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:
Ÿ
Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone
contacts;
Ÿ
Web site information, including any information captured through the use of “cookies”; and
Ÿ
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, 2013
$545.6 million
Portfolio Data as of June 30, 2013
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 06/30/2013 (%)(1)
AAA
1.1
AA
0.4
A
1.1
BBB
10.8
BB
20.6
B
22.9
CCC
21.0
CC
0.8
C
1.0
NR(2)
20.3
Top 5 Sectors as of 06/30/2013 (%)(1)
Financial
23.1
(3)
Broadcasting
10.8
Consumer Discretionary
9.2
Telecommunications
6.5
Utility
6.0
Top 10 Holdings as of 06/30/2013 (%)(1)
New Young Broadcasting Holding Co., Inc., Class A (Common Stocks)
Corrections Corp. of America, REIT (Common Stocks)
2.4
AMR Corp. (Common Stocks)
2.3
Texas Competitive Electric Holdings Co. LLC (US Senior Loans)
2.2
Sony Corp. ADR (Common Stocks)
2.2
Spirit Realty Capital, Inc., REIT (Common Stocks)
2.2
DeVry, Inc. (Common Stocks)
2.1
(1)
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. 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 Fund’s portfolio and
not the Fund itself. Quality ratings are subject to change. Top Holdings and Top Sectors exclude the Fund’s investment in an investment company purchased with cash collateral from securities lending.
(2)
NR is a designation for a security that is not rated by a Nationally Recognized Statistical Rating Organization.
A guide to understanding the Fund’s financial statements
Consolidated Investment Portfolio
The Consolidated Investment Portfolio details all of the Fund’s 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.
Consolidated Statement of Assets and Liabilities
This statement details the Fund’s 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
Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s 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.
Consolidated Statement of Operations
This statement reports income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Consolidated 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 Fund’s net increase or decrease in net assets from operations
applicable to common shareholders.
Consolidated Statements of Changes in Net Assets
These statements detail how the Fund’s 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 Consolidated Statements of Changes in Net Assets also detail changes in the number of common shares outstanding.
Consolidated 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 Fund’s net asset value per common share was affected by the Fund’s operating results. The Financial Highlights also disclose the
Fund’s performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).
Notes to Consolidated 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.
State Street Navigator Prime Securities Lending Portfolio
995,478
Total Investment Companies (Cost $995,478)
995,478
Total Investments - 149.9%
818,051,602
(Cost $992,249,638) (n)
$23,729,870 in cash was segregated or on deposit with the brokers to cover
investments sold short as of June 30, 2013 and is included in “Other Assets & Liabilities, Net”.
Securities Sold Short - (5.8)%
Common Stocks - (1.6)%
ENERGY - (1.6)%
434,800
Chesapeake Energy Corp.
(8,861,224
)
Total Common Stocks (Proceeds $8,381,998)
(8,861,224
)
Exchange-Traded Funds - (4.2)%
416,000
ProShares Ultra DJ-UBS Crude Oil, ETF (o)
(12,521,600
)
106,100
iShares Russell 2000 Index Fund, ETF
(10,308,676
)
Total Exchange-Traded Funds (Proceeds $22,605,382)
(22,830,276
)
Total Securities Sold Short (Proceeds $30,987,380)
(31,691,500
)
Other Assets & Liabilities, Net - (44.1)%
(240,778,385
)
Net Assets - 100.0%
545,581,717
(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, all senior loans carry a variable rate of interest). These base lending rates are generally (j) 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, 2013.
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, cannot be predicted with accuracy. As a result, the actual remaining maturity may be
substantially less than the stated maturity shown.
(b)
Affiliated issuer. Assets with a total aggregate market value of $141,780,704, or 21.3% of net assets, were affiliated with the Fund as of June 30, 2013.
(c)
Represents fair value as determined by the Fund’s 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 value of $88,011,187, or 16.1% of net assets, were fair valued under the Fund’s valuation procedures as of June 30, 2013.
(d)
All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
(e)
The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued.
8
See accompanying Notes to Consolidated Financial Statements.
Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional
buyers. At June 30, 2013, these securities amounted to $253,321,473 or 46.4% of net assets.
(h)
Variable or floating rate security. The interest rate shown reflects the rate in effect June 30, 2013.
(i)
Security purchased on a when-issued basis. As of June 30, 2013, assets with a total aggregate market value of $10,847,940, or 2.0% of net assets, were purchased on a when-issued
basis.
(j)
All or part of this security is pledged as collateral for short sales. The market value of the securities pledged as collateral was $55,601,787.
(k)
Securities (or a portion of securities) on loan. As of June 30, 2013, the market value of securities loaned was $981,857. The loaned securities were secured with cash
collateral of $995,478. Collateral is calculated based on prior day’s prices. See Note 5.
(l)
Non-income producing security.
(m)
Represents investments of cash collateral received in connection with securities lending.
(n)
Cost for U.S. federal income tax purposes is $998,196,682.
(o)
No dividend payable on security sold short.
(p)
All or part of the security is pledged as collateral for the Committed Facility Agreement with BNPP PB, Inc. The market value of the securities pledged as collateral was
$225,111,936. See Note 7.
(q)
Investment is part of the wholly-owned REIT which has been consolidated for reporting purposes. See Note 10.
Currency Abbreviations:
EUR
Euro Currency
GBP
British Pound
Glossary:
ADR
American Depositary Receipt
CDO
Collateralized Debt Obligation
CLO
Collateralized Loan Obligation
ETF
Exchange-Traded Fund
PIK
Payment-in-Kind
PLC
Public Limited Company
PNC
PNC Capital Markets LLC
REIT
Real Estate Investment Trust
Forward foreign currency exchange contracts outstanding as of June 30, 2013 were as follows:
Contracts to Buy or to Sell
Currency
Counter - party
Principal Amount Covered by Contracts
Expiration
Unrealized Appreciation/ (Depreciation)
Sell
EUR
PNC
4,615,000
08/01/2013
$
266,498
Foreign Denominated or Domiciled Senior
Loans and Foreign Corporate Bonds & Notes Industry Concentration Table: (% of Net Assets)
Telecommunications
4.1
%
Service
1.9
%
Chemicals
1.1
%
Retail
0.1
%
Total
7.2
%
See accompanying Notes to Consolidated Financial Statements.
