INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
Purchased options contracts outstanding as of September 30, 2019 were as follows:
| Description |
Exercise price | Counterparty | Expiration Date | Number of Contracts |
Notional Value |
Premium | Value | |||||||||||||||||||||
| PURCHASED CALL OPTIONS: |
||||||||||||||||||||||||||||
| October 2019 Calls on VIX |
$ | 19.00 | October 2019 | 10,000 | $ | 16,240,000 | $ | 1,642,881 | $ | 1,070,000 | ||||||||||||||||||
| October 2019 Calls on VIX |
22.00 | October 2019 | 10,000 | 16,240,000 | 892,881 | 700,000 | ||||||||||||||||||||||
| November 2019 Calls on VIX |
18.00 | November 2019 | 10,000 | 16,240,000 | 2,727,881 | 2,500,000 | ||||||||||||||||||||||
| USD Call/HKD Put |
7.85 | May 2020 | 143,000,000 | 1,121,005,600 | 1,000,000 | 525,655 | ||||||||||||||||||||||
| USD Call/HKD Put |
7.85 | May 2020 | 65,750,000 | 515,427,400 | 500,000 | 248,752 | ||||||||||||||||||||||
| USD Call/HKD Put |
7.85 | June 2020 | 91,000,000 | 713,367,200 | 600,000 | 355,819 | ||||||||||||||||||||||
| USD Call/HKD Put |
7.85 | November 2019 | 300,000,000 | 2,351,760,000 | 1,000,000 | 287,136 | ||||||||||||||||||||||
| USD Call/HKD Put |
7.85 | November 2019 | 138,500,000 | 1,085,729,200 | 500,000 | 159,642 | ||||||||||||||||||||||
| USD Call/HKD Put |
7.85 | December 2019 | 225,000,000 | 1,763,820,000 | 600,000 | 288,495 | ||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||
| $ | 9,463,643 | $ | 6,135,499 | |||||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||
Written options contracts outstanding as of September 30, 2019 were as follows:
| Description |
Exercise price | Counterparty | Expiration Date | Number of Contracts |
Notional Value |
Premium | Value | |||||||||||||||||||||
| WRITTEN CALL OPTIONS: |
||||||||||||||||||||||||||||
| October 19 Calls on VIX |
$ | 23.00 | October 2019 | (10,000 | ) | $ | 16,240,000 | $ | (747,119 | ) | $ | (520,000 | ) | |||||||||||||||
| November 19 Calls on VIX |
28.00 | November 2019 | (10,000) | 16,240,000 | (832,369) | (790,000) | ||||||||||||||||||||||
| $ | (1,579,488 | ) | $ | (1,310,000 | ) | |||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||
Futures contracts outstanding as of September 30, 2019 were as follows:
| Description |
Expiration Date |
Number of Contracts |
Notional Value |
Value | Unrealized Appreciation |
|||||||||||||||
| Long Futures: |
||||||||||||||||||||
| Russell 2000 Index E-MINI |
December 2019 | (1,350 | ) | $ | (106,727,410 | ) | $ | (102,937,500 | ) | $ | 3,789,910 | |||||||||
|
|
|
|
|
|||||||||||||||||
The average amount of borrowing by the Fund on reverse repurchase agreements outstanding during the period ended September 30, 2019 was $82,034,479 at a weighted average interest rate of 3.85%.
