N-Q 1 d589076dnq.htm FORM N-Q Form N-Q

 

 

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: 811-23268

 

 

Highland Floating Rate Opportunities Fund

(Exact name of registrant as specified in charter)

 

 

200 Crescent Court

Suite 700

Dallas, Texas 75201

(Address of principal executive offices)(Zip code)

 

 

Highland Capital Management Fund 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: (800) 357-9167

Date of fiscal year end: June 30

Date of reporting period: March 31, 2018

 

 

 


Item 1: Schedule of Investments

The Schedule of Investments are attached herewith.


INVESTMENT PORTFOLIO (unaudited)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

Principal Amount ($)

        Value ($)  
U.S. Senior Loans (a) - 83.7%   

AEROSPACE - 4.2%

  

11,631,268

  

Accudyne Industries, LLC 3-month LIBOR + 3.250% 08/18/2024

     11,710,535  

14,959,150

  

Engility Corporation
Term Loan B-2, 3-month LIBOR + 2.750% 08/12/2023

     14,985,927  

1,965,125

  

TransDigm, Inc.
Term Loan F, 3-month LIBOR + 2.750% 06/09/2023

     1,972,956  

13,897,561

  

Term Loan E, 3-month LIBOR + 2.750% 05/14/2022

     13,949,677  

2,985,000

  

Term Loan G, 3-month LIBOR + 2.500% 08/22/2024

     2,998,060  
     

 

 

 
        45,617,155  
     

 

 

 

CHEMICALS - 0.5%

  

1,375,000

  

Minerals Technologies, Inc.
Fixed Rate Term Loan 05/09/2021

     1,393,906  

1,381,579

  

WR Grace & Co.
Term Loan B-1, 3-month LIBOR + 1.750%, 04/03/2025

     1,387,623  

2,368,421

  

Term Loan B-2, 3-month LIBOR + 1.750%, 04/03/2025

     2,378,783  
     

 

 

 
        5,160,312  
     

 

 

 

CONSUMER DISCRETIONARY - 3.3%

  

13,823,613

  

Truck Hero, Inc.
First Lien Term Loan, 3-month LIBOR + 4.000% 04/21/2024

     13,920,378  

4,076,667

  

Second Lien Term Loan, 3-month LIBOR + 8.250% 04/21/2025

     4,122,529  

17,491,949

  

USS Ultimate Holdings, Inc.
First Lien Term Loan, 3-month LIBOR + 3.750% 08/25/2024

     17,612,206  
     

 

 

 
        35,655,113  
     

 

 

 

CONSUMER PRODUCTS - 2.2%

  

3,393,956

  

Dayco Products, LLC
Term Loan B, 3-month LIBOR + 5.000% 05/19/2023

     3,432,138  

11,000,000

  

KIK Custom Products, Inc.
Term Loan B, 3-month LIBOR + 4.000% 05/15/2023

     11,122,925  

8,852,935

  

Laureate Education, Inc.
Term Loan B, 3-month LIBOR + 3.500% 04/26/2024

     8,911,364  
     

 

 

 
        23,466,427  
     

 

 

 

ENERGY - 8.7%

  

16,744,010

  

Azure Midstream Energy LLC
Term Loan B, 3-month LIBOR + 6.500% 11/15/2018

     16,437,092  

6,150,592

  

BCP Renaissance Parent LLC 3-month LIBOR + 4.000% 10/31/2024

     6,189,033  

21,946,657

  

Chief Exploration & Development LLC
Second Lien Term Loan, 3-month LIBOR + 6.500% 05/16/2021

     21,827,816  

10,000,000

  

Fairmount Santrol, Inc.
Term Loan B, 3-month LIBOR + 6.000% 11/01/2022

     10,133,350  

1,798,463

  

Fieldwood Energy LLC
First Lien Term Loan, 3-month LIBOR + 2.875% 10/01/2018

     1,797,349  

2,805,767

  

First Lien Term Loan, 3-month LIBOR + 7.000% 08/31/2020

     2,797,588  

 

1


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

10,349,097

  

First Lien Last Out Term Loan, 3-month LIBOR + 7.125% 09/30/2020

     9,948,070  

8,185,000

  

Second Lien Term Loan, 3-month LIBOR + 7.125% 09/30/2020

     1,718,850  

5,985,000

  

SolarWinds Holdings, Inc.
3-month LIBOR + 3.000%, 02/05/2024

     6,018,666  

17,496,088

  

Traverse Midstream Partners LLC
Term Loan, 3-month LIBOR + 4.000% 09/27/2024

     17,619,085  
     

 

 

 
        94,486,899  
     

 

 

 

FINANCIAL - 9.4%

  

11,926,784

  

AssuredPartners, Inc.
First Lien Term Loan, 3-month LIBOR + 3.250% 10/22/2024

     11,973,001  

19,621,816

  

GTCR Valor Companies, Inc.
Term Loan B1, 3-month LIBOR + 3.250% 06/16/2023

     19,830,298  

6,547,100

  

LBM Borrower, LLC 3-month LIBOR + 3.750% 08/20/2022

     6,624,029  

11,787,240

  

NFP Corp. 3-month LIBOR + 3.000% 01/08/2024

     11,840,047  

11,981,872

  

Ocwen Loan Servicing LLC
Term Loan B, 3-month LIBOR + 5.000% 12/05/2020

     12,086,714  

16,081,648

  

Russell Investment Group
Term Loan B, 3-month LIBOR + 3.250% 06/01/2023

     16,198,963  

24,159,097

  

Walter Investment Management Co.
3-month LIBOR + 6.000%, 06/30/2022

     23,565,267  
     

 

 

 
        102,118,319  
     

 

 

 

FOOD & DRUG - 0.9%

  

6,185,589

  

Supervalu, Inc.
Term Loan B, 3-month LIBOR + 3.500% 06/08/2024

     6,146,404  

3,711,354

  

Delayed Draw Term Loan, 3-month LIBOR + 3.500% 06/08/2024

     3,687,842  
     

 

 

 
        9,834,246  
     

 

 

 

GAMING & LEISURE - 1.4%

  

49,138,954

  

Ginn-LA CS Borrower LLC
First Lien Tranche B Term Loan(b)(i)(o)

     —    

22,925,890

  

First Lien Tranche A Credit-Linked Deposit(b)(i)(o)

     —    

11,940,100

  

LLV Holdco LLC
Exit Revolver (b)(c)(i)(o)

     9,091,193  

6,229,546

  

Scientific Games International, Inc.
Term Loan B, 3-month LIBOR + 2.750% 08/14/2024

     6,259,261  
     

 

 

 
        15,350,454  
     

 

 

 

HEALTHCARE - 8.9%

  

1,994,975

  

American Renal Holdings Inc., Term Loan B,
3.25%, 06/21/2024

     1,999,334  

47,549,409

  

CCS Medical, Inc., PRIME + 7.000% 04/01/2019 (c)(o)

     26,009,527  

9,384,443

  

Quorum Health Corporation
Term Loan B, 3-month LIBOR + 6.750% 04/29/2022

     9,603,663  

9,718,472

  

RadNet, Inc.
Reprice Term Loan, 3-month LIBOR + 3.500% 06/30/2023

     9,855,163  

18,007,969

  

Surgery Center Holdings, Inc.
Term Loan B, 3-month LIBOR + 3.250% 09/02/2024

     18,025,977  

18,363,483

  

