Opinion on the Financial Statements
We
have audited the accompanying statement of assets and liabilities of BNY Mellon Alcentra
Global Credit Income 2024 Target Term Fund, Inc. (the “Fund”), including the statements
of investments and forward foreign currency exchange contracts, as of August 31, 2021, the statement of investments
in affiliated issuers as of and for the year then ended, the related statements of operations and cash
flows for the year then ended, the statements of changes in net assets for each of the years in the two-year
period then ended, and the related notes (collectively, the financial statements), and the financial
highlights for each of the years in the three-year period then ended and for the period from October
27, 2017 (commencement of operations) to August 31, 2018. In our opinion, the financial statements and
financial highlights present fairly, in all material respects, the financial position of the Fund as
of August
31, 2021, the results of its operations and its cash flows for the year then ended, the
changes in its net assets for each of the years in the two-year period then ended, and the financial
highlights for each of the years in the three-year period then ended and for the period from October
27, 2017 (commencement of operations) to August 31, 2018, in conformity with U.S. generally accepted
accounting principles.
Basis for Opinion
These financial statements
and financial highlights are the responsibility of the Fund’s management. Our responsibility is to
express an opinion on these financial statements and financial highlights based on our audits. We are
a public accounting firm registered with the Public Company Accounting Oversight Board (United States)
(PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the financial statements and financial highlights,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the financial
statements and financial highlights. Such procedures also included confirmation of securities owned as
of August
31, 2021, by correspondence with the custodian, agent banks and brokers or by other appropriate
auditing procedures when replies from agent banks and brokers were not received. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating
the overall presentation of the financial statements and financial highlights. We believe that our audits
provide a reasonable basis for our opinion.
We
have served as the auditor of one or more BNY Mellon Investment Adviser, Inc. investment companies since
1994.
New
York, New York
October 22, 2021
47
ADDITIONAL
INFORMATION (Unaudited)
Dividend
Reinvestment Plan
The fund has a dividend reinvestment plan (the “Plan”)
commonly referred to as an “opt-out” plan. Each holder of Common Shares who participates in the Plan
will have all distributions of dividends and capital gains (“Dividends”) automatically reinvested
in additional Common Shares by Computershare Trust Company, N.A. as agent (the “Plan Agent”). Shareholders
who elect not to participate in the plan will receive all Dividends in cash paid by check mailed directly
to the shareholder of record (or if the Common Shares are held in street or other nominee name, then
to the nominee) by the Plan Agent, as dividend disbursing agent. Shareholders whose Common Shares are
held in the name of a broker or nominee should contact the broker or nominee to determine whether and
how they may participate in the Plan.
The Plan Agent serves as agent for the
fund’s shareholders in administering the Plan. After the fund declares a Dividend, the Plan Agent will,
as agent for the shareholders, either (i) receive the cash payment and use it to buy Common Shares in
the open market, on the NYSE or elsewhere, for the participants’ accounts or (ii) distribute newly
issued Common Shares of the fund on behalf of the participants.
A. The Plan Agent will receive cash from the fund with which
to buy Common Shares in the open market if, on the Dividend payment date, the fund’s net asset value
per Common Share exceeds the market price per Common Share plus estimated brokerage commissions on that
date. The Plan Agent will receive the Dividend in newly issued Common Shares of the fund if, on the Dividend
payment date, the market price per Common Share plus estimated brokerage commissions equals or exceeds
the net asset value per Common Share of the fund on that date. The number of Common Shares to be issued
will be computed at a per share rate equal to the greater of (i) the net asset value or (ii) 95% of the
closing market price per Common Share on the Dividend payment date.
B. If the market price per Common Share is less than the net
asset value per Common Share on a Dividend payment date, the Plan Agent will have until the last business
day before the next ex-Dividend date for the Common Shares, but in no event more than 30 days after the
Dividend payment date (as the case may be, the “Purchase Period”), to invest the Dividend amount
in Common Shares acquired in open market purchases. If, at the close of business on any day during the
Purchase Period on which the fund’s net asset value is calculated, the fund’s net asset value on
the Dividend payment date equals or is less than the market price per Common Share plus estimated brokerage
commissions, the Plan Agent will cease making open market purchases and the uninvested portion of such
Dividends shall be filled through the issuance by the fund of new Common Shares at the price set forth
in paragraph A above.
Participants in the Plan may withdraw from the Plan upon notice
to the Plan Agent. Such withdrawal will be effective immediately if received not less than ten days prior
to a Dividend record date; otherwise, it will be effective for all subsequent Dividends. When a participant
withdraws from the Plan or the Plan is terminated, such participant
48
will receive whole Common Shares in his or her account under the Plan and will
receive a cash payment for any fraction of a Common Share credited to such account. If any participant
elects to have the Plan Agent sell all or part of his or her Common Shares and remit the proceeds, the
Plan Agent is authorized to deduct a $2.50 fee plus $0.10 per share brokerage commissions.
The
Plan Agent’s fees for the handling of reinvestment of Dividends will be paid by the fund. However,
each participant will pay a pro rata share of brokerage commissions incurred with respect to the Plan
Agent’s open market purchases in connection with the reinvestment of Dividends. The automatic reinvestment
of Dividends will not relieve participants of any income tax that may be payable or required to be withheld
on such Dividends.
The fund reserves the right to amend or terminate the Plan.
All correspondence concerning the Plan should be directed to the Plan Agent at 1-800-522-6645.
Investment
Objectives and Principal Investment Strategies
Investment Objectives. The fund’s investment
objectives are to seek high current income and to return at least $9.835 per Common Share (the public
offering price per Common Share (as defined below) after deducting a sales load of $0.165 per Common
Share but before deducting offering costs of $0.02 per Common Share (“Original NAV”)) to holders
of record of shares of the Fund’s common stock (“Common Shares”) on or about the December 1, 2024
(subject to certain extensions, the “Termination Date”). The objective to return at least the fund’s
Original NAV is not an express or implied guarantee obligation of the fund, the Adviser, the Sub-Adviser
or any other entity, and an investor may receive less than the Original NAV upon termination of the fund.
The fund will attempt to strike a balance between its investment objectives, seeking
to provide as high a level of current income as is consistent with the fund’s Credit Strategies (as
defined herein), the declining average maturity of its portfolio and its objective of returning at least
the Original NAV on or about the Termination Date. However, as the fund approaches the Termination Date,
its monthly distributions are likely to decline, and there can be no assurance that the fund will achieve
either of its investment objectives or that the fund’s investment strategies will be successful.
There is no assurance the fund will achieve either of its investment objectives.
The fund’s investment objectives are fundamental and may not be changed without prior approval of the
fund’s shareholders.
Principal Investment Strategies. Under normal market conditions, the fund
invests at least 80% of its Managed Assets in credit instruments and other investments with similar economic
characteristics. Such credit instruments include: first lien secured floating rate loans, as well as
investments in participations and assignments of such loans; second lien, senior unsecured, mezzanine
and other collateralized and uncollateralized subordinated loans; corporate debt obligations other than
loans; and structured products, including collateralized bond, loan and other debt obligations,
49
ADDITIONAL
INFORMATION (Unaudited) (continued)
structured notes and credit-linked notes. To the extent that the fund invests
in derivative instruments with economic characteristics similar to those credit instruments, the value
of such investments will be included for purposes of the fund’s 80% investment policy.
The
fund may invest in credit instruments of any credit quality, including credit instruments that, at the
time of investment, are rated below investment grade (i.e., below BBB- or Baa3) by one or more of the
nationally recognized statistical rating organizations (“NRSROs”) that rate such instruments, or,
if unrated, determined to be of comparable quality by the Sub-Adviser. Instruments of below investment
grade quality, commonly referred to as “junk” or “high yield” instruments, are regarded as having
predominantly speculative characteristics with respect to an obligor’s capacity to pay interest and
repay principal and are more susceptible to default or decline in market value due to adverse economic
and business developments than higher quality instruments. The fund may invest in credit instruments
that, at the time of investment, are distressed or defaulted, or illiquid, unregistered (but are eligible
for purchase and sale by certain qualified institutional buyers) or subject to contractual restrictions
on their resale. The fund also may invest in investment grade credit instruments.
The
fund may invest in credit instruments of any maturity or duration. “Expected maturity” means the
time of expected return of the majority of the instrument’s principal and/or the time when a reasonable
investor would expect to have the majority of the principal returned. The expected maturity of some credit
instruments may be the same as the stated maturity. Certain credit instruments may have mandatory call
features, prepayment features or features obligating the issuer or another party to repurchase or redeem
the instrument at dates that are earlier than the instruments’ respective stated maturity dates. For
these credit instruments, expected maturity is likely to be earlier than the stated maturity.
The
fund focuses its investments in credit instruments of U.S. and European companies, although as a global
fund, the fund may invest in companies located anywhere in the world. Under normal circumstances, the
fund invests in at least three countries, which may include the United States. The fund’s investments
in European companies are generally anticipated to be in companies in Northern and Western European countries,
including the United Kingdom, Ireland, France, Germany, Austria and Switzerland, as well as the Benelux
countries (Belgium, the Netherlands and Luxembourg) and the Scandinavian countries (Sweden, Denmark,
Norway and Finland). Other European countries in which the fund may seek to invest include, but are not
limited, to Spain, Italy, Greece and Portugal. The fund also may invest in other developed countries,
including Canada. The fund will not invest more than 25% of its Managed Assets in securities of issuers
located in any single country outside the United States. Moreover, the fund will not invest more than
25% of its Managed Assets in companies located in emerging market countries. The fund expects that, under
current market conditions, it will seek to hedge substantially all of its exposure to foreign currencies
against the value of the U.S. dollar (i.e., up to 100% of its Managed Assets in the event the fund holds
no U.S. dollar-denominated investments).
