See
notes to financial statements.
NOTE
1—Significant Accounting Policies:
BNY Mellon High Yield Strategies Fund
(the “fund”) is registered under the Investment Company Act of 1940, as amended (the “Act”),
as a diversified, closed-end management investment company. The fund’s primary investment objective
is to seek high current income. Under normal market conditions, the fund invests at least 65% of its
total assets in income securities of U.S. issuers rated below investment grade quality or unrated income
securities that BNY Mellon Investment Adviser, Inc. (the “Adviser”), a wholly-owned subsidiary of
The Bank of New York Mellon Corporation (“BNY Mellon”), serving as the fund’s investment manager
and administrator, determines to be of comparable quality. The fund’s Common Stock trades on the New
York Stock Exchange (the “NYSE”) under the ticker symbol DHF.
The Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the exclusive reference
of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP for SEC
registrants. The fund is an investment company and applies the accounting and reporting guidance of the
FASB ASC Topic 946 Financial Services-Investment Companies. The fund’s financial statements are prepared
in accordance with GAAP, which may require the use of management estimates and assumptions. Actual results
could differ from those estimates.
The fund enters into contracts
that contain a variety of indemnifications. The fund’s maximum exposure under these arrangements is
unknown. The fund does not anticipate recognizing any loss related to these arrangements.
(a)
Portfolio valuation: The fair value of a financial instrument is the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes
the inputs of valuation techniques used to measure fair value. This hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and the lowest priority to unobservable inputs (Level 3 measurements).
Additionally,
GAAP provides guidance on determining whether the volume and activity in a market has decreased significantly
and whether such a decrease in activity results in transactions that are not orderly.
23
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
GAAP requires enhanced disclosures around valuation inputs and techniques used
during annual and interim periods.
Various inputs are used in determining
the value of the fund’s investments relating to fair value measurements. These inputs are summarized
in the three broad levels listed below:
Level 1—unadjusted quoted
prices in active markets for identical investments.
Level 2—other significant
observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds,
credit risk, etc.).
Level 3—significant unobservable inputs (including
the fund’s own assumptions in determining the fair value of investments).
The
inputs or methodology used for valuing securities are not necessarily an indication of the risk associated
with investing in those securities.
Changes in valuation techniques may result
in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used
to value the fund’s investments are as follows:
The fund’s Board of Trustees (the “Board”)
has designated the Adviser as the fund’s valuation designee, effective September 8, 2022, to make all
fair value determinations with respect to the fund’s portfolio investments, subject to the Board’s
oversight and pursuant to Rule 2a-5 under the Act.
Investments in debt
securities and floating rate loan interests, excluding short-term investments (other than U.S. Treasury
Bills), and forward foreign currency exchange contracts (“forward contracts”) are valued each business
day by one or more independent pricing services (each, a “Service”) approved by the Board. Investments
for which quoted bid prices are readily available and are representative of the bid side of the market
in the judgment of a Service are valued at the mean between the quoted bid prices (as obtained by a Service
from dealers in such securities) and asked prices (as calculated by a Service based upon its evaluation
of the market for such securities). Securities are valued as determined by a Service, based on methods
which include consideration of the following: yields or prices of securities of comparable quality, coupon,
maturity and type; indications as to values from dealers; and general market conditions. The Services
are engaged under the general supervision of the Board. These securities are generally categorized within
Level 2 of the fair value hierarchy.
24
Investments in equity securities are valued at the last sales price on the securities
exchange or national securities market on which such securities are primarily traded. Securities listed
on the National Market System for which market quotations are available are valued at the official closing
price or, if there is no official closing price that day, at the last sales price. For open short positions,
asked prices are used for valuation purposes. Bid price is used when no asked price is available. Registered
investment companies that are not traded on an exchange are valued at their net asset value. All of the
preceding securities are generally categorized within Level 1 of the fair value hierarchy.
Securities
not listed on an exchange or the national securities market, or securities for which there were no transactions,
are valued at the average of the most recent bid and asked prices. U.S. Treasury Bills are valued at
the mean price between quoted bid prices and asked prices by the Service. These securities are generally
categorized within Level 2 of the fair value hierarchy.
Fair valuing of securities
may be determined with the assistance of a Service using calculations based on indices of domestic securities
and other appropriate indicators, such as prices of relevant American Depository Receipts and futures.
