| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(concluded) | ||
| As of September 30, 2020 | Highland Income Fund | |
Purchased options contracts outstanding as of September 30, 2020 were as follows:
| Description |
Exercise price | Counterparty | Expiration Date |
Number of Contracts |
Notional Value | Premium | Value | |||||||||||||||||||||
| PURCHASED CALL OPTIONS: |
||||||||||||||||||||||||||||
| USD Call/CNH Put |
$ | 7.70 | BNP | October 2020 | 200,000,000 | $ | 1,358,000,000 | $ | 1,300,000 | $ | 400 | |||||||||||||||||
Futures contracts outstanding as of September 30, 2020 were as follows:
| Description |
Expiration Date |
Number of Contracts |
Notional Value | Unrealized Depreciation |
Value | |||||||||||||||
| Short Futures: |
||||||||||||||||||||
| Russell 2000 Index E-MINI |
June 2020 | (631 | ) | $ | (47,311,878 | ) | $ | (151,942 | ) | $ | (47,463,820 | ) | ||||||||
| S&P 500 Index E-MINI |
June 2020 | (760 | ) | (127,027,706 | ) | (348,294 | ) | (127,376,000 | ) | |||||||||||
|
|
|
|
|
|||||||||||||||||
| $ | (500,236 | ) | $ | (174,839,820 | ) | |||||||||||||||
|
|
|
|
|
|||||||||||||||||
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited) | ||
| As of September 30, 2020 | Highland Income Fund | |
Organization
Highland Income 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.
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.
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; |
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| 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, 2020, 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.
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | 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. A summary of the inputs used to value the Fund’s assets as of September 30, 2020 is as follows:
| Total value at September 30, 2020 $ |
Level 1 Quoted Price $ |
Level 2 Significant Observable Inputs $ |
Level 3 Significant Unobservable Inputs $ |
|||||||||||||
| Highland Floating Rate Opportunities Fund |
| |||||||||||||||
| Assets |
||||||||||||||||
| Preferred Stock |
||||||||||||||||
| Energy |
10,548,890 | — | 10,548,890 | — | ||||||||||||
| Financials |
59,739,883 | — | 41,116,383 | 18,623,500 | ||||||||||||
| Real Estate |
253,077,085 | — | 9,854,523 | 243,222,562 | ||||||||||||
| U.S. Senior Loans |
||||||||||||||||
| Business Equipment & Services |
9,594,505 | — | 9,594,505 | — | ||||||||||||
| Commercial Services |
3,406,180 | — | 3,406,180 | — | ||||||||||||
| Communication Services |
6,696,457 | — | — | 6,696,457 | ||||||||||||
| Consumer Discretionary |
10,638,993 | — | 10,638,993 | — | ||||||||||||
| Consumer Products |
2,121,554 | — | 2,121,554 | — | ||||||||||||
| Energy |
9,969,384 | — | 9,969,384 | — | ||||||||||||
| Financials |
9,981,552 | — | 9,981,552 | — | ||||||||||||
| Gaming/Leisure |
13,475,743 | — | — | 13,475,743 | ||||||||||||
| Healthcare |
62,905,639 | — | 15,382,277 | 47,523,362 | ||||||||||||
| Industrials |
10,031,970 | — | 10,031,970 | — | ||||||||||||
| Information Technology |
83,805,020 | — | 32,277,020 | 51,528,000 | ||||||||||||
| Real Estate |
8,889,297 | — | 8,889,297 | — | ||||||||||||
| Retail |
22,809,718 | — | 22,809,718 | — | ||||||||||||
| Service |
17,699,227 | — | 17,699,227 | — | ||||||||||||
| Transportation |
11,124,738 | — | 11,124,738 | — | ||||||||||||
| Utilities |
4,940,400 | — | 4,940,400 | — | ||||||||||||
| Common Stocks |
||||||||||||||||
| Communication Services |
48,268,479 | 907,680 | 38,264,668 | 9,096,131 | ||||||||||||
| Consumer Discretionary |
1,537,180 | — | 1,537,180 | — | ||||||||||||
| Energy |
21,766 | — | 21,765 | 1 | ||||||||||||
| Gaming/Leisure(1) |
— | — | — | — | ||||||||||||
| Healthcare |
5,797 | — | — | 5,797 | ||||||||||||
| Housing(1) |
— | — | — | — | ||||||||||||
| Industrials(1) |
