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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-21869

 

 

NEXPOINT CREDIT STRATEGIES FUND

(Exact name of registrant as specified in charter)

 

 

200 Crescent Court

Suite 700

Dallas, Texas 75201

(Address of principal executive offices)(Zip code)

 

 

NexPoint Advisors, L.P.

200 Crescent Court

Suite 700

Dallas, Texas 75201

(Name and Address of Agent for Service)

 

 

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

Date of fiscal year end: December 31

Date of reporting period: December 31, 2016

 

 

 

 

 

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Item 1. Reports to Stockholders.

A copy of the Annual Report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”), is attached herewith.

 

2

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NexPoint Credit Strategies Fund

 

 

 

Annual Report

December 31, 2016

 

 

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NexPoint Credit Strategies Fund

 

TABLE OF CONTENTS

 

Portfolio Manager Commentary			1
Fund Profile			3
Financial Statements			4
Investment Portfolio			5
Statement of Assets and Liabilities			9
Statement of Operations			10
Statements of Changes in Net Assets			11
Statement of Cash Flows			12
Financial Highlights			13
Notes to Financial Statements			14
Report of Independent Registered Public Accounting Firm			28
Additional Information			29
Important Information About This Report			41

Economic and market conditions change frequently.

There is no assurance that the trends described in this report will continue or commence.

 

Privacy Policy

We recognize and respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.

Collection of Information. We may collect nonpublic personal information about you from the following sources:

 

•

Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone contacts;

•

Web site information, including any information captured through the use of “cookies”; and

•

Account history, including information about the transactions and balances in your accounts with us or our affiliates.

Disclosure of Information. We may share the information we collect with our affiliates. We may also disclose this information as otherwise permitted by law. We do not sell your personal information to third parties for their independent use.

Confidentiality and Security of Information. We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.

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PORTFOLIO MANAGER COMMENTARY (unaudited)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

2016 Performance

In 2016, the net asset value (“NAV”) of the NexPoint Credit Strategies Fund (the “Fund”) was up 22.54% while its market price was up 27.69%, including reinvested dividends, reducing the discount to NAV during the year. The Fund outperformed its benchmark, the Credit Suisse Hedge Fund Index that returned 1.25% as well as other Allocation and Fixed Income closed-end funds. The Fund had a rough start to the year as financial markets tumbled amid slowing global growth concerns and commodity price weakness. However, as commodity prices rebounded, credit and equity markets normalized enabling the Fund’s performance to rebound significantly.

On February 15, 2017, the Fund received the Alt Credit U.S. Performance Award for the Top ‘40 Act Credit Fund over the trailing 5-year period.

 

NHF		1 Year				3 Year				5 Year				Inception to Date
NAV			22.54	%			5.76	%			16.79	%			2.70	%
Market Price			27.69	%			11.05	%			19.06	%			4.91	%

For the year ended December 31, 2016, the top five performing investments in the portfolio were the Fund’s positions in Vistra Energy (the former TXU), NexPoint Real Estate Opportunities, LLC, Grayson CLO Preferred Equity, Medivation common equity and Stratford CLO Preferred Equity. The top five underperforming investments in the portfolio for the year ended December 31, 2016 were Twitter common equity, Anadarko Petroleum, Salesforce.com, Zillow Group common equity, and Aberdeen Loan Funding Preferred Equity. Overall, the Fund’s equity investments detracted approximately 6.5% from the Fund’s NAV return. The Fund’s leading contributors to performance included its investments in CLOs, Loans, and REITs, which contributed approximately 12%, 11.25%, and 2%, respectively, to the Fund’s NAV return.

Portfolio Highlights

Vistra Energy, one of the largest, high conviction positions in the portfolio that we continued to hold after it significantly underperformed in 2015, was the largest contributor to the Fund’s overall performance in 2016. To provide a little history on the position, Vistra Energy is the largest power generator and retailer in Texas. The company has an integrated business platform that provides stability to cash flow yet opportunity for upside as power prices recover. Texas is a unique marketplace for an electricity provider: it is the second largest state economy and one of the fastest growing; electricity produced in Texas is consumed in Texas, making it subject to favorable supply-demand dynamics; and its power market is unregulated with compensation achieved through supply-demand imbalances. Their former parent company, Energy Future Holdings, was taken private in a 2007 leveraged buyout led by KKR, TPG and Goldman Sachs. Stumbling after being saddled with roughly $40 billion in debt, the company eventually filed for Chapter 11 bankruptcy in April 2014.

The Fund’s initial investment was in the company’s 1^st Lien Term Loan following the bankruptcy announcement. Our view was that a combination of technical factors (large position held in many loan funds many of whom became forced sellers) and fundamental factors (severely depressed power prices in the Texas market) created an opportunity to invest in a critical piece of energy infrastructure at an attractive valuation during the bottoming of the cycle. Our position in the fulcrum security gave us an opportunity to participate in equity upside post-bankruptcy while providing downside protection during bankruptcy as the position earned an approximate 15% current yield.

The investment contributed to the Fund’s 2016 performance (Vistra Energy common equity +12.7% since emergence), and we believe the foundation is set for the position to provide positive returns in the future. The company emerged from bankruptcy in October (which converted our 1^st lien TL into common equity), hired new senior management, initiated guidance for 2016 and 2017 EBITDA and free cash flow which were above projections provided during the bankruptcy process, and paid a $2.32/share special dividend.

Looking ahead to 2017 and beyond, we view the investment thesis in three parts: 1) standalone valuation convergence to peers post-bankruptcy, 2) cyclical earnings upside, and 3) potential for strategic value creation opportunities. With this in mind, we believe that catalysts from strategic value creation opportunities along with earnings recovery will provide attractive returns for this investment going forward.

The Fund’s allocation to CLOs, both CLO debt and CLO equity, contributed the most to the Fund’s NAV return. Following the selloff in credit towards the end of 2015, beginning of 2016, CLOs recovered markedly as investor interest in risk assets improved and markets normalized throughout the remainder of the year. CLOs can be effected by broad technical issues that hit credit markets, but risk is muted by their long-term financing structure.

Taking into consideration the Feds rate hike plans, we anticipate a strong technical demand for floating rate securities and thus CLOs. This optimism is tempered somewhat given the realization that higher rates may impact levered balance sheets. We also believe that CLOs are still cheap on a fundamental basis. Recently implemented CLO risk retention regulations as well as post-crisis banking reform has reduced CLO demand and kept spreads historically wide (despite current spread narrowing). We

 

Annual Report						1

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PORTFOLIO MANAGER COMMENTARY (unaudited)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

don’t expect the administration to eliminate risk retention rules, but we believe small tweaks to banking regulations could allow smaller banks to purchase more CLOs. And with market risk appetite rising with expectations for nominal growth, fiscal spending optimism, oil production cuts, and global growth, we expect CLO demand to pick up and spreads to compress. With a favorable technical picture, attractive yields, and structural protections, we believe CLOs should continue to offer investors attractive risk-adjusted returns.

Lastly, the preferred equity real estate positions in one of the Fund’s internally owned REIT subsidiaries, NexPoint Real Estate Capital, LLC. (“NREC”), made a meaningful contribution to the Fund’s performance. For the full year 2016, NREC received gross distributions of $25.0 million, which included $16.3 million from two investments that were redeemed during the period. The first, a $2.8 million position in an apartment complex in in Galveston, Texas was redeemed in February 2016 after a 22-month investment period. This investment earned an internal rate of return of 17.89%. The second position was redeemed in April 2016 after only a 7-month investment period when the borrower chose to redeem our $13 million position. A Dallas-based apartment complex, this investment earned an internal rate of return of 19.36%. As of December 31, 2016, NREC had 14 preferred equity positions representing $74.0 million of invested capital. For the full year 2016, those investments earned an unlevered yield of 11.87%.

We believe financing shortfalls within the commercial real estate market have become a common occurrence and are likely to persist in the future. Due to new regulations designed to reduce risk at financial institutions, real estate lenders have become more sensitive to what regulators have termed “high-volatility commercial real estate” (HVCRE), leaving developers and investors with large financing shortfalls — our preferred and mezzanine structure is designed to fill this gap. Preferred and mezzanine lenders can provide value to real estate owners and operators by developing structured financial products to capitalize acquisitions, refinance, or enhance the property. Preferred and mezzanine structures usually include downside protection via change of control provisions, foreclosures, forced-sale rights, and put options in the event of default. Our preferred and mezzanine investments are structured in a flexible manner in an attempt to help mitigate risk, such as real estate market cycles, maturing first mortgages, etc. We estimate the term of each of our investments to be roughly 36 months.

As of December 31, 2015 and December 31, 2016, the Fund’s investments were allocated among the following asset classes.

 

2015		2016

The Fund’s Strategy

The Fund’s investment adviser, NexPoint Advisers L.P. (the “Investment Adviser”), manages the Fund pursuant to a multi-strategy investment program that attempts to exceed the return of the Fund’s benchmark in a transparent, registered fund format, with monthly dividends. We will typically allocate the Fund’s investments in the following asset classes: public equities, private equity investments, collateralized loan obligation (CLOs) debt, high yield bonds, syndicated floating rate bank loans, real estate assets, CLO equity, non-traditional yield oriented investments and may hedge exposure where necessary.