Unaffiliated issuers, at value (cost $770,972,286)
676,270,898
Affiliated issuers, at value (cost $221,277,352) (Note 14)
141,780,704
Total investments, at value (cost $992,249,638)
818,051,602
Cash and foreign currency*
2,967,207
Restricted Cash — Securities sold short (Note 2)
23,729,870
Net unrealized appreciation on forward foreign currency exchange contracts
266,498
Receivable for:
Investments sold
32,625,943
Dividends & Interest receivable
10,302,857
Other assets
200,000
Total assets
888,143,977
Liabilities:
Notes payable (Notes 7 and 8)
235,000,000
Securities sold short, at value (Proceeds $30,987,380) (Note 2 and Note 12)
31,691,500
Payable upon receipt of securities loaned (Note 5)
995,478
Payables for:
Investments purchased
73,291,244
Investment advisory fee payable (Note 11)
605,122
Administration fee (Note 11)
131,503
Trustees’ fees (Note 11)
51,685
Interest expense (Notes 7 and 8)
311,867
Accrued expenses and other liabilities
483,861
Total Liabilities
342,562,260
Net Assets Applicable To Common Shares
545,581,717
Composition of Net Assets:
Par value of common shares (Note 1)
63,881
Paid-in capital in excess of par value of common shares
1,139,566,517
Undistributed net investment income
8,065,727
Accumulated net realized gain/(loss) from investments, securities sold short, written options and foreign currency
transactions
(427,467,980
)
Net unrealized appreciation/(depreciation) on investments, securities sold short, written options, forward foreign currency exchange
contracts and translation of assets and liabilities denominated in foreign currency
(174,646,428
)
Net Assets Applicable to Common Shares
545,581,717
Common Shares
Net assets
545,581,717
Shares outstanding (unlimited authorization)
63,881,473
Net asset value per share (Net assets/shares outstanding)
8.54
*
Includes foreign currency held at value of $1,319,918, with a cost of $1,328,805.
10
See accompanying Notes to Consolidated Financial Statements.
Net realized gain/(loss) on investments, securities sold short, written options, forward foreign currency contracts and foreign currency
transactions
38,716,774
(8,429,212
)
Net unrealized appreciation/(depreciation) on investments, securities sold short, written options, forward foreign currency contracts and
translation of assets and liabilities denominated in foreign currency
26,574,863
41,426,537
Net change in net assets from operations
85,224,818
60,365,264
Distributions Declared to Common Shareholders
From net investment income
(15,906,487
)
(27,149,626
)
Total distributions declared to common shareholders
(15,906,487
)
(27,149,626
)
Share Transactions from Common Shares
Net increase (decrease) from share transactions from common shares
—
—
Total increase in net assets from common shares
69,318,331
33,215,638
Net Assets Applicable to Common Shares
Beginning of period
476,263,386
443,047,748
End of period (including undistributed net investment income of $8,065,727 and $4,039,033, respectively)
545,581,717
476,263,386
Change in Common Shares
Net increase (decrease) in common shares
—
—
12
See accompanying Notes to Consolidated Financial Statements.
Adjustments to Reconcile Net Investment Income to Net Cash Provided by Operating Activities
Purchases of investment securities
(635,801,036
)
Proceeds from disposition of investment securities
580,175,580
Purchases of purchased options
(1,353,814
)
Proceeds from the disposition of purchased options
220,791
Purchases of securities sold short
34,142,900
Proceeds from disposition of securities sold short
(8,243,574
)
Net premium received on written options
1,355,645
Paydowns at cost
3,891,297
Net amortization/(accretion) of premium/(discount)
(3,181,382
)
Net realized gain on investments, securities sold short, written options, forward foreign currency exchange contracts and foreign currency
related transactions
(38,716,774
)
Net change in unrealized appreciation on investments, securities sold short, written options, forward foreign currency exchange contracts
and foreign currency related translations
(26,574,863
)
Net change in short-term investments
(995,478
)
Increase in restricted cash
(22,074,979
)
Decrease in cash held with prime broker
3,464,191
Decrease in receivable for investments sold
4,417,968
Increase in dividends and interest receivable
(5,900,803
)
Increase in receivable for other assets
(185,583
)
Increase in payable for investments purchased
60,122,690
Decrease in payable for distributions
(77,628
)
Increase in payables to related parties
44,026
Increase in payable upon receipt of securities loaned
975,618
Decrease in payable to prime broker
(21,791,386
)
Decrease in payable for interest expense
(434,791
)
Decrease in dividends payable on securities sold short
(3,888
)
Increase in accrued expenses and other liabilities
124,765
Net cash flow provided by operating activities
8,824,310
Cash Flows Used in Financing Activities
Increase in notes payable
10,000,000
Distributions paid in cash
(15,906,487
)
Net cash flow used in financing activities
(5,906,487
)
Effect of exchange rate changes on cash
(20,031
)
Net increase in cash
2,897,792
Cash & Foreign Currency
Beginning of the period
69,415
End of the period
2,967,207
Supplemental non-cash information:
Cash paid during the year for interest
2,009,677
See accompanying Notes to Consolidated Financial Statements.
