Notes to Financial Statements (Unaudited)
1 Significant Accounting Policies
Eaton Vance
Senior Income Trust (the Trust) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The Trusts investment objective is to
provide a high level of current income, consistent with the preservation of capital, by investing primarily in senior, secured floating-rate loans.
The following is
a summary of significant accounting policies of the Trust. The policies are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The Trust is an investment company and follows accounting and
reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946.
A Investment Valuation The following methodologies are used to determine the market value or fair value of investments.
Senior Floating-Rate Loans. Interests in senior floating-rate loans (Senior Loans) for which reliable market quotations are readily available are valued generally
at the average mean of bid and ask quotations obtained from a third party pricing service. Other Senior Loans are valued at fair value by the investment adviser under procedures approved by the Trustees. In fair valuing a Senior Loan, the investment
adviser utilizes one or more of the valuation techniques described in (i) through (iii) below to assess the likelihood that the borrower will make a full repayment of the loan underlying such Senior Loan relative to yields on other Senior
Loans issued by companies of comparable credit quality. If the investment adviser believes that there is a reasonable likelihood of full repayment, the investment adviser will determine fair value using a matrix pricing approach that considers the
yield on the Senior Loan. If the investment adviser believes there is not a reasonable likelihood of full repayment, the investment adviser will determine fair value using analyses that include, but are not limited to: (i) a comparison of the
value of the borrowers outstanding equity and debt to that of comparable public companies; (ii) a discounted cash flow analysis; or (iii) when the investment adviser believes it is likely that a borrower will be liquidated or sold,
an analysis of the terms of such liquidation or sale. In certain cases, the investment adviser will use a combination of analytical methods to determine fair value, such as when only a portion of a borrowers assets are likely to be sold. In
conducting its assessment and analyses for purposes of determining fair value of a Senior Loan, the investment adviser will use its discretion and judgment in considering and appraising relevant factors. Fair value determinations are made by the
portfolio managers of the Trust based on information available to such managers. The portfolio managers of other funds managed by the investment adviser that invest in Senior Loans may not possess the same information about a Senior Loan borrower as
the portfolio managers of the Trust. At times, the fair value of a Senior Loan determined by the portfolio managers of other funds managed by the investment adviser that invest in Senior Loans may vary from the fair value of the same Senior Loan
determined by the portfolio managers of the Trust. The fair value of each Senior Loan is periodically reviewed and approved by the investment advisers Valuation Committee and by the Trustees based upon procedures approved by the Trustees.
Junior Loans (i.e., subordinated loans and second lien loans) are valued in the same manner as Senior Loans.
Debt Obligations. Debt obligations are generally
valued on the basis of valuations provided by third party pricing services, as derived from such services pricing models. Inputs to the models may include, but are not limited to, reported trades, executable bid and ask prices, broker/dealer
quotations, prices or yields of securities with similar characteristics, interest rates, anticipated prepayments, benchmark curves or information pertaining to the issuer, as well as industry and economic events. The pricing services may use a
matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. Short-term debt obligations purchased with a remaining maturity of sixty days or less for which a valuation
from a third party pricing service is not readily available may be valued at amortized cost, which approximates fair value.
Equity Securities. Equity
securities listed on a U.S. securities exchange generally are valued at the last sale or closing price on the day of valuation or, if no sales took place on such date, at the mean between the closing bid and ask prices on the exchange where such
securities are principally traded. Equity securities listed on the NASDAQ National Market System are valued at the NASDAQ official closing price. Unlisted or listed securities for which closing sales prices or closing quotations are not available
are valued at the mean between the latest available bid and ask prices or, in the case of preferred equity securities that are not listed or traded in the over-the-counter market, by a third party pricing service that uses various techniques that
consider factors including, but not limited to, prices or yields of securities with similar characteristics, benchmark yields, broker/dealer quotes, quotes of underlying common stock, issuer spreads, as well as industry and economic events.
Derivatives. Forward foreign currency exchange contracts are generally valued at the mean of the average bid and average ask prices that are reported by currency
dealers to a third party pricing service at the valuation time. Such third party pricing service valuations are supplied for specific settlement periods and the Trusts forward foreign currency exchange contracts are valued at an interpolated
rate between the closest preceding and subsequent settlement period reported by the third party pricing service.
