The changes of the fair value of investments for which the Funds have used Level 3 inputs to determine the fair value
are as follows:
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Blackstone / GSO Funds
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Notes to Financial Statements
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June 30, 2013 (Unaudited)
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Blackstone / GSO Strategic Credit Fund
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Fair Value
|
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Valuation Technique(s)
|
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Unobservable Input(s)
|
Assets
|
|
|
|
|
|
|
|
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Floating Rate Loan Interests
|
|
$
|
175,458,860
|
|
|
Third-party vendor pricing service
|
|
Vendor quotes
|
Corporate Bonds
|
|
$
|
3,180,000
|
|
|
Third-party vendor pricing service
|
|
Vendor quotes
|
The Funds evaluate transfers into or out of Level 1, 2 and 3 as of the end of the reporting period. There were no
transfers between Level 1 and 2 during the period. Securities were transferred from Level 2 to Level 3 because of a lack of observable market data due to decrease in market activity and information for these securities. Other securities were moved
from Level 3 to Level 2 as observable inputs were available for purposes of valuing those assets.
Securities Transactions and Investment
Income:
Securities transactions are recorded on trade date for financial reporting purposes and amounts payable or receivable for trades not settled at the time of period end are reflected as liabilities and assets, respectively. Interest
income, including accretion of discount and amortization of premium, is recorded on the accrual basis. Realized gains and losses from securities transactions and foreign currency transactions, if any, are recorded on the basis of identified cost and
stated separately in the Statement of Operations.
When the Funds sell a floating rate loan interest they may pay an agency fee. The Funds earn
facility and other fees on floating rate loan interests, and facility fees are typically amortized to income over the term of the loan. Consent and amendment fees are also recorded to income as earned. All of these fees are shown on the Statement of
Operations under Facility and other fees.
Federal Income Taxes:
It is the policy of the Funds to continue to qualify as regulated investment
companies by complying with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies, and to distribute substantially all of their earnings to their shareholders. While no
federal income tax provision is required, in early 2013 BGX paid an excise tax liability of $32,140 relating to the tax year 2012. No federal income or excise tax provision is required for BSL or BGB.
Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These
differences are primarily due to differing treatments of income and gains on various investment securities held by the Funds, timing differences and differing characterization of distributions made by the Funds as a whole.
As of and during the six month period ended June 30, 2013, the Funds did not have a liability for any unrecognized tax benefits. The Funds file U.S.
federal, state, and local tax returns as required. The Funds tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations which is generally three years after the filing of
the tax return for federal purposes and four years for most state returns. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
Distributions to Shareholders:
The Funds make monthly cash distributions of all or a portion of their net investment income to common
shareholders. The Funds will distribute to common shareholders at least annually all or substantially all of their net investment income after the payment of dividends and interest, if any, owed with respect to outstanding preferred shares and/or
borrowings. The Funds intend to pay any capital gains distributions at least annually. If BSL realizes a long-term capital gain, it will be required to allocate such gain between the common shares and term preferred shares issued by BSL in
proportion to the total dividends paid to each class for the year in which the income is realized.
NOTE 3. MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER
AGREEMENTS
The Adviser, a
wholly-owned subsidiary of GSO Capital Partners LP (collectively with its affiliates, GSO), is a registered investment adviser and is responsible for the day-to-day management of, and providing administrative and compliance oversight
services to, the Funds. GSO is an affiliate of The Blackstone Group L.P. (collectively with its affiliates, Blackstone).
For BSL, the
Adviser receives a monthly fee at the annual rate of 1.00% of the average daily value of BSLs total assets (including any assets attributable to any leverage used) minus the sum of the BSLs accrued liabilities (other than Fund
liabilities incurred for any leverage) (Managed Assets). For BGX, the Adviser receives a monthly fee at the annual rate of 1.20% of the average daily value of BGXs net assets (total assets of BGX minus liabilities including accrued
expenses or dividends). For BGB, the Adviser receives a monthly fee at the annual rate of 1.00% of the average daily value of BGBs Managed Assets.
Each Fund pays every Trustee who is not a director, officer, employee, or affiliate of GSO or ALPS (as defined below), a fee of $16,667 per annum, plus
$2,500 per joint meeting of the Board of Trustees. The Chairman of the Audit Committee and Chairman of the Nominating and Governance Committee also each receive $2,500 per annum from each fund. The Lead Independent Trustee receives $2,667 from each
Fund. In addition, for each joint meeting of a committee of the Board of Trustees that does not occur on a regular meeting or special meeting of the Funds, the Funds will each pay every committee member $750 for each such committee meeting attended.
If such committee meeting is not held jointly, the respective
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Blackstone / GSO Funds
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Notes to Financial Statements
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June 30, 2013 (Unaudited)
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Fund will pay each committee member $1,000 for each such meeting attended. The Funds will also
reimburse independent Trustees for travel and out-of-pocket expenses incurred in connection with such meetings.
ALPS Fund Services, Inc.
(ALPS) serves as administrator to the Funds. Under the administration agreement, ALPS is responsible for calculating the net asset value of the common shares and generally managing the administrative affairs of the Funds. For BSL and
BGB, ALPS receives a monthly fee at the annual rate of 0.15% of the average daily value of Managed Assets, subject to a minimum annual fee of $350,000, plus out-of-pocket expenses. For BGX, ALPS receives a monthly fee at the annual rate of 0.18% of
the average daily value of BGXs net assets, also subject to a minimum annual fee of $350,000, plus out-of-pocket expenses. ALPS is not considered an affiliate of the Funds, as defined under the 1940 Act.
The Bank of New York Mellon serves as BSLs and BGBs custodian and JP Morgan Chase Bank, National Association serves as BGXs custodian.
Computershare Shareowner Services, LLC, serves as the Funds transfer agent. The Bank of New York Mellon, Computershare Shareowner Services, LLC, and JP Morgan Chase are not considered affiliates of the Funds as defined under the 1940 Act.
NOTE 4. SECURITIES TRANSACTIONS
Investment transactions for the six months ended June 30, 2013, excluding temporary short-term investments, were as follows:
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Fund
|
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Cost of Investments
Purchased
|
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Proceeds from
Investments Sold
|
|
Blackstone / GSO Senior Floating Rate Term Fund
|
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$
|
234,526,215
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$
|
223,330,836
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Blackstone / GSO Long-Short Credit Income Fund
|
|
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144,161,087
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|
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137,383,535
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Blackstone / GSO Strategic Credit Fund
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|
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716,049,967
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|
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444,063,613
|
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NOTE 5. CAPITAL
The Funds have authorized an unlimited number of $0.001 par value common shares.