Utilizing these techniques may result in transfers between Level 1 and Level 2 of the fair value hierarchy.
When market quotations or official closing prices are not readily available, or
are determined not to accurately reflect fair value, such as when the value of a security has been significantly
affected by events after the close of the exchange or market on which the security is principally traded
(for example, a foreign exchange or market), but before the fund calculates its net asset value, the
fund may value these investments at fair value as determined in accordance with the procedures approved
by the Board. Certain factors may be considered when fair valuing investments such as: fundamental analytical
data, the nature and duration of restrictions on disposition, an evaluation of the forces that influence
the market in which the securities are purchased and sold, and public trading in similar securities of
the issuer or comparable issuers. These securities are either categorized within Level 2 or 3 of the
fair value hierarchy depending on the relevant inputs used.
For securities where
observable inputs are limited, assumptions about market activity and risk are used and such securities
are generally categorized within Level 3 of the fair value hierarchy.
Investments
denominated in foreign currencies are translated to U.S. dollars at the prevailing rates of exchange.
25
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Forward contracts are valued at the forward rate and are generally categorized
within Level 2 of the fair value hierarchy.
The following is a summary of the inputs used as of September
30, 2022 in valuing the fund’s investments:
| | | | | | | |
| | Level 1-Unadjusted Quoted
Prices | Level
2- Other Significant Observable Inputs | | Level 3-Significant Unobservable
Inputs | Total | |
Assets ($) | | |
Investments
in Securities:† | | |
Collateralized Loan Obligations | - | 13,228,475 | | - | 13,228,475 | |
Corporate Bonds | - | 209,465,458 | | - | 209,465,458 | |
Equity Securities - Common Stocks | 76,021 | - | | - | 76,021 | |
Exchange-Traded Funds | 1,054,446 | - | | - | 1,054,446 | |
Floating Rate Loan Interests | - | 12,211,874 | | - | 12,211,874 | |
Investment Companies | 11,360,558 | - | | - | 11,360,558 | |
Other Financial Instruments: | | |
Forward Foreign Currency Exchange Contracts†† | - | 10,782 | | - | 10,782 | |
Liabilities
($) | | |
Other Financial Instruments: | | |
Forward Foreign Currency Exchange Contracts†† | - | (773,224) | | - | (773,224) | |
† See
Statement of Investments for additional detailed categorizations, if any.
†† Amount shown represents unrealized appreciation (depreciation)
at period end, but only variation margin on exchange-traded and centrally cleared derivatives, if any,
are reported in the Statement of Assets and Liabilities.
(b) Foreign currency transactions:
The fund does not isolate that portion of the results of operations resulting from changes in foreign
exchange rates on investments from the fluctuations arising from changes in the market prices of securities
held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies,
currency gains or losses realized on securities transactions between trade and settlement date, and the
difference between the amounts of dividends, interest and foreign withholding taxes recorded on the fund’s
books and the U.S. dollar equivalent of the amounts actually
26
received or paid. Net unrealized foreign exchange gains and losses arise from
changes in the value of assets and liabilities other than investments resulting from changes in exchange
rates. Foreign currency gains and losses on foreign currency transactions are also included with net
realized and unrealized gain or loss on investments.
(c) Securities transactions
and investment income: Securities transactions are recorded on a trade date basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis. Dividend income is recognized
on the ex-dividend date and interest income, including, where applicable, accretion of discount and amortization
of premium on investments, is recognized on the accrual basis.
(d) Affiliated issuers:
Investments in other investment companies advised by the Adviser are considered “affiliated” under
the Act.
(e) Market Risk: The value of the securities in which the fund invests may
be affected by political, regulatory, economic and social developments, and developments that impact
specific economic sectors, industries or segments of the market. The value of a security may also decline
due to general market conditions that are not specifically related to a particular company or industry,
such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings,
changes in interest or currency rates, changes to inflation, adverse changes to credit markets or adverse
investor sentiment generally. In addition, turbulence in financial markets and reduced liquidity in equity,
credit and/or fixed income markets may negatively affect many issuers, which could adversely affect the
fund. Global economies and financial markets are becoming increasingly interconnected, and conditions
and events in one country, region or financial market may adversely impact issuers in a different country,
region or financial market. These risks may be magnified if certain events or developments adversely
interrupt the global supply chain; in these and other circumstances, such risks might affect companies
world-wide. Recent examples include pandemic risks related to COVID-19 and aggressive measures taken
world-wide in response by governments, including closing borders, restricting international and domestic
travel, and the imposition of prolonged quarantines of large populations, and by businesses, including
changes to operations and reducing staff.
