File No. 333-337878
Rule 497(c)
Rule 497(h)
PROSPECTUS
33,250,000 SHARES
FIRST TRUST HIGH YIELD OPPORTUNITIES 2027 TERM FUND
COMMON SHARES
$20.00 PER SHARE
----------------------
The Fund. First Trust High Yield Opportunities 2027 Term Fund (the "Fund")
is a newly organized, diversified, closed-end management investment company.
Investment Objective. The Fund's investment objective is to provide
current income. There can be no assurance that the Fund will achieve its
investment objective or that the Fund's investment strategies will be
successful.
Seven-Year Term. The Fund intends to liquidate and distribute
substantially all of its net assets to shareholders on or about August 1, 2027
(the "Termination Date").
Investment Strategies. Under normal market conditions, the Fund will seek
to achieve its investment objective by investing at least 80% of its Managed
Assets (as defined below) in high yield debt securities of any maturity that are
rated below investment grade at the time of purchase or unrated securities
determined by the Advisor (as defined below) to be of comparable quality. Such
securities include U.S. and non-U.S. corporate debt obligations and senior,
secured floating rate loans ("Senior Loans"). See "The Fund's
Investments--Investment Policies and Strategies." SECURITIES RATED BELOW
INVESTMENT GRADE ARE COMMONLY REFERRED TO AS "JUNK" OR "HIGH YIELD" SECURITIES
AND ARE CONSIDERED SPECULATIVE WITH RESPECT TO THE ISSUER'S CAPACITY TO PAY
INTEREST AND REPAY PRINCIPAL. See "Risks--Principal Risks--Credit and Below
Investment Grade Securities Risk." Below investment grade securities are
securities rated below "BBB-" by S&P or Fitch, or below "Baa3" by Moody's (each,
as defined below), or comparably rated by another nationally recognized
statistical rating organization or, if unrated, determined by the Advisor to be
of comparable credit quality at the time of purchase. The Fund's investments may
include securities of issuers located in countries considered to be emerging
markets. Investments in such emerging market securities entail additional risks.
See "Risks--Principal Risks--Emerging Markets Risk."
Portfolio Holdings Disclosure. After the invest-up period and prior to the
wind-down period, under normal market conditions, the Fund currently intends to
disclose on its website (www.ftportfolios.com) its portfolio holdings on a daily
basis.
(continued on the following page)
No Prior History. BECAUSE THE FUND IS NEWLY ORGANIZED, ITS COMMON SHARES
HAVE NO HISTORY OF PUBLIC TRADING. SHARES OF CLOSED-END INVESTMENT COMPANIES
FREQUENTLY TRADE AT A DISCOUNT FROM THEIR NET ASSET VALUE. THIS RISK OF LOSS DUE
TO THE DISCOUNT MAY BE GREATER FOR INVESTORS EXPECTING TO SELL THEIR COMMON
SHARES IN A RELATIVELY SHORT PERIOD OF TIME AFTER COMPLETION OF THE PUBLIC
OFFERING. The Fund's Common Shares have been approved for listing on the New York
Stock Exchange. The trading or ticker symbol of the Common Shares is "FTHY."
THIS PROSPECTUS SETS FORTH CONCISELY INFORMATION ABOUT THE FUND THAT A
PROSPECTIVE INVESTOR SHOULD KNOW BEFORE INVESTING, AND SHOULD BE RETAINED FOR
FUTURE REFERENCE. INVESTING IN THE FUND'S COMMON SHARES INVOLVES CERTAIN RISKS
THAT ARE DESCRIBED IN THE "RISKS" SECTION BEGINNING ON PAGE 29 OF THIS PROSPECTUS,
INCLUDING THE RISK THAT YOU COULD LOSE SOME OR ALL OF YOUR INVESTMENT.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
PER SHARE TOTAL (1)
--------- ---------
Public offering price $20.00 $665,000,000
Sales load (2) $0.00 $0.00
Proceeds to the Fund (3) $20.00 $665,000,000
(notes on following page)
The underwriters expect to deliver the Common Shares to purchasers on or
about June 30, 2020.
MORGAN STANLEY
RBC CAPITAL MARKETS STIFEL OPPENHEIMER & CO. BB&T CAPITAL MARKETS
A.G.P. Arete Wealth B. Riley FBR
Brookline Capital Markets D.A. Davidson & Co. HilltopSecurities
Incapital Janney Montgomery Scott JonesTrading
Ladenburg Thalmann Maxim Group LLC National Securities Corporation
Pershing LLC Synovus Securities, Inc. U.S. Capital Advisors
Wedbush Securities Wintrust Investments
The date of this prospectus is June 25, 2020.
(notes from previous page)
(1) The Fund has granted the underwriters an option to purchase up to
4,947,442 additional Common Shares at the public offering price within 45
days of the date of this prospectus solely to cover over-allotments, if
any. If such option is exercised in full, the total public offering
price, sales load and proceeds to the Fund will be $763,948,840, $0 and
$763,948,840, respectively. See "Underwriters."
(2) The Advisor (and not the Fund) has agreed to pay, from its own assets,
(a) compensation of $0.40 per Common Share to the underwriters in
connection with this offering, and separately (b) an upfront structuring
and syndication fee to Morgan Stanley & Co. LLC and an upfront fee to
each of Oppenheimer & Co. Inc., RBC Capital Markets, LLC, Stifel,
Nicolaus & Company, Incorporated, BB&T Capital Markets, a division of
BB&T Securities, LLC, A.G.P./Alliance Global Partners, Arete Wealth
Management, LLC, B. Riley FBR, Inc., Brookline Capital Markets, a
Division of Arcadia Securities, LLC, D.A. Davidson & Co., Hilltop
Securities Inc., Incapital LLC, Janney Montgomery Scott LLC, JonesTrading
Institutional Services LLC, Ladenburg Thalmann & Co. Inc., Maxim Group
LLC, National Securities Corporation, Pershing LLC, Synovus Securities,
Inc., USCA Securities LLC, Wedbush Securities Inc., Wintrust Investments,
LLC, Amerivet Securities, Inc., Huntleigh Securities Corporation,
Newbridge Securities Corporation, Northland Securities, Inc., Arkadios
Capital, Fidelity Capital Markets, a division of National Financial
Services LLC, Independent Financial Group, LLC, and TD Ameritrade, Inc.
See "Underwriters--Additional Compensation to be Paid by the Advisor."
(3) The Advisor has agreed to pay all organizational expenses of the Fund and
all offering costs associated with this offering, which are estimated to
be $956,752 in the aggregate. The Fund is not obligated to repay any such
organizational expenses or offering costs paid by the Advisor. See
"Summary of Fund Expenses."
(continued from previous page)
"Managed Assets" means the average daily gross asset value of the Fund
(which includes assets attributable to the Fund's preferred shares of beneficial
interest ("Preferred Shares"), if any, and the principal amount of any
borrowings or commercial paper or notes issued by the Fund), minus the sum of
the Fund's accrued and unpaid dividends on any outstanding Preferred Shares and
accrued liabilities (other than the principal amount of any borrowings of money
incurred or of commercial paper or notes issued by the Fund).
Investment Advisor. First Trust Advisors L.P. (the "Advisor") will be the
Fund's investment adviser. See "Management of the Fund" in this prospectus and
"Investment Advisor" in the Fund's Statement of Additional Information (the
"SAI").
Seven-Year Term. On or about the Termination Date, the Fund intends to
cease its investment operations, liquidate its portfolio (to the extent
possible) and retire or redeem its leverage facilities, unless the term is
extended for one period of up to six months by a vote of the Fund's Board of
Trustees. The amount distributed to Common Shareholders at termination will be
based on the Fund's net asset value ("NAV") at that time, which may be more or
less than the public offering price.
The Fund is not a so called "target date" or "life cycle" fund whose asset
allocation becomes more conservative over time as its target date, often
associated with retirement, approaches. In addition, the Fund is not a "target
term" fund whose investment objective is to return its original NAV on the
Termination Date. The Fund's investment objective and policies are not designed
to seek to return to investors that purchase Common Shares in this offering
their initial investment of $20.00 per Common Share on the Termination Date, and
such investors and investors that purchase Common Shares after the completion of
this offering may receive more or less than their original investment upon
termination.
Distributions. The Fund intends to pay monthly distributions to Common
Shareholders out of legally available funds. The Fund expects to declare its
initial monthly distribution approximately 30 to 45 days following the
completion of this offering and pay such initial monthly distribution
approximately 60 to 90 days after the completion of this offering, depending on
market conditions. There is no assurance the Fund will make this distribution or
continue to pay regular distributions or that it will do so at a particular
rate.
From time to time, portions of the Fund's distributions may constitute a
return of capital. A return of capital to Common Shareholders is a return of a
portion of their original investment in the Fund and does not represent net
income or profit. A return of capital would reduce a Common Shareholder's tax
basis in its Common Shares, which could result in higher taxes when the Common
Shareholder sells such Common Shares. This may cause the Common Shareholder to
owe taxes even if it sells Common Shares for less than the original purchase
price of such Common Shares. See "Distributions" and "Federal Tax Matters."
Use of Leverage. The Fund currently intends to use leverage to seek to
achieve its investment objective. The Fund initially anticipates that, under
normal market conditions, it will employ leverage through borrowings from banks
or other financial institutions in the amount of approximately 30% of the Fund's
Managed Assets. The costs associated with any issuance and use of leverage will
be borne by Common Shareholders. The use of leverage is a speculative technique
and investors should note that there are special risks and costs associated with
the leveraging of the Common Shares. There can be no assurance that a leveraging
strategy will be successful during any period in which it is employed. See "Use
of Leverage" and "Risks--Principal Risks--Leverage Risk."
You should read this prospectus, which contains important information
about the Fund, before deciding whether to invest in the Fund's Common Shares,
and retain it for future reference. The SAI, dated June 25, 2020, as it may be
supplemented, containing additional information about the Fund, has been filed
with the Securities and Exchange Commission and is incorporated by reference in
its entirety into this prospectus. You may request a free copy of the SAI, the
table of contents of which is on page 66 of this prospectus, annual and semi-
annual reports to shareholders when available, and other information about the
Fund, and make shareholder inquiries by calling (800) 988-5891, by writing to
the Fund at 120 East Liberty Drive, Wheaton, Illinois 60187, or from the Fund's
or the Advisor's website (http://www.ftportfolios.com). Please note that the
information contained in the Fund's or Advisor's website, whether currently
posted or posted in the future, is not part of this prospectus or the documents
incorporated by reference in this prospectus. You also may obtain a copy of the
SAI (and other information regarding the Fund) from the Securities and Exchange
Commission's website (http://www.sec.gov).
Beginning on January 1, 2021, as permitted by regulations adopted by the
SEC, paper copies of the Fund's annual and semi-annual shareholder reports will
no longer be sent by mail, unless you specifically request paper copies of the
reports. Instead, the reports will be made available on the Fund's website
(www.ftportfolios.com), 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
anytime by contacting your financial intermediary (such as a broker-dealer or
bank). You may elect to receive all future reports in paper free of charge. You
can contact your financial intermediary to request that you continue to receive
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 your
financial intermediary.
THE FUND'S COMMON SHARES DO NOT REPRESENT A DEPOSIT OR OBLIGATION OF, AND
ARE NOT GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER INSURED DEPOSITORY
INSTITUTION, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY.
TABLE OF
CONTENTS
PAGE
Prospectus Summary ................................................................... 1
Summary of Fund Expenses ............................................................. 20
The Fund ............................................................................. 21
Use of Proceeds ...................................................................... 21
Portfolio Holdings Disclosure......................................................... 21
The Fund's Investments ............................................................... 21
Use of Leverage ...................................................................... 27
Risks ............................................................................... 29
Management of the Fund .............................................................. 48
Net Asset Value....................................................................... 50
Distributions ....................................................................... 51
Dividend Reinvestment Plan ........................................................... 52
Description of Shares................................................................. 53
Certain Provisions in the Declaration of Trust and By-Laws ........................... 54
Structure of the Fund; Common Share Repurchases and Conversion to Open-End Fund ...... 57
Federal Tax Matters ................................................................. 58
Underwriters ......................................................................... 61
Custodian, Administrator, Fund Accountant and Transfer Agent ......................... 65
Legal Matters ........................................................................ 65
Table of Contents for the Statement of Additional Information ........................ 66
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER THE FUND NOR THE UNDERWRITERS HAVE AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. NEITHER THE FUND NOR THE
UNDERWRITERS ARE MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION
WHERE THE OFFER OR SALE IS NOT PERMITTED.
i
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ii
PROSPECTUS SUMMARY
This is only a summary. This summary does not contain all of the
information that you should consider before investing in the Fund's common
shares of beneficial interest (the "Common Shares"). You should review the more
detailed information contained elsewhere in this prospectus and in the Statement
of Additional Information (the "SAI"), especially the information set forth in
this prospectus under the heading "Risks."
THE FUND ........... First Trust High Yield Opportunities 2027 Term Fund (the
"Fund") is a newly organized, diversified, closed-end
management investment company. See "The Fund."
THE OFFERING ....... The Fund is offering 33,250,000 Common Shares at $20.00
per share through a group of underwriters (the
"Underwriters") led by Morgan Stanley & Co. LLC. You must
purchase at least 100 Common Shares in this offering. The
Fund has given the Underwriters an option to purchase up
to 4,947,442 additional Common Shares within 45 days of
the date of this prospectus solely to cover
over-allotments, if any. The Advisor (as defined below)
has agreed to pay compensation of $0.40 per Common Share
to the Underwriters in connection with this offering. The
Advisor also has agreed to pay all of the Fund's
organizational expenses and all offering costs associated
with this offering. The Fund is not obligated to repay any
such organizational expenses or offering costs paid by the
Advisor. See "Underwriters."
WHO MAY WANT
TO INVEST .......... Investors should consider their financial situation and
needs, other investments, investment goals and experience,
time horizons, liquidity needs and risk tolerance before
investing in the Fund. An investment in the Fund is not
appropriate for all investors and is not intended to be a
complete investment program. The Fund is designed for
investment and not as a trading vehicle. The Fund may be
appropriate for investors who are seeking income with
significant credit risks with the following features and
potential benefits:
o current income;
o a defined term of seven years;
o a diversified portfolio of high yield corporate
debt securities; and
o access to the credit expertise of the First Trust
Leveraged Finance Investment Team at First Trust
Advisors L.P. ("First Trust" or the "Advisor").
PORTFOLIO HOLDINGS
DISCLOSURE ......... After the invest-up period and prior to the wind-down
period, under normal market conditions, the Fund currently
intends to disclose on its website (www.ftportfolios.com)
its portfolio holdings on a daily basis.
INVESTMENT
OBJECTIVE .......... The Fund's investment objective is to provide current
income. There can be no assurance that the Fund will
achieve its investment objective or that the Fund's
investment strategies will be successful.
The Fund intends to liquidate and distribute
substantially all of its net assets to shareholders on or
about August 1, 2027 (the "Termination Date").
INVESTMENT POLICIES
AND STRATEGIES ..... Under normal market conditions, the Fund will seek to
achieve its investment objective by investing at least 80%
of its Managed Assets (as defined below) in high yield
debt securities of any maturity that are rated below
investment grade at the time of purchase or unrated
securities determined by the Advisor to be of comparable
quality. Below investment grade securities are commonly
referred to as "junk bonds" or "junk securities". High
yield debt securities include U.S. and non-U.S. corporate
debt obligations (such as bonds and notes issued by
corporations and other business entities) and senior,
secured floating rate loans ("Senior Loans") (as well as
other types of instruments described in this prospectus
and the SAI and derivatives that provide comparable
economic exposure to the corporate debt market).
1
The corporate debt obligations in which the Fund may
invest are generally issued by U.S. and non-U.S. companies
to borrow money from investors, typically to finance their
operations. These obligations may be either secured or
unsecured. Holders of corporate debt obligations, as
creditors, have a prior legal claim over common and
preferred stockholders as to both income and assets of the
issuer for the principal and interest due to them and may
have a prior claim over other creditors but are generally
subordinate to any existing lenders in the issuer's
capital structure. Interest on corporate debt obligations
may be fixed or floating, or such obligations may be zero
coupon fixed income securities which pay no interest.
Interest on corporate debt obligations is typically paid
semi-annually and is fully taxable to the security holder.
See "Risks--Principal Risks--Corporate Debt Obligations
Risk."
The Senior Loans in which the Fund may invest are
generally made to U.S. and non-U.S. corporations,
partnerships and other business entities. Senior Loans are
generally secured with specific collateral and have a
claim on the assets and/or stock of the borrower that is
senior to that held by unsecured creditors, subordinated
debt holders and stockholders of the borrower. Senior
Loans pay interest at rates which are determined
periodically on the basis of a floating base lending rate,
plus a risk premium. If the nationally recognized
statistical rating organizations ("NRSROs") assign
different ratings to the same Senior Loan, the Fund will
use the lowest available rating for purposes of its 80%
policy. See "Risks--Principal Risks--Senior Loan Risk."
Some of the loans in which the Fund may invest or to which
the Fund may obtain exposure may be "covenant-lite." Such
loans contain fewer or less restrictive constraints on the
borrower than certain other types of loans. Accordingly,
the Fund may have fewer rights against a borrower when it
invests in or has exposure to such loans and so may have a
greater risk of loss on such investments as compared to
investments in or exposure to loans with additional or
more conventional covenants. See "Risks--Principal
Risks--Other Risks Associated with Loans--Restrictive Loan
Covenants Risk."
The Fund's investments may include securities of issuers
located in countries considered to be emerging markets.
Investments in such emerging market securities entail
additional risks. See "Risks--Principal Risks--
Emerging Markets Risk." The Fund's investments also
may include defaulted or distressed securities--i.e.,
securities of companies whose financial condition is
troubled or uncertain and that may be involved in
bankruptcy proceedings, reorganizations or financial
restructurings. See "Risks--Principal Risks--Defaulted and
Distressed Securities Risk." For a further description of
the Fund's potential principal investments, see "The
Fund's Investments--Portfolio Composition."
In addition, under normal market conditions:
o The Fund may invest up to 20% of its Managed Assets in
(i) investment grade corporate debt obligations, (ii)
U.S. and non-U.S. government debt securities, (iii)
warrants and equity securities, including common stock
and other equity securities acquired in connection
with the restructuring of the debt of an issuer, the
reorganization of a Senior Loan or as part of a
package of securities acquired together with the
Senior Loans of an issuer, and (iv) investment
companies.
o The Fund will invest no more than 20% of its Managed
Assets in corporate debt obligations that, at the time
of purchase, either are rated "CCC+" or lower by
Standard & Poor's Ratings Services, a Standard &
Poor's Financial Services LLC business ("S&P"), or
Fitch Ratings, a part of the Fitch Group ("Fitch"), or
"Caa1" or lower by Moody's Investor Services, Inc.
("Moody's"), or comparably rated by another NRSRO or,
if unrated, determined by the Advisor to be of
comparable quality. For purposes of this investment
policy, the highest available rating will be used.
See "Risks--Principal Risks-- Credit and Below
Investment Grade Securities Risk."
o The Fund will invest no more than 25% of its Managed
Assets in any single industry in the corporate debt
market.
2
o The Fund will not invest more than 5% of its Managed
Assets in securities issued by a single issuer, other
than securities issued by the U.S. government.
The Fund also may use certain credit derivatives to take
on additional credit risk and obtain exposure to the high
yield corporate debt market. These instruments, if used,
will be considered an investment in high yield debt
securities for purposes of the Fund's investment policy to
invest, under normal market conditions, at least 80% of
its Managed Assets in high yield debt securities that are
rated below investment grade at the time of purchase or
unrated securities determined by the Advisor to be of
comparable quality. The Fund anticipates that total return
swaps and credit default swaps will be the primary type of
credit derivatives used to gain such exposure to high
yield debt securities as part of its investment strategy.
See "Risks--Principal Risks--Total Return Swaps Risk" and
"Risks--Principal Risks--Credit Default Swaps Risk." The
Fund's use of total return swaps, credit default swaps and
other derivative transactions other than for hedging
purposes, as measured by the total notional amount of such
instruments, will not exceed 20% of the Fund's Managed
Assets. If the exposure to the underlying instrument of a
derivative position of the Fund is negated or offset by
another derivative position of the Fund providing exposure
to the same underlying instrument, the Fund will include
only the net amount of the exposure for purposes of
calculating the foregoing limitation. The Fund also may
enter into futures contracts and options on futures
contracts, and may, but is not required to, use various
other derivative transactions to seek to manage the risks
of the Fund's portfolio securities or for other purposes
to the extent the Advisor determines that the use of such
transactions is consistent with the Fund's investment
objective, policies and applicable regulatory
requirements.
During temporary defensive periods, the period in which
the net proceeds of the offering of Common Shares are
first being invested or the period in which the Fund is
approaching its Termination Date (i.e., the "wind-down"
period during which the Fund may begin liquidating its
portfolio in anticipation of the Termination Date; which
period is expected to begin six months prior to the
Termination Date), the Fund may deviate from its
investment policies and objective. During such periods,
the Fund may invest up to 100% of its Managed Assets in
cash or short-term investments, including high quality,
short-term securities, or may invest in short- or
intermediate-term U.S. Treasury securities. There can be
no assurance that such techniques will be successful.
Accordingly, during such periods, the Fund may not achieve
its investment objective.
"Managed Assets" means the average daily gross asset value
of the Fund (which includes assets attributable to the
Fund's preferred shares of beneficial interest ("Preferred
Shares"), if any, and the principal amount of any
borrowings or commercial paper or notes issued by the
Fund), minus the sum of the Fund's accrued and unpaid
dividends on any outstanding Preferred Shares and accrued
liabilities (other than the principal amount of any
borrowings of money incurred or of commercial paper or
notes issued by the Fund). For purposes of determining
Managed Assets, the liquidation preference of the
Preferred Shares would not be treated as a liability.
Percentage limitations described in this prospectus are
as of the time of investment by the Fund and may be
exceeded on a going-forward basis as a result of credit
rating downgrades or market value fluctuations of the
Fund's portfolio securities.
Unless otherwise specified, the investment policies and
limitations of the Fund are not considered to be
fundamental by the Fund and can be changed without a vote
of the holders of the Common Shares ("Common
Shareholders") upon 60 days' prior written notice to
shareholders. The Fund's investment objective and certain
investment restrictions specifically identified as such in
the SAI are considered fundamental and may not be changed
without approval of the holders of a "majority of the
outstanding voting securities" of the Fund, as defined in
the Investment Company Act of 1940, as amended (the "1940
Act"), which includes Common Shares and Preferred Shares,
if any, voting together as a single class, and the holders
of the outstanding Preferred Shares, if any, voting as a
single class.
3
INVESTMENT
ADVISOR ............ First Trust Advisors L.P. will be the Fund's investment
adviser and will be responsible for the day-to-day
management of the Fund's portfolio, managing the Fund's
business affairs and providing certain clerical,
bookkeeping and other administrative services.
First Trust, a registered investment adviser, is an
Illinois limited partnership formed in 1991. It serves as
investment adviser or portfolio supervisor to investment
portfolios with approximately $127 billion in assets,
which it managed or supervised as of April 30, 2020. See
"Management of the Fund" in this prospectus and
"Investment Advisor" in the SAI.
INVESTMENT
PHILOSOPHY
AND PROCESS ........ The investment philosophy for the Advisor's Leveraged
Finance Investment Team is based on the belief that deep
fundamental credit analysis performed by a highly
experienced credit team, within a risk managed framework,
will generate higher absolute and risk-adjusted returns
in high yield debt strategies. The team's core framework
is designed around capturing yield and seeking to avoid
loss. This investment philosophy is expressed by the team
through an investment process that combines rigorous
bottom-up fundamental credit analysis and disciplined
portfolio construction. Risk management is a critical
component of the entire process and is embedded in both
the fundamental credit analysis and portfolio
construction.
Fundamental credit analysis involves the evaluation of
the macro-economy, industry trends, consistency of cash
flows, collateral coverage and management quality. The
Advisor's key considerations of portfolio construction
include relative value assessment, portfolio
diversification, issuer liquidity and continuous
monitoring. Through fundamental credit analysis, the
Advisor's Leveraged Finance Investment Team can position
the Fund's portfolio in high yield debt securities that
the Advisor believes provide the most attractive
opportunities in the market. See "The Fund's
Investments--Investment Philosophy and Process."
SEVEN-YEAR TERM .... The Fund intends, on or about the Termination Date, to
cease its investment operations, liquidate its portfolio
(to the extent possible), retire or redeem its leverage
facilities, and distribute all its liquidated net assets
to Common Shareholders of record. However, if the Board of
Trustees determines it is in the best interest of the
shareholders to do so, upon provision of at least 60 days'
prior written notice to shareholders, the Fund's term may
be extended, and the Termination Date deferred, for one
period of up to six months by a vote of the Board of
Trustees. In determining whether to extend the Fund's term
beyond the Termination Date, the Board of Trustees may
consider the inability to sell the Fund's assets in a time
frame consistent with termination due to lack of market
liquidity or other extenuating circumstances.
Additionally, the Board of Trustees may determine that
market conditions are such that it is reasonable to
believe that, with an extension, the Fund's remaining
assets will appreciate and generate income in an amount
that, in the aggregate, is meaningful relative to the cost
and expense of continuing the operation of the Fund.
The Fund's final distribution to Common Shareholders will
be based upon the Fund's net asset value ("NAV") on the
Termination Date, and initial investors and any investors
that purchase Common Shares after the completion of this
offering (particularly if their purchase price differs
meaningfully from the original offering price) may
receive more or less in such final distribution than the
amount of their original investment. The Fund will make a
distribution on or about the Termination Date of all cash
raised from the liquidation of the Fund's assets at that
time. However, if the Fund is not able to liquidate all
of its assets prior to that distribution (for example,
because one or more portfolio securities are in workout
or receivership on the Termination Date), or to the
extent accrued but unpaid interest on the liquidated
portfolio securities will be made following such
distribution, subsequent to that distribution, the Fund
may make one or more small additional distributions of
any cash received from ultimate liquidation of those
assets and from payment of such accrued interest. The
Fund expects that the total of such liquidating
distributions, including any additional subsequent
4
distributions, will equal the Fund's NAV on the
Termination Date, but the actual total may be more or
less than that NAV, depending on the ultimate results of
those post-Termination Date asset liquidations.
The Fund's NAV on the Termination Date will depend upon a
variety of factors, including the performance of the
Fund's portfolio over the life of the Fund and the
amounts of income or gains retained by the Fund that
otherwise would have been paid out as income dividends or
capital gain distributions over the life of the Fund, and
the amount of any taxes paid on such retained amounts.
Interest rates, including yields on below investment grade
securities (which are commonly referred to as "junk" or
"high yield" securities), tend to vary with maturity.
Securities with longer maturities tend to have higher
yields than otherwise similar securities having shorter
maturities. To the extent the average effective maturity
of the Fund's portfolio shortens as the Fund approaches
its Termination Date, shareholders should expect that the
average portfolio yield will also fall during such period.
Consequently, the Fund's dividend rate may need to be
reduced over time as the yield on portfolio securities
declines as they are sold and either not replaced or
replaced by lower-yielding securities; and as the
portfolio is liquidated prior to and in anticipation of
the Termination Date, as described above. See
"Risks--Principal Risks--Seven-Year Term Risk."
The Fund is not a so called "target date" or "life cycle"
fund whose asset allocation becomes more conservative
over time as its target date, often associated with
retirement, approaches. In addition, the Fund is not a
"target term" fund whose investment objective is to
return its original NAV on the termination date. The
Fund's investment objective and policies are not designed
to seek to return to investors that purchase Common
Shares in this offering their initial investment of
$20.00 per Common Share on the Termination Date, and such
investors and investors that purchase Common Shares after
the completion of this offering may receive more or less
than their original investment upon termination. See
"Certain Provisions in the Declaration of Trust and
By-Laws."
USE OF LEVERAGE .... The Fund currently intends to use leverage to seek to
achieve its investment objective. The Fund initially
anticipates that, under normal market conditions, it will
employ leverage through borrowings from banks or other
financial institutions in an amount equal to approximately
30% of the Fund's Managed Assets. The Fund does not
currently anticipate it will issue Preferred Shares within
12 months of the date of this prospectus. The Fund also
may enter into derivative and other transactions that have
the economic effect of leverage. Economic leverage exists
when the Fund seeks the right to a return on a capital
base that exceeds the investment which the Fund has
contributed to the instrument seeking a return. This
prospectus refers to the combination of such economic
leverage and the Fund's senior securities (as defined
under the 1940 Act) as "effective leverage." Under normal
market conditions, the Fund will seek to limit its overall
effective leverage to 40% of its Managed Assets.
In general, the Fund is prohibited from engaging in most
forms of leverage representing indebtedness unless
immediately after the issuance of such leverage the Fund
has satisfied the asset coverage requirement with respect
to senior securities representing indebtedness prescribed
by the 1940 Act--i.e., the value of the Fund's total
assets, less all liabilities and indebtedness not
represented by senior securities (for these purposes,
"total net assets"), is at least 300% of the senior
securities representing indebtedness (effectively limiting
the use of leverage through senior securities representing
indebtedness to 33 1/3% of the Fund's total net assets,
including assets attributable to such leverage). In
addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Shares
unless, at the time of such declaration, this asset
coverage requirement is satisfied. The Fund may (but is
not required to) cover its commitments under its
derivative and other transactions by segregating liquid
assets, or by entering into offsetting transactions or
owning positions covering its obligations. To the extent
these instruments are so covered, they will not be
considered "senior securities" under the 1940 Act and
therefore will not be subject to the 300% asset coverage
5
requirement of the 1940 Act otherwise applicable to forms
of senior securities representing indebtedness used by the
Fund. However, the Securities and Exchange Commission has
proposed a new rule that could further limit or otherwise
alter the Fund's ability to use certain derivative and
other transactions. See "Risks--Principal Risks--Risks of
Investing in Derivative Transactions." Moreover, even if
such derivative and other transactions of the Fund are
covered, they could represent a form of economic leverage
and create special risks. See "Risks--Principal
Risks--Leverage Risk."
The Fund will seek to use leverage opportunistically and
may determine to increase, decrease, or eliminate its use
of leverage over time and from time to time based on
various considerations, including the yield curve
environment, interest rate trends, market conditions and
time remaining until the Termination Date. There is no
assurance that borrowings or other forms of leverage will
in fact be established or be maintained in the future. If
and when leverage is used, there is no assurance that the
Fund's leveraging strategies will be successful. The use
of leverage will increase the volatility of the
performance of the Fund's investment portfolio and could
result in the Fund experiencing greater losses than if
leverage was not used. The net proceeds the Fund obtains
from the use of leverage will be invested in accordance
with the Fund's investment objective and policies as
described in this prospectus. So long as the rate of
return, net of applicable Fund expenses, on the
investments purchased by the Fund from leverage proceeds
exceeds the costs of such leverage to the Fund, the use of
leverage should help the Fund to achieve an investment
return greater than it would if it were not leveraged,
although the use of leverage also may result in losses
greater than if the Fund had not used leverage.
Leveraging is a speculative technique and there are
special risks and costs involved. See "Risks--Principal
Risks--Leverage Risk." The Fund cannot assure you that the
use of leverage, including through borrowings and/or the
use of derivatives will result in a higher investment
return on the Common Shares, and it may result in losses.
When leverage is used, the NAV and market price of the
Common Shares and the yield to Common Shareholders will be
more volatile. In addition, the leverage costs will be
borne immediately by the Common Shareholders and result in
a reduction of the NAV of the Common Shares. See "Summary
of Fund Expenses." Any senior securities issued by the
Fund will have seniority over the Common Shares and,
therefore, have complete priority upon distribution of
assets over the Common Shares.
Because the management fee received by the Advisor is
based on Managed Assets (which includes assets
attributable to the Fund's borrowings and other forms of
leverage, such as the Fund's derivative instruments),
there is a financial incentive for the Advisor to cause
the Fund to use leverage, which creates a conflict of
interest between the Advisor and the Common Shareholders.
See "Risks--Principal Risks--Potential Conflicts of
Interest Risk."
DISTRIBUTIONS ...... The Fund intends to distribute monthly all or a portion of
its net investment income to Common Shareholders (after
the payment of interest and/or dividends in connection
with leverage). In addition, the Fund intends to
distribute any net long-term capital gains, if any, to
Common Shareholders as long-term capital gain dividends at
least annually. The Fund's initial monthly distribution is
expected to be declared approximately 30 to 45 days after
the completion of this offering and paid approximately 60
to 90 days after the completion of this offering,
depending on market conditions. Unless an election is made
to receive dividends in cash, Common Shareholders will
automatically have their monthly distributions reinvested
in Common Shares through the Fund's dividend reinvestment
plan. See "Dividend Reinvestment Plan." The Fund reserves
the right to change its distribution policy and the basis
for establishing the rate of its monthly distributions at
any time upon notice to shareholders.
From time to time, portions of the Fund's distributions
may constitute a return of capital. A return of capital to
Common Shareholders is a return of a portion of their
original investment in the Fund and does not represent net
income or profit. A return of capital would reduce a
6
Common Shareholder's tax basis in its Common Shares, which
could result in higher taxes when the Common Shareholder
sells such Common Shares. This may cause the Common
Shareholder to owe taxes even if it sells Common Shares
for less than the original purchase price of such Common
Shares. See "Distributions" and "Federal Tax Matters."
CUSTODIAN,
ADMINISTRATOR, FUND
ACCOUNTANT AND
TRANSFER AGENT ..... The Fund has retained The Bank of New York Mellon ("BNY")
as custodian, administrator and fund accountant and
Computershare Trust Company, N.A. as transfer agent for
the Fund. The Advisor and the Board of Trustees will be
responsible for overseeing the activities of the
custodian, administrator, fund accountant and transfer
agent. See "Custodian, Administrator, Fund Accountant and
Transfer Agent."
LISTING ............ The Fund's Common Shares have been approved for listing on
the New York Stock Exchange. The trading or ticker symbol
of the Common Shares is "FTHY."
