CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number
811-21869
NexPoint Credit Strategies Fund (formerly, Pyxis Credit Strategies Fund)
(Exact name of registrant as specified in charter)
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Address of principal executive offices) (Zip code)
Pyxis Capital, L.P.
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Name
and address of agent for service)
Registrants telephone number, including area code: (877) 665-1287
Date of fiscal year end: December 31
Date of reporting period: June 30, 2012
Form N-CSR is to be used by
management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of
1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information
contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (OMB) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for
reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
There is no assurance that the trends described in this report will continue or commence.
Privacy Policy
We recognize and respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.
Collection of Information. We may collect nonpublic personal information about you from the following sources:
Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and
telephone contacts;
Web site information, including any information captured through the use of cookies; and
Account history, including information about the transactions and balances in your accounts with us or our affiliates.
Disclosure of Information. We may share the information we collect with our affiliates. We may also
disclose this information as otherwise permitted by law. We do not sell your personal information to third parties for their independent use.
Confidentiality and Security of Information. We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or
services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.
The NexPoint Credit Strategies Fund (the Fund) seeks to provide both current income and capital appreciation.
Total Net Assets of Common Shares as of June 30, 2012
$444.5 million
Portfolio Data as of June 30, 2012
The information below provides a snapshot of the Fund at the end of the reporting period. The Fund is actively managed and the composition
of its portfolio will change over time.
Quality Breakdown as of 06/30/12 (%)*
BBB
0.2
BB
15.9
B
39.6
CCC
5.6
CC
1.5
NR**
37.2
Top 5 Sectors as of 06/30/12 (%)*
Broadcasting
14.4
Chemicals
10.4
Healthcare
10.2
Service
9.2
Information Technology
8.0
Top 10 Holdings as of 06/30/12 (%)*
Genesys Ventures IA, LP (Common Stocks)
6.2
ComCorp Broadcasting, Inc. (US Senior Loans)
5.4
Young Broadcasting Holding Co., Inc. (Common
Stocks)
3.2
TPC Group LLC (Corporate Notes and Bonds)
2.6
PL Propylene LLC (US Senior Loans)
2.3
Sabre, Inc. (US Senior Loans)
2.2
Texas Competitive Electric Holdings Company, LLC (US Senior
Loans)
2.0
Momentive Performance Materials, Inc. (Corporate Notes and
Bonds)
1.9
US Airways Group, Inc. (US Senior Loans)
1.9
Azithromycin Royalty Sub LLC (Corporate Notes and Bonds)
1.6
*
Quality is calculated as a percentage of total senior loans, asset-backed securities, corporate notes and bonds. Sectors and holdings are calculated as a percentage of
total assets, excluding cash invested in Registered Investment Companies. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Quality ratings reflect the credit
quality of the underlying loans and bonds in the Funds portfolio and not that of the Fund itself. Quality ratings are subject to change.
**
NR is a designation for a security that is not rated by a Nationally Recognized Statistical Organization.
A guide to understanding the Funds financial statements
Investment Portfolio
The Investment Portfolio details all of the Funds holdings and their value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and
industry to demonstrate areas of concentration and diversification.
Statement of Assets and Liabilities
This statement details the Funds assets, liabilities, net assets and common share price as of the last day of the reporting period. Net assets are calculated by subtracting
all the Funds liabilities (including any unpaid expenses) from the total of the Funds investment and non-investment assets. The net asset value per common share is calculated by dividing net assets by the number of common shares
outstanding as of the last day of the reporting period.
Statement of Operations
This statement reports income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the
Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Funds net increase or decrease in net assets from operations
applicable to common shareholders.
Statements of Changes in Net Assets
These statements detail how the Funds net assets were affected by its operating results, distributions to common shareholders and shareholder transactions from common shares
(e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of common shares outstanding.
Statement of Cash Flows
This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency
during the period.
Financial Highlights
The Financial Highlights demonstrate how the Funds net asset value per common share was affected by the Funds operating results. The Financial Highlights also disclose
the Funds performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).
Notes to Financial Statements
These notes disclose the organizational background of the Fund, its significant accounting policies (including those surrounding security valuation, income recognition and
distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.
IAP Worldwide Services, Inc., Series A, expires 06/12/15 (c)
14,444
IAP Worldwide Services, Inc., Series B, expires 06/12/15 (c)
7,312
IAP Worldwide Services, Inc., Series C, expires 06/12/15 (c)
602
LLV Holdco, LLC, Series C, expires 07/15/15 (c) (d)
828
LLV Holdco, LLC, Series D, expires 07/15/15 (c) (d)
925
LLV Holdco, LLC, Series E, expires 07/15/15 (c) (d)
1,041
LLV Holdco, LLC, Series F, expires 07/15/15 (c) (d)
1,179
LLV Holdco, LLC, Series G, expires 07/15/15 (c) (d)
80,472
Microvision, Inc., expires 07/23/13
8,852
422
Young Broadcasting Holding Co., Inc., expires 12/24/24
1,266,000
Total Warrants (Cost $840,742)
1,274,852
Shares
Registered Investment Company - 5.5%
24,375,196
Federated Prime Obligations Fund
24,375,196
Total Registered Investment Company (Cost $24,375,196)
24,375,196
Total Investments - 139.9%
621,843,841
(Cost of $846,594,234) (l)
Other Assets & Liabilities, Net - (39.9)%
(177,333,852
)
Net Assets applicable to Common Shareholders - 100.0%
$
444,509,989
(a)
Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests, generally pay interest at rates which are periodically determined by
reference to a base lending rate plus a spread. (Unless otherwise identified by (g), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks,
(ii) the lending rate offered by one or more European banks such as the London InterBank Offered Rate (LIBOR) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at June 30, 2012.
Senior loans, while exempt from registration under the Securities Act of 1933 (the 1933 Act), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess
cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election. The degree to which borrowers repay, whether as a contractual requirement or at their
election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturities shown.
(b)
The issuer is in default of its payment obligation. Income is not being accrued.
(c)
Represents fair value as determined by the Funds Board of Trustees (the Board) or its designee in good faith, pursuant to the policies and procedures approved
by the Board. Securities with a total aggregate market value of $91,982,548, or 20.7% of net assets, were fair valued under the Funds valuation procedures as of June 30, 2012.
(d)
Affiliated issuer. See Note 12.
(e)
All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
(f)
Senior Loan assets have additional unfunded loan commitments. See Note 11.
(g)
Fixed rate senior loan.
(h)
Floating rate asset. The interest rate shown reflects the rate in effect at June 30, 2012.
(i)
Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional
buyers. At June 30, 2012, these securities amounted to $137,763,139 or 31.0% of net assets.
(j)
Securities (or a portion of securities) on loan. See Note 10.
(k)
Non-income producing security.
(l)
Cost for U.S. federal income tax purposes is $846,594,234.
Forward foreign currency contracts outstanding as of June 30, 2012 were as follows:
Contracts to Buy or to Sell
Currency
Counter- party
Principal Amount Covered by Contracts
Expi- ration
Net Unrealized Appreciation*
Sell
EUR
PNC
11,150,000
08/02/12
$
441,634
Sell
GBP
PNC
300,000
08/02/12
13,453
$
455,087
*
The primary risk exposure is foreign exchange contracts. Statement of Assets and Liabilities location: Net unrealized appreciation on forward foreign currency contracts. (see
Notes 2 and 14).
