The table below provides information about income and capital changes for a share of common stock outstanding throughout the periods indicated
(excluding supplemental data provided below):
Note 1. Organization
Duff & Phelps Utility and Corporate Bond Trust Inc. (the “Fund”) was incorporated under the laws of the State of Maryland on
November 23, 1992. The Fund commenced operations on January 29, 1993 as a diversified, closed-end management investment company registered under the Investment Company Act of 1940, as amended (the
“1940 Act”). The Fund’s investment objective is to seek high current income consistent with investing in securities of investment grade quality.
Note 2. Significant Accounting Policies
The following are the significant accounting policies of the Fund:
A. Investment Valuation: Preferred equity securities traded on a national or foreign securities exchange or traded over-the-counter and quoted on the NASDAQ Stock Market are valued at the last reported sale price or, if there was no sale on the valuation date, then the security is valued
at the closing bid price, in each case using valuation data provided by an independent pricing service, and are generally classified as Level 1. Preferred equity securities traded on more than one securities exchange shall be valued at the last
sale price on the business day as of which such value is being determined at the close of the exchange representing the principal market for such securities and are classified as Level 1. If there was no sale on the valuation date, then the
security is valued at the closing bid price of the exchange representing the principal market for such securities. Debt securities are valued at the mean of bid and ask prices provided by an independent pricing service when such prices are believed
to reflect the fair value of such securities and are generally classified as Level 2. Any securities for which it is determined that market prices are unavailable or inappropriate are valued at a fair value using a procedure determined in good
faith by the Board of Directors and are classified as Level 2 or 3 based on the valuation inputs.
B. Investment Transactions and
Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of securities are calculated on the identified cost basis. Dividend income is recognized on the ex-dividend date and interest income is
recognized on the accrual basis. Premiums on securities are amortized over the period remaining until first call date, if any, or if none, the remaining life of the security and discounts are accreted over the remaining life of the security for
financial reporting purposes. Premiums are not amortized for tax purposes.
C. Federal Income Taxes: It is the Fund’s intention
to comply with requirements of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income and capital gains to its shareholders. Therefore, no provision for
Federal income or excise taxes is required. Management of the Fund has concluded that there are no significant uncertain tax positions that would require recognition in the financial statements. Since tax authorities can examine previously filed tax
returns, the Fund’s tax returns filed for the tax years 2016 to 2019 are subject to review.
D. Dividends and Distributions:
The Fund declares and pays dividends on its common stock monthly from net investment income. Net long-term capital gains, if any, in excess of loss carryforwards are expected to be distributed annually. The Fund will make a determination at the
end of its fiscal year as to whether to retain or distribute such gains. Dividends and distributions are recorded on the ex-dividend date. The amount and timing of distributions are generally determined in
accordance with federal tax regulations, which may differ from U.S. generally accepted accounting principles.
E. Use of Estimates:
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
15
DUFF & PHELPS UTILITY AND CORPORATE BOND TRUST INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2020
(Unaudited)
F. Accounting Standards: In 2017, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2017-08,
which shortened the premium amortization period for callable debt to the earliest call date. During the current fiscal period, ASU 2017-08 became effective for the Fund and did not materially impact the Fund’s financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on
Financial Reporting. The amendments in ASU 2020-04 provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of LIBOR (London Interbank Offering Rate) and
other interbank-offered based reference rates as of the end of 2021. ASU 2020-04 is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management is currently
evaluating the impact, if any, of applying ASU 2020-04.
Note 3. Agreements and Management Arrangements
A. Adviser: The Fund has an Advisory Agreement with Duff & Phelps Investment Management Co. (the “Adviser”), an
indirect, wholly owned subsidiary of Virtus Investment Partners, Inc. (“Virtus”). The investment advisory fee is payable monthly at an annual rate of 0.50% of the Fund’s average weekly managed assets, which is defined as the average
weekly value of the total assets of the Fund minus the sum of all accrued liabilities of the Fund (other than the aggregate amount of any outstanding borrowings or other indebtedness constituting financial leverage).
B. Administrator: The Fund has an Administration Agreement with Robert W. Baird & Co. Incorporated (the
“Administrator” or “Baird”). The administration fee is payable quarterly at an annual rate of 0.14% of the Fund’s average weekly net assets, which is defined as the average weekly value of the total assets of the Fund minus
the sum of all accrued liabilities of the Fund (including the aggregate amount of any outstanding borrowings or other indebtedness constituting financial leverage).
