Form N-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-Q

 

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS

OF REGISTERED MANAGEMENT INVESTMENT COMPANY

Investment Company Act file number: 811-21869

 

 

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)

 

 

Registrant’s telephone number, including area code: (877) 665-1287

Date of fiscal year end: December 31

Date of reporting period: September 30, 2015

 

 

 


Item 1: Schedule of Investments

The Schedule of Investments are attached herewith.


INVESTMENT PORTFOLIO (unaudited)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

Principal Amount ($)

   Value ($)  

U.S. Senior Loans (a) - 16.9%

  

CHEMICALS - 0.6%

  

2,978,959

  

Vertellus Specialties, Inc.
Term Loan B
10.50%, 10/31/2019

     2,636,378   
     

 

 

 

ENERGY - 0.2%

  

459,930

  

Azure Midstream Energy LLC
Term Loan B
7.50%, 11/15/2018

     395,540   

1,529,000

  

Fieldwood Energy LLC
Second Lien Term Loan
8.38%, 09/30/2020

     434,488   
     

 

 

 
     830,028   
     

 

 

 

GAMING & LEISURE - 1.0%

  

3,883,480

  

Ginn-LA CS Borrower LLC
First Lien Tranche A Credit-Linked Deposit (c)

     77,670   

8,322,966

  

First Lien Tranche B Term Loan (c)

     166,459   

8,604,815

  

LLV Holdco LLC
Exit Revolving Loan
5.00%, 02/28/2017 (d)(e)

     4,120,846   
     

 

 

 
     4,364,975   
     

 

 

 

HOUSING - 0.0%

  

2,221,161

  

LBREP/L-SunCal Master I LLC
First Lien Term Loan B (c)(e)

     —     
     

 

 

 

INFORMATION TECHNOLOGY - 1.0%

  

4,982,000

  

Scientific Games International, Inc.
Term Loan B-2
10.00%, 12/01/2022 (f)

     4,371,705   
     

 

 

 

MEDIA & TELECOMMUNICATIONS - 0.0%

  

2,578,841

  

Endurance Business Media, Inc.
Term Loan (c)(e)

     —     
     

 

 

 

SERVICE - 1.9%

  

14,715,754

  

Weight Watchers International, Inc.
Tranche B-2 Initial Term Loan
4.00%, 04/02/2020

     8,088,147   
     

 

 

 

TELECOMMUNICATIONS - 3.2%

  

13,549,570

  

TerreStar Corp.
Term Loan A
5.50%, 02/27/2020 (e)

     13,495,372   
     

 

 

 

UTILITY - 9.0%

  

8,759,095

  

Entegra TC LLC
Third Lien Term Loan
9.25%, 10/02/2020

     8,649,607   

60,329,417

  

Texas Competitive Electric Holdings Co. LLC
Extended Term Loan
10/10/2017 (b)

     23,249,750   

17,000,000

  

Non-Extended Term Loan
4.70%, 10/10/2016

     6,393,615   
     

 

 

 
     38,292,972   
     

 

 

 
   Total U.S. Senior Loans (Cost $117,376,566)      72,079,577   
     

 

 

 

Principal Amount

           

Foreign Denominated or Domiciled Senior Loans (a) - 0.3%

  

MARSHALL ISLANDS - 0.2%

  

1,504,646

  

Drillships Financing Holding, Inc.
Tranche Term Loan B-1
6.00%, 03/31/2021

     898,395   
     

 

 

 


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

UNITED KINGDOM - 0.1%

  

986,568

   Henson No. 4, Ltd. (c)(e)      130,689   

998,204

   Henson No. 4, Ltd. (c)(e)      131,999   
     

 

 

 
   Total Foreign Denominated or Domiciled Senior Loans (Cost $2,955,949)      1,161,083   
     

 

 

 

Principal Amount ($)

           

Asset-Backed Securities (g)(h) - 16.7%

  

10,000,000

  

Acis CLO, Ltd.
Series 2014-3A, Class E
5.05%, 02/01/2026

     8,064,000   

2,000,000

  

Series 2013-2A, Class E
5.22%, 10/14/2022

     1,912,333   

14,000,000

  

Series 2013-1A, Class SUB
5.83%, 04/18/2024

     6,790,000   

4,500,000

  

Series 2013-1A, Class E
5.89%, 04/18/2024

     3,992,625   

5,000,000

  

Series 2014-3A, Class F
5.90%, 02/01/2026

     3,731,250   

9,142,000

  

Series 2013-1A, Class F
6.79%, 04/18/2024

     7,477,242   

2,250,000

  

