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, 2010
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 of Investments is attached herewith.
INVESTMENT PORTFOLIO (unaudited)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Principal Amount ($)     Value ($)  
US Senior Loans (a) - 70.1%        
       
 
        
AEROSPACE - 3.7%        
       
AWAS Capital, Inc.
        
  1,483,176    
Second Priority Term Facility, 6.31%, 03/25/13
     1,442,388  
       
Delta Air Lines, Inc.
        
  1,984,615    
Second Lien Term Loan, 3.51%, 04/30/14
     1,893,660  
  1,980,000    
Term Loan, 8.75%, 09/27/13
     2,011,353  
  4,957,249    
Term Loan Equipment Notes, 3.79%, 09/29/12
     4,709,386  
       
Hawker Beechcraft Acquisition Co. LLC
        
  1,496,559    
Series A New Term Loan, 10.50%, 03/26/14
     1,490,947  
       
IAP Worldwide Services, Inc.
        
  2,209,671    
Second Lien Term Loan, 12.50%, 06/28/13
     2,169,897  
       
US Airways Group, Inc.
        
  4,931,507    
Term Loan, 2.76%, 03/21/14
     4,263,016  
       
 
      
       
 
     17,980,647  
       
 
      
       
 
        
BROADCASTING - 10.3%        
       
ComCorp Broadcasting, Inc.
        
  3,584,549    
Revolving Loan, 9.00%, 10/03/12 (b) (c)
     3,149,743  
  35,860,392    
Term Loan, 9.00%, 04/03/13 (b) (c)
     31,510,526  
       
Cumulus Media, Inc.
        
  4,626,968    
Replacement Term Loan, 4.01%, 06/11/14
     4,192,472  
       
Entercom Radio LLC
        
  3,526,614    
Term A Loan, 2.29%, 06/29/12
     3,407,591  
       
Univision Communications, Inc.
        
  7,962,148    
Initial Term Loan, 2.51%, 09/29/14 (d)
     7,015,130  
       
Young Broadcasting, Inc.
        
  490,186    
Term Loan, 8.00%, 06/30/15
     490,186  
       
 
      
       
 
     49,765,648  
       
 
      
       
 
        
CABLE/WIRELESS VIDEO - 3.1%        
       
Broadstripe, LLC
        
  1,564,215    
DIP Revolver, 7.75%, 12/31/10 (c) (e)
     1,562,651  
  14,151,375    
First Lien Term Loan, 06/30/11 (c) (f)
     10,456,451  
  1,428,203    
Revolver, 06/30/11 (c) (f)
     1,055,299  
       
Charter Communications Operating, LLC
        
  23,727    
Term B-1 Loan, 2.26%, 03/06/14
     23,174  
       
WideOpenWest Finance, LLC.
        
  1,777,584    
Series A New Term Loan, 6.76%, 06/30/14
     1,734,620  
       
 
      
       
 
     14,832,195  
       
 
      
       
 
        
CHEMICALS - 3.2%        
       
TPC Group LLC
        
  2,316,334    
Incremental Term Loan B, 2.97%, 06/27/13
     2,304,266  
  7,549,518    
Term B Loan, 2.97%, 06/27/13
     7,510,185  
       
W.R. Grace & Co.
        
  1,597,107    
5 Year Revolver, 5.25%
     2,808,241  
  1,597,107    
Revolving Credit Loan, 5.25%
     2,808,241  
       
 
      
       
 
     15,430,933  
       
 
      
       
 
        
CONSUMER NON-DURABLES - 1.0%        
       
KIK Custom Products, Inc.
        
  572,870    
First Lien Canadian Term Loan, 2.54%, 06/02/14 (d)
     484,076  
  3,341,744    
First Lien U.S. Term Loan, 2.54%, 06/02/14 (d)
     2,823,774  
  2,000,000    
Second Lien Term Loan, 5.29%, 12/01/14
     1,343,000  
       
 
      
       
 
     4,650,850  
       
 
      
       
 
        
DIVERSIFIED MEDIA - 4.9%        
       
Cengage Learning Acquisitions, Inc.
        
  5,445,214    
Term Loan, 2.54%, 07/03/14
     4,898,379  
       
Cydcor, Inc.
        
  5,088,683    
First Lien Tranche B Term Loan, 9.00%, 02/05/13
     4,681,588  
  3,000,000    
Second Lien Tranche B Term Loan, 12.00%, 02/05/14 (c)
     2,856,300  
       
Endurance Business Media, Inc.
        
  3,000,000    
Second Lien Term Loan, 01/26/14 (f)
     165,000  
       
Harland Clarke Holdings Corp.
        
  1,272,674    
Tranche B Term Loan, 2.78%, 06/30/14
     1,118,764  
       
Metro-Goldwyn-Mayer, Inc.
        
  14,144,529    
Tranche B Term Loan, 04/09/12 (f)
     6,274,655  
  2,917,500    
Tranche B-1 Term Loan, 04/09/12 (f)
     1,294,232  
       
Visant Corp.
        
  2,500,000    
Tranche B Term Loan, 7.00%, 12/22/16
     2,514,850  
       
 
      
       
 
     23,803,768  
       
 
      
       
 
        
ENERGY - 3.0%        
       
Alon USA Energy, Inc.
        
  212,778    
Edington Facility, 2.51%, 08/05/13
     142,561  
  1,702,222    
Paramount Facility, 2.59%, 08/05/13
     1,140,489  
       
Big West Oil, LLC
        
  2,347,222    
Term Loan, 12.00%, 07/23/15
     2,394,167  
       
Calumet Lubricants Co., LP
        
  107,319    
Credit Linked Letter of Credit, 4.38%, 01/03/15 (d)
     100,478  
  197,380    
Credit-Linked Letter of Credit, 4.14%, 01/03/15
     184,797  
  2,244,703    
Term Loan, 4.38%, 01/03/15 (d)
     2,101,603  
See accompanying Notes to Investment Portfolio.

