UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-08603
Name of Fund: BlackRock Debt Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, BlackRock Debt Strategies Fund, Inc., 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 02/28/07
Date of reporting period: 03/01/06 - 08/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES
FIXED INCOME LIQUIDITY REAL ESTATE
BlackRock Debt Strategies BLACKROCK
Fund, Inc.
SEMI-ANNUAL REPORT | AUGUST 31, 2006
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
BlackRock Debt Strategies Fund, Inc.
The Benefits and Risks of Leveraging
BlackRock Debt Strategies Fund, Inc. utilizes leveraging through borrowings or
issuance of short-term debt securities or shares of Preferred Stock. The concept
of leveraging is based on the premise that the cost of assets to be obtained
from leverage will be based on short-term interest rates, which normally will be
lower than the income earned by the Fund on its longer-term portfolio
investments. To the extent that the total assets of the Fund (including the
assets obtained from leverage) are invested in higher-yielding portfolio
investments, the Fund's Common Stock shareholders will benefit from the
incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the Fund's
net income will be less than if leverage had not been used, and therefore the
amount available for distribution to Common Stock shareholders will be reduced.
Officers and Directors
Robert C. Doll, Jr., President and Director
Ronald Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Donald C. Burke, Vice President and Treasurer
Kevin J. Booth, Vice President
Jeffrey Hiller, Fund Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
NYSE Symbol
DSU
2 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
A Letter to Shareholders
Dear Shareholder
It is my pleasure to welcome you to BlackRock.
On September 29, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch
Investment Managers, L.P. ("MLIM") united to form one of the largest asset
management firms in the world. Now with more than $1 trillion in assets under
management, over 4,000 employees in 18 countries and representation in key
markets worldwide, BlackRock's global presence means greater depth and scale to
serve you.
The new BlackRock unites some of the finest money managers in the industry. Our
ranks include more than 500 investment professionals globally -- portfolio
managers, research analysts, risk management professionals and traders. With
offices strategically located around the world, our investment professionals
have in-depth local knowledge and the ability to leverage our global presence
and robust infrastructure to deliver focused investment solutions. BlackRock's
professional investors are supported by disciplined investment processes and
best-in-class technology, ensuring that our portfolio managers are well equipped
to research, uncover and capitalize on the opportunities the world's markets
have to offer.
The BlackRock culture emphasizes excellence, teamwork and integrity in the
management of a variety of equity, fixed income, cash management, alternative
investment and real estate products. Our firm's core philosophy is grounded in
the belief that experienced investment and risk professionals using disciplined
investment processes and sophisticated analytical tools can consistently add
value to client portfolios.
As you probably are aware, former MLIM investment products now carry the
"BlackRock" name. This is reflected in newspapers and online fund reporting
resources. Your account statements will reflect the BlackRock name beginning
with the October month-end reporting period. Unless otherwise communicated to
you, your funds maintain the same investment objectives that they did prior to
the combination of MLIM and BlackRock. Importantly, this union does not affect
your brokerage account or your relationship with your financial advisor. Clients
of Merrill Lynch remain clients of Merrill Lynch.
We view this combination of asset management leaders as a complementary union
that reinforces our commitment to shareholders. Individually, each firm made
investment performance its single most important mission. Together, we are even
better prepared to capitalize on market opportunities on behalf of our
shareholders. Our focus on investment excellence is accompanied by an unwavering
commitment to service, enabling us to assist clients, in cooperation with their
financial professionals, in working toward their investment goals. We thank you
for allowing us the opportunity, and we look forward to serving your investment
needs in the months and years ahead as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
Vice Chairman
BlackRock, Inc.
Data, including assets under management, are as of June 30, 2006.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 3
A Discussion With Your Fund's Portfolio Manager
The Fund outpaced its benchmark return for the period and provided an
attractive yield as we sought to protect the portfolio's underlying value while
enhancing the level of income provided to shareholders.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended August 31, 2006, the Common Stock of Debt
Strategies Fund, Inc. had net annualized yields of 9.39% and 8.94%, based on a
period-end per share net asset value of $6.72 and a per share market price of
$7.06, respectively, and $.318 per share income dividends. Over the same period,
the total investment return on the Fund's Common Stock was +5.29%, based on a
change in per share net asset value from $6.69 to $6.72, and assuming
reinvestment of all distributions. The Fund's total return for the period
outpaced the +3.35% return of its benchmark, which is an equal blend of the
Credit Suisse High Yield Index and the Credit Suisse Leveraged Loan Index.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As a closed-end fund, the Fund's shares may trade in the secondary
market at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the Fund's
Common Stock can vary significantly from total investment returns based on
changes in the Fund's net asset value.
Leveraged loans posted steady, positive returns for the six months ended August
31, 2006, with the Credit Suisse Leveraged Loan Index returning +3.25%. Despite
a couple of small corrections in the high yield market, returns for the
six-month period also were well in the positive range, at +3.45% as measured by
the Credit Suisse High Yield Index.
The most important factor impacting both the high yield and leveraged loan
markets was the robust issuance pace and growing influence of collateralized
loan obligations (CLOs). CLOs are structured investment pools with various
seniority tranches ranging from AAA-rated to equity. At present, AAA tranches,
which typically represent approximately 76% of the CLO funding, are receiving
the London InterBank Offered Rate (LIBOR) plus 25 basis points - 30 basis points
(.25% - .30%). This relatively inexpensive source of funding has been the
principal driver of spread compression for leveraged bank loans over the past
few years. CLOs dominate the leveraged loan market with a roughly 65% share.
Moreover, the CLO-related demand for leveraged loans has affected the high yield
bond market. We have seen traditional high yield bond names migrate to the
leveraged loan market often and are optimistically titled "second lien" bank
loans. This bond to bank loan migration has curtailed high yield bond supply,
resulting in spreads that are tighter than they otherwise would be.
CLO issuance for the first eight months of 2006 has been very strong at $63.2
billion. This represents a nearly 74% increase compared to the same period in
2005, when issuance totaled $34 billion. To date, the market has already
eclipsed 2005's record full-year issuance of $60.5 billion and could potentially
exceed $90 billion for the full year 2006.
With CLOs purchasing 65% of newly issued leveraged bank loans, their success has
effectively compressed spreads in both the high yield and leveraged loan
markets, as liabilities for such products have tightened. Given that current
spreads allow for a barely double-digit return for the equity with favorable
default and recovery scenarios and that AAA-rated CLO liabilities have been
stable recently, we believe CLOs' ability to purchase bank loans at
ever-tightening spreads is at an end.
What factors most influenced Fund performance?
The portfolio's outperformance of its composite benchmark stems from its
reliance on floating rate high yield notes, along with leveraged loans, to
achieve its floating rate target. Floating rate high yield notes are subordinate
to bank loans and, therefore, command higher spreads. They also have call
protection, which enables them to trade at premiums not found in the leveraged
loan market. This is because the vast majority of bank loans are callable at par
for life. The Fund's performance also was enhanced by our active use of its
leverage lines, which averaged 26.5% during the six-month period. (See page 2 of
this report to shareholders for a discussion of the benefits and risks of
leveraging.)
Specific investments that made outsized contributions to Fund performance
included Pliant Corporation, New World Pasta Co. and Charter Communications,
Inc. We began the period with a $20.5 million bond position in Pliant, a
flexible plastics packaging company that filed for Chapter 11 bank-
4 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
ruptcy protection in January 2006. The bonds were marked at 24.50 and we
opportunistically exited the position throughout the six months at various
prices averaging 41. Regarding New World Pasta, we owned a $29 million bond
position that emerged from bankruptcy in December 2005. We received equity in
exchange for our bonds, which we subsequently sold at a profit. Finally, the
Fund owned four bond positions in the Charter complex totaling $10.5 million.
Charter's management lacks a meaningful plan to address the company's
overleveraged financial structure; however, the bonds rallied an average of 15
points based on both short covering (that is, the purchase of bonds previously
sold short in order to close the open position) and more favorable sentiment on
cable valuations.
Conversely, investments that detracted most from Fund performance included
Ainsworth Lumber Co. Ltd. (ALC), XM Satellite Radio, Inc. and GEO Specialty
Chemicals, Inc. We had a $17.7 million floating rate note exposure to ALC that
weakened roughly 20 points during the period. ALC is the fourth-largest oriented
strand board (OSB) manufacturer in North America. A slowdown in residential
construction, coupled with additional OSB capacity, resulted in OSB price
weakness, which adversely impacted the company's financial results. We had a $10
million floating rate and $8.5 million fixed rate bond exposure in satellite
radio company XM Satellite Radio. The bonds declined nearly six points in price
following management's announcement of slower-than-expected subscriber growth.
Although XM Satellite remains first in this space, Sirius Satellite Radio, Inc.
has managed to close the subscriber gap. Finally, the Fund's bond and stock
positions in GEO Specialty Chemicals declined roughly four points and two
points, respectively, over the six-month period. These declines occurred despite
a marked improvement in GEO's financial results and operations during the first
half of 2006. We continue to believe that the price decline primarily reflects
technical selling pressure related to the company's securities, which has arisen
partly because of a lack of information in the market regarding the company. The
Fund continues to benefit from an attractive coupon on the bonds, and we expect
the technical pressures to at least stabilize going forward.
What changes were made to the portfolio during the period?
We continued to shorten the portfolio's duration, and the attendant price
sensitivity to rising long-term interest rates, by investing in floating rate
notes and bank loans. The Fund began the period with a roughly 60% fixed
rate/40% floating rate composition. In our last report to shareholders, we
stated that it was our intention to target a 50% fixed/50% floating make-up in
2006. At period-end, the portfolio was constructed with a 51% fixed rate/49%
floating rate composition. The Fund's duration at August 31, 2006, was 2.3
years, compared to 4.3 years for the Credit Suisse High Yield Index. This means
the Fund is positioned with less sensitivity to interest rate moves, cushioning
its underlying value in the event of rising interest rates. Essentially, we have
removed nearly 50% of the price risk that would result from rising long-term
interest rates.
How would you characterize the Fund's position at the close of the period?
The 10-year Treasury yield retreated to approximately 4.75% at August 31, 2006,
after brushing up against 5.25% last June. We continue to believe there is a
good chance that a spike in inflation could prompt a rise in long-term interest
rates. In the meantime, we are basing half of the portfolio off of a three-month
LIBOR rate of 5.4%. We believe this remains an attractive proposition given the
4.75% yield of the 10-year Treasury.
We thank you for your interest in the Fund and look forward to reviewing our
performance, strategy and outlook with you again in our next report to
shareholders.
Kevin J. Booth
Vice President and Portfolio Manager
September 15, 2006
--------------------------------------------------------------------------------
Effective October 2, 2006, we are pleased to announce that Mark J. Williams has
joined Kevin Booth as Portfolio Manager and together they are primarily
responsible for the day-to-day management of the Fund. Mr. Williams is a
Managing Director and portfolio manager/loan originator with BlackRock. Prior to
joining BlackRock in 1998, Mr. Williams spent eight years with PNC Bank's New
York office and was a founding member of the bank's Leveraged Finance Group.
--------------------------------------------------------------------------------
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 5
Portfolio Information
As of August 31, 2006
--------------------------------------------------------------------------------
Percent of
Ten Largest Holdings Net Assets
--------------------------------------------------------------------------------
Charter Communications, Inc. Term Loan B,
8.125% due 4/28/2013 ................................................ 2.8%
Nova Chemicals Corp., 8.405%
due 11/15/2013 ...................................................... 2.6
United Rentals North America, Inc., 7.75%
due 11/15/2013 ...................................................... 2.0
Sirius Satellite Radio, Inc., 9.625%
due 8/01/2013 ....................................................... 1.8
JSG Funding Plc, 7.75% due 4/01/2015 ................................. 1.7
Simmons Co., 11.074% due 12/15/2014 .................................. 1.6
Rainbow National Services LLC, 10.375%
due 9/01/2014 ....................................................... 1.6
SBA Senior Finance Term Loan, 7.33%
due 1/27/2007 ....................................................... 1.5
Omnova Solutions, Inc., 11.25%
due 6/01/2010 ....................................................... 1.5
Frontier Drilling Term Loan B, 8.68%
due 6/21/2013 ....................................................... 1.4
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Percent of
Five Largest Industries Net Assets
--------------------------------------------------------------------------------
Cable -- U.S. ........................................................ 19.5%
Chemicals ............................................................ 11.9
Paper ................................................................ 10.1
Information Technology ............................................... 8.0
Broadcasting ......................................................... 7.8
--------------------------------------------------------------------------------
For Fund compliance purposes, the Fund's industry classifications refer to
one or more of the industry sub-classifications used by one or more widely
recognized market indexes or ratings group indexes, and/or as defined by
Fund management. This definition may not apply for purposes of this
report, which may combine industry sub-classifications for reporting ease.
