N-CSRS 1 d783160dncsrs.htm ANGEL OAK STRATEGIC CREDIT FUND Angel Oak Strategic Credit Fund
Table of Contents

As filed with the U.S. Securities and Exchange Commission on 10/7/19

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM N-CSR

 

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-23289

 

 

Angel Oak Strategic Credit Fund

(Exact name of registrant as specified in charter)

 

 

3344 Peachtree Rd. NE, Suite 1725

Atlanta, Georgia 30326

(Address of principal executive offices) (Zip code)

 

 

Dory S. Black, Esq., President

3344 Peachtree Rd. NE, Suite 1725

Atlanta, Georgia 30326

(Name and address of agent for service)

 

 

Copy to:

Douglas P. Dick

Stephen T. Cohen

Dechert LLP

1900 K Street NW

Washington, DC 20006

 

 

404-953-4900

Registrant’s telephone number, including area code

Date of fiscal year end: January 31

Date of reporting period: July 31, 2019

 

 

 

Table of Contents

Item 1. Reports to Stockholders.

Table of Contents

SEMI-ANNUAL REPORT

July 31, 2019

 

LOGO

Angel Oak Strategic Credit Fund

 

Angel Oak Capital Advisors, LLC

3344 Peachtree Road NE

Suite 1725

Atlanta, GA 30326

(404) 953-4900

 

Beginning on January 1, 2021, as permitted by regulations adopted by the U.S. Securities and Exchange Commission, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from the Fund or from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.

If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary (such as broker-dealer or bank) or, if you are a direct investor, by calling (855) 751-4324.

You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with the Fund, you can call (855) 751-4324 to let the Fund know you wish to continue receiving paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held in your account if you invest through a financial intermediary or all funds held with the fund complex if you invest directly with the Fund.

Table of Contents

Table of Contents

 

 

 

Investment Results

      1  

Summary of Fund Expenses

      2  

Portfolio Holdings

      3  

Schedule of Investments

      4  

Statement of Assets and Liabilities

      7  

Statement of Operations

      8  

Statements of Changes in Net Assets

      9  

Financial Highlights

      10  

Notes to the Financial Statements

      11  

Additional Information

      20  

Table of Contents

Investment Results – (Unaudited)

Angel Oak Strategic Credit Fund

Total Return Based on a $50,000 Investment

 

LOGO

The chart above assumes an initial investment of $50,000 made on December 26, 2017 (commencement of operations). Returns shown include the reinvestment of all dividends. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions. In the absence of fee waivers and reimbursements, when they are necessary to keep expenses at the expense cap, total return would be reduced. Past performance is not predictive of future performance. Investment return and principal value will fluctuate so that your shares, when repurchased, may be worth more or less than the original cost. Index returns do not reflect the effects of fees or expenses. It is not possible to invest directly in an index.

 

Average Annual Returns(1)

(For the period ended July 31, 2019)

 

     One Year     Since  Inception(2)  

Angel Oak Strategic Credit Fund – Institutional Class

      5.51 %      6.02 % 

Bloomberg Barclays U.S. Aggregate Bond Index(3)

      8.08 %      4.19 % 

(1) Return figures reflect any change in price per share and assume the reinvestment of all distributions.

(2) Inception date is December 26, 2017.

(3) The Bloomberg Barclays U.S. Aggregate Bond Index measures the performance of the investment-grade, fixed-rate bond market, including government and credit securities, agency pass-through securities, asset-backed securities and commercial mortgage-backed securities. Performance figures include the change in value of the bonds in the index and the reinvestment of interest. The index return does not reflect expenses, which have been deducted from the Fund’s return. You cannot invest directly in an index; however, an individual can invest in exchange-traded funds or other investment vehicles that attempt to track the performance of a benchmark index.

 

1

Table of Contents

Summary of Fund Expenses – (Unaudited)

As a shareholder of the Fund, you incur ongoing costs, including management fees and other expenses of the Fund. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the period, and held for the entire period from February 1, 2019 to July 31, 2019.

Actual Expenses

The first line of the table below provides information about actual account values and actual expenses. You may use the information in this, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = $8.60), then multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes

The second line of the table below provides information about hypothetical account value and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account value and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.

Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the table below is useful in comparing ongoing costs only and will not help you determine the relative costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.

 

Angel Oak Strategic Credit Fund    Beginning
Account Value,
February 1, 2019		    Ending
Account Value,
July 31, 2019		    Expenses Paid
During Period(1)		    Annualized
Expense  Ratio

Institutional Class

    Actual    $1,000.00    $1,036.80    $3.79    0.75%
     Hypothetical(2)    $1,000.00    $1,021.08    $3.76    0.75%

(1) Expenses are equal to the Fund’s annualized expense ratio, multiplied by the average account value over the period, multiplied by the number of days (181) in the most recent six month period and divided by the number of days in the most recent twelve month period (365). The annualized expense ratios reflects fee waiver and expense limitation arrangements, including interest expense, in effect during the period. The “Financial Highlights” tables in the Fund’s financial statements, included in the report, also show the gross expense ratios, without such reimbursements.

(2) Hypothetical assumes 5% annual return before expenses.

 

2

Table of Contents

Portfolio Holdings – (Unaudited)

The investment objective of Angel Oak Strategic Credit Fund is to seek total return.

 

LOGO

* As a percentage of total investments.

 

3

Table of Contents

Angel Oak Strategic Credit Fund

Schedule of Investments

July 31, 2019 (Unaudited)

 

     Principal
Amount		      Value  

Asset-Backed Securities – 18.20%

      

First Investors Auto Owner Trust, Series 2019-1A, Class F, 6.150%, 7/15/2026 (a)

    $ 250,000      $ 252,545  

Foursight Capital Automobile Receivables Trust, Series 2019-1, Class F, 5.570%, 11/16/2026 (a)

      250,000        250,502  

Mosaic Solar Loan Trust, Series 2018-1A, Class C, 0.000%, 6/22/2043 (a)(e)

      350,000        292,765  

Mosaic Solar Loan Trust, Series 2019-1A, Class B, 0.000%, 12/21/2043 (a)(e)

      100,000        79,663  

Mosaic Solar Loans LLC, Series 2017-2A, Class D, 0.000%, 6/22/2043 (a)(e)

      204,923        189,677  

Prosper Marketplace Issuance Trust, Series 2019-2A, Class C, 5.050%, 9/15/2025 (a)

      600,000        606,585  

Upstart Securitization Trust, Series 2018-1, Class D, 6.147%, 8/20/2025 (a)

      500,000        508,757  
     

 

 

  

TOTAL ASSET-BACKED SECURITIES –
(Cost – $2,168,867)

         2,180,494  
     

 

 

  

Collateralized Loan Obligations – 17.80%

      

AMMC CLO Ltd., Series 2016-19A, Class E, 9.303%
(3 Month LIBOR USD + 7.000%), 10/16/2028 (a)(d)

      250,000        249,978  

AMMC CLO Ltd., Series 2014-15A, Class ERR, 9.213%
(3 Month LIBOR USD + 6.910%), 1/15/2032 (a)(d)

      250,000        243,978  

Ares XLIV CLO Ltd., Series 2017-44A, Class E, 10.353%
(3 Month LIBOR USD + 8.050%), 10/15/2029 (a)(d)

      500,000        458,751  

MMCF CLO LLC, Series 2017-1A, Class D, 8.683%
(3 Month LIBOR USD + 6.380%), 1/15/2028 (a)(d)

      100,000        97,534  

Monroe Capital MML CLO VI Ltd., Series 2018-1A, Class E, 9.203%
(3 Month LIBOR USD + 6.900%), 4/15/2030 (a)(d)

      250,000        233,846  

OZLM VI Ltd., Series 2014-6A, Class ES, 10.943%
(3 Month LIBOR USD + 8.640%), 4/17/2031 (a)(d)

      300,000        276,098  

THL Credit Lake Shore MM CLO I Ltd., Series 2019-1A, Class E, 10.803%
(3 Month LIBOR USD + 8.500%), 4/15/2030 (a)(d)

