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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05769
Invesco High Income Trust II
(Exact name of registrant as specified in charter)
1555 Peachtree Street, N.E., Atlanta, Georgia 30309
(Address of principal executive offices) (Zip code)
Philip A. Taylor 1555 Peachtree Street, N.E., Atlanta, Georgia 30309
(Name and address of agent for service)
Registrant’s telephone number, including area code: (404) 439-3217
Date of fiscal year end: 2/28
Date of reporting period: 8/31/14
Item 1. Report to Stockholders.
| 2
|
Letters to Shareholders | |
| 3
|
Trust Performance | |
| 4
|
Dividend Reinvestment Plan | |
| 5
|
Schedule of Investments | |
| 14
|
Financial Statements | |
| 17
|
Notes to Financial Statements | |
| 24
|
Financial Highlights | |
| 26
|
Approval of Investment Advisory and Sub-Advisory Contracts | |
| 28 | Proxy Results |
Unless otherwise noted, all data provided by Invesco.
NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE
Letters to Shareholders
|
Bruce Crockett |
Dear Fellow Shareholders: While the members of the Invesco Funds Board, which I chair, can’t dictate the performance of the Invesco funds, be assured that your Board works diligently throughout the year to focus on how your investments are managed. Our job is to represent you and your interests on a variety of fund management-related matters. We regularly monitor how the portfolio management teams of the Invesco funds are performing in light of ever-changing and often unpredictable economic and market conditions, and we review the investment strategies and investment process employed by each fund’s management team as explained in the fund’s prospectus. Perhaps our most significant responsibility is conducting the annual review of the funds’ advisory and sub-advisory contracts with Invesco Advisers and its affiliates. This annual review, which is required by the Investment Company Act of 1940, focuses on the nature and quality of the services Invesco provides as the adviser to the Invesco funds and the reasonableness of the fees that it charges for those services. Each year, we spend months carefully reviewing information from Invesco that allows us to evaluate the quality of its services and the |
reasonableness of its fees. We also use information from a variety of independent sources, including materials provided by the independent senior officer of the Invesco funds, who reports directly to the independent trustees on the Board. Additionally, we meet with legal counsel and review performance and fee data prepared for us by Lipper Inc., an independent, third-party firm widely recognized as a leader in its field.
After a careful review, the members of the Invesco Funds Board approved the continuation of advisory and sub-advisory contracts with Invesco Advisers and its affiliates.
As always, please contact me at bruce@brucecrockett.com with any questions or concerns you may have. On behalf of the Board, we look forward to continuing to represent your interests and serving your needs.
Sincerely,
Bruce L. Crockett
Independent Chair
Invesco Funds Board of Trustees
|
Philip Taylor |
Dear Shareholders: This semiannual report includes information about your Fund, including performance data and a list of its investments as of the close of the reporting period. I hope you find this report of interest. Our website, invesco.com/us, offers a wide range of market insights and investment perspectives. On the website, you’ll find detailed information about our funds, including prices, performance, holdings and portfolio manager commentaries. You can access information about your individual Invesco account whenever it’s convenient for you; just complete a simple, secure online registration. Use the “Login” box on our home page to get started. Invesco’s mobile app for iPad® (available free from the App StoreSM) allows you to obtain the same detailed information about your Fund and the same investment insights from our investment leaders, market strategists, economists and retirement experts on the go. Also, you can obtain timely updates to help you stay informed about the markets, the economy and investing by connecting with Invesco on Twitter, LinkedIn or Facebook. You can access our |
blog at blog.invesco.us.com or by visiting the “Intentional Investing Forum” on our home page.
For questions about your account, feel free to contact an Invesco client services representative at 800 341 2929. For Invesco-related questions or comments, please email me directly at phil@invesco.com.
Thank you for investing with us.
Sincerely,
Philip Taylor
Senior Managing Director, Invesco Ltd.
iPad is a trademark of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc. Invesco Distributors, Inc. is not affiliated with Apple Inc.
2 Invesco High Income Trust II
Trust Performance
3 Invesco High Income Trust II
Dividend Reinvestment Plan
The dividend reinvestment plan (the Plan) offers you a prompt and simple way to reinvest your dividends and capital gains distributions (Distributions) into additional shares of your Invesco closed-end Trust (the Trust). Under the Plan, the money you earn from Distributions will be reinvested automatically in more shares of the Trust, allowing you to potentially increase your investment over time. All shareholders in the Trust are automatically enrolled in the Plan when shares are purchased.
4 Invesco High Income Trust II
Schedule of Investments(a)
August 31, 2014
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
5 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
6 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
7 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
8 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
9 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
10 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
11 Invesco High Income Trust II
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
12 Invesco High Income Trust II
Investment Abbreviations:
Notes to Schedule of Investments:
| (a) | Industry and/or sector classifications used in this report are generally according to the Global Industry Classification Standard, which was developed by and is the exclusive property and a service mark of MSCI Inc. and Standard & Poor’s. |
| (b) | Calculated as a percentage of net assets. Amounts in excess of 100% are due to the Trust’s use of leverage. |
| (c) | Security purchased or received in a transaction exempt from registration under the Securities Act of 1933, as amended (the “1933 Act”). The security may be resold pursuant to an exemption from registration under the 1933 Act, typically to qualified institutional buyers. The aggregate value of these securities at August 31, 2014 was $87,914,299, which represented 60.79% of the Trust’s Net Assets. |
| (d) | All or a portion of this security is Payment-in-Kind. |
| Issuer | Cash Rate | PIK Rate | ||||||
| Central European Media Enterprises Ltd., Sr. Sec. Gtd. Global PIK Notes |
0.00 | % | 15.00 | % | ||||
| Emerald Plantation Holdings Ltd., Sr. Sec. Gtd. Global PIK Notes |
6.00 | 8.00 | ||||||
| Schaeffler Holding Finance B.V., Sr. Sec. Gtd. PIK Notes |
6.88 | 7.63 | ||||||
| (e) | Defaulted security. Currently, the issuer is partially or fully in default with respect to interest payments. The value of this security at August 31, 2014 represented less than 1% of the Trust’s Net Assets. |
| (f) | Step coupon bond. The interest rate represents the coupon rate at which the bond will accrue at a specified future date. |
| (g) | Acquired as part of the Sino-Forest Corp. reorganization. |
| (h) | Foreign denominated security. Principal amount is denominated in the currency indicated. |
| (i) | Non-income producing security. |
| (j) | Acquired as part of the General Motors reorganization. |
| (k) | Non-income producing security acquired as part of the NewPage Corp. bankruptcy reorganization. |