--------------------------------------------------------------------------------
Quality Ratings by Percent of
S&P/Moody's Total Investments
--------------------------------------------------------------------------------
BBB/Baa .............................................................. 0.5%
BB/Ba ................................................................ 10.8
B/B .................................................................. 60.7
CCC/Caa .............................................................. 15.5
CCC/Ca ............................................................... 0.6
NR (Not Rated) ....................................................... 8.8
Other* ............................................................... 3.1
--------------------------------------------------------------------------------
* Includes portfolio holdings in common stocks, preferred stocks, warrants
and other interests.
6 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Schedule of Investments (in U.S. dollars)
Face
Amount Corporate Bonds Value
===============================================================================
Aerospace & Defense--3.1%
$ 5,000,000 Alliant Techsystems, Inc., 3%
due 8/15/2024 (a)(j) $ 5,868,750
7,500,000 L-3 Communications Corp., 3%
due 8/01/2035 (a)(j) 7,546,875
9,870,000 Vought Aircraft Industries, Inc., 8%
due 7/15/2011 8,883,000
-------------
22,298,625
===============================================================================
Automotive--3.4%
700,000 Advanced Accessory Systems LLC, 10.75%
due 6/15/2011 719,250
3,150,000 Cooper-Standard Automotive, Inc., 8.375%
due 12/15/2014 2,386,125
2,700,000 Delco Remy International, Inc., 9.507%
due 4/15/2009 (b) 2,659,500
4,625,000 Exide Technologies,11.50% due 3/15/2013 (j) 4,070,000
5,000,000 Ford Motor Credit Co., 9.957%
due 4/15/2012 (b) 5,285,800
10,050,000 Metaldyne Corp., 11% due 6/15/2012 9,246,000
Venture Holdings Co. LLC:
4,450,000 12% due 6/01/2009 (d) 0
1,800,000 Series B, 9.50% due 7/01/2005 (h) 2,250
-------------
24,368,925
===============================================================================
Broadcasting--6.9%
5,000,000 Canadian Satellite Radio Holdings, Inc.,
12.75% due 2/15/2014 (j) 4,937,500
1,100,000 LIN Television Corp. Series B, 6.50%
due 5/15/2013 1,014,750
Paxson Communications Corp. (b)(j):
2,800,000 8.757% due 1/15/2012 2,821,000
5,625,000 11.757% due 1/15/2013 5,667,188
3,235,000 Sinclair Broadcast Group, Inc. Class A,
4.875% due 7/15/2018 (a) 2,899,369
13,300,000 Sirius Satellite Radio, Inc., 9.625%
due 8/01/2013 12,635,000
XM Satellite Radio, Inc. (j):
10,000,000 9.989% due 5/01/2013 (b) 9,325,000
8,500,000 9.75% due 5/01/2014 7,990,000
2,000,000 Young Broadcasting, Inc.,10% due 3/01/2011 1,850,000
-------------
49,139,807
===============================================================================
Cable--International--0.1%
750,000 NTL Cable Plc, 8.75% due 4/15/2014 778,125
===============================================================================
Cable--U.S.--9.6%
7,500,000 Adelphia Communications Corp., 6%
due 2/15/2006 (a)(h) 37,500
3,450,000 CSC Holdings, Inc., 7.25% due 7/15/2008 3,488,813
4,225,000 Cablevision Systems Corp. Series B, 9.62%
due 4/01/2009 (b) 4,504,906
Charter Communications Holdings LLC:
3,750,000 10% due 4/01/2009 3,412,500
2,000,000 11.75% due 1/15/2010 1,680,000
2,000,000 11.125% due 1/15/2011 1,540,000
3,000,000 10% due 5/15/2011 2,130,000
2,500,000 Insight Midwest, LP, 9.75%
due 10/01/2009 2,543,750
7,500,000 Intelsat Bermuda Ltd., 11.55%
due 6/15/2013 (b)(j) 7,781,250
Intelsat Subsidiary Holding Co. Ltd.:
3,825,000 10.484% due 1/15/2012 (b) 3,882,375
3,375,000 8.25% due 1/15/2013 3,366,563
4,800,000 8.625% due 1/15/2015 4,848,000
1,023,000 Loral Spacecom Corp., 14% due 11/15/2015 (f) 1,158,548
3,875,000 Mediacom LLC, 9.50% due 1/15/2013 3,981,563
5,650,000 PanAmSat Corp., 9% due 6/15/2016 (j) 5,734,750
10,000,000 Rainbow National Services LLC, 10.375%
due 9/01/2014 (j) 11,137,500
10,350,000 Zeus Special Subsidiary Ltd., 9.25%
due 2/01/2015 (g)(j) 7,089,750
-------------
68,317,768
===============================================================================
Chemicals--9.6%
3,550,000 ArCo Chemical Co., 9.80% due 2/01/2020 4,055,875
4,000,000 Compass Minerals International, Inc. Series B,
12% due 6/01/2013 (g) 3,710,000
9,783,000 GEO Specialty Chemicals, Inc., 13.981%
due 12/31/2009 (b) 8,070,975
Huntsman International, LLC:
1,635,000 9.875% due 3/01/2009 1,700,400
1,199,000 10.125% due 7/01/2009 1,222,980
1,500,000 Innophos, Inc., 8.875% due 8/15/2014 1,500,000
2,400,000 Millennium America, Inc., 7.625%
due 11/15/2026 2,112,000
18,000,000 Nova Chemicals Corp., 8.405%
due 11/15/2013 (b) 18,382,500
10,000,000 Omnova Solutions, Inc., 11.25% due 6/01/2010 10,600,000
5,025,101 PCI Chemicals Canada, Inc.,10%
due 12/31/2008 5,213,542
2,500,000 PolyOne Corp., 6.89% due 9/22/2008 2,396,875
Rockwood Specialties Group, Inc.:
2,612,000 10.625% due 5/15/2011 2,801,370
450,000 7.50% due 11/15/2014 442,125
6,000,000 Tronox Worldwide LLC, 9.50% due 12/01/2012 6,165,000
-------------
68,373,642
===============================================================================
Consumer--Durables--1.6%
16,500,000 Simmons Co., 11.074% due 12/15/2014 (g) 11,508,750
===============================================================================
Consumer--Non-Durables--2.0%
9,000,000 Hines Nurseries, Inc., 10.25% due 10/01/2011 8,010,000
5,750,000 Levi Strauss & Co., 10.258% due 4/01/2012 (b) 5,936,875
-------------
13,946,875
===============================================================================
Diversified Media--4.2%
2,000,000 Cadmus Communications Corp., 8.375%
due 6/15/2014 1,955,000
7,000,000 Houghton Mifflin Co., 12.031%
due 5/15/2011 (b)(j) 7,035,000
7,500,000 Liberty Media Corp., 0.75% due 3/30/2023 (a) 7,865,625
2,675,000 Muzak Holdings, LLC, 13% due 3/15/2010 441,375
3,875,000 NBC Acquisition Corp., 11% due 3/15/2013 (g) 2,731,875
4,325,000 Nielsen Finance LLC, 10% due 8/01/2014 (j) 4,427,719
Universal City Florida Holding Co. I:
375,000 8.375% due 5/01/2010 377,344
5,300,000 10.239% due 5/01/2010 (b) 5,419,250
-------------
30,253,188
===============================================================================
Energy--Exploration & Production--1.2%
3,000,000 Chaparral Energy, Inc., 8.50% due 12/01/2015 3,022,500
5,500,000 Compton Petroleum Finance Corp., 7.625%
due 12/01/2013 5,362,500
-------------
8,385,000
===============================================================================
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 7
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
===============================================================================
Energy--Other--2.4%
$ 1,000,000 Dresser, Inc., 9.375% due 4/15/2011 $ 1,017,500
2,045,000 Dresser-Rand Group, Inc., 7.375%
due 11/01/2014 1,968,313
8,000,000 Ocean RIG ASA, 9.481% due 4/04/2011 (b) 7,940,000
6,300,000 SemGroup LP, 8.75% due 11/15/2015 (j) 6,410,250
-------------
17,336,063
===============================================================================
Financial--1.0%
5,743,690 Archimedes Funding III Ltd., 5.50%
due 11/29/2011 (b)(j) 3,963,146
1,500,000 Investcorp SA, 7.54% due 10/21/2008 1,521,740
2,000,000 Pennant CBO Ltd., 13.43% due 3/14/2011 1,360,000
-------------
6,844,886
===============================================================================
Food & Drug--0.2%
1,000,000 Stripes Acquisition LLC, 10.625%
due 12/15/2013 1,050,000
===============================================================================
Food & Tobacco--0.1%
842,946 Archibald Candy Corp., 10% due 11/01/2007 (d) 53,687
1,000,000 Dole Food Co., Inc., 8.75% due 7/15/2013 945,000
-------------
998,687
===============================================================================
Gaming--4.4%
Galaxy Entertainment Finance Co. Ltd. (j):
9,250,000 10.42% due 12/15/2010 (b) 9,689,375
1,250,000 9.875% due 12/15/2012 1,309,375
5,250,000 Inn of the Mountain Gods Resort & Casino,
12% due 11/15/2010 5,302,500
4,000,000 Jacobs Entertainment Co., 9.75%
due 6/15/2014 (j) 3,995,000
3,275,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (j) 3,258,625
915,000 Penn National Gaming, Inc., 6.75%
due 3/01/2015 880,688
3,400,000 Station Casinos, Inc., 7.75% due 8/15/2016 3,506,250
3,000,000 Tunica-Biloxi Gaming Authority, 9%
due 11/15/2015 (j) 3,082,500
-------------
31,024,313
===============================================================================
Health Care--6.5%
3,525,000 CDRV Investors, Inc., 9.75% due 1/01/2015 (g) 2,538,000
4,963,829 Cinacalcet Royalty Corp., 8% due 3/30/2017 (j) 5,410,573
Elan Finance Plc:
3,525,000 7.75% due 11/15/2011 3,384,000
4,825,000 9.405% due 11/15/2011 (b) 4,873,250
HealthSouth Corp. (j):
9,000,000 11.418% due 6/15/2014 (b) 9,247,500
6,750,000 10.75% due 6/15/2016 6,901,875
5,000,000 Risperdal Consta Pharma, 7% due 1/01/2018 4,600,000
6,000,000 Tenet Healthcare Corp., 7.375% due 2/01/2013 5,340,000
1,400,000 VWR International, Inc., 8% due 4/15/2014 1,386,000
4,100,000 Vanguard Health Holding Co. I, LLC, 11.25%
due 10/01/2015 (g) 2,952,000
-------------
46,633,198
===============================================================================
Housing--4.3%
Goodman Global Holding Co., Inc.:
2,319,000 8.329% due 6/15/2012 (b) 2,319,000
8,200,000 7.875% due 12/15/2012 7,687,500
5,850,000 Nortek, Inc., 8.50% due 9/01/2014 5,440,500
5,450,000 Ply Gem Industries, Inc., 9% due 2/15/2012 4,414,500
Scranton Products, Inc.:
3,000,000 12.39% due 7/01/2012 (b) 3,090,000
1,300,000 10.50% due 7/01/2013 1,342,250
2,250,000 Stanley-Martin Communities LLC, 9.75%
due 8/15/2015 1,755,000
5,000,000 Technical Olympic USA, Inc., 8.25%
due 4/01/2011 (j) 4,675,000
-------------
30,723,750
===============================================================================
Information Technology--5.5%
Amkor Technology, Inc.:
6,950,000 9.25% due 2/15/2008 7,019,500
3,000,000 7.125% due 3/15/2011 2,850,000
1,000,000 Cypress Semiconductor Corp., 1.25%
due 6/15/2008 (a) 1,182,500
2,425,000 MagnaChip Semiconductor SA, 8.579%
due 12/15/2011 (b) 2,073,375
SunGard Data Systems, Inc.:
7,075,000 9.125% due 8/15/2013 7,304,938
3,825,000 9.973% due 8/15/2013 (b) 3,997,125
4,818,000 10.25% due 8/15/2015 (j) 4,920,383
2,925,000 Telcordia Technologies Inc., 10%
due 3/15/2013 (j) 2,332,688
2,775,000 UGS Capital Corp. II, 10.38%
due 6/01/2011 (b)(f)(j) 2,795,813
5,075,000 Viasystems, Inc., 10.50% due 1/15/2011 4,922,750
-------------
39,399,072
===============================================================================
Leisure--3.2%
5,475,000 FelCor Lodging LP, 9.57% due 6/01/2011 (b) 5,611,875
5,183,263 HRP Myrtle Beach Holdings LLC, 14.50%
due 4/01/2014 (f)(j) 5,384,115
HRP Myrtle Beach Operations LLC (j):
5,000,000 9.829% due 4/01/2012 (b) 4,975,000
5,000,000 12.50% due 4/01/2013 4,975,000
2,000,000 True Temper Sports, Inc., 8.375% due 9/15/2011 1,780,000
-------------
22,725,990
===============================================================================
Manufacturing--1.2%
4,000,000 CPI Holdco, Inc., 11.298% due 2/01/2015 (b) 4,120,000
3,815,000 Invensys Plc, 9.875% due 3/15/2011 (j) 4,120,200
-------------
8,240,200
===============================================================================
Metal--Other--2.7%
Indalex Holding Corp.:
1,500,000 11.50% due 2/01/2014 1,597,500
5,000,000 11.50% due 2/01/2014 (j) 5,300,000
8,500,000 James River Coal Co., 9.375% due 6/01/2012 7,883,750
4,550,000 RathGibson, Inc., 11.25% due 2/15/2014 (j) 4,686,500
-------------
19,467,750
===============================================================================
8 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
===============================================================================
Packaging--2.0%
$ 1,100,000 Graham Packing Co., Inc., 9.875%
due 10/15/2014 $ 1,058,750
8,000,000 Packaging Dynamics Finance Corp., 10%
due 5/01/2016 (j) 8,000,000
6,325,000 Wise Metals Group LLC, 10.25% due 5/15/2012 4,996,750
-------------
14,055,500
===============================================================================
Paper--10.1%
6,500,000 Abitibi-Consolidated, Inc., 8.829%
due 6/15/2011 (b) 6,402,500
Ainsworth Lumber Co. Ltd. (b):
9,725,000 9.249% due 10/01/2010 8,120,375
8,000,000 9.499% due 4/01/2013 6,240,000
Boise Cascade LLC:
2,150,000 8.382% due 10/15/2012 (b) 2,160,750
900,000 7.125% due 10/15/2014 837,000
7,600,000 Bowater, Inc., 8.329% due 3/15/2010 (b) 7,676,000
3,775,000 Domtar, Inc., 7.125% due 8/15/2015 3,510,750
2,000,000 Graphic Packaging International Corp.,