Shareholder Loyalty Program

In July 2012, we developed and implemented a unique and creative Shareholder Loyalty Program (the “Program”) that we believe rewards long-term shareholders while aligning the interests of the portfolio manager and other employees of the Investment Adviser and its affiliates with those of the Fund’s shareholders. The primary purpose of the Program is to promote shareholder loyalty. Subject to certain limitations, the Program offers shareholders a 2% gross-up on all new contributions made through accounts held by the Program’s administrator that are held for at least 12-months after initial purchase date. The Program was offered to employees of NexPoint and affiliates beginning in July 2012 and has increased direct employee ownership in the Fund. All costs of the program, including the cost of the gross-up on purchases and dividend reinvestments, are paid by the Investment Adviser, not by the Fund.

 

2						Annual Report

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FUND PROFILE (unaudited)

 

 

 

		NexPoint Credit Strategies Fund

 

NexPoint Credit Strategies Fund seeks to provide both current income and capital appreciation.

 

$414.8 million

 

The information below provides a snapshot of NexPoint Credit Strategies Fund at the end of the reporting period. NexPoint Credit Strategies Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.

 

 

Top 10 Holdings as of 12/31/2016 (%)(2)
NexPoint Real Estate Capital, LLC (Common Stocks)			22.5
NexPoint Real Estate Opportunities, LLC (Common Stocks)			17.3
TerreStar Corporation (Common Stocks)			8.4
Metro-Goldwyn-Mayer, Inc. (Common Stocks)			6.7
Vistra Energy Corp. (Common Stocks)			6.1
Twitter, Inc. (Common Stocks)			5.7
Grayson CLO, Ltd. (Preferred Stocks)			5.2
Stratford CLO, Ltd. (Preferred Stocks)			5.0
Greenbriar CLO, Ltd. (Preferred Stocks)			4.4
Specialty Financial Products, Ltd. (Common Stocks)			4.2

 

(1)

Quality is calculated as a percentage of total bonds and notes. Sectors and holdings are calculated as a percentage of total assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer-specific factors as cash flows, capital structure and leverage ratios, ability to deleverage through free cash flow, quality of management, market positioning and access to capital, as well as such security specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral. Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not the Fund itself. Quality ratings are subject to change.

 

(2)	Top 5 Sectors and Top 10 Holdings tables are calculated as a percentage of total net assets.

 

Annual Report						3

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FINANCIAL STATEMENTS

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

A guide to understanding the Fund’s financial statements

 

Investment Portfolio		The Investment Portfolio details all of the Fund’s holdings and its market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification.
Statement of Assets and Liabilities		This statement details the Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and noninvestment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period.
Statement of Operations		This statement reports income earned by the Fund and the expenses incurred by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations.
Statement of Changes in Net Assets		This statement details how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting period. The Statement of Changes in Net Assets also details changes in the number of shares outstanding.
Statement of Cash Flows		This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period.
Financial Highlights		The Financial Highlights demonstrate how the Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).
Notes to Financial Statements		These notes disclose the organizational background of the Funds, certain of its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.

 

4						Annual Report

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INVESTMENT PORTFOLIO

 

 

 

As of December 31, 2016		NexPoint Credit Strategies Fund

 

 

See accompanying Notes to Financial Statements.						5

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INVESTMENT PORTFOLIO (continued)

 

 

 

As of December 31, 2016		NexPoint Credit Strategies Fund

 

 

6						See accompanying Notes to Financial Statements.

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INVESTMENT PORTFOLIO (continued)

 

 

 

As of December 31, 2016		NexPoint Credit Strategies Fund

 

 

See accompanying Notes to Financial Statements.						7

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INVESTMENT PORTFOLIO (concluded)

 

 

 

As of December 31, 2016		NexPoint Credit Strategies Fund

 

 

8						See accompanying Notes to Financial Statements.

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STATEMENTS OF ASSETS AND LIABILITIES

 

 

 

As of December 31, 2016		NexPoint Credit Strategies Fund

 

		($)
Assets
Investments from unaffiliated issuers, at value (cost $581,967,097)			312,026,947
Affiliated issuers, at value (cost $316,211,267) (Note 11)			242,147,949
Total Investments, at value (cost $898,178,364)			554,174,896
Receivable for:
Due from broker			1,736,660
Investments sold			42,154
Dividends and interest			6,055,546
Prepaid expenses and other assets			694,528
Total assets			562,703,784
Liabilities
Due to custodian			656,200
Due to broker			13,025,757
Notes payable (Note 6)			124,983,081
Securities sold short, at value (proceeds $7,634,868) (Notes 2 and 9)			6,958,398
Payable for:
Distributions to shareholders			345
Investments purchased			1,050,220
Investment advisory and administration fees (Note 8)			531,530
Interest expense (Note 6)			259,999
Accrued expenses and other liabilities			438,548
Total liabilities			147,904,078
Commitments and Contingencies (Note 9)
Net Assets Applicable to Common Shares			414,799,706
Net Assets Consist of:
Par value (Note 1)			16,022
Paid-in capital			861,671,474
Accumulated (distributions in excess of) net investment income			29,688,677
Accumulated net realized loss from investments, securities sold short, written options, futures contracts and foreign currency transactions			(133,249,469	)
Net unrealized appreciation (depreciation) on investments and securities sold short			(343,326,998	)
Net Assets Applicable to Common Shares			414,799,706
Common Shares
Net Assets			414,799,706
Shares outstanding (unlimited authorization)			16,022,326
Net asset value per share (Net assets/shares outstanding)			25.89

 

See accompanying Notes to Financial Statements.						9

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STATEMENTS OF OPERATIONS

 

 

 

For the Year Ended December 31, 2016		NexPoint Credit Strategies Fund

 

		($)
Investment Income
Income:
Dividends from unaffiliated issuers			41,053,498
Dividends from affiliated issuers (Note 11)			13,256,016
Securities lending income (Note 4)			8,303
Interest from unaffiliated issuers			20,556,096
Interest from affiliated issuers (Note 11)			2,091,696
Other income			51,812
Total Income			77,017,421
Expenses:
Investment advisory (Note 8)			5,419,265
Administration fees (Note 8)			1,083,853
Transfer agent fees			67,779
Trustees fees (Note 8)			77,503
Accounting services fees			137,552
Audit fees			373,693
Legal fees			426,166
Registration fees			21,637
Insurance			63,798
Reports to shareholders			197,054
Interest expense (Note 6)			3,516,046
Dividends and fees on securities sold short (Note 2)			267,915
Other			83,575
Total operating expenses			11,735,836
Net investment income			65,281,585
Net Realized and Unrealized Gain (Loss) on Investments
Realized gain (loss) on:
Investments from unaffiliated issuers			(55,430,901	)
Securities sold short (Note 2)			4,803,104
Written options contracts (Note 3)			302,877
Futures contracts (Note 3)			(220	)
Foreign currency related transactions			(1,441	)
Change in unrealized appreciation (depreciation) on:
Investments			73,643,756
Securities sold short (Note 2)			(2,910,160	)
Written options contracts (Note 3)			6,626,614
Foreign currency related translations			81,633
Net realized and unrealized gain (loss) on investments			27,115,262
Total increase in net assets resulting from operations			92,396,847

 

10						See accompanying Notes to Financial Statements.

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STATEMENTS OF CHANGES IN NET ASSETS

 

 

 

		NexPoint Credit Strategies Fund

 

		Year Ended December 31, 2016 ($)				Year Ended December 31, 2015 ($)
Increase (Decrease) in Net Assets Operations:
Net investment income			65,281,585				139,812,878
Net realized gain (loss) on investments, securities sold short and foreign currency transactions			(50,326,581	)			18,008,984
Net change in unrealized depreciation on investments, securities sold short, written options contracts and translation of assets and liabilities denominated in foreign currency			77,441,843				(274,559,990	)
Net increase (decrease) from operations			92,396,847				(116,738,128	)
Distributions Declared to Common Shareholders
From net investment income			(44,778,032	)			(45,994,364	)
Spin-Off (Note 12)			—				(332,056,224	)
Total distributions declared to common shareholders			(44,778,032	)			(378,050,588	)
Total increase/(decrease) in net assets from common shares			47,618,815				(494,788,716	)
Share transactions:
Value of distributions reinvested			1,102,742				—
Cost of shares redeemed (Note 13)			—				(10,532	)
Net increase (decrease) from shares transactions			1,102,742				(10,532	)
Total increase (decrease) in net assets			48,721,557				(494,799,248	)
Net Assets
Beginning of period			366,078,149				860,877,397
End of period (including undistributed net investment income of $29,688,677 and $(1,123,636) respectively)			414,799,706				366,078,149
Change in Common Shares
Issued for distribution reinvested			52,973				—
Shares redeemed (Note 13)			(302	)			(713	)
Net increase/(decrease) in common shares			52,671				(713	)

 

See accompanying Notes to Financial Statements.						11

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STATEMENT OF CASH FLOWS

 

 

 

For the Six Months Ended December 31, 2016		NexPoint Credit Strategies Fund

 