      500,000        488,293  

York CLO Ltd., Series 2015-1A, Class F, 9.528%
(3 Month LIBOR USD + 7.250%), 1/22/2031 (a)(d)

      100,000        84,902  
     

 

 

  

TOTAL COLLATERALIZED LOAN OBLIGATIONS –
(Cost – $2,211,127)

         2,133,380  
     

 

 

  

Collateralized Mortgage Obligations – 45.05%

      

American Home Mortgage Assets Trust, Series 2006-6, Class XP, 1.386%, 12/25/2046 (c)(f)

      1,647,216        128,272  

American Home Mortgage Investment Trust, Series 2006-3, Class 3A2, 6.750%, 12/25/2036 (b)

      323,765        152,950  

American Home Mortgage Investment Trust, Series 2006-2, Class 1A2, 2.586%
(1 Month LIBOR USD + 0.320%), 6/25/2046 (d)

      435,171        197,324  

BAMLL Commercial Mortgage Securities Trust, Series 2019-AHT, Class F, 6.525%
(1 Month LIBOR USD + 4.200%), 3/15/2034 (a)(d)

      250,000        251,013  

CHL Mortgage Pass-Through Trust, Series 2004-29, Class 1X, 0.768%, 2/25/2035 (c)(f)

      3,899,244        63,862  

CountryWide Alternative Loan Trust, Series 2007-20, Class A1, 2.766%
(1 Month LIBOR USD + 0.500%), 8/25/2047 (d)

      319,666        189,834  

CSMC Trust, Series 2017-PFHP, Class G, 8.475%
(1 Month LIBOR USD + 6.150%), 12/15/2030 (a)(d)

      250,000        252,822  

CSMC Trust, Series 2018-RPL2, Class A2, 4.266%, 8/25/2062 (a)(c)

      211,000        212,929  

Deephaven Residential Mortgage Trust, Series 2018-1A, Class B1, 4.340%, 12/25/2057 (a)(c)

      200,000        199,446  

Deutsche Alt-A Securities, Inc. Mortgage Loan Trust, Series 2007-AR1, Class A5, 2.506%
(1 Month LIBOR USD + 0.240%), 1/25/2047 (d)

      257,601        224,656  

Federal Home Loan Mortgage Corp., Series 2018-HQA1, Class M2, 4.566%
(1 Month LIBOR USD + 2.300%), 9/25/2030 (d)

      200,000        201,139  

 

See accompanying notes which are an integral part of these financial statements.

 

4

Table of Contents

Angel Oak Strategic Credit Fund

Schedule of Investments – (continued)

July 31, 2019 (Unaudited)

 

     Principal
Amount		      Value  

Collateralized Mortgage Obligations – (continued)

      

Federal Home Loan Mortgage Corp., Series 2018-HQA1, Class B1, 6.616%
(1 Month LIBOR USD + 4.350%), 9/25/2030 (d)

    $ 170,000      $ 183,958  

Federal National Mortgage Association, Series 2017-C03, Class 1M2, 5.266%
(1 Month LIBOR USD + 3.000%), 10/25/2029 (d)

      100,000        104,621  

Federal National Mortgage Association, Series 2018-C06, Class 2M2, 4.366%
(1 Month LIBOR USD + 2.100%), 3/25/2031 (d)

      100,000        100,442  

GS Mortgage Securities Trust, Series 2018-HART, Class F, 6.225%
(1 Month LIBOR USD + 3.900%), 10/15/2031 (a)(d)

      250,000        249,828  

GSAA Home Equity Trust, Series 2006-15, Class AF6, 5.876%, 9/25/2036 (b)

      50,318        25,181  

GSAA Home Equity Trust, Series 2006-18, Class AF3A, 5.772%, 11/25/2036 (c)

      166,000        89,121  

JP Morgan Chase Commercial Mortgage Securities Trust, Series 2018-ASH8, Class F, 6.325%
(1 Month LIBOR USD + 4.000%), 2/15/2035 (a)(d)

      100,000        101,190  

Legacy Mortgage Asset Trust, Series 2019-GS5, Class A2, 4.250%, 5/25/2059 (a)(b)

      366,000        361,383  

Morgan Stanley Mortgage Loan Trust, Series 2007-7AX, Class 2A1, 2.386%
(1 Month LIBOR USD + 0.120%), 4/25/2037 (d)

      193,708        99,048  

Pretium Mortgage Credit Partners I, Series 2019-NPL1, Class A2, 5.927%, 7/28/2060 (a)(b)

      150,000        151,315  

RBSSP Resecuritization Trust, Series 2009-10, Class 2A2, 2.000%, 1/26/2037 (a)(c)

      501,057        349,640  

Residential Accredit Loans, Inc. Trust, Series 2005-QS12, Class A4, 5.500%, 8/25/2035

      88,413        87,360  

Residential Accredit Loans, Inc. Trust, Series 2006-QS16, Class A10, 6.000%, 11/25/2036

      284,291        261,372  

Residential Asset Securitization Trust, Series 2006-A8, Class 2A7, 6.500%, 8/25/2036

      311,685        192,101  

Seasoned Credit Risk Transfer Trust, Series 2019-2, Class M, 4.750%, 8/26/2058 (a)(c)

      150,000        142,502  

Velocity Commercial Capital Loan Trust, Series 2018-1, Class M6, 7.260%, 4/25/2048 (a)

      211,052        217,711  

Verus Securitization Trust, Series 2019-1, Class B1, 5.311%, 2/25/2059 (a)(c)

      500,000        508,377  

WFRBS Commercial Mortgage Trust, Series 2014-C24, Class C, 4.290%, 11/18/2047 (c)

      100,000        100,008  
     

 

 

  

TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS –
(Cost – $5,424,444)

         5,399,405  
     

 

 

  

Corporate Obligations – 8.25%

      

Financial – 8.25%

      

Hunt Cos, Inc., 6.250%, 2/15/2026 (a)

      200,000        189,500  

Nationstar Mortgage Holdings, Inc., 8.125%, 7/15/2023 (a)

      100,000        104,125  

Realogy Group LLC / Realogy Co-Issuer Corp., 9.375%, 4/1/2027 (a)

      100,000        87,000  

Trinitas Capital Management LLC, 7.750%, 6/15/2023 (a)

      300,000        308,094  

WT Holdings, Inc., 7.000%, 4/30/2023 (a)

      300,000        300,215  
     

 

 

  

TOTAL CORPORATE OBLIGATIONS –
(Cost – $991,594)

         988,934  
     

 

 

  
     Shares         

Preferred Stocks – 2.56%

      

Real Estate Investment Trust – 2.56%

      

Ready Capital Corp., 6.500%, 04/30/2021

      12,000        306,840  
     

 

 

  

TOTAL PREFERRED STOCKS
(Cost – $300,000)

         306,840  
     

 

 

  

 

See accompanying notes which are an integral part of these financial statements.

 

5

Table of Contents

Angel Oak Strategic Credit Fund

Schedule of Investments – (continued)

July 31, 2019 (Unaudited)

 

     Shares      Value  

Short-Term Investments – 8.18%

      

Money Market Funds – 8.18%

      

Fidelity Institutional Money Market Government Portfolio, Institutional Class, 2.190% (g)(h)

      979,942      $ 979,942  
     

 

 

  

TOTAL SHORT-TERM INVESTMENTS
(Cost – $979,942)

         979,942  
     

 

 

  

TOTAL INVESTMENTS – 100.04%
(Cost – $12,075,974)

         11,988,995  
     

 

 

  

Liabilities in Excess of Other Assets – (0.04)%

         (5,012 ) 
     

 

 

  

NET ASSETS – 100.00%

       $ 11,983,983  
     

 

 

  

 

(a)

Security exempt from registration under Rule 144A or Section 4(a)(2) of the Securities Act of 1933. The security may be resold in transactions exempt from registration, normally to qualified institutional buyers. These securities are determined to be liquid by the Adviser, under the procedures established by the Fund’s Board of Trustees. At July 31, 2019, the value of these securities amounted to $8,300,965, or 69.27% of net assets.