Reverse Repurchase Agreements outstanding as of September 30, 2019 were as follows:
| Counterparty |
Collateral Pledged |
Interest Rate | Trade Date | Maturity Date | Repurchase Amount |
Principal Amount |
Value | |||||||||||||||||||
| Acis CLO, Ltd., Series 2014-3A, Class E, VAR ICE LIBOR USD 3 Month+4.750%, 02/01/26 | 3.733 | 7/23/2019 | 10/23/2019 | $ | (2,302,962 | ) | $ | (4,000,000 | ) | $ | (2,281,200 | ) | ||||||||||||||
| Acis CLO, Ltd., Series 2014-4A, Class E, VAR ICE LIBOR USD 3 Month+4.800%, 05/01/26 | 3.733 | 7/23/2019 | 10/23/2019 | (9,996,136 | ) | (14,750,000 | ) | (9,901,675 | ) | |||||||||||||||||
| Acis CLO, Ltd., Series 2014-5A, Class D, VAR ICE LIBOR USD 3 Month+4.340%, 11/01/26 | 3.283 | 7/23/2019 | 10/23/2019 | (5,694,983 | ) | (7,000,000 | ) | (5,647,600 | ) | |||||||||||||||||
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
| Counterparty |
Collateral Pledged |
Interest Rate | Trade Date | Maturity Date | Repurchase Amount |
Principal Amount |
Value | |||||||||||||||||||
| Acis CLO, Ltd., Series 2015-6A, Class E, VAR ICE LIBOR USD 3 Month+5.490%, 05/01/27 | 3.733 | 7/23/2019 | 10/23/2019 | $ | (5,212,254 | ) | $ | (7,500,000 | ) | $ | (5,163,000 | ) | ||||||||||||||
| Acis CLO, Ltd., Series 2015-6A, Class D, VAR ICE LIBOR USD 3 Month+3.770%, 05/01/27 | 3.283 | 7/23/2019 | 10/23/2019 | (804,090 | ) | (1,000,000 | ) | (797,400 | ) | |||||||||||||||||
| BlueMountain CLO, Ltd., Series 2015-3A, Class ER, VAR ICE LIBOR USD 3 Month+8.080%, 04/20/31 | 4.038 | 7/9/2019 | 10/7/2019 | (3,962,350 | ) | (6,500,000 | ) | (3,922,750 | ) | |||||||||||||||||
| Catamaran CLO, Ltd., Series 2014-2A, Class D, VAR ICE LIBOR USD 3 Month+4.850%, 10/18/26 | 3.750 | 7/19/2019 | 10/15/2019 | (2,176,773 | ) | (3,000,000 | ) | (2,157,000 | ) | |||||||||||||||||
| CIFC Funding, Ltd., Series 2014-3A, Class FR2, VAR ICE LIBOR USD 3 Month+8.250%, 10/22/31 | 4.038 | 7/9/2019 | 10/7/2019 | (3,081,800 | ) | (5,000,000 | ) | (3,051,000 | ) | |||||||||||||||||
| Denali Capital CLO XI, Series 2015-1A, Class ER, VAR ICE LIBOR USD 3 Month+8.250%, 10/20/28 | 4.038 | 7/9/2019 | 10/7/2019 | (3,076,871 | ) | (4,600,000 | ) | (3,046,120 | ) | |||||||||||||||||
| Dryden 64 CLO, Series 2018-64A, Class F, VAR ICE LIBOR USD 3 Month+7.150%, 04/18/31 | 4.038 | 7/9/2019 | 10/7/2019 | (2,039,533 | ) | (3,500,000 | ) | (2,019,150 | ) | |||||||||||||||||
| FREMF Mortgage Trust, Series 2019-KF60, Class C, VAR LIBOR USD 1 Month+6.000%, 02/25/26 | 3.530 | 7/30/2019 | 10/30/2019 | (45,819,528 | ) | (60,669,313 | ) | (45,409,880 | ) | |||||||||||||||||
| GoldenTree Loan Opportunities IX, Ltd., Series 2018-9A, Class FR2, VAR ICE LIBOR USD 3 Month+7.640%, 10/29/29 | 4.020 | 9/30/2019 | 12/27/2019 | (2,087,059 | ) | (3,500,000 | ) | (2,066,750 | ) | |||||||||||||||||
| Jamestown CLO IX, Series 2019-9A, Class DR, VAR ICE LIBOR USD 3 Month+6.940%, 10/20/28 | 3.606 | 8/2/2019 | 10/31/2019 | (4,099,754 | ) | (5,500,000 | ) | (4,063,125 | ) | |||||||||||||||||
| Jay Park CLO, Ltd., Series 2018-1A, Class ER, VAR ICE LIBOR USD 3 Month+7.350%, 10/20/27 | 4.020 | 9/30/2019 | 12/27/2019 | (3,585,693 | ) | (6,000,000 | ) | (3,550,800 | ) | |||||||||||||||||
| LCM XIII, Ltd., Series 2016-13A, Class ER, VAR ICE LIBOR USD 3 Month+7.300%, 07/19/27 | 3.770 | 9/30/2019 | 12/27/2019 | (2,261,047 | ) | (3,000,000 | ) | (2,240,400 | ) | |||||||||||||||||
