nvq
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-Q
QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY
Investment Company Act file number 811-21869
Highland Credit Strategies Fund
(Exact name of registrant as specified in charter)
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Address of principal executive offices) (Zip code)
R. Joseph Dougherty
Highland Capital Management, L.P.
NexBank Tower
13455 Noel Road, Suite 800
Dallas, Texas 75240
(Name and address of agent for service)
Registrant’s telephone number, including area code: (877) 665-1287
Date of fiscal year end: December 31
Date of reporting period: September 30, 2009
Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
 
 

 

 

Item 1. Schedule of Investments.
The Schedule(s) of Investments is attached herewith.
     
INVESTMENT PORTFOLIO    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
                 
Principal
Amount ($)		         Value ($)  
       
 
        
US Senior Loans (a) — 74.8%        
       
 
        
AEROSPACE — 2.6%        
       
AWAS Capital, Inc.
        
  1,590,886    
Second Lien Priority Term Facility, 6.31%, 03/15/13
     1,002,258  
       
Continental Airlines, Inc.
        
  571,429    
Tranche A-1 Term Loan, 3.74%, 06/01/11
     520,571  
  1,428,571    
Tranche A-2 Term Loan, 3.74%, 06/01/11
     1,301,429  
       
Delta Air Lines, Inc.
        
  2,700,000    
Term Loan, 09/27/13 (b)
     2,692,129  
  6,078,144    
Term Loan Equipment Notes, 3.78%, 09/29/12
     5,166,423  
       
IAP Worldwide Services, Inc.
        
  2,149,488    
Second Lien Term Loan, PIK, 11.50%, 06/28/13
     929,654  
       
 
      
       
 
        
       
 
     11,612,464  
       
 
      
       
 
        
BROADCASTING — 6.9%        
       
ComCorp Broadcasting, Inc.
        
  3,432,700    
Revolving Loan, PIK 17.50%, 10/03/12 (c) (d)
     2,429,665  
  34,341,268    
Term Loan, PIK 17.50%, 04/03/13 (c) (d)
     24,306,749  
       
Univision Communications, Inc.
        
  4,000,000    
Initial Term Loan, 2.53%, 09/29/14
     3,395,920  
       
 
      
       
 
        
       
 
     30,132,334  
       
 
      
       
 
        
CABLE/WIRELESS VIDEO — 4.5%        
       
Broadstripe, LLC
        
  664,445    
DIP Revolver, 2.66%, 12/31/09 (c) (e)
     664,445  
  14,167,345    
First Lien Term Loan, PIK, 9.20%, 06/30/11 (c) (f)
     11,687,438  
  1,428,203    
Revolver, 9.81%, 06/30/11 (c) (f)
     1,179,410  
       
Cequel Communications, LLC
        
  2,806,501    
Term Loan, 2.25%, 11/05/13
     2,656,325  
       
Charter Communications Operating, LLC
        
  3,984,798    
New Term Loan, 6.25%, 03/06/14 (b)
     3,766,869  
       
 
      
       
 
        
       
 
     19,954,487  
       
 
      
       
 
        
CHEMICALS — 2.0%        
       
Solutia, Inc.
        
  4,442,581    
Term Loan, 7.25%, 02/28/14
     4,514,795  
       
Texas Petrochemical, LP
        
  748,490    
Incremental Term Loan B, 2.81%, 06/27/13 (b)
     619,376  
  2,217,541    
Term B Loan, 2.81%, 06/27/13 (b)
     1,835,015  
       
Tronox Worldwide, LLC
        
  1,910,160    
Revolving Credit Loan, 5.93%, 11/28/10 (e)
     1,700,042  
       
 
      
       
 
        
       
 
     8,669,228  
       
 
      
                 
Principal
Amount ($)		         Value ($)  
       
 
        
DIVERSIFIED MEDIA — 5.7%        
       
Cedar Fair, LP
        
  388,934    
U.S. Term B Loan, 4.25%, 08/30/14
     379,049  
  107,269    
U.S. Term Loan, 2.25%, 08/30/12
     103,582  
       
Cengage Learning Acquisitions, Inc.
        
  3,491,094    
Term Loan, 2.75%, 07/03/14 (b)
     3,138,493  
       
Cydcor, Inc.
        
  7,523,483    
First Lien Tranche B Term Loan, 9.00%, 02/05/13
    7,072,074  
  3,000,000    
Second Lien Tranche B Term Loan, 12.00%, 02/05/14 (c)
     2,597,400  
       
DTN, Inc.
        
  1,654,530    
Tranche C Term Loan, 5.29%, 03/10/13
    1,600,758  
       
Endurance Business Media, Inc.
        
  3,000,000    
Second Lien Term Loan, 11.25%, 01/26/14 (f)
     903,750  
       
Harland Clarke Holdings Corp.
        
  4,944,809    
Tranche B Term Loan, 2.78%, 06/30/14
     4,168,474  
       
Metro-Goldwyn-Mayer, Inc.
        
  6,181,268    
Tranche B Term Loan, 20.50%, 04/09/12
     3,547,368  
  2,925,000    
Tranche B-1 Term Loan, 20.50%, 04/09/12
     1,678,628  
       
 
      
       
 
        
       
 
     25,189,576  
       
 
      
       
 
        
ENERGY — 2.8%        
       
Alon USA Energy, Inc.
        
  215,000    
Edington Facility, 2.50%, 08/05/13
     177,644  
  1,720,000    
Paramount Facility, 2.50%, 08/05/13
     1,421,150  
       
Coffeyville Resources, LLC
        
  302,938    
Funded Letter of Credit, 8.50%, 12/28/10 (b)
     304,074  
  2,423,221    
Tranche D Term Loan, 8.50%, 12/30/13 (b)
     2,432,309  
       
Venoco, Inc.
        
  9,340,080    
Second Lien Loan, 4.25%, 05/07/14
     7,993,567  
       
 
      
       
 
        
       
 
     12,328,744  
       
 
      
       
 
        
FINANCIAL — 0.4%        
       
HUB International Ltd.
        
  183,054    
Delayed Draw Term Loan, 2.75%, 06/13/14
     165,207  
  814,396    
Initial Term Loan, 2.75%, 06/13/14
     734,993  
       
Nuveen Investments, Inc.
        
  1,000,000    
Second Lien Term Loan, 07/31/15 (b)
     1,003,330  
       
 
      
       
 
        
       
 
     1,903,530  
       
 
      
See accompanying Notes to Investment Portfolio.
 1

 

 

     
INVESTMENT PORTFOLIO (continued)    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
                 
Principal
Amount ($)		         Value ($)  
       
 
        
US Senior Loans (continued)        
       
 
        
FOOD AND DRUG — 0.4%        
       
Rite Aid Corp.
        