Transactions in shares were as follows:
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Blackstone / GSO Senior Floating Rate Term Fund
|
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For the Six
Months Ended
June 30, 2013
(Unaudited)
|
|
|
For the
Year Ended
December 31, 2012
|
|
Common shares outstanding - beginning of period
|
|
|
15,193,991
|
|
|
|
15,166,193
|
|
Common shares issued as reinvestment of dividends
|
|
|
11,448
|
|
|
|
27,798
|
|
Common shares outstanding - end of period
|
|
|
15,205,439
|
|
|
|
15,193,991
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|
|
|
|
|
|
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|
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Blackstone / GSO Long-Short Credit Income Fund
|
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For the Six
Months Ended
June 30, 2013
(Unaudited)
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|
For the
Year Ended
December 31, 2012
|
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Common shares outstanding - beginning of period
|
|
|
12,700,248
|
|
|
|
12,694,664
|
|
Common shares issued as reinvestment of dividends
|
|
|
1,912
|
|
|
|
5,584
|
|
Common shares outstanding - end of period
|
|
|
12,702,160
|
|
|
|
12,700,248
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Blackstone / GSO Strategic Credit Fund
|
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For the Six
Months Ended
June 30, 2013
(Unaudited)
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|
|
For the Period
September 26, 2012
(Commencement of
Operations) to
December 31, 2012
|
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Common shares outstanding - beginning of period
|
|
|
44,616,577
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|
|
5,236
|
|
Common shares issued in connection with initial public offering
|
|
|
|
|
|
|
44,605,000
|
|
Common shares issued as reinvestment of dividends
|
|
|
47,805
|
|
|
|
6,341
|
|
Common shares outstanding - end of period
|
|
|
44,664,382
|
|
|
|
44,616,577
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|
|
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46
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Blackstone / GSO Funds
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Notes to Financial Statements
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June 30, 2013 (Unaudited)
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NOTE 6. SENIOR AND SECURED FLOATING RATE LOANS
BSL defines Senior Loans as first
lien senior secured, floating rate loans that are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities (Borrowers), which operate in various industries and geographical regions. BGX
includes first and second lien secured, floating rate loans in its definition of Secured Loans. Under normal market conditions, at least 80% of BSLs Managed Assets will be invested in Senior Loans and 70% of BGXs managed
assets will be invested in Secured Loans. Under normal market conditions, at least 80% of BGBs Managed Assets will be invested in credit investments comprised of corporate fixed income instruments and other investments (including derivatives)
with similar economic characteristics. BGX defines its managed assets as net assets plus effective leverage obtained through securities lending, swap contract arrangements, and short selling or other derivative transactions (BGX Managed
Assets). At June 30, 2013, 88.37% of BSLs Managed Assets were held in Senior Loans, 75.51% of BGXs Managed Assets were held in Secured Loans, and 98.40% of BGBs Managed Assets were held in corporate fixed income instruments
including Loans.
Loans hold a senior position in the capital structure of a business entity, are secured with specific collateral and have a claim
on the assets and/or stock of the Borrower that is senior to that held by unsecured creditors, subordinated debt holders and stockholders of the Borrower.
Loans often require prepayments from Borrowers excess cash flows or permit the Borrowers to repay at their election. The degree to which Borrowers
repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity may be substantially less than the stated maturities shown. However, floating rate loans typically have
an expected average life of two to four years. Floating rate loans typically have rates of interest which are re-determined periodically, either daily, monthly, quarterly or semi-annually by reference to a floating base lending rate, primarily the
London Interbank Offered Rate (LIBOR), plus a premium or credit spread.
Loans are subject to the risk of payment defaults of scheduled interest or
principal. Such non-payment could result in a reduction of income, a reduction in the value of the investment and a potential decrease in the net asset value of either Fund. Risk of loss of income is generally higher for subordinated unsecured loans
or debt, which are not backed by a security interest in any specific collateral. There can be no assurance that the liquidation of any collateral securing a Loan would satisfy the Borrowers obligation to the Fund in the event of non-payment of
scheduled interest or principal payments, or that such collateral could be readily liquidated.
Second lien loans generally are subject to similar
risks as those associated with investments in first lien loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders. In the event of default on a second lien loan, the first priority lien holder has
first claim to the underlying collateral of the loan. Second lien loans are subject to the additional risk that the cash flow of the Borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving
effect to the senior unsecured or senior secured obligations of the Borrower. At June 30, 2013, BSL, BGX and BGB had invested $18,841,789, $7,447,794 and $69,865,951, respectively, in second lien secured loans. Second lien secured loans are
considered Secured Loans for BGX and Senior Secured Loans for BGB, but are not considered Senior Loans for BSL.
Loans can be rated below investment
grade or may also be unrated. As a result, the risks associated with Loans may be similar to the risks of other below investment grade securities, although they are senior and secured in contrast to other below investment grade securities, which are
often subordinated or unsecured. BSL, BGX and BGB typically invest in Loans rated below investment grade, which are considered speculative because of the credit risk of the Borrowers. Such companies are more likely than investment grade issuers to
default on their payments of interest and principal owed to BSL, BGX and BGB, and such defaults could reduce net asset value and income distributions. The amount of public information available with respect to below investment grade loans will
generally be less extensive than that available for registered or exchange-listed securities. In evaluating the creditworthiness of Borrowers, the Adviser will consider, and may rely in part, on analyses performed by others. The Advisers
established best execution procedures and guidelines require trades to be placed for execution only with broker-dealer counterparties approved by the risk and valuation committee of the Adviser. The factors considered by the committee when selecting
and approving brokers and dealers include, but are not limited to: (i) quality, accuracy, and timeliness of execution, (ii) review of the reputation, financial strength and stability of the financial institution, (iii) willingness and ability of the
counterparty to commit capital, (iv) ongoing reliability and (v) access to underwritten offerings and secondary markets.
BSL, BGX and BGB may
acquire Loans through assignments or participations. BSL, BGX and BGB typically acquire these Loans through assignment, and if a Fund acquires a Loan through participation, will seek to elevate a participation interest into an assignment as soon as
practicably possible. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchasers
rights can be more restricted than those of the assigning institution, and BSL, BGX or BGB may not be able to unilaterally enforce all rights and remedies under the Loan and with regard to any associated collateral. A participation typically results
in a contractual relationship only with the institution participating out the interest, not with the Borrower. Sellers of participations typically include banks, broker-dealers, other financial institutions and lending institutions. The Adviser has
adopted best execution procedures and guidelines to mitigate credit and counterparty risk in a typical situation when BSL, BGX or BGB must acquire a Loan through a
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Blackstone / GSO Funds
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Notes to Financial Statements
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June 30, 2013 (Unaudited)
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participation. None of the Funds had outstanding participations as of June 30, 2013. The Adviser has
established a counterparty and liquidity sub-committee that regularly reviews each broker-dealer counterparty for, among other things, its quality and the quality of its execution.
NOTE 7. TOTAL RETURN SWAPS
BGX has entered into total return swaps as of June 30, 2013 in an aggregate notional amount equal to $17,890,749. In a total return swap, BGX pays
another party a fixed or floating short-term interest rate and receives in exchange the total return of underlying loans or debt securities. If the other party to a total return swap defaults, BGXs risk of loss consists of the net amount of
total return payments that BGX is contractually entitled to receive. BGX bears the risk of default on the underlying loans or debt securities, based on the notional amount of the swap. BGX is required to post collateral to cover this potential
obligation. BGX may use total return swaps for financing, hedging or investment purposes (see further information in Note 9 Leverage). For the purposes of Managed Assets, BGX will treat the value of a total return swap as the notional amount
of the swap.
The periodic swap payments received or made by BGX are recorded in the Statements of Operations as realized gains or losses,
respectively. Any upfront fees paid are recorded as assets and any upfront fees received are recorded as liabilities and amortized over the term of the swap. Swaps are marked-to-market daily and changes in value, including the accrual of periodic
amounts of interest, are recorded as unrealized appreciation (depreciation) and shown on BGXs Statement of Operations. When the swap is terminated, BGX will record a realized gain or loss equal to the difference between the proceeds from (or
cost of) the closing transaction and BGXs basis in the contract, if any. Generally, the basis of the contracts is the unamortized premium received or paid.
