509 | ) | |||||||||||||||||
| USD | 154,314 | GBP | 117,000 | Bank of America N.A. | 9/06/16 | 666 | ||||||||||||||||||
| USD | 11,590,621 | GBP | 8,796,000 | HSBC Bank PLC | 9/06/16 | 39,456 | ||||||||||||||||||
| USD | 865,739 | GBP | 657,000 | HSBC Bank PLC | 9/06/16 | 2,947 | ||||||||||||||||||
| AUD | 1,600,000 | CAD | 1,570,350 | Citibank N.A. | 9/14/16 | 4,581 | ||||||||||||||||||
| AUD | 2,650,000 | CAD | 2,626,283 | HSBC Bank PLC | 9/14/16 | (11,774 | ) | |||||||||||||||||
| AUD | 2,680,000 | CAD | 2,632,698 | JPMorgan Chase Bank N.A. | 9/14/16 | 5,873 | ||||||||||||||||||
| CAD | 2,706,941 | AUD | 2,745,000 | BNP Paribas S.A. | 9/14/16 | 1,908 | ||||||||||||||||||
| CAD | 2,139,891 | AUD | 2,135,000 | Citibank N.A. | 9/14/16 | 27,788 | ||||||||||||||||||
| CAD | 2,072,546 | AUD | 2,115,000 | Deutsche Bank AG | 9/14/16 | (8,543 | ) | |||||||||||||||||
| CAD | 2,641,936 | AUD | 2,680,000 | Deutsche Bank AG | 9/14/16 | 1,172 | ||||||||||||||||||
| AUD | 2,120,000 | USD | 1,625,555 | HSBC Bank PLC | 9/22/16 | (33,051 | ) | |||||||||||||||||
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 27 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
Forward Foreign Currency Exchange Contracts (concluded)
| Currency Purchased |
Currency Sold |
Counterparty | Settlement Date |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||
| EUR | 730,000 | SEK | 6,901,043 | Citibank N.A. | 9/22/16 | $ | 8,055 | |||||||||||||||||||
| SEK | 13,855,422 | EUR | 1,460,000 | Citibank N.A. | 9/22/16 | (9,874 | ) | |||||||||||||||||||
| USD | 1,633,195 | AUD | 2,120,000 | Citibank N.A. | 9/22/16 | 40,691 | ||||||||||||||||||||
| JPY | 100,812,258 | EUR | 890,000 | UBS AG | 9/26/16 | (18,384 | ) | |||||||||||||||||||
| USD | 740,716 | EUR | 664,000 | Royal Bank of Scotland PLC | 10/05/16 | (1,008 | ) | |||||||||||||||||||
| USD | 8,762,535 | EUR | 7,855,000 | Royal Bank of Scotland PLC | 10/05/16 | (11,919 | ) | |||||||||||||||||||
| USD | 11,535,083 | GBP | 8,796,000 | Royal Bank of Scotland PLC | 10/05/16 | (24,772 | ) | |||||||||||||||||||
| USD | 1,011,090 | GBP | 771,000 | Royal Bank of Scotland PLC | 10/05/16 | (2,171 | ) | |||||||||||||||||||
| NOK | 33,703,812 | USD | 4,000,000 | Citibank N.A. | 10/07/16 | 45,031 | ||||||||||||||||||||
| USD | 4,000,000 | NOK | 33,715,840 | Goldman Sachs International | 10/07/16 | (46,475 | ) | |||||||||||||||||||
| CHF | 799,328 | USD | 830,000 | Goldman Sachs International | 10/25/16 | (14,748 | ) | |||||||||||||||||||
| CHF | 794,742 | USD | 820,000 | JPMorgan Chase Bank N.A. | 10/25/16 | (9,426 | ) | |||||||||||||||||||
| SEK | 17,213,055 | USD | 2,050,000 | Citibank N.A. | 10/25/16 | (34,040 | ) | |||||||||||||||||||
| USD | 2,050,000 | SEK | 17,128,958 | Goldman Sachs International | 10/25/16 | 43,889 | ||||||||||||||||||||
| MXN | 14,685,693 | USD | 780,000 | Citibank N.A. | 2/03/17 | (10,617 | ) | |||||||||||||||||||
| USD | 1,250,000 | MXN | 22,971,800 | HSBC Bank PLC | 2/03/17 | 46,508 | ||||||||||||||||||||
| USD | 4,800,000 | MXN | 92,410,464 | JPMorgan Chase Bank N.A. | 2/03/17 | (41,382 | ) | |||||||||||||||||||
| Total | $ | (34,255 | ) | |||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||
Exchange-Traded Options Purchased
| Description | Put/ Call |
Expiration Date |
Strike Price |
Contracts | Value | |||||||||||||||||||
| 30-Year U.S. Treasury Bond Future |
Put | 9/23/16 | USD | 166.00 | 27 | $ | 12,234 | |||||||||||||||||
| 90-Day Euro Future |
Put | 10/14/16 | USD | 99.00 | 160 | 12,000 | ||||||||||||||||||
| Total |
|
$ | 24,234 | |||||||||||||||||||||
|
|
|
|||||||||||||||||||||||
OTC Interest Rate Swaptions Purchased
| Description | Counterparty | Put/ Call |
Exercise Rate |
Pay/ Receive Exercise Rate |
Floating Rate Index |
Expiration Date |
Notional Amount (000) |
Value | ||||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 2.25 | % | Receive | 3-Month LIBOR | 2/17/17 | USD | 3,000 | $ | 224,938 | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Citibank N.A. | Call | 1.55 | % | Receive | 3-Month LIBOR | 1/25/18 | USD | 40,000 | 403,397 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Call | 1.60 | % | Receive | 3-Month LIBOR | 8/16/18 | USD | 3,500 | 143,363 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Wells Fargo Bank N.A. | Call | 1.60 | % | Receive | 3-Month LIBOR | 8/16/18 | USD | 3,500 | 144,195 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
Deutsche Bank AG | Call | 3.12 | % | Receive | 3-Month LIBOR | 9/17/20 | USD | 800 | 280,939 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 3.12 | % | Receive | 3-Month LIBOR | 9/17/20 | USD | 800 | 280,939 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 2.42 | % | Receive | 3-Month LIBOR | 2/08/21 | USD | 670 | 151,816 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 2.50 | % | Receive | 3-Month LIBOR | 4/27/21 | USD | 500 | 120,427 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 3.03 | % | Receive | 3-Month LIBOR | 12/10/25 | USD | 2,000 | 269,938 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Call | 2.83 | % | Receive | 3-Month LIBOR | 1/13/26 | USD | 2,000 | 246,269 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.75 | % | Pay | 3-Month LIBOR | 9/20/16 | GBP | 5,000 | 1 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 3.30 | % | Pay | 3-Month LIBOR | 9/21/16 | USD | 4,020 | — | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
Citibank N.A. | Put | 2.85 | % | Pay | 3-Month LIBOR | 10/14/16 | USD | 6,000 | 14 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
UBS AG | Put | 2.85 | % | Pay | 3-Month LIBOR | 10/14/16 | USD | 6,000 | 14 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.85 | % | Pay | 3-Month LIBOR | 1/13/17 | USD | 6,000 | 29,970 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
Bank of America N.A. | Put | 2.85 | % | Pay | 3-Month LIBOR | 1/13/17 | USD | 6,000 | 3,391 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.80 | % | Pay | 3-Month LIBOR | 1/23/17 | USD | 2,300 | 14,880 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Wells Fargo Bank N.A. | Put | 1.75 | % | Pay | 3-Month LIBOR | 2/17/17 | USD | 8,000 | 72,414 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.70 | % | Pay | 3-Month LIBOR | 2/23/17 | USD | 5,000 | 54,112 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
Barclays Bank PLC | Put | 2.40 | % | Pay | 3-Month LIBOR | 4/13/17 | USD | 2,650 | 23,280 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 2.55 | % | Pay | 3-Month LIBOR | 4/04/19 | USD | 3,600 | 156,405 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
Deutsche Bank AG | Put | 3.12 | % | Pay | 3-Month LIBOR | 9/17/20 | USD | 800 | 28,178 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 3.12 | % | Pay | 3-Month LIBOR | 9/17/20 | USD | 800 | 28,178 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Bank of America N.A. | Put | 3.50 | % | Pay | 3-Month LIBOR | 2/01/21 | USD | 4,000 | 54,589 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 2.42 | % | Pay | 3-Month LIBOR | 2/08/21 | USD | 670 | 53,293 | ||||||||||||||||||||||||||||||
| 30-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 2.50 | % | Pay | 3-Month LIBOR | 4/27/21 | USD | 500 | 37,937 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 3.03 | % | Pay | 3-Month LIBOR | 12/10/25 | USD | 2,000 | 76,558 | ||||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Put | 2.83 | % | Pay | 3-Month LIBOR | 1/13/26 | USD | 2,000 | 86,548 | ||||||||||||||||||||||||||||||
| Total |
$ | 2,985,983 | ||||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||
See Notes to Financial Statements.
| 28 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
OTC Options Purchased
| Description | Put/ Call |
Counterparty | Expiration Date |
Strike Price |
Notional Amount (000) |
Value | ||||||||||||||||||||||||||||||
| AUD Currency |
Call | Deutsche Bank AG | 09/12/16 | CAD | 1.01 | AUD | 10,845 | $ | 3,383 | |||||||||||||||||||||||||||
| AUD Currency |
Call | UBS AG | 09/22/16 | NZD | 1.07 | AUD | 16,105 | 5,289 | ||||||||||||||||||||||||||||
| AUD Currency |
Call | Barclays Bank PLC | 10/20/16 | CAD | 1.00 | AUD | 16,190 | 73,772 | ||||||||||||||||||||||||||||
| EUR Currency |
Put | Deutsche Bank AG | 09/20/16 | SEK | 9.35 | EUR | 10,980 | 4,973 | ||||||||||||||||||||||||||||
| EUR Currency |
Put | Deutsche Bank AG | 09/22/16 | JPY | 113.00 | EUR | 7,035 | 32,723 | ||||||||||||||||||||||||||||
| USD Currency |
Put | UBS AG | 10/21/16 | SEK | 8.25 | USD | 12,320 | 32,956 | ||||||||||||||||||||||||||||
| USD Currency |
Put | JPMorgan Chase Bank N.A. | 02/01/17 | MXN | 17.06 | USD | 18,990 | 61,774 | ||||||||||||||||||||||||||||
| Total |
$ | 214,870 | ||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
OTC Interest Rate Swaptions Written
| Description | Counterparty | Put/ Call |
Exercise Rate |
Pay/Receive Exercise Rate |
Floating Rate Index |
Expiration Date |
Notional Amount (000) |
Value | ||||||||||||||||||
| 5-Year Interest Rate Swap |
Deutsche Bank AG | Call | 2.10 | % | Pay | 3-Month LIBOR | 12/05/16 | USD | 6,700 | $ | (284,495 | ) | ||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Call | 0.01 | % | Pay | 6-Month EURIBOR | 2/10/17 | EUR | 39,800 | (354,954 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 1.50 | % | Pay | 3-Month LIBOR | 2/17/17 | USD | 4,500 | (89,986 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Call | 0.01 | % | Pay | 6-Month EURIBOR | 2/17/17 | EUR | 4,500 | (40,353 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
UBS AG | Call | 0.01 | % | Pay | 6-Month EURIBOR | 3/10/17 | EUR | 10,000 | (90,964 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Call | 1.51 | % | Pay | 3-Month LIBOR | 6/28/17 | USD | 2,000 | (51,965 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Call | 1.57 | % | Pay | 3-Month LIBOR | 8/03/17 | USD | 3,300 | (99,167 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Goldman Sachs Bank USA | Call | 0.15 | % | Pay | 6-Month EURIBOR | 12/04/17 | EUR | 5,700 | (88,984 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Call | 1.05 | % | Pay | 3-Month LIBOR | 12/15/17 | USD | 39,800 | (177,400 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Call | 0.88 | % | Pay | 3-Month LIBOR | 1/08/18 | USD | 8,200 | (27,519 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Citibank N.A. | Call | 1.05 | % | Pay | 3-Month LIBOR | 1/25/18 | USD | 60,000 | (281,356 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Deutsche Bank AG | Call | 0.70 | % | Pay | 3-Month LIBOR | 2/09/18 | USD | 11,000 | (27,484 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Call | 0.90 | % | Pay | 3-Month LIBOR | 2/12/18 | USD | 17,600 | (64,833 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 1.00 | % | Pay | 3-Month LIBOR | 3/16/18 | USD | 6,500 | (29,664 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Call | 1.00 | % | Pay | 3-Month LIBOR | 3/19/18 | USD | 38,200 | (175,518 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Call | 0.85 | % | Pay | 3-Month LIBOR | 4/06/18 | USD | 25,000 | (92,491 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Call | 0.75 | % | Pay | 3-Month LIBOR | 4/12/18 | USD | 38,200 | (117,471 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Deutsche Bank AG | Call | 0.90 | % | Pay | 3-Month LIBOR | 4/16/18 | USD | 38,800 | (156,305 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Call | 0.85 | % | Pay | 3-Month LIBOR | 4/27/18 | USD | 15,000 | (56,203 | ) | |||||||||||||||
| 2-Year Interest Rate Swap |
Deutsche Bank AG | Call | 0.90 | % | Pay | 3-Month LIBOR | 4/30/18 | USD | 17,100 | (70,446 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Deutsche Bank AG | Call | 1.56 | % | Pay | 3-Month LIBOR | 7/06/18 | USD | 690 | (26,495 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Royal Bank of Canada | Call | 1.65 | % | Pay | 3-Month LIBOR | 8/01/18 | USD | 4,750 | (207,102 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Call | 1.35 | % | Pay | 3-Month LIBOR | 8/16/18 | USD | 4,800 | (148,348 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Wells Fargo Bank N.A. | Call | 1.35 | % | Pay | 3-Month LIBOR | 8/16/18 | USD | 4,800 | (148,348 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Deutsche Bank AG | Put | 0.75 | % | Receive | 6-Month EURIBOR | 9/02/16 | EUR | 10,400 | (1 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.55 | % | Receive | 3-Month LIBOR | 9/20/16 | GBP | 10,000 | (1 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 2.45 | % | Receive | 3-Month LIBOR | 9/21/16 | USD | 16,900 | (2 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 2.00 | % | Receive | 3-Month LIBOR | 10/03/16 | USD | 1,000 | (7 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Deutsche Bank AG | Put | 2.10 | % | Receive | 3-Month LIBOR | 12/05/16 | USD | 6,700 | (1,342 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 2.20 | % | Receive | 3-Month LIBOR | 1/09/17 | USD | 3,600 | (1,094 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.50 | % | Receive | 6-Month EURIBOR | 2/10/17 | EUR | 49,800 | (9,653 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 3.50 | % | Receive | 3-Month LIBOR | 2/17/17 | USD | 3,000 | (146 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.51 | % | Receive | 6-Month EURIBOR | 2/17/17 | EUR | 6,000 | (1,260 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.45 | % | Receive | 6-Month EURIBOR | 2/23/17 | EUR | 12,100 | (3,694 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.60 | % | Receive | 3-Month LIBOR | 4/13/17 | USD | 12,900 | (65,981 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.51 | % | Receive | 3-Month LIBOR | 6/28/17 | USD | 2,000 | (51,857 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.57 | % | Receive | 3-Month LIBOR | 8/03/17 | USD | 3,300 | (83,567 | ) | |||||||||||||||
| 10-Year Interest Rate Swap |
Royal Bank of Canada | Put | 1.75 | % | Receive | 3-Month LIBOR | 8/11/17 | USD | 8,000 | (147,959 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.15 | % | Receive | 6-Month EURIBOR | 9/11/17 | EUR | 10,800 | (2,454 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Royal Bank of Scotland PLC | Put | 1.10 | % | Receive | 6-Month EURIBOR | 9/25/17 | EUR | 10,000 | (2,973 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 2.20 | % | Receive | 3-Month LIBOR | 10/02/17 | USD | 1,200 | (3,385 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Citibank N.A. | Put | 0.50 | % | Receive | 6-Month EURIBOR | 10/23/17 | EUR | 3,340 | (6,474 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Citibank N.A. | Put | 1.00 | % | Receive | 6-Month EURIBOR | 10/23/17 | EUR | 6,670 | (3,277 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
UBS AG | Put | 0.50 | % | Receive | 6-Month EURIBOR | 10/26/17 | EUR | 6,200 | (12,266 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
UBS AG | Put | 1.00 | % | Receive | 6-Month EURIBOR | 10/26/17 | EUR | 12,300 | (6,208 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 0.50 | % | Receive | 6-Month EURIBOR | 10/30/17 | EUR | 7,000 | (14,122 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.00 | % | Receive | 6-Month EURIBOR | 10/30/17 | EUR | 14,000 | (7,271 | ) | |||||||||||||||
| 5-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 0.65 | % | Receive | 6-Month EURIBOR | 12/04/17 | EUR | 10,000 | (16,264 | ) | |||||||||||||||
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 29 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
OTC Interest Rate Swaptions Written (concluded)
| Description | Counterparty | Put/ Call |
Exercise Rate |
Pay/Receive Exercise Rate |
Floating Rate Index |
Expiration Date |
Notional Amount (000) |
Value | ||||||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.95 | % | Receive | 3-Month LIBOR | 12/15/17 | USD | 39,800 | $ | (54,505 | ) | ||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.88 | % | Receive | 3-Month LIBOR | 1/08/18 | USD | 8,200 | (14,142 | ) | |||||||||||||||||||||||||||||
| 5-Year Interest Rate Swap |
UBS AG | Put | 1.00 | % | Receive | 6-Month EURIBOR | 1/08/18 | EUR | 7,200 | (6,068 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Citibank N.A. | Put | 2.30 | % | Receive | 3-Month LIBOR | 1/25/18 | USD | 20,000 | (16,215 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Deutsche Bank AG | Put | 1.70 | % | Receive | 3-Month LIBOR | 2/09/18 | USD | 11,000 | (29,782 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Put | 1.90 | % | Receive | 3-Month LIBOR | 2/12/18 | USD | 17,600 | (33,005 | ) | |||||||||||||||||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.75 | % | Receive | 6-Month EURIBOR | 3/05/18 | EUR | 15,000 | (30,420 | ) | |||||||||||||||||||||||||||||
| 5-Year Interest Rate Swap |
Deutsche Bank AG | Put | 0.35 | % | Receive | 6-Month EURIBOR | 3/09/18 | EUR | 22,310 | (118,334 | ) | |||||||||||||||||||||||||||||
| 5-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.65 | % | Receive | 6-Month EURIBOR | 3/12/18 | EUR | 3,450 | (9,086 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 2.00 | % | Receive | 3-Month LIBOR | 3/16/18 | USD | 6,500 | (11,281 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 2.00 | % | Receive | 3-Month LIBOR | 3/19/18 | USD | 38,200 | (67,080 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA. | Put | 1.85 | % | Receive | 3-Month LIBOR | 3/29/18 | USD | 5,000 | (11,882 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.85 | % | Receive | 3-Month LIBOR | 4/06/18 | USD | 25,000 | (60,158 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.75 | % | Receive | 3-Month LIBOR | 4/12/18 | USD | 38,200 | (111,771 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Deutsche Bank AG | Put | 1.70 | % | Receive | 3-Month LIBOR | 4/16/18 | USD | 38,800 | (125,148 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 1.75 | % | Receive | 3-Month LIBOR | 4/27/18 | USD | 15,000 | (45,555 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Deutsche Bank AG | Put | 1.90 | % | Receive | 3-Month LIBOR | 4/30/18 | USD | 17,100 | (40,541 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Morgan Stanley Capital Services LLC | Put | 1.60 | % | Receive | 3-Month LIBOR | 6/18/18 | USD | 10,000 | (43,416 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.45 | % | Receive | 3-Month LIBOR | 6/27/18 | USD | 10,000 | (54,995 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Citibank N.A. | Put | 1.40 | % | Receive | 3-Month LIBOR | 7/05/18 | USD | 10,000 | (59,983 | ) | |||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Deutsche Bank AG | Put | 1.56 | % | Receive | 3-Month LIBOR | 7/06/18 | USD | 690 | (28,612 | ) | |||||||||||||||||||||||||||||
| 5-Year Interest Rate Swap |
Deutsche Bank AG | Put | 0.50 | % | Receive | 6-Month EURIBOR | 7/16/18 | EUR | 10,730 | (61,026 | ) | |||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Royal Bank of Canada | Put | 1.65 | % | Receive | 3-Month LIBOR | 8/01/18 | USD | 4,750 | (179,830 | ) | |||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Wells Fargo Bank N.A. | Put | 1.90 | % | Receive | 3-Month LIBOR | 8/17/18 | USD | 8,000 | (227,966 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.70 | % | Receive | 3-Month LIBOR | 8/20/18 | USD | 5,500 | (23,146 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Goldman Sachs Bank USA | Put | 1.75 | % | Receive | 3-Month LIBOR | 4/04/19 | USD | 40,000 | (221,157 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.40 | % | Receive | 6-Month EURIBOR | 7/08/19 | EUR | 21,060 | (63,230 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
Barclays Bank PLC | Put | 0.40 | % | Receive | 6-Month EURIBOR | 7/08/19 | EUR | 1,975 | (5,930 | ) | |||||||||||||||||||||||||||||
| 2-Year Interest Rate Swap |
JPMorgan Chase Bank N.A. | Put | 0.40 | % | Receive | 6-Month EURIBOR | 7/08/19 | EUR | 1,965 | (5,900 | ) | |||||||||||||||||||||||||||||
| 10-Year Interest Rate Swap |
Bank of America N.A. | Put | 5.50 | % | Receive | 3-Month LIBOR | 2/01/21 | USD | 10,000 | (36,151 | ) | |||||||||||||||||||||||||||||
| Total |
$ | (5,145,424 | ) | |||||||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||
OTC Options Written
| Description | Put/ Call |
Counterparty | Expiration Date |
Strike Price |
Notional Amount (000) |
Value | ||||||||||||||||||||||||||||||
| AUD Currency |
Call | Barclays Bank PLC | 10/20/16 | CAD | 1.01 | AUD | 16,190 | $ | (43,110 | ) | ||||||||||||||||||||||||||
| USD Currency |
Call | JPMorgan Chase Bank N.A. | 2/01/17 | MXN | 21.22 | USD | 18,990 | (201,237 | ) | |||||||||||||||||||||||||||
| USD Currency |
Put | UBS AG | 10/21/16 | CHF | 0.94 | USD | 12,320 | (24,307 | ) | |||||||||||||||||||||||||||
| Total |
$ | (268,654 | ) | |||||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
Centrally Cleared Credit Default Swaps — Buy Protection
| Issuer/Index | Pay Fixed Rate |
Expiration Date |
Notional Amount (000) |
Unrealized Depreciation |
||||||||||||||||
| Markit iTraxx XO, Series 25, Version 1 |
5.00 | % | 6/20/21 | EUR | 350 | $ | (12,404 | ) | ||||||||||||
Centrally Cleared Interest Rate Swaps
| Fixed Rate | Floating Rate |
Effective Date |
Expiration Date |
Notional Amount (000) |
Unrealized Appreciation (Depreciation) |
|||||||||||||||
| 0.77%1 |
3-Month LIBOR | N/A | 2/05/18 | USD | 107,000 | $ | 345,118 | |||||||||||||
| 1.13%2 |
3-Month LIBOR | 8/07/183 | 8/07/20 | USD | 7,000 | (17,647 | ) | |||||||||||||
| 1.18%2 |
3-Month LIBOR | 8/13/183 | 8/12/20 | USD | 6,400 | (10,691 | ) | |||||||||||||
| 1.19%2 |
3-Month LIBOR | 8/14/183 | 8/14/20 | USD | 5,000 | (7,085 | ) | |||||||||||||
| 1.24%1 |
3-Month LIBOR | N/A | 8/20/20 | USD | 5,000 | 2,555 | ||||||||||||||
| 1.26%1 |
3-Month LIBOR | N/A | 8/21/20 | USD | 3,000 | 290 | ||||||||||||||
See Notes to Financial Statements.
| 30 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
Centrally Cleared Interest Rate Swaps (concluded)
| Fixed Rate | Floating Rate |
Effective Date |
Expiration Date |
Notional Amount (000) |
Unrealized Appreciation (Depreciation) |
|||||||||||||||||||||||
| 1.26%2 |
3-Month LIBOR | 8/21/183 | 8/21/20 | USD | 20,500 | $ | (1,219 | ) | ||||||||||||||||||||
| 1.26%1 |
3-Month LIBOR | N/A | 8/23/20 | USD | 4,860 | 203 | ||||||||||||||||||||||
| 1.31%1 |
3-Month LIBOR | 8/31/183 | 8/31/20 | USD | 3,500 | (2,846 | ) | |||||||||||||||||||||
| 1.31%1 |
3-Month LIBOR | N/A | 8/31/20 | USD | 1,500 | (1,425 | ) | |||||||||||||||||||||
| 1.33%1 |
3-Month LIBOR | 8/31/183 | 8/31/20 | USD | 3,240 | (3,933 | ) | |||||||||||||||||||||
| 1.33%1 |
3-Month LIBOR | N/A | 8/31/20 | USD | 3,240 | (4,123 | ) | |||||||||||||||||||||
| 0.78%1 |
Fed Funds Effective Rate plus 0.25% | N/A | 2/28/21 | USD | 26,550 | 41,963 | ||||||||||||||||||||||
| 1.18%1 |
3-Month LIBOR | 1/05/173 | 2/28/21 | USD | 32,890 | 28,550 | ||||||||||||||||||||||
| 0.00%2 |
6-Month EURIBOR | N/A | 6/28/21 | EUR | 3,500 | 1,270 | ||||||||||||||||||||||
| 1.00%2 |
3-Month LIBOR | N/A | 6/28/21 | USD | 1,000 | (9,058 | ) | |||||||||||||||||||||
| 0.00%1 |
6-Month EURIBOR | N/A | 7/14/21 | EUR | 2,350 | 3,076 | ||||||||||||||||||||||
| 1.05%2 |
3-Month LIBOR | N/A | 7/14/21 | USD | 3,900 | (26,655 | ) | |||||||||||||||||||||
| 0.00%1 |
6-Month EURIBOR | 10/19/163 | 10/19/21 | EUR | 2,100 | (60 | ) | |||||||||||||||||||||
| 0.08%2 |
6-Month EURIBOR | 8/14/183 | 8/14/23 | EUR | 2,450 | (3,265 | ) | |||||||||||||||||||||
| 1.33%1 |
3-Month LIBOR | 12/30/163 | 8/15/23 | USD | 9,700 | (2,151 | ) | |||||||||||||||||||||
| 1.40%1 |
3-Month LIBOR | N/A | 8/16/26 | USD | 200 | 611 | ||||||||||||||||||||||
| 1.41%2 |
3-Month LIBOR | N/A | 8/25/26 | USD | 1,640 | (3,626 | ) | |||||||||||||||||||||
| 2.41%1 |
3-Month LIBOR | N/A | 1/19/46 | USD | 300 | (52,916 | ) | |||||||||||||||||||||
| 2.33%1 |
3-Month LIBOR | N/A | 1/25/46 | USD | 300 | (47,258 | ) | |||||||||||||||||||||
| 2.25%1 |
3-Month LIBOR | N/A | 2/05/46 | USD | 400 | (55,582 | ) | |||||||||||||||||||||
| 2.16%1 |
3-Month LIBOR | N/A | 2/12/46 | USD | 500 | (58,339 | ) | |||||||||||||||||||||
| 2.11%1 |
3-Month LIBOR | N/A | 4/07/46 | USD | 300 | (30,843 | ) | |||||||||||||||||||||
| 1.96%1 |
3-Month LIBOR | N/A | 6/21/46 | USD | 300 | (19,920 | ) | |||||||||||||||||||||
| 1.76%1 |
3-Month LIBOR | N/A | 7/15/46 | USD | 100 | (1,745 | ) | |||||||||||||||||||||
| 1.72%1 |
3-Month LIBOR | 8/25/163 | 8/25/46 | USD | 250 | (1,523 | ) | |||||||||||||||||||||
| Total |
$ | 61,726 | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| 1 Trust pays the fixed rate and receives the floating rate. |
|
|||||||||||||||||||||||||||
| 2 Trust pays the floating rate and receives the fixed rate. |
|
|||||||||||||||||||||||||||
| 3 Forward swap. |
|
|||||||||||||||||||||||||||
OTC Credit Default Swaps — Buy Protection
| Issuer/Index | Pay Fixed Rate | Counterparty | Expiration Date |
Notional Amount (000) |
Value | Premiums Paid |
Unrealized Depreciation |
|||||||||||||||||||||||||||
| Australia & New Zealand Banking Group Ltd. |
1.00% | Deutsche Bank AG | 9/20/17 | USD | 1 | $ | (5 | ) | $ | 4 | $ | (9 | ) | |||||||||||||||||||||
| Westpac Banking Corp. |
1.00% | Deutsche Bank AG | 9/20/17 | USD | 1 | (4 | ) | 3 | (7 | ) | ||||||||||||||||||||||||
| Total |
$ | (9 | ) | $ | 7 | $ | (16 | ) | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||
OTC Credit Default Swaps — Sell Protection
| Issuer/Index | Receive Fixed Rate |
Counterparty |
Expiration Date |
Credit Rating1 |
Notional Amount (000)2 |
Value | Premiums (Received) |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Credit Suisse International | 9/20/16 | A- | USD | 1,080 | $ | 2,694 | $ | (1,126 | ) | $ | 3,820 | ||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Deutsche Bank AG | 9/20/16 | A- | USD | 1,460 | 3,642 | (1,379 | ) | 5,021 | |||||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Goldman Sachs Bank USA | 9/20/16 | A- | USD | 1,000 | 2,495 | (912 | ) | 3,407 | |||||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Morgan Stanley Capital Services LLC | 9/20/16 | A- | USD | 1,810 | 4,515 | (1,677 | ) | 6,192 | |||||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Morgan Stanley Capital Services LLC | 9/20/16 | A- | USD | 550 | 1,372 | (452 | ) | 1,824 | |||||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Citibank N.A. | 12/20/16 | A- | USD | 595 | 2,743 | (2,691 | ) | 5,434 | |||||||||||||||||||||||||||||
| MetLife, Inc. |
1.00 | % | Citibank N.A. | 12/20/16 | A- | USD | 575 | 2,663 | (2,819 | ) | 5,482 | |||||||||||||||||||||||||||||
| Markit CMBX North America, Series 8 |
3.00 | % | Barclays Bank PLC | 10/17/57 | NR | USD | 5,000 | (820,502 | ) | (528,977 | ) | (291,525 | ) | |||||||||||||||||||||||||||
| Markit CMBX North America, Series 8 |
3.00 | % | Credit Suisse International | 10/17/57 | NR | USD | 2,500 | (410,251 | ) | (261,322 | ) | (148,929 | ) | |||||||||||||||||||||||||||
| Total |
$ | (1,210,629 | ) | $ | (801,355 | ) | $ | (409,274 | ) | |||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||
| 1 Using Standard & Poor’s (“S&P’s”) rating of the issuer or the underlying securities of the indes, as applicable. |
| |||||||||||||||||||||||||||||||||||||||
| 2 The maximum potential amount the Trust may pay should a negative credit event take place as defined under the terms of the agreement. |
|
|||||||||||||||||||||||||||||||||||||||
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 31 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
OTC Interest Rate Swaps
| Fixed Rate | Floating Rate |
Counterparty |
Effective Date |
Expiration Date |
Notional Amount (000) |
Value | Premiums Paid (Received) |
Unrealized Appreciation |
||||||||||||||||||||||||||||
| SIFMA Rate1 |
3-Month LIBOR | Citibank N.A. | 6/09/25 | 2 | 6/09/35 | USD | 1,500 | $ | 26,297 | — | $ | 26,297 | ||||||||||||||||||||||||
| 1 Trust pays the fixed rate and receives the floating rate. |
|
|||||||||||||||||||||||||||||||||||
| 2 Forward swap. |
|
|||||||||||||||||||||||||||||||||||
| Transactions in Options Written for the Year Ended August 31, 2016 |
| Calls | ||||||||||||||||||||||||||||||||||||
| Notional (000) | ||||||||||||||||||||||||||||||||||||
| Contracts | AUD | CAD | EUR | GBP | NZD | USD | Premiums Received |
|||||||||||||||||||||||||||||
| Outstanding options, beginning of year |
449 | — | — | 16,350 | — | — | $ | 173,900 | $ | 2,666,359 | ||||||||||||||||||||||||||
| Options written |
186 | 41,615 | — | 121,550 | — | 28,040 | 534,520 | 6,975,375 | ||||||||||||||||||||||||||||
| Options exercised |
— | — | — | — | — | (28,040 | ) | (24,000 | ) | (670,405 | ) | |||||||||||||||||||||||||
| Options expired |
— | (25,425 | ) | — | (14,160 | ) | — | — | (35,380 | ) | (702,766 | ) | ||||||||||||||||||||||||
| Options closed |
(635 | ) | — | — | (63,740 | ) | — | — | (283,110 | ) | (5,206,884 | ) | ||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
| Outstanding options, end of year |
— | 16,190 | — | 60,000 | — | — | $ | 365,930 | $ | 3,061,679 | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
| Puts | ||||||||||||||||||||||||||||||||||||
| Notional (000) | ||||||||||||||||||||||||||||||||||||
| Contracts | AUD | CAD | EUR | GBP | NZD | USD | Premiums Received |
|||||||||||||||||||||||||||||
| Outstanding options, beginning of year |
— | — | — | 56,000 | — | — | $ | 208,200 | $ | 4,126,898 | ||||||||||||||||||||||||||
| Options written |
110 | 14,960 | 15,285 | 312,605 | 34,000 | 106,570 | 711,290 | 10,554,058 | ||||||||||||||||||||||||||||
| Options exercised |
— | — | — | (3,630 | ) | — | — | — | (8,166 | ) | ||||||||||||||||||||||||||
| Options expired |
— | — | (15,285 | ) | (54,390 | ) | (24,000 | ) | (78,525 | ) | (57,380 | ) | (1,768,049 | ) | ||||||||||||||||||||||
| Options closed |
(110 | ) | (14,960 | ) | — | (68,285 | ) | — | (28,045 | ) | (411,850 | ) | (6,997,257 | ) | ||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
| Outstanding options, end of year |
— | — | — | 242,300 | 10,000 | — | $ | 450,260 | $ | 5,907,484 | ||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
| Derivative Financial Instruments Categorized by Risk Exposure |
As of period end, the fair values of derivative financial instruments located in the Statements of Assets and Liabilities were as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||||||||
| Assets — Derivative Financial Instruments | ||||||||||||||||||||||||||||||||||
| Futures contracts |
Net unrealized appreciation1 | — | — | — | — | $ | 195,536 | — | $ | 195,536 | ||||||||||||||||||||||||
| Forward foreign currency exchange contracts |
Unrealized appreciation on forward foreign currency exchange contracts |
— | — | — | $ | 268,565 | — | — | 268,565 | |||||||||||||||||||||||||
| Options purchased |
Investments at value — unaffiliated2 | — | — | — | 214,870 | 3,010,217 | — | 3,225,087 | ||||||||||||||||||||||||||
| Swaps — centrally cleared |
Net unrealized appreciation1 | — | — | — | — | 423,636 | — | 423,636 | ||||||||||||||||||||||||||
| Swaps — OTC |
Unrealized appreciation on OTC derivatives; Swap premiums paid | — | $ | 31,187 | — | — | 26,297 | — | 57,484 | |||||||||||||||||||||||||
| Total |
— | $ | 31,187 | — | $ | 483,435 | $ | 3,655,686 | — | $ | 4,170,308 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
See Notes to Financial Statements.