Foreign Securities and Currencies. Foreign
securities and currencies are valued in U.S. dollars, based on foreign currency exchange rate quotations supplied by a third party pricing service. The pricing service uses a proprietary model to determine the exchange rate. Inputs to the model
include reported trades and implied bid/ask spreads.
Affiliated Fund. The Trust may invest in Eaton Vance Cash Reserves Fund, LLC (Cash Reserves Fund), an
affiliated investment company managed by Eaton Vance Management (EVM). While Cash Reserves Fund is not a registered money market mutual fund, it conducts all of its investment activities in accordance with the requirements of Rule 2a-7 under the
1940 Act. Investments in Cash Reserves Fund are valued at the closing net asset value per unit on the valuation day. Cash Reserves Fund generally values its investment securities based on available market quotations provided by a third party pricing
service.
Fair Valuation. Investments for which valuations or market quotations are not readily available or are deemed unreliable are valued at fair value
using methods determined in good faith by or at the direction of the Trustees of the Trust in a manner that most fairly reflects the securitys fair value, which is the amount that the Trust might reasonably expect to receive for
the security upon its current sale in the ordinary course. Each such determination is based
Eaton Vance
Senior Income Trust
December 31, 2021
Notes to Financial Statements (Unaudited) continued
on a consideration of relevant factors, which are likely to vary from one pricing context to another. These factors may include, but are not limited to, the type of
security, the existence of any contractual restrictions on the securitys disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies or entities, quotations or relevant information
obtained from broker/dealers or other market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the companys or entitys financial
statements, and an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold.
B Investment Transactions Investment transactions for financial statement purposes are accounted for on a trade date basis. Realized
gains and losses on investments sold are determined on the basis of identified cost.
C Income Interest income is recorded on the basis
of interest accrued, adjusted for amortization of premium or accretion of discount. Fees associated with loan amendments are recognized immediately. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or
securities. Distributions from investment companies are recorded as dividend income, capital gains or return of capital based on the nature of the distribution.
D Federal Taxes The Trusts policy is to
comply with the provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute to shareholders each year substantially all of its net investment income, and all or substantially all of its net realized capital
gains. Accordingly, no provision for federal income or excise tax is necessary.
As of December 31, 2021, the Trust had no uncertain tax positions that
would require financial statement recognition, de-recognition, or disclosure. The Trust files a U.S. federal income tax return annually after its fiscal year-end, which is subject to examination by the Internal Revenue Service for a period of three
years from the date of filing.
E Foreign Currency Translation Investment valuations, other assets, and liabilities initially expressed in foreign currencies are translated each business day into U.S. dollars based upon current exchange rates. Purchases and sales of foreign
investment securities and income and expenses denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates in effect on the respective dates of such transactions. Recognized gains or losses on investment
transactions attributable to changes in foreign currency exchange rates are recorded for financial statement purposes as net realized gains and losses on investments. That portion of unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
F Unfunded Loan Commitments The Trust may enter
into certain loan agreements all or a portion of which may be unfunded. The Trust is obligated to fund these commitments at the borrowers discretion. These commitments are disclosed in the accompanying Portfolio of Investments. At
December 31, 2021, the Trust had sufficient cash and/or securities to cover these commitments.
G Use of Estimates The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.
H Indemnifications Under the Trusts
organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Trust. Under Massachusetts law, if certain conditions prevail, shareholders of a
Massachusetts business trust (such as the Trust) could be deemed to have personal liability for the obligations of the Trust. However, the Trusts Declaration of Trust contains an express disclaimer of liability on the part of Trust
shareholders and the By-laws provide that the Trust shall assume, upon request by the shareholder, the defense on behalf of any Trust shareholders. Moreover, the By-laws also provide for indemnification out of Trust property of any shareholder held
personally liable solely by reason of being or having been a shareholder for all loss or expense arising from such liability. Additionally, in the normal course of business, the Trust enters into agreements with service providers that may contain
indemnification clauses. The Trusts maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Trust that have not yet occurred.
I Forward Foreign Currency Exchange Contracts The
Trust may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of
the underlying currency and any gains or losses are recorded as unrealized until such time as the contracts have been closed. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their
contracts and from movements in the value of a foreign currency relative to the U.S. dollar.
J Interim Financial Statements The interim
financial statements relating to December 31, 2021 and for the six months then ended have not been audited by an independent registered public accounting firm, but in the opinion of the Trusts management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary for the fair presentation of the financial statements.
