|
|
|
|
|
|
|
Assets:
|
|
|
|
|
Investments, at value (Cost $530,588,521)
|
|
$
|
605,726,191
|
|
Foreign currency, at value (Cost $230,725)
|
|
|
225,144
|
|
Cash
|
|
|
90,900
|
|
Interest and dividends receivable
|
|
|
7,676,746
|
|
Receivable for securities sold
|
|
|
1,826,603
|
|
Unrealized appreciation on forward foreign currency contracts
|
|
|
66,596
|
|
Prepaid expenses
|
|
|
18,294
|
|
Total Assets
|
|
|
615,630,474
|
|
|
|
Liabilities:
|
|
|
|
|
Loan payable (Note 6)
|
|
|
158,000,000
|
|
Payable for open reverse repurchase agreements (Note 3)
|
|
|
18,560,250
|
|
Payable for securities purchased
|
|
|
16,316,603
|
|
Distributions payable
|
|
|
2,874,429
|
|
Investment management fee payable
|
|
|
388,593
|
|
Interest expense payable
|
|
|
42,853
|
|
Directors fees payable
|
|
|
18,762
|
|
Unrealized depreciation on forward foreign currency contracts
|
|
|
16,225
|
|
Accrued expenses
|
|
|
138,932
|
|
Total Liabilities
|
|
|
196,356,647
|
|
Total Net Assets
|
|
$
|
419,273,827
|
|
|
|
Net Assets:
|
|
|
|
|
Par value ($0.001 par value; 58,661,812 shares issued and outstanding; 100,000,000 shares authorized)
|
|
$
|
58,662
|
|
Paid-in capital in excess of par value
|
|
|
553,949,095
|
|
Total distributable earnings (loss)
|
|
|
(134,733,930)
|
|
Total Net Assets
|
|
$
|
419,273,827
|
|
|
|
Shares Outstanding
|
|
|
58,661,812
|
|
|
|
Net Asset Value
|
|
|
$7.15
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
25
|
Statement of operations
For the Year Ended April 30, 2021
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
Interest
|
|
$
|
44,999,213
|
|
Dividends
|
|
|
281,766
|
|
Less: Foreign taxes withheld
|
|
|
(67,041)
|
|
Total Investment Income
|
|
|
45,213,938
|
|
|
|
Expenses:
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
5,664,612
|
|
Interest expense (Notes 3 and 6)
|
|
|
1,602,461
|
|
Legal fees
|
|
|
198,988
|
|
Directors fees
|
|
|
189,870
|
|
Transfer agent fees
|
|
|
187,908
|
|
Audit and tax fees
|
|
|
79,632
|
|
Stock exchange listing fees
|
|
|
50,525
|
|
Shareholder reports
|
|
|
26,415
|
|
Custody fees
|
|
|
16,211
|
|
Insurance
|
|
|
8,046
|
|
Fund accounting fees
|
|
|
8,000
|
|
Miscellaneous expenses
|
|
|
5,757
|
|
Total Expenses
|
|
|
8,038,425
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(2,819)
|
|
Net Expenses
|
|
|
8,035,606
|
|
Net Investment Income
|
|
|
37,178,332
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Forward Foreign Currency Contracts
and Foreign Currency Transactions (Notes
1, 3 and 4):
|
|
|
|
|
Net Realized Gain (Loss) From:
|
|
|
|
|
Investment transactions
|
|
|
6,041,964
|
|
Forward foreign currency contracts
|
|
|
(130,166)
|
|
Foreign currency transactions
|
|
|
29,511
|
|
Net Realized Gain
|
|
|
5,941,309
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
Investments
|
|
|
75,994,991
|
|
Forward foreign currency contracts
|
|
|
111,036
|
|
Foreign currencies
|
|
|
9,484
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
76,115,511
|
|
Net Gain on Investments, Forward Foreign Currency Contracts and Foreign Currency Transactions
|
|
|
82,056,820
|
|
Increase in Net Assets From Operations
|
|
$
|
119,235,152
|
|
|
Net of foreign capital gains tax of $3,835.
|
See Notes to Financial Statements.
|
|
|
26
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Years Ended April 30,
|
|
2021
|
|
|
2020
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
37,178,332
|
|
|
$
|
47,194,817
|
|
Net realized gain (loss)
|
|
|
5,941,309
|
|
|
|
(56,456,439)
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
76,115,511
|
|
|
|
(38,551,492)
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
119,235,152
|
|
|
|
(47,813,114)
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(34,735,425)
|
|
|
|
(40,900,287)
|
|
Return of capital
|
|
|
(7,277,376)
|
|
|
|
(7,578,964)
|
|
Decrease in Net Assets From Distributions to Shareholders
|
|
|
(42,012,801)
|
|
|
|
(48,479,251)
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
Cost of shares repurchased (0 and 917,344 shares repurchased, respectively) (Note 8)
|
|
|
|
|
|
|
(4,506,248)
|
|
Cost of shares repurchased through tender offer (25,577,060 and 0 shares repurchased, respectively) (Note
5)
|
|
|
(179,295,192)
|
|
|
|
|
|
Decrease in Net Assets From Fund Share Transactions
|
|
|
(179,295,192)
|
|
|
|
(4,506,248)
|
|
Decrease in Net Assets
|
|
|
(102,072,841)
|
|
|
|
(100,798,613)
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
521,346,668
|
|
|
|
622,145,281
|
|
End of year
|
|
$
|
419,273,827
|
|
|
$
|
521,346,668
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
27
|
Statement of cash flows
For the Year Ended April 30, 2021
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
Net increase in net assets resulting from operations
|
|
$
|
119,235,152
|
|
Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating
activities:
|
|
|
|
|
Purchases of portfolio securities
|
|
|
(334,926,229)
|
|
Sales of portfolio securities
|
|
|
544,995,901
|
|
Net purchases, sales and maturities of short-term investments
|
|
|
8,850,917
|
|
Payment-in-kind
|
|
|
(352,312)
|
|
Net amortization of premium (accretion of discount)
|
|
|
(7,393,079)
|
|
Decrease in receivable for securities sold
|
|
|
16,457,682
|
|
Decrease in interest and dividends receivable
|
|
|
3,641,117
|
|
Decrease in prepaid expenses
|
|
|
20,859
|
|
Increase in payable for securities purchased
|
|
|
7,969,718
|
|
Decrease in investment management fee payable
|
|
|
(81,285)
|
|
Increase in Directors fees payable
|
|
|
13,195
|
|
Decrease in interest expense payable
|
|
|
(55,388)
|
|
Increase in accrued expenses
|
|
|
68,730
|
|
Net realized gain on investments
|
|
|
(6,041,964)
|
|
Change in net unrealized appreciation (depreciation) of investments and forward foreign currency
contracts
|
|
|
(76,106,027)
|
|
Net Cash Provided in Operating Activities*
|
|
|
276,296,987
|
|
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
Distributions paid on common stock (net of distributions payable)
|
|
|
(43,266,077)
|
|
Repayment of loan facility borrowings
|
|
|
(50,000,000)
|
|
Decrease in payable for reverse repurchase agreements
|
|
|
(9,658,750)
|
|
Payment for shares repurchased through tender offer
|
|
|
(179,295,192)
|
|
Net Cash Used by Financing Activities
|
|
|
(282,220,019)
|
|
Net Decrease in Cash and Restricted Cash
|
|
|
(5,923,032)
|
|
Cash and restricted cash at beginning of year
|
|
|
6,239,076
|
|
Cash and restricted cash at end of year
|
|
$
|
316,044
|
|
*
|
Included in operating expenses is cash of $1,657,849 paid for interest on borrowings.
|
|
The following table provides a reconciliation of cash (including foreign currency) and restricted cash reported within the Statement of Assets and
Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows.
|
|
|
|
|
|
|
|
April 30, 2021
|
|
Cash
|
|
$
|
316,044
|
|
Restricted cash
|
|
|
|
|
Total cash and restricted cash shown in the Statement of Cash Flows
|
|
$
|
316,044
|
|
See Notes to Financial
Statements.
