N-Q 1 creditstrategiesnq.txt HIGHLAND CREDIT STRATEGIES NQ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-Q QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY Investment Company Act file number 811-21869 ---------------------------- HIGHLAND CREDIT STRATEGIES FUND -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Two Galleria Tower 13455 Noel Road, Suite 800 DALLAS, TEXAS 75240 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) James D. Dondero, President Highland Credit Strategies Fund Two Galleria Tower 13455 Noel Road, Suite 800 DALLAS, TEXAS 75240 -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (877) 665-1287 --------------- Date of fiscal year end: DECEMBER 31 ------------ Date of reporting period: SEPTEMBER 30, 2006 ------------------- Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. SCHEDULE OF INVESTMENTS. The Schedule(s) of Investments is attached herewith. INVESTMENT PORTFOLIO (UNAUDITED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ SENIOR LOAN NOTES (A) - 106.5% AEROSPACE - 4.0% 2,473,977 AWAS Capital, Inc. Second Priority Term Loan, 11.44%, 03/15/13 2,486,347 10,000,000 Delta Airlines, Inc. Term Loan Equipment Notes, 08/25/12 (b) 10,012,500 7,000,000 Northwest Airlines, Inc. Term Loan DIP, 7.90%, 08/21/08 7,017,500 TDS Investor Corp. 3,674,267 Dollar Term Loan, 08/23/13(b) 3,682,791 325,733 Synthetic LC, 08/23/13 (b) 326,241 3,000,000 U S Airways Group, Inc. Term Loan, 9.00%, 03/31/11 3,022,500 --------------- 26,547,879 --------------- BROADCASTING - 1.4% 9,180,933 Millennium Digital Media Systems, LLC Term Facility, 9.49%, 06/30/11 (c) 9,180,933 --------------- CABLE/WIRELESS VIDEO - 5.0% 4,500,000 Bresnan Communications LLC First Lien Term Loan B, 7.21%, 09/29/13 4,496,625 6,000,000 Century Cable Holdings LLC Revolver, 03/31/09 (b) 5,802,480 9,000,000 Cequel Communications, LLC NC Term Facility, 10.13%, 10/30/07 (b) 8,932,500 1,484,480 Charter Communications Operating, LLC Term Facility, 7.76%, 04/28/13 1,492,140 4,987,500 RCN Corp. Initial Term Loan, 7.28%, 05/30/13 4,987,500 1,625,000 San Juan Cable LLC (Puerto Rico) Second Lien Term Loan, 10/31/13 (b) 1,644,630 WideOpenWest Finance LLC First Lien Term Loan, 2,400,000 7.73%, 05/01/13 2,402,352 Second Lien Term Loan, 3,250,000 10.23%, 05/01/14 3,286,985 --------------- 33,045,212 --------------- CHEMICALS - 1.6% 1,833,333 Ferro Corp. Term Loan, 8.66%, 06/06/12 (c) (b) 1,831,060 2,000,000 Georgia Gulf Corp. Term Loan, 09/01/13 (b) 2,005,840 INEOS US Finance 500,000 Term B2, 7.61%, 12/16/13 505,100 500,000 Term C2, 8.11%, 12/16/14 505,470 PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ CHEMICALS (CONTINUED) 5,729,500 Solutia Inc. New Term Loan B DIP, 8.96%, 03/31/07 5,754,595 --------------- 10,602,065 --------------- CONSUMER DURABLES - 0.5% 3,000,000 Rexair LLC First Lien Term Loan, 9.78%, 06/30/10 3,007,500 --------------- CONSUMER NON-DURABLES - 4.3% 1,512,000 Camelbak Products LLC First Lien Term Loan, 9.46%, 08/04/11 1,474,200 2,000,000 HBI Branded Apparel Ltd., Inc. Second Lien Facility, 9.13%, 03/05/14 2,045,840 4,324,404 Jarden Corp. Term Loan, 7.50%, 01/24/12 4,332,880 7,754,121 Revlon Consumer Products Corp. Term Loan, 11.48%, 07/09/10 (b) 7,998,591 5,077,650 Spectrum Brands Dollar Term Loan, 8.45%, 02/07/12 5,094,812 8,000,000 VNU Inc./Nielsen Finance LLC Dollar Term Loan, 8.19%, 08/09/13 7,982,880 --------------- 28,929,203 --------------- DIVERSIFIED MEDIA - 4.0% 3,000,000 Endurance Business Media, Inc. Second Lien Term Loan, 12.58%, 01/24/14 3,022,500 997,500 MediaNews Group, Inc. New Term Loan C, 7.07%, 08/02/13 1,000,622 Metro-Goldwyn-Mayer Holdings II, Inc./LOC Acquisition Co. Tranche A Term Loan, 3,000,000 8.75%, 04/08/11 2,975,100 Tranche B Term Loan, 10,467,462 8.75%, 04/08/12 10,392,934 3,500,000 North American Membership Group, Inc. Revolver, 05/19/10 (b) 3,462,550 500,000 Panavision, Inc. Second Lien Term Loan, 12.13%, 03/30/12 508,750 3,000,000 PBI Media, Inc. Second Lien Term Loan, 11.13%, 09/30/13 