  997,468    
Tranche 2 Term Loan, 06/04/14 (b)
     880,266  
  987,508    
Tranche 3 Term Loan, 06/04/14 (b)
     941,224  
       
 
      
       
 
        
       
 
     1,821,490  
       
 
      
       
 
        
FOOD/TOBACCO — 3.8%        
       
Aramark Corp.
        
  238,939    
Facility Letter of Credit, 2.25%, 01/26/14
     223,462  
  3,641,591    
U.S. Term Loan, 2.16%, 01/26/14
     3,405,707  
       
DS Waters of America, Inc.
        
  1,833,889    
Term Loan, 2.54%, 10/29/12
     1,687,178  
       
DSW Holdings, Inc.
        
  3,000,000    
Term Loan, 03/02/12 (b)
     2,580,000  
       
PBM Holdings, Inc.
        
  1,750,543    
Term Loan, 2.50%, 09/28/12
     1,654,263  
       
Pierre Foods Inc.
        
  1,000,000    
Term Loan, 09/30/14 (b)
     667,500  
       
Sturm Foods, Inc.
        
  1,000,000    
First Lien Initial Term Loan, 3.06%, 01/31/14
     925,000  
  2,562,500    
Second Lien Inital Term Loan, 6.56%, 07/31/14
     2,165,313  
       
WM. Bolthouse Farms, Inc.
        
  1,053,726    
First Lien Term Loan, 2.56%, 12/16/12
     1,032,657  
  2,500,000    
Second Lien Term Loan, 5.75%, 12/16/13
     2,275,000  
       
 
      
       
 
        
       
 
     16,616,080  
       
 
      
       
 
        
FOREST PRODUCTS/CONTAINERS — 1.0%        
       
Boise Paper Holdings, LLC
        
  2,500,000    
Second Lien Term Loan, 9.25%, 02/23/15
     2,493,750  
       
Newark Group, Inc.
        
  1,480,493    
Credit-Link Letter of Credit, 6.77%, 03/09/13
     1,073,357  
  362,252    
Term Loan, 10.75%, 03/09/13
     262,633  
       
Tegrant Corp.
        
  1,000,000    
Second Lien Term Loan, 5.79%, 03/08/15
     358,335  
       
 
      
       
 
        
       
 
     4,188,075  
       
 
      
       
 
        
GAMING/LEISURE — 10.2%        
       
Blockbuster, Inc.
        
  2,000,000    
Revolver, 13.50%, 09/30/10
     1,995,000  
       
Drake Hotel Acquisition
        
  6,041,285    
B Note 1, 12.90% (c) (f)
     —  
       
Fontainebleau Florida Hotel, LLC
        
  18,500,000    
Tranche C Term Loan, 8.00%, 06/06/12
     10,637,500  
                 
Principal
Amount ($)		         Value ($)  
       
 
        
GAMING/LEISURE (continued)        
       
Ginn LA Conduit Lender, Inc.
        
  3,937,249    
First Lien Tranche A Credit-Linked Deposit, 5.87%, 06/08/11 (f)
     334,666  
  8,438,203    
First Lien Tranche B Term Loan, 6.20%, 06/08/11 (f)
     717,247  
       
Green Valley Ranch Gaming, LLC
        
  1,000,000    
Second Lien Term Loan, 3.55%, 08/16/14
     277,500  
       
Lake at Las Vegas Joint Venture
        
  8,162,813    
Revolving Loan Credit-Linked Deposit Account, 14.35%, 06/20/12 (f)
     448,996  
  34,125,359    
Term Loan, DIP, 9.75%, 07/16/10
     18,768,948  
  85,683,610    
Term Loan, PIK, 14.35%, 06/20/12 (f)
     3,541,476  
       
Las Vegas Sands, LLC
        
  1,061,828    
Delayed Draw I Term Loan, 05/23/14 (b)
     893,114  
  5,255,376    
Tranche B Term Loan, 05/23/14 (b)
     4,420,350  
       
VML US Finance, LLC
        
  597,622    
Term B Delayed Draw Project Loan, 5.79%, 05/25/12
     572,597  
  1,034,640    
Term B Funded Project Loan, 5.79%, 05/27/13
     991,315  
       
WAICCS Las Vegas 3 LLC
        
  7,000,000    
Second Lien Term Loan, 13.25% (f)
     1,032,500  
       
 
      
       
 
        
       
 
     44,631,209  
       
 
      
       
 
        
HEALTHCARE — 3.0%        
       
Aveta, Inc.
        
  2,609,404    
MMM Original Term Loan, 5.50%, 08/22/11
     2,491,980  
  387,639    
NAMM New Term Loan, 5.50%, 08/22/11
     370,195  
  698,508    
NAMM Original Term Loan, 5.50%, 08/22/11
     667,075  
  2,138,466    
PHMC Acquisition Term Loan, 5.50%, 08/22/11
     2,042,235  
       
LifeCare Holdings
        
  5,366,612    
Term Loan, 4.74%, 08/10/12
     4,306,706  
       
Talecris Biotherapeutics Holdings Corp.
        
  2,909,210    
First Lien Term Loan, 3.96%, 12/06/13
     2,863,142  
       
Triumph Healthcare Second Holdings, LLC
        
  500,000    
Second Lien Term Loan, 8.46%, 07/28/14
     412,500  
       
 
      
       
 
        
       
 
     13,153,833  
       
 
      
       
 
        
HOUSING — 4.4%        
       
Custom Building Products, Inc.
        
  3,334,411    
First Lien Term Loan, 8.00%, 10/29/11
     3,255,218  
  3,981,250    
Second Lien Term Loan, 10.75%, 04/20/12
     3,841,906  
See accompanying Notes to Investment Portfolio.
 2

 

 

     
INVESTMENT PORTFOLIO (continued)    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
                 
Principal
Amount ($)		         Value ($)  
       
 
        
US Senior Loans (continued)        
       
 
        
HOUSING (continued)        
       
LBREP/L-Suncal Master I, LLC
        
  3,190,581    
First Lien Term Loan, 8.59%, 01/18/10 (f)
     95,717  
       
November 2005 Land Investors, LLC
        
  2,522,724    
Second Lien Term Loan, 12.68%, 05/09/12 (f)
     182,299  
       
Pacific Clarion, LLC
        
  24,752,866    
Term Loan, 15.00%, 01/23/10 (c) (f) (g)
     3,804,342  
       
Roofing Supply Group, LLC
        
  3,554,742    
Term Loan, 7.25%, 08/24/13
     3,080,771  
       
Westgate Investments, LLC
        
  8,016,093    
Senior Secured Loan, PIK, 15.00%, 09/25/10 (f) (g)
     3,890,755  
  2,336,387    
Senior Unsecured Loan, PIK, 18.00%, 09/25/12 (f)
     561,578  
  3,743,195    
Third Lien Term Loan, PIK, 18.00%, 06/30/15 (f) (g)
     535,839  
       
Weststate Land Partners, LLC
        
  2,000,000    
Second Lien Term Loan, 10.99%, 05/01/18 (f)
     60,000  
       
 
      
       
 
        
       
 
     19,308,425  
       
 
      
       
 
        
INFORMATION TECHNOLOGY — 2.0%        
       
Kronos, Inc.
        
