N-Q 1 fhy_nq.txt QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-Q QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY Investment Company Act file number 811-21842 ----------- First Trust Strategic High Income Fund II ---------------------------------------------------------------- (Exact name of registrant as specified in charter) 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 ---------------------------------------------------------------- (Address of principal executive offices) (Zip code) W. Scott Jardine, Esq. First Trust Portfolios L.P. 120 East Liberty Drive, Suite 400 Wheaton, IL 60187 ---------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 630-765-8000 -------------- Date of fiscal year end: October 31 ------------ Date of reporting period: January 31, 2016 ------------------ Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. SCHEDULE OF INVESTMENTS. The Schedule of Investments is attached herewith. FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- CORPORATE BONDS AND NOTES - 106.0% AUTOMOTIVE - 3.8% $ 1,275,000 American Axle & Manufacturing, Inc. (a).............. 6.25% 03/15/21 $ 1,287,750 1,050,000 American Axle & Manufacturing, Inc. (a).............. 6.63% 10/15/22 1,052,625 1,500,000 Ford Motor Co. (a)................................... 6.50% 08/01/18 1,651,062 -------------- 3,991,437 -------------- BASIC INDUSTRY - 6.1% 3,275,000 Arch Coal, Inc. (a) (b).............................. 7.25% 06/15/21 30,703 775,000 Hexion, Inc. ........................................ 8.88% 02/01/18 530,875 2,450,000 Hexion, Inc. (a)..................................... 9.00% 11/15/20 943,250 500,000 Ply Gem Industries, Inc. ............................ 6.50% 02/01/22 445,625 2,100,000 Pulte Group, Inc. (a)................................ 6.38% 05/15/33 2,121,000 2,100,000 USG Corp. (a) (c).................................... 9.75% 01/15/18 2,320,500 -------------- 6,391,953 -------------- CAPITAL GOODS - 5.9% 1,700,000 Crown Cork & Seal Co., Inc. (a)...................... 7.38% 12/15/26 1,827,500 2,375,000 H&E Equipment Services, Inc. (a)..................... 7.00% 09/01/22 2,185,000 650,000 Terex Corp. ......................................... 6.50% 04/01/20 624,000 1,625,000 Terex Corp. (a)...................................... 6.00% 05/15/21 1,470,625 -------------- 6,107,125 -------------- CONSUMER GOODS - 7.2% 2,000,000 ACCO Brands Corp. (a)................................ 6.75% 04/30/20 2,067,500 1,775,000 L Brands, Inc. (a)................................... 7.60% 07/15/37 1,872,625 1,800,000 New Albertsons, Inc. (a)............................. 7.75% 06/15/26 1,552,500 1,850,000 Post Holdings, Inc. (a).............................. 7.38% 02/15/22 1,956,375 -------------- 7,449,000 -------------- ENERGY - 21.8% 2,100,000 Atlas Pipeline Partners LP/Atlas Pipeline Finance Corp. (a) (d)..................................... 5.88% 08/01/23 1,686,563 2,200,000 Blue Racer Midstream LLC/Blue Racer Finance Corp. (e)......................................... 6.13% 11/15/22 1,655,500 1,750,000 Breitburn Energy Partners LP/Breitburn Finance Corp. (a) (d)..................................... 8.63% 10/15/20 301,875 250,000 Breitburn Energy Partners LP/Breitburn Finance Corp. (a) (d)..................................... 7.88% 04/15/22 41,875 1,925,000 Calfrac Holdings LP (a) (e).......................... 7.50% 12/01/20 779,779 1,299,500 Chesapeake Energy Corp. (e).......................... 8.00% 12/15/22 562,034 2,075,000 EP Energy LLC / Everest Acquisition Finance, Inc. ... 6.38% 06/15/23 736,625 2,410,000 EV Energy Partners LP/EV Energy Finance Corp. (a).... 8.00% 04/15/19 807,350 1,850,000 Ferrellgas Partners LP/Ferrellgas Partners Finance Corp. (a)......................................... 8.63% 06/15/20 1,692,750 2,625,000 Global Partners LP/GLP Finance Corp. (a) (d)......... 6.25% 07/15/22 1,850,625 1,650,000 Holly Energy Partners LP/ Holly Energy Finance Corp. ............................................ 6.50% 03/01/20 1,575,750 1,000,000 ION Geophysical Corp. (d)............................ 8.13% 05/15/18 405,000
