Fitch Affirms BlackRock Muni CEF Preferred Shares on Reorganization

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'AAA' long-term ratings assigned to the $231,900,000 of Series W-7 Variable Rate Demand Preferred Shares (VRDP Shares) issued by BlackRock MuniYield Michigan Quality Fund, Inc. (MIY). The date of final mandatory redemption is May 2041 and the liquidity provider is Citibank, N.A.

KEY RATING DRIVERS

The 'AAA' long-term ratings of the VRDP Shares primarily reflect:

--Sufficient asset coverage provided to the VRDP Shares as calculated per over-collateralization (OC) tests of MIY;

--The structural protections afforded by mandatory de-leveraging provisions in the event of asset coverage declines;

--The legal and regulatory parameters that govern the operations of MIY;

--The capabilities of BlackRock Advisors, LLC as investment advisor.

FUND REORGANIZATION

Today, BlackRock Advisors, LLC announced the closing of a closed-end fund reorganization, whereby Blackrock MuniYield Michigan Quality Fund II, Inc. (MYM) is reorganized into MIY. As a result of the reorganization, substantially all the assets and liabilities of MYM have become assets and liabilities of MIY. The reorganizations have been approved, as applicable, by the common and preferred shareholders of the acquiring and target funds.

Today, MIY has issued an additional $87.3 million of Series W-7 VRDP Shares, increasing the amount outstanding from $144.6 million to $231.9 million.

Upon the closing of MYM's reorganization with MIY, holders of the VRDP Shares of target fund MYM that were previously rated 'AAA' by Fitch received, for each VRDP Share held immediately prior to the reorganization, one VRDP Share of the additional issuance by MIY having substantially the same terms. Fitch now marks the VRDP shares of MYM as Paid in Full.

SPECIAL RATE PERIOD

The MIY VRDP Shares are in a Special Rate Period that will end on June 22, 2016. During this time, Citibank, N.A. will remain the liquidity provider for the VRDP Shares. However, during the Special Rate Period 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 Special Rate Period, the holder of the VRDP Shares and the Fund may mutually elect to extend the Special Rate Period. If the Special Rate Period is, however, 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, similar to other Fitch-rated VRDP Shares issued by Blackrock closed-end funds.

If the Special Rate Period is not extended, Fitch would expect to assign a short-term rating to the VRDP Shares based on the ratings of the liquidity provider. Currently, Fitch rates Citibank, N.A. 'A+/F1'/Outlook Stable. However, any designated liquidity provider or its rating may be subject to change in the future, which could result in a change to Fitch's short-term rating on the VRDP Shares.

FUND PROFILES

MIY is a closed-end management investment companies regulated by the Investment Company Act of 1940. MIY invests in municipal securities that are exempt from regular federal and Michigan income taxes. The Funds invest a significant portion of their total net assets in securities rated at least investment grade. As of Aug. 14, 2015, MIY had approximately $731.5 million in managed assets including the impact of the MYM acquisition on a pro forma consolidated basis.

FUND LEVERAGE

Total leverage on a pro forma consolidated basis was $268.9 million, consisting of approximately $231.9 million of VRDP Shares and $37 million of tender option bond obligations.

ASSET COVERAGE

As of Aug. 14, 2015, MIY's pro forma Fitch total and net overcollateralization tests (Fitch OC Tests) outlined in Fitch's criteria at the 'AAA' level were in excess of 100%. This is the minimum threshold required under the terms of the VRDP Shares.

The Fund's pro forma asset coverage ratio calculated in accordance with the Investment Company Act of 1940 was in excess of the minimum asset coverage of 225% required by the governing documents for the VRDP Shares.

MIY's pro forma effective leverage ratio was 36.8% as of Aug. 14, 2015. This effective leverage ratio is below the 45% maximum effective leverage ratio allowed by the governing documents of the VRDP Shares.

In the event of breaches to any of the above thresholds, the Funds are required to restore compliance per structural protections described below.

STRUCTURAL PROTECTIONS

Compliance with the Fitch OC, asset coverage and effective leverage thresholds is tested periodically. For the Fitch OC test, the fund manager is expected to cure any breach by altering the composition of the portfolio toward assets with lower discount factors. For the asset coverage test, the fund manager is expected to cure any breach by reducing leverage in a sufficient amount within a pre-specified time period. In the case of an effective leverage breach for VRDP Shares, the Liquidity Provider has the option to institute actions to require the Fund to remedy the breach pursuant to a covenant with the Liquidity Provider.