Unaffiliated issuers, at value (cost $671,074,428)
536,984,446
Affiliated issuers, at value (cost $175,519,806) (Note 12)
84,859,395
Total investments, at value (cost $846,594,234)
621,843,841
Cash and foreign currency*
134,918
Cash held as collateral for securities loaned (Note 10)
19,860
Net unrealized appreciation on forward foreign currency contracts
455,087
Receivable for:
Investments sold
23,064,723
Dividends & Interest receivable
4,897,563
Other assets
1,018
Total assets
650,417,010
Liabilities:
Notes payable (Notes 7 and 8)
170,000,000
Net discount and unrealized depreciation on unfunded transactions (Note 11)
525,443
Payable upon receipt of securities loaned (Note 10)
19,860
Payables for:
Distributions
93,771
Investments purchased
33,831,069
Investment advisory fee payable (Note 4)
254,807
Administration fee (Note 4)
50,962
Trustees fees (Note 4)
10,534
Interest expense (Notes 7 and 8)
770,788
Accrued expenses and other liabilities
349,787
Total liabilities
205,907,021
Net Assets Applicable To Common Shares
444,509,989
Composition of Net Assets:
Par value of common shares (Note 1)
63,881
Paid-in capital in excess of par value of common shares
1,142,932,645
Undistributed net investment income
4,477,569
Accumulated net realized gain/(loss) from investments, forward currency contracts and foreign currency transactions
(478,621,316
)
Net unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts and translation of
assets and liabilities denominated in foreign currency
(224,342,790
)
Net Assets Applicable to Common Shares
444,509,989
Common Shares
Net assets
444,509,989
Shares outstanding (unlimited authorization)
63,881,473
Net asset value per share (Net assets/shares outstanding)
6.96
*
Includes foreign currency held at value of $6,720, with a cost of $6,924.
Net realized gain/(loss) on investments, forward currency contracts and foreign currency transactions
(16,723,900
)
(3,955,560
)
Net change in unrealized appreciation/(depreciation) on investments, unfunded transactions, forward foreign currency contracts, and
translation of assets and liabilities denominated in foreign currency
18,305,038
(42,227,624
)
Net change in net assets from operations
15,196,758
(16,418,687
)
Distributions Declared to Common Shareholders
From net investment income
(13,734,517
)
(33,689,329
)
Total distributions declared to common shareholders
(13,734,517
)
(33,689,329
)
Share Transactions from Common Shares
Distributions reinvested
402,973
Net increase from share transactions from common shares
402,973
Total increase (decrease) in net assets from common shares
1,462,241
(49,705,043
)
Net Assets Applicable to Common Shares
Beginning of period
443,047,748
492,752,791
End of period (including undistributed net investment income of $4,477,569 and $4,596,466, respectively)
Selected data for a share outstanding throughout each period is as follows:
For the Six Months Ended June 30, 2012 (unaudited)
Years Ended December 31,
Common Shares Per Share Operating Performance:
2011
2010
2009
2008
2007
Net Asset Value, Beginning of Year
$
6.94
$
7.72
$
7.20
$
6.51
$
17.99
$
20.08
Income from Investment Operations:
Net investment income
0.22
0.47
0.59
0.74
1.35
1.71
Net realized and unrealized gain/(loss) on investments
0.02
(0.72
)
0.56
0.74
(9.79
)
(1.85
)
Total from investment operations
0.24
(0.25
)
1.15
1.48
(8.44
)
(0.14
)
Less Distributions Declared to Common Shareholders:
From net investment income
(0.22
)
(0.53
)
(0.63
)
(0.79
)
(1.46
)
(1.65
)
From net realized gains
(0.26
)
(0.30
)
Total distributions declared to common shareholders
(0.22
)
(0.53
)
(0.63
)
(0.79
)
(1.72
)
(1.95
)
Dilutive impact of rights offering
(1.32
)
Net Asset Value, End of Year
$
6.96
$
6.94
$
7.72
$
7.20
$
6.51
$
17.99
Market Value, End of Year
$
6.28
$
6.18
$
7.58
$
6.31
$
5.70
$
15.82
Market Value Total Return(a)
5.13
%(b)
(12.18
)%
30.76
%
27.69
%
(57.84
)%
(17.05
)%
Ratios and Supplemental Data:
Net assets, end of period (in 000s)
$
444,391
$
443,048
$
492,753
$
458,764
$
361,211
$
621,078
Common Share Information at End of Year:
Ratios based on average net assets of common shares:
Gross operating expenses (including interest and commitment fee expense)
3.02
%(c)
3.15
%
3.14
%
3.90
%
3.78
%
4.03
%
Interest and commitment fee expense
0.88
%(c)
0.92
%
1.01
%
1.49
%
1.63
%
2.16
%
Dividend expense from short positions
N/A
N/A
(d)
(d)
0.17
%
0.03
%
Fees and expenses waived
N/A
N/A
(0.14
)%
(0.31
)%
(0.09
)%
Net expenses
3.02
%(c)
3.15
%
3.00
%
3.59
%
3.86
%
4.06
%
Net investment income
6.07
%(c)
6.24
%
7.92
%
11.09
%
11.36
%
8.64
%
Ratios based on managed net assets of common shares:
Gross operating expenses (including interest and commitment fee expense)
2.23
%(c)
2.27
%
2.51
%
3.12
%
2.69
%
2.94
%
Interest and commitment fee expense
0.65
%(c)
0.66
%
0.81
%
1.19
%
1.16
%
1.58
%
Dividend expense from short positions
N/A
N/A
(d)
(d)
0.12
%
0.02
%
Fees and expenses waived
N/A
N/A
(0.11
)%
(0.25
)%
(0.06
)%
Net expenses
2.23
%(c)
2.27
%
2.40
%
2.87
%
2.75
%
2.96
%
Net investment income
4.49
%(c)
4.50
%
6.34
%
8.88
%
8.12
%
6.31
%
Portfolio turnover rate
37
%(b)
52
%
91
%
88
%
78
%
66
%
(a)
Based on market value per share. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Funds Dividend
Reinvestment Plan.
NexPoint Credit Strategies Fund (formerly Pyxis Credit Strategies Fund) (the Fund) is a Delaware statutory trust and is registered with the Securities and Exchange Commission (the
SEC) under the Investment Company Act of 1940, as amended (the 1940 Act), as a non-diversified, closed-end management investment company. The Fund trades on the New York Stock Exchange under the ticker symbol HCF. The Fund
may issue an unlimited number of common shares, par value $0.001 per share (Common Shares). The Fund commenced operations on June 29, 2006. Effective June 14, 2012, NexPoint Advisors, L.P. (NexPoint), an affiliate
of Pyxis Capital, L.P. (Pyxis), became the investment advisor and administrator to the Fund. Prior to June 14, 2012, Pyxis (the Former Advisor) was the investment advisor and administrator to the Fund. NexPoint assumes all
duties, rights and obligations of Pyxis under the Funds investment advisory agreement, pursuant to a novation agreement among the Fund, Pyxis and NexPoint. This change will not result in any changes to the identity of the Funds portfolio
managers, the advisory or administrative services fees paid by the Fund or the services to be provided to the Fund.