ALM VII, Ltd.
Series 2013-7R2A, Class SUB
0.00%, 04/24/2024

     1,653,750   

1,000,000

  

Apidos CLO
Series 2013-12A, Class F
5.19%, 04/15/2025

     796,200   

1,925,000

  

Betony CLO, Ltd.
Series 2015-1A, Class SUB
0.00%, 04/15/2027

     1,395,625   

2,000,000

  

CFIP CLO, Ltd.
Series 2014-1A, Class E
5.04%, 04/13/2025

     1,636,580   

1,000,000

  

CIFC Funding, Ltd.
Series 2014-4A, Class F
5.89%, 10/17/2026

     780,000   

3,375,116

  

Eastland CLO, Ltd.
Series 2007-1A, Class D
3.90%, 05/01/2022

     3,063,508   

1,000,000

  

Flagship CLO VIII, Ltd.
Series 2014-8A, Class F
6.14%, 01/16/2026

     790,000   

2,915,407

  

Grayson CLO, Ltd.
Series 2006-1A, Class D
3.90%, 11/01/2021

     2,597,919   

850,000

  

Greywolf CLO, Ltd.
Series 2013-1A, Class E
5.34%, 04/15/2025

     659,260   

3,000,000

  

Harbourview CLO, Ltd.
Series 7A, Class E
5.45%, 11/18/2026

     2,520,000   

2,127,119

  

Hewett’s Island CDO, Ltd.
Series 2007-1RA, Class E
7.06%, 11/12/2019

     2,105,847   

753,309

  

Highland Loan Funding V, Ltd.
2.76%, 08/01/2016

     489,651   

13,375,000

  

Highland Park CDO, Ltd.
Series 2006-1A, Class A2
0.73%, 11/25/2051

     9,228,750   

2,000,000

  

KVK CLO, Ltd.
Series 2015-1A, Class E
6.03%, 05/20/2027

     1,690,000   

2,000,000

  

Lenox CDO, Ltd.
Series 2005-1A, Class A1S
1.21%, 11/14/2043

     1,800,000   

2,752,426

  

Rockwall CDO II, Ltd.
Series 2007-1A, Class B2L
4.55%, 08/01/2024

     2,400,804   


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

1,500,000

  

Valhalla CLO, Ltd.
Series 2004-1A, Class EIN
0.00%, 08/01/2016

     386,250   

2,100,000

  

Vibrant CLO II, Ltd.
Series 2013-2A, Class E
5.79%, 07/24/2024

     1,606,500   

3,980,138

  

Westchester CLO, Ltd.
Series 2007-1A, Class E
4.60%, 08/01/2022

     3,643,658   
     

 

 

 
   Total Asset-Backed Securities (Cost $74,520,170)      71,211,752   
     

 

 

 

Corporate Bonds & Notes - 9.6%

  

ENERGY - 0.8%

  

877,000

  

American Energy-Permian Basin LLC
7.13%, 11/01/2020(f)(h)

     517,430   

307,681

  

7.38%, 11/01/2021(f)(h)

     179,993   

4,062,000

  

Arch Coal, Inc.
7.00%, 06/15/2019 (f)

     324,960   

3,363,000

  

Linn Energy LLC
6.25%, 11/01/2019

     874,380   

2,493,000

  

Penn Virginia Corp.
8.50%, 05/01/2020 (f)

     657,529   

5,000,000

  

Venoco, Inc.
8.88%, 02/15/2019 (f)

     925,000   
     

 

 

 
     3,479,292   
     

 

 

 

INFORMATION TECHNOLOGY - 2.6%

  

23,971,250

  

Avaya, Inc.
10.50%, 03/01/2021 (f)(h)

     11,146,631   
     

 

 

 

TELECOMMUNICATIONS - 0.2%

  

2,020,000

  

iHeartCommunications, Inc., PIK
14.00%, 02/01/2021 (f)

     847,138   
     

 

 

 

TRANSPORTATION - 0.1%

  

3,750,000

  

DPH Holdings Corp. (c)

     154,688   

3,933,000

  

DPH Holdings Corp. (c)

     162,236   

8,334,000

  

DPH Holdings Corp. (c)

     343,777   
     

 

 

 
     660,701   
     

 

 

 

UTILITY - 5.9%

  

8,622,712

  

Entegra TC LLC, PIK
10.00%, 10/03/2017 (f)(h)

     8,816,723   

21,239,000

  

Ocean Rig UDW, Inc.
7.25%, 04/01/2019 (f)(h)

     11,913,805   

5,000,000

   Texas Competitive Electric Holdings Co. LLC (c)(f)(h)      1,950,000   

24,000,000

   Texas Competitive Electric Holdings Co. LLC (c)(f)      2,460,000   
     

 

