BLACKROCK LONG-TERM MUNICIPAL ADVANTAGE TRUST
Fitch Ratings has affirmed the 'AA' long-term ratings assigned to the Variable Rate Demand Preferred Shares (VRDP shares), Variable Rate MuniTerm Preferred Shares (VMTP shares), and Remarketable VMTP Shares (RVMTP shares) issued across 23 municipal closed-end funds (CEFs) managed by
Fitch has also affirmed the 'A' long-term rating assigned to the VRDP shares of
Additional details about the specific rating actions are presented at the bottom of this release.
KEY RATING DRIVERS
The long-term ratings primarily reflect the following:
Sufficient asset coverage provided to the preferred shares as calculated per the funds' overcollateralization (OC) tests;
The structural protections afforded by mandatory collateral maintenance and de-leveraging provisions in the event of asset coverage declines;
The legal and regulatory parameters that govern the funds' operations;
The capabilities of
FUND PROFILES
The 24 BlackRock CEFs are regulated by the Investment Company Act of 1940 (the Act). Each of the funds invests a significant portion of their total assets in securities whose income is exempt from federal income tax (for national funds) and both federal and state income tax (for single-state funds). Each fund except BTA invests a significant portion of its total assets in municipal bond securities rated at least investment grade. BTA invests in a greater level of high yield and unrated exposure relative to the other BlackRock funds discussed in this commentary-with about 39% of the fund invested in this category as of the review date.
LEVERAGE
Effective leverage levels for the BlackRock funds rated by Fitch are currently in the 37%-44% range. Leverage for these BlackRock funds is generally composed of the rated preferred shares, with most of the funds making use of tender option bond (TOB) trusts as well. Effective leverage is a ratio measuring a fund's structural leverage as a percentage of its total assets.
In a TOB transaction, the funds transfer municipal bonds into a trust that issues two types of securities: short-term floating rate securities sold to third-party investors, and residual inverse floating rate interests which are issued to the fund that provide the municipal bond collateral to the TOB trust. Cash received from the sale of the short-term floating rating securities can be used by each fund to purchase additional fund assets.
Although this creates a degree of subordination risk for the preferred share investors, Fitch believes the risk is manageable. The rights of the holders of the floating rate securities to receive payments of principal and interest are fully secured by the collateral of the applicable fund and are senior to the rights of holders of the rated preferred shares to receive dividends. The Fitch net OC test quantifies subordination risk by assessing asset coverage to the rated obligations after first repaying liabilities that are senior in the capital structure. All BlackRock funds have Fitch net OC test results in excess of 100% at the assigned rating level.
Fitch believes there is minimal refinancing risk associated with the BlackRock preferred shares. The Fitch OC test results indicate the funds are sufficiently liquid to fully repay all of their leverage within a relatively brief 45- to 60-day exposure period, even during a time of substantial market stress. In addition, as maturity approaches, the preferred share transaction documents provide for a liquidity account that segregates assets in an amount at least equal to that of maturing securities and to converts the segregated assets to more liquid securities closer to the maturity date, minimizing the risk of the fund being forced to liquidate portfolio assets to provide for redemption of the preferred shares.
DERIVATIVES
As of the review date, most of the BlackRock funds discussed in this commentary used
PREFERRED SHARE ASSET COVERAGE
As noted above, these 24 funds generally leverage with TOBs and Fitch-rated preferred shares. The latter consist of VMTP shares, Termed-out VRDP shares (those in a Special Rate Period) and RVMTP shares.
As of the review date, each fund's asset coverage ratio for the preferred shares, as calculated in accordance with the 'AA' Fitch total and net OC tests (Fitch OC tests) outlined in Fitch's criteria, was in excess of 100%, which is the minimum threshold required for the Basic Maintenance Amount under the terms of the preferred shares.
As of the review date, BTA's preferred shares asset coverage ratio was marginally in excess of 100% in accordance with the 'AA' Fitch OC tests. However, this has not been the case in the two previous review cycles, when it instead passed only at the 'A' level. The higher 2023 Fitch OC Test results are largely due to reduced TOB leverage relative to prior reviews. The fund's effective leverage was about 38% as of
As of the review date, the minimum asset coverage ratio for each fund, as calculated in accordance with the Act, was in excess of 225%, which is the minimum asset coverage threshold required under the terms of the preferred shares.