3,015,000 2,460,008 RH Donnelley, Inc. Tranche D-2 Term Loan, 6.93%, 06/30/11 2,443,329 --------------- 26,820,785 --------------- 1 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ SENIOR LOAN NOTES (CONTINUED) ENERGY - 6.5% Alon USA Energy, Inc. Edington Facility, 7.82%, 222,222 06/22/13 224,167 Paramount Facility , 1,777,778 7.91%, 06/22/13 1,793,334 8,000,000 ATP Oil & Gas Corp. Term Loan, 8.70%, 04/14/10 8,080,000 Coffeyville Resources LLC First Lien Tranche C Term 1,193,402 Loan, 7.63%, 06/24/12 1,201,457 New Funded LOC, 5.28%, 803,607 06/24/12 809,634 1,985,000 Complete Production Services, Inc. Term B Facility, 7.66%, 09/12/12 1,994,925 3,041,609 Dresser Rand Group, Inc. Tranche B Dollar Term Loan, 7.41%, 10/29/11 3,057,425 7,920,000 EPCO Holdings, Inc. Institutional Term Loan C, 7.17%, 08/18/10 7,977,341 1,995,000 Hawkeye Renewables LLC First Lien Term Loan, 9.32%, 06/30/12 1,971,738 2,000,000 J Ray McDermott, SA (Panama) Synthetic Facility, 06/06/12 (b) 2,015,000 14,000,000 Paramount Resources, Ltd. (Canada) Term Loan, 08/25/12 (b) 14,175,000 --------------- 43,300,021 --------------- FINANCIAL - 1.6% 750,000 Arrowhead General Insurance Agency, Inc. Second Lien Term Loan, 02/08/13 (b) 760,312 1,000,000 Checksmart Financial Co. First Lien Tranche B Term Loan, 8.06%, 05/01/12 1,000,000 5,000,000 Concord Re Ltd. (Bermuda) Term Loan, 9.58%, 02/29/12 5,062,500 1,500,000 FleetCor Technologies Operating Co. LLC Additional Term Loan , 06/30/11 (b) 1,500,000 995,000 IPayment, Inc. Term Facility, 7.61%, 05/10/13 994,383 1,000,000 Transfirst Holdings, Inc. First Lien Term Loan, 9.25%, 08/15/12 1,005,000 --------------- 10,322,195 --------------- FOOD AND DRUG - 2.2% 7,877,713 Jean Coutu Group, Inc. Term Loan B, 8.00%, 07/30/11 7,903,552 2,500,000 Le-Nature's, Inc. Tranche B Term Loan, 9.39%, 03/01/11 2,539,050 PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ FOOD AND DRUG (CONTINUED) 2,000,000 Restaurant Co., (The) Term Loan, 8.02%, 05/03/13 (b) 2,012,500 1,994,987 Roundy's Supermarkets, Inc. Term Loan, 8.23%, 11/03/11 2,014,439 --------------- 14,469,541 --------------- FOOD/TOBACCO - 1.8% 3,350,000 Garden Fresh Restaurant Corp. First Lien Term Loan B, 06/22/11 (b) 3,358,375 8,925,104 Merisant Co. Tranche B Term Loan, 8.74%, 01/11/10 8,824,697 99,802 Pinnacle Foods Group, Inc. New Term Loan, 7.39%, 11/25/10 99,844 --------------- 12,282,916 --------------- FOREST PRODUCTS - CONTAINERS - 0.1% 995,000 Georgia-Pacific Corp. Term B Loan, 7.41%, 12/20/12 997,756 --------------- GAMING/LEISURE - 5.0% 4,000,000 Cedar Fair L.P. (Canada) US Term Loan, 7.83%, 08/30/12 (b) 4,028,720 7,000,000 Drake Hotel Acquisition B Note 1, 04/01/07 (b) 7,000,000 Ginn LA Conduit Lender, Inc. First Lien Tranche A Credit-Linked Deposit, 314,286 8.29%, 06/08/11 311,143 First Lien Tranche B Term 2,685,714 Loan, 8.41%, 06/08/11 (b) 2,645,429 1,984,949 Kerasotes Showplace Theatres LLC Term B1 Loan, 7.88%, 10/28/11 1,991,579 OpBiz LLC Term Loan A, 6.76%, 4,433,346 08/31/10 (b) 4,339,137 103,821 Term Loan B, 08/31/10 (b) 100,923 1,000,000 Pivotal Promontory LLC First Lien Term Loan, 8.08%, 08/31/10 988,750 Resorts International Holdings LLC Second Lien Term Loan, 2,000,000 16.50%, 04/26/13 2,085,000 Term Loan B, 16.50%, 1,000,000 04/26/12 (b) 1,006,880 8,437,492 Six Flags Theme Parks, Inc. Tranche B-1, 8.73%, 06/30/09 8,545,238 --------------- 33,042,799 --------------- HEALTHCARE - 11.3% 13,038,594 Alliance Imaging, Inc. Tranche C Term Loan, 7.98%, 12/29/11 13,090,227 2 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ SENIOR LOAN NOTES (CONTINUED) HEALTHCARE (CONTINUED) 9,977,387 CCS Medical, Inc. (Chronic Care) First Lien Term Loan, 8.75%, 09/30/12 (b) 9,653,122 1,488,750 ComPsych Investments Corp. Term Loan, 04/11/12 (b) 1,498,055 3,000,000 Cornerstone Healthcare Group Holding, Inc. Senior Subordinated Unsecured Notes, 14.00%, 07/15/12 (d) (e) 2,325,000 4,000,000 Golden Gate National Senior Care LLC Second Lien Term Loan, 12.99%, 09/14/11 4,070,000 