C. Directors: The Fund pays each director not affiliated with the Adviser an annual fee. Total fees paid to directors for the six months
ended April 30, 2020 were $33,528.
D. Affiliated Shareholder: At April 30, 2020, Virtus Partners, Inc. (a wholly owned
subsidiary of Virtus) held 52,836 shares of the Fund, which represents 0.19% of the shares of common stock outstanding. These shares may be sold at any time.
Note 4. Investment Transactions
Purchases and sales of investment securities (excluding U.S. Government and agency mortgage-backed securities and short-term investments) for
the six months ended April 30, 2020 were $26,850,496 and $17,590,697, respectively. Purchases and sales of U.S. Government and agency mortgage-backed securities for the six months ended April 30, 2020 were $-0- and $30,012, respectively.
Note 5. Distributions and Tax Information
At October 31, 2019, the Fund’s most recent fiscal year end, the federal tax cost of investments and aggregate gross
unrealized appreciation (depreciation) were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Tax
Cost
|
|
Unrealized
Appreciation
|
|
|
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
|
|
|
$351,175,807
|
|
|
$14,104,922
|
|
|
|
$(8,977,814
|
)
|
|
|
$5,127,108
|
|
16
DUFF & PHELPS UTILITY AND CORPORATE BOND TRUST INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2020
(Unaudited)
The difference between the book basis and tax basis of unrealized appreciation (depreciation) and cost of investments is primarily attributable
to the tax treatment of premium amortization on fixed income securities.
The tax character of distributions paid during the year ended
October 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
10/31/2019
|
|
|
Distributions paid from ordinary income
|
|
|
$11,547,768
|
|
The tax character of distributions paid in 2020 will be determined at the Fund’s fiscal year end,
October 31, 2020.
At October 31, 2019, the Fund had unused capital loss carryforwards available to offset future capital gains,
if any, to the extent permitted by the Internal Revenue Code. The character and amounts of the carryforwards are given in the table below. These capital losses are not subject to expiration.
|
|
|
|
|
|
|
|
|
|
|
Short Term
|
|
Long Term
|
|
|
Total
|
|
|
68,738
|
|
|
55,080,103
|
|
|
|
55,148,841
|
|
Note 6. Borrowings
The Fund has a Committed Facility Agreement (the “Facility”) with a commercial bank (the “Bank”) that allows the Fund to
borrow cash, up to a limit of $125,000,000. Borrowings under the Facility are collateralized by certain assets of the Fund (the “Hypothecated Securities”). The Fund expressly grants the Bank the right to
re-register the Hypothecated Securities in its own name or in another name other than the Fund’s and to pledge, repledge, hypothecate, rehypothecate, sell, lend or otherwise transfer or use the
Hypothecated Securities. Interest is charged at 1 month LIBOR plus an additional percentage rate of 0.85% on the amount borrowed. The Bank has the ability to require repayment of outstanding borrowings under the Facility upon 179 days’ notice
or following an event of default. For the six months ended April 30, 2020, the average daily borrowings under the Facility and the weighted daily average interest rate were $105,000,000 and 2.26%, respectively. As of April 30, 2020, the
amount of such outstanding borrowings was $105,000,000 and the applicable interest rate was 1.18%.
The Bank has the ability to borrow the
Hypothecated Securities (“Rehypothecated Securities”). The Fund is entitled to receive a fee from the Bank in connection with any borrowing of Rehypothecated Securities. The fee is computed daily based on a percentage of the difference
between the fair market rate as determined by the Bank and the Federal Funds Open rate and is paid monthly. The Fund can designate any Hypothecated Security as ineligible for rehypothecation and can recall any Rehypothecated Security at any time and
if the Bank fails to return it (or an equivalent security) in a timely fashion, the Bank will be liable to the Fund for the ultimate delivery of such security and certain costs associated with delayed delivery.
In the event the Bank does not return the Rehypothecated Security or an equivalent security, the Fund will have the right to, among other
things, apply and set off an amount equal to 100% of the then-current fair market value of such Rehypothecated Securities against any amounts owed to the Bank under the Facility. The Fund is entitled to receive an amount equal to any and all
interest, dividends, or distributions paid or distributed with respect to any Hypothecated Security on the payment date. At April 30, 2020, Hypothecated Securities under the Facility had a market value of $247,290,828 and Rehypothecated
Securities had a market value of $103,252,474. If at the close of any business day, the value of all outstanding Rehypothecated Securities exceeds the value of the borrowings, the Bank shall promptly, at its option, either reduce the amount of the
outstanding securities or deliver an amount of cash at least equal to the excess amount.
