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: 811-05597
Morgan Stanley Municipal Income Opportunities Trust
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: May 31, 2007
Date of reporting period: November 30, 2006
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Municipal Income Opportunities Trust performed during the semiannual period. We
will provide an overview of the market conditions, and discuss some of the
factors that affected performance during the reporting period. In addition, this
report includes the Fund's financial statements and a list of Fund investments.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO PASS. THERE
IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE. THE FUND IS
SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT MARKET VALUES OF
SECURITIES OWNED BY THE FUND WILL DECLINE AND, THEREFORE, THE VALUE OF THE
FUND'S SHARES MAY BE LESS THAN WHAT YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE
MONEY INVESTING IN THIS FUND.
INCOME EARNED BY CERTAIN SECURITIES IN THE PORTFOLIO MAY BE SUBJECT TO THE
FEDERAL ALTERNATIVE MINIMUM TAX (AMT).
FUND REPORT
For the six months ended November 30, 2006
MARKET CONDITIONS
The Federal Open Market Committee's (the "Fed") increase in the target federal
funds rate in June was the last in a series of 17 consecutive rate increases
over a two-year period. Slower economic growth and weaker consumer spending and
housing data in the months that followed prompted the Fed to keep its target
rate unchanged at 5.25 percent for the remainder of the fiscal period.
The change in the Fed's stance led to a rally in the municipal bond market, with
long-term tax-exempt yields reaching record lows. Yields on 30-year AAA-rated
municipal bonds declined from 4.55 percent at the beginning of the reporting
period to 3.90 percent by the end of November 2006. In contrast, shorter-term
municipal bond yields continued to reflect earlier Fed rate hikes and, as a
result, remained relatively unchanged during the period. Representative yields
on two-year AAA municipal bonds declined only 15 basis points during the period,
from 3.60 percent to 3.45 percent. Accordingly, the spread between long-term and
short-term municipal yields narrowed, causing the slope of the municipal yield
curve to dramatically flatten. Many investors continued to favor the higher
income of lower-quality bonds and as such, credit spreads remained tight. Credit
spreads measure the additional yield investors require to assume more credit
risk. When credit spreads tighten, lower-quality issues typically outperform
high-grade issues.
Continued interest in the municipal market by institutional investors and
non-traditional buyers, such as hedge funds and arbitrage accounts, strengthened
demand for municipal bonds. Although municipal bond issuance in 2006 has lagged
2005's record pace, declining interest rates in the latter half of this year
spurred a rebound in issuance. As a result, year-to-date new issue volume is
only down 15 percent versus last year. Issuers in California, Texas, Florida,
New York and Illinois accounted for about 40 percent of 2006 year-to-date
underwriting volume. Volume of higher yielding, lower rated and non-rated
municipal debt was significantly lower.
Strong demand helped municipal bond performance keep pace with that of
Treasuries. The municipal-to-Treasury yield ratio measures the relative
attractiveness of the two sectors. During the six-month reporting period, the
30-year municipal-to-Treasury yield ratio remained in the 85-to-87 percent
range. In comparison, this ratio reached a high of 102 percent in 2005. A
decline in this ratio indicates that municipals outperformed Treasuries while at
the same time becoming richer (less attractive) on a relative basis.
PERFORMANCE ANALYSIS
For the six-month period ended November 30, 2006, the net asset value (NAV) of
Morgan Stanley Municipal Income Opportunities Trust (OIA) increased from $8.02
to $8.38 per share. Based on this change plus reinvestment of tax-free dividends
totaling $0.27 per share, the Fund's total NAV return was 7.58 percent. OIA's
value on the New York Stock Exchange (NYSE) moved from $8.76 to $9.36 per share
during the same period. Based on this change plus reinvestment of dividends, the
Fund's total market return was 10.01 percent. OIA's NYSE market price was at a
11.69 percent premium to its NAV. Past performance is no guarantee of future
results.
2
Monthly dividends for the fourth quarter of 2006, declared in September, were
unchanged at $0.045 per share. The dividend reflects the current level of the
Fund's net investment income. OIA's level of undistributed net investment income
was $0.129 per share on November 30, 2006 versus $0.137 per share six months
earlier.(1) All holdings were accruing interest at the end/midpoint of the
fiscal year.
During the reporting period, the Fund's interest-rate posture continued to
reflect the anticipation of higher rates. As a result, at the end of November
the Fund's option-adjusted duration* was conservatively positioned at 6.6 years.
At the beginning of the period, this duration strategy helped total returns when
interest rates rose but later tempered the Fund's total returns as rates
declined.
The Fund invests primarily in higher yielding municipal bonds. Consistent with
its focus on higher yielding securities, the Fund's exposure to below investment
grade or non-rated issues was more than two-thirds of assets during the
reporting period. This security mix had a positive impact on performance as
high-yield municipal bonds outperformed investment grade issues. The decline in
high-yield issuance, coupled with strong demand, served as catalysts to their
outperformance. Another boost to the Fund's performance were five holdings,
representing nearly 5 percent of net assets, that appreciated significantly when
they were prerefunded. In addition, the sale of two multi-family mortgage issues
owned since the Fund's inception and representing over 5 percent of the
portfolio, produced a significant increase in asset value. Reflecting an ongoing
commitment to diversification, the Fund's net assets of approximately $165
million were invested among 12 long-term sectors and 100 credits.
OIA's procedure for reinvesting all dividends and distributions in common shares
is through purchases in the open market. This method helps support the market
value of the Fund's shares. In addition, we would like to remind you that the
Trustees have approved a procedure whereby the Fund may, when appropriate,
purchase shares in the open market or in privately negotiated transactions at a
price not above market value or net asset value, whichever is lower at the time
of purchase.
----------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND FUND SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST.
There is no guarantee that any sectors mentioned will continue to perform as
discussed herein or that securities in such sectors will be held by the Fund in
the future.
(1) Income earned by certain securities in the portfolio may be subject to the
federal alternative minimum tax (AMT).
* A measure of the sensitivity of a bond's price to changes in interest rates,
expressed in years. Each year of duration represents an expected 1 percent
change in the price of a bond for every 1 percent change in interest rates. The
longer a bond's duration, the greater the effect of interest-rate movements on
its price. Typically, funds with shorter durations perform better in
rising-interest-rate environments, while funds with longer durations perform
better when rates decline.