CLOSED-END
STRUCTURE .......... Closed-end funds differ from open-end management
investment companies (commonly referred to as mutual
funds) in that closed-end funds generally list their
shares for trading on a securities exchange and do not
redeem their shares at the option of the shareholder. By
comparison, mutual funds issue securities redeemable at
NAV at the option of the shareholder and typically engage
in a continuous offering of their shares. Mutual funds are
subject to continuous asset in-flows and out-flows that
can complicate portfolio management, whereas closed-end
funds can generally stay more fully invested in securities
consistent with the closed-end fund's investment
objective(s) and policies. In addition, in comparison to
open-end funds, closed-end funds have greater flexibility
in their ability to make certain types of investments,
including investments in illiquid securities.
Shares of closed-end funds listed for trading on a
securities exchange frequently trade at a discount from
NAV, but in some cases trade at a premium. The market
price of such shares may be affected by factors such as
NAV, dividend or distribution levels and their stability
(which will in turn be affected by levels of dividend and
interest payments by the fund's portfolio holdings, the
timing and success of the fund's investment strategies,
regulations affecting the timing and character of fund
distributions, fund expenses and other factors), supply
of and demand for the shares, trading volume of the
shares, general market, interest rate and economic
conditions and other factors beyond the control of the
closed-end fund. The foregoing factors, among others, may
result in the market price of the Common Shares being
greater than, less than or equal to NAV. See "Structure
of the Fund; Common Share Repurchases and Conversion to
Open-End Fund."
FEDERAL TAX
MATTERS ............ Distributions with respect to the Common Shares will
constitute dividends to the extent of the Fund's current
and accumulated earnings and profits, as calculated for
U.S. federal income tax purposes. Such dividends generally
will be taxable as ordinary income to Common Shareholders.
Distributions of net capital gain that are designated by
the Fund as capital gain dividends will be treated as
long-term capital gains in the hands of Common
Shareholders receiving such distributions. See "Federal
Tax Matters."
SUMMARY OF
PRINCIPAL RISKS .... RISK IS INHERENT IN ALL INVESTING. The principal risks of
investing in the Fund are summarized below. There may be
circumstances that could prevent the Fund from achieving
its investment objective and you may lose money by
investing in the Fund. You should carefully consider the
Fund's investment risks before deciding whether to invest
in the Fund. An investment in the Fund is not a deposit at
a bank and is not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other government
agency.
For a more complete discussion of the risks of investing
in the Fund, see "Risks" beginning on page 29. Shareholders
should consider carefully the following principal risks
before investing in the Fund.
7
No Operating History. The Fund is a newly organized,
diversified, closed-end management investment company with
no operating history.
Investment and Market Risk. An investment in the Common
Shares represents an indirect investment in the securities
owned by the Fund. The value of these securities, like
other market investments, may move up or down, sometimes
rapidly and unpredictably. Accordingly, an investment in
the Fund's Common Shares is subject to investment risk,
including the possible loss of the entire amount that you
invest. Your Common Shares at any point in time may be
worth less than your original investment, even after
taking into account the reinvestment of Fund dividends and
distributions.
Market Discount from Net Asset Value Risk. Shares of
closed-end investment companies frequently trade at a
discount from their NAV. This characteristic is a risk
separate and distinct from the risk that the Fund's NAV
could decrease as a result of its investment activities
and may be greater for investors expecting to sell their
Common Shares in a relatively short period of time
following completion of this offering. Because the market
price of the Common Shares will be determined by factors
such as NAV, dividend and distribution levels and their
stability (which will in turn be affected by levels of
dividend and interest payments by the Fund's portfolio
holdings, the timing and success of the Fund's investment
strategies, regulations affecting the timing and character
of Fund distributions, Fund expenses and other factors),
supply of and demand for the Common Shares, trading volume
of the Common Shares, general market, interest rate and
economic conditions and other factors beyond the control
of the Fund, the Fund cannot predict whether or when the
Common Shares will trade at, below or above NAV or at,
below or above the initial public offering price.
General Economic and Market Conditions. The success of the
Fund's activities may be affected by general economic and
market conditions, such as interest rates, availability of
credit, inflation rates, economic uncertainty, changes in
laws and national and international political
circumstances.
Recent Market Circumstances. The Fund (as well as its
service providers) may be adversely affected by
uncertainties and events around the world, such as
epidemics and pandemics, including the spread of
infectious illness or other public health issues, natural
disasters, terrorism and other conflicts, social unrest,
political developments, and changes in government
policies, taxation, restrictions on foreign investment and
currency repatriation, currency fluctuations and other
developments in the laws and regulations of the countries
in which it invests.
A recent outbreak of a virus, named "SARS-CoV-2"
(sometimes referred to as the "corona virus" and
abbreviated as "COVID-19"), has adversely impacted global
commercial activity and has contributed to significant
volatility in certain financial markets. There are no
comparable recent events in the United States that provide
guidance as to the effect of the spread of COVID-19 and a
potential pandemic on the economy as a whole and,
consequently, the Fund. Accordingly, while there have been
proposed, and in some cases enacted, economic stimulus
measures aimed at curbing the negative economic impacts to
the U.S. and other countries as a result of COVID-19, it
cannot be determined at this time whether such stimulus
measures will have a stabilizing economic effect.
As a result of these recent market circumstances, the
markets for credit instruments are currently experiencing
deteriorating conditions that could cause periods of
extreme illiquidity and volatility. These conditions may
exist for a prolonged period of time and could recur from
time to time in the future. Such periods may be subject to
market uncertainty and consequent repricing risk that
could lead to market imbalances of sellers and buyers,
which in turn could result in significant valuation
uncertainties in a variety of debt securities and also
result in sudden and significant valuation declines in the
Fund's holdings. Illiquidity and volatility in the credit
markets may directly and adversely affect the setting of
dividend rates on the Fund's Common Shares.
8
Government Intervention in Financial Markets Risk. The
instability in the financial markets in the recent past
led the U.S. government and foreign governments to take a
number of unprecedented actions designed to support
certain financial institutions and segments of the
financial markets that experienced extreme volatility, and
in some cases a lack of liquidity. U.S. federal and state
governments and foreign governments, their regulatory
agencies or self-regulatory organizations may take
additional actions that affect the regulation of the
securities in which the Fund invests, or the issuers of
such securities, in ways that are unforeseeable and on an
"emergency" basis with little or no notice with the
consequence that some market participants' ability to
continue to implement certain strategies or manage the
risk of their outstanding positions will be suddenly
and/or substantially eliminated or otherwise negatively
implicated. Given the complexities of the global financial
markets and the limited time frame within which
governments have been able to take action, these
interventions have sometimes been unclear in scope and
application, resulting in confusion and uncertainty, which
in itself has been materially detrimental to the efficient
functioning of such markets as well as previously
successful investment strategies.
Credit and Below Investment Grade Securities Risk. Credit
risk is the risk that an issuer or counterparty will fail
to pay its obligations to the Fund when they are due. If
an investment's issuer or counterparty fails to pay
interest or otherwise fails to meet its obligations to the
Fund, the Fund's income might be reduced and the value of
the investment might fall or be lost entirely. The values
of securities also may decline for a number of other
reasons that relate directly to the issuer, such as
management performance, financial leverage and reduced
demand for the issuer's goods and services, as well as the
historical and prospective earnings of the issuer and the
value of its assets. Credit risk of a security may change
over time, and securities which are rated by rating
agencies may be subject to downgrade, which may have an
indirect impact on the market price of securities.
Below investment grade securities are securities rated
below "BBB-" by S&P or Fitch, or below "Baa3" by Moody's,
or comparably rated by another NRSRO or, if unrated,
determined by the Advisor to be of comparable credit
quality at the time of purchase. Below investment grade
securities are commonly referred to as "junk" or "high
yield" securities and are considered speculative with
respect to the issuer's capacity to pay interest and repay
principal and are susceptible to default or decline in
market value due to adverse economic and business
developments. High yield securities are often unsecured
and subordinated to other creditors of the issuer. The
market values for high yield securities tend to be very
volatile, and these securities are generally less liquid
than investment grade securities. For these reasons, an
investment in the Fund is subject to the following
specific risks: (i) increased price sensitivity to
changing interest rates and to a deteriorating economic
environment; (ii) greater risk of loss due to default or
declining credit quality; (iii) adverse company specific
events more likely to render the issuer unable to make
interest and/or principal payments; (iv) negative
perception of the high yield market which may depress the
price and liquidity of high yield securities; (v)
volatility; and (vi) illiquidity.
The secondary market for high yield securities may not be
as liquid as the secondary market for more highly rated
securities, a factor which may have an adverse effect on
the Fund's ability to dispose of a particular security.
Under adverse market or economic conditions, the secondary
market for high yield securities could contract further,
independent of any specific adverse changes in the
condition of a particular issuer, and these securities may
become illiquid. As a result, the Fund could find it more
difficult to sell these securities or may be able to sell
the securities only at prices lower than if such
securities were widely traded.
Debt Securities Risk. In addition to certain of the other
risks described herein such as interest rate risk and
credit risk, debt securities generally also are subject to
the following risks:
o Redemption Risk--Debt securities sometimes contain
provisions that allow for redemption in the event
of tax or security law changes in addition to call
9
features at the option of the issuer. In the event
of a redemption, the Fund may not be able to
reinvest the proceeds at comparable rates of
return.
o Extension Risk--This is the risk that if interest
rates rise, repayments of principal on certain
debt securities, including, but not limited to,
floating rate loans, may occur at a slower rate
than expected and the expected maturity of those
securities could lengthen as a result.
o Liquidity Risk--Certain debt securities may be
substantially less liquid than many other
securities, such as U.S. Government securities or
common shares or other equity securities.
o Spread Risk--Wider credit spreads and decreasing
market values typically represent a deterioration
of the debt security's credit soundness and a
perceived greater likelihood or risk of default by
the issuer.
o Limited Voting Rights--Debt securities typically
do not provide any voting rights, except in some
cases when interest payments have not been made
and the issuer is in default. Even in such cases,
such rights may be limited to the terms of the
debenture or other agreements.
o Prepayment/Reinvestment Risk--Many types of debt
securities, including floating rate loans, may
reflect an interest in periodic payments made by
borrowers. Although debt securities and other
obligations typically mature after a specified
period of time, borrowers may pay them off sooner.
The effect of prepayments on the price of a
security may be difficult to predict and may
increase the security's price volatility. Income
from the Fund's portfolio may decline when the
Fund invests the proceeds from investment income,
sales of portfolio securities or matured, traded
or called debt obligations. A decline in income
received by the Fund from its investments is
likely to have a negative effect on the dividend
levels and market price, NAV and/or overall return
of the Common Shares.
Corporate Debt Obligations Risk. The market value of
corporate debt obligations generally may be expected to
rise and fall inversely with interest rates. The market
value of corporate debt obligations also may be affected
by factors directly related to the issuer, such as
investors' perceptions of the creditworthiness of the
issuer, the issuer's financial performance, perceptions of
the issuer in the marketplace, performance of management
of the issuer, the issuer's capital structure and use of
financial leverage and demand for the issuer's goods and
services. There is a risk that the issuers of corporate
debt may not be able to meet their obligations on interest
and/or principal payments at the time called for by an
instrument.
Senior Loan Risk. Senior Loans are subject to the risk of
payment defaults of scheduled interest or principal. Such
payment defaults would result in a reduction of income to
the Fund, a reduction in the value of the investment and a
potential decrease in the NAV of the Fund. Similarly, a
sudden and significant increase in market interest rates
may increase the risk of payment defaults and cause a
decline in the value of these investments and in the
Fund's NAV. Other factors (including, but not limited to,
rating downgrades, credit deterioration, a large downward
movement in stock prices, a disparity in supply and demand
of certain securities or market conditions that reduce
liquidity) can reduce the value of Senior Loans and other
debt obligations, impairing the Fund's NAV. If a borrower
under a Senior Loan defaults or goes into bankruptcy, the
Fund may recover only a fraction of what is owed on the
Senior Loan or nothing at all.
Senior Loans are structured as floating rate instruments
in which the interest rate payable on the obligation
fluctuates with interest rate changes. As a result, the
yield on Senior Loans will generally decline in a falling
interest rate environment, causing the Fund to experience
a reduction in the income it receives from a Senior Loan.
In addition, the market value of Senior Loans may fall in
a declining interest rate environment and may also fall in
a rising interest rate environment if there is a lag
between the rise in interest rates and the reset.
10
Although the Senior Loans in which the Fund will invest
will be secured by collateral, there can be no assurance
that such collateral could be readily liquidated or that
the liquidation of such collateral would satisfy the
borrower's obligation in the event of non-payment of
scheduled interest or principal. In the event of a decline
in the value of the already pledged collateral, if the
terms of the Senior Loan do not require the borrower to
pledge additional collateral, the Fund will be exposed to
the risk that the value of the collateral will not at all
times equal or exceed the amount of the borrower's
obligations under the Senior Loans. Senior Loans that are
under-collateralized involve a greater risk of loss. In
the event of the bankruptcy or insolvency of a borrower,
the Fund could experience delays or limitations with
respect to its ability to realize the benefits of the
collateral securing a Senior Loan. To the extent that a
Senior Loan is collateralized by stock in the borrower or
its subsidiaries, such stock may lose some or all of its
value in the event of the bankruptcy or insolvency of the
borrower.
If a borrower defaults on a collateralized Senior Loan,
the Fund may receive assets other than cash or securities
in full or partial satisfaction of the borrower's
obligation under the Senior Loan. Those assets may be
illiquid, and the Fund might not be able to realize the
benefit of the assets for legal, practical or other
reasons.
Some Senior Loans are subject to the risk that a court,
pursuant to equitable subordination or other similar laws,
could subordinate the Senior Loans to presently existing
or future indebtedness of the borrower or take other
action detrimental to lenders, such as the Fund. Such
court action could under certain circumstances include
invalidation of Senior Loans. If legislation or state or
federal regulations impose additional requirements or
restrictions on the ability of financial institutions to
make loans, the availability of Senior Loans for
investment by the Fund may be adversely affected.
The Fund may acquire Senior Loans through participations
or assignments. The purchaser of a participation typically
succeeds to all the rights and obligations of the
participating institution and becomes a lender under the
credit agreement with respect to the debt obligation;
however, the purchaser's rights can be more restricted
than those of the participating institution, and the Fund
may not be able to unilaterally enforce all rights and
remedies under the loan and with regard to any associated
collateral.
Interest Rate Risk. Generally, when market interest rates
rise, prices of debt securities fall, and vice versa.
Interest rate risk is the risk that the debt securities in
the Fund's portfolio will decline in value because of
increases in market interest rates. This risk may be
greater in the current market environment because, as of
the date of this prospectus, certain interest rates are at
or near historic lows. Therefore, there is a risk that
interest rates will rise, which will likely cause the
Fund's debt security prices to fall.
Seven-Year Term Risk. The Fund intends to terminate on or
about the Termination Date. Because the assets of the Fund
will be liquidated in connection with the termination, the
Fund may be required to sell portfolio securities when it
otherwise would not, including at times when market
conditions are not favorable, which may cause the Fund to
lose money. In particular, the Fund's portfolio may still
have significant remaining average maturity and duration,
and large exposures to lower-quality credits, as the
Termination Date approaches, and if interest rates are
high (and the value of lower-quality fixed-income
securities consequently low) at the time the Fund needs to
liquidate its assets in connection with the termination,
the losses due to portfolio liquidation may be
significant. Moreover, as the Fund approaches the
Termination Date, its portfolio composition may change as
more of its portfolio holdings are called or sold, which
may cause the returns to decrease and the NAV of the
Common Shares to fall. Rather than reinvesting the
proceeds of matured, called or sold securities, the Fund
may distribute the proceeds in one or more liquidating
distributions prior to the final liquidation, which may
cause fixed expenses to increase when expressed as a
percentage of assets under management, or the Fund may
invest the proceeds in lower yielding securities or hold
the proceeds in cash, which may adversely affect its
performance.
11
Because the Fund will invest in below investment grade
securities (which are commonly referred to as "junk" or
"high yield" securities), it may be exposed to the greater
potential for an issuer of its securities to default, as
compared to a fund that invests solely in investment grade
securities. As a result, should a Fund portfolio holding
default, this may significantly reduce net investment
income and, therefore, Common Share dividends, and also
may prevent or inhibit the Fund from fully being able to
liquidate its portfolio at or prior to the Termination
Date.
The Fund's investment objective and policies are not
designed to return to investors who purchase Common Shares
in this offering their initial investment on the
Termination Date. When terminated, the Fund's final
distribution will be based upon its NAV at the end of the
term and such initial investors and any investors that
purchase Common Shares after the completion of this
offering may receive more or less than their original
investment.
Subordinated Debt Instruments Risk. Issuers of
subordinated loans and other subordinated debt instruments
in which the Fund may invest usually will have, or may be
permitted to incur, other debt that ranks equally with, or
senior to, the subordinated loans or other subordinated
debt instruments. By their terms, such debt instruments
may provide that the holders are entitled to receive
payment of interest or principal on or before the dates on
which the Fund is entitled to receive payments in respect
of subordinated loans or other subordinated debt
instruments in which it invests. Also, in the event of
insolvency, liquidation, dissolution, reorganization or
bankruptcy of an issuer, holders of debt instruments
ranking senior to the subordinated loan or other debt
instrument in which the Fund invests would typically be
entitled to receive payment in full before the Fund
receives any distribution in respect of its investment.
After repaying such senior creditors, such issuer may not
have any remaining assets to use for repaying its
obligation to the Fund. In the case of debt ranking
equally with subordinated loans or other subordinated debt
instruments in which the Fund invests, the Fund would have
to share on an equal basis any distributions with other
creditors holding such debt in the event of an insolvency,
liquidation, dissolution, reorganization or bankruptcy of
the relevant issuer.
Shareholder Activism Risk. Shareholder activism could take
many forms, including making public demands that the Fund
consider certain strategic alternatives, engaging in
public campaigns to attempt to influence the Fund's
governance and/or management, and commencing proxy
contests to attempt to elect the activists'
representatives or others to the Fund's Board of Trustees
or seeking a tender offer or liquidation of the Fund.
Shareholder activism could result in substantial costs and
divert management's and the Fund's Board's attention and
resources from its business.
Management Risk and Reliance on Key Personnel. The Fund is
subject to management risk because it is an actively
managed portfolio. The Advisor will apply investment
techniques and risk analyses in making investment
decisions for the Fund, but there can be no guarantee that
these will produce the desired results.
In addition, implementation of the Fund's investment
strategy depends upon the continued contributions of
certain key employees of the Advisor, some of whom have
unique talents and experience and would be difficult to
replace.
Other Risks Associated with Loans. Investments in loans
(including loans other than Senior Loans) are generally
subject to the same risks as investments in other types of
debt obligations, including, among others, credit risk,
interest rate risk, prepayment risk, and extension risk.
In addition, in many cases loans are subject to the risks
associated with below investment grade securities.
o Interest Rate and Interest Rate Benchmarks. The
interest rates on floating rate loans typically
adjust only periodically. Accordingly, adjustments
in the interest rate payable under a loan may
trail prevailing interest rates significantly,
especially if there are limitations placed on the
amount the interest rate on a loan may adjust in a
given period.
12
o Valuation and Liquidity. Investments in loans may
be difficult to value and may be illiquid.
o Equity Securities. The acquisition of equity
securities (e.g., common stock, preferred stock
and securities convertible into common stock) may
generally be incidental to the Fund's purchase of
a loan. Equity securities are subject to market
risks and the risks of changes to the financial
condition of the issuer, and fluctuations in
value.
o Restrictive Loan Covenants Risk. Borrowers must
comply with various restrictive covenants that may
be contained in loan agreements. They may include
restrictions on dividend payments and other
distributions to stockholders, provisions
requiring the borrower to maintain specific
financial ratios, and limits on total debt.
o Settlement Risk. Transactions in many loans settle
on a delayed basis, and the Fund may not receive
the proceeds from the sale of such loans for a
substantial period after the sale.
o Other Legal Risks. Recent case law has cast doubt
on the ability of a purchaser of a loan, such as
the Fund, to charge the same rate of interest as
an originating entity after the loan has been sold
by the originating entity.
Second Lien Loan Risk. A second lien loan may have a claim
on the same collateral pool as the first lien or it may be
secured by a separate set of assets. Second lien loans are
typically secured by a second priority security interest
or lien to or on specified collateral securing the
borrower's obligation under the interest. Because second
lien loans are second to first lien loans, they present a
greater degree of investment risk ..
Second lien loans generally give investors priority over
general unsecured creditors in the event of an asset sale.
The priority of the collateral claims of third or lower
lien loans ranks below holders of second lien loans and so
on. Such junior loans are subject to the same general
risks inherent to any loan investment, including credit
risk, market and liquidity risk, and interest rate risk.
Due to their lower place in the borrower's capital
structure and possible unsecured or partially secured
status, such loans involve a higher degree of overall risk
than first lien loans, since cash flow of the borrower and
property securing the loan, if any, may be insufficient to
meet scheduled payments after giving effect to higher
priority secured obligations of the borrower.
LIBOR Risk. The terms of many investments, financings or
other transactions to which the Fund may be a party have
been historically tied to the London Interbank Offered
Rate, or "LIBOR." LIBOR is the offered rate at which major
international banks can obtain wholesale, unsecured
funding, and LIBOR may be available for different
durations (e.g., 1 month or 3 months) and for different
currencies. In July 2017, the Financial Conduct Authority,
the United Kingdom's financial regulatory body, announced
that after 2021 it will cease its active encouragement of
banks to provide the quotations needed to sustain LIBOR.
That announcement suggests that LIBOR may cease to be
published after that time. Various financial industry
groups have begun planning for that transition, but there
are obstacles to converting certain securities and
transactions to a new benchmark. Transition planning is at
an early stage, and neither the effect of the transition
process nor its ultimate success can yet be known.
Lender Liability Risk. A number of U.S. judicial decisions
have upheld judgments of borrowers against lending
institutions on the basis of various evolving legal
theories, collectively termed "lender liability." Because
of the nature of its investments, the Fund may be subject
to allegations of lender liability.
Defaulted and Distressed Securities Risk. The Fund may
invest in securities that may be in default or
distressed--i.e., securities of companies whose financial
condition is troubled or uncertain and that may be
involved in bankruptcy proceedings, reorganizations or
financial restructurings. Distressed securities present a
substantial risk of future default which may cause the
Fund to incur losses, including additional expenses, to
the extent it is required to seek recovery upon a default
in the payment of principal or interest on those
securities.
13
The Fund may be required to incur certain extraordinary
expenses in order to protect and recover its investment on
defaulted or distressed securities. The Fund also will be
subject to significant uncertainty as to when and in what
manner and for what value the obligations evidenced by the
defaulted or distressed securities will eventually be
satisfied (e.g., through a liquidation of the obligor's
assets, an exchange offer or plan of reorganization
involving the defaulted or distressed securities or a
payment of some amount in satisfaction of the obligation).
In addition, even if an exchange offer is made or a plan
of reorganization is adopted with respect to defaulted or
distressed securities held by the Fund, there can be no
assurance that the securities or other assets received by
the Fund in connection with such exchange offer or plan of
reorganization will not have a lower value or income
potential than may have been anticipated when the
investment was made.
The Fund may invest in loans of borrowers that are
experiencing, or are likely to experience, financial
difficulty. These loans are subject to greater credit and
liquidity risks than other types of loans. In addition,
the Fund can invest in loans of borrowers that have filed
for bankruptcy protection or that have had involuntary
bankruptcy petitions filed against them by creditors. A
bankruptcy proceeding or other court proceeding could
delay or limit the ability of the Fund to collect the
principal and interest payments on that borrower's loans
or adversely affect the Fund's rights in collateral
relating to a loan.
Leverage Risk. Any senior securities issued by the Fund
will have seniority over the Common Shares and may be
secured by the assets of the Fund. The use of leverage by
the Fund can magnify the effect of any losses. Leverage
involves risks and special considerations for Common
Shareholders including:
o the likelihood of greater volatility of NAV and
market price of the Common Shares than a
comparable portfolio without leverage;
o the risk that fluctuations in interest rates on
borrowings and other associated costs of leverage
will reduce the return to the Common Shareholders
or will result in fluctuations in the dividends
paid on the Common Shares;
o the effect of leverage in a declining market,
which is likely to cause a greater decline in the
NAV of the Common Shares than if the Fund were not
leveraged, which may result in a greater decline
in the market price of the Common Shares; and
o when the Fund uses certain types of leverage, the
investment advisory fee payable to the Advisor
will be higher than if the Fund did not use
leverage.
There is no assurance that a leveraging strategy will be
successful.
The funds borrowed pursuant to a leverage borrowing
program (such as a credit line), or obtained through the
issuance of Preferred Shares, constitute a substantial
lien and burden by reason of their prior claim against the
income of the Fund and against the net assets of the Fund
in liquidation. Certain types of leverage may result in
the Fund being subject to covenants relating to asset
coverage and Fund composition requirements. Generally,
covenants to which the Fund may be subject include
affirmative covenants, negative covenants, financial
covenants, and investment covenants.
The Fund also may be subject to certain restrictions on
investments imposed by guidelines of one or more rating
agencies, which may issue ratings for the Preferred Shares
or other senior securities issued by the Fund.
While the Fund may from time to time consider reducing
leverage in response to actual or anticipated changes in
interest rates in an effort to mitigate the increased
volatility of current income and NAV associated with
leverage, there can be no assurance that the Fund will
actually reduce leverage in the future or that any
reduction, if undertaken, will benefit the Common
Shareholders.
14
Non-U.S. Securities Risk. The Fund may invest a portion of
its assets in securities of non-U.S. issuers. Investing in
securities of non-U.S. issuers, which are generally
denominated in non-U.S. currencies, may involve certain
risks not typically associated with investing in
securities of U.S. issuers.
Loans involving foreign borrowers may involve risks not
ordinarily associated with exposure to loans to U.S.
entities and individuals. The foreign lending industry may
be subject to less governmental supervision and regulation
than exists in the U.S.; conversely, foreign regulatory
regimes applicable to the lending industry may be more
complex and more restrictive than those in the U.S.,
resulting in higher costs associated with such
investments, and such regulatory regimes may be subject to
interpretation or change without prior notice to
investors, such as the Fund. In addition, to the extent
that investments are made in a limited number of
countries, events in those countries will have a more
significant impact on the Fund. Loans to foreign entities
and individuals may be subject to risks of increased
transaction costs, potential delays in settlement or
unfavorable differences between the U.S. economy and
foreign economies.
Emerging Markets Risk. Investing in emerging market
countries, as compared to foreign developed markets,
involves substantial additional risk due to more limited
information about the issuer and/or the security
(including limited financial and accounting information);
higher brokerage costs; different accounting, auditing and
financial reporting standards; less developed legal
systems and thinner trading markets; the possibility of
currency blockages or transfer restrictions; an emerging
market country's dependence on revenue from particular
commodities or international aid; and the risk of
expropriation, nationalization or other adverse political
or economic developments.
Foreign Currency Risk. Currency risk is the risk that
fluctuations in exchange rates may adversely affect the
value of the Fund's investments.
Common Stock and Warrants Risk. The Fund may hold common
stocks and warrants to purchase common stocks. Common
stocks and warrants have a subordinate claim on an
issuer's assets as compared with debt securities. An
adverse event, such as an unfavorable earnings report, may
depress the value of a particular common stock or warrant
held by the Fund. Common stock and warrant prices
fluctuate for several reasons including changes in
investors' perceptions of the financial condition of an
issuer or the general condition of the relevant stock
market, or rising interest rates, as the cost of capital
rises and borrowing costs increase. The value of the
common stocks and warrants in which the Fund may invest
will be affected by changes in the stock markets
generally, which may be the result of domestic or
international political or economic news, changes in
interest rates or changing investor sentiment. Common
stock and warrant risk will affect the Fund's NAV per
share, which will fluctuate as the value of the securities
held by the Fund changes.
Liquidity Risk. Liquidity risk is the risk that the Fund
may invest in securities that trade in lower volumes and
may be less liquid than other investments or that the
Fund's investments may become less liquid in response to
market developments or adverse investor perceptions. When
there is no willing buyer and investments cannot be
readily sold or closed out, the Fund may have to sell an
investment at a lower price than the price at which the
Fund is carrying the investments or may not be able to
sell the investments at all, each of which would have a
negative effect on the Fund's performance and may cause
the Fund to hold an investment longer than the Advisor
would otherwise determine. Additionally, the market for
certain investments may become illiquid under adverse
market or economic conditions (e.g., if interest rates
rise or fall significantly, if there is significant
inflation or deflation, increased selling of debt
securities generally across other funds, pools and
accounts, changes in investor perception, or changes in
government intervention in the financial markets)
independent of any specific adverse changes in the
conditions of a particular issuer. In such cases, shares
of the Fund, due to the difficulty in purchasing and
selling such securities or instruments, may decline in
value or the Fund may be unable to achieve its desired
15
level of exposure to a certain issuer or sector. It may be
more difficult for the Fund to determine a fair value of
an illiquid investment than those of more liquid
comparable investments.
Risks of Investing in Derivative Transactions. Investing
in derivative transactions has risks, including the
imperfect correlation between the value of such
instruments and the underlying asset, rate or index, which
creates the possibility that the loss on such instruments
may be greater than the gain in the value of the
underlying asset, rate or index; the loss of principal;
the possible default of the other party to the
transaction; and illiquidity of the derivative
investments. If a counterparty becomes bankrupt or
otherwise fails to perform its obligations under a
derivative contract due to financial difficulties, the
Fund may experience significant delays in obtaining any
recovery under the derivative contract in a bankruptcy or
other reorganization proceeding, or may not recover at
all. Certain of the derivative investments in which the
Fund may invest may, in certain circumstances, give rise
to a form of financial leverage, which may magnify the
risk of owning such instruments. The ability to
successfully use derivative investments depends on the
ability of the Advisor to predict pertinent market
movements, which cannot be assured.
Swaps Risk. A swap contract is an agreement between two
parties pursuant to which the parties exchange payments at
specified dates on the basis of a specified notional
amount, with the payments calculated by reference to
specified securities, indexes, reference rates, currencies
or other instruments. Swap agreements are particularly
subject to counterparty credit, liquidity, valuation,
correlation and leverage risk. Swaps could result in
losses if interest rate or foreign currency exchange rates
or credit quality changes are not correctly anticipated by
the Fund or if the reference index, security or
investments do not perform as expected.
Total Return Swaps Risk. Total return swaps are contracts
in which one party agrees to make payments of the total
return from the underlying asset(s), which may include
securities, derivatives or indices, during the specified
period in return for payments equal to a fixed or floating
rate of interest or the total return from other underlying
asset(s). The Fund anticipates that, under its total
return swaps, if any, it will pay the counterparty a
regular, set payment at an agreed rate of return and, in
return, will receive a payment which is equal to the
performance of the underlying assets. In the event that
the performance of the relevant assets is less than the
agreed rate, the Fund will be required to make further
payments to the total return swap counterparty in respect
of such shortfalls. The Fund will not be able to replicate
exactly the performance of the relevant underlying assets
because the total return generated by the Fund's
investment in a total return swap will be reduced by
certain costs and expenses. In addition, total return
swaps may effectively add leverage to the Fund's portfolio
because the Fund would be subject to investment exposure
on the full notional amount of the swap.
Credit Default Swaps Risk. The "buyer" in a credit default
contract is obligated to pay the "seller" a periodic
stream of payments over the term of the contract, provided
that no event of default on an underlying reference
obligation has occurred. If an event of default occurs,
the seller must pay the buyer the full notional value, or
"par value," of the reference obligation through either
physical settlement or cash settlement. The Fund may be
either the buyer or seller in a credit default swap
transaction. If the Fund is a buyer and no event of
default occurs, the Fund will have made a series of
periodic payments and recover nothing of monetary value.
However, if an event of default occurs, the Fund (if the
buyer) will receive the full notional value of the
reference obligation through a cash payment in exchange
for the asset or, alternatively, a cash payment
representing the difference between the expected recovery
rate and the full notional value. As a seller, the Fund
receives a fixed rate of income throughout the term of the
contract, which typically is between six months and five
years, provided that there is no event of default.
16
Unrated Securities Risk. Unrated securities (which are not
rated by a rating agency) may be less liquid than
comparable rated securities and involve the risk that the
Advisor may not accurately evaluate the security's
comparative credit rating and value. To the extent that
the Fund invests in unrated securities, the Fund's success
in achieving its investment objective may depend more
heavily on the creditworthiness analysis by the Advisor
than if the Fund invested exclusively in rated securities.
Valuation Risk. When market quotations are not readily
available or are deemed to be unreliable, the Fund values
its investments at fair value as determined in good faith
pursuant to policies and procedures approved by the Board
of Trustees. Fair value pricing may require subjective
determinations about the value of a security or other
asset. As a result, there can be no assurance that fair
value pricing will result in adjustments to the prices of
securities or other assets, or that fair value pricing
will reflect actual market value, and it is possible that
the fair value determined for a security or other asset
will be materially different from quoted or published
prices, from the prices used by others for the same
security or other asset and/or from the value that
actually could be or is realized upon the sale of that
security or other asset.
Market Disruption and Geopolitical Risk. Various market
risks can affect the price or liquidity of an issuer's
securities in which the Fund may invest. Returns from the
securities in which the Fund invests may underperform
returns from the various general securities markets.
During periods of severe market stress, it is possible
that the market for certain investments held by the Fund,
such as high yield bonds and loans, may become highly
illiquid. In such an event, the Fund may find it difficult
to sell the investments it holds, and, for those
investments it is able to sell in such circumstances, the
sale price may be significantly lower than, and the trade
settlement period may be longer than, anticipated.
Markets may, in response to governmental actions or
intervention, political, economic or market developments,
or other external factors, experience periods of high
volatility and reduced liquidity. During those periods,
the Fund may have to sell securities at times when it
would otherwise not do so, and potentially at unfavorable
prices.
Credit Rating Agency Risk. Credit ratings are determined
by credit rating agencies such as S&P, Moody's and Fitch,
and are only the opinions of such entities. Any
shortcomings or inefficiencies in credit rating agencies'
processes for determining credit ratings may adversely
affect the credit ratings of securities held by the Fund
and, as a result, may adversely affect those securities'
perceived or actual credit risk.
