UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED
MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number

811-22485

 

Avenue Income Credit Strategies Fund

(Exact name of registrant as specified in charter)

 

399 Park Avenue, 6th Floor

New York, NY

 

10022

(Address of principal executive offices)

 

(Zip code)

 

Randolph Takian

Avenue Capital Group

399 Park Avenue, 6th Floor

New York, NY 10022

(Name and address of agent for service)

 

Registrant’s telephone number, including area code:

(212) 878-3500

 

 

Date of fiscal year end:

October 31

 

 

Date of reporting period:

July 31, 2014

 

 



 

Item 1. Schedule of Investments. — The schedule of investments for the period ended July 31, 2014, is filed herewith.

 



 

Avenue Income Credit Strategies Fund

SCHEDULE OF INVESTMENTS

July 31, 2014 (unaudited)

 

Security Description

 

Coupon

 

Maturity

 

Principal
Amount (000)

 

Value

 

 

 

 

 

 

 

 

 

 

 

CORPORATE BONDS & NOTES — 103.8%

 

 

 

 

 

 

 

 

 

Aerospace & Defense — 1.6%

 

 

 

 

 

 

 

 

 

Accudyne Industries Borrower / Accudyne Industries LLC (a)

 

7.75

%

12/15/2020

 

$

3,800

 

$

3,980,500

 

 

 

 

 

 

 

 

 

 

 

Airlines — 2.7%

 

 

 

 

 

 

 

 

 

US Airways 2000-3C Pass Through Trust

 

8.39

%

3/1/2022

 

5,163

 

5,833,928

 

US Airways 2011-1 Pass Through Trust

 

10.88

%

10/22/2014

 

757

 

777,541

 

 

 

 

 

 

 

 

 

6,611,469

 

Auto Components — 3.4%

 

 

 

 

 

 

 

 

 

Chassix Holdings, Inc. PIK (a)

 

10.00

%

12/15/2018

 

2,490

 

2,496,225

 

Chassix, Inc. (a)

 

9.25

%

8/1/2018

 

5,600

 

5,950,000

 

 

 

 

 

 

 

 

 

8,446,225

 

Chemicals — 1.0%

 

 

 

 

 

 

 

 

 

Perstorp Holding AB (a)

 

8.75

%

5/15/2017

 

2,425

 

2,588,688

 

 

 

 

 

 

 

 

 

 

 

Commercial Banks — 1.9%

 

 

 

 

 

 

 

 

 

Royal Bank of Scotland Group PLC

 

7.65

%

 

(b)

4,000

 

4,760,800

 

 

 

 

 

 

 

 

 

 

 

Commercial Services & Supplies — 0.6%

 

 

 

 

 

 

 

 

 

Light Tower Rentals, Inc. (a)

 

8.13

%

8/1/2019

 

1,536

 

1,562,880

 

 

 

 

 

 

 

 

 

 

 

Communications Equipment — 5.0%

 

 

 

 

 

 

 

 

 

Alcatel-Lucent USA, Inc. (a)

 

8.88

%

1/1/2020

 

3,195

 

3,546,450

 

Aspect Software, Inc.

 

10.63

%

5/15/2017

 

2,925

 

3,034,687

 

Avaya, Inc.:

 

 

 

 

 

 

 

 

 

 

 

9.00

%

4/1/2019

(a)

3,700

 

3,774,000

 

 

 

10.50

%

3/1/2021

(a)

2,199

 

1,924,125

 

 

 

 

 

 

 

 

 

12,279,262

 

Computers & Peripherals — 0.8%

 

 

 

 

 

 

 

 

 

Oberthur Technologies Holding SAS (a)

 

9.25

%

4/30/2020

 

EUR

1,357

 

1,989,715

 

 

 

 

 

 

 

 

 

 

 

Construction Materials — 3.6%

 

 

 

 

 

 

 

 

 

CeramTec Group GmbH (a)

 

8.25

%

8/15/2021

 

6,100

 

8,964,606

 

 

 

 

 

 

 

 

 

 

 

Consumer Finance — 1.7%

 

 

 

 

 

 

 

 

 

Springleaf Finance Corp.

 

6.90

%

12/15/2017

 

$

4,000

 

4,330,000

 

 

 

 

 

 

 

 

 

 

 

Containers & Packaging — 1.7%

 

 

 

 

 

 

 

 

 

Ardagh Finance Holdings SA PIK (a)

 

8.63

%

6/15/2019

 

3,261

 

3,285,457

 

Ardagh Packaging Finance PLC / Ardagh Holdings USA, Inc. (a)

 

4.25

%

1/15/2022

 

EUR

750

 

983,198

 

 

 

 

 

 

 

 

 

4,268,655

 

Diversified Telecommunication Services — 1.9%

 

 

 

 

 

 

 

 

 

Avanti Communications Group PLC (a)

 

10.00

%

10/1/2019

 

$

3,761

 

3,826,818

 

Wind Acquisition Finance SA (a)

 

7.38

%

4/23/2021

 

950

 

990,375

 

 

 

 

 

 

 

 

 

4,817,193

 

Electric Utilities — 1.8%

 

 

 

 

 

 

 

 

 

Energy Future Intermediate Holding Corp. (a)

 

11.75

%

3/1/2022

 

3,655

 

4,386,000

 

 

 

 

 

 

 

 

 

 

 

Energy Equipment & Services — 12.5%

 

 

 

 

 

 

 

 

 

CHC Helicopter SA

 

9.38

%

6/1/2021

 

9,050

 

9,502,500

 

Globe Luxembourg SCA (a)

 

9.63

%

5/1/2018

 

7,150

 

7,863,427

 

Hercules Offshore, Inc.:

 

 

 

 

 

 

 

 

 

 

 

6.75

%

4/1/2022

(a)

817

 

735,300

 

 

 

8.75

%

7/15/2021

(a)

5,015

 

5,102,762

 

 

 

10.25

%

4/1/2019

(a)

1,710

 

1,863,900

 

Tervita Corp.:

 

 

 

 

 

 

 

 

 

 

 

8.00

%

11/15/2018

(a)

2,725

 

2,806,750

 

 

 

9.00

%

11/15/2018

(a)

CAD

1,500

 

1,399,780

 

 

 

10.88

%

2/15/2018

(a)

$

1,680

 

1,696,800

 

 

 

 

 

 

 

 

 

30,971,219

 

 

See Accompanying Notes to Schedule of Investments.

