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
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HIGHLAND CREDIT STRATEGIES FUND
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(Exact name of registrant as specified in charter)
Two Galleria Tower
13455 Noel Road, Suite 800
DALLAS, TEXAS 75240
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(Address of principal executive offices) (Zip code)
James D. Dondero, President
Highland Credit Strategies Fund
Two Galleria Tower
13455 Noel Road, Suite 800
DALLAS, TEXAS 75240
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(Name and address of agent for service)
Registrant's telephone number, including area code: (877) 665-1287
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Date of fiscal year end: DECEMBER 31
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Date of reporting period: SEPTEMBER 30, 2006
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Form N-Q is to be used by management investment companies, other than small
business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than 60 days after
the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under
the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use
the information provided on Form N-Q in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and
the Commission will make this information public. A registrant is not required
to respond to the collection of information contained in Form N-Q unless the
Form displays a currently valid Office of Management and Budget ("OMB") control
number. Please direct comments concerning the accuracy of the information
collection burden estimate and any suggestions for reducing the burden to the
Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC
20549. The OMB has reviewed this collection of information under the clearance
requirements of 44 U.S.C. ss. 3507.
ITEM 1. SCHEDULE OF INVESTMENTS.
The Schedule(s) of Investments is attached herewith.
INVESTMENT PORTFOLIO (UNAUDITED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOAN NOTES (A) - 106.5%
AEROSPACE - 4.0%
2,473,977 AWAS Capital, Inc.
Second Priority Term Loan,
11.44%, 03/15/13 2,486,347
10,000,000 Delta Airlines, Inc.
Term Loan Equipment Notes,
08/25/12 (b) 10,012,500
7,000,000 Northwest Airlines, Inc.
Term Loan DIP,
7.90%, 08/21/08 7,017,500
TDS Investor Corp.
3,674,267 Dollar Term Loan, 08/23/13(b) 3,682,791
325,733 Synthetic LC, 08/23/13 (b) 326,241
3,000,000 U S Airways Group, Inc.
Term Loan, 9.00%, 03/31/11 3,022,500
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26,547,879
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BROADCASTING - 1.4%
9,180,933 Millennium Digital Media
Systems, LLC
Term Facility, 9.49%, 06/30/11
(c) 9,180,933
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CABLE/WIRELESS VIDEO - 5.0%
4,500,000 Bresnan Communications LLC
First Lien Term Loan B,
7.21%, 09/29/13 4,496,625
6,000,000 Century Cable Holdings LLC
Revolver, 03/31/09 (b) 5,802,480
9,000,000 Cequel Communications, LLC
NC Term Facility, 10.13%,
10/30/07 (b) 8,932,500
1,484,480 Charter Communications
Operating, LLC
Term Facility, 7.76%, 04/28/13 1,492,140
4,987,500 RCN Corp.
Initial Term Loan, 7.28%,
05/30/13 4,987,500
1,625,000 San Juan Cable LLC (Puerto
Rico) Second Lien Term Loan,
10/31/13 (b) 1,644,630
WideOpenWest Finance LLC
First Lien Term Loan,
2,400,000 7.73%, 05/01/13 2,402,352
Second Lien Term Loan,
3,250,000 10.23%, 05/01/14 3,286,985
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33,045,212
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CHEMICALS - 1.6%
1,833,333 Ferro Corp.
Term Loan, 8.66%, 06/06/12
(c) (b) 1,831,060
2,000,000 Georgia Gulf Corp.
Term Loan, 09/01/13 (b) 2,005,840
INEOS US Finance
500,000 Term B2, 7.61%, 12/16/13 505,100
500,000 Term C2, 8.11%, 12/16/14 505,470
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
CHEMICALS (CONTINUED)
5,729,500 Solutia Inc.
New Term Loan B DIP,
8.96%, 03/31/07 5,754,595
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10,602,065
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CONSUMER DURABLES - 0.5%
3,000,000 Rexair LLC
First Lien Term Loan,
9.78%, 06/30/10 3,007,500
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CONSUMER NON-DURABLES - 4.3%
1,512,000 Camelbak Products LLC
First Lien Term Loan,
9.46%, 08/04/11 1,474,200
2,000,000 HBI Branded Apparel Ltd., Inc.
Second Lien Facility,
9.13%, 03/05/14 2,045,840
4,324,404 Jarden Corp.
Term Loan, 7.50%, 01/24/12 4,332,880
7,754,121 Revlon Consumer Products
Corp.
Term Loan, 11.48%,
07/09/10 (b) 7,998,591
5,077,650 Spectrum Brands
Dollar Term Loan, 8.45%,
02/07/12 5,094,812
8,000,000 VNU Inc./Nielsen Finance LLC
Dollar Term Loan, 8.19%,
08/09/13 7,982,880
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28,929,203
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DIVERSIFIED MEDIA - 4.0%
3,000,000 Endurance Business Media, Inc.
Second Lien Term Loan,
12.58%, 01/24/14 3,022,500
997,500 MediaNews Group, Inc.
New Term Loan C, 7.07%,
08/02/13 1,000,622
Metro-Goldwyn-Mayer Holdings
II, Inc./LOC Acquisition Co.
Tranche A Term Loan,
3,000,000 8.75%, 04/08/11 2,975,100
Tranche B Term Loan,
10,467,462 8.75%, 04/08/12 10,392,934
3,500,000 North American Membership
Group, Inc.