10,000,000 HCA Inc. Second Lien Bridge Loan, 09/15/07 (b) 9,950,000 7,000,000 HealthSouth Corp. Term Loan B, 8.52%, 03/10/13 (b) 7,036,750 6,219,838 LifePoint Hospitals, Inc. Term Loan B, 6.91%, 04/15/12 6,196,949 MMM Holding, Inc./NAMM Holdings, Inc./PHMC (Puerto Rico) NAMM New Term Loan, 7.75%, 3,069,066 08/22/11 3,067,163 NAMM Original Term Loan, 638,730 7.75%, 08/22/11 638,334 NAMM PHMC Acquistion Term 61,951 Loan, 7.75%, 08/22/11 61,913 PHMC Acquisition Term 2,230,253 Loan, 7.75%, 08/10/11 2,235,829 National Mentor Holdings, Inc. Institutional LC Facility, 230,000 06/29/13 (b) 230,862 Tranche B Term Loan, 3,750,000 06/29/13 (b) 3,768,750 1,975,000 Quintiles Transnational Corp. First Lien Term B, 7.37%, 03/31/13 1,974,684 1,000,000 Renal Advantage Inc. Tranche B Term Loan, 7.89%, 10/06/12 1,001,250 2,000,000 Triumph Healthcare Second Holdings LLC Second Lien Term Loan, 13.48%, 07/28/14 2,012,500 Warner Chilcott Co., Inc. (Puerto Rico) Dovobet Delayed Draw Term 130,258 Loan, 7.93%, 01/18/12 (b) 130,556 Dovonex Delayed Draw Term 1,315,790 Loan, 7.80%, 01/18/12 (b) 1,319,079 Tranche B Acquisition Date 2,931,988 Term Loan, 7.79%, 01/18/12 (b) 2,938,556 Tranche C Acquisition Date 1,181,448 Term Loan, 7.61%, 01/18/12 (b) 1,184,035 Tranche D Acquisition Date 399,408 Term Loan, 01/18/12 (b) 400,283 PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ HEALTHCARE (CONTINUED) 146,38 Warner Chilcott Holdings Co. III, Ltd. (Bermuda) Tranche D Acquisition Date Term Loan, 7.61%, 01/18/12 146,708 --------------- 74,930,605 --------------- HOUSING - 9.4% Atrium Cos., Inc. Closing Date Term 2,404,588 Facility, 05/31/12 (b) 2,305,399 Delayed Draw Term Loan, 295,412 05/31/12 (b) 284,703 5,976,376 Custom Building Products, Inc. First Lien Term Loan, 7.62%, 10/20/11 6,009,963 1,224,056 DESA LLC Term Loan, 11/26/11 (b) 1,226,357 1,500,000 EH/Transeastern, LLC/TE TOUSA Term Loan, 7.75%, 08/01/08 1,200,000 1,500,000 Flag Luxury Properties Holdings, LLC First Lien Term Loan, 03/21/11 (b) 1,477,500 1,860,595 Knoll, Inc. Term Loan, 7.12%, 10/03/12 1,866,028 6,000,000 Kuilima Resort Co. First Lien Term Loan, 8.08%, 09/30/10 (b) 5,955,000 1,000,000 LBREP/L-Suncal Master I LLC First Lien Term Loan, 01/19/10 (b) 1,006,880 12,000,000 LNR Property Corp. Initial Tranche B Term Loan, 8.22%, 07/12/11 12,090,000 2,500,000 November 2005 Land Investors, LLC Second Lien Term Loan, 12.50%, 04/24/10 2,493,750 Owens Corning 2,041,667 Letter of Credit, 09/30/11 (b) 3,266,667 1,458,333 Revolver, 09/30/11 (b) 2,344,723 4,000,000 Roofing Supply Group LLC First Lien Term Loan, 8.58%, 08/31/13 3,970,000 7,500,000 Rubicon GSA II LLC (Australia) Term Loan, 10.00%, 08/30/08 7,500,000 555,169 Walter Industries, Inc. Term Loan, 6.87%, 10/03/12 557,045 Westgate Investments LLC Senior Secured Loan, 7,300,000 13.00%, 09/25/10 7,300,000 Senior Unsecured Loan, 1,475,000 18.00%, 08/03/12 1,475,000 --------------- 62,329,015 --------------- INFORMATION TECHNOLOGY - 6.3% 2,000,000 Data Transmission Network Corp. Second Lien Term Loan, 13.30%, 09/10/13 (b) 2,010,000 3 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ SENIOR LOAN NOTES (CONTINUED) INFORMATION TECHNOLOGY (CONTINUED) Infor Enterprise Solutions Holdings, Inc. Delayed Draw Term Loan, 2,742,857 9.15%, 07/28/12 2,765,129 Initial US Term Facility, 5,257,143 9.08%, 07/28/12 5,289,211 2,000,000 IPC Aquisition Corp. Second Lien Tem Loan, 12.52%, 08/05/12 2,040,000 8,000,000 NameMedia, Inc. Term Loan, 11.33%, 08/31/08 7,960,000 8,372,916 ON Semiconductor Corp. Term Loan H, 7.75%, 12/15/11 8,416,539 4,858,156 Open Solutions Inc. First Lien Term Loan, 7.90%, 09/03/11 4,900,665 Quantum Corp. First Lien Term Loan, 3,000,000 10.40%, 08/22/12 3,003,750 Second Lien Term Loan, 1,000,000 14.25%, 08/22/13 997,500 2,500,000 Secure Computing Corp. Term Loan, 8.58%, 08/31/13 2,518,750 2,000,000 Serena Software, Inc. Term Loan, 7.41%, 03/11/13 2,001,240 --------------- 41,902,784 --------------- MANUFACTURING - 3.8% 3,000,000 CST