|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
19 |
|
Statement of operations (unaudited)
For the Six Months Ended October 31, 2022
|
|
|
|
|
|
|
Investment Income: |
|
|
|
|
Interest |
|
$ |
21,354,863 |
|
Dividends from affiliated investments |
|
|
19,380 |
|
Less: Foreign taxes withheld |
|
|
(53,203) |
|
Total Investment
Income |
|
|
21,321,040 |
|
|
|
Expenses: |
|
|
|
|
Interest expense (Notes 3 and 5) |
|
|
2,247,143 |
|
Investment management fee (Note 2) |
|
|
2,084,662 |
|
Legal fees |
|
|
110,878 |
|
Transfer agent fees (Note 9) |
|
|
95,702 |
|
Directors fees |
|
|
65,688 |
|
Audit and tax fees |
|
|
39,150 |
|
Commitment fees (Note 5) |
|
|
38,784 |
|
Shareholder reports |
|
|
15,730 |
|
Stock exchange listing fees |
|
|
14,710 |
|
Custody fees |
|
|
5,745 |
|
Fund accounting fees |
|
|
4,033 |
|
Insurance |
|
|
955 |
|
Miscellaneous expenses |
|
|
4,666 |
|
Total Expenses |
|
|
4,727,846 |
|
Less: Fee waivers and/or expense reimbursements (Note 2) |
|
|
(964) |
|
Net Expenses |
|
|
4,726,882 |
|
Net Investment Income |
|
|
16,594,158 |
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions (Notes 1, 3 and
4): |
|
Net Realized Gain (Loss) From: |
|
|
|
|
Investment transactions in unaffiliated securities |
|
|
(33,677,218) |
|
Futures contracts |
|
|
59,566 |
|
Forward foreign currency contracts |
|
|
830,012 |
|
Foreign currency transactions |
|
|
(119,332) |
|
Net Realized Loss |
|
|
(32,906,972) |
|
Change in Net Unrealized Appreciation (Depreciation) From: |
|
|
|
|
Investments in unaffiliated securities |
|
|
(23,229,152) |
|
Forward foreign currency contracts |
|
|
(242,596) |
|
Foreign currencies |
|
|
47,474 |
|
Change in Net Unrealized Appreciation
(Depreciation) |
|
|
(23,424,274) |
|
Net Loss on Investments, Futures Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions |
|
|
(56,331,246) |
|
Decrease in Net Assets From Operations |
|
$ |
(39,737,088) |
|
See Notes to Financial
Statements.
|
|
|
|
|
20 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Six Months Ended October 31, 2022 (unaudited)
and the Year Ended April 30, 2022 |
|
October 31 |
|
|
April 30 |
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
16,594,158 |
|
|
$ |
31,812,263 |
|
Net realized loss |
|
|
(32,906,972) |
|
|
|
(1,164,451) |
|
Change in net unrealized appreciation (depreciation) |
|
|
(23,424,274) |
|
|
|
(71,764,285) |
|
Decrease in Net Assets From
Operations |
|
|
(39,737,088) |
|
|
|
(41,116,473) |
|
|
|
|
Distributions to Shareholders From (Note 1): |
|
|
|
|
|
|
|
|
Total distributable earnings |
|
|
(19,096,246) |
|
|
|
(31,284,412) |
|
Return of capital |
|
|
|
|
|
|
(3,301,743) |
|
Decrease in Net Assets From Distributions
to Shareholders |
|
|
(19,096,246) |
|
|
|
(34,586,155) |
|
|
|
|
Fund Share Transactions: |
|
|
|
|
|
|
|
|
Net proceeds from sale of shares (6,001,836 and 0 shares issued, respectively) |
|
|
30,943,027 |
|
|
|
|
|
Reinvestment of distributions (64,637 and 262,774 shares issued, respectively) |
|
|
342,659 |
|
|
|
1,834,300 |
|
Increase in Net Assets From Fund Share
Transactions |
|
|
31,285,686 |
|
|
|
1,834,300 |
|
Decrease in Net
Assets |
|
|
(27,547,648) |
|
|
|
(73,868,328) |
|
|
|
|
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of period |
|
|
345,405,499 |
|
|
|
419,273,827 |
|
End of period |
|
$ |
317,857,851 |
|
|
$ |
345,405,499 |
|
|
Net of rights offering costs of $86,465 (Note 8). |
See Notes to Financial Statements.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
21 |
|
Statement of cash flows (unaudited)
For the Six Months Ended October 31, 2022
|
|
|
|
|
|
|
Increase (Decrease) in Cash: |
|
|
|
|
Cash Flows from Operating Activities: |
|
|
|
|
Net decrease in net assets resulting from operations |
|
$ |
(39,737,088) |
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash
provided (used) by operating activities: |
|
|
|
|
Purchases of portfolio securities |
|
|
(373,586,459) |
|
Sales of portfolio securities |
|
|
354,425,015 |
|
Net purchases, sales and maturities of short-term investments |
|
|
(768,511) |
|
Net amortization of premium (accretion of discount) |
|
|
(5,037,251) |
|
Decrease in receivable for securities sold |
|
|
3,889,940 |
|
Increase in interest receivable |
|
|
(642,384) |
|
Increase in prepaid expenses |
|
|
(311,468) |
|
Increase in dividends receivable from affiliated investments |
|
|
(7,061) |
|
Increase in payable for securities purchased |
|
|
2,270,050 |
|
Decrease in investment management fee payable |
|
|
(26,059) |
|
Decrease in Directors fees payable |
|
|
(1,558) |
|
Increase in interest expense payable |
|
|
422,055 |
|
Increase in accrued expenses |
|
|
37,499 |
|
Net realized loss on investments |
|
|
33,677,218 |
|
Change in net unrealized appreciation (depreciation) of investments and forward foreign
currency contracts |
|
|
23,471,748 |
|
Net Cash Used in Operating
Activities* |
|
|
(1,924,314) |
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
Distributions paid on common stock (net of distributions payable) |
|
|
(18,456,330) |
|
Proceeds from loan facility borrowings |
|
|
142,000,000 |
|
Repayment of loan facility borrowings |
|
|
(154,500,000) |
|
Increase in payable for open reverse repurchase agreements |
|
|
3,572,054 |
|
Proceeds from sale of shares |
|
|
30,943,027 |
|
Net Cash Provided by Financing
Activities |
|
|
3,558,751 |
|
Net Increase in Cash and Restricted Cash |
|
|
1,634,437 |
|
Cash and restricted cash at beginning of period |
|
|
3,423,280 |
|
Cash and restricted cash at end of period |
|
$ |
5,057,717 |
|
* |
Included in operating expenses is cash of $1,856,938 paid for interest and commitment fees on borrowings.
|
See Notes to Financial Statements.
|
|
|
|
|
22 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
The following table provides a reconciliation of cash (including foreign currency) and restricted cash reported within the
Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows. |
|
|
|
|
|
|
|
|
October 31, 2022 |
|
Cash |
|
$ |
3,209,616 |
|
Restricted cash |
|
|
1,848,101 |
|
Total cash and restricted cash shown in the Statement of Cash Flows |
|
$ |
5,057,717 |
|
Restricted cash consists of cash that has been segregated to cover the Funds collateral or margin obligations under derivative
contracts and for reverse repurchase agreements. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.