| (l) | Variable rate senior loan interests are, at present, not readily marketable, not registered under the Securities Act of 1933, as amended (the “1933 Act”), and may be subject to contractual and legal restrictions on sale. Senior secured corporate loans and senior secured debt securities in the Fund’s portfolio generally have variable rates which adjust to a base, such as the London Inter-Bank Offered Rate (“LIBOR”), on set dates, typically every 30 days but not greater than one year; and/or have interest rates that float at a margin above a widely recognized base lending rate such as the Prime Rate of a designated U.S. bank. |
| (m) | All or a portion of this holding is subject to unfunded loan commitment. Interest rate will be determined at the time of funding. See Note 1M. |
| (n) | The money market fund and the Fund are affiliated by having the same investment adviser. |
Portfolio Composition*
By credit quality, based on Total Investments
As of August 31, 2014
| BBB |
0.8 | % | ||
| BB |
44.6 | |||
| B |
42.9 | |||
| CCC |
8.6 | |||
| Non-Rated |
0.9 | |||
| Cash |
2.2 |
| * | Standard and Poor’s. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. “Non-Rated” indicates the debtor was not rated, and should not be interpreted as indicating low quality. For more information on Standard and Poor’s rating methodology, please visit standardandpoors.com and select ‘Understanding Ratings’ under Rating Resources on the homepage. |
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
13 Invesco High Income Trust II
Statement of Assets and Liabilities
August 31, 2014
(Unaudited)
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
14 Invesco High Income Trust II
Statement of Operations
For the six months ended August 31, 2014
(Unaudited)
| Investment income: |
| |||
| Interest |
$ | 5,925,382 | ||
| Dividends (net of foreign withholding taxes of $33) |
23,466 | |||
| Dividends from affiliated money market funds |
704 | |||
| Total investment income |
5,949,552 | |||
| Expenses: |
||||
| Advisory fees |
689,594 | |||
| Administrative services fees |
25,205 | |||
| Custodian fees |
12,457 | |||
| Interest, facilities and maintenance fees |
268,276 | |||
| Transfer agent fees |
19,214 | |||
| Trustees’ and officers’ fees and benefits |
9,838 | |||
| Other |
73,265 | |||
| Total expenses |
1,097,849 | |||
| Less: Fees waived |
(28,875 | ) | ||
| Net expenses |
1,068,974 | |||
| Net investment income |
4,880,578 | |||
| Realized and unrealized gain (loss) from: |
||||
| Net realized gain (loss) from: |
||||
| Investment securities |
4,741,400 | |||
| Foreign currencies |
(21,437 | ) | ||
| Forward foreign currency contracts |
(124,786 | ) | ||
| 4,595,177 | ||||
| Change in net unrealized appreciation (depreciation) of: |
||||
| Investment securities |
(5,186,252 | ) | ||
| Foreign currencies |
(9,319 | ) | ||
| Forward foreign currency contracts |
506,902 | |||
| (4,688,669 | ) | |||
| Net realized and unrealized gain (loss) |
(93,492 | ) | ||
| Net increase in net assets resulting from operations |
$ | 4,787,086 | ||
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
15 Invesco High Income Trust II
Statement of Changes in Net Assets
For the six months ended August 31, 2014 and the year ended February 28, 2014
(Unaudited)
| August 31, 2014 |
February 28, 2014 |
|||||||
| Operations: |
||||||||
| Net investment income |
$ | 4,880,578 | $ | 10,393,851 | ||||
| Net realized gain |
4,595,177 | 4,929,519 | ||||||
| Change in net unrealized appreciation (depreciation) |
(4,688,669 | ) | (1,132,107 | ) | ||||
| Net increase in net assets resulting from operations |
4,787,086 | 14,191,263 | ||||||
| Distributions to common shareholders from net investment income |
(5,358,162 | ) | (11,154,722 | ) | ||||
| Net increase (decrease) in net assets |
(571,076 | ) | 3,036,541 | |||||
| Net assets: |
||||||||
| Beginning of period |
145,197,176 | 142,160,635 | ||||||
| End of period (includes undistributed net investment income of $(1,056,085) and $(578,501), respectively) |
$ | 144,626,100 | $ | 145,197,176 | ||||
See accompanying Notes to Financial Statements which are an integral part of the financial statements.
16 Invesco High Income Trust II
Statement of Cash Flows
For the six months ended August 31, 2014
(Unaudited)
| Cash provided by operating activities: |
| |||
| Net increase in net assets resulting from operations |
$ | 4,787,086 | ||
| Adjustments to reconcile the change in net assets applicable from operations to net cash provided by operating activities: |
| |||
| Purchases of investments |
(104,593,989 | ) | ||
| Proceeds from sales of investments |
102,974,516 | |||
| Amortization of premium |
358,925 | |||
| Accretion of discount |
(29,217 | ) | ||
| Increase in receivables and other assets |
(341,900 | ) | ||
| Decrease in accrued expenses and other payables |
(157,758 | ) | ||
| Net realized gain from investment securities |
(4,741,400 | ) | ||
| Net change in unrealized appreciation (depreciation) on investment securities |
5,186,252 | |||
| Net cash provided by operating activities |
3,442,515 | |||
| Cash provided by (used in) financing activities: |
||||
| Dividends paid to shareholders from net investment income |
(5,359,613 | ) | ||
| Decrease in payable for amount due custodian |
(21,326 | ) | ||
| Net cash provided by (used in) financing activities |
(5,380,939 | ) | ||
| Net increase (decrease) in cash and cash equivalents |
(1,938,424 | ) | ||
| Cash at beginning of period |
5,539,336 | |||
| Cash at end of period |
$ | 3,600,912 | ||
| Supplemental disclosure of cash flow information: |
||||
| Cash paid during the period for interest, facilities and maintenance fees |
$ | 265,183 | ||
Notes to Financial Statements
August 31, 2014
(Unaudited)
NOTE 1—Significant Accounting Policies
Invesco High Income Trust II (the “Trust”) is a Delaware statutory 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 objective is to provide high current income, while seeking to preserve shareholders’ capital, through investment in a professionally managed, diversified portfolio of high-income producing fixed-income securities.
The following is a summary of the significant accounting policies followed by the Trust in the preparation of its financial statements.
| A. | Security Valuations — Securities, including restricted securities, are valued according to the following policy. |
Debt obligations (including convertible securities) and unlisted equities are fair 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 institution-size trading in similar groups of securities, developments related to specific securities, dividend rate (for unlisted equities), yield (for debt obligations), quality, type of issue, coupon rate (for debt obligations), maturity (for debt obligations), individual trading characteristics and other market data. Debt obligations are subject to interest rate and credit risks. In addition, all debt obligations involve some risk of default with respect to interest and/or principal payments.
Senior secured floating rate loans and senior secured floating rate debt securities are fair valued using an evaluated quote provided by an independent pricing service. Evaluated quotes provided by the pricing service may reflect appropriate factors such as ratings, tranche type, industry, company performance, spread, individual trading characteristics, institution-size trading in similar groups of securities and other market data.
A security listed or traded on an exchange (except convertible securities) is valued at its last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded, or lacking any sales or official closing price on a particular day, the security may be valued at the closing bid price on that day. Securities traded in the over-the-counter market are valued based on prices furnished by independent pricing services or market makers. When such securities are valued by an independent pricing service they may be considered fair valued. Futures contracts are valued at the final settlement price set by an exchange on which they are principally traded. Listed options are valued at the mean between the last bid and ask prices from the exchange on which they are principally traded. Options not listed on an exchange are valued by an independent source at the mean between the last bid and ask prices. For purposes of determining net asset value per share, futures and option contracts generally are valued 15 minutes after the close of the customary trading session of the New York Stock Exchange (“NYSE”).
