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: MARCH 31, 2007
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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)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (A) - 91.4%
AEROSPACE - AEROSPACE/DEFENSE - 1.5%
2,209,942 AWAS Capital, Inc.
Second Priority Term Loan,
11.38%, 03/15/13 2,243,091
IAP Worldwide Services, Inc.
First Lien Term Loan,
2,000,000 12/30/12 (b) 1,997,520
Second Lien Term Loan,
2,000,000 10.91%, 06/30/13 2,022,500
TDS Investor Corp.
Dollar Term Loan, 8.37%,
3,634,004 08/23/13 3,668,382
Synthetic Letter of
356,888 Credit, 8.37%, 08/23/13 359,640
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10,291,133
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AEROSPACE - AIRLINES - 2.4%
9,652,860 Delta Airlines, Inc.
Term Loan Equipment Notes,
8.87%, 09/29/12 9,664,925
7,000,000 Northwest Airlines, Inc.
Term Loan DIP, 7.85%,
08/21/08 7,031,710
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16,696,635
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AUTOMOBILE - 2.1%
14,962,500 Ford Motor Co., Term Loan
8.36%, 12/15/13 15,043,597
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BROADCASTING - 2.7%
9,138,204 Millennium Digital Media
Systems, LLC
Term Facility, 8.99%,
06/30/11 (c) 9,154,171
2,000,000 Persona Communications Corp.
Second Lien Term Loan,
11.37%, 04/12/14 2,041,240
1,947,381 Revolution Studios
Tranche B Term Loan,
9.07%, 12/21/14 1,961,986
6,000,000 Univision Communications Inc.
Second Lien Asset Sale
Bridge Loan, 02/12/09 (b) 6,024,360
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19,181,757
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CABLE - INTERNATIONAL CABLE - 0.2%
1,105,000 San Juan Cable, LLC
Second Lien Term Loan,
10.85%, 10/31/13 1,119,741
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CABLE - US CABLE - 2.1%
33,054 Century Cable Holdings LLC
Revolver, 10.32%, 03/31/09 32,062
9,000,000 Cequel Communications, LLC
NC Term Facility, 10.32%,
10/30/07 9,022,500
WideOpenWest Finance LLC
First Lien Term Loan,
2,400,000 7.61%, 05/01/13 2,419,488
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOANS (CONTINUED)
CABLE - US CABLE (CONTINUED)
Second Lien Term Loan,
3,250,000 10.37%, 05/01/14 3,332,615
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14,806,665
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CHEMICALS - COMMODITY & FERTILIZER - 0.2%
1,694,444 Ferro Corp.
Term Loan, 8.07%, 06/06/12
(c) 1,694,987
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CHEMICALS - SPECIALTY CHEMICALS - 0.8%
5,729,500 Solutia, Inc.
New Term Loan B DIP,
8.36%, 03/31/07 5,795,733
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CONSUMER DURABLES - 0.4%
2,862,201 Rexair LLC
First Lien Term Loan,
9.61%, 06/30/10 2,869,357
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CONSUMER NON-DURABLES - 0.9%
1,512,000 Camelbak Products LLC
First Lien Term Loan,
9.41%, 08/04/11 1,498,770
2,000,000 DS Waters of America, Inc.
Term Loan B, 7.86%,
10/27/12 2,007,500
1,000,000 GTM Holding, Inc.
First Lien Term Loan,
8.13%, 10/30/13 1,007,500
1,990,000 VNU Inc./Nielsen Finance LLC
Dollar Term Loan, 8.13%,
08/09/13 2,011,054
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6,524,824
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DIVERSIFIED MEDIA - 3.4%
3,000,000 Endurance Business Media, Inc.
Second Lien Term Loan,
12.57%, 01/24/14 3,060,000
3,000,000 Metro-Goldwyn-Mayer Holdings II, Inc.
Tranche B-1 Term Loan,
8.60%, 04/08/12 3,001,170
10,412,368 Metro-Goldwyn-Mayer Holdings
II, Inc./LOC Acquisition Co.
Tranche B Term Loan,
8.61%, 04/08/12 10,419,970
742,424 North American Membership
Group, Inc.
Revolver, 12.50%, 05/19/10 704,360
500,000 Panavision, Inc.
Second Lien Term Loan,
12.38%, 03/30/12 508,125
5,000,000 Penton Media, Inc.
Second Lien Term Loan,
02/01/14 (b) 5,075,000
1,000,000 ProQuest-CSA LLC
Second Lien Term Loan,
11.09%, 02/09/15 1,018,750
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23,787,375
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 1
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOANS (CONTINUED)
ENERGY - EXPLORATION & PRODUCTION - 4.3%
11,950,050 ATP Oil & Gas Corp.
First Additional Term
Loan, 8.94%, 04/14/10 12,047,084
17,750,000 Paramount Resources Ltd. (Canada)
Term Loan, 9.86%, 08/28/12 17,971,875
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30,018,959
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ENERGY - OTHER ENERGY - 1.2%
Alon USA Energy, Inc.