|
|
|
|
|
Non-Cash Financing Activities: |
|
|
|
|
Proceeds from reinvestment of distributions |
|
$ |
342,659 |
|
See Notes to Financial
Statements.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
23 |
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended
April 30, unless otherwise noted: |
|
|
|
20221,2 |
|
|
20221 |
|
|
20211 |
|
|
20201 |
|
|
20191 |
|
|
20181 |
|
Net asset value, beginning of period |
|
$ |
5.86 |
|
|
$ |
7.15 |
|
|
$ |
6.19 |
|
|
$ |
7.31 |
|
|
$ |
7.39 |
|
|
$ |
7.78 |
|
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
0.26 |
|
|
|
0.54 |
|
|
|
0.51 |
|
|
|
0.55 |
|
|
|
0.52 |
|
|
|
0.56 |
|
Net realized and unrealized gain (loss) |
|
|
(0.89) |
|
|
|
(1.24) |
|
|
|
1.03 |
|
|
|
(1.11) |
|
|
|
(0.06) |
|
|
|
(0.37) |
|
Total income (loss) from
operations |
|
|
(0.63) |
|
|
|
(0.70) |
|
|
|
1.54 |
|
|
|
(0.56) |
|
|
|
0.46 |
|
|
|
0.19 |
|
|
|
|
|
|
|
|
Less distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
(0.29) |
3 |
|
|
(0.53) |
|
|
|
(0.46) |
|
|
|
(0.48) |
|
|
|
(0.50) |
|
|
|
(0.57) |
|
Return of capital |
|
|
|
|
|
|
(0.06) |
|
|
|
(0.13) |
|
|
|
(0.09) |
|
|
|
(0.05) |
|
|
|
(0.01) |
|
Total
distributions |
|
|
(0.29) |
|
|
|
(0.59) |
|
|
|
(0.59) |
|
|
|
(0.57) |
|
|
|
(0.55) |
|
|
|
(0.58) |
|
Anti-dilutive impact of repurchase plan |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01 |
4 |
|
|
0.01 |
4 |
|
|
|
|
Dilutive impact of rights offering |
|
|
(0.05) |
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive impact of tender offer |
|
|
|
|
|
|
|
|
|
|
0.01 |
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period |
|
$ |
4.89 |
|
|
$ |
5.86 |
|
|
$ |
7.15 |
|
|
$ |
6.19 |
|
|
$ |
7.31 |
|
|
$ |
7.39 |
|
Market price, end of period |
|
$ |
4.56 |
|
|
$ |
5.38 |
|
|
$ |
7.09 |
|
|
$ |
5.51 |
|
|
$ |
6.69 |
|
|
$ |
6.55 |
|
Total return, based on NAV7,8 |
|
|
(11.68) |
% |
|
|
(10.66) |
% |
|
|
25.68 |
% |
|
|
(8.11) |
% |
|
|
6.77 |
% |
|
|
2.41 |
% |
Total return, based on Market Price9 |
|
|
(10.18) |
% |
|
|
(17.20) |
% |
|
|
40.48 |
% |
|
|
(10.02) |
% |
|
|
11.29 |
% |
|
|
(4.15) |
% |
|
|
|
|
|
|
|
Net assets, end of period (millions) |
|
$ |
318 |
|
|
$ |
345 |
|
|
$ |
419 |
|
|
$ |
521 |
|
|
$ |
622 |
|
|
$ |
637 |
|
|
|
|
|
|
|
|
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses |
|
|
2.75 |
%10 |
|
|
1.66 |
% |
|
|
1.59 |
% |
|
|
2.57 |
%11 |
|
|
2.47 |
% |
|
|
1.97 |
% |
Net expenses12 |
|
|
2.75 |
10,13 |
|
|
1.66 |
13 |
|
|
1.59 |
13 |
|
|
2.55 |
11,13 |
|
|
2.45 |
13 |
|
|
1.97 |
|
Net investment income |
|
|
9.65 |
10 |
|
|
7.87 |
|
|
|
7.37 |
|
|
|
7.76 |
|
|
|
7.31 |
|
|
|
7.26 |
|
Portfolio turnover rate |
|
|
71 |
% |
|
|
55 |
% |
|
|
50 |
% |
|
|
66 |
% |
|
|
105 |
% |
|
|
91 |
% |
See Notes to Financial
Statements.
|
|
|
|
|
24 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended
April 30, unless otherwise noted: |
|
|
|
20221,2 |
|
|
20221 |
|
|
20211 |
|
|
20201 |
|
|
20191 |
|
|
20181 |
|
|
|
|
|
|
|
|
Supplemental data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Outstanding, End of Period (000s) |
|
$ |
142,000 |
|
|
$ |
154,500 |
|
|
$ |
158,000 |
|
|
$ |
208,000 |
|
|
$ |
246,500 |
|
|
$ |
235,000 |
|
Asset Coverage Ratio for Loan
Outstanding14 |
|
|
324 |
% |
|
|
324 |
% |
|
|
365 |
% |
|
|
351 |
% |
|
|
352 |
% |
|
|
371 |
% |
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding14 |
|
$ |
3,238 |
|
|
$ |
3,236 |
|
|
$ |
3,654 |
|
|
$ |
3,506 |
|
|
$ |
3,524 |
|
|
$ |
3,710 |
|
Weighted Average Loan (000s) |
|
$ |
142,128 |
|
|
$ |
155,075 |
|
|
$ |
178,800 |
|
|
$ |
241,971 |
|
|
$ |
242,889 |
|
|
$ |
239,548 |
|
Weighted Average Interest Rate on Loan |
|
|
2.62 |
% |
|
|
0.89 |
% |
|
|
0.86 |
% |
|
|
2.58 |
% |
|
|
3.08 |
% |
|
|
2.17 |
% |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
For the six months ended October 31, 2022 (unaudited). |
3 |
The actual source of the Funds current fiscal year distributions may be from net investment income, return of
capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. |
4 |
The repurchase plan was completed at an average repurchase price of $4.91 for 917,344 shares and $4,506,248 for the year
ended April 30, 2020 and $5.98 for 1,047,640 shares and $6,268,230 for the year ended April 30, 2019. |
5 |
The rights offering was completed at a price of $5.16 for 6,001,836 shares and $30,943,027 for the period ended
October 31, 2022. |
6 |
The tender offer was completed at a price of $7.01 for 25,577,060 shares and $179,295,192 for the year ended
April 30, 2021. |
7 |
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the
absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
8 |
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future
results. Total returns for periods of less than one year are not annualized. |
9 |
The total return calculation assumes that distributions are reinvested in accordance with the Funds dividend
reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
11 |
Included in the expense ratios are certain non-recurring legal and transfer agent
fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 2.37% and 2.35%, respectively. |
12 |
The manager has agreed to waive the Funds management fee to an extent sufficient to offset the net management fee
payable in connection with any investment in an affiliated money market fund. |
13 |
Reflects fee waivers and/or expense reimbursements. |
14 |
Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the
end of the period. |
See Notes to
Financial Statements.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
25 |
|
Notes to financial statements (unaudited)
1. Organization and significant accounting policies
Western Asset High Income Fund II Inc. (the Fund) was incorporated in Maryland and is registered as a diversified,
closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund seeks to maximize current income by investing at least 80% of its net assets,
plus any borrowings for investment purposes, in high-yield debt securities. As a secondary objective, the Fund seeks capital appreciation to the extent consistent with its objective of seeking to maximize current income.
