UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-21869
NEXPOINT CREDIT STRATEGIES FUND
(Exact name of registrant as specified in charter)
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Address of principal executive offices) (Zip code)
NexPoint Advisors, L.P.
200 Crescent Court
Suite 700
Dallas, Texas 75201
(Name and Address of Agent for Service)
Registrants telephone number, including area code: (877) 665-1287
Date of fiscal year end: December 31
Date of reporting period: December 31, 2013
Item 1. Reports to Stockholders.
A copy of the Report to Shareholders transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940 is attached herewith.
NexPoint Credit Strategies Fund
Annual Report
December 31, 2013
NexPoint Credit Strategies Fund
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Economic and market conditions change frequently.
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.
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| Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone contacts; |
| Web site information, including any information captured through the use of cookies; and |
| Account history, including information about the transactions and balances in your accounts with us or our affiliates. |
Disclosure of Information. We may share the information we collect with our affiliates. We may also disclose this information as otherwise permitted by law. We do not sell your personal information to third parties for their independent use.
Confidentiality and Security of Information. We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.
PORTFOLIO MANAGER COMMENTARY (unaudited)
December 31, 2013 | NexPoint Credit Strategies Fund |
2013: A Step in the Right Direction
We are pleased to report strong 2013 results for the Funds shareholders. As discussed in our letter last year, we refocused the priorities in NexPoint Credit Strategies Fund (the Fund) beginning in the summer of 2012. We believe we can consistently outperform the DJ Credit Suisse Hedge Fund Index and the HFRX Global Hedge Fund Index. The Fund had the best NAV performance of all closed-end funds in 201311, up 61.55%, and was one of only 43 credit oriented funds to increase its dividend during the year, increasing it three times for a total increase of 43%. For the month of February 2014, the Trustees approved an additional dividend increase of 10%. The Fund now pays a monthly dividend of $.055 per share. As of December 31, 2013, the Fund had an undistributed net investment income balance of $6.4 million or $.100 per share, representing income that has been earned but not paid out to shareholders. This balance provides a cushion to maintain the current monthly dividend if the portfolio suffers defaults or losses of income in the future. The annualized earn rate on assets as of January 31, 2014, is $.684 per share; the current monthly distribution is $.055 per share, or $.66 per share annually.
2013 Performance
In 2013, the Fund (NAV) returned 61.55% and the stock price was up 52.03%, including reinvested dividends. The Funds performance compared very favorably to the Funds two benchmarks, the DJ Credit Suisse Hedge Fund Index (+ 9.73%) and the HFRX Global Hedge Fund Index (+6.72%) as well as to other credit focused closed-end funds. In 2013, 43 credit funds increased their dividend, 93 credit funds decreased their dividend and 8 credit funds left their dividend unchanged (source: Morningstar, includes only credit oriented funds). The Fund increased its regular monthly dividend three times during 2013 for a total increase of 43%.
For the year, the top five performing investments in the portfolio were American Airlines Group common stock, Media General/New Young Broadcasting common stock, Communications Corporation of America common stock, American Express Co. common stock, and Metro-Goldwyn-Mayer Inc common stock. The top five underperforming investments in the portfolio in 2013 were ProShares Ultra Silver ETF, Celtic Pharma Phinco bond, LLV Holding Co. equity and debt, ProShares UltraShort Russell 2000 ETF, Oracle Corporation equity short and Chesapeake Energy Corporation equity short. In 2013, the Funds equity investments outperformed all other asset classes contributing 51.8% to the Funds NAV. CLOs were the second best performing asset class contributing 5.7% to the Funds NAV.
As of December 31, 2012, the Funds investments were allocated among the following asset classes:
As of December 31, 2013, the Funds investments were allocated among the following asset classes:
1 | Morningstar |
Annual Report | 1 |
PORTFOLIO MANAGER COMMENTARY (unaudited)
December 31, 2013 | NexPoint Credit Strategies Fund |
During 2013, the Fund increased its allocation to CLOs. We feel CLOs are a more efficient way to gain exposure to syndicated floating rate bank debt. Beginning in the summer of 2013, we also began allocating a portion of the portfolio to real estate through a wholly-owned private REIT subsidiary that invests directly in real estate. The allocation to private equity increased through additional market gains not purchases.
The Funds Strategy
The Fund is managed as an asset allocation strategy that attempts to exceed the return of the Funds two benchmarks in a transparent, registered fund format, paying a stable monthly dividend. We consider the Fund similar to a hedge fund and position the portfolio accordingly. We will typically allocate the Funds investments in the following asset classes: public equities, private equity investments, collateralized loan obligation (CLOs) debt, high yield bonds, syndicated floating rate bank loans, real estate assets, CLO equity and will hedge exposure where necessary.
Our View of the Year Ahead
In 2014, we believe the equity markets will encounter significant head winds compared to 2013, especially in emerging markets. Based on our research, we believe equities may be poised for a significant pullback of 10% or more and that choppy and/or declining markets may last longer than some expect. Specifically we notice that on an historical basis the US equity market appears to be overvalued measured as a percentage of US GDP. As the chart below shows, the two previous times the total capitalization of the U.S. equity market hit 140% of U.S. GDP (2000 and 2008), the S&P 500 suffered a pullback of over 20%, with 2008 being the worst decline since the Great Depression.
Source: Ron Griess, www.thechartstore.com
2 | Annual Report |
PORTFOLIO MANAGER COMMENTARY (unaudited)
December 31, 2013 | NexPoint Credit Strategies Fund |
Of equal concern to us is the high level of margin debt shown in the chart below. Again, the last two times margin debt was at current levels (2000 and 2008), the S&P 500 suffered a pullback of over 20%.
Source: Alan Newman, www.cross-currents.net
Finally, we are concerned about the disparity between household net worth and disposable personal income, as shown in the chart below. Household net worth in the U.S. is driven largely by gains in the equity and housing markets, which we believe have been artificially inflated by easy money policies by the Federal Reserve and is not sustainable in the long-term. The same factors were present in 2000 and 2008 and a severe decline in the equity markets followed.
Annual Report | 3 |
PORTFOLIO MANAGER COMMENTARY (unaudited)
December 31, 2013 | NexPoint Credit Strategies Fund |
Reviewing these observations, U.S. equity market capitalization to U.S. GDP, margin debt and household net worth to disposable income together, we believe a 20% pullback in the broader equity markets is possible. However, we are not bears long-term and feel any correction will be a healthy clearing of the market and then it will resume its upward trajectory. We believe it will be a stock pickers market with opportunities among downtrodden and misunderstood situations. Although we feel some are overly optimistic regarding GDP and employment growth in the U.S., we do feel both will continue to improve. We believe the Federal Reserve will be slow to increase rates or remove tapering, erring on the side of accommodation. We will watch emerging markets carefully, and move in to these markets if we see a bottom forming in 2014.
As for credit markets, our view is that credit still provides attractive risk-adjusted returns and yields. Given the importance of yield in todays environment, particularly in the closed-end fund universe, we intend to have high allocations to credit and credit alternatives. Although we are weary of long duration fixed income investments, we still see value in high yield investments, including bonds, with maturities of less than five years. Our opinion is that the Federal Reserve will work to keep the short end of the yield curve low until there is a reduction in the unemployment rate below 5.5%. GDP growth has been anemic for a recovery in its sixth year and lower unemployment rates mask a drop in workforce participation. We see rates remaining lower thru 2015.
As always, the Federal Reserves actions will be a major determinant in how the equity and credit markets fare this year.
Portfolio Allocation
As a result of our views of the equity and credit markets we intend to have large allocations to low duration credit investments and credit alternatives with opportunistic allocations to value equities. The Fund will be cautious in its allocations to equities in 2014. Our focus with regard to equities will be on undervalued stocks with catalysts to the upside. We will continue to hedge our overall equity exposure and short more single names we feel are overvalued with a downside risk. On the credit side, we anticipate our allocations to liquid syndicated floating rate bank debt and high yield bonds will remain largely unchanged. However, our allocation to CLO debt and equity tranches will increase. We see the strongest risk-adjusted returns and yields in this asset class.
Although not a large contributor to returns in 2013, the Fund began to allocate to real estate investments in mid-2013. The Fund set up a private REIT subsidiary and is funding the purchase of real estate, predominantly class B multi-family properties but also opportunistic retail investments. Both categories provide high cash flow. We view these real estate investments as credit alternatives. They pay a healthy and stable yield, while offering strong collateral, and a low correlation versus credit and equity markets. We intend to allocate 15-20% of the Funds total assets to this private REIT in 2014.
As is our philosophy, we will continue to diversify the portfolio across asset classes and sectors but will continue to make large allocations to our highest conviction ideas in an effort to generate meaningful alpha and outperformance against relevant indices and competing funds.
