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)
Registrants telephone number, including area code: (877) 665-1287
Date of fiscal year end: December 31
Date of reporting period: March 31, 2016
Item 1: Schedule of Investments
The Schedule of Investments are attached herewith.
INVESTMENT PORTFOLIO (unaudited) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
Principal Amount ($) |
Value ($) | |||||||
U.S. Senior Loans (a) - 16.8% |
||||||||
CHEMICALS - 0.5% |
||||||||
2,963,913 |
Vertellus Specialties, Inc. |
1,767,233 | ||||||
|
|
|||||||
ENERGY - 0.2% |
||||||||
449,798 |
Azure Midstream Energy LLC |
236,144 | ||||||
1,529,000 |
Fieldwood Energy LLC |
282,865 | ||||||
|
|
|||||||
519,009 | ||||||||
|
|
|||||||
GAMING & LEISURE - 1.1% |
||||||||
3,883,480 |
Ginn-LA CS Borrower LLC |
97,087 | ||||||
8,322,966 |
First Lien Tranche B Term Loan(b) |
208,074 | ||||||
8,824,911 |
LLV Holdco LLC |
3,596,151 | ||||||
|
|
|||||||
3,901,312 | ||||||||
|
|
|||||||
HOUSING - 0.0% |
||||||||
2,221,161 |
LBREP/L-SunCal Master I LLC |
| ||||||
|
|
|||||||
MEDIA & TELECOMMUNICATIONS - 0.0% |
||||||||
2,578,841 |
Endurance Business Media, Inc. |
| ||||||
|
|
|||||||
SERVICE - 3.2% |
||||||||
14,640,289 |
Weight Watchers International, Inc. |
10,877,735 | ||||||
|
|
|||||||
TELECOMMUNICATIONS - 4.1% |
||||||||
14,320,737 |
TerreStar Corp. |
14,263,454 | ||||||
|
|
|||||||
UTILITY - 7.7% |
||||||||
75,329,417 |
Texas Competitive Electric Holdings Co. LLC |
21,845,531 | ||||||
17,000,000 |
Non-Extended Term Loan |
4,830,805 | ||||||
|
|
|||||||
26,676,336 | ||||||||
|
|
|||||||
Total U.S. Senior Loans (Cost $111,326,332) | 58,005,079 | |||||||
|
|
|||||||
Principal Amount | ||||||||
Foreign Denominated or Domiciled Senior Loans (a) - 0.7% |
||||||||
MARSHALL ISLANDS - 0.7% |
||||||||
USD | 6,269,697 |
Drillships Financing Holding, Inc. |
2,268,878 | |||||
|
|
|||||||
UNITED KINGDOM - 0.0% |
||||||||
GBP |
Henson No. 4, Ltd. |
|||||||
930,409 |
Term Loan Facility B (b)(d) |
16,900 | ||||||
942,045 |
Term Loan Facility C (b)(d) |
17,082 | ||||||
|
|
|||||||
33,982 | ||||||||
|
|
|||||||
Total Foreign Denominated or Domiciled Senior Loans (Cost $4,285,366) | 2,302,860 | |||||||
|
|
INVESTMENT PORTFOLIO (unaudited) (continued) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
Principal Amount ($) |
||||||
Asset-Backed Securities (g)(h) - 16.0% |
||||||
4,500,000 |
Acis CLO, Ltd. |
3,020,625 | ||||
9,142,000 |
Series 2013-1A, Class F |
4,999,760 | ||||
14,000,000 |
Series 2013-1A, Class SUB |
3,839,500 | ||||
2,000,000 |
Series 2013-2A, Class E |
1,638,400 | ||||
10,000,000 |
Series 2014-3A, Class E |
5,825,000 | ||||
5,000,000 |
Series 2014-3A, Class F |
2,355,000 | ||||
2,250,000 |
ALM VII, Ltd. |
1,031,400 | ||||
1,000,000 |
Apidos CLO |
576,000 | ||||
1,925,000 |
Betony CLO, Ltd. |
938,630 | ||||
2,000,000 |
CFIP CLO, Ltd. |
1,528,760 | ||||
1,000,000 |
CIFC Funding, Ltd. |
667,400 | ||||
3,375,116 |
Eastland CLO, Ltd. |
2,692,555 | ||||
1,000,000 |
Flagship CLO VIII, Ltd. |
470,000 | ||||
2,915,407 |
Grayson CLO, Ltd. |
2,448,942 | ||||
850,000 |
Greywolf CLO, Ltd. |
564,400 | ||||
3,000,000 |
Harbourview CLO, Ltd. |
1,740,000 | ||||
2,127,119 |
Hewetts Island CDO, Ltd. |
1,979,007 | ||||
764,133 |
Highland Loan Funding V, Ltd. |
588,535 | ||||
13,375,000 |
Highland Park CDO, Ltd. |
9,496,250 | ||||
2,000,000 |
KVK CLO, Ltd. |
1,440,000 | ||||
2,752,426 |
Rockwall CDO II, Ltd. |
2,239,236 | ||||
1,500,000 |
Valhalla CLO, Ltd. |
378,750 | ||||
2,100,000 |
Vibrant CLO II, Ltd. |
1,155,000 | ||||
3,980,138 |
Westchester CLO, Ltd. |
3,395,947 | ||||
|
|
|||||
Total Asset-Backed Securities (Cost $73,521,413) |
55,009,097 | |||||
|
|
INVESTMENT PORTFOLIO (unaudited) (continued) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
Corporate Bonds & Notes - 8.0% |