| 32 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
| Liabilities — Derivative Financial Instruments | Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | |||||||||||||||||||||
| Futures contracts |
Net unrealized depreciation1 | — | — | — | — | $ | 233,653 | — | $ | 233,653 | ||||||||||||||||||
| Forward foreign currency exchange contracts |
Unrealized depreciation on forward foreign currency exchange contracts |
— | — | — | $ | 302,820 | — | — | 302,820 | |||||||||||||||||||
| Options written |
Options written at value | — | — | — | 268,654 | 5,145,424 | — | 5,414,078 | ||||||||||||||||||||
| Swaps — centrally cleared |
Net unrealized depreciation1 | — | $ | 12,404 | — | — | 361,910 | — | 374,314 | |||||||||||||||||||
| Swaps — OTC |
Unrealized depreciation on OTC derivatives; Swap premiums received | — | 1,241,825 | — | — | — | — | 1,241,825 | ||||||||||||||||||||
| Total |
— | $ | 1,254,229 | — | $ | 571,474 | $ | 5,740,987 | — | $ | 7,566,690 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| 1 Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, if any, as reported in the Schedules of Investments. Only current day’s variation margin is reported within the Statements of Assets and Liabilities. |
| |||||||||||||||||||||||||||
| 2 Includes options purchased at value as reported in the Schedule of Investments. |
||||||||||||||||||||||||||||
For the year ended August 31, 2016, the effect of derivative financial instruments in the Statements of Operations was as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Realized Gain (Loss) from: |
||||||||||||||||||||||||||||
| Futures contracts |
— | — | — | — | $ | 2,738,560 | — | $ | 2,738,560 | |||||||||||||||||||
| Forward foreign currency exchange contracts |
— | — | — | $ | 2,418,791 | — | — | 2,418,791 | ||||||||||||||||||||
| Options purchased1 |
— | — | — | (1,864,389 | ) | (21,275 | ) | — | (1,885,664 | ) | ||||||||||||||||||
| Options written |
— | — | — | 1,516,897 | 2,370,997 | — | 3,887,894 | |||||||||||||||||||||
| Swaps |
— | $ | 241,648 | — | — | (4,507,611 | ) | — | (4,265,963 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
— | $ | 241,648 | — | $ | 2,071,299 | $ | 580,671 | — | $ | 2,893,618 | |||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Change in Unrealized Appreciation (Depreciation) on: |
||||||||||||||||||||||||||||
| Futures contracts |
— | — | — | — | $ | 1,159,137 | — | $ | 1,159,137 | |||||||||||||||||||
| Forward foreign currency exchange contracts |
— | — | — | $ | (230,637 | ) | — | — | (230,637 | ) | ||||||||||||||||||
| Options purchased2 |
— | — | — | (309,409 | ) | (1,005 | ) | — | (310,414 | ) | ||||||||||||||||||
| Options written |
— | — | — | 144,893 | 2,290,324 | — | 2,435,217 | |||||||||||||||||||||
| Swaps |
— | $ | (509,296 | ) | — | — | 214,861 | — | (294,435 | ) | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
— | $ | (509,296 | ) | — | $ | (395,153 | ) | $ | 3,663,317 | — | $ | 2,758,868 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| 1 Options purchased are included in net realized gain (loss) from investments. |
| |||||||||||||||||||||||||||
| 2 Options purchased are included in net change in unrealized appreciation (depreciation) on investments. |
| |||||||||||||||||||||||||||
| Average Quarterly Balances of Outstanding Derivative Financial Instruments |
| Futures contracts: |
||||
| Average notional value of contracts — long |
$ | 299,103,926 | ||
| Average notional value of contracts — short |
$ | 180,387,482 | ||
| Forward foreign currency exchange contracts: | ||||
| Average amounts purchased — in USD |
$ | 64,786,917 | ||
| Average amounts sold — in USD |
$ | 28,779,249 | ||
| Options: | ||||
| Average value of option contracts purchased |
$ | 337,444 | ||
| Average value of option contracts written |
$ | 232,344 | ||
| Average notional value of swaption contracts purchased |
$ | 95,586,437 | ||
| Average notional value of swaption contracts written |
$ | 875,476,254 | ||
| Credit default swaps: | ||||
| Average notional value — buy protection |
$ | 1,898,602 | ||
| Average notional value — sell protection |
$ | 12,695,000 | ||
| Interest rate swaps: | ||||
| Average notional value — pays fixed rate |
$ | 163,197,384 | ||
| Average notional amount — receives fixed rate |
$ | 52,841,004 |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 33 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
For more information about the Trust’s investment risks regarding derivative financial instruments, refer to the Notes to Financial Statements.
| Derivative Financial Instruments — Offsetting as of Period End |
The Trust’s derivative assets and liabilities (by type) were as follows:
| Assets | Liabilities | |||||||
| Derivative Financial Instruments: | ||||||||
| Futures contracts |
$ | 75,335 | $ | 3,169 | ||||
| Forward foreign currency exchange contracts |
268,565 | 302,820 | ||||||
| Options |
3,225,087 | 1 | 5,414,078 | |||||
| Swaps — centrally cleared |
5,906 | — | ||||||
| Swaps — OTC2 |
57,484 | 1,241,825 | ||||||
|
|
|
|||||||
| Total derivative assets and liabilities in the Statement of Assets and Liabilities |
$ | 3,632,377 | $ | 6,961,892 | ||||
|
|
|
|||||||
| Derivatives not subject to a master netting agreement or similar agreement (“MNA”) |
(105,475 | ) | (3,169 | ) | ||||
|
|
|
|||||||
| Total derivative assets and liabilities subject to an MNA |
$ | 3,526,902 | $ | 6,958,723 | ||||
|
|
|
|||||||
|
1 Includes options purchased at value which is included in Investments at value — unaffiliated in the Statement of Assets and Liabilities and reported in the Schedule of Investments.
2 Includes unrealized appreciation (depreciation) on OTC swaps and swap premiums paid/received in the Statement of Assets and Liabilities. |
| |||||||
The following table presents the Trust’s derivative assets and liabilities by counterparty net of amounts available for offset under an Master Netting Agreement (“MNA”) and net of the related collateral received and pledged by the Trust:
| Counterparty | Derivative Assets Subject to an MNA by Counterparty |
Derivatives Available for Offset1 |
Non-cash Collateral Received |
Cash Collateral Received2 |
Net Amount of Derivative Assets3 |
|||||||||||||||||||
| Bank of America N.A. |
$ | 58,646 | $ | (36,151 | ) | — | — | $ | 22,495 | |||||||||||||||
| Barclays Bank PLC |
642,224 | (642,224 | ) | — | — | — | ||||||||||||||||||
| BNP Paribas S.A. |
1,908 | (1,908 | ) | — | — | — | ||||||||||||||||||
| Citibank N.A. |
566,770 | (427,346 | ) | — | — | 139,424 | ||||||||||||||||||
| Credit Suisse International |
3,820 | (3,820 | ) | — | — | — | ||||||||||||||||||
| Deutsche Bank AG |
356,396 | (356,396 | ) | — | — | — | ||||||||||||||||||
| Goldman Sachs Bank USA |
189,783 | (189,783 | ) | — | — | — | ||||||||||||||||||
| Goldman Sachs International |
43,889 | (43,889 | ) | — | — | — | ||||||||||||||||||
| HSBC Bank PLC |
88,911 | (44,825 | ) | — | — | 44,086 | ||||||||||||||||||
| JPMorgan Chase Bank N.A. |
1,311,671 | (491,876 | ) | — | $ | (520,000 | ) | 299,795 | ||||||||||||||||
| Morgan Stanley Capital Services LLC |
8,016 | (8,016 | ) | — | — | — | ||||||||||||||||||
| UBS AG |
38,259 | (38,259 | ) | — | — | — | ||||||||||||||||||
| Wells Fargo Bank N.A. |
216,609 | (216,609 | ) | — | — | — | ||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Total |
$ | 3,526,902 | $ | (2,501,102 | ) | — | $ | (520,000 | ) | $ | 505,800 | |||||||||||||
|
|
|
|||||||||||||||||||||||
| Counterparty | Derivative Liabilities Subject to an MNA by Counterparty |
Derivatives Available for Offset1 |
Non-cash Collateral Pledged |
Cash Collateral Pledged4 |
Net Amount of Derivative Liabilities5 |
|||||||||||||||||||
| Bank of America N.A. |
$ | 36,151 | $ | (36,151 | ) | — | — | — | ||||||||||||||||
| Barclays Bank PLC |
2,254,481 | (642,224 | ) | — | $ | (1,612,257 | ) | — | ||||||||||||||||
| BNP Paribas S.A. |
2,303 | (1,908 | ) | — | — | $ | 395 | |||||||||||||||||
| Citibank N.A. |
427,346 | (427,346 | ) | — | — | — | ||||||||||||||||||
| Credit Suisse International |
411,377 | (3,820 | ) | — | (407,557 | ) | — | |||||||||||||||||
| Deutsche Bank AG |
979,949 | (356,396 | ) | — | (623,553 | ) | — | |||||||||||||||||
| Goldman Sachs Bank USA |
1,069,069 | (189,783 | ) | — | (879,286 | ) | — | |||||||||||||||||
| Goldman Sachs International |
61,223 | (43,889 | ) | — | — | 17,334 | ||||||||||||||||||
| HSBC Bank PLC |
44,825 | (44,825 | ) | — | — | — | ||||||||||||||||||
| JPMorgan Chase Bank N.A. |
491,876 | (491,876 | ) | — | — | — | ||||||||||||||||||
| Morgan Stanley Capital Services LLC |
45,545 | (8,016 | ) | — | — | 37,529 | ||||||||||||||||||
| Royal Bank of Canada |
534,891 | — | — | — | 534,891 | |||||||||||||||||||
| Royal Bank of Scotland PLC |
61,749 | — | — | — | 61,749 | |||||||||||||||||||
| Standard Chartered Bank |
3,427 | — | — | — | 3,427 | |||||||||||||||||||
| UBS AG |
158,197 | (38,259 | ) | — | — | 119,938 | ||||||||||||||||||
| Wells Fargo Bank N.A. |
376,314 | (216,609 | ) | — | — | 159,705 | ||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Total |
$ | 6,958,723 | $ | (2,501,102 | ) | — | $ | (3,522,653 | ) | $ | 934,968 | |||||||||||||
|
|
|
|||||||||||||||||||||||
| 1 The amount of derivatives available for offset is limited to the amount of derivative assets and/or liabilities that are subject to an MNA. |
|
|||||||||||||||||||||||
| 2 Excess of collateral received from the individual counterparty is not shown for financial reporting purposes. |
|
|||||||||||||||||||||||
See Notes to Financial Statements.
| 34 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Core Bond Trust (BHK) |
| 3 Net amount represents the net amount receivable from the counterparty in the event of default. |
||||||||||||||
| 4 Excess of collateral pledged from the individual counterparty is not shown for financial reporting purposes. |
||||||||||||||
| 5 Net amount represents the net amount payable due to the counterparty in the event of default. |
||||||||||||||
| Fair Value Hierarchy as of Period End |
Various inputs are used in determining the fair value of investments and derivative financial instruments. For information about the Trust’s policy regarding valuation of investments and derivative financial instruments, refer to the Notes to Financial Statements.
The following tables summarize the Trust’s investments and derivative financial instruments categorized in the disclosure hierarchy:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Investments: | ||||||||||||||||
| Long-Term Investments: |
||||||||||||||||
| Asset-Backed Securities |
— | $ | 78,690,093 | $ | 6,235,302 | $ | 84,925,395 | |||||||||
| Common Stocks |
$ | 79,694 | 107,729 | — | 187,423 | |||||||||||
| Corporate Bonds |
— | 505,539,569 | 7,833,603 | 513,373,172 | ||||||||||||
| Floating Rate Loan Interests |
— | 9,091,982 | 425,295 | 9,517,277 | ||||||||||||
| Foreign Agency Obligations |
— | 23,962,151 | — | 23,962,151 | ||||||||||||
| Municipal Bonds |
— | 26,434,074 | — | 26,434,074 | ||||||||||||
| Non-Agency Mortgage-Backed Securities |
— | 105,705,862 | — | 105,705,862 | ||||||||||||
| Preferred Securities |
13,995,334 | 89,718,310 | — | 103,713,644 | ||||||||||||
| U.S. Government Sponsored Agency Securities |
— | 63,271,495 | 2 | 63,271,497 | ||||||||||||
| U.S. Treasury Obligations |
— | 155,240,411 | — | 155,240,411 | ||||||||||||
| Short-Term Securities: |
||||||||||||||||
| Money Market Funds |
12,926,909 | — | — | 12,926,909 | ||||||||||||
| Options Purchased: |
||||||||||||||||
| Interest rate contracts |
24,234 | 2,985,983 | — | 3,010,217 | ||||||||||||
| Foreign currency exchange contracts |
— | 214,870 | — | 214,870 | ||||||||||||
|
|
|
|||||||||||||||
| Total |
$ | 27,026,171 | $ | 1,060,962,529 | $ | 14,494,202 | $ | 1,102,482,902 | ||||||||
|
|
|
|||||||||||||||
| Derivative Financial Instruments1 | ||||||||||||||||
| Assets: |
||||||||||||||||
| Credit contracts |
— | $ | 31,180 | — | $ | 31,180 | ||||||||||
| Foreign currency exchange contracts |
— | 268,565 | — | 268,565 | ||||||||||||
| Interest rate contracts |
$ | 195,536 | 449,933 | — | 645,469 | |||||||||||
| Liabilities: |
||||||||||||||||
| Credit contracts |
— | (452,874 | ) | — | (452,874 | ) | ||||||||||
| Foreign currency exchange contracts |
— | (571,474 | ) | — | (571,474 | ) | ||||||||||
| Interest rate contracts |
(233,653 | ) | (5,507,334 | ) | — | (5,740,987 | ) | |||||||||
|
|
|
|||||||||||||||
| Total |
$ | (38,117 | ) | $ | (5,782,004 | ) | — | $ | (5,820,121 | ) | ||||||
|
|
|
|||||||||||||||
| 1 Derivative financial instruments are swaps, futures contracts, forward foreign currency exchange contracts and options written. Swaps, futures contracts and forward foreign currency exchange contracts are valued at the unrealized appreciation (depreciation) on the instrument and options written are shown at value. |
| |||||||||||||||
The Trust may hold assets and/or liabilities in which the fair value approximates the carrying amount, or face value, including accrued interest, for financial statement purposes. As of period end, such assets and/or liabilities are categorized within the disclosure hierarchy as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Cash |
$ | 44,891 | — | — | $ | 44,891 | ||||||||||
| Foreign currency at value |
437,584 | — | — | 437,584 | ||||||||||||
| Cash pledged: |
||||||||||||||||
| Centrally cleared swaps |
1,239,940 | — | — | 1,239,940 | ||||||||||||
| Collateral — OTC derivatives |
4,020,000 | — | — | 4,020,000 | ||||||||||||
| Futures contracts |
1,349,970 | — | — | 1,349,970 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Cash received: |
||||||||||||||||
| Collateral — OTC derivatives |
— | $ | (520,000 | ) | — | (520,000 | ) | |||||||||
| Collateral — reverse repurchase agreements |
— | (1,204,000 | ) | — | (1,204,000 | ) | ||||||||||
| Reverse repurchase agreements |
— | (288,238,889 | ) | — | (288,238,889 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | 7,092,385 | $ | (289,962,889 | ) | — | $ | (282,870,504 | ) | |||||||
|
|
|
|||||||||||||||
During the year ended August 31, 2016, there were no transfers between Level 1 and Level 2.
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 35 |
Table of Contents
| Schedule of Investments (concluded) |
BlackRock Core Bond Trust (BHK) |
A reconciliation of Level 3 investments is presented when the Trust had a significant amount of Level 3 investments at the beginning and/or end of the period in relation to net assets. The following table is a reconciliation of Level 3 investments for which significant unobservable inputs were used in determining fair value:
| Asset- Backed Securities |
Corporate Bonds |
Floating Rate Loan Interests |
Non-Agency Mortgage-Backed Securities |
U.S. Government Sponsored Agency Securities |
Total | |||||||||||||||||||
| Assets: |
||||||||||||||||||||||||
| Opening Balance, as of August 31, 2015 |
$ | 22,613,310 | $ | 5,716,325 | — | $ | 8 | $ | 357 | $ | 28,330,000 | |||||||||||||
| Transfers into Level 3 |
— | — | — | — | — | — | ||||||||||||||||||
| Transfers out of Level 31 |
(11,329,317 | ) | — | — | — | — | (11,329,317 | ) | ||||||||||||||||
| Accrued discounts/premiums |
(194,024 | ) | — | $ | 511 | — | — | (193,513 | ) | |||||||||||||||
| Net realized gain |
(425,159 | ) | — | — | 8 | 4 | (425,147 | ) | ||||||||||||||||
| Net change in unrealized appreciation (depreciation)2,3 |
256,242 | 524,704 | 3,459 | (8 | ) | (355 | ) | 784,042 | ||||||||||||||||
| Purchases |
— | 1,621,622 | 421,325 | — | — | 2,042,947 | ||||||||||||||||||
| Sales |
(4,685,750 | ) | (29,048 | ) | — | (8 | ) | (4 | ) | (4,714,810 | ) | |||||||||||||
| Closing Balance, as of August 31, 2016 |
$ | 6,235,302 | $ | 7,833,603 | $ | 425,295 | — | $ | 2 | $ | 14,494,202 | |||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments still held at August 31, 20162 |
$ | 329,847 | $ | 524,704 | $ | 3,459 | $ | (8 | ) | $ | (355 | ) | $ | 857,647 | ||||||||||
|
|
|
|
|
|||||||||||||||||||||
| 1 As of August 31, 2015, the Trust used significant unobservable inputs in determining the value of certain investments. As of August 31, 2016, the Trust used observable inputs in determining the value of the same investments. As a result, investments at beginning of period value were transferred from Level 3 to Level 2 in the disclosure hierarchy |
| |||||||||||||||||||||||
| 2 Included in the related net change in unrealized appreciation (depreciation) in the Statement of Operations. |
| |||||||||||||||||||||||
| 3 Any difference between net change in unrealized appreciation (depreciation) and net change in unrealized appreciation (depreciation) on investments held as of August 31, 2016 is generally due to investments no longer held or categorized as Level 3 at period end. |
| |||||||||||||||||||||||
Certain of the Trust’s investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. Such valuations are based on unobservable inputs. A significant change in third party information inputs could result in a significantly lower or higher value of such Level 3 investments.
See Notes to Financial Statements.
| 36 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments August 31, 2016 |
BlackRock Corporate High Yield Fund, Inc. (HYT) (Percentages shown are based on Net Assets) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 37 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 38 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 39 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 40 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 41 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 42 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 43 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 44 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 45 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 46 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 47 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 48 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 49 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
See Notes to Financial Statements.
| 50 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
| Notes to Schedule of Investments | ||
| (a) | Non-income producing security. |
| (b) | All or a portion of security is held by a wholly owned subsidiary. |
| (c) | Restricted security as to resale, excluding 144A securities. As of period end, the Trust held restricted securities with a current value of $535,351 and an original cost of $816,585, which was 0.04% of its net assets. |
| (d) | Variable rate security. Rate as of period end. |
| (e) | Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration to qualified institutional investors. |
| (f) | When-issued security. |
| (g) | Payment-in-kind security which may pay interest/dividends in additional par/shares and/or in cash. Rates shown are the current rate and possible payment rates. |
| (h) | Issuer filed for bankruptcy and/or is in default. |
| (i) | Zero-coupon bond. |
| (j) | Convertible security. |
| (k) | Perpetual security with no stated maturity date. |
| (l) | During the year ended August 31, 2016, investments in issuers considered to be affiliates of the Trust for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows: |
| Affiliate | Shares Held at August 31, 2015 |
Shares Purchased |
Shares Sold |
Shares Held at August 31, 2016 |
Value at August 31, 2016 |
Income | Realized Gain (Loss) |
|||||||||||||||||||||
| BlackRock Liquidity Funds, TempFund, Institutional Class1 |
— | — | — | — | — | $ | 4,410 | — | ||||||||||||||||||||
| iShares iBoxx USD High Yield Corporate Bond ETF |
— | 1,256,443 | (1,104,443 | ) | 152,000 | $ | 13,179,920 | 817,027 | $ | (2,263,123 | ) | |||||||||||||||||
| Total |
$ | 13,179,920 | $ | 821,437 | $ | (2,263,123 | ) | |||||||||||||||||||||
|
|
|
|
|
|
|
|||||||||||||||||||||||
| 1 No longer held by the Trust as of report date. |
|
|||||||||||||||||||||||||||
| (m) | Other interests represent beneficial interests in liquidation trusts and other reorganization or private entities. |
| • | For Trust compliance purposes, the Trust’s industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or rating group indexes, and/or as defined by the investment adviser. These definitions may not apply for purposes of this report, which may combine such industry subclassifications for reporting ease. |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 51 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
| Derivative Financial Instruments Outstanding as of Period End |
Futures Contracts
| Contracts Short |
Issue | Expiration | Notional Value | Unrealized Depreciation |
||||||||||||||||||||||||
| (80 | ) | Russell 2000 Mini Index | September 2016 | USD | 9,910,400 | $ | (757,024 | ) | ||||||||||||||||||||
| (267 | ) | S&P 500 E-Mini Index | September 2016 | USD | 28,962,825 | (595,638 | ) | |||||||||||||||||||||
| Total | $ | (1,352,662 | ) | |||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
Forward Foreign Currency Exchange Contracts
| Currency Purchased |
Currency Sold |
Counterparty | Settlement Date |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||
| EUR | 1,034,000 | USD | 1,154,132 | Barclays Bank PLC | 9/06/16 | $ | (597 | ) | ||||||||||||||||||
| EUR | 60,000 | USD | 66,956 | Barclays Bank PLC | 9/06/16 | (20 | ) | |||||||||||||||||||
| EUR | 230,000 | USD | 260,644 | Citibank N.A. | 9/06/16 | (4,055 | ) | |||||||||||||||||||
| EUR | 481,500 | USD | 537,919 | Deutsche Bank AG | 9/06/16 | (755 | ) | |||||||||||||||||||
| EUR | 100,000 | USD | 111,669 | Deutsche Bank AG | 9/06/16 | (109 | ) | |||||||||||||||||||
| EUR | 380,000 | USD | 430,442 | Goldman Sachs International | 9/06/16 | (6,513 | ) | |||||||||||||||||||
| EUR | 700,000 | USD | 782,109 | Morgan Stanley & Co. International PLC | 9/06/16 | (1,186 | ) | |||||||||||||||||||
| EUR | 460,000 | USD | 514,857 | Morgan Stanley & Co. International PLC | 9/06/16 | (1,679 | ) | |||||||||||||||||||
| EUR | 500,000 | USD | 559,651 | Royal Bank of Canada | 9/06/16 | (1,848 | ) | |||||||||||||||||||
| GBP | 145,000 | USD | 187,943 | Australia And New Zealand Bank Group | 9/06/16 | 2,475 | ||||||||||||||||||||
| GBP | 300,000 | USD | 393,636 | Citibank N.A. | 9/06/16 | 333 | ||||||||||||||||||||
| GBP | 700,000 | USD | 917,018 | Deutsche Bank AG | 9/06/16 | 2,242 | ||||||||||||||||||||
| GBP | 1,450,000 | USD | 1,897,501 | Morgan Stanley & Co. International PLC | 9/06/16 | 6,682 | ||||||||||||||||||||
| GBP | 920,000 | USD | 1,208,503 | Morgan Stanley & Co. International PLC | 9/06/16 | (332 | ) | |||||||||||||||||||
| USD | 1,203,007 | AUD | 1,605,000 | Westpac Group | 9/06/16 | (3,112 | ) | |||||||||||||||||||
| USD | 21,538,235 | CAD | 28,080,000 | Westpac Group | 9/06/16 | 125,421 | ||||||||||||||||||||
| USD | 134,308 | EUR | 119,000 | Australia And New Zealand Bank Group | 9/06/16 | 1,551 | ||||||||||||||||||||
| USD | 11,168 | EUR | 10,000 | Barclays Bank PLC | 9/06/16 | 12 | ||||||||||||||||||||
| USD | 1,493,971 | EUR | 1,335,000 | BNP Paribas S.A. | 9/06/16 | 4,639 | ||||||||||||||||||||
| USD | 141,202 | EUR | 127,000 | Citibank N.A. | 9/06/16 | (479 | ) | |||||||||||||||||||
| USD | 277,544 | EUR | 250,000 | Citibank N.A. | 9/06/16 | (1,357 | ) | |||||||||||||||||||
| USD | 282,162 | EUR | 250,000 | Morgan Stanley & Co. International PLC | 9/06/16 | 3,260 | ||||||||||||||||||||
| USD | 81,140,745 | EUR | 72,870,000 | Royal Bank of Scotland PLC | 9/06/16 | (153,354 | ) | |||||||||||||||||||
| USD | 36,106 | EUR | 32,000 | State Street Bank And Trust Co. | 9/06/16 | 406 | ||||||||||||||||||||
| USD | 23,962,647 | GBP | 18,185,000 | HSBC Bank USA N.A. | 9/06/16 | 81,572 | ||||||||||||||||||||
| USD | 145,620 | GBP | 110,000 | Morgan Stanley & Co. International PLC | 9/06/16 | 1,165 | ||||||||||||||||||||
| USD | 122,575 | GBP | 94,000 | Morgan Stanley & Co. International PLC | 9/06/16 | (869 | ) | |||||||||||||||||||
| USD | 1,205,435 | AUD | 1,605,000 | Commonwealth Bank of Australia | 10/05/16 | 174 | ||||||||||||||||||||
| USD | 21,405,425 | CAD | 28,080,000 | Westpac Group | 10/05/16 | (10,602 | ) | |||||||||||||||||||
| USD | 5,582 | EUR | 5,000 | Bank of America N.A. | 10/05/16 | (4 | ) | |||||||||||||||||||
| USD | 79,149,510 | EUR | 70,952,000 | Royal Bank of Scotland PLC | 10/05/16 | (107,665 | ) | |||||||||||||||||||
| USD | 19,385,130 | GBP | 14,782,000 | Royal Bank of Scotland PLC | 10/05/16 | (41,631 | ) | |||||||||||||||||||
| Total | $ | (106,235 | ) | |||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||
OTC Credit Default Swaptions Purchased
| Description | Counterparty | Put/ Call |
Exercise Rate |
Pay/ Receive Exercise Rate |
Floating Rate Index |
Expiration Date |
Notional Amount (000) |
Value | ||||||||||||||||||
| Bought Protection on 5-Year Credit Default Swap |
Goldman Sachs International | Put | 103.00% | Pay | Markit CDX North America High Yield Index, Series 26 |
10/19/16 | USD | 10,000 | $ | 67,870 | ||||||||||||||||
OTC Options Purchased
| Description | Put/ Call |
Counterparty | Expiration Date |
Strike Price |
Contracts | Value | ||||||||||||||
| Marsico Parent Superholdco LLC |
Call | Goldman Sachs & Co. | 12/14/19 | USD | 942.86 | 39 | — | |||||||||||||
See Notes to Financial Statements.
| 52 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
OTC Credit Default Swaptions Written
| Description | Counterparty | Put/ Call |
Exercise Rate |
Pay/Receive Exercise Rate |
Floating Rate Index |
Expiration Date |
Notional Amount (000) |
Value | ||||||||||||||||||
| Sold Protection on 5-Year Credit Default Swap |
Goldman Sachs International | Put | 100.00 | % | Receive | Markit CDX North America High Yield Index, Series 26 |
10/19/16 | USD | 10,000 | $ | (22,041 | ) | ||||||||||||||
Centrally Cleared Credit Default Swaps — Buy Protection
| Issuer / Index | Pay Fixed Rate |
Expiration Date |
Notional Amount (000) |
Unrealized Depreciation |
||||||||||
| Markit iTraxx XO, Series 25, Version 1 |
5.00% | 6/20/21 | EUR 3,730 | $ | (134,079 | ) | ||||||||
Centrally Cleared Credit Default Swaps — Sold Protection
| Issuer / Index | Receive Fixed Rate |
Expiration Date |
Credit Rating1 |
Notional Amount (000)2 |
Unrealized Appreciation |
|||||||||||||
| Dow Jones CDX North America High Yield Index, Series 26, Version 2 |
5.00% | 6/20/21 | B+ | 50,055 | $ | 40,399 | ||||||||||||
OTC Credit Default Swaps — Sell Protection
| Issuer/Index | Receive Fixed Rate |
Counterparty | Expiration Date |
Credit Rating1 |
Notional Amount (000)2 |
Value | Premiums Paid |
Unrealized Appreciation |
||||||||||||||||||||||||||||
| CCO Holdings LLC |
8.00 | % | Deutsche Bank AG | 9/20/17 | NR | USD 8,180 | $ | 794,712 | — | $ | 794,712 | |||||||||||||||||||||||||
| CNH Industrial NV |
5.00 | % | Goldman Sachs International | 6/20/21 | BB+ | EUR 554 | 81,631 | $ | 53,238 | 28,393 | ||||||||||||||||||||||||||
| Total |
$ | 876,343 | $ | 53,238 | $ | 823,105 | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||
| 1 Using Standard & Poors (“S&P’s”) rating of the issuer or the underlying securities of the index, as applicable. |
|
|||||||||||||||||||||||||||||||||||
| 2 The maximum potential amount the Trust may pay should a negative credit event take place as defined under the terms of the agreement. |
|
|||||||||||||||||||||||||||||||||||
OTC Total Return Swaps
| Reference Entity | Fixed Rate/ Floating Rate |
Counterparty | Effective Date |
Expiration Date |
Notional Amount (000) |
Value | Premiums Received |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | JPMorgan Chase Bank N.A. | N/A | 9/20/16 | USD | 6,000 | $ | 426,416 | — | $ | 426,416 | |||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 9/20/16 | USD | 1,500 | 94,548 | — | 94,548 | |||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 12/20/16 | USD | 2,000 | 127,775 | — | 127,775 | |||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Morgan Stanley Capital Services LLC | N/A | 12/20/16 | USD | 2,700 | 170,187 | — | 170,187 | |||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | JPMorgan Chase Bank N.A. | N/A | 12/20/16 | USD | 1,000 | 63,009 | — | 63,009 | |||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | JPMorgan Chase Bank N.A. | N/A | 12/20/16 | USD | 2,700 | 121,045 | — | 121,045 | |||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Citibank N.A. | N/A | 12/20/16 | USD | 1,400 | 23,029 | $ | (629 | ) | 23,658 | |||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 12/20/16 | USD | 3,725 | 37,170 | (3,144 | ) | 40,314 | ||||||||||||||||||||||
| Markit iBoxx Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 12/20/16 | USD | 1,900 | 10,825 | (1,809 | ) | 12,634 | ||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 3/20/17 | USD | 5,800 | 274,424 | (104 | ) | 274,528 | ||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 3/20/17 | USD | 13,000 | 169,964 | (7,705 | ) | 177,669 | ||||||||||||||||||||||
| Morgan Stanley Energy Long Basket Index |
Fed Funds Effective Rate plus 0.25% | Morgan Stanley & Co. International PLC | N/A | 3/30/17 | USD | 1 | 1,073 | — | 1,073 | |||||||||||||||||||||||
| Morgan Stanley Energy Long Basket Index |
Fed Funds Effective Rate plus 0.25% | Morgan Stanley & Co. International PLC | N/A | 3/30/17 | USD | — | 1 | (32 | ) | — | (32 | ) | ||||||||||||||||||||
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 53 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
OTC Total Return Swaps (concluded)
| Reference Entity | Fixed Rate/ Floating Rate |
Counterparty | Effective Date |
Expiration Date |
Notional Amount (000) |
Value | Premiums Received |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||||
| Morgan Stanley Energy Long Basket Index |
Fed Funds Effective Rate plus 0.25% | Morgan Stanley & Co. International PLC | N/A | 3/30/17 | USD | 1 | $ | (1,845 | ) | — | $ | (1,845 | ) | |||||||||||||||||||
| Morgan Stanley Energy Long Basket Index |
Fed Funds Effective Rate plus 0.25% | Morgan Stanley & Co. International PLC | N/A | 3/30/17 | USD | 30 | 216,515 | — | 216,515 | |||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Goldman Sachs International | N/A | 6/20/17 | USD | 1,800 | 11,503 | $ | (1,681 | ) | 13,184 | |||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Morgan Stanley Capital Services LLC | N/A | 6/20/17 | USD | 1,400 | 45,252 | (453 | ) | 45,705 | ||||||||||||||||||||||
| iBoxx USD Liquid High Yield Index |
3-Month LIBOR | Morgan Stanley Capital Services LLC | N/A | 6/20/17 | USD | 2,700 | 6,267 | (2,813 | ) | 9,080 | ||||||||||||||||||||||
| Total |
$ | 1,797,125 | $ | (18,338 | ) | $ | 1,815,463 | |||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
| 1 Amount is less than $500. |
|
|||||||||||||||||||||||||||||||
| Transactions in Options Written for the Year Ended August 31, 2016 |
| Puts | ||||||||||||||||
| Contracts | Notional (000) |
Premiums Received |
||||||||||||||
| Outstanding options, beginning of year |
— | — | — | |||||||||||||
| Options written |
4,734 | $ | 10,000 | $ | 331,605 | |||||||||||
| Options expired |
(3,934 | ) | — | (231,039 | ) | |||||||||||
| Options closed |
(800 | ) | — | (81,566 | ) | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Outstanding options, end of year |
— | $ | 10,000 | $ | 19,000 | |||||||||||
|
|
|
|
|
|
|
|||||||||||
| Derivative Financial Instruments Categorized by Risk Exposure |
| As | of period end, the fair values of derivative financial instruments located in the Consolidated Statement of Assets and Liabilities were as follows: |
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||||||
| Assets — Derivative Financial Instruments | ||||||||||||||||||||||||||||||||
| Futures contracts |
Net unrealized appreciation1 | — | — | — | — | — | — | — | ||||||||||||||||||||||||
| Forward foreign currency exchange contracts |
Unrealized appreciation on forward foreign currency exchange contracts |
— | — | — | $ | 229,932 | — | — | $ | 229,932 | ||||||||||||||||||||||
| Options purchased |
Investments at value — unaffiliated2 | $ | 67,870 | 67,870 | ||||||||||||||||||||||||||||
| Swaps — centrally cleared |
Net unrealized appreciation1 | — | 40,399 | — | — | — | — | 40,399 | ||||||||||||||||||||||||
| Swaps — OTC |
Unrealized appreciation on OTC swaps, Swap premiums paid | — | 876,343 | $ | 217,588 | — | $ | 1,599,752 | — | 2,693,683 | ||||||||||||||||||||||
| Total |
— | $ | 984,612 | $ | 217,588 | $ | 229,932 | $ | 1,599,752 | — | $ | 3,031,884 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Liabilities — Derivative Financial Instruments | ||||||||||||||||||||||||||||||||
| Futures contracts |
Net unrealized depreciation1 | — | — | $ | 1,352,662 | — | — | — | $ | 1,352,662 | ||||||||||||||||||||||
| Forward foreign currency exchange contracts |
Unrealized depreciation on forward foreign currency exchange contracts |
— | — | — | $ | 336,167 | — | — | 336,167 | |||||||||||||||||||||||
| Options written |
Options written at value | $ | 22,041 | 22,041 | ||||||||||||||||||||||||||||
| Swaps — centrally cleared |
Net unrealized depreciation1 | — | 134,079 | — | — | — | — | 134,079 | ||||||||||||||||||||||||
| Swaps — OTC |
Unrealized depreciation on OTC swaps, Swap premiums received | — | — | 1,877 | — | $ | 18,338 | — | 20,215 | |||||||||||||||||||||||
| Total |
— | $ | 156,120 | $ | 1,354,539 | $ | 336,167 | $ | 18,338 | — | $ | 1,865,164 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| 1 Includes cumulative appreciation (depreciation) on futures contracts and centrally cleared swaps, as reported in the Consolidated Schedule of Investments. Only current day’s variation margin is reported within the Consolidated Statement of Asset and Liabilities. |
| |||||||||||||||||||||||||||||||
| 2 Includes options purchased at value as reported in the Consolidated Schedule of Investments. |
|
|||||||||||||||||||||||||||||||
See Notes to Financial Statements.