High Yield Risk: The fund invests primarily in high yield
debt securities. Below investment grade instruments are commonly referred to as “junk” or “high
yield” instruments and are regarded as predominantly speculative with respect to the issuer’s capacity
to pay interest and repay principal. Below investment grade instruments, though generally higher yielding,
are
27
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
characterized by higher risk. These instruments are especially sensitive to adverse
changes in general economic conditions, to changes in the financial condition of their issuers and to
price fluctuation in response to changes in interest rates. During periods of economic downturn or rising
interest rates, issuers of below investment grade instruments may experience financial stress that could
adversely affect their ability to make payments of principal and interest and increase the possibility
of default. The secondary market for below investment grade instruments may not be as liquid as the secondary
market for more highly rated instruments, a factor which may have an adverse effect on the fund’s ability
to dispose of a particular security. There are fewer dealers in the market for high yield instruments
than for investment grade instruments. The prices quoted by different dealers may vary significantly,
and the spread between the bid and asked price is generally much larger for high yield securities than
for higher quality instruments. Under adverse market or economic conditions, the secondary market for
below investment grade instruments could contract, independent of any specific adverse changes in the
condition of a particular issuer, and these instruments may become illiquid. In addition, adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may also decrease the values
and liquidity of below investment grade instruments, especially in a market characterized by a low volume
of trading.
Collateralized Loan Obligation Risk: The fund invests in collateralized loan
obligations (“CLO”). Holders of CLOs and other types of structured products bear risks of the underlying
investments, index or reference obligation and are subject to counterparty risk. Although it is difficult
to predict whether the prices of indices and securities underlying structured products will rise or fall,
these prices (and, therefore, the prices of structured products) will be influenced by the same types
of political and economic events that affect issuers of securities and capital markets generally. Collateralized
debt obligations (“CDO”), such as CLOs, may be thinly traded or have a limited trading market. CLOs
are typically privately offered and sold, and thus are not registered under the securities laws. As a
result, investments in CLOs and CDOs may be characterized by the fund as illiquid securities, especially
investments in mezzanine and subordinated/equity tranches of CLOs; however, an active dealer market may
exist for certain investments and more senior CLO tranches, which would allow such securities to be considered
liquid in some circumstances. In addition to the general risks associated with credit instruments, CLOs
and CDOs carry additional risks, including, but not limited to: (i) the possibility that distributions
from collateral securities will not be adequate to make interest or other payments; (ii) the quality
of the collateral may
28
decline in value or default; (iii) the possibility that the class of CLO held
by the fund is subordinate to other classes; and (iv) the complex structure of the security may not
be fully understood at the time of investment and may produce disputes with the issuer or unexpected
investment results.
Common Stock Risk: The fund is permitted to invest up to 5% of its assets directly
in the common stock of junk bond issuers. Stocks generally fluctuate more in value than bonds and may
decline significantly over short time periods. There is the chance that stock prices overall will decline
because stock markets tend to move in cycles, with periods of rising prices and falling prices. The market
value of a stock may decline due to general market conditions that are not related to the particular
company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate
earnings, changes in interest or currency rates, or adverse investor sentiment generally. A security’s
market value also may decline because of factors that affect a particular industry, such as labor shortages
or increased production costs and competitive conditions within an industry, or factors that affect a
particular company, such as management performance, financial leverage, and reduced demand for the company’s
products or services.
Floating Rate Loans Risk: The fund is permitted to invest up to
10% of the fund’s total assets in floating rate loans. Unlike publicly-traded common stocks which trade
on national exchanges, there is no central market or exchange for loans to trade. Loans trade in an over-the-counter
market, and confirmation and settlement, which are effected through standardized procedures and documentation,
may take significantly longer than seven days to complete. The secondary market for floating rate loans
also may be subject to irregular trading activity and wide bid/ask spreads. The lack of an active trading
market for certain floating rate loans may impair the ability of the fund to realize full value in the
event of the need to sell a floating rate loan and may make it difficult to value such loans. There may
be less readily available, reliable information about certain floating rate loans than is the case for
many other types of securities, and the fund’s portfolio managers may be required to rely primarily
on their own evaluation of a borrower’s credit quality rather than on any available independent sources.