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- CORPORATE BONDS AND NOTES (CONTINUED) ENERGY (CONTINUED) $ 950,000 Linn Energy LLC/Linn Energy Finance Corp. (a)........ 8.63% 04/15/20 $ 147,250 800,000 Linn Energy LLC/Linn Energy Finance Corp. ........... 7.75% 02/01/21 100,000 2,200,000 MPLX LP (e).......................................... 4.88% 12/01/24 1,719,953 2,200,000 NRG Energy, Inc. (a)................................. 6.25% 07/15/22 1,826,000 2,250,000 NRG Yield Operating, LLC (a)......................... 5.38% 08/15/24 1,901,250 1,275,000 Pioneer Natural Resources Co. (a).................... 6.65% 03/15/17 1,298,103 1,550,000 Suburban Propane Partners LP/Suburban Energy Finance Corp. ............................................ 7.38% 08/01/21 1,526,750 2,200,000 Tesoro Logistics LP/Tesoro Logistics Finance Corp. (a)......................................... 6.13% 10/15/21 2,002,000 415,000 W&T Offshore, Inc. (d)............................... 8.50% 06/15/19 112,050 -------------- 22,729,082 -------------- HEALTHCARE - 8.0% 1,925,000 CHS/Community Health Systems, Inc. (a)............... 7.13% 07/15/20 1,848,000 675,000 CHS/Community Health Systems, Inc. .................. 6.88% 02/01/22 614,250 150,000 DJO Finco, Inc./DJO Finance LLC/DJO Finance Corp. (e)......................................... 8.13% 06/15/21 126,750 1,750,000 HCA, Inc. (a)........................................ 8.00% 10/01/18 1,966,562 1,000,000 HCA, Inc. (a)........................................ 5.88% 05/01/23 1,047,500 438,000 inVentiv Health, Inc. (d)............................ 10.00% 08/15/18 418,290 682,025 inVentiv Health, Inc. (f) (g)........................ 10.00% 08/15/18 671,795 2,000,000 Kindred Healthcare, Inc. (a)......................... 6.38% 04/15/22 1,635,000 -------------- 8,328,147 -------------- LEISURE - 10.7% 2,000,000 Boyd Gaming Corp. (a)................................ 9.00% 07/01/20 2,120,000 2,375,000 Cedar Fair LP/Canada's Wonderland Co./Magnum Management Corp. (a).............................. 5.25% 03/15/21 2,446,250 1,775,000 Chester Downs & Marina LLC (a) (g)................... 9.25% 02/01/20 1,242,500 2,450,000 GLP Capital LP/GLP Financing II, Inc. (a)............ 5.38% 11/01/23 2,358,125 1,300,000 MGM Resorts International (a)........................ 7.63% 01/15/17 1,352,000 1,725,000 Palace Entertainment Holdings LLC/Palace Entertainment Holdings Corp. (a) (g).............. 8.88% 04/15/17 1,650,609 -------------- 11,169,484 -------------- MEDIA - 10.5% 3,125,000 CCO Holdings LLC/CCO Holdings Capital Corp. (a)...... 5.75% 01/15/24 3,222,656 1,345,000 Cumulus Media Holdings, Inc. (a) (d)................. 7.75% 05/01/19 526,231 1,700,000 iHeartCommunications, Inc. (a)....................... 9.00% 03/01/21 1,111,375 2,325,000 Lamar Media Corp. (a)................................ 5.38% 01/15/24 2,383,125 1,750,000 Mediacom Broadband LLC/Mediacom Broadband Corp. (a).. 6.38% 04/01/23 1,706,250 1,925,000 Neptune Finco Corp. (e).............................. 10.88% 10/15/25 2,040,500 -------------- 10,990,137 --------------
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- CORPORATE BONDS AND NOTES (CONTINUED) SERVICES - 6.5% $ 1,000,000 Avis Budget Car Rental LLC/Avis Budget Finance, Inc. (a).......................................... 5.50% 04/01/23 $ 953,750 1,850,000 Casella Waste Systems, Inc. (a)...................... 7.75% 02/15/19 1,803,750 1,000,000 Sotheby's (e)........................................ 5.25% 10/01/22 905,000 369,000 United Rentals North America, Inc. .................. 8.25% 02/01/21 386,528 900,000 United Rentals North America, Inc. (a)............... 7.63% 04/15/22 930,375 1,925,000 United Rentals North America, Inc. .................. 5.75% 11/15/24 1,785,437 -------------- 6,764,840 -------------- TECHNOLOGY & ELECTRONICS - 2.3% 2,350,000 CyrusOne LP/CyrusOne Finance Corp. .................. 6.38% 11/15/22 2,397,000 -------------- TELECOMMUNICATIONS - 17.8% 2,000,000 Centurylink, Inc. (a)................................ 7.65% 03/15/42 1,510,000 1,400,000 FairPoint Communications, Inc. (a) (e)............... 8.75% 08/15/19 1,356,250 1,925,000 Frontier Communications Corp. (a).................... 7.13% 01/15/23 1,612,188 1,725,000 Frontier Communications Corp. (e).................... 11.00% 09/15/25 1,668,938 3,250,000 Level 3 Financing, Inc. ............................. 5.38% 05/01/25 3,282,500 500,000 Qwest Capital Funding, Inc. ......................... 6.88% 07/15/28 382,500 2,750,000 SBA Communications Corp. (a)......................... 4.88% 07/15/22 2,760,312 1,875,000 T-Mobile USA, Inc. (a)............................... 6.63% 04/01/23 1,926,562 2,950,000 Windstream Corp. (a)................................. 7.50% 06/01/22 2,286,250 1,850,000 Zayo Group LLC/Zayo Capital, Inc. (a)................ 