Senior Loan Agent Risk. Senior Loans generally are
negotiated between a borrower and several financial
institution lenders represented by one or more lenders
acting as agent of all the lenders. A financial
institution's employment as an agent under a Senior Loan
might be terminated in the event that it fails to observe
a requisite standard of care or becomes insolvent. A
successor agent would generally be appointed to replace
the terminated agent, and assets held by the agent under
the loan agreement would likely remain available to
holders of such indebtedness. However, if assets held by
the terminated agent for the benefit of the Fund were
determined to be subject to the claims of the agent's
general creditors, the Fund might incur certain costs and
delays in realizing payment on a Senior Loan or loan
participation and could suffer a loss of principal and/or
interest.
Inflation/Deflation Risk. Inflation risk is the risk that
the value of assets or income from investments will be
worth less in the future as inflation decreases the value
of money. Deflation risk is the risk that prices
throughout the economy decline over time--the opposite of
inflation. Deflation may have an adverse effect on the
creditworthiness of issuers and may make issuer defaults
more likely, which may result in a decline in the value of
the Fund's portfolio.
Duration Risk. Duration is the sensitivity, expressed in
years, of the price of a fixed income security to changes
in the general level of interest rates (or yields).
Securities with longer durations tend to be more sensitive
to interest rate (or yield) changes than securities with
shorter durations.
17
Illiquid/Restricted Securities Risk. The Fund may invest
in securities that, at the time of investment, are
illiquid (determined using the SEC's standard applicable
to registered investment companies, i.e., securities that
cannot be disposed of by the Fund within seven days in the
ordinary course of business at approximately the amount at
which the Fund has valued the securities). The Fund may
also invest in restricted securities. Investments in
restricted securities could have the effect of increasing
the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling
to purchase these securities. Illiquid and restricted
securities may be difficult to dispose of at a fair price
at the times when the Fund believes it is desirable to do
so. Illiquid and restricted securities are also more
difficult to value, especially in challenging markets.
Investment of the Fund's assets in illiquid and restricted
securities may restrict the Fund's ability to take
advantage of market opportunities
Potential Conflicts of Interest Risk. The Advisor and the
portfolio managers have interests which may conflict with
the interests of the Fund. In particular, the Advisor
advises other investment funds or accounts with the same
or substantially similar investment objective(s) and
strategies as the Fund. As a result, the Advisor and the
Fund's portfolio managers may devote unequal time and
attention to the management of the Fund and those other
funds and accounts, and may not be able to formulate as
complete a strategy or identify equally attractive
investment opportunities as might be the case if they were
to devote substantially more attention to the management
of the Fund. The Advisor and the Fund's portfolio managers
may identify a limited investment opportunity that may be
suitable for multiple funds and accounts, and the
opportunity may be allocated among these several funds and
accounts, which may limit the Fund's ability to take full
advantage of the investment opportunity. Additionally,
transaction orders may be aggregated for multiple accounts
for purposes of execution, which may cause the price or
brokerage costs to be less favorable to the Fund than if
similar transactions were not being executed concurrently
for other accounts.
There is no guarantee that the policies and procedures
adopted by the Advisor and the Fund will be able to
identify or mitigate the conflicts of interest that arise
between the Fund and any other investment funds or
accounts that the Advisor may manage or advise from time
to time.
Anti-Takeover and Other Provisions in the Declaration and
By-Laws. The Fund's Declaration and By-Laws include
provisions that could limit the ability of other entities
or persons to acquire control of the Fund or convert the
Fund to an open-end fund. These provisions could have the
effect of depriving the Common Shareholders of
opportunities to sell their Common Shares at a premium
over the then-current market price of the Common Shares.
In addition, the Declaration contains provisions governing
the bringing of claims or demands by shareholders against
the Fund, including a forum selection provision and the
waiver of jury trials to the fullest extent permitted by
law. These provisions could have the effect of
discouraging suits by shareholders or making them more
costly to bring. If a demand is rejected in accordance
with the Declaration, the complaining shareholders will be
responsible, jointly and severally, for the costs and
expenses (including attorneys' fees) incurred by the Fund
in connection with the consideration of the demand under a
number of circumstances. In addition, if a court
determines that a derivative action was made without
reasonable cause or for an improper purpose, or if a
derivative or direct action is dismissed on the basis of a
failure to comply with the procedural provisions relating
to shareholder actions as set forth in the Declaration, or
if a direct action is dismissed by a court for failure to
state a claim, the shareholders bringing the action may be
jointly and severally responsible for the Fund's costs,
including attorneys' fees.
The provisions of the Declaration provide that any direct
or derivative action commenced by a shareholder must be
brought only in the U.S. District Court for the District
of Massachusetts (Boston Division) or if any such action
may not be brought in that court, then in the Business
Litigation Session of Suffolk Superior Court in
Massachusetts (the "Chosen Courts"). Except as prohibited
by applicable law, if a shareholder commences an
18
applicable action in a court other than a Chosen Court,
then such shareholder may be obligated to reimburse the
Fund and any Trustee or officer of the Fund made party to
such proceeding for the costs and expenses (including
attorneys' fees) incurred in connection with any
successful motion to dismiss, stay or transfer of the
action. The Declaration also provides that any shareholder
bringing an action against the Fund waives the right to
trial by jury to the fullest extent permitted by law.
The provisions of the Declaration, any By-laws of the
Fund, including the procedures applicable to derivative
claims, Chosen Courts, and waiver of jury trial, and any
contract or agreement entered into by the Fund governed by
applicable state law do not affect, waive or limit the
rights of any shareholder with respect to any claims
arising under any provision of the Securities Act of 1933,
as amended, the Securities Exchange Act of 1934, as
amended, or the 1940 Act, or any rule, regulation or order
of the Securities and Exchange Commission thereunder. The
provisions regarding Chosen Courts and waiver of jury
trials limit a shareholder's right to bring claims against
the Fund in a court a shareholder might deem preferable. A
court may choose not to enforce these provisions. See
"Certain Provisions in the Declaration of Trust and
By-Laws."
19
SUMMARY OF FUND EXPENSES
The purpose of the table and the example below is to help Common
Shareholders understand all fees and expenses that they will bear directly or
indirectly. Expenses borne by the Fund are borne, indirectly, by Common
Shareholders. The expenses shown in the table are based on estimated amounts for
the current fiscal year.
The table assumes that the Fund issues 33,250,000 Common Shares and
utilizes leverage through the use of bank borrowings in an amount equal to 30%
of the Fund's Managed Assets (after its utilization). The table shows Fund
expenses as a percentage of $665,000,000 in net assets attributable to Common
Shares. The "Other expenses" shown in the table are based on estimated amounts
for the current fiscal year. The Fund's actual expenses may vary from the
estimated expenses shown in the table.
SHAREHOLDER TRANSACTION EXPENSES
Sales load paid by Common Shareholders (as a percentage of offering price) None(1)
Offering expenses borne by Common Shareholders (as a percentage of offering price) None(2)
Dividend reinvestment plan fees None(3)
PERCENTAGE OF NET ASSETS
ATTRIBUTABLE TO COMMON SHARES(4)
ANNUAL EXPENSES --------------------------------
Management fees(5) 1.93%
Interest on borrowed funds(6) 0.44%
Other expenses 0.13%
-----
Total annual expenses 2.50%
-----
(1) The Advisor, and not the Fund, has agreed to pay from its own assets
compensation of $0.40 per Common Share to the Underwriters in connection
with this offering. See "Underwriters."
(2) The Advisor, and not the Fund, has agreed to pay from its own assets all
organizational expenses of the Fund and all offering costs associated
with this offering, which are estimated to be $956,752 in the aggregate.
The Fund is not obligated to repay any such organizational expenses or
offering costs paid by the Advisor.
(3) Common Shareholders will pay brokerage charges if they direct
Computershare Trust Company, N.A., as agent for the Common Shareholders,
to sell their Common Shares held in a dividend reinvestment account.
(4) This table assumes the Fund's use of leverage as described herein. The
net assets attributable to Common Shares is calculated by deducting the
assumed amount of leverage to be used by the Fund from Managed Assets.
(5) Pursuant to an investment management agreement between the Advisor and
the Fund, the Fund has agreed to pay a fee for the services and
facilities provided by the Advisor at the annual rate of 1.35% of Managed
Assets. If the Fund uses leverage in the amount equal to 30% of the
Fund's Managed Assets (after the issuance of leverage), the Fund's
management fee would be 1.93% of net assets attributable to Common
Shares.
(6) Interest on borrowed funds is based upon the assumed borrowing of
$285,000,000 at an estimated annual interest rate of 1.03% (based on such
assumed borrowing). This amount reflects the assumption that there will
not be any additional fees payable by the Fund under the assumed
borrowing.
EXAMPLE
Investors would pay the following expenses on a $1,000 investment,
assuming (i) a 5% annual return; (ii) the Fund issues 33,250,000 Common Shares;
(iii) total annual expenses of 2.50% of net assets attributable to Common Shares
in years 1 through 7; and (iv) reinvestment of all dividends and distributions
at NAV.
1 YEAR 3 YEARS 5 YEARS 7 YEARS
------ ------- ------- -------
$25 $78 $133 $191
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FUTURE EXPENSES.
ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THE FUND'S ACTUAL
RATE OF RETURN MAY BE GREATER OR LESS THAN THE HYPOTHETICAL 5% RETURN
SHOWN IN THE EXAMPLE.
20
THE FUND
First Trust High Yield Opportunities 2027 Term Fund (the "Fund") is a
newly organized, diversified, closed-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund was organized on April 24, 2020, as a Massachusetts business
trust pursuant to a Declaration of Trust (the "Declaration"). As a newly
organized entity, the Fund has no operating history. The Fund's principal office
is located at 120 East Liberty Drive, Wheaton, Illinois 60187, and its telephone
number is (630) 765-8000. An investment in the Fund involves certain risks and
special considerations. See "Risks."
USE OF PROCEEDS
The net proceeds of the offering of the Fund's common shares of beneficial
interest (the "Common Shares") will be approximately $665,000,000 ($763,948,840
if the underwriters (the "Underwriters") exercise the over-allotment option in
full). First Trust Advisors L.P. ("First Trust" or the "Advisor"), and not the
Fund, has agreed to pay all of the Fund's organizational expenses and all
offering costs associated with this offering, and the Fund is not obligated to
repay any such organizational expenses or offering costs paid by the Advisor.
The Fund will invest the net proceeds of the offering in accordance with the
Fund's investment objective and policies as stated below. The Fund expects it
will be able to invest substantially all of the net proceeds in securities that
meet the Fund's investment objective and policies within 45 to 60 days after
completion of the offering. Pending such investment, it is anticipated that the
proceeds will be invested in cash or cash equivalents.
PORTFOLIO HOLDINGS DISCLOSURE
After the invest-up period and prior to the wind-down period, under normal
market conditions, the Fund currently intends to disclose on its website
(www.ftportfolios.com) its portfolio holdings on a daily basis.
THE FUND'S INVESTMENTS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide current income. There can be
no assurance that the Fund will achieve its investment objective or that the
Fund's investment strategies (as described below) will be successful.
The Fund intends to liquidate and distribute substantially all of its net
assets to shareholders on or about August 1, 2027 (the "Termination Date").
Unless otherwise specified, the investment policies and limitations of the
Fund are not considered to be fundamental by the Fund and can be changed without
a vote of the holders of the Common Shares ("Common Shareholders") upon 60 days'
prior written notice to shareholders. The Fund's investment objective and
certain investment restrictions specifically identified as such in the Statement
of Additional Information (the "SAI") are considered fundamental and may not be
changed without approval by holders of a "majority of the outstanding voting
securities" of the Fund, as defined in the Investment Company Act of 1940, as
amended (the "1940 Act"), which includes Common Shares and preferred shares of
beneficial interest of the Fund ("Preferred Shares"), if any, voting together as
a single class, and the holders of the outstanding Preferred Shares voting as a
single class. As defined in the 1940 Act, when used with respect to particular
shares of the Fund, a "majority of the outstanding voting securities" means: (i)
67% or more of the shares present at a meeting, if the holders of more than 50%
of the shares are present or represented by proxy; or (ii) more than 50% of the
shares, whichever is less.
INVESTMENT POLICIES AND STRATEGIES
Under normal market conditions, the Fund will seek to achieve its
investment objective by investing at least 80% of its Managed Assets (as defined
below) in high yield debt securities of any maturity that are rated below
investment grade at the time of purchase or unrated securities determined by the
Advisor to be of comparable quality. Below investment grade securities are
commonly referred to as "junk bonds" or "junk securities". High yield debt
securities include U.S. and non-U.S. corporate debt obligations (such as bonds
and notes issued by corporations and other business entities) and senior,
secured floating rate loans ("Senior Loans") (as well as other types of
instruments described in this prospectus and the SAI and derivatives that
provide comparable economic exposure to the corporate debt market).
The Fund's investments may include securities of issuers located in
countries considered to be emerging markets. Investments in such emerging market
securities entail additional risks. See "Risks--Principal Risks--Emerging
Markets Risk." The Fund's investments also may include defaulted or distressed
securities--i.e., securities of companies whose financial condition is troubled
21
or uncertain and that may be involved in bankruptcy proceedings, reorganizations
or financial restructurings. See "Risks--Principal Risks--Defaulted and
Distressed Securities Risk." For a further description of the Fund's potential
principal investments, see "--Portfolio Composition" below.
In addition, under normal market conditions:
o The Fund may invest up to 20% of its Managed Assets in (i)
investment grade corporate debt obligations, (ii) U.S. and
non-U.S. government debt securities, (iii) warrants and equity
securities, including common stock and other equity securities
acquired in connection with the restructuring of the debt of an
issuer, the reorganization of a Senior Loan or as part of a
package of securities acquired together with the Senior Loans of
an issuer, and (iv) investment companies.
o The Fund will invest no more than 20% of its Managed Assets in
corporate debt obligations that, at the time of purchase, either
are rated "CCC+" or lower by Standard & Poor's Ratings Services, a
Standard & Poor's Financial Services LLC business ("S&P"), or
Fitch Ratings, a part of the Fitch Group ("Fitch"), or "Caa1" or
lower by Moody's Investor Services, Inc. ("Moody's"), or
comparably rated by another nationally recognized statistical
rating organization ("NRSRO") or, if unrated, determined by the
Advisor to be of comparable quality. For purposes of this
investment policy, the highest available rating will be used. See
"Risks--Principal Risks--Credit and Below Investment Grade
Securities Risk."
o The Fund will invest no more than 25% of its Managed Assets in any
single industry in the corporate debt market.
o The Fund will not invest more than 5% of its Managed Assets in
securities issued by a single issuer, other than securities issued
by the U.S. government.
The Fund also may use certain credit derivatives to take on additional
credit risk and obtain exposure to the high yield corporate debt market. These
instruments, if used, will be considered an investment in high yield debt
securities for purposes of the Fund's investment policy to invest, under normal
market conditions, at least 80% of its Managed Assets in high yield debt
securities that are rated below investment grade at the time of purchase or
unrated securities determined by the Advisor to be of comparable quality. The
Fund anticipates that total return swaps and credit default swaps will be the
primary type of credit derivatives used to gain such exposure to high yield debt
securities as part of its investment strategy. See "Risks--Principal
Risks--Total Return Swaps Risk" and "Risks--Principal Risks--Credit Default
Swaps Risk." The Fund's use of total return swaps, credit default swaps and
other derivative transactions other than for hedging purposes, as measured by
the total notional amount of such instruments, will not exceed 20% of the Fund's
Managed Assets. If the exposure to the underlying instrument of a derivative
position of the Fund is negated or offset by another derivative position of the
Fund providing exposure to the same underlying instrument, the Fund will include
only the net amount of the exposure for purposes of calculating the foregoing
limitation. The Fund also may enter into futures contracts and options on
futures contracts, and may, but is not required to, use various other derivative
transactions to seek to manage the risks of the Fund's portfolio securities or
for other purposes to the extent the Advisor determines that the use of such
transactions is consistent with the Fund's investment objective, policies and
applicable regulatory requirements.
During temporary defensive periods, the period in which the net proceeds
of the offering of Common Shares are first being invested or the period in which
the Fund is approaching its Termination Date (i.e., the "wind-down" period
during which the Fund may begin liquidating its portfolio in anticipation of the
Termination Date; which period is expected to begin six months prior to the
Termination Date), the Fund may deviate from its investment policies and
objective. During such periods, the Fund may invest up to 100% of its Managed
Assets in cash or short-term investments, including high quality, short-term
securities, or may invest in short- or intermediate-term U.S. Treasury
securities. There can be no assurance that such techniques will be successful.
Accordingly, during such periods, the Fund may not achieve its investment
objective.
"Managed Assets" means the average daily gross asset value of the Fund
(which includes assets attributable to the Fund's Preferred Shares, if any, and
the principal amount of any borrowings or commercial paper or notes issued by
the Fund), minus the sum of the Fund's accrued and unpaid dividends on any
outstanding Preferred Shares and accrued liabilities (other than the principal
amount of any borrowings of money incurred or of commercial paper or notes
issued by the Fund). For purposes of determining Managed Assets, the liquidation
preference of the Preferred Shares would not be treated as a liability.
Percentage limitations described in this prospectus are as of the time of
investment by the Fund and may be exceeded on a going-forward basis as a result
of credit rating downgrades or market value fluctuations of the Fund's portfolio
securities.
INVESTMENT PHILOSOPHY AND PROCESS
The investment philosophy for the Advisor's Leveraged Finance Investment
Team is based on the belief that deep fundamental credit analysis performed by a
highly experienced credit team, within a risk managed framework, will generate
higher absolute and risk-adjusted returns in high yield debt strategies. The
team's core framework is designed around capturing yield and seeking to avoid
22
loss. This investment philosophy is expressed by the team through an investment
process that combines rigorous bottom-up fundamental credit analysis and
disciplined portfolio construction. Risk management is a critical component of
the entire process and is embedded in both the fundamental credit analysis and
portfolio construction.
Fundamental credit analysis involves the evaluation of macro-economy,
industry trends, consistency of cash flows, collateral coverage and management
quality, among other things. The investment process favors companies that
produce relatively stable cash flows through an economic cycle, companies that
have an appropriate level of assets backing the debt and companies that have
management teams with a sound track record of managing businesses with leveraged
balance sheets and a commitment to deleveraging.
The Advisor's key considerations of portfolio construction include
relative value assessment, portfolio diversification, issuer liquidity and
continuous monitoring. Each approved investment opportunity is evaluated
relative to other opportunities available in the market. This relative value
assessment helps ensure the portfolio is positioned in the credits that offer
the best return relative to risk. Portfolio diversification is a key component
of the portfolio construction process and an important factor in risk
management. The investment process seeks to have a properly diversified
portfolio across individual issuers and industries. The Advisor's Leveraged
Finance Investment Team believes concentrated issuer or industry positions
typically lead to outsized risk and, therefore, the investment team seeks to
construct well diversified portfolios. The potential liquidity of each
investment opportunity is analyzed prior to purchase. Through fundamental credit
analysis, the Advisor's Leveraged Finance Investment Team can position the
Fund's portfolio in high yield debt securities that the Advisor believes provide
the most attractive opportunities in the market.
Fundamental credit analysis involves:
o EVALUATION OF INDUSTRY TRENDS: The Advisor tends to favor
industries that are either stable or growing. Moreover, the
Advisor intends to invest in issuers or borrowers that it believes
have strong positions within a given industry.
o MANAGEMENT QUALITY: The investment process favors companies that
have management teams with a sound track record of managing
businesses with leveraged balance sheets and a commitment to
deleveraging. The Advisor believes strong management teams are
typically able to navigate more challenging business conditions or
economic environments in a nimble fashion. Additionally, the
industry analyst will often speak with management teams in order
to fully understand management's strategy and goals regarding the
capital structure.
o ASSET VALUE: The investment process evaluates the enterprise
value, any collateral backing the investment opportunity and the
priority of claims on that collateral within the entire capital
structure. Importantly, the enterprise value and collateral value
are assessed not only in a benign credit environment when
valuations are highest, but assuming the company or collateral
will be monetized in a recession when valuations are typically at
their lowest. The entire capital structure is analyzed to
determine the level of liabilities that may have a claim on the
collateral ahead of the debt that is under review. The investment
process favors companies that have strong collateral value so that
a positive outcome may be achieved even in a situation when cash
flows deteriorate.
o CONSISTENCY OF CASH FLOWS: The investment process favors companies
that produce relatively stable cash flows through an economic
cycle. The Advisor's Leveraged Finance Investment Team believes
highly cyclical companies or capital intensive industries face a
high hurdle. A company's cash flow is stressed to determine how
resilient the company would be in a downside case.
The Advisor's key considerations of portfolio construction include:
o RELATIVE VALUE: The relative value assessment is an ongoing
process, as market prices and the Advisor's credit outlooks change
over time. While analysts are focused on individual industries,
the portfolio managers of the Fund aggregate this information and
make decisions across the entire portfolio, so as to continually
seek to own the best relative value opportunities in the market.
The industry analyst will assign an internal rating to the asset
being analyzed. The internal rating has two components, a credit
rating and a relative value rating. The internal ratings system
assists in the fundamental risk assessment by standardizing the
risk level of credits across issuers and industries. Credits are
scored from 1 through 6, with 1 the strongest fundamental business
profile and 6 the weakest fundamental business profile.
o DIVERSIFICATION: This is a key risk control for any portfolio
managed by the Advisor's Leveraged Finance Investment Team. The
portfolio managers seek to ensure the Fund is properly diversified
across industries and issuers.
o LIQUIDITY: Within the high yield debt markets, there can be
significant differences in the level of secondary market liquidity
between individual bonds and loans. The portfolio managers, in
conjunction with the traders, will assess the liquidity of an
issue prior to purchase to ensure the appropriate liquidity is
maintained in the Fund.
23
SEVEN-YEAR TERM AND FINAL DISTRIBUTION
The Fund intends, on or about the Termination Date, to cease its
investment operations, liquidate its portfolio (to the extent possible), retire
or redeem its leverage facilities, and distribute all its liquidated net assets
to Common Shareholders of record. However, if the Board of Trustees determines
it is in the best interest of the shareholders to do so, upon provision of at
least 60 days' prior written notice to shareholders, the Fund's term may be
extended, and the Termination Date deferred, for one period of up to six months
by a vote of the Board of Trustees. In determining whether to extend the Fund's
term beyond the Termination Date, the Board of Trustees may consider the
inability to sell the Fund's assets in a time frame consistent with termination
due to lack of market liquidity or other extenuating circumstances.
Additionally, the Board of Trustees may determine that market conditions are
such that it is reasonable to believe that, with an extension, the Fund's
remaining assets will appreciate and generate income in an amount that, in the
aggregate, is meaningful relative to the cost and expense of continuing the
operation of the Fund.
The Fund's liquidating distribution(s) to Common Shareholders will be
based upon the Fund's net asset value ("NAV") on the Termination Date, and
initial investors and any investors that purchase Common Shares after the
completion of this offering (particularly if their purchase price differs
meaningfully from the original offering price) may receive more or less in such
liquidating distribution(s) than the amount of their original investment. The
Fund will make a distribution on or about the Termination Date of all cash
raised from the liquidation of the Fund's assets at that time. However, if the
Fund is not able to liquidate all of its assets prior to that distribution (for
example, because one or more portfolio securities are in workout or receivership
on the Termination Date), or to the extent accrued but unpaid interest on the
liquidated portfolio securities will be made following such distribution,
subsequent to that distribution, the Fund may make one or more additional
distributions of any cash received from ultimate liquidation of those assets and
from payment of such accrued interest. The Fund expects that the total of such
liquidating distributions, including any additional subsequent distributions,
will equal the Fund's NAV on the Termination Date, but the actual total may be
more or less than that NAV, depending on the ultimate results of those
post-Termination Date asset liquidations.
The Fund's NAV on the Termination Date will depend upon a variety of
factors, including the performance of the Fund's portfolio over the life of the
Fund and the amounts of income or gains retained by the Fund that otherwise
would have been paid out as income dividends or capital gains distributions over
the life of the Fund, and the amount of any taxes paid on such retained amounts.
Interest rates, including yields on below investment grade securities
(which are commonly referred to as "junk" or "high yield" securities), tend to
vary with maturity. Securities with longer maturities tend to have higher yields
than otherwise similar securities having shorter maturities. To the extent the
average effective maturity of the Fund's portfolio shortens as the Fund
approaches its Termination Date, shareholders should expect that the average
portfolio yield will also fall during such period. Consequently, the Fund's
dividend rate may need to be reduced over time as the yield on portfolio
securities declines as they are sold and either not replaced or replaced by
lower-yielding securities; and as the portfolio is liquidated prior to and in
anticipation of the Termination Date, as described above. See "Risks--Principal
Risks--Seven-Year Term Risk."
The Fund is not a so called "target date" or "life cycle" fund whose asset
allocation becomes more conservative over time as its target date, often
associated with retirement, approaches. In addition, the Fund is not a "target
term" fund whose investment objective is to return its original NAV on the
Termination Date. The Fund's investment objective and policies are not designed
to seek to return to investors that purchase Common Shares in this offering
their initial investment of $20.00 per Common Share on the Termination Date, and
such investors and investors that purchase Common Shares after the completion of
this offering may receive more or less than their original investment upon
termination. See "Certain Provisions in the Declaration of Trust and By-Laws."
PORTFOLIO COMPOSITION
The Fund's portfolio may be composed principally of the following
investments. Additional description of the Fund's investment policies and
restrictions and additional information about the Fund's portfolio investments
are contained in the SAI. See "Additional Information About the Fund's
Investments and Investment Risks" and "Other Investment Policies and Techniques"
in the SAI.
Corporate Debt Obligations. The corporate debt obligations in which the
Fund may invest are generally issued by U.S. and non-U.S. companies to borrow
money from investors, typically to finance their operations, in exchange for
interest payments and repayment of the principal at a set maturity date. These
obligations may fund capital improvements, expansions, debt refinancing or
acquisitions that require more capital than would ordinarily be available from a
single lender.
Corporate debt obligations come in many varieties and may differ in the
way that interest is calculated, the amount and frequency of payments, the type
of collateral, if any, and the presence of special features (e.g., conversion
rights). The Fund's investments in corporate debt obligations may include, but
are not limited to, senior, junior, secured and unsecured bonds, notes and other
debt securities. Collateral used for secured debt may include, but is not
limited to, real property, machinery, equipment, accounts receivable, stocks,
24
bonds or notes. Holders of corporate debt obligations, as creditors, have a
prior legal claim over common and preferred stockholders as to both income and
assets of the issuer for the principal and interest due to them and may have a
prior claim over other creditors but are generally subordinate to any existing
lenders in the issuer's capital structure. Interest on corporate debt
obligations may be fixed or floating, or such obligations may be zero coupon
fixed income securities which pay no interest. Interest on corporate debt
obligations is typically paid semi-annually and is fully taxable to the security
holder.
The investment return of corporate debt obligations reflects interest on
the security and changes in the market value of the security. The market value
of fixed rate corporate debt obligations will generally rise and fall inversely
with interest rates. The value of intermediate- and longer-term fixed rate
corporate debt obligations normally fluctuates more in response to changes in
interest rates than does the value of shorter-term fixed rate corporate debt
obligations. The market value of a corporate debt obligation may be affected by
the credit rating of the corporation, the corporation's performance and
perceptions of the corporation in the marketplace. There is a risk that the
issuers of the securities may not be able to meet their obligations on interest
or principal payments at the time called for by an instrument. Corporate debt
obligations usually yield more than government or agency bonds due to the
presence of credit risk. See "Risks--Principal Risks--Corporate Debt Obligations
Risk."
Senior Loans. Senior Loans are made to U.S. and non-U.S. corporations,
partnerships and other business entities which operate in various industries and
geographical regions (i.e., the borrower). Senior Loans are generally secured
with specific collateral and have a claim on the assets and/or stock of the
borrower that is senior to that held by unsecured creditors, subordinated debt
holders and stockholders of the borrower. Senior Loans pay interest at rates
which are determined periodically on the basis of a floating base lending rate,
plus a risk premium. Borrowers may obtain Senior Loans to, among other reasons,
refinance existing debt and for acquisitions, dividends, leveraged buyouts and
general corporate purposes. The Fund may invest in a Senior Loan by acquiring in
the secondary market participations in, assignments of or novations of a Senior
Loan. An assignment involves the sale of a loan by an existing lender to the
Fund and a participation involves the sale of a beneficial interest in a loan by
the lender to the Fund. In an assignment, the Fund becomes a lender of record
and a party to the underlying loan agreement; whereas, in a participation, the
Fund purchases only an economic interest in the loan and does not become a party
to the underlying loan agreement.
By purchasing a participation, the Fund acquires some or all of the
interest of a bank or other lending institution in a loan to a borrower. The
participations typically will result in the Fund having a contractual
relationship only with the lender, not the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the lender selling the participation and only upon receipt by
the lender of the payments from the borrower. Senior Loans offer the Fund more
protection than an unsecured loan in the event of non-payment of scheduled
interest or principal. However, there is no assurance that the liquidation of
collateral from a secured loan would satisfy the borrower's obligation, or that
the collateral can be liquidated. Direct debt instruments may involve a risk of
loss in case of default or insolvency of the borrower and may offer less legal
protection to the Fund in the event of fraud or misrepresentation. In addition,
loan participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in Senior Loans are not regulated by federal
securities laws or the SEC. The Senior Loans in which the Fund may invest also
may include debtor-in-possession financings pursuant to Chapter 11 of the U.S.
Bankruptcy Code. See "--Debtor-in-Possession Loans" below.
Senior Loans may be rated in the lower rating categories of the
established rating services (such as "Ba1" or lower by Moody's or "BB+" or lower
by S&P or Fitch), or may be unrated investments determined to be of comparable
quality by the Advisor. If the NRSROs assign different ratings to the same
Senior Loan, the Fund will use the lowest available rating for purposes of its
80% policy. As in the case of other high yield securities, Senior Loans can be
expected to provide higher yields than lower yielding, higher rated fixed income
securities, but may be subject to greater risk of loss of principal and income.
There are, however, some significant differences between Senior Loans and other
high yield securities. Senior Loan obligations are frequently secured by pledges
of liens and security interests in the assets of the borrower, and the holders
of Senior Loans are frequently the beneficiaries of debt service subordination
provisions imposed on the borrower's bondholders. These arrangements are
designed to give Senior Loan investors preferential treatment over high yield
investors in the event of deterioration in the credit quality of the issuer.
Even when these arrangements exist, however, there can be no assurance that the
borrowers of the Senior Loans will repay principal and/or pay interest in full.
Senior Loans generally bear interest at rates set at a margin above a generally
recognized base lending rate that may fluctuate on a day-to-day basis, in the
case of the prime rate of a U.S. bank, or which may be adjusted on set dates,
typically 30 to 90 days but generally not more than one year. Consequently, the
value of Senior Loans held by the Fund may be expected to fluctuate
significantly less than the value of fixed rate high yield instruments as a
result of changes in the interest rate environment; however, the secondary
dealer market for certain Senior Loans may not be as well developed as the
secondary dealer market for high yield bonds and, therefore, presents increased
market risk relating to liquidity and pricing concerns. See "Risks--Principal
Risks--Senior Loan Risk."
Many Senior Loans had historically paid interest at rates determined
periodically on the basis of the London-Interbank Offered Rate (LIBOR). See
"Risks--Principal Risks--LIBOR Risk."
25
Debtor-in-Possession Loans. The Fund may invest in debtor-in-possession or
"DIP" loans issued by a debtor that has filed for protection under Chapter 11 of
the United States Bankruptcy Code. DIP loans are typically working-capital
facilities put into place at the outset of a Chapter 11 case to provide the
debtor with immediate cash and ongoing working capital necessary to fund the
debtor's Chapter 11 case through confirmation of a plan or asset sale. DIP loans
are approved by the bankruptcy court and are entitled to super priority over all
administrative expenses incurred during the bankruptcy and all other claims.
Typically, DIP loans are secured by a priming lien with priority over
pre-bankruptcy secured debt, a second lien on any encumbered property, and/or a
first-priority lien on all of the debtor's unencumbered assets. Consequently,
DIP loans generally must be repaid before other claims in a bankruptcy case.
While such loans are generally viewed as less risky than many other types of
loans as a result of their seniority in the debtor's capital structure, their
super-priority claim status, and because their terms will have been approved by
a bankruptcy court order, the debtor's reorganization efforts may fail and the
proceeds of the ensuing liquidation of the DIP lender's collateral might be
insufficient to repay the DIP loan. See "Risks--Principal Risks--Defaulted and
Distressed Securities Risk."
Below Investment Grade Securities. Below investment grade securities are
securities rated below "BBB-" by S&P or Fitch, or below "Baa3" by Moody's, or
comparably rated by another NRSRO or, if unrated, determined by the Advisor to
be of comparable credit quality at the time of purchase. Below investment grade
securities are commonly referred to as "junk" or "high yield" securities and are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal. The ratings of a rating agency represent its opinion as to the
quality of securities it undertakes to rate. Ratings are not absolute standards
of quality; consequently, securities with the same maturity, duration, coupon,
and rating may have different yields.
If a security owned by the Fund is subsequently downgraded, the Fund will
not be required to dispose of such security. If a downgrade occurs, the Advisor
will consider what action, including the sale of such security, is in the best
interest of the Fund and its Common Shareholders.
Because the risk of default is higher for below investment grade
securities than investment grade securities, research and credit analysis will
be an especially important part of managing securities of this type. The Advisor
will attempt to identify those issuers of below investment grade securities
whose financial condition the Advisor believes is adequate to meet future
obligations or who have improved or are expected to improve in the future. The
Advisor's analysis focuses on relative values based on such factors as interest
or dividend coverage, asset coverage, earnings prospects and the experience and
managerial strength of the issuer. See "Risks--Principal Risks--Credit and Below
Investment Grade Securities Risk." The Fund's investments may include defaulted
or distressed securities--i.e., securities of companies whose financial
condition is troubled or uncertain and that may be involved in bankruptcy
proceedings, reorganizations or financial restructurings. See "Risks--Principal
Risks--Defaulted and Distressed Securities Risk."