Shareholder Loyalty Program
In July 2012, we developed and implemented a unique and creative Dividend Reinvestment Plan (the DRIP Program) that we believe rewards long-term shareholders while aligning the interests of the portfolio manager and other employees of the manager with those of the Funds shareholders. The primary purpose of the DRIP Program is to promote shareholder loyalty. The DRIP Program offers shareholders a 2% gross-up on all new purchases made through accounts held by the DRIP Programs administrator that are held for at least 12-months after initial purchase date. The DRIP Program was offered to employees of NexPoint and affiliates beginning in July 2012 and has increased direct employee ownership in the Fund from less than 1% of outstanding shares to 7% as of January, 2014. As of February 15, 2014, the DRIP Program had accumulated 5.7 million shares of the Funds stock, representing 8.3% of the outstanding shares or $61.6 million in value. All costs of the program, including the cost of the gross-up on purchases and dividend reinvestments, are paid by the manager, not by the Fund.
We believe over time the DRIP Program will prove an effective means of increasing liquidity and ultimately reducing the market price discount to NAV.
James Dondero
President and Portfolio Manager
4 | Annual Report |
NexPoint Credit Strategies Fund |
Objective
The NexPoint Credit Strategies Fund (the Fund) seeks to provide both current income and capital appreciation.
Total Net Assets of Common Shares as of December 31, 2013
$724.5 million
Portfolio Data as of December 31, 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.
Top 10 Holdings as of 12/31/2013 (%)(1)(2) | ||||
Media General, Inc. (Common Stocks) |
15.4 | |||
AAL (Rights) |
14.7 | |||
Freedom REIT (Private REIT) |
5.9 | |||
ComCorp Broadcasting, Inc. (U.S. Senior Loans) |
4.9 | |||
ProShares Ultra Silver, ETF (Exchange-Traded Funds) |
4.8 | |||
K12, Inc. (Common Stocks) |
4.5 | |||
Fortinet, Inc. (Common Stocks) |
3.6 | |||
Spirit Realty Capital, Inc. (Common Stocks) |
3.6 | |||
Nokia OYJ (Foreign Corporate Bonds & Notes) |
3.3 | |||
Texas Competitive Electric Holdings Co. LLC (U.S. Senior Loans) |
3.2 |
(1) | Quality is calculated as a percentage of total senior loans, asset-backed securities and corporate bonds & notes. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Funds portfolio and not that of the Fund itself. Quality Ratings are subject to change. |
(2) | Excludes the Funds investment in an investment company purchased with cash collateral from securities lending. |
Annual Report | 5 |
December 31, 2013 | NexPoint Credit Strategies Fund |
A guide to understanding the Funds financial statements
Investment Portfolio | The Investment Portfolio details all of the Funds holdings and their value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification. | |
Statement of Assets and Liabilities | This statement details the Funds assets, liabilities, net assets and common share price as of the last day of the reporting period. Net assets are calculated by subtracting all the Funds liabilities (including any unpaid expenses) from the total of the Funds investment and non-investment assets. The net asset value per common share is calculated by dividing net assets by the number of common shares outstanding as of the last day of the reporting period. | |
Statement of Operations | This statement reports income earned by the Fund and the expenses accrued by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Funds net increase or decrease in net assets from operations applicable to common shareholders. | |
Statements of Changes in Net Assets | These statements detail how the Funds net assets were affected by its operating results, distributions to common shareholders and shareholder transactions from common shares (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statements of Changes in Net Assets also detail changes in the number of common shares outstanding. | |
Statement of Cash Flows | This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period. | |
Financial Highlights | The Financial Highlights demonstrate how the Funds net asset value per common share was affected by the Funds operating results. The Financial Highlights also disclose the Funds performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets). | |
Notes to Financial Statements | These notes disclose the organizational background of the Fund, its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies. |
6 | Annual Report |
As of December 31, 2013 | NexPoint Credit Strategies Fund |
See accompanying Notes to Financial Statements. | 7 |
INVESTMENT PORTFOLIO (continued)
As of December 31, 2013 | NexPoint Credit Strategies Fund |
8 | See accompanying Notes to Financial Statements. |
INVESTMENT PORTFOLIO (continued)
As of December 31, 2013 | NexPoint Credit Strategies Fund |
See accompanying Notes to Financial Statements. | 9 |
INVESTMENT PORTFOLIO (continued)
As of December 31, 2013 | NexPoint Credit Strategies Fund |
10 | See accompanying Notes to Financial Statements. |
INVESTMENT PORTFOLIO (continued)
As of December 31, 2013 | NexPoint Credit Strategies Fund |
See accompanying Notes to Financial Statements. | 11 |
INVESTMENT PORTFOLIO (continued)
As of December 31, 2013 | NexPoint Credit Strategies Fund |
12 | See accompanying Notes to Financial Statements. |
INVESTMENT PORTFOLIO (continued)
As of December 31, 2013 | NexPoint Credit Strategies Fund |
See accompanying Notes to Financial Statements. | 13 |
STATEMENTS OF ASSETS AND LIABILITIES
As of December 31, 2013 | NexPoint Credit Strategies Fund |
($) | ||||
Assets: |
||||
Unaffiliated issuers, at value (cost $928,500,863)(a) |
900,811,093 | |||
Affiliated issuers, at value (cost $167,135,761) (Note 12) |
$ | 170,669,686 | ||
|
|
|||
Total investments, at value (cost $1,095,636,624) |
1,071,480,779 | |||
Foreign currency (cost $2,876,696) |
2,886,963 | |||
Restricted Cash Securities sold short (Note 2) |
75,438,228 | |||
Receivable for: |
||||
Investments sold |
1,455,263 | |||
Dividends & interest receivable |
9,394,623 | |||
Other assets |
86,215 | |||
|
|
|||
Total assets |
1,160,742,071 | |||
|
|
|||
Liabilities: |
||||
Due to Custodian |
15,871,110 | |||
Notes payable (Notes 6 and 7) |
318,500,000 | |||
Securities sold short, at value (Proceeds $81,502,729) (Notes 2 and 10) |
92,703,773 | |||
Net unrealized depreciation on forward foreign currency exchange contracts |
240,356 | |||
Payable upon receipt of securities loaned (Note 4) |
1,919,814 | |||
Payables for: |
||||
Investments purchased |
5,107,792 | |||
Investment advisory fee payable (Note 9) |
825,149 | |||
Administration fee (Note 9) |
158,433 | |||
Audit and tax payable |
191,523 | |||
Trustees fees (Note 9) |
19,112 | |||
Interest expense (Notes 6 and 7) |
294,795 | |||
Accrued expenses and other liabilities |
425,218 | |||
|
|
|||
Total Liabilities |
436,257,075 | |||
|
|
|||
Net Assets Applicable To Common Shares |
724,484,996 | |||
|
|
|||
Composition of Net Assets: |
||||
Par value of common shares (Note 1) |
63,881 | |||
Paid-in capital in excess of par value of common shares |
1,139,462,715 | |||
Undistributed net investment income |
6,414,491 | |||
Accumulated net realized gain/(loss) from investments, securities sold short, written options and foreign currency transactions |
(385,866,887 | ) | ||
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 |
(35,589,204 | ) | ||
|
|
|||
Net Assets Applicable to Common Shares |
724,484,996 | |||
|
|
|||
Common Shares |
||||
Net assets |
724,484,996 | |||
Shares outstanding (unlimited authorization) |
63,881,473 | |||
Net asset value per share (Net assets/shares outstanding) |
11.34 |
(a) | Includes market value of securities on loan of $1,909,969. |
14 | See accompanying Notes to Financial Statements. |
For the Year Ended December 31, 2013 | NexPoint Credit Strategies Fund |
($) | ||||
Investment Income: |
||||
Interest from unaffiliated issuers |
37,717,499 | |||
Interest from affiliated issuers (Note 12) |
681,706 | |||
Dividends (Net of withholdings tax of $8,044) |
16,756,395 | |||
Securities lending income (Note 4) |
328,733 | |||
Other income |
33,457 | |||
|
|
|||
Total investment income |
55,517,790 | |||
|
|
|||
Expenses: |
||||
Investment advisory fees (Note 9) |
8,050,253 | |||
Administration fees (Note 9) |
1,603,454 | |||
Accounting service fees |
244,269 | |||
Transfer agent fee |
87,566 | |||
Trustees fees (Note 9) |
94,066 | |||
Custodian fees |
6,956 | |||
Reports to shareholders |
153,961 | |||
Audit fees |
244,313 | |||
Legal fees |
1,671,942 | |||
Insurance expense |
50,561 | |||
Interest expense (Notes 6 and 7) |
3,412,769 | |||