Revolver, 05/19/10 (b) 3,462,550
500,000 Panavision, Inc.
Second Lien Term Loan,
12.13%, 03/30/12 508,750
3,000,000 PBI Media, Inc.
Second Lien Term Loan,
11.13%, 09/30/13 3,015,000
2,460,008 RH Donnelley, Inc.
Tranche D-2 Term Loan,
6.93%, 06/30/11 2,443,329
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26,820,785
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1
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOAN NOTES (CONTINUED)
ENERGY - 6.5%
Alon USA Energy, Inc.
Edington Facility, 7.82%,
222,222 06/22/13 224,167
Paramount Facility ,
1,777,778 7.91%, 06/22/13 1,793,334
8,000,000 ATP Oil & Gas Corp.
Term Loan, 8.70%, 04/14/10 8,080,000
Coffeyville Resources LLC
First Lien Tranche C Term
1,193,402 Loan, 7.63%, 06/24/12 1,201,457
New Funded LOC, 5.28%,
803,607 06/24/12 809,634
1,985,000 Complete Production
Services, Inc.
Term B Facility, 7.66%,
09/12/12 1,994,925
3,041,609 Dresser Rand Group, Inc.
Tranche B Dollar Term
Loan, 7.41%, 10/29/11 3,057,425
7,920,000 EPCO Holdings, Inc.
Institutional Term Loan C,
7.17%, 08/18/10 7,977,341
1,995,000 Hawkeye Renewables LLC
First Lien Term Loan,
9.32%, 06/30/12 1,971,738
2,000,000 J Ray McDermott, SA (Panama)
Synthetic Facility,
06/06/12 (b) 2,015,000
14,000,000 Paramount Resources, Ltd.
(Canada)
Term Loan, 08/25/12 (b) 14,175,000
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43,300,021
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FINANCIAL - 1.6%
750,000 Arrowhead General Insurance
Agency, Inc.
Second Lien Term Loan,
02/08/13 (b) 760,312
1,000,000 Checksmart Financial Co.
First Lien Tranche B Term
Loan, 8.06%, 05/01/12 1,000,000
5,000,000 Concord Re Ltd. (Bermuda)
Term Loan, 9.58%, 02/29/12 5,062,500
1,500,000 FleetCor Technologies
Operating Co. LLC
Additional Term Loan ,
06/30/11 (b) 1,500,000
995,000 IPayment, Inc.
Term Facility, 7.61%,
05/10/13 994,383
1,000,000 Transfirst Holdings, Inc.
First Lien Term Loan,
9.25%, 08/15/12 1,005,000
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10,322,195
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FOOD AND DRUG - 2.2%
7,877,713 Jean Coutu Group, Inc.
Term Loan B, 8.00%,
07/30/11 7,903,552
2,500,000 Le-Nature's, Inc.
Tranche B Term Loan,
9.39%, 03/01/11 2,539,050
PRINCIPAL AMOUNT ($) VALUE ($)
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FOOD AND DRUG (CONTINUED)
2,000,000 Restaurant Co., (The)
Term Loan, 8.02%, 05/03/13
(b) 2,012,500
1,994,987 Roundy's Supermarkets, Inc.
Term Loan, 8.23%, 11/03/11 2,014,439
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14,469,541
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FOOD/TOBACCO - 1.8%
3,350,000 Garden Fresh Restaurant Corp.
First Lien Term Loan B,
06/22/11 (b) 3,358,375
8,925,104 Merisant Co.
Tranche B Term Loan,
8.74%, 01/11/10 8,824,697
99,802 Pinnacle Foods Group, Inc.
New Term Loan, 7.39%,
11/25/10 99,844
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12,282,916
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FOREST PRODUCTS - CONTAINERS - 0.1%
995,000 Georgia-Pacific Corp.
Term B Loan, 7.41%,
12/20/12 997,756
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GAMING/LEISURE - 5.0%
4,000,000 Cedar Fair L.P. (Canada)
US Term Loan, 7.83%,
08/30/12 (b) 4,028,720
7,000,000 Drake Hotel Acquisition
B Note 1, 04/01/07 (b) 7,000,000
Ginn LA Conduit Lender, Inc.
First Lien Tranche A
Credit-Linked Deposit,
314,286 8.29%, 06/08/11 311,143
First Lien Tranche B Term
2,685,714 Loan, 8.41%, 06/08/11 (b) 2,645,429
1,984,949 Kerasotes Showplace Theatres LLC
Term B1 Loan, 7.88%,
10/28/11 1,991,579
OpBiz LLC
Term Loan A, 6.76%,
4,433,346 08/31/10 (b) 4,339,137
103,821 Term Loan B, 08/31/10 (b) 100,923
1,000,000 Pivotal Promontory LLC
First Lien Term Loan,
8.08%, 08/31/10 988,750
Resorts International Holdings LLC
Second Lien Term Loan,
2,000,000 16.50%, 04/26/13 2,085,000
Term Loan B, 16.50%,
1,000,000 04/26/12 (b) 1,006,880
8,437,492 Six Flags Theme Parks, Inc.
Tranche B-1, 8.73%,
06/30/09 8,545,238
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33,042,799
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HEALTHCARE - 11.3%
13,038,594 Alliance Imaging, Inc.
