ACP abrdn Income Credit Strategies Fund

 

FIRST TRUST HIGH INCOME LONG/SHORT FUND

FIRST TRUST/ABRDN GLOBAL OPPORTUNITY INCOME FUND

 

120 East Liberty Drive, Suite 400

Wheaton, IL 60187

(630) 765-8000

 

IMPORTANT SHAREHOLDER INFORMATION

 

We are pleased to enclose a notice, combined proxy statement/prospectus (the “Proxy Statement/Prospectus”), and proxy card(s) for special meetings of shareholders relating to each of First Trust High Income Long/Short Fund (“FSD”) and First Trust/abrdn Global Opportunity Income Fund (“FAM”), each a Massachusetts business trust (each, an “Acquired Fund” and collectively, the “Acquired Funds”). The special meetings (with any postponements or adjournments, each a “Special Meeting” and, collectively, the “Special Meetings”) of shareholders of each Acquired Fund are scheduled to be held at the offices of the Acquired Fund’s investment adviser, First Trust Advisors L.P., located at 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, on February 20, 2024, at 12:30 p.m. Central Time for FSD and at 12:30 p.m. Central Time for FAM. At the Special Meeting, shareholders will be asked to consider and, to vote on the approval of a proposed Agreement and Plan of Reorganization (each, a “Reorganization Agreement” and, collectively, the “Reorganization Agreements”) for each Acquired Fund, which contemplates the reorganization of the Acquired Fund with and into abrdn Income Credit Strategies Fund (the “Acquiring Fund”), a Delaware statutory trust (each, a “Reorganization” and collectively, the “Reorganizations”). The Acquiring Fund as it would exist after the Reorganizations is referred to as the “Combined Fund.” Each Reorganization is not contingent on the approval or consummation of the other Reorganization.

 

After careful consideration, the Board of Trustees of FSD and the Board of Trustees of FAM believe that each Reorganization, as applicable, is in the best interests of FSD and FAM shareholders and therefore recommends that you vote “FOR” the respective proposal. The Acquired Funds and the Acquiring Fund are managed by different investment advisers. Each Reorganization is anticipated to provide shareholders of FSD and FAM, among other things, with exposure to a similar investment objective, principal investment strategies and principal risks, with some differences as discussed in the enclosed Proxy Statement/Prospectus and access to the Acquiring Fund’s investment adviser’s and its affiliates’ asset management business, including its commitment to the closed-end fund business, and its investment management experience.

 

It is expected that shareholders of each Acquired Fund will not recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares in the applicable Acquired Fund for shares of the Acquiring Fund in connection with the applicable Reorganization (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). The Reorganization proposals are described in more detail, and a comparison of the strategies, expenses and certain other features of each Acquired Fund and the Acquiring Fund is included, in the enclosed Proxy Statement/Prospectus. We encourage you to review this information carefully.

 

As a shareholder of record as of the close of business on October 23, 2023, the record date, you are entitled to notice of, and to vote at, the Special Meeting, therefore we are asking that you please take the time to cast your vote prior to the February 20, 2024 Special Meeting. If you do not vote, you may receive a phone call from the Acquired Fund’s proxy solicitor, EQ Fund Solutions, LLC.

 

We appreciate your participation in this important Special Meeting.

 

Sincerely,

 

James A. Bowen 

Chairman of the Board of Trustees, First Trust High Income Long/Short Fund and First Trust/abrdn Global Opportunity Income Fund

 

 

 

 

FIRST TRUST HIGH INCOME LONG/SHORT FUND 

FIRST TRUST/ABRDN GLOBAL OPPORTUNITY INCOME FUND

 

120 East Liberty Drive, Suite 400

Wheaton, IL 60187

(630) 765-8000

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

 

TO BE HELD FEBRUARY 20, 2024

 

Notice is hereby given that special meetings of shareholders (with any postponements or adjournments, each a “Special Meeting” and, collectively, the “Special Meetings”) of each of First Trust High Income Long/Short Fund (“FSD”) and First Trust/abrdn Global Opportunity Income Fund (“FAM”), each a Massachusetts business trust, (each an “Acquired Fund” and, collectively, the “Acquired Funds”), are scheduled to be held at the offices of the Acquired Fund’s investment adviser, First Trust Advisors, L.P., located at 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, on February 20, 2024, at 12:30 p.m. Central Time for FSD and at 12:30 p.m. Central Time for FAM. At the Special Meeting, shareholders will be asked to consider and to vote on the below proposals (each a “Proposal” and, collectively, the “Proposals”).

 

For shareholders of FSD:

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of FSD to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all liabilities of FSD and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of FSD and complete liquidation of FSD (the “FSD Reorganization”)

 

For shareholders of FAM:

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of FAM to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all liabilities of FAM and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of FAM and complete liquidation of FAM (the “FAM Reorganization”)

 

Shareholders will also be asked to transact such other business as may properly come before the applicable Special Meeting.

 

Shareholders of record as of the close of business on October 23, 2023, the record date (the “Record Date”), are entitled to notice of, and to vote at, the Special Meeting.

 

Each Reorganization is intended to be treated as a tax-free reorganization for US federal income tax purposes.

 

Each Reorganization is not contingent on the approval or consummation of the other Reorganization.

 

Whether or not you are planning to attend the Special Meeting, please vote prior to the Special Meeting on February 20, 2024. Voting is quick and easy. Voting by proxy will not prevent you from voting your shares at the Special Meeting. You may revoke your proxy at any time before the Special Meeting by (i) written notice delivered to the Secretary of the respective Acquired Fund prior to the exercise of the proxy; (ii) execution of a subsequent proxy; or (iii) attending and voting at the Special Meeting. If you hold shares through a broker, bank or other nominee, you must follow the instructions you receive from your nominee in order to revoke your voting instructions.

 

Please contact EQ Fund Solutions, LLC at (866) 620-8437 with any questions regarding access to the Special Meeting, and an EQ representative will contact you to answer your questions. Whether or not you plan to participate in the Special Meeting, we urge you to vote and submit your vote in advance of the Special Meeting.

 

 

By order of the Board of Trustees of FSD and the Board of Trustees of FAM,

 

W. Scott Jardine

Secretary, First Trust High Income Long/Short Fund and First Trust/abrdn Global Opportunity Income Fund

 

Important Notice Regarding Internet Availability of Proxy Materials for the Special Meeting to be Held on February 20, 2024:

 

The Proxy Statement/Prospectus, the Notice of the Special Meeting, any accompanying materials and any amendments or supplements to the foregoing materials that are required to be furnished to shareholders are available to you on the Internet at https://www.ftportfolios.com/LoadContent/gohdcqj3gy3y.

 

 

 

QUESTIONS & ANSWERS

 

The following is a summary of more complete information appearing later in the attached combined proxy statement/prospectus (the “Proxy Statement/Prospectus”) or incorporated by reference into the Proxy Statement/Prospectus. You should carefully read the entire Proxy Statement/Prospectus, including the Agreements and Plans of Reorganization (each, a “Reorganization Agreement” and, collectively, the “Reorganization Agreements”), forms of which are attached as Appendix A thereto, because it contains details that are not in the Questions & Answers.

 

Q:

Why is a shareholder meeting being held?

A:

The shareholders of First Trust High Income Long/Short Fund (“FSD”) and First Trust/abrdn Global Opportunity Income Fund (“FAM”), each a Massachusetts business trust (each an “Acquired Fund” and, collectively, the “Acquired Funds”), are being asked to approve a Reorganization Agreement providing for the transfer of all of the assets of each Acquired Fund to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund)and the assumption by the Acquiring Fund of all liabilities of each Acquired Fund and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of each Acquired Fund and complete liquidation of each Acquired Fund (each a “Reorganization” and, collectively, the “Reorganizations”). It is currently expected that the Reorganizations will occur in the first quarter of 2024.   As summarized below and described more fully in the Proxy Statement/Prospectus, each Acquired Fund and the Acquiring Fund (each, a “Fund” and, collectively, the “Funds”) are closed-end management investment companies with similar investment objectives, principal investment strategies and principal risks, with some substantial differences. Please see below and “Comparison of the Funds” in the Proxy Statement/Prospectus for additional information. The Acquiring Fund would be the accounting and performance survivor of each Reorganization. The Acquiring Fund as it would exist after each Reorganization is referred to as the “Combined Fund.”   At a separate meeting, the shareholders of the Acquiring Fund are being asked to approve the issuance of additional common shares of beneficial interest of the Acquiring Fund that would be issued to the Acquired Fund shareholders in connection with the Reorganizations.

 

Q:	Why are the Reorganizations being proposed?
A:	On October 23, 2023, First Trust Advisors L.P. (“First Trust”), abrdn Inc. and, for the purposes specified therein, abrdn plc., entered into a separate agreement (the “Purchase Agreement”) pursuant to which abrdn Inc. will acquire certain assets related to First Trust’s business of providing investment management services with respect to the assets of each Acquired Fund and certain other registered investment companies (the “Business”) if the Reorganizations are approved, and upon satisfaction or waiver of certain other conditions. More specifically, under the Purchase Agreement, First Trust has agreed to transfer to abrdn Inc., for a cash payment at the closing of the Asset Transfer (as defined below) and subject to certain exceptions, (i) all right, title and interest of First Trust in and to the books and records relating to the Business of the Acquired Fund; and (ii) the goodwill of the Business (the “Asset Transfer”).   The Funds are not a party to the Purchase Agreement; however, the completion of the Asset Transfer is subject to certain conditions, including shareholder approval of each Reorganization described in the Proxy Statement/Prospectus for such Fund’s Reorganization to proceed. Therefore, if the respective shareholders do not approve the Reorganizations or if the other conditions in the Purchase Agreement are not satisfied or waived, then the Asset Transfer may not be completed, and the Purchase Agreement may be terminated.
Q:	Why are the Reorganizations being recommended by the Board of Trustees of FSD and the Board of Trustees of FAM?
A:	The Board of Trustees of FSD and the Board of Trustees of FAM (each an “Acquired Fund Board” and, collectively, the “Acquired Fund Boards”) have determined that the Reorganizations are in the best interests of the shareholders of the respective Acquired Funds. In reaching its decision to approve the respective Reorganization, each Acquired Fund Board considered alternatives to the Reorganizations, including continuing to operate the Acquired Fund as a separate fund, and determined to recommend that shareholders approve the respective Reorganization.

 

 

Please see “Background and Reasons for the Proposed Reorganization” in the Proxy Statement/Prospectus for additional information on each Acquired Fund Board’s considerations relating to each Reorganization.

 

Q:	What happens if a Proposal is not approved by the shareholders?
A:	Completion of each Reorganization requires both the approval of the Reorganization Agreement by the respective Acquired Fund shareholders and approval of the issuance of Acquiring Fund common shares by the Acquiring Fund shareholders. However, each Reorganization is not contingent on the approval or consummation of the other Reorganization (i.e., a Reorganization of one of the Acquired Funds, if approved by that Acquired Fund’s shareholders, may still proceed if the other Reorganization is not approved by the other Acquired Fund’s shareholders). If the applicable Reorganization Agreement or the issuance of Acquiring Fund common shares is not approved by shareholders of the applicable Fund, then the Acquired Fund will continue to operate as a separate fund in the manner in which it is currently managed.
Q:	How will the fees and expenses of the Combined Fund compare to those of each Acquired Fund?
A:	The contractual advisory fee of FSD is 1.00% of the average daily value of FSD’s Managed Assets, and the contractual advisory fee of the FAM is 1.00% of the average daily value of FAM’s Managed Assets. For FAM, the term Managed Assets, for purposes of the advisory fee, means the total asset value of FAM minus the sum of FAM’s liabilities other than the principal amount of borrowings, if any. For FSD, the term Managed Assets, for purposes of the advisory fee, means the average daily gross asset value of FSD (which includes the principal amount of any borrowings) minus the sum of FSD’s liabilities. The Acquired Funds and Acquiring Fund each currently use leverage.   The contractual advisory fee of the Acquiring Fund and the Combined Fund is 1.25% of the Fund’s average daily Managed Assets. For the Acquiring Fund and the Combined Fund, the term Managed Assets means the total assets of the Acquiring Fund (including any assets attributable to money borrowed for investment purposes, including proceeds from (and assets subject to) reverse repurchase agreements, any credit facility and any issuance of preferred shares or notes) minus the sum of the Acquiring Fund’s accrued liabilities (other than Acquiring Fund liabilities incurred for the purpose of leverage).

 

The gross total annual operating expense ratios, including interest expense, of the Acquired Funds and the Acquiring Fund, and, following the consummation of one or both Reorganizations, the gross total annual operating expense ratio, including interest expense, of the Combined Fund is expected to be as follows:

 

	Current Expense Ratio of FSD*			Current Expense Ratio of FAM*		Current Expense Ratio of the Acquiring Fund**		Pro Forma Combined Fund (FSD into Acquiring Fund only)**		Pro Forma Combined Fund (FAM into Acquiring Fund only)**		Pro Forma Combined Fund (FSD and FAM into Acquiring Fund)**
		3.92	%	3.62	%	4.60	%	4.43	%	4.54	%	4.40	%

 

The net total annual operating expense ratios, including interest expense, of the Acquired Funds and the Acquiring Fund, and, following the consummation of one or both Reorganizations, the net total annual operating expense ratio, including interest expense, of the Combined Fund is expected to be as follows:

 

	Current Expense Ratio of FSD*†			Current Expense Ratio of FAM*†		Current Expense Ratio of the Acquiring Fund**†		Pro Forma Combined Fund (FSD into Acquiring Fund only)**†		Pro Forma Combined Fund (FAM into Acquiring Fund only)**†		Pro Forma Combined Fund (FSD and FAM into Acquiring Fund)**†
		3.92	%	3.62	%	4.42	%	4.36	%	4.39	%	4.34	%

 

The net total annual operating expense ratios, including interest expense, in this table of the Acquiring Fund and Combined Fund reflect reimbursement of Other Expenses (defined below) from abrdn Investments Limited ("aIL"), which can be recouped under certain circumstances by aIL.

 

	*As of the Acquired Fund’s most recent semi-annual period end (April 30, 2023 for FSD and June 30, 2023 for FAM), based on average daily net assets.
	**Information for the Acquiring Fund and Combined Fund is as of the six months ended April 30, 2023. The Acquiring Fund’s assets have been restated to reflect the net assets as of April 30, 2023 (rather than average net assets over the six months ended April 30, 2023) in order to provide more accurate expense ratios due to a significant increase in Fund assets that occurred on March 10, 2023 as the result of a reorganization of another closed-end management investment company registered under the 1940 Act with and into the Acquiring Fund. The estimated total annual operating expense ratio of the Acquiring Fund and the Combined Fund is net of fee waivers and, therefore, reflects the application of the operating expense limitation described below.
	† The net total annual operating expense ratios, excluding interest expense, of FSD and FAM are 1.16% and 1.91%, respectively. The net total operating expense ratio, excluding interest expense, of the Acquiring Fund is 1.99%. Following the consummation of one or both Reorganizations, the net total annual operating expense ratio, excluding interest expense, of the Combined Fund is expected to be 1.99%.
	Pro forma combined fees and expenses are estimated in good faith and are hypothetical. There can be no assurance that future expenses will not increase or that any estimated expense savings will be realized.

 

 

	Following the consummation of the Reorganization, the total annual operating expense ratio of the Combined Fund is expected to be higher than the current total annual operating expense ratio of each Acquired Fund. The Acquiring Fund has consistently traded at a tighter discount/premium over near and longer-term periods than each Acquired Fund and has a higher distribution rate and yield. Morningstar reports that as of September 29, 2023, the 12-month average discount of the Acquiring Fund was 0.21% as compared to the discount of the FSD of 9.85% and FAM of 10.73% over the same period. Please see question “At what prices have common shares of each Acquired Fund and common shares of the Acquiring Fund historically traded?” for more information.
	aIL, the investment adviser of the Acquiring Fund, has contractually agreed to limit total “Other Expenses” of the Acquiring Fund (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) as a percentage of net assets attributable to common shares of the Acquiring Fund to 0.25% per annum of the Acquiring Fund’s average daily net assets until March 7, 2024 and then 0.35% per annum of the Acquiring Fund’s average daily net assets until October 31, 2024. aIL has contractually agreed to limit total “Other Expenses” of the Combined Fund (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) as a percentage of net assets attributable to common shares of the Combined Fund to 0.25% per annum of the Combined Fund’s average daily net assets for twelve months following the closing of the Reorganization and then 0.35% until June 30, 2025. This contractual limitation may not be terminated before twelve months following the closing of the Reorganization or June 30, 2025, whichever is later, without the approval of the Acquiring Fund’s or Combined Fund’s, as applicable, trustees who are not “interested persons” of the Acquiring Fund or Combined Fund, as applicable (as defined in the Investment Company Act of 1940, as amended (the “1940 Act”)).
	The Acquiring Fund or Combined Fund, as applicable, may repay any such reimbursement from aIL, within three years of the reimbursement, provided that the following requirements are met: the reimbursements do not cause the Acquiring Fund or Combined Fund, as applicable, to exceed the lesser of the applicable expense limitation in the contract at the time the fees were limited or expenses are paid or the applicable expense limitation in effect at the time the expenses are being recouped by aIL.
	Please see “Fees and Expenses” and “Management of the Funds” in the Proxy Statement/Prospectus for additional information.

 

Q:	How different are the Funds?

 

A:

As summarized below and set forth more fully in the Proxy Statement/Prospectus, there are substantial differences between each Acquired Fund and the Acquiring Fund. In particular, they have different investment advisers. First Trust is the investment manager of each Acquired Fund. MacKay Shields LLC (“MacKay”) is the sub-adviser of FSD and abrdn Inc. is the sub-adviser of FAM. aIL is the investment adviser of the Acquiring Fund and abrdn Inc. is the investment sub-adviser of the Acquiring Fund.   Each Fund is a closed-end management investment company registered under the 1940 Act. FSD and FAM are Massachusetts business trusts and diversified closed-end management investment companies. The Acquiring Fund is a Delaware statutory trust and a diversified closed-end management investment company. Each Fund’s common shares are listed on the New York Stock Exchange.   The Acquiring Fund and FAM have investment objectives that are materially the same. FSD’s primary investment objective is to provide current income, with a secondary objective of capital appreciation. Each of FAM’s and the Acquiring Fund’s primary investment objective is to is to seek a high level of current income with a secondary objective of capital appreciation. The Funds’ investment strategies are similar in that they invest in high-yield fixed income securities. However, in seeking to achieve their respective investment objectives, there are some substantial differences in the investment strategies and risks of each Fund. The Acquiring Fund and FSD each may invest in high-yield securities without limitation (although FSD generally limits its investment in certain high-yield securities to no more than 5% above the index which it tracks) while FAM may only invest up to 60% of its Managed Assets in such securities. In addition, although each Fund invests in high yield fixed income securities, the Acquiring Fund generally invests in lower rated bonds in the high yield sector as compared to FSD, while the current weighted average for FAM is in investment grade bonds.   FSD seeks to achieve its investment objectives by investing, under normal market conditions, a majority of its assets in a diversified portfolio of U.S. and foreign (including emerging markets) high-yield corporate fixed-income securities of varying maturities that are rated below investment grade at the time of purchase. As part of its investment strategy, FSD maintains both long and short positions in securities under normal market conditions. FSD’s long positions, either directly or through derivatives, may total up to 130% of FSD’s managed assets.

 

 

FSD’s short positions, either directly or through derivatives, may total up to 30% of FSD’s managed assets. FSD’s use of derivatives, other than for hedging purposes, will not exceed 30% of FSD’s managed assets.    FSD may invest up to 5% of its Managed Assets (defined below) in common stocks, including those of foreign issuers. FSD may invest up to 20% of its Managed Assets in securities that, at the time of investment, are illiquid. FSD may also invest, without limit, in securities that are unregistered (but are eligible for purchase and sale by certain qualified institutional buyers) or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale (“restricted securities”). However, restricted securities determined to be illiquid are subject to the limitations set forth above.   FAM seeks to achieve its investment objectives by investing, under normal circumstances, substantially all of its Managed Assets (defined below) in a diversified portfolio of fixed-income securities, including government and corporate bonds, of U.S. and non-U.S. issuers. FAM invests primarily in emerging markets. FAM’s investment team believes that a portfolio containing investment grade securities that invests across many national markets has the opportunity to achieve returns in excess of a portfolio that invests in a single domestic bond market, as the global fixed-income marketplace is generally less efficient than domestic markets. Under normal market conditions, FAM invests in securities of issuers in at least three countries (in addition to the United States), however, securities of issuers in a single country will not exceed 30% of FAM’s Managed Assets. FAM invests at least 60% of its Managed Assets in securities issued by government, government-related and supranational issuers (“government debt”). At least 25% of FAM's Managed Assets will be invested in U.S. dollar-denominated securities or non-U.S. dollar-denominated securities that have been fully hedged into U.S. dollars. FAM may also invest up to 10% of its Managed Assets in forward foreign currency exchange contracts for hedging and investment purposes. FAM places thresholds of the proportion of its Managed Assets that may be invested in corporate debt obligations, below investment grade securities, asset-backed securities, credit-linked notes, illiquid securities, and forward foreign exchange contracts (both deliverable and non-deliverable).   For purposes of FAM’s investment strategies, “Managed Assets” means the total asset value of FAM minus the sum of FAM’s liabilities other than the principal amount of borrowings, if any. For purposes of FSD’s investment strategies, “Managed Assets” means the average daily gross asset value of FSD (which includes the principal amount of any borrowings), minus the sum of FSD’s liabilities.   The Acquiring Fund is a high yield debt fund that is permitted to invest in a variety of US and foreign-issued debt instruments, and may utilize derivatives and hedging techniques, to achieve its investment objectives. The Acquiring Fund generally invests in corporate bonds and is permitted to invest in senior loans and in second lien or other subordinated loans or debt instruments, including non-stressed and stressed credit obligations, and related derivatives. The Acquiring Fund seeks to capitalize on market inefficiencies and to reallocate the portfolio of the Acquiring Fund to opportunistically emphasize those investments, categories of investments and geographic exposures believed to be best suited to the current investment and interest rate environment and market outlook. There is no minimum or maximum limit on the amount of the Acquiring Fund’s assets that may be invested in non-U.S. credit obligations generally or in emerging market credit obligations specifically.   The Acquiring Fund is permitted to use derivative instruments to manage currency risk, credit risk, and interest rate risk and to replicate, or use as a substitute for, physical securities. As of the Acquiring Fund’s most recent annual report to shareholders, the Acquiring Fund used derivatives to hedge foreign currency exposure.   The Acquiring Fund and the Acquired Funds may use leverage to the extent permitted by the 1940 Act. Currently, the 1940 Act and the rules and regulations thereunder generally limit the extent to which a Fund may utilize borrowings, together with any other senior securities representing indebtedness, to 33 and 1/3% of the Fund’s total assets (including the assets subject to, and obtained with, the proceeds of such leverage) at the time utilized (less the Fund’s liabilities and indebtedness not represented by senior securities). In addition, the 1940 Act limits the extent to which the Fund may issue preferred shares plus senior securities representing indebtedness to 50% of the Fund’s total assets (less the Fund’s liabilities and indebtedness not represented by senior securities). As of September 29, 2023, FSD and FAM had 26.0% and 20.3% aggregate leverage from borrowings as a percentage of each Acquired Fund’s total assets, respectively. As of September 29, 2023, the Acquiring Fund had 29.1% aggregate leverage from the issuance of preferred shares and borrowings as a percentage of its total assets. The Combined Fund anticipates that it will use leverage similarly to the Acquiring Fund.

 

  

	The Acquiring Fund offers preferred shares. The preferred shares of the Acquiring Fund are senior to the Acquiring Fund’s common shares, such that holders of preferred shares have priority over the distribution of the Acquiring Fund’s assets, including dividends and liquidating distributions. Additionally, holders of the preferred shares, voting separately as a class, have the right to elect two trustees of the Acquiring Fund.   The Acquiring Fund is subject to the control share acquisition statute (the “Control Share Statute”) contained in Subchapter III of the Delaware Statutory Trust Act (the “DSTA”), which became automatically applicable to listed closed-end funds, such as the Acquiring Fund. The Acquired Funds are not subject to this type of limitation as Massachusetts does not currently have a control share statute applicable to Massachusetts business trusts. Please see “Rights of Fund Shareholders” in the Proxy Statement/Prospectus for additional information.   Please see “Comparison of the Funds” in the Proxy Statement/Prospectus for additional information.
Q:	How will the Reorganizations be effected?
A:	Assuming FSD and FAM shareholders approve the Reorganizations and the Acquiring Fund’s shareholders approve the issuance of Acquiring Fund common shares, each Acquired Fund will transfer all of its assets to the Acquiring Fund in exchange for common shares of the Acquiring Fund (although shareholders may receive cash for fractional shares of the Acquiring Fund), and the assumption by the Acquiring Fund of all liabilities of each Acquired Fund. Following the Reorganizations, each Acquired Fund will be dissolved and terminated in accordance with its Declaration of Trust, Amended and Restated By-Laws and the 1940 Act.   Following each Reorganization, you, as an Acquired Fund shareholder, will become a shareholder of the Acquiring Fund. Holders of common shares of each Acquired Fund will receive newly issued common shares of the Acquiring Fund, par value $0.001 per share, the aggregate net asset value (“NAV”) (not the market value) of which will equal the aggregate NAV (not the market value) of the common shares of the respective Acquired Fund you held immediately prior to the respective Reorganization (although shareholders may receive cash for fractional shares of the Acquiring Fund).   Based on each Fund’s NAV as of September 29, 2023, the exchange ratio at which common shares of FSD would have converted to common shares of the Combined Fund is 1.8109 (assuming each Reorganization was consummated following the market close on September 29, 2023) and the exchange ratio at which common shares of FAM would have converted to common shares of the Combined Fund is 0.9511 (assuming each Reorganization was consummated following the market close on September 29, 2023). An FSD shareholder would have received 1.8109 shares of the Combined Fund for each FSD share held and an FAM shareholder would have received 0.9511 shares of the Combined Fund for each FAM share held.
Q:	How will a Reorganization affect the value of my investment?
A:	At the closing of each Reorganization, each Agreement and Plan of Reorganization sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of Trustees of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund. The valuation procedures for the Acquired Funds, on the one hand, and the Acquiring Fund, on the other hand, differ in certain respects.   For purposes of determining an Acquired Fund’s net asset value, corporate, sovereign, government, foreign, mortgage backed, and capital preferred fixed income securities and senior floating rate bank loans are priced at the mean of evaluated bid and asked prices provided by third-party pricing vendors on the valuation date. In contrast, the Acquiring Fund values such securities at the bid price provided by third-party pricing vendors.   If a Reorganization is approved by shareholders and assuming that FSD’s and FAM’s fixed income holdings are not sold in advance of the respective Reorganization, the net asset value per share of the Acquiring Fund will be less than the net asset value per share of the respective Acquired Fund. For example, if ACP’s valuation procedures were used to value FSD and FAM’s fixed income security holdings as of September 29, 2023, the value of the Combined Fund’s shares is estimated to be reduced by approximately $1,052,639 (0.13% of the Combined Fund as of September 29, 2023) or $0.009 per share of the Combined Fund, assuming both Reorganizations are consummated.

 

 

Q:	At what prices have common shares of each Acquired Fund and common shares of the Acquiring Fund historically traded?
A:	Common shares of each Acquired Fund and the Acquiring Fund have from time to time traded below their NAVs. As of September 29, 2023, FSD common shares were trading at a 12.56% discount to its NAV, FAM common shares were trading at a 11.49% discount to its NAV, and the Acquiring Fund common shares were trading at a 0.44%premium to its NAV. There can be no assurance that, after the Reorganization, common shares of the Combined Fund will trade at, above or below NAV. The market value of the common shares of the Combined Fund may be more or less than the market value of the common shares of either the Acquiring Fund or each Acquired Fund prior to the Reorganization.   To the extent the respective Acquired Fund is trading at a discount to its NAV and the Acquiring Fund is trading at a premium to its NAV at the time of the Reorganization, Acquired Fund shareholders would have the potential for an economic benefit. To the extent the respective Acquired Fund is trading at a premium to its NAV and the Acquiring Fund is trading at a discount to its NAV at the time of the Reorganization, the respective Acquired Fund shareholders would lose the economic benefit. There can be no assurance that, after the Reorganization, common shares of the Combined Fund will trade at, above or below NAV. The market value of the common shares of the Combined Fund may be less than the market value of the common shares of the Acquiring Fund prior to the Reorganization. Additionally, among other potential consequences of the Reorganization, portfolio transitioning due to the Reorganization may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Funds and the Combined Fund.   Please see “Share Price Data” in the Proxy Statement/Prospectus for additional information.
Q:	Will the Reorganizations impact Fund distributions to shareholders?
A:	FSD currently pays a monthly distribution of $0.105 per share; based on the market price and NAV as of September 29, 2023, FSD’s annualized distribution rate is 11.75% and 10.28%, respectively. FAM currently pays a monthly distribution of $0.060 per share; based on the market price and NAV as of September 29, 2023, FAM’s annualized distribution rate is 12.63% and 11.18%, respectively. The Acquiring Fund currently pays a monthly distribution of $0.100 per share; based on the market price and NAV as of September 29, 2023, the Acquiring Fund’s annualized distribution rate is 17.6% and 17.7%, respectively. The Combined Fund expects to pay a monthly distribution of $0.100 per share and would have the same distribution yield as the Acquiring Fund.   Prior to the closing of the Reorganizations, each Acquired Fund expects to declare a distribution to its shareholders that, together with all previous distributions, will have the effect of distributing to its shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains, if any, through the date of the Reorganizations’ closing. All or a portion of such distribution may be taxable to the Acquired Fund shareholders for US federal income tax purposes.   The Combined Fund intends to make its first distribution to shareholders in the month immediately following the Reorganization. In addition, the Combined Fund expects to follow the same frequency of payments as each Fund and to make monthly distributions to shareholders.

 

Q:	Who will manage the Combined Fund’s portfolio?
A:	The Combined Fund will be advised by aIL, the Acquiring Fund’s current adviser, and sub-advised by abrdn Inc., the Acquiring Fund’s current sub-adviser. Furthermore, the Acquiring Fund’s current portfolio management team will be primarily responsible for the day-to-day management of the Combined Fund’s portfolio.

 

Q:

Will there be any significant portfolio transitioning in connection with the Reorganizations?

A:

Each Acquired Fund is required to pay back its outstanding leverage in connection with the closing of the Reorganization. It is anticipated that approximately 26% of FSD’s holdings and 20% of FAM’s holdings will be sold by each respective Acquired Fund before the closing of the Reorganizations in order to pay back each Acquired Fund’s outstanding leverage. As a result of the disposition of securities, each Acquired Fund may hold more uninvested cash than normal and there may be times when each Acquired Fund is not fully invested in accordance with its investment objective and strategies during this transition period, which may cause an Acquired Fund to forgo any appreciation in value of portfolio investments, if any. This may impact each Acquired Fund’s performance. As of September 21, 2023, the expected costs to de-lever FSD’s portfolio would be approximately $405,000 (or 0.08% of FSD’s NAV as of September 21, 2023) or $0.012 per share. As of September 21, 2023, the expected costs to de-lever FAM’s portfolio would be approximately $33,000 (or 0.04% of FAM’s NAV as of September 21, 2023) or $0.003 per share. To the extent an Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund. The foregoing estimates are subject to change depending on the composition of each Acquired Fund’s portfolio and market circumstances at the time any sales are made.

 

 

	Following the Reorganization, the Combined Fund expects to realign its portfolio in a manner consistent with its investment strategies and policies, which will be the same as the Acquiring Fund’s strategies and policies. The Combined Fund may not be invested consistent with its investment strategies or aIL’s investment approach while such realignment occurs. The realignment is anticipated to take approximately one week following the closing of the Reorganization, based on current market conditions and assuming that the Acquired Funds’ holdings are the same as of September 21, 2023. Sales and purchases of less liquid securities could take longer. Based on the FSD and FAM holdings as of September 21, 2023, the Combined Fund expects to sell approximately 99% of FAM’s portfolio following the closing of the Reorganization. If the Reorganization of FAM only was completed on September 21, 2023, the expected cost to sell 99% of FAM’s holdings following the closing of the Reorganization, which is estimated to equal 7.7% of the Combined Fund’s portfolio, would be approximately $315,300 (or 0.04% of the estimated NAV of the Combined Fund as of September 21, 2023) or $0.0026 per share. The Combined Fund currently does not expect to sell any of FSD’s portfolio following the closing of the Reorganization. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganization, these will be borne by the Acquired Fund with respect to the portfolio transitioning conducted before the Reorganizations and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganizations. The portfolio transitioning pre- and post-Reorganizations may result in capital gains or losses, which may have federal income tax consequences for shareholders of the Acquired Funds and the Combined Fund.
Q:	Will I have to pay any sales load or commission in connection with the respective Reorganization?
A:	No. You will pay no sales load or commission in connection with the respective Reorganization.
Q:	Who will pay for the costs associated with each Reorganization?
A:	aIL and its affiliates and First Trust and its affiliates will bear certain expenses incurred in connection with each Reorganization, except as otherwise disclosed in the proxy statements to Acquired Fund and Acquiring Fund shareholders including portfolio transaction costs and certain taxes, whether or not the Reorganization is consummated. The expenses of the Reorganizations expected to be borne by abrdn and First Trust are estimated to be approximately $589,000 for FSD and approximately $453,000 for FAM. To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganizations, these will be borne by the applicable Acquired Fund with respect to the portfolio transitioning and de-levering conducted before the Reorganizations and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganizations. In addition, to the extent an Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund.
Q:	Are the Reorganizations expected to be taxable to the respective shareholders of each Acquired Fund?
A:	It is expected that shareholders of each Acquired Fund will not recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares in the Acquired Fund for shares of the Acquiring Fund pursuant to the Reorganization Agreement (except with respect to cash received in lieu of fractional shares of the Acquiring Fund).   As a condition to each Acquired Fund’s obligation to consummate the Reorganization, each Acquired Fund and the Acquiring Fund will receive an opinion from legal counsel to the effect that, on the basis of the existing provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current administrative rules and court decisions, the transactions contemplated by the respective Reorganization Agreement constitute a tax-free reorganization for federal income tax purposes (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). Despite this opinion, there can be no assurances that the US Internal Revenue Service will deem the exchanges to be tax-free.   The portfolio transitioning discussed above may result in capital gains or losses, which may have federal income tax consequences.