17 Invesco High Income Trust II
Investments in open-end and closed-end registered investment companies that do not trade on an exchange are valued at the end of day net asset value per share. Investments in open-end and closed-end registered investment companies that trade on an exchange are valued at the last sales price or official closing price as of the close of the customary trading session on the exchange where the security is principally traded.
Foreign securities’ (including foreign exchange contracts) prices are converted into U.S. dollar amounts using the applicable exchange rates as of the close of the NYSE. If market quotations are available and reliable for foreign exchange-traded equity securities, the securities will be valued at the market quotations. Because trading hours for certain foreign securities end before the close of the NYSE, closing market quotations may become unreliable. If between the time trading ends on a particular security and the close of the customary trading session on the NYSE, events occur that the Adviser determines are significant and make the closing price unreliable, the Fund may fair value the security. If the event is likely to have affected the closing price of the security, the security will be valued at fair value in good faith using procedures approved by the Board of Trustees. Adjustments to closing prices to reflect fair value may also be based on a screening process of an independent pricing service to indicate the degree of certainty, based on historical data, that the closing price in the principal market where a foreign security trades is not the current value as of the close of the NYSE. Foreign securities’ prices meeting the approved degree of certainty that the price is not reflective of current value will be priced at the indication of fair value from the independent pricing service. Multiple factors may be considered by the independent pricing service in determining adjustments to reflect fair value and may include information relating to sector indices, American Depositary Receipts and domestic and foreign index futures. Foreign securities may have additional risks including exchange rate changes, potential for sharply devalued currencies and high inflation, political and economic upheaval, the relative lack of issuer information, relatively low market liquidity and the potential lack of strict financial and accounting controls and standards.
Securities for which market prices are not provided by any of the above methods may be valued based upon quotes furnished by independent sources. The last bid price may be used to value equity securities. The mean between the last bid and asked prices is used to value debt obligations, including corporate loans.
Securities for which market quotations are not readily available or became unreliable are valued at fair value as determined in good faith by or under the supervision of the Fund’s officers following procedures approved by the Board of Trustees. Issuer specific events, market trends, bid/ask quotes of brokers and information providers and other market data may be reviewed in the course of making a good faith determination of a security’s fair value.
The Trust may invest in securities that are subject to interest rate risk, meaning the risk that the prices will generally fall as interest rates rise and, conversely, the prices will generally rise as interest rates fall. Specific securities differ in their sensitivity to changes in interest rates depending on their individual characteristics. Changes in interest rates may result in increased market volatility, which may affect the value and/or liquidity of certain of the Trust’s investments.
Valuations change in response to many factors including the historical and prospective earnings of the issuer, the value of the issuer’s assets, general economic conditions, interest rates, investor perceptions and market liquidity. Because of the inherent uncertainties of valuation, the values reflected in the financial statements may materially differ from the value received upon actual sale of those investments.
| B. | Securities Transactions and Investment Income — Securities transactions are accounted for on a trade date basis. Realized gains or losses on sales are computed on the basis of specific identification of the securities sold. Interest income (net of withholding tax, if any) is recorded on the accrual basis from settlement date. Dividend income (net of withholding tax, if any) is recorded on the ex-dividend date. Bond premiums and discounts are amortized and/or accreted for financial reporting purposes. |
The Trust may periodically participate in litigation related to Trust investments. As such, the Trust may receive proceeds from litigation settlements. Any proceeds received are included in the Statement of Operations as realized gain (loss) for investments no longer held and as unrealized gain (loss) for investments still held.
Brokerage commissions and mark ups are considered transaction costs and are recorded as an increase to the cost basis of securities purchased and/or a reduction of proceeds on a sale of securities. Such transaction costs are included in the determination of net realized and unrealized gain (loss) from investment securities reported in the Statement of Operations and the Statement of Changes in Net Assets and the net realized and unrealized gains (losses) on securities per share in the Financial Highlights. Transaction costs are included in the calculation of the Trust’s net asset value and, accordingly, they reduce the Trust’s total returns. These transaction costs are not considered operating expenses and are not reflected in net investment income reported in the Statement of Operations and Statement of Changes in Net Assets, or the net investment income per share and ratios of expenses and net investment income reported in the Financial Highlights, nor are they limited by any expense limitation arrangements between the Trust and the investment adviser.
| C. | Country Determination — For the purposes of making investment selection decisions and presentation in the Schedule of Investments, the investment adviser may determine the country in which an issuer is located and/or credit risk exposure based on various factors. These factors include the laws of the country under which the issuer is organized, where the issuer maintains a principal office, the country in which the issuer derives 50% or more of its total revenues and the country that has the primary market for the issuer’s securities, as well as other criteria. Among the other criteria that may be evaluated for making this determination are the country in which the issuer maintains 50% or more of its assets, the type of security, financial guarantees and enhancements, the nature of the collateral and the sponsor organization. Country of issuer and/or credit risk exposure has been determined to be the United States of America, unless otherwise noted. |
| D. | Distributions — Distributions from net investment income are declared and paid monthly. Distributions from net realized capital gain, if any, are generally declared and paid annually and recorded on the ex-dividend date. |
| E. | Federal Income Taxes — The Trust intends to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”) necessary to qualify as a regulated investment company and to distribute substantially all of the Trust’s taxable earnings to shareholders. As such, the Trust will not be subject to federal income taxes on otherwise taxable income (including net realized capital gain) that is distributed to shareholders. Therefore, no provision for federal income taxes is recorded in the financial statements. |
The Trust recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained. Management has analyzed the Trust’s uncertain tax positions and concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. Management is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months.
18 Invesco High Income Trust II
The Trust files tax returns in the U.S. Federal jurisdiction and certain other jurisdictions. Generally, the Trust is subject to examinations by such taxing authorities for up to three years after the filing of the return for the tax period.
| F. | Accounting Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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 revenues and expenses during the reporting period including estimates and assumptions related to taxation. Actual results could differ from those estimates by a significant amount. In addition, the Trust monitors for material events or transactions that may occur or become known after the period-end date and before the date the financial statements are released to print. |
| G. | Indemnifications — Under the Trust’s organizational documents, each Trustee, officer, employee or other agent of the Trust is indemnified against certain liabilities that may arise out of the performance of their duties to the Trust. Additionally, in the normal course of business, the Trust enters into contracts, including the Trust’s servicing agreements, that contain a variety of 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. The risk of material loss as a result of such indemnification claims is considered remote. |
| H. | Cash and Cash Equivalents — For the purposes of the Statement of Cash Flows, the Trust defines Cash and Cash Equivalents as cash (including foreign currency), money market funds and other investments held in lieu of cash and excludes investments made with cash collateral received. |
| I. | Interest, Facilities and Maintenance Fees — Interest, Facilities and Maintenance Fees include interest and related borrowing costs such as commitment fees and other expenses associated with lines of credit and interest and administrative expenses related to establishing and maintaining the credit agreement. |
| J. | Foreign Currency Translations — Foreign currency is valued at the close of the NYSE based on quotations posted by banks and major currency dealers. Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at date of valuation. Purchases and sales of portfolio securities (net of foreign taxes withheld on disposition) and income items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Trust does not separately account for the portion of the results of operations resulting from changes in foreign exchange rates on investments and the fluctuations arising from changes in market prices of securities held. The combined results of changes in foreign exchange rates and the fluctuation of market prices on investments (net of estimated foreign tax withholding) are included with the net realized and unrealized gain or loss from investments in the Statement of Operations. Reported net realized foreign currency gains or losses arise from (1) sales of foreign currencies, (2) currency gains or losses realized between the trade and settlement dates on securities transactions, and (3) the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Trust’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign currency gains and losses arise from changes in the fair values of assets and liabilities, other than investments in securities at fiscal period end, resulting from changes in exchange rates. |
The Trust may invest in foreign securities, which may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Foreign taxes, if any, are recorded based on the tax regulations and rates that exist in the foreign markets in which the Trust invests and are shown in the Statement of Operations.