3
TOP FIVE SECTORS
Retirement & Life Care Facilities 21.2%
Tax Allocation 14.6
Hospital 12.0
IDR/PCR* 11.1
Mortgage Revenue--Single Family 9.8
LONG-TERM CREDIT ANALYSIS
Aaa/AAA 1.0%
Aa/AA 6.4
A/A 1.5
Baa/BBB 17.8
Ba/BB 9.3
N/R 64.0
* Industrial Development/Pollution Control Revenue
Data as of November 30, 2006. Subject to change daily. All percentages for top
five sectors are as a percentage of net assets and all percentages for long-term
credit analysis are as a percentage of total long-term investments. These data
are provided for informational purposes only and should not be deemed a
recommendation to buy or sell the securities mentioned. Morgan Stanley is a
full-service securities firm engaged in securities trading and brokerage
activities, investment banking, research and analysis, financing and financial
advisory services.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS. THE SEMIANNUAL REPORTS AND THE ANNUAL REPORTS ARE
FILED ELECTRONICALLY WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) ON FORM
N-CSRS AND FORM N-CSR, RESPECTIVELY. MORGAN STANLEY ALSO DELIVERS THE SEMIANNUAL
AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE REPORTS AVAILABLE ON ITS
PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN STANLEY FUND ALSO FILES A
COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC FOR THE FUND'S FIRST AND
THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES NOT DELIVER THE REPORTS
FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS, NOR ARE THE REPORTS
POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY, HOWEVER, OBTAIN THE FORM
N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS FILINGS) BY ACCESSING THE
SEC'S WEB SITE, HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE
SEC'S PUBLIC REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF
THE SEC'S PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800)
SEC-0330. YOU CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A
DUPLICATING FEE, BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS
(PUBLICINFO@SEC.GOV) OR BY WRITING THE PUBLIC REFERENCE SECTION OF THE SEC,
WASHINGTON, DC 20549-0102.
4
DISTRIBUTION BY MATURITY
(% of Long-Term Portfolio) As of November 30, 2006
WEIGHTED AVERAGE MATURITY: 21 YEARS(A)
0-5 14
6-10 7
11-15 5
16-20 9
21-25 17
26-30 34
31+ 14
(a) Where applicable maturities reflect mandatory tenders, puts and call dates.
Portfolio structure is subject to change.
Geographic Summary of Investments
Based on Market Value as a Percent of Total Investments
Alabama................ 0.6%
Alaska................. 0.6
Arkansas............... 1.2
California............. 4.0
Colorado............... 5.2
Connecticut............ 1.8
District of Columbia... 0.2
Florida................ 12.4
Georgia................ 1.3
Hawaii................. 2.0
Illinois............... 5.1
Indiana................ 0.7
Iowa................... 0.9
Kansas................. 1.0
Kentucky............... 0.3
Maryland............... 2.2
Massachusetts.......... 2.6
Michigan............... 0.4
Minnesota.............. 1.0
Missouri............... 5.5
Nevada................. 3.3
New Hampshire.......... 5.5
New Jersey............. 5.3
New York............... 8.8
North Carolina......... 1.3
North Dakota........... 0.9
Ohio................... 0.2
Pennsylvania........... 6.9
South Carolina......... 1.3
Tennessee.............. 3.0
Texas.................. 9.0
Vermont................ 1.4
Virginia............... 4.3
Joint exemption*....... (0.2)
-----
Total.................. 100.0%
=====
---------------------
* Joint exemptions have been included in each geographic location.
5
CALL AND COST (BOOK) YIELD STRUCTURE
(Based on Long-Term Portfolio) As of November 30, 2006
YEARS BONDS CALLABLE -- WEIGHTED AVERAGE CALL PROTECTION: 6 YEARS
2007(a) 12
2008 8
2009 10
2010 4
2011 7
2012 8
2013 9
2014 7
2015 14
2016+ 21
COST (BOOK) YIELD(B) -- WEIGHTED AVERAGE BOOK YIELD: 6.7%
2007(a) 7.7
2008 6.5
2009 6.3
2010 7.0
2011 7.2
2012 6.6
2013 6.6
2014 6.4
2015 7.1
2016+ 5.9
(a) May include issues initially callable in previous years.
(b) Cost or "book" yield is the annual income earned on a portfolio investment
based on its original purchase price before the Fund's operating expenses.
For example, the Fund is earning a book yield of 7.7% on 12% of the
long-term portfolio that is callable in 2007.
Portfolio structure is subject to change.
6
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED)
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Tax-Exempt Municipal Bonds (98.2%)
General Obligation (1.8%)
$ 1,000 Copperleaf Metropolitan District # 2, Colorado, Ser
2006.................................................... 5.95% 12/01/36 $ 1,031,550
2,000 Georgetown Special Taxing District, Connecticut, Ser 2006
A (a)................................................... 5.125 10/01/36 2,016,000
------------
--------
3,047,550
3,000
------------
--------
Educational Facilities Revenue (2.8%)
985 Bellalago Educational Facilities Benefits District,
Florida, Bellalago Charter School Ser 2004 B............ 5.80 05/01/34 1,034,605
500 Maryland Industrial Development Financing Authority, Our
Lady of Good Counsel High School Ser 2005 A............. 6.00 05/01/35 541,670
1,000 Westchester County Industrial Development Agency, New
York, Guiding Eyes for The Blind Inc Ser 2004........... 5.375 08/01/24 1,063,490
2,000 Chattanooga Health Educational & Housing Facilities Board,
Tennessee, Student Housing Refg Ser 2005 A.............. 5.00 10/01/25 2,040,680
------------
--------
4,680,445
4,485
------------
--------
Hospital Revenue (12.0%)
1,000 Colbert County -- Northwest Health Care Authority,
Alabama, Helen Keller Hospital Ser 2003................. 5.75 06/01/27 1,060,230
2,000 Baxter County, Arkansas, Baxter County Regional Hospital
Impr & Refg Ser 1999 B.................................. 5.625 09/01/28 2,073,480
700 Salida, Hospital District, Colorado, Heart of the Rockies
Regional Medical Center Ser 2006........................ 5.25 10/01/36 722,477
2,000 Hawaii Department of Budget & Finance, Kuakini Health
2002 Ser A.............................................. 6.375 07/01/32 2,216,600
1,000 Indiana Health Facility Financing Authority, Riverview
Hospital Ser 2002....................................... 6.125 08/01/31 1,093,470
525 Washington County Hospital, Iowa, Ser 2006................ 5.375 07/01/26 550,011
600 Gaylord Hospital Financing Authority, Michigan, Otsego
Memorial Hospital Ser 2004.............................. 6.50 01/01/37 629,844
1,500 St Paul Housing & Redevelopment Authority, Minnesota,
HealthEast Ser 2005..................................... 6.00 11/15/35 1,674,420
2,335 Henderson, Nevada, Catholic Health West 1998A Ser A....... 5.375 07/01/26 2,399,166
1,500 New Hampshire Higher Educational & Health Facilities
Authority, Littleton Hospital Assn Ser 1998 A........... 6.00 05/01/28 1,543,215
2,000 New Jersey Health Care Facilities Financing Authority,
Raritan Bay Medical Center Ser 1994..................... 7.25 07/01/27 2,058,880
500 Fulton County Industrial Development Authority,
Pennsylvania, Fulton County Medical Center Ser 2006..... 5.875 07/01/31 518,510
1,000 Monroe County Hospital Authority, Pennsylvania, Pocono
Medical Center Ser 2003................................. 6.00 01/01/43 1,091,060
7