Selected data for a share outstanding throughout each period is as follows:
For the Six Months Ended June 30, 2013 (unaudited)
Years Ended December 31,
Common Shares Per Share Operating Performance:
2012
2011
2010
2009
2008
Net Asset Value, Beginning of Period
$
7.46
$
6.94
$
7.72
$
7.20
$
6.51
$
17.99
Income from Investment Operations:
Net investment income
0.31
0.43
0.47
0.59
0.74
1.35
Net realized and unrealized gain/(loss) on investments
1.02
0.52
(0.72
)
0.56
0.74
(9.79
)
Total from investment operations
1.33
0.95
(0.25
)
1.15
1.48
(8.44
)
Less Distributions Declared to Common Shareholders:
From net investment income
(0.25
)
(0.43
)
(0.53
)
(0.63
)
(0.79
)
(1.46
)
From net realized gains
—
—
—
—
—
(0.26
)
Total distributions declared to common shareholders
(0.25
)
(0.43
)
(0.53
)
(0.63
)
(0.79
)
(1.72
)
Dilutive impact of rights offering
—
—
—
—
—
(1.32
)
Net Asset Value, End of Period
$
8.54
$
7.46
$
6.94
$
7.72
$
7.20
$
6.51
Market Value, End of Period
$
7.87
$
6.64
$
6.18
$
7.58
$
6.31
$
5.70
Market Value Total Return(a)
22.46
%(b)
14.73
%
(12.18
)%
30.76
%
27.69
%
(57.84
)%
Ratios and Supplemental Data:
Net assets, end of period (in 000’s)
$
545,582
$
476,263
$
443,048
$
492,753
$
458,764
$
361,211
Common Share Information at End of Period:
Ratios based on average net assets of common shares:
Gross operating expenses (excluding interest and commitment fee expense)(c)
2.16
%(d)
2.22
%
2.23
%
2.13
%
2.41
%
2.32
%
Interest and commitment fee expense
0.77
%(d)
0.92
%
0.92
%
1.01
%
1.49
%
1.63
%
Fees and expenses waived
N/A
N/A
N/A
(0.14
)%
(0.31
)%
(0.09
)%
Net operating expenses (including interest and commitment fee expense)(c)
2.93
%(d)
3.14
%
3.15
%
3.00
%
3.59
%
3.86
%
Net investment income
7.67
%(d)
6.00
%
6.24
%
7.92
%
11.09
%
11.36
%
Ratios based on managed net assets of common shares:
Gross operating expenses (excluding interest and commitment fee expense)(c)
1.53
%(d)
1.60
%
1.61
%
1.70
%
1.93
%
1.65
%
Interest and commitment fee expense
0.55
%(d)
0.66
%
0.66
%
0.81
%
1.19
%
1.16
%
Fees and expenses waived
N/A
N/A
N/A
(0.11
)%
(0.25
)%
(0.06
)%
Net operating expenses (including interest and commitment fee expense)(c)
2.08
%(d)
2.26
%
2.27
%
2.40
%
2.87
%
2.75
%
Net investment income
5.43
%(d)
4.32
%
4.50
%
6.34
%
8.88
%
8.12
%
Portfolio turnover rate
61
%(b)
92
%
52
%
91
%
88
%
78
%
(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 Fund’s Dividend
Reinvestment Plan.
(b)
Not annualized.
(c)
Includes dividends and expenses on securities sold short.
(d)
Annualized.
14
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
June 30, 2013
NexPoint Credit Strategies Fund
Note 1. Organization
NexPoint 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. Freedom REIT is a wholly-owned subsidiary of the Fund organized under the laws of Delaware as a Real Estate Investment Trust (the
“Subsidiary”). The Fund’s Consolidated Schedule of Investments, Consolidated Statement of Assets and Liabilities, Consolidated Statement of Operations, Consolidated Statement of Changes in Net Assets and Consolidated Statement of Cash
Flows include the accounts of both NexPoint Credit Strategies Fund and the Subsidiary. The consolidated financial statements include information for the fiscal period ended June 30, 2013. The Fund trades on the New York Stock Exchange under the
ticker symbol NHF. 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. NexPoint Advisors, L.P. (“NexPoint”) or
“Investment Advisor”, an affiliate of Highland Capital Management Fund Advisors, L.P. (formerly Pyxis Capital, L.P. (“Highland”), is the investment advisor and administrator to the Fund.
Note 2. Significant Accounting Policies
The following
summarizes the significant accounting policies consistently followed by the Fund in the preparation of its financial statements.
Use of Estimates
The Fund’s 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
Fund’s common shares is calculated daily. The NAV is calculated by dividing the value of the Fund’s net assets attributable to common shares by the numbers of common shares outstanding.
Valuation of Investments
In computing the Fund’s 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 Fund’s 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 Advisor”) 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 Fund’s 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 Fund’s 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 security’s 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.
There can be no assurance that the
Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. 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 CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
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 Fund’s 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 investment’s 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 Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.
The Investment Adviser has established policies, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels
of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser. The Pricing Committee
meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of those policies.
As of June 30, 2013, the Fund’s investments consisted of senior loans, asset-backed securities, corporate
bonds and notes, claims, common stock, preferred stock, exchange-traded funds, interests in a REIT and warrants. The fair value of the Fund’s loans, bonds and asset-backed securities are generally based on quotes received from brokers or
independent pricing services. Loans, bonds and asset-backed securities 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 Fund’s 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 Fund’s 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
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 Fund’s assets as of June 30, 2013 is as follows:
Total value at
June 30, 2013
Level 1 Quoted Price
Level 2 Significant Observable Inputs
Level
3 Significant Unobservable
Inputs
NexPoint Credit Strategies Fund
Assets
U.S. Senior Loans
$
177,374,642
$
—
$
135,167,233
$
42,207,409
Foreign Denominated or Domiciled Senior Loans
462,398
—
223,333
239,065
Asset-Backed Securities
147,189,213
—
133,522,044
13,667,169
Corporate Bonds & Notes
89,821,883
—
81,296,411
8,525,472
(2)
Foreign Corporate Bonds & Notes
38,591,514
—
38,591,514
—
Claims(1)
—
—
—
—
(2)
Common Stocks
Broadcasting
57,321,731
—
47,145,400
10,176,331
Consumer Discretionary
81,867,521
81,867,521
—
—
Consumer Staples
660,241
660,241
—
—
Energy
4,926,909
4,926,909
—
—
Financial
9,125,922
8,747,988
—
377,934
Gaming & Leisure
—
—
—
—
(2)
Healthcare
27,376,899
12,211,299
—
15,165,600
Housing
1,052,909
—
—
1,052,909
Information Technology
2,432,389
2,432,389
—
—
Media & Telecommunications
19,760,624
4,220,196
15,540,428
—
(2)
Metals & Minerals
2,048,861
2,048,861
—
—
Real Estate Investment Trust
40,663,305
40,663,305
—
—
Telecommunications
377,153
377,153
—
—
Transportation
20,409,532
20,409,532
—
—
Utility
22,328
—
22,328
—
Wireless Communications
5,922,586
5,922,586
—
—
Preferred Stocks
Financial
41,188,238
—
23,632,500
17,555,738
Exchange-Traded Funds(1)
33,544,886
33,544,886
—
—
Real Estate
12,030,207
—
—
12,030,207
Warrants(1)
Equity Contracts
2,884,233
5,633
—
2,878,600
(2)
Investment Companies
995,478
995,478
—
—
Other Financial Instruments
Forward Foreign Currency Contracts
Foreign Exchange Contracts
266,498
266,498
—
—
Total Assets
$
818,318,100
$
219,300,475
$
475,141,191
$
123,876,434
Liabilities
Securities Sold Short
$
(31,691,500
)
$
(31,691,500
)
$
—
$
—
Total Liabilities
$
(31,691,500
)
$
(31,691,500
)
$
—
$
—
Total
$
786,626,600
$
187,608,975
$
475,141,191
$
123,876,434
(1)
See Investment Portfolio detail for industry breakout.