  2,941,642    
First Lien Initial Term Loan, 2.28%, 06/11/14
     2,773,969  
       
Serena Software, Inc.
        
  1,696,000    
Term Loan, 2.32%, 03/11/13
     1,577,280  
       
Sungard Data Systems, Inc.
        
  1,994,962    
Incremental Term Loan, 02/28/14 (b)
     2,007,012  
       
Verint Systems, Inc.
        
  2,483,246    
Term Loan, 3.50%, 05/25/14
     2,261,306  
       
 
      
       
 
        
       
 
     8,619,567  
       
 
      
       
 
        
MANUFACTURING — 1.4%        
       
Acument Global Technologies, Inc.
        
  7,844,147    
Term Loan, 14.00%, 08/11/13
     4,451,553  
       
Matinvest 2 SAS
        
  1,091,124    
Mezzanine A USD Facility, PIK, 4.25%, 06/22/16
     163,669  
       
United Central Industrial Supply Co., LLC
        
  1,493,955    
Term Loan, 2.50%, 03/31/12
     1,419,257  
       
 
      
       
 
        
       
 
     6,034,479  
       
 
      
       
 
        
METALS/MINERALS — 1.6%        
       
Euramax International, Inc.
        
  1,454,449    
Domestic Term Loan (Cash Pay), 10.00%, 06/29/13
     824,185  
  1,427,699    
Domestic Term Loan, PIK, 14.00%, 06/29/13
     809,027  
                 
Principal
Amount ($)		         Value ($)  
       
 
        
METALS/MINERALS (continued)        
       
Murray Energy Corp.
        
  1,994,535    
First Lien Tranche B Term Loan, 3.25%, 01/28/10
     1,954,644  
  3,490,872    
Second Lien Term Loan, 8.75%, 01/28/11
     3,412,328  
       
 
      
       
 
        
       
 
     7,000,184  
       
 
      
       
 
        
RETAIL — 6.2%        
       
Blockbuster, Inc.
        
  2,972,067    
Tranche B Term Loan, 4.57%, 08/20/11
     2,952,258  
       
Burlington Coat Factory Warehouse Corp.
        
  5,958,670    
Term Loan, 2.57%, 05/28/13 (b)
     5,469,195  
       
Dollar General Corp.
        
  3,491,250    
Tranche B-2 Term Loan, 3.00%, 07/07/14
     3,376,580  
       
Michaels Stores, Inc.
        
  3,833,333    
Replacement Loan, 2.54%, 10/31/13
     3,428,706  
       
Revlon Consumer Products Corp.
        
  6,125,000    
Term Loan, 4.34%, 01/15/12
     5,946,364  
       
Sally Holdings, LLC
        
  2,919,263    
Term B Loan, 2.55%, 11/16/13
     2,789,721  
       
Spirit Finance Corp.
        
  6,500,000    
Term Loan, 3.48%, 08/01/13
     3,233,750  
       
 
      
       
 
        
       
 
     27,196,574  
       
 
      
       
 
        
SERVICE — 5.5%        
       
Asurion Corp.
        
  2,750,000    
First Lien Term Loan, 3.25%, 07/03/14
     2,629,124  
       
CCS, Inc.
        
  2,144,543    
Term Loan, 11/14/14 (b)
     1,712,075  
       
CDW Corp.
        
  2,998,634    
Term Loan, 3.24%, 10/10/14
     2,455,761  
       
First Data Corp.
        
  1,492,386    
Initial Tranche B-1 Term Loan, 3.00%, 09/24/14
     1,288,533  
       
NES Rentals Holdings, Inc.
        
  3,224,820    
Second Lien Permanent Term Loan, 7.00%, 07/20/13
     2,088,071  
       
Penhall Holding Co.
        
  9,508,197    
Term Loan, PIK, 10.00%, 04/01/12
     522,950  
       
Sabre, Inc.
        
  7,000,000    
Initial Term Loan, 2.64%, 09/30/14
     6,182,610  
       
Safety-Kleen Systems, Inc.
        
  1,627,119    
Synthetic Letter of Credit, 2.81%, 08/02/13
     1,496,949  
  6,065,763    
Term B Loan, 2.81%, 08/02/13
     5,580,502  
       
 
      
       
 
        
       
 
     23,956,575  
       
 
      
       
 
        
TELECOMMUNICATIONS — 2.0%        
       
Avaya, Inc.
        
  2,992,316    
Term Loan, 3.14%, 10/24/14 (b)
     2,423,776  
See accompanying Notes to Investment Portfolio.
 3

 

 

     
INVESTMENT PORTFOLIO (continued)
    
 
    
As of September 30, 2009 (unaudited)
  Highland Credit Strategies Fund
                 
Principal
Amount ($)		         Value ($)  
       
 
        
US Senior Loans (continued)        
       
 
        
TELECOMMUNICATIONS (continued)        
       
Consolidated Communications, Inc.
        
  1,000,000    
Delayed Draw Term Loan, 2.75%, 12/31/14
     938,750  
       
Level 3 Financing, Inc.
        
  6,000,000    
Tranche A Term Loan, 2.68%, 03/13/14 (b)
     5,335,710  
       
 
      
       
 
        
       
 
     8,698,236  
       
 
      
       
 
        
TRANSPORTATION — AUTOMOTIVE — 1.5%        
       
BST Safety Textiles Acquisition GMBH
        
  3,498,324    
Second Lien Facility, 16.53% (f)
     104,950  
       
Dana Holding Corp.
        
  1,863,133    
Term Advance, 01/30/15 (b)
     1,671,649  
       
Motor Coach Industries International, Inc.
        
  5,970,085    
Second Lien Tranche A, 11.75%, 06/30/12 (c)
     3,119,967  
  3,678,190    
Second Lien Tranche B, 11.75%, 06/30/12 (c)
     1,922,222  
       
 
      
       
 
        
       
 
     6,818,788  
       
 
      
       
 
        
TRANSPORTATION — LAND TRANSPORTATION — 0.8%        
       
New Century Transportation, Inc.
        
  2,057,879    
Term Loan, 5.00%, 08/14/12
     1,800,644  
       
SIRVA Worldwide, Inc.
        
