Annual Report Avenue Capital
Annual Report Avenue Capital
Annual Report Avenue Capital
Manager Commentary
October 31, 2014
Dear Shareholder,
We are pleased to present the 2014 Annual Report for Avenue Income Credit Strategies Fund (the Fund). The
following Manager Commentary covers the one year ended October31, 2014.
Fund Objective
The Funds primary investment objective is to seek a high level of current income with a secondary objective of
capital appreciation. Depending on market conditions and the Funds outlook over time, the Fund seeks to achieve
its investment objectives by opportunistically investing primarily in loan and debt instruments (and loan-related or
debt-related instruments, including repurchase and reverse repurchase agreements and derivative instruments) of
issuers that operate in a variety of industries and geographic regions.
Performance1
For the one year ended October31, 2014, the Fund had a total return of 6.19% based on net asset value, and 4.24%
based on market value. The average annual total return from January27, 2011 (inception) through October31, 2014,
was 6.95% based on net asset value, and 2.92% based on market value.2,3 The closing price of the Funds shares as of
October31, 2014 on the New York Stock Exchange was $16.35 representing a 9.37% discount to the Funds net asset
value per share of $18.04.
High Yield Bond and Bank Loan Market Returns for the Period November1, 2013 to October 31, 20141,4
The Fund invests across a range of assets. The below indices cover asset classes that Avenue Capital
Management II, L.P. (the Investment Adviser) believes are similar to the asset classes to which the Funds assets
are exposed (in whole or in part).
Fund/Index
Avenue Income Credit Strategies Fund (ACP) based on net asset value
Avenue Income Credit Strategies Fund (ACP) based on market value
Barclays U.S. Corporate High Yield Index
CS Leveraged Loan Index
CHC Helicopter SA, JC Penney Corporation, Inc., American Airlines, Avaya, Inc. and Clondalkin Acquisition BV5
The top issuer detractors were:
Hercules Offshore LLC, Caesars Entertainment Corp., Halcon Resources LLC, iShares iBoxx Investment
Grade Corporate Bond and NII International Telecom S.C.A.6
During the year, the Funds use of leverage increased from 28.1% to 29.8% as a percentage of Managed Assets or
from $95,000,000 to $100,000,000.
Global GDP growth forecasts are being revised down amid a lumpy recovery. In October the IMF cut its
2014 growth forecast for 18 countries that use the euro to 0.8% from their 1.1% forecast in July.10
We believe slower growth, combined with supply concerns, has caused sharp declines in commodity prices
including oil and metals.
It is our view that recent geo-political turmoil has created more uncertainty related to macro GDP growth
forecasts and has been a contributing factor in the recent selloff in the broader market.
The impact of the Federal Reserve ending quantitative easing and raising rates. The Fed has reiterated its
intent to move slowly with respect to increasing rates, stating that it needs to see more improvement in the
job market.
Europe and China undertaking stimulus actions and the probable positive consequences of these actions
The potential impact from increased equity market volatility
While there is likely to be continued volatility in the near term for credit and risk assets11, we believe that the
current yield to worst for the high yield market is attractive for the medium-to-long term. There has been a
substantial amount of bonds and loans that have sold off since the beginning of the quarter which should provide
the Fund with an increased investment opportunity set.
The Investment Advisers investment team will continue working diligently to identify attractive investment
opportunities across the performing and stressed universe on a global basis. We appreciate your continued interest
and support.
Avenue Capital Management II, L.P.
December, 2014
Alternative investments are speculative and involve substantial risks. It is possible that investors may lose some
or all of their investment. An investment in the Fund is not appropriate for all investors, and the Fund is not
intended to be a complete investment program.
The views and opinions in the preceding discussion are subject to change. There is no guarantee that any market forecast set
forth in the discussion will be realized. This material represents an assessment of the market environment at a specific point in
time, should not be relied upon as investment advice and is not intended to predict or depict performance of any investment.
1
Performance data shown represents past performance and does not guarantee future results. Current
performance may be lower or higher than the performance data shown. Investment returns and principal
value will fluctuate, and when sold, your investment may be worth more or less than its original cost. All
2
7
8
9
10
11
returns assume reinvestment of all dividends. The Fund is subject to various fees and expenses which include
advisory fees, operating expenses, investment related expenses (including but not limited to interest on
borrowings) and extraordinary expenses, and the performance shown above reflects the deduction of such
fees and expenses. The performance above reflects fee waivers and/or expense reimbursements made by the
Adviser. Absent such waivers and/or reimbursements, the Funds returns would be lower. Performance
information is not annualized, unless otherwise noted. The Fund commenced operations on January27, 2011.
The performance shown thus represents the Funds results for a short period of time and may not be
indicative of the performance the Fund will be able to generate over longer periods. Current performance for
the most recent month end can be obtained by calling (877) 525-7330. An independent accountant has not
audited, reviewed or compiled the performance results.
Includes dilution of approximately $0.97 to NAV per share resulting from the Funds transferable rights
offering, which expired on May 17, 2013. In connection with such offering, the Fund issued 3,268,518
additional common shares at a subscription price per share below the then-current NAV per share of the Fund.
Includes dilution of approximately $0.94 to NAV per share resulting from the Funds transferable rights
offering, which expired on March 23, 2012. In connection with such offering, the Fund issued 2,450,466
additional common shares at a subscription price per share below the then-current NAV per share of the Fund.