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 1,000 Knox County Health, Educational & Housing Facility Board,
Tennessee, Baptist Health of East Tennessee Ser 2002.... 6.50% 04/15/31 $ 1,089,610
1,000 Decatur Hospital Authority, Texas, Wise Regional Health
Ser 2004 A.............................................. 7.125 09/01/34 1,104,320
------------
--------
19,825,293
18,660
------------
--------
Industrial Development/Pollution Control Revenue (11.1%)
1,000 Northern Tobacco Securitization Corporation, Alaska, Ser
2006 A.................................................. 5.00 06/01/46 1,017,830
2,000 California County Tobacco Securitization Agency, Gold
County Settlement Funding Corp Ser 2006................. 0.00 06/01/33 441,660
260 Metropolitan Washington Airports Authority, District of
Columbia & Virginia, CaterAir International Corp Ser
1991 (AMT)++............................................ 10.125 09/01/11 260,413
New York City Industrial Development Agency, New York,
2,000 7 World Trade Center LLC Ser 2005 A..................... 6.50 03/01/35 2,142,020
2,000 American Airlines Inc Ser 2005 (AMT).................... 7.75 08/01/31 2,427,260
1,500 TSASC Inc, New York, Tobacco Settlement Ser 2006-1........ 5.125 06/01/42 1,548,990
1,000 Nassau County Tobacco Settlement Corporation, New York,
Ser 2006 A-3............................................ 5.125 06/01/46 1,034,210
250 Zanesville-Muskingum County Port Authority, Ohio, Anchor
Glass Container Corp Ser 1989 B (AMT)................... 10.25 12/01/08 250,713
2,620 Carbon County Industrial Development Authority,
Pennsylvania, Panther Creek Partners Refg 2000 Ser
(AMT)................................................... 6.65 05/01/10 2,754,773
1,000 Pennsylvania Economic Development Financing Authority,
Reliant Energy Inc Ser 2001 A (AMT)..................... 6.75 12/01/36 1,087,070
350 Lexington County, South Carolina, Ellett Brothers Inc
Refg Ser 1988........................................... 7.50 09/01/08 348,761
1,000 Brazos River Authority, Texas, Texas Utilities Electric Co
Refg Ser 1999 A (AMT)................................... 7.70 04/01/33 1,173,410
1,000 Chesterfield County Industrial Development Authority,
Virginia, Virginia Electric & Power Co Ser 1985......... 5.50 10/01/09 1,011,160
2,700 Pittsylvania County Industrial Development Authority,
Virginia, Multi-Trade LP Ser 1994 A (AMT)............... 7.45 01/01/09 2,741,688
------------
--------
18,239,958
18,680
------------
--------
Mortgage Revenue -- Multi-Family (1.9%)
3,000 Brookhaven Industrial Development Agency, New York,
-------- Woodcrest Estates Ser 1998 A (AMT)...................... 6.375 12/01/37 3,118,050
------------
Mortgage Revenue -- Single Family (9.8%)
Colorado Housing & Finance Authority,
55 1996 Ser B (AMT)........................................ 7.65 11/01/26 55,957
455 Ser 1998 D-2 (AMT)...................................... 6.35 11/01/29 457,543
17,360 New Hampshire Housing Finance Authority, Residential 1983
Ser B................................................... 0.00 01/01/15 7,580,071
See Notes to Financial Statements
8
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 3,520 Pennsylvania Housing Finance Agency, Ser 2006 96A
(AMT)++................................................. 4.65% 10/01/31 $ 3,550,351
4,480 Pennsylvania Housing Finance Agency, Ser 2006 96A
(AMT)++................................................. 4.70 10/01/37 4,518,629
------------
--------
16,162,551
25,870
------------
--------
Nursing & Health Related Facilities Revenue (8.9%)
Escambia County, Florida,
4,250 Pensacola Care Development Centers Ser 1989............. 10.25 07/01/11 4,264,153
980 Pensacola Care Development Centers Ser 1989 A........... 10.25 07/01/11 983,263
1,000 Orange County Health Facilities Authority, Florida,
Westminister Community Care Services Inc Ser 1999....... 6.75 04/01/34 1,044,100
1,000 Pinellas County Health Facilities Authority, Florida, Oaks
of Clearwater Ser 2004.................................. 6.25 06/01/34 1,084,320
515 Kentucky Economic Development Financing Authority, AHF/
Kentucky-Iowa Inc Ser 2003.............................. 6.50# 01/01/29 563,039
1,675 Massachusetts Development Finance Agency, New England
Center for Children Ser 1998............................ 5.875 11/01/18 1,724,178
1,000 Massachusetts Health & Educational Facilities Authority,
The Learning Center for Deaf Children Ser C............. 6.125 07/01/29 1,028,620
1,000 St Louis County Industrial Development Authority,
Missouri, Pediatric Rehabilitation Center Ser 2003 A.... 6.625 11/15/35 1,048,400
700 New Jersey Economic Development Authority, Seashore
Gardens Ser 2006........................................ 5.375 11/01/36 709,912
610 Mount Vernon Industrial Development Agency, New York,
Meadowview at the Wartburg Ser 1999..................... 6.00 06/01/09 624,329
1,500 Suffolk County Industrial Development Agency, New York,
Medford Hamlet Ser 2006................................. 6.375 01/01/39 1,540,440
------------
--------
14,614,754
14,230
------------
--------
Recreational Facilities Revenue (5.0%)
2,000 Sacramento Financing Authority, California, Convention
Center Hotel 1999 Ser A................................. 6.25 01/01/30 2,087,140
1,000 San Diego County, California, San Diego Natural History
Museum COPs............................................. 5.70 02/01/28 1,010,950
1,000 Mashantucket (Western) Pequot Tribe, Connecticut, Special
1997 Ser B (a).......................................... 5.75 09/01/27 1,027,400
1,000 Maryland State Economic Development Corporation,
Chesapeake Bay Conference Center Ser 2006 A............. 5.00 12/01/31 1,016,140
1,000 New York Liberty Development Corporation, National Sports
Museum Ser 2006 A....................................... 6.125 02/15/19 1,066,230
2,000 Austin Convention Enterprises Inc, Texas, Convention
Center Hotel Ser 2006 B (WI)............................ 5.75 01/01/34 2,112,740
------------
--------
8,320,600
8,000
------------
--------
See Notes to Financial Statements
9
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
Retirement & Life Care Facilities Revenue (21.2%)
$ 1,000 Colorado Health Facilities Authority, Christian Living
Communities Ser 2006 A.................................. 5.75% 01/01/37 $ 1,053,050
500 Orange County Health Facilities Authority, Florida,
Orlando Lutheran Towers Inc Ser 2005.................... 5.70 07/01/26 522,640
1,000 Hawaii Department of Budget & Finance, Kahala Nui
2003 Ser A.............................................. 8.00 11/15/33 1,172,100
Illinois Finance Authority,
1,000 Landing at Plymouth Ser 2005 A.......................... 6.00 05/15/37 1,067,380
1,000 Luther Oaks Ser 2006 A.................................. 6.00 08/15/39 1,057,940
1,650 Montgomery Place Ser 2006 A (WI)........................ 5.75 05/15/38 1,708,311
1,000 Iowa Finance Authority, Bethany Life Communities
Refg Ser 2006 A......................................... 5.55 11/01/41 1,005,800
1,500 Lenexa, Kansas, Lakeview Village -- Southridge Ser 2002
C....................................................... 6.875 05/15/32 1,649,220
Maryland Health & Higher Education Facilities Authority,
500 Edenwald Ser 2006....................................... 5.40 01/01/31 531,700