|
|
|
28
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended April
30:
|
|
|
|
20211
|
|
|
20201
|
|
|
20191
|
|
|
20181
|
|
|
20171
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
6.19
|
|
|
$
|
7.31
|
|
|
$
|
7.39
|
|
|
$
|
7.78
|
|
|
$
|
7.12
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.51
|
|
|
|
0.55
|
|
|
|
0.52
|
|
|
|
0.56
|
|
|
|
0.66
|
|
Net realized and unrealized gain (loss)
|
|
|
1.03
|
|
|
|
(1.11)
|
|
|
|
(0.06)
|
|
|
|
(0.37)
|
|
|
|
0.69
|
|
Total income (loss) from operations
|
|
|
1.54
|
|
|
|
(0.56)
|
|
|
|
0.46
|
|
|
|
0.19
|
|
|
|
1.35
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.46)
|
|
|
|
(0.48)
|
|
|
|
(0.50)
|
|
|
|
(0.57)
|
|
|
|
(0.63)
|
|
Return of capital
|
|
|
(0.13)
|
|
|
|
(0.09)
|
|
|
|
(0.05)
|
|
|
|
(0.01)
|
|
|
|
(0.06)
|
|
Total distributions
|
|
|
(0.59)
|
|
|
|
(0.57)
|
|
|
|
(0.55)
|
|
|
|
(0.58)
|
|
|
|
(0.69)
|
|
Anti-dilutive impact of repurchase plan
|
|
|
|
|
|
|
0.01
|
2
|
|
|
0.01
|
2
|
|
|
|
|
|
|
|
|
Anti-dilutive impact of tender offer
|
|
|
0.01
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
7.15
|
|
|
$
|
6.19
|
|
|
$
|
7.31
|
|
|
$
|
7.39
|
|
|
$
|
7.78
|
|
|
|
|
|
|
|
Market price, end of year
|
|
$
|
7.09
|
|
|
$
|
5.51
|
|
|
$
|
6.69
|
|
|
$
|
6.55
|
|
|
$
|
7.42
|
|
Total return, based on NAV4,5
|
|
|
25.68
|
%
|
|
|
(8.11)
|
%
|
|
|
6.77
|
%
|
|
|
2.41
|
%
|
|
|
19.76
|
%
|
Total return, based on Market Price6
|
|
|
40.48
|
%
|
|
|
(10.02)
|
%
|
|
|
11.29
|
%
|
|
|
(4.15)
|
%
|
|
|
18.36
|
%
|
|
|
|
|
|
|
Net assets, end of year (millions)
|
|
$
|
419
|
|
|
$
|
521
|
|
|
$
|
622
|
|
|
$
|
637
|
|
|
$
|
671
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.59
|
%
|
|
|
2.57
|
%7
|
|
|
2.47
|
%
|
|
|
1.97
|
%
|
|
|
1.73
|
%
|
Net expenses
|
|
|
1.59
|
8
|
|
|
2.55
|
7,8
|
|
|
2.45
|
8
|
|
|
1.97
|
|
|
|
1.73
|
|
Net investment income
|
|
|
7.37
|
|
|
|
7.76
|
|
|
|
7.31
|
|
|
|
7.26
|
|
|
|
8.72
|
|
Portfolio turnover rate
|
|
|
50
|
%
|
|
|
66
|
%
|
|
|
105
|
%
|
|
|
91
|
%
|
|
|
77
|
%
|
|
|
|
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Outstanding, End of Year (000s)
|
|
$
|
158,000
|
|
|
$
|
208,000
|
|
|
$
|
246,500
|
|
|
$
|
235,000
|
|
|
$
|
240,000
|
|
Asset Coverage Ratio for Loan Outstanding9
|
|
|
365
|
%
|
|
|
351
|
%
|
|
|
352
|
%
|
|
|
371
|
%
|
|
|
380
|
%
|
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding9
|
|
$
|
3,654
|
|
|
$
|
3,506
|
|
|
$
|
3,524
|
|
|
$
|
3,710
|
|
|
$
|
3,796
|
|
Weighted Average Loan (000s)
|
|
$
|
178,800
|
|
|
$
|
241,971
|
|
|
$
|
242,889
|
|
|
$
|
239,548
|
|
|
$
|
240,000
|
|
Weighted Average Interest Rate on Loan
|
|
|
0.86
|
%
|
|
|
2.58
|
%
|
|
|
3.08
|
%
|
|
|
2.17
|
%
|
|
|
1.41
|
%
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
29
|
Financial highlights (contd)
1
|
Per share amounts have been calculated using the average shares method.
|
2
|
The repurchase plan was completed at an average repurchase price of $4.91 for 917,344 shares and $4,506,248 for the year ended April 30, 2020 and $5.98 for
1,047,640 shares and $6,268,230 for the year ended April 30, 2019.
|
3
|
The tender offer was completed at a price of $7.01 for 25,577,060 shares and $179,295,192 for the year ended April 30, 2021.
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results.
|
5
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results.
|
6
|
The total return calculation assumes that distributions are reinvested in accordance with the Funds dividend reinvestment plan. Past performance is no
guarantee of future results.
|
7
|
Included in the expense ratios are certain non-recurring legal and transfer agent fees that were incurred by the Fund
during the period. Without these fees, the gross and net expense ratios would have been 2.37% and 2.35%, respectively.
|
8
|
Reflects fee waivers and/or expense reimbursements.
|
9
|
Represents value of net assets plus the loan outstanding at the end of the period divided by the loan outstanding at the end of the period.
|
See Notes to Financial
Statements.
|
|
|
30
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
Notes to financial statements
1. Organization and significant accounting policies
Western Asset High Income Fund II Inc. (the Fund) was incorporated in Maryland and is registered as a diversified,
closed-end management investment company under the Investment Company Act of 1940, as amended (the 1940 Act). The Fund seeks to maximize current income by investing at least 80% of its net assets,
plus any borrowings for investment purposes, in high-yield debt securities. As a secondary objective, the Fund seeks capital appreciation to the extent consistent with its objective of seeking to maximize current income. On August 14, 2020, the
Board of Directors of the Fund approved amendments to the Funds bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange
Commissions website at www.sec.gov.
The following are significant accounting policies consistently followed by the Fund and are in conformity with
U.S. generally accepted accounting principles (GAAP). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in
the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but
are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services,
which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest rates, yield
curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the
day of valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets
that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices
supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been
obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is
principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Funds Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Global Fund Valuation
Committee (formerly known as Legg Mason North Atlantic Fund Valuation Committee prior to March 1, 2021) (the
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Western Asset High Income Fund II Inc. 2021 Annual Report
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31
|
Notes to financial statements (contd)
Valuation Committee). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for
making fair value determinations, evaluating the effectiveness of the Funds pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the
Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of
earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will
also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuers financial statements; the purchase price of the
security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts research and observations from financial institutions; information regarding any transactions or offers with respect to the
security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted
securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is
compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and
the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future
cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and
liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
|
Level 1 quoted prices in active markets for identical investments
|
|
|
Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
|
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|
32
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Western Asset High Income Fund II Inc. 2021 Annual Report
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The following is a summary of the inputs used in valuing the Funds assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Long-Term Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds & Notes
|
|
|
|
|
|
$
|
516,018,727
|
|
|
|
|
|
|
$
|
516,018,727
|
|
Sovereign Bonds
|
|
|
|
|
|
|
39,072,715
|
|
|
|
|
|
|
|
39,072,715
|
|
U.S. Government & Agency Obligations
|
|
|
|
|
|
|
20,225,793
|
|
|
|
|
|
|
|
20,225,793
|
|
Senior Loans
|
|
|
|
|
|
|
14,803,010
|
|
|
|
|
|
|
|
14,803,010
|
|
Convertible Bonds & Notes
|
|
|
|
|
|
|
4,721,125
|
|
|
|
|
|
|
|
4,721,125
|
|
Preferred Stocks
|
|
$
|
3,994,712
|
|
|
|
|
|
|
|
|
|
|
|
3,994,712
|
|
Convertible Preferred Stocks
|
|
|
|
|
|
|
1,526,642
|
|
|
|
|
|
|
|
1,526,642
|
|
Common Stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary
|
|
|
1,044,008
|
|
|
|
|
|
|
|
|
|
|
|
1,044,008
|
|
Energy
|
|
|
|
|
|
|
|
|
|
$
|
58,553
|
|
|
|
58,553
|
|
Total Long-Term Investments
|
|
|
5,038,720
|
|
|
|
596,368,012
|
|
|
|
58,553
|
|
|
|
601,465,285
|
|
Short-Term Investments
|
|
|
4,260,906
|
|
|
|
|
|
|
|
|
|
|
|
4,260,906
|
|
Total Investments
|
|
$
|
9,299,626
|
|
|
$
|
596,368,012
|
|
|
$
|
58,553
|
|
|
$
|
605,726,191
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts
|
|
|
|
|
|
$
|
66,596
|
|
|
|
|
|
|
$
|
66,596
|
|
Total
|
|
$
|
9,299,626
|
|
|
$
|
596,434,608
|
|
|
$
|
58,553
|
|
|
$
|
605,792,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts
|
|
|
|
|
|
$
|
16,225
|
|
|
|
|
|
|
$
|
16,225
|
|
|
See Schedule of Investments for additional detailed categorizations.
|
(b) Forward foreign currency contracts. The Fund enters into a forward foreign currency contract to hedge against foreign currency exchange
rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward foreign currency contract is an agreement between two
parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal
to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.
Non-deliverable forward foreign currency exchange contracts are settled with the counterparty in cash without the delivery of foreign currency.
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Western Asset High Income Fund II Inc. 2021 Annual Report
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33
|
Notes to financial statements (contd)
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and
Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties
to meet the terms of their contracts.
(c) Loan participations. The Fund may
invest in loans arranged through private negotiation between one or more financial institutions. The Funds investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing
participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund
may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the
borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of
the lender and may not benefit from any off-set between the lender and the borrower.
(d)
Unfunded loan commitments. The Fund may enter into certain credit agreements where all or a portion of the total amount committed may be unfunded. The Fund is obligated to fund these commitments at
the borrowers discretion. The commitments are disclosed in the accompanying Schedule of Investments. At April 30, 2021, the Fund had sufficient cash and/or securities to cover these commitments.
(e) Reverse repurchase agreements. The Fund may enter into reverse repurchase agreements.
Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed upon time and price. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Funds use of the proceeds of the agreement may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Funds obligation to
repurchase the securities. In entering into reverse repurchase agreements, the Fund will pledge cash, U.S. government securities or other liquid debt obligations at least equal in value to its obligations with respect to reverse repurchase
agreements or will take other actions permitted by law to cover its obligations. If the market value of the collateral declines during the period, the Fund may be required to post additional collateral to cover its obligation. Cash collateral that
has been pledged to cover obligations of the Fund under reverse repurchase agreements, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral are noted in the Schedule of Investments.