International Swaps and Derivatives Association, Inc. Master Agreements (ISDA Master Agreements) govern OTC financial derivative
transactions entered into by a Fund and those counterparties. The ISDA Master Agreements maintain provisions for general obligations, representations, agreements, collateral and events of default or termination. Events of termination include
conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements.
Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the
Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the
contractual terms in the agreements, and that there may be unfavorable changes in interest rates and/or market values associated with these transactions. The Adviser selects only those counterparties that it believes are credit-worthy. BGX
segregates sufficient assets as collateral to satisfy the current obligations with respect to total return and credit default swaps, and this is reflected as Deposit held with broker for swap contracts on BGXs Statement of Assets and
Liabilities.
The effect of derivative instruments on the Statements of Assets and Liabilities as of June 30, 2013 is as follows:
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
|
|
|
|
Risk Exposure
|
|
Statements of Assets and Liabilities Location
|
|
Asset Derivatives
Gross Unrealized Appreciation
|
|
Liability Derivatives
Gross Unrealized Depreciation
|
|
Credit Contracts (Total Return
Swap Contracts)
|
|
Unrealized appreciation/
(depreciation) on total return
swap contracts
|
|
$ 33,338
|
|
$ 182,785
|
|
Total
|
|
|
|
$ 33,338
|
|
$ 182,785
|
|
|
|
|
|
The effect of derivative instruments on the Statements of Operations as of June 30, 2013 is as follows:
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
|
|
|
|
Risk Exposure
|
|
Statements of Operations Location
|
|
Net Realized Gain/(Loss)
|
|
Net Change in Unrealized
Appreciation/(Depreciation)
|
|
Credit Contracts
(Total Return
Swap Contracts)
|
|
Net realized gain/(loss) on total return
swap contracts/change in
unrealized appreciation/
(depreciation) on
total return
swap contracts
|
|
$ 408,805
|
|
$ 51,143
|
|
Total
|
|
|
|
$ 408,805
|
|
$ 51,143
|
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|
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Notes to Financial Statements
|
|
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June 30, 2013 (Unaudited)
|
NOTE 8. SECURITIES LENDING
BGX may make secured loans of its marginable
securities to brokers, dealers and other financial institutions amounting to no more than 30% of its net assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the securities
or possible loss of rights in the collateral should the borrower fail financially. However, such loans will be made only to broker-dealers and other financial institutions that are believed by the Adviser to be of relatively high credit standing.
Loans of securities are made to broker-dealers pursuant to agreements requiring that loans be continuously secured by collateral consisting of U.S.
Government securities, cash or cash equivalents (negotiable certificates of deposit, bankers acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal at all times to the market value of the
securities lent. The borrower pays to BGX, as the lender, an amount equal to any dividends or interest received on the securities lent. The collateral must have a market value at least equal to 100% of the market value of the loaned securities at
all times during the duration of the loan.
BGX invests the cash collateral received in accordance with its investment objectives, subject to
BGXs agreement with the borrower of the securities. In the case of cash collateral, BGX typically pays a rebate to the borrower. The reinvestment of cash collateral will result in a form of effective leverage for BGX.
Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, BGX, as the lender, retains the right to call
the loans and obtain the return of the securities loaned at any time on reasonable notice, and it will do so in order that the securities may be voted by BGX if the holders of such securities are asked to vote upon or consent to matters materially
affecting the investment. BGX may also call such loans in order to sell the securities involved. When engaged in securities lending, BGXs performance will continue to reflect changes in the value of the securities loaned and will also reflect
the receipt of interest through investment of cash collateral by BGX in permissible investments.
As of June 30, 2013, BGX had securities on loan
valued at $48,098,073 and received cash collateral with a value of $48,880,313 representing 20.01% and 20.34% of net assets, respectively.
NOTE 9. LEVERAGE
On August 13, 2010, BSL issued $96
million in aggregate principal amount of senior secured notes and 48,000 term preferred shares with an aggregate liquidation preference of $48 million, both rated AAA by Fitch Ratings. The senior secured notes and term preferred shares
in combination represent total leverage of approximately 33% of BSLs Managed Assets. BSL used the proceeds of the offerings to purchase additional assets for BSLs portfolio. The final maturity date of the senior secured notes and the
final redemption date of the term preferred shares is May 31, 2020, which coincides with the scheduled dissolution date of BSL.
Both the senior
secured notes and the term preferred shares may be prepaid or redeemed at the option of BSL commencing the second anniversary of issuance. In addition, both the senior secured notes and the term preferred shares are subject to mandatory prepayment
or redemption a) if BSL fails to meet certain overcollateralization tests, b) after the expiration of the BSLs reinvestment period, which ends on May 31, 2017, c) if the senior secured notes and term preferred shares have not been fully
prepaid/redeemed six months prior to the final maturity date (May 31, 2020), or d) if BSL fails to pay dividends on the term preferred shares for six consecutive months. Should either the senior secured notes or the term preferred shares be
prepaid/redeemed, either through an optional or mandatory prepayment/redemption, the remainder of the term preferred shares or the senior secured notes shall also become payable/redeemable on a pro-rata basis.
In connection with BSLs issuance of senior secured notes and term preferred shares, certain costs were incurred by BSL and have been recorded as a
deferred asset. These costs are being amortized over the period beginning August 13, 2010 (day of issuance) through May 31, 2017, the date on which mandatory prepayments commence. The deferred asset balance as of June 30, 2013 is shown on BSLs
Statement of Assets and Liabilities under Deferred financing costs. The amount of expense amortized during the six months ended June 30, 2013 is shown on BSLs Statement of Operations under Amortization of deferred financing costs.
The average interest rate of the $144 million aggregate amount of senior secured notes and term preferred shares is 1.78% over 3 month LIBOR. BSL pays
quarterly, a floating rate interest of 1.55% over 3 month LIBOR on the senior secured notes and a floating rate dividend of 2.25% over 3 month LIBOR on the term preferred shares. Due to the short term nature of the floating rate payments on the
senior secured notes and term preferred shares, face value approximates fair value at June 30, 2013. This fair value is based on Level 2 inputs under the three-tier fair valuation hierarchy (see Note 2).
BSL may prepay the senior secured notes or term preferred shares in whole or in part at any time on or after the second anniversary of the issuance date
at an optional prepayment price. The redemption price per share of the term preferred shares and secured notes, respectively is at a premium to the issuance price. The redemption price is equal to 102% of the issuance price from the second
anniversary date of the issuance date to but excluding the third anniversary date of the issuance date, and 101% of the issuance price from the third anniversary date of the issuance
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date to but excluding the fourth anniversary date of the issuance date and on or after the fourth
anniversary date of the issuance date, 100% plus, in each case, an amount equal to accrued, accumulated and unpaid dividends thereon, to, but not including, the applicable redemption date.
According to the governing documents for the senior secured notes and term preferred shares, BSL must adhere to certain limitations and restrictions
while the leverage is outstanding. These compliance tests are performed by BSLs custodian, The Bank of New York Mellon Trust Company. These tests are in addition to any requirements outlined in BSLs registration statement and the 1940
Act. As of June 30, 2013, BSL was in compliance with all required limitations and restrictions related to its leverage.