Edington Facility, 7.57%,
221,111 06/22/13 222,632
Paramount Facility ,
1,768,889 7.64%, 06/22/13 1,781,059
3,000,000 Endeavour International
Holding B.V.
Second Lien Term Loan,
12.37%, 11/01/11 3,090,000
3,000,000 Willbros USA, Inc.
Syndicate Term Loan,
5.25%, 10/27/09 3,015,000
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8,108,691
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ENERGY - REFINING - 0.3%
2,000,000 J Ray McDermott, SA
Synthetic Facility, 5.27%,
06/06/12 2,020,000
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FINANCIAL - 1.8%
750,000 Arrowhead General Insurance
Agency, Inc.
Second Lien Term Loan,
12.60%, 02/08/13 769,688
994,987 Checksmart Financial Co.
First Lien Tranche B Term
Loan, 8.13%, 05/01/12 996,858
2,000,000 Clarke American Corp.
Tranche B Term Loan,
03/09/14 (b) 2,001,260
5,000,000 Concord Re Ltd.
Term Loan, 9.61%, 02/29/12 5,056,250
995,000 First American Payment
Systems, L.P.
Term Loan, 8.63%, 10/06/13 1,002,462
1,492,237 Fleetcor Tech
Term Loan, 9.07%, 03/21/11 1,503,428
992,500 Transfirst Holdings, Inc.
First Lien Term Loan,
7.85%, 08/15/12 998,703
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12,328,649
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FOOD AND DRUG - 1.3%
1,338,052 Duloxetine Royalty Sub
Term Loan, 9.86%, 10/18/13 1,348,087
7,309,332 Jean Coutu Group, Inc.
Term Loan B, 7.88%,
07/30/11 7,325,339
PRINCIPAL AMOUNT ($) VALUE ($)
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SENIOR LOANS (CONTINUED)
FOOD AND DRUG (CONTINUED)
500,000 Sturm Foods, Inc.
Inital Term Loan 2nd Lien,
07/31/14 501,565
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9,174,991
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FOOD/TOBACCO - BEVERAGES & BOTTLING - 0.3%
1,990,000 PBM Holdings, Inc.
Term Loan, 8.07%, 09/29/12 2,004,925
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FOOD/TOBACCO - RESTAURANTS - 0.8%
3,307,595 Garden Fresh Restaurant Corp.
First Lien Term Loan B,
8.61%, 06/22/11 3,324,133
1,985,000 Restaurant Co., The
Term Loan, 8.12%, 05/03/13 2,002,369
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5,326,502
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FOREST PRODUCTS - 1.5%
11,000,000 Verso Paper Financial
Holding LLC
Unsecured Loan, 11.57%,
02/01/13 10,642,500
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GAMING/LEISURE - GAMING - 1.6%
5,972,822 Drake Hotel Acquisition
B Note 1, 8.22%, 04/01/07
(c) 5,972,822
5,000,000 Sabre Inc.
Initial Term Loan,
09/30/14 (b) 4,993,750
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10,966,572
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GAMING/LEISURE - OTHER LEISURE - 1.6%
3,980,000 Cedar Fair L.P.
US Term Loan, 7.32%, 08/30/12 4,020,039
977,449 Kerasotes Showplace Theatres LLC
Term B1 Loan, 7.63%,
10/28/11 980,909
5,969,773 Kuilima Resort Co.
First Lien Term Loan,
8.10%, 09/30/10 5,973,474
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10,974,422
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HEALTHCARE - ACUTE CARE - 7.7%
12,506,406 Alliance Imaging, Inc.
Tranche C Term Loan,
7.88%, 12/29/11 12,594,951
1,466,250 ComPsych Investments Corp.
Term Loan, 8.11%, 04/11/12 1,477,247
Cornerstone Healthcare Group
Holding, Inc.
Senior Subordinated
Unsecured Notes, 14.00%,
3,015,000 07/15/12 (d) 2,713,500
9,000,000 Term Loan, 9.35%, 07/15/11 8,910,000
1,000,000 Graceway Pharmaceuticals, LLC
Second Lien Term Loan,
12/29/12 (b) 1,016,880
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 2
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
HEALTHCARE - ACUTE CARE (CONTINUED)
12,967,500 HCA, Inc.
Tranche B Term Loan,
7.61%, 11/17/13 13,107,290
2,375,000 MultiPlan, Inc.
Term Loan C, 7.82%,
04/12/13 2,395,045
National Mentor Holdings, Inc.
Institutional Line of
Credit Facility, 4.83%,
230,000 06/29/13 230,718
Tranche B Term Loan,
3,751,150 7.37%, 06/29/13 3,771,106
Sheridan Healthcare, Inc.
Delayed Draw Term Loan,
293,040 10.25%, 11/09/11 295,238
First Lien Term C Loan,
1,696,960 8.36%, 11/09/11 1,709,687
Second Lien Term Loan,
1,500,000 12.36%, 11/09/12 1,515,930
4,500,000 Triumph Healthcare Second
Holdings LLC
Second Lien Term Loan,
13.36%, 07/28/14 4,494,375
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54,231,967
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HEALTHCARE - ALTERNATE SITE SERVICES - 1.0%
6,000,000 InSight Health Services Corp.