The value of collateral, if any, securing a floating rate loan can decline, and may be insufficient to
meet the issuer’s obligations in the event of non-payment of scheduled interest or principal or may
be difficult to readily liquidate. In the event of the bankruptcy of a borrower, the fund could experience
delays or limitations imposed by bankruptcy or other insolvency laws with respect to its ability to realize
the benefits of the collateral securing a loan. The floating rate loans in which the fund invests typically
will be below investment grade quality and, like other below
29
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
investment grade securities, are inherently speculative. As a result, the risks
associated with such floating rate loans are similar to the risks of below investment grade securities,
although senior loans are typically senior and secured in contrast to other below investment grade securities,
which are often subordinated and unsecured. Floating rate loans may not be considered to be “securities”
for purposes of the anti-fraud protections of the federal securities laws, including those with respect
to the use of material non-public information, so that purchasers, such as the fund, may not have the
benefit of these protections.
(f) Dividends and distributions to Shareholders: Dividends and distributions
are recorded on the ex-dividend date. Dividends from net investment income are normally declared and
paid monthly. Dividends from net realized capital gains, if any, are normally declared and paid annually,
but the fund may make distributions on a more frequent basis to comply with the distribution requirements
of the Internal Revenue Code of 1986, as amended (the “Code”). To the extent that net realized capital
gains can be offset by capital loss carryovers, it is the policy of the fund not to distribute such gains.
Income and capital gain distributions are determined in accordance with income tax regulations, which
may differ from GAAP.
Shareholders will have their distributions reinvested in additional
shares of the fund, unless such shareholders elect to receive cash, at the lower of the market price
or net asset value per share (but not less than 95% of the market price). If market price is equal to
or exceeds net asset value, shares will be issued at net asset value. If net asset value exceeds market
price, Computershare Inc., the transfer agent, will buy fund shares in the open market and reinvest those
shares accordingly.
On September 27, 2022, the Board declared a cash dividend
of $.0185 per share from undistributed net investment income, payable on October 26, 2022 to shareholders
of record as of the close of business on October 12, 2022. The ex-dividend date was October 11, 2022.
(g)
Federal income taxes: It is the policy of the fund to continue to qualify as a regulated investment
company, if such qualification is in the best interests of its shareholders, by complying with the applicable
provisions of the Code, and to make distributions of taxable income and net realized capital gain sufficient
to relieve it from substantially all federal income and excise taxes.
As
of and during the period ended September 30, 2022, the fund did not have any liabilities for any uncertain
tax positions. The fund recognizes interest and penalties, if any, related to uncertain tax positions
as income
30
tax expense in the Statement of Operations. During the period ended September
30, 2022, the fund did not incur any interest or penalties.
Each tax year in the
three-year period ended March 31, 2022 remains subject to examination by the Internal Revenue Service
and state taxing authorities.
The fund is permitted to carry forward capital losses for
an unlimited period. Furthermore, capital loss carryovers retain their character as either short-term
or long-term capital losses.
The fund has an unused capital loss carryover of $46,089,766
available for federal income tax purposes to be applied against future net realized capital gains, if
any, realized subsequent to March 31, 2022. The fund has $13,420,003 of short-term capital losses and
$32,669,763 of long-term capital losses which can be carried forward for an unlimited period.
The
tax character of distributions paid to shareholders during the fiscal year ended March 31, 2022 was as
follows: ordinary income $17,889,926. The tax character of current year distributions will be determined
at the end of the current fiscal year.
(h) New accounting pronouncements: In March 2020, the
FASB issued Accounting Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the
Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”), and in January 2021, the
FASB issued Accounting Standards Update 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”),
which provides optional, temporary relief with respect to the financial reporting of contracts subject
to certain types of modifications due to the planned discontinuation of the LIBOR and other interbank
offered rates as of the end of 2021. The temporary relief provided by ASU 2020-04 and ASU 2021-01 is
effective for certain reference rate-related contract modifications that occur during the period from
March 12, 2020 through December 31, 2022 (“FASB Effective Date”). Management had evaluated the impact
of ASU 2020-04 and ASU 2021-01 on the fund’s investments, derivatives, debt and other contracts that
will undergo reference rate-related modifications as a result of the Reference Rate Reform. Management
will be adopting ASU 2020-04 and ASU 2021-01 on FASB Effective Date or if amended ASU 2020-04 new extended
FASB Effective Date, if any. Management will continue to work with other financial institutions and counterparties
to modify contracts as required by applicable regulation and within the regulatory deadlines.