Interest payments made on reverse repurchase agreements are recognized as a component of Interest expense on the Statement of Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security
by the counterparty, which may result in interest income to the Fund.
(f) Securities traded on a when-issued and delayed delivery
basis. The Fund may trade securities on a when-issued or delayed delivery basis. In when-issued and delayed
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|
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34
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Western Asset High Income Fund II Inc. 2021 Annual Report
|
delivery transactions, the securities are purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and
yield to the Fund at the time of entering into the transaction.
Purchasing such securities involves risk of loss if the value of the securities declines
prior to settlement. These securities are subject to market fluctuations and their current value is determined in the same manner as for other securities.
(g) Inflation-indexed bonds. Inflation-indexed bonds are fixed income securities whose principal value or interest rate is periodically
adjusted according to the rate of inflation. As the index measuring inflation changes, the principal value or interest rate of inflation-indexed bonds will be adjusted accordingly. Inflation adjustments to the principal amount of inflation-indexed
bonds are reflected as an increase or decrease to investment income on the Statement of Operations. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed
bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
(h) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which
are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash
Flows.
(i) Foreign currency translation. Investment securities and other assets
and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign
currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not
isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including
gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes
recorded on the Funds books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in
securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of,
|
|
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Western Asset High Income Fund II Inc. 2021 Annual Report
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35
|
Notes to financial statements (contd)
among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the
possibility of political or economic instability.
(j) Credit and market risk. The
Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The
Funds investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater
market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Funds investments in non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
(k) Foreign investment risks. The Funds investments in foreign securities may involve risks not present in domestic investments. Since
securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect
the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the
market and/or credit risk of the investments.
(l) Counterparty risk and credit-risk-related contingent features of derivative
instruments. The Fund may invest in certain securities or engage in other transactions where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest
in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to
meet its contractual obligations. The Funds subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure
to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk
by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
With exchange
traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the
seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the
event of a default of the clearing broker or clearinghouse.
|
|
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36
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Western Asset High Income Fund II Inc. 2021 Annual Report
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The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master
Agreement (ISDA Master Agreement) or similar agreement, with certain of its derivative counterparties that govern over-the-counter (OTC)
derivatives and provide for general obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include,
but are not limited to, a percentage decrease in the Funds net assets or net asset value per share over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the
positions and demand payment or require additional collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with
the counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the
agreement, the terms of the ISDA Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable
counterparty. The enforceability of the right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or
margin requirements are set by the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for OTC traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under
derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of April 30, 2021, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $16,225. If a
contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivatives counterparties.
(m) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income (including
interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Paydown gains and
losses on mortgage- and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. Foreign
dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of
investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability
of interest accrued up to the date of default or credit event.
(n) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. Distributions of net realized gains, if any, are declared at least annually. Distributions to
shareholders of the Fund are
|
|
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Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
37
|
Notes to financial statements (contd)
recorded on the ex-dividend date and are determined in accordance with income tax regulations,
which may differ from GAAP.
(o) Compensating balance arrangements. The Fund has
an arrangement with its custodian bank whereby a portion of the custodians fees is paid indirectly by credits earned on the Funds cash on deposit with the bank.
(p) Federal and other taxes. It is the Funds policy to comply with the federal income and excise tax requirements of the Internal Revenue
Code of 1986 (the Code), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements
imposed by the Code. Therefore, no federal or state income tax provision is required in the Funds financial statements.
Management has analyzed
the Funds tax positions taken on income tax returns for all open tax years and has concluded that as of April 30, 2021, no provision for income tax is required in the Funds financial statements. The Funds federal and state
income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates. Realized gains upon disposition
of securities issued in or by certain foreign countries are subject to capital gains tax imposed by those countries.
(q)
Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on
net assets or net asset value per share. During the current year, the following reclassifications have been made:
|
|
|
|
|
|
|
|
|
|
|
Total Distributable
Earnings (Loss)
|
|
|
Paid-in
Capital
|
|
(a)
|
|
$
|
(37,031)
|
|
|
$
|
37,031
|
|
(a)
|
Reclassifications are due to differences between actual and estimated information which adjusted the prior year return of capital.
|
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (LMPFA) is the Funds investment manager. Western Asset Management Company, LLC (Western Asset),
Western Asset Management Company Limited (Western Asset Limited) and Western Asset Management Company Pte. Ltd. (Western Asset Singapore) are the Funds subadvisers. As of July 31, 2020, LMPFA, Western Asset,
Western Asset Limited and Western Asset Singapore are indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (Franklin Resources). Prior to July 31, 2020, LMPFA, Western Asset, Western Asset Limited and Western Asset
Singapore were wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason). As of July 31, 2020, Legg Mason is a subsidiary of Franklin Resources.
|
|
|
38
|
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Western Asset High Income Fund II Inc. 2021 Annual Report
|
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management
fee, calculated daily and paid monthly, at an annual rate of 0.80% of the Funds average weekly net assets plus the proceeds of any outstanding borrowings used for leverage and any proceeds from the issuance of preferred stock.
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund.
Western Asset Limited and Western Asset Singapore provide certain subadvisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated debt securities. Western
Asset Limited and Western Asset Singapore do not receive any compensation from the Fund and are paid by Western Asset for their services to the Fund. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net
management fee it receives from the Fund. In turn, Western Asset pays Western Asset Limited and Western Asset Singapore a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that Western Asset
allocates to each such non-U.S. subadviser to manage.
During periods in which the Fund utilizes financial
leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Funds assets, including those investments purchased with leverage.
During the year ended April 30, 2021, fees waived and/or expenses reimbursed amounted to $2,819.
As of July 31, 2020, all officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund. Prior to July 31, 2020, all officers and
one Director of the Fund were employees of Legg Mason and did not receive compensation from the Fund.
3. Investments
During the year ended April 30, 2021, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S.
Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
U.S. Government &
Agency Obligations
|
|
Purchases
|
|
$
|
303,755,995
|
|
|
$
|
31,170,234
|
|
Sales
|
|
|
506,333,426
|
|
|
|
38,662,475
|
|
At April 30, 2021, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of
investments for federal income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
|
|
Securities
|
|
$
|
537,248,124
|
|
|
$
|
84,390,554
|
|
|
$
|
(15,912,487)
|
|
|
$
|
68,478,067
|
|
Forward foreign currency contracts
|
|
|
|
|
|
|
66,596
|
|
|
|
(16,225)
|
|
|
|
50,371
|
|
|
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
39
|
Notes to financial statements (contd)
Transactions in reverse repurchase agreements for the Fund during the year ended April 30, 2021 were as follows:
|
|
|
|
|
Average Daily
Balance*
|
|
Weighted Average
Interest Rate*
|
|
Maximum Amount
Outstanding
|
$23,232,147
|
|
0.256%
|
|
$28,301,250
|
*
|
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding.
|
Interest rates on reverse repurchase agreements ranged from 0.130% to 0.720% during the year ended April 30, 2021. Interest expense incurred on reverse
repurchase agreements totaled $59,420.
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and
Liabilities at April 30, 2021.
|
|
|
|
|
ASSET DERIVATIVES1
|
|
|
|
Foreign
Exchange Risk
|
|
Forward foreign currency contracts
|
|
$
|
66,596
|
|
|
|
|
|
|
LIABILITY DERIVATIVES1
|
|
|
|
Foreign
Exchange Risk
|
|
Forward foreign currency contracts
|
|
$
|
16,225
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized
depreciation.
|
The following tables provide information about the effect of derivatives and hedging activities on the Funds
Statement of Operations for the year ended April 30, 2021. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information
about the change in unrealized appreciation (depreciation) resulting from the Funds derivatives and hedging activities during the period.
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
Foreign
Exchange Risk
|
|
Forward foreign currency contracts
|
|
$
|
(130,166)
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
Foreign
Exchange Risk
|
|
Forward foreign currency contracts
|
|
$
|
111,036
|
|
|
|
|
40
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
During the year ended April 30, 2021, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
Average Market
Value
|
|
Forward foreign currency contracts (to buy)
|
|
$
|
3,696,374
|
|
Forward foreign currency contracts (to sell)
|
|
|
2,758,757
|
|
The following table presents the Funds OTC derivative assets and liabilities by counterparty net of amounts available for
offset under an ISDA Master Agreement and net of the related collateral pledged (received) by the Fund as of April 30, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Gross Assets
Subject to
Master
Agreements1
|
|
|
Gross
Liabilities
Subject to
Master
Agreements1
|
|
|
Net Assets
(Liabilities)
Subject to
Master
Agreements
|
|
|
Collateral
Pledged
(Received)
|
|
|
Net
Amount2
|
|
Citibank N.A.
|
|
$
|
66,596
|
|
|
|
|
|
|
$
|
66,596
|
|
|
|
|
|
|
$
|
66,596
|
|
Goldman Sachs Group Inc.
|
|
|
|
|
|
$
|
(16,225)
|
|
|
|
(16,225)
|
|
|
|
|
|
|
|
(16,225)
|
|
Total
|
|
$
|
66,596
|
|
|
$
|
(16,225)
|
|
|
$
|
50,371
|
|
|
|
|
|
|
$
|
50,371
|
|
1
|
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
|
2 Represents the net amount receivable
(payable) from (to) the counterparty in the event of default.