The holders of the term
preferred shares are entitled to one vote per share and will vote with holders of common stock as a single class, except that the term preferred shares will vote separately as a class on certain matters, as required by law or BSLs Declaration
of Trust. The holders of term preferred shares, voting as a separate class, are entitled at all times to elect two Trustees of BSL.
On December 21,
2012, BGB entered into a Credit Agreement (Agreement) with a bank to borrow up to a limit of $425 million pursuant to a 364 day revolving line of credit. Borrowings under the Agreement are secured by the assets of BGB. Interest is
charged at a rate of 0.875% above LIBOR, the period commencing on the date of the making of such LIBOR Loan (or the last date upon which any other Loan was converted to, or continued as, such LIBOR Loan) and ending on the numerically corresponding
day in the calendar month that is one (1) week or one (1), two (2), three (3), six (6) or nine (9) months thereafter, as BGB may elect, or such other period as the lender may agree in its sole and absolute discretion. Under the terms of the
Agreement, BGB must pay a commitment fee on any undrawn amounts. The commitment fee payable is 0.15% on the undrawn amounts when drawn amounts exceed 50% of the borrowing limit and 0.25% on the undrawn amounts at any other time. Interest and fees
are payable quarterly. The Fund may elect to extend the Agreement for a further 364-day period with the consent of the lending bank. At June 30, 2013, BGB had borrowings outstanding under the Agreement of $390 million at an interest rate of 1.07%.
Due to the short term nature of the Agreement, face value approximates fair value at June 30, 2013. This fair value is based on Level 2 inputs under the three-tier fair valuation hierarchy (see Note 2). For the six months ended June 30, 2013, the
average borrowings under the Agreement and the average interest rate were $320,219,780 and 1.07%, respectively.
Under the Agreement, BGB has agreed
to certain covenants and additional investment limitations while the leverage is outstanding. The Fund agrees to maintain asset coverage of three times over borrowings. Compliance with the investment restrictions and calculations are performed by
BGBs custodian, The Bank of New York Mellon. As of June 30, 2013, BGB was in compliance with all required investment limitations and asset coverage requirements related to its leverage.
The use of borrowings to leverage the common shares can create risks. Changes in the value of BSLs and BGBs portfolio, including securities
bought with the proceeds of leverage, are borne entirely by the holders of common shares. All costs and expenses related to any form of leverage used by BSL and BGB are borne entirely by common shareholders. If there is a net decrease or increase in
the value of BSLs or BGBs investment portfolio, the leverage may decrease or increase, as the case may be, the net asset value per common share to a greater extent than if BSL or BGB did not utilize leverage. During periods when BSL or
BGB is using leverage, the fees paid to the Adviser for advisory services and to ALPS for administrative services are higher than if BSL or BGB did not use leverage because the fees paid are calculated on the basis of BSLs or BGBs
Managed Assets, which include the assets purchased through leverage. As of June 30, 2013, BSLs and BGBs effective leverage represented 33.07% and 31.48% of each funds Managed Assets, respectively.
BGX currently employs leverage through securities lending arrangements (see Note 8 Securities Lending) and swap arrangements (see Note 7
Total Return Swaps). All costs and expenses related to any form of leverage used by BGX are borne entirely by holders of common shares. Although certain forms of effective leverage used by BGX, such as leverage incurred in securities lending, total
return and credit default swap arrangements, other derivative transactions or short selling, may not be considered senior securities under the 1940 Act, such effective leverage will be considered leverage for BGXs leverage limits. BGXs
use of these forms of effective leverage will not exceed 30% of its net assets. As of June 30, 2013, BGXs effective leverage represented 25.42% of net assets. BGXs total leverage and short sale exposure, through securities lending, total
return and credit default swap arrangements, other derivative transactions or short selling (including the market value of securities BGX is obligated to repay through short sales even in transactions that do not result in leverage), will not exceed
67% of BGXs net assets.
Leverage creates risk for the common shareholders, including the likelihood of greater volatility of NAV and market
price of the common shares, and may affect the return to the common shareholders or result in fluctuations in the dividends paid on the common shares. To the extent total return exceeds the cost of leverage, the Funds return will be greater
than if leverage had not been used. Conversely, if the total return derived from the use of leverage is less than the cost of leverage, the Funds return will be less than if leverage had not been used, and therefore the amount available for
distribution to common shareholders as dividends and other distributions will be reduced. In the latter case, the Adviser in its best judgment nevertheless may determine to maintain the Funds leveraged position if it expects that the benefits
to the Funds common shareholders of maintaining the leveraged position will outweigh the current reduced return.
|
|
|
|
50
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|
www.blackstone-gso.com
|
|
|
|
Blackstone / GSO Funds
|
|
Notes to Financial Statements
|
|
|
June 30, 2013 (Unaudited)
|
NOTE 10. TAX BASIS DISTRIBUTIONS
Ordinary income (inclusive of short-term
capital gains) and long-term capital gains are allocated to common stockholders after payment of the available amounts on any outstanding term preferred shares. To the extent that the amount distributed to common stockholders exceeds the amount of
available ordinary income and long-term capital gains after allocation to any outstanding term preferred shares, these distributions are treated as a tax return of capital. Additionally, to the extent that the amount distributed on any outstanding
term preferred shares exceeds the amount of available ordinary income and long-term capital gains, these distributions are treated as a tax return of capital.
The amounts and characteristics of tax basis distributions and composition of distributable earnings/(accumulated losses) are finalized at fiscal year
end; accordingly, tax basis balances have not been determined as of June 30, 2013.
As determined on December 31, 2012, certain permanent
differences between financial and tax accounting were reclassified. These differences were primarily due to the differing tax treatment of certain investments. The amounts reclassified did not affect net assets. The reclassifications were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease) Paid-in capital
|
|
|
Increase/(Decrease)
Accumulated net investment
income/(loss)
|
|
|
Increase/(Decrease) Accumulated
net realized gain/(loss)
|
|
Blackstone / GSO
Senior Floating
Rate Term Fund
|
|
|
$ (23,764)
|
|
|
|
$ (756,241)
|
|
|
|
$ 780,005
|
|
Blackstone / GSO
Long-Short
Credit Income
Fund
|
|
|
(20,278)
|
|
|
|
1,352,328
|
|
|
|
(1,332,050)
|
|
Blackstone / GSO
Strategic Credit Fund
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
The tax character of distributions paid by the Funds during the fiscal years ended December 31, 2012 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Senior Floating Rate Term Fund
|
|
|
|
2012
|
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
|
|
21,274,807
|
|
|
|
Long-term capital gain
|
|
|
|
|
1,607,742
|
|
|
|
Total
|
|
$
|
|
|
22,882,549
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
|
2012
|
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
|
|
16,455,664
|
|
|
|
Tax return of capital
|
|
|
|
|
0
|
|
|
|
Total
|
|
$
|
|
|
16,455,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Strategic Credit Fund
|
|
|
|
2012
|
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
|
|
6,586,517
|
|
|
|
Tax return of capital
|
|
|
|
|
3,852,602
|
|
|
|
Total
|
|
$
|
|
|
10,439,119
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, the Funds had available for federal tax purposes unused capital loss carryforwards, which are
available to offset future realized gains. To the extent that these carryforwards are used to offset future gains, it is probable that the amount offset will not be distributed to shareholders. The carryforward losses are as follows:
|
|
|
|
|
|
|
|
|
|
|
Short Term
|
|
|
Long Term
|
|
Blackstone / GSO Senior Floating Rate Term Fund
|
|
|
$ 0
|
|
|
|
$ 0
|
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
148,416
|
|
|
|
3,047
|
|
Blackstone / GSO Strategic Credit Fund
|
|
|
0
|
|
|
|
0
|
|
Additionally, the Blackstone /GSO Long-Short Credit Income Fund elects to defer to the period ending December 31, 2013,
capital losses recognized during the period November 1, 2012 through December 31, 2012 in the amount of $32,571.
