UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number

811-22265

 

Western Asset Municipal Defined Opportunity Trust Inc.

(Exact name of registrant as specified in charter)

 

55 Water Street, New York, NY

 

10041

(Address of principal executive offices)

 

(Zip code)

 

Robert I. Frenkel, Esq.

Legg Mason & Co., LLC

100 First Stamford Place,

Stamford, CT 06902

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

(888)777-0102

 

 

Date of fiscal year end:

November 30

 

 

Date of reporting period:

November 30, 2010

 

 



 

ITEM 1.                  REPORT TO STOCKHOLDERS.

 

The Annual Report to Stockholders is filed herewith.

 



 

November 30, 2010

 

 

Annual Report

 

 

Western Asset Municipal Defined Opportunity Trust Inc.
(MTT)

 

 

 

 

 

INVESTMENT PRODUCTS: NOT FDIC INSURED · NO BANK GUARANTEE · MAY LOSE VALUE

 

 

 


 

II

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Fund objectives

 

The Fund’s primary investment objective is to provide high current income exempt from federal income tax* and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return. There can be no assurance the Fund’s investment objectives will be achieved.

 

*    Certain investors may be subject to the federal alternative minimum tax (“AMT”), and state and local taxes will apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

 

What’s inside

 

Letter from the chairman

 

II

 

 

 

Investment commentary

 

III

 

 

 

Fund overview

 

1

 

 

 

Fund at a glance

 

6

 

 

 

Spread duration

 

7

 

 

 

Effective duration

 

8

 

 

 

Schedule of investments

 

9

 

 

 

Statement of assets and liabilities

 

17

 

 

 

Statement of operations

 

18

 

 

 

Statements of changes in net assets

 

19

 

 

 

Financial highlights

 

20

 

 

 

Notes to financial statements

 

21

 

 

 

Report of independent registered public accounting firm

 

26

 

 

 

Board approval of management and subadvisory agreements

 

27

 

 

 

Additional information

 

33

 

 

 

Annual chief executive officer and chief financial officer certifications

 

39

 

 

 

Dividend reinvestment plan

 

40

 

 

 

Important tax information

 

42

 

Letter from the chairman

Dear Shareholder,

 

We are pleased to provide the annual report of Western Asset Municipal Defined Opportunity Trust Inc. for the twelve-month reporting period ended November 30, 2010. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.

 

As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.leggmason.com/cef. Here you can gain immediate access to market and investment information, including:

 

·    Fund prices and performance,

·    Market insights and commentaries from our portfolio managers, and

·    A host of educational resources.

 

We look forward to helping you meet your financial goals.

 

Sincerely,

R. Jay Gerken, CFA

Chairman, President and Chief Executive Officer

 

December 31, 2010

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

III

 

 

Investment commentary

 

Economic review

 

While the U.S. economy continued to expand over the twelve months ended November 30, 2010, economic data was mixed and unemployment remained elevated. The Federal Reserve Board (“Fed”)i expressed concerns regarding the direction of the economy and took additional actions in an attempt to spur growth. This initially caused investor sentiment to improve, but the financial markets declined toward the end of the reporting period given a re-escalation of the European sovereign debt crisis.

 

In September 2010, the National Bureau of Economic Research (“NBER”), the organization charged with determining when recessions start and end, announced that the recession that began in December 2007 had concluded in June 2009. However, the NBER said, “In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity.” The NBER’s point is well-taken given continued areas of weakness in the U.S. economy.

 

Although the U.S. Department of Commerce continued to report positive U.S. gross domestic product (“GDP”)ii growth, the expansion has moderated since peaking at 5.0% in the fourth quarter of 2009. A slower drawdown in business inventories and renewed consumer spending were contributing factors spurring the economy’s solid growth at the end of 2009. However, the economy has grown at a more modest pace thus far in 2010. According to the Commerce Department, GDP growth was 3.7% and 1.7% during the first and second quarters of 2010, respectively. GDP growth then edged somewhat higher to 2.6% in the third quarter.

 

Turning to the job market, after experiencing sharp job losses in 2009, the U.S. Department of Labor reported that over one million new positions were added during the first five months of 2010. Included in that number, however, were 700,000 temporary government jobs tied to the 2010 Census. From June through September, more than 525,000 of these temporary positions were eliminated. This more than offset private sector growth and resulted in a total net loss of 300,000 jobs from June through September. The employment picture then brightened somewhat in October, as 172,000 new jobs were created. Payrolls then increased a disappointing 39,000 in November and the unemployment rate inched up to end the period at 9.8%. The unemployment rate has now exceeded 9.0% since May 2009.

 

There was mixed news in the housing market during the period. According to the National Association of Realtors (“NAR”), existing-home sales increased 7.0% and 8.0% in March and April, respectively, after sales had fallen for the period from December 2009 through February 2010. The rebound was largely attributed to people rushing to take advantage of the government’s $8,000 tax credit for first-time home buyers that expired at the end of April. However, with the end of the tax credit, existing-home sales then declined from May through July. Sales then rose 7.3% and 10.0% in August and September, respectively. Sales then dipped 2.2% in October and rose 5.6% in November. Looking at home prices, the NAR reported that the median existing-home price for all housing types was $170,600 in November 2010, which was 0.4% higher

 


 

IV

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Investment commentary (cont’d)

 

than in November 2009. Prices appeared to stabilize somewhat as the number of existing homes on the market declined in November. The inventory of unsold homes was a 9.5 month supply in November at the current sales level, versus a 10.5 month supply in October.

 

One overall bright spot for the economy has been the manufacturing sector. Based on the Institute for Supply Management’s PMIiii, the manufacturing sector has grown sixteen consecutive months since it began expanding in August 2009. After reaching a six-year peak of 60.4 in April 2010, PMI data indicated somewhat more modest growth from May through July (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). The manufacturing sector then expanded at a faster pace in August, before moderating somewhat in September. Manufacturing then grew in October at its fastest pace since May with a reading of 56.9 for the month, before dipping to 56.6 in November.

 

Financial market overview

 

During the majority of the reporting period, the financial markets were largely characterized by healthy investor risk appetite and solid results by lower-quality bonds. However, the market experienced a sharp sell-off in late April and in May, during which risk aversion returned and investors flocked to the relative safety of U.S. Treasury securities. Demand for riskier assets then resumed in June and July, followed by another “flight to quality” in August. Risk appetite then returned in September and October before the financial markets again weakened beginning in mid-November.

 

Due to signs that economic growth was slowing toward the end of the reporting period, the Fed took further actions to spur the economy. At its August 10th meeting, the Fed announced an ongoing program that calls for using the proceeds from expiring agency debt and agency mortgage-backed securities to purchase longer-dated Treasury securities.

 

In addition, the Fed remained cautious throughout the reporting period given pockets of weakness in the economy. At its meeting in September 2010, the Fed said, “The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery. . . .” This led to speculation that the Fed may again move to purchase large amounts of agency and Treasury securities in an attempt to avoid a double-dip recession and ward off deflation.

 

The Fed then took additional action in early November. Citing that “the pace of recovery in output and employment continues to be slow,” the Fed announced another round of quantitative easing to help stimulate the economy, entailing the purchase of $600 billion of long-term U.S. Treasury securities by the end of the second quarter of 2011. This, coupled with the Fed’s previously announced program to use the proceeds of expiring securities to purchase Treasuries, means it could buy a total of $850 billion to $900 billion of Treasury securities by the end of June 2011.

 

Fixed-income market review

 

Continuing the trend that began in the second quarter of 2009, nearly every spread sector (non-Treasury) outperformed equal-durationiv Treasuries during most of the first half of the reporting

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

V

 

 

period. Over that time, investor confidence was high given encouraging economic data, continued low interest rates, benign inflation and rebounding corporate profits. Robust investor appetite was then replaced with heightened risk aversion toward the end of April and during the month of May. This was due to the escalating sovereign debt crisis in Europe, uncertainties regarding new financial reforms in the U.S. and some worse-than-expected economic data. Most spread sectors then produced positive absolute returns in June and July, as investor demand for these securities again increased. There was another bout of risk aversion in August, given fears that the economy may slip back into a recession. However, with the Fed indicating the possibility of another round of quantitative easing, most spread sectors rallied in September and October. The spread sectors then ended the reporting period on a weak note as financial troubles in Ireland resulted in a re-emergence of the European sovereign debt crisis.

 

Both short- and long-term Treasury yields fluctuated but, overall, moved lower during the twelve months ended November 30, 2010. When the period began, two- and ten-year Treasury yields were 0.67% and 3.21%, respectively. On April 5, 2010, two- and ten-year Treasury yields peaked at 1.18% and 4.01%, respectively. Subsequent to hitting their highs for the period, yields largely declined during much of the remainder of the reporting period. When the period ended on November 30, 2010, two-year Treasury yields were 0.45%, versus a low of 0.33% earlier in the month. Ten-year Treasury yields ended the period at 2.81%, which was higher than their trough of 2.41% that occurred in October. Longer-term yields moved higher toward the end of the period as fears of future inflation increased in light of the Fed’s additional policy accommodation.

 

The municipal bond market lagged its taxable bond counterpart over the twelve months ended November 30, 2010. Over that period, the Barclays Capital Municipal Bond Indexv and the Barclays Capital U.S. Aggregate Indexvi returned 4.76% and 6.02%, respectively. The majority of the municipal market’s underperformance occurred in November 2010. Concerns that Congress may not extend the popular Build America Bond program, which was scheduled to expire at the end of 2010, led to a sharp increase in issuance of these securities, which was not readily absorbed by investor demand. In addition, there were some high profile issues regarding the financial well-being of some municipal bond issuers.

 

As always, thank you for your confidence in our stewardship of your assets.

 

Sincerely,

R. Jay Gerken, CFA

Chairman, President and
Chief Executive Officer

 

December 31, 2010

 

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 


 

VI

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Investment commentary (cont’d)

 

i                The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.

ii             Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time.

iii          The Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the manufacturing sector.

iv           Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.

v              The Barclays Capital Municipal Bond Index is a market value weighted index of investment grade municipal bonds with maturities of one year or more.

vi           The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.

 

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

1

 

 

Fund overview

 

Q. What is the Fund’s investment strategy?

 

A. The Fund’s primary investment objective is to provide high current income exempt from federal income tax and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return. There can be no assurance the Fund’s investment objectives will be achieved.

 

As a fundamental policy, the Fund seeks to achieve its primary investment objective by investing, under normal market conditions, at least 80% of its net assets in investment grade municipal securities, the interest on which is exempt from federal income tax. The Fund may invest up to 20% of its net assets in municipal securities rated below investment grade at the time of purchase by at least one nationally recognized statistical rating organization or which, if unrated, are deemed to be of comparable quality. The Fund may also invest up to 20% of its net assets in investments that generate income that is subject to federal income tax and in municipal securities, the interest on which is subject to the federal alternative minimum tax (“AMT”), and as a result, a portion of the Fund’s distributions may be taxable to common shareholders. The Fund may use a variety of derivative instruments as part of its investment strategies or for hedging and/or risk management purposes.

 

In purchasing securities and other investments for the Fund, we may take full advantage of the entire range of maturities and durationsi offered by municipal securities and may adjust the average maturity or duration of the Fund’s portfolio from time to time, depending on our assessment of the relative yields available on securities of different maturities and durations and our expectations of future changes in interest rates.