(2)
This category includes securities with a value of zero.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
The table below sets forth a summary of changes in the Fund’s Level 3 assets (assets measured at fair value using significant unobservable inputs) for the
period ended June 30, 2013.
NexPoint Credit Strategies Fund
Balance as
of December 31, 2012
Transfers into Level
3
Transfers Out of Level
3
Net Amortization (Accretion)
of Premium/ (Discount)
Net Realized Gains/ (Losses)
Net Unrealized Gains/ (Losses)
Net Purchases(1)
Net (Sales)(1)
Balance as
of June 30, 2013
Change
in Unrealized Gain/(Loss) on Level 3 securities still held at period end
U.S. Senior Loans
$
42,087,789
$
—
$
—
$
549,080
$
23,396
$
(687,899
)
$
911,673
$
(676,630
)
$
42,207,409
$
(686,841
)
Foreign Denominated or Domiciled Senior Loans
187,531
—
—
—
678
175,152
—
(124,296
)
239,065
175,923
Asset-Backed Securities
1,700,238
11,893,727
—
22,799
50,405
—
—
13,667,169
50,405
Corporate Bonds & Notes
8,435,914
3,602,973
(400,425
)
(2,755,302
)
(357,688
)
8,525,472
(3,070,926
)
Claims
—
—
—
—
—
(560,322
)
560,322
—
—
(560,322
)
Common Stocks
Broadcasting
24,671,202
—
(47,145,400
)
—
701,679
32,650,529
—
(701,679
)
10,176,331
9,555,654
Financial(2)
428,263
—
—
—
—
(27,029
)
—
(23,300
)
377,934
(27,029
)
Gaming & Leisure
—
—
—
—
—
4,551,471
95,809
(4,647,280
)
—
4,551,471
Healthcare
40,320,000
—
—
—
—
(1,154,400
)
—
(24,000,000
)
15,165,600
(1,154,400
)
Housing
839,382
—
—
—
—
213,527
—
—
1,052,909
213,527
Media & Telecommunications(2)
71,278
—
—
—
—
(71,278
)
—
—
—
(71,278
)
Utility
18,269
—
(22,328
)
—
—
4,059
—
—
—
—
Preferred Stocks
—
—
—
—
—
58,863
17,496,875
—
17,555,738
58,863
Real Estate
—
—
—
—
—
—
12,030,207
—
12,030,207
—
Warrants
Equity Contracts
1,468,475
—
—
66,254
1,410,125
—
(66,254
)
2,878,600
1,410,125
Total
$
120,228,341
$
15,496,700
$
(47,568,153
)
$
571,879
$
792,007
$
33,857,901
$
31,094,886
$
(30,597,127
)
$
123,876,434
$
10,445,172
(1)
Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Fund’s Investment Portfolio.
(2)
Balance as of December 31, 2012 reflects a industry reclassification for American Banknote Corp. from Media & Telecommunications to Financial.
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 period ended June 30, 2013, a net amount of $25,196,953 of the Fund’s portfolio investments were transferred between Level 2 and Level 3. Determination of
fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers between Level 2 and Level 3 were due to management’s assessment of observable
and unobservable inputs for valuing the assets.
For the period ended June 30, 2013, a net amount of $7,033 of the Fund’s portfolio investments
was transferred between Level 1 and Level 2. Transfers between Level 1 and Level 2 were due to management’s assessment of quoted prices for assets in active markets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
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 6/30/13
Valuation Technique
Unobservable Inputs
Input Value(s)
NexPoint Credit Strategies
Fund
Debt
$
64,639,115
Third-Party Pricing Vendor
N/A
N/A
Liquidation Analysis
Discount Rate
15
% - 25%
Liquidity Discount
25
% - 30%
Asset Specific Discount
90
% - 100%
Debt - Loan Spread
Weighting of Comparables
Equal Weights
Weighted Avg DM
4
%
Liquidity Discount
20
%
Multiple Discount
10
%
Scenario Probabilities
Various
Preferred Stocks
17,555,738
Common Stocks
26,772,774
Multiple Analysis
Discount Rate
20
% - 25%
Liquidity Discount
25
%
Minority Discount
20
%
Scenario Probabilities
Various
Fair Valuation – Multiple Scenarios
Discount Rate
24
%
Scenario Probabilities
Various
Real Estate
12,030,207
Cost
N/A
N/A
Warrants
2,878,600
Third-Party Pricing Vendor
N/A
N/A
Total
$
123,876,434
The significant unobservable inputs used in the fair value measurement of the Fund’s debt investments are
discount rates and liquidity discounts. 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 entity’s 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. Realized gains/(losses) on investments sold are recorded on the basis of identified cost for both
financial statement and U.S. federal income tax purposes.
Income Recognition
Corporate actions (including cash dividends) are recorded on the ex-dividend date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after ex-dividend
date as such information becomes available. Interest income is recorded on the accrual basis.
Accretion of discount and amortization of premium on
taxable bonds are computed to the call or maturity date,
whichever is shorter, using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Funds’ understanding of the applicable
country’s tax rules and rates.
U.S. Federal Income Tax Status
The Fund is treated as a separate taxpayer for U.S. federal income tax purposes. The fund intends to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code
of 1986, as amended, and will distribute substantially all of its taxable income and gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes. In addition, the Fund intends to distribute, in each calendar year,
all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded.
