Notes to Financial Statements
June 30, 2022 (Unaudited)
(1) Significant Accounting and Other Policies
The New America High Income Fund, Inc. (the Fund) was organized as a corporation in the state of Maryland on November 19, 1987 and is registered with the Securities and Exchange Commission as a diversified, closed-end investment company under the Investment Company Act of 1940. The Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 "Financial Services Investment Companies". The Fund commenced operations on February 26, 1988. The investment objective of the Fund is to provide high current income while seeking to preserve stockholders' capital through investment in a professionally managed, diversified portfolio of "high yield" fixed-income securities.
The Fund invests primarily in fixed maturity corporate debt securities that are rated less than investment grade. Risk of loss upon default by the issuer is significantly greater with respect to such securities compared to investment grade securities because these securities are generally unsecured and are often subordinated to other creditors of the issuer and because these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as a recession, than are investment grade issuers. In some cases, the collection of principal and timely receipt of interest is dependent upon the issuer attaining improved operating results, selling assets or obtaining additional financing.
The Fund may focus its investments in certain industries, subjecting it to greater risk than a Fund that is more diversified. See the schedule of investments for information on individual securities as well as industry diversification and credit quality ratings.
The Fund's financial statements have been prepared in conformity with accounting principles generally accepted in the United States for investment companies that require the management of the Fund to, among other things, make estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The following is a summary of significant accounting policies consistently followed by the Fund, which are in conformity with those generally accepted in the investment company industry.
(a) Valuation of Investments—Except as otherwise described below, the Fund's investments are valued based on evaluated bid prices provided by an independent pricing service. Independent pricing services provide prices based primarily on quotations from dealers and brokers, market transactions, data accessed from quotations services, offering sheets obtained from dealers and various relationships among similar securities. Investments whose primary market is on an exchange are valued at the last sale price on the day of valuation. Short-term investments with original maturities of 60 days or less are stated at amortized cost, which approximates the fair value of such investments. Following procedures approved by the Board of Directors, investments for which market prices are not yet provided by an independent pricing service (primarily newly issued fixed-income corporate bonds and notes) shall be valued at the most recently quoted bid price provided by a principal market maker for the security. Other investments for which market quotations are not readily available are valued in good faith at fair value using methods approved by the Board of Directors. Fair value measurement is further discussed in section (f) of this footnote.
(b) Foreign Currency—Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at 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 on the respective dates of such transactions.
28
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
June 30, 2022 (Unaudited)
The Fund does not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transaction, and the difference between the amounts of dividends, interest and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates.
(c) Foreign Currency Forward Exchange Contracts—The Fund may enter into foreign currency forward exchange contracts to hedge against foreign currency exchange rate risks on its non-U.S. dollar denominated investment securities. When entering into a forward currency contract, the Fund agrees to receive or deliver a fixed quantity of foreign currency for an agreed upon price on an agreed future date. The Fund's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the statement of assets and liabilities. Realized and unrealized gains and losses are included in the statement of operations. These instruments involve market risk, credit risk or both kinds of risks, in excess of the amount recognized in the statement of assets and liabilities. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency and securities values and interest rates.
(d) Securities Transactions and Net Investment Income—Securities transactions are recorded on trade
date. Realized gains or losses on sales of securities are calculated on the identified cost basis. Interest income is accrued on a daily basis. Loan fee income is recorded when received. Discount on short-term investments is amortized to investment income. Premiums or discounts on corporate debt securities are amortized based on the interest method for financial reporting purposes. All income on original issue discount and step interest bonds is accrued based on the effective interest method. The Fund does not amortize market premiums or discounts for tax purposes. Dividend payments received in the form of additional securities are recorded on the ex-dividend date in an amount equal to the value of the security on such date.
(e) Federal Income Taxes—It is the Fund's policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders each year. Accordingly, no federal income tax provision is required.
(f) Fair Value Measurement—The Fund applies ASC 820 "Fair Value Measurements and Disclosures". This standard establishes the definition of fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements.
The three levels of the fair value hierarchy under ASC 820 are described below:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.
Level 2—Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
29
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
June 30, 2022 (Unaudited)
Level 3—Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund's own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
A description of the valuation techniques applied to the Fund's major asset and liability categories is as follows.
Debt securities (corporate, U.S. Treasury, convertible & bank debt). The fair value of debt securities is provided by independent pricing services using quotations from dealers and brokers, market transactions, data from quotations services, offering sheets and various relationships between securities. While most corporate bonds are categorized in level 2 of the fair value hierarchy, there may be instances where less observable inputs necessitate a level 3 categorization.
Equity securities (preferred and common stock). Equity securities for which the primary market is on an exchange will be valued at the last sale price on the day of valuation and are categorized in level 1 of the fair value hierarchy. Other equity securities traded in inactive markets or valued by independent pricing services using methods similar to debt securities are categorized in level 2. The fair value of equity securities in which observable inputs are unavailable are categorized in level 3.