 

 
     25,140,528   
     

 

 

 
   Total Corporate Bonds & Notes (Cost $78,351,507)      41,274,290   
     

 

 

 

Principal Amount

           

Foreign Corporate Bonds & Notes - 1.0%

  

CANADA - 0.9%

  

USD

     

5,069,000

  

Tervita Corp.
8.00%, 11/15/2018 (f)(h)

     3,827,095   
     

 

 

 

NETHERLANDS - 0.1%

  

USD

     

64,515,064

   Celtic Pharma Phinco BV (c)      645,151   

28,665,284

   Celtic Pharma Phinco BV (c)(e)      —     
     

 

 

 
     645,151   
     

 

 

 
   Total Foreign Corporate Bonds & Notes (Cost $67,323,526)      4,472,246   
     

 

 

 


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

Principal Amount ($)

 

Sovereign Bonds (c)(f) - 9.2%

  

10,000,000

  

Argentine Republic Government International Bond

     5,805,000   

22,017,585

  

Argentine Republic Government International Bond

     22,266,871   

4,128,293

  

Argentine Republic Government International Bond

     4,175,034   

7,010,200

  

Argentine Republic Government International Bond

     6,975,149   

20

  

Argentine Republic Government International Bond

     20   
     

 

 

 
   Total Sovereign Bonds (Cost $40,133,957)      39,222,074   
     

 

 

 

Shares

           

Common Stocks - 81.3%

  

BROADCASTING - 0.0%

  

2,317,006

   Communications Corp. of America (e)(i)(j)      2   
     

 

 

 

CONSUMER DISCRETIONARY - 3.4%

  

55,125

   American Airlines Group, Inc. (k)      2,140,504   

24,950

   Apollo Group, Inc., Class A (i)(k)      275,947   

982,727

   K12, Inc. (i)(k)      12,225,124   
     

 

 

 
     14,641,575   
     

 

 

 

ENERGY - 1.1%

  

161,280

   Atlantic Power Corp. (f)      299,981   

3,360

   California Resources Corp. (k)      8,736   

2,060,928

   Ocean Rig UDW, Inc. (f)(k)      4,389,776   
     

 

 

 
     4,698,493   
     

 

 

 

FINANCIAL - 6.7%

  

1,000,000

   Adelphia Recovery Trust (i)      2,500   

46,601

   American Banknote Corp. (e)      221,821   

1,098,185

   Fortress Investment Group LLC, Class A (f)(k)      6,094,927   

83,904

   MPM Holdings, Inc. (i)      1,908,816   

12,819,115

   Specialty Finance, Inc. (e)(i)(l)      12,362,754   

1,175,233

   SWS Group, Inc. (e)(f)(i)(k)      8,120,860   
     

 

 

 
     28,711,678   
     

 

 

 

GAMING & LEISURE - 0.0%

  

14

   LLV Holdco LLC - Litigation Trust Units (e)      —     

26,712

   LLV Holdco LLC - Series A, Membership Interest (e)      —     

144

   LLV Holdco LLC - Series B, Membership Interest (e)      —     
     

 

 

 
     —     
     

 

 

 

HEALTHCARE - 0.4%

  

24,000,000

   Genesys Ventures IA, LP (e)      1,569,600   
     

 

 

 

HOUSING - 0.3%

  

368,150

   CCD Equity Partners LLC (e)      1,214,895   
     

 

 

 

INDUSTRIALS - 0.4%

  

6,241,435

   DryShips, Inc. (f)(i)(k)      1,053,554   

18,550

   JetBlue Airways Corp. (i)(k)      478,034   
     

 

 

 
     1,531,588   
     

 

 

 

INFORMATION TECHNOLOGY - 2.6%

  

833

   CDK Global, Inc. (k)      39,801   

563,485

   Corning, Inc. (f)(k)      9,646,863   

1

   Magnachip Semiconductor Corp. (i)      7   

4,897

   Microsoft Corp. (k)      216,741   

27,450

   NetApp, Inc. (k)      812,520   

11,600

   Teradata Corp. (f)(i)(k)      335,936   
     

 

 

 
     11,051,868   
     

 

 

 

MEDIA & TELECOMMUNICATIONS - 18.5%

  

6,480

   Endurance Business Media, Inc., Class A (e)(i)      —     

18,000

   Gray Television, Inc., Class A (f)(i)      208,800   


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

49,784

   Loral Space & Communications, Inc. (f)(i)      2,343,831   

3,160,625

   Media General, Inc. (i)(k)      44,217,144   

308,875

   Metro-Goldwyn-Mayer, Inc., Class A (i)(m)      23,880,053   

372,971

   MPM Holdings, Inc. (i)(k)      8,485,090   

645

   Time, Inc. (k)      12,287   
     

 