| LCM XXIII, Ltd., Series 2016-23A, Class D, VAR ICE LIBOR USD 3 Month+7.050%, 10/20/29 | 3.770 | 9/30/2019 | 12/27/2019 | (741,673 | ) | (1,000,000 | ) | (734,900 | ) | |||||||||||||||||
| Neuberger Berman CLO XX, Ltd., Series 2017-20A, Class FR, VAR ICE LIBOR USD 3 Month+7.450%, 01/15/28 | 4.020 | 9/30/2019 | 12/27/2019 | (1,783,455 | ) | (3,000,000 | ) | (1,766,100 | ) | |||||||||||||||||
| Palmer Square CLO, Ltd., Series 2019-1A, Class DR2, VAR ICE LIBOR USD 3 Month+6.250%, 05/21/29 | 3.770 | 9/30/2019 | 12/27/2019 | (2,753,645 | ) | (3,750,000 | ) | (2,728,500 | ) | |||||||||||||||||
| Shackleton CLO IX, Ltd., Series 2016-9A, Class E, VAR ICE LIBOR USD 3 Month+6.760%, 10/20/28 | 3.788 | 7/9/2019 | 10/7/2019 | (1,139,136 | ) | (1,500,000 | ) | (1,128,450 | ) | |||||||||||||||||
| Z Capital Credit Partners CLO, Ltd., Series 2015-1A, Class E, VAR ICE LIBOR USD 3 Month+5.970%, 07/16/27 | 3.733 | 7/23/2019 | 10/23/2019 | (2,880,015 | ) | (4,000,000 | ) | (2,852,800 | ) | |||||||||||||||||
| Z Capital Credit Partners CLO, Ltd., Series 2015-1A, Class E, VAR ICE LIBOR USD 3 Month+5.970%, 8.29%, 07/16/27 | 3.770 | 9/30/2019 | 12/27/2019 | (2,209,703 | ) | (3,250,000 | ) | (2,189,525 | ) | |||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
| Total Reverse Repurchase Agreements |
$ | (152,019,313 | ) | $ | (106,718,125 | ) | ||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||
INVESTMENT PORTFOLIO (unaudited)
| As of September 30, 2019 | Highland Income Fund |
Organization
Highland Floating Rate Opportunities Fund (the “Fund”) is organized as an unincorporated business trust under the laws of The
Commonwealth of Massachusetts. The Fund is registered with the U.S. Securities and Exchange Commission (the “SEC”) under the
Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company.
On September 25, 2017, the Fund acquired the assets of Highland Floating Rate Opportunities Fund (the “Predecessor Fund”), a series of Highland Funds I, a Delaware statutory trust. The Fund is the successor to the accounting and performance information of the Predecessor Fund. This report includes information for the nine months ended September 30, 2019.
On November 3, 2017, shareholders of the Fund approved a proposal authorizing the Board of Trustees (the “Board”) of the Fund to
convert the fund from an open-end fund to a closed-end fund at a special meeting of shareholders. The Board took action to convert the Fund to a closed-end fund effective shortly after 4:00 p.m. Eastern Time on November 3, 2017 (the “Conversion Date”). The Fund also effected an approximately 1-for-2 reverse stock split of the Fund’s issued and outstanding shares on November 3, 2017, thereby reducing the number of shares outstanding. Shareholders were paid cash for any fractional shares resulting from the reverse stock split. The Fund began listing its shares for trading on the New York Stock Exchange (the “NYSE”) on November 6, 2017 under the ticker symbol “HFRO”. The Fund may issue an unlimited number of common shares, par value $0.001 per share (“Common Shares”). Prior to the Conversion Date, the Fund issued Class A, Class C, and Class Z shares. On May 20, 2019, the Fund changed its name to Highland Income Fund.