Management has analyzed the Fund’s 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 Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not
expired are subject to examination by the Internal Revenue Service and state departments of revenue.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
Distributions to Shareholders
The Fund plans to pay distributions from net investment income monthly and net realized capital gains 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 issues by the Fund or purchased in the open market in accordance with the Fund’s 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.
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 amount shown in the Statement of Cash Flows is the
amount included within the Fund’s Statement of Assets and Liabilities and includes cash on hand at its custodian bank and sub-custodian bank, respectively, and does not include cash posted as collateral in the segregated account or with the
broker-dealers.
Cash & 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.
Foreign Currency
Accounting records of the Fund are maintained in U.S. dollars. Foreign currencies,
investments and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the WM/Reuter exchange rate computed at 11:00 AM, Eastern time. 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 securities 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 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 and unrealized gain or loss on investment securities.
Investments in Foreign Markets
Investments in foreign
markets involve special risks and considerations not typically associated with investing in the United States. These risks include revaluation of currencies, high rates of inflation, restrictions on repatriation of income and capital, and adverse
political and economic developments. Moreover, securities issued in these markets may be less liquid, subject to government ownership controls, tariffs and taxes, subject to delays in settlements, and their prices may be more volatile.
The Fund may be subject to capital gains and repatriation taxes imposed by certain countries in which they invest. Such taxes are generally based on income and/or
capital gains earned or repatriated. Taxes are accrued based upon net investment income, net realized gains and net unrealized appreciation as income and/or capital gains are earned.
Securities Sold Short
The Fund may sell securities short. A security sold short 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 sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion
of the transaction. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. Cash held as collateral for securities sold short is
classified as restricted cash on the Statement of Assets and Liabilities. Securities held as collateral for securities sold short are shown on the Investment Portfolio of the fund.
When securities are sold short, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
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.
When-Issued Securities & Forward Commitments
The Fund may purchase or sell securities on a when-issued or forward commitment basis. These transactions are arrangements in which the Fund purchases and sells securities with payment and delivery scheduled a
month or more after entering into the transactions. The price of the underlying securities and the date when these securities will be delivered and paid for are fixed at the time the transaction is negotiated. Losses may arise due to changes in the
market value of the underlying securities or if the counterparty does not perform under the contract. In connection with such purchases, the Fund maintains cash or liquid assets in an amount equal to purchase commitments for such underlying
securities until settlement date. For sales commitments, the Fund maintains equivalent deliverable securities as “cover” for the transaction. Unsettled commitments are valued at current market value of the underlying security. Daily
fluctuations in the value of such contracts are recorded as unrealized gains or losses. The Fund will not enter into such commitments for the purpose of investment leverage. As of June 30, 2013, the Fund held securities on a when-issued basis
with a total aggregate market value of $10,547,940. These securities are detailed in the Fund’s Consolidated Investment Portfolio.
Note 3.
Derivative Transactions
The Funds is subject to equity price risk, interest rate risk, and foreign currency exchange rate risk in the normal course
of pursuing its investment objective. The Fund enters into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market
exposure for residual and accumulating cash positions, and for managing the duration of fixed income investments.
Forward Foreign Currency Exchange
Contracts
The Funds enters into forward foreign currency exchange contracts to facilitate transactions in foreign denominated securities and to
manage the Fund’s currency exposure. Forward foreign currency exchange contracts are valued at the mean between the bid and the offered forward rates as last quoted by a recognized dealer. The aggregate principal amounts of the contracts are
not recorded in the Fund’s financial statements. Such amounts appear under the caption Forward Foreign Currency Exchange Contracts
in the Investment Portfolio. Fluctuations in the value of the contracts are recorded in the Statement of Assets and Liabilities as an asset (or liability) and in the Statement of Operations as
unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains or losses on foreign currency related transactions. The Fund’s risks in using these contracts include changes in the value of
foreign currency or the possibility that the counterparties do not perform under the contracts’ terms. When the Fund enters into a forward foreign currency exchange contract, it is required to segregate cash or liquid securities on its books in
an amount equal to the value of the Fund’s total assets committed to the consummation of the forward contract. If the value of the segregated securities declines, additional cash or securities is segregated so that the value of the account will
equal the amount of the Fund’s commitment with respect to the contract.
Options
The Fund purchases and writes options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values.
Writing puts and buying calls tend to increase the Fund’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund’s exposure to the underlying instrument, or economically hedge other Fund
investments. The Fund’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the
contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price.
When the Fund writes an option,
the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date
as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount
paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased are adjusted by the original premium received or paid.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
Transactions in written options for the six months ended June 30, 2013 were as follows:
Number of Contracts
Premium
Outstanding, December 31, 2012
11,934
$
2,951,678
Call Options Written
4,675
533,599
Put Options Written
7,334
931,120
Call Options Exercised
(3,900
)
(483,448
)
Put Options Expired
(11,934
)
(1,416,025
)
Call Options Expired
(775
)
(50,151
)
Put Options Closed
(7,334
)
(2,466,773
)
Outstanding, June 30, 2013
—
$
—
Additional Derivative Information
The Fund adopted amendments to authoritative guidance on disclosures about derivative instruments and hedging activities which require that the Fund disclose: a) how and why an entity uses derivative instruments,
b) how derivative instruments and related hedged items are accounted for, c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows, and d) how the netting of derivatives
subject to master netting arrangements affects the net exposure of the fund related to the derivatives.
The fair value of derivative instruments on the
Investment Portfolio have the following risk exposure at June 30, 2013.
Fair
Value
Risk Exposure
Asset Derivative
Liability Derivative
Equity Price Risk
$
2,884,233
(1)
$
—
Foreign Exchange Risk
266,498
(2)
—
(1)
Statement of Assets and Liabilities location: Total investments, at value.
(2)
Statement of Assets and Liabilities location: Unrealized appreciation on forward foreign currency exchange contracts.
The gross amounts of derivatives not offset in the Statement of Assets and Liabilities at June 30, 2013, are as follows:
Counterparty
Gross Amounts of
Assets Presented in Statement of Assets & Liabilities(1)
Financial Instrument
Collateral Received
Net Amount (not less than
0)
Exchange-Traded Warrants
2,884,233
(2)
—
—
2,884,233
PNC Capital Markets LLC
266,498
—
—
266,498
(1)
Absent an event of default or early termination, OTC derivative assets and liabilities are presented gross and not offset in the Statement of Assets & Liabilities.