— | — | — | — | ||||||||||||
| Materials |
1,495,160 | — | 1,495,160 | — | ||||||||||||
| Real Estate |
186,621,925 | 11,226,593 | — | 175,395,332 | ||||||||||||
| Collateralized Loan Obligations |
159,035,168 | — | 159,035,168 | — | ||||||||||||
| LLC Interest |
86,938,309 | — | 17,017,285 | 69,921,024 | ||||||||||||
| Registered Investment Companies |
10,320,750 | 10,320,750 | — | — | ||||||||||||
| Corporate Bonds & Notes |
||||||||||||||||
| Communication Services |
1,617 | — | 1,617 | — | ||||||||||||
| Energy(1) |
— | — | — | — | ||||||||||||
| Industrials |
123,276 | — | 123,276 | — | ||||||||||||
| Real Estate |
755,610 | — | 755,610 | — | ||||||||||||
| Utilities |
12,000 | — | 12,000 | — | ||||||||||||
| Warrants |
||||||||||||||||
| Energy |
46,408 | 46,408 | — | — | ||||||||||||
| Industrials(1) |
— | — | — | — | ||||||||||||
| Claims |
52,138 | — | — | 52,138 | ||||||||||||
| Purchased Call Options |
400 | — | 400 | — | ||||||||||||
| Repurchase Agreement |
40,008 | — | 40,008 | — | ||||||||||||
| Cash Equivalent |
202,449,213 | 202,449,213 | — | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Assets |
1,309,181,439 | 224,950,644 | 448,690,748 | 635,540,047 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
| Total value at September 30, 2020 $ |
Level 1 Quoted Price $ |
Level 2 Significant Observable Inputs $ |
Level 3 Significant Unobservable Inputs $ |
|||||||||||||
| Liabilities |
||||||||||||||||
| Securities Sold Short |
||||||||||||||||
| Common Stocks |
||||||||||||||||
| Information Technology |
(7,610,707 | ) | (7,610,707 | ) | — | — | ||||||||||
| Futures(2) |
(500,236 | ) | (500,236 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total Liabilities |
(8,110,943 | ) | (8,110,943 | ) | — | — | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
1,301,070,496 | 216,839,701 | 448,690,748 | 635,540,047 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | This category includes securities with a value of zero. |
| (2) | Futures are valued at the unrealized depreciation on the instrument. |
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, 2020.
| Category |
Fair Value at 9/30/2020 $ |
Valuation Technique |
Unobservable Inputs |
Input Values | ||||||||
| Preferred Stock |
261,846,062 | Discounted Cash Flow | Discount Rate | 11% - 13% | ||||||||
| Third Party Indication of Value | Broker Quote | Various | ||||||||||
| U.S. Senior Loans |
119,223,562 | Multiple Analysis | Multitple of EBITDA less CAPEX | 7.00x - 10.00x | ||||||||
| Transaction Analysis | Multitple of EBITDA less CAPEX | 7.00x - 9.00x | ||||||||||
| Black-Scholes Model | Volatility Assumption | 25% | ||||||||||
| Discounted Cash Flow | Discount Rate | 9.00% - 15.00% | ||||||||||
| Spread Adjustment | 0.10% | |||||||||||
| Transaction Indication of Value | Enterprise Value ($mm) | $13.25 | ||||||||||
| Common Stocks |
184,497,261 | Multiple Analysis | Multitple of EBITDA less CAPEX | 7.00x - 10.00x | ||||||||
| Unadjusted Price/Mhz-PoP | $0.10 - $0.95 | |||||||||||
| Discounted Cash Flow | Discount Rate | 11.00% - 16.50% | ||||||||||
| Capitalization Rate | 6.75% - 7.75% | |||||||||||
| Transaction Analysis | Multitple of EBITDA less CAPEX | 7.00x - 9.00x | ||||||||||
| Transaction Indication of Value | Enterprise Value ($mm) | $771.0 | ||||||||||
| Transaction Price per Share | $16.61 | |||||||||||
| Black-Scholes Model | Volatility Assumption | 25% | ||||||||||
| Net Asset Value | N/A | N/A | ||||||||||
| LLC Interest |
69,921,024 | Discounted Cash Flow | Discount Rate | 1.28% - 5.93% | ||||||||
| Net Asset Value | N/A | N/A | ||||||||||
| Claims |
52,138 | Pricing Feed | Indication of Value | 1.375 | ||||||||
|
|
|
|||||||||||
| 635,540,047 | ||||||||||||
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, 2020, there were no transfers in or out of Level 3.