| K. | Forward Foreign Currency Contracts — The Trust may engage in foreign currency transactions either on a spot (i.e. for prompt delivery and settlement) basis at the rate prevailing in the currency exchange market at the time or through forward foreign currency contracts to manage or minimize currency or exchange rate risk. |
The Trust may also enter into forward foreign currency contracts for the purchase or sale of a security denominated in a foreign currency in order to “lock in” the U.S. dollar price of that security, or the Trust may also enter into forward foreign currency contracts that do not provide for physical settlement of the two currencies, but instead are settled by a single cash payment calculated as the difference between the agreed upon exchange rate and the spot rate at settlement based upon an agreed upon notional amount (non-deliverable forwards). The Trust will set aside liquid assets in an amount equal to daily mark-to-market obligation for forward foreign currency contracts.
A forward foreign currency contract is an obligation to purchase or sell a specific currency for an agreed-upon price at a future date. The use of forward foreign currency contracts does not eliminate fluctuations in the price of the underlying securities the Trust owns or intends to acquire but establishes a rate of exchange in advance. Fluctuations in the value of these contracts are measured by the difference in the contract date and reporting date exchange rates and are recorded as unrealized appreciation (depreciation) until the contracts are closed. When the contracts are closed, realized gains (losses) are recorded. Realized and unrealized gains (losses) on the contracts are included in the Statement of Operations. The primary risks associated with forward foreign currency contracts include failure of the counterparty to meet the terms of the contract and the value of the foreign currency changing unfavorably. These risks may be in excess of the amounts reflected in the Statement of Assets and Liabilities.
| L. | Leverage Risk — Leverage exists when a Trust can lose more than it originally invests because it purchases or sells an instrument or enters into a transaction without investing an amount equal to the full economic exposure of the instrument or transaction. |
| M. | Securities Purchased on a When-Issued and Delayed Delivery Basis — The Trust may purchase and sell interests in corporate loans and corporate debt securities and other portfolio securities on a when-issued and delayed delivery basis, with payment and delivery scheduled for a future date. No income accrues to the Trust on such interests or securities in connection with such transactions prior to the date the Trust actually takes delivery of such interests or securities. These transactions are subject to market fluctuations and are subject to the risk that the value at delivery may be more or less than the trade date purchase price. Although the Trust will generally purchase these securities with the intention of acquiring such securities, they may sell such securities prior to the settlement date. |
19 Invesco High Income Trust II
NOTE 2—Advisory Fees and Other Fees Paid to Affiliates
The Trust has entered into a master investment advisory agreement with Invesco Advisers, Inc. (the “Adviser” or “Invesco”). Under the terms of the investment advisory agreement, the Trust pays an advisory fee to the Adviser based on the annual rate of 0.70% of the Trust’s average daily managed assets. Managed assets for this purpose means the Trust’s net assets, plus assets attributable to outstanding preferred shares and the amount of any borrowings incurred for the purpose of leverage (whether or not such borrowed amounts are reflected in the Trust’s financial statements for purposes of GAAP).
Under the terms of a master sub-advisory agreement between the Adviser and each of Invesco Asset Management Deutschland GmbH, Invesco Asset Management Limited, Invesco Asset Management (Japan) Limited, Invesco Australia Limited, Invesco Hong Kong Limited, Invesco Senior Secured Management, Inc. and Invesco Canada Ltd. (collectively, the “Affiliated Sub-Advisers”) the Adviser, not the Trust, may pay 40% of the fees paid to the Adviser to any such Affiliated Sub-Adviser(s) that provide(s) discretionary investment management services to the Trust based on the percentage of assets allocated to such Sub-Adviser(s).
The Adviser had contractually agreed, through August 31, 2014, to waive advisory fees and/or reimburse expenses to the extent necessary to limit the Trust’s expenses (excluding certain items discussed below) to 1.10%. In determining the Adviser’s obligation to waive advisory fees and/or reimburse expenses, the following expenses are not taken into account, and could cause the Trust’s expenses to exceed the limit reflected above: (1) interest, facilities and maintenance fees; (2) taxes; (3) dividend expense on short sales; (4) extraordinary or non-routine items, including litigation expenses; and (5) expenses that the Trust has incurred but did not actually pay because of an expense offset arrangement. The Adviser has agreed to continue to limit the Trust’s expenses as described above. This agreement may be discontinued at any time without notice to shareholders. To the extent that the annualized expense ratio does not exceed the expense limitation, the Adviser will retain its ability to be reimbursed for such fee waivers or reimbursements prior to the date the expense limit is discontinued.
Further, the Adviser has contractually agreed, through at least June 30, 2016, to waive the advisory fee payable by the Trust in an amount equal to 100% of the net advisory fees the Adviser receives from the affiliated money market funds on investments by the Trust of uninvested cash in such affiliated money market funds.
For the six months ended August 31, 2014, the Adviser waived advisory fees of $28,875.
The Trust has entered into a master administrative services agreement with Invesco pursuant to which the Trust has agreed to pay Invesco for certain administrative costs incurred in providing accounting services to the Trust. For the six months ended August 31, 2014, expenses incurred under this agreement are shown in the Statement of Operations as Administrative services fees.
Certain officers and trustees of the Trust are officers and directors of Invesco.
NOTE 3—Additional Valuation Information
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 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 Trust’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 following is a summary of the tiered valuation input levels, as of August 31, 2014. 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 financial statements may materially differ from the value received upon actual sale of those investments.
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||
| Equity Securities |
$ | 4,456,433 | $ | 176,640 | $ | 0 | $ | 4,633,073 | ||||||||
| Corporate Debt Securities |
— | 173,261,455 | 0 | 173,261,455 | ||||||||||||
| Foreign Debt Securities |
— | 12,274,270 | — | 12,274,270 | ||||||||||||
| Variable Rate Senior Loan Interests |
— | 834,063 | — | 834,063 | ||||||||||||
| 4,456,433 | 186,546,428 | 0 | 191,002,861 | |||||||||||||
| Forward Foreign Currency Contracts* |
— | 343,258 | — | 343,258 | ||||||||||||
| Total Investments |
$ | 4,456,433 | $ | 186,889,686 | $ | 0 | $ | 191,346,119 | ||||||||
| * | Unrealized appreciation. |
20 Invesco High Income Trust II
NOTE 4—Derivative Investments
Value of Derivative Investments at Period-End
The table below summarizes the value of the Trust’s derivative investments, detailed by primary risk exposure, held as of August 31, 2014:
| Value | ||||||||
| Risk Exposure/Derivative Type | Assets | Liabilities | ||||||
| Currency risk: |
||||||||
| Forward foreign currency contracts(a) |
$ | 440,702 | $ | (97,444 | ) | |||
| (a) | Values are disclosed as forward foreign currency contracts outstanding on Statement of Assets and Liabilities. |
Effect of Derivative Investments for the six months ended August 31, 2014
The table below summarizes the gains (losses) on derivative investments, detailed by primary risk exposure, recognized in earnings during the period:
| Location of Gain (Loss) on Statement of Operations |
||||
| Forward Foreign Currency Contracts |
||||
| Realized Gain (Loss): |
||||
| Currency risk |
$ | (124,786 | ) | |
| Change in Unrealized Appreciation: |
||||
| Currency risk |
506,902 | |||
| Total |
$ | 382,116 | ||
The table below summarizes the average notional value of forward foreign currency contracts outstanding during the period.
