|
INVESTMENT PRODUCTS: NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE
VALUE
|
Fund objectives
The Fund seeks to maximize current income. As a secondary objective, the Fund seeks capital appreciation to the extent consistent with its objective
of seeking to maximize current income.
Under normal market conditions, the Fund invests at least 80% of its net assets, plus any borrowings for
investment purposes, in high-yield debt securities. In addition, the Fund may invest up to 35% of its total assets in debt securities of issuers located in emerging market countries.
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|
|
II
|
|
Western Asset High Income Fund II Inc.
|
Letter from the chairman
Dear Shareholder,
We are pleased to provide the annual report of Western Asset High Income Fund II Inc. for the twelve-month reporting period ended April 30,
2020. Please read on for a detailed look at prevailing economic and market conditions during the Funds reporting period and to learn how those conditions have affected Fund performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One
way we accomplish this is through our website, www.lmcef.com. Here you can gain immediate access to market and investment information, including:
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Fund prices and performance,
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|
|
Market insights and commentaries from our portfolio managers, and
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A host of educational resources.
|
We look
forward to helping you meet your financial goals.
Sincerely,
Jane Trust, CFA
Chairman, President and Chief Executive Officer
May 29, 2020
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Western Asset High Income Fund II Inc.
|
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III
|
Fund overview
Q. What is the Funds investment strategy?
A. The Fund seeks to maximize current income. As a secondary objective, the Fund seeks capital appreciation to the extent consistent with its objective of seeking to maximize current income. Under normal
market conditions, the Fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in high-yield debt securities. The Fund may invest up to 35% of its total assets in debt securities of issuers located in emerging
market countries. It may also invest up to 30% of its assets in zero coupon securities, pay-in-kind bonds and deferred payment securities, and up to 20% of its assets in
equity securities. The Fund may utilize a variety of derivative instruments for investment or risk management purposes, such as options, futures contracts, swap agreements including credit default swaps. We employ an actively managed approach that
is risk-controlled and assimilates top-down macroeconomic views with industry sector insights and bottom-up credit research to derive the general framework for the
Funds predominantly non-investment grade credit mandate. This framework provides the foundation for how the portfolio is positioned with respect to risk (aggressive, neutral, conservative), as well as
identifying sector overweights and underweights.
Risk and weightings are reviewed on a regular basis. Our
bottom-up process provides the basis for populating the targeted industry weightings through individual credit selection. Analysts work closely with portfolio managers to determine which credits provide the
best risk/reward relationship within their respective sectors. The research team focuses on key fundamental measures such as leverage, cash flow adequacy, liquidity, amortization schedule, underlying asset value and management integrity/track
record.
At Western Asset Management Company, LLC (Western Asset), the Funds subadviser, we utilize a fixed-income team approach, with
decisions derived from interaction among various investment management sector specialists. The sector teams are comprised of Western Assets senior portfolio management personnel, research analysts and an
in-house economist. Under this team approach, management of client fixed-income portfolios will reflect a consensus of interdisciplinary views within the Western Asset organization. The individuals responsible
for development of investment strategy, day-to-day portfolio management, oversight and coordination of the Fund are S. Kenneth Leech, Michael C. Buchanan and Christopher
F. Kilpatrick.
Q. What were the overall market conditions during the Funds reporting period?
A. Fixed income markets, in general, posted mixed results over the twelve-month reporting period ended April 30, 2020. Most spread
sectors (non-Treasuries) lagged equal durationi Treasuries amid periods of heightened volatility. This was driven by a number of factors, including extreme risk aversion as the COVID-19 pandemic escalated, sharply falling
global growth, aggressive monetary policy accommodation from the Federal Reserve Board (the Fed),ii trade conflicts and a number of geopolitical issues.
Both short- and long-term U.S. Treasury yields moved sharply
lower during the reporting period. The yield for the two-year Treasury note began the reporting period at 2.27% and
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Western Asset High Income Fund II Inc. 2020 Annual Report
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|
1
|
Fund overview (contd)
ended the period at 0.20%, equaling the low for the period. The yield for the two-year Treasury note experienced a high for the period of 2.35% on May 2, 2019. The yield for the ten-year Treasury began the reporting period at 2.51% and ended the
reporting period at 0.64%. The yield for the ten-year Treasury peaked at 2.55% on May 2, 2019, and the low for the period of 0.58% occurred on April 21, 2020.
The Bloomberg Barclays U.S. Aggregate Indexiii returned 10.84% for the twelve months ended April 30, 2020. Comparatively, riskier fixed-income securities, including
high-yield bonds, produced weak results. Over the fiscal year, the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Cap Indexiv returned -4.08%. Elsewhere, the JPMorgan Emerging Markets Bond Index Globalv (EMBI Global) returned -3.31% for the
twelve-month reporting period ended April 30, 2020.
Q. How did we respond to these changing market conditions?
A. A number of adjustments were made to the Funds portfolio during the reporting period. From a regional perspective, we reduced the Funds
overweight allocation to both emerging markets and higher-quality bank loans in favor of developed market high-yield bonds during periods of uncertainty and increased volatility. Additionally, we increased the Funds allocation to
investment-grade corporate bonds (largely in the banking industry), as valuations became significantly more attractive toward the end of the reporting period.
From a quality prospective, we increased the overall quality of the Funds portfolio by reducing its allocation to lower-rated highly-levered companies rated CCC or lower. Meanwhile, we increased the
Funds exposure to securities rated BB and investment-grade bonds. The rating agencies have been in downgrade mode and we added several select fallen angel opportunities (securities that were rated investment-grade, but that were
downgraded to below investment-grade). From an industry perspective, we increased the Funds overweights to the cable, pharmaceuticals and the previously mentioned banking industries. We are staying cautious on
big-box retail and transportation, and trying to maintain a higher quality bias among the Funds energy holdings.
We employed U.S. Treasury futures to manage the durationv of the Fund. On a standalone basis, these derivatives did not have a material impact on performance.
During the
reporting period, we tactically utilized leverage in the Fund. We ended the period with liabilities as a percentage of gross assets of approximately 31%, versus roughly 29% when the period began. We reduced the amount of money we were borrowing in
March 2020, as asset prices moved lower and then redrew a portion of the leverage in April 2020 as asset prices stabilized. The use of leverage detracted from results given the negative total returns posted by the Funds high-yield and emerging
market positions in March 2020.
During March and into the beginning of April 2020, we repurchased roughly $4.5 million in equity of the Fund. We
felt the aggressive selling was overdone and the Funds shares offered an attractive income opportunity for shareholders.
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2
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Western Asset High Income Fund II Inc. 2020 Annual Report
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Performance review
For the twelve months ended April 30, 2020, Western Asset High Income Fund II Inc. returned -8.11%
based on its net asset value (NAV)vi and -10.02% based on its New York Stock Exchange (NYSE) market price per share. The Funds unmanaged benchmarks, the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Cap Index and the EMBI
Global, returned -4.08% and -3.31%, respectively, for the same period. The Lipper High Yield (Leveraged) Closed-End Funds
Category Averagevii returned -11.96%
over the same time frame. Please note that Lipper performance returns are based on each funds NAV.
During the twelve-month period, the Fund made
distributions to shareholders totaling $0.57 per share of which $0.09 will be treated as a return of capital for tax purposes.* The performance table shows the Funds twelve-month total return based on its NAV and market price as of
April 30, 2020. Past performance is no guarantee of future results.
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Performance Snapshot as
of April 30, 2020
|
|
Price Per Share
|
|
12-Month
Total Return**
|
|
$ 6.19 (NAV)
|
|
|
-8.11
|
%
|
$ 5.51 (Market Price)
|
|
|
-10.02
|
%
|
All figures represent past performance and are not a guarantee of future results.
** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees,
operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.
Total return assumes the reinvestment of all distributions, including returns of capital, at NAV.
Total return assumes the reinvestment of all distributions, including returns of capital, in additional shares in accordance with the Funds Dividend
Reinvestment Plan.
Q. What were the leading contributors to performance?
A. Duration and yield curveviii positioning were the largest contributors to the Funds results. In particular, having both a long duration bias and an
overweight to U.S. Treasuries were beneficial as rates moved sharply lower over the reporting period.
In terms of individual sectors and holdings,
within the Communication Services sector, overweights to Sprint Capital Corp., Sprint Communications, Inc., DISH DBS Corp., Altice France SA (SFR), along with a large underweight in Frontier Communications, were additive for results.
During the reporting period, Sprint Capital Corp. completed its merger with higher-rated and more fundamentally sound T-Mobile USA Inc., sending the Funds T-Mobile
bonds higher. DISH DBS Corp. posted solid fundamental results and continued to generate impressive free cash flow and paid down debt during the period. SFR continued to post positive fundamental results and we added additional exposure during the
March 2020
*
|
For the character of distributions paid during the fiscal year ended April 30, 2020, please refer to page 48 of this report.
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Western Asset High Income Fund II Inc. 2020 Annual Report
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3
|
Fund overview (contd)
selloff at very attractive prices. Frontier Communications filed for Chapter 11
bankruptcy, which negatively impacted its large debt load. Within the retail sector, the Funds PetSmart exposure continued to perform well as its fundamental results were positive and the company used its shares in Chewy.com to reduce debt.
Within the pharmaceutical space, the Funds overweight to Teva Pharmaceutical Industries was rewarded, as the company was able to stabilize its fundamental results, tapped the high-yield market, and redirected its cash flow to reduce debt.
Lastly, an overweight to the higher-quality high-yield bond and loan issuer Burger King (BC/New Red Finance) performed well during the reporting period.
The Funds quality biases were beneficial for returns, led by an underweight in securities rated CCC and below. An opportunistic allocation to investment-grade
corporate bonds was also additive for performance during the reporting period.
Q. What were the leading detractors from performance?
A. The largest detractors from performance during the reporting period were concentrated in a few areas. A handful of Energy sector
overweights, including Chesapeake Energy Corp., Oasis Petroleum and Continental Resources detracted from results. The overall Energy sector was negatively impacted by the global economic slowdown and falling oil prices as demand sharply declined.
Chesapeake Energy and Oasis Petroleum posted poor results, and we believe both companies are preparing to restructure or offer unfavorable distressed exchange opportunities. Continental Resources is an example of an overweight investment-grade
energy issuer that performed poorly. We thought it would be beneficial to stay in the higher quality portion of the space given the sectors dynamics. This strategy was not rewarded, as the rating agencies were aggressively downgrading many
issuers toward the end of the reporting period. While Energy was the worst performing sector in the first quarter of 2020, it is worth noting that it has been one of the best performing sectors thus far in the second quarter of 2020, as prices
appear to have stabilized and demand is slowly returning.
Within the Consumer Discretionary sector, overweight positions in Party City Holdings, Inc.,
both its bonds and senior secured term-loans, were negative for results. The company posted disappointing fourth quarter 2019 earnings, due to a shortage of helium and several operational missteps, including poor execution during the important
Halloween holiday season. We believed the company was taking the necessary steps to stabilize its business and could begin to generate free cash flow to reduce its debt. However, the global shutdown from
COVID-19 appears to have been an additional blow to the company that they were not in a position to endure. Demand for party supplies significantly declined as consumers have had to shelter in place and avoid non-essential gatherings. Against this backdrop, Party Citys bonds and loans have performed very poorly.