50
The fund generally does not intend to invest, at the time of purchase, more than
5% of its Managed Assets in any one issuer (except securities issued by the U.S. Government and its agencies
and instrumentalities). In addition, the fund will not invest more than 25% of its Managed Assets in
issuers in any one particular industry.
The fund may use derivative instruments
as a substitute for investing directly in an underlying asset, to increase returns, to manage credit
or interest rate risk, to manage foreign currency risk, or as part of a hedging strategy. Although the
fund is not limited in the types of derivatives it can use, the fund currently expects that its use of
derivatives will consist principally of credit default swaps and foreign currency forward and futures
contracts. The fund will not invest more than 20% of its Managed Assets in derivatives, except that such
limitation will not apply to derivatives used as part of a hedging strategy. The fund’s use of derivatives
will be limited by the Act.
The fund may employ leverage to enhance its potential for
achieving its investment objectives. The fund currently intends to utilized leverage in an amount equal
to 30% of the fund’s total assets, but may borrow up to the limits imposed by the Act (i.e., for every
dollar of indebtedness from Borrowings, the fund is required to have at least three dollars of total
assets, including the proceeds from Borrowings) principally through Borrowings from certain financial
institutions.
In seeking to return at least the Original NAV on or about
the Termination Date, the fund utilizes various portfolio and cash flow management techniques, including
setting aside a portion of its net investment income, possibly retaining capital gains. The average maturity
of the fund’s holdings is generally expected to shorten as the fund approaches its Termination Date,
which may reduce interest rate risk over time but which may also reduce returns and net income amounts
available for distribution to holders of the fund’s Common Shares (“Common Shareholders”). During
any wind-down period, the fund’s portfolio composition will depend on then-current market conditions
and the availability of the types of securities in which the fund may invest. Accordingly, the fund’s
portfolio composition during that period cannot currently be estimated, nor can the fund precisely predict
how its portfolio composition may change as the fund’s Termination Date approaches. There can be no
assurance that the fund’s strategies will be successful.
Credit Strategies
The Sub-Adviser constructs the fund’s investment portfolio by allocating the
fund’s assets to credit instruments and related investments in the following credit strategies: (i)
Senior Secured Loans and Other Loans; (ii) Corporate Debt; (iii) Special Situations; and (iv) Structured
Credit (collectively, the “Credit Strategies”). The Sub-Adviser has considerable latitude in allocating
the fund’s Managed Assets and the composition of the fund’s investment portfolio will vary over time,
based on the allocation to the Credit Strategies and the fund’s exposure to different types of credit
instruments. Under normal market conditions, the Sub-Adviser generally allocates the fund’s Managed
Assets as follows:
● at
least 25% in the Senior Secured Loans and Other Loans Strategy;
51
ADDITIONAL
INFORMATION (Unaudited) (continued)
● at least 25% in the
Corporate Debt Strategy;
● no
more than 15% in the Special Situations Strategy; and
● no more than 30% in both the Special Situations Strategy and
the Structured Credit Strategy.
Allocations among the Credit Strategies
will vary over time, perhaps significantly, and the fund may not be invested in all of the Credit Strategies
at all times and may maintain zero exposure to a particular Credit Strategy or type of credit instrument.
The fund’s primary portfolio managers make all determinations regarding allocations
and reallocations of the fund’s Managed Assets to each Credit Strategy. The fund’s primary portfolio
managers set target allocations for each Credit Strategy, which may be modified at any time. The percentage
allocations among Credit Strategies may, from time to time, be out of balance with the target allocations
set by the fund’s primary portfolio managers due to various factors, such as varying investment performance
among Credit Strategies, illiquidity of certain portfolio investments or a change in the target allocations.
At least quarterly, the fund’s primary portfolio managers review the percentage allocations to each
Credit Strategy and rebalance the fund’s portfolio and/or modify the target allocations as they deem
necessary or appropriate in light of economic and market conditions, available investment opportunities
and the relative returns and risks then represented by each type of security.
Senior Secured Loans
and Other Loans Strategy. The Senior Secured Loans and Other Loans Strategy seeks to generate high current
income by investing in the secured debt of borrowers in the higher credit quality categories of the below
investment grade corporate debt market. As part of this strategy, the fund may invest in first lien secured
floating rate loans (“Senior Secured Loans”), which typically are syndicated. Senior Secured Loans
are loans secured by specific collateral of the borrower and are senior to most other securities of the
borrower (e.g., common stock or debt instruments) in the event of bankruptcy. The fund also may purchase
participations and assignments in, and commitments to purchase, Senior Secured Loans. Investments in
Senior Secured Loans may provide more favorable exposure to the below investment grade corporate debt
market due to their senior position in an issuer’s capital structure, which promotes lower price volatility
and higher recoveries in the event of default. Senior Secured Loans also may provide additional protection
through financial covenants and access to private management accounting information from the borrower.
There also is a more established market for syndicated Senior Secured Loans, which, under normal market
conditions, may facilitate a more liquid trading environment.
As part of this Credit
Strategy, the fund also may invest in second lien, senior unsecured, mezzanine and other collateralized
and uncollateralized subordinated loans (“Subordinated Loans”). Subordinated Loans sit below the
senior secured debt in a company’s capital structure, but have priority over the company’s bonds
and equity securities. The fund, from time to time, also may seek to participate in the upside gain of
a business through the exercise of warrants or other equity securities acquired in connection with its
investment in a Subordinated Loan.
52
Corporate
Debt Strategy. The Corporate Debt Strategy seeks to generate high current income by capturing
the higher yields offered by below investment grade corporate credit instruments while managing the fund’s
exposure to interest rate movements. As part of this strategy, the fund may invest in corporate debt
obligations including corporate bonds, debentures, notes, commercial paper and other similar instruments,
such as certain convertible securities (“Corporate Debt”). The Sub-Adviser expects that most of the
Corporate Debt the fund invests in will be rated below investment grade. The fixed rate Corporate Debt
in which the fund invests typically will be unsecured, while the floating rate Corporate Debt in which
the fund invests typically will be secured.
Special Situations Strategy.
The Special Situations Strategy seeks to generate attractive total return driven by income and capital
appreciation by investing in specialized credit opportunities in the below investment grade debt markets,
on both a long-term and short-term basis. As part of this strategy, the fund may invest in loans and
other credit instruments related to companies engaged in extraordinary transactions, such as mergers
and acquisitions, litigation, rights offerings, liquidations outside of bankruptcy, covenant defaults,
refinancings, recapitalizations and other special situations (collectively, “Special Situations Investments”).
The Sub-Adviser intends to focus the fund’s Special Situations Investments in companies that have experienced,
or are currently experiencing, financial difficulties as a result of deteriorating operations, changes
in macro-economic conditions, changes in governmental monetary or fiscal policies, adverse legal judgments,
or other events which may adversely impact their credit standing. The Sub-Adviser seeks opportunistic
investment opportunities where it believes that the return potential exceeds the downside risk. Consequently,
the fund’s Special Situations Investments will focus on loans and other secured credit instruments
over equity securities, as those credit instruments provide a claim on an issuer’s assets. As part
of this strategy, however, the fund may acquire equity securities incidental to the purchase or ownership
of Special Situations Investments.
Structured Credit Strategy. The Structured Credit
Strategy seeks to generate income with the potential for capital appreciation by investing predominately
in the mezzanine (i.e., rated below the senior tranches but above the most junior tranches) tranches
and most junior tranches of CLOs backed by Senior Secured Loans. When analyzing the value and suitability
of CLO tranches, the Sub-Adviser assesses collateral composition, subordination levels and cash flow
levels. The underlying portfolio is reviewed by the Sub-Adviser, which looks at, among other things:
downgrade and default risk for individual credits; recovery rate expectations and the amount of second
lien and mezzanine exposure in the portfolio; and the pricing on the underlying portfolio.
In addition to investing in CLOs and other collateralized debt obligations (“CDOs”)
backed by Senior Secured Loans, the fund also may invest in structured notes and credit-linked notes
that provide exposure to Senior Secured Loans, as well as investments in asset-backed securities, including
mortgage-backed securities. These instruments collectively are referred to as “Structured Credit Investments.”
The Sub-Adviser believes attractive returns in Structured Credit Investments can be achieved
53
ADDITIONAL
INFORMATION (Unaudited) (continued)
through a combination of current income and price appreciation due to the discounted
valuations of many of these investments.
Non-Principal Investment Strategies. Although not a principal
investment strategy, the fund may invest up to 20% of its Managed Assets in other securities and instruments
including, without limitation: (i) equity securities of issuers that are related to the fund’s investments
in credit instruments, such as common stock, preferred stock and convertible securities (including warrants
or other rights to acquire common or preferred stock); (ii) U.S. and foreign government securities; and
(iii) short-term fixed income securities and money market instruments.
During
temporary defensive periods or in order to keep the fund’s cash fully invested, including during the
wind-down period of the fund, the fund may deviate from its investment objectives and policies. During
such periods, the fund may invest up to 100% of its assets in money market instruments, including U.S.
Government securities, repurchase agreements, bank obligations and commercial paper, as well as cash,
cash equivalents or high quality short-term fixed income and other securities. Accordingly, during such
periods, the fund may not achieve its investment objectives.