Illiquid and Restricted Securities. The Fund may invest in securities
that, at the time of investment, are illiquid (i.e., securities that cannot be
disposed of by the Fund within seven days in the ordinary course of business at
approximately the amount at which the Fund has valued the securities). In the
absence of readily available market quotations, the Fund's Board of Trustees, a
committee appointed by the Board of Trustees or a designee of the Board of
Trustees will price illiquid investments at a fair value as determined in good
faith. Valuing illiquid securities typically requires greater judgment than
valuing securities for which there is an active trading market. The market price
of illiquid securities generally is more volatile than that of more liquid
securities, which may adversely affect the price that the Fund pays for or
recovers upon the sale of illiquid securities. Investment of the Fund's assets
in illiquid securities may restrict the Fund's ability to take advantage of
market opportunities. The risks associated with illiquid securities may be
particularly acute in situations in which the Fund's operations require cash,
including in connection with the Fund's termination, and could result in the
Fund borrowing to meet its short-term needs or incurring losses on the sale of
illiquid securities.
The Fund may invest in restricted securities, which are securities that
may not be sold to the public without an effective registration statement under
the Securities Act of 1933, as amended (the "1933 Act"). The restriction on
public sale may make it more difficult to value such securities, limit the
Fund's ability to dispose of them and lower the amount the Fund could realize
upon their sale. Because they are not registered, restricted securities may be
sold only in a privately negotiated transaction or pursuant to an exemption from
registration. See "Risks--Principal Risks--Liquidity Risk."
Total Return Swaps. Total return swaps are contracts in which one party
agrees to make payments of the total return from the underlying asset(s), which
may include securities, derivatives or indices, during the specified period in
return for payments equal to a fixed or floating rate of interest or the total
return from other underlying asset(s). The Fund may, for example, enter into
total return swap agreements on certain loan indices to gain exposure to high
yield debt securities. The Fund also may utilize total return swaps as a
component of "synthetic" investments. A "synthetic" investment is comprised of
two components that, when combined, replicate or emulate the economic exposure
of a third investment. The Fund may use the combination of a total return swap
and cash equivalents to replicate or emulate exposure to high yield debt
securities. The cash equivalent market value effectively represents the
"principal" portion of such "synthetic" exposure, and the total return swap
market value (not notional value) represents the "interest" and/or "return"
26
portion of such exposure. When combined, these two components provide the
investment profile of a direct investment in such securities. See
"Risks--Principal Risks--Leverage Risk" and "Risks--Principal Risks--Total
Return Swaps Risk."
Credit Default Swaps. The "buyer" in a credit default swap contract is
obligated to pay the "seller" a periodic stream of payments over the term of the
contract, provided that no event of default on an underlying reference
obligation has occurred. If an event of default occurs, the seller must pay the
buyer the full notional value, or "par value," of the reference obligation. The
Fund may be either the buyer or seller in a credit default swap transaction. If
the Fund is a buyer and no event of default occurs, the Fund will have made a
series of periodic payments and recovered nothing of monetary value. However, if
an event of default occurs, the Fund (if the buyer) will receive the full
notional value of the reference obligation through a cash payment in exchange
for the asset or, alternatively, a cash payment representing the difference
between the expected recovery rate and the full notional value. As a seller, the
Fund would receive a fixed rate of income throughout the term of the contract,
which typically is between six months and five years, provided that there is no
event of default. The Fund currently intends to segregate or earmark assets on
the Fund's records in the form of cash, cash equivalents or liquid securities in
an amount equal to the notional value of the credit default swaps of which it is
the seller. If such assets are not fully segregated by the Fund, the use of
credit default swap transactions could then be considered leverage for purposes
of the 1940 Act. If an event of default occurs, the seller must pay the buyer
the full notional value of the reference obligation through either physical
settlement or cash settlement. Whether or not there is a segregation of assets,
the sale of a credit default swap effectively creates leverage and subjects the
Fund to risks such as those described under "Risks--Principal Risks--Leverage
Risk" and "Risks--Principal Risks--Credit Default Swap Risk."
Common Stock and Warrants. The Fund may hold common stocks and warrants to
purchase common stock. Common stock represents an equity ownership interest in a
corporation or similar entity, providing voting rights and entitling the holder
to a share of the company's success through dividends and/or capital
appreciation. In the event of liquidation, common stockholders have rights to a
company's remaining assets after bondholders, other debtholders and preferred
stockholders have been paid in full. Typically, common stockholders are entitled
to one vote per share to elect the company's board of directors (although the
number of votes is not always directly proportional to the number of shares
owned). Common stockholders also receive voting rights regarding other company
matters such as mergers and certain important company policies, such as issuing
securities to management. In addition to voting rights, common stockholders
sometimes enjoy what are called "preemptive rights." Preemptive rights allow
common stockholders to maintain their proportional ownership in the company in
the event that the company issues another offering of stock. This means that
common stockholders with preemptive rights have the right but not the obligation
to purchase as many new shares of the stock as it would take to maintain their
proportional ownership in the company. See "Risks--Principal Risks--Common Stock
and Warrants Risk."
Other Securities. New financial products continue to be developed, and the
Fund may seek to invest in such products that may be developed to the extent
consistent with its investment objective and the regulatory and federal tax
requirements applicable to investment companies.
Short-Term Debt Securities; Temporary Defensive Position; Invest-Up
Period. During the period in which the net proceeds of the offering of Common
Shares are being invested, the period in which the Fund's assets are being
liquidated in anticipation of the Fund's termination, or the periods in which
the Advisor determines that it is temporarily unable to follow the Fund's
investment strategy or that it is impractical to do so, the Fund may deviate
from its investment strategy and invest all or any portion of its Managed Assets
in cash or short-term investments, including high quality, short-term
securities, or may invest in short- or intermediate-term U.S. Treasury
securities. A determination by the Advisor that it is temporarily unable to
follow the Fund's investment strategy or that it is impractical to do so will
generally occur only in situations in which a market disruption event has
occurred and where trading in the securities selected through application of the
Fund's investment strategy is extremely limited or absent. In such a case,
Common Shareholders of the Fund may be adversely affected and the Fund may not
pursue or achieve its investment objective. For a further description of these
temporary investments, see the SAI under "Investment Policies and
Techniques--Portfolio Composition."
USE OF LEVERAGE
The Fund currently intends to use leverage to seek to achieve its
investment objective. The Fund initially anticipates that, under normal market
conditions, it will employ leverage through borrowings from banks or other
financial institutions in an amount equal to approximately 30% of the Fund's
Managed Assets. The Fund does not currently anticipate it will issue Preferred
Shares within 12 months of the date of this prospectus. The Fund also may enter
into derivative and other transactions that have the economic effect of
leverage. Economic leverage exists when the Fund seeks the right to a return
on a capital base that exceeds the investment which the Fund has contributed to
the instrument seeking a return. This prospectus refers to the combination of
such economic leverage and the Fund's senior securities (as defined under the
1940 Act) as "effective leverage." Under normal market conditions, the Fund will
seek to limit its overall effective leverage to 40% of its Managed Assets.
27
In general, the Fund is prohibited from engaging in most forms of leverage
representing indebtedness unless immediately after the issuance of such leverage
the Fund has satisfied the asset coverage requirement with respect to senior
securities representing indebtedness prescribed by the 1940 Act--i.e., the value
of the Fund's total assets, less all liabilities and indebtedness not
represented by senior securities (for these purposes, "total net assets"), is at
least 300% of the senior securities representing indebtedness (effectively
limiting the use of leverage through senior securities representing indebtedness
to 33 1/3% of the Fund's total net assets, including assets attributable to such
leverage). In addition, the Fund is not permitted to declare any cash dividend
or other distribution on its Common Shares unless, at the time of such
declaration, this asset coverage requirement is satisfied. The Fund may (but is
not required to) cover its commitments under its derivative and other
transactions by segregating liquid assets, or by entering into offsetting
transactions or owning positions covering its obligations. To the extent these
instruments are so covered, they will not be considered "senior securities"
under the 1940 Act and therefore will not be subject to the 300% asset coverage
requirement of the 1940 Act otherwise applicable to forms of senior securities
representing indebtedness used by the Fund. However, the Securities and Exchange
Commission (the "SEC") has proposed a new rule that could further limit or
otherwise alter the Fund's ability to use certain derivative and other
transactions. See "Risks--Principal Risks--Risks of Investing in Derivative
Transactions." Moreover, even if such derivative and other transactions of the
Fund are covered, they could represent a form of economic leverage and create
special risks.
The Fund will seek to use leverage opportunistically and may determine to
increase, decrease, or eliminate its use of leverage over time and from time to
time based on various considerations, including the yield curve environment,
interest rate trends, market conditions and time remaining until the Termination
Date. There is no assurance that borrowings or other forms of leverage will in
fact be established or be maintained in the future. If and when leverage is
used, there is no assurance that the Fund's leveraging strategies will be
successful. The use of leverage will increase the volatility of the performance
of the Fund's investment portfolio and could result in the Fund experiencing
greater losses than if leverage were not used. The net proceeds the Fund obtains
from the use of leverage will be invested in accordance with the Fund's
investment objective and policies as described in this prospectus. So long as
the rate of return, net of applicable Fund expenses, on the investments
purchased by the Fund from leverage proceeds exceeds the costs of such leverage
to the Fund, the use of leverage should help the Fund to achieve an investment
return greater than it would if it were not leveraged, although the use of
leverage also may result in losses greater than if the Fund had not used
leverage.
Leveraging is a speculative technique and there are special risks and
costs involved. See "Risks--Principal Risks--Leverage Risk." The Fund cannot
assure you that the use of leverage, including through borrowings and/or the use
of derivatives strategies will result in a higher investment return on the
Common Shares, and it may result in losses. When leverage is used, the NAV and
market price of the Common Shares and the yield to Common Shareholders will be
more volatile. In addition, the leverage costs will be borne immediately by the
Common Shareholders and result in a reduction of the NAV of the Common Shares.
See "Summary of Fund Expenses." Any senior securities issued by the Fund will
have seniority over the Common Shares and, therefore, have complete priority
upon distribution of assets over the Common Shares.
Because the management fees received by the Advisor are based on Managed
Assets (which includes assets attributable to the Fund's borrowings and other
forms of leverage, such as the Fund's derivative instruments), there is a
financial incentive for the Advisor to cause the Fund to use leverage, which
creates a conflict of interest between the Advisor and the Common Shareholders.
See "Risks--Principal Risks--Potential Conflicts of Interest Risk."
Borrowings. The Declaration authorizes the Fund, without prior approval of
the Common Shareholders, to borrow money. It is expected that the Fund's
borrowings, if any, will be made pursuant to a revolving credit facility
established with a bank, or a margin loan facility with a prime broker, at a
fixed or floating rate. A typical credit facility may contain various covenants
that, among other things, could limit the Fund's ability to pay dividends in
certain circumstances, incur additional debt, change its fundamental investment
policies and engage in certain transactions, including mergers and
consolidations; could limit or prohibit certain investments otherwise
contemplated by the Fund's principal investment strategies; and may require
asset coverage ratios in addition to those required by the 1940 Act. The Fund
may be required to pledge its assets and to maintain a portion of its assets in
cash or high-grade securities, including as a reserve against interest or
principal payments and expenses. Only certain of the Fund's assets may be
eligible to be pledged under the terms of a credit facility. Consequently, the
Fund may be limited in its ability to draw on the credit facility by the amount
of eligible securities the Fund holds in its portfolio and is able to pledge.
The Fund expects that any credit facility would have customary covenant and
default provisions. Examples of customary covenants include affirmative
covenants that may require the Fund to send its annual audited financial report
to the lender, negative covenants that may prohibit the Fund from making any
amendments to its fundamental policies, financial covenants that may require the
Fund to maintain a 3:1 asset coverage ratio, and/or investment covenants that
may require the Fund to limit its investment in a particular asset class. There
can be no assurance that the Fund will enter into an agreement for a credit
facility at all or on terms and conditions representative of the foregoing, or
that additional material terms will not apply. In addition, if entered into, any
such credit facility may in the future be replaced or refinanced by one or more
credit facilities having substantially different terms or by the issuance of
Preferred Shares or debt securities. The Fund may be required to maintain
minimum average balances with the lender or to pay a commitment or other fee to
maintain a line of credit.
28
The Fund also may borrow money as a temporary measure for extraordinary or
emergency purposes, including the payment of dividends and the settlement of
securities transactions which otherwise might require untimely dispositions of
Fund securities.
Preferred Shares. Although the Fund does not currently anticipate it will
employ leverage through the issuance of Preferred Shares within 12 months after
the completion of this offering, it may do so in the future upon the approval of
the Board of Trustees. Any issued Preferred Shares would have complete priority
upon distribution of assets over the Common Shares. Under the 1940 Act, the Fund
would not be permitted to issue Preferred Shares unless immediately after such
issuance the value of the Fund's total assets, less all liabilities and
indebtedness not represented by senior securities, was at least 200% of the
aggregate amount of senior securities representing indebtedness plus the
aggregate of the involuntary liquidation preference of the Preferred Shares. In
addition, if the Fund issues Preferred Shares, the 1940 Act prohibits the
declaration of any dividend (except a dividend payable in Common Shares of the
Fund) or distribution upon the Common Shares of the Fund, or the purchase of any
such Common Shares, unless in every such case the Preferred Share class has, at
the time of the declaration of any such dividend or distribution or at the time
of any such purchase, an asset coverage of at least 200% (as described above)
after deducting the amount of such dividend, distribution, or purchase price, as
the case may be. The 1940 Act requires that the holders of any Preferred Shares,
voting separately as a single class, have the right to elect two Trustees at all
times and, if dividends on Preferred Shares shall be unpaid in an amount equal
to two full years' dividends on such Preferred Shares, to elect a majority of
the Trustees. The Fund might also be subject to certain restrictions imposed by
guidelines of one or more rating agencies that may issue ratings for Preferred
Shares issued by the Fund. These guidelines may impose asset coverage or
portfolio composition requirements that are more stringent than those imposed on
the Fund by the 1940 Act.
EFFECTS OF LEVERAGE
The following table is furnished in response to requirements of the SEC.
It is designed to illustrate the effect of leverage on Common Share total
return, assuming investment portfolio total returns (comprised of income and
changes in the value of securities held in the Fund's portfolio) of -10%, -5%,
0%, 5% and 10%. These assumed investment portfolio returns are hypothetical
figures and are not necessarily indicative of the investment portfolio returns
experienced or expected to be experienced by the Fund. See "Risks."
As assumed in the table below, if the Fund's leverage through borrowings
represent approximately 30% of the Fund's Managed Assets at an estimated annual
interest expense rate of 1.03%, the return generated by the Fund's portfolio
(net of estimated expenses) must exceed 0.31% in order to cover such costs
related to the Fund's borrowings. Of course, these numbers are merely estimates
used for illustration. Actual interest expense rates on the leverage will vary
frequently and may be significantly higher or lower than the rate estimated
above. The information below does not reflect the Fund's use of certain other
forms of economic leverage achieved through the use of other instruments or
transactions not considered to be senior securities under the 1940 Act.
Assumed Portfolio Total Return (Net of Expenses) ...... -10% -5% 0% 5% 10%
Common Share Total Return ............................. -14.73% -7.58% -0.44% 6.70% 13.84%
Common Share total return is composed of two elements: Common Share
dividends paid by the Fund (the amount of which is largely determined by the net
investment income of the Fund after paying leverage costs) and gains or losses
on the value of the securities the Fund owns. As required by SEC rules, the
table above assumes that the Fund is more likely to suffer capital losses than
to enjoy capital appreciation. For example, to assume a total return of 0% the
Fund must assume that the interest it receives on its investments is entirely
offset by losses in the value of those investments.
RISKS
PRINCIPAL RISKS
Risk is inherent in all investing. The following discussion summarizes the
principal risks that you should consider before deciding whether to invest in
the Fund. For additional information about the risks associated with investing
in the Fund, see "--Other Risks Relating to the Fund" below and "Additional
Information About the Fund's Investments and Investment Risks" in the SAI.
NO OPERATING HISTORY
The Fund is a newly organized, diversified, closed-end management
investment company with no operating history. It is designed for long-term
investing and not as a vehicle for trading.
29
INVESTMENT AND MARKET RISK
An investment in the Common Shares represents an indirect investment in
the securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Accordingly, an investment in the Fund's Common Shares is subject to investment
risk, including the possible loss of the entire amount that you invest. Your
Common Shares at any point in time may be worth less than your original
investment, even after taking into account the reinvestment of Fund dividends
and distributions.
MARKET DISCOUNT FROM NET ASSET VALUE RISK
Shares of closed-end investment companies frequently trade at a discount
from their NAV. This characteristic is a risk separate and distinct from the
risk that the Fund's NAV could decrease as a result of its investment activities
and may be greater for investors expecting to sell their Common Shares in a
relatively short period of time following completion of this offering. Because
the market price of the Common Shares will be determined by factors such as NAV,
dividend and distribution levels and their stability (which will in turn be
affected by levels of dividend and interest payments by the Fund's portfolio
holdings, the timing and success of the Fund's investment strategies,
regulations affecting the timing and character of Fund distributions, Fund
expenses and other factors), supply of and demand for the Common Shares, trading
volume of the Common Shares, general market, interest rate and economic
conditions and other factors beyond the control of the Fund, the Fund cannot
predict whether or when the Common Shares will trade at, below or above NAV or
at, below or above the initial public offering price.
GENERAL ECONOMIC AND MARKET CONDITIONS
The success of the Fund's activities may be affected by general economic
and market conditions, such as interest rates, availability of credit, inflation
rates, economic uncertainty, changes in laws and national and international
political circumstances. These factors may affect the level and volatility of
security prices and liquidity of the Fund's investments. Unexpected volatility
or illiquidity could impair the Fund's profitability or result in its suffering
losses.
RECENT MARKET CIRCUMSTANCES
The Fund (as well as its service providers) may be adversely affected by
uncertainties and events around the world, such as epidemics and pandemics,
including the spread of infectious illness or other public health issues,
natural disasters, terrorism and other conflicts, social unrest, political
developments, and changes in government policies, taxation, restrictions on
foreign investment and currency repatriation, currency fluctuations and other
developments in the laws and regulations of the countries in which it invests.
The Fund cannot predict the effects or likelihood of such events on the U.S. and
world economies, the value of the Common Shares or the NAV of the Fund. The
issuers of securities, including those held in the Fund's portfolio, could be
materially impacted by such events which may, in turn, negatively affect the
value of such securities or such issuers' ability to make interest payments or
distributions to the Fund.
A recent outbreak of respiratory disease caused by a novel and highly
contagious form of coronavirus was first detected in Wuhan City, Hubei Province,
China and has as of March 11, 2020, been characterized by the World Health
Organization as a pandemic. On March 13, 2020, the President of the United
States declared the outbreak a national emergency. The virus, named "SARS-CoV-2"
(sometimes referred to as the "corona virus" and abbreviated as "COVID-19"), has
adversely impacted global commercial activity and has contributed to significant
volatility in certain financial markets. The global impact of the outbreak is
rapidly evolving, and many countries, including the United States and various
European countries, have reacted by instituting quarantines, prohibitions on
travel and the closure of offices, businesses, schools, retail stores and other
public venues. Businesses are also implementing similar precautionary measures.
Such measures, as well as the general uncertainty surrounding the dangers and
impact of COVID-19, are creating significant disruption in supply chains and
economic activity and are having a particularly adverse impact on
transportation, hospitality, tourism, entertainment and other industries. As
COVID-19 continues to spread, the potential impacts, including a global,
regional or other economic recession, are increasingly uncertain and difficult
to assess. There are no comparable recent events in the United States that
provide guidance as to the effect of the spread of COVID-19 and a potential
pandemic on the economy as a whole and, consequently, the Fund. Accordingly,
while there have been proposed, and in some cases enacted, economic stimulus
measures aimed at curbing the negative economic impacts to the U.S. and other
countries as a result of COVID-19, it cannot be determined at this time whether
such stimulus measures will have a stabilizing economic effect.
As a result of these recent market circumstances, the markets for credit
instruments are currently experiencing deteriorating conditions that could cause
periods of extreme illiquidity and volatility. These conditions may exist for a
prolonged period of time and could recur from time to time in the future. Such
periods may be subject to market uncertainty and consequent repricing risk that
could lead to market imbalances of sellers and buyers, which in turn could
result in significant valuation uncertainties in a variety of debt securities
and also result in sudden and significant valuation declines in the Fund's
holdings. Moreover, such periods could result in widening credit spreads and a
lack of price transparency. Illiquidity and volatility in the credit markets may
directly and adversely affect the setting of dividend rates on the Fund's Common
Shares. See "--Liquidity Risk."
30
During periods of extreme illiquidity and volatility in the credit
markets, issuers of debt securities may be subject to increased costs associated
with incurring debt, tightening underwriting standards and reduced liquidity for
the loans they make, the securities they purchase and the securities they issue.
The reduced willingness of some lenders to extend credit, in general, may make
it more difficult for issuers of debt instruments, including issuers of high
yield debt securities and Senior Loans, to finance their operations, may
adversely affect the ability of the issuers of securities owned by the Fund to
make payments of principal and interest when due, and lead to lower credit
ratings and increased defaults. Such developments could, in turn, reduce the
value of securities owned by the Fund and adversely affect the Fund's NAV.
GOVERNMENT INTERVENTION IN FINANCIAL MARKETS RISK
The instability in the financial markets in the recent past led the U.S.
government and foreign governments to take a number of unprecedented actions
designed to support certain financial institutions and segments of the financial
markets that experienced extreme volatility, and in some cases a lack of
liquidity, such as implementing stimulus packages, providing liquidity in fixed
income, commercial paper and other markets, and providing tax breaks, among
other actions. Current market conditions resulting from the COVID-19 crisis have
led and may continue to lead to further such actions. See "--Recent Market
Circumstances." U.S. federal and state governments and foreign governments,
their regulatory agencies or self-regulatory organizations may take additional
actions that affect the regulation of the securities in which the Fund invests,
or the issuers of such securities, in ways that are unforeseeable and on an
"emergency" basis with little or no notice with the consequence that some market
participants' ability to continue to implement certain strategies or manage the
risk of their outstanding positions will be suddenly and/or substantially
eliminated or otherwise negatively implicated. Given the complexities of the
global financial markets and the limited time frame within which governments
have been able to take action, these interventions have sometimes been unclear
in scope and application, resulting in confusion and uncertainty, which in
itself has been materially detrimental to the efficient functioning of such
markets as well as previously successful investment strategies. Decisions made
by government policy makers could exacerbate any economic difficulties. Issuers
might seek protection under the bankruptcy laws. Legislation or regulation may
also change the way in which the Fund itself is regulated. Such legislation or
regulation could limit or preclude the Fund's ability to achieve its investment
objective.
CREDIT AND BELOW INVESTMENT GRADE SECURITIES RISK
Credit risk is the risk that an issuer or counterparty will fail to pay
its obligations to the Fund when they are due. If an investment's issuer or
counterparty fails to pay interest or otherwise fails to meet its obligations to
the Fund, the Fund's income might be reduced and the value of the investment
might fall or be lost entirely. Financial strength and solvency of an issuer are
the primary factors influencing credit risk. Changes in the financial condition
of an issuer or counterparty, changes in specific economic, social or political
conditions that affect a particular type of instrument or an issuer, and changes
in economic, social or political conditions generally can increase the risk of
default by an issuer or counterparty, which can affect an instrument's credit
quality or value and an issuer's or counterparty's ability to pay interest and
principal when due. The values of securities also may decline for a number of
other reasons that relate directly to the issuer, such as management
performance, financial leverage and reduced demand for the issuer's goods and
services, as well as the historical and prospective earnings of the issuer and
the value of its assets. Credit risk is heightened to the extent the Fund has
fewer counterparties.
In addition, lack of or inadequacy of collateral or credit enhancements
for a fixed income security may affect its credit risk. Credit risk of a
security may change over time, and securities which are rated by rating agencies
may be subject to downgrade, which may have an indirect impact on the market
price of securities. Ratings are only opinions of the agencies issuing them as
to the likelihood of re-payment. They are not guarantees as to quality and they
do not reflect market risk.
Below investment grade securities are securities rated below "BBB-" by S&P
or Fitch, or below "Baa3" by Moody's, or comparably rated by another NRSRO or,
if unrated, determined by the Advisor to be of comparable credit quality at the
time of purchase. Below investment grade securities are commonly referred to as
"junk" or "high yield" securities and are considered speculative with respect to
the issuer's capacity to pay interest and repay principal and are susceptible to
default or decline in market value due to adverse economic and business
developments. High yield securities are often unsecured and subordinated to
other creditors of the issuer. The market values for high yield securities tend
to be very volatile, and these securities are generally less liquid than
investment grade securities. For these reasons, an investment in the Fund is
subject to the following specific risks: (i) increased price sensitivity to
changing interest rates and to a deteriorating economic environment; (ii)
greater risk of loss due to default or declining credit quality; (iii) adverse
company specific events more likely to render the issuer unable to make interest
and/or principal payments; (iv) negative perception of the high yield market
which may depress the price and liquidity of high yield securities; (v)
volatility; and (vi) illiquidity.
Default, or the market's perception that an issuer is likely to default,
could reduce the value and liquidity of securities held by the Fund, thereby
reducing the value of the Common Shares. In addition, default may cause the Fund
to incur expenses in seeking recovery of principal or interest on its portfolio
holdings. In any reorganization or liquidation proceeding relating to a
portfolio company, the Fund may lose its entire investment or may be required to
accept cash or securities with a value less than its original investment. Among
the risks inherent in investments in a troubled entity is the fact that it
frequently may be difficult to obtain information as to the true financial
31
condition of such issuer. The Advisor's judgment about the credit quality of an
issuer and the relative value of its securities may prove to be wrong.
Investments in below investment grade securities may present special tax issues
for the Fund to the extent that the issuers of these securities default on their
obligations pertaining thereto, and the federal income tax consequences to the
Fund as a holder of such distressed securities may not be clear.
Adverse changes in economic conditions are more likely to lead to a
weakened capacity of a high yield issuer to make principal payments and interest
payments than an investment grade issuer. An economic downturn could severely
affect the ability of highly leveraged issuers to service their debt obligations
or to repay their obligations upon maturity. If the current economic downturn
continues longer than corporate managers anticipate or prepare for, that could
similarly affect many issuers. See "--Recent Market Circumstances."
The secondary market for high yield securities may not be as liquid as the
secondary market for more highly rated securities, a factor which may have an
adverse effect on the Fund's ability to dispose of a particular security. There
are fewer dealers in the market for high yield securities than for investment
grade obligations. The prices quoted by different dealers may vary
significantly, and the spread between bid and asked prices is generally much
larger for high yield securities than for higher quality instruments. Under
adverse market or economic conditions, the secondary market for high yield
securities could contract further, independent of any specific adverse changes
in the condition of a particular issuer, and these securities may become
illiquid. As a result, the Fund could find it more difficult to sell these
securities or may be able to sell the securities only at prices lower than if
such securities were widely traded. Prices realized upon the sale of such lower
rated or unrated securities, under these circumstances, may be less than the
prices used in calculating the Fund's NAV. See "--Liquidity Risk."
DEBT SECURITIES RISK
In addition to certain of the other risks described herein such as
interest rate risk and credit risk, debt securities generally also are subject
to the following risks:
o Redemption Risk--Debt securities sometimes contain provisions that
allow for redemption in the event of tax or security law changes
in addition to call features at the option of the issuer. In the
event of a redemption, the Fund may not be able to reinvest the
proceeds at comparable rates of return.
o Extension Risk--This is the risk that if interest rates rise,
repayments of principal on certain debt securities, including, but
not limited to, floating rate loans, may occur at a slower rate
than expected and the expected maturity of those securities could
lengthen as a result. Securities that are subject to extension
risk generally have a greater potential for loss when prevailing
interest rates rise, which could cause their values to fall
sharply.
o Liquidity Risk--Certain debt securities may be substantially less
liquid than many other securities, such as U.S. Government
securities or common shares or other equity securities.
o Spread Risk--Wider credit spreads and decreasing market values
typically represent a deterioration of the debt security's credit
soundness and a perceived greater likelihood or risk of default by
the issuer.
o Limited Voting Rights--Debt securities typically do not provide
any voting rights, except in some cases when interest payments
have not been made and the issuer is in default. Even in such
cases, such rights may be limited to the terms of the debenture or
other agreements.
o Prepayment/Reinvestment Risk--Many types of debt securities,
including floating rate loans, may reflect an interest in periodic
payments made by borrowers. Although debt securities and other
obligations typically mature after a specified period of time,
borrowers may pay them off sooner. When a prepayment happens, all
or a portion of the obligation will be prepaid. A borrower is more
likely to prepay an obligation which bears a relatively high rate
of interest. This means that in times of declining interest rates,
there is a greater likelihood that the Fund's higher yielding
securities will be pre-paid and the Fund will probably be unable
to reinvest those proceeds in an investment with as high a yield,
causing the Fund's yield to decline. Securities subject to
prepayment risk generally offer less potential for gains when
prevailing interest rates fall. If the Fund buys those investments
at a premium, accelerated prepayments on those investments could
cause the Fund to lose a portion of its principal investment and
result in lower yields to shareholders. The increased likelihood
of prepayment when interest rates decline also limits market price
appreciation, especially with respect to certain loans. The effect
of prepayments on the price of a security may be difficult to
predict and may increase the security's price volatility.
Interest-only and principal only securities are especially
sensitive to interest rate changes, which can affect not only
their prices but can also change the income flows and repayment
assumptions about those investments. Income from the Fund's
portfolio may decline when the Fund invests the proceeds from
investment income, sales of portfolio securities or matured,
traded or called debt obligations. A decline in income received by
the Fund from its investments is likely to have a negative effect
on the dividend levels and market price, NAV and/or overall return
of the Common Shares.
32
CORPORATE DEBT OBLIGATIONS RISK
The market value of corporate debt obligations generally may be expected
to rise and fall inversely with interest rates. The market value of
intermediate- and longer term corporate debt obligations is generally more
sensitive to changes in interest rates than is the market value of shorter term
corporate debt obligations. The market value of corporate debt obligations also
may be affected by factors directly related to the issuer, such as investors'
perceptions of the creditworthiness of the issuer, the issuer's financial
performance, perceptions of the issuer in the marketplace, performance of
management of the issuer, the issuer's capital structure and use of financial
leverage and demand for the issuer's goods and services. There is a risk that
the issuers of corporate debt may not be able to meet their obligations on
interest and/or principal payments at the time called for by an instrument.
Corporate debt obligations rated below investment grade quality is often high
risk and has speculative characteristics and may be particularly susceptible to
adverse issuer-specific developments. See "--Credit and Below Investment Grade
Securities Risk." See also "--Debt Securities Risk."
SENIOR LOAN RISK
Senior Loans are subject to the risk of payment defaults of scheduled
interest or principal. Such payment defaults would result in a reduction of
income to the Fund, a reduction in the value of the investment and a potential
decrease in the NAV of the Fund. Similarly, a sudden and significant increase in
market interest rates may increase the risk of payment defaults and cause a
decline in the value of these investments and in the Fund's NAV. Other factors
(including, but not limited to, rating downgrades, credit deterioration, a large
downward movement in stock prices, a disparity in supply and demand of certain
securities or market conditions that reduce liquidity) can reduce the value of
Senior Loans and other debt obligations, impairing the Fund's NAV. If a borrower
under a Senior Loan defaults or goes into bankruptcy, the Fund may recover only
a fraction of what is owed on the Senior Loan or nothing at all.
The Fund will invest in Senior Loans rated below investment grade, which
are commonly referred to as "junk" or "high yield" securities and considered
speculative because of the credit risk of their issuers. Such issuers are more
likely than investment grade issuers to default on their payments of interest
and principal owed to the Fund, and such defaults could reduce the Fund's NAV
and income distributions. See "--Credit and Below Investment Grade Securities
Risk." During an economic downturn, the Fund may experience a higher non-payment
rate, and a Senior Loan may lose significant market value before a default
occurs. Moreover, any specific collateral used to secure a Senior Loan may
decline in value or become illiquid, which would adversely affect the Senior
Loan's value.
Senior Loans are structured as floating rate instruments in which the
interest rate payable on the obligation fluctuates with interest rate changes.
See "--Other Risks Associated with Loans--Interest Rate and Interest Rate
Benchmarks."
Senior Loans are generally not registered with the SEC or state securities
commissions, and are generally not listed on any securities exchange. In
addition, the amount of public information available on Senior Loans is
generally less extensive than that available for other types of assets.
Therefore, the Fund will be particularly dependent on the analytical abilities
of the Advisor. See "--Other Risks Associated with Loans--Valuation and
Liquidity"
Although the Senior Loans in which the Fund will invest will be secured by
collateral, there can be no assurance that such collateral could be readily
liquidated or that the liquidation of such collateral would satisfy the
borrower's obligation in the event of non-payment of scheduled interest or
principal. The Fund's investments in Senior Loans may be collateralized with one
or more of (1) working capital assets, such as accounts receivable and
inventory, (2) tangible fixed assets, such as real property, buildings and
equipment, (3) intangible assets such as trademarks or patents, or (4) security
interests in shares of stock of the borrower or its subsidiaries or affiliates.
In the case of loans to a non-public company, the company's shareholders or
owners may provide collateral in the form of secured guarantees and/or security
interests in assets they own. In the event of a decline in the value of the
already pledged collateral, if the terms of the Senior Loan do not require the
borrower to pledge additional collateral, the Fund will be exposed to the risk
that the value of the collateral will not at all times equal or exceed the
amount of the borrower's obligations under the Senior Loans. Senior Loans that
are under-collateralized involve a greater risk of loss. In the event of the
bankruptcy or insolvency of a borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
collateral securing a Senior Loan. For example, if a borrower defaults,
insolvency laws may limit the Fund's access to the collateral, or the lenders
may be unable to liquidate the collateral. A bankruptcy court might find that
the collateral securing the Senior Loan is invalid or require the borrower to
use the collateral to pay other outstanding obligations. If the collateral
consists of stock of the borrower or its subsidiaries, the stock may lose all of
its value in the event of a bankruptcy, which would leave the Fund exposed to
greater potential loss. To the extent that a Senior Loan is collateralized by
stock in the borrower or its subsidiaries, such stock may lose some or all of
its value in the event of the bankruptcy or insolvency of the borrower.
