N-Q 1 fp0045991_nq.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF

REGISTERED MANAGEMENT INVESTMENT COMPANY

 

811-23368

(Investment Company Act file number)

 

1WS Credit Income Fund

(Exact name of registrant as specified in charter)

 

299 Park Avenue, 25th Floor, New York, New York 10171

(Address of principal executive offices)

 

(212) 377-4810

(Registrant's telephone number)

 

Kurt A. Locher

c/o 1WS Credit Income Fund

Chief Executive Officer

299 Park Avenue, 25th Floor

New York, New York 10171

(Name and Address of Agent for Service)

 

Date of fiscal year end: October 31

 

Date of reporting period: July 31, 2019

 

Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.

 

A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

 

 

 

Item 1. Schedule of Investments.

 

1WS CREDIT INCOME FUND

CONSOLIDATED SCHEDULE OF INVESTMENTS

July 31, 2019 (Unaudited)

 

      Maturity   Principal     
   Rate  Date   Amount   Value 
MORTGAGE-BACKED SECURITIES (40.53%)
Residential (33.63%)                  
Accredited Mortgage Loan Trust, Series 2007-1, Class M3(a)  1M US L + 0.29%   02/25/37   $1,000,000   $565,200 
Argent Securities, Inc. Asset-Backed Pass-Through Certificates Series, Series 2004-W10, Class M5(a)  1M US L + 2.10%   10/25/34    206,162    193,524 
Banc of America Funding, Series 2007-5, Class CA8(a)  5.35% - 1M US L   07/25/37    4,453,863    827,528 
Bear Stearns Asset Backed Securities I Trust, Series 2005-HE3, Class M5(a)  1M US L + 2.12%   03/25/35    2,128,000    2,065,862 
BNC Mortgage Loan Trust, Series 2006-1, Class A4(a)  1M US L + 0.31%   10/25/36    1,512,000    856,850 
Citicorp Residential Mortgage Trust Series, Series 2006-2, Class M2(b)  5.34%   09/25/36    2,000,000    2,006,000 
First Franklin Mortgage Loan Trust, Series 2005-FF12, Class M3(a)  1M US L + 0.50%   11/25/36    2,032,161    924,024 
Fremont Home Loan Trust, Series 2004-C, Class M3(a)  1M US L + 1.73%   08/25/34    261,399    253,453 
HSI Asset Securitization Corp. Trust, Series 2006-OPT2, Class M5(a)  1M US L + 0.54%   01/25/36    979,550    678,142 
JP Morgan Mortgage Acquisition Trust, Series 2006-HE2, Class M2(a)  1M US L + 0.32%   07/25/36    1,015,626    923,813 
JP Morgan Mortgage Trust, Series 2005-A5, Class TB1(a)  4.54%   08/25/35    740,771    737,141 
Merrill Lynch Mortgage Investors Trust HE1, Series 2006-HE1, Class M2(a)  1M US L + 0.40%   12/25/36    2,000,000    1,793,600 
Nationstar Home Equity Loan Trust, Series 2007-B, Class M2(a)  1M US L + 0.47%   04/25/37    992,476    649,377 
New Century Home Equity Loan Trust, Series 2004-A, Class MI1(a)  4.39%   08/25/34    1,037,349    1,001,042 
New Century Home Equity Loan Trust, Series 2005-B, Class M2(a)(c)  1M US L + 0.49%   10/25/35    500,000    397,000 
New Century Home Equity Loan Trust, Series 2005-2, Class M6(a)  1M US L + 1.02%   06/25/35    304,736    231,722 
Nomura Home Equity Loan, Inc. Home Equity Loan Trust, Series 2006-HE2, Class M2(a)  1M US L + 0.34%   03/25/36    1,723,444    1,151,261 
Popular ABS Mortgage Pass-Through Trust, Series 2005-5, Class MF1(b)  3.99%   11/25/35    436,308    298,304 
RALI Trust, Series 2007-QS4, Class 3A9  6.00%   03/25/37    1,177,908    1,099,106 
RALI Trust, Series 2006-Q05, Class 1A2(a)  1M US L + 0.19%   05/25/46    1,133,722    981,576 
RALI Trust, Series 2006-QS9, Class 1A16(a)  1M US L + 0.65%   07/25/36    958,845    752,022 
RALI Trust, Series 2006-QS9, Class 1A5(a)  1M US L + 0.70%   07/25/36    1,413,599    1,116,602 
Residential Asset Securitization Trust, Series 2005-A8CB, Class A6  5.00%   07/25/35    676,786    568,500 
Wells Fargo Mortgage Backed Securities Trust, Series 2007-1, Class A4  5.75%   02/25/37    673,090    645,762 
Wells Fargo Mortgage Backed Securities Trust, Series 2007-1, Class A8  5.75%   02/25/37    475,833    456,229 
                 21,173,640 
Commercial (6.90%)                  
Banc of America Commercial Mortgage Trust, Series 2007-1, Class AMFX(a)  5.48%   01/15/49    675,767    675,699 
Commercial Mortgage Trust, Series 2015-CR24, Class D(a)  3.46%   08/10/25    500,000    470,150 
JP Morgan Chase Commercial Mortgage Securities Trust, Series 2005-CB13, Class AJ(a)  5.79%   01/12/43    1,167,236    1,180,660 
Morgan Stanley Bank of America Merrill Lynch Trust, Series 2015-C20, Class A4(d)  3.25%   12/15/24    1,000,000    1,037,500 
Wells Fargo Commercial Mortgage Trust, Series 2015-LC22, Class D(a)  4.69%   09/15/58    1,000,000    980,700 
                 4,344,709 
 