 



 

Security Description

 

Coupon

 

Maturity

 

Principal
Amount (000)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Health Care Equipment & Supplies — 2.5%

 

 

 

 

 

 

 

 

 

ConvaTec Finance International SA PIK (a)

 

8.25

%

1/15/2019

 

$

5,000

 

$

5,118,750

 

Jaguar Holding Co. I PIK (a)

 

9.38

%

10/15/2017

 

956

 

972,730

 

 

 

 

 

 

 

 

 

6,091,480

 

Health Care Providers & Services — 2.9%

 

 

 

 

 

 

 

 

 

Amsurg Corp. (a)

 

5.63

%

7/15/2022

 

1,246

 

1,252,230

 

HCA, Inc.:

 

 

 

 

 

 

 

 

 

 

 

7.05

%

12/1/2027

 

745

 

752,450

 

 

 

7.50

%

11/6/2033

 

120

 

125,700

 

 

 

7.58

%

9/15/2025

 

555

 

604,950

 

 

 

7.69

%

6/15/2025

 

900

 

996,750

 

 

 

7.75

%

7/15/2036

 

525

 

546,000

 

Tenet Healthcare Corp.:

 

 

 

 

 

 

 

 

 

 

 

6.88

%

11/15/2031

 

2,475

 

2,376,000

 

 

 

8.13

%

4/1/2022

 

525

 

586,688

 

 

 

 

 

 

 

 

 

7,240,768

 

Hotels, Restaurants & Leisure — 5.8%

 

 

 

 

 

 

 

 

 

Caesars Entertainment Operating Co, Inc.:

 

 

 

 

 

 

 

 

 

 

 

9.00

%

2/15/2020

 

6,215

 

5,173,987

 

 

 

11.25

%

6/1/2017

 

5,850

 

5,148,000

 

The Unique Pub Finance Co. PLC

 

5.66

%

6/30/2027

 

GBP

2,353

 

4,016,500

 

 

 

 

 

 

 

 

 

14,338,487

 

Household Durables — 3.2%

 

 

 

 

 

 

 

 

 

K Hovnanian Enterprises, Inc.:

 

 

 

 

 

 

 

 

 

 

 

7.00

%

1/15/2019

(a)

$

240

 

241,200

 

 

 

9.13

%

11/15/2020

(a)

7,000

 

7,700,000

 

 

 

 

 

 

 

 

 

7,941,200

 

Independent Power Producers & Energy Traders — 1.5%

 

 

 

 

 

 

 

 

 

Illinois Power Generating Co.:

 

 

 

 

 

 

 

 

 

 

 

6.30

%

4/1/2020

 

981

 

939,308

 

 

 

7.00

%

4/15/2018

 

1,350

 

1,296,000

 

 

 

7.95

%

6/1/2032

 

1,450

 

1,428,250

 

 

 

 

 

 

 

 

 

3,663,558

 

Insurance — 3.6%

 

 

 

 

 

 

 

 

 

American International Group, Inc.:

 

 

 

 

 

 

 

 

 

 

 

8.00

%

5/22/2068

(a)

EUR

3,000

 

4,850,709

 

 

 

8.18

%

5/15/2068

 

$

3,000

 

4,143,750

 

 

 

 

 

 

 

 

 

8,994,459

 

Machinery — 2.7%

 

 

 

 

 

 

 

 

 

Emeco Pty Ltd. (a)

 

9.88

%

3/15/2019

 

4,126

 

4,105,370

 

Galapagos Holding SA (a)

 

7.00

%

6/15/2022

 

EUR

570

 

755,626

 

Waterjet Holdings, Inc. (a)

 

7.63

%

2/1/2020

 

$

1,840

 

1,936,600

 

 

 

 

 

 

 

 

 

6,797,596

 

Marine — 4.9%

 

 

 

 

 

 

 

 

 

Global Ship Lease, Inc. (a)

 

10.00

%

4/1/2019

 

2,954

 

3,101,700

 

Navios Maritime Acquisition Corp. / Navios Acquisition Finance US, Inc. (a)

 

8.13

%

11/15/2021

 

2,780

 

2,814,750

 

Navios Maritime Holdings, Inc. / Navios Maritime Finance II US, Inc.:

 

 

 

 

 

 

 

 

 

 

 

7.38

%

1/15/2022

(a)

1,046

 

1,064,305

 

 

 

8.13

%

2/15/2019

 

5,127

 

5,242,357

 

 

 

 

 

 

 

 

 

12,223,112

 

Media — 10.8%

 

 

 

 

 

 

 

 

 

Altice SA (a)

 

7.75

%

5/15/2022

 

1,835

 

1,876,286

 

Clear Channel Communications, Inc.

 

11.25

%

3/1/2021

 

8,610

 

9,471,000

 

Clear Channel Communications, Inc. PIK

 

14.00

%

2/1/2021

 

1,853

 

1,848,367

 

Clear Channel Worldwide Holdings, Inc.

 

7.63

%

3/15/2020

 

3,500

 

3,675,000

 

Gibson Brands, Inc. (a)

 

8.88

%

8/1/2018

 

3,948

 

3,987,480

 

Univision Communications, Inc.:

 

 

 

 

 

 

 

 

 

 

 

7.88

%

11/1/2020

(a)

3,000

 

3,225,000

 

 

See Accompanying Notes to Schedule of Investments.