33
If a borrower defaults on a collateralized Senior Loan, the Fund may
receive assets other than cash or securities in full or partial satisfaction of
the borrower's obligation under the Senior Loan. Those assets may be illiquid,
and the Fund might not be able to realize the benefit of the assets for legal,
practical or other reasons. The Fund might hold those assets until the Advisor
determined it was appropriate to dispose of them. If the collateral becomes
illiquid or loses some or all of its value, the collateral may not be sufficient
to protect the Fund in the event of a default of scheduled interest or principal
payments.
Some Senior Loans are subject to the risk that a court, pursuant to
equitable subordination or other similar laws, could subordinate the Senior
Loans to presently existing or future indebtedness of the borrower or take other
action detrimental to lenders, such as the Fund. Such court action could under
certain circumstances include invalidation of Senior Loans. If legislation or
state or federal regulations impose additional requirements or restrictions on
the ability of financial institutions to make loans, the availability of Senior
Loans for investment by the Fund may be adversely affected. In addition, such
requirements or restrictions could reduce or eliminate sources of financing for
certain borrowers. This would increase the risk of default. See "--Lender
Liability Risk."
Any new legislation or federal or state regulations that require financial
institutions to increase their capital requirements may cause financial
institutions to dispose of Senior Loans on their balance sheets that are
considered highly levered transactions. Such sales could result in prices that,
in the opinion of the Advisor, do not represent fair value. If the Fund attempts
to sell a Senior Loan at a time when a financial institution is engaging in such
a sale, the price the Fund could get for the Senior Loan may be adversely
affected.
The Fund may acquire Senior Loans through participations or assignments.
The purchaser of a participation typically succeeds to all the rights and
obligations of the participating institution and becomes a lender under the
credit agreement with respect to the debt obligation; however, the purchaser's
rights can be more restricted than those of the participating institution, and
the Fund may not be able to unilaterally enforce all rights and remedies under
the loan and with regard to any associated collateral. A participation typically
results in a contractual relationship only with the institution participating
out the interest, not with the borrower. By purchasing a participation, the Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the lender selling the participation and only
upon receipt by the lender of the payments from the borrower. Sellers of
participations typically include banks, broker-dealers, other financial
institutions and lending institutions. In purchasing participations, the Fund
generally will have no right to enforce compliance by the borrower with the
terms of the loan agreement against the borrower, and the Fund may not directly
benefit from the collateral supporting the Senior Loan in which it has purchased
the participation. As a result, the Fund will be exposed to the credit risk of
both the borrower and the institution selling the participation. Further, in
purchasing participations in lending syndicates, in certain circumstances the
Fund may not be able to conduct the due diligence on the borrower or the quality
of the Senior Loan with respect to which it is buying a participation that the
Fund would otherwise conduct if it were investing directly in the Senior Loan,
which may result in the Fund being exposed to greater credit or fraud risk with
respect to the borrower or the Senior Loan than the Fund expected when initially
purchasing the participation.
When the Fund is a purchaser of an assignment, it typically succeeds to
all the rights and obligations under the loan agreement of the assigning lender
and becomes a lender under the loan agreement with the same rights and
obligations as the assigning lender. Assignments are arranged through private
negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an assignment may differ from, and
be more limited than, those held by the assigning lender.
The Fund may obtain exposure to Senior Loans through the use of derivative
instruments. The Fund may utilize these instruments and similar instruments that
may be available in the future. Derivative transactions involve the risk of loss
due to unanticipated adverse changes in securities prices, interest rates, the
inability to close out a position, imperfect correlation between a position and
the desired hedge, tax constraints on closing out positions and portfolio
management constraints on securities subject to such transactions. The potential
loss on derivative instruments may be substantial relative to the initial
investment therein. The Fund may also be subject to the risk that the
counterparty in a derivative transaction will default on its obligations. See
"--Total Return Swaps Risk" and "--Credit Default Swaps Risk."
INTEREST RATE RISK
Generally, when market interest rates rise, prices of debt securities
fall, and vice versa. Interest rate risk is the risk that the debt securities in
the Fund's portfolio will decline in value because of increases in market
interest rates. As interest rates decline, issuers of debt securities may prepay
principal earlier than scheduled, forcing the Fund to reinvest in lower-yielding
securities and potentially reducing the Fund's income. As interest rates
increase, slower than expected principal payments may extend the average life of
securities, potentially locking in a below-market interest rate and reducing the
Fund's value. In typical market interest rate environments, the prices of
longer-term debt securities generally fluctuate more than prices of shorter-term
debt securities as interest rates change. These risks may be greater in the
current market environment because, as of the date of this prospectus, certain
interest rates are at or near historic lows. Therefore, there is a risk that
interest rates will rise, which will likely cause the Fund's debt security
prices to fall. See "--LIBOR Risk."
34
SEVEN-YEAR TERM RISK
The Fund intends to terminate on or about the Termination Date. Because
the assets of the Fund will be liquidated in connection with the termination,
the Fund may be required to sell portfolio securities when it otherwise would
not, including at times when market conditions are not favorable, which may
cause the Fund to lose money. In particular, the Fund's portfolio may still have
significant remaining average maturity and duration, and large exposures to
lower-quality credits, as the Termination Date approaches, and if interest rates
are high (and the value of lower-quality fixed-income securities consequently
low) at the time the Fund needs to liquidate its assets in connection with the
termination, the losses due to portfolio liquidation may be significant.
Moreover, as the Fund approaches the Termination Date, its portfolio composition
may change as more of its portfolio holdings are called or sold, which may cause
the returns to decrease and the NAV of the Common Shares to fall. Rather than
reinvesting the proceeds of matured, called or sold securities, the Fund may
distribute the proceeds in one or more liquidating distributions prior to the
final liquidation, which may cause fixed expenses to increase when expressed as
a percentage of assets under management, or the Fund may invest the proceeds in
lower yielding securities or hold the proceeds in cash, which may adversely
affect its performance.
Because the Fund will invest in below investment grade securities, it may
be exposed to the greater potential for an issuer of its securities to default,
as compared to a fund that invests solely in investment grade securities. As a
result, should a Fund portfolio holding default, this may significantly reduce
net investment income and, therefore, Common Share dividends, and also may
prevent or inhibit the Fund from fully being able to liquidate its portfolio at
or prior to the Termination Date. See "--Credit and Below Investment Grade
Securities Risk."
The Fund's investment objective and policies are not designed to return to
investors who purchase Common Shares in this offering their initial investment
on the Termination Date. When terminated, the Fund's final distribution will be
based upon its NAV at the end of the term and such initial investors and any
investors that purchase Common Shares after the completion of this offering may
receive more or less than their original investment.
SUBORDINATED DEBT INSTRUMENTS RISK
Issuers of subordinated loans and other subordinated debt instruments in
which the Fund may invest usually will have, or may be permitted to incur, other
debt that ranks equally with, or senior to, the subordinated loans or other
subordinated debt instruments. By their terms, such debt instruments may provide
that the holders are entitled to receive payment of interest or principal on or
before the dates on which the Fund is entitled to receive payments in respect of
subordinated loans or other subordinated debt instruments in which it invests.
Also, in the event of insolvency, liquidation, dissolution, reorganization or
bankruptcy of an issuer, holders of debt instruments ranking senior to the
subordinated loan or other debt instrument in which the Fund invests would
typically be entitled to receive payment in full before the Fund receives any
distribution in respect of its investment. After repaying such senior creditors,
such issuer may not have any remaining assets to use for repaying its obligation
to the Fund. In the case of debt ranking equally with subordinated loans or
other subordinated debt instruments in which the Fund invests, the Fund would
have to share on an equal basis any distributions with other creditors holding
such debt in the event of an insolvency, liquidation, dissolution,
reorganization or bankruptcy of the relevant issuer. In addition, the Fund will
likely not be in a position to control any issuer by investing in its debt
instruments. As a result, the Fund will be subject to the risk that an issuer in
which it invests may make business decisions with which the Fund disagrees and
the management of such issuer, as representatives of the holders of their common
equity, may take risks or otherwise act in ways that do not serve the Fund's
interests as a debt investor.
SHAREHOLDER ACTIVISM RISK
Shareholder activism, which could take many forms, including making public
demands that the Fund consider certain strategic alternatives, engaging in
public campaigns to attempt to influence the Fund's governance and/or
management, and commencing proxy contests to attempt to elect the activists'
representatives or others to the Fund's Board of Trustees or seeking a tender
offer or liquidation of the Fund. Shareholder activism arises in a variety of
situations, and has been increasing in the closed-end fund space recently. Due
to the potential volatility of the Fund's stock price and for a variety of other
reasons, the Fund may in the future become the target of shareholder activism.
Shareholder activism could result in substantial costs and divert management's
and the Fund's Board's attention and resources from its business. Also, the Fund
may be required to incur significant legal and other expenses related to any
activist shareholder matters. Further, the Fund's stock price could be subject
to significant fluctuation or otherwise be adversely affected by the events,
risks and uncertainties of any shareholder activism. Shareholder activists seek
short-term actions that can increase Fund costs per share and be detrimental to
long-term shareholders.
MANAGEMENT RISK AND RELIANCE ON KEY PERSONNEL
The Fund is subject to management risk because it is an actively managed
portfolio. The Advisor will apply investment techniques and risk analyses in
making investment decisions for the Fund, but there can be no guarantee that
these will produce the desired results. The Advisor's judgments about the
attractiveness, value and potential appreciation of particular asset classes,
35
sectors, securities, or other investments may prove to be incorrect and may not
anticipate actual market movements or the impact of economic conditions
generally. No matter how well a portfolio manager evaluates market conditions,
the investments a portfolio manager chooses may fail to produce the intended
result, and you could lose money on your investment in the Fund.
In addition, implementation of the Fund's investment strategy depends upon
the continued contributions of certain key employees of the Advisor, some of
whom have unique talents and experience and would be difficult to replace. The
loss or interruption of the services of a key member of the portfolio management
team could have a negative impact on the Fund during the transitional period
that would be required for a successor to assume the responsibilities of the
position.
OTHER RISKS ASSOCIATED WITH LOANS
Investments in loans (including loans other than Senior Loans) are
generally subject to the same risks as investments in other types of debt
obligations, including, among others, credit risk, interest rate risk,
prepayment risk, and extension risk. In addition, in many cases loans are
subject to the risks associated with below investment grade securities.
Interest Rate and Interest Rate Benchmarks. The interest rates on floating
rate loans typically adjust only periodically. Accordingly, adjustments in the
interest rate payable under a loan may trail prevailing interest rates
significantly, especially if there are limitations placed on the amount the
interest rate on a loan may adjust in a given period. Certain floating rate
loans have a feature that prevents their interest rates from adjusting if market
interest rates are below a specified minimum level. When interest rates are low,
this feature could result in the interest rates of those loans becoming fixed at
the applicable minimum level until interest rates rise above that level.
Although this feature is intended to result in these loans yielding more than
they otherwise would when interest rates are low, the feature might also result
in the prices of these loans becoming more sensitive to changes in interest
rates should interest rates rise but remain below the applicable minimum level.
Interest rates on loans typically adjust periodically often based on changes
in a benchmark rate plus a premium or spread over the benchmark rate. The
benchmark rate may be LIBOR, the Prime Rate, or other base lending rates used by
commercial lenders (each as defined in the applicable loan agreement). Some
benchmark rates may reset daily; others reset less frequently. The interest rate
on LIBOR-based loans is reset periodically, typically based on a period between
30 days and one year. Certain floating or variable rate loans may permit the
borrower to select an interest rate reset period of up to one year or longer.
Investing in loans with longer interest rate reset periods may increase
fluctuations in the Fund's NAV as a result of changes in interest rates.
Interest rates on loans with longer periods between benchmark resets will
typically trail market interest rates in a rising interest rate environment. See
"--LIBOR Risk."
Certain loans may permit the borrower to change the base lending rate
during the term of the loan. One benchmark rate may not adjust to changing
market or interest rates to the same degree or as rapidly as another, permitting
the borrower the option to select the benchmark rate that is most advantageous
to it and less advantageous to the Fund. To the extent the borrower elects this
option, the interest income and total return the Fund earns on the investment
may be adversely affected as compared to other investments where the borrower
does not have the option to change the base lending or benchmark rate.
Valuation and Liquidity. Investments in loans may be difficult to value
and may be illiquid. Floating rate loans generally are subject to legal or
contractual restrictions on resale. The liquidity of floating rate loans,
including the volume and frequency of secondary market trading in such loans,
varies significantly over time and among individual floating rate loans. For
example, if the credit quality of the borrower related to a floating rate loan
unexpectedly declines significantly, secondary market trading in that floating
rate loan can also decline.
Opportunities to invest in loans or certain types of loans, including
Senior Loans, may be limited. Alternative investments may provide lower yields
and may, in the Advisor's view, offer less attractive investment
characteristics. The limited availability of loans may be due to a number of
reasons, including that direct lenders may allocate only a small number of loans
to new investors, including the Fund. There also may be fewer loans made or
available that the Advisor considers to be attractive investment opportunities,
particularly during economic downturns. Also, lenders or agents may have an
incentive to market only the least desirable loans to investors such as the
Fund. If the market demand for loans increases, the availably of loans for
purchase and the interest paid by borrowers may decrease.
Equity Securities. The acquisition of equity securities (e.g., common
stock, preferred stock and securities convertible into common stock) may
generally be incidental to the Fund's purchase of a loan. The Fund may acquire
equity securities as part of an instrument combining a loan and equity
securities of a borrower or its affiliates. The Fund also may acquire equity
securities issued in exchange for a loan or in connection with the default
and/or restructuring of a loan, including subordinated and unsecured loans, and
high yield securities. Equity securities are subject to market risks and the
risks of changes to the financial condition of the issuer, and fluctuations in
value.
36
Restrictive Loan Covenants Risk. Borrowers must comply with various
restrictive covenants that may be contained in loan agreements. They may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the borrower to maintain specific financial ratios, and
limits on total debt. They may include requirements that the borrower prepay the
loan with any free cash flow. A break of a covenant that is not waived by the
agent bank (or the lenders) is normally an event of default that provides the
agent bank or the lenders the right to call the outstanding amount on the loan.
If a lender accelerates the repayment of a loan because of the borrower's
violation of a restrictive covenant under the loan agreement, the borrower might
default in payment of the loan.
Some of the loans in which the Fund may invest or to which the Fund may
obtain exposure may be "covenant-lite." Such loans contain fewer or less
restrictive constraints on the borrower than certain other types of loans. Such
loans generally do not include terms which allow the lender to monitor the
performance of the borrower and declare a default or force a borrower into
bankruptcy restructuring if certain criteria are breached. Under such loans,
lenders typically must rely on covenants that restrict a borrower from incurring
additional debt or engaging in certain actions. Such covenants can be breached
only by an affirmative action of the borrower, rather than by a deterioration in
the borrower's financial condition. Accordingly, the Fund may have fewer rights
against a borrower when it invests in or has exposure to such loans and so may
have a greater risk of loss on such investments as compared to investments in or
exposure to loans with additional or more conventional covenants.
Settlement Risk. Transactions in many loans settle on a delayed basis, and
the Fund may not receive the proceeds from the sale of such loans for a
substantial period after the sale. As a result, sale proceeds related to the
sale of such loans may not be available to make additional investments until
potentially a substantial period after the sale of the loans.
Other Legal Risks. Recent case law has cast doubt on the ability of a
purchaser of a loan, such as the Fund, to charge the same rate of interest as an
originating entity after the loan has been sold by the originating entity. In
2015, the U.S. Court of Appeals for the Second Circuit issued a significant
decision that interpreted the scope of federal preemption under the National
Bank Act (the "NBA") and held that a non-bank assignee of loans sourced by a
national bank was not entitled to the benefits of NBA preemption as to state law
claims of usury. Although the decision is binding only in Connecticut, New York
and Vermont, it may significantly affect non-bank assignees of loans, including,
potentially, the Fund. At a minimum, non-bank assignees/purchasers of bank loans
may face uncertainty regarding their ability to rely upon federal preemption of
state usury laws in those three states; in addition, a number of market
participants, including, potentially, the Fund purchase loans from
state-chartered banks promptly after origination and may seek to rely upon
federal preemption to exempt the loans from state usury caps. The decision,
although directly ruling on purchasers of national bank loans, could be applied
by courts considering the scope of federal preemption under the Depository
Institutions Deregulation and Monetary Control Act of 1980 (which generally
preempts state usury laws in favor of federally insured state-chartered banks)
with respect to loans originated by state-chartered banks.
The Second Circuit's decision appears to be contrary to other federal
circuit court decisions and inconsistent with longstanding commercial practice.
Although the decision was appealed to the U.S. Supreme Court, the Court declined
to consider it, leaving in place the Second Circuit's ruling. In February 2017,
in further action following remand from the Second Circuit, the U.S. District
Court ruled that the choice of law provision, which selected Delaware rather
than New York law, would not be enforced and that New York law should be applied
for determining the applicable usury ceiling. The claims based on usury were
also dismissed. The impact of the case is uncertain because the case ultimately
settled in September 2019 without further action, and the Supreme Court could
ultimately disagree with the ruling in a different case. In addition, the
holding could be overturned, distinguished or otherwise limited by the
subsequent litigation on similar issues in other cases in the Second Circuit. If
the decision in this case were applied to lending activity more broadly, it is
possible that certain loans made to borrowers in Connecticut, New York and
Vermont by originating banks at interest rates in excess of the local usury
ceiling could be in jeopardy if assigned to a non-bank assignee if the ruling in
this case is applied to them. As a result, if the Fund purchases or holds such
loans (directly or indirectly) and litigation is brought to challenge their
enforceability on similar grounds as this case, the Fund could suffer
significant losses. Moreover, if the ruling in this case is applied in other
jurisdictions, the enforceability of loans made through originating banks at
interest rates in excess of a local usury ceiling may also be in jeopardy and
the Fund could suffer losses if it purchases or holds such loans.
The Colorado Attorney General has filed two actions against online lenders
alleging that non-banks were collecting interest and fees in excess of the
Colorado usury laws. Motions to dismiss have been filed in the case which are
awaiting decision. However, in a recent bankruptcy proceeding in Colorado, a
federal judge rejected the holding in the above-referenced Second Circuit case
and found that the high interest rate on a promissory note of a bank to a
commercial borrower remained valid in the hands of a non-bank assignee. The
debtor has appealed the decision to the District Court including theories based
on such Second Circuit court decision. The Federal Deposit Insurance Corporation
(the "FDIC") and the Office of the Comptroller of the Currency (the "OCC") filed
a joint amicus brief in the action challenging the Second Circuit court opinion
stating that the court failed to consider the long standing legal principle that
a loan that is valid when made does not become usurious when it is assigned and
that not being able to engage in assignments of loans could lead to economic
disruptions and negative consequences. The agencies also state that inherent in
federal law is the right to assign loans and that failure to enforce contractual
terms would significantly interfere with a bank's powers.
37
On November 18, 2019, the OCC issued a Notice of Proposed Rulemaking and,
on November 19, 2019, the FDIC also issued a Notice of Proposed Rulemaking under
their interest rate authority to codify in the Code of Federal Regulations the
"valid when made" doctrine affirming that the interest rate on loans is not
subject to change when a loan is sold, assigned or otherwise transferred. The
public comment period has ended for both proposals. If codified, the regulations
would serve as authority contrary to the aforementioned Second Circuit court
decision and courts would need to consider deference to those regulations of the
federal banking regulators.
In addition, loans and certain other forms of direct indebtedness may not
be classified as "securities" under the federal securities laws and, therefore,
when the Fund purchases such instruments, it may not be entitled to the
protections against fraud and misrepresentation contained in the federal
securities laws.
SECOND LIEN LOAN RISK
A second lien loan may have a claim on the same collateral pool as the
first lien or it may be secured by a separate set of assets. Second lien loans
are typically secured by a second priority security interest or lien to or on
specified collateral securing the borrower's obligation under the interest.
Because second lien loans are second to first lien loans, they present a greater
degree of investment risk. Specifically, these loans are subject to the
additional risk that the cash flow of the borrower and property securing the
loan may be insufficient to meet scheduled payments after giving effect to those
loans with a higher priority. In addition, loans that have a lower than first
lien priority on collateral of the borrower generally have greater price
volatility than those loans with a higher priority and may be less liquid.
However, second lien loans often pay interest at higher rates than first lien
loans reflecting such additional risks.
Second lien loans generally give investors priority over general unsecured
creditors in the event of an asset sale. The priority of the collateral claims
of third or lower lien loans ranks below holders of second lien loans and so on.
Such junior loans are subject to the same general risks inherent to any loan
investment, including credit risk, market and liquidity risk, and interest rate
risk. Due to their lower place in the borrower's capital structure and possible
unsecured or partially secured status, such loans involve a higher degree of
overall risk than first lien loans, since cash flow of the borrower and property
securing the loan, if any, may be insufficient to meet scheduled payments after
giving effect to higher priority secured obligations of the borrower. Second
lien loans also share the same risks of other below investment grade debt
instruments. See "--Credit and Below Investment Grade Securities Risk."
LIBOR RISK
The terms of many investments, financings or other transactions to which
the Fund may be a party have been historically tied to the London Interbank
Offered Rate, or "LIBOR." LIBOR is the offered rate at which major international
banks can obtain wholesale, unsecured funding, and LIBOR may be available for
different durations (e.g., 1 month or 3 months) and for different currencies.
LIBOR may be a significant factor in determining the Fund's payment obligations
under a derivative investment, the cost of financing to the Fund or an
investment's value or return to the Fund, and may be used in other ways that
affect the Fund's investment performance. In July 2017, the Financial Conduct
Authority, the United Kingdom's financial regulatory body, announced that after
2021 it will cease its active encouragement of banks to provide the quotations
needed to sustain LIBOR. That announcement suggests that LIBOR may cease to be
published after that time. Various financial industry groups have begun planning
for that transition, but there are obstacles to converting certain securities
and transactions to a new benchmark. Transition planning is at an early stage,
and neither the effect of the transition process nor its ultimate success can
yet be known. The transition process might lead to increased volatility and
illiquidity in markets for instruments whose terms currently include LIBOR. It
could also lead to a reduction in the value of some LIBOR-based investments and
reduce the effectiveness of new hedges placed against existing LIBOR-based
investments. While some LIBOR-based instruments may contemplate a scenario where
LIBOR is no longer available by providing for an alternative rate-setting
methodology and/or increased costs for certain LIBOR-related instruments or
financing transactions, not all may have such provisions and there may be
significant uncertainty regarding the effectiveness of any such alternative
methodologies, resulting in prolonged adverse market conditions for the Fund.
Since the usefulness of LIBOR as a benchmark could deteriorate during the
transition period, these effects could occur prior to the end of 2021. There
also remains uncertainty and risk regarding the willingness and ability of
issuers to include enhanced provisions in new and existing contracts or
instruments.
Alternatives to LIBOR are established or in development in most major
currencies, including the Secured Overnight Financing Rate, which is intended
to replace U.S. dollar LIBOR. Markets are slowly developing in response to these
new rates. Questions around liquidity impacted by these rates, and how to
appropriately adjust these rates at the time of transition, remain a concern.
All of the aforementioned may adversely affect the Fund's performance or NAV.
It is difficult to predict the full impact of the transition away from LIBOR on
the Fund or its investments.
38
LENDER LIABILITY RISK
A number of U.S. judicial decisions have upheld judgments of borrowers
against lending institutions on the basis of various evolving legal theories,
collectively termed "lender liability." Generally, lender liability is founded
on the premise that a lender has violated a duty (whether implied or
contractual) of good faith, commercial reasonableness and fair dealing, or a
similar duty owed to the borrower or has assumed an excessive degree of control
over the borrower resulting in the creation of a fiduciary duty owed to the
borrower or its other creditors or shareholders. Because of the nature of its
investments, the Fund may be subject to allegations of lender liability.
In addition, under common law principles that in some cases form the basis
for lender liability claims, if a lender (i) intentionally takes an action that
results in the undercapitalization of a borrower to the detriment of other
creditors of such borrower; (ii) engages in inequitable conduct to the detriment
of the other creditors; (iii) engages in fraud with respect to, or makes
misrepresentations to, the other creditors; or (iv) uses its influence as a
stockholder to dominate or control a borrower to the detriment of other
creditors of the borrower, a court may elect to subordinate the claim of the
offending lender to the claims of the disadvantaged creditor or creditors, a
remedy called "equitable subordination." Because affiliates of, or persons
related to, the Advisor may hold equity or other interests in obligors of the
Fund, the Fund could be exposed to claims for equitable subordination or lender
liability or both based on such equity or other holdings.
DEFAULTED AND DISTRESSED SECURITIES RISK
The Fund may invest in securities that may be in default or
distressed--i.e., securities of companies whose financial condition is troubled
or uncertain and that may be involved in bankruptcy proceedings, reorganizations
or financial restructurings. Distressed securities present a substantial risk of
future default which may cause the Fund to incur losses, including additional
expenses, to the extent it is required to seek recovery upon a default in the
payment of principal or interest on those securities. In any reorganization or
liquidation proceeding relating to a portfolio security, the Fund may lose its
entire investment or may be required to accept cash or securities with a value
less than its original investment.
The Fund may be required to incur certain extraordinary expenses in order
to protect and recover its investment on defaulted or distressed securities. The
Fund also will be subject to significant uncertainty as to when and in what
manner and for what value the obligations evidenced by the defaulted or
distressed securities will eventually be satisfied (e.g., through a liquidation
of the obligor's assets, an exchange offer or plan of reorganization involving
the defaulted or distressed securities or a payment of some amount in
satisfaction of the obligation). In addition, even if an exchange offer is made
or a plan of reorganization is adopted with respect to defaulted or distressed
securities held by the Fund, there can be no assurance that the securities or
other assets received by the Fund in connection with such exchange offer or plan
of reorganization will not have a lower value or income potential than may have
been anticipated when the investment was made. Moreover, any securities received
by the Fund upon completion of an exchange offer or plan of reorganization may
be restricted as to resale. As a result of the Fund's participation in
negotiations with respect to any exchange offer or plan of reorganization with
respect to an issuer of defaulted or distressed securities, the Fund may be
restricted from disposing of such securities.
The Fund may invest in loans of borrowers that are experiencing, or are
likely to experience, financial difficulty. These loans are subject to greater
credit and liquidity risks than other types of loans. In addition, the Fund can
invest in loans of borrowers that have filed for bankruptcy protection or that
have had involuntary bankruptcy petitions filed against them by creditors.
Various laws enacted for the protection of debtors may apply to loans. A
bankruptcy proceeding or other court proceeding could delay or limit the ability
of the Fund to collect the principal and interest payments on that borrower's
loans or adversely affect the Fund's rights in collateral relating to a loan. If
a lawsuit is brought by creditors of a borrower under a loan, a court or a
trustee in bankruptcy could take certain actions that would be adverse to the
Fund. For example:
o Other creditors might convince the court to set aside a loan or
the collateralization of the loan as a "fraudulent conveyance" or
"preferential transfer." In that event, the court could recover
from the Fund the interest and principal payments that the
borrower made before becoming insolvent. There can be no assurance
that the Fund would be able to prevent that recapture.
o A bankruptcy court may restructure the payment obligations under
the loan so as to reduce the amount to which the Fund would be
entitled.
o The court might discharge the amount of the loan that exceeds the
value of the collateral.
o The court could subordinate the Fund's rights to the rights of
other creditors of the borrower under applicable law, decreasing,
potentially significantly, the likelihood of any recovery on the
Fund's investment.
39
LEVERAGE RISK
Any senior securities issued by the Fund will have seniority over the
Common Shares and may be secured by the assets of the Fund. The use of leverage
by the Fund can magnify the effect of any losses. If the income and gains earned
on the securities and investments purchased with leverage proceeds are greater
than the cost of the leverage, the Common Shares' return will be greater than if
leverage had not been used. Conversely, if the income and gains from the
securities and investments purchased with such proceeds do not cover the cost of
leverage, the return to the Common Shares will be less than if leverage had not
been used. Leverage involves risks and special considerations for Common
Shareholders including:
o the likelihood of greater volatility of NAV and market price of
the Common Shares than a comparable portfolio without leverage;
o the risk that fluctuations in interest rates on borrowings and
other associated costs of leverage will reduce the return to the
Common Shareholders or will result in fluctuations in the
dividends paid on the Common Shares;
o the effect of leverage in a declining market, which is likely to
cause a greater decline in the NAV of the Common Shares than if
the Fund were not leveraged, which may result in a greater decline
in the market price of the Common Shares; and
o when the Fund uses certain types of leverage, the investment
advisory fee payable to the Advisor will be higher than if the
Fund did not use leverage.
There is no assurance that a leveraging strategy will be successful. The
Fund may continue to use leverage if the benefits to the Fund's Common
Shareholders of maintaining the leveraged position are believed to outweigh any
current reduced return.
The funds borrowed pursuant to a leverage borrowing program (such as a
credit line), or obtained through the issuance of Preferred Shares, constitute a
substantial lien and burden by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of Common Shareholders and the holders of Preferred Shares with respect
to the payment of dividends or upon liquidation. The Fund may not be permitted
to declare dividends or other distributions, including dividends and
distributions with respect to Common Shares or Preferred Shares, or purchase
Common Shares or Preferred Shares, unless at the time thereof the Fund meets
certain asset coverage requirements and no event of default exists under any
leverage program. In addition, the Fund may not be permitted to pay dividends on
Common Shares unless all dividends on the Preferred Shares and/or accrued
interest on borrowings have been paid, or set aside for payment. In an event of
default under a leverage borrowing program, the lenders may have the right to
cause a liquidation of collateral (i.e., sell securities and other assets of the
Fund) and, if any such default is not cured, the lenders may be able to control
the liquidation as well. Certain types of leverage may result in the Fund being
subject to covenants relating to asset coverage and Fund composition
requirements. Generally, covenants to which the Fund may be subject include
affirmative covenants, negative covenants, financial covenants, and investment
covenants. See "Use of Leverage."
The Fund also may be subject to certain restrictions on investments
imposed by guidelines of one or more rating agencies, which may issue ratings
for the Preferred Shares or other senior securities issued by the Fund. These
guidelines may impose asset coverage or Fund composition requirements that are
more stringent than those imposed by the 1940 Act.
While the Fund may from time to time consider reducing leverage in
response to actual or anticipated changes in interest rates in an effort to
mitigate the increased volatility of current income and NAV associated with
leverage, there can be no assurance that the Fund will actually reduce leverage
in the future or that any reduction, if undertaken, will benefit the Common
Shareholders. Changes in the future direction of interest rates are very
difficult to predict accurately. If the Fund were to reduce leverage based on a
prediction about future changes to interest rates, and that prediction turned
out to be incorrect, the reduction in leverage would likely operate to reduce
the income and/or total returns to Common Shareholders relative to the
circumstance if the Fund had not reduced leverage. The Fund may decide that this
risk outweighs the likelihood of achieving the desired reduction to volatility
in income and Common Share price if the prediction were to turn out to be
correct, and determine not to reduce leverage as described above.
NON-U.S. SECURITIES RISK
The Fund may invest a portion of its assets in securities of non-U.S.
issuers. Investing in securities of non-U.S. issuers, which are generally
denominated in non-U.S. currencies, may involve certain risks not typically
associated with investing in securities of U.S. issuers. These risks include:
(i) there may be less publicly available information about non-U.S. issuers or
markets due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) non-U.S. markets may be smaller, less liquid and more volatile
than the U.S. market; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of non-U.S. countries may grow at slower rates than expected or
may experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain non-U.S. countries may impose
restrictions on the ability of non-U.S. issuers to make payments of principal
and interest to investors located in the United States due to blockage of
40
non-U.S. currency exchanges or otherwise; and (vii) withholding and other
non-U.S. taxes may decrease the Fund's return. Foreign companies are generally
not subject to the same accounting, auditing and financial reporting standards
as are U.S. companies. In addition, there may be difficulty in obtaining or
enforcing a court judgment abroad.
Loans involving foreign borrowers may involve risks not ordinarily
associated with exposure to loans to U.S. entities and individuals. The foreign
lending industry may be subject to less governmental supervision and regulation
than exists in the U.S.; conversely, foreign regulatory regimes applicable to
the lending industry may be more complex and more restrictive than those in the
U.S., resulting in higher costs associated with such investments, and such
regulatory regimes may be subject to interpretation or change without prior
notice to investors, such as the Fund. Foreign lending may not be subject to
accounting, auditing, and financial reporting standards and practices comparable
to those in the U.S. Due to differences in legal systems, there may be
difficulty in obtaining or enforcing a court judgment outside the U.S. For
example, bankruptcy laws may differ across the jurisdictions in which the Fund
may invest and it may be difficult for a servicer to pursue non-U.S. borrowers.
In addition, to the extent that investments are made in a limited number of
countries, events in those countries will have a more significant impact on the
Fund. Loans to foreign entities and individuals may be subject to risks of
increased transaction costs, potential delays in settlement or unfavorable
differences between the U.S. economy and foreign economies.
EMERGING MARKETS RISK
Investing in emerging market countries, as compared to foreign developed
markets, involves substantial additional risk due to more limited information
about the issuer and/or the security (including limited financial and accounting
information); higher brokerage costs; different accounting, auditing and
financial reporting standards; less developed legal systems and thinner trading
markets; the possibility of currency blockages or transfer restrictions; an
emerging market country's dependence on revenue from particular commodities or
international aid; and the risk of expropriation, nationalization or other
adverse political or economic developments.
Emerging market countries may lack the social, political and economic
stability and characteristics of more developed countries, and their political
and economic structures may undergo unpredictable, significant and rapid changes
from time to time, any of which could adversely impact the value of investments
in emerging markets as well as the availability of additional investments in
such markets. Some of these countries have in the past failed to recognize
private property rights and have at times nationalized or expropriated the
assets of private companies. The securities markets of emerging market countries
may be substantially smaller, less developed, less liquid and more volatile than
the major securities markets in the United States and other developed nations,
and the Fund may be required to establish special custodial or other
arrangements before transacting in securities traded in emerging markets. The
limited size of these securities markets and the limited trading volume of
securities issued by emerging market issuers could cause prices to be erratic
and investments in emerging markets can become illiquid. As a result of the
foregoing risks, it may be difficult to assess the value or prospects of an
investment in such securities.