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
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:
| Balance as of December 31, 2019 |
Transfers Into Level 3 |
Transfers Out of Level 3 |
Accrued Discounts (Premiums) |
Realized Gain (Loss) |
Change in Net Unrealized Appreciation (Depreciation) |
Net Purchases | Net Sales | Distribution to Return Capital |
Balance as of September 30, 2020 |
Change in Unrealized Appreciation (Depreciation) from Investments held at September 30, 2020 |
||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Preferred Stock |
||||||||||||||||||||||||||||||||||||||||||||
| Financials |
— | — | — | — | — | (1,095,500 | ) | 19,719,000 | — | — | 18,623,500 | (1,095,500 | ) | |||||||||||||||||||||||||||||||
| Real Estate |
233,025,297 | — | — | — | 351,780 | 15,838,844 | 1,825,244 | (7,314,604 | ) | (503,999 | ) | 243,222,562 | 15,838,844 | |||||||||||||||||||||||||||||||
| U.S. Senior Loans |
||||||||||||||||||||||||||||||||||||||||||||
| Communication Services |
6,107,407 | — | — | (207 | ) | — | (101,086 | ) | 690,343 | — | — | 6,696,457 | (101,086 | ) | ||||||||||||||||||||||||||||||
| Gaming/Leisure |
10,753,914 | — | — | — | 32,687 | 3,257,160 | — | (568,018 | ) | — | 13,475,743 | 3,257,160 | ||||||||||||||||||||||||||||||||
| Healthcare |
47,733,657 | — | — | — | — | (6,714,762 | ) | 6,504,467 | — | — | 47,523,362 | (6,714,762 | ) | |||||||||||||||||||||||||||||||
| Industrials |
8,105,187 | — | — | 347,422 | — | (8,452,609 | ) | — | — | — | — | (8,452,609 | ) | |||||||||||||||||||||||||||||||
| Information Technology |
56,829,000 | — | — | — | — | (5,301,000 | ) | — | — | — | 51,528,000 | (5,301,000 | ) | |||||||||||||||||||||||||||||||
| Common Stocks |
||||||||||||||||||||||||||||||||||||||||||||
| Communication Services |
7,520,731 | — | — | — | — | 1,575,400 | — | — | — | 9,096,131 | 1,575,400 | |||||||||||||||||||||||||||||||||
| Energy |
1 | — | — | — | — | — | — | — | — | 1 | — | |||||||||||||||||||||||||||||||||
| Healthcare |
72,254 | — | — | — | — | (66,457 | ) | — | — | — | 5,797 | (66,457 | ) | |||||||||||||||||||||||||||||||
| Materials |
45,617 | — | — | — | — | (45,617 | ) | — | — | — | — | (45,617 | ) | |||||||||||||||||||||||||||||||
| Real Estate |
95,747,531 | — | — | — | — | (34,463,261 | ) | 123,711,047 | — | (9,599,985 | ) | 175,395,332 | (34,463,261 | ) | ||||||||||||||||||||||||||||||
| Collateralized Loan Obligations |
— | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
| LLC Interest |
88,777,470 | — | — | — | — | (18,856,446 | ) | — | — | — | 69,921,024 | (18,856,446 | ) | |||||||||||||||||||||||||||||||
| Corporate Bonds & Notes |
||||||||||||||||||||||||||||||||||||||||||||
| Energy |
1,076,400 | — | — | — | — | (1,076,400 | ) | — | — | — | — | (1,076,400 | ) | |||||||||||||||||||||||||||||||
| Warrants |
||||||||||||||||||||||||||||||||||||||||||||
| Industrials |
1,412 | — | — | — | — | (1,412 | ) | — | — | — | — | (1,412 | ) | |||||||||||||||||||||||||||||||
| Claims |
52,138 | — | — | — | — | — | — | — | — | 52,138 | — | |||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
| Total |
555,848,016 | — | — | 347,215 | 384,467 | (55,503,146 | ) | 152,450,101 | (7,882,622 | ) | (10,103,984 | ) | 635,540,047 | (55,503,146 | ) | |||||||||||||||||||||||||||||
The significant unobservable inputs used in the fair value measurement of the Fund’s preferred stock assets are the discount rate and broker quotes. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Fund’s bank loan securities are: multiple of adjusted EBITDA, volatility assumption, transaction indication of value, discount rate and spread adjustment. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The significant unobservable inputs used in the fair value measurement of the Fund’s common equity securities are: multiple of adjusted EBITDA, price/MHz-PoP multiple, capitalization rate, discount rate, volatility assumption and transaction indication of value. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. The significant unobservable input used in the fair value measurement of the Fund’s LLC interests is the discount rate. A significant increase (decrease) in this input in isolation could result in a significantly lower (higher) fair value measurement.