Tranche C Term Loan,
7.98%, 12/29/11 13,090,227
2
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOAN NOTES (CONTINUED)
HEALTHCARE (CONTINUED)
9,977,387 CCS Medical, Inc. (Chronic
Care) First Lien Term Loan,
8.75%, 09/30/12 (b) 9,653,122
1,488,750 ComPsych Investments Corp.
Term Loan, 04/11/12 (b) 1,498,055
3,000,000 Cornerstone Healthcare Group
Holding, Inc.
Senior Subordinated
Unsecured Notes, 14.00%,
07/15/12 (d) (e) 2,325,000
4,000,000 Golden Gate National Senior
Care LLC
Second Lien Term Loan,
12.99%, 09/14/11 4,070,000
10,000,000 HCA Inc.
Second Lien Bridge Loan,
09/15/07 (b) 9,950,000
7,000,000 HealthSouth Corp.
Term Loan B, 8.52%,
03/10/13 (b) 7,036,750
6,219,838 LifePoint Hospitals, Inc.
Term Loan B, 6.91%,
04/15/12 6,196,949
MMM Holding, Inc./NAMM
Holdings, Inc./PHMC (Puerto
Rico)
NAMM New Term Loan, 7.75%,
3,069,066 08/22/11 3,067,163
NAMM Original Term Loan,
638,730 7.75%, 08/22/11 638,334
NAMM PHMC Acquistion Term
61,951 Loan, 7.75%, 08/22/11 61,913
PHMC Acquisition Term
2,230,253 Loan, 7.75%, 08/10/11 2,235,829
National Mentor Holdings, Inc.
Institutional LC Facility,
230,000 06/29/13 (b) 230,862
Tranche B Term Loan,
3,750,000 06/29/13 (b) 3,768,750
1,975,000 Quintiles Transnational Corp.
First Lien Term B, 7.37%,
03/31/13 1,974,684
1,000,000 Renal Advantage Inc.
Tranche B Term Loan,
7.89%, 10/06/12 1,001,250
2,000,000 Triumph Healthcare Second
Holdings LLC
Second Lien Term Loan,
13.48%, 07/28/14 2,012,500
Warner Chilcott Co., Inc.
(Puerto Rico)
Dovobet Delayed Draw Term
130,258 Loan, 7.93%, 01/18/12 (b) 130,556
Dovonex Delayed Draw Term
1,315,790 Loan, 7.80%, 01/18/12 (b) 1,319,079
Tranche B Acquisition Date
2,931,988 Term Loan, 7.79%, 01/18/12 (b) 2,938,556
Tranche C Acquisition Date
1,181,448 Term Loan, 7.61%, 01/18/12 (b) 1,184,035
Tranche D Acquisition Date
399,408 Term Loan, 01/18/12 (b) 400,283
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
HEALTHCARE (CONTINUED)
146,38 Warner Chilcott Holdings Co.
III, Ltd. (Bermuda)
Tranche D Acquisition Date
Term Loan, 7.61%, 01/18/12 146,708
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74,930,605
---------------
HOUSING - 9.4%
Atrium Cos., Inc.
Closing Date Term
2,404,588 Facility, 05/31/12 (b) 2,305,399
Delayed Draw Term Loan,
295,412 05/31/12 (b) 284,703
5,976,376 Custom Building Products, Inc.
First Lien Term Loan,
7.62%, 10/20/11 6,009,963
1,224,056 DESA LLC
Term Loan, 11/26/11 (b) 1,226,357
1,500,000 EH/Transeastern, LLC/TE TOUSA
Term Loan, 7.75%, 08/01/08 1,200,000
1,500,000 Flag Luxury Properties
Holdings, LLC
First Lien Term Loan,
03/21/11 (b) 1,477,500
1,860,595 Knoll, Inc.
Term Loan, 7.12%, 10/03/12 1,866,028
6,000,000 Kuilima Resort Co.
First Lien Term Loan,
8.08%, 09/30/10 (b) 5,955,000
1,000,000 LBREP/L-Suncal Master I LLC
First Lien Term Loan,
01/19/10 (b) 1,006,880
12,000,000 LNR Property Corp.
Initial Tranche B Term
Loan, 8.22%, 07/12/11 12,090,000
2,500,000 November 2005 Land
Investors, LLC
Second Lien Term Loan,
12.50%, 04/24/10 2,493,750
Owens Corning
2,041,667 Letter of Credit, 09/30/11 (b) 3,266,667
1,458,333 Revolver, 09/30/11 (b) 2,344,723
4,000,000 Roofing Supply Group LLC
First Lien Term Loan,
8.58%, 08/31/13 3,970,000
7,500,000 Rubicon GSA II LLC
(Australia)
Term Loan, 10.00%,
08/30/08 7,500,000
555,169 Walter Industries, Inc.
Term Loan, 6.87%, 10/03/12 557,045
Westgate Investments LLC
Senior Secured Loan,
7,300,000 13.00%, 09/25/10 7,300,000
Senior Unsecured Loan,
1,475,000 18.00%, 08/03/12 1,475,000
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62,329,015
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INFORMATION TECHNOLOGY - 6.3%
2,000,000 Data Transmission Network
Corp.
Second Lien Term Loan,
13.30%, 09/10/13 (b) 2,010,000
3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOAN NOTES (CONTINUED)
INFORMATION TECHNOLOGY (CONTINUED)
Infor Enterprise Solutions
Holdings, Inc.