6.00% 04/01/23 1,817,625 -------------- 18,603,125 -------------- TRANSPORTATION - 1.7% 1,800,000 Watco Cos. LLC/Watco Finance Corp. (a) (g)........... 6.38% 04/01/23 1,737,000 -------------- UTILITY - 3.7% 2,350,000 AES Corp. (a)........................................ 4.88% 05/15/23 2,091,500 2,225,000 TerraForm Power Operating LLC (e).................... 5.88% 02/01/23 1,785,563 -------------- 3,877,063 -------------- TOTAL CORPORATE BONDS AND NOTES....................................................... 110,535,393 (Cost $132,608,961) -------------- PRINCIPAL VALUE (LOCAL STATED STATED VALUE CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS) ---------------- ------------------------------------- --------------- -------------- --------------- -------------- FOREIGN CORPORATE BONDS AND NOTES - 11.1% BASIC INDUSTRY - 1.3% 1,000,000 Cascades, Inc. (USD) (a) (e)......................... 5.50% 07/15/22 962,500 875,000 Millar Western Forest Products Ltd. (USD) (d)........ 8.50% 04/01/21 398,125 -------------- 1,360,625 --------------
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL VALUE (LOCAL STATED STATED VALUE CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLARS) ---------------- ------------------------------------- --------------- -------------- --------------- -------------- FOREIGN CORPORATE BONDS AND NOTES (CONTINUED) CAPITAL GOODS - 1.8% 2,000,000 Ardagh Packaging Finance PLC/Ardagh Holdings USA, Inc. (USD) (a) (e)................................ 6.75% 01/31/21 $ 1,905,000 -------------- ENERGY - 3.7% 1,800,000 LBC Tank Terminals Holding Netherlands BV (USD) (g).. 6.88% 05/15/23 1,728,000 645,000 Precision Drilling Corp. (USD) ...................... 6.63% 11/15/20 448,275 1,750,000 Puma International Financing S.A. (USD) (e).......... 6.75% 02/01/21 1,627,577 -------------- 3,803,852 -------------- TELECOMMUNICATIONS - 2.2% 3,600,000 Intelsat Luxembourg S.A. (USD) (a)................... 7.75% 06/01/21 1,584,000 700,000 Wind Acquisition Finance S.A. (USD) (e).............. 7.38% 04/23/21 668,934 -------------- 2,252,934 -------------- TRANSPORTATION - 2.1% 1,550,000 Dynagas LNG Partners LP/Dynagas Finance, Inc. (USD) (a) (d)..................................... 6.25% 10/30/19 1,077,250 2,000,000 Teekay Offshore Partners LP/Teekay Offshore Finance Corp. (USD) (a) (d)............................... 6.00% 07/30/19 1,145,000 -------------- 2,222,250 -------------- TOTAL FOREIGN CORPORATE BONDS AND NOTES............................................... 11,544,661 -------------- (Cost $15,507,791) PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- MORTGAGE-BACKED SECURITIES - 8.7% COLLATERALIZED MORTGAGE OBLIGATIONS - 7.6% Citicorp Mortgage Securities, Inc. $ 1,396,721 Series 2007-2, Class 1A3 ......................... 6.00% 02/01/37 1,419,739 Countrywide Alternative Loan Trust 131,692 Series 2007-11T1, Class A37 (d) (h)............... 37.46% 05/25/37 293,430 922,627 Series 2007-OA3, Class 1A1 (h).................... 0.57% 04/25/47 780,309 Countrywide Home Loan Mortgage Pass-Through Trust 152,535 Series 2006-21, Class A8 ......................... 5.75% 02/01/37 144,239 Home Equity Asset Trust 1,190,000 Series 2006-4, Class 2A4 (h)...................... 0.71% 08/25/36 1,013,781 1,261,000 Series 2006-7, Class 2A3 (h)...................... 0.58% 01/25/37 966,561 Nomura Resecuritization Trust 2,675,931 Series 2014-1R, Class 2A11 (e) (h)................ 0.69% 02/26/37 1,398,256 Residential Accredit Loans, Inc. 134,845 Series 2007-Q56, Class A2 (h)..................... 52.03% 04/25/37 324,845 Securitized Asset Backed Receivables LLC Trust 1,224,624 Series 2007, Class BR4 (h)........................ 0.63% 05/25/37 722,917
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- MORTGAGE-BACKED SECURITIES (CONTINUED) COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED) Washington Mutual Alternative Mortgage Pass-Through Certificates $ 41,445 Series 2007-5, Class A11(d) (h)................... 36.92% 06/25/37 $ 98,829 Wells Fargo Mortgage Backed Securities Trust 504,896 Series 2006-8, Class A15 ......................... 6.00% 07/01/36 510,696 207,660 Series 2007-8, Class 2A2 ......................... 6.00% 07/01/37 204,948 -------------- 7,878,550 -------------- COMMERCIAL MORTGAGE-BACKED SECURITIES - 1.1% Greenwich Capital Commercial Funding Corp. 1,180,000 Series 2007-GG11, Class AJ (h).................... 6.25% 12/01/49 1,171,800 -------------- TOTAL MORTGAGE-BACKED SECURITIES...................................................... 