Tranche B Term Loan,
7.36%, 04/06/14 6,052,500
995,274 Renal Advantage Inc.
Tranche B Term Loan,
7.86%, 10/06/12 1,005,226
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7,057,726
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HEALTHCARE - MEDICAL PRODUCTS - 3.6%
9,927,127 CCS Medical, Inc.
First Lien Term Loan,
8.60%, 09/30/12 9,896,949
4,000,000 Golden Gate National Senior
Care LLC
Second Lien Term Loan,
13.12%, 09/14/11 4,070,000
6,965,000 HealthSouth Corp.
Term Loan B, 8.62%,
03/10/13 7,014,869
MMM Holding, Inc./NAMM
Holdings, Inc./PHMC
NAMM New Term Loan, 7.62%,
7,692 08/22/11 7,423
NAMM Original Term Loan,
1,601 7.62%, 08/22/11 1,545
NAMM PHMC Acquistion Term
155 Loan, 7.61%, 08/22/11 149
PHMC Acquisition Term
5,576 Loan, 7.61%, 08/10/11 5,381
Warner Chilcott Co., Inc.
Dovonex Delayed Draw Term
1,350,398 Loan, 01/18/12 (b) 1,357,123
Tranche B Acquisition Date
2,129,686 Term Loan, 7.62%, 01/18/12 2,140,100
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
HEALTHCARE - MEDICAL PRODUCTS (CONTINUED)
584,705 Warner Chilcott Corp.
Tranche C Acquisition Date
Term Loan, 7.61%, 01/18/12 586,716
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25,080,255
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HOUSING - BUILDING MATERIALS - 3.4%
2,392,518 Atrium Cos., Inc.
Closing Date Term
Facility, 8.44%, 05/31/12 2,396,489
Custom Building Products, Inc.
First Lien Term Loan,
5,915,878 7.61%, 10/20/11 5,934,336
Second Lien Term Loan,
1,625,000 04/20/12 (b) 1,626,008
Macklowe/EOP NYC Portfolio Pool 1
6,000,000 Mezzanine 2B, 02/01/08 (b) 6,015,000
4,000,000 Mezzanine 3, 02/02/08 (b) 4,010,000
3,980,000 Roofing Supply Group LLC
First Lien Term Loan,
8.61%, 08/31/13 3,950,150
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23,931,983
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HOUSING - REAL ESTATE DEVELOPMENT - 6.0%
1,213,715 DESA LLC
Term Loan, 13.00%,
11/26/11 1,095,378
4,000,000 Edge Star Partners, LLC
(Harmon Koval)
First Lien Term Loan,
9.36%, 05/21/07 4,010,000
1,488,722 Flag Luxury Properties
Holdings, LLC
First Lien Term Loan,
8.64%, 03/21/11 1,479,417
Ginn LA Conduit Lender, Inc.
First Lien Tranche A
Credit Linked Deposit,
1,573,593 06/08/11 (b) 1,536,866
First Lien Tranche B Term
3,414,405 Loan, 06/08/11 (b) 3,326,176
992,462 LBREP/L-Suncal Master I LLC
First Lien, 8.61%,
01/19/10 981,297
10,000,000 LNR Property Corp.
Initial Tranche B Term
Loan, 8.12%, 07/12/11 10,078,800
2,500,000 November 2005 Land
Investors, LLC
Second Lien Term Loan,
12.50%, 04/24/12 2,525,000
7,500,000 Rubicon GSA II LLC
Term Loan, 8.09%, 08/30/08 7,500,000
Westgate Investments LLC
Senior Secured Loan,
7,391,901 13.00%, 07/15/10 (d) 7,687,577
Senior Unsecured Loan,
1,475,000 18.00%, 08/03/12 1,534,000
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41,754,511
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SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 3
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
INFORMATION TECHNOLOGY - 5.8%
2,000,000 DTN, Inc.
First Lien Tranche C Term
Loan, 03/10/13 (b) 2,010,000
575,000 GXS Worldwide, Inc.
First Lien Term Loan,
07/29/11 (b) 583,625
Infor Enterprise Solutions
Holdings, Inc.
Delayed Draw Term Loan,
2,736,000 9.12%, 07/28/12 2,766,780
Initial US Term Facility,
5,244,000 9.12%, 07/28/12 5,279,397
Second Lien Term Loan US,
7,000,000 11.57%, 03/02/14 7,148,750
Stage One U.S. Bridge
3,069,304 Facility, 10.27%, 07/29/13 3,069,304
2,000,000 Metrologic Instruments, Inc.
Second Lien Term Loan,
11.82%, 12/21/13 2,025,000
8,000,000 NameMedia, Inc.
Term Loan, 11.37%,
08/31/08 8,040,000
997,500 Open Text Corp.
Term Loan, 7.86%, 10/02/13 1,004,981
2,444,444 Secure Computing Corp.
Term Loan, 8.62%, 08/31/13 2,473,484
2,500,000 Semiconductor Components
Industries, LLC
Term Loan, 7.06%, 09/06/13 2,516,650
1,840,000 Serena Software, Inc.