| 54 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
For the year ended August 31, 2016, the effect of derivative financial instruments in the Consolidated Statement of Operations was as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Realized Gain (Loss) from: |
||||||||||||||||||||||||||||
| Futures contracts |
— | — | $ | (3,489,133 | ) | — | $ | (829,018 | ) | — | $ | (4,318,151 | ) | |||||||||||||||
| Forward foreign currency exchange contracts |
— | — | — | $ | 3,781,389 | — | — | 3,781,389 | ||||||||||||||||||||
| Options purchased1 |
— | — | (1,288,782 | ) | — | — | — | (1,288,782 | ) | |||||||||||||||||||
| Options written |
— | — | 259,773 | — | — | — | 259,773 | |||||||||||||||||||||
| Swaps |
— | $ | 4,051,821 | 1,251,588 | — | 780,396 | — | 6,083,805 | ||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Total |
— | $ | 4,051,821 | $ | (3,266,554 | ) | $ | 3,781,389 | $ | (48,622 | ) | — | $ | 4,518,034 | ||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate |
Other Contracts |
Total | ||||||||||||||||||||||
| Net Change in Unrealized Appreciation (Depreciation) on: |
|
|||||||||||||||||||||||||||
| Futures contracts |
— | — | $ | (7,567,960 | ) | $ | (95,646 | ) | — | $ | (7,663,606 | ) | ||||||||||||||||
| Forward foreign currency exchange contracts |
— | — | — | $ | 23,421 | — | — | 23,421 | ||||||||||||||||||||
| Options purchased2 |
— | $ | 7,870 | — | — | — | — | 7,870 | ||||||||||||||||||||
| Options written |
— | (3,041 | ) | — | — | — | — | (3,041 | ) | |||||||||||||||||||
| Swaps |
— | (298,660 | ) | 489,959 | — | 1,817,452 | — | 2,008,751 | ||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Total |
— | $ | (293,831 | ) | $ | (7,078,001 | ) | $ | 23,421 | $ | 1,721,806 | — | $ | (5,626,605 | ) | |||||||||||||
|
|
|
|||||||||||||||||||||||||||
| 1 Options purchased are included in net realized gain (loss) from investments. |
|
|||||||||||||||||||||||||||
| 2 Options purchased are included in net change in unrealized appreciation (depreciation) on investments. |
|
|||||||||||||||||||||||||||
| Average Quarterly Balances of Outstanding Derivative Financial Instruments |
| Futures contracts: | ||||
| Average notional value of contracts — short |
$ | 99,135,415 | ||
| Forward foreign currency exchange contracts: | ||||
| Average amounts purchased — in USD |
$ | 280,657,112 | ||
| Average amounts sold — in USD |
$ | 6,538,790 | ||
| Options: | ||||
| Average value of options contracts written |
$ | 299,768 | 1 | |
| Average value of options swaption contracts purchased |
$ | 2,500,000 | ||
| Average value of options swaption contract written |
$ | 2,500,000 | ||
| Credit default swaps: | ||||
| Average notional value — buy protection |
$ | 1,717,657 | ||
| Average notional value — sell protection |
$ | 36,529,846 | ||
| Total return rate swaps: | ||||
| Average notional value |
$ | 25,894,870 | ||
| 1 Actual amounts for the period are shown due to limited outstanding derivative financial instruments as of each quarter. |
| |||
For more information about the Trust’s investment risks regarding derivative financial instruments, refer to the Notes to Consolidated Financial Statements.
The Trust’s derivative assets and liabilities (by type) were as follows:
| Assets | Liabilities | |||||||||||
| Derivative Financial Instruments: | ||||||||||||
| Futures contracts |
$ | 132,895 | — | |||||||||
| Forward foreign currency exchange contracts |
229,932 | $ | 336,167 | |||||||||
| Options |
67,870 | 1 | 22,041 | |||||||||
| Swaps — centrally cleared |
— | 99,311 | ||||||||||
| Swaps — OTC2 |
2,693,683 | 20,215 | ||||||||||
|
|
|
|||||||||||
| Total derivative assets and liabilities in the Consolidated Statement of Assets and Liabilities |
$ | 3,124,380 | $ | 477,734 | ||||||||
|
|
|
|||||||||||
| Derivatives not subject to a master netting agreement or similar agreement (“MNA”) |
(132,895 | ) | (99,311 | ) | ||||||||
|
|
|
|||||||||||
| Total derivative assets and liabilities subject to an MNA |
$ | 2,991,485 | $ | 378,423 | ||||||||
|
|
|
|||||||||||
| 1 Includes options purchased at value which is included in Investments at value — unaffiliated in the Consolidated Statement of Assets and Liabilities and reported in the Consolidated Schedule of Investments. |
|
|||||||||||
| 2 Includes unrealized appreciation (depreciation) on OTC swaps and swap premiums paid/received in the Consolidated Statement of Assets and Liabilities. |
|
|||||||||||
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 55 |
Table of Contents
| Consolidated Schedule of Investments (continued) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
The following table presents the Trust’s derivative assets and liabilities by counterparty net of amounts available for offset under an Master Netting Agreement (“MNA”) and net of the related collateral received by the Trust:
| Counterparty | Derivative
Assets Subject to an MNA by Counterparty |
Derivatives Available for Offset1 |
Non-cash Collateral Received |
Cash Collateral Received2 |
Net Amount of Derivative Assets3 |
|||||||||||||||||||
| Australia And New Zealand Bank Group |
$ | 4,026 | — | — | — | $ | 4,026 | |||||||||||||||||
| Barclays Bank PLC |
12 | $ | (12 | ) | — | — | — | |||||||||||||||||
| BNP Paribas S.A. |
4,639 | — | — | — | 4,639 | |||||||||||||||||||
| Citibank N.A. |
23,991 | (6,520 | ) | — | — | 17,471 | ||||||||||||||||||
| Commonwealth Bank of Australia |
174 | — | — | — | 174 | |||||||||||||||||||
| Deutsche Bank AG |
796,954 | (864 | ) | — | $ | (796,090 | ) | — | ||||||||||||||||
| Goldman Sachs International |
890,153 | (42,997 | ) | — | (800,000 | ) | 47,156 | |||||||||||||||||
| HSBC Bank USA N.A. |
81,572 | — | — | — | 81,572 | |||||||||||||||||||
| JPMorgan Chase Bank N.A. |
610,470 | — | — | (530,000 | ) | 80,470 | ||||||||||||||||||
| Morgan Stanley & Co. International PLC |
228,695 | (5,943 | ) | — | — | 222,752 | ||||||||||||||||||
| Morgan Stanley Capital Services LLC |
224,972 | (3,266 | ) | — | — | 221,706 | ||||||||||||||||||
| State Street Bank and Trust Company |
406 | — | — | — | 406 | |||||||||||||||||||
| Westpac Group |
125,421 | (13,714 | ) | — | — | 111,707 | ||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Total |
$ | 2,991,485 | $ | (73,316 | ) | — | $ | (2,126,090 | ) | $ | 792,079 | |||||||||||||
|
|
|
|||||||||||||||||||||||
| Counterparty | Derivative Liabilities Subject to an MNA by Counterparty |
Derivatives Available for Offset1 |
Non-cash Collateral Pledged |
Cash Collateral Pledged |
Net Amount of Derivative Liabilities4 |
|||||||||||||||||||
| Bank of America, N.A. |
$ | 4 | — | — | — | $ | 4 | |||||||||||||||||
| Barclays Bank PLC |
617 | $ | (12 | ) | — | — | 605 | |||||||||||||||||
| Citibank N.A. |
6,520 | (6,520 | ) | — | — | — | ||||||||||||||||||
| Deutsche Bank AG |
864 | (864 | ) | — | — | — | ||||||||||||||||||
| Goldman Sachs International |
42,997 | (42,997 | ) | — | — | — | ||||||||||||||||||
| Morgan Stanley & Co. International PLC |
5,943 | (5,943 | ) | — | — | — | ||||||||||||||||||
| Morgan Stanley Capital Services LLC |
3,266 | (3,266 | ) | — | — | — | ||||||||||||||||||
| Royal Bank of Canada |
1,848 | — | — | — | 1,848 | |||||||||||||||||||
| Royal Bank of Scotland PLC |
302,650 | — | — | — | 302,650 | |||||||||||||||||||
| Westpac Group |
13,714 | (13,714 | ) | — | — | — | ||||||||||||||||||
|
|
|
|||||||||||||||||||||||
| Total |
$ | 378,423 | $ | (73,316 | ) | — | — | $ | 305,107 | |||||||||||||||
|
|
|
|||||||||||||||||||||||
| 1 The amount of derivatives available for offset is limited to the amount of derivative assets and/or liabilities that are subject to an MNA. |
|
|||||||||||||||||||||||
| 2 Excess of collateral received from the individual counterparty is not shown for financial reporting purposes. |
|
|||||||||||||||||||||||
| 3 Net amount represents the net amount receivable from the counterparty in the event of default. |
|
|||||||||||||||||||||||
| 4 Net amount represents the net amount payable due to the counterparty in the event of default. |
|
|||||||||||||||||||||||
| Fair Value Hierarchy as of Period End |
Various inputs are used in determining the fair value of investments and derivative financial instruments. For information about the Trust’s policy regarding valuation of investments and derivative financial instruments, refer to the Notes to Consolidated Financial Statements.
The following tables summarize the Trust’s investments and derivative financial instruments categorized in the disclosure hierarchy:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Investments: | ||||||||||||||||
| Long-Term Investments: |
||||||||||||||||
| Asset-Backed Securities |
— | $ | 33,032,621 | $ | 13,191,932 | $ | 46,224,553 | |||||||||
| Common Stocks |
$ | 41,964,842 | 29,349,732 | 1,725,910 | 73,040,484 | |||||||||||
| Corporate Bonds |
— | 1,634,605,449 | 5,853,024 | 1,640,458,473 | ||||||||||||
| Floating Rate Loan Interests |
— | 165,429,110 | 22,184,147 | 187,613,257 | ||||||||||||
| Investment Companies |
36,761,859 | — | — | 36,761,859 | ||||||||||||
| Non-Agency Mortgage-Backed Securities |
— | 4,711,643 | — | 4,711,643 | ||||||||||||
| Other Interests |
— | — | 13 | 13 | ||||||||||||
| Preferred Securities |
6,454,520 | 72,678,461 | 17,201,711 | 96,334,692 | ||||||||||||
| Warrants |
— | 30,987 | 13,361 | 44,348 | ||||||||||||
| Options Purchased: |
||||||||||||||||
| Credit contracts |
— | 67,870 | — | 67,870 | ||||||||||||
|
|
|
|||||||||||||||
| Subtotal |
$ | 85,181,221 | $ | 1,939,905,873 | $ | 60,170,098 | $ | 2,085,257,192 | ||||||||
|
|
|
|||||||||||||||
| Investments Valued at NAV1 |
523,176 | |||||||||||||||
|
|
|
|||||||||||||||
| Total |
$ | 2,085,780,368 | ||||||||||||||
|
|
|
|||||||||||||||
| 1 As of August 31, 2016, certain of the Trust’s investments were fair valued using net asset value (“NAV”) per share as no quoted market value is available and have been excluded from the fair value hierarchy. |
| |||||||||||||||
See Notes to Financial Statements.
| 56 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Consolidated Schedule of Investments (concluded) |
BlackRock Corporate High Yield Fund, Inc. (HYT) |
The following tables summarize the Trust’s investments and derivative financial instruments categorized in the disclosure hierarchy (concluded):
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Derivative Financial Instruments1 | ||||||||||||||||
| Assets: |
||||||||||||||||
| Credit contracts |
— | $ | 863,504 | — | $ | 863,504 | ||||||||||
| Equity contracts |
— | 217,588 | — | 217,588 | ||||||||||||
| Foreign currency exchange contracts |
— | 229,932 | — | 229,932 | ||||||||||||
| Interest rate contracts |
— | 1,599,752 | — | 1,599,752 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Credit contracts |
— | (156,120 | ) | — | (156,120 | ) | ||||||||||
| Equity contracts |
$ | (1,352,662 | ) | (1,877 | ) | — | (1,354,539 | ) | ||||||||
| Foreign currency exchange contracts |
— | (336,167 | ) | — | (336,167 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | (1,352,662 | ) | $ | 2,416,612 | — | $ | 1,063,950 | ||||||||
|
|
|
|||||||||||||||
| 1 Derivative financial instruments are swaps, futures contracts and forward foreign currency exchange contracts and options written. Swaps, futures contracts and forward foreign currency exchange contracts are valued at the unrealized appreciation (depreciation) on the instrument and options written are shown at value. |
| |||||||||||||||
The Trust may hold assets and/or liabilities in which the fair value approximates the carrying amount for financial statement purposes. As of period end, such assets and/or liabilities are categorized within the disclosure hierarchy as follows:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Foreign currency at value |
$ | 631,458 | — | — | $ | 631,458 | ||||||||||
| Cash pledged: |
||||||||||||||||
| Centrally cleared swaps |
2,857,000 | — | — | 2,857,000 | ||||||||||||
| Futures contracts |
1,568,150 | — | — | 1,568,150 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Bank overdraft |
— | $ | (2,604 | ) | — | (2,604 | ) | |||||||||
| Bank borrowings payable |
— | (604,000,000 | ) | — | (604,000,000 | ) | ||||||||||
| Cash received as collateral for OTC derivatives |
— | (2,330,000 | ) | — | (2,330,000 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | 5,056,608 | $ | (606,332,604 | ) | — | $ | (601,275,996 | ) | |||||||
|
|
|
|||||||||||||||
During the year ended August 31, 2016, there were no transfers between Level 1 and Level 2.
A reconciliation of Level 3 investments is presented when the Trust had a significant amount of Level 3 investments at the beginning and/or end of the period in relation to net assets. The following table is a reconciliation of Level 3 investments for which significant unobservable inputs were used in determining fair value:
| Common Stocks |
Asset-Backed Securities |
Corporate Bonds |
Floating Interests |
Other Interests |
Preferred Securities |
Warrants | Total | |||||||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||||||||||
| Opening Balance, as of August 31, 20151 |
$ | 3,739,028 | $ | 5,936,098 | $ | 25,160,883 | $ | 25,557,215 | $ | 10,978 | $ | 20,459,861 | $ | 74,732 | $ | 80,938,795 | ||||||||||||||||
| Transfers into Level 32 |
— | — | — | 5,372,890 | — | — | — | 5,372,890 | ||||||||||||||||||||||||
| Transfers out of Level 33 |
— | (1,499,223 | ) | (18,524,109 | ) | — | — | — | — | (20,023,332 | ) | |||||||||||||||||||||
| Accrued discounts/premiums |
— | 14,387 | 11,411 | 148,129 | — | — | — | 173,927 | ||||||||||||||||||||||||
| Net realized gain (loss) |
(1,991,849 | ) | (6,361 | ) | 2,553 | 213,080 | (400 | ) | — | — | (1,782,977 | ) | ||||||||||||||||||||
| Net change in unrealized appreciation (depreciation)4,5 |
(208,733 | ) | 95,351 | (156,996 | ) | 190,237 | (10,565 | ) | (3,258,150 | ) | (61,371 | ) | (3,410,227 | ) | ||||||||||||||||||
| Purchases |
187,464 | 9,897,780 | 1,359 | 2,447,823 | — | — | — | 12,534,426 | ||||||||||||||||||||||||
| Sales |
— | (1,246,100 | ) | (642,077 | ) | (11,745,227 | ) | — | — | — | (13,633,404 | ) | ||||||||||||||||||||
| Closing Balance, as of August 31, 2016 |
$ | 1,725,910 | $ | 13,191,932 | $ | 5,853,024 | $ | 22,184,147 | $ | 13 | $ | 17,201,711 | $ | 13,361 | $ | 60,170,098 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| Net change in unrealized appreciation/depreciation on investments still held at August 31, 20163 |
$ | (2,200,578 | ) | $ | 130,810 | $ | (156,996 | ) | $ | 237,746 | $ | (10,925 | ) | $ | (3,258,150 | ) | $ | (61,371 | ) | $ | (5,319,464 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
| 1 The opening balance of preferred securities has been adjusted to exclude certain investments amounting to $555,106 that were valued using NAV per share as no quoted market value is available. The fair value of those investments have been excluded from the fair value hierarchy due to the adoption of the Accounting Standard Update related to Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). |
| |||||||||||||||||||||||||||||||
| 2 As of August 31, 2015, the Trust used observable inputs in determining the value of certain investments. As of August 31, 2016, the Trust used significant unobservable inputs in determining the value of the same investments. As a result, investments at beginning of period value were transferred from Level 2 to Level 3 in the disclosure hierarchy. |
| |||||||||||||||||||||||||||||||
| 3 As of August 31, 2015, the Trust used significant unobservable inputs in determining the value of certain investments. As of August 31, 2016, the Trust used observable inputs in determining the value of the same investments. As a result, investments at beginning of period value were transferred from Level 3 to Level 2 in the disclosure hierarchy. |
| |||||||||||||||||||||||||||||||
| 4 Included in the related net change in unrealized appreciation (depreciation) in the Consolidated Statement of Operations. |
| |||||||||||||||||||||||||||||||
| 5 Any difference between net change in unrealized appreciation (depreciation) on investments still held at August 31, 2016 is generally due to investments no longer held or categorized as Level 3 at period end. |
| |||||||||||||||||||||||||||||||
Certain of the Trust’s investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. Such valuations are based on unobservable inputs. A significant change in third party information inputs could result in a significantly lower or higher value of such Level 3 investments.
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 57 |
Table of Contents
| Schedule of Investments August 31, 2016 |
BlackRock Income Trust, Inc. (BKT) (Percentages shown are based on Net Assets) |
See Notes to Financial Statements.
| 58 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Income Trust, Inc. (BKT) |
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 59 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Income Trust, Inc. (BKT) |
| Notes to Schedule of Investments |
| (a) | Variable rate security. Rate as of period end. |
| (b) | Security exempt from registration pursuant to Rule 144A under the Securities Act of 1933, as amended. These securities may be resold in transactions exempt from registration to qualified institutional investors. |
| (c) | Step-up bond that pays an initial coupon rate for the first period and then a higher coupon rate for the following periods. Rate as of period end. |
| (d) | Amount is less than $500. |
| (e) | Zero-coupon bond. |
| (f) | All or a portion of security has been pledged as collateral in connection with outstanding reverse repurchase agreements. |
| (g) | The amount to be repurchased assumes the maturity will be the day after period end. |
| (h) | Certain agreements have no stated maturity and can be terminated by either party at any time. |
| (i) | During the year ended August 31, 2016, investments in issuers considered to be affiliates of the Trust for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows: |
| Affiliate | Shares Held at August 31, 2015 |
Net Activity |
Shares Held at August 31, 2016 |
Value at August 31, 2016 |
Income | |||||||||||||||
| BlackRock Liquidity Funds, TempFund, Institutional Class |
24,634,500 | (17,450,920 | ) | 7,183,580 | $ | 7,183,580 | $ | 36,838 | ||||||||||||
| (j) | Current yield as of period end. |
| (k) | Represents or includes a TBA transaction. As of period end, unsettled TBA transactions were as follows: |
| Counterparty | Value | Unrealized Depreciation |
||||||
| Barclays Bank PLC |
$ | (1,474,014 | ) | $ | (4,572 | ) | ||
| Credit Suisse Securities (USA) LLC |
$ | (7,946,376 | ) | $ | (25,512 | ) | ||
| Goldman Sachs & Co. |
$ | (4,876,437 | ) | $ | (11,000 | ) | ||
| • | For Trust compliance purposes, the Trust’s industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or rating group indexes, and/or as defined by the investment adviser. These definitions may not apply for purposes of this report, which may combine such industry subclassifications for reporting ease. |
Reverse Repurchase Agreements
| Counterparty | Interest Rate |
Trade Date |
Maturity Date1 |
Face Value | Face Value Including Accrued Interest |
Type of Underlying Collateral |
Remaining Contractual Maturity of the Agreements | |||||||||||||||||
| Credit Suisse Securities (USA) LLC |
0.51 | % | 3/15/16 | Open | $ | 12,505,774 | $ | 12,535,715 | U.S. Government Sponsored Agency Securities | Open/Demand1 | ||||||||||||||
| BNP Paribas Securities Corp. |
0.52 | % | 6/13/16 | Open | 2,972,413 | 2,976,060 | U.S. Treasury Obligations | Open/Demand1 | ||||||||||||||||
| BNP Paribas Securities Corp. |
0.57 | % | 6/13/16 | Open | 4,110,731 | 4,116,423 | U.S. Treasury Obligations | Open/Demand1 | ||||||||||||||||
| HSBC Securities (USA), Inc. |
0.60 | % | 8/10/16 | 9/14/16 | 80,143,000 | 80,171,050 | U.S. Government Sponsored Agency Securities | Up to 30 Days | ||||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith, Inc. | 0.59 | % | 8/10/16 | 9/14/16 | 53,041,000 | 53,059,255 | U.S. Government Sponsored Agency Securities | Up to 30 Days | ||||||||||||||||
| Total |
|
$ | 152,772,918 | $ | 152,858,503 | |||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||
| 1 Certain agreements have no stated maturity and can be terminated by either party at any time. | ||||||||||||||||||||||||
See Notes to Financial Statements.
| 60 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Income Trust, Inc. (BKT) |
| Derivative Financial Instruments Outstanding as of Period End |
Futures Contracts
| Contracts Long (Short) |
Issue | Expiration | Notional Value |
Unrealized (Depreciation) |
||||||||||||||||||||||||||||
| 118 | 2-Year U.S. Treasury Note | December 2016 | USD | 25,760,875 | $ | (22 | ) | |||||||||||||||||||||||||
| (100) | 5-Year U.S. Treasury Note | December 2016 | USD | 12,125,000 | (3,720 | ) | ||||||||||||||||||||||||||
| (123) | 10-Year U.S. Treasury Note | December 2016 | USD | 16,103,391 | (10,852 | ) | ||||||||||||||||||||||||||
| (108) | 10-Year U.S. Ultra Long Treasury Note | December 2016 | USD | 15,592,500 | (1,223 | ) | ||||||||||||||||||||||||||
| (814) | Long U.S. Treasury Bond | December 2016 | USD | 138,685,250 | 8,470 | |||||||||||||||||||||||||||
| 285 | Ultra Long U.S. Treasury Bond | December 2016 | USD | 53,428,594 | 94,205 | |||||||||||||||||||||||||||
| Total | $ | 86,858 | ||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||
OTC Interest Rate Swaps
| Fixed Rate | Floating Rate |
Counterparty | Effective Date |
Expiration Date |
Notional |
Value | Premiums Received |
Unrealized (Depreciation) |
||||||||||||||||||||||||||||||||
| 4.31%1 |
3-Month LIBOR | Deutsche Bank AG | N/A | 10/01/18 | $ | 60,000 | $ | (5,064,509 | ) | — | $ | (5,064,509 | ) | |||||||||||||||||||||||||||
| 3.43%2 |
3-Month LIBOR | JPMorgan Chase Bank N.A. | N/A | 3/28/21 | $ | 6,000 | 685,358 | $ | (128,872 | ) | 814,230 | |||||||||||||||||||||||||||||
|
5.41%2 |
3-Month LIBOR | JPMorgan Chase Bank N.A. | N/A | 8/15/22 | $ | 9,565 | 2,328,637 | — | 2,328,637 | |||||||||||||||||||||||||||||||
| Total |
$ | (2,050,514 | ) | $ | (128,872 | ) | $ | (1,921,642 | ) | |||||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||
| 1 Fund pays a fixed rate and receives the floating rate. |
|
|||||||||||||||||||||||||||||||||||||||
| 2 Fund pays a floating rate and receives the fixed rate. |
|
|||||||||||||||||||||||||||||||||||||||
| Derivative Financial Instruments Categorized by Risk Exposure |
| As | of period end, the fair values of derivative financial instruments located in the Statements of Assets and Liabilities were as follows: |
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contacts |
Total | ||||||||||||||||||||||||||
| Assets — Derivative Financial Instruments | ||||||||||||||||||||||||||||||||
| Futures contracts |
Net unrealized appreciation1 | — | — | — | — | $ | 102,675 | — | $ | 102,675 | ||||||||||||||||||||||
| Swaps — OTC |
Unrealized appreciation on OTC swaps | — | — | — | — | 3,142,867 | 3,142,867 | |||||||||||||||||||||||||
| Total |
— | — | — | — | $ | 3,245,542 | — | $ | 3,245,542 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Liabilities — Derivative Financial Instruments | ||||||||||||||||||||||||||||||||
| Futures contracts |
Net unrealized depreciation1 | — | — | — | — | $ | 15,817 | — | $ | 15,817 | ||||||||||||||||||||||
| Swaps — OTC |
Unrealized depreciation on OTC swaps: Swap premiums received | — | — | — | — | 5,193,381 | — | 5,193,381 | ||||||||||||||||||||||||
| Total |
— | — | — | — | $ | 5,209,198 | — | $ | 5,209,198 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| 1 Includes cumulative appreciation (depreciation) on futures contracts, if any, as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statements of Assets and Liabilities. |
| |||||||||||||||||||||||||||||||
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 61 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Income Trust, Inc. (BKT) |
For the year ended August 31, 2016, the effect of derivative financial instruments in the Statements of Operations was as follows:
| Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contacts |
Total | ||||||||||||||||||||||
| Net Realized Gain (Loss) From: |
||||||||||||||||||||||||||||
| Futures contracts |
— | — | — | — | $ | (7,752,347 | ) | — | $ | (7,752,347 | ) | |||||||||||||||||
| Swaps |
— | — | — | — | (112,714 | ) | — | (112,714 | ) | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
— | — | — | — | $ | (7,865,061 | ) | — | $ | (7,865,061 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Net Change in Unrealized Appreciation (Depreciation) on: |
||||||||||||||||||||||||||||
| Futures contracts |
— | — | — | — | $ | (2,102,198 | ) | — | $ | (2,102,198 | ) | |||||||||||||||||
| Swaps |
— | — | — | — | 289,644 | — | 289,644 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
— | — | — | — | $ | (1,812,554 | ) | — | $ | (1,812,554 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Average Quarterly Balances of Outstanding Derivative Financial Instruments |
| Futures contracts: |
||||
| Average notional value of contracts — long |
$ | 70,241,758 | ||
| Average notional value of contracts — short |
$ | 170,537,795 | ||
| Interest rate swaps: | ||||
| Average notional value — pays fixed rate |
$ | 60,000,000 | ||
| Average notional value — receives fixed rate |
$ | 25,990,000 |
For more information about the Trust’s investment risks regarding derivative financial instruments, refer to the Notes to Financial Statements.
| Derivative Financial Instruments — Offsetting as of Period End |
The Trust’s derivative assets and liabilities (by type) were as follows:
| Assets | Liabilities | |||||||||||
| Derivative Financial Instruments: | ||||||||||||
| Futures contracts |
$ | 92,750 | $ | 54,125 | ||||||||
| Swaps — OTC1 |
3,142,867 | 5,193,381 | ||||||||||
|
|
|
|||||||||||
| Total derivative assets and liabilities in the Statement of Assets and Liabilities |
$ | 3,235,617 | $ | 5,247,506 | ||||||||
|
|
|
|||||||||||
| Derivatives not subject to a master netting agreement or similar agreement (“MNA”) |
(92,750 | ) | (54,125 | ) | ||||||||
|
|
|
|||||||||||
| Total derivative assets and liabilities subject to an MNA |
$ | 3,142,867 | $ | 5,193,381 | ||||||||
|
|
|
|||||||||||
| 1 Includes unrealized appreciation(depreciation) on OTC swaps and swap premiums paid/received in the Statements of Assets and Liabilities. |
|
|||||||||||
The following table presents the Trust’s derivative assets and liabilities by counterparty net of amounts available for offset under an Master Netting Agreement (“MNA”) and net of the related collateral received and pledged by the Trust:
| Counterparty |
Derivative Assets |
Derivatives Available for Offset1 |
Non-cash Collateral Received |
Cash Collateral Received2 |
Net Amount of Derivative Assets3 |
|||||||||||||||||||||||
| JPMorgan Chase Bank N.A. |
$ | 3,142,867 | $ | (128,872 | ) | — | $(3,013,995) | — | ||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Counterparty |
Derivative Liabilities |
Derivatives Available for Offset1 |
Non-cash Collateral Pledged |
Cash Collateral Pledged4 |
Net Amount of Derivative Liabilities5 |
|||||||||||||||||||||||
| Deutsche Bank AG |
$ | 5,064,509 | — | — | $ | (5,040,000 | ) | $24,509 | ||||||||||||||||||||
| JPMorgan Chase Bank N.A. |
128,872 | $ | (128,872 | ) | — | — | — | |||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| Total |
$ | 5,193,381 | $ | (128,872 | ) | — | $ | (5,040,000 | ) | $ | 24,509 | |||||||||||||||||
|
|
|
|||||||||||||||||||||||||||
| 1 The amount of derivatives available for offset is limited to the amount of derivative assets and/or liabilities that are subject to an MNA. |
| |||||||||||||||||||||||||||
| 2 Excess of collateral received from the individual counterparty is not shown for financial reporting purposes |
| |||||||||||||||||||||||||||
| 3 Net amount represents the net amount receivable from the counterparty in the event of default. |
| |||||||||||||||||||||||||||
| 4 Excess of collateral pledged from the individual counterparty is not shown for financial reporting purposes. |
| |||||||||||||||||||||||||||
| 5 Net amount represents the net amount payable due to the counterparty in the event of default. |
| |||||||||||||||||||||||||||
See Notes to Financial Statements.
| 62 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Schedule of Investments (continued) |
BlackRock Income Trust, Inc. (BKT) |
| Fair Value Hierarchy as of Period End |
Various inputs are used in determining the fair value of investments and derivative financial instruments. For information about the Trust’s policy regarding valuation of investments and derivative financial instruments, refer to the Notes to Financial Statements.
The following tables summarize the Trust’s investments and derivative financial instruments categorized in the disclosure hierarchy:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Investments: | ||||||||||||||||
| Long-Term Investments: |
||||||||||||||||
| Asset-Backed Securities |
— | $ | 1,729,682 | $ | 468,888 | $ | 2,198,570 | |||||||||
| Non-Agency Mortgage-Backed Securities |
— | 5,300,309 | 1,589,583 | 6,889,892 | ||||||||||||
| U.S. Government Sponsored Agency Securities |
— | 561,481,489 | 2,580,068 | 564,061,557 | ||||||||||||
| U.S. Treasury Obligations |
— | 13,452,836 | — | 13,452,836 | ||||||||||||
| Short-Term Securities: |
||||||||||||||||
| Money Market Funds |
$ | 7,183,580 | — | — | 7,183,580 | |||||||||||
| Borrowed Bond Agreement |
— | 935,340 | — | 935,340 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Investments: | ||||||||||||||||
| Borrowed Bonds |
— | (1,018,658 | ) | — | (1,018,658 | ) | ||||||||||
| TBA Sale Commitments |
— | (14,296,827 | ) | — | (14,296,827 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | 7,183,580 | $ | 567,584,171 | $ | 4,638,539 | $ | 579,406,290 | ||||||||
|
|
|
|||||||||||||||
| Derivative Financial Instruments1 | ||||||||||||||||
| Assets: |
||||||||||||||||
| Interest rate contracts |
$ | 102,675 | $ | 3,142,867 | — | $ | 3,245,542 | |||||||||
| Liabilities: |
||||||||||||||||
| Interest rate contracts |
(15,817 | ) | (5,064,509 | ) | — | (5,080,326 | ) | |||||||||
|
|
|
|||||||||||||||
| Total |
$ | 86,858 | $ | (1,921,642 | ) | — | $ | (1,834,784 | ) | |||||||
|
|
|
|||||||||||||||
| 1 Derivative financial instruments are swaps and futures contracts. Swaps and futures contracts are valued at the unrealized appreciation (depreciation) on the instrument. |
| |||||||||||||||
| The Trust may hold assets and/or liabilities in which the fair value approximates the carrying amount, or face value, including accrued interest, for financial statement purposes. As of period end, such assets and/or liabilities are categorized within the disclosure hierarchy as follows:
|
| |||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Assets: |
||||||||||||||||
| Cash pledged: |
||||||||||||||||
| Futures contracts |
$ | 2,523,260 | — | — | $ | 2,523,260 | ||||||||||
| Collateral — OTC derivatives |
5,040,000 | — | — | 5,040,000 | ||||||||||||
| Collateral — reverse repurchase agreements |
682,769 | — | — | 682,769 | ||||||||||||
| Liabilities: |
||||||||||||||||
| Cash received as collateral for OTC derivatives |
— | $ | (3,330,000 | ) | — | (3,330,000 | ) | |||||||||
| Reverse repurchase agreements |
— | (152,858,503 | ) | — | (152,858,503 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | 8,246,029 | $ | (156,188,503 | ) | — | $ | (147,942,474 | ) | |||||||
|
|
|
|||||||||||||||
During the year ended August 31, 2016, there were no transfers between Level 1 and Level 2.