| Forward Foreign Currency Contracts |
||||
| Average notional value |
$ | 23,876,099 | ||
| Open Forward Foreign Currency Contracts at Period-End | ||||||||||||||||||||||||||
| Settlement
|
Counterparty |
Contract to | Notional Value |
Unrealized Appreciation (Depreciation) |
||||||||||||||||||||||
| Deliver | Receive | |||||||||||||||||||||||||
| 09/02/14 |
Citibank, N.A. |
EUR | 6,093,000 | USD | 8,291,141 | $ | 8,006,339 | $ | 284,802 | |||||||||||||||||
| 09/02/14 |
Citibank, N.A. |
USD | 8,085,320 | EUR | 6,093,000 | 8,006,340 | (78,980 | ) | ||||||||||||||||||
| 09/02/14 |
RBC Capital Markets Corp. |
GBP | 2,292,890 | USD | 3,828,679 | 3,806,523 | 22,156 | |||||||||||||||||||
| 09/02/14 |
RBC Capital Markets Corp. |
USD | 3,793,217 | GBP | 2,292,890 | 3,806,523 | 13,306 | |||||||||||||||||||
| 10/07/14 |
Citibank, N.A. |
GBP | 1,886,940 | USD | 3,236,272 | 3,131,629 | 104,643 | |||||||||||||||||||
| 10/07/14 |
Citibank, N.A. |
USD | 533,917 | GBP | 318,367 | 528,372 | (5,545 | ) | ||||||||||||||||||
| 10/24/14 |
RBC Capital Markets Corp. |
CAD | 173,664 | USD | 161,428 | 159,514 | 1,914 | |||||||||||||||||||
| 10/24/14 |
RBC Capital Markets Corp. |
USD | 168,675 | CAD | 184,135 | 169,132 | 457 | |||||||||||||||||||
| 12/15/14 |
Citibank, N.A. |
EUR | 4,380,000 | USD | 5,772,840 | 5,759,416 | 13,424 | |||||||||||||||||||
| 12/15/14 |
RBC Capital Markets Corp. |
GBP | 2,250,000 | USD | 3,718,755 | 3,731,674 | (12,919 | ) | ||||||||||||||||||
| Total open forward foreign currency contracts — Currency Risk |
$ | 343,258 | ||||||||||||||||||||||||
Currency Abbreviations:
Offsetting Assets and Liabilities
Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities, which was subsequently clarified in Financial Accounting Standards Board ASU 2013-01 “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” is intended to enhance disclosures about financial instruments and derivative instruments that are subject to offsetting arrangements on the Statement of Assets and Liabilities and to enable investors to better understand the effect of those arrangements on its financial position. In order for an arrangement to be eligible for netting, the Fund must have a basis to conclude that such netting arrangements are legally enforceable. The Fund enters into netting agreements and collateral agreements in an attempt to reduce the Fund’s Counterparty credit risk by providing for a single net settlement with a Counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.
21 Invesco High Income Trust II
There were no derivative instruments subject to a netting agreement for which the Fund is not currently netting. The following tables present derivative instruments that are either subject to an enforceable netting agreement or offset by collateral arrangements as of August 31, 2014.
| Assets: | ||||||||||||||||||||||||
| Gross amounts presented in Statement of Assets & Liabilities |
Gross amounts offset in Statement of Assets & Liabilities |
Net amounts of assets presented in the Statement of Assets & Liabilities |
Collateral Received | |||||||||||||||||||||
| Counterparty | Financial Instruments |
Cash | Net Amount |
|||||||||||||||||||||
| Citibank, N.A. |
$ | 402,869 | $ | (84,525 | ) | $ | 318,344 | $ | — | $ | — | $ | 318,344 | |||||||||||
| RBC Capital Markets Corp. |
37,833 | (12,919 | ) | 24,914 | — | — | 24,914 | |||||||||||||||||
| Total |
$ | 440,702 | $ | (97,444 | ) | $ | 343,258 | $ | — | $ | — | $ | 343,258 | |||||||||||
| Liabilities: | ||||||||||||||||||||||||
| Gross amounts presented in Statement of Assets & Liabilities |
Gross amounts offset in Statement of Assets & Liabilities |
Net amounts of liabilities presented in the Statement of Assets & Liabilities |
Collateral Pledged | |||||||||||||||||||||
| Counterparty | Financial Instruments |
Cash | Net Amount |
|||||||||||||||||||||
| Citibank, N.A. |
$ | 84,525 | $ | (84,525 | ) | $ | — | $ | — | $ | — | $ | — | |||||||||||
| RBC Capital Markets Corp. |
12,919 | (12,919 | ) | — | — | — | — | |||||||||||||||||
| Total |
$ | 97,444 | $ | (97,444 | ) | $ | — | $ | — | $ | — | $ | — | |||||||||||
NOTE 5—Security Transactions with Affiliated Funds
The Trust is permitted to purchase or sell securities from or to certain other Invesco Funds under specified conditions outlined in procedures adopted by the Board of Trustees of the Trust. The procedures have been designed to ensure that any purchase or sale of securities by the Trust from or to another fund or portfolio that is or could be considered an affiliate by virtue of having a common investment adviser (or affiliated investment advisers), common Trustees and/or common officers complies with Rule 17a-7 of the 1940 Act. Further, as defined under the procedures, each transaction is effected at the current market price. Pursuant to these procedures, for the six months ended August 31, 2014, the Trust engaged in securities purchases of $109,453.
NOTE 6—Trustees’ and Officers’ Fees and Benefits
Trustees’ and Officers’ Fees and Benefits include amounts accrued by the Trust to pay remuneration to certain Trustees and Officers of the Trust. Effective August 29, 2014, Trustees will have the option to defer compensation payable by the Trust, and “Trustees’ and Officers’ Fees and Benefits” will include amounts accrued by the Trust to fund such deferred compensation amounts.
During the six months ended August 31, 2014, the Trust did not pay any legal fees for services rendered by Skadden, Arps, Slate, Meagher & Flom LLP as counsel to the Trust. A trustee of the Trust is Of Counsel of Skadden, Arps, Slate, Meagher & Flom LLP. Effective August 29, 2014, Skadden, Arps, Slate, Meagher & Flom LLP is no longer counsel to the Trust.
NOTE 7—Cash Balances and Borrowings
Trust has entered into a $65 million Credit Agreement which will expire on August 25, 2015. This Credit Agreement is secured by the assets of the Trust.