2 Auction
Preferred Shares
The Trust issued Auction Preferred Shares (APS) on July 27, 2001 in a public offering. Dividends on the APS, which accrue daily, are
cumulative at rates which are reset every seven days by an auction, unless a special dividend period has been set. Series of APS are identical in all respects except for the reset dates of the dividend rates. If the APS auctions do not successfully
clear, the dividend payment rate over the next period for the APS holders is set at a specified maximum applicable rate until such time as the APS auctions are successful. Auctions have not cleared since February 13, 2008 and the rate
Eaton Vance
Senior Income Trust
December 31, 2021
Notes to Financial Statements (Unaudited) continued
since that date has been the maximum applicable rate (see Note 3). The maximum applicable rate on the APS is 125% of the AA Financial Composite Commercial
Paper Rate at the date of the auction. The stated spread over the reference benchmark rate is determined based on the credit rating of the APS.
The number of APS
issued and outstanding as of December 31, 2021 is as follows:
|
|
|
|
|
|
|
APS Issued and
Outstanding |
|
|
|
Series A |
|
|
752 |
|
|
|
Series B |
|
|
752 |
|
The APS are redeemable at the option of the Trust at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends,
on any dividend payment date. The APS are also subject to mandatory redemption at a redemption price equal to $25,000 per share, plus accumulated and unpaid dividends, if the Trust is in default for an extended period on its asset maintenance
requirements with respect to the APS. If the dividends on the APS remain unpaid in an amount equal to two full years dividends, the holders of the APS as a class have the right to elect a majority of the Board of Trustees. In general, the
holders of the APS and the common shares have equal voting rights of one vote per share, except that the holders of the APS, as a separate class, have the right to elect at least two members of the Board of Trustees. The APS have a liquidation
preference of $25,000 per share, plus accumulated and unpaid dividends. The Trust is required to maintain certain asset coverage with respect to the APS as defined in the Trusts By-Laws and the 1940 Act. The Trust pays an annual fee up to
0.15% of the liquidation value of the APS to broker/dealers as a service fee if the auctions are unsuccessful; otherwise, the annual fee is 0.25%.
3 Distributions to Shareholders and Income Tax Information
The Trust intends to make monthly distributions of net investment
income to common shareholders, after payment of any dividends on any outstanding APS. In addition, at least annually, the Trust intends to distribute all or substantially all of its net realized capital gains. Distributions to common shareholders
are recorded on the ex-dividend date. Distributions to preferred shareholders are recorded daily and are payable at the end of each dividend period. The dividend rates for the APS at December 31, 2021, and the amount of dividends accrued
(including capital gains, if any) to APS shareholders, average APS dividend rates (annualized), and dividend rate ranges for the six months then ended were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
APS Dividend
Rates at December 31, 2021 |
|
|
Dividends Accrued to APS Shareholders |
|
|
Average APS Dividend Rates |
|
|
Dividend Rate Ranges (%) |
|
|
|
|
|
|
Series A |
|
|
0.09 |
% |
|
$ |
8,080 |
|
|
|
0.09 |
% |
|
|
0.06-0.10 |
|
|
|
|
|
|
Series B |
|
|
0.10 |
|
|
|
8,610 |
|
|
|
0.09 |
|
|
|
0.06-0.10 |
|
Beginning February 13, 2008 and consistent with the patterns in the broader market for auction-rate securities, the Trusts APS
auctions were unsuccessful in clearing due to an imbalance of sell orders over bids to buy the APS. As a result, the dividend rates of the APS were reset to the maximum applicable rates. The table above reflects such maximum dividend rate for each
series as of December 31, 2021.
Distributions to shareholders are determined in accordance with income tax regulations, which may differ from U.S. GAAP. As
required by U.S. GAAP, only distributions in excess of tax basis earnings and profits are reported in the financial statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified
to paid-in capital. For tax purposes, distributions from short-term capital gains are considered to be from ordinary income.
At June 30, 2021, the Trust, for
federal income tax purposes, had deferred capital losses of $19,936,705 which would reduce its taxable income arising from future net realized gains on investment transactions, if any, to the extent permitted by the Internal Revenue Code, and thus
would reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Trust of any liability for federal income or excise tax. The deferred capital losses are treated as arising on the first day of the
Trusts next taxable year and retain the same short-term or long-term character as when originally deferred. Of the deferred capital losses at June 30, 2021, $2,021,139 are short-term and $17,915,566 are long-term.