Among
the Funds emerging market allocation, an overweight to Argentina was a detractor from results. The Funds U.S. dollar-denominated sovereign bonds (Republic of Argentine and Provincia de Buenos Aire) underperformed. Both were negatively
impacted by the countrys external financing needs and heightened political uncertainty. In particular, an
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4
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Western Asset High Income Fund II Inc. 2020 Annual Report
|
unexpectedly large margin of victory for the opposition party in Argentinas presidential primaries caused debt
domiciled in the country to considerably decline in August 2019. Given current valuations and the ongoing negotiations, we are maintaining the Funds positions in the country.
Looking for additional information?
The Fund is traded under the symbol HIX and
its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available online under the symbol XHGIX on most financial websites. Barrons and the Wall Street Journals Monday edition
both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.lmcef.com (click
on the name of the Fund).
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Funds current NAV, market price and other information.
Thank you for your investment in Western Asset High Income Fund II Inc. As always, we appreciate that you have chosen us to manage your assets and we
remain focused on achieving the Funds investment goals.
Sincerely,
Western Asset Management Company, LLC
May 29, 2020
RISKS: The Fund is a diversified closed-end management
investment company designed primarily as a long-term investment and not as a trading vehicle. The Fund is not intended to be a complete investment program and, due to the uncertainty inherent in all investments, there can be no assurance that the
Fund will achieve its investment objective. The Funds common stock is traded on the New York Stock Exchange. Similar to stocks, the Funds share price will fluctuate with market conditions and, at the time of sale, may be worth more or
less than the original investment. Shares of closed-end funds often trade at a discount to their net asset value. Diversification does not assure against market loss. The Funds investments are subject to
a number of risks, such as credit risk, inflation risk and interest rate risk. As interest rates rise, bond prices fall, reducing the value of the Funds holdings. The Fund may use derivatives, such as options and futures, which can be
illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. High-yield bonds, known as junk bonds, involve greater credit and liquidity risks than investment grade bonds. Foreign securities
are subject to certain risks not associated with domestic investing, such as currency fluctuations and changes in political and economic conditions which could result in significant fluctuations. These risks are magnified in emerging markets.
Emerging market countries tend to have economic, political and legal systems that are less developed and are less stable than those of more developed countries. The Fund is also permitted purchases of equity securities. Equity securities generally
have greater price volatility than fixed income securities. Leverage may result in greater volatility
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Western Asset High Income Fund II Inc. 2020 Annual Report
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5
|
Fund overview (contd)
of NAV and the market price of common shares and increases a shareholders risk
of loss. The Fund may also invest in money market funds, including funds affiliated with the Funds manager and subadviser.
Portfolio holdings
and breakdowns are as of April 30, 2020 and are subject to change and may not be representative of the portfolio managers current or future investments. Please refer to pages 8 through 28 for a list and percentage breakdown of the
Funds holdings.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or
sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment
strategies discussed should consult their financial professional. The Funds top five sector holdings (as a percentage of net assets) as of April 30, 2020 were: Communication Services (27.8%), Consumer Discretionary (21.6%), Financials
(19.5%), Energy (18.5%) and Materials (11.9%). The Funds portfolio composition is subject to change at any time.
All investments are subject to
risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from
those of the firm as a whole.
i
|
Duration is the measure of the price sensitivity of a fixed-income security to an interest rate change of 100 basis points. Calculation is based on the weighted
average of the present values for all cash flows.
|
ii
|
The Federal Reserve Board (the Fed) is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable
prices, and a sustainable pattern of international trade and payments.
|
iii
|
The Bloomberg Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment
grade or higher, and having at least one year to maturity.
|
iv
|
The Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Cap Index is an index of the 2% Issuer Cap component of the Bloomberg Barclays U.S. Corporate
High Yield Index, which covers the U.S. dollar-denominated, non-investment grade, fixed-rate, taxable corporate bond market.
|
v
|
The JPMorgan Emerging Markets Bond Index Global (EMBI Global) tracks total returns for U.S. dollar-denominated debt instruments issued by emerging
market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds and local market instruments.
|
vi
|
Net asset value (NAV) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any), from the
closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the
Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Funds market price as determined by supply of and demand for the Funds shares.
|
vii
|
Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period
ended April 30, 2020, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 38 funds in the Funds Lipper category.
|
viii
|
The yield curve is the graphical depiction of the relationship between the yield on bonds of the same credit quality but different maturities.
|
|
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6
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Western Asset High Income Fund II Inc. 2020 Annual Report
|
Fund at a glance (unaudited)
Investment breakdown (%) as a percent of total investments
|
The bar graph above represents the composition of the Funds investments as of April 30, 2020 and April 30, 2019 and does not include
derivatives, such as forward foreign currency contracts. The Fund is actively managed. As a result, the composition of the Funds investments is subject to change at any time.
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Western Asset High Income Fund II Inc. 2020 Annual Report
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|
7
|
Schedule of investments
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
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|
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|
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|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Corporate Bonds & Notes 114.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication Services 25.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Telecommunication Services 5.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Altice France Holding SA, Senior Secured Notes
|
|
|
10.500
|
%
|
|
|
5/15/27
|
|
|
|
2,190,000
|
|
|
$
|
2,376,610
|
(a)
|
Altice France SA, Senior Secured Notes
|
|
|
7.375
|
%
|
|
|
5/1/26
|
|
|
|
13,680,000
|
|
|
|
14,359,212
|
(a)(b)
|
Altice France SA, Senior Secured Notes
|
|
|
8.125
|
%
|
|
|
2/1/27
|
|
|
|
2,530,000
|
|
|
|
2,737,713
|
(a)(b)
|
Cogent Communications Group Inc., Senior Secured Notes
|
|
|
5.375
|
%
|
|
|
3/1/22
|
|
|
|
1,120,000
|
|
|
|
1,142,904
|
(a)(b)
|
Intelsat Jackson Holdings SA, Senior Secured Notes
|
|
|
8.000
|
%
|
|
|
2/15/24
|
|
|
|
2,660,000
|
|
|
|
2,745,120
|
(a)(b)
|
Telecom Italia Capital SA, Senior Notes
|
|
|
6.000
|
%
|
|
|
9/30/34
|
|
|
|
2,660,000
|
|
|
|
2,770,922
|
|
Telecom Italia SpA, Senior Notes
|
|
|
5.303
|
%
|
|
|
5/30/24
|
|
|
|
410,000
|
|
|
|
428,466
|
(a)(b)
|
Windstream Services LLC/ Windstream Finance Corp., Secured Notes
|
|
|
10.500
|
%
|
|
|
6/30/24
|
|
|
|
4,089,000
|
|
|
|
286,230
|
*(a)(b)(c)
|
Windstream Services LLC/ Windstream Finance Corp., Secured Notes
|
|
|
9.000
|
%
|
|
|
6/30/25
|
|
|
|
1,225,000
|
|
|
|
76,563
|
*(a)(b)(c)
|
Total Diversified Telecommunication Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,923,740
|
|
Entertainment 1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Netflix Inc., Senior Notes
|
|
|
5.875
|
%
|
|
|
11/15/28
|
|
|
|
2,755,000
|
|
|
|
3,128,303
|
(b)
|
Netflix Inc., Senior Notes
|
|
|
6.375
|
%
|
|
|
5/15/29
|
|
|
|
2,305,000
|
|
|
|
2,713,100
|
(b)
|
Total Entertainment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,841,403
|
|
Interactive Media & Services 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Match Group Inc., Senior Notes
|
|
|
6.375
|
%
|
|
|
6/1/24
|
|
|
|
1,170,000
|
|
|
|
1,220,228
|
(b)
|
Match Group Inc., Senior Notes
|
|
|
5.000
|
%
|
|
|
12/15/27
|
|
|
|
920,000
|
|
|
|
969,772
|
(a)(b)
|
Total Interactive Media & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,190,000
|
|
Media 10.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CCO Holdings LLC/CCO Holdings Capital Corp., Senior Notes
|
|
|
5.125
|
%
|
|
|
5/1/27
|
|
|
|
5,850,000
|
|
|
|
6,101,550
|
(a)(b)
|
CCO Holdings LLC/CCO Holdings Capital Corp., Senior Notes
|
|
|
5.875
|
%
|
|
|
5/1/27
|
|
|
|
1,100,000
|
|
|
|
1,151,961
|
(a)(b)
|
CCO Holdings LLC/CCO Holdings Capital Corp., Senior Notes
|
|
|
5.000
|
%
|
|
|
2/1/28
|
|
|
|
8,300,000
|
|
|
|
8,560,101
|
(a)(b)
|
CCO Holdings LLC/CCO Holdings Capital Corp., Senior Notes
|
|
|
4.500
|
%
|
|
|
8/15/30
|
|
|
|
5,105,000
|
|
|
|
5,194,337
|
(a)
|
CCO Holdings LLC/CCO Holdings Capital Corp., Senior Notes
|
|
|
4.500
|
%
|
|
|
5/1/32
|
|
|
|
7,100,000
|
|
|
|
7,086,776
|
(a)(b)
|
See Notes to Financial
Statements.