Investment Objective
The Fund seeks to provide both current income and capital appreciation.
Note 2. Significant Accounting Policies
The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its financial statements.
Use of Estimates
The Funds financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America
(GAAP), which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Fund Valuation
The net asset value
(NAV) of the Funds common shares is calculated each week, in connection with each issuance of common shares by the Fund, as of each distribution date (after giving effect to the relevant declaration) and on such other dates as
determined by the Funds Board of Trustees (the Board or Trustees), or its designee, in accordance with procedures approved by the Board. The NAV is calculated by dividing the value of the Funds net assets
attributable to common shares by the numbers of common shares outstanding.
Valuation of Investments
In computing the Funds net assets attributable to common shares, securities with readily available market quotations on the New York Stock Exchange, NASDAQ or other nationally recognized exchange,
use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued at the mean between the most recently quoted bid and ask prices provided by
the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means.
Securities
without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Funds loan and bond positions are not traded on exchanges and consequently are valued based on
a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that NexPoint Advisors, L.P. (the Investment Adviser) has determined to generally have the capability to provide appropriate pricing services
and have been approved by the Trustees.
Securities for which market quotations are not readily available, for which the Fund has determined
the price received from a pricing service or broker-dealer is stale or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and
calculation of the Funds net asset value), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably
determined to be relevant, including: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence
the market in which these securities are purchased and sold. In these cases, the Funds NAV will reflect the affected portfolio securities fair value as determined in the judgment of the Board or its designee instead of being determined
by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a securitys most recent sale price and from the prices used by other investment companies to calculate their NAV.
Determination of fair value is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures.
There can be no assurance that the Funds valuation of a security will not differ from the amount that it realizes upon the sale of such security.
Short-term debt investments, that is, those with a remaining maturity of 60 days or less, are valued at cost adjusted for amortization of premiums and accretion of discounts. Repurchase agreements are valued at cost plus accrued interest. Foreign
price quotations are converted to U.S. dollar equivalents using the 4:00 PM London Time Spot Rate.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
Fair Value Measurements:
The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair
value inputs used to measure the Funds investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety
based on the lowest level input that is significant to that investments valuation. The three levels of the fair value hierarchy are described below:
Level 1
Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;
Level 2
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on
executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in
connection with market data at the measurement date; and
Level 3
Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3
may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable
inputs are those inputs that reflect the Funds own assumptions that market participants would use to price the asset or liability based on the best available information.
As of June 30, 2012, the Funds investments consisted of senior loans, corporate notes and bonds, asset-backed securities, common stock, preferred stock and warrants. The fair value of the
Funds loans, bonds and asset-backed securities
are generally based on quotes received from brokers or independent pricing services. Loans and bonds with quotes that are based on actual trades with a sufficient level of activity on or near the
measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the
inputs used by the brokers and pricing services to derive the values are not readily observable.
The fair value of the Funds common
stocks, preferred stocks and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets
because the inputs used by the brokers and pricing services to derive the values are not readily observable.
At the end of each calendar
quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services,
and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the
Funds investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially
from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the
value at the end of the period. A summary of the inputs used to value the Funds assets as of June 30, 2012 are as follows:
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
Investments
Total Value at June 30, 2012
Level 1 Quoted Price
Level 2 Significant Observable Input
Level 3 Significant Unobservable Input
Information Technology
$
38,872
$
38,872
$
$
Service
2,662,777
2,662,777
Utility
30,448
30,448
Wireless Communication
2,531,822
2,531,822
Warrants
1,274,852
8,852
1,266,000
Registered Investment Company
24,375,196
24,375,196
Debt
Senior Loans
323,177,513
233,340,164
89,837,349
Asset-Backed Securities
49,878,435
49,878,435
Corporate Debt
147,122,793
128,230,771
18,892,022
Other Financial Instruments*
Forward foreign exchange contracts
455,087
455,087
Total
$
622,298,928
$
27,249,383
$
362,034,874
$
233,014,671
*
Other financial instruments are derivative instruments not reflected in the Investment Portfolio, such as forwards, which are valued at the unrealized
appreciation/(depreciation) on the investment.
The table below sets forth a summary of changes in the Funds Level 3 assets
(assets measured at fair value using significant unobservable inputs) for the six month period ended June 30, 2012.
Assets at Fair Value using unobservable inputs (Level 3)
Balance as of December 31, 2011
Transfers into Level 3
Transfers out of Level 3
Net amortization/ (accretion) of premium/ (discount)
Net realized gains/(losses)
Net unrealized gains/(losses)
Net purchase*
Net sales*
Balance as of June 30, 2012
Common Stocks
Broadcasting
$
627,000
$
$
$
$
83,694
$
137,256
$
20,081,250
$
(211,200
)
$
20,718,000
Diversified Media
7,048,340
1,424,358
29
8,472,727
Gaming/Leisure
2,655,220
(2,332,415
)
322,805
Healthcare
41,040,000
(960,000
)
40,080,000
Housing
853,312
(48,954
)
49,750
854,108
Metals/Minerals
993,326
527,729
(557,083
)
(963,972
)
Service
2,562,295
100,482
2,662,777
Utility
30,448
30,448
Preferred Stocks
3,830,442
(9,290,170
)
9,959,728
(4,500,000
)
Warrants
2,169,253
228,851
(554,604
)
(577,500
)
1,266,000
Debt
Senior Loans
95,912,547
13,607,392
(11,604,147
)
484,465
595,125
873,681
18,829,079
(28,860,793
)
89,837,349
Asset-Backed Securities
47,161,139
(93,650
)
153,739
4,817,807
(2,160,600
)
49,878,435
Corporate Debt
31,025,478
43,230
(7,034
)
(11,825,602
)
(344,050
)
18,892,022
Claims
(210,914
)
211,023
(109
)
Total
$
235,908,800
$
13,607,392
$
(11,604,147
)
$
434,045
$
(7,708,066
)
$
823,740
$
39,171,131
$
(37,618,224
)
$
233,014,671
* Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the
Funds investment portfolio.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
For the six months ended June 30, 2012, total change in unrealized gain/(loss) on Level 3 securities still
held at period end and included in the change in net assets was $(9,338,865). For the six months ended June 30, 2012, there were no transfers between Level 1 and Level 2. The Fund presents these unrealized losses on the Statement of Operations as
net change in unrealized appreciation/(depreciation) on investments.
Investments designated as Level 3 may include assets valued using quotes
or indications furnished by brokers which are based on models or estimates and may not be executable
prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio
investments. As a result, for the six months ended June 30, 2012, a net amount of $13,607,392 of the Funds portfolio investments were transferred to Level 3 from Level 2 and a net amount of $11,604,147 of the Funds portfolio investments
were transferred to Level 2 from Level 3. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable.