Dividends and expenses on securities sold short (Note 2) |
266,978 | |||
Other expenses |
74,629 | |||
|
|
|||
Total operating expenses |
15,961,717 | |||
|
|
|||
Net investment income |
39,556,073 | |||
|
|
|||
Net Realized and Unrealized Gain/(Loss) on Investments: |
||||
Net realized gain/(loss) on investments from unaffiliated issuers |
73,960,991 | |||
Net realized gain/(loss) on securities sold short (Note 2) |
555,400 | |||
Net realized gain/(loss) on written options (Note 3) |
3,995,994 | |||
Net realized gain/(loss) on forward foreign currency exchange contracts (Note 3) |
(440,040 | ) | ||
Net realized gain/(loss) on foreign currency transactions |
32,034 | |||
Net change in unrealized appreciation/(depreciation) on investments |
177,124,637 | |||
Net change in unrealized appreciation/(depreciation) on securities sold short (Note 2) |
(11,750,784 | ) | ||
Net change in unrealized appreciation/(depreciation) on written options (Note 3) |
107,942 | |||
Net change in unrealized appreciation/(depreciation) on forward foreign currency exchange contracts (Note 3) |
174,955 | |||
Net change in unrealized appreciation/(depreciation) on translation of assets and liabilities denominated in foreign currency |
(24,663 | ) | ||
|
|
|||
Net realized and unrealized gain/(loss) on investments |
243,736,466 | |||
|
|
|||
Net increase in net assets from operations |
283,292,539 | |||
|
|
See accompanying Notes to Financial Statements. | 15 |
STATEMENTS OF CHANGES IN NET ASSETS
NexPoint Credit Strategies Fund |
Year Ended December 31, 2013 ($) |
Year Ended December 31, 2012 ($) |
|||||||
From Operations |
||||||||
Net investment income |
39,556,073 | 27,367,939 | ||||||
Net realized gain/(loss) on investments, securities sold short, written options, forward foreign currency contracts and foreign currency transactions |
78,104,379 | (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 |
165,632,087 | 41,426,537 | ||||||
|
|
|
|
|||||
Net change in net assets from operations |
283,292,539 | 60,365,264 | ||||||
|
|
|
|
|||||
Distributions Declared to Common Shareholders |
||||||||
From net investment income |
(35,070,929 | ) | (27,149,626 | ) | ||||
|
|
|
|
|||||
Total distributions declared to common shareholders |
(35,070,929 | ) | (27,149,626 | ) | ||||
|
|
|
|
|||||
Total increase in net assets from common shares |
248,221,610 | 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 $6,414,491 and $4,039,033, respectively) |
724,484,996 | 476,263,386 | ||||||
|
|
|
|
|||||
Change in Common Shares |
||||||||
Net increase (decrease) in common shares |
| | ||||||
|
|
|
|
16 | See accompanying Notes to Financial Statements. |
For the Year Ended December 31, 2013 | NexPoint Credit Strategies Fund |
($) | ||||
Cash Flows Used in Operating Activities |
||||
Net increase from operations |
283,292,539 | |||
Adjustments to Reconcile Net Investment Income to Net Cash Used in Operating Activities |
||||
Purchases of investment securities from unaffiliated issuers |
(884,442,859 | ) | ||
Proceeds from disposition of investment securities from unaffiliated issuers |
804,861,036 | |||
Purchases of investment securities from affiliated issuers |
(42,679,484 | ) | ||
Proceeds from disposition of investment securities from affiliated issuers |
4,558,190 | |||
Purchases of purchased options |
(2,227,204 | ) | ||
Proceeds from the disposition of purchased options |
220,791 | |||
Purchases of securities sold short |
(24,981,852 | ) | ||
Proceeds from disposition of securities sold short |
101,639,313 | |||
Net premium received on written options |
1,044,317 | |||
Paydowns at cost |
8,209,656 | |||
Net accretion of discount |
(7,563,441 | ) | ||
Net realized gain on investments from unaffiliated issuers |
(73,960,991 | ) | ||
Net realized gain on securities sold short, written options contracts, and foreign currency related transactions |
(4,143,388 | ) | ||
Net change in unrealized appreciation on investments, securities sold short, written options contracts and foreign currency related translations |
(165,632,087 | ) | ||
Net change in short-term investments |
(1,919,814 | ) | ||
Increase in restricted cash |
(73,783,337 | ) | ||
Decrease in cash held with prime broker |
3,464,191 | |||
Decrease in receivable for investments sold |
35,588,648 | |||
Increase in dividends and interest receivable |
(4,992,569 | ) | ||
Increase in receivable for other assets |
(71,798 | ) | ||
Decrease in payable for investments purchased |
(8,060,762 | ) | ||
Decrease in payable for distributions |
(77,628 | ) | ||
Increase in payable for audit and tax |
191,523 | |||
Increase in payables to related parties |
258,410 | |||
Increase in payable upon receipt of securities loaned |
1,899,954 | |||
Decrease in payable to prime broker |
(21,791,386 | ) | ||
Decrease in payable for interest expense |
(451,863 | ) | ||
Decrease in dividends payable on securities sold short |
(3,888 | ) | ||
Increase in accrued expenses and other liabilities |
66,122 | |||
|
|
|||
Net cash flow used in operating activities |
(71,489,661 | ) | ||
Cash Flows Provided by Financing Activities |
||||
Increase in notes payable |
93,500,000 | |||
Distributions paid in cash |
(35,070,929 | ) | ||
|
|
|||
Net cash flow provided by financing activities |
58,429,071 | |||
Effect of exchange rate changes on cash |
7,028 | |||
|
|
|||
Net decrease in cash |
(13,053,562 | ) | ||
Cash & Foreign Currency/Due to Custodian |
||||
Beginning of the year |
69,415 | |||
|
|
|||
End of the year |
(12,984,147 | ) | ||
|
|
|||
Supplemental disclosure of cash flow information: |
||||
Cash paid during the year for interest |
3,412,769 | |||
|
|
See accompanying Notes to Financial Statements. | 17 |
NexPoint Credit Strategies Fund |
Selected data for a share outstanding throughout each period is as follows:
For the Years Ended December 31, | ||||||||||||||||||||
Common Shares Per Share Operating Performance: | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Net Asset Value, Beginning of Period |
$ | 7.46 | $ | 6.94 | $ | 7.72 | $ | 7.20 | $ | 6.51 | ||||||||||
Income from Investment Operations: |
||||||||||||||||||||
Net investment income |
0.63 | 0.43 | 0.47 | 0.59 | 0.74 | |||||||||||||||
Net realized and unrealized gain/(loss) |
3.80 | 0.52 | (0.72 | ) | 0.56 | 0.74 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total from investment operations |
4.43 | 0.95 | (0.25 | ) | 1.15 | 1.48 | ||||||||||||||
Less Distributions Declared to Common Shareholders: |
||||||||||||||||||||
From net investment income |
(0.55 | ) | (0.43 | ) | (0.53 | ) | (0.63 | ) | (0.79 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total distributions declared to common shareholders |
(0.55 | ) | (0.43 | ) | (0.53 | ) | (0.63 | ) | (0.79 | ) | ||||||||||
Net Asset Value, End of Period |
$ | 11.34 | $ | 7.46 | $ | 6.94 | $ | 7.72 | $ | 7.20 | ||||||||||
Market Value, End of Period |
$ | 9.42 | $ | 6.64 | $ | 6.18 | $ | 7.58 | $ | 6.31 | ||||||||||
Market Value Total Return(a) |
52.03 | % | 14.73 | % | (12.18 | )% | 30.76 | % | 27.69 | % | ||||||||||
Ratios and Supplemental Data: |
||||||||||||||||||||
Net assets, end of period (in 000s) |
$ | 724,485 | $ | 476,263 | $ | 443,048 | $ | 492,753 | $ | 458,764 | ||||||||||
Common Share Information at End of Period: |
||||||||||||||||||||
Ratios based on average net assets of common shares: |
||||||||||||||||||||
Gross operating expenses (excluding interest expense and commitment fee)(b) |
2.22 | % | 2.22 | % | 2.23 | % | 2.13 | % | 2.41 | % | ||||||||||
Interest expense and commitment fee |
0.60 | % | 0.92 | % | 0.92 | % | 1.01 | % | 1.49 | % | ||||||||||
Fees and expenses waived |
N/A | N/A | N/A | (0.14 | )% | (0.31 | )% | |||||||||||||
Net operating expenses (including interest expense and commitment fee)(b) |
2.82 | % | 3.14 | % | 3.15 | % | 3.00 | % | 3.59 | % | ||||||||||
Net investment income |
7.01 | % | 6.00 | % | 6.24 | % | 7.92 | % | 11.09 | % | ||||||||||
Ratios based on managed net assets of common shares: |
||||||||||||||||||||
Gross operating expenses (excluding interest and commitment fee expense)(b) |
1.56 | % | 1.60 | % | 1.61 | % | 1.70 | % | 1.93 | % | ||||||||||
Interest expense and commitment fee |
0.42 | % | 0.66 | % | 0.66 | % | 0.81 | % | 1.19 | % | ||||||||||
Fees and expenses waived |
N/A | N/A | N/A | (0.11 | )% | (0.25 | )% | |||||||||||||
Net operating expenses (including interest expense and commitment fee)(b) |
1.98 | % | 2.26 | % | 2.27 | % | 2.40 | % | 2.87 | % | ||||||||||
Net investment income |
4.91 | % | 4.32 | % | 4.50 | % | 6.34 | % | 8.88 | % | ||||||||||
Portfolio turnover rate |
74 | % | 92 | % | 52 | % | 91 | % | 88 | % |