||||||
ENERGY - 0.4% |
||||||
877,000 |
American Energy-Permian Basin LLC |
267,485 | ||||
307,681 |
7.38%, 11/01/2021 (g) |
95,381 | ||||
4,062,000 |
Arch Coal, Inc. (b)(j)(k) |
27,926 | ||||
3,363,000 |
Linn Energy LLC |
386,745 | ||||
2,493,000 |
Penn Virginia Corp. |
324,090 | ||||
5,000,000 |
Venoco, Inc. (b)(j)(k) |
150,000 | ||||
|
|
|||||
1,251,627 | ||||||
|
|
|||||
INFORMATION TECHNOLOGY - 3.4% |
||||||
23,971,250 |
Avaya, Inc. |
7,491,016 | ||||
5,000,000 |
Scientific Games International, Inc. |
4,075,000 | ||||
|
|
|||||
11,566,016 | ||||||
|
|
|||||
TELECOMMUNICATIONS - 0.1% |
||||||
2,040,200 |
iHeartCommunications, Inc., PIK |
469,246 | ||||
|
|
|||||
TRANSPORTATION - 0.1% |
||||||
3,750,000 |
DPH Holdings Corp. |
117,188 | ||||
3,933,000 |
06/15/2006 (b)(j)(k) |
122,906 | ||||
8,334,000 |
05/01/2029 (b)(j)(k) |
260,437 | ||||
|
|
|||||
500,531 | ||||||
|
|
|||||
UTILITY - 4.0% |
||||||
18,439,000 |
Ocean Rig UDW, Inc. |
11,432,180 | ||||
5,000,000 |
Texas Competitive Electric Holdings Co. LLC |
1,462,500 | ||||
24,000,000 |
04/01/2021 (b)(j)(k) |
930,000 | ||||
|
|
|||||
13,824,680 | ||||||
|
|
|||||
Total Corporate Bonds & Notes (Cost $72,926,756) | 27,612,100 | |||||
|
|
|||||
Principal Amount |
||||||
Foreign Corporate Bonds & Notes (b) - 0.2% |
||||||
NETHERLANDS - 0.2% |
||||||
USD |
Celtic Pharma Phinco BV, PIK |
|||||
64,515,064 |
17.00%, 06/15/2012 (g) |
645,151 | ||||
28,665,284 |
17.00%, 07/15/2016 (d) |
| ||||
|
|
|||||
Total Foreign Corporate Bonds & Notes (Cost $62,254,526) | 645,151 | |||||
|
|
|||||
Principal Amount ($) |
||||||
Sovereign Bonds (b)(j) - 1.9% |
||||||
10,000,000 |
Argentine Republic Government International Bond | 6,705,000 | ||||
|
|
|||||
Total Sovereign Bonds (Cost $4,939,437) | 6,705,000 | |||||
|
|
INVESTMENT PORTFOLIO (unaudited) (continued) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
Shares |
||||||
Common Stocks - 89.9% |
||||||
CHEMICALS - 0.9% |
||||||
372,971 |
MPM Holdings, Inc. (k)(m) |
2,610,797 | ||||
83,904 |
MPM Holdings, Inc. (m)(o) |
587,328 | ||||
|
|
|||||
3,198,125 | ||||||
|
|
|||||
CONSUMER DISCRETIONARY - 1.9% |
||||||
676,933 |
K12, Inc. (k)(m) |
6,694,868 | ||||
|
|
|||||
ENERGY - 1.5% |
||||||
161,280 |
Atlantic Power Corp. (j)(k) |
396,749 | ||||
3,360 |
California Resources Corp. (k) |
3,461 | ||||
249,657 |
DryShips, Inc. (j)(k)(m) |
586,694 | ||||
85,750 |
Energy Transfer Equity LP (j)(k) |
611,397 | ||||
2,060,928 |
Ocean Rig UDW, Inc. (j)(k) |
1,690,579 | ||||
110,000 |
Plains GP Holdings LP, Class A (j)(k) |
955,900 | ||||
22,600 |
Western Gas Equity Partners LP (j)(k) |
805,464 | ||||
|
|
|||||
5,050,244 | ||||||
|
|
|||||
FINANCIAL - 6.8% |
||||||
1,000,000 |
Adelphia Recovery Trust |
2,300 | ||||
46,601 |
American Banknote Corp. (d)(m) |
122,561 | ||||
1,098,185 |
Fortress Investment Group LLC, Class A (j)(k) |
5,249,324 | ||||
14,899,174 |
Specialty Finance, Inc. (d)(e)(m) |
18,081,638 | ||||
|
|
|||||
23,455,823 | ||||||
|
|
|||||
GAMING & LEISURE - 0.0% |
||||||
14 |
LLV Holdco LLC - Litigation Trust Units (d)(e)(m) |
| ||||
26,712 |
LLV Holdco LLC - Series A, Membership Interest (d)(e)(m) |
| ||||
144 |
LLV Holdco LLC - Series B, Membership Interest (d)(e)(m) |
| ||||
|
|
|||||
| ||||||
|
|
|||||
HEALTHCARE - 0.5% |
||||||
24,000,000 |
Genesys Ventures IA, LP (d)(e) |
1,670,400 | ||||
|
|
|||||
HOUSING - 0.4% |
||||||
368,150 |
CCD Equity Partners LLC (d) |
1,200,169 | ||||
|
|
|||||
INFORMATION TECHNOLOGY - 15.9% |
||||||
833 |
CDK Global, Inc. (k) |
38,776 | ||||
24,185 |
Corning, Inc. (j)(k) |
505,225 | ||||
1 |
Magnachip Semiconductor Corp. (m) |
5 | ||||
734,300 |
salesforce.com, Inc. (j)(k)(m) |
54,213,369 | ||||
|
|
|||||
54,757,375 | ||||||
|
|
|||||
MEDIA & TELECOMMUNICATIONS - 7.0% |
||||||
74,362 |
Cumulus Media, Inc., Class A (k)(m) |