 

 
     79,147,205   
     

 

 

 

REAL ESTATE - 0.0%

  

417,307

   Allenby (e)(n)      —     

4,739,161

   Claymore (e)(n)      5   
     

 

 

 
     5   
     

 

 

 

REAL ESTATE INVESTMENT TRUST - 33.2%

  

25,096,927

   Freedom, REIT (e)(n)      67,510,733   

30,000

   Landmark Apartment Trust, Inc., REIT (e)      175,500   

5,983,095

   Nexpoint Real Estate Capital, REIT (e)(n)      69,488,867   

537,527

   Spirit Realty Capital, Inc., REIT (f)(k)      4,912,997   
     

 

 

 
     142,088,097   
     

 

 

 

TELECOMMUNICATIONS - 7.8%

  

110,872

   TerreStar Corp. (e)(i)(m)      33,585,346   
     

 

 

 

UTILITY - 6.5%

  

26,220

   Entegra TC LLC, Class A (i)      7,407,150   

1,272,973

   Entegra TC LLC, Class B (i)      4,455   

1,365,663

   NRG Energy, Inc. (k)      20,280,096   
     

 

 

 
     27,691,701   
     

 

 

 

WIRELESS COMMUNICATIONS - 0.4%

  

2,260,529

   Pendrell Corp. (f)(i)      1,627,581   
     

 

 

 
   Total Common Stocks (Cost $508,449,956)      347,559,634   
     

 

 

 

Preferred Stocks (h) – 32.2%

  

FINANCIAL - 32.2%

  

14,500

   Aberdeen Loan Funding, Ltd.      5,872,500   

1,200

   Brentwood CLO, Ltd.      588,000   

13,800

   Brentwood CLO, Ltd.      6,762,000   

34,500

   Eastland CLO, Ltd.      17,244,825   

5,000

   Eastland Investors Corp.      2,499,250   

7,750

   Gleneagles CLO, Ltd.      2,063,437   

62,600

   Grayson CLO, Ltd., Series II      28,170,000   

1,500

   Grayson Investors Corp.      675,000   

39,000

   Greenbriar CLO, Ltd.      21,450,000   

3,750

   Greenbriar CLO, Ltd.      2,062,500   

2,500

   Liberty CLO, Ltd.      863,500   

8,500

   Red River CLO, Ltd., Series PS-2      2,040,000   

10,500

   Rockwall CDO, Ltd.      7,247,100   

6,000

   Southfork CLO, Ltd.      2,829,000   

41,500

   Stratford CLO, Ltd.      22,410,000   

29,007

   Westchester CLO, Ltd.      14,793,570   
     

 

 

 
     137,570,682   
     

 

 

 
   Total Preferred Stocks (Cost $169,308,711)      137,570,682   
     

 

 

 

Exchange-Traded Funds (i)(k) - 1.7%

  

23,400

   Direxion Daily Gold Miners Bull 3x Shares, ETF      67,626   

77,076

   ProShares Ultra Silver, ETF (f)      2,353,131   

121,455

   ProShares UltraShort Nasdaq Biotechnology, ETF      4,682,090   
     

 

 

 
   Total Exchange-Traded Funds (Cost $13,301,185)      7,102,847   
     

 

 

 

Units

           

Warrants (e)(i) - 0.0%

  

GAMING & LEISURE - 0.0%

  

602

   LLV Holdco LLC - Series C, Membership Interest, expires 07/15/15      —     

828

   LLV Holdco LLC - Series D, Membership Interest, expires 07/15/15      —     


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

925

   LLV Holdco LLC - Series E, Membership Interest, expires 07/15/15      —     
1,041    LLV Holdco LLC - Series F, Membership Interest, expires 07/15/15      —     
1,179    LLV Holdco LLC - Series G, Membership Interest, expires 07/15/15      —     
     

 

 

 
     —     
     

 

 

 
   Total Warrants (Cost $0)      —     
     

 

 

 

Contracts

           
Purchased Call Options (o) - 1.2%   
9,000    Anadarko Petroleum Corp., Strike price $72.50, expires 01/15/2016      1,224,000   
4,000    Anadarko Petroleum Corp., Strike price $80.00, expires 01/15/2016      200,000   
7,900    Salesforce.com, Inc., Strike price $72.50, expires 03/18/2016      3,871,000   
     

 

 

 
   Total Purchased Call Options (Cost $20,111,061)      5,295,000   
     

 