  767,856    
Revolving Credit Loan (Exit Finance), 3.43%, 05/12/12 (e)
     345,535  
  3,276,830    
Second Lien Term Loan, PIK, 12.00%, 05/12/15
     491,525  
  1,519,826    
Term Loan (Exit Finance), 9.50%, 05/12/12
     759,913  
       
 
      
       
 
        
       
 
     3,397,617  
       
 
      
       
 
        
UTILITY — 5.3%        
       
Calpine Corp.
        
  1,994,924    
First Priority Term Loan, 3.17%, 03/29/14
     1,832,258  
       
Coleto Creek Power, LP
        
  184,651    
First Lien Synthetic Letter of Credit, 3.03%, 06/28/13
     170,340  
  2,568,125    
First Lien Term Loan, 3.02%, 06/28/13
     2,356,255  
  4,837,500    
Second Lien Term Loan, 4.25%, 06/28/13
     3,543,469  
       
Entegra TC LLC
        
  10,018,109    
Third Lien Term Loan, PIK, 6.28%, 10/19/15
     4,424,648  
       
GBGH, LLC
        
  2,202,643    
First Lien Term Loan, 4.00%, 06/09/13 (c)
     1,785,046  
  685,480    
Second Lien Term Loan, 12.00%, 06/09/14 (c)
     513,178  
                 
Principal
Amount ($)		         Value ($)  
       
 
        
UTILITY (continued)        
       
NRG Energy, Inc.
        
  1,393,978    
Credit-Linked Deposit, 0.18%, 02/01/13
     1,324,014  
  2,595,506    
Term Loan, 2.02%, 02/01/13
     2,465,238  
       
Texas Competitive Electric Holdings Co., LLC
        
  5,979,670    
Initial Tranche B-2 Term Loan, 3.75%, 10/10/14
     4,776,949  
       
 
      
       
 
        
       
 
     23,191,395  
       
 
      
       
 
        
WIRELESS COMMUNICATIONS — 0.8%        
       
Digicel International Finance Ltd.
        
  833,350    
Tranche A Term Loan, 2.81%, 03/30/12
     806,266  
       
MetroPCS Wireless, Inc.
        
  2,992,288    
Tranche B Term Loan, 2.66%, 11/03/13
     2,871,564  
       
 
      
       
 
        
       
 
     3,677,830  
       
 
      
       
 
        
       
Total US Senior Loans
(Cost $520,931,857)
     328,100,720  
       
 
      
                 
Principal
Amount		              
       
 
        
Foreign Denominated Senior Loans (a) — 3.9%        
       
 
        
AUSTRALIA — 3.9%        
       
 
        
AUD        
       
SMG H5 Property Ltd.
        
  22,885,307    
Facility A Term Loan, 5.99%, 12/24/12
     16,965,839  
       
 
      
       
 
        
       
Total Foreign Denominated Senior Loans
(Cost $18,578,536)
     16,965,839  
       
 
      
                 
Principal
Amount ($)		              
       
 
        
Asset-Backed Securities (h) — 3.4%        
       
AB CLO, Ltd.
        
  2,000,000    
Series 2007-1A, Class C, 2.36%, 04/15/21 (c) (i)
     983,712  
       
ACA CLO, Ltd.
        
  4,000,000    
Series 2006-2A, Class B, 1.23%, 01/20/21 (i)
     1,600,000  
  2,000,000    
Series 2007-1A, Class D, 2.86%, 06/15/22 (i)
     310,000  
       
Babson CLO, Ltd.
        
  1,014,193    
Series 2007-2A, Class D, 2.21%, 04/15/21 (f) (i)
     162,271  
       
Bluemountain CLO, Ltd.
        
  1,000,000    
Series 2007-3A, Class D, 1.69%, 03/17/21 (c) (i)
     479,643  
       
Cent CDO, Ltd.
        
  2,000,000    
Series 2007-15A, Class C, 2.55%, 03/11/21 (i)
     468,600  
       
Columbus Nova CLO, Ltd.
        
  2,000,000    
Series 2007- 1A, Class D, 1.79%, 05/16/19 (i)
     645,000  
See accompanying Notes to Investment Portfolio.

4

 

     
INVESTMENT PORTFOLIO (continued)
    
 
    
As of September 30, 2009 (unaudited)
  Highland Credit Strategies Fund
                 
Principal
Amount ($)		         Value ($)  
       
 
        
Asset-Backed Securities (continued)        
       
Commercial Industrial Finance Corp.
        
  1,000,000    
Series 2006-1BA, Class B2L, 4.29%, 12/22/20
     114,100  
  962,970    
Series 2006-2A, Class B2L, 4.36%, 03/01/21 (i)
     94,371  
       
Cornerstone CLO, Ltd.
        
  2,500,000    
Series 2007-1A, Class C, 2.91%, 07/15/21 (i)
     375,000  
       
Goldman Sachs Asset Management CLO PLC
        
  4,139,370    
Series 2007-1A, Class D, 3.23%, 08/01/22 (f) (i)
     351,846  
  1,052,397    
Series 2007-1A, Class E, 5.48%, 08/01/22 (f) (i)
     36,834  
       
Greywolf CLO, Ltd
        
  1,000,000    
Series 2007-1A, Class D, 1.93%, 02/18/21 (f) (i)
     133,900  
  1,025,280    
Series 2007-1A, Class E, 4.38%, 02/18/21 (f) (i)
     102,528  
       
GSC Partners CDO Fund, Ltd.
        
  3,000,000    
Series 2007-8A, Class C, 1.99%, 04/17/21 (i)
     601,800  
       
Gulf Stream Sextant CLO, Ltd.
        
  1,013,186    
Series 2007-1A, Class D, 2.69%, 06/17/21 (f) (i)
     263,428  
       
Hillmark Funding
        
  2,000,000    
Series 2006-1A, Class C, 2.12%, 05/21/21 (i)
     580,000  
  612,103    
Series 2006-1A, Class D, 4.02%, 05/21/21 (i)
     6,672  
       
Inwood Park CDO, Ltd.
        
  1,000,000    
Series 2006-1A, Class C, 1.21%, 01/20/21 (i)
     600,000  
  1,000,000    
Series 2006-1A, Class D, 1.91%, 01/20/21 (i)
     530,000  
       
Limerock CLO
        
  2,045,095    
Series 2007-1A, Class D, 3.85%, 04/24/23 (f) (i)
     81,804  
       
Madison Park Funding Ltd.
        
  2,000,000    
Series 2007-5A, Class C, 1.84%, 02/26/21 (i)
     417,000  
  1,500,000    
Series 2007-5A, Class D, 3.89%, 02/26/21 (i)
     319,800  
       
Marquette US/European CLO, PLC
        
  1,000,000    
Series 2006-1A, Class D1, 2.26%, 07/15/20 (i)
     180,000  
       
Navigator CDO, Ltd.
        