(2)
Includes financial instruments (warrants) which are not subject to a master netting arrangement, or another similar arrangement.
The effect of derivative instruments on the Statement of Operations for the six months ended June 30, 2013, is as follows:
Risk Exposure
Net Realized Gain
(Loss) on Derivatives
Net Change
in Unrealized Appreciation/ (Depreciation) on Derivatives
Equity Price Risk
$
4,373,578
(1)
1,304,597
(3)
Foreign Exchange Risk
(591,182
)(2)
681,809
(4)
(1)
Statement of Operations location: Net realized gain/(loss) on written options and/or investments.
(2)
Statement of Operations location: Net realized gain/(loss) on foreign currency related transactions.
(3)
Statement of Operations location: Net change in unrealized appreciation/(depreciation) on written options, and/or investments.
(4)
Statement of Operations location: Net change in unrealized appreciation/(depreciation) on foreign currency related translations.
For the six months ended June 30, 2013, the Fund’s average volume of derivatives is as follows:
Units/ Contracts
Appreciation/ (Depreciation)
Warrants
85,436
$
—
Forward Currency Exchange Contracts
—
61,888
Written Options
3,978
—
Note 4. U.S. Federal Income 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 Fund’s 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, 2012 and December 31, 2011, the past two tax year ends, were as follows:
Distributions Paid From:
2012
2011
Ordinary Income*
$
27,149,626
$
33,689,329
*
For tax purposes, short-term capital gains distributions, if any, are considered ordinary income distributions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
As of December 31, 2012, 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 Appreciation/ (Depreciation) (1)
Accumulated Capital and Other
Losses
$
4,260,936
$
—
$
(207,168,335
)
$
(460,797,296
)
(1)
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, 2012, 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(3)
Expiration Date
$
8,679,337
(1)
2014
6,437,279
(1)
2015
90,161,614
(1) (2)
2016
282,026,384
(3)
2017
45,893,101
(3)
2018
27,599,581
N/A+
Total
$
460,797,296
(1)
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 Fund’s ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations.
(2)
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 Fund’s ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations.
(3)
The Fund’s 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.
During the year ended
December 31, 2012, the Fund lost through expiration $3,279,930 of capital loss carryforwards.
Unrealized appreciation and depreciation at June 30, 2013, based on cost of investments for U.S. federal income
tax purposes was:
Gross Appreciation
Gross Depreciation
Net Appreciation/ (Depreciation)
Cost
$
85,239,379
$
265,384,459
$
(180,145,080
)
$
998,196,682
Qualified Late Year Ordinary and Post October Losses
Under current laws, certain capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the fiscal year ended December 31, 2012,
the Fund did not elect to defer net realized capital losses incurred from November 1, 2012 through December 31, 2012.
Note 5. Securities
Lending
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 Fund’s 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, 2013, the market value of securities loaned by the Fund was $981,857. The loaned
securities were secured with cash collateral of $995,478, which was invested in the State Street Navigator Prime Securities Lending Portfolio.
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,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
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.
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. 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, and subsequently lowered to 1.15%. In connection with the execution of the Credit Agreement, the Fund amended the
agreement with the holders of the Notes (the “Amendment”) (see Note 8) to allow for a secured credit facility provider. The Amendment changed the status of the Notes from unsecured to secured pari pasu with State Street Bank and Trust
Company.
On December 14, 2012, the Fund entered into an amendment (the “Fifth Amendment”) extending the Credit Agreement termination date
from January 31, 2013 to December 13, 2013. Additionally, the spread over LIBOR on amounts borrowed declined from 1.15% to 0.95%. The terms of the Credit Agreement continue to require the Fund to pay 0.15% on the uncommitted balance. On
May 16, 2013 the Credit Agreement was increased to $150,000,000. As of June 30, 2013, the carrying value of the outstanding Notes was $80 million, excluding accrued interest that was owed at that date. As of June 30, 2013, the fair
value of the outstanding Credit Agreement was estimated to be $80,441,000, and would be categorized as Level 3 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 11 month risk free rate.
For the period ended June 30, 2013, the average daily loan balance was $89,093,923 at a weighted average interest rate
of 1.15%, excluding any commitment fee. With respect to these borrowings, interest expense of $515,947 and uncommitted balance fee of $29,729 are included in interest expense in the Statement of Operations.
On May 16, 2013, the Fund entered into a $125,000,000, 90-day rolling, Committed Facility Agreement with BNP
Paribas Prime Brokerage, Inc. (“BNPP PB, Inc.”) (the “Committed Facility Agreement”). The terms of the Committed Facility Agreement require the Fund to pay 0.55% on the uncommitted balance and pay a spread of 0.75% over the
1-month LIBOR on amounts borrowed. The Fund must pledge collateral to secure amounts borrowed under the Committed Facility Agreement. BNPP PB, Inc. may lend out the pledged collateral and the Fund receives at least 7.5 bps of income on pledged
securities lent by BNPP PB, Inc. This has the effect of lowering the borrowing costs. The Committed Facility Agreement may be terminated by either party with 90 days prior written notice. On May 29, 2013 the Committed Facility Agreement was
amended (the “First Amendment”), increasing from $125,000,000 to $155,000,000. As of June 30, 2013, the fair value of the outstanding Committed Facility Agreement was estimated to be $155,049,000, and would be categorized as Level 3
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 90 day risk free rate.
For the period ended June 30, 2013, the average daily note balance was $146,418,913 at a weighted average interest rate of 0.95%. With respect to the Notes, interest expense of $176,987 and uncommitted balance
fee of $72 are included in interest expense in the Statement of Operations.