Term Loan, 7.61%, 03/11/13 1,850,065
2,000,000 Spansion LLC
Term Loan B, 8.53%,
11/01/12 2,017,520
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40,785,556
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MANUFACTURING - 4.9%
6,982,500 Acument Global Technologies, Inc.
Term Loan, 8.92%, 08/11/13 7,034,869
2,985,000 CST Industries, Inc.
Term Loan, 8.12%, 08/09/13 2,979,179
913,043 FR X Ohmstede Acquisitions
Co. Term B Loan, 8.38%,
08/09/13 918,750
3,000,000 Generac Acquisition Corp.
Second Lien Term Loan,
05/12/14 (b) 3,007,500
5,960,000 Global Petroleum, Inc.
Term Loan, 9.85%,
07/26/13 6,004,700
Matinvest 2 SAS
B-2 Facility, 7.90%,
2,250,000 06/22/14 2,273,895
C-2 Facility, 8.08%,
2,250,000 06/22/15 2,285,145
1,011,458 Mezz A USD Facility,
13.54%, 06/22/16 1,036,745
Prysmian Power Cables &
Systems, Inc.
B3b Term Loan, 7.88%,
1,525,200 08/25/13 1,532,826
C5b Term Loan, 8.38%,
381,300 08/25/13 385,113
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
MANUFACTURING (CONTINUED)
Quantum Corp.
First Lien Term Loan,
2,916,667 9.44%, 08/22/12 2,934,896
Second Lien Term Loan,
1,000,000 13.69%, 08/22/13 1,007,500
2,000,000 Ray Acquisition SCA
Term Loan B3-A US, 7.61%,
08/02/14 2,006,880
1,000,000 TFS Acquisition Corp.
Term Loan, 08/03/13 (b) 1,007,500
---------------
34,415,498
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METALS/MINERALS - OTHER METALS/MINERALS - 2.1%
1,326,316 Euramax International
Holdings B.V.
Second Lien European
Loan, 12.36%, 06/29/13 1,317,615
Euramax International, Inc.
First Lien Domestic Term
2,884,136 Loan, 7.88%, 06/29/12 2,877,647
Second Lien Domestic Term
3,673,684 Loan, 12.36%, 06/29/13 3,649,585
1,530,450 Oglebay Norton Co.
Tranche B Term Loan,
7.86%, 07/31/12 1,545,754
1,989,950 PinnOak Resources, LLC
Term Loan, 8.78%, 11/23/12 1,960,100
1,736,875 United Central Industrial
Supply Co., L.L.C.
Term Loan, 8.32%, 03/31/12 1,744,483
1,466,481 Universal Buildings
Products, Inc.
Term Loan, 8.86%, 04/28/12 1,459,149
---------------
14,554,333
---------------
RETAIL - 5.2%
3,151,476 Blockbuster Entertainment Corp.
Tranche B Term Loan,
8.81%, 08/20/11 3,184,189
11,833,160 Burlington Coat Factory
Warehouse Corp.
Term Loan, 7.61%, 05/28/13 11,791,034
2,985,019 CSK Auto, Inc.
Term Loan, 8.68%, 06/30/12 3,014,869
994,565 Eddie Bauer, Inc.
Term Loan, 11.50%,
06/21/11 997,360
7,223,706 Home Interiors & Gifts, Inc.
Initial Term Loan, 10.46%,
03/31/11 5,300,394
4,028,354 Neiman Marcus Group, Inc.
Term Loan, 7.60%, 04/06/13 4,068,638
1,985,000 Sports Authority, Inc., The
Term Loan B, 7.64%,
05/03/13 1,993,377
6,000,000 Toys "R" Us
Tranche B Term Loan,
9.62%, 07/19/12 6,158,460
---------------
36,508,321
---------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 4
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
SERVICE - ENVIRONMENTAL SERVICES - 1.4%
944,681 Alliance Laundry Systems LLC
Term Loan, 7.60%, 01/27/12 951,766
997,475 LVI Services, Inc.
Tranche B Term Loan,
10.35%, 11/16/11 985,420
6,221,695 Safety-Kleen JPMP SK
Holdings Ltd.
GBP Term Loan B1, 7.88%,
08/02/13 6,237,249
1,627,119 Safety-Kleen Systems, Inc.
Synthetic Letter of
Credit, 7.88%, 08/02/13 1,631,187
---------------
9,805,622
---------------
SERVICE - OTHER SERVICES - 3.0%
3,000,000 Cydcor, Inc.
Second Lien Term Loan,
11.82%, 02/05/14 2,985,000
3,000,000 Education Management LLC
Term Loan C, 7.38%,
06/01/13 3,016,860
2,000,000 Koosharem Corp.
Second Lien Term Loan,
15.75%, 06/30/13 2,010,000
9,000,000 NES Rentals Holdings, Inc.
Second Lien Permanent Term
Loan, 12.13%, 07/20/13 9,135,000
1,458,815 Survey Sampling
International, LLC
Term Loan, 8.62%, 05/06/11
(b) 1,466,108
1,646,647 United Rentals, Inc.