1,500 Mercy Ridge 2003 Ser A.................................. 6.00 04/01/35 1,642,125
1,500 Massachusetts Development Finance Agency, Loomis
Communities Ser 1999 A.................................. 5.75 07/01/23 1,560,150
1,500 Kansas City Industrial Development Agency, Missouri,
Bishop Spencer 2004 Ser A............................... 6.50 01/01/35 1,597,770
New Jersey Economic Development Authority,
1,000 Franciscan Oaks Ser 1997................................ 5.70 10/01/17 1,024,270
730 Lions Gate Ser 2005 A................................... 5.875 01/01/37 765,244
1,000 The Presbyterian Home at Montgomery Ser 2001 A.......... 6.375 11/01/31 1,066,490
2,000 United Methodist Homes of New Jersey Ser 1998........... 5.125 07/01/25 1,977,480
North Carolina Medical Care Commission,
1,000 Given Estate Ser 2003 A................................. 6.50 07/01/32 1,085,660
1,000 Presbyterian Homes Ser 2006............................. 5.50 10/01/31 1,045,520
1,500 Grand Forks, North Dakota, 4000 Valley Square Ser 2006.... 5.30 12/01/34 1,514,115
1,500 Bucks County Industrial Development Authority,
Pennsylvania, Ann's Choice Ser 2005 A................... 6.125 01/01/25 1,601,490
1,000 Montgomery County Industry Development Authority,
Pennsylvania, Whitemarsh Community Ser 2005............. 6.25 02/01/35 1,073,210
750 South Carolina Jobs - Economic Development Authority,
Wesley Commons Ser 2006................................. 5.30 10/01/36 767,205
Shelby County Health, Educational & Housing Facilities
Board, Tennessee,
500 Trezevant Manor Ser 2006 A.............................. 5.75 09/01/37 515,380
500 Village at Germantown Ser 2006.......................... 6.25 12/01/34 515,365
750 Village at Germantown Ser 2003 A........................ 7.25 12/01/34 812,670
1,250 HFDC Central Texas Inc, Legacy at Willow Bend Ser 2006
A....................................................... 5.75 11/01/36 1,289,013
See Notes to Financial Statements
10
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
---------------------------------------------------------------------------------------------------------
$ 1,000 Houston Health Facilities Authority, Texas, Buckingham
Senior Living Community Ser 2004 A...................... 7.125% 02/15/34 $ 1,121,100
1,000 Lubbock, Health Facilities Development Corporation, Texas,
Carillon Senior Lifecare Ser 2005 A..................... 6.50 07/01/26 1,049,090
2,000 Peninsula Ports Authority of Virginia, Virginia Baptist
Homes
Ser 2006 C.............................................. 5.40 12/01/33 2,068,739
1,000 Virginia Beach Development Authority, Virginia,
Westminister-Canterbury Refg Ser 2005 A................. 5.25 11/01/26 1,031,930
------------
--------
34,892,157
33,130
------------
--------
Tax Allocation Revenue (14.6%)
1,000 Poway Unified School District Community Facilities
District #14, California, Ser 2006...................... 5.25 09/01/36 1,030,670
1,000 San Marcos Community Facilities District # 2002-01,
California, University Commons Ser 2004................. 5.95 09/01/35 1,053,770
1,000 Santa Ana Unified School District Community Facilities
District # 2004-1, California, Central Park Ser 2005.... 5.10 09/01/35 1,020,420
2,000 Elk Valley Public Improvement Corporation, Colorado, Ser
2001 A.................................................. 7.35 09/01/31 2,144,820
2,000 Northwest Metropolitan District #3, Colorado, Ser 2005.... 6.25 12/01/35 2,144,260
1,000 Southlands Metropolitan District #1, Colorado, Ser 2004... 7.125 12/01/34 1,116,050
2,000 Beacon Lakes, Community Development District, Florida,
Ser 2003 A.............................................. 6.90 05/01/35 2,205,300
1,000 Midtown Miami Community Development District, Florida,
Parking Garage Ser 2004 A............................... 6.25 05/01/37 1,096,430
1,000 Renaissance Commons Community Development District,
Florida, 2005 Ser A..................................... 5.60 05/01/36 1,035,560
2,000 Atlanta, Georgia, Eastside Ser 2005 B..................... 5.60 01/01/30 2,089,520
1,000 Bolingbrook, Illinois, Sales Tax Ser 2005................. 0.00# 01/01/24 991,650
2,000 Chicago, Illinois, Lake Shore East Ser 2002............... 6.75 12/01/32 2,180,240
725 Lincolnshire, Illinois, Service Area No 1-Sedgebrook Ser
2004.................................................... 6.25 03/01/34 781,151
2,000 Des Peres, Missouri, West County Center Ser 2002.......... 5.75 04/15/20 2,069,340
1,975 Las Vegas District # 808, Nevada, Summerlin Ser 2001...... 6.75 06/01/21 2,052,716
1,000 Myrtle Beach, South Carolina, Air Force Base Redevelopment
Ser 2006 A.............................................. 5.30 11/01/26 1,029,900
------------
--------
24,041,797
22,700
------------
--------
Transportation Facilities Revenue (1.6%)
1,515 Mid-Bay Bridge Authority, Florida, Sr Lien Crossover
Refg Ser 1993 A (Ambac)................................. 5.85 10/01/13 1,611,824
1,000 Nevada Department of Business & Industry, Las Vegas
Monorail 2nd Tier Ser 2000.............................. 7.375 01/01/40 1,042,780
------------
--------
2,654,604
2,515
------------
--------
See Notes to Financial Statements
11
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
----------------------------------------------------------------------------------------------------------
Refunded (7.5%)
$ 1,000 St Johns County Industrial Development Authority, Florida,
Glenmoor Ser 1999 A..................................... 8.00% 01/01/10+ $ 1,125,990
1,000 New Jersey Economic Development Authority, Cedar Crest
Village Inc Ser 2001 A.................................. 7.25 11/15/11+ 1,156,720
1,000 Chester County Health & Education Facilities Authority,
Pennsylvania, Jenner's Pond Inc Ser 2002................ 7.625 07/01/12+ 1,210,710
3,850 Fenton, Missouri, Gravois Bluffs Redevelopment Ser 2001 A
Refg.................................................... 7.00 10/01/11+ 4,453,757
2,000 Austin Convention Enterprises Inc, Texas, Convention
Center Hotel Ser 2000 B................................. 6.70 01/01/11+ 2,124,900
2,100 Vermont Economic Development Authority, Wake Robin Corp
Ser 1999 A.............................................. 6.75 03/01/09+ 2,266,446
------------
--------
12,338,523
10,950
------------
--------
165,220 Total Tax-Exempt Municipal Bonds (Cost $152,317,366)......................... 161,936,282
------------
--------
Convertible Bond (b) (0.4%)
Airlines
633 UAL Corp (Cost $633,080).................................. 5.00 02/01/21 710,442
------------
--------
Short Term Tax-Exempt Municipal Obligations (5.8%)
4,600 Pinellas County Health Facilities Authority, Florida,
Pooled Loan
Ser 1985 (Ambac) (Demand 12/01/06)...................... 3.65* 12/01/15 4,600,000
1,800 Bell County Health Facilities Development Corporation,
Texas, Scott & White Memorial Hospital Ser 2000 B-1
(MBIA) (Demand 12/01/06)................................ 3.65* 08/15/29 1,800,000
3,200 North Central Texas Health Facilities Development
Corporation, Presbyterian Medical Center Ser 1985 D
(MBIA) (Demand 12/01/06)................................ 3.61* 12/01/15 3,200,000
------------
--------
9,600 Total Short-Term Tax-Exempt Municipal Obligations (Cost $9,600,000).......... 9,600,000
------------
--------
$175,453 Total Investments (Cost $162,550,446) (c)(d)......................... 172,246,724