34,526 | ||||
18,000 |
Gray Television, Inc., Class A (k)(m) |
188,550 | ||||
49,784 |
Loral Space & Communications, Inc. (j)(k)(m) |
1,748,912 | ||||
308,875 |
Metro-Goldwyn-Mayer, Inc., Class A (m)(n) |
21,949,430 | ||||
645 |
Time, Inc. (k) |
9,959 | ||||
|
|
|||||
23,931,377 | ||||||
|
|
|||||
REAL ESTATE - 0.0% |
||||||
438,384 |
Allenby (d)(e)(m) |
| ||||
4,886,550 |
Claymore (d)(e)(m) |
5 | ||||
|
|
|||||
5 | ||||||
|
|
|||||
REAL ESTATE INVESTMENT TRUST - 43.8% |
||||||
25,255,573 |
Freedom, REIT (d)(e)(m) |
64,906,823 | ||||
8,271,300 |
Nexpoint Real Estate Capital, REIT (d)(e)(m) |
85,801,505 | ||||
|
|
|||||
150,708,328 | ||||||
|
|
INVESTMENT PORTFOLIO (unaudited) (continued) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
TELECOMMUNICATIONS - 10.0% |
||||||
110,872 |
TerreStar Corp. (d)(e)(m)(n) | 34,547,715 | ||||
|
|
|||||
UTILITY - 0.9% |
||||||
26,220 |
Entegra TC LLC, Class A (m) | 707,940 | ||||
1,272,973 |
Entegra TC LLC, Class B (m) | 4,455 | ||||
181,163 |
NRG Energy, Inc. (k) | 2,356,931 | ||||
|
|
|||||
3,069,326 | ||||||
|
|
|||||
WIRELESS COMMUNICATIONS - 0.3% |
||||||
2,260,529 |
Pendrell Corp. (j)(k)(m) | 1,198,080 | ||||
|
|
|||||
Total Common Stocks (Cost $485,404,085) | 309,481,835 | |||||
|
|
|||||
Preferred Stocks (g)(i) - 32.3% |
||||||
FINANCIAL - 32.3% |
||||||
14,500 |
Aberdeen Loan Funding, Ltd. | 5,739,583 | ||||
15,000 |
Brentwood CLO, Ltd. | 5,925,000 | ||||
34,500 |
Eastland CLO, Ltd. | 13,599,900 | ||||
5,000 |
Eastland Investors Corp. | 1,971,000 | ||||
7,750 |
Gleneagles CLO, Ltd. | 2,974,063 | ||||
62,600 |
Grayson CLO, Ltd., Series II | 19,562,500 | ||||
1,500 |
Grayson Investors Corp. | 468,750 | ||||
42,750 |
Greenbriar CLO, Ltd. | 19,558,125 | ||||
2,500 |
Liberty CLO, Ltd. | 790,000 | ||||
8,500 |
Red River CLO, Ltd., Series PS-2 | 1,615,000 | ||||
10,500 |
Rockwall CDO, Ltd. | 7,426,125 | ||||
6,000 |
Southfork CLO, Ltd. | 2,527,200 | ||||
41,500 |
Stratford CLO, Ltd. | 17,396,800 | ||||
29,007 |
Westchester CLO, Ltd. | 11,602,800 | ||||
|
|
|||||
111,156,846 | ||||||
|
|
|||||
Total Preferred Stocks (Cost $169,308,711) | 111,156,846 | |||||
|
|
|||||
Exchange-Traded Funds (k) - 0.0% |
||||||
2,340 |
Direxion Daily Gold Miners Index Bull 3X Shares ETF | 136,726 | ||||
|
|
|||||
Total Exchange-Traded Funds (Cost $1,995,037) | 136,726 | |||||
|
|
|||||
Units |
||||||
Warrants (m) - 0.1% |
||||||
ENERGY - 0.1% |
||||||
6,536,535 |
Kinder Morgan, Inc., expires 05/25/2017 | 238,584 | ||||
|
|
|||||
GAMING & LEISURE - 0.0% |
||||||
602 |
LLV Holdco LLC - Series C, Membership Interest, expires 07/15/15 (d)(e) | | ||||
828 |
LLV Holdco LLC - Series D, Membership Interest, expires 07/15/15 (d)(e) | | ||||
925 |
LLV Holdco LLC - Series E, Membership Interest, expires 07/15/15 (d)(e) | | ||||
1,041 | LLV Holdco LLC - Series F, Membership Interest, expires 07/15/15 (d)(e) | | ||||
1,179 | LLV Holdco LLC - Series G, Membership Interest, expires 07/15/15 (d)(e) | | ||||
|
|
|||||
| ||||||
|
|
|||||
Total Warrants (Cost $4,500,396) | 238,584 | |||||
|
|
|||||
Shares |
||||||
Registered Investment Companies (p) - 0.1% | ||||||
172,125 | State Street Navigator Prime Securities Lending Portfolio | 172,125 | ||||
|
|
|||||
Total Registered Investment Companies (Cost $172,125) | 172,125 | |||||
|
|
|||||
Cash Equivalents - 0.1% | ||||||
324,583 | State Street Institutional Liquid Reserves Fund | 324,583 | ||||
|
|
|||||
Total Cash Equivalents (Cost $324,583) | 324,583 | |||||
|
|
|||||
Total Investments - 166.1% |
571,789,986 | |||||
|
|
INVESTMENT PORTFOLIO (unaudited) (continued) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
Securities Sold Short (q) - (3.3)% |
||||||
Common Stocks (r) - (3.3)% | ||||||
ENERGY - 0.0% |
||||||
8,451 | Seventy Seven Energy, Inc. | (4,902 | ) | |||
|
|
|||||
HEALTHCARE - (1.8)% |