Basis of Consolidation
The Fund consolidates HFRO Sub, LLC (“HFRO Sub”), a Delaware wholly owned subsidiary, for financial reporting, and the holdings of HFRO Sub, LLC are included within the Consolidated Investment Portfolio for the Fund. HFRO Sub is a bankruptcy remote financing vehicle used to obtain leverage with the portfolio of bank loans serving as collateral. All inter-company accounts and transactions have been eliminated in the consolidation.
Valuation of Investments
In computing the Fund’s net assets attributable to shares, securities with readily available market quotations on the NYSE, National
Association of Securities Dealers Automated Quotation (“NASDAQ”) or other nationally recognized exchange, use the closing
quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market
quotations will be valued pursuant to policies adopted by the Fund’s Board of Trustees (the “Board”). Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that Highland Capital Management Fund Advisors, L.P. (“the Investment Adviser”) has determined to have the capability to provide appropriate pricing services which have been approved by the Board.
Securities for which market quotations are not readily available, or for which the Fund has determined that the price received from a
pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Fund’s net asset value (“NAV”)), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, but not limited to: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.
There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. The NAV shown in the Fund’s financial statements may vary from the NAV published by the Fund as of its period end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes.
INVESTMENT PORTFOLIO (unaudited)(continued)
| As of September 30, 2019 | Highland Income Fund |
Fair Value Measurements
The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:
| Level 1 — | Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement; | |
| Level 2 — | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and | |
| Level 3 — | Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information. | |
The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that
valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser and its affiliates. The Pricing Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.
As of September 30, 2019, the Fund’s investments consisted of senior loans, foreign denominated or domiciled senior loans,
collateralized loan obligations, corporate bonds and notes, U.S. asset-backed securities, non-U.S. asset-backed securities, claims,
common stocks, registered investment companies, cash equivalents, rights and warrants. The fair value of the Fund’s senior loans and bonds are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.
The fair value of the Fund’s common stocks, registered investment companies, rights and warrants that are not actively traded on
national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.
At the end of each calendar quarter, the Investment Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity,
including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Investment Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.
INVESTMENT PORTFOLIO (unaudited)(continued)
| As of September 30, 2019 | Highland Income Fund |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s assets as of September 30, 2019 is as follows:
| Total value at September 30, 2019 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs |
|||||||||||||
| Highland Income Fund |
| |||||||||||||||
| Assets |
||||||||||||||||
| U.S. Senior Loans |
||||||||||||||||
| Commercial Services |
$ | 32,078,223 | $ | — | $ | 32,078,223 | $ | — | ||||||||
| Communication Services |
20,447,532 | — | 14,493,136 | 5,954,396 | ||||||||||||
| Consumer Discretionary |
28,458,809 | — | 28,458,809 | — | ||||||||||||
| Consumer Products |
16,416,569 | — | 16,416,569 | — | ||||||||||||
| Energy |
27,158,165 | — | 27,158,165 | — | ||||||||||||