See Notes to Financial Statements.
| ANNUAL REPORT | AUGUST 31, 2016 | 63 |
Table of Contents
| Schedule of Investments (concluded) |
BlackRock Income Trust, Inc. (BKT) |
A reconciliation of Level 3 investments is presented when the Trust had a significant amount of Level 3 investments at the beginning and/or end of the period in relation to net assets. The following table is a reconciliation of Level 3 investments for which significant unobservable inputs were used in determining fair value:
|
Asset-Backed |
Non-Agency Mortgage-Backed Securities |
U.S. Government Sponsored Agency Securities |
Total | |||||||||||||||
| Assets: |
||||||||||||||||||
| Opening Balance, as of August 31, 2015 |
$ | 522,965 | $ | 2,114,419 | $ | 3,072,791 | $ | 5,710,175 | ||||||||||
| Transfers into Level 3 |
— | — | — | — | ||||||||||||||
| Transfers out of Level 3 |
— | — | — | — | ||||||||||||||
| Accrued discounts/premiums |
(135,173 | ) | — | (11,442 | ) | (146,615 | ) | |||||||||||
| Net realized gain (loss) |
(185,161 | ) | 7 | (11,113 | ) | (196,267 | ) | |||||||||||
| Net change in unrealized appreciation (depreciation)1,2 |
266,257 | (524,836 | ) | (669 | ) | (259,248 | ) | |||||||||||
| Purchases |
— | — | — | — | ||||||||||||||
| Sales |
— | (7 | ) | (469,499 | ) | (469,506 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Closing Balance, as of August 31, 2016 |
$ | 468,888 | $ | 1,589,583 | $ | 2,580,068 | $ | 4,638,539 | ||||||||||
|
|
|
|||||||||||||||||
| Net change in unrealized appreciation (depreciation) on investments held as of August 31, 20162 |
$ | 266,257 | $ | (524,836 | ) | $ | (669 | ) | $ | (259,248 | ) | |||||||
|
|
|
|||||||||||||||||
| 1 Included in the related net change in unrealized appreciation (depreciation) in the Statements of Operations. |
| |||||||||||||||||
| 2 Any difference between net change in unrealized appreciation (depreciation) and Net change in unrealized appreciation (depreciation) on investments held as of August 31, 2016 is generally due to investments no longer held or categorized as Level 3 at period end. |
| |||||||||||||||||
Certain of the Trust’s investments that are categorized as Level 3 were valued utilizing third party pricing information without adjustment. Such valuations are based on unobservable inputs. A significant change in third party information inputs could result in a significantly lower or higher value of such Level 3 investments.
See Notes to Financial Statements.
| 64 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Statements of Assets and Liabilities |
| August 31, 2016 | BlackRock Core Bond Trust |
BlackRock High Yield Fund, Inc. |
BlackRock Trust, Inc. |
|||||||||
| Assets | ||||||||||||
| Investments at value — unaffiliated2 |
$ | 1,089,555,993 | $ | 2,072,600,448 | $ | 587,538,195 | ||||||
| Investments at value — affiliated3 |
12,926,909 | 13,179,920 | 7,183,580 | |||||||||
| Cash |
44,891 | — | — | |||||||||
| Cash pledged: | ||||||||||||
| Collateral — OTC derivatives |
4,020,000 | — | 5,040,000 | |||||||||
| Collateral — reverse repurchase agreements |
— | — | 682,769 | |||||||||
| Futures contracts |
1,349,970 | 1,568,150 | 2,523,260 | |||||||||
| Centrally cleared swaps |
1,239,940 | 2,857,000 | — | |||||||||
| Foreign currency at value4 |
437,584 | 631,458 | — | |||||||||
| Receivables: | ||||||||||||
| Investments sold |
2,367,639 | 6,225,127 | 34,621 | |||||||||
| Options written |
162,906 | — | — | |||||||||
| TBA sale commitments |
— | — | 14,255,743 | |||||||||
| Dividends — unaffiliated |
27,422 | 8,761 | — | |||||||||
| Dividends — affiliated |
3,137 | 566 | 6,576 | |||||||||
| Interest |
11,124,669 | 29,724,353 | 2,129,649 | |||||||||
| Principal paydowns |
— | — | 5,744 | |||||||||
| Variation margin on futures contracts |
75,335 | 132,895 | 92,750 | |||||||||
| Variation margin on centrally cleared swaps |
5,906 | — | — | |||||||||
| Swap premiums paid |
7 | 53,238 | — | |||||||||
| Unrealized appreciation on: | ||||||||||||
| Forward foreign currency exchange contracts |
268,565 | 229,932 | — | |||||||||
| OTC swaps |
57,477 | 2,640,445 | 3,142,867 | |||||||||
| Prepaid expenses |
13,608 | 29,663 | 11,647 | |||||||||
| Other assets |
5,942 | — | 768 | |||||||||
|
|
|
|||||||||||
| Total assets |
1,123,687,900 | 2,129,881,956 | 622,648,169 | |||||||||
|
|
|
|||||||||||
| Liabilities | ||||||||||||
| Bank overdraft |
— | 2,604 | — | |||||||||
| Cash received: | ||||||||||||
| Collateral — OTC derivatives |
520,000 | 2,330,000 | 3,330,000 | |||||||||
| Collateral — reverse repurchase agreements |
1,204,000 | — | — | |||||||||
| Borrowed bonds at value5 |
— | — | 1,018,658 | |||||||||
| Options written at value6 |
5,414,078 | 22,041 | — | |||||||||
| TBA sale commitments at value7 |
— | — | 14,296,827 | |||||||||
| Reverse repurchase agreements |
288,238,889 | — | 152,858,503 | |||||||||
| Payables: | ||||||||||||
| Investments purchased |
2,145,291 | 25,568,515 | — | |||||||||
| Administration fees |
— | — | 113,243 | |||||||||
| Bank borrowings |
— | 604,000,000 | — | |||||||||
| Income dividends |
82,854 | 454,688 | 47,756 | |||||||||
| Interest expense |
— | 758,592 | 7,469 | |||||||||
| Investment advisory fees |
933,797 | 2,061,804 | 489,753 | |||||||||
| Officer’s and Trustees’ fees |
196,948 | 506,722 | 182,154 | |||||||||
| Options written |
315,214 | — | — | |||||||||
| Other accrued expenses |
299,342 | 772,836 | 174,179 | |||||||||
| Variation margin on futures contracts |
3,169 | — | 54,125 | |||||||||
| Variation margin on centrally cleared swaps |
— | 99,311 | — | |||||||||
| Swap premiums received |
801,355 | 18,338 | 128,872 | |||||||||
| Unrealized depreciation on: | ||||||||||||
| Forward foreign currency exchange contracts |
302,820 | 336,167 | — | |||||||||
| OTC swaps |
440,470 | 1,877 | 5,064,509 | |||||||||
| Other liabilities |
240,760 | — | — | |||||||||
| Contingencies |
— | — | 8 | — | ||||||||
|
|
|
|||||||||||
| Total liabilities |
301,138,987 | 636,933,495 | 177,766,048 | |||||||||
|
|
|
|||||||||||
| Net Assets |
$ | 822,548,913 | $ | 1,492,948,461 | $ | 444,882,121 | ||||||
|
|
|
|||||||||||
| See Notes to Financial Statements. | ||||||
| ANNUAL REPORT | AUGUST 31, 2016 | 65 | ||||
Table of Contents
| Statements of Assets and Liabilities (concluded) |
| August 31, 2016 | BlackRock Core Bond Trust |
BlackRock High Yield Fund, Inc. |
BlackRock Trust, Inc. |
|||||||||
| Net Assets Consist of | ||||||||||||
| Paid-in capital9,10,11 |
$ | 761,161,052 | $ | 1,778,771,251 | $ | 478,262,054 | ||||||
| Undistributed (distributions in excess of) net investment income |
(234,993 | ) | 6,355,015 | 4,211,880 | ||||||||
| Accumulated net realized loss |
(16,074,607 | ) | (264,241,991 | ) | (42,971,317 | ) | ||||||
| Net unrealized appreciation (depreciation) |
77,697,461 | (27,935,814 | ) | 5,379,504 | ||||||||
|
|
|
|||||||||||
| Net Assets |
$ | 822,548,913 | $ | 1,492,948,461 | $ | 444,882,121 | ||||||
|
|
|
|||||||||||
| Net asset value, offering and redemption price per share |
$ | 15.25 | $ | 11.79 | $ | 6.96 | ||||||
|
|
|
|||||||||||
| 1 Consolidated Statement of Assets and Liabilities |
||||||||||||
| 2 Investments at cost — unaffiliated |
$ | 1,015,055,944 | $ | 2,101,867,196 | $ | 580,107,207 | ||||||
| 3 Investments at cost — affiliated |
$ | 12,926,909 | $ | 13,050,340 | $ | 7,183,580 | ||||||
| 4 Foreign currency at cost |
$ | 434,549 | $ | 630,843 | — | |||||||
| 5 Proceeds received from borrowed bonds |
— | — | $ | 842,347 | ||||||||
| 6 Premiums received |
$ | 8,969,163 | $ | 19,000 | — | |||||||
| 7 Proceeds from TBA sale commitments |
— | — | $ | 14,255,743 | ||||||||
| 8 See Note 12 of the Notes to Financial Statements for details of contingencies. |
||||||||||||
| 9 Par value |
$ | 0.001 | $ | 0.100 | $ | 0.010 | ||||||
| 10 Shares outstanding |
53,935,126 | 126,599,668 | 63,942,535 | |||||||||
| 11 Shares authorized |
Unlimited | 200 million | 200 million | |||||||||
| See Notes to Financial Statements. | ||||||
| 66 | ANNUAL REPORT | AUGUST 31, 2016 | ||||
Table of Contents
| Statements of Operations |
| Year Ended August 31, 2016 | BlackRock Core Bond Trust |
BlackRock High Yield Fund, Inc. |
BlackRock Trust, Inc. |
|||||||||
| Investment Income | ||||||||||||
| Interest |
$ | 48,713,009 | $ | 122,323,419 | $ | 22,470,081 | ||||||
| Dividends — unaffiliated |
722,567 | 805,002 | — | |||||||||
| Dividends — affiliated |
43,746 | 821,437 | 36,838 | |||||||||
| Other income |
487,964 | — | 263,157 | |||||||||
| Foreign taxes withheld |
— | (16 | ) | — | ||||||||
|
|
|
|||||||||||
| Total income |
49,967,286 | 123,949,842 | 22,770,076 | |||||||||
|
|
|
|||||||||||
| Expenses | ||||||||||||
| Investment advisory |
5,338,516 | 11,975,292 | 2,910,565 | |||||||||
| Professional |
135,071 | 313,246 | 97,388 | |||||||||
| Miscellaneous |
125,385 | 208,159 | 45,407 | |||||||||
| Transfer agent |
109,693 | 146,109 | 73,485 | |||||||||
| Officer and Trustees |
101,665 | 187,462 | 63,238 | |||||||||
| Accounting services |
99,724 | 204,867 | 64,703 | |||||||||
| Custodian |
94,698 | 201,859 | 35,662 | |||||||||
| Registration |
17,970 | 41,873 | 21,791 | |||||||||
| Printing |
17,127 | 31,636 | 15,018 | |||||||||
| Administration |
— | — | 671,669 | |||||||||
|
|
|
|||||||||||
| Total expenses excluding interest expense and income tax |
6,039,849 | 13,310,503 | 3,998,926 | |||||||||
| Interest expense |
1,494,097 | 6,431,659 | 824,201 | |||||||||
| Income tax |
— | 29,880 | — | |||||||||
|
|
|
|||||||||||
| Total expenses |
7,533,946 | 19,772,042 | 4,823,127 | |||||||||
| Less fees waived by the Manager |
(9,230 | ) | (997 | ) | (7,301 | ) | ||||||
| Less fees paid indirectly |
(195 | ) | — | (302 | ) | |||||||
|
|
|
|||||||||||
| Total expenses after fees waived and paid indirectly |
7,524,521 | 19,771,045 | 4,815,524 | |||||||||
|
|
|
|||||||||||
| Net investment income |
42,442,765 | 104,178,797 | 17,954,552 | |||||||||
|
|
|
|||||||||||
| Realized and Unrealized Gain (Loss) | ||||||||||||
| Net realized gain (loss) from: | ||||||||||||
| Investments |
(14,009,882 | ) | (88,802,531 | ) | 632,667 | |||||||
| Investments — affiliated |
— | (2,263,123 | ) | — | ||||||||
| Futures contracts |
2,738,560 | (4,318,151 | ) | (7,752,347 | ) | |||||||
| Foreign currency transactions |
2,545,608 | 7,230,510 | — | |||||||||
| Options written |
3,887,894 | 259,773 | — | |||||||||
| Swaps |
(4,265,963 | ) | 6,083,805 | (112,714 | ) | |||||||
|
|
|
|||||||||||
| (9,103,783 | ) | (81,809,717 | ) | (7,232,394 | ) | |||||||
|
|
|
|||||||||||
| Net change in unrealized appreciation (depreciation) on: | ||||||||||||
| Investments |
60,815,086 | 74,000,645 | 5,553,116 | |||||||||
| Investments — affiliated |
— | 129,580 | — | |||||||||
| Futures contracts |
1,159,137 | (7,663,606 | ) | (2,102,198 | ) | |||||||
| Foreign currency translations |
(178,895 | ) | 144,189 | — | ||||||||
| Options written |
2,435,217 | (3,041 | ) | — | ||||||||
| Swaps |
(294,435 | ) | 2,008,751 | 289,644 | ||||||||
| Borrowed bonds |
— | — | (136,440 | ) | ||||||||
|
|
|
|||||||||||
| 63,936,110 | 68,616,518 | 3,604,122 | ||||||||||
|
|
|
|||||||||||
| Net realized and unrealized gain (loss) |
54,832,327 | (13,193,199 | ) | (3,628,272 | ) | |||||||
|
|
|
|||||||||||
| Net Increase in Net Assets Resulting from Operations |
$ | 97,275,092 | $ | 90,985,598 | $ | 14,326,280 | ||||||
|
|
|
|||||||||||
| 1 Consolidated Statement of Operations. |
| |||||||||||
| See Notes to Financial Statements. | ||||||
| ANNUAL REPORT | AUGUST 31, 2016 | 67 | ||||
Table of Contents
| Statements of Changes in Net Assets |
| BlackRock Core Bond Trust (BHK) | ||||||||
| Year Ended August 31, | ||||||||
| Increase (Decrease) in Net Assets: | 2016 | 2015 | ||||||
| Operations | ||||||||
| Net investment income |
$ | 42,442,765 | $ | 42,093,223 | ||||
| Net realized gain (loss) |
(9,103,783 | ) | 19,284,069 | |||||
| Net change in unrealized appreciation (depreciation) |
63,936,110 | (53,137,205 | ) | |||||
|
|
|
|||||||
| Net increase in net assets resulting from operations |
97,275,092 | 8,240,087 | ||||||
|
|
|
|||||||
| Distributions to Shareholders1 | ||||||||
| From net investment income |
(45,548,216 | ) | (47,657,688 | ) | ||||
| In excess of net investment income |
— | (1,743,768 | ) | |||||
|
|
|
|||||||
| Decrease in net assets resulting from distributions to shareholders |
(45,548,216 | ) | (49,401,456 | ) | ||||
|
|
|
|||||||
| Capital Share Transactions | ||||||||
| Net proceeds from the issuance of shares due to reorganization |
— | 399,906,769 | ||||||
| Cost of shares redeemed |
— | (1,775 | ) | |||||
|
|
|
|||||||
| Net increase in net assets derived from capital transactions |
— | 399,904,994 | ||||||
|
|
|
|||||||
| Net Assets | ||||||||
| Total increase in net assets |
51,726,876 | 358,743,625 | ||||||
| Beginning of year |
770,822,037 | 412,078,412 | ||||||
|
|
|
|||||||
| End of year |
$ | 822,548,913 | $ | 770,822,037 | ||||
|
|
|
|||||||
| Distributions in excess of net investment income, end of year |
$ | (234,993 | ) | $ | (17,798 | ) | ||
|
|
|
|||||||
| 1 Distributions for annual periods determined in accordance with federal income tax regulations. |
| |||||||
| See Notes to Financial Statements. | ||||||
| 68 | ANNUAL REPORT | AUGUST 31, 2016 | ||||
Table of Contents
| Consolidated Statements of Changes in Net Assets |
|
BlackRock Corporate High Yield Fund, Inc. (HYT) |
||||||||||||||||||||
| Year Ended August 31, |
||||||||||||||||||||
| Increase (Decrease) in Net Assets: | 2016 | 2015 | ||||||||||||||||||
| Operations | ||||||||||||||||||||
| Net investment income |
$ | 104,178,797 | $ | 110,710,853 | ||||||||||||||||
| Net realized gain (loss) |
(81,809,717 | ) | 3,532,873 | |||||||||||||||||
| Net change in unrealized appreciation (depreciation) |
68,616,518 | (169,304,412 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||
| Net increase (decrease) in net assets resulting from operations |
90,985,598 | (55,060,686 | ) | |||||||||||||||||
|
|
|
|||||||||||||||||||
| Distributions to Shareholders1 | ||||||||||||||||||||
| From net investment income |
(125,343,672 | ) | (123,054,879 | ) | ||||||||||||||||
|
|
|
|||||||||||||||||||
| Net Assets | ||||||||||||||||||||
| Total decrease in net assets |
(34,358,074 | ) | (178,115,565 | ) | ||||||||||||||||
| Beginning of year |
1,527,306,535 | 1,705,422,100 | ||||||||||||||||||
|
|
|
|||||||||||||||||||
| End of year |
$ | 1,492,948,461 | $ | 1,527,306,535 | ||||||||||||||||
|
|
|
|||||||||||||||||||
| Undistributed net investment income, end of year |
$ | 6,355,015 | $ | 22,469,916 | ||||||||||||||||
|
|
|
|||||||||||||||||||
| 1 | Distributions for annual periods determined in accordance with federal income tax regulations. |
| See Notes to Financial Statements. | ||||||
| ANNUAL REPORT | AUGUST 31, 2016 | 69 | ||||
Table of Contents
| Statements of Changes in Net Assets |
| BlackRock Income Trust, Inc. (BKT) | ||||||||
| Year Ended August 31, | ||||||||
| Increase (Decrease) in Net Assets: | 2016 | 2015 | ||||||
| Operations | ||||||||
| Net investment income |
$ | 17,954,552 | $ | 20,490,679 | ||||
| Net realized loss |
(7,232,394 | ) | (6,803,051 | ) | ||||
| Net change in unrealized appreciation (depreciation) |
3,604,122 | (682,875 | ) | |||||
|
|
|
|||||||
| Net increase in net assets resulting from operations |
14,326,280 | 13,004,753 | ||||||
|
|
|
|||||||
| Distributions to Shareholders1 | ||||||||
| From net investment income |
(22,060,177 | ) | (25,321,248 | ) | ||||
|
|
|
|||||||
| Net Assets | ||||||||
| Total decrease in net assets |
(7,733,897 | ) | (12,316,495 | ) | ||||
| Beginning of year |
452,616,018 | 464,932,513 | ||||||
|
|
|
|||||||
| End of year |
$ | 444,882,121 | $ | 452,616,018 | ||||
|
|
|
|||||||
| Undistributed net investment income, end of year |
$ | 4,211,880 | $ | 7,048,258 | ||||
|
|
|
|||||||
| 1 | Distributions for annual periods determined in accordance with federal income tax regulations. |
| See Notes to Financial Statements. | ||||||
| 70 | ANNUAL REPORT | AUGUST 31, 2016 | ||||
Table of Contents
| Statements of Cash Flows |
| Year Ended August 31, 2016 | BlackRock Core Bond Trust (BHK) |
BlackRock Corporate High Yield Fund, Inc. (HYT)1 |
BlackRock Income |
|||||||||
| Cash Provided by (Used for) Operating Activities | ||||||||||||
| Net increase in net assets resulting from operations |
$ | 97,275,092 | $ | 90,985,598 | $ | 14,326,280 | ||||||
| Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: | ||||||||||||
| Proceeds from sales of long term investments and principal paydowns |
386,810,823 | 1,334,108,590 | 907,319,977 | |||||||||
| Purchases of long term investments |
(376,278,777 | ) | (1,296,727,395 | ) | (895,903,574 | ) | ||||||
| Net proceeds from sales of short-term securities |
— | — | 17,362,580 | |||||||||
| Net purchases of short-term securities |
(3,006,544 | ) | — | — | ||||||||
| Amortization of premium and accretion of discount on investments |
4,482,327 | (1,428,429 | ) | 4,989,570 | ||||||||
| Premiums paid on closing options written |
(10,489,307 | ) | (52,832 | ) | — | |||||||
| Premiums received from options written |
17,366,527 | 331,605 | — | |||||||||
| Net realized (gain) loss on investments and options written |
9,485,896 | 90,278,943 | 204,031 | |||||||||
| Net unrealized loss on investments, options written, swaps, borrowed bonds and foreign currency translations |
(62,457,584 | ) | (76,225,662 | ) | (5,708,711 | ) | ||||||
| (Increase) Decrease in Assets: | ||||||||||||
| Cash Pledged: | ||||||||||||
| Collateral — OTC derivatives |
1,640,000 | 80,000 | 1,460,000 | |||||||||
| Collateral — reverse repurchase agreements |
2,140,000 | — | 483,231 | |||||||||
| Futures contracts |
85,080 | 3,986,240 | (531,950 | ) | ||||||||
| Centrally cleared swaps |
(1,130,790 | ) | (2,334,250 | ) | — | |||||||
| Receivables: | ||||||||||||
| Dividends — unaffiliated |
— | (3,674 | ) | — | ||||||||
| Income — affiliated |
(3,137 | ) | (566 | ) | (6,576 | ) | ||||||
| Interest |
462,018 | 3,747,970 | 168,585 | |||||||||
| Swaps |
15,098 | 224,244 | 248,798 | |||||||||
| Variation margin on futures contracts |
15,953 | 1,060,225 | 312,182 | |||||||||
| Variation margin on centrally cleared swaps |
30,155 | — | — | |||||||||
| Swap premiums paid |
65,721 | 47,171 | — | |||||||||
| Prepaid expenses |
(2,951 | ) | (4,751 | ) | (1,771 | ) | ||||||
| Other assets |
18,507 | — | 2,466 | |||||||||
| Increase (Decrease) in Liabilities: | ||||||||||||
| Cash received: | ||||||||||||
| Collateral — reverse repurchase agreements |
1,204,000 | — | — | |||||||||
| Collateral — OTC derivatives |
520,000 | 730,000 | (640,000 | ) | ||||||||
| Payables: | ||||||||||||
| Swaps |
(7,510 | ) | — | (1,111,408 | ) | |||||||
| Administration fees |
— | — | (2,242 | ) | ||||||||
| Interest expense |
198,235 | 239,863 | 44,205 | |||||||||
| Investment advisory fees |
(1,394 | ) | (193,022 | ) | (9,181 | ) | ||||||
| Officer’s and Trustees’ fees |
12,951 | 85,853 | 27,346 | |||||||||
| Other accrued expenses |
3,269 | 65,265 | (8,421 | ) | ||||||||
| Variation margin on futures contracts |
(258,593 | ) | (73 | ) | (46,344 | ) | ||||||
| Variation margin on centrally cleared swaps |
(19,444 | ) | 74,968 | — | ||||||||
| Swap premiums received |
674,064 | (33,046 | ) | (27,312 | ) | |||||||
|
|
|
|||||||||||
| Net cash provided by operating activities |
68,849,685 | 149,042,835 | 42,951,761 | |||||||||
|
|
|
|||||||||||
| 1 Consolidated Statement of Cash Flows. |
||||||||||||
| See Notes to Financial Statements. | ||||||
| ANNUAL REPORT | AUGUST 31, 2016 | 71 | ||||
Table of Contents
| Statements of Cash Flows (concluded) |
| Year Ended August 31, 2016 | BlackRock Core Bond Trust (BHK) |
BlackRock Corporate High Yield Fund, Inc. (HYT)1 |
BlackRock Income |
|||||||||
| Cash Used for Financing Activities | ||||||||||||
| Cash dividends paid to Common Shareholders |
$ | (45,546,171 | ) | $ | (125,391,326 | ) | $ | (22,068,187 | ) | |||
| Payments on bank borrowings |
— | (676,000,000 | ) | — | ||||||||
| Proceeds from bank borrowings |
— | 649,000,000 | — | |||||||||
| Increase (decrease) in bank overdraft |
— | 2,604 | (2,492 | ) | ||||||||
| Net borrowing of reverse repurchase agreements |
(23,202,872 | ) | — | (20,881,082 | ) | |||||||
|
|
|
|||||||||||
| Net cash used for financing activities |
(68,749,043 | ) | (152,388,722 | ) | (42,951,761 | ) | ||||||
|
|
|
|||||||||||
| Cash Impact from Foreign Exchange Fluctuations | ||||||||||||
| Cash impact from foreign exchange fluctuations |
$ | 10,387 | $ | 727 | — | |||||||
|
|
|
|||||||||||
| Cash and Foreign Currency | ||||||||||||
| Net increase (decrease) in cash and foreign currency at value |
111,029 | (3,345,160 | ) | — | ||||||||
| Cash and foreign currency at value at beginning of year |
371,446 | 3,976,618 | — | |||||||||
|
|
|
|||||||||||
| Cash and foreign currency at value at end of year |
$ | 482,475 | $ | 631,458 | — | |||||||
|
|
|
|||||||||||
| Supplemental Disclosure of Cash Flow Information | ||||||||||||
| Cash paid during the year for interest expense |
$ | 1,295,862 | $ | 6,191,796 | $ | 779,996 | ||||||
|
|
|
|||||||||||
| 1 Consolidated Statement of Cash Flows. |
| |||||||||||
| See Notes to Financial Statements. | ||||||
| 72 | ANNUAL REPORT | AUGUST 31, 2016 | ||||
Table of Contents
| Financial Highlights | BlackRock Core Bond Trust (BHK) |
| Year Ended August 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Per Share Operating Performance | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 14.29 | $ | 15.24 | $ | 14.05 | $ | 15.21 | $ | 13.78 | ||||||||||
|
|
|
|||||||||||||||||||
| Net investment income1 |
0.79 | 0.86 | 0.87 | 0.89 | 0.88 | |||||||||||||||
| Net realized and unrealized gain (loss) |
1.01 | (0.73 | ) | 1.23 | (1.11 | ) | 1.37 | |||||||||||||
|
|
|
|||||||||||||||||||
| Net increase (decrease) from investment operations |
1.80 | 0.13 | 2.10 | (0.22 | ) | 2.25 | ||||||||||||||
|
|
|
|||||||||||||||||||
| Distributions:2 |
||||||||||||||||||||
| From net investment income |
(0.84 | ) | (1.04 | ) | (0.91 | ) | (0.94 | ) | (0.82 | ) | ||||||||||
| In excess of net investment income3 |
— | (0.04 | ) | — | — | — | ||||||||||||||
|
|
|
|||||||||||||||||||
| Total distributions |
(0.84 | ) | (1.08 | ) | (0.91 | ) | (0.94 | ) | (0.82 | ) | ||||||||||
|
|
|
|||||||||||||||||||
| Net asset value, end of year |
$ | 15.25 | $ | 14.29 | $ | 15.24 | $ | 14.05 | $ | 15.21 | ||||||||||
|
|
|
|||||||||||||||||||
| Market price, end of year |
$ | 14.33 | $ | 12.63 | $ | 13.64 | $ | 12.50 | $ | 15.41 | ||||||||||
|
|
|
|||||||||||||||||||
| Total Return4 | ||||||||||||||||||||
| Based on net asset value |
13.67% | 1.62% | 16.09% | 5 | (1.42)% | 17.06% | ||||||||||||||
|
|
|
|||||||||||||||||||
| Based on market price |
20.85% | 0.35% | 16.78% | (13.43)% | 28.78% | |||||||||||||||
|
|
|
|||||||||||||||||||
| Ratios to Average Net Assets | ||||||||||||||||||||
| Total expenses |
0.97% | 0.95% | 6 | 1.06% | 6 | 1.03% | 0.95% | |||||||||||||
|
|
|
|||||||||||||||||||
| Total expenses after fees waived and paid indirectly |
0.97% | 0.95% | 6 | 1.02% | 6 | 0.98% | 0.94% | |||||||||||||
|
|
|
|||||||||||||||||||
| Total expenses after fees waived and paid indirectly and excluding interest expense |
0.78% | 0.82% | 6 | 0.91% | 6 | 0.86% | 0.86% | |||||||||||||
|
|
|
|||||||||||||||||||
| Net investment income |
5.48% | 5.83% | 5.94% | 5.92% | 6.13% | |||||||||||||||
|
|
|
|||||||||||||||||||
| Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (000) |
$ | 822,549 | $ | 770,822 | $ | 412,078 | $ | 379,913 | $ | 411,136 | ||||||||||
|
|
|
|||||||||||||||||||
| Borrowings outstanding, end of year (000) |
$ | 288,239 | $ | 303,651 | $ | 168,301 | $ | 172,537 | $ | 182,679 | ||||||||||
|
|
|
|||||||||||||||||||
| Portfolio turnover rate7 |
35% | 55% | 82% | 100% | 290% | |||||||||||||||
|
|
|
|||||||||||||||||||
| 1 | Based on average shares outstanding. |
| 2 | Distributions for annual periods determined in accordance with federal income tax regulations. |
| 3 | Taxable distribution. |
| 4 | Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions. |
| 5 | Includes proceeds received from a settlement of litigation, which impacted the Trust’s total return. Excluding these proceeds, the total return would have been 16.01%. |
| 6 | Includes reorganization costs associated with the Trust’s merger. Without these costs, total expenses, total expenses after fees waived and paid indirectly, and total expenses after fees waived and paid indirectly and excluding interest expense would have been 0.94%, 0.94% and 0.82% for the year ended August 31, 2015 and 1.00%, 0.96% and 0.85% for the year ended August 31, 2014, respectively. |
| 7 | Includes mortgage dollar roll transactions (“MDRs”). Additional information regarding portfolio turnover rate is as follows: |
| Year Ended August 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Portfolio turnover (excluding MDRs) |
35% | 51% | 48% | 63% | 237% | |||||||||||||||
|
|
|
|||||||||||||||||||
| See Notes to Financial Statements. | ||||||
| ANNUAL REPORT | AUGUST 31, 2016 | 73 | ||||
Table of Contents
| Consolidated Financial Highlights | BlackRock Corporate High Yield Fund, Inc. (HYT) |
| Year Ended August 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Per Share Operating Performance | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 12.06 | $ | 13.47 | $ | 12.62 | $ | 12.32 | $ | 11.49 | ||||||||||
|
|
|
|||||||||||||||||||
| Net investment income1 |
0.82 | 0.87 | 0.98 | 1.00 | 1.04 | |||||||||||||||
| Net realized and unrealized gain (loss) |
(0.10 | ) | (1.31 | ) | 0.91 | 0.41 | 0.83 | |||||||||||||
|
|
|
|||||||||||||||||||
| Net increase (decrease) from investment operations |
0.72 | (0.44 | ) | 1.89 | 1.41 | 1.87 | ||||||||||||||
|
|
|
|||||||||||||||||||
| Distributions from net investment income2 |
(0.99 | ) | (0.97 | ) | (1.04 | ) | (1.11 | ) | (1.04 | ) | ||||||||||
|
|
|
|||||||||||||||||||
| Net asset value, end of year |
$ | 11.79 | $ | 12.06 | 3 | $ | 13.47 | $ | 12.62 | $ | 12.32 | |||||||||
|
|
|
|||||||||||||||||||
| Market price, end of year |
$ | 10.88 | $ | 9.97 | $ | 12.07 | $ | 11.37 | $ | 12.96 | ||||||||||
|
|
|
|||||||||||||||||||
| Total Return4 | ||||||||||||||||||||
| Based on net asset value |
7.76% | (2.40)% | 3 | 16.21% | 11.90% | 17.14% | ||||||||||||||
|
|
|
|||||||||||||||||||
| Based on market price |
20.29% | (9.96)% | 15.58% | (4.16)% | 26.30% | |||||||||||||||
|
|
|
|||||||||||||||||||
| Ratios to Average Net Assets | ||||||||||||||||||||
| Total expenses |
1.39% | 5 | 1.37% | 1.35% | 6 | 1.54% | 7 | 1.51% | ||||||||||||
|
|
|
|||||||||||||||||||
| Total expenses after fees waived and paid indirectly |
1.39% | 5 | 1.37% | 1.35% | 6 | 1.54% | 7 | 1.51% | ||||||||||||
|
|
|
|||||||||||||||||||
| Total expenses after fees waived and paid indirectly and excluding interest expense and income tax |
0.93% | 5 | 0.96% | 0.98% | 6 | 1.16% | 7,8 | 1.19% | 9 | |||||||||||
|
|
|
|||||||||||||||||||
| Net investment income |
7.30% | 5 | 6.88% | 7.40% | 7.83% | 8.84% | ||||||||||||||
|
|
|
|||||||||||||||||||
| Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (000) |
$ | 1,492,948 | $ | 1,527,307 | $ | 1,705,422 | $ | 446,847 | $ | 435,955 | ||||||||||
|
|
|
|||||||||||||||||||
| Borrowings outstanding, end of year (000) |
$ | 604,000 | $ | 631,000 | $ | 723,000 | $ | 191,000 | $ | 181,000 | ||||||||||
|
|
|
|||||||||||||||||||
| Asset coverage, end of year $1,000 of bank borrowing |
$ | 3,472 | $ | 3,419 | $ | 3,359 | $ | 3,340 | $ | 3,409 | ||||||||||
|
|
|
|||||||||||||||||||
| Portfolio turnover rate |
66% | 57% | 64% | 77% | 61% | |||||||||||||||
|
|
|
|||||||||||||||||||
| 1 | Based on average shares outstanding. |
| 2 | Distributions for annual periods determined in accordance with federal income tax regulations. |
| 3 | For financial reporting purposes, the market value of certain total return swaps were adjusted as of report date. Accordingly, the net asset value (“NAV”) per share and total return performance based on net asset value presented herein are different than the information previously published on August 31, 2015. |
| 4 | Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions. |
| 5 | Does not include expenses incurred indirectly as a result of investments in underlying funds of approximately 0.11%. |
| 6 | Includes reorganization costs. Without these costs, total expenses, total expenses after fees waived and paid indirectly, and total expenses after fees waived and paid indirectly and excluding interest expense would have been 1.34%, 1.34% and 0.97%, respectively. |
| 7 | Includes reorganization costs. Without these costs, total expenses, total expenses after fees waived and paid indirectly, and total expenses after fees waived and paid indirectly and excluding interest expense would have been 1.50%, 1.50% and 1.12%, respectively. |
| 8 | For the year ended August 31, 2013, the total expense ratio after fees waived and paid indirectly and excluding interest expense, borrowing costs and income tax was 1.15%. |
| 9 | For the year ended August 31, 2012, the total expense ratio after fees waived and paid indirectly and excluding interest expense and borrowing costs was 1.09%. |
| See Notes to Financial Statements. | ||||||
| 74 | ANNUAL REPORT | AUGUST 31, 2016 | ||||
Table of Contents
| Financial Highlights | BlackRock Income Trust, Inc. (BKT) |
| Year Ended August 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Per Share Operating Performance | ||||||||||||||||||||
| Net asset value, beginning of year |
$ | 7.08 | $ | 7.27 | $ | 7.32 | $ | 7.94 | $ | 7.96 | ||||||||||
|
|
|
|||||||||||||||||||
| Net investment income1 |
0.28 | 0.32 | 0.35 | 0.32 | 0.39 | |||||||||||||||
| Net realized and unrealized gain (loss) |
(0.05 | ) | (0.11 | ) | 0.03 | (0.46 | ) | 0.06 | ||||||||||||
|
|
|
|||||||||||||||||||
| Net increase (decrease) from investment operations |
0.23 | 0.21 | 0.38 | (0.14 | ) | 0.45 | ||||||||||||||
|
|
|
|||||||||||||||||||
| Distributions:2 |
||||||||||||||||||||
| From net investment income |
(0.35 | ) | (0.40 | ) | (0.43 | ) | (0.48 | ) | (0.27 | ) | ||||||||||
| From net realized gain |
— | — | — | — | (0.20 | ) | ||||||||||||||
|
|
|
|||||||||||||||||||
| Total distributions |
(0.35 | ) | (0.40 | ) | (0.43 | ) | (0.48 | ) | (0.47 | ) | ||||||||||
|
|
|
|||||||||||||||||||
| Net asset value, end of year |
$ | 6.96 | $ | 7.08 | $ | 7.27 | $ | 7.32 | $ | 7.94 | ||||||||||
|
|
|
|||||||||||||||||||
| Market price, end of year |
$ | 6.60 | $ | 6.30 | $ | 6.42 | $ | 6.40 | $ | 7.63 | ||||||||||
|
|
|
|||||||||||||||||||
| Total Return3 | ||||||||||||||||||||
| Based on net asset value |
3.64% | 3.56% | 6.05% | (1.45)% | 6.24% | |||||||||||||||
|
|
|
|||||||||||||||||||
| Based on market price |
10.44% | 4.35% | 7.12% | (10.34)% | 13.19% | |||||||||||||||
|
|
|
|||||||||||||||||||
| Ratios to Average Net Assets | ||||||||||||||||||||
| Total expenses |
1.08% | 0.99% | 4 | 1.02% | 4 | 1.00% | 0.97% | |||||||||||||
|
|
|
|||||||||||||||||||
| Total expenses after fees waived and paid indirectly |
1.08% | 0.99% | 4 | 1.02% | 4 | 1.00% | 0.97% | |||||||||||||
|
|
|
|||||||||||||||||||
| Total expenses after fees waived and paid indirectly and excluding interest expense |
0.89% | 0.90% | 4 | 0.96% | 4 | 0.90% | 0.90% | |||||||||||||
|
|
|
|||||||||||||||||||
| Net investment income |
4.01% | 4.48% | 4.74% | 4.18% | 4.86% | |||||||||||||||
|
|
|
|||||||||||||||||||
| Supplemental Data | ||||||||||||||||||||
| Net assets, end of year (000) |
$ | 444,882 | $ | 452,616 | $ | 464,933 | $ | 467,948 | $ | 507,852 | ||||||||||
|
|
|
|||||||||||||||||||
| Borrowings outstanding, end of year (000) |
$ | 152,859 | $ | 173,695 | $ | 205,415 | $ | 148,344 | $ | 119,706 | ||||||||||
|
|
|
|||||||||||||||||||
| Portfolio turnover rate5 |
141% | 191% | 256% | 358% | 487% | |||||||||||||||
|
|
|
|||||||||||||||||||
| 1 | Based on average shares outstanding. |
| 2 | Distributions for annual periods determined in accordance with federal income tax regulations. |
| 3 | Total returns based on market price, which can be significantly greater or less than the net asset value, may result in substantially different returns. Where applicable, excludes the effects of any sales charges and assumes the reinvestment of distributions. |
| 4 | Includes reorganization costs. Without these costs, total expenses, total expenses after fees waived and paid indirectly, and total expenses after fees waived and paid indirectly and excluding interest expense would have been 0.99%, 0.99% and 0.89% for the year ended August 31, 2015 and 0.97%, 0.97% and 0.90% for the year ended August 31, 2014, respectively. |
| 5 | Includes MDRs. Additional information regarding portfolio turnover rate is as follows: |
| Year Ended August 31, | ||||||||||||||||||||
| 2016 | 2015 | 2014 | 2013 | 2012 | ||||||||||||||||
| Portfolio turnover (excluding MDRs) |
63% | 78% | 125% | 196% | 230% | |||||||||||||||
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| ANNUAL REPORT | AUGUST 31, 2016 | 75 |
Table of Contents
| Notes to Financial Statements | ||||
1. Organization:
The following are registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as closed-end management investment companies and are referred to herein collectively as the “Trusts”, or individually, a “Trust”:
| Trust Name | Herein Referred To As | Organized | Diversification Classification | |||||||||
| BlackRock Core Bond Trust |
BHK | Delaware | Diversified | |||||||||
| BlackRock Corporate High Yield Fund, Inc. |
HYT | Maryland | Diversified | |||||||||
| BlackRock Income Trust, Inc. |
BKT | Maryland | Diversified | |||||||||
The Boards of Directors and Boards of Trustees of the Trusts are collectively referred to throughout this report as the “Board of Trustees” or the “Board,” and the directors/trustees thereof are collectively referred to throughout this report as “Trustees.” The Trusts determine and make available for publication the NAVs of their Common Shares on a daily basis.