 

 

Total Investments - 170.1%
(Cost $1,091,832,588)

     726,949,185   
     

 

 

 
Securities Sold Short - (5.2)%   

Shares

           
Common Stocks (p) - (5.2)%   
ENERGY - (0.4)%   
31,350    Cheniere Energy, Inc.      (1,514,205
8,451    Seventy Seven Energy, Inc.      (11,662
     (1,525,867
     

 

 

 
HEALTHCARE - (2.6)%   
13,025    Alexion Pharmaceuticals, Inc.      (2,036,980
236,200    Myriad Genetics, Inc.      (8,852,776
     

 

 

 
     (10,889,756
     

 

 

 
INFORMATION TECHNOLOGY - (2.2)%   
114,750    Zillow Group, Inc., Class A      (3,296,768
229,500    Zillow Group, Inc., Class C      (6,196,500
     

 

 

 
     (9,493,268
     

 

 

 
  

Total Common Stocks
(Proceeds $26,376,269)

     (21,908,891
     

 

 

 
  

Total Securities Sold Short
(Proceeds $26,376,269)

     (21,908,891
     

 

 

 

Other Assets & Liabilities, Net - (64.9)%

     (277,587,571
     

 

 

 

Net Assets - 100.0%

     427,452,723   
     

 

 

 

 

(a) Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at September 30, 2015. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown.
(b) All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
(c) The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued.
(d) Fixed rate senior loan.
(e) Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $212,129,289, or 49.6% of net assets, were fair valued under the Fund’s valuation procedures as of September 30, 2015.
(f) All or part of the security is pledged as collateral for the Committed Facility Agreement with BNP Paribas Prime Brokerage, Inc. The market value of the securities pledged as collateral was $102,495,454.
(g) Variable or floating rate security. The interest rate shown reflects the rate in effect September 30, 2015.
(h) Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At September 30, 2015, these securities amounted to $247,134,111 or 57.8% of net assets.
(i) Non-income producing security.
(j) Shares are held in an escrow account.


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of September 30, 2015    NexPoint Credit Strategies Fund

 

(k) All or part of this security is pledged as collateral for short sales and written options contracts. The market value of the securities pledged as collateral was $115,095,423.
(l) This investment is made up of the fair value of ten life settlement contracts.
(m) Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the procedures established by the Fund’s Board of Trustees.
(n) Affiliated issuer. Assets with a total aggregate market value of $136,999,605, or 32.1% of net assets, were affiliated with the Fund as of September 30, 2015.
(o) Options are shown at market value.
(p) No dividend payable on security sold short.

 

Currency Abbreviations:

EUR

   Euro Currency

GBP

   British Pound

USD

   United States Dollar

Glossary:

  

CDO

   Collateralized Debt Obligation

CLO

   Collateralized Loan Obligation

ETF

   Exchange-Traded Fund

PIK

   Payment-in-Kind

REIT

   Real Estate Investment Trust

Written options contracts outstanding as of September 30, 2015 were as follows:

 

Description

   Exercise
Price
     Expiration
Date
     Number of
Contracts
     Premium      Value  

WRITTEN PUT OPTIONS:

              

Anadarko Petroleum Corp.

   $ 80.00         January 2016         4,000       $ 2,529,793       $ (8,200,000

Salesforce.com, Inc.

     72.50         March 2016         7,900         5,981,827         (6,517,500
           

 

 

    

 

 

 

Total Written Options Contracts

            $ 8,511,620       $ (14,717,500
           

 

 

    

 

 

 

Foreign Denominated or Domiciled Senior Loans and Foreign Corporate Bonds & Notes

Industry Concentration Table:

(% of Net Assets)

 

Service

         0.9

Energy

     0.2

Healthcare

     0.1

Retail

     0.1
  

 

 

 

Total

     1.3
  

 

 

 


NOTES TO INVESTMENT PORTFOLIO (unaudited)

 

 

September 30, 2015

   NexPoint Credit Strategies Fund

Valuation of Investments

In computing the NexPoint Credit Strategies Fund’s (the “Fund”) net assets attributable to common shares, securities with readily available market quotations on the New York Stock Exchange, National Association of Securities Dealers Automated Quotation, or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that NexPoint Advisors, L.P. (the “Investment Adviser”) has determined to generally have the capability to provide appropriate pricing services and have been approved by the Trustees.

Securities for which market quotations are not readily available, for which the Fund has determined the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Fund’s net asset value (“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: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAV. Determination of fair value is uncertain because it involves subjective judgments and estimates.