| Financial |
24,915,827 | — | 24,915,827 | — | ||||||||||||
| Gaming/Leisure |
10,941,700 | — | — | 10,941,700 | ||||||||||||
| Healthcare |
77,147,567 | — | 42,830,907 | 34,316,660 | ||||||||||||
| Housing |
11,945,941 | — | 11,945,941 | — | ||||||||||||
| Industrials |
33,904,492 | — | 25,162,433 | 8,742,059 | ||||||||||||
| Information Technology |
113,554,373 | — | 55,129,373 | 58,425,000 | ||||||||||||
| Manufacturing |
6,479,267 | — | 6,479,267 | — | ||||||||||||
| Oil & Gas |
9,051,222 | — | 9,051,222 | — | ||||||||||||
| Real Estate |
21,210,192 | — | 21,210,192 | — | ||||||||||||
| Retail |
49,665,035 | — | 49,665,035 | — | ||||||||||||
| Service |
52,160,128 | — | 52,160,128 | — | ||||||||||||
| Transportation |
13,359,259 | — | 13,359,259 | — | ||||||||||||
| Utilities |
25,800,435 | — | 25,800,435 | — | ||||||||||||
| Preferred Stock |
||||||||||||||||
| Energy |
16,539,728 | — | 16,539,728 | — | ||||||||||||
| Financial |
33,218,931 | — | 33,218,931 | — | ||||||||||||
| Real Estate |
242,029,880 | — | 14,201,490 | 227,828,390 | ||||||||||||
| Collateralized Loan Obligations |
216,514,222 | — | 216,514,222 | — | ||||||||||||
| Common Stocks |
||||||||||||||||
| Communication Services |
46,871,411 | 8,946,604 | 30,380,741 | 7,544,066 | ||||||||||||
| Consumer Discretionary |
7,649,821 | — | 7,649,821 | — | ||||||||||||
| Energy |
9,362,562 | 4,905,030 | 4,457,531 | 1 | ||||||||||||
| Gaming/Leisure |
— | (1) | — | — | — | (1) | ||||||||||
| Healthcare |
502,875 | 502,875 | — | — | ||||||||||||
| Housing |
— | (1) | — | — | — | (1) | ||||||||||
| Industrials |
563,911 | — | 563,911 | — | ||||||||||||
| Information Technology |
1,950,012 | 1,950,012 | — | — | ||||||||||||
| Materials |
2,208,360 | — | 1,495,160 | 713,200 | ||||||||||||
| Real Estate |
61,304,052 | 601,216 | — | 60,702,836 | ||||||||||||
| LLC Interest |
91,188,988 | — | — | 91,188,988 | ||||||||||||
| Agency Collateralized Mortgage Obligations |
90,110,254 | — | 90,110,254 | — | ||||||||||||
| Corporate Bonds & Notes |
||||||||||||||||
| Energy |
1,101,400 | — | 25,000 | 1,076,400 | ||||||||||||
| Industrials |
189,000 | — | 189,000 | — | ||||||||||||
| Information Technology |
— | (1) | — | — | — | (1) | ||||||||||
| Real Estate |
1,415,000 | — | 1,415,000 | — | ||||||||||||
| Utilities |
36,815,884 | — | 36,815,884 | — | ||||||||||||
| Foreign Denominated or Domiciled Senior Loans |
||||||||||||||||
| Canada |
8,306,965 | — | 8,306,965 | — | ||||||||||||
| Luxembourg |
15,063,300 | — | 15,063,300 | — | ||||||||||||
| Registered Investment Companies |
17,735,334 | 17,735,334 | — | — | ||||||||||||
| Purchased Call Options |
6,135,499 | 6,135,499 | — | — | ||||||||||||
| Non-U.S. Government Bonds |
||||||||||||||||
INVESTMENT PORTFOLIO (unaudited)(continued)
| As of September 30, 2019 | Highland Income Fund |
| Sovereign |
1,839,371 | — | 1,839,371 | — | ||||||||||||
| Rights |
||||||||||||||||
| Utilities |
989,311 | — | 989,311 | — | ||||||||||||
| Warrants |
||||||||||||||||
| Energy |
174,030 | — | 174,030 | — | ||||||||||||
| Industrials |
22,076 | — | — | 22,076 | ||||||||||||
| Claims |
52,138 | — | — | 52,138 | ||||||||||||
| Cash Equivalents |
73,970 | 73,970 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Assets |
1,484,623,021 | 40,850,540 | $ | 936,264,571 | 507,507,910 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Liabilities |
||||||||||||||||
| Securities Sold Short |
||||||||||||||||
| Common Stocks |
||||||||||||||||
| Information Technology |
(10,791,540 | ) | (10,791,540 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Liabilities |
(10,791,540 | ) | (10,791,540 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
$ | 1,473,831,481 | $ | 30,059,000 | $ | 936,264,571 | $ | 507,507,910 | ||||||||
|
|
|
|
|
|
|
|
|
| (1) | This category includes securities with a value of zero. |
The table below sets forth a summary of changes in the Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the period ended September 30, 2019.