||||||
6,525 | Alexion Pharmaceuticals, Inc. | (908,411 | ) | |||
145,900 | Myriad Genetics, Inc. | (5,461,037 | ) | |||
|
|
|||||
(6,369,448 | ) | |||||
|
|
|||||
INFORMATION TECHNOLOGY - (1.5)% |
||||||
66,250 | Zillow Group, Inc., Class A | (1,692,687 | ) | |||
140,400 | Zillow Group, Inc., Class C | (3,331,692 | ) | |||
|
|
|||||
(5,024,379 | ) | |||||
|
|
|||||
Total Common Stocks |
(11,398,729 | ) | ||||
|
|
|||||
Total Securities Sold Short |
(11,398,729 | ) | ||||
|
|
|||||
Other Assets & Liabilities, Net - (62.8)% |
(216,120,407 | ) | ||||
|
|
|||||
Net Assets - 100.0% |
344,270,850 | |||||
|
|
(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 March 31, 2016. 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) | The issuer is, or is in danger of being, in default of its payment obligation. Income is not being accrued. |
(c) | Fixed rate senior loan. |
(d) | Represents fair value as determined by the Funds 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 $224,224,403, or 65.1% of net assets, were fair valued under the Funds valuation procedures as of March 31, 2016. |
(e) | Affiliated issuer. Assets with a total aggregate market value of $222,867,691, or 64.7% of net assets, were affiliated with the Fund as of March 31, 2016. |
(f) | All or a portion of this position has not settled. Full contract rates do not take effect until settlement date. |
(g) | 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 March 31, 2016, these securities amounted to $187,559,656 or 54.5% of net assets. |
(h) | Variable or floating rate security. The interest rate shown reflects the rate in effect March 31, 2016. |
(i) | Securities of collateralized loan obligations where an affiliate of the Investment Adviser serves as collateral manager. |
(j) | 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 $56,673,362. |
(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 $91,900,949. |
(l) | Securities (or a portion of securities) on loan. As of March 31, 2016, the market value of securities loaned was $168,039. The loaned securities were secured with cash collateral of $172,125. Collateral is calculated based on prior days prices. |
(m) | Non-income producing security. |
(n) | 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 Funds Board of Trustees. |
(o) | All or a portion of this security is a 4(a)(2) Security. The 4(a)(2) Securities will be deemed restricted securities (as defined by Rule 144 of the Securities Act) that may not be offered, sold, exchanged, assigned or otherwise transferred unless they are registered under the Securities Act, or an exemption from registration under the Securities Act is available. |
(p) | Represents investments of cash collateral received in connection with securities lending. |
(q) | As of March 31, 2016, $19,617,734 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in Other Assets & Liabilities, Net. |
(r) | No dividend payable on security sold short. |
Currency Abbreviations:
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 |
INVESTMENT PORTFOLIO (unaudited) (continued) |
As of March 31, 2016 | NexPoint Credit Strategies Fund |
CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS
Remaining Contractual Maturity of the Agreements
Overnight and Continuous | Total | |||||||
Securities Lending Transactions1 |
||||||||
Corporate Bonds & Notes |
$ | 172,125 | $ | 172,125 | ||||
|
|
|
|
|||||
Total Borrowings |
$ | 172,125 | $ | 172,125 | ||||
|
|
|
|
|||||
Gross amount of recognized liabilities for securities lending transactions |
|
$ | 172,125 |
1 | Amounts represent the payable for cash collateral received on securities on loan. This will generally be in Overnight and Continuous column as the securities are typically callable on demand. |
NOTES TO INVESTMENT PORTFOLIO (unaudited)