Short-term investments. Short-term investments are valued using amortized cost, which approximates fair value. To the extent the inputs are observable and timely the values would be categorized in level 2 of the fair value hierarchy.
Forwards are valued at the unrealized gain or loss on the contract as measured by the difference between the forward exchange rates at the date of entry into the contract and the forward rates at the reporting date. Forwards are categorized in level 2 of the fair value hierarchy.
The following is a summary of the inputs used as of June 30, 2022 in valuing the Fund's investments:
|
|
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total Value |
|
|
|
|
Quoted
Prices
(000's) |
|
Significant
Observable
Inputs
(000's) |
|
Significant
Unobservable
Inputs
(000's) |
|
(000's) |
|
|
Investments |
|
|
Debt Securities* |
|
$ |
— |
|
|
$ |
252,632 |
|
|
$ |
— |
|
|
$ |
252,632 |
|
|
|
Preferred Stock |
|
|
Finance |
|
|
— |
|
|
|
314 |
|
|
|
— |
|
|
|
314 |
|
|
|
Healthcare |
|
|
539 |
|
|
|
— |
|
|
|
— |
|
|
|
539 |
|
|
|
Manufacturing |
|
|
918 |
|
|
|
— |
|
|
|
— |
|
|
|
918 |
|
|
|
Utilities |
|
|
1,104 |
|
|
|
577 |
|
|
|
— |
|
|
|
1,681 |
|
|
|
Common Stock |
|
|
Healthcare |
|
|
736 |
|
|
|
— |
|
|
|
— |
|
|
|
736 |
|
|
|
Total Investments |
|
$ |
3,297 |
|
|
$ |
253,523 |
|
|
$ |
— |
|
|
$ |
256,820 |
|
|
Forward Currency
Exchange
Contracts |
|
$ |
— |
|
|
$ |
7 |
|
|
$ |
— |
|
|
$ |
7 |
|
|
* Debt Securities — Type of debt and industries are shown on the Schedule of Investments.
30
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
June 30, 2022 (Unaudited)
The Fund had no Level 3 securities at June 30, 2022.
The following is a reconciliation of Fund investments using Level 3 inputs for the period:
|
|
|
Securities
(000's) |
|
|
Balance, December 31, 2021 |
|
$ |
3,649 |
|
|
|
Transfers out |
|
|
(3,238 |
) |
|
|
Change in unrealized depreciation |
|
|
(411 |
) |
|
|
Balance, June 30, 2022 |
|
$ |
— |
|
|
(2) Tax Matters and Distributions
At June 30, 2022, the total cost of securities (including temporary cash investments) for federal income tax purposes was approximately $296,905,000. Aggregate gross unrealized gain on securities in which there was an excess of value over tax cost was approximately $1,481,000. Aggregate gross unrealized loss on securities in which there was an excess of tax cost over value was approximately $41,565,000. Net unrealized loss on investments for tax purposes at June 30, 2022 was approximately $40,084,000.
At December 31, 2021, the Fund had approximate capital loss carryforwards available to offset future capital gains, if any, to the extent provided by regulations:
|
Carryover Available |
|
Character |
|
Expiration Date |
|
|
$ |
4,911,000 |
|
|
Short-term |
|
|
None |
|
|
|
|
17,369,000 |
|
|
Long-term |
|
|
None |
|
|
|
$ |
22,280,000 |
|
|
|
|
|
|
|
|
|
|
As a result of the passage of the Regulated Investment Company Modernization Act of 2010 (the "Act"), losses incurred in the 2011 fiscal year and beyond retain their character as short-term or long-term, have no expiration date and are utilized before the capital losses incurred prior to the enactment of the Act. At December 31, 2021, the Fund had total non-expiring capital loss carryforwards of $22,280,000.
It is the policy of the Fund to reduce future distributions of realized gains to shareholders to the extent of the unexpired capital loss carryforwards.
The tax character of distributions paid to common shareholders in 2021 and 2020 of approximately $15,834,000 and $15,248,000, respectively, was from ordinary income.
As of December 31, 2021, the components of distributable earnings on a tax basis were approximately:
|
Unrealized Gain on Investments |
|
$ |
10,780,000 |
|
|
|
Capital Loss Carryforwards |
|
|
(22,280,000 |
) |
|
|
Other Accumulated Losses |
|
|
— |
|
|
|
Undistributed Net Investment Income |
|
|
215,000 |
|
|
|
|
|
$ |
(11,285,000 |
) |
|
The difference between components of distributable earnings on a tax basis and amounts in accordance with generally accepted accounting principals ("GAAP") are primarily due to market discount and premium adjustments, wash sales, and the recognition of unrealized gain on currency forward contracts. GAAP also requires components related to permanent differences of net assets to be classified differently for financial reporting purposes than for tax reporting purposes. These differences have no net effect on the net asset value of the Fund. As of December 31, 2021, there were no financial reporting reclassifications recorded to the net asset accounts.