|
|
|
8
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Media continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH DBS Corp., Senior Notes
|
|
|
5.875
|
%
|
|
|
11/15/24
|
|
|
|
6,180,000
|
|
|
$
|
5,976,307
|
(b)
|
DISH DBS Corp., Senior Notes
|
|
|
7.750
|
%
|
|
|
7/1/26
|
|
|
|
13,359,000
|
|
|
|
13,220,734
|
(b)
|
Univision Communications Inc., Senior Secured Notes
|
|
|
9.500
|
%
|
|
|
5/1/25
|
|
|
|
2,490,000
|
|
|
|
2,530,463
|
(a)
|
UPC Holding BV, Senior Secured Notes
|
|
|
5.500
|
%
|
|
|
1/15/28
|
|
|
|
3,010,000
|
|
|
|
2,930,085
|
(a)(b)
|
Virgin Media Finance PLC, Senior Notes
|
|
|
6.000
|
%
|
|
|
10/15/24
|
|
|
|
1,710,000
|
|
|
|
1,743,858
|
(a)(b)
|
Virgin Media Secured Finance PLC, Senior Secured Notes
|
|
|
5.500
|
%
|
|
|
8/15/26
|
|
|
|
1,610,000
|
|
|
|
1,671,100
|
(a)
|
Virgin Media Secured Finance PLC, Senior Secured Notes
|
|
|
5.500
|
%
|
|
|
5/15/29
|
|
|
|
500,000
|
|
|
|
521,425
|
(a)
|
Total Media
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,688,697
|
|
Wireless Telecommunication Services 7.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSC Holdings LLC, Senior Notes
|
|
|
6.625
|
%
|
|
|
10/15/25
|
|
|
|
2,510,000
|
|
|
|
2,640,771
|
(a)(b)
|
CSC Holdings LLC, Senior Notes
|
|
|
10.875
|
%
|
|
|
10/15/25
|
|
|
|
5,649,000
|
|
|
|
6,132,837
|
(a)(b)
|
CSC Holdings LLC, Senior Notes
|
|
|
5.375
|
%
|
|
|
2/1/28
|
|
|
|
1,000,000
|
|
|
|
1,033,300
|
(a)(b)
|
CSC Holdings LLC, Senior Notes
|
|
|
6.500
|
%
|
|
|
2/1/29
|
|
|
|
1,930,000
|
|
|
|
2,117,403
|
(a)
|
Sprint Capital Corp., Senior Notes
|
|
|
6.875
|
%
|
|
|
11/15/28
|
|
|
|
2,200,000
|
|
|
|
2,659,800
|
(b)
|
Sprint Capital Corp., Senior Notes
|
|
|
8.750
|
%
|
|
|
3/15/32
|
|
|
|
5,170,000
|
|
|
|
7,287,890
|
(b)
|
Sprint Communications Inc., Senior Notes
|
|
|
7.000
|
%
|
|
|
8/15/20
|
|
|
|
2,300,000
|
|
|
|
2,326,795
|
(b)
|
Sprint Communications Inc., Senior Notes
|
|
|
11.500
|
%
|
|
|
11/15/21
|
|
|
|
4,285,000
|
|
|
|
4,797,272
|
(b)
|
Sprint Corp., Senior Notes
|
|
|
7.250
|
%
|
|
|
9/15/21
|
|
|
|
4,400,000
|
|
|
|
4,634,520
|
(b)
|
Sprint Corp., Senior Notes
|
|
|
7.875
|
%
|
|
|
9/15/23
|
|
|
|
110,000
|
|
|
|
124,195
|
(b)
|
T-Mobile USA Inc., Senior Notes
|
|
|
6.000
|
%
|
|
|
3/1/23
|
|
|
|
1,900,000
|
|
|
|
1,928,215
|
(b)
|
T-Mobile USA Inc., Senior Notes
|
|
|
6.500
|
%
|
|
|
1/15/26
|
|
|
|
310,000
|
|
|
|
328,879
|
(b)
|
VEON Holdings BV, Senior Notes
|
|
|
7.504
|
%
|
|
|
3/1/22
|
|
|
|
1,620,000
|
|
|
|
1,750,378
|
(d)
|
VEON Holdings BV, Senior Notes
|
|
|
7.504
|
%
|
|
|
3/1/22
|
|
|
|
700,000
|
|
|
|
756,336
|
(a)(b)
|
Vimpel Communications Via VIP Finance Ireland Ltd. OJSC, Senior Notes
|
|
|
7.748
|
%
|
|
|
2/2/21
|
|
|
|
2,300,000
|
|
|
|
2,392,322
|
(a)(b)
|
Total Wireless Telecommunication Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,910,913
|
|
Total Communication Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132,554,753
|
|
Consumer Discretionary 15.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auto Components 2.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adient Global Holdings Ltd., Senior Notes
|
|
|
4.875
|
%
|
|
|
8/15/26
|
|
|
|
5,333,000
|
|
|
|
4,012,016
|
(a)(b)
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
9
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Oil, Gas & Consumable Fuels continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Targa Resources Partners LP/Targa Resources Partners Finance Corp., Senior Notes
|
|
|
6.500
|
%
|
|
|
7/15/27
|
|
|
|
1,150,000
|
|
|
$
|
1,042,187
|
(b)
|
Targa Resources Partners LP/Targa Resources Partners Finance Corp., Senior Notes
|
|
|
6.875
|
%
|
|
|
1/15/29
|
|
|
|
270,000
|
|
|
|
249,305
|
|
Transportadora de Gas del Sur SA, Senior Notes
|
|
|
6.750
|
%
|
|
|
5/2/25
|
|
|
|
3,360,000
|
|
|
|
2,488,618
|
(a)(b)
|
Western Midstream Operating LP, Senior Notes
|
|
|
4.050
|
%
|
|
|
2/1/30
|
|
|
|
2,690,000
|
|
|
|
2,468,075
|
(b)
|
Western Midstream Operating LP, Senior Notes
|
|
|
5.300
|
%
|
|
|
3/1/48
|
|
|
|
1,540,000
|
|
|
|
1,166,550
|
|
Western Midstream Operating LP, Senior Notes
|
|
|
5.250
|
%
|
|
|
2/1/50
|
|
|
|
10,952,000
|
|
|
|
8,665,770
|
(b)
|
Williams Cos. Inc., Senior Notes
|
|
|
3.700
|
%
|
|
|
1/15/23
|
|
|
|
1,040,000
|
|
|
|
1,053,418
|
(b)
|
Williams Cos. Inc., Senior Notes
|
|
|
4.550
|
%
|
|
|
6/24/24
|
|
|
|
1,280,000
|
|
|
|
1,330,510
|
(b)
|
Williams Cos. Inc., Senior Notes
|
|
|
7.500
|
%
|
|
|
1/15/31
|
|
|
|
780,000
|
|
|
|
919,103
|
(b)
|
Williams Cos. Inc., Senior Notes
|
|
|
5.750
|
%
|
|
|
6/24/44
|
|
|
|
3,900,000
|
|
|
|
4,259,054
|
(b)
|
WPX Energy Inc., Senior Notes
|
|
|
8.250
|
%
|
|
|
8/1/23
|
|
|
|
1,070,000
|
|
|
|
1,035,011
|
(b)
|
YPF SA, Senior Notes
|
|
|
8.500
|
%
|
|
|
7/28/25
|
|
|
|
6,630,000
|
|
|
|
3,263,949
|
(a)(b)
|
YPF SA, Senior Notes
|
|
|
6.950
|
%
|
|
|
7/21/27
|
|
|
|
570,000
|
|
|
|
257,703
|
(a)
|
Total Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94,722,489
|
|
Financials 18.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks 14.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank of America Corp., Junior Subordinated Notes (6.500% to 10/23/24 then 3 mo. USD LIBOR + 4.174%)
|
|
|
6.500
|
%
|
|
|
10/23/24
|
|
|
|
2,550,000
|
|
|
|
2,717,522
|
(b)(e)(f)
|
Barclays Bank PLC, Subordinated Notes
|
|
|
10.179
|
%
|
|
|
6/12/21
|
|
|
|
1,970,000
|
|
|
|
2,111,724
|
(a)(b)
|
Barclays Bank PLC, Subordinated Notes
|
|
|
7.625
|
%
|
|
|
11/21/22
|
|
|
|
2,950,000
|
|
|
|
3,095,258
|
(b)
|
Barclays PLC, Junior Subordinated Notes (8.000% to 6/15/24 then 5 year Treasury Constant Maturity Rate +
5.672%)
|
|
|
8.000
|
%
|
|
|
6/15/24
|
|
|
|
2,120,000
|
|
|
|
2,116,173
|
(b)(e)(f)
|
Barclays PLC, Subordinated Notes (5.088% to 6/20/29 then 3 mo. USD LIBOR + 3.054%)
|
|
|
5.088
|
%
|
|
|
6/20/30
|
|
|
|
3,250,000
|
|
|
|
3,531,163
|
(b)(f)
|
See Notes to Financial
Statements.
|
|
|
14
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Banks continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBVA Bancomer SA, Subordinated Notes (5.125% to 1/18/28 then 5 year Treasury Constant Maturity Rate +
2.650%)
|
|
|
5.125
|
%
|
|
|
1/18/33
|
|
|
|
5,330,000
|
|
|
$
|
4,630,704
|
(a)(b)(f)
|
BNP Paribas SA, Junior Subordinated Notes (7.375% to 8/19/25 then USD 5 year ICE Swap Rate + 5.150%)
|
|
|
7.375
|
%
|
|
|
8/19/25
|
|
|
|
1,820,000
|
|
|
|
1,891,790
|
(a)(b)(e)(f)
|
CIT Group Inc., Senior Notes
|
|
|
5.000
|
%
|
|
|
8/15/22
|
|
|
|
1,060,000
|
|
|
|
1,050,725
|
(b)
|
CIT Group Inc., Senior Notes
|
|
|
5.000
|
%
|
|
|
8/1/23
|
|
|
|
2,801,000
|
|
|
|
2,756,100
|
(b)
|
Citigroup Inc., Junior Subordinated Notes (5.950% to 5/15/25 then 3 mo. USD LIBOR + 3.905%)
|
|
|
5.950
|
%
|
|
|
5/15/25
|
|
|
|
1,750,000
|
|
|
|
1,764,534
|
(b)(e)(f)
|
Citigroup Inc., Junior Subordinated Notes (6.300% to 5/15/24 then 3 mo. USD LIBOR + 3.423%)
|
|
|
6.300
|
%
|
|
|
5/15/24
|
|
|
|
10,120,000
|
|
|
|
10,000,533
|
(b)(e)(f)
|
Credit Agricole SA, Junior Subordinated Notes (8.125% to 12/23/25 then USD 5 year ICE Swap Rate +
6.185%)
|
|
|
8.125
|
%
|
|
|
12/23/25
|
|
|
|
2,510,000
|
|
|
|
2,800,219
|
(a)(b)(e)(f)
|
HSBC Holdings PLC, Junior Subordinated Notes (6.000% to 5/22/27 then USD 5 year ICE Swap Rate + 3.746%)
|
|
|
6.000
|
%
|
|
|
5/22/27
|
|
|
|
2,640,000
|
|
|
|
2,582,804
|
(b)(e)(f)
|
HSBC Holdings PLC, Junior Subordinated Notes (6.500% to 3/23/28 then USD 5 year ICE Swap Rate + 3.606%)
|
|
|
6.500
|
%
|
|
|
3/23/28
|
|
|
|
2,910,000
|
|
|
|
2,889,441
|
(b)(e)(f)
|
Intesa Sanpaolo SpA, Subordinated Notes
|
|
|
5.017
|
%
|
|
|
6/26/24
|
|
|
|
8,230,000
|
|
|
|
8,239,847
|
(a)(b)
|
Intesa Sanpaolo SpA, Subordinated Notes
|
|
|
5.710
|
%
|
|
|
1/15/26
|
|
|
|
4,250,000
|
|
|
|
4,350,691
|
(a)(b)
|
JPMorgan Chase & Co., Junior Subordinated Notes (6.000% to 8/1/23 then 3 mo. USD LIBOR +
3.300%)
|
|
|
6.000
|
%
|
|
|
8/1/23
|
|
|
|
1,570,000
|
|
|
|
1,586,791
|
(b)(e)(f)
|
JPMorgan Chase & Co., Junior Subordinated Notes (6.100% to 10/1/24 then 3 mo. USD LIBOR +
3.330%)
|
|
|
6.100
|
%
|
|
|
10/1/24
|
|
|
|
2,410,000
|
|
|
|
2,471,925
|
(b)(e)(f)
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
15
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Banks continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royal Bank of Scotland Group PLC, Junior Subordinated Notes (7.648% to 9/30/31 then 3 mo. USD LIBOR +
2.500%)
|
|
|
7.648
|
%
|
|
|
9/30/31
|
|
|
|
3,530,000
|
|
|
$
|
4,882,167
|
(b)(e)(f)
|
Royal Bank of Scotland Group PLC, Junior Subordinated Notes (8.625% to 8/15/21 then USD 5 year ICE Swap Rate +
7.598%)
|
|
|
8.625
|
%
|
|
|
8/15/21
|
|
|
|
1,370,000
|
|
|
|
1,403,497
|
(b)(e)(f)
|
Santander UK Group Holdings PLC, Junior Subordinated Notes (7.375% to 6/24/22 then GBP 5 year Swap Rate +
5.543%)
|
|
|
7.375
|
%
|
|
|
6/24/22
|
|
|
|
1,640,000
|
GBP
|
|
|
1,928,477
|
(d)(e)(f)
|
TC Ziraat Bankasi AS, Senior Notes
|
|
|
5.125
|
%
|
|
|
9/29/23
|
|
|
|
2,530,000
|
|
|
|
2,408,585
|
(a)(b)
|
UniCredit SpA, Subordinated Notes (7.296% to 4/2/29 then USD 5 year ICE Swap Rate + 4.914%)
|
|
|
7.296
|
%
|
|
|
4/2/34
|
|
|
|
2,840,000
|
|
|
|
3,054,646
|
(a)(b)(f)
|
Total Banks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,265,316
|
|
Capital Markets 2.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Suisse Group AG, Junior Subordinated Notes (7.250% to 9/12/25 then 5 year Treasury Constant Maturity Rate +
4.332%)
|
|
|
7.250
|
%
|
|
|
9/12/25
|
|
|
|
3,920,000
|
|
|
|
3,912,924
|
(a)(b)(e)(f)
|
Donnelley Financial Solutions Inc., Senior Notes
|
|
|
8.250
|
%
|
|
|
10/15/24
|
|
|
|
2,080,000
|
|
|
|
1,949,584
|
(b)
|
UBS Group AG, Junior Subordinated Notes (7.000% to 1/31/24 then USD 5 year ICE Swap Rate + 4.344%)
|
|
|
7.000
|
%
|
|
|
1/31/24
|
|
|
|
5,790,000
|
|
|
|
5,924,299
|
(a)(b)(e)(f)
|
Total Capital Markets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,786,807
|
|
Consumer Finance 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navient Corp., Senior Notes
|
|
|
5.875
|
%
|
|
|
10/25/24
|
|
|
|
1,170,000
|
|
|
|
1,072,013
|
(b)
|
Navient Corp., Senior Notes
|
|
|
6.750
|
%
|
|
|
6/15/26
|
|
|
|
1,990,000
|
|
|
|
1,805,228
|
(b)
|
Total Consumer Finance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,877,241
|
|
Diversified Financial Services 1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AerCap Ireland Capital DAC/AerCap Global Aviation Trust, Senior Notes
|
|
|
4.625
|
%
|
|
|
10/30/20
|
|
|
|
890,000
|
|
|
|
878,742
|
|
AerCap Ireland Capital DAC/AerCap Global Aviation Trust, Senior Notes
|
|
|
4.450
|
%
|
|
|
12/16/21
|
|
|
|
150,000
|
|
|
|
139,950
|
|
AerCap Ireland Capital DAC/AerCap Global Aviation Trust, Senior Notes
|
|
|
4.625
|
%
|
|
|
7/1/22
|
|
|
|
1,390,000
|
|
|
|
1,311,380
|
|
See Notes to Financial
Statements.
