Notes to Financial Statements (Unaudited)
1 Significant Accounting Policies
Eaton Vance Floating-Rate 2022 Target Term Trust (the
Trust) is a Massachusetts business trust registered under the Investment Company Act of 1940, as amended (the 1940 Act), as a diversified, closed-end management investment company. The Trust’s investment
objectives are high current income and to return $9.85 per share, the original net asset value per common share before deducting offering costs of $0.02 per common share (“Original NAV”), to holders of common shares of record on or about
October 31, 2022 (the “Termination Date”). On or about the Termination Date, the Trust intends to cease its investment operations, liquidate its portfolio, retire or redeem its leverage facilities, and seek to return Original NAV to
common shareholders, unless the term is extended for one period of up to twelve months and one additional period of up to six months by a vote of the Trust’s Board of Trustees.
The following is a summary of significant accounting policies of the Trust. The policies are in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The Trust is an
investment company and follows accounting and reporting guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946.
A Investment Valuation — The following methodologies are used to determine the market value or fair value of investments.
Senior Floating-Rate Loans. Interests in senior floating-rate loans (Senior Loans) for which reliable market quotations are readily available are valued
generally at the average mean of bid and ask quotations obtained from a third party pricing service. Other Senior Loans are valued at fair value by the investment adviser under procedures approved by the Trustees. In fair valuing a Senior Loan, the
investment adviser utilizes one or more of the valuation techniques described in (i) through (iii) below to assess the likelihood that the borrower will make a full repayment of the loan underlying such Senior Loan relative to yields on other
Senior Loans issued by companies of comparable credit quality. If the investment adviser believes that there is a reasonable likelihood of full repayment, the investment adviser will determine fair value using a matrix pricing approach that
considers the yield on the Senior Loan. If the investment adviser believes there is not a reasonable likelihood of full repayment, the investment adviser will determine fair value using analyses that include, but are not limited to: (i) a
comparison of the value of the borrower’s outstanding equity and debt to that of comparable public companies; (ii) a discounted cash flow analysis; or (iii) when the investment adviser believes it is likely that a borrower will be
liquidated or sold, an analysis of the terms of such liquidation or sale. In certain cases, the investment adviser will use a combination of analytical methods to determine fair value, such as when only a portion of a borrower’s assets are
likely to be sold. In conducting its assessment and analyses for purposes of determining fair value of a Senior Loan, the investment adviser will use its discretion and judgment in considering and appraising relevant factors. Fair value
determinations are made by the portfolio managers of the Trust based on information available to such managers. The portfolio managers of other funds managed by the investment adviser that invest in Senior Loans may not possess the same information
about a Senior Loan borrower as the portfolio managers of the Trust. At times, the fair value of a Senior Loan determined by the portfolio managers of other funds managed by the investment adviser that invest in Senior Loans may vary from the fair
value of the same Senior Loan determined by the portfolio managers of the Trust. The fair value of each Senior Loan is periodically reviewed and approved by the investment adviser’s Valuation Committee and by the Trustees based upon procedures
approved by the Trustees. Junior Loans (i.e., subordinated loans and second lien loans) are valued in the same manner as Senior Loans.
Debt
Obligations. Debt obligations are generally valued on the basis of valuations provided by third party pricing services, as derived from such services’ pricing models. Inputs to the models may include, but are not limited to, reported
trades, executable bid and ask prices, broker/dealer quotations, prices or yields of securities with similar characteristics, interest rates, anticipated prepayments, benchmark curves or information pertaining to the issuer, as well as industry and
economic events. The pricing services may use a matrix approach, which considers information regarding securities with similar characteristics to determine the valuation for a security. Short-term debt
obligations purchased with a remaining maturity of sixty days or less for which a valuation from a third party pricing service is not readily available may be valued at amortized cost, which approximates fair value.
Affiliated Fund. The Trust may invest in Eaton Vance Cash Reserves Fund, LLC (Cash Reserves Fund), an affiliated investment company managed by
Eaton Vance Management (EVM). While Cash Reserves Fund is not a registered money market mutual fund, it conducts all of its investment activities in accordance with the requirements of Rule 2a-7 under the 1940
Act. Investments in Cash Reserves Fund are valued at the closing net asset value per unit on the valuation day. Cash Reserves Fund generally values its investment securities based on available market quotations provided by a third party pricing
service.