 

As a fundamental policy, the Fund will not leverage its capital structure by issuing senior securities such as preferred shares or debt instruments. However, the Fund may lend portfolio securities, invest in certain instruments, including inverse floating rate securities, participate in the creation of tender option bonds and enter into transactions such as short sales, that have the economic effect of financial leverage (“effective leverage”), provided that the Fund will not make such investments if, upon completion of the investment, the effective leverage of the Fund would be greater than 10% of the Fund’s total assets.

 

At Western Asset Management Company (“Western Asset”), the Fund’s subadviser, we utilize a fixed-income team approach, with decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Asset’s senior portfolio managers, research analysts and an in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The portfolio managers responsible for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are Stephen A. Walsh, Robert E. Amodeo, David T. Fare and Joseph P. Deane.

 

Q. What were the overall market conditions during the Fund’s reporting period?

 

A. During the twelve months ended November 30, 2010, the riskier segments of the fixed-income market produced

 


 

2

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Fund overview (cont’d)

 

strong results and outperformed U.S. Treasuries. This was due, in part, to improving economic conditions following the lengthy downturn from mid-2008 through mid-2009. Also supporting the spread sectors (non-U.S. Treasuries) was overall solid demand from investors seeking incremental yields given the low rates available from short-term fixed-income securities.

 

The spread sectors rallied during most of the reporting period, with notable exceptions being in late April and May 2010, as well as August and November 2010. Starting toward the end of April, there was a “flight to quality,” triggered by concerns regarding the escalating sovereign debt crisis in Europe. In addition, investor sentiment was negatively impacted by uncertainties surrounding financial reform legislation in the U.S. and signs that economic growth was moderating. Collectively, this caused investors to flock to the relative safety of Treasury securities, driving their yields lower and prices higher.

 

Robust investor risk appetite largely resumed during June and July, and again in September and October. These turnarounds occurred as the situation in Europe appeared to stabilize, the financial reform bill was signed into law and the Federal Reserve Board (“Fed”)ii continued to indicate that it would keep short-term rates low for an extended period. However, investor risk aversion returned in November when fears regarding the European debt crisis re-emerged.

 

The yields on two- and ten-year Treasuries began the fiscal year at 0.67% and 3.21%, respectively. Treasury yields fluctuated during the twelve-month reporting period given changing perceptions regarding the economy, interest rates, inflation and deflation. Yields moved sharply lower in October 2010 in anticipation of additional quantitative easing by the Fed. Yields then reversed course toward the end of the period as certain economic data were stronger than expected and there were concerns regarding future inflation. During the fiscal year, two-year Treasury yields moved as high as 1.18% and as low as 0.33%, whereas ten-year Treasuries rose as high as 4.01% and as low as 2.41%. On November 30, 2010, yields on two- and ten-year Treasuries were 0.45% and 2.81%, respectively.

 

Despite a sharp sell-off in November 2010, municipal bonds posted solid returns during the fiscal year as a whole. Although the fundamentals in the municipal market remained challenging, tax-free bond prices rallied during much of the reporting period. This was due, in part, to generally strong demand as investors were drawn to their attractive yields. In addition, new supply in the tax-exempt market was pared due to increased issuance of Build America Bonds (“BABs”). However, the municipal market ended the fiscal year on a weak note when investor demand could not absorb a sharp increase in new issuance of BABs. This spike in new issuance occurred as municipalities feared that the BAB program, which is scheduled to expire at the end of December, would not be extended by Congress. In addition, there were concerns regarding the financial health of some municipal bond issuers. All told, the Barclays Capital Municipal Bond Indexiii returned 4.76% for the twelve months ended November 30, 2010. Over the same period, the overall taxable bond market, as measured by the

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

3

 

 

Barclays Capital U.S. Aggregate Indexiv, returned 6.02%.

 

Q. How did we respond to these changing market conditions?

 

A. A general theme for the Fund throughout the fiscal year was its underweight exposures to State General Obligation bonds (“GOs”) and Local GOs. These securities are typically economically sensitive, in that the issuing municipality repays bondholders from tax revenues. We avoided GOs given declining tax revenues, ongoing budget challenges and the likelihood of further agency rating downgrades. In contrast, we continued to emphasize essential service revenue bonds. Within this area, we increased the Fund’s exposure to Industrial Revenue bonds, as we continued to find them to be attractively valued. We pared the Fund’s exposure to the Power sector in order to pursue more attractive opportunities.

 

The Fund employed short U.S. Treasury futures during the reporting period to manage duration. This strategy materially detracted from the Fund’s performance and we closed the position in November 2010.

 

Performance review

 

For the twelve months ended November 30, 2010, Western Asset Municipal Defined Opportunity Trust Inc. returned 3.57% based on its net asset value (“NAV”)v and 7.41% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmark, the Barclays Capital Municipal Bond Index, returned 4.76% for the same period. The Lipper General and Insured Municipal Debt (Unleveraged) Closed-End Funds Category Averagevi returned 3.88% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.

 

Certain investors may be subject to the AMT, and state and local taxes will apply. Capital gains, if any, are fully taxable. Please consult your personal tax or legal adviser.

 

During the twelve-month period, the Fund made distributions to shareholders totaling $1.12 per share. The performance table shows the Fund’s twelve-month total return based on its NAV and market price as of November 30, 2010. Past performance is no guarantee of future results.

 

Performance Snapshot as of November 30, 2010

 

Price Per Share

 

12-Month
Total Return*

$20.90 (NAV)

 

3.57%

$20.83 (Market Price)

 

7.41%

 

All figures represent past performance and are not a guarantee of future results.

 

*            Total returns are based on changes in NAV or market price, respectively. Total returns assume the reinvestment of all distributions in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.

 

Q. What were the leading contributors to performance?

 

A. The largest contributor to the Fund’s relative performance during the reporting period was our overweight to the Health Care sector, as it outperformed the overall benchmark. An overweight to the Industrial Revenue sector was also rewarded. Within this sector, the Fund’s gas prepayvii securities significantly contributed to performance. These securities performed poorly during the majority of 2008 due to the fallout from the credit crisis. As the financial system recovered, gas prepay securities rallied and generated strong results during much of the fiscal year. Elsewhere, issue selection within the Water & Sewer sector was beneficial for the Fund’s performance.

 


 

4

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Fund overview (cont’d)

 

Q. What were the leading detractors from performance?

 

A. The largest detractor from relative performance for the period was the use of a short Treasury futures position. This derivative position was employed given our expectations for Treasuries to underperform municipal bonds due to a dramatic increase in Treasury issuance. However, Treasuries outperformed the municipal market over the twelve months ended November 30, 2010. In addition, the Treasury futures position served to shorten the Fund’s overall duration, which negatively impacted performance as the longer portions of the municipal yield curveviii generated the best results during the reporting period.

 

Looking for additional information?

 

The Fund is traded under the symbol “MTT” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol “XMTTX” on most financial websites. Barron’s and the Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.leggmason.com/cef.

 

In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.

 

Thank you for your investment in Western Asset Municipal Defined Opportunity Trust Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.

 

Sincerely,

 

Western Asset Management Company

 

December 21, 2010

 

RISKS: The Fund’s investments are subject to credit risk, inflation risk and interest rate risk. As interest rates rise, bond prices fall, reducing the value of the fixed-income securities held by the Fund. The Fund may invest in lower-rated high-yield bonds which are subject to greater credit risk (risk of default) than higher-rated obligations. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. The Fund may invest up to 10% of its assets in securities that have the economic effects of leverage which can increase the risk and volatility of the Fund. Shares of closed-end exchange-traded funds may trade at a discount or premium to their original offering price and often trade at a discount to their NAV.

 

The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. Portfolio holdings are subject to change at any time and may not be representative of the portfolio managers’ current or future investments. The Fund’s portfolio composition is subject to change at any time.

 

All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.

 

The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

5

 

 

i                Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted average of the present values for all cash flows.

ii             The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments.

iii          The Barclays Capital Municipal Bond Index is a market value weighted index of investment grade municipal bonds with maturities of one year or more.

iv           The Barclays Capital U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity.

v              Net asset value (“NAV”) is calculated by subtracting total liabilities and outstanding preferred stock (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares.

vi           Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended November 30, 2010, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 8 funds in the Fund’s Lipper category.

vii        Gas prepay bonds are issued to enable a municipal utility to contract for a stated amount of natural gas supply over an extended period of time. The utility contracts with a natural gas supplier to purchase gas at a discount to the spot price of gas at the time of delivery. The bonds are issued to fund future purchases of the gas supplier. Bonds are repaid by the utility from gas sales to its customers, though the ratings are primarily driven by the credit strength of the financial firm that guarantees the performance of the gas supplier.

viii     The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.

 


 

6

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Fund at a glance(unaudited)

 

Investment breakdown (%) as a percent of total investments

 

 

        The bar graph above represents the composition of the Fund’s investments as of November 30, 2010 and November 30, 2009 and does not include derivatives such as futures contracts. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at anytime.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

7

 

 

Spread duration (unaudited)

 

Economic Exposure November 30, 2010

 

 

Spread duration measures the sensitivity to changes in spreads. The spread over Treasuries is the annual risk-premium demanded by investors to hold non-Treasury securities. Spread duration is quantified as the % change in price resulting from a 100 basis points change in spreads. For a security with positive spread duration, an increase in spreads would result in a price decline and a decline in spreads would result in a price increase. This chart highlights the market sector exposure of the Fund’s portfolio and the exposure relative to the selected benchmark as of the end of the reporting period.

 


BC Muni Bond

— Barclays Capital Municipal Bond Index

MTT

— Western Asset Municipal Defined Opportunity Trust Inc.

 

 


 

8

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Effective duration (unaudited)

 

Interest Rate Exposure November 30, 2010

 

 

Effective duration measures the sensitivity to changes in Treasury yields. Effective duration is quantified as the % change in price resulting from a 100 basis points change in Treasury yields. For a security with positive effective duration, an increase in Treasury yields would result in a price decline and a decline in Treasury yields would result in a price increase. This chart highlights the interest rate exposure of the Fund’s portfolio relative to the selected benchmark as of the end of the reporting period.