5. Tender offer
On June 22, 2020, the Funds Board of Directors (the Board) authorized (subject to certain conditions) a cash tender offer for up to 35% of
the outstanding common stock (Shares) of the Fund at a price per Share equal to 99.5% of the Funds net asset value per Share as of the business day immediately following the expiration date of the tender offer. On October 19,
2020, the Fund commenced its tender offer, which expired on November 16, 2020. On November 19, 2020, the Fund announced the final results of the tender offer. A total of 25,577,060 Shares were duly tendered and not withdrawn, representing
approximately 30% of the Funds outstanding Shares. The Shares accepted for tender were repurchased at a price of $7.01 equal to 99.5% of the per Share net asset value, $7.05, as of the close of the regular trading session of the New York Stock
Exchange on November 17, 2020. Payment for such Shares was made on November 19, 2020. Shares that were not tendered remain outstanding.
6. Loan
The Fund has a revolving credit agreement with Pershing LLC (Credit
Agreement) that allows the Fund to borrow up to an aggregate amount of $300,000,000, subject to approval by Pershing LLC, and renews daily for a 180-day term unless notice to the contrary is given to the
Fund. The interest on the loan is calculated at a variable rate based on the one-month LIBOR plus any applicable margin. On May 27, 2021, the Fund amended its credit agreement with Pershing LLC. Under the
amendment, effective June 20, 2021, the Fund pays interest on borrowings calculated based on the Overnight Bank Funding Rate plus applicable margin. The Overnight Bank Funding Rate means the Overnight Bank Funding Rate as reported by the New
York Federal Reserve in the FR2420 Report of Selected Money Market Rates or any
|
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
41
|
Notes to financial statements (contd)
successor report or website. To the extent of the borrowing outstanding, the Fund is required to maintain collateral in a special custody
account at the Funds custodian on behalf of Pershing LLC. The Funds Credit Agreement contains customary covenants that, among other things, may limit the Funds ability to pay distributions in certain circumstances, incur additional
debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the Credit Agreement may be
subject to early termination under certain conditions and may contain other provisions that could limit the Funds ability to utilize borrowing under the agreement. Interest expense related to this loan for the year ended April 30, 2021
was $1,540,746. For the year ended April 30, 2021, the Fund had an average daily loan balance outstanding of $178,800,000 and the weighted average interest rate was 0.86%. At April 30, 2021, the Fund had $158,000,000 of borrowings
outstanding.
7. Distributions subsequent to April 30, 2021
The following distributions have been declared by the Funds Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
4/23/2021
|
|
|
5/3/2021
|
|
|
$
|
0.0490
|
|
5/21/2021
|
|
|
6/1/2021
|
|
|
$
|
0.0490
|
|
6/23/2021
|
|
|
7/1/2021
|
|
|
$
|
0.0490
|
|
7/23/2021
|
|
|
8/2/2021
|
|
|
$
|
0.0490
|
|
8/24/2021
|
|
|
9/1/2021
|
|
|
$
|
0.0490
|
|
8. Stock repurchase program
On November 16, 2015, the Fund announced that the Funds Board of Directors had authorized the Fund to repurchase in the open market up to approximately 10% of the Funds outstanding common stock
when the Funds shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes may enhance stockholder
value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the year ended April 30, 2021, the Fund did not repurchase any shares.
Since the commencement of the stock repurchase program through April 30, 2021, the Fund repurchased 1,964,984 shares or 2.28% of its common shares outstanding
for a total amount of $10,774,478.
|
|
|
42
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
9. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended April 30, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
34,735,425
|
|
|
$
|
40,900,287
|
|
Tax return of capital
|
|
|
7,277,376
|
|
|
|
7,578,964
|
|
Total distributions paid
|
|
$
|
42,012,801
|
|
|
$
|
48,479,251
|
|
As of April 30, 2021, the components of distributable earnings (loss) on a tax basis were as follows:
|
|
|
|
|
Deferred capital losses*
|
|
$
|
(200,123,833)
|
|
Other book/tax temporary differences(a)
|
|
|
(3,134,599)
|
|
Unrealized appreciation (depreciation)(b)
|
|
|
68,524,502
|
|
Total distributable earnings (loss) net
|
|
$
|
(134,733,930)
|
|
*
|
These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first
day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains. These losses must be utilized before any of the Funds capital loss carryforward may be utilized.
|
(a)
|
Other book/tax temporary differences are attributable to the tax deferral of losses on straddles, the realization for tax purposes of unrealized gains (losses)
on foreign currency contracts, the difference between cash and accrual basis distributions paid, book/tax differences in the accrual of interest income on securities in default and book/tax differences in the timing of the deductibility of various
expenses.
|
(b)
|
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax
deferral of losses on wash sales, the difference between book and tax amortization methods for premium on fixed income securities and other book/tax basis adjustments.
|
10. Recent accounting pronouncement
In March 2020, the Financial Accounting Standards Board
issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (the ASU). The
amendments in the ASU provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate and other interbank-offered based
reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and
believes the adoption of this ASU will not have a material impact on the financial statements.
11. Other matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as coronavirus) has continued to rapidly
spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not
known. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively impact the Funds performance. In addition, the outbreak of
|
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
|
43
|
Notes to financial statements (contd)
COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services
provided to the Fund by its service providers.
***
The Funds investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or LIBOR, which is the offered rate for short-term
Eurodollar deposits between major international banks. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of (i) the overnight and
one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023 and (ii) all other LIBOR settings,
including the one-week and two-month USD LIBOR settings, immediately following the LIBOR publication on Friday, December 31, 2021. There remains uncertainty
regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Funds transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the
Funds investments cannot yet be determined.
|
|
|
44
|
|
Western Asset High Income Fund II Inc. 2021 Annual Report
|
Report of independent registered public accounting firm
To the Board of Directors and Shareholders of Western Asset High
Income Fund II Inc.
|
|
|
Independent Directors
|
|
|
Robert D. Agdern
|
|
|
Year of birth
|
|
1950
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison, Class I
|
Term of office1 and length of time served
|
|
Since 2015
|
Principal occupation(s) during the past five years
|
|
Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002
to 2016); formerly, Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special
assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
Carol L. Colman
|
|
|
Year of birth
|
|
1946
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class III
|
Term of office1 and length of time served
|
|
Since 2002
|
Principal occupation(s) during the past five years
|
|
President, Colman Consulting Company (consulting)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
48
|
|
Western Asset High Income Fund II Inc.
|
|
|
|
Independent
Directors
(contd)
|
Daniel P. Cronin
|
|
|
Year of birth
|
|
1946
|
Position(s) held with Fund1
|
|
Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class I
|
Term of office1 and length of time served
|
|
Since 2007
|
Principal occupation(s) during the past five years
|
|
Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
Paolo M. Cucchi
|
Year of birth
|
|
1941
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class II
|
Term of office1 and length of time served
|
|
Since 2007
|
Principal occupation(s) during the past five years
|
|
Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and
Professor of French and Italian (2009 to 2014) at Drew University
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
None
|
|
William R. Hutchinson
|
Year of birth
|
|
1942
|
Position(s) held with Fund1
|
|
Lead Independent Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class III
|
Term of office1 and length of time served
|
|
Since 2003
|
Principal occupation(s) during the past five years
|
|
President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
Director (since 1994) and formerly, Non-Executive Chairman of the Board (December 2009 to April 2020),
Associated Banc-Corp. (financial services company)
|
|
|
|
Western Asset High Income Fund II Inc.
|
|
49
|
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
Independent
Directors
(contd)
|
Eileen A. Kamerick
|
|
|
Year of birth
|
|
1958
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee, Class I
|
Term of office1 and length of time served
|
|
Since 2013
|
Principal occupation(s) during the past five years
|
|
Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership
Fellow (since 2016) and financial expert; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, Washington University in St. Louis and University of
Iowa law schools (since 2007); formerly, Senior Advisor to the Chief Executive Officer and Executive Vice President and Chief Financial Officer of ConnectWise, Inc. (software and services company) (2015 to 2016); Chief Financial Officer, Press Ganey
Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
Director of ACV Auctions Inc. (since 2021); Trustee of AIG Funds and Anchor Series Trust (since 2018); Director of Hochschild Mining plc (precious
metals company) (since 2016); Director of Associated Banc-Corp (financial services company) (since 2007)
|
|
Nisha Kumar
|
|
|
Year of birth
|
|
1970
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class II
|
Term of office1 and length of time served
|
|
Since 2019
|
Principal occupation(s) during the past five years
|
|
Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief
Financial Officer and Chief Administrative Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign
Relations
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
20
|
Other board memberships held by Director during the past five years
|
|
Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017-2018); and Director of The Asia
Tigers Fund, Inc. (2016 to 2018)
|
|
|
|
50
|
|
Western Asset High Income Fund II Inc.
