Note 1–Organization and Business
MainStay MacKay DefinedTerm Municipal Opportunities Fund (the “Fund”) was organized as a Delaware statutory trust on April 20, 2011, pursuant to an
agreement and declaration of trust, which was amended and restated on June 4, 2015 (“Declaration of Trust’’). The Fund is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a
“diversified”, closed-end management investment company, as those terms are defined in the 1940 Act, as interpreted or modified by regulatory authorities having jurisdiction, from time to time. The
Fund first offered Common shares through an initial public offering on June 26, 2012.
Pursuant to the terms of the Declaration of Trust, the Fund will commence
the process of liquidation and dissolution at the close of business on December 31, 2024 (the “Termination Date”) unless otherwise extended by a majority of the Board of Trustees (the “Board”) (as discussed in further detail
below). During the six-month period preceding the Termination Date or Extended Termination Date (as defined below), the Board may, without shareholder approval unless such approval is required by the 1940 Act,
determine to (i) merge or consolidate the Fund so long as the surviving or resulting entity is an open-end registered investment company that is managed by the same investment adviser which serves as the
investment adviser to the Fund at that time or is an affiliate of such investment adviser; or (ii) convert the Fund from a closed-end fund into an open-end
registered investment company. Upon liquidation and termination of the Fund, shareholders will receive an amount equal to the Fund’s net asset value (“NAV”) at that time, which may be greater or less than the price at which Common
shares were issued. The Fund’s investment objectives and policies are not designed to return to investors who purchased Common shares in the initial offering of such shares their initial investment on the Termination Date and such initial
investors may receive more or less than their original investment upon termination.
Prior to the commencement of the
six-month period preceding the Termination Date, a majority of the Board may extend the Termination Date for a period of not more than two years or such shorter time as may be determined (the “Extended
Termination Date”), upon a determination that taking such actions as described in (i) or (ii) above would not, given prevailing market conditions, be in the best interests of the Fund’s shareholders. The Termination Date may be
extended an unlimited number of times by the Board prior to the first business day of the sixth month before the next occurring Extended Termination Date.
The
Fund’s primary investment objective is to seek current income exempt from regular U.S. Federal income taxes (but which may be includable in taxable income for the purpose of the Federal alternative minimum tax). Total return is a secondary
objective.
Note 2–Significant Accounting Policies
The Fund
is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services—Investment
Companies. The Fund prepares its financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States of America and follows the significant accounting policies described below.
(A) Securities Valuation. Investments are usually valued as of the close of regular trading on the New York Stock Exchange (the “Exchange”) (usually 4:00 p.m. Eastern time) on each day the Fund is open for
business (“valuation date”).
The Board adopted procedures establishing methodologies for the valuation of the Fund’s securities and other
assets and delegated the responsibility for valuation determinations under those procedures to the Valuation Committee of the Fund (the “Valuation Committee”). The procedures state that, subject to the oversight of the Board and unless
otherwise noted, the responsibility for the day-to-day valuation of portfolio assets (including fair value measurements for the Fund’s assets and liabilities) rests
with New York Life Investment Management LLC (“New York Life Investments” or the “Manager”), aided to whatever extent necessary by the Subadvisor (as defined in Note 3(A)). To assess the appropriateness of security valuations,
the Manager, the Subadvisor or the Fund’s third-party service provider, who is subject to oversight by the Manager, regularly compares prior day prices, prices on comparable securities and the sale prices to the prior and current day prices and
challenges prices with changes exceeding certain tolerance levels with third-party pricing services or broker sources.
The Board authorized the Valuation Committee
to appoint a Valuation Subcommittee (the “Subcommittee”) establish the prices of securities for which market quotations are not readily available or the prices of which are not otherwise readily determinable under the procedures. The
Subcommittee meets (in person, via electronic mail or via teleconference) on an as-needed basis. The Valuation Committee meets to ensure that actions taken by the Subcommittee were appropriate.
For those securities valued through either a standardized fair valuation methodology or a fair valuation measurement, the Subcommittee deals in the first instance with
such valuation and the Valuation Committee reviews and affirms, if appropriate, the reasonableness of the valuation based on such methodologies and measurements on a regular basis after considering information that is reasonably available and deemed
relevant by the Valuation Committee. Any action taken by the Subcommittee with respect to the valuation of a portfolio security or other asset is submitted for review and ratification (if appropriate) to the Valuation Committee and the Board at the
next regularly scheduled meeting.
“Fair value” is defined as the price the Fund would reasonably expect to receive upon selling an asset or liability in an
orderly transaction to an independent buyer in the principal or most advantageous market for the asset or liability. Fair value measurements are determined within a framework that establishes a three-tier hierarchy that maximizes the use of
observable market data and minimizes the use of unobservable inputs to establish a classification of fair value measurements for disclosure purposes. “Inputs” refer broadly to the assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk, such as the risk inherent in a particular valuation technique used to measure fair value using a pricing model and/or the risk inherent in the inputs for the valuation technique. Inputs may
be observable or unobservable. Observable inputs reflect the assumptions market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Fund. Unobservable inputs reflect the Fund’s
own assumptions about the assumptions market participants would use in pricing the asset or
Notes to Financial Statements (continued)
liability based on the information available. The inputs or methodology used for valuing assets or liabilities may not be
an indication of the risks associated with investing in those assets or liabilities. The three-tier hierarchy of inputs is summarized below.
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Level 1—quoted prices in active markets for an identical asset or liability
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Level 2—other significant observable inputs (including quoted prices for a similar asset or liability in active markets, interest rates and yield curves, prepayment speeds, credit risk, etc.)