Delayed Draw Term Loan,
2,742,857 9.15%, 07/28/12 2,765,129
Initial US Term Facility,
5,257,143 9.08%, 07/28/12 5,289,211
2,000,000 IPC Aquisition Corp.
Second Lien Tem Loan,
12.52%, 08/05/12 2,040,000
8,000,000 NameMedia, Inc.
Term Loan, 11.33%,
08/31/08 7,960,000
8,372,916 ON Semiconductor Corp.
Term Loan H, 7.75%,
12/15/11 8,416,539
4,858,156 Open Solutions Inc.
First Lien Term Loan,
7.90%, 09/03/11 4,900,665
Quantum Corp.
First Lien Term Loan,
3,000,000 10.40%, 08/22/12 3,003,750
Second Lien Term Loan,
1,000,000 14.25%, 08/22/13 997,500
2,500,000 Secure Computing Corp.
Term Loan, 8.58%, 08/31/13 2,518,750
2,000,000 Serena Software, Inc.
Term Loan, 7.41%, 03/11/13 2,001,240
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41,902,784
---------------
MANUFACTURING - 3.8%
3,000,000 CST Industries, Inc.
Term Loan, 10.00%,
08/09/13 2,994,150
1,000,000 FR X Ohmstede Acquisitions
Co. Term B Loan, 8.50%,
08/09/13 1,011,250
5,000,000 Global Petroleum, Inc. (SPI
Petroleum)
Term Loan, 9.84%, 07/26/13 5,012,500
1,011,458 Matinvest 2 SAS (Deutsche
Connector) (France)
Mezz A USD Facility,
13.54%, 06/22/16 1,039,273
Matinvest 2 SAS/ Butterfly
Wendel US, Inc.
B-2 Facility, 7.90%,
2,250,000 06/22/14 2,271,803
C-2 Facility, 8.40%,
2,250,000 06/22/15 2,280,960
Prysmian Power Cables &
Systems, Inc.
B3b Term Loan, 7.88%,
1,525,200 08/25/13 1,533,634
C5b Term Loan, 8.38%,
381,300 08/25/13 384,000
2,000,000 Ray Acquisition SCA (Rexel)
(France) Term Loan B3-A US, 7.86%,
08/02/14 2,027,500
7,000,000 TFS Acquisition Corp.
Term Loan, 8.83%, 08/03/13 (b) 7,052,500
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25,607,570
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PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
METALS/MINERALS - 3.0%
1,000,000 Aleris International, Inc.
(Germany)
U S Loan, 7.88%, 07/31/13 1,002,190
1,326,316 Euramax International
Holdings B.V.
Second Lien European Loan,
12.49%, 06/29/13 1,346,211
Euramax International, Inc.
First Lien Domestic Term Loan,
2,884,136 8.06%, 06/29/12 2,892,788
Second Lien Domestic Term Loan,
2,673,684 12.49%, 06/29/13 2,693,737
6,500,000 James River Coal Co.
Credit Linked Certificate
of Deposit, 5.10%, 11/30/11 6,500,000
1,600,000 Oglebay Norton Co.
Tranche B Term Loan,
7.83%, 07/31/12 (c) 1,615,008
2,000,000 PinnOak Resources, LLC
Term Loan, 11/23/12 (b) 1,970,000
1,745,625 United Central Industrial
Supply Company, L.L.C.
Term Loan, 8.61%, 03/31/12 1,757,635
---------------
19,777,569
---------------
RETAIL - 8.4%
3,476,222 Blockbuster Entertainment Corp.
Tranche B Term Loan,
8.83%, 08/20/11 3,476,848
11,987,469 Burlington Coat Factory
Warehouse Corp.
Term Loan, 7.53%, 05/28/13 (b) 11,649,182
3,000,000 CSK Auto, Inc.
Term Loan, 8.54%, 06/30/12 3,033,750
1,000,000 Eddie Bauer, Inc.
Term Loan, 9.65%, 06/21/11 1,000,000
Movie Gallery, Inc.
1,524,931 Term Loan A, 04/27/11 (b) 1,439,535
Term Loan B, 10.62%,
18,805,629 04/27/11 (b) 17,656,793
9,443,038 Neiman Marcus Group, Inc.
(The)
Term Loan, 7.89%, 04/06/13 9,516,599
2,000,000 Sports Authority, Inc., (The)
Term Loan B, 05/03/13 (b) 1,990,840
6,000,000 Toys "R" US, Inc.
Tranche B Term Loan,
9.62%, 07/19/12 6,098,760
---------------
55,862,307
---------------
SERVICE - 5.9%
1,000,000 Alliance Laundry Systems LLC
Term Loan, 7.58%, 01/27/12 1,006,880
2,992,500 Education Management Corp.
Tranche B Term Loan,
9.75%, 06/01/13 3,014,764
2,000,000 Koosharem Corp.
Second Lien Term Loan,
15.75%, 06/30/13 1,975,000
4
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOAN NOTES (CONTINUED)
SERVICE (CONTINUED)
La Petite Academy, Inc.
Closing Date First Lien
6,500,000 Term Loan, 8.33%, 08/16/12 6,544,720
La Petite Academy, Inc. (continued)
Second Lien Term Loan,
4,000,000 12.61%, 02/16/13 4,050,000
8,000,000 NES Rentals Holdings, Inc.