9,050,350 (Cost $8,311,799) -------------- ASSET-BACKED SECURITIES - 5.7% Ace Securities Corp. 837,278 Series 2003-MH1, Class A4 (e)..................... 6.50% 08/01/30 925,278 BankAmerica Manufactured Housing Contract Trust II 2,300,000 Series 1997-1, Class B1 .......................... 6.94% 06/10/21 2,932,105 Bombardier Capital Mortgage Securitization Corp. 265,615 Series 1999-B, Class A1B (d)...................... 6.61% 12/01/29 133,066 Citigroup Mortgage Loan Trust, Inc. 2,301,000 Series 2003-HE3, Class M4 (h)..................... 3.43% 12/25/33 1,143,611 Green Tree Financial Corp. 62,698 Series 1997-4, Class B1 (d) ...................... 7.23% 02/15/29 4,347 654,811 Series 1998-4, Class M1 .......................... 6.83% 04/01/30 432,500 925,796 Series 1999-3, Class M1 (d)....................... 6.96% 02/01/31 86,702 GSAMP Trust 2,878,014 Series 2006-S5, Class A1 (d) (h).................. 0.61% 09/25/36 70,730 Oakwood Mortgage Investors, Inc. 676,291 Series 1999-B, Class M1 (d)....................... 7.18% 12/01/26 238,818 -------------- TOTAL ASSET-BACKED SECURITIES......................................................... 5,967,157 (Cost $4,686,314) -------------- SENIOR FLOATING-RATE LOAN INTERESTS - 5.0% BASIC INDUSTRY - 1.3% 1,945,026 FMG Resources (August 2006) Pty Ltd., Term Loan B (h)........................................ 4.25% 06/30/19 1,343,526 -------------- LEISURE - 1.7% 1,825,000 Four Seasons Holdings Inc. Term Loan, Second Lien (d) (h)...................................... 6.25% 12/28/20 1,795,344 --------------
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED) SERVICES - 0.8% $ 985,000 Caesars Growth Properties, LLC, Term Loan (h)........ 6.25% 04/15/21 $ 814,270 -------------- TELECOMMUNICATIONS - 0.9% 972,500 Fairpoint Communications, Inc., Term Loan (h)........ 7.50% 02/14/19 955,481 -------------- UTILITY - 0.3% 834,744 TXU (Texas Competitive Electric Holdings Co. LLC) 2017 Term Loan (Extending) (h).................... 4.91% 10/10/17 251,584 -------------- TOTAL SENIOR FLOATING-RATE LOAN INTERESTS............................................. 5,160,205 (Cost $6,286,011) -------------- SHARES DESCRIPTION VALUE ---------------- -------------------------------------------------------------------------------------- -------------- COMMON STOCKS - 1.5% AUTOMOTIVE - 0.4% 33,500 Ford Motor Co......................................................................... 399,990 -------------- CAPITAL GOODS - 0.5% 20,275 General Electric Co................................................................... 590,003 -------------- ENERGY - 0.3% 7 Thunderbird Resources Equity, Inc. (d) (i) (j)........................................ 281,907 -------------- UTILITY - 0.3% 36,000 AES Corp.............................................................................. 342,000 -------------- TOTAL COMMON STOCKS................................................................... 1,613,900 (Cost $2,302,182) -------------- MASTER LIMITED PARTNERSHIPS - 0.0% ENERGY - 0.0% 4,411 EV Energy Partners, L.P............................................................... 11,910 (Cost $141,982) -------------- PREFERRED SECURITIES - 0.0% 4,000 Soloso CDO, Ltd., Series 2005-1 (g) (j) (k)........................................... 1,250 (Cost $0) -------------- PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- STRUCTURED NOTES - 0.0% $ 5,750,000 Preferred Term Securities XXV, Ltd. (g) (j).......... (k) 06/22/37 1,797
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED)
PRINCIPAL STATED STATED VALUE DESCRIPTION COUPON MATURITY VALUE ---------------- ----------------------------------------------------- -------------- --------------- -------------- STRUCTURED NOTES (CONTINUED) Preferred Term Securities XXVI, Ltd. $ 2,500,000 Subordinated Note (g) (j)......................... (k) 09/22/37 $ 3,906 -------------- TOTAL STRUCTURED NOTES................................................................ 5,703 (Cost $0) -------------- TOTAL INVESTMENTS - 138.0%............................................................ 143,890,529 (Cost $169,845,040) (l) OUTSTANDING LOAN - (42.5%)............................................................ (44,350,000) NET OTHER ASSETS AND LIABILITIES - 4.5%............................................... 4,714,853 -------------- NET ASSETS - 100.0%................................................................... $ 104,255,382 ==============