 


BC Muni Bond

— Barclays Capital Municipal Bond Index

MTT

— Western Asset Municipal Defined Opportunity Trust Inc.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

9

 

Schedule of investments

November 30, 2010

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

Security

 

Rate

 

Maturity
Date

 

Face
Amount

 

Value

 

Municipal Bonds — 98.1%

 

 

 

 

 

 

 

 

 

Arizona — 2.7%

 

 

 

 

 

 

 

 

 

Salt Verde, AZ, Financial Corp. Gas Revenue

 

5.000

%

12/1/32

 

$

7,610,000

 

$

6,811,102

 

California — 4.3%

 

 

 

 

 

 

 

 

 

California Housing Finance Agency Revenue:

 

 

 

 

 

 

 

 

 

Home Mortgage

 

5.000

%

2/1/28

 

6,755,000

 

6,083,688

(a)

Home Mortgage

 

4.800

%

8/1/37

 

6,000,000

 

4,823,340

(a)

Total California

 

 

 

 

 

 

 

10,907,028

 

Colorado — 2.6%

 

 

 

 

 

 

 

 

 

Public Authority for Colorado Energy, Natural Gas Purchase Revenue

 

6.125

%

11/15/23

 

6,000,000

 

6,500,400

 

Florida — 3.5%

 

 

 

 

 

 

 

 

 

Citizens Property Insurance Corp., FL, Senior Secured High Act

 

6.000

%

6/1/17

 

6,900,000

 

7,579,029

 

Florida State Municipal Power Agency Revenue, All Requirements Power

 

6.250

%

10/1/31

 

1,000,000

 

1,116,990

 

Total Florida

 

 

 

 

 

 

 

8,696,019

 

Georgia — 8.1%

 

 

 

 

 

 

 

 

 

Atlanta, GA, Water & Wastewater Revenue

 

6.000

%

11/1/23

 

5,000,000

 

5,694,950

 

Atlanta, GA, Water & Wastewater Revenue

 

6.250

%

11/1/34

 

3,260,000

 

3,564,680

 

DeKalb, Newton & Gwinnett Counties, GA, Joint Development Authority Revenue, GGC Foundation LLC Project

 

6.125

%

7/1/40

 

10,000,000

 

10,951,700

 

Total Georgia

 

 

 

 

 

 

 

20,211,330

 

Illinois — 1.2%

 

 

 

 

 

 

 

 

 

Metropolitan Pier & Exposition Authority, IL, Dedicated State Tax Revenue, Mccormick

 

5.250

%

6/15/50

 

3,000,000

 

2,936,340

 

Indiana — 7.6%

 

 

 

 

 

 

 

 

 

Indiana Municipal Power Agency Power Supply System Revenue

 

6.000

%

1/1/39

 

10,000,000

 

10,454,600

 

Richmond, IN, Hospital Authority Revenue, Reid Hospital & Health Care Services Inc. Project

 

6.500

%

1/1/29

 

8,000,000

 

8,526,400

 

Total Indiana

 

 

 

 

 

 

 

18,981,000

 

Louisiana — 4.5%

 

 

 

 

 

 

 

 

 

Louisiana State Citizens Property Insurance Corp., Assessment Revenue, AGC

 

6.125

%

6/1/25

 

10,000,000

 

11,364,300

 

Maryland — 3.6%

 

 

 

 

 

 

 

 

 

Maryland State Health & Higher EFA Revenue, Washington County Hospital

 

5.750

%

1/1/38

 

9,000,000

 

8,926,290

 

 

See Notes to Financial Statements.

 


 

10

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Schedule of investments (cont’d)

November 30, 2010

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

Security

 

Rate

 

Maturity Date

 

Face
Amount

 

Value

 

Michigan — 14.2%

 

 

 

 

 

 

 

 

 

Detroit, MI, Water Supply System Revenue:

 

 

 

 

 

 

 

 

 

AGM

 

5.000

%

7/1/34

 

$

7,000,000

 

$

6,866,650

 

AGM

 

6.250

%

7/1/36

 

3,000,000

 

3,158,340

 

Michigan State Hospital Finance Authority Revenue, McLaren Health Care Corp.

 

5.750

%

5/15/38

 

9,000,000

 

9,201,870

 

Michigan State Housing Development Authority, Rental Housing Revenue, AMBAC

 

6.350

%

10/1/35

 

6,600,000

 

6,976,794

(a)

Royal Oak, MI, Hospital Finance Authority Revenue, William Beaumont Hospital

 

8.250

%

9/1/39

 

8,000,000

 

9,371,200

 

Total Michigan

 

 

 

 

 

 

 

35,574,854

 

Missouri — 4.9%

 

 

 

 

 

 

 

 

 

Missouri State Development Finance Board, Infrastructure Facilities Revenue, Independence Events Center

 

6.250

%

4/1/34

 

11,940,000

 

12,215,098

 

New Jersey — 4.6%

 

 

 

 

 

 

 

 

 

New Jersey State EFA Revenue, University of Medicine and Dentistry

 

7.500

%

12/1/32

 

10,000,000

 

11,459,700

 

New York — 1.2%

 

 

 

 

 

 

 

 

 

Liberty, NY, Development Corporation Revenue, Goldman Sachs Headquarters

 

5.250

%

10/1/35

 

3,000,000

 

3,012,210

 

Ohio — 5.4%

 

 

 

 

 

 

 

 

 

Ohio State Air Quality Development Authority Revenue:

 

 

 

 

 

 

 

 

 

FirstEnergy Generation Corp.

 

5.700

%

8/1/20

 

2,500,000

 

2,642,425

 

FirstEnergy Nuclear Generation Corp.

 

5.750

%

6/1/16

 

10,000,000

 

10,881,200

(b)(c)

Total Ohio

 

 

 

 

 

 

 

13,523,625

 

Pennsylvania — 4.2%

 

 

 

 

 

 

 

 

 

Pennsylvania Economic Development Financing Authority, Water Facility Revenue, American Water Co. Project

 

6.200

%

4/1/39

 

10,000,000

 

10,516,300

 

Rhode Island — 4.4%

 

 

 

 

 

 

 

 

 

Rhode Island State Health & Educational Building Corp., Revenue, Hospital Financing

 

7.000

%

5/15/39

 

10,000,000

 

11,088,100

 

Tennessee — 3.3%

 

 

 

 

 

 

 

 

 

Tennessee Energy Acquisition Corp., Gas Revenue

 

5.000

%

9/1/16

 

8,000,000

 

8,393,920

 

Texas — 11.4%

 

 

 

 

 

 

 

 

 

Brazos River, TX, Harbor Navigation District, Brazoria County Environmental, Dow Chemical Co. Project

 

5.950

%

5/15/33

 

10,000,000

 

9,651,800

(a)(c)

Love Field Airport Modernization Corp, TX, Special Facilities Revenue, Southwest Airlines Co. Project

 

5.250

%

11/1/40

 

1,000,000

 

926,260

 

North Texas Tollway Authority Revenue

 

5.750

%

1/1/33

 

10,200,000

 

10,199,490

 

 

See Notes to Financial Statements.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

11

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

Security

 

Rate

 

Maturity
Date

 

Face
Amount

 

Value

 

Texas — continued

 

 

 

 

 

 

 

 

 

Tarrant County, TX, Cultural Education Facilities Finance Corp. Revenue, Texas Health Resources

 

5.000

%

11/15/40

 

$

1,000,000

 

$

975,710

 

Texas Municipal Gas Acquisition & Supply Corp. I, Gas Supply Revenue

 

5.250

%

12/15/18

 

3,325,000

 

3,430,402

 

Texas Municipal Gas Acquisition & Supply Corp. I, Gas Supply Revenue

 

6.250

%

12/15/26

 

1,310,000

 

1,405,054

 

Texas Private Activity Bond Surface Transportation Corp. Revenue, LBJ Infrastructure Group LLC

 

7.000

%

6/30/40

 

2,000,000

 

2,061,700

 

Total Texas

 

 

 

 

 

 

 

28,650,416

 

U.S. Virgin Islands — 2.1%

 

 

 

 

 

 

 

 

 

Virgin Islands Public Finance Authority Revenue, Matching Fund Loan

 

6.625

%

10/1/29

 

5,000,000

 

5,367,050

 

Wisconsin — 4.3%

 

 

 

 

 

 

 

 

 

Wisconsin State HEFA Revenue, Prohealth Care Inc. Obligation Group

 

6.625

%

2/15/39

 

10,000,000

 

10,706,200

 

Total Investments before Short-Term Investments (Cost — $218,214,337)

 

 

 

 

245,841,282

 

Short-Term Investments — 0.3%

 

 

 

 

 

 

 

 

 

California — 0.0%

 

 

 

 

 

 

 

 

 

California Infrastructure & Economic Development Bank Revenue, Pacific Gas & Electric Co., LOC-Wells Fargo Bank N.A.

 

0.220

%

12/1/16

 

100,000

 

100,000

(d)(e)

New York — 0.3%

 

 

 

 

 

 

 

 

 

New York City, NY, Municipal Finance Authority, Water & Sewer System Revenue, SPA-Bank of America N.A.

 

0.230

%

6/15/33

 

700,000

 

700,000

(d)(e)

Total Short-Term Investments (Cost — $800,000)

 

 

 

 

 

 

 

800,000

 

Total Investments — 98.4% (Cost — $219,014,337 #)

 

 

 

 

 

 

 

246,641,282

 

Other Assets in Excess of Liabilities — 1.6%

 

 

 

 

 

 

 

4,037,629

 

Total Net Assets — 100.0%

 

 

 

 

 

 

 

$250,678,911

 

 

(a)         Income from this issue is considered a preference item for purposes of calculating the alternative minimum tax (“AMT”).

(b)        Maturity date shown represents the mandatory tender date.

(c)         Variable rate security. Interest rate disclosed is that which is in effect at November 30, 2010.

(d)        Variable rate demand obligations have a demand feature under which the Fund can tender them back to the issuer or liquidity provider on no more than 7 days notice.

(e)         Maturity date shown is the final maturity date. The security may be sold back to the issuer before final maturity.

#            Aggregate cost for federal income tax purposes is $218,296,973.

 

See Notes to Financial Statements.

 


 

12

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Schedule of investments (cont’d)

November 30, 2010

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

Abbreviations used in this schedule:

 

AGC

— Assured Guaranty Corporation — Insured Bonds

AGM

— Assured Guaranty Municipal Corporation — Insured Bonds

AMBAC

— American Municipal Bond Assurance Corporation — Insured Bonds

EFA

— Educational Facilities Authority

HEFA

— Health & Educational Facilities Authority

LOC

— Letter of Credit

SPA

— Standby Bond Purchase Agreement — Insured Bonds

 

Summary of Investments by Industry*

 

Industrial revenue

 

28.2

%

Health care

 

23.8

 

Education

 

9.1

 

Special tax obligation

 

8.9

 

Water & sewer

 

7.8

 

Housing

 

7.3

 

Transportation

 

5.0

 

Other

 

4.9

 

Power

 

4.7

 

Short-term investments

 

0.3

 

 

 

100.0

%

 

*            As a percentage of total investments. Please note that Fund holdings are as of November 30, 2010 and are subject to change.

 

Ratings Table† (unaudited)

 

S&P/Moody’s/Fitch‡

 

 

 

AAA/Aaa

 

1.2

%

AA/Aa

 

16.9

 

A

 

65.2

 

BBB/Baa

 

16.4

 

A-1/VMIG 1

 

0.3

 

 

 

100.0

%

 

             As a percentage of total investments.

             The ratings shown are based on each portfolio security’s rating as determined by S&P, Moody’s or Fitch, each a Nationally Recognized Statistical Ratings Organization (“NRSRO”). These ratings are the opinions of the NRSRO and are not measures of quality or guarantees of performance. Securities may be rated by other NRSROs, and these ratings may be higher or lower. In the event that a security is rated by multiple NRSROs and receives different ratings, the Fund will treat the security as being rated in the highest rating category received from an NRSRO.

 

See pages 13 through 16 for definitions of ratings.