In addition, emerging market countries' exchanges and broker-dealers may
generally be subject to less regulation than their counterparts in developed
countries. Brokerage commissions and dealer mark-ups, custodial expenses and
other transaction costs are generally higher in emerging market countries than
in developed countries. As a result, funds that invest in emerging market
countries may have operating expenses that are higher than funds investing in
other securities markets. Emerging market countries also may have different
clearance and settlement procedures than in the U.S., including significantly
longer settlement cycles for purchases and sales of securities, and in certain
markets there may be times when settlements fail to keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Further, satisfactory custodial services for investment securities may not be
available in some emerging market countries, which may result in the Fund
incurring additional costs and delays in transporting and custodying such
securities outside such countries. Delays in settlement or other problems could
result in periods when the Fund's assets are uninvested and no return is earned
thereon. The Fund's inability to make intended security purchases due to
settlement problems or the risk of intermediary counterparty failures could
cause the Fund to miss attractive investment opportunities. The inability to
dispose of a portfolio security due to settlement problems could result either
in losses to the Fund due to subsequent declines in the value of such portfolio
security or, if the Fund has entered into a contract to sell the security, could
result in possible liability to the purchaser.
The currencies of certain emerging market countries have experienced
devaluations relative to the U.S. dollar, and future devaluations may adversely
affect the value of assets denominated in such currencies. Many emerging market
countries have experienced substantial, and in some periods extremely high,
rates of inflation or deflation for many years, and future inflation may
adversely affect the economies and securities markets of such countries. When
debt and similar obligations issued by foreign issuers are denominated in a
currency (e.g., the U.S. dollar or the Euro) other than the local currency of
the issuer, the subsequent strengthening of the non-local currency against the
local currency will generally increase the burden of repayment on the issuer and
may increase significantly the risk of default by the issuer. Emerging market
countries have and may in the future impose capital controls, foreign currency
controls and repatriation controls. In addition, some currency hedging
techniques may be unavailable in emerging market countries, and the currencies
of emerging market countries may experience greater volatility in exchange rates
as compared to those of developed countries.
41
FOREIGN CURRENCY RISK
Currency risk is the risk that fluctuations in exchange rates may
adversely affect the value of the Fund's investments. Currency exchange rates
fluctuate significantly for many reasons, including changes in supply and demand
in the currency exchange markets, actual or perceived changes in interest rates,
intervention (or the failure to intervene) by U.S. or foreign governments,
central banks, or supranational agencies such as the International Monetary
Fund, and currency controls or other political and economic developments in the
U.S. or abroad.
COMMON STOCK AND WARRANTS RISK
The Fund may hold common stocks and warrants to purchase common stocks.
Common stocks and warrants have a subordinate claim on an issuer's assets as
compared with debt securities. An adverse event, such as an unfavorable earnings
report, may depress the value of a particular common stock or warrant held by
the Fund. In addition, the prices of common stocks and warrants are sensitive to
general movements in the stock market, and a drop in the stock market may
depress the prices of common stocks and warrants to which the Fund has exposure.
Common stock and warrant prices fluctuate for several reasons including changes
in investors' perceptions of the financial condition of an issuer or the general
condition of the relevant stock market, or rising interest rates, as the cost of
capital rises and borrowing costs increase. The value of the common stocks and
warrants in which the Fund may invest will be affected by changes in the stock
markets generally, which may be the result of domestic or international
political or economic news, changes in interest rates or changing investor
sentiment. At times, stock markets can be volatile and stock prices can change
substantially. The common stocks and warrants of smaller companies are more
sensitive to these changes than those of larger companies. Common stock and
warrant risk will affect the Fund's NAV per share, which will fluctuate as the
value of the securities held by the Fund changes.
LIQUIDITY RISK
Liquidity risk is the risk that the Fund may invest in securities that
trade in lower volumes and may be less liquid than other investments or that the
Fund's investments may become less liquid in response to market developments or
adverse investor perceptions. Illiquidity may be the result of, for example, low
trading volumes, lack of a market maker, or contractual or legal restrictions
that limit or prevent the Fund from selling securities or closing positions.
When there is no willing buyer and investments cannot be readily sold or closed
out, the Fund may have to sell an investment at a lower price than the price at
which the Fund is carrying the investments or may not be able to sell the
investments at all, each of which would have a negative effect on the Fund's
performance and may cause the Fund to hold an investment longer than the Advisor
would otherwise determine. It is possible that the Fund may be unable to sell a
portfolio investment at a desirable time or at the value the Fund has placed on
the investment or that the Fund may be forced to sell large amounts of
securities more quickly than it normally would in the ordinary course of
business. In such a case, the sale proceeds received by the Fund may be
substantially less than if the Fund had been able to sell the securities in
more-orderly transactions, and the sale price may be substantially lower than
the price previously used by the Fund to value the securities for purposes of
determining the Fund's NAV. In addition, if the Fund sells investments with
extended settlement times (e.g., Senior Loans), the settlement proceeds from the
sales will not be available to the Fund for a substantial period of time. The
Fund may be forced to sell other investment positions with shorter settlement
cycles when the Fund would not otherwise have done so, which may adversely
affect the Fund's performance. Additionally, the market for certain investments
may become illiquid under adverse market or economic conditions (e.g., if
interest rates rise or fall significantly, if there is significant inflation or
deflation, increased selling of debt securities generally across other funds,
pools and accounts, changes in investor perception, or changes in government
intervention in the financial markets) independent of any specific adverse
changes in the conditions of a particular issuer. In such cases, shares of the
Fund, due to the difficulty in purchasing and selling such securities or
instruments, may decline in value or the Fund may be unable to achieve its
desired level of exposure to a certain issuer or sector. During periods of
substantial market disruption, a large portion of the Fund's assets could
potentially experience significant levels of illiquidity. The values of illiquid
investments are often more volatile than the values of more liquid investments.
It may be more difficult for the Fund to determine a fair value of an illiquid
investment than those of more liquid comparable investments. Bond markets have
consistently grown over the past three decades while the growth of capacity for
traditional dealer counterparties to engage in fixed income trading has not kept
pace and in some cases has decreased. As a result, dealer inventories of certain
types of bonds and similar instruments, which provide a core indication of the
ability of financial intermediaries to "make markets," are at or near historic
lows in relation to market size. Because market makers provide stability to a
market through their intermediary services, the significant reduction in dealer
inventories could potentially lead to decreased liquidity and increased
volatility in the fixed income markets. Such issues may be exacerbated during
periods of economic uncertainty.
RISKS OF INVESTING IN DERIVATIVE TRANSACTIONS
Investing in derivative transactions has risks, including the imperfect
correlation between the value of such instruments and the underlying asset, rate
or index, which creates the possibility that the loss on such instruments may be
greater than the gain in the value of the underlying asset, rate or index; the
loss of principal; the possible default of the other party to the transaction;
and illiquidity of the derivative investments. If a counterparty becomes
bankrupt or otherwise fails to perform its obligations under a derivative
42
contract due to financial difficulties, the Fund may experience significant
delays in obtaining any recovery under the derivative contract in a bankruptcy
or other reorganization proceeding, or may not recover at all. In addition, in
the event of the insolvency of a counterparty to a derivative transaction, the
derivative contract would typically be terminated at its fair market value. If
the Fund is owed this fair market value in the termination of the derivative
contract and its claim is unsecured, the Fund will be treated as a general
creditor of such counterparty, and will not have any claim with respect to the
underlying security. Certain of the derivative investments in which the Fund may
invest may, in certain circumstances, give rise to a form of financial leverage,
which may magnify the risk of owning such instruments. The ability to
successfully use derivative investments depends on the ability of the Advisor to
predict pertinent market movements, which cannot be assured. In addition,
amounts paid by the Fund as premiums and cash or other assets held in margin
accounts with respect to the Fund's derivative investments would not be
available to the Fund for other investment purposes, which may result in lost
opportunities for gain.
The SEC recently re-proposed rules governing the use of derivatives by
registered investment companies, which could affect the nature and extent of
derivatives used by the Fund. Such rules have not yet been adopted and therefore
the full extent of the rules and their ultimate impact on the Fund is uncertain
at this time.
SWAPS RISK
A swap contract is an agreement between two parties pursuant to which the
parties exchange payments at specified dates on the basis of a specified
notional amount, with the payments calculated by reference to specified
securities, indexes, reference rates, currencies or other instruments. Most swap
agreements provide that when the period payment dates for both parties are the
same, the payments are made on a net basis (i.e., the two payment streams are
netted out, with only the net amount paid by one party to the other). The Fund's
obligations or rights under a swap contract entered into on a net basis will
generally be equal only to the net amount to be paid or received under the
agreement, based on the relative values of the positions held by each
counterparty. Swap agreements are particularly subject to counterparty credit,
liquidity, valuation, correlation and leverage risk. Certain standardized swaps
are now subject to mandatory central clearing requirements and others are now
required to be exchange-traded. While central clearing and exchange-trading are
intended to reduce counterparty and liquidity risk, they do not make swap
transactions risk-free. Swaps could result in losses if interest rate or foreign
currency exchange rates or credit quality changes are not correctly anticipated
by the Fund or if the reference index, security or investments do not perform as
expected.
TOTAL RETURN SWAPS RISK
Total return swaps are contracts in which one party agrees to make
payments of the total return from the underlying asset(s), which may include
securities, derivatives or indices, during the specified period in return for
payments equal to a fixed or floating rate of interest or the total return from
other underlying asset(s). The Fund anticipates that, under its total return
swaps, if any, it will pay the counterparty a regular, set payment at an agreed
rate of return and, in return, will receive a payment which is equal to the
performance of the underlying assets. Total return swaps are subject to the risk
that a counterparty will default on its payment obligations. In the event that
the performance of the relevant assets is less than the agreed rate, the Fund
will be required to make further payments to the total return swap counterparty
in respect of such shortfalls. The Fund will not be able to replicate exactly
the performance of the relevant underlying assets because the total return
generated by the Fund's investment in a total return swap will be reduced by
certain costs and expenses. In addition, total return swaps may effectively add
leverage to the Fund's portfolio because the Fund would be subject to investment
exposure on the full notional amount of the swap. See "--Leverage Risk."
CREDIT DEFAULT SWAPS RISK
The "buyer" in a credit default contract is obligated to pay the "seller"
a periodic stream of payments over the term of the contract, provided that no
event of default on an underlying reference obligation has occurred. If an event
of default occurs, the seller must pay the buyer the full notional value, or
"par value," of the reference obligation through either physical settlement or
cash settlement. The Fund may be either the buyer or seller in a credit default
swap transaction. If the Fund is a buyer and no event of default occurs, the
Fund will have made a series of periodic payments and recover nothing of
monetary value. However, if an event of default occurs, the Fund (if the buyer)
will receive the full notional value of the reference obligation through a cash
payment in exchange for the asset or, alternatively, a cash payment representing
the difference between the expected recovery rate and the full notional value.
As a seller, the Fund receives a fixed rate of income throughout the term of the
contract, which typically is between six months and five years, provided that
there is no event of default. The sale of a credit default swap effectively
creates leverage and subjects the Fund to the risks described under "--Leverage
Risk." The Fund currently intends to segregate assets on the Fund's records in
the form of cash, cash equivalents or liquid securities in an amount equal to
the notional value of the credit default swaps of which it is the seller. If
such assets are not fully segregated by the Fund, the use of credit default swap
transactions could then be considered leverage for purposes of the 1940 Act.
Asset segregation affects the regulatory treatment but does not diminish the
effective leverage in such instruments. Credit default swap transactions involve
greater risks than if the Fund had invested in the reference obligation
directly. In addition to general market risk, credit default swaps are subject
to illiquidity risk, counterparty risk and credit risk.
43
UNRATED SECURITIES RISK
Unrated securities (which are not rated by a rating agency) may be less
liquid than comparable rated securities and involve the risk that the Advisor
may not accurately evaluate the security's comparative credit rating and value.
To the extent that the Fund invests in unrated securities, the Fund's success in
achieving its investment objective may depend more heavily on the
creditworthiness analysis by the Advisor than if the Fund invested exclusively
in rated securities. Some or all of the unrated instruments in which the Fund
may invest will involve credit risk comparable to or greater than that of rated
debt securities of below investment grade quality.
VALUATION RISK
When market quotations are not readily available or are deemed to be
unreliable, the Fund values its investments at fair value as determined in good
faith pursuant to policies and procedures approved by the Board of Trustees. See
"Net Asset Value." Fair value pricing may require subjective determinations
about the value of a security or other asset. As a result, there can be no
assurance that fair value pricing will result in adjustments to the prices of
securities or other assets, or that fair value pricing will reflect actual
market value, and it is possible that the fair value determined for a security
or other asset will be materially different from quoted or published prices,
from the prices used by others for the same security or other asset and/or from
the value that actually could be or is realized upon the sale of that security
or other asset.
MARKET DISRUPTION AND GEOPOLITICAL RISK
Various market risks can affect the price or liquidity of an issuer's
securities in which the Fund may invest. Returns from the securities in which
the Fund invests may underperform returns from the various general securities
markets. Different types of securities tend to go through cycles of
outperformance and underperformance in comparison to the general securities
markets. Adverse events occurring with respect to an issuer's performance or
financial position can depress the value of the issuer's securities. The
liquidity in a market for a particular security will affect its value and may be
affected by factors relating to the issuer, as well as the depth of the market
for that security. Other market risks that can affect value include a market's
current attitudes about types of securities, market reactions to political or
economic events, including litigation, and tax and regulatory effects (including
lack of adequate regulations for a market or particular type of instrument).
During periods of severe market stress, it is possible that the market for
certain investments held by the Fund, such as high yield bonds and loans, may
become highly illiquid. In such an event, the Fund may find it difficult to sell
the investments it holds, and, for those investments it is able to sell in such
circumstances, the sale price may be significantly lower than, and the trade
settlement period may be longer than, anticipated.
Markets may, in response to governmental actions or intervention,
political, economic or market developments, or other external factors,
experience periods of high volatility and reduced liquidity. During those
periods, the Fund may have to sell securities at times when it would otherwise
not do so, and potentially at unfavorable prices. Securities may be difficult to
value during such periods. These risks may be heightened for fixed income
securities due to the current low interest rate environment.
The United States and other governments and the Federal Reserve and
certain foreign central banks have taken steps to support financial markets. For
example, governmental financial regulators, including the U.S. Federal Reserve,
have taken steps to maintain historically low interest rates, such as by
purchasing bonds. Steps by those regulators, including, for example, steps to
reverse, withdraw, curtail or taper such activities, could have a material
adverse effect on prices for the Fund's portfolio of investments and on the
management of the Fund. The withdrawal of support, failure of efforts in
response to a financial crisis, or investor perception that those efforts are
not succeeding could negatively affect financial markets generally as well as
the values and liquidity of certain securities. Federal, state, and other
governments, their regulatory agencies, or self-regulatory organizations may
take actions that affect the regulation of the securities in which the Fund
invests or the issuers of such securities in ways that are unforeseeable.
Legislation or regulation also may change the way in which the Fund or the
Advisor are regulated. Such legislation, regulation, or other government action
could limit or preclude the Fund's ability to achieve its investment objective
and affect the Fund's performance.
Political, social or financial instability, civil unrest and acts of
terrorism are other potential risks that could adversely affect an investment in
a security or in markets or issuers generally. In addition, political
developments in foreign countries or the United States may at times subject such
countries to sanctions from the U.S. government, foreign governments and/or
international institutions that could negatively affect the Fund's investments
in issuers located in, doing business in or with assets in such countries.
44
Global economies and financial markets are also becoming increasingly
interconnected, which increases the possibilities that conditions in one country
or region might adversely impact issuers in a different country or region.
CREDIT RATING AGENCY RISK
Credit ratings are determined by credit rating agencies such as S&P,
Moody's and Fitch, and are only the opinions of such entities. Ratings assigned
by a rating agency are not absolute standards of credit quality and do not
evaluate market risk or the liquidity of securities. Any shortcomings or
inefficiencies in credit rating agencies' processes for determining credit
ratings may adversely affect the credit ratings of securities held by the Fund
and, as a result, may adversely affect those securities' perceived or actual
credit risk.
SENIOR LOAN AGENT RISK
Senior Loans generally are negotiated between a borrower and several
financial institution lenders represented by one or more lenders acting as agent
of all the lenders. A financial institution's employment as an agent under a
Senior Loan might be terminated in the event that it fails to observe a
requisite standard of care or becomes insolvent. A successor agent would
generally be appointed to replace the terminated agent, and assets held by the
agent under the loan agreement would likely remain available to holders of such
indebtedness. However, if assets held by the terminated agent for the benefit of
the Fund were determined to be subject to the claims of the agent's general
creditors, the Fund might incur certain costs and delays in realizing payment on
a Senior Loan or loan participation and could suffer a loss of principal and/or
interest. In situations involving other interposed financial institutions (e.g.,
an insurance company or government agency), similar risks may arise.
INFLATION/DEFLATION RISK
Inflation risk is the risk that the value of assets or income from
investments will be worth less in the future as inflation decreases the value of
money. As inflation increases, the real value of the Common Shares and
distributions can decline. In addition, during any periods of rising inflation,
the dividend rates or borrowing costs associated with the Fund's use of leverage
would likely increase, which would tend to further reduce returns to Common
Shareholders. Deflation risk is the risk that prices throughout the economy
decline over time--the opposite of inflation. Deflation may have an adverse
effect on the creditworthiness of issuers and may make issuer defaults more
likely, which may result in a decline in the value of the Fund's portfolio.
DURATION RISK
Duration is the sensitivity, expressed in years, of the price of a fixed
income security to changes in the general level of interest rates (or yields).
Securities with longer durations tend to be more sensitive to interest rate (or
yield) changes than securities with shorter durations. In general, each year of
duration represents an expected 1% change in the value for every 1% immediate
change in interest rates (or yields). For example, if a portfolio of debt
securities has an average duration of three years, its value can be expected to
fall about 3% if interest rates (or yields) rise by 1%. Conversely, the
portfolio's value can be expected to rise about 3% if interest rates (or yields)
fall by 1%. As the value of a security changes over time, so will its duration.
Duration differs from maturity in that it considers potential changes to
interest rates, and a security's coupon payments, yield, price and par value and
call features, in addition to the amount of time until the security matures. The
duration of a security will be expected to change over time with changes in
market factors and time to maturity.
ILLIQUID/RESTRICTED SECURITIES RISK
The Fund may invest in securities that, at the time of investment, are
illiquid (determined using the SEC's standard applicable to registered
investment companies, i.e., securities that cannot be disposed of by the Fund
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the securities). The Fund may also invest in
restricted securities. Investments in restricted securities could have the
effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase these
securities. Illiquid and restricted securities may be difficult to dispose of at
a fair price at the times when the Fund believes it is desirable to do so. The
market price of illiquid and restricted securities generally is more volatile
than that of more liquid securities, which may adversely affect the price that
the Fund pays for or recovers upon the sale of such securities. Illiquid and
restricted securities are also more difficult to value, especially in
challenging markets. The Advisor's judgment may play a greater role in the
valuation process. Investment of the Fund's assets in illiquid and restricted
securities may restrict the Fund's ability to take advantage of market
opportunities. The risks associated with illiquid and restricted securities may
be particularly acute in situations in which the Fund's operations require cash
and could result in the Fund borrowing to meet its short-term needs or incurring
losses on the sale of illiquid or restricted securities. In order to dispose of
an unregistered security, the Fund, where it has contractual rights to do so,
may have to cause such security to be registered. A considerable period may
elapse between the time the decision is made to sell the security and the time
the security is registered, therefore enabling the Fund to sell it. Contractual
restrictions on the resale of securities vary in length and scope and are
generally the result of a negotiation between the issuer and acquiror of the
securities. In either case, the Fund would bear market risks during that period.
45
POTENTIAL CONFLICTS OF INTEREST RISK
The Advisor and the portfolio managers have interests which may conflict
with the interests of the Fund. In particular, the Advisor advises other
investment funds or accounts with the same or substantially similar investment
objective(s) and strategies as the Fund. As a result, the Advisor and the Fund's
portfolio managers may devote unequal time and attention to the management of
the Fund and those other funds and accounts, and may not be able to formulate as
complete a strategy or identify equally attractive investment opportunities as
might be the case if they were to devote substantially more attention to the
management of the Fund. The Advisor and the Fund's portfolio managers may
identify a limited investment opportunity that may be suitable for multiple
funds and accounts, and the opportunity may be allocated among these several
funds and accounts, which may limit the Fund's ability to take full advantage of
the investment opportunity. Additionally, transaction orders may be aggregated
for multiple accounts for purposes of execution, which may cause the price or
brokerage costs to be less favorable to the Fund than if similar transactions
were not being executed concurrently for other accounts. At times, a portfolio
manager may determine that an investment opportunity may be appropriate for only
some of the funds and accounts for which he or she exercises investment
responsibility, or may decide that certain of the funds and accounts should take
differing positions with respect to a particular security. In these cases, the
portfolio manager may place separate transactions for one or more funds or
accounts which may affect the market price of the security or the execution of
the transaction, or both, to the detriment or benefit of one or more other funds
and accounts. For example, a portfolio manager may determine that it would be in
the interest of another account to sell a security that the Fund holds,
potentially resulting in a decrease in the market value of the security held by
the Fund.
To the extent that the Fund holds interests in an issuer that are
different (or more senior or junior) than, or potentially adverse to, those held
by other accounts managed by the Advisor, the Advisor may be presented with
investment decisions where the outcome would benefit one account and would not
benefit or would harm the other account. This may include, but is not limited
to, an account investing in a different security of an issuer's capital
structure than another account, an account investing in the same security but on
different terms than another account, an account obtaining exposure to an
investment using different types of securities or instruments than another
account, an account engaging in short selling of securities that another account
holds long, an account voting securities in a different manner than another
account, and/or an account acquiring or disposing of its interests at different
times than another account. This could have a material adverse effect on, or in
some instances could benefit, one or more of such accounts, including accounts
that are affiliates of the Advisor, accounts in which the Advisor has an
interest, or accounts which pay the Advisor higher fees or a performance fee.
These transactions or investments by one or more accounts could dilute or
otherwise disadvantage the values, prices, or investment strategies of such
accounts. When the Advisor, on behalf of an account, manages or implements a
portfolio decision ahead of, or contemporaneously with, portfolio decisions of
another account, market impact, liquidity constraints, or other factors could
result in such other account receiving less favorable pricing or trading
results, paying higher transaction costs, or being otherwise disadvantaged. In
addition, in connection with the foregoing, the Advisor, on behalf of an
account, is permitted to pursue or enforce rights or actions, or refrain from
pursuing or enforcing rights or actions, with respect to a particular issuer in
which action could materially adversely affect such other account.
In addition, when the Fund and other accounts hold investments in the same
issuer (including at the same place in the capital structure), the Fund may be
prohibited by applicable law from participating in restructurings, work-outs or
other activities related to its investment in the issuer. As a result, the Fund
may not be permitted by law to make the same investment decisions as other
accounts in the same or similar situations even if the Advisor believes it would
be in the Fund's best economic interests to do so. The Fund may be prohibited by
applicable law from investing in an issuer (or an affiliate) that other accounts
are also investing in or currently invest in even if the Advisor believes it
would be in the best economic interests of the Fund to do so. Furthermore,
entering into certain transactions that are not deemed prohibited by law when
made may potentially lead to a condition that raises regulatory or legal
concerns in the future. In some cases, to avoid the potential of future
prohibited transactions, the Advisor may avoid allocating an investment
opportunity to the Fund that it would otherwise recommend, subject to the
Advisor's then-current allocation policy and any applicable exemptions.
In certain circumstances, the Advisor may be restricted from transacting
in a security or instrument because of material non-public information received
in connection with an investment opportunity that is offered to the Advisor or
an affiliate of the Advisor. In other circumstances, the Advisor will not
participate in an investment opportunity to avoid receiving material non-public
information that would restrict the Advisor from transacting in a security or
instrument. These restrictions may adversely impact the Fund's performance.
The portfolio managers may also engage in cross trades between funds and
accounts, may select brokers or dealers to execute securities transactions based
in part on brokerage and research services provided to the Advisor which may not
benefit all funds and accounts equally and may receive different amounts of
financial or other benefits for managing different funds and accounts. Finally,
the Advisor or its affiliates may provide more services to some types of funds
and accounts than others.
There is no guarantee that the policies and procedures adopted by the
Advisor and the Fund will be able to identify or mitigate the conflicts of
interest that arise between the Fund and any other investment funds or accounts
that the Advisor may manage or advise from time to time. For further information
on potential conflicts of interest, see "Investment Advisor" in the SAI.
46
In addition, while the Fund is using leverage, the amount of the fees paid
to the Advisor for investment advisory and management services are higher than
if the Fund did not use leverage because the fees paid are calculated based on
the Fund's Managed Assets, which include assets purchased with leverage.
Therefore, the Advisor has a financial incentive to leverage the Fund, which may
create a conflict of interest between the Advisor and the Common Shareholders of
the Fund.
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION AND BY-LAWS
The Fund's Declaration and By-Laws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund or convert
the Fund to an open-end fund. These provisions could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over the then-current market price of the Common Shares. See
"Certain Provisions in the Declaration of Trust and By-Laws."
In addition, the Declaration contains provisions governing the bringing of
claims or demands by shareholders against the Fund, including a forum selection
provision and the waiver of jury trials to the fullest extent permitted by law.
These provisions could have the effect of discouraging suits by shareholders or
making them more costly to bring. If a demand is rejected in accordance with the
Declaration, the complaining shareholders will be responsible, jointly and
severally, for the costs and expenses (including attorneys' fees) incurred by
the Fund in connection with the consideration of the demand under a number of
circumstances. In addition, if a court determines that a derivative action was
made without reasonable cause or for an improper purpose, or if a derivative or
direct action is dismissed on the basis of a failure to comply with the
procedural provisions relating to shareholder actions as set forth in the
Declaration, or if a direct action is dismissed by a court for failure to state
a claim, the shareholders bringing the action may be jointly and severally
responsible for the Fund's costs, including attorneys' fees.
The provisions of the Declaration provide that any direct or derivative
action commenced by a shareholder must be brought only in the U.S. District
Court for the District of Massachusetts (Boston Division) or if any such action
may not be brought in that court, then in the Business Litigation Session of
Suffolk Superior Court in Massachusetts (the "Chosen Courts"). Except as
prohibited by applicable law, if a shareholder commences an applicable action in
a court other than a Chosen Court, then such shareholder may be obligated to
reimburse the Fund and any Trustee or officer of the Fund made party to such
proceeding for the costs and expenses (including attorneys' fees) incurred in
connection with any successful motion to dismiss, stay or transfer of the
action. The Declaration also provides that any shareholder bringing an action
against the Fund waives the right to trial by jury to the fullest extent
permitted by law.
The provisions of the Declaration, any By-laws of the Fund, including the
procedures applicable to derivative claims, Chosen Courts, and waiver of jury
trial, and any contract or agreement entered into by the Fund governed by
applicable state law do not affect, waive or limit the rights of any shareholder
with respect to any claims arising under any provision of the 1933 Act, the
Securities Exchange Act of 1934, as amended (the "1934 Act"), or the 1940 Act,
or any rule, regulation or order of the Securities and Exchange Commission
thereunder. The provisions regarding Chosen Courts and waiver of jury trials
limit a shareholder's right to bring claims against the Fund in a court a
shareholder might deem preferable. A court may choose not to enforce these
provisions. See "Certain Provisions in the Declaration of Trust and By-Laws."
OTHER RISKS RELATING TO THE FUND
TECHNOLOGY RISK
As the use of Internet technology has become more prevalent, the Fund and
its service providers and markets generally have become more susceptible to
potential operational risks related to intentional and unintentional events that
may cause the Fund or a service provider to lose proprietary information, suffer
data corruption or lose operational capacity. There can be no guarantee that any
risk management systems established by the Fund, its service providers, or
issuers of the securities in which the Fund invests to reduce technology and
cyber security risks will succeed, and the Fund cannot control such systems put
in place by service providers, issuers or other third parties whose operations
may affect the Fund.
CYBER SECURITY RISK
The Fund and its service providers are susceptible to cyber security risks
that include, among other things, theft, unauthorized monitoring, release,
misuse, loss, destruction or corruption of confidential and highly restricted
data; denial of service attacks; unauthorized access to relevant systems,
compromises to networks or devices that the Fund and its service providers use
to service the Fund's operations; or operational disruption or failures in the
physical infrastructure or operating systems that support the Fund and its
service providers. Cyber-attacks against or security breakdowns of the Fund or
its service providers may adversely impact the Fund and its shareholders,
potentially resulting in, among other things, financial losses; the inability of
Fund shareholders to transact business and the Fund to process transactions;
inability to calculate the Fund's NAV; violations of applicable privacy and
other laws; regulatory fines, penalties, reputational damage, reimbursement or
other compensation costs; and/or additional compliance costs. The Fund may incur
additional costs for cyber security risk management and remediation purposes. In
47
addition, cyber security risks may also impact issuers of securities in which
the Fund invests, which may cause the Fund's investment in such issuers to lose
value. There can be no assurance that the Fund or its service providers will not
suffer losses relating to cyber-attacks or other information security breaches
in the future.
PORTFOLIO TURNOVER RISK
The Fund's annual portfolio turnover rate may vary from year to year, as
well as within a given year. Although the Fund cannot accurately predict its
annual portfolio turnover rate, it is initially anticipated to be between 35%
and 75% under normal circumstances. High portfolio turnover may result in the
realization of net short-term capital gains by the Fund which, when distributed
to Common Shareholders, will be taxable as ordinary income. A high portfolio
turnover may increase the Fund's expenses as well as current and accumulated
earnings and profits, resulting in a greater portion of the Fund's distributions
being treated as a dividend to the Fund's Common Shareholders. However,
portfolio turnover rate is not considered a limiting factor in the execution of
investment decisions for the Fund. See "Federal Tax Matters."
EARNINGS RISK
The Fund's limited term may cause it to invest in lower yielding
securities or hold the proceeds of securities sold near the end of its term in
cash or cash equivalents, which may adversely affect the performance of the Fund
or the Fund's ability to maintain its dividend.
TAX RISKS
The Fund intends to elect to be treated and to qualify each year as a
"regulated investment company" (a "RIC") under the Internal Revenue Code of
1986, as amended (the "Code"). As a RIC, the Fund is not expected to be subject
to U.S. federal income tax to the extent that it distributes its investment
company taxable income and net capital gains. To qualify for the special tax
treatment available to a RIC, the Fund must comply with certain investment,
distribution, and diversification requirements. Under certain circumstances, the
Fund may be forced to sell certain assets when it is not advantageous in order
to meet these requirements, which may reduce the Fund's overall return. If the
Fund fails to meet any of these requirements, subject to the opportunity to cure
such failures under applicable provisions of the Code, the Fund's income would
be subject to a double level of U.S. federal income tax. The Fund's income,
including its net capital gain, would first be subject to U.S. federal income
tax at regular corporate rates, even if such income were distributed to
shareholders and, second, all distributions by the Fund from earnings and
profits, including distributions of net capital gain (if any), would be taxable
to shareholders as dividends. See "Federal Tax Matters."
TEMPORARY DEFENSIVE STRATEGIES RISK
When the Advisor anticipates unusual market or other conditions, the Fund
may temporarily depart from its principal investment strategies as a defensive
measure and invest all or a portion of its Managed Assets in cash or cash
equivalents or accept lower current income from short-term investments rather
than investing in high yielding long-term securities. In such a case, Common
Shareholders of the Fund may be adversely affected and the Fund may not pursue
or achieve its investment objective.
SECONDARY MARKET FOR THE FUND'S COMMON SHARES
The issuance of Common Shares through the Fund's dividend reinvestment
plan may have an adverse effect on the secondary market for the Fund's Common
Shares. The increase in the number of outstanding Common Shares resulting from
issuances pursuant to the Fund's dividend reinvestment plan and the discount to
the market price at which such Common Shares may be issued may put downward
pressure on the market price for the Common Shares. Common Shares will not be
issued pursuant to the dividend reinvestment plan at any time when Common Shares
are trading at a lower price than the Fund's NAV per Common Share. When the
Fund's Common Shares are trading at a premium, the Fund may also issue Common
Shares that may be sold through private transactions effected on the NYSE or
through broker-dealers. The increase in the number of outstanding Common Shares
resulting from these offerings may put downward pressure on the market price for
Common Shares.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
General oversight of the duties performed by the Advisor is the
responsibility of the Board of Trustees. There are five Trustees of the Fund,
one of whom is an "interested person" (as defined in the 1940 Act) and four of
whom are not "interested persons." The names and business addresses of the
Trustees and officers of the Fund and their principal occupations and other
affiliations during the past five years are set forth under "Management of the
Fund" in the SAI.
48
INVESTMENT ADVISOR
First Trust Advisors L.P., 120 East Liberty Drive, Wheaton, Illinois
60187, is the investment adviser to the Fund. First Trust Advisors L.P. serves
as investment adviser or portfolio supervisor to investment portfolios with
approximately $127 billion in assets which it managed or supervised as of April
30, 2020.
First Trust Advisors L.P. will be responsible for the day-to-day
management of the Fund's portfolio, managing the Fund's business affairs and
providing certain clerical, bookkeeping and other administrative services.
First Trust Advisors L.P. is an Illinois limited partnership formed in
1991 and an investment adviser registered with the SEC under the Investment
Advisers Act of 1940, as amended. First Trust Advisors L.P. has one limited
partner, Grace Partners of DuPage L.P. ("Grace Partners"), and one general
partner, The Charger Corporation. Grace Partners is a limited partnership with
one general partner, The Charger Corporation, and a number of limited partners.
Grace Partners' and The Charger Corporation's primary business is investment
advisory and broker-dealer services through their ownership interests. The
Charger Corporation is an Illinois corporation controlled by James A. Bowen,
Chief Executive Officer of the Advisor. First Trust Advisors L.P. is controlled
by Grace Partners and The Charger Corporation.