9.50% due 8/15/2013 2,010,000
NewPage Corp.:
8,000,000 11.739% due 5/01/2012 (b) 8,640,000
4,725,000 12% due 5/01/2013 4,878,563
13,625,000 Smurfit Kappa Funding Plc, 7.75%
due 4/01/2015 12,398,750
1,600,000 Smurfit-Stone Container Enterprises, Inc.,
8.375% due 7/01/2012 1,524,000
Verso Paper Holdings LLC (j):
4,400,000 9.235% due 8/01/2014 (b) 4,433,000
3,125,000 11.375% due 8/01/2016 3,093,750
-------------
71,925,438
===============================================================================
Retail--1.6%
Neiman Marcus Group, Inc.:
6,000,000 9% due 10/15/2015 6,375,000
5,000,000 10.375% due 10/15/2015 5,350,000
-------------
11,725,000
===============================================================================
Service--2.7%
2,000,000 Buhrmann US, Inc., 7.875% due 3/01/2015 1,940,000
3,000,000 Neff Rental LLC, 11.25% due 6/15/2012 (j) 3,225,000
14,825,000 United Rentals North America, Inc., 7.75%
due 11/15/2013 14,194,938
-------------
19,359,938
===============================================================================
Telecommunications--5.2%
5,000,000 ADC Telecommunications, Inc., 5.795%
due 6/15/2013 (a)(b) 4,706,250
5,100,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 5,119,125
2,600,000 Nordic Telephone Co. Holdings ApS, 8.875%
due 5/01/2016 (j) 2,704,000
7,900,000 Qwest Communications International, Inc.,
8.905% due 2/15/2009 (b) 8,018,500
2,675,000 Qwest Corp., 8.579% due 6/15/2013 (b) 2,878,969
Time Warner Telecom Holdings, Inc.:
7,000,000 9.405% due 2/15/2011 (b) 7,140,000
6,000,000 9.25% due 2/15/2014 6,240,000
-------------
36,806,844
===============================================================================
Transportation--0.3%
2,500,000 Titan Petrochemicals Group Ltd., 8.50%
due 3/18/2012 (j) 2,081,250
===============================================================================
Utility--2.0%
4,142,000 Centerpoint Energy, Inc. Series B, 3.75%
due 5/15/2023 (a) 5,338,003
3,375,000 Dynegy Holdings, Inc., 8.375%
due 5/01/2016 (j) 3,324,375
4,000,000 El Paso Performance-Linked Trust, 7.75%
due 7/15/2011 (j) 4,075,000
1,425,000 Williams Cos., Inc., 8.625% due 6/01/2010 1,487,356
-------------
14,224,734
===============================================================================
Wireless Communications--0.4%
2,500,000 iPCS Escrow Co., 11.50% due 5/01/2012 2,812,500
===============================================================================
Total Corporate Bonds
(Cost--$716,067,282)--97.5% 694,805,818
===============================================================================
Floating Rate Loan Interests**
===============================================================================
Airlines--1.1%
Delta Air Lines:
3,000,000 Term Loan B, 10.023% due 3/16/2008 3,039,642
3,000,000 Term Loan C, 12.773% due 3/16/2008 3,076,173
United Air Lines:
248,750 Delay Draw Term Loan, 9.08%
due 2/01/2012 252,481
1,741,250 Term Loan B, 9.25% due 2/01/2012 1,767,369
-------------
8,135,665
===============================================================================
Automotive--3.6%
7,775,042 Delphi Automotive Systems Term Loan B,
13.75% due 6/14/2011 8,071,465
Intermet Corp.:
1,685,185 Letter of Credit,10.248% due 11/08/2010 1,376,233
4,814,815 Term Loan B, 10.39% due 11/08/2010 3,932,100
JL French Corp.:
4,000,000 First Lien Term Loan, 8.499% due 6/05/2011 3,993,332
2,000,000 Second Lien Term Loan, 10.75%
due 6/05/2012 1,950,000
Tenneco Automotive, Inc.:
2,185,236 Term Loan B, 7.40% due 12/12/2010 2,200,533
959,936 Tranche B-1 Credit Linked Deposit,
7.402% due 12/12/2010 966,655
3,250,000 Visteon Corp. Term Loan B, 8.61%
due 6/13/2013 3,250,000
-------------
25,740,318
===============================================================================
Broadcasting--0.9%
6,500,000 Ellis Communications Term Loan, 10%
due 12/30/2011 6,500,000
===============================================================================
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 9
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests** Value
===============================================================================
Cable--U.S.--9.0%
$10,000,000 Adelphia Communications Corp. Term Loan B,
10.25% due 6/30/2009 $ 9,737,500
Cebridge Connections:
8,080,711 Second Lien Term Loan, 11.49%
due 5/05/2014 7,838,290
4,310,344 Term Loan B, 7.739% due 11/06/2013 4,285,327
7,000,000 Century Cable Holdings LLC Discretionary Term
Loan, 10.25% due 12/31/2009 6,785,620
20,000,000 Charter Communications, Inc. Term Loan B,
8.125% due 4/28/2013 20,073,620
7,800,000 Insight Midwest Holdings LLC Term Loan C,
7.375% due 12/31/2009 7,849,156
Olympus Cable Holdings LLC:
6,000,000 Term Loan B, 10.25% due 9/30/2010 5,819,064
1,500,000 Tranche 2 Term Loan A, 9.50%
due 6/30/2010 1,447,734
-------------
63,836,311
===============================================================================
Chemicals--2.2%
2,809,462 Huntsman ICI Holdings Term Loan B, 7.076%
due 8/16/2012 2,805,951
3,152,000 Rockwood Specialties Group, Inc. Tranche D
Term Loan, 7.485% due 12/13/2012 3,170,717
10,000,000 Wellman, Inc. Second Lien Term Loan,
12.239% due 2/10/2010 9,775,000
-------------
15,751,668
===============================================================================
Energy--Exploration & Production--1.6%
10,000,000 Frontier Drilling Term Loan B, 8.68%
due 6/21/2013 10,025,000
1,246,875 MEG Energy Corp. Term Loan B, 7.50%
due 4/03/2013 1,249,658
-------------
11,274,658
===============================================================================
Energy--Other--1.6%
Dresser, Inc.:
211,632 Term Loan C, 7.83% due 4/10/2009 213,749
2,500,000 Term Loan Unsecured, 8.94%
due 2/25/2010 2,550,000
8,000,000 Scorpion Drilling Ltd. Second Lien Term Loan,
13.576% due 5/05/2015 8,320,000
-------------
11,083,749
===============================================================================
Financial--0.8%
6,000,000 JG Wentworth Manufacturing Term Loan,
9.008% due 4/12/2011 6,067,500
===============================================================================
Food & Tobacco--2.1%
1,000,000 Bolthouse Farms, Inc. Second Lien Term Loan,
10.999% due 12/16/2013 1,019,167
2,811,750 Commonwealth Brands Term Loan, 7.75%
due 12/22/2012 2,832,135
Dole Food Co., Inc.:
465,116 Letter of Credit, 5.37% due 4/12/2013 458,947
1,043,895 Term Loan B, 7.375% due 4/12/2013 1,030,045
3,479,651 Term Loan C, 7.313% - 9.25%
due 4/12/2013 3,433,497
6,000,000 QCE LLC Second Lien Term Loan, 11.249%
due 11/05/2013 5,993,124
-------------
14,766,915
===============================================================================
Gaming--0.7%
5,000,000 Venetian Macau U.S. Finance Co. LLC
Term Loan B, 8.20% due 5/25/2013 5,025,000
===============================================================================
Housing--2.0%
4,672,338 Headwaters, Inc. Term Loan B-1, 7.38% - 7.50%
due 4/30/2011 4,698,620
10,000,000 Stile U.S. Acquisition Corp. Bridge Loan,
11% due 4/06/2015 9,483,330
-------------
14,181,950
===============================================================================
Information Technology--2.5%
3,950,100 Activant Solutions Term Loan B, 7.438% - 7.50%
due 5/02/2013 3,900,724
8,000,000 Aspect Software 2nd Lien PR, 12.563%
due 7/11/2012 8,020,000
3,027,500 Fidelity National Information Solutions, Inc.
Term Loan B, 7.08% due 3/08/2013 3,038,965
3,332,813 Telcordia Technologies, Inc. Term Loan,
7.86% - 7.90% due 9/15/2012 3,178,670
-------------
18,138,359
===============================================================================
Metal--Other--1.2%
Euramax International Plc:
4,010,526 Second Lien Term Loan,
12.489% due 6/29/2013 4,043,112
1,989,474 Second Lien Term Loan, 12.49%
due 6/29/2013 2,005,638
2,551,265 Tranche 3 Term Loan B, 8.06%
due 6/29/2012 2,567,210
-------------
8,615,960
===============================================================================
Packaging--0.8%
3,842,365 Anchor Glass Container Corp. Term Loan B,
7.65% - 7.749% due 5/03/2013 3,851,970
2,000,000 Graham Packaging Co. LP Second Lien Term
Loan, 9.75% due 4/07/2012 2,027,500
-------------
5,879,470
===============================================================================
Service--1.4%
3,500,000 NES Rentals Holdings, Inc. Term Loan C,
12.125% due 7/20/2013 3,533,541
Waste Services, Inc. Term Loan B:
2,154,600 8.58% - 8.65% due 3/31/2011 2,170,760
3,910,000 8.58% due 3/31/2011 3,936,881
-------------
9,641,182
===============================================================================
Steel--0.0%
Acme Metals, Inc. Term Loan (h):
7,000,072 11.75% - 12% due 12/01/2005 1
711,758 12.25% due 12/01/2005 0
-------------
1
===============================================================================
Telecommunications--2.2%
11,000,000 SBA Senior Finance Term Loan, 7.33%
due 1/27/2007 11,030,943
3,161,871 Winstar Communications Debtor In Possession,
6.366% due 12/31/2006 (d) 4,489,857
-------------
15,520,800
===============================================================================
Utility--1.0%
2,000,000 Calpine Corp. Second Lien Debtor in Possession,
9.499% due 12/20/2007 2,029,166
Covanta Energy Corp.:
2,000,000 Delayed Draw Term Loan, 7.749%
due 6/30/2012 2,000,000
3,250,000 Second Lien Term Loan, 10.96%
due 6/24/2013 3,323,125
-------------
7,352,291
===============================================================================
10 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests** Value
===============================================================================
Wireless Communications--1.3%
$ 5,500,000 Centennial Cellular Operating Co. Term Loan,
7.318% - 7.749% due 2/09/2011 $ 5,543,703
3,500,000 Crown Castle Operating Co. Term Loan B,
7.65% due 6/01/2014 3,523,335
-------------
9,067,038
-------------------------------------------------------------------------------
Total Floating Rate Loan Interests
(Cost--$257,369,907)--36.0% 256,578,835
===============================================================================
Shares
Held Common Stocks
===============================================================================
Cable--U.S.--0.5%
142,518 Loral Space & Communications Ltd. (c) 3,662,713
===============================================================================
Chemicals--0.1%
339,340 GEO Specialty Chemicals, Inc. (c) 678,680
===============================================================================
Financial--0.3%
35,000 Preferred Term Securities VI (j) 2,130,100
===============================================================================
Food & Tobacco--0.5%
1,428,423 Viskase Cos., Inc. (c) 3,213,952
===============================================================================
Leisure--0.0%
5,000 HRP PIK Corp. Class B (j) 50
27,787 Lodgian, Inc. (c) 347,615
-------------
347,665
===============================================================================
Manufacturing--1.0%
724,291 ACP Holding Co. (c) 1,158,866
286,757 Medis Technologies Ltd. (c) 5,743,743
-------------
6,902,609
===============================================================================
Paper--0.0%
211,149 Western Forest Products, Inc. (c) 313,941
===============================================================================
Service--0.5%
90,876 Outsourcing Solutions Inc. (c) 3,544,155
===============================================================================
Steel--0.0%
41,149 Acme Package Corp. Senior Holdings (c)(i) 0
===============================================================================
Total Common Stocks
(Cost--$22,143,313)--2.9% 20,793,815
===============================================================================
Preferred Stocks
===============================================================================
Automotive--0.6%
200,000 General Motors Corp. Series C, 6.25% (a)(j) 4,200,000
===============================================================================
Broadcasting--0.0%
2 ION Media Networks, Inc., 9.75% (a)(f)(j) 12,580
===============================================================================
Cable--U.S.--0.3%
5,000 Adelphia Communications Corp. Series B,
13% (c) 1,250
9,594 Loral Spacecom Corp. Series A, 12% (c)(f) 1,894,815
-------------
1,896,065
-------------------------------------------------------------------------------
Total Preferred Stocks
(Cost--$7,252,459)--0.9% 6,108,645
===============================================================================
Warrants (k)
===============================================================================
Broadcasting--0.0%
15,000 Sirius Satellite Radio, Inc.