U.S. Renal Care, Inc.
Term Loan B, 3-month LIBOR + 4.250% 12/31/2022

     18,470,542  


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

2,375,000

  

Second Lien, 3-month LIBOR + 8.000% 12/31/2023

     2,389,844  

10,177,758

  

Valeant Pharmaceuticals International, Inc.
3-month LIBOR + 3.500% 04/01/2022

     10,296,634  
     

 

 

 
        96,650,684  
     

 

 

 

HOUSING - 3.5%

  

5,663,298

  

84 Lumber Company
Term Loan B-1, 3-month LIBOR + 5.250% 10/25/2023

     5,741,168  

14,482,875

  

Builders FirstSource, Inc.
Term Loan B, 3-month LIBOR + 3.000% 02/29/2024

     14,564,342  

3,638,401

  

Capital Automotive LP
First Lien Term Loan, 3-month LIBOR + 2.500% 03/24/2024

     3,655,082  

2,296,581

  

Second Lien Term Loan, 3-month LIBOR + 6.000% 03/24/2025

     2,326,735  

7,127,746

  

HD Supply Waterworks, Ltd.
Term Loan B, 3-month LIBOR + 3.000% 08/01/2024

     7,176,749  

1,743,503

  

Nevada Land Group LLC
First Lien Initial Term Loan (b)(c)(i)(o)

     —    

4,187,365

  

Quikrete Holdings, Inc.
First Lien Term Loan, 3-month LIBOR + 2.750% 11/15/2023

     4,210,207  
     

 

 

 
        37,674,283  
     

 

 

 

INDUSTRIALS - 4.9%

  

1,290,323

  

American Traffic Solutions, Inc.
3-month LIBOR + 7.750%, 02/23/2026

     1,307,264  

7,049,470

  

Aquilex Holdings LLC
First Lien Term Loan, 3-month LIBOR + 4.250% 10/03/2024

     7,124,406  

4,000,000

  

Second Lien Term Loan, 3-month LIBOR + 8.500% 10/03/2025

     3,965,000  

9,477,612

  

ATS Consolidated, Inc. 3-month LIBOR + 3.750% 02/28/2025

     9,602,053  

7,301,510

  

Omnimax International, Inc.
Unsecured Term Loan, 14.000% PIK, 2.000% Cash 02/06/2021 (b)(o)

     7,221,193  

14,942,456

  

Hayward Industries, Inc.
First Lien Term Loan, 3-month LIBOR + 3.500% 08/05/2024

     15,020,904  

8,977,080

  

SRS Distribution Inc.
Term Loan B, 3-month LIBOR + 3.250% 08/25/2022

     9,050,019  
     

 

 

 
        53,290,839  
     

 

 

 

INFORMATION TECHNOLOGY - 5.5%

  

9,361,252

  

Avaya, Inc., 3-month LIBOR + 4.750% 12/15/2024

     9,439,839  

9,339,168

  

CCC Information Services, Inc.
First Lien Term Loan, 3-month LIBOR + 3.000% 04/27/2024

     9,383,389  

18,660,201

  

Kronos Incorporated
Term Loan B, 3-month LIBOR + 3.000% 11/01/2023

     18,801,179  

4,800,000

  

Second Lien Term Loan, 3-month LIBOR + 8.250% 11/01/2024

     4,989,984  

16,635,731

  

NeuStar, Inc.
3-month LIBOR + 3.500%, 08/08/2024

     16,715,499  
     

 

 

 
        59,329,890  
     

 

 

 

MANUFACTURING - 2.7%

  

5,131,471

  

Doncasters U.S. Finance LLC
Term Loan B, 3-month LIBOR + 3.500% 04/09/2020

     5,089,777  


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

1,440,290

  

Second Lien Term Loan, 3-month LIBOR + 8.250%10/09/2020

     1,377,883  

905,660

  

SMG Stadium Management Group, First Lien Term Loan, 3.25%, 01/23/2025

     914,717  

12,490,667

  

VC GB Holdings, Inc.
Second Lien Term Loan, 3-month LIBOR + 8.000% 02/28/2025

     12,678,027  

8,701,281

  

First Lien Term Loan, 3-month LIBOR + 3.250% 02/28/2024

     8,733,911  
     

 

 

 
        28,794,315  
     

 

 

 

MATERIALS - 0.4%

  

4,323,533

  

Kraton Polymers, LLC 3-month LIBOR + 2.500% 03/05/2025

     4,356,501  
     

 

 

 

MEDIA & TELECOMMUNICATIONS - 3.9%

  

13,392,857

  

Cineworld Group PLC, Term Loan 1-month LIBOR + 2.50%, 02/28/2025

     13,391,049  

8,674,465

  

Fort Dearborn Company
First Lien Term Loan, 3-month LIBOR + 4.000% 10/19/2023

     8,598,564  

18,571,429

  

iHeartCommunications, Inc.
Term Loan D, 1-month LIBOR + 6.750% 01/30/2019

     14,726,307  

4,956,601

  

Univision Communications, Inc.
Term Loan C-5, 3-month LIBOR + 2.750% 03/15/2024

     4,884,854  
     

 

 

 
        41,600,774  
     

 

 

 

METALS & MINERALS - 2.2%

  

15,297,054

  

MacDermid, Inc.
Term Loan B-6, 3-month LIBOR + 3.000% 06/07/2023

     15,411,782  

8,272,782

  

Peabody Energy Corporation
Exit Term Loan, 3-month LIBOR + 3.500% 03/31/2022

     8,303,805  
     

 

 

 
        23,715,587  
     

 

 

 

RETAIL - 6.8%

  

17,081,636

  

Academy, Ltd.
Term Loan B, 3-month LIBOR + 4.000% 07/01/2022

     13,673,849  

1,178,368

  

General Nutrition Centers, Inc.
FILO Term Loan, 3-month LIBOR + 7.000%, 12/31/2022

     1,211,068  

2,939,279

  

Term Loan B-2, 3-month LIBOR + 8.750%, 03/04/2021

     2,777,619  

10,913,961

  

Harbor Freight Tools USA, Inc.
3-month LIBOR + 2.500%, 8/18/2023

     10,944,356  

14,043,245

  

Jo-Ann Stores, Inc.
3-month LIBOR + 5.000%, 10/20/2023

     13,999,430  

7,802,449

  

Leslie’s Poolmart, Inc.
Tranche B Term Loan, 3-month LIBOR + 3.500% 08/16/2023

     7,867,053  

9,001,502

  

Men’s Wearhouse, Inc. (The)
2015 Term Loan 5.00%, 06/18/2021

     9,016,534  

4,465,116

  

Neiman Marcus Group, Inc. (The)
3-month LIBOR + 3.250%, 0/25/2020

     3,870,318  

14,988,683

  

Toys ‘R’ Us-Delaware, Inc.
Term Loan B-4 (i)

     5,877,737  

4,329,245

  

Initial Loan, 3-month LIBOR + 9.750% 01/18/2019

     4,340,068  
     

 

 

 
        73,578,032  
     

 

 

 


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

SERVICE - 8.3%

  

6,773,330

  

Advantage Sales & Marketing, Inc.
First Lien Term Loan, 3-month LIBOR + 3.250% 07/23/2021

     6,649,954  

2,211,315

  