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Level 3—significant unobservable inputs (including the Fund’s own assumptions about the assumptions that market participants would use in measuring fair value of an asset or liability)
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The level of an asset or liability within the fair value hierarchy is based on the lowest level of an input, both individually and in the aggregate, that is significant
to the fair value measurement. The aggregate value by input level of the Fund’s assets and liabilities as of May 31, 2020 is included at the end of the Portfolio of Investments.
The Fund may use third-party vendor evaluations, whose prices may be derived from one or more of the following standard inputs, among others:
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• Benchmark yields
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• Reported trades
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• Broker/dealer quotes
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• Issuer spreads
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• Two-sided markets
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• Benchmark securities
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• Bids/offers
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• Reference data (corporate actions or
material event notices)
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• Industry and economic events
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• Comparable bonds
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• Monthly payment information
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An asset or liability for which market values cannot be measured using the methodologies described above is valued by methods deemed
reasonable in good faith by the Valuation Committee, following the procedures established by the Board, to represent fair value. Under these procedures, the Fund generally uses a market-based approach which may use related or comparable
assets or liabilities, recent transactions, market multiples, book values, and other relevant information. The Fund may also use an income-based valuation approach in which the anticipated future cash flows of the asset or liability are discounted
to calculate fair value. Discounts may also be applied due to the nature and/or duration of any restrictions on the disposition of the asset or liability. Fair value represents a good faith approximation of the value of a security. Fair value
determinations involve the consideration of a number of subjective factors, an analysis of applicable facts and circumstances and the exercise of judgment. As a result, it is possible that the fair value for a security determined in good faith in
accordance with the Fund’s valuation procedures may differ from valuations for the same security determined by other funds using their own valuation procedures. Although the Fund’s valuation procedures are designed to value a security at
the price the Fund may reasonably expect to receive upon the security’s sale in an orderly transaction, there can be no assurance that any fair value determination thereunder would, in fact, approximate the amount that the Fund would actually
realize upon the sale of the security or the price at which the security would trade if a reliable market price were readily available. During the year ended
May 31, 2020, there were no material changes to the fair value methodologies.
Securities which may be
valued in this manner include, but are not limited to: (i) a security for which trading has been halted or suspended; (ii) a debt security that has recently gone into default and for which there is not a current market quotation;
(iii) a security of an issuer that has entered into a restructuring; (iv) a security that has been delisted from a national exchange; (v) a security for which the market price is not readily available from a third-party pricing source
or, if so provided, does not, in the opinion of the Manager or the Subadvisor, reflect the security’s market value; (vi) a security subject to trading collars for which no or limited trading takes place; and (vii) a security whose
principal market has been temporarily closed at a time when, under normal conditions, it would be open. Securities valued in this manner are generally categorized as Level 3 in the hierarchy. As of May 31, 2020, no securities held by the
Fund were fair valued in such a manner.
Municipal debt securities are valued at the evaluated mean prices supplied by a pricing agent or broker selected by the
Manager, in consultation with the Subadvisor. Those values reflect broker-dealer supplied prices and electronic data processing techniques, if the evaluated bid or mean prices are deemed by the Manager, in consultation with the Subadvisor, to be
representative of market values, at the regular close of trading of the Exchange on each valuation date. Debt securities purchased on a delayed delivery basis are marked to market daily until settlement at the forward settlement date. Municipal debt
securities are generally categorized as Level 2 in the hierarchy.
Futures contracts are valued at the last posted settlement price on the market where such
futures are primarily traded and are generally categorized as Level 1 in the hierarchy.
Temporary cash investments acquired in excess of 60 days to maturity at
the time of purchase are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities and ratings), both as furnished by independent pricing services. Temporary
cash investments that mature in 60 days or less at the time of purchase (“Short-Term Investments”) are valued using the amortized cost method of valuation, unless the use of such method would be inappropriate. The amortized cost method
involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between such cost and the value on maturity date. Amortized cost approximates the current fair value of a
security. Securities valued using the amortized cost method are not valued using quoted prices in an active market and are generally categorized as Level 2 in the hierarchy.
The information above is not intended to reflect an exhaustive list of the methodologies that may be used to value portfolio investments. The valuation procedures permit
the use of a variety of valuation methodologies in connection with valuing portfolio investments. The methodology used for a specific type of investment may vary based on the market data available or other considerations. The methodologies
summarized above may not represent the specific means by which portfolio investments are valued on any particular business day.
(B) Income Taxes. The Fund’s policy is to comply with the requirements of the Internal Revenue Code of 1986, as amended (the
“Internal
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MainStay MacKay DefinedTerm Municipal Opportunities Fund
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Revenue Code”), applicable to regulated investment companies and to distribute all of its taxable income to the shareholders of the Fund within the allowable time limits.
The Manager evaluates the Fund’s tax positions to determine if the tax positions taken meet the minimum recognition threshold in connection with accounting for
uncertainties in income tax positions taken or expected to be taken for the purposes of measuring and recognizing tax liabilities in the financial statements. Recognition of tax benefits of an uncertain tax position is permitted only to the extent
the position is “more likely than not” to be sustained assuming examination by taxing authorities. The Manager analyzed the Fund’s tax positions taken on federal, state and local income tax returns for all open tax years (for up to
three tax years), and has concluded that no provisions for federal, state and local income tax are required in the Fund’s financial statements. The Fund’s federal, state and local income tax and federal excise tax returns for tax years for
which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state and local departments of revenue.