(b)

Step-up bond that pays an initial coupon rate for the first period and then a higher coupon rate for the following periods. Rate disclosed is the rate in effect as of July 31, 2019.

(c)

Variable rate security. The coupon is based on an underlying pool of assets. Rate disclosed is the rate in effect as of July 31, 2019.

(d)

Variable or Floating Rate Security based on a reference index and spread. Rate disclosed as of July 31, 2019.

(e)

Principal Only Security.

(f)

Interest Only Security.

(g)

Rate disclosed is the seven day yield as of July 31, 2019.

(h)

All or portion of this security has been pledged as collateral in connection with open futures contracts.

Schedule of Open Futures Contracts

 

Short Futures Contracts

   

Expiration
Month

     

Number of
Contracts

     

Notional
Value

     

Value &
Unrealized
Appreciation
(Depreciation)

  

3 Year ERIS Aged Standard Swap Future

      December 2021        (5 )     $ (510,030 )     $ (13,530 ) 

4 Year ERIS Aged Standard Swap Future

      March 2022        (6 )       (598,271 )       (17,950 ) 

5 Year ERIS Aged Standard Swap Future

      June 2024        (1 )       (105,539 )       (2,313 ) 
           

 

 

  

Total

             $ (33,793 ) 
           

 

 

  

 

See accompanying notes which are an integral part of these financial statements.

 

6

Table of Contents

Statement of Assets and Liabilities

July 31, 2019 (Unaudited)

 

     Strategic
Credit Fund		  

Assets

   

Investments in securities at fair value (cost $12,075,974)

    $ 11,988,995  

Due from Adviser

      31,650  

Deposit at broker for futures

      10,956  

Interest receivable

      58,513  

Variation margin on futures contracts

      1,230  

Prepaid expenses

      10,443  
  

 

 

  

Total Assets

      12,101,787  
  

 

 

  

Liabilities

   

Payable for investments purchased

      1,058  

Payable for distributions to shareholders

      25,919  

Payable to administrator, fund accountant, and transfer agent

      28,920  

Payable to custodian

      1,002  

Other accrued expenses

      60,905  
  

 

 

  

Total Liabilities

      117,804  
  

 

 

  

Net Assets

    $ 11,983,983  
  

 

 

  

Net Assets consist of:

   

Paid-in capital

    $ 12,117,767  

Total distributable earnings (accumulated deficit)

      (133,784 ) 
  

 

 

  

Net Assets

    $ 11,983,983  
  

 

 

  

Shares outstanding (unlimited number of shares authorized, no par value)

      487,502  
  

 

 

  

Net asset value (“NAV”) and offering price per share

    $ 24.58  
  

 

 

  

 

See accompanying notes which are an integral part of these financial statements.

 

7

Table of Contents

Statement of Operations

For the Period Ended July 31, 2019 (Unaudited)

 

     Strategic
Credit Fund		  

Investment Income

   

Interest

    $ 388,704  

Dividends

      9,750  
  

 

 

  

Total Investment Income

      398,454  
  

 

 

  

Expenses

   

Investment Advisory

      62,799  

Legal

      35,648  

Administration

      32,863  

Transfer agent

      30,117  

Distribution

      25,150  

Trustee

      24,043  

Fund accounting

      20,437  

Audit and tax

      17,085  

Registration

      13,231  

Compliance

      7,864  

Printing

      3,718  

Insurance

      3,620  

Custodian

      3,187  

Miscellaneous

      737  
  

 

 

  

Total Expenses

      280,499  
  

 

 

  

Fees voluntarily waived by Adviser (See Note 4)

      (242,820 ) 
  

 

 

  

Net operating expenses

      37,679  
  

 

 

  

Net Investment Income (Loss)

      360,775  
  

 

 

  

Realized and Unrealized Gain (Loss) on Investments

   

Net realized gain (loss) on investments

      4,871  

Net realized gain (loss) on futures contracts

      (27,190 ) 

Net change in unrealized appreciation (depreciation) on investments

      16,666  

Net change in unrealized appreciation (depreciation) on futures contracts

      242  
  

 

 

  

Net realized and unrealized gain (loss) on investments

      (5,411 ) 
  

 

 

  

Net increase (decrease) in net assets resulting from operations

    $ 355,364  
  

 

 

  

 

See accompanying notes which are an integral part of these financial statements.

 

8

Table of Contents

Angel Oak Strategic Credit Fund

Statements of Changes in Net Assets

 

     For the Period Ended
July 31, 2019
(Unaudited)		     For the Year Ended
January 31, 2019		  

Increase (Decrease) in Net Assets due to:

     

Operations

     

Net investment income (loss)

    $ 360,775     $ 453,648  

Net realized gain (loss) on investment transactions and futures contracts

      (22,319 )      (16,633 ) 

Net change in unrealized appreciation (depreciation) on investments and futures contracts

      16,908       (143,452 ) 
  

 

 

    

 

 

  

Net increase (decrease) in net assets resulting from operations

      355,364       293,563  
  

 

 

    

 

 

  

Distributions to Shareholders

     

Total distributions

      (329,469 )      (477,667 ) 
  

 

 

    

 

 

  

Capital Transactions

     

Proceeds from shares sold

      5,623,025       4,746,401  

Reinvestment of distributions

      204,705       444,192  

Amount paid for shares redeemed

      (852,051 )      (815,108 ) 
  

 

 

    

 

 

  

Net increase (decrease) in net assets resulting from capital transactions

      4,975,679       4,375,485  
  

 

 

    

 

 

  

Total Increase (Decrease) in Net Assets

      5,001,574       4,191,381  
  

 

 

    

 

 

  

Net Assets

     

Beginning of period

      6,982,409       2,791,028  
  

 

 

    

 

 

  

End of period

    $ 11,983,983     $ 6,982,409  
  

 

 

    

 

 

  

Share Transactions

     

Shares sold

      228,628       189,077  

Shares issued in reinvestment of distributions

      8,325       17,790  

Shares redeemed

      (34,602 )      (32,340 ) 
  

 

 

    

 

 

  

Net increase (decrease) in share transactions

      202,351       174,527  
  

 

 

    

 

 

  

 

See accompanying notes which are an integral part of these financial statements.

 

9

Table of Contents

Angel Oak Strategic Credit Fund – Institutional Class

Financial Highlights

(For a share outstanding during each period)

 

     For the Period Ended
July 31, 2019
(Unaudited)		     For the Year Ended
January 31, 2019		     For the Period Ended
January 31, 2018 (a)		  

Selected Per Share Data:

       

Net asset value, beginning of period

    $ 24.49     $ 25.23     $ 25.00  
  

 

 

    

 

 

    

 

 

  

Income from investment operations:

       

Net investment income (loss)

      0.22       1.76       0.14  

Net realized and unrealized gain (loss) on investments

      0.03  (b)      (0.60 )      0.14  
  

 

 

    

 

 

    

 

 

  

Total from investment operations

      0.25       1.16       0.28  
  

 

 

    

 

 

    

 

 

  

Less distributions to shareholders:

       

From net investment income

      (0.16 )      (1.85 )      (0.05 ) 

From net realized gain

      –         (0.05 )      –    
  

 

 

    

 

 

    

 

 

  

Total distributions

      (0.16 )      (1.90 )      (0.05 ) 
  

 

 

    

 

 

    

 

 

  

Net asset value, end of period

    $ 24.58     $ 24.49     $ 25.23  
  

 

 

    

 

 

    

 

 

  

Total Return

      3.68 % (c)      4.72 %      1.10 % (c) 

Ratios and Supplemental Data:

       

Net assets, end of period (000’s omitted)

    $ 11,984     $ 6,982     $ 2,791  

Ratio of expenses to average net assets after waiver and reimbursement (d)

      0.75 % (e)      0.75 %      0.75 % (e) 

Ratio of net investment income (loss) to average net assets before waiver and reimbursement

      2.35 % (e)      0.42 %      (16.03 %) (e) 

Ratio of net investment income (loss) to average net assets after waiver and reimbursement

      7.18 % (e)      7.63 %      5.85 % (e) 

Portfolio turnover rate

      19.81 % (c)      63.83 %      69.68 % (c) 

 

(a)   Fund commenced operations on December 26, 2017.