		($)
Cash Flows Provided by (Used for) Operating Activities:
Net increase in net assets resulting from operations			92,396,847
Adjustments to Reconcile Net Investment Income to Net Cash Provided by Operating Activities
Operating Activities:
Purchases of investment securities from unaffiliated issuers			(319,810,995	)
Proceeds from disposition of investment securities from unaffiliated issuers			367,685,688
Proceeds from disposition of investment securities from affiliated issuers			6,576,895
Purchases of investment securities from affiliated issuers			(2,515,865	)
Purchases of securities sold short			(13,206,822	)
Proceeds of securities sold short			688,732
Paydowns at cost			13,324,997
Net accretion of discount			(3,536,755	)
Net realized loss on investments from unaffiliated issuers			55,430,901
Net realized gain on securities sold short, written options contracts and foreign currency transa			(5,104,540	)
Net change in unrealized appreciation/(depreciation) on investments, securities sold short, written options contracts and translation on assets and liabilities denominated in foreign currency			(77,441,843	)
Decrease in due from broker			18,597,750
Decrease in receivable for investments sold			2,000,476
Increase in receivable for dividends and interest			(255,704	)
Increase in prepaid expenses and other assets			(631,474	)
Decrease in payable for investments purchased			(9,118,530	)
Increase in payable due to broker			13,025,757
Decrease in payables to related parties			(83,049	)
Decrease in payable to transfer agent fees			(20,699	)
Decrease in payable for interest expense			(95,930	)
Decrease in accrued expenses and other liabilities			(233,056	)
Net cash flow provided by operating activities			137,672,781
Cash Flows Received from (Used In) Financing Activities:
Decrease in notes payable			(90,942,234	)
Distributions paid in cash			(43,675,290	)
Net cash flow received from (used in) financing activities			(134,617,524	)
Effect of exchange rate changes on cash			80,192
Net Increase in Cash			3,135,449
Cash & Foreign Currency/Due to Custodian/Bank Overdraft of Foreign Currency:
Beginning of period			(3,791,649	)
End of period			(656,200	)
Supplemental disclosure of cash flow information:
Cash paid during the period for interest			3,611,976
Reinvestment of distributions			1,102,742

 

12						See accompanying Notes to Financial Statements.

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FINANCIAL HIGHLIGHTS

 

 

 

		NexPoint Credit Strategies Fund, Class A

 

Selected data for a share outstanding throughout each period is as follows:

 

		For the Years Ended December 31,
Common Shares Per Share Operating Performance:		2016				2015*				2014				2013				2012
Net Asset Value, Beginning of Year		$	22.92			$	53.92			$	11.34			$	7.46			$	6.94
Income from Investment Operations:
Net investment income			4.08				8.75	(a)			0.82				0.63				0.43
Net realized and unrealized gain/(loss)			1.69				(16.08	)			2.02				3.80				0.52
Total from investment operations			5.77				(7.33	)			2.84				4.43				0.95
Less Distributions Declared to Common Shareholders:
From net investment income			(2.80	)			(2.88	)			(0.70	)			(0.55	)			(0.43	)
From spin-off (Note 12)			—				(20.79	)			—				—				—
Total distributions declared to common shareholders			(2.80	)			(23.67	)			(0.70	)			(0.55	)			(0.43	)
Net Asset Value, End of Period		$	25.89			$	22.92			$	13.48			$	11.34			$	7.46
Market Value, End of Period		$	22.77			$	20.44			$	11.23			$	9.42			$	6.64
Market Value Total Return(b)			27.69	%			(18.09	)%			26.77	%			52.03	%			14.73	%
Ratios and Supplemental Data:
Net assets, end of period (in 000’s)		$	414,800			$	366,078			$	860,877			$	724,485			$	476,263
Common Share Information at End of Period:
Ratios based on average net assets of common shares:
Gross operating expenses(c)			3.12	%			3.43	%			2.48	%			2.82	%			3.14	%
Net investment income/(loss)			17.34	%			24.23	%(d)			6.45	%			7.01	%			6.00	%
Common and Preferred Share Information at End of Period:
Ratios based on average Managed Assets (as defined in Note 8) of common shares:
Gross operating expenses(c)			2.17	%			2.23	%			1.68	%			1.98	%			2.26	%
Net investment income (loss)			12.05	%			15.79	%(f)			4.38	%			4.91	%			4.32	%
Portfolio turnover rate(f)			41	%			31	%			59	%			74	%			92	%

 

*	Per share data prior to October 6, 2015 has been adjusted to give effect to a 4 to 1 reverse stock split. (See Note 13)

(a)	Includes non-recurring dividend from Freedom REIT. (see Note 12).

(b)	Based on market value per share. Distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan.

(c)	Supplemental expense ratios are shown below:

 

		For the Years Ended December 31,
		2016				2015				2014				2013				2012
Ratios based on average net assets of common shares:
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses)			3.12	%			3.43	%			2.48	%			2.82	%			3.14	%
Interest expense and commitment fees			0.93	%			0.71	%			0.50	%			0.60	%			0.92	%
Dividends and fees on securities sold short			0.07	%			0.24	%			0.07	%			0.05	%			0.01	%

 

		For the Years Ended December 31,
		2016				2015				2014				2013				2012
Ratios based on average Managed Assets of common shares:
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses)			2.17	%			2.23	%			1.68	%			1.98	%			2.26	%
Interest expense and commitment fees			0.65	%			0.46	%			0.34	%			0.42	%			0.66	%
Dividends and fees on securities sold short			0.05	%			0.15	%			0.04	%			0.03	%			0.01	%

 

(d)	Net investment income (excluding non-recurring dividend from Freedom REIT) was 9.76% (See Note 12)

(e)	Net investment income (excluding non-recurring dividend from Freedom REIT) was 6.36% (See Note 12)

(f)	Excludes in-kind activity

 

See accompanying Notes to Financial Statements.						13

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

14						Annual Report

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

Annual Report						15

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NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 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. A summary of the inputs used to value the Fund’s assets as of December 31, 2016 is as follows:

 

		Total value at December 31, 2016				Level 1 Quoted Price				Level 2 Significant Observable Inputs				Level 3 Significant Unobservable Inputs
Assets
U.S. Senior Loans
Chemicals		$	2,077,155			$	—			$	2,077,155			$	—
Energy			2,140,338				—				2,140,338				—
Gaming & Leisure			8,249,655				—				—				8,249,655
Housing			—				—				—				—	(2)
Media & Telecommunications			—				—				—				—	(2)
Service			12,114,577				—				12,114,577				—
Telecommunications			15,523,291				—				—				15,523,291
Utility			461,647				—				461,647				—
Foreign Denominated or Domiciled Senior Loans			4,062,619				—				4,062,619				—	(2)
Asset-Backed Securities			46,482,738				—				45,907,838				574,900
Corporate Bonds & Notes(1)			24,342,677				—				24,342,677				—
Foreign Corporate Bonds & Notes(1)			—				—				—				—	(2)
Sovereign Bonds			1,620,000				—				1,620,000				—
Common Stocks
Chemicals			4,802,703				—				843,196				3,959,507
Consumer Discretionary			6,731,405				6,731,405				—				—
Energy			4,056,997				4,056,997				—				—
Financial			22,459,389				4,889,687				—				17,569,702
Gaming & Leisure			—				—				—				—	(2)
Healthcare			751,200				—				—				751,200
Housing			909,331				—				—				909,331
Information Technology			23,626,048				23,626,048				—				—
Media & Telecommunications			28,970,335				1,197,376				27,772,959				—
Real Estate			6				—				—				6
Real Estate Investment Trust			165,366,446				—				—				165,366,446
Telecommunications			34,788,307				—				—				34,788,307
Utilities			25,821,562				25,087,401				734,161				—
Wireless Communications			1,525,851				1,525,851				—				—
Preferred Stocks(1)			114,343,041				—				114,343,041				—
Exchange-Traded Funds			89,388				89,388				—				—
Rights(1)
Utility			2,670,594				—				2,670,594				—
Warrants(1)
Energy			187,596				35,951				151,645				—
Gaming & Leisure			—				—				—				—	(2)
Total Assets		$	554,174,896			$	67,240,104			$	239,242,447			$	247,692,345
Liabilities
Securities Sold Short(1)		$	(6,958,398	)		$	(6,958,398	)		$	—			$	—
Total Liabilities		$	(6,958,398	)		$	(6,958,398	)		$	—			$	—
Total		$	547,216,498			$	60,281,706			$	239,242,447			$	247,692,345

 

(1)	See Investment Portfolio detail for industry breakout.

(2)	This category includes securities with a value of zero.

 

16						Annual Report

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December 31, 2016		NexPoint Credit Strategies Fund

 

The table below sets forth a summary of changes in the Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the year ended December 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 Gain/ (Losses)				Net Unrealized Gains/ (Losses)				Net Purchases				Net (Sales)				Balance as of December 31, 2016				Change in Un realized Gain/ (Loss) on Level 3 securities still held at period end
U.S. Senior Loans
Gaming & Leisure		$	4,476,048			$	—			$	—			$	—			$	—			$	3,322,090			$	451,517	(a)		$	—			$	8,249,655			$	3,322,090
Telecommunications			13,874,103				—				—				(2,345	)			—				11,354				1,640,179	(a)			—				15,523,291				11,354
Foreign Denominated or Domiciled Senior Loans			35,060				—				—				—				14,158				9,744				2,556				(61,518	)			—				—
Asset-Backed Securities			—				574,900				—				—				—				—				—				—				574,900				—
Common Stocks
Chemicals			4,682,969				—				—				—				—				(723,462	)			1,449,861				(1,449,861	)			3,959,507				(1,313,307	)
Financial			22,516,499				—				—				—				2,096,897				791,391				1,852,149				(9,687,234	)			17,569,702				1,489,762
Healthcare			1,569,600				—				—				—				—				(818,400	)			—				—				751,200				(818,400	)
Housing			1,141,265				—				—				—				—				(231,934	)			—				—				909,331				(231,934	)
Real Estate			5				—				—				—				—				(513,716	)			513,717				—				6				(513,716	)
Real Estate Investment Trust			161,905,867				—				—				—				69,599				3,636,080				—				(245,100	)			165,366,446				3,636,080
Telecommunications			33,434,560				—				—				—				—				1,353,747				—				—				34,788,307				1,353,747
Total		$	243,635,976			$	574,900			$	—			$	(2,345	)		$	2,180,654			$	6,836,894			$	5,909,979			$	(11,443,713	)		$	247,692,345			$	6,935,676