(a) | Based on market value per share. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Funds Dividend Reinvestment Plan. |
(b) | Includes dividends and expenses on securities sold short. |
18 | See accompanying Notes to Financial Statements. |
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 19 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
20 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 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 Funds assets as of December 31, 2013 is as follows:
Total value at December 31, 2013 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs |
|||||||||||||
Assets |
||||||||||||||||
U.S. Senior Loans |
$ | 138,168,603 | $ | | $ | 95,599,158 | $ | 42,569,445 | (2) | |||||||
Foreign Denominated or Domiciled Senior Loans |
386,509 | | 228,751 | 157,758 | ||||||||||||
Asset-Backed Securities |
159,977,786 | | 144,416,158 | 15,561,628 | ||||||||||||
Corporate Bonds & Notes |
||||||||||||||||
Chemicals |
15,975,834 | | 15,975,834 | | ||||||||||||
Energy |
9,423,525 | | 9,423,525 | | ||||||||||||
Food & Drug |
992,500 | | 992,500 | | ||||||||||||
Gaming & Leisure |
4,075,000 | | 4,075,000 | | ||||||||||||
Healthcare |
3,747,536 | | | 3,747,536 | ||||||||||||
Housing |
1,217,812 | | 1,217,812 | | ||||||||||||
Information Technology |
33,354,900 | | 33,354,900 | | ||||||||||||
Media & Telecommunications |
3,281,250 | | 3,281,250 | | ||||||||||||
Retail |
5,547,500 | | 5,547,500 | | ||||||||||||
Service |
11,392,048 | | 11,392,048 | | ||||||||||||
Telecommunications |
3,191,250 | | 3,191,250 | | ||||||||||||
Transportation |
520,553 | | 520,553 | | ||||||||||||
Utility |
11,432,500 | | 11,432,500 | | ||||||||||||
Foreign Corporate Bonds & Notes |
34,424,087 | | 34,424,087 | | ||||||||||||
Common Stocks |
||||||||||||||||
Broadcasting |
16,084,928 | | | 16,084,928 | ||||||||||||
Consumer Discretionary |
75,683,797 | 75,683,797 | | | ||||||||||||
Consumer Staples |
742,082 | 742,082 | | | ||||||||||||
Energy |
3,216,330 | 3,216,330 | | | ||||||||||||
Financial |
5,345,023 | 5,002,506 | | 342,517 | ||||||||||||
Gaming & Leisure |
| | | | (2) | |||||||||||
Healthcare |
15,996,316 | 2,004,316 | | 13,992,000 | ||||||||||||
Housing |
1,126,539 | | | 1,126,539 | ||||||||||||
Information Technology |
41,405,128 | 41,405,128 | | | ||||||||||||
Media & Telecommunications |
132,984,723 | 112,212,879 | 20,771,844 | | (2) | |||||||||||
Metals & Minerals |
2,733,225 | 2,733,225 | | | ||||||||||||
Real Estate Investment Trust |
89,064,379 | 46,100,365 | | 42,964,014 | ||||||||||||
Telecommunications |
510,850 | 510,850 | | | ||||||||||||
Transportation |
13 | 13 | | | ||||||||||||
Utility |
5,074,691 | 4,947,394 | 127,297 | | ||||||||||||
Wireless Communications |
4,543,663 | 4,543,663 | | | ||||||||||||
Preferred Stocks |
||||||||||||||||
Financial |
78,842,431 | | 64,623,600 | 14,218,831 | ||||||||||||
Real Estate |
| | | | (2) | |||||||||||
Exchange-Traded Funds(1) |
52,251,205 | 52,251,205 | | | ||||||||||||
Rights |
106,846,449 | | 106,846,449 | | ||||||||||||
Warrants(1) |
||||||||||||||||
Equity Contracts |
| | | | (2) | |||||||||||
Investment Companies |
1,919,814 | 1,919,814 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
$ | 1,071,480,779 | $ | 353,273,567 | $ | 567,442,016 | $ | 150,765,196 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Securities Sold Short |
$ | (92,703,773 | ) | $ | (92,703,773 | ) | $ | | $ | | ||||||
Other Financial Instruments |
||||||||||||||||
Forward Foreign Currency Contracts Foreign Exchange Contracts |
(240,356 | ) | (240,356 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
$ | (92,944,129 | ) | $ | (92,944,129 | ) | $ | | $ | | ||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 978,536,650 | $ | 260,329,438 | $ | 567,442,016 | $ | 150,765,196 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
(2) | This category includes securities with a value of zero. |
Annual Report | 21 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
The table below sets forth a summary of changes in the Funds Level 3 assets (assets measured at fair value using significant unobservable inputs) for the year ended December 31, 2013.
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 December 31, 2013 |
Change
in Unrealized Gain/(Loss) on Level 3 securities still held at period end |
|||||||||||||||||||||||||||||||
U.S. Senior Loans |
$ | 42,087,789 | $ | | $ | | $ | 1,073,704 | $ | 27,766 | $ | (2,503,850 | ) | $ | 2,711,432 | $ | (827,396 | ) | 42,569,445 | $ | (2,503,850 | ) | ||||||||||||||||||
Foreign |
187,531 | | | | 165 | 225,222 | 1,437 | (256,597 | ) | 157,758 | 225,222 | |||||||||||||||||||||||||||||
Asset-Backed Securities |
1,700,238 | 12,630,200 | | 539,663 | (19,749 | ) | 46,057 | 733,720 | (68,501 | ) | 15,561,628 | 46,057 | ||||||||||||||||||||||||||||
Corporate Bonds & Notes |
8,435,914 | 1,379,833 | (520,552 | ) | | | (5,189,970 | ) | | (357,689 | ) | 3,747,536 | (5,916,031 | ) | ||||||||||||||||||||||||||
Claims |
| | | | (1,752,328 | ) | 1,192,006 | 560,322 | | | | |||||||||||||||||||||||||||||
Common Stocks |
||||||||||||||||||||||||||||||||||||||||
Broadcasting |
24,671,202 | | | | 1,438,321 | 10,367,451 | | (20,392,046 | ) | 16,084,928 | 15,464,251 | |||||||||||||||||||||||||||||
Financial(2) |
428,263 | | | | | (62,445 | ) | | (23,301 | ) | 342,517 | (62,445 | ) | |||||||||||||||||||||||||||
Gaming & Leisure |
| | | | | 4,558,190 | 95,809 | (4,653,999 | ) | | 4,558,190 | |||||||||||||||||||||||||||||
Healthcare |
40,320,000 | | | | | (2,328,000 | ) | | (24,000,000 | ) | 13,992,000 | (2,328,000 | ) | |||||||||||||||||||||||||||
Housing |
839,382 | | | | | 287,157 | | | 1,126,539 | 287,157 | ||||||||||||||||||||||||||||||
Media & Telecommunications(2) |
71,278 | | | | | (71,278 | ) | | | | (71,278 | ) | ||||||||||||||||||||||||||||
Real Estate Investment Trust |
| | | | | 284,530 | 42,679,484 | | 42,964,014 | 284,530 | ||||||||||||||||||||||||||||||
Utility |
18,269 | | (127,297 | ) | | | (224,670 | ) | 333,698 | | | | ||||||||||||||||||||||||||||
Preferred Stocks |
||||||||||||||||||||||||||||||||||||||||
Financial |
| | | | | (362,345 | ) | 14,581,176 | | 14,218,831 | (362,345 | ) | ||||||||||||||||||||||||||||
Real Estate |
| | | | | (711,172 | ) | 711,172 | | | (711,172 | ) | ||||||||||||||||||||||||||||
Warrants |
||||||||||||||||||||||||||||||||||||||||
Equity Contracts |
1,468,475 | | | | 65,745 | (693,478 | ) | | (840,742 | ) | | | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 120,228,341 | $ | 14,010,033 | $ | (647,849 | ) | $ | 1,613,367 | $ | (240,080 | ) | $ | 4,813,405 | $ | 62,408,250 | $ | (51,420,271 | ) | $ | 150,765,196 | $ | 8,910,286 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1) | Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Funds Investment Portfolio. |
(2) | Balance as of December 31, 2012 reflects an industry reclassification for American Banknote Corp. from Media & Telecommunications to Financial. |
22 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 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:
Category | Ending Balance at 12/31/13 |
Valuation Technique | Unobservable Inputs | Input Value(s) | ||||||
Debt |
$ | 62,036,367 | Third-Party Pricing Vendor | N/A | N/A | |||||
Liquidation Analysis | Discount Rate | 15% - 25% | ||||||||
Liquidity Discount | 25% - 30% | |||||||||
Asset Specific Discount | 99% - 100% | |||||||||
Debt - Loan Spread | Weighting of Comparables | Equal Weights of Comps | ||||||||
Weighted Avg DM | 5% | |||||||||
Liquidity Discount | 3% | |||||||||
Preferred Stock |
14,218,831 | Third-Party Pricing Vendor | N/A | N/A | ||||||
Common Stocks |
31,545,984 | Multiples Analysis | Discount Rate | 20% -25% | ||||||
Liquidity Discount | 25% -40% | |||||||||
Minority Discount | 20% | |||||||||
Fair Valuation - Multiple Scenarios | Discount Rate | 22% | ||||||||
Scenario Probabilities | Various Equal Weights | |||||||||
Real Estate Investment Trust |
42,964,014 | Fair Valuation - Multiple Scenarios | Capitalization Rate |
5% - 7% | ||||||
Regional Market Appreciation | 11% - 13% | |||||||||
|
|
|||||||||
Total |
$ | 150,765,196 |
Annual Report | 23 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
24 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 25 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
26 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 27 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
For the year ended December 31, 2013, the Fund had capital loss carryovers as indicated below. The capital loss carryovers are available to offset future realized capital gains to the extent provided in the Code and regulations promulgated thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income.