|
|
|
|
Interested Director and Officer
|
Jane Trust, CFA2
|
|
|
|
|
Year of birth
|
|
1962
|
Position(s) held with Fund1
|
|
Director, Chairman, President and Chief Executive Officer, Class III
|
Term of office1 and length of time served
|
|
Since 2015
|
Principal occupation(s) during the past five years
|
|
Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 146 funds associated with Legg
Mason Partners Fund Advisor, LLC (LMPFA) or its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg
Mason & Co., LLC (Legg Mason & Co.); Senior Vice President of LMPFA (2015)
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
144
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
Additional Officers
|
Fred Jensen
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY
10018
|
|
|
|
|
Year of birth
|
|
1963
|
Position(s) held with Fund1
|
|
Chief Compliance Officer
|
Term of office1 and length of time served
|
|
Since 2020
|
Principal occupation(s) during the past five years
|
|
Director - Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of
Compliance, Legg Mason Office of the Chief Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013);
formerly, Chief Compliance Officer of The Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker-dealer) (2000 to 2003)
|
|
Jenna Bailey
Franklin Templeton
100 First Stamford Place, 5th Floor, Stamford, CT
06902
|
|
|
Year of birth
|
|
1978
|
Position(s) held with Fund1
|
|
Identity Theft Prevention Officer
|
Term of office1 and length of time served
|
|
Since 2015
|
Principal occupation(s) during the past five years
|
|
Senior Compliance Analyst of Franklin Templeton (since 2020); Identity Theft Prevention Officer of certain funds associated with Legg
Mason & Co. or its affiliates (since 2015); formerly, Compliance Officer of Legg Mason & Co. (2013 to 2020); Assistant Vice President of Legg Mason & Co. (2011 to 2020)
|
|
|
|
Western Asset High Income Fund II Inc.
|
|
51
|
Additional information (unaudited) (contd)
Information about Directors and Officers
|
|
|
Additional Officers (contd)
|
George P. Hoyt*
|
|
|
Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT 06902
|
|
|
|
|
Year of birth
|
|
1965
|
Position(s) held with Fund1
|
|
Secretary and Chief Legal Officer
|
Term of office1 and length of time served
|
|
Since 2020
|
Principal occupation(s) during the past five years
|
|
Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain mutual funds associated with Legg
Mason & Co. or its affiliates (since 2020); formerly, Managing Director (2016 to 2020) and Associate General Counsel for Legg Mason & Co. and Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or
its affiliates (2006 to 2020)
|
|
Thomas C. Mandia
Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford,
CT 06902
|
|
|
Year of birth
|
|
1962
|
Position(s) held with Fund1
|
|
Assistant Secretary
|
Term of office1 and length of time served
|
|
Since 2006
|
Principal occupation(s) during the past five years
|
|
Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds
associated with Legg Mason & Co. or its affiliates (since 2006); Secretary of LM Asset Services, LLC (LMAS) (since 2002) and Legg Mason Fund Asset Management, Inc. (LMFAM) (since 2013) (formerly registered investment
advisers); formerly, Managing Director and Deputy General Counsel of Legg Mason & Co. (2005 to 2020)
|
|
Christopher Berarducci
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY
10018
|
|
|
Year of birth
|
|
1974
|
Position(s) held with Fund1
|
|
Treasurer and Principal Financial Officer
|
Term of office1 and length of time served
|
|
Since 2019
|
Principal occupation(s) during the past five years
|
|
Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since
2019) of certain funds associated with Legg Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co.
|
|
|
|
52
|
|
Western Asset High Income Fund II Inc.
|
|
|
|
Additional Officers (contd)
|
Jeanne M. Kelly
|
|
|
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
Year of birth
|
|
1951
|
Position(s) held with Fund1
|
|
Senior Vice President
|
Term of office1 and length of time served
|
|
Since 2007
|
Principal occupation(s) during the past five years
|
|
U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or
its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM
(2013 to 2015)
|
|
Directors who are not interested persons of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as
amended (the 1940 Act).
|
*
|
Effective August 13, 2020, Mr. Hoyt became Secretary and Chief Legal Officer.
|
1
|
The Funds Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and
III Directors expire at the Annual Meetings of Stockholders in the year 2023, year 2021 and year 2022, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Funds executive officers are
chosen each year, to hold office until their successors are duly elected and qualified.
|
2
|
Ms. Trust is an interested person of the Fund as defined in the 1940 Act because Ms. Trust is an officer of LMPFA and certain of its
affiliates.
|
|
|
|
Western Asset High Income Fund II Inc.
|
|
53
|
Annual chief executive officer and principal financial officer
certifications (unaudited)
The Funds Chief Executive Officer (CEO) has submitted to the NYSE the required annual certification and the Fund also has included the
Certifications of the Funds CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Funds Form N-CSR filed with the SEC for the period of this report.
|
|
|
54
|
|
Western Asset High Income Fund II Inc.
|
Other shareholder communications regarding accounting
matters (unaudited)
The Funds Audit Committee has established guidelines and procedures
regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, Accounting Matters). Persons with complaints or concerns regarding Accounting Matters may
submit their complaints to the Chief Compliance Officer (CCO). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Funds Audit Committee
Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 47th Floor
New York,
New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.
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Summary of information regarding the Fund (unaudited)
Investment Objectives
The Funds
primary investment objective is to maximize current income by investing at least 80% of its net assets, plus any borrowings for investment purposes, in high-yield debt securities. As a secondary objective, the Fund seeks capital appreciation to the
extent consistent with its objective of seeking to maximize current income.
Principal Investment Policies and Strategies
Under normal conditions, the Fund will invest at least 80% of its net assets plus any borrowings for investment purposes in high-yield debt
securities. The Funds investment manager is free to invest in debt securities of any maturity. Certain of the debt securities purchased by the Fund may be rated as low as C by Moodys Investor Service
(Moodys) or D by Standard & Poors Ratings Services (S&P) or may be comparable to securities so rated. The Fund is not required to dispose of a debt security if its credit rating or credit
quality declines.
The Fund invests up to 35% of its total assets in debt securities of issuers located in emerging market countries. Emerging
market country is defined to include any country which is, at the time of investment, (i) represented in the J.P. Morgan Emerging Market Bond Index Global or the J.P. Morgan Corporate Emerging Market Bond Index Broad or
(ii) categorized by the World Bank in its annual categorization as middle- or low-income. The Fund may also invest in securities denominated in currencies of emerging market countries. There is no minimum
rating criteria for the Funds investments in such securities. The Funds investments in debt securities of emerging market issuers may include dollar and non-dollar-denominated (a) debt
obligations issued or guaranteed by foreign national, provincial, state, municipal or other governments with taxing authority or by their agencies or instrumentalities, including Brady bonds; (b) debt obligations of supranational entities;
(c) debt obligations and other fixed-income securities of foreign corporate issuers; (d) debt obligations of U.S. corporate issuers; and (e) debt securities issued by corporations that generate significant profits from emerging market
countries.
The Fund may invest up to 30% of its assets in zero coupon securities,
pay-in-kind bonds and deferred payment securities. The Fund may also invest up to 20% of its total assets in common stock, convertible securities, warrants, preferred
stock or other equity securities of U.S. and foreign issuers when consistent with its objectives.
The Fund may invest in high-yield foreign and U.S.
corporate securities including bonds, debentures, notes, commercial paper and preferred stock and will generally be unsecured. The Fund may invest in corporate debt securities with variable rates of interest or which involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e., interest or other payments, often in addition to a fixed rate of return, that are based on the borrowers attainment of specified levels of revenues, sales or
profits
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and thus enable the holder of the
security to share in the potential success of the venture). The Fund may invest in high-yield debt securities with floating interest rates.
The Fund may
invest in Brady bonds, which are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness; participations in loans between emerging market governments and
financial institutions; or fixed-income securities issued by supranational entities such as the World Bank or the European Economic Community.
The Fund
may invest in fixed and floating rate loans arranged through private negotiations between a corporate borrower or a foreign sovereign entity and one or more financial institutions in the form of participations in loans and assignments of all or a
portion of loans from third parties.
In times of adverse market conditions, the Fund may employ alternative strategies, including investment of a
substantial portion of the Funds assets in securities rated higher than Baa by Moodys or BBB by S&P, or in unrated securities of comparable quality. In addition, in order to maintain liquidity, the Fund may
invest up to 35% of its total assets in high- quality short-term money market instruments. Such instruments may include obligations of the U.S. Government or its agencies or instrumentalities; commercial paper of issuers rated, at the time of
purchase, A-2 or better by S&P or P-2 or better by Moodys or which, in the opinion of management, are of comparable creditworthiness; certificates of deposit,
bankers acceptances or time deposits of United States banks with total assets of at least $1 billion (including obligations of foreign branches of such banks) and of the 75 largest foreign commercial banks in terms of total assets
(including domestic branches of such banks); and repurchase agreements with respect to the foregoing obligations.
In times of adverse market conditions,
the Fund may invest its assets without limit in high-quality short-term money market instruments.
The Fund generally utilizes leverage, and is
authorized to use leverage in amounts of up to 33 1/3% of its total assets immediately after such borrowing and/or issuance (including the amount obtained from leverage).
The Fund may, in addition to engaging in the transactions described above, borrow money for temporary or emergency purposes (including, for example, clearance of transactions, share repurchases or payments of
dividends to stockholders) in an amount not exceeding 5% of the value of the funds total assets (including the amount borrowed).
The Fund may
enter into repurchase agreements for cash management purposes. Reverse repurchase agreements and similar investment management techniques that may provide leverage are not subject to the foregoing 33 1/3% limitation so long as the Fund has
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covered its commitment with respect to such techniques by segregating or earmarking liquid assets, entering into offsetting transactions or owning positions
covering related obligations.
The Fund may engage in currency transactions with counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate income or gain. Currency transactions include currency forward contracts, exchange-listed currency futures contracts and options thereon, exchange-listed and OTC options on
currencies and currency swaps.