|
|
|
16
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Diversified Financial Services continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global Aircraft Leasing Co. Ltd., Senior Notes (6.500% Cash or 7.250% PIK)
|
|
|
6.500
|
%
|
|
|
9/15/24
|
|
|
|
4,480,000
|
|
|
$
|
2,738,400
|
(a)(b)(g)
|
International Lease Finance Corp., Senior Notes
|
|
|
8.250
|
%
|
|
|
12/15/20
|
|
|
|
2,160,000
|
|
|
|
2,173,408
|
(b)
|
International Lease Finance Corp., Senior Notes
|
|
|
5.875
|
%
|
|
|
8/15/22
|
|
|
|
760,000
|
|
|
|
742,568
|
(b)
|
Total Diversified Financial Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,984,448
|
|
Insurance 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetLife Capital Trust IV, Junior Subordinated Notes
|
|
|
7.875
|
%
|
|
|
12/15/37
|
|
|
|
1,100,000
|
|
|
|
1,365,501
|
(a)(b)
|
Total Financials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,279,313
|
|
Health Care 9.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Providers & Services 2.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHS/Community Health Systems Inc., Senior Secured Notes
|
|
|
8.000
|
%
|
|
|
3/15/26
|
|
|
|
1,900,000
|
|
|
|
1,830,232
|
(a)(b)
|
DaVita Inc., Senior Notes
|
|
|
5.000
|
%
|
|
|
5/1/25
|
|
|
|
2,010,000
|
|
|
|
2,043,919
|
(b)
|
HCA Inc., Senior Notes
|
|
|
5.625
|
%
|
|
|
9/1/28
|
|
|
|
1,810,000
|
|
|
|
2,013,951
|
(b)
|
HCA Inc., Senior Notes
|
|
|
7.500
|
%
|
|
|
11/15/95
|
|
|
|
2,205,000
|
|
|
|
2,444,463
|
(b)
|
LifePoint Health Inc., Senior Secured Notes
|
|
|
6.750
|
%
|
|
|
4/15/25
|
|
|
|
1,140,000
|
|
|
|
1,177,506
|
(a)
|
Magellan Health Inc., Senior Notes
|
|
|
4.900
|
%
|
|
|
9/22/24
|
|
|
|
4,030,000
|
|
|
|
3,953,631
|
(b)
|
Tenet Healthcare Corp., Secured Notes
|
|
|
6.250
|
%
|
|
|
2/1/27
|
|
|
|
1,000,000
|
|
|
|
987,750
|
(a)(b)
|
Tenet Healthcare Corp., Senior Secured Notes
|
|
|
7.500
|
%
|
|
|
4/1/25
|
|
|
|
610,000
|
|
|
|
659,105
|
(a)
|
Total Health Care Providers & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,110,557
|
|
Pharmaceuticals 6.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bausch Health Americas Inc., Senior Notes
|
|
|
8.500
|
%
|
|
|
1/31/27
|
|
|
|
4,660,000
|
|
|
|
5,158,853
|
(a)
|
Bausch Health Cos. Inc., Senior Notes
|
|
|
5.875
|
%
|
|
|
5/15/23
|
|
|
|
114,000
|
|
|
|
113,322
|
(a)(b)
|
Bausch Health Cos. Inc., Senior Notes
|
|
|
6.125
|
%
|
|
|
4/15/25
|
|
|
|
5,510,000
|
|
|
|
5,607,527
|
(a)(b)
|
Bausch Health Cos. Inc., Senior Notes
|
|
|
9.000
|
%
|
|
|
12/15/25
|
|
|
|
500,000
|
|
|
|
547,750
|
(a)(b)
|
Bausch Health Cos. Inc., Senior Secured Notes
|
|
|
7.000
|
%
|
|
|
3/15/24
|
|
|
|
740,000
|
|
|
|
764,827
|
(a)(b)
|
Teva Pharmaceutical Finance Co. BV, Senior Notes
|
|
|
2.950
|
%
|
|
|
12/18/22
|
|
|
|
9,888,000
|
|
|
|
9,462,322
|
(b)
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
17
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Pharmaceuticals continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teva Pharmaceutical Finance IV BV, Senior Notes
|
|
|
3.650
|
%
|
|
|
11/10/21
|
|
|
|
250,000
|
|
|
$
|
242,612
|
|
Teva Pharmaceutical Finance Netherlands III BV, Senior Notes
|
|
|
2.200
|
%
|
|
|
7/21/21
|
|
|
|
5,060,000
|
|
|
|
4,950,198
|
(b)
|
Teva Pharmaceutical Finance Netherlands III BV, Senior Notes
|
|
|
2.800
|
%
|
|
|
7/21/23
|
|
|
|
7,920,000
|
|
|
|
7,317,684
|
(b)
|
Teva Pharmaceutical Finance Netherlands III BV, Senior Notes
|
|
|
6.000
|
%
|
|
|
4/15/24
|
|
|
|
1,160,000
|
|
|
|
1,160,000
|
|
Total Pharmaceuticals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,325,095
|
|
Total Health Care
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,435,652
|
|
Industrials 7.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aerospace & Defense 0.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TransDigm Inc., Senior Secured Notes
|
|
|
8.000
|
%
|
|
|
12/15/25
|
|
|
|
3,220,000
|
|
|
|
3,364,900
|
(a)
|
Air Freight & Logistics 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
XPO Logistics Inc., Senior Notes
|
|
|
6.500
|
%
|
|
|
6/15/22
|
|
|
|
754,000
|
|
|
|
760,371
|
(a)(b)
|
Airlines 2.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continental Airlines Pass-Through Trust
|
|
|
5.983
|
%
|
|
|
4/19/22
|
|
|
|
3,035,693
|
|
|
|
2,922,552
|
(b)
|
Delta Air Lines Inc., Senior Notes
|
|
|
3.625
|
%
|
|
|
3/15/22
|
|
|
|
3,340,000
|
|
|
|
2,984,410
|
|
Delta Air Lines Inc., Senior Notes
|
|
|
2.900
|
%
|
|
|
10/28/24
|
|
|
|
1,070,000
|
|
|
|
847,102
|
|
Delta Air Lines Inc., Senior Secured Notes
|
|
|
7.000
|
%
|
|
|
5/1/25
|
|
|
|
4,070,000
|
|
|
|
4,181,619
|
(a)
|
Delta Air Lines Pass-Through Certificates Trust
|
|
|
8.021
|
%
|
|
|
8/10/22
|
|
|
|
520,068
|
|
|
|
494,761
|
(b)
|
Total Airlines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,430,444
|
|
Building Products 0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Industries Inc., Senior Notes
|
|
|
5.000
|
%
|
|
|
2/15/27
|
|
|
|
2,580,000
|
|
|
|
2,601,414
|
(a)(b)
|
Standard Industries Inc., Senior Notes
|
|
|
4.750
|
%
|
|
|
1/15/28
|
|
|
|
2,345,000
|
|
|
|
2,307,480
|
(a)(b)
|
Total Building Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,908,894
|
|
Commercial Services & Supplies 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GFL Environmental Inc., Senior Notes
|
|
|
8.500
|
%
|
|
|
5/1/27
|
|
|
|
1,404,000
|
|
|
|
1,538,559
|
(a)
|
Industrial Conglomerates 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General Electric Co., Junior Subordinated Notes (5.000% to 1/21/21 then 3 mo. USD LIBOR + 3.330%)
|
|
|
5.000
|
%
|
|
|
1/21/21
|
|
|
|
1,780,000
|
|
|
|
1,461,825
|
(b)(e)(f)
|
See Notes to Financial
Statements.