Industries, Inc. Term Loan, 10.00%, 08/09/13 2,994,150 1,000,000 FR X Ohmstede Acquisitions Co. Term B Loan, 8.50%, 08/09/13 1,011,250 5,000,000 Global Petroleum, Inc. (SPI Petroleum) Term Loan, 9.84%, 07/26/13 5,012,500 1,011,458 Matinvest 2 SAS (Deutsche Connector) (France) Mezz A USD Facility, 13.54%, 06/22/16 1,039,273 Matinvest 2 SAS/ Butterfly Wendel US, Inc. B-2 Facility, 7.90%, 2,250,000 06/22/14 2,271,803 C-2 Facility, 8.40%, 2,250,000 06/22/15 2,280,960 Prysmian Power Cables & Systems, Inc. B3b Term Loan, 7.88%, 1,525,200 08/25/13 1,533,634 C5b Term Loan, 8.38%, 381,300 08/25/13 384,000 2,000,000 Ray Acquisition SCA (Rexel) (France) Term Loan B3-A US, 7.86%, 08/02/14 2,027,500 7,000,000 TFS Acquisition Corp. Term Loan, 8.83%, 08/03/13 (b) 7,052,500 --------------- 25,607,570 --------------- PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ METALS/MINERALS - 3.0% 1,000,000 Aleris International, Inc. (Germany) U S Loan, 7.88%, 07/31/13 1,002,190 1,326,316 Euramax International Holdings B.V. Second Lien European Loan, 12.49%, 06/29/13 1,346,211 Euramax International, Inc. First Lien Domestic Term Loan, 2,884,136 8.06%, 06/29/12 2,892,788 Second Lien Domestic Term Loan, 2,673,684 12.49%, 06/29/13 2,693,737 6,500,000 James River Coal Co. Credit Linked Certificate of Deposit, 5.10%, 11/30/11 6,500,000 1,600,000 Oglebay Norton Co. Tranche B Term Loan, 7.83%, 07/31/12 (c) 1,615,008 2,000,000 PinnOak Resources, LLC Term Loan, 11/23/12 (b) 1,970,000 1,745,625 United Central Industrial Supply Company, L.L.C. Term Loan, 8.61%, 03/31/12 1,757,635 --------------- 19,777,569 --------------- RETAIL - 8.4% 3,476,222 Blockbuster Entertainment Corp. Tranche B Term Loan, 8.83%, 08/20/11 3,476,848 11,987,469 Burlington Coat Factory Warehouse Corp. Term Loan, 7.53%, 05/28/13 (b) 11,649,182 3,000,000 CSK Auto, Inc. Term Loan, 8.54%, 06/30/12 3,033,750 1,000,000 Eddie Bauer, Inc. Term Loan, 9.65%, 06/21/11 1,000,000 Movie Gallery, Inc. 1,524,931 Term Loan A, 04/27/11 (b) 1,439,535 Term Loan B, 10.62%, 18,805,629 04/27/11 (b) 17,656,793 9,443,038 Neiman Marcus Group, Inc. (The) Term Loan, 7.89%, 04/06/13 9,516,599 2,000,000 Sports Authority, Inc., (The) Term Loan B, 05/03/13 (b) 1,990,840 6,000,000 Toys "R" US, Inc. Tranche B Term Loan, 9.62%, 07/19/12 6,098,760 --------------- 55,862,307 --------------- SERVICE - 5.9% 1,000,000 Alliance Laundry Systems LLC Term Loan, 7.58%, 01/27/12 1,006,880 2,992,500 Education Management Corp. Tranche B Term Loan, 9.75%, 06/01/13 3,014,764 2,000,000 Koosharem Corp. Second Lien Term Loan, 15.75%, 06/30/13 1,975,000 4 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ SENIOR LOAN NOTES (CONTINUED) SERVICE (CONTINUED) La Petite Academy, Inc. Closing Date First Lien 6,500,000 Term Loan, 8.33%, 08/16/12 6,544,720 La Petite Academy, Inc. (continued) Second Lien Term Loan, 4,000,000 12.61%, 02/16/13 4,050,000 8,000,000 NES Rentals Holdings, Inc. Second Lien Term Loan, 12.13%, 07/20/13 8,080,000 6,237,288 Safety-Kleen Holdings Ltd. GBP Term Loan B1, 7.88%, 08/02/13 6,252,881 1,762,712 Safety-Kleen Systems Synthetic LC, 5.53%, 08/02/13 1,767,119 1,512,756 Survey Sampling International, LLC Term Loan, 8.75%, 05/06/11 1,518,429 United Rentals, Inc. Initial Term Loan, 3,663,158 02/14/11 (b) 3,679,569 Tranche B Credit-Linked 336,842 Deposit, 02/14/11 (b) 337,684 1,000,000 Vanguard Car Rental USA Holding, Inc. Term Loan, 8.32%, 06/14/13 1,002,340 --------------- 39,229,386 --------------- TELECOMMUNICATIONS - 4.4% 1,995,000 Gabriel Communications Finance Co. Term Loan B, 10.34%, 05/12/12 2,006,212 Madison River Capital 4,000,000 Term B-1, 7.73%, 07/29/12 4,020,000 1,000,000 Term B-2, 7.73%, 07/29/12 1,005,000 8,000,000 PaeTec Communications, Inc. Second Lien Term Loan, 12.88%, 06/12/13 (b) 8,162,560 Sorenson Communications, Inc. 2,000,000 Revolver, 08/16/12 (b) 1,996,800 Second Lien Term Loan, 5,000,000 12.39%, 02/16/14 5,046,900 Tranche B Term Loan, 6,000,000 8.39%, 08/16/13 6,041,280 1,250,000 Stratos Global Corp./Stratos