 



 

Security Description

 

Coupon

 

Maturity

 

Principal
Amount (000)

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

8.50

%

5/15/2021

(a)

$

2,500

 

$

2,700,000

 

 

 

 

 

 

 

 

 

26,783,133

 

Metals & Mining — 4.3%

 

 

 

 

 

 

 

 

 

Essar Steel Minnesota LLC (a)

 

11.50

%

5/15/2020

 

3,973

 

4,082,258

 

Schmolz + Bickenbach Luxembourg SA (a)

 

9.88

%

5/15/2019

 

EUR

2,268

 

3,385,533

 

Wise Metals Group LLC / Wise Alloys Finance Corp. (a)

 

8.75

%

12/15/2018

 

$

820

 

879,450

 

Wise Metals Intermediate Holdings LLC/Wise Holdings Finance Corp. (a)

 

9.75

%

6/15/2019

 

2,263

 

2,308,260

 

 

 

 

 

 

 

 

 

10,655,501

 

Multiline Retail — 2.2%

 

 

 

 

 

 

 

 

 

JC Penney Corp, Inc.

 

5.65

%

6/1/2020

 

5,150

 

4,493,375

 

The Neiman Marcus Group, Inc. (a)

 

8.00

%

10/15/2021

 

150

 

158,250

 

The Neiman Marcus Group, Inc. PIK (a)

 

8.75

%

10/15/2021

 

645

 

688,538

 

 

 

 

 

 

 

 

 

5,340,163

 

Oil, Gas & Consumable Fuels — 7.4%

 

 

 

 

 

 

 

 

 

Connacher Oil and Gas Ltd. (a)

 

8.50

%

8/1/2019

 

4,000

 

3,160,000

 

Halcon Resources Corp.:

 

 

 

 

 

 

 

 

 

 

 

8.88

%

5/15/2021

 

6,300

 

6,536,250

 

 

 

9.25

%

2/15/2022

 

3,458

 

3,635,222

 

Midstates Petroleum Co, Inc. / Midstates Petroleum Co. LLC

 

10.75

%

10/1/2020

 

1,612

 

1,736,930

 

New Gulf Resources LLC/NGR Finance Corp.

 

11.75

%

5/15/2019

 

1,800

 

1,845,000

 

Westmoreland Coal Company (a)

 

10.75

%

2/1/2018

 

1,360

 

1,448,400

 

 

 

 

 

 

 

 

 

18,361,802

 

Personal Products — 2.6%

 

 

 

 

 

 

 

 

 

Ontex IV (a)

 

7.50

%

4/15/2018

 

EUR

4,560

 

6,335,535

 

 

 

 

 

 

 

 

 

 

 

Pharmaceuticals — 0.2%

 

 

 

 

 

 

 

 

 

Pinnacle Merger Sub, Inc. (a)

 

9.50

%

10/1/2023

 

$

400

 

440,000

 

 

 

 

 

 

 

 

 

 

 

Road & Rail — 2.5%

 

 

 

 

 

 

 

 

 

Jack Cooper Holdings Corp. (a)

 

9.25

%

6/1/2020

 

5,675

 

6,214,125

 

 

 

 

 

 

 

 

 

 

 

Software — 3.9%

 

 

 

 

 

 

 

 

 

BMC Software Finance, Inc. (a)

 

8.13

%

7/15/2021

 

937

 

932,315

 

Boxer Parent Co., Inc. PIK (a)

 

9.00

%

10/15/2019

 

5,659

 

5,262,870

 

Infor US, Inc.

 

9.38

%

4/1/2019

 

3,250

 

3,550,625

 

 

 

 

 

 

 

 

 

9,745,810

 

Wireless Telecommunication Services — 2.6%

 

 

 

 

 

 

 

 

 

Arqiva Broadcast Finance PLC (a)

 

9.50

%

3/31/2020

 

GBP

3,375

 

6,353,282

 

TOTAL CORPORATE BONDS & NOTES
(Cost $244,963,162)

 

 

 

 

 

 

 

257,477,223

 

 

 

 

 

 

 

 

 

 

 

SENIOR LOANS — 29.8% (c)

 

 

 

 

 

 

 

 

 

Chemicals — 2.1%

 

 

 

 

 

 

 

 

 

Az Chem Us, Inc. 2nd Lien Term Loan

 

7.50

%

6/12/2022

 

$

500

 

505,500

 

Solenis International, LP USD 2nd Lien Term Loan

 

7.75

%

7/2/2022

 

4,633

 

4,606,465

 

 

 

 

 

 

 

 

 

5,111,965

 

Containers & Packaging — 3.7%

 

 

 

 

 

 

 

 

 

Clondalkin Aquisition B.V. 2nd Lien Term Loan (d)(e)

 

10.00

%

11/30/2020

 

3,600

 

3,627,000

 

Mauser Industrieverpackungen GmbH 2nd Lien Term Loan

 

8.25

%

6/30/2022

 

5,481

 

5,470,751

 

 

 

 

 

 

 

 

 

9,097,751

 

Diversified Telecommunication Services — 3.0%

 

 

 

 

 

 

 

 

 

IPC Systems, Inc., 2nd Lien Term Loan

 

9.50

%

5/8/2021

 

1,410

 

1,397,663

 

Tyrol Acquisitions 2 SAS 2nd Lien Term Loan PIK (d)

 

4.35

%

7/28/2016

 

EUR

4,876

 

6,056,572

 

 

 

 

 

 

 

 

 

7,454,235

 

Electric Utilities — 2.3%

 

 

 

 

 

 

 

 

 

Astoria Generating Company Acquisitions Term Loan (d)

 

8.50

%

10/26/2017

 

$

1,900

 

1,949,875

 

La Paloma Generating Co., LLC 2nd Lien Term Loan

 

9.25

%

2/20/2020

 

4,000

 

3,880,000

 

 

 

 

 

 

 

 

 

5,829,875

 

 

See Accompanying Notes to Schedule of Investments.