For the Fitch OC, asset coverage and effective leverage tests, the total market value exposure (i.e. valuation, cure and redemption) is consistent with Fitch's 60 business day criteria guideline.

STRESS TESTS

Fitch performed various stress tests on the Funds to assess the strength of the structural protections available to the VRDP Shares compared to the rating stresses outlined in Fitch's closed-end fund rating criteria. These tests included determining various 'worst case' scenarios where the pro forma leverage and portfolio composition for MIY migrated to the outer limits of its operating and investment guidelines.

Only under remote circumstances, such as increasing either Fund's issuer concentration, while simultaneously migrating the portfolios to a mix of 80% 'BBB', 10+ years to maturity bonds and 20% high yield bonds, did the asset coverage available to the VRDP Shares fall below the 'AAA' long-term rating level, and instead passed at an 'AA' long-term rating level.

Given the highly unlikely nature of the stress scenarios, and the minimal rating impact, Fitch views the permitted investments, municipal issuer diversification framework and mandatory deleveraging mechanisms of MIY as consistent with an 'AAA' long-term rating.

THE FUND ADVISOR

BlackRock Advisors, LLC, a subsidiary of BlackRock, Inc., is the advisor to the Funds, responsible for the overall investment strategies and their implementation. BlackRock, Inc. and its affiliates had approximately $4.72 trillion of assets under management as of June 30, 2015.

CLOSED-END FUND CRITERIA EXPOSURE DRAFT

On July 30, 2015 Fitch published an exposure draft with respect to its global rating criteria for rating closed-end fund debt and preferred stock and other market value structures. The exposure draft, titled 'Rating Closed-End Fund Debt and Preferred Stock' (July 30, 2015), is available at 'www.fitchratings.com'. As discussed at length in this document, Fitch proposes to amend issuer concentration guidelines for state-level general obligation (GO) exposure. The proposed change will not impact the ratings assigned to the MIY VRDP Shares.

RATING SENSITIVITIES

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 Funds, as described above. A material adverse deviation from Fitch guidelines for any key rating driver could cause ratings to be lowered by Fitch.

Certain terms relevant to key VRDP structural protections, including minimum asset coverage and the effective leverage ratio are set forth in the fee agreement and the purchase agreement and are renewed on a periodic basis. 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 derivative transactions which may not be captured by the Funds' minimum asset coverage test or effective leverage ratio. The Funds do not currently engage in speculative derivative activities and Fitch's analysis assumes the Funds do not envision engaging in material amounts of such activity in the future. Any material derivative exposures in the future could have potential negative rating implications if it adversely affects asset coverage available to rated securities.

For additional information about Fitch closed-end fund ratings guidelines, please review the criteria referenced below, which can be found on Fitch's website.

To receive Fitch's forthcoming research on closed-end funds please go to:

http://forms.fitchratings.com/forms/FAMCEFOptinform

Additional information is available at 'www.fitchratings.com'.

The sources of information used to assess this rating were the public domain and BlackRock Advisors, LLC s.

Opt-in to receive Fitch's forthcoming research on closed-end funds:

http://pages.fitchemail.fitchratings.com/FAMCEFBlankOptin/

Related Research:

--'Leveraged Closed-End Funds Weather U.S. Rate Shock Scenarios' (Oct. 7, 2014);

--'Municipal Closed-End Funds More Exposed to Rising Interest Rates than Corporate CEFs' (Oct. 7, 2014)'.

Applicable Criteria

Exposure Draft: Rating Closed-End Fund Debt and Preferred Stock (pub. 30 Jul 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=868875

Rating Closed-End Fund Debt and Preferred Stock (pub. 04 Sep 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=765528

Related Research

Leveraged Closed-End Funds Weather U.S. Rate Shock Scenarios (Impact on Asset Coverage and Ratings Limited Due to Structural Protections)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=784190

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=990787

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=990787

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20150914006225/en/

Fitch Ratings
Primary Analyst
Ralph Aurora, +1-212-908-0528
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Ian Rasmussen, +1-212-908-0232
Senior Director
or
Committee Chairperson
Davie Rodriguez, +1-212-908-0386
Senior Director
or
Media Relations
Alyssa Castelli, New York, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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