As of March 31, 2016 |
NexPoint Credit Strategies Fund |
Organization
NexPoint Credit Strategies Fund (the Fund) is a Delaware statutory trust and is registered with the 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. The financial statements include information for the period ended March 31, 2016. The Fund trades on the New York Stock Exchange (NYSE) under the ticker symbol NHF. The Fund may issue an unlimited number of common shares, par value $0.001 per share (Common Shares). The Fund commenced operations on June 29, 2006. NexPoint Advisors, L.P. (NexPoint or Investment Adviser), an affiliate of Highland Capital Management Fund Advisors, L.P. (Highland), is the investment adviser and administrator to the Fund.
Valuation of Investments
In computing the Funds net assets attributable to common 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 Funds 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 Funds 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 the Investment Adviser has determined to generally have the capability to provide appropriate pricing and have been approved by the Board.
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 Funds 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, among other things,: (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 Funds 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 securitys 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 Funds 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 Funds financial statements may vary from the NAV published by the Fund as of the end of the reporting period because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes and/or because of information relating to the value of the Funds portfolio securities as of the Funds reporting period end date that became available prior to the completion of this report that was not available at the time the Funds NAV as of the reporting period end date was published.
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 Funds 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 investments 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 INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 |
NexPoint Credit Strategies 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 Funds 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. 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 March 31, 2016, the Funds investments consisted of senior loans, asset-backed securities, corporate bonds and notes, foreign bonds, sovereign bonds, common stocks, preferred stocks, exchange-traded funds, warrants, securities sold short and options. The fair value of the Funds loans, bonds and asset-backed securities are generally based on quotes received from brokers or independent pricing services. Loans, bonds collateralized loan obligations 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 Funds common stocks, preferred stocks, exchange-traded funds, warrants and options 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. The Funds real estate investments include equity interests in limited liability companies and equity issued by REITs that invest in commercial real estate. The fair value of real estate investments that are not actively traded on national exchanges are based on internal models developed by the Investment Adviser. The significant inputs to the models include cash flow projections for the underlying properties, capitalization rates and appraisals performed by independent valuation firms. These inputs are not readily observable, and the Fund has classified the investments as Level 3 assets. Exchange-traded options are valued based on the last traded price on the primary exchange on which they trade. If an option does not trade, the mid-price is utilized to value the option.