Index information was compiled from sources that the Investment Adviser believes to be reliable. No
representation or guarantee is made hereby with respect to the accuracy or completeness of such data. The
Barclays U.S. Corporate High Yield Index comprises issues that have at least $150 million par value
outstanding, a maximum credit rating of Ba1 or BB+ (excluding defaulted issues) and at least one year to
maturity. The CS Leveraged Loan Index is designed to mirror the investible universe of the $US-denominated
leveraged loan market. Investors cannot invest directly in an index, and index performance does not reflect the
deduction of any fees or expenses. There are material differences between such indices and the Fund,
including without limitation that such indices are unmanaged, broadly-based indices, do not reflect payment
of management or brokerage fees and differ in numerous other respects from the portfolio composition of the
Fund; as a result, the Funds investment portfolio is materially different from any given index. Indices include
reinvestment of dividends and other income.
The top contributors are evaluated on a total profit and loss basis, which includes realized and unrealized
market value gains and losses, impact from foreign exchange transactions, and accrued interest. The list of top
contributors does not represent all investments held, purchased or sold during the reporting period and is
based on the investment advisers books and records. As of the reporting date of October 31, 2014, the
positions listed represented the following percentages of the Fund on a market value basis: CHC Helicopter
SA 1.4%, JC Penney Corporation, Inc. 1.8%, American Airlines, Inc. 2.5%, Avaya, Inc. 2.4% and Clondalkin
Acquisition BV 1.5%.
The top detractors are evaluated on a total profit and loss basis, which includes realized and unrealized
market value gains and losses, impact from foreign exchange transactions, and accrued interest. The list of top
detractors does not represent all investments held, purchased or sold during the reporting period and is based
on the investment advisers books and records. As of the reporting date of October 31, 2014, the positions
listed represented the following percentages of the Fund on a market value basis: Hercules Offshore LLC 0.0%,
Caesars Entertainment Corp. 3.9%, Halcon Resources LLC 0.7%, iShares iBoxx Investment Grade Corporate
Bond ETF -0.5% and NII International Telecom S.C.A. 0.0%.
Bloomberg, November25, 2014.
Bank of America Merrill Lynch Mercury Research website, November25, 2014.
Bank of America Merrill Lynch Mercury Research website, November25, 2014.
International Monetary Fund, World Economic and Financial Surveys, October2014.
Risk assets generally refers to assets that have a significant degree of price volatility, such as equities,
commodities, high-yield bonds, real estate and currencies.
Ratings(c)
40%
40%
Geographic Allocation(d)
40%
21%
20%
4%
17%
10%
0%
5%
Canada
Cash and
Cash Equivalents(e)
NR
0%
CCC
Equity/ETF
Short
Junior
Subordinated
Bonds
Cash and
Cash Equivalents(e)
Loans(h)
Senior Unsecured
Bonds
Senior Secured
Bonds
Government Debt
0%
4%
10%
4%
28%
30%
20%
10%
10%
17%
BB
17%
BBB
20%
50%
Europe
25%
50%
30%
30%
United States
of America
30%
60%
35%
33%
10%
3.2%
2.7%
2.6%
2.5%
Faenza GMBH
2.4%
2%
2.4%
0%
2.4%
Chassix
2.3%
9%
8%
5%
5%
Energy
Equipment &
Services
Media
4%
Containers &
Packaging
4%
4%
Hotels,
Restaurants &
Leisure
6%
1.8%
1.8%
Total Top 10:
24.1%
(a) Holdings are subject to change without notice. Calculated as a percent of managed assets as of the date of this document. Where applicable, percentages may not
add to 100% due to rounding.
(b) Security Type, as defined by Avenue Capital Management II, L.P. (the Investment Adviser), is sourced from Bloomberg as well as developed via internal
classifications.
(c) Ratings information represent Standard & Poors ratings on instruments in the portfolio. Ratings are provided for informational purposes only and may change
over time. Standard & Poors rates securities from AAA (highest quality) to C (lowest quality), and D to indicate securities in default. BB and below are
considered below investment grade securities. Greater risk, such as increased volatility, limited liquidity, prepayment, non-payment and increased default risk, is
inherent in portfolios that invest in high yield (junk) bonds. The Fund may invest all or a substantial portion of its assets in below investment grade securities
which are often referred to as high yield or junk securities.
(d) The geographic allocation is based on where the Investment Adviser believes the country of risk to be. Country of risk is the country where the majority of the
companys operations are based or where it is headquartered. Investment in non-U.S. securities is subject to the risk of currency fluctuations and to economic and
political risks associated with such foreign countries.
(e) Cash and Cash Equivalents includes cash as well as other non-investment asset and liabilities (net), excluding borrowings under credit facilities.
(f) Industries are represented using GICS classifications.
(g) The holdings of the Fund are calculated based on Issuer as opposed to Issue. The number of Issues the Fund owns will be significantly higher than the number of
Issuers set forth herein.
(h) Loans may include senior secured, senior unsecured and subordinated loan obligations.