Second Lien Term Loan, 3-month LIBOR + 3.250% 07/25/2021

     2,171,036  

13,710,000

  

Second Lien Term Loan, 3-month LIBOR + 6.500% 07/25/2022

     13,205,678  

450,395

  

EnergySolutions LLC
Term Loan, 3-month LIBOR + 4.750% 05/29/2020

     458,277  

11,739,568

  

Parexel International Corporation
Term Loan B, 3-month LIBOR + 2.750% 09/27/2024

     11,757,178  

14,170,800

  

Spin Holdco Inc. 3-month LIBOR + 3.250% 11/14/2022

     14,274,176  

18,739,301

  

USI, Inc.
Repriced Term Loan, 3-month LIBOR + 3.000% 05/16/2024

     18,794,019  

6,574,804

  

WASH Multifamily Laundry Systems LLC
First Lien Term Loan, 3-month LIBOR + 3.250% 05/14/2022

     6,622,077  

1,428,031

  

First Lien Term Loan, 3-month LIBOR + 3.250% 05/14/2022

     1,052,232  

15,207,500

  

Weight Watchers International, Inc.
3-month LIBOR + 4.750%, 11/29/2024

     15,423,751  
     

 

 

 
        90,408,378  
     

 

 

 

TELECOMMUNICATIONS (b)(c)(o) - 0.4%

  

5,063,285

  

TerreStar Corporation
Term Loan A, PIK 11.000% 02/27/2020

     5,053,159  
     

 

 

 

TRANSPORTATION - 0.9%

  

9,475,934

  

Gruden Acquisition, Inc.
Term Loan, 3-month LIBOR + 5.500% 08/18/2022

     9,602,296  
     

 

 

 

UTILITIES - 4.7%

  

10,711,609

  

Dynegy Inc.
3-month LIBOR + 2.500%, 02/07/2024

     10,787,822  

2,319,304

  

Granite Acquisition Inc.
Second Lien Term Loan B, 3-month LIBOR + 7.250% 12/19/2022

     2,351,924  

9,575,399

  

Term Loan B, 3-month LIBOR + 3.500%, 12/19/2021

     9,719,030  

383,266

  

Term Loan C, 3-month LIBOR + 3.500%, 12/19/2021

     389,015  

14,472,689

  

Lightstone Generation LLC
3-month LIBOR + 3.750%, 01/30/2024

     14,569,511  

918,974

  

3-month LIBOR + 3.750%, 01/30/2024

     925,122  

2,083,333

  

Pike Corporation,
3-month LIBOR + 3.500%, 03/23/2025

     2,105,469  

59,127,210

  

Texas Competitive Electric Holdings Co., LLC
Non Extended Escrow Loan (d)

     177,382  

9,916,589

  

Vistra Operations Company LLC
Term Loan B-2, 3-month LIBOR + 2.250% 12/14/2023

     9,988,137  
     

 

 

 
        51,013,412  
     

 

 

 
  

Total U.S. Senior Loans (Cost $1,013,275,041)

     906,757,075  
     

 

 

 

Foreign Denominated or Domiciled Senior Loans (a) - 5.9%

 

CANADA - 1.7%

  

14,942,456

  

Sandvine Corporation
Term Loan B, 3-month LIBOR + 5.750% 09/21/2022

     14,905,100  


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

3,819,000

  

Telesat Canada
Term Loan B4, 3-month LIBOR + 2.500% 11/17/2023

     3,842,486  
     

 

 

 
     18,747,586  
     

 

 

 

LUXEMBOURG - 4.2%

  

1,929,779

  

Auris Luxembourg III S.a.r.l.
Term Loan B-7, 3-month LIBOR + 3.000% 01/17/2022

     1,945,757  
17,545,526   

Evergreen Skills Lux S.a.r.l.
First Lien Initial Term Loan, 3-month LIBOR + 4.750% 04/28/2021

     16,989,947  

2,160,920

  

Second Lien Initial Term Loan, 1-month LIBOR + 8.250% 04/28/2022

     1,880,681  
15,000,000   

Intelsat Jackson Holdings SA
Term Loan B3, 3-month LIBOR + 3.750% 11/27/2023

     15,032,325  
9,204,545   

Travelport Finance (Luxembourg) S.a.r.l., 3-month LIBOR + 2.500% 03/17/2025

     9,235,059  
     

 

 

 
     45,083,769  
     

 

 

 
  

Total Foreign Denominated or Domiciled Senior Loans (Cost $63,217,578)

     63,831,355  
     

 

 

 

Collateralized Loan Obligations (e)(f) - 20.6%

 

3,000,000   

Acis CLO, Ltd.
Series 2013-1A, Class E, 3-month LIBOR + 5.600%, FRN 04/18/2024 (g)

     3,001,875  

4,000,000

  

Series 2014-3A, Class E, 3-month LIBOR + 4.750%, FRN 02/01/2026 (g)

     3,856,400  

7,369,780

  

Series 2014-4A, Class A, 3-month LIBOR + 1.420%, FRN 05/01/2026 (g)

     7,381,638  

750,000

  

Series 2014-4A, Class D, 3-month LIBOR + 3.100%, FRN 05/01/2026 (g)

     751,153  

14,750,000

  

Series 2014-4A, Class E, 3-month LIBOR + 4.800%, FRN 05/01/2026 (g)

     14,602,500  

7,000,000

  

Series 2014-5A, Class D, 3-month LIBOR + 4.340%, FRN 11/01/2026 (g)

     7,027,066  

3,000,000

  

Series 2014-3A, Class D, 3-month LIBOR + 3.120%, FRN 02/01/2026 (g)

     3,004,913  

1,000,000

  

Series 2015-6A, Class D, 3-month LIBOR + 3.770%, FRN 05/01/2027 (g)

     1,001,875  

7,500,000

  

Series 2015-6A, Class E, 3-month LIBOR + 5.490%, FRN 05/01/2027 (g)

     7,368,750  
1,870,000   

AMMC CLO XII, Ltd.
Series 2013-12A, Class FR, 3-month LIBOR + 8.365%, FRN 11/10/2030

     1,675,520  
9,500,000   

Apidos CLO XVII
Series 2014-17A, Class E, 3-month LIBOR + 5.500%, FRN 04/17/2026

     9,313,800  
3,125,000   

Ares XXIX CLO, Ltd.
Series 2014-1A, Class D, 3-month LIBOR + 4.800%, FRN 04/17/2026

     3,110,938  
6,500,000   

Ares XXVIII CLO, Ltd.
Series 2013-3A, Class E, 3-month LIBOR + 4.900%, FRN 10/17/2024

     6,484,400  
2,752,500   

Atlas Senior Loan Fund III, Ltd.
Series 2013-1A, Class ER, 3-month LIBOR + 6.000%, FRN 11/17/2027

     2,759,381  
3,000,000   

Ballyrock CLO LLC
Series 2014-1A, Class D, 3-month LIBOR + 5.000%, FRN 10/20/2026

     3,007,500  
2,000,000   

Birchwood Park CLO, Ltd.
Series 2014-1A, Class E1, 3-month LIBOR + 5.100%, FRN 07/15/2026

     1,980,000  
3,750,000   

BlueMountain CLO, Ltd.
Series 2012-2A, Class ER, 3-month LIBOR + 7.100%, FRN 11/20/2028