TOTAL MORTGAGE-BACKED SECURITIES (Cost $23,966,575)                25,518,349 
                   
ASSET-BACKED SECURITIES (18.53%)
Exeter Automobile Receivables Trust, Series 2019-2X, Class E  4.68%   06/15/23    2,500,000    2,559,500 
KeyCorp Student Loan Trust, Series 2006-A, Class 2C(a)  3M US L + 1.15%   03/27/42    2,000,000    1,686,600 
MelTel Land Funding LLC, Series 2019-1X, Class B  4.70%   04/15/24    750,000    767,100 
MelTel Land Funding LLC, Series 2019-1X, Class C  6.07%   04/15/24    750,000    771,600 
National Collegiate Student Loan Trust, Series 2007-4, Class A3A2(a)  5.74%   03/25/38    857,000    856,657 
National Collegiate Student Loan Trust, Series 2007-1, Class A4(a)  1M US L + 0.31%   10/25/33    2,000,000    1,818,000 
National Collegiate Student Loan Trust, Series 2005-3, Class B(a)(d)  1M US L + 0.50%   07/27/37    1,746,000    1,158,122 

 

 

 

      Maturity   Principal     
   Rate  Date   Amount   Value 
ASSET-BACKED SECURITIES (continued)
Sofi Professional Loan Program, Series 2019-BX, Class R1(e)  0.00%   08/17/48   $56,770   $2,045,501 
 