|
|
|
|
|
|
Semi-Annual
Report | June 30, 2013
|
|
51
|
|
|
|
Blackstone / GSO Funds
|
|
Notes to Financial Statements
|
|
|
June 30, 2013 (Unaudited)
|
At December 31, 2012, the components of distributable earnings on a tax basis for the Funds were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Senior
Floating Rate Term Fund
|
|
Blackstone / GSO Long-Short
Credit Income Fund
|
|
Blackstone / GSO
Strategic Credit Fund
|
|
|
|
Undistributed ordinary income
|
|
$
|
1,132,402
|
|
|
|
|
$
|
1,033,002
|
|
|
|
|
$
|
0
|
|
|
|
Accumulated capital gains/(loss)
|
|
|
175,364
|
|
|
|
|
|
(184,034
|
)
|
|
|
|
|
0
|
|
|
|
Unrealized appreciation
|
|
|
2,686,607
|
|
|
|
|
|
932,664
|
|
|
|
|
|
9,838,733
|
|
|
|
Other Cumulative Effect of Timing Differences
|
|
|
(109,248
|
)
|
|
|
|
|
216,746
|
|
|
|
|
|
0
|
|
|
|
Total
|
|
$
|
3,885,125
|
|
|
|
|
$
|
1,998,378
|
|
|
|
|
$
|
9,838,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of net unrealized appreciation (depreciation) and the cost of investment securities for tax purposes,
including short-term securities at June 30, 2013, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Senior
Floating Rate Term Fund
|
|
Blackstone / GSO Long-Short
Credit Income Fund
|
|
|
|
|
|
Blackstone / GSO
Strategic Credit Fund
|
|
Gross appreciation on investments (excess of value over tax cost)
|
|
$
|
|
|
|
|
3,937,764
|
|
|
|
|
$
|
|
|
|
|
4,235,439
|
|
|
$
|
|
|
|
|
10,113,185
|
|
Gross depreciation (excess of tax cost over value)
|
|
|
|
|
|
|
(5,491,334
|
)
|
|
|
|
|
|
|
|
|
(5,021,032
|
)
|
|
|
|
|
|
|
(8,003,005
|
)
|
Net unrealized appreciation (depreciation)
|
|
$
|
|
|
|
|
(1,553,570
|
)
|
|
|
|
$
|
|
|
|
|
(785,593
|
)
|
|
$
|
|
|
|
|
2,110,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of investments for income tax purposes
|
|
$
|
|
|
|
|
429,629,686
|
|
|
|
|
$
|
|
|
|
|
282,594,414
|
|
|
$
|
|
|
|
|
1,218,751,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 11. OFFSETTING AGREEMENTS
Certain derivative contracts are executed
under either standardized netting agreements or, for exchange-traded derivatives, the relevant contracts for a particular exchange which contain enforceable netting provisions. A derivative netting arrangement creates an enforceable right of offset
that becomes effective, and affects the realization of settlement on individual assets, liabilities and collateral amounts, only following a specified event of default or early termination. Default events may include the failure to make payments or
deliver securities timely, material adverse changes in financial condition or insolvency, the breach of minimum regulatory capital requirements, or loss of license, charter or other legal authorization necessary to perform under the contract. The
Funds also manage counterparty risk by entering into enforceable collateral arrangements with counterparties to securities lending agreements. These agreements mitigate counterparty credit risk by providing for a single net settlement with a
counterparty of all financial transactions covered by the agreement in an event of default as defined under such agreement.
The following table
presents derivative financial instruments and securties lending arrangements that are subject to enforceable netting arrangements, collateral arrangments or other similar agreements as of June 30, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in The Statement of
Financial Position
|
|
Description
|
|
Gross
Amounts of
Recognized
Assets
|
|
|
Gross
Amounts
Offset In The
Statements of
Assets And
Liabilities
|
|
|
Net Amounts
Presented In The
Statements of
Assets And
Liabilities
|
|
|
Financial
Instruments*
|
|
|
Cash
Collateral
Received*
|
|
|
Net Amount
|
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap Contracts
|
|
$
|
33,338
|
|
|
$
|
|
|
|
$
|
33,338
|
|
|
$
|
|
|
|
$
|
(33,338
|
)
|
|
$
|
33,338
|
|
Total
|
|
$
|
33,338
|
|
|
$
|
|
|
|
$
|
33,338
|
|
|
$
|
|
|
|
$
|
(33,338
|
)
|
|
$
|
33,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
52
|
|
www.blackstone-gso.com
|
|
|
|
Blackstone / GSO Funds
|
|
Notes to Financial Statements
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in The Statement of
Financial Position
|
|
Description
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
|
Gross
Amounts
Offset In The
Statements of
Assets And
Liabilities
|
|
|
Net Amounts
Presented In The
Statements of
Assets And
Liabilities
|
|
|
Financial
Instruments*
|
|
|
Cash
Collateral
Pledged*
|
|
|
Net Amount
|
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Swap Contracts
|
|
$
|
182,785
|
|
|
$
|
|
|
|
$
|
182,785
|
|
|
$
|
|
|
|
$
|
(182,785
|
)
|
|
$
|
|
|
Securities Lending
|
|
|
48,880,313
|
|
|
|
|
|
|
|
48,880,313
|
|
|
|
(48,880,313
|
)
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
49,063,098
|
|
|
$
|
|
|
|
$
|
49,063,098
|
|
|
$
|
(48,880,313
|
)
|
|
$
|
(182,785
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
These amounts do not include the excess collateral received/pledged.
NOTE 12. SUBSEQUENT EVENTS
Shareholder Distributions for BSL:
On July 31, 2013, BSL paid regularly scheduled distributions in the amount of $0.11 per share to shareholders
of record as of July 18, 2013.
Shareholder Distributions for BGX:
On July 31, 2013, BGX paid regularly scheduled distributions in the amount
of $0.108 per share to shareholders of record as of July 18, 2013.
Shareholder Distributions for BGB:
On July 31, 2013, BGB paid regularly
scheduled distributions in the amount of $0.117 per share to shareholders of record as of July 18, 2013.
|
|
|
|
|
|
Semi-Annual
Report | June 30, 2013
|
|
53
|
|
|
|
Blackstone /
GSO Funds
|
|
Summary of Dividend Reinvestment Plan
|
|
|
June 30, 2013 (Unaudited)
|
Pursuant to the Funds Dividend Reinvestment Plan (the DRIP), shareholders whose shares are registered in their own name may
opt-in to the plan and elect to reinvest all or a portion of their distributions in common shares by providing the required enrollment notice to Computershare, the DRIP administrator. Shareholders whose shares are held in the
name of a broker or other nominee may have distributions reinvested only if such a service is provided by the broker or the nominee or if the broker or the nominee permits participation in the DRIP. Shareholders whose shares are held in the name of
a broker or other nominee should contact the broker or nominee for details. A shareholder may terminate participation in the DRIP at any time by notifying the DRIP administrator before the record date of the next distribution through the Internet,
by telephone or in writing. All distributions to shareholders who do not participate in the DRIP, or have elected to terminate their participation in the DRIP, will be paid by check mailed directly to the record holder by or under the direction of
the DRIP administrator when the Funds Board of Trustees declares a distribution.