1

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Principal Amount ($)     Value ($)  
US Senior Loans (continued)        
       
 
        
ENERGY (continued)        
       
Venoco, Inc.
        
  8,735,835    
Second Lien Term Loan, 4.31%, 05/07/14
     8,198,974  
       
 
      
       
 
     14,263,069  
       
 
      
       
 
        
FINANCIAL - 2.9%        
       
AGFS Funding Co.
        
  6,000,000    
Term Loan, 7.25%, 04/21/15
     6,042,090  
       
Nuveen Investments, Inc.
        
  5,500,000    
First Lien Term Loan, 3.37%, 11/13/14
     4,958,938  
  2,750,000    
Second Lien Term Loan, 12.50%, 07/31/15 (g)
     2,990,625  
       
 
      
       
 
     13,991,653  
       
 
      
       
 
        
FOOD/TOBACCO - 3.1%        
       
DS Waters of America, Inc.
        
  1,813,889    
Term Loan, 2.51%, 10/29/12
     1,751,536  
       
DSW Holdings, Inc.
        
  7,000,000    
Term Loan, 4.26%, 03/02/12
     6,615,000  
       
OSI Restaurant Partners, LLC
        
  331,476    
Pre-Funded RC Loan, 1.47%, 06/14/13
     305,084  
  3,646,813    
Term Loan, 2.63%, 06/14/14
     3,356,453  
       
WM. Bolthouse Farms, Inc.
        
  3,000,000    
Second Lien Term Loan, 9.50%, 08/11/16
     3,013,605  
       
 
      
       
 
     15,041,678  
       
 
      
       
 
        
FOREST PRODUCTS/CONTAINERS - 2.8%        
       
Consolidated Container Co., LLC
        
  4,000,000    
Second Lien Term Loan, 5.75%, 09/28/14
     3,602,520  
       
Graham Packaging Co., L.P.
        
  3,333,333    
D Term Loan, 6.00%, 09/23/16
     3,366,066  
       
Smurfit Stone Container Enterprises, Inc.
        
  5,486,250    
Exit Term Loan, 6.75%, 02/22/16
     5,523,118  
       
Tegrant Corp.
        
  1,000,000    
Second Lien Term Loan, 5.79%, 03/08/15
     775,000  
       
 
      
       
 
     13,266,704  
       
 
      
       
 
        
GAMING/LEISURE - 2.5%        
       
Ginn LA Conduit Lender, Inc.
        
  3,937,249    
First Lien Tranche A Credit-Linked Deposit, 06/08/11 (f)
     216,549  
  8,438,203    
First Lien Tranche B Term Loan, 06/08/11 (f)
     464,101  
       
Green Valley Ranch Gaming, LLC
        
  1,000,000    
Second Lien Term Loan, 08/16/14 (f)
     35,125  
       
Las Vegas Sands, LLC
        
  907,965    
Extended Delayed Draw I Term Loan, 3.03%, 11/23/16
     827,124  
  4,493,499    
Extended Tranche B Term Loan, 3.03%, 11/23/16
     4,093,420  
       
LLV Holdco, LLC
        
  1,148,510    
Exit Revolving Loan, PIK, 15.00%, 12/31/12 (b) (e) (g)
     1,137,025  
       
MGM Mirage, Inc.
        
  96,213    
Class A-2 Loan, 7.00%, 02/21/14 (e)
     80,248  
  108,445    
Class C Loan, 7.00%, 02/21/14
     92,884  
  2,000,000    
Class D Loan, 6.00%, 10/03/11
     1,939,730  
       
VML US Finance, LLC
        
  1,105,111    
Term B Delayed Draw Project Loan, 4.78%, 05/25/12
     1,093,579  
  1,913,235    
Term B Funded Project Loan, 4.78%, 05/27/13
     1,893,271  
       
WAICCS Las Vegas 3 LLC
        
  7,000,000    
Second Lien Term Loan (f)
     35,000  
       
 
      
       
 
     11,908,056  
       
 
      
       
 
        
HEALTHCARE - 2.0%        
       
LifeCare Holdings
        
  10,284,532    
Term Loan, 4.73%, 08/10/12
     9,590,326  
       
 
      
       
 
        
HOUSING - 1.1%        
       
LBREP/L-Suncal Master I, LLC
        
  3,190,581    
First Lien Term Loan (f)
     47,859  
       
Roofing Supply Group, LLC
        
  2,897,769    
Term Loan, PIK, 9.25%, 08/24/13
     2,863,967  
       
Westgate Investments, LLC
        
  8,539,069    
Senior Secured Loan (f)
     2,134,579  
  2,762,778    
Senior Unsecured Loan, 09/25/12 (f)
     44,926  
  3,572,258    
Third Lien Term Loan, 06/30/15 (f)
     17,861  
       
 
      
       
 
     5,109,192  
       
 
      
       
 
        
INFORMATION TECHNOLOGY - 4.6%        
       
CDW LLC
        
  10,336,576    
Term Loan, 4.26%, 10/10/14
     9,541,384  
       
Freescale Semiconductor, Inc.
        
  1,993,564    
Extended Maturity Term Loan, 4.51%, 12/01/16
     1,824,799  
       
Kronos, Inc.
        
  4,000,000    
Second Lien Term Loan, 6.04%, 06/11/15
     3,779,000  
       
SSI Investments II Ltd.
        
  2,992,500    
Term Loan, 6.50%, 05/30/17 (d)
     3,020,554  
       
Vertafore, Inc.
        
  3,990,000    
Term Loan, 6.75%, 07/29/16 (d)
     4,006,838  
       
 
      
       
 
     22,172,575  
       
 
      
See accompanying Notes to Investment Portfolio.