Principal Risk Factors
An
investment in the fund involves special risk considerations, which are described below. The fund is a
diversified, closed-end management investment company designed as a long-term investment and not as a
vehicle for short-term trading purposes. An investment in the fund’s Common Shares may be speculative
and it involves a high degree of risk. The fund should not constitute a complete investment program.
Due to the uncertainty in all investments, there can be no assurance that the fund will achieve its investment
objectives. Different risks may be more significant at different times depending on market conditions.
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.
General Risks
of Investing in the Fund
Risk of Market Price Discount From Net Asset Value. Shares of closed-end
funds frequently trade at a market price that is below their net asset value. This is commonly referred
to as “trading at a discount.” This characteristic of shares of closed-end funds is a risk separate
and distinct from the risk that the fund’s net asset value may decrease.
Whether
Common Shareholders will realize a gain or loss upon the sale of the Common Shares will depend upon whether
the market value of those Common Shares at the time of sale is above or below the price the Common Shareholder
paid, taking into account transaction costs, for the Common Shares and is not directly dependent upon
the fund’s net asset value. Because the market value of the Common Shares will be determined by factors
such as the relative demand for and supply of the Common Shares in the market, general market conditions
and other factors beyond the control of the fund, the fund cannot predict whether its Common Shares will
trade at, below or above net asset value, or below or above the initial offering price for such Common
Shares.
54
Management
and Allocation Risk. The fund’s primary portfolio managers make all determinations regarding allocations
and reallocations of the fund’s Managed Assets to each Credit Strategy. The percentage allocations
among Credit Strategies may, from time to time, be out of balance with the target allocations set by
the fund’s primary portfolio managers due to various factors, such as varying investment performance
among Credit Strategies, illiquidity of certain portfolio investments or a change in the target allocations.
Any rebalancing of the fund’s portfolio, whether pursuant to a fixed percentage allocation or otherwise,
may have an adverse effect on the performance of the fund and may be subject to certain additional limits
and constraints. There can be no assurance that the decisions of the fund’s primary portfolio managers
with respect to the allocation and reallocation of the fund’s Managed Assets among the Credit Strategies,
or that an investment within a particular Credit Strategy, will be successful.
Seven-Year Term Risk.
It is anticipated that the fund will terminate on or about December 1, 2024, subject to certain extensions
described herein. As the assets of the fund will be liquidated in connection with its 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. During any wind-down period,
the fund may deviate from its 80% investment policy and its Credit Strategy allocations and may not achieve
its investment objectives. In addition, the Board of Directors may choose to adopt a plan of termination
prior to the Termination Date upon written notice to all shareholders of the fund.
As
the fund approaches its Termination Date, the portfolio composition of the fund will change as more of
the fund’s investments mature or are called or sold, which may cause the fund’s returns to decrease.
The fund may also shift its portfolio composition to securities the Sub-Adviser believes will provide
adequate liquidity upon termination of the fund, which may also cause the fund’s returns to decrease.
In addition, rather than reinvesting the proceeds of its matured, called or sold credit investments,
the fund may distribute the proceeds in one or more liquidating distributions prior to the final liquidation,
which may cause the fund’s 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 the performance of the fund.
The Board of Directors
may choose to commence the liquidation and termination of the fund prior to the Termination Date, which
would cause the fund to miss any market appreciation that occurs after the termination is implemented.
Conversely, the Board of Directors may decide against early termination, after which decision, market
conditions may deteriorate and the fund may experience losses. Upon its termination, it is anticipated
that the fund will have distributed substantially all of its net assets to Common Shareholders, although
securities for which no market exists or securities trading at depressed prices, if any, may be placed
in a liquidating trust. Securities placed in a liquidating trust may be held for an indefinite period
of time until they can be sold or pay out all of their cash flows. The fund cannot predict the amount
of securities that will be required to be placed in a liquidating trust.
55
ADDITIONAL
INFORMATION (Unaudited) (continued)
Investment
and Market Risk. An investment in the fund is subject to investment risk, including the possible
loss of the entire amount that you invest. Your investment in Common Shares represents an indirect investment
in the credit instruments and other investments and assets owned by the fund. The value of the fund’s
portfolio investments may move up or down, sometimes rapidly and unpredictably. The value of the instruments
in which the fund invests may be affected by political, regulatory, economic and social developments,
and developments that impact specific economic sectors, industries or segments of the market. In addition,
turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income markets may
negatively affect many issuers, which could adversely affect the fund. Global economies and financial
markets are becoming increasingly interconnected, and conditions and events in one country, region or
financial market may adversely impact issuers in a different country, region or financial market. These
risks may be magnified if certain events or developments adversely interrupt the global supply chain;
in these and other circumstances, such risks might affect companies world-wide. Recent examples include
pandemic risks related to COVID-19 and aggressive measures taken world-wide in response by governments,
including closing borders, restricting international and domestic travel and imposing prolonged quarantines
of large populations, and by businesses, including changes to operations and reducing staff. The effects
of COVID-19 have contributed to increased volatility in global markets and will likely affect certain
countries, companies, industries and market sectors more dramatically than others. The COVID-19 pandemic
has had, and any other outbreak of an infectious disease or other serious public health concern could
have, a significant negative impact on economic and market conditions and could trigger a prolonged period
of global economic slowdown. To the extent the fund has significant investments in certain countries,
regions, companies, industries or market sectors, such positions will increase the risk of loss from
adverse developments affecting those countries, regions, companies, industries or sectors.
Tax
Risk.
Certain of the fund’s investments will require the fund to recognize taxable income in a taxable year
in excess of the cash generated on those investments during that year. In particular, the fund invests
in loans and other debt obligations that will be treated as having “market discount” and/or original
issue discount for U.S. federal income tax purposes. Because the fund may be required to recognize income
in respect of these investments before, or without receiving, cash representing such income, the fund
may have difficulty satisfying the annual distribution requirements applicable to regulated investment
companies and avoiding fund-level U.S. federal income and/or excise taxes. Accordingly, the fund may
be required to sell assets, including at potentially disadvantageous times or prices, borrow, raise additional
equity capital, make taxable distributions of its shares or debt securities, or reduce new investments,
to obtain the cash needed to make these income distributions. If the fund liquidates assets to raise
cash, the fund may realize gain or loss on such liquidations; in the event the fund realizes net capital
gains from such liquidation transactions, its shareholders may receive larger capital gain distributions
than they would in the absence of such transactions.
Risks of Investing
in Credit Instruments
56
Issuer
Risk.
The market value of credit instruments may decline for a number of reasons that directly relate to the
issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods
and services. The market value of a credit instrument also may be affected by investors’ perceptions
of the creditworthiness of the issuer, the issuer’s performance and perceptions of the issuer in the
market place.
Credit Risk. Credit risk is the risk that one or more credit instruments
in the fund’s portfolio will decline in price or fail to pay interest or principal when due because
the issuer of the instrument experiences a decline in its financial status. Losses may occur because
the market value of a credit instrument is affected by the creditworthiness or perceived creditworthiness
of the issuer and by general economic and specific industry conditions and the fund’s investments will
often be subordinate to other debt in the issuer’s capital structure. Because the fund generally invests
a significant portion of its Managed Assets in below investment grade instruments, it will be exposed
to a greater amount of credit risk than a fund which invests in investment grade securities. The prices
of below investment grade instruments are more sensitive to negative developments, such as a decline
in the issuer’s revenues or a general economic downturn, than are the prices of investment grade instruments,
which may reduce the fund’s net asset value.
Interest Rate Risk. Prices of fixed rate
credit instruments tend to move inversely with changes in interest rates. Typically, a rise in rates
will adversely affect these instruments and, accordingly, will cause the value of the fund’s investments
in these securities to decline. During periods of very low interest rates, which occur from time to time
due to market forces or actions of governments and/or their central banks, including the Board of Governors
of the Federal Reserve System in the United States, the fund may be subject to a greater risk of principal
decline from rising interest rates. The magnitude of these fluctuations in the market price of fixed
rate credit instruments is generally greater for instruments with longer effective maturities and durations
because such instruments do not mature, reset interest rates or become callable for longer periods of
time.
Unlike investment grade instruments, however, the prices of
high yield (“junk”) instruments may fluctuate unpredictably and not necessarily inversely with changes
in interest rates. In addition, the rates on floating rate instruments adjust periodically with changes
in market interest rates. Although these instruments are generally less sensitive to interest rate changes
than fixed rate instruments, the value of floating rate loans and other floating rate instruments may
decline if their interest rates do not rise as quickly, or as much, as general interest rates. Substantial
increases in interest rates could cause an increase in loan defaults as borrowers might lack resources
to meet higher debt service requirements.
Prepayment Risk. During periods of declining interest
rates, the issuer of a credit instrument may exercise its option to prepay principal earlier than scheduled,
forcing the fund to reinvest the proceeds from such prepayment in potentially lower yielding instruments,
which may result in a decline in the fund’s income and distributions to Common Shareholders. This is
known as prepayment or “call” risk. Credit instruments frequently have call features that allow the
issuer to redeem the instrument at dates prior
57
ADDITIONAL
INFORMATION (Unaudited) (continued)
to its stated maturity at a specified price (typically greater than par) only
if certain prescribed conditions are met (“call protection”). An issuer may choose to redeem a fixed
rate credit instrument if, for example, the issuer can refinance the instrument at a lower cost due to
declining interest rates or an improvement in the credit standing of the issuer. For premium bonds (bonds
acquired at prices that exceed their par or principal value) purchased by the fund, prepayment risk may
be enhanced.