As of December 31, 2021, the Fund had no post-October losses which are deferred until fiscal year 2022 for tax purposes. The other accumulated losses incurred after October 31, and within the taxable year are deemed to arise on the first day of the Fund's next taxable year. Distributions on common stock are declared based upon annual projections of the Fund's investment company taxable income. The Fund records all dividends and distributions payable to shareholders on the ex-dividend date and declares and distributes income dividends monthly.
The Fund is required to amortize market discounts and premiums for financial reporting purposes. This results in additional interest income in some years and decreased interest income in others for financial reporting purposes only. The Fund does not amortize market
31
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
June 30, 2022 (Unaudited)
discounts or premiums for tax purposes. Therefore, the additional or decreased interest income for financial reporting purposes does not result in additional or decreased common stock dividend income.
The Fund recognizes the tax benefits of uncertain tax positions only where the position is "more likely than not" to be sustained assuming examination by tax authorities. Management has analyzed the Fund's tax positions, and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years 2018-2020, or expected to be taken in the Fund's 2021 tax returns. The Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
(3) Investment Advisory Agreement
T. Rowe Price Associates, Inc. (T. Rowe Price), the Fund's Investment Advisor, earned approximately $509,000 in management fees during the six months ended June 30, 2022. Management fees paid by the Fund to T. Rowe Price were calculated at 0.50% on the first $50,000,000 of the Fund's average weekly net assets, 0.40% on the next $50 million and 0.30% on average weekly net assets in excess of $100 million. T. Rowe Price's fee is calculated based on assets attributable to the Fund's common stock and amounts borrowed under the credit facility. At June 30, 2022, the fee payable to T. Rowe Price was approximately $80,000, as shown on the accompanying statement of assets and liabilities.
(4) Bank Credit Agreement
The Fund has a credit agreement with The Bank of Nova Scotia pursuant to which the Fund may borrow
up to an aggregate amount of $100,000,000. On June 30, 2022 the total amount outstanding on the loan was $84,000,000. The term of the facility has been extended to October 2022. Amounts borrowed under the credit facility bear interest at an adjustable rate based on a margin above LIBOR. The rate paid on these borrowings is approximately 2.47% and will be in effect until July 27, 2022 at which time the rate will be reset. For the six months ended June 30, 2022 the weighted average rate on the loan was approximately 1.34% and the maximum amount borrowed during the period was $84,000,000.
The Fund pays a commitment fee to The Bank of Nova Scotia at a rate of .15% per annum for any unused portion of borrowings not to exceed $100,000,000. For the six months ended June 30, 2022 the Fund paid approximately $12,000 for this commitment.
The Fund has granted to The Bank of Nova Scotia a security interest in the investments and other assets of the Fund in accordance with the Credit Agreement.
(5) Purchases and Sales of Securities
Purchases and proceeds of sales or maturities of long-term securities during the six months ended June 30, 2022 were approximately:
|
Cost of purchases |
|
$ |
70,486,000 |
|
|
|
Proceeds of sales or maturities |
|
$ |
71,479,000 |
|
|
(6) Related Party Transactions
The Fund paid approximately $100,000 during the six months ended June 30, 2022 to the president of the Fund for her services as an officer and employee of the Fund.
32
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
June 30, 2022 (Unaudited)
(7) Derivative Contracts (Currency Amounts in Thousands)
Forward Currency Exchange Contracts—As of June 30, 2022 the Fund had forward currency exchange contracts outstanding as follows:
|
Counterparty |
|
Settlement
Date |
|
Receive
(Deliver) |
|
Asset |
|
Liability |
|
Unrealized
Appreciation
(Depreciation) |
|
|
HSBC Bank |
|
7/29/22 |
|
EUR |
(843 |
) |
|
$ |
889 |
|
|
$ |
885 |
|
|
$ |
4 |
|
|
|
HSBC Bank |
|
7/29/22 |
|
EUR |
45 |
|
|
|
47 |
|
|
|
47 |
|
|
|
— |
|
|
|
JP Morgan |
|
7/29/22 |
|
GBP |
(825 |
) |
|
|
1,008 |
|
|
|
1,005 |
|
|
|
3 |
|
|
|
Net unrealized gain on open forward currency exchange contracts |
|
$ |
7 |
|
|
Fair Value of Derivative Instruments—The fair value of derivative instruments as of June 30, 2022 was as follows:
|
|
|
Asset Derivatives
June 30, 2022 |
|
|
|
Statement of Assets
and Liabilities Location |
|
Fair
Value |
|
Forward currency contracts
|
|
Unrealized gain
on forward currency
exchange contracts |
|
$ |
7 |
|
|
The effect of derivative instruments that are included on the Statement of Operations for the six months ended June 30, 2022 was as follows:
|
Amount of Realized Gain on Derivatives |
|
|
Forward currency exchange contracts |
|
$ |
152 |
|
|
|
Change in Unrealized Appreciation on Derivatives |
|
|
Forward currency exchange contracts |
|
$ |
26 |
|
|
(8) LIBOR Transition
In March 2020, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848)—Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The amendments in the ASU provides optional temporary 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. The ASU is 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 this ASU will not have a material impact on the consolidated financial statements.