When the Funds declare a distribution, shareholders who are
participants in the applicable DRIP receive the equivalent of the amount of the distribution in common shares. If you participate in the DRIP, the number of common shares of the Funds that you will receive will be determined as follows:
(1) If the market price of the common shares plus any brokerage commissions on the payable date (or, if the payable date is not a New York Stock
Exchange trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant distribution (the determination date) is equal to or exceeds 98% of the net asset value per common
share, the Fund will issue new common shares at a price equal to the greater of:
(a) 98% of the net asset value per share at the
close of trading on the New York Stock Exchange on the determination date or
(b) 95% of the market price per common share on the
determination date.
(2) If 98% of the net asset value per common share exceeds the market price of the common shares plus any brokerage commissions
on the determination date, the DRIP administrator will receive the distribution in cash and will buy common shares in the open market, on the New York Stock Exchange or elsewhere, for your account as soon as practicable commencing on the trading day
following the determination date and terminating no later than the earlier of (a) 30 days after the distribution payment date, or (b) the record date for the next succeeding distribution to be made to the shareholders; except when necessary to
comply with applicable provisions of the federal securities laws. If during this period: (i) the market price plus any brokerage commissions rises so that it equals or exceeds 98% of the net asset value per common share at the close of trading on
the New York Stock Exchange on the determination date before the DRIP administrator has completed the open market purchases or (ii) the DRIP administrator is unable to invest the full amount eligible to be reinvested in open market purchases, the
DRIP administrator will cease purchasing common shares in the open market and the Fund will issue the remaining common shares at a price per share equal to the greater of (a) 98% of the net asset value per share at the close of trading on the New
York Stock Exchange on the determination date or (b) 95% of the then current market price per share.
The DRIP administrator maintains all
shareholder accounts in the dividend reinvestment plan and furnishes written confirmations of all transactions in the account, including information needed by shareholders for personal and tax records. Common shares in the account of each DRIP
participant are held by the DRIP administrator in non-certificated form in the name of the participant, and each shareholders proxy includes shares purchased pursuant to the DRIP.
There is no charge to participants for reinvesting regular distributions and capital gains distributions. The fees of the DRIP administrator for
handling the reinvestment of regular distributions and capital gains distributions are included in the fee to be paid by us to our transfer agent. There are no brokerage charges with respect to shares issued directly by us as a result of regular
distributions or capital gains distributions payable either in shares or in cash. However, each participant bears a pro rata share of brokerage commissions incurred with respect to the DRIP administrators open market purchases in connection
with the reinvestment of such distributions. Shareholders that opt-in to the DRIP will add to their investment through dollar cost averaging. Because all dividends and distributions paid to such shareholder will be automatically reinvested in
additional common shares, the average cost of such shareholders common shares will decrease 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.
The automatic reinvestment of
such dividends or distributions does not relieve participants of any income tax that may be payable on such dividends or distributions.
You may
obtain additional information by contacting the DRIP administrator at the following address: Computershare, Attn: Sales Dept., P.O. Box 358035, Pittsburgh, PA 15252.
|
|
|
|
54
|
|
www.blackstone-gso.com
|
|
|
|
Blackstone / GS
O Funds
|
|
Additional Information
|
|
|
June 30, 2013 (Unaudited)
|
Portfolio Information.
The Funds file their complete schedules of portfolio
holdings with the Securities and Exchange Commission (the SEC) for the first and third quarters of each fiscal year on Form N-Q. The Funds Forms N-Q will be available (1) on the Funds website located at
http://www.blackstone-gso.com; (2) on the SECs website at http://www.sec.gov; or (3) for review and copying at the SECs Public Reference Room (the PRR) in Washington, DC. Information regarding the operation of the PRR may be
obtained by calling 1-800-SEC-0330.
Proxy Information.
The policies and procedures used to determine how to vote proxies relating to
securities held by the Funds are available (1) without charge, upon request, by calling 1-877-876-1121, or (2) on the Funds website located at http://www.blackstone-gso.com, and (3) on the SECs website at http://www.sec.gov. Information
regarding how the Funds voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available on Form N-PX by August 31 of each year (1) without charge, upon request, by calling 1-877-876-1121, or (2)
on the Funds website located at http://www.blackstone-gso.com, and (3) on the SECs website at http://www.sec.gov.
Senior Officer
Code of Ethics.
The Funds file a copy of their code of ethics that applies to the Funds principal executive officer, principal financial officer or controller, or persons performing similar functions, with the SEC as an exhibit to each
annual report on Form N-CSR. This will be available on the SECs website at http://www.sec.gov.
Privacy Procedures.
Privacy is very
important to the Funds. To ensure our shareholders privacy the Funds have developed policies that are designed to protect confidentiality while allowing their shareholders needs to be served. In the course of providing their shareholders
with products and services, the Funds may obtain non-public personal information, such as address, social security number, assets and/or income information: (i) in the subscription document and related support documents; (ii) in correspondence and
conversations with the Funds or their representatives; and (iii) through transactions in and relating to the investment with the Funds.
The Funds
do not disclose any of this personal information about shareholders to anyone other than to their affiliates, except as required for everyday purposes or as permitted by law, such as to their attorneys, auditors, brokers, bankers, regulators,
administrators and certain service providers, in each such case, only as necessary to facilitate the acceptance of the shareholders investment or the management of the Funds. The Funds will also release information about a shareholder if such
shareholder directs the Funds to do so, if compelled to do so by law, or in connection with any government or self-regulatory organization request or investigation.
The Funds seek to carefully safeguard private information and, to that end, restrict access to non-public personal information about the shareholders to
those employees and other persons who need to know the information to enable the Funds to provide services to the shareholders. The Funds maintain physical, electronic and procedural safeguards to protect each shareholders non-public personal
information.
Tax Information.
Of the ordinary income (including short-term capital gains) distributions made by BSL during the year ended
December 31, 2012, 0% qualifies for the dividend received deduction available to stockholders. The amount of long-term capital gains paid for the year ended December 31, 2012 was $1,607,742. For the year ended December 31, 2012, 0% of the taxable
investment income qualifies for the 15% dividend tax rate.
Of the ordinary income (including short-term capital gain) distributions made by BGX
during the fiscal period ended December 31, 2012, 0% qualifies for the dividend received deduction available to stockholders. The amount of long-term capital gains paid for the fiscal period ended December 31, 2012 was $0. For the fiscal period
ended December 31, 2012, 0% of the taxable investment income qualifies for the 15% dividend tax rate.
Of the ordinary income (including short-term
capital gain) distributions made by BGB during the fiscal period ended December 31, 2012, 0% qualifies for the dividend received deduction available to stockholders. The amount of long-term capital gains paid for the fiscal period ended December 31,
2012 was $0. For the fiscal period ended December 31, 2012, 0% of the taxable investment income qualifies for the 15% dividend tax rate.