| Balance as of December 31, 2018 |
Transfers into Level 3 |
Transfers Out of Level 3 |
Net Amortization (Accretion) of Premium/ (Discount) |
Net Realized Gains/ (Losses) |
Net Unrealized Gains/ (Losses) |
Net Purchase |
Net (Sales) |
Balance as of September 30, 2019 |
Change in Unrealized Appreciation (Depreciation) from Investments at September 30, 2019 |
|||||||||||||||||||||||||||||||
| U.S. Senior Loans |
||||||||||||||||||||||||||||||||||||||||
| Communication Services |
$ | 5,472,828 | $ | — | $ | — | $ | — | $ | — | $ | 16,859 | $ | 464,709 | $ | — | $ | 5,954,396 | $ | 16,859 | ||||||||||||||||||||
| Gaming/Leisure |
10,002,768 | — | — | — | — | — | 938,932 | — | 10,941,700 | — | ||||||||||||||||||||||||||||||
| Healthcare |
24,398,513 | — | — | — | — | 3,571,185 | 6,346,962 | — | 34,316,660 | 3,571,185 | ||||||||||||||||||||||||||||||
| Industrials |
8,269,728 | — | — | 397,939 | — | (218,861 | ) | 293,253 | — | 8,742,059 | (218,861 | ) | ||||||||||||||||||||||||||||
| Information Technology |
57,000,000 | — | — | — | — | 1,425,000 | — | — | 58,425,000 | 1,425,000 | ||||||||||||||||||||||||||||||
| Real Estate |
1,228,016 | — | — | (6,343 | ) | — | 42,159 | — | (1,263,832 | ) | — | 42,159 | ||||||||||||||||||||||||||||
| Preferred Stock |
||||||||||||||||||||||||||||||||||||||||
| Real Estate |
214,305,563 | — | — | — | — | 12,373,827 | 1,149,000 | — | 227,828,390 | 12,373,827 | ||||||||||||||||||||||||||||||
| Common Stocks |
||||||||||||||||||||||||||||||||||||||||
| Communication Services |
7,566,587 | — | — | — | — | (22,521 | ) | — | — | 7,544,066 | (22,521 | ) | ||||||||||||||||||||||||||||
| Energy |
1 | — | — | — | — | — | — | — | 1 | — | ||||||||||||||||||||||||||||||
| Materials |
2,844,759 | — | — | — | — | (2,131,559 | ) | — | — | 713,200 | (2,131,559 | ) | ||||||||||||||||||||||||||||
| Media |
1,258,086 | — | — | — | — | 6,598,465 | — | (7,856,551 | ) | — | 6,598,465 | |||||||||||||||||||||||||||||
| Real Estate |
17,207,035 | — | — | — | — | 158,985 | 43,336,816 | — | 60,702,836 | 158,985 | ||||||||||||||||||||||||||||||
| LLC Interest |
— | — | — | — | — | — | 91,188,988 | — | 91,188,988 | — | ||||||||||||||||||||||||||||||
| Corporate Bonds & Notes |
||||||||||||||||||||||||||||||||||||||||
| Energy |
1,076,400 | — | — | — | — | — | — | — | 1,076,400 | — | ||||||||||||||||||||||||||||||
| Warrants |
||||||||||||||||||||||||||||||||||||||||
| Industrials |
88,054 | — | — | — | — | (65,978 | ) | — | — | 22,076 | (65,978 | ) | ||||||||||||||||||||||||||||
| Information Technology |
51,729 | — | (18,641 | ) | — | — | (33,088 | ) | — | — | — | (33,088 | ) | |||||||||||||||||||||||||||
| Claims |
52,138 | — | — | — | — | — | — | — | 52,138 | — | ||||||||||||||||||||||||||||||
| Total |
$ | 350,822,205 | $ | — | $ | (18,641 | ) | $ | 391,596 | $ | — | $ | 21,714,473 | $ | 143,718,660 | $ | (9,120,383 | ) | $ | 507,507,910 | $ | 21,714,473 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
INVESTMENT PORTFOLIO (unaudited)(continued)
| As of September 30, 2019 | Highland Income Fund |
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. For the period ended September 30, 2019, there were no transfers between Levels.