(expires 5/15/2009) 6,750
===============================================================================
Health Care--0.0%
126,761 HealthSouth Corp. (expires 1/16/2014) 221,832
===============================================================================
Manufacturing--0.2%
652,739 ACP Holding Co. (expires 9/30/2013) 1,044,382
===============================================================================
Paper--0.0%
17 Cellu Tissue Holdings, Inc.
(expires 5/08/2007) 0
7,000 MDP Acquisitions Plc
(expires 10/01/2013) 140,000
-------------
140,000
===============================================================================
Wireless Communications--0.1%
1,325 American Tower Corp. (expires 8/01/2008) 668,237
-------------------------------------------------------------------------------
Total Warrants
(Cost--$870,754)--0.3% 2,081,201
===============================================================================
Beneficial
Interest Other Interests (e)
===============================================================================
Automotive--0.0%
$3,614,601 Cambridge Industries, Inc.
(Litigation Trust Certificates) 36
===============================================================================
Cable--U.S.--0.1%
9,500,000 Pegasus Satellite Communications, Inc.
(Litigation Trust Certificates) 1,045,000
-------------------------------------------------------------------------------
Total Other Interests
(Cost--$1,440,678)--0.1% 1,045,036
===============================================================================
Total Investments (Cost--$1,005,144,393*)--137.7% 981,413,350
Liabilities in Excess of Other Assets--(37.7%) (268,490,124)
-------------
Net Assets--100.0% $ 712,923,226
=============
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 11
Schedule of Investments (concluded) (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
August 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ............................. $ 1,004,887,696
===============
Gross unrealized appreciation .............. $ 29,606,473
Gross unrealized depreciation .............. (53,080,819)
---------------
Net unrealized depreciation ................ $ (23,474,346)
===============
** Floating rate loan interests in which the Fund invests generally pay
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. The base lending rates are generally (i)
the lending rate offered by one or more European banks, such as LIBOR
(London InterBank Offered Rate), (ii) the prime rate offered by one or
more U.S. banks or (iii) the certificate of deposit rate.
(a) Convertible security.
(b) Floating rate security.
(c) Non-income producing security.
(d) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(e) Other interests represent beneficial interest in liquidation trusts and
other reorganization entities and are non-income producing.
(f) Represents a pay-in-kind security which may pay interest/dividends in
additional face/shares.
(g) Represents a step bond; the interest rate shown reflects the effective
yield at the time of purchase.
(h) As a result of bankruptcy proceedings, the company did not repay the
principal amount of the security upon maturity and is non-income
producing.
(i) Restricted security as to resale, representing 0.0% of net assets, were as
follows:
--------------------------------------------------------------------------
Acquisition
Issue Date Cost Value
--------------------------------------------------------------------------
Acme Package Corp.
Senior Holdings 11/25/2002 -- --
--------------------------------------------------------------------------
(j) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(k) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net
Affiliate Activity Interest
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I -- $ 55,195
--------------------------------------------------------------------------
o Swaps outstanding as of August 31, 2006 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Sold credit default protection on General
Motors Corp. and receive 5%
Broker, Citibank N.A.
Expires December 2006 $8,000,000 $ 669,624
Sold credit default protection on General
Motors Corp. and receive 5%
Broker, Lehman Brothers Special Finance
Expires December 2006 $7,000,000 638,421
--------------------------------------------------------------------------
Total $ 1,308,045
============
See Notes to Financial Statements.
12 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Statement of Assets, Liabilities and Capital
As of August 31, 2006
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$1,005,144,393) .................................................. $ 981,413,350
Cash ................................................................................ 6,955,946
Unrealized appreciation on swaps .................................................... 1,308,045
Receivables:
Interest ......................................................................... $ 16,705,661
Swaps ............................................................................ 152,083
Commitment fees .................................................................. 9,003 16,866,747
--------------
Prepaid expenses .................................................................... 7,178
--------------
Total assets ........................................................................ 1,006,551,266
--------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Loans ............................................................................... 286,000,000
Swap premiums received .............................................................. 314,330
Unfunded loan commitment ............................................................ 10,040
Payables:
Securities purchased ............................................................. 6,500,000
Investment adviser ............................................................... 405,798
Interest on loans ................................................................ 303,144
Other affiliates ................................................................. 5,840 7,215,782
--------------
Accrued expenses .................................................................... 88,888
--------------
Total liabilities ................................................................... 293,628,040
--------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Net assets .......................................................................... $ 712,923,226
==============
===================================================================================================================================
Capital
-----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $.10 par value, 200,000,000 shares authorized (106,020,941
shares issued and outstanding) ..................................................... $ 10,602,094
Paid-in capital in excess of par .................................................... 1,054,775,888
Undistributed investment income--net ................................................ $ 6,662,158
Accumulated realized capital losses--net ............................................ (336,683,876)
Unrealized depreciation--net ........................................................ (22,433,038)
--------------
Total accumulated losses--net ....................................................... (352,454,756)
--------------
Total capital--Equivalent to $6.72 net asset value per share of Common
Stock (market price--$7.06) ........................................................ $ 712,923,226
==============
See Notes to Financial Statements.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 13
Statement of Operations
For the Six Months Ended August 31, 2006
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest (including $55,195 from affiliates) ........................................ $ 44,762,356
Dividends ........................................................................... 838,398
Facility and other fees ............................................................. 262,624
--------------
Total income ........................................................................ 45,863,378
--------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Loan interest expense ............................................................... $ 7,037,302
Investment advisory fees ............................................................ 2,946,667
Borrowing costs ..................................................................... 206,000
Accounting services ................................................................. 109,467
Transfer agent fees ................................................................. 58,869
Professional fees ................................................................... 50,477
Listing fees ........................................................................ 32,878
Printing and shareholder reports .................................................... 30,841
Custodian fees ...................................................................... 26,408
Directors' fees and expenses ........................................................ 22,004
Pricing services .................................................................... 12,608
Other ............................................................................... 20,942
--------------
Total expenses ...................................................................... 10,554,463
--------------
Investment income--net .............................................................. 35,308,915
--------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ................................................................. (3,618,239)
Swaps--net ....................................................................... 909,004
Foreign currency transactions--net ............................................... (9) (2,709,244)
--------------
Change in unrealized appreciation/depreciation on:
Investments--net ................................................................. 2,857,742
Swaps--net ....................................................................... 1,416,809
Unfunded corporate loans--net .................................................... (24,102) 4,250,449
--------------------------------
Total realized and unrealized gain--net ............................................. 1,541,205
--------------
Net Increase in Net Assets Resulting from Operations ................................ $ 36,850,120
==============
See Notes to Financial Statements.
14 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
August 31, February 28,
Increase (Decrease) in Net Assets: 2006 2006
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net .............................................................. $ 35,308,915 $ 67,036,658
Realized loss--net .................................................................. (2,709,244) (4,220,616)
Change in unrealized appreciation/depreciation--net ................................. 4,250,449 (33,146,904)
--------------------------------
Net increase in net assets resulting from operations ................................ 36,850,120 29,669,138
--------------------------------
===================================================================================================================================
Dividends to Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from investment income--net ............................... (33,667,471) (68,179,612)
--------------------------------
===================================================================================================================================
Capital Share Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in reinvestment of dividends .... 1,329,636 1,665,334
--------------------------------
Net increase in net assets resulting from capital share transactions ................ 1,329,636 1,665,334
--------------------------------
===================================================================================================================================
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets ............................................. 4,512,285 (36,845,140)
Beginning of period ................................................................. 708,410,941 745,256,081
--------------------------------
End of period* ...................................................................... $ 712,923,226 $ 708,410,941
================================
* Undistributed investment income--net ........................................... $ 6,662,158 $ 5,020,714
================================
See Notes to Financial Statements.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 15
Statement of Cash Flows
For the Six Months Ended August 31, 2006
===================================================================================================================================
Cash Provided by Operating Activities
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ............................................... $ 36,850,120
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables ......................................................................... (1,194,568)
Decrease in prepaid expenses and other assets ................................................... 46,095
Decrease in other liabilities and swap premiums received ........................................ (371,516)
Realized and unrealized gain--net ............................................................... (1,541,205)
Realized loss on foreign currency transactions--net ............................................. (9)
Amortization of premium and discount ............................................................ (2,220,028)
Proceeds from sales and paydowns of long-term securities ........................................... 357,337,237
Other investment-related transactions .............................................................. 909,004
Purchases of long-term securities .................................................................. (369,573,883)
-------------
Cash provided by operating activities .............................................................. 20,241,247
-------------
===================================================================================================================================
Cash Used for Financing Activities
-----------------------------------------------------------------------------------------------------------------------------------
Cash receipts from borrowings ...................................................................... 285,100,000
Cash payments from borrowings ...................................................................... (259,000,000)
Dividends paid to shareholders ..................................................................... (32,337,835)
Decrease in bank overdraft ......................................................................... (7,047,466)
-------------
Cash used for financing activities ................................................................. (13,285,301)
-------------
===================================================================================================================================
Cash
-----------------------------------------------------------------------------------------------------------------------------------
Net increase in cash ............................................................................... 6,955,946
Cash at beginning of period ........................................................................ 0
-------------
Cash at end of period .............................................................................. $ 6,955,946
=============
===================================================================================================================================
Cash Flow Information
-----------------------------------------------------------------------------------------------------------------------------------
Cash paid for interest ............................................................................. $ 6,875,518
=============
===================================================================================================================================
Non-Cash Financing Activities
-----------------------------------------------------------------------------------------------------------------------------------
Value of capital shares issued on reinvestment of dividends to shareholders ........................ $ 1,329,636
=============
See Notes to Financial Statements.
16 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Financial Highlights
For the Six For the Year Ended For the For the Year Ended
Months Ended February 28, Year Ended February 28,
The following per share data and ratios have been derived August 31, ------------------- February 29, -------------------
from information provided in the financial statements. 2006 2006 2005 2004 2003 2002
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................... $ 6.69 $ 7.06 $ 6.71 $ 5.35 $ 6.03 $ 7.53
------------------------------------------------------------------
Investment income--net*** ............................... .33 .63 .67 .75 .79 .92
Realized and unrealized gain (loss)--net ................ .02 (.35) .34 1.40 (.68) (1.49)
------------------------------------------------------------------
Total from investment operations ........................ .35 .28 1.01 2.15 .11 (.57)
------------------------------------------------------------------
Less dividends from investment income--net .............. (.32) (.65) (.66) (.79) (.79) (.93)
------------------------------------------------------------------
Recovery of previously expensed offering costs
(capital write-off) resulting from the issuance of
Common Stock .......................................... -- -- -- --+ -- --+
------------------------------------------------------------------
Net asset value, end of period .......................... $ 6.72 $ 6.69 $ 7.06 $ 6.71 $ 5.35 $ 6.03
==================================================================
Market price per share, end of period ................... $ 7.06 $ 6.77 $ 6.71 $ 6.69 $ 5.99 $ 6.57
==================================================================
==================================================================================================================================
Total Investment Return**
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................... 5.29%@ 4.57% 15.95% 41.84% 2.04% (7.89%)
==================================================================
Based on market price per share ......................... 9.31%@ 11.34% 10.53% 26.31% 4.85% 5.69%
==================================================================
==================================================================================================================================
Ratios to Average Net Assets
----------------------------------------------------------------------------------------------------------------------------------
Expenses, excluding interest expense .................... .98%* 1.02% 1.02% 1.00% 1.07% 1.04%
==================================================================
Expenses ................................................ 2.94%* 2.63% 1.83% 1.53% 1.91% 2.59%
==================================================================
Investment income--net .................................. 9.84%* 9.55% 9.84% 12.22% 14.32% 13.69%
==================================================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Amount of borrowings, end of period (in thousands) ...... $286,000 $259,900 $298,400 $269,075 $245,900 $273,600
==================================================================
Average amount of borrowings outstanding during the
period (in thousands) ................................. $262,505 $294,371 $304,549 $239,315 $238,863 $280,460
==================================================================
Average amount of borrowings outstanding per share during
the period*** ......................................... $ 2.48 $ 2.79 $ 2.89 $ 2.29 $ 2.31 $ 2.75
==================================================================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets, end of period (in thousands) ................ $712,923 $708,411 $745,256 $706,261 $557,068 $620,043
==================================================================
Portfolio turnover ...................................... 36.61% 45.67% 60.11% 70.43% 64.54% 49.58%
==================================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges.