As of the review date, the effective leverage ratio for each fund, calculated by including both preferred shares and TOBs, was below 45%, which is the maximum leverage threshold allowed under the terms of the preferred shares (for VRDP shares, the threshold is 46% if the increase in the ratio is due solely to fluctuations in the market value of a fund's portfolio securities).
The impact of TOBs leverage is captured under the Fitch OC tests and the effective leverage ratio but not under the minimum asset coverage ratio as calculated in accordance with the Act.
STRUCTURAL PROTECTIONS
In the event of asset coverage declines, the preferred shares' governing documents require the funds to cure any breach by reducing leverage in a sufficient amount within a pre-specified time period. For Fitch OC tests, a fund can also cure any breach within a pre-specified time period by altering the composition of the portfolio toward assets with lower discount factors.
Compliance with the Fitch OC threshold under the Basic Maintenance Amount is tested every five business days for all BlackRock preferred shares rated by Fitch. Failure to cure a breach by the allotted cure date requires the redemption of sufficient preferred shares to restore the total and net OC ratios to 100%. The time allowed for the funds to restore compliance is consistent with Fitch's 60-business day criteria guideline.
Minimum asset coverage compliance is tested every five business days for the VMTP and RVMTP shares and monthly for the VRDP shares. Failure to cure a breach of the minimum asset coverage requirement by the allotted cure date results in mandatory redemption of sufficient preferred shares to restore asset coverage to 225%.
Compliance with the effective leverage ratio is tested daily for all preferred shares. For VMTP and RVMTP shares, a breach of the effective leverage ratio threshold requires the fund to redeem a sufficient number of preferred shares, and/or reduce the amount of TOBs the fund has outstanding in order to restore compliance. The time allowed for the funds to restore compliance is consistent with Fitch's 60-business day criteria guideline.
For VRDP shares, a breach of the effective leverage ratio is a breach of the fee agreement with the applicable liquidity provider. In the event of an effective leverage ratio breach, Fitch expects that the fund will redeem a sufficient number of preferred shares or reduce the amount of TOBs outstanding in order to restore compliance.
SPECIAL RATE PERIOD
Currently all BlackRock VRDP shares are issued under a special rate period (SRP). For the BlackRock VRDP shares issued under SRP, the liquidity provider becomes the holder of the VRDP shares and the VRDP shares will not be subject to optional or mandatory tender events and will not be remarketed by a remarketing agent pursuant to such events.
At the conclusion of the SRP for the VRDP shares, the applicable fund may mutually elect to extend the SRP with the holders of the VRDP shares of each applicable series. If the SRP is not extended, the VRDP shares will revert to remarketable securities available for purchase by qualified third-party investors. At that point, the VRDP shares are expected to benefit from an unconditional and irrevocable purchase obligation by a liquidity provider upon optional or mandatory tender events.
If the SRP is not extended, Fitch would expect to assign a short-term rating to the VRDP shares based on the then-current Short-Term-rating of the applicable liquidity provider at that time.
INVESTMENT MANAGER
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Rating upgrades are not currently envisioned for the 'AA' rated preferred shares issued by the funds under review as Fitch criteria effectively caps CEF ratings at 'AA'.
BTA could potentially be upgraded to 'AA' if over a sustained period it reduces leverage or reallocates its portfolio to lower discount factor assets to the extent necessary to pass the Fitch OC tests at the 'AA' level on a consistent basis over the longer term.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The ratings assigned to the preferred shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund, as described above.
A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be downgraded by Fitch.
Certain terms relevant to key VRDP structural protections, including the minimum asset coverage and the effective leverage ratio are set forth in the fee agreements between the applicable funds and liquidity providers, and are renewed on a periodic basis. As noted above, any future changes to these terms that weaken the structural protections may have negative rating implications.
The funds have the ability to assume economic leverage through speculative derivative transactions that may not be captured by the Funds' minimum asset coverage test or effective leverage ratio. The Fitch OC tests would capture any such economic leverage.
Although the funds have the ability, as of the review date they did not engage in speculative derivative activities. Fitch's analysis assumes the funds do not envision engaging in material amounts of such activity in the future. Any material speculative derivative exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated securities.
The ratings could be downgraded if asset coverage cushions erode as a result of market volatility, or if Fitch believes the assets the funds invest in are unlikely to retain sufficient liquidity and price stability at the current rating stress levels. Based on portfolio compositions as of the review date, only three of the BlackRock funds could withstand market value declines of less than 32% before breaching Fitch's OC Test results at the assigned rating level. These funds are
(C) 2023 Electronic News Publishing, source