The Trusts, together with certain other registered investment companies advised by BlackRock Advisors, LLC (the “Manager”) or its affiliates, are included in a complex of closed-end funds referred to as the Closed-End Complex.
Reorganization: The Board and shareholders of BHK and the Board and shareholders of BlackRock Income Opportunity Trust, Inc. (“BNA” or the “Target Fund”) approved the reorganization of the Target Fund into BHK pursuant to which BHK acquired substantially all of the assets and substantially all of the liabilities of the Target Fund in exchange for an equal aggregate value of newly-issued Common Shares of BHK. The purpose of the transaction was to combine two funds managed by BlackRock Advisors, LLC (the “Manager”) with the same or substantially similar (but not identical) investment objectives, investment policies, strategies, risks and restrictions. The reorganization was a tax-free event and was effective on November 10, 2014.
Each Common Shareholder of the Target Fund received Common Shares of BHK in an amount equal to the aggregate net asset value of such Common Shareholder’s Target Fund Common Shares, as determined at the close of business on November 7, 2014, less the costs of the Target Fund’s reorganization. Cash was distributed for any fractional shares.
The reorganization was accomplished by a tax-free exchange of shares of BHK in the following amount and at the following conversion ratio:
| Target Fund | Shares Prior to Reorganization |
Conversion Ratio |
Shares of BHK |
|||||||||
| BNA |
34,456,370 | 0.78050585 | 26,893,279 | |||||||||
BNA’s net assets and composition of net assets on November 7, 2014, the valuation date of the reorganization, was as follows:
| BNA | ||||
| Net assets |
$ | 399,906,040 | ||
| Paid-in capital |
$ | 384,183,492 | ||
| Distributions in excess of net investment income |
$ | (65,119 | ) | |
| Accumulated net realized loss |
$ | (14,090,276 | ) | |
| Net unrealized appreciation/ depreciation |
$ | 29,877,943 | ||
For financial reporting purposes, assets received and shares issued by BHK were recorded at fair value. However, the cost basis of the investments received from the Target Fund were carried forward to maintain ongoing reporting of BHK’s realized and unrealized gains and losses distributable to shareholders for tax purposes.
The net assets of BHK before the acquisition were $402,115,685. The aggregate net assets of BHK immediately after the acquisition amounted to $802,021,725. The Target Fund’s fair value and cost of investments and derivative financial investments prior to the reorganization were as follows:
| Target Fund |
Fair Value of Investments and |
Cost of Investments |
||||||
| BNA |
$ | 587,550,335 | $ | 557,681,213 | ||||
In connection with the reorganization, BHK investment advisory fee was reduced by 5 basis points, from 0.55% of BHK’s average weekly net assets to 0.50% of BHK’s average weekly net assets as defined in Note 6. In addition to this reduction, BHK’s contractual investment advisory fee waiver of 0.03%, as a percentage of average weekly net assets, was discontinued in connection with the reorganization.
Assuming the acquisition had been completed on September 1, 2014, the beginning of the fiscal reporting period of BHK, the pro forma results of operations for the year ended August 31, 2015, are as follows:
| • | Net investment income/loss: $46,563,761 |
| • | Net realized and change in unrealized gain/loss on investments: $(39,413,545) |
| • | Net increase/decrease in net assets resulting from operations: $7,150,216 |
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Table of Contents
| Notes to Financial Statements (continued) |
Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the BHK Target Fund that have been included in BHK’s Statement of Operations since November 10, 2014.
Reorganization costs incurred in connection with the reorganization were expensed by BHK.
Basis of Consolidation: The accompanying consolidated financial statements of HYT include the accounts of BLK HYT (Luxembourg) Investments, S.a.r.l., BLK HYV (Luxembourg) Investments, S.a.r.l., BLK COY (Luxembourg) Investments, S.a.r.l. and BLK CYE (Luxembourg) Investments, S.a.r.l. (the “Taxable Subsidiaries”), which are wholly owned taxable subsidiaries of HYT which hold shares of private Canadian companies, Laricina Energy Ltd. and Osum Oil Sands Corp. Such shares are held in the Taxable Subsidiaries in order to realize benefits under the Double Tax Avoidance Convention between Canada and Luxembourg, the result of which is gains on the sale of such shares will generally not be subject to capital gains taxes in Canada. Income earned on the investment held by the Taxable Subsidiary may be taxable to such subsidiary in Luxembourg. A tax provision, if any, is included in expenses in the Consolidated Statement of Operations for HYT. The net assets of the Taxable Subsidiaries as of period end were $699,084, which is less than 0.1% of HYT’s consolidated net assets. Intercompany accounts and transactions, if any, have been eliminated. The Taxable Subsidiaries are subject to the same investment policies and restrictions that apply to HYT.
2. Significant Accounting Policies:
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. Each Trust is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. Below is a summary of significant accounting policies:
Foreign Currency: Each Trust’s books and records are maintained in U.S. dollars. Purchases and sales of investments are recorded at the rates of exchange prevailing on the respective dates of such transactions. Generally, when the U.S. dollar rises in value against a foreign currency, the investments denominated in that currency will lose value; the opposite effect occurs if the U.S. dollar falls in relative value.
Each Trust does not isolate the portion of the results of operations arising as a result of changes in the exchange rates from the changes in the market prices of investments held or sold for financial reporting purposes. Accordingly, the effects of changes in exchange rates on investments are not segregated in the Statements of Operations from the effects of changes in market prices of those investments, but are included as a component of net realized and unrealized gain (loss) from investments. Each Trust reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are generally treated as ordinary income for federal income tax purposes.
Segregation and Collateralization: In cases where a Trust enters into certain investments (e.g., dollar rolls, TBA sale commitments, futures contracts, forward foreign currency exchange contracts, options written, swaps and short sales) or certain borrowings (e.g., reverse repurchase transactions) that would be treated as “senior securities” for 1940 Act purposes, a Trust may segregate or designate on its books and records cash or liquid assets having a market value at least equal to the amount of its future obligations under such investments or borrowings. Doing so allows the investment or borrowing to be excluded from treatment as a “senior security.” Furthermore, if required by an exchange or counterparty agreement, the Trust may be required to deliver/deposit cash and/or securities to/with an exchange, or broker-dealer or custodian as collateral for certain investments or obligations.
Investment Transactions and Investment Income: For financial reporting purposes, investment transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on investment transactions are determined on the identified cost basis. Dividend income is recorded on the ex-dividend date. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Trusts are informed of the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest. Upon notification from issuers, some of the dividend income received from a real estate investment trust may be redesignated as a reduction of cost of the related investment and/or realized gain. Interest income, including amortization and accretion of premiums and discounts on debt securities, is recognized on the accrual basis.
Distributions: Distributions from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend date and made at least annually. Portions of return of capital distributions under U.S. GAAP may be taxed at ordinary income rates. The character of distributions is determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. The portion of distributions that exceeds a Trust’s current and accumulated earnings and profits, as measured on a tax basis, constitute a non-taxable return of capital. Realized net capital gains can be offset by capital losses carried forward from prior years. However, certain Trusts have capital loss carryforwards from pre-2012 tax years that offset realized net capital gains but do not offset current earnings and profits. Consequently, if distributions in any tax year are less than the Trust’s current earnings and profits but greater than net investment income and net realized capital gains (taxable income), distributions in excess of taxable income are not treated as non-taxable return of capital, but rather may be taxable to shareholders at ordinary income rates. Under certain circumstances, taxable excess distributions could be significant. See Note 8, Income Tax Information, for the tax character of each Trust’s distributions paid during the year.
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| Notes to Financial Statements (continued) | ||||
Deferred Compensation Plan: Under the Deferred Compensation Plan (the “Plan”) approved by each Trust’s Board, the independent Trustees (“Independent Trustees”) may defer a portion of their annual complex-wide compensation. Deferred amounts earn an approximate return as though equivalent dollar amounts had been invested in common shares of certain other BlackRock Closed-End Funds selected by the Independent Trustees. This has the same economic effect for the Independent Trustees as if the Independent Trustees had invested the deferred amounts directly in certain other BlackRock Closed-End Funds.
The Plan is not funded and obligations thereunder represent general unsecured claims against the general assets of each Trust, if applicable. Deferred compensation liabilities are included in officer’s and trustees’ fees payable in the Statements of Assets and Liabilities and will remain as a liability of the Trusts until such amounts are distributed in accordance with the Plan.
Recent Accounting Standard: In April 2015, the Financial Accounting Standards Board issued “Disclosures for Investments in Certain Entities that Calculate Net Asset Value (“NAV”) per Share” which eliminates the requirement to categorize investments within the fair value hierarchy when fair value is based on the NAV per share and no quoted market value is available. As of August 31, 2016, certain investments of HYT were valued using NAV per share as no quoted market value is available and have been excluded from the fair value hierarchy.
Indemnifications: In the normal course of business, each Trust enters into contracts that contain a variety of representations that provide general indemnification. A Trust’s maximum exposure under these arrangements is unknown because it involves future potential claims against a Trust, which cannot be predicted with any certainty.
Other: Expenses directly related to a Trust are charged to that Trust. Other operating expenses shared by several funds, including other funds managed by the Manager, are prorated among those funds on the basis of relative net assets or other appropriate methods.
Through May 31, 2016, the Trusts had an arrangement with their custodian whereby credits were earned on uninvested cash balances, which could be used to reduce custody fees and/or overdraft charges. Credits previously earned may be utilized until December 31, 2016. Under current arrangements effective June 1, 2016, the Trusts no longer earn credits on uninvested cash, and may incur charges on uninvested cash balances and overdrafts, subject to certain conditions.
3. Investment Valuation and Fair Value Measurements:
Investment Valuation Policies: The Trusts’ investments are valued at fair value (also referred to as “market value” within the financial statements) as of the close of trading on the New York Stock Exchange (“NYSE”) (generally 4:00 p.m., Eastern time). U.S. GAAP defines fair value as the price the Trusts would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The Trusts determine the fair values of their financial instruments using various independent dealers or pricing services under policies approved by the Board of Trustees. The BlackRock Global Valuation Methodologies Committee (the “Global Valuation Committee”) is the committee formed by management to develop global pricing policies and procedures and to oversee the pricing function for all financial instruments.
Fair Value Inputs and Methodologies: The following methods (or “techniques”) and inputs are used to establish the fair value of each Trust’s assets and liabilities:
| • | Equity investments traded on a recognized securities exchange are valued at the official closing price each day, if available. For equity investments traded on more than one exchange, the official closing price on the exchange where the stock is primarily traded is used. Equity investments traded on a recognized exchange for which there were no sales on that day may be valued at the last available bid (long positions) or ask (short positions) price. |
| • | Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of business on the NYSE. Occasionally, events affecting the values of such instruments may occur between the foreign market close and the close of business on the NYSE that may not be reflected in the computation of the Trusts’ net assets. Each business day, the Trusts use a pricing service to assist with the valuation of certain foreign exchange-traded equity securities and foreign exchange-traded and over-the-counter (“OTC”) options (the “Systematic Fair Value Price”). Using current market factors, the Systematic Fair Value Price is designed to value such foreign securities and foreign options at fair value as of the close of business on the NYSE, which follows the close of the local markets. |
| • | Bond investments are valued on the basis of last available bid prices or current market quotations provided by dealers or pricing services. Floating rate loan interests are valued at the mean of the bid prices from one or more brokers or dealers as obtained from a pricing service. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in comparable investments, various relationships observed in the market between investments and calculated yield measures. Asset-backed and mortgage-backed securities are valued by independent pricing services using models that consider estimated cash flows of each tranche of the security, establish a benchmark yield and develop an estimated tranche-specific spread to the benchmark yield based on the unique attributes of the tranche. |
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| Notes to Financial Statements (continued) |
| • | Municipal investments (including commitments to purchase such investments on a “when-issued” basis) are valued on the basis of prices provided by dealers or pricing services. In determining the value of a particular investment, pricing services may use certain information with respect to transactions in such investments, quotations from dealers, pricing matrixes, market transactions in comparable investments and information with respect to various relationships between investments. |
| • | To-be-announced (“TBA”) commitments are valued on the basis of last available bid prices or current market quotations provided by pricing services. |
| • | Investments in open-end U.S. mutual funds are valued at NAV each business day. |
| • | Futures contracts traded on exchanges are valued at their last sale price. |
| • | Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates determined as of the close of business on the NYSE. Forward foreign currency exchange contracts are valued at the mean between the bid and ask prices and are determined as of the close of business on the NYSE. Interpolated values are derived when the settlement date of the contract is an interim date for which quotations are not available. |
| • | Exchange-traded options are valued at the mean between the last bid and ask prices at the close of the options market in which the options trade. An exchange-traded option for which there is no mean price is valued at the last bid (long positions) or ask (short positions) price. If no bid or ask price is available, the prior day’s price will be used, unless it is determined that the prior day’s price no longer reflects the fair value of the option. OTC options and options on swaps (“swaptions”) are valued by an independent pricing service using a mathematical model, which incorporates a number of market data factors, such as the trades and prices of the underlying instruments. |
| • | Swap agreements are valued utilizing quotes received daily by the Trusts’ pricing service or through brokers, which are derived using daily swap curves and models that incorporate a number of market data factors, such as discounted cash flows, trades and values of the underlying reference instruments. |
If events (e.g., a company announcement, market volatility or a natural disaster) occur that are expected to materially affect the value of such instruments, or in the event that the application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Global Valuation Committee, or its delegate, in accordance with a policy approved by the Board as reflecting fair value (“Fair Valued Investments”). When determining the price for Fair Valued Investments, the Global Valuation Committee, or its delegate, seeks to determine the price that each Trust might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the Global Valuation Committee, or its delegate, deems relevant and consistent with the principles of fair value measurement, which include the market approach, income approach and/or in the case of recent investments, the cost approach, as appropriate. The market approach generally consists of using comparable market transactions. The income approach generally is used to discount future cash flows to present value and is adjusted for liquidity as appropriate. These factors include but are not limited to: (i) attributes specific to the investment or asset; (ii) the principal market for the investment or asset; (iii) the customary participants in the principal market for the investment or asset; (iv) data assumptions by market participants for the investment or asset, if reasonably available; (v) quoted prices for similar investments or assets in active markets; and (vi) other factors, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks, recovery rates, liquidation amounts and/or default rates. Due to the inherent uncertainty of valuations of such investments, the fair values may differ from the values that would have been used had an active market existed. The Global Valuation Committee, or its delegate, employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of the Trusts’ pricing vendors, regular reviews of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices and large movements in market values and reviews of any market related activity. The pricing of all Fair Valued Investments is subsequently reported to the Board or a committee thereof on a quarterly basis.
Fair Value Hierarchy: Various inputs are used in determining the fair value of investments and derivative financial instruments. These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial statement purposes as follows:
| • | Level 1 — unadjusted price quotations in active markets/exchanges for identical assets or liabilities that each Trust has the ability to access |
| • | Level 2 — other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market–corroborated inputs) |
| • | Level 3 — unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available (including each Trust’s own assumptions used in determining the fair value of investments and derivative financial instruments) |
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgment exercised in determining fair value is greatest for
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| Notes to Financial Statements (continued) | ||||
instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The significant unobservable inputs used by the Global Valuation Committee in determining the price for Fair Valued Investments are typically categorized as Level 3. The fair value hierarchy for each Trust’s investments and derivative financial instruments has been included in the Schedules of Investments.
Changes in valuation techniques may result in transfers into or out of an assigned level within the hierarchy. In accordance with each Trust’s policy, transfers between different levels of the fair value hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of a value determined for investments and derivative financial instruments is based on the pricing transparency of the investments and derivative financial instruments and is not necessarily an indication of the risks associated with investing in those securities.
4. Securities and Other Investments:
Asset-Backed and Mortgage-Backed Securities: Asset-backed securities are generally issued as pass-through certificates or as debt instruments. Asset-backed securities issued as pass-through certificates represent undivided fractional ownership interests in an underlying pool of assets. Asset-backed securities issued as debt instruments, which are also known as collateralized obligations are typically issued as the debt of a special purpose entity organized solely for the purpose of owning such assets and issuing such debt. Asset-backed securities are often backed by a pool of assets representing the obligations of a number of different parties. The yield characteristics of certain asset-backed securities may differ from traditional debt securities. One such major difference is that all or a principal part of the obligations may be prepaid at any time because the underlying assets (i.e., loans) may be prepaid at any time. As a result, a decrease in interest rates in the market may result in increases in the level of prepayments as borrowers, particularly mortgagors, refinance and repay their loans. An increased prepayment rate with respect to an asset-backed security will have the effect of shortening the maturity of the security. In addition, the Trusts may subsequently have to reinvest the proceeds at lower interest rates. If a Trust has purchased such an asset-backed security at a premium, a faster than anticipated prepayment rate could result in a loss of principal to the extent of the premium paid.
For mortgage pass-through securities (the “Mortgage Assets”), there are a number of important differences among the agencies and instrumentalities of the U.S. Government that issue mortgage-related securities and among the securities that they issue. For example, mortgage-related securities guaranteed by Ginnie Mae are guaranteed as to the timely payment of principal and interest by Ginnie Mae and such guarantee is backed by the full faith and credit of the United States. However, mortgage-related securities issued by Freddie Mac and Fannie Mae, including Freddie Mac and Fannie Mae guaranteed mortgage pass-through certificates, which are solely the obligations of Freddie Mac and Fannie Mae, are not backed by or entitled to the full faith and credit of the United States, but are supported by the right of the issuer to borrow from the U.S. Treasury.
Non-agency mortgage-backed securities are securities issued by non-governmental issuers and have no direct or indirect government guarantees of payment and are subject to various risks. Non-agency mortgage loans are obligations of the borrowers thereunder only and are not typically insured or guaranteed by any other person or entity. The ability of a borrower to repay a loan is dependent upon the income or assets of the borrower. A number of factors, including a general economic downturn, acts of God, terrorism, social unrest and civil disturbances, may impair a borrower’s ability to repay its loans.
Collateralized Debt Obligations: Collateralized debt obligations (“CDOs”), including collateralized bond obligations (“CBOs”) and collateralized loan obligations (“CLOs”), are types of asset-backed securities. A CDO is an entity that is backed by a diversified pool of debt securities (CBOs) or syndicated bank loans (CLOs). The cash flows of the CDO can be split into multiple segments, called “tranches,” which will vary in risk profile and yield. The riskiest segment is the subordinated or “equity” tranche. This tranche bears the greatest risk of defaults from the underlying assets in the CDO and serves to protect the other, more senior, tranches from default in all but the most severe circumstances. Since it is shielded from defaults by the more junior tranches, a “senior” tranche will typically have higher credit ratings and lower yields than their underlying securities, and often receive investment grade ratings from one or more of the nationally recognized rating agencies. Despite the protection from the more junior tranches, senior tranches can experience substantial losses due to actual defaults, increased sensitivity to future defaults and the disappearance of one or more protecting tranches as a result of changes in the credit profile of the underlying pool of assets.
Multiple Class Pass-Through Securities: Multiple class pass-through securities, including collateralized mortgage obligations (“CMOs”) and commercial mortgage-backed securities, may be issued by Ginnie Mae, U.S. Government agencies or instrumentalities or by trusts formed by private originators of, or investors in, mortgage loans. In general, CMOs are debt obligations of a legal entity that are collateralized by a pool of residential or commercial mortgage loans or mortgage pass-through securities (the “Mortgage Assets”). The payments on these are used to make payments on the CMOs or multiple pass-through securities. Multiple class pass-through securities represent direct ownership interests in the Mortgage Assets. Classes of CMOs include interest only (“IOs”), principal only (“POs”), planned amortization classes and targeted amortization classes. IOs and POs are stripped mortgage-backed securities representing interests in a pool of mortgages, the cash flow from which has been separated into interest and principal components. IOs receive the interest portion of the cash flow while POs receive the principal portion. IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases the rate at which the principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slower than anticipated, the life of the PO is lengthened and the yield to maturity is reduced. If the underlying Mortgage Assets experience greater than anticipated prepayments of principal, the Trust’s initial investment in the IOs may not fully recoup.
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| Notes to Financial Statements (continued) |
Stripped Mortgage-Backed Securities: Stripped mortgage-backed securities are typically issued by the U.S. Government, its agencies and instrumentalities. Stripped mortgage-backed securities are usually structured with two classes that receive different proportions of the interest (IOs) and principal (POs) distributions on a pool of Mortgage Assets. Stripped mortgage-backed securities may be privately issued.
Zero-Coupon Bonds: Zero-coupon bonds are normally issued at a significant discount from face value and do not provide for periodic interest payments. These bonds may experience greater volatility in market value than other debt obligations of similar maturity which provide for regular interest payments.
Capital Securities and Trust Preferred Securities: Capital securities, including trust preferred securities, are typically issued by corporations, generally in the form of interest-bearing notes with preferred securities characteristics. In the case of trust preferred securities, an affiliated business trust of a corporation issues these securities, generally in the form of beneficial interests in subordinated debentures or similarly structured securities. The securities can be structured with either a fixed or adjustable coupon that can have either a perpetual or stated maturity date. For trust preferred securities, the issuing bank or corporation pays interest to the trust, which is then distributed to holders of these securities as a dividend. Dividends can be deferred without creating an event of default or acceleration, although maturity cannot take place unless all cumulative payment obligations have been met. The deferral of payments does not affect the purchase or sale of these securities in the open market. Payments on these securities are treated as interest rather than dividends for federal income tax purposes. These securities generally are rated below that of the issuing company’s senior debt securities and are freely callable at the issuer’s option.
Preferred Stock: Preferred stock has a preference over common stock in liquidation (and generally in receiving dividends as well) but is subordinated to the liabilities of the issuer in all respects. As a general rule, the market value of preferred stock with a fixed dividend rate and no conversion element varies inversely with interest rates and perceived credit risk, while the market price of convertible preferred stock generally also reflects some element of conversion value. Because preferred stock is junior to debt securities and other obligations of the issuer, deterioration in the credit quality of the issuer will cause greater changes in the value of a preferred stock than in a more senior debt security with similar stated yield characteristics. Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions.
Warrants: Warrants entitle a Trust to purchase a specified number of shares of common stock and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date of the warrants, if any. If the price of the underlying stock does not rise above the strike price before the warrant expires, the warrant generally expires without any value and a Trust will lose any amount it paid for the warrant. Thus, investments in warrants may involve more risk than investments in common stock. Warrants may trade in the same markets as their underlying stock; however, the price of the warrant does not necessarily move with the price of the underlying stock.
Floating Rate Loan Interests: Floating rate loan interests are typically issued to companies (the “borrower”) by banks, other financial institutions, or privately and publicly offered corporations (the “lender”). Floating rate loan interests are generally non-investment grade, often involve borrowers whose financial condition is troubled or uncertain and companies that are highly leveraged or in bankruptcy proceedings. In addition, transactions in floating rate loan interests may settle on a delayed basis, which may result in proceeds from the sale to not be readily available for a Trust to make additional investments or meet its redemption obligations. Floating rate loan interests may include fully funded term loans or revolving lines of credit. Floating rate loan interests are typically senior in the corporate capital structure of the borrower. Floating rate loan interests generally pay interest at rates that are periodically determined by reference to a base lending rate plus a premium. Since the rates reset only periodically, changes in prevailing interest rates (and particularly sudden and significant changes) can be expected to cause some fluctuations in the net asset value of a Trust to the extent that it invests in floating rate debt securities. The base lending rates are generally the lending rate offered by one or more European banks, such as the London Interbank Offered Rate (“LIBOR”), the prime rate offered by one or more U.S. banks or the certificate of deposit rate. Floating rate loan interests may involve foreign borrowers, and investments may be denominated in foreign currencies. These investments are treated as investments in debt securities for purposes of a Trust’s investment policies.
When a Trust purchases a floating rate loan interest, it may receive a facility fee and when it sells a floating rate loan interest, it may pay a facility fee. On an ongoing basis, a Trust may receive a commitment fee based on the undrawn portion of the underlying line of credit amount of a floating rate loan interest. Facility and commitment fees are typically amortized to income over the term of the loan or term of the commitment, respectively. Consent and amendment fees are recorded to income as earned. Prepayment penalty fees, which may be received by the Trusts upon the prepayment of a floating rate loan interest by a borrower, are recorded as realized gains. A Trust may invest in multiple series or tranches of a loan. A different series or tranche may have varying terms and carry different associated risks.
Floating rate loan interests are usually freely callable at the borrower’s option. A Trust may invest in such loans in the form of participations in loans (“Participations”) or assignments (“Assignments”) of all or a portion of loans from third parties. Participations typically will result in a Trust having a contractual relationship only with the lender, not with the borrower. A Trust has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the Participation and only upon receipt by the lender of the payments from the borrower. In connection with purchasing Participations, a Trust generally will have no right to enforce compliance by the borrower with the terms of the loan agreement, nor any rights of offset against the borrower. A Trust may not benefit directly from any collateral supporting the loan in which it has purchased the Participation. As a result, a Trust
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| Notes to Financial Statements (continued) | ||||
assumes the credit risk of both the borrower and the lender that is selling the Participation. A Trust’s investment in loan participation interests involves the risk of insolvency of the financial intermediaries who are parties to the transactions. In the event of the insolvency of the lender selling the Participation, a Trust may be treated as a general creditor of the lender and may not benefit from any offset between the lender and the borrower. Assignments typically result in a Trust having a direct contractual relationship with the borrower, and a Trust may enforce compliance by the borrower with the terms of the loan agreement.
Forward Commitments and When-Issued Delayed Delivery Securities: Certain Trusts may purchase securities on a when-issued basis and may purchase or sell securities on a forward commitment basis. Settlement of such transactions normally occurs within a month or more after the purchase or sale commitment is made. A Trust may purchase securities under such conditions with the intention of actually acquiring them, but may enter into a separate agreement to sell the securities before the settlement date. Since the value of securities purchased may fluctuate prior to settlement, a Trust may be required to pay more at settlement than the security is worth. In addition, a Trust is not entitled to any of the interest earned prior to settlement. When purchasing a security on a delayed delivery basis, a Trust assumes the rights and risks of ownership of the security, including the risk of price and yield fluctuations. In the event of default by the counterparty, a Trust’s maximum amount of loss is the unrealized appreciation of unsettled when-issued transactions.
TBA Commitments: TBA commitments are forward agreements for the purchase or sale of mortgage-backed securities for a fixed price, with payment and delivery on an agreed upon future settlement date. The specific securities to be delivered are not identified at the trade date. However, delivered securities must meet specified terms, including issuer, rate and mortgage terms. When entering into TBA commitments, a Trust may take possession of or deliver the underlying mortgage-backed securities but can extend the settlement or roll the transaction. TBA commitments involve a risk of loss if the value of the security to be purchased or sold declines or increases, respectively, prior to settlement date.
In order to better define contractual rights and to secure rights that will help a Trust mitigate its counterparty risk, TBA commitments may be entered into by a Trust under Master Securities Forward Transaction Agreements (each, an “MSFTA”). An MSFTA typically contains, among other things, collateral posting terms and netting provisions in the event of default and/or termination event. The collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of the collateral currently pledged by a Trust and the counterparty. Cash collateral that has been pledged to cover the obligations of a Trust and cash collateral received from the counterparty, if any, is reported separately on the Statements of Assets and Liabilities as cash pledged as collateral for TBA commitments or cash received as collateral for TBA commitments, respectively. Non-cash collateral pledged by a Trust, if any, is noted in the Schedules of Investments. Typically, a Trust is permitted to sell, repledge or use the collateral it receives; however, the counterparty is not permitted to do so. To the extent amounts due to a Trust are not fully collateralized, contractually or otherwise, a Trust bears the risk of loss from counterparty non-performance.
Mortgage Dollar Roll Transactions: Certain Trusts may sell TBA mortgage-backed securities and simultaneously contract to repurchase substantially similar (i.e., same type, coupon and maturity) securities on a specific future date at an agreed upon price. During the period between the sale and repurchase, a Trust is not entitled to receive interest and principal payments on the securities sold. Mortgage dollar roll transactions are treated as purchases and sales and realize gains and losses on these transactions. Mortgage dollar rolls involve the risk that the market value of the securities that a Trust is required to purchase may decline below the agreed upon repurchase price of those securities.
Borrowed Bond Agreements: Repurchase agreements may be referred to as borrowed bond agreements when entered into in connection with short sales of bonds. In a borrowed bond agreement, a Trust borrows a bond from a counterparty in exchange for cash collateral. The agreement contains a commitment that the security and the cash will be returned to the counterparty and a Trust at a mutually agreed upon date. Certain agreements have no stated maturity and can be terminated by either party at any time. Earnings on cash collateral and compensation to the lender of the bond are based on agreed upon rates between a Trust and the counterparty. The value of the underlying cash collateral approximates the market value and accrued interest of the borrowed bond. To the extent that a borrowed bond transaction exceeds one business day, the value of the cash collateral in the possession of the counterparty is monitored on a daily basis to ensure the adequacy of the collateral. As the market value of the borrowed bond changes, the cash collateral is periodically increased or decreased with a frequency and in amounts prescribed in the borrowed bond agreement. A Trust may also experience delays in gaining access to the collateral.