*** Based on average shares outstanding.
+ Amount is less than $.01 per share.
@ Aggregate total investment return.
See Notes to Financial Statements.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 17
Notes to Financial Statements
1. Significant Accounting Policies:
On September 29, 2006, Debt Strategies Fund, Inc. was renamed BlackRock Debt
Strategies Fund, Inc. (the "Fund"). The Fund is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. The Fund's financial statements are prepared in conformity
with U.S. generally accepted accounting principles, which may require the use of
management accruals and estimates. Actual results may differ from these
estimates. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to present a fair statement of the
results for the interim period. All such adjustments are of a normal, recurring
nature. The Fund determines and makes available for publication the net asset
value of its Common Stock on a daily basis. The Fund's Common Stock shares are
listed on the New York Stock Exchange ("NYSE") under the symbol DSU.
(a) Corporate debt obligations -- The Fund invests principally in debt
obligations of companies, including floating rate loans made by banks and other
financial institutions and both privately and publicly offered corporate bonds
and notes. Because agents and intermediaries are primarily commercial banks and
other financial institutions, the Fund's investment in floating rate loans could
be considered concentrated in financial institutions.
(b) Valuation of investments -- Floating rate loans are valued in accordance
with guidelines established by the Board of Directors. Floating rate loans are
valued at the mean between the last available bid and asked prices from one or
more brokers or dealers as obtained from Loan Pricing Corporation. As of October
2, 2006, floating rate loan interests will be valued at the mean between the
last available bid prices. For the limited number of floating rate loans for
which no reliable price quotes are available, such floating rate loans will be
valued by Loan Pricing Corporation through the use of pricing matrixes to
determine valuations. If the pricing service does not provide a value for
floating rate loans, Fund Asset Management, L.P. ("FAM") will value the floating
rate loans at fair value, which is intended to approximate market value.
Debt securities are traded primarily in the over-the-counter ("OTC") markets and
are valued at the last available bid price in the OTC markets or on the basis of
values as obtained by a pricing service. Pricing services use valuation matrixes
that incorporate both dealer-supplied valuations and valuation models. The
procedures of the pricing service and its valuations are reviewed by the
officers of the Fund under the general direction of the Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Securities that are held by the Fund that are traded on stock exchanges or the
Nasdaq National Market are valued at the last sale price or official close price
on the exchange on which such securities are traded, as of the close of business
on the day the securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last available asked price
for short positions. In cases where securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Fund. Long
positions in securities traded in the OTC market, Nasdaq Small Cap or Bulletin
Board are valued at the last available bid price or yield equivalent obtained
from one or more dealers or pricing services approved by the Board of Directors
of the Fund. Short positions in securities traded in the OTC market are valued
at the last available asked price. Portfolio securities that are traded both in
the OTC market and on a stock exchange are valued according to the broadest and
most representative market. When the Fund writes an option, the amount of the
premium received is recorded on the books of the Fund as an asset and an
equivalent liability. The amount of the liability is subsequently valued to
reflect the current market value of the option written, based on the last sale
price in the case of exchange-traded options or, in the case of options traded
in the OTC market, the last asked price. Options purchased by the Fund are
valued at their last sale price in the case of exchange-traded options or, in
the case of options traded in the OTC market, the last bid price. Swap
agreements are valued based upon quoted fair valuations received daily by the
Fund from a pricing service or counterparty. Other investments, including
futures contracts and related options, are stated at market value. Obligations
with remaining maturities of 60 days or less are valued at amortized cost unless
FAM believes that this method no longer produces fair valuations. Valuation of
other short-term investment vehicles is generally based on the net asset value
of the underlying investment vehicle or amortized cost. Repurchase agreements
will be valued at cost plus accrued interest.
Generally, trading in foreign securities, as well as U.S. government securities,
money market instruments and certain fixed income securities, is substantially
completed each day at various times prior to the close of business on the NYSE.
The values of such securities used in computing the net asset value of the
Fund's shares are determined as of such times. Foreign
18 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Notes to Financial Statements (continued)
currency exchange rates also are generally determined prior to the close of
business on the NYSE. As of October 2, 2006, foreign currency exchange rates
will be determined at the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation of the Fund's net asset value.
If events (for example, a company announcement, market volatility or a natural
disaster) occur during such periods that are expected to materially affect the
value of such securities, those securities may be valued at their fair value as
determined in good faith by the Board of Directors or by FAM using a pricing
service and/or procedures approved by the Board of Directors.
(c) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the securities
markets. Losses may arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
o Financial futures contracts -- The Fund may purchase or sell financial
futures contracts and options on such financial futures contracts.
Financial futures contracts are contracts for delayed delivery of
securities at a specific future date and at a specific price or yield.
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known
as variation margin and are recorded by the Fund as unrealized gains or
losses. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at the time
it was opened and the value at the time it was closed.
o Forward foreign exchange contracts -- The Fund may enter into forward
foreign exchange contracts as a hedge against either specific transactions
or portfolio positions. The contract is marked-to-market daily and the
change in market value is recorded by the Fund as an unrealized gain or
loss. When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value at the time it was opened
and the value at the time it was closed.
o Options -- The Fund may write covered call and put options and purchase
call and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option
written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added to)
the proceeds of the security sold. When an option expires (or the Fund
enters into a closing transaction), the Fund realizes a gain or loss on
the option to the extent of the premiums received or paid (or gain or loss
to the extent the cost of the closing transaction exceeds the premium paid
or received).
Written and purchased options are non-income producing investments.
o Swaps -- The Fund may enter into swap agreements, which are OTC contracts
in which the Fund and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a pre-determined credit event. The
net periodic payments may be based on a fixed or variable interest rate;
the change in market value of a specified security, basket of securities,
or index; or the return generated by a security. These periodic payments
received or made by the Fund are recorded in the accompanying Statement of
Operations as realized gains or losses, respectively. Gains or losses are
also realized upon termination of the swap agreements. Swaps are
marked-to-market daily and changes in value are recorded as unrealized
appreciation (depreciation). Risks include changes in the returns of the
underlying instruments, failure of the counterparties to perform under the
contracts' terms and the possible lack of liquidity with respect to the
swap agreements.
(d) Foreign currency transactions -- Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized. Assets
and liabilities denominated in foreign currencies are valued at the exchange
rate at the end of the period. Foreign currency transactions are the result of
settling (realized) or valuing (unrealized) assets or liabilities expressed in
foreign currencies into U.S. dollars. Realized and unrealized gains or losses
from investments include the effects of foreign exchange rates on investments.
The Fund invests in foreign securities, which may involve a
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 19
Notes to Financial Statements (continued)
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
(e) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(f) Recent accounting pronouncement -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48") entitled
"Accounting for Uncertainty in Income Taxes -- an interpretation of FASB
Statement No. 109." FIN 48 prescribes the minimum recognition threshold a tax
position must meet in connection with accounting for uncertainties in income tax
positions taken or expected to be taken by an entity including mutual funds
before being measured and recognized in the financial statements. Adoption of
FIN 48 is required for fiscal years beginning after December 15, 2006. The
impact on the Fund's financial statements, if any, is currently being assessed.
(g) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(h) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(i) Securities lending -- The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at least
100% of the current market value of the loaned securities. The market value of
the loaned securities is determined at the close of business of the Fund and any
additional required collateral is delivered to the Fund on the next business
day. Where the Fund receives securities as collateral for the loaned securities,
it collects a fee from the borrower. The Fund typically receives the income on
the loaned securities but does not receive the income on the collateral. Where
the Fund receives cash collateral, it may invest such collateral and retain the
amount earned on such investment, net of any amount rebated to the borrower.
Loans of securities are terminable at any time and the borrower, after notice,
is required to return borrowed securities within five business days. The Fund
may pay reasonable finder's, lending agent, administrative and custodial fees in
connection with its loans. In the event that the borrower defaults on its
obligation to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access to the
collateral. The Fund also could suffer a loss where the value of the collateral
falls below the market value of the borrowed securities, in the event of
borrower default or in the event of losses on investments made with cash
collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to perform the investment advisory function. For such services, the Fund pays a
monthly fee at an annual rate of .60% of the Fund's average weekly net assets
plus the proceeds of any outstanding borrowings used for leverage.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated, an affiliate of FAM, or its affiliates. Pursuant to
that order, the Fund also has retained Merrill Lynch Investment Managers, LLC
("MLIM, LLC"), an affiliate of FAM, as the securities lending agent for a fee
based on a share of the returns on investment of cash collateral. MLIM, LLC may,
on behalf of the Fund, invest cash collateral received by the Fund for such
loans, among other things, in a private investment company managed by MLIM, LLC
or in registered money market funds advised by Merrill Lynch Investment
Managers, L.P. ("MLIM"), an affiliate of FAM.
For the six months ended August 31, 2006, the Fund reimbursed FAM $7,091 for
certain accounting services.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction will close on
September 29, 2006.
20 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Notes to Financial Statements (concluded)
On August 15, 2006, shareholders of the Fund approved a new Investment Advisory
Agreement with BlackRock Advisors, Inc. (the "Manager"), a wholly-owned
subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was reorganized into
BlackRock Advisors, LLC. The new advisory agreement will become effective on
September 29, 2006 and the investment advisory fee is unchanged. In addition,
the Manager has entered into a sub-advisory agreement with BlackRock Financial
Management, Inc., an affiliate, under which the Manager pays the Sub-Adviser for
services it provides a fee equal to 59% of the management fee paid to the
Manager.
In connection with the closing, MLIM, LLC, the security lending agent, will
become BlackRock Investment Management, LLC.
During the six months ended August 31, 2006, certain officers and/or directors
of the Fund are officers and/or directors of FAM, PSI, ML & Co., MLIM, and/or
MLIM, LLC.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended August 31, 2006 were $359,340,535 and
$354,699,771, respectively.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of Common Stock, par value
$.10 per share. The Board of Directors is authorized, however, to classify and
reclassify any unissued shares of capital stock without approval of the holders
of Common Stock.
Shares issued and outstanding during the six months ended August 31, 2006 and
the year ended February 28, 2006 increased by 197,722 and 252,856, respectively,
as a result of dividend reinvestment.
5. Unfunded Corporate Loans:
As of August 31, 2006, the Fund had unfunded loan commitments of $5,750,000,
which would be extended at the option of the borrower, pursuant to the following
loan agreements:
(in Thousands)
--------------------------------------------------------------------------------
Unfunded
Borrower Commitment Value
--------------------------------------------------------------------------------
Calpine Corp. .................................... $2,000 $1,980
MEG Energy Corp. ................................. $1,250 $1,247
Venetian Macau U.S. Finance Co. LLC .............. $2,500 $2,513
--------------------------------------------------------------------------------
6. Short-Term Borrowings:
On May 22, 2006, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citigroup North
America, Inc. ("Citigroup") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The agreement
was renewed for one year and has a maximum limit of $370,000,000. Under the
Citigroup program, the conduits will fund advances to the Fund through the
issuance of highly rated commercial paper. As security for its obligations to
the Lenders under the revolving securitization facility, the Fund has granted a
security interest in substantially all of its assets to and in favor of the
Lenders. The interest rate on the Fund's borrowings is based on the interest
rate carried by the commercial paper plus a program fee. The Fund pays
additional borrowing costs including a backstop commitment fee.
The weighted average annual interest rate was 5.24% and the average borrowing
was approximately $262,505,000 for the six months ended August 31, 2006.