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 Funds 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)
As of March 31, 2016 |
NexPoint Credit Strategies Fund |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Funds assets as of March 31, 2016 is as follows:
Total value at March 31, 2016 |
Level 1 Quoted Price |
Level 2 Significant Observable Inputs |
Level 3 Significant Unobservable Inputs |
|||||||||||||
Assets |
||||||||||||||||
U.S. Senior Loans |
||||||||||||||||
Chemicals |
$ | 1,767,233 | $ | | $ | 1,767,233 | $ | | ||||||||
Energy |
519,009 | | 519,009 | | ||||||||||||
Gaming & Leisure |
3,901,312 | | | 3,901,312 | ||||||||||||
Housing |
| | | | (2) | |||||||||||
Media & Telecommunications |
| | | | (2) | |||||||||||
Service |
10,877,735 | | 10,877,735 | | ||||||||||||
Telecommunications |
14,263,454 | | | 14,263,454 | ||||||||||||
Utility |
26,676,336 | | 26,676,336 | | ||||||||||||
Foreign Denominated or Domiciled Senior Loans |
2,302,860 | | 2,268,878 | 33,982 | ||||||||||||
Asset-Backed Securities |
55,009,097 | | 54,420,562 | 588,535 | ||||||||||||
Corporate Bonds & Notes(1) |
27,612,100 | | 27,612,100 | | (2) | |||||||||||
Foreign Corporate Bonds & Notes(1) |
645,151 | | 645,151 | | (2) | |||||||||||
Sovereign Bonds |
6,705,000 | | 6,705,000 | | ||||||||||||
Common Stocks |
||||||||||||||||
Chemicals |
3,198,125 | | | 3,198,125 | ||||||||||||
Consumer Discretionary |
6,694,868 | 6,694,868 | | | ||||||||||||
Energy |
5,050,244 | 5,050,244 | | | ||||||||||||
Financial |
23,455,823 | 5,251,624 | | 18,204,199 | ||||||||||||
Gaming & Leisure |
| | | | (2) | |||||||||||
Healthcare |
1,670,400 | | | 1,670,400 | ||||||||||||
Housing |
1,200,169 | | | 1,200,169 | ||||||||||||
Information Technology |
54,757,375 | 54,757,375 | | | ||||||||||||
Media & Telecommunications |
23,931,377 | 1,981,947 | 21,949,430 | | ||||||||||||
Real Estate |
5 | | | 5 | (2) | |||||||||||
Real Estate Investment Trust |
150,708,328 | | | 150,708,328 | ||||||||||||
Telecommunications |
34,547,715 | | | 34,547,715 | ||||||||||||
Utility |
3,069,326 | 2,356,931 | 712,395 | | ||||||||||||
Wireless Communications |
1,198,080 | 1,198,080 | | | ||||||||||||
Preferred Stocks(1) |
111,156,846 | | 111,156,846 | | ||||||||||||
Exchange-Traded Funds |
136,726 | 136,726 | | | ||||||||||||
Warrants(1) |
||||||||||||||||
Equity Contracts |
238,584 | 238,584 | | | (2) | |||||||||||
Registered Investment Companies |
172,125 | 172,125 | | | ||||||||||||
Cash Equivalents |
324,583 | 324,583 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Assets |
571,789,986 | 78,163,087 | 265,310,675 | 228,316,224 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Liabilities |
||||||||||||||||
Securities Sold Short(1) |
(11,398,729 | ) | (11,398,729 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total Liabilities |
(11,398,729 | ) | (11,398,729 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 560,391,257 | $ | 66,764,358 | $ | 265,310,675 | $ | 228,316,224 | ||||||||
|
|
|
|
|
|
|
|
(1) | See Investment Portfolio detail for industry breakout. |
(2) | This category includes securities with a value of zero. |
NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 |
NexPoint Credit Strategies Fund |
The table below sets forth a summary of changes in the Funds Level 3 assets (assets measured at fair value using significant unobservable inputs) for the three month period ended March 31, 2016.