       

(b)   Realized and unrealized gains and loses per share in this capture balancing adjustment necessary to reconcile to the change in net asset value for the period and may reconcile with the aggregate gains and loses in the statement of operations due to share transactions for the period.

       

(c)   Not Annualized.

       

(d)   Ratio of expenses to average net assets before waiver and reimbursement

      5.58 % (e)      7.96 %      22.63 % (e) 

(e)   Annualized.

    

 

See accompanying notes which are an integral part of these financial statements.

 

10

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements

July 31, 2019 (Unaudited)

NOTE 1. ORGANIZATION

Angel Oak Strategic Credit Fund (the “Trust” or the “Fund”), a Delaware statutory trust organized on August 18, 2017, is a continuously-offered diversified, closed-end management investment company issuing shares, as defined in the Investment Company Act of 1940 (the “1940 Act”), as amended. The Trust’s sole series is the Fund. The Fund offers Class A and Institutional Class shares to investors. The Fund’s Institutional Class shares commenced operations on December 26, 2017. As of July 31, 2019, Class A shares have not commenced operations. Class A shares charge a 2.25% front-end sales charge and are subject to a 0.25% 12b-1 fee. Institutional Class shares do not charge front-end or back-end sales charges and are not subject to a 12b-1 fee. The Trust’s Agreement and Declaration of Trust authorizes the issuance of an unlimited number of shares. The investment objective of the Fund is to seek total return.

The Fund operates as an “interval fund” pursuant to Rule 23c-3 under the 1940 Act. The Board of Trustees (“Board”) of the Fund has adopted a fundamental policy that the Fund will make quarterly repurchase offers pursuant to Rule 23c-3 under the 1940 Act, as such rule may be amended from time to time, for between 5% and 25% of the shares of beneficial interest (“Shares”) outstanding at net asset value (“NAV”), unless suspended or postponed in accordance with regulatory requirements, and each repurchase pricing shall occur no later than the 14th day after the Repurchase Request Deadline (as defined in the Fund’s Prospectus), or the next business day if the 14th day is not a business day. The Fund will not be required to repurchase Shares at a shareholder’s option nor will Shares be exchangeable for units, interests or shares of any investment of the Fund. In connection with each repurchase offer, it is possible that the Fund may offer to repurchase only the minimum amount of 5% of its outstanding Shares. It is also possible that a repurchase offer may be oversubscribed, with the result that shareholders may only be able to have a portion of their Shares repurchased. The Fund does not currently intend to list its Shares for trading on any national securities exchange. The Fund does not expect any secondary market to develop for the Shares in the foreseeable future. The Shares are, therefore, not readily marketable. Even though the Fund will make quarterly repurchase offers to repurchase a portion of the Shares to try to provide liquidity to shareholders, investors should consider the Shares to be illiquid. The schedule requires the Fund to make repurchase offers every three months. Quarterly repurchases occur in the month of March, June, September, and December.

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements in accordance with the generally accepted accounting principles in the United States of America (“GAAP”). The Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Codification Topic 946 “Financial Services-Investment Companies.”

Securities Valuation and Fair Value Measurements – The Fund has adopted fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion in changes in valuation techniques and related inputs, if any, during the period. In addition, these standards require expanded disclosure for each major category of assets. These inputs are summarized in the three broad levels listed below:

 

  •  

Level 1 – quoted prices in active markets for identical securities

  •  

Level 2 – other significant observable inputs (including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)

  •  

Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining fair value of investments based on the best information available)

The inputs or methodology used for valuing securities are not an indication of the risks associated with investing in those securities.

Investments in registered open-end management investment companies, including money market funds, will be valued based upon the NAV of such investments and are categorized as Level 1 of the fair value hierarchy.

Fair values for long-term debt securities, including asset-backed securities, collateralized loan obligations, collateralized mortgage obligations, corporate obligations and mortgage-backed securities are normally determined on the basis of valuations provided by independent pricing services. Vendors typically value such securities based on one or more inputs, including but not limited to,

 

11

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other relationships observed in the markets among comparable securities; and pricing models such as yield measurers calculated using factors such as cash flows, financial or collateral performance and other reference data. In addition to these inputs, mortgage-backed and asset-backed obligations may utilize cash flows, prepayment information, default rates, delinquency and loss assumptions, collateral characteristics, credit enhancements and specific deal information. Securities that use similar valuation techniques and inputs are categorized as Level 2 of the fair value hierarchy. To the extent the significant inputs are unobservable; the values generally would be categorized as Level 3.

Equity securities, including preferred stocks, that are traded on a national securities exchange, except those listed on the Nasdaq Global Market®, Nasdaq Global Select Market®, and the Nasdaq Capital Market® exchanges (collectively, “Nasdaq”), are valued at the last sale price at the close of that exchange. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price (“NOCP”). If, on a particular day, an exchange-listed or Nasdaq security does not trade, then: (i) the security shall be valued at the mean between the most recent quoted bid and asked prices at the close of the exchange; or (ii) the security shall be valued at the latest sales price on the Composite Market (defined below) for the day such security is being valued. “Composite Market” means a consolidation of the trade information provided by national securities and foreign exchanges and over-the-counter markets (“OTC”) as published by a pricing service. In the event market quotations or Composite Market pricing are not readily available, Fair Value will be determined in accordance with the procedures adopted by the Board. All equity securities that are not traded on a listed exchange are valued at the last sale price at the close of the over-the counter market. If a non-exchange listed security does not trade on a particular day, then the mean between the last quoted bid and asked price will be used as long as it continues to reflect the value of the security. If the mean is not available, then bid price can be used as long as the bid price continues to reflect the value of the security. Otherwise Fair Value will be determined in accordance with the procedures adopted by the Board. These securities will generally be categorized as Level 3 securities. When using the market quotations or close prices provided by the pricing service and when the market is considered active, the security will be classified as a Level 1 security. Sometimes, an equity security owned by the Fund will be valued by the pricing service with factors other than market quotations or when the market is considered inactive. When this happens, the security will be classified as a Level 2 security.

Short term debt securities having a maturity of 60 days or less are generally valued at amortized cost, which approximates fair market value. These investments are categorized as Level 2 of the fair value hierarchy. Reverse repurchase agreements and repurchase agreements are priced at their acquisition cost, which represents fair value. These securities will generally be categorized as Level 2 securities.

Financial derivative instruments, such as futures contracts, that are traded on a national securities or commodities exchange are typically valued at the settlement price determined by the relevant exchange. Swaps, such as credit default swaps, interest-rate swaps and currency swaps, are valued by a Pricing Service. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy. Over-the-counter financial derivative instruments, such as certain futures contracts or swap agreements, derive their values from underlying asset prices, indices, reference rates, other inputs or a combination of these factors. These instruments are normally valued on the basis of evaluations provided by independent pricing services or broker dealer quotations. Derivatives that use similar valuation techniques as described above are typically categorized as Level 2 of the fair value hierarchy.

Securities may be fair valued in accordance with the fair valuation procedures approved by the Board. The Valuation and Risk Management Oversight Committee is generally responsible for overseeing the Fund’s valuation processes and reports quarterly to the Board. The Valuation and Risk Management Oversight Committee has delegated to the Valuation Committee of Angel Oak Capital Advisors, LLC (the “Adviser”) the day to day responsibilities for making all necessary determinations of the fair value of portfolio securities and other assets for which market quotations are not readily available or if the prices obtained from brokers and dealers or independent pricing services are deemed to be unreliable indicators of market or fair value. Representatives of the Adviser’s Valuation Committee report quarterly to the Valuation and Risk Management Oversight Committee.