|
|
|
18
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Machinery 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allison Transmission Inc., Senior Notes
|
|
|
4.750
|
%
|
|
|
10/1/27
|
|
|
|
1,690,000
|
|
|
$
|
1,583,699
|
(a)(b)
|
Marine 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Navios Maritime Acquisition Corp./ Navios Acquisition Finance U.S. Inc., Senior Secured Notes
|
|
|
8.125
|
%
|
|
|
11/15/21
|
|
|
|
1,720,000
|
|
|
|
1,127,718
|
(a)(b)
|
Trading Companies & Distributors 2.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Rentals North America Inc., Senior Notes
|
|
|
5.500
|
%
|
|
|
7/15/25
|
|
|
|
230,000
|
|
|
|
234,071
|
|
United Rentals North America Inc., Senior Notes
|
|
|
6.500
|
%
|
|
|
12/15/26
|
|
|
|
7,390,000
|
|
|
|
7,683,013
|
(b)
|
United Rentals North America Inc., Senior Notes
|
|
|
5.500
|
%
|
|
|
5/15/27
|
|
|
|
606,000
|
|
|
|
615,878
|
|
United Rentals North America Inc., Senior Notes
|
|
|
4.875
|
%
|
|
|
1/15/28
|
|
|
|
4,075,000
|
|
|
|
4,102,914
|
(b)
|
Total Trading Companies & Distributors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,635,876
|
|
Total Industrials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,812,286
|
|
Information Technology 2.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communications Equipment 0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CommScope Inc., Senior Notes
|
|
|
8.250
|
%
|
|
|
3/1/27
|
|
|
|
4,001,000
|
|
|
|
3,853,563
|
(a)(b)
|
CommScope Technologies LLC, Senior Notes
|
|
|
6.000
|
%
|
|
|
6/15/25
|
|
|
|
80,000
|
|
|
|
71,692
|
(a)
|
Total Communications Equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,925,255
|
|
Semiconductors & Semiconductor Equipment
0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sensata Technologies UK Financing Co. PLC, Senior Notes
|
|
|
6.250
|
%
|
|
|
2/15/26
|
|
|
|
900,000
|
|
|
|
931,185
|
(a)
|
Software 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
j2 Cloud Services LLC/j2 Cloud Co-Obligor Inc., Senior Notes
|
|
|
6.000
|
%
|
|
|
7/15/25
|
|
|
|
240,000
|
|
|
|
243,648
|
(a)(b)
|
Technology Hardware, Storage & Peripherals
1.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dell International LLC/EMC Corp., Senior Notes
|
|
|
7.125
|
%
|
|
|
6/15/24
|
|
|
|
1,230,000
|
|
|
|
1,278,401
|
(a)(b)
|
Seagate HDD Cayman, Senior Notes
|
|
|
4.750
|
%
|
|
|
6/1/23
|
|
|
|
1,700,000
|
|
|
|
1,775,373
|
(b)
|
Seagate HDD Cayman, Senior Notes
|
|
|
4.750
|
%
|
|
|
1/1/25
|
|
|
|
850,000
|
|
|
|
877,798
|
(b)
|
Seagate HDD Cayman, Senior Notes
|
|
|
4.875
|
%
|
|
|
6/1/27
|
|
|
|
495,000
|
|
|
|
517,529
|
|
Western Digital Corp., Senior Notes
|
|
|
4.750
|
%
|
|
|
2/15/26
|
|
|
|
1,798,000
|
|
|
|
1,842,375
|
(b)
|
Total Technology Hardware, Storage & Peripherals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,291,476
|
|
Total Information Technology
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,391,564
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
19
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Materials 11.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Braskem America Finance Co., Senior Notes
|
|
|
7.125
|
%
|
|
|
7/22/41
|
|
|
|
700,000
|
|
|
$
|
637,000
|
(b)(d)
|
Mexichem SAB de CV, Senior Notes
|
|
|
5.875
|
%
|
|
|
9/17/44
|
|
|
|
2,000,000
|
|
|
|
1,934,720
|
(a)(b)
|
Total Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,571,720
|
|
Construction Materials 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemex SAB de CV, Senior Secured Notes
|
|
|
6.125
|
%
|
|
|
5/5/25
|
|
|
|
1,530,000
|
|
|
|
1,384,956
|
(a)(b)
|
Containers & Packaging 4.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARD Finance SA, Senior Secured Notes (6.500% Cash or 7.250% PIK)
|
|
|
6.500
|
%
|
|
|
6/30/27
|
|
|
|
2,790,000
|
|
|
|
2,602,652
|
(a)(b)(g)
|
Ardagh Packaging Finance PLC/ Ardagh Holdings USA Inc., Senior Notes
|
|
|
6.000
|
%
|
|
|
2/15/25
|
|
|
|
7,158,000
|
|
|
|
7,208,965
|
(a)(b)
|
Greif Inc., Senior Notes
|
|
|
6.500
|
%
|
|
|
3/1/27
|
|
|
|
2,930,000
|
|
|
|
2,943,624
|
(a)(b)
|
Hercule Debtco Sarl, Senior Secured Notes (6.750% Cash or 7.500% PIK)
|
|
|
6.750
|
%
|
|
|
6/30/24
|
|
|
|
2,050,000
|
EUR
|
|
|
2,111,703
|
(a)(g)
|
Pactiv LLC, Senior Notes
|
|
|
7.950
|
%
|
|
|
12/15/25
|
|
|
|
920,000
|
|
|
|
975,016
|
(b)
|
Pactiv LLC, Senior Notes
|
|
|
8.375
|
%
|
|
|
4/15/27
|
|
|
|
4,310,000
|
|
|
|
4,513,001
|
(b)
|
Trivium Packaging Finance BV, Senior Notes
|
|
|
8.500
|
%
|
|
|
8/15/27
|
|
|
|
1,230,000
|
|
|
|
1,291,070
|
(a)
|
Total Containers & Packaging
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,646,031
|
|
Metals & Mining 5.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoa Nederland Holding BV, Senior Notes
|
|
|
7.000
|
%
|
|
|
9/30/26
|
|
|
|
3,470,000
|
|
|
|
3,451,435
|
(a)(b)
|
Alcoa Nederland Holding BV, Senior Notes
|
|
|
6.125
|
%
|
|
|
5/15/28
|
|
|
|
2,416,000
|
|
|
|
2,348,714
|
(a)(b)
|
Anglo American Capital PLC, Senior Notes
|
|
|
4.125
|
%
|
|
|
4/15/21
|
|
|
|
590,000
|
|
|
|
593,201
|
(a)(b)
|
ArcelorMittal SA, Senior Notes
|
|
|
7.000
|
%
|
|
|
10/15/39
|
|
|
|
3,200,000
|
|
|
|
3,351,553
|
(b)
|
Arconic Corp., Senior Notes
|
|
|
6.000
|
%
|
|
|
5/15/25
|
|
|
|
1,140,000
|
|
|
|
1,155,675
|
(a)(h)
|
First Quantum Minerals Ltd., Senior Notes
|
|
|
7.250
|
%
|
|
|
4/1/23
|
|
|
|
4,590,000
|
|
|
|
4,189,752
|
(a)(b)
|
Freeport-McMoRan Inc., Senior Notes
|
|
|
3.550
|
%
|
|
|
3/1/22
|
|
|
|
760,000
|
|
|
|
769,234
|
(b)
|
Freeport-McMoRan Inc., Senior Notes
|
|
|
3.875
|
%
|
|
|
3/15/23
|
|
|
|
910,000
|
|
|
|
915,460
|
(b)
|
Freeport-McMoRan Inc., Senior Notes
|
|
|
4.550
|
%
|
|
|
11/14/24
|
|
|
|
2,045,000
|
|
|
|
2,060,747
|
(b)
|
See Notes to Financial
Statements.
|
|
|
20
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Metals & Mining continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freeport-McMoRan Inc., Senior Notes
|
|
|
4.250
|
%
|
|
|
3/1/30
|
|
|
|
750,000
|
|
|
$
|
700,688
|
|
Freeport-McMoRan Inc., Senior Notes
|
|
|
5.400
|
%
|
|
|
11/14/34
|
|
|
|
1,320,000
|
|
|
|
1,245,156
|
(b)
|
Freeport-McMoRan Inc., Senior Notes
|
|
|
5.450
|
%
|
|
|
3/15/43
|
|
|
|
6,030,000
|
|
|
|
5,507,802
|
(b)
|
Vale Overseas Ltd., Senior Notes
|
|
|
6.875
|
%
|
|
|
11/21/36
|
|
|
|
2,960,000
|
|
|
|
3,466,486
|
(b)
|
Total Metals & Mining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,755,903
|
|
Paper & Forest Products 1.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mercer International Inc., Senior Notes
|
|
|
6.500
|
%
|
|
|
2/1/24
|
|
|
|
1,039,000
|
|
|
|
976,452
|
(b)
|
Mercer International Inc., Senior Notes
|
|
|
7.375
|
%
|
|
|
1/15/25
|
|
|
|
3,300,000
|
|
|
|
3,185,160
|
(b)
|
Suzano Austria GmbH, Senior Notes
|
|
|
5.750
|
%
|
|
|
7/14/26
|
|
|
|
2,250,000
|
|
|
|
2,331,225
|
(a)(b)
|
Total Paper & Forest Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,492,837
|
|
Total Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,851,447
|
|
Real Estate 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Real Estate Investment Trusts (REITs) 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CoreCivic Inc., Senior Notes
|
|
|
5.000
|
%
|
|
|
10/15/22
|
|
|
|
1,440,000
|
|
|
|
1,393,848
|
(b)
|
CoreCivic Inc., Senior Notes
|
|
|
4.625
|
%
|
|
|
5/1/23
|
|
|
|
200,000
|
|
|
|
190,250
|
(b)
|
CoreCivic Inc., Senior Notes
|
|
|
4.750
|
%
|
|
|
10/15/27
|
|
|
|
1,340,000
|
|
|
|
1,134,042
|
|
MPT Operating Partnership LP/MPT Finance Corp., Senior Notes
|
|
|
5.000
|
%
|
|
|
10/15/27
|
|
|
|
1,132,000
|
|
|
|
1,161,772
|
(b)
|
Total Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,879,912
|
|
Utilities 1.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utilities 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pampa Energia SA, Senior Notes
|
|
|
7.375
|
%
|
|
|
7/21/23
|
|
|
|
1,470,000
|
|
|
|
969,906
|
(b)(d)
|
Pampa Energia SA, Senior Notes
|
|
|
7.500
|
%
|
|
|
1/24/27
|
|
|
|
2,410,000
|
|
|
|
1,479,861
|
(a)
|
Total Electric Utilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,449,767
|
|
Gas Utilities 0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Suburban Propane Partners LP/ Suburban Energy Finance Corp., Senior Notes
|
|
|
5.875
|
%
|
|
|
3/1/27
|
|
|
|
4,850,000
|
|
|
|
4,658,667
|
(b)
|
Independent Power and Renewable Electricity Producers
0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minejesa Capital BV, Senior Secured Notes
|
|
|
4.625
|
%
|
|
|
8/10/30
|
|
|
|
2,380,000
|
|
|
|
2,289,084
|
(a)(b)
|
Total Utilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,397,518
|
|
Total Corporate Bonds & Notes (Cost $576,519,257)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
596,368,952
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
21
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Sovereign Bonds 8.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina 1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentine Republic Government International Bond, Senior Notes
|
|
|
6.875
|
%
|
|
|
4/22/21
|
|
|
|
2,720,000
|
|
|
$
|
790,160
|
|
Argentine Republic Government International Bond, Senior Notes
|
|
|
5.625
|
%
|
|
|
1/26/22
|
|
|
|
6,530,000
|
|
|
|
1,844,725
|
|
Argentine Republic Government International Bond, Senior Notes
|
|
|
4.625
|
%
|
|
|
1/11/23
|
|
|
|
6,000,000
|
|
|
|
1,710,060
|
|
Provincia de Buenos Aires, Senior Notes
|
|
|
9.950
|
%
|
|
|
6/9/21
|
|
|
|
4,880,000
|
|
|
|
1,366,400
|
(a)
|
Total Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,711,345
|
|
Brazil 0.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazil Notas do Tesouro Nacional Serie F, Notes
|
|
|
10.000
|
%
|
|
|
1/1/21
|
|
|
|
4,502,000
|
BRL
|
|
|
865,491
|
|
Brazil Notas do Tesouro Nacional Serie F, Notes
|
|
|
10.000
|
%
|
|
|
1/1/23
|
|
|
|
10,569,000
|
BRL
|
|
|
2,183,142
|
|
Total Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,048,633
|
|
Costa Rica 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costa Rica Government International Bond, Senior Notes
|
|
|
7.158
|
%
|
|
|
3/12/45
|
|
|
|
1,000,000
|
|
|
|
780,000
|
(a)
|
Dominican Republic 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dominican Republic International Bond, Senior Notes
|
|
|
5.500
|
%
|
|
|
1/27/25
|
|
|
|
1,500,000
|
|
|
|
1,413,450
|
(a)
|
Egypt 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Egypt Government International Bond, Senior Notes
|
|
|
5.577
|
%
|
|
|
2/21/23
|
|
|
|
1,600,000
|
|
|
|
1,558,397
|
(a)
|
Egypt Government International Bond, Senior Notes
|
|
|
7.600
|
%
|
|
|
3/1/29
|
|
|
|
2,230,000
|
|
|
|
2,124,534
|
(a)
|
Total Egypt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,682,931
|
|
Ghana 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ghana Government International Bond, Senior Notes
|
|
|
7.625
|
%
|
|
|
5/16/29
|
|
|
|
2,720,000
|
|
|
|
2,101,994
|
(a)
|
Guatemala 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guatemala Government Bond, Senior Notes
|
|
|
4.375
|
%
|
|
|
6/5/27
|
|
|
|
970,000
|
|
|
|
967,187
|
(a)
|
Honduras 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Honduras Government International Bond, Senior Notes
|
|
|
6.250
|
%
|
|
|
1/19/27
|
|
|
|
2,450,000
|
|
|
|
2,315,250
|
(a)
|
Indonesia 0.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia Government International Bond, Senior Notes
|
|
|
3.500
|
%
|
|
|
1/11/28
|
|
|
|
2,000,000
|
|
|
|
2,022,686
|
|
See Notes to Financial
Statements.