2

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Principal Amount ($)     Value ($)  
US Senior Loans (continued)        
       
 
        
MANUFACTURING - 1.7%        
       
Brand Energy & Infrastructure Services, Inc.
        
  3,500,000    
Second Lien Term Loan, 6.43%, 02/07/15
     3,053,750  
       
Dana Holding Corp.
        
  2,392,726    
Term Advance, 4.69%, 01/30/15
     2,371,419  
       
Pinafore, LLC/Inc.
        
  1,660,000    
Term B Loan, 6.75%, 09/29/16 (d)
     1,676,036  
       
United Central Industrial Supply Co., LLC
        
  1,216,722    
Term Loan, 2.51%, 03/31/12
     1,224,326  
       
 
      
       
 
     8,325,531  
       
 
      
       
 
        
METALS/MINERALS - 0.5%        
       
Euramax International, Inc.
        
  1,454,449    
Domestic Term Loan (Cash Pay), 10.00%, 06/29/13
     1,372,636  
  1,378,103    
Domestic Term Loan, PIK, 14.00%, 06/29/13
     1,300,584  
       
 
      
       
 
     2,673,220  
       
 
      
       
 
        
RETAIL - 3.4%        
       
Guitar Center, Inc.
        
  6,334,043    
Term Loan, 3.77%, 10/09/14 (d)
     5,693,228  
       
Michaels Stores, Inc.
        
  3,926,400    
B-1 Term Loan, 2.63%, 10/31/13
     3,800,677  
  2,074,063    
B-2 Term Loan, 4.88%, 07/31/16
     2,037,124  
       
Neiman Marcus Group, Inc.
        
  1,065,174    
Term Loan, 2.29%, 04/06/13
     1,033,751  
       
Spirit Finance Corp.
        
  4,300,000    
Term Loan, 3.47%, 08/01/13
     3,743,688  
       
 
      
       
 
     16,308,468  
       
 
      
       
 
        
SERVICE - 5.1%        
       
CCS, Inc.
        
  4,452,585    
Term Loan, 3.26%, 11/14/14
     3,859,835  
       
First Data Corp.
        
  7,153,096    
Initial Tranche B-1 Term Loan, 3.01%, 09/24/14
     6,310,998  
       
NES Rentals Holdings, Inc.
        
  1,193,183    
Second Lien Permanent Term Loan, 10.00%, 07/20/13
     1,112,644  
       
Penhall Holding Co.
        
  10,477,778    
Term Loan, 04/01/12 (f)
     1,781,222  
       
Sabre, Inc.
        
  4,927,144    
Initial Term Loan, 2.34%, 09/30/14
     4,570,961  
       
Safety-Kleen Systems, Inc.
        
  1,301,695    
Synthetic Letter of Credit, 3.31%, 08/02/13
     1,221,419  
  6,003,390    
Term B Loan, 3.31%, 08/02/13
     5,633,161  
       
 
      
       
 
     24,490,240  
       
 
      
       
 
        
TELECOMMUNICATIONS - 4.0%        
       
Avaya, Inc.
        
  8,915,318    
Term B-1 Loan, 3.06%, 10/24/14 (d)
     7,926,876  
       
Digicel International Finance, Ltd.
        
  2,100,168    
Tranche A - T&T, 2.81%, 09/30/12
     2,063,415  
  2,250,225    
U.S. Term Loan, 2.81%, 03/30/12
     2,210,846  
       
Fairpoint Communications, Inc.
        
  3,947,368    
Term Loan B, 03/31/15 (f)
     2,576,092  
       
Level 3 Financing, Inc.
        
  4,000,000    
Tranche A Term Loan, 2.70%, 03/13/14
     3,656,060  
       
U.S. Telepacific Corp.
        
  995,000    
Term Loan Advance, 9.25%, 08/17/15
     999,821  
       
 
      
       
 
     19,433,110  
       
 
      
       
 
        
TRANSPORTATION - AUTOMOTIVE - 2.2%        
       
Federal-Mogul Corp.
        
  1,966,268    
Tranche B Term Loan, 2.20%, 12/29/14
     1,735,536  
  1,003,198    
Tranche C Term Loan, 2.20%, 12/28/15
     885,478  
       
Ford Motor Co.
        
  4,614,267    
Tranche B-1 Term Loan, 3.03%, 12/15/13
     4,526,550  
       
Key Safety Systems, Inc.
        
  4,019,624    
First Lien Term Loan, 2.52%, 03/08/14
     3,595,051  
       
 
      
       
 
     10,742,615  
       
 
      
       
 
        
TRANSPORTATION - LAND TRANSPORTATION - 1.0%        
       
New Century Transportation, Inc.
        
  1,769,217    
Term Loan, 7.26%, 08/14/12
     1,548,065  
       
SIRVA Worldwide, Inc.
        
  960,711    
Revolving Credit Loan (Exit Finance), PIK, 7.20%, 05/12/12 (e)
     658,087  
  3,667,612    
Second Lien Term Loan, PIK, 12.00%, 05/12/15
     1,146,129  
  1,649,680    
Term Loan (Exit Finance), PIK, 12.76%, 05/12/12
     1,253,757  
       
 
      
       
 
     4,606,038  
       
 
      
See accompanying Notes to Investment Portfolio.