Fair Valuation. Investments for which valuations or market quotations are not readily available or are deemed unreliable are
valued at fair value using methods determined in good faith by or at the direction of the Trustees of the Trust in a manner that most fairly reflects the security’s “fair value”, which is the amount that the Trust might reasonably
expect to receive for the security upon its current sale in the ordinary course. Each such determination is based on a consideration of relevant factors, which are likely to vary from one pricing context to another. These factors may include, but
are not limited to, the type of security, the existence of any contractual restrictions on the security’s disposition, the price and extent of public trading in similar securities of the issuer or of comparable companies or entities, quotations
or relevant information obtained from broker/dealers or other market participants, information obtained from the issuer, analysts, and/or the appropriate stock exchange (for exchange-traded securities), an analysis of the company’s or
entity’s financial statements, and an evaluation of the forces that influence the issuer and the market(s) in which the security is purchased and sold.
B Investment Transactions — Investment transactions for financial statement purposes are accounted for on a trade date basis. Realized
gains and losses on investments sold are determined on the basis of identified cost.
C Income — Interest income is recorded on the basis of interest accrued, adjusted for amortization of premium or accretion of discount. Fees associated with loan amendments are recognized immediately. Dividend income
is recorded on the ex-dividend date for dividends received in cash and/or securities.
Eaton Vance
Floating-Rate 2022 Target Term Trust
December 31, 2019
Notes to Financial Statements (Unaudited) — continued
D Federal Taxes — The Trust intends to make monthly distributions of net investment income and any net realized capital gains in
amounts necessary to maintain its taxation as a regulated investment company for U.S. federal income tax purposes. For the purpose of pursuing its investment objective of returning Original NAV, the Trust may retain a portion of its net investment
income and some or all of its net capital gains, which would result in the Trust paying U.S. federal excise and corporate income taxes.
As of
December 31, 2019, the Trust had no uncertain tax positions that would require financial statement recognition, de-recognition, or disclosure. The Trust files a U.S. federal income tax return annually
after its fiscal year-end, which is subject to examination by the Internal Revenue Service for a period of three years from the date of filing.
E Unfunded Loan Commitments — The Trust may enter into certain loan agreements all or a portion of which may be unfunded. The Trust is
obligated to fund these commitments at the borrower’s discretion. These commitments are disclosed in the accompanying Portfolio of Investments. At December 31, 2019, the Trust had sufficient cash and/or securities to cover these
commitments.
F Use of Estimates — The preparation of the financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during
the reporting period. Actual results could differ from those estimates.
G Indemnifications — Under the Trust’s organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the Trust. Under
Massachusetts law, if certain conditions prevail, shareholders of a Massachusetts business trust (such as the Trust) could be deemed to have personal liability for the obligations of the Trust. However, the Trust’s Declaration of Trust contains
an express disclaimer of liability on the part of Trust shareholders and the By-laws provide that the Trust shall assume, upon request by the shareholder, the defense on behalf of any Trust shareholders.
Moreover, the By-laws also provide for indemnification out of Trust property of any shareholder held personally liable solely by reason of being or having been a shareholder for all loss or expense arising from such liability. Additionally, in the
normal course of business, the Trust enters into agreements with service providers that may contain indemnification clauses. The Trust’s maximum exposure under these arrangements is unknown as this would involve future claims that may be made
against the Trust that have not yet occurred.
H Interim Financial Statements
— The interim financial statements relating to December 31, 2019 and for the six months then ended have not been audited by an independent registered public accounting firm, but in the opinion of the Trust’s management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the financial statements.
2 Variable Rate Term Preferred Shares
Variable rate term preferred shares are a form of preferred shares that represent stock of the Trust. They have a par value of $0.01 per share and a liquidation
preference of $100,000 per share.
On September 6, 2017, the Trust issued 320 shares of Series C-1 Variable
Rate Term Preferred Shares (VRTP Shares) in a private offering to a commercial paper conduit sponsored by a large financial institution (the Conduit), with a mandatory redemption date of September 8, 2020, unless extended. Dividends on the VRTP
Shares are determined each day based on a spread of 1.85% to three-month LIBOR. Such spread is determined based on the current credit rating of the VRTP Shares, which is provided by Moody’s Investor Service.
The VRTP Shares are redeemable at the option of the Trust at a redemption price equal to $100,000 per share, plus accumulated and unpaid dividends, on any business
day and solely for the purpose of reducing the leverage of the Trust. The VRTP Shares are also subject to mandatory redemption at a redemption price equal to $100,000 per share, plus accumulated and unpaid dividends, if the Trust is in default for
an extended period on its asset maintenance or leverage ratio requirements with respect to the VRTP Shares. Six months prior to the mandatory redemption date, the Trust is required to segregate in a liquidity account with its custodian investments
equal to 110% of the VRTP Shares’ redemption price, and over the six-month period execute a series of liquidation transactions to assure sufficient liquidity to redeem the VRTP Shares. The holders of the
VRTP Shares, voting as a class, are entitled to elect two Trustees of the Trust. If the dividends on the VRTP Shares remain unpaid in an amount equal to two full years’ dividends, the holders of the VRTP Shares as a class have the right to
elect a majority of the Board of Trustees.