The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:
| Category |
Market Value at 9/30/2019 |
Valuation Technique | Unobservable Inputs | Input Value(s) | ||||||||||||
| Preferred Stock |
$ | 227,828,390 | Net Asset Value | N/A | N/A | |||||||||||
| Discounted Cash Flow | Discount Rate | 8.5% | ||||||||||||||
| Internal Rate of Return | 14.0% | |||||||||||||||
| U.S. Senior Loans |
118,379,815 | Adjusted Appraisal | Liquidity Discount | 10% | ||||||||||||
| Asset Specific Discount | 10% | |||||||||||||||
| Multiples Analysis | Multiple of EBITDA less CAPEX | 6.00x - 11.75x | ||||||||||||||
| Transaction Analysis | Multiple of EBITDA less CAPEX | 10.0x - 12.0x | ||||||||||||||
| Transaction Indication of Value | % of Par | 30.0% - 35.0% | ||||||||||||||
| Black-Scholes Model | Volatility Assumption | 25% | ||||||||||||||
| Discounted Cash Flow | Discount Rate | 8.9% - 17.75% | ||||||||||||||
| Spread Adjustment | 0.1% - 1.75% | |||||||||||||||
| Common Stocks |
68,960,103 | Multiples Analysis | Multiple of EBITDA less CAPEX | 6.00x - 11.75x | ||||||||||||
| Multiple of EBITDA | 7.50x - 9.25x | |||||||||||||||
| Unadjusted Price/MHz-PoP | $ | 0.12 - $0.95 | ||||||||||||||
| Risk Discount | 55.2% - 59.8% | |||||||||||||||
| Discounted Cash Flow | Discount Rate | 11.5 - 15.0% | ||||||||||||||
| Terminal Multiple | 7.0x | |||||||||||||||
| Transaction Analysis | Multiple of EBITDA | 3.5x - 9.0x | ||||||||||||||
| Multiple of EBITDA less CAPEX | 10.0x - 12.0x | |||||||||||||||
| Transaction Indication of Value | % of Par | 30.0% - 35.0% | ||||||||||||||
| Black-Scholes Model | Volatility Assumption | 25% | ||||||||||||||
| Net Asset Value | N/A | N/A | ||||||||||||||
| LLC Interest |
91,188,988 | Discounted Cash Flow | Discount Rate | 2.46% - 4.54% | ||||||||||||
| Corporate Bonds |
1,076,400 | Liquidation Analysis | Claim Amount: Percent of Par | 6.9% | ||||||||||||
| Claims |
52,138 | N/A | N/A | N/A | ||||||||||||
| Warrants |
22,076 | Discounted Cash Flow | Discount Rate | 11.5% - 14.0% | ||||||||||||
| Terminal Multiple | 7.0x | |||||||||||||||
| Multiples Analysis | Multiple of EBITDA | 7.50x - 9.25x | ||||||||||||||
| Transaction Analysis | Multiple of EBITDA | 8.5x - 9.0x | ||||||||||||||
| Total |
$ | 507,507,910 | ||||||||||||||
INVESTMENT PORTFOLIO (unaudited)(continued)
| As of September 30, 2019 | Highland Income Fund |
In addition to the unobservable inputs utilized for various valuation methodologies, the Investment Adviser frequently uses a combination of two or more valuation methodologies to determine fair value for a single holding. In such instances, the Investment Adviser assesses the methodologies and ascribes weightings to each methodology. The selection of weightings is an inherently subjective process, dependent on professional judgement. These selections may have a material impact to the concluded fair value for such holdings.
