Section 19 Notice - BBN April 2023 Tax Information Actions Download Add to favorites Information Information Description: Section 19 Publication date: Apr 28, 2023 Target Audience: For Individuals Product group: BlackRock Closed-End Funds Done

Spotlight on leverage in closed-end funds

March 2023

Leverage is a strategy that can be employed by closed- end funds ("CEFs") in an effort to potentially increase income and enhance returns. The use of leverage is subject to risks, including the potential for higher net asset value ("NAV") and market price volatility and fluctuations of distributions. It is important to understand why and how funds employ this strategy along with

the potential benefits and risks associated with the use of leverage.

Why do CEFs use leverage?

CEF's generally use leverage as a way to increase earnings and potentially enhance returns of a fund. The CEF structure is ideal for using leverage given its "fixed" asset base. Typically, a CEF raises capital by selling a fixed number of shares through an initial public offering ("IPO") and invests the proceeds from the IPO in a portfolio of securities. After the IPO period, the CEF trades on a

national stock exchange and typically does not offer further subscriptions for, or redemptions of, its shares.1 This feature limits the ability of the CEF to raise capital following the IPO but provides the portfolio managers with greater investment flexibility in the portfolio as the portfolio managers are not required to manage daily inflows and outflows of assets like open-end mutual funds. Given this relatively stable asset base, CEFs can seek to utilize leverage to potentially increase earnings and potentially enhance returns. Leverage adds a multiplier effect to the portfolio and will magnify both returns and losses. As illustrated below, over the long term, leveraged municipal CEFs have outperformed unleveraged municipal CEFs in 14 of the last 20 years. While total returns for leveraged municipal CEFs have been lower during periods of heightened volatility in the last 20 years, the use of leverage generally helped enhance total returns over that time frame.

Leveraged municipal CEFs have had higher NAV total returns than unleveraged municipal CEFs in 14 of the last 20 years

60
		35.4
30
		15.8	17.9	15.6	20.6
		12.0
8.64.5 6.55.9 6.24.87.1 5.0				10.7	10.6	8.4 6.8	10.68.56.2
2.9	2.6 2.4	5.7 4.1	5.0	4.5	3.2
0							0.5	0.9	0.3 0.9
-0.7	-6.1					-3.7
					-7.5						-9.9
		-22.2											-17.3
-30
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

• Municipal CEFs (leveraged) ● Municipal CEFs (unleveraged)

Source: Lipper as of 12/31/2022. Past performance does not guarantee or indicate future results. Total returns are annualized and based on NAV. Municipal CEFs (leveraged) are represented by the General & Insured Municipal (leveraged) Lipper Category. Municipal CEFs (unleveraged) are represented by the General & Insured Municipal (unleveraged) Lipper Category. Lipper category returns are shown for illustrative purposes only and are not meant to represent the past or future performance for any fund.

1 In order to increase net assets, a CEF may be able to issue new shares through an at-the-market equity shelf offering program, overnight follow-on offering or rights offering. In certain circumstances, CEFs may be able to reduce shares outstanding through open market share repurchases or tender offers.

blackrock.com

USWAH0423U/S-2802225-1/4

How does leverage work?

Leverage can come in a variety of forms including debt, preferred stock, and derivative instruments. The use of leverage seeks to profit from the spread between short-term (lower) and long-term (higher) interest rates. Assuming such an upward sloping yield curve, a CEF may borrow at lower short-term interest rates, and invest the proceeds of leverage in longer-term securities that typically pay higher rates of return. As a consequence, the use of leverage is more commonly employed in funds that invest in fixed or floating rate income securities. Although there are several potential benefits of using leverage, investors should consider the potential for increased risk and volatility prior to investing in a leveraged CEF.

The spread between short- and long-term interest rates may generate excess cash flow when the yield curve is positively sloped

	6								Invest
(%)
4
Yield
2			Investors benefit from the "spread"
	0	Borrow
	2	6	10	14	18	22	26	30

Maturity (In years)

For Illustrative Purposes Only. The above chart represents a positively sloped yield curve. There is no assurance that a fund's leveraging strategy will be successful. Once a portfolio is leveraged, the NAV and market value of the common shares will be more volatile. While a common investment practice by many CEF managers, leverage cannot assure a higher yield or return to the holders of the common shares. Please refer to the section entitled "What are some of the risks of leverage?" for a summary of some of the risks involved in the use of leverage.

How do I calculate the amount of leverage in a CEF?

BlackRock believes it is important to consider leverage in the context of total managed assets (as defined herein). Calculating leverage based solely on net assets may overstate a fund's leverage percentage.

• "Managed assets" typically refers to a CEF's total assets (including any assets attributable to the use of leverage for investment purposes) minus the sum of the CEF's accrued liabilities (excluding leverage used for investment purposes).
• "Net assets" typically refers to a CEF's managed assets minus the value of the CEF's assets attributable to leverage used for investment purposes.

2 Spotlight on leverage in closed-end funds

To calculate a fund's leverage percentage based on total managed assets, divide the dollar amount of leverage by the fund's total managed assets as seen below:

% leveraged =

(Total managed assets - net assets) / Total managed assets

Example:

• Net Assets = $100 million
• Leverage Amount = $50 million
• Total Managed Assets = $150 million
• • % Leveraged based on net assets = 50%
  • % Leveraged based on total managed assets = 33.33%
• Asset Coverage = 300% ($150 million / $50 million)

For illustrative purposes only. The above does not represent an actual BlackRock fund.