For financial reporting purposes, the liquidation value of the VRTP Shares (net of unamortized deferred debt
issuance costs) is presented as a liability on the Statement of Assets and Liabilities and unpaid dividends are included in interest expense and fees payable. Dividends accrued on VRTP Shares are treated as interest payments for financial reporting
purposes and are included in interest expense and fees on the Statement of Operations. In connection with the issuance of VRTP Shares, the Trust paid an upfront fee of $160,000 and debt issuance costs of $110,112, both of which are being amortized
to interest expense and fees over a period of three years. The unamortized amount of the debt issuance costs as of December 31, 2019 is presented as a reduction of the liability for VRTP Shares on the Statement of Assets and Liabilities.
The carrying amount of the VRTP Shares at December 31, 2019 represents its liquidation value, which approximates fair value. If measured at fair
value, the VRTP Shares would have been considered as Level 2 in the fair value hierarchy (see Note 10) at December 31, 2019. The average liquidation preference of the VRTP Shares during the six months ended December 31, 2019 was
$32,000,000.
Eaton Vance
Floating-Rate 2022 Target Term Trust
December 31, 2019
Notes to Financial Statements (Unaudited) — continued
3 Distributions to Shareholders and Income Tax Information
The Trust intends to make
monthly distributions of net investment income to common shareholders, after payment of any dividends on any outstanding VRTP Shares. The Trust may also distribute net realized capital gains, if any, generally not more than once per year.
Distributions to common shareholders are recorded on the ex-dividend date. Dividends to variable rate term preferred shareholders are accrued daily and payable quarterly. The dividend rate on the VRTP Shares
at December 31, 2019 was 3.95%. The amount of dividends accrued and the average annual dividend rate of the VRTP Shares during the six months ended December 31, 2019 were $663,832 and 4.13%, respectively.
Distributions to shareholders are determined in accordance with income tax regulations, which may differ from U.S. GAAP. As required by U.S. GAAP, only
distributions in excess of tax basis earnings and profits are reported in the financial statements as a return of capital. Permanent differences between book and tax accounting relating to distributions are reclassified to paid-in capital. For tax purposes, distributions from short-term capital gains are considered to be from ordinary income.
At June 30, 2019, the Trust, for federal income tax purposes, had deferred capital losses of $1,449,062 which would reduce its taxable income arising from future net realized gains on investment transactions,
if any, to the extent permitted by the Internal Revenue Code, and thus would reduce the amount of distributions to shareholders, which would otherwise be necessary to relieve the Trust of any liability for federal income or excise tax. The deferred
capital losses are treated as arising on the first day of the Trust’s next taxable year and retain the same short-term or long-term character as when originally deferred. Of the deferred capital losses at June 30, 2019, $876,280 are
short-term and $572,782 are long-term.
The cost and unrealized appreciation (depreciation) of investments of the Trust at December 31, 2019, as
determined on a federal income tax basis, were as follows:
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Aggregate cost
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$
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351,064,171
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|
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Gross unrealized appreciation
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$
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1,885,559
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Gross unrealized depreciation
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(6,672,819
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)
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Net unrealized depreciation
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$
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(4,787,260
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)
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4 Investment Adviser Fee and Other Transactions with Affiliates
The investment adviser fee is earned by EVM as compensation for investment advisory services rendered to the Trust. The fee is computed at an annual rate of 0.70%
of the Trust’s average daily total managed assets and is payable monthly. During any extension period of the Trust’s term, the fee will be reduced to 0.35% of the Trust’s average daily total managed assets. Total managed assets as
referred to herein represent total assets of the Trust (including assets attributable to borrowings, any outstanding preferred shares, or other forms of leverage) less accrued liabilities (other than liabilities representing borrowings or such other
forms of leverage). For the six months ended December 31, 2019, the Trust’s investment adviser fee amounted to $1,229,908. The Trust invests its cash in Cash Reserves Fund. EVM does not currently receive a fee for investment advisory
services provided to Cash Reserves Fund. EVM also serves as administrator of the Trust, but receives no compensation.
Trustees and officers of the Trust
who are members of EVM’s organization receive remuneration for their services to the Trust out of the investment adviser fee. Trustees of the Trust who are not affiliated with EVM may elect to defer receipt of all or a percentage of their
annual fees in accordance with the terms of the Trustees Deferred Compensation Plan. For the six months ended December 31, 2019, no significant amounts have been deferred. Certain officers and Trustees of the Trust are officers of EVM.