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Blackstone / GSO Funds
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Additional Information
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June 30, 2013 (Unaudited)
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BGB Meeting of Shareholders Voting Results
On April 24, 2013, BGB held its Annual Meeting of Shareholders to consider the proposal set forth below. The following votes were recorded:
Proposal 1: The election of five (5) Trustees of BGB, each to hold office for the term indicated and until his successor shall have been elected and
qualified.
Election of Edward H. DAlelio as Class I Trustee of BGB, term to expire at 2014 Annual Meeting
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Number of Shares
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% of Shares Voted
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Affirmative
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|
39,216,096.555
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98.484%
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Withheld
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604,062.201
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1.516%
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TOTAL
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39,820,158.756
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100.00%
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Election of Michael F. Holland as Class III Trustee of BGB, term to expire at 2016 Annual Meeting
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Number of Shares
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% of Shares Voted
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Affirmative
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|
39,048,104.279
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98.062%
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Withheld
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772,054.477
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1.938%
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TOTAL
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39,820,158.756
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100.00%
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Election of Thomas W. Jasper as Class II Trustee of BGB, term to expire at 2015 Annual Meeting
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Number of Shares
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% of Shares Voted
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Affirmative
|
|
39,227,628.777
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98.512%
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Withheld
|
|
592,529.979
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1.488%
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TOTAL
|
|
39,820,158.756
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100.00%
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Election of Gary S. Schpero as Class II Trustee of BGB, term to expire at 2015 Annual Meeting
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Number of Shares
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|
% of Shares Voted
|
Affirmative
|
|
39,137,809.764
|
|
98.287%
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Withheld
|
|
682,348.992
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1.713%
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TOTAL
|
|
39,820,158.646
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100.00%
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Election of Daniel H. Smith, Jr. as Class III Trustee of BGB, term to expire at 2016 Annual Meeting
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Number of Shares
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|
% of Shares Voted
|
Affirmative
|
|
39,272,136.110
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98.624%
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Withheld
|
|
548,022.646
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1.376%
|
TOTAL
|
|
39,820,158.756
|
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100.00%
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Semi-Annual
Report | June 30, 2013
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Blackstone /
GSO Funds
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Approval of Investment Advisory Agreement
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June 30, 2013 (Unaudited)
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The Investment Company Act of 1940, as amended (the 1940 Act), requires that the Board of Trustees (together, the Board) of each
of Blackstone / GSO Senior Floating Rate Term Fund (BSL) and Blackstone /GSO Long-Short Credit Income Fund (BGX, together with BSL, the Funds and each a Fund), including a majority of its members who
are not considered to be interested persons under the 1940 Act (the Independent Trustees) voting separately, approve on an annual basis the continuation of the Funds investment advisory agreement (the
Agreement) with the Funds investment adviser, GSO /Blackstone Debt Funds Management LLC (the Adviser). At meetings (the Contract Renewal Meetings) held in person on May 24, 2013 and May 29, 2013, the Board
of each Fund, including the Independent Trustees, considered and approved the continuation of the Agreement for an additional one-year term (at the May 24, 2013 meeting, the Board approved the continuation of the Agreement through June 1, 2013 and
at the May 29, 2013 meeting, the Board approved the continuation of the Agreement for a one-year term commencing June 1, 2013). To assist in its consideration of the renewal of the Agreement, the Board requested, received and considered a variety of
information (together with the information provided at the Contract Renewal Meetings, the Contract Renewal Information) about the Adviser, as well as the advisory arrangements for the Funds, certain portions of which are discussed below.
The presentation made by the Adviser to the Board of each Fund at the Contract Renewal Meetings in connection with its evaluation of the Agreement encompassed both Funds. In addition to the Contract Renewal Information, the Board received
performance and other information since each Funds inception related to the services rendered by the Adviser to such Fund. The Boards evaluation took into account the information received since each Funds inception and also
reflected the knowledge and familiarity gained as members of the Board with respect to the investment advisory and other services provided to each Fund by the Adviser under its Agreement.
Board Approval of the Agreement
In its deliberations
regarding renewal of the Agreement, the Board of each Fund, including the Independent Trustees, considered various factors, including those set forth below.
Nature, Extent and Quality of the Services Provided to each Fund under the Agreements
The Board received and considered Contract Renewal Information regarding the nature, extent and quality of services provided to the Funds by the Adviser
under the Agreements since each Funds inception. The Board also reviewed Contract Renewal Information regarding the Funds compliance policies and procedures established pursuant to the 1940 Act and each Funds compliance record
since its inception.
The Board reviewed the qualifications, backgrounds and responsibilities of the Funds senior personnel and the portfolio
management team primarily responsible for the day-to-day portfolio management of each Fund. The Board also considered, based on its knowledge of the Adviser and its affiliates, the Contract Renewal Information and the Boards discussions with
the Adviser at the Contract Renewal Meetings, the general reputation and investment performance records of the Adviser and its affiliates and the financial resources of the corporate parent of the Adviser, The Blackstone Group L.P., available to
support its activities in respect of the Funds.
The Board considered the responsibilities of the Adviser under each Funds Agreement,
including the Advisers coordination and oversight of the services provided to such Fund by other unaffiliated parties.
In reaching its
determinations regarding continuation of each Funds Agreement, the Board took into account that such Funds shareholders, in pursuing their investment goals and objectives, likely considered the reputation and the investment style,
philosophy and strategy of the Adviser, as well as the resources available to the Adviser, in purchasing their shares.
The Board concluded that,
overall, the nature, extent and quality of the advisory and other services provided to each Fund since each its inception under its Agreement have been of high quality.
Fund Performance
The Board received and considered
performance information and analyses (the Morningstar Performance Information) for the Funds, as well as for a group of funds identified by the Adviser as comparable to the Funds in their focus on bank loans in their portfolios
regardless of asset size (the Performance Peer Group), prepared by Morningstar DirectSM (Morningstar), an independent provider of investment company data. The Performance Peer Group consisted of eighteen funds, including BSL,
BGX and BGB. The Board noted that it had received and discussed with the Adviser information at periodic intervals since each Funds inception comparing such Funds performance against its benchmarks and its peer funds.
BSL
The Morningstar Performance Information comparing
BSLs performance to that of the Performance Peer Group based on net asset value per share showed, among other things, that BSLs performance for the 1-year and 2-year periods ended March 31, 2013 and since inception was in the fourth
quartile of its Performance Peer Group. The Board also considered BSLs performance relative to its benchmarks and in absolute terms and noted that BSL outperformed its benchmark for the 1-year and 2-year periods and the period since inception.
BGX
The Morningstar Performance Information comparing
BGXs performance to that of the Performance Peer Group based on net asset value per share showed, among other things, that BGXs performance for the 1-year period ended March 31, 2013 and since inception was in the fourth quartile of its
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Blackstone / GSO Funds
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Approval of Investment Advisory Agreement
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June 30, 2013 (Unaudited)
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Performance Peer Group. The Board also considered BGXs performance relative to its benchmarks and
in absolute terms and noted that BGX outperformed its benchmark for the 1-year period and the period since inception.