2016 | 2017 | 2018 | 2019 | No Short-Term(1) |
No Expiration Long-Term(1) |
Total | ||||||||||||||||||||
$ | 50,723,640 | (2)(3) | $ | 282,026,384 | (4) | $ | 45,893,101 | (4) | $ | | $ | | $ | | $ | 378,643,125 |
(1) | On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the Modernization Act) was signed into law. The Modernization Act modifies several of the Federal income and excise tax provisions related to RICs. Under the Modernization Act, new capital losses may now be carried forward indefinitely, and retain the character of the original loss as compared with pre-enactment law where capital losses could be carried forward for eight years, and carried forward as short-term capital losses, irrespective of the character of the original loss. |
(2) | These capital loss carryforward amounts were acquired in the reorganizations of Prospect Street High Income Portfolio Inc (PHY) and Prospect Street Income Shares Inc (CNN) into the Fund on July 18, 2008 and are available to offset future capital gains of the Fund. The Funds ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations. |
(3) | This capital loss carryforward amount was acquired in the reorganization of Highland Distressed Opportunities, Inc. (HCD) into the Fund on June 12, 2009, and is available to offset future capital gains of the Fund. The Funds ability to utilize the capital loss carryforwards is limited under Internal Revenue Service regulations. |
(4) | The Funds ability to utilize the capital loss carryforward may be limited. |
28 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 29 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
30 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 31 |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Note 12. Affiliated Issuers
Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as affiliated if a Fund owns five percent or more of its outstanding voting securities. The Fund held at least five percent of the outstanding voting securities of the following companies as of December 31, 2013:
Market Value | ||||||||||||||||||||||||||||
Issuer | Par
Value at December 31, 2013 |
Shares/Units at December 31, 2013 |
December 31, 2012 |
December 31, 2013 |
Affiliated Income |
Purchases | Sales | |||||||||||||||||||||
ComCorp Broadcasting, Inc. (Senior Loans)(1)(2) |
$ | 35,950,043 | | $ | 34,829,552 | $ | 35,809,838 | $ | | $ | | $ | | |||||||||||||||
Communications Corp of America (Common Stocks) |
| 2,010,616 | 620,677 | 16,084,928 | | | | |||||||||||||||||||||
Endurance Business Media, Inc., Class A (Common Stocks) |
| 6,480 | 71,278 | | | | | |||||||||||||||||||||
Endurance Business Media, Inc. (Senior Loans)(2) |
3,373,813 | | 682,339 | 775,977 | | | | |||||||||||||||||||||
Freedom REIT (Common Stocks) |
| 2,845,299 | | 42,964,014 | 681,706 | 42,679,484 | | |||||||||||||||||||||
Genesys Ventures IA, L.P. (Common Stocks)(2) |
| 24,000,000 | 40,320,000 | 13,992,000 | | | | |||||||||||||||||||||
LLV Holdco, LLC (Senior Loans)(2) |
7,879,521 | | 5,234,227 | 3,519,782 | | | | |||||||||||||||||||||
LLV Holdco, LLC (Common Stocks) |
| 26,869 | | | | | (4,558,190 | )(3) | ||||||||||||||||||||
LLV Holdco, LLC (Warrants)(2) |
| 4,575 | | | | | | |||||||||||||||||||||
Media General, Inc. (Common Stocks)(4) |
| 4,938,971 | 24,050,525 | 111,620,744 | | | | |||||||||||||||||||||
Young Broadcasting Holding Co., Inc., (Warrants)(2) |
| | 1,468,475 | | | | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
$ | 47,203,377 | 33,832,810 | $ | 107,277,073 | $ | 224,767,283 | $ | 681,706 | $ | 42,679,484 | $ | (4,558,190 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Company is a wholly owned subsidiary of Communications Corp. of America. |
(2) | No longer an affiliate as of December 31, 2013. |
(3) | Amount represents return of capital. |
(4) | Previously known as Young Broadcasting Holding Co., Inc., Class A. |
32 | Annual Report |
NOTES TO FINANCIAL STATEMENTS (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 33 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Nexpoint Credit Strategies Fund:
In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations, of cash flows and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Nexpoint Credit Strategies Fund (the Fund) at December 31, 2013, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as financial statements) are the responsibility of the Funds management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2013 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 28, 2014
34 | Annual Report |
ADDITIONAL INFORMATION (unaudited)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 35 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
36 | Annual Report |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 37 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
38 | Annual Report |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Annual Report | 39 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Trustees and Officers
The Board of Trustees (Board) provides broad oversight of the operations and affairs of the Funds and protects the interests of shareholders. The Board has overall responsibility to manage and control the business affairs of the Funds, including the complete and exclusive authority to establish policies regarding the management, conduct and operation of the Funds business. The names and birth dates of the Trustees and officers of the Funds, the year each was first elected or appointed to office, their principal business occupations during the last five years, the number of funds overseen by each Trustee and other directorships or trusteeships they hold are shown below. The business address for each Trustee and officer of the Funds is c/o Highland Capital Management Fund Advisors, L.P., 200 Crescent Court, Suite 700, Dallas, Texas 75201. The Statement of Additional Information includes additional information about the Trustees and is available, without charge, upon request, by calling (877) 665-1287.
Name and Date of Birth | Position(s) with the Funds |
Term of Office and Length of Time Served1 |
Principal Occupation(s) During Past Five Years |
Number of
Portfolios in Highland Fund Complex Overseen by Trustee2 |
Other Directorships/ Trusteeships Held | |||||
Independent Trustees | ||||||||||
Timothy K. Hui (6/13/1948) |
Trustee | Indefinite Term; Trustee since inception in 2006 |
Dean of Educational Resources since July 2012 and from July 2006 to January 2008, Vice President from February 2008 to June 2012, and Assistant Provost for Graduate Education from July 2004 to June 2006 at Cairn University. | 16 | None | |||||
Bryan A. Ward (2/4/1955) |
Trustee | Indefinite Term; Trustee since inception in 2006 | Senior Manager, Accenture, LLP (a consulting firm) since January 2002. | 16 | None | |||||
Terrence O. Jones (7/3/1963) |
Trustee | Indefinite Term; Trustee since December 2013 | Chief Investment Officer, Banco Santander/Optimal Investments from November 2008 to April 2009; Founder and President, Battersby Capital Management LLC from January 2006 to November 2008; and Managing Director, Goldman Sachs Hedge Fund Strategies from December 2001 to December 2005. | 16 | Genworth Life Insurance Company of New York; Father Judge |
40 | Annual Report |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Trustees and Officers
Name and Date of Birth | Position(s) with the Funds |
Term of Office and Length of Time Served1 |
Principal Occupation(s) During Past Five Years |
Number of
Portfolios in Highland Fund Complex Overseen by Trustee2 |
Other Directorships/ Trusteeships Held | |||||
Independent Trustees | ||||||||||
Dr. Bob Froehlich (4/28/1953) |
Trustee | Indefinite Term; Trustee since December 2013 | Executive Vice President and Chief Investment Strategist, The Hartford Mutual Funds from 2009 until retirement in 2012; Vice Chairman of Deutsche Asset Management from 2002 to 2009. | 16 | Director of American Realty Capital Finance Trust, Inc.; Director of KC Concession, Inc.; Trustee of American AR Capital Real Estate Fund; Director of American Realty Capital Healthcare Trust II; Director, American Realty Capital Daily Net Asset Value Trust, Inc.; Director of American Sports Enterprise, Inc.; Director of Davidson Investment Advisors. | |||||
Interested Trustees | ||||||||||
John Honis3 (6/16/1958) |
Trustee | Indefinite Term; Trustee since July 2013. | President of Rand Advisors, LLC since August 2013; Partner of Highland Capital Management, L.P. (HCM) | 16 | None | |||||
Ethan Powell3 (6/20/1975) |
Trustee; Chairman of the Board; Executive Vice President and Secretary (Principal Executive Officer) | Indefinite Term; Trustee since December 2013; Chairman of the Board since December 2013; Executive Vice President since June 2012; Secretary since November 2010 |
Trustee of NexPoint Credit Strategies Fund (NHF), Highland Funds II, Highland Funds I and Highland Special Situations Fund (HSSF) from June 2012 until July 2013; Chief Product Strategist of NexPoint Advisors, L.P. and HCMFA since 2012; Senior Retail Fund Analyst of HCM since 2007 and of HCMFA since its inception and Secretary of the funds in the Highland Fund Complex since November 2010. | 16 | None |
Annual Report | 41 |
ADDITIONAL INFORMATION (unaudited) (continued)
December 31, 2013 | NexPoint Credit Strategies Fund |
Trustees and Officers
Name and Date of Birth |
Position(s) with the Funds |
Term of Office and Length of Time Served |
Principal Occupation(s) During Past Five Years | |||
Officers | ||||||
Brian Mitts (8/26/1970) |
Treasurer (Principal Accounting Officer and Principal Financial Officer) | Indefinite Term; Treasurer since November 2010 | Chief Financial Officer and Financial and Operations Principal of Highland Capital Funds Distributor, Inc. since November 2013; Chief Operations Officer of HCMFA since 2012; Senior Retail Fund Analyst of Highland Capital Management, L.P. (HCM) since 2007 and HCMFA since its inception; Principal Accounting Officer and Treasurer of the funds in the Highland Fund Complex since November 2010; Manager of Financial Reporting at HBK Investments (a hedge fund) from 2005 to 2007. | |||