 

 

The portfolio de-levering discussed above may result in capital gains or losses, which may have federal income tax consequences. For example, if the de-levering of FSD was completed on September 21, 2023, it is estimated that approximately $16,821,000, or $0.505 per share, in capital losses would have resulted from the sale of portfolio securities ahead of the Reorganization. If the de-levering of FAM was completed on September 21, 2023, it is estimated that approximately $2,261,000, or $0.223 per share, in capital losses would have resulted from the sale of portfolio securities ahead of the Reorganization.    The portfolio transitioning after the Reorganization discussed above may result in capital gains or losses, which may have federal income tax consequences. For example, if the Reorganization of FAM only was completed on September 21, 2023, it is estimated that approximately $10,756,000, or $0.088 per share, in capital losses would have resulted from portfolio transitioning in the Combined Fund following the Reorganization. No sales of portfolio securities are anticipated after the Reorganization as it relates to the FSD Reorganization.    The actual tax consequences as a result of portfolio repositioning after the closing of the Reorganizations are dependent on the portfolio composition of each Acquired Fund at the time of closing and market conditions. Any net capital gain resulting from the realignment coupled with the results of the Acquiring Fund’s normal operations during the tax year following the close of the Reorganizations would be distributed to the shareholder base of the Combined Fund post-Reorganization in connection with the annual distribution requirements under US federal tax laws.

 

Q:	How do the Acquired Fund Boards suggest that I vote?
A:	The Acquired Fund Boards recommend that you vote “FOR” the respective Proposal.
Q:	How do I vote my proxy?
A:	You may vote in any one of four ways:

 

·

by mail, by sending the enclosed proxy card, signed and dated, in the enclosed envelope;

 

·

by phone, by following the instructions set forth on your proxy card;

 

·

via the Internet, by following the instructions set forth on your proxy card; or

 

·

in person, by attending the Special Meeting. Please note that shareholders who intend to attend the Special Meeting will need to provide valid identification and, if they hold shares through a bank, broker or other nominee, satisfactory proof of ownership of shares, such as a voting instruction form (or a copy thereof) or a letter from their bank, broker or other nominee or broker’s statement indicating ownership as of October 23, 2023 (the record date), to be admitted to the Special Meeting.

 

	Broker-dealer firms holding shares in “street name” for the benefit of their customers and clients may request voting instructions from such customers and clients. You are encouraged to contact your broker-dealer and record your voting instructions.
Q:	Whom do I contact for further information?
A:	If you need any assistance or have any questions regarding the Proposals or how to vote your shares, please call EQ Fund Solutions, LLC, the Acquired Fund’s proxy solicitor, at (866) 620-8437 weekdays from 9:00 a.m. to 10:00 p.m. Eastern Time.

 

 

 

PROXY STATEMENT FOR

 

FIRST TRUST HIGH INCOME LONG/SHORT FUND

FIRST TRUST/ABRDN GLOBAL OPPORTUNITY INCOME FUND

 

120 East Liberty Drive, Suite 400

Wheaton, IL 60187

(630) 765-8000

 

PROSPECTUS FOR

 

ABRDN INCOME CREDIT STRATEGIES FUND

1900 Market Street, Suite 200

Philadelphia, PA 19103

(215) 405-5700

 

December 18, 2023

 

This combined proxy statement/prospectus (the “Proxy Statement/Prospectus”) is furnished to you as a common shareholder of each of or either of First Trust High Income Long/Short Fund (“FSD”) and First Trust/abrdn Global Opportunity Income Fund (“FAM”), each a Massachusetts business trust and closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”) (each, an “Acquired Fund” and, collectively, the “Acquired Funds”). Special Meetings (with any postponements or adjournments, each a “Special Meeting” and, collectively, the “Special Meetings”) of shareholders of each Acquired Fund are scheduled to be held at the offices of the Acquired Fund’s investment adviser, First Trust Advisors L.P. (“First Trust”), located at 120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, on February 20, 2024, at 12:30 p.m. Central Time for FSD and at 12:30 p.m. Central Time for FAM. At the Special Meeting, shareholders will be asked to consider and to vote on the below proposals (each a “Proposal” and, collectively, the “Proposals”). If you are unable to attend the Special Meeting, the Board of Trustees of FSD and the Board of Trustees of FAM (each a “Board” and, collectively, the “Boards”) requests that you vote your shares by completing and returning the enclosed proxy card or by recording your voting instructions by telephone or via the Internet. The approximate mailing date of this Proxy Statement/Prospectus is December 26, 2023.

 

For shareholders of FSD:

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of FSD to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all liabilities of FSD and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of FSD and complete liquidation of FSD (the “FSD Reorganization”)

 

For shareholders of FAM:

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of FAM to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all liabilities of FAM and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of FAM and complete liquidation of FAM (the “FAM Reorganization”)

 

 

Shareholders of record as of the close of business on October 23, 2023, the record date (the “Record Date”), are entitled to notice of and to vote at the Special Meeting.

 

Shareholders of each Acquired Fund are being asked to consider and vote on an Agreement and Plan of Reorganization (each a “Reorganization Agreement” and, collectively, the “Reorganization Agreements”) pursuant to which each Reorganization would be accomplished. The aggregate NAV (not the market value) of Acquiring Fund common shares received by the shareholders of each Acquired Fund in the Reorganization would equal the aggregate NAV (not the market value) of the respective Acquired Fund common shares held immediately prior to the respective Reorganizations (although shareholders may receive cash for fractional shares of the Acquiring Fund, which may be taxable). It is important to note that the Reorganization of an Acquired Fund is not contingent on the approval of the other Acquired Fund’s shareholders (i.e., a Reorganization of one of the Acquired Funds, if approved by that Acquired Fund’s shareholders, may still proceed if the other Reorganization is not approved by the other Acquired Fund’s shareholders). The Acquiring Fund as it would exist after one or both Reorganizations is referred to as the “Combined Fund.”

 

At the closing of each Reorganization, each Reorganization Agreement sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund. The valuation procedures for the Acquired Funds, on the one hand, and the Acquiring Fund, on the other hand differ in certain respects.

 

For purposes of determining an Acquired Fund’s net asset value, corporate, sovereign, government, foreign, mortgage backed, and capital preferred fixed income securities and senior floating rate bank loans are priced at the mean of evaluated bid and asked prices provided by third-party pricing vendors on the valuation date. In contrast, the Acquiring Fund values such securities at the bid price provided by third-party pricing vendors.

 

If a Reorganization is approved by shareholders and assuming that FSD’s and FAM’s fixed income holdings are not sold in advance of the respective Reorganization, the net asset value per share of the Acquiring Fund will be less than the net asset value per share of the respective Acquired Fund. For example, if ACP’s valuation procedures were used to value FSD and FAM’s fixed income security holdings as of September 29, 2023, the value of the Combined Fund’s shares is estimated to be reduced by approximately $1,052,639 (0.13% of the Combined Fund as of September 29, 2023) or $0.009 per share of the Combined Fund, assuming both Reorganizations are consummated.

 

Separately, the shareholders of the Acquiring Fund are being asked to approve the issuance of additional common shares of the Acquiring Fund in connection with the Reorganizations. Completion of each Reorganization requires both the approval of the respective Acquired Fund shareholders of the respective Reorganization Agreement and the Acquiring Fund shareholders of the issuance of Acquiring Fund common shares.

 

There are differences between each Acquired Fund and the Acquiring Fund. In particular, they have different investment advisers. First Trust Advisors L.P. (previously defined as “First Trust”) is the investment manager of each Acquired Fund. MacKay Shields LLC (“MacKay”) is the sub-adviser of FSD and abrdn Inc. is the sub-adviser of FAM. aIL is the investment adviser of the Acquiring Fund and abrdn Inc. is the investment sub-adviser of the Acquiring Fund. The Funds have similar investment objectives, principal investment strategies and principal risks, with some differences. The Acquiring Fund and FAM have investment objectives that are materially the same. FSD’s primary investment objective is to provide current income, with a secondary objective of capital appreciation. Each of FAM’s and the Acquiring Fund’s primary investment objective is to is to seek a high level of current income with a secondary objective of capital appreciation.

 

The common shares of the Acquiring Fund are listed on the New York Stock Exchange (the “NYSE”) under the ticker symbol “ACP” and will continue to be so listed following the Reorganizations. The common shares of FSD are listed on the NYSE under the ticker symbol “FSD” and the common shares of FAM are listed on the NYSE under the ticker symbol “FAM”. Common shares of each Acquired Fund would be delisted from the NYSE following the Reorganization. Shareholder reports, proxy statements and other information concerning Funds can be inspected at the NYSE.

 

The following documents have been filed with the Securities and Exchange Commission (“SEC”):

 

	·	the Statement of Additional Information, dated December 18, 2023, relating to this Proxy Statement/Prospectus is incorporated into this Proxy Statement/Prospectus by reference;
	·	the Semi-Annual Report to shareholders of FSD for the fiscal period ended April 30, 2023 (Investment Company Act File No. 811-22442; Accession Number 0001445546-23-004198);

 

 

	·	the Annual Report to shareholders of FSD for the fiscal period ended October 31, 2022 (Investment Company Act File No. 811-22442; Accession Number 0001445546-23-000101);
	·	the Semi-Annual Report to shareholders of FAM for the fiscal period ended June 30, 2023 (Investment Company Act File No. 811-21636; Accession Number 0001445546-23-005506);
	·	the Annual Report to shareholders of FAM for the fiscal period ended December 31, 2022 (Investment Company Act File No. 811-21636; Accession Number 0001445546-23-001824);
	·	the Semi-Annual Report to shareholders of the Acquiring Fund for the fiscal period ended April 30, 2023 (Investment Company Act File No. 811-22485; Accession Number 0001104659-23-079589); and
	·	the Annual Report to shareholders of the Acquiring Fund for the fiscal period ended October 31, 2022 (Investment Company Act File No. 811-22485; Accession Number 0001104659-23-002299).

  

Additionally, copies of the foregoing and any more recent reports filed after the date hereof may be obtained without charge:

 

for the Acquiring Fund:

 

By Phone:	1-800-522-5465
By Mail:	abrdn Income Credit Strategies Fund
	c/o abrdn Inc. 1900 Market Street, Suite 200
	Philadelphia, PA 19103
By Internet:	www.abrdnacp.com

 

for FSD:

 

By Phone:	(630) 765-8000
By Mail:	First Trust High Income Long/Short Fund
	120 East Liberty Drive, Suite 400
	Wheaton, IL 60187
By Internet:	www.ftportfolios.com

 

for FAM:

 

By Phone:	(630) 765-8000
By Mail:	First Trust/abrdn Global Opportunity Income Fund
	120 East Liberty Drive, Suite 400
	Wheaton, IL 60187
By Internet:	www.ftportfolios.com

 

The Funds are subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, and, in accordance therewith, file reports, proxy statements, proxy materials and other information with the SEC. You also may view or obtain the foregoing documents from the SEC:

 

By e-mail:	publicinfo@sec.gov (duplicating fee required)
By Internet:	www.sec.gov

 

This Proxy Statement/Prospectus serves as a prospectus of the Acquiring Fund. This Proxy Statement/Prospectus sets forth concisely the information that shareholders of the Acquired Funds should know before voting on the Proposals. Please read it carefully and retain it for future reference. No person has been authorized to give any information or make any representation not contained in this Proxy Statement/Prospectus and, if so given or made, such information or representation must not be relied upon as having been authorized. This Proxy Statement/Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any securities in any jurisdiction in which, or to any person to whom, it is unlawful to make such offer or solicitation.

 

 

THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

 

 

TABLE OF CONTENTS

 

PROPOSALS	6
COMPARISON OF THE FUNDS	16
MANAGEMENT OF THE FUNDS	53
AGREEMENT BETWEEN First Trust Advisors L.P. AND ABRDN INC.	57
NET ASSET VALUE OF COMMON SHARES of the acquiring fund	63
DIVIDEND REINVESTMENT AND OPTIONAL CASH PURCHASE PLAN	63
ANTI-TAKEOVER AND CERTAIN PROVISIONS OF THE ACQUIRING FUND’S AGREEMENT AND DECLARATION OF TRUST AND BYLAWS	65
APPRAISAL RIGHTS	66
FINANCIAL HIGHLIGHTS	66
INFORMATION ABOUT THE REORGANIZATION	72
TERMS OF THE REORGANIZATION AGREEMENT	72
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATIONS	73
VOTING INFORMATION AND REQUIREMENTS	75
SHAREHOLDER INFORMATION	77
SHAREHOLDER PROPOSALS	78
SOLICITATION OF PROXIES	78
OTHER BUSINESS	78
APPENDIX A: FORMS OF AGREEMENT AND PLAN OF REORGANIZATION	A-1

 

 

PROPOSALS

 

For shareholders of FSD:

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of FSD to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all liabilities of FSD and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of FSD and complete liquidation of FSD (the “FSD Reorganization”)

 

For shareholders of FAM:

 

To approve an Agreement and Plan of Reorganization providing for the transfer of all of the assets of FAM to abrdn Income Credit Strategies Fund (the “Acquiring Fund”) in exchange solely for newly issued common shares of beneficial interest of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund) and the assumption by the Acquiring Fund of all liabilities of FAM and the distribution of common shares of beneficial interest of the Acquiring Fund to the shareholders of FAM and complete liquidation of FAM (the “FAM Reorganization”)

 

Synopsis

 

The Board of each Acquired Fund, including trustees who are not “interested persons” of each Acquired Fund (as defined in the 1940 Act) (the “Independent Trustees”), have approved the respective Reorganization Agreement. The Acquiring Fund as it would exist after one or both Reorganizations is referred to as the “Combined Fund.”

 

Subject to approval of the respective Reorganization Agreements by the shareholders of the respective Acquired Funds and of the issuance of Acquiring Fund common shares by the shareholders of the Acquiring Fund, the Reorganization Agreements provide for:

 

·

the transfer of all of the assets of each Acquired Fund to the Acquiring Fund, in exchange solely for shares of the Acquiring Fund (although cash may be distributed in lieu of fractional shares of the Acquiring Fund);

 

·

the assumption by the Acquiring Fund of all liabilities of each Acquired Fund;

 

·

the distribution of common shares of the Acquiring Fund to the shareholders of each Acquired Fund; and

 

·

the complete liquidation of each Acquired Fund.

 

It is currently expected that each Reorganization will occur in the first quarter of 2024.

 

The Reorganization of an Acquired Fund is not contingent on the approval of the other Acquired Fund’s shareholders (i.e., a Reorganization of one of the Acquired Funds, if approved by that Acquired Fund’s shareholders, may still proceed if the other Reorganization is not approved by the other Acquired Fund’s shareholders).

 

Valuation

 

At the closing of each Reorganization, each Reorganization Agreement sets forth that the Acquired Fund assets will be valued in accordance with the Acquired Fund’s valuation procedures as approved by the Board of the Acquired Fund. Upon the consummation of the Reorganization, the assets transferred to the Acquiring Fund will be valued pursuant to the Acquiring Fund’s valuation procedures as approved by the Board of Trustees of the Acquiring Fund. The valuation procedures for the Acquired Funds, on the one hand, and the Acquiring Fund, on the other hand, differ in certain respects.

 

For purposes of determining an Acquired Fund’s net asset value, corporate, sovereign, government, foreign, mortgage backed, and capital preferred fixed income securities and senior floating rate bank loans are priced at the mean of evaluated bid and asked prices provided by third-party pricing vendors on the valuation date. In contrast, the Acquiring Fund values such securities at the bid price provided by third-party pricing vendors.

 

If a Reorganization is approved by shareholders and assuming that FSD’s and FAM’s fixed income holdings are not sold in advance of the respective Reorganization, the net asset value per share of the Acquiring Fund will be less than the net asset value per share of the respective Acquired Fund. For example, if ACP’s valuation procedures were used to value FSD and FAM’s fixed income security holdings as of September 29, 2023, the value of the Combined Fund’s shares is estimated to be reduced by approximately $1,052,639 (0.13% of the Combined Fund as of September 29, 2023) or $0.009 per share of the Combined Fund, assuming both Reorganizations are consummated.

 

 

Leverage and Portfolio Transitioning

 

Each Acquired Fund is required to pay back its outstanding leverage in connection with the closing of the Reorganization. It is anticipated that approximately 26% of FSD’s holdings and approximately 20% of FAM’s holdings will be sold by such Acquired Fund before the closing of the Reorganization in order to pay back each Acquired Fund’s outstanding leverage. This portfolio transition may take a significant amount of time and result in the Acquired Fund holding large amounts of uninvested cash. As a result, there may be times when an Acquired Fund is not pursuing its investment objective or is not being managed consistent with its investment strategies. This may impact each Acquired Fund’s performance. As of September 21, 2023, the expected costs to de-lever FSD’s portfolio would be approximately $405,000 (or 0.08% of FSD’s NAV as of September 21, 2023) or $0.012 per share. As of September 21, 2023, the expected costs to de-lever FAM’s portfolio would be approximately $33,000 (or 0.04% of FAM’s NAV as of September 21, 2023) or $0.003 per share. The foregoing estimates are subject to change depending on the composition of each Acquired Fund’s portfolio and market circumstances at the time any sales are made.

 

Following the Reorganization, the Combined Fund expects to realign its portfolio in a manner consistent with its investment strategies and policies, which will be the same as the Acquiring Fund’s strategies and policies. The Combined Fund may not be invested consistent with its investment strategies or the adviser’s investment approach while such realignment occurs. The realignment is anticipated to take approximately one week, based on current market conditions and assuming that the Acquired Funds’ holdings are the same as of September 21, 2023. Sales and purchases of less liquid securities could take longer. Based on the FSD and FAM holdings as of September 21, 2023, the Combined Fund expects to sell approximately 99% of FAM’s portfolio following the closing of the Reorganization. The Combined Fund expects to sell approximately 99% of FAM’s portfolio because it consists primarily of emerging market sovereign debt, which the Acquiring Fund’s investment team does not currently believe contributes to the Acquiring Fund's investment strategy. Although the Acquiring Fund may invest in emerging markets and sovereign debt without limit, the Acquiring Fund currently invests primarily in corporate bonds with just over 50% of its assets in bonds issued in the United States, with the remainder issued internationally, while FAM’s portfolio consists primarily of emerging markets sovereign debt. In addition, the Acquiring Fund’s investment team does not believe that FAM’s portfolio holdings would sufficiently contribute to supporting the Acquiring Fund’s distribution rate, which is higher than FAM’s distribution rate. As of September 21, 2023, the expected cost to sell 99% of FAM’s holdings following the closing of the Reorganization, which is estimated to equal 7.7% of the Combined Fund's portfolio, would be approximately $315,300 (or 0.04% of the estimated NAV of the Combined Fund as of September 21, 2023) or $0.0026 per share and would be borne by the Combined Fund.

 

To the extent there are any transaction costs (including brokerage commissions, transaction charges and related fees) associated with the sales and purchases made in connection with the Reorganizations, these will be borne by the Acquired Fund with respect to the portfolio transitioning conducted before the Reorganizations and borne by the Combined Fund with respect to the portfolio transitioning conducted after the Reorganizations. To the extent an Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund.

 

The portfolio transitioning after the Reorganization discussed above may result in capital gains or losses, which may have federal income tax consequences. For example, if the Reorganization of FAM only was completed on September 21, 2023, it is estimated that approximately $10,756,000, or $0.088 per share, in capital losses would have resulted from portfolio transitioning in the Combined Fund following the Reorganization. No sales of portfolio securities are anticipated after the Reorganization as it relates to the FSD Reorganization. The actual tax consequences as a result of portfolio repositioning after the closing of the Reorganizations are dependent on the portfolio composition of each Acquired Fund at the time of closing and market conditions. Any net capital gain resulting from the realignment coupled with the results of the Acquiring Fund’s normal operations during the tax year following the close of the Reorganizations would be distributed to the shareholder base of the Combined Fund post-Reorganization in connection with the annual distribution requirements under US federal tax laws. Please see the Question "Are the Reorganizations expected to be taxable to the respective shareholders of each Acquired Fund?" and "Board Consideration of the Reorganizations" and "Material Federal Income Tax Consequences of the Reorganizations" for additional information.

 

Comparison of the Funds 

 

FSD seeks to achieve its investment objectives by investing, under normal market conditions, a majority of its assets in a diversified portfolio of U.S. and foreign (including emerging markets) high-yield corporate fixed-income securities of varying maturities that are rated below investment grade at the time of purchase. As part of its investment strategy, FSD maintains both long and short positions in securities under normal market conditions. The Fund’s long positions, either directly or through derivatives, may total up to 130% of the Fund’s managed assets. The Fund’s short positions, either directly or through derivatives, may total up to 30% of the Fund’s managed assets. The Fund’s use of derivatives, other than for hedging purposes, will not exceed 30% of the Fund’s managed assets.

 

FSD may invest up to 5% of its Managed Assets (defined below) in common stocks, including those of foreign issuers. FSD may invest up to 20% of its Managed Assets in securities that, at the time of investment, are illiquid. FSD may also invest, without limit, in securities that are unregistered (but are eligible for purchase and sale by certain qualified institutional buyers) or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale (“restricted securities”). However, restricted securities determined to be illiquid are subject to the limitations set forth above.

 

FAM seeks to achieve its investment objectives by investing, under normal circumstances, substantially all of its Managed Assets (defined below) in a diversified portfolio of fixed-income securities, including government and corporate bonds, of U.S. and non-U.S. issuers. FAM’s investment team believes that a portfolio containing investment grade securities that invests across many national markets has the opportunity to achieve returns in excess of a portfolio that invests in a single domestic bond market, as the global fixed-income marketplace is generally less efficient than domestic markets. Under normal market conditions, FAM invests in securities of issuers in at least three countries (in addition to the United States), however, securities of issuers in a single country will not exceed 30% of the FAM’s Managed Assets. The Fund invests at least 60% of its Managed Assets in securities issued by government, government-related and supranational issuers (“government debt”). At least 25% of the Fund’s Managed Assets will be invested in U.S. dollar-denominated securities or non-U.S. dollar-denominated securities that have been fully hedged into U.S. dollars. FAM may also invest up to 10% of its Managed Assets in forward foreign currency exchange contracts for hedging and investment purposes. FAM places thresholds of the proportion of its Managed Assets that may be invested in corporate debt obligations, below investment grade securities, asset-backed securities, credit-linked notes, illiquid securities, and forward foreign exchange contracts (both deliverable and non-deliverable).

 

 

For purposes of FAM’s investment strategies, “Managed Assets” means the total asset value of FAM minus the sum of FAM’s liabilities other than the principal amount of borrowings, if any. For purposes of FSD’s investment strategies, “Managed Assets” means the average daily gross asset value of FSD (which includes the principal amount of any borrowings), minus the sum of FSD’s liabilities.

 

The Acquiring Fund is a high yield debt fund that is permitted to invest in a variety of US and foreign-issued debt instruments, and may utilize derivatives and hedging techniques, to achieve its investment objectives. The Acquiring Fund generally invests in corporate bonds and is permitted to invest in senior loans and in second lien or other subordinated loans or debt instruments, including non-stressed and stressed credit obligations, and related derivatives. The Acquiring Fund seeks to capitalize on market inefficiencies and to reallocate the portfolio of the Acquiring Fund to opportunistically emphasize those investments, categories of investments and geographic exposures believed to be best suited to the current investment and interest rate environment and market outlook. There is no minimum or maximum limit on the amount of the Acquiring Fund’s assets that may be invested in non-U.S. credit obligations generally or in emerging market credit obligations specifically. The Acquiring Fund has an 80% policy, under which it must invest 80% of its Managed Assets in credit obligations and related instruments. The Acquired Funds have no such 80% policy.

 

The Acquiring Fund is permitted to use derivative instruments to manage currency risk, credit risk, and interest rate risk and to replicate, or use as a substitute for, physical securities. As of the Acquiring Fund’s most recent shareholder report, the Acquiring Fund used derivatives to hedge foreign currency exposure.

 

The Acquiring Fund and the Acquired Funds may use leverage to the extent permitted by the 1940 Act. Currently, the 1940 Act and the rules and regulations thereunder generally limit the extent to which a Fund may utilize borrowings, together with any other senior securities representing indebtedness, to 33 and 1/3% of the Fund’s total assets (including the assets subject to, and obtained with, the proceeds of such leverage) at the time utilized (less the Fund’s liabilities and indebtedness not represented by senior securities). In addition, the 1940 Act limits the extent to which the Fund may issue preferred shares plus senior securities representing indebtedness to 50% of the Fund’s total assets (less the Fund’s liabilities and indebtedness not represented by senior securities).

 

As of September 29, 2023, FSD and FAM had 26.0% and 20.3% aggregate leverage from borrowings as a percentage of each Acquired Fund’s total assets, respectively. As of September 29, 2023, the Acquiring Fund had 29.1% aggregate leverage from the issuance of preferred shares and borrowings as a percentage of its total assets. The Combined Fund anticipates using leverage similarly to the Acquiring Fund’s use thereof.

 

The Acquiring Fund offers preferred shares. The preferred shares of the Acquiring Fund are senior to the Acquiring Fund’s common shares, such that holders of preferred shares have priority over the distribution of the Acquiring Fund’s assets, including dividends and liquidating distributions. Additionally, holders of the preferred shares, voting separately as a class, have the right to elect two trustees of the Acquiring Fund.

 

Tax Considerations

 

It is expected that shareholders of each Acquired Fund will not recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares in the Acquired Fund for shares of the Acquiring Fund pursuant to the Reorganization Agreement (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). There can be no assurance that the US Internal Revenue Service (“IRS”) will deem the exchanges to be tax-free. You should consult your tax adviser regarding the effect, if any, of the Reorganizations in light of your individual circumstances. You should also consult your tax adviser about other state and local tax consequences of the Reorganizations, if any, because the information about tax consequences in this document relates to the federal income tax consequences of the Reorganizations only. For further information about the federal income tax consequences of the Reorganization, see “Material Federal Income Tax Consequences of the Reorganizations” below.

 

As a condition to the closing of each Reorganization, each Acquired Fund and the Acquiring Fund will receive an opinion from the Acquiring Fund’s counsel Dechert LLP (based on certain facts, assumptions and representations) to the effect that, on the basis of the existing provisions of the Internal Revenue Code of 1986, as amended (the “Code”), current administrative rules and court decisions, the transactions contemplated by the Reorganization Agreement constitute a tax-free reorganization within the meaning of section 368(a) of the Code (except with respect to cash received in lieu of fractional shares of the Acquiring Fund). Despite this opinion, there can be no assurances that the IRS will deem the exchanges to be tax-free.

 

 

The portfolio transitioning discussed above may result in capital gains or losses, which may have federal income tax consequences.

 

Prior to the date of the Reorganizations’ closing, each Acquired Fund may declare one or more distributions to its shareholders that, together with all previous distributions, will have the effect of distributing to its shareholders all of its investment company taxable income (computed without regard to the deduction for dividends paid) and net realized capital gains, if any, through the date of the Reorganizations’ closing. All or a portion of such distribution may be taxable to the Acquired Fund’s shareholders for US federal income tax purposes.

 

Background and Reasons for the Proposed Reorganizations

 

Board Consideration of the Reorganizations

 

On October 23, 2023, the Boards of Trustees of FSD and FAM approved the reorganizations of the Acquired Funds into the Acquiring Fund. The Boards of Trustees of the Acquired Funds are comprised of the same seven individuals and are referred to in this “Board Consideration of the Reorganizations” section as the “Board.” For the reasons discussed below, the Board determined that, as applicable to each Acquired Fund, the proposed Reorganizations would be in the overall best interests of each Acquired Fund.

 

The Board considered the Reorganizations over the course of meetings held in September and October 2023. At those meetings, First Trust, the investment adviser for the Acquired Funds, discussed with the Board its reasons for proposing the Reorganizations. First Trust stated that it had conducted an evaluation of strategic alternatives for each Acquired Fund in light of certain factors, including, among others, the Acquired Funds’ discount levels. First Trust reviewed its evaluation of the strategic alternatives considered for each Acquired Fund, including maintaining the status quo, liquidation, conversion to an open-end fund, reorganization with an affiliated fund and reorganization with a third-party fund, and advised that, based on its evaluation, First Trust had determined that a reorganization with a third-party fund would be in the overall best interests of each Acquired Fund. First Trust reviewed its communications with AIL, the investment adviser for the Acquiring Fund, and its affiliate, abrdn Inc. (“AI” and together with AIL, “abrdn”), investment sub-adviser for the Acquiring Fund, and the due diligence it had conducted on abrdn, and informed the Board that First Trust was in the process of negotiating an agreement with AI, pursuant to which AI would acquire certain assets related to First Trust’s business of providing investment management services to the Acquired Funds and certain other closed-end funds in the First Trust Fund Complex (the “Purchase Transaction”) and that the Reorganizations were being proposed as part of the Purchase Transaction. In connection with the meetings at which the Reorganizations were discussed, First Trust and abrdn provided the Board with a variety of materials relating to the Reorganizations and the Purchase Transaction, including the rationale for and expected benefits and costs of each Reorganization, comparative information about the Funds and information about the Purchase Transaction and abrdn. Based on all the information reviewed, First Trust expressed its belief that, as applicable to each Acquired Fund, the Reorganizations were the best option for existing shareholders of the Acquired Funds and that the Board should approve and recommend that shareholders of each Acquired Fund approve the Reorganization for their Fund. First Trust highlighted that the Reorganizations would allow existing shareholders of the Acquired Funds to remain in a closed-end fund that seeks to provide current income, noting that, compared to each Acquired Fund, although the Acquiring Fund has a higher total expense ratio, the Acquiring Fund has a stronger performance track record on a net asset value (“NAV”) basis over recent periods, currently trades and has historically traded at a narrower discount (or higher premium), provides a significantly higher above-market distribution rate and offers better overall liquidity in light of its higher average daily trade volume. In addition, at the meetings, the Board received presentations from representatives of abrdn and was able to ask questions about the Reorganizations, the Purchase Transaction, abrdn and the Acquiring Fund. In connection with the meetings and prior to approving the Reorganizations, the Trustees of the Acquired Funds who are not “interested persons” (as defined in the Investment Company Act of 1940, as amended) of the Acquired Funds (the “Independent Trustees”) met in private sessions and reviewed the information provided and discussed the proposed Reorganizations with their independent legal counsel.

 

 

Based upon all the information provided taken as a whole and the discussions at the meetings, the Board, including all of the Independent Trustees, approved the Reorganizations, and determined that, as applicable to each Acquired Fund, the Reorganizations would be in the overall best interests of each Acquired Fund. Accordingly, the Board recommends that shareholders of each Acquired Fund approve the Reorganization for their Fund.

 

In determining to approve the Reorganizations and to recommend that shareholders of each Acquired Fund approve the Reorganization for their Fund, the Board considered, among other things, the following factors:

 

·

Compatibility of Investment Objectives and Policies; Closed-End Fund Structure. The Board noted that the Funds have substantially the same primary and secondary investment objectives, with each Fund seeking to provide current income as its primary objective and capital appreciation as its secondary objective. The Board considered similarities and differences between the Funds’ investment strategies, noting that each Fund invests globally in fixed income securities, which may include loans and high yield securities, while also noting, among other differences, that the Acquiring Fund generally invests in lower rated bonds in the high yield sector as compared to FSD, while the current weighted average for FAM is in investment grade bonds. The Board also noted that the Acquiring Fund currently invests just over 50% of its assets in bonds issued in the United States, with the remainder issued internationally, while FAM invests primarily in emerging markets. The Board further noted that corporate bonds comprise almost all of the Acquiring Fund’s portfolio, whereas corporate bonds comprise approximately 25% of FAM’s portfolio. The Board considered that, like the Acquired Funds, the Acquiring Fund utilizes leverage, although the Acquiring Fund utilizes leverage from borrowings and the issuance of preferred shares whereas the Acquired Funds utilize leverage only from borrowings. The Board compared the Funds’ leverage ratios, as of the end of each Fund’s most recent respective semi-annual fiscal period, noting the Acquiring Fund’s leverage ratio of 28% was higher than FSD’s leverage ratio of 25% and FAM’s leverage ratio of 19%. The Board noted that the Acquiring Fund’s leverage structure and utilization were not anticipated to change as a result of the Reorganizations. The Board considered that each Acquired Fund would need to eliminate its leverage prior to the closing of the applicable Reorganization, which would require sales of portfolio securities and related transaction costs to each Acquired Fund. The Board also considered that although no repositioning of FSD’s remaining portfolio was anticipated post-Reorganization, substantially all of FAM’s remaining portfolio would be repositioned post-Reorganization, resulting in transaction costs, which would be borne by the Acquiring Fund, including shareholders of the Acquired Funds who remain in the Acquiring Fund. In addition, the Board noted that all three Funds are structured as closed-end investment companies and considered the advantages of such structure, including the ability to use leverage and hold less liquid and potentially higher yielding assets.

 

 

·

Investment Capabilities and Financial Condition of abrdn. The Board considered information provided with respect to abrdn’s investment capabilities and products, including its closed-end fund business, noting abrdn’s statements that it has managed and operated closed-end funds for nearly four decades, that its registered closed-end fund business is the third largest globally and that it continues to view closed-end funds as a core area of growth for its business. The Board also considered information regarding abrdn’s financial strength and resources and the services it provides to the Acquiring Fund, noting abrdn’s representation that abrdn continues to review and provide the required resources to ensure high quality and professional management services to the Acquiring Fund. In addition, the Board considered other information regarding abrdn’s investment platform, including abrdn’s administration and investor support services, abrdn’s valuation process and abrdn’s risk management infrastructure. The Board also considered the presentations from representatives of abrdn at the meetings in September and October 2023. In evaluating the capabilities and resources of abrdn and the rationale for each Reorganization, the Board also considered First Trust’s assessment of abrdn. The Board noted that the reorganizations of two other closed-end funds in the First Trust Fund Complex into closed-end funds managed by abrdn are also contemplated by the Purchase Transaction.

 

·

Portfolio Management. The Board noted that, like the Acquired Funds, the Acquiring Fund employs an adviser/sub-adviser management structure, although each Acquired Fund’s sub-adviser is not affiliated with its adviser whereas the Acquiring Fund’s adviser and sub-adviser are affiliated. The Board also noted that AI serves as the sub-adviser for both FAM and the Acquiring Fund, although each Fund has a different portfolio management team. The Board considered the background and experience of the persons responsible for the management of the Acquiring Fund’s portfolio, including their tenure at abrdn and their experience managing closed-end funds, as well as information regarding investment support resources at abrdn that are utilized by the portfolio management team.

 

·

The Acquiring Fund Board Governance. The Board considered information provided by abrdn regarding the governance structure of the Acquiring Fund’s Board, the compliance and risk program and the service providers rendering core services to the Acquiring Fund.