The Fund may use a variety of derivative instruments as part of its investment strategies or for hedging or risk
management purposes. Examples of derivative instruments that the fund may use include options contracts, futures contracts, options on futures contracts, credit default swaps and other swap agreements. The Fund may purchase and sell futures
contracts, purchase and sell (or write) exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts, enter into
various interest rate and currency transactions and enter into other similar transactions which may be developed in the future to the extent the management determines that they are consistent with the funds investment objectives and policies
and applicable regulatory requirements. The Fund may use any or all of these techniques at any time, and the use of any particular derivative transaction will depend on market conditions.
The Fund may enter into interest rate swaps and may purchase interest rate caps, floors and collars and may sell interest rate caps, floors and collars that it has purchased.
The Fund may also enter into (a) contracts for the purchase or sale for future delivery (futures contracts) of debt securities, aggregates of
securities, indices based upon the prices thereof and other financial indices and (b) put or call options on such futures contracts.
The Fund may
purchase or sell exchange-traded or over-the-counter put or call options on securities and indices based upon the prices, yields or spreads of securities.
The Fund may purchase securities on a firm commitment basis, including when-issued securities. The Fund may also invest in delayed-delivery securities.
The Fund may lend portfolio securities to brokers or dealers or other financial institutions. The Fund does not currently intend to make loans of portfolio
securities with a value in excess of 33 1/3% of the value of its total assets.
The Fund may invest, without limitation, in illiquid securities, which
are securities that cannot be sold within seven days at a price which the fund would determine to be fair value. The Fund may purchase Rule 144A securities for which there is a secondary market of qualified institutional buyers, as defined in Rule
144A promulgated under the Securities
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Act. The Fund may purchase securities for
which there is a limited trading market or which are subject to restrictions on resale to the public.
The Fund may invest in dollar rolls, asset-backed
securities and mortgage-backed securities.
Principal Risk Factors
There is no assurance that the Fund will meet its investment objectives. You may lose money on your investment in the Fund. The value of the Funds shares may go up or down, sometimes rapidly and
unpredictably. Market conditions, financial conditions of issuers represented in the Funds portfolio, investment strategies, portfolio management, and other factors affect the volatility of the Funds shares. An investment in the Fund is
not insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The following section
includes a summary of the principal risks of investing in the Fund.
Investment Risk and Market Risk. An investment in the Fund is subject to
investment risk, including the possible loss of the entire principal amount that you invest. Your investment in the Fund represents an indirect investment in the securities owned by the Fund. The value of these securities may increase or decrease,
at times rapidly and unexpectedly. Your investment in the Fund may at any point in the future be worth less than your original investment even after taking into account the reinvestment of dividends and distributions.
Below Investment Grade Securities (High-Yield) Risk. At any one time, substantially all of the Funds managed assets may be invested in high-yield debt
securities. High yield debt securities are generally subject to greater credit risks than higher-grade debt securities, including the risk of default on the payment of interest or principal. High yield debt securities are considered speculative,
typically have lower liquidity and are more difficult to value than higher grade bonds. High yield debt securities tend to be volatile and more susceptible to adverse events, credit downgrades and negative sentiments and may be difficult to sell at
a desired price, or at all, during periods of uncertainty or market turmoil.
Low Rated and Unrated Securities. The Fund may invest in instruments
that are low rated or unrated. Debt securities of emerging market issuers may be considered to have a credit quality rated below investment grade by internationally recognized credit rating organizations such as Moodys and S&P. Non-investment grade securities (that is, rated Ba1 or lower by Moodys or BB+ or lower by S&P) are commonly referred to as junk bonds and are regarded as predominantly speculative with respect
to the issuers capacity to pay interest and repay principal in accordance with the terms of the obligations and involve major risk exposure to adverse conditions. Some of the emerging market issuer securities held by the Fund, which may not be
paying interest currently or may be in payment default, may be comparable to securities rated as low as C by Moodys or CCC or lower by S&P. These securities are considered to have extremely poor prospects of ever attaining any real
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investment standing, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to pay interest and repay principal when due in
the event of adverse business, financial or economic conditions and/or to be in default or not current in the payment of interest or principal.
Low
rated and unrated debt instruments generally offer a higher current yield than that available from higher grade issues, but typically involve greater risk. Low rated and unrated securities are especially subject to adverse changes in general
economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic downturn or rising interest rates, issuers of low rated and unrated instruments
may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default. Adverse publicity and investor perceptions, whether or not based on fundamental analysis,
may also decrease the values and liquidity of low rated and unrated securities especially in a market characterized by a low volume of trading.
Default Risk. Investments in fixed-income securities are subject to the risk that the issuer of the security could default on its obligations, causing a fund
to sustain losses on those investments. A default could impact both interest and principal payments. High-yield fixed-income securities (commonly known as junk bonds) are considered speculative with respect to the issuers capacity
to pay interest and repay principal in accordance with the terms of the obligations. This means that, compared to issuers of higher rated securities, issuers of medium and lower rated securities are less likely to have the capacity to pay interest
and repay principal when due in the event of adverse business, financial or economic conditions and/or may be in default or not current in the payment of interest or principal.
The market values of medium and lower rated securities tend to be more sensitive to company-specific developments and changes in economic conditions than higher rated securities. The companies that issue these
securities often are highly leveraged, and their ability to service their debt obligations during an economic downturn or periods of rising interest rates may be impaired. In addition, these companies may not have access to more traditional methods
of financing, and may be unable to repay debt at maturity by refinancing. The risk of loss due to default in payment of interest or principal by these issuers is significantly greater than with higher rated securities because medium and lower rated
securities generally are unsecured and subordinated to senior debt.
Default, or the markets perception that an issuer is likely to default, could
reduce the value and liquidity of securities held by the Fund, thereby reducing the value of your investment in the Common Stock. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio
holdings.
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Foreign (Non-U.S.) Investment Risk. A fund that invests in foreign (non-U.S.) securities may experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies. The securities markets of many foreign countries are relatively
small, with a limited number of companies representing a small number of industries. Investments in foreign securities (including those denominated in U.S. dollars) are subject to economic and political developments in the countries and regions
where the issuers operate or are domiciled, or where the securities are traded, such as changes in economic or monetary policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country. Less
information may be publicly available about foreign companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, the
Funds investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and adverse diplomatic developments. In addition, there may be difficulty in obtaining or enforcing a court judgment abroad. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject
to non-U.S. withholding taxes, and special U.S. tax considerations may apply.
The risks of foreign investment
are greater for investments in emerging markets. Emerging market countries typically have economic and political systems that are less fully developed, and that can be expected to be less stable, than those of more advanced countries. Low trading
volumes may result in a lack of liquidity and in price volatility. Emerging market countries may have policies that restrict investment by foreigners, that require governmental approval prior to investments by foreign persons, or that prevent
foreign investors from withdrawing their money at will. An investment in emerging market securities should be considered speculative.
Economic and
Political Risks. The economies of individual emerging market countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected
by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely
affected by economic conditions in the countries with which they trade.
With respect to any emerging market country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes, governmental regulation, social
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instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the value of the Funds investments in
those countries.
Investment Controls; Repatriation. Foreign investment in certain emerging market issuers is restricted or controlled to varying
degrees. These restrictions or controls may at times limit or preclude foreign investment in certain emerging market issuers and increase the costs and expenses of the Fund. Certain emerging market countries require governmental approval prior to
investments by foreign persons in a particular issuer, limit the amount of investment by foreign persons in a particular issuer, limit the investment by foreign persons only to a specific class of securities of an issuer that may have less
advantageous rights than the classes available for purchase by domiciliaries of the countries and/or impose additional taxes on foreign investors. Certain emerging market countries may also restrict investment opportunities in issuers in industries
deemed important to national interests.
Emerging market countries may require governmental approval for the repatriation of investment income, capital
or the proceeds of sales of securities by foreign investors. In addition, if a deterioration occurs in an emerging market countrys balance of payments, the country could impose temporary restrictions on foreign capital remittances. The Fund
could be adversely affected by delays in, or a refusal to grant, any restrictions on investments. Investing in local markets in emerging market countries may require the Fund to adopt special procedures, seek local government approvals or take other
actions, each of which may involve additional costs to the Fund.
Market Illiquidity. No established secondary markets may exist for many of the
emerging market issuer securities in which the Fund may invest. Reduced secondary market liquidity may have an adverse effect on market price and the Funds ability to dispose of particular instruments when necessary to meet its liquidity
requirements or in response to specific economic events such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain emerging market issuer securities may also make it more difficult for the Fund to
obtain accurate market quotations for purposes of valuing its portfolio and calculating its net asset value. Market quotations are generally available on many emerging market issuer securities only from a limited number of dealers and may not
necessarily represent firm bids of those dealers or prices for actual sales.
Currency Devaluations and Fluctuations. The value of investments in
securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency conversion costs and currency fluctuations could erase investment gains or add to investment
losses. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls and speculation. The Fund may be
unable or may choose not to hedge its foreign currency exposure.
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Financial Information and Standards. Issuers in emerging market countries generally are subject to accounting,
auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. issuers. In particular, the assets and profits appearing on the financial statements of an emerging market country issuer may
not reflect its financial position or results of operations in the way they would be reflected had the financial statements been prepared in accordance with U.S. generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuers balance sheet in order to express items in terms of currency of
constant purchasing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by restatements for inflation and may not accurately reflect the real condition of those issuers and
securities markets. Substantially less information may be publicly available about issuers in emerging market countries than is available about U.S. issuers.