The following table summarizes the
valuation techniques used and unobservable inputs developed to determine the fair value of material Level 3 investments:
Fund and Category
Ending Balance
at 6/30/2012
Valuation
Technique
Unobservable Inputs
Input Value(s)
NexPoint Credit Strategies Fund
Debt
$
158,607,806
Third-Party Pricing Vendor
57.31 - 100.1
Liquidation Analysis
Discount Rate
0.13% - 25%
A/R Recovery Assumption
45%
Debt Loan Spread
Comparable Valuations
511 - 645
Weighted Comparables
10% - 40%
Spread on Weighted Avg Discount
3%
Recovery Analysis
Discount Rate
15%
Multiple Analysis
Liquidity Discount
28%
Expected Sale Proceeds
Discount Rate
15%
Common Stocks
73,140,865
Third-Party Pricing Vendor
0.38 - 3,000
Multiples Analysis
Discount Rate
25%
Fair Valuation Multiple Scenarios
Discount Rate
26%
Scenario Probabilities
25%
Warrants
1,266,000
Third-Party Pricing Vendor
3,000
Total
$
233,014,671
The significant unobservable inputs used in the fair value measurement of the Funds debt investments
are discount rates and accounts receivable recovery assumption. Significant increases or decreases in either of those inputs in isolation would result in a significantly lower or higher fair value measurement.
The significant unobservable inputs used in the fair value measurement of the reporting entitys common stock investments are discount rates and
scenario probabilities. Significant changes in either of those inputs in isolation would result in a significantly lower or higher fair value measurement.
Security Transactions
Security transactions are accounted for on the trade date. Cost is
determined and gains/(losses) are based upon the
specific identification method for both financial statement and federal income tax purposes.
Foreign Currency
Foreign currencies, investments and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollars at the exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in
exchange rates between trade and settlement dates on security transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes are recorded as unrealized foreign currency gains/(losses). Realized
gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net
realized gain (loss) on foreign currency transaction.
Forward Foreign Currency Contracts
In order to minimize the movement in NAV resulting from a decline or appreciation in the value of a particular foreign currency against the U.S. dollar or
another foreign currency or for other reasons, the Fund is authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time of
the contract. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Fund to establish a rate of exchange for a future point in time. Forwards involve counterparty credit risk to the Fund
because the forwards are not exchange traded, and there is no clearinghouse to guarantee forwards against default. As of June 30, 2012, the open value of the Funds forward foreign currency contracts were EUR 11,150,000 and
GBP 300,000 and during the six months ended June 30, 2012, the closed notional value were GBP 3,100,000 and EUR 14,569,000.
Short Equity and Bond Sales
A short
sale is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline. When the Fund makes a short sale, it must borrow the security sold short from a broker-dealer and deliver
it to the buyer upon settlement of the sale. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any payments received on such borrowed securities.
When short sales are employed, the Fund intends to limit exposure to a possible market decline in the value of its portfolio securities through short
sales of securities that the Investment Adviser believes possess volatility characteristics similar to those being hedged. In addition, the Fund may use short sales for non-hedging purposes to pursue its investment objective. Subject to the
requirements of the 1940 Act and the Internal Revenue Code of 1986, as amended (the Code), the Fund will not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Fund exceeds 25% of
the value of its total assets. As of June 30, 2012, the Fund did not have any short sale transactions.
Credit Default Swaps
To the extent consistent with the Funds prospectus, the Fund may enter into credit default swap agreements. The buyer in
a credit default contract is obligated to pay the seller a periodic stream of payments over the term of the
contract provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller typically pays the buyer the par value (full
notional value) of the reference obligation in exchange for the reference obligation. The Fund may be either the buyer or seller in the transaction. If the Fund is a buyer and no event of default occurs, the Fund loses its investment and recovers
nothing. However, if an event of default occurs, the buyer receives full notional value for a reference obligation that may have little or no value. As a seller, the Fund receives income throughout the term of the contract, which typically is
between six months and five years, provided that there is no default event.
Credit default swaps involve greater risks than if the Fund had
invested in the reference obligation directly. In addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risks. If an event of default were to occur, the value of the reference obligation
received by the seller, coupled with the periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. When the Fund acts as a seller of a credit default swap
agreement it is exposed to many of the same risks of leverage as certain other leveraged transactions, since if an event of default occurs the seller must pay the buyer the full notional value of the reference obligation. During the six months ended
June 30, 2012, there were no credit default swap trades outstanding.
Income Recognition
Interest income is recorded on the accrual basis and includes accretion of discounts and amortization of premiums. Dividend income is recorded on the
ex-dividend date.
U.S. Federal Income Tax Status
The Fund intends to qualify each year as a regulated investment company under Subchapter M of the Code and will distribute substantially all of its taxable income and gains, if any, for its
tax year, and as such will not be subject to U.S. federal income taxes.
Management has analyzed the Funds tax positions taken on federal
income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for federal income tax is required in the Funds financial statements. The Funds 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 the Internal Revenue Service and state departments of revenue.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
Distributions to Shareholders
The Fund plans to pay distributions from Net Investment Income monthly and capital gain distributions annually to common shareholders. To permit the Fund to maintain more stable monthly distributions and
annual distributions, the Fund may from time to time distribute less than the entire amount of income and gains earned in the relevant month or year, respectively. The undistributed income and gains would be available to supplement future
distributions. Shareholders of the Fund will automatically have all distributions reinvested in Common Shares of the Fund issued by the Fund or purchased in the open market in accordance with the Funds Dividend Reinvestment Plan (the
Plan) unless an election is made to receive cash. Each participant in the Plan will pay a pro rata share of brokerage commissions incurred in connection with open market purchases, and participants requesting a sale of securities through
the plan agent of the Plan are subject to a sales fee and a brokerage commission.
Cash and Cash Equivalents
The Fund considers liquid assets deposited with a bank, money market funds, and certain short term debt instruments with original maturities of 3 months
or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which
approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of the Statement of Assets and Liabilities. At June 30, 2012, the Fund had $6,720 of cash and cash
equivalents denominated in foreign currencies, with a cost of $6,924.
Statement of Cash Flows
Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The
cash and foreign currency amount shown in the Statement of Cash Flows is the amount included within the Funds Statement of Assets and Liabilities and includes cash and foreign currency on hand at its custodian bank.
Note 3. U.S. Federal Tax Information
The timing and character of income and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. As
a result, net investment income/(loss) and net realized gain/(loss) on investment transactions for a reporting period may differ significantly from distributions during such period.
Reclassifications are made to the Funds capital accounts for permanent tax differences to reflect income and gains available for distribution (or available capital loss carryforwards) under income
tax regulations.
The tax character of distributions paid during the years ended December 31, 2011 and December 31,
2010, the past two tax years ends, were as follows:
Distributions paid
from:
2011
2010
Ordinary income*
$
33,689,329
$
40,172,474
*
For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions.
As of December 31, 2011, the most recent tax year end, the components of distributable earnings on a tax basis were as follows:
Undistributed Ordinary
Income
Undistributed
Long-Term Capital Gains
Net Unrealized (Depreciation)*
Accumulated
Capital and Other Losses
$5,069,629
$
$
(248,858,871
)
$
(454,295,223
)
*
Any differences between book-basis and tax-basis net unrealized appreciation/(depreciation) are primarily due to deferral of losses from wash sales.