Funding LP (Canada) Term B Facility, 8.11%, 02/13/12 1,249,225 --------------- 29,527,977 --------------- TRANSPORTATION - 8.5% Carey International, Inc. First Lien Term Loan, 3,974,748 9.19%, 05/10/11 3,974,748 Second Lien Term Loan, 2,594,598 17.20%, 05/10/12 2,588,111 4,233,334 Consolidated Container Holdings LLC Term Loan, 11.00%, 12/15/08 4,254,500 375,854 Cooper-Standard Automotive Canada Ltd. Tranche B Term Loan, 12/23/11 (b) 375,974 PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ TRANSPORTATION (CONTINUED) Cooper-Standard Automotive Inc. 627,281 Term Loan D, 12/23/11 (b) 628,654 Tranche C Term Loan , 604,635 12/23/11 (b) 606,146 3,000,000 Dana Corp. DIP Term Loan, 7.65%, 04/13/08 2,998,140 2,000,000 Dayco Proudcts LLC Second Lien Term Loan, 12/31/11 (b) 2,042,500 8,495,000 Delphi Corp. Term Loan, 13.75%, 06/14/11 (b) 8,798,951 505,325 Environmental Systems Products Holdings Inc. Term Loan, 8.70%, 12/12/08 511,485 Key Plastics LLC Term Loan B, 8.75%, 1,000,000 06/24/10 1,005,000 3,459,900 Term Loan C, 06/29/11 (b) 3,425,301 Keystone Automotive Operations, Inc. Term Loan B, 7.94%, 92,223 10/30/09 92,454 Term Loan C, 7.99%, 2,052,075 10/30/10 2,055,933 5,000,000 Lear Corp. First Lien Term Loan B, 7.98%, 04/25/12 4,900,000 3,548,572 Motor Coach Industries International, Inc. Second Lien Term Loan, 12/01/08 (b) 3,637,286 5,000,000 Navistar International Corp. Delay Draw Term Loan, 10.49%, 02/22/09 5,046,900 2,000,000 New Century Transportation, Inc. Term Loan B, 8.58%, 08/14/12 2,005,000 7,889,163 SIRVA Worldwide, Inc. Tranche B Term Loan, 11.46%, 12/01/10 (b) 7,488,157 --------------- 56,435,240 --------------- UTILITIES - 7.2% 5,000,000 ANP Funding I, LLC Tranche A Term Loan, 07/29/10 (b) 5,035,400 Calpine Corp. Second Lien Term Loan B, 1,000,000 13.00%, 07/16/07 1,041,960 Second Priority DIP Term 1,000,000 Loan, 9.50%, 12/20/07 1,018,130 902,601 CenterPoint Energy, Inc. Term Loan, 7.71%, 04/30/10 903,639 Coleto Creek Power, LP Second Lien Term Loan, 5,000,000 9.45%, 06/28/13 4,687,500 Synthetic Facility, 8.26%, 382,166 06/28/13 381,210 5,617,834 Term Loan, 8.20%, 06/28/13 5,603,790 GBGH, LLC (U S Energy) First Lien Term Loan, 5,000,000 10.94%, 08/07/13 5,012,500 Second Lien Term Loan, 5,000,000 7.94%, 08/07/14 5,012,500 3,427,490 Midwest Generation LLC Term Loan, 04/27/11 (b) 3,451,071 5 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ SENIOR LOAN NOTES (CONTINUED) UTILITIES (CONTINUED) Plum Point Energy Associates, LLC First Lien Term Loan, 607,134 8.75%, 03/14/14 611,687 Funded Letter of Credit, 2,236,456 8.75%, 03/14/14 2,260,207 TECO Panda Generating Co. - Gila River Power Station Project Letter of Credit, 598,071 06/01/12 (b) 696,752 Tranche A Term Loan, 3,243,645 06/01/12 (b) 3,876,156 Tranche B Term Loan, 3,129,163 06/01/20 (b) 3,719,793 38,585 Working Capital, 06/01/12 (b) 44,952 TECO Panda Generating Co.- Union Power Partners, L.P. 173,633 Letter of Credit, 06/01/12 (b) 202,283 Tranche A Term Loan, 1,908,026 06/01/12 (b) 2,280,092 Tranche B Term Loan, 1,831,705 06/01/20 (b) 2,177,440 77,170 Working Capital, 06/01/12 (b) 89,903 --------------- 48,106,965 --------------- WIRELESS COMMUNICATIONS - 0.3% 2,000,000 Cricket Communications, Inc. Term B Facility, 8.25%, 06/16/13 2,019,000 --------------- TOTAL SENIOR LOAN NOTES (COST $707,256,771) 708,277,223 --------------- FOREIGN DENOMINATED SENIOR LOAN NOTES - 6.1% FRANCE EUR - 2.6% CABLE - INTERNATIONAL CABLE Ypso Holding SA Eur B (Acq) 1 Facility, 1,148,808 06/06/14 (b) 1,429,788 Eur B (Acq) 1 Facility, 1,531,744 5.61%, 06/15/14 1,905,900 Eur B (Acq) 2 Facility, 4,373,530 5.61%, 06/15/14 (b) 5,441,844 Eur B (Recap) 1 Facility, 3,969,096 5.61%, 06/15/14 4,938,619 Eur B (Recap) 1 Facility, 2,976,822 06/06/14 (b) 3,667,198 --------------- 17,383,349 --------------- GERMANY EUR - 1.0% BROADCASTING 5,000,000 P7S1 Holding II S.A..R.L - GMP Facility B, 7.09%, 07/08/11 6,347,635 --------------- PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ LUXEMBOURG EUR - 0.9% INFORMATION TECHNOLOGY Infor Enterprise Solutions Holdings, Inc. Euro Delayed Draw Bridge 1,915,423 Term Loan, 07/29/13 (b) 2,420,301 Stage One Euro Bridge 3,059,702 Facility, 07/29/13 (b) 3,866,196 --------------- 6,286,497 --------------- SPAIN EUR - 0.9% CABLE/WIRELESS VIDEO 5,000,000 Cableuropa, S.A.U. Term Loan, 05/14/14 (b) 6,286,261 --------------- UNITED KINGDOM GBP - 0.7% UTILITIES 750,000 Eggborough Power Ltd. Term Loan, 7.00%, 03/31/22 (b) 4,637,153 --------------- TOTAL FOREIGN DENOMINATED SENIOR LOAN NOTES (COST $41,170,108) 40,940,895 --------------- CORPORATE NOTES AND BONDS - 26.9% AEROSPACE - 0.7% 5,000,000 Standard Aero Holdings, Inc. 8.25%, 09/01/14 4,850,000 --------------- CABLE/WIRELESS VIDEO - 1.2% 4,500,000 CCH I LLC 11.00%, 10/01/15 4,117,500 4,000,000 Charter Communications Inc. 5.88%, 11/16/09 (f) 3,625,000 --------------- 7,742,500 --------------- CHEMICALS - 2.0% Solutia Inc. 8,000,000 10/15/27 (d) 7,800,000 5,500,000 10/15/37 (d) 5,362,500 --------------- 13,162,500 --------------- CONSUMER NON-DURABLES - 1.4% 3,000,000 Ames True Temper 9.51%, 01/15/12 (g) 3,030,000 Remington Arms Co., Inc. 500,000 10.50%, 02/01/11 (f) (h) 462,500 4,100,000 10.50%, 02/01/11 (f) 3,792,500 2,000,000 Solo Cup Co. Senior Subordinated Notes, 8.50%, 02/15/14 (f) 1,737,500 --------------- 9,022,500 --------------- DIVERSIFIED MEDIA - 1.0% 4,500,000 Network Communications, Inc. 10.75%, 12/01/13 4,522,500 6 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ CORPORATE NOTES AND BONDS (CONTINUED) DIVERSIFIED MEDIA (CONTINUED) 2,000,000 PRIMEDIA, Inc. Senior Notes, 10.78%, 05/15/10 (g) 2,055,000 --------------- 6,577,500 --------------- ENERGY - 0.4% 3,000,000 Massey Energy Co. Senior Notes, 6.63%, 11/15/10 2,940,000 --------------- FINANCIAL - 0.3% 2,000,000 Penhall International, Corp. Senior Secured Notes, 12.00%, 08/01/14 (f) (h) 2,105,000 --------------- FOOD/TOBACCO - 2.2% Chiquita Brands International, Inc. Senior Notes, 7.50%, 3,000,000 11/01/14 2,610,000 Senior Notes, 8.88%, 5,000,000 12/01/15 (f) 4,637,500 10,000,000 Swift & Co. PIK Holdco Notes, 8.00%, 03/19/10 7,400,000 --------------- 14,647,500 --------------- FOREST PRODUCTS - CONTAINERS - 1.5% 1,500,000 Impress Metal Packaging Holdings BV (Netherlands) 8.51%, 09/15/13 (f) (g) (h) 1,509,750 4,000,000 Graphic Packaging International, Inc. Senior Subordinated Notes, 9.50%, 08/15/13 (f) 4,110,000 4,000,000 NewPage Corp. Senior Subordinated Notes, 12.00%, 05/01/13 4,160,000 --------------- 9,779,750 --------------- GAMING/LEISURE - 2.4% Six Flags Theme Parks, Inc. Senior Notes, 4.50%, 3,600,000 05/15/15 3,784,500 Senior Notes, 8.88%, 4,500,000 02/01/10 (f) 4,331,250 8,000,000 Trump Entertainment Resorts Holdings LP 8.50%, 06/01/15 (f) 7,690,000 --------------- 15,805,750 --------------- HEALTHCARE - 0.5% 5,000,000 Rotech Healthcare, Inc. 9.50%, 04/01/12 (f) 3,450,000 --------------- HOUSING - 1.3% 1,000,000 Builders FirstSource, Inc. 9.66%, 02/15/12 (g) 985,000 3,000,000 Dayton Superior Corp. 13.00%, 06/15/09 (f) 2,835,000 PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ HOUSING (CONTINUED) 9,000,000 Owens Corning 08/01/18 (f) (d) 4,657,500 --------------- 8,477,500 --------------- ELECTRONICS/ELECTRIC - 0.8% 6,000,000 MagnaChip Semiconductor Senior Secured Notes, 8.64%, 12/15/11 (g) 5,100,000 --------------- MANUFACTURING - 0.4% 1,000,000 Polypore, Inc. Senior Subordinated Notes, 8.75%, 05/15/12 (f) 965,000 2,000,000 TFS Acquisition Corp Senior Secured Notes, 12.90%, 08/01/14 (g) (h) 2,005,000 --------------- 2,970,000 --------------- RETAIL - 2.9% 9,500,000 Blockbuster Entertainment Corp. Senior Subordinated Notes, 9.00%, 09/01/12 (f) 8,763,750 1,000,000 Finlay Fine Jewelry Corp. Senior Notes, 8.38%, 06/01/12 900,000 2,000,000 Gregg Appliances, Inc. 9.00%, 02/01/13 1,835,000 2,000,000 Linens 'n Things, Inc. 11.13%, 01/15/14 (g) 1,940,000 3,000,000 Movie Gallery Inc. Senior Unsecured Notes, 11.00%, 05/01/12 (f) 1,935,000 5,000,000 Toys "R" US, Inc. 