  996,136    
Series 2006-2A, Class D, 3.79%, 09/20/20 (f) (i)
     209,189  
       
Ocean Trails CLO
        
  1,000,000    
Series 2006-1A, Class D, 4.26%, 10/12/20 (i)
     93,700  
  2,500,000    
Series 2007-2A, Class C, 2.86%, 06/27/22 (i)
     300,000  
       
PPM Grayhawk CLO, Ltd.
        
  1,000,000    
Series 2007-1A, Class C, 1.91%, 04/18/21 (i)
     250,000  
  957,665    
Series 2007-1A, Class D, 4.11%, 04/18/21 (f) (i)
     143,650  
                 
Principal
Amount ($)		         Value ($)  
       
Primus CLO, Ltd.
        
  5,088,701    
Series 2007-2A, Class D, 2.91%, 07/15/21 (f) (i)
     508,870  
  2,059,200    
Series 2007-2A, Class E, 5.26%, 07/15/21 (f) (i)
     102,960  
       
Rampart CLO, Ltd.
        
  4,000,000    
Series 2006-1A, Class C, 1.96%, 04/18/21 (i)
     851,200  
       
St. James River CLO, Ltd.
        
  2,505,768    
Series 2007-1A, Class E, 4.60%, 06/11/21 (i)
     626,442  
       
Stanfield Daytona CLO, Ltd.
        
  1,200,000    
Series 2007-1A, Class B1L, 1.85%, 04/27/21 (i)
     216,000  
       
Stanfield McLaren CLO, Ltd.
        
  4,000,000    
Series 2007-1A, Class B1L, 2.78%, 02/27/21 (i)
     740,000  
       
Stone Tower CLO, Ltd.
        
  2,000,000    
Series 2007-6A, Class C, 1.86%, 04/17/21 (i)
     500,000  
       
Venture CDO, Ltd.
        
  2,000,000    
Series 2007-9A, Class D, 4.68%, 10/12/21 (i)
     610,000  
       
Westbrook CLO, Ltd.
        
  1,000,000    
Series 2006-1A, Class D, 1.99%, 12/20/20 (i)
     222,600  
       
 
      
       
 
        
       
Total Asset-Backed Securities (Cost $49,932,104)
     14,812,920  
       
 
      
Foreign Asset-Backed Securities (h) — 0.1%
                 
Principal Amount              
       
 
        
IRELAND — 0.1%        
EUR        
       
Static Loan Funding
        
  2,000,000    
Series 2007-1X, Class D, 5.65%, 07/31/17 (i)
     306,959  
  2,000,000    
Series 2007-1X, Class E, 8.15%, 07/31/17 (i)
     219,257  
       
 
      
       
 
        
       
Total Foreign Asset-Backed Securities (Cost $5,663,280)
     526,216  
       
 
      
                 
Principal
Amount ($)		              
       
 
        
Corporate Notes and Bonds — 27.1%        
       
 
        
AEROSPACE — 0.5%        
       
Delta Air Lines, Inc.
        
  5,000,000    
8.00%, 06/30/23 (f)
     32,500  
  7,000,000    
8.30%, 12/15/29 (f)
     79,100  
  1,000,000    
9.50%, 09/15/14 (i)
     1,005,000  
       
Northwest Airlines Corp.
        
  2,500,000    
8.88%, 12/30/27 (f)
     8,000  
       
Northwest Airlines, Inc.
        
  1,498,064    
9.06%, 05/20/12
     1,138,529  
       
 
      
       
 
        
       
 
     2,263,129  
       
 
      
See accompanying Notes to Investment Portfolio.

5

 

     
INVESTMENT PORTFOLIO (continued)
    
 
    
As of September 30, 2009 (unaudited)
  Highland Credit Strategies Fund
                 
Principal
Amount ($)		         Value ($)  
       
 
        
Corporate Notes and Bonds (continued)        
       
 
        
BROADCASTING - 0.0%        
       
Young Broadcasting, Inc.
        
  3,065,000    
10.00%, 03/01/11 (f) (j)
     3,831  
       
 
      
       
 
        
CABLE/WIRELESS VIDEO - 0.5%        
       
Dish DBS Corp.
        
  2,000,000    
7.88%, 09/01/19 (i)
     2,030,000  
       
 
      
       
 
        
CHEMICALS - 0.6%        
       
Tronox Worldwide LLC
        
  6,750,000    
9.50%, 12/01/12 (f)
     2,632,500  
       
 
      
       
 
        
DIVERSIFIED MEDIA - 0.8%        
       
Baker & Taylor, Inc.
        
  8,300,000    
11.50%, 07/01/13 (i)
     3,340,750  
       
 
      
       
 
        
FINANCIAL - 0.8%        
       
HUB International Holdings, Inc.
        
  2,200,000    
10.25%, 06/15/15 (i)
     2,059,750  
       
Penhall International Corp.
        
  3,500,000    
12.00%, 08/01/14 (i)
     1,697,500  
       
 
      
       
 
        
       
 
     3,757,250  
       
 
      
       
 
        
FOOD/TOBACCO - 0.5%        
       
Dole Foods Company, Inc.
        
  2,000,000    
8.00%, 10/01/16 (i)
     2,017,500  
       
 
      
       
 
        
FOREST PRODUCTS/CONTAINERS - 0.0%        
       
NewPage Holding Corp., PIK
        
  327,135    
8.58%, 11/01/13 (h)
     67,063  
       
 
      
       
 
        
HEALTHCARE - 17.4%        
       
Argatroban Royalty Sub LLC
        
  10,585,429    
18.50%, 09/21/14 (i)
     9,526,886  
       
Azithromycin Royalty Sub LLC
        
  15,000,000    
16.00%, 05/15/19 (i)
     12,000,000  
       
Celtic Pharma Phinco B.V., PIK
        
  48,537,355    
17.00%, 06/15/12 (i)
     31,549,281  
       
Cinacalcet Royalty Sub LLC
        
  270,520    
8.00%, 03/30/17 (i)
     284,046  
       
Fosamprenavir Pharma
        
  4,066,637    
15.50%, 06/15/18 (i)
     3,659,973  
       
Molecular Insight Pharmaceuticals, Inc., PIK
        
  3,870,629    
9.17%, 11/01/12 (h) (i)
     3,096,503  
       
Pharma IV (Eszopiclone)
        
  2,356,251    
12.00%, 06/30/14 (i)
     2,002,813  
       
Pharma V (Duloxetine)
        
  1,040,000    
13.00%, 10/15/13 (i)
     998,400  
       
TCD Pharma
        
  15,500,000    
16.00%, 04/15/24 (i)
     13,330,000  
       
 
      
       
 
        
       
 
     76,447,902  
       
 
      
       
 
        
INFORMATION TECHNOLOGY - 0.1%        
       
MagnaChip Semiconductor
        
  13,000,000    
0.00%, 12/15/11 (f) (h) (j)
     40,300  
       
New Holding, Inc.
        