As of December 31, 2011, the most recent year end, for federal income tax purposes, the Fund had capital loss
carryforwards, which will expire in the indicated years:
Capital
Loss Carryforwards***
Expiration
Date
$
3,279,930
*
2012
8,679,337
*
2014
6,437,279
*
2015
90,161,614
* **
2016
282,026,384
2017
45,893,101
2018
11,831,412
N/A
+
Total
$
448,309,057
*
These capital loss carryforward amounts were acquired in the reorganizations of Prospect Street High Income Portfolio Inc (PHY) and Prospect Street Income
Shares Inc (CNN) into the Fund on July 18, 2008 and are available to offset future capital gains of the Fund. The Funds ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations.
**
This capital loss carryforward amount was acquired in the reorganization of Highland Distressed Opportunities, Inc. (HCD) into the Fund on June 12,
2009, and is available to offset future capital gains of the Fund. The Funds ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations.
***
The Funds ability to utilize the capital loss carryforward may be limited.
+
The Regulated Investment Company Modernization Act of 2010 (Modernization Act) was signed into law on December 22, 2010. Under the Modernization Act
the Fund will be permitted to carry forward indefinitely capital losses incurred in taxable years beginning after December 22, 2010 (Tax Year 2011 for the Fund). However, any losses incurred during those future taxable years must be utilized
prior to the losses incurred in pre-enactment taxable years. As a result, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character
as either short-term or long-term capital losses rather than being considered all short-term as under previous law.
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
Unrealized appreciation and depreciation at June 30, 2012, based on cost of investments for U.S. federal
income tax purposes was:
Gross unrealized appreciation
$
26,586,491
Gross unrealized depreciation
(251,336,884
)
Net unrealized depreciation
$
(224,750,393
)
Note 4. Investment Advisory, Administration, and Trustee Fees
Investment Advisory Fee
Effective June
14, 2012, the Investment Adviser to the Fund receives an annual fee, paid monthly, in an amount equal to 1.00% of the average weekly value of the Funds Managed Assets. The Funds Managed Assets is an amount equal to the total
assets of the Fund, including any form of leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness
of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other preference securities, (iii) the reinvestment of collateral received for
securities loaned in accordance with the Funds investment objectives and policies, and/or (iv) any other means. Prior to June 14, 2012, the Former Advisor received the same fee arrangement as described above. For its services, the Former
Advisor received $2,747,366, which is included in the Investment advisory fees in the Statement of Operations.
Administration Fee
Effective June 14, 2012, the Investment Adviser provides administrative services to the Fund. For its services, the Investment Adviser
receives an annual fee, payable monthly, in an amount equal to 0.20% of the average weekly value of the Funds Managed Assets. Under a separate sub-administration agreement, the Investment Adviser has delegated certain administrative functions
to BNY Mellon Investment Servicing (US) Inc. (BNY Mellon). The Investment Adviser pays BNY Mellon directly for these sub-administration services. Prior to June 14, 2012, the Former Advisor received the same fee arrangement as described
above. For its services, the Former Advisor received $549,473, which is included in the Administration fees in the Statement of Operations.
Fees Paid to Officers and Trustees
Each
Trustee who is not an interested person of the Fund as defined in the 1940 Act (the Independent Trustees) receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the
Pyxis Fund Complex based on relative net assets. The Pyxis Fund
Complex consists of all of the registered investment companies advised by the Investment Adviser and any affiliates as of the period covered by this annual report.
The Fund pays no compensation to its one interested Trustee or any of its officers, all of whom are employees of the Investment Adviser.
Note 5. Fund Information
For the six
months ended June 30, 2012, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $222,717,879 and $261,405,269, respectively.
Note 6. Senior Loan Participation Commitments
The Fund may invest its assets (plus any
borrowings for investment purposes) in adjustable rate senior loans (Senior Loans), the interest rates of which float or vary periodically based upon a benchmark indicator of prevailing interest rates to domestic or foreign corporations,
partnerships and other entities that operate in a variety of industries or geographic regions (Borrowers). If the lead lender in a typical lending syndicate becomes insolvent, enters Federal Deposit Insurance Corporation
(FDIC) receivership or, if not FDIC insured, enters into bankruptcy, the Fund may incur certain costs and delays in receiving payment or may suffer a loss of principal and/or interest.
When the Fund purchases a participation of a Senior Loan interest, the Fund typically enters into a contractual agreement with the lender or other third
party selling the participation, not with the Borrower directly. As such, the Fund assumes the credit risk of the Borrowers, as well as of the selling participants or other persons interpositioned between the Fund and the Borrowers. The ability of
Borrowers, selling participants or other persons interpositioned between the Fund and the Borrowers to meet their obligations may be affected by a number of factors, including economic developments in a specific industry.
At June 30, 2012, the Fund held no loans on participation.
Note 7. Credit Agreement
On February 2, 2011, the Fund entered into a $125,000,000
credit agreement with State Street Bank and Trust Company (the Credit Agreement). Concurrent with entering into the Credit Agreement, the Fund agreed to pay a $125,000 structuring fee, which was amortized ratably over the term of the
agreement. As of June 30, 2012, $11,851 of structuring fee is included in commitment fee expense on the Statement of Operations. The terms of the Credit Agreement require the Fund to pay 0.15% on the uncommitted balance and pay a spread of 1.25%
over LIBOR on amounts borrowed. In connection with the execution of the Credit Agreement, the
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
Fund amended the agreement with the holders of the Notes (the Amendment) (see Note 8) to allow for a secured credit facility provider.
On January 31, 2012, the Fund entered into an amendment (the Second Amendment), extending the Credit Agreement termination date from
January 31, 2012, to January 29, 2013. Additionally, the spread over LIBOR on amounts borrowed declined from 1.25% to 1.15%. As of June 30, 2012, the fair value of the outstanding Credit Agreement was estimated to be $50,494,817, and would
be categorized as Level 2 within the fair value hierarchy. The fair value was estimated based on discounting the cash flows owed using a discount rate of 0.50% over the 1 year risk free rate.
For the six month period ended June 30, 2012, the average daily loan balance was $37,967,033 at a weighted average interest rate of 1.39%, excluding any
commitment fee. With respect to these borrowings, interest expense of $250,397 and uncommitted balance fee of $66,000 are included in interest expense in the Statement of Operations.
Note 8. Floating Rate Series A Senior Secured Notes
On April 16, 2010, the Fund
issued $120,000,000 principal amount of floating rate Series A senior unsecured notes (Notes). The Notes bear interest, payable quarterly, at the rate of 3 month LIBOR, subject to a LIBOR floor of 1.00%, plus 1.70%, to maturity on
April 16, 2015. As of June 30, 2012, the carrying value of the outstanding Notes was $120 million, excluding accrued interest that was owed at that date. As of June 30, 2012, the fair value of the outstanding Notes was estimated to be
$124,377,602, and would be categorized as Level 2 within the fair value hierarchy. The fair value was estimated based on discounting the cash flows owed using a discount rate of 0.50% over the 5 year risk free rate.