Eaton Vance
Senior Income Trust
December 31, 2021
Notes to Financial Statements (Unaudited) continued
The cost and unrealized appreciation (depreciation) of investments, including open derivative contracts, of the Trust at December 31, 2021, as determined on a
federal income tax basis, were as follows:
|
|
|
|
|
|
|
Aggregate cost |
|
$ |
190,940,949 |
|
|
|
Gross unrealized appreciation |
|
$ |
1,923,952 |
|
|
|
Gross unrealized depreciation |
|
|
(2,874,702 |
) |
|
|
Net unrealized depreciation |
|
$ |
(950,750 |
) |
4 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by EVM as compensation for investment advisory services rendered to the Trust. The investment adviser fee is computed at an annual
rate of 0.73% of the Trusts average weekly gross assets and is payable monthly. The annual investment adviser fee rate shall be reduced to the following as of the stated date: May 1, 2022: 0.72%, May 1, 2023: 0.71%, May 1, 2024:
0.70%, May 1, 2025: 0.69% and May 1, 2026: 0.55%. Gross assets as referred to herein are calculated by deducting accrued liabilities of the Trust except the principal amount of any indebtedness for money borrowed, including debt securities
issued by the Trust. For the six months ended December 31, 2021, the Trusts investment adviser fee amounted to $802,291. The Trust invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for advisory services provided
to Cash Reserves Fund. The administration fee is earned by EVM for administering the business affairs of the Trust and is computed at an annual rate of 0.25% of the Trusts average weekly gross assets. For the six months ended December 31,
2021, the administration fee amounted to $274,757.
Trustees and officers of the Trust who are members of EVMs organization receive remuneration for their
services to the Trust out of the investment adviser fee. Trustees of the Trust who are not affiliated with EVM may elect to defer receipt of all or a percentage of their annual fees in accordance with the terms of the Trustees Deferred Compensation
Plan. For the six months ended December 31, 2021, no significant amounts have been deferred. Certain officers and Trustees of the Trust are officers of EVM.
During the six months ended December 31, 2021, EVM reimbursed the Trust $1,737 for a net realized loss due to a trading error. The amount of the reimbursement had an
impact on total return on net asset value of less than 0.01%.
5 Purchases and Sales of Investments
Purchases and sales of investments, other than short-term obligations and including maturities, paydowns and principal repayments on Senior Loans, aggregated $67,990,080
and $252,157,790, respectively, for the six months ended December 31, 2021.
6 Common Shares of Beneficial Interest and Shelf
Offering
The Trust may issue common shares pursuant to its dividend reinvestment plan. Common shares issued by the Trust pursuant to its dividend reinvestment
plan for the six months ended December 31, 2021 were 2,542. There were no common shares issued by the Trust for the year ended June 30, 2021.
As announced
on May 12, 2021, the Trusts Board of Trustees authorized an initial conditional cash tender offer (the Initial Tender Offer) by the Trust for up to 60% of its outstanding common shares at a price per share equal to 99% of the
Trusts net asset value (NAV) per share as of the close of regular trading on the New York Stock Exchange on the date the tender offer expires. On June 29, 2021, the Trust commenced a cash tender offer for up to 22,719,965 of
its outstanding common shares. The tender offer expired at 5:00 P.M. Eastern Time on July 30, 2021. The number of shares properly tendered was 20,330,291.438. The purchase price of the properly tendered shares was equal to $6.7897 per share for
an aggregate purchase price of $138,036,580.
In addition to the Initial Tender Offer, the Trust announced on May 12, 2021 that it will conduct cash tender
offers in the fourth quarter of each of 2022, 2023 and 2024 (each, a Conditional Tender Offer) for up to 10% of the Trusts then-outstanding common shares if, from January to August of the relevant year, the Trusts shares
trade at an average daily discount to NAV of more than 10%, based upon the Trusts volume-weighted average market price and NAV on each business day during the period. If triggered, common shares tendered and accepted in a Conditional Tender
Offer would be repurchased at a price per share equal to 98% of the Trusts NAV as of the close of regular trading on the New York Stock Exchange on the date such Conditional Tender Offer expires.