17
DUFF & PHELPS UTILITY AND CORPORATE BOND TRUST INC.
NOTES TO FINANCIAL STATEMENTS—(Continued)
April 30, 2020
(Unaudited)
Note 7. Indemnifications
Under the Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the
performance of their duties to the Fund. In addition, in the normal course of business, the Fund enters into contracts that provide general indemnifications to other parties. The Fund’s maximum exposure under these arrangements is unknown as
this would involve future claims that may be made against the Fund that have not occurred. However, the Fund has not had prior claims or losses pursuant to these arrangements and expects the risk of loss to be remote.
Note 8. Subsequent Events
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were issued, and has
determined that there were no subsequent events requiring recognition or disclosure in these financial statements.
18
RENEWAL OF INVESTMENT ADVISORY AGREEMENT (Unaudited)
Under Section 15(c) of the
Investment Company Act of 1940 (the “1940 Act”), the terms of the Fund’s investment advisory agreement must be reviewed and approved at least annually by the Board of Directors of the Fund (the “Board”), including a majority
of the directors who are not “interested persons” of the Fund, as defined in section 2(a)(19) of the 1940 Act (the “Independent Directors”). Section 15(c) of the 1940 Act also requires the Fund’s directors to request
and evaluate, and the Fund’s investment adviser to furnish, such information as may reasonably be necessary to evaluate the terms of the investment advisory agreement. To assist the Board with this responsibility, the Board has appointed a
Contracts Committee, which is composed of the Independent Directors of the Fund and acts under a written charter that was most recently amended on December 17, 2015. A copy of the charter is available on the Fund’s website at
www.dpimc.com/duc and in print to any shareholder, upon request.
The Contracts Committee, assisted by the advice of independent legal
counsel, conducted an annual review of the terms of the Fund’s contractual arrangements, including the investment advisory agreement with Duff & Phelps Investment Management Co. (the “Adviser”). Set forth below is a
description of the Contracts Committee’s annual review of the Fund’s investment advisory agreement, which provided the material basis for the Board’s decision to continue the investment advisory agreement.
In the course of the Contracts Committee’s review, the members of the Contracts Committee considered all of the information they deemed
appropriate, including informational materials furnished by the Adviser in response to a request made by independent counsel on behalf of the Contracts Committee. In arriving at its recommendation that continuation of the investment advisory
agreement was in the best interests of the Fund and its shareholders, the Contracts Committee took into account all factors that it deemed relevant, without identifying any single factor or group of factors as
all-important or controlling. Among the factors considered by the Contracts Committee, and the conclusion reached with respect to each, were the following:
Nature, extent, and quality of services. The Contracts Committee considered the nature, extent and quality of the services provided to
the Fund by the Adviser. Among other materials, the Adviser furnished the Contracts Committee with a copy of its most recent investment adviser registration form (Form ADV). In evaluating the quality of the Adviser’s services, the Contracts
Committee noted the various complexities involved in the operations of the Fund, such as the use of leverage in the form of borrowings under a credit facility and the rehypothecation of portfolio securities pledged under the credit facility, and
concluded that the Adviser is consistently providing high-quality services to the Fund in an increasingly complex environment. The Contracts Committee also considered the length of service of the individual professional employees of the Adviser who
provide services to the Fund. In the Contracts Committee’s view, the long-term service of capable and conscientious professionals provides a significant benefit to the Fund and its shareholders. The Contracts Committee also considered the
Fund’s investment performance as discussed below. The Contracts Committee also took into account its evaluation of the quality of the Adviser’s code of ethics and compliance program. In light of the foregoing, the Contracts Committee
concluded that it was generally satisfied with the nature, extent and quality of the services provided to the Fund by the Adviser.