     3,800,625  
3,000,000   

BlueMountain CLO, Ltd.
Series 2014-2A, Class F, 3-month LIBOR + 5.500%, FRN 07/20/2026

     2,977,500  


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

1,000,000

  

Cathedral Lake CLO, Ltd.
Series 2015-3A, Class DR, 3-month LIBOR + 4.100%, FRN 07/16/2029

     1,016,250  

5,250,000

  

CIFC Funding, Ltd.
Series 2013-4A, Class E, 3-month LIBOR + 4.750%, FRN 11/27/2024

     5,203,800  

2,025,000

  

Series 2013-2A, Class B3LR, 3-month LIBOR + 7.880%, FRN 10/18/2030

     1,928,813  

5,100,000

  

Series 2014-1A, Class FR2, 3-month LIBOR + 7.900%, FRN 01/18/2031

     4,824,345  

3,250,000

  

Series 2014-3A, Class C1R, 3-month LIBOR + 1.900%, FRN 07/22/2026

     3,254,062  

4,125,000

  

Series 2015-1A, Class ERR, 3-month LIBOR + 7.750%, FRN 01/22/2031

     4,167,075  

4,000,000

  

Covenant Credit Partners CLO III, Ltd.
Series 2017-1A, Class F, 3-month LIBOR + 7.950%, FRN 10/15/2029

     3,680,000  

2,000,000

  

Dryden CLO, Ltd.
3-month LIBOR + 5.600%, FRN 04/18/2031

     1,980,000  

2,500,000

  

Dryden XXV Senior Loan Fund
Series 2012-25A, Class ERR, 3-month LIBOR + 5.820%, FRN 10/15/2027

     2,500,000  

3,100,000

  

Eaton Vance Clo 2015-1, Ltd.
Series 2015-1A, Class FR, 3-month LIBOR + 7.970%, FRN 01/20/2030

     2,937,870  

4,350,000

  

Elevation CLO, Ltd.
Series 2014-2A, Class ER, 3-month LIBOR + 6.350%, FRN 10/15/2029

     4,354,350  

7,500,000

  

Figueroa CLO, Ltd.
Series 2014-1A, Class E, 3-month LIBOR + 5.700%, FRN 01/15/2027

     7,476,844  

2,500,000

  

Halcyon Loan Advisors Funding 2015-2, Ltd.
Series 2015-2A, Class E, 3-month LIBOR + 5.700%, FRN 07/25/2027

     2,472,500  

2,000,000

  

Hildene CLO IV, Ltd.
Series 2015-4A, Class D, 3-month LIBOR + 5.500%, FRN 07/23/2027

     2,000,400  

5,000,000

  

Jamestown CLO VII, Ltd.
Series 2015-7A, Class DR, 3-month LIBOR + 5.450%, FRN 07/25/2027

     5,000,000  

2,250,000

  

Jefferson Mill CLO, Ltd.
Series 2015-1A, Class E, 3-month LIBOR + 5.600%, FRN 07/20/2027

     2,247,187  

3,000,000

  

KVK CLO, Ltd.
Series 2015-1A, Class D, 3-month LIBOR + 3.620%, FRN 05/20/2027

     3,012,972  

5,294,000

  

Series 2015-1A, Class E, 3-month LIBOR + 4.450%, FRN 05/20/2027

     5,300,617  

5,000,000

  

Lockwood Grove CLO, Ltd.
Series 2014-1A, Class CRR, FRN 3.74%, 01/25/2030

     4,987,500  

1,750,000

  

MidOcean Credit CLO II
Series 2013-2A, Class ER, FRN 7.96%, 01/29/2030

     1,734,688  

1,000,000

  

Midocean Credit CLO VIII
Series 2018-8A, Class E, FRN 7.75%, 02/20/2031

     995,000  

1,250,000

  

Mountain View CLO, Ltd.
Series 2013-1A, Class ER, 3-month LIBOR + 7.700%, FRN 10/12/2030

     1,220,500  

2,600,000

  

MP CLO VIII, Ltd.
Series 2015-2A, Class E, 3-month LIBOR + 5.900%, FRN 10/28/2027

     2,603,250  

7,400,000

  

Neuberger Berman CLO XX, Ltd.
Series 2015-20A, Class FR, 3-month LIBOR + 7.450%, FRN 01/15/2028

     7,392,600  

750,000

  

Oaktree CLO 2015-1, Ltd.
Series 2015-1A, Class DR, 3-month LIBOR + 5.200%, FRN 10/20/2027

     750,000  


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

5,000,000

  

Octagon Loan Funding, Ltd.
Series 2014-1A, Class E, 3-month LIBOR + 5.200%, FRN 11/18/2026

     4,999,500  

4,000,000

  

OHA Credit Partners VIII, Ltd.
Series 2013-8A, Class E, 3-month LIBOR + 4.400%, FRN 04/20/2025

     3,960,000  

1,000,000

  

Palmer Square CLO, Ltd.
Series 2015-1A, Class DR, 3-month LIBOR + 6.200%, FRN 05/21/2029

     1,005,000  

1,000,000

  

Parallel, Ltd.
Series 2015-1A, Class E, 3-month LIBOR + 5.150%, FRN 07/20/2027

     990,000  

1,800,000

  

Silver Spring CLO, Ltd.
Series 2014-1A, Class F, 3-month LIBOR + 5.200%, FRN 10/15/2026

     1,350,000  

1,000,000

  

Sound Harbor Loan Fund, Ltd.
Series 2014-1A, Class D, 3-month LIBOR + 7.000%, FRN 10/30/2026

     1,001,500  

2,000,000

  

Symphony CLO XIV, Ltd.
Series 2014-14A, Class E, 3-month LIBOR + 4.600%, FRN 07/14/2026

     1,955,850  

5,000,000

  

Thacher Park CLO, Ltd.
Series 2014-1A, Class E1, 3-month LIBOR + 4.950%, FRN 10/20/2026

     4,968,437  

5,500,000

  

TICP CLO I, Ltd.
Series 2015-1A, Class E, 3-month LIBOR + 5.500%, FRN 07/20/2027

     5,527,500  

3,250,000

  

TICP CLO II, Ltd.
Series 2014-2A, Class D, 3-month LIBOR + 4.750%, FRN 07/20/2026

     3,217,500  

3,000,000

  

TICP CLO III, Ltd.
Series 2014-3A, Class E1, 3-month LIBOR + 5.550%, FRN 01/20/2027

     2,999,700  

3,250,000

  

TICP CLO II-2, Ltd.
Series 2018-IIA, Class D, 3-month LIBOR + 7.750%, FRN 04/20/2028

     3,225,625  

2,000,000

  

Venture XVI CLO, Ltd.
Series 2014-16A, Class ERR, FRN 6.75%, 01/15/2028

     1,958,700  

3,625,000

  

Venture XVIII CLO, Ltd.
Series 2014-18A, Class ER, FRN 8.31%, 10/15/2029

     3,661,250  

2,550,000

  

Voya CLO 2013-2, Ltd.
Series 2013-2A, Class DR, FRN 7.94%, 04/25/2031

     2,524,500  

7,000,000

  

Wellfleet CLO, Ltd.
Series 2015-1A, Class F, 3-month LIBOR + 7.350%, FRN 10/20/2027

     6,755,000  

1,871,937

  

Westchester CLO, Ltd.
Series 2007-1A, Class E, 3-month LIBOR + 4.300%, FRN 08/01/2022 (g)