 

·

Valuation of Portfolio Investments. The Board noted the information provided by abrdn regarding the valuation procedures used to value the Acquiring Fund’s investments and considered the uncertain impact on the value of an Acquired Fund shareholder’s investment immediately after the applicable Reorganization as a result of differences in the Acquired Funds’ valuation procedures and Acquiring Fund’s valuation procedures.

 

 

·

Comparison of Fees and Expense Ratios. The Board considered comparative expense information for the Funds, including comparisons between the current advisory fee rates and total expense ratios for the Funds and the estimated pro forma advisory fee rate and total expense ratio of the combined fund. The Board noted that the Acquiring Fund’s stated advisory fee rate of 1.25% of managed assets is higher than each Acquired Fund’s stated advisory fee rate of 1.00% of managed assets, and that the Acquiring Fund’s advisory fee rate would not change as a result of the Reorganizations. The Board considered that AIL has contractually agreed to limit the Acquiring Fund’s other operating expenses (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) to 0.35% of net assets; that, in connection with a separate reorganization of another closed-end fund into the Acquiring Fund that was completed in the first quarter of 2023, AIL has agreed to lower the limit to 0.25% of net assets for a period of one year from the closing of that reorganization; and that, in connection with the Reorganizations, AIL has proposed to extend the contractual expense limitation at 0.25% of net assets for twelve months from the closing of the Reorganizations, after which the contractual expense limitation would continue at 0.35% of net assets to June 30, 2025. The Board considered that the estimated pro forma total expense ratio of the Acquiring Fund post-Reorganization of 2.00% of net assets (excluding leverage costs and reflecting the impact of the current expense waiver of 0.06%) and 4.75% of net assets (including leverage costs, assuming a consistent leverage ratio, and reflecting the impact of the current expense waiver of 0.06%) was higher than the total expense ratio of FSD as of the end of its most recent semi-annual fiscal period of 1.16% of net assets (excluding leverage costs) and 3.95% of net assets (including leverage costs) and higher than the total expense ratio of FAM as of the end of its most recent semi-annual fiscal period of 1.91% of net assets (excluding leverage costs) and 3.62% of net assets (including leverage costs). The Board noted the differences in the cost of each Fund’s leverage and the impact of leverage costs on each Fund’s expense ratio. The Board also noted the estimated pro forma total expense ratio of the Acquiring Fund post-reorganization without the impact of the current expense waiver.

 

·

Fund Performance and Distribution Rates. The Board reviewed the performance of the Funds. The Board noted that the Acquiring Fund had outperformed FSD on a NAV basis for the one- and three-year periods ended September 30, 2023 and underperformed FSD on a NAV basis for the five-year period ended September 30, 2023. The Board noted that the Acquiring Fund had outperformed FAM on a NAV basis for the one-, three- and five-year periods ended September 30, 2023. In reviewing the Funds’ performance, the Board took into account the different investment strategies of the Funds. The Board also received information comparing the Funds’ distribution rates and noted that the Acquiring Fund’s current distribution rate is significantly higher than each Acquired Fund’s current distribution rate and that the distributions paid by the Acquiring Fund over the past five fiscal years have been comprised of 11% return of capital while the distributions paid by FSD and FAM over the past five fiscal years have been comprised of 30% and 62% return of capital, respectively.

 

·

Anticipated Tax-Free Reorganizations; Other Tax Impact. The Board noted First Trust’s representation that each Reorganization will be structured with the intention that it qualify as a tax-free reorganization for federal income tax purposes and that, as to the applicable Reorganization, each Fund will obtain an opinion of counsel substantially to this effect (based on certain factual representations and certain customary assumptions). In addition, the Board noted information indicating that each Acquired Fund’s pre-Reorganization portfolio sales in connection with the elimination of its leverage were expected to result in capital losses and that post-Reorganization sales of FAM’s portfolio securities were also expected to result in capital losses.

 

 

·

Potential for Improved Trading and Liquidity and Narrower Discounts. The Board considered the higher average daily trading volume of the Acquiring Fund as compared to each Acquired Fund, although FSD is a slightly larger fund than the Acquiring Fund, and that shareholders of the Acquired Funds may benefit from becoming shareholders of a larger combined fund with higher trading volume, potentially resulting in improved liquidity and narrower bid-ask spreads. The Board noted abrdn’s expectation that a larger combined fund should provide improved scale and liquidity for shareholders with a larger free float and engender greater market visibility, analyst and media coverage attracting more buyers and increased trading of fund shares. The Board considered that, in general, the Acquiring Fund’s shares have historically traded at a narrower discount (or higher premium) to NAV compared to the shares of each Acquired Fund and that the Acquiring Fund’s current discount is narrower than the current discounts of the Acquired Funds. The Board noted abrdn’s expectation that the combination of the Funds should provide improved liquidity and tradability creating improved potential for a narrower discount and lower discount volatility over time.

 

·

Expenses of the Reorganizations. The Board noted that the direct costs of the Reorganizations, including legal costs and costs associated with proxy solicitation, would be borne by First Trust and abrdn. The Board noted the transaction costs to be borne by each Acquired Fund in connection with the elimination of its leverage pre-Reorganization and the transaction costs to be borne by the Acquiring Fund (including shareholders of the Acquired Funds who remain in the Acquiring Fund) as a result of portfolio repositioning post-Reorganization and considered estimates of such costs.

 

·

Alternatives to the Reorganizations. The Board noted First Trust’s consideration of alternatives to the Reorganizations, including maintaining the status quo, liquidation, conversion to an open-end fund, reorganization with an affiliated fund and reorganization with a third-party fund, and First Trust’s determination that, as applicable to each Acquired Fund, the Reorganizations were the best option for existing shareholders of the Acquired Funds.

 

·

Terms and Conditions of the Reorganizations. The Board considered the terms and conditions of the Reorganizations and whether the Reorganizations would result in the dilution of the interests of existing shareholders of the Acquired Funds in light of the basis on which shares of the Acquiring Fund would be issued to shareholders of the Acquired Funds. The Board noted abrdn’s statement indicating that, although none of the reorganizations contemplated by the Purchase Transaction, including the Reorganizations, is contingent upon any other reorganization, if the reorganizations are not approved, or if the other conditions in the Purchase Transaction agreement are not satisfied or waived, then the Purchase Transaction may not be completed, and the Purchase Transaction agreement and the Reorganizations may be terminated.

 

 

In addition, the Board considered the Reorganizations in light of the increased focus by activist investors on the First Trust Fund Complex closed-end fund suite and the significant costs that may be imposed on the Acquired Funds in connection with an activist campaign, including potential litigation costs. The Board considered that the Reorganizations may have the additional benefit of reducing the likelihood of an activist campaign against the larger combined fund. The Board noted abrdn’s view that the Reorganizations will help ensure the viability of the Funds for the benefit of long-term shareholders by addressing risks arising from lack of scale, primarily liquidity, marketability challenges and fund costs that lead to wider discounts over time giving investors a poorer outcome and resulting in increasing threats from activists. In evaluating the Reorganizations, the Board also considered that First Trust will receive compensation from abrdn in connection with the Purchase Transaction.

 

Based upon on all of the foregoing considerations, the Board, in the exercise of its business judgment, approved the Reorganizations, including each proposed Agreement and Plan of Reorganization and the Reorganization contemplated thereby, and determined that, as applicable to each Acquired Fund, the Reorganizations would be in the overall best interests of each Acquired Fund. No single factor was determinative in the Board’s analysis and all factors were taken as a whole. The Board, including the Independent Trustees, unanimously recommends that shareholders of each Acquired Fund approve the Reorganization for their Fund.

 

 

Vote Required for each Proposal

 

Each Proposal will require the affirmative vote of a majority of the outstanding shares (as defined under the 1940 Act) entitled to be cast by FSD or FAM, as applicable. The 1940 Act defines a majority of the outstanding voting shares as the lesser of either (i) at least 67% of the voting securities present at the Special Meeting, if at least 50% of such securities are present or represented by proxy, or (ii) more than 50% of the outstanding voting shares. For additional information regarding voting requirements, see “Voting Information and Requirements.”

 

 

COMPARISON OF THE FUNDS

 

Investment Objectives

 

All of the Funds seek current income with a secondary objective of capital appreciation.

 
FSD’s primary investment objective is to provide current income, with a secondary objective of capital appreciation. Each of FAM’s and the Acquiring Fund’s primary investment objective is to is to seek a high level of current income with a secondary objective of capital appreciation.

 

Each Fund’s investment objectives are fundamental and may not be changed without shareholder approval.

 

Principal Investment Strategies

 

The Funds’ respective investment strategies are similar in that they invest in high-yield fixed income securities. However, in seeking to achieve their respective investment objectives, there are some substantial differences in the investment strategies and risks of each Fund. The Acquiring Fund and each Acquired Fund invest in high yield debt securities, utilizes leverage and invest in a variety of US and foreign issued debt instruments and may utilize derivatives and hedging techniques, to achieve their respective investment objectives. Some key differences between the Funds’ investment strategies include that FSD maintains both long and short positions in securities under normal market conditions and FAM has a distinctly global focus and places upward thresholds on investments in various securities including high-yield fixed income securities. The Acquiring Fund invests opportunistically and does not have the same limits and investment policies. The Acquiring Fund has an 80% policy, under which it must invest 80% of its Managed Assets in credit obligations and related instruments. The Acquired Funds have no such 80% policy.

 

The definition of “Managed Assets” for purposes of the Acquired Funds’ and the Acquiring Fund’s investment strategies are similar. For purposes of FAM’s investment strategies, “Managed Assets” means the total asset value of FAM minus the sum of the FAM’s liabilities other than the principal amount of borrowings, if any. For purposes of FSD’s investment strategies, “Managed Assets” means the average daily gross asset value of FSD (which includes the principal amount of any borrowings), minus the sum of FSD’s liabilities. For purposes of the Acquiring Fund’s investment strategies, “Managed Assets” means the total assets of the Acquiring Fund (including any assets attributable to money borrowed for investment purposes, including proceeds from (and assets subject to) reverse repurchase agreements, any credit facility and any issuance of preferred shares or notes) minus the sum of the Acquiring Fund’s accrued liabilities (other than Fund liabilities incurred for the purpose of leverage).

 

 

FSD	FAM	Acquiring Fund
The Fund invests primarily in a diversified portfolio of U.S. and foreign (including emerging markets) high-yield corporate fixed-income securities of varying maturities that are rated below-investment grade at the time of purchase. Such securities include corporate bonds; debentures; notes; commercial paper; other types of corporate debt instruments, including instruments issued by corporations with direct or indirect government ownership; asset-backed securities; preferred shares; loan participations and assignments; payment-in-kind securities; zero-coupon bonds; bank certificates of deposit; fixed time deposits; banker’s acceptances; and derivative instruments that provide the same or similar economic impact as a physical investment in any of the above referenced securities.   The Fund will generally limit its investment in securities rated below “B-” by Standard & Poor’s Ratings Group, a division of the McGraw Hill Companies, Inc., or Fitch Ratings, below “B3” by Moody’s Investors Service, Inc., comparably rated by another nationally recognized statistical rating organization or, if unrated, determined by the investment team to be of comparable quality at the time of purchase to no more than 5% above the approximate aggregate weighting of such securities in the index which the Fund tracks.   The Fund maintains both long and short positions in securities. The Fund’s long positions, either directly or indirectly, may total up to 130% of the Fund’s managed assets. The Fund’s short positions, either directly or through derivatives, may total up to 30% of the Fund’s managed assets.   The Fund’s use of derivatives, other than for hedging purposes, will not exceed 30% of the Fund’s managed assets. The Fund’s principal investments in derivative instruments may include investments in credit default swaps, structured notes, special purpose vehicles, futures transactions, options and options on futures as well as certain currency and interest rate instruments such as foreign currency forward contracts, currency exchange transactions on a spot (i.e., cash) basis, put and call options on foreign currencies and interest rate swaps.   The Fund’s investments may be denominated in U.S. dollars or in foreign currencies. In order to minimize the impact of currency fluctuations, MacKay may at times hedge certain or all of the Fund’s investments denominated in foreign currencies into U.S. dollars.   The Fund may also invest up to 5% of its managed assets in common stock, including those of foreign issuers; invest up to 20% of its managed assets in securities that, at the time of investment, are illiquid; invest without limit in securities that are unregistered or are held by control persons of the issuer; and invest without limit in securities that are subject to contractual restrictions on their resale.	The Fund will pursue its objectives by investing in the world bond markets through a diversified portfolio of investment grade and below-investment grade government and corporate debt securities. Investments in government debt may also include bonds issued by countries considered to be emerging markets.   Under normal market conditions, the Fund invests substantially all of its “Managed Assets” in a diversified portfolio of fixed-income securities, including government and corporate bonds, of U.S. and non-U.S. issuers. Under normal market conditions, the Fund invests in securities of issuers in at least three countries (in addition to the United States), however, securities of issuers in a single country will not exceed 30% of the Fund’s Managed Assets.   The Fund has no stated maturity strategy. Rather, abrdn Inc. invests in securities of various maturities which it believes offer income and total return opportunities to the Fund. Allocation between investment grade and below-investment grade securities will vary according to relative value and opportunity identified by abrdn Inc. The Fund’s portfolio positions will be undertaken according to the quality of their risk-adjusted potential return.   The Fund invests at least 60% of its Managed Assets in securities issued by government, government-related and supranational issuers (“government debt”). At least 25% of the Fund’s Managed Assets will be invested in U.S. dollar-denominated securities or non-U.S. dollar-denominated securities that have been fully hedged into U.S. dollars. Government debt includes: debt securities issued or guaranteed by governments, governmental agencies or instrumentalities and political subdivisions; debt securities issued by government owned, controlled or sponsored entities; interests in entities organized and operated for the purpose of restructuring the investment characteristics of instruments issued by the above-noted issuers; or debt securities issued by supranational entities such as the World Bank or the European Union.   The Fund:   May invest up to 40% of its Managed Assets in corporate debt obligations.   ·    Corporate debt bonds generally are used by corporations to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Certain corporate bonds are “perpetual” in that they have no maturity date. The Fund may invest in non-U.S. corporate bonds which involve unique risks compared to investing in the securities of U.S. issuers.   May invest up to 60% of its Managed Assets in securities rated below “Baa3” by Moody’s Investment Service, inc. (“Moody’s”) below “BBB-” by Standard & Poor’s Corporation, a division of The McGraw-Hill Companies (“S&P”), or comparably rated by another nationally recognized statistical rating organization or, if unrated, determined by abrdn Inc. to be of comparable credit quality.	Depending on current market conditions and the Fund’s outlook over time, the Fund seeks to achieve its investment objectives by opportunistically investing primarily in loan and debt instruments (and loan-related or debt-related instruments, including repurchase and reverse repurchase agreements and derivative instruments) of issuers that operate in a variety of industries and geographic regions. The Fund expects to emphasize high current income, with a secondary emphasis on capital appreciation, by investing generally in senior secured floating rate and fixed rate loans and in second lien or other subordinated loans or debt instruments, including non-stressed and stressed credit obligations, and related derivatives. Under normal market conditions, the Fund will invest at least 80% of its “Managed Assets” in any combination of the following credit obligations and related instruments: (i) senior secured floating rate and fixed rate loans (“Senior Loans”) (including those that, at the time of investment, are rated below investment grade by a nationally recognized statistical rating organization (a “NRSRO”) or are unrated but deemed by aIL or abrdn Inc. (collectively with aIL, the “Advisers”) to be of comparable quality; these types of below investment grade instruments are commonly known as “junk” securities and are regarded as predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal); (ii) second lien or other subordinated or unsecured floating rate and fixed rate loans or debt (including those that, at the time of investment, could be considered “junk” securities as described above); (iii) other debt obligations, including high-yield, high-risk obligations (i.e., instruments that are commonly known as “junk” securities as described above) and “covenant lite” loans; (iv) structured products, including collateralized debt and loan obligations (collectively, “structured products”) that provide long or short exposure to other credit obligations; (v) swaps and other derivative instruments (including credit default, total return, index and interest rate swaps, options, forward contracts, futures contracts and options on futures contracts) that provide long or short exposure to other credit obligations; and (vi) short-term debt securities such as US government securities, commercial paper and other money market instruments and cash equivalents (including shares of money market funds). Certain types of structured products, swaps and other derivative instruments provide short exposure to other credit obligations because the value of such instruments is inversely related to the value of one or more other credit obligations.   The Fund has no liquidity limitation or restriction, thus some or all its investments may be illiquid securities. The Advisers have expertise in Senior Loans and subordinated debt instruments, including those of stressed and distressed issuers, and is responsible for the overall management of the Fund.

 

 

FSD	FAM	Acquiring Fund
To the extent the Fund enters into derivatives transactions, it will do so pursuant to Rule 18f-4 under the 1940 Act. Rule 18f-4 requires the Fund to implement certain policies and procedures designed to manage its derivatives risks, dependent upon the Fund’s level of exposure to derivative instruments.	·     The Fund may invest in high yield securities of any rating. However, the Fund will not invest more than 15% of its Managed Assets in securities rated below “B-” by Moody’s and/or S& P.     May invest up to 15% of its Managed Assets in asset-backed securities.   ·     Asset-backed securities are securities that represent a participation in, or are secured by and payable from, a stream of payments generated by particular assets, most often a pool or pools of similar assets (e.g., trade receivables). The credit quality of these securities depends primarily upon the quality of the underlying assets and the level of credit support and/or enhancement provided. The underlying assets (e.g., loans) are subject to prepayments which shorten the securities’ weighted average maturity and may lower their return. Losses or delays in payment may result if the credit support or enhancement is exhausted because the required payments of principal and interest on the underlying assets are not made. The value of these securities may also change because of changes in the market’s perception of the creditworthiness of the servicing agent for the pool, the originator of the pool or the financial institution or fund providing the credit support or enhancement.     May invest up to 35% of its Managed Assets in credit linked notes (“Credit Linked Notes”), provided such securities are issued by an institution with at least an “A” credit rating by Moody’s and/or S&P.	The Advisers seek to maximize risk adjusted returns, including by seeking to manage risk through shorting and other hedging strategies when deemed advisable by the Advisers. There can be no assurance that the Fund’s hedging strategies will succeed. The Advisers seek to achieve the Fund’s investment objectives while carefully evaluating risk/return within the capital structure of a company, as well as the industry and asset class. The Advisers look to maintain trading flexibility and to preserve capital. They conduct thorough in-depth research and employ a disciplined investment philosophy and a consistent investment approach in their focus on credit opportunities. The Advisers’ investment teams use a robust credit process that includes research and analysis using a top-down/bottom-up approach to find mispriced or undervalued opportunities: from the top down, they consider macroeconomic themes of the overall credit market and industries, and from the bottom up, they conduct detailed fundamental analysis related to credit obligations of specific issuers, including examining issuers’ financials and operations, including sales, earnings, growth potential, assets, debt, management and competition. The Advisers also seek to understand historic and prospective industry trends affecting an investment opportunity. The Fund can invest in both fixed-rate and floating-rate credit obligations. When investing in credit obligations, the Fund may invest in the same securities or other credit obligations in which other accounts managed by the Advisers also invest. To the extent that the Advisers serve as an investment manager to other accounts in the future that have the same investment strategy as the Fund, investment opportunities within such strategy will, to the extent practicable, be allocated among the Fund and such other accounts on a pro rata basis or on such other basis as the Advisers determine to be fair and equitable to the Fund and such other accounts.

 

 

FSD	FAM	Acquiring Fund
	·     Credit Linked Notes are structured securities typically issued by banks whose principal and interest payments are contingent on the performance of a specified borrower company or companies (the “Reference Issuer”). Credit Linked Notes are created by embedding a credit default swap in a funded asset to form an investment whose credit risk and cash flow characteristics resemble those of a bond or loan. These notes pay an enhanced coupon to the investor for taking on the added credit risk of the Reference Issuer.   May invest up to 10% of its Managed Assets in securities that, at the time of investment, are illiquid (i.e., securities that cannot be disposed of within seven days in the ordinary course of business at approximately the value at which the Fund has valued the securities). The Fund may also invest, without limit, in securities that are unregistered (but are eligible for purchase and sale by certain qualified institutional buyers) or are held by control persons of the issuer and securities that are subject to contractual restrictions on their resale (“restricted securities”). However, restricted securities determined by abrdn Inc., under the supervision of the Board of Trustees, to be illiquid are subject to the limitations set forth above.     May invest up to 5% of its Managed Assets in non-deliverable forward foreign exchange contracts for purposes of hedging.   May invest up to 10% of its Managed Assets in forward foreign exchange contracts (both deliverable and non-deliverable).	Investors should note that the investment advisory fee structure for other accounts managed by the Advisers may be different than the investment advisory fee structure for the Fund. The Fund offers an opportunity for its investors to have access to an investment strategy implemented by the Advisers, which normally is not directly available to retail investors, albeit only at the lower risk and return segment of the market.   Leverage – The Fund is permitted to obtain leverage using any form or combination of financial leverage instruments, including reverse repurchase agreements, credit facilities such as bank loans or commercial paper, and the issuance of preferred shares or notes. The Fund is permitted to obtain leverage using any form or combination of financial leverage instruments, including reverse repurchase agreements, credit facilities such as bank loans or commercial paper, and the issuance of preferred shares or notes. The Fund is permitted to have financial leverage representing up to the maximum extent permitted by the 1940 Act. The 1940 Act generally prohibits the Fund from engaging in most forms of leverage representing indebtedness other than preferred shares unless immediately after such incurrence the Fund's total assets less all liabilities and indebtedness not represented by senior securities (for these purposes, "total net assets") is at least 300% of the aggregate senior securities representing indebtedness (i.e., the use of leverage through senior securities representing indebtedness may not exceed 33 1/3% of the Fund's total net assets (including the proceeds from leverage)). Additionally, under the 1940 Act, the Fund generally may not declare any dividend or other distribution upon any class of its capital shares, or purchase any such capital shares, unless at the time of such declaration or purchase, this asset coverage test is satisfied. In addition, the 1940 Act limits the extent to which the Fund may issue preferred shares plus senior securities representing indebtedness to 50% of the Fund’s total assets (less the Fund’s liabilities and indebtedness not represented by senior securities). Indebtedness associated with reverse repurchase agreements and similar financing transactions may be aggregated with any other senior securities representing indebtedness for this purpose or be treated as derivatives transactions under the 1940 Act and the rules and regulations thereunder, depending on the Fund’s election under applicable SEC requirements.

 

 

Distribution Information

 

FSD currently pays a monthly distribution of $0.105 per share; based on the market price and NAV as of September 29, 2023, FSD’s annualized distribution rate is 11.75% and 10.28%, respectively. FAM currently pays a monthly distribution of $0.060 per share; based on the market price and NAV as of September 29, 2023, FAM’s annualized distribution rate is 12.63% and 11.18%, respectively. The Acquiring Fund currently pays a monthly distribution of $0.100 per share; based on the market price and NAV as of September 29, 2023, the Acquiring Fund’s annualized distribution rate is 17.6% and 17.7%, respectively. The Combined Fund expects to pay a monthly distribution of $0.100 per share and would have the same distribution yield as the Acquiring Fund.

 

The Combined Fund intends to make its first distribution to shareholders in the month immediately following the Reorganization. In addition, the Combined Fund expects to follow the same frequency of payments as each Fund and to make monthly distributions to shareholders.

 

Please see “Description of Common Shares to be Issued by the Acquiring Fund; Comparison to the Acquired Fund” below for additional information.

 

Leverage

 

Each Acquired Fund will be required to pay back its outstanding leverage in connection with the closing of the Reorganization. It is anticipated that approximately 26% of FSD’s holdings and 20% of FAM’s holdings will be sold by each respective Acquired Fund before the closing of the Reorganizations in order to pay back each Acquired Fund’s outstanding leverage. As a result of the disposition of such securities, each Acquired Fund may hold more uninvested cash than normal and there may be times when each Acquired Fund is not fully invested in accordance with its investment objective and strategies during this transition period, which may cause an Acquired Fund to forgo any appreciation in value of portfolio investments, if any. This may impact each Acquired Fund’s performance. As of September 21, 2023, the expected costs to de-lever FSD’s portfolio would be approximately $405,000 (or 0.08% of FSD’s NAV as of September 21, 2023) or $0.012 per share. As of September 21, 2023, the expected costs to de-lever FAM’s portfolio would be approximately $33,000 (or 0.04% of FAM’s NAV as of September 21, 2023) or $0.003 per share. To the extent an Acquired Fund has holdings in France, Spain and/or Italy, such countries may impose an additional foreign transfer tax on the transfer of such securities to the Acquiring Fund. These taxes are in addition to the transaction costs disclosed above and would be borne by the Combined Fund. The foregoing estimates are subject to change depending on the composition of each Acquired Fund’s portfolio and market circumstances at the time any sales are made.

 

The portfolio de-levering discussed above may result in capital gains or losses, which may have federal income tax consequences. For example, if the de-levering of FSD was completed on September 21, 2023, it is estimated that approximately $16,821,000, or $0.505 per share, in capital losses would have resulted from the sale of portfolio securities ahead of the Reorganization. If the de-levering of FAM was completed on September 21, 2023, it is estimated that approximately $2,261,000, or $0.223 per share, in capital losses would have resulted from the sale of portfolio securities ahead of the Reorganization. The actual tax consequences as a result of portfolio repositioning are dependent on the portfolio composition of each Acquired Fund at the time and market conditions.

 

The Funds’ strategies relating to their use of leverage may not be successful, and the Funds’ use of leverage will cause the Funds’ NAV to be more volatile than they would otherwise be. There can be no guarantee that the Funds will leverage their assets or, to the extent the Funds utilize leverage, what percentage of its assets such leverage will represent.

 

As of September 29, 2023, each of FSD and FAM had aggregate leverage from borrowings and the Acquiring Fund had aggregate leverage from the issuance of preferred shares and borrowings as a percentage of its total assets as follows:

 

		Leverage Ratio
FSD		26.0	%
FAM		20.3	%
Acquiring Fund		29.1	%

 

 

If the Reorganization(s) had occurred on September 29, 2023, the leverage ratio for the Combined Fund would have been as follows:

 

Pro Forma Combined Fund (FSD into the Acquiring Fund only)				Pro Forma Combined Fund (FAM into the Acquiring Fund only)				Pro Forma Combined Fund (FSD and FAM into the Acquiring Fund)
	29.1	%			29.1	%			29.1	%

 

Fees and Expenses

 

Below is a comparison of the fees and expenses of the Funds before and after the Reorganizations based on the expenses for the six months ended April 30, 2023, for FSD and the Acquiring Fund and for the six months ended June 30, 2023 for FAM. The pro forma information for the Combined Fund is as of April 30, 2023. The Acquiring Fund’s assets have been restated to reflect the net assets as of April 30, 2023 (rather than average net assets over the six months ended April 30, 2023) in order to provide more accurate expense ratios due to a significant increase in Fund assets that occurred on March 10, 2023 as the result of a reorganization of another closed-end management investment company registered under the 1940 Act with and into the Acquiring Fund and, therefore, the information in the fee table below will not match the Financial Highlights in the Acquiring Fund’s April 30, 2023 semi-annual report to shareholders. Pro forma combined fees and expenses are estimated in good faith and are hypothetical.

 

It is important to note that following the Reorganization, shareholders of the Acquired Funds would be subject to the actual fees and expenses of the Acquiring Fund, which may not be the same as the pro forma combined fees and expenses. Future fees and expenses may be greater or lesser than those indicated below.

 

		FSD			FAM			Acquiring Fund*		Pro Forma Combined Fund* (FSD into Acquiring Fund Only)		Pro Forma Combined Fund* (FAM into Acquiring Fund Only)		Pro Forma Combined Fund* (FSD and FAM into Acquiring Fund)
Common Shareholder Transaction Expenses
Sales Load (as a percentage of the offering price)(1)		None			None			None		None		None		None
Offering expenses (as a percentage of offering price)(1)		None			None			None		None		None		None
Dividend reinvestment and optional cash purchase plan fees (per share for open-market purchases of common shares)
Fee for Open Market Purchases of Common Shares		$0.03			$0.03			$0.02 (per share)(2)		$0.02 (per share)(2)		$0.02 (per share)(2)		$0.02 (per share)(2)
Fee for Optional Shares Purchases		None			None			$5.00 (max)(2)		$5.00 (max)(2)		$5.00 (max)(2)		$5.00 (max)(2)
Sales of Shares Held in a Dividend Reinvestment Account		$0.12 (per share) plus $15(3)			$0.12 (per share) plus $15(3)			$0.12 (per share) and $25.00 (max)(2)		$0.12 (per share) and $25.00 (max)(2)		$0.12 (per share) and $25.00 (max)(2)		$0.12 (per share) and $25.00 (max)(2)
Annual expenses (as a percentage of net assets attributable to Common Shares)
Advisory fee(4)			1.00	%		1.31	%	1.74	%	1.74	%	1.74	%	1.74	%
Interest expense(5)			2.76	%		1.71	%	1.84	%	2.09	%	1.91	%	2.11	%
Dividends on Preferred Shares			None			None		0.57	%(6)	0.27	%	0.48	%	0.24	%
Other expenses			0.16	%		0.60	%	0.44	%	0.33	%	0.40	%	0.31	%
Acquired Fund Fees and Expenses(7)			-	%		-	%	0.01	%	0.00	%	0.01	%	0.00	%
Total annual expenses			3.92	%		3.62	%	4.60	%	4.43	%	4.54	%	4.40	%
Less: expense reimbursement			None			None	%	0.18	%(8)	0.07	%(8)	0.15	%(8)	0.06	%(8)
Total annual expenses after expense reimbursement			3.92	%		3.62	%	4.42	%(8)	4.36	%(8)	4.39	%(8)	4.34	%(8)

 

 

*	The Acquiring Fund’s assets have been restated to reflect net assets as of April 30, 2023 (rather than average net assets over the six months ended April 30, 2023) in order to provide more accurate expense ratios due to a significant increase in Fund assets that occurred on March 10, 2023 as the result of a reorganization of another closed-end management investment company registered under the 1940 Act with and into the Acquiring Fund and, therefore, the information in the fee table below will not match the Financial Highlights in the Acquiring Fund’s April 30, 2023 semi-annual report to shareholders.
(1)	No sales load will be charged in connection with the issuance of Acquiring Fund common shares as part of the Reorganization. Common shares are not available for purchase from the Funds but may be purchased on the NYSE through a broker-dealer subject to individually negotiated commission rates. Common shares purchased in the secondary market may be subject to brokerage commissions or other charges.
(2)	Shareholders who participate in the Acquiring Fund’s Dividend Reinvestment and Optional Cash Purchase Plan (the “Plan”) may be subject to fees on certain transactions. Fees for Computershare Trust Company N.A. (the “Plan Agent”) for the handling of the reinvestment of dividends will be paid by the Acquiring Fund; however, participating shareholders will pay a $0.02 per share fee incurred in connection with open-market purchases in connection with the reinvestment of dividends, capital gains distributions and voluntary cash payments made by the participant, which will be deducted from the value of the dividend. For optional share purchases, shareholders will also be charged a $2.50 fee for automatic debits from a checking/savings account, a $5.00 one-time fee for online bank debit and/or $5.00 for check. Shareholders will be subject to $0.12 per share fee and either a $10.00 fee (for batch orders) or $25.00 fee (for market orders) for sales of shares held in a dividend reinvestment account. Per share fees include any applicable brokerage commissions the Plan Agent is required to pay.
(3)	You will pay brokerage charges if you direct Computershare Inc., as agent for the Common Shareholders Dividend Reinvestment Plan, to sell your Common Shares held in a dividend reinvestment account.
(4)	The contractual advisory fee of each Acquired Fund is 1.00% of the average daily value of the Acquired Managed Assets. For the purpose of this calculation for FAM, “Managed Assets” means the gross asset value of FAM (including assets attributable to FAM’s preferred shares, if any, and the principal amount of borrowings) minus the sum of FAM’s accrued and unpaid dividends on any outstanding preferred shares, and accrued liabilities (other than the principal amount of any borrowings incurred or of commercial paper or notes issued by FAM). For purposes of this calculation for FSD, “Managed Assets” means the average daily gross asset value of FSD (which includes the principal amount of any borrowings) minus the sum of FSD’s liabilities.   The contractual advisory fee of the Acquiring Fund and Combined Fund is 1.25% of the Combined Fund’s average daily Managed Assets. Managed Assets for these purposes are the total assets of the Fund (including any assets attributable to money borrowed for investment purposes, including proceeds from (and assets subject to) reverse repurchase agreements, any credit facility and any issuance of preferred shares or notes) minus the sum of the Fund’s accrued liabilities (other than Acquiring Fund liabilities incurred for the purpose of leverage).   The advisory fee percentage calculation assumes the use of leverage by each Fund as discussed in note (5) below.
(5)	For FAM, the percentage in the table is based on total borrowings of $21,409,545 (the average balance outstanding under FAM’s credit facility as of June 30, 2023, representing approximately 25% of the FAM’s Managed Assets) and an average interest rate during the semi-annual period ended June 30, 2023 of 5.60%.   For FSD, the percentage in the table is based on the average margin interest expense rate of 5.11% charged on the sum of total borrowings of $143,105,137 (the average balance outstanding in FSD’s margin account, representing approximately 26% of FSD’s Managed Assets) and the average market value of securities sold short of $56,937,033 during the semi-annual period ended April 30, 2023. In addition, the percentage in the table includes interest expense on investments sold short.   For the Acquiring Fund, the percentage in the table is based on total borrowings of $87,000,000 (the average balance outstanding under the Acquiring Fund’s credit facility as of April 30, 2023, representing approximately 28.7% of the Acquiring Fund’s Managed Assets) and an average interest rate during the fiscal period ended April 30, 2023 of 5.82%.   For the Combined Fund, the percentage in the table is based on estimated total borrowings under a credit facility of $299,759,000 (representing approximately 25.0% of the Combined Fund’s Managed Assets and an average interest rate of 5.82%.)   There can be no assurances that either Fund will be able to obtain such level of borrowing (or to maintain its current level of borrowing), that the terms under which either Fund borrows will not change, or that either Fund’s use of leverage will be profitable.
(6)	Based on 1,600,000 shares of Preferred Shares outstanding as of April 30, 2023, with an aggregate liquidation preference of $40 million and an annual dividend rate equal to 5.25% of such liquidation preference. The costs associated with the Preferred Shares are borne entirely by common shareholders.
(7)	Acquired Fund fees and expenses are indirect fees and expenses that the Acquired Fund incurs from investing in the shares of other mutual funds, including money market funds and exchange traded funds. Acquired Fund fees and expenses are borne indirectly by the Acquired Fund, but they are not reflected in the Acquired Fund’s financial statements; and the information presented in the table will differ from that presented in the Acquired Fund’s financial highlights.
(8)	abrdn Investments Limited (“aIL”), the investment adviser of the Acquiring Fund, has contractually agreed to limit total “Other Expenses” of the Acquiring Fund (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) as a percentage of net assets attributable to common shares of the Acquiring Fund to 0.25% per annum of the Acquiring Fund’s average daily net assets until Mach 7, 2024 and then 0.35% per annum of the Acquiring Fund’s average daily net assets until October 31, 2024. aIL has contractually agreed to limit total “Other Expenses” of the Combined Fund (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) as a percentage of net assets attributable to common shares of the Combined Fund to 0.25% per annum of the Combined Fund’s average daily net assets for twelve months following the closing of the Reorganization and 0.35% per annum of the Combined Fund’s average daily net assets until June 30, 2025. This contractual limitation may not be terminated before October 31, 2024 or June 30, 2025, without the approval of the Acquiring Fund’s or Combined Fund’s, as applicable, trustees who are not “interested persons” of the Acquiring Fund or Combined Fund, as applicable (as defined in the 1940 Act). The Acquiring Fund or Combined Fund, as applicable, may repay any such reimbursement from aIL, within three years of the reimbursement, provided that the following requirements are met: the reimbursements do not cause the Acquiring Fund or Combined Fund, as applicable, to exceed the lesser of the applicable expense limitation in the contract at the time the fees were limited or expenses are paid or the applicable expense limitation in effect at the time the expenses are being recouped by aIL.