TOTAL ASSET-BACKED SECURITIES (Cost $11,371,776)                11,663,080 
                   
COLLATERALIZED LOAN OBLIGATIONS (30.21%)(a)
Anchorage Capital CLO, Ltd., Series 2015-7X, Class ER  3M US L + 5.60%   10/15/27    1,000,000    995,200 
Anchorage Capital CLO, Ltd., Series 2016-8X, Class ER  3M US L + 5.75%   07/28/28    500,000    493,800 
Anchorage Capital CLO, Ltd., Series 2015-6X, Class ER  3M US L + 6.35%   07/15/30    700,000    678,370 
Apex Credit CLO, LLC, Series 2015-2X, Class ER  3M US L + 6.10%   10/17/26    500,000    484,050 
BlueMountain CLO, Ltd., Series 2018-2X, Class SUB(e)  0.00%   08/15/31    1,300,000    767,000 
BlueMountain CLO, Ltd., Series 2018-1X, Class ER  3M US L + 5.55%   04/20/27    500,000    470,450 
Canyon Capital CLO, Ltd., Series 2014-2X, Class ER  3M US L + 6.85%   04/15/29    950,000    940,405 
Cent CLO, Ltd., Series 2015-24X, Class DR  3M US L + 5.75%   10/15/26    1,000,000    978,800 
Dryden Senior Loan Fund, Series 2015-38X, Class SUB(e)  0.00%   07/15/30    750,000    465,000 
Figueroa CLO, Ltd., Series 2013-2X, Class DRR  3M US L + 5.60%   06/20/27    1,036,000    1,021,289 
ICG US CLO, Ltd., Series 2016-1X, Class DR  3M US L + 5.75%   07/29/28    1,250,000    1,231,500 
KKR Financial CLO, Ltd., Series 2018-13X, Class ER  3M US L + 4.95%   01/16/28    1,000,000    959,800 
KKR Financial CLO, Ltd., Series 2019-16X, Class DR  3M US L + 6.75%   01/20/29    500,000    500,650 
MP CLO, Ltd., Series 2015-2X, Class ER  3M US L + 5.45%   10/28/27    750,000    737,850 
OCP CLO, Ltd., Series 2015-8X, Class D  3M US L + 5.50%   04/17/27    500,000    496,900 
Palmer Square Loan Funding, Series 2019-2X, Class D  3M US L + 5.50%   04/20/27    1,000,000    982,000 
Recette CLO, Ltd., Series 2015-1X, Class E  3M US L + 5.70%   10/20/27    1,500,000    1,492,950 
SCOF, Ltd., Series 2015-2X, Class ER  3M US L + 5.71%   07/15/28    500,000    492,050 
Shackleton CLO, Ltd., Series 2015-8X, Class ER  3M US L + 5.34%   10/20/27    1,000,000    983,100 
Sound Point CLO III-R, Ltd., Series 2013-2RX, Class E  3M US L + 6.00%   04/15/29    500,000    473,750 
Taberna Preferred Funding, Ltd., Series 2005-3X, Class B1  3M US L + 0.80%   02/05/36    1,000,000    406,300 
TICP, Series 2015-1X, Class E  3M US L + 5.50%   07/20/27    1,000,000    951,400 
Venture CDO, Ltd., Series 2016-23X, Class ER  3M US L + 5.95%   07/19/28    500,000    488,850 
Venture CDO, Ltd., Series 2016-25X, Class E  3M US L + 7.20%   04/20/29    500,000    499,950 
Voya CLO, Ltd., Series 2014-2X, Class SUB(e)  0.00%   04/17/30    761,000    304,400 
Wind River CLO, Ltd., Series 2016-1X, Class ER  3M US L + 5.55%   07/15/28    750,000    721,350 
 
TOTAL COLLATERALIZED LOAN OBLIGATIONS (Cost $19,023,275)                19,017,164 

 

   7-Day         
   Yield   Shares     
SHORT TERM INVESTMENTS (11.42%)               
BlackRock Liquidity Funds T-Fund   2.20%   7,191,253    7,191,253 
                
TOTAL SHORT TERM INVESTMENTS (Cost $7,191,253)             7,191,253 
                
TOTAL INVESTMENTS (100.69%) (Cost $61,552,879)            $63,389,846 
                
Liabilities in Excess of Other Assets (-0.69%)(f)             (432,852)
NET ASSETS (100.00%)            $62,956,994 

 

Percentages are stated as a percentage of net assets

 

 

 

Investment Abbreviations:

LIBOR - London Interbank Offered Rate

 

Libor Rates:

1M US L - 1 Month LIBOR as of July 31, 2019 was 2.22%

3M US L - 3 Month LIBOR as of July 31, 2019 was 2.27%

 

(a) Floating or variable rate security. The Reference Rate is described above. The Interest Rate in effect as of July 31, 2019 is based on the Reference Rate plus the displayed spread as of the security's last reset date.
(b) Step bond. Coupon changes periodically based upon a predetermined schedule. Interest rate disclosed is that which is in effect at July 31, 2019.
(c) All or a portion of this position has not settled as of July 31, 2019. The Fund will not accrue interest until the settlement date.
(d) On July 31, 2019, securities valued at $1,597,050 were pledged as collateral for reverse repurchase agreements.
(e) The level 3 assets were a result of unavailable quoted prices from an active market or the unavailability of other significant observable inputs.
(f) Includes cash being held as collateral for futures contracts.