During the six months ended August 31, 2014, the average daily balance of borrowing under the Credit Agreement was $50,550,000 with a weighted interest rate of 0.81%. Expenses under the Credit Agreement are shown in the Statement of Operations as Interest, facilities and maintenance fees.
Additionally, the Trust is permitted to temporarily carry a negative or overdrawn balance in its account with State Street Bank and Trust Company (“SSB”), the custodian bank. Such balances, if any at period end, are shown in the Statement of Assets and Liabilities under the payable caption Amount due custodian. To compensate the custodian bank for such overdrafts, the overdrawn Trust may either (1) leave funds as a compensating balance in the account so the custodian bank can be compensated by earning the additional interest; or (2) compensate by paying the custodian bank at a rate agreed upon by the custodian bank and Invesco, not to exceed the contractually agreed upon rate.
NOTE 8—Unfunded Loan Commitments
As of August 31, 2014, the Trust had unfunded loan commitments, which could be extended at the option of the borrower, pursuant to the following loan agreements with the following borrowers:
| Borrower | Type | Principal Amount |
Value | |||||||||
| Level 3 Financing Inc. |
Term Loan | $ | 650,000 | $ | 650,000 | |||||||
NOTE 9—Tax Information
The amount and character of income and gains to be distributed are determined in accordance with income tax regulations, which may differ from GAAP. Reclassifications are made to the Trust’s capital accounts to reflect income and gains available for distribution (or available capital loss carryforward) under income tax regulations. The tax character of distributions paid during the year and the tax components of net assets will be reported at the Trust’s fiscal year-end.
22 Invesco High Income Trust II
Capital loss carryforward is calculated and reported as of a specific date. Results of transactions and other activity after that date may affect the amount of capital loss carryforward actually available for the Trust to utilize. Capital losses generated in years beginning after December 22, 2010 can be carried forward for an unlimited period, whereas previous losses expire in 8 tax years. Capital losses with an expiration period may not be used to offset capital gains until all net capital losses without an expiration date have been utilized. Capital loss carryforwards with no expiration date will retain their character as either short-term or long-term capital losses instead of as short-term capital losses as under prior law. The ability to utilize capital loss carryforward in the future may be limited under the Internal Revenue Code and related regulations based on the results of future transactions.
The Trust had a capital loss carryforward as of February 28, 2014 which expires as follows:
| Capital Loss Carryforward* | ||||||||||||
| Expiration | Short-Term | Long-Term | Total | |||||||||
| February 29, 2016 |
$ | 14,276,956 | $ | — | $ | 14,276,956 | ||||||
| February 28, 2017 |
7,729,955 | — | 7,729,955 | |||||||||
| $ | 22,006,911 | $ | — | $ | 22,006,911 | |||||||
| * | Capital loss carryforward as of the date listed above is reduced for limitations, if any, to the extent required by the Internal Revenue Code and may be further limited depending upon a variety of factors, including the realization of net unrealized gains or losses as of the date of any reorganization. |
NOTE 10—Investment Securities
The aggregate amount of investment securities (other than short-term securities, U.S. Treasury obligations and money market funds, if any) purchased and sold by the Trust during the six months ended August 31, 2014 was $102,064,101 and $103,577,544, respectively. Cost of investments on a tax basis includes the adjustments for financial reporting purposes as of the most recently completed federal income tax reporting period-end.
| Unrealized Appreciation (Depreciation) of Investment Securities on a Tax Basis | ||||
| Aggregate unrealized appreciation of investment securities |
$ | 4,630,463 | ||
| Aggregate unrealized (depreciation) of investment securities |
(1,116,388 | ) | ||
| Net unrealized appreciation of investment securities |
$ | 3,514,075 | ||
Cost of investments for tax purposes is $187,488,786.
NOTE 11—Common Shares of Beneficial Interest
Transactions in common shares of beneficial interest were as follows:
| Six months ended August 31, 2014 |
Year ended February 28, 2014 |
|||||||
| Beginning shares |
8,118,429 | 8,118,429 | ||||||
| Shares issued through dividend reinvestment |
— | — | ||||||
| Ending shares |
8,118,429 | 8,118,429 | ||||||
The Trust may, when appropriate, purchase shares in the open market or in privately negotiated transactions at a price not above market value or net asset value, whichever is lower at the time of purchase.
NOTE 12—Senior Loan Participation Commitments
The Trust invests in participations, assignments, or acts as a party to the primary lending syndicate of a Senior Loan interest to corporations, partnerships, and other entities. When the Trust purchases a participation of a Senior Loan interest, the Trust typically enters into a contractual agreement with the lender or other third party selling the participation, but not with the borrower directly. As such, the Trust assumes the credit risk of the borrower, selling participant or other persons interpositioned between the Trust and the borrower.
At the six months ended August 31, 2014, the following sets forth the selling participants with respect to interest in Senior Loans purchased by the Trust on a participation basis.
| Selling Participant | Principal Amount |
Value | ||||||
| Bank of America, N.A. |
$ | 650,000 | $ | 650,000 | ||||
| Credit Suisse First Boston |
190,000 | 184,063 | ||||||
| Total |
$ | 840,000 | $ | 834,063 | ||||
NOTE 13—Dividends
The Trust declared the following dividends to common shareholders from net investment income subsequent to August 31, 2014:
| Declaration Date | Amount per Share | Record Date | Payable Date | |||||||||
| September 2, 2014 |
$ | 0.1100 | September 15, 2014 | September 30, 2014 | ||||||||
| October 1, 2014 |
$ | 0.1045 | October 16, 2014 | October 31, 2014 | ||||||||
23 Invesco High Income Trust II
NOTE 14—Financial Highlights
The following schedule presents financial highlights for a share of the Trust outstanding throughout the periods indicated.