(9) Covid-19 Risks
In early 2020, an outbreak of a novel strain of coronavirus (COVID-19) emerged globally. This coronavirus has resulted in closing international borders, enhanced health screenings, healthcare service preparation and delivery, quarantines, cancellations, disruptions to supply chains and customer activity, as well as general public concern and uncertainty. The impact of this outbreak has negatively affected the worldwide economy, as well as the economies of individual countries, the financial health of individual companies and the market in general in significant and unforeseen ways. The future impact of COVID-19 is currently unknown, and it may exacerbate other risks that apply to the Fund, including political, social and economic risks. Any such impact could adversely affect the Fund's performance, the performance of the securities in which the Fund Invests and may lead to losses on your investment in the Fund. The ultimate impact of COVID-19 on the financial performance of the Fund's investments is not reasonably estimable at this time.
33
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
June 30, 2022 (Unaudited)
(10) Subsequent Events
The Fund has evaluated the need for additional disclosures and/or adjustments resulting from subsequent
events through the date the financial statements were issued. Based on this evaluation, no adjustments were required to the financial statements as of June 30, 2022.
34
The New America High Income Fund, Inc.
Notes to Financial Statements — Continued
Supplemental Information (Unaudited)
Availability of Portfolio Holdings
The Fund provides a complete schedule of its portfolio holdings quarterly. The lists of holdings as of the end of the second and fourth quarters appear in the Fund's semi-annual and annual reports to shareholders, respectively. The schedules of portfolio holdings as of the end of the first and third quarters are filed with the Securities and Exchange Commission (the "SEC") on Form NPORT-P (the "Forms") within 60 days of the end of the first and third quarters. Shareholders can look up the Forms on the SEC's web site at www.sec.gov. The Forms may also be reviewed and copied at the SEC's public reference room in Washington, D.C. You may call the SEC at 1-800-SEC-0330 for information about the SEC's web site and their public reference room.
Compliance with CFTC Regulation of Transactions in Commodity Interests
The Fund does not currently intend to engage in transactions in commodity interests such as futures contracts, options on futures contracts, and swaps. However, the Fund may in the future enter into interest rate transactions, such as swaps, caps, collars and floors for the purpose or with the effect of hedging its portfolio and/or its payment obligations with respect to senior securities. In addition, the Fund has reserved the right, subject to the approval of the Board of Directors, to purchase and sell financial futures contracts and options on such futures contracts for the purpose of hedging its portfolio securities (or portfolio securities which it expects to acquire) against anticipated changes in prevailing interest rates. To the extent it engages in transactions in commodity interests, the Fund expects their use to be limited such that the Fund may claim the exclusion from the definition of the term "commodity pool operator" available under Regulation 4.5 of the Commodity Futures Trading Commission under the Commodity Exchange Act, and will not therefor be subject to regulation as a pool operator under the Commodity Exchange Act.
Common Stock Transactions
The Fund may purchase shares of its Common Stock in the open market when the Common Stock trades at a discount to net asset value or at other times if the Fund determines such purchases are advisable. There can be no assurance that the Fund will take such action in the event of a market discount to net asset value or that Fund purchases will reduce a discount.
35
The New America High Income Fund, Inc.
Directors
Joseph L. Bower
Stuart A. McFarland
Marguerite A. Piret
Oleg M. Pohotsky
Ellen E. Terry
Officer
Ellen E. Terry – President, Treasurer, Secretary
Investment Advisor
T. Rowe Price Associates, Inc.
100 E. Pratt Street
Baltimore, Maryland 21202
Administrator
The New America High Income Fund, Inc.
33 Broad Street
Boston, MA 02109
(617) 263-6400
Custodian
State Street Corporation
One Lincoln Street
Boston, MA 02111
Transfer Agent
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
(800) 937-5449
Web site: www.astfinancial.com
Listed: NYSE
Symbol: HYB
Web site: www.newamerica-hyb.com
36
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
The New
America
High Income
Fund, Inc.
Semi-Annual
Report
June 30, 2022