------------
--------
Floating Rate Note Obligation Related to Securities Held (-3.6%).....
(6,000) Note with interest rate of 3.55% at November 30, 2006 and contractual
maturities of collateral ranging from 10/01/31 to 10/01/37 (see Note
1D)++++ (Cost ($6,000,000)).......................................... (6,000,000)
------------
$169,453 Total Net Investments (Cost $156,550,446)............................ 100.8% 166,246,724
========
Liabilities in Excess of Other Assets................................ (0.8) (1,340,213)
----- ------------
Net Assets........................................................... 100.0% $164,906,511
===== ============
See Notes to Financial Statements
12
Morgan Stanley Municipal Income Opportunities Trust
PORTFOLIO OF INVESTMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
---------------------------------------------------
AMT Alternative Minimum Tax.
COPs Certificates of Participation.
WI Security purchased on a when-issued basis.
* Current coupon of variable rate demand obligation.
++ Underlying security related to inverse floater entered into
by the Fund. (See Note 1D).
++++ Floating rate note obligation related to securities held.
The interest rate shown reflects the rate in effect at
November 30, 2006.
+ Prerefunded to call date shown.
++ Joint exemption in locations shown.
# Security is a "step-up" bond where the coupon increases on a
predetermined future date.
(a) Resale is restricted to qualified institutional investors.
(b) Taxable convertible bond issued in reorganization.
(c) Securities have been designated as collateral in an amount
equal to $5,792,810, in connections with the purchase of
when-issued securities.
(d) The aggregate cost for federal income tax purposes is
$156,490,899. The aggregate gross unrealized appreciation is
$9,783,892 and the aggregate gross unrealized depreciation
is $28,067, resulting in net unrealized appreciation of
$9,755,825.
Bond Insurance:
---------------
Ambac Ambac Assurance Corporation.
MBIA Municipal Bond Investors Assurance Corporation.
See Notes to Financial Statements
13
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
November 30, 2006 (unaudited)
Assets:
Investments in securities, at value (cost $162,550,446)..... $172,246,724
Cash........................................................ 24,374
Receivable for:
Interest................................................ 2,534,109
Investments sold........................................ 80,150
Prepaid expenses and other assets........................... 13,676
------------
Total Assets............................................ 174,899,033
------------
Liabilities:
Floating rate note obligations related to securities held... 6,000,000
Payable for:
Investments purchased................................... 3,792,810
Investment advisory fee................................. 76,002
Administration fee...................................... 12,160
Transfer agent fee...................................... 9,528
Accrued expenses and other payables......................... 102,022
------------
Total Liabilities....................................... 9,992,522
------------
Net Assets.............................................. $164,906,511
============
Composition of Net Assets:
Paid-in-capital............................................. $173,986,180
Net unrealized appreciation................................. 9,696,278
Accumulated undistributed net investment income............. 2,548,181
Accumulated net realized loss............................... (21,324,128)
------------
Net Assets.............................................. $164,906,511
============
Net Asset Value Per Share
19,685,043 shares outstanding (unlimited shares authorized
of $.01 par value).......................................... $8.38
============
See Notes to Financial Statements
14
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statement of Operations
For the six months ended November 30, 2006 (unaudited)
Net Investment Income:
Interest Income............................................. $ 5,725,327
-----------
Expenses
Investment advisory fee..................................... 402,098
Administration fee.......................................... 64,336
Professional fees........................................... 33,679
Transfer agent fees and expenses............................ 17,858
Shareholder reports and notices............................. 15,826
Listing fees................................................ 12,557
Custodian fees.............................................. 3,937
Trustees' fees and expenses................................. 2,814
Other....................................................... 16,322
-----------
Total Expenses.......................................... 569,427
Less: expense offset........................................ (3,927)
-----------
Net Expenses............................................ 565,500
-----------
Net Investment Income................................... 5,159,827
-----------
Net Realized and Unrealized Gain (Loss):
Net Realized Loss on:
Investments................................................. (9,515,987)
Futures contracts........................................... (80,653)
-----------
Net Realized Loss....................................... (9,596,640)
-----------
Net Change in Unrealized Appreciation/Depreciation on:
Investments................................................. 16,747,974
Futures contracts........................................... (17,647)
-----------
Net Appreciation........................................ 16,730,327
-----------
Net Gain................................................ 7,133,687
-----------
Net Increase................................................ $12,293,514
===========
See Notes to Financial Statements
15
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
NOVEMBER 30, 2006 MAY 31, 2006
----------------- ------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 5,159,827 $ 10,672,776
Net realized gain (loss).................................... (9,596,640) 29,575
Net change in unrealized appreciation/depreciation.......... 16,730,327 131,023
------------ ------------
Net Increase............................................ 12,293,514 10,833,374
Dividends to shareholders from net investment income........ (5,314,893) (10,435,062)
Decrease from transactions in shares of beneficial
interest.................................................. -- (64,710)
------------ ------------
Net Increase............................................ 6,978,621 333,602
Net Assets:
Beginning of period......................................... 157,927,890 157,594,288
------------ ------------
End of Period
(Including accumulated undistributed net investment income
of $2,548,181 and $2,703,247, respectively)................. $164,906,511 $157,927,890
============ ============
See Notes to Financial Statements
16
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2006 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Municipal Income Opportunities Trust (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a diversified,
closed-end management investment company. The Fund's investment objective is to
provide a high level of current income which is exempt from federal income tax.