 

See Notes to Financial Statements.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

13

 

 

Bond ratings

 

The definitions of the applicable rating symbols are set forth below:

 

Long-term security ratings (unaudited)

 

Standard & Poor’s Ratings Service (“Standard & Poor’s”) Long-term Issue Credit Ratings — Ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standings within the major rating categories.

 

AAA

An obligation rated “AAA” has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is extremely strong.

AA

An obligation rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.

A

An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.

BBB

An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

BB

An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

B

An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on the obligation.

CCC

An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.

CC

An obligation rated “CC” is currently highly vulnerable to nonpayment.

C

The “C” rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on this obligation are being continued.

D

An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due, even if the applicable grace period has not expired, unless Standard & Poor’s believes that such payments will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments of on obligation are jeopardized.

 


 

14

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Long-term security ratings (unaudited) (cont’d)

 

Moody’s Investors Service (“Moody’s”) Long-term Obligation Ratings — Numerical modifiers 1, 2 and 3 may be applied to each generic rating from “Aa” to “Caa,” where 1 is the highest and 3 the lowest ranking within its generic category.

 

Aaa

Obligations rated “Aaa” are judged to be of the highest quality, with minimal credit risk.

Aa

Obligations rated “Aa” are judged to be of high quality and are subject to very low credit risk.

A

Obligations rated “A” are considered upper-medium grade and are subject to low credit risk.

Baa

Obligations rated “Baa” are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.

Ba

Obligations rated “Ba” are judged to have speculative elements and are subject to substantial credit risk.

B

Obligations rated “B” are considered speculative and are subject to high credit risk.

Caa

Obligations rated “Caa” are judged to be of poor standing and are subject to very high credit risk.

Ca

Obligations rated “Ca” are highly speculative and are likely in, or very near, default, with some prospect of recovery for principal and interest.

C

Obligations rated “C” are the lowest rated class and are typically in default, with little prospect of recovery for principal and interest.

 

Fitch Ratings Service (“Fitch”) Structured, Project & Public Finance Obligations — Ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (–) sign to show relative standings within the major rating categories.

 

AAA

Obligations rated “AAA” by Fitch denote the lowest expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.

AA

Obligations rated “AA” denote expectations of very low default risk. They indicate very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.

A

Obligations rated “A” denote expectations of low default risk. The capacity for payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.

BBB

Obligations rated “BBB” indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.

BB

Obligations rated “BB” indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.

B

Obligations rated “B” indicate that material default risk is present, but a limited margin of safety remains. Financial commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.

CCC

Default is a real possibility.

CC

Default of some kind appears probable.

C

Default is imminent or inevitable, or the issuer is in standstill.

NR

indicates that the obligation is not rated by Standard & Poor’s, Moody’s or Fitch.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

15

 

Short-term security ratings (unaudited)

 

Standard & Poor’s Municipal Short-Term Notes Ratings

 

SP-1

A short-term obligation rated “SP-1” is rated in the highest category by Standard & Poor’s. Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.

SP-2

A short-term obligation rated “SP-2” is a Standard & Poor’s rating indicating satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.

SP-3

A short-term obligation rated “SP-3” is a Standard & Poor’s rating indicating speculative capacity to pay principal and interest.

 

Standard & Poor’s Short-Term Issues Credit Ratings

 

A-1

A short-term obligation rated “A-1” is rated in the highest category by Standard & Poor’s. The obligor’s capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet its financial commitment on these obligations is extremely strong.

A-2

A short-term obligation rated “A-2” by Standard & Poor’s is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.

A-3

A short-term obligation rated “A-3” by Standard & Poor’s exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.

B

A short-term obligation rated “B” by Standard & Poor’s is regarded as having significant speculative characteristics. Ratings of “B-1”, “B-2” and “B-3” may be assigned to indicate finer distinctions within the “B” category. The obligor currently has the capacity to meet its financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.

 

Moody’s Variable Rate Demand Obligations (VRDO) Ratings

 

VMIG 1

Moody’s highest rating for issues having a variable rate demand feature — VRDO. This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price on demand.

VMIG 2

This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price on demand.

VMIG 3

This designation denotes acceptable credit quality. Adequate protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price on demand.

 


 

16

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Short-term security ratings (unaudited) (cont’d)

 

Moody’s Short-Term Municipal Obligations Ratings

 

MIG 1

Moody’s highest rating for short-term municipal obligations. This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.

MIG 2

This designation denotes strong credit quality. Margins of protection are ample, although not as large as the preceding group.

MIG 3

This designation denotes acceptable credit quality. Liquidity and cash flow protection may be narrow, and market access for refinancing is likely to be less well-established.

SG

This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.

 

Moody’s Short-Term Obligations Ratings

 

P-1

Moody’s highest rating for commercial paper and for VRDO prior to the advent of the VMIG 1 rating. Have a superior ability to repay short-term debt obligations.

P-2

Have a strong ability to repay short-term debt obligations.

P-3

Have an acceptable ability to repay short-term debt obligations.

NP

Issuers do not fall within any of the Prime rating categories.

 

Fitch’s Short-Term Issuer or Obligations Ratings

 

F1

Fitch’s highest rating indicating the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+” to denote any exceptionally strong credit feature.

F2

Fitch rating indicating good intrinsic capacity for timely payment of financial commitments.

F3

Fitch rating indicating intrinsic capacity for timely payment of financial commitments is adequate.

NR

Indicates that the obligation is not rated by Standard & Poor’s, Moody’s or Fitch.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

17

 

Statement of assets and liabilities

November 30, 2010

 

Assets:

 

 

 

Investments, at value (Cost — $219,014,337)

 

$246,641,282

 

Cash

 

780

 

Interest receivable

 

4,216,454

 

Prepaid expenses

 

21,089

 

Other receivable

 

2,307

 

Total Assets

 

250,881,912

 

 

 

 

 

Liabilities:

 

 

 

Investment management fee payable

 

124,670

 

Directors’ fees payable

 

1,678

 

Accrued expenses

 

76,653

 

Total Liabilities

 

203,001

 

Total Net Assets

 

$250,678,911

 

 

 

 

 

Net Assets:

 

 

 

Par value ($0.001 par value; 11,992,136 shares issued and outstanding; 100,000,000 shares authorized)

 

$          11,992

 

Paid-in capital in excess of par value

 

228,740,530

 

Undistributed net investment income

 

96,256

 

Accumulated net realized loss on investments and futures contracts

 

(5,796,812)

 

Net unrealized appreciation on investments

 

27,626,945

 

Total Net Assets

 

$250,678,911

 

 

 

 

 

Shares Outstanding

 

11,992,136

 

 

 

 

 

Net Asset Value

 

$20.90

 

 

See Notes to Financial Statements.

 


 

18

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Statement of operations

For the Year Ended November 30, 2010

 

Investment Income:

 

 

 

Interest

 

$14,883,943

 

 

 

 

 

Expenses:

 

 

 

Investment management fee (Note 2)

 

1,536,735

 

Directors’ fees

 

58,572

 

Transfer agent fees

 

50,564

 

Audit and tax

 

45,250

 

Shareholder reports

 

33,187

 

Stock exchange listing fees

 

29,175

 

Legal fees

 

27,748

 

Insurance

 

6,342

 

Custody fees

 

1,823

 

Miscellaneous expenses

 

5,531

 

Total Expenses

 

1,794,927

 

Net Investment Income

 

13,089,016

 

 

 

 

 

Realized and Unrealized Gain (Loss) on Investments and Futures Contracts (Notes 1, 3 and 4):

 

 

 

Net Realized Gain (Loss) From:

 

 

 

Investment transactions

 

916,240

 

Futures contracts

 

(7,430,994)

 

Net Realized Loss

 

(6,514,754)

 

Change in Net Unrealized Appreciation (Depreciation)

 

2,445,525

 

Net Loss on Investments and Futures Contracts

 

(4,069,229)

 

Increase in Net Assets From Operations

 

$  9,019,787

 

 

See Notes to Financial Statements.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

19

 

Statements of changes in net assets

 

For the Year Ended November 30, 2010
and Period Ended November 30, 2009

 

2010

 

2009

 

 

 

 

 

 

 

Operations:

 

 

 

 

 

Net investment income

 

$  13,089,016

 

$    8,062,959

 

Net realized gain (loss)

 

(6,514,754)

 

588,835

 

Change in net unrealized appreciation (depreciation)

 

2,445,525

 

25,181,420

 

Increase in Net Assets From Operations

 

9,019,787

 

33,833,214

 

 

 

 

 

 

 

Distributions to Shareholders From (Note 1):

 

 

 

 

 

Net investment income

 

(12,830,356)

 

(7,506,598)

 

Net realized gains

 

(589,658)

 

 

Decrease in Net Assets From Distributions to Shareholders

 

(13,420,014)

 

(7,506,598)

 

 

 

 

 

 

 

Fund Share Transactions:

 

 

 

 

 

Net proceeds from sale of shares (0 and 11,915,236 shares issued, respectively)

 

 

227,104,600

 

Reinvestment of distributions (76,900 and 0 shares issued, respectively)

 

1,647,922

 

 

Increase in Net Assets From Fund Share Transactions

 

1,647,922

 

227,104,600

 

Increase (Decrease) in Net Assets

 

(2,752,305)

 

253,431,216

 

 

 

 

 

 

 

Net Assets:

 

 

 

 

 

Beginning of year

 

253,431,216

 

 

End of year*

 

$250,678,911

 

$253,431,216

 

* Includes undistributed net investment income of:

 

$96,256

 

$289,364

 

 

  For the period March 27, 2009 (commencement of operations) to November 30, 2009.

 

See Notes to Financial Statements.

 


 

20

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Financial highlights

 

For a share of capital stock outstanding throughout each year ended November 30, unless otherwise noted:

 

 

 

2010† 

 

2009

 

 

 

 

 

 

 

Net asset value, beginning of year

 

$21.27

 

$19.06

2

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

Net investment income

 

1.10

 

0.68

 

Net realized and unrealized gain (loss)

 

(0.35)

 

2.16

 

Total income from operations

 

0.75

 

2.84

 

 

 

 

 

 

 

Less distributions from:

 

 

 

 

 

Net investment income

 

(1.07)

 

(0.63)

 

Net realized gains

 

(0.05)

 

 

Total distributions

 

(1.12)

 

(0.63)

 

 

 

 

 

 

 

Net asset value, end of year

 

$20.90

 

$21.27

 

 

 

 

 

 

 

Market price, end of year

 

$20.83

 

$20.44

 

Total return, based on NAV3,4

 

3.57

%

15.13

%

Total return, based on Market Price4

 

7.41

%

5.44

%

 

 

 

 

 

 

Net assets, end of year (000s)

 

$250,679

 

$253,431

 

 

 

 

 

 

 

Ratios to average net assets:

 

 

 

 

 

Gross expenses

 

0.70

%

0.73

%5

Net expenses

 

0.70

 

0.72

5,6

Net investment income

 

5.11

 

4.89

5

 

 

 

 

 

 

Portfolio turnover rate

 

3

%

9

%

 

1

For the period March 27, 2009 (commencement of operations) to November 30, 2009.

2

Initial public offering price of $20.00 per share less offering costs and sales load totaling $0.94 per share.

3

Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

4

The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.

5

Annualized.

6

The investment manager has agreed to reimburse all organization expenses.