 

 

Expense Example

 

The following example illustrates the expenses that a shareholder would pay on a $1,000 investment that is held for the time periods provided in the table. The example set forth below assumes shares of each Fund were owned as of the completion of each Reorganization and uses a 5% annual rate of return as mandated by SEC regulations.*

 

		1 Year				3 Years				5 Years				10 Years
FSD		$	39			$	120			$	201			$	414
FAM		$	36			$	111			$	187			$	388
Acquiring Fund		$	44			$	137			$	231			$	468
Pro Forma Combined Fund (FSD into Acquiring Fund only)		$	44			$	133			$	224			$	455
Pro Forma Combined Fund (FAM into Acquiring Fund only)		$	44			$	134			$	227			$	463
Pro Forma Combined Fund (FSD and FAM into Acquiring Fund)		$	44			$	132			$	222			$	453

 

* The example should not be considered a representation of future expenses or rate of return and actual Combined Fund expenses may be greater or less than those shown. The example assumes that (i) all dividends and other distributions are reinvested at NAV, (ii) the percentage amounts listed under “Total annual expenses” above remain the same in the years shown; (iii) the expense reimbursement agreement for the Acquiring Fund limiting “Other expenses” as a percentage of net assets attributable to common shares of the Acquiring Fund to 0.25% per annum of the Acquiring Fund’s average daily net assets is only in effect through March 7, 2024 and then 0.35% per annum of the Acquiring Fund’s average daily net assets until October 31, 2024; and (iv) the expense reimbursement agreement for the Combined Fund is only in effect until June 30, 2025, at the rates described in note (7) above.

  

Principal Risks

 

The principal risks of the Funds are similar, but include some substantial differences. Although the Funds are subject to similar risks in connection with their investment objectives, their risks materially differ in certain ways on account of certain distinctions in the investment objectives and strategies. For example, FAM is subject to certain risks specific to its holdings in foreign countries, particularly emerging markets, FSD is subject to risk of its long/short investment strategy, and the Acquiring Fund is subject to risks specific to its ability to invest in derivatives, use hedging techniques and invest in senior loans and in second lien or other subordinated loans or debt instruments. Therefore, in the table below and principal risks that follow, you will notice that FAM is subject to certain regional risks to which the other Funds are not subject and that the Acquiring Fund is subject to risks stemming from its potential exposure to loans and various derivative instruments to which the Acquired Funds are not subject. The Acquired Funds and the Acquiring Fund may share similar risks but describe them differently or under a different risk heading – for instance, although “Distressed Debt Risk” is not checked for the Acquiring Fund, the Acquiring Fund may invest in distressed issuers and includes risk disclosure about stressed and distressed issuers under “Credit Risk”. A chart showing the risks applicable to each Fund based on section headings is included directly below. Because the chart categorizes risk heading titles only, it is possible that the descriptions of the risks could encompass broader concepts for one Fund compared to the other or include multiple associated risks under a single heading. Therefore, the description of the risks associated with each heading for each Fund is included below the chart to provide more descriptive information of each risk.

 

 

Principal Risks	FSD	FAM	Acquiring Fund
Active management and selection risk; Management risk and reliance on key personnel	X	X	X
Africa risk		X
Anti-takeover provisions			X
Asia risk		X
Asset-backed and mortgage-backed (or mortgage-related) instruments risk; Asset-backed securities risk		X	X
Conflicts of interest risk	X	X	X
Counterparty risk			X
Covenant lite loans risk			X
Credit risk			X
Credit agency risk	X	X
Credit and below-investment grade securities risk; Below investment grade (high-yield or junk bond) securities risk	X	X	X
Credit-linked notes risk		X
Currency risk	X	X
Cyber Security Risk	X	X	X
Distressed securities risk	X
Emerging markets risk		X	X
Equity securities risk			X
Europe Risk		X
Financial leverage risk			X
Foreign securities risk; Non-U.S. securities risk; non-U.S. securities and currency risk	X	X	X
Forward foreign currency exchange contracts risk	X	X
Geographic concentration risk		X
Government intervention in the financial markets risk			X
Government securities risk; Sovereign debt securities risk		X	X
Illiquid investments risk; Illiquid and restricted securities risk	X	X	X
Inflation risk	X	X	X
Interest rate risk	X	X	X
Investment risk			X
Issuer risk	X	X
Latin America risk		X
Lender liability risk			X
Leveraging risk; Leverage risk	X	X	X
Market discount from net asset value; NAV discount risk	X	X	X
Market risk; Market events risk	X	X	X
Operational risk	X	X	X
Preferred securities risk	X
Prepayment risk; Prepayment or call risk	X	X	X
Reinvestment Risk	X	X
Repurchase agreements and reverse repurchase agreements risk			X
Risks of other derivative instruments			X
Risks of senior loans			X
Risks of second lien or other subordinated or unsecured loans or debt			X
Risks of structured products			X
Risks of swaps			X
Short sales risk; Short selling risk	X		X
Tax risk			X
Temporary investments risk			X
US government debt securities risk			X
Valuation risk	X	X	X
Warrants risk			X
When-issued and delayed delivery securities risk			X
Zero coupon securities risk			X

 

 

Principal Risks of Investing in the Acquiring Fund

 

Market Risk. Market risk is the possibility that the market values of securities owned by the Fund will decline. The values of fixed income securities tend to fall as interest rates rise, and such declines tend to be greater among fixed income securities with longer remaining maturities. Market risk is often greater among certain types of fixed income securities, such as zero coupon bonds which do not make regular interest payments but are instead bought at a discount to their face values and paid in full upon maturity. As interest rates change, these securities often fluctuate more in price than securities that make regular interest payments and therefore subject the Fund to greater market risk than a fund that does not own these types of securities. The values of adjustable, variable or floating rate income securities tend to have less fluctuation in response to changes in interest rates, but will have some fluctuation particularly when the next interest rate adjustment on such security is further away in time or adjustments are limited in number or degree over time. The Fund has no policy limiting the maturity of credit obligations it purchases. Such obligations often have mandatory and optional prepayment provisions and because of prepayments, the actual remaining maturity of loans and debts may be considerably less than their stated maturity. Obligations with longer remaining maturities or durations generally expose the Fund to more market risk. When-issued and delayed delivery transactions are subject to changes in market conditions from the time of the commitment until settlement. This may adversely affect the prices or yields of the securities being purchased. The greater the Fund’s outstanding commitments for these securities, the greater the Fund’s exposure to market price fluctuations. Interest rate risk can be considered a type of market risk.

 

Credit Risk. Credit risk refers to the possibility that the issuer of a security will be unable to make timely interest payments and/or repay the principal on its debt. Because the Fund may invest, without limitation, in securities that are below investment grade, the Fund is subject to a greater degree of credit risk than a fund investing primarily in investment grade securities. Below investment grade securities (that is, securities rated Ba or lower by Moody’s or BB or lower by S&P) are commonly referred to as “junk” securities. Generally, lower-grade securities provide a higher yield than higher-grade securities of similar maturity but are subject to greater risks, such as greater credit risk, greater market risk and volatility, greater liquidity concerns and potentially greater manager risk. Such securities are generally regarded as predominantly speculative with respect to the issuers’ capacities to pay interest or repay principal in accordance with their terms. Lower-grade securities are more susceptible to non-payment of interest and principal and default than higher-grade securities and are more sensitive to specific issuer developments or real or perceived general adverse economic changes than higher-grade securities. The market for lower-grade securities may also have less information available than the market for other securities, further complicating evaluations and valuations of such securities and placing more emphasis on the experience, judgment and analysis of the Advisers.

 

Credit obligations of stressed and distressed issuers (including those that are in covenant or payment default) are subject to a multitude of legal, industry, market, economic and governmental forces each of which make analysis of these companies inherently difficult. The Advisers rely on company management, outside experts, market research and personal experience to analyze potential investments. There can be no assurance that any of these sources will provide credible information, or that the Advisers’ analysis will produce conclusions that lead to profitable investments. Obligations of stressed and distressed issuers generally trade significantly below par and are considered speculative. The repayment of defaulted obligations is subject to significant uncertainties. Defaulted obligations might be repaid only after lengthy workout or bankruptcy proceedings or result in only partial recovery of cash payments or an exchange of the defaulted obligation for other debt or equity securities of the issuer or its affiliates, which may in turn be illiquid or speculative. There are a number of significant risks inherent in the bankruptcy process. Many events in a bankruptcy are the product of contested matters and adversary proceedings and are beyond the control of the creditors. A bankruptcy court may approve actions that would be contrary to the interests of the Fund. A bankruptcy filing by an issuer may cause such issuer to lose its market position and key employees and otherwise become incapable of restoring itself as a viable entity, and its liquidation value may be less than its value was believed to be at the time of investment. In addition, the duration of a bankruptcy proceeding is difficult to predict and, as such, a creditor’s return on investment can be adversely affected by delays while the plan of reorganization is being negotiated, approved by the creditors and confirmed by the bankruptcy court and until it ultimately becomes effective. The administrative costs in connection with a bankruptcy proceeding are frequently high and would be paid out of the debtor’s estate prior to any return to creditors. Further, in the early stages of the bankruptcy process it is often difficult to estimate the extent of any contingent claims that might be made and, as such, there is a risk that the Fund’s influence with respect to the class of obligations it owns could be lost by increases in the number and amount of claims in that class or by different classification and treatment. A creditor, such as the Fund, can also lose its ranking and priority if it is determined that such creditor exercised “domination and control” over a debtor and other creditors can demonstrate that they have been harmed by such actions. In addition, certain claims have priority by law, such as claims for taxes, which may be substantial and could affect the ability of the Fund to be repaid.

 

In any investment involving stressed or distressed obligations, there is a risk that the transaction involving such debt obligations will be unsuccessful, take considerable time or will result in a distribution of cash or a new security or obligation in exchange for the stressed or distressed obligations, the value of which may be less than the Fund’s purchase price of such obligations. Furthermore, if an anticipated transaction does not occur, the Fund may be required to sell its investment at a loss. However, investments in equity securities obtained through debt restructurings or bankruptcy proceedings may be illiquid and thus difficult or impossible to sell.

 

Interest Rate and Income Risk. The income you receive from the Fund is based in large part on interest rates, which can vary widely over the short and long term. If interest rates drop, your income from the Fund may drop as well. The more the Fund invests in adjustable, variable or floating rate securities or in securities susceptible to prepayment risk, the greater the Fund’s income risk. Securities with longer durations are likely to be more sensitive to changes in interest rates, generally making them more volatile than securities with shorter durations. Lower rated fixed income securities have greater volatility because there is less certainty that principal and interest payments will be made as scheduled.

 

Prepayment or Call Risk. If interest rates fall, it is possible that issuers of fixed income securities with high interest rates will prepay or “call” their securities before their maturity dates. In this event, the proceeds from the prepaid or called securities would likely be reinvested by the Fund in securities bearing the new, lower interest rates, resulting in a possible decline in the Fund’s income and distributions to shareholders.

 

Below Investment Grade (High-Yield or Junk Bond) Securities Risk. Fixed income securities rated below investment grade generally offer a higher current yield than that available from higher grade issues, but typically involve greater risk. These securities are especially sensitive to adverse changes in general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, issuers of below investment grade instruments may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default. The secondary market for high-yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on the Fund’s ability to dispose of a particular security. There are fewer dealers in the market for high-yield securities than for investment grade obligations. The prices quoted by different dealers may vary significantly, and the spread between the bid and asked price is generally much larger for high-yield securities than for higher quality instruments. Under continuing adverse market or economic conditions, the secondary market for high-yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer, and these securities may become illiquid. In addition, adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of below investment grade securities, especially in a market characterized by a low volume of trading. Unrated instruments involve the risk that the Advisers may not accurately evaluate the instrument’s comparative credit rating. As a result, the Fund’s investments in unrated instruments depend more heavily on the Advisers’ credit analysis than if the Fund invested in comparable rated instruments. Some unrated securities may not have an active trading market or may be difficult to value, and the Fund might have difficulty selling them at an acceptable price.

 

Risks of Senior Loans. There is less readily available and reliable information about most Senior Loans than is the case for many other types of instruments, including listed securities. Senior Loans are not listed on any national securities exchange or automated quotation system and as such, many Senior Loans are illiquid, meaning that the Fund may not be able to sell them quickly at a fair price. To the extent that a secondary market does exist for certain Senior Loans, the market is more volatile than for liquid, listed securities and may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods. The market for Senior Loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates, resulting in fluctuations in the NAV of the Fund’s common shares (“Common Shares”) and difficulty in valuing the Fund’s portfolio of Senior Loans. Although the Advisers believe that the Fund’s investments in adjustable rate Senior Loans could limit fluctuations in the NAV of the Fund’s Common Shares as a result of changes in interest rates, extraordinary and sudden changes in interest rates could nevertheless disrupt the market for such Senior Loans and result in fluctuations in the NAV of the Fund’s Common Shares and difficulty in valuing the Fund’s portfolio of Senior Loans. Senior Loans, like most other debt obligations, are subject to the risk of default. Default in the payment of interest or principal on a Senior Loan will result in a reduction of income to the Fund, a reduction in the value of the Senior Loan and a potential decrease in the NAV of the Fund’s Common Shares. The risk of default will increase in the event of an economic downturn or a substantial increase in interest rates. The Advisers rely primarily on their own evaluation of borrower credit quality rather than on any available independent sources. As a result, the Fund is particularly dependent on the analytical abilities of the Advisers.

 

The Fund may acquire or hold Senior Loans of borrowers that are experiencing, or are more likely to experience, financial difficulty, including Senior Loans issued to highly leveraged borrowers or borrowers that have filed for bankruptcy protection. Borrowers may have outstanding debt obligations, including Senior Loans that are rated below investment grade. The Fund may invest a substantial portion of its assets in Senior Loans that are rated below investment grade or that are unrated at the time of purchase but are deemed by the Advisers to be of comparable quality. If a Senior Loan is rated at the time of purchase, the Fund may consider the rating when evaluating the Senior Loan but, in any event, does not view ratings as a determinative factor in investment decisions. As a result, the Fund is dependent on the credit analytical abilities of the Advisers. Because of the protective terms of Senior Loans, the Advisers believe that the Fund is more likely to recover more of its investment in a defaulted Senior Loan than would be the case for most other types of defaulted credit obligations. The values of Senior Loans of borrowers that have filed for bankruptcy protection or that are experiencing payment difficulty could be affected by, among other things, the assessment of the likelihood that the lenders ultimately will receive repayment of the principal amount of such Senior Loans, the likely duration, if any, of a lapse in the scheduled payment of interest and repayment of principal and prevailing interest rates. There is no assurance that the Fund will be able to recover any amount on Senior Loans of such borrowers or that sale of the collateral granted in connection with Senior Loans would raise enough cash to satisfy the borrower’s payment obligation or that the collateral can or will be liquidated. In the event of bankruptcy, liquidation may not occur and the bankruptcy court may not give lenders the full benefit of their senior position in the capital structure of the borrower.

 

The Fund may act as an original lender under Senior Loans or may acquire Senior Loans through assignments or participations. The Fund may make Senior Loans to, or acquire Senior Loans of, borrowers that, at the time of the making or acquisition of the loan by the Fund, are experiencing, or are likely to experience, financial difficulty (including highly leveraged borrowers) and such loans may constitute a material amount of the Fund’s portfolio. The Fund will not make Senior Loans to, or acquire Senior Loans of, borrowers that, at the time of the making or acquisition of the loan by the Fund, are in bankruptcy.

 

If the Fund acquires a Senior Loan through an assignment agreement, it will typically succeed to all the rights and obligations of the assigning institution and become a lender under the credit agreement with respect to the debt obligation purchased; however, its rights can be more restricted than those of the assigning institution, and, in any event, the Fund may not be able to unilaterally enforce all rights and remedies of the lenders under the loan agreement and with regard to any associated collateral. If the Fund acquires an interest in a Senior Loan through a participation agreement, the Fund will enter into a contractual relationship with the institution selling the participation, not with the borrower. In purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement or any rights of setoff against the borrower, and the Fund may not directly benefit from the collateral supporting the debt obligation in which it has purchased the participation. As a result, the Fund will be exposed to the credit risk of both the borrower and the institution selling the participation. When purchasing a participation, the Advisers will analyze the credit risk posed by the institution selling the participation. The Advisers rely primarily on their own evaluation of the credit quality of such selling institutions rather than on any available independent sources. As a result, the Fund is particularly dependent on the analytical abilities of the Advisers. Because of the nature of its investments, the Fund may be subject to allegations of lender liability and other claims. In addition, the Securities Act deems certain persons to be “underwriters” if they purchase a security from an issuer and later sell it to the public. Although it is not believed that the application of this Securities Act provision would cause the Fund to be engaged in the business of underwriting, a person who purchases an instrument from the Fund that was acquired by the Fund from the issuer of such instrument could allege otherwise. Under the Securities Act, an underwriter may be liable for material omissions or misstatements in an issuer’s registration statement or prospectus.

 

In certain circumstances, Senior Loans may not be deemed to be securities, and in the event of fraud or misrepresentation by a borrower, lenders and purchasers of interests in loans, such as the Fund, will not have the protection of the anti-fraud provisions of the federal securities laws, as would be the case for bonds or stocks. Instead, in such cases, lenders generally rely on the contractual provisions in the loan agreement itself, and common law fraud protections under applicable state law.

 

Leverage risks. The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having similar investment objectives and policies. The funds borrowed pursuant to the loan facility may constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The Fund is limited in its ability to declare dividends or other distributions in the event of default under the loan facility. In the event of default under the loan facility, the lender has the right to cause a liquidation of the collateral (i.e., sell portfolio securities and other assets of the Fund) and, if any such default is not cured, the lender may be able to control the liquidation as well. The loan facility has a term of 364 days and is not a perpetual form of leverage; there can be no assurance that the loan facility will be available for renewal on acceptable terms, if at all.

 

The credit agreement governing the loan facility includes usual and customary covenants for this type of transaction. These covenants impose on the Fund asset coverage requirements, Fund composition requirements and limits on certain investments which are more stringent than those imposed on the Fund by the 1940 Act. The covenants or guidelines could impede the Fund’s investment adviser or sub-adviser from fully managing the Fund’s portfolio in accordance with the Fund’s investment objective and policies. Furthermore, non-compliance with such covenants or the occurrence of other events could lead to the cancellation of the loan facility.

 

Covenant Lite Loans Risk. Covenant lite loans contain fewer maintenance covenants than traditional loans, or no maintenance covenants at all, and may not include terms that allow the lender to monitor the financial performance of the borrower and declare a default if certain criteria are breached. This may hinder the Fund’s ability to reprice credit risk associated with the borrower and reduce the Fund’s ability to restructure a problematic loan and mitigate potential loss. As a result, the Fund’s exposure to losses on such investments may be increased, especially during a downturn in the credit cycle.

 

Market events risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the US Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor sentiment and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Fund’s investments may be negatively affected. In addition, any spread of an infectious illness, public health threat or similar issue could reduce consumer demand or economic output, result in market closures, travel restrictions or quarantines, and generally have a significant impact on the world economy, which in turn could adversely affect the Fund’s investments. 

 

Foreign Securities Risk. The Fund will invest in credit obligations, including loans, of issuers that are organized or located in countries other than the United States, including non-US dollar denominated securities. Investing in non-US issuers involves risks, including that non-US issuers may be subject to less rigorous accounting and reporting requirements than US issuers, less rigorous regulatory requirements, different legal systems and laws relating to creditors’ rights, the potential inability to enforce legal judgments, the potential for political, social and economic adversity and currency risk.

 

Currency risk is the risk that fluctuations in the exchange rates between the US dollar and non-US currencies may negatively affect an investment. The value of investments denominated in non-US currencies may fluctuate based on changes in the value of those currencies relative to the US dollar, and a decline in such relative value could reduce the value of such investments held by the Fund.

 

Emerging Markets. The foreign securities in which the Fund may invest may be issued by companies or governments located in emerging market countries. Investing in the securities of issuers operating in emerging markets involves a high degree of risk and special considerations not typically associated with investing in the securities of other foreign or US issuers. Compared to the United States and other developed countries, emerging market countries may have relatively unstable governments, economies which may be more likely to take extra-legal action with respect to companies, industries, assets, or foreign ownership than those in more developed markets and therefore issuers of such emerging markets may be more affected by the performance of such industries or sectors. Emerging market economies may be based on only a few industries and securities markets that trade a small number of securities. Securities issued by companies or governments located in emerging market countries tend to be especially volatile (particularly during market closures due to local market holidays or other reasons) and may be less liquid than securities traded in developed countries. Securities in these countries have been characterized by greater potential loss than securities of companies and governments located in developed countries. Investments in the securities of issuers located in emerging markets could be affected by risks associated with expropriation and/or nationalization, political or social instability, pervasiveness of corruption and crime, armed conflict, the impact on the economy of civil war, religious or ethnic unrest and the withdrawal or non-renewal of any license enabling the Fund to trade in securities of a particular country, confiscatory taxation, restrictions on transfers of assets, lack of uniform accounting and auditing standards, less publicly available financial and other information, diplomatic development which could affect US investments in those countries, and potential difficulties in enforcing contractual obligations. Emerging market countries generally have less developed legal, accounting and financial reporting systems than those in more developed markets, which may reduce the scope or quality of financial information available to investors. Moreover, it can be more difficult for investors to bring litigation or enforce judgments against issuers in emerging markets or for US regulators to bring enforcement actions against such issuers.

 

Foreign Currency Risk. Since the Fund may invest in credit obligations of foreign issuers denominated in the local currency, changes in foreign currency exchange rates will affect the value of credit obligations in the Fund’s portfolio and the unrealized appreciation or depreciation of investments. In addition to changes in the value of the Fund’s portfolio investments resulting from currency fluctuations, the Fund may incur costs in connection with conversions between various currencies. The Fund may also invest directly in currencies for hedging purposes. The Fund is subject to the risk that those currencies will decline in value relative to the US dollar. The values of the currencies of the emerging market countries in which the Fund may invest may be subject to a high degree of fluctuation due to changes in interest rates, the effects of monetary policies of the United States, foreign governments, central banks or supranational entities, the imposition of currency controls or due to other national or global political or economic developments. Foreign exchange dealers realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer normally will offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire immediately to resell that currency to the dealer. The Fund will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forward, futures or options contracts to purchase or sell foreign currencies. Therefore, the Fund’s exposure to foreign currencies may result in reduced returns to the Fund. The Fund may, from time to time, seek to protect the value of some portion or all of its portfolio holdings against currency risks by engaging in currency hedging transactions. Such transactions may include entering into forward currency exchange contracts, currency futures contracts and options on such futures contracts as well as purchasing put or call options on currencies, in US or foreign markets. Currency hedging involves risks, including possible default by the other party to the transaction, illiquidity and, to the extent the view as to certain market movements is incorrect, the risk that the use of hedging could result in losses greater than if they had not been used. In addition, in certain countries in which the Fund may invest, currency hedging opportunities may not be available. The use of currency transactions can result in the Fund incurring losses because of the imposition of exchange controls, suspension of settlements or the inability of the Fund to deliver or receive a specified currency.

 

Investing in Euro-denominated (or other European currency-denominated) securities entails risk of being exposed to a currency that may not fully reflect the strengths and weaknesses of the disparate European economies. In addition, it is possible that the Euro could be abandoned in the future by countries that have already adopted its use. The effects of such an abandonment on the applicable country and the rest of the European Economic and Monetary Union (“EMU”) are uncertain but could be negative and severe. Many European countries rely heavily upon export-dependent businesses and any change in the exchange rate between the Euro and the US dollar can have either a positive or a negative effect upon corporate profits and the performance of investments in the European Union. The effects of the collapse of the Euro, or of the exit of one or more countries from the EMU, on the United States and global economy and securities markets are impossible to predict and any such events could have a significant adverse impact on the value and risk profile of the Fund’s portfolio.

 

The Fund computes and expects to continue to distribute its income in US dollars, and the computation of income is made on the date that the income is earned by the Fund at the foreign exchange rate in effect on that date. If the value of the foreign currencies in which the Fund receives its income falls relative to the US dollar between the date of earning of the income and the time at which the Fund converts the foreign currencies to US dollars, the Fund may be required to liquidate securities in order to make distributions if the Fund has insufficient cash in US dollars to meet distribution requirements. The liquidation of investments, if required, may have an adverse impact on the Fund’s performance.

 

Risks of Second Lien or Other Subordinated or Unsecured Loans or Debt. Second lien or other subordinated or unsecured loans or debt generally are subject to similar risks as those associated with investments in Senior Loans. In addition, because second lien or other subordinated or unsecured loans or debt are subordinated in payment and/or lower in lien priority to Senior Loans, they are subject to additional risk that the cash flow of the borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving effect to the senior secured obligations of the borrower. This risk is generally higher for subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second lien or subordinated loans or debt, both secured and unsecured, are expected to have greater price volatility than Senior Loans and may be less liquid. There is also a possibility that originators will not be able to sell participations in second lien loans and subordinated loans or debt, both secured and unsecured, which would create greater credit risk exposure. Second lien or other subordinated or unsecured loans or debt of below investment grade quality share risks similar to those associated with investments in other below investment grade securities and obligations.

 

Risks of Structured Products. The Fund may invest in structured products, including collateralized debt obligations (“CDOs”), collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”), structured notes, credit-linked notes and other types of structured products. Holders of structured products bear risks of the underlying investments, index or reference obligation and are subject to counterparty risk. The Fund may have the right to receive payments to which it is entitled only from the issuer of the structured product, and generally does not have direct rights against the issuer of, or the entity that sold, assets underlying the structured product. While certain structured products enable the investor to acquire interests in a pool of securities without the brokerage and other expenses associated with directly holding such securities, investors in structured products generally pay their share of the structured product’s administrative and other expenses. When investing in structured products, it is impossible to predict whether the underlying indices or prices of the underlying assets will rise or fall, but prices of the underlying indices and assets (and, therefore, the prices of structured products) will be influenced by the same types of political and economic events that affect particular issuers of securities and capital markets generally. Certain structured products may be thinly traded or have a limited trading market and may have the effect of increasing the Fund’s illiquidity to the extent that the Fund, at a particular point in time, may be unable to find qualified buyers for, and may have difficulty valuing, these securities.

 

CBOs, CLOs and other CDOs are typically privately offered and sold, and thus, are not registered under the securities laws. As a result, investments in CDOs may be characterized by the Fund as illiquid securities; however, an active dealer market may exist for CDOs allowing a CDO to be considered liquid in some circumstances. In addition to the general risks associated with fixed income securities discussed herein, CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or the collateral may go into default; (iii) the possibility that the CDOs are subordinate to other classes of obligations issued by the same issuer; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.

 

Investments in structured notes involve risks including income risk, credit risk and market risk. Recent market conditions have magnified the risks related to an investment in structured products, including greater volatility, increased lack of liquidity and significant losses in value. Where the return on a structured note held by the Fund is based upon the movement of one or more factors, including currency exchange rates, interest rates, referenced bonds and stock indices, depending on the factor used and the use of multipliers or deflators, changes in interest rates and movement of the factor may cause significant fluctuations in the price of the structured note. Additionally, changes in the reference instrument or security may cause the interest rate on the structured note to be reduced to zero and any further changes in the reference instrument may then reduce the principal amount payable on maturity. Structured notes may be less liquid than other types of securities and more volatile than the reference instrument or security underlying the note.

  

Asset-backed and mortgage-backed (or mortgage-related) instruments risk. To the extent the Fund invests in asset-backed and mortgage-backed (or mortgage-related) securities or other instruments, its exposure to prepayment and extension risks may be greater than other investments in fixed income instruments. Rising interest rates tend to extend the duration of mortgage-backed (or mortgage-related) instruments, making them more sensitive to changes in interest rates. In addition, mortgage-backed (or mortgage-related) instruments are subject to prepayment risk—the risk that borrowers may pay off their mortgages sooner than expected, particularly when interest rates decline. This can reduce the Fund’s returns because the Fund may have to reinvest that money at lower prevailing interest rates. The Fund’s investments in other asset-backed instruments, such as securities backed by car loans, are subject to risks similar to those associated with mortgage-backed (or mortgage-related) securities.

 

Privately issued asset-backed and mortgage-backed (or mortgage-related) instruments are typically not traded on an exchange and may have a limited market. Without an active trading market, these instruments may be particularly difficult to value given the complexities in valuing the underlying collateral. Unlike many mortgage-backed (or mortgage-related) instruments issued or guaranteed by the US government, its agencies and instrumentalities, or a government-sponsored enterprise (such as the Federal National Mortgage Association, or Fannie Mae), asset-backed and mortgage-backed (or mortgage-related) instruments issued by private issuers do not have a government or government-sponsored enterprise guarantee and may, and frequently do, have less favorable collateral, credit risk or other characteristics. Although instruments issued by a government-sponsored enterprise are sometimes considered to carry an implicit guarantee from the US government, there can be no assurance that the US government would in fact guarantee such instruments.

 

Risks of Swaps. The Fund may enter into swap transactions, including credit default, total return, index and interest rate swap agreements, as well as options thereon, and may purchase or sell interest rate caps, floors and collars. Such transactions are subject to market risk, risk of default by the other party to the transaction (i.e., counterparty risk), risk of imperfect correlation and manager risk and may involve commissions or other costs. Swaps generally do not involve delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to swaps generally is limited to the net amount of payments that the Fund is contractually obligated to make, or in the case of the other party to a swap defaulting, the net amount of payments that the Fund is contractually entitled to receive. If the Advisers are incorrect in their forecast of market values, interest rates or currency exchange rates, the investment performance of the Fund would be less favorable than it would have been if these investment techniques were not used.

 

Counterparty Risk. Changes in the credit quality of the dealers that serve as the Fund’s counterparties with respect to derivatives, swaps or other transactions will affect the value of those instruments. In the event of a default by, or the insolvency of, a counterparty, the Fund may sustain losses or be unable to liquidate a derivative or swap position. The Fund and the Advisers seek to deal only with counterparties of high creditworthiness. All of the Fund’s bank or dealer counterparties (including bank or dealer derivative counterparties) will be subject to approval by the Advisers’ risk and compliance groups. The Advisers evaluate and monitor the creditworthiness of the Fund’s counterparties. Specifically, the Advisers’ risk and compliance personnel implement processes with respect to pre-approval, ongoing monitoring and parameters with respect to the Fund’s counterparty risk exposure. The parameters and limitations that may be imposed depend on the creditworthiness of the Funds’ counterparties and the nature of the transactions in which the Fund engages. The counterparty risk for cleared derivatives is generally lower than for uncleared over-the-counter derivative transactions since generally a clearing organization becomes substituted for each counterparty to a cleared derivative contract and, in effect, guarantees the parties’ performance under the contract as each party to a trade generally looks to the clearing organization for performance of financial obligations under the derivative contract. However, there can be no assurance that a clearing organization, or its members, will satisfy its obligations to the Fund.

 

Financial Leverage Risk. The Fund is permitted to obtain leverage using any form or combination of financial leverage instruments, including reverse repurchase agreements, credit facilities such as bank loans or commercial paper, and the issuance of preferred shares or notes. The Fund intends to use leverage opportunistically and may choose to increase or decrease its leverage, or use different types or combinations of leveraging instruments, at any time based on the Fund’s assessment of market conditions and the investment environment.

 

There can be no assurance that a financial leveraging strategy will continue to be utilized by the Fund or that, if utilized, it will be successful during any period in which it is employed. Leverage creates risks for Common Shareholders, including the likelihood of greater volatility of NAV of the Common Shares and market price of, and distributions on, the Common Shares and the risk that fluctuations in the costs to borrow, or in the distribution or interest rates on any preferred shares or notes, may affect the return to Common Shareholders. To the extent the income derived from investments purchased with proceeds received from leverage exceeds the cost of leverage, the Fund’s distributions will be greater than if leverage had not been used. Conversely, if the income from the investments purchased with such proceeds is not sufficient to cover the cost of the financial leverage, the amount available for distribution to Common Shareholders will be less than if leverage had not been used. In the latter case, the Fund may nevertheless maintain its leveraged position if such action is deemed to be appropriate based on market conditions. The Fund has issued preferred shares. Holders of preferred shares will have rights to elect a minimum of two Trustees. This voting power may negatively affect Common Shareholders (or the interests of holders of preferred shares may differ from the interests of Common Shareholders). The use of leverage by the Fund may magnify the Fund’s losses when there is a decrease in the value of a Fund investment and even totally eliminate the Fund’s equity in its portfolio or a Common Shareholder’s equity in the Fund.

  

The costs of a financial leverage program (including the costs of offering preferred shares and notes) will be borne by Common Shareholders and consequently will result in a reduction of the NAV of the Common Shares. During periods in which the Fund is using leverage, the fees paid by the Fund for investment advisory services will be higher than if the Fund did not use leverage because the investment advisory fees paid will be calculated on the basis of the Fund’s Managed Assets, which includes proceeds from (and assets subject to) reverse repurchase agreements, any credit facility and any issuance of preferred shares or notes, so that the investment advisory fees payable to the Adviser will be higher when leverage is utilized. This will create a conflict of interest between the Advisers, on the one hand, and Common Shareholders, on the other hand. Fees and expenses in respect of financial leverage, as well as the investment advisory fee and all other expenses of the Fund, will be borne entirely by the Common Shareholders, and not by preferred shareholders, noteholders or any other leverage providers.