(C) Dividends and Distributions to Common Shareholders. Dividends and distributions are recorded on the ex-dividend date. The Fund intends to declare dividends from net investment income, after payment of any dividends on any outstanding Preferred shares, if any, at least monthly and declares and pays distributions
from net realized capital gains, if any, at least annually. To the extent that the Fund realizes any capital gains or ordinary taxable income, it will be required to allocate such income between the Common shares and Preferred shares issued by the
Fund, in proportion to the total dividends paid to each share class for the year in which the income is realized. Dividends and distributions are determined in accordance with federal income tax regulations and may differ from determinations using
GAAP. For information on the Fund’s dividend reinvestment plan, please see page 35.
(D) Security Transactions and Investment
Income. The Fund records security transactions on the trade date. Realized gains and losses on security transactions are determined using the identified cost method. Interest income is
accrued as earned using the effective interest rate method. Distributions received from real estate investment trusts (“REITs”) may be classified as dividends, capital gains and/or return of capital. Discounts and premiums on securities
purchased for the Fund are accreted and amortized, respectively, on the effective interest rate method over the life of the respective securities.
The Fund
may place a debt security on non-accrual status and reduce related interest income by ceasing current accruals and writing off all or a portion of any interest receivables when the collection of all or a
portion of such interest has become doubtful. A debt security is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured.
(E) Expenses. Expenses of the Fund are
recorded on the date the expenses are incurred. The expenses borne by the Fund, including those of related parties to the Fund, are shown in the Statement of Operations. Certain expenses of the Fund are allocated in proportion to other funds within
the MainStay Group of Funds.
(F) Use of Estimates. In preparing financial statements in conformity with GAAP, the Manager makes estimates and assumptions that
affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
(G) Futures Contracts. A futures contract is
an agreement to purchase or sell a specified quantity of an underlying instrument at a specified future date and price, or to make or receive a cash payment based on the value of a financial instrument (e.g., foreign currency, interest rate,
security or securities index). The Fund is subject to risks such as market price risk and/or interest rate risk in the normal course of investing in these contracts. Upon entering into a futures contract, the Fund is required to pledge to the broker
or futures commission merchant an amount of cash and/or U.S. government securities equal to a certain percentage of the collateral amount, known as the “initial margin.” During the period the futures contract is open, changes in the value
of the contract are recognized as unrealized appreciation or depreciation by marking to market such contract on a daily basis to reflect the market value of the contract at the end of each day’s trading. The Fund agrees to receive from or pay
to the broker or futures commission merchant an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as “variation margin.” When the futures contract is closed, the Fund records a
realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund’s basis in the contract.
The
use of futures contracts involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. The contract or notional amounts and variation margin reflect the extent of the Fund’s
involvement in open futures positions. There are several risks associated with the use of futures contracts as hedging techniques. There can be no assurance that a liquid market will exist at the time when the Fund seeks to close out a futures
contract. If no liquid market exists, the Fund would remain obligated to meet margin requirements until the position is closed. Futures contracts may involve a small initial investment relative to the risk assumed, which could result in losses
greater than if the Fund did not invest in futures contracts. Futures contracts may be more volatile than direct investments in the instrument underlying the futures and may not correlate to the underlying instrument, causing a given hedge not to
achieve its objectives. The Fund’s activities in futures contracts have minimal counterparty risk as they are conducted through regulated exchanges that guarantee the futures against default by the counterparty. In the event of a bankruptcy or
insolvency of a futures commission merchant that holds margin on behalf of the Fund, the Fund may not be entitled to the return of the entire margin owed to the Fund, potentially resulting in a loss. The Fund may invest in futures contracts to seek
enhanced returns or to reduce the risk of loss by hedging certain of its holdings. The Fund’s investment in futures contracts and other derivatives may increase the volatility of the Fund’s NAVs and may result in a loss to the Fund. As of
May 31, 2020, the Fund did not hold any futures contracts.
(H) Tender Option
Bonds. The Fund may leverage its assets through the use of proceeds received from tender option bond (“TOB”) transactions. In a TOB transaction, a tender option bond trust (a
“TOB Issuer”) is typically established, which forms a special purpose trust into which the Fund, or an agent on behalf of the Fund, transfers municipal bonds or other municipal securities (“Underlying Securities”). A TOB Issuer
typically issues two classes of beneficial interests: short-term floating rate notes (“TOB Floaters”) with a fixed principal amount
Notes to Financial Statements (continued)
representing a senior interest in the Underlying Securities, and which are sold to third party investors, and residual
interest municipal tender option bonds (“TOB Residuals”) representing a subordinate interest in the Underlying Securities, and which are generally issued to the Fund. The interest rate on the TOB Floaters resets periodically, usually
weekly, to a prevailing market rate, and holders of the TOB Floaters are granted the option to tender their TOB Floaters back to the TOB Issuer for repurchase at their principal amount plus accrued interest thereon periodically, usually daily or
weekly. The Fund may invest in both TOB Floaters and TOB Residuals. The Fund may not invest more than 5% of its Managed Assets (as defined in Note 3(A)) in any single TOB Issuer. The Fund may invest in both TOB Floaters and TOB Residuals issued by
the same TOB Issuer.