|
|
|
22
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Indonesia continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia Treasury Bond, Senior Notes
|
|
|
8.250
|
%
|
|
|
7/15/21
|
|
|
|
10,046,000,000
|
IDR
|
|
$
|
695,791
|
|
Indonesia Treasury Bond, Senior Notes
|
|
|
7.000
|
%
|
|
|
5/15/22
|
|
|
|
8,097,000,000
|
IDR
|
|
|
551,685
|
|
Total Indonesia
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,270,162
|
|
Ivory Coast 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ivory Coast Government International Bond, Senior Notes
|
|
|
5.750
|
%
|
|
|
12/31/32
|
|
|
|
427,500
|
|
|
|
375,088
|
(a)
|
Jamaica 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jamaica Government International Bond, Senior Notes
|
|
|
6.750
|
%
|
|
|
4/28/28
|
|
|
|
1,500,000
|
|
|
|
1,503,150
|
|
Nigeria 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nigeria Government International Bond, Senior Notes
|
|
|
7.875
|
%
|
|
|
2/16/32
|
|
|
|
1,130,000
|
|
|
|
863,998
|
(d)
|
Oman 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oman Government International Bond, Senior Notes
|
|
|
5.625
|
%
|
|
|
1/17/28
|
|
|
|
1,500,000
|
|
|
|
1,149,564
|
(a)
|
Russia 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian Federal Bond OFZ
|
|
|
7.000
|
%
|
|
|
1/25/23
|
|
|
|
98,290,000
|
RUB
|
|
|
1,379,709
|
|
South Africa 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Republic of South Africa Government International Bond, Senior Notes
|
|
|
4.875
|
%
|
|
|
4/14/26
|
|
|
|
1,100,000
|
|
|
|
1,026,998
|
|
Republic of South Africa Government International Bond, Senior Notes
|
|
|
5.650
|
%
|
|
|
9/27/47
|
|
|
|
2,300,000
|
|
|
|
1,788,250
|
|
Total South Africa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,815,248
|
|
Sri Lanka 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sri Lanka Government International Bond, Senior Notes
|
|
|
6.850
|
%
|
|
|
3/14/24
|
|
|
|
1,920,000
|
|
|
|
1,171,212
|
(a)
|
Sri Lanka Government International Bond, Senior Notes
|
|
|
7.850
|
%
|
|
|
3/14/29
|
|
|
|
1,930,000
|
|
|
|
1,109,770
|
(a)
|
Total Sri Lanka
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,280,982
|
|
Turkey 1.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turkey Government International Bond, Senior Notes
|
|
|
4.250
|
%
|
|
|
4/14/26
|
|
|
|
3,900,000
|
|
|
|
3,368,356
|
|
Turkey Government International Bond, Senior Notes
|
|
|
4.875
|
%
|
|
|
10/9/26
|
|
|
|
3,875,000
|
|
|
|
3,414,879
|
|
Total Turkey
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,783,235
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
23
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Ukraine 0.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ukraine Government International Bond, Senior Notes
|
|
|
7.750
|
%
|
|
|
9/1/20
|
|
|
|
2,480,000
|
|
|
$
|
2,418,640
|
(a)
|
Ukraine Government International Bond, Senior Notes
|
|
|
7.375
|
%
|
|
|
9/25/32
|
|
|
|
2,000,000
|
|
|
|
1,780,460
|
(a)
|
Total Ukraine
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,199,100
|
|
Uruguay 0.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uruguay Government International Bond, Senior Notes
|
|
|
9.875
|
%
|
|
|
6/20/22
|
|
|
|
82,160,000
|
UYU
|
|
|
1,836,118
|
(d)
|
Total Sovereign Bonds (Cost $56,499,036)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,477,144
|
|
Senior Loans 8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication Services 1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media 0.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
iHeartCommunications Inc., New Term Loan (1 mo. USD LIBOR + 3.000%)
|
|
|
3.404
|
%
|
|
|
5/1/26
|
|
|
|
2,953,611
|
|
|
|
2,658,250
|
(f)(i)(j)
|
Wireless Telecommunication Services 1.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CSC Holdings LLC, Term Loan (1 mo. USD LIBOR + 2.500%)
|
|
|
3.314
|
%
|
|
|
4/15/27
|
|
|
|
5,279,250
|
|
|
|
5,072,477
|
(f)(i)(j)
|
Total Communication Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,730,727
|
|
Consumer Discretionary 6.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diversified Consumer Services 1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime Security Services Borrower LLC, 2019 Refinancing Term Loan B1 (1 mo. USD LIBOR + 3.250%)
|
|
|
4.266
|
%
|
|
|
9/23/26
|
|
|
|
5,999,224
|
|
|
|
5,745,505
|
(f)(i)(j)
|
Hotels, Restaurants & Leisure 3.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1011778 BC Unlimited Liability Co., Term Loan B4 (1 mo. USD LIBOR + 1.750%)
|
|
|
2.154
|
%
|
|
|
11/19/26
|
|
|
|
11,576,160
|
|
|
|
10,944,298
|
(f)(i)(j)
|
Aramark Services Inc., Term Loan B3 (1 mo. USD LIBOR + 1.750%)
|
|
|
2.154
|
%
|
|
|
3/11/25
|
|
|
|
1,137,544
|
|
|
|
1,073,273
|
(f)(i)(j)
|
Caesars Resort Collection LLC, Term Loan B (1 mo. USD LIBOR + 2.750%)
|
|
|
3.154
|
%
|
|
|
12/23/24
|
|
|
|
4,762,756
|
|
|
|
4,026,514
|
(f)(i)(j)
|
Four Seasons Hotels Ltd., Restated Term Loan (1 mo. USD LIBOR + 2.000%)
|
|
|
2.404
|
%
|
|
|
11/30/23
|
|
|
|
1,240,385
|
|
|
|
1,153,945
|
(f)(i)(j)
|
See Notes to Financial
Statements.
|
|
|
24
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
Hotels, Restaurants & Leisure continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hilton Worldwide Finance LLC, Refinance Term Loan B2
|
|
|
|
|
|
|
6/21/26
|
|
|
|
720,000
|
|
|
$
|
685,929
|
(k)
|
Wyndham Hotels & Resorts Inc., Term Loan B (1 mo. USD LIBOR + 1.750%)
|
|
|
2.154
|
%
|
|
|
5/30/25
|
|
|
|
1,032,889
|
|
|
|
955,745
|
(f)(i)(j)
|
Total Hotels, Restaurants & Leisure
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,839,704
|
|
Specialty Retail 1.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michaels Stores Inc., 2018 New Replacement Term Loan B (1 mo. USD LIBOR + 2.500%)
|
|
|
3.500-3.568
|
%
|
|
|
1/30/23
|
|
|
|
1,088,431
|
|
|
|
897,956
|
(f)(i)(j)(k)
|
Party City Holdings Inc., 2018 Replacement Term Loan
|
|
|
3.250-4.100
|
%
|
|
|
8/19/22
|
|
|
|
2,617,730
|
|
|
|
1,338,547
|
(f)(i)(j)
|
PetSmart Inc., Term Loan B2 (3 mo. USD LIBOR + 4.000%)
|
|
|
5.000
|
%
|
|
|
3/11/22
|
|
|
|
5,561,645
|
|
|
|
5,411,481
|
(f)(i)(j)
|
Total Specialty Retail
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,647,984
|
|
Total Consumer Discretionary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,233,193
|
|
Energy 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, Gas & Consumable Fuels 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chesapeake Energy Corp., Term Loan A (3 mo. USD LIBOR + 8.000%)
|
|
|
9.928
|
%
|
|
|
6/24/24
|
|
|
|
4,710,000
|
|
|
|
1,670,741
|
(f)(i)(j)
|
Health Care 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Care Providers & Services 0.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Care Health Inc., First Lien Term Loan B (1 mo. USD LIBOR + 4.500%)
|
|
|
4.904
|
%
|
|
|
8/6/26
|
|
|
|
1,765,575
|
|
|
|
1,672,882
|
(f)(i)(j)
|
Utilities 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electric Utilities 0.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Panda Temple Power LLC, Second Lien Term Loan (1 mo. USD LIBOR + 8.000% PIK)
|
|
|
9.000
|
%
|
|
|
2/7/23
|
|
|
|
933,032
|
|
|
|
904,458
|
(f)(g)(i)(j)(l)
|
Total Senior Loans (Cost $47,559,473)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,212,001
|
|
U.S. Government & Agency Obligations 5.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Obligations 5.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
2.250
|
%
|
|
|
4/30/21
|
|
|
|
4,000,000
|
|
|
|
4,084,063
|
(m)
|
U.S. Treasury Notes
|
|
|
1.375
|
%
|
|
|
5/31/21
|
|
|
|
5,000,000
|
|
|
|
5,065,820
|
(m)
|
U.S. Treasury Notes
|
|
|
1.125
|
%
|
|
|
2/28/22
|
|
|
|
4,000,000
|
|
|
|
4,068,203
|
(m)
|
U.S. Treasury Notes
|
|
|
1.875
|
%
|
|
|
8/31/22
|
|
|
|
3,400,000
|
|
|
|
3,531,617
|
(m)
|
U.S. Treasury Notes
|
|
|
1.625
|
%
|
|
|
5/31/23
|
|
|
|
1,000,000
|
|
|
|
1,042,031
|
(m)
|
U.S. Treasury Notes
|
|
|
2.750
|
%
|
|
|
8/31/23
|
|
|
|
4,000,000
|
|
|
|
4,329,219
|
(m)
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
25
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
Value
|
|
U.S. Government Obligations continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes
|
|
|
2.125
|
%
|
|
|
3/31/24
|
|
|
|
3,000,000
|
|
|
$
|
3,213,047
|
(m)
|
U.S. Treasury Notes
|
|
|
2.000
|
%
|
|
|
6/30/24
|
|
|
|
3,000,000
|
|
|
|
3,208,594
|
(m)
|
Total U.S. Government & Agency Obligations (Cost $27,333,962)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,542,594
|
|
Convertible Bonds & Notes 0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication Services 0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media 0.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network Corp., Senior Notes (Cost $4,811,226)
|
|
|
3.375
|
%
|
|
|
8/15/26
|
|
|
|
5,955,000
|
|
|
|
4,842,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Preferred Stocks 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Banks 0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GMAC Capital Trust I (3 mo. USD LIBOR + 5.785%) (Cost $3,419,137)
|
|
|
7.477
|
%
|
|
|
|
|
|
|
155,800
|
|
|
|
3,513,290
|
(b)(f)
|
|
|
|
|
|
|
|
|
|
|
Maturity
Date
|
|
|
Face
Amount
|
|
|
|
|
Non-U.S. Treasury Inflation Protected Securities 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina 0.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentina Treasury Bond (Cost $705,082)
|
|
|
1.000
|
%
|
|
|
8/5/21
|
|
|
|
73,083,413
|
ARS
|
|
|
562,532
|
(n)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
Common Stocks 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotels, Restaurants & Leisure 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bossier Escrow Shares
|
|
|
|
|
|
|
|
|
|
|
166,350
|
|
|
|
0
|
*(l)(n)(o)
|
Energy 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Equipment & Services 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hercules Offshore Inc. (Escrow)
|
|
|
|
|
|
|
|
|
|
|
96,800
|
|
|
|
85,643
|
*(l)(n)
|
KCAD Holdings I Ltd.