There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. Short-term debt investments, that is, those with a remaining maturity of 60 days or less, are valued at cost adjusted for amortization of premiums and accretion of discounts. Foreign price quotations are converted to U.S. dollar equivalents using the 4:00 PM London Time Spot Rate.

Fair Value Measurements

The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and

Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

The Investment Adviser has established policies, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy


NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)

 

 

September 30, 2015

   NexPoint Credit Strategies Fund

 

are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser. The Pricing Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of those policies.

As September 30, 2015, the Fund’s investments consisted of senior loans, asset-backed securities, corporate bonds and notes, common stocks, preferred stocks, exchange-traded funds, rights, warrants and securities sold short. The fair value of the Fund’s loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans, bonds and asset-backed securities that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Fund’s common stocks, preferred stocks 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.

At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.


NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)

 

 

September 30, 2015

   NexPoint Credit Strategies Fund

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s assets as of September 30, 2015 is as follows:

 

     Total value at
September 30, 2015
    Level 1
Quoted Price
    Level 2
Significant
Observable Inputs
    Level 3
Significant
Unobservable Inputs
 

NexPoint Credit Strategies Fund

        

Assets

        

U.S. Senior Loans

        

Chemicals

   $ 2,636,378      $ —        $ 2,636,378      $ —     

Energy

     830,028        —          830,028        —     

Gaming & Leisure

     4,364,975        —          244,129        4,120,846   

Housing

     —          —          —          —   (2) 

Information Technology

     4,371,705        —          4,371,705        —     

Media & Telecommunications

     —          —          —          —   (2) 

Service

     8,088,147        —          8,088,147        —     

Telecommunications

     13,495,372        —          —          13,495,372   

Utility

     38,292,972        —          38,292,972        —     

Foreign Denominated or Domiciled Senior Loans

     1,161,083        —          898,395        262,688   

Asset-Backed Securities

     71,211,752        —          71,211,752        —     

Corporate Bonds & Notes(1)

     41,274,290        —          41,274,290        —     

Foreign Corporate Bonds & Notes

     4,472,246        —          4,472,246 (2)      —     

Sovereign Bonds

     39,222,074        —          39,222,074        —     

Common Stocks

        

Broadcasting

     2        —          —          2   

Consumer Discretionary

     14,641,575        14,641,575        —          —     

Energy

     4,698,493        4,698,493        —          —     

Financial

     28,711,678        6,097,427        —          22,614,251   

Gaming & Leisure

     —          —          —          —   (2) 

Healthcare

     1,569,600        —          —          1,569,600   

Housing

     1,214,895        —          —          1,214,895   

Industrials

     1,531,588        1,531,588        —          —     

Information Technology

     11,051,868        11,051,868        —          —     

Media & Telecommunications

     79,147,205        46,782,062        23,880,053        8,485,090 (2) 

Real Estate

     5        —          —          5 (2) 

Real Estate Investment Trust

     142,088,097        4,912,996        —          137,175,101   

Telecommunications

     33,585,346        —          —          33,585,346   

Utility

     27,691,701        20,280,096        7,411,605        —     

Wireless Communications

     1,627,581        1,627,581        —          —     

Preferred Stocks(1)

     137,570,682        —          137,570,682        —     

Exchange-Traded Funds

     7,102,847        7,102,847        —          —     

Warrants(1)

        

Equity Contracts

     —          —          —          —   (2) 

Purchased Call Options

     5,295,000        5,295,000        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Assets

     726,949,185        124,021,533        380,404,456        222,523,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

        

Securities Sold Short(1)

     (21,908,891     (21,908,891     —          —     

Other Financial Instruments

        

Written Put Options Contracts

        

Equity Contracts

     (14,717,500     (14,717,500     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Liabilities

     (36,626,391     (36,626,391     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 690,322,794      $ 87,395,142      $ 380,404,456      $ 222,523,196   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  See Investment Portfolio detail for industry breakout.
(2)  This category includes securities with a value of zero.


NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)

 

 

September 30, 2015

   NexPoint Credit Strategies Fund

 

The table below sets forth a summary of changes in the Fund’s Level 3 assets (assets measured at fair value using significant unobservable inputs) for the nine months ended September 30, 2015.