Investment performance of the Fund and the Adviser. The Contracts Committee reviewed the Fund’s investment performance over time
and compared that performance to other funds in its peer group. In making its comparisons, the Contracts Committee utilized data provided by the Adviser and a report from Broadridge (“Broadridge”), an independent provider of investment
company data. As reported by Broadridge, the Fund’s net asset value (“NAV”) total return ranked below the median among all leveraged closed-end general bond funds for the 3- and 5-year periods ended June 30, 2019, and above the median for the 1-year period ended June 30, 2019. The Adviser
provided the Contracts Committee with performance information for the Fund for various periods, measured against three benchmarks: the Lipper General Bond Funds Average (the Fund’s category as determined by Thomson Reuters Lipper), the
Bloomberg Barclays U.S. Aggregate Index and the Bloomberg Barclays U.S. Credit Index (which is a subset of the Bloomberg Barclays U.S. Aggregate Index). The Contracts Committee noted that the Fund’s performance outperformed the Bloomberg
Barclays U.S. Aggregate Index on an NAV basis over the 1- and 3-year periods ended June 30, 2019,
19
although it underperformed the index on an NAV basis over the 5-year period. On a market value basis, the Fund underperformed the index over the 1-, 3- and 5-year periods ended June 30, 2019. The Fund also trailed the Bloomberg Barclays U.S. Credit Index on a NAV and market
value basis over the 1-, 3-, and 5-year periods ended June 30, 2019. The Fund also trailed the Lipper General Bonds Fund
Average on a NAV basis over the 3-, and 5-year periods ended June 30, 2019, while outperforming over the 1-year period ended
June 30, 2019. On a market value basis, the Fund trailed the Lipper General Bonds Fund Average over the 1-, 3- and 5-year
period ended June 30, 2019. In evaluating the Fund’s performance, the Contracts Committee took into consideration the Adviser’s explanation that the fixed-income investments comprising certain of the benchmarks include higher
yielding, lower-quality bonds in which the Fund is not permitted to invest. The Adviser also reported that the Fund had an annualized distribution rate of 4.80% as of June 30, 2019, which compared favorably with the 2.49% yield of the Bloomberg
Barclays U.S. Aggregate Index.
Costs of services and profits realized. The Contracts Committee considered the reasonableness of the
compensation paid to the Adviser, in both absolute and comparative terms, and also the profits realized by the Adviser and its affiliates from its relationship with the Fund. To facilitate this analysis, the Contracts Committee retained Broadridge
to furnish a report comparing the Fund’s management fee (defined as the sum of the advisory fee and administration fee) and other expenses to the similar expenses of other bond funds selected by Broadridge (the “Broadridge expense
group”). The Contracts Committee reviewed, among other things, information provided by Broadridge comparing the Fund’s contractual management fee rate (at common asset levels) and actual management fee rate (reflecting fee waivers, if any)
as a percentage of total assets and as a percentage of assets attributable to common stock to other funds in its Broadridge expense group. Based on the data provided on management fee rates, the Contracts Committee noted that: (i) the
Fund’s contractual management fee rate at a common asset level was lower than the median of its Broadridge expense group; (ii) the actual total expense rate was lower than the median its Broadridge expense group on the basis of assets
attributable to common stock and on a total asset basis; and (iii) the actual management fee rate was lower than the median of its Broadridge expense group on the basis of assets attributable to common stock and on a total asset basis.
In reviewing expense ratio comparisons between the Fund and other funds in the peer group selected by Broadridge, the Contracts Committee
considered leverage-related expenses separately from other expenses. The Contracts Committee noted that leverage-related expenses are not conducive to direct comparisons between funds, because the leverage-related expenses on a fund’s income
statement are significantly affected by the amount, type, tenor and accounting treatment of the leverage used by each fund, and considered the Adviser’s report indicating that amount of the Fund’s leverage was the primary driver of the
difference between the Fund’s investment-related expenses and those of other funds in the Broadridge peer group. Also, unlike all the other expenses of the Fund (and other funds) which are incurred in return for a service, leverage expenses are
incurred in return for the receipt of additional capital that is then invested by the Fund (and other funds using leverage) in additional portfolio securities that produce revenue directly offsetting the leverage expenses. Accordingly, in evaluating
the cost of the Fund’s leverage, the Contracts Committee considered the specific benefits to the Fund’s common shareholders of maintaining such leverage, noting that the Fund’s management and the Board regularly monitor the amount,
form, terms and risks of the Fund’s leverage, and that such leverage has continued to be accretive, generating net income for the Fund’s common shareholders over and above its cost.
The Adviser also furnished the Contracts Committee with copies of its financial statements, and the financial statements of its parent company,
Virtus Investment Partners, Inc. The Adviser also provided information regarding the revenue and expenses related to its management of the Fund, and the methodology used by the Adviser in allocating such revenue and expenses among its various
clients. In reviewing those financial statements and other materials, the Contracts Committee examined the profitability of the investment advisory agreement to the Adviser and determined that the profitability of that contract was reasonable in
light of the services rendered to the Fund. The Contracts Committee considered that the Adviser must be able to compensate its employees at competitive levels in order to attract and retain high-quality personnel to provide high-quality service to
the Fund. The Contracts Committee concluded that the investment advisory fee was the product of arm’s length bargaining and that it was fair and reasonable to the Fund.