Reinvestment Risk. Reinvestment risk is the risk that income from the fund’s
portfolio will decline if and when the fund invests the proceeds from matured, traded or called credit
instruments at market interest rates that are below the portfolio’s current earnings rate. A decline
in income could affect the Common Share price or its overall return.
Spread Risk.
Wider credit spreads and decreasing market values typically represent a deterioration of the fixed income
instrument’s credit soundness and a perceived greater likelihood or risk of default by the issuer.
Fixed income instruments generally compensate for greater credit risk by paying interest at a higher
rate. The difference (or “spread”) between the yield of a security and the yield of a benchmark,
such as a U.S. Treasury security with a comparable maturity, measures the additional interest paid for
credit risk. As the spread on a security widens (or increases), the price (or value) of the security
generally falls. Spread widening may occur, among other reasons, as a result of market concerns over
the stability of the market, excess supply, general credit concerns in other markets, security- or market-specific
credit concerns or general reductions in risk tolerance.
Inflation/Deflation Risk. Inflation risk is
the risk that the value of certain assets or income from the fund’s 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 on the Common Shares can decline. In addition, during any periods of
rising inflation, the costs associated with the fund’s use of leverage through Borrowings 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.
Below
Investment Grade Instruments Risk
The fund may invest all of its assets
in below investment grade instruments. Below investment grade instruments are commonly referred to as
“junk” or “high yield” instruments and are regarded as predominantly speculative with respect
to the issuer’s capacity to pay interest and repay principal. Below investment grade instruments, though
generally higher yielding, are characterized by higher risk. These instruments are especially sensitive
to adverse changes in general economic conditions, to changes in the financial condition of their issuers
and to price fluctuation in response to changes in interest rates. During periods of economic downturn
or rising interest rates, issuers of below investment grade instruments may experience financial stress
that could adversely affect their ability to make payments of principal and interest and increase the
possibility
58
of default. The secondary market for below investment grade instruments may not
be as liquid as the secondary market for more highly rated instruments, 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 instruments than for investment grade instruments. The prices quoted by different dealers
may vary significantly, and the spread between the bid and asked price is generally much larger for high-yield
securities than for higher quality instruments. Under adverse market or economic conditions, the secondary
market for below investment grade instruments could contract, independent of any specific adverse changes
in the condition of a particular issuer, and these instruments may become illiquid. In addition, adverse
publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the
values and liquidity of below investment grade instruments, especially in a market characterized by a
low volume of trading.
Default, or the market’s perception that an issuer is likely
to default, could reduce the value and liquidity of below investment grade instruments held by the fund,
thereby reducing the value of an investment in the Common Shares. In addition, default, or the market’s
perception that an issuer is likely to default, may cause the fund to incur expenses, including legal
expenses, in seeking recovery of principal or interest on its portfolio holdings, including litigation
to enforce the fund’s rights. 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 condition
of such issuer. The Sub-Adviser’s judgment about the credit quality of an issuer and the relative value
of its securities may prove to be wrong. In addition, not only may the fund lose its entire investment
on one or more instruments, Common Shareholders may also lose their entire investments in the fund. Investments
in below investment grade instruments 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 U.S. federal
income tax consequences to the fund as a holder of such distressed securities may not be clear.
Because of the greater number of investment considerations involved in investing
in below investment grade instruments, the ability of the fund to meet its investment objectives depends
more on the Sub-Adviser’s judgment and analytical abilities than would be the case if the portfolio
invested primarily in securities in the higher rating categories. While the Sub-Adviser will attempt
to reduce the risks of investing in below investment grade instruments through active portfolio management,
diversification, credit analysis and attention to current developments and trends in the economy and
the financial markets, there can be no assurance that a broadly diversified portfolio of such instruments
would substantially lessen the risks of defaults brought about by an economic downturn or recession.
Distressed
or Defaulted Issuers. The fund may invest up to 15% of its Managed Assets in credit instruments of
distressed or defaulted issuers. Such instruments may be rated in
59
ADDITIONAL
INFORMATION (Unaudited) (continued)
the lower rating categories (Caa1 or lower by Moody’s Investors Service, Inc.,
or CCC+ or lower by S&P Global Ratings or Fitch Ratings, Inc.) or, if unrated, are considered by
the Sub-Adviser to be of comparable quality. For these securities, the risks associated with below investment
grade instruments are more pronounced. Instruments rated in the lower rating categories are subject to
higher credit risk with extremely poor prospects of ever attaining any real investment standing, to have
a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or economic conditions and/or
to be in default or not current in the payment of interest or principal. Ratings may not accurately reflect
the actual credit risk associated with a corporate security.
Investing in distressed
or defaulted securities is speculative and involves substantial risks. The fund may make such investments
when, among other circumstances, the Sub-Adviser believes it is reasonably likely that the issuer of
the distressed or defaulted securities will make an exchange offer or will be the subject of a plan of
reorganization pursuant to which the fund will receive new securities in return for the distressed or
defaulted securities. There can be no assurance, however, that such an exchange offer will be made or
that such a plan of reorganization will be adopted. In addition, a significant period of time may pass
between the time at which the fund makes its investment in distressed or defaulted securities and the
time that any such exchange offer or plan of reorganization is completed, if at all. During this period,
it is unlikely that the fund would receive any interest payments on the distressed or defaulted securities,
the fund would be subject to significant uncertainty whether the exchange offer or plan of reorganization
will be completed and the fund may be required to bear certain extraordinary expenses to protect and
recover its investment. The fund also will be subject to significant uncertainty as to when, in what
manner and for what value the obligations evidenced by the distressed or defaulted securities will eventually
be satisfied (e.g., through a liquidation of the issuer’s assets, an exchange offer or plan of reorganization
involving the distressed or defaulted securities or a payment of some amount in satisfaction of the obligation).
Even if an exchange offer is made or plan of reorganization is adopted with respect to distressed or
defaulted securities held by the fund, there can be no assurance that the securities or other assets
received by the fund in connection with the 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, or no value.
Senior Secured Loans Risk
The Senior Secured
Loans in which the fund invests typically will be below investment grade quality. Although, in contrast
to other below investment grade instruments, Senior Secured Loans hold senior positions in the capital
structure of a business entity, are 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, the risks associated with Senior Secured Loans are similar to the risks
of below investment grade instruments. Additionally, if a borrower under a Senior Secured Loan defaults,
becomes insolvent or goes into bankruptcy, the
60
fund may recover only a fraction of what is owed on the Senior Secured Loan or
nothing at all.
Although the Senior Secured Loans in which the fund invests
will be secured by collateral, there can be no assurance that such collateral can 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 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 Secured Loan. In the event of a decline in the value
of the already pledged collateral, if the terms of a Senior Secured 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 Secured
Loan. To the extent that a Senior Secured 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.
Senior Secured Loans that are under-collateralized involve a greater risk of loss. Some Senior Secured
Loans are subject to the risk that a court, pursuant to fraudulent conveyance or other similar laws,
could subordinate a Senior Secured Loan to presently existing or future indebtedness of the borrower
or take other action detrimental to lenders, including the fund. Such court action could, under certain
circumstances, include invalidation of a Senior Secured Loan.
In general, the secondary
trading market for Senior Secured Loans is not fully-developed. No active trading market may exist for
certain Senior Secured Loans, which may make it difficult to value them. Illiquidity and adverse market
conditions may mean that the fund may not be able to sell certain Senior Secured Loans quickly or at
a fair price. To the extent that a secondary market does exist for certain Senior Secured Loans, the
market for them may be subject to irregular trading activity, wide bid/ask spreads and extended trade
settlement periods. Furthermore, Senior Secured Loans may not be considered securities, and purchasers,
such as the fund, may not be entitled to rely on the anti-fraud protections of the federal securities
laws, including those with respect to the use of material non-public information.
If
legislation or state or federal regulations impose additional requirements or restrictions on the ability
of financial institutions to make Senior Secured Loans, the availability of Senior Secured 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.
If legislation or federal
or state regulations require financial institutions to increase their capital requirements this may cause
financial institutions to dispose of Senior Secured Loans that are considered highly levered transactions.
Such sales could result in prices that, in the opinion of the Adviser or the Sub-Adviser, do not represent
fair value. If the fund attempts to sell a Senior Secured Loan at a time when a financial institution
is
61
ADDITIONAL
INFORMATION (Unaudited) (continued)
engaging in such a sale, the price the fund could obtain for the Senior Secured
Loan may be adversely affected.
Loan Valuation Risk. Because there may be a lack of centralized
information and trading for certain loans in which the fund may invest, reliable market value quotations
may not be readily available for such loans and their valuation may require more research than for securities
with a more developed secondary market. Moreover, the valuation of such loans may be affected by uncertainties
in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency
of valuation models and processes. Trades can be infrequent and the market for floating rate loans may
experience substantial volatility. As a result, the fund is subject to the risk that when a loan is sold
in the market, the amount received by the fund may be less than the value that such instrument is carried
at on the fund’s books immediately prior to the sale.
Participations and Assignments Risk.
A participation interest gives the fund an undivided interest in a loan in the proportion that the fund’s
participation interest bears to the total principal amount of the loan, but does not establish any direct
relationship between the fund and the borrower. If a Senior Secured Loan is acquired through a participation,
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 loan obligation in which it has purchased the participation. The fund may be subject to delays, expenses
and risks that are greater than those that would be involved if the fund would enforce its rights directly
against the borrower. Moreover, under the terms of a participation interest the fund may be regarded
as a creditor of another lender or co-participant (rather than of the borrower), so that the fund may
also be subject to the risk that such party may become insolvent. Similar risks may arise with respect
to the agent for a Senior Secured Loan if, for example, assets held by the agent for the benefit of the
fund were determined by the appropriate regulatory authority or court to be subject to the claims of
the agent’s creditors. Further, in the event of the bankruptcy or insolvency of the borrower, the obligation
of the borrower to repay the loan may be subject to certain defenses that can be asserted by such borrower
as a result of improper conduct by the agent or intermediate participant.