The Board further noted for
each Fund that, while its investment program is complex, the Funds performance was achieved in a risk-aware manner. In addressing each Funds performance relative to its Performance Peer Group, the Adviser explained that the Fund has
invested less of its portfolio in low-rated assets (those rated CCC or below or that are unrated) than the average among the other Performance Peer Group funds in light of prevailing conditions and uncertainties in credit markets and interest rate
environment. While the higher credit quality orientation of each Funds portfolio was appropriate under the circumstances, the Adviser noted that strategy put the Fund at a relative disadvantage during the performance periods measured to the
other Performance Peer Group funds maintaining riskier, but higher yielding, portfolios. The Board gave significant weight to the Advisers explanation. In assessing Fund performance, the Board also considered the Advisers success to date
in maintaining each Funds level of distributions to shareholders since its inception in light of the low interest rate environment and prevailing credit market conditions. The Board noted, however, that there could be no assurance that the
Advisers success in this regard would continue in light of the prevailing low interest rate environment and each Funds orientation toward a higher credit quality, but lower yielding, portfolio.
Based on its review, the Board concluded that, under the circumstances, each Funds performance supported continuation of its Agreement for an
additional period of one year.
Management Fees and Expenses
The Board reviewed and considered the investment advisory fee (the Advisory Fee) payable under each Funds Agreement by each Fund to the
Adviser in light of the nature, extent and overall high quality of the investment advisory and other services provided by the Adviser to the Fund.
Additionally, the Board received and considered information and analyses (the Lipper Expense Information) prepared by Lipper Inc.
(Lipper), an independent provider of investment company data, comparing the Advisory Fee and each Funds overall expenses with those of funds in an expense group (the Expense Group) selected and provided by Lipper with
the input of the Adviser. The comparison was based upon the constituent funds latest fiscal years. The Expense Group consisted of six leveraged loan closed-end funds, as classified by Lipper, including the Funds. The Expense Group funds had
net common share assets ranging from $123.1 million to $869.2 million.
BSL
Two of the other funds in the Expense Group were larger than BSL and three of the other funds were smaller. The Lipper Expense Information, comparing
BSLs actual total expenses to the Expense Group, showed, among other things, that the Funds actual Advisory Fee (i.e., including the administrators fee and giving effect to any voluntary fee waivers implemented by the Adviser with
respect to the Fund and by the managers of the other Expense Group funds), whether compared on the basis of common assets only or on the basis of common and leveraged assets, was ranked last (i.e., highest) among the funds in the Expense Group. The
Funds actual total expenses whether compared on the basis of common assets or on the basis of common and leveraged assets were ranked fifth out of six funds in the Expense Group and were significantly higher than the Expense Group median.
BGX
Four of the other funds in the Expense Group were larger
than BGX and one of the other funds was smaller. The Adviser noted that the Lipper report did not consider BGXs leverage, consisting of total return swaps and securities lending, as a form of leverage for the purposes of the report. The Board
concluded that comparisons of BGXs expenses to Expense Group funds on the basis of common and leverage assets were not meaningful because BGX was not considered in the Lipper report to have leveraged assets and focused on comparisons of
BGXs expenses to Expense Group funds on a common assets basis. The Lipper Expense Information, comparing BGXs actual total expenses to the Funds Expense Group, showed, among other things, that the Funds actual Advisory Fee
(i.e., including the administrators fee and giving effect to any voluntary fee waivers implemented by the Adviser with respect to the Fund and by the managers of the other Expense Group funds) compared on the basis of common assets only was
ranked third among the funds in the Expense Group and was better (i.e., lower) than the Expense Group median. BGXs actual total expenses compared on the basis of common assets were ranked second among the funds in the Expense Group and were
also better than the Expense Group median.
In addition, in its evaluation of the Advisory Fee for each Fund, the Board took into account the
complexity of such Funds investment program. The Board further noted that the small number and varying sizes of funds in the Expense Group made meaningful expense comparisons difficult. The Board also considered information provided by the
Adviser showing that other Expense Group funds are parts of larger fund complexes than the Funds fund complex, which contributes to reduced cost opportunities for those funds owing to economies of scale. The Board also considered information
provided by the Adviser showing BSLs cost of leverage compared to the cost of leverage of other peer funds and noted that newer funds such as BSL tended to have higher costs of leverage than funds of earlier vintage, several of which used
low-cost auction rate preferred share leverage, which under current market conditions would not be available to BSL.
The Board also reviewed
Contract Renewal Information regarding fees charged by the Adviser to other U.S. clients investing primarily in an asset class similar to that of the Funds, including, where applicable, institutional and separate accounts. The Board was advised that
the base fees paid by such institutional, separate account and other clients generally are lower, and may be significantly lower, than the Advisory Fee. The Contract Renewal Information discussed the significant differences in scope of services
provided to the Funds and to these other clients, noting that the Funds were subject to heightened regulatory requirements relative to institutional clients; that the Funds were provided with administrative services, office facilities and Fund
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Blackstone / GSO Funds
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Approval of Investment Advisory Agreement
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June 30, 2013 (Unaudited)
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officers (including each Funds chief executive, chief financial and chief compliance officers);
and that the Adviser coordinates and oversees the provision of services to the Funds by other fund service providers. In addition, the Board was advised that several institutional clients pay performance fees, which the Funds do not pay. The Board
considered the fee comparisons in light of the different services provided in managing these other types of clients and funds.
Taking all of the
above into consideration, the Board determined that the Advisory Fee for each Fund was reasonable in light of the nature, extent and overall quality of the investment advisory and other services provided to such Fund under its Agreement.
Profitability
The Board, as part of the Contract Renewal
Information, received an analysis of the profitability to the Adviser and its affiliates in providing services to each Fund for the past year and since such Funds inception. In addition, the Board received Contract Renewal Information with
respect to the Advisers revenue and cost allocation methodologies used in preparing such profitability data. The profitability analysis, among other things, indicated that the profitability to the Adviser in providing investment advisory and
other services to each Fund was at a level which was not considered excessive by the Board in light of the nature, extent and overall high quality of such services.
Economies of Scale
The Board received and discussed Contract
Renewal Information concerning whether the Adviser would realize economies of scale if either the Funds assets grow. The Board noted that because each Fund is a closed-end fund with no current plans to seek additional assets beyond maintaining
its dividend reinvestment plan, any significant growth in its assets generally will occur through appreciation in the value of each Funds investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the
Advisory Fee structure was appropriate under present circumstances.
Other Benefits to the Adviser
The Board considered other benefits received by the Adviser and its affiliates as a result of the Advisers relationship with each of the Funds and
did not regard such benefits as excessive.
* * * * *
In light of all of the foregoing and other relevant factors, the Board determined that, under the circumstances, continuation of each Funds
Agreement would be in the interests of the Fund and its shareholders and unanimously voted to continue the Agreement for a period of one additional year.
The principal factor in the Boards determination at its May 24, 2013 meeting to continue each Agreement until June 1, 2013 was the need to provide
continuity of investment adviser services to each Fund pending completion of the Boards evaluation of each Agreement. Otherwise, no single factor reviewed by the Board was identified by the Board as the principal factor in determining whether
to approve continuation of each Agreement for the next year, and each Board member attributed different weights to the various factors. The Independent Trustees were advised by separate independent legal counsel throughout the process. Prior to the
Contract Renewal Meetings, the Board received a memorandum prepared by counsel to the Funds discussing its responsibilities in connection with the proposed continuation of the Agreement as part of the Contract Renewal Information and the Independent
Trustees separately received a memorandum discussing such responsibilities from their independent counsel. Prior to voting, the Independent Trustees discussed the proposed continuation of each Agreement in a private session with their independent
legal counsel at which no representatives of the Adviser were present.
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