|
|
|
|
|
|
|
|
|
|
|
533,873,172
|
|
|
|
0
|
*(l)(n)(o)
|
Total Energy Equipment & Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,643
|
|
Oil, Gas & Consumable Fuels 0.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MWO Holdings LLC
|
|
|
|
|
|
|
|
|
|
|
1,069
|
|
|
|
82,003
|
*(l)(n)
|
Total Energy
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,646
|
|
Total Common Stocks (Cost $8,696,318)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,646
|
|
Total Investments before Short-Term Investments (Cost $725,543,491)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
724,686,170
|
|
See Notes to Financial
Statements.
|
|
|
26
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Western Asset High Income Fund II Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security
|
|
Rate
|
|
|
|
|
|
Shares
|
|
|
Value
|
|
Short-Term Investments 2.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dreyfus Government Cash Management, Institutional Shares (Cost $10,178,264)
|
|
|
0.153
|
%
|
|
|
|
|
|
|
10,178,264
|
|
|
$
|
10,178,264
|
|
Total Investments 141.0% (Cost $735,721,755)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
734,864,434
|
|
Liabilities in Excess of Other Assets (41.0)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(213,517,766
|
)
|
Total Net Assets 100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
521,346,668
|
|
|
Face amount denominated in U.S. dollars, unless otherwise noted.
|
*
|
Non-income producing security.
|
(a)
|
Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors.
|
(b)
|
All or a portion of this security is pledged as collateral pursuant to the loan agreement (Note 5).
|
(c)
|
The coupon payment on these securities is currently in default as of April 30, 2020.
|
(d)
|
Security is exempt from registration under Regulation S of the Securities Act of 1933. Regulation S applies to securities offerings that are made outside of the
United States and do not involve direct selling efforts in the United States. This security has been deemed liquid pursuant to guidelines approved by the Board of Directors.
|
(e)
|
Security has no maturity date. The date shown represents the next call date.
|
(f)
|
Variable rate security. Interest rate disclosed is as of the most recent information available. Certain variable rate securities are not based on a published
reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description above.
|
(g)
|
Payment-in-kind security for which the issuer has the option at each interest
payment date of making interest payments in cash or additional securities.
|
(h)
|
Securities traded on a when-issued or delayed delivery basis.
|
(i)
|
Interest rates disclosed represent the effective rates on senior loans. Ranges in interest rates are attributable to multiple contracts under the same loan.
|
(j)
|
Senior loans may be considered restricted in that the Fund ordinarily is contractually obligated to receive approval from the agent bank and/or borrower prior to
the disposition of a senior loan.
|
(k)
|
All or a portion of this loan is unfunded as of April 30, 2020. The interest rate for fully unfunded term loans is to be determined.
|
(l)
|
Security is valued using significant unobservable inputs (Note 1).
|
(m)
|
All or a portion of this security is held by the counterparty as collateral for open reverse repurchase agreements.
|
(n)
|
Security is valued in good faith in accordance with procedures approved by the Board of Directors (Note 1).
|
(o)
|
Value is less than $1.
|
See Notes to Financial Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
27
|
Schedule of investments (contd)
April 30, 2020
Western Asset High Income Fund II Inc.
|
|
|
Abbreviation(s) used in this schedule:
|
|
|
ARS
|
|
Argentine Peso
|
|
|
BRL
|
|
Brazilian Real
|
|
|
EUR
|
|
Euro
|
|
|
GBP
|
|
British Pound
|
|
|
ICE
|
|
Intercontinental Exchange
|
|
|
IDR
|
|
Indonesian Rupiah
|
|
|
JSC
|
|
Joint Stock Company
|
|
|
LIBOR
|
|
London Interbank Offered Rate
|
|
|
OFZ
|
|
Obligatsyi Federalnovo Zaima (Federal Loan Obligation)
|
|
|
OJSC
|
|
Open Joint Stock Company
|
|
|
PIK
|
|
Payment-In-Kind
|
|
|
PJSC
|
|
Private Joint Stock Company
|
|
|
RUB
|
|
Russian Ruble
|
|
|
USD
|
|
United States Dollar
|
|
|
UYU
|
|
Uruguayan Peso
|
At April 30, 2020, the Fund had the following open reverse repurchase agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Rate
|
|
|
Effective
Date
|
|
|
Maturity
Date
|
|
Face Amount
of Reverse
Repurchase
Agreements
|
|
|
Asset Class of Collateral*
|
|
|
Collateral
Value
|
|
Deutsche Bank Securities Inc.
|
|
|
0.520
|
%
|
|
|
3/26/2020
|
|
|
6/5/2020
|
|
$
|
4,020,000
|
|
|
|
U.S. Government & Agency Obligations
|
|
|
$
|
4,068,203
|
|
Deutsche Bank Securities Inc.
|
|
|
0.520
|
%
|
|
|
3/25/2020
|
|
|
6/5/2020
|
|
|
5,025,000
|
|
|
|
U.S. Government & Agency Obligations
|
|
|
|
5,065,820
|
|
Deutsche Bank Securities Inc.
|
|
|
0.720
|
%
|
|
|
3/13/2020
|
|
|
6/5/2020
|
|
|
19,174,000
|
|
|
|
U.S. Government & Agency Obligations
|
|
|
|
19,408,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
28,219,000
|
|
|
|
|
|
|
$
|
28,542,594
|
|
*
|
Refer to the Schedule of Investments for positions held at the counterparty as collateral for reverse repurchase agreements.
|
At April 30, 2020, the Fund had the following open forward foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
Purchased
|
|
|
Currency
Sold
|
|
|
Counterparty
|
|
Settlement
Date
|
|
|
Unrealized
Depreciation
|
|
USD
|
|
|
2,190,921
|
|
|
EUR
|
|
|
2,000,000
|
|
|
Citibank N.A.
|
|
|
7/16/20
|
|
|
$
|
(4,302)
|
|
USD
|
|
|
3,811,019
|
|
|
GBP
|
|
|
3,069,590
|
|
|
Citibank N.A.
|
|
|
7/16/20
|
|
|
|
(56,363)
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(60,665)
|
|
|
|
|
Abbreviation(s) used in this table:
|
|
|
EUR
|
|
Euro
|
|
|
GBP
|
|
British Pound
|
|
|
USD
|
|
United States Dollar
|
See Notes to Financial
Statements.
|
|
|
28
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Statement of assets and liabilities
April 30, 2020
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
Investments, at value (Cost $735,721,755)
|
|
$
|
734,864,434
|
|
Foreign currency, at value (Cost $3,009,421)
|
|
|
3,021,539
|
|
Cash
|
|
|
3,217,537
|
|
Receivable for securities sold
|
|
|
18,284,285
|
|
Interest receivable
|
|
|
11,317,863
|
|
Prepaid expenses
|
|
|
39,153
|
|
Total Assets
|
|
|
770,744,811
|
|
|
|
Liabilities:
|
|
|
|
|
Loan payable (Note 5)
|
|
|
208,000,000
|
|
Payable for open reverse repurchase agreements (Note 3)
|
|
|
28,219,000
|
|
Payable for securities purchased
|
|
|
8,346,885
|
|
Distributions payable
|
|
|
4,127,705
|
|
Investment management fee payable
|
|
|
469,878
|
|
Interest payable
|
|
|
98,241
|
|
Unrealized depreciation on forward foreign currency contracts
|
|
|
60,665
|
|
Directors fees payable
|
|
|
5,567
|
|
Accrued expenses
|
|
|
70,202
|
|
Total Liabilities
|
|
|
249,398,143
|
|
Total Net Assets
|
|
$
|
521,346,668
|
|
|
|
Net Assets:
|
|
|
|
|
Par value ($0.001 par value; 84,238,872 shares issued and outstanding; 100,000,000 shares authorized)
|
|
$
|
84,239
|
|
Paid-in capital in excess of par value
|
|
|
740,459,055
|
|
Total distributable earnings (loss)
|
|
|
(219,196,626)
|
|
Total Net Assets
|
|
$
|
521,346,668
|
|
|
|
Shares Outstanding
|
|
|
84,238,872
|
|
|
|
Net Asset Value
|
|
|
$6.19
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
29
|
Statement of operations
For the Year Ended April 30, 2020
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
Interest
|
|
$
|
62,353,092
|
|
Dividends
|
|
|
346,980
|
|
Less: Foreign taxes withheld
|
|
|
(14,747)
|
|
Total Investment Income
|
|
|
62,685,325
|
|
|
|
Expenses:
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
6,953,732
|
|
Interest expense (Notes 3 and 5)
|
|
|
6,562,750
|
|
Transfer agent fees
|
|
|
1,230,518
|
|
Legal fees
|
|
|
302,464
|
|
Directors fees
|
|
|
189,922
|
|
Audit and tax fees
|
|
|
81,688
|
|
Stock exchange listing fees
|
|
|
43,767
|
|
Custody fees
|
|
|
35,731
|
|
Shareholder reports
|
|
|
25,832
|
|
Insurance
|
|
|
8,903
|
|
Fund accounting fees
|
|
|
8,000
|
|
Miscellaneous expenses
|
|
|
193,821
|
|
Total Expenses
|
|
|
15,637,128
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(146,620)
|
|
Net Expenses
|
|
|
15,490,508
|
|
Net Investment Income
|
|
|
47,194,817
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts,
Forward Foreign Currency Contracts and Foreign Currency
Transactions (Notes 1, 3 and 4):
|
|
|
|
|
Net Realized Gain (Loss) From:
|
|
|
|
|
Investment transactions
|
|
|
(57,108,398)
|
|
Futures contracts
|
|
|
376,795
|
|
Forward foreign currency contracts
|
|
|
757,196
|
|
Foreign currency transactions
|
|
|
(482,032)
|
|
Net Realized Loss
|
|
|
(56,456,439)
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
Investments
|
|
|
(38,447,439)
|
|
Forward foreign currency contracts
|
|
|
(129,475)
|
|
Foreign currencies
|
|
|
25,422
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
(38,551,492)
|
|
Net Loss on Investments, Futures Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions
|
|
|
(95,007,931)
|
|
Decrease in Net Assets From Operations
|
|
$
|
(47,813,114)
|
|
|
Net of foreign capital gains tax of $22,689.
|
See Notes to Financial Statements.