 

12

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

The following is a summary of the inputs used to value the Fund’s net assets as of July 31, 2019:

 

Assets    Level 1      Level 2      Level 3      Total  

Asset-Backed Securities

    $ –      $ 2,180,494      $     –      $ 2,180,494  

Collateralized Loan Obligations

      –        2,133,380        –        2,133,380  

Collateralized Mortgage Obligations

      –        5,399,405        –        5,399,405  

Corporate Obligations

      –        988,934        –        988,934  

Preferred Stocks

      306,840                 –        306,840  

Short-Term Investments

      979,942        –        –        979,942  

Total

    $ 1,286,782      $ 10,702,213      $ –      $ 11,988,995  

Other Financial Instruments*

                                    

Liabilities

                                    

Futures Contracts

    $ (33,793 )     $ –      $ –      $ (33,793 ) 

 

*

Other financial instruments are derivative instruments, such as futures. Futures are reflected at the unrealized appreciation (depreciation) on the instrument.

See the Schedule of Investments for further disaggregation of investment categories. During the period ended July 31, 2019, the Fund did not recognize any transfers to or from Level 3.

Federal Income Taxes – The Fund intends to elect and continue to qualify to be taxed as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended. If so qualified, the Fund generally will not be subject to federal income tax to the extent it distributes substantially all of its net investment income and capital gains to shareholders. The Fund generally intends to operate in a manner such that it will not be liable for federal income or excise taxes.

The Fund has adopted financial reporting rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the Statement of Operations. During the period ended July 31, 2019, the Fund did not incur any interest or penalties. The Fund has reviewed all open tax years and major jurisdictions and concluded that no provision for income tax would be required in the Fund’s financial statements. The Fund’s Federal and state income and Federal excise tax returns for tax years for which the applicable statues of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Security Transactions and Income Recognition – Investment security transactions are accounted for on trade date. Gains and losses realized on sales of securities are determined on a specific identification basis. Interest income and expense is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized using the effective yield method, based on each security’s estimated life. Dividend income and corporate actions, if any, are recorded on the ex-date. Paydown gains and losses on mortgage-related and other asset-backed securities are recorded as components of interest income on the Statement of Operations. Payments received from certain investments held by the Fund may be comprised of dividends, capital gains and return of capital. The Fund originally estimates the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of the information from the issuer. The actual character of distributions to the Fund’s shareholders will be reflected in the Form 1099 received by shareholders after the end of the calendar year.

Distributions to Shareholders – Distributions from the Fund’s net investment income are accrued daily and typically paid monthly. The Fund intends to distribute its net realized long term capital gains and net realized short term capital gains, if any, at least annually. Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. The treatment for financial reporting purposes of distributions made to shareholders during the period from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused primarily by differences in the timing of the recognition of certain components of income, expense or realized capital gain for federal income tax purposes. Where such differences are permanent in nature, they are reclassified in the components of the net assets based on their ultimate characterization for federal income tax purposes. Any such reclassifications will have no effect on net assets, results of operations or net asset values per share of the Fund. For the period ended July 31, 2019, there were no reclassifications.

 

13

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

Share Valuation – The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding, rounded to the nearest cent. The Fund’s NAV will not be calculated on the days on which the New York Stock Exchange is closed for trading.

Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the period. Actual results could differ from those estimates.

Indemnifications – Under the Trust’s organizational documents, the Trust will indemnify its officers and trustees for certain liabilities that may arise from performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representatives and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred.

Cash and Cash Equivalents – Cash and cash equivalents are highly liquid assets including coin, currency and short-term investments that typically mature in 30-90 days. Short-term investments can include U.S. government securities and government agency securities, investment grade money market instruments, investment grade fixed-income securities, repurchase agreements, commercial paper and cash equivalents. Cash equivalents are extremely low risk assets that are liquid and easily converted into cash. These investments are only considered equivalents if they are readily available and are not restricted by some agreement. When the Adviser believes market, economic or pollical conditions are unfavorable for investors, the Adviser may invest up to 100% of a Fund’s net assets in cash, cash equivalents or other short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, or the U.S. economy. The Adviser also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity.

Repurchase Agreements – Repurchase agreements are transactions by which the Fund purchases a security and simultaneously commits to resell that security to the seller (a bank or securities dealer) at an agreed upon price on an agreed upon date. The resale price reflects the purchase price plus an agreed upon market rate of interest which is unrelated to the coupon rate or the date of maturity of the purchased security. A repurchase agreement is accounted for as an investment by the Fund, collateralized by securities, which are delivered to the Fund’s custodian or to an agent bank under a tri-party agreement. The securities are marked-to-market daily and additional securities are acquired as needed, to ensure that their value equals or exceeds the repurchase price plus accrued interest. Repurchase agreements involve certain risks not associated with direct investments in the underlying securities. In the event of a default or bankruptcy by the seller, the Fund will seek to liquidate such collateral. The exercise of the Fund’s right to liquidate such collateral could involve certain costs or delays, and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. The Fund did not hold any repurchase agreements during the period ended July 31, 2019.

Reverse Repurchase Agreements – A reverse repurchase agreement is the sale by the Fund of a security to a party for a specified price, with the simultaneous agreement by the Fund to repurchase that security from that party on a future date at a higher price. Securities sold under reverse repurchase agreements are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made are recorded as a component of interest expense on the Statement of Operations. Reverse repurchase agreements involve the risk that the counterparty will become subject to bankruptcy or other insolvency proceedings or fail to return a security to the Fund. In such situations, the Fund may incur losses as a result of a possible decline in the value of the underlying security during the period while the Fund seeks to enforce its rights, a possible lack of access to income on the underlying security during this period, or expenses of enforcing its rights. The Fund will segregate assets determined to be liquid by the Adviser or otherwise covered its obligations under reverse repurchase agreement. The Fund did not hold any reverse repurchase agreements during the period ended July 31, 2019.

Mortgage-Backed and Asset-Backed Securities Risks – Prepayment risk is associated with mortgage-backed and asset-backed securities, including collateralized loan obligations (“CLOs”). If interest rates fall, the underlying debt may be repaid ahead of

 

14

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

schedule, reducing the value of the Fund’s investments. If interest rates rise, there may be fewer prepayments, which would cause the average bond maturity to rise, increasing the potential for the Fund to lose money. The value of these securities may be significantly affected by changes in interest rates, the market’s perception of issuers, and the creditworthiness of the parties involved. The ability of the Fund to successfully utilize these instruments may depend on the ability of the Fund’s Adviser to forecast interest rates and other economic factors correctly. These securities may have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value highly volatile. Certain mortgage-backed securities may be secured by pools of mortgages on single-family, multi-family properties, as well as commercial properties. Similarly, asset-backed securities may be secured by pools of loans, such as corporate loans, student loans, automobile loans and credit card receivables. The credit risk on such loans is affected by homeowners or borrowers defaulting on their loans. The values of assets underlying mortgage-backed and asset-backed securities, including CLOs, may decline and therefore may not be adequate to cover underlying investors. Mortgage-backed securities and other securities issued by participants in housing and commercial real estate finance, as well as other real estate-related markets have experienced extraordinary weakness and volatility in recent years. Possible legislation in the area of residential mortgages, credit cards, corporate loans and other loans that may collateralize the securities in which the Fund may invest could negatively impact the value of the Fund’s investments. To the extent the Fund focuses its investments in particular types of mortgage-backed or asset-backed securities, including CLOs, the Fund may be more susceptible to risk factors affecting such types of investments.

Subordinated Debt of Banks and Diversified Financial Companies – The Fund may invest in subordinated debt securities, sometimes also called “junior debt,” which are debt securities for which the issuer’s obligations to make principal and interest payment are secondary to the issuer’s payment obligations to more senior debt securities. Such investments will consist primarily of debt issued by community banks or savings intuitions (or their holding companies), which are subordinated to senior debt issued by the banks and deposits held by the bank, but are senior to trust preferred obligations, preferred stock and common stock issued by the bank.