Reverse Repurchase Agreements: Reverse repurchase agreements are agreements with qualified third party broker dealers in which a Trust sells securities to a bank or broker-dealer and agrees to repurchase the same securities at a mutually agreed upon date and price. A Trust receives cash from the sale to use for other investment purposes. During the term of the reverse repurchase agreement, a Trust continues to receive the principal and interest payments on the securities sold. Certain agreements have no stated maturity and can be terminated by either party at any time. Interest on the value of the reverse repurchase agreements issued and outstanding is based upon competitive market rates determined at the time of issuance. A Trust may utilize reverse repurchase agreements when it is anticipated that the interest income to be earned from the investment of the proceeds of the transaction is greater than the interest expense of the transaction. Reverse repurchase agreements involve leverage risk. If a Trust suffers a loss on its investment of the transaction proceeds from a reverse repurchase agreement, a Trust would still be required to pay the full repurchase price. Further, a Trust remains subject to the risk that the market value of the securities repurchased declines below the repurchase price. In such cases, a Trust would be required to return a portion of the cash received from the transaction or provide additional securities to the counterparty.
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| Notes to Financial Statements (continued) |
Cash received in exchange for securities delivered plus accrued interest due to the counterparty is recorded as a liability in the Statements of Assets and Liabilities at face value including accrued interest. Due to the short- term nature of the reverse repurchase agreements, face value approximates fair value. Interest payments made by a Trust to the counterparties are recorded as a component of interest expense in the Statements of Operations. In periods of increased demand for the security, a Trust may receive a fee for use of the security by the counterparty, which may result in interest income to a Trust.
For the year ended August 31, 2016, the average amount of reverse repurchase agreements outstanding and the daily weighted average interest rates were as follows:
|
Average Amount Outstanding |
Daily Average Interest Rate |
|||||||
| BHK |
$ | 293,360,951 | 0.51 | % | ||||
| BKT |
$ | 160,153,322 | 0.51 | % | ||||
Borrowed bond agreements and reverse repurchase transactions are entered into by a Trust under Master Repurchase Agreements (each, an “MRA”), which permit a Trust, under certain circumstances, including an event of default (such as bankruptcy or insolvency), to offset payables and/or receivables under the MRA with collateral held and/or posted to the counterparty and create one single net payment due to or from a Trust. With borrowed bond agreements and reverse repurchase transactions, typically a Trust and the counterparty under an MRA are permitted to sell, re-pledge, or use the collateral associated with the transaction. Bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of the MRA counterparty’s bankruptcy or insolvency. Pursuant to the terms of the MRA, a Trust receives or posts securities as collateral with a market value in excess of the repurchase price to be paid or received by a Trust upon the maturity of the transaction. Upon a bankruptcy or insolvency of the MRA counterparty, a Trust is considered an unsecured creditor with respect to excess collateral and, as such, the return of excess collateral may be delayed.
As of period end, the following table is a summary of the Trusts’ open borrowed bond agreements and reverse repurchase agreements by counterparty which are subject to offset under an MRA on a net basis:
| BHK | ||||||||||||||||||||
| Counterparty | Reverse Repurchase Agreements |
Fair Value of Non-cash Collateral Pledged Accrued Interest1 |
Cash Collateral Pledged |
Net Amount2 | ||||||||||||||||
| Barclays Capital, Inc. |
$ | 12,975,689 | $ | (12,975,689 | ) | — | — | |||||||||||||
| BNP Paribas Securities Corp. |
102,361,521 | (102,361,521 | ) | — | — | |||||||||||||||
| Credit Suisse Securities (USA) LLC |
5,031,655 | (5,031,655 | ) | — | — | |||||||||||||||
| Deutsche Bank AG |
24,457,665 | (24,457,665 | ) | — | — | |||||||||||||||
| HSBC Securities (USA), Inc. |
54,395,612 | (54,395,612 | ) | — | — | |||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith, Inc |
17,974,441 | (17,974,441 | ) | — | — | |||||||||||||||
| Nomura Securities International, Inc |
31,779,484 | (31,732,707 | ) | — | $ | 46,777 | ||||||||||||||
| RBC Capital Markets, LLC |
39,262,822 | (39,262,822 | ) | — | — | |||||||||||||||
|
|
|
|||||||||||||||||||
| Total |
$ | 288,238,889 | $ | (288,192,112 | ) | — | $ | 46,777 | ||||||||||||
|
|
|
|||||||||||||||||||
| 1 | Net collateral with a value of $296,141,939 has been pledged in connection with open reverse repurchase agreements. Excess of collateral pledged to the individual counterparty is not shown for financial reporting purposes. |
| 2 | Net amount represents the net amount payable due to counterparty in the event of default. |
| BKT | ||||||||||||||||||||||||||||||||||||||||
| Counterparty | Borrowed Bonds Agreements1 |
Reverse Repurchase Agreements |
Borrowed Value |
Net Amount before Collateral |
Non-cash Collateral Received |
Cash Collateral Received |
Non-cash Pledged |
Cash Collateral Pledged |
Net Collateral (Received)/ Pledged3 |
Net Exposure Due (to)/from Counterparty4 |
||||||||||||||||||||||||||||||
| BNP Paribas Securities Corp |
— | $ | (7,092,483 | ) | — | $ | (7,092,483 | ) | — | — | $ | 7,062,347 | — | $ | 7,062,347 | $ | (30,136 | ) | ||||||||||||||||||||||
| Credit Suisse Securities (USA) LLC |
$ | 935,340 | (12,535,715 | ) | $ | (1,026,127 | ) | (12,626,502 | ) | — | — | 12,245,942 | $ | 380,560 | 12,626,502 | — | ||||||||||||||||||||||||
| HSBC Securities (USA) LLC |
— | (80,171,050 | ) | — | (80,171,050 | ) | — | — | 80,171,050 | — | 80,171,050 | — | ||||||||||||||||||||||||||||
| Merrill Lynch, Pierce, Fenner & Smith Inc. |
— | (53,059,255 | ) | — | (53,059,255 | ) | — | — | 53,059,255 | — | 53,059,255 | — | ||||||||||||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||
| Total |
$ | 935,340 | $ | (152,858,503 | ) | $ | (1,026,127 | ) | $ | (152,949,290 | ) | — | — | $ | 152,538,594 | $ | 380,560 | $ | 152,919,154 | $ | (30,136 | ) | ||||||||||||||||||
|
|
|
|||||||||||||||||||||||||||||||||||||||
| 1 | Included in investments at value-unaffiliated in the Statements of Assets and Liabilities. |
| 2 | Includes accrued interest on borrowed bonds in the amount of $7,469 which is included in interest expense payable in the Statements of Assets and Liabilities. |
| 3 | Net collateral with a value of $158,123,036 has been pledged in connection with open reverse repurchase agreements. Excess of net collateral pledged to the individual counterparty is not shown for financial reporting purposes. |
| 4 | Net exposure represents the net receivable (payable) that would be due from/to the counterparty in the event of default. |
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| Notes to Financial Statements (continued) | ||||
In the event the counterparty of securities under an MRA files for bankruptcy or becomes insolvent, a Trust’s use of the proceeds from the agreement may be restricted while the counterparty, or its trustee or receiver, determines whether or not to enforce a Trust’s obligation to repurchase the securities.
Short Sale Transactions: In short sale transactions, a Trust sells a security it does not hold in anticipation of a decline in the market price of that security. When a Trust makes a short sale, it will borrow the security sold short (borrowed bond) and deliver the security to the counterparty to which it sold the security short. An amount equal to the proceeds received by a Trust is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the market value of the short sale. A Trust is required to repay the counterparty interest on the security sold short, which, if applicable, is shown as interest expense in the Statements of Operations. A Trust is exposed to market risk based on the amount, if any, that the market value of the security increases beyond the market value at which the position was sold. Thus, a short sale of a security involves the risk that instead of declining, the price of the security sold short will rise. The short sale of securities involves the possibility of an unlimited loss since there is an unlimited potential for the market price of the security sold short to increase. A gain is limited to the price at which a Trust sold the security short. A realized gain or loss is recognized upon the termination of a short sale if the market price is either less than or greater than the proceeds originally received. There is no assurance that a Trust will be able to close out a short position at a particular time or at an acceptable price.
5. Derivative Financial Instruments:
The Trusts engage in various portfolio investment strategies using derivative contracts both to increase the returns of the Trusts and/or to manage their exposure to certain risks such as credit risk, equity risk, interest rate risk, foreign currency exchange rate risk, commodity price risk or other risks (e.g., inflation risk). Derivative financial instruments categorized by risk exposure are included in the Schedules of Investments. These contracts may be transacted on an exchange or OTC.
Futures Contracts: Certain Trusts invest in long and/or short positions in futures and options on futures contracts to gain exposure to, or manage exposure to changes in interest rates (interest rate risk), changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate risk).
Futures contracts are agreements between the Trusts and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date. Upon entering into a futures contract, the Trusts are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contract’s size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract.
Securities deposited as initial margin are designated in the Schedules of Investments and cash deposited, if any, is shown as cash pledged for futures contracts in the Statements of Assets and Liabilities. Pursuant to the contract, the Trusts agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market value of the contract (“variation margin”). Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin receivable (or payable) on futures contracts in the Statements of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded in the Statements of Operations equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts and interest, foreign currency exchange rates or underlying assets.
Forward Foreign Currency Exchange Contracts: Certain Trusts enter into forward foreign currency exchange contracts to gain or reduce exposure to foreign currencies (foreign currency exchange rate risk). A forward foreign currency exchange contract is an agreement between two parties to buy and sell a currency at a set exchange rate on a specified date. These contracts help to manage the overall exposure to the currencies in which some of the investments held by the Trusts are denominated and in some cases, may be used to obtain exposure to a particular market. The contract is marked to market daily and the change in market value is recorded as unrealized appreciation (depreciation) in the Statements of Assets and Liabilities. When a contract is closed, a realized gain or loss is recorded in the Statements of Operations equal to the difference between the value at the time it was opened and the value at the time it was closed. Non-deliverable forward foreign currency exchange contracts are settled with the counterparty in cash without the delivery of foreign currency. The use of forward foreign currency exchange contracts involves the risk that the value of a forward foreign currency exchange contract changes unfavorably due to movements in the value of the referenced foreign currencies.
Options: Certain Trusts purchase and write call and put options to increase or decrease their exposure to the risks of underlying instruments, including equity risk, interest rate risk and/or commodity price risk and/or, in the case of options written, to generate gains from options premiums.
A call option gives the purchaser (holder) of the option the right (but not the obligation) to buy, and obligates the seller (writer) to sell (when the option is exercised) the underlying instrument at the exercise or strike price at any time or at a specified time during the option period. A put option gives the holder the right to sell and obligates the writer to buy the underlying instrument at the exercise or strike price at any time or at a specified time during the option period.
Premiums paid on options purchased and premiums received on options written, as well as the daily fluctuation in market value, are included in investments at value — unaffiliated and options written at value, respectively, in the Statements of Assets and Liabilities. When an instrument is purchased or
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| Notes to Financial Statements (continued) |
sold through the exercise of an option, the premium is offset against the cost or proceeds of the underlying instrument. When an option expires, a realized gain or loss is recorded in the Statements of Operations to the extent of the premiums received or paid. When an option is closed or sold, a gain or loss is recorded in the Statements of Operations to the extent the cost of the closing transaction exceeds the premiums received or paid. When the Trusts write a call option, such option is typically “covered,” meaning that they hold the underlying instrument subject to being called by the option counterparty. When the Trusts write a put option, such option is covered by cash in an amount sufficient to cover the obligation.
| • | Swaptions — Certain Trusts purchase and write options on swaps (“swaptions”) primarily to preserve a return or spread on a particular investment or portion of the Trusts’ holdings, as a duration management technique or to protect against an increase in the price of securities it anticipates purchasing at a later date. The purchaser and writer of a swaption is buying or granting the right to enter into a previously agreed upon interest rate or credit default swap agreement (interest rate risk and/or credit risk) at any time before the expiration of the option. |
| • | Foreign currency options — Certain Trusts purchase and write foreign currency options, foreign currency futures and options on foreign currency futures to gain or reduce exposure to foreign currencies (foreign currency exchange rate risk). Foreign currency options give the purchaser the right to buy from or sell to the writer a foreign currency at any time before the expiration of the option. |
In purchasing and writing options, the Trusts bear the risk of an unfavorable change in the value of the underlying instrument or the risk that they may not be able to enter into a closing transaction due to an illiquid market. Exercise of a written option could result in the Trusts purchasing or selling a security when it otherwise would not, or at a price different from the current market value.
Swaps: Certain Trusts enter into swap contracts to manage exposure to issuers, markets and securities. Such contracts are agreements between the Trusts and a counterparty to make periodic net payments on a specified notional amount or a net payment upon termination. Swap agreements are privately negotiated in the OTC market and may be entered into as a bilateral contract (“OTC swaps”) or centrally cleared (“centrally cleared swaps”).
For OTC swaps, any upfront premiums paid and any upfront fees received are shown as swap premiums paid and swap premiums received, respectively, in the Statements of Assets and Liabilities and amortized over the term of the contract. The daily fluctuation in market value is recorded as unrealized appreciation (depreciation) on OTC Swaps in the Statements of Assets and Liabilities. Payments received or paid are recorded in the Statements of Operations as realized gains or losses, respectively. When an OTC swap is terminated, a realized gain or loss is recorded in the Statements of Operations equal to the difference between the proceeds from (or cost of) the closing transaction and the Trusts’ basis in the contract, if any. Generally, the basis of the contract is the premium received or paid.
In a centrally cleared swap, immediately following execution of the swap contract, the swap contract is novated to a central counterparty (the “CCP”) and the Trusts’ counterparty on the swap agreement becomes the CCP. The Trusts are required to interface with the CCP through the broker. Upon entering into a centrally cleared swap, the Trusts are required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on the size and risk profile of the particular swap. Securities deposited as initial margin are designated in the Schedules of Investments and cash deposited is shown as cash pledged for centrally cleared swaps in the Statements of Assets and Liabilities. Pursuant to the contract, the Trusts agree to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market value of the contract (“variation margin”). Variation margin is recorded as unrealized appreciation (depreciation) and shown as variation margin receivable (or payable) on centrally cleared swaps in the Statements of Assets and Liabilities. Payments received from (paid to) the counterparty, including at termination, are recorded as realized gains (losses) in the Statements of Operations.
| • | Credit default swaps — Certain Trusts enter into credit default swaps to manage their exposure to the market or certain sectors of the market, to reduce their risk exposure to defaults of corporate and/or sovereign issuers or to create exposure to corporate and/or sovereign issuers to which they are not otherwise exposed (credit risk). |
The Trusts may either buy or sell (write) credit default swaps on single-name issuers (corporate or sovereign), a combination or basket of single-name issuers or traded indexes. Credit default swaps are agreements in which the protection buyer pays fixed periodic payments to the seller in consideration for a promise from the protection seller to make a specific payment should a negative credit event take place with respect to the referenced entity (e.g., bankruptcy, failure to pay, obligation acceleration, repudiation, moratorium or restructuring). As a buyer, if an underlying credit event occurs, the Trusts will either (i) receive from the seller an amount equal to the notional amount of the swap and deliver the referenced security or underlying securities comprising the index, or (ii) receive a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index. As a seller (writer), if an underlying credit event occurs, the Trusts will either pay the buyer an amount equal to the notional amount of the swap and take delivery of the referenced security or underlying securities comprising the index or pay a net settlement of cash equal to the notional amount of the swap less the recovery value of the security or underlying securities comprising the index.
| • | Total return swaps — Certain Trusts enter into total return swaps to obtain exposure to a security or market without owning such security or investing directly in that market or to transfer the risk/return of one market (e.g., fixed income) to another market (e.g., equity or commodity prices) (equity risk, commodity price risk and/or interest rate risk). |
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| Notes to Financial Statements (continued) | ||||
Total return swaps are agreements in which there is an exchange of cash flows whereby one party commits to make payments based on the total return (coupons plus capital gains/losses) of an underlying instrument in exchange for fixed or floating rate interest payments. To the extent the total return of the instrument or index underlying the transaction exceeds or falls short of the offsetting interest rate obligation, the Trusts will receive a payment from or make a payment to the counterparty.
| • | Forward swaps — Certain Trusts enter into forward interest rate swaps and forward total return swaps. In a forward swap, the Trust and the counterparty agree to make periodic net payments beginning on a specified date or a net payment at termination. |
| • | Interest rate swaps — Certain Trusts enter into interest rate swaps to gain or reduce exposure to interest rates or to manage duration, the yield curve or interest rate (interest rate risk). |
Interest rate swaps are agreements in which one party pays a stream of interest payments, either fixed or floating, in exchange for another party’s stream of interest payments, either fixed or floating, on the same notional amount for a specified period of time. In more complex interest rate swaps, the notional principal amount may decline (or amortize) over time.
Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions.
Master Netting Arrangements: In order to define their contractual rights and to secure rights that will help them mitigate their counterparty risk, the Trusts may enter into an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement with their counterparties. An ISDA Master Agreement is a bilateral agreement between each Trust and a counterparty that governs certain OTC derivatives and typically contains, among other things, collateral posting terms and netting provisions in the event of a default and/or termination event. Under an ISDA Master Agreement, each Trust may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. Bankruptcy or insolvency laws of a particular jurisdiction may restrict or prohibit the right of offset in bankruptcy, insolvency or other events. In addition, certain ISDA Master Agreements allow counterparties to terminate derivative contracts prior to maturity in the event the Trusts’ net assets decline by a stated percentage or the Trusts fail to meet the terms of their ISDA Master Agreements. The result would cause the Trusts to accelerate payment of any net liability owed to the counterparty.
Collateral Requirements: For derivatives traded under an ISDA Master Agreement, the collateral requirements are typically calculated by netting the mark-to-market amount for each transaction under such agreement and comparing that amount to the value of any collateral currently pledged by the Trust and the counterparty.
Cash collateral that has been pledged to cover obligations of the Trusts and cash collateral received from the counterparty, if any, is reported separately on the Statements of Assets and Liabilities as cash pledged as collateral and cash received as collateral, respectively. Non-cash collateral pledged by the Trusts, if any, is noted in the Schedules of Investments. Generally, the amount of collateral due from or to a counterparty is subject to a certain minimum transfer amount threshold before a transfer is required, which is determined at the close of business of the Trusts. Any additional required collateral is delivered to/pledged by the Trusts on the next business day. Typically, the counterparty is not permitted to sell, re-pledge or use cash and non-cash collateral it receives. The Trusts generally agree not to use non-cash collateral that it receives but may, absent default or certain other circumstances defined in the underlying ISDA Master Agreement, be permitted to use cash collateral received. In such cases, interest may be paid pursuant to the collateral arrangement with the counterparty. To the extent amounts due to the Trusts from their counterparties are not fully collateralized, they bear the risk of loss from counterparty non-performance. Likewise, to the extent the Trusts have delivered collateral to a counterparty and stand ready to perform under the terms of their agreement with such counterparty, they bear the risk of loss from a counterparty in the amount of the value of the collateral in the event the counterparty fails to return such collateral. Based on the terms of agreements, collateral may not be required for all derivative contracts.
For financial reporting purposes, the Trusts do not offset derivative assets and derivative liabilities that are subject to netting arrangements, if any, in the Statements of Assets and Liabilities.
6. Investment Advisory Agreement and Other Transactions with Affiliates:
The PNC Financial Services Group, Inc. is the largest stockholder and an affiliate of BlackRock, Inc. (“BlackRock”) for 1940 Act purposes.
Investment Advisory: Each Trust entered into an Investment Advisory Agreement with the Manager, the Trusts’ investment adviser, an indirect, wholly owned subsidiary of BlackRock, to provide investment advisory and administration services. The Manager is responsible for the management of each Trust’s portfolio and provides the personnel, facilities, equipment and certain other services necessary to the operations of each Trust.
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| Notes to Financial Statements (continued) |
For such services, BHK pays the Manager a monthly fee based on an annual rate of 0.50% of the average weekly value of the Trust’s managed assets. For purposes of calculating this fee, “managed assets” means the total assets of the Trust minus the sum of the accrued liabilities (other than the aggregate indebtedness constituting financial leverage).
For such services, HYT pays the Manager a monthly fee based on an annual rate of 0.60% of the average daily value of the Trust’s net assets, plus the proceeds of any outstanding debt securities or borrowings used for leverage. For purposes of calculating these fees, “net assets” means the total assets of the Trust minus the sum of the accrued liabilities.
For such services, BKT pays the Manager a monthly fee based on an annual rate of 0.65% of the average weekly value of the Trust’s net assets. For purposes of calculating these fees, “net assets” means the total assets of the Trust minus the sum of the accrued liabilities (including the aggregate indebtedness constituting financial leverage).
Distribution Fees: HYT has entered into a Distribution Agreement with BlackRock Investments, LLC (“BRIL”), an affiliate of the Manager, to provide for distribution of HYT’s Common Shares on a reasonable best efforts basis through an equity shelf offering (a “Shelf Offering”) (the “Distribution Agreement”). Pursuant to the Distribution Agreement, HYT will compensate BRIL with respect to sales of Common Shares at a commission rate of 1.00% of the gross proceeds of the sale of HYT’s Common Shares and a portion of such commission is re-allowed to broker-dealers engaged by BRIL.
Administration: BKT has an Administration Agreement with the Manager. The administration fee paid to the Manager is computed at an annual rate of 0.15% of BKT’s average weekly net assets.
Expense Waivers: The Manager voluntarily agreed to waive its investment advisory fees by the amount of investment advisory fees each Trust pays to the Manager indirectly through its investment in affiliated money market funds. These amounts are shown as fees waived by the Manager in the Statements of Operations. However, the Manager does not waive its investment advisory fees by the amount of investment advisory fees paid in connection with each Trust’s investments in other affiliated investment companies, if any. For the year ended August 31, 2016, the amounts waived were as follows:
| BHK | HYT | BKT | ||||||||||
| Amounts waived |
$ | 9,230 | $ | 997 | $ | 7,301 | ||||||
The Manager provides investment management and other services to the Taxable Subsidiaries. The Manager does not receive separate compensation from the Taxable Subsidiaries for providing investment management or administrative services. However, HYT pays the Manager based on HYT’s net assets, plus the proceeds of any debt securities or outstanding borrowings used for leverage, which includes the assets of the Taxable Subsidiaries.
Officers and Trustees Fees: Certain officers and/or Trustees of the Trusts are officers and/or directors of BlackRock or its affiliates. The Trusts reimburse the Manager for a portion of the compensation paid to the Trusts’ Chief Compliance Officer, which is included in Officer and Trustees in the Statements of Operations.
Other Transactions: The Trusts may purchase securities from, or sell securities to, an affiliated fund provided the affiliation is due solely to having a common investment adviser, common officers, or common trustees. For the year ended August 31, 2016, the purchase and sale transactions which resulted in net realized gains (losses) with an affiliated fund in compliance with Rule 17a-7 under the 1940 Act for HYT were as follow:
| Purchases | Sales | Net Realized Loss | ||||||||||
| HYT |
$ | 2,004,265 | $ | 1,004,787 | $ | (34,538 | ) | |||||
7. Purchases and Sales:
For the year ended August 31, 2016, purchases and sales of investments including paydowns, mortgage dollar rolls and TBA transactions and excluding short-term securities were as follows:
| Purchases | ||||||||||||
| BHK | HYT | BKT | ||||||||||
| Non-U.S. Government Securities |
$ | 260,415,862 | $ | 1,316,661,413 | $ | 828,498,409 | ||||||
| U.S. Government Securities |
108,397,735 | — | 13,392,722 | |||||||||
|
|
|
|||||||||||
| Total Purchases |
$ | 368,813,597 | $ | 1,316,661,413 | $ | 841,891,131 | ||||||
|
|
|
|||||||||||
| Sales | ||||||||||||
| BHK | HYT | BKT | ||||||||||
| Non-U.S. Government Securities |
$ | 348,713,421 | $ | 1,332,807,230 | $ | 877,456,351 | ||||||
| U.S. Government Securities |
35,702,275 | — | 11,407,693 | |||||||||
|
|
|
|||||||||||
| Total Sales |
$ | 384,415,696 | $ | 1,332,807,230 | $ | 888,864,044 | ||||||
|
|
|
|||||||||||
For the year ended August 31, 2016, purchases and sales related to mortgage dollar rolls for BKT were $462,681,717 and $462,783,644, respectively.
| ANNUAL REPORT | AUGUST 31, 2016 | 87 |
Table of Contents
| Notes to Financial Statements (continued) | ||||
8. Income Tax Information:
It is the Trusts’ policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies, and to distribute substantially all of their taxable income to their shareholders. Therefore, no federal income tax provision is required, except with respect to any taxes related to the Taxable Subsidiaries.
The Trusts file U.S. federal and various state and local tax returns. No income tax returns are currently under examination. The statute of limitations on the Trusts’ U.S. federal tax returns generally remains open for each of the four years ended August 31, 2016. The statutes of limitations on the Trusts’ state and local tax returns may remain open for an additional year depending upon the jurisdiction.
Management has analyzed tax laws and regulations and their application to the Trusts as of August 31, 2016, inclusive of the open tax return years, and does not believe there are any uncertain tax positions that require recognition of a tax liability in the Trusts’ financial statements.
US GAAP require that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. As of August 31, 2016 the following permanent differences attributable to the accounting for swap agreements, the classification of investments, foreign currency transactions, the expiration of capital loss carryforwards, income recognized from investments in partnerships, net paydowns gains, and dividends recognized for tax purposes were reclassified to the following accounts:
| BHK | HYT | BKT | ||||||||||
| Paid-in capital |
— | $ | (4,056,597 | ) | — | |||||||
| Undistributed net investment income |
$ | 2,888,256 | $ | 5,049,974 | $ | 1,269,247 | ||||||
| Accumulated net realized loss |
$ | (2,888,256 | ) | $ | (993,377 | ) | $ | (1,269,247 | ) | |||
The tax character of distributions paid was as follows:
| BHK | HYT | BKT | ||||||||||||||
| Ordinary income |
8/31/2016 | $ | 45,548,216 | $ | 125,343,672 | $ | 22,060,177 | |||||||||
| 8/31/2015 | $ | 49,401,456 | $ | 123,054,879 | $ | 25,321,248 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
8/31/2016 | $ | 45,548,216 | $ | 125,343,672 | $ | 22,060,177 | |||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| 8/31/2015 | $ | 49,401,456 | $ | 123,054,879 | $ | 25,321,248 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
As of August 31, 2016 the tax components of accumulated net earnings (losses) were as follows:
| BHK | HYT | BKT | ||||||||||
| Undistributed ordinary income |
$ | 405,350 | $ | 11,543,563 | $ | 4,387,342 | ||||||
| Capital loss carryforwards |
(16,990,715 | ) | (265,114,804 | ) | (43,751,932 | ) | ||||||
| Net unrealized gains1 |
77,973,226 | (32,251,549 | ) | 5,984,657 | ||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 61,387,861 | $ | (285,822,790 | ) | $ | (33,379,933 | ) | ||||
|
|
|
|
|
|
|
|||||||
| 1 | The differences between book-basis and tax-basis net unrealized gains were attributable primarily to the tax deferral of losses on wash sales and straddles, amortization methods for premiums and discounts on fixed income securities, the accrual of income on securities in default, the realization for tax purposes of unrealized gains/losses on certain futures and foreign currency contracts, the realization for tax purposes of unrealized gains on investments in passive foreign investment companies, the accounting for swap agreements, the investment in a wholly owned subsidiary, dividends recognized for tar purposes, the classification of investments and the deferral of compensation to trustees. |
As of August 31, 2016, the Trusts had capital loss carryforwards available to offset future realized capital gains through the indicated expiration dates as follows:
| Expires | BHK | HYT | BKT | |||||||||
| No expiration date2 |
$ | 11,373,636 | $ | 114,202,809 | $ | 43,751,932 | ||||||
| 2017 |
5,617,079 | 95,246,388 | — | |||||||||
| 2018 |
— | 55,665,607 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Total |
$ | 16,990,715 | $ | 265,114,804 | $ | 43,751,932 | ||||||
|
|
|
|
|
|
|
|||||||
| 2 | Must be utilized prior to losses subject to expiration. |
As of August 31, 2016, gross unrealized appreciation and depreciation based on cost for federal income tax purposes were as follows:
| BHK | HYT | BKT | ||||||||||
| Tax cost |
$ | 1,027,813,449 | $ | 2,118,135,188 | $ | 587,334,727 | ||||||
|
|
|
|
|
|
|
|||||||
| Gross unrealized appreciation |
$ | 86,739,765 | $ | 78,880,786 | $ | 29,842,960 | ||||||
| Gross unrealized depreciation |
(12,070,312 | ) | (111,235,606 | ) | (22,455,912 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net unrealized appreciation (depreciation) |
$ | 74,669,453 | $ | (32,354,820 | ) | $ | 7,387,048 | |||||
|
|
|
|
|
|
|
|||||||
| 88 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Notes to Financial Statements (continued) |
9. Bank Borrowings:
HYT is party to a senior committed secured, 360-day rolling line of credit facility and a separate security agreement (the “SSB Agreement”) with State Street Bank and Trust Company (“SSB”). SSB may elect to terminate its commitment upon 360-days written notice to HYT. As of period end, the HYT has not received any notice to terminate. HYT has granted a security interest in substantially all of their assets to SSB.
The SSB Agreement allows for a maximum commitment of $732,000,000 for HYT. Prior to August 31, 2016, the maximum commitment amount for HYT was $798,000,000.
Advances will be made by SSB to HYT, at HYT’s option of (a) the higher of (i) 0.80% above the Fed Funds rate and (ii) 0.80% above the Overnight LIBOR or (b) 0.80% above 7-day, 30-day, 60-day or 90-day LIBOR.
In addition, HYT paid a facility fee and may pay a commitment fee (based on the daily unused portion of the commitments). The commitment fees are waived if HYT meets certain conditions. The fees associated with each of the agreements are included in the Statements of Operations as borrowing costs, if any. Advances to HYT as of period end are shown in the Statements of Assets and Liabilities as bank borrowings payable. Based on the short-term nature of the borrowings under the line of credit and the variable interest rate, the carrying amount of the borrowings approximates fair value.
HYT may not declare dividends or make other distributions on shares or purchase any such shares if, at the time of the declaration, distribution or purchase, asset coverage with respect to the outstanding short-term borrowings is less than 300%.
For the year ended August 31, 2016, the average amount of bank borrowings and the daily weighted average interest rates for HYT with loans under the revolving credit agreement were $568,838,798 and 1.13%.
10. Principal Risks:
Many municipalities insure repayment of their bonds, which may reduce the potential for loss due to credit risk. The market value of these bonds may fluctuate for other reasons, including market perception of the value of such insurance, and there is no guarantee that the insurer will meet its obligation.
Inventories of municipal bonds held by brokers and dealers may decrease, which would lessen their ability to make a market in these securities. Such a reduction in market making capacity could potentially decrease a Trust’s ability to buy or sell bonds. As a result, a Trust may sell a security at a lower price, sell other securities to raise cash, or give up an investment opportunity, any of which could have a negative impact on performance. If a Trust needed to sell large blocks of bonds, those sales could further reduce the bonds’ prices and impact performance.
In the normal course of business, the Trusts invest in securities and enter into transactions where risks exist due to fluctuations in the market (market risk) or failure of the issuer to meet all its obligations, including the ability to pay principal and interest when due (issuer credit risk). The value of securities held by the Trusts may decline in response to certain events, including those directly involving the issuers of securities owned by the Trusts. Changes arising from the general economy, the overall market and local, regional or global political and/or social instability, as well as currency, interest rate and price fluctuations, may also affect the securities’ value.
Each Trust may be exposed to prepayment risk, which is the risk that borrowers may exercise their option to prepay principal earlier than scheduled during periods of declining interest rates, which would force each Trust to reinvest in lower yielding securities. Each Trust may also be exposed to reinvestment risk, which is the risk that income from each Trust’s portfolio will decline if each Trust invests the proceeds from matured, traded or called fixed income securities at market interest rates that are below each Fund portfolio’s current earnings rate.
Counterparty Credit Risk: Similar to issuer credit risk, the Trusts may be exposed to counterparty credit risk, or the risk that an entity may fail to or be unable to perform on its commitments related to unsettled or open transactions. The Trusts manage counterparty credit risk by entering into transactions only with counterparties that the Manager believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Trusts to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Trusts’ exposure to market, issuer and counterparty credit risks with respect to these financial assets is approximately their value recorded in the Statements of Assets and Liabilities, less any collateral held by the Trusts.
A derivative contract may suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
A Trust’s risk of loss from counterparty credit risk on OTC derivatives is generally limited to the aggregate unrealized gain less the value of any collateral held by such Trust.
For OTC options purchased, each Trust bears the risk of loss in the amount of the premiums paid plus the positive change in market values net of any collateral held by the Trusts should the counterparty fail to perform under the contracts. Options written by the Trusts do not typically give rise to counterparty credit risk, as options written generally obligate the Trusts, and not the counterparty, to perform. The Trusts may be exposed to counterparty credit risk with respect to options written to the extent the Trusts deposit collateral with their counterparty to a written option.
| ANNUAL REPORT | AUGUST 31, 2016 | 89 |
Table of Contents
| Notes to Financial Statements (continued) | ||||
With exchange-traded options purchased and futures and centrally cleared swaps, there is less counterparty credit risk to the Trusts since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Trusts do not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally, credit risk exists in exchange-traded futures and centrally cleared swaps with respect to initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing broker’s customers, potentially resulting in losses to the Trusts.
Concentration Risk: Certain Trusts may invest in securities that are rated below investment grade quality (sometimes called “junk bonds”), which are predominantly speculative, have greater credit risk and generally are less liquid and have more volatile prices than higher quality securities.
Certain Trusts invest a significant portion of their assets in fixed-income securities and/or use derivatives tied to the fixed-income markets. Changes in market interest rates or economic conditions may affect the value and/or liquidity of such investments. Interest rate risk is the risk that prices of bonds and other fixed-income securities will increase as interest rates fall and decrease as interest rates rise. The Trusts may be subject to a greater risk of rising interest rates due to the current period of historically low rates.
Certain Trusts invest a significant portion of their assets in securities backed by commercial or residential mortgage loans or in issuers that hold mortgage and other asset-backed securities. Investment percentages in these securities are presented in the Schedules of Investments. Changes in economic conditions, including delinquencies and/or defaults on assets underlying these securities, can affect the value, income and/or liquidity of such positions.
11. Capital Share Transactions
BHK is authorized to issue an unlimited number of shares, par value $0.001, all of which were initially classified as Common Shares. HYT is authorized to issue 200 million shares, par value $0.10, all of which were initially classified as Common Shares. BKT is authorized to issue 200 million shares, par value $0.01, all of which were initially classified as Common Shares. The Board is authorized, however, to reclassify any unissued shares to Preferred Shares without approval of Common Shareholders.
Common Shares: HYT filed a final prospectus with the U.S. Securities and Exchange Commission (“SEC”) allowing it is issue an additional 10,425,000 Common Shares through an equity shelf program (a “Shelf Offering”). Under the Shelf Offering, HYT, subject to market conditions, may raise additional equity capital from time to time in varying amounts and utilizing various offering methods at a net price at or above HYT’s net asset value (“NAV”) per Common Share (calculated within 48 hours of pricing). HYT has not issued any Common Shares through the Shelf Offering. See Additional Information — Shelf Offering Program for additional information about the Shelf Offering.