Per share amounts have been calculated using the average shares method.

 

See Notes to Financial Statements.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

21

 

Notes to financial statements

 

1. Organization and significant accounting policies

 

Western Asset Municipal Defined Opportunity Trust Inc. (the “Fund”) was incorporated in Maryland on January 15, 2009 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s primary investment objective is to provide high current income exempt from federal income tax and then to liquidate on or about April 30, 2021 and distribute all of the Fund’s net assets to shareholders. As a secondary investment objective, the Fund will seek total return.

 

The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.

 

(a) Investment valuation. Securities are valued at the mean between the last quoted bid and asked prices provided by an independent pricing service, which are based on transactions in municipal obligations, quotations from municipal bond dealers, market transactions in comparable securities and various other relationships between securities. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. When prices are not readily available, or are determined not to reflect fair value, the Fund values these securities at fair value as determined in accordance with procedures approved by the Fund’s Board of Directors. Short-term obligations with maturities of 60 days or less are valued at amortized cost, which approximates fair value.

 

The Fund has adopted Financial Accounting Standards Board Codification Topic 820 (“ASC Topic 820”). ASC Topic 820 establishes a single definition of fair value, creates a three-tier hierarchy as a framework for measuring fair value based on inputs used to value the Fund’s investments, and requires additional disclosure about fair value. The hierarchy of inputs is summarized below.

 

·        Level 1 — quoted prices in active markets for identical investments

 

·        Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)

 

·        Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.


 

22

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Notes to financial statements (cont’d)

 

The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.

 

The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:

 

ASSETS

 

 

 

 

 

 

 

 

 

 

Description

 

Quoted Prices
(Level 1)

 

Other Significant
Observable Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Municipal bonds

 

 

$245,841,282

 

 

$245,841,282

 

Short-term investments

 

 

800,000

 

 

800,000

 

Total

 

 

$246,641,282

 

 

$246,641,282

 

 

†  See Schedule of Investments for additional detailed categorizations.

 

(b) Futures contracts. The Fund may use futures contracts to gain exposure to, or hedge against, changes in the value of interest rates. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

 

Upon entering into a futures contract, the Fund is required to deposit cash or cash equivalents with a broker in an amount equal to a certain percentage of the contract amount. This is known as the “initial margin” and subsequent payments (“variation margin”) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. The daily changes in contract value are recorded as unrealized gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.

 

Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.

 

(c) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.

 

(d) Distributions to shareholders. Distributions from net investment income for the Fund, if any, are declared quarterly and paid on a monthly basis. The

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

23

 

Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from federal and certain state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Distributions of net realized gains, if any, are taxable and are declared at least annually. Distributions are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.

 

(e) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.

 

Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of November 30, 2010, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by Internal Revenue Service and state departments of revenue

 

(f) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:

 

 

 

Undistributed Net
Investment Income

 

Accumulated Net
Realized Loss

 

(a)

 

$(451,768)

 

$451,768

 

 

(a)  Reclassifications are primarily due to differences between book and tax accretion of market discount on fixed income securities.

 

2. Investment management agreement and other transactions with affiliates

 

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager and Western Asset Management Company (“Western Asset”) is the Fund’s subadviser. LMPFA and Western Asset are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).

 

LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.60% of the Fund’s average daily Managed Assets. “Managed Assets” means the total assets of the Fund (including assets financed through the creation of tender option bond trusts)

 


 

24

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Notes to financial statements (cont’d)

 

minus the sum of accrued liabilities (other than Fund liabilities representing financial leverage).

 

LMPFA has delegated to Western Asset the day-to-day portfolio management of the Fund. For its services, LMPFA pays Western Asset 70% of the net management fee it receives from the Fund.

 

All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.

 

3. Investments

 

During the year ended November 30, 2010, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:

 

Purchases

$  7,765,250

 

 

Sales

14,894,513

 

 

 

At November 30, 2010, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:

 

Gross unrealized appreciation

$28,416,987

 

 

Gross unrealized depreciation

(72,678

)

 

Net unrealized appreciation

$28,344,309

 

 

 

4. Derivative instruments and hedging activities

 

Financial Accounting Standards Board Codification Topic 815 requires enhanced disclosure about an entity’s derivative and hedging activities.

 

The following table provides information about the effect of derivatives and hedging activities on the Fund’s Statement of Operations for the year ended November 30, 2010. The table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period.

 

AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED

 

 

 

 

 

 

Interest Rate
Contracts Risk

 

Futures contracts

 

$(7,430,994)

 

 

At November 30, 2010, the Fund did not have any derivative instruments outstanding.

 

During the year ended November 30, 2010, the volume of derivative activity for the Fund was as follows:

 

 

 

Average
Market Value

 

Futures contracts (to sell)

 

$42,543,852

 

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

25

 

5. Distributions subsequent to November 30, 2010

 

On November 15, 2010, the Fund’s Board of Directors declared three dividends, each in the amount of $0.0840 per share, payable on December 30, 2010, January 28, 2011 and February 25, 2011 to shareholders of record on December 23, 2010, January 21, 2011 and February 18, 2011, respectively.

 

6. Income tax information and distributions to shareholders.

 

The tax character of distributions paid during the fiscal years ended November 30, were as follows:

 

 

 

2010

 

2009

 

 

 

 

 

 

 

Distributions Paid From:

 

 

 

 

 

Tax-exempt income

 

$12,827,814

 

$7,506,598

 

Ordinary income

 

502,787

 

 

Net long-term capital gains

 

89,413

 

 

Total taxable distributions

 

$     592,200

 

 

Total distributions paid

 

$13,420,014

 

$7,506,598

 

 

As of November 30, 2010, the components of accumulated earnings on a tax basis were as follows:

 

Undistributed tax-exempt income — net

 

$     155,569

 

Undistributed ordinary income — net

 

849

 

Total undistributed earnings

 

$     156,418

 

Capital loss carryforward*

 

(4,574,467

)

Other book/tax temporary differences(a)

 

(1,999,871

)

Unrealized appreciation (depreciation)(b)

 

28,344,309

 

Total accumulated earnings (losses) — net

 

$21,926,389

 

 

*  As of November 30, 2010, the Fund had the following net capital loss carryforwards remaining:

 

Year of Expiration

Amount

 

 

 

 

 

11/30/2018

$(4,574,467)

 

 

 

 

 

 

This amount will be available to offset any future taxable capital gains.

 

(a)  Other book/tax temporary differences are attributable primarily to the book/tax differences in the timing of the deductibility of various items.

(b)  The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable primarily to the difference between book & tax accretion methods for market discount on fixed income securities.

 


 

26

 

 

Western Asset Municipal Defined Opportunity Trust Inc. 2010 Annual Report

 

 

 

Report of independent registered public accounting firm

 

The Board of Directors and Shareholders
Western Asset Municipal Defined Opportunity Trust Inc.:

 

We have audited the accompanying statement of assets and liabilities of Western Asset Municipal Defined Opportunity Trust Inc., including the schedule of investments, as of November 30, 2010, and the related statement of operations for the year then ended, and the statements of changes in net assets and financial highlights for the year then ended and for the period from March 27, 2009 (commencement of operations) to November 30, 2009. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 2010, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Western Asset Municipal Defined Opportunity Trust Inc. as of November 30, 2010, and the results of its operations, the changes in its net assets, and the financial highlights for the periods described above, in conformity with U.S. generally accepted accounting principles.

 

 

New York, New York
January 20, 2011

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

27

 

Board approval of management and subadvisory agreements (unaudited)

 

Background

 

The Investment Company Act of 1940, as amended (the “1940 Act”), requires that the Board of Directors (the “Board”) of Western Asset Municipal Defined Opportunity Trust, Inc. (the “Fund”), including a majority of its members that are not considered to be “interested persons” under the 1940 Act (the “Independent Directors”) voting separately, approve on an annual basis the continuation of the investment management contract (the “Management Agreement”) with the Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreement (the “Sub-Advisory Agreement”) with the Manager’s affiliate, Western Asset Management Company (the “Sub-Adviser”). At a meeting (the “Contract Renewal Meeting”) held in-person on November 10 and 11, 2010, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and Sub-Advisory Agreement for an additional one-year term. To assist in its consideration of the renewals of the Management Agreement and the Sub-Advisory Agreement, the Board received and considered a variety of information (together with the information provided at the Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and Sub-Adviser, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds in the same complex under the Board’s supervision (collectively, the “Legg Mason Closed-end Funds”), certain portions of which are discussed below. A presentation made by the Manager and the Sub-Adviser to the Board at the Contract Renewal Meeting in connection with its evaluations of the Management Agreement and the Sub-Advisory Agreement encompassed the Fund and other Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related to the respective services rendered by the Manager and the Sub-Adviser to the Fund. The Board’s evaluation took into account the information received throughout the year and also reflected the knowledge and familiarity gained as members of the Board of the Fund and the other Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Adviser.

 

The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the Sub-Adviser provides the Fund with investment sub-advisory services pursuant to the Sub-Advisory Agreement. The discussion below covers the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and the investment sub-advisory function being rendered by the Sub-Adviser.

 


 

28

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Board approval of management and subadvisory agreements (unaudited) (cont’d)

 

Board approval of management agreement and sub-advisory agreement

 

In its deliberations regarding renewal of the Management Agreement and the Sub-Advisory Agreement, the Board, including the Independent Directors, considered the factors below.

 

Nature, extent and quality of the services under the management agreement and sub-advisory agreement

 

The Board received and considered Contract Renewal Information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Sub-Adviser under the Management Agreement and the Sub-Advisory Agreement, respectively, during the past year. The Board also reviewed Contract Renewal Information regarding the Fund’s compliance policies and procedures established pursuant to the 1940 Act.

 

The Board reviewed the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the Contract Renewal Information and the Board’s discussions with the Manager and the Sub-Adviser at the Contract Renewal Meeting, the general reputation and investment records of the Manager and the Sub-Adviser and their affiliates and the financial resources available to the corporate parent of the Manager and the Sub-Adviser, Legg Mason, Inc. (“Legg Mason”), to support their activities in respect of the Fund and the other Legg Mason Closed-end Funds.

 

The Board considered the responsibilities of the Manager and the Sub-Adviser under the Management Agreement and the Sub-Advisory Agreement, respectively, including the Manager’s coordination and oversight of services provided to the Fund by the Sub-Adviser and others. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Management Agreement, the Manager does not provide day-to-day portfolio management services to the Fund. Rather, portfolio management services for the Fund are provided by the Sub-Adviser pursuant to the Sub-Advisory Agreement.

 

In reaching its determinations regarding continuation of the Management Agreement and Sub-Advisory Agreements, the Board took into account that Fund shareholders, in pursuing their investment goals and objectives, likely purchased their shares based upon the reputation and the investment style, philosophy and strategy of the Manager and the Sub-Adviser, as well as the resources available to the Manager and the Sub-Adviser.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

29

 

The Board concluded that, overall, the nature, extent and quality of services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement have been satisfactory under the circumstances.

 

Fund performance

 

The Board received and considered performance information and analyses (the “Lipper Performance Information”) for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Performance Universe consisted of the Fund and all funds classified by Lipper as non-leveraged general and insured municipal debt closed-end funds regardless of asset size. The Board noted that it had received and discussed with management information throughout the year at periodic intervals comparing the Fund’s performance against its benchmarks and its peer funds as selected by Lipper.