7. Capital Loss Carryforward:
On February 28, 2006, the Fund had a net capital loss carryforward of
$334,486,594, of which $27,376,921 expires in 2007, $51,234,056 expires in 2008,
$21,442,332 expires in 2009, $90,564,493 expires in 2010, $85,285,305 expires in
2011, $17,223,475 expires in 2012, $21,126,025 expires in 2013 and $20,233,987
expires in 2014. This amount will be available to offset like amounts of any
future taxable gains.
8. Subsequent Event:
The Fund paid an ordinary income dividend in the amount of .053000 per share on
September 29, 2006 to shareholders of record on September 15, 2006.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 21
Disclosure of FAM Investment Advisory Agreement
The Board of Directors met in August 2006 to consider approval of the Fund's
investment advisory agreement with Fund Asset Management, L.P. ("FAM"), the
Fund's investment adviser at the time.
Activities and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director, whose
only association with FAM or other Merrill Lynch affiliates was as a director of
the Fund and as a trustee or director of certain other funds advised by FAM or
its affiliates. The Chairman of the Board is also an independent director. New
director nominees are chosen by a Nominating Committee comprised of independent
directors. All independent directors also are members of the Board's Audit
Committee, and the independent directors meet in executive session at each
in-person Board meeting. The Board and the Audit Committee meet in person for at
least two days each quarter and conduct other in-person and telephonic meetings
throughout the year, some of which are formal Board meetings and some of which
are informational meetings. The independent counsel to the independent directors
attends all in-person Board and Audit Committee meetings and other meetings at
the independent directors' request.
Investment Advisory Agreement -- Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement. The Board assesses the nature, scope and quality of the services
provided to the Fund by the personnel of the investment adviser and its
affiliates, including administrative services, shareholder services, oversight
of fund accounting, marketing services and assistance in meeting legal and
regulatory requirements. The Board also receives and assesses information
regarding the services provided to the Fund by certain unaffiliated service
providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
investment adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the investment adviser and its
affiliates by the Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to the Fund's
investment objective, policies and restrictions, and its compliance with its
Code of Ethics and compliance policies and procedures; and (d) the nature, cost
and character of non-investment management services provided by the investment
adviser and its affiliates.
The Board noted its view of FAM as one of the most experienced global asset
management firms and considered the overall services provided by FAM to be of
high quality. The Board also noted its view of FAM as financially sound and well
managed and noted FAM's affiliation with one of America's largest financial
firms. The Board works closely with the investment adviser in overseeing the
investment adviser's efforts to achieve good performance. As part of this
effort, the Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the investment adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the investment
advisory agreement, the Board requests and receives materials specifically
relating to the investment advisory agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses,
investment performance and leverage of the Fund as compared to a comparable
group of funds as classified by Lipper; (b) information comparing the Fund's
market price with its net asset value per share; (c) a discussion by the Fund's
portfolio management team regarding investment strategies used by the Fund
during its most recent fiscal year; (d) information on the profitability to the
investment adviser and its affiliates of the investment advisory agreement and
other relationships with the Fund; and (e) information provided by the
investment adviser concerning investment advisory fees charged to other retail
closed-end funds under similar investment mandates. The Board also considers
other matters it deems important to the approval process, such as payments made
for services related to the valuation and pricing of Fund portfolio holdings,
the Fund's portfolio turnover statistics, and direct and indirect benefits to
the investment adviser and its affiliates from their relationship with the Fund.
The Board did not identify any particular information as controlling, and each
member of the Board may have attributed different weights to the various items
considered.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's investment advisory
agreement with FAM (the "FAM Investment Advisory Agreement") in August 2006, the
independent directors' and Board's review included the following:
Services Provided by the Investment Adviser -- The Board reviewed the nature,
extent and quality of services provided by FAM, including the investment
advisory services and the resulting performance of the Fund. The Board focused
22 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
primarily on FAM's investment advisory services and the Fund's investment
performance. The Board compared Fund performance -- both including and excluding
the effects of the Fund's fees and expenses -- to the performance of a
comparable group of funds and the performance of a relevant index or combination
of indexes. While the Board reviews performance data at least quarterly,
consistent with the investment adviser's investment goals, the Board attaches
more importance to performance over relatively long periods of time, typically
three to five years.
The Board noted that according to Lipper's ranking of all closed-end leveraged
high current yield funds for the periods ended May 31, 2006, the Fund's
performance after fees and expenses ranked in the first quintile for each of the
one-, three- and five-year periods. The Board considered the Fund's performance
based on annualized total return and noted that the Fund's total return was in
the first quintile for each of the one-year periods ended May 31, 2006 and 2004,
in the second quintile for each of the one-year periods ended May 31, 2003 and
2002 and in the third quintile for the one-year period ended May 31, 2005. The
Board also considered the Fund's performance based on annualized yield and noted
that the Fund's yield was in the second quintile for each of the one-year
periods ended May 31, 2004 and 2003, in the third quintile for each of the
one-year periods ended May 31, 2006 and 2002 and in the fourth quintile for the
one-year period ended May 31, 2005. The Board concluded that the Fund's
performance supported the continuation of the FAM Investment Advisory Agreement.
FAM's Personnel and Investment Process -- The Board reviewed the Fund's
investment objectives and strategies. The Board discusses with senior management
of the investment adviser responsible for investment operations and the senior
management of the investment adviser's taxable fixed-income investing group the
strategies being used to achieve the stated objectives. Among other things, the
Board considers the size, education and experience of the investment adviser's
investment staff, its use of technology, and the investment adviser's approach
to training and retaining portfolio managers and other research, advisory and
management personnel. The Board also reviews the investment adviser's
compensation policies and practices with respect to the Fund's portfolio
manager. The Board also considered the experience of the Fund's portfolio
manager. It was noted that Mr. Booth, the Fund's portfolio manager, has more
than twenty years' experience in portfolio management. The Board considered the
extensive experience of FAM and its investment staff in analyzing and managing
the types of investments used by the Fund. The Board concluded that the Fund
benefits from that experience.
Management Fees and Other Expenses -- The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory and
administrative service fees and the effects of any fee waivers -- compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by FAM to another retail closed-end fund with a
similar investment mandate. The Board noted that the investment advisory fees
charged to the Fund were somewhat higher than the fees charged to the other
retail closed-end funds of FAM with a similar investment mandate. The Board
noted that the Fund's contractual and actual management fee rates and total
expense ratio were below the median fees charged by and total expense ratios of
comparable funds, as determined by Lipper. The Board concluded that the Fund's
management fee rate and overall expense ratio were reasonable compared to those
of other comparable funds.
Profitability -- The Board considers the cost of the services provided to the
Fund by the investment adviser and the investment adviser's and its affiliates'
profits relating to the management and distribution of the Fund and the funds
advised by the investment manager and its affiliates. As part of its analysis,
the Board reviewed FAM's methodology in allocating its costs to the management
of the Fund and concluded that there was a reasonable basis for the allocation.
The Board also considered federal court decisions discussing an investment
adviser's profitability and profitability levels considered to be reasonable in
those decisions. The Board concluded that the profits of FAM and its affiliates
were acceptable in relation to the nature and quality of services provided and
given the level of fees and expenses overall.
Economies of Scale -- The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. The Board considered economies
of scale to the extent applicable to the Fund's closed-end structure and
determined that no changes were currently necessary.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 23
Disclosure of FAM Investment Advisory Agreement (concluded)
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing FAM Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal was
in the best interests of the shareholders.
Disclosure of New Investment Advisory Agreement
New BlackRock Investment Advisory Agreement -- Matters Considered by the Board
In connection with the combination of Merrill Lynch's investment advisory
business, including Fund Asset Management, L.P. (the "Previous Investment
Adviser"), with that of BlackRock, Inc. ("BlackRock") to create a new
independent company ("New BlackRock") (the "Transaction"), the Fund's Board of
Directors considered and approved a new investment advisory agreement (the
"BlackRock Investment Advisory Agreement") between the Fund and BlackRock
Advisors, LLC ("BlackRock Advisors"). The Fund's shareholders subsequently
approved the BlackRock Investment Advisory Agreement and it became effective on
September 29, 2006, replacing the investment advisory agreement with the
Previous Investment Adviser (the "Previous Investment Advisory Agreement").
The Board discussed the BlackRock Investment Advisory Agreement at telephonic
and in-person meetings held during April and May 2006. The Board, including the
independent directors, approved the BlackRock Investment Advisory Agreement at
an in-person meeting held on May 12, 2006.
To assist the Board in its consideration of the BlackRock Investment Advisory
Agreement, BlackRock provided materials and information about BlackRock,
including its financial condition and asset management capabilities and
organization, and Merrill Lynch provided materials and information about the
Transaction. The independent directors, through their independent legal counsel,
also requested and received additional information from Merrill Lynch and
BlackRock in connection with their consideration of the BlackRock Investment
Advisory Agreement. The additional information was provided in advance of the
May 12, 2006 meeting. In addition, the independent directors consulted with
their counsel and Fund counsel on numerous occasions, discussing, among other
things, the legal standards and certain other considerations relevant to the
directors' deliberations.
At the Board meetings, the directors discussed with Merrill Lynch management and
certain BlackRock representatives the Transaction, its strategic rationale and
BlackRock's general plans and intentions regarding the Fund. At these Board
meetings, representatives of Merrill Lynch and BlackRock made presentations to
and responded to questions from the Board. The directors also inquired about the
plans for and anticipated roles and responsibilities of certain employees and
officers of the Previous Investment Adviser, and of its affiliates, to be
transferred to BlackRock in connection with the Transaction. The independent
directors of the Board also conferred separately and with their counsel about
the Transaction and other matters related to the Transaction on a number of
occasions, including in connection with the April and May 2006 meetings. After
the presentations and after reviewing the written materials provided, the
independent directors met in executive sessions with their counsel to consider
the BlackRock Investment Advisory Agreement.
In connection with the Board's review of the BlackRock Investment Advisory
Agreement, Merrill Lynch and/or BlackRock advised the directors about a variety
of matters. The advice included the following, among other matters:
o that there was not expected to be any diminution in the nature, quality
and extent of services provided to the Fund and its shareholders by
BlackRock Advisors, including compliance services;
o that operation of New BlackRock as an independent investment management
firm would enhance its ability to attract and retain talented
professionals;
o that the Fund was expected to benefit from having access to BlackRock's
state of the art technology and risk
24 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
management analytic tools, including investment tools, provided under the
BlackRock Solutions(R) brand name;
o that BlackRock had no present intention to alter any applicable expense
waivers or reimbursements that were currently in effect and, while it
reserved the right to do so in the future, it would seek the approval of
the Board before making any changes;
o that in connection with the Transaction, Merrill Lynch and BlackRock had
agreed to conduct, and use reasonable best efforts to cause their
respective affiliates to conduct, their respective businesses in
compliance with the conditions of Section 15(f) of the Investment Company
Act of 1940 (the "1940 Act") in relation to any public funds advised by
BlackRock or the Previous Investment Adviser (or affiliates),
respectively; and
o that Merrill Lynch and BlackRock would derive benefits from the
Transaction and that, as a result, they had a financial interest in the
matters being considered that was different from that of Fund
shareholders.
The directors considered the information provided by Merrill Lynch and BlackRock
above, and, among other factors, the following:
o the potential benefits to Fund shareholders from being part of a combined
fund family with BlackRock-sponsored funds, including possible economies
of scale and access to investment opportunities;
o the reputation, financial strength and resources of BlackRock and its
investment advisory subsidiaries and the anticipated financial strength
and resources of New BlackRock;
o the compliance policies and procedures of BlackRock Advisors;
o the terms and conditions of the BlackRock Investment Advisory Agreement,
including the fact that the schedule of the Fund's total advisory fees
would not increase under the BlackRock Investment Advisory Agreement, but
would remain the same;
o that in August 2005, the Board had performed a full annual review of the
Previous Investment Advisory Agreement, as required by the 1940 Act, and
had determined that the Previous Investment Adviser had the capabilities,
resources and personnel necessary to provide the advisory and
administrative services that were then being provided to the Fund; and
that the advisory and/or management fees paid by the Fund, taking into
account any applicable agreed-upon fee waivers and breakpoints, had
represented reasonable compensation to the Previous Investment Adviser in
light of the services provided, the costs to the Previous Investment
Adviser of providing those services, economies of scale, the fees and
other expenses paid by similar funds (including information provided by
Lipper Inc. ["Lipper"]), and such other matters as the directors had
considered relevant in the exercise of their reasonable judgment; and
o that Merrill Lynch had agreed to pay all expenses of the Fund in
connection with the Board's consideration of the BlackRock Investment
Advisory Agreement and related agreements and all costs of shareholder
approval of the BlackRock Investment Advisory Agreement and as a result
the Fund would bear no costs in obtaining shareholder approval of the
BlackRock Investment Advisory Agreement.
Certain of these considerations are discussed in more detail below.