 



 

Security Description

 

Coupon

 

Maturity

 

Principal
Amount (000)

 

Value

 

 

 

 

 

 

 

 

 

 

 

Energy Equipment & Services — 2.9%

 

 

 

 

 

 

 

 

 

KCA Deutag US Finance LLC, Term Loan

 

6.25

%

5/16/2020

 

$

2,100

 

$

2,090,382

 

Stallion Oilfield Services, Ltd. Term Loan B (d)

 

8.00

%

6/19/2018

 

5,060

 

5,125,170

 

 

 

 

 

 

 

 

 

7,215,552

 

Food Products — 1.7%

 

 

 

 

 

 

 

 

 

Cucina Acquisition Limited 2nd Lien Term Loan D, PIK (d)

 

3.78

%

3/12/2017

 

GBP

2,556

 

4,197,211

 

 

 

 

 

 

 

 

 

 

 

Health Care Equipment & Supplies — 1.7%

 

 

 

 

 

 

 

 

 

Accellent, Inc. Second Lien (d)

 

7.50

%

3/11/2022

 

$

4,300

 

4,246,250

 

 

 

 

 

 

 

 

 

 

 

Health Care Providers & Services — 1.2%

 

 

 

 

 

 

 

 

 

Surgery Center Holdings, Inc. 2nd Lien Term Loan

 

8.00

%

7/24/2021

 

2,992

 

2,977,040

 

 

 

 

 

 

 

 

 

 

 

Household Products — 2.3%

 

 

 

 

 

 

 

 

 

KIK Custom Products, Inc. 2nd Lien Term Loan (d)

 

9.50

%

10/29/2019

 

5,680

 

5,743,900

 

 

 

 

 

 

 

 

 

 

 

Insurance — 1.3%

 

 

 

 

 

 

 

 

 

Asurion LLC 2nd Lien Term Loan (d)

 

8.50

%

3/3/2021

 

3,200

 

3,277,344

 

 

 

 

 

 

 

 

 

 

 

Media — 2.1%

 

 

 

 

 

 

 

 

 

IMG Worldwide Holdings LLC 2nd Lien Term Loan (d)

 

8.25

%

5/6/2022

 

5,157

 

5,109,710

 

 

 

 

 

 

 

 

 

 

 

Oil, Gas & Consumable Fuels — 2.8%

 

 

 

 

 

 

 

 

 

Bennu Oil & Gas LLC Replacement Loans (d)

 

8.75

%

11/1/2018

 

5,389

 

5,425,384

 

Southern Pac Resource Corp. First Lien (d)

 

11.00

%

3/31/2019

 

1,526

 

1,510,913

 

 

 

 

 

 

 

 

 

6,936,297

 

Professional Services — 0.9%

 

 

 

 

 

 

 

 

 

Academi Holdings, LLC 1st Lien Term Loan

 

6.25

%

7/24/2019

 

1,511

 

1,499,667

 

Academi Holdings, LLC 2nd Lien Term Loan

 

11.00

%

7/24/2020

 

755

 

743,675

 

 

 

 

 

 

 

 

 

2,243,342

 

Software — 0.4%

 

 

 

 

 

 

 

 

 

Applied Systems, Inc. 2nd Lien Term Loan (d)

 

7.50

%

1/23/2022

 

997

 

1,006,068

 

 

 

 

 

 

 

 

 

 

 

Trading Companies & Distributors — 1.4%

 

 

 

 

 

 

 

 

 

Neff Rental LLC 2nd Lien Term Loan

 

7.25

%

6/9/2021

 

3,485

 

3,467,575

 

TOTAL SENIOR LOANS
(Cost $73,367,274)

 

 

 

 

 

 

 

73,914,115

 

 

 

 

 

 

 

 

 

 

 

CONVERTIBLE BONDS — 2.5%

 

 

 

 

 

 

 

 

 

Machinery — 0.6%

 

 

 

 

 

 

 

 

 

Meritor, Inc.

 

7.88

%

3/1/2026

 

1,045

 

1,655,019

 

 

 

 

 

 

 

 

 

 

 

Thrifts & Mortgage Finance — 1.9%

 

 

 

 

 

 

 

 

 

MGIC Investment Corp. (a)

 

9.00

%

4/1/2063

 

3,625

 

4,640,000

 

TOTAL CONVERTIBLE BONDS
(Cost $5,092,662)

 

 

 

 

 

 

 

6,295,019

 

 

 

 

 

 

 

 

 

 

 

MUNICIPAL BONDS — 0.5%

 

 

 

 

 

 

 

 

 

Commonwealth of Puerto Rico

 

8.00

%

7/1/2035

 

1,300

 

1,170,520

 

TOTAL MUNICIPAL BONDS
(Cost $1,220,264)

 

 

 

 

 

 

 

1,170,520

 

TOTAL LONG-TERM INVESTMENTS — 136.6%
(Cost $324,643,362)

 

 

 

 

 

 

 

338,856,877

 

 

 

 

 

 

 

 

 

 

 

SHORT-TERM INVESTMENTS — 4.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REPURCHASE AGREEMENT — 4.5%

 

 

 

 

 

 

 

 

 

State Street Repurchase Agreement, dated 7/31/14, due 8/1/14 at 0.01%, collateralized by Federated National Mortgage Association obligations maturing on 10/17/2022 market value $11,435,514 (repurchase proceeds $11,209,228)

 

 

 

 

 

11,209

 

11,209,225

 

TOTAL SHORT-TERM INVESTMENTS — 4.5%
(Cost $11,209,225)

 

 

 

 

 

 

 

11,209,225

 

 

 

 

 

 

 

 

 

 

 

TOTAL INVESTMENTS — 141.1%
(Cost $335,852,587)

 

 

 

 

 

 

 

350,066,102

 

 

See Accompanying Notes to Schedule of Investments.