3

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Principal Amount ($)     Value ($)  
US Senior Loans (continued)        
       
 
        
UTILITY - 4.0%        
       
Coleto Creek Power, LP
        
  11,289    
First Lien Synthetic Letter of Credit, 3.04%, 06/28/13
     10,302  
  142,946    
First Lien Term Loan, 3.03%, 06/28/13
     131,460  
  4,787,500    
Second Lien Term Loan, 4.26%, 06/28/13
     3,839,575  
       
GBGH, LLC
        
  2,202,643    
First Lien Term Loan, 4.00%, 06/09/13 (c)
     1,912,115  
  771,514    
Second Lien Term Loan, PIK, 12.00%, 06/09/14 (c) (g)
     —  
       
New Development Holdings, LLC
        
  2,618,438    
Term Loan, 7.00%, 07/03/17
     2,662,859  
       
Texas Competitive Electric Holdings Co., LLC
        
  13,790,927    
Initial Tranche B-2 Term Loan, 3.92%, 10/10/14
     10,744,649  
       
 
      
       
 
     19,300,960  
       
 
      
 
       
Total US Senior Loans
(Cost $395,714,246)
     337,687,476  
       
 
      
                 
Principal Amount        
Foreign Denominated Senior Loans (a) - 3.4%        
       
 
        
AUSTRALIA - 3.4%        
AUD        
       
SMG H5 Pty., Ltd.
        
  17,870,278    
Facility A Term Loan, 7.17%, 12/24/12
     16,264,740  
 
       
 
      
       
Total Foreign Denominated Senior Loans
(Cost $14,457,294)
     16,264,740  
       
 
      
                 
Principal Amount ($)        
US Asset-Backed Securities (h) - 7.6%        
       
AB CLO, Ltd.
        
  2,000,000    
Series 2007-1A, Class C, 2.38%, 04/15/21 (c) (i)
     1,134,590  
       
ACA CLO, Ltd.
        
  4,000,000    
Series 2006-2A, Class B, 1.24%, 01/20/21 (i)
     2,560,000  
  2,000,000    
Series 2007-1A, Class D, 2.88%, 06/15/22 (i)
     930,000  
       
Babson CLO, Ltd.
        
  1,000,000    
Series 2007-2A, Class D, 2.23%, 04/15/21 (i)
     525,000  
       
Bluemountain CLO, Ltd.
        
  1,000,000    
Series 2007-3A, Class D, 1.69%, 03/17/21 (c) (i)
     562,454  
       
Cent CDO, Ltd.
        
  2,000,000    
Series 2007-15A, Class C, 2.54%, 03/11/21 (i)
     1,023,960  
       
Columbus Nova CLO, Ltd.
        
  2,000,000    
Series 2007- 1A, Class D, 1.73%, 05/16/19 (i)
     1,095,000  
       
Commercial Industrial Finance Corp.
        
  1,000,000    
Series 2006-1BA, Class B2L, 4.29%, 12/22/20
     421,000  
  962,970    
Series 2006-2A, Class B2L, 4.30%, 03/01/21 (i)
     381,336  
       
Cornerstone CLO, Ltd.
        
  2,500,000    
Series 2007-1A, Class C, 2.93%, 07/15/21 (i)
     1,307,500  
       
Goldman Sachs Asset Management CLO PLC
        
  4,000,000    
Series 2007-1A, Class D, 3.22%, 08/01/22 (i)
     2,180,000  
  847,661    
Series 2007-1A, Class E, 5.47%, 08/01/22 (i)
     440,784  
       
Greywolf CLO, Ltd
        
  1,000,000    
Series 2007-1A, Class D, 1.86%, 02/18/21 (i)
     517,500  
  814,466    
Series 2007-1A, Class E, 4.31%, 02/18/21 (i)
     419,450  
       
GSC Partners CDO Fund, Ltd.
        
  3,000,000    
Series 2007-8A, Class C, 2.00%, 04/17/21 (i)
     1,281,840  
       
Gulf Stream Sextant CLO, Ltd.
        
  1,000,000    
Series 2007-1A, Class D, 2.69%, 06/17/21 (i)
     477,500  
       
Hillmark Funding
        
  2,000,000    
Series 2006-1A, Class C, 2.04%, 05/21/21 (i)
     1,067,500  
  612,103    
Series 2006-1A, Class D, 3.94%, 05/21/21 (i)
     275,446  
       
Inwood Park CDO, Ltd.
        
  1,000,000    
Series 2006-1A, Class C, 1.22%, 01/20/21 (i)
     800,000  
  1,000,000    
Series 2006-1A, Class D, 1.92%, 01/20/21 (i)
     717,500  
       
Limerock CLO
        
  2,000,000    
Series 2007-1A, Class D, 3.85%, 04/24/23 (i)
     740,000  
       
Madison Park Funding Ltd.
        
  2,000,000    
Series 2007-5A, Class C, 1.76%, 02/26/21 (i)
     948,880  
  1,500,000    
Series 2007-5A, Class D, 3.81%, 02/26/21 (i)
     697,305  
       
Marquette US/European CLO, PLC
        
  1,000,000    
Series 2006-1A, Class D1, 2.28%, 07/15/20 (i)
     462,500  
       
Navigator CDO, Ltd.
        
  835,038    
Series 2006-2A, Class D, 3.79%, 09/20/20 (i)
     341,789  
       
Ocean Trails CLO
        
  1,000,000    
Series 2006-1A, Class D, 4.28%, 10/12/20 (i)
     470,000  
  2,500,000    
Series 2007-2A, Class C, 2.88%, 06/27/22 (i)
     1,300,000  
       
PPM Grayhawk CLO, Ltd.
        
  1,000,000    
Series 2007-1A, Class C, 1.92%, 04/18/21 (i)
     484,405  
  826,734    
Series 2007-1A, Class D, 4.12%, 04/18/21 (i)
     388,920  
       
Primus CLO, Ltd.
        
  5,000,000    
Series 2007-2A, Class D, 2.93%, 07/15/21 (i)
     2,712,500  
  1,889,756    
Series 2007-2A, Class E, 5.28%, 07/15/21 (i)
     831,492  
See accompanying Notes to Investment Portfolio.

4

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Principal Amount ($)     Value ($)  
US Asset-Backed Securities (continued)        
       
Rampart CLO, Ltd.
        
  4,000,000    
Series 2006-1A, Class C, 1.97%, 04/19/21 (i)
     2,240,000  
       
St. James River CLO, Ltd.
        