(a) All or a portion of this security serves as collateral on the outstanding loan. (b) The issuer is in default and has filed for protection in federal bankruptcy court. Interest is not being accrued. (c) Multi-Step Coupon Bond - Coupon steps up or down based upon ratings changes by Standard & Poor's Ratings Group or Moody's Investors Service, Inc. The interest rate shown reflects the rate in effect at January 31, 2016. (d) Pursuant to procedures adopted by the Fund's Board of Trustees, this security has been determined to be illiquid by Brookfield Investment Management, Inc. ("Brookfield"), the Fund's sub-advisor. (e) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the Securities Act of 1933, as amended (the "1933 Act"), and may be resold in transactions exempt from registration, normally to qualified institutional buyers. Pursuant to procedures adopted by the Fund's Board of Trustees, this security has been determined to be liquid by Brookfield. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security- specific factors and assumptions, which require subjective judgment. At January 31, 2016, securities noted as such amounted to $20,087,812 or 19.3% of net assets. (f) This security is a Payment-in-Kind ("PIK") Toggle Note whereby the issuer may elect to pay interest in cash at the stated coupon or in PIK at 12.00%. The next interest payment is scheduled for February 15, 2016 and will be paid in PIK. (g) This security, sold within the terms of a private placement memorandum, is exempt from registration upon resale under Rule 144A under the 1933 Act, and may be resold in transactions exempt from registration, normally to qualified institutional buyers (see Note 2C - Restricted Securities in the Notes to Portfolio of Investments). (h) Floating rate security. The interest rate shown reflects the rate in effect at January 31, 2016. (i) Non-income producing security. (j) This security is fair valued by the Advisor's Pricing Committee in accordance with procedures adopted by the Fund's Board of Trustees, and in accordance with the provisions of the Investment Company Act of 1940, as amended. At January 31, 2016, securities noted as such are valued at $288,860 or 0.3% of net assets. (k) Zero coupon security. (l) Aggregate cost for financial reporting purposes, which approximates the aggregate cost for federal income tax purposes. As of January 31, 2016, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost was $4,230,174 and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value was $30,184,685. See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED) CAD Canadian Dollar CDO Collateralized Debt Obligation USD United States Dollar ----------------------------- VALUATION INPUTS A summary of the inputs used to value the Fund's investments as of January 31, 2016 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial Statements):
LEVEL 2 LEVEL 3 TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT VALUE AT QUOTED OBSERVABLE UNOBSERVABLE INVESTMENTS 7/31/2015 PRICES INPUTS INPUTS ---------------------------------------------- --------------- --------------- --------------- -------------- Corporate Bonds and Notes*.................... $ 110,535,393 $ -- $ 110,535,393 $ -- Foreign Corporate Bonds and Notes*............ 11,544,661 -- 11,544,661 -- Mortgage-Backed Securities: Collateralized Mortgage Obligations........ 7,878,550 -- 7,878,550 -- Commercial Mortgage-Backed Securities...... 1,171,800 -- 1,171,800 -- Asset-Backed Securities....................... 5,967,157 -- 5,967,157 -- Senior Floating-Rate Loan Interests*.......... 5,160,205 -- 5,160,205 -- Common Stocks: Energy..................................... 281,907 -- -- 281,907 Other industry categories*................. 1,331,993 1,331,993 -- -- Master Limited Partnerships*.................. 11,910 11,910 -- -- Preferred Securities.......................... 1,250 -- -- 1,250 Structured Notes.............................. 5,703 -- -- 5,703 --------------- --------------- --------------- -------------- Total Investments............................. $ 143,890,529 $ 1,343,903 $ 142,257,766 $ 288,860 =============== =============== =============== ==============
* See Portfolio of Investments for industry breakout. All transfers in and out of the Levels during the period are assumed to be transferred on the last day of the period at their current value. There were no transfers between Levels at January 31, 2016. The following provides information on the Level 3 equity held by the Fund that was valued at January 31, 2016 based on unobservable inputs.