Maturity
7.75%
12/15/2020
7.88%
9/1/2019
589
616,978
8.39%
3/1/2022
5,163
5,821,021
10.00%
9.25%
7.38%
7.75%
12/15/2018
8/1/2018
10/15/2022
10/15/2021
2,490
5,600
1,084
2,376
2,141,400
5,432,000
1,138,200
2,414,610
11,126,210
8.75%
5/15/2017
2,425
2,467,438
1,400
1,646,750
7.65%
(b)
4,728
Value
4,917,120
8.13%
8/1/2019
5,017
4,941,745
8.88%
10.63%
1/1/2020
5/15/2017
3,195
2,925
3,506,512
2,888,438
3,700
2,199
3,792,500
1,926,874
12,114,324
1,357
1,721,781
6,100
8,202,243
4,000
4,360,000
9.00%
10.50%
Computers& Peripherals 0.7%
Oberthur Technologies Holding SAS (a)
Construction Materials 3.5%
CeramTec Group GmbH (a)
Consumer Finance 1.8%
Springleaf Finance Corp.
Containers& Packaging 1.8%
Ardagh Finance Holdings SA PIK (a)
BWAY Holding Co. (a)
Principal
Amount (000)
Coupon
4/1/2019(a)
3/1/2021(a)
9.25%
4/30/2020
8.25%
8/15/2021
6.90%
12/15/2017
8.63%
9.13%
6/15/2019
8/15/2021
3,261
841
3,334,405
872,538
4,206,943
7.38%
4/23/2021
950
928,625
9.38%
9.63%
6/1/2021
5/1/2018
3,087
5,715
3,279,938
5,886,450
8.00%
9.00%
10.88%
11/15/2018(a)
11/15/2018(a)
2/15/2018(a)
2,725
1,500
1,422
2,616,000
1,284,326
1,294,020
14,360,734
8.25%
9.38%
1/15/2019
10/15/2017
5,000
956
5,106,875
978,705
6,085,580
EUR
CAD
$
Security Description
Coupon
Maturity
5.63%
7/15/2022
7.05%
7.50%
7.58%
7.69%
12/1/2027
11/6/2033
9/15/2025
6/15/2025
745
120
555
900
771,075
127,200
621,600
1,017,000
6.88%
8.13%
11/15/2031
4/1/2022
2,475
525
2,425,500
601,781
6,855,168
9.00%
11.25%
5.66%
2/15/2020
6/1/2017
6/30/2027
6,215
5,850
2,323
4,692,325
4,387,500
3,738,313
12,818,138
7.25%
7.50%
2/1/2023
9/15/2021
1,016
1,329
1,010,920
1,342,290
240
213
7,000
234,000
213,799
7,595,000
10,396,009
1,770
981
1,831,950
895,162
2,727,112
3,000
3,000
4,445,550
4,072,500
8,518,050
1,246
Value
1,291,012
GBP
1/15/2019(a)
11/1/2019(a)
11/15/2020(a)
6.75%
6.30%
11/1/2019
4/1/2020
8.00%
8.18%
5/22/2038(a)
5/15/2058
Insurance 3.6%
American International Group, Inc.:
Machinery 0.8%
Waterjet Holdings, Inc. (a)
Marine 3.7%
Navios Maritime Acquisition Corp. / Navios Acquisition Finance US, Inc. (a)
Navios Maritime Holdings, Inc. / Navios Maritime FinanceII US, Inc.:
Media 9.9%
Altice SA (a)
Clear Channel Communications, Inc.
Clear Channel Communications, Inc. PIK
Clear Channel Worldwide Holdings, Inc.
Gibson Brands, Inc. (a)
Univision Communications, Inc.:
EUR
$
7.63%
2/1/2020
1,840
1,922,800
8.13%
11/15/2021
2,780
2,828,650
7.38%
8.13%
1/15/2022(a)
2/15/2019
1,046
5,127
1,051,230
4,960,372
8,840,252
7.75%
11.25%
14.00%
7.63%
8.88%
5/15/2022
3/1/2021
2/1/2021
3/15/2020
8/1/2018
1,030
8,610
1,872
3,500
1,907
1,081,500
9,105,075
1,628,231
3,723,125
1,830,720
7.88%
8.50%
11/1/2020(a)
5/15/2021(a)
3,000
2,500
3,243,750
2,706,250
23,318,651
Security Description
Coupon
Maturity
9.88%
8.75%
9.75%
5/15/2019
12/15/2018
6/15/2019
5.65%
8.00%
8.75%
6/1/2020
10/15/2021
10/15/2021
5,150
150
645
4,235,875
160,003
690,150
5,086,028
8.50%
8/1/2019
4,000
2,560,000
9.25%
9.75%
11.75%
12.50%
2/15/2022
7/15/2020
5/15/2019
9/1/2017
1,169
944
900
178
949,812
787,650
837,000
1,602,900
6,737,362
7.50%
4/15/2018
EUR
4,560
5,914,367
9.25%
6/1/2020
5,675
6,086,437
8.13%
9.00%
9.38%
7/15/2021
10/15/2019
4/1/2019
937
5,659
3,250
897,177
5,075,444
3,534,375
9,506,996
9.50%
3/31/2020
3,375
5,905,145
EUR
$
GBP
2,268
820
2,263
3,083,104
885,600
2,455,355
6,424,059
204,574,066
7.75%
7/31/2022
10.00%
8.25%
11/30/2020
7/31/2022
9.50%
4.76%
5/8/2021
6/3/2016
9.25%
Value
4,633
4,528,269
3,600
5,481
3,600,000
5,371,380
8,971,380
1,410
4,876
1,415,288
5,703,055
7,118,343
2/20/2020
4,000
3,773,320
6.25%
5/16/2020
2,095
2,021,434
3.81%
3/13/2017
GBP
2,576
3,914,314
7.50%
3/11/2022
5,167
5,001,656
EUR