 



 

Security Description

 

 

Shares

 

Value

 

 

 

 

 

 

 

EQUITY SOLD SHORT — (4.1)%

 

 

 

 

 

Index — (4.1)%

 

 

 

 

 

iShares iBoxx Investment Grade Corporate Bond ETF

 

(85,969

)

$

(10,191,625

)

TOTAL EQUITY SOLD SHORT —(4.1)%
(Proceeds $9,784,804)

 

 

 

(10,191,625

)

OTHER ASSETS & LIABILITIES — (37.0)%

 

 

 

(91,880,804

)

NET ASSETS — 100.0%

 

 

 

$

247,993,673

 

 

Percentages are calculated as a percentage of net assets as of July 31, 2014.

 


(a) Securities exempt from registration under Rule 144a of the Securities Act of 1933.  These securities may be resold in transactions exempt from registration, to Qualified Institutional Investors as defined in Rule 144a promulgated under the Securities Act of 1933, as amended.

(b) Perpetual Maturity.

(c) Interest rates on Senior Loans may be fixed or may float periodically.  On floating rate Senior Loans, the interest rates typically are adjusted based on a base rate plus a premium or spread over the base rate.  The base rate usually is a standard inter-bank offered rate, such as a LIBOR, the prime rate offered by one or more major U.S. banks, or the certificate of deposit rate or other base lending rates used by commercial lenders.  Floating rate Senior Loans adjust over different time periods, including daily, monthly, quarterly, semi-annually or annually.

(d) Variable Rate Security.  Rate shown is rate in effect at July 31, 2014.

(e) For fair value measurement disclosure purposes, security is categorized as Level 3.

 

PIK - Payment in Kind

PLC - Public Limited Company

SCA - Societe en Commandite par Actions

 

Geographic Allocation of Investments:

 

Country

 

Percentage of Net
Assets

 

Value

 

United States (Includes Short-Term Investments)

 

87.9

%

$

217,943,897

 

United Kingdom

 

13.8

 

34,119,738

 

Canada

 

6.6

 

16,318,143

 

Germany

 

6.1

 

15,190,983

 

Luxembourg

 

5.7

 

14,260,993

 

France

 

4.7

 

11,592,737

 

Norway

 

3.8

 

9,502,500

 

Greece

 

3.7

 

9,121,412

 

Belgium

 

2.5

 

6,335,535

 

Australia

 

1.6

 

4,105,370

 

Netherlands

 

1.5

 

3,627,000

 

Switzerland

 

1.4

 

3,385,533

 

Sweden

 

1.0

 

2,588,688

 

Italy

 

0.4

 

990,375

 

Ireland

 

0.4

 

983,198

 

Total Investments

 

141.1

%

$

350,066,102

 

United States (securities sold short)

 

(4.1

)%

$

(10,191,625

)

Total Securities Sold Short

 

(4.1

)%

$

(10,191,625

)

 

The geographic allocation is based on where Avenue Capital Management II L.P., the “Investment Adviser”, believes the country of risk to be.  Country of risk is traditionally the country where the majority of the company’s operations are based or where it is headquartered.

 

See Accompanying Notes to Schedule of Investments.

 



 

Forward Foreign Currency Contracts:

 

Settlement
Date

 

Amount

 

Value

 

In Exchange for
U.S. $

 

Net Unrealized
Appreciation
(Depreciation)

 

Counterparty

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward Foreign Currency Contracts to Buy:

 

 

 

 

 

 

 

08/07/2014

 

EUR

288,207

 

$

385,927

 

391,170

 

$

(5,243

)

State Street Bank and Trust Co.

 

08/07/2014

 

EUR

191,957

 

257,043

 

260,914

 

(3,871

)

State Street Bank and Trust Co.

 

08/07/2014

 

EUR

791,764

 

1,060,221

 

1,078,303

 

(18,082

)

State Street Bank and Trust Co.

 

08/07/2014

 

GBP

3,749,084

 

6,329,424

 

6,323,224

 

6,200

 

State Street Bank and Trust Co.

 

08/07/2014

 

GBP

1,013,367

 

1,710,826

 

1,704,838

 

5,988

 

State Street Bank and Trust Co.

 

08/07/2014

 

GBP

1,524,097

 

2,573,070

 

2,585,447

 

(12,377

)

State Street Bank and Trust Co.

 

08/07/2014

 

GBP

1,980,775

 

3,344,061

 

3,369,255

 

(25,194

)

State Street Bank and Trust Co.

 

 

 

 

 

 

 

 

 

(52,579

)

 

 

Forward Foreign Currency Contracts to Sell:

 

 

 

 

 

 

 

08/07/2014

 

CAD

1,578,375

 

1,447,382

 

1,427,437

 

(19,945

)

State Street Bank and Trust Co.

 

08/07/2014

 

EUR

750,000

 

1,004,297

 

1,020,522

 

16,225

 

State Street Bank and Trust Co.

 

08/07/2014

 

EUR

760,000

 

1,017,687

 

1,034,805

 

17,118

 

State Street Bank and Trust Co.

 

08/07/2014

 

EUR

23,271,168

 

31,161,555

 

32,230,640

 

1,069,085

 

State Street Bank and Trust Co.

 

08/07/2014

 

GBP

16,506,727

 

27,867,626

 

27,726,233

 

(141,393

)

State Street Bank and Trust Co.

 

 

 

 

 

 

 

 

 

 

941,090

 

 

 

 

 

TOTAL

 

 

 

 

 

$

888,511

 

 

 

 

CAD - Canadian Dollar

EUR - Euro Currency

GBP - Great British Pound

 

See Accompanying Notes to Schedule of Investments.