Balance as of December 31, 2015 |
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 March 31, 2016 |
Change in Unrealized Gain/(Loss) on Level 3 securities still held at period end |
|||||||||||||||||||||||||||||||
NexPoint Credit Strategies Fund |
|
|||||||||||||||||||||||||||||||||||||||
U.S. Senior Loans |
|
|||||||||||||||||||||||||||||||||||||||
Gaming & Leisure |
$ | 4,476,048 | $ | | $ | | $ | | $ | | $ | (684,881 | ) | $ | 110,145 | $ | | $ | 3,901,312 | $ | (684,881 | ) | ||||||||||||||||||
Housing |
| | | | | | | | | (2) | | |||||||||||||||||||||||||||||
Media & Telecommunications |
| | | | | | | | | (2) | | |||||||||||||||||||||||||||||
Telecommunications |
13,874,103 | | | (583 | ) | (981 | ) | 390,915 | | 14,263,454 | (981 | ) | ||||||||||||||||||||||||||||
Foreign Denominated or Domiciled Senior Loans |
35,060 | | | | | (1,078 | ) | | | 33,982 | (1,078 | ) | ||||||||||||||||||||||||||||
Asset-Backed Securities |
| 588,535 | | | | | | | 588,535 | | ||||||||||||||||||||||||||||||
Common Stocks |
||||||||||||||||||||||||||||||||||||||||
Chemicals |
4,682,969 | | | | | (1,484,844 | ) | | | 3,198,125 | (1,484,844 | ) | ||||||||||||||||||||||||||||
Financial |
22,516,499 | | | | 2,096,897 | 1,507,008 | 1,603,182 | (9,519,387 | ) | 18,204,199 | 1,507,008 | |||||||||||||||||||||||||||||
Gaming & Leisure |
| | | | | | | | | (2) | | |||||||||||||||||||||||||||||
Healthcare |
1,569,600 | | | | | 100,800 | | | 1,670,400 | 100,800 | ||||||||||||||||||||||||||||||
Housing |
1,141,265 | | | 58,904 | | | 1,200,169 | 58,904 | ||||||||||||||||||||||||||||||||
Real Estate |
5 | | | (7,263 | ) | 7,263 | | 5 | (7,263 | ) | ||||||||||||||||||||||||||||||
Real Estate Investment Trust |
161,905,867 | | | | 69,598 | (11,022,037 | ) | | (245,100 | ) | 150,708,328 | (11,022,037 | ) | |||||||||||||||||||||||||||
Telecommunications |
33,434,560 | | | | | 1,113,155 | | | 34,547,715 | 1,113,155 | ||||||||||||||||||||||||||||||
U.S. Warrants |
||||||||||||||||||||||||||||||||||||||||
Equity Contracts |
| | | | | | | | | | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total |
$ | 243,635,976 | $ | 588,535 | $ | | $ | (583 | ) | $ | 2,166,495 | $ | (10,421,217 | ) | $ | 2,111,505 | $ | (9,764,487 | ) | $ | 228,316,224 | $ | (10,421,217 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 |
NexPoint Credit Strategies 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. As a result, for the three months ended March 31, 2016, $588,535 was transferred from Level 2 to Level 3. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 2 to 3 were due to a decline in market activity (e.g. frequency of trades), which resulted in a reduction of available market inputs to determine price.
For the three months ended March 31, 2016, there were no transfers between Level 3 to Level 2 or Level 1 to Level 2.
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 3/31/2016 |
Valuation Technique |
Unobservable Inputs |
Input Value(s) | ||||||
Real Estate Investment Trust |
$ | 150,708,328 | Third-Party Valuations | Capitalization Rates | 6% - 9.5% | |||||
Net Asset Value | N/A | N/A | ||||||||
Common Stock |
55,950,044 | Third-Party Pricing Vendor | N/A | N/A | ||||||
Multiples Analysis | Price/MHz-PoP | $0.13 - $0.50 | ||||||||
Multiple of EBITDA | 1.5x - 5.7x | |||||||||
Liquidity Discount | 25% | |||||||||
Net Asset Value | N/A | N/A | ||||||||
Bank Loans |
18,198,748 | 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 |
2,870,569 | Recovery Analysis | Scenario Probabilities | Various | ||||||
Discounted Cash Flow | Discount Rate | 19% | ||||||||
Adjusted Appraisal | Liquidity Discount | 25% | ||||||||
Minority Discount | 20% | |||||||||
Regional Market Appreciation | 6% - 40% | |||||||||
Asset-Backed Securities |
588,535 | Net Asset Value | Internal Rate of Return | 9.1% | ||||||
|
|
|||||||||
Total |
$ | 228,316,224 |
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of specific identification method for both financial statement and U.S. federal income tax purposes.
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 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 as of the date of this 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. Securities and cash held as collateral for securities sold short are shown on the Investments Portfolios for the Fund.