Second Lien Term Loan,
12.13%, 07/20/13 8,080,000
6,237,288 Safety-Kleen Holdings Ltd.
GBP Term Loan B1, 7.88%,
08/02/13 6,252,881
1,762,712 Safety-Kleen Systems
Synthetic LC, 5.53%,
08/02/13 1,767,119
1,512,756 Survey Sampling
International, LLC
Term Loan, 8.75%, 05/06/11 1,518,429
United Rentals, Inc.
Initial Term Loan,
3,663,158 02/14/11 (b) 3,679,569
Tranche B Credit-Linked
336,842 Deposit, 02/14/11 (b) 337,684
1,000,000 Vanguard Car Rental USA
Holding, Inc.
Term Loan, 8.32%, 06/14/13 1,002,340
---------------
39,229,386
---------------
TELECOMMUNICATIONS - 4.4%
1,995,000 Gabriel Communications
Finance Co.
Term Loan B, 10.34%,
05/12/12 2,006,212
Madison River Capital
4,000,000 Term B-1, 7.73%, 07/29/12 4,020,000
1,000,000 Term B-2, 7.73%, 07/29/12 1,005,000
8,000,000 PaeTec Communications, Inc.
Second Lien Term Loan,
12.88%, 06/12/13 (b) 8,162,560
Sorenson Communications, Inc.
2,000,000 Revolver, 08/16/12 (b) 1,996,800
Second Lien Term Loan,
5,000,000 12.39%, 02/16/14 5,046,900
Tranche B Term Loan,
6,000,000 8.39%, 08/16/13 6,041,280
1,250,000 Stratos Global Corp./Stratos
Funding LP (Canada)
Term B Facility, 8.11%,
02/13/12 1,249,225
---------------
29,527,977
---------------
TRANSPORTATION - 8.5%
Carey International, Inc.
First Lien Term Loan,
3,974,748 9.19%, 05/10/11 3,974,748
Second Lien Term Loan,
2,594,598 17.20%, 05/10/12 2,588,111
4,233,334 Consolidated Container
Holdings LLC
Term Loan, 11.00%,
12/15/08 4,254,500
375,854 Cooper-Standard Automotive Canada
Ltd.
Tranche B Term Loan, 12/23/11 (b) 375,974
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
TRANSPORTATION (CONTINUED)
Cooper-Standard Automotive Inc.
627,281 Term Loan D, 12/23/11 (b) 628,654
Tranche C Term Loan ,
604,635 12/23/11 (b) 606,146
3,000,000 Dana Corp.
DIP Term Loan, 7.65%,
04/13/08 2,998,140
2,000,000 Dayco Proudcts LLC
Second Lien Term Loan,
12/31/11 (b) 2,042,500
8,495,000 Delphi Corp.
Term Loan, 13.75%, 06/14/11 (b) 8,798,951
505,325 Environmental Systems
Products Holdings Inc.
Term Loan, 8.70%, 12/12/08 511,485
Key Plastics LLC
Term Loan B, 8.75%,
1,000,000 06/24/10 1,005,000
3,459,900 Term Loan C, 06/29/11 (b) 3,425,301
Keystone Automotive Operations,
Inc.
Term Loan B, 7.94%,
92,223 10/30/09 92,454
Term Loan C, 7.99%,
2,052,075 10/30/10 2,055,933
5,000,000 Lear Corp.
First Lien Term Loan B,
7.98%, 04/25/12 4,900,000
3,548,572 Motor Coach Industries
International, Inc.
Second Lien Term Loan,
12/01/08 (b) 3,637,286
5,000,000 Navistar International Corp.
Delay Draw Term Loan,
10.49%, 02/22/09 5,046,900
2,000,000 New Century Transportation,
Inc. Term Loan B, 8.58%,
08/14/12 2,005,000
7,889,163 SIRVA Worldwide, Inc.
Tranche B Term Loan,
11.46%, 12/01/10 (b) 7,488,157
---------------
56,435,240
---------------
UTILITIES - 7.2%
5,000,000 ANP Funding I, LLC
Tranche A Term Loan,
07/29/10 (b) 5,035,400
Calpine Corp.
Second Lien Term Loan B,
1,000,000 13.00%, 07/16/07 1,041,960
Second Priority DIP Term
1,000,000 Loan, 9.50%, 12/20/07 1,018,130
902,601 CenterPoint Energy, Inc.
Term Loan, 7.71%, 04/30/10 903,639
Coleto Creek Power, LP
Second Lien Term Loan,
5,000,000 9.45%, 06/28/13 4,687,500
Synthetic Facility, 8.26%,
382,166 06/28/13 381,210
5,617,834 Term Loan, 8.20%, 06/28/13 5,603,790
GBGH, LLC (U S Energy)
First Lien Term Loan,
5,000,000 10.94%, 08/07/13 5,012,500
Second Lien Term Loan,
5,000,000 7.94%, 08/07/14 5,012,500
3,427,490 Midwest Generation LLC
Term Loan, 04/27/11 (b) 3,451,071
5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOAN NOTES (CONTINUED)
UTILITIES (CONTINUED)
Plum Point Energy Associates,
LLC
First Lien Term Loan,
607,134 8.75%, 03/14/14 611,687
Funded Letter of Credit,
2,236,456 8.75%, 03/14/14 2,260,207
TECO Panda Generating Co. -
Gila River Power Station
Project Letter of Credit,
598,071 06/01/12 (b) 696,752
Tranche A Term Loan,
3,243,645 06/01/12 (b) 3,876,156
Tranche B Term Loan,
3,129,163 06/01/20 (b) 3,719,793
38,585 Working Capital, 06/01/12 (b) 44,952
TECO Panda Generating Co.-
Union Power Partners, L.P.