 

(a)	Represents payment in kind interest

 

 

Annual Report						17

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December 31, 2016		NexPoint Credit Strategies Fund

 

The following is a summary of significant unobservable inputs used in the fair valuation of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category

Market Value  at 12/31/2016

Valuation Technique

Unobservable Inputs

Input Value(s)

Common Stock

$

223,344,499

Third-Party Pricing Vendor

N/A

N/A

Net Asset Value

N/A

N/A

Multiples Analysis

Price/MHz-PoP

$0.13 - $0.50

Multiple of EBITDA

1.5x - 8.0x

Capitalization Rates

6.1%

Liquidity Discount

25%

Minority Discount

20%

Third-Party Valuations

Capitalization Rates

5.5% - 8.75%

Recovery Analysis

Scenario Probabilities

33%

Discounted Cash Flow

Discount Rate

19%

U.S. Senior Loans

23,772,946

Discounted Cash Flow

Spread Adjustment

0.10%

Adjusted Appraisal

Liquidity Discount

10%

Asset-Backed Securities

574,900

Discounted Cash Flow

Discount Rate

9%

Total

$

247,692,345

 

 

18						Annual Report

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

Annual Report						19

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

20						Annual Report

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NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

For the year ended December 31, 2016, the Fund had capital loss carryovers as indicated below. The capital loss carryovers are available to offset future realized capital gains to the extent provided in the Code and regulations promulgated thereunder. To the extent that these carryover losses are used to offset future capital gains, it is probable that the gains so offset will not be distributed to shareholders because they would be taxable as ordinary income.

 

2017				2018				No Expiration Short-Term(1)				No Expiration Long-Term(1)				Total
$	36,362,724			$	43,701,044	(2)		$	7,831,127			$	54,195,650	(2)		$	142,090,545

 

(1)

On December 22, 2010, the Regulated Investment Company Modernization Act of 2010 (the “Modernization Act”) was signed into law. The Modernization Act modifies several of the Federal income and excise tax provisions related to RICs. Under the Modernization Act, new capital losses may now be carried forward indefinitely, and retain the character of the original loss as compared with pre-enactment law where capital losses could be carried forward for eight years, and carried forward as short-term capital losses, irrespective of the character of the original loss.

 

(2)	The Fund’s ability to utilize the capital loss carryforward may be limited.

 

Annual Report						21

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

22						Annual Report

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NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

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NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

24						Annual Report

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NOTES TO FINANCIAL STATEMENTS (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

Note 11. Affiliated Issuers

Under Section 2 (a) (3) of the Investment Company Act of 1940, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Fund as of December 31, 2016:

 

		Shares								Market Value
Issuer		December 31, 2015				December 31, 2016				December 31, 2015				December 31, 2016				Affiliated Income				Purchases				Sales
Majority Owned, Not Consolidated
NexPoint Real Estate Capital, LLC, REIT (Common Stocks)			8,271,300				8,271,300			$	97,833,766			$	93,428,471			$	9,240,986			$	—			$	6,414,478
NexPoint Real Estate Opportunities, LLC, REIT (Common Stocks)			25,255,573				25,255,573				63,896,601				71,937,975				2,215,057				—				—
Specialty Financial Products, Ltd. (Common Stocks)			13,388,945				15,267,474				14,188,265				17,469,044				1,799,973				2,002,149				—
Other Affiliates
Genesys Ventures IA, LP (Common Stocks)			24,000,000				24,000,000				1,569,600				751,200				—				—				—
LLV Holdco, LLC (U.S. Senior Loans, Common Stocks & Warrants)			8,746,211				9,197,728				4,170,887				8,249,655				451,517				—				—
TerreStar Corp. (U.S. Senior Loans & Common Stocks)			14,040,695				15,680,873				47,308,663				50,311,598				1,640,179				—				—
Other Controlled
Allenby (Common Stocks)			436,635				560,390				—				1				—				123,755				—
Claymore (Common Stocks)			4,881,036				5,270,997				5				5				—				389,961				—
Total			99,020,395				103,504,335			$	228,967,787			$	242,147,949			$	15,347,712			$	2,515,865			$	6,414,478

 

Annual Report						25

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

26						Annual Report

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NOTES TO FINANCIAL STATEMENTS (concluded)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

Annual Report						27

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

 

To the Board of Trustees and Shareholders of NexPoint Credit Strategies Fund:

 

In our opinion, the accompanying statement of assets and liabilities, including the investment portfolio, and the related statements of operations, of changes in net assets, and of cash flows and the financial highlights present fairly, in all material respects, the financial position of NexPoint Credit Strategies Fund (the “Fund”) at December 31, 2016, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at December 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

 

Dallas, Texas

February 24, 2017

 

28						Annual Report

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ADDITIONAL INFORMATION (unaudited)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

30						Annual Report

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

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December 31, 2016		NexPoint Credit Strategies Fund

 

 

32						Annual Report

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ADDITIONAL INFORMATION (unaudited) (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

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ADDITIONAL INFORMATION (unaudited) (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

 

 

34						Annual Report

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ADDITIONAL INFORMATION (unaudited) (continued)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

Trustees and Officers

 

The Board is responsible for the overall management of the Fund, including supervision of the duties performed by the Investment Adviser. The names and birth dates of the Trustees and officers of the Fund, the year each was first elected or appointed to office, their principal business occupations during the last five years, the number of funds overseen by each Trustee and other directorships they hold are shown below. The business address for each Trustee and officer of the Fund is c/o NexPoint Advisors, L.P., 200 Crescent Court, Suite 700, Dallas, TX 75201.

 

Name and Date of Birth

Position(s) held with the Trust

Term of Office and Length of Time Served(1)

Principal Occupation(s) During the Past Five Years

Number  of Portfolios in Highland Fund Complex Overseen by the Trustee(2)

Other Directorships/ Trusteeships Held During the Past Five Years

Experience, Qualifications, Attributes, Skills for Board Membership

Independent Trustees

Timothy K. Hui (6/13/1948)

Trustee

Indefinite Term; Trustee since inception in 2006

Dean of Educational Resources since July 2012 and from July 2006 to January 2008, Vice President from February 2008 to June 2012, and Assistant Provost for Graduate Education from July 2004 to June 2006 at Cairn University.

23

None

Significant experience on this board of directors/ trustees; administrative and managerial experience; legal training and practice.

Bryan A. Ward (2/4/1955)

Trustee

Indefinite Term; Trustee since inception in 2006

Private Investor, BW Consulting, LLC since 2014; Senior Manager, Accenture, LLP (a consulting firm) from 2002 until retirement in 2014.

23

Director of Equity Metrix, LLC

Significant experience on this and/or other boards of directors/ trustees; significant managerial and executive experience; significant experience as a management consultant.

 

Annual Report						35

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December 31, 2016		NexPoint Credit Strategies Fund

Trustees and Officers

 

Name and Date of Birth

Position(s) held with the Trust

Term of Office and Length of Time Served(1)

Principal Occupation(s) During the Past Five Years

Number  of Portfolios in Highland Fund Complex Overseen by the Trustee(2)

Other Directorships/ Trusteeships Held During the Past Five Years

Experience, Qualifications, Attributes, Skills for Board Membership

Independent Trustees

Dr. Bob Froehlich (4/28/1953)

Trustee

Indefinite Term; Trustee since December 2013

Executive Vice President and Chief Investment Strategist, The Hartford Mutual Funds from 2009 until retirement in 2012; Vice Chairman of Deutsche Asset Management from 2002 to 2009.

23

Trustee of ARC Realty Finance Trust, Inc. (from January 2013 to May 2016); Director of KC Concessions, Inc.; Trustee of Realty Capital Income Funds Trust; Director of American Realty Capital Healthcare Trust II (from January 2013 to June 2016); Director, American Realty Capital Daily Net Asset Value Trust, Inc. (from November 2012 to July 2016); Director of American Sports Enterprise, Inc.; Director of Davidson Investment Advisors (from July 2009 to July 2016); Chairman and owner, Kane County Cougars Baseball Club; Advisory Board of Directors, Internet Connectivity Group, Inc. (from January 2014 to April 2016); Director of AXAR Acquisition Corp. (formerly AR Capital Acquisition Corp.); Director of The Midwest League of Professional Baseball Clubs, Inc.; Director of Kane County Cougars Foundation, Inc.’ Director of Galen Robotics, Inc.

Significant experience in the financial industry; significant managerial and executive experience; significant experience on other boards of directors, including as a member of several audit committees.

 

36						Annual Report

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December 31, 2016		NexPoint Credit Strategies Fund

Trustees and Officers

 

Name and Date of Birth

Position(s) held with the Trust

Term of Office and Length of Time Served(1)

Principal Occupation(s) During the Past Five Years

Number  of Portfolios in Highland Fund Complex Overseen by the Trustee(2)

Other Directorships/ Trusteeships Held During the Past Five Years

Experience, Qualifications, Attributes, Skills for Board Membership

Independent Trustees

John Honis3 (6/16/1958)

Trustee

Indefinite Term; Trustee since July 2013

President of Rand Advisors, LLC since August 2013; Partner of Highland Capital Management, L.P. (“HCM”) from February 2007 until his resignation in November 2014.