 

Any lender in connection with a credit facility may impose specific restrictions as a condition to borrowing. The credit facility fees may include, among other things, up front structuring fees and ongoing commitment fees (including fees on amounts undrawn on the facility) in addition to the traditional interest expense on amounts borrowed. The credit facility may involve a lien on the Fund’s assets. The Fund is currently a party to a credit facility. Similarly, to the extent the Fund issues additional preferred shares or notes, the Fund currently intends to seek a credit rating from one or more NRSROs on any preferred shares or notes it issues and the Fund may be subject to fees, covenants and investment restrictions required by the NRSRO as a result. Such covenants and restrictions imposed by a NRSRO or lender may include asset coverage or portfolio composition requirements that are more stringent than those imposed on the Fund by the 1940 Act. It is not anticipated that these covenants or restrictions will significantly impede the Advisers in managing the Fund’s portfolio in accordance with its investment objectives and policies. Nonetheless, if these covenants or guidelines are more restrictive than those imposed by the 1940 Act, the Fund may not be able to utilize as much leverage as it otherwise could have, which could reduce the Fund’s investment returns.

 

The Fund may enter into other transactions that may give rise to a form of leverage including, among others, swaps, futures and forward contracts, options and other derivative transactions. Under current regulations, to the extent that the Fund covers its obligations under such other transactions, such transactions should not be treated as borrowings for purposes of the 1940 Act. However, these transactions, even if covered, may represent a form of economic leverage and will create risks. The potential loss on derivative instruments may be substantial relative to the initial investment therein.

 

Sovereign debt securities risk. Investments in government debt securities involve special risks. Certain countries have historically experienced, and may continue to experience, high rates of inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. The issuer or governmental authority that controls the repayment of a country’s debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the government debtor’s policy towards the International Monetary Fund and the political constraints to which a government debtor may be subject.

 

 

Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a debtor’s implementation of economic reforms and/or economic performance and the timely service of such debtor’s obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of such third parties’ commitments to lend funds to the government debtor, which may further impair such debtor’s ability or willingness to service its debts on a timely basis. Holders of government debt, potentially including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors.

 

As a result of the foregoing, a government obligor may default on its obligations. If such an event occurs, the Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government debt securities to obtain recourse may be subject to the political climate in the relevant country.

 

Risks of Other Derivative Instruments. The Fund may utilize options, forward contracts, futures contracts and options on futures contracts. These instruments involve risks, including the imperfect correlation between the value of such instruments and the underlying assets, the possible default by the counterparty to the transaction (i.e., counterparty risk), illiquidity of the derivative instrument and, to the extent the prediction as to certain market movements is incorrect, the risk that the use of such instruments could result in losses greater than if they had not been used. In addition, transactions in such instruments may involve commissions and other costs, which may increase the Fund’s expenses and reduce its return. Amounts paid as premiums and cash or other assets held in margin accounts with respect to such instruments are not otherwise available to the Fund for investment purposes.

 

Further, the use of such instruments by the Fund could create the possibility that losses on the instrument would be greater than gains in the value of the Fund’s position. In addition, futures and options markets could be illiquid in some circumstances, and certain over-the-counter options could have no markets. As a result, in certain markets, the Fund might not be able to close out a position without incurring substantial losses. To the extent that the Fund utilizes forward contracts, futures contracts or options transactions for hedging, such transactions should tend to minimize the risk of loss due to a decline in the value of the hedged position and, at the same time, limit any potential gain to the Fund that might result from an increase in value of the position. In addition, the daily variation margin requirements for futures contracts create a greater ongoing potential financial risk than would purchases of call options, in which case the market exposure is limited to the cost of the initial premium and transaction costs. Losses resulting from the use of hedging will reduce the NAV of the Fund’s Common Shares, and possibly income, and the losses can be greater than if hedging had not been used. Forward contracts may limit gains on portfolio securities that could otherwise be realized had they not been utilized and could result in losses. The contracts may also increase the Fund’s volatility and may involve a significant amount of risk relative to the investment of cash. The use of put and call options may result in losses to the Fund, force the sale of portfolio securities at inopportune times or for prices other than at current market values, limit the amount of appreciation the Fund can realize on its investments or cause the Fund to hold a security it might otherwise sell. The Fund will be subject to credit risk with respect to the counterparties to any transactions in options, forward contracts, futures contracts or options on futures contracts. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such circumstances.

 

When conducted outside the United States, transactions in options, forward contracts, futures contracts or options on futures contracts may not be regulated as rigorously as in the United States, may not involve a clearing mechanism and related guarantees, and are subject to the risk of governmental actions affecting trading in, or the prices of, foreign securities, currencies and other instruments. The value of such positions also could be adversely affected by: (i) other complex foreign political, legal and economic factors; (ii) lesser availability than in the United States of data on which to make trading decisions; (iii) delays in the Fund’s ability to act upon economic events occurring in foreign markets during non-business hours in the United States; (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States; and (v) lower trading volume and liquidity.

 

In October 2020, the SEC adopted Rule 18f-4 under the 1940 Act governing a registered investment company’s use of derivatives, short sales, reverse repurchase agreements, and certain other instruments. Under Rule 18f-4, a fund’s derivatives exposure is limited through a value-at-risk test and requires the adoption and implementation of a derivatives risk management program for certain derivatives users. However, subject to certain conditions, funds that do not invest heavily in derivatives may be deemed limited derivatives users and would not be subject to the full requirements of Rule 18f-4. Under the rule, when the Fund trades reverse repurchase agreements or similar financing transactions, including certain tender option bonds, it needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when calculating the Fund’s asset coverage ratio or treat all such transactions as derivatives transactions. In addition, under the rule, the Fund is permitted to invest in a security on a when-issued or forward-settling basis, or with a non-standard settlement cycle, and the transaction will be deemed not to involve a senior security (as defined under Section 18(g) of the 1940 Act), provided that, (i) the Fund intends to physically settle the transaction and (ii) the transaction will settle within 35 days of its trade date (the “Delayed-Settlement Securities Provision”). The Fund may otherwise engage in when-issued, forward-settling and non-standard settlement cycle securities transactions that do not meet the conditions of the Delayed-Settlement Securities Provision so long as the Fund treats any such transaction as a “derivatives transaction” for purposes of compliance with the rule. Furthermore, under the rule, the Fund is permitted to enter into an unfunded commitment agreement, and such unfunded commitment agreement will not be subject to the asset coverage requirements under the 1940 Act, if the Fund reasonably believes, at the time it enters into such agreement, that it will have sufficient cash and cash equivalents to meet its obligations with respect to all such agreements as they come due. These requirements may limit the ability of the Fund to use derivatives, and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These requirements may increase the cost of the Fund’s investments and cost of doing business, which could adversely affect investors.

 

 

Lender Liability Risk. A number of US judicial decisions have upheld judgments for borrowers against lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has violated a duty (whether implied or contractual) of good faith, commercial reasonableness and fair dealing, or a similar duty owed to the borrower or has assumed an excessive degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or shareholders. Because of the nature of its investments, the Fund may be subject to allegations of lender liability.

 

In addition, under common law principles that in some cases form the basis for lender liability claims, if a lender or bondholder (a) intentionally takes an action that results in the undercapitalization of a borrower to the detriment of other creditors of such borrower, (b) engages in other inequitable conduct to the detriment of such other creditors, (c) engages in fraud with respect to, or makes misrepresentations to, such other creditors or (d) uses its influence as a stockholder to dominate or control a borrower to the detriment of other creditors of such borrower, a court may elect to subordinate the claim of the offending lender or bondholder to the claims of the disadvantaged creditor or creditors, a remedy called “equitable subordination.”

 

Because affiliates of, or persons related to, the Advisers may hold equity or other interests in obligors of the Fund, the Fund could be exposed to claims for equitable subordination or lender liability or both based on such equity or other holdings.

 

NAV Discount Risk. Frequently, shares of closed-end investment companies, such as the Fund, trade at a price below their NAV, commonly referred to as a “discount.” Historically, shares of closed-end funds have traded at a discount to their NAV, and the Fund can provide no assurance that its Common Shares will trade at or above their NAV. The Fund’s Common Shares frequently trade at a discount to NAV.

 

Manager Risk. As with any managed fund, the Advisers may not be successful in selecting the best-performing investments or investment techniques in managing the Fund’s portfolio, and the Fund’s performance may lag behind that of similar funds.

 

Conflicts of Interest Risk. The portfolio managers’ management of “other accounts” may give rise to potential conflicts of interest in connection with their management of a Fund’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio manager could favor one account over another. However, the Adviser (or Subadviser) believes that these risks are mitigated by the fact that: (i) accounts with like investment strategies managed by a particular portfolio manager are generally managed in a similar fashion, subject to exceptions to account for particular investment restrictions or policies applicable only to certain accounts, differences in cash flows and account sizes, and similar factors; and (ii) portfolio manager personal trading is monitored to avoid potential conflicts. In addition, the Adviser (or Subadviser) has adopted trade allocation procedures that require equitable allocation of trade orders for a particular security among participating accounts.

 

In some cases, another account managed by the same portfolio manager may compensate abrdn based on the performance of the portfolio held by that account. The existence of such a performance-based fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities.

 

In some cases, another account managed by the same portfolio manager may compensate abrdn based on the performance of the portfolio held by that account. The existence of such a performance-based fee may create additional conflicts of interest for the portfolio manager in the allocation of management time, resources and investment opportunities.

 

 

Another potential conflict could include instances in which securities considered as investments for the Fund also may be appropriate for other investment accounts managed by the Adviser or its affiliates. Whenever decisions are made to buy or sell securities by the Fund and one or more of the other accounts simultaneously, the Adviser (or Subadviser) may aggregate the purchases and sales of the securities and will allocate the securities transactions in a manner that it believes to be equitable under the circumstances. As a result of the allocations, there may be instances where the Fund will not participate in a transaction that is allocated among other accounts. While these aggregation and allocation policies could have a detrimental effect on the price or amount of the securities available to the Fund from time to time, it is the opinion of the Adviser (or Subadviser) that the benefits from the policies outweigh any disadvantage that may arise from exposure to simultaneous transactions. The Trust has adopted policies that are designed to eliminate or minimize conflicts of interest, although there is no guarantee that procedures adopted under such policies will detect each and every situation in which a conflict arises.

 

From time to time, the Adviser or the Subadviser may seed proprietary accounts for the purpose of evaluating a new investment strategy that eventually may be available to clients through one or more product structures. Such accounts also may serve the purpose of establishing a performance record for the strategy. The management by the Adviser and the Subadviser of accounts with proprietary interests and nonproprietary client accounts may create an incentive to favor the proprietary accounts in the allocation of investment opportunities, and the timing and aggregation of investments. The Adviser’s and Subadviser’s proprietary seed accounts may include long-short strategies, and certain client strategies may permit short sales. A conflict of interest arises if a security is sold short at the same time as a long position, and continuous short selling in a security may adversely affect the stock price of the same security held long in client accounts. The Adviser and Subadviser have adopted various policies to mitigate these conflicts.

 

In addition, the 1940 Act limits the Fund’s ability to enter into certain transactions with certain affiliates of the Advisers. As a result of these restrictions, the Fund may be prohibited from buying or selling any security directly from or to any portfolio company of a fund managed by the Advisers or one of their affiliates. Nonetheless, the Fund may under certain circumstances purchase any such portfolio company’s loans or securities in the secondary market, which could create a conflict for the Advisers between the interests of the Fund and the portfolio company, in that the ability of the Advisers to recommend actions in the best interest of the Fund might be impaired. The 1940 Act also prohibits certain “joint” transactions with certain of the Fund’s affiliates (which could include other abrdn-managed Funds), which could be deemed to include certain types of investments, or restructuring of investments, in the same portfolio company (whether at the same or different times). These limitations may limit the scope of investment opportunities that would otherwise be available to the Fund. The Board has approved policies and procedures reasonably designed to monitor potential conflicts of interest. The Board will review these procedures and any conflicts that may arise.

 

The Adviser (or Subadviser) or their respective members, officers, directors, employees, principals or affiliates may come into possession of material, non-public information. The possession of such information may limit the ability of the Fund to buy or sell a security or otherwise to participate in an investment opportunity. Situations may occur where the Fund could be disadvantaged because of the investment activities conducted by the Adviser (or Subadviser) for other clients, and the Adviser (or Subadviser) will not employ information barriers with regard to its operations on behalf of its registered and private funds, or other accounts. In certain circumstances, employees of the Adviser (or Subadviser) may serve as board members or in other capacities for portfolio or potential portfolio companies, which could restrict the Fund’s ability to trade in the securities of such companies.

 

Repurchase Agreements and Reverse Repurchase Agreements Risk. The Fund may invest in repurchase agreements and reverse repurchase agreements. In its purchase of repurchase agreements, the Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and losses, including possible decline in the value of the underlying security during the period while the Fund seeks to enforce its rights thereto, possible lack of access to income on the underlying security during this period, and expenses of enforcing its rights. A repurchase agreement effectively represents a loan from the Fund to the seller under the agreement.

 

The Fund’s use of reverse repurchase agreements involves many of the same risks involved in the Fund’s use of financial leverage, as the proceeds from reverse repurchase agreements generally will be invested in additional securities. There is a risk that the market value of the securities acquired in the reverse repurchase agreement may decline below the price of the securities that the Fund has sold but remains obligated to repurchase. In addition, there is a risk that the market value of the securities retained by the Fund may decline. If the buyer of securities under a reverse repurchase agreement were to file for bankruptcy or experience insolvency, the Fund may be adversely affected. Also, in entering into reverse repurchase agreements, the Fund would bear the risk of loss to the extent that the proceeds of the reverse repurchase agreement are less than the value of the underlying securities. In addition, due to the interest costs associated with reverse repurchase agreements, the NAV of the Fund’s Common Shares will decline, and, in some cases, the investment performance of the Fund would be less favorable than it would have been if the Fund had not used such instruments. A reverse repurchase agreement effectively represents a loan from the buyer to the Fund under the agreement.

 

Cybersecurity Risk. Cybersecurity incidents may allow an unauthorized party to gain access to Fund assets, customer data (including private shareholder information), or proprietary information, or cause the Fund, the Adviser and/or its service providers (including, but not limited to, Fund accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data breaches, data corruption or lose operational functionality.

 

 

Other Risks Related to Investing in the Acquiring Fund

 

Investment risk. You may lose money by investing in the Fund, including the possibility that you may lose all of your investment. An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the US Federal Deposit Insurance Corporation or any other governmental agency.

 

The Fund is intended to be a long-term investment vehicle and is not designed to provide investors with a means of speculating on short-term stock market movements. Investors should not consider the Fund a complete investment program.

 

Risks of investing in other investment companies. The Fund may acquire shares in other investment companies, including foreign investment companies to the extent permitted by the 1940 Act. The market value of the shares of other investment companies may differ from the NAV of the particular fund. As a shareholder in an investment company, the Fund would bear its ratable share of that entity’s expenses, including its investment advisory and administration fees. At the same time, the Fund would continue to pay its own investment advisory fees and other expenses. As a result, the Fund and its Common Shareholders, in effect, will be absorbing two levels of fees with respect to investments in other investment companies.

 

Zero coupon securities risk. Certain debt obligations purchased by the Fund may take the form of zero coupon bonds. A zero coupon bond is a bond that does not pay interest either for the entire life of the obligation or for an initial period after the issuance of the obligation. When held to its maturity, its return comes from the difference between the purchase price and its maturity value. A zero coupon bond is normally issued and traded at a deep discount from face value. Zero coupon bonds allow an issuer to avoid or delay the need to generate cash to meet current interest payments and, as a result, may involve greater credit risk than bonds that pay interest currently or in cash. The Fund would be required to distribute the income on any of these instruments as it accrues, even though the Fund will not receive all of the income on a current basis or in cash. Thus, the Fund may have to sell other investments, including when it may not be advisable to do so, to make income distributions to its shareholders.

 

Distributions attributable to the Fund’s “original issue discount” income accruing on zero coupon bonds, and of all other ordinary income, will generally be taxable to the Common Shareholders as ordinary income. As a consequence of selling investments in order to make distributions of “original issue discount” income and other income in respect of which the Fund has not received a corresponding amount of cash, the Fund may realize additional income that gives rise to additional distribution requirements; distributions of such additional income may be taxable to the Common Shareholders as ordinary income or as long-term capital gain depending on which investments are sold.

 

Inflation risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. To the extent that inflation occurs, it will reduce the real value of dividends paid by the Fund and the Fund’s Common Shares. Most emerging market countries, in particular, have experienced substantial, and in some periods extremely high and volatile, rates of inflation. Inflation and rapid fluctuations in inflation rates have had and may continue to have very negative effects on the economies and securities markets globally. In an attempt to control inflation, wage and price controls have been imposed at times in certain countries.

 

When-issued and delayed delivery securities risk. The Fund may purchase and sell securities on a “when-issued” or “delayed delivery” basis whereby the Fund buys or sells a security with payment and delivery taking place in the future. These transactions are subject to market risk as the value or yield of a security at delivery may be more or less than the purchase price or the yield generally available on securities when delivery occurs. In addition, the Fund is subject to counterparty risk because it relies on the buyer or seller, as the case may be, to consummate the transaction, and failure by the other party to complete the transaction may result in the Fund missing the opportunity of obtaining a price or yield considered to be advantageous. When the Fund is the buyer in such a transaction, however, it will segregate cash and/or liquid securities having an aggregate value at least equal to the amount of such purchase commitments until payment is made. An increase in the percentage of the Fund’s assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of the NAV of the Fund’s Common Shares.

 

Illiquid investments risk. The Fund’s investments in relatively illiquid investments and loans may restrict the ability of the Fund to dispose of its investments in a timely fashion and for fair value, as well as its ability to fairly value such investments and take advantage of market opportunities. The risks associated with illiquidity will be particularly acute in situations in which the Fund’s operations require cash, such as when the Fund pays dividends or distributions, and could result in the Fund borrowing to meet short-term cash requirements or incurring capital losses on the sale of illiquid investments.

 

 

Short sales risk. The Fund may engage in short sales. Short sales involve certain risks and special considerations. If the Fund incorrectly predicts that the price of the borrowed security will decline, the Fund will have to replace the securities with securities with a greater value than the amount received from the sale. As a result, losses from short sales differ from losses that could be incurred from a purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases can equal only the total amount invested.

 

Equity securities risk. The value of equity securities, including common stock, preferred stock and convertible stock, will fluctuate in response to factors affecting the particular company, as well as broader market and economic conditions. An adverse event, such as an unfavorable earnings report, may depress the value of an issuer’s equity securities held by the Fund. The prices of equity securities fluctuate for several reasons, including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant market, or when political or economic events affecting the issuer occur. In addition, equity security prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. Moreover, in the event of a company’s bankruptcy, claims of certain creditors, including bondholders, will have priority over claims of common stock holders and are likely to have varying types of priority over holders of preferred and convertible stock.

 

Warrants risk. The Fund may invest in warrants. The risk of investing in a warrant is that the warrant may expire prior to the market value of the common stock exceeding the price fixed by the warrant. Warrants have a subordinate claim on a borrower’s assets compared with Senior Loans. As a result, the values of warrants generally are dependent on the financial condition of the borrower and less dependent on fluctuations in interest rates than are the values of many debt securities. The values of warrants may be more volatile than those of Senior Loans and this may increase the volatility of the NAV of the Fund’s Common Shares.

 

Temporary investments risk. During periods in which the Advisers believe that changes in economic, financial or political conditions make it advisable to do so, the Fund may, for temporary defensive purposes, reduce its primary investment holdings and invest in certain short-term and medium-term debt securities or hold cash. The Fund intends to invest for temporary defensive purposes only in short-term and medium-term debt securities believed to be of high quality, which are expected to be subject to relatively low risk of loss of interest or principal. In taking such defensive position, the Fund temporarily would not be pursuing and may not achieve its investment objectives.

 

Tax risk. The Fund has elected to be treated as, and intends to continue to qualify each year as, a “regulated investment company” under the Code. Assuming the Fund qualifies as a regulated investment company, it generally will not be subject to US federal income tax on its “investment company taxable income” as that term is defined in the Code (which includes, among other items, dividends, taxable interest, original issue discount, market discount and the excess of any net short-term capital gains over net long-term capital losses, as reduced by certain deductible expenses), and net capital gain, that it distributes (including amounts that are treated as distributed and reinvested pursuant to the Plan, as described below) to shareholders, provided that, for each taxable year, the Fund distributes (or is treated as distributing) to its shareholders an amount at least equal to 90% of its investment company taxable income. The Fund intends to continue to distribute annually all or substantially all of its investment company taxable income and net capital gain. In order for the Fund to qualify as a regulated investment company in any taxable year, the Fund must also meet certain asset diversification tests and at least 90% of its gross income for such year must be comprised of certain types of qualifying income. If, for any taxable year, the Fund does not qualify as a regulated investment company, it will be treated as a corporation subject to US federal income tax on its net income and capital gains at the regular corporate tax rates (without a deduction for distributions to shareholders). In addition, shareholders will be subject to tax on distributions to the extent of the Fund’s current or accumulated earnings and profits. Accordingly, in such event, the Fund’s ability to achieve its investment objectives would be adversely affected, and Common Shareholders would be subject to the risk of diminished investment returns.

 

Valuation risk. Unlike publicly traded common stock which trades on national exchanges, there is no central place or exchange for loans or fixed-income instruments to trade. Loans and fixed-income instruments generally trade on an “over-the-counter” market which may be anywhere in the world where the buyer and seller can settle on a price. Due to the lack of centralized information and trading, the valuation of loans or fixed-income instruments may carry more risk than that of common stock. Uncertainties in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing. In addition, other market participants may value securities differently than the Fund. As a result, the Fund may be subject to the risk that when a loan or fixed-income instrument is sold in the market, the amount received by the Fund is less than the value of such loans or fixed-income instruments carried on the Fund’s books.

 

 

US government debt securities risk. US government debt securities have historically not involved the credit risks associated with investments in other types of debt securities, although, as a result, the yields available from US government debt securities are generally lower than the yields available from other securities. Like other debt securities, however, the values of US government securities change as interest rates fluctuate. Fluctuations in the value of portfolio securities will not affect interest income on existing portfolio securities but will be reflected in the NAV of the Fund’s Common Shares. Since the magnitude of these fluctuations will generally be greater at times when the Fund’s average maturity is longer, under certain market conditions the Fund may, for temporary defensive purposes, accept lower current income from short-term investments rather than investing in higher yielding long-term securities.

 

Operational Risk. Your ability to transact with the Fund or the valuation of your investment may be negatively impacted because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third-party service providers or trading counterparties. Although the Fund attempts to minimize such failures through controls and oversight, it is not possible to identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted as a result.

 

Government intervention in the financial markets risk. In the past decade financial markets throughout the world have experienced increased volatility, depressed valuations, decreased liquidity and heightened uncertainty. Governmental and non-governmental issuers have defaulted on, or been forced to restructure, their debts. Certain non-US governments and central banks have implemented or may implement so-called negative rates (e.g., charging depositors who keep their cash at a bank) to spur economic growth. Further Federal Reserve or other US or non-US governmental or central bank actions, including interest rate increases or contrary actions by different governments, could negatively affect financial markets generally, increase market volatility and reduce the value and liquidity of securities in which the fund invests.

 

Federal, state, and other governments, their regulatory agencies or self-regulatory organizations may take additional actions that affect the regulation of the securities or structured products in which the Fund invests, or the issuers of such securities or structured products, in ways that are unforeseeable. Borrowers under Senior Loans held by the Fund may seek protection under bankruptcy laws. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation or regulation could limit or preclude the Fund’s ability to achieve its investment objectives. The Advisers monitor developments and seek to manage the Fund’s portfolio in a manner consistent with achieving the Fund’s investment objectives, but there can be no assurance that they will be successful in doing so.

 

Anti-takeover provisions. The Fund’s Agreement and Declaration of Trust and By-Laws include provisions that could limit the ability of other entities or persons to acquire control of the Fund or convert the Fund to open-end status and delay or limit the ability of other persons to acquire control of the Fund. These provisions could deprive the Common Shareholders of opportunities to sell their Common Shares at a premium over the then-current market price of the Common Shares or at NAV. The Fund’s Board has determined that these provisions are in the best interests of shareholders generally.

 

Principal Risks of Investing in FSD

 

Credit Agency Risk. Credit ratings are determined by credit rating agencies and are only the opinions of such entities. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risk or the liquidity of securities. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may adversely affect the credit ratings of securities held by the Fund and, as a result, may adversely affect those securities’ perceived or actual credit risk.

 

Credit and Below-Investment Grade Securities Risk. Credit risk is the risk that one or more securities in the Fund’s portfolio will decline in price, or the issuer thereof will fail to pay dividends or interest or repay principal when due. Below-investment grade instruments are commonly referred to as high-yield securities or “junk” bonds and are considered speculative with respect to the issuer’s capacity to pay dividends or interest and repay principal and are susceptible to default or decline in market value due to adverse economic and business developments. High-yield securities are often unsecured and subordinated to other creditors of the issuer. The market values for high-yield securities tend to be very volatile, and these securities are generally less liquid than investment grade securities. For these reasons, an investment in the Fund is subject to the following specific risks: (i) increased price sensitivity to changing interest rates and to a deteriorating economic environment; (ii) greater risk of loss due to default or declining credit quality; (iii) adverse company specific events more likely to render the issuer unable to make dividend, interest and/or principal payments; (iv) negative perception of the high-yield market which may depress the price and liquidity of high-yield securities; (v) volatility; and (vi) liquidity.

 

Currency Risk. The value of securities denominated or quoted in foreign currencies may be adversely affected by fluctuations in the relative currency exchange rates and by exchange control regulations. The Fund’s investment performance may be negatively affected by a devaluation of a currency in which the Fund’s investments are denominated or quoted. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities denominated or quoted in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.

 

 

Cyber Security Risk. The Fund is susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to the Fund’s digital information systems through “hacking” or malicious software coding, but may also result from outside attacks such as denial-of-service attacks through efforts to make network services unavailable to intended users. In addition, cyber security breaches of the Fund’s third-party service providers, such as its administrator, transfer agent, custodian, or Sub-Advisor, as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber security breaches. The Fund has established risk management systems designed to reduce the risks associated with cyber security. However, there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber security systems of issuers or third party service providers. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber incidents in the future.

 

Distressed Securities Risk. Distressed securities frequently do not produce income while they are outstanding. The Fund may be required to incur certain extraordinary expenses in order to protect and recover its investment. The Fund also will be subject to significant uncertainty as to when and in what manner and for what value the obligations evidenced by the distressed securities will eventually be satisfied. Distressed securities might be repaid only after lengthy workout, bankruptcy or similar proceedings, during which the issuer may not make any interest or other payments. Because there typically is substantial uncertainty regarding the outcome of such proceedings, there is a high risk of loss, including loss of the entire investment.

 

Fixed-Income Securities Risk. An investment in fixed-income securities is subject to certain risks, including:

 

·

Issuer Risk. The value of fixed-income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, leverage and reduced demand for the issuer’s goods and services. In addition, an issuer of fixed-income securities may default on its obligation to pay interest and repay principal.

·

Prepayment Risk. Prepayment risk is the risk that the issuer of a debt security will repay principal prior to the scheduled maturity date. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest the proceeds from such prepayment in lower yielding securities, which may result in a decline in the Fund’s income and distributions to common shareholders.

·

Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded or called bonds at market interest rates that are below the Fund portfolio’s current earnings rate.

 

Illiquid and Restricted Securities Risk. The Fund may invest in securities that are restricted and/or illiquid. Restricted securities are securities that cannot be offered for public resale unless registered under the applicable securities laws or that have a contractual restriction that prohibits or limits their resale. Restricted securities may be illiquid as they generally are not listed on an exchange and may have no active trading market. Investments in restricted securities could have the effect of increasing the amount of the Fund’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities are also more difficult to value, especially in challenging markets.

 

Inflation Risk. The Fund invests in securities that are subject to inflation risk. Inflation risk is the risk that the value of assets or income from investments will be less in the future as inflation decreases the value of money. As inflation increases, the present value of the Fund’s assets and distributions may decline. This risk is more prevalent with respect to debt securities. Inflation creates uncertainty over the future real value (after inflation) of an investment. Inflation rates may change frequently and drastically as a result of various factors, including unexpected shifts in the domestic or global economy, and the Fund’s investments may not keep pace with inflation, which may result in losses to Fund investors.

 

Interest Rate Risk. Interest rate risk is the risk that securities will decline in value because of changes in market interest rates. For fixed rate securities, when market interest rates rise, the market value of such securities generally will fall. Investments in fixed rate securities with long-term maturities may experience significant price declines if long-term interest rates increase. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected prepayments. This may lock in a below-market yield, increase the security’s duration and further reduce the value of the security. Fixed rate securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. The duration of a security will be expected to change over time with changes in market factors and time to maturity.

 

 

The interest rates payable on floating rate securities are not fixed and may fluctuate based upon changes in market rates. As short-term interest rates decline, interest payable on floating rate securities typically decreases. Alternatively, during periods of rising interest rates, interest payable on floating rate securities typically increases. Changes in interest rates on floating rate securities may lag behind changes in market rates or may have limits on the maximum increases in interest rates. The value of floating rate securities may decline if their interest rates do not rise as much, or as quickly, as interest rates in general.

 

Many financial instruments use or may use a floating rate based upon the LIBOR. The United Kingdom’s Financial Conduct Authority (the “FCA”), which regulates LIBOR, has ceased making LIBOR available as a reference rate over a phase-out period that began December 31, 2022. There is no assurance that any alternative reference rate, including the Secured Overnight Financing Rate (“SOFR”) will be similar to or produce the same value or economic equivalence as LIBOR or that instruments using an alternative rate will have the same volume or liquidity. The unavailability or replacement of LIBOR may affect the value, liquidity or return on certain Fund investments and may result in costs incurred in connection with closing out positions and entering into new trades. Any potential effects of the transition away from LIBOR on the Fund or on certain instruments in which the Fund invests can be difficult to ascertain, and they may vary depending on a variety of factors, and they could result in losses to the Fund.

  

Leverage Risk. The use of leverage by the Fund can magnify the effect of any losses. If the income and gains from the securities and investments purchased with leverage proceeds do not cover the cost of leverage, the return to the common shares will be less than if leverage had not been used. Leverage involves risks and special considerations for common shareholders including: (i) the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage; (ii) the risk that fluctuations in interest rates on borrowings will reduce the return to the common shareholders or will result in fluctuations in the dividends paid on the common shares; (iii) in a declining market, the use of leverage is likely to cause a greater decline in the net asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares; and (iv) when the Fund uses certain types of leverage, the investment advisory fee payable to the Advisor and by the Advisor to the Sub-Advisor will be higher than if the Fund did not use leverage.

 

Management Risk and Reliance on Key Personnel. The implementation of the Fund’s investment strategy depends upon the continued contributions of certain key employees of the Advisor and Sub-Advisor, some of whom have unique talents and experience and would be difficult to replace. The loss or interruption of the services of a key member of the portfolio management team could have a negative impact on the Fund.

 

Market Discount from Net Asset Value. Shares of closed-end investment companies such as the Fund frequently trade at a discount from their net asset value. The Fund cannot predict whether its common shares will trade at, below or above net asset value.

 

Market Risk. Securities held by the Fund, as well as shares of the Fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on the Fund and its investments. For example, the coronavirus (COVID-19) global pandemic and the aggressive responses taken by many governments, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines or similar restrictions, had negative impacts, and in many cases severe impacts, on markets worldwide. While the development of vaccines has slowed the spread of the virus and allowed for the resumption of reasonably normal business activity in the United States, many countries continue to impose lockdown measures in an attempt to slow the spread. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. Also, in February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility across markets globally, including the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain Fund investments as well as Fund performance. As the global pandemic and conflict in Ukraine have illustrated, such events may affect certain geographic regions, countries, sectors and industries more significantly than others. These events also may adversely affect the prices and liquidity of the Fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of the Fund’s shares and result in increased market volatility. During any such events, the Fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on the Fund’s shares may widen.

 

 

Non-U.S. Securities Risk. Investing in securities of non-U.S. issuers, which are generally denominated in non-U.S. currencies, may involve certain risks not typically associated with investing in securities of U.S. issuers. These risks include: (i) there may be less publicly available information about non-U.S. issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices; (ii) non-U.S. markets may be smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of the Fund’s investments; (iv) the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic events; (vi) certain non-U.S. countries may impose restrictions on the ability of non-U.S. issuers to make payments of principal and interest to investors located in the United States due to blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes may decrease the Fund’s return. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, there may be difficulty in obtaining or enforcing a court judgment abroad, including in the event the issuer of a non-U.S. security defaults or enters bankruptcy, administration or other proceedings. These risks may be more pronounced to the extent that the Fund invests a significant amount of its assets in companies located in one region or in emerging markets.

 

Operational Risk. The Fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund relies on third-parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect the Fund’s ability to meet its investment objective. Although the Fund and the Fund’s investment advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.

 

Potential Conflicts of Interest Risk. First Trust, MacKay and the portfolio managers have interests which may conflict with the interests of the Fund. In particular, First Trust and MacKay currently manage and may in the future manage and/or advise other investment funds or accounts with the same or substantially similar investment objective and strategies as the Fund. In addition, while the Fund is using certain types of leverage, the amount of the fees paid to First Trust (and by First Trust to MacKay) for investment advisory and management services are higher than if the Fund did not use leverage because the fees paid are calculated based on managed assets. Therefore, First Trust and MacKay could have a financial incentive to leverage the Fund.

 

Preferred Securities Risk. Preferred securities combine some of the characteristics of both common stocks and bonds. Preferred securities are typically subordinated to bonds and other debt securities in a company’s capital structure in terms of priority to corporate income, subjecting them to greater credit risk than those debt securities. Generally, holders of preferred securities have no voting rights with respect to the issuing company unless preferred dividends have been in arrears for a specified number of periods, at which time the preferred security holders may obtain limited rights. In certain circumstances, an issuer of preferred securities may defer payment on the securities and, in some cases, redeem the securities prior to a specified date. Preferred securities may also be substantially less liquid than other securities, including common stock.

 

Short Selling Risk. If a security sold short increases in price, the Fund may have to cover its short position at a higher price than the short sale price, resulting in a loss. Because losses on short sales arise from increases in the value of the security sold short, such losses are theoretically unlimited. It is possible that the Fund’s long securities positions will decline in value at the same time that the value of its short securities positions increase, thereby increasing potential losses to the Fund. In addition, the Fund’s short selling strategies will limit its ability to fully benefit from increases in the fixed-income markets.