The Fund was organized as a Massachusetts business trust on June 22, 1988 and
commenced operations on September 19, 1988.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) portfolio securities are valued by an outside
independent pricing service approved by the Trustees. The pricing service uses
both a computerized grid matrix of tax-exempt securities and evaluations by its
staff, in each case based on information concerning market transactions and
quotations from dealers which reflect the mean between the last reported bid and
asked price. The portfolio securities are thus valued by reference to a
combination of transactions and quotations for the same or other securities
believed to be comparable in quality, coupon, maturity, type of issue, call
provisions, trading characteristics and other features deemed to be relevant.
The Trustees believe that timely and reliable market quotations are generally
not readily available for purposes of valuing tax-exempt securities and that the
valuations supplied by the pricing service are more likely to approximate the
fair value of such securities; (2) futures are valued at the latest sale price
on the commodities exchange on which they trade unless it is determined that
such price does not reflect their market value, in which case they will be
valued at their fair value as determined in good faith under procedures
established by and under the supervision of the Trustees; and (3) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily except where collection
is not expected.
C. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable and nontaxable
income to its shareholders. Accordingly, no federal income tax provision is
required.
17
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
D. Floating Rate Note Obligations Related to Securities Held -- The Fund enters
into transactions in which it transfers to Dealer Trusts ("Dealer Trusts"),
fixed rate bonds in exchange for cash and residual interests in the Dealer
Trust's assets and cash flows, which are in the form of inverse floating rate
investments. The Dealer Trusts funds the purchases of the fixed rate bonds by
issuing floating rate notes to third parties and allowing the Fund to retain
residual interest in the bonds. The Fund enters into shortfall agreements with
the Dealer Trusts which commit the Fund to pay the Dealer Trusts, in certain
circumstances, the difference between the liquidation value of the fixed rate
bonds held by the Dealer Trusts and the liquidation value of the floating rate
notes held by third parties, as well as any shortfalls in interest cash flows.
The residual interests held by the Fund (inverse floating rate investments)
include the right of the Fund (1) to cause the holders of the floating rate
notes to tender their notes at par at the next interest rate reset date, and (2)
to transfer the municipal bond from the Dealer Trusts to the Fund, thereby
collapsing the Dealer Trusts. The Fund accounts for the transfer of bonds to the
Dealer Trusts as secured borrowings, with the securities transferred remaining
in the Fund's investment assets, and the related floating rate notes reflected
as trust liabilities under the caption "floating rate note obligations" on the
"Statement of Assets and Liabilities". The Fund records the interest income from
the fixed rate bonds under the caption "Interest Income" and records the
expenses related to floating rate note obligations and any administrative
expense of the dealer trusts under the caption "Interest and residual trust
expenses" in the Fund's "Statement of Operations". The notes issued by the
Dealer Trusts have interest rates that reset weekly and the floating rate note
holders have the option to tender their notes to the Dealer Trusts for
redemption at par at each reset date. At November 30, 2006, Fund investments
with a value of $8,068,980 are held by the Dealer Trusts and serve as collateral
for the $6,000,000 in floating rate note obligations outstanding at that date.
Contractual maturities of the floating rate note obligations and interest rates
in effect at November 30, 2006 are presented in the "Portfolio of Investments".
E. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
F. Futures Contracts -- A futures contract is an agreement between two parties
to buy and sell financial instruments or contracts based on financial indices at
a set price on a future date. Upon entering into such a contract, the Fund is
required to pledge to the broker cash, U.S. Government securities or other
liquid portfolio securities equal to the minimum initial margin requirements of
the applicable futures exchange. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments known as
variation margin are recorded by the Fund as unrealized gains and losses. Upon
18
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
closing of the contract, the Fund realizes a gain or loss equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed.
G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
2. Investment Advisory/Administration Agreements
Pursuant to an Investment Advisory Agreement with Morgan Stanley Investment
Advisors Inc. (the "Investment Adviser"), the Fund pays an advisory fee,
calculated weekly and payable monthly, by applying the annual rate of 0.50% to
the Fund's weekly net assets.
Pursuant to an Administration Agreement with Morgan Stanley Services Company
Inc. (the "Administrator"), an affiliate of the Investment Adviser, the Fund
pays an administration fee, calculated weekly and payable monthly, by applying
the annual rate of 0.08% to the Fund's weekly net assets.
3. Security Transactions and Transactions with Affiliates
The cost of purchases and proceeds from sales of portfolio securities, excluding
short-term investments, for the six months ended November 30, 2006 aggregated
$31,942,570 and $31,178,255, respectively. Included in the aforementioned
transactions are sales of $1,278,335 with other Morgan Stanley funds including
net realized gains of $49,277.
Morgan Stanley Trust, an affiliate of the Investment Adviser and Administrator,
is the Fund's transfer agent.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Trustees of the Fund who will have served as independent
Trustees for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation. The
Trustees voted to close the plan to new participants and eliminate the future
benefits growth due to increases to compensation after July 31, 2003. Aggregate
pension costs for the six months ended November 30, 2006 included in Trustees'
fees and expenses in the Statement of Operations amounted to $1,558. At November
30, 2006, the Fund had an accrued pension liability of $62,746 which is included
in accrued expenses in the Statement of Assets and Liabilities.
The Fund has an unfunded Deferred Compensation Plan (the "Compensation Plan")
which allows each independent Trustee to defer payment of all, or a portion, of
the fees he or she receives for serving on the Board of Trustees. Each eligible
Trustee generally may elect to have the deferred amounts
19
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
credited with a return equal to the total return on one or more of the Morgan
Stanley funds that are offered as investment options under the Compensation
Plan. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.