     1,870,190  

4,000,000

  

Z Capital Credit Partners CLO 2015-1, Ltd.
Series 2015-1A, Class E, 3-month LIBOR + 5.970%, FRN 07/16/2027

     4,008,400  
     

 

 

 
  

Total Collateralized Loan Obligations (Cost $221,948,980)

     222,125,109  
     

 

 

 

Corporate Bonds & Notes - 2.6%

 

HEALTHCARE (f)(h) - 0.6%

  

3,364,000

  

Quorum Health Corp.
11.63%, 04/15/2023

     3,582,660  

2,506,000

  

Surgery Center Holdings Co.
6.75%, 07/01/2025

     2,443,350  
     

 

 

 
        6,026,010  
     

 

 

 


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

INDUSTRIALS (i) - 0.4%

  

15,000,000

  

FGI Operating Co. LLC / FGI Finance, Inc.
7.875%, 05/01/2020

     3,975,000  
     

 

 

 

INFORMATION TECHNOLOGY - 0.5%

  

4,571,000

  

Avaya, Inc. (b)(i)(o)

     —    

6,034,000

  

Intelsat Jackson Holdings SA
9.75%, 07/15/2025 (f)(h)

     5,649,333  
     

 

 

 
        5,649,333  
     

 

 

 

RETAIL (h) - 1.0%

  

1,779,000

  

Guitar Center, Inc.
6.50%, 04/15/2019 (f)

     1,780,779  

2,345,000

  

Home Depot, Inc. (The)
2.13%, 09/15/2026

     2,123,673  

3,000,000

  

Neiman Marcus Group, Ltd. LLC
8.00%, 10/15/2021 (f)(j)

     1,912,500  

4,110,000

  

PetSmart, Inc. (f)
7.13%, 03/15/2023

     2,352,975  

666,000

  

8.88%, 06/01/2025

     382,950  

2,500,000

  

Walmart, Inc.
2.65%, 12/15/2024

     2,413,261  
     

 

 

 
        10,966,138  
     

 

 

 

UTILITIES (i) - 0.1%

  

15,600,000

  

Ocean Rig UDW, Inc. (b)(f)(i)(o)

     1,076,400  

20,000,000

  

Texas Competitive Electric Holdings Co., LLC (d)

     70,000  

8,000,000

  

Texas Competitive Electric Holdings Co., LLC (d)

     80,000  
     

 

 

 
        1,226,400  
     

 

 

 
  

Total Corporate Bonds & Notes (Cost $40,244,344)

     27,842,881  
     

 

 

 

Shares

      

Claims - 0.0%

 

TELECOMMUNICATIONS (b)(m)(o) - 0.0%

  

3,791,858

  

Lehman Brothers Commercial Paper LCPI Claim Facility

     52,138  
     

 

 

 
  

Total Claims (Cost $1,819,529)

     52,138  
     

 

 

 

Common Stocks - 12.4%

 

ENERGY - 1.8%

  

20,317

  

Arch Coal, Inc., Class A (h)

     1,866,726  

112,142

  

Fieldwood Energy LLC (k)

     2,616,273  

441,000

  

Kinder Morgan, Inc. (h)

     6,641,460  

137,025

  

Targa Resources Corp. (h)

     6,029,100  

1,118,286

  

Value Creation, Inc. (b)(o)

     1  

88,000

  

Williams Cos., Inc. (The) (h)

     2,187,680  
     

 

 

 
        19,341,240  
     

 

 

 

FINANCIAL (k) - 0.0%

  

3,143

  

Venoco LLA Unit

     —    

220

  

Venoco LLC Units

     —    
     

 

 

 
        —    
     

 

 

 

GAMING & LEISURE (b)(c)(k)(o) - 0.0%

  

44

  

LLV Holdco LLC - Litigation Trust Units

     —    

34,512

  

LLV Holdco LLC - Series A, Membership Interest

     —    

436

  

LLV Holdco LLC - Series B, Membership Interest

     —    
     

 

 

 
        —    
     

 

 

 

HEALTHCARE (b)(c)(k)(o) - 0.0%

  

207,031

  

CCS Medical, Inc.

     —    
     

 

 

 

HOUSING (b)(k)(o) - 0.3%

  

1,648,350

  

Westgate Investments LLC

     3,247,250  
     

 

 

 


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

INFORMATION TECHNOLOGY (h)(k) - 0.2%

  

80,141

  

Avaya Holdings Corp.

     1,795,158  
     

 

 

 

MATERIALS - 1.5%

  

227,000

  

United States Steel Corp. (h)

     7,988,130  

299,032

  

MPM Holdings, Inc. (k)

     7,969,203  
     

 

 

 
        15,957,333  
     

 

 

 

MEDIA & TELECOMMUNICATIONS (k) - 4.7%

  

10,939,879

  

Gambier Bay LLC (c)

     1,723,031  

501,736

  

Metro-Goldwyn-Mayer, Inc., Class A (l)

     49,170,128  
     

 

 

 
        50,893,159  
     

 

 

 

METALS & MINERALS (b)(k) - 0.4%

  

14,621

  

Omnimax International, Inc.

     4,478,043  
     

 

 

 

REAL ESTATE - 0.1%

  

1,125,433

  

Allenby (b)(c)(k)(o)

     1  

7,591,418

  

Claymore (b)(c)(k)(o)

     8  

16,920

  

Macerich Co. (The), REIT (h)

     947,858  
     

 

 

 
        947,867  
     

 

 

 

TELECOMMUNICATIONS (b)(c)(k)(l)(o) - 0.7%

  

27,134

  

TerreStar Corporation

     7,563,331  
     

 

 

 

TRANSPORTATION (h)(k) - 0.4%

  

342,199

  

Corp. America Airports SA

     4,222,736  
     

 

 

 

UTILITIES (k) - 2.3%

  

96,250

  

Central Puerto SA ADR (h)

     1,636,250  

10,378

  

Entegra TC LLC, Class A (b)

     81,986  

1,117,865

  

Vistra Energy Corp. (h)(j)

     23,285,128  
     

 

 

 
        25,003,364  
     

 

 

 
  

Total Common Stocks (Cost $425,185,310)

     133,449,481  
     

 

 

 

Units

      

Rights - 0.1%

 

UTILITIES (k) - 0.1%

  

1,117,866

  

Texas Competitive Electric Holdings Co., LLC

     623,210  
     

 

 

 
  

Total Rights (Cost $3,925,049)

     623,210  
     

 

 

 

Warrants - 0.0%

 

ENERGY (k) - 0.0%

  

5,801

  

Arch Coal, Inc., expires 10/05/2023

     277,114  
     

 

 

 

GAMING & LEISURE (b)(c)(k)(o) - 0.0%

  

1,834

  

LLV Holdco LLC - Series C, Membership Interest

     —    

2,522

  

LLV Holdco LLC - Series D, Membership Interest

     —    

2,819

  

LLV Holdco LLC - Series E, Membership Interest

     —    

3,172

  

LLV Holdco LLC - Series F, Membership Interest

     —    

3,594

  

LLV Holdco LLC - Series G, Membership Interest

     —    
     

 

 

 
        —    
     

 

 

 

INDUSTRIALS (b)(k)(o) - 0.0%

  

453

  

Omnimax Holdings, Inc.