31
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
NOTE
2—Borrowings:
The fund has a $125,000,0000 Committed Facility Agreement
with BNP Paribas Prime Brokerage International, Limited (the “BNPP Agreement”), which is an evergreen
facility with a lock-up term of 179 days. Under the terms of the BNPP Agreement, the fund may make “Borrowings”
on a collateralized basis with certain fund assets used as collateral, which amounted to $159,533,972
at September 30, 2022. The interest to be paid by the fund on such Borrowings is determined with reference
to the principal amount of each such Borrowings outstanding from time to time. Any commitment fees with
respect to the BNPP Agreement have been waived and there is no fee in connection with any renewal thereof.
During the period ended September 30, 2022, total fees pursuant to the BNPP Agreement
amounted to $1,147,348 of interest expense. These fees are included in Interest expense in the Statement
of Operations.
The average amount of Borrowings outstanding under the BNPP
Agreement during the period ended September 30, 2022 was $86,890,710 with a related weighted average
annualized interest rate of 2.63%.
NOTE 3—Management Fee and Other Transactions with Affiliates:
(a)
Pursuant
to a management and administration agreement with the Adviser, the management and administration fee
is computed at the annual rate of .75% of the value of the fund’s average weekly total assets minus
the sum of accrued liabilities (other than the aggregate indebtedness constituting financial leverage)
(the “Managed Assets”) and is payable monthly.
(b) The fund has an arrangement
with The Bank of New York Mellon (the “Custodian”), a subsidiary of BNY Mellon and an affiliate of
the Adviser, whereby the fund will receive interest income or be charged overdraft fees when cash balances
are maintained. For financial reporting purposes, the fund includes this interest income and overdraft
fees, if any, as interest income in the Statement of Operations.
The fund compensates
the Custodian under a custody agreement, for providing custodial services for the fund. These fees are
determined based on net assets and transaction activity. During the period ended September 30, 2022,
the
fund was charged $9,263 pursuant to the custody agreement.
During the period ended
September 30, 2022, the fund was charged $4,805 for services performed by the fund’s Chief Compliance
Officer and his staff. These fees are included in Chief Compliance Officer fees in the Statement of Operations.
32
The components of “Due to BNY Mellon Investment Adviser, Inc. and affiliates”
in the Statement of Assets and Liabilities consist of: management fee of $165,845, Custodian fees of
$7,500 and Chief Compliance Officer fees of $2,285.
(c) Each Board member also
serves as a Board member of other funds in the BNY Mellon Family of Funds complex. Annual retainer fees
and attendance fees are allocated to each fund based on net assets.
NOTE 4—Securities Transactions:
The aggregate amount of purchases and sales (including paydowns) of investment
securities, excluding short-term securities and forward contracts, during the period ended September
30, 2022, amounted to $126,668,820 and $142,866,831, respectively.
Floating Rate Loan Interests:
Floating rate instruments are loans and other securities with interest rates that adjust or “float”
periodically. Floating rate loans are made by banks and other financial institutions to their corporate
clients. The rates of interest on the loans adjust periodically by reference to a base lending rate,
plus a premium or credit spread. Floating rate loans reset on periodic set dates, typically 30 to 90
days, but not to exceed one year. The fund may invest in multiple series or tranches of a loan. A different
series or tranche may have varying terms and carry different associated risks.
Derivatives:
A derivative is a financial instrument whose performance is derived from the performance of another asset.
The fund enters into International Swaps and Derivatives Association, Inc. Master Agreements or similar
agreements (collectively, “Master Agreements”) with its over-the-counter (“OTC”) derivative contract
counterparties in order to, among other things, reduce its credit risk to counterparties. Master Agreements
include provisions for general obligations, representations, collateral and events of default or termination.
Under a Master Agreement, the fund may offset with the counterparty certain derivative financial instruments’
payables and/or receivables with collateral held and/or posted and create one single net payment in the
event of default or termination. The SEC recently adopted Rule 18f-4 under the Act, which, effective
August 18, 2022, regulates the use of derivatives transactions for certain funds registered under the
Act. The fund is deemed a “limited” derivatives user under the rule and is required to limit its
derivatives exposure so that the total notional value of derivatives does not exceed 10% of fund’s
net assets, and is subject to certain reporting requirements.