 

The Lipper Performance Information comparing the Fund’s performance to that of its Performance Universe showed, among other things, that the Fund’s performance for the 1-year period ended June 30, 2010 was ranked second out of the six funds in the Performance Universe. The Board also considered the Fund’s performance in relation to its benchmarks and in absolute terms. The Board noted the limited performance record of the Fund, which commenced operations in early 2009.

 

Based on its review, which included consideration of all of the factors noted above, the Board concluded that, under the circumstances, the Fund’s performance supported continuation of the Management Agreement and the Sub-Advisory Agreement for an additional period not to exceed one year.

 

Management fees and expense ratios

 

The Board reviewed and considered the management fee (the “Management Fee”) payable by the Fund to the Manager under the Management Agreement and the sub-advisory fee (the “Sub-Advisory Fee”) payable to the Sub-Adviser under the Sub-Advisory Agreement in light of the nature, extent and quality of the management and sub-advisory services provided by the Manager and the Sub-Adviser. The Board noted that the Sub-Advisory Fee is paid by the Manager, not the Fund, and, accordingly, that the retention of the Sub-Adviser does not increase the fees or expenses otherwise incurred by the Fund’s shareholders.

 

Additionally, the Board received and considered information and analyses prepared by Lipper (the “Lipper Expense Information”) comparing the Management Fee and the Fund’s overall expenses with those of funds in an expense universe (the “Expense Universe”) selected and provided by Lipper.

 


 

30

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Board approval of management and subadvisory agreements (unaudited) (cont’d)

 

The comparison was based upon the constituent funds’ latest fiscal years. The Expense Universe consisted of the Fund and six other leveraged general and insured municipal debt closed-end funds, as classified by Lipper. The Expense Universe funds had net common share assets ranging from $30.8 million to $269.4 million. Three of the other funds in the Expense Universe were larger than the Fund and three were smaller.

 

The Lipper Expense Information, comparing the Management Fee as well as the Fund’s actual total expenses to the Fund’s Expense Universe, showed that the Fund’s contractual Management Fee, the Fund’s actual Management Fee (i.e., giving in effect to a voluntary fee waiver implemented by the Manager) and the Fund’s actual total expenses each was ranked seventh among the seven Expense Universe funds. The Board noted that the small number of funds in the Expense Universe and the limited operating history of the Fund made meaningful comparisons difficult.

 

At the Contract Renewal Meeting, the Board considered and approved a request (the “Cost Allocation Request”) from the Manager to allocate to the Fund certain fund accounting and financial reporting costs previously paid by the Manager on a voluntary basis in line with industry practice and the terms of the Management Agreement. In doing so, the Board reviewed supporting information and analyses provided by the Manager, including information and analyses as to the impact of the Cost Allocation Request on Fund expenses.

 

The Board also reviewed Contract Renewal Information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts. The Board was advised that the fees paid by such other clients generally are lower, and may be significantly lower, than the Management Fee. The Contract Renewal Information discussed the significant differences in scope of services provided to the Fund and to these other clients, noting that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Contract Renewal Information included an analysis of complex-wide management fees provided by the Manager. At the Contract Renewal Meeting, the Board noted that the Contract Renewal Information included information regarding management fees paid by open-end mutual funds in the same complex (the “Legg Mason Open-end Funds”) and that such information indicated that the management fees paid by the Legg Mason Closed-end Funds generally were higher than those paid by the Legg Mason Open-end Funds. The Manager, in response, discussed differences between the services provided to the Fund and the other Legg Mason Closed-end Funds and services provided to the Legg Mason Open-end Funds. The Board considered the fee comparisons in

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

31

 

 

light of the different services provided in managing these other types of clients and funds.

 

Taking all of the above into consideration, the Board determined that the Management Fee and the Sub-Advisory Fee were reasonable in light of the nature, extent and overall quality of the investment advisory and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreement.

 

Manager profitability

 

The Board, as part of the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Manager’s fiscal years ended March 31, 2010 and March 31, 2009. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in preparing such profitability data. In 2007, the Board received a report from an outside consultant that had reviewed the Manager’s methodologies and the Board was assured by the Manager at the Contract Renewal Meeting that there had been no significant changes in those methodologies since the report was rendered. The profitability to the Sub-Adviser was not considered to be a material factor in the Board’s considerations since the Sub-Advisory Fee is paid by the Manager. The profitability analysis presented to the Board as part of the Contract Renewal Information indicated that profitability to the Manager in providing services to the Fund was 56 percent over the period covered by the analysis. The Manager presented information to the Board showing that the Cost Allocation Request would increase profitability slightly. Under the circumstances, the Board concluded that the Manager’s profitability was reasonable in light of the nature, extent and overall quality of the services provided to the Fund.

 

Economies of scale

 

The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s assets grow. The Board noted that because the Fund is a closed-end fund with no current plans to seek additional assets beyond maintaining its dividend reinvestment plan, any significant growth in its assets generally will occur through appreciation in the value of the Fund’s investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the Management Fee structure was appropriate under present circumstances.

 


 

32

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Board approval of management and subadvisory agreements (unaudited) (cont’d)

 

Other benefits to the manager and the sub-adviser

 

The Board considered other benefits received by the Manager, the Sub-Adviser and their affiliates as a result of their relationship with the Fund and did not regard such benefits as excessive.

 

* * *

 

In light of all of the foregoing and other relevant factors, the Board determined that, under the circumstances, continuation of the Management and the Sub-Advisory Agreements would be in the interests of the Fund and its shareholders and unanimously voted to continue each Agreement for a period of one additional year.

 

No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve continuation of the Management Agreement and the Sub-Advisory Agreement, and each Board member attributed different weights to the various factors. The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to the Contract Renewal Meeting, the Board received a memorandum prepared by the Manager discussing its responsibilities in connection with the proposed continuation of the Management Agreement and the Sub-Advisory Agreement as part of the Contract Renewal Information and the Independent Directors separately received a memorandum discussing such responsibilities from their independent counsel. Prior to voting, the Independent Directors also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreement in private sessions with their independent legal counsel at which no representatives of the Manager were present.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

33

 

 

Additional information (unaudited)

Information about Directors and Officers

 

The business and affairs of Western Asset Municipal Defined Opportunity Trust Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o R. Jay Gerken, 620 Eighth Avenue, New York, New York 10018. Information pertaining to the Directors and officers of the Fund is set forth below.

 

Independent Directors†:

 

Carol L. Colman

 

 

Year of birth

 

1946

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class I

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

President, Colman Consulting Company (consulting)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

None

 

 

 

Daniel P. Cronin

 

 

Year of birth

 

1946

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class I

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

None

 

 

 

Paolo M. Cucchi

 

 

Year of birth

 

1941

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class II

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Professor of French and Italian at Drew University; formerly, Vice President and Dean of College of Liberal Arts at Drew University (1984 to 2009)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

None

 


 

34

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Additional information (unaudited) (cont’d)

Information about Directors and Officers

 

Independent Directors cont’d

 

Leslie H. Gelb

 

 

Year of birth

 

1937

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class II

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

President Emeritus and Senior Board Fellow (since 2003), The Council on Foreign Relations; formerly, President, (prior to 2003), The Council on Foreign Relations; formerly, Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New York Times

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

Director of two registered investment companies advised by Blackstone Asia Advisors LLC: India Fund, Inc. and Asia Tigers Fund, Inc. (since 1994)

 

 

 

William R. Hutchinson

 

 

Year of birth

 

1942

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class III

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

President, W.R. Hutchinson & Associates Inc. (Consulting) (since 2001)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp. (banking) (since 1994)

 

 

 

Riordan Roett

 

 

Year of birth

 

1938

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class III

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

The Sarita and Don Johnston Professor of Political Science and Director of Western Hemisphere Studies, Paul H. Nitze School of Advanced International Studies, The John Hopkins University (since 1973)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

None

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

35

 

 

Independent Directors cont’d

 

Jeswald W. Salacuse

 

 

Year of birth

 

1938

Position(s) held with Fund1

 

Director and Member of the Nominating and Audit Committees, Class III

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Henry J. Braker Professor of Commercial Law, The Fletcher School of Law and Diplomacy, Tufts University (since 1986); President and Member, Arbitration Tribunal, World Bank/ICSID (since 2004)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

24

Other board memberships held by Director

 

Director of two registered investment companies advised by Blackstone Asia Advisors LLC; India Fund, Inc. and Asia Tigers Fund, Inc. (since 1993)

 

 

 

Interested Director and Officer:

 

 

 

 

 

R. Jay Gerken, CFA2

 

 

Year of birth

 

1951

Position(s) held with Fund1

 

Director, Chairman, President and Chief Executive Officer, Class II

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2005); Officer and Trustee/Director of 149 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); President and Chief Executive Officer (“CEO”) of LMPFA (since 2006); President and CEO of Smith Barney Fund Management LLC (“SBFM”) and Citi Fund Management Inc. (“CFM”) (formerly registered investment advisers) (since 2002); formerly, Chairman, President and CEO, Travelers Investment Adviser Inc. (prior to 2005)

Number of portfolios in fund complex overseen by Director (including the Fund)

 

136

Other board memberships held by Director

 

Former Trustee, Consulting Group Capital Markets Funds (11 funds) (prior to 2006)

 

 

 


 

36

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Additional information (unaudited) (cont’d)

Information about Directors and Officers

 

Additional Officers:

 

Ted P. Becker

 

 

Legg Mason

 

 

620 Eighth Avenue, New York, NY 10018

 

 

Year of birth

 

1951

Position(s) held with Fund1

 

Chief Compliance Officer

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)

 

 

 

John Chiota

 

 

Legg Mason

 

 

100 First Stamford Place, Stamford, CT 06902

Year of birth

 

1968

Position(s) with Fund1

 

Identity Theft Prevention Officer

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2008); Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006); Vice President of Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (prior to 2006); formerly, Chief Anti-Money Laundering Compliance Officer of TD Waterhouse (prior to 2004)

 

 

 

Robert I. Frenkel

 

 

Legg Mason

 

 

100 First Stamford Place, Stamford, CT 06902

Year of birth

 

1954

Position(s) held with Fund1

 

Secretary and Chief Legal Officer

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006)

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

37

 

 

Additional Officers cont’d

 

Thomas C. Mandia

 

 

Legg Mason

 

 

100 First Stamford Place, Stamford, CT 06902

Year of birth

 

1962

Position(s) held with Fund1

 

Assistant Secretary

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of SBFM and CFM (since 2002)

 

 

 

Kaprel Ozsolak

 

 

Legg Mason

 

 

55 Water Street, New York, NY 10041

 

 

Year of birth

 

1965

Position(s) held with Fund1

 

Chief Financial Officer

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Director of Legg Mason & Co. (since 2005); Chief Financial Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007) and Legg Mason & Co. predecessors (prior to 2007); formerly, Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) and Legg Mason & Co. predecessors (prior to 2005); formerly, Controller of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2004)

 

 

 

Steven Frank

 

 

Legg Mason

 

 

55 Water Street, New York, NY 10041

 

 

Year of birth

 

1967

Position(s) held with Fund1

 

Treasurer

Term of office1 and length of time served

 

Since 2010

Principal occupation(s) during past five years

 

Vice President of Legg Mason & Co. and Legg Mason & Co. predecessors (since 2002); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010); formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. predecessors (prior to 2005)

 


 

38

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Additional information (unaudited) (cont’d)

Information about Directors and Officers

 

Additional Officers cont’d

 

Jeanne M. Kelly

 

 

Legg Mason

 

 

620 Eighth Avenue, New York, NY 10018

 

 

Year of birth

 

1951

Position(s) with Fund1

 

Senior Vice President

Term of office1 and length of time served

 

Since 2009

Principal occupation(s) during past five years

 

Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005)

 

        Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the 1940 Act.