 

FUTURES CONTRACTS            

 

                 Notional   Unrealized 
Description  Counterparty  Position   Contracts   Expiration Date  Value   Depreciation 
US 5YR NOTE  Wells Fargo   Short    280   September 2019  $(32,915,313)  $(125,790)
                   $(32,915,313)  $(125,790)

 

REVERSE REPURCHASE AGREEMENTS

 

Counterparty  Borrowing Rate   Settlement Date  Maturity Date  Amount Borrowed 
BNP Paribas   3.42%   07/18/19  01/14/2020  $460,000 
Royal Bank of Canada   2.70%   07/08/19  01/06/2020   846,000 
              $1,306,000 

 

CREDIT DEFAULT SWAP CONTRACTS ON CREDIT INDICES ISSUE - SELL PROTECTION (CENTRALLY CLEARED)(a)

 

Reference Obligations  Clearing House  Fixed Deal
Receive Rate		   Currency   Maturity Date  Implied Credit Spread at July 31, 2019(b)   Notional Amount*(c)   Value   Upfront Premiums Received/(Paid)   Unrealized Appreciation 
The Markit CDX NA High Yield Index  Intercontinental Exchange   5.00%   USD   6/20/24   3.22%   4,950,000   $373,561   $301,826   $71,735 
                             $373,561   $301,826   $71,735 

 

Credit default swaps pay quarterly.

 

* The notional amount of each security is stated in the currency in which the security is denominated.

 

 

 

(a) If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(b) Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on sovereign issues of an emerging country as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(c) The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

 

See Notes to Quarterly Consolidated Schedule of Investments.

 

 

 

1WS Credit Income Fund

Notes to Quarterly Consolidated Schedule of Investments

July 31, 2019

 

NOTE 1. ORGANIZATION

 

1WS Credit Income Fund (“1WS Credit”) is a Delaware statutory trust registered under the Investment Company Act of 1940 (the “1940 Act”), as amended, as a non-diversified, closed-end management investment company that continuously offers its shares of beneficial interest (‘‘Shares’’). 1WS Credit operates as an interval fund under Rule 23c-3 of the 1940 Act and, as such, has adopted a policy to make quarterly repurchase offers at a price equal to net asset value (‘‘NAV’’) per Share, of no less than 5% of the Shares outstanding.

 

1WS Credit’s investment objective is to seek attractive risk-adjusted total returns through generating income and capital appreciation. 1WS Credit will seek to achieve its investment objective by investing primarily in a wide array of structured credit and securitized debt instruments. There can be no assurance that our investment objective will be achieved.

 

1WS Credit was organized as a Delaware statutory trust on July 20, 2018 pursuant to an Agreement and Declaration of Trust governed by the laws of the State of Delaware. 1WS Credit had no operations from that date to March 4, 2019, commencement of operations, other than those related to organizational matters and the registration of its shares under applicable securities laws. 1WS Credit wholly owns and consolidates 1WSCI Sub I, LLC (the “Cayman Islands SPV”), an exempted company incorporated in the Cayman Islands on February 22, 2019. The Cayman Islands SPV is an investment vehicle formed to make investments on behalf of 1WS Credit. 1WS Credit is the managing and sole member of the Cayman Islands SPV pursuant to a limited liability agreement dated March 1, 2019. 1WS Credit and the Cayman Islands SPV are collectively referred to as the “Fund”.

 

1WS Capital Advisors, LLC (the ‘‘Adviser’’ or ‘‘1WS’’) serves as the investment adviser of the Fund. 1WS is a Delaware limited liability company that is registered as an investment adviser with the Securities and Exchange Commission (the ‘‘SEC’’) under the Investment Advisers Act of 1940 (the ‘‘Advisers Act’’). The Adviser is controlled by its managing member, One William Street Capital Management, L.P. (‘‘OWS’’), which is also registered with the SEC as an investment adviser. The Fund’s portfolio manager and other personnel of the Adviser have substantial experience in managing investments and investment funds; including funds which have investment programs similar to that of the Fund.