23

Manager of Turtle Bay Resort, LLC

Significant experience in the financial industry; significant managerial and executive experience, including experience as president, chief executive officer or chief restructuring officer of five telecommunication firms; experience on other boards of directors.

 

Annual Report						37

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December 31, 2016		NexPoint Credit Strategies Fund

Trustees and Officers

 

Name and Date of Birth

Position(s) held with the Trust

Term of Office and Length of Time Served(1)

Principal Occupation(s) During the Past Five Years

Number  of Portfolios in Highland Fund Complex Overseen by the Trustee(2)

Other Directorships/ Trusteeships Held During the Past Five Years

Experience, Qualifications, Attributes, Skills for Board Membership

Interested Trustees

Ethan Powell4 (6/20/1975)

Trustee; Chairman of the Board

Indefinite Term; Trustee since December 2013; Chairman of the Board since December 2013; Executive Vice President and Principal Executive Officer from June 2012 until December 2015

President and Founder of Impact Shares LLC (a registered investment advisor dedicated to building a platform to create better socially responsible investment solutions) since December 2015; Trustee/Director of the Highland Fund Complex from June 2012 until July 2013 and since December 2013; Chief Product Strategist of Highland Capital Management Fund Advisors, L.P. (“HCMFA”) from 2012 until December 2015; Senior Retail Fund Analyst of HCM from 2007 until December 2015 and HCMFA from its inception until December 2015; Secretary of NexPoint Credit Strategies Fund (“NHF”) from November 2010 until June 2012; President and Principal Executive Officer of NHF from June 2012 until May 2015; Secretary of NHF from May 2015 until December 2015; Executive Vice President and Principal Executive Officer of Highland Funds I and Highland Funds II from June 2012 until December 2015; and Secretary of Highland Funds I and Highland Funds II from November 2010 to May 2015.

23

Trustee of Impact Shares Funds I Trust

Significant experience in the financial industry; significant executive experience including past service as an officer of funds in the Highland Fund Complex; significant administrative and managerial experience.

 

38						Annual Report

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December 31, 2016		NexPoint Credit Strategies Fund

Trustees and Officers

 

Name and Date of Birth		Position(s) with  the Trust		Term of Office and Length of Time Served		Principal  Occupation(s) During Past Five Years
Officers
James Dondero (6/29/1962)		President and Principal Executive Officer		Indefinite Term; President since May 2015		President of Highland Capital Management, L.P., which he co-founded in 1993; Portfolio Manager of NHF, Portfolio Manager of Highland Energy MLP Fund, Highland Global Allocation Fund, Highland Small-Cap Equity Fund and Highland Premier Growth Equity Fund (all series of HFII); Portfolio Manager of Highland Opportunistic Credit Fund (series of Highland Funds I (“HFI”); and a Portfolio Manager of NexPoint Capital since 2014; President and Portfolio Manager of NexPoint Discount Yield Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Healthcare Opportunities Fund, NexPoint Latin American Opportunities Fund, NexPoint Merger Arbitrage Fund and NexPoint Distressed Strategies Fund since 2016.
Brian Mitts (8/26/1970)		Executive Vice President, Principal Accounting Officer and Principal Financial Officer		Executive Vice President since December 2015; Indefinite Term; Principal Accounting Officer and Principal Financial Officer since May 2015; Treasurer from November 2010 until May 2015		Chief Financial Officer, Executive Vice President and Treasurer of NexPoint Residential Trust, Inc. since 2014; Principal Financial Officer and Principal Accounting Officer of NHF since November 2010; Executive Vice President, Principal Financial Officer and Principal Accounting Officer of NHF since May 2015; Treasurer of NHF from November 2010 until May 2015; Chief Financial Officer of NexPoint Capital, Inc. from August 2014 until May 2015; Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer of NexPoint Capital, Inc. since May 2015; Principal Financial Officer and Principal Accounting Officer of NexPoint Real Estate Strategies Fund since March 2016; Chief Financial Officer and Financial and Operations Principal of HCFD since November 2013; Chief Operations Officer of HCMFA since 2012; Secretary of NexPoint Advisors, L.P. from August 2012 until May 2015; Executive Vice President of NexPoint Advisors, L.P. since May 2015; Senior Retail Fund Analyst of HCM since 2007 and HCMFA since its inception; Secretary, Principal Financial Officer and Principal Accounting Officer of Highland Funds I and Highland Funds II since May 2015; Principal Financial Officer and Principal Accounting Officer of Highland Funds I since November 2010 and of Highland Funds II since February 2011; Treasurer of Highland Funds I from November 2010 until May 2015 and of Highland Funds II from February 2011 until May 2015 and Financial and Operations Principal of NexBank Securities, Inc. since 2014.
Frank Waterhouse (4/14/1971)		Treasurer		Indefinite Term; Treasurer since May 2015		Assistant Treasurer of Acis Capital Management, L.P. from December 2011 until February 2012; Treasurer of Acis Capital Management, L.P. since February 2012; Assistant Treasurer of HCM from November 2011 until April 2012; Treasurer of HCM since April 2012; Assistant Treasurer of HCMFA from December 2011 until October 2012; Treasurer of HCMFA since October 2012; Treasurer of NexPoint Advisors, L.P. since March 2012 and Treasurer of NexPoint Capital, Inc., NHF, Highland Funds I, Highland Funds II, and NexPoint Real Estate Advisors, L.P. since May 2015 and Treasurer of NexPoint Real Estate Strategies Fund since March 2016.

 

Annual Report						39

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ADDITIONAL INFORMATION (unaudited) (concluded)

 

 

 

December 31, 2016		NexPoint Credit Strategies Fund

Trustees and Officers

 

Name and Date of Birth		Position(s) with  the Trust		Term of Office and Length of Time Served		Principal  Occupation(s) During Past Five Years
Officers
Dustin Norris (1/6/1984)		Secretary		Indefinite Term; Secretary since December 2015		Chief Product Strategist at HCMFA since September 2015, Director of Product Strategy at HCMFA from May 2014 to September 2015; Secretary of NHF since December 2015; Assistant Treasurer of Highland Funds I and Highland Funds II since November 2012; Assistant Treasurer of NHF from November 2012 to December 2015; Secretary of NexPoint Capital, Inc. since 2014; Secretary of NexPoint Real Estate Strategies Fund since March 2016; Senior Accounting Manager at HCMFA from August 2012 to May 2014; and Fund Accountant at HCM from June 2010 to August 2012.

 

1

On an annual basis, as a matter of Board policy, the Governance Committee reviews each Trustee’s performance and determines whether to extend each such Trustee’s service for another year. Effective June 2013, the Board adopted a retirement policy wherein the Governance Committee shall not recommend the continued service as a Trustee of a Board member who is older than 80 years of age at the time the Governance Committee reports its findings to the Board.

2

The “Highland Fund Complex” consists of NHF, each series of Highland Funds I, each series of Highland Funds II, NexPoint Capital, Inc., a closed-end management investment company that has elected to be treated as a business development company under the 1940 Act, NexPoint Merger Arbitrage Fund, NexPoint Latin American Opportunities Fund, NexPoint Real Estate Strategies Fund, NexPoint Opportunistic Credit Fund, NexPoint Energy and Materials Opportunities Fund, NexPoint Discount Yield Fund and NexPoint Healthcare Opportunities Fund.

3

Since May 1, 2015, Mr. Honis has been treated as an Independent Trustee of the Trust. Prior to that date, Mr. Honis was treated as an Interested Trustee because he was a partner of an investment adviser affiliated with the Adviser until his resignation in November 2014. As of August 31, 2016, Mr. Honis was entitled to receive aggregate severance and/or deferred compensation payments of approximately $1.5 million from another affiliate of the Adviser. Mr. Honis also serves as a director of a portfolio company affiliated with the Adviser. During the Trust’s last two fiscal years, Mr. Honis’ aggregate compensation from this portfolio company for his services as a director was approximately $50,000.

In addition, Mr. Honis serves as a trustee of a trust that owns substantially all of the economic interest in an investment adviser affiliated with the Adviser. Mr. Honis indirectly receives an asset-based fee in respect of such interest, which is projected to range from $100,000-$150,000 annually. In light of these relationships between Mr. Honis and affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Honis to be an interested person of the Trust.

4

Effective December 4, 2015, Mr. Powell resigned from his position with the Adviser. Mr. Powell currently receives hourly fees from the Adviser to perform consulting services for the Adviser relating to matters on which he worked during his tenure at the Adviser. Although the Trust believes that Mr. Powell is technically no longer an interested person of the Trust, in light of his previous employment and his ongoing provision of consulting services to the Adviser and affiliates of the Adviser, it is possible that the SEC might in the future determine Mr. Powell to be an interested person of the Trust. Therefore, the Trust treats Mr. Powell as an Interested Trustee of the Trust for all purposes other than compensation (Mr. Powell will be compensated at the same rate as the Independent Trustees) from December 16, 2015 until at least December 4, 2017 (the second anniversary of his resignation).

 

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IMPORTANT INFORMATION ABOUT THIS REPORT

 

 

 

 

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6201 15th Avenue

Brooklyn, NY 11219

 

 

NexPoint Credit Strategies Fund		Annual Report, December 31, 2016

 

www.nexpointadvisors.com		NHF-AR-1216

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Item 2. Code of Ethics.

 

(a)

NexPoint Credit Strategies Fund (the “Registrant”), as of the end of the period covered by this report, has adopted a code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party.