The
fund also may have difficulty disposing of participation interests and assignments because to do so it
will have to sell such securities to a third party. Because there is no established secondary market
for such securities, it is anticipated that such securities could be sold only to a limited number of
institutional investors. The lack of an established secondary market may have an adverse impact on the
value of such securities and the fund’s ability to dispose of particular participation interests or
assignments when necessary to meet the fund’s liquidity needs or in response to a specific economic
event such as a deterioration in the creditworthiness of the borrower. The lack of an established secondary
market for participation interests and assignments also may make it more difficult for the fund to assign
a value to these securities for purposes of valuing the fund’s portfolio.
Covenant-Lite Loan Risk.
The fund may invest in “covenant-lite” loans. Certain financial institutions may define “covenant-lite”
loans differently. Covenant-lite loans may have
62
tranches that contain fewer or no restrictive covenants. The tranche of the covenant-lite
loan that has fewer restrictions typically does not include the legal clauses which allow an investor
to proactively enforce financial tests or prevent or restrict undesired actions taken by the company
or sponsor. Covenant-lite loans also generally give the borrower/issuer more flexibility if they have
met certain loan terms and provide fewer investor protections if certain criteria are breached. The fund
may experience relatively greater realized or unrealized losses or delays in enforcing its rights on
its holdings of certain covenant-lite loans than its holdings of loans with the usual covenants. In the
event of a breach of a covenant in non-covenant-lite loans, lenders may have the ability to intervene
and either prevent or restrict actions that may potentially compromise the borrower’s ability to pay
or lenders may be in a position to obtain concessions from the borrower in exchange for a waiver or amendment
of the specific covenant(s). In contrast, covenant-lite loans do not always or necessarily offer the
same ability to intervene or obtain additional concessions from borrowers. This risk is offset to varying
degrees by the fact that the same financial and performance information may be available with or without
covenants to lenders and the public alike and can be used to detect such early warning signs as deterioration
of a borrower’s financial condition or results. With such information, the Sub-Adviser is normally
able to take appropriate actions without the help of covenants in the loans. Covenant-lite corporate
loans, however, may foster a capital structure designed to avoid defaults by giving borrowers or issuers
increased financial flexibility when they need it the most.
Subordinated Loans Risk. Subordinated Loans
generally are subject to similar risks as those associated with investments in Senior Secured Loans,
except that such loans are subordinated in payment and/or lower in lien priority to first lien holders
(e.g., holders of Senior Secured Loans) in the event of the liquidation or bankruptcy of the issuer.
In the event of default on a Subordinated Loan, the first priority lien holder has first claim to the
underlying collateral of the loan. Subordinated Loans are subject to the additional risk that the cash
flow of the borrower and collateral securing the loan or debt, if any, may be insufficient to meet scheduled
payments after giving effect to the senior unsecured or senior secured obligations of the borrower. This
risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security
interest in any specific collateral. There also is a possibility that originators will not be able to
sell participations in Subordinated Loans, which would create greater credit risk exposure for the holders
of such loans. Subordinated Loans generally have greater price volatility than Senior Secured Loans and
may be less liquid.
Corporate Debt Risk
The market value of
Corporate Debt generally may be expected to rise and fall inversely with interest rates. The market value
of intermediate and longer term Corporate Debt is generally more sensitive to changes in interest rates
than is the market value of shorter term Corporate Debt. The market value of Corporate Debt 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 market place, performance
of management of the issuer, the issuer’s capital
63
ADDITIONAL
INFORMATION (Unaudited) (continued)
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 rated below
investment grade quality is often high risk and has speculative characteristics and may be particularly
susceptible to adverse issuer-specific developments.
Special Situations
Investments Risk
The Sub-Adviser focuses the fund’s Special Situations Investments
in companies that have experienced, or are currently experiencing, financial difficulties as a result
of deteriorating operations, changes in macro-economic conditions, changes in governmental monetary or
fiscal policies, adverse legal judgments, or other events which may adversely impact their credit standing.
These investments are subject to many of the risks discussed elsewhere herein, including risks associated
with investing in high yield fixed income securities. Special Situations Investments generally will be
treated as illiquid securities by the fund.
From time to time, the Sub-Adviser may
take control positions, sit on creditors’ committees or otherwise take an active role in seeking to
influence the management of the issuers of Special Situations Investments, in which case the fund may
be subject to increased litigation risk resulting from its actions and it may obtain inside information
that may restrict its ability to dispose of Special Situations Investments.
Structured
Credit Investments Risk
Holders of Structured Credit Investments bear risks of the
underlying investments, index or reference obligation and are subject to counterparty risk. The fund
may have the right to receive payments only from the issuers of the structured product, and generally
does not have direct rights against the issuer or the entity that sold the assets to be securitized.
While certain Structured Credit Investments enable the investor to acquire interests in a pool of securities
without the brokerage and other expenses associated with directly holding the same securities, investors
in Structured Credit Investments generally pay their share of the investment’s administrative and other
expenses. Although it is difficult to predict whether the prices of indices and securities underlying
structured products will rise or fall, these prices (and, therefore, the prices of structured products)
will be influenced by the same types of political and economic events that affect issuers of securities
and capital markets generally. If the issuer of a Structured Credit Investment uses shorter term financing
to purchase longer term securities, the issuer may be forced to sell its securities at below market prices
if it experiences difficulty in obtaining such financing, which may adversely affect the value of the
Structured Credit Investments owned by the fund.
CDOs may be thinly traded or have a limited
trading market. CDOs, such as CLOs, are typically privately offered and sold, and thus are not registered
under the securities laws. As a result, investments in CLOs and other types of CDOs may be characterized
by the fund as illiquid securities, especially investments in mezzanine and subordinated/equity tranches
of CLOs; however, an active dealer market may exist for certain investments
64
and more senior CLO tranches, which would allow such securities to be considered
liquid in some circumstances. In addition to the general risks associated with credit instruments discussed
herein, CLOs and other types of CDOs carry additional risks, including, but not limited to: (i) the possibility
that distributions from collateral securities will not be adequate to make interest or other payments;
(ii) the quality of the collateral may decline in value or default; (iii) the possibility that the class
of CLO or CDO held by the fund is subordinate to other classes; and (iv) the complex structure of the
security may not be fully understood at the time of investment and may produce disputes with the issuer
or unexpected investment results.
Credit-linked notes, which are used to
transfer credit risk, are typically privately offered and sold. Certain credit-linked notes also may
be thinly traded or have a limited trading market. As a result, investments in credit-linked notes may
be characterized by the fund as illiquid securities. The performance of the notes is linked to the performance
of an underlying reference entity. The main risk of credit-linked notes is the risk of the reference
entity experiencing a credit event that triggers a contingent payment obligation by the special purpose
vehicle (“SPV”) that sold the credit protection. Should such an event occur, the SPV would have to
pay the transaction sponsor and payments to the note holders would be subordinated.
Asset-backed
securities are a form of derivative instrument. Payment of principal and interest may depend largely
on the cash flows generated by the assets backing the securities and, in certain cases, supported by
letters of credit, surety bonds or other forms of credit or liquidity enhancements. The value of these
asset-backed securities may be affected by the creditworthiness of the servicing agent for the pool of
assets, the originator of the loans or receivables or the financial institution providing the credit
support.
Zero Coupon, Pay-In-Kind and Step-Up Securities Risk
The
amount of any discount on these securities varies depending on the time remaining until maturity or cash
payment date, prevailing interest rates, liquidity of the security and perceived credit quality of the
issuer. The market prices of these securities generally are more volatile and are likely to respond to
a greater degree to changes in interest rates than the market prices of securities that pay cash interest
periodically having similar maturities and credit qualities. In addition, unlike bonds that pay cash
interest throughout the period to maturity, the fund will realize no cash until the cash payment date
unless a portion of such securities are sold and, if the issuer defaults, the fund may obtain no return
at all on its investment. The interest payments deferred on a PIK security are subject to the risk that
the borrower may default when the deferred payments are due in cash at the maturity of the instrument.
In addition, the interest rates on PIK securities are higher to reflect the time value of money on deferred
interest payments and the higher credit risk of borrowers who may need to defer interest payments. The
deferral of interest on a PIK loan increases its loan to value ratio, which is a measure of the riskiness
of a loan. An election to defer PIK interest payments by adding them to principal increases the fund’s
Managed Assets and, thus, increases future investment management fees to the Adviser (and, indirectly,
the Sub-Adviser). PIK
65
ADDITIONAL
INFORMATION (Unaudited) (continued)
securities also may have unreliable valuations because the accruals require judgments
by the Sub-Adviser about ultimate collectability of the deferred payments and the value of the associated
collateral. Federal income tax law requires the holder of a zero coupon security or of certain pay-in-kind
or step-up bonds to accrue income with respect to these securities prior to the receipt of cash payments.