Each type of derivative
instrument that was held by the fund during the period ended September 30, 2022 is discussed below.
33
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Forward
Foreign Currency Exchange Contracts: The fund enters into forward contracts in order to hedge
its exposure to changes in foreign currency exchange rates on its foreign portfolio holdings, to settle
foreign currency transactions or as a part of its investment strategy. When executing forward contracts,
the fund is obligated to buy or sell a foreign currency at a specified rate on a certain date in the
future. With respect to sales of forward contracts, the fund incurs a loss if the value of the contract
increases between the date the forward contract is opened and the date the forward contract is closed.
The fund realizes a gain if the value of the contract decreases between those dates. With respect to
purchases of forward contracts, the fund incurs a loss if the value of the contract decreases between
the date the forward contract is opened and the date the forward contract is closed. The fund realizes
a gain if the value of the contract increases between those dates. Any realized or unrealized gains or
losses which occurred during the period are reflected in the Statement of Operations. The fund is exposed
to foreign currency risk as a result of changes in value of underlying financial instruments. The fund
is also exposed to credit risk associated with counterparty non-performance on these forward contracts,
which is generally limited to the unrealized gain on each open contract. This risk may be mitigated by
Master Agreements, if any, between the fund and the counterparty and the posting of collateral, if any,
by the counterparty to the fund to cover the fund’s exposure to the counterparty. Forward Contracts
open at September 30, 2022 are set forth in the Statement of Investments.
The
provisions of ASC Topic 210 “Disclosures about Offsetting Assets and Liabilities” require disclosure
on the offsetting of financial assets and liabilities. These disclosures are required for certain investments,
including derivative financial instruments subject to Master Agreements which are eligible for offsetting
in the Statement of Assets and Liabilities and require the fund to disclose both gross and net information
with respect to such investments. For financial reporting purposes, the fund does not offset derivative
assets and derivative liabilities that are subject to Master Agreements in the Statement of Assets and
Liabilities.
34
At September 30, 2022, derivative assets and liabilities (by type) on a gross
basis are as follows:
The following tables present derivative assets and liabilities net of amounts
available for offsetting under Master Agreements and net of related collateral received or pledged, if
any, as of September 30, 2022:
At September 30, 2022, accumulated net unrealized depreciation
on investments inclusive of derivative contracts was $38,017,377, consisting of $1,594,688 gross unrealized
appreciation and $39,612,065 gross unrealized depreciation.
At September 30, 2022, the cost of investments for federal income tax purposes
was substantially the same as the cost for financial reporting purposes (see the Statement of Investments).
Effective November 1, 2022, the Adviser, has engaged Alcentra
NY, LLC (“Alcentra NY”) to serve as the sub-adviser to the fund, pursuant to a sub-investment advisory
agreement between the Adviser and Alcentra NY (the “Sub-Advisory Agreement”). As sub-adviser to
the fund, Alcentra NY, subject to the Adviser’s supervision, provides day-to-day management of the
fund’s investments. Alcentra NY, located at 200 Park Avenue, 7th Floor, New York, New York 10166,
is a registered investment adviser specializing in sub-investment grade corporate credit investment strategies.
Alcentra NY was founded in 2002 and, together with Alcentra Limited, managed more than $34 billion in
assets as of September 30, 2022. Alcentra NY is a subsidiary of Franklin Resources, Inc., a global investment
management organization operating as Franklin Templeton (“Franklin Templeton”). Franklin Templeton,
through its specialist investment managers, offers boutique specialization on a global scale, bringing
extensive capabilities in fixed income, equity, alternatives, and multi-asset solutions.
There
is no increase in the advisory fee payable by the fund to the Adviser and the sub-advisory fee payable
to Alcentra NY under the Sub-Advisory Agreement is payable by the Adviser, not the fund.
At
a Special Meeting of Shareholders held on October 13, 2022, shareholders of the fund approved the Sub-Advisory
Agreement. For the results of the shareholder voting, see “Proxy Results (unaudited)”.
The fund will disclose its complete schedule of portfolio holdings, as reported
on a month-end basis, at www.im.bnymellon.com, under Investments. The information will be posted with
a one-month lag and will remain accessible until the fund files a report on Form N-PORT or Form N-CSR
for the period that includes the date as of which the information was current.