 

Institutional Class Shares (which are not subject to any sales load or asset-based distribution fee) of the Fund are being offered on a continuous basis at the NAV per Share calculated each day.

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation: The accompanying consolidated schedule of investments are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and are stated in United States dollars. The Fund is considered an investment company under GAAP and follows the accounting and reporting guidance for investment companies under Financial Accounting Standards Board’s (‘’FASB’’) Accounting Standards Codification (‘’ASC’’) 946, Financial Services-Investment Companies, including accounting for investments at fair value.

 

Consolidation: 1WS Credit consolidates its investment in the Cayman Islands SPV because 1WS Credit is the sole shareholder of this entity. In accordance with ASC 810, Consolidation, the accompanying consolidated schedule of investments includes investments held by the Cayman Islands SPV.

 

Investment Transactions: Investment transactions are accounted for on a trade-date basis. Interest is recorded on an accrual basis. Premiums on fixed-income securities and discounts on non-distressed fixed-income securities are amortized.

 

In the normal course of business, the Fund may enter into derivative contracts (“derivatives”) for hedging purposes or to gain synthetic exposures to certain investments. Derivatives are financial instruments whose values are based on an underlying asset, index, or reference rate and include futures, swaps, swaptions, options, or other financial instruments with similar characteristics.

 

Methodologies for fair valuing Fund investments are determined by the Board’s Valuation Committee. The Board and its Valuation Committee have delegated the day to day responsibility for determining fair values in accordance with the policies it has approved to the Adviser.

 

Fund Valuation: Institutional Class Shares are offered at NAV. NAV per Share is determined daily. The Fund’s NAV per share is calculated by subtracting liabilities (including accrued expenses and indebtedness) from the total assets of the Fund (the value of the investments plus cash or other assets, including interest accrued but not yet received) and dividing the result by the total number of Shares outstanding.

 

NOTE 3. PORTFOLIO VALUATION

 

ASC 820 Fair Value Measurement, defines fair value as an exit price representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC 820 establishes a fair value hierarchy for inputs used in measuring fair value and maximizes the use of observable inputs and minimizes the use of unobservable inputs by prioritizing the use of the most observable input when available.

 

 

 

Valuation inputs broadly refer to the assumptions market participants would use in pricing the asset or liability, including assumptions about risk. ASC 820 distinguishes between: (i) observable inputs, which are based on market data obtained from parties independent of the reporting entity, and (ii) unobservable inputs, which reflect the Adviser’s own assumptions about the judgments market participants would use. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is deemed significant to the fair value measurement. When a valuation uses multiple inputs from varying levels of the fair value hierarchy, the hierarchy level is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

 

Level 1—Inputs that are unadjusted, quoted prices in active markets for identical assets or liabilities.

 

Level 2— Inputs (other than quoted prices included in Level 1) that are observable, either directly or indirectly.

 

Level 3— Inputs that are unobservable and reflect the Adviser’s best estimate of what market participants would use in pricing the asset or liability. This includes situations where there is little, if any, market activity for the asset or liability.

 

Generally, the Fund expects to be able to obtain pricing from independent third-party sources on many of its investments. However, in certain circumstances where such inputs are difficult or impractical to obtain or such inputs are deemed unreliable, we may fair value certain investments using internal manager marks.

 

The following factors may be pertinent in determining fair value: security covenants, call protection provisions and information rights; cash flows, the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets and financial environment in which the portfolio company operates; publicly available financial ratios of peer companies; changes in interest rates for similar debt instruments; and enterprise values, among other relevant factors.

 

Determination of fair value involves subjective judgments and estimates not susceptible to substantiation by auditing procedures. Due to the inherent uncertainty of determining the fair value of investments that do not have readily available market quotations, the fair value of these investments may differ significantly from the values that would have been used had such market quotations existed for such investments, and any such differences could be material. Accordingly, under current accounting standards, the notes to the Fund’s financial statements will refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on the Fund’s financial statements.