William Housey, CFA, Senior Portfolio Manager, Orlando Purpura, CFA,
Co-Portfolio Manager, and Jeffrey Scott, CFA, Co-Portfolio Manager, will be
responsible for implementing portfolio management decisions for the Fund.
WILLIAM HOUSEY, CFA -- MANAGING DIRECTOR OF FIXED INCOME, SENIOR PORTFOLIO
MANAGER. Mr. Housey joined First Trust Advisors L.P. in June 2010 as the Senior
Portfolio Manager for the Leveraged Finance Investment Team and has 24 years of
investment experience. Mr. Housey is a Managing Director of Fixed Income and is
also a member of the First Trust Strategic Model Investment Committee and the
Fixed Income Sub-Committee. Prior to joining First Trust, Mr. Housey was at
Morgan Stanley Investment Management and its wholly owned subsidiary, Van Kampen
Funds, Inc., for 11 years where he last served as Executive Director and
Co-Portfolio Manager. Mr. Housey has extensive experience in the portfolio
management of both leveraged and unleveraged credit products, including senior
loans, high yield bonds, credit derivatives and corporate restructurings. Mr.
Housey received a B.S. in Finance from Eastern Illinois University and an M.B.A.
in Finance as well as Management and Strategy from Northwestern University's
Kellogg School of Business. He also holds the FINRA Series 7, Series 52 and
Series 63 licenses. Mr. Housey also holds the Chartered Financial Analyst
designation. He is a member of the CFA Institute and the CFA Society of Chicago.
Mr. Housey also serves on the Village of Glen Ellyn, IL Police Pension Board.
ORLANDO PURPURA, CFA, CMT -- SENIOR VICE PRESIDENT, CHIEF CREDIT OFFICER,
PORTFOLIO MANAGER. Mr. Purpura joined First Trust Advisors L.P. in May 2013 as
Chief Credit Officer and Portfolio Manager for the Leveraged Finance Investment
Team and has 30 years of investment industry experience. Mr. Purpura is also a
member of the First Trust Strategic Model Fixed Income Sub-Committee. Prior to
joining First Trust, Mr. Purpura was at Allstate Investments LLC where he served
as Portfolio Manager in the Equity Special Situations Group that invested in the
public equity of companies in various stages of distress. Additionally, he also
was a Portfolio Manager in the Private Placement Group where he completed
corporate restructurings and workouts for troubled credits held in the
investment portfolio. Prior to Allstate Investments, Mr. Purpura was a founding
partner at Tall Tree Investment Management LLC, an institutional money manager
that focuses on Senior Secured Bank Loans in structured finance vehicles. Before
moving to Tall Tree, Mr. Purpura was a Senior Distressed Debt Analyst and
Workout specialist at Van Kampen Investments where he specialized in leading the
credit oversight and trading strategy for workouts and restructurings across
various industries. In the early 1990s, Mr. Purpura began his credit career at
Sanwa Business Credit Corporation that specialized in below investment grade
non-traditional lending and leasing. Mr. Purpura received a B.S. in Finance from
Elmhurst College and an M.B.A. in Finance from DePaul University. Mr. Purpura
holds the Chartered Financial Analyst designation and is a member of the CFA
Institute and the CFA Society of Chicago. He also holds the Chartered Market
Technician designation and is a member of the Market Technicians Association,
Chicago Chapter.
JEFFREY SCOTT, CFA -- SENIOR VICE PRESIDENT, DEPUTY CREDIT OFFICER,
PORTFOLIO MANAGER. Mr. Scott is Deputy Credit Officer and Portfolio Manager for
the Leveraged Finance Investment Team at First Trust Advisors L.P. He has 30
years of experience in the investment management industry and has extensive
experience in credit analysis, product development, and product management.
Prior to joining First Trust, Mr. Scott served as an Assistant Portfolio Manager
and as a Senior Credit Analyst for Morgan Stanley/Van Kampen from October 2008
to June 2010. As Assistant Portfolio Manager, Mr. Scott served on a team that
managed over $4.0 billion of Senior Loan assets in three separate funds: Van
Kampen Senior Loan Fund; Van Kampen Senior Income Trust; and Van Kampen Dynamic
Credit Opportunities Fund. His responsibilities included assisting with
portfolio construction, buy and sell decision making, and monitoring fund
liquidity and leverage. Mr. Scott earned a B.S. in Finance and Economics from
Elmhurst College and an M.B.A. with specialization in Analytical Finance and
Econometrics and Statistics from the University of Chicago. He also holds the
Chartered Financial Analyst designation and is a member of the CFA Institute and
the CFA Society of Chicago.
49
For additional information about the Advisor, including a description of
the services provided and additional information about the Fund's portfolio
managers, including portfolio managers' compensation, other accounts managed by
the portfolio managers and the portfolio managers' ownership of Fund shares, see
"Investment Advisor" in the SAI.
INVESTMENT MANAGEMENT AGREEMENT
Pursuant to an investment management agreement between the Advisor and the
Fund, the Fund has agreed to pay a fee for the services and facilities provided
by the Advisor at the annual rate of 1.35% of Managed Assets.
For purposes of calculating the management fee, the Fund's "Managed
Assets" means the average daily gross asset value of the Fund (which includes
assets attributable to the Fund's Preferred Shares, if any, and the principal
amount of any borrowings or commercial paper or notes issued by the Fund), minus
the sum of the Fund's accrued and unpaid dividends on any outstanding Preferred
Shares and accrued liabilities (other than the principal amount of any
borrowings of money incurred or of commercial paper or notes issued by the
Fund). For purposes of determining Managed Assets, the liquidation preference of
the Preferred Shares would not be treated as a liability, and the Fund's
derivative investments will be valued at their market value, as opposed to their
notional value.
In addition to the management fee, the Fund pays all other costs and
expenses of its operations including the compensation of its Trustees (other
than those affiliated with the Advisor), custodian, transfer agency,
administrative, accounting and dividend disbursing expenses, legal fees,
leverage expenses, rating agency fees, listing fees and expenses, expenses of
independent auditors, expenses of repurchasing Common Shares, expenses of
preparing, printing and distributing shareholder reports, notices, proxy
statements and reports to governmental agencies and taxes, if any.
Because the fee paid to the Advisor will be calculated on the basis of the
Fund's Managed Assets, which include the proceeds of leverage, the dollar amount
of its management fees will be higher (and the Advisor will be benefited to that
extent) when leverage is utilized. In this regard, if the Fund uses leverage in
the amount equal to 30% of the Fund's Managed Assets (after the issuance of
leverage), the Fund's management fee would be 1.93% of net assets attributable
to Common Shares.
A discussion regarding the basis for approval by the Board of Trustees of
the Fund's investment management agreement with the Advisor will be available in
the Fund's Semi-Annual Report to Shareholders for the period ended November 30,
2020.
NET ASSET VALUE
The NAV of the Common Shares of the Fund will be computed based upon the
value of the Fund's portfolio securities and other assets. The NAV will be
determined as of the close of regular trading on the NYSE (normally 4:00 p.m.
New York City time) on each day the NYSE is open for trading. Domestic debt
securities and foreign securities will normally be priced using data reflecting
the earlier closing of the principal markets for those securities. The Fund
calculates NAV per Common Share by subtracting the Fund's liabilities (including
accrued expenses, dividends payable and any borrowings of the Fund) and the
liquidation value of any outstanding Preferred Shares from the Fund's Managed
Assets (the value of the securities and other investments the Fund holds plus
cash or other assets, including interest accrued but not yet received) and
dividing the result by the total number of Common Shares outstanding.
The assets in the Fund's portfolio will be valued daily in accordance with
valuation procedures adopted by the Board of Trustees. The Advisor anticipates
that a majority of the Fund's assets will be valued using market information
supplied by third parties. In the event that market quotations are not readily
available, a pricing service does not provide a valuation for a particular
asset, or the valuations are deemed unreliable, or if events occurring after the
close of the principal markets for particular securities (e.g., domestic debt
and foreign securities), but before the Fund values its assets, would call into
doubt whether the market quotations or pricing service valuations represent fair
value, the Fund may use a fair value method in good faith to value the Fund's
securities and investments. The use of fair value pricing by the Fund will be
governed by valuation procedures established by the Fund's Board of Trustees,
and in accordance with the provisions of the 1940 Act.
The high yield debt securities in which the Fund may invest may not be
listed on any securities exchange or board of trade. Senior Loans are typically
bought and sold by institutional investors in individually negotiated private
transactions that function in many respects like an over the counter secondary
market, although typically no formal market-makers exist. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a specific
Senior Loan may not be widely available or may be incomplete. Accordingly,
determinations of the market value of Senior Loans may be based on infrequent
and dated information. Because there is less reliable, objective data available,
elements of judgment may play a greater role in valuation of Senior Loans held
by the Fund than for other types of assets held by the Fund.
50
Typically, Senior Loans and certain other high yield debt securities are
valued using information provided by an independent third party pricing service.
If the pricing service cannot or does not provide a valuation for a particular
security (which is the case for most, if not all, unlisted investments) or such
valuation is deemed unreliable, the Fund may value it at a fair value as
determined in good faith under procedures established by the Board of Trustees,
and in accordance with the provisions of the 1940 Act.
Fair Value. When applicable, fair value of securities of an issuer is
determined by the Board of Trustees or a committee of the Board of Trustees or a
designee of the Board of Trustees. In fair valuing the Fund's investments,
consideration is given to several factors, which may include, among others, the
following:
o the fundamental business data relating to the issuer;
o an evaluation of the forces which influence the market in which
the securities of the issuer are purchased and sold;
o the type, size and cost of the security;
o the financial statements of the issuer;
o the credit quality and cash flow of the issuer, based on the
Advisor's or external analysis;
o the information as to any transactions in or offers for the
security;
o the price and extent of public trading in similar securities (or
equity securities) of the issuer, or comparable companies;
o the coupon payments;
o the quality, value and saleability of collateral, if any, securing
the security;
o the business prospects of the issuer, including any ability to
obtain money or resources from a parent or affiliate and an
assessment of the issuer's management;
o the prospects for the issuer's industry, and multiples (of
earnings and/or cash flow) being paid for similar businesses in
that industry; and
o other relevant factors.
Other Securities. Securities for which the primary market is a national
securities exchange are valued at the last reported sales price on the day of
valuation. Listed securities for which no sale was reported on that date are
valued at the mean between the most recent bid and asked prices. Securities
traded on the over-the-counter market are valued at their closing bid prices.
Valuation of short-term cash equivalent investments will be at amortized cost.
DISTRIBUTIONS
The Fund intends to distribute monthly all or a portion of its net
investment income to Common Shareholders (after the payment of interest and/or
dividends in connection with leverage). In addition, the Fund intends to
distribute any net long-term capital gains, if any, to Common Shareholders as
long-term capital gain dividends at least annually. The Fund's initial monthly
distribution is expected to be declared approximately 30 to 45 days after the
completion of this offering and paid approximately 60 to 90 days after the
completion of this offering, depending on market conditions. Unless an election
is made to receive dividends in cash, Common Shareholders will automatically
have their monthly distributions reinvested in Common Shares through the Fund's
dividend reinvestment plan. See "Dividend Reinvestment Plan" below.
Various factors will affect the level of the Fund's income, including the
asset mix, the average maturity of the Fund's portfolio, the amount of leverage
utilized by the Fund and the Fund's use of hedging. The Fund may from time to
time distribute less than the entire amount of income earned in a particular
period. The undistributed income would be available to supplement future
distributions. As a result, the distributions paid by the Fund for any
particular monthly period may be more or less than the amount of income actually
earned by the Fund during that period. Undistributed income will add to the
Fund's NAV and, correspondingly, distributions from undistributed income will
decrease the Fund's NAV. The Fund will continue to pay at least the percentage
of its net investment income and any gains necessary to maintain its status as a
RIC for U.S. federal income tax purposes. See "Federal Tax Matters."
51
From time to time, portions of the Fund's distributions may constitute a
return of capital. A return of capital to Common Shareholders is a return of a
portion of their original investment in the Fund and does not represent net
income or profit. A return of capital would reduce a Common Shareholder's tax
basis in its Common Shares, which could result in higher taxes when the Common
Shareholder sells such Common Shares. This may cause the Common Shareholder to
owe taxes even if it sells Common Shares for less than the original purchase
price of such Common Shares.
The Fund reserves the right to change its distribution policy and the
basis for establishing the rate of its monthly distribution at any time upon
notice to Common Shareholders.
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold
your Common Shares with a brokerage firm that participates in the Fund's
dividend reinvestment plan (the "Plan"), unless you elect, by written notice to
the Fund, to receive cash distributions, all dividends, including any capital
gain dividends, on your Common Shares will be automatically reinvested by
Computershare Trust Company, N.A. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by
Computershare Inc., as dividend paying agent.
You are automatically enrolled in the Plan when you become a shareholder
of the Fund. As a participant in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If the Common Shares are trading at or above NAV at the time of
valuation, the Fund will issue new shares at a price equal to the greater of (i)
NAV per Common Share on that date or (ii) 95% of the market price on that date;
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and will purchase
Common Shares in the open market, on the NYSE or elsewhere, for the
participants' accounts. It is possible that the market price for the Common
Shares may increase before the Plan Agent has completed its purchases.
Therefore, the average purchase price per share paid by the Plan Agent may
exceed the market price at that time of valuation, resulting in the purchase of
fewer shares than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and distributions
received in cash to purchase Common Shares in the open market within 30 days of
the valuation date except where temporary curtailment or suspension of purchases
is necessary to comply with federal securities laws. Interest will not be paid
on any uninvested cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by
giving written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a book
entry statement for each whole share in your account under the Plan and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds minus brokerage
commissions incurred by the Plan Agent in selling your shares.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and
gives written confirmation of all transactions in the accounts, including
information you may need for tax records. Common Shares in your account will be
held by the Plan Agent in non-certificated form. The Plan Agent will forward to
each participant any proxy solicitation material and will vote any shares so
held only in accordance with proxies returned to the Fund. Any proxy you receive
will include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or
distributions in Common Shares. However, all participants will pay a pro rata
share of brokerage commissions incurred by the Plan Agent when it makes open
market purchases.
Automatically reinvesting dividends and distributions will not affect a
Common Shareholder's tax liability on those dividends and distributions. See
"Federal Tax Matters."
If you hold your Common Shares with a brokerage firm that does not
participate in the Plan, you will not be able to participate in the Plan and any
dividend reinvestment may be effected on different terms than those described
above. Consult your financial advisor for more information.
Neither the Fund nor the Plan Agent shall be liable with respect to the
Plan for any act done in good faith or for any good faith omission to act,
including, without limitation, any claim of liability: (i) arising out of
failure to terminate any participant's account upon such participant's death
prior to receipt of notice in writing of such death; and (ii) with respect to
the prices at which Common Shares are purchased and sold for the participant's
account and the times such purchases and sales are made.
52
The Fund reserves the right to amend or terminate the Plan if in the
judgment of the Board of Trustees the change is warranted. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
Additional information about the Plan may be obtained from the Plan Agent,
Computershare Trust Company, N.A., P.O. Box 505000, Louisville, KY 40233-5000,
with overnight correspondence being directed to Computershare Trust Company,
N.A., P.O. Box 505000, Louisville, KY 40233-5000. Participants can also contact
the Plan Agent through the Plan Agent's website at
www.computershare.com/investor or by telephone at (866) 340-1104.
DESCRIPTION OF SHARES
COMMON SHARES
The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares being offered have a par value of $0.01 per share and,
subject to the rights of the holders of Preferred Shares, if issued, have equal
rights to the payment of dividends and the distribution of assets upon
liquidation. The Common Shares being offered will, when issued, be fully paid
and, subject to matters discussed in "Certain Provisions in the Declaration of
Trust and By-Laws," non-assessable, and currently have no preemptive or
conversion rights (except as may otherwise be determined by the Board of
Trustees in its sole discretion) or rights to cumulative voting.
The Fund's Common Shares have been approved for listing on the New York
Stock Exchange. The trading or "ticker" symbol of the Common Shares is "FTHY."
The Fund intends to hold annual meetings of shareholders so long as the Common
Shares are listed on a national securities exchange and such meetings are
required as a condition to such listing. Any such meeting initially called to be
held in any given calendar or fiscal year shall be deemed to be an annual
meeting for that calendar or fiscal year, if so designated by the Board of
Trustees, even if the actual date of the meeting is in a subsequent calendar or
fiscal year, due to postponements, adjournments, delays or other similar events
or circumstances. In the event that such a meeting is not held within such
calendar or fiscal year if so required by the national securities exchange on
which the Common Shares are listed, for whatever reason, a subsequent special
meeting may be called by the Board of Trustees and held in lieu of such meeting
with the same effect as if held within that year and such meeting shall be
deemed to be an annual meeting.
Unlike open-end funds, closed-end funds like the Fund do not continuously
offer shares and do not provide daily redemptions. Rather, if a shareholder
determines to buy additional Common Shares or sell shares already held, the
shareholder may do so by trading on the exchange through a broker or otherwise.
Shares of closed-end investment companies may frequently trade on an exchange at
prices lower than NAV. Shares of closed-end investment companies like the Fund
have during some periods traded at prices higher than NAV and during other
periods have traded at prices lower than NAV. Because the market value of the
Common Shares may be influenced by such factors as dividend levels (which are in
turn affected by expenses), dividend stability, portfolio credit quality, NAV,
relative demand for and supply of such shares in the market, general market and
economic conditions, and other factors beyond the control of the Fund, the Fund
cannot assure you that Common Shares will trade at a price equal to or higher
than NAV in the future. The Common Shares are designed primarily for long-term
investors, and investors in the Common Shares should not view the Fund as a
vehicle for trading purposes.
PREFERRED SHARES
The Declaration provides that the Fund's Board of Trustees may authorize
and issue Preferred Shares with rights as determined by the Board of Trustees,
by action of the Board of Trustees without the approval of the Common
Shareholders. Common Shareholders have no preemptive right to purchase any
Preferred Shares that might be issued.
The Fund may elect to issue Preferred Shares as part of its leverage
strategy. See "Use of Leverage--Preferred Shares." However, the Fund does not
currently anticipate it will issue Preferred Shares within 12 months of the date
of this prospectus. Although the terms of any Preferred Shares, including
dividend rate, liquidation preference and redemption provisions, will be
determined by the Board of Trustees, subject to applicable law and the
Declaration, it is likely that the Preferred Shares will be structured to carry
a relatively short-term dividend rate reflecting interest rates on short-term
bonds, by providing for the periodic redetermination of the dividend rate at
relatively short intervals through an auction, remarketing or other procedure.
The Fund also believes that it is likely that the liquidation preference, voting
rights and redemption provisions of the Preferred Shares will be similar to
those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of Preferred
Shares will be entitled to receive a preferential liquidating distribution,
which is expected to equal the original purchase price per Preferred Share plus
accrued and unpaid dividends, whether or not declared, before any distribution
of assets is made to Common Shareholders. After payment of the full amount of
the liquidating distribution to which they are entitled, the holders of
Preferred Shares will not be entitled to any further participation in any
distribution of assets by the Fund.
53
Voting Rights. The 1940 Act requires that the holders of any Preferred
Shares, voting separately as a single class, have the right to elect at least
two trustees at all times. The remaining trustees will be elected by holders of
Common Shares and Preferred Shares, voting together as a single class. In
addition, subject to the prior rights, if any, of the holders of any other class
of senior securities outstanding, the holders of any Preferred Shares have the
right to elect a majority of the trustees of the Fund at any time that two years
of dividends on any Preferred Shares are unpaid. The 1940 Act also requires
that, in addition to any approval by shareholders that might otherwise be
required, the approval of the holders of a majority of any outstanding Preferred
Shares, voting separately as a class, would be required to: (i) adopt any plan
of reorganization that would adversely affect the Preferred Shares; and (ii)
take any action requiring a vote of security holders under Section 13(a) of the
1940 Act, including, among other things, changes in the Fund's subclassification
as a closed-end investment company or changes in its fundamental investment
restrictions. See "Certain Provisions in the Declaration of Trust and By-Laws."
As a result of these voting rights, the Fund's ability to take any such actions
may be impeded to the extent that there are any Preferred Shares outstanding.
The Board of Trustees presently intends that, except as otherwise indicated in
this prospectus and except as otherwise required by applicable law or the
Declaration, holders of Preferred Shares will have equal voting rights with
Common Shareholders (one vote per share, unless otherwise required by the 1940
Act) and will vote together with Common Shareholders as a single class.
The affirmative vote of the holders of a majority of the outstanding
Preferred Shares, voting as a separate class, will be required to amend, alter
or repeal any of the preferences, rights or powers of holders of Preferred
Shares so as to affect materially and adversely such preferences, rights or
powers, or to increase or decrease the authorized number of Preferred Shares.
The class vote of holders of Preferred Shares described above will in each case
be in addition to any other vote required to authorize the action in question.
Redemption, Purchase and Sale of Preferred Shares by the Fund. The terms
of any Preferred Shares issued are expected to provide that: (i) they are
redeemable by the Fund in whole or in part at the original purchase price per
share plus accrued dividends per share; (ii) the Fund may tender for or purchase
Preferred Shares; and (iii) the Fund may subsequently resell any shares so
tendered for or purchased. Any redemption or purchase of Preferred Shares by the
Fund will reduce any leverage applicable to the Common Shares, while any resale
of shares by the Fund will increase that leverage.
The discussion above describes the possible offering of Preferred Shares
by the Fund. If the Board of Trustees determines to proceed with such an
offering, the terms of the Preferred Shares may be the same as, or different
from, the terms described above, subject to applicable law and the Fund's
Declaration. The Board of Trustees, without the approval of the Common
Shareholders, may authorize an offering of Preferred Shares or may determine not
to authorize such an offering, and may fix the terms of the Preferred Shares to
be offered.
CERTAIN PROVISIONS IN THE DECLARATION OF TRUST AND BY-LAWS
Under Massachusetts law, shareholders could, in certain circumstances, be
held personally liable for the obligations of the Fund. However, the Declaration
contains an express disclaimer of shareholder liability for debts or obligations
of the Fund and requires that notice of such limited liability be given in each
agreement, obligation or instrument entered into or executed by the Fund or the
Trustees. The Declaration further provides for indemnification out of the assets
and property of the Fund for all loss and expense of any shareholder held
personally liable for the obligations of the Fund solely by reason of his or her
being a shareholder. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is limited to circumstances in which the Fund
would be unable to meet its obligations. The Fund believes that the likelihood
of such circumstances is remote.
The Declaration and By-Laws include provisions that could limit the
ability of other entities or persons to acquire control of the Fund or to
convert the Fund to open-end status. The number of Trustees is currently five,
but by action of two-thirds of the Trustees, the Board of Trustees may from time
to time be increased or decreased. Under the By-Laws, the Board of Trustees is
divided into three classes of Trustees serving staggered three-year terms, with
the terms of one class expiring at each annual meeting of shareholders. If the
Fund issues Preferred Shares, the Fund may establish a separate class for the
trustees elected by the holders of the Preferred Shares. Subject to applicable
provisions of the 1940 Act, vacancies on the Board of Trustees may be filled by
a majority action of the remaining Trustees. Removal of a Trustee requires
either (a) a vote of two-thirds of the outstanding shares (or if the Trustee was
elected or appointed with respect to a particular class, two-thirds of the
outstanding shares of such class), or (b) the action of at least two-thirds of
the remaining trustees. Such provisions may work to delay a change in the
majority of the Board of Trustees. The provisions of the Declaration relating to
the election and removal of Trustees may be amended only by a vote of two-thirds
of the trustees then in office. The By-Laws may be amended only by the Board of
Trustees.
The Declaration generally requires a Common Shareholder vote only on those
matters where the 1940 Act or the Fund's listing with an exchange require a
Common Shareholder vote, but otherwise permits the Board of Trustees to take
action without seeking the consent of Common Shareholders. For example, the
Declaration gives the Board of Trustees broad authority to approve most
reorganizations between the Fund and another entity, such as another closed-end
fund, and the sale of all or substantially all of its assets without Common
Shareholder approval if the 1940 Act would not require such approval, and except
as described in the paragraph below. The Declaration further provides that the
Board of Trustees may amend the Declaration in any respect without Common
54
Shareholder approval, except for the provisions relating to reorganizations of
the Fund described in the paragraph below. The Declaration, however, prohibits
amendments to certain provisions relating to the term of the Fund and amendments
that impair the exemption from personal liability granted in the Declaration to
persons who are or have been shareholders, trustees, officers or employees of
the Fund or that limit the rights to indemnification or insurance provided in
the Declaration with respect to actions or omissions of persons entitled to
indemnification under the Declaration prior to the amendment.
The Declaration provides that the Fund in ordinary circumstances will
terminate on or about August 1, 2027. The Fund's Board of Trustees may terminate
the Fund prior to this date. The Declaration provides also that the Fund's term
may be extended by the Board of Trustees, without a vote of Common Shareholders,
for one period of up to six months. In addition, although generally the Trustees
may authorize most reorganizations or mergers between the Fund and another
entity, in the event that such a transaction would result in the shareholders of
the Fund becoming shareholders of another entity with a term and/or termination
provisions inconsistent in any material respect with the term provisions
described above in this paragraph, such transaction would require the
affirmative vote or consent by holders of at least two-thirds of the shares
outstanding and entitled to vote, provided, however, that if such transaction
has been previously approved by the affirmative vote of two-thirds of the
Trustees, then a vote of the majority of the outstanding voting securities as
defined in the 1940 Act (a "Majority Shareholder Vote") is required.
Generally, the Declaration requires the affirmative vote or consent by
holders of at least two-thirds of the shares outstanding and entitled to vote,
except as described below, to authorize (1) a conversion of the Fund from a
closed-end to an open-end management investment company, if required pursuant to
the provisions of the 1940 Act, (2) a merger or consolidation of the Fund with
any corporation, association, trust or other organization, including a series or
class of such other organization (only in the limited circumstances where a vote
by shareholders is otherwise required under the 1940 Act or the Declaration),
(3) a sale, lease or exchange of all or substantially all of the Fund's assets
(only in the limited circumstances where a vote by shareholders is otherwise
required under the 1940 Act and the Declaration), or (4) certain transactions in
which a Principal Shareholder (as defined below) is a party to the transactions.
However, with respect to items (1), (2) and (3) above, if the applicable
transaction has been already approved by the affirmative vote of two-thirds of
the Trustees, then a Majority Shareholder Vote is required. In addition, if
there are then Preferred Shares outstanding, with respect to item (1) above,
two-thirds of the Preferred Shares voting as a separate class shall also be
required unless the action has already been approved by two-thirds of the
Trustees, in which case then a Majority Shareholder Vote is required. Such
affirmative vote or consent shall be in addition to the vote or consent of the
holders of the shares otherwise required by law or by the terms of any class or
series of Preferred Shares, whether now or hereafter authorized, or any
agreement between the Fund and any national securities exchange. Further, in the
case of items (2) or (3) that constitute a plan of reorganization (as such term
is used in the 1940 Act) which adversely affects the Preferred Shares within the
meaning of section 18(a)(2)(D) of the 1940 Act, except as may otherwise be
required by law, the approval of the action in question will also require the
affirmative vote of two-thirds of the Preferred Shares voting as a separate
class; provided, however, that such separate class vote shall be by a Majority
Shareholder Vote if the action in question has previously been approved by the
affirmative vote of two-thirds of the Trustees.
As noted above, pursuant to the Declaration, the affirmative approval of
two-thirds of the shares outstanding and entitled to vote, subject to certain
exceptions, shall be required for the following transactions in which a
Principal Shareholder is a party: (1) the merger or consolidation of the Fund or
any subsidiary of the Fund with or into any Principal Shareholder; (2) the
issuance of any securities of the Fund to any Principal Shareholder for cash
other than pursuant to a dividend reinvestment or similar plan available to all
shareholders; (3) the sale, lease or exchange of all or any substantial part of
the assets of the Fund to any Principal Shareholder (except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the purpose
of such computation all assets sold, leased or exchanged in any series of
similar transactions within a twelve-month period); (4) the sale, lease or
exchange to the Fund or any subsidiary thereof, in exchange for securities of
the Fund, of any assets of any Principal Shareholder (except assets having an
aggregate fair market value of less than $1,000,000, aggregating for the
purposes of such computation all assets sold, leased or exchanged in any series
of similar transactions within a twelve-month period). However, shareholder
approval for the foregoing transactions shall not be applicable to (1) any
transaction, including, without limitation, any rights offering, made available
on a pro rata basis to all shareholders of the Fund or class thereof unless the
Trustees specifically make such transaction subject to this voting provision,
(2) any transaction if the Trustees shall by resolution have approved a
memorandum of understanding with such Principal Shareholder with respect to and
substantially consistent with such transaction or (3) any such transaction with
any corporation of which a majority of the outstanding shares of all classes of
stock normally entitled to vote in elections of directors is owned of record or
beneficially by the Fund and its subsidiaries. As described in the Declaration,
a Principal Shareholder shall mean any corporation, person or other entity which
is the beneficial owner, directly or indirectly, of more than 5% of the
outstanding shares and shall include any affiliate or associate (as such terms
are defined in the Declaration) of a Principal Shareholder. The above
affirmative vote shall be in addition to the vote of the shareholders otherwise
required by law or by the terms of any class or series of Preferred Shares,
whether now or hereafter authorized, or any agreement between the Fund and any
national securities exchange.
The provisions of the Declaration described above could have the effect of
depriving the Common Shareholders of opportunities to sell their Common Shares
at a premium over market value by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The overall
effect of these provisions is to render more difficult the accomplishment of a
55
merger or the assumption of control by a third party. They provide, however, the
advantage of potentially requiring persons seeking control of a fund to
negotiate with its management regarding the price to be paid and facilitating
the continuity of the Fund's investment objective and policies. The Board of
Trustees of the Fund has considered the foregoing anti-takeover provisions and
concluded that they are in the best interests of the Fund and its Common
Shareholders.
The Declaration provides that the obligations of the Fund are not binding
upon the Trustees of the Fund individually, but only upon the assets and
property of the Fund, and that the Trustees shall not be liable to any person in
connection with the Fund property or the affairs of the Fund for any action or
failure to act, errors of judgment or mistakes of fact or law or for any neglect
or wrongdoing of any officer, employee or agent of the Fund or for the act or
omission of any other Trustee. Nothing in the Declaration, however, protects a
Trustee against any liability to which he or she would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office with or on behalf of the
Fund.
The Declaration provides a detailed process for the bringing of derivative
actions by shareholders, and provides that actions that are derivative in nature
may not be brought directly, in order to permit legitimate inquiries and claims
while avoiding the time, expense, distraction and other harm that can be caused
to the Fund or its shareholders as a result of spurious shareholder claims,
demands and derivative actions. Prior to bringing a derivative action, a demand
must first be made on the Trustees by no less than three shareholders who
together hold not less than 5% of the voting power of the Fund or, if brought in
the right of or name of or on behalf of a class, the affected class none of
which shall be related to (by blood or by marriage) or otherwise affiliated with
any other complaining shareholder (other than as shareholders of the Fund). The
Declaration details various information, certifications, undertakings and
acknowledgements that must be included in the demand. Following receipt of the
demand, the Trustees have a period of 90 days, which may be extended by an
additional 60 days, to consider the demand. If a majority of the Trustees who
are considered independent for the purposes of considering the demand determine
that maintaining the suit would not be in the best interests of the Fund, the
Trustees are required to reject the demand and the complaining shareholder may
not proceed with the derivative action unless the shareholder is able to sustain
the burden of proof to a court that the decision of the Trustees not to pursue
the requested action was not a good faith exercise of their business judgment on
behalf of the Fund. In making such a determination, a Trustee is not considered
to have a personal financial interest by virtue of being compensated for his or
her services as a Trustee.
If a demand is rejected as set forth above, the complaining shareholders
will be responsible, jointly and severally, for the costs and expenses
(including attorneys' fees) incurred by the Fund in connection with the
consideration of the demand under a number of circumstances. In addition, if a
court determines that a derivative action was made without reasonable cause or
for an improper purpose, or if a derivative or direct action is dismissed on the
basis of a failure to comply with the procedural provisions relating to
shareholder actions as set forth in the Declaration, or if a direct action is
dismissed by a court for failure to state a claim, the shareholders bringing the
action may be jointly and severally responsible for the Fund's costs, including
attorneys' fees.
The provisions of the Declaration provide that any direct or derivative
action commenced by a shareholder must be brought only in the U.S. District
Court for the District of Massachusetts (Boston Division) or if any such action
may not be brought in that court, then in the Business Litigation Session of
Suffolk Superior Court in Massachusetts (the "Chosen Courts"). Except as
prohibited by applicable law, if a shareholder commences an applicable action in
a court other than a Chosen Court, then such shareholder may be obligated to
reimburse the Fund and any Trustee or officer of the Fund made party to such
proceeding for the costs and expenses (including attorneys' fees) incurred in
connection with any successful motion to dismiss, stay or transfer of the
action. The Declaration also provides that any shareholder bringing an action
against the Fund waives the right to trial by jury to the fullest extent
permitted by law.
The provisions of the Declaration, any By-laws of the Fund, including the
procedures applicable to derivative claims, Chosen Courts, and waiver of jury
trial, and any contract or agreement entered into by the Fund governed by
applicable state law do not affect, waive or limit the rights of any shareholder
with respect to any claims arising under any provision of the 1933 Act, the 1934
Act or the 1940 Act, or any rule, regulation or order of the Securities and
Exchange Commission thereunder. The provisions regarding Chosen Courts and
waiver of jury trials limit a shareholder's right to bring claims against the
Fund in a court a shareholder might deem preferable. A court may choose not to
enforce these provisions.
Reference should be made to the Declaration on file with the Securities
and Exchange Commission for the full text of these provisions.
56
STRUCTURE OF THE FUND; COMMON SHARE REPURCHASES
AND CONVERSION TO OPEN-END FUND
CLOSED-END STRUCTURE
Closed-end funds differ from open-end management investment companies
(commonly referred to as mutual funds) in that closed-end funds generally list
their shares for trading on a securities exchange and do not redeem their shares
at the option of the shareholder. By comparison, mutual funds issue securities
redeemable at NAV at the option of the shareholder and typically engage in a
continuous offering of their shares. Mutual funds are subject to continuous
asset in-flows and out-flows that can complicate portfolio management, whereas
closed-end funds generally can stay more fully invested in securities consistent
with the closed-end fund's investment objective(s) and policies. In addition, in
comparison to open-end funds, closed-end funds have greater flexibility in their
ability to make certain types of investments, including investments in illiquid
securities.