In its review of the BlackRock Investment Advisory Agreement, the Board assessed
the nature, quality and scope of the services to be provided to the Fund by the
personnel of BlackRock Advisors and its affiliates, including administrative
services, shareholder services, oversight of fund accounting and assistance in
meeting legal and regulatory requirements. In its review of the BlackRock
Investment Advisory Agreement, the Board also considered a range of information
in connection with its oversight of the services to be provided by BlackRock
Advisors and its affiliates. Among the matters considered were: (a) fees (in
addition to management fees) to be paid to BlackRock Advisors and its affiliates
by the Fund; (b) Fund operating expenses paid to third parties; (c) the
resources devoted to and compliance reports relating to the Fund's investment
objective, policies and restrictions, and its compliance with its Code of Ethics
and BlackRock Advisors' compliance policies and procedures; and (d) the nature,
cost and character of non-investment management services to be provided by
BlackRock Advisors and its affiliates.
In the period prior to the Board meeting to consider renewal of the Previous
Investment Advisory Agreement, the Board had requested and received materials
specifically relating to the Previous Investment Advisory Agreement. These
materials included (a) information compiled by Lipper on the fees and expenses
and the investment performance of the Fund as
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 25
Disclosure of New Investment Advisory Agreement (continued)
compared to a comparable group of funds as classified by Lipper; (b) information
comparing the Fund's market price with its net asset value per share; (c) a
discussion by the Fund's portfolio management team on investment strategies used
by the Fund during its most recent fiscal year; (d) information on the
profitability to the Previous Investment Adviser of the Previous Investment
Advisory Agreement and other payments received by the Previous Investment
Adviser and its affiliates from the Fund; and (e) information provided by the
Previous Investment Adviser concerning services related to the valuation and
pricing of Fund portfolio holdings, the Fund's portfolio turnover statistics,
and direct and indirect benefits to the Previous Investment Adviser and its
affiliates from their relationship with the Fund.
In their deliberations, the directors considered information received in
connection with their most recent approval of the continuance of the Previous
Investment Advisory Agreement, in addition to information provided by BlackRock
and BlackRock Advisors in connection with their evaluation of the terms and
conditions of the BlackRock Investment Advisory Agreement. The directors did not
identify any particular information that was all-important or controlling, and
each director attributed different weights to the various factors. The
directors, including a majority of the independent directors, concluded that the
terms of the BlackRock Investment Advisory Agreement are appropriate, that the
fees to be paid are reasonable in light of the services to be provided to the
Fund, and that the BlackRock Investment Advisory Agreement should be approved
and recommended to Fund shareholders.
Nature, Quality and Extent of Services Provided -- The Board reviewed the
nature, quality and extent of services provided by the Previous Investment
Adviser, including the investment advisory services and the resulting
performance of the Fund, as well as the nature, quality and extent of services
expected to be provided by BlackRock Advisors. The Board focused primarily on
the Previous Investment Adviser's investment advisory services and the Fund's
investment performance, but also considered certain areas in which both the
Previous Investment Adviser and the Fund received services as part of the
Merrill Lynch complex. The Board compared the Fund's performance -- both
including and excluding the effects of fees and expenses -- to the performance
of a comparable group of funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Previous Investment Adviser's investment goals,
the Board attaches more importance to performance over relatively long periods
of time, typically three to five years.
In evaluating the nature, quality and extent of the services to be provided by
BlackRock Advisors under the BlackRock Investment Advisory Agreement, the
directors considered, among other things, the expected impact of the Transaction
on the operations, facilities, organization and personnel of New BlackRock and
how it would affect the Fund; the ability of BlackRock Advisors to perform its
duties after the Transaction; and any anticipated changes to the current
investment and other practices of the Fund. The directors considered BlackRock's
advice as to proposed changes in portfolio management personnel of the Fund
after the closing of the Transaction.
The directors were given information with respect to the potential benefits to
the Fund and its shareholders from having access to BlackRock's state of the art
technology and risk management analytic tools, including the investment tools
provided under the BlackRock Solutions brand name.
The directors were advised that, as a result of Merrill Lynch's equity interest
in BlackRock after the Transaction, the Fund would continue to be subject to
restrictions concerning certain transactions involving Merrill Lynch affiliates
(for example, transactions with a Merrill Lynch broker-dealer acting as
principal) absent revised or new regulatory relief. The directors were advised
that a revision of existing regulatory relief with respect to these restrictions
was being sought from the Securities and Exchange Commission and were advised of
the possibility of receipt of such revised regulatory relief.
Based on their review of the materials provided and the assurances they had
received from the management of Merrill Lynch and of BlackRock, the directors
determined that the nature and quality of services to be provided to the Fund
under the BlackRock Investment Advisory Agreement were expected to be as good as
or better than that provided under the Previous Investment Advisory Agreement.
It was noted, however, that changes in personnel were expected to follow the
Transaction and the combination of the operations of the Previous Investment
Adviser and its affiliates with those of BlackRock. The directors noted that if
portfolio managers or other personnel were to cease to be available prior to the
closing of the Transaction, the Board would consider all available options,
including seeking the investment advisory or other services of BlackRock
affiliates. Accordingly, the directors concluded that, overall, they were
satisfied at the present time with assurances from BlackRock and BlackRock
Advisors as to the expected nature, quality and extent of the services to be
provided to the Fund under the BlackRock Investment Advisory Agreement.
26 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Costs of Services Provided and Profitability -- It was noted that, in
conjunction with the recent review of the Previous Investment Advisory
Agreement, the directors had received, among other things, a report from Lipper
comparing the Fund's fees and expenses to those of a peer group selected by
Lipper, and information as to the fees charged by the Previous Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels -- the actual rate includes advisory fees and the
effects of any fee waivers -- compared to the other funds in its Lipper
category. They also compared the Fund's total expenses to those of other,
comparable funds. The information showed that the Fund had fees and expenses
within the range of fees and expenses of comparable funds. The Board considered
the services to be provided by and the fees to be charged by BlackRock Advisors
to other funds with similar investment mandates and noted that the fees charged
by BlackRock Advisors in those cases, including fee waivers and expense
reimbursements, were generally comparable to those being charged to the Fund.
The Board also noted that, as a general matter, according to the information
provided by BlackRock, fees charged to institutional clients were lower than the
fees charged to the Fund, but BlackRock Advisors provided less extensive
services to such clients. The Board concluded that the Fund's management fee and
fee rate and overall expense ratio are reasonable compared to those of other
comparable funds.
In evaluating the costs of the services to be provided by BlackRock Advisors
under the BlackRock Investment Advisory Agreement, the directors considered,
among other things, whether advisory fees or other expenses would change as a
result of the Transaction. Based on their review of the materials provided and
the fact that the BlackRock Investment Advisory Agreement is substantially
similar to the Previous Investment Advisory Agreement in all material respects,
including the rate of compensation, the directors determined that the
Transaction should not increase the total fees payable, including any fee
waivers and expense reimbursements, for advisory and administrative services.
The directors noted that it was not possible to predict how the Transaction
would affect BlackRock Advisors' profitability from its relationship with the
Fund.
The directors discussed with BlackRock Advisors its general methodology to be
used in determining its profitability with respect to its relationship with the
Fund. The directors noted that they expect to receive profitability information
from BlackRock Advisors on at least an annual basis and thus be in a position to
evaluate whether any adjustments in Fund fees and/or fee breakpoints would be
appropriate.
Fees and Economies of Scale -- The Board considered the extent to which
economies of scale might be realized as the assets of the Fund increase and
whether there should be changes in the management fee rate or structure in order
to enable the Fund to participate in these economies of scale. The Board
determined that changes were not currently necessary.
In reviewing the Transaction, the directors considered, among other things,
whether advisory fees or other expenses would change as a result of the
Transaction. Based on the fact that the BlackRock Investment Advisory Agreement
is substantially similar to the Previous Investment Advisory Agreement in all
material respects, including the rate of compensation, the directors determined
that as a result of the Transaction, the Fund's total advisory fees would be no
higher than the fees under the Previous Investment Advisory Agreement. The
directors noted that in conjunction with their most recent deliberations
concerning the Previous Investment Advisory Agreement, they had determined that
the total fees for advisory and administrative services for the Fund were
reasonable in light of the services provided. It was noted that in conjunction
with the recent review of the Previous Investment Advisory Agreement, the
directors had received, among other things, a report from Lipper comparing the
Fund's fees, expenses and performance to those of a peer group selected by
Lipper, and information as to the fees charged by the Previous Investment
Adviser or its affiliates to other registered investment company clients for
investment management services. The directors concluded that because the rates
for advisory fees for the Fund would be no higher than the fee rates in effect
at the time, the proposed management fee structure, including any fee waivers,
was reasonable and that no additional changes were currently necessary.
Fall-Out Benefits -- In evaluating the fall-out benefits to be received by
BlackRock Advisors under the BlackRock Investment Advisory Agreement, the
directors considered whether BlackRock Advisors would experience such benefits
to the same extent that the Previous Investment Adviser was experiencing such
benefits under the Previous Investment Advisory Agreement. Based on their review
of the materials provided, including materials received in connection with their
most recent approval of the continuance of the Previous Investment Advisory
Agreement, and their discussions with management of the Previous Investment
Adviser and
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 27
Disclosure of New Investment Advisory Agreement (concluded)
BlackRock, the directors determined that BlackRock Advisors' fall-out benefits
could include increased ability for BlackRock to distribute shares of its funds
and other investment products. The directors noted that any fall-out benefits
were difficult to quantify with certainty at this time, and indicated that they
would continue to evaluate them going forward.
Investment Performance -- The directors considered investment performance for
the Fund. The directors compared the Fund's performance -- both including and
excluding the effects of fees and expenses -- to the performance of a comparable
group of funds, and the performance of a relevant index or combination of
indexes. The comparative information received from Lipper showed Fund
performance at various levels within the range of performance of comparable
funds over different time periods. While the Board reviews performance data at
least quarterly, consistent with the Previous Investment Adviser's investment
goals, the Board attaches more importance over relatively long periods of time,
typically three to five years. The directors believed the Fund's performance was
satisfactory. Also, the directors took into account the investment performance
of funds advised by BlackRock Advisors. The Board considered comparative
information from Lipper which showed that the performance of the funds advised
by BlackRock Advisors was within the range of performance of comparable funds
over different time periods. The Board also noted that, following the close of
the Transaction, BlackRock Advisors intended to implement steps to seek to
improve the investment performance of the Fund, including changes in the
portfolio management personnel. The Board noted BlackRock's considerable
investment management experience and capabilities, but was unable to predict
what effect, if any, consummation of the Transaction would have on the future
performance of the Fund.
Conclusion -- After the independent directors of the Fund deliberated in
executive session, the entire Board, including the independent directors,
approved the BlackRock Investment Advisory Agreement, concluding that the
advisory fee rate was reasonable in relation to the services provided and that
the BlackRock Investment Advisory Agreement was in the best interests of the
shareholders. In approving the BlackRock Investment Advisory Agreement, the
Board noted that it anticipated reviewing the continuance of the agreement in
advance of the expiration of the initial two-year period.
New BlackRock Sub-Advisory Agreement -- Matters Considered by the Board
At an in-person meeting held on August 14-16, 2006, the Board of Directors,
including the independent directors, discussed and approved the sub-advisory
agreement (the "BlackRock Sub-Advisory Agreement") between BlackRock Advisors
and its affiliate, BlackRock Financial Management, Inc. (the "Sub-Adviser"). The
BlackRock Sub-Advisory Agreement became effective on September 29, 2006, at the
same time the BlackRock Investment Advisory Agreement became effective.
Pursuant to the BlackRock Sub-Advisory Agreement, the Sub-Adviser receives a
monthly fee from BlackRock Advisors equal to 59% of the advisory fee received by
BlackRock Advisors from the Fund. BlackRock Advisors pays the Sub-Adviser out of
its own resources, and there is no increase in Fund expenses as a result of the
BlackRock Sub-Advisory Agreement.
In approving the BlackRock Sub-Advisory Agreement at the August in person
meeting, the Board reviewed its considerations in connection with its approval
of BlackRock Investment Advisory Agreement in May 2006. The Board relied on the
same information and considered the same factors as those discussed above in
connection with the approval of the BlackRock Investment Advisory Agreement, and
came to the same conclusions. In reviewing the sub-advisory fee rate provided in
the BlackRock Sub-Advisory Agreement, the Board noted the fact that both
BlackRock Advisors and the Sub-Adviser have significant responsibilities under
their respective advisory agreements. BlackRock Advisors remains responsible for
oversight of the Fund's operations and administration, and the Sub-Adviser
provides advisory services to the Fund and is responsible for the day-to-day
management of the Fund's portfolio under the BlackRock Sub-Advisory Agreement.
The Board also took into account the fact that there is no increase in total
advisory fees paid by the Fund as a result of the BlackRock Sub-Advisory
Agreement. Under all of the circumstances, the Board concluded that it was a
reasonable allocation of fees for the Sub-Adviser to receive 59% of the advisory
fee paid by the Fund to BlackRock Advisors.