LIBOR Risk
Many credit instruments, derivatives and
other financial instruments, including those in which the fund may invest, utilize LIBOR as the reference
or benchmark rate for variable interest rate calculations. However, the use of LIBOR started to come
under pressure following manipulation allegations in 2012. Despite increased regulation and other corrective
actions since that time, concerns have arisen regarding its viability as a benchmark, due largely to
reduced activity in the financial markets that it measures. In July 2017, the Financial Conduct Authority
announced plans to phase out the use of LIBOR by the end of 2021. It was subsequently announced that
tenors of US Dollar LIBOR would continue to be published through June 30, 2023, other than one week and
two month USD LIBOR settings which will cease publication on December 31, 2021. Various financial industry
groups around the world have begun planning the transition to the use of different benchmarks. In the
United States, the Federal Reserve Board and the New York Fed convened the Alternative Reference Rates
Committee, comprised of a group of private-market participants, which recommended the Secured Overnight
Financing Rate as an alternative reference rate to USD LIBOR. Neither the effect of the transition process,
in the United States or elsewhere, nor its ultimate success, can yet be known. While some instruments
tied to LIBOR may include a replacement rate in the event LIBOR is discontinued, not all instruments
have such fallback provisions and the effectiveness of such replacement rates remains uncertain. The
transition process might lead to increased volatility and illiquidity in markets that currently rely
on the LIBOR to determine interest rates. The potential cessation of LIBOR could affect the value and
liquidity of investments tied to LIBOR, especially those that do not include fallback provisions, and
may result in costs incurred in connection with closing out positions and entering into new trades.
Foreign Investments Risk
Investing in foreign
instruments involve certain risks not involved in domestic investments. Foreign securities markets generally
are not as developed or efficient as those in the United States. There may be a lack of comprehensive
information regarding foreign issuers, and their securities are less liquid and more volatile than securities
of comparable U.S. issuers. Similarly, volume and liquidity in most foreign securities markets are less
than in the United States and, at times, volatility of price can be greater than in the United States.
The risks of investing in foreign securities also include restrictions that may make it difficult for
the fund to obtain or enforce judgments in foreign courts. These risks also include certain national
policies that may restrict the fund’s investment opportunities, including restrictions on investments
in issuers or industries deemed sensitive to national interests and/or limitations on the total amount
or type of position in any single issuer.
66
Certain foreign countries may impose restrictions on the ability of issuers within
those countries to make payments of principal and interest to investors located outside the country.
In addition, the fund will be subject to risks associated with adverse political and economic developments
in foreign countries, which could cause the fund to lose money on its investments in non-U.S. instruments.
The ability of a foreign sovereign issuer to make timely payments on its debt obligations will also be
strongly influenced by the sovereign issuer’s balance of payments, including export performance, its
access to international credit facilities and investments, fluctuations of interest rates and the extent
of its foreign reserves. The cost of servicing external debt will also generally be adversely affected
by rising international interest rates, as many external debt obligations bear interest at rates which
are adjusted based upon international interest rates.
Some foreign instruments
may be less liquid and more volatile than securities of comparable U.S. issuers. Similarly, there is
less volume and liquidity in most foreign securities markets than in the United States and, at times,
greater price volatility than in the United States. Because evidences of ownership of such instruments
usually are held outside the United States, the fund will be subject to additional risks if it invests
in non-U.S. instruments, which include possible adverse political and economic developments, seizure
or nationalization of foreign deposits and adoption of governmental restrictions which might adversely
affect or restrict the payment of principal and interest on the foreign instruments to investors located
outside the country of the issuer, whether from currency blockage or otherwise. Foreign instruments may
trade on days when the Common Shares are not priced.
Foreign government
debt includes bonds that are issued or backed by foreign governments or their agencies, instrumentalities
or political subdivisions or by foreign central banks. The governmental authorities that control the
repayment of the debt may be unable or unwilling to repay principal and/or interest when due in accordance
with terms of such debt, and the fund may have limited legal recourse in the event of a default.
The risks associated with investing in foreign securities are often heightened
for investments in emerging market countries. These heightened risks include: (i) greater risks of expropriation,
confiscatory taxation and nationalization, and less social, political and economic stability; (ii) the
small size of the markets for securities of emerging market issuers and a low or nonexistent volume of
trading, resulting in lack of liquidity and in price volatility; (iii) certain national policies which
may restrict the investment opportunities including restrictions on investing in issuers or industries
deemed sensitive to relevant national interests; and (iv) the absence of developed legal structures governing
private or foreign investment and private property. The purchase and sale of portfolio investments in
certain emerging market countries may be constrained by limitations as to daily changes in the prices
of listed securities, periodic trading or settlement volume and/or limitations on aggregate holdings
of foreign investors. In certain cases, such limitations may be computed based upon the aggregate trading
by or holdings of the fund, the Adviser, the Sub-Adviser and their affiliates and their respective clients
and other service providers. The fund may not be able to sell securities
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ADDITIONAL
INFORMATION (Unaudited) (continued)
in circumstances where price, trading or settlement volume limitations have been
reached.
European Investments Risk
A number of countries
in Europe have experienced severe economic and financial difficulties. Many non-governmental issuers,
and even certain governments, have defaulted on, or been forced to restructure, their debts. Many other
issuers have faced difficulties obtaining credit or refinancing existing obligations. Financial institutions
have in many cases required government or central bank support, have needed to raise capital, and/or
have been impaired in their ability to extend credit, and financial markets in Europe and elsewhere have
experienced significant volatility and declines in asset values and liquidity. These difficulties may
continue, worsen or spread within and without Europe. Responses to the financial problems by European
governments, central banks and others, including austerity measures and reforms, may not be effective,
may result in social unrest and may limit future growth and economic recovery or have other unintended
consequences. Further defaults or restructurings by governments and others of outstanding debt could
have additional adverse effects on economies, financial markets and asset valuations around the world.
Decreasing imports or exports, changes in governmental or European Union (“EU”)
regulations on trade, changes in the exchange rate of the euro, the default or threat of default by an
EU member country on its sovereign debt, and/or an economic recession in an EU member country may have
a significant adverse effect on the securities of EU issuers. The European financial markets have recently
experienced volatility and adversity due to concerns about economic downturns, or rising government debt
levels, in several European countries. These events have adversely affected the exchange rate of the
euro and may continue to significantly affect every country in Europe.
The
risk of investing in Europe may be heightened due to the withdrawal of the United Kingdom from membership
in the EU (known as “Brexit”). Although the effects of Brexit are unknown at this time, Brexit may
result in fluctuations of exchange rates, increased illiquidity, inflation, and changes in legal and
regulatory regimes to which certain of the fund’s assets are subject. These and other geopolitical
developments could have a negative impact on both the United Kingdom’s economy and the economies of
the other countries in Europe, as well as greater volatility in the global financial and currency markets.
The effect on the economies of the United Kingdom and the EU likely will depend on the nature of trade
relations between the United Kingdom and the EU and the other major economies. These events could negatively
affect the value and liquidity of all of the fund’s investments, not only the fund’s investments
in securities of issuers located in Europe.
Foreign Currency Transactions Risk
As the fund invests in securities that trade in, and receives revenues in, foreign
currencies, or in derivatives that provide exposure to foreign currencies, it will be subject to the
risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging
positions intended to protect the fund from decline in the
68
value of non-U.S. currencies, that the U.S. dollar will decline in value relative
to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short
periods of time for a number of reasons, including changes in interest rates, intervention (or the failure
to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International
Monetary Fund, or by the imposition of currency controls or other political developments in the United
States or abroad. As a result, the fund’s investments in foreign currency denominated securities may
reduce the returns of the fund. While the fund generally seeks to hedge substantially all of its non-U.S.
dollar-denominated securities into U.S. dollars, hedging may not alleviate all currency risks. Furthermore,
the issuers in which the fund invests may be subject to risks relating to changes in currency rates,
as described above. If a company in which the fund invests suffers such adverse consequences as a result
of such changes, the fund may also be adversely affected as a result.
Continuing
uncertainty as to the status of the euro and the EU has created significant volatility in currency and
financial markets generally. Any partial or complete dissolution of the EU could have significant adverse
effects on currency and financial markets, and on the values of the fund’s portfolio investments. If
one or more EU countries were to stop using the euro as its primary currency, the fund’s investments
in such countries, if any, may be redenominated into a different or newly adopted currency. As a result,
the value of those investments could decline significantly and unpredictably. In addition, instruments
or other investments that are redenominated may be subject to foreign currency risk, liquidity risk and
valuation risk to a greater extent than similar investments currently denominated in euros.
Principal
Risks of the Use of Derivatives
The fund is subject to additional risks
with respect to the use of derivatives. Derivatives can be volatile and involve various types and degrees
of risk, depending upon the characteristics of the particular derivative and the portfolio as a whole.
Derivatives permit the fund to increase or decrease the level of risk, or change the character of the
risk, to which its portfolio is exposed in much the same way as the fund can increase or decrease the
level of risk, or change the character of the risk, of its portfolio by making investments in specific
securities. However, derivatives may entail investment exposures that are greater than their cost would
suggest, meaning that a small investment in derivatives could have a large potential impact on the fund’s
performance. If the fund invests in derivatives at inopportune times or judges market conditions incorrectly,
such investments may lower the fund’s return or result in a loss. The fund also could experience losses
if its derivatives were poorly correlated with the underlying instruments or the fund’s other investments,
or if the fund were unable to liquidate its position because of an illiquid secondary market. The market
for many derivatives is, or suddenly can become, illiquid. Changes in liquidity may result in significant,
rapid and unpredictable changes in the prices for derivatives. If a derivative transaction is particularly
large or if the relevant market is illiquid, it may not be possible to initiate a transaction or liquidate
a position at an advantageous time or price. Additionally, some derivatives the fund may use may involve
economic leverage, which may increase the
69
ADDITIONAL
INFORMATION (Unaudited) (continued)
volatility of these instruments as they may increase or decrease in value more
quickly than the underlying security, index, currency, futures contract, or other economic variable.