 

(b)	Not applicable.

 

(c)

There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party, and that relates to any element of the code of ethics description.

 

(d)

The Registrant has not granted any waiver, including any implicit waiver, from a provision of the code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the Registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of this Item’s instructions.

 

(e)	Not applicable.

 

(f)	The Registrant’s code of ethics that applies to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions is filed herewith as Exhibit (a)(1).

Item 3. Audit Committee Financial Expert.

As of the end of the period covered by the report, the Registrant’s Board of Trustees (the “Board”) has determined that Bryan A. Ward, a member of the Audit & Qualified Legal Compliance Committee of the Board (the “Audit Committee”), is an audit committee financial expert as defined by the U.S. Securities and Exchange Commission (the “SEC”) in Item 3 of Form N-CSR. Mr. Ward is “independent” as defined by the SEC for purposes of this Item 3 of Form N-CSR.

Item 4. Principal Accountant Fees and Services.

Audit Fees

 

(a)

The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the Registrant’s annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $275,000 for the fiscal year ended December 31, 2015 and $280,500 for the fiscal year ended December 31, 2016.

Audit-Related Fees

 

(b)

The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the Registrant’s financial statements and are not reported under paragraph (a) of this Item are $8,500 for the fiscal year ended December 31, 2015 and $8,500 for the fiscal year ended December 31, 2016. The nature of the services related to agreed-upon procedures, performed on the Registrant’s semi-annual financial statements.

 

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Tax Fees

 

(c)

The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $10,820 for the fiscal year ended December 31, 2015 and $11,150 for the fiscal year ended December 31, 2016. The nature of the services related to assistance on the Registrant’s tax returns and excise tax calculations.

All Other Fees

 

(d)

The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for the fiscal year ended December 31, 2015 and $0 for the fiscal year ended December 31, 2016.

 

(e)(1)

Disclose the Audit Committee’s pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X:

The Audit Committee shall:

(a) have direct responsibility for the appointment, compensation, retention and oversight of the Registrant’s independent auditors and, in connection therewith, to review and evaluate matters potentially affecting the independence and capabilities of the auditors; and

(b) review and pre-approve (including associated fees) all audit and other services to be provided by the independent auditors to the Registrant and all non-audit services to be provided by the independent auditors to the Registrant’s investment adviser or any entity controlling, controlled by or under common control with the investment adviser (an “Adviser Affiliate”) that provides ongoing services to the Registrant, if the engagement relates directly to the operations and financial reporting of the Registrant; and

(c) establish, to the extent permitted by law and deemed appropriate by the Audit Committee, detailed pre-approval policies and procedures for such services; and

(d) review and consider whether the independent auditors’ provision of any non-audit services to the Registrant, the Registrant’s investment adviser or an Adviser Affiliate not pre-approved by the Audit Committee are compatible with maintaining the independence of the independent auditors.

 

(e)(2)

The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the Audit Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:

(b) 100%

(c) 100%

(d) N/A

 

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(f)

The percentage of hours expended on the principal accountant’s engagement to audit the Registrant’s financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees was less than fifty percent.

 

(g)

The aggregate non-audit fees billed by the Registrant’s principal accountant for services rendered to the Registrant, and rendered to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and an Adviser Affiliate that provides ongoing services to the Registrant for each of the last two fiscal years of the Registrant was $412,000 for the fiscal year ended December 31, 2015 and $399,500 for the fiscal year ended December 31, 2016.

 

(h)

The Registrant’s Audit Committee has considered whether the provision of non-audit services that were rendered to the Registrant’s investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and an Adviser Affiliate that provides ongoing services to the Registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant’s independence.

Item 5. Audit Committee of Listed Registrants.

The Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. It is composed of the following Trustees, each of whom is not an “interested person” as defined in the 1940 Act:

Dr. Bob Froehlich

Timothy K. Hui

Bryan A. Ward

Item 6. Investments.

 

(a)	Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the Annual Report to Shareholders filed under Item 1 of this form.

 

(b)	Not applicable.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

NEXPOINT ADVISORS, L.P.

PROXY VOTING POLICY

Purpose and Scope

The purpose of these voting policies and procedures (the “Policy”) is to set forth the principles and procedures by which HCMLP (the “Company”) votes or gives consents with respect to the securities owned by Clients for which the Company exercises voting authority and discretion.¹ For avoidance of doubt, this includes any proxy and any shareholder vote or

 

1	In any case where a Client has instructed the Company to vote in a particular manner on the Client’s behalf, those instructions will govern in lieu of parameters set forth in the Policy.

 

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consent, including a vote or consent for a private company or other issuer that does not involve a proxy. These policies and procedures have been designed to help ensure that votes are cast in the best interests of Clients in accordance with the Company’s fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940 (the “Advisers Act”).

This Policy applies to securities held in all Client accounts (including Retail Funds and other pooled investment vehicles) as to which the Company has explicit or implicit voting authority. Implicit voting authority exists where the Company’s voting authority is implied by a general delegation of investment authority without reservation of proxy voting authority to the Client.

If the Company has delegated voting authority to an investment sub-adviser with respect to any Retail Fund, such sub-adviser will be responsible for voting all proxies for such Retail Funds in accordance with the sub-adviser’s proxy voting policies. The Compliance Department, to provide oversight over the proxy voting by sub-advisers and to ensure that votes are executed in the best interests of the Retail Funds, shall (i) review the proxy voting policies and procedures of each Retail Fund sub-adviser to confirm that they comply with Rule 206(4)-6, both upon engagement of the sub-adviser and upon any material change to the sub-adviser’s proxy voting policies and procedures, and (ii) require each such sub-adviser to provide quarterly certifications that all proxies were voted pursuant to the sub-adviser’s policies and procedures or to describe any inconsistent votes.

General Principles

The Company and its affiliates engage in a broad range of activities, including investment activities for their own accounts and for the accounts of various Clients and providing investment advisory and other services to Clients. In the ordinary course of conducting the Company’s activities, the interests of a Client may conflict with the interests of the Company, other Clients and/or the Company’s affiliates and their clients. Any conflicts of interest relating to the voting of proxies, regardless of whether actual or perceived, will be addressed in accordance with these policies and procedures. The guiding principle by which the Company votes all proxies is to vote in the best interests of each Client by maximizing the economic value of the relevant Client’s holdings, taking into account the relevant Client’s investment horizon, the contractual obligations under the relevant advisory agreements or comparable documents and all other relevant facts and circumstances at the time of the vote. The Company does not permit voting decisions to be influenced in any manner that is contrary to, or dilutive of, this guiding principle.

Voting Procedures

Third-Party Proxy Advisors

The Company may engage a third-party proxy advisor (“Proxy Advisor”) to provide proxy voting recommendations with respect to Client proxies. Proxy Advisor voting recommendation guidelines are generally designed to increase investors’ potential financial gain. When considering whether to retain or continue retaining any particular Proxy Advisor, the Compliance Department will ascertain, among other things, whether the Proxy Advisor has the capacity and competency to adequately analyze proxy issues. In this regard, the Compliance Department will consider, among other things: the adequacy and quality of the Proxy Advisor’s staffing and personnel; the robustness of its policies and

 

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procedures regarding its ability to (a) ensure that its proxy voting recommendations are based on current and accurate information and (b) identify and address any conflicts of interest and any other considerations that the Compliance Department determines would be appropriate in considering the nature and quality of the services provided by the Proxy Advisor. To identify and address any conflicts that may arise on the part of the Proxy Advisor, the Compliance Department will ensure that the Proxy Advisor notifies the Compliance Department of any relevant business changes or changes to its policies and procedures regarding conflicts.

Third-Party Proxy Voting Services

The Company may utilize a third-party proxy voting service (“Proxy Voting Service”) to monitor holdings in Client accounts for purposes of determining whether there are upcoming shareholder meetings or similar corporate actions and to execute Client proxies on behalf of the Company pursuant to the Company’s instructions, which shall be given in a manner consistent with this Policy. The Compliance Department will oversee each Proxy Voting Service to ensure that proxies have been voted in a manner consistent with the Company’s instructions.

Monitoring

Subject to the procedures regarding Nonstandard Proxy Notices described below, the Compliance Department of the Company shall have responsibility for monitoring Client accounts for proxy notices. Except as detailed below, if proxy notices are received by other employees of the Company, such employees must promptly forward all proxy or other voting materials to the Compliance Department.

Portfolio Manager Review and Instruction

From time to time, the settlement group of the Company may receive nonstandard proxy notices, regarding matters including, but not limited to, proposals regarding corporate actions or amendments (“Nonstandard Proxy Notices”) with respect to securities held by Clients. Upon receipt of a Nonstandard Proxy Notice, a member of the settlement group (the “Settlement Designee”) shall send an email notification containing all relevant information to the Portfolio Manager(s) with responsibility for the security and [            .com]. Generally, the relevant Portfolio Manager(s) shall deliver voting instructions for Nonstandard Proxy Notices by replying to the email notice sent to the Portfolio Manager(s) and [            .com] by the Settlement Designee or by sending voting instructions to [            .com] and [            .com]. Any conflicts for Nonstandard Proxy Notices should also be disclosed to the Compliance Department. In the event a Portfolio Manager orally conveys voting instructions to the Settlement Designee or any other member of the Company’s settlement group, that Settlement Designee or member of the Company’s settlement group shall respond to the original notice email sent to [            .com] detailing the Portfolio Manager(s) voting instructions.