 



 

Avenue Income Credit Strategies Fund

Notes to Schedule of Investments

July 31, 2014 (unaudited)

 

1. Organization

 

Avenue Income Credit Strategies Fund (the “Fund”) is a Delaware statutory trust registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a non-diversified, closed-end management investment company. The Fund’s primary investment objective is to seek a high level of current income, with a secondary objective of capital appreciation. The Fund commenced operations on January 27, 2011.

 

2. Significant Accounting Policies

 

The following is a summary of significant accounting policies of the Fund in preparation of the Schedule of Investments.

 

SECURITY VALUATION — Corporate Bonds and Notes (including convertible bonds) and unlisted equities are valued using an evaluated quote provided by independent pricing services. Evaluated quotes provided by the pricing services may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as institutional-size trading in similar groups of securities, developments related to specific securities, dividend rate, yield, quality, type of issue, coupon rate, maturity, individual trading characteristics and other market data.  Short-term debt securities purchased with a remaining maturity of sixty days or less are generally valued at amortized cost, which approximates market value.

 

Senior Loans are valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may be determined without exclusive reliance on quoted prices, and may reflect appropriate factors such as ratings, tranche type, industry, company performance, spread, individual trading characteristics, institutional-size trading in similar groups of securities and other market data.

 

Credit default swaps are valued using an independent pricing service, or, if the pricing service does not provide a value, by quotes provided by the selling dealer or financial institution.

 

Equity securities listed on a U.S. Stock Exchange are valued at the latest quoted sales price on valuation date. Securities listed on a foreign exchange are valued at their closing price.

 

Forward foreign currency contracts are valued using quoted foreign exchange rates. Foreign securities and currencies are valued in U.S. dollars, based on foreign currency exchange rate quotations supplied by a third party pricing service. 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 Fund’s net asset value was last calculated, such securities may be valued at their fair value as determined in good faith in accordance with procedures established by the Board of Trustees of the Fund (the “Board”).

 

Where reliable market quotes are not readily available, loans and debt obligations are valued, where possible, using independent market indicators provided by independent pricing sources approved by the Board. Any investment and other assets or liabilities for which current market quotations are not readily available are valued at fair value as determined in good faith in accordance with procedures established by the Board.

 

SECURITY TRANSACTIONS AND INVESTMENT INCOME — Investment transactions are accounted for on a trade date basis. Realized gains and losses on investments sold are determined on the basis of identified cost. Interest income is determined on the basis of coupon interest accrued using the effective interest method which adjusts for amortization of premiums and accretion of discounts. For those issuers who are not paying in full, interest is only recognized if amounts are reasonably estimable and collectable. Discounts or premiums on debt securities purchased are accreted or amortized, respectively, to interest income over the lives of the respective securities, subject to collectability. Dividend income and

 



 

Avenue Income Credit Strategies Fund

Notes to Schedule of Investments (continued)

July 31, 2014 (unaudited)

 

distributions are recorded on ex-dividend date (except for certain foreign dividends which may be recorded as soon as the Fund is informed of such dividend) net of applicable withholding taxes.

 

SENIOR LOANS — The Fund purchases assignments of, and participations in, senior secured floating rate and fixed rate loans (“Senior Loans”) originated, negotiated and structured by a U.S. or foreign commercial bank, insurance company, finance company or other financial institution (the “Agent”) for a lending syndicate of financial institutions (the “Lender”). When purchasing an assignment, the Fund typically succeeds to all the rights and obligations under the loan of the assigning Lender and becomes a lender under the credit agreement with respect to the debt obligation purchased. Assignments may, however, be arranged through private negotiations between potential assignees and potential assignors, and the rights and obligations acquired by the purchaser of an assignment may differ from, and be more restricted than, those held by the assigning Lender. A participation typically results in a contractual relationship only with the institution participating out the interest, 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.

 

FOREIGN CURRENCY TRANSLATION — Investment valuations, other assets, and liabilities initially expressed in foreign currencies are translated each business day into U.S. dollars based upon current exchange rates. Purchases and sales of foreign investment securities and income and expenses denominated in foreign currencies are translated into U.S. dollars based upon currency exchange rates in effect on the respective dates of such transactions. Recognized gains or losses on investment transactions attributable to changes in foreign currency exchange rates are recorded as net realized gains and losses on investments. That portion of unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed.

 

FORWARD FOREIGN CURRENCY CONTRACTS — The Fund may enter into forward foreign currency contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. The Fund may enter into such forward contracts for hedging purposes. The forward foreign currency contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until such time as the contracts have been closed. Risks may arise upon entering these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of a foreign currency relative to the U.S. dollar. In addition, these contracts may involve market risk in excess of the unrealized appreciation (depreciation) reflected in the Fund’s Schedule of Investments.  It is the Fund’s policy to net the unrealized appreciation and depreciation amounts for the same counterparty.

 

SHORT SALES — The Fund may engage in short sales. A short sale is a transaction in which the Fund sells an instrument that it does not own in anticipation that the market price will decline. To deliver the securities to the buyer, the Fund arranges through a broker to borrow the securities and, in so doing, the Fund becomes obligated to replace the securities borrowed at their market price at the time of replacement. When selling short, the Fund intends to replace the securities at a lower price and therefore, profit from the difference between the cost to replace the securities and the proceeds received from the sale of the securities. When the Fund makes a short sale, the proceeds it receives from the sale will be held on behalf of a broker until the Fund replaces the borrowed securities. The Fund may have to pay a premium to borrow the securities and must pay any dividends or interest payable on the securities until they are replaced. The Fund’s obligation to replace the securities borrowed in connection with a short sale will be secured by collateral deposited with the broker that consists of cash and/or liquid securities. In addition, the Fund will place in a segregated account an amount of cash and/or liquid securities equal to the difference, if any, between (i) the market value of the securities sold at the time they were sold short, and (ii) any cash and/or liquid securities deposited as collateral with the broker in connection with the short sale. 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

 



 

Avenue Income Credit Strategies Fund

Notes to Schedule of Investments (continued)

July 31, 2014 (unaudited)

 

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.