5 Purchases and Sales of Investments
Purchases and sales of investments, other than short-term obligations and including maturities and principal repayments on Senior Loans, aggregated $46,624,562 and $54,487,273, respectively, for the six months
ended December 31, 2019.
6 Common Shares of Beneficial Interest
The Trust may issue common shares pursuant to its dividend reinvestment plan. There were no common shares issued by the Trust for the six months ended
December 31, 2019 and the year ended June 30, 2019.
7 Credit Agreement
The Trust has entered into a Credit Agreement, as amended (the Agreement) with a bank to borrow up to a limit of $109 million. Borrowings under the Agreement
are secured by the assets of the Trust. Interest is charged at a rate above the London Interbank Offered Rate (LIBOR) and is payable monthly.
Eaton Vance
Floating-Rate 2022 Target Term Trust
December 31, 2019
Notes to Financial Statements (Unaudited) — continued
Under the terms of the Agreement, in effect through March 17, 2020, the Trust pays a facility fee of 0.15% on the borrowing limit. In connection with the renewal of the Agreement on March 19, 2019, the
Trust paid an upfront fee of $54,500, which is being amortized to interest expense over a period of one year. The unamortized balance as of December 31, 2019 is approximately $11,000 and is included in prepaid upfront fees on notes payable on
the Statement of Assets and Liabilities. The Trust is required to maintain certain net asset levels during the term of the Agreement. At December 31, 2019, the Trust had borrowings outstanding under the Agreement of $92,000,000 at an annual
interest rate of 2.45%. Based on the short-term nature of the borrowings under the Agreement and the variable interest rate, the carrying amount of the borrowings at December 31, 2019 approximated its fair value. If measured at fair value,
borrowings under the Agreement would have been considered as Level 2 in the fair value hierarchy (see Note 10) at December 31, 2019. For the six months ended December 31, 2019, the average borrowings under the Agreement and the
average annual interest rate (excluding fees) were $94,619,565 and 2.84%, respectively.
8 Credit Risk
The Trust invests primarily in below investment grade floating-rate loans, which are considered speculative because of the credit risk of their issuers. Changes in
economic conditions or other circumstances are more likely to reduce the capacity of issuers of these securities to make principal and interest payments. Such companies are more likely to default on their payments of interest and principal owed than
issuers of investment grade bonds. An economic downturn generally leads to a higher non-payment rate, and a loan or other debt obligation may lose significant value before a default occurs. Lower rated
investments also may be subject to greater price volatility than higher rated investments. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value.
9 Investments in Affiliated Funds
At December 31, 2019, the value of the Trust’s investment in affiliated funds was $9,291,983, which represents 4.2% of the Trust’s net assets applicable to common shares. Transactions in affiliated
funds by the Trust for the six months ended December 31, 2019 were as follows:
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Name of affiliated fund
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Value,
beginning
of period
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Purchases
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Sales
proceeds
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Net
realized
gain (loss)
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Change in
unrealized
appreciation
(depreciation)
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Value,
end of
period
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Dividend
income
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Units, end
of period
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Short-Term Investments
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Eaton Vance Cash Reserves Fund, LLC, 1.78%
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|
$
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6,727,116
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|
|
$
|
70,781,384
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$
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(68,216,403
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)
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$
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(363
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)
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$
|
249
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$
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9,291,983
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$
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84,587
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|
|
9,291,983
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10 Fair Value Measurements
Under generally accepted accounting principles for fair value measurements, a three-tier hierarchy to prioritize the assumptions, referred to as inputs, is used in valuation techniques to measure fair value. The
three-tier hierarchy of inputs is summarized in the three broad levels listed below.
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•
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Level 1 – quoted prices in active markets for identical investments
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•
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Level 2 – other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
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•
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Level 3 – significant unobservable inputs (including a fund’s own assumptions in determining the fair value of investments)
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In cases where the inputs used to measure fair value fall in different levels of the fair value hierarchy, the level disclosed is
determined based on the lowest level input that is significant to the fair value measurement in its entirety. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those
securities.
At December 31, 2019, the hierarchy of inputs used in valuing the Trust’s investments, which are carried at value, were as
follows:
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Asset Description
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Level 1
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Level 2
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Level 3
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Total
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Senior Floating-Rate Loans (Less Unfunded Loan Commitments)
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$
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—
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$
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288,212,197
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$
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—
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$
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288,212,197
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Corporate Bonds & Notes
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—
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48,482,402
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—
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48,482,402
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Convertible Bonds
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—
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290,329
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—
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290,329
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Short-Term Investments
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—
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9,291,983
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—
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9,291,983
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Total Investments
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$
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—
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$
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346,276,911
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$
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—
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$
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346,276,911
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Eaton Vance
Floating-Rate 2022 Target Term Trust
December 31, 2019