IMPACT TO VALUATION FROM FAIR VALUE AT VALUATION UNOBSERVABLE AN INCREASE ASSET TYPE 01/31/16 TECHNIQUE INPUTS AMOUNT IN INPUT --------------- --------------- --------------- ------------------- --------------- --------------- Equity $ 281,907 Income Approach Expected Life 20 years Decrease Discount Rate 10% Decrease
See Notes to Portfolio of Investments FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) PORTFOLIO OF INVESTMENTS (CONTINUED) JANUARY 31, 2016 (UNAUDITED) Level 3 Structured Notes and Preferred Securities are valued using broker quotes. These values are based on unobservable and non-quantitative inputs. The Fund's Board of Trustees has adopted valuation procedures that are utilized by the Advisor's Pricing Committee to oversee the day-to-day valuation of the Fund's investments. The Advisor's Pricing Committee, through the Fund's fund accounting agent, monitors daily pricing via tolerance checks and stale and unchanged price reviews. The Advisor's Pricing Committee also reviews monthly back testing of pricing services prices by comparing sales prices of Fund investments to prior day pricing service prices. Additionally, the Advisor's Pricing Committee reviews periodic information from the Fund's third-party pricing service that compares secondary market trade prices to their daily valuations. The following table presents the activity of the Fund's investments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period presented. BEGINNING BALANCE AT OCTOBER 31, 2015 Common Stocks $ 248,220 Preferred Securities 1,250 Structured Notes 4,922 Net Realized Gain (Loss) -- Net Change in Unrealized Appreciation/Depreciation Common Stocks 33,687 Preferred Securities -- Structured Notes 781 Purchases -- Sales -- Transfers In -- Transfers Out -- ENDING BALANCE AT JANUARY 31, 2015 Common Stocks 281,907 Preferred Securities 1,250 Structured Notes 5,703 ---------- Total Level 3 holdings $ 288,860 ========== There was a net change of $34,468 in unrealized appreciation (depreciation) from Level 3 investments held as of January 31, 2016. See Notes to Portfolio of Investments NOTES TO PORTFOLIO OF INVESTMENTS FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) JANUARY 31, 2016 (UNAUDITED) 1. ORGANIZATION First Trust Strategic High Income Fund II (the "Fund") is a diversified, closed-end management investment company organized as a Massachusetts business trust on January 18, 2006, and is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol "FHY" on the New York Stock Exchange ("NYSE"). The Fund, which is an investment company within the scope of Financial Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows accounting and reporting guidance under FASB Accounting Standards Codification Topic 946, "Financial Services - Investment Companies." 2. VALUATION AND INVESTMENT PRACTICES A. PORTFOLIO VALUATION The net asset value ("NAV") of the Common Shares of the Fund is determined daily, as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time, on each day the NYSE is open for trading. If the NYSE closes early on a valuation day, the NAV is determined as of that time. Domestic debt securities and foreign securities are priced using data reflecting the earlier closing of the principal markets for those securities. The Fund's NAVper Common Share is calculated by dividing the value of all assets of the Fund (including accrued interest and dividends), less all liabilities (including accrued expenses, dividends declared but unpaid, and any borrowings of the Fund), by the total number of Common Shares outstanding. The Fund's investments are valued daily at market value or, in the absence of market value with respect to any portfolio securities, at fair value. Market value prices represent last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party pricing services. Fair value prices represent any prices not considered market value prices and are either obtained from a third-party pricing service or are determined by the Pricing Committee of the Fund's investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"), in accordance with valuation procedures adopted by the Fund's Board of Trustees, and in accordance with provisions of the 1940 Act. Investments valued by the Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to the Portfolio of Investments. The Fund's investments are valued as follows: Corporate bonds, notes, U.S. government securities, mortgage-backed securities, asset-backed securities and other debt securities are valued on the basis of valuations provided by dealers who make markets in such securities or by an independent pricing service approved by the Fund's Board of Trustees, which may use the following valuation inputs when available: 1) benchmark yields; 2) reported trades; 3) broker/dealer quotes; 4) issuer spreads; 5) benchmark securities; 6) bids and offers; and 7) reference data including market research publications. Common stocks and other equity securities listed on any national or foreign exchange (excluding The Nasdaq(R) Stock Market LLC ("Nasdaq") and the London Stock Exchange Alternative Investment Market ("AIM")) are valued at the last sale price on the exchange on which they are principally traded or, for Nasdaq and AIM securities, the official closing price. Securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, at the close of the securities exchange representing the principal market for such securities. Securities traded in an over-the-counter market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price. The Senior Floating-Rate Loan interests ("Senior Loans")1 held in the Fund are not listed on any securities exchange or board of trade. Senior Loans are typically bought and sold by institutional investors in individually negotiated private transactions that function in many respects like an over-the-counter secondary market, although typically no formal market-makers exist. This market, while having grown substantially since its inception, generally has fewer trades and less liquidity than the secondary market for other types of securities. Some Senior Loans have few or no trades, or trade infrequently, and information regarding a specific Senior Loan may not be widely available or may be incomplete. Accordingly, determinations of the market value of Senior Loans may be based on infrequent and dated information. Because there is less reliable, objective data available, elements of judgment may play a greater role in valuation of Senior Loans than for other types of securities. Typically, Senior Loans are fair valued using information provided by a third-party NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) JANUARY 31, 2016 (UNAUDITED) pricing service. The third-party pricing service primarily uses over-the-counter pricing from dealer runs and broker quotes from indicative sheets to value the Senior Loans. Forward foreign currency contracts are fair valued at the current day's interpolated foreign exchange rate, as calculated using the current day's spot rate, and the thirty, sixty, ninety, and one-hundred eighty day forward rates provided by an independent pricing service. Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of discounts (amortized cost), provided the Advisor's Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following: 1) the credit conditions in the relevant market and changes thereto; 2) the liquidity conditions in the relevant market and changes thereto; 3) the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates); 4) issuer-specific conditions (such as significant credit deterioration); and 5) any other market-based data the Advisor's Pricing Committee considers relevant. In this regard, the Advisor's Pricing Committee may use last-obtained market-based data to assist it when valuing portfolio securities using amortized cost. Certain securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Fund's Board of Trustees or its delegate, the Advisor's Pricing Committee, at fair value. These securities generally include, but are not limited to, restricted securities (securities which may not be publicly sold without registration under the Securities Act of 1933, as amended (the "1933 Act")) for which a pricing service is unable to provide a market price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred that is likely to materially affect the value of the security after the market has closed but before the calculation of the Fund's NAV or make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security's fair value. As a general principle, the current fair value of a security would appear to be the amount which the owner might reasonably expect to receive for the security upon its current sale. When fair value prices are used, generally they will differ from market quotations or official closing prices on the applicable exchanges. A variety of factors may be considered in determining the fair value of such securities, including, but not limited to, the following: 1) the fundamental business data relating to the borrower/issuer; 2) an evaluation of the forces which influence the market in which these securities are purchased and sold; 3) the type, size and cost of a security; 4) the financial statements of the borrower/issuer; 5) the credit quality and cash flow of the borrower/issuer, based on the sub-advisor's or external analysis; 6) the information as to any transactions in or offers for the security; 7) the price and extent of public trading in similar securities (or equity securities) of the borrower/issuer, or comparable companies; 8) the coupon payments; 9) the quality, value and salability of collateral, if any, securing the security; 10) the business prospects of the borrower/issuer, including any ability to obtain money or resources from a parent or affiliate and an assessment of the borrower's/issuer's management; 11) the prospects for the borrower's/issuer's industry, and multiples (of earnings and/or cash flows) being paid for similar businesses in that industry; 12) the borrower's/issuer's competitive position within the industry; 13) the borrower's/issuer's ability to access additional liquidity through public and/or private markets; and 14) other relevant factors. The Fund invests a significant portion of its assets in below-investment grade debt securities, including structured finance securities and corporate bonds. Structured finance securities include: asset-backed securities, including home equity, manufactured housing, etc.; commercial mortgage-backed securities; residential mortgage-backed or private-label collateralized mortgage obligations; and collateralized debt obligations. The value and related income of these securities is sensitive to changes in economic conditions, including delinquencies and/or defaults. The Fund is subject to fair value accounting standards that define fair value, establish the framework for measuring fair value and provide a three-level hierarchy for fair valuation based upon the inputs to the valuation as of the measurement date. The three levels of the fair value hierarchy are as follows: NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) JANUARY 31, 2016 (UNAUDITED) o Level 1 - Level 1 inputs are quoted prices in active markets for identical investments. An active market is a market in which transactions for the investment occur with sufficient frequency and volume to provide pricing information on an ongoing basis. o Level 2 - Level 2 inputs are observable inputs, either directly or indirectly, and include the following: o Quoted prices for similar investments in active markets. o Quoted prices for identical or similar investments in markets that are non-active. A non-active market is a market where there are few transactions for the investment, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. o Inputs other than quoted prices that are observable for the investment (for example, interest rates and yield curves observable at commonly quoted intervals, volatilities, prepayment speeds, loss severities, credit risks, and default rates). o Inputs that are derived principally from or corroborated by observable market data by correlation or other means. o Level 3 - Level 3 inputs are unobservable inputs. Unobservable inputs may reflect the reporting entity's own assumptions about the assumptions that market participants would use in pricing the investment. The inputs or methodologies used for valuing investments are not necessarily an indication of the risk associated with investing in those investments. A summary of the inputs used to value the Fund's investments as of January 31, 2016, is included with the Fund's Portfolio of Investments. B. SECURITIES TRANSACTIONS Securities transactions are recorded as of the trade date. Realized gains and losses from securities transactions are recorded on the identified cost basis. The Fund invests in certain lower credit quality securitized assets (for example, asset-backed securities, collateralized mortgage obligations and commercial mortgage-backed securities) that have contractual cash flows. For these securities, if there is a change in the estimated cash flows, based on an evaluation of current information, then the estimated yield is adjusted. Additionally, if the evaluation of current information indicates a permanent impairment of the security, the cost basis of the security is written down and a loss is recognized. Debt obligations may be placed on non-accrual status, and related interest income may be reduced by ceasing current accruals and amortization/accretion and writing off interest receivables when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is reasonably assured. Securities