The Fund follows the accounting and reporting guidance in Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946,
Financial Services - Investment Companies (ASC 946). The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (GAAP),
including, but not limited to, ASC 946. Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment,
financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which
may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party
pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest
rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each
fund on the day of valuation. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last
reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates
as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the
manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily
available, 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, but before the Fund calculates its net asset value, the Fund values
these securities as determined in accordance with procedures approved by the Funds Board of Directors.
Pursuant to policies adopted by the Board of
Directors, the Funds manager has been designated as the valuation designee and is responsible for the oversight of the daily
|
|
|
|
|
26 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
valuation process. The Funds manager is
assisted by the Global Fund Valuation Committee (the Valuation Committee). The Valuation Committee is responsible for making fair value determinations, evaluating the effectiveness of the Funds pricing policies, and reporting to
the Funds manager and the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing
vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it
deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis;
book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances.
Examples of possible factors include, but are not limited to, the type of security; the issuers financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time
of purchase; analysts research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price
and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For
each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the
results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure
fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions
involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP
establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. 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 Funds own assumptions in determining the fair value of
investments) |
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
27 |
|
Notes to financial statements
(unaudited) (contd)
The inputs or methodologies used to value securities are not necessarily an indication of the risk
associated with investing in those securities.
The following is a summary of the inputs used in valuing the Funds assets and liabilities carried at fair
value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
Description |
|
Quoted Prices
(Level 1) |
|
|
Other Significant
Observable Inputs (Level 2) |
|
|
Significant
Unobservable Inputs (Level 3) |
|
|
Total |
|
Long-Term Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds & Notes |
|
|
|
|
|
$ |
409,941,928 |
|
|
|
|
|
|
$ |
409,941,928 |
|
Sovereign Bonds |
|
|
|
|
|
|
31,081,450 |
|
|
|
|
|
|
|
31,081,450 |
|
U.S. Government & Agency Obligations |
|
|
|
|
|
|
24,821,515 |
|
|
|
|
|
|
|
24,821,515 |
|
Convertible Bonds & Notes |
|
|
|
|
|
|
8,634,687 |
|
|
|
|
|
|
|
8,634,687 |
|
Senior Loans |
|
|
|
|
|
|
1,465,312 |
|
|
|
|
|
|
|
1,465,312 |
|
Warrants |
|
$ |
5,411 |
|
|
|
|
|
|
|
|
|
|
|
5,411 |
|
Common Stocks |
|
|
|
|
|
|
|
|
|
$ |
0 |
* |
|
|
0 |
* |
Total Long-Term Investments |
|
|
5,411 |
|
|
|
475,944,892 |
|
|
|
0 |
* |
|
|
475,950,303 |
|
Short-Term Investments |
|
|
7,270,168 |
|
|
|
|
|
|
|
|
|
|
|
7,270,168 |
|
Total Investments |
|
$ |
7,275,579 |
|
|
$ |
475,944,892 |
|
|
$ |
0 |
* |
|
$ |
483,220,471 |
|
Other Financial Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts |
|
|
|
|
|
$ |
54,960 |
|
|
|
|
|
|
$ |
54,960 |
|
Total |
|
$ |
7,275,579 |
|
|
$ |
475,999,852 |
|
|
$ |
0 |
* |
|
$ |
483,275,431 |
|
|
LIABILITIES |
|
Description |
|
Quoted Prices (Level 1) |
|
|
Other Significant
Observable Inputs (Level 2) |
|
|
Significant Unobservable
Inputs (Level 3) |
|
|
Total |
|
Other Financial Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts |
|
|
|
|
|
$ |
44,695 |
|
|
|
|
|
|
$ |
44,695 |
|
|
See Schedule of Investments for additional detailed categorizations. |
* |
Amount represents less than $1. |
|
Reflects the unrealized appreciation (depreciation) of the instruments. |
(b) Futures contracts. The Fund uses futures contracts generally to gain
exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a
specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain
percentage of the contract amount. This is known as the initial margin and subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuation in the
value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily,
|
|
|
|
|
28 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
but is recorded as a net variation margin payable or
receivable. The daily changes in contract value are recorded as unrealized appreciation or depreciation in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund
may not be able to enter into a closing transaction because of an illiquid secondary market.
(c) Forward foreign
currency contracts. The Fund enters into a forward foreign currency contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated
securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a
future date. The contract is marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency
contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the
value of the contract at the time it is closed.
Non-deliverable forward foreign currency exchange contracts are
settled with the counterparty in cash without the delivery of foreign currency.
Forward foreign currency contracts involve elements of market risk in excess of the
amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts
from the potential inability of the counterparties to meet the terms of their contracts.
(d) Loan participations.
The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Funds investment in any such loan may be in the form of a participation in or an
assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower.
In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.
(e) Reverse repurchase agreements. The Fund may enter into reverse
repurchase agreements. Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed upon time and price. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Funds use of the proceeds of the agreement may be restricted pending a determination by the counterparty, or its trustee or
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
29 |
|
Notes to financial statements
(unaudited) (contd)
receiver, whether to enforce the Funds obligation to repurchase the securities. In entering
into reverse repurchase agreements, the Fund will pledge cash, U.S. government securities or other liquid debt obligations at least equal in value to its obligations with respect to reverse repurchase agreements or will take other actions permitted
by law to cover its obligations. If the market value of the collateral declines during the period, the Fund may be required to post additional collateral to cover its obligation. Cash collateral that has been pledged to cover obligations of the Fund
under reverse repurchase agreements, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral are noted in the Schedule of Investments. Interest payments made on reverse repurchase agreements
are recognized as a component of Interest expense on the Statement of Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest
income to the Fund.
(f) Securities traded on a when-issued and delayed delivery basis. The Fund may trade securities on a when-issued or delayed delivery basis. In when-issued and delayed delivery transactions, the securities are purchased or sold by the Fund with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction.
Purchasing such
securities involves risk of loss if the value of the securities declines prior to settlement. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(g) Cash flow information. The Fund invests in securities and distributes
dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statements of Changes in Net Assets and additional information on cash
receipts and cash payments is presented in the Statement of Cash Flows.
(h) Foreign currency translation.
Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and
sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising
from changes in 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, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the
difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Funds books and the U.S. dollar equivalent of the amounts actually
|
|
|
|
|
30 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
received or paid. Net unrealized foreign exchange
gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a
result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(i) Credit and market risk. The Fund invests in high-yield and emerging
market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Funds investments in securities rated
below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid
secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Funds investments in
non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
(j) Foreign investment risks. The Funds investments in foreign
securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or may pay interest or dividends in foreign currencies, changes in the
relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation,
taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(k) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other
transactions where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may
increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Funds subadviser attempts to mitigate counterparty risk by
(i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the
counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose
the Fund to increased risk of loss.
With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or
clearinghouse, as counterparty to such instruments,
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
31 |
|
Notes to financial statements
(unaudited) (contd)
guarantees against a possible default. The clearinghouse stands between the buyer and the seller
of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event
of a default of the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc.
Master Agreement (ISDA Master Agreement) or similar agreement, with certain of its derivative counterparties that govern over-the-counter (OTC)
derivatives and provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include,
but are not limited to, a percentage decrease in the Funds net assets or net asset value per share over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the
positions and demand payment or require additional collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the
counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement,
the terms of the ISDA Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The
enforceability of the right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by
the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for OTC traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any,
will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of October 31, 2022, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $44,695. If a
contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties.