  477,689    
15.00%, 03/12/13 (c) (f)
     286,613  
       
 
      
       
 
        
       
 
     326,913  
       
 
      
                 
Principal
Amount ($)		         Value ($)  
       
 
        
RETAIL - 0.2%        
       
Nebraska Book Co., Inc.
        
  1,000,000    
10.00%, 12/01/11 (i)
     995,000  
       
 
      
       
 
        
TRANSPORTATION — AUTOMOTIVE - 2.2%        
       
American Tire Distributors Holdings, Inc.
        
  11,500,000    
6.85%, 04/01/12 (h)
     9,602,500  
       
Delphi Corp.
        
  3,750,000    
6.50% (f)
     46,875  
  3,933,000    
6.55% (f)
     49,163  
  8,334,000    
7.13%, 05/01/29 (f) (j)
     104,175  
       
 
      
       
 
        
       
 
     9,802,713  
       
 
      
       
 
        
UTILITY - 0.4%        
       
Kiowa Power
        
  2,000,000    
5.74%, 03/30/21 (i)
     1,876,262  
       
 
      
       
 
        
WIRELESS COMMUNICATIONS - 3.1%        
       
Digicel Group, Ltd., PIK
        
  14,492,000    
9.13%, 01/15/15 (i)
     13,622,480  
       
 
      
       
 
        
       
Total Corporate Notes and Bonds
(Cost $170,955,793)
     119,183,293  
       
 
      
       
 
        
Claims - 0.0%        
       
 
        
RETAIL - 0.0%        
       
Home Interiors & Gifts, Inc.
        
  7,106,867    
Proof of Claims (c) (f) (k)
     10,660  
       
 
      
       
 
        
       
Total Claims
(Cost $5,739,941)
     10,660  
       
 
      
                 
Shares              
       
 
        
Common Stocks (k) - 8.6%        
       
 
        
AEROSPACE - 0.0%        
  3,948    
Delta Air Lines, Inc.
     35,374  
       
 
      
       
 
        
BROADCASTING - 0.0%        
  2,010,616    
Communications Corp. of America (c) (d)
     —  
  57,757    
Gray Television, Inc., Class A
     133,996  
       
 
      
       
 
        
       
 
     133,996  
       
 
      
       
 
        
DIVERSIFIED MEDIA - 0.2%        
  46,601    
American Banknote Corp. (c)
     736,762  
       
 
      
       
 
        
HEALTHCARE - 7.1%        
  24,000,000    
Genesys Ventures IA, LP (c) (d)
        
       
 
     30,960,000  
       
 
      
       
 
        
HOUSING - 0.0%        
       
Westgate Investments LLC,
        
  8    
Class B-1 (c)
     —  
       
 
      
       
 
        
INFORMATION TECHNOLOGY - 0.3%        
  9,342    
New Holding, Inc. (c)
     1,216,795  
       
 
      
See accompanying Notes to Investment Portfolio.

6

 

     
INVESTMENT PORTFOLIO (continued)
    
 
    
As of September 30, 2009 (unaudited)
  Highland Credit Strategies Fund
                 
Shares         Value ($)  
       
 
        
Common Stocks (continued)        
       
 
        
METALS/MINERALS — 0.1%        
  7,579    
Euramax International, Inc. (c)
     303,615  
       
 
      
       
 
        
RETAIL — 0.2%        
  105,092    
Sally Beauty Holdings, Inc.
     747,204  
       
 
      
       
 
        
SERVICE — 0.2%        
  200,964    
Safety-Kleen Systems, Inc. (c)
     1,105,304  
       
 
      
       
 
        
TELECOMMUNICATIONS — 0.0%        
  70,342    
Micadent PLC (c)
     —  
  1    
Viatel Holding (Bermuda) Ltd.
     10  
       
 
      
       
 
        
       
 
     10  
       
 
      
       
 
        
TRANSPORTATION — AUTOMOTIVE — 0.0%        
  1,544,148    
Delphi Corp. (j)
     98,825  
       
 
      
       
 
        
TRANSPORTATION — LAND TRANSPORTATION — 0.2%        
  18,030    
SIRVA Worldwide, Inc. (c)
     778,716  
       
 
      
       
 
        
UTILITY — 0.0%        
  81,194    
Entegra TC LLC
     71,045  
  4,365    
GBGH LLC (c)
     —  
       
 
      
       
 
        
       
 
     71,045  
       
 
      
       
 
        
WIRELESS COMMUNICATIONS — 0.3%        
  1,772,064    
ICO Global Communications Holding Ltd.
     1,523,975  
       
 
      
       
 
        
       
Total Common Stocks
(Cost $62,661,608)
     37,711,621  
       
 
      
       
 
        
Preferred Stocks (k) — 3.8%        
  1,000,000    
Adelphia Recovery Trust
     5,000  
  2,150,537    
Dfine, Inc., Series D (c)
     16,537,630  
       
 
      
       
 
        
       
Total Preferred Stocks (Cost $10,934,997)
     16,542,630  
       
 
      
                 
Units              
       
 
        
Warrants (k) — 0.3%        
  20,000    
Clearwire Corp., expires 08/15/10
     1,800  
  1,271    
GBGH LLC, expires 06/09/14 (c)
     —  
  1,000    
Grande Communications, expires 04/01/11 (c)
     —  
  49,317    
IAP Worldwide Services, Inc., Series A, expires 06/12/15
     —  
  14,444    
IAP Worldwide Services, Inc., Series B, expires 06/12/15
     —  
  7,312    
IAP Worldwide Services, Inc., Series C, expires 06/12/15
     —  
  643,777    
Microvision, Inc., expires 07/23/13
     1,287,554  
       
 
      
       
Total Warrants
(Cost $10)
     1,289,354  
       
 
      
         
    Value ($)  
 
        
Total Investments — 122.0%
(Cost of $845,398,126) (l)
     535,143,253  
 
      
 
        
Other Assets & Liabilities, Net — (22.0)%
     (96,344,475 )
 
      
Net Assets applicable to Common Shareholders — 100.0%
   $ 438,798,778  
 
      
The amount of $3,060,777 in cash was segregated with the brokers and/or custodian to cover investments sold short outstanding as of September 30, 2009 and is included in “Other Assets & Liabilities, Net”:
Short Sales — 0.5%
EQUITY SECURITY — 0.5%
                 
Shares              
       
 
        
RETAIL — 0.5%        
  135,778    
Ethan Allen Interiors, Inc.
     2,240,337  
       
 
      
       
 
        
Total Investments sold short
(Proceeds $1,813,710)		   $ 2,240,337  
       
 
      
 
(a)   Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which Highland Credit Strategies Fund (the “Fund”) invests, generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread. (Unless otherwise identified by footnote (g), all senior loans carry a variable rate interest.) These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. Rate shown represents the weighted average rate at September 30, 2009. Senior loans, while exempt from registration under the Securities Act of 1933 (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the remaining actual maturity may be substantially less than the stated maturity shown.
 