 

The following tables summarize the Fund’s financial instruments classified as assets and liabilities measured at fair value by level within the fair value hierarchy as of July 31, 2019:

 

Investments in Securities at Value  Level 1   Level 2   Level 3   Total 
Residential Mortgage-Backed Securities  $–   $21,173,640   $–   $21,173,640 
Commercial Mortgage-Backed Securities   –    4,344,709    –    4,344,709 
Asset-Backed Securities   –    9,617,579    2,045,501    11,663,080 
Collateralized Loan Obligations   –    17,480,764    1,536,400    19,017,164 
Short Term Investments   7,191,253    –    –    7,191,253 
Total  $7,191,253   $52,616,692   $3,581,901   $63,389,846 
Other Financial Instruments                    
Assets:
Credit Default Swap Contracts  $–   $71,735   $–   $71,735 
Liabilities:
Future Contracts   (125,790)   –    –    (125,790)
Total  $(125,790)  $71,735   $–   $(54,055)

 

 

 

The following table discloses the purchase of Level 3 portfolio investments as well as the value of transfers into or out of Level 3 for the period from commencement of operations to July 31, 2019 of the Fund’s Level 3 portfolio investments:

 

1WS Credit Income Fund  Asset Backed Securities   Collateralized Loan Obligations   Total 
 Balance as of March 4, 2019 (Commencement of Operations)  $-   $-   $- 
Accrued discount/ premium   (81,077)   (46,992)   (128,069)
Realized Gain/(Loss)   -    -    - 
Change in Unrealized Appreciation/(Depreciation)   126,571    13,250    139,821 
Purchases   2,000,007    1,570,142    3,570,149 
Sales Proceeds   -    -    - 
Transfer into Level 3   -    -    - 
Transfer out of Level 3   -    -    - 
Balance as of July 31, 2019  $2,045,501   $1,536,400   $3,581,901 
Net change in unrealized appreciation/(depreciation)
attributable to Level 3 investments held at July 31, 2019		  $126,571   $13,250   $139,821 

 

The following table presents additional information about the valuation methodologies and inputs used for investments that are measured at fair value and categorized within Level 3 as of July 31, 2019:

 

Quantitative Information about Level 3 Fair Value Measurements

 

Asset Class  Fair Value (USD)   Valuation Technique  Unobservable Inputs  Value/Range 
Asset-Backed Securities  $2,045,501   Broker pricing  Indicative quote  $3,603.14(1)
Collateralized Loan Obligations  $1,536,400   Broker pricing  Indicative quote  $40.00 - $62.00 

 

(1)Input is based on the total market value of the outstanding loan, of which the Fund owns 6%.

 

Note 4. Derivative Instruments

 

The Fund may enter into derivative transactions in connection with its investing activities. These instruments derive their value, primarily or partially, from the underlying asset, indices, reference rate, or a combination of these factors. Derivatives are subject to various risks similar to non-derivative instruments, such as interest, market, and credit risk.

 

The Fund is subject to interest rate exposures, both directly and indirectly. Direct interest rate exposure can result from holding fixed rate bonds, the value of which may decrease if interest rates rise. Additionally, indirect interest rate exposure can result from certain securitization transactions that contain mismatches between the rate of interest earned on the underlying loans and/or receivables as compared to the rate of interest due on the securities. To hedge this risk for cases in which the Fund deems it effective, the Fund may enter into futures contracts, interest rate swaps, other interest rate options, or securities sold, not yet purchased.

 

The Fund is also subject to credit risk in the normal course of pursuing its investment objectives. In addition to the specific credit risk, in particular investment securities, the Fund is exposed to broader market credit risk. To hedge this risk, the Fund may enter into a variety of instruments, including credit default swaps, futures, options, and swaptions.

 

Futures Contracts: Futures contracts are commitments to either purchase or sell a financial instrument or commodity at a future date for a specified price. Upon entering into futures contracts, the Fund is required to deposit with the broker, either in cash or securities, an initial margin in an amount equal to a certain percentage of the contract amount. Subsequent changes in market value of the contract (which may require additional margin to be deposited) are recorded for financial statement purposes as unrealized gains or losses.