(l) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Paydown gains and losses on mortgage- and
asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. Foreign dividend income is recorded
on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use
of the specific identification method. To the extent any issuer
|
|
|
|
|
32 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
defaults or a credit event occurs that impacts the
issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(m) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The actual
source of the Funds current fiscal year distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal
year. Distributions of net realized gains, if any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income
tax regulations, which may differ from GAAP.
(n) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodians fees is paid indirectly by credits earned on the Funds cash on deposit with the bank.
(o) Federal and other taxes. It is the Funds policy to comply with
the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the Code), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized
gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Funds financial statements.
Management has analyzed the Funds tax positions taken on income tax returns for all open tax years and has concluded that as of April 30, 2022, no provision
for income tax is required in the Funds financial statements. The Funds federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by
the Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(p) Reclassification. GAAP requires
that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the Fund had no
reclassifications.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (LMPFA) is the Funds investment manager. Western Asset Management Company, LLC (Western Asset),
Western Asset Management Company Limited (Western Asset Limited) and Western Asset Management Company Pte. Ltd. (Western Asset Singapore) are the Funds subadvisers. LMPFA, Western Asset, Western Asset Limited and
Western Asset Singapore are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (Franklin Resources).
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
33 |
|
Notes to financial statements
(unaudited) (contd)
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an
investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of the Funds average weekly net assets plus the proceeds of any outstanding borrowings used for leverage and any proceeds from the issuance of preferred
stock.
LMPFA delegates to Western Asset the day-to-day portfolio management of the
Fund. Western Asset Limited and Western Asset Singapore provide certain subadvisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated debt securities.
Western Asset Limited and Western Asset Singapore do not receive any compensation from the Fund and are paid by Western Asset for their services to the Fund. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of
the net management fee it receives from the Fund. In turn, Western Asset pays Western Asset Limited and Western Asset Singapore a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that
Western Asset allocates to each such non-U.S. subadviser to manage.
During periods in which the Fund utilizes financial
leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Funds assets, including those investments purchased with leverage.
The manager has agreed to waive the Funds management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an
affiliated money market fund.
During the six months ended October 31, 2022, fees waived and/or expenses reimbursed amounted to $964, all of which was an
affiliated money market fund waiver.
All officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation
from the Fund.
3. Investments
During the
six months ended October 31, 2022, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S. Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Investments |
|
|
U.S. Government &
Agency Obligations |
|
Purchases |
|
$ |
339,130,559 |
|
|
$ |
34,455,900 |
|
Sales |
|
|
327,933,673 |
|
|
|
26,491,342 |
|
|
|
|
|
|
34 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
At October 31, 2022, the aggregate cost of
investments and the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
Gross
Unrealized Appreciation |
|
|
Gross
Unrealized Depreciation |
|
|
Net
Unrealized Appreciation (Depreciation) |
|
Securities |
|
$ |
503,263,474 |
|
|
$ |
13,662,015 |
|
|
$ |
(33,705,018) |
|
|
$ |
(20,043,003) |
|
Forward foreign currency contracts |
|
|
|
|
|
|
54,960 |
|
|
|
(44,695) |
|
|
|
10,265 |
|
Transactions in reverse repurchase agreements for the Fund during the six months ended October 31, 2022 were as follows:
|
|
|
|
|
Average Daily
Balance* |
|
Weighted Average
Interest Rate* |
|
Maximum Amount
Outstanding |
$32,402,285 |
|
2.083% |
|
$33,140,230 |
* |
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding. |
Interest rates on reverse repurchase agreements ranged from 0.450% to 3.750% during the six months ended October 31, 2022. Interest expense incurred on reverse
repurchase agreements totaled $345,039.
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and
Liabilities at October 31, 2022.
|
|
|
|
|
ASSET DERIVATIVES1 |
|
|
|
Foreign
Exchange Risk |
|
Forward foreign currency contracts |
|
$ |
54,960 |
|
|
LIABILITY DERIVATIVES1 |
|
|
|
Foreign
Exchange Risk |
|
Forward foreign currency contracts |
|
$ |
44,695 |
|
1 |
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability
derivatives is payables/net unrealized depreciation. |
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
35 |
|
Notes to financial statements
(unaudited) (contd)
The following tables provide information about the effect of derivatives and hedging activities on
the Funds Statement of Operations for the six months ended October 31, 2022. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides
additional information about the change in net unrealized appreciation (depreciation) resulting from the Funds derivatives and hedging activities during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF NET REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED |
|
|
|
Interest Rate Risk |
|
|
Foreign Exchange Risk |
|
|
Total |
|
Futures contracts |
|
$ |
59,566 |
|
|
|
|
|
|
$ |
59,566 |
|
Forward foreign currency contracts |
|
|
|
|
|
$ |
830,012 |
|
|
|
830,012 |
|
Total |
|
$ |
59,566 |
|
|
$ |
830,012 |
|
|
$ |
889,578 |
|
|
|
|
|
|
CHANGE IN NET UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED |
|
|
|
Foreign
Exchange Risk |
|
Forward foreign currency contracts |
|
$ |
(242,596) |
|
During the six months ended October 31, 2022, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
Average Market Value |
|
Futures contracts (to buy) |
|
$ |
9,689,364 |
|
Forward foreign currency contracts (to buy) |
|
|
3,146,468 |
|
Forward foreign currency contracts (to sell) |
|
|
10,811,349 |
|
|
At October 31, 2022, there were no open positions held in this derivative. |
The following table presents the Funds OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master Agreement and
net of the related collateral pledged (received) by the Fund as of October 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
Gross Assets Subject to Master Agreements1 |
|
|
Gross Liabilities Subject to Master Agreements1 |
|
|
Net Assets (Liabilities) Subject to Master Agreements |
|
|
Collateral Pledged (Received) |
|
|
Net Amount2 |
|
Goldman Sachs Group Inc. |
|
$ |
12,212 |
|
|
$ |
(42,417) |
|
|
$ |
(30,205) |
|
|
|
|
|
|
$ |
(30,205) |
|
JPMorgan Chase & Co. |
|
|
898 |
|
|
|
(2,278) |
|
|
|
(1,380) |
|
|
|
|
|
|
|
(1,380) |
|
Morgan Stanley & Co. Inc. |
|
|
41,850 |
|
|
|
|
|
|
|
41,850 |
|
|
|
|
|
|
|
41,850 |
|
Total |
|
$ |
54,960 |
|
|
$ |
(44,695) |
|
|
$ |
10,265 |
|
|
|
|
|
|
$ |
10,265 |
|
1 |
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in
the Statement of Assets and Liabilities. |
2 |
Represents the net amount receivable (payable) from (to) the counterparty in the event of default. |
|
|
|
|
|
36 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
5. Loan
Effective May 6, 2022, the Fund entered into a Margin Loan and Security Agreement (the BofA Credit Agreement) with the Bank of America, N.A.