Initial Term Loan, 7.32%,
02/14/11 1,664,398
745,000 Vanguard Car Rental USA
Holding, Inc.
Term Loan, 8.36%, 06/14/13 752,912
---------------
21,030,278
---------------
TELECOMMUNICATIONS - 3.6%
4,047,369 American Messaging Services, Inc.
Senior Secured Note,
11.62%, 09/03/08 4,077,724
933,333 Madison River Capital
Term B-1, 7.61%, 07/29/12 935,900
6,500,000 PaeTec Communications, Inc.
Initial Term LoanInitial
Term Loan, 8.82%, 02/28/13 6,589,375
Sorenson Communications, Inc.
Second Lien Term Loan,
5,000,000 12.37%, 02/16/14 5,087,500
Tranche B Term Loan,
5,957,049 8.36%, 08/16/13 5,984,988
1,237,500 Stratos Global Corp./Stratos
Funding LP
Term B Facility, 8.11%,
02/13/12 1,246,781
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
TELECOMMUNICATIONS (CONTINUED)
997,500 Time Warner Telecom Holdings
Inc. Term Loan B, 7.32%,
01/07/13 1,003,944
---------------
24,926,212
---------------
TRANSPORTATION - AUTO - 3.4%
310,307 Cooper-Standard Automotive
Canada Ltd.
Tranche B Term Loan,
7.88%, 12/23/11 311,858
Cooper-Standard Automotive, Inc.
Term Loan D, 7.88%,
992,462 12/23/11 997,425
Tranche C Term Loan,
83,280 7.88%, 12/23/11 83,696
3,000,000 Dana Corp.
DIP Term Loan, 10.55%,
04/13/08 3,004,680
5,000,000 Delphi Corp.
Second Lien DIP Term Loan,
8.13%, 12/31/07 5,025,550
482,517 Environmental Systems
Products Holdings Inc.
Term Loan, 8.87%, 12/12/08 482,517
3,459,900 Key Plastics LLC
Term Loan C, 11.59%,
06/29/11 3,520,448
4,970,000 Lear Corp.
First Lien Term Loan B,
7.87%, 04/25/12 4,982,425
5,360,471 Motor Coach Industries
International, Inc.
Second Lien Term Loan,
12/01/08 (b) 5,786,856
---------------
24,195,455
---------------
TRANSPORTATION - LAND - 1.9%
1,990,000 New Century Transportation,
Inc. Term Loan B, 8.59%,
08/14/12 1,996,209
SIRVA Worldwide, Inc.
1,500,000 Revolver, 12/01/07 (b) 1,481,250
Tranche B Term Loan,
10,147,900 11.60%, 12/01/10 10,001,973
---------------
13,479,432
---------------
UTILITIES - 6.0%
5,000,000 ANP Funding I, LLC
Tranche A Term Loan,
8.86%, 07/29/10 5,043,750
Calpine Corp.
Second Lien Term Loan B,
1,000,000 13.00%, 07/16/07 1,121,000
Second Priority DIP Term
1,000,000 Loan, 9.37%, 12/20/07 1,005,620
Coleto Creek Power, LP
Second Lien Term Loan,
4,975,000 9.37%, 06/28/13 4,975,000
Synthetic Facility, 5.27%,
382,166 06/28/13 384,554
5,589,745 Term Loan, 8.12%, 06/28/13 5,628,203
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 5
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
SENIOR LOANS (CONTINUED)
UTILITIES (CONTINUED)
GBGH, LLC
First Lien Term Loan,
5,000,000 10.86%, 08/07/13 5,012,500
Second Lien Term Loan,
5,000,000 7.86%, 08/07/14 5,012,500
Magnolia Energy LP
Additional PCLC Facility,
30,043 12/14/11 (b) 29,668
465,044 Facility A, 12/14/11 (b) 459,230
4,504,913 Facility B, 12/14/11 (b) 4,448,602
1,000,000 NE Energy, Inc.
Second Lien Term Loan,
9.88%, 05/01/14 1,015,620
Reliant Energy, Inc.
New Term Loan, 7.70%,
571,429 12/01/10 576,480
Pre-Funded Letter of
428,571 Credit, 5.19%, 12/01/10 432,321
TECO Panda Generating Co. -
Gila River Power L.P.
Tranche A Term Loan,
1,284,151 06/01/12 (b) 2,288,999
Tranche B Term Loan,
1,235,472 06/01/20 (b) 2,186,785
TECO Panda Generating Co.-
Union Power Partners, L.P.
Tranche A Term Loan,
753,585 06/01/12 (b) 1,343,265
Tranche B Term Loan,
726,792 06/01/20 (b) 1,295,508
---------------
42,259,605
---------------
WIRELESS - CELLULAR/PCS - 1.0%
1,990,000 Cricket Communications, Inc.
Term B-1 Facility, 8.11%,
06/16/13 (b) 2,008,666
2,000,000 Insight Midwest Holdings, LLC
B Delayed Draw Term Loan,
7.61%, 04/06/14 2,020,000
3,000,000 Level 3 Financing, Inc.