 

The Fund may not be able to borrow a security that it needs to deliver or it may not be able to close out a short position at an acceptable price and may have to sell related long positions before it had intended to do so. Thus, the Fund may not be able to successfully implement its short sale strategy due to limited availability of desired securities or for other reasons. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund. Further, when the Fund is selling a security short, it must maintain a segregated account of cash or high-grade securities equal to the margin requirement. As a result, the Fund may maintain high levels of cash or other liquid assets, which may limit the Fund’s ability to pursue other opportunities.

 

Valuation Risk. Unlike publicly traded common stock which trades on national exchanges, there is no central place or exchange for fixed-income securities trading. Fixed-income securities generally trade on an “over-the-counter” market which may be anywhere in the world where the buyer and seller can settle on a price. Due to the lack of centralized information and trading, the valuation of fixed-income securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing.

 

 

Principal Risks of Investing in FAM

 

Asia Risk. The Fund is subject to certain risks specifically associated with investments in the securities of Asian issuers. Many Asian economies have experienced rapid growth and industrialization, and there is no assurance that this growth rate will be maintained. Some Asian economies are highly dependent on trade, and economic conditions in other countries within and outside Asia can impact these economies. Certain of these economies may be adversely affected by trade or policy disputes with its major trade partners. There is also a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Certain Asian countries have experienced and may in the future experience expropriation and nationalization of assets, confiscatory taxation, currency manipulation, political instability, armed conflict and social instability as a result of religious, ethnic, socio-economic and/or political unrest. In particular, escalated tensions involving North Korea and any outbreak of hostilities involving North Korea could have a severe adverse effect on Asian economies. Governments of certain Asian countries have exercised, and continue to exercise, substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly, government actions could have a significant effect on the issuers of the Fund’s securities or on economic conditions generally. Recent developments in relations between the U.S. and China have heightened concerns of increased tariffs and restrictions on trade between the two countries. An increase in tariffs or trade restrictions, or even the threat of such developments, could lead to a significant reduction in international trade, which could have a negative impact on the economy of Asian countries and a commensurately negative impact on the Fund.

 

Asset-Backed Securities Risk. Asset-backed securities are debt securities typically created by buying and pooling loans or other receivables other than mortgage loans and creating securities backed by those similar type assets. Asset-backed securities are subject to credit risk, extension risk, interest rate risk, liquidity risk, prepayment risk and valuation risk, as well as risk of default on the underlying assets. Rising interest rates tend to extend the duration of such securities, making them more sensitive to losses in value resulting from increases in interest rates. These securities are generally not backed by the full faith and credit of the U.S. government and are subject to the risk of default on the underlying asset or loan, particularly during periods of economic downturn. Payment of interest and repayment of principal on asset-backed securities is largely dependent upon the cash flows generated by the assets backing the securities. Asset-backed security values may also be affected by the creditworthiness of the servicing agent for the pool, the originator of the loans or receivables and any entities providing credit enhancement.

 

Credit Agency Risk. Credit ratings are determined by credit rating agencies and are only the opinions of such entities. Ratings assigned by a rating agency are not absolute standards of credit quality and do not evaluate market risk or the liquidity of securities. Any shortcomings or inefficiencies in credit rating agencies’ processes for determining credit ratings may adversely affect the credit ratings of securities held by the Fund or such credit rating agency’s ability to evaluate creditworthiness, and, as a result, may adversely affect those securities’ perceived or actual credit risk.

 

Credit and Below-Investment Grade Securities Risk. Credit risk is the risk that the issuer or other obligated party of a debt security in the Fund’s portfolio will fail to pay, or it is perceived that it will fail to pay, dividends or interest and/or repay principal, when due. Below-investment grade instruments, including instruments that are not rated but judged to be of comparable quality, are commonly referred to as high-yield securities or “junk” bonds and are considered speculative with respect to the issuer’s capacity to pay dividends or interest and repay principal and are more susceptible to default or decline in market value than investment grade securities due to adverse economic and business developments. High-yield securities are often unsecured and subordinated to other creditors of the issuer. The market values for high-yield securities tend to be very volatile, and these securities are generally less liquid than investment grade securities. For these reasons, an investment in the Fund is subject to the following specific risks: (i) increased price sensitivity to changing interest rates and to a deteriorating economic environment; (ii) greater risk of loss due to default or declining credit quality; (iii) adverse company specific events more likely to render the issuer unable to make dividend, interest and/or principal payments; (iv) negative perception of the high-yield market which may depress the price and liquidity of high-yield securities; (v) volatility; and (vi) liquidity.

 

Credit Linked Notes Risk. Credit linked notes are securities that are collateralized by one or more credit default swaps on designated debt securities that are referred to as “reference securities.” Through the purchase of a credit linked note, the buyer assumes the risk of the default or, in some cases, other declines in credit quality of the referenced securities. The buyer also takes on exposure to the issuer of the credit linked note in the full amount of the purchase price of the note. The issuer of a credit linked note normally will have hedged its risk on the reference securities without acquiring any additional credit exposure. The Fund has the right to receive periodic interest payments from the issuer of the credit linked note at an agreed upon interest rate, and, if there has been no default or, if applicable, other declines in credit quality, a return of principal at the maturity date. If one of the underlying reference securities defaults or suffers certain other declines in credit quality, the Fund may, instead of receiving repayment of principal in whole or in part, receive the security that has defaulted. The market for credit linked notes may suddenly become illiquid. Changes in liquidity may result in significant, rapid and unpredictable changes in the prices for credit linked notes. In certain cases, a market price for a credit linked note may not be available.

 

 

Cyber Security Risk. The Fund is susceptible to potential operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. Cyber security breaches may involve unauthorized access to the Fund’s digital information systems through “hacking” or malicious software coding, but may also result from outside attacks such as denial-of-service attacks through efforts to make network services unavailable to intended users. In addition, cyber security breaches of the Fund’s third-party service providers, such as its administrator, transfer agent, custodian, or sub-advisor, as applicable, or issuers in which the Fund invests, can also subject the Fund to many of the same risks associated with direct cyber security breaches. The Fund has established risk management systems designed to reduce the risks associated with cyber security. However, there is no guarantee that such efforts will succeed, especially because the Fund does not directly control the cyber security systems of issuers or third party service providers. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber incidents in the future.

 

Emerging Markets Risk. Investments in emerging market securities are considered speculative. In addition to the general risks of investing in non-U.S. securities, heightened risks of investing in emerging markets securities include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; and possible restrictions on repatriation of investment income and capital. Furthermore, foreign investors may be required to register the proceeds of sales, and future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. dollar, and devaluation may occur subsequent to investments in these currencies by the Fund. Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. The risks associated with investing in emerging market securities also include: greater political uncertainties, risk of market closure or manipulation, limited reliable access to capital, dependence on international trade or development assistance, overburdened infrastructures and environmental problems. Emerging market countries also often have less uniformity in accounting and reporting requirements, unsettled securities laws, unreliable securities valuation and greater risks associated with custody of securities. In addition, because the Public Company Accounting Oversight Board is generally restricted from inspecting the audit work and practices of registered accountants in certain emerging market countries there is the risk that material accounting and financial information about issuers in such countries may be unavailable or unreliable.

  

Shareholder claims that are available in the U.S. may be less reliable in emerging market countries, and claims that are available in the U.S., as well as regulatory oversight and authority that is common in the U.S., including for claims based on fraud, may be difficult or impossible for shareholders of securities in emerging market countries or for U.S. authorities to pursue. The limitations associated with investments in emerging market companies could impact the Fund’s ability to achieve its investment objective.

 

Europe Risk. The Fund is subject to certain risks associated specifically with investments in securities of European issuers, in addition to the risks associated with investments in non-U.S. securities generally. Political or economic disruptions in European countries, even in countries in which the Fund is not invested, may adversely affect security values and thus the Fund’s holdings. A significant number of countries in Europe are member states in the European Union (“EU”), and the member states no longer control their own monetary policies by directing independent interest rates for their currencies. In these member states, the authority to direct monetary policies, including money supply and official interest rates for the Euro, is exercised by the European Central Bank. In a 2016 referendum, the United Kingdom elected to withdraw from the EU (“Brexit”). After years of negotiations between the United Kingdom and the EU, a withdrawal agreement was reached whereby the United Kingdom formally left the EU. As the second largest economy among EU members, the implications of the United Kingdom’s withdrawal are difficult to gauge and cannot be fully known. Trade between the United Kingdom and the EU is highly integrated through supply chains and trade in services, as well as through multinational companies. The United Kingdom’s departure may negatively impact the EU and Europe as a whole by causing volatility within the EU, triggering prolonged economic downturns in certain European countries or sparking additional member states to contemplate departing the EU (thereby perpetuating political instability in the region).

 

Fixed Income Securities Risk. An investment in fixed income securities is subject to certain risks, including:

 

·

Interest Rate Risk. Interest rate risk is the risk that securities will decline in value because of changes in market interest rates. For fixed rate securities, when market interest rates rise, the market value of such securities generally will fall. Investments in fixed rate securities with long-term maturities may experience significant price declines if long-term interest rates increase. During periods of rising interest rates, the average life of certain types of securities may be extended because of slower than expected prepayments. This may lock in a below-market yield, increase the security’s duration and further reduce the value of the security. Fixed rate securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations.

·

Issuer Risk. The value of fixed income securities may decline for a number of reasons which directly relate to the issuer, such as management performance, leverage and reduced demand for the issuer’s goods and services.

 

 

·

Prepayment Risk. Prepayment risk is the risk that the issuer of a debt security will repay principal prior to the scheduled maturity date. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest the proceeds from such prepayment in lower yielding securities, which may result in a decline in the Fund’s income and distributions to common shareholders.

·

Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if the Fund invests the proceeds from matured, traded or called securities at market interest rates that are below the Fund portfolio’s current earnings rate. Similarly, the yield-to-maturity of a security assumes that all coupons are reinvested at the prevailing rate. If rates fall, the actual yield realized on the security may be lower as the security’s coupons are reinvested at lower yields.

 

Forward Foreign Currency Exchange Contracts Risk. The Fund may use forward foreign currency exchange contracts for both hedging and investment purposes. A forward foreign currency exchange contract is a negotiated agreement between the contracting parties to exchange a specified amount of currency at a specified future time at a specified rate. The rate can be higher or lower than the spot rate between the currencies that are the subject of the contract. The Fund may also invest in non-deliverable forward foreign currency exchange contracts (“NDFs”). NDFs are similar to other forward foreign currency exchange contracts, but do not require or permit physical delivery of currency upon settlement. Instead, settlement is made in cash based on the difference between the contracted exchange rate and the spot foreign exchange rate at settlement.

 

Forward foreign currency exchange contracts involve certain risks, including foreign currency risk, the risk of failure of the counterparty to perform its obligations under the contract, and liquidity risk. For example, because forward currency exchange contracts are privately negotiated transactions, there can be no assurance that the Fund will be able to roll-over a forward currency exchange contract upon its expiration if it desires to do so. In addition, the principals who deal in the forward markets are not required to continue to make markets in the currencies they trade and these markets can experience periods of illiquidity, sometimes of significant duration. The cost to the Fund of engaging in currency exchange transactions varies with such factors as the currency involved, the length of the contract period and prevailing market conditions. Successful use of forward foreign currency exchange contracts depends on the portfolio manager’s skill in analyzing and predicting currency values, among other factors. Forward contracts may substantially change the Fund’s exposure to changes in currency exchange rates and could result in losses to the Fund if currencies do not perform as the portfolio manager anticipates. There is no assurance that the portfolio manager’s use of forward currency contracts will be advantageous to the Fund.

  

When used for hedging purposes, the Fund is subject to the risk that the use of forward contracts may not serve as a complete hedge because of an imperfect correlation between movements in the prices of the contracts and the prices of the currencies hedged. While forward foreign currency exchange contracts may limit the risk of loss due to a decline in the value of the hedged currencies, they also may limit any potential gain that might result should the value of the currencies increase. Hedging against a decline in the value of a currency does not eliminate fluctuations in the value of a portfolio security traded in that currency or prevent a loss if the value of the security declines. Moreover, it may not be possible for the Fund to hedge against a devaluation that is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the devaluation level it anticipates. The projection of short-term currency market movements can be extremely difficult, and the successful execution of a hedging strategy can be highly uncertain.

 

Geographic Concentration Risk. The Fund may invest from time to time a substantial amount of its assets in issuers located in a single country or region. Because the Fund may concentrate its investments in this manner, it assumes the risk that economic, political and social conditions in that country or region will have a significant impact on its investment performance, which may result in greater losses and volatility than if it had diversified its investments across a greater number of countries and regions.

 

Government Securities Risk. The ability of a government issuer, especially in an emerging market country, to make timely and complete payments on its debt obligations will be strongly influenced by the government issuer’s balance of payments, including export performance, its access to international credits and investments, fluctuations of interest rates and the extent of its foreign reserves. A country whose exports are concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of such commodities or imports. To the extent that a country receives payment for its exports in currencies other than U.S. dollars, its ability to make debt payments denominated in U.S. dollars could be adversely affected. If a government issuer cannot generate sufficient earnings from foreign trade to service its external debt, it may need to depend on continuing loans and aid from foreign governments, commercial banks, and multinational organizations. There are no bankruptcy proceedings similar to those in the United States by which defaulted government debt may be collected. Additional factors that may influence a government issuer’s ability or willingness to service debt include, but are not limited to, a country’s cash flow situation, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, and the issuer’s policy towards the International Monetary Fund, the International Bank for Reconstruction and Development and other international agencies to which a government debtor may be subject.

 

 

The Fund’s investments in non-U.S. government securities have additional risks and considerations that may not typically be associated with investments in U.S. government securities. Economies and social and political climates in individual countries may differ, and may differ unfavorably, from that of the United States. Non-U.S. economies may have less favorable rates of growth of gross domestic product, rates of inflation, currency valuation, capital reinvestment, resource self-sufficiency and balance of payments positions. Many countries have experienced extremely high rates of inflation for many years. Unanticipated economic, political and social developments may also affect the values of the Fund’s investments and limit the availability of additional investments in such countries. Furthermore, such developments may significantly disrupt the financial markets or interfere with the Fund’s ability to enforce its rights against non-U.S. government issuers. Investments in debt instruments of issuers located in emerging market countries are considered speculative.

 

Illiquid and Restricted Securities Risk. The Fund may invest in securities that are restricted and/or illiquid securities. Restricted securities are securities that cannot be offered for public resale unless registered under the applicable securities laws or that have a contractual restriction that prohibits or limits their resale. Restricted securities may be illiquid as they generally are not listed on an exchange and may have no active trading market. Investments in restricted securities could have the effect of increasing the amount of the Fund’s assets invested in illiquid securities if qualified institutional buyers are unwilling to purchase these securities. Illiquid and restricted securities may be difficult to dispose of at a fair price at the times when the Fund believes it is desirable to do so. The market price of illiquid and restricted securities generally is more volatile than that of more liquid securities, which may adversely affect the price that the Fund pays for or recovers upon the sale of such securities. Illiquid and restricted securities are also more difficult to value, especially in challenging markets.

 

Inflation Risk. Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the present value of the Fund’s assets and distributions may decline. This risk is more prevalent with respect to fixed income securities held by the Fund. Inflation creates uncertainty over the future real value (after inflation) of an investment. Inflation rates may change frequently and drastically as a result of various factors, including unexpected shifts in the domestic or global economy, and the Fund’s investments may not keep pace with inflation, which may result in losses to Fund investors.

 

Latin America Risk. The Fund is subject to certain risks specifically associated with investments in the securities of Latin American issuers. The economies of Latin American countries have in the past experienced considerable difficulties, including high inflation rates, high interest rates, high unemployment, government overspending and political instability. International economic conditions, particularly those in the United States, Europe and Asia, as well as world prices for oil and other commodities may also influence the development of Latin American economies. Many Latin American countries are highly reliant on the exportation of commodities and their economies may be significantly impacted by fluctuations in commodity prices and the global demand for certain commodities. Investments in Latin American countries may be subject to currency risks, such as restrictions on the flow of money in and out of a country, extreme volatility relative to the U.S. dollar, and devaluation, all of which could decrease the value of investments in Latin American companies. Other Latin American investment risks may include inadequate investor protection, less developed regulatory, accounting, auditing and financial standards, unfavorable changes in laws or regulations, natural disasters, corruption and military activity. The governments of many Latin American countries may also exercise substantial influence over many aspects of the private sector, and any such exercise could have a significant effect on companies in which the Fund invests. Securities of companies in Latin America may also be subject to significant price volatility.

 

Leverage Risk. The use of leverage by the Fund can magnify the effect of any losses. If the income and gains from the securities and investments purchased with leverage proceeds do not cover the cost of leverage, the return to the common shares will be less than if leverage had not been used. Leverage involves risks and special considerations for common shareholders including: (i) the likelihood of greater volatility of net asset value and market price of the common shares than a comparable portfolio without leverage; (ii) the risk that fluctuations in interest rates on borrowings will reduce the return to the common shareholders or will result in fluctuations in the dividends paid on the common shares; (iii) in a declining market, the use of leverage is likely to cause a greater decline in the net asset value of the common shares than if the Fund were not leveraged, which may result in a greater decline in the market price of the common shares; and (iv) when the Fund uses certain types of leverage, the investment advisory fee payable to the Advisor and by the Advisor to the Sub-Advisor will be higher than if the Fund did not use leverage.

 

Management Risk and Reliance on Key Personnel. The implementation of the Fund’s investment strategy depends upon the continued contributions of certain key employees of the Advisor and Sub-Advisor, some of whom have unique talents and experience and would be difficult to replace. The loss or interruption of the services of a key member of the portfolio management team could have a negative impact on the Fund.

 

Market Discount from Net Asset Value. Shares of closed-end investment companies such as the Fund frequently trade at a discount from their net asset value. The Fund cannot predict whether its common shares will trade at, below or above net asset value.

 

 

Market Risk. Securities held by the Fund, as well as shares of the Fund itself, are subject to market fluctuations caused by factors such as general economic conditions, political events, regulatory or market developments, changes in interest rates and perceived trends in securities prices. Shares of the Fund could decline in value or underperform other investments as a result of the risk of loss associated with these market fluctuations. In addition, local, regional or global events such as war, acts of terrorism, spread of infectious diseases or other public health issues, recessions, or other events could have a significant negative impact on the Fund and its investments. For example, the coronavirus (COVID-19) global pandemic and the aggressive responses taken by many governments, including closing borders, restricting international and domestic travel, and the imposition of prolonged quarantines or similar restrictions, had negative impacts, and in many cases severe impacts, on markets worldwide. While the development of vaccines has slowed the spread of the virus and allowed for the resumption of reasonably normal business activity in the United States, many countries continue to impose lockdown measures in an attempt to slow the spread. Additionally, there is no guarantee that vaccines will be effective against emerging variants of the disease. Also, in February 2022, Russia invaded Ukraine which has caused and could continue to cause significant market disruptions and volatility across markets globally, including the United States. The hostilities and sanctions resulting from those hostilities could have a significant impact on certain Fund investments as well as Fund performance. As the global pandemic and conflict in Ukraine have illustrated, such events may affect certain geographic regions, countries, sectors and industries more significantly than others. These events also may adversely affect the prices and liquidity of the Fund’s portfolio securities or other instruments and could result in disruptions in the trading markets. Any of such circumstances could have a materially negative impact on the value of the Fund’s shares and result in increased market volatility. During any such events, the Fund’s shares may trade at increased premiums or discounts to their net asset value and the bid/ask spread on the Fund’s shares may widen.

 

Non-U.S. Securities and Currency Risk. Investing in securities of non-U.S. issuers may involve certain risks not typically associated with investing in securities of U.S. issuers. These risks include: (i) there may be less publicly available information about non-U.S. issuers or markets due to less rigorous disclosure or accounting standards or regulatory practices; (ii) non-U.S. markets may be smaller, less liquid and more volatile than the U.S. market; (iii) potential adverse effects of fluctuations in currency exchange rates or controls on the value of the Fund’s investments; (iv) the economies of non-U.S. countries may grow at slower rates than expected or may experience a downturn or recession; (v) the impact of economic, political, social or diplomatic events as well as of foreign governmental laws or restrictions and differing legal standards; (vi) certain non-U.S. countries may impose restrictions on the ability of non-U.S. issuers to make payments of principal and interest to investors located in the United States due to blockage of non-U.S. currency exchanges or otherwise; and (vii) withholding and other non-U.S. taxes may decrease the Fund’s return. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, there may be difficulty in obtaining or enforcing a court judgment abroad, including in the event the issuer of a non-U.S. security defaults or enters bankruptcy administration or other proceedings. These risks may be more pronounced to the extent that the Fund invests a significant amount of its assets in companies located in one region or in emerging markets. Because the Fund may invest in securities denominated or quoted in non-U.S. currencies, changes in the non-U.S. currency/United States dollar exchange rate may affect the value of the Fund’s securities and the unrealized appreciation or depreciation of investments. While certain of the Fund’s non-U.S. dollar-denominated securities may be hedged into U.S. dollars, hedging may not alleviate all currency risks.

  

Recent developments in relations between the U.S. and China had heightened concerns of increased tariffs and restrictions on trade between the two countries. An increase in tariffs or trade restrictions, or even the threat of such developments, could lead to a significant reduction in international trade, which could have a negative impact on global markets, including the economy of Asian countries, and a commensurately negative impact on the Fund.

 

Operational Risk. The Fund is subject to risks arising from various operational factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund relies on third parties for a range of services, including custody. Any delay or failure relating to engaging or maintaining such service providers may affect the Fund’s ability to meet its investment objective. Although the Fund and the Advisor seek to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.

 

Potential Conflicts of Interest Risk. First Trust, abrdn Inc. and the portfolio managers have interests which may conflict with the interests of the Fund. In particular, First Trust and abrdn Inc. currently manage and may in the future manage and/or advise other investment funds or accounts with the same or substantially similar investment objectives and strategies as the Fund. In addition, while the Fund is using leverage, the amount of the fees paid to First Trust (and by First Trust to abrdn Inc.) for investment advisory and management services are higher than if the Fund did not use leverage because the fees paid are calculated based on managed assets. Therefore, First Trust and abrdn Inc. have a financial incentive to leverage the Fund.

 

Valuation Risk. Unlike publicly traded common stock which trades on national exchanges, there is no central place or exchange for certain debt securities trading. Debt securities generally trade on an “over-the-counter” market which may be anywhere in the world where the buyer and seller can settle on a price. Due to the lack of centralized information and trading, the valuation of certain debt securities may carry more risk than that of common stock. Uncertainties in the conditions of the financial market, unreliable reference data, lack of transparency and inconsistency of valuation models and processes may lead to inaccurate asset pricing.

 

 

Investment Restrictions and Policies

  

The following is a comparison of the fundamental investment restrictions of the Acquired Funds and the Acquiring Fund, which are substantially similar.

 

FSD	FAM	Acquiring Fund	Differences
The Fund may not, with respect to 75% of its total assets, purchase any securities if, as a result (i) more than 5% of the Fund’s total assets would then be invested in securities of any single issuer, or (ii) the Fund would hold more than 10% of the outstanding voting securities of any single issuer; provided, that Government securities (as defined in the 1940 Act) securities issued by other investment companies and cash items (including receivables) shall not be counted for purposes of this limitation.	The Fund may not, with respect to 75% of its total assets, purchase any securities if, as a result, more than 5% of the Fund’s total assets would then be invested in securities of any single issuer or if, as a result, the Fund would hold more than 10% of the outstanding voting securities of any single issuer; provided, that Government securities (as defined in the 1940 Act), securities issued by other investment companies and cash items (including receivables) shall not be counted for purposes of this limitation.	May not purchase securities of any one issuer, other than obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities, if, immediately after such purchase, more than 5% of the Fund’s total assets would be invested in such issuer or the Fund would hold more than 10% of the outstanding voting securities of the issuer, except that 25% or less of the Fund’s total assets may be invested without regard to such limitations. There is no limit to the percentage of assets that may be invested in U.S. Treasury bills, notes, or other obligations issued or guaranteed by the U.S. Government, its agencies or instrumentalities.	Substantially similar.

 

 

FSD	FAM	Acquiring Fund	Differences
The Fund may not purchase or sell real estate or commodities except as permitted by (i) the 1940 Act and the rules and regulations thereunder, or other successor law governing the regulation of registered investment companies, or interpretations or modifications thereof by the SEC, SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority of competent jurisdiction.	The Fund may not purchase or sell real estate, but this shall not prevent the Fund from investing in securities of companies that deal in real estate or are engaged in the real estate business, including real estate investment trusts, and securities secured by real estate or interests therein and the Fund may hold and sell real estate or mortgages on real estate acquired through default, liquidation, or other distributions of an interest in real estate as a result of the Fund’s ownership of such securities.   The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but this shall not prevent the Fund from purchasing or selling options, futures contracts, derivative instruments or from investing in securities or other instruments backed by physical commodities).	The Fund may not purchase or sell real estate, except that the Fund may: (a) acquire or lease office space for its own use, (b) invest in securities and/or other instruments of issuers that invest in real estate or interests therein or that are engaged in or operate in the real estate industry, (c) invest in securities and/or other instruments that are secured by real estate or interests therein, (d) purchase and sell mortgage-related securities and/or other instruments, and (e) hold and sell real estate acquired by the Fund as a result of the ownership of securities and/or other instruments.   The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments; provided that this restriction shall not prohibit the Fund from purchasing or selling options, futures contracts and related options thereon, forward contracts, swaps, caps, floors, collars and any other financial or derivative instruments or from investing in securities or other instruments backed by physical commodities.	Substantially similar.

 

 

FSD	FAM	Acquiring Fund	Differences
The Fund may not borrow money except as permitted by (i) the 1940 Act and the rules and regulations thereunder, or other successor law governing the regulation of registered investment companies, or interpretations or modifications thereof by the SEC, SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority of competent jurisdiction.	The Fund may not borrow money, except as permitted by the 1940 Act, the rules thereunder and interpretations thereof or pursuant to a Securities and Exchange Commission exemptive order;	The Fund may not issue senior securities or borrow money, except the Fund may issue senior securities and/or borrow money (including through reverse repurchase agreements) to the extent permitted by the 1940 Act, as amended from time to time, and as modified or supplemented from time to time by (i) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time and (ii) an exemption or other relief applicable to the Fund from the provisions of the 1940 Act, as amended from time to time. The Fund does not have an investment policy limiting the amount of leverage that may be obtained through the use of covered reverse repurchase agreements.	Substantially similar.
The Fund may not issue senior securities except as permitted by (i) the 1940 Act and the rules and regulations thereunder, or other successor law governing the regulation of registered investment companies, or interpretations or modifications thereof by the SEC, SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority of competent jurisdiction.	The Fund may not issue senior securities, as defined in the 1940 Act, other than: (i) Preferred Shares which immediately after issuance will have asset coverage of at least 200%; (ii) indebtedness which immediately after issuance will have asset coverage of at least 300%; (iii) the borrowings permitted by investment restriction 3 above, or (iv) pursuant to a Securities and Exchange Commission exemptive order;	The Fund may not issue senior securities or borrow money, except the Fund may issue senior securities and/or borrow money (including through reverse repurchase agreements) to the extent permitted by the 1940 Act, as amended from time to time, and as modified or supplemented from time to time by (i) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time and (ii) an exemption or other relief applicable to the Fund from the provisions of the 1940 Act, as amended from time to time. The Fund does not have an investment policy limiting the amount of leverage that may be obtained through the use of covered reverse repurchase agreements.	Substantially similar.

 

 

FSD	FAM	Acquiring Fund	Differences
The Fund may not underwrite the securities of other issuers except (a) to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended, in connection with the purchase and sale of portfolio securities; and (b) as permitted by (i) the 1940 Act and the rules and regulations thereunder, or other successor law governing the regulation of registered investment companies, or interpretations or modifications thereof by the SEC, SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority of competent jurisdiction.	The Fund may not act as underwriter of another issuer’s securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase and sale of portfolio securities;	The Fund may not act as an underwriter of securities issued by others, except to the extent that, in connection with the disposition of loans or portfolio securities, it may be deemed to be an underwriter under applicable securities laws.	Substantially similar.
The Fund may not make loans except as permitted by (i) the 1940 Act and the rules and regulations thereunder, or other successor law governing the regulation of registered investment companies, or interpretations or modifications thereof by the SEC, SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority of competent jurisdiction.	The Fund may not make loans of funds or other assets, other than by entering into repurchase agreements, lending portfolio securities and through the purchase of debt securities in accordance with its investment objectives, policies and limitations;	The Fund may not make loans of money or property to any person, except (a) to the extent that securities, instruments, credit obligations or interests (including Senior Loans) in which the Fund may invest, or which the Fund may originate, are considered to be loans, (b) through the loan of portfolio securities or (c) by engaging in repurchase agreements.	Substantially similar.

 

 

FSD	FAM	Acquiring Fund	Differences
The Fund may not purchase the securities of any issuer if, as a result of such purchase, the Fund’s investments would be concentrated in any particular industry except as permitted by (i) the 1940 Act and the rules and regulations thereunder, or other successor law governing the regulation of registered investment companies, or interpretations or modifications thereof by the SEC, SEC staff or other authority of competent jurisdiction, or (ii) exemptive or other relief or permission from the SEC, SEC staff or other authority of competent jurisdiction.	The Fund may not purchase any security if, as a result of the purchase, 25% or more of the Fund’s total assets (taken at current value) would be invested in the securities of Borrowers and other issuers having their principal business activities in the same industry; provided, that this limitation shall not apply with respect to obligations issued or guaranteed by the U.S. Government or by its agencies or instrumentalities;	The Fund may nay not invest in any security if as a result, 25% or more of the value of the Fund’s total assets, taken at market value at the time of each investment, are in the securities of issuers in any particular industry except (a) securities issued or guaranteed by the U.S. government and its agencies and instrumentalities or securities of state and municipal governments or their political subdivisions (however, not including private purpose industrial development bonds issued on behalf of non-government issuers), or (b) as otherwise provided by the 1940 Act, as amended from time to time, and as modified or supplemented from time to time by (i) the rules and regulations promulgated by the SEC under the 1940 Act, as amended from time to time, and (ii) any exemption or other relief applicable to the Fund from the provisions of the 1940 Act, as amended from time to time. For purposes of this restriction, (i) an investment in a loan participation will be considered to be an investment in the securities or obligations of the issuer of the loan to which the participation relates and (ii) an investment in a repurchase agreement, reverse repurchase agreement, CLO, CBO, CDO or a swap or other derivative will be considered to be an investment in the industry (if any) of the underlying or reference security, instrument or asset. The Fund defines an industry by reference to Bloomberg BICS codes for industry classifications.	Substantially similar.

 

Rights of Fund Shareholders

 

FSD was organized as a Massachusetts business trust on June 18, 2010. FAM was organized as a Massachusetts business trust on September 2, 2004. The Acquiring Fund was organized as a statutory trust under the laws of the State of Delaware on October 12, 2010.

 

The Acquiring Fund is subject to the control share acquisition statute (the “Control Share Statute”) contained in Subchapter III of the Delaware Statutory Trust Act (the “DSTA”), which became automatically applicable to listed closed-end funds, such as the Acquiring Fund. The Acquired Funds are not subject to this type of limitation as Massachusetts does not currently have a control share statute applicable to Massachusetts business trusts. Accordingly, the Control Share Statute will have no impact on the Special Meeting.

 

Following the consummation of one or both Reorganizations, the Combined Fund will be subject to the Control Share Statute. The Control Share Statute provides for a series of voting power thresholds above which shares are considered “control beneficial interests” (referred to here as “control shares”). Once a threshold is reached, an acquirer has no voting rights under the DSTA or the governing documents of the Fund with respect to shares acquired in excess of that threshold (i.e., the “control shares”) unless approved by shareholders of the Fund or exempted by the Board. The Control Share Statute provides procedures for an acquirer to request a shareholder meeting for the purpose of considering whether voting rights shall be accorded to control shares.

 

Some uncertainty around the general application under the 1940 Act of state control share statutes exists as a result of recent federal and state court decisions that have found that certain control share by-laws adopted by Massachusetts business trusts violated the 1940 Act. Additionally, in some circumstances uncertainty may also exist in how to enforce the control share restrictions contained in state control share statutes against beneficial owners who hold their shares through financial intermediaries.

 

 

Each Fund is governed by its own Declaration of Trust and By-laws. Copies of these documents are available to shareholders without charge upon written request to the applicable Fund.

 

The below table summarizes a number of provisions of the respective governing documents of the Acquired Funds and the Acquiring Fund, which are in each case subject to any other applicable provision of the governing instruments of the relevant Fund and applicable law. The governing instruments have certain similar provisions, however there are differences that might impact how each Fund is governed. There are certain differences between the matters in which shareholders of the Funds have the right to vote, as highlighted below. Additionally, the Acquired Fund shareholders have voting rights regarding the removal of trustees and the approval of reorganizations or mergers, whereas Acquiring Fund shareholders have no such rights. The Funds are subject to different thresholds regarding termination of the respective Trust (as defined subsequently). The term “the Trust,” when used in the below table, refers to the applicable Fund.

 

	FSD	FAM	Acquiring Fund
Voting Rights	Shareholders shall not have the power to vote on any matter except: (i) for the election of Trustees under certain circumstances or the removal of Trustees; (ii) with respect to a sale of assets or reorganization or similar transaction if required by applicable law or as may be determined by the Trustees; (iii) with respect to the conversion of the Trust to an "open-end company"; and (iv) with respect to such additional matters relating to the Trust as may be required by law, the Declaration of Trust or as the Trustees may consider and determine necessary or desirable.	The shareholders shall have power to vote only (i) for the election of Trustees when that issue is submitted to shareholders, and for the removal of Trustees; (ii) with respect to any investment advisory or management contract on which a shareholder vote is required by the 1940 Act; (iii) with respect to termination of the Trust under certain circumstances; (iv) with respect to certain amendments of the Declaration of Trust such as those affecting a shareholder’s voting rights or otherwise required by law or as determined by the Trustees; (v) generally with respect to any merger, consolidation, or reorganization; (vi) with respect to any conversion of the Trust to an "open-end company"; (vii) to the same extent as the stockholders of a Massachusetts business corporation as to whether or not a court action, proceeding or claim should or should not be brought or maintained derivatively or as a class action on behalf of the Trust or the shareholders; and (viii) with respect to such additional matters relating to the Trust as may be required by the Declaration of Trust, the Amended and Restated By-Laws, or any registration of the Trust with the SEC (or any successor agency) or any other regulator having jurisdiction over the Trust, or as the Trustees may consider necessary or desirable.	Shareholders shall have no power to vote on any matter except matters on which a vote of shareholders is required by the 1940 Act or the Declaration of Trust, or otherwise permitted pursuant to a resolution of the Trustees.
Shareholder Quorum	Thirty-three and a third percent (33-1/3%) of the outstanding shares entitled to vote present in person or by proxy shall constitute a quorum at any meeting of the shareholders.	Thirty-three and a third percent (33-1/3%) of the outstanding shares entitled to vote present in person or by proxy shall constitute a quorum at any meeting of the shareholders.	The presence in person or by proxy of one-third (1/3) of the Shares entitled to vote which, for the avoidance of doubt, will include Shares held by brokers who provide votes and/or nonvotes as to all matters, shall be a quorum for the transaction of business at a meeting of Shareholders; provided that the By-Laws may specify a lower quorum.