(BofA). The BofA Credit Agreement allows the Fund to borrow up to an aggregate amount of $220,000,000 and renews daily for a 179-day term unless notice to the contrary is given to the Fund. The
Fund pays interest on borrowings calculated based on SOFR plus applicable margin. The Fund pays a commitment fee on the unutilized portion of the loan commitment amount at an annual rate of 0.15% except that the commitment fee is 0.10% when the
aggregate outstanding balance of the loan is equal to or greater than 50% of the maximum commitment amount. To the extent of the borrowing outstanding, the Fund is required to maintain collateral in a special custody account at the Funds
custodian on behalf of BofA. The BofA Credit Agreement contains customary covenants that, among other things, may limit the Funds ability to pay distributions in certain circumstances, incur additional debt, change certain material investment
policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the BofA Credit Agreement may be subject to early termination under
certain conditions and may contain other provisions that could limit the Funds ability to utilize borrowing under the agreement. Interest expense related to the Credit Agreement for the October 31, 2022 was $1,876,017. For the period
ended October 31, 2022, the Fund incurred commitment fees of $38,784. For the period ended October 31, 2022, based on the number of days during the reporting period that the Fund had a loan balance outstanding, the average daily loan
balance was $142,000,000 and the weighted average interest rate was 2.66%. At October 31, 2022, the Fund had $142,000,000 of borrowings outstanding.
Prior to
May 6, 2022, the Fund had a revolving credit agreement with Pershing LLC. The amended Credit Agreement allowed the Fund to borrow up to an aggregate amount of $300,000,000, subject to approval by BNYM, and renewed daily for a 180-day term unless notice to the contrary was given to the Fund. The Credit Agreement terminated on May 6, 2022. The Fund paid interest on borrowings calculated based on the Overnight Bank Funding Rate plus
applicable margin. The Overnight Bank Funding Rate means the Overnight Bank Funding Rate as reported by the New York Federal Reserve in the FR2420 Report of Selected Money Market Rates or any successor report or website. Prior to June 20, 2021,
the interest on the loan was calculated at a variable rate based on the one-month LIBOR plus any applicable margin. To the extent of the borrowing outstanding, the Fund was required to maintain collateral in a
special custody account at the Funds custodian on behalf of BNYM. The Funds Credit Agreement contained customary covenants that, among other things, limited the Funds ability to pay distributions in certain circumstances, incur
additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement
was subject to early termination under certain conditions and contained other provisions that could limit the Funds ability to utilize borrowing under the agreement. Interest expense related to this loan for the period through May 6, 2022
was $24,792. For the period through May 6, 2022, the Fund had an average daily loan balance outstanding of $146,700,000 and the weighted average interest rate was 1.22%.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
37 |
|
Notes to financial statements
(unaudited) (contd)
6. Distributions subsequent to October 31, 2022
The following distributions have been declared by the Funds Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
Record Date |
|
Payable Date |
|
|
Amount |
|
10/24/2022 |
|
|
11/1/2022 |
|
|
$ |
0.0490 |
|
11/22/2022 |
|
|
12/1/2022 |
|
|
$ |
0.0490 |
|
12/22/2022 |
|
|
12/30/2022 |
|
|
$ |
0.0490 |
|
1/24/2023 |
|
|
2/1/2023 |
|
|
$ |
0.0490 |
|
2/21/2023 |
|
|
3/1/2023 |
|
|
$ |
0.0490 |
|
7. Stock repurchase program
On November 16, 2015, the Fund announced that the Funds Board of Directors (the Board) had authorized the Fund to repurchase in the open market up
to approximately 10% of the Funds outstanding common stock when the Funds shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such
amounts as management reasonably believes may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the six months ended October 31, 2022 and the year
ended April 30, 2022, the Fund did not repurchase any shares.
Since the commencement of the stock repurchase program through October 31, 2022, the Fund
repurchased 1,964,984 shares or 2.28% of its common shares outstanding for a total amount of $10,774,478.
8. Capital shares
On March 29, 2022, the Fund announced that the Funds Board of Directors had approved a transferable rights offering (Rights) to common
shareholders of record (Record Date) as of April 8, 2022. The Rights offering expired on May 6, 2022. Each Record Date stockholder received one right for each outstanding whole common share held. The Rights holders were
entitled to purchase one additional share of common stock for every three Rights held (Primary Subscription) at the final subscription price (Subscription Price) per share. Stockholders who held fewer than three common shares
on Record Date were entitled to subscribe for one common share, and fractional shares were not issued. The Subscription Price was determined based upon a formula equal to 92.5% of the average of the last reported sales price per share of the
Funds common stock on the New York Stock Exchange (NYSE) on the expiration date and each of the four preceding trading days (Formula Price). If, however, the Formula Price was less than 90% of the net asset value per
share of common stock at the close of trading on the NYSE on the expiration date, then the Subscription Price was 90% of the Funds net asset value per share of common stock at the close of trading on the NYSE on that day. Record Date
stockholders who fully exercised their Rights in the Primary Subscription were eligible for an over-subscription privilege entitling those stockholders to subscribe for any additional shares of common stock not purchased pursuant to the Primary
Subscription, subject to certain limitations, allotment and the right of the Board of Directors to have eliminated the over-subscription privilege. Holders of Rights acquired in the secondary market were not able to participate in the
|
|
|
|
|
38 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
oversubscription privilege. The Rights offering
resulted in the issuance of 6,001,836 shares of common stock. The gross proceeds from the Rights offering were $31,029,492. The shares of common stock subscribed were issued on May 13, 2022. Costs incurred by the Fund in connection with the
Rights offering were recorded as a prepaid expense and amortized on a pro-rata basis as a reduction to the net proceeds on the Statement of Changes in Net Assets.
9. Rights offering
On March 29, 2022, the
Fund announced that the Funds Board of Directors had approved a transferable rights offering (Rights) to common shareholders of record (Record Date) as of April 8, 2022, to subscribe for additional shares of common
stock for up to an aggregate offering price of $175,000,000. The Rights offering expired on May 6, 2022. Each Record Date stockholder received one right for each outstanding whole common share held. The Rights holders were entitled to purchase
one additional share of common stock for every three Rights held (Primary Subscription) at the final subscription price (Subscription Price) per share. Stockholders who held fewer than three common shares on Record Date were
entitled to subscribe for one common share, and fractional shares were not issued. The Subscription Price was determined based upon a formula equal to 92.5% of the average of the last reported sales price per share of the Funds common stock on
the New York Stock Exchange (NYSE) on the expiration date and each of the four preceding trading days (Formula Price). If, however, the Formula Price was less than 90% of the net asset value per share of common stock at the
close of trading on the NYSE on the expiration date, then the Subscription Price was 90% of the Funds net asset value per share of common stock at the close of trading on the NYSE on that day. Record Date stockholders who fully exercised their
Rights in the Primary Subscription were eligible for an over-subscription privilege entitling those stockholders to subscribe for any additional shares of common stock not purchased pursuant to the Primary Subscription, subject to certain
limitations, allotment and the right of the Board of Directors to have eliminated the over-subscription privilege. Holders of Rights acquired in the secondary market were not able to participate in the over-subscription privilege. The Rights
offering resulted in the issuance of 6,001,836 shares of common stock. The gross proceeds from the Rights offering were $31,029,492. The Fund received the gross proceeds of the Rights offering less fees and expenses totaling $86,465. The shares of
common stock subscribed were issued on May 13, 2022.