7.88%, 04/15/13 4,081,250 --------------- 19,455,000 --------------- SERVICE - 1.1% 7,550,000 HydroChem Industrial Services, Inc. Senior Subordinated Notes, 9.25%, 02/15/13 (h) 7,512,250 --------------- TRANSPORTATION - 4.0% 5,000,000 American Tire Distributors Holdings, Inc. Senior Notes, 11.76%, 04/01/12 (g) 4,575,000 2,000,000 Cooper-Standard Automotive, Inc. 8.38%, 12/15/14 (f) 1,480,000 Delphi Corp. 5,000,000 06/15/06 (f) (d) 4,500,000 5,000,000 05/01/29 (f) (d) 4,250,000 Federal-Mogul Corp. 1,000,000 07/01/06 (d) 580,000 12,000,000 01/15/09 (d) 6,960,000 2,000,000 General Motors Accept Corp. 6.75%, 12/01/14 (f) 1,955,522 Stanadyne Corp. Senior Discount Notes, 2,250,000 12.00%, 02/15/15 (i) 1,496,250 7 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND PRINCIPAL AMOUNT ($) VALUE ($) --------------------- ------------ TRANSPORTATION (CONTINUED) Senior Subordinated Notes, 1,000,000 10.00%, 08/15/14 1,015,000 --------------- 26,811,772 --------------- UTILITIES - 0.4% 5,000,000 Calpine Corp. 02/15/11 (f) (d) 2,500,000 --------------- WIRELESS COMMUNICATIONS - 2.4% 999,990 Mobile Services Group Inc. Senior Notes, 9.75%, 08/01/14 (h) 1,029,990 SunCom Wireless Holdings, Inc. 5,000,000 8.50%, 06/01/13 (f) 4,662,500 1,500,000 8.75%, 11/15/11 (f) 1,128,750 12,000,000 9.38%, 02/01/11 (f) 9,030,000 --------------- 15,851,240 --------------- TOTAL CORPORATE NOTES AND BONDS (COST $177,243,193) 178,760,762 --------------- COMMON STOCKS - 2.1% 26,000 Diamond Offshore Drilling 1,881,620 528,000 Graphic Packaging Corp. (j) 1,932,480 65,472 Gray Television, Inc., Class A 452,412 259,100 GrayTelevision, Inc. 1,660,831 125,000 Ico Global Com Holding Ltd. (j) 731,250 100,067 Louisiana-Pacific Corp. 1,878,258 119,680 Newpark Resources, Inc. (j) 637,894 29,800 NRG Energy, Inc. (j) 1,349,940 110,000 Owens Illinois (f) (j) 1,696,200 20,000 Trump Entertainment Resorts, Inc. (j) 339,200 8 Westgate Investments LLC 25,000 47,150 Williams Cos., Inc. 1,125,470 --------------- TOTAL COMMON STOCKS (COST $14,193,809) 13,710,555 --------------- TOTAL INVESTMENTS - 141.6% 941,689,435 --------------- (cost of $939,863,881) (k) OTHER ASSETS & LIABILITIES, NET - (41.6)% (276,596,290) --------------- NET ASSETS APPLICABLE TO COMMON SHAREHOLDERS - 100.0% 665,093,145 =============== --------------------- (a) Senior loans in which the Fund invests generally pay interest at rates which are periodically predetermined by reference to a base lending rate plus a premium. (Unless otherwise identified by footnote (c), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Inter-Bank Offered Rate ("LIBOR") or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at September 30, 2006. Senior loans, while exempt from registration under the Security Act of 1933, as amended, 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 maturities shown. (b) All or a portion of this position has not settled. Contract rates do not take effect until settlement date. (c) Senior Loan Notes have additional unfunded loan commitments. As of Senior Loan Notes have additional unfunded loan commitments. As of September 30, 2006, the Portfolio had unfunded loan commitments of $2,304,989, which could be extended at the option of the Borrower, pursuant to the following loan agreements: UNFUNDED LOAN BORROWER COMMITMENT Ferro Corp. $ 666,667 Millennium Digital Media Systems, LLC 1,238,322 Oglebay Norton Co. 400,000 ---------- $2,304,989 ========== (d) The issuer is in default of certain debt covenants. Income is not being accrued. (e) Fixed Rate Senior Loan. (f) Securities (or a portion of securites) on loan as of September 30, 2006. 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. As a matter of 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 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 or receives a fee from the borrower. As of September 30, 2006, the market value of securities loaned by the Fund was $73,810,609. The loans were secured with cash collateral of $75,403,290. (g) Floating rate note. The interest rate shown reflects the rate in effect at September 30, 2006. 