Coupon
Maturity
Principal
Amount (000)
8.50%
7/9/2021
9.50%
10/29/2019
5,680
5,680,000
8.50%
3/3/2021
3,200
3,248,800
6.75%
8.25%
8/13/2021
5/6/2022
2,527
5,157
2,453,238
5,028,075
7,481,313
8.75%
11.00%
11.00%
11/1/2018
1/2/2017
3/31/2019
5,376
2,275
1,522
5,102,670
2,272,156
1,434,815
8,809,641
6.25%
11.00%
7/25/2019
7/25/2020
1,473
755
1,458,493
739,900
2,198,393
7.50%
1/22/2022
997
989,544
7.25%
6/9/2021
3,485
3,493,712
Software 0.4%
Applied Systems, Inc. 2nd Lien Term Loan (e)
Trading Companies& Distributors 1.5%
Neff Rental LLC 2nd Lien Term Loan (e)
2,992
Value
2,934,045
70,164,164
7.88%
3/1/2026
1,045
1,533,538
9.00%
4/1/2063
3,625
4,572,031
6,105,569
8.00%
7/1/2035
1,300
1,134,328
1,134,328
281,978,127
42,670
42,670,042
42,670,042
324,648,169
Shares
(10,722)
Value
$ (1,279,563)
(1,279,563)
Coupon
Maturity
6.75%
7.25%
7/15/2022
8/15/2024
Principal
Amount (000)
(711)
(498)
(545,693)
(385,950)
(931,643)
(2,211,206)
(86,624,245)
$235,812,718
Value
91.0%
8.9
7.3
6.1
5.8
4.6
3.7
3.5
2.5
1.4
1.3
1.1
0.4
$214,489,437
21,090,972
17,283,771
14,439,900
13,573,623
10,931,348
8,840,252
8,325,394
5,914,367
3,279,938
3,083,104
2,467,438
928,625
137.6%
$324,648,169
(0.9)%
$ (2,211,206)
(0.9)%
$ (2,211,206)
The geographic allocation is based on where Avenue Capital ManagementII L.P., the Investment Adviser, believes the country of risk to be. Country of risk is traditionally the country
where the majority of the companys operations are based or where it is headquartered. Investments in non-U.S. securities are subject to the risk of currency fluctuations and to
political risks associated with such foreign countries.
Amount
In Exchange for
U.S. $
Value
$ 1,409,601
31,775,452
13,193,890
Net Unrealized
Appreciation
(Depreciation)
(9,290)
(293,228)
(13,632)
Counterparty
(316,150)
Forward Foreign Currency Contracts to Sell:
11/07/2014
CAD 1,578,375
1,400,311
02/09/2015
CAD 1,578,375
1,396,993
11/07/2014
EUR 25,121,988
31,482,224
02/09/2015
EUR 23,849,075
29,906,343
11/07/2014
GBP 8,239,404
13,180,258
02/09/2015
GBP 8,239,404
13,170,004
1,436,884
1,406,182
33,582,377
30,124,483
13,868,977
13,183,656
36,573
9,189
2,100,153
218,140
688,719
13,652
3,066,426
Total
$2,750,276
Swap Contracts:
At October31, 2014, outstanding swap contracts were as follows:
Buy Protection:
Counterparty
OTC Swaps:
Goldman Sachs
*
**
Reference
Obligation
Implied Credit
Spread
(Basis Points)
Notional
Amount
Fixed
Rate*
Russian Federation
242
USD 3,000,000
1.00
Expiration Date
Market
Value**
Upfront
Premiums
Paid
(Received)
Unrealized
Appreciation/
(Depreciation)
12/20/2019
$195,960
$228,676
$(32,716)
The fixed rate represents the fixed annual rate of interest paid by the Fund (as a buyer of protection) or received by the Fund (as a seller of protection) annually on the notional
amount of the credit default swap contract.
Implied credit spreads are an indication of the sellers performance risk, related to the likelihood of a credit event occurring that would require a seller to make payment to a
buyer. Implied credit spreads are used to determine the value of swap contracts and reflect the cost of buying/selling protection, which may include upfront payments made to
enter into the contract. Therefore, higher spreads would indicate a greater likelihood that a seller will be obligated to perform (i.e., make payment) under the swap contract.
Increasing values, in absolute terms and relative to notional amounts, are also indicative of greater performance risk. Implied credit spreads for credit default swaps on credit
indexes are linked to the weighted average spread across the underlying reference obligations included in a particular index.