When securities are sold short, the Fund intends to limit exposure to a possible market decline in the value of its portfolio securities through short sales of securities that the Investment Adviser believes possess volatility characteristics similar to those being hedged. In addition, the Fund may use short sales for non-hedging purposes to pursue its investment objective. Subject to the requirements of the 1940 Act and the Internal Revenue Code of 1986, as amended (the Code), the Fund will not make a short sale if, after giving effect to such sale, the market value of all securities sold short by the Fund exceeds 25% of the value of its total assets. The Fund may make short sales against the box without respect to such limitations.
NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 |
NexPoint Credit Strategies 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 Funds exposure to the underlying instrument while buying puts and writing calls tend to decrease the Funds exposure to the underlying instrument, or economically hedge other Fund investments. The Funds 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.
Transactions in written options for the three months ended March 31, 2016 were as follows:
Number of Contracts |
Notional Value |
Premium | ||||||||||
Outstanding, December 31, 2015 |
3,125 | $ | 24,700,000 | $ | 2,026,299 | |||||||
Put Options Expired |
(400 | ) | (2,900,000 | ) | (302,877 | ) | ||||||
Put Options Exercised |
(2,725 | ) | (21,800,000 | ) | (1,723,422 | ) | ||||||
Outstanding, March 31, 2016 |
| | |
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. The Fund held at least five percent of the outstanding voting securities of the following companies during the three month period ended March 31, 2016:
Market Value | ||||||||||||||||||||||||||||
Issuer |
Shares at December 31, 2015 |
Shares at March 31, 2016 |
December 31, 2015 |
March 31, 2016 |
Affiliated Income |
Purchases | Sales | |||||||||||||||||||||
Allenby (Common Stocks) |
436,635 | 438,384 | | | | 1,749 | | |||||||||||||||||||||
Claymore (Common Stocks) |
4,881,036 | 4,886,550 | 5 | 5 | | 5,514 | | |||||||||||||||||||||
Endurance Business Media, Inc. (U.S. Senior Loans) |
2,578,841 | 2,578,841 | | | | | | |||||||||||||||||||||
Freedom REIT (Common Stocks)(1) |
25,255,573 | 25,255,573 | 63,896,601 | 64,906,823 | 944,536 | | | |||||||||||||||||||||
Genesys Ventures IA, LP (Common Stocks) |
24,000,000 | 24,000,000 | 1,569,600 | 1,670,400 | | | | |||||||||||||||||||||
LLV Holdco, LLC (U.S. Senior Loans & Common Stocks) |
8,746,211 | 8,856,356 | 4,170,887 | 3,596,151 | | 110,145 | | |||||||||||||||||||||
NexPoint Real Estate Capital, REIT (Common Stocks)(1) |
8,271,300 | 8,271,300 | 97,833,766 | 85,801,505 | 7,305,464 | | | |||||||||||||||||||||
TerreStar Corp. (U.S. Senior Loans & Common Stocks) |
14,040,695 | 14,431,609 | 47,308,663 | 48,811,169 | | 390,914 | | |||||||||||||||||||||
Specialty Finance, Inc. (Common Stocks) |
13,388,945 | 14,899,174 | 14,188,265 | 18,081,638 | | 22,983 | | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
101,599,236 | 103,617,787 | 228,967,787 | 222,867,691 | 8,250,000 | 531,305 | | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Managed by the same Investment Adviser as the Fund. |
NOTES TO INVESTMENT PORTFOLIO (unaudited) (continued)
As of March 31, 2016 |
NexPoint Credit Strategies Fund |
U.S. Federal Income Tax Information
Unrealized appreciation and depreciation at March 31, 2016, based on cost of investments for U.S. federal income tax purposes was:
Gross Appreciation |
Gross Depreciation |
Net Appreciation/ (Depreciation |
Cost | |||||||||
$27,813,858 |
$ | 430,268,701 | $ | (402,454,843 | ) | $ | 962,846,100 |
For more information with regard to significant accounting policies, see the most recent semi-annual report filed with the Securities and Exchange Commission.
Item 2. Controls and Procedures.
(a) The registrants principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrants disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the 1940 Act) (17 CFR 270.30a-3 (c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrants internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrants last fiscal quarter that have materially affected, or is reasonably likely to materially affect, the registrants 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: | May 27, 2016 |
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: | May 27, 2016 |
By: | /s/ Brian Mitts | |
Brian Mitts | ||
Executive Vice President, Principal Financial Officer and | ||
Principal Accounting Officer | ||
Date: | May 27, 2016 |