Note 8. 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 the 3 month LIBOR, subject to a LIBOR floor of 1.00%, plus 1.70%, to maturity on April 16, 2015. On May 16, 2013 the Fund made full repayment satisfying the Fund’s obligations under the terms of the
Notes. With respect to the Notes, interest expense of $1,215,000 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 Fund’s total liabilities, not including any amount representing bank loans and senior securities, from the Fund’s total assets and dividing the result by the principal amount of the borrowings
outstanding. As of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
dates indicated below, the Fund’s debt outstanding and asset coverage was as follows:
Date
Total
Amount Outstanding
% of Asset
Coverage of
Indebtedness
06/30/2013
235,000,000
346.0
12/31/2012
225,000,000
311.7
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. Basis for Consolidation for Nexpoint Credit Strategies Fund
The Subsidiary was formed on September 17, 2012 as a wholly-owned Real Estate Investment Trust of NexPoint Credit Strategies Fund. The Fund will seek to gain
exposure to the real estate markets, in whole or in part, through investments by the Subsidiary. As of June 30, 2013, net assets of the Fund were $545,581,717, of which $12,030,207, or approximately 2.2%, represented the Fund’s ownership
of the shares of the Subsidiary. NexPoint Credit Strategies Fund’s Consolidated Schedule of Investments, Consolidated Statement of Assets and Liabilities, Consolidated Statement of Operations, and Consolidated Statement of Changes in Net Assets
include the accounts of both NexPoint Credit Strategies Fund and the Subsidiary. All inter-company transactions and balances have been eliminated in consolidation. The Advisor does not charge an additional fee for assets managed on the Subsidiary.
Note 11. Investment Advisory, Administration, and Trustee Fees
Investment Advisory Fee
The Investment Adviser to the Fund receives an annual fee, paid monthly, in an amount
equal to 1.00% of the average daily value of the Fund’s Managed Assets. The Fund’s “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 Fund’s investment objectives and policies, and/or
(iv) any other means.
Administration Fee
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 Fund’s Managed Assets. Under a separate sub-administration agreement, the Investment Adviser
has delegated certain administrative functions to State Street Bank and Trust Company. The Investment Adviser pays State Street Bank and Trust Company directly for these sub-administration services.
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 Highland Fund Complex
based on relative net assets. The “Highland 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 12. Disclosure of
Significant Risks and Contingencies
The primary risks of investing in the Funds are described below in alphabetical order:
Concentration Risk
The Fund may focus its investments in
instruments of only a few companies. The concentration of the Fund’s 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.
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 payments
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 derivative financial instruments, the Fund may be 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.
Credit Risk
Investments rated below investment grade are commonly referred to as high-yield, high risk or “junk debt.” They are regarded as predominantly speculative
with respect to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
issuing company’s continuing ability to meet principal and/ or interest payments. Investments in high yield debt and high yield Senior Loans may result in greater net asset value fluctuation
than if the Fund did not make such investments.
Currency Risk
A portion of the Fund’s assets may be quoted or denominated in non-U.S. currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control
regulations. The Fund’s investment performance may be negatively affected by a devaluation of a currency in which the Fund’s investments are quoted or denominated. Further, the Fund’s investment performance may be significantly
affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to
the U.S. dollar.
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 Adviser’s ability to predict pertinent
market movements, which cannot 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.
Emerging Markets Risk
Any investments in Emerging Market Countries (countries in which the capital markets are
developing) may involve greater risks than investments in more developed markets and the prices of such investments may be more volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the
market prices of the Fund’s investments and the income they generate, as well as the Fund’s ability to repatriate such amounts.
Exchange-Traded Funds Risk
The risk that the exchange-traded funds (“ETFs”) in which the Fund invests will not be able to replicate exactly the performance of the indices they track and may result in a loss. In addition,
shareholders bear both their proportionate share of the Fund’s expenses and similar expenses of the underlying investment company when the Fund invests in shares of another investment company.
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 Fund’s 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 counterparty
credit risk to the Fund because the forwards are not exchange-traded, and there is no clearinghouse to guarantee the forwards against default.
Futures Contracts Risk
The risks of entering into futures
contracts include the possibilities that their markets may become illiquid and/or changes in the values of the contracts may not correlate to changes in the values of the underlying instruments.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
Hedging Transactions Risk
Each Fund may engage in “hedging,” the practice of attempting to offset a potential loss in one position by establishing an opposite position in another investment. Hedging strategies in general are
usually intended to limit or reduce investment risk, but can also be expected to limit or reduce the potential for profit. For example, if the Fund has taken a defensive posture by hedging its portfolio, and stock prices advance, the return to
investors will be lower than if the portfolio had not been hedged. No assurance can be given that any particular hedging strategy will be successful, or that the Investment Adviser will elect to use a hedging strategy at a time when it is advisable.
Illiquid Securities 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 Adviser’s 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 Fund’s investments, especially those in
financially distressed companies, may require a long holding period prior to profitability.
Indemnification Risk
The Fund has a variety of indemnification obligations under contracts with their service providers. The Fund’s maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote.
Leverage Risk
The Fund may use leverage in their investment program, including the use of borrowed funds and investments in certain types of options, such as
puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk
of loss. To the extent the Fund purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on
the portfolio securities purchased with borrowed funds, the Fund’s use of leverage would result in a lower rate of return than if the Fund were not leveraged.
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 corporate debt obligation experiencing non-payment and a potential decrease in the
NAV of the Fund.
Options Risk
There are several
risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction
not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.
When the Fund writes a covered call option, the Fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the
security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be
required to fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.
When the Fund writes a covered put option, the Fund bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Fund could
incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Fund’s
potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price
of the option minus the put premium.
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 Fund’s ability to use derivatives, and may adversely affect the performance of some derivative instruments used by the Fund as well as the Fund’s ability to pursue its investment
objective through the use of such instruments.
Restricted Securities Risk
Restricted securities (i.e., securities acquired in private placement transactions) and illiquid securities may offer higher yields than comparable publicly traded securities. The Fund,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
however, may not be able to sell these securities when the Investment Adviser considers it desirable to do so or, to the extent they are sold privately, may have to sell them at less than the
price of otherwise comparable securities. Restricted securities are subject to limitations on resale which can have an adverse effect on the price obtainable for such securities. Also, if in order to permit resale the securities are registered under
the Securities Act at the Fund’s expense, the Fund’s expenses would be increased.
Short-Selling Risk
Short sales by the Fund that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss
potential since the market price of securities sold short may continuously increase. Short selling allows the Fund to profit from declines in market prices to the extent such decline exceeds the transaction costs and 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. Purchasing securities to
close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Fund may mitigate such losses by replacing the securities sold short before the market price has
increased significantly. Under adverse market conditions, the Fund might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell
portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.