10
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
281,978,127
42,670,042
8,702,196
6,637,312
5,260,827
2,750,276
228,676
78,649
18,819
348,324,924
Liabilities
Payable for line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payable for investments purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold short, at value (proceeds of $2,247,650) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued investment advisory fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable short sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized depreciation on OTC swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued Trustees fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,000,000
9,545,664
2,211,206
369,451
111,957
32,716
12,329
228,883
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
112,512,206
Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
235,812,718
13,074
227,747,776
3,768,108
602,760
3,681,000
$
235,812,718
18.04
11
27,539,682
56,069
27,595,751
Expenses
Investment Advisory fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense and commitment fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend expense on securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fund Accounting and Custody fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administration fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trustees fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expenses related to securities sold short . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholder reporting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer agent fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan servicing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses recouped by Investment Adviser (Note4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,321,562
1,114,953
356,951
285,094
178,246
151,424
98,994
75,957
64,167
54,338
9,355
1,130
130,741
6,842,912
283,461
7,126,373
20,469,378
3,422,641
(446,318)
(3,024,486)
(262,178)
535
(309,806)
(12,067,460)
155,269
4,852,595
180,764
(32,716)
(6,911,548)
12
(7,221,354)
$
13,248,024
Year Ended
October31, 2013
20,469,378
17,589,720
(309,806)
547,846
(6,911,548)
8,723,138
13,248,024
26,860,704
(20,128,991)
(907,191)
(15,549,479)
(564,183)
(21,036,182)
(16,113,662)
51,792,372
70,707
51,863,079
(7,788,158)
243,600,876
$
13
235,812,718
62,610,121
180,990,755
$
243,600,876
13,248,024
(160,622,711)
186,310,504
(1,314,997)
(26,228,961)
(268,858)
7,668,172
1,349,743
(4,852,595)
9,802
32,132
(57,303)
9,112
51,736
(228,676)
(9,010,768)
1,027,295
446,318
(155,269)
32,716
12,067,460
(3,422,641)
16,090,235
(21,036,182)
5,000,000
(16,036,182)
54,053
24,596
78,649
1,082,821
Non-cash transactions for the year ended October 31, 2014 include $43,925,171 of non-cash exchanges and $1,314,997 of payment
in-kind interest income.
14
Year Ended
October31, 2012
$
17.22
1.57
(0.55)
1.02
1.56
1.02
2.58
1.51
2.13
3.64
1.01
(1.94)
(0.93)
(1.54)
(0.07)
(1.61)
(1.39)
(0.05)
(1.44)
(1.46)
(1.46)
(0.91)
(0.91)
(0.90)
(0.04)
18.46
18.22
16.94%5
21.19%5
180,991
2.50%
(0.04)
17.22
16.40
(5.12)%4
(13.71)%4
126,587
2.50%7
Year Ended
October31, 2014
Net asset value, beginning of period . . . . . . . . $
18.63
$
$
18.04
$
16.35
$
6.19%
4.24%
235,813
$
2.89%
(0.93)
(0.04)
18.63
$
17.20
$
9.29%6
2.23%6
243,601
$
2.70%
2.27%9
2.27%
2.12%
2.09%7
8.31%
8.40%
8.61%
7.28%7
2.77%
2.64%
2.77%
3.00%7
8.43%
48%
100,000
$
8.46%
89%
95,000
$
8.34%
60%
59,000
6.78%7
56%4
43,000
4,068
3,944
$
$
2
3
4
5
7
8
$
$
3,358
3,564
Commencement of operations.
Net asset value, (NAV), at beginning of period reflects the deduction of the underwriters discount of $0.90 per share from the
$20.00 offering price.
Per share amounts have been calculated using average shares outstanding.
Total market value return is computed based upon the New York Stock Exchange market price of the Funds shares and excludes the
effects of brokerage commissions. Total net asset value return measures the changes in value over the period indicated, taking into
account dividends as reinvested. Dividends and distributions are assumed for purposes of these calculations to be reinvested at
prices obtained under the Funds dividend reinvestment plan.
Not annualized.
Includes dilution (net of offering costs) of approximately $0.94 to NAV per share resulting from the Funds transferrable rights
offering, which expired on March23, 2012. In connection with such offering, the Fund issued 2,450,466 additional common shares
at a subscription price per share below the then-current NAV per share of the Fund.
Includes dilution (net of offering costs) of approximately $0.97 to NAV per share resulting from the Funds transferrable rights
offering, which expired on May17, 2013. In connection with such offering, the Fund issued 3,268,518 additional common shares at a
subscription price per share below the then-current NAV per share of the Fund.
Annualized.
Calculated by subtracting the Funds total liabilities (not including borrowings) from the Funds total assets and dividing by the total
number of senior indebtedness units, where one unit equals $1,000 of senior indebtedness.
For the year ended October 31, 2014, the ratio of expenses to average net assets excludes dividend and interest expenses on
securities sold short, interest expense, commitment fee and loan servicing fees.
See Accompanying Notes to Financial Statements.
15
Under the terms of the Expense Limitation Agreement, if the Funds expense ratio declines sufficiently, the
Fund may be liable to the Investment Adviser to repay such reimbursed amounts until no later than October31,
2015, in the case of amounts reimbursed during the second fiscal year.
State Street provides, or arranges for the provision of certain administrative services for the Fund, including
preparing certain reports and other documents required by federal and/or state laws and regulations. State Street
also provides legal administration services, including corporate secretarial services and preparing regulatory
filings. For administration related services, State Street receives an annual fee, plus certain out-of-pocket expenses.