Derivatives may be purchased on established exchanges or through privately negotiated
transactions referred to as OTC derivatives. Exchange-traded derivatives generally are guaranteed by
the clearing agency that is the issuer or counterparty to such derivatives. As a result, unless the clearing
agency defaults, there is relatively little counterparty credit risk associated with derivatives purchased
on an exchange. In contrast, no clearing agency guarantees OTC derivatives. Therefore, many of the regulatory
protections afforded participants on organized exchanges for futures contracts and exchange-traded options,
such as the performance guarantee of an exchange clearing house, are not available in connection with
OTC derivative transactions. As a result, each party to an OTC derivative bears the risk that the counterparty
will default. Accordingly, the Sub-Adviser will consider the creditworthiness of counterparties to OTC
derivatives in the same manner as it would review the credit quality of a security to be purchased by
the fund. OTC derivatives are less liquid than exchange-traded derivatives since the other party to the
transaction may be the only investor with sufficient understanding of the derivative to be interested
in bidding for it.
Because many derivatives have a leverage component, adverse
changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially
greater than the amount invested in the derivative itself. Certain derivatives, such as written call
options, have the potential for unlimited loss, regardless of the size of the initial investment. If
a derivative transaction is particularly large or if the relevant market is illiquid (as is the case
with many privately-negotiated derivatives, including swap agreements), it may not be possible to initiate
a transaction or liquidate a position at an advantageous time or price.
Credit Derivatives.
The use of credit derivatives is a highly specialized activity which involves strategies and risks different
from those associated with ordinary portfolio security transactions. If the Sub-Adviser is incorrect
in its forecasts of default risks, market spreads or other applicable factors, the investment performance
of the fund would diminish compared with what it would have been if these techniques were not used. Moreover,
even if the Sub-Adviser is correct in its forecasts, there is a risk that a credit derivative position
may correlate imperfectly with the price of the asset or liability being protected.
Swap Agreements.
The fund may enter into swap transactions, including credit default and total return swap agreements.
Such transactions are subject to market risk, risk of default by the other party to the transaction and
risk of imperfect correlation between the value of such instruments and the underlying assets and may
involve commissions or other costs. Swaps generally do not involve the delivery of securities, other
underlying assets or principal. Accordingly, the risk of loss with respect to swaps generally is limited
to the net amount of payments that the fund is contractually obligated to make, or in the case of the
other party to a swap defaulting, the net amount of payments that the fund is contractually entitled
to receive. The fund bears the risk of loss of the amount expected
70
to be received under a swap agreement in the event of the default or bankruptcy
of a swap agreement counterparty. The fund will enter into swap agreements only with counterparties that
meet certain standards of creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the fund’s repurchase agreement guidelines). In addition, it is possible
that developments in the swaps market, including potential government regulation, could adversely affect
the fund’s ability to terminate existing swap agreements or to realize amounts to be received under
such agreements.
The federal income tax treatment of payments in respect of
certain derivatives contracts is unclear. Common Shareholders may receive distributions that are attributable
to derivatives contracts that are treated as ordinary income for federal income tax purposes.
The SEC recently adopted Rule 18f-4 under the Act, which will regulate the use
of derivatives by the fund and is effective in August 2022. Under the new rule, the fund may be required
to establish a comprehensive derivatives risk management program, to comply with certain value-at-risk
based leverage limits, to appoint a derivatives risk manager and to provide additional disclosure both
publicly and to the SEC regarding its derivatives positions. Compliance with the new rule by the fund
could, among other things, make derivatives more costly, limit their availability or utility or otherwise
adversely affect their performance. The new rule may limit the fund’s ability to use derivatives as
part of its investment strategy.
Valuation Risk
Unlike
publicly traded common stock which trades on national exchanges, there is no central place or exchange
for loans or other credit instruments in which the fund may invest to trade. Some credit instruments
trade in an OTC market which may be anywhere in the world where the buyer and seller can settle on a
price. Due to the lack of centralized information and trading, the valuation of credit instruments may
carry more risk than that of common stock. Uncertainties in the conditions of the financial market, unreliable
reference data, lack of transparency and inconsistency of valuation models and processes may lead to
inaccurate asset pricing. In addition, other market participants may value instruments differently than
the fund. As a result, the fund may be subject to the risk that when a credit instrument is sold in the
market, the amount received by the fund is less than the value that such credit instrument is carried
at on the fund’s books.
In addition, certain of the fund’s investments will need
to be fair valued in accordance with valuation procedures approved by the Board of Directors. Those portfolio
valuations may be based on unobservable inputs and certain assumptions about how market participants
would price the instrument. As a result, there will be uncertainty as to the value of certain of the
fund’s investments. The fund expects that inputs into the determination of fair value of those investments
will require significant management judgment or estimation. The net asset value of the fund, as determined
based, in part,
71
ADDITIONAL
INFORMATION (Unaudited) (continued)
on the fair value of those investments, may vary from the amount the fund would
realize upon the sale of such investments.
Furthermore, the Board of Directors may
use the services of one or more independent valuation firms to aid it in determining the fair value of
certain investments. Because valuations may fluctuate over short periods of time and may be based on
estimates, fair value determinations may differ materially from the value received in an actual transaction.
Additionally, valuations of private securities and private companies are inherently uncertain. The fund’s
net asset value could be adversely affected if the fund’s determinations regarding the fair value of
those investments were materially higher or lower than the values that it ultimately realize upon the
disposal of such investments.
Liquidity Risk
In addition to the
various other risks associated with investing in credit instruments, to the extent those instruments
are determined to be illiquid or restricted securities, they 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 Sub-Adviser’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. 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, thereby 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 purchaser of the securities. In either case, the fund would bear market risks
during the restricted period.
Leverage Risk
The fund’s use of
leverage could create the opportunity for a higher return for Common Shareholders, but would also result
in special risks for Common Shareholders and 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 return on the Common Shares 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 on the Common Shares will be less than
if leverage had not been used. There is no assurance that a leveraging strategy will be successful. In
addition, derivative transactions can involve leverage or the potential for leverage because they enable
the fund to magnify the fund’s exposure beyond its investment.
Leverage involves risks
and special considerations compared to a comparable portfolio without leverage including: (i) the likelihood
of greater volatility of the fund’s net asset
72
value; (ii) the risk that fluctuations in interest rates on Borrowings will reduce
the return to the Common Shareholders or will result in fluctuations in the dividends paid on the Common
Shares; (iii) the effect of leverage in a declining market, which is likely to cause a greater decline
in the net asset value of the Common Shares than if the fund were not leveraged; (iv) when the fund uses
leverage, the investment management fees payable to the Adviser (and, indirectly, the Sub-Adviser) will
be higher than if the fund did not use leverage, and may provide a financial incentive to the Adviser
and the Sub-Adviser to increase the fund’s use of leverage and create an inherent conflict of interest;
and (v) leverage may increase expenses, which may reduce total return.
The
fund may continue to use leverage if the benefits to the Common Shareholders of maintaining the leveraged
position are believed to outweigh any current reduced return, but expects to reduce, modify or cease
its leverage if it is believed the costs of the leverage will exceed the return provided from the investments
made with the proceeds of the leverage.
Cybersecurity Risk
The
fund and its service providers are susceptible to operational and information security risks due to cybersecurity
incidents. In general, cybersecurity incidents can result from deliberate attacks or unintentional events.
Cybersecurity attacks include, but are not limited to, gaining unauthorized access to digital systems
(e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or
sensitive information, corrupting data or causing operational disruption. Cyber attacks also may be carried
out in a manner that does not require gaining unauthorized access, such as causing denial-of-service
attacks on websites (i.e., efforts to make services unavailable to intended users). Cybersecurity incidents
affecting the Adviser or other service providers, as well as financial intermediaries, have the ability
to cause disruptions and impact business operations, potentially resulting in financial losses, including
by interference with the fund’s ability to calculate its net asset value; impediments to trading for
the fund’s portfolio; the inability of Common Shareholders to transact business with the fund; violations
of applicable privacy, data security or other laws; regulatory fines and penalties; reputational damage;
reimbursement or other compensation or remediation costs; legal fees; or additional compliance costs.
Similar adverse consequences could result from cybersecurity incidents affecting issuers of securities
in which the fund invests, counterparties with which the fund engages in transactions, governmental and
other regulatory authorities, exchange and other financial market operators, banks, brokers, dealers,
insurance companies and other financial institutions and other parties. While information risk management
systems and business continuity plans have been developed which are designed to reduce the risks associated
with cybersecurity, there are inherent limitations in any cybersecurity risk management systems or business
continuity plans, including the possibility that certain risks have not been identified.
Recent Changes
The
following information in this annual report is a summary of certain changes since August 31, 2020. This
information may not reflect all of the changes that have occurred
73
ADDITIONAL
INFORMATION (Unaudited) (continued)
since you purchased the fund. Effective as of January 31, 2021, Leland Hart no
longer serves as a portfolio manager of the fund. The fund’s primary portfolio managers now are Chris
Barris, Kevin Cronk, CFA, and Hiram Hamilton. There have been no other changes to the fund’s portfolio
management team since August 31, 2020.
The fund also has updated certain of its
principal risk factors to reflect the risks associated with the COVID-19 pandemic, covenant-lite loans,
Brexit, cybersecurity, new Rule 18f-4 under the Act and the pending cessation of LIBOR.