173,633 Letter of Credit, 06/01/12 (b) 202,283
Tranche A Term Loan,
1,908,026 06/01/12 (b) 2,280,092
Tranche B Term Loan,
1,831,705 06/01/20 (b) 2,177,440
77,170 Working Capital, 06/01/12 (b) 89,903
---------------
48,106,965
---------------
WIRELESS COMMUNICATIONS - 0.3%
2,000,000 Cricket Communications, Inc.
Term B Facility, 8.25%,
06/16/13 2,019,000
---------------
TOTAL SENIOR LOAN NOTES
(COST $707,256,771) 708,277,223
---------------
FOREIGN DENOMINATED SENIOR LOAN NOTES - 6.1%
FRANCE EUR - 2.6%
CABLE - INTERNATIONAL CABLE
Ypso Holding SA
Eur B (Acq) 1 Facility,
1,148,808 06/06/14 (b) 1,429,788
Eur B (Acq) 1 Facility,
1,531,744 5.61%, 06/15/14 1,905,900
Eur B (Acq) 2 Facility,
4,373,530 5.61%, 06/15/14 (b) 5,441,844
Eur B (Recap) 1 Facility,
3,969,096 5.61%, 06/15/14 4,938,619
Eur B (Recap) 1 Facility,
2,976,822 06/06/14 (b) 3,667,198
---------------
17,383,349
---------------
GERMANY EUR - 1.0%
BROADCASTING
5,000,000 P7S1 Holding II S.A..R.L - GMP
Facility B, 7.09%, 07/08/11 6,347,635
---------------
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
LUXEMBOURG EUR - 0.9%
INFORMATION TECHNOLOGY
Infor Enterprise Solutions Holdings, Inc.
Euro Delayed Draw Bridge
1,915,423 Term Loan, 07/29/13 (b) 2,420,301
Stage One Euro Bridge
3,059,702 Facility, 07/29/13 (b) 3,866,196
---------------
6,286,497
---------------
SPAIN EUR - 0.9%
CABLE/WIRELESS VIDEO
5,000,000 Cableuropa, S.A.U.
Term Loan, 05/14/14 (b) 6,286,261
---------------
UNITED KINGDOM GBP - 0.7%
UTILITIES
750,000 Eggborough Power Ltd.
Term Loan, 7.00%, 03/31/22 (b) 4,637,153
---------------
TOTAL FOREIGN DENOMINATED
SENIOR LOAN NOTES
(COST $41,170,108) 40,940,895
---------------
CORPORATE NOTES AND BONDS - 26.9%
AEROSPACE - 0.7%
5,000,000 Standard Aero Holdings, Inc.
8.25%, 09/01/14 4,850,000
---------------
CABLE/WIRELESS VIDEO - 1.2%
4,500,000 CCH I LLC
11.00%, 10/01/15 4,117,500
4,000,000 Charter Communications Inc.
5.88%, 11/16/09 (f) 3,625,000
---------------
7,742,500
---------------
CHEMICALS - 2.0%
Solutia Inc.
8,000,000 10/15/27 (d) 7,800,000
5,500,000 10/15/37 (d) 5,362,500
---------------
13,162,500
---------------
CONSUMER NON-DURABLES - 1.4%
3,000,000 Ames True Temper
9.51%, 01/15/12 (g) 3,030,000
Remington Arms Co., Inc.
500,000 10.50%, 02/01/11 (f) (h) 462,500
4,100,000 10.50%, 02/01/11 (f) 3,792,500
2,000,000 Solo Cup Co.
Senior Subordinated Notes,
8.50%, 02/15/14 (f) 1,737,500
---------------
9,022,500
---------------
DIVERSIFIED MEDIA - 1.0%
4,500,000 Network Communications, Inc.
10.75%, 12/01/13 4,522,500
6
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
CORPORATE NOTES AND BONDS (CONTINUED)
DIVERSIFIED MEDIA (CONTINUED)
2,000,000 PRIMEDIA, Inc.
Senior Notes, 10.78%,
05/15/10 (g) 2,055,000
---------------
6,577,500
---------------
ENERGY - 0.4%
3,000,000 Massey Energy Co.
Senior Notes, 6.63%,
11/15/10 2,940,000
---------------
FINANCIAL - 0.3%
2,000,000 Penhall International, Corp.
Senior Secured Notes,
12.00%, 08/01/14 (f) (h) 2,105,000
---------------
FOOD/TOBACCO - 2.2%
Chiquita Brands
International, Inc.
Senior Notes, 7.50%,
3,000,000 11/01/14 2,610,000
Senior Notes, 8.88%,
5,000,000 12/01/15 (f) 4,637,500
10,000,000 Swift & Co.
PIK Holdco Notes, 8.00%,
03/19/10 7,400,000
---------------
14,647,500
---------------
FOREST PRODUCTS - CONTAINERS - 1.5%
1,500,000 Impress Metal Packaging
Holdings BV (Netherlands)
8.51%, 09/15/13 (f) (g) (h) 1,509,750
4,000,000 Graphic Packaging
International, Inc.