The Fund has also contracted with State Street to provide custody, fund accounting and transfer agent services
to the Fund. Custody, fund accounting and transfer agent fees are payable monthly based on assets held in
custody, investment purchases and sales activity and other factors, plus reimbursement for certain out-of-pocket
expenses. In addition, the Fund has entered into repurchase agreements and foreign currency transactions with
State Street during the period.
5. Related Party Transactions
No shareholder, to the knowledge of the Fund, other than (i) Morgan Stanley and Morgan Stanley Smith
Barney LLC (together, MS) (ii)First Trust Portfolios L.P., First Trust Advisors L.P. and The Charger Corporation
(together, First Trust), and Guggenheim Capital, LLC, Guggenheim Partners, LLC, GI Holdco II, LLC, GI
Holdco, LLC, Guggenheim Partners Investment Management Holdings, LLC, Guggenheim Funds Services
Holdings, LLC, Guggenheim Funds Services, LLC, Guggenheim Funds Distributors, LLC (together,
Guggenheim) beneficially owned more than five percent of the Funds Common Shares.
On February10, 2014, MS filed an amended beneficial ownership report on Schedule 13G with the SEC stating
that as of December31, 2013 it beneficially owned 1,607,528 Common Shares. Based on the share amounts shown
in this filing, the holdings held by MS (assuming the percentage remained constant) represented approximately
12.3%, of the Funds October31, 2014 net assets
On February12, 2014, First Trust filed an amended beneficial ownership report on Schedule 13G with the SEC
stating that as of December31, 2013 it beneficially owned 2,683,646 Common Shares. Based on the share amounts
shown in this filing, the holdings held by First Trust (assuming the percentage remained constant) represented
approximately 20.5%, of the Funds October31, 2014 net assets.
21
Price
Shares
Amount
$17.06
16.78
16.54
16.60
16.46
16.55
117,366
168,134
114,796
160,204
75,000
2,633,018
$ 2,002,733
2,820,616
1,898,955
2,658,746
1,234,575
43,576,448
Gross Proceeds
Commissions
Trading Profits
3,268,518
Net Proceeds
Offering Costs (charged against Paid in Capital)
54,192,073
(2,032,202)
17,000
52,176,871
(384,499)
$51,792,372
* Rights converted to newly issued shares prior to the expiration of the Offer. Trading profits realized by UBS Securities LLC, the deal manager, were reimbursed to the Fund and
treated as additional proceeds.
** Expiration date.
22
Year Ended
October31, 2013
Sale of shares
Shares issued through dividend reinvestment
3,268,518
3,688
Net Increase
3,272,206
Undistributed
Net Investment Income
$1,163,043
Accumulated
Net Realized Gain
$(1,163,043)
The tax character of distributions declared for the years ended October31, 2014 and October31, 2013, were as
follows:
Distributions declared from:
Ordinary income*
October31, 2014
October31, 2013
$21,036,182
$16,113,662
* For tax purposes short-term capital gains distributions, if any, are considered ordinary income distributions.
As of October 31, 2014, the components of distributable earnings (accumulated losses) and unrealized
appreciation (depreciation) on a tax basis were as follows:
Undistributed
Ordinary
Income
$4,959,497
Undistributed
Long-Term
Capital Gains
$2,225,634
Net Unrealized
Appreciation*
$914,123
* The differences between book-basis and tax-basis net unrealized appreciation are primarily due to wash sales and forward contracts being treated as realized for tax purposes.
The cost and unrealized appreciation (depreciation) of investments in securities of the Fund at October 31,
2014, as determined on a federal income tax basis, were as follows:
Aggregate cost of securities held long
$323,696,941
$ 11,034,242
(10,083,014)
951,228
987,672
36,444
23
Derivative
Forward foreign currency contracts
1
Statement of Assets and Liabilities location: Net unrealized appreciation on open forward foreign currency contracts
The effect of derivative instruments on the Statement of Operations whose primary underlying risk exposure is
foreign exchange for the year ended October31, 2014 was as follows
Realized Gain
(Loss) on
Derivatives
Recognized in
Income1
$(3,024,486)
Change in
Unrealized
Appreciation
(Depreciation) on
Derivatives
Recognized in
Income2
$4,852,595
Statement of Operations location: Net realized gain (loss) Forward foreign currency contracts
Statement of Operations location: Net change in unrealized appreciation (depreciation) Forward foreign currency contracts
The average volume of outstanding forward foreign currency contracts bought and sold measured at each
month end during the year ended October31, 2014 was approximately $24,284,786 and $81,604,960, respectively.
The Fund is subject to credit risk in the normal course of pursuing its investment objectives. The Fund enters
into credit default swap contracts to manage its credit risk, to gain a particular exposure to a credit risk, or to
enhance return.
At October31, 2014 the fair value of derivative instruments whose primary underlying risk exposure is credit
risk at October31, 2014 was as follows:
Fair Value
Asset Derivative1
Liability Derivative1
$195,960
$
Derivative
Credit default swaps
1
Statement of Assets and Liabilities location: Premium paid for OTC swap contracts and Unrealized depreciation on OTC swap contracts, respectively.