     138,610  
     

 

 

 

INFORMATION TECHNOLOGY (k) - 0.0%

  

18,641

  

Avaya Holdings Corp.

     102,525  
     

 

 

 
  

Total Warrants (Cost $26,165)

     518,249  
     

 

 

 


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

Shares

      

Master Limited Partnerships - 3.3%

 

ENERGY (h) - 3.3%

  

26,729

  

Andeavor Logistics LP

     1,197,727  

378,000

  

Boardwalk Pipeline Partners LP

     3,836,700  

762,000

  

Enterprise Products Partners LP

     18,653,760  

215,233

  

MPLX LP

     7,111,298  

21,000

  

Phillips 66 Partners LP

     1,003,380  

112,000

  

Williams Partners LP

     3,856,160  
     

 

 

 
        35,659,025  
     

 

 

 
  

Total Master Limited Partnerships (Cost $37,946,799)

     35,659,025  
     

 

 

 

Registered Investment Companies - 0.1%

 

1,119,150

  

State Street Navigator Prime Securities Lending Portfolio (n)

     1,119,150  
     

 

 

 
  

Total Registered Investment Companies (Cost $1,119,150)

     1,119,150  
     

 

 

 

Cash Equivalents - 7.0%

 

MONEY MARKET FUND - 7.0%

  

75,213,154

  

State Street Institutional U.S. Government Money Market Fund, Premier Class

     75,213,154  
     

 

 

 
  

Total Cash Equivalents (Cost $75,213,154)

     75,213,154  
     

 

 

 

Total Investments - 135.7%
(Cost $1,883,921,099)

     1,467,190,827  
     

 

 

 

Securities Sold Short - (0.5)%

 

Corporate Bonds - (0.5)%

 

INDUSTRIALS - (0.5)%

  

(5,000,000)

  

Western Digital Corp.
4.75%, 02/15/2026

     (4,998,375
     

 

 

 
  

Total Corporate Bonds (Cost $5,009,370)

     (4,998,375
     

 

 

 
  

Total Securities Sold Short (Proceeds $5,009,370)

     (4,998,375
     

 

 

 

Other Assets & Liabilities, Net - (35.2)%

     (381,170,774
     

 

 

 

Net Assets - 100.0%

     1,081,021,678  
     

 

 

 

 

(a) Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at March 31, 2018. Senior loans, while exempt from registration under the Securities Act of 1933, as amended (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturity shown. Current LIBOR rates include 1 month which is equal to 1.88% and 3 months equal to 2.31%.
(b) Represents fair value as determined by the Fund’s Board of Trustees (the “Board”), or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate value of $64,012,840, or 5.9% of net assets, were fair valued under the Fund’s valuation procedures as of March 31, 2018.
(c) Affiliated issuer. Assets with a total aggregate market value of $49,440,250, or 4.6% of net assets, were affiliated with the Fund as of March 31, 2018.
(d) Represents value held in escrow pending future events. No interest is being accrued.
(e) Variable or floating rate security. The base lending rates are generally the lending rate offered by one or more European banks such as the LIBOR. The interest rate shown reflects the rate in effect March 31, 2018. Current LIBOR rates include 1 month which is equal to 1.88% and 3 months equal to 2.31%.
(f) Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transaction exempt from registration to qualified institutional buyers. At March 31, 2018, these securities amounted to $241,306,056 or 22.3% of net assets.
(g) Securities of collateralized loan obligations where an affiliate of the Investment Adviser serves as collateral manager.
(h) All or part of this security is pledged as collateral for short sales and written options contracts. The market value of the securities pledged as collateral was $105,331,692.
(i) The issuer is, or is in danger of being, in default of its payment obligation.
(j) Securities (or a portion of securities) on loan. As of March 31, 2018, the market value of securities loaned was $2,121,260. The loaned securities were secured with cash and securities collateral of $2,151,709. Collateral is calculated based on prior day’s prices.
(k) Non-income producing security.


INVESTMENT PORTFOLIO (unaudited) (continued)

 

As of March 31, 2018

   Highland Floating Rate Opportunities Fund

 

(l) Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the procedures established by the Fund’s Board of Trustees. Additional Information regarding such securities follows:

 

Restricted Security

   Security Type      Acquisition
Date
     Cost of
Security
     Market Value
at Period End
     Percent
of Net
Assets
 

Metro-Goldwyn-Mayer, Inc.

     Common Stocks        12/20/2010      $ 21,845,688      $ 49,170,128        4.5

TerreStar Corporation

     Common Stocks        03/16/2018        3,093,276        7,563,331        0.7

 

(m) These positions represent claims that have been filed with the United States Bankruptcy Court Southern District of New York against Lehman Commercial Paper, Inc. UK Branch.
(n) Represents investments of cash collateral received in connection with securities lending.
(o) Classified as Level 3 within the three-tier fair value hierarchy. Please see Note 2 for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments.

Reverse Repurchase Agreements outstanding as of March 31, 2018 were as follows:

 

Counter-

party

  

Collateral Pledged

   Interest Rate    Trade Date    Maturity
Date
   Repurchase
Amount
     Principal
Amount
     Value  

BNP

  

Acis CLO, Ltd.,

Series 2014-4A, Class E, 3-month LIBOR + 4.800%, FRN 05/01/2026

   3.42    03/26/2018    04/26/2018    $ 8,286,186      $ 11,250,000      $ (8,282,250

BNP

  

Acis CLO, Ltd.,

Series 2015-6A, Class E, 3-month LIBOR + 5.490%, FRN 05/01/2027

   3.42    03/26/2018    04/26/2018      5,600,660        7,500,000        (5,598,000

BNP

  

Ares XXVIII CLO, Ltd.,

Series 2013-3A, Class E, 3-month LIBOR + 4.900%, FRN 10/17/2024

   3.43    03/27/2018    04/26/2018      4,891,812        6,500,000        (4,889,950

BNP

  

Figueroa CLO, Ltd.

Series 2014-1A, Class E, 3-month LIBOR + 5.700%, FRN 01/15/2027

   3.42    03/26/2018    04/26/2018      5,709,462        7,500,000        (5,706,750

BNP

  

Jamestown CLO VII, Ltd.,

Series 2015-7A, Class DR, FRN 07/25/2027

   3.42    03/26/2018    04/26/2018      3,751,782        5,000,000        (3,750,000

BNP

  

KVK CLO, Ltd.,

Series 2015-1A, Class E, 3-month LIBOR + 5.750%, FRN 05/20/2027

   3.43    03/27/2018    04/26/2018      3,972,012        5,294,000        (3,970,500

BNP

  

TICP CLO I, Ltd.,

Series 2015-1A, Class E, 3-month LIBOR + 5.500%, FRN 07/20/2027

   3.43    03/27/2018    04/26/2018      4,170,037        5,500,000        (4,168,450
                 

 

 

    

 

 

 

Total Reverse Repurchase Agreements

      $ 48,544,000      $ (36,365,900
                 

 

 

    

 

 

 


GLOSSARY: (abbreviations that may be used in the preceding statements)(unaudited)

 

 

Other Abbreviations:

 

ADR   

American Depositary Receipt

CLO   

Collateralized Loan Obligation

PIK   

Payment-in-Kind


NOTES TO FINANCIAL STATEMENTS (unaudited)

 

March 31, 2018

   Highland Floating Rate Opportunities Fund

Organization

Highland Floating Rate Opportunities Fund (the “Fund”) is organized as an unincorporated business trust under the laws of The Commonwealth of Massachusetts. The Fund is registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company. On September 25, 2017, the Fund acquired the assets of Highland Floating Rate Opportunities Fund (the “Predecessor Fund”), a series of Highland Funds I, a Delaware statutory trust. The Fund is the successor to the accounting and performance information of the Predecessor Fund. This report includes information for the period ended March 31, 2018.