Typically, a fund serves as the sponsor of the TOB issuer (“Fund-sponsored TOB”). Under this structure, a fund establishes, structures
and “sponsors” the TOB Issuer in which it holds TOB Residuals. The Fund uses this or a similar structure for any TOB in which it invests. In connection with Fund-sponsored TOBs, the fund sponsoring the Fund-sponsored TOB (“Fund
Sponsor”) may contract with a third-party to perform some or all of the Fund Sponsor’s duties as sponsor. Regardless of whether the Fund Sponsor delegates any of its sponsorship duties to a third party, the Fund Sponsor’s expanded
role under the Fund-sponsored TOB structure may increase the Fund Sponsor’s operational and regulatory risk. If the third-party is unable to perform its obligations as an administrative agent, the Fund Sponsor itself would be subject to such
obligations or would need to secure a replacement agent. The obligations that the Fund Sponsor may be required to undertake could include reporting and recordkeeping obligations under the Internal Revenue Code and federal securities laws and
contractual obligations with other TOB service providers. The Fund may serve as a Fund Sponsor to a Fund-sponsored TOB. If the Fund serves as a Fund Sponsor, it would be subject to the obligations discussed above and the risks attendant to such
obligations.
Under the Fund-sponsored TOB structure, the TOB Issuer receives Underlying Securities from the Fund through (or as) the Fund Sponsor and then issues TOB
Floaters to third party investors and TOB Residuals to the Fund. The Fund is paid the cash (less transaction expenses, which are borne by the Fund) received by the TOB Issuer from the sale of TOB Floaters and typically will invest the cash in
additional municipal bonds or other investments permitted by its investment policies. TOB Floaters may have first priority on the cash flow from the securities held by the TOB Issuer and are enhanced with a liquidity support arrangement from a bank
or an affiliate of the sponsor (the “liquidity provider”), which allows holders to tender their position back to the TOB Issuer at par (plus accrued interest). The Fund, in addition to receiving cash from the sale of TOB Floaters, also
receives TOB Residuals. TOB Residuals provide the Fund with the right to (1) cause the holders of TOB Floaters to tender their notes to the TOB Issuer at par (plus accrued interest), and (2) acquire the Underlying Securities from the TOB
Issuer. In addition, all voting rights and decisions to be made with respect to any other rights relating to the Underlying Securities deposited in the TOB Issuer are passed through to the Fund, as the holder of TOB Residuals. Such a transaction, in
effect, creates exposure for the Fund to the entire return of the Underlying Securities deposited in the TOB Issuer, with a net cash investment by the Fund that is less than the value of the Underlying Securities deposited in the TOB Issuer. This
multiplies the positive or
negative impact of the Underlying Securities’ return within the Fund (thereby creating leverage). Income received from TOB Residuals will vary inversely with the short-term rate paid to
holders of TOB Floaters and in most circumstances, TOB Residuals represent substantially all of the Underlying Securities’ downside investment risk and also benefits disproportionately from any potential appreciation of the Underlying
Securities’ value. The amount of such increase or decrease is a function, in part, of the amount of TOB Floaters sold by the TOB Issuer of these securities relative to the amount of TOB Residuals that it sells. The greater the amount of TOB
Floaters sold relative to TOB Residuals, the more volatile the income paid on TOB Residuals will be. The price of TOB Residuals will be more volatile than that of the Underlying Securities because the interest rate is dependent on not only the fixed
coupon rate of the Underlying Securities, but also on the short-term interest rate paid on TOB Floaters.
For TOB Floaters, generally, the interest rate earned will
be based upon the market rates for municipal securities with maturities or remarketing provisions that are comparable in duration to the periodic interval of the tender option, which may vary from weekly, to monthly, to extended periods of one year
or multiple years. Since the option feature has a shorter term than the final maturity or first call date of the Underlying Securities deposited in the TOB Issuer, the Fund, if it is the holder of the TOB Floaters, relies upon the terms of the
agreement with the financial institution furnishing the option as well as the credit strength of that institution. As further assurance of liquidity, the terms of the TOB Issuer provide for a liquidation of the Underlying Security deposited in the
TOB Issuer and the application of the proceeds to pay off the TOB Floaters.
The TOB Issuer may be terminated without the consent of the Fund upon the occurrence of
certain events, such as the bankruptcy or default of the issuer of the Underlying Securities deposited in the TOB Issuer, a substantial downgrade in the credit quality of the issuer of the securities deposited in the TOB Issuer, the inability of the
TOB Issuer to obtain liquidity support for the TOB Floaters, a substantial decline in the market value of the Underlying Securities deposited in the TOB Issuer, or the inability of the sponsor to remarket any TOB Floaters tendered to it by holders
of the TOB Floaters. In such an event, the TOB Floaters would be redeemed by the TOB Issuer at par (plus accrued interest) out of the proceeds from a sale of the Underlying Securities deposited in the TOB Issuer. If this happens, the Fund would be
entitled to the assets of the TOB Issuer, if any, that remain after the TOB Floaters have been redeemed at par (plus accrued interest). If there are insufficient proceeds from the sale of these Underlying Securities to redeem all of the TOB Floaters
at par (plus accrued interest), the liquidity provider or holders of the TOB Floaters would bear the losses on those securities and there would be no recourse to the Fund’s assets (unless the Fund held a recourse TOB Residual).
To the extent that the remarketing agent and/or the liquidity provider is a banking entity, the TOB may face heightened liquidity risks due to restrictions applicable to
banking entities under the Volcker Rule. The Volcker Rule generally prohibits banking entities from engaging in proprietary trading or from acquiring or retaining an ownership interest in, or sponsoring, a hedge fund or private equity fund (a
“Covered Fund”). TOB Issuers are often structured as a Covered Fund, and therefore, a banking entity that is a remarketing agent would not be able to repurchase tendered TOB Floaters for its own account upon a failed remarketing. In the
event of a failed remarketing, a banking entity
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MainStay MacKay DefinedTerm Municipal Opportunities Fund
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serving as liquidity provider may loan the necessary funds to the TOB Issuer to purchase the tendered TOB Floaters. The TOB Issuer, not the Fund Sponsor or the Fund, would be the borrower and the
loan from the liquidity provider will be secured by the purchased TOB Floaters now held by the TOB Issuer. However, the Fund Sponsor and the Fund would bear the risk of loss with respect to any liquidity shortfall to the extent it entered into a
reimbursement agreement with the liquidity provider. If a TOB Issuer in which the Fund invests experiences adverse events in connection with a failed remarketing of TOB Floaters or a liquidity shortfall, the Fund would experience a loss.
For financial reporting purposes, Underlying Securities that are deposited into a TOB Issuer are treated as investments of the Fund, and are presented in the Fund’s
Portfolio of Investments. Outstanding TOB Floaters issued by a TOB Issuer are presented as a liability at their face value as “Payable for Floating Rate Note Obligations” in the Fund’s Statement of Assets and Liabilities. The face
value of the TOB Floaters approximates their fair value of the floating rate notes. Interest income from the Underlying Securities are recorded by the Fund on an accrual basis. Interest expense incurred on the TOB Floaters and other expenses related
to remarketing, administration and trustee services to a TOB Issuer are recognized as a component of “Interest expense and fees” in the Statement of Operations.
At May 31, 2020, the aggregate value of the Underlying Securities transferred to the TOB Issuer and the related liability for TOB Floaters were as follows:
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Underlying
Securities Transferred
to TOB
Issuers
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Liability for
Floating Rate Note
Obligations
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$473,891,581
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$292,350,000
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During the year ended May 31, 2020, the Fund’s average TOB Floaters outstanding and the daily weighted average interest rate,
including fees, were as follows:
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Average
Floating Rate Note
Obligations Outstanding
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Daily Weighted
Average
Interest Rate
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$250,093,101
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2.13%
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(I) Fixed Rate Municipal Term Preferred Shares. On October 4, 2012, the Fund issued and has outstanding, two series of Fixed Rate Municipal Term Preferred Shares (“Series A FMTP Shares” and “Series B FMTP Shares”, collectively,
“FMTP Shares”), each with a liquidation preference of $100,000 per share (“Liquidation Preference”). Dividends on FMTP Shares, which are recognized as interest expense for financial reporting purposes, are paid semiannually at a
fixed annual rate, subject to adjustments in certain circumstances. The FMTP Shares were issued in a private offering exempt from registration under the Securities Act of 1933, as amended.
The Fund is obligated to redeem its FMTP Shares by the date as specified in its offering document (“Term Redemption”), unless redeemed earlier by the Fund. FMTP
Shares are subject to optional and mandatory redemption in certain circumstances. FMTP Shares will be subject to redemption, at the option of the Fund (“Optional Redemption”), in whole or in part at any time only for the purposes of
decreasing leverage of the Fund. The Fund may be obligated to redeem certain of the FMTP Shares
if the Fund fails to maintain certain asset coverage and leverage ratio requirements and such failures are not cured by the applicable cure date. The Optional Redemption price per share is equal
to the sum of the Liquidation Preference per share plus any accrued but unpaid dividends.
As of May 31, 2020, the number of FMTP Shares outstanding and annual
dividend rate were as follows:
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Series
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Dates of Issuance
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Shares
Outstanding
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Annual
Dividend Rate
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A
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October 4, 2012
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350
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2.78
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%
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B
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October 4, 2012
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350
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3.01
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%
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As of May 31, 2020, the Term Redemption date and liquidation value for the FMTP Shares outstanding were as follows:
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Series
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Term Redemption Date
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Liquidation Value
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A
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November 30, 2020
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$
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35,445,959
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B
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May 31, 2021
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$
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35,482,854
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For financial reporting purposes only, the liquidation value of FMTP Shares is recorded as a liability on the Statement of Assets and
Liabilities. Unpaid dividends on FMTP Shares are recognized as a component of “Interest expense and fees payable” on the Statement of Assets and Liabilities. Dividends accrued on FMTP Shares are recognized as a component of “Interest
expense and fees” in the Statement of Operations. As of May 31, 2020, the fair value of the FMTP Shares for Series A and Series B were $35,000,000 and $34,999,738, respectively.
(J) Statement of Cash Flows. The cash amount
shown in the Fund’s Statement of Cash Flows is the amount included in the Fund’s Statement of Assets and Liabilities and represents the cash on hand at its custodian and restricted cash, if any, as of May 31, 2020.
(K) Municipal Bond Risk. The Fund may invest
more heavily in municipal bonds from certain cities, states, territories or regions than others, which may increase the Fund’s exposure to losses resulting from economic, political, or regulatory occurrences impacting these particular cities,
states, territories or regions. In addition, many state and municipal governments that issue securities are under significant economic and financial stress and may not be able to satisfy their obligations. The Fund may invest a substantial amount of
its assets in municipal bonds whose interest is paid solely from revenues of similar projects, such as tobacco settlement bonds. If the Fund concentrates its investments in this manner, it assumes the legal and economic risks relating to such
projects and this may have a significant impact on the Fund’s investment performance.
Certain of the issuers in which the Fund may invest have recently
experienced, or may experience, significant financial difficulties and repeated credit rating downgrades. On May 3, 2017, the Commonwealth of Puerto Rico began proceedings pursuant to the Puerto Rico Oversight, Management, and Economic
Stability Act (“PROMESA”) to seek bankruptcy-type protections from approximately $74 billion in debt and approximately $48 billion in unfunded pension obligations. Puerto Rico’s debt restructuring process and other economic,
political, social, environmental, or health factors or developments, which could occur rapidly, may significantly affect the value of municipal securities of
Notes to Financial Statements (continued)
Puerto Rico. In September 2017, the Commonwealth of Puerto Rico did experience severe damage from Hurricane Maria which has
impacted the island’s economy and has delayed the resolution of the debt restructuring as timetables are being revised. The Fund’s vulnerability to potential losses associated with such developments may be reduced through investing in
municipal securities that feature credit enhancements (such as bond insurance). The bond insurance provider pays both principal and interest when due to the bond holder. The magnitude of Puerto Rico’s debt restructuring or other adverse
economic developments could pose significant strains on the ability of municipal securities insurers to meet all future claims. As of May 31, 2020, 87.2% of the Puerto Rico municipal securities held by the Fund were insured. The Fund’s
largest bond insurance provider, Assured Guaranty Municipal Corp., insured certain Puerto Rico municipal securities totaling 5.48% of the Fund’s total investments. Those securities, whose principal and interest are covered by bond insurance
providers, are shown in the Portfolio of Investments.
On February 12, 2019, the Puerto Rico Sales Tax Financing Corporation (“COFINA”) restructured
$17.5 billion of its debt into $12 billion of new securities. On May 3, 2019, the Financial Oversight and Management Board for Puerto Rico (the “Oversight Board”), the Commonwealth of Puerto Rico and a majority of creditors
committed to a restructuring support agreement (“RSA”) to restructure the outstanding debt of the Puerto Rico Electric Power Authority. The RSA requires approval from the presiding judge and the Puerto Rican legislature and there is no
assurance that either will approve of the agreement. On September 27, 2019, the Oversight Board released its draft of Puerto Rico’s Bankruptcy Plan of Adjustment. There is no assurance that the plan will be approved by creditors or the
presiding judge.
On August 7, 2019, the U.S. Court of Appeals for the First Circuit (“First Circuit”) entered an order denying the Oversight
Board’s motion to dismiss as equitably moot the appeal of the presiding judge’s rulings related to confirmation of the COFINA third amended plan of adjustment. The appeal of the COFINA debt restructuring stems from a group of legacy COFINA
subordinate bondholders. There is no assurance the First Circuit will uphold the COFINA plan of adjustment approved by the presiding judge.
In July 2018, a creditor
challenged the constitutionality of the Oversight Board and the Commonwealth’s petition to restructure its debt pursuant to PROMESA. In February 2019, the First Circuit determined that the Oversight Board’s organization was
unconstitutional. The ruling was appealed, and a decision from the United States Supreme Court is pending. If the First Circuit’s decision is upheld, the Oversight Board’s ability to seek to restructure debt on behalf of the Commonwealth
could be impaired.
In February of 2020 certain holders of the Commonwealth’s debt, including general obligation bonds and public building authority bonds,
reached a plan support agreement (“PSA”) with the Oversight Board to restructure a portion of the Commonwealth’s general fund debt. The Commonwealth has not formally endorsed the PSA and the agreement still requires the approval of
the presiding judge who oversees the Commonwealth’s proceedings under PROMESA. Under certain circumstances, PSA creditors may terminate the PSA, including for the lack of approval of the Bankruptcy Disclosure Statement by August 31, 2020
from the presiding judge. The settlement provides for a recovery of new
general obligation bonds, new junior COFINA bonds, and cash. The Fund is a signatory to the PSA.
In light of
the spread of the novel coronavirus in early 2020 to Puerto Rico and globally, the presiding judge has adjourned most of the Commonwealth’s PROMESA proceedings for public health reasons. As of May 31, 2020, the Fund held no COFINA
bonds that have not yet been restructured.
(L) Indemnifications. Under the Fund’s organizational documents, its officers and trustees are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal
course of business, the Fund enters into contracts with third-party service providers that contain a variety of representations and warranties and that may provide general indemnifications. The Fund’s maximum exposure under these arrangements
is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. The Manager believes that the risk of loss in connection with these potential indemnification obligations is remote. However, there can be
no assurance that material liabilities related to such obligations will not arise in the future, which could adversely impact the Fund.
(M) Quantitative Disclosure of Derivative Holdings. The following tables show additional disclosures related to the Fund’s
derivative and hedging activities, including how such activities are accounted for and their effect on the Fund’s financial positions, performance and cash flows. The Fund entered into United States Treasury Note futures contracts to help
manage the duration and yield curve positioning of the portfolio. These derivatives are not accounted for as hedging instruments.
The effect of derivative
instruments on the Statement of Operations for the year ended May 31, 2020:
Realized Gain (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
Operations
Location
|
|
Interest
Rate
Contracts
Risk
|
|
|
Total
|
|
|
|
|
|
|
|
Futures Contracts
|
|
Net realized gain (loss) on futures transactions
|
|
$
|
(4,557,158
|
)
|
|
$
|
(4,557,158
|
)
|
|
|
|
|
|
|
|
|
|
Total Realized Gain (Loss)
|
|
|
|
$
|
(4,557,158
|
)
|
|
$
|
(4,557,158
|
)
|
|
|
|
|
|
|
|
|
Change in Unrealized Appreciation (Depreciation)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of
Operations
Location
|
|
Interest
Rate
Contracts
Risk
|
|
|
Total
|
|
|
|
|
|
|
|
Futures Contracts
|
|
Net change in unrealized appreciation (depreciation) on futures contracts
|
|
$
|
1,039,760
|
|
|
$
|
1,039,760
|
|
|
|
|
|
|
|
|
|
|
Total Change in Unrealized Appreciation (Depreciation)
|
|
|
|
$
|
1,039,760
|
|
|
$
|
1,039,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
MainStay MacKay DefinedTerm Municipal Opportunities Fund
|
Average Notional Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate
Contracts
Risk
|
|
|
Total
|
|
|
|
|
|
|
Futures Contracts Short (a)
|
|
$
|
(114,220,879
|
)
|
|
$
|
(114,220,879
|
)
|
|
|
|
|
|
|
|
(a)
|
Positions were open four months during the reporting period
|
Note 3–Fees and Related Party Transactions
(A) Manager and Subadvisor. New York Life Investments, a registered investment adviser and an indirect, wholly-owned subsidiary of
New York Life Insurance Company (“New York Life”), serves as the Fund’s Manager, pursuant to an Amended and Restated Management Agreement (“Management Agreement”). The Manager provides offices, conducts clerical,
recordkeeping and bookkeeping services, and keeps most of the financial and accounting records required to be maintained by the Fund. Except for the portion of salaries and expenses that are the responsibility of the Fund, the Manager pays the
salaries and expenses of all personnel affiliated with the Fund and certain operational expenses of the Fund. The Fund reimburses New York Life Investments in an amount equal to a portion of the compensation of the Chief Compliance Officer
attributable to the Fund. MacKay Shields LLC (“MacKay Shields” or the ‘‘Subadvisor’’), a registered investment adviser and an indirect, wholly-owned subsidiary of New York Life, serves as Subadvisor to the Fund and is
responsible for the day-to-day portfolio management of the Fund. Pursuant to the terms of a Subadvisory Agreement (“Subadvisory Agreement”) between New York
Life Investments and MacKay Shields, New York Life Investments pays for the services of the Subadvisor.
Under the Management Agreement, the Fund pays the
Manager a monthly fee for the services performed and the facilities furnished at an annual rate of 0.60% of the “Managed Assets”. Managed Assets is defined as the Fund’s total assets, minus the sum of its accrued liabilities (other
than Fund liabilities incurred for the purpose of creating effective leverage (i.e. tender option bonds) or Fund liabilities related to liquidation preference of any Preferred shares issued).
During the year ended May 31, 2020, New York Life Investments earned fees from the Fund in the amount of $5,323,229, and paid the Subadvisor in the amount of
$2,661,615.
State Street provides sub-administration and sub-accounting services to
the Fund pursuant to an agreement with New York Life Investments. These services include calculating the daily NAV of the Fund, maintaining the general ledger and sub-ledger accounts for the calculation of the
Fund’s NAV, and assisting New York Life Investments in conducting various aspects of the Fund’s administrative operations. For providing these services to the Fund, State Street is compensated by New York Life Investments.
Pursuant to an agreement between the Fund and New York Life Investments, New York Life Investments is responsible for providing or procuring certain regulatory reporting
services for the Fund. The Fund will reimburse New York Life Investments for the actual costs incurred by New York Life Investments in connection with providing or procuring these services for the Fund.
(B) Transfer, Dividend Disbursing and Shareholder Servicing
Agent. Computershare Trust Company, N.A. (“Computershare”), 150 Royall Street, Canton, Massachusetts, 02021, is the Fund’s transfer, dividend disbursing and shareholder
servicing agent pursuant to an agreement between the Fund and Computershare.
Note 4–Federal Income Tax
As of May 31, 2020, the cost and unrealized appreciation (depreciation) of the Fund’s investment portfolio, including applicable derivative contracts and other
financial instruments, as determined on a federal income tax basis, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax
Cost
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
(Depreciation)
|
|
|
Net
Unrealized
Appreciation/
(Depreciation)
|
|
|
Investments in Securities
|
|
$
|
557,597,565
|
|
|
$
|
38,370,354
|
|
|
$
|
(1,911,495
|
)
|
|
$
|
36,458,859
|
|
As of May 31, 2020, the components of accumulated gain (loss) on a tax basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary
Income
|
|
Undistributed
Tax Exempt
Income
|
|
Accumulated
Capital and
Other Gain
(Loss)
|
|
Other
Temporary
Differences
|
|
Unrealized
Appreciation
(Depreciation)
|
|
Total
Accumulated
Gain (Loss)
|
|
|
|
|
|
|
|
|
$—
|
|
$687,781
|
|
$(13,729,635)
|
|
$(1,139,184)
|
|
$34,985,526
|
|
$20,804,488
|
The difference between book-basis and tax basis unrealized depreciation is due to TOB transactions.
The other temporary differences are primarily due to dividends payable.
As of
May 31, 2020, for federal income tax purposes, capital loss carryforwards of $13,729,635 were available as shown in the table below, to the extent provided by the regulations to offset future realized gains of the Fund through the years
indicated. To the extent that these capital loss carryforwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to shareholders. No capital gain distributions shall be made until any
capital loss carryforwards have been fully utilized.
|
|
|
|
|
|
|
Capital Loss
Available Through
|
|
Short-Term
Capital Loss
Amounts (000’s)
|
|
Long-Term
Capital Loss
Amounts (000’s)
|
|
|
|
|
|
Unlimited
|
|
$13,730
|
|
$—
|
The Fund utilized $5,943,512 of capital loss carryforwards during the year ended May 31, 2020.
Notes to Financial Statements (continued)
The tax character of distributions paid
during the years ended May 31, 2020 and May 31, 2019, to Common shareholders (as reflected in the Statements of Changes in Net Assets) and Preferred shareholders (included as interest expense for financial statement purposes (See Note
2(I)) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
Distributions paid from:
|
|
Ordinary
Income
|
|
|
Exempt
Interest
Dividends
|
|
|
Long-Term
Capital Gain
|
|
|
Ordinary
Income
|
|
|
Exempt
Interest
Dividends
|
|
|
Long-Term
Capital Gain
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
$
|
214,915
|
|
|
$
|
27,974,131
|
|
|
$
|
—
|
|
|
$
|
553,807
|
|
|
$
|
27,701,000
|
|
|
$
|
—
|
|
|
Preferred shares
|
|
|
31,930
|
|
|
|
2,001,297
|
|
|
|
—
|
|
|
|
42,648
|
|
|
|
1,879,607
|
|
|
|
—
|
|
|
Total
|
|
$
|
246,845
|
|
|
$
|
29,975,428
|
|
|
$
|
—
|
|
|
$
|
596,455
|
|
|
$
|
29,580,607
|
|
|
$
|
—
|
|
Note 5–Custodian
State
Street is the custodian of cash and securities held by the Fund. Custodial fees are charged to the Fund based on the Fund’s net assets and/or the market value of securities held by the Fund and the number of certain transactions incurred by the
Fund.
Note 6–Purchases and Sales of Securities (in 000’s)
During the year ended May 31, 2020, purchases and sales of securities, other than short-term securities, were $351,403 and $331,137, respectively.
Note 7–Capital Share Transactions
|
|
|
|
|
|
|
|
|
|
|
Common Shares:
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
For the Year ended May 31, 2020:
|
|
|
|
|
|
|
|
|
|
Common shares issued to shareholders in reinvestment of dividends (a)
|
|
|
85,241
|
|
|
$
|
1,735, 312
|
|
|
|
|
|
|
|
|
For the Year ended May 31, 2019:
|
|
|
|
|
|
|
|
|
|
Common shares issued to shareholders in reinvestment of dividends (a)
|
|
|
31,427
|
|
|
$
|
635,272
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Shares (b):
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
For the period June 26, 2012 through May 31, 2013:
|
|
|
|
|
|
|
|
|
|
Series A Shares Issued
|
|
|
350
|
|
|
$
|
35,000,000
|
|
|
Series B Shares Issued
|
|
|
350
|
|
|
$
|
35,000,000
|
|
|
|
|
|
|
|
|
(a)
|
See page 35 for information on the Fund’s dividend reinvestment plan.
|
|
(b)
|
For the period June 1, 2013 through May 31, 2020, there were no new shares issued.
|
Note 8–Recent Accounting Pronouncements
To improve the effectiveness
of fair value disclosure requirements, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2018-13, Fair Value Measurement Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which adds, removes, and modifies certain fair value measurement disclosure requirements. ASU
2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. The Manager evaluated the implications of certain provisions of ASU
2018-13 and determined to early adopt aspects related to the removal and modifications of certain fair value measurement disclosures, which
are currently in place as of May 31, 2020. The Manager is evaluating the implications of certain other provisions of ASU 2018-13 related to new
disclosure requirements and has not yet determined the impact of those provisions on the financial statement disclosures, if any.
In March 2020, FASB issued
Accounting Standards Update 2020-04 (“ASU 2020-04”), which provides optional guidance to ease the potential accounting burden associated with transitioning away from LIBOR and other reference rates that are expected to be discontinued. ASU
2020-04 is effective immediately upon release of the update on March 12, 2020 through December 31, 2022. At this time, the Manager is evaluating the implications of certain other provisions of ASU 2020-04 related to new disclosure requirements and
any impact on the financial statement disclosures has not yet been determined.
Note 9–Subsequent Events
In connection with the preparation of the financial statements of the Fund as of and for the year ended May 31, 2020, events and transactions subsequent to May 31,
2020, through the date the financial statements were issued have been evaluated by the Manager for possible adjustment and/or disclosure. No subsequent events requiring financial statement adjustment or disclosure have been identified, other than
the following:
On April 1, 2020, the Fund declared a dividend in the amount of $0.085 per Common share, payable on June 30, 2020, to shareholders of record
on June 16, 2020.
On June 15, 2020, the Fund paid its semiannual distribution to its Series A FMTP Shares and Series B FMTP Shares in the amounts of
$1,390.00 and $1,505.00, per Preferred share, respectively.
On June 15, 2020, the Fund fully redeemed its Series A FMTP Shares. The redemption price per share
totaled $100,000 for a total redemption amount of $35,000,000.
On July 1, 2020, the Fund declared its July monthly dividend to Common shareholders as shown in
the following schedule:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month
|
|
Ex-Date
|
|
|
Record Date
|
|
|
Payable Date
|
|
|
Amount
|
|
|
|
|
|
|
|
|
July
|
|
|
7/14/20
|
|
|
|
7/15/20
|
|
|
|
7/31/20
|
|
|
$
|
0.085
|
|
Note 10–Other Matters
An outbreak of COVID-19, first detected in December 2019, has developed into a global pandemic and has resulted in travel restrictions,
|
|
|
|
|
28
|
|
MainStay MacKay DefinedTerm Municipal Opportunities Fund
|
closure of international borders, certain businesses and securities markets, restrictions on securities trading activities, prolonged quarantines, supply chain disruptions, and lower consumer
demand, as well as general concern and uncertainty. The continued impact of COVID-19 is uncertain and could further adversely affect the global economy, national economies, individual issuers and capital
markets in unforeseeable ways and result in a substantial and extended economic downturn. Developments that disrupt global economies and financial markets, such as COVID-19, may magnify factors that affect the
Fund’s performance.
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of
MainStay MacKay DefinedTerm Municipal
Opportunities Fund