The effect of derivative instruments on the Statement of Operations whose primary underlying risk exposure is
credit risk for the year ended October31, 2014 was as follows:
Realized Gain
(Loss) on
Derivatives
Recognized in
Income1
$535
24
Change in
Unrealized
Appreciation
(Depreciation) on
Derivatives
Recognized in
Income2
$(32,716)
Gross Assets in
Derivatives (Liabilities)
Statement of Assets
Available for
and Liabilities
Offset
$3,066,426
$(316,150)
195,960
$3,262,386
$(316,150)
Non-cash
Collateral
Received(a)
$
Gross Liabilities in
Derivatives (Assets)
Non-cash
Statement of Assets
Available for
Collateral
Counterparty
and Liabilities
Offset
Pledged(a)
State Street Bank and Trust Co.
$316,150
$(316,150)
$
$316,150
$(316,150)
$
(a)
In some instances, the actual collateral received and/or pledged may be more than the amount shown due to overcollateralization.
(b)
Net amount represents the net amount due from the counterparty in the event of default.
(c)
Net amount represents the net amount payable to the counterparty in the event of default.
Cash
Collateral
Received(a)
$
(195,960)
$(195,960)
Net Amount of
Derivative
Assets(b)
$2,750,276
$2,750,276
Cash
Collateral
Pledged(a)
$
$
Net Amount of
Derivative
Assets(c)
$
$
29
Other
Significant
Observable
Inputs
(Level1)
Significant
Unobservable
Inputs
(Level2)
(Level3)
Total
3,600,000
$ 204,574,066
6,105,569
70,164,164
1,134,328
42,670,042
2,750,276
$3,600,000
$327,398,445
$ 204,574,066
6,105,569
66,564,164
1,134,328
42,670,042
2,750,276
$323,798,445
(1,279,563)
$(1,279,563)
(931,643)
(32,716)
$
(964,359)
(2,211,206)
(32,716)
$ (2,243,922)
* Other financial instruments such as forward foreign currency contracts and credit default swaps are valued at the unrealized appreciation/(depreciation) of the instrument.
Quantitative Information about Level3 Fair Value Inputs
Senior Loans
Fair Value At
10/31/14
$3,600,000
Valuation Technique
Third-Party Vendor
Unobservable Input
Vendor quotes
Range
$97 - $100.00
The Investment Adviser has established a Valuation Committee (the Committee) which is responsible for
overseeing the pricing and valuation of all securities held in the Fund. The Committee operates under pricing and
valuation policies and procedures established by the Fund and approved by the Board, including pricing policies
which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and
procedures. In particular, the pricing policies describe how to determine market quotations for securities and
other instruments. The Committees responsibilities include: 1) fair value and liquidity determinations (and
oversight of any third parties to whom any responsibility for fair value and liquidity determinations is delegated),
and 2) regular monitoring of the Funds pricing and valuation policies and procedures and modification or
enhancement of these policies and procedures (or recommendation of the modification of these policies and
procedures) as the Committee believes appropriate. The Committee is also responsible for monitoring the
implementation of the pricing policies by the Fund and third parties which perform certain pricing functions in
accordance with the pricing policies. The Investment Adviser is responsible for the oversight of the third party on
a day-to-day basis. The Committee and the Investment Adviser perform a series of activities to provide
reasonable assurance of the accuracy of prices including: 1) periodic vendor due diligence meetings, review of
methodologies, new developments and processes at vendors, 2) daily comparison of security valuation versus
prior day for all securities that exceeded established thresholds, and 3) daily review of unpriced, stale, and
variance reports with exceptions reviewed by and the Committee.
31
The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to
determine fair value:
Investments
in
Senior Loans
Total
$15,488,767
(3,022,500)
(9,086,767)
10,569
66,391
143,540
$15,488,767
(3,022,500)
(9,086,767)
10,569
66,391
143,540
$ 3,600,000
$ 3,600,000
Change in net unrealized appreciation (depreciation) on Investments still held as of October31, 2014*
143,540
143,540
Transfers are reflected at the value of the securities at the beginning of the period. Transfers from Level 3 to
Level2 were due to an increase in the availability of significant observable inputs in determining the fair value of
these investments.
For information related to geographical and industry categorization of investments and types of derivative
contracts held, please refer to the Schedule of Investments.
13. Other
On March 17, 2011, the Board approved a share repurchase program for the Fund. Under the repurchase
program, the Fund is authorized to make open market purchases of its Common Shares as a measure to reduce
any discount from net asset value in the market price of the Common Shares. The program authorizes the Fund to
repurchase up to 10% of its outstanding Common Shares in any calendar year. The Fund is not required to make
any such repurchases and there can be no assurances that it will. There also can be no assurances that any such
repurchases would have the effect of reducing any discount from net asset value in the market price of the
Common Shares. The Funds ability to make repurchases will also be subject to regulatory requirements and to
the Funds ability to liquidate portfolio investments to raise cash for such repurchases. For the years ended
October31, 2014 and October31, 2013, the Fund did not make any share repurchases.
14. Recently Issued Accounting Pronouncements
In June 2013, the FASB issued ASU 2013-08 Financials Services Investment Companies (Topic 946):
Amendments to the Scope, Measurement, and Disclosure Requirements, which sets forth a new approach for
determining whether a public or private company is an Investment Company and sets certain measurement and
disclosure requirements for an Investment Company. The amendments are effective for fiscal years beginning on
or after December15, 2013. An entity regulated under the 1940Act would automatically qualify as an Investment
Company for accounting purposes under Topic 946 and thus the Funds management believes the release will
have no impact to the Fund.