  2,287,217    
Series 2007-1A, Class E, 4.59%, 06/11/21 (i)
     1,006,376  
       
Stanfield Daytona CLO, Ltd.
        
  1,200,000    
Series 2007-1A, Class B1L, 1.84%, 04/27/21 (i)
     636,000  
       
Stanfield McLaren CLO, Ltd.
        
  4,000,000    
Series 2007-1A, Class B1L, 2.70%, 02/27/21 (i)
     2,160,000  
       
Stone Tower CLO, Ltd.
        
  2,000,000    
Series 2007-6A, Class C, 1.87%, 04/17/21 (i)
     1,040,000  
       
Venture CDO, Ltd.
        
  2,000,000    
Series 2007-9A, Class D, 4.68%, 10/12/21 (i)
     1,212,500  
       
Westbrook CLO, Ltd.
        
  1,000,000    
Series 2006-1A, Class D, 1.99%, 12/20/20 (i)
     545,000  
       
 
      
 
       
Total US Asset-Backed Securities
(Cost $49,015,237)
     36,336,027  
       
 
      
 
Foreign Asset-Backed Securities (h) - 0.6%        
                 
Principal Amount        
IRELAND - 0.6%        
EUR        
       
Static Loan Funding
        
  2,000,000    
Series 2007-1X, Class D, 5.65%, 07/31/17 (i)
     1,556,335  
  2,000,000    
Series 2007-1X, Class E, 8.15%, 07/31/17 (i)
     1,365,206  
       
 
      
 
       
Total Foreign Asset-Backed Securities
(Cost $5,686,541)
     2,921,541  
       
 
      
                 
Principal Amount ($)        
Corporate Notes and Bonds - 22.0%        
       
 
        
AEROSPACE - 0.3%        
       
Delta Air Lines, Inc.
        
  5,000,000    
06/30/23 (f)
     90,500  
  7,000,000    
12/15/29 (f)
     140,000  
  898,000    
9.50%, 09/15/14 (i)
     978,820  
       
Northwest Airlines Corp.
        
  2,500,000    
12/30/27 (f)
     12,750  
       
 
      
       
 
     1,222,070  
       
 
      
       
 
        
CABLE/WIRELESS VIDEO - 0.1%        
       
CCO Holdings, LLC
        
  500,000    
7.25%, 10/30/17 (i)
     509,375  
       
 
      
       
 
        
CHEMICALS - 3.4%        
       
Berry Plastics Holding Corp.
        
  3,000,000    
8.88%, 09/15/14
     2,932,500  
       
Chemtura Corp.
        
  2,500,000    
7.88%, 09/01/18 (i)
     2,618,750  
       
Lyondell Chemical Co.
        
  5,430,130    
11.00%, 05/01/18
     6,034,230  
       
TPC Group, LLC
        
  5,000,000    
8.25%, 10/01/17 (i)
     4,967,500  
       
 
      
       
 
     16,552,980  
       
 
      
       
 
        
CONSUMER NON-DURABLES - 0.1%        
       
Cott Beverages, Inc.
        
  500,000    
8.13%, 09/01/18 (i)
     531,875  
       
 
      
       
 
        
DIVERSIFIED MEDIA - 1.5%        
       
Baker & Taylor, Inc.
        
  8,300,000    
11.50%, 07/01/13 (i)
     6,027,875  
       
Gannett Co., Inc.
        
  500,000    
6.38%, 09/01/15 (i)
     496,875  
  500,000    
7.13%, 09/01/18 (i)
     495,000  
       
 
      
       
 
     7,019,750  
       
 
      
       
 
        
ENERGY - 0.1%        
       
Peabody Energy Corp.
        
  500,000    
6.50%, 09/15/20
     540,625  
       
 
      
       
 
        
FOOD AND DRUG - 0.9%        
       
Rite Aid Corp.
        
  4,000,000    
10.38%, 07/15/16 (j)
     4,185,000  
       
 
      
       
 
        
FOREST PRODUCTS/CONTAINERS - 0.0%        
       
NewPage Holding Corp., PIK
        
  354,466    
7.53%, 11/01/13 (h)
     19,496  
       
 
      
       
 
        
GAMING/LEISURE - 0.4%        
       
MGM Mirage, Inc.
        
  2,000,000    
6.75%, 04/01/13 (j)
     1,867,500  
       
 
      
       
 
        
HEALTHCARE (i) - 13.3%        
       
Argatroban Royalty Sub LLC
        
  2,666,931    
18.50%, 09/21/14
     2,666,931  
       
Azithromycin Royalty Sub LLC
        
  15,000,000    
16.00%, 05/15/19
     12,000,000  
       
Celtic Pharma Phinco B.V., PIK
        
  57,089,600    
17.00%, 06/15/12
     28,544,800  
       
Cinacalcet Royalty Sub LLC
        
  —    
8.00%, 03/30/17
     —  
       
Fosamprenavir Pharma
        
  3,294,781    
15.50%, 06/15/18
     3,162,990  
       
Molecular Insight Pharmaceuticals, Inc.
        
  4,208,444    
11/16/12 (f) (h)
     1,683,378  
       
Pharma IV (Eszopiclone)
        
  1,757,472    
12.00%, 06/30/14
     1,546,575  
       
Pharma V (Duloxetine)
        
  240,000    
13.00%, 10/15/13
     235,200  
       
TCD Pharma
        
  15,500,000    
16.00%, 04/15/24
     13,640,000  
       
Warner Chilcott Co., LLC
        
  550,000    
7.75%, 09/15/18
     567,875  
       
 
      
       
 
     64,047,749  
       
 
      
       
 
        
INFORMATION TECHNOLOGY - 1.1%        
       
Freescale Semiconductor, Inc.
        
  5,000,000    
10.13%, 03/15/18 (i)
     5,350,000  
See accompanying Notes to Investment Portfolio.