In addition to the unobservable inputs utilized for various valuation methodologies, the Investment Advisor frequently uses a combination of two or more valuation methodologies to determine fair value for a single holding. In such instances, the Investment Advisor assesses the methodologies and ascribes weightings to each methodology. The weightings ascribed to any individual methodology ranged from as low as 5% to as high as 95% as of September 30, 2020. 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.
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(continued) | ||
| As of September 30, 2020 | Highland Income Fund | |
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.
| NOTES TO CONSOLIDATED INVESTMENT PORTFOLIO (unaudited)(concluded) | ||
| As of September 30, 2020 | 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, 2020:
| Issuer |
Shares at December 31, 2019 |
Beginning Value as of December 31, 2019 $ |
Purchases at Cost $ |
Proceeds from Sales $ |
Net Amortization (Accretion) of Premium/ (Discount) $ |
Net Realized Gain/ (Loss) on Sales of Affiliated Issuers $ |
Change in Unrealized Appreciation/ (Depreciation) $ |
Ending Value as of September 30, 2020 $ |
Shares at September 30, 2020 |
Affiliated Income $ |
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| Majority Owned, Not Consolidated |
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| Allenby (Common Stocks) |
1,393,678 | 1 | 44,988 | — | — | — | (44,988 | ) | 1 | 1,438,666 | — | |||||||||||||||||||||||||||||
| Claymore (Common Stocks) |
9,370,190 | 9 | 761,084 | — | — | — | (761,083 | ) | 10 | 10,131,274 | — | |||||||||||||||||||||||||||||
| Other Affiliates |
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| CCS Medical, Inc. (U.S. Senior Loans & Common Stocks) |
58,920,016 | 47,805,911 | 4,803,858 | — | — | — | (5,080,610 | ) | 47,529,159 | 63,723,874 | 4,835,942 | |||||||||||||||||||||||||||||
| EDS Legacy Partners (U.S. Senior Loans) |
57,000,000 | 56,829,000 | — | — | — | — | (5,301,000 | ) | 51,528,000 | 57,000,000 | 3,253,750 | |||||||||||||||||||||||||||||
| Highland Global Allocation Fund (Registered Investment Company) |
— | — | 197,609 | — | — | — | 104,015 | 301,624 | 48,649 | 28,606 | ||||||||||||||||||||||||||||||
| LLV Holdco LLC (U.S. Senior Loans & Common Stocks) |
13,442,392 | 10,753,914 | 333,130 | — | (58,674 | ) | — | 1,723,067 | 12,751,437 | 13,810,470 | 147,258 | |||||||||||||||||||||||||||||
| NexPoint Real Estate Finance (Common Stocks) |
— | — | 218,170 | — | — | — | 40,638 | 258,808 | 17,630 | — | ||||||||||||||||||||||||||||||
| NexPoint Residential Trust (Common Stocks) |
— | — | 5,371,315 | (76,433 | ) | — | — | 1,292,024 | 6,586,906 | 148,521 | 15,296 | |||||||||||||||||||||||||||||
| NexPoint Strategic Opportunities Fund (Registered Investment Company) |
989,143 | 17,517,723 | 1,740,631 | (1,548,659 | ) | — | — | (7,690,569 | ) | 10,019,126 | 1,156,943 | — | ||||||||||||||||||||||||||||
| NFRO REIT SUB, LLC (Common Stocks) |
4,328,483 | 95,747,521 | 56,625,000 | (9,599,985 | ) | — | — | (6,521,421 | ) | 136,251,115 | 7,287,130 | — | ||||||||||||||||||||||||||||
| NexPoint Real Estate Finance Operating Partnership, L.P., NREF OP II (LLC Interest) |
— | — | 23,107,833 | — | — | — | (6,090,548 | ) | 17,017,285 | 1,159,216 | — | |||||||||||||||||||||||||||||
| Omnimax International, Inc. (U.S. Senior Loans, Common Stocks & Warrants) |
9,629,768 | 8,152,216 | 684,807 | (4,118,050 | ) | 254,449 | (6,010,799 | ) | 1,037,377 | — | 15,074 | 1,264,067 | ||||||||||||||||||||||||||||
| SFR WLIF I, II, III, LLC (LLC Interest) |
90,000,000 | 88,777,470 | — | — | — | — | (18,856,446 | ) | 69,921,024 | 90,000,000 | 4,933,747 | |||||||||||||||||||||||||||||
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| Total |
245,073,670 | 325,583,765 | 93,888,425 | (15,343,127 | ) | 195,775 | (6,010,799 | ) | (46,149,544 | ) | 352,164,495 | 245,937,447 | 14,478,666 | |||||||||||||||||||||||||||
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