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.
Note 13. Investment Transactions
For the period
ended June 30, 2013, the cost of purchases and proceeds from sales of securities, excluding short-term obligations, were $574,653,488 and $476,719,027, respectively.
Note 14. 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, 2013:
Market Value
Issuer
Par Value at
June 30, 2013
Shares
at June 30, 2013
December 31, 2012
June 30, 2013
Affiliated Income
Purchases
Sales
ComCorp Broadcasting, Inc. (Senior Loans)*
35,950,043
—
$
34,829,552
$
35,444,082
$
1,666,197
$
—
$
—
Communications Corp of America (Common Stocks)
—
2,010,616
620,677
10,176,331
—
—
—
Endurance Business Media, Inc., Class A (Common Stocks)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued)
June 30, 2013
NexPoint Credit Strategies Fund
Note 15. Subsequent Events
Management has evaluated the impact of all subsequent events on the Funds through the date the financial statements were issued, and has determined that there were no subsequent events.
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
American Stock Transfer & Trust Company, LLC (“AST” or the “Plan Agent”), as agent for shareholders in administering the Fund’s dividend reinvestment plan (the “Plan”), all dividends declared for Common Shares
of the Fund will be automatically reinvested by AST 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 AST, 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 AST, 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 shareholder’s 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 participant’s 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 shareholder’s 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 American Stock Transfer & Trust Company, LLC 6201
15th Avenue Brookly, NY 11219; telephone (877) 665-1287.
Shareholder Loyalty Program
To promote loyalty and
long-term alignment of interests among the Trust’s shareholders, the Adviser offers an incentive to shareholders that buy and hold the Trust’s common shares for a period of at least twelve months through its Shareholder Loyalty Program
(the “Program”). To participate in the Program, existing shareholders must open an account (the “Account”) with the Program’s administrator, American Stock Transfer & Trust Company
(“AST”). Subsequently, if a participant makes contributions to the Account during a defined trading period to purchase shares, the Adviser will make a corresponding contribution to create an effective 2% gross up of the
participant’s contributions. More specifically, the Adviser’s contribution will account for 2% of the total sum contributed by both the participant and the Adviser. For example, if a participant contributes $10,000 to the Account
during a defined trading period to purchase shares, the Adviser will make a corresponding contribution of $204.08, or 2% of $10,204.08, to purchase additional shares for the participant (the “Bonus Shares”). In addition, Program
participants will not be required to pay any customary selling commissions or distribution fees on the purchase of shares under the Program. The Adviser will bear the costs of brokerage fees in connection with the Program.
While the portion of the Trust’s common shares that are acquired through the participant’s contribution will vest immediately, Bonus Shares will not vest
until the first anniversary of the date that the Bonus Shares were purchased. Vested shares will be held in the Account and Bonus Shares will be held in an account at AST for the conditional benefit of the shareholder. Under the Program,
participants must purchase a minimum of $10,000 worth of shares in the initial subscription and $5,000 in each subsequent subscription, unless the Adviser, in its sole
discretion, decides to permit subscriptions for a lesser amount. If the Trust’s common shares are trading at a discount, AST will purchase common shares on behalf of participants in
open-market purchases. If the Trust’s common shares are trading at a premium, AST may purchase common shares on behalf of participants in open-market purchases or the Trust may sell common shares to the Shareholder Loyalty Program by
means of a prospectus or otherwise.
All dividends received on shares that are purchased under the Program will be automatically reinvested through the
Program. A participant’s interest in a dividend paid to the holder of a vested share will vest immediately. A participant’s interest in a dividend paid to the holder of a Bonus Share will vest at the same time that the Bonus
Share’s vesting requirements are met. In addition, for dividends paid to holders of shares that were purchased with a participant’s contributions, the Adviser will make a corresponding contribution to the amount of the reinvested dividend
to create an effective 2% gross up of the dividend amount.
AST maintains all shareholders’ accounts in the Program and furnishes written
confirmation of all transactions in the accounts, including information needed by shareholders for tax records. Shares in the account of each Program participant will be held by AST on behalf of the Program participant, and each shareholder proxy
will include those shares purchased or received pursuant to a Program. AST will forward all proxy solicitation materials to participants and vote proxies for shares held under the Program 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, AST will administer the
Program on the basis of the number of common shares certified from time to time by the record shareholder’s name and held for the account of beneficial owners who participate in the Program.
The Trust and the Adviser reserve the right to amend or terminate the Program. To help align the interests of the Adviser’s employees with the interests of the
Trust’s shareholders, the Adviser offers a similar program to its employees.
Participants in the Program should be aware that their receipt of
Bonus Shares under the Program constitutes taxable income to them. In addition, such participants owe taxes on that portion of any distribution that constitutes taxable income in respect of shares of our common stock held in their Program
accounts, whether or not such shares of common stock have vested in the hands of the participants. To the extent any payments or distributions under
the Program are subject to U.S. federal, state or local taxes, the Trust, any participating affiliate of the Trust or the agent for the Program may satisfy its tax withholding obligation by
(1) withholding shares of Stock allocated to the participant’s account, (2) deducting cash from the participant’s account or (3) deducting cash from any other compensation the participant may receive. Program
participants should consult their tax advisers regarding the tax consequences to them of participating in the Program.
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 1-866-351-4440 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 Fund’s proxy
voting record for the most recent 12-month period ended June 30, are available (i) without charge, upon request, by calling
1-866-351-4440 and (ii) on the SEC’s 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 Fund’s Forms N-Q are available on the SEC’s website at http://www.sec.gov and also may be reviewed and copied at the SEC’s 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 Fund’s website at www.NexPointAdvisors.com.
On July 2, 2013, the Fund submitted a CEO annual certification to the New York Stock Exchange
(“NYSE”) on which the Fund’s principal executive officer certified that he was not aware, as of the date, of any violation by the Fund of the NYSE’s Corporate Governance listing standards. In addition, as required by
Section 302 of the Sarbanes-Oxley Act of 2002 and related SEC rules, the Fund’s 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 Fund’s 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.
Not applicable.
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 registrant’s 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 registrant’s board of directors.
(a) The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (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 registrant’s 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 registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting.
Item 12. Exhibits.
(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.
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: September 6, 2013
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.