10. Transactions with affiliated company
As defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is under common
ownership or control with the Fund. The following company was considered an affiliated company for
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
39 |
|
Notes to financial statements
(unaudited) (contd)
all or some portion of the six months ended October 31, 2022. The following transactions were
effected in such company for the six months ended October 31, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Value at April 30, 2022 |
|
|
Purchased |
|
|
Sold |
|
|
|
Cost |
|
|
Shares |
|
|
Proceeds |
|
|
Shares |
|
Western Asset Premier Institutional Government Reserves, Premium Shares |
|
$ |
7,012,556 |
|
|
$ |
85,040,540 |
|
|
|
85,040,540 |
|
|
$ |
84,782,928 |
|
|
|
84,782,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(contd) |
|
Realized Gain (Loss) |
|
|
Dividend Income |
|
|
Net Increase (Decrease) in Unrealized Appreciation (Depreciation) |
|
|
Affiliate
Value at October 31, 2022 |
|
Western Asset Premier Institutional Government Reserves, Premium Shares |
|
|
|
|
|
$ |
19,380 |
|
|
|
|
|
|
$ |
7,270,168 |
|
11. Deferred capital losses
As of April 30, 2022, the Fund had deferred capital losses of $202,802,047, which have no expiration date, that will be available to offset future taxable capital
gains.
12. Recent accounting pronouncement
In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04,
Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, with further amendments to
Topic 848. The amendments in the ASUs provide optional temporary accounting recognition and financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the LIBOR and other
interbank-offered based reference rates as of the end of 2021 and 2023. The ASUs are effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has
reviewed the requirements and believes the adoption of these ASUs will not have a material impact on the financial statements.
13. Other
matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as coronavirus) has
continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual
issuers, are not known. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively impact the Funds performance. In addition, the outbreak of
|
|
|
|
|
40 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
COVID-19,
and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
* * *
The Funds investments, payment obligations, and financing terms may be based on floating rates, such as
the London Interbank Offered Rate, or LIBOR, which is the offered rate for short-term Eurodollar deposits between major international banks. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that
it will cease the publication of the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday,
June 30, 2023. All other LIBOR settings, including the one-week and two-month USD LIBOR settings, have ceased publication as of January 1, 2022. There remains
uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Funds transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or
the Funds investments cannot yet be determined.
* * *
Russias military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict could
increase volatility and uncertainty in the financial markets and adversely affect regional and global economies. The United States and other countries have imposed broad-ranging economic sanctions on Russia and certain Russian individuals, banking
entities and corporations as a response to its invasion of Ukraine. The United States and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that support Russias military invasion. These
sanctions, as well as any other economic consequences related to the invasion, such as additional sanctions, boycotts or changes in consumer or purchaser preferences or cyberattacks on governments, companies or individuals, may further decrease the
value and liquidity of certain Russian securities and securities of issuers in other countries that are subject to economic sanctions related to the invasion. To the extent that the Fund has exposure to Russian investments or investments in
countries affected by the invasion, the Funds ability to price, buy, sell, receive or deliver such investments was impaired. The Fund could determine at any time that certain of the most affected securities have little or no value. In
addition, any exposure that the Fund may have to counterparties in Russia or in countries affected by the invasion could negatively impact the Funds portfolio. The extent and duration of Russias military actions and the repercussions of
such actions (including any retaliatory actions or countermeasures that may be taken by those subject to sanctions) are impossible to predict, but could result in significant market disruptions, including in the oil and natural gas markets, and may
negatively affect global supply chains, inflation and global growth. These and any related events could significantly impact the Funds performance and the value of an investment in the Fund, even beyond any direct exposure the Fund may have to
Russian issuers or issuers in other countries affected by the invasion. At October 31, 2022, the Fund had 1.06% of its net assets invested in securities with significant economic risk or exposure to Russia.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
|
|
|
|
41 |
|
Notes to financial statements
(unaudited) (contd)
14. Subsequent event
On December 9, 2022, the Fund filed a registration statement with the Securities and Exchange Commission authorizing the Fund to offer and sell shares of common
stock having an aggregate offering price of up to $143,970,507. Under the equity shelf offering program, the Fund, subject to market conditions, may raise additional equity capital from time to time in varying amounts and offering methods at a net
price at or above the Funds then-current net asset value per common share. Costs incurred by the Fund in connection with the shelf offering are recorded as a prepaid expense. These costs are amortized on a
pro-rata basis as shares are sold and are presented as a reduction to the net proceeds from sale of shares on the Statement of Changes in Net Assets. Any deferred charges remaining at the end of the life of
the shelf offering period will be expensed. As of December 9, 2022, no shares of common stock were sold.
|
|
|
|
|
42 |
|
|
|
Western Asset High Income Fund II Inc. 2022 Semi-Annual Report |
Board approval of management and subadvisory agreements (unaudited)
Background
The Investment Company Act of 1940,
as amended (the 1940 Act), requires that the Board of Directors (the Board) of Western Asset High Income Fund II Inc. (the Fund), including a majority of its members who are not considered to be interested
persons under the 1940 Act (the Independent Directors) voting separately, approve on an annual basis the continuation of the investment management agreement (the Management Agreement) between the Fund and the
Funds manager, Legg Mason Partners Fund Advisor, LLC (the Manager), and the sub-advisory agreements (individually, a Sub-Advisory
Agreement, and collectively, the Sub-Advisory Agreements) with the Managers affiliates, Western Asset Management Company, LLC (Western Asset), Western Asset Management
Company Limited (Western Asset London) and Western Asset Management Company Pte. Ltd. (Western Asset Singapore, and together with Western Asset and Western Asset London, collectively, the
Sub-Advisers), with respect to the Fund.
At an in-person meeting (the
Contract Renewal Meeting) held on May 10-11, 2022, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period. To assist in its consideration of the renewal of each of the Management Agreement and the Sub-Advisory Agreements, the Board received and considered extensive information (together with the information provided at the Contract Renewal Meeting, the Contract Renewal Information) about the
Manager and the Sub-Advisers, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds
in the same complex under the Boards purview (the Franklin Templeton/Legg Mason Closed-end Funds), certain portions of which are discussed below.
A presentation made by the Manager and the Sub-Advisers to the Board at the Contract Renewal Meeting in connection with the
Boards evaluation of each of the Management Agreement and the Sub-Advisory Agreements encompassed the Fund and other Franklin Templeton/Legg Mason Closed-end
Funds. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related to the respective services rendered by the Manager and the Sub-Advisers
to the Fund. The Boards evaluation took into account the information received throughout the year and also reflected the knowledge and experience gained as members of the Boards of the Fund and other Franklin Templeton/Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Advisers. The information received and considered by the Board (including its
various committees) in conjunction with the Contract Renewal Meeting and throughout the year was both written and oral. The contractual arrangements discussed below are the product of multiple years of review and negotiation and information received
and considered by the Board during each of those years.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. |
|
|
|
|
43 |
|
Board approval of management and subadvisory agreements (unaudited) (contd)
At a meeting held by videoconference on April 19, 2022, the Independent Directors, in preparation for the Contract Renewal Meeting, met in a private session with
their independent legal counsel to review the Contract Renewal Information regarding the Franklin Templeton/Legg Mason Closed-end Funds, including the Fund, received to date. No representatives of the Manager
or the Sub-Advisers participated in this meeting. Following the April 19, 2022 meeting, the Independent Directors submitted certain questions and requests for additional information to Fund management.
The Independent Directors also met in private sessions with their independent legal counsel to consider the Contract Renewal Information and Fund managements responses to the Independent Directors questions and requests for additional
information in advance of and during the Contract Renewal Meeting. The discussion below reflects all of these reviews.