New Term Loan, 7.57%,
03/13/14 3,015,000
---------------
7,043,666
---------------
Total Senior Loans
(Cost $631,705,129) 640,438,435
---------------
FOREIGN DENOMINATED SENIOR LOANS - 7.0%
CANADA - 0.9%
CAD
Persona Communications Corp.
First Lien CDN
Delayed-Draw Term Loan,
2,880,000 7.44%, 10/12/13 2,530,750
First Lien CDN Tranche B
3,695,455 Term Loan, 7.44%, 10/12/13 3,247,317
First Lien US Tranche B
924,545 Term Loan, 7.44%, 10/12/13 812,428
---------------
6,590,495
---------------
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
FOREIGN DENOMINATED SENIOR LOANS (CONTINUED)
FRANCE- 2.8%
EUR
Ypso Holding SA
Eur B (Acq) 1 Facility,
2,012,048 6.12%, 06/15/14 2,685,034
Eur B (Acq) 2 Facility,
3,282,814 6.12%, 06/15/14 4,380,844
Eur B (Recap) 1 Facility,
5,213,674 6.12%, 06/15/14 6,969,679
Eur C (Acq), 6.61%,
1,389,750 12/31/15 1,882,045
Eur C (Recap), 6.61%,
2,610,250 12/31/15 3,512,647
---------------
19,430,249
---------------
NETHERLANDS - 1.2%
EUR
Amsterdamse Beheer- En
Consultingmaatschappij B.V.
Casema
Kabelcom B Term Loan,
2,500,000 6.11%, 09/12/14 3,373,401
Kabelcom C Term Loan,
2,500,000 6.61%, 09/12/15 3,379,857
Kabelcom D Term Loan (2nd
1,500,000 Lien), 7.86%, 03/12/16 2,046,883
---------------
8,800,141
---------------
UNITED KINGDOM - 2.1%
GBP
250,000 Eggborough Power Ltd.
Term Loan, 7.00%, 03/31/22
(b) 1,716,191
Mobileserv Ltd.
Facility B , 7.65%,
3,250,000 09/22/14 6,388,383
Facility C, 8.15%,
3,250,000 09/22/15 6,403,810
---------------
14,508,384
---------------
Total Foreign Denominated
Senior Loans
(Cost $47,306,585) 49,329,269
---------------
CORPORATE NOTES AND BONDS - 28.4%
AEROSPACE - AEROSPACE/DEFENSE - 0.4%
5,000,000 Delta Airlines, Inc.
8.00%, 06/03/23 2,812,500
---------------
AUTOMOTIVE - 0.3%
2,400,000 Ford Motor Co.
9.98%, 02/15/47 2,202,000
---------------
BROADCASTING - 0.9%
6,000,000 Umbrella Acquisition
9.75%, 03/15/15 (e) 6,007,500
---------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 6
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
CORPORATE NOTES AND BONDS (CONTINUED)
CABLE - US CABLE - 2.0%
CCH I Holdings LLC
1,000,000 9.92%, 04/01/14 895,000
1,000,000 13.50%, 01/15/14 1,015,000
CCH I LLC
5,500,000 11.00%, 10/01/15 5,733,750
2,500,000 11.75%, 05/15/14 2,406,250
1,000,000 CCO Holdings, LLC
8.75%, 11/15/13 1,040,000
2,000,000 Charter Communications Inc.
5.88%, 11/16/09 2,722,500
---------------
13,812,500
---------------
CHEMICALS - SPECIALTY CHEMICALS - 1.8%
Solutia Inc.
8,000,000 10/15/27 (f) 7,640,000
5,500,000 10/15/37 (f) 5,252,500
---------------
12,892,500
---------------
CONSUMER NON-DURABLES - 1.0%
Ames True Temper, Inc.
3,000,000 9.36%, 01/15/12 (g) 3,082,500
1,500,000 10.00%, 07/15/12 1,462,500
1,100,000 Remington Arms Co., Inc.
10.50%, 02/01/11 1,067,000
1,875,000 Solo Cup Co.
8.50%, 02/15/14 1,605,469
---------------
7,217,469
---------------
DIVERSIFIED MEDIA - 0.8%
4,500,000 Network Communications, Inc.
10.75%, 12/01/13 4,618,125
1,000,000 PRIMEDIA, Inc.
10.74%, 05/15/10 (g) 1,040,000
---------------
5,658,125
---------------
ENERGY - EXPLORATION & PRODUCTION - 0.3%
1,750,000 Opti Canada, Inc.
8.25%, 12/15/14 (e) 1,828,750
---------------
FINANCIAL - 0.3%
2,000,000 Penhall International, Corp.
12.00%, 08/01/14 (e) 2,170,000
---------------
FOOD AND DRUG - 1.0%
496,383 Cinacalcet Royalty Sub LLC
8.00%, 03/30/17 (h) 565,876
Rite Aid Corp.
2,500,000 7.50%, 03/01/17 2,481,250
4,000,000 8.63%, 03/01/15 3,810,000
---------------
6,857,126
---------------
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
CORPORATE NOTES AND BONDS (CONTINUED)
FOOD/TOBACCO - 2.4%
Chiquita Brands
International, Inc.