Ethan Powell (6/20/1975) |
Trustee; Chairman of the Board; Executive Vice President and Secretary (Principal Executive Officer) | Indefinite Term; Trustee since December 2013; Chairman of the Board since December 2013; Executive Vice President since June 2012; Secretary since November 2010 | Chief Product Strategist of HCMFA since 2012; Senior Retail Fund Analyst of HCM since 2007 and HCMFA since its inception; and Secretary of the funds in the Highland Fund Complex since November 2010; Manager in the Merger and Acquisitions Division at Ernst & Young from 1999 to 2007. | |||
Alan Head (8/5/1973) |
Chief Compliance Officer | Indefinite Term; Chief Compliance Officer since January 2012 | Chief Compliance Officer of Highland Capital Funds Distributor, Inc. since November 2013; Compliance Director at HCM and Chief Compliance Officer of NexBank Securities, Inc. (an affiliated broker-dealer) since November 2010; President of NexBank Securities, Inc. since November 2011;Vice President, Manager of Reporting and Research from May 2008 to September 2010 and Compliance; Manager from August 2005 to May 2008 at Capital Institutional Services. | |||
Dustin Norris (1/6/1984) |
Assistant Treasurer | Indefinite Term; Assistant Treasurer since November 2012 | Senior Accounting Manager at HCMFA since August 2012; Assistant Treasurer of the Funds in the Highland Fund Complex since November 2012; Fund Accountant at HCM from June 2010 to August 2012; Auditor at Deloitte & Touche LLP from 2009 to June 2010. |
1 | One on annual basis, as a matter of Board policy, the Governance Committee reviews each Trustees performance and determines whether to extend each such Trustees service for another year. Effective June 2013, the Board adopted a retirement policy wherein the Governance Committee shall not recommend the continued service as a Trustee of a Board member who is older than 80 years of age at the time the Governance Committee reports its findings to the Board. |
2 | The Highland Fund Complex consists of all of the registered investment companies overseen by the Board and advised by the Adviser or an affiliated person of the Adviser as of the date of this report. |
3 | Mr. Powell is deemed to be an interested person of the Funds under the 1940 Act because of his position with HCMFA. Mr. Honis is deemed to be an interested person of the Fund under the 1940 Act because of his affiliation with Highland Capital Management, L.P., an affiliate of HCMFA. |
42 | Annual Report |
IMPORTANT INFORMATION ABOUT THIS REPORT
Annual Report | 43 |
6201 15th Avenue
Brooklyn, NY 11219
NexPoint Credit Strategies Fund | Annual Report, December 31, 2013 |
www.nexpointadvisors.com | NexPoint-HCF-AR-12/13 |
Item 2. Code of Ethics.
(a) | The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrants principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. |
(b) | Not applicable. |
(c) | There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrants principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics description. |
(d) | The registrant has not granted any waivers, including an implicit waiver, from a provision of the code of ethics that applies to the registrants principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this items instructions. |
(e) | Not applicable. |
(f) | The registrants code of ethics is attached. |
Item 3. Audit Committee Financial Expert.
As of the end of the period covered by the report, the registrants board of trustees has determined that Bryan Ward is qualified to serve as an audit committee financial expert serving on its audit committee and that he is independent, as defined by Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
Audit Fees
(a) | The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrants annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $124,000 for 2012 and $204,500 for 2013. |
Audit-Related Fees
(b) | The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrants financial statements and are not reported under paragraph (a) of this Item $8,500 for 2012 and $8,500 for 2013. The nature of the services related to agreed-upon procedures, performed on the Funds semi-annual financial statements. |
Tax Fees
(c) | The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $9,000 for 2012 and $9,833 for 2013. The nature of the services related to assistance on the Funds tax returns and excise tax calculations. |
All Other Fees
(d) | The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2012 and $0 for 2013. |
(e)(1) | Disclose the audit committees pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X: |
The Audit Committee shall:
(a) have direct responsibility for the appointment, compensation, retention and oversight of the Funds independent auditors and, in connection therewith, to review and evaluate matters potentially affecting the independence and capabilities of the auditors; and
(b) review and pre-approve (including associated fees) all audit and other services to be provided by the independent auditors to the Fund and all non-audit services to be provided by the independent auditors to the Funds investment adviser or any entity controlling, controlled by or under common control with the investment adviser (an Adviser Affiliate) that provides ongoing services to the Fund, if the engagement relates directly to the operations and financial reporting of the Fund; and
(c) establish, to the extent permitted by law and deemed appropriate by the Audit Committee, detailed pre-approval policies and procedures for such services; and
(d) consider whether the independent auditors provision of any non-audit services to the Fund, the Funds investment adviser or an Adviser Affiliate not pre-approved by the Audit Committee are compatible with maintaining the independence of the independent auditors.
(e)(2) | The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: |
(b) 100%
(c) 100%
(d) N/A
(f) | The percentage of hours expended on the principal accountants engagement to audit the registrants financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountants full-time, permanent employees was less than fifty percent. |
(g) | The aggregate non-audit fees billed by the registrants accountant for services rendered to the registrant, and rendered to the registrants investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant was $475,000 for 2012 and $475,000 for 2013. |
(h) | The registrants audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrants investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountants independence. |
Item 5. Audit Committee of Listed Registrants.
The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. It is composed of the following Directors, each of who is not an interested person as defined in the 1940 Act:
Timothy K. Hui
Bryan A. Ward
Dr. Bob Froehlich
Terrence O. Jones
Item 6. Investments.
(a) | 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.
NEXPOINT ADVISORS, L.P.
PROXY VOTING POLICY
General Principals
This Policy applies to securities held in Client accounts (including registered investment companies and other pooled investment vehicles) as to which the Company has voting authority, directly or indirectly. Indirect voting authority exists where the Companys voting authority is implied by a general delegation of investment authority without reservation of proxy voting authority.
The Company shall vote proxies in respect of securities owned by or on behalf of a Client in the Clients best economic interests and without regard to the interests of the Company or any other Client of the Company.
Voting Procedures
Monitoring
A member of the settlement group (the settlement designee) of the Company shall have responsibility for monitoring portfolios managed by the Company for securities subject to a proxy vote. Upon the receipt of a proxy notice related to a security held in a portfolio managed by the Company, the settlement designee shall forward all relevant information to the Portfolio Manager(s) with responsibility for the security. The Portfolio Manager(s) may consult a member of the settlement group as necessary.
Voting
Upon receipt of notice from the settlement designee, the Portfolio Manager(s) of the fund(s) in which the security subject to a proxy vote shall evaluate the subject matter of the proxy and cause the proxy to be voted on behalf of the Client in accordance with the Guidelines set forth below.
Guidelines
In determining how to vote a particular proxy, the Portfolio Manager(s) shall consider, among other things, the interests of each Client account as it relates to the subject matter of the proxy, any potential conflict of interest the Company may have in voting the proxy on behalf of the Client and the procedures set forth in this Policy. This Policy is designed to be implemented in a manner reasonably expected to ensure that voting rights are exercised in the best interests of the Companys clients. Each proxy is voted on a case-by-case basis taking into consideration any relevant contractual obligations as well as other relevant facts and circumstances. In general, the Company reviews and considers corporate governance issues related to proxy matters and generally supports proposals that foster good corporate governance practices. Portfolio manager(s) may vote proxies as recommended by the security issuers management on routine matters related to the operation of the issuer and on matters not expected to have a significant impact on the issuer and/or its shareholders, because the Company believes that recommendations by the issuer are generally in shareholders best interests, and therefore in the best economic interest of the Companys clients.
Conflicts of Interest
If the Portfolio Manager(s) determine that the Company may have a potential material conflict of interest (as defined in Section 3 of this Policy) in voting a particular proxy, the Portfolio Manager(s) shall contact the Companys compliance department prior to causing the proxy to be voted.