On November 3, 2017, shareholders of the Fund approved a proposal authorizing the Board of Trustees (the “Board”) of the Fund to convert the fund from an open-end fund to a closed-end fund at a special meeting of shareholders. The Board took action to convert the Fund to a closed-end fund effective shortly after 4:00 p.m. Eastern Time on November 3, 2017 (the “Conversion Date”). The Fund also effected an approximately 1-for-2 reverse stock split of the Fund’s issued and outstanding shares on November 3, 2017, thereby reducing the number of shares outstanding. Shareholders were paid cash for any fractional shares resulting from the reverse stock split. The Fund began listing its shares for trading on the New York Stock Exchange (the “NYSE”) on November 6, 2017 under the ticker symbol “HFRO”. The Fund may issue an unlimited number of common shares, par value $0.001 per share (“Common Shares”). Prior to the Conversion Date, the Fund issued Class A, Class C, and Class Z shares. The Fund incurred $1,076,274 in Conversion costs related to the fund conversion to a closed-end fund.

The Fund consolidates HFRO Sub, LLC, a wholly owned subsidiary, for financial reporting, and the holdings of HFRO Sub, LLC are included within the Investment Portfolio for the Fund.

Valuation of Investments

In computing the Fund’s net assets attributable to shares, securities with readily available market quotations on the NYSE, National Association of Securities Dealers Automated Quotation (“NASDAQ”) or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued pursuant to policies adopted by the Fund’s Board of Trustees (the “Board”). Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that the Investment Adviser has determined to have the capability to provide appropriate pricing services which have been approved by the Board.

Securities for which market quotations are not readily available, or for which the Fund has determined that the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Funds’ net asset value (“NAV”), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including, but not limited to: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Funds’ NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.

There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. The NAV shown in the Fund’s financial statements may vary from the NAV published by the Fund as of its period end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes.


NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2018

   Highland Floating Rate Opportunities Fund

 

Fair Value Measurements

The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:

 

Level 1        Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;
Level 2        Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and
Level 3        Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

Highland Capital Management Fund Advisors, L.P. (“the Investment Adviser”) has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Pricing Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser and its affiliates. The Pricing Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.

As of March 31, 2018, the Fund’s investments consisted of senior loans, collateralized loan obligations, corporate bonds and notes, U.S. asset-backed securities, non-U.S. asset-backed securities, claims, common stocks, registered investment companies, cash equivalents, rights, and warrants. The fair value of the Fund’s loans and bonds are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset-backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable.

The fair value of the Fund’s common stocks, registered investment companies, rights and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the mid-price, which is the mean of the bid and ask price, is utilized to value the option.

At the end of each calendar quarter, the Investment Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Investment Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.


NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2018

   Highland Floating Rate Opportunities Fund

 

Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s assets as of March 31, 2018 is as follows:

 

     Total value at
March 31, 2018
    Level 1
Quoted Price
     Level 2
Significant
Observable Inputs
    Level 3
Significant
Unobservable Inputs
 

Floating Rate Opportunities Fund

 

Assets

 

U.S. Senior Loans

         

Aerospace

   $ 45,617,155     $ —        $ 45,617,155     $ —    

Chemicals

     5,160,312       —          5,160,312       —    

Consumer Discretionary

     35,655,113       —          35,655,113       —    

Consumer Products

     23,466,427       —          23,466,427       —    

Energy

     94,486,899       —          94,486,899       —    

Financial

     102,118,319       —          102,118,319       —    

Food & Drug

     9,834,246       —          9,834,246       —    

Gaming & Leisure

     15,350,454       —          6,259,261       9,091,193  

Healthcare

     96,650,684       —          70,641,157       26,009,527  

Housing

     37,674,283       —          37,674,283       (2) 

Industrials

     53,290,839       —          46,069,646       7,221,193  

Information Technology

     59,329,890       —          59,329,890       —    

Manufacturing

     28,794,315       —          28,794,315       —    

Materials

     4,356,501       —          4,356,501       —    

Media & Telecommunications

     41,600,774       —          41,600,774       —    

Metals & Minerals

     23,715,587       —          23,715,587       —    

Retail

     73,578,032       —          73,578,032       —    

Service

     90,408,378       —          90,408,378       —    

Telecommunications

     5,053,159       —          —         5,053,159  

Transportation

     9,602,296       —          9,602,296       —    

Utilities

     51,013,412       —          51,013,412       —    

Foreign Denominated or Domiciled Senior Loans

     63,831,355       —          63,831,355       —    

Collateralized Loan Obligations

     222,125,109       —          222,125,109       —    

Corporate Bonds & Notes

         

Healthcare

     6,026,010       —          6,026,010       —    

Industrials

     3,975,000       —          3,975,000       —    

Information Technology

     5,649,333       —          5,649,333       —    

Retail

     10,966,138       —          10,966,138       —    

Utilities

     1,226,400       —          150,000       1,076,400  

Claims

     52,138       —          —         52,138  

Common Stocks

         

Energy

     19,341,240       16,724,966        2,616,273       1  

Financial

     (2)      —          —         (2) 

Gaming & Leisure

     (2)      —          —         (2) 

Healthcare

     (2)      —          —         (2) 

Housing

     3,247,250       —          —         3,247,250  

Information Technology

     1,795,158       1,795,158        —         —    

Materials

     15,957,333       15,957,333        —         —    

Media & Telecommunications

     50,893,159       —          50,893,159       —    

Metals & Minerals

     4,478,043       —          —         4,478,043  

Real Estate

     947,867       947,858        —         9  

Telecommunications

     7,563,331       —          —         7,563,331  

Transportation

     4,222,736       4,222,736        —         —    

Utilities

     25,003,364       24,921,378        —         81,986  

Rights

     623,210       —          623,210       —    

Warrants

         

Energy

     277,114       277,114        —         —    

Gaming & Leisure

     (2)      —          —         (2) 

Industrials

     138,610       —          —         138,610  

Information Technology

     102,525       102,525        —         —    

Master Limited Partnerships(1)

     35,659,025       35,659,025        —         —    

Registered Investment Companies

     1,119,150       1,119,150        —         —    

Cash Equivalents

     75,213,154       75,213,154        —         —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Assets

     1,467,190,827       176,940,397        1,226,237,590       64,012,840  
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities

         

Securities Sold Short(1)

     (4,998,375     —          (4,998,375     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Liabilities

     (4,998,375     —          (4,998,375     —    
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,462,192,452     $ 176,940,397      $ 1,221,239,215     $ 64,012,840  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)  See Investment Portfolio detail for industry breakout.
(2)  This category includes securities with a value of zero.


NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2018

   Highland Floating Rate Opportunities 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 period ended March 31, 2018.