In November 2013, the Board of Trustees initially approved a share repurchase program for the Trust. Pursuant to the reauthorization of the share repurchase program by
the Board of Trustees in March 2019, the Trust is authorized to repurchase up to 10% of its common shares outstanding as of the last day of the prior calendar year at market prices when shares are trading at a discount to net asset value. The share
repurchase program does not obligate the Trust to purchase a specific amount of shares. There were no repurchases of common shares by the Trust for the six months ended December 31, 2021 and the year ended June 30, 2021.
Eaton Vance
Senior Income Trust
December 31, 2021
Notes to Financial Statements (Unaudited) continued
Pursuant to a registration statement filed with the SEC, the Trust is authorized to issue up to an additional 4,551,438 common shares through an equity shelf offering
program (the shelf offering). Under the shelf offering, the Trust, subject to market conditions, may raise additional capital from time to time and in varying amounts and offering methods at a net price at or above the Trusts net
asset value per common share. During the six months ended December 31, 2021 and the year ended June 30, 2021, there were no shares sold by the Trust pursuant to its shelf offering.
According to filings made on Schedule 13D and 13G pursuant to Sections 13(d) and 13(g) of the Securities Exchange Act of 1934, as amended, three affiliated entities
together owned 10.6% of the Trusts common shares.
7 Restricted Securities
At December 31, 2021, the Trust owned the following securities which were restricted as to public resale and not registered under the Securities Act of 1933
(excluding Rule 144A securities). The Trust has various registration rights (exercisable under a variety of circumstances) with respect to these securities. The value of these securities is determined based on valuations provided by brokers when
available, or if not available, they are valued at fair value using methods determined in good faith by or at the direction of the Trustees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description |
|
Date of Acquisition |
|
|
Shares |
|
|
Cost |
|
|
Value |
|
|
|
|
|
|
Common Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Point Energy Holdings, Inc. |
|
|
7/15/14 |
|
|
|
325 |
|
|
$ |
15,070 |
|
|
$ |
0 |
|
|
|
|
|
|
Convertible Preferred Stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Point Energy Holdings, Inc., Series A, 12.00% (PIK) |
|
|
5/26/17 |
|
|
|
5 |
|
|
|
5,000 |
|
|
|
0 |
|
|
|
|
|
|
Total Restricted Securities |
|
|
|
|
|
|
|
|
|
$ |
20,070 |
|
|
$ |
0 |
|
8 Financial Instruments
The Trust may trade in financial instruments with off-balance sheet risk in the normal course of its investing activities. These financial instruments may include forward
foreign currency exchange contracts and may involve, to a varying degree, elements of risk in excess of the amounts recognized for financial statement purposes. The notional or contractual amounts of these instruments represent the investment the
Trust has in particular classes of financial instruments and do not necessarily represent the amounts potentially subject to risk. The measurement of the risks associated with these instruments is meaningful only when all related and offsetting
transactions are considered. A summary of obligations under these financial instruments at December 31, 2021 is included in the Portfolio of Investments. At December 31, 2021, the Trust had sufficient cash and/or securities to cover
commitments under these contracts.
The Trust is subject to foreign exchange risk in the normal course of pursuing its investment objective. Because the Trust holds
foreign currency denominated investments, the value of these investments and related receivables and payables may change due to future changes in foreign currency exchange rates. To hedge against this risk, the Trust enters into forward foreign
currency exchange contracts.
The Trust enters into forward foreign currency exchange contracts that may contain provisions whereby the counterparty may terminate the
contract under certain conditions, including but not limited to a decline in the Trusts net assets below a certain level over a certain period of time, which would trigger a payment by the Trust for those derivatives in a liability position.
At December 31, 2021, the fair value of derivatives with credit-related contingent features in a net liability position was $143,462. At December 31, 2021, there were no assets pledged by the Trust for such liability.
The over-the-counter (OTC) derivatives in which the Trust invests are subject to the risk that the counterparty to the contract fails to perform its obligations under the
contract. To mitigate this risk, the Trust has entered into an International Swaps and Derivatives Association, Inc. Master Agreement (ISDA Master Agreement) or similar agreement with substantially all its derivative counterparties. An
ISDA Master Agreement is a bilateral agreement between the Trust and a counterparty that governs certain OTC derivatives and typically contains, among other things, set-off provisions in the event of a default and/or termination event as defined
under the relevant ISDA Master Agreement. Under an ISDA Master Agreement, the Trust may, under certain circumstances, offset with the counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or
posted and create one single net payment. The provisions of the ISDA Master Agreement typically permit a single net payment in the event of default including the bankruptcy or insolvency of the counterparty. However, bankruptcy or insolvency laws of
a particular jurisdiction may impose restrictions on or prohibitions against the right of offset in bankruptcy or insolvency. Certain ISDA Master Agreements allow counterparties to OTC derivatives to terminate derivative contracts prior to maturity
in the event the Trusts net assets decline by a stated percentage or the Trust fails to meet the terms of its ISDA Master Agreements, which would cause the counterparty to accelerate payment by the Trust of any net liability owed to it.