 

    Balance as of
December 31,
2014
    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
September 30, 2015
    Change in
Unrealized
Gain/(Loss) on
Level 3
securities still
held at period
end
 

U.S. Senior Loans

  

               

Chemicals

  $ —        $ —        $ (2,827,197   $ 4,282      $ 748      $ 187,304      $ 2,640,878      $ (6,015   $ —        $ —     

Gaming & Leisure

    4,596,592        —          —          —          —          (793,935     318,189        —          4,120,846        (610,769

Healthcare

    2,150,625        —          —          757        (34,057     47,175        —          (2,164,500     —          —     

Housing

    72,857        —          —          —          204,848        (53,990     —          (223,715     —   (2)      —     

Media & Telecommunications

    6,637,538        —          —          —          (2     (191,199     208,240        (6,654,577     —   (2)      —     

Telecommunications

    —          —          —          (1,205     11,518        (64,512     16,264,889        (2,715,318     13,495,372        (76,782

Utility

    7,883,995        —          (8,649,606     81,579        —          109,001        575,031        —          —          —     

Foreign Denominated or Domiciled

                   

Senior Loans

    383,212        —          —          75        (2,178     177,079        —          (295,500     262,688        174,976   

Foreign Corporate Bonds & Notes

                   

Healthcare

    645,151        —          (645,151     —          —          —          —          —          —          —     

Common Stocks

                   

Broadcasting

    2,826,747        —          —          —          —          (2,826,745     —          —          2        (2,826,745

Financial

    7,285,094        8,120,860        —          —          —          (1,229,253     8,437,550        —          22,614,251        (1,229,253

Gaming & Leisure

    —          —          —          —          —          —          —          —          —   (2)      —     

Healthcare

    3,429,600        —          —          —          —          (1,860,000     —          —          1,569,600        (1,860,000

Housing

    1,239,193        —          —          —          —          (24,298     —          —          1,214,895        (24,298

Media & Telecommunications

    4,085,241        —          —          —          —          (1,742,831     6,142,680        —          8,485,090 (2)      —     

Real Estate

    3        —          —          —          —          (2,511,740     2,511,742        —          5 (2)      (2,511,739

Real Estate Investment Trust

    294,021,630        —          —          —          —          (69,290,930     464,785,174        (552,340,773     137,175,101        (69,290,931

Telecommunications

    12,325,733        —          —          —          —          1,995,788        19,263,825        —          33,585,346        1,995,788   

Warrants

                   

Equity Contracts

    —          —          —          —          —          —          —          —          —   (2)   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 347,583,211      $ 8,120,860      $ (12,121,954   $ 85,488      $ 180,877      $ (78,073,086   $ 521,148,198      $ (564,400,398   $ 222,523,196      $ (76,259,753
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  Includes any applicable borrowings and/or paydowns made on revolving credit facilities held in the Fund’s Investment Portfolio.
(2)  This category includes securities with a value of zero.

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 nine months ended September 30, 2015, a net amount of $12,121,954 of the Fund’s portfolio investments, respectively, was transferred from Level 3 to Level 2. Transfers from Level 3 to Level 2 were due to a decrease in observable pricing inputs as compared to the previous period.

For the nine months ended September 30, 2015, a net amount of $8,120,860 of the Fund’s portfolio investments was transferred from Level 1 to Level 3. Transfers from Level 1 to Level 3 were due to a decrease in observable pricing inputs as compared to the previous period.


NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)

 

 

September 30, 2015

   NexPoint Credit Strategies Fund

 

For the three months ended September 30, 2015, there were no other transfers.

The following table summarizes the valuation techniques used and unobservable inputs developed to determine the fair value of material Level 3 investments:

 

Category

   Market Value at
9/30/2015
     Valuation
Technique
   Unobservable
Inputs
  

Input

Value(s)

Real Estate Investment Trust

   $ 137,175,101       Income Approach    Capitalization Rates    6% - 9%
      Net Asset Value    N/A    N/A

Common Stock

     64,684,694       Third-Party Pricing Vendor    N/A    N/A
      Multiples Analysis    Price/MHz-PoP    $0.13 - $0.50
         Multiple of EBITDA    7.1x
         Liquidity Discount    20%
      Weighted Scenarios    Scenario Probabilities    Various
      Discounted Cash Flow    Discount Rate    15%
      Net Asset Value    N/A    N/A

Bank Loans

     17,878,906       Third-Party Pricing Vendor    N/A    N/A
      Discounted Cash Flow    Spread Adjustment    0.0% - 0.2%
      Adjusted Appraisal    Liquidity Discount    10%

Limited Partnership Units

     2,784,495       Recovery Analysis    Scenario Probabilities    Various
      Discounted Cash Flow    Discount Rate    21%
  

 

 

          

Total

   $ 222,523,196            

Significant changes in the unobservable inputs in isolation would result in a significantly lower or higher fair value measurement.

Cash & Cash Equivalents

The Fund considers liquid assets deposited with a bank and certain short-term debt instruments with original maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of this financial report.