1         The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2013, year 2011 and year 2012, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year at the first meeting of the Fund’s Board of Directors following the Annual Meeting of Stockholders, to hold office until the meeting of the Board following the next Annual Meeting of Stockholders and until their successors are duly elected and qualified.

2         Mr. Gerken is an “interested person” of the Fund as defined in the 1940 Act because Mr. Gerken is an officer of LMPFA and certain of its affiliates.

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

39

 

 

Annual chief executive officer and chief financial officer certifications (unaudited)

 

The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the certifications of the Fund’s CEO and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.

 


 

40

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Dividend reinvestment plan (unaudited)

 

Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends, on your Common Shares will be automatically reinvested by American Stock Transfer & Trust Company, LLC (“AST”), as agent for the Common Shareholders (the “Plan Agent”), in additional Common Shares under the Fund’s Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by AST as dividend paying agent.

 

If you participate in the Plan, the number of Common Shares you will receive will be determined as follows:

 

(1) If the market price of the Common Shares on the record date (or, if the record date is not an NYSE trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant dividend or distribution (the “determination date”) is equal to or exceeds the net asset value per share of the Common Shares, the Fund will issue new Common Shares at a price equal to the net asset value per share at the close of trading on the NYSE on the determination date.

 

(2) If the net asset value per share of the Common Shares exceeds the market price of the Common Shares on the determination date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Shares in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date or (b) the record date for the next succeeding dividend or distribution to be made to the Common Shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price rises so that it equals or exceeds the net asset value per share of the Common Shares at the close of trading on the NYSE on the determination date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Shares in the open market and the Fund shall issue the remaining Common Shares at a price per share equal to the net asset value per share at the close of trading on the NYSE on the determination date.

 

Common Shares in your account will be held by the Plan Agent in non-certificated form. Any proxy you receive will include all Common Shares you have received under the Plan.

 

You may withdraw from the Plan by notifying the Plan Agent in writing at 59 Maiden Lane, New York, NY 10038 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is

 


 

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

41

 

 

received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Shares. The Plan may be terminated by the Fund upon notice in writing mailed to Common Shareholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination is to be effective. Upon any termination, you will be sent a certificate or certificates for the full Common Shares held for you under the Plan and cash for any fractional Common Shares. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Shares on your behalf. You will be charged a service charge and the Plan Agent is authorized to deduct brokerage charges actually incurred for this transaction from the proceeds.

 

There is no service charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional Common Shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Shares over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.

 

Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.

 

The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan and your account may be obtained from the Plan Agent at 1-888-888-0151.

 


 

42

 

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

 

Important tax information (unaudited)

 

All of the net investment income distributions paid monthly by the Fund during the taxable year ended November 30, 2010 qualify as tax-exempt interest dividends for Federal income tax purposes.

 

Additionally, the Fund paid an ordinary income distribution and long-term capital gain distribution of $0.040496 and $0.007504, respectively to shareholders of record on December 18, 2009. Finally, the Fund paid an ordinary income distribution of $0.001700 to shareholders of record on March 19, 2010.

 

The following information is applicable to non-U.S. resident shareholders:

 

The ordinary income distributions of $0.040496 and $0.001700 paid by the Fund to shareholders of record on December 18, 2009 and March 19, 2010, respectively, represent Qualified Net Interest Income eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations.

 

Please retain this information for your records.

 

 


 

 

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Western Asset

Municipal Defined Opportunity Trust Inc.

 

Directors

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

Independent registered public accounting firm

Carol L. Colman

 

55 Water Street

 

KPMG LLP

Daniel P. Cronin

 

New York, NY 10041

 

345 Park Avenue

Paolo M. Cucchi

 

 

 

New York, NY 10154

Leslie H. Gelb

 

Investment manager

 

 

R. Jay Gerken, CFA

 

Legg Mason Partners Fund

 

Legal counsel

Chairman

 

Advisor, LLC

 

Simpson Thacher & Bartlett LLP

William R. Hutchinson

 

 

 

425 Lexington Avenue

Riordan Roett

 

Subadviser

 

New York, NY 10017

Jeswald W. Salacuse

 

Western Asset Management Company

 

 

 

 

 

 

New York Stock Exchange Symbol

Officers

 

Custodian

 

MTT

R. Jay Gerken, CFA

 

State Street Bank and

 

 

President and Chief Executive Officer

 

Trust Company

 

 

Kaprel Ozsolak

 

1 Lincoln Street

 

 

Chief Financial Officer

 

Boston, MA 02111

 

 

Ted P. Becker

 

 

 

 

Chief Compliance Officer

 

Transfer agent

 

 

John Chiota

 

American Stock Transfer & Trust Company

 

 

Identity Theft Prevention Officer

 

59 Maiden Lane

 

 

Robert I. Frenkel

 

New York, NY 10038

 

 

Secretary and Chief Legal Officer

 

 

 

 

Thomas C. Mandia

 

 

 

 

Assistant Secretary

 

 

 

 

Steven Frank

 

 

 

 

Treasurer

 

 

 

 

Jeanne M. Kelly

 

 

 

 

Senior Vice President

 

 

 

 

 


 

Privacy policy

 

We are committed to keeping nonpublic personal information about you secure and confidential. This notice is intended to help you understand how we fulfill this commitment. From time to time, we may collect a variety of personal information about you, including:

 

·        Information we receive from you on applications and forms, via the telephone, and through our websites;

 

·        Information about your transactions with us, our affiliates, or others (such as your purchases, sales, or account balances); and

 

·        Information we receive from consumer reporting agencies.

 

We do not disclose nonpublic personal information about our customers or former customers, except to our affiliates (such as broker-dealers or investment advisers within the Legg Mason family of companies) or as is otherwise permitted by applicable law or regulation. For example, we may share this information with others in order to process your transactions or service an account. We may also provide this information to companies that perform marketing services on our behalf, such as printing and mailing, or to other financial institutions with whom we have joint marketing agreements. When we enter into such agreements, we will require these companies to protect the confidentiality of this information and to use it only to perform the services for which we hired them.

 

With respect to our internal security procedures, we maintain physical, electronic, and procedural safeguards to protect your nonpublic personal information, and we restrict access to this information.

 

If you decide at some point either to close your account(s) or become an inactive customer, we will continue to adhere to our privacy policies and practices with respect to your nonpublic personal information.

 

 

      NOT PART OF THE ANNUAL REPORT      

 


 

Western Asset Municipal Defined Opportunity Trust Inc.

 

Western Asset Municipal Defined Opportunity Trust Inc.
55 Water Street
New York, NY 10041

 

Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time, the Fund may purchase, at market prices, shares of its Common Stock in the open market.

 

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 website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-888-777-0102.

 

Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) on the Fund’s website at www.leggmason.com/cef and (3) on the SEC’s website at www.sec.gov.

 

This report is transmitted to the shareholders of Western Asset Municipal Defined Opportunity Trust Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or any securities mentioned in the report.

 

American Stock
Transfer & Trust Company
59 Maiden Lane
New York, NY 10038

 

 

WASX012163 1/11 SR10-1270

 


 

ITEM 2.                                                   CODE OF ETHICS.

 

The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.

 

ITEM 3.                                                   AUDIT COMMITTEE FINANCIAL EXPERT.

 

The Board of Directors of the registrant has determined that William R. Hutchinson, the Chairman of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert,” and has designated Mr. Hutchinson as the Audit Committee’s financial expert. Mr. Hutchinson is an “independent” Director pursuant to paragraph (a)(2) of Item 3 to Form N-CSR.

 

ITEM 4.                                                   PRINCIPAL ACCOUNTANT FEES AND SERVICES.

 

a) Audit Fees. The aggregate fees billed in the last two fiscal years ending November 30, 2009 and November 30, 2010 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $13,500 in 2009 and $40,000 in 2010.

 

b) Audit-Related Fees. There aggregate fees billed in the Reporting Periods for assurance and related services by the Auditor that are reasonably related to the performance of the audit of the Registrant’s financial statements were $4,500 in 2009 and $0 in 2010.

 

In addition, there were no Audit-Related Fees billed in the Reporting Period for assurance and related services by the Auditor to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the Western Asset Municipal Defined Opportunity Trust Inc. (“service affiliates”), that were reasonably related to the performance of the annual audit of the service affiliates. Accordingly, there were no such fees that required pre-approval by the Audit Committee for the Reporting Periods (prior to August 6, 2003 services provided by the Auditor were not required to be pre-approved).

 

(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) was $0 in 2009 and $3,100 in 2010. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.

 



 

There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.

 

d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the Western Asset Municipal Defined Opportunity Trust Inc.

 

All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”) and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to Western Asset Municipal Defined Opportunity Trust Inc. requiring pre-approval by the Audit Committee in the Reporting Period.

 

(e) Audit Committee’s pre-approval policies and procedures described in paragraph(c) (7) of Rule 2-01 of Regulation S-X.

 

(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund.  The Committee may implement policies and procedures by which such services are approved other than by the full Committee.

 

The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors.  As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund.  Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.

 

Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund

 



 

(“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.

 

(2) For the Western Asset Municipal Defined Opportunity Trust Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees was 100% and 100% for 2009 and 2010; Tax Fees was 100% and 100% for 2009 and 2010; and Other Fees was 100% and 100% for 2009 and 2010.

 

(f) N/A

 

(g) Non-audit fees billed by the Auditor for services rendered to Western Asset Municipal Defined Opportunity Trust Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to Western Asset Municipal Defined Opportunity Trust Inc. during the reporting period were $0 in 2010.

 

(h) Yes.  Western Asset Municipal Defined Opportunity Trust Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence.  All services provided by the Auditor to the Western Asset Municipal Defined Opportunity Trust Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.

 

ITEM 5.                                                   AUDIT COMMITTEE OF LISTED REGISTRANTS.

 

a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:

 

William R. Hutchinson

Paolo M. Cucchi

Daniel P. Cronin

Carol L. Colman

Leslie H. Gelb

Dr. Riordan Roett

Jeswald W. Salacuse

 

b) Not applicable

 

ITEM 6.                                                   SCHEDULE OF INVESTMENTS.

 

Included herein under Item 1.

 



 

ITEM 7.                                                   DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

Proxy Voting Guidelines and Procedures

 

Legg Mason Partners Fund Advisor, LLC (“LMPFA”) delegates the responsibility for voting proxies for the fund to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained.

 

The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to the fund’s portfolio securities are voted and are provided below.  Information regarding how each fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-777-0102, (2) on the fund’s website at http://www.leggmason.com/individualinvestors  and (3) on the SEC’s website at http://www.sec.gov.