However, shares of closed-end investment companies listed for trading on a
securities exchange frequently trade at a discount from NAV, but in some cases
trade at a premium. The market price may be affected by factors such as NAV,
dividend or distribution levels and their stability (which will in turn be
affected by levels of dividend and interest payments by the fund's portfolio
holdings, the timing and success of the fund's investment strategies,
regulations affecting the timing and character of fund distributions, fund
expenses and other factors), supply of and demand for the shares, trading volume
of the shares, general market, interest rate and economic conditions and other
factors beyond the control of the closed-end fund. The foregoing factors, among
others, may result in the market price of the Common Shares being greater than,
less than or equal to NAV. The Board of Trustees has reviewed the structure of
the Fund in light of its investment objective and policies and has determined
that the closed-end structure is in the best interests of the shareholders. As
described below, however, the Board of Trustees will review periodically the
trading range and activity of the Fund's shares with respect to its NAV, and the
Board of Trustees may take certain actions to seek to reduce or eliminate any
such discount. Such actions may include open market repurchases or tender offers
for the Common Shares at NAV or the possible conversion of the Fund to an
open-end fund. There can be no assurance that the Board will decide to undertake
any of these actions or that, if undertaken, such actions would result in the
Common Shares trading at a price equal to or close to their NAV. In addition, as
noted above, the Board of Trustees has determined in connection with this
initial offering of Common Shares of the Fund that the closed-end structure is
desirable, given the Fund's investment objective and policies. Investors should
assume, therefore, that it is highly unlikely that the Board would vote to
propose to shareholders that the Fund convert to an open-end investment company.
REPURCHASE OF COMMON SHARES AND TENDER OFFERS
Shares of closed-end funds frequently trade at a discount to their NAV.
Because of this possibility and the recognition that any such discount may not
be in the interest of Common Shareholders, the Board of Trustees might consider
from time to time engaging in open-market repurchases, tender offers for shares
or other programs intended to reduce the discount. The Fund cannot guarantee or
assure, however, that the Board of Trustees will decide to engage in any of
these actions. After any consideration of potential actions to seek to reduce
any significant market discount, the Board of Trustees may, subject to its
fiduciary obligations and compliance with applicable state and federal laws and
the requirements of the principal stock exchange on which the Common Shares are
listed, authorize the commencement of a share repurchase program or tender
offer. The size and timing of any such share repurchase program or tender offer
will be determined by the Board of Trustees in light of the market discount of
the Common Shares, the trading volume of the Common Shares, information
presented to the Board of Trustees regarding the potential impact of any such
share repurchase program or tender offer, and general market and economic
conditions. There can be no assurance that the Fund will in fact effect
repurchases of or tender offers for any of its Common Shares. The Fund may,
subject to its investment limitation with respect to borrowings, incur debt to
finance such repurchases or a tender offer or for other valid purposes. Interest
on any such borrowings would increase the Fund's expenses and reduce the Fund's
net income.
There can be no assurance that repurchases of Common Shares or tender
offers, if any, will cause the Common Shares to trade at a price equal to or in
excess of their NAV. Nevertheless, the possibility that a portion of the Fund's
outstanding Common Shares may be the subject of repurchases or tender offers may
reduce the spread between market price and NAV that might otherwise exist. In
the opinion of the Fund, sellers may be less inclined to accept a significant
discount in the sale of their Common Shares if they have a reasonable
expectation of being able to receive a price of NAV for a portion of their
Common Shares in conjunction with an announced repurchase program or tender
offer for the Common Shares.
Although the Board of Trustees believes that repurchases or tender offers
may have a favorable effect on the market price of the Common Shares, the
acquisition of Common Shares by the Fund will decrease the Managed Assets of the
Fund and therefore will have the effect of increasing the Fund's expense ratio
and decreasing the asset coverage with respect to any Preferred Shares
outstanding. Because of the nature of the Fund's investment objective, policies
and portfolio, the Advisor currently does not anticipate that repurchases of
Common Shares or tender offers should interfere with the ability of the Fund to
manage its investments in order to seek its investment objective, and does not
anticipate any material difficulty in borrowing money or disposing of portfolio
securities to consummate repurchases of or tender offers for Common Shares,
although no assurance can be given that this will be the case.
57
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time if
approved by the holders of two-thirds of the Fund's shares outstanding and
entitled to vote, provided that, unless otherwise required by law, if there are
Preferred Shares outstanding, the affirmative vote of the holders of two-thirds
of the Preferred Shares voting as a separate class shall also be required;
provided, however, that such votes shall be by Majority Shareholder Vote if the
action in question was previously approved by the affirmative vote of two-thirds
of the Board of Trustees. Such affirmative vote or consent shall be in addition
to the vote or consent of the holders of the shares otherwise required by law or
any agreement between the Fund and any national securities exchange. In the
event of conversion, the Common Shares would cease to be listed on the NYSE or
other national securities exchange. Any Preferred Shares or borrowings would
need to be redeemed or repaid upon conversion to an open-end investment company.
The Board of Trustees believes, however, that the closed-end structure is
desirable, given the Fund's investment objective and policies. Investors should
assume, therefore, that it is unlikely that the Board of Trustees would vote to
propose to shareholders that the Fund convert to an open-end investment company.
Shareholders of an open-end investment company may require the company to redeem
their shares at any time (except in certain circumstances as authorized by or
under the 1940 Act) at their net asset value, less such redemption charge or
contingent deferred sales charge, if any, as might be in effect at the time of a
redemption. The Fund would expect to pay all such redemption requests in cash,
but would intend to reserve the right to pay redemption requests in a
combination of cash or securities. If such partial payment in securities were
made, investors may incur brokerage costs in converting such securities to cash.
If the Fund were converted to an open-end fund, it is likely that new Common
Shares would be sold at NAV plus a sales load.
FEDERAL TAX MATTERS
This section summarizes some of the main federal income tax consequences
of owning Common Shares of the Fund. This section is current as of the date of
this prospectus. Tax laws and interpretations change frequently, and these
summaries do not describe all of the tax consequences to all taxpayers. For
example, except as specifically provided below, these summaries generally do not
describe your situation if you are a corporation, a non-U.S. person, a
broker/dealer, or other investor with special circumstances. In addition, this
section does not describe your state, local or foreign tax consequences.
This federal income tax summary is based in part on the advice of counsel
to the Fund. The Internal Revenue Service could disagree with any conclusions
set forth in this section. In addition, the Fund's counsel was not asked to
review, and has not reached a conclusion with respect to the federal income tax
treatment of the assets to be deposited in the Fund. This may not be sufficient
for you to use for the purpose of avoiding penalties under federal tax law.
As with any investment, you should seek advice based on your individual
circumstances from your own tax advisor.
Fund Status. The Fund intends to elect and to qualify annually as a
"regulated investment company," commonly known as a "RIC," under the federal tax
laws. To qualify, the Fund must, among other things, satisfy certain
requirements relating to the source and nature of its income and the
diversification of its assets. If the Fund qualifies as a RIC and distributes
its income as required by tax law, the Fund generally will not pay federal
income taxes.
For federal income tax purposes, you are treated as the owner of Common
Shares and not of the assets held by the Fund. Taxability issues are taken into
account at the Fund level. Your federal income tax treatment from the Fund is
based on the distributions paid by the Fund.
Distributions. Fund distributions will generally be taxable. After the end
of each year, you will receive a tax statement that separates the Fund's
distributions into ordinary dividends, capital gains dividends and returns of
capital. Income reported is generally net of expenses. Ordinary income
distributions are generally taxed at your ordinary tax rate, however, as further
discussed below, certain ordinary income distributions received from the Fund
may be taxed at the capital gains tax rates. Generally, you will treat all
capital gains dividends as long-term capital gains regardless of how long you
have owned your Common Shares. To determine your actual tax liability for your
capital gains dividends, you must calculate your total net capital gain or loss
for the tax year after considering all of your other taxable transactions, as
described below. In addition, the Fund may make distributions that represent a
return of capital for tax purposes and thus will generally not be taxable to
you; however, such distributions will be applied against and reduce your tax
basis in your Common Shares. To the extent that the amount of any distribution
exceeds your tax basis in your Common Shares, the excess will be treated as gain
from a sale or exchange of your Common Shares. The tax status of your
distributions from the Fund is not affected by whether you reinvest your
distributions in additional Common Shares or receive them in cash. The income
from the Fund that you must take into account for federal income tax purposes is
not reduced by amounts used to pay a deferred sales charge, if any. The tax laws
may require you to treat distributions made to you in January as if you had
received them on December 31 of the previous year.
58
Income from the Fund may also be subject to a 3.8% "Medicare tax." This
tax will generally apply to your net investment income if your adjusted gross
income exceeds certain threshold amounts, which are $250,000 in the case of
married couples filing joint returns and $200,000 in the case of single
individuals.
Deemed Distributions. The Fund currently intends to distribute, at least
annually, realized capital gains. However, the Fund may elect to retain capital
gains and provide a notice to Common Shareholders within 60 days of the taxable
year that the Common Shareholders of record as of the end of the Fund's taxable
year will be required to include their attributable share of the retained gain
in their income for the year as long-term capital gain. Common Shareholders
required to include such retained gain in their income will be entitled to a
credit or a refund for the tax deemed paid on their behalf by the Fund and will
increase their basis in their Common Shares in an amount equal to the excess of
their share of the retained gains included in their income over the taxes deemed
paid on their behalf by the Fund.
Dividends Received Deduction. A corporation that owns Common Shares
generally will not be entitled to the dividends received deduction with respect
to dividends received from the Fund because the dividends received deduction is
generally not available for distributions from regulated investment companies.
However, certain ordinary income dividends on Common Shares that are
attributable to dividends received by the Fund (if any) from certain domestic
corporations may be designated by the Fund as being eligible for the dividends
received deduction.
If You Sell Shares. If you sell your Common Shares, you will generally
recognize a taxable gain or loss. To determine the amount of this gain or loss,
you must subtract your tax basis in your Common Shares from the amount you
receive in the transaction. Your tax basis in your Common Shares is generally
equal to the cost of your Common Shares, generally including sales charges. In
some cases, however, you may have to adjust your tax basis after you purchase
your Common Shares, such as to account for any distributions which are a return
of capital as discussed above. Any loss realized upon a taxable disposition of
the Common Shares may be disallowed if other substantially identical shares are
acquired within a 61-day period beginning 30 days before and ending 30 days
after the date the original Common Shares are disposed of. If disallowed, the
loss will be reflected by an upward adjustment to the basis of the Common Shares
acquired. In addition, the ability to deduct capital losses may otherwise be
limited.
Taxation of Capital Gains and Losses and Certain Ordinary Income
Dividends. If you are an individual, the maximum marginal federal tax rate for
net capital gain is generally 20% (generally 0% or 15% for certain taxpayers not
in the top tax brackets).
Net capital gain equals net long-term capital gain minus net short-term
capital loss for the taxable year. Capital gain or loss is long-term if the
holding period for the asset is more than one year and is short-term if the
holding period for the asset is one year or less. You must exclude the date you
purchase your Common Shares to determine your holding period. However, if you
receive a capital gain dividend from the Fund and sell your Common Shares at a
loss after holding it for six months or less, the loss will be recharacterized
as long-term capital loss to the extent of the capital gain dividend received.
The tax rates for capital gains realized from assets held for one year or less
are generally the same as for ordinary income. The Code treats certain capital
gains as ordinary income in special situations.
A portion of the ordinary income dividends received by an individual
shareholder from a regulated investment company such as the Fund generally will
be taxed at the same rates that apply to net capital gain (as discussed above),
but only if certain holding period requirements are satisfied and the dividends
are attributable to qualified dividends received by the Fund itself. The Fund
does not expect to receive significant amounts of such dividend income. The Fund
will provide notice to its shareholders of the amount of any distribution which
may be taken into account as a dividend which is eligible for the capital gains
tax rates.
Foreign Tax Credit. If at least 50% of the value of the total assets of
the Fund (at the close of the taxable year) is represented by foreign securities
or at least 50% of the value of the total assets of the Fund (at the close of
each quarter of the taxable year) is represented by interests in other RICs, the
tax statement that you receive may include an item showing foreign taxes the
Fund paid to other countries. In this case, dividends taxed to you will include
your share of the taxes the Fund paid to other countries. You may be able to
deduct or receive a tax credit for your share of these taxes.
You should consult your tax advisor regarding potential foreign, state or
local taxation with respect to your Common Shares.
Investments in Certain Foreign Corporations. The Fund may invest a portion
of its portfolio in Senior Loans of non-U.S. borrowers. Because of the nature of
Senior Loans, there is an increased risk that a portion of the Senior Loans may
be recharacterized as equity for U.S. federal income tax purposes. If the Fund
holds an equity interest in any "passive foreign investment companies"
("PFICs"), which are generally certain foreign corporations that receive at
least 75% of their annual gross income from passive sources (such as interest,
dividends, certain rents and royalties or capital gains) or that hold at least
50% of their assets in investments producing such passive income, the Fund could
be subject to U.S. federal income tax and additional interest charges on gains
and certain distributions with respect to those equity interests, even if all
the income or gain is timely distributed to its shareholders. The Fund will not
be able to pass through to its shareholders any credit or deduction for such
59
taxes. The Fund may be able to make an election that could ameliorate these
adverse tax consequences. In this case, the Fund would recognize as ordinary
income any increase in the value of such PFIC shares, and as ordinary loss any
decrease in such value to the extent it did not exceed prior increases included
in income. Under this election, the Fund might be required to recognize in a
year income in excess of its distributions from PFICs and its proceeds from
dispositions of PFIC stock during that year, and such income would nevertheless
be subject to the distribution requirement and would be taken into account for
purposes of the 4% excise tax. Dividends paid by PFICs will not be treated as
qualified dividend income.
Backup Withholding. The Fund may be required to withhold, for U.S. federal
income taxes, a portion of all taxable dividends and redemption proceeds payable
to shareholders who fail to provide the Fund with their correct taxpayer
identification numbers or who otherwise fail to make required certifications, or
if the Fund or a shareholder has been notified by the Internal Revenue Service
that such shareholder is subject to backup withholding. Corporate shareholders
and certain other shareholders under federal tax laws are generally exempt from
such backup withholding. Backup withholding is not an additional tax. Any
amounts withheld will be allowed as a refund or credit against the shareholder's
federal income tax liability if the appropriate information is provided to the
Internal Revenue Service.
FATCA Withholding. Under the Foreign Account Tax Compliance Act ("FATCA"),
distributions may be subject to a U.S. withholding tax of 30% in the case of
distributions to (i) certain non-U.S. financial institutions that have not
entered into an agreement with the U.S. Treasury to collect and disclose certain
information and are not resident in a jurisdiction that has entered into such an
agreement with the U.S. Treasury and (ii) certain other non-U.S. entities that
do not provide certain certifications and information about the entity's U.S.
owners. Dispositions of Common Shares by such persons may be subject to such
withholding; however, proposed regulations may eliminate the requirement to
withhold on dispositions.
Alternative Minimum Tax. As with any taxable investment, non-corporate
investors may be subject to the federal alternative minimum tax on their income
(including taxable income from the Fund), depending on their individual
circumstances.
Further Information. The SAI summarizes further federal income tax
considerations that may apply to the Fund and its shareholders and may qualify
the considerations discussed herein.
60
UNDERWRITERS
Under the terms and subject to the conditions in an underwriting
agreement, dated the date of this prospectus, the Underwriters named below, for
whom Morgan Stanley & Co. LLC is acting as representative (the
"Representative"), have severally agreed to purchase, and the Fund has agreed
to sell to them, the number of Common Shares indicated below.
NUMBER OF
UNDERWRITER COMMON SHARES
Morgan Stanley & Co. LLC ........................................... 19,520,000
RBC Capital Markets, LLC ........................................... 3,770,000
Stifel, Nicolaus & Company, Incorporated ........................... 2,150,000
Oppenheimer & Co. Inc. ............................................. 1,420,000
BB&T Capital Markets, a division of BB&T Securities, LLC ........... 417,000
A.G.P./Alliance Global Partners .................................... 86,000
Arete Wealth Management, LLC ....................................... 440,000
B. Riley FBR, Inc. ................................................. 372,000
Brookline Capital Markets, a Division of Arcadia Securities, LLC ... 200,000
D.A. Davidson & Co. ................................................ 440,000
Hilltop Securities Inc. ............................................ 223,000
Incapital LLC ...................................................... 460,000
Janney Montgomery Scott LLC ........................................ 509,000
JonesTrading Institutional Services LLC ............................ 430,000
Ladenburg Thalmann & Co. Inc. ...................................... 305,000
Maxim Group LLC .................................................... 60,000
National Securities Corporation .................................... 237,000
Pershing LLC ....................................................... 750,000
Synovus Securities, Inc. ........................................... 200,000
USCA Securities LLC ................................................ 114,000
Wedbush Securities Inc. ............................................ 323,000
Wintrust Investments, LLC .......................................... 64,000
Amerivet Securities, Inc. .......................................... 14,000
Huntleigh Securities Corporation ................................... 660,000
Newbridge Securities Corporation ................................... 21,000
Northland Securities, Inc. ......................................... 65,000
----------
Total ............................................................ 33,250,000
==========
The Underwriters are offering the Common Shares subject to their
acceptance of the Common Shares from the Fund and subject to prior sale. The
underwriting agreement provides that the obligations of the several Underwriters
to pay for and accept delivery of the Common Shares offered by this prospectus
are subject to the approval of certain legal matters by their counsel and to
certain other conditions. The Underwriters are obligated to take and pay for all
of the Common Shares offered by this prospectus if any such shares are taken.
However, the Underwriters are not required to take or pay for the Common Shares
covered by the Underwriters' over-allotment option described below.
The Underwriters initially propose to offer part of the Common Shares
directly to the public at the public offering price listed on the cover page of
this prospectus and part to certain dealers at a price that represents a
concession not in excess of $0.30 per Common Share under the public offering
price. Investors must pay for any Common Shares purchased in this offering on or
before June 30, 2020.
The Fund has granted to the Underwriters an option, exercisable for 45
days from the date of this prospectus, to purchase up to 4,947,442 additional
Common Shares at the public offering price listed on the cover page of this
prospectus. The Underwriters may exercise this option solely for the purpose of
covering over-allotments, if any, made in connection with the offering of the
Common Shares offered by this prospectus. To the extent the option is exercised,
each Underwriter will become obligated, subject to certain conditions, to
purchase approximately the same percentage of the additional Common Shares as
the number listed next to the Underwriter's name in the preceding table bears to
the total number of Common Shares listed next to the names of all Underwriters
in the preceding table.
The following table shows the per share and total public offering price,
underwriting discounts and commissions (sales load) and proceeds to the Fund.
These amounts are shown assuming both no exercise and full exercise of the
Underwriters' option to purchase up to an additional 4,947,442 Common Shares.
61
PER SHARE NO EXERCISE FULL EXERCISE
--------- ----------- -------------
Public offering price $20.00 $665,000,000 $763,948,840
Sales load $0.00 $0.00 $0.00
Proceeds to the Fund $20.00 $665,000,000 $763,948,840
The compensation and fees paid to the Underwriters described below under
"--Additional Compensation to be Paid by the Advisor" are not reimbursable to
the Advisor by the Fund and are therefore not reflected in the table above.
The Advisor (and not the Fund) will pay all organizational expenses of the
Fund and all offering costs associated with this offering. The Fund is not
obligated to repay any such organizational expenses or offering costs paid by
the Advisor.
The Underwriters have informed the Fund that they do not intend sales to
discretionary accounts to exceed five percent of the total number of Common
Shares offered by them.
In order to meet requirements for listing the Common Shares on the NYSE,
the Underwriters have undertaken to sell lots of 100 or more shares to a minimum
of 400 beneficial owners in the United States. The minimum investment
requirement is 100 common shares ($2,000).
The Fund's Common Shares have been approved for listing on the NYSE,
subject to notice of issuance, under the symbol "FTHY".
The Fund has agreed that, without the prior written consent of the
Representative on behalf of the Underwriters, it will not, during the period
ending 180 days after the date of this prospectus:
o offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, lend or otherwise transfer
or dispose of, directly or indirectly, any Common Shares or any
securities convertible into or exercisable or exchangeable for
Common Shares;
o file any registration statement with the SEC relating to the
offering of any Common Shares or any securities convertible into
or exercisable or exchangeable for Common Shares; or
o enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of
ownership of the Common Shares;
whether any such transaction described above is to be settled by delivery
of Common Shares or such other securities, in cash or otherwise.
The restrictions described in the immediately preceding paragraph do not
apply to:
o the sale of Common Shares to the Underwriters;
o any Common Shares issued pursuant to the Plan; or
o any Preferred Share issuance.
The Representative, in its sole discretion, may release the Common
Shares and other securities subject to the lock-up agreement described above in
whole or in part at any time with or without notice.
In order to facilitate the offering of the Common Shares, the Underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the Common Shares. Specifically, the Underwriters may sell more Common
Shares than they are obligated to purchase under the underwriting agreement,
creating a short position. A short sale is covered if the short position is no
greater than the number of Common Shares available for purchase by the
Underwriters under the over-allotment option. The Underwriters can close out a
covered short sale by exercising the over-allotment option or purchasing Common
Shares in the open market. In determining the source of Common Shares to close
out a covered short sale, the Underwriters will consider, among other things,
the open market price of the Common Shares compared to the price available under
the over-allotment option. The Underwriters may also sell Common Shares in
excess of the over-allotment option, creating a naked short position. The
Underwriters must close out any naked short position by purchasing Common Shares
in the open market. A naked short position is more likely to be created if the
Underwriters are concerned that there may be downward pressure on the price of
the Common Shares in the open market after pricing that could adversely affect
investors who purchase in the offering. As an additional means of facilitating
the offering, the Underwriters may bid for, and purchase, Common Shares in the
open market to stabilize the price of the Common Shares. Finally, the
underwriting syndicate may also reclaim selling concessions allowed to an
62
Underwriter or a dealer for distributing the Common Shares in the offering. Any
of these activities may raise or maintain the market price of the Common Shares
above independent market levels or prevent or retard a decline in the market
price of the Common Shares. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The Fund, the Advisor, and the Underwriters have agreed to indemnify each
other against certain liabilities, including liabilities under the 1933 Act.
A prospectus in electronic format may be made available on websites
maintained by one or more Underwriters, or selling group members, if any,
participating in this offering. The Representative may agree to allocate a
number of Common Shares to Underwriters for sale to their online brokerage
account holders. Internet distributions will be allocated by the Representative
to Underwriters that may make Internet distributions on the same basis as other
allocations.
Prior to this offering, there has been no public market for the Common
Shares. The initial public offering price for the Common Shares was determined
by negotiation among the Fund, the Advisor and the Representative. There can be
no assurance, however, that the price at which the Common Shares trade after
this offering will not be lower than the price at which they are sold by the
Underwriters or that an active trading market in the Common Shares will develop
and continue after this offering.
Prior to the public offering of the common shares, First Trust Portfolios
L.P., an affiliate of the Advisor ("FTP"), purchased Common Shares from the Fund
in an amount satisfying the net worth requirements of Section 14(a) of the 1940
Act, which requires the Fund to have a net worth of at least $100,000 prior to
making a public offering. As of the date of this prospectus, FTP owned 100% of
the Fund's outstanding Common Shares and therefore may be deemed to control the
Fund until such time as it owns less than 25% of the Fund's outstanding Common
Shares, which is expected to occur upon the closing of this offering.
The Fund anticipates that the Representative and certain other
Underwriters may from time to time act as brokers and dealers in connection with
the execution of its portfolio transactions after they have ceased to be
Underwriters and, subject to certain restrictions, may act as such brokers while
they are Underwriters.
The Underwriters and their respective affiliates are full service
financial institutions engaged in various activities, which may include
securities trading, commercial lending, investment banking, financial advisory,
investment management, principal investment, hedging, derivatives, financing and
brokerage activities. Certain of the Underwriters or their respective affiliates
from time to time have provided in the past, and may provide in the future,
securities trading, commercial lending, investment banking, financial advisory,
investment management, principal investment, hedging, derivatives, financing and
brokerage services to the Fund, certain of its executive officers and affiliates
and the Advisor and its affiliates in the ordinary course of business, for which
they have received, and may receive, customary fees and expenses.
No action has been taken in any jurisdiction (except in the United States)
that would permit a public offering of the Common Shares, or the possession,
circulation or distribution of this prospectus or any other material relating to
the Fund or the Common Shares where action for that purpose is required.
Accordingly, the Common Shares may not be offered or sold, directly or
indirectly, and neither this prospectus nor any other offering material or
advertisements in connection with the Common Shares may be distributed or
published, in or from any country or jurisdiction except in compliance with the
applicable rules and regulations of any such country or jurisdiction.
The principal business address of Morgan Stanley & Co. LLC is
1585 Broadway, New York, New York 10036.
ADDITIONAL COMPENSATION PAID BY THE ADVISOR
The Advisor (and not the Fund) has agreed to pay Morgan Stanley & Co. LLC,
from its own assets, an upfront structuring and syndication fee in the amount of
$5,056,331.56 for advice and services relating to the structure and design of
the Fund as well as services related to the sale and distribution of the Common
Shares. If the over-allotment option is not exercised, the upfront structuring
and syndication fee paid to Morgan Stanley & Co. LLC will not exceed 0.7604% of
the total public offering price of the Common Shares. These services provided by
Morgan Stanley & Co. LLC to the Advisor are unrelated to the Advisor's function
of advising the Fund as to its investments in securities or use of investment
strategies and investment techniques.
The Advisor (and not the Fund) has agreed to pay each of Oppenheimer & Co.
Inc., RBC Capital Markets, LLC, Stifel, Nicolaus & Company, Incorporated, BB&T
Capital Markets, a division of BB&T Securities, LLC, A.G.P./Alliance Global
Partners, Arete Wealth Management, LLC, B. Riley FBR, Inc., Brookline Capital
Markets, a Division of Arcadia Securities, LLC, D.A. Davidson & Co., Hilltop
Securities Inc., Incapital LLC, Janney Montgomery Scott LLC, JonesTrading
Institutional Services LLC, Ladenburg Thalmann & Co. Inc., Maxim Group LLC,
National Securities Corporation, Pershing LLC, Synovus Securities, Inc., USCA
Securities LLC, Wedbush Securities Inc., Wintrust Investments, LLC, Amerivet
Securities, Inc., Huntleigh Securities Corporation, Newbridge Securities
Corporation, Northland Securities, Inc., Arkadios Capital, Fidelity Capital
Markets, a division of National Financial Services LLC, Independent Financial
Group, LLC, and TD Ameritrade, Inc. from its own assets, an upfront fee in the
amount of $261,000, $693,000, $396,000, $76,878, $7,064, $81,209.88, $68,400,
$55,800, $81,000, $18,254.40, $84,636, $93,600, $79,830, $56,377.26, $4,904,
63
$19,384, $138,191.76, $16,379.60, $9,326.32, $59,400, $5,258.32, $1,200,
$121,831.74, $1,732, $5,357.28, $45,180, $83,376, $134,120.70 and $380,363.22,
respectively, for services related to the distribution of the Common Shares. If
the over-allotment option is not exercised, the upfront fee paid to each of
Oppenheimer & Co. Inc., RBC Capital Markets, LLC, Stifel, Nicolaus & Company,
Incorporated, BB&T Capital Markets, a division of BB&T Securities, LLC,
A.G.P./Alliance Global Partners, Arete Wealth Management, LLC, B. Riley FBR,
Inc., Brookline Capital Markets, a Division of Arcadia Securities, LLC, D.A.
Davidson & Co., Hilltop Securities Inc., Incapital LLC, Janney Montgomery Scott
LLC, JonesTrading Institutional Services LLC, Ladenburg Thalmann & Co. Inc.,
Maxim Group LLC, National Securities Corporation, Pershing LLC, Synovus
Securities, Inc., USCA Securities LLC, Wedbush Securities Inc., Wintrust
Investments, LLC, Amerivet Securities, Inc., Huntleigh Securities Corporation,
Newbridge Securities Corporation, Northland Securities, Inc., Arkadios Capital,
Fidelity Capital Markets, a division of National Financial Services LLC,
Independent Financial Group, LLC, and TD Ameritrade, Inc. will not exceed
0.0392%, 0.1042%, 0.0595%, 0.0116%, 0.0011%, 0.0122%, 0.0103%, 0.0084%, 0.0122%,
0.0027%, 0.0127%, 0.0141%, 0.0120%, 0.0085%, 0.0007%, 0.0029%, 0.0208%, 0.0025%,
0.0014%, 0.0089%, 0.0008%, 0.0002%, 0.0183%, 0.0003%, 0.0008%, 0.0068%, 0.0125%,
0.0202% and 0.0572%, respectively, of the total public offering price of the
Common Shares. These services provided by these Underwriters and other dealers
to the Advisor are unrelated to the Advisor's function of advising the Fund as
to its investments in securities or use of investment strategies and investment
techniques.
The amount of these structuring, syndication and other fees are calculated
based on the total respective sales of Common Shares by these Underwriters and
other dealers, including those Common Shares included in the Underwriters'
over-allotment option, and will be paid regardless of whether some or all of the
over-allotment option is exercised.
In addition, the Advisor (and not the Fund) has agreed to pay from its own
assets, compensation of $0.40 per Common Share to the Underwriters in connection
with the offering, which aggregate amount will not exceed 2.00% of the total
public offering price of the Common Shares.
Total underwriting compensation determined in accordance with Financial
Industry Regulatory Authority, Inc. ("FINRA") rules is summarized as follows.
The Advisor has agreed to reimburse the Underwriters for the reasonable fees and
disbursements of counsel to the Underwriters in connection with the review by
FINRA of the terms of the sale of the Common Shares in an amount not to exceed
$30,000 in the aggregate, which amount will not exceed 0.0045% of the total
public offering price of the Common Shares if the over-allotment option is not
exercised. The sum total of all compensation to the Underwriters and the other
dealers as referenced above in connection with this public offering of the
Common Shares, including expense reimbursement and all forms of structuring,
syndication and other fee payments to the Underwriters, will not exceed 3.2279%
of the total public offering price of the Common Shares.
64
CUSTODIAN, ADMINISTRATOR, FUND ACCOUNTANT AND TRANSFER AGENT
The custodian of the assets of the Fund is The Bank of New York Mellon,
240 Greenwich Street, New York, New York 10286. The Fund's dividend paying agent
is Computershare Inc., 250 Royall Street, Canton, Massachusetts 02021, and the
Fund's transfer agent is Computershare Trust Company, N.A., a fully owned
subsidiary of Computershare Inc., 250 Royall Street, Canton, Massachusetts
02021. Pursuant to an administration and accounting services agreement, The Bank
of New York Mellon provides certain administrative and accounting services to
the Fund, including maintaining the Fund's books of account, records of the
Fund's securities transactions, and certain other books and records; acting as
liaison with the Fund's independent registered public accounting firm by
providing such accountant with various audit-related information with respect to
the Fund; and providing other continuous accounting and administrative services.
As compensation for these services, the Fund has agreed to pay The Bank of New
York Mellon an annual fee, calculated daily and payable on a monthly basis, of
0.05% of the Fund's average net assets, subject to decrease with respect to
additional Fund net assets.
LEGAL MATTERS
Certain legal matters in connection with the Common Shares will be passed
upon for the Fund by Chapman and Cutler LLP, Chicago, Illinois, Weil Gotshal &
Manges LLP, New York, New York, advised the Underwriters in connection with the
offering of the Common Shares. Chapman and Cutler LLP and Weil, Gotshal & Manges
LLP may rely as to certain matters of Massachusetts law on the opinion of
Morgan, Lewis & Bockius LLP.
65
TABLE OF CONTENTS FOR THE STATEMENT
OF ADDITIONAL INFORMATION
PAGE
Investment Objective.......................................................... 1
Investment Restrictions....................................................... 1
Investment Policies and Techniques ........................................... 2
Additional Information about the Fund's Investments and Investment Risks...... 5
Other Investment Policies and Techniques...................................... 17
Management of the Fund........................................................ 33
Investment Advisor............................................................ 43
Proxy Voting Policies and Procedures.......................................... 48
Portfolio Transactions and Brokerage.......................................... 49
Repurchase of Fund Shares; Conversion to Open-End Fund........................ 51
Certain Provisions in the Declaration of Trust................................ 53
Federal Tax Matters........................................................... 55
Independent Registered Public Accounting Firm................................. 64
Custodian, Administrator, Fund Accountant and Transfer Agent.................. 64
Additional Information........................................................ 64
Report of Independent Registered Public Accounting Firm....................... 66
Statement of Assets and Liabilities........................................... 67
Appendix A--Ratings of Investments............................................A-1
Appendix B--ISS Proxy Voting Guidelines.......................................B-1
66
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33,250,000 SHARES
FIRST TRUST HIGH YIELD OPPORTUNITIES 2027 TERM FUND
COMMON SHARES
$20.00 PER SHARE
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P R O S P E C T U S
June 25, 2020
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MORGAN STANLEY
RBC CAPITAL MARKETS
STIFEL
OPPENHEIMER & CO.
BB&T CAPITAL MARKETS
A.G.P.
ARETE WEALTH
B. RILEY FBR
BROOKLINE CAPITAL MARKETS
D.A. DAVIDSON & CO.
HILLTOPSECURITIES
INCAPITAL
JANNEY MONTGOMERY SCOTT
JONESTRADING
LADENBURG THALMANN
MAXIM GROUP LLC
NATIONAL SECURITIES CORPORATION
PERSHING LLC
SYNOVUS SECURITIES, INC.
U.S. CAPITAL ADVISORS
WEDBUSH SECURITIES
WINTRUST INVESTMENTS
Until July 20, 2020 (25 days after the date of this prospectus), all
dealers that buy, sell or trade the Common Shares, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the dealers' obligation to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
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