 

REPURCHASE AGREEMENTS — The Fund may engage in repurchase agreements with broker-dealers, banks and other financial institutions to earn incremental income on temporarily available cash which would otherwise be uninvested. A repurchase agreement is a short-term investment in which the purchaser (i.e., the Fund) acquires ownership of a security and the seller agrees to repurchase the obligation at a future time and set price, thereby determining the yield during the holding period. Such agreements are carried at the contract amount, which is considered to represent fair value. It is the Fund’s policy that the value of collateral pledged (the securities received), which consists primarily of U.S. government securities and those of its agencies or instrumentalities, is not less than the repurchase price and is held by the custodian bank for the benefit of the Fund until maturity of the repurchase agreement. Repurchase agreements involve certain risks, including bankruptcy or other default of a seller of a repurchase agreement.

 

UNFUNDED LOAN COMMITMENTS — The Fund may enter into certain credit agreements all or a portion of which may be unfunded. The Fund is obligated to fund these commitments at the borrower’s discretion.

 

3. Derivative Instruments & Hedging Activities

 

The Fund is subject to foreign exchange risk in the normal course of pursuing its investment objectives. Because the Fund holds foreign currency denominated investments, the value of these investments and related receivables and payables may change due to future changes in foreign currency exchange rates. To hedge against this risk, the Fund used forward foreign currency contracts.

 

At July 31, 2014, the fair value of derivative instruments in an asset position and in a liability position and whose primary underlying risk exposure is foreign exchange risk was $1,114,616 and $(226,105), respectively.

 

4. Related Party Transactions

 

Affiliates of the Fund may have lending, brokerage, underwriting, or other business relationships with issuers of securities in which the Fund invests. Morgan Stanley, the global financial services firm, owns an indirect, non-controlling minority interest in Avenue Capital Group. During the period, the Fund acquired securities through unaffiliated broker-dealers which were part of underwriting groups in which Morgan Stanley participated.

 

5. Unrealized Appreciation/(Depreciation)

 

The cost and unrealized appreciation (depreciation) of investments of the Fund at July 31, 2014, as determined on a federal income tax basis, were as follows:

 

Aggregate cost of investments

 

$

335,852,587

 

 

 

 

 

Gross unrealized appreciation

 

$

18,813,802

 

Gross unrealized (depreciation)

 

(4,600,287

)

Net unrealized appreciation of investments

 

$

14,213,515

 

Net unrealized (depreciation) on short sales securities

 

$

(406,821

)

Net unrealized appreciation

 

$

13,806,694

 

 

6. Fair Value Measurements

 

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, under current market

 



 

Avenue Income Credit Strategies Fund

Notes to Schedule of Investments (continued)

July 31, 2014 (unaudited)

 

conditions. GAAP establishes a hierarchy that prioritizes the inputs to valuation methods giving the highest priority to readily available unadjusted quoted prices in an active market for identical assets (Level 1) and the lowest priority to significant unobservable inputs (Level 3) generally when market prices are not readily available or are unreliable. Based on the valuation inputs, the securities or other investments are tiered into one of three levels. Changes in valuation methods may result in transfers in or out of an investment’s assigned level:

 

·                  Level 1 — Prices are determined using quoted prices in an active market for identical assets.

 

·                  Level 2 — Prices are determined using other significant observable inputs. Observable inputs are inputs that other market participants may use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves, loss severities, default rates, discount rates, volatilities and others.

 

·                  Level 3 — Prices are determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Fund’s own assumptions about the factors market participants would use in determining fair value of the securities or instruments and would be based on the best available information.

 

The valuation techniques used by the Fund to measure fair value during the period ended July 31, 2014 maximized the use of observable inputs and minimized the use of unobservable inputs.

 

The following are certain inputs and techniques that the Fund generally uses to evaluate how to classify each major category of assets and liabilities for Level 2 and Level 3, in accordance with GAAP.

 

Corporate Bonds & Notes — Corporate bonds and notes are generally comprised of two main categories: investment grade bonds and high yield bonds. Investment grade bonds are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, active market trading levels, recently executed transactions in securities of the issuer or comparable issuers, and option adjusted spread models that include base curve and spread curve inputs. Adjustments to individual bonds can be applied to recognize trading differences compared to other bonds issued by the same issuer. High yield bonds are valued by independent pricing services based primarily on broker-dealer quotations from relevant market makers and recently executed transactions in securities of the issuer or comparable issuers. To the extent that these inputs are observable, the values of corporate bonds and notes are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

 

Senior Loans — Senior loans are valued using inputs which include broker-dealer quotes or quotes received from independent pricing services that take into account quotes received from broker-dealers or other market sources pertaining to the issuer or security. The Fund may also engage a third party appraiser or other valuation techniques, as described in the private equity section above, to value these securities. Inputs may include quoted prices for similar investments in active markets, interest rates, coupon rates, yield curves, option adjusted spreads, default rates, credit spreads and other unique security features in order to estimate the relevant cash flows which is then discounted to calculate fair values. To the extent that these inputs are observable, the values of senior loans are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

 

Forward Foreign Currency Contracts — Forward foreign currency contracts are valued by independent pricing services using various inputs and techniques, which include broker-dealer quotations, actual trading information and foreign currency exchange rates gathered from leading market makers and foreign currency exchange trading centers throughout the world. To the extent that these inputs are observable, the values of forward foreign currency contracts are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

 

Equity Securities — Equity securities traded in inactive markets are valued using inputs which include broker-dealer quotes, recently executed transactions adjusted for changes in the benchmark index, or evaluated price quotes received from independent pricing services that take into account the integrity of the market sector and issuer, the individual characteristics of the security, and information received from

 



 

Avenue Income Credit Strategies Fund

Notes to Schedule of Investments (continued)

July 31, 2014 (unaudited)

 

broker-dealers and other market sources pertaining to the issuer or security. To the extent that these inputs are observable, the values of equity securities are categorized as Level 2. To the extent that these inputs are unobservable, the values are categorized as Level 3.