Economies of scale. The Contracts Committee considered whether the Fund has appropriately benefited from any economies of scale. The
Contracts Committee concluded that currently the Fund is not sufficiently large to realize
20
benefits from economies of scale with fee breakpoints. The Contracts Committee encouraged the Adviser to continue to work towards reducing costs by leveraging relationships with service providers
across the complex of funds advised by the Adviser.
Comparison with other advisory contracts. The Contracts Committee also received
comparative information from the Adviser with respect to its standard fee schedule for investment advisory clients other than the Fund. The Contracts Committee noted that, among all accounts managed by the Adviser, the Fund’s advisory fee is
higher than the Adviser’s standard fee schedule. However, the Contracts Committee noted that the services provided by the Adviser to the Fund are significantly more extensive and demanding than the services provided by the Adviser to its non-investment company, institutional accounts. Specifically, in providing services to the Fund, the Contracts Committee considered that the Adviser needs to: (1) comply with the 1940 Act, the Sarbanes-Oxley
Act and other federal securities laws and New York Stock Exchange requirements, (2) provide for external reporting (including quarterly and semi-annual reports to shareholders, annual audited financial statements and disclosure of proxy
voting), tax compliance and reporting (which are particularly complex for investment companies), requirements of Section 19 of the 1940 Act relating to the source of distributions, (3) prepare for and attend meetings of the Board and its
committees, (4) communicate with Board and committee members between meetings, (5) communicate with a retail shareholder base consisting of thousands of investors, (6) manage the use of financial leverage and respond to changes in the
financial markets and regulatory environment that could affect the amount and type of the Fund’s leverage and (7) respond to unanticipated issues in the financial markets or regulatory environment that can impact the Fund. Based on the
fact that the Adviser only provides the foregoing services to its investment company clients and not to its institutional account clients, the Contracts Committee concluded that the management fees charged to the Fund are reasonable compared to
those charged to other clients of the Adviser, when the nature and scope of the services provided to the Funds are taken into account. Furthermore, the Contracts Committee noted that many of the Adviser’s other clients would not be considered
“like accounts” of the Fund because these accounts are not of similar size and do not have the same investment objectives as, or possess other characteristics similar to, the Fund.
Indirect benefits. The Contracts Committee considered possible sources of indirect benefits to the Adviser from its relationship to the
Fund, including enhanced reputation that may aid in obtaining new clients. As a fixed-income fund, the Contracts Committee noted that the Fund does not utilize affiliates of the Adviser for brokerage purposes.
Conclusion. Based upon its evaluation of all material factors, including the foregoing, and assisted by the advice of independent legal
counsel, the Contracts Committee concluded that the continued retention of the Adviser as investment adviser to the Fund was in the best interests of the Fund and its shareholders. Accordingly, the Contracts Committee recommended to the full Board
that the investment advisory agreement with the Adviser be continued for a one-year term ending March 1, 2021. On December 18, 2019, the Contracts Committee presented its recommendations, and the
criteria on which they were based, to the full Board, whereupon the Board, including all of the Independent Directors voting separately, accepted the Contracts Committee’s recommendations and unanimously approved the continuation of the current
investment advisory agreement with the Adviser for a one-year term ending March 1, 2021.
INFORMATION
ABOUT PROXY VOTING BY THE FUND (Unaudited)
Although the Fund does not typically hold voting securities, a description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge, upon request, by calling the Administrator toll-free at (833) 604-3163 or is available on the Fund’s website at
www.dpimc.com/duc or on the SEC’s website at www.sec.gov.
21
INFORMATION ABOUT THE FUND’S PORTFOLIO HOLDINGS (Unaudited)
The Fund files its complete
schedule of portfolio holdings with the SEC for the first and third fiscal quarters of each fiscal year (quarters ended January 31 and July 31) as an exhibit to Form NPORT-P. The Fund’s Form NPORT-P is available on the SEC’s website at www.sec.gov. In addition, the Fund’s schedule of portfolio holdings is available without charge, upon request, by calling the Administrator toll-free at (833) 604-3163 or is available on the Fund’s website at www.dpimc.com/duc.
ADDITIONAL
INFORMATION (Unaudited)
Notice is hereby given in accordance with Section 23(c) of the 1940 Act that the Fund may from time to time purchase its shares of common
stock in the open market.