Costs incurred by the HYT in connection with the Shelf Offering are recorded as a deferred charge and amortized over 12 months.
For the year ended August 31, 2016, shares issued and outstanding remained constant for BHK, HYT and BKT. For the year ended August 31, 2015, shares issued and outstanding increased by 26,893,279 for BHK due to the reorganization for BHK and remained constant for HYT and BKT.
12. Contingencies:
In May 2015, the Motors Liquidation Company Avoidance Action Trust, as the Trust Administrator and Trustee of the General Motors bankruptcy estate, began serving amended complaints on defendants, which include former holders of certain General Motors debt (the “Debt”), in an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York. In addition to HYT, the lawsuit also names over five hundred other institutional investors as defendants, some of which are also managed by BlackRock Advisors, LLC or its affiliates. The plaintiffs are seeking an order that HYT and other defendants return proceeds received in 2009 in full payment of the principal and interest on the Debt. The holders received a full repayment of a term loan pursuant to a court order in the General Motors bankruptcy proceeding with the understanding that the Debt was fully secured at the time of repayment. The plaintiffs contend that the Fund and other defendants were not secured creditors at the time of the 2009 payments and therefore not entitled to the payments in full. HYT cannot predict the outcome of the lawsuit, or the effect, if any, on HYT’s net asset value. As such, no liability for litigation related to this matter is reflected in the financial statements. Management cannot determine the amount of loss that will be realized by HYT but does not expect the loss to exceed the payment received in 2009. The amount of the proceeds received in 2009 is $3,528,671.
| 90 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Notes to Financial Statements (concluded) |
13. Subsequent Events:
Management’s evaluation of the impact of all subsequent events on the Trusts’ financial statements was completed through the date the financial statements were issued and the following items were noted:
| Common Dividend Per Share | ||||||||
| Paid1 | Declared2 | |||||||
| BHK |
$ | 0.0650 | $ | 0.0650 | ||||
| HYT |
$ | 0.0700 | $ | 0.0700 | ||||
| BKT |
$ | 0.0265 | $ | 0.0265 | ||||
| 1 | Net investment income dividend paid on September 30, 2016 to Common Shareholders of record on September 15, 2016. |
| 2 | Net investment income dividend declared on October 3, 2016, payable to Common Shareholders of record on October 14, 2016. |
On October 26, 2016, the Board approved an open market share repurchase program that allows each Trust to purchase up to 5% of its outstanding common shares from time to time in open market transactions through November 30, 2017, subject to certain conditions. There is no assurance that the Trusts will purchase shares in any particular amounts.
| ANNUAL REPORT | AUGUST 31, 2016 | 91 |
Table of Contents
| Report of Independent Registered Public Accounting Firm | ||||
To the Shareholders and Board of Trustees/Directors of BlackRock Core Bond Trust, BlackRock Corporate High Yield Fund, Inc., BlackRock Income Trust, Inc.:
We have audited the accompanying statements of assets and liabilities, including the schedules of investments, of BlackRock Core Bond Trust and BlackRock Income Trust, Inc. (collectively the “Funds”) as of August 31, 2016, and the related statements of operations and cash flows for the year then ended, and the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. We have also audited the consolidated statement of assets and liabilities, including the consolidated schedule of investments of BlackRock Corporate High Yield Fund, Inc., (collectively with the Funds mentioned above, the “Trusts”) as of August 31, 2016, and the related consolidated statements of operations and consolidated cash flows for the year then ended, the consolidated statements of changes in net assets for each of the two years in the period then ended, and the consolidated financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trusts’ management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trusts are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trusts’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of August 31, 2016, by correspondence with the custodian, brokers, and agent banks; where replies were not received from brokers or agent banks, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial positions of BlackRock Core Bond Trust and BlackRock Income Trust, Inc., as of August 31, 2016, the results of their operations and their cash flows for the year then ended, the changes in their net assets for each of the two years in the period then ended, and their financial highlights for each of the five years in the period then ended, and the consolidated financial position of BlackRock Corporate High Yield Fund, Inc., as of August 31, 2016, the consolidated results of its operations and its consolidated cash flows for the year then ended, the consolidated changes in its net assets for each of the two years in the period then ended, and its consolidated financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Boston, Massachusetts
October 28, 2016
| Important Tax Information (Unaudited) |
The following information is provided with respect to the ordinary income distributions paid by the Trusts during the fiscal year ended August 31, 2016
| Payable Dates | BHK | HYT | BKT | |||||||||||
| Interest-Related Dividends for Non-U.S. Residents1 |
September 2015 - January 2016 | 73.53% | 57.11% | 98.32% | ||||||||||
| February 2016 - August 2016 | 61.74% | 78.90% | 100.00% | |||||||||||
| Qualified Dividend Income For individuals2 |
September 2015 - January 2016 | 9.04% | 4.46% | — | ||||||||||
| February 2016 - August 2016 | 11.42% | 2.80% | — | |||||||||||
| Dividends Qualifying for Dividends Received deduction for corporations2 |
September 2015 - January 2016 | 7.33% | 3.14% | — | ||||||||||
| February 2016 - August 2016 | 9.00% | 3.60% | — | |||||||||||
| Federal Obligation Interest3 |
September 2015 - January 2016 | 4.39% | — | 0.51% | ||||||||||
| February 2016 - August 2016 | 5.59% | — | 1.11% | |||||||||||
| 1 | Represents the portion of the taxable ordinary income dividends eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations. |
| 2 | The Trust hereby designates the percentage indicated above or the maximum amount allowable by law. |
| 3 | The law varies in each state as to whether and what percentage of dividend income attributable to federal obligations is exempt from state income tax. We recommend that you consult your tax advisor to determine if any portion of the dividends you received is exempt from state income taxes. |
| 92 | ANNUAL REPORT | AUGUST 31, 2016 |
Table of Contents
| Disclosure of Investment Advisory Agreements |
The Board of Trustees or the Board of Directors, as applicable (the “Board,” the members of which are referred to as “Board Members”), of BlackRock Core Bond Trust (“BHK”), BlackRock Corporate High Yield Fund, Inc. (“HYT”) and BlackRock Income Trust, Inc. (“BKT” and together with BHK and HYT, each a “Trust,” and, collectively, the “Trusts”) met in person on April 28, 2016 (the “April Meeting”) and June 9-10, 2016 (the “June Meeting”) to consider the approval of each Trust’s investment advisory agreement (each an “Agreement,” and, collectively, the “Agreements”) with BlackRock Advisors, LLC (the “Manager”), each Trust’s investment advisor. The Manager is also referred to herein as “BlackRock”.
Activities and Composition of the Board
On the date of the June Meeting, the Board of each Trust consisted of eleven individuals, nine of whom were not “interested persons” of the Trust as defined in the Investment Company Act of 1940, as amended (the “1940 Act”) (the “Independent Board Members”). The Board Members are responsible for the oversight of the operations of its Trust and perform the various duties imposed on the directors of investment companies by the 1940 Act. The Independent Board Members have retained independent legal counsel to assist them in connection with their duties. The Chair of each Board is an Independent Board Member. Each Board has established five standing committees: an Audit Committee, a Governance and Nominating Committee, a Compliance Committee, a Performance Oversight Committee, and an Executive Committee, each of which is chaired by an Independent Board Member and composed of Independent Board Members (except for the Executive Committee, which also has one interested Board Member).
The Agreements
Pursuant to the 1940 Act, each Board is required to consider the continuation of the Agreement for its Trust on an annual basis. Each Board has four quarterly meetings per year, each extending over two days, a fifth one-day meeting to consider specific information surrounding the consideration of renewing the Agreement for its Trust and additional in-person and telephonic meetings as needed. In connection with this year-long deliberative process, each Board assessed, among other things, the nature, extent and quality of the services provided to its Trust by BlackRock, BlackRock’s personnel and affiliates, including, as applicable; investment management, administrative, and shareholder services; the oversight of fund service providers; marketing; risk oversight; compliance; and ability to meet applicable legal and regulatory requirements.
Each Board, acting directly and through its committees, considers at each of its meetings, and from time to time as appropriate, factors that are relevant to its annual consideration of the renewal of the Agreement for its Trust, including the services and support provided by BlackRock to the Trust and its shareholders. BlackRock also furnished additional information to each Board in response to specific questions from the Board. This additional information is discussed further below in the section titled “Board Considerations in Approving the Agreements.” Among the matters each Board considered were: (a) investment performance for one-year, three-year, five-year, ten-year, and/or since inception periods, as applicable, against peer funds, applicable benchmarks, and performance metrics, as applicable, as well as senior management’s and portfolio managers’ analysis of the reasons for any over-performance or underperformance relative to its peers, benchmarks, and other performance metrics, as applicable; (b) fees, including advisory, administration, if applicable, paid to BlackRock and its affiliates by the Trust for services; (c) Trust operating expenses and how BlackRock allocates expenses to the Trust; (d) the resources devoted to, risk oversight of, and compliance reports relating to, implementation of the Trust’s investment objective(s), policies and restrictions, and meeting regulatory requirements; (e) the Trust’s compliance with its compliance policies and procedures; (f) the nature, cost and character of non-investment management services provided by BlackRock and its affiliates; (g) BlackRock’s and other service providers’ internal controls and risk and compliance oversight mechanisms; (h) BlackRock’s implementation of the proxy voting policies approved by the Board; (i) execution quality of portfolio transactions; (j) BlackRock’s implementation of the Trust’s valuation and liquidity procedures; (k) an analysis of management fees for products with similar investment mandates across the open-end fund, closed-end fund and institutional account product channels, as applicable, and the similarities and differences between these products and the services provided as compared to the Trust; (l) BlackRock’s compensation methodology for its investment professionals and the incentives and accountability it creates, along with investment professionals’ investments in the fund(s) they manage; and (m) periodic updates on BlackRock’s business.
Board Considerations in Approving the Agreements
The Approval Process: Prior to the April Meeting, each Board requested and received materials specifically relating to the Agreement for its Trust. Each Board is continuously engaged in a process with its independent legal counsel and BlackRock to review the nature and scope of the information provided to better assist its deliberations. The materials provided to the Board of each Trust in connection with the April Meeting included (a) information independently compiled and prepared by Broadridge Financial Solutions, Inc. (“Broadridge”) on Trust fees and expenses as compared with a peer group of funds as determined by Broadridge (“Expense Peers”) and the investment performance of the Trust as compared with a peer group of funds as determined by Broadridge,1 as well as the performance of BHK and BKT as compared with its custom benchmark; (b) information on the profits realized by BlackRock and its affiliates pursuant to the Trust’s Agreement and a discussion of fall-out benefits to BlackRock and its affiliates; (c) a general analysis provided by BlackRock concerning investment management fees charged to other clients, such as institutional clients, sub-advised mutual funds, and open-end funds, under similar investment mandates, as applicable; (d) review of non-management fees; (e) the existence, impact and sharing of potential economies of scale; and (f) a summary of aggregate amounts paid by the Trust to BlackRock.
| 1 | Trusts are ranked by Broadridge in quartiles, ranging from first to fourth, where first is the most desirable quartile position and fourth is the least desirable. |
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| Disclosure of Investment Advisory Agreements (continued) |
At the April Meeting, each Board reviewed materials relating to its consideration of the Agreement for its Trust. As a result of the discussions that occurred during the April Meeting, and as a culmination of each Board’s year-long deliberative process, each Board presented BlackRock with questions and requests for additional information. BlackRock responded to these requests with additional written information in advance of the June Meeting.
At the June Meeting, each Board, including the Independent Board Members, unanimously approved the continuation of the Agreement between the Manager and its Trust for a one-year term ending June 30, 2017. In approving the continuation of the Agreement for its Trust, each Board considered: (a) the nature, extent and quality of the services provided by BlackRock; (b) the investment performance of the Trust; (c) the advisory fee and the cost of the services and profits to be realized by BlackRock and its affiliates from their relationship with the Trust; (d) the Trust’s costs to investors compared to the costs of Expense Peers and performance compared to the relevant performance metrics as previously discussed; (e) the sharing of potential economies of scale; (f) fall-out benefits to BlackRock and its affiliates as a result of its relationship with the Trust; and (g) other factors deemed relevant by the Board Members.
Each Board also considered other matters it deemed important to the approval process, such as other payments made to BlackRock or its affiliates relating to securities lending and cash management, services related to the valuation and pricing of Trust portfolio holdings, and advice from independent legal counsel with respect to the review process and materials submitted for the Board’s review. Each Board noted the willingness of BlackRock personnel to engage in open, candid discussions with the Board. Each Board did not identify any particular information as determinative, and each Board Member may have attributed different weights to the various items considered.
A. Nature, Extent and Quality of the Services Provided by BlackRock: Each Board, including the Independent Board Members, reviewed the nature, extent and quality of services provided by BlackRock, including the investment advisory services and the resulting performance of its Trust. Throughout the year, each Board compared its Trust’s performance to the performance of a comparable group of closed-end funds, relevant benchmark, and performance metrics, as applicable. Each Board met with BlackRock’s senior management personnel responsible for investment activities, including the senior investment officers. Each Board also reviewed the materials provided by its Trust’s portfolio management team discussing the Trust’s performance and the Trust’s investment objective(s), strategies and outlook.
Each Board considered, among other factors, with respect to BlackRock: the number, education and experience of investment personnel generally and its Trust’s portfolio management team; BlackRock’s research capabilities; investments by portfolio managers in the funds they manage; portfolio trading capabilities; use of technology; commitment to compliance; credit analysis capabilities; risk analysis and oversight capabilities; and the approach to training and retaining portfolio managers and other research, advisory and management personnel. Each Board engaged in a review of BlackRock’s compensation structure with respect to the Trust’s portfolio management team and BlackRock’s ability to attract and retain high-quality talent and create performance incentives.
In addition to investment advisory services, each Board considered the quality of the administrative and other non-investment advisory services provided to its Trust. BlackRock and its affiliates provide each Trust with certain administrative, shareholder, and other services (in addition to any such services provided to the Trust by third parties) and officers and other personnel as are necessary for the operations of the Trust. In particular, BlackRock and its affiliates provide each Trust with administrative services including, among others: (i) preparing disclosure documents, such as the prospectus and the statement of additional information in connection with the initial public offering, registration statements in connection with HYT’s equity shelf program and periodic shareholder reports; (ii) preparing communications with analysts to support secondary market trading of the Trust; (iii) oversight of daily accounting and pricing; (iv) preparing periodic filings with regulators and stock exchanges; (v) overseeing and coordinating the activities of other service providers; (vi) organizing Board meetings and preparing the materials for such Board meetings; (vii) providing legal and compliance support; (viii) furnishing analytical and other support to assist the Board in its consideration of strategic issues such as the merger, consolidation or repurposing of certain closed-end funds; and (ix) performing other administrative functions necessary for the operation of the Trust, such as tax reporting, fulfilling regulatory filing requirements and call center services. Each Board reviewed the structure and duties of BlackRock’s fund administration, shareholder services, and legal & compliance departments and considered BlackRock’s policies and procedures for assuring compliance with applicable laws and regulations.
B. The Investment Performance of the Trusts and BlackRock: Each Board, including the Independent Board Members, also reviewed and considered the performance history of its Trust. In preparation for the April Meeting, the Board of each Trust was provided with reports independently prepared by Broadridge, which included a comprehensive analysis of the Trust’s performance. Each Board also reviewed a narrative and statistical analysis of the Broadridge data that was prepared by BlackRock. In connection with its review, the Board of each Trust received and reviewed information regarding the investment performance, based on net asset value (NAV), of the Trust as compared to other funds in its applicable Broadridge category and the performance of BHK and BKT as compared with its custom benchmark. Each Board was provided with a description of the methodology used by Broadridge to select peer funds and periodically meets with Broadridge representatives to review its methodology. Each Board was provided with information on the composition of the Broadridge performance universes and expense universes. Each Board and its Performance Oversight Committee regularly review, and meet with Trust management to discuss, the performance of its Trust throughout the year.
In evaluating performance, each Board recognized that the performance data reflects a snapshot of a period as of a particular date and that selecting a different performance period could produce significantly different results. Further, each Board recognized that it is possible that long-term performance can
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| Disclosure of Investment Advisory Agreements (continued) | ||||
be adversely affected by even one period of significant underperformance so that a single investment decision or theme has the ability to affect long-term performance disproportionately.
The Board of each of BHK and BKT noted that for each of the one-, three- and five-year periods reported, each of BHK and BKT exceeded its customized benchmark. BlackRock believes that performance relative to the customized benchmark is an appropriate performance metric for the Trust.
The Board of HYT noted that for the one-, three- and five-year periods reported, the Trust ranked in the second, first and first quartiles, respectively, against its Broadridge Performance Universe.
C. Consideration of the Advisory/Management Fees and the Cost of the Services and Profits to be Realized by BlackRock and its Affiliates from their Relationship with the Trusts: Each Board, including the Independent Board Members, reviewed its Trust’s contractual management fee rate compared with the other funds in its Broadridge category. The contractual management fee rate represents a combination of the advisory fee and any administrative fees, before taking into account any reimbursements or fee waivers. Each Board also compared its Trust’s total expense ratio, as well as its actual management fee rate as a percentage of total assets, to those of other funds in its Broadridge category. The total expense ratio represents a fund’s total net operating expenses, excluding any investment related expenses. The total expense ratio gives effect to any expense reimbursements or fee waivers that benefit a fund, and the actual management fee rate gives effect to any management fee reimbursements or waivers that benefit a fund. Each Board considered the services provided and the fees charged by BlackRock and its affiliates to other types of clients with similar investment mandates, as applicable, including institutional accounts and sub-advised mutual funds (including mutual funds sponsored by third parties).
Each Board received and reviewed statements relating to BlackRock’s financial condition. Each Board reviewed BlackRock’s profitability methodology and was also provided with a profitability analysis that detailed the revenues earned and the expenses incurred by BlackRock for services provided to its Trust. Each Board reviewed BlackRock’s profitability with respect to its Trust and other funds the Board currently oversees for the year ended December 31, 2015 compared to available aggregate profitability data provided for the prior two years. Each Board reviewed BlackRock’s profitability with respect to certain other U.S. fund complexes managed by the Manager and/or its affiliates. Each Board reviewed BlackRock’s assumptions and methodology of allocating expenses in the profitability analysis, noting the inherent limitations in allocating costs among various advisory products. Each Board recognized that profitability may be affected by numerous factors including, among other things, fee waivers and expense reimbursements by the Manager, the types of funds managed, precision of expense allocations and business mix. As a result, calculating and comparing profitability at individual fund level is difficult.
Each Board noted that, in general, individual fund or product line profitability of other advisors is not publicly available. Each Board reviewed BlackRock’s overall operating margin, in general, compared to that of certain other publicly-traded asset management firms. Each Board considered the differences between BlackRock and these other firms, including the contribution of technology at BlackRock, BlackRock’s expense management, and the relative product mix.
In addition, each Board considered the cost of the services provided to its Trust by BlackRock, and BlackRock’s and its affiliates’ profits relating to the management of its Trust and the other funds advised by BlackRock and its affiliates. As part of its analysis, each Board reviewed BlackRock’s methodology in allocating its costs of managing its Trust, to the Trust. Each Board may receive and review information from independent third parties as part of its annual evaluation. Each Board considered whether BlackRock has the financial resources necessary to attract and retain high quality investment management personnel to perform its obligations under the Trust’s Agreement and to continue to provide the high quality of services that is expected by the Board. Each Board further considered factors including but not limited to BlackRock’s commitment of time, assumption of risk, and liability profile in servicing its Trust in contrast to what is required of BlackRock with respect to other products with similar investment mandates across the open-end fund, ETF, closed-end fund, sub-advised mutual fund and institutional account product channels, as applicable.
The Board of each Trust noted that its Trust’s contractual management fee rate ranked in the first quartile, and that the actual management fee rate and total expense ratio each ranked in the first quartile, relative to the Expense Peers.
D. Economies of Scale: Each Board, including the Independent Board Members, considered the extent to which economies of scale might be realized as the assets of its Trust increase. Each Board also considered the extent to which its Trust benefits from such economies in a variety of ways, and whether there should be changes in the advisory fee rate or breakpoint structure in order to enable the Trust to more fully participate in these economies of scale. The Board considered the Trust’s asset levels and whether the current fee was appropriate.
Based on each Board’s review and consideration of the issue, each Board concluded that most closed-end funds do not have fund level breakpoints because closed-end funds generally do not experience substantial growth after the initial public offering. They are typically priced at scale at a fund’s inception. The Board of HYT noted that although HYT may from time to time make additional share offerings pursuant to its equity shelf program, the growth of HYT’s assets will occur primarily through the appreciation of its investment portfolio.
E. Other Factors Deemed Relevant by the Board Members: Each Board, including the Independent Board Members, also took into account other ancillary or “fall-out” benefits that BlackRock or its affiliates may derive from their respective relationships with its Trust, both tangible and intangible, such as BlackRock’s ability to leverage its investment professionals who manage other portfolios and risk management personnel, an increase in BlackRock’s profile in the investment advisory community, and the engagement of BlackRock’s affiliates as service providers to the Trust, including for administrative,
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| Disclosure of Investment Advisory Agreements (concluded) | ||
securities lending and cash management services. Each Board also considered BlackRock’s overall operations and its efforts to expand the scale of, and improve the quality of, its operations. Each Board also noted that BlackRock may use and benefit from third party research obtained by soft dollars generated by certain registered fund transactions to assist in managing all or a number of its other client accounts. Each Board further noted that it had considered the investment by BlackRock’s funds in affiliated exchange traded funds (i.e., ETFs) without any offset against the management fees payable by the funds to BlackRock.
In connection with its consideration of the Agreement for its Trust, each Board also received information regarding BlackRock’s brokerage and soft dollar practices. Each Board received reports from BlackRock which included information on brokerage commissions and trade execution practices throughout the year.
Each Board noted the competitive nature of the closed-end fund marketplace, and that shareholders are able to sell their Trust shares in the secondary market if they believe that the Trust’s fees and expenses are too high or if they are dissatisfied with the performance of the Trust.
Each Board also considered the various notable initiatives and projects BlackRock performed in connection with its closed-end fund product line. These initiatives included the redemption of auction rate preferred shares (“AMPS”) for the BlackRock closed-end funds with AMPS outstanding; developing equity shelf programs; efforts to eliminate product overlap with fund mergers; ongoing services to manage leverage that has become increasingly complex; periodic evaluation of share repurchases and other support initiatives for certain BlackRock funds; and continued communications efforts with shareholders, fund analysts and financial advisers. With respect to the latter, the Independent Board Members noted BlackRock’s continued commitment to supporting the secondary market for the common shares of its closed-end funds through a comprehensive secondary market communication program designed to raise investor and analyst awareness and understanding of closed-end funds. BlackRock’s support services included, among other things: continuing communications concerning the redemption efforts related to AMPS; sponsoring and participating in conferences; communicating with closed-end fund analysts covering the BlackRock funds throughout the year; providing marketing and product updates for the closed-end funds; and maintaining and enhancing its closed-end fund website.
Conclusion
Each Board, including the Independent Board Members, unanimously approved the continuation of the Agreement between the Manager and its Trust for a one-year term ending June 30, 2017. Based upon its evaluation of all of the aforementioned factors in their totality, as well as other information, each Board, including the Independent Board Members, was satisfied that the terms of Agreement for its Trust were fair and reasonable and in the best interest of the Trust and its shareholders. In arriving at its decision to approve the Agreement for its Trust, each Board did not identify any single factor or group of factors as, all-important or controlling, but considered all factors together, and different Board Members may have attributed different weights to the various factors considered. The Independent Board Members were also assisted by the advice of independent legal counsel in making this determination. The contractual fee arrangements for each Trust reflect the results of several years of review by the Trust’s Board Members and predecessor Board Members, and discussions between such Board Members (and predecessor Board Members) and BlackRock. As a result, the Board Members’ conclusions may be based in part on their consideration of these arrangements in prior years.
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| Automatic Dividend Reinvestment Plans | ||||
Pursuant to each Trust’s Dividend Reinvestment Plan (the “Reinvestment Plan”), Common Shareholders are automatically enrolled to have all distributions of dividends and capital gains reinvested by Computershare Trust Company, N.A. (the “Reinvestment Plan Agent”) in the respective Trust’s shares pursuant to the Reinvestment Plan. Shareholders who do not participate in the Reinvestment Plan will receive all distributions in cash paid by check and mailed directly to the shareholders of record (or if the shares are held in street name or other nominee name, then to the nominee) by the Reinvestment Plan Agent, which serves as agent for the shareholders in administering the Reinvestment Plan.
After the Trusts declare a dividend or determine to make a capital gain or other distribution, the Reinvestment Plan Agent will acquire shares for the participants’ accounts, depending upon the following circumstances, either (i) through receipt of unissued but authorized shares from the Trusts (“newly issued shares”) or (ii) by purchase of outstanding shares on the open market or on the Trust’s primary exchange (“open-market purchases”). If, on the dividend payment date, the net asset value per share (“NAV”) is equal to or less than the market price per share plus estimated brokerage commissions (such condition often referred to as a “market premium”), the Reinvestment Plan Agent will invest the dividend amount in newly issued shares acquired on behalf of the participants. The number of newly issued shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the NAV on the date the shares are issued. However, if the NAV is less than 95% of the market price on the dividend payment date, the dollar amount of the dividend will be divided by 95% of the market price on the dividend payment date. If, on the dividend payment date, the NAV is greater than the market price per share plus estimated brokerage commissions (such condition often referred to as a “market discount”), the Reinvestment Plan Agent will invest the dividend amount in shares acquired on behalf of the participants in open-market purchases. If the Reinvestment Plan Agent is unable to invest the full dividend amount in open-market purchases, or if the market discount shifts to a market premium during the purchase period, the Reinvestment Plan Agent will invest any un-invested portion in newly issued shares. Investments in newly issued shares made in this manner would be made pursuant to the same process described above and the date of issue for such newly issued shares will substitute for the dividend payment date.
You may elect not to participate in the Reinvestment Plan and to receive all dividends in cash by contacting the Reinvestment Plan Agent, at the address set forth below.
Participation in the Reinvestment Plan is completely voluntary and may be terminated or resumed at any time without penalty by notice if received and processed by the Reinvestment Plan Agent prior to the dividend record date. Additionally, the Reinvestment Plan Agent seeks to process notices received after the record date but prior to the payable date and such notices often will become effective by the payable date. Where late notices are not processed by the applicable payable date, such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution.
The Reinvestment Plan Agent’s fees for the handling of the reinvestment of distributions will be paid by each Trust. However, each participant will pay a pro rata share of brokerage commissions incurred with respect to the Reinvestment Plan Agent’s open market purchases in connection with the reinvestment of all distributions. The automatic reinvestment of all distributions will not relieve participants of any federal, state or local income tax that may be payable on such dividends or distributions.
Each Trust reserves the right to amend or terminate the Reinvestment Plan. There is no direct service charge to participants in the Reinvestment Plan; however, each Trust reserves the right to amend the Reinvestment Plan to include a service charge payable by the participants. Participants that request a sale of shares are subject to a $2.50 sales fee and a $0.15 per share fee. Per share fees include any applicable brokerage commissions the Reinvestment Plan Agent is required to pay. All correspondence concerning the Reinvestment Plan should be directed to Computershare Trust Company, N.A. through the internet at http://www.computershare.com/blackrock, or in writing to Computershare, P.O. Box 30170, College Station, TX 77842-3170, Telephone: (800) 699-1236. Overnight correspondence should be directed to the Reinvestment Plan Agent at Computershare, 211 Quality Circle, Suite 210, College Station, TX 77845.
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| Officers and Trustees | ||||
| Name, Address1 and Year of Birth |
Position(s) Held with the Trusts |
Length of Time Served3 |
Principal Occupation(s) During Past Five Years | Number of BlackRock- Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen4 |
Public Company and Other Investment Company Directorships During Past Five Years | |||||
| Independent Trustees2 | ||||||||||
| Richard E. Cavanagh
1946 |
Chair of the Board and Trustee | Since 2007 | Director, The Guardian Life Insurance Company of America since 1998; Director, Arch Chemical (chemical and allied products) from 1999 to 2011; Trustee, Educational Testing Service from 1997 to 2009 and Chairman thereof from 2005 to 2009; Senior Advisor, The Fremont Group since 2008 and Director thereof since 1996; Faculty Member/Adjunct Lecturer, Harvard University since 2007; President and Chief Executive Officer, The Conference Board, Inc. (global business research organization) from 1995 to 2007. | 74 RICs consisting of 74 Portfolios | None | |||||
| Karen P. Robards
1950 |
Vice Chair of the Board and Trustee | Since 2007 | Principal of Robards & Company, LLC (consulting and private investing) since 1987; Co-founder and Director of the Cooke Center for Learning and Development (a not-for-profit organization) since 1987; Investment Banker at Morgan Stanley from 1976 to 1987. | 74 RICs consisting of 74 Portfolios | AtriCure, Inc. (medical devices); Greenhill & Co., Inc. | |||||
| Michael J. Castellano
1946 |
Trustee | Since 2011 | Chief Financial Officer of Lazard Group LLC from 2001 to 2011; Chief Financial Officer of Lazard Ltd from 2004 to 2011; Director, Support Our Aging Religious (non-profit) from 2009 to June 2015; Director, National Advisory Board of Church Management at Villanova University since 2010; Trustee, Domestic Church Media Foundation since 2012; Director, CircleBlack Inc. (financial technology company) since 2015. | 74 RICs consisting of 74 Portfolios | None | |||||
| Cynthia L. Egan
1955 |
Trustee | Since 2016 | Advisor, U.S. Department of the Treasury from 2014 to 2015; a President at T. Rowe Price Group, Inc. from 2007 to 2012. | 74 RICs consisting of 74 Portfolios | Unum (insurance); The Hanover Insurance Group (insurance); Envestnet (investment platform) from 2013 until 2016 | |||||
| Frank J. Fabozzi
1948 |
Trustee | Since 2007 | Editor of and Consultant for The Journal of Portfolio Management since 2006; Professor of Finance, EDHEC Business School since 2011; Visiting Professor, Princeton University from 2013 to 2014; Professor in the Practice of Finance and Becton Fellow, Yale University School of Management from 2006 to 2011. | 74 RICs consisting of 74 Portfolios | None | |||||
| Jerrold B Harris
1942 |
Trustee | Since 2007 | Trustee, Ursinus College from 2000 to 2012; Director, Ducks Unlimited — Canada (conservation) since 2015; Director, Waterfowl Chesapeake (conservation) since 2014; Director, Ducks Unlimited, Inc. since 2013; Director, Troemner LLC (scientific equipment) since 2000; Director of Delta Waterfowl Foundation from 2010 to 2012; President and Chief Executive Officer, VWR Scientific Products Corporation from 1990 to 1999. | 74 RICs consisting of 74 Portfolios | BlackRock Capital Investment Corp. (business development company) | |||||
| R. Glenn Hubbard
1958 |
Trustee | Since 2007 | Dean, Columbia Business School since 2004; Faculty member, Columbia Business School since 1988. | 74 RICs consisting of 74 Portfolios | ADP (data and information services); Metropolitan Life Insurance Company (insurance) | |||||
| W. Carl Kester
1951 |
Trustee | Since 2007 | George Fisher Baker Jr. Professor of Business Administration, Harvard Business School since 2008, Deputy Dean for Academic Affairs from 2006 to 2010, Chairman of the Finance Unit, from 2005 to 2006, Senior Associate Dean and Chairman of the MBA Program from 1999 to 2005; Member of the faculty of Harvard Business School since 1981. | 74 RICs consisting of 74 Portfolios | None | |||||
| Catherine A. Lynch
1961 |
Trustee | Since 2016 | Chief Executive Officer, Chief Investment Officer and various other positions, National Railroad Retirement Investment Trust from 2003 to 2016; Associate Vice President for Treasury Management, The George Washington University from 1999 to 2003; Assistant Treasurer, Episcopal Church of America from 1995 to 1999. | 74 RICs consisting of 74 Portfolios | None | |||||
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| Officers and Trustees (continued) |
| Name, Address1 and Year of Birth |
Position(s) Held with the Trusts |
Length of Time Served3 |
Principal Occupation(s) During Past Five Years | Number of BlackRock- Advised Registered Investment Companies (“RICs”) Consisting of Investment Portfolios (“Portfolios”) Overseen4 |
Public Company and Other Investment Company Directorships During Past Five Years | |||||
| Interested Trustees5 | ||||||||||
| Barbara G. Novick
1960 |
Trustee | Since 2014 | Vice Chairman of BlackRock, Inc. since 2006; Chair of Blackrock’s Government Relations Steering Committee since 2009; Head of the Global Client Group of BlackRock, Inc. from 1988 to 2008. | 100 RICs consisting of 218 Portfolios | None | |||||
| John M. Perlowski
1964 |
Trustee, President and Chief Executive Officer | Since 2014 (Trustee); Since 2011 (President and Chief Executive Officer) | Managing Director of BlackRock, Inc. since 2009; Head of BlackRock Global Fund & Accounting Services since 2009; Managing Director and Chief Operating Officer of the Global Product Group at Goldman Sachs Asset Management, L.P. from 2003 to 2009; Treasurer of Goldman Sachs Mutual Funds from 2003 to 2009 and Senior Vice President thereof from 2007 to 2009; Director of Goldman Sachs Offshore Funds from 2002 to 2009; Director of Family Resource Network (charitable foundation) since 2009. | 128 RICs consisting of 316 Portfolios | None | |||||
| 1 The address of each Trustee is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. | ||||||||||
| 2 Each Independent Trustees serve until his or her successor is elected and qualifies, or until his or her earlier death, resignation, retirement or removal, or until December 31 of the year in which he or she turns 75. The maximum age limitation may be waived as to any Trustee by action of a majority of the Trustees upon finding of good cause therefor. | ||||||||||
| 3 Following the combination of Merrill Lynch Investment Managers, L.P. (“MLIM”) and BlackRock, Inc. (“BlackRock”) in September 2006, the various legacy MLIM and legacy BlackRock fund boards were realigned and consolidated into three new fund boards in 2007. As a result, although the chart shows certain Independent Trustees as joining the Board in 2007, each Trustee first became a member of the boards of other legacy MLIM or legacy BlackRock funds as follows: Richard E. Cavanagh, 1994; Frank J. Fabozzi, 1988; Jerrold B. Harris, 1999; R. Glenn Hubbard, 2004; W. Carl Kester, 1995 and Karen P. Robards, 1998. | ||||||||||
| 4 For purposes of this chart, “RICs” refers to investment companies registered under the 1940 Act and “Portfolios” refers to the investment programs of the BlackRock-advised funds. The Closed-End Complex is comprised of 74 RICs. Mr. Perlowski and Ms. Novick are also board members of certain complexes of BlackRock registered open-end funds. Mr. Perlowski is also a board member of the BlackRock Equity-Bond Complex and the BlackRock Equity-Liquidity Complex, and Ms. Novick is also a board member of the BlackRock Equity-Liquidity Complex. | ||||||||||
|
5 Mr. Perlowski and Ms. Novick are both “interested persons,” as defined in the 1940 Act, of the Trust based on their positions with BlackRock and its affiliates. Mr. Perlowski and Ms. Novick are also board members of certain complexes of BlackRock registered open-end funds. Mr. Perlowski is also a board member of the BlackRock Equity-Bond Complex and the BlackRock Equity-Liquidity Complex, and Ms. Novick is also a board member of the BlackRock Equity-Liquidity Complex. Interested Trustees serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. The maximum age limitation may be waived as to any Trustee by action of a majority of the Trustees upon a finding of good cause therefor. | ||||||||||
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| Officers and Trustees (concluded) | ||||
| Name, Address1 and Year of Birth |
Position(s) Held with the Trusts |
Length of Time Served as an Officer |
Principal Occupation(s) During Past Five Years | |||
| Officers Who Are Not Trustees2 | ||||||
| Jonathan Diorio
1980 |
Vice President | Since 2015 | Managing Director of BlackRock, Inc. since 2015; Director of BlackRock, Inc. from 2011 to 2015; Director of Deutsche Asset & Wealth Management from 2009 to 2011. | |||
| Neal J. Andrews
1966 |
Chief Financial Officer | Since 2007 | Managing Director of BlackRock, Inc. since 2006; Senior Vice President and Line of Business Head of Fund Accounting and Administration at PNC Global Investment Servicing (U.S.) Inc. from 1992 to 2006. | |||
| Jay M. Fife
1970 |
Treasurer | Since 2007 | Managing Director of BlackRock, Inc. since 2007; Director of BlackRock, Inc. in 2006; Assistant Treasurer of the MLIM and Fund Asset Management, L.P. advised funds from 2005 to 2006; Director of MLIM Fund Services Group from 2001 to 2006. | |||
| Charles Park
1967 |
Chief Compliance Officer | Since 2014 | Anti-Money Laundering Compliance Officer for the BlackRock-advised Funds in the Equity-Bond Complex, the Equity-Liquidity Complex and the Closed-End Complex from 2014 to 2015; Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds in the Equity-Bond Complex, the Equity-Liquidity Complex and the Closed-End Complex since 2014; Principal of and Chief Compliance Officer for iShares® Delaware Trust Sponsor LLC since 2012 and BlackRock Fund Advisors (“BFA”) since 2006; Chief Compliance Officer for the BFA-advised iShares® exchange traded funds since 2006; Chief Compliance Officer for BlackRock Asset Management International Inc. since 2012. | |||
| Janey Ahn
1975 |
Secretary | Since 2012 | Director of BlackRock, Inc. since 2009; Assistant Secretary of the funds in the Closed-End Complex from 2008 to 2012. | |||
| 1 The address of each Officer is c/o BlackRock, Inc., 55 East 52nd Street, New York, NY 10055. | ||||||
|
2 Officers of the Trust serve at the pleasure of the Board. | ||||||
Effective September 30, 2016, the Portfolio Managers for BKT are Ron Sion and Matt Kraeger.