With regard to standard proxy notices, on a weekly basis, the Compliance Department will send a notice of upcoming proxy votes related to securities held by Clients and the corresponding voting recommendations of the Proxy Advisor to the relevant Portfolio Manager(s). Upon receipt of a proxy notice from the Compliance Department, the Portfolio Manager(s) will review and evaluate the upcoming votes and recommendations. The Portfolio Managers may rely on any information and/or research available to him or her and may, in his or her discretion, meet with members of an issuer’s management to discuss matters of importance to the relevant Clients and their economic interests. Should the Portfolio Manager determine that deviating from the Proxy Advisor’s recommendation is in a Client’s best interest, the Portfolio Manager shall communicate his or her voting instructions to the Compliance Department.

 

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In the event that more than one Portfolio Manager is responsible for making a particular voting decision and such Portfolio Managers are unable to arrive at an agreement as to how to vote with respect to a particular proposal, they should consult with the applicable Chief Compliance Officer (the “CCO”) for guidance.

Voting

Upon receipt of the relevant Portfolio Managers’ voting instructions, if any, the Compliance Department will communicate the instructions to the Proxy Voting Service to execute the proxy votes.

Non-Votes

It is the general policy of the Company to vote or give consent on all matters presented to security holders in any vote, and these policies and procedures have been designated with that in mind. However, the Company reserves the right to abstain on any particular vote if, in the judgment of the CCO, or the relevant Portfolio Manager, the effect on the relevant Client’s economic interests or the value of the portfolio holding is insignificant in relation to the Client’s portfolio, if the costs associated with voting in any particular instance outweigh the benefits to the relevant Clients or if the circumstances make such an abstention or withholding otherwise advisable and in the best interests of the relevant Clients not to vote. Such determination may apply in respect of all Client holdings of the securities or only certain specified Clients, as the Company deems appropriate under the circumstances. As examples, a Portfolio Manager may determine: (a) not to recall securities on loan if, in his or her judgment, the matters being voted upon are not material events affecting the securities and the negative consequences to Clients of disrupting the securities lending program would outweigh the benefits of voting in the particular instance or (b) not to vote proxies relating to certain foreign securities if, in his or her judgment, the expense and administrative inconvenience outweighs the benefits to Clients of voting the securities.

Conflicts of Interest

The Company’s Compliance Department is responsible for monitoring voting decisions for any conflicts of interest, regardless of whether they are actual or perceived. All voting decisions contrary to the recommendation of a Proxy Advisor require a mandatory conflicts of interest review by the Compliance Department, which will include a consideration of whether the Company or any Portfolio Manager or other person recommending or providing input on how to vote has an interest in the vote that may present a conflict of interest.

In addition, all Company investment professionals are expected to perform their tasks relating to the voting of proxies in accordance with the principles set forth above, according the first priority to the best interest of the relevant Clients. If at any time a Portfolio Manager or any other investment professional becomes aware of a potential or actual conflict of interest regarding any particular voting decision, he or she must contact the Compliance Department promptly and, if in connection with a proxy that has yet to be voted, prior to such vote. If any investment professional is pressured or lobbied, whether from inside or outside the Company, with respect to any particular voting decision, he or she should contact the Compliance Department promptly. The CCO will use his or her best judgment to address any such conflict of interest and ensure that it is resolved in accordance with his or her independent assessment of the best interests of the relevant Clients.

 

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In the event of a conflict, the Company may choose to address such conflict by: (i) voting in accordance with the Proxy Advisor’s recommendation; (ii) the CCO determining how to vote the proxy (if the CCO approves deviation from the Proxy Advisor’s recommendation, then the CCO shall document the rationale for the vote); (iii) “echo voting” or “mirror voting” the proxy in the same proportion as the votes of other proxy holders that are not Clients; or (iv) with respect to Clients other than Retail Funds, notifying the affected Client of the material conflict of interest and seeking a waiver of the conflict or obtaining such Client’s voting instructions. Where the Compliance Department deems appropriate, third parties may be used to help resolve conflicts. In this regard, the CCO or his or her delegate shall have the power to retain fiduciaries, consultants or professionals to assist with voting decisions and/or to delegate voting or consent powers to such fiduciaries, consultants or professionals.

Where a conflict of interest arises with respect to a voting decision for a Retail Fund, the Company shall disclose the conflict and the rationale for the vote taken to the Retail Fund’s Board of Directors/Trustees at the next regularly scheduled quarterly meeting. The Compliance Department will maintain a log documenting the basis for the decision and will furnish the log to the Board of Trustees.

Material Conflicts of Interest

The following relationships or circumstances are examples of situations that may give rise to a material conflict of interest for purposes of this Policy. This list is not exclusive or determinative; any potential conflict (including payments of the types described below but less than the specified threshold) should be identified to the Company’s Compliance Department:

 

(i)

The issuer is a Client of the Company, or of an affiliate, accounting for more than 5% of the Company’s or affiliate’s annual revenues.

 

(ii)

The issuer is an entity that reasonably could be expected to pay the Company or its affiliates more than $1 million through the end of the Company’s next two full fiscal years.

 

(iii)

The issuer is an entity in which a “Covered Person” (as defined in the Company’s Policies and Procedures Designed to Detect and Prevent Insider Trading and to Comply with Rule 17j-1 of the Investment Company Act of 1940, as amended (the “Code of Ethics”)) has a beneficial interest contrary to the position held by the Company on behalf of Clients.

 

(iv)

The issuer is an entity in which an officer or partner of the Company or a relative of any such person is or was an officer, director or employee, or such person or relative otherwise has received more than $150,000 in fees, compensation and other payment from the issuer during the Company’s last three fiscal years; provided, however, that the Compliance Department may deem such a relationship not to be a material conflict of interest if the Company representative serves as an officer or director of the issuer at the direction of the Company for purposes of seeking control over the issuer.

 

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(v)

The matter under consideration could reasonably be expected to result in a material financial benefit to the Company or its affiliates through the end of the Company’s next two full fiscal years (for example, a vote to increase an investment advisory fee for a Retail Fund advised by the Company or an affiliate).

 

(vi)

Another Client or prospective Client of the Company, directly or indirectly, conditions future engagement of the Company on voting proxies in respect of any Client’s securities on a particular matter in a particular way.

 

(vii)

The Company holds various classes and types of equity and debt securities of the same issuer contemporaneously in different Client portfolios.

 

(viii)

Any other circumstance where the Company’s duty to serve its Clients’ interests, typically referred to as its “duty of loyalty,” could be compromised.

Notwithstanding the foregoing, a conflict of interest described above shall not be considered material for the purposes of this Policy in respect of a specific vote or circumstance if:

The securities in respect of which the Company has the power to vote account for less than 1% of the issuer’s outstanding voting securities, but only if: (i) such securities do not represent one of the 10 largest holdings of such issuer’s outstanding voting securities and (ii) such securities do not represent more than 2% of the Client’s holdings with the Company.

The matter to be voted on relates to a restructuring of the terms of existing securities or the issuance of new securities or a similar matter arising out of the holding of securities, other than common equity, in the context of a bankruptcy or threatened bankruptcy of the issuer.

Recordkeeping

Following the submission of a proxy vote, the Fund will maintain a report of the vote and all relevant documentation.

The Fund shall retain records relating to the voting of proxies and the Company shall conduct due diligence, including on Proxy Voting Services and Proxy Advisors, as applicable, to ensure the following records are adequately maintained by the appropriate party:

 

(i)

Copies of this Policy and any amendments thereto.

 

(ii)

A current copy of the Proxy Advisor’s voting guidelines, as amended.

 

(iii)

A copy of each proxy statement that the Company receives regarding Client securities. The Company may rely on a third party to make and retain, on the Company’s behalf, a copy of a proxy statement, provided that the Company has obtained an undertaking from the third party to provide a copy of the proxy statement promptly upon request.

 

(iv)

Records of each vote cast by the Company on behalf of Clients. The Company may satisfy this requirement by relying on a third party to make and retain, on the Company’s behalf, a record of the vote cast, provided that the Company has obtained an undertaking from the third party to provide a copy of the record promptly upon request.

 

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(v)

A copy of any documents created by the Company that were material to making a decision how to vote or that memorializes the basis for that decision.

 

(vi)

A copy of each written request for information on how the Company voted proxies on behalf of the Client, and a copy of any written response by the Company to any (oral or written) request for information on how the Company voted.

These records shall be maintained and preserved in an easily accessible place for a period of not less than five years from the end of the Company’s fiscal year during which the last entry was made in the records, the first two years in an appropriate office of the Company.²

Enforcement of this Policy

It shall be the responsibility of the Compliance Department to handle or coordinate the enforcement of this Policy. The Compliance Department will periodically sample proxy voting records to ensure that proxies have been voted in accordance with this Policy, with a particular focus on any proxy votes that require additional analysis (e.g., proxies voted contrary to the recommendations of a Proxy Advisor).

If the Compliance Department determines that a Proxy Advisor or Proxy Voting Service may have committed a material error, the Compliance Department will investigate the error, taking into account the nature of the error, and seek to determine whether the Proxy Advisor or Proxy Voting Service is taking reasonable steps to reduce similar errors in the future.

In addition, no less frequently than annually, the Compliance Department will review the adequacy of this Policy to ensure that it has been implemented effectively and to confirm that this Policy continues to be reasonably designed to ensure that proxies are voted in the best interest of Clients.