Securities Sold Short

The Fund may sell securities short. A short sale 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 a 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. A 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. Securities and cash held as collateral for short sales are shown on the Investment Portfolio for the Fund.

Derivative Transactions

The Fund is subject to equity price risk, interest rate risk, and foreign currency exchange rate risk in the normal course of pursuing its investment objective. The Fund enters into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions, and for managing the duration of fixed income investments.

Options

The Fund purchases and writes options, subject to certain limitations. The Fund may invest in options contracts to manage its exposure to the stock and bond markets and fluctuations in foreign currency values. Writing puts and buying calls tend to increase the Fund’s exposure to the underlying instrument while buying puts and writing calls tend to decrease the Fund’s exposure to the underlying instrument, or economically hedge other Fund investments. The Fund’s risks in using these contracts include changes in the value of the underlying instruments, nonperformance of the counterparties under the contracts terms and changes in the liquidity of the secondary market for the contracts. Options are valued at the last sale price, or if no sales occurred on that day, at the last quoted bid price.

When the Fund writes an option, the amount of the premium received is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or if the premium is less than the amount paid for the closing purchase, as a realized loss. When an option is exercised, the proceeds from the sale of the underlying security or the cost basis of the securities purchased are adjusted by the original premium received or paid.


NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)

 

 

September 30, 2015

   NexPoint Credit Strategies Fund

 

Transactions in written options for the nine months ended September 30, 2015 were as follows:

 

     Number of
Contracts
     Premium  

Outstanding, December 31, 2014

     5,050       $ 1,296,020   

Call Options Written

     3,000         427,321   

Put Options Written

     11,900         8,511,620   

Call Options Bought back

     (2,000      (284,881

Call Options Expired

     (1,000      (142,440

Put Options Closed

     (5,050      (1,296,020
  

 

 

    

 

 

 

Outstanding, September 30, 2015

     11,900       $ 8,511,620   
  

 

 

    

 

 

 

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 for the nine months ended September 30, 2015 is as follows:

The Fund held at least five percent of the outstanding voting securities of the following companies during the period ended September 30, 2015:

 

                Market Value                    

Issuer

  Shares at
December 31,
2014
    Shares at
September 30,
2015
    December 31,
2014
    September 30,
2015
    Affiliated
Income
    Purchases     Sales  

Allenby (Common Stocks)

    250,912        417,307      $ —        $ —        $ —        $ 166,395      $     

Claymore (Common Stocks)

    2,393,814        4,739,161        3        5        —          2,345,347        —     

Endurance Business Media, Inc. Class A (Common Stocks)(1)

    6,480        6,480        —          —          —          —          —     

Freedom REIT (Common Stocks)(2)

    15,006,336        25,096,927        278,967,787        67,510,733        11,769,675        84,430,450        —     

LLV Holdco, LLC (Common Stocks)(1)

    26,870        26,870        —          —          —          —          —     

NexPoint Real Estate Capital, REIT (Common Stocks)

    1,457,100        5,983,095        15,051,843        69,488,867          48,125,000     

NexPoint Residential Trust, Inc., REIT (Common Stocks)(3)

    200,000        —          2,000        —          —          —          —     

Specialty Finance, Inc. (Common Stocks)(1)

    4,762,223        12,819,115        4,630,310        12,362,754        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    24,103,735        49,088,955      $ 298,651,943      $ 149,362,359      $ 11,769,675      $ 135,067,192      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)  No longer an affiliate as of September 30, 2015.
(2)  Managed by the same Investment Adviser as the Fund.
(3)  No longer held as of September 30, 2015.

U.S. Federal Income Tax Information

Unrealized appreciation and depreciation at September 30, 2015, based on cost of investments for U.S. federal income tax purposes was:

 

Gross Appreciation

   Gross Depreciation      Net
Appreciation/
(Depreciation)
     Cost  

$64,342,568

   $ 399,839,014       $ (335,496,446    $ 1,062,445,631   
  

 

 

    

 

 

    

 

 

 

For more information with regard to significant accounting policies, see the most recent annual report filed with the Securities and Exchange Commission.


Item 2. Controls and Procedures.

(a) The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3 (c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s last fiscal quarter that have materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 3. Exhibits.

Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NEXPOINT CREDIT STRATEGIES FUND

 

By:  

/s/ James Dondero

  James Dondero
  President and Principal Executive Officer
Date:   November 24, 2015

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:  

/s/ James Dondero

  James Dondero
  President and Principal Executive Officer
Date:   November 24, 2015

 

By:  

/s/ Brian Mitts

  Brian Mitts
  Executive Vice President, Principal Financial Officer and Principal Accounting Officer
Date:   November 24, 2015