Eaton Vance
Senior Income Trust
December 31, 2021
Notes to Financial Statements (Unaudited) continued
The collateral requirements for derivatives traded under an ISDA Master Agreement are governed by a Credit Support Annex to the ISDA Master Agreement. Collateral
requirements are determined at the close of business each day and are typically based on changes in market values for each transaction under an ISDA Master Agreement and netted into one amount for such agreement. Generally, the amount of collateral
due from or to a counterparty is subject to a minimum transfer threshold amount before a transfer is required, which may vary by counterparty. Collateral pledged for the benefit of the Trust and/or counterparty is held in segregated accounts by the
Trusts custodian and cannot be sold, re-pledged, assigned or otherwise used while pledged. The portion of such collateral representing cash, if any, is reflected as deposits for derivatives collateral and, in the case of cash pledged by a
counterparty for the benefit of the Trust, a corresponding liability on the Statement of Assets and Liabilities. Securities pledged by the Trust as collateral, if any, are identified as such in the Portfolio of Investments.
The fair value of open derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) and whose primary underlying risk exposure is
foreign exchange risk at December 31, 2021 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
Derivative |
|
Asset Derivative(1) |
|
|
Liability Derivative(2) |
|
|
|
|
Forward foreign currency exchange contracts |
|
$ |
44,786 |
|
|
$ |
(143,462 |
) |
(1) |
Statement of Assets and Liabilities location: Receivable for open forward foreign currency exchange contracts.
|
(2) |
Statement of Assets and Liabilities location: Payable for open forward foreign currency exchange contracts.
|
The Trusts derivative assets and liabilities at fair value by type, which are reported gross in the Statement of Assets and Liabilities, are
presented in the table above. The following tables present the Trusts derivative assets and liabilities by counterparty, net of amounts available for offset under a master netting agreement and net of the related collateral received by the
Trust for such assets and pledged by the Trust for such liabilities as of December 31, 2021.
The effect of derivative instruments (not considered to be hedging instruments for accounting disclosure purposes) on the Statement of Operations and whose primary
underlying risk exposure is foreign exchange risk for the six months ended December 31, 2021 was as follows:
The average notional amount of forward foreign currency exchange contracts (based on the absolute value of notional amounts of
currency purchased and currency sold) outstanding during the six months ended December 31, 2021, which is indicative of the volume of this derivative type, was approximately $27,957,000.
The
Trust has entered into a Revolving Credit and Security Agreement, as amended (the Agreement) with conduit lenders and a bank to borrow up to $50 million ($125 million prior to September 29, 2021). Borrowings under the Agreement are secured by
the assets of the Trust. Interest is charged at a rate above the conduits commercial paper issuance rate and is payable monthly. Under the terms of the Agreement, in effect through March 7, 2022, the Trust also pays a program fee of
0.90% per annum on its outstanding borrowings to administer the facility and a liquidity fee of 0.15% (0.25% if the outstanding loan amount is less than or equal to 60% of the total facility size) per annum on the unused portion of the total
commitment under the Agreement. Program and liquidity fees for the six months ended December 31, 2021 totaled $209,445 and are included in interest expense and fees on the Statement of Operations. In connection with the renewal of the Agreement
on March 8, 2021, the Trust paid upfront fees of $187,500, which is being amortized to interest expense over a period of one year through March 7, 2022. The unamortized balance at December 31, 2021 is approximately $34,000 and is
included in prepaid upfront fees on notes payable on the Statement of Assets and Liabilities. At December 31, 2021, the Trust had borrowings outstanding under the Agreement of $25,000,000 at an annual interest rate of 0.14%. Based on the
short-term nature of the borrowings under the Agreement and the variable interest rate, the carrying amount of the borrowings at December 31, 2021 approximated its fair value. If measured at fair value, borrowings under the Agreement would have
been considered as Level 2 in the fair value hierarchy (see Note 11) at December 31, 2021. For the six months ended December 31, 2021, the average borrowings under the Agreement and the average annual interest rate (excluding fees) were
$28,733,696 and 0.14%, respectively.