4. Shares of Beneficial Interest
Transactions in shares of beneficial interest were as follows:
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
---------- --------- ------------
Balance, May 31, 2005....................................... 19,693,243 $196,932 $174,267,222
Treasury shares purchased and retired (weighted average
discount 0.54%*).......................................... (8,200) (82) (64,628)
Reclassification due to permanent book/tax differences...... -- -- (413,264)
---------- -------- ------------
Balance, May 31, 2006 and November 30, 2006................. 19,685,043 $196,850 $173,789,330
========== ======== ============
---------------------
* The Trustees have voted to retire the shares purchased.
5. Dividends
The Fund declared the following dividend from net investment income:
DECLARATION AMOUNT RECORD PAYABLE
DATE PER SHARE DATE DATE
------------------ --------- ---------------- -----------------
September 26, 2006 0.045 December 8, 2006 December 22, 2006
December 26, 2006 0.045 January 5, 2007 January 19, 2007
December 26, 2006 0.045 February 9, 2007 February 23, 2007
December 26, 2006 0.045 March 9, 2007 March 23, 2007
6. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of May 31, 2006, the Fund had a net capital loss carryforward of $11,456,366
of which $87,017 will expire on May 31, 2008, $4,628,820 will expire on May 31,
2009, $1,864,080 will
20
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
expire on May 31, 2011 and $4,876,449 will expire on May 31, 2013 to offset
future capital gains to the extent provided by regulations.
As of May 31, 2006, Fund had temporary book/tax differences primarily
attributable to post-October losses (capital losses incurred after October 31
within the taxable year which are deemed to arise on the first business day of
the Fund's next taxable year), book amortization of discounts on debt
securities, mark-to-market of open futures contracts and interest on bonds in
default.
7. Expense Offset
The expense offset represents a reduction of the fees and expenses for interest
earned on cash balances maintained by the Fund with the transfer agent and
custodian.
8. Purposes of and Risks Relating to Certain Financial Instruments
The Fund may invest a portion of its assets in inverse floating rate
instruments, either through outright purchases of inverse floating rate
securities or through the transfer of bonds to a dealer trust in exchange for
cash and residual interests in the dealer trust. These investments are typically
used by the Fund in seeking to enhance the yield of the portfolio. These
instruments typically involve greater risks than a fixed rate municipal bond. In
particular, these instruments are acquired through leverage or may have leverage
embedded in them and therefore involve many of the risks associated with
leverage. Leverage is a speculative technique that may expose the Fund to
greater risk and increased costs. Leverage may cause the Fund's net asset value
to be more volatile than if it had not been leveraged because leverage tends to
magnify the effect of any increases or decreases in the value of the Fund's
portfolio securities. The use of leverage may also cause the Fund to liquidate
portfolio positions when it may not be advantageous to do so in order to satisfy
its obligations with respect to inverse floating rate instruments.
To hedge against adverse interest rate changes, the Fund may invest in financial
futures contracts or municipal bond index futures contracts ("futures
contracts").
These futures contracts involve elements of market risk in excess of the amount
reflected in the Statement of Assets and Liabilities. The Fund bears the risk of
an unfavorable change in the value of the underlying securities. Risks may also
arise upon entering into these contracts from the potential inability of the
counterparties to meet the terms of their contracts.
9. New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation 48, Accounting for Uncertainty in Income Taxes -- an
interpretation of FASB Statement 109 (FIN 48). FIN 48 clarifies
21
Morgan Stanley Municipal Income Opportunities Trust
NOTES TO FINANCIAL STATEMENTS - NOVEMBER 30, 2006 (UNAUDITED) continued
the accounting for income taxes by prescribing the minimum recognition threshold
a tax position must meet before being recognized in the financial statements.
FIN 48 is effective for fiscal years beginning after December 15, 2006. The Fund
will adopt FIN 48 for the fiscal year ending 2008 and the impact to the Fund's
financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, Fair Value Measurements (SFAS 157), was issued and is effective for fiscal
years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the impact the
adoption of SFAS 157 will have on the Fund's financial statement disclosures.
22
Morgan Stanley Municipal Income Opportunities Trust
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
FOR THE SIX FOR THE YEAR ENDED MAY 31
MONTHS ENDED ------------------------------------------------------
NOVEMBER 30, 2006 2006 2005 2004 2003 2002
----------------- -------- -------- -------- -------- --------
(unaudited)
Selected Per Share Data:
Net asset value, beginning of the
period................................ $8.02 $8.00 $7.67 $7.91 $7.88 $8.03
----- ----- ----- ----- ----- -----
Income (loss) from investment
operations:
Net investment income*............. 0.26 0.54 0.53 0.52 0.54 0.55
Net realized and unrealized gain
(loss)............................. 0.37 0.01 0.29 (0.26) 0.04 (0.13)
----- ----- ----- ----- ----- -----
Total income from investment
operations............................ 0.63 0.55 0.82 0.26 0.58 0.42
----- ----- ----- ----- ----- -----
Less dividends from net investment
income................................ (0.27) (0.53) (0.50) (0.50) (0.55) (0.57)
----- ----- ----- ----- ----- -----
Anti-dilutive effect of acquiring
treasury shares*...................... -- -- 0.01 -- -- --
----- ----- ----- ----- ----- -----
Net asset value, end of period......... $8.38 $8.02 $8.00 $7.67 $7.91 $7.88
===== ===== ===== ===== ===== =====
Market value, end of period............ $9.36 $8.76 $7.97 $7.09 $7.76 $8.08
===== ===== ===== ===== ===== =====
Total Return+.......................... 10.01%(1) 17.04% 20.12% (2.34)% 3.09% 1.42%
Ratios to Average Net Assets:
Total expenses (before expense
offset)............................... 0.71%(2) 0.71% 0.83% 0.94% 0.93%(3) 0.92%
Net investment income.................. 6.42%(2) 6.78% 6.76% 6.63% 6.85% 6.92%
Supplemental Data:
Net assets, end of period, in
thousands............................. $164,907 $157,928 $157,594 $156,265 $164,208 $165,019
Portfolio turnover rate................ 17%(1) 19% 12% 10% 8% 7%
---------------------
* The per share amounts were computed using an average number
of shares outstanding during the period.
+ Total return is based upon the current market value on the
last day of each period reported. Dividends are assumed to
be reinvested at the prices obtained under the Fund's
dividend reinvestment plan. Total return does not reflect
brokerage commissions.
(1) Not annualized.
(2) Annualized.
(3) Does not reflect the effect of expense offset of 0.01%.