Preferred Stocks – The Fund may invest in preferred stock. Preferred stock is a class of stock having a preference over common stock as to the payment of dividends and the recovery of investment should a company be liquidated, although preferred stock is usually junior to the debt securities of the issuer. Preferred stock typically does not possess voting rights and its market value may change based on changes in interest rates. The fundamental risk of investing in preferred stock is the risk that the value of the stock might decrease.

Futures Contracts – The Fund may enter into futures contracts to hedge various investments for risk management as well as speculative purposes. Initial margin deposits are made upon entering into futures contracts and can be either cash or securities. Secondary margin limits are required to be maintained while futures are held, as defined by each contract.

During the period a futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by “marking-to-market” on a daily basis to reflect the fair value of the contract at the end of each day’s trading. Variation margin receivables or payables represent the difference between the change in unrealized appreciation and depreciation on the open contracts and the cash deposits made on the margin accounts. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from the closing transaction and the Fund’s cost of entering into a contract. The use of futures contracts involves the risk of illiquid markets or imperfect correlation between the value of the instruments and the underlying securities, or that the counterparty will fail to perform its obligations.

Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they are traded. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contract and may realize a loss.

Options – The Fund may purchase call and put options on specific securities, and may write and sell covered or uncovered call and put options for hedging purposes in pursuing its investment objectives. A put option gives the purchaser of the option the right to sell, and obligates the writer to buy, the underlying security at a stated exercise price, typically at any time prior to the expiration of the option for American options or only at expiration for European options. A call option gives the purchaser of the option the right to buy, and obligates the writer to sell, the underlying security at a stated exercise price, typically at any time prior to the expiration of the option. A covered call option is a call option with respect to which the seller of the option owns the underlying security. The sale of such an option exposes the seller during the term of the option to possible loss of opportunity to realize appreciation in the market

 

15

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

price of the underlying security or to possible continued holding of a security that might otherwise have been sold to protect against depreciation in the market price of the security. A covered put option is a put option with respect to which cash or liquid securities have been placed in a segregated account on the books of the Fund or with a custodian to fulfill the obligation undertaken. The sale of such an option exposes the seller during the term of the option to a decline in price of the underlying security while depriving the seller of the opportunity to invest the segregated assets.

The Fund may close out a position when writing options by purchasing an option on the same underlying security with the same exercise price and expiration date as the option that it has previously written on the security. In such a case, the Fund will realize a profit or loss if the amount paid to purchase an option is less or more than the amount received from the sale of the option. The Fund did not hold any options during the period ended July 31, 2019.

Swaps – The Fund may enter into swap contracts to hedge various investments for risk management or to pursue its investment objective. The Fund may invest in credit default swaps, total return swaps, interest rate swaps, equity swaps, currency swaps, options on foregoing swaps, and other types of swaps. Such transactions are subject to market risk, liquidity risk, risk of default by the other party to the transaction, known as “counterparty risk,” regulatory risk and risk of imperfect correlation between the value of such instruments and the underlying assets and may involve commissions or other costs. Swap agreements are valued by a pricing service and unrealized appreciation or depreciation is recorded daily as the difference between the prior day and current day closing price. The Fund did not hold any swaps during the period ended July 31, 2019.

NOTE 3. DERIVATIVE TRANSACTIONS

The following tables present a summary of the value of derivative instruments as of July 31, 2019 and the effect of derivative instruments on the Statement of Assets and Liabilities as of July 31, 2019.

 

Derivatives    Type of
Derivative
Risk		    Statement of
Assets and
Liabilities Location		    Asset

Futures Contracts

    Interest Rate    Variation Margin on Futures Contracts    $1,230

The effect of derivative instruments on the Statement of Operations for the period ended July 31, 2019:

 

Derivatives    Type of
Derivative
Risk		    Location of
Gain (Loss) on Derivatives
in Income		    Realized Gain
(Loss) on
Derivatives

Futures Contracts

    Interest Rate    Net realized gain (loss) on futures contracts    $(27,190)

 

Derivatives    Type of
Derivative
Risk		    Location of
Gain (Loss) on Derivatives
in Income		    Change in
Unrealized
Appreciation
(Depreciation) on
Derivatives

Futures Contracts

    Interest Rate    Net change in unrealized appreciation (depreciation) on futures contracts    $242

The average monthly notional value of the short futures contracts during the period ended July 31, 2019 was ($2,020,683).

NOTE 4. FEES AND OTHER RELATED PARTY TRANSACTIONS

Under the terms of the investment advisory agreement, on behalf of the Fund (the “Agreement”), the Adviser manages the Fund’s investments subject to oversight of the Trustees. As compensation for its management services, the Fund is obligated to pay the Adviser a fee computed and accrued daily and paid monthly at an annual rate of 1.25% of the average daily net assets of the Fund.

 

16

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 4. FEES AND OTHER RELATED PARTY TRANSACTIONS – (continued)

 

The Adviser has voluntarily agreed to waive its fees and/or reimburse certain expenses (exclusive of any taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization and extraordinary expenses) to limit the Operating Expenses after fee waiver/expense reimbursement to 0.75% of the Fund’s average daily net assets (the “Expense Limit”). The Adviser may voluntarily waive fees at different levels, from time to time. The Adviser may not recoup from the Fund any waived amount or reimbursed expenses pursuant to this arrangement. The Adviser may amend or discontinue this waiver at any time without advance notice.

Quasar Distributors, LLC (the “Distributor”) acts as the Fund’s principal underwriter in a continuous public offering of the Fund’s shares. For its services during the period ended July 31, 2019, the fund paid Quasar $25,150.

U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”), an indirect wholly-owned subsidiary of U.S. Bancorp, serves as the Fund’s Administrator (“Administrator”) and, in that capacity, performs various administrative and accounting services for the Fund. Fund Services also serves as the Fund’s fund accountant and transfer agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund’s custodian; coordinates the preparation and payment of the Fund’s expenses and reviews the Fund’s expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee at an annual rate based upon the average daily net assets of the Fund. U.S. Bank, N.A. (the “Custodian”) serves as custodian to the Fund. Both the Administrator and Custodian are affiliates of the Distributor.

Certain officers, Trustees and shareholders of the Fund are also owners or employees of the Adviser.

NOTE 5. ORGANIZATIONAL AND OFFERING COSTS

Organization costs consist of costs incurred to establish the Fund and enable it legally to do business. Offering costs include state registration fees and legal fees regarding the preparation of the initial registration statement. These organization and offering expenses were paid by the Adviser and will not be subject to reimbursement by the Fund.

NOTE 6. INVESTMENT TRANSACTIONS

For the period ended July 31, 2019, purchases and sales of investment securities, other than short-term investments and short-term U.S. government obligations, were as follows:

 

Purchases   Sales  
$6,244,207   $ 1,846,663  

For the period ended July 31, 2019, there were $681,925 of purchases and $743,594 of sales of U.S. Government securities for the Fund. These amounts are included in the aggregate purchases and sales of investment securities displayed in the table above.

NOTE 7. REPURCHASE OFFERS

Shares repurchased during the period ended July 31, 2019 were as follows (See Note 1):

 

Repurchase
Offer Date		   Cash Payment Date   NAV on
Repurchase
Pricing Date		     Percentage of
Outstanding Shares the
Fund Offered to
Repurchase		     Amount of
Shares the Fund
Offered to
Repurchase		     Percentage of
Shares Repurchased  to
Outstanding
Shares		     Number of
Shares
Repurchased		  

February 22, 2019

   March 15, 2019   $ 24.50       5 %      18,827       4 %      16,700  

May 31, 2019

   June 21, 2019   $ 24.74       5 %      24,050       3 %      17,902  

 

17

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 8. BENEFICIAL OWNERSHIP

 

The beneficial ownership, either directly or indirectly, of 25% or more of the voting securities of a fund creates a presumption of control of a fund, under Section 2(a)(9) of the 1940 Act. At July 31, 2019, Pershing LLC and National Financial Services LLC owned, as record shareholder, 66% and 28%, respectively, of the outstanding shares of the Fund.