The Amendment changed the status of the Notes from unsecured to secured pari pasu with State Street Bank and Trust Company.
The Fund is required to maintain on a monthly basis a specified discounted asset value for its portfolio in compliance with guidelines established in the
Notes agreement. The Fund is required under the 1940 Act to maintain asset coverage for the Notes and Credit Agreement at 300%. The Fund may prepay the Notes at any time, and is subject to the following prepayment penalty on any amounts prepaid:
2.00% in the first two years, 1.00% in year three, and 0% thereafter.
The interest rate charged at June 30, 2012, was 2.70%. The average daily
note balance was $120,000,000 at a weighted average interest rate of 2.70%. With respect to the Notes, interest expense of $1,638,000 is included in interest expense in the Statement of Operations.
Note 9. Asset Coverage
The Fund is required to maintain 300% asset coverage with respect to amounts outstanding under the Credit Agreement and the Notes.
Asset coverage is calculated by subtracting the Funds total liabilities, not including any amount representing bank loans and senior securities, from the Funds total assets and dividing the
result by the principal amount of the borrowings outstanding. As of the dates indicated below, the Funds debt outstanding and asset coverage was as follows:
Date
Total Amount
Outstanding
%
of Asset Coverage of Indebtedness
06/30/2012
$
170,000,000
361.4
%
12/31/2011
173,000,000
356.1
12/31/2010
120,000,000
510.6
12/31/2009
112,000,000
509.6
12/31/2008
141,000,000
356.2
12/31/2007
248,000,000
350.4
Note 10. Securities Loans
The Fund may make secured loans of its portfolio securities amounting to not more than one-third of the value of its total assets, thereby realizing additional income. The risks in lending portfolio
securities, as with other extensions of credit, consist of possible delays in recovery of the securities or possible loss of rights in the collateral should the borrower fail financially and possible investment losses in the investment of
collateral. Pursuant to the Funds securities lending policy, securities loans are made to unaffiliated broker-dealers pursuant to agreements requiring that loans be continuously secured by collateral in cash or short-term debt obligations at
least equal at all times to the bid value of the securities subject to the loan. The borrower pays to the Fund an amount equal to any interest or dividends received on securities subject to the loan. The Fund retains all or a portion of the interest
received on investment of the cash collateral and receives a fee from the borrower. As of June 30, 2012, the market value of securities loaned by the Fund was $2,483. The loaned securities were secured with cash collateral of $19,860, which was
invested in the BlackRock Institutional Money Market Trust.
Note 11. Unfunded Loan Commitments
As of June 30, 2012 the Fund had unfunded loan commitments of $2,877,675, which could be extended at the option of the borrower, as detailed below:
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
Unfunded loan commitments are marked to market on the relevant day of valuation in accordance with the Funds valuation policies. Any applicable
unrealized gain/(loss) and unrealized appreciation/(depreciation) on unfunded loan commitments are recorded on the Statement of Assets and Liabilities and the Statement of Operations, respectively. As of June 30, 2012 the Fund recognized net
discount and unrealized depreciation on unfunded transactions of $(525,443). The net change in unrealized depreciation on unfunded transactions of $(62,221) is recorded in the Statement of Operations.
Note 12. Affiliated Issuers
Under
Section 2(a)(3) of the 1940 Act, a portfolio company is defined as affiliated if a Fund owns five percent or more of its outstanding voting securities. The Fund held at least five percent of the outstanding voting securities of the
following companies as of June 30, 2012:
Par Value at June 30, 2012
Shares at June 30, 2012
Market Value
Issuer
December 31, 2011
June 30, 2012
Affiliated Income
Purchases
Sales
ComCorp Broadcasting, Inc. (Senior Loans)*
$
37,331,876
$
37,232,080
$
36,335,115
$
1,856,137
$
98,612
$
2,211,677
Communications Corp of America (Common Stock)
2,010,616
Genesys Ventures IA, LP (Common Stock)
24,000,000
41,040,000
40,080,000
LLV Holdco, LLC (Senior Loans)
7,266,478
6,363,641
6,721,492
464,234
1,053,417
LLV Holdco, LLC (Senior Loans)
1,399,073
527,212
1,399,983
92,066
828,924
LLV Holdco, LLC Series A Membership Interest (Common Stock)
26,712
2,640,973
321,073
LLV Holdco, LLC Series B Membership Interest (Common Stock)
144
14,247
1,732
LLV Holdco, LLC Litigation Trust Units (Common Stock)
13
LLV Holdco, LLC Series C Membership Interest (Warrants)
602
LLV Holdco, LLC Series D Membership Interest (Warrants)
828
LLV Holdco, LLC Series E Membership Interest (Warrants)
925
LLV Holdco, LLC Series F Membership Interest (Warrants)
1,041
LLV Holdco, LLC Series G Membership Interest (Warrants)
1,179
$
45,997,427
26,042,060
$
87,818,153
$
84,859,395
$
2,412,437
$
1,980,953
$
2,211,677
*
Company is a wholly owned subsidiary of Communications Corp. of America.
Note 13. Indemnification
The Fund has a variety of indemnification obligations under contracts with its service providers and certain counterparties. The Funds maximum exposure under these arrangements is unknown. The Board
has approved the advancement of certain expenses to a service provider in connection with pending litigation subject to various undertakings and reporting requirements.
Note 14. Disclosure of Significant Risks and Contingencies
Concentration Risk
The Fund may focus its investments in instruments of only a few companies. The concentration of the Funds portfolio in any one
obligor would subject the Fund to a greater degree
of risk with respect to defaults by such obligor, and the concentration of the portfolio in any one industry would subject the Fund to a greater degree of risk with respect to economic downturns
relating to such industry.
Non-Payment Risk
Corporate debt obligations, including Senior Loans, are subject to the risk of non-payment of scheduled interest and/or principal. Non-payment would result in a reduction of income to the Fund, a
reduction in the value of the Senior Loan experiencing non-payment, and a potential decrease in the net asset value of the Fund.
Credit
Risk
Investments rated below investment grade are commonly referred to as high-yield, high risk or junk debt. They are
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
regarded as predominantly speculative with respect to the issuing companys continuing ability to meet principal and/or interest payments. Investments in high yield Senior Loans may result
in greater net asset value fluctuation than if the Fund did not make such investments.
Illiquidity of Investments Risk
The investments made by the Fund may be illiquid, and consequently the Fund may not be able to sell such investments at prices that reflect the Investment
Advisers assessment of their value or the amount originally paid for such investments by the Fund. Illiquidity may result from the absence of an established market for the investments as well as legal, contractual or other restrictions on
their resale and other factors. Furthermore, the nature of the Funds investments, especially those in financially distressed companies, may require a long holding period prior to profitability.
Troubled, Distressed or Bankrupt Companies Risk
The Fund invests in companies that are troubled, in distress or bankrupt. As such, they are subject to a multitude of legal, industry, market, environmental and governmental forces that make analysis of
these companies inherently difficult. Further, the Investment Adviser relies on company management, outside experts, market participants and personal experience to analyze potential investments for the Fund. There can be no assurance that any of
these sources will prove credible, or that the resulting analysis will produce accurate conclusions.