 

Background

 

Western Asset Management Company (“WA” or “Western Asset”) have adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). Our authority to vote the proxies of our clients is established through investment management agreements or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.

 

In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (except that WA may so consult and agree with each other) regarding the voting of any securities owned by its clients.

 

Policy

 

Western Asset’s proxy voting procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are handled in the best interest of our clients. While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration Western Asset’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent Western Asset deems appropriate).

 

Procedures

 

Responsibility and Oversight

 

The Western Asset Compliance Department (“Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.

 



 

Client Authority

 

Prior to August 1, 2003, all existing client investment management agreements (“IMAs”) will be reviewed to determine whether Western Asset has authority to vote client proxies. At account start-up, or upon amendment of an IMA, the applicable client IMA are similarly reviewed. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Client Account Transition Team maintains a matrix of proxy voting authority.

 

Proxy Gathering

 

Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Prior to August 1, 2003, Proxy Recipients of existing clients will be reminded of the appropriate routing to Corporate Actions for proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.

 

Proxy Voting

 

Once proxy materials are received by Corporate Actions, they are forwarded to the Compliance Department for coordination and the following actions:

 

a. Proxies are reviewed to determine accounts impacted.

 

b. Impacted accounts are checked to confirm Western Asset voting authority.

 

c. Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.)

 

d. If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party.

 

e. Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different

 



 

clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Compliance Department.

 

f. Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials.

 

Timing

 

Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.

 

Recordkeeping

 

Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:

 

a. A copy of Western Asset’s policies and procedures.

 

b. Copies of proxy statements received regarding client securities.

 

c. A copy of any document created by Western Asset that was material to making a decision how to vote proxies.

 

d. Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests.

 

e. A proxy log including:

 

1. Issuer name;

2. Exchange ticker symbol of the issuer’s shares to be voted;

3. Council on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted;

4. A brief identification of the matter voted on;

5. Whether the matter was proposed by the issuer or by a shareholder of the issuer;

6. Whether a vote was cast on the matter;

7. A record of how the vote was cast; and

8. Whether the vote was cast for or against the recommendation of the issuer’s management team.

 

Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.

 

Disclosure

 

Part II of the WA Form ADV contains a description of Western Asset’s proxy policies. Prior to August 1, 2003, Western Asset will deliver Part II of its revised Form ADV to all existing clients, along with a letter identifying the new disclosure. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.

 



 

Conflicts of Interest

 

All proxies are reviewed by the Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:

 

1. Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company;

 

2. Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and

 

3. Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders.

 

Voting Guidelines

 

Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.

 

Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.

 

I. Board Approved Proposals

 

The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:

 

1. Matters relating to the Board of Directors

 

Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:

 

a. Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors.

 

b. Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director.

 

c. Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences.

 



 

d. Votes are cast on a case-by-case basis in contested elections of directors.

 

2. Matters relating to Executive Compensation

 

Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:

 

a. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution.

 

b. Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options.

 

c. Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price.

 

d. Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less.

 

3. Matters relating to Capitalization

 

The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.

 

a. Western Asset votes for proposals relating to the authorization of additional common stock.

 

b. Western Asset votes for proposals to effect stock splits (excluding reverse stock splits).

 

c. Western Asset votes for proposals authorizing share repurchase programs.

 

4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions

 

Western Asset votes these issues on a case-by-case basis on board-approved transactions.

 

5. Matters relating to Anti-Takeover Measures

 

Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:

 

a. Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans.

 

b. Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions.

 

6. Other Business Matters

 



 

Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.

 

a. Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws.

 

b. Western Asset votes against authorization to transact other unidentified, substantive business at the meeting.

 

II. Shareholder Proposals

 

SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:

 

1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.

 

2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.

 

3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.

 

III. Voting Shares of Investment Companies

 

Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.

 

1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.

 

2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.

 

IV. Voting Shares of Foreign Issuers

 

In the event Western Asset is required to vote on securities held in foreign issuers — i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.

 

1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.

 



 

2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.

 

3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.

 

4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.

 

ITEM 8.                                                   PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

 

(a)(1):

 

NAME AND

 

LENGTH OF

 

PRINCIPAL OCCUPATION(S) DURING

ADDRESS

 

TIME SERVED

 

PAST 5 YEARS

 

 

 

 

 

Stephen A. Walsh
Western Asset
385 East Colorado Blvd. Pasadena, CA 91101

 

Since 2009

 

Co-portfolio manager of the fund; Deputy Chief Investment Officer of Western Asset since 2000.

 

 

 

 

 

Joseph Deane
Western Asset
385 East Colorado Blvd. Pasadena, CA 91101

 

Since 2009

 

Co-portfolio manager of the fund; portfolio manager at Western Asset since 2005; prior to that time, Mr. Deane was with Citigroup Asset Management or one of its affiliates since 1972.

 

 

 

 

 

David Fare
Western Asset
385 East Colorado Blvd. Pasadena, CA 91101

 

Since 2009

 

Co-portfolio manager of the fund; portfolio manager at Western Asset since 2005; prior to that time, Mr. Fare was with Citigroup Asset Management or one of its affiliates since 1989.

 

 

 

 

 

Robert Amodeo
Western Asset

 

Since 2009

 

Co-portfolio manager of the fund; portfolio manager at Western Asset since 2005; prior to that time, Mr. Amodeo was a Managing Director and portfolio manager with Salomon Brothers Asset Management Inc from 1992 to 2005.

 



 

385 East Colorado Blvd. Pasadena, CA 91101

 

 

 

 

 

(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL

 

The following tables set forth certain additional information with respect to the fund’s portfolio managers for the fund. Unless noted otherwise, all information is provided as of November 30, 2010.

 

Other Accounts Managed by Portfolio Managers

 

The table below identifies the number of accounts (other than the fund) for which the fund’s portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.

 

 

 

Registered

 

Other Pooled

 

 

Portfolio

 

Investment

 

Investment

 

Other

Manager(s)

 

Companies

 

Vehicles

 

Accounts

 

 

 

 

 

 

 

Stephen A. Walsh

 

104 registered investment companies with $171.6 billion in total assets under management

 

216 Other pooled investment vehicles with $109.2 billion in assets under management*

 

791 Other accounts with $178.9 billion in total assets under management**

 

 

 

 

 

 

 

Joseph P. Deane

 

25 registered investment companies with $29.6 billion in total assets under management

 

0 Other pooled investment vehicles with $0.0 billion in assets under management

 

12 Other accounts with $1.6 billion in total assets under management

 

 

 

 

 

 

 

David T. Fare

 

16 registered investment companies with $15.4 billion in total assets under management

 

0 Other pooled investment vehicles with $0.0 billion in assets under management

 

12 Other accounts with $1.6 billion in total assets under management

 

 

 

 

 

 

 

Robert Amodeo

 

25 registered investment companies with $29.6 billion in total assets under management

 

0 Other pooled investment vehicles with $0.0 billion in assets under management

 

12 Other accounts with $1.6 billion in total assets under management

 


*

Includes 7 accounts managed, totaling $1.1 billion, for which advisory fee is performance based.

**

Includes 81 accounts managed, totaling $19.5 billion, for which advisory fee is performance based.

 



 

‡ The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”).  Mr. Walsh is involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios.  Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members.

 

(a)(3): Portfolio Manager Compensation

 

With respect to the compensation of the portfolio managers, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.

 

In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is a portfolio manager’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure a portfolio manager’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because portfolio managers are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.

 

Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.

 

Potential Conflicts of Interest

 

Conflicts of Interest

 

The manager, subadvisers and portfolio managers have interests which conflict with the interests of the fund. There is no guarantee that the policies and procedures adopted by the manager, the subadvisers and the fund will be able to identify or mitigate these conflicts of interest.

 

Some examples of material conflicts of interest include:

 

Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. A portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those funds and accounts as might be the case if he or she

 



 

were to devote substantially more attention to the management of a single fund. Such a portfolio manager may make general determinations across multiple funds, rather than tailoring a unique approach for each fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.

 

Allocation of Limited Investment Opportunities; Aggregation of Orders. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit the fund’s ability to take full advantage of the investment opportunity. Additionally, a subadviser may aggregate transaction orders for multiple accounts for purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. In addition, a subadviser’s trade allocation policies may result in the fund’s orders not being fully executed or being delayed in execution.

 

Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts. For example, a portfolio manager may determine that it would be in the interest of another account to sell a security that the fund holds long, potentially resulting in a decrease in the market value of the security held by the fund.

 

Cross Trades. Portfolio managers may manage funds that engage in cross trades, where one of the manager’s funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.

 

Selection of Broker/Dealers. Portfolio managers may select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide subadvisers with brokerage and research services, These services may be taken into account in the selection of brokers and dealers whether a broker is being selected to effect a trade on an agency basis for a commission or (as is normally the case for the funds) whether a dealer is being selected to effect a trade on a principal basis. This may result in the payment of higher brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the manager’s funds or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits among the funds and/or accounts managed.

 

Variation in Financial and Other Benefits. A conflict of interest arises where the financial or other benefits available to a portfolio manager differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment manager’s management fee and/or a portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager. A portfolio manager may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, a portfolio manager’s or the manager’s or a subadviser’s desire to increase assets under management could influence the portfolio manager to keep a fund open for new investors without regard to

 



 

potential benefits of closing the fund to new investors. Additionally, the portfolio manager might be motivated to favor funds and/or accounts in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if a portfolio manager does not personally hold an investment in the fund, the portfolio manager’s conflicts of interest with respect to the fund may be more acute.

 

Related Business Opportunities. The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.

 

(a)(4): Portfolio Manager Securities Ownership

 

The table below identifies the dollar range of securities beneficially owned by each portfolio managers as of November 30, 2010.

 

Portfolio Manager(s)

 

Dollar Range of
Portfolio
Securities
Beneficially
Owned

 

 

 

Stephen A. Walsh

 

B

Joseph P. Deane

 

A

David T. Fare

 

A

Robert Amodeo

 

A

 

Dollar Range ownership is as follows:
A: none
B: $1 - $10,000
C: 10,001 - $50,000
D: $50,001 - $100,000
E: $100,001 - $500,000
F: $500,001 - $1 million
G: over $1 million

 

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.

 

Not applicable.

 



 

ITEM 11.                                             CONTROLS AND PROCEDURES.

 

(a)      The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934.

 

(b)      There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal half-year (the registrant’s second fiscal half-year in the case of an annual report) that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

 

ITEM 12.                                             EXHIBITS.

 

(a) (1) Code of Ethics attached hereto.

Exhibit 99.CODE ETH

 

(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.CERT

 

(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.

Exhibit 99.906CERT

 



 

SIGNATURES

 

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, there unto duly authorized.

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

By:

/s/ R. Jay Gerken

 

 

(R. Jay Gerken)

 

Chief Executive Officer of

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

Date:

January 28, 2011

 

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/ R. Jay Gerken

 

 

(R. Jay Gerken)

 

Chief Executive Officer of

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

Date:

January 28, 2011

 

 

 

 

By:

/s/ Kaprel Ozsolak

 

 

(Kaprel Ozsolak)

 

Chief Financial Officer of

 

Western Asset Municipal Defined Opportunity Trust Inc.

 

 

Date:

January 28, 2011