 

    Balance
as of
June 30,
2017
    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
March 31,
2018
    Change in
Unrealized
Gain/
(Loss) on
Level 3
securities
still held at
period end
 
Highland Floating Rate Opportunities
Fund
                                                           
U.S. Senior Loans                                                            

Gaming & Leisure

  $ 9,552,080     $ —       $ —       $ —       $ —       $ (460,887   $ —       $ —       $ 9,091,193     $ (460,887

Healthcare

    24,146,282       —         —         —         —         (1,942,900     3,806,145       —         26,009,527       (1,942,900

Housing

    4,000,000       —         —         —         (3,491,393     4,000,000       —         (4,508,607     —         —    

Industrials

    —         —         —         129,010       464       1,026,568       6,067,895       (2,744     7,221,193       1,026,568  

Telecommunications

    —         —         —         —         —         (10,126     5,063,285       —         5,053,159       (10,126
Corporate Bonds & Notes                                                            

Utilities

    —         1,076,400       —         —         —         —         —         —         1,076,400       —    

Claims

    52,138       —         —         —         —         115,221       —         (115,221     52,138       115,221  
Common Stocks                                                            

Energy

    1       —         —         —         —         —         —         —         1       —    

Housing

    3,675,821       —         —         —         —         (428,571     —         —         3,247,250       (428,571

Metals & Minerals

    —         —         —         —         —         3,030,589       1,447,454       —         4,478,043       3,030,589  

Real Estate

    10       —         —         —         —         1,591,220       876,356       (2,467,577     9       1,591,220  

Telecommunications

    —         —         —         —         —         4,470,055       3,093,276       —         7,563,331       4,470,055  

Utilities

    242,015       —         —         —         (14,308     59,633       —         (205,354     81,986       59,633  
Warrants                                                            

Industrials

    —         —         —         —         —         138,610       —         —         138,610       138,610  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 41,668,347     $ 1,076,400     $ —       $ 129,010     $ (3,505,237   $ 11,589,412     $ 20,354,411     $ (7,299,503   $ 64,012,840     $ 7,589,412  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, for the period ended March 31, 2018, a net amount of $1,076,400 of the Fund’s portfolio investments were transferred from Level 2 to Level 3. Determination of fair values is uncertain because it involves subjective judgments and estimates that are unobservable. Transfers from Level 2 to 3 were due to a decline in market activity (e.g. frequency of trades), which resulted in a reduction of available market inputs to determine price.

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

 

Category

   Market Value at
3/31/2018
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)

U.S. Senior Loans

   $ 47,375,072      Adjusted Appraisal    Liquidity Discount    10%
         Asset Specific Discount    10%
      Multiples Analysis    Multiple of Revenue    0.4x - 0.5x
         Multiple of EBITDA    3.0x - 5.0x
      Discounted Cash Flow    Discount Rate    11.1% - 16.4%
         Spread Adjustment    0.1% - 0.4%

Corporate Bonds

     1,076,400      Liquidation Analysis    Claim Amount: Percent
of Par
   6.9%

Claims

     52,138      N/A    N/A    N/A

Common Stocks

     15,509,230      Multiples Analysis    Multiple of Revenue    0.4x - 0.5x
         Multiple of EBITDA    3.0x - 8.25x
         Price/MHz-PoP    $0.120 - $0.550
         Risk Discount    25.0%
         Capitalization Rate    6.4% - 7.0%
         Discount    37.0%
      Discounted Cash Flow    Scenario Probabilities    15.0% - 70.0%
         Illiquidity Discount    10.0%
         Discount Rate    11.0 - 12.0%
         Minority Discount    20.0%
         Terminal Multiple    7.0x
         Discount for Lack of
Marketability
   15.0%
  

 

 

          

Total

   $ 64,012,840           

Security Transactions

Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes taking into account any foreign taxes withheld.

Cash & Cash Equivalents

The Fund considers liquid assets deposited with a bank and certain short-term debt instruments of sufficient credit quality with original maturities of 3 months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates market value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of this financial report.

Securities Sold Short

The Fund may sell securities short. A security sold short is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline. When the Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Fund may have to pay a fee to borrow particular securities and is often obligated to pay over any dividends or other payments received on such borrowed securities. In some circumstances, the Fund may be allowed by its prime broker to utilize proceeds from securities sold short to purchase additional investments, resulting in leverage. Securities and cash held as collateral for securities sold short are shown on the Investments Portfolio for the Fund


NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)

March 31, 2018

   Highland Floating Rate Opportunities Fund

 

Derivative Transactions

The Fund is subject to equity securities risk, interest rate risk and currency risk in the normal course of pursuing its investment objectives. The Fund enters into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions and for managing the duration of fixed income investments.

Reverse Repurchase Agreements

The Fund may engage in reverse repurchase agreement transactions with respect to instruments that are consistent with the Fund’s investment objective or policies.

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 for the period ended March 31, 2018:

 

Issuer

  Shares at
June 30,
2017
    Beginning
Value as of
June 30,
2017
    Purchases
at Cost
    Proceeds
from Sales
    Net
Realized
Gain/(Loss)
on Sales of
Affiliated
Issuers
    Change in
Unrealized
Appreciation/
Depreciation
    Ending
Value as of
March 31,
2018
    Shares at
March 31,
2018
    Affiliated
Income
 

Majority Owned Not Consolidated

                 

Allenby (Common Stocks)

    1,323,961     $ 1     $ 115,110     $ (313,638   $ —       $ 198,529     $ 1       1,125,433     $ —    

Claymore (Common Stocks)

    8,984,111       9       761,246       (2,153,939     —         1,392,701       8       7,591,418       —    

Other Affiliates

                 

CCS Medical, Inc. (U.S. Senior Loans & Common Stocks)

    46,240,843       24,146,282       3,806,145       —         —         (1,942,900     26,009,527       47,756,440     $ 3,806,145  

LLV Holdco, LLC (U.S. Senior Loans, Common Stocks and Warrants

    11,989,033       9,552,080       —         —         —         (460,887     9,091,193       11,989,033       —    

Nevada Land Group LLC (U.S. Senior Loans & Common Stocks)

    1,743,503       —         —         —         —         —         —         1,743,503       —    

Gambier Bay LLC (Common Stocks)(1)

    6,831,564       1,502,944       970,000       —         —         (749,913     1,723,031       10,939,879       —    

Terrestar Corporation (U.S. Senior Loans & Common Stocks)

    —         —         8,156,561       —         —         4,459,929       12,616,490       5,090,419       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    77,113,015     $ 35,201,316     $ 13,809,062     $ (2,467,577   $ —       $ 4,203,688     $ 49,440,250       86,236,125     $ 3,806,145  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes the value of iHeart Communications, Inc. bonds as of June 30, 2017 and subsequent activity.

U.S. Federal Income Tax Information

Unrealized appreciation and depreciation at March 31, 2018, based on cost of investments, derivatives and cash equivalents for U.S. federal income tax purposes was:

 

Gross Appreciation

   Gross Depreciation    Net Appreciation/
(Depreciation)
   Cost
$49,534,098    $(455,260,277)    $(405,726,179)    $1,569,167,509

For more information with regard to significant accounting policies, see the most recent semi-annual report filed with the U.S. Securities and Exchange Commission.


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 is 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.

 

Highland Floating Rate Opportunities Fund
By:   /s/ Frank Waterhouse
  Frank Waterhouse
  Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer

Date: May 25, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:   /s/ Frank Waterhouse
  Frank Waterhouse
  Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer

Date: May 25, 2018