The Manager provides the Fund with investment
advisory and administrative services pursuant to the Management Agreement and the Sub-Advisers together provide the Fund with investment sub-advisory services pursuant
to the Sub-Advisory Agreements. The discussion below covers both the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and
the investment sub-advisory functions being rendered by the Sub-Advisers pursuant to the Sub-Advisory Agreements.
Board Approval of Management Agreement and Sub-Advisory Agreements
The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Directors received a memorandum
discussing the legal standards for their consideration of the proposed continuation of the Management Agreement and the Sub-Advisory Agreements. The Independent Directors considered the Management Agreement
and each Sub-Advisory Agreement separately during the course of their review. In doing so, they noted the respective roles of the Manager and the Sub-Advisers in
providing services to the Fund.
In approving the continuation of the Management Agreement and Sub-Advisory Agreements, the
Board, including the Independent Directors, considered a variety of factors, including those factors discussed below. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the
continuation of the Management Agreement and the Sub-Advisory Agreements. Each Director may have attributed different weight to the various factors in evaluating the Management Agreement and the Sub-Advisory Agreements.
After considering all relevant factors and information, the Board, exercising its reasonable business
judgment, determined that the continuation of the Management Agreement and Sub-Advisory Agreements were in the best interests of the Funds shareholders and approved the continuation of each such
agreement for an additional one-year period.
|
|
|
|
|
44 |
|
|
|
Western Asset High Income Fund II Inc. |
Nature, Extent and Quality
of the Services under the Management Agreement and Sub-Advisory Agreements
The Board received and considered
Contract Renewal Information regarding the nature, extent, and quality of services provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and the
Sub-Advisory Agreements, respectively, during the past year. The Board noted information received at regular meetings throughout the year related to the services provided by the Manager in its management of
the Funds affairs and the Managers role in coordinating the activities of the Sub-Advisers and the Funds other service providers. The Board observed that the scope of services provided by the
Manager and the Sub-Advisers, and of the undertakings required of the Manager and Sub-Advisers in connection with those services, including maintaining and monitoring
their respective compliance programs as well as the Funds compliance programs, had expanded over time as a result of regulatory, market and other developments. The Board also noted that on a regular basis it received and reviewed information
from the Manager and the Sub-Advisers regarding the Funds compliance policies and procedures established pursuant to Rule 38a-1 under the 1940 Act. The Board also
considered the risks borne by the Manager, the Sub-Advisers and their respective affiliates on behalf of the Fund, including entrepreneurial, operational, reputational, litigation and regulatory risks, as well
as the Managers and the Sub-Advisers risk management processes.
The Board reviewed the qualifications,
backgrounds, and responsibilities of the Managers senior personnel and the Sub-Advisers portfolio management teams primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the financial resources of Franklin Resources, Inc., the parent organization
of the Manager and the Sub-Advisers. The Board recognized the importance of having a fund manager with significant resources.
The Board considered the division of responsibilities between the Manager and the Sub-Advisers under the Management Agreement and
the Sub-Advisory Agreements, respectively, including the Managers coordination and oversight of the services provided to the Fund by the Sub-Advisers and other
fund service providers and Western Assets coordination and oversight of the services provided to the Fund by Western Asset London and Western Asset Singapore. The Management Agreement permits the Manager to delegate certain of its
responsibilities, including its investment advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee.
In
reaching its determinations regarding continuation of the Management Agreement and the Sub-Advisory Agreements, the Board took into account that Fund stockholders, in pursuing their investment goals and
objectives, may have purchased their shares of the
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. |
|
|
|
|
45 |
|
Board approval of management and subadvisory agreements (unaudited) (contd)
Fund based upon the reputation and the investment style, philosophy and strategy of the Manager and the Sub-Advisers, as well as
the resources available to the Manager and the Sub-Advisers.
The Board concluded that, overall, the nature, extent, and
quality of the management and other services provided (and expected to be provided) to the Fund, under the Management Agreement and the Sub-Advisory Agreements were satisfactory.
Fund Performance
The Board received and
considered information regarding Fund performance, including information and analyses (the Broadridge Performance Information) for the Fund, as well as for a group of comparable funds (the Performance Universe) selected by
Broadridge Financial Solutions, Inc. (Broadridge), an independent third-party provider of investment company data. The Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with
the funds included in the Performance Universe. It was noted that while the Board found the Broadridge Performance Information generally useful, they recognized its limitations, including that the data may vary depending on the end date selected,
and that the results of the performance comparisons may vary depending on the selection of the peer group and its composition over time. The Board also noted that Board members had received and discussed with the Manager and the Sub-Advisers information throughout the year at periodic intervals comparing the Funds performance against its benchmark and against the Funds peers. In addition, the Board considered the Funds
performance in view of overall financial market conditions.
The Broadridge Performance Information comparing the Funds performance to that of its Performance
Universe, consisting of the Fund and all leveraged closed-end high yield funds, regardless of asset size, showed, among other data, that based on net asset value per share, the Funds performance was
below the median for the 1-, 5- and 10-year periods ended December 31, 2021, and was above the median for the 3-year period ended December 31, 2021. The Board noted the explanations from the Manager and the Sub-Advisers regarding the Funds relative performance versus the
Performance Universe for the various periods.
Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted
above, the Board concluded, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period
would be consistent with the interests of the Fund and its stockholders.
Management and
Sub-Advisory Fees and Expense Ratios
The Board reviewed and considered the contractual management fee (the
Contractual Management Fee) and the actual management fee (the Actual Management Fee)
|
|
|
|
|
46 |
|
|
|
Western Asset High Income Fund II Inc. |
payable by the Fund to the Manager under the
Management Agreement and the sub-advisory fees (the Sub-Advisory Fees) payable by the Manager to the Sub-Advisers
under the Sub-Advisory Agreements in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the
Sub-Advisers, respectively. The Board noted that the Sub-Advisory Fee payable to Western Asset under its Sub-Advisory Agreement
with the Manager is paid by the Manager, not the Fund, and, accordingly, that the retention of Western Asset does not increase the fees or expenses otherwise incurred by the Funds stockholders. Similarly, the Board noted that the Sub-Advisory Fees payable to Western Asset London and Western Asset Singapore under their Sub-Advisory Agreements with Western Asset are paid by Western Asset, not the Fund,
and, accordingly, that the retention of Western Asset London and Western Asset Singapore does not increase the fees or expenses otherwise incurred by the Funds stockholders.
In addition, the Board received and considered information and analyses prepared by Broadridge (the Broadridge Expense Information) comparing the Contractual
Management Fee and the Actual Management Fee and the Funds total actual expenses with those of funds in an expense group (the Expense Group), as well as a broader group of funds, each selected and provided by Broadridge. The
comparison was based upon the constituent funds latest fiscal years. It was noted that while the Board found the Broadridge Expense Information generally useful, they recognized its limitations, including that the data may vary depending on
the selection of the peer group.
The Broadridge Expense Information showed that the Funds Contractual Management Fee was below the median. The Broadridge
Expense Information also showed that the Funds Actual Management Fee was equal to the median compared on the basis of common share assets and was below the median compared on the basis of leveraged assets. The Broadridge Expense Information
also showed that the Funds actual total expenses were below the median on the basis of both common share assets and leveraged assets. The Board took into account managements discussion of the Funds expenses.