8 INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED) SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND (h) Security exempt from registration under Rule 144A of the Securities Act of 1933, as amended. This security is purchased in accordance with guidelines approved by the Fund's Board of Trustees and may only be resold, in transactions exempt from registration, to qualified institutional buyers. At September 30, 2006, this security amounted to $14,624,490 or 2.2% of net assets. This security has been determined by the Adviser to be a liquid security. (i) Step Coupon. A bond that pays an initial coupon rate for the first period and then a higher coupon rate for the following periods until maturity. Interest rate presented represents annualized yield at time of purchase. The coupon rate will be 0.000% until the date shown and the subsequent rate thereafter. (j) Non-income producing security. (k) Cost for Federal income tax purposes is $939,863,881. Gross unrealized appreciation $ 8,693,619 Gross unrealized depreciation (6,868,065) ------------- Net unrealized appreciation $ 1,825,554 ============= DIP Debtor in Possession LP Limited Partnership PIK Payment in Kind Investments sold short outstanting at September 30, 2006: TYPE SHARES VALUE --------------------------------------------------------------- Sharper Image 82,800 $ 852,840 Superior Industries International, Inc. 114,720 1,926149 ----------- $ 2,778,989 =========== SECURITY VALUATION: The value of the Fund's assets is based on the current market value of its investments. For securities with readily available market quotations, the Fund uses those quotations for pricing. When portfolio securities are traded on the relevant day of valuation, the valuation will be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and asked prices from principal market makers. Securities without a sale price or bid and ask quotations on the valuation day will be priced by an independent pricing service. If securities do not have readily available market quotations or pricing service prices, including circumstances under which such are determined not to be accurate or current (including when events materially affect the value of securities occurring between the time when market price is determined and calculation of the Fund's net asset value), such securities are valued at their fair value, as determined in good faith in accordance with procedures established by the Fund's Board of Trustees. In these cases, the Fund's net asset value will reflect the affected portfolio securities' value as determined in the judgment of the Board of Trustees or its designee instead of being determined by the market. Using a fair value pricing methodology to price 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 net asset values. 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. For more information with regard to significant accounting policies, see the most recent semi-annual report filed with the Securities and Exchange Commission. 9 ITEM 2. CONTROLS AND PROCEDURES. (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 last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 3. EXHIBITS. Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) HIGHLAND CREDIT STRATEGIES FUND By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date OCTOBER 16, 2006 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ JAMES D. DONDERO ------------------------------------------------------- James D. Dondero, Chief Executive Officer (principal executive officer) Date OCTOBER 16, 2006 ---------------------------------------------------------------------------- By (Signature and Title)* /S/ M. JASON BLACKBURN ------------------------------------------------------- M. Jason Blackburn, Chief Financial Officer (principal financial officer) Date OCTOBER 16, 2006 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature.