4. Capital
Stock (continued)
Inc., in the open market. During
the six months ended September 30, 2020 and the year ended March 31, 2020, the Funds did not issue any shares under their dividend reinvestment plan.
On April 25, 2019, Colorado
Municipal Fund, Minnesota Municipal Fund II, and National Municipal Fund (each, a “Fund” and collectively, the “Funds”) priced private offerings to a qualified institutional buyer, as defined
pursuant to Rule 144A under the Securities Act of 1933, of approximately $135 million of Muni-MultiMode Preferred Shares, Series 2049 (MMP). Colorado Municipal Fund, Minnesota Municipal Fund II, and National Municipal
Fund issued $30,000,000, $75,000,000 and $30,000,000, respectively, of MMP Shares with a $100,000 liquidation value per share. Each Fund used the net proceeds from each offering to redeem its outstanding Variable Rate
MuniFund Term Preferred Shares, Series 2021 (VMTP). The MMP shares were the same amount and value as the respective Fund’s VMTP shares.
The MMP shares are a floating rate
form of preferred stock with a mandatory term redemption. The mandatory term redemption date for these three offerings is April 1, 2049. MMP shares have the option at either the request of the purchaser or issuer to
be converted to a variable rate demand preferred (“VRDP”) structure. The converted VRDP shares could then be offered for sale to certain institutional investors. The VRDP could continue to remain
outstanding for the remainder of the MMP shares’ 30-year term. MMP dividends are set weekly at a spread to the Securities Industry and Financial Markets Association Municipal Swap Index. MMP shares represent the
preferred stock of each Fund and are senior, with priority in all respects, to each Fund’s common shares as to payments of dividends. MMP shares are redeemable at par. A Fund may be obligated to redeem certain
of the MMP 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 redemption price per share is equal to the sum of
the liquidation value per share plus any accumulated but unpaid dividends. Dividends on MMP shares are set weekly, and are based on a short-term index rate plus an additional spread that is subject to adjustment in
certain circumstances, including a change in the credit rating assigned to the MMP shares by Fitch Ratings (“Fitch”).
The weighted average dividend rates
for the six months ended September 30, 2020 were as follows:
|
|
|
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Delaware Investments® Colorado Municipal Income Fund, Inc.
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$1.22
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Delaware Investments® Minnesota Municipal Income Fund II, Inc.
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1.22
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Delaware Investments® National Municipal Income Fund
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1.22
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The Funds use leverage because
their managers believe that, over time, leveraging may provide opportunities for additional income and total return for common shareholders. However, the use of leverage also can expose common shareholders to
additional volatility. For example, as the prices of securities held by a Fund decline, the negative impact of these valuation changes on common share net asset value and common shareholder total return is magnified
by the use of leverage; accordingly, the use of structural leverage may hurt a Fund’s overall performance.
Leverage may also cause the Funds
to incur certain costs. In the event that a Fund is unable to meet certain criteria (including, but not limited to, maintaining certain ratings with Fitch and Moody’s, funding dividend payments, or funding
redemptions), that Fund will pay additional fees with respect to the leverage.
For financial reporting purposes,
the MMP shares are considered debt of the issuer; therefore, the liquidation value which approximates fair value of the MMP shares is recorded as a liability in the statements of assets and liabilities. Dividends
accrued and paid on the MMP shares are included as a component of interest expense in the statements of operations. The MMP shares are treated as equity for legal and tax purposes. Dividends paid to holders of the MMP
shares are generally classified as tax-exempt income for tax-reporting purposes.
Offering costs for MMP shares are
recorded as a deferred charge and amortized over the 5-year life of the MMP shares. These are presented as “Offering cost for preferred shareholders” on the “Statements of assets and
liabilities” and “Offering costs” on the “Statements of operations.”
5. Geographic, Credit, and
Market Risk
The Funds concentrate their
investments in securities issued by municipalities. Because each of Colorado Municipal Fund and Minnesota Municipal Fund II invests substantially all of its net assets in municipal obligations of its respective state
at the time of investment, events in that state may have a significant impact on the performance and investments of Colorado Municipal Fund and Minnesota Municipal Fund II. These events may include economic or
political policy changes, tax base erosion, state constitutional limits on tax increases, budget deficits and