Leverage can magnify both returns and losses

	Unleveraged	Leveraged
	fund	fund
Net assets ($Millions)	$1,000	$1,000
Shares issued	100	100
NAV	$10.00	$10.00
Leverage	$0	$500
Total managed assets	$1,000	$1,500
($Millions)
Leverage ratio
(Total managed assets -	0%	33%
Net assets) /
Total managed assets
Effects of a 5% increase in	$50	$75
total assets
New total managed assets	$1,050	$1,575
New net assets	$1,050	$1,075
New NAV	$10.50	$10.75
Resulting increase in NAV	5.00%	7.50%
Effects of a 5% decrease in	($50)	($75)
total assets
New total assets	$950	$1,425
New net assets	$950	$925
New NAV	$9.50	$9.25
Resulting decrease in NAV	-5.00%	-7.50%

For illustrative purposes only. Not indicative of future returns.

USWAH0423U/S-2802225-2/4

What are some of the risks of leverage?

Cost of Leverage: As short-term rates rise, the cost of leverage may increase, which could cause the spread earned between the cost of leverage and the income from investments to narrow or even become negative (i.e. leverage costs exceed income), which would reduce or eliminate the CEF's ability to use leverage to profit from the interest rate spread. When this occurs, a leveraged CEF would lose the income it would otherwise have received from the use of leverage and may be required to reduce its distributions.

Duration: A portfolio's interest rate risk, or "duration," generally increases with the use of leverage since the leverage strategy magnifies the CEF's investment exposure to its portfolio assets. Funds that employ leverage tend to exhibit greater NAV and market price volatility than nonleveraged funds. Due to their sensitivity to changes in interest rates, leveraged CEFs may experience larger declines in NAV compared to similar unleveraged CEFs as a result of a rise in interest rates.

A reduction in the CEF's NAV may cause a reduction in the market price of its common stock.

Managing leverage risk: In seeking to mitigate interest rate risk, a portfolio manager may invest in shorter duration securities or seek to compensate for interest rate risk by balancing exposure to other factors such as credit risk. Additionally, the use of certain derivative instruments for hedging purposes, such as interest rate swaps or short Treasury future positions, may help manage interest rate sensitivity. When comparing leveraged and non-leveraged CEFs, it is important to view the duration of a CEF's portfolio in light of the fund's use of leverage. The exhibit (below) illustrates a simple calculation to make this adjustment:

Leveraged adjusted duration =

Non-leveraged duration / (1 - leverage %)

Example:

• Non-leveragedDuration: 5.5 years
• Leverage: 30.0%
• Leverage Adjusted Duration: 5.5 / (1 - 0.300) = 7.9 years

For illustrative purposes only. The above does not represent an actual BlackRock fund. Duration numbers published for BlackRock CEFs on BlackRock.com are adjusted for leverage.

3

USWAH0423U/S-2802225-3/4

About BlackRock

BlackRock's purpose is to help more and more people experience financial well-being. As a fiduciary to investors and a leading provider of financial technology, we help millions of people build savings that serve them throughout their lives by making investing easier and more affordable. For additional information on BlackRock, please visit www.blackrock.com/corporate

Want to know more?

blackrock.com

Performance results reflect past performance and are no guarantee of future results. Investment return and principal value of shares will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. All returns assume reinvestment of all dividends. Performance information shown without sales charge would have been lower if the applicable sales charge had been included. Performance during periods of exceptional market conditions should not be expected to be repeated in a normal market environment. Current performance may be lower or higher than the performance data quoted.

Closed-end fund shares are not deposits or obligations of, or guaranteed by, any bank and are not insured by the FDIC or any other agency. Investing involves risk, including possible loss of principal amount invested. A closed-end fund that writes covered calls over its portfolio in order to enhance distributions to shareholders, limits its ability to benefit from capital appreciation. As a means of enhancing return, many fixed income closed-end funds may issue senior securities or borrow money to "leverage" their investment position. There is no assurance that a fund's leveraging strategy will be successful. Once a portfolio is leveraged, the net asset value and market value of the common shares will be more volatile. While a common investment practice by many CEF managers, leverage cannot assure a higher yield or return to the holders of the common shares. This is not a prospectus intended for use in the purchase or sale of any fund's shares. Investors should review a fund's prospectus and other publicly available information, including shareholder reports, carefully before investing. Shares may only be purchased or sold through registered broker/dealers. For more information regarding any of BlackRock's closed-end funds, please call BlackRock at 800-882-0052. No assurance can be given that a fund will achieve its investment objective.

The market value and net asset value (NAV) of a fund's shares will fluctuate with market conditions. Closed-end funds may trade at a premium to NAV but often trade at a discount.

This material is provided for informational purposes only and does not constitute a solicitation in any jurisdiction in which such solicitation is unlawful or to any person to whom it is unlawful. Moreover, it neither constitutes an offer to enter into an investment agreement with the recipient of this document nor an invitation to respond to it by making an offer to enter into an investment agreement. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of March 2023 and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. There is no guarantee that any forecasts made will come to pass. Any investments named within this material may not necessarily be held in any accounts managed by BlackRock. Reliance upon information in this material is at the sole discretion of the reader.

• 2023 BlackRock, Inc. or its affiliates. All Rights Reserved. BLACKROCK is a trademark of BlackRock, Inc., or its affiliates. All other trademarks are those of their respective owners.
  Prepared by BlackRock Investments, LLC, member FINRA.

Not FDIC Insured • May Lose Value • No Bank Guarantee

230604T-0323

USWAH0423U/S-2802225-4/4