Smaller Company Risk. The general risks associated with income-producing securities are particularly pronounced for securities issued by companies with smaller market capitalizations. These companies may
have limited product lines, markets or financial resources or they may depend on a few key employees. As a result, they may be subject to greater levels of credit, market and issuer risk. Securities of smaller companies may trade less frequently and
in lesser volume than more widely held securities and their values may fluctuate more sharply than other securities. Companies with medium-sized market capitalizations may have risks similar to those of
smaller companies.
Interest Rate Risk. The market price of the Funds investments will change in response to changes in interest rates and
other factors. During periods of declining interest rates, the market price of fixed income securities generally rises. Conversely, during periods of rising interest rates, the market price of such securities generally declines. The magnitude of
these fluctuations in the market price of fixed income securities is generally greater for securities with longer maturities. Additionally, such risk may be greater during the current period of historically low interest rates. Fluctuations in the
market price of the Funds securities will not affect interest income derived from securities already owned by the Fund, but will be reflected in the Funds net asset value. The Fund may utilize certain strategies, including investments in
structured notes or interest rate swap or cap transactions, for the purpose of reducing the interest rate sensitivity of the portfolio and decreasing the Funds exposure to interest rate risk, although there is no assurance that it will do so
or that such strategies will be successful.
Credit Risk and Counterparty Risk. If an issuer or guarantor of a security held by the Fund or a
counterparty to a financial contract with the Fund defaults or its credit is downgraded, or is perceived to be less creditworthy, or if the value of the assets underlying a security
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declines, the value of your investment will typically decline. Changes in actual or perceived creditworthiness may occur quickly. The Fund could be delayed or
hindered in its enforcement of rights against an issuer, guarantor or counterparty. Subordinated securities are more likely to suffer a credit loss than non-subordinated securities of the same issuer and will
be disproportionately affected by a default, downgrade or perceived decline in creditworthiness.
Reinvestment Risk. Reinvestment risk is the risk
that income from the Funds portfolio will decline if and when the Fund invests the proceeds from matured, traded or called debt obligations at market interest rates that are below the portfolios current earnings rate. A decline in income
could affect the price of Common Stock or the Funds overall return.
Liquidity Risk. The Fund has no limit on its ability to purchase
illiquid securities. Liquidity risk exists when particular investments are difficult to sell. Securities may become illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid investments, the
portfolio may be harder to value, especially in changing markets, and if the Fund is forced to sell these investments in order to segregate assets or for other cash needs, the Fund may suffer a loss.
Duration Risk. The duration of a fixed-income security is a measure of the portfolios sensitivity to changes in interest rates. Prices of fixed-income
securities with longer effective maturities are more sensitive to interest rate changes than those with shorter effective maturities. Holding long duration investments may expose the Fund to certain magnified risks. These include interest rate risk,
credit risk and liquidity risk, as discussed above.
Management Risk. The Fund is subject to management risk because it is an actively managed
investment portfolio. The Manager and each individual portfolio manager will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Leverage Risk. The Fund generally utilizes leverage, and is authorized to use leverage in amounts of up to approximately 33 1/3% of its total
assets immediately after such borrowing and/or issuance, and under current market conditions intends to continue to use leverage. The value of your investment may be more volatile if the fund borrows or uses instruments, such as derivatives, that
have a leveraging effect on the funds portfolio. Other risks described in the Prospectus also will be compounded because leverage generally magnifies the effect of a change in the value of an asset and creates a risk of loss of value on a
larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations created by the use of leverage or derivatives. The use of leverage is considered to be a speculative
investment practice and may result in the loss of a substantial amount, and possibly all, of the funds assets. In
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addition, the funds portfolio will be leveraged if it exercises its right to delay payment on a redemption, and
losses will result if the value of the funds assets declines between the time a redemption request is deemed to be received by the fund and the time the fund liquidates assets to meet redemption requests.
Derivatives Risk. The Fund may utilize a variety of derivative instruments for investment or risk management purposes, such as options, futures contracts,
swap agreements and credit default swaps. Using derivatives can increase Fund losses and reduce opportunities for gains when market prices, interest rates, currencies, or the derivatives themselves behave in a way not anticipated by the Fund. Using
derivatives also can have a leveraging effect and increase Fund volatility. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Derivatives may not be available at the time or price desired,
may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the Fund. Derivatives are generally subject to the risks applicable to the assets, rates, indices or other indicators underlying the derivative. The
value of a derivative may fluctuate more than the underlying assets, rates, indices or other indicators to which it relates. Use of derivatives may have different tax consequences for the Fund than an investment in the underlying security, and those
differences may affect the amount, timing and character of income distributed to shareholders. The U.S. government and foreign governments are in the process of adopting and implementing regulations governing derivatives markets, including mandatory
clearing of certain derivatives, margin and reporting requirements. The ultimate impact of the regulations remains unclear. Additional regulation of derivatives may make derivatives more costly, limit their availability or utility, otherwise
adversely affect their performance or disrupt markets.
The Securities and Exchange Commission adopted a new rule on October 28, 2020 that mandates
that a funds derivatives risk management program provide for specific items as required by the rule, including compliance with a VaR test. Compliance with these new requirements will be required after a transition period that ends on
August 19, 2022. Following the compliance date, these requirements may limit the ability of the Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These
requirements may increase the cost of the Funds investments in derivatives, which could adversely affect shareholders.
Credit default swap
contracts involve heightened risks and may result in losses to the Fund. Credit default swaps may be illiquid and difficult to value. When the Fund sells credit protection via a credit default swap, credit risk increases since the Fund has exposure
to both the issuer whose credit is the subject of the swap and the counterparty to the swap.
Dollar Rolls, Asset-Backed Securities and
Mortgage-Backed Securities Risk. The Fund may invest in dollar rolls, asset-backed securities and mortgage-backed securities. Under a dollar roll transaction, the Fund sells securities for delivery in the current month, or sells
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securities it has purchased on a to-be-announced basis, and
simultaneously contracts to repurchase substantially similar (same type and coupon) securities on a specified future date. During the roll period, the Fund forgoes principal and interest paid on the purchased securities. Dollar rolls are speculative
techniques involving leverage, and are considered borrowings by the Fund if the Fund does not establish and maintain a segregated account. In addition, dollar rolls involve the risk that the market value of the securities the Fund is obligated to
repurchase may decline below the repurchase price. In the event the buyer of securities under a dollar roll files for bankruptcy or becomes insolvent, the Funds use of proceeds may be restricted pending a determination by the other party, or
its trustee or receiver, whether to enforce the Funds obligation to repurchase the securities. Successful use of dollar rolls may depend upon the ability of the Funds investment manager to correctly predict interest rates and
prepayments. There is no assurance that dollar rolls can be successfully employed.
Mortgage-backed securities may be issued by private companies or by
agencies of the U.S. Government and represent direct or indirect participations in, or are collateralized by and payable from, mortgage loans secured by real property. Asset-backed securities represent participations in, or are secured by and
payable from, assets such as installment sales or loan contracts, leases, credit card receivables and other categories of receivables. Certain debt instruments may only pay principal at maturity or may only represent the right to receive payments of
principal or payments of interest on underlying pools of mortgages, assets or government securities, but not both. The value of these types of instruments may change more drastically than debt securities that pay both principal and interest during
periods of changing interest rates. The Fund may obtain a below market yield or incur a loss on such instruments during periods of declining interest rates. Principal only and interest only instruments are subject to extension risk. For mortgage
derivatives and structured securities that have imbedded leverage features, small changes in interest or prepayment rates may cause large and sudden price movements. Mortgage derivatives may be illiquid and hard to value in declining markets.
Interest Rate Transactions Risk. The Fund may enter into a swap or cap transaction to attempt to protect itself from increasing interest expenses
on borrowings resulting from increasing short-term interest rates or dividend expenses on any preferred shares. A decline in interest rates may result in a decline in net amounts receivable by the Fund from the counterparty under the swap or cap (or
an increase in the net amounts payable by the Fund to the counterparty under the swap), which may result in a decline in the net asset value of the Fund.
Risks of Warrants and Rights. Warrants and rights are subject to the same market risks as stocks, but may be more volatile in price. Warrants and rights do
not carry the right to dividends or voting rights with respect to their underlying securities, and they do not
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represent any rights in the assets of the issuer. An investment in warrants or rights may be considered speculative.
In addition, the value of a warrant or right does not necessarily change with the value of the underlying security and a warrant or right ceases to have value if it is not exercised prior to its expiration date. The purchase of warrants or rights
involves the risk that the Fund could lose the purchase value of a warrant or right if the right to subscribe to additional shares is not exercised prior to the warrants or rights expiration. Also, the purchase of warrants and rights
involves the risk that the effective price paid for the warrant or right added to the subscription price of the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the price of
the underlying security.
Market Price Discount from Net Asset Value. Shares of closed-end investment
companies frequently trade at a discount from their net asset value. This risk is separate and distinct from the risk that the Funds net asset value could decrease as a result of its investment activities and may be a greater risk to investors
expecting to sell their Common Stock in a relatively short period following completion of this offering. Whether investors will realize gains or losses upon the sale of the Common Stock will depend not upon the Funds net asset value but upon
whether the market price of the Common Stock at the time of sale is above or below the investors purchase price for the Common Stock.
Inflation/Deflation Risk. Inflation risk is the risk that the value of certain assets or income from the Funds investments will be worth less in the
future as inflation decreases the value of money. As inflation increases, the real value of the Common Stock and distributions on the Common Stock can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing
costs associated with the Funds use of leverage would likely increase, which would tend to further reduce returns to stockholders. Deflation risk is the risk that prices throughout the economy decline over timethe opposite of inflation.
Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more likely, which may result in a decline in the
value of the Funds portfolio.
Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and
unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or
other factors, political developments, investor sentiment, the global and domestic effects of a pandemic, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the
world are increasingly interconnected. Economic, financial or political events, trading and tariff arrangements, public health events, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on
global economies or markets. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to the
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Western Asset High Income Fund II Inc.
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67
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Summary of information regarding the Fund (unaudited) (contd)
countries directly affected, the value and liquidity of the Funds investments may be negatively affected.
The rapid and global spread of a highly contagious novel coronavirus respiratory disease, designated COVID-19, first
detected in China in December 2019, has resulted in extreme volatility in the financial markets and severe losses; reduced liquidity of many instruments; restrictions on international and, in some cases, local travel, significant disruptions to
business operations (including business closures); strained healthcare systems; disruptions to supply chains, consumer demand and employee availability; and widespread uncertainty regarding the duration and long-term effects of this pandemic. Some
sectors of the economy and individual issuers have experienced particularly large losses. In addition, the COVID-19 pandemic may result in a sustained economic downturn or a global recession, domestic and
foreign political and social instability, damage to diplomatic and international trade relations and increased volatility and/or decreased liquidity in the securities markets. The ultimate economic fallout from the pandemic, and the long-term impact
on economies, markets, industries and individual issuers, are not known. Certain risks, such as interest rate risk, credit risk, liquidity risk and counterparty risk, may be heightened as a result of such market events. The U.S. government and the
Federal Reserve, as well as certain foreign governments and central banks, are taking extraordinary actions to support local and global economies and the financial markets in response to the COVID-19 pandemic,
including by pushing interest rates to very low levels. This and other government intervention into the economy and financial markets to address the COVID-19 pandemic may not work as intended, particularly if
the efforts are perceived by investors as being unlikely to achieve the desired results. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively
impact the Funds performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
Legislative and Regulatory Risk. Prices for high-yield securities may be affected by legislative and regulatory developments which could
adversely affect the Funds net asset value and investment practices, the secondary market for high-yield securities, the financial condition of issuers of these securities and the value of outstanding high-yield securities. These risks
generally are higher than issuers in emerging market countries.
Anti-Takeover Provisions Risk. The Funds Charter and Bylaws include
provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term objectives, including by converting the Fund to open-end status or changing the
composition of the Board, that may be detrimental to the Funds ability to achieve its primary investment objective. Such provisions may limit the ability of shareholders to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the Fund. There can be no assurance, however, that such
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68
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Western Asset High Income Fund II Inc.
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provisions will be sufficient to deter activist investors that seek to cause the Fund to take actions that may not be
aligned with the interests of long-term shareholders.
LIBOR Risk. The Funds investments, payment obligations, and financing terms may be
based on floating rates, such as the London Interbank Offered Rate, or LIBOR, which is the offered rate for short-term Eurodollar deposits between major international banks. On March 5, 2021, the ICE Benchmark Administration, the
administrator of LIBOR, stated that it will cease the publication of (i) the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately
following the LIBOR publication on Friday, June 30, 2023 and (ii) all other LIBOR settings, including the one-week and two-month USD LIBOR settings,
immediately following the LIBOR publication on Friday, December 31, 2021. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Funds transactions and the financial
markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Funds investments cannot yet be determined.
Operational Risk. The valuation of the Funds investments may be negatively impacted because of the operational risks arising from factors such as
processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It is not possible to
identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted as a result.
Cybersecurity Risk. Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain access to Fund assets,
Fund or proprietary information, cause the Fund, Western Asset, the Sub-Advisers and/or their service providers to suffer data breaches, data corruption or loss of operational functionality or prevent fund
investors from purchasing, redeeming or exchanging shares or receiving distributions. The Fund, Western Asset, and the Sub-Advisers have limited ability to prevent or mitigate cybersecurity incidents affecting
third party service providers, and such third party service providers may have limited indemnification obligations to the fund or the manager. Cybersecurity incidents may result in financial losses to the fund and its shareholders, and substantial
costs may be incurred in order to prevent any future cybersecurity incidents. Issuers of securities in which the fund invests are also subject to cybersecurity risks, and the value of these securities could decline if the issuers experience
cybersecurity incidents.
More Information
For a complete list of the Funds fundamental investment restrictions and more detailed descriptions of the Funds investment policies, strategies and risks, see the Funds registration statement on
Form N-14 that was declared effective by the SEC on July 25,
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Western Asset High Income Fund II Inc.
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69
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Summary of information regarding the Fund (unaudited) (contd)
2008. The Funds fundamental investment restrictions may not be changed without the approval of the holders of a majority of the outstanding voting securities,
as defined in the 1940 Act.
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70
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Western Asset High Income Fund II Inc.
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Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and
return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the Plan Agent), in additional shares of Common Stock under the Funds
Dividend Reinvestment Plan (the Plan). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare
Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined
as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date
is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal
to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close
of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading
day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders;
except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the
Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases,
the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the
day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by
the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e.,
opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date;
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Western Asset High Income Fund II Inc.
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71
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Dividend reinvestment plan
(unaudited) (contd)
otherwise such withdrawal will be effective as soon as practicable after the Plan Agents investment of the most recently declared dividend or distribution on
the Common Stock.
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is
authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a
pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your
investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Funds net asset value declines. While
dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends
and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated,
amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon
any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf.
Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.
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72
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Western Asset High Income Fund II Inc.
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Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended April 30, 2021:
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Record date:
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Monthly
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Monthly
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Payable date:
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May 2020 through
December 2020
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January 2021 through
April 2021
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Ordinary Income:
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Qualified Dividend Income for Individuals
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2.79
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%
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8.11
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%*
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Dividends Qualifying for the Dividends
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Received Deduction for Corporations
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2.79
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%
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8.11
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%*
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Tax Return of Capital
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84.39
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%**
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The following information is applicable to non-U.S. resident
shareholders:
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Record date:
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Monthly
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Daily
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Payable date:
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May 2020 through
December 2020
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January 2021 through
April 2021
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Qualified Net Interest Income
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38.00%
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100.00%*
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The percentages indicated above represent the portion of the ordinary income distributions paid monthly by the Fund that are
Interest-related dividends and eligible for exemption from U.S. withholding tax for nonresident shareholders and foreign corporations.
*
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Expressed as a percentage of the distributions paid reduced by the return of capital.
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**
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Expressed as a percentage of the cash distributions paid.
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Western Asset High Income Fund II Inc.
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73
|
Western Asset
High Income Fund II Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
George P.
Hoyt*
Secretary and Chief Legal Officer
Thomas
C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
*
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Effective August 13, 2020, Mr. Hoyt became Secretary and Chief Legal Officer.
|
Western Asset High Income Fund II Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Western Asset Management Company, LLC
Western Asset Management Company Limited
Western Asset Management
Company Pte. Ltd.
Custodian
The
Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered
public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher &
Bartlett LLP
425 Lexington Avenue
New York, NY 10017
New York Stock
Exchange Symbol
HIX
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the Privacy Notice) addresses the Legg Mason Funds privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end
funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and
maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
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Personal information included on applications or other forms;
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Account balances, transactions, and mutual fund holdings and positions;
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Bank account information, legal documents, and identity verification documentation;
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Online account access user IDs, passwords, security challenge question responses; and
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individuals total debt,
payment history, etc.).
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How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law.
The Funds may disclose information about you to:
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Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business, or to comply with obligations to
government regulators;
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Service providers, including the Funds affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;
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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds employees, agents and affiliates and
service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;
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The Funds representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations
to government regulators;
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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NOT PART OF THE ANNUAL REPORT
|
Legg Mason Funds Privacy and Security Notice (contd)
Except as otherwise permitted by applicable law, companies acting on the Funds
behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them
to perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory
request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds
practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds Privacy and Security Practices
The Funds will notify
you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds Security Practices
The
Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds internal data security policies restrict access to your nonpublic personal information to authorized
employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal
information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds
will attempt to notify you as necessary, so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the
most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information
accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds privacy practices, or our use of your nonpublic personal information, write the Funds
using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds website at www.leggmason.com, or contact the Fund at
1-888-777-0102.
Revised April
2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is nonpublic personal information subject to federal law, residents of California may, in certain circumstances, have additional rights under the
California Consumer Privacy Act (CCPA). For example, if you are a broker,
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NOT PART OF THE ANNUAL REPORT
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Legg Mason Funds Privacy and Security Notice (contd)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the
account of any other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your
personal information (as defined by the CCPA).
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In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces of personal
information we have collected about you.
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You also have the right to request the deletion of the personal information collected or maintained by the Funds.
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If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth below. The
rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described below. We
do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a
request on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or
other applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an
agent if suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this
Privacy Policy, the Legg Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact Information
Address:
Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2020
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NOT PART OF THE ANNUAL REPORT
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Western Asset High Income Fund II Inc.
Western Asset High Income Fund II Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first and third quarters of each
fiscal year as an exhibit to its reports on Form N-PORT. The Funds Forms N-PORT are available on the SECs website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the
policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.lmcef.com and (3) on the SECs website at
www.sec.gov.
This report is transmitted to the shareholders of Western Asset High Income Fund II Inc. for their information. This is not a prospectus,
circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
WAS04049 6/21 SR21-4174