(b)   All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
 
(c)   Represents fair value as determined by the Fund’s Board of Trustees (the “Board”) or its designee in good faith, pursuant to the policies and procedures approved by the Board. Securities with a total aggregate market value of $107,409,312, or 24.5% of net assets, were fair valued under the fair value procedures as of September 30, 2009.
See accompanying Notes to Investment Portfolio.

7

 

INVESTMENT PORTFOLIO (continued)    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
(d)   Affiliated issuer. Under Section 2(a)(3) of the 1940 Act, a portfolio company is defined as “affiliated” if a Fund owns five percent or more of its voting stock. The Fund held at least five percent of the outstanding voting stock of the following companies during the period ended September 30, 2009.
                                 
    Par Value        
    at   Shares at   Market Value
    09/30/09   09/30/09   12/31/08   09/30/09
 
ComCorp Broadcasting, Inc. (Senior Loans)*(1)
   $ 37,773,968       —     $ 5,807,308     $ 26,736,414  
Communications Corp of America (Common Stock) (2)
     —       2,010,616       —       —  
Genesys Ventures IA, LP (Common Stock) (3)
     —       24,000,000       10,157,000       30,960,000  
           
           
 
   $ 37,773,968       26,010,616     $ 15,964,308     $ 57,696,414  
           
 
*   Company is a wholly owned subsidiary of Communications Corp. of America.
 
(1)   On 6/12/09, $18,849,521 par value of the security was acquired through the HCD reorganization (See Note 1 and 13 of the most recent semi-annual report).
 
(2)   On 6/12/09, $1,256,635 shares of the security were acquired through the HCD reorganization (See Note 1 and 13 of the most recent semi-annual report).
 
(3)   On 6/12/09, $12,000,000 shares of the security were acquired through the HCD reorganization (See Note 1 and 13 of the most recent semi-annual report).
(e)   Senior Loan assets have additional unfunded loan commitments. As of September 30, 2009, the Fund had unfunded loan commitments, which could be extended at the option of the Borrower, pursuant to the following loan agreements:
         
    Unfunded Loan  
Borrower   Commitments  
 
Mobileserv Ltd.
   £ 5,000,000  
 
      
 
        
Broadstripe, LLC
   $ 1,411,947  
Sirva Worldwide, Inc.
     1,591,982  
Sorenson Communications, Inc.
     2,000,000  
Tronox Worldwide, LLC
     1,314,866  
 
      
 
   $ 6,318,795  
 
      
(f)   The issuer is in default of its payment obligation. Income is not being accrued.
 
(g)   Fixed rate senior loan.
 
(h)   Floating rate asset. The interest rate shown reflects the rate in effect at September 30, 2009.
 
(i)   Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold, in transactions exempt from registration, to qualified institutional buyers. At September 30, 2009, these securities amounted to $120,317,180 or 27.4% of net assets.
 
(j)   Securities (or a portion of securites) on loan. As of September 30, 2009, the market value of securities loaned was $231,046. The loaned securities were secured with cash collateral of $949,453.
 
(k)   Non-income producing security.
 
(l)   Cost for U.S. federal income tax purposes is identical to book basis. Unrealized appreciation and depreciation on investments are as follows:
         
Gross unrealized appreciation
   $ 21,259,368  
Gross unrealized depreciation
     (331,514,242 )
 
      
Net unrealized depreciation
   $ (310,254,874 )
 
      
AUD     Australian Dollar
 
EUR     Euro Currency
 
GBP     Great Britain Pound
 
CDO     Collateralized Debt Obligation
 
CLO     Collateralized Loan Obligation
 
DIP     Debtor-in-Possession
 
PIK     Payment-in-Kind
Foreign Denominated Senior Loans &
Asset Backed Securities
Industry Concentration Table:
(% of Net Assets)
         
Diversified Media
     3.9 %
Financial
     0.1 %
 
        
Total
     4.0 %
 
        
Forward foreign currency contracts outstanding as of September 30, 2009 were as follows:
                                 
            Principal             Net  
Contracts           Amount             Unrealized  
to Buy or           Covered by             Appreciation/  
to Sell   Currency   Contracts     Expiration     (Depreciation)  
 
Buy
   EUR     550,000       11/10/09     $ 29,926  
Sell
   EUR     775,000       11/10/09       (106,878 )
Sell
   EUR     35,000       02/03/10       (788 )
Sell
   GBP     1,910,000       11/10/09       (205,699 )
Sell
   GBP     384,000       02/03/10       35,255  
 
                              
 
                           $ (248,184 )
 
                              
See accompanying Notes to Investment Portfolio.

8

 

NOTES TO INVESTMENT PORTFOLIO    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
Security Valuation
In computing the Fund’s net assets attributable to common shares, securities with readily available market quotations use those quotations for valuation. When portfolio securities are traded on the relevant day of valuation, the valuation will generally be the last reported sale price on that day. If there are no such sales on that day, the security will be valued at the mean between the most recently quoted bid and asked prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that Highland Capital Management, L.P. (the “Investment Adviser”) has determined generally has the capability to provide appropriate pricing services and is approved by the Fund’s Board.
Securities for which market quotations are not readily available, for which the Fund has determined the price received from a pricing service or broker-dealer is “stale” or otherwise do not represent fair value (including when events materially affect the value of securities that occur between the time when market price is determined and calculation of the Fund’s net asset value), will be valued by the Fund at fair value, as determined by the Board or its designee in good faith in accordance with procedures approved by the Board, taking into account factors reasonably determined to be relevant, including: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s net assset value will reflect the affected portfolio securities’ fair value as determined in the judgement of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value secirities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their net asset values. Determination of fair value is uncertain because it involves subjective judgements and estimates not easily substantiated.
There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Short-term investments, that is, those with a remaining maturity of 60 days or less, are valued at amortized cost, a method of valuation which approximates market value. Repurchase agreements are valued at cost plus accrued interest. Foreign price quotations are converted to U.S. dollar equivalents using the 4:00 PM London Time Spot Rate.
Forward Foreign Currency Contracts
In order to minimize the movement in net asset value resulting from a decline or appreciation in the value of a particlular foreign currency against the U.S. dollar or another foreign currency or for other reasons, the Fund is authorized to enter into forward currency exchange contracts. These contracts involve an obligation to purchase or sell a specified currency at a future date at a price set at the time the contract is initiated. Forward currency contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Fund to establish a rate of exchange for a future point in time.
The Fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. The Fund may use futures contracts to gain exposure to, or hedge against changes in the value of foreign currencies. Upon entering into such contracts, daily fluctuations in the value of the contract are recorded for financial statement purposes as unrealized gains or losses by the Fund. At the expiration of the contracts the Fund realizes the gain or loss. Upon entering into such contracts, the Fund bears the risk of exchange rates moving unexpectedly, in which case, the Fund may not achieve the anticipated benefits of the forward contracts and may realize a loss. With forwards, there is counterparty credit risk to the Fund since the forwards are not exchange traded, and there is not a clearinghouse that guarantees the forwards against default. For open forward foreign currency contracts see the Investment Portfolio, which is also indicative of activity for the nine months ended, September 30, 2009.
Fair Value Measurements:
The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of all inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:
Level 1 — Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;
Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and
Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.