After the independent directors deliberated in executive session, the entire
Board, including the independent directors, approved the BlackRock Sub-Advisory
Agreement, concluding that the sub-advisory fee was reasonable in relation to
the services provided and that the Sub-Advisory Agreement was in the best
interests of shareholders.
28 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
Proxy Results
During the six-month period ended August 31, 2006, BlackRock Debt Strategies
Fund, Inc.'s shareholders voted on the following proposals. Proposals 1, 2 and 3
were approved at a shareholders' meeting on August 15, 2006. A description of
the proposals and number of shares voted were as follows:
---------------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For from Voting
---------------------------------------------------------------------------------------------------
1. To elect the Fund's Robert C. Doll, Jr. 74,158,541 3,188,944
Board of Directors: Ronald W. Forbes 74,200,021 3,147,464
Cynthia A. Montgomery 74,187,784 3,159,701
Jean Margo Reid 74,184,355 3,163,130
Roscoe S. Suddarth 74,189,067 3,158,418
Richard R. West 74,192,675 3,154,810
Edward D. Zinbarg 74,179,550 3,167,935
---------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
---------------------------------------------------------------------------------------------------
2. To approve a new investment advisory agreement. 52,204,561 1,712,045 2,237,450
---------------------------------------------------------------------------------------------------
3. To approve a contingent subadvisory agreement. 52,058,658 1,799,585 2,295,812
---------------------------------------------------------------------------------------------------
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 29
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial adviser. Please note that not all investment
advisers, banks or brokerages may offer this service.
30 BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former fund
investors and individual clients (collectively, "Clients") and to safeguarding
their nonpublic personal information. The following information is provided to
help you understand what personal information BlackRock collects, how we protect
that information and why in certain cases we share such information with select
parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you
from different sources, including the following: (i) information we receive from
you or, if applicable, your financial intermediary, on applications, forms or
other documents; (ii) information about your transactions with us, our
affiliates, or others; (iii) information we receive from a consumer reporting
agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any nonpublic
personal information about its Clients, except as permitted by law or as is
necessary to service Client accounts. These nonaffiliated third parties are
required to protect the confidentiality and security of this information and to
use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that may
be of interest to you. In addition, BlackRock restricts access to nonpublic
personal information about its Clients to those BlackRock employees with a
legitimate business need for the information. BlackRock maintains physical,
electronic and procedural safeguards that are designed to protect the nonpublic
personal information of its Clients, including procedures relating to the proper
storage and disposal of such information.
BLACKROCK DEBT STRATEGIES FUND, INC. AUGUST 31, 2006 31
BlackRock Debt Strategies Fund, Inc. seeks to provide current income by
investing primarily in a diversified portfolio of U.S. companies' debt
instruments, including corporate loans, that are rated in the lower rating
categories of the established rating services (Baa or lower by Moody's Investors
Service, Inc. or BBB or lower by Standard & Poor's) or unrated debt instruments
of comparable quality.
This report, including the financial information herein, is transmitted to
shareholders of BlackRock Debt Strategies Fund, Inc. for their information. It
is not a prospectus. Past performance results shown in this report should not be
considered a representation of future performance. The Fund leverages its Common
Stock to provide Common Stock shareholders with a potentially higher rate of
return. Leverage creates risk for Common Stock shareholders, including the
likelihood of greater volatility of net asset value and market price of Common
Stock shares, and the risk that fluctuations in short-term interest rates may
reduce the Common Stock's yield. Statements and other information herein are as
dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-441-7762; (2) at
www.blackrock.com; and (3) on the Securities and Exchange Commission's Web site
at http://www.sec.gov. Information about how the Fund voted proxies relating to
securities held in the Fund's portfolio during the most recent 12-month period
ended June 30 is available (1) at www.blackrock.com and (2) on the Securities
and Exchange Commission's Web site at http://www.sec.gov.
BlackRock Debt Strategies Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
BLACKROCK
#DEBT-8/06
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - As
of October 2, 2006
(a)(1) The Fund is managed by a team of investment professionals that
is responsible for the day-to-day management of the Fund's portfolio.
The lead members of this team are Mark J. Williams, Managing Director
at BlackRock, and Kevin J. Booth, Managing Director at BlackRock. Mr.
Williams and Mr. Booth each has been a portfolio manager of the Fund
since 2006. Mr. Williams is responsible for setting the Fund's overall
investment strategy and overseeing the management of the Fund as of
October 2, 2006. Mr. Booth is responsible for the day-to-day management
of the Fund's portfolio and the selection of its investments.
Mr. Williams is the head of BlackRock's bank loan group and a member of
the Investment Strategy Group. His primary responsibility is
originating and evaluating bank loan investments for the firm's
collateralized bond obligations. He is also involved in the evaluation
and sourcing of mezzanine investments. Prior to joining BlackRock in
1998, Mr. Williams spent eight years with PNC Bank's New York office
and was a founding member of the bank's Leveraged Finance Group. In
that capacity he was responsible for structuring proprietary middle
market leveraged deals and sourcing and evaluating broadly syndicated
leveraged loans in the primary and secondary markets for PNC Bank's
investment portfolio. From 1984 until 1990, Mr. Williams worked in PNC
Bank's Philadelphia office in a variety of marketing and corporate
finance positions.
Mr. Booth is a member of BlackRock's bank loan group. He joined
BlackRock in 2006. Prior to joining BlackRock, Mr. Booth was a Managing
Director (Global Fixed Income) of Merrill Lynch Investment Managers,
L.P. ("MLIM") since 2006 and a member of MLIM's bank loan group from
2000 to 2006. He was a Director of MLIM from 2000 to 2006 and was a
Vice President of MLIM from 1994 to 2000. He has been portfolio manager
with BlackRock or MLIM since 2000.
(a)(2) As of October 2, 2006:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
Registered Other Pooled Registered Other Pooled
(i) Name of Investment Investment Other Investment Investment Other
Portfolio Manager Companies Vehicles Accounts Companies Vehicles Accounts
Kevin J. Booth 7 5 1 0 2 0
$2,686,020,144 $2,357,557,822 $ 25,390,431 $ 0 $ 587,029,626 $ 0
Mark Williams 9 17 7 0 10 4
$3,829,742,172 $6,368,469,951 $1,222,718,181 $ 0 $2,908,136,350 $1,030,000,000
(iv) Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide
compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over
another. BlackRock has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential
conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to numerous
clients in addition to the Fund, and BlackRock may, consistent with
applicable law, make investment recommendations to other clients or
accounts (including accounts which are hedge funds or have performance
or higher fees paid to BlackRock, or in which portfolio managers have a
personal interest in the receipt of such fees), which may be the same
as or different from those made to the Fund. In addition, BlackRock,
its affiliates and any officer, director, stockholder or employee may
or may not have an interest in the securities whose purchase and sale
BlackRock recommends to the Fund. BlackRock, or any of its affiliates,
or any officer, director, stockholder, employee or any member of their
families may take different actions than those recommended to the Fund
by BlackRock with respect to the same securities. Moreover, BlackRock
may refrain from rendering any advice or services concerning securities
of companies of which any of BlackRock's (or its affiliates') officers,
directors or employees are directors or officers, or companies as to
which BlackRock or any of its affiliates or the officers, directors and
employees of any of them has any substantial economic interest or
possesses material non-public information. Each portfolio manager also
may manage accounts whose investment strategies may at times be opposed
to the strategy utilized for the Fund. In this connection, it should be
noted that certain portfolio managers currently manage certain accounts
that are subject to performance fees. In addition, certain portfolio
managers assist in managing certain hedge funds and may be entitled to
receive a portion of any incentive fees earned on such funds and a
portion of such incentive fees may be voluntarily or involuntarily
deferred. Additional portfolio managers may in the future manage other
such accounts or funds and may be entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and
must treat each client fairly. When BlackRock purchases or sells
securities for more than one account, the trades must be allocated in a
manner consistent with its fiduciary duties. BlackRock attempts to
allocate investments in a fair and equitable manner among client
accounts, with no account receiving preferential treatment. To this
end, BlackRock has adopted a policy that is intended to ensure that
investment opportunities are allocated fairly and equitably among
client accounts over time. This policy also seeks to achieve reasonable
efficiency in client transactions and provide BlackRock with sufficient
flexibility to allocate investments in a manner that is consistent with
the particular investment discipline and client base.
(a)(3) As of October 2, 2006:
With respect to Mr. Williams, the following compensation structure applies:
BlackRock Portfolio Manager Compensation
BlackRock's financial arrangements with its portfolio managers, its
competitive compensation and its career path emphasis at all levels
reflect the value senior management places on key resources.
Compensation may include a variety of components and may vary from year
to year based on a number of factors. The principal components of
compensation include a base salary, a discretionary bonus,
participation in various benefits programs and one or more of the
incentive compensation programs established by BlackRock such as its
Long-Term Retention and Incentive Plan and Restricted Stock Program.
Base compensation. Generally, portfolio managers receive base
compensation based on their seniority and/or their position with the
firm.
Discretionary compensation. In addition to base compensation, portfolio
managers may receive discretionary compensation, which can be a
substantial portion of total compensation. Discretionary compensation
can include a discretionary cash bonus as well as one or more of the
following:
Long-Term Retention and Incentive Plan ("LTIP") --The LTIP is a
long-term incentive plan that seeks to reward certain key employees.
The plan provides for the grant of awards that are expressed as an
amount of cash that, if properly vested and subject to the attainment
of certain performance goals, will be settled in cash and/or in
BlackRock, Inc. common stock.
Deferred Compensation Program --A portion of the compensation paid to
each portfolio manager may be voluntarily deferred by the portfolio
manager into an account that tracks the performance of certain of the
firm's investment products. Each portfolio manager is permitted to
allocate his deferred amounts among various options, including to
certain of the firm's hedge funds and other unregistered products. In
addition, prior to 2005, a portion of the annual compensation of
certain senior managers was mandatorily deferred in a similar manner
for a number of years. Beginning in 2005, a portion of the annual
compensation of certain senior managers is paid in the form of
BlackRock, Inc. restricted stock units which vest ratably over a number
of years.
Options and Restricted Stock Awards --While incentive stock options are
not currently being awarded to BlackRock employees, BlackRock, Inc.
previously granted stock options to key employees, including certain
portfolio managers who may still hold unexercised or unvested options.
BlackRock, Inc. also has a restricted stock award program designed to
reward certain key employees as an incentive to contribute to the
long-term success of BlackRock. These awards vest over a period of
years.
Incentive Savings Plans --The PNC Financial Services Group, Inc. has
created a variety of incentive savings plans in which BlackRock
employees are eligible to participate, including an Employee Stock
Purchase Plan ("ESPP") and a 401(k) plan. The 401(k) plan may involve a
company match of the employee's contribution of up to 6% of the
employee's salary. The company match is made using BlackRock, Inc.
common stock. The firm's 401(k) plan offers a range of investment
options, including registered investment companies managed by the firm.
Each portfolio manager is eligible to participate in these plans.
Annual incentive compensation for each portfolio manager is a function
of several components: the performance of BlackRock, Inc., the
performance of the portfolio manager's group within BlackRock, the
investment performance, including risk-adjusted returns, of the firm's
assets under management or supervision by that portfolio manager
relative to predetermined benchmarks, and the individual's teamwork and
contribution to the overall performance of these portfolios and
BlackRock. Unlike many other firms, portfolio managers at BlackRock
compete against benchmarks rather than each other. In most cases,
including for the portfolio managers of the Fund, these benchmarks are
the same as the benchmark or benchmarks against which the performance
of the Fund or other accounts are measured. A group of BlackRock,
Inc.'s officers determines the benchmarks against which to compare the
performance of funds and other accounts managed by each portfolio
manager. With respect to Mr. Williams, such benchmarks will include the
CSFB Leveraged Loan Index and CSFB High Yield II Value Index.
The group of BlackRock, Inc.'s officers then makes a subjective
determination with respect to the portfolio manager's compensation
based on the performance of the funds and other accounts managed by
each portfolio manager relative to the various benchmarks. Senior
portfolio managers who perform additional management functions within
BlackRock may receive additional compensation for serving in these
other capacities.
(a)(4) Beneficial Ownership of Securities. As of October 2, 2006, Mr.
Williams does not beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - The registrant's
Nominating Committee will consider nominees to the Board recommended
by shareholders when a vacancy becomes available. Shareholders who
wish to recommend a nominee should send nominations which include
biographical information and sets forth the qualifications of the
proposed nominee to the registrant's Secretary. There have been no
material changes to these procedures.
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
BlackRock Debt Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Debt Strategies Fund, Inc.
Date: October 19, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
----------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
BlackRock Debt Strategies Fund, Inc.
Date: October 19, 2006
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
BlackRock Debt Strategies Fund, Inc.
Date: October 19, 2006