3,000,000 7.50%, 11/01/14 2,718,750
5,000,000 8.88%, 12/01/15 4,725,000
10,000,000 Swift & Co., PIK Holdco Notes
8.00%, 03/19/10 (h) 9,500,000
---------------
16,943,750
---------------
FOREST PRODUCTS - PAPER - 0.9%
4,000,000 Graphic Packaging
International, Inc.
9.50%, 08/15/13 4,275,000
1,500,000 Impress Metal Packaging
Holdings B.V.
8.49%, 09/15/13 (g) (e) 1,545,000
500,000 Newpage Corp.
12.00%, 05/01/13 545,000
---------------
6,365,000
---------------
GAMING/LEISURE - OTHER LEISURE - 1.1%
4,500,000 Six Flags, Inc.
8.88%, 02/01/10 4,556,250
3,000,000 Trump Entertainment Resorts
Holdings, LP
8.50%, 06/01/15 3,045,000
---------------
7,601,250
---------------
HEALTHCARE - ACUTE CARE - 4.2%
16,000,000 Argatroban Royalty Sub
LLC., 12.00%, 09/30/14 (h) 16,080,000
HCA, Inc.
800,000 6.30%, 10/01/12 750,000
3,000,000 8.36%, 04/15/24 2,747,415
9,000,000 9.63%, 11/15/16 (e) 9,742,500
---------------
29,319,915
---------------
HEALTHCARE - MEDICAL PRODUCTS - 0.8%
250,000 Medquest, Inc., Series B
11.88%, 08/15/12 228,750
5,625,000 Rotech Healthcare, Inc.
9.50%, 04/01/12 5,596,875
---------------
5,825,625
---------------
HOUSING - BUILDING MATERIALS - 0.1%
1,000,000 Builders FirstSource, Inc.
9.61%, 02/15/12 (g) 1,020,000
---------------
INFORMATION TECHNOLOGY - 1.0%
6,000,000 MagnaChip Semiconductor
8.60%, 12/15/11 (g) 5,175,000
2,000,000 NXP BV/NXP Funding LLC
8.11%, 10/15/13 (g) (e) 2,067,500
---------------
7,242,500
---------------
MANUFACTURING - 0.2%
1,000,000 Polypore, Inc.
8.75%, 05/15/12 1,035,000
---------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 7
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
PRINCIPAL AMOUNT ($) VALUE ($)
--------------------- ------------
CORPORATE NOTES AND BONDS (CONTINUED)
RETAIL - 1.7%
9,500,000 Blockbuster, Inc.
9.00%, 09/01/12 9,642,500
2,000,000 Gregg Appliances, Inc.
9.00%, 02/01/13 2,110,000
---------------
11,752,500
---------------
SERVICE - OTHER SERVICES - 1.1%
7,550,000 HydroChem Industrial
Services, Inc.
9.25%, 02/15/13 (e) 7,776,500
---------------
TELECOMMUNICATIONS - 1.6%
12,000,000 Digicel Group, Ltd.
9.13%, 01/15/15 (e) 11,520,000
---------------
TRANSPORTATION - 1.5%
5,000,000 American Tire Distributors
Holdings, Inc.
11.61%, 04/01/12 (g) 5,025,000
Federal-Mogul Corp.
1,000,000 07/01/06 (f) 895,000
5,000,000 01/15/09 (f) 4,475,000
---------------
10,395,000
---------------
UTILITIES - 0.1%
1,000,000 Enron Corp.
6.63%, 11/15/05 (f) 358,750
---------------
WIRELESS COMMUNICATIONS - 2.9%
232,750 Clearwire Corp.
11.00%, 08/15/10 (e) (h) 240,896
SunCom Wireless Holdings, Inc.
5,000,000 8.50%, 06/01/13 5,175,000
1,550,000 8.75%, 11/15/11 1,596,500
13,035,000 9.38%, 02/01/11 13,426,050
---------------
20,438,446
---------------
Total Corporate Notes and
Bonds
(Cost $183,301,582) 199,052,706
---------------
TRADE CLAIMS - 0.3%
3,750,000 Delta Airlines, Inc.
Trade Claim , 12/12/07 (b) 1,984,388
---------------
Total Trade Claims
(Cost $2,428,125) 1,984,388
---------------
SHARES
---------------
COMMON STOCKS - 7.2%
33,333 Chesapeake Energy Corp. 1,029,323
2,338,938 Delphi Corp. 6,782,920
28,534 Diamond Offshore Drilling 2,309,827
16,800 Ferro Corp. 363,048
60,000 GlobalSantaFe Corp. 3,700,800
563,258 Graphic Packaging Corp. (i) 2,669,843
121,072 Gray Television, Inc., Class A 1,265,202
357,343 GrayTelevision, Inc. 3,723,514
SHARES VALUE ($)
--------------------- ------------
COMMON STOCKS (CONTINUED)
225,000 ICO Global Communications
Holding Ltd. (i) 877,500
100,067 Louisiana-Pacific Corp. 2,007,344
44,493 Newpark Resources, Inc. (i) 313,676
59,000 Noble Corp. 4,642,120
29,800 NRG Energy, Inc. 2,146,792
177,509 Owens Corning, Inc. 5,655,424
136,990 Safety-Kleen Systems, Inc. 2,979,533
317,535 United Rentals, Inc. 8,732,212
8 Westgate Investments LLC 0
47,150 Williams Cos., Inc. 1,341,889
---------------
Total Common Stocks
(Cost $48,470,025) 50,540,967
---------------
PURCHASED PUT OPTIONS - 0.0%
74 Corus Bankshares, Inc. Swap
OTC Strike @ $17.50 Exp.