Senior Subordinated Notes,
9.50%, 08/15/13 (f) 4,110,000
4,000,000 NewPage Corp.
Senior Subordinated Notes,
12.00%, 05/01/13 4,160,000
---------------
9,779,750
---------------
GAMING/LEISURE - 2.4%
Six Flags Theme Parks, Inc.
Senior Notes, 4.50%,
3,600,000 05/15/15 3,784,500
Senior Notes, 8.88%,
4,500,000 02/01/10 (f) 4,331,250
8,000,000 Trump Entertainment Resorts
Holdings LP
8.50%, 06/01/15 (f) 7,690,000
---------------
15,805,750
---------------
HEALTHCARE - 0.5%
5,000,000 Rotech Healthcare, Inc.
9.50%, 04/01/12 (f) 3,450,000
---------------
HOUSING - 1.3%
1,000,000 Builders FirstSource, Inc.
9.66%, 02/15/12 (g) 985,000
3,000,000 Dayton Superior Corp.
13.00%, 06/15/09 (f) 2,835,000
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
HOUSING (CONTINUED)
9,000,000 Owens Corning
08/01/18 (f) (d) 4,657,500
---------------
8,477,500
---------------
ELECTRONICS/ELECTRIC - 0.8%
6,000,000 MagnaChip Semiconductor
Senior Secured Notes,
8.64%, 12/15/11 (g) 5,100,000
---------------
MANUFACTURING - 0.4%
1,000,000 Polypore, Inc.
Senior Subordinated Notes,
8.75%, 05/15/12 (f) 965,000
2,000,000 TFS Acquisition Corp
Senior Secured Notes,
12.90%, 08/01/14 (g) (h) 2,005,000
---------------
2,970,000
---------------
RETAIL - 2.9%
9,500,000 Blockbuster Entertainment
Corp.
Senior Subordinated Notes,
9.00%, 09/01/12 (f) 8,763,750
1,000,000 Finlay Fine Jewelry Corp.
Senior Notes, 8.38%,
06/01/12 900,000
2,000,000 Gregg Appliances, Inc.
9.00%, 02/01/13 1,835,000
2,000,000 Linens 'n Things, Inc.
11.13%, 01/15/14 (g) 1,940,000
3,000,000 Movie Gallery Inc.
Senior Unsecured Notes,
11.00%, 05/01/12 (f) 1,935,000
5,000,000 Toys "R" US, Inc.
7.88%, 04/15/13 4,081,250
---------------
19,455,000
---------------
SERVICE - 1.1%
7,550,000 HydroChem Industrial
Services, Inc.
Senior Subordinated Notes,
9.25%, 02/15/13 (h) 7,512,250
---------------
TRANSPORTATION - 4.0%
5,000,000 American Tire Distributors
Holdings, Inc.
Senior Notes, 11.76%,
04/01/12 (g) 4,575,000
2,000,000 Cooper-Standard Automotive,
Inc.
8.38%, 12/15/14 (f) 1,480,000
Delphi Corp.
5,000,000 06/15/06 (f) (d) 4,500,000
5,000,000 05/01/29 (f) (d) 4,250,000
Federal-Mogul Corp.
1,000,000 07/01/06 (d) 580,000
12,000,000 01/15/09 (d) 6,960,000
2,000,000 General Motors Accept Corp.
6.75%, 12/01/14 (f) 1,955,522
Stanadyne Corp.
Senior Discount Notes,
2,250,000 12.00%, 02/15/15 (i) 1,496,250
7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
TRANSPORTATION (CONTINUED)
Senior Subordinated Notes,
1,000,000 10.00%, 08/15/14 1,015,000
---------------
26,811,772
---------------
UTILITIES - 0.4%
5,000,000 Calpine Corp.
02/15/11 (f) (d) 2,500,000
---------------
WIRELESS COMMUNICATIONS - 2.4%
999,990 Mobile Services Group Inc.
Senior Notes, 9.75%,
08/01/14 (h) 1,029,990
SunCom Wireless Holdings, Inc.
5,000,000 8.50%, 06/01/13 (f) 4,662,500
1,500,000 8.75%, 11/15/11 (f) 1,128,750
12,000,000 9.38%, 02/01/11 (f) 9,030,000
---------------
15,851,240
---------------
TOTAL CORPORATE NOTES AND
BONDS
(COST $177,243,193) 178,760,762
---------------
COMMON STOCKS - 2.1%
26,000 Diamond Offshore Drilling 1,881,620
528,000 Graphic Packaging Corp. (j) 1,932,480
65,472 Gray Television, Inc., Class A 452,412
259,100 GrayTelevision, Inc. 1,660,831
125,000 Ico Global Com Holding Ltd. (j) 731,250
100,067 Louisiana-Pacific Corp. 1,878,258
119,680 Newpark Resources, Inc. (j) 637,894
29,800 NRG Energy, Inc. (j) 1,349,940
110,000 Owens Illinois (f) (j) 1,696,200
20,000 Trump Entertainment Resorts,
Inc. (j) 339,200
8 Westgate Investments LLC 25,000
47,150 Williams Cos., Inc. 1,125,470
---------------
TOTAL COMMON STOCKS
(COST $14,193,809) 13,710,555
---------------
TOTAL INVESTMENTS - 141.6% 941,689,435
---------------
(cost of $939,863,881) (k)
OTHER ASSETS & LIABILITIES, NET - (41.6)% (276,596,290)
---------------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS - 100.0% 665,093,145
===============
---------------------
(a) Senior loans in which the Fund invests generally pay
interest at rates which are periodically
predetermined by reference to a base lending rate
plus a premium. (Unless otherwise identified by
footnote (c), all senior loans carry a variable rate
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
Inter-Bank Offered Rate ("LIBOR") or (iii) the
Certificate of Deposit rate. Rate shown represents
the weighted average rate at September 30, 2006.