5

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Principal Amount ($)     Value ($)  
Corporate Notes and Bonds (continued)        
       
 
        
INFORMATION TECHNOLOGY (continued)        
       
New Holding, Inc.
        
  477,689    
03/12/13 (c) (f)
     94,917  
       
 
      
       
 
     5,444,917  
       
 
      
       
 
        
MANUFACTURING - 0.0%        
       
Pinafore, LLC/Inc.
        
  100,000    
9.00%, 10/01/18 (i)
     105,500  
       
 
      
       
 
        
METALS/MINERALS - 0.6%        
       
Appleton Papers, Inc.
        
  3,000,000    
10.50%, 06/15/15 (i)
     2,827,500  
       
 
      
       
 
        
RETAIL - 0.1%        
       
Burlington Coat Factory Warehouse Corp.
        
  500,000    
11.13%, 04/15/14
     525,000  
       
 
      
       
 
        
TRANSPORTATION - AUTOMOTIVE - 0.1%        
       
DPH Holdings Corp.
        
  3,750,000    
05/01/11 (f)
     121,875  
  3,933,000    
06/15/11 (f)
     127,823  
  8,334,000    
05/01/29 (f) (j)
     270,855  
       
 
      
       
 
     520,553  
       
 
      
 
       
Total Corporate Notes and Bonds
(Cost $145,563,810)
     105,919,890  
       
 
      
       
 
        
Claims (k) - 0.1%        
       
 
        
FINANCIAL - 0.1%        
       
Lehman Brothers Holding, Inc.
        
  1,198,046    
Trade Claims LBSF
     494,194  
       
 
      
       
 
        
RETAIL - 0.0%        
       
Home Interiors & Gifts, Inc.
        
  6,933,961    
Proof of Claims (c)
     83  
       
 
      
 
       
Total Claims
(Cost $5,595,198)
     494,277  
       
 
      
                 
Shares            
Common Stocks (k) - 13.9%        
       
 
        
AEROSPACE - 0.0%        
  263    
Delta Air Lines, Inc.
     3,061  
       
 
      
       
 
        
BROADCASTING - 0.1%        
  2,010,616    
Communications Corp. of America (b) (c)
     —  
  18,000    
Gray Television, Inc., Class A
     34,200  
  220    
Young Broadcasting, Inc. (c)
     439,285  
       
 
      
       
 
     473,485  
       
 
      
       
 
        
CHEMICALS - 0.2%        
  17,874    
Lyondell Chemical Co., Class A
     427,213  
  31,131    
Lyondell Chemical Co., Class B
     742,474  
       
 
      
       
 
     1,169,687  
       
 
      
       
 
        
DIVERSIFIED MEDIA - 0.1%        
  46,601    
American Banknote Corp. (c)
     406,827  
       
 
      
       
 
        
GAMING/LEISURE - 2.2%        
  26,712    
LLV Holdco, LLC - Series A Membership Interest (b) (c)
     10,387,595  
  126    
LLV Holdco, LLC - Series B Membership Interest (b) (c)
     413,864  
  529    
LLV Holdco, LLC - Series C Membership Interest (b) (c)
     —  
  727    
LLV Holdco, LLC - Series D Membership Interest (b) (c)
     —  
  813    
LLV Holdco, LLC - Series E Membership Interest (b) (c)
     —  
  914    
LLV Holdco, LLC - Series F Membership Interest (b) (c)
     —  
  1,036    
LLV Holdco, LLC - Series G Membership Interest (b) (c)
     —  
       
 
      
       
 
     10,801,459  
       
 
      
       
 
        
HEALTHCARE - 9.2%        
  24,000,000    
Genesys Ventures IA, LP (b) (c)
     44,160,000  
       
 
      
       
 
        
INFORMATION TECHNOLOGY - 0.1%        
  385,679    
Magnachip Semiconductor (c) (j)
     219,837  
  9,342    
New Holding, Inc. (c)
     —  
       
 
      
       
 
     219,837  
       
 
      
       
 
        
METALS/MINERALS - 0.5%        
  7,579    
Euramax International, Inc.
     2,273,700  
       
 
      
       
 
        
RETAIL - 0.2%        
  105,092    
Sally Beauty Holdings, Inc. (j)
     1,177,030  
       
 
      
       
 
        
SERVICE - 0.4%        
  200,964    
Safety-Kleen Systems, Inc. (c)
     1,993,566  
       
 
      
       
 
        
TRANSPORTATION - LAND TRANSPORTATION - 0.1%        
  18,022    
SIRVA Worldwide, Inc. (c)
     405,495  
       
 
      
       
 
        
UTILITY - 0.0%        
  81,194    
Entegra TC LLC
     38,567  
  4,365    
GBGH LLC (c)
     —  
       
 
      
       
 
     38,567  
       
 
      
       
 
        
WIRELESS COMMUNICATIONS - 0.8%        
  2,260,529    
ICO Global Communications Holding Ltd.
     3,707,268  
       
 
      
 
       
Total Common Stocks
(Cost $166,012,046)
     66,829,982  
       
 
      
       
 
        
Preferred Stocks (k) - 1.4%        
  1,000,000    
Adelphia Recovery Trust
     20,000  
  4,464,284    
Dfine, Inc., Series D (c)
     4,241,070  
  2,647,663    
Dfine, Inc., Series E (c)
     2,515,280  
       
 
      
 
       
Total Preferred Stocks
(Cost $13,203,793)
     6,776,350  
       
 
      
See accompanying Notes to Investment Portfolio.