| Investment Advisor BlackRock Advisors, LLC Wilmington, DE 19809 |
Accounting Agent and Custodian State Street Bank and |
Distributor BlackRock Investments,
LLC1 |
Address of the Trusts 100 Bellevue Parkway Wilmington, DE 19809 | |||
| Transfer Agent Computershare Trust Company, N.A. Canton, MA 02021 |
Legal Counsel Skadden, Arps, Slate, Meagher & Flom LLP Boston, MA 02116 |
Independent Registered |
||||
| 1 | For HYT. |
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| Additional Information |
| Proxy Results |
The Annual Meeting of Shareholders was held on July 26, 2016 for shareholders of record on May 31, 2016, to elect trustee nominees for each Trust. There were no broker non-votes with regard to any of the Trusts. Approved the Trustees as follows:
| Catherine A. Lynch1 |
Richard E. Cavanagh2 |
Cynthia L. Egan2 | ||||||||||||||||
| Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | ||||||||||
| BHK |
44,966,706 | 2,727,798 | 0 | 44,905,433 | 2,789,070 | 0 | 44,946,194 | 2,748,310 | 0 | |||||||||
| BKT |
46,338,795 | 11,167,857 | 0 | 46,433,755 | 11,072,896 | 0 | 46,348,678 | 11,157,973 | 0 | |||||||||
| Jerrold B. Harris2 |
Barbara G. Novick2 |
|||||||||||||||||
| Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | |||||||||||||
| BHK |
44,863,568 | 2,830,935 | 0 | 44,960,080 | 2,734,424 | 0 | ||||||||||||
| BKT |
46,377,066 | 11,129,585 | 0 | 46,401,962 | 11,104,690 | 0 | ||||||||||||
For the Trusts listed above, Trustees whose term of office continued after the Annual Meeting of Shareholders because they were not up for election are Michael J. Castellano,
Frank J. Fabozzi, R. Glenn Hubbard, W. Carl Kester, John M. Perlowski, and Karen P. Robards.
| 1 | Class II |
| 2 | Class III |
Approved the Trustees as follows:
| Michael J. Castellano |
Richard E. Cavanagh |
Cynthia L. Egan | ||||||||||||||||
| Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | ||||||||||
| HYT |
105,565,164 | 2,378,529 | 0 | 105,569,992 | 2,373,701 | 0 | 105,617,062 | 2,326,631 | 0 | |||||||||
| Frank J. Fabozzi |
Jerrold B. Harris |
R. Glenn Hubbard | ||||||||||||||||
| Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | ||||||||||
| HYT |
105,802,206 | 2,141,487 | 0 | 105,556,714 | 2,386,979 | 0 | 105,656,239 | 2,287,453 | 0 | |||||||||
| W. Carl Kester |
Catherine A. Lynch |
Barbara G. Novick | ||||||||||||||||
| Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | ||||||||||
| HYT |
105,656,522 | 2,287,171 | 0 | 105,632,194 | 2,311,499 | 0 | 105,547,258 | 2,396,435 | 0 | |||||||||
| John M. Perlowski |
Karen P. Robards |
|||||||||||||||||
| Votes For | Votes Withheld |
Abstain | Votes For | Votes Withheld |
Abstain | |||||||||||||
| HYT |
105,704,555 | 2,239,138 | 0 | 105,538,490 | 2,405,203 | 0 | ||||||||||||
| Trust Certification |
The Trusts are listed for trading on the NYSE and have filed with the NYSE their annual chief executive officer certification regarding compliance with the NYSE’s listing standards. The Trusts filed with the SEC the certification of its chief executive officer and chief financial officer required by section 302 of the Sarbanes-Oxley Act.
| Dividend Policy |
Each Trust’s dividend policy is to distribute all or a portion of its net investment income to its shareholders on a monthly basis. In order to provide shareholders with a more stable level of dividend distributions, the distributions paid by the Trusts for any particular month may be more or less than the amount of net investment income earned by the Trusts during such month. The portion of distributions that exceeds a Trust’s current and accumulated earnings and profits, which are measured on a tax basis, will constitute a nontaxable return of capital. Distributions in excess of a Trust’s taxable income and net capital gains, but not in excess of a Trust’s earnings and profits, will be taxable to shareholders as ordinary income and will not constitute a nontaxable return of capital. The Trusts’ current accumulated but undistributed net investment income, if any, is disclosed in the Statements of Assets and Liabilities, which comprises part of the financial information included in this report.
| ANNUAL REPORT | AUGUST 31, 2016 | 101 |
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| Additional Information (continued) |
| General Information |
BHK and BKT do not make available copies of their respective Statements of Additional Information because each of BHK and BKT’s shares are not continuously offered, which means that BHK and BKT’s respective Statements of Additional Information have not been updated after the completion of BHK and BKT’s respective offerings and the information contained in BHK and BKT’s Statements of Additional Information may have become outdated.
In accordance with Section 23(c) of the 1940 Act, notice is hereby given that each Trust may from time to time purchase its Common Shares in open market transactions.
HYT’s Statement of Additional Information includes additional information about its Board and is available, without charge upon request by calling (800) 882-0052.
During the period, there were no material changes in the Trusts’ investment objectives or policies or to the Trusts’ charter or by-laws that would delay or prevent a change of control of the Trusts that were not approved by the shareholders or in the principal risk factors associated with investment in the Trusts. There have been no changes in the persons who are primarily responsible for the day-to-day management of the Trusts’ portfolios.
Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Trusts may be found on BlackRock’s website, which can be accessed at http://www.blackrock.com. This reference to BlackRock’s website is intended to allow investors public access to information regarding the Trusts and does not, and is not intended to, incorporate BlackRock’s website in this report.
Electronic Delivery
Shareholders can sign up for e-mail notifications of quarterly statements, annual and semi-annual shareholder reports by enrolling in the Trusts’ electronic delivery program. Electronic copies of shareholder reports are available on BlackRock’s website.
Shareholders Who Hold Accounts with Investment Advisors, Banks or Brokerages:
Please contact your financial advisor. Please note that not all investment advisors, banks or brokerages may offer this service.
Householding
The Trusts will mail only one copy of shareholder documents, including annual and semi-annual reports and proxy statements, to shareholders with multiple accounts at the same address. This practice is commonly called “householding” and is intended to reduce expenses and eliminate duplicate mailings of shareholder documents. Mailings of your shareholder documents may be householded indefinitely unless you instruct us otherwise. If you do not want the mailing of these documents to be combined with those for other members of your household, please call the Trusts at (800) 882-0052.
Availability of Quarterly Schedule of Investments
The Trusts file their complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Trusts’ Forms N-Q are available on the SEC’s website at http://www.sec.gov and may also be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on how to access documents on the SEC’s website without charge may be obtained by calling (800) SEC-0330. The Trusts’ Forms N-Q may also be obtained upon request and without charge by calling (800) 882-0052.
Availability of Proxy Voting Policies and Procedures
A description of the policies and procedures that the Trusts use to determine how to vote proxies relating to portfolio securities is available upon request and without charge (1) by calling (800) 882-0052; (2) at http://www.blackrock.com; and (3) on the SEC’s website at http://www.sec.gov.
Availability of Proxy Voting Record
Information about how the Trusts voted proxies relating to securities held in the Trusts’ portfolios during the most recent 12-month period ended June 30 is available upon request and without charge (1) at http://www.blackrock.com or by calling (800) 882-0052; and (2) on the SEC’s website at http://www.sec.gov.
Availability of Trust Updates
BlackRock will update performance and certain other data for the Trusts on a monthly basis on its website in the “Closed-end Funds” section of http://www.blackrock.com as well as certain other material information as necessary from time to time. Investors and others are advised to check the website for updated performance information and the release of other material information about the Trusts. This reference to BlackRock’s website is intended to allow investors public access to information regarding the Trusts and does not, and is not intended to, incorporate BlackRock’s website in this report.
| 102 | ANNUAL REPORT | AUGUST 31, 2016 |
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| Additional Information (concluded) | ||||
| Section 19(a) Notices |
BHK’s amounts and sources of distributions reported are estimates and are being provided to you pursuant to regulatory requirements and are not being provided for tax reporting purposes. The actual amounts and sources for tax reporting purposes will depend upon the Trust’s investment experience during the remainder of the fiscal year and may be subject to changes based on tax regulations. The Trust will provide a Form 1099-DIV each calendar year that will tell you how to report these distributions for federal income tax purposes.
| Total Fiscal Year-to-Date Cumulative Distributions by Character | Percentage of Fiscal Year-to-Date Cumulative Distributions by Character | |||||||||||||||||||||||||||||||||||||||
| Net Investment Income |
Net Realized Capital Gains Short Term |
Net Realized Capital Gains Long Term |
Return of Capital |
Total Per Common Share |
Net Investment Income |
Net Realized Capital Gains Short Term |
Net Realized Capital Gains Long Term |
Return of Capital |
Total Per Common Share |
|||||||||||||||||||||||||||||||
| BHK |
$ | 0.784983111 | — | — | $ | 0.059517 | $ | 0.8445 | 93 | % | 0 | % | 0 | % | 7 | % | 100 | % | ||||||||||||||||||||||
The Trust estimates that it has distributed more than the amount of earned income and net realized gains; therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the shareholder's investment in the Trust is returned to the shareholder. A return of capital does not necessarily reflect the Trust's investment performance and should not be confused with "yield" or "income". When distributions exceed total return performance, the difference will incrementally reduce the Trust's net asset value per share.
Section 19(a) notices for the Trusts, as applicable, are available on the BlackRock website http://www.blackrock.com.
| Shelf Offering Program |
From time-to-time, each Trust may seek to raise additional equity capital through an equity shelf program (a “Shelf Offering”). In a Shelf Offering, a Trust may, subject to market conditions, raise additional equity capital by issuing new Common Shares from time to time in varying amounts at a net price at or above the Trust’s net asset value (“NAV”) per Common Share (calculated within 48 hours of pricing). While any such Shelf Offering may allow a Trust to pursue additional investment opportunities without the need to sell existing portfolio investments, it could also entail risks — including that the issuance of additional Common Shares may limit the extent to which the Common Shares are able to trade at a premium to NAV in the secondary market. Each Trust, other than HYT, has not filed a registration statement with respect to any Shelf Offerings. This report is not an offer to sell Trust Common Shares and is not a solicitation of an offer to buy Trust Common Shares. If a Trust files a registration statement with respect to any Shelf Offering, the prospectus contained therein will contain more complete information about the Trust and should be read carefully before investing.
On December 23, 2015, HYT filed a final prospectus with the SEC in connection with its Shelf Offering. This report and the prospectus are not offers to sell HYT Common Shares or solicitations of an offer to buy HYT Common Shares in any jurisdiction where such offers or sales are not permitted. The prospectus contains important information about HYT, including its investment objectives, risks, charges and expenses. Investors are urged to read the prospectus of HYT carefully and in its entirety before investing. A copy of the final prospectus for HYT can be obtained from BlackRock at http://www.blackrock.com.
| BlackRock Privacy Principles |
BlackRock is committed to maintaining the privacy of its current and former fund investors and individual clients (collectively, “Clients”) and to safeguarding their non-public personal information. The following information is provided to help you understand what personal information BlackRock collects, how we protect that information and why in certain cases we share such information with select parties.
If you are located in a jurisdiction where specific laws, rules or regulations require BlackRock to provide you with additional or different privacy-related rights beyond what is set forth below, then BlackRock will comply with those specific laws, rules or regulations.
BlackRock obtains or verifies personal non-public information from and about you from different sources, including the following: (i) information we receive from you or, if applicable, your financial intermediary, on applications, forms or other documents; (ii) information about your transactions with us, our affiliates, or others; (iii) information we receive from a consumer reporting agency; and (iv) from visits to our websites.
BlackRock does not sell or disclose to non-affiliated third parties any non-public personal information about its Clients, except as permitted by law or as is necessary to respond to regulatory requests or to service Client accounts. These non-affiliated third parties are required to protect the confidentiality and security of this information and to use it only for its intended purpose.
We may share information with our affiliates to service your account or to provide you with information about other BlackRock products or services that may be of interest to you. In addition, BlackRock restricts access to non-public personal information about its Clients to those BlackRock employees with a legitimate business need for the information. BlackRock maintains physical, electronic and procedural safeguards that are designed to protect the non-public personal information of its Clients, including procedures relating to the proper storage and disposal of such information.
| ANNUAL REPORT | AUGUST 31, 2016 | 103 |
Table of Contents
This report is intended for current holders. It is not a prospectus. Past performance results shown in this report should not be considered a representation of future performance. The Trusts have leveraged their Common Shares, which creates risks for Common Shareholders, including the likelihood of greater volatility of net asset value and market price of the Common Shares, and the risk that fluctuations in short-term interest rates may reduce the Common Shares’ yield. Statements and other information herein are as dated and are subject to change.
| CEFBHK-8/16-AR |
|
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| Item 2 – | Code of Ethics – The registrant (or the “Fund”) has adopted a code of ethics, as of the end of the period covered by this report, applicable to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. During the period covered by this report, the code of ethics was amended to update certain information and to make other non-material changes. During the period covered by this report, there have been no waivers granted under the code of ethics. The registrant undertakes to provide a copy of the code of ethics to any person upon request, without charge, by calling 1-800-882-0052, option 4. |
| Item 3 – | Audit Committee Financial Expert – The registrant’s board of directors (the “board of directors”), has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: |
Michael Castellano
Frank J. Fabozzi
James T. Flynn
W. Carl Kester
Karen P. Robards
The registrant’s board of directors has determined that W. Carl Kester and Karen P. Robards qualify as financial experts pursuant to Item 3(c)(4) of Form N-CSR.
Prof. Kester has a thorough understanding of generally accepted accounting principles, financial statements and internal control over financial reporting as well as audit committee functions. Prof. Kester has been involved in providing valuation and other financial consulting services to corporate clients since 1978. Prof. Kester’s financial consulting services present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by the registrant’s financial statements.
Ms. Robards has a thorough understanding of generally accepted accounting principles, financial statements and internal control over financial reporting as well as audit committee functions. Ms. Robards has been President of Robards & Company, a financial advisory firm, since 1987. Ms. Robards was formerly an investment banker for more than 10 years where she was responsible for evaluating and assessing the performance of companies based on their financial results. Ms. Robards has over 30 years of experience analyzing financial statements. She also is a member of the audit committee of one publicly held company and a non-profit organization.
Under applicable securities laws, a person determined to be an audit committee financial expert will not be deemed an “expert” for any purpose, including without limitation for the purposes of Section 11 of the Securities Act of 1933, as a result of being designated or identified as an audit committee financial expert. The designation or identification as an audit committee financial expert does not impose on such person any duties, obligations, or liabilities greater than the duties, obligations, and liabilities imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification. The designation or identification of a person as an audit committee financial expert does not affect the duties, obligations, or liability of any other member of the audit committee or board of directors.
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| Item 4 – | Principal Accountant Fees and Services |
The following table presents fees billed by Deloitte & Touche LLP (“D&T”) in each of the last two fiscal years for the services rendered to the Fund:
| (a) Audit Fees | (b) Audit-Related Fees1 | (c) Tax Fees2 | (d) All Other Fees3 | |||||||||||||
| Entity Name | Current Fiscal Year |
Previous Fiscal Year End |
Current Fiscal Year |
Previous Fiscal Year End |
Current Fiscal Year |
Previous Fiscal Year End |
Current Fiscal Year |
Previous Fiscal Year End | ||||||||
| BlackRock Income Trust, Inc. |
$65,713 | $65,713 | $0 | $0 | $6,732 | $6,732 | $0 | $0 | ||||||||
The following table presents fees billed by D&T that were required to be approved by the registrant’s audit committee (the “Committee”) for services that relate directly to the operations or financial reporting of the Fund and that are rendered on behalf of BlackRock Advisors, LLC (“Investment Adviser” or “BlackRock”) and entities controlling, controlled by, or under common control with BlackRock (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser) that provide ongoing services to the Fund (“Fund Service Providers”):
| Current Fiscal Year End | Previous Fiscal Year End | |||
| (b) Audit-Related Fees1 | $0 | $0 | ||
| (c) Tax Fees2 | $0 | $0 | ||
| (d) All Other Fees3 | $2,129,000 | $2,391,000 |
1 The nature of the services includes assurance and related services reasonably related to the performance of the audit of financial statements not included in Audit Fees.
2 The nature of the services includes tax compliance, tax advice and tax planning.
3 Aggregate fees borne by BlackRock in connection with the review of compliance procedures and attestation thereto performed by D&T with respect to all of the registered closed-end funds and some of the registered open-end funds advised by BlackRock.
(e)(1) Audit Committee Pre-Approval Policies and Procedures:
The Committee has adopted policies and procedures with regard to the pre-approval of services. Audit, audit-related and tax compliance services provided to the registrant on an annual basis require specific pre-approval by the Committee. The Committee also must approve other non-audit services provided to the registrant and those non-audit services provided to the Investment Adviser and Fund Service Providers that relate directly to the operations and the financial reporting of the registrant. Certain of these non-audit services that the Committee believes are (a) consistent with the SEC’s auditor independence rules and (b) routine and recurring services that will not impair the independence of the independent accountants may be approved by the Committee without consideration on a specific case-by-case basis (“general pre-approval”). The term of any general pre-approval is 12 months from the date of the pre-approval, unless the Committee provides for a different period. Tax or other non-audit services provided to the registrant which have a direct impact on the operations or financial reporting of the registrant will only be deemed pre-approved provided that any individual project does not exceed $10,000 attributable to the registrant or $50,000 per project. For this purpose, multiple projects will be aggregated to determine if they exceed the previously mentioned cost levels.
Any proposed services exceeding the pre-approved cost levels will require specific pre-approval by the Committee, as will any other services not subject to general pre-approval (e.g., unanticipated but permissible services). The Committee is informed of each service approved
3
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subject to general pre-approval at the next regularly scheduled in-person board meeting. At this meeting, an analysis of such services is presented to the Committee for ratification. The Committee may delegate to the Committee Chairman the authority to approve the provision of and fees for any specific engagement of permitted non-audit services, including services exceeding pre-approved cost levels.
(e)(2) None of the services described in each of Items 4(b) through (d) were approved by the Committee pursuant to the de minimis exception in paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not Applicable
(g) The aggregate non-audit fees paid to the accountant for services rendered by the accountant to the registrant, the Investment Adviser and the Fund Service Providers were:
| Entity Name |
Current Fiscal Year End |
Previous Fiscal Year End |
||||
| BlackRock Income Trust, Inc. | $6,732 | $6,732 |
Additionally, SSAE 16 Review (Formerly, SAS No. 70) fees for the current and previous fiscal years of $2,129,000 and $2,391,000, respectively, were billed by D&T to the Investment Adviser.
(h) The Committee has considered and determined that the provision of non-audit services that were rendered to the Investment Adviser, and the Fund Service Providers that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.
| Item 5 – | Audit Committee of Listed Registrants |
| (a) | The following individuals are members of the registrant’s separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(58)(A)): |
Michael Castellano
Frank J. Fabozzi
James T. Flynn
W. Carl Kester
Karen P. Robards
| (b) | Not Applicable |
| Item 6 – | Investments |
(a) The registrant’s Schedule of Investments is included as part of the Report to Stockholders filed under Item 1 of this Form.
(b) Not Applicable due to no such divestments during the semi-annual period covered since the previous Form N-CSR filing.
4
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| Item 7 – | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies – The board of directors has delegated the voting of proxies for the Fund’s portfolio securities to the Investment Adviser pursuant to the Investment Adviser’s proxy voting guidelines. Under these guidelines, the Investment Adviser will vote proxies related to Fund securities in the best interests of the Fund and its stockholders. From time to time, a vote may present a conflict between the interests of the Fund’s stockholders, on the one hand, and those of the Investment Adviser, or any affiliated person of the Fund or the Investment Adviser, on the other. In such event, provided that the Investment Adviser’s Equity Investment Policy Oversight Committee, or a sub-committee thereof (the “Oversight Committee”) is aware of the real or potential conflict or material non-routine matter and if the Oversight Committee does not reasonably believe it is able to follow its general voting guidelines (or if the particular proxy matter is not addressed in the guidelines) and vote impartially, the Oversight Committee may retain an independent fiduciary to advise the Oversight Committee on how to vote or to cast votes on behalf of the Investment Adviser’s clients. If the Investment Adviser determines not to retain an independent fiduciary, or does not desire to follow the advice of such independent fiduciary, the Oversight Committee shall determine how to vote the proxy after consulting with the Investment Adviser’s Portfolio Management Group and/or the Investment Adviser’s Legal and Compliance Department and concluding that the vote cast is in its client’s best interest notwithstanding the conflict. A copy of the Fund’s Proxy Voting Policy and Procedures are attached as Exhibit 99.PROXYPOL. Information on how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge, (i) at www.blackrock.com and (ii) on the SEC’s website at http://www.sec.gov. |
| Item 8 – | Portfolio Managers of Closed-End Management Investment Companies – as of August 31, 2016. |
(a)(1) The registrant is managed by a team of investment professionals comprised of Akiva Dickstein, Managing Director at BlackRock, Thomas Musmanno, Managing Director at BlackRock, Matthew Kraeger, Managing Director at BlackRock and Ron Sion, Managing Director at BlackRock. Messrs. Dickstein, Musmanno, Kraeger and Sion are the Fund’s co-portfolio managers and are responsible for the day-to-day management of the Fund’s portfolio , which includes setting the Fund’s overall investment strategy, overseeing the management of the Fund and/or selection of its investments. Messrs. Dickstein, Musmanno, Kraeger and Sion have been members of the Fund’s portfolio management team since 2009, 2012, 2016 and 2016 respectively.
|
Portfolio Manager
|
Biography
| |||
| Akiva Dickstein | Managing Director of BlackRock since 2009; Managing Director of Merrill Lynch Investment Managers, L.P. from 2003 to 2009 and Head of the U.S. Rates & Structured Credit Research Group.
| |||
| Thomas Musmanno | Managing Director of BlackRock since 2010; Director of BlackRock from 2006 to 2009.
| |||
| Matthew Kraeger | Managing Director of BlackRock, Inc. since 2015; Director of BlackRock, Inc. since 2015; Director of BlackRock, Inc. since 2009.
| |||
| Ron Sion | Managing Director of BlackRock, Inc. since 2011; Director of BlackRock, Inc. since 2007.
|
(a)(2) As of August 31, 2016:
5
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| (ii) Number of Other Accounts Managed and Assets by Account Type
|
(iii) Number of Other Accounts and Assets for Which Advisory Fee is Performance-Based | |||||||||||
| (i) Name of Portfolio Manager |
Other Registered Investment Companies
|
Other Pooled Investment Vehicles |
Other Accounts |
Other Registered Investment Companies
|
Other Pooled Investment Vehicles |
Other Accounts | ||||||
|
Akiva Dickstein
|
9
|
17
|
102
|
0
|
1
|
3
| ||||||
| $7.11 Billion
|
$6.06 Billion
|
$45.09 Billion
|
$0
|
$293.8 Million
|
$1.41 Billion
| |||||||
|
Thomas Musmanno
|
11
|
12
|
139
|
0
|
1
|
0
| ||||||
| $11.50 Billion
|
$5.00 Billion
|
$54.45 Billion
|
$0
|
$1.58 Billion
|
$0
| |||||||
|
Matthew Kraeger
|
6
|
10
|
21
|
0
|
1
|
1
| ||||||
| $2.68 Billion
|
$1.90 Billion
|
$11.00 Billion
|
$0
|
$293.8 Million
|
$252.8 Million
| |||||||
|
Ron Sion
|
0
|
0
|
0
|
0
|
0
|
0
| ||||||
| $0
|
$0
|
$0
|
$0
|
$0
|
$0
| |||||||
| (iv) | Portfolio Manager Potential Material Conflicts of Interest |
BlackRock has built a professional working environment, firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. BlackRock has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, BlackRock furnishes investment management and advisory services to numerous clients in addition to the Fund, and BlackRock may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts which are hedge funds or have performance or higher fees paid to BlackRock, or in which portfolio managers have a personal interest in the receipt of such fees), which may be the same as or different from those made to the Fund. In addition, BlackRock, Inc., its affiliates and significant shareholders and any officer, director, shareholder or employee may or may not have an interest in the securities whose purchase and sale BlackRock recommends to the Fund. BlackRock, Inc., or any of its affiliates or significant shareholders, or any officer, director, shareholder, employee or any member of their families may take different actions than those recommended to the Fund by BlackRock with respect to the same securities. Moreover, BlackRock may refrain from rendering any advice or services concerning securities of companies of which any of BlackRock, Inc.’s (or its affiliates’ or significant shareholders’) officers, directors or employees are directors or officers, or companies as to which BlackRock, Inc. or any of its affiliates or significant shareholders or the officers, directors and employees of any of them has any substantial economic interest or possesses material non-public information. Certain portfolio managers also may manage accounts whose investment strategies may at times be opposed to the strategy utilized for a fund. It should also be noted that Messrs. Dickstein, Musmanno, Kraeger and Sion may be managing hedge fund and/or long only accounts, or may be part of a team managing hedge fund and/or long only accounts, subject to incentive fees. Messrs. Dickstein, Musmanno, Kraeger and Sion may therefore be entitled to receive a portion of any incentive fees earned on such accounts.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and must treat each client fairly. When BlackRock purchases or sells securities for more than one account, the trades must
6
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be allocated in a manner consistent with its fiduciary duties. BlackRock attempts to allocate investments in a fair and equitable manner among client accounts, with no account receiving preferential treatment. To this end, BlackRock, Inc. has adopted policies that are intended to ensure reasonable efficiency in client transactions and provide BlackRock with sufficient flexibility to allocate investments in a manner that is consistent with the particular investment discipline and client base, as appropriate.
(a)(3) As of August 31, 2016:
Portfolio Manager Compensation Overview
The discussion below describes the portfolio managers’ compensation as of August 31, 2016.
BlackRock’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary, a performance-based discretionary bonus, participation in various benefits programs and one or more of the incentive compensation programs established by BlackRock.
Base compensation. Generally, portfolio managers receive base compensation based on their position with the firm.
Discretionary Incentive Compensation. Discretionary incentive compensation is a function of several components: the performance of BlackRock, Inc., the performance of the portfolio manager’s group within BlackRock, the investment performance, including risk-adjusted returns, of the firm’s assets under management or supervision by that portfolio manager relative to predetermined benchmarks, and the individual’s performance and contribution to the overall performance of these portfolios and BlackRock. In most cases, these benchmarks are the same as the benchmark or benchmarks against which the performance of the Funds or other accounts managed by the portfolio managers are measured. Among other things, BlackRock’s Chief Investment Officers make a subjective determination with respect to each portfolio manager’s compensation based on the performance of the Funds and other accounts managed by each portfolio manager relative to the various benchmarks. Performance of fixed income funds is measured on a pre-tax and/or after-tax basis over various time periods including 1-, 3- and 5- year periods, as applicable. With respect to these portfolio managers, such benchmarks for the Fund and other accounts are:
| Portfolio Manager | Benchmark | |
| Akiva Dickstein Matthew Kraeger
|
A combination of market-based indices (e.g. Citigroup Mortgage Index, Barclays GNMA MBS Index), certain cusThomasized indices and certain fund industry peer groups.
| |
| Thomas Musmanno | A combination of market-based indices (e.g., Bank of America Merrill Lynch U.S. Corporate & Government Index, 1-3 Years), certain cusThomasized indices and certain fund industry peer groups.
| |
| Ron Sion | Citigroup Mortgage Index
|
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Distribution of Discretionary Incentive Compensation. Discretionary incentive compensation is distributed to portfolio managers in a combination of cash and BlackRock, Inc. restricted stock units which vest ratably over a number of years. For some portfolio managers, discretionary incentive compensation is also distributed in deferred cash awards that notionally track the returns of select BlackRock investment products they manage and that vest ratably over a number of years. The BlackRock, Inc. restricted stock units, upon vesting, will be settled in BlackRock, Inc. common stock. Typically, the cash portion of the discretionary incentive compensation, when combined with base salary, represents more than 60% of total compensation for the portfolio managers. Paying a portion of discretionary incentive compensation in BlackRock, Inc. stock puts compensation earned by a portfolio manager for a given year “at risk” based on BlackRock’s ability to sustain and improve its performance over future periods. Providing a portion of discretionary incentive compensation in deferred cash awards that notionally track the BlackRock investment products they manage provides direct alignment with investment product results.
Long-Term Incentive Plan Awards — From time to time long-term incentive equity awards are granted to certain key employees to aid in retention, align their interests with long-term shareholder interests and motivate performance. Equity awards are generally granted in the form of BlackRock, Inc. restricted stock units that, once vested, settle in BlackRock, Inc. common stock. The portfolio managers of this Fund have unvested long-term incentive awards.
Deferred Compensation Program — A portion of the compensation paid to eligible United States-based BlackRock employees may be voluntarily deferred at their election for defined periods of time into an account that tracks the performance of certain of the firm’s investment products. Any portfolio manager who is either a managing director or director at BlackRock with compensation above a specified threshold is eligible to participate in the deferred compensation program.
Other Compensation Benefits. In addition to base salary and discretionary incentive compensation, portfolio managers may be eligible to receive or participate in one or more of the following:
Incentive Savings Plans — BlackRock, Inc. has created a variety of incentive savings plans in which BlackRock, Inc. employees are eligible to participate, including a 401(k) plan, the BlackRock Retirement Savings Plan (RSP), and the BlackRock Employee Stock Purchase Plan (ESPP). The employer contribution components of the RSP include a company match equal to 50% of the first 8% of eligible pay contributed to the plan capped at $5,000 per year, and a company retirement contribution equal to 3-5% of eligible compensation up to the Internal Revenue Service limit ($265,000 for 2016). The RSP offers a range of investment options, including registered investment companies and collective investment funds managed by the firm. BlackRock, Inc. contributions follow the investment direction set by participants for their own contributions or, absent participant investment direction, are invested into a target date fund that corresponds to, or is closest to, the year in which the participant attains age 65. The ESPP allows for investment in
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BlackRock, Inc. common stock at a 5% discount on the fair market value of the stock on the purchase date. Annual participation in the ESPP is limited to the purchase of 1,000 shares of common stock or a dollar value of $25,000 based on its fair market value on the purchase date. All of the eligible portfolio managers are eligible to participate in these plans.
(a)(4) Beneficial Ownership of Securities – As of August 31, 2016.
| Portfolio Manager |
Dollar Range of Equity Securities of the Fund Beneficially Owned
| |
| Akiva Dickstein |
None | |
| Thomas Musmanno |
None | |
| Matthew Kraeger |
$10,001 - $50,000 | |
| Ron Sion |
$100,001 - $500,000 |
(b) Not Applicable
| Item 9 – | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers – Not Applicable due to no such purchases during the period covered by this report. |
| Item 10 – | Submission of Matters to a Vote of Security Holders – There have been no material changes to these procedures. |
| Item 11 – | Controls and Procedures |
(a) – The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing of this report based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended.
(b) – There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
| Item 12 – | Exhibits attached hereto |
(a)(1) – Code of Ethics – See Item 2
(a)(2) – Certifications – Attached hereto
(a)(3) – Not Applicable
(b) – Certifications – Attached hereto
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Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock Income Trust, Inc.
| By: | /s/ John M. Perlowski |
|||||
| John M. Perlowski | ||||||
| Chief Executive Officer (principal executive officer) of | ||||||
| BlackRock Income Trust, Inc. | ||||||
| Date: November 3, 2016 | ||||||
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| By: | /s/ John M. Perlowski |
|||||
| John M. Perlowski | ||||||
| Chief Executive Officer (principal executive officer) of | ||||||
| BlackRock Income Trust, Inc. | ||||||
| Date: November 3, 2016 | ||||||
| By: | /s/ Neal J. Andrews |
|||||
| Neal J. Andrews | ||||||
| Chief Financial Officer (principal financial officer) of | ||||||
| BlackRock Income Trust, Inc. | ||||||
| Date: November 3, 2016 | ||||||
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