Senior loans, while exempt from registration under
the Security Act of 1933, as amended, 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 maturities shown.
(b) All or a portion of this position has not settled.
Contract rates do not take effect until settlement date.
(c) Senior Loan Notes have additional unfunded loan commitments.
As of Senior Loan Notes have additional unfunded loan
commitments. As of September 30, 2006, the Portfolio had
unfunded loan commitments of $2,304,989, which could be
extended at the option of the Borrower, pursuant to the
following loan agreements:
UNFUNDED
LOAN
BORROWER COMMITMENT
Ferro Corp. $ 666,667
Millennium Digital Media Systems, LLC 1,238,322
Oglebay Norton Co. 400,000
----------
$2,304,989
==========
(d) The issuer is in default of certain debt covenants. Income is
not being accrued.
(e) Fixed Rate Senior Loan.
(f) Securities (or a portion of securites) on loan as of
September 30, 2006. The Fund may make secured loans
of its portfolio securities amounting to not more
than one-third of the value of its total assets,
thereby realizing additional income. The risks in
lending portfolio securities, as with other
extensions of credit, consist of possible delays in
recovery of the securities or possible loss of
rights in the collateral should the borrower fail
financially. As a matter of policy, securities loans
are made to unaffiliated broker-dealers pursuant to
agreements requiring that loans be continuously
secured by collateral in cash or short-term debt
obligations at least equal at all times to the value
of the securities subject to the loan. The borrower
pays to the Fund an amount equal to any interest or
dividends received on securities subject to the
loan. The Fund retains all or a portion of the
interest received on investment of the cash
collateral or receives a fee from the borrower. As
of September 30, 2006, the market value of
securities loaned by the Fund was $73,810,609. The
loans were secured with cash collateral of
$75,403,290.
(g) Floating rate note. The interest rate shown reflects the rate
in effect at September 30, 2006.
8
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
SEPTEMBER 30, 2006 HIGHLAND CREDIT STRATEGIES FUND
(h) Security exempt from registration under Rule 144A of
the Securities Act of 1933, as amended. This
security is purchased in accordance with guidelines
approved by the Fund's Board of Trustees and may
only be resold, in transactions exempt from
registration, to qualified institutional buyers. At
September 30, 2006, this security amounted to
$14,624,490 or 2.2% of net assets. This security has
been determined by the Adviser to be a liquid
security.
(i) Step Coupon. A bond that pays an initial coupon rate
for the first period and then a higher coupon rate for
the following periods until maturity. Interest rate
presented represents annualized yield at time of purchase.
The coupon rate will be 0.000% until the date shown and
the subsequent rate thereafter.
(j) Non-income producing security.
(k) Cost for Federal income tax purposes is $939,863,881.
Gross unrealized appreciation $ 8,693,619
Gross unrealized depreciation (6,868,065)
-------------
Net unrealized appreciation $ 1,825,554
=============
DIP Debtor in Possession
LP Limited Partnership
PIK Payment in Kind
Investments sold short outstanting at September 30, 2006:
TYPE SHARES VALUE
---------------------------------------------------------------
Sharper Image 82,800 $ 852,840
Superior Industries International,
Inc. 114,720 1,926149
-----------
$ 2,778,989
===========
SECURITY VALUATION:
The value of the Fund's assets is based on the current market value of its
investments. For securities with readily available market quotations, the Fund
uses those quotations for pricing. When portfolio securities are traded on the
relevant day of valuation, the valuation will be the last reported sale price on
that day. If there are no such sales on that day, the security will be valued at
the mean between the most recently quoted bid and asked prices from principal
market makers. Securities without a sale price or bid and ask quotations on the
valuation day will be priced by an independent pricing service. If securities do
not have readily available market quotations or pricing service prices,
including circumstances under which such are determined not to be accurate or
current (including when events materially affect the value of securities
occurring between the time when market price is determined and calculation of
the Fund's net asset value), such securities are valued at their fair value, as
determined in good faith in accordance with procedures established by the Fund's
Board of Trustees. In these cases, the Fund's net asset value will reflect the
affected portfolio securities' value as determined in the judgment of the Board
of Trustees or its designee instead of being determined by the market. Using a
fair value pricing methodology to price 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 net asset values. 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.
For more information with regard to significant accounting policies, see the
most recent semi-annual report filed with the Securities and Exchange
Commission.
9
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 are 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.
(Registrant) HIGHLAND CREDIT STRATEGIES FUND
By (Signature and Title)* /S/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)
Date OCTOBER 16, 2006
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ JAMES D. DONDERO
-------------------------------------------------------
James D. Dondero, Chief Executive Officer
(principal executive officer)
Date OCTOBER 16, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)
Date OCTOBER 16, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.