06/16/07
Broker: Susquehanna
International Group 21,830
---------------
Total Purchased Put Options
(Cost $20,081) 21,830
---------------
WARRANTS - 0.0%
20,000 Clearwire Corp., expires
08/15/10 (i) (h) 7,500
5,031 OpBiz LLC
08/31/10 (i) 0
10 OpBiz LLC
08/31/10 (i) 0
---------------
Total Warrants
(Cost $0) 7,500
---------------
TOTAL INVESTMENTS - 134.3% 941,375,095
---------------
(cost of $913,231,527) (j)
OTHER ASSETS & LIABILITIES, NET - (34.3)% (240,625,701)
---------------
NET ASSETS APPLICABLE TO COMMON
SHAREHOLDERS - 100.0% 700,749,394
===============
---------------------
Investments sold short outstanding as of March 31, 2007:
Equity Securities Shares Value
-------------------------------------------------------
Freemont General Corp. 105,835 $733,437
Imperial Sugar Co. 76,995 2,581,642
Indymac Bancorp, Inc. 90,501 2,900,557
Superior Industries
International, Inc. 104,250 2,171,528
------------
Total Investments sold short
(Proceeds $7,338,464) $8,387,164
------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 8
INVESTMENT PORTFOLIO (UNAUDITED) (CONTINUED)
MARCH 31, 2007 HIGHLAND CREDIT STRATEGIES FUND
Forward foreign currency contracts outstanding as of March 31, 2007 were as
follows:
Principal Net
Contracts Amount Unrealized
to Buy or Covered by Appreciation
to Sell Currency Contracts Expiration (Depreciation)
-----------------------------------------------------------------
Sell EUR 18,000,000 08/01/07 ($654,030)
Sell EUR 11,000,000 08/02/07 (388,328)
--------------
($1,042,358)
--------------
(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 (d), 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 March 31,
2007. Senior loans, while exempt from registration under the Security Act
of 1933 (the "1933 Act"), 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 March
31, 2007, the Portfolio had unfunded loan commitments of $7,321,723, which
could be extended at the option of the Borrower, pursuant to the following
loan agreements
UNFUNDED
BORROWER LOAN COMMITMENT
-------------------------------------- -------------------
Drake Hotel Acquisition $ 968,250
Millennium Digital Media Systems, LLC 1,238,322
North American Membership Group, Inc. 2,715,151
Oglebay Norton Co. 400,000
Sorenson Communications, Inc. 2,000,000
-------------------
$ 7,321,723
===================
(d) Fixed Rate Senior Loan.
(e) Security exempt from registration pursuant to Rule 144A under the 1933
Act. These securities may only be resold, in transactions exempt from
registration, to qualified institutional buyers. At March 31, 2007, the
value of these securities amounted to $42,898,646 or 6.1% of net assets.
This security has been determined by the Adviser to be a liquid security.
(f) The issuer is in default of certain debt covenants. Income is not being
accrued.
(g) Floating rate note. The interest rate shown reflects the rate in effect
at March 31, 2007.
(h) Represents fair value as determined in good faith under the direction of
the Board of Trustees.
(i) Non-income producing security.
(j) Cost for Federal income tax purposes is $913,231,527.
Gross unrealized appreciation $ 31,737,087
Gross unrealized depreciation (3,593,519)
-------------------
Net unrealized appreciation $ 28,143,568
===================
DIP Debtor in Possession
PIK Payment in Kind
SECURITY VALUATION:
In computing the Fund's net assets attributable to Common Shares, securities
with readily available market quotations use those quotations for valuation.
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 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 will be valued 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
deter-mined and calculation of the Fund's net asset value), such securities are
valued at their fair value, as determined by Highland Capital Management, L.P.
("Highland" or the "Investment Adviser") in good faith in accordance with
procedures approved 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 deter-mined 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 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. Short-term investments, that is, those with a remaining maturity of 60
days or less, are valued at amortized cost. Repurchase agreements are valued at
cost plus accrued interest. Foreign price quotations are converted to U.S.
dollar equivalents using the 4 PM London Time Spot Rate.
For more information with regard to significant accounting policies, see the
most recent annual report filed with the Securities and Exchange Commission.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 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 MAY 15, 2007
----------------------------------------------------------------------------
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 MAY 15, 2007
----------------------------------------------------------------------------
By (Signature and Title)* /S/ M. JASON BLACKBURN
-------------------------------------------------------
M. Jason Blackburn, Chief Financial Officer
(principal financial officer)
Date MAY 15, 2007
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.