9

 

NOTES TO INVESTMENT PORTFOLIO (continued)    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise less liquid than publicly traded securities.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund’s assets as of September 30, 2009 are as follows:
                                 
                    Level 2     Level 3  
    Total Value at     Level 1     Signficant     Significant  
    September     Quoted     Observable     Unobservable  
Investments in Securities:   30, 2009     Price     Input     Input  
Common Stocks
                                
Aerospace
   $ 35,374     $ 35,374     $ —     $ —  
Broadcasting
     133,996       133,996       —       —  
Diversified Media
     736,762       —       —       736,762  
Healthcare
     30,960,000       —       —       30,960,000  
Information Technology
     1,216,795       —       —       1,216,795  
Metals/Minerals
     303,615       —       —       303,615  
Retail
     747,204       747,204       —       —  
Service
     1,105,304       —       —       1,105,304  
Telecommunications
     10       10       —       —  
Transportation — Automotive
     98,825       —       98,825       —  
Transportation — Land Transportation
     778,716       —       —       778,716  
Utility
     71,045       —       —       71,045  
Wireless Communication
     1,523,975       1,523,975       —       —  
Preferred Stocks
     16,542,630       —       5,000       16,537,630  
Warrants
     1,289,354       1,287,554       —       1,800  
Debt
                                
Senior Loans
     345,066,559       —       173,208,144       171,858,415  
Asset-Backed Securities
     15,339,136       —       —       15,339,136  
Corporate Debt
     119,183,293       —       42,448,777       76,734,516  
Claims
     10,660       —       —       10,660  
Short Sales
                                
Retail
     (2,240,337 )     (2,240,337 )     —       —  
 
                        
Total
   $ 532,902,916     $ 1,487,776     $ 215,760,746     $ 315,654,394  
 
                        
 
                                
Other Financial Instruments*
                                
Liabilities
   $ 248,184     $ —     $ 248,184     $ —  
 
                        
Total
   $ 248,184     $       $ 248,184     $    
 
                        
 
*   Other financial instruments are derivative instruments not reflected in the Investments Portfolio, such as forwards, which are valued at the unrealized appreciation/ (depreciation) on the investment.
The Fund did not have any liabilities that were measured at fair value or level 3 on a recurring basis at September 30, 2009.
The table below set forth a summaary of changes in the Fund’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2009.
                                                                 
                    Level 3     Net amortization/                          
    Balance as of     Transfers     securities     (accretion) of     Net     Net     Net     Balance as of  
Assets at Fair Value using   December 31,     in/(out)     acquired from     premium/     realized     unrealized     purchase/     September 30,  
unobservable inputs (Level 3)   2008     of Level 3     reorganization     (discount)     gains/(losses)     gains/(losses)     (sales) *     2009  
Common Stocks
                                                                
Broadcasting
   $ —     $ —     $ —     $ —     $ —     $ —     $ —     $ —  
Diversified Media
     489,310       —       —       —       —       247,452       —       736,762  
Healthcare
     10,157,000               14,880,000       —       —       923,000       5,000,000       30,960,000  
Housing
     —       —       —       —       —       —       —       —  
Information Technology
     —       —       —       —       —       2,335       1,214,460       1,216,795  
Metals/Minerals
     —       —       —       —       —       (178,785 )     482,400       303,615  
Service
     502,411       —       —       —       —       602,893       —       1,105,304  
Transportation — Land Transportation
     585,073       —       —       —       —       193,643       —       778,716  
Utility
     324,776       —       —       —       —       (253,731 )     —       71,045  
Preferred Stocks
     9,999,997       —       —       —       —       6,537,633       —       16,537,630  
Warrants
     309,073       —       —       —       —       (307,273 )     —       1,800  
Debt
                                                                
Senior Loans
     210,106,203       (1,919,769 )     18,670,689       2,123,001       (79,377,889 )     59,248,709       (36,992,529 )     171,858,415  
Asset-Backed Securities
     9,437,152       —       —       305,007       449,644       6,038,254       (890,921 )     15,339,136  
Corporate Debt
     118,919,586       (19,077,935 )     14,718,377       196,047       (24,520,953 )     32,548,894       (46,049,500 )     76,734,516  
Claims
     1,306,894       —       25,515       —       18,824       (1,200,548 )     (140,025 )     10,660  
 
                                                
Total
     362,137,475       (20,997,704 )     48,294,581       2,624,055       (103,430,374 )     104,402,476       (77,376,115 )     315,654,394  
 
                                                
 
*   Includes any applicable borrowings and/ or paydowns made on revolving credit facilities held in the Fund’s Investment Portfolio

10

 

NOTES TO INVESTMENT PORTFOLIO (continued)    
     
As of September 30, 2009 (unaudited)   Highland Credit Strategies Fund
The net unrealized gains presented in the table above relates to investments that are still held at September 30, 2009.
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to search for observable data points and evaluate broker quotes and indications received for portfolio investments. As a result, for the nine months ended September 30, 2009, $20,997,704 of the Fund’s portfolio investments were transferred to/from Level 3 to Level 2. Determination of fair values is uncertain because it involves subjective judgements and estimates not easily substantiated.
For more information with regard to significant accounting policies, see the most recent semi-annual report filed with the Securities and Exchange Commission.

11

 

Item 2. Controls and Procedures.
  (a)   The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)).
 
  (b)   There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 3. Exhibits.
Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.

 

 

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Highland Credit Strategies Fund
         
By (Signature and Title)*
  /s/ R. Joseph Dougherty
 
R. Joseph Dougherty, Chief Executive Officer and President 		   
 
  (principal executive officer)    
Date 11/18/09
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
         
By (Signature and Title)*
  /s/ R. Joseph Dougherty    
 
       
 
  R. Joseph Dougherty, Chief Executive Officer and President    
 
  (principal executive officer)    
 
        
Date 11/18/09
        
 
        
By (Signature and Title)*
  /s/ M. Jason Blackburn    
 
       
 
  M. Jason Blackburn, Treasurer and Secretary    
 
  (principal financial officer)    
 
        
Date 11/18/09
        
 
*   Print the name and title of each signing officer under his or her signature.