 

 

	FSD	FAM	Acquiring Fund
Election of Trustees	A plurality of shares voted at a meeting at which a quorum is present shall elect a Trustee, except in the case of a contested election, where a majority of the outstanding shares entitled to vote is required.	A plurality of shares voted at a meeting at which a quorum is present shall elect a Trustee, except in the case of a contested election, where a majority of the outstanding shares entitled to vote is required.	A plurality of the votes cast by Shares represented in person or by proxy at the meeting and entitled to vote thereon.
Removal of Trustees	Any of the Trustees may be removed (i) by action of at least two-thirds of the outstanding shares, or (ii) by the action of at least two-thirds of the remaining Trustees.	Any Trustee may be removed at any time, with or without cause, by written instrument signed by at least three-quarters of the Trustees.   A Trustee may also be removed at any meeting of shareholders by a two-thirds vote of the outstanding shares of the Trust entitled to vote for the election of such Trustee.	Shareholders have no right under the Declaration of Trust to remove any Trustee.
Approval of a Reorganization or Merger	In the event that such a transaction is required by applicable law to be approved by shareholders of the Trust or otherwise determined by the Trustees, such transaction shall require approval by the affirmative vote or consent of the holders of not less than two-thirds of the outstanding shares of the Trust entitled to vote, provided, however, that if such merger, consolidation, sale, lease or exchange has been previously approved by the affirmative vote of two-thirds of the Trustees, the vote of a majority of the outstanding voting securities, as defined in the 1940 Act (a “Majority Shareholder Vote”), is required.	The affirmative vote or consent of the holders of not less than two-thirds of the shares outstanding and entitled to vote is required to approve a merger, consolidation or sale of substantially all of the assets of the Trust (except where the merger, consolidation or sale is with a non-operating entity), provided, however, that if such merger, consolidation or sale has been previously approved by the affirmative vote of two-thirds of the Trustees, a Majority Shareholder Vote is required.	Without the vote of the shareholders, the Trustees may (i) sell, convey and transfer all or substantially all of the assets of the Trust to another trust, corporation, partnership, association, or other entity organized under the laws of any state of the United States, in exchange for cash, securities or other consideration, (ii) merge or consolidate the Trust with any other trust, corporation, partnership, association or other entity organized under the laws of any state of the United States, or (iii) cause the Trust to convert to a corporation, limited liability company, limited partnership or other Person under the laws of Delaware or any other state or jurisdiction all upon such terms and conditions and for such consideration as the Trustees shall approve.
Termination of the Trust	The Trust may be terminated at any time by the Trustees by written notice to the shareholders.	The Trust may be terminated at any time (i) by the affirmative vote of the holders of not less than two-thirds of the shares outstanding and entitled to vote at any meeting of shareholders, or (ii) by the Trustees by written notice to the shareholders.	The Trust may be dissolved at any time by a majority of the Trustees by written notice to the shareholders.

 

 

MANAGEMENT OF THE FUNDS

 

The Boards of the Funds

 

The Board of each Fund is responsible for the overall supervision of the operations of the Fund and performs the various duties imposed on the trustees of investment companies by the 1940 Act and under Delaware or Massachusetts law, as applicable.

 

The Advisers of the Funds

 

First Trust, located at 120 East Liberty Drive, Suite 400, Wheaton, IL 60187, serves as the investment adviser to each Acquired Fund pursuant to an investment management agreement between the applicable Acquired Fund and First Trust (each an “Investment Management Agreement”). In addition, First Trust is responsible for providing certain clerical, bookkeeping and other administrative services to the Acquired Funds and also provides fund reporting services to the Acquired Funds for a flat annual fee. First Trust is an investment adviser registered with the SEC under the Investment Advisers Act of 1940, as amended. First Trust is a limited partnership with one limited partner, Grace Partners of DuPage L.P. (“Grace Partners”), and one general partner, The Charger Corporation. Grace Partners is a limited partnership with one general partner, The Charger Corporation, and a number of limited partners. The Charger Corporation is an Illinois corporation controlled by James A. Bowen, the Chief Executive Officer of First Trust and the sole Trustee of each Acquired Fund who is not an Independent Trustee. As of September 30, 2023, First Trust had collective assets under management or supervision of approximately $195 billion through unit investment trusts, exchange-traded funds, closed-end funds, mutual funds and separately managed accounts. Subject to the general supervision of the applicable Acquired Fund’s Board, and in accordance with the investment objective, policies, and restrictions of the applicable Acquired Fund, First Trust is responsible for the management and operation of each Acquired Fund and the investment of each Acquired Fund’s assets. First Trust provides such services to the Acquired Funds pursuant to the respective Investment Management Agreements. FSD commenced investment operations on September 27, 2010 and FAM commenced investment operations on November 23, 2004. Each Investment Management Agreement became effective for an initial two-year term and continue in effect from year to year provided such continuance is specifically approved at least annually in the manner required by the 1940 Act. A discussion regarding the basis for FSD’s Board’s renewal of its Investment Management Agreement is available in FSD’s annual report to shareholders for the fiscal year ended October 31, 2022. A discussion regarding the basis for FAM’s Board’s renewal of its Investment Management Agreement is available in FAM’s semi-annual report to shareholders for the fiscal period ended June 30, 2023. The Acquired Funds pay First Trust an investment management fee in consideration of the advisory and other services provided by First Trust to the Funds. Pursuant to their Investment Management Agreements, FSD and FAM have agreed to pay First Trust a management fee payable on a monthly basis at the annual rate of 1.00% of each Fund’s Managed Assets. For the purpose of this calculation for FAM, “Managed Assets” means the gross asset value of FAM (including assets attributable to FAM’s preferred shares, if any, and the principal amount of borrowings) minus the sum of FAM’s accrued and unpaid dividends on any outstanding preferred shares, and accrued liabilities (other than the principal amount of any borrowings incurred or of commercial paper or notes issued by FAM). For purposes of this calculation for FSD, “Managed Assets” means the average daily gross asset value of FSD (which includes the principal amount of any borrowings) minus the sum of FSD’s liabilities.

 

MacKay Shields LLC (“MacKay”), located at 1345 Avenue of the Americas, 43^rd Floor, New York, NY 10105, serves as FSD’s sub-adviser and manages FSD’s portfolio subject to First Trust’s supervision. abrdn Inc., located at 1900 Market Street, Suite 200, Philadelphia, PA 19103, serves as FAM’s sub-advisor and manages FAM’s portfolio subject to First Trust’s supervision.

 

abrdn Investments Limited (formerly, Aberdeen Asset Managers Limited) (“aIL”), a Scottish Company, serves as the adviser to the Acquiring Fund. aIL’s registered address is 10 Queen's Terrace, Aberdeen, Aberdeenshire, United Kingdom, AB10 1XL..aIL is an indirect wholly-owned subsidiary of abrdn plc, which manages or administers approximately $632.2 billion in assets as of June 30, 2023. abrdn Inc. serves as the sub-adviser to the Acquiring Fund. The Acquiring Fund pays aIL a monthly fee computed at the annual rate of 1.25% of the Acquiring Fund’s average daily Managed Assets. Managed Assets are the total assets of the Acquiring Fund (including any assets attributable to money borrowed for investment purposes, including proceeds from (and assets subject to) reverse repurchase agreements, any credit facility and any issuance of preferred shares or notes) minus the sum of the Acquiring Fund’s accrued liabilities (other than Acquiring Fund liabilities incurred for the purpose of leverage). The Acquiring Fund commenced operations on January 27, 2011.

 

aIL has contractually agreed to limit total “Other Expenses” of the Acquiring Fund (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) as a percentage of net assets attributable to common shares of the Acquiring Fund to 0.25% per annum of the Acquiring Fund’s average daily net assets until until March 7, 2024 and then 0.35% per annum of the Acquiring Fund’s average daily net assets until October 31, 2024. aIL has contractually agreed to limit total “Other Expenses” of the Combined Fund (excluding any interest, taxes, brokerage fees, short sale dividend and interest expenses and non-routine expenses) as a percentage of net assets attributable to common shares of the Combined Fund to 0.25% per annum of the Combined Fund’s average daily net assets for twelve months following the closing of the Reorganization and the 0.35% until June 30, 2025. The contractual limitations may not be terminated before October 31, 2024 or June 30, 2025, as applicable, without the approval of the Acquiring Fund’s or Combined Fund’s, as applicable, trustees who are not “interested persons” of the Acquiring Fund or Combined Fund, as applicable (as defined in the 1940 Act).

 

 

The Acquiring Fund or Combined Fund, as applicable, may repay any such reimbursement from aIL, within three years of the reimbursement, provided that the following requirements are met: the reimbursements do not cause the Acquiring Fund or Combined Fund, as applicable, to exceed the lesser of the applicable expense limitation in the contract at the time the fees were limited or expenses are paid or the applicable expense limitation in effect at the time the expenses are being recouped by aIL.

 

Information regarding the basis of the Board of the Acquiring Fund’s approval of the investment advisory and sub-advisory agreements with aIL and abrdn Inc., respectively, is available in the Acquiring Fund’s annual shareholder report for the fiscal year ended October 31, 2022.

 

abrdn Inc. serves as the sub-adviser to the Acquiring Fund, pursuant to a sub-advisory agreement among aIL, the Acquiring Fund and abrdn Inc. abrdn Inc. is located at 1900 Market Street, Suite 200, Philadelphia, PA 19103 and is a wholly-owned subsidiary of abrdn plc. For its services to the Acquiring Fund, abrdn Inc. receives a percentage of the advisory fee received by aIL from the Acquiring Fund after fee waivers and expense reimbursements, if any. For its services as sub-adviser, abrdn Inc. is paid only by the Adviser out of its fees, and is not paid directly by the Acquiring Fund.

 

Under the Sub-Advisory Agreement, subject to the directions of aIL and the Board, aIL has retained abrdn Inc. to monitor on a continuous basis the performance of the Acquiring Fund’s assets and to assist aIL in conducting a continuous program of investment, evaluation and, if appropriate, sale and reinvestment of the Acquiring Fund’s assets.

 

The Advisory and Sub-Advisory Agreements with aIL and abrdn Inc., respectively, were effective for an initial term of two years and may be continued thereafter from year to year provided such continuance is specifically approved at least annually in the manner required by the 1940 Act. The Advisory and Sub-Advisory Agreements may be terminated at any time without payment of penalty by the Acquiring Fund or by aIL upon 60 days’ written notice. The Advisory and Sub-Advisory Agreements will automatically terminate in the event of its assignment, as defined under the 1940 Act. Under the Advisory and Sub-Advisory Agreements, the Advisers are permitted to provide investment advisory services to other clients.

 

Effective December 1, 2017, aIL became the Fund’s investment adviser and abrdn Inc. became the Fund’s sub-adviser. Prior to December 1, 2017, the Acquiring Fund was managed by another, unaffiliated investment adviser.

 

In rendering investment advisory services to the Acquiring Fund, aIL and abrdn Inc. may use the resources of subsidiaries owned by abrdn plc. The abrdn plc affiliates have entered into a memorandum of understanding/personnel sharing procedures pursuant to which investment professionals from the abrdn plc affiliates may render portfolio management, research and/or trade services to US clients of aIL or abrdn Inc.

 

Portfolio Management of the Acquired Funds

 

FSD

 

The personnel of MacKay who have primary responsibility for the day-to-day management of FSD are Eric Gold, Matthew Jacob and Shu-Yang Tan.

 

Listed below are the biographies for each member of the portfolio management team.

 

Eric Gold

 

Senior Managing Director, Head of Global Credit Group

 

Mr. Gold joined MacKay Shields in 2010. Before joining the Global Credit team, Mr. Gold served as a Managing Director for the High Yield team. Mr. Gold is currently the head of the Global Credit Group and Portfolio Manager.

 

 

Matthew Jacob

 

Managing Director, Global Credit Group

 

Mr. Jacob joined MacKay Shields and the Global Fixed Income Division in 2011 as a portfolio analyst and was promoted to Portfolio Manager in 2017. Mr. Jacob is currently a member of the Global Credit Group.

 

Shu-Yang Tan

 

Managing Director, Global Credit Group

 

Mr. Tan joined MacKay Shields and the Global Fixed Income Division in 2010 as a portfolio analyst and was promoted to Portfolio Manager in 2017. Mr. Tan is currently a member of the Global Credit Group.

 

FAM

 

The personnel of abrdn Inc. who have primary responsibility for the day-to-day management of FAM are Brett Diment, Max Wolman, Edwin Gutierrez, James Athey, Patrick O’Donnell, and Kevin Daly.

 

Listed below are the biographies for each member of the portfolio management team.

 

Brett Diment

 

Head of Global Emerging Market Debt

 

Mr. Diment is the Head of Global Emerging Market Debt and joined abrdn following the acquisition of Deutsche Asset Management (“Deutsche”) in 2005. He is responsible for the day-to-day management of the Emerging Market Debt Team and portfolios. Mr. Diment had been at Deutsche since 1991 as a member of the Fixed Income group and served as Head of the Emerging Debt Team there from 1999 until its acquisition by abrdn.

 

Max Wolman

 

Investment Director, Emerging Market Debt

 

Mr. Wolman is an Investment Director on the Emerging Market Debt Team and has been with abrdn since January 2001. Mr. Wolman originally specialized in currency and domestic debt analysis but is now responsible for a wide range of emerging debt analysis including external and corporate issuers. Mr. Wolman is a member of the Emerging Market Debt Investment Committee at abrdn and is also responsible for the daily implementation of the investment process.

 

Edwin Gutierrez

 

Head of Emerging Market Sovereign Debt

 

Mr. Gutierrez is the Head of Emerging Market Sovereign Debt. Mr. Gutierrez joined abrdn via the acquisition of Deutsche Asset Management's London and Philadelphia fixed income businesses in 2005, where he held the same role since joining Deutsche in 2000.

 

James Athey

 

Investment Director, Rates Management

 

Mr. Athey is an Investment Director on the Rates Management Team (Global & European Rates – Fixed Income). Mr. Athey joined abrdn via the acquisition of Deutsche Asset Management’s London and Philadelphia fixed income business in 2005, where he had been since 2001, initially on the Graduate Recruitment Program.

 

Patrick O’Donnell

 

Senior Investment Manager, Rates Management

 

Mr. O’Donnell is a Senior Investment Manager on the Rates Management Team (Global & European Rates – Fixed Income) and joined abrdn in 2005 through the Graduate Recruitment Program.

 

 

Kevin Daly

 

Investment Director, Emerging Markets Debt

 

Mr. Daly is an Investment Director on the Emerging Market Debt team and joined abrdn in 2007. Prior to joining abrdn, Mr. Daly worked at Standard & Poor’s in London and Singapore where he was as a Credit Market Analyst covering global emerging debt.

 

Portfolio Management of the Acquiring Fund

 

The Acquiring Fund is managed by abrdn’s Euro High Yield and Global Leverage Loans teams. The Euro High Yield and Global Leverage Loans teams work in a truly collaborative fashion; all team members have both portfolio management and research responsibilities. The teams are responsible for the day-to-day management of the Acquiring Fund. The following individuals have primary responsibility for the day-to-day management of the Acquiring Fund’s portfolio:

 

Ben Pakenham – Head of European High Yield and Global Loans – Ben Pakenham is Head of European High Yield and Global Loans. He joined abrdn in 2011 from Henderson Global Investors (from 2008-2011), where he was the lead fund manager on the Extra Monthly Income Bond Fund and a named manager on various other credit portfolios including the High Yield Monthly Income Bond Fund. Prior to Henderson Global Investors, he was an Assistant Fund Manager on the High Yield Funds at New Star Asset Management (2005-2008).

 

Matthew Kence – Investment Director – US High Yield and Global High Yield – Matthew Kence is an Investment Director and is a Portfolio Manager on the abrdn Income Credit Strategies Fund and the Global High Yield strategies at abrdn. He is also responsible for covering US high yield energy companies.  Mr. Kence joined the company in 2010 from Gannet Welsh & Kotler where he was a Vice President, Credit. Previously, Mr. Kence also worked for MFS Investment Management as a high yield analyst. Matt graduated with a BS Mechanical Engineering from Ohio University and received his MBA from the Haas School of Business at the University of California, Berkeley.

 

Adam Tabor – Investment Director – European High Yield and Leveraged Loans – Adam Tabor is an Investment Director on the Global High Yield team at abrdn. Mr. Tabor joined the company in 2010 on the graduate rotation scheme having previously interned with the company in 2009. Adam graduated with an MA in Financial Economics from the University of St Andrews. He is a CFA Charterholder.

 

George Westervelt– Head of Global High Yield and Head of US High Yield Research – George Westervelt is Head of Global High Yield and Head of US High Yield Research. He is one of the Portfolio Managers on the team that manages the Global High Yield strategies and is also a member of the North American Fixed Income Leadership team. Mr. Westervelt joined abrdn in 2009 as a Credit Analyst and joined the portfolio management group in 2011. Prior to joining abrdn, Mr. Westervelt worked at MFS Investment Management in Boston and Citigroup in New York. He earned a BA in English from the University of Vermont and is a CFA Charterholder.

 

Other Service Providers

 

The other service providers for the Funds are as follows. The other service providers for the Acquiring Fund will be the service providers to the Combined Fund.

 

	Service Providers to FSD	Service Providers to FAM	Service Providers to the Acquiring Fund
Administrator	The Bank Of New York Mellon	The Bank Of New York Mellon	abrdn Inc.
Sub-Administrator	N/A	N/A	State Street Bank and Trust Company
Custodian	The Bank Of New York Mellon	The Bank Of New York Mellon	State Street Bank and Trust Company
Transfer Agent, Dividend Paying Agent and Registrar	Computershare, Inc.	Computershare, Inc.	Computershare Trust Company, N.A.
Fund Accounting Services Provider	The Bank Of New York Mellon	The Bank Of New York Mellon	State Street Bank and Trust Company
Independent Registered Public Accounting Firm	Deloitte & Touche LLP	Deloitte & Touche LLP	KPMG LLP
Fund Counsel	Chapman and Cutler LLP	Chapman and Cutler LLP	Dechert LLP
Counsel to the Independent Trustees	Vedder Price P.C.	Vedder Price P.C.	Faegre Drinker Biddle & Reath LLP

 

 

Capitalization

 

The table below sets forth the capitalization of each Acquired Fund and the Acquiring Fund as of September 30, 2023, and the pro forma capitalization of the Combined Fund as if the Reorganizations had occurred on that date. As shown below, it is anticipated that the NAV of Acquiring Fund shareholders’ shares would decrease due to the valuation differences described in the Proxy Statement/Prospectus and Acquiring Fund assets would increase.

 

		FSD				FAM				Acquiring Fund				Adjustments				Pro Forma Combined Fund
Net Assets		$	408,136,149			$	65,309,146			$	352,692,478				(1,052,639	)(a)		$	825,096,828
Common Shares Outstanding (b)			33,291,015				10,143,247				52,094,950				26,498,384	(c)			122,027,596
NAV Per Common Share		$	12.26			$	6.44			$	6.77			$	18.71	(c)		$	6.76
Preferred Shares Outstanding			None				None				1,600,000				None				1,600,000
Liquidation Preference per Preferred Share			None				None			$	25				None			$	25

 

(a)	For purposes of determining the Acquired Fund’s NAV, corporate, municipal, and convertible fixed income securities as well as bank loan agreements are priced at the mean of evaluated bid and asked prices provided by third-party pricing vendors on the valuation date. In contrast, the Acquiring Fund values such securities at the bid price provided by third-party pricing vendors.
(b)	Based on the number of outstanding common shares as of September 30, 2023.
(c)	Reflects the exchange of Acquired Fund shares for Acquiring Fund shares as a result of the Reorganizations.

 

AGREEMENT BETWEEN FIRST TRUST ADVISORS L.P. AND ABRDN INC.

 

First Trust and abrdn Inc. have entered into a separate agreement (the “Purchase Agreement”) pursuant to which abrdn Inc. will acquire certain assets related to First Trust’s business of providing investment management services with respect to the assets of each Acquired Fund and certain other registered investment companies (the “Business”) if the Reorganizations are approved, and upon satisfaction or waiver of certain other conditions. More specifically, under the Purchase Agreement, First Trust has agreed to transfer to abrdn Inc., for a cash payment at the closing of the Asset Transfer (as defined below) and subject to certain exceptions, (i) all right, title and interest of First Trust in and to the books and records relating to the Business of the Acquired Fund; and (ii) all goodwill of the Business as a going concern. Such transfers hereinafter are referred to collectively as the “Asset Transfer.”

 

 

Section 15(f) of the 1940 Act is a non-exclusive safe harbor provision that permits an investment adviser of a registered investment company (or any affiliated persons of the investment adviser) to receive any amount or benefit in connection with a sale of securities of, or a sale of any other interest in, the investment adviser that results in an “assignment” (as defined in the 1940 Act) of an investment advisory contract with such registered investment company, provided that two conditions are satisfied. First, during the three-year period after such transaction, at least 75% of the members of the investment company’s board of trustees may not be “interested persons” (as defined in the 1940 Act) of the investment adviser or its predecessor. Second, an “unfair burden”, as the term is defined in Section 15(f), must not be imposed on such registered investment company as a result of such transaction or any express or implied terms, conditions, or understandings relating to such transaction during the two-year period after the date on which any such transaction occurs. The term “unfair burden,” as defined in the 1940 Act, includes any arrangement during the two-year period after the sale whereby the investment adviser (or predecessor or successor adviser), or any “interested person” of the adviser (as defined in the 1940 Act), receives or is entitled to receive any compensation, directly or indirectly, from the investment company or its security holders (other than fees for bona fide investment advisory or other services), or from any person in connection with the purchase or sale of securities or other property to, from or on behalf of the investment company (other than ordinary fees for bona fide principal underwriting services).

 

First Trust intends to qualify for the “safe harbor” provided by Section 15(f), and consequently: (i) for a period of three years after the Closing Date, at least 75% of the trustees of the Combined Fund will not be “interested persons” (as defined in the 1940 Act) of aIL, abrdn Inc. or First Trust, and (ii) for a period of two years after the Closing Date, no “unfair burden” as defined in the 1940 Act will be imposed on the Combined Fund as a result of the Reorganizations or any express or implied terms, conditions, or understandings applicable thereto.

 

 

ADDITIONAL INFORMATION ABOUT THE SHARES OF THE FUNDS

 

Description of Common Shares to be Issued by the Acquiring Fund; Comparison to the Acquired Funds

 

The Acquired Funds offer one class of shares: common shares. The Acquiring Fund offers two classes of shares: common shares and Preferred Shares. As a general matter, with respect to the Acquiring Fund and the Acquired Funds, the common shares have equal voting rights and equal rights with respect to the payment of dividends and the distribution of assets upon dissolution, liquidation or winding up of the affairs of their respective Fund and have no preemptive, conversion or exchange rights or rights to cumulative voting. Holders of whole common shares of each Fund are entitled to one vote per share on any matter on which the shares are entitled to vote, while each fractional share is entitled to a proportional fractional vote.

 

The Acquiring Fund’s Agreement and Declaration of Trust authorizes an unlimited number of shares, par value $0.001 per share. If the Reorganizations are consummated, the Acquiring Fund will issue common shares to the shareholders of common stock of the Acquired Fund based on the relative per share NAV of the Acquiring Fund and the NAV of the assets of the Acquired Fund, in each case as of the date of the Reorganization. The Acquiring Fund common shares, when issued, will be fully paid and non-assessable.

 

Preferred Shares

 

Currently, neither Acquired Fund has issued preferred shares. The Acquiring Fund has issued 1,600,000 shares of 5.25% Series A Perpetual Preferred Shares, par value $0.001 (“Preferred Shares”). The Acquiring Fund’s Preferred Shares are listed on the NYSE under the ticker symbol “ACP PRA.” The Preferred Shares will have a liquidation preference of $25.00 per share, plus accumulated and unpaid dividends, before any distribution of assets is made to Common Shareholders. After payment of the full amount of the liquidating distribution to which they are entitled, the preferred shareholders would not be entitled to any further participation in any distribution of assets by the Fund.

 

Holders of the Series A Perpetual Preferred Shares are entitled to receive quarterly cumulative cash dividend payments at a rate of 5.250%. Dividends and distributions on the Preferred Shares will accumulate from the date of their original issue. Dividends and distributions will be paid quarterly on March 31, June 30, September 30 and December 31 of each year (or, in each case, if such date is not a business day, the next succeeding business day). Distributions are accrued daily and paid quarterly.

 

Prior to June 30, 2026, the Preferred Shares are not subject to optional redemption by the Acquiring Fund unless the redemption is necessary, in the judgment of the Board, to maintain the Acquiring Fund’s status as a regulated investment company (“RIC”) under Subchapter M of the Code. On or after June 30, 2026 (any such date, an “Optional Redemption Date”), the Acquiring Fund may redeem in whole or from time to time in part outstanding Preferred Shares at a redemption price per share equal to the $25.00 per share liquidation preference plus an amount equal to all unpaid dividends and distributions accumulated through the Optional Redemption Date (whether or not earned or declared by the Acquiring Fund, but excluding interest thereon).

 

The Preferred Shares rank senior to the Acquiring Fund’s Common Shares in priority of payment of dividends and as to the distribution of assets upon dissolution, liquidation or winding up of the Acquiring Fund’s affairs; equal in priority with all other future series of preferred shares the Acquiring Fund may issue as to priority of payment of dividends and as to distributions of assets upon dissolution, liquidation or the winding-up of the Acquiring Fund’s affairs; and subordinate in right of payment to amounts owed under the Acquiring Fund’s existing credit facility, and to the holder of any future senior indebtedness, which may be issued without the vote or consent of preferred shareholders.

 

If the Acquiring Fund fails to have asset coverage of at least 200% with respect to its Preferred Shares as of the close of business on the last business day of each calendar quarter, and such failure is not cured as of the close of business on the date that is 30 calendar days following such business day, the Acquiring Fund will fix a redemption date and proceed to redeem the Preferred Shares, as described above at a price per share equal to $25.00 per share liquidation preference plus accumulated but unpaid dividends and distributions thereon (whether or not earned or declared but excluding interest thereon) through the date fixed for redemption by the Board.

 

Except for matters that do not require the vote of holders of Preferred Shares under the 1940 Act and except as otherwise provided in the Acquiring Fund’s governing documents, or as otherwise required by applicable law, each holder of Preferred Shares will be entitled to one vote for each Preferred Share held by such holder on each matter submitted to a vote of shareholders of the Acquiring Fund. Except as otherwise provided herein or in the Statement of Preferences, the holders of outstanding preferred shares, including the Preferred Shares, will vote together with holders of the Acquiring Fund’s Common Shares as a single class.

 

Holders of Preferred Shares, voting as a class, shall be entitled to elect at least two of the Acquiring Fund’s trustees. Under the 1940 Act, if at any time distributions on the Preferred Shares are unpaid in an amount equal to two (2) full years’ distributions thereon, the holders of all outstanding Preferred Shares, voting as a class, will be allowed to elect at least a majority of the Acquiring Fund’s trustees with the number of Trustees increased appropriately to the extent necessary to effectuate such rights until all distributions in arrears have been paid or declared and set apart for payment. The 1940 Act also requires that, in addition to any approval by shareholders that might otherwise be required, the approval of the holders of a majority of any outstanding Preferred Shares, voting separately as a class, would be required to (1) adopt any plan of reorganization that would adversely affect the Preferred Shares and (2) take any action requiring a vote of security holders under Section 13(a) of the 1940 Act, including among other things, changes in the Acquiring Fund’s sub-classification as a closed-end investment company or changes in its fundamental investment restrictions.

 

 

Other Shares

 

The Acquiring Fund’s Board (subject to applicable law and the Acquiring Fund’s Agreement and Declaration of Trust) may authorize an offering, without the approval of the holders of either Common Shares or Preferred Shares, of other classes of shares, or other classes or series of shares, as they determine to be necessary, desirable or appropriate, having such terms, rights, preferences, privileges, limitations and restrictions as the Acquiring Fund’s Board sees fit. The Acquiring Fund currently does not expect to issue any other classes of shares, or series of shares, except for the Common Shares in connection with the Reorganizations.

 

Distributions

 

The Funds have similar dividend policies with respect to the payment of dividends on their shares. Distributions of investment company taxable income for each Fund are declared and paid on a monthly basis, and capital gains distributions, if any, are paid at least annually.

 

Outstanding Shares as of October 23, 2023

 

	Outstanding Shares
FSD	Common Shares: 33,291,015
FAM	Common Shares: 10,143,247
Acquiring Fund	Common Shares: 52,109,950 Preferred Shares: 1,600,000

 

Purchase and Sale

 

Each Fund’s common shares are listed on the NYSE. The common shares of the Acquiring Fund are listed on the NYSE under the ticker symbol “ACP” and will continue to be so listed following the Reorganization. The common shares of the Acquired Funds are listed on the NYSE under the ticker symbol “FSD” (First Trust High Income Long/Short Fund) and “FAM” (First Trust/abrdn Global Opportunity Income Fund) and each Acquired Fund would be delisted from the NYSE following the applicable Reorganization.

 

Purchase and sale procedures for the common shares of each of the Funds are similar. Investors typically purchase and sell common shares of the Funds through a registered broker-dealer on the NYSE, thereby incurring a brokerage commission set by the broker-dealer. Alternatively, investors may purchase or sell common shares of the Funds through privately negotiated transactions with existing shareholders.

 

Share Price Data

 

The Funds’ common shares have traded both at a premium and at a discount to the Funds’ NAV per common share. There can be no assurance that the Funds’ common shares will not trade at a discount in the future. Shares of closed-end investment companies frequently trade at a discount to NAV. It is not possible to state whether Combined Fund shares will trade at a discount or premium to NAV, or what the extent of any such discount or premium might be.

 

The following table sets forth for the fiscal quarters indicated the highest and lowest daily prices during the applicable quarter at the close of market on the NYSE per common share along with (i) the highest and lowest closing NAV and (ii) the highest and lowest premium or discount from NAV represented by such prices at the close of the market on the NYSE.

 

 

FSD

 

		Market Price ($)(1)								NAV ($)(2)								Premium/discount to NAV (%)(3)
Quarter Ended		High				Low				High				Low				High				Low
October 31, 2023			11.36				10.21				12.48				11.89				-8.97				-14.13
July 31, 2023			11.66				10.90				12.63				12.39				-7.68				-12.03
April 30, 3023			12.13				10.89				13.16				12.39				-7.83				-12.11
January 31, 2023			12.12				10.92				13.03				12.35				-6.98				-11.58
October 31, 2022			12.64				10.56				13.66				12.29				-7.47				-14.08
July 31, 2022			12.98				11.23				13.97				12.88				-7.09				-12.81
April 30, 2022			14.41				12.83				15.54				14.06				-7.27				-8.75
January 31, 2022			15.93				14.32				16.11				15.69				-1.12				-8.73
October 31, 2021			16.12				15.68				16.48				16.25				-2.18				-3.51
July 31, 2021			16.05				15.12				16.55				16.34				-3.02				-7.47
April 30, 2021			15.46				14.75				16.51				16.48				-6.36				-10.50

 

(1) Based on high and low closing market price for the respective quarter.

(2) Based on the net asset value calculated on the day of the high and low closing market prices, as applicable, as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern time).

(3) Calculated based on the information presented.

 

FAM

 

		Market Price ($)(1)								NAV ($)(2)								Premium/discount to NAV (%)(3)
Quarter Ended		High				Low				High				Low				High				Low
September 30, 2023			6.52				5.63				6.93				6.42				-5.92				-12.31
June 30, 2023			6.27				5.70				6.81				6.66				-7.93				-14.41
March 31, 3023			6.25				5.70				6.94				6.62				-9.94				-13.90
December 31, 2022			6.00				5.25				6.68				6.11				-10.18				-14.08
September 30, 2022			6.81				5.30				6.91				6.31				-1.45				-16.01
June 30, 2022			7.48				5.95				7.93				6.82				-5.67				-12.76
March 31, 2022			9.50				7.09				9.48				7.85				0.21				-9.68
December 31, 2021			10.20				9.62				9.86				9.64				3.45				-0.21
September 30, 2021			10.33				10.00				10.50				10.07				-1.62				-0.70
June 30, 2021			10.24				9.85				10.57				10.37				-3.12				-5.01
March 31, 2021			10.74				9.91				11.18				10.52				-3.94				-5.80

 

(1) Based on high and low closing market price for the respective quarter.

(2) Based on the net asset value calculated on the day of the high and low closing market prices, as applicable, as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern time).

(3) Calculated based on the information presented.

 

 

Acquiring Fund

 

		Market Price ($)(1)								NAV ($)(2)								Premium/discount to NAV (%)(3)
Quarter Ended		High				Low				High				Low				High				Low
October 31, 2023			7.15				5.62				6.96				6.47				2.73				-13.14
July 31, 2023			6.98				6.46				7.06				6.80				-0.43				-5.00
April 30, 3023			8.50				6.45				7.38				6.89				16.28				-6.66
January 31, 2023			8.21				6.32				7.34				6.65				12.16				-4.96
October 31, 2022			8.72				6.16				7.80				6.54				12.81				-5.81
July 31, 2022			9.33				7.57				8.74				7.11				6.75				3.13
April 30, 2022			10.51				9.34				10.01				8.80				7.68				2.64
January 31, 2022			11.45				9.62				10.53				9.94				8.94				-4.47
October 31, 2021			11.69				10.94				11.02				10.45				6.66				1.11
July 31, 2021			12.59				10.76				11.71				10.87				8.35				-6.19
April 30, 2021			12.56				10.91				11.70				11.32				7.63				-3.62

 

(1) Based on high and low closing market price for the respective quarter.

(2) Based on the net asset value calculated on the day of the high and low closing market prices, as applicable, as of the close of regular trading on the NYSE (normally 4:00 p.m. eastern time).

(3) Calculated based on the information presented.