 

The following is a summary of the tiered valuation input levels, as of July 31, 2014. The Schedule of Investments includes disclosure of each security type by category and/or industry. The level assigned to the securities valuations may not be an indication of the risk or liquidity associated with investing in those securities. Because of the inherent uncertainties of valuation, the values reflected in the Schedule of Investments may materially differ from the value received upon actual sale of those investments.

 

Investment Securities in an Asset Position

 

Quoted Prices in
Active Markets
for
Identical Assets
(Level 1)

 

Other
Significant
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Total

 

Corporate Bonds & Notes

 

$

 

$

257,477,223

 

$

 

$

257,477,223

 

Senior Loans

 

 

70,287,115

 

3,627,000

 

73,914,115

 

Convertible Bonds

 

 

6,295,019

 

 

6,295,019

 

Municipal Bonds

 

 

1,170,520

 

 

1,170,520

 

Repurchase Agreements

 

 

11,209,225

 

 

11,209,225

 

Forward Foreign Currency Contracts*

 

 

888,511

 

 

888,511

 

Total Asset Position

 

$

 

$

347,327,613

 

$

3,627,000

 

$

350,954,613

 

 

 

 

 

 

 

 

 

 

 

Investments in a Liability Position

 

 

 

 

 

 

 

 

 

Securities Sold Short

 

(10,191,625

)

 

 

(10,191,625

)

Total Liability Position

 

$

(10,191,625

)

$

 

$

 

$

(10,191,625

)

 


*                 Other financial instruments such as forward foreign currency contracts are valued at the unrealized appreciation/(depreciation) of the instrument.

 

Quantitative Information about Level 3 Fair Value Inputs

 

 

 

Fair Value At July
31, 2014

 

Valuation
Technique

 

Unobservable Input

 

Range

 

 

 

 

 

 

 

 

 

 

 

Senior Loans

 

$

3,627,000

 

Third -Party Vendor

 

Vendor quotes

 

$97 - $100.75

 

 

The Investment Adviser has established a Valuation Committee (the “Committee”) which is responsible for overseeing the pricing and valuation of all securities held in the Fund. The Committee operates under pricing and valuation policies and procedures established by the Fund and approved by the Board, including pricing policies which set forth the mechanisms and processes to be employed on a daily basis to implement these policies and procedures. In particular, the pricing policies describe how to determine market quotations for securities and other instruments. The Committee’s responsibilities include: 1) fair value and liquidity determinations (and oversight of any third parties to whom any responsibility for fair value and liquidity determinations is delegated), and 2) regular monitoring of the Fund’s pricing and valuation policies and procedures and modification or enhancement of these policies and procedures (or recommendation of the modification of these policies and procedures) as the Committee believes appropriate. The Committee is also responsible for monitoring the implementation of the pricing policies by the Fund and third parties which perform certain pricing functions in accordance with the pricing policies. The Investment Adviser is responsible for the oversight of the third party on a day-to-day basis. The Committee and the Investment Adviser perform a series of activities to provide reasonable assurance of the accuracy of prices including: 1) periodic vendor due diligence meetings, review of methodologies, new developments and processes at vendors, 2) daily comparison of security valuation versus prior day for all securities that exceeded established thresholds, and 3) daily review of unpriced, stale, and variance reports with exceptions reviewed by senior management and the Committee.

 



 

Avenue Income Credit Strategies Fund

Notes to Schedule of Investments

July 31, 2014 (unaudited)

 

The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value:

 

 

 

Investments

 

 

 

 

 

in

 

 

 

 

 

Senior Loans

 

Total

 

 

 

 

 

 

 

Balance as of October 31, 2013

 

$

15,488,767

 

$

15,488,767

 

Cost of purchases

 

 

 

Proceeds from sales

 

(3,022,500

)

(3,022,500

)

Transfers to Level 3

 

 

 

Transfers from Level 3

 

(9,086,767

)

(9,086,767

)

Accrued discount (premium)

 

8,528

 

8,528

 

Realized gains (losses)

 

59,050

 

59,050

 

Change in net unrealized appreciation (depreciation)

 

179,922

 

179,922

 

Balance as of July 31, 2014

 

$

3,627,000

 

$

3,627,000

 

Change in net unrealized appreciation (depreciation) on Investments still held as of July 31, 2014

 

$

179,922

 

$

179,922

 

 

Transfers are reflected at the value of the securities at the beginning of the period. Transfers from Level 3 to Level 2 were due to an increase in the availability of significant observable inputs in determining the fair value of these investments.

 

For information related to geographical and industry categorization of investments and types of derivative contracts held, please refer to the Schedule of Investments.

 



 

Item 2. Controls and Procedures.

 

(a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days prior to the filing date of this report, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act and Rule 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended.

 

(b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

Item 3. Exhibits.

 

Certifications of the principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the 1940 Act are attached hereto as Exhibit 99CERT.

 



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Avenue Income Credit Strategies Fund

 

 

 

 

By

/S/ Randolph Takian

 

 

Randolph Takian

 

 

Trustee, Chief Executive Officer and President (Principal Executive Officer)

 

 

 

 

 

Date

9/29/14

 

 

 

Pursuant to the requirement of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report had been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

By

/S/ Randolph Takian

 

 

Randolph Takian

 

 

Trustee, Chief Executive Officer and President (Principal Executive Officer)

 

 

 

Date

9/29/14

 

 

 

 

 

 

 

By

/S/ Stephen M. Atkins

 

 

Stephen M. Atkins

 

 

Treasurer and Chief Financial Officer (Principal Financial Officer)

 

 

 

 

Date

9/29/14