Leverage Risk
The Fund uses leverage (see Notes 7 and 8) through borrowings from notes and a credit facility, and may also use leverage through the issuances of
preferred shares. The use of leverage, which can be described as exposure to changes in price at a ratio greater than the amount of equity invested, either through the issuance of preferred shares, borrowing or other forms of market exposure,
magnifies both the favorable and unfavorable effects of price movements in the investments made by the Fund. Insofar as the Fund employs leverage in its investment operations, the Fund will be subject to substantial risks of loss.
Foreign Securities Risk
Investments in
foreign securities involve certain factors not typically associated with investing in U.S. securities, such as risks relating to (i) currency exchange matters, including fluctuations in the rate of exchange between the U.S. dollar (the currency
in which the books of the Fund are maintained) and the various foreign currencies in which the Funds portfolio securities will be denominated and costs associated with conversion of investment principal and income from
one currency into another; (ii) differences between the U.S. and foreign securities markets, including the absence of uniform accounting, auditing and financial reporting standards and
practices and disclosure requirements, and less government supervision and regulation; (iii) political, social or economic instability; and (iv) the extension of credit, especially in the case of sovereign debt.
Forward Currency Contracts Risk
The
Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use forward contracts to gain exposure to, or hedge against changes in the value of foreign currencies. A forward
contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. Upon entering into such contracts, daily fluctuations in the value of the contract are recorded for financial statement purposes
as unrealized gains or losses by the Fund. At the expiration of the contracts the Fund realizes the gain or loss. Upon entering into such contracts, the Fund bears the risk of exchange rates moving unexpectedly, in which case, the Fund may not
achieve the anticipated benefits of the forward contracts and may realize a loss. With forwards, there is counter-party credit risk to the Fund because the forwards are not exchange traded, and there is no clearinghouse to guarantee the forwards
against default.
Emerging Markets Risk
Investing in securities of issuers based in underdeveloped emerging markets entails all of the risks of investing in foreign securities to a heightened degree. These heightened risks include:
(i) greater risks of expropriation, confiscatory taxation, nationalization, and less social, political and economic stability; (ii) the smaller size of the markets for such securities and a lower volume of trading, resulting in lack of
liquidity and in price volatility; and (iii) certain national policies which may restrict the Funds investment opportunities, including restrictions on investing in issuers or industries deemed sensitive to relevant national interest.
Derivatives Risk
Derivative
transactions in which the Fund may engage for hedging or speculative purposes to enhance total return, including engaging in transactions such as options, futures, swaps, foreign currency transactions (including forward foreign currency contracts,
currency swaps or options on currency and currency futures) and other derivative transactions, involve certain risks and considerations. These risks include the imperfect correlation between the value of such instruments and the underlying assets,
the possible default of the other party to the transaction or illiquidity of the derivative instruments. Furthermore, the ability to successfully use derivative transactions depends on the Investment Advisers ability to predict pertinent
market
NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2012
NexPoint Credit Strategies Fund
movements, which can not be assured. Thus, the use of derivative transactions may result in losses greater than if they had not been used, may require the Fund to sell or purchase portfolio
securities at inopportune times or for prices other than current market value, may limit the amount of appreciation the Fund can realize on an investment or may cause the Fund to hold a security that it might otherwise sell.
Investments in Swaps Risk
Investments
in swaps involve the exchange with another party of commitments to pay a stream of payments. The use of swaps subjects the Fund to the risk of default by the counterparty. If there is a default by the counterparty to such a transaction, there may be
contractual remedies pursuant to the agreements related to the transaction although contractual remedies may not be sufficient in the event the counterparty is insolvent. However, the swap market has grown substantially in recent years with a large
number of banks and investment banking firms acting both as principals and agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which
are traded in the interbank market. The Fund may enter into total return swaps, credit default swaps, currency swaps or other swaps which may be surrogates for other instruments such as currency forwards or options.
Regulatory Risk
Recent legislation has
called for a new regulatory framework for the derivatives market. The impact of the new regulations are still unknown, but has the potential to increase the costs of using derivatives, may limit the availability of some forms of derivatives or the
Funds ability to use derivatives, and may adversely affect the performance of some derivative instruments used by the Fund as well as the Funds ability to pursue its investment objective through the use of such instruments.
Counterparty Credit Risk
Counterparty
credit risk is the potential loss the Fund may incur as a result of the failure of a counterparty or an issuer to make payment according to the terms of a contract. Counterparty credit risk is measured as the loss the Fund would record if its
counterparties failed to perform pursuant to the terms of their obligations to the Fund. Because the Fund may enter into over-the-counter forwards, options, swaps and other derivatives financial instruments, the Fund is exposed to the credit risk of
its counterparties. To limit the counterparty credit risk associated with such transactions, the Fund conducts business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.
Short Selling Risk
Short selling involves selling securities which may or may not be owned and borrowing the same securities for delivery to the purchaser, with an obligation to replace the borrowed securities at a later
date. The Fund will profit from declines in the market prices of securities sold short to the extent such decline exceeds the transaction costs and the costs of borrowing the securities. However, since the borrowed securities must be replaced by
purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. There can be no assurance that the securities necessary to cover a short position will be available
for purchase.
Note 15. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has determined that there were no subsequent events that would
materially impact the financial statements as presented.
The Investment Adviser and its affiliates manage other accounts, including registered and private funds and individual accounts. Although investment decisions for the Fund are made independently from
those of such other accounts, the Investment Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts that may be the same or different from those made to the Fund, including investments in different
levels of the capital structure of a company, such as equity versus senior loans, or that involve taking contradictory positions in multiple levels of the capital structure. The Investment Adviser has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless,
this may create situations where a client could be disadvantaged because of the investment activities conducted by the Investment Adviser for other client accounts. When the Fund and one or more of such other accounts is prepared to invest in, or
desires to dispose of, the same security, available investments or opportunities for each will be allocated in a manner believed by the Investment Adviser to be equitable to the fund and such other accounts. The Investment Adviser also may aggregate
orders to purchase and sell securities for the Fund and such other accounts. Although the Investment Adviser believes that, over time, the potential benefits of participating in volume transactions and negotiating lower transaction costs should
benefit all accounts including the Fund, in some cases these activities may adversely affect the price paid or received by the Fund or the size of the position obtained or disposed of by the Fund.
Dividend Reinvestment Plan
Unless the
registered owner of Common Shares elects to receive cash by contacting BNY Mellon (the Plan Agent), as agent for shareholders in administering the Funds dividend reinvestment plan (the Plan), all dividends declared for
Common Shares of the Fund will be automatically reinvested by BNY Mellon in additional Common Shares of the Fund. If a registered owner of Common Shares elects not to participate in the Plan, they will receive all dividends in cash paid by check
mailed directly to them (or, if the shares are held in street or other nominee name, then to such nominee) by BNY Mellon, as dividend disbursing agent. Shareholders may elect not to participate in the Plan and to receive all dividends in cash by
sending written instructions or by contacting BNY Mellon, as dividend disbursing agent, at the address set forth below. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by contacting the
Plan Agent
before the dividend record date; otherwise such termination or resumption will be effective with respect to any subsequently declared dividend or other distribution. Some brokers may
automatically elect to receive cash on the shareholders behalf and may reinvest that cash in additional Common Shares of the Fund for them.