During
the period ended August 31, 2021, except as noted above, there were: (i) no material changes in the fund’s
investment objectives or policies that have not been approved by shareholders, (ii) no changes in the
fund’s charter or by-laws that would delay or prevent a change of control of the fund that have not
been approved by shareholders, (iii) no material changes to the principal risk factors associated with
investment in the fund, and (iv) no change in the persons primarily responsible for the day-to-day management
of the fund’s portfolio.
74
BOARD
MEMBERS INFORMATION (Unaudited)
INDEPENDENT BOARD MEMBERS
Joseph
S. DiMartino (77)
Chairman of the Board (2017)
Current
term expires in 2024
Principal Occupation During Past 5 Years:
· Director or Trustee of funds in the BNY Mellon Family of Funds
and certain other entities (as described in the fund’s Statement of Additional Information) (1995-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ, Inc., a public company providing professional business
services, products and solutions, Director (1997-Present)
No. of Portfolios for
which Board Member Serves: 97
———————
Francine J. Bovich (70)
Board Member (2017)
Current term expires in 2022
Principal Occupation
During Past 5 Years:
· The
Bradley Trusts, private trust funds, Trustee (2011-Present)
Other
Public Company Board Memberships During Past 5 Years:
· Annaly Capital Management, Inc., a real estate investment
trust, Director (2014-Present)
No. of Portfolios for which Board Member
Serves: 54
———————
Andrew
J. Donohue (71)
Board Member (2019)
Current term expires in
2023
Principal Occupation During Past 5 Years:
· Attorney, Solo Law Practice (2019-Present)
· Shearman
& Sterling LLP. A law firm, Of Counsel (2017-2019)
· Chief of Staff to the Chair of the SEC (2015-2017)
Other Public Company Board Memberships During Past 5 Years:
· Oppenheimer Funds (58 funds), Director
(2017-2019)
No. of Portfolios for which Board Member Serves: 44
———————
76
Kenneth A. Himmel (75)
Board Member (2017)
Current term expires in 2024
Principal Occupation
During Past 5 Years:
· Gulf
Related, an international real estate development company, Managing Partner (2010-Present)
· Related
Urban Development, a real estate development company, President and Chief Executive Officer
(1996-Present)
· American
Food Management, a restaurant company, Chief Executive Officer (1983-Present)
· Himmel
& Company, a real estate development company, President and Chief Executive Officer
(1980-Present)
No. of Portfolios for which Board Member Serves: 21
———————
Stephen
J. Lockwood (74)
Board Member (2017)
Current term expires in
2022
Principal Occupation During Past 5 Years:
· Stephen J. Lockwood and Company LLC, a real estate investment
company, Chairman (2000-Present)
No. of Portfolios for which Board Member
Serves: 21
———————
Roslyn M.
Watson (71)
Board Member (2017)
Current term expires in
2023
Principal Occupation During Past 5 Years:
· Watson Ventures, Inc., a real estate investment company, Principal
(1993-Present)
Other Public Company Board Memberships During Past 5 Years:
· American
Express Bank, FSB, Director (1993-2018)
No. of Portfolios for which Board Member
Serves: 44
———————
77
BOARD
MEMBERS INFORMATION (Unaudited) (continued)
INDEPENDENT BOARD MEMBERS (continued)
Benaree Pratt Wiley (75)
Board Member (2017)
Current term expires in 2023
Principal Occupation
During Past 5 Years:
· The
Wiley Group, a firm specializing in strategy and business development, Principal
(2005-Present)
Other Public Company Board Memberships During Past 5 Years:
· CBIZ,
Inc., a public company providing professional business services, products and solutions, Director
(2008-Present)
· Blue
Cross-Blue Shield of Massachusetts, Director (2004-2020)
No. of Portfolios for
which Board Member Serves: 62
———————
The address of the Board Members and Officers is c/o BNY Mellon Investment Adviser,
Inc. 240 Greenwich Street, New York, New York 10286.
78
OFFICERS
OF THE FUND (Unaudited)
DAVID
DIPETRILLO, President since January 2021.
Vice President and Director
of the Adviser since February 2021, Head of North America Product, BNY Mellon Investment Management since
January 2018, Director of Product Strategy, BNY Mellon Investment Management from January 2016 to December
2017; He is an officer of 56 investment companies (comprised of 106 portfolios) managed by the Adviser
or an affiliate of the Adviser. He is 43 years old and has been an employee of BNY Mellon since 2005.
JAMES
WINDELS, Treasurer since July 2017.
Vice President of the
Adviser since September 2020, Director-BNY Mellon Fund Administration, and an officer of 57 investment
companies (comprised of 128 portfolios) managed by the Adviser or an affiliate of the Adviser. He is
62 years old and has been an employee of the Adviser since April 1985.
PETER M. SULLIVAN, Chief
Legal Officer since July 2021 and Vice President and Assistant Secretary since March 2019.
Chief
Legal Officer of the Adviser since July 2021, Associate General Counsel of BNY Mellon since July 2021;
Senior
Managing Counsel of BNY Mellon from December 2020 to July 2021; Managing Counsel of BNY Mellon from March
2009 to December 2020, and an officer of 57 investment companies (comprised of 128 portfolios) managed
by the Adviser or an affiliate of the Adviser. He is 53 years old and has been an employee of BNY Mellon
since April 2004.
JAMES BITETTO, Vice President since July 2017 and Secretary since February 2018.
Senior Managing Counsel of BNY Mellon since December 2019; Managing Counsel of
BNY Mellon from April 2014 to December 2019; Secretary of the Adviser, and an officer of 57 investment
companies (comprised of 128 portfolios) managed by the Adviser or an affiliate of the Adviser. He is
55 years old and has been an employee of the Adviser since December 1996.
DEIRDRE CUNNANE,
Vice President and Assistant Secretary since March 2019.
Counsel
of BNY Mellon since August 2018; Senior Regulatory Specialist at BNY Mellon Investment Management Services
from February 2016 to August 2018. She is an officer of 57 investment companies (comprised of 128 portfolios)
managed by the Adviser or an affiliate of the Adviser. She is 31 years old and has been an employee of
the Adviser since August 2018.
SARAH S. KELLEHER, Vice President and Assistant Secretary since July 2017.
Managing Counsel of BNY Mellon since December 2017, Senior Counsel of BNY Mellon
from March 2013 to December 2017. She is an officer of 57 investment companies (comprised of 128 portfolios)
managed by the Adviser or an affiliate of the Adviser. She is 45 years old and has been an employee of
the Adviser since March 2013.
JEFF PRUSNOFSKY, Vice President and Assistant Secretary since July 2017.
Senior Managing Counsel of BNY Mellon, and an officer of 57 investment companies
(comprised of 128 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 56 years old
and has been an employee of the Adviser since October 1990.
AMANDA QUINN, Vice President and Assistant
Secretary since March 2020.
Counsel of BNY Mellon since June 2019;
Regulatory Administration Manager at BNY Mellon Investment Management Services from September 2018 to
May 2019; Senior Regulatory Specialist at BNY Mellon Investment Management Services from April 2015 to
August 2018. She is an officer of 57 investment companies (comprised of 128 portfolios) managed by the
Adviser or an affiliate of the Adviser. She is 36 years old and has been an employee of the Adviser
since June 2019.
NATALYA ZELENSKY, Vice President and Assistant Secretary since
March 2017.
Chief Compliance Officer (since August 2021) and Vice President
and Assistant Secretary (since February 2020) of BNY Mellon ETF Investment Adviser, LLC; Chief Compliance
Officer (since August 2021) and Vice President (since February 2020) of BNY Mellon ETF Trust; Managing
Counsel (December 2019 to August 2021) and Counsel (May 2016 to December 2019) of BNY Mellon; Assistant
Secretary of the Adviser from April 2018 to August 2021. She is an officer of 57 investment companies
(comprised of 128 portfolios) managed by the Adviser or an affiliate of the Adviser. She is 36 years
old and has been an employee of BNY Mellon since May 2016.
GAVIN C. REILLY, Assistant Treasurer since
July 2017.
Tax Manager-BNY Mellon Fund Administration, and an officer
of 57 investment companies (comprised of 128 portfolios) managed by the Adviser or an affiliate of the
Adviser. He is 53 years old and has been an employee of the Adviser since April 1991.
79
OFFICERS
OF THE FUND (Unaudited) (continued)
ROBERT
SALVIOLO, Assistant Treasurer since July 2017.
Senior Accounting Manager–BNY
Mellon Fund Administration, and an officer of 57 investment companies (comprised of 128 portfolios) managed
by the Adviser or an affiliate of the Adviser. He is 54 years old and has been an employee of the Adviser
since June 1989.
ROBERT SVAGNA, Assistant Treasurer since July 2017.
Senior
Accounting Manager–BNY Mellon Fund Administration, and an officer of 57 investment companies (comprised
of 128 portfolios) managed by the Adviser or an affiliate of the Adviser. He is 54 years old and has
been an employee of the Adviser since November 1990.
JOSEPH W. CONNOLLY, Chief Compliance Officer
since July 2017.
Chief Compliance Officer of the BNY Mellon
Family of Funds and BNY Mellon Funds Trust since 2004, CCO of the Adviser from 2004 until June 2021 (56
investment companies, comprised of 119 portfolios). He is 64 years old and has served in various capacities
with the Adviser since 1980, including manager of the firm’s Fund Accounting Department from 1997 through
October 2001.
80