32
Record Date
December 12, 2014
December 31, 2014
December 31, 2014
December 31, 2014
Payable Date
December 16, 2014
January 14, 2015
January 14, 2015
January 14, 2015
Type
Income
Income
L.T. Capital Gain
S.T. Capital Gain
On December 11, 2014, the Fund and the Investment Adviser agreed to amend and restate the current Expense
Limitation Agreement to extend the term through February 29, 2016.
33
PricewaterhouseCoopers LLP
New York, New York
December 24, 2014
34
35
For
Withheld
Shares Voted
Percentage
of Shares Voted
11,371,852
213,257
98.2%
1.8%
Shares Voted
Percentage
of Shares Voted
11,371,852
213,257
98.2%
1.8%
For
Withheld
The terms of office of Darren Thompson and Julie Dien Ledoux, the remaining members of the Board of
Trustees, continued after the Meeting.
36
37
Position(s)
with the Fund
President, Chief
Executive Officer
and Trustee
Term
of Office
and
Length of
Service
Since
October 2010
Principal Occupation(s)
During Past Five Years and
Other Relevant Experience
President, Chief Executive Officer
and Trustee of Avenue Mutual
Funds Trust (since March 2012);
Senior Managing Director and Head
of Traditional Asset Management of
Avenue Capital Group (since 2010);
President and Principal Executive
Officer of certain open-end and
closed-end funds advised by
Morgan Stanley Investment
Management, Inc. (MSIM) or an
affiliated person of MSIM
(2008-2010); President and Chief
Executive Officer of Morgan Stanley
Services Company Inc. (2008-2010);
Managing Director and Head of
Americas distribution, product and
marketing for MSIM (2009-2010);
Head of Liquidity and Bank Trust
business (2008-2010) and the Latin
American Franchise (July2008-2010)
at MSIM, Managing Director,
Director and/or Officer of MSIM
and various entities affiliated with
MSIM. Formerly, Head of Retail and
Intermediary business, Head of
Strategy and Product Development
for the Alternatives Group and
Senior Loan Investment
Management.
39
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
2
Position(s)
with the Fund
Term
of Office
and
Length of
Service
Principal Occupation(s)
During Past Five Years and
Other Relevant Experience
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
Other Directorships
Held During the
Last Five Years
Trustee
Since
December2010
Director of Boulevard
Acquisition Corp., a blank
check company, and an
affiliate of Avenue Capital
Group (since 2014); Director
of Hello Products LLC, a
consumer package goods
company (since 2013);
Chairman of Tenth Avenue
Commerce, an e-commerce
company (since 2010);
Director of Attivio, Inc., a
software company (since
2009); Chairman of Oasmia
AB, a Swedish publicly
traded biotech company
(since 2011); Director of
Starfall Education
Foundation; President of the
Board of The Heschel School;
Board of Councilors Member
of Shoah Foundation at the
University of Southern
California.
Trustee
Since
December2010
Director of Boulevard
Acquisition Corp., a blank
check company, and an
affiliate of Avenue Capital
Group (since 2014).
Trustee
Since
December2010
40
Position(s)
with the Fund
Treasurer and
Chief Financial
Officer
Since
September 2012
Vice President
Since
September 2012
Ty Oyer (43)
399 Park Avenue, 6th Floor
New York, NY 10022
Secretary
Since
December2010
Chief Compliance
Officer
Since
December2010
(1)
(2)
Principal Occupation(s)
During Past Five Years
Independent Trustees are those Trustees who are not interested persons (as defined in Section2(a)(19) of the 1940Act) of the Fund, and
Interested Trustees are those Trustees who are interested persons of the Fund.
Mr.Takian is an Interested Trustee due to his employment with the Investment Adviser.
41
Rev. 11/2014
FACTS
Why?
Financial companies choose how they share your personal information. Federal law
gives consumers the right to limit some but not all sharing. Federal law also requires
us to tell you how we collect, share, and protect your personal information. Please
read this notice carefully to understand what we do.
What?
The types of personal information we collect and share depend on the product or
service you have with us. This information can include:
When you are no longer our customer, we continue to share your information as
described in this notice.
How?
All financial companies need to share customers personal information to run their
everyday business. In the section below, we list the reasons financial companies can
share their customers personal information; the reasons the Fund chooses to share;
and whether you can limit this sharing.
Does the Fund
share?
Yes
No
Yes
No
No
We dont share
No
We dont share
No
We dont share
No
We dont share
Questions?
Page 2
Who we are
Who is providing this notice?
What we do
How does the Fund protect my
personal information?
Nonaffiliates
Joint marketing
Trustees
Joel Citron,
Chairman of the Board
Julie Dien Ledoux
Randolph Takian
Darren Thompson
Officers
Randolph Takian
Principal Executive Officer and President
Stephen M. Atkins
Treasurer and Principal Financial Officer
Jeffrey J. Gary
Vice President
Eric Ross
Chief Compliance Officer
Ty Oyer
Secretary
Investment Adviser
Avenue Capital Management II, L.P.
399 Park Avenue, 6th Floor
New York, New York 10022
Legal Counsel
Dechert LLP
1095 Avenue of the Americas
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ANNUAL REPORT
October 31, 2014