purchased on a when-issued, delayed-delivery or forward purchase commitment basis may have extended settlement periods. The value of the security so purchased is subject to market fluctuations during this period. The Fund maintains liquid assets with a current value at least equal to the amount of its when-issued, delayed-delivery or forward purchase commitments until payment is made. At January 31, 2016, the Fund had no when-issued, delayed-delivery or forward purchase commitments. C. RESTRICTED SECURITIES The Fund invests in restricted securities, which are securities that may not be offered for public sale without first being registered under the 1933 Act. Prior to registration, restricted securities may only be resold in transactions exempt from registration under Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of January 31, 2016, the Fund held restricted securities as shown in the following table that Brookfield Investment Management Inc., the sub-advisor, has deemed illiquid pursuant to procedures adopted by the Fund's Board of Trustees. Although market instability can result in periods of increased overall market illiquidity, liquidity for each security is determined based on security-specific factors and assumptions, which require subjective judgment. The Fund does not have the right to demand that such securities be registered. These securities are valued according to the valuation procedures as stated in the Portfolio Valuation note (Note 2A) and are not expressed as a discount to the carrying value of a comparable unrestricted security. There are no unrestricted securities with the same maturity dates and yields for these issuers. NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) JANUARY 31, 2016 (UNAUDITED)
% OF ACQUISITION PRINCIPAL CARRYING NET SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS --------------------------------------------- ------------------ ------------ --------- ------------ ------------ ------------ Chester Downs & Marina LLC, 02/01/20 04/11/13, 04/17/13 $ 1,775,000 70 $ 1,740,195 $ 1,242,500 1.19 inVentiv Health, Inc., 08/15/18 02/15/15-08/15/15 $ 682,025 99 672,002 671,795 0.65 LBC Tank Terminals Holding Netherlands BV, 05/15/23 9/03/14 $ 1,800,000 96 1,914,727 1,728,000 1.66 Preferred Term Securities XXV, Ltd., Zero Coupon, 06/22/37 03/27/07 $ 5,750,000 0.00* -- 1,797 0.00** Preferred Term Securities XXVI, Ltd., Subordinated Note, Zero Coupon, 09/22/37 06/06/07 $ 2,500,000 0.00* -- 3,906 0.00** Palace Entertainment Holdings, LLC, 04/15/17 03/18/11-02/22/13 $ 1,725,000 96 1,731,685 1,650,609 1.58 Soloso CDO, Ltd., Series 2005-1 04/24/06 4,000 0.31 -- 1,250 0.00** Watco Cos. LLC/Watco Finance Corp., 04/01/23 03/31/15-04/08/15 $ 1,800,000 97 1,814,756 1,737,000 1.67 ----------- ----------- ------ $ 7,873,365 $ 7,036,857 6.75% =========== =========== ======
* Amount is less than $0.01. ** Amount is less than 0.01%. D. COLLATERALIZED DEBT OBLIGATIONS A collateralized debt obligation ("CDO") is an asset-backed security whose underlying collateral is typically a portfolio of bonds or bank loans. Where the underlying collateral is a portfolio of bonds, a CDO is referred to as a collateralized bond obligation ("CBO"). Where the underlying collateral is a portfolio of bank loans, a CDO is referred to as a collateralized loan obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying collateral. Multiple tranches of securities are issued by the CDO, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity, according to their degree of risk. If there are defaults or the CDO's collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. CDOs, similar to other asset-backed securities, are subject to prepayment risk. E. FORWARD FOREIGN CURRENCY CONTRACTS The Fund is subject to foreign currency risk in the normal course of pursuing its investment objectives. Forward foreign currency contracts are agreements between two parties ("Counterparties") to exchange one currency for another at a future date and at a specified price. The Fund uses forward foreign currency contracts to facilitate transactions in foreign securities and to manage the Fund's foreign currency exposure. These contracts are valued daily, and the Fund's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included on the Forward Foreign Currency Contracts table in the Portfolio of Investments. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency and securities values and interest rates. Due to the risks, the Fund could incur losses in excess of the net unrealized value shown on the Forward Foreign Currency Contracts table in the Portfolio of Investments. In the event of default by the Counterparty, the Fund will provide notice to the Counterparty of the Fund's intent to convert the currency held by the Fund into the currency that the Counterparty agreed to exchange with the Fund. If a Counterparty becomes bankrupt or otherwise fails to perform its obligations due to financial difficulties, the Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding. The Fund may obtain only limited recovery or may obtain no recovery in such circumstances. The Fund held no forward foreign currency contracts as of January 31, 2016. NOTES TO PORTFOLIO OF INVESTMENTS (CONTINUED) FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) JANUARY 31, 2016 (UNAUDITED) F. FOREIGN CURRENCY The books and records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities are translated into U.S. dollars at the exchange rates prevailing at the end of the period. Purchases and sales of investments and items of income and expense are translated on the respective dates of such transactions. 3. DERIVATIVE TRANSACTIONS For the fiscal year-to-date period (November 1, 2015 through January 31, 2016), the notional values of forward foreign currency contracts opened and closed were $1,331,381 and $5,935,981, respectively. ITEM 2. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 3. EXHIBITS. Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) First Trust Strategic High Income Fund II ----------------------------------------------- By (Signature and Title)* /s/ James M. Dykas ---------------------------------------- James M. Dykas, President and Chief Executive Officer (principal executive officer) Date: March 22, 2016 ------------------ Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ James M. Dykas ---------------------------------------- James M. Dykas, President and Chief Executive Officer (principal executive officer) Date: March 22, 2016 ------------------ By (Signature and Title)* /s/ Donald P. Swade ---------------------------------------- Donald P. Swade, Treasurer, Chief Financial Officer and Chief Accounting Officer (principal financial officer) Date: March 22, 2016 ------------------ * Print the name and title of each signing officer under his or her signature.