6

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
                 
Units         Value ($)  
Warrants (k) - 0.4%        
  20,000    
Clearwire Corp., expires 08/15/10 (c)
     4,000  
  1,271    
GBGH LLC, expires 06/09/14 (c)
     —  
  49,317    
IAP Worldwide Services, Inc., Series A, expires 06/12/15 (c)
     —  
  14,444    
IAP Worldwide Services, Inc., Series B, expires 06/12/15 (c)
     —  
  7,312    
IAP Worldwide Services, Inc., Series C, expires 06/12/15 (c)
     —  
  643,777    
Microvision, Inc., expires 07/23/13
     659,871  
  597    
Young Broadcasting, Inc., expires 12/24/24
     1,192,060  
       
 
      
       
Total Warrants
(Cost $1,197,645)
     1,855,931  
       
 
      
Total Investments - 119.5%
(Cost of $796,445,810) (l)
     575,086,214  
       
 
      
Other Assets & Liabilities, Net - (19.5)%     (93,659,115 )
       
 
      
Net Assets applicable to Common Shareholders - 100.0%   $ 481,427,099  
       
 
      
 
(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, 2010. 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 a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual maturity may be substantially less than the stated maturity shown.
 
(b)   Affiliated issuers. 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 outstanding voting securities. The Fund held at least five percent of the outstanding voting securities of the following companies as of September 30, 2010:
                                 
    Par Value   Shares at   Market Value
    at Sept   Sept 30,   December 31,   Sept 30,
    30, 2010   2010   2009   2010
 
ComCorp Broadcasting, Inc. (Senior Loans)*
   $ 39,444,941       —     $ 29,524,538     $ 34,660,269  
Communications Corp of America (Common Stock)
     —       2,010,616       —       —  
Genesys Ventures IA, LP (Common Stock)
     —       24,000,000       38,160,000       44,160,000  
LLV Holdco, LLC (Senior Loans)
     1,148,510       —       —       1,137,025  
LLV Holdco, LLC – Series A Membership Interest (Common Stock)
     —       26,712       —       10,387,595  
LLV Holdco, LLC – Series B Membership Interest (Common Stock)
     —       126       —       413,864  
LLV Holdco, LLC – Series C Membership Interest (Common Stock)
     —       529       —       —  
LLV Holdco, LLC – Series D Membership Interest (Common Stock)
     —       727       —       —  
LLV Holdco, LLC – Series E Membership Interest (Common Stock)
     —       813       —       —  
LLV Holdco, LLC – Series F Membership Interest (Common Stock)
     —       914       —       —  
LLV Holdco, LLC – Series G Membership Interest (Common Stock)
     —       1,036       —       —  
     
 
                                
 
   $ 40,593,451       26,041,473     $ 67,684,538     $ 90,758,753  
     
 
*   Company is a wholly owned subsidiary of Communications Corp. of America.
 
(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 $119,481,948, or 24.8% of net assets, were fair valued under the Fund’s valuation procedures as of September 30, 2010.
 
(d)   All or a portion of this position has not settled. Full contract rates do not take effect until settlement date.
 
(e)   Senior Loan assets have additional unfunded loan commitments. As of September 30, 2010, the Fund had unfunded loan commitments, which could be extended at the option of the Borrower, pursuant to the following loan agreements:
See accompanying Notes to Investment Portfolio.

7

 

INVESTMENT PORTFOLIO (unaudited) (continued)
     
As of September 30, 2010   Highland Credit Strategies Fund
         
    Unfunded Loan  
Borrower   Commitment  
 
Mobileserv Ltd.
   GBP 5,000,000  
 
      
Broadstripe, LLC
   $ 754,422  
MGM Mirage, Inc.
     195,342  
LLV Holdco, LLC
     5,841,342  
Sirva Worldwide, Inc.
     1,508,759  
Sorenson Communications, Inc.
     2,000,000  
 
      
 
   $ 10,299,865  
 
      
 
(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, 2010.
 
(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, 2010, these securities amounted to $127,793,387 or 26.5% of net assets.
 
(j)   Securities (or a portion of securities) on loan. As of September 30, 2010, the market value of securities loaned was $2,106,341. The loaned securities were secured with cash collateral of $2,233,460.
 
(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
   $ 33,481,469  
Gross unrealized depreciation
     (254,841,065 )
 
      
Net unrealized depreciation
   $ (221,359,596 )
 
      
     
AUD
  Australian Dollar
EUR
  Euro Currency
GBP
  Great Britain Pound
     
CDO
  Collateralized Debt Obligation
CLO
  Collateralized Loan Obligation
CSF
  Credit Suisse First Boston
DIP
  Debtor-in-Possession
PIK
  Payment-in-Kind
Foreign Denominated Senior Loans &
Asset Backed Securities
Industry Concentration Table:
(% of Net Assets)
         
Diversified Media
     3.4 %
Financial
     0.6 %
 
        
Total
     4.0 %
 
        
Forward foreign currency contracts outstanding as of September 30, 2010 were as follows:
                                         
Contracts                   Principal
Amount		             Net
Unrealized		  
to Buy or           Counter-     Covered by             Appreciation/  
to Sell   Currency     party     Contracts     Expiration     (Depreciation)*  
 
Sell
   EUR   CSF     2,750,000       11/12/10       (299,744 )
Sell
   GBP   CSF     1,960,000       11/12/10       (214,956 )
Sell
   GBP   CSF     1,060,000       02/03/11       23,997  
 
                                      
 
                                   $ (490,703 )
 
                                      
 
*   The primary risk exposure is foreign exchange contracts. See Notes to Financial Statements.
See accompanying Notes to Investment Portfolio.