| Six months ended 2014 |
Years ended February 28, |
Year ended 2012 |
Two months ended 2011 |
Years ended December 31, |
||||||||||||||||||||||||
| 2014 | 2013 | 2010 | 2009 | |||||||||||||||||||||||||
| Net asset value per common share, beginning of period |
$ | 17.88 | $ | 17.51 | $ | 16.38 | $ | 16.63 | $ | 16.16 | $ | 15.38 | $ | 10.45 | ||||||||||||||
| Net investment income(a) |
0.60 | 1.28 | 1.35 | 1.37 | 0.24 | 1.61 | 1.83 | |||||||||||||||||||||
| Net gains (losses) on securities (both realized and unrealized) |
(0.01 | ) | 0.46 | 1.17 | (0.23 | ) | 0.46 | 0.73 | 4.93 | |||||||||||||||||||
| Distributions paid to preferred shareholders from net investment income |
N/A | N/A | — | — | — | (0.01 | ) | (0.42 | ) | |||||||||||||||||||
| Total from investment operations |
0.59 | 1.74 | 2.52 | 1.14 | 0.70 | 2.33 | 6.34 | |||||||||||||||||||||
| Less dividends paid to common shareholders from net investment income |
(0.66 | ) | (1.37 | ) | (1.39 | ) | (1.39 | ) | (0.23 | ) | (1.55 | ) | (1.41 | ) | ||||||||||||||
| Net asset value per common share, end of period |
$ | 17.81 | $ | 17.88 | $ | 17.51 | $ | 16.38 | $ | 16.63 | $ | 16.16 | $ | 15.38 | ||||||||||||||
| Market value per common share, end of period |
$ | 16.48 | $ | 16.65 | $ | 18.03 | $ | 16.89 | $ | 16.52 | $ | 16.02 | $ | 14.48 | ||||||||||||||
| Total return at net asset value(b) |
3.62 | % | 10.95 | % | 15.74 | % | 7.26 | % | 4.37 | % | 15.55 | % | — | |||||||||||||||
| Total return at market value(c) |
2.95 | % | 0.34 | % | 15.57 | % | 11.33 | % | 4.59 | % | 21.67 | % | 83.40 | % | ||||||||||||||
| Net assets applicable to common shares, end of period (000’s omitted) |
$ | 144,626 | $ | 145,197 | $ | 142,161 | $ | 61,755 | $ | 62,711 | $ | 60,916 | $ | 57,997 | ||||||||||||||
| Portfolio turnover rate(d) |
54 | % | 74 | % | 58 | % | 60 | % | 18 | % | 135 | % | 58 | % | ||||||||||||||
| Ratios/supplemental data based on average net assets applicable to common shares: |
|
|||||||||||||||||||||||||||
| Ratio of expenses: |
||||||||||||||||||||||||||||
| With fee waivers and/or expense reimbursements |
1.47 | %(e) | 1.54 | % | 1.67 | % | 2.38 | % | 2.44 | %(f) | 2.57 | %(g) | 2.31 | %(g) | ||||||||||||||
| With fee waivers and/or expense reimbursements excluding interest, facilities and maintenance fees(h) |
1.10 | %(e) | 1.13 | % | 1.20 | % | 1.95 | % | 1.71 | %(f) | 1.74 | %(g) | ||||||||||||||||
| Without fee waivers and/or expense reimbursements |
1.51 | %(e) | 1.63 | % | 1.83 | % | 2.38 | % | 2.44 | %(f) | 2.61 | %(g) | 2.40 | %(g) | ||||||||||||||
| Ratio of net investment income before preferred share dividends |
6.68 | %(e) | 7.36 | % | 7.96 | % | 8.69 | % | 8.93 | %(f) | 10.34 | % | 14.13 | % | ||||||||||||||
| Preferred share dividends |
N/A | N/A | — | — | — | (0.03 | )% | — | ||||||||||||||||||||
| Ratio of net investment income after preferred share dividends |
6.68 | %(e) | 7.36 | % | 7.96 | % | 8.69 | % | 8.93 | %(f) | 10.31 | % | 10.90 | % | ||||||||||||||
| Senior securities: |
||||||||||||||||||||||||||||
| Total amount of preferred shares outstanding (000’s omitted) |
N/A | N/A | N/A | N/A | N/A | N/A | $ | 4,400 | (i) | |||||||||||||||||||
| Asset coverage per $1,000 unit of senior indebtedness(j) |
$ | 3,861 | $ | 3,872 | $ | 3,812 | $ | 3,628 | $ | 3,412 | ||||||||||||||||||
| Asset coverage per preferred |
N/A | N/A | N/A | N/A | N/A | N/A | $ | 354,600 | ||||||||||||||||||||
| Liquidating preference per preferred share(j) |
N/A | N/A | N/A | N/A | N/A | N/A | $ | 25,000 | ||||||||||||||||||||
| Total borrowings (000’s omitted) |
$ | 50,550 | $ | 50,550 | $ | 50,550 | $ | 23,500 | $ | 26,000 | $ | 26,000 | $ | 28,000 | ||||||||||||||
| (a) | Calculated using average shares outstanding. |
| (b) | Includes adjustments in accordance with accounting principles generally accepted in the United States of America and as such, the net asset value for financial reporting purposes and the returns based upon those net asset values may differ from the net asset value and returns for shareholder transactions. Not annualized for periods less than one year, if applicable. |
| (c) | Total return assumes an investment at the common share market price at the beginning of the period indicated, reinvestment of all distributions for the period in accordance with the Trust’s dividend reinvestment plan, and sale of all shares at the closing common share market price at the end of the period indicated. Not annualized for periods less than one year, if applicable. |
| (d) | Portfolio turnover is calculated at the fund level and is not annualized for periods less than one year, if applicable. For the year ending February 28, 2013, the portfolio turnover calculation excludes the value of securities purchases of $94,353,288 and sold of $25,036,644 in the effort to realign the Trust’s portfolio holdings after the reorganization of Invesco High Yield Investments Fund, Inc. into the Trust. |
| (e) | Ratios are annualized and based on average daily net assets applicable to common shares (000’s omitted) of $144,871. |
| (f) | Annualized. |
| (g) | Ratios do not reflect the effect of dividend payments to preferred shareholders. |
| (h) | For the years ended October 31, 2010 and prior, ratio does not exclude facilities and maintenance fees. |
| (i) | Total shares outstanding for the year ended December 31, 2009 was 176. |
| (j) | Calculated by subtracting the Trust’s total liabilities (not including the preferred shares and the borrowings) from the Trust’s total assets and dividing this by the total number of senior indebtedness units, where one unit equals $1,000 of senior indebtedness. |
| (k) | Calculated by subtracting the Trust’s total liabilities (not including preferred shares) from the Trust’s total assets and dividing this by preferred shares outstanding. |
| N/A | = Not Applicable |
24 Invesco High Income Trust II
NOTE 15—Legal Proceedings
Terms used in the Legal Proceedings Note are defined terms solely for the purpose of this note.
Pending Litigation and Regulatory Inquiries
On January 17, 2011, a Consolidated Amended Shareholder Derivative Complaint (“Complaint”) was filed by common shareholders on behalf of the trusts now known as Invesco Advantage Municipal Income Trust II; Invesco Municipal Opportunity Trust; Invesco Municipal Trust; Invesco High Income Trust II; Invesco Senior Income Trust (the “Trusts”) against Van Kampen Asset Management, Morgan Stanley, and certain individuals (collectively, the “Defendants”) in Rotz v. Van Kampen Asset Management. The Plaintiffs alleged that, prior to the tenure of the current adviser, Defendants breached their fiduciary duties to common shareholders by causing the Trusts to redeem Auction Rate Preferred Securities (“ARPS”) at their liquidation value, which was allegedly higher than market value at the time, and by not having adequate procedures to deal with potential conflicts of interest. The Plaintiffs alleged that the redemptions of the ARPS wasted Trust assets, occurred at the expense of the Trusts and the common shareholders, and were improperly motivated to benefit preferred shareholders and Defendants. Additionally, the Plaintiffs claimed that the ARPS were replaced with less favorable financing. Plaintiffs sought judgment that: 1) ordered Defendants to refrain from redeeming any ARPS at their liquidation value using Trusts assets; 2) awarded monetary damages against all Defendants, individually, jointly or severally, in favor of the Trusts, for all losses and damages allegedly suffered as a result of the redemptions of ARPS at their liquidation value; 3) granted appropriate equitable relief to remedy the Defendants’ alleged breaches of fiduciary duties; and 4) awarded to Plaintiffs the costs and disbursements of the action. On August 10, 2010, the Board of Trustees formed a Special Litigation Committee (“SLC”) to investigate the claims made in the April 2010 demand letters underlying the Complaint with the assistance of independent counsel. After reviewing the findings of the SLC and a vote by Independent Trustees, the Board announced on June 24, 2011, that the Independent Trustees had adopted the SLC recommendation to reject the demands and seek dismissal of the lawsuit. The Trusts filed a motion to dismiss the case with prejudice on October 4, 2011, which was granted on October 22, 2014.
