Fitch Ratings assigns an 'AAA' long-term rating and an 'F1' short-term rating to the following variable rate demand preferred shares (VRDP shares) issued by BlackRock New York Municipal Income Trust II (BFY), a municipal closed-end fund managed by BlackRock Advisors, LLC:
--$44,400,000 of VRDP shares, series W-7, due Oct. 1, 2041, with a liquidation preference of $100,000 per share.
KEY RATING DRIVERS
The 'F1' short-term rating primarily reflects:
--The credit strength of Morgan Stanley Bank, N.A. (rated 'A/F1' by Fitch) as liquidity provider.
--The terms and conditions of the VRDP shares purchase agreement (purchase agreement).
The 'AAA' long-term rating primarily reflects:
--Sufficient asset coverage provided to the VRDP shares as calculated per the fund's over-collateralization (OC) tests.
--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines.
--The legal and regulatory parameters that govern the fund's operations.
--Both the short- and long-term ratings also reflect the capabilities of BlackRock Advisors as investment manager.
TENDER AND REMARKETING
The VRDP shares benefit from an unconditional demand feature giving investors the right to tender the securities with a seven-day notice for remarketing. The VRDP shares are also subject to a mandatory tender upon the occurrence of certain events, such as non payment of dividends by the fund, among others. VRDP shares that are unsuccessfully remarketed are purchased by the liquidity provider, Morgan Stanley Bank, N.A.
The VRDP shares have a 30-year mandatory redemption date and pay an adjustable dividend rate set weekly by the remarketing agent, Morgan Stanley & Co. LLC (or any subsequent replacement). Should a remarketing be unsuccessful, the dividend rate will reset to a maximum rate as defined in the governing documents.
PURCHASE OBLIGATION
The VRDP shares are supported by a purchase agreement to ensure full and timely repayment of the liquidation preference amount plus any accumulated and unpaid dividends to holders upon occurrence of certain events. The agreement requires the liquidity provider to purchase all VRDP shares tendered for sale that were not successfully remarketed. The liquidity provider must also purchase all outstanding VRDP shares if the fund has not obtained an alternate purchase agreement prior to the termination of the purchase agreement being replaced or following the downgrade of the liquidity provider's rating below 'F2' (or equivalent).
The purchase of VRDP shares pursuant to the purchase agreement is unconditional and irrevocable, and as such the short-term ratings assigned to the VRDP shares are directly linked to the short-term creditworthiness of the associated liquidity provider.
The liquidity provider's obligation under the purchase agreement currently has a term of 364 days from the date of issue. Fitch expects the purchase agreement to be extended in subsequent years, with terms that are substantially similar to the current purchase agreement.
LEVERAGE
As of Aug. 5, 2011, the fund had pro forma assets of $119.3 million and leverage of $44.6 million. Leverage consisted of $44.4 million of the Fitch-rated VRDP shares and $0.2 million of floating rate certificates of tender option bonds.
ASSET COVERAGE
As of Aug. 5, 2011, the fund's pro forma asset coverage ratios, as calculated in accordance with the Fitch total and net OC tests per the 'AAA' rating guidelines outlined in Fitch's criteria, were in excess of 100%, which is the minimum threshold required under the fund's governing documents.
As of the same date, the fund's asset coverage ratio for the VRDP shares, as calculated in accordance with the Investment Company Act of 1940, was in excess of the minimum asset coverage threshold of 225% currently set by the terms of the fee agreement between the fund and the liquidity provider (Minimum VRDP Shares Asset Coverage Test).
The fund has also covenanted with the liquidity provider to maintain an Effective Leverage Ratio below 45% (or 46% if the increase in the ratio is due exclusively to asset market value volatility), taking into account all of the fund's leverage, including VRDP shares and floating-rate certificates of tender option bonds.
In the event of asset coverage declines, the fund's governing documents will require the fund to reduce leverage in order to restore compliance with the OC test(s) breaching the required threshold(s).
FUND PROFILE
The fund is a closed-end management investment company registered under the Investment Company Act of 1940. The fund seeks to provide current income exempt from federal (including the alternative minimum tax), New York State, and New York City income tax. The fund currently invests primarily in investment grade quality municipal bonds.
THE ADVISOR
BlackRock Advisors, a subsidiary of BlackRock, Inc., is the fund's advisor, responsible for the fund's overall investment strategy and its implementation. BlackRock and its affiliates had approximately $3.7 trillion of assets under management as of June 30, 2011.
RATINGS SENSITIVITY
The ratings assigned to the VRDP shares may be sensitive to material changes in the leverage composition, portfolio credit quality or market risk of the fund. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.
Certain terms of the Minimum VRDP Shares Asset Coverage Test and Effective Leverage Ratio are set in the liquidity and fee agreements, which are renewed on a periodic basis. Changes to these terms that weaken the tests may have negative rating implications.
The short-term ratings assigned to the VRDP shares may also be sensitive to changes in the financial condition of the liquidity provider. A downgrade of the liquidity provider to 'F2' would result in a downgrade of the short-term ratings of the VRDP shares to 'F2', absent other mitigants. A downgrade below 'F2', on the other hand, would not necessarily result in a downgrade of the short-term rating of the VRDPs, given the acceleration features in the transaction that would result in a mandatory tender of the VRDPs for purchase by the liquidity provider.
For additional information about Fitch rating guidelines applicable to debt and preferred stock issued by closed-end fund, please review the criteria referenced below, which can be found on Fitch's web site at 'www.fitchratings.com'.
Additional information is available at 'www.fitchratings.com'.
The sources of information used to assess this rating were the public domain and BlackRock Advisors.
Applicable Criteria and Related Research:
--'Rating Closed-End Fund Debt and Preferred Stock' (Aug. 1, 2011);
--'Global Rating Criteria for Asset-Backed Commercial Paper' (Nov. 30, 2010);
--'Tax-Exempt CEFs Change Leverage' (June 17, 2011);
--'Tax-Exempt Closed-End Fund Weather Price Declines' (Feb. 2, 2011);
--'Closed-End Fund: Evolving Use of Leverage and Derivatives' (Sept. 27, 2010);
--'Closed-End Fund: Redemptions Provide Some Liquidity to Illiquid ARPS Market' (Aug. 31, 2010).
Applicable Criteria and Related Research:
Tax-Exempt CEFs Change Leverage (ARPS Balances Reduced; New Securities Provide Flexibility)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=637110
Tax-Exempt Closed-End Funds Weather Price Declines (Asset Coverage Remains Strong)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=601825
Rating Closed-End Fund Debt and Preferred Stock
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648840
Global Rating Criteria for Asset-Backed Commercial Paper
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=577965
Closed-End Funds: Redemptions Provide Some Liquidity to Illiquid ARPS Market
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=552106
Closed-End Funds: Evolving Use of Leverage and Derivatives
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=559525
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