 

The Fund may use futures contracts to hedge against changes in the value of financial instruments or changes in interest rates. Upon entering into such futures contracts, the Fund bears the risk of interest rates or financial instruments’ prices moving adversely to the positions. With futures, counterparty risk is mitigated as these contracts are exchange-traded and the exchange’s clearinghouse guarantees against non-performance by the counterparty.

 

Credit Default Swaps and Credit Default Tranches: In a typical credit default swap, the Fund receives (if a buyer) or provides (if a seller) protection against certain credit events involving one or more specified reference entities. The buyer of a credit default swap is generally obligated to pay the seller a periodic stream of payments over the term of the contract in return for a contingent payment upon the occurrence of a defined credit event on the reference obligation which may be a single security, a basket of securities, or a specified credit index. The applicable credit events are established at the inception of the transaction and generally include bankruptcy, insolvency, and failure to meet payment obligations when due, among other events. After a credit event occurs, the contingent payment payable by the seller to the buyer may be mitigated or reduced by segregated collateral and netting arrangements between the counterparties to the transaction.

 

 

 

A credit default tranche is a type of credit default swap that allows an investor to gain exposure to a particular portion of the loss distribution on a specified credit index. Tranches are defined by attachment and detachment points that specify the range of exposure to which an investor is receiving or providing protection with respect to the specified credit index.

 

The Fund may enter into credit default swaps or credit default tranches to hedge against changes in the value of, or to gain exposure to, the market, certain sectors of the market, or specific issuers. Upon the occurrence of a defined credit event, the difference between the value of the reference obligation and the swap’s notional amount is recorded as realized gain or loss. Upon entering into a credit default swap, as a seller of protection or a buyer of protection, the Fund bears exposure to changes in market pricing of risk related to the reference obligations. Additionally, the Fund is exposed to counterparty risk to the extent the fair value of the credit default swap exceeds the collateral posted. Credit default swaps are either centrally cleared swaps or executed bilaterally under standard form ISDA master agreements entered into with each counterparty.

 

Any upfront payments made or received upon entering into a credit default swap contract are treated as part of the cost and any fluctuations are reflected as part of the unrealized gain (loss) on valuation. Upon termination of the swap contract, the amount included in the cost is reversed and becomes part of the credit default swap’s realized gain (loss). For credit default swap contracts, the upfront payments serve as an indicator of the current status of the payment/performance risk. The fair value of a credit default swap contract represents the amount of upfront payment that would be required to enter into such swap as of a measurement date. Upfront payments vary inversely to the price of debt issued by the reference entity. Increasing fair values for credit default swap contracts, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the market pricing of the reference entity’s debt.

 

Note 5. Leverage

 

The Fund may obtain leverage in seeking to achieve its investment objective, including obtaining financing to make investments in all types of debt and other obligations (“Credit Investments”). The Fund expects that borrowings by the Fund will be secured by Credit Investments held by the Fund. The Fund may obtain leverage through direct borrowing and/or through entering into reverse repurchase agreements or derivative transactions that create leverage.

 

Leverage can have the effect of magnifying the Fund’s exposure to changes in the value of its assets and may also result in increased volatility in the Fund’s NAV. This means the Fund will have the potential for greater gains, as well as the potential for greater losses, than if the Fund owned its assets on an unleveraged basis. The value of an investment in the Fund will be more volatile and other risks tend to be compounded if and to the extent that the Fund is exposed to leverage directly or indirectly.

 

 

 

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 controls over financial reporting (as defined in rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the registrant's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting.

 

Item 3. Exhibits.

 

The certifications required by Rule 30a-2 under the Investment Company Act of 1940, as amended, 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.

 

1WS Credit Income Fund

 

  By: /s/ Kurt A. Locher  
     Kurt A. Locher, Chief Executive Officer  
    (Principal Executive Officer)  
  Date: September 26, 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: /s/ Kurt A. Locher  
    Kurt A. Locher, Chief Executive Officer  
    (Principal Executive Officer)  
  Date: September 26, 2019  

 

  By: /s/ Stephanie Dolan  
    Stephanie Dolan, Chief Financial Officer  
    (Principal Financial Officer)  
  Date: September 26, 2019