The Board also reviewed Contract Renewal Information regarding fees charged by the Manager and/or the Sub-Advisers to other U.S.
clients investing primarily in an asset class similar to that of the Fund, including, where applicable, institutional and separate accounts. The Manager reviewed with the Board the differences in services provided to these different types of
accounts, noting that the Fund is provided with certain administrative services, office facilities, and Fund officers, and that the Fund is subject not only to heightened regulatory requirements relative to institutional clients but also to
requirements for listing on the New York Stock Exchange, and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Board
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. |
|
|
|
|
47 |
|
Board approval of management and subadvisory agreements (unaudited) (contd)
considered the fee comparisons in view of the different services provided in managing these other types of clients and funds.
The Board considered the overall management fee, the fees of the Sub-Advisers and the amount of the management fee retained by
the Manager after payment of the subadvisory fees in each case in view of the services rendered for those amounts. The Board also received an analysis of complex-wide management fees provided by the Manager, which, among other things, set out a
framework of fees based on asset classes.
Taking all of the above into consideration, as well as the factors identified below, the Board determined that the
management fee and the Sub-Advisory Fees were reasonable in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Advisers to the Fund under the Management Agreement and the Sub-Advisory Agreements, respectively.
Manager Profitability
The Board, as part of the
Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Managers fiscal years ended September 30, 2021 and September 30, 2020. The Board also
received profitability information with respect to the Franklin Templeton/Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Managers revenue and cost allocation methodologies
used in preparing such profitability data. It was noted that the allocation methodologies had been reviewed by an outside consultant. The profitability to each of the Sub-Advisers was not considered to be a
material factor in the Boards considerations since the Sub-Advisory Fee is paid by the Manager in the case of Western Asset and by Western Asset in the case of Western Asset London and Western Asset
Singapore, not the Fund, although the Board noted the affiliation of the Manager with the Sub-Advisers. The profitability of the Manager and its affiliates was considered by the Board to be reasonable in view
of the nature, extent and quality of services provided to the Fund.
Economies of Scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Funds assets grow. The Board noted
that because the Fund is a closed-end fund it has limited ability to increase its assets. The Board determined that the management fee structure was appropriate under the circumstances. For similar reasons as
stated above with respect to the Sub-Advisers profitability and the costs of the Sub-Advisers provision of services, the Board did not consider the potential
for economies of scale in the Sub-Advisers management of the Fund to be a material factor in the Boards consideration of the Sub-Advisory Agreements.
|
|
|
|
|
48 |
|
|
|
Western Asset High Income Fund II Inc. |
Other Benefits to the
Manager and the Sub-Advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their relationship with the Fund, including the opportunity to offer additional products and services to the Funds shareholders. In view of the costs of
providing investment management and other services to the Fund and the ongoing commitment of the Manager and the Sub-Advisers to the Fund, the Board considered that the ancillary benefits that the Manager and
its affiliates, including the Sub-Advisers, were reasonable.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. |
|
|
|
|
49 |
|
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return
of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the Plan Agent), in additional shares of Common Stock under the Funds Dividend
Reinvestment Plan (the Plan). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust
Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading
day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of
(a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of
trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day
following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except
when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common
Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the
Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day
prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the Plan Agent
in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out)
by notifying the Plan Agent in writing at P.O. Box 43006, Providence, RI 02940-3078 or by calling the Plan Agent at
1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business
days prior to any dividend or distribution record date;
|
|
|
|
|
50 |
|
|
|
Western Asset High Income Fund II Inc. |
otherwise such withdrawal will be effective as soon
as practicable after the Plan Agents investment of the most recently declared dividend or distribution on the Common Stock.
Plan participants who sell their
shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for
reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions
will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for
lowering the average cost per share over time if the Funds net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors
will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of
Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund
for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan
Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at P.O. Box 43006, Providence, RI 02940-3078 or by calling the Plan Agent at 1-888-888-0151.
|
|
|
|
|
|
|
Western Asset High Income Fund II Inc. |
|
|
|
|
51 |
|
Western Asset
High Income Fund II Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson*
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen
Chief Compliance Officer
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia
Senior Vice President
Jeanne M. Kelly
Senior Vice President
Western Asset High Income Fund
II Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Western Asset Management Company, LLC
Western Asset Management Company
Limited
Western Asset Management Company Pte. Ltd.
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
P.O. Box 43006
Providence, RI 02940-3078
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett
LLP
900 G Street NW
Washington, DC 20001
New York Stock Exchange Symbol
HIX
* Mr. Hutchinson served as a Director until his passing on October 28, 2022.
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very
Important to the Legg Mason Funds
This Privacy and Security Notice (the Privacy Notice) addresses the Legg Mason Funds privacy and
data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include the Western Asset Money Market Funds sold by the Funds distributor, Franklin Distributors, LLC, as well as Legg
Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited
to:
|
|
Personal information included on applications or other forms; |
|
|
Account balances, transactions, and mutual fund holdings and positions; |
|
|
Bank account information, legal documents, and identity verification documentation; and |
|
|
Online account access user IDs, passwords, security challenge question responses. |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, unless you have authorized the
Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law.
The Funds may disclose information about you to:
|
|
Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business or
to comply with obligations to government regulators; |
|
|
Service providers, including the Funds affiliates, who assist the Funds as part of the ordinary course of business
(such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds behalf, including companies that may perform statistical analysis, market research and marketing services solely
for the Funds; |
|
|
Permit access to transfer, whether in the United States or countries outside of the United States to such Funds
employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
|
|
The Funds representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary
business, or to comply with obligations to government regulators; |
|
|
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
|
NOT PART OF THE SEMI-ANNUAL
REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
Except as otherwise permitted by applicable law, companies acting on the Funds behalf,
including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to
perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or
required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to
disclose your nonpublic personal information to third parties. While it is the Funds practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain
unchanged.
Keeping You Informed of the Funds Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time, they will
notify you promptly if this privacy policy changes.
The Funds Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds internal data
security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them,
and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented
to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is
incomplete, not accurate or not current, if you have questions about the Funds privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by
clicking on the Contact Us section of the Funds website at www.franklintempleton.com, or contact the Funds at
1-877-721-1926 for the Western Asset Money Market Funds or 1-888-777-0102 for the Legg Mason-sponsored closed-end funds.
Revised
October 2022
|
NOT PART OF THE SEMI-ANNUAL
REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is nonpublic personal information subject to federal law, residents of California may, in certain
circumstances, have additional rights under the California Consumer Privacy Act (CCPA). For example, if you are a broker, dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any other person(s)
or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal information (as defined
by the CCPA).
In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces
of personal information we have collected about you.
You also have the right to request the deletion of the personal information collected or maintained by the
Funds.
If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth
below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described
below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request
on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other
applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if
suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this Privacy Policy, the Legg
Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2022
|
NOT PART OF THE SEMI-ANNUAL
REPORT |
Western Asset High Income Fund II Inc.
Western Asset High Income Fund II Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market
prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first
and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Funds Forms N-PORT are available on the SECs website at www.sec.gov.
To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SECs website at www.sec.gov.
Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Fund may be found on Franklin Templetons website,
which can be accessed at www.franklintempleton.com. Any reference to Franklin Templetons website in this report is intended to allow investors public access to information regarding the Fund and does not, and is not intended to, incorporate
Franklin Templetons website in this report.
This report is transmitted to the shareholders of Western Asset High Income Fund II Inc. for their information.
This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare
Inc.
P.O. Box 43006
Providence, RI 02940-3078
WAS0022 12/22 SR22-4541