The Plan Agent will open an account for each shareholder under the Plan in the same name in which such shareholders Common Shares are registered. Whenever the Fund declares a dividend or other
distribution (together, a dividend) payable in cash, non-participants in the Plan will receive cash and participants in the Plan will receive the equivalent in Common Shares. The Common Shares will be acquired by the Plan Agent for the
participants accounts, depending upon the circumstances described below, either (i) through receipt of additional unissued but authorized Common Shares from the Fund (newly issued Common Shares) or (ii) by purchase of
outstanding Common Shares on the open market (open-market purchases) on the New York Stock Exchange or elsewhere.
If, on the
payment date for any dividend, the market price per Common Share plus estimated brokerage commissions is greater than the net asset value per Common Share (such condition being referred to herein as market premium), the Plan Agent will
invest the dividend amount in newly issued Common Shares, including fractional shares, on behalf of the participants. The number of newly issued Common Shares to be credited to each participants account will be determined by dividing the
dollar amount of the dividend by the net asset value per Common Share on the payment date; provided that, if the net asset value per Common Share is less than 95% of the market price per Common Share on the payment date, the dollar amount of the
dividend will be divided by 95% of the market price per Common Share on the payment date.
If, on the payment date for any dividend, the net
asset value per Common Share is greater than the market value per common share plus estimated brokerage commissions (such condition being referred to herein as market discount), the Plan Agent will invest the dividend amount in Common
Shares acquired on behalf of the participants in open-market purchases.
In the event of a market discount on the payment date for any
dividend, the Plan Agent will have until the last business day before the next date on which the Common Shares trade on an ex-dividend basis or 120 days after the payment date for such dividend, whichever is sooner (the last
purchase date), to invest the dividend amount in Common Shares acquired in open-market purchases. It is contemplated that the Fund will pay monthly dividends. Therefore, the period during which open-market purchases can be made will exist
only from the payment date of each dividend through the date before the ex-dividend date of the third month of the quarter. If, before the Plan Agent has completed its open-market
purchases, the market price of a Common Share exceeds the net asset value per Common Share, the average per Common Share purchase price paid by the Plan Agent may exceed the net asset value of the Common Shares, resulting in the acquisition of fewer
common shares than if the dividend had been paid in newly issued Common Shares on the dividend payment date. Because of the foregoing difficulty with respect to open market purchases, if the Plan Agent is unable to invest the full dividend amount in
open market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent may cease making open-market purchases and may invest the uninvested portion of the dividend amount in
newly issued Common Shares at the net asset value per Common Share at the close of business on the last purchase date; provided that, if the net asset value per Common Share is less than 95% of the market price per Common Share on the payment date,
the dollar amount of the dividend will be divided by 95% of the market price per Common Share on the payment date.
The Plan Agent maintains
all shareholders accounts in the Plan and furnishes written confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Common Shares in the account of each Plan participant will be held by
the Plan Agent on behalf of the Plan participant, and each shareholder proxy will include those shares purchased or received pursuant to the Plan. The Plan Agent will forward all proxy solicitation materials to participants and vote proxies for
shares held under the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or
nominees which hold shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of Common Shares certified from time to time by the record shareholders name and held for the account of
beneficial owners who participate in the Plan.
There will be no brokerage charges with respect to Common Shares issued directly by the Fund.
However, each participant will pay a pro rata share of brokerage commissions incurred in connection with open-market purchases. The automatic reinvestment of dividends will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Accordingly, any taxable dividend received by a participant that is reinvested in additional Common Shares will be subject to federal (and possibly state and local) income tax even though
such participant will not receive a corresponding amount of cash with which to pay such taxes. Participants who request a sale of shares through the Plan Agent are
subject to a $2.50 sales fee and pay a brokerage commission of $0.05 per share sold.
The
Fund reserves the right to amend or terminate the Plan. 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.
All correspondence concerning the Plan should be directed to the Plan Agent at BNY Mellon, 301 Bellevue Parkway, Wilmington, Delaware 19809; telephone
(877) 665-1287.
Approval of Novation of Investment Advisory Agreement
The Trustees, including the Independent Trustees, approved the novation of the Funds investment advisory agreement from Pyxis to NexPoint (the Novation) at a meeting held on June 8,
2012. In reviewing the Novation, the Board determined that NexPoint would provide the same services and the same level of service as Pyxis. (See also Note 1.)
This report has been prepared for shareholders of NexPoint Credit Strategies Fund (the Fund).
The Fund mails one shareholder report to each shareholder address. If you would like more than one report, please call shareholder services at 1-877-665-1287 to request that additional reports be sent to you.
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to its portfolio securities, and the
Funds proxy voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling 1-877-665-1287 and (ii) on the SECs website at http://www.sec.gov.
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. The Funds
Forms N-Q are available on the SECs website at http://www.sec.gov and also may be reviewed and copied at the SECs Public Reference Room in Washington, DC. Information on the Public Reference Room may be obtained by calling
1-800-SEC-0330. Shareholders may also obtain the Form N-Q by visiting the Funds website at www.NexPointAdvisors.com.
On June 12, 2012,
the Fund submitted a CEO annual certification to the New York Stock Exchange (NYSE) on which the Funds principal executive officer certified that he was not aware, as of the date, of any violation by the Fund of the NYSEs
Corporate Governance listing standards. In addition, as required by Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Funds principal executive officer and principal financial officer made quarterly certifications,
included in filings with the SEC on Forms N-CSR and N-Q relating to, among other things, the Funds disclosure controls and procedures and internal controls over financial reporting, as applicable.
Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under
Item 1 of this form.
(b)
Not applicable.
Item 7. Disclosure of
Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
There has been no change, as of the date of this filing, in any of the portfolio managers identified in response to paragraph (a)(1) of this Item in the
registrants most recently filed annual report on Form N-CSR.
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.
There have been no
material changes to the procedures by which the shareholders may recommend nominees to the registrants board of directors.
Item 11. Controls and Procedures.
(a)
The registrants principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrants
disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the 1940 Act) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that
includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of
1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b)
There were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that
occurred during the registrants second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting.
Item 12. Exhibits.
(a)(1)
Not applicable.
(a)(2)
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3)
Not applicable.
(b)
Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(registrant) NexPoint Credit Strategies Fund (formerly, Pyxis
Credit Strategies Fund)
By (Signature and Title)*
/s/ Ethan Powell
Ethan Powell, Executive Vice President and Principal Executive Officer
(principal executive officer)
Date 9/5/12
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 (Signature and Title)*
/s/ Ethan Powell
Ethan Powell, Executive Vice President and Principal Executive Officer
(principal executive officer)
Date 9/5/12
By (Signature and Title)*
/s/ Brian Mitts
Brian Mitts, Chief Financial Officer and Treasurer
(principal financial officer)
Date 9/5/12
*
Print the name and title of each signing officer under his or her signature.