 

On December 6, 2023, FSD’s NAV per share was $12.48 and the last reported sale price of a common share on the NYSE was $11.25, representing a discount to NAV of -9.86%. On December 6, 2023, FAM’s NAV per share was $6.68 and the last reported sale price of a common share on the NYSE was $5.99, representing a discount to NAV of -10.33%. On November 30, 2023, the Acquiring Fund’s NAV per share was $6.76 and the last reported sale price of a common share on the NYSE was $6.16, representing a discount to NAV of 8.88%.

 

 

Performance Information

 

The performance table below illustrates the past performance of an investment in shares of FSD, FAM, and the Acquiring Fund by setting forth the average total returns for the Funds for their fiscal years ended October 31, 2022, December 31, 2022, and October 31, 2022, respectively. A Fund’s past performance does not necessarily indicate how its shares will perform in the future and the deduction of taxes that a shareholder would pay on fund distributions or the sale of fund shares is not reflected in the below.

 

		Average Annual Total Return on NAV												Average Annual Total Return on Market Value
		Ten Years				Five Years				One Year				Ten Years				Five Years				One Year				Inception Date
FSD			4.40	%			1.73	%			-14.11	%			3.17	%			0.56	%			-23.99	%		September 27, 2010
FAM			-0.91	%			-3.97	%			-23.23	%			-1.69	%			-4.01	%			-30.91	%		November 23, 2004
Acquiring Fund			1.30	%			-3.93	%			-25.87	%			0.90	%			-4.11	%			-34.92	%		January 27, 2011

 

Average Annual Total Return on NAV is the combination of changes in common share NAV, reinvested dividend income at NAV and reinvested capital gains distributions at NAV, if any. The last dividend declared in the period is assumed to be reinvested at the ending NAV. The actual reinvestment price for the last dividend declared in the period may often be based on a Fund’s market price (and not its NAV), and therefore may be different from the price used in the calculation. Average Annual Total Return on Market Value is the combination of changes in the market price per share and the effect of reinvested dividend income and reinvested capital gains distributions, if any, at the average price paid per share at the time of reinvestment. The last dividend declared in the period is assumed to be reinvested at the ending market price. The actual reinvestment for the last dividend declared in the period may take place over several days, and in some instances it may not be based on the market price, so the actual reinvestment price may be different from the price used in the calculation.

 

NET ASSET VALUE OF COMMON SHARES OF THE ACQUIRING FUND

 

Common shares of the Acquiring Fund are listed on the NYSE. The NAV of the common shares of the Acquiring Fund is computed based upon the value of the Fund’s total assets. NAV is generally determined daily by the Acquiring Fund’s custodian as of the close of the regular trading session on each day that the NYSE is open for business. The NAV of the common shares of the Acquiring Fund is determined by calculating the total value of the Fund’s assets (the value of the securities, plus cash or other assets, including interest accrued but not yet received), deducting its total liabilities (including accrued expenses or dividends), and dividing the result by the number of common shares outstanding of the Fund. The Acquiring Fund reserves the right to calculate the NAV more frequently if deemed desirable.

 

Loans and securities are valued by the Acquiring Fund following valuation guidelines established and periodically reviewed by the Board. Under the valuation guidelines, loans and securities for which reliable market quotes are readily available are valued at current market value and all other loans, securities and assets of the Fund are valued at fair value in good faith following procedures established by the Board.

 

Pursuant to Rule 2a-5 under the Investment Company Act of 1940, as amended (the "1940 Act"), the Acquiring Fund Board designated aIL as the valuation designee ("Valuation Designee") for the Acquiring Fund to perform the fair value determinations relating to Acquiring Fund investments for which market quotations are not readily available. In the event that a security’s market quotations are not readily available or are deemed unreliable (for reasons other than because the foreign exchange on which it trades closed before the Valuation Time), the security is valued at fair value as determined by the Fund’s Valuation Designee, taking into account the relevant factors and surrounding circumstances using Valuation and Liquidity Procedures approved by the Acquiring Fund’s Board of Trustees.

 

If events materially affecting the price of foreign portfolio securities occur between the time when their price was last determined on such foreign securities exchange or market and the time when the Acquiring Fund’s NAV was last calculated (for example, movements in certain US securities indices which demonstrate strong correlation to movements in certain foreign securities markets), such securities may be valued at their fair value as determined in good faith in accordance with procedures established by the Board. For purposes of calculating NAV, all assets and liabilities initially expressed in foreign currencies will be converted into US dollars at the mean of the bid price and ask price of such currencies against the US dollar, as quoted by a major bank.

 

When an Acquiring Fund common shareholder sells common shares, he or she will typically receive the market price for such common shares, which may be less than the NAV of such common shares.

 

DIVIDEND REINVESTMENT AND OPTIONAL CASH PURCHASE PLAN

 

The dividend reinvestment plan (the “Plan”) of the Acquiring Fund, described below, will be the dividend reinvestment plan of the Combined Fund.

 

 

The Acquiring Fund intends to distribute to stockholders substantially all of its net investment income and to distribute any net realized capital gains at least annually. Net investment income for this purpose is income other than net realized long-term and short-term capital gains net of expenses. Pursuant to the Dividend Reinvestment and Optional Cash Purchase Plan (the “Plan”), stockholders whose shares of common stock are registered in their own names will be deemed to have elected to have all distributions automatically reinvested by Computershare Trust Company N.A. (the “Plan Agent” or “Computershare”) in the Acquiring Fund shares pursuant to the Plan, unless such stockholders elect to receive distributions in cash. Stockholders who elect to receive distributions in cash will receive such distributions paid by check in US dollars mailed directly to the stockholder by the Plan Agent, as dividend paying agent. In the case of stockholders such as banks, brokers or nominees that hold shares for others who are beneficial owners, the Plan Agent will administer the Plan on the basis of the number of shares certified from time to time by the stockholders as representing the total amount registered in such stockholders’ names and held for the account of beneficial owners that have not elected to receive distributions in cash. Investors that own shares registered in the name of a bank, broker or other nominee should consult with such nominee as to participation in the Plan through such nominee and may be required to have their shares registered in their own names in order to participate in the Plan. Please note that the Acquiring Fund does not issue certificates so all shares will be registered in book entry form. The Plan Agent serves as agent for the stockholders in administering the Plan. If the Trustees of the Acquiring Fund declare an income dividend or a capital gains distribution payable either in the Acquiring Fund’s common stock or in cash, nonparticipants in the Plan will receive cash and participants in the Plan will receive common stock, to be issued by the Acquiring Fund or purchased by the Plan Agent in the open market, as provided below. If the market price per share (plus expected per share fees) on the valuation date equals or exceeds NAV per share on that date, the Acquiring Fund will issue new shares to participants at NAV; provided, however, that if the NAV is less than 95% of the market price on the valuation date, then such shares will be issued at 95% of the market price. The valuation date will be the payable date for such distribution or dividend or, if that date is not a trading day on the NYSE, the immediately preceding trading date. If NAV exceeds the market price of Acquiring Fund shares at such time, or if the Acquiring Fund should declare an income dividend or capital gains distribution payable only in cash, the Plan Agent will, as agent for the participants, buy Acquiring Fund shares in the open market, on the NYSE or elsewhere, for the participants’ accounts on, or shortly after, the payment date. If, before the Plan Agent has completed its purchases, the market price exceeds the NAV of an Acquiring Fund share, the average per share purchase price paid by the Plan Agent may exceed the NAV of the Acquiring Fund’s shares, resulting in the acquisition of fewer shares than if the distribution had been paid in shares issued by the Acquiring Fund on the dividend payment date. Because of the foregoing difficulty with respect to open-market purchases, the Plan provides that if the Plan Agent is unable to invest the full dividend amount in open-market purchases during the purchase period or if the market discount shifts to a market premium during the purchase period, the Plan Agent will cease making open-market purchases and will receive the uninvested portion of the dividend amount in newly issued shares at the close of business on the last purchase date.

 

Participants have the option of making additional cash payments of a minimum of $50 per investment (by check, one-time online bank debit or recurring automatic monthly ACH debit) to the Plan Agent for investment in the Acquiring Fund’s common stock, with an annual maximum contribution of $250,000. The Plan Agent will wait up to three business days after receipt of a check or electronic funds transfer to ensure it receives good funds. Following confirmation of receipt of good funds, the Plan Agent will use all such funds received from participants to purchase Acquiring Fund shares in the open market on the 25th day of each month or the next trading day if the 25th is not a trading day.

 

If the participant sets up recurring automatic monthly ACH debits, funds will be withdrawn from his or her US bank account on the 20th of each month or the next business day if the 20th is not a banking business day and invested on the next investment date. The Plan Agent maintains all stockholder accounts in the Plan and furnishes written confirmations of all transactions in an account, including information needed by stockholders for personal and tax records. Shares in the account of each Plan participant will be held by the Plan Agent in the name of the participant, and each stockholder’s proxy will include those shares purchased pursuant to the Plan. There will be no brokerage charges with respect to common shares issued directly by the Acquiring Fund. However, each participant will pay a per share fee of $0.02 incurred with respect to the Plan Agent’s open market purchases in connection with the reinvestment of dividends, capital gains distributions and voluntary cash payments made by the participant. Per share fees include any applicable brokerage commissions the Plan Agent is required to pay.

 

Participants also have the option of selling their shares through the Plan. The Plan supports two types of sales orders. Batch order sales are submitted on each market day and will be grouped with other sale requests to be sold. The price will be the average sale price obtained by Computershare’s broker, net of fees, for each batch order and will be sold generally within 2 business days of the request during regular open market hours. Please note that all written sales requests are always processed by Batch Order. ($10 and $0.12 per share). Market Order sales will sell at the next available trade. The shares are sold real time when they hit the market, however an available trade must be presented to complete this transaction. Market Order sales may only be requested by phone at 1-800-647-0584 or using Investor Center through www.computershare.com/buyaberdeen. ($25 and $0.12 per share).

 

 

The receipt of dividends and distributions under the Plan will not relieve participants of any income tax that may be payable on such dividends or distributions. The Acquiring Fund or the Plan Agent may terminate the Plan as applied to any voluntary cash payments made and any dividend or distribution paid subsequent to notice of the termination sent to members of the Plan at least 30 days prior to the record date for such dividend or distribution. The Plan also may be amended by the Acquiring Fund or the Plan Agent, but (except when necessary or appropriate to comply with applicable law or the rules or policies of the SEC or any other regulatory authority) only by mailing a written notice at least 30 days prior to the effective date to the participants in the Plan. All correspondence concerning the Plan should be directed to the Plan Agent by phone at 1-800-647-0584, using Investor Center through www.computershare.com/buyaberdeen or in writing to Computershare Trust Company N.A., P.O. Box 43006, Providence, RI 02940-3078.

 

ANTI-TAKEOVER AND CERTAIN PROVISIONS OF THE ACQUIRING FUND’S AGREEMENT AND DECLARATION OF TRUST AND BY-LAWS

 

The Agreement and Declaration of Trust and By-Laws of the Acquiring Fund contain provisions, which are described below in this section, that could have the effect of limiting (i) the ability of other entities or persons to acquire control of the Acquiring Fund; (ii) the Acquiring Fund’s freedom to engage in certain transactions or (iii) the ability of the Acquiring Fund’s trustees or shareholders to amend the Agreement and Declaration of Trust and By-Laws or effectuate changes in the Acquiring Fund’s management. These provisions of the Agreement and Declaration of Trust and By-Laws of the Acquiring Fund may be regarded as “anti-takeover” provisions.

 

The Board of the Acquiring Fund is divided into three (3) classes, with the terms of one (1) class expiring at each annual meeting of shareholders or special meeting in lieu thereof. At each annual meeting, one class of trustees is elected to a three-year term. This provision could delay for up to two (2) years the replacement of a majority of the Board of the Acquiring Fund . Shareholders have no right under the Agreement and Declaration of Trust to remove any trustee, other than by electing a different trustee at an annual meeting of shareholders. The Acquiring Fund’s Agreement and Declaration of Trust provides that, unless a two-thirds (2/3) majority of the Board approves such action, the affirmative vote of at least three-fourths (3/4) of the Acquiring Fund’s outstanding shares of each affected class or series entitled to be cast, voting together unless otherwise entitled to vote as a separate class or series, is required in order to approve (i) any amendment to, repeal of, or adoption of any provision inconsistent with, the Acquiring Fund’s Agreement and Declaration of Trust regarding election and term of trustees or (ii) any amendment to the Agreement and Declaration of Trust that reduces the foregoing three-fourths (3/4) vote requirement. A trustee may be removed from office for cause only, and not without cause, and only by the action of two-thirds (2/3) of the remaining trustees provided the aggregate number of Trustees after such removal shall not be less than the minimum set forth in the Agreement and Declaration of Trust.

 

The Agreement and Declaration of Trust provides that the trustees may (i) sell, convey and transfer all or substantially all of the assets of the Acquiring Fund to another trust, corporation, partnership, association or other entity; (ii) merge or consolidate the Fund with any other trust, corporation, partnership, association or other entity or (iii) dissolve the Acquiring Fund. The trustees may require a shareholder vote on such matters as well. The Agreement and Declaration of Trust does not contemplate that the shareholders could affect any of the foregoing actions directly.

 

The overall effect of these provisions is to render more difficult the accomplishment of a merger or the assumption of control by a third party. These provisions also provide, however, the advantage of potentially requiring persons seeking control of the Acquiring Fund to negotiate with its management regarding the price to be paid and facilitating the continuity of the Fund’s investment objectives and policies. The provisions of the Agreement and Declaration of Trust and By-Laws described above could have the effect of discouraging a third party from seeking to obtain control of the Acquiring Fund in a tender offer or similar transaction.

 

The Board of the Acquiring Fund has determined that provisions with respect to the Board of the Acquiring Fund and the shareholder voting requirements are in the best interests of the shareholders generally. Reference should be made to the Agreement and Declaration of Trust on file with the SEC for the full text of these provisions.

 

The Agreement and Declaration of Trust provides that the Acquiring Fund will fully indemnify (except in the case of certain disabling conduct) each of its trustees, officers and employees, and any investment adviser or sub-adviser in connection with their service with the Acquiring Fund. The Agreement and Declaration of Trust also provides for advancement of expenses (including counsel fees) to such indemnified persons subject to certain conditions set forth in the Agreement and Declaration of Trust.

 

 

APPRAISAL RIGHTS

 

Shareholders of the Acquired Funds and the Acquiring Fund do not have appraisal rights in connection with the proposed transactions.

 

FINANCIAL HIGHLIGHTS

 

FSD

 

The information for the six months ended April 30, 2023, is unaudited. The information for the other periods shown has been audited by Deloitte & Touche LLP, the Acquired Fund’s independent registered public accounting firm, unless identified as unaudited. Financial statements for the fiscal year ended October 31, 2022, and the Report of the Independent Registered Public Accounting Firm thereon appear in the FSD’s Annual Report for the fiscal year ended October 31, 2022, which is available at http://www.ftportfolios.com and upon request.

 

Selected data for each share of the Fund outstanding throughout each period were as follows:

 

For a Common Share outstanding throughout each period

 

		Six Months Ended 4/30/2023				Year Ended October 31,
		(Unaudited)				2022				2021				2020				2019				2018
Net asset value, beginning of period		$	12.63			$	16.22			$	15.66			$	16.94			$	16.57			$	18.23
Income from investment operations:
Net investment income (loss)			0.32				0.76				0.94				0.92				0.93				0.96
Net realized and unrealized gain (loss)			0.39				(3.09	)			0.93				(0.92	)			0.68				(1.32	)
Total from investment operations			0.71				(2.33	)			1.87				—				1.61				(0.36	)
Distributions paid to shareholders from:
Net investment income			(0.63	)			(0.79	)			(0.95	)			(0.92	)			(0.92	)			(0.98	)
Return of capital			—				(0.47	)			(0.37	)			(0.40	)			(0.36	)			(0.37	)
Total distributions paid to Common Shareholders			(0.63	)			(1.26	)			(1.32	)			(1.32	)			(1.28	)			(1.35	)
Common Share repurchases			0.01				0.00	(a)			0.01				0.04				0.04				0.05
Net asset value, end of period		$	12.72			$	12.63			$	16.22			$	15.66			$	16.94			$	16.57
Market value, end of period		$	11.40			$	11.06			$	16.05			$	13.49			$	15.49			$	13.91
Total return based on net asset value (b)			6.38	%			(14.11	)%			12.88	%			1.53	%			11.58	%			(0.82	)%
Total return based on market value (b)			8.87	%			(23.99	)%			29.67	%			(4.35	)%			21.54	%			(10.24	)%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)		$	423,584			$	421,973			$	543,048			$	526,815			$	582,502			$	578,360
Ratio of total expenses to average net assets			3.92	%(c)			2.22	%			1.84	%			2.13	%			2.53	%			2.20	%
Ratio of total expenses to average net assets excluding interest expense			1.16	%(c)			1.13	%			1.19	%			1.22	%			1.16	%			1.13	%
Ratio of net investment income (loss) to average net assets			5.06	%(c)			5.34	%			5.74	%			5.80	%			5.55	%			5.48	%
Portfolio turnover rate			9	%			32	%			43	%			63	%			33	%			29	%

 

		Year Ended October 31,
		2017				2016				2015				2014				2013
Net asset value, beginning of period		$	17.71			$	17.28			$	19.47			$	19.63			$	19.05
Income from investment operations:
Net investment income (loss)			1.04				1.00				1.11				1.31				1.35
Net realized and unrealized gain (loss)			0.83				0.44				(2.05	)			(0.15	)			0.64
Total from investment operations			1.87				1.44				(0.94	)			1.16				1.99
Distributions paid to shareholders from:
Net investment income			(1.07	)			(1.06	)			(1.26	)			(1.32	)			(1.33	)
Return of capital			(0.34	)			—				—				—				(0.08	)
Total distributions to Common Shareholders			(1.41	)			(1.06	)			(1.26	)			(1.32	)			(1.41	)
Common share repurchases			0.00	(a)			0.05				0.01				—				—
Tender offer purchases			0.06				—				—				—				—
Net asset value, end of period		$	18.23			$	17.71			$	17.28			$	19.47			$	19.63
Market value, end of period		$	16.91			$	15.52			$	14.96			$	17.19			$	17.62
Total return based on net asset value (b)			11.98	%			10.24	%			(3.89	)%			6.86	%			11.32	%
Total return based on market value (b)			18.52	%			11.58	%			(5.76	)%			5.12	%			1.36	%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)		$	546,047			$	624,109			$	620,309			$	701,955			$	707,807
Ratio of total expenses to average net assets			1.86	%			1.54	%			1.66	%			1.75	%			1.72	%
Ratio of total expenses to average net assets excluding interest expense			1.19	%			1.16	%			1.21	%			1.26	%			1.27	%
Ratio of net investment income (loss) to average net assets			5.76	%			5.92	%			6.05	%			6.59	%			6.93	%
Portfolio turnover rate			39	%			36	%			26	%			28	%			28	%

 

(a)	Amount is less than $0.01.
(b)	Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan, and changes in net asset value per share for net asset value returns and changes in Common Share Price for market value returns. Total returns do not reflect sales load and are not annualized for periods of less than one year. Past performance is not indicative of future results.
(c)	Annualized.

 

 

FAM

 

The information for the six months ended June 30, 2023, is unaudited. The information for the other periods shown has been audited by Deloitte & Touche LLP, the Acquired Fund’s independent registered public accounting firm, unless identified as unaudited. Financial statements for the fiscal year ended December 31, 2022, and the Report of the Independent Registered Public Accounting Firm thereon appear in the FAM’s Annual Report for the fiscal year ended December 31, 2022, which is available at http://www.ftportfolios.com and upon request.

 

Selected data for each share of the Fund outstanding throughout each period were as follows:

 

For a Common Share outstanding throughout each period

 

		Six Months Ended 6/30/2023				Year Ended December 31,
		(Unaudited)				2022				2021				2020				2019				2018
Net asset value, beginning of period		$	6.68			$	9.64			$	11.37			$	11.93			$	11.07			$	12.94
Income from investment operations:
Net investment income (loss)			0.17				0.33				0.44				0.45				0.65				0.69
Net realized and unrealized gain (loss)			0.28				(2.60	)			(1.27	)(d)			(0.06	)			1.09				(1.70	)
Total from investment operations			0.45				(2.27	)			(0.83	)			0.39				1.74				(1.01	)
Distributions paid to shareholders from:
Net investment income			(0.30	)			—				(0.30	)			(0.42	)			(0.39	)			(0.54	)
Return of capital			—				(0.69	)			(0.65	)			(0.54	)			(0.49	)			(0.34	)
Total distributions paid to Common Shareholders			(0.30	)			(0.69	)			(0.95	)			(0.96	)			(0.88	)			(0.88	)
Common Share repurchases			—				—				—				0.01				0.00	(e)			0.02
Tender offer purchases			—				—				0.05				—				—				—
Net asset value, end of period		$	6.83			$	6.68			$	9.64			$	11.37			$	11.93			$	11.07
Market value, end of period		$	6.22			$	6.00			$	9.62			$	10.55			$	11.19			$	9.38
Total return based on net asset value (f)			7.48	%			(23.23	)%			(6.96	)%(d)			4.84	%			17.09	%			(6.85	)%
Total return based on market value (f)			8.97	%			(30.91	)%			0.07	%			3.71	%			29.74	%			(12.42	)%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's)		$	69,323			$	67,782			$	97,771			$	144,094			$	152,154			$	141,376
Ratio of total expenses to average net assets			3.62	%(g)			2.93	%			2.29	%			2.53	%			2.88	%			2.81	%
Ratio of total expenses to average net assets excluding interest expense			1.91	%(g)			1.93	%			1.89	%			2.00	%			1.77	%			1.82	%
Ratio of net investment income (loss) to average net assets			5.06	%(g)			4.57	%			4.53				4.13	%			5.60	%			5.88	%
Portfolio turnover rate			21	%			47	%			44	%			39	%			42	%			58	%
Indebtedness:
Total loans outstanding (in 000's)		$	16,600			$	29,971			$	42,184			$	53,514			$	60,572			$	60,799
Asset coverage per $1,000 of indebtedness (h)			5,176				3,262				3,318				3,693				3,512				3,325

 

		Year Ended December 31,
		2017				2016				2015				2014				2013
Net asset value, beginning of period		$	12.07			$	11.66			$	13.77			$	15.32			$	18.37
Income from investment operations:
Net investment income (loss)			0.72				0.73				0.82				1.03				1.07
Net realized and unrealized gain (loss)			0.98				0.58				(1.80	)			(1.22	)			(2.56	)
Total from investment operations			1.70				1.31				(0.98	)			(0.19	)			(1.49	)
Distributions paid to shareholders from:
Net investment income			(0.37	)			(0.43	)			—				(0.71	)			(1.08	)
Net realized gain			—				—				—				(0.13	)			(0.13	)
Return of capital			(0.53	)			(0.47	)			(1.14	)			(0.52	)			(0.35	)
Total distributions paid to Common Shareholders			(0.90	)			(0.90	)			(1.14	)			(1.36	)			(1.56	)
Common Share repurchases			—				—				0.01				—				—
Tender offer purchases			0.07				—				—				—				—
Net asset value, end of period		$	12.94			$	12.07			$	11.66			$	13.77			$	15.32
Market value, end of period		$	11.66			$	11.16			$	10.13			$	12.04			$	14.05
Total return based on net asset value (f)			15.91	%			12.39	%			(6.03	)%			(0.84	)%			(7.91	)%
Total return based on market value (f)			12.88	%			19.61	%			(6.63	)%			(5.46	)%			(13.13	)%
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000’s)		$	167,620			$	208,482			$	201,262			$	239,807			$	266,682
Ratio of total expenses to average net assets			2.52	%			2.19	%			2.10	%			2.16	%			2.10	%
Ratio of total expenses to average net assets excluding interest expense			1.84	%			1.71	%			1.71	%			1.76	%			1.72	%
Ratio of net investment income (loss) to average net assets.			5.81	%			5.93	%			6.42	%			6.79	%			6.41	%
Portfolio turnover rate			54	%			64	%			61	%			61	%			56	%
Indebtedness:
Total loans outstanding (in 000’s)		$	63,309			$	82,421			$	86,243			$	97,405			$	98,966
Asset coverage per $1,000 of indebtedness (h)		$	3,648			$	3,529			$	3,334			$	3,462			$	3,695

 

(d)	The Fund received a reimbursement from the sub-advisor in the amount of $4,120 in connection with a trade error, which represents less than $0.01 per share. Since the sub-advisor reimbursed the Fund, there was no effect on the total return.
(e)	Amount is less than $0.01.
(f)	Total return is based on the combination of reinvested dividend, capital gain and return of capital distributions, if any, at prices obtained by the Dividend Reinvestment Plan, and changes in net asset value per share for net asset value returns and changes in Common Share Price for market value returns. Total returns do not reflect sales load and are not annualized for periods of less than one year. Past performance is not indicative of future results.
(g)	Annualized.
(h)	Calculated by subtracting the Fund's total liabilities (not including the loans outstanding) from the Fund's total assets, and dividing by the outstanding loans balance in 000's.

 

 

The Acquiring Fund

 

The information for the six months ended April 30, 2023, and for the fiscal years ended October 31, 2016 through October 31, 2013 is unaudited. The information for the other periods shown has been audited by KPMG LLP, the Acquiring Fund’s independent registered public accounting firm, unless identified as unaudited. Financial statements for the fiscal year ended October 31, 2022, and the Report of the Independent Registered Public Accounting Firm thereon appear in the Acquiring Fund’s Annual Report for the fiscal year ended October 31, 2022, which is available at https//www.abrdnacp.com and upon request.

 

		For the Six-Months Ended April 30, 2023				For the Fiscal Years Ended October 31,
		(unaudited)				2022				2021				2020				2019				2018
PER SHARE OPERATING PERFORMANCE(a):
Net asset value per common share, beginning of period		$	6.72			$	10.45			$	10.15			$	12.46			$	14.08			$	15.25
Net investment income			0.39				0.87				0.98				0.87				1.05				1.55
Net realized and unrealized gains/(losses) on investments, forward foreign currency exchange contracts and foreign currency transactions			0.54				(3.35	)			1.11				(1.07	)			(1.23	)			(1.28	)
Total from investment operations applicable to common shareholders			0.93				(2.48	)			2.09				(0.20	)			(0.18	)			0.27
Distributions to preferred shareholders from:
Net investment income			(0.04	)			(0.09	)			(0.05	)			—				—				—
Net increase/(decrease) in net assets attributable to common shareholders resulting from operations			0.89				(2.57	)			2.04				—				—				—
Distributions to common shareholders from:
Net investment income			(0.60	)			(1.20	)			(1.13	)			(0.77	)			(1.41	)			(1.44	)
Return of capital			—				—				(0.07	)			(0.63	)			(0.03	)			—
Total distributions			(0.60	)			(1.20	)			(1.20	)			(1.40	)			(1.44	)			(1.44	)
Capital Share Transactions:
Offering costs for preferred shares charged to paid-in-capital			—				—				(0.11	)			—				—				—
Impact of shelf offering			0.02				0.04				—				—				—				—
Dilutive effect of rights offer (Note 5)			—				—				(0.43	)			(0.71	)			—				—
Total capital share transactions			0.02				0.04				(0.54	)			—				—				—
Net asset value per common share, end of period		$	7.03			$	6.72			$	10.45			$	10.15			$	12.46			$	14.08
Market price, end of period		$	6.73			$	6.37			$	11.30			$	9.18			$	11.33			$	13.09
Total Investment Return Based on(b):
Market price			15.02	%			(34.92	)%			37.13	%			(6.16	)%			(2.48	)%			(0.75	)%
Net asset value			13.89	%(c)			(25.76	)%(c)			14.69	%			(5.65	)%			(0.29	)%			2.34	%
Ratio to Average Net Assets Applicable to Common Shareholders/Supplementary Data:
Net assets including liquidation value of preferred shares, end of year(000 omitted)		$	406,324			$	206,650			$	283,077			$	—			$	—			$	—
Net assets applicable to common shareholders, end of period (000 omitted)		$	366,324			$	166,650			$	243,077			$	176,871			$	162,939			$	184,028
Average net assets applicable to common shareholders (000 omitted)		$	230,257			$	206,720			$	218,990			$	181,152			$	167,302			$	195,965
Net operating expenses, net of fee waivers/recoupments			4.60	%(d)			3.70	%			2.86	%			3.06	%			3.89	%			3.49	%
Net operating expenses, excluding fee waivers/recoupments			4.85	%(d)			3.95	%			3.01	%			3.24	%			4.05	%			3.55	%

 

 

		For the Six-Months Ended April 30, 2023				For the Fiscal Years Ended October 31,
		(unaudited)				2022				2021				2020				2019				2018
Net operating expenses, net of fee waivers/recoupment, excluding interest expense, commitment fee and loan servicing fees			2.33	%(d)			2.48	%			2.24	%			2.15	%			2.27	%			2.24	%
Net Investment income			11.10	%(d)			10.10	%			8.75	%			8.26	%			8.19	%			10.34	%
Portfolio turnover			37	%(e)			66	%			63	%			97	%			93	%			103	%
Senior securities (loan facility) outstanding (000 omitted)		$	105,000			$	88,000			$	118,000			$	81,200			$	72,000			$	83,000
Asset coverage ratio on senior securities period end(f)			487	%			335	%			340	%			318	%			326	%			322	%
Asset coverage per $1000 on senior securities period end		$	4,870			$	3,348			$	3,399			$	3,178			$	3,263			$	3,217
Asset coverage ratio on total leverage at period end(g)			353	%			230	%			254	%			318	%			326	%			322	%
Asset coverage per $1,000 on total leverage at period end		$	3,526			$	2,302			$	2,538			$	3,178			$	3,263			$	3,217

 

(a)	Based on average shares outstanding.
(b)	Total investment return based on market value is calculated assuming that shares of the Fund’s common stock were purchased at the closing market price as of the beginning of the period, dividends, capital gains and other distributions were reinvested as provided for in the Fund’s dividend reinvestment plan and then sold at the closing market price per share on the last day of the period. The computation does not reflect any sales commission investors may incur in purchasing or selling shares of the Fund. The total investment return based on the net asset value is similarly computed except that the Fund’s net asset value is substituted for the closing market value.
(c)	The total return shown above includes the impact of financial statement rounding of the NAV per share and/or financial statement adjustments.
(d)	Annualized.
(e)	Not annualized.
(f)	Asset coverage ratio is calculated by dividing net assets plus the amount of any borrowings, including Series A Perpetual Preferred Shares, for investment purposes by the amount of any senior securities, which includes the revolving credit facility.
(g)	Asset coverage ratio is calculated by dividing net assets plus the amount of any borrowings for investment purposes by the amount of any borrowings.

 

Amounts listed as “–” are $0

or round to $0. See Notes to

 

 

 

						Year Ended				Year Ended				Year Ended				Year Ended
		Year Ended				October 31, 2016				October 31, 2015				October 31, 2014				October 31, 2013
		October 31, 2017				(unaudited)				(unaudited)				(unaudited)				(unaudited)
Net asset value, beginning of period		$	14.63			$	14.91			$	18.04			$	18.63			$	18.46
Income (loss) from investment operations:
Net investment income1			1.49				1.46				1.48				1.57				1.56
Net realized and unrealized gain (loss)			0.57				(0.30	)			(2.76	)			(0.55	)			1.02
Total from investment operations			2.06				1.16				(1.28	)			1.02				2.58
Distributions to shareholders from:
Net investment income			(1.44	)			(1.31	)			(1.59	)			(1.54	)			(1.39	)
Net realized gains			—				—				(0.26	)			(0.07	)			(0.05	)
Return of capital			—				(0.13	)			—				—				—
Total distributions			(1.44	)			(1.44	)			(1.85	)			(1.61	)			(1.44	)
Capital Share Transactions
Dilutive effect on net asset value as a result of rights offering			—				—				—				—				(0.93	)
Offering costs charged to paid-in-capital			—				—				—				—				(0.04	)
Net asset value, end of period		$	15.25			$	14.63			$	14.91			$	18.04			$	18.63
Market value, end of period		$	14.62			$	12.60			$	13.09			$	16.35			$	17.20
Total return on net asset value2			15.34	%			10.86	%			(6.36	)%			6.19	%			9.29	%3
Total return on market value2			28.39	%			8.75	%			(9.29	)%			4.24	%			2.23	%3
Net assets, end of period (in 000’s)		$	199,375			$	191,323			$	194,937			$	235,813			$	243,601
Ratio of expenses to average net assets			3.15	%			3.04	%			2.86	%			2.89	%			2.70	%
Ratio of expenses to average net assets excluding interest expense, commitment fee and loan servicing fees			2.26	%4			2.33	%4			2.32	%4			2.27	%4			2.27	%
Ratio of net investment income to average net assets			9.78	%			10.88	%			9.07	%			8.31	%			8.40	%

 

 

Aberdeen Income Credit Strategies Fund (formerly known as Avenue Income Credit Strategies Fund)
Financial Highlights

Selected data for a share outstanding throughout each period

 

						Year Ended				Year Ended				Year Ended				Year Ended
		Year Ended				October 31, 2016				October 31, 2015				October 31, 2014				October 31, 2013
		October 31, 2017				(unaudited)				(unaudited)				(unaudited)				(unaudited)
Ratios before expense limitation/recoupment:
Ratio of expenses to average net assets .			3.13	%			3.06	%			2.80	%			2.77	%			2.64	%
Ratio of net investment income to average net assets			9.80	%			10.86	%			9.13	%			8.43	%			8.46	%
Portfolio turnover rate			95	%			95	%			56	%			48	%			89	%
Loans Outstanding, End of Year (000s)		$	83,000			$	83,000			$	90,000			$	100,000			$	95,000
Asset Coverage per $1,000 unit of senior indebtedness5		$	3,402			$	3,305			$	3,166			$	3,358			$	3,564

 

1	Per share amounts have been calculated using average shares outstanding.
2	Total market value return is computed based upon the New York Stock Exchange market price of the Fund’s shares and excludes the effects of brokerage commissions. Total net asset value return measures the changes in value over the period indicated, taking into account dividends as reinvested. Dividends and distributions are assumed for purposes of these calculations to be reinvested at prices obtained under the Fund’s dividend reinvestment plan.
3	Includes dilution (net of offering costs) of approximately $0.97 to NAV per share resulting from the Fund’s transferrable rights offering, which expired on May 17, 2013. In connection with such offering, the Fund issued 3,268,518 additional common shares at a subscription price per share below the then-current NAV per share of the Fund.
4	For the years ended October 31, 2017, 2016, 2015 and 2014 the ratio of expenses to average net assets excludes dividend and interest expense on securities sold short, interest expense, commitment fee and loan servicing fees.

 

Calculated by subtracting the Fund’s total liabilities (not including borrowings) from the Fund’s total assets and dividing by the total number of senior indebtedness units, where one unit equals $1,000 of senior indebtedness.