NOTE 9. FEDERAL TAX INFORMATION

The tax characterization of distributions paid for the year/period ended January 31, 2019 and January 31, 2018, were as follows:

 

     
      2019      2018  
     

Distributions paid from:

                  
     

Ordinary Income

    $ 472,949      $ 4,654  
     

Net Long-Term Capital Gain

      4,718        –    
     

Total

    $ 477,667      $ 4,654  

At January 31, 2019, the components of distributable earnings (accumulated deficit) on a tax basis were as follows:

 

   

Tax Cost of Investments

    $ 6,997,074  
   

Unrealized Appreciation*

      60,379  
   

Unrealized Depreciation*

      (164,024 ) 
   

Net Unrealized Appreciation (Depreciation)*

    $ (103,645 ) 
   

Undistributed Ordinary Income

      1,972  
   

Undistributed Long-Term Gain (Loss)

      –    
   

Accumulated Gain (Loss)

    $ 1,972  
   

Other Accumulated Gain (Loss)

      (58,006 ) 
   

Distributable Earnings (Accumulated Deficit)

    $ (159,679 ) 

 

*

Represents aggregated amounts of Fund’s investments and futures.

The temporary differences between book basis and tax basis in the Fund are primarily attributable to mark-to-markets.

As of January 31, 2019, the Fund did not have any capital loss carry forwards.

Certain capital losses incurred after October 31 and within the current taxable year, are deemed to arise on the first business day of the Fund’s following taxable year. For the tax year ended January 31, 2019, the Fund deferred $58,006 of post-October losses.

NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS

In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-08, Receivable – Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in the ASU shorten the amortization period for certain callable debt securities, held at a premium, to be amortized to the earliest call date. The ASU does not require an accounting change for securities held at a discount; which continues to be amortized to maturity. The ASU is effective for fiscal years and interim period within those fiscal years beginning after December 15, 2018. Management has assessed these changes and concluded these changes do not have a material impact on the Fund’s financial statements.

In August 2018, FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the

 

18

Table of Contents

Angel Oak Strategic Credit Fund

Notes to the Financial Statements - (continued)

July 31, 2019 (Unaudited)

 

NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS – (continued)

 

effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management has evaluated ASU 2018-13 and has adopted the disclosure framework.

NOTE 11. SUBSEQUENT EVENT

Management of the Fund has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments other than the following.

Shares repurchased subsequent to July 31, 2019 were as follows (see Note 1):

 

Repurchase Offer
Date		   Cash Payment Date     NAV on
Repurchase
Pricing
Date		     Percentage of
Outstanding Shares the
Fund Offered to
Repurchase		     Amount of
Shares the Fund
Offered to
Repurchase		     Percentage of
Shares Repurchased  to
Outstanding
Shares		      Number of
Shares
Repurchased		  

August 30, 2019

     September 20, 2019     $ 24.59       10 %      77,905       12 %       61,783  

Effective August 1, James E. Stueve has resigned from the Board.

 

19

Table of Contents

Additional Information (Unaudited)

1. Shareholder Notification of Federal Tax Status

For the taxable year ended January 31, 2019, certain dividends paid by the Fund may be subject to a maximum tax rate of 20% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate the maximum amount allowable as taxed at a maximum rate of 20%.

For the taxable year ended January 31, 2019, the Fund paid qualified dividend income of 3.11%.

For the taxable year ended January 31, 2019, the percentage of ordinary income dividends paid by the Fund that qualifies for the dividends received deduction available to corporations was 3.11%.

For the taxable year ended January 31, 2019, the percentage of ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)2(c) was 1.75%.

For the taxable year ended January 31, 2019, the percentage of taxable ordinary income distributions that are designated as interest related dividends under Internal Revenue 871(k)1(c) was 87.14%.

2. Disclosure of Portfolio Holdings

The Fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Part F of Form N-PORT. The Fund’s Part F of Form N-PORT is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

3. Proxy Voting Policies and Procedures

A description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio securities and information regarding how the Fund voted those proxies during the most recent twelve month period ended June 30, is available without charge upon request by (1) calling the Fund at (855) 751-4324 and (2) from Trust documents filed with the SEC on the SEC’s website at www.sec.gov.

4. Special Meeting of Shareholders

On February 8, 2019, a special meeting of the shareholders of the Fund was held at the offices of the Trust for the purpose of electing new Trustees.

Below are the voting results from the special meeting of the Trust:

 

Election of Directors    For      Withheld  

Andrea Mullins

      262,194        0  

James E. Stueve

      262,194        0  

Samuel R. Dunlap, III

      262,194        0  

5. Compensation of Trustees

Each Trustee who is not an “interested person” of the Trust (i.e., an “Independent Trustee”) receives an annual retainer of $50,000 (pro-rated for any periods less than one year), paid quarterly as well as $10,000 for attending each regularly scheduled meeting in person in connection with his or her service on the Board of the Trust and other funds advised by the Adviser. In addition, each Committee Chairman receives additional annual compensation of $12,000 (pro-rated for any periods less than one year). Independent Trustees are permitted for reimbursement of out-of-pocket expenses incurred in connection with attendance at meetings. The Fund’s Statement of Additional Information includes additional information about the Trustees and is available upon request by calling toll free 1-855-444-9243.

 

20

Table of Contents

6. Trustees and Officers

The business of the Fund is managed under the direction of the Board. The Board formulates the general policies of the Fund and meets periodically to review the Fund’s performance, monitor investment activities and practices, and discuss other matters affecting the Fund. The Trustees are fiduciaries for the Fund’s shareholders and are governed by the laws of the State of Delaware in this regard. The names and addresses of the Trustees and officers of the Trust are listed below along with a description of their principal occupations over at least the last five years. The address of each Trustee and Officer of the Trust is c/o Angel Oak Capital Advisors, LLC, 3344 Peachtree Road NE, Suite 1725, Atlanta, GA 30326. The Fund’s Statement of Additional Information includes additional information about the Trustees and is available upon request by calling toll free 1-855-751-4324.

 

Name and
Year of Birth		   Position with
the Trust		   Term of Office
and Length of
Time Served		   Principal Occupation(s)
During Past 5 Years		  

Number of 

Portfolios 

in Fund 

Complex(1) 

Overseen 

by Trustee 

   Other Directorships Held
During the Past 5 Years

Independent Trustees of the Trust(2)

Ira P. Cohen

1959

  

Independent

Trustee, Chairman

   Trustee since 2017, Chairman since 2017; indefinite terms   Executive Vice President, Recognos Financial (investment industry data analysis provider) (since 2015); Independent financial services consultant (since 2005).   6   Trustee, Valued Advisers Trust (since 2010) (12 portfolios); Trustee, Griffin Institutional Access Credit Fund (since 2017); Trustee, Griffin Institutional Access Real Estate Access Fund (since 2014); Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2018).

Alvin R. Albe, Jr.

1953

   Independent Trustee   Since 2017; indefinite term   Retired; Senior Advisor, The TCW Group, Inc. (asset manager) (2008 – 2013).   6   Director, Syntroleum Corporation (renewable energy firm) (1988 – 2014); Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2018).

 

(1)

The Fund Complex includes the Fund, each series of Angel Oak Funds Trust, and Angel Oak Financial Strategies Income Term Trust.

(2)

The Trustees of the Trust who are not “interested persons” of the Trust as defined in the 1940 Act (“Independent Trustees”).

 

 

21

Table of Contents
Name and
Year of Birth		   Position with
the Trust		   Term of Office
and Length of
Time Served		   Principal Occupation(s)
During Past 5 Years		  

Number of 

Portfolios 

in Fund 

Complex(1) 

Overseen 

by Trustee 

   Other Directorships Held
During the Past 5 Years

Keith M. Schappert

1951

   Independent Trustee   Since 2017; indefinite term   President, Schappert Consulting LLC (investment industry consulting) (since 2008).   6   Trustee, Mirae Asset Discovery Funds (since 2010) (4 portfolios); Trustee, Metropolitan Series Fund, Inc. (2009 – 2015) (30 portfolios); Trustee, Met Investors Series Trust (2012 – 2015) (45 portfolios); Director, Commonfund Capital, Inc. (since 2015); Director, The Commonfund (since 2012); Director, Calamos Asset Management, Inc. (2012 – 2017); Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2018).