Management of Invesco and the Trust believe that the outcome of the proceedings described above will not have a material adverse effect on the Trust or on the ability of Invesco to provide ongoing services to the Trust.
25 Invesco High Income Trust II
Approval of Investment Advisory and Sub-Advisory Contracts
| 26 Invesco High Income Trust II |
| 27 Invesco High Income Trust II |
Proxy Results
An Annual Meeting (“Meeting”) of Shareholders of Invesco High Income Trust II (the “Fund”) was held on August 29, 2014. The Meeting was held for the following purposes:
| (1) | Elect four Class I Trustees by the holders of Common Shares of the Fund, each of whom will serve until the later of the Fund’s annual meeting of shareholders in 2016 or until a successor shall have been duly elected and qualified. |
The results of the voting on the above matter were as follows:
| Matter | Votes For | Votes Against |
Votes Abstain |
|||||||||||
| (1) | Albert R. Dowden | 6,880,626 | 358,228 | 88,047 | ||||||||||
| Dr. Prema Mathai-Davis | 6,887,620 | 346,024 | 93,257 | |||||||||||
| Hugo F. Sonnenschein | 6,873,184 | 363,433 | 90,284 | |||||||||||
| Raymond Stickel, Jr. | 6,884,150 | 353,327 | 89,424 | |||||||||||
| (2) | Elect five Class II Trustees by the holders of Common Shares of the Fund, each of whom will serve until the later of the Fund’s annual meeting of shareholders in 2017 or until a successor shall have been duly elected and qualified. |
The results of the voting on the above matter were as follows:
| Matter | Votes For | Votes Against |
Votes Abstain |
|||||||||||
| (2) | David C. Arch | 6,897,176 | 340,668 | 89,057 | ||||||||||
| Frank S. Bayley | 6,878,541 | 360,559 | 87,801 | |||||||||||
| Dr. Larry Soll | 6,883,447 | 353,966 | 89,488 | |||||||||||
| Philip A. Taylor | 6,881,002 | 350,953 | 94,946 | |||||||||||
| Suzanne H. Woolsey | 6,837,452 | 400,802 | 88,647 | |||||||||||
| (3) | Elect five Class III Trustees by the holders of Common Shares of the Fund, each of whom will serve until the later of the Fund’s annual meeting of shareholders in 2015 or until a successor shall have been duly elected and qualified. |
The results of the voting on the above matter were as follows:
| Matter | Votes For | Votes Against |
Votes Abstain |
|||||||||||
| (3) | James T. Bunch | 6,867,471 | 363,266 | 96,164 | ||||||||||
| Bruce L. Crockett | 6,875,758 | 355,032 | 96,111 | |||||||||||
| Rodney F. Dammeyer | 6,857,091 | 372,055 | 97,755 | |||||||||||
| Jack M. Fields | 6,883,749 | 347,418 | 95,734 | |||||||||||
| Martin L. Flanagan | 6,897,635 | 335,935 | 93,331 | |||||||||||
28 Invesco High Income Trust II
Correspondence information
Send general correspondence to Computershare Trust Company, N.A., P.O. Box 30170, College Station, TX 77842-3170.
Trust holdings and proxy voting information
The Trust provides a complete list of its holdings four times in each fiscal year, at the quarter ends. For the second and fourth quarters, the lists appear in the Trust’s semiannual and annual reports to shareholders. For the first and third quarters, the Trust files the lists with the Securities and Exchange Commission (SEC) on Form N-Q. The most recent list of portfolio holdings is available at invesco.com/us. Shareholders can also look up the Trust’s Forms N-Q on the SEC website at sec.gov. Copies of the Trust’s Forms N-Q may be reviewed and copied at the SEC Public Reference Room in Washington, D.C. You can obtain information on the operation of the Public Reference Room, including information about duplicating fee charges, by calling 202 551 8090 or 800 732 0330, or by electronic request at the following email address: publicinfo@sec.gov. The SEC file number for the Trust is shown below.
| A description of the policies and procedures that the Trust uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, from our Client Services department at 800 341 2929 or at invesco.com/proxyguidelines. The information is also available on the SEC website, sec.gov. Information regarding how the Trust voted proxies related to its portfolio securities during the most recent 12-month period ended June 30 is available at invesco.com/proxysearch. In addition, this information is available on the SEC website at sec.gov. |
|
| SEC file number: 811-05769 | VK-CE-HINC2-SAR-1 |
| ITEM 2. | CODE OF ETHICS. |
There were no amendments to the Code of Ethics (the “Code”) that applies to the Registrant’s Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) during the period covered by the report. The Registrant did not grant any waivers, including implicit waivers, from any provisions of the Code to the PEO or PFO during the period covered by this report.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
Not applicable.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
Not applicable.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
Not applicable.
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Investments in securities of unaffiliated issuers is included as part of the reports to stockholders filed under Item 1 of this Form.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Not applicable.
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
Not applicable.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | As of August 20, 2014, an evaluation was performed under the supervision and with the participation of the officers of the Registrant, including the Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), to assess the effectiveness of the Registrant’s disclosure controls and procedures, as that term is defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”), as amended. Based on that evaluation, the Registrant’s officers, including the PEO and PFO, concluded that, as of August 20, 2014, the Registrant’s disclosure controls and procedures were reasonably designed to ensure: (1) that information required to be disclosed by the Registrant on Form N-CSR is |
| recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission; and (2) that material information relating to the Registrant is made known to the PEO and PFO as appropriate to allow timely decisions regarding required disclosure. |
| (b) | There have been no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. |
| ITEM 12. | EXHIBITS. |
| 12(a) (1) | Not applicable. | |
| 12(a) (2) | Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. | |
| 12(a) (3) | Not applicable. | |
| 12(b) | Certifications of principal executive officer and principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. | |
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.
Registrant: Invesco High Income Trust II
| By: | /s/ Philip A. Taylor | |
| Philip A. Taylor | ||
| Principal Executive Officer | ||
| Date: | November 7, 2014 | |
Pursuant to the requirements of the Securities and Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
| By: | /s/ Philip A. Taylor | |
| Philip A. Taylor | ||
| Principal Executive Officer | ||
| Date: | November 7, 2014 | |
| By: | /s/ Sheri Morris | |
| Sheri Morris | ||
| Principal Financial Officer | ||
| Date: | November 7, 2014 | |
EXHIBIT INDEX
| 12(a) (1) | Not applicable. | |
| 12(a) (2) | Certifications of principal executive officer and Principal financial officer as required by Rule 30a-2(a) under the Investment Company Act of 1940. | |
| 12(a) (3) | Not applicable. | |
| 12(b) | Certifications of principal executive officer and Principal financial officer as required by Rule 30a-2(b) under the Investment Company Act of 1940. | |