For a security held by a an investment company, the Company shall disclose the conflict and its reasoning for voting as it did to the Retail Funds Board of Trustees at the next regularly scheduled quarterly meeting. In voting proxies for securities held by an investment company, the Company may consider only the interests of the Fund. It is the responsibility of the compliance department to document the basis for the decision and furnish the documentation to the Board of Trustees. The Company may resolve the conflict of interest by following the proxy voting recommendation of a disinterested third party (such as ISS, Glass Lewis, or another institutional proxy research firm).
Non-Votes
The Company may determine not to vote proxies in respect of securities of any issuer if it determines it would be in its Clients overall best interests not to vote. Such determination may apply in respect of all Client holdings of the securities or only certain specified Clients, as the Company deems appropriate under the circumstances. As examples, the Portfolio Manager(s) may determine: (a) not to recall securities on loan if, in its judgment, the matters being voted upon are not material events affecting the securities and the negative consequences to Clients of disrupting the securities lending program would outweigh the benefits of voting in the particular instance or (b) not to vote certain foreign securities positions if, in its judgment, the expense and administrative inconvenience outweighs the benefits to Clients of voting the securities.
Recordkeeping
Following the submission of a proxy vote, the applicable Portfolio Manager(s) shall submit a report of the vote to a settlement designee of the Company. Records of proxy votes by the Company shall be maintained in accordance with the Recordkeeping section of this Policy.
Material Conflicts of Interest
Voting the securities of an issuer where the following relationships or circumstances exist are deemed to give rise to a material conflict of interest for purposes of this Policy:
(i) | The issuer is a Client of the Company, or of an affiliate, accounting for more than 5% of the Companys or affiliates annual revenues. |
(ii) | The issuer is an entity that reasonably could be expected to pay the Company or its affiliates more than $1 million through the end of the Companys next two full fiscal years. |
(iii) | The issuer is an entity in which a Covered Person (as defined in the Companys Policies and Procedures Designed to Detect and Prevent Insider Trading and to Comply with Rule 17j-1 of the Investment Company Act of 1940, as amended (the Code of Ethics)) has a beneficial interest contrary to the position held by the Company on behalf of Clients. |
(iv) | The issuer is an entity in which an officer or partner of the Company or a relative of any such person is or was an officer, director or employee, or such person or relative otherwise has received more than $150,000 in fees, compensation and other payment from the issuer during the Companys last three fiscal years; provided, however, that the Compliance Department may deem such a relationship not to be a material conflict of interest if the Company representative serves as an officer or director of the issuer at the direction of the Company for purposes of seeking control over the issuer. |
(v) | The matter under consideration could reasonably be expected to result in a material financial benefit to the Company or its affiliates through the end of |
the Companys next two full fiscal years (for example, a vote to increase an investment advisory fee for a Fund advised by the Company or an affiliate).
(vi) | Another Client or prospective Client of the Company, directly or indirectly, conditions future engagement of the Company on voting proxies in respect of any Clients securities on a particular matter in a particular way. |
(vii) | The Company holds various classes and types of equity and debt securities of the same issuer contemporaneously in different Client portfolios. |
(viii) | Any other circumstance where the Companys duty to serve its Clients interests, typically referred to as its duty of loyalty, could be compromised. |
Notwithstanding the foregoing, a conflict of interest described in Section 3.1 shall not be considered material for the purposes of this Policy in respect of a specific vote or circumstance if:
(i) | The securities in respect of which the Company has the power to vote account for less than 1% of the issuers outstanding voting securities, but only if: (i) such securities do not represent one of the 10 largest holdings of such issuers outstanding voting securities and (ii) such securities do not represent more than 2% of the Clients holdings with the Company. |
(ii) | The matter to be voted on relates to a restructuring of the terms of existing securities or the issuance of new securities or a similar matter arising out of the holding of securities, other than common equity, in the context of a bankruptcy or threatened bankruptcy of the issuer. |
Recordkeeping
The Company shall retain records relating to the voting of proxies, including:
(i) | Copies of this Policy and any amendments thereto; |
(ii) | A copy of each proxy statement that the Company receives regarding Client securities. |
(iii) | Records of each vote cast by the Company on behalf of Clients. |
(iv) | A copy of any documents created by the Company that were material to making a decision how to vote or that memorializes the basis for that decision. |
(v) | A copy of each written request for information on how the Company voted proxies on behalf of the Client, and a copy of any written response by the Company to any (oral or written) request for information on how the Company voted. |
These records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the Companys fiscal year during which the last entry was made in the records, the first two years in an appropriate office of the Company.
The Company may rely on proxy statements filed on the SECs EDGAR system or on proxy statements and records of votes cast by the Company maintained by a third party, such as a proxy voting service (provided the Company had obtained an undertaking from the third party to provide a copy of the proxy statement or record promptly on request).
Records relating to the voting of proxies for securities held by investment company clients will be reported periodically, as requested, to the investment companys Board of Trustees and, to the SEC on an annual basis pursuant to Form N-PX.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
(a)(1) | Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members |
The Funds portfolio manager, who is primarily responsible for the day-to-day management of the Funds portfolio, is James Dondero.
James Dondero Mr. Dondero has over 25 years of experience in the credit markets. In addition to his role at NexPoint Advisors, L.P., Mr. Dondero is the President of Highland Capital Management, L.P. (HCM), which he co-founded in 1993. Prior to founding HCM, Mr. Dondero served as Chief Investment Officer of Protective Lifes GIC subsidiary and helped grow the business from concept to over $2 billion between 1989 and 1993. His portfolio management experience includes mortgage-backed securities, investment grade corporates, leveraged bank loans, high-yield bonds, emerging market debt, derivatives, and equity securities. He received a BS in Commerce (Accounting and Finance) from the University of Virginia. Mr. Dondero is a Certified Public Accountant, a Certified Management Accountant, and a Chartered Financial Analyst.
(a)(2) | Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest |
Other Accounts Managed by Portfolio Manager(s) or Management Team Member
The following table provides information about funds and accounts, other than the Fund, for which the Funds portfolio manager is primarily responsible for the day-to-day portfolio management as of December 31, 2013.
Jim Dondero
Type of Accounts |
Total # of Accounts Managed |
Total Assets (millions) |
# of Accounts Managed with |
Total Assets with (millions) | ||||
Registered Investment Companies: |
2 | $968 | 0 | $0 | ||||
Other Pooled Investment Vehicles: |
2 | $152 | 0 | $0 | ||||
Other Accounts: |
0 | $0 | 0 | $0 |
Potential Conflicts of Interests
NexPoint Advisors, L.P. (NexPoint or the Adviser) and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Fund. In connection with such other investment management activities, the Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than the Funds monies, in a particular security or strategy. In addition, the Adviser and such other persons will determine the allocation of funds from the Fund and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.
The Adviser has built a professional working environment, a firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. The 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, the Adviser furnishes advisory services to numerous clients in addition to the Fund, and the Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts that are hedge funds or have performance or higher fees paid to the Adviser or in which portfolio managers have a personal interest in the receipt of such fees) that may be the same as or different from those made to the Fund. In addition, the Adviser, its affiliates and any of their partners, directors, officers, stockholders or employees may or may not have an interest in the securities whose purchase and sale the Adviser recommends to the Fund. Actions with respect to securities of the same kind may be the same as or different from the action that the Adviser, or any of its affiliates, or any of their partners, directors, officers, stockholders or employees or any member of their families may take with respect to the same securities. Moreover, the Adviser may refrain from rendering any advice or services concerning securities of companies of which any of the Advisers (or its affiliates) partners, directors, officers or employees are directors or officers, or companies as to which the Adviser or any of its affiliates or partners, directors, officers and employees of any of them has any substantial economic interest or possesses material non-public information. In addition to its various policies and procedures designed to address these issues, the Adviser includes disclosure regarding these matters to its clients in both its Form ADV and investment advisory agreements.
The Adviser, its affiliates or their partners, directors, officers and employees similarly serve or may serve other entities that operate in the same or related lines of business or of investment funds managed by affiliates of the Adviser. Accordingly, these individuals may have obligations to investors in those entities or funds or to other clients, the fulfillment of which might not be in the best interests of the Fund. As a result, the Adviser will face conflicts in the allocation of investment opportunities to the Fund and other funds and clients. In order to enable such affiliates to fulfill their fiduciary duties to each of the clients for which they have responsibility, the Adviser will endeavor to allocate investment opportunities in a fair and equitable manner which may, subject to applicable regulatory constraints, involve pro rata co-investment by the Fund and such other clients or may involve a rotation of opportunities among the Fund and such other clients.
While the Adviser does not believe there will be frequent conflicts of interest, if any, the Adviser and its affiliates have both subjective and objective procedures and policies in place designed to manage the potential conflicts of interest between the Advisers fiduciary obligations to the Fund and their similar fiduciary obligations to other clients so that, for example, investment opportunities are allocated in a fair and equitable manner among the Fund and such other clients. An investment opportunity that is suitable for multiple clients of the Adviser and its affiliates may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act. There can be no assurance that the Advisers or its affiliates efforts to allocate any particular investment opportunity fairly among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to the Fund. Not all conflicts of interest can be expected to be resolved in favor of the Fund.