|
|
|
30
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Years Ended April 30,
|
|
2020
|
|
|
2019
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
47,194,817
|
|
|
$
|
44,946,190
|
|
Net realized loss
|
|
|
(56,456,439)
|
|
|
|
(32,167,235)
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
(38,551,492)
|
|
|
|
25,690,297
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
(47,813,114)
|
|
|
|
38,469,252
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(40,900,287)
|
|
|
|
(42,981,123)
|
|
Return of capital
|
|
|
(7,578,964)
|
|
|
|
(3,911,661)
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(48,479,251)
|
|
|
|
(46,892,784)
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
Cost of shares repurchased (917,344 and 1,047,640 shares repurchased, respectively)
|
|
|
(4,506,248)
|
|
|
|
(6,268,230)
|
|
Decrease in Net Assets From Fund Share Transactions
|
|
|
(4,506,248)
|
|
|
|
(6,268,230)
|
|
Decrease in Net Assets
|
|
|
(100,798,613)
|
|
|
|
(14,691,762)
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
622,145,281
|
|
|
|
636,837,043
|
|
End of year
|
|
$
|
521,346,668
|
|
|
$
|
622,145,281
|
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
31
|
Statement of cash flows
For the Year Ended April 30, 2020
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
Cash Provided (Used) by Operating Activities:
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(47,813,114)
|
|
Adjustments to reconcile net decrease in net assets resulting from operations
to net cash provided (used) by
operating activities:
|
|
|
|
|
Purchases of portfolio securities
|
|
|
(565,707,453)
|
|
Sales of portfolio securities
|
|
|
633,304,425
|
|
Net purchases, sales and maturities of short-term investments
|
|
|
(10,592,714)
|
|
Payment-in-kind
|
|
|
(328,585)
|
|
Net amortization of premium (accretion of discount)
|
|
|
(10,045,320)
|
|
Increase in receivable for securities sold
|
|
|
(8,741,354)
|
|
Decrease in interest receivable
|
|
|
2,256,332
|
|
Decrease in prepaid expenses
|
|
|
163
|
|
Decrease in payable for securities purchased
|
|
|
(8,134,259)
|
|
Decrease in investment management fee payable
|
|
|
(89,867)
|
|
Decrease in Directors fees payable
|
|
|
(1,630)
|
|
Decrease in interest payable
|
|
|
(161,081)
|
|
Decrease in accrued expenses
|
|
|
(124,555)
|
|
Net realized loss on investments
|
|
|
57,108,398
|
|
Change in net unrealized appreciation (depreciation) of investments and forward foreign currency
contracts
|
|
|
38,576,914
|
|
Net Cash Provided by Operating Activities*
|
|
|
79,506,300
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
Distributions paid on common stock
|
|
|
(48,268,732)
|
|
Proceeds from loan facility borrowings
|
|
|
3,500,000
|
|
Repayment of loan facility borrowings
|
|
|
(42,000,000)
|
|
Increase in payable for reverse repurchase agreements
|
|
|
17,096,000
|
|
Payment for shares repurchased
|
|
|
(4,506,248)
|
|
Net Cash Used in Financing Activities
|
|
|
(74,178,980)
|
|
Net Increase in Cash and Restricted Cash
|
|
|
5,327,320
|
|
Cash and restricted cash at beginning of year
|
|
|
911,756
|
|
Cash and restricted cash at end of year
|
|
$
|
6,239,076
|
|
*
|
Included in operating expenses is cash of $6,723,831 paid for interest on borrowings.
|
|
The following table provides a reconciliation of cash 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, 2020
|
|
Cash
|
|
$
|
6,239,076
|
|
Restricted cash
|
|
|
|
|
Total cash and restricted cash shown in the Statement of Cash Flows
|
|
$
|
6,239,076
|
|
See Notes to Financial
Statements.
|
|
|
32
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended April
30:
|
|
|
|
20201
|
|
|
20191
|
|
|
20181
|
|
|
20171
|
|
|
20161
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
|
$7.31
|
|
|
|
$7.39
|
|
|
|
$7.78
|
|
|
|
$7.12
|
|
|
|
$8.57
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.55
|
|
|
|
0.52
|
|
|
|
0.56
|
|
|
|
0.66
|
|
|
|
0.73
|
|
Net realized and unrealized gain (loss)
|
|
|
(1.11)
|
|
|
|
(0.06)
|
|
|
|
(0.37)
|
|
|
|
0.69
|
|
|
|
(1.36)
|
|
Total income (loss) from operations
|
|
|
(0.56)
|
|
|
|
0.46
|
|
|
|
0.19
|
|
|
|
1.35
|
|
|
|
(0.63)
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.48)
|
|
|
|
(0.50)
|
|
|
|
(0.57)
|
|
|
|
(0.63)
|
|
|
|
(0.82)
|
|
Return of capital
|
|
|
(0.09)
|
|
|
|
(0.05)
|
|
|
|
(0.01)
|
|
|
|
(0.06)
|
|
|
|
|
|
Total distributions
|
|
|
(0.57)
|
|
|
|
(0.55)
|
|
|
|
(0.58)
|
|
|
|
(0.69)
|
|
|
|
(0.82)
|
|
Anti-dilutive impact of repurchase plan
|
|
|
0.01
|
2
|
|
|
0.01
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
|
$6.19
|
|
|
|
$7.31
|
|
|
|
$7.39
|
|
|
|
$7.78
|
|
|
|
$7.12
|
|
|
|
|
|
|
|
Market price, end of year
|
|
|
$5.51
|
|
|
|
$6.69
|
|
|
|
$6.55
|
|
|
|
$7.42
|
|
|
|
$6.90
|
|
Total return, based on NAV3,4
|
|
|
(8.11)
|
%
|
|
|
6.77
|
%
|
|
|
2.41
|
%
|
|
|
19.76
|
%
|
|
|
(7.12)
|
%
|
Total return, based on Market Price5
|
|
|
(10.02)
|
%
|
|
|
11.29
|
%
|
|
|
(4.15)
|
%
|
|
|
18.36
|
%
|
|
|
(4.40)
|
%
|
|
|
|
|
|
|
Net assets, end of year (millions)
|
|
|
$521
|
|
|
|
$622
|
|
|
|
$637
|
|
|
|
$671
|
|
|
|
$614
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
2.57
|
%6
|
|
|
2.47
|
%
|
|
|
1.97
|
%
|
|
|
1.73
|
%
|
|
|
1.59
|
%
|
Net expenses
|
|
|
2.55
|
6,7
|
|
|
2.45
|
7
|
|
|
1.97
|
|
|
|
1.73
|
|
|
|
1.59
|
|
Net investment income
|
|
|
7.76
|
|
|
|
7.31
|
|
|
|
7.26
|
|
|
|
8.72
|
|
|
|
9.78
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
66
|
%
|
|
|
105
|
%
|
|
|
91
|
%
|
|
|
77
|
%
|
|
|
65
|
%
|
|
|
|
|
|
|
Supplemental data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Outstanding, End of Year (000s)
|
|
|
$208,000
|
|
|
|
$246,500
|
|
|
|
$235,000
|
|
|
|
$240,000
|
|
|
|
$240,000
|
|
Asset Coverage Ratio for Loan Outstanding8
|
|
|
351
|
%
|
|
|
352
|
%
|
|
|
371
|
%
|
|
|
380
|
%
|
|
|
356
|
%
|
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding8
|
|
|
$3,506
|
|
|
|
$3,524
|
|
|
|
$3,710
|
|
|
|
$3,796
|
|
|
|
$3,557
|
|
Weighted Average Loan (000s)
|
|
|
$241,971
|
|
|
|
$242,889
|
|
|
|
$239,548
|
|
|
|
$240,000
|
|
|
|
$241,803
|
|
Weighted Average Interest Rate on Loan
|
|
|
2.58
|
%
|
|
|
3.08
|
%
|
|
|
2.17
|
%
|
|
|
1.41
|
%
|
|
|
1.05
|
%
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
33
|
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
|
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.
|
4
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results.
|
5
|
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.
|
6
|
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.
|
7
|
Reflects fee waivers and/or expense reimbursements.
|
8
|
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.
|
|
|
34
|
|
Western Asset High Income Fund II Inc. 2020 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 October 31, 2019 and
April 1, 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 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. Futures contracts are valued daily at the settlement price established by the board of trade or exchange on which they are traded. 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.
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
35
|
Notes to financial statements (contd)
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the
Legg Mason North Atlantic Fund Valuation Committee (the 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.
|
|
|
36
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
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.
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
|
|
|
|
|
|
$
|
596,368,952
|
|
|
|
|
|
|
$
|
596,368,952
|
|
Sovereign bonds
|
|
|
|
|
|
|
46,477,144
|
|
|
|
|
|
|
|
46,477,144
|
|
Senior loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilities
|
|
|
|
|
|
|
|
|
|
$
|
904,458
|
|
|
|
904,458
|
|
Other senior loans
|
|
|
|
|
|
|
43,307,543
|
|
|
|
|
|
|
|
43,307,543
|
|
U.S. government & agency obligations
|
|
|
|
|
|
|
28,542,594
|
|
|
|
|
|
|
|
28,542,594
|
|
Convertible bonds & notes
|
|
|
|
|
|
|
4,842,011
|
|
|
|
|
|
|
|
4,842,011
|
|
Preferred Stocks
|
|
$
|
3,513,290
|
|
|
|
|
|
|
|
|
|
|
|
3,513,290
|
|
Non-U.S. Treasury inflation protected securities
|
|
|
|
|
|
|
562,532
|
|
|
|
|
|
|
|
562,532
|
|
Common stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer discretionary
|
|
|
|
|
|
|
|
|
|
|
0
|
*
|
|
|
0
|
*
|
Energy
|
|
|
|
|
|
|
|
|
|
|
167,646
|
|
|
|
167,646
|
|
Total long-term investments
|
|
|
3,513,290
|
|
|
|
720,100,776
|
|
|
|
1,072,104
|
|
|
|
724,686,170
|
|
Short-term investments
|
|
|
10,178,264
|
|
|
|
|
|
|
|
|
|
|
|
10,178,264
|
|
Total investments
|
|
$
|
13,691,554
|
|
|
$
|
720,100,776
|
|
|
$
|
1,072,104
|
|
|
$
|
734,864,434
|
|
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
37
|
Notes to financial statements (contd)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
$
|
60,665
|
|
|
|
|
|
|
$
|
60,665
|
|
|
See Schedule of Investments for additional detailed categorizations.
|
*
|
Amount represents less than $1.
|
(b) Futures contracts. The Fund uses futures contracts generally to gain exposure to, or hedge against, changes in interest rates or gain
exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain percentage of the contract
amount. This is known as the initial margin and subsequent payments (variation margin) are made or received by the Fund each day, depending on the daily fluctuation in the value of the contract. For
certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized gains or losses in the
Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve, to varying degrees, risk
of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(c) 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.
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.
|
|
|
38
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
(d) 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.
(e) 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, 2020, the Fund had sufficient cash and/or securities to cover these commitments.
(f) Repurchase agreements. The Fund may enter into repurchase agreements with institutions
that its subadviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the
Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Funds holding period. When entering into repurchase agreements, it is the Funds policy that its custodian or a third party custodian,
acting on the Funds behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that
any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an
effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during
the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(g) 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
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
39
|
Notes to financial statements (contd)
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 maintain 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.
(h) 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.
(i) 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 are presented in the Statement of Cash Flows.
(j) 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.
|
|
|
40
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
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, 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.
(k) 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.
(l) 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.
(m) 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
|
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
|
41
|
Notes to financial statements (contd)
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.
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 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 NAV 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 over-the-counter 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, 2020, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $60,665. 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.
|
|
|
42
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
|
(n) 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.
(o) 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 recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(p) 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.
(q) 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, 2020, 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.
(r) 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 Fund had no reclassifications.
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Western Asset High Income Fund II Inc. 2020 Annual Report
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43
|
Notes to financial statements (contd)
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. LMPFA, Western Asset, Western Asset Limited and
Western Asset Singapore are wholly-owned subsidiaries of Legg Mason, Inc. (Legg Mason).
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.
Effective December