Andrea N. Mullins

1967

   Independent Trustee   Since 2019; indefinite term   Private Investor; Independent Contractor, SWM Advisors (since 2014); Retired from Eagle Funds in 2010 as Chief Financial Officer   6   Trustee, Valued Advisors Trust (since 2013, Chairperson since 2017) (12 portfolios); Trustee, Angel Oak Funds Trust (since 2019); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2019).

Interested Trustees

Sreeniwas (Sreeni) V. Prabhu

1974

   Interested Trustee   Since 2017; indefinite term   Chief Investment Officer, Managing Partner, Co-Founder, Angel Oak Capital Advisors, LLC (since 2009).   6   Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2018).

Samuel R. Dunlap, III

1979

   Interested Trustee   Since 2019; indefinite term   Managing Director and Senior Portfolio Manager, Angel Oak Capital Advisors, LLC (since 2009)   6   Trustee, Angel Oak Funds Trust (since 2019); Trustee, Angel Oak Financial Strategies Income Term Trust (since 2019).

 

(1)

The Fund Complex includes the Fund, each series of Angel Oak Funds Trust, and Angel Oak Financial Strategies Income Term Trust.

(2)

The Trustees of the Trust who are not “interested persons” of the Trust as defined in the 1940 Act (“Independent Trustees”).

 

22

Table of Contents
Name and
Year of Birth		   Position with the Trust   Term of Office and Length of Time Served   Principal Occupation(s) During Past 5 Years

Officers of the Trust

Dory S. Black, Esq.

1975

   President   Since 2017; indefinite term   General Counsel, Angel Oak (since 2014); General Counsel, EARNEST Partners, LLC (investment management firm) (2014); Vice-President and Assistant General Counsel, GE Asset Management Incorporated (2004 – 2014).

Adam Langley

1967

   Chief Compliance Officer   Since 2017; indefinite term   Chief Compliance Officer, Angel Oak Capital Advisors, LLC (since 2015); Chief Compliance Officer, Angel Oak Strategic Credit Fund (since 2017); Chief Compliance Officer, Angel Oak Capital Partners II, LLC (since 2016); Chief Compliance Officer, Buckhead One Financial Opportunities, LLC (since 2015); Chief Compliance Officer of Falcons I, LLC (since 2018); Chief Compliance Officer of Hawks I, LLC (since 2019); Compliance Manager, Invesco Advisers, Ltd. (2013 – 2015).

Lu Chang, CFA, FRM, CAIA

1975

   Secretary   Since 2017; indefinite term   Chief Operations and Risk Officer, Angel Oak Capital Advisors, LLC (since 2014); Vice-President and Finance Manager, Wells Fargo Advisors, LLC (investment advisory firm) (2004 – 2014).

Daniel Fazioli

1981

   Treasurer   Since 2017; indefinite term   Chief Accounting Officer, Angel Oak Capital Advisors, LLC (since 2015); Controller, Tang Capital Partners, LP (2014 – 2015); Associate, Goldman Sachs & Company, Inc. (2010 – 2014).

Each Trustee holds office for an indefinite term and until the earlier of: the Trust’s next meeting of shareholders and the election and qualification of his/her successor; or until the date a trustee dies, resigns or is removed in accordance with the Trust’s Declaration of Trust and By-laws. Each Trustee shall serve during the lifetime of the Trust until he or she: (a) dies; (b) resigns; (c) has reached the mandatory retirement age, if any, as set by the Trustees; (d) is declared incompetent by a court of appropriate jurisdiction; or (e) is removed, or, if sooner, until the next meeting of shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor. Each officer holds office at the pleasure of the Board.

 

23

Table of Contents

INVESTMENT ADVISER

Angel Oak Capital Advisors, LLC

3344 Peachtree Road NE, Suite 1725

Atlanta, GA 30326

DISTRIBUTOR

Quasar Distributors, LLC

777 East Wisconsin Avenue

Milwaukee, WI 53202

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Cohen & Company, Ltd.

1350 Euclid Avenue, Suite 800

Cleveland, OH 44115

LEGAL COUNSEL

Dechert LLP

1900 K Street NW

Washington, DC 20006

CUSTODIAN

U.S. Bank National Association

1555 North Rivercenter Drive, Suite 302

Milwaukee, WI 53202

ADMINISTRATOR, TRANSFER AGENT, AND FUND ACCOUNTANT

U.S Bancorp Fund Services, LLC

615 East Michigan Street

Milwaukee, WI 53202

This report is intended only for the information of shareholders or those who have received the Fund’s prospectus which contains information about the Fund’s management fee and expenses. Please read the prospectus carefully before investing.

Table of Contents

Item 2. Code of Ethics.

Not applicable for semi-annual reports.

Item 3. Audit Committee Financial Expert.

Not applicable for semi-annual reports.

Item 4. Principal Accountant Fees and Services.

Not applicable for semi-annual reports.

Item 5. Audit Committee of Listed Registrants.

Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).

Item 6. Investments.

Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.

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

Not applicable for semi-annual reports.

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

Not applicable for semi-annual reports.

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

 

Period

    (a)
Total Number of
Shares (or Units)
Purchased		      (b)
Average
Price Paid
per Share
(or Unit)		      (c)
Total Number of
Shares (or Units)
Purchased as Part
of  Publicly
Announced Plans
or Programs		      (d)
Maximum Number
(or Approximate
Dollar Value) of
Shares (or  Units)
that May Yet Be
Purchased Under
the Plans or
Programs		  

Month #1 (02/01/19-02/28/19)

      —          —          —          —    

Month #2 (03/01/19-03/31/19) (1)

      16,700      $ 24.50        16,700        —    

Month #3 (04/01/19-04/30/19)

      —          —          —          —    

Month #4 (05/01/19-05/31/19)

      —          —          —          —    

Month #5 (06/01/19-06/30/19) (2)

      17,902      $ 24.74        17,902        —    

Month #6 (07/01/19-07/31/19)

      —          —          —          —    

Total

      34,602        —          34,602        —    

 

(1)

On February 22, 2019, the Registrant offered to repurchase up to 5% of the Registrant’s total outstanding shares as of March 15, 2019 (the “Repurchase Request Deadline”). On the Repurchase Request Deadline, 16,700 shares representing 4% of the Registrant’s total outstanding shares were repurchased.

(2)

On May 31, 2019, the Registrant offered to repurchase up to 5% of the Registrant’s total outstanding shares as of June 21, 2019. On the Repurchase Request Deadline, 17,902 shares representing 3% of the Registrant’s total outstanding shares were repurchased.

Table of Contents

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

There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of trustees.

Item 11. Controls and Procedures.

 

(a)

The Registrant’s Principal Executive Officer and Principal Financial Officer have reviewed the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider.

 

(b)

There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies

The registrant did not engage in securities lending activities during the fiscal year reported on this Form N-CSR.

Item 13. Exhibits.

 

(a)

(1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Not Applicable.

(2) A separate certification for each principal executive officer and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not Applicable.

(4) Change in the registrant’s independent public accountant. There was no change in the registrant’s independent public accountant for the period covered by this report.

Table of Contents
(b)

Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith.

Table of Contents

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) Angel Oak Strategic Credit Fund                                                                                                                                 

By (Signature and Title)*

   /s/ Dory S. Black                                                                                                                                
  Dory S. Black, President (Principal Executive Officer)

Date     9/30/2019                                                                                                                                                                               

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/ Dory S. Black                                                                                                                                   
  Dory S. Black, President (Principal Executive Officer)

Date     9/30/2019                                                                                                                                                                              

By (Signature and Title)*

   /s/ Daniel Fazioli                                                                                                                                   
  Daniel Fazioli, Treasurer (Principal Financial Officer)

Date     9/30/2019                                                                                                                                                                               

 

*

Print the name and title of each signing officer under his or her signature.