23
See Notes to Financial Statements
Morgan Stanley Municipal Income Opportunities Trust
REVISED INVESTMENT POLICY (UNAUDITED)
THE TRUSTEES APPROVED THE FOLLOWING INVESTMENT POLICY:
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and may
purchase or sell interest rate caps, floors and collars. The Fund expects to
enter into these transactions primarily to manage interest rate risk, hedge
portfolio positions and preserve a return or spread on a particular investment
or portion of its portfolio. The Fund may also enter into these transactions to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund does not intend to use these transactions
as speculative investments and will not enter into interest rate swaps or sell
interest rate caps or floors where it does not own or have the right to acquire
the underlying securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed-rate payments.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on a contractually-based
principal amount from the party selling the interest rate floor. An interest
rate collar combines the elements of purchasing a cap and selling a floor. The
collar protects against an interest rate rise above the maximum amount but
foregoes the benefit of an interest rate decline below the minimum amount.
The Fund may enter into interest rate swaps, caps, floors and collars on either
an asset-based or liability-based basis, and will usually enter into interest
rate swaps on a net basis, i.e., the two payment streams are netted out, with
the Fund receiving or paying, as the case may be, only the net amount of the two
payments. The net amount of the excess, if any, of the Fund's obligations over
its entitlements with respect to each interest rate swap will be accrued on a
daily basis and the Fund segregates an amount of cash and/or liquid securities
having an aggregate net asset value at least equal to the accrued excess. If the
Fund enters into an interest rate swap on other than a net basis, the Fund would
segregate the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. Interest rate transactions do not constitute senior
securities under the 1940 Act when the Fund segregates assets to cover the
obligations under the transactions. The Fund will enter into interest rate swap,
cap or floor transactions only with counterparties approved by the Fund's Board
of Trustees. The Adviser will monitor the creditworthiness of counterparties to
the Fund's interest rate swap, cap, floor and collar transactions on an ongoing
basis. If there is a default by the other party to such a transaction, the Fund
will have contractual remedies pursuant to the agreements related to the
transaction. To the extent the Fund sells (i.e., writes) caps, floors and
collars, it will segregate cash and/or liquid securities having an aggregate net
asset value at least
24
Morgan Stanley Municipal Income Opportunities Trust
REVISED INVESTMENT POLICY (UNAUDITED) continued
equal to the full amount, accrued on a daily basis, of the Fund's net
obligations with respect to the caps, floors or collars. The use of interest
rate swaps is a highly specialized activity which involves investment techniques
and risks different from those associated with ordinary portfolio securities
transactions. If the Adviser is incorrect in its forecasts of the market values,
interest rates and other applicable factors, the investment performance of the
Fund would diminish compared with what it would have been if these investment
techniques were not used. The use of interest rate swaps, caps, collars and
floors may also have the effect of shifting the recognition of income between
current and future periods.
These transactions do not involve the delivery of securities or other underlying
assets or principal. Accordingly, the risk of loss with respect to interest rate
swaps is limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the other party to an interest rate swap
defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive.
25
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TRUSTEES
Frank L. Bowman
Michael Bozic
Kathleen A. Dennis
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael F. Klein
Michael E. Nugent
W. Allen Reed
Fergus Reid
OFFICERS
Michael E. Nugent
Chairman of the Board
Ronald E. Robison
President and Principal Executive Officer
J. David Germany
Vice President
Dennis F. Shea
Vice President
Barry Fink
Vice President
Amy R. Doberman
Vice President
Carsten Otto
Chief Compliance Officer
Stefanie V. Chang Yu
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT ADVISER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
(c) 2006 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Municipal Income
Opportunities Trust
Semiannual Report
November 30, 2006
[MORGAN STANLEY LOGO]
OIASAN-RA07-0001OP-Y11/06
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Portfolio Managers of Closed-End Management Investment Companies
Applicable only to reports covering periods ending on or after December 31,
2005.
Item 9. Closed-End Fund Repurchases
REGISTRANT PURCHASE OF EQUITY SECURITIES
(d) Maximum Number (or
(c) Total Number of Shares Approximate Dollar Value)
(a) Total Number (b) Average Price (or Units) Purchased as of Shares (or Units) that
of Shares (or Paid per Share Part of Publicly Announced May Yet Be Purchased Under
Period Units) Purchased (or Unit) Plans or Programs the Plans or Programs
------ ---------------- ----------------- -------------------------- --------------------------
June 1, 2006 ---
June 30, 2006 -- -- N/A N/A
July 1, 2006 ---
July 31,2006 -- -- N/A N/A
August 1, 2006 ---
August 31, 2006 -- -- N/A N/A
September 1, 2006 ---
September 31, 2006 -- -- N/A N/A
October 1, 2006 ---
October 31, 2006 -- -- N/A N/A
November 1, 2006 ---
November 30, 2006 -- -- N/A N/A
Total -- -- N/A N/A
Item 10. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 11. Controls and Procedures
a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
provide reasonable assurance that information required to be disclosed by the
Fund in this Form N-CSR was recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's ("SEC")
rules and forms, based upon such officers' evaluation of these controls and
procedures as of a date within 90 days of the filing date of the report. The
Fund's principal executive officer and principal
2
financial officer have also concluded that the Fund's disclosure controls and
procedures designed to ensure that information required to be disclosed by the
Fund in this Form N-CSR is accumulated and communicated to the Fund's
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required disclosure
were effective.
Management of the Fund has determined that as of and prior to November 30, 2006,
the Fund's fiscal semiannual period, the Fund had a deficiency in its internal
control over financial reporting related to the review, analysis and
determination of whether certain transfers of municipal securities qualified for
sale accounting under the provisions of Statement of Financial Accounting
Standards No. 140 "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." Since November 30, 2006, and prior to the
issuance of the Fund's semiannual report, management has revised its disclosure
controls and procedures and its internal control over financial reporting in
order to improve the controls' effectiveness to ensure that transactions in
transfers of municipal securities are accounted for properly.
Management notes that other investment companies investing in similar
investments over similar time periods had been accounting for such investments
in a similar manner as the Fund. Accordingly, other investment companies are
also concluding that there was a material weakness in their internal control
over financial reporting of such investments. There was no impact to the net
asset value of the Fund's shares or the Fund's total return for any period as a
result of the changes in financial reporting of such investments.
(b) There were no changes in the Fund's internal control over financial
reporting that occurred during the second fiscal quarter of the period covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Fund's internal control over financial reporting.
However, as discussed above, subsequent to November 30, 2006, the Fund's
internal control over financial reporting was revised.
Item 12. Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
3
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, thereunto duly authorized.
Morgan Stanley Municipal Income
Opportunities Trust
/s/ Ronald E. Robison
-------------------------------------
Ronald E. Robison
Principal Executive Officer
January 18, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
-------------------------------------
Ronald E. Robison
Principal Executive Officer
January 18, 2007
/s/ Francis Smith
-------------------------------------
Francis Smith
Principal Financial Officer
January 18, 2007
4