8

 

NOTES TO INVESTMENT PORTFOLIO
     
As of September 30, 2010 (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. Securities where there are no readily available market quotations will be valued at the mean between the most recently quoted bid and ask 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 has been approved by the 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 does 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 (“NAV”)), 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 NAV will reflect the affected portfolio securities’ fair value as determined in the judgment of the Board or its designee instead of being determined by the market. Using a fair value pricing methodology to value securities 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 NAV. Determination of fair value is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures.
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 debt investments, that is, those with a remaining maturity of 60 days or less, are valued at cost adjusted for amortization of premiums and accretion of discounts. 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 NAV resulting from a decline or appreciation in the value of a particular 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 entered into. 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. Forwards involve counterparty credit risk to the Fund because the forwards are not exchange traded, and there is no clearinghouse to guarantee forwards against default. During the nine months ended September 30, 2010, the open value of forward foreign currency contracts was EUR 2,750,000 and GBP 3,020,000 and the closed value was EUR 1,700,000 and GBP 3,792,300.
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, 2010 (unaudited)   Highland Credit Strategies Fund
At the end of each calendar quarter, management evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, management evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
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. Transfers in and out of the levels are recognized at the value at the end of the period. A summary of the inputs used to value the Fund’s assets as of September 30, 2010 are as follows:
                                 
    Total Value at     Level 1     Level 2
Significant		     Level 3
Significant		  
    September     Quoted     Observable     Unobservable  
Investments in Securities:   31, 2010     Price     Input     Input  
Common Stocks
                                
Aerospace
   $ 3,061     $ —     $ 3,061     $ —  
Broadcasting
     473,485       —       34,200       439,285  
Chemicals
     1,169,687       —       1,169,687       —  
Diversified Media
     406,827       —       —       406,827  
Gaming/Leisure
     10,801,459       —       —       10,801,459  
Healthcare
     44,160,000       —       —       44,160,000  
Information Technology
     219,837       —       —       219,837  
Metals/Minerals
     2,273,700       —       —       2,273,700  
Retail
     1,177,030       —       1,177,030       —  
Service
     1,993,566       —       —       1,993,566  
Transportation - Land Transportation
     405,495       —       —       405,495  
Utility
     38,567       —       —       38,567  
Wireless Communication
     3,707,268       3,707,268       —       —  
Preferred Stocks
     6,776,350       —       20,000       6,756,350  
Warrants
     1,855,931       659,871       —       1,196,060  
Debt
                                
Senior Loans
     353,952,216       —       289,558,166       64,394,050  
Asset-Backed Securities
     39,257,568       —       —       39,257,568  
Corporate Debt
     105,919,890       —       41,824,546       64,095,344  
Claims
     494,277       —       494,194       83  
 
                        
Total Investments
   $ 575,086,214     $ 4,367,139     $ 334,280,884     $ 236,438,191  
 
                        
Other Financial Instruments*
                                
Assets
                                
Foreign exchange contracts
   $ 23,997       —     $ 23,997     $ —  
Liabilities
                                
Foreign exchange contracts
     (514,700 )     —       (514,700 )     —  
 
                        
Total Other Financial Instruments
  $ (490,703)     $ —     $ (490,703 )   $ —  
 
                        
 
*   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 at September 30, 2010.
The table below sets forth a summary of changes in the Fund’s Level 3 assets (assets measured at fair value using significant unobservable inputs for the nine months ended September 30, 2010.
                                                         
                    Net amortization/                          
    Balance as of     Transfers     (accretion) of     Net     Net     Net     Balance as of  
Assets at Fair Value using   December 31,     in/(out)     premium/     realized     unrealized     purchase/     September 30,  
unobservable inputs (Level 3)   2009     of Level 3     (discount)     gains/(losses)     gains/(losses)     (sales) *     2010  
Common Stocks
                                                        
Broadcasting
   $ —     $ —     $ —     $ —     $ (2,058 )   $ 441,343     $ 439,285  
Diversified Media
     765,188       —       —       (304,444 )     (53,917 )     —       406,827  
Gaming/Leisure
     —       —       —       —       (83,339,979 )     94,141,438       10,801,459  
Healthcare
     38,555,838               —       —       6,000,000       (395,838 )     44,160,000  
Information Technology
     —       —       —       —       (12,155,601 )     12,375,438       219,837  
Metals/Minerals
     454,361       —       —       —       1,315,672       503,667       2,273,700  
Service
     1,406,750       —       —       —       586,816       —       1,993,566  
Transportation - Land Transportation
     937,144       —       —       —       (531,649 )     —       405,495  
Utility
     182,687       —       —       —       (144,120 )     —       38,567  
Preferred Stocks
     12,774,190       —       —       —       (8,286,636 )     2,268,796       6,756,350  
Warrants
     700       —       —       (10 )     (2,275 )     1,197,645       1,196,060  
Debt
                                                        
Senior Loans
     155,755,247       (44,952,871 )     314,375       (42,822,116 )     132,328,807       (136,229,392 )     64,394,050  
Asset-Backed Securities
     33,822,437       —       39,564       275,352       5,951,873       (831,658 )     39,257,568  
Corporate Debt
     73,601,522       520,553       31,474       (7,781 )     5,924,124       (15,974,548 )     64,095,344  
Claims
     441,698       (494,194 )     —       —       52,579       —       83  
 
                                          
Total
   $ 318,697,762     $ (44,926,512 )   $ 385,413     $ (42,858,999 )   $ 47,643,636     $ (42,503,109 )   $ 236,438,191  
 
                                          
 
*   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, 2010 (unaudited)   Highland Credit Strategies Fund
The net unrealized gains presented in the table above relates to investments that are still held at September 30, 2010.
For the nine months ended September 30, 2010, a net amount of $319,486 of the Fund’s portfolio investments was transferred from Level 1 to Level 2.
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, 2010, a net amount of $44,926,512 of the Fund’s portfolio investments were transferred from Level 3 to Level 2. Determination of fair values is uncertain because it involves subjective judgments and estimates not easily substantiated by auditing procedures.
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 11/19/10
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 11/19/10
         
By (Signature and Title)*
  /s/ Brian Mitts    
 
 
 
Brian Mitts, Chief Financial Officer and Treasurer
(principal financial officer) 		   
Date 11/19/10
 
*   Print the name and title of each signing officer under his or her signature.