Seeking Alpha
Value, special situations, debt
Profile| Send Message|
( followers)  
This is one of a series of articles on specific municipal bond closed-end funds. In this report, I will analyze the Blackrock MuniHoldings Investment Quality Fund (ticker: MFL). MFL is national municipal bond closed-end fund that is currently earning a tax free yield over 7% with no return of capital.
MFL is a national fund that primarily invests in investment quality tax free municipal bond holdings. When the fund was first formed, it invested in Florida municipal bonds in order to offer an investment that was exempt from the Florida intangible personal property tax. But when the Florida intangible property tax was repealed, the Board approved an amended policy in September 2008, allowing the fund to invest in municipal bonds from any state.
I will be discussing 14 factors you can consider when evaluating any municipal bond closed-end fund. For more background information on these factors, refer to my first report on NPM.
Factor #1: What is the distribution rate?
In the current market, there are three “tiers” of national municipal bond closed-end funds. The higher risk leveraged funds have distribution rates of 8% or more. The middle tier lower risk leveraged funds yield around 7%, and the safer, low volatility funds, which are mainly unleveraged, yield in the 5%-6% range.
MFL falls in the middle tier and currently has a distribution yield of 7.28%. It pays a regular monthly dividend of $0.0765 per share or an annual distribution of $0.918. The monthly dividend was recently raised from $0.0750 to $0.0765.
Factor #2: What is the likelihood the fund can raise its monthly dividend?
To determine this, I look at the Average Earnings/Current Dividend Ratio. This ratio tells you whether or not a fund is earning its current dividend. If the value is well above 100%, it means the fund can easily afford to raise its distribution rate.
For MFL, the average earnings over the last three months are $0.0788, which is higher than the recently increased monthly payment. The Average Earnings/Current Dividend ratio is now 103%.
I like to see a positive value for “Undistributed Net Investment Income” or UNII. This is the life-to-date balance of a fund’s net investment income less distributions. For MFL, the UNII per share is +0.16226 which provides a nice cushion to protect the monthly dividend payout.
Factor #3: What is the Expense Ratio?
I look at the Baseline expense ratio which does not include leverage costs. MFL has a baseline expense ratio of 1.01% which is a little below average. Anything over 1.5% is a big negative.
Factor #4: What is the discount to NAV?
MFL is currently selling at a -2.32% discount to NAV which is slightly better than the 6 month average discount of -1.48%. The one year Z-statistic is -0.42, or about half a standard deviation above average. Overall, this factor is a small positive for MFL.
Factor #5: How much leverage is used, and what is the preferred share asset coverage?
In 2008, some leveraged closed-end funds got into trouble because they violated the Investment Company 1940 Act when their asset coverage for the preferred shares went below 200% and they were forced to liquidate portions of the fund at a bad time. MFL currently uses 42.1% effective leverage (33.4% is from adjustable preferred and the remainder from using tender option bonds). The preferred asset coverage ratio is currently 303% which provides an adequate margin of safety.
Factor #6: What is the AMT exposure?
MFL has an AMT percentage of 10.20%. This is about average.
Factor #7: What is the credit quality?
I look at the breakdown of AAA, AA, A, BBB, Below BBB & Unrated. Within the AAA category, a higher percentage of pre-refunded bonds is a positive, because these bonds are effectively backed by the US government.
This is the ratings breakdown for MFL:
AAA
2.7%
AA
78.3%
A
16.1%
BBB
2.7%
BB & Below
0.2%
Includes unrated.
MFL is a solid fund with an average credit rating around AA-. I like to see the lowest rating category (BB & Below) less than 10%, and MFL qualifies easily.
Factor #8: What is the interest rate exposure?
MFL has an average duration of 9.95 adjusted for leverage. This is about average for municipal bond closed-end funds. If interest rates go up by 100 basis points or 1%, the net asset value of MFL would drop in price by about 10%. Of course, if interest rates were to fall 1%, the NAV would increase by about 10%, all other things being equal.
Factor #9: What is the call exposure?
Owning a callable bond is similar to owning a stock and writing a covered call against it. But with the callable bond, the option is embedded instead of external. The call option is owned by the issuer, and can have the effect of taking away some of your upside potential if interest rates decline significantly.
Here is a table with the upcoming call dates for bonds in MFL portfolio:
2011
2.3%
2012
3.4%
MFL has very limited call risk over the next few years.
Factor #10: For a national fund, what is the breakdown by state?
Here is a breakdown by state for the MFL portfolio (top 5)
Florida
17.9%
Texas
14.5%
California
11.7%
Michigan
11.1%
Illinois
8.7%
One state I like to look for is Illinois, and I do not like to see the Illinois percentage exceed 10%, unless those bonds are very highly rated (AA or better) and for critical services like the water supply for Chicago. The Illinois percentage for MFL is below 10%.
Factor #11: How good is the trading liquidity?
MFL has an average daily volume of 117,000 shares, and an average dollar volume of $1.5 million. I usually like to buy closed-end funds in chunks of $25,000 and do not like to be more than 10% of the daily dollar volume. MFL is fairly liquid, since you can buy $100,000 in one day and be well under 10% of the daily trading volume.
Factor #12: What percent of the portfolio is in Housing-Multifamily bonds?
Given the shaky housing market, I like to avoid funds where Housing sector bond holdings are above 10%. MFL has 5.72% of the portfolio in this sector.
Factor #13: Fund Management
MFL is team managed:
  • Theodore R Jaeckel, Jr., CFA: Managing director at BlackRock; Member of Blackrock’s Fixed Income Portfolio Management Group; Prior experience as a municipal bond trader with Chemical Bank, and has worked previously at Merrill Lynch Investment Managers (MLIM).
  • Walter O’Connor: Managing director of BlackRock since 2006; Portfolio manager at Blackrock and MLIM since 2000.
  • Robert D. Sneeden: Portfolio manager with BlackRock and MLIM since 1994.
Factor #14: Other Analyst Coverage
MFL is covered by the Merrill Lynch closed-end fund team and is currently rated as a Buy.
Based on the above 14 factors, I believe that MFL is a solid core holding for most portfolios, especially when it is trading at a discount to net asset value.

Disclosure: I am long MFL.
Source: Blackrock MuniHoldings Investment Quality Fund: A Solid Core Muni Bond Holding