(a)(3) | Compensation Structure of Portfolio Manager(s) or Management Team Members |
NexPoints financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors, including the relative performance of a portfolio managers underlying account, the combined performance of the portfolio managers underlying accounts, and the relative performance of the portfolio managers underlying accounts measured against other employees. The principal components of compensation include a base salary, a discretionary bonus, various retirement benefits and one or more of the incentive compensation programs established by NexPoint, such as its Short-Term Incentive Plan and its Long-Term Incentive Plan, described below.
Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with NexPoint, which may include the amount of assets supervised and other management roles within NexPoint. Base compensation is determined by taking into account current industry norms and market data to ensure that NexPoint pays a competitive base compensation.
Discretionary compensation. In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus paid to recognize specific business contributions and to ensure that the total level of compensation is competitive with the market, as well as participation in incentive plans, including one or more of the following:
Short-Term Incentive Plan. The purpose of this plan is to attract and retain the highest quality employees for positions of substantial responsibility, and to provide additional incentives to a select group of management or highly-compensated employees of NexPoint in order to promote the success of NexPoint.
Long Term Incentive Plan. The purpose of this plan is to create positive morale and teamwork, to attract and retain key talent, and to encourage the achievement of common goals. This plan seeks to reward participating employees based on the increased value of NexPoint through the use of Long-Term Incentive Units.
Because each persons compensation is based on his or her individual performance, NexPoint does not have a typical percentage split among base salary, bonus and other compensation. Senior portfolio managers who perform additional management functions may receive additional compensation in these other capacities. Compensation is structured such that key professionals benefit from remaining with NexPoint.
(a)(4) | Disclosure of Securities Ownership |
The following table sets forth the dollar range of equity securities beneficially owned by the portfolio manager in the Fund as of December 31, 2013.
Name of Portfolio Manager | Dollar Ranges of Equity Securities Beneficially Owned by Portfolio Manager | |
Jim Dondero |
Over $1,000,000 |
(b) | Not applicable. |
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrants board of directors.
Item 11. Controls and Procedures.
(a) | The registrants principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrants disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the 1940 Act) (17 CFR 270.30a-3 (c)) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrants second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. |
Item 12. Exhibits.
(a)(1) | Code of ethics, or amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. |
(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. |
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.
NEXPOINT CREDIT STRATEGIES FUND
By (Signature and Title): |
/s/ Ethan Powell | |
Ethan Powell | ||
Executive Vice President and Principal Executive Officer | ||
(Principal Executive Officer) |
Date: March 10, 2014
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title): |
/s/ Ethan Powell | |
Ethan Powell | ||
Executive Vice President and Principal Executive Officer | ||
(Principal Executive Officer) |
Date: March 10, 2014
By (Signature and Title): |
/s/ Brian Mitts | |
Brian Mitts | ||
Chief Financial Officer and Treasurer | ||
(Principal Financial Officer) |
Date: March 10, 2014
EX-99.CODE ETH
HIGHLAND FUNDS
CODE OF ETHICS FOR
PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS
I | Covered Officers/Purpose of the Code |
This code of ethics (this Code) for the Funds applies to each Funds Principal Executive Officer and Principal Financial Officer (the Covered Officers) for the purpose of promoting:
| honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| full, fair, accurate, timely and understandable disclosure in reports and documents that the Fund files with, or submits to, the Securities and Exchange Commission (the SEC) and in other public communications made by the Fund; |
| compliance with applicable laws and governmental rules and regulations; |
| the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and |
| accountability for adherence to the Code. |
Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest.
II. | Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest |
Overview. A conflict of interest occurs when a Covered Officers private interest interferes with the interests of, or his service to, the Fund. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the Fund.
Certain conflicts of interest arise out of the relationships between Covered Officers and the Fund and already are subject to conflict of interest provisions in the 1940 Act and the Investment Advisers Act of 1940, as amended (the Investment Advisers Act). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the Fund because of their status as affiliated persons of the Fund. The compliance programs and procedures of the Fund and Highland are designed to prevent, or identify and correct, violations of these provisions. The Code does not, and is not intended to, repeat or replace these programs and procedures, and the circumstances they cover fall outside of the parameters of this Code.
Although typically not presenting an opportunity for improper personal benefit, conflicts arise
1
from, or as a result of, the contractual relationship between the Fund and Highland of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers, in the ordinary course of their duties (whether formally for the Fund or for Highland, or for both), will be involved in establishing policies and implementing decisions that will have different effects on Highland and the Fund. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the Fund and Highland and is consistent with the performance by the Covered Officers of their duties as officers of the Fund and, if addressed in conformity with the provisions of the 1940 Act and the Investment Advisers Act, will be deemed to have been handled ethically. In addition, it is recognized by the Board that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes of ethics.
Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the 1940 Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle of the Code is that the personal interest of a Covered Officer of a Fund should not be placed improperly before the interest of the Fund.
Each Covered Officer of a Fund must:
| not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the Fund whereby the Covered Officer would benefit personally to the detriment of the Fund; |
| not cause the Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit of the Fund; |
| report at least annually any affiliations or other relationships related to conflicts of interest indicated in the Funds Directors and Officers Questionnaire; and |
| disclose any material ownership interest in, or any consulting or employment relationship with, any of the Funds service providers, other than Highland or any affiliated person thereof. |
III. | Disclosure and Compliance |
| Each Covered Officer of a Fund should familiarize himself with the disclosure requirements generally applicable to the Fund; |
| Each Covered Officer of a Fund should not knowingly misrepresent, or cause others to misrepresent, facts about the Fund to others, whether within or outside the Fund, including to the Board and auditors, and to governmental regulators and self- regulatory organizations; |
| Each Covered Officer of a Fund should, to the extent appropriate within his area |
2
of responsibility, consult with other officers and employees of the Fund and Highland and take other appropriate steps with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Fund files with, or submits to, the SEC and in other public communications made by the Fund; and |
| It is the responsibility of each Covered Officer of a Fund to promote compliance with the standards and restrictions imposed by laws, rules and regulations applicable to the Fund. |
IV. | Reporting and Accountability |
Each Covered Officer of a Fund must:
| upon adoption of the Code (or thereafter, as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code; |
| annually thereafter affirm to the Board that he has complied with the requirements of the Code; |
| not retaliate against any other Covered Officer or any employee of the Fund or their affiliated persons for reports of potential violations that are made in good faith; and |
| notify the Funds Qualified Legal Compliance Committee (the QLCC) promptly if he knows of any violation of this Code. Failure to do so is itself a violation of this Code. |
The Fund will follow these procedures in investigating and enforcing this Code:
| the QLCC will take all appropriate action to investigate any potential violations reported to it; |
| if, after such investigation, the QLCC believes that no violation has occurred, the QLCC is not required to take any further action; |
| any matter that the QLCC believes is a violation will be reported to the Board; |
| if the Board concurs that a violation has occurred, it will consider appropriate action, which may include: review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of Highland or its board; or a recommendation to dismiss the Covered Officer; |
| the QLCC will be responsible for granting waivers, as appropriate; and |
| any changes to or waivers of this Code will, to the extent required, be disclosed |
3
as provided by SEC rules. |
V. | Other Policies and Procedures |
This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act of 2002 and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies and procedures of the Funds, Highland or other Service Providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds and Highlands codes of ethics under Rule 17j-1 under the 1940 Act and Highlands additional policies and procedures are separate requirements applying to the Covered Officers and others, and are not part of this Code.
VI. | Amendments |
Any amendments to this Code must be approved or ratified by a majority vote of each Funds Board, including a majority of Independent Directors.
VII. | Confidentiality |
All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Fund and its Board and Highland and each of their respective counsel.
VIII. | Internal Use |
The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion.
As Revised: March 4, 2005
4
EX-99.CERT
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act
I, Ethan Powell, certify that:
1. | I have reviewed this report on Form N-CSR of NexPoint Credit Strategies Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
By: |
/s/ Ethan Powell | |
Ethan Powell | ||
Executive Vice President and Principal Executive Officer | ||
(Principal Executive Officer) | ||
Date: |
March 10, 2014 |
Certification Pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act
I, Brian Mitts, certify that:
1. | I have reviewed this report on Form N-CSR of NexPoint Credit Strategies Fund; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize, and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
By: |
/s/ Brian Mitts | |
Brian Mitts | ||
Chief Financial Officer and Treasurer | ||
(Principal Financial Officer) | ||
Date: |
March 10, 2014 |
EX-99.906CERT
Certification Pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the
Sarbanes-Oxley Act
I, Ethan Powell, Executive Vice President and Principal Executive Officer of NexPoint Credit Strategies Fund (the Registrant), certify that:
1. | The Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
By: | /s/ Ethan Powell |
Ethan Powell
Executive Vice President and Principal Executive Officer
(Principal Executive Officer)
Date: March 10, 2014
I, Brian Mitts, Chief Financial Officer and Treasurer of NexPoint Credit Strategies Fund (the Registrant), certify that:
1. | The Form N-CSR of the Registrant (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. |
By: | /s/ Brian Mitts |
Brian Mitts
Chief Financial Officer and Treasurer
(Principal Financial Officer)
Date: March 10, 2014
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