Under generally accepted accounting principles for fair value measurements, a three-tier hierarchy to prioritize the assumptions, referred to as inputs, is used in
valuation techniques to measure fair value. The three-tier hierarchy of inputs is summarized in the three broad levels listed below.
In cases where the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level disclosed is determined based on the lowest level
input that is significant to the fair value measurement in its entirety. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
At December 31, 2021, the hierarchy of inputs used in valuing the Trusts investments and open derivative instruments, which are carried at value, were as
follows:
Level 3 investments at the beginning and/or end of the period in relation to net assets were not significant and accordingly, a reconciliation of
Level 3 assets for the six months ended December 31, 2021 is not presented.
Foreign investments can be adversely
affected by political, economic and market developments abroad, including the imposition of economic and other sanctions by the United States or another country. There may be less publicly available information about foreign issuers because they may
not be subject to reporting practices, requirements or regulations comparable to those to which United States companies are subject. Foreign markets may be smaller, less liquid and more volatile than the major markets in the United States. Trading
in foreign markets typically involves higher expense than trading in the United States. The Trust may have difficulties enforcing its legal or contractual rights in a foreign country. Securities that trade or are denominated in currencies other than
the U.S. dollar may be adversely affected by fluctuations in currency exchange rates.
The Trust invests primarily in below investment grade floating-rate loans, which are considered speculative because of the credit risk of their issuers. Changes in
economic conditions or other circumstances are more likely to reduce the capacity of issuers of these securities to make principal and interest payments. Such companies are more likely to default on their payments of interest and principal owed than
issuers of investment grade bonds. An economic downturn generally leads to a higher non-payment rate, and a loan or other debt obligation may lose significant value before a default occurs. Lower rated investments also may be subject to greater
price volatility than higher rated investments. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loans value.
Certain instruments held by the Trust may pay an
interest rate based on the London Interbank Offered Rate (LIBOR), which is the average offered rate for various maturities of short-term loans between certain major international banks. LIBOR is used throughout global banking and
financial industries to determine interest rates for a variety of financial instruments (such as debt instruments and derivatives) and borrowing arrangements. The ICE Benchmark
Administration Limited, the administrator of LIBOR, ceased publishing certain LIBOR settings on December 31, 2021, and is expected to cease publishing the remaining
LIBOR settings on June 30, 2023. Although the transition process away from LIBOR has become increasingly well-defined, the impact on certain debt securities, derivatives and other financial instruments that utilize LIBOR remains uncertain. The
phase-out of LIBOR may result in, among other things, increased volatility or illiquidity in markets for instruments based on LIBOR and changes in the value of such instruments.
An outbreak of respiratory disease caused by a novel coronavirus
was first detected in China in late 2019 and subsequently spread internationally. This coronavirus has resulted in closing borders, enhanced health screenings, changes to healthcare service preparation and delivery, quarantines, cancellations,
disruptions to supply chains and customer activity, as well as general concern and uncertainty. Health crises caused by outbreaks, such as the coronavirus outbreak, may exacerbate other pre-existing political, social and economic risks and disrupt
normal market conditions and operations. The impact of this outbreak has negatively affected the worldwide economy, the economies of individual countries, individual companies, and the market in general, and may continue to do so in significant and
unforeseen ways, as may other epidemics and pandemics that may arise in the future. Any such impact could adversely affect the Trusts performance, or the performance of the securities in which the Trust invests.
On August 27,
2020, Saba Capital Master Fund, Ltd., a hedge fund (Saba), filed claims against the Trust in a lawsuit in Suffolk County Superior Court in Massachusetts asserting breach of contract and fiduciary duty by the Trust and certain of its
affiliates, the Trusts adviser, and the Board, following the implementation by the Trust of by-law amendments that (i) require trustee nominees in contested elections to obtain affirmative votes of a majority of eligible shares in order
to be elected and (ii) establish certain requirements related to shares obtained in control share acquisitions. With respect to the Trust, Saba seeks rescission of these by-law provisions and certain related relief. On
March 31, 2021, the court allowed in part and denied in part a motion to dismiss Sabas claims.