Disclosures to Clients and Investors

The Company includes a description of its policies and procedures regarding proxy voting in Part 2 of Form ADV, along with a statement that Clients can contact the CCO to obtain a copy of these policies and procedures and information about how the Company voted with respect to a Client’s securities. This Policy is, however, subject to change at any time without notice.

 

2

If the Company has essentially immediate access to a book or record (on the Company’s proprietary system or otherwise) through a computer located at an appropriate office of the Company, then that book or record will be considered to be maintained at an appropriate office of the Company. “Immediate access” to books and records includes that the Company has the ability to provide promptly to Securities and Exchange Commission (the “SEC”) examination staff hard copies of the books and records or access to the storage medium. The party responsible for the applicable books and records as described above shall also be responsible for ensuring that those books and records for the first two years are either physically maintained in an appropriate office of the Company or that the Company otherwise has essentially immediate access to the required books and records for the first two years.

 

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As a matter of policy, the Company does not disclose how it expects to vote on upcoming proxies. Additionally, the Company does not disclose the way it voted proxies to unaffiliated third parties without a legitimate need to know such information.

 

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Item 8. Portfolio Managers of Closed-End Management Investment Companies.

 

(a)(1)

Identification of Portfolio Manager(s) or Management Team Members and Description of Role of Portfolio Manager(s) or Management Team Members

The Registrant’s portfolio manager, who is primarily responsible for the day-to-day management of the Registrant’s portfolio, is James Dondero.

James Dondero – Mr. Dondero has over 25 years of experience in the credit markets. In addition to his role at NexPoint Advisors, L.P., Mr. Dondero is the President of Highland Capital Management, L.P. (“HCM”), which he co-founded in 1993. Prior to founding HCM, Mr. Dondero served as Chief Investment Officer of Protective Life’s GIC subsidiary and helped grow the business from concept to over $2 billion between 1989 and 1993. His portfolio management experience includes mortgage-backed securities, investment grade corporates, leveraged bank loans, high-yield bonds, emerging market debt, derivatives, and equity securities. He received a BS in Commerce (Accounting and Finance) from the University of Virginia. Mr. Dondero is a Certified Public Accountant, a Certified Management Accountant, and has earned the right to use the Chartered Financial Analyst designation.

 

(a)(2)

Other Accounts Managed by Portfolio Manager(s) or Management Team Member and Potential Conflicts of Interest

Other Accounts Managed by Portfolio Manager(s) or Management Team Member

The following table provides information about funds and accounts, other than the Registrant, for which the Registrant’s portfolio manager is primarily responsible for the day-to-day portfolio management as of December 31, 2016.

 

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James Dondero

 

Type of Accounts		Total # of Accounts Managed				Total Assets (millions)				# of Accounts Managed with Performance-Based Advisory Fee				Total Assets with Performance-Based Advisory Fee (millions)
Registered Investment Companies:			8			$	1,372				0			$	0
Other Pooled Investment Vehicles:			2			$	508				2			$	508
Other Accounts:			0			$	0				0			$	0

Potential Conflicts of Interests

NexPoint Advisors, L.P. (“NexPoint” or the “Adviser”) and/or its general partner, limited partners, officers, affiliates and employees provide investment advice to other parties and manage other accounts and private investment vehicles similar to the Registrant. In connection with such other investment management activities, the Adviser and/or its general partner, limited partners, officers, affiliates and employees may decide to invest the funds of one or more other accounts or recommend the investment of funds by other parties, rather than the Registrant’s monies, in a particular security or strategy. In addition, the Adviser and such other persons will determine the allocation of funds from the Registrant and such other accounts to investment strategies and techniques on whatever basis they consider appropriate or desirable in their sole and absolute discretion.

The Adviser has built a professional working environment, a firm-wide compliance culture and compliance procedures and systems designed to protect against potential incentives that may favor one account over another. The Adviser has adopted policies and procedures that address the allocation of investment opportunities, execution of portfolio transactions, personal trading by employees and other potential conflicts of interest that are designed to ensure that all client accounts are treated equitably over time. Nevertheless, the Adviser furnishes advisory services to numerous clients in addition to the Registrant, and the Adviser may, consistent with applicable law, make investment recommendations to other clients or accounts (including accounts that are hedge funds or have performance or higher fees paid to the Adviser or in which portfolio managers have a personal interest in the receipt of such fees) that may be the same as or different from those made to the Registrant. In addition, the Adviser, its affiliates and any of their partners, directors, officers, stockholders or employees may or may not have an interest in the securities whose purchase and sale the Adviser recommends to the Registrant. Actions with respect to securities of the same kind may be the same as or different from the action that the Adviser, or any of its affiliates, or any of their partners, directors, officers, stockholders or employees or any member of their families may take with respect to the same securities. Moreover, the Adviser may refrain from rendering any advice or services concerning securities of companies of which any of the Adviser’s (or its affiliates’) partners, directors, officers or employees are directors or officers, or companies as to which the Adviser or any of its affiliates or partners, directors, officers and employees of any of them has any substantial economic interest or possesses material non-public information. In addition to its various policies and procedures designed to address these issues, the Adviser includes disclosure regarding these matters to its clients in both its Form ADV and investment advisory agreements.

The Adviser, its affiliates or their partners, directors, officers and employees similarly serve or may serve other entities that operate in the same or related lines of business or of investment funds managed by affiliates of the Adviser. Accordingly, these individuals may have obligations to investors in those entities or funds or to other clients, the fulfillment of which might not be in the best interests of the

 

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Registrant. As a result, the Adviser will face conflicts in the allocation of investment opportunities to the Fund and other funds and clients. In order to enable such affiliates to fulfill their fiduciary duties to each of the clients for which they have responsibility, the Adviser will endeavor to allocate investment opportunities in a fair and equitable manner which may, subject to applicable regulatory constraints, involve pro rata co-investment by the Registrant and such other clients or may involve a rotation of opportunities among the Registrant and such other clients.

The Adviser and its affiliates have both subjective and objective procedures and policies in place designed to manage potential conflicts of interest involving clients so that, for example, investment opportunities are allocated in a fair and equitable manner among the Registrant and such other clients. An investment opportunity that is suitable for multiple clients of the Adviser and its affiliates may not be capable of being shared among some or all of such clients due to the limited scale of the opportunity or other factors, including regulatory restrictions imposed by the 1940 Act. There can be no assurance that the Adviser’s or its affiliates’ efforts to allocate any particular investment opportunity fairly among all clients for whom such opportunity is appropriate will result in an allocation of all or part of such opportunity to the Registrant. Not all conflicts of interest can be expected to be resolved in favor of the Registrant.

 

(a)(3)

Compensation Structure of Portfolio Manager(s) or Management Team Members

NexPoint’s financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors, including the relative performance of a portfolio manager’s underlying account, the combined performance of the portfolio managers’ underlying accounts, and the relative performance of the portfolio managers’ underlying accounts measured against other employees. The principal components of compensation include a base salary, a discretionary bonus, various retirement benefits and one or more of the incentive compensation programs established by NexPoint, such as its “Short-Term Incentive Plan” and its “Long-Term Incentive Plan,” described below.

Base compensation. Generally, portfolio managers receive base compensation based on their seniority and/or their position with NexPoint, which may include the amount of assets supervised and other management roles within NexPoint. Base compensation is determined by taking into account current industry norms and market data to ensure that NexPoint pays a competitive base compensation.

Discretionary compensation. In addition to base compensation, portfolio managers may receive discretionary compensation, which can be a substantial portion of total compensation. Discretionary compensation can include a discretionary cash bonus paid to recognize specific business contributions and to ensure that the total level of compensation is competitive with the market, as well as participation in incentive plans, including one or more of the following:

Short-Term Incentive Plan. The purpose of this plan is to attract and retain the highest quality employees for positions of substantial responsibility, and to provide additional incentives to a select group of management or highly-compensated employees of NexPoint in order to promote the success of NexPoint.

Long Term Incentive Plan. The purpose of this plan is to create positive morale and teamwork, to attract and retain key talent, and to encourage the achievement of common goals. This plan seeks to reward participating employees based on the increased value of NexPoint through the use of Long-Term Incentive Units.

 

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Because each person’s compensation is based on his or her individual performance, NexPoint does not have a typical percentage split among base salary, bonus and other compensation. Senior portfolio managers who perform additional management functions may receive additional compensation in these other capacities. Compensation is structured such that key professionals benefit from remaining with NexPoint.

 

(a)(4)

Disclosure of Securities Ownership

The following table sets forth the dollar range of equity securities beneficially owned by the portfolio manager in the Registrant as of December 31, 2016.

 

Name of Portfolio Manager		Dollar Ranges of Equity Securities Beneficially Owned by Portfolio Manager
James Dondero		Over $1,000,000

 

(b)	Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which the shareholders may recommend nominees to the Registrant’s Board.

Item 11. 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 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 second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12. Exhibits.

 

(a)(1)

Code of ethics, or amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto.

 

(a)(2)

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

 

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(a)(3)

Not applicable.

 

(b)	Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.

 

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SIGNATURES

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

NEXPOINT CREDIT STRATEGIES FUND

 

By (Signature and Title):		/s/ James Dondero
		James Dondero
		President and Principal Executive Officer
Date:    March 8, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, and the Investment Company Act of 1940, as amended, 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 Dondero
		James Dondero
		President and Principal Executive Officer
Date:    March 8, 2017

 

By (Signature and Title):		/s/ Brian Mitts
		Brian Mitts
		Executive Vice President, Principal Financial Officer and Principal Accounting Officer
Date:    March 8, 2017

 

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