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes taking into account any foreign taxes withheld.
Cash & Cash Equivalents
The Fund considers liquid assets deposited with a bank and certain short-term debt instruments of sufficient credit quality with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of this financial report.
Securities Sold Short
The Fund may sell securities short. A security sold short is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline. When the Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. In some circumstances, the Fund may be allowed by its prime broker to utilize proceeds from securities sold short to purchase additional investments, resulting in leverage. Securities and cash held as collateral for securities sold short are shown on the Investments Portfolio for the Fund.
Derivative Transactions
The Fund is subject to equity securities risk, interest rate risk and currency risk in the normal course of pursuing its investment objectives. The Fund enters into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions and for managing the duration of fixed income investments.
Reverse Repurchase Agreements
The Fund may engage in reverse repurchase agreement transactions with respect to instruments that are consistent with the Fund’s investment objective or policies.
INVESTMENT PORTFOLIO (unaudited)(continued)
| As of September 30, 2019 | Highland Income Fund |
Affiliated Issuers
Under Section 2 (a)(3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Fund for the period ended September 30, 2019:
| Issuer |
Shares at December 31, 2018 |
Beginning Value as of December 31, 2018 |
Purchases at Cost |
Proceeds from Sales |
Net Realized Gain/(Loss) on Sales of Affiliated Issuers |
Change in Unrealized Appreciation/ Depreciation |
Ending Value as of September 30, 2019 |
Shares at September 30, 2019 |
Affiliated Income |
|||||||||||||||||||||||||||
| Majority Owned, Not Consolidated |
|
|||||||||||||||||||||||||||||||||||
| Allenby (Common Stocks) |
1,291,881 | $ | 1 | $ | 101,797 | $ | — | $ | — | $ | (101,797 | ) | 1 | 1,393,678 | $ | 19,896 | ||||||||||||||||||||
| Claymore (Common Stocks) |
8,698,220 | 9 | 671,970 | — | — | (671,970 | ) | 9 | 9,370,190 | 5,082,401 | ||||||||||||||||||||||||||
| Other Affiliates |
||||||||||||||||||||||||||||||||||||
| CCS Medical, Inc. (U.S. Senior Loans & Common Stocks) |
52,229,448 | 24,398,513 | 6,633,831 | — | — | 3,284,316 | 34,316,660 | 55,260,321 | — | |||||||||||||||||||||||||||
| EDS Legacy Partners (U.S. Senior Loans) |
57,000,000 | 57,000,000 | — | — | — | 1,425,000 | 58,425,000 | 57,000,000 | 3,579,125 | |||||||||||||||||||||||||||
| Gambier Bay LLC (Common Stocks) |
10,939,879 | 1,258,086 | — | (7,856,551 | ) | — | 6,598,465 | — | — | — | ||||||||||||||||||||||||||
| LLV Holdco LLC (U.S. Senior Loans, Common Stocks and Warrants) |
12,552,393 | 10,002,768 | 938,932 | — | — | — | 10,941,700 | 13,677,126 | 27,382 | |||||||||||||||||||||||||||
| Nevada Land Group (U.S. Senior Loans) |
1,743,503 | — | — | — | 1,743,503 | (1,743,503 | ) | — | — | 49,304 | ||||||||||||||||||||||||||
| NexPoint Strategic Opportunities Fund (Registered Investment Company) |
427,345 | 8,516,986 | 9,983,151 | (338,560 | ) | — | (426,243 | ) | 17,735,334 | 989,143 | 880,100 | |||||||||||||||||||||||||
| NFRO REIT SUB, LLC (Common Stocks) |
802,563 | 17,207,025 | 49,780,000 | — | — | (6,284,199 | ) | 60,702,826 | 2,918,931 | — | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
| Total |
$ | 145,685,232 | $ | 118,383,388 | $ | 68,109,681 | $ | (8,195,111 | ) | $ | 1,743,503 | $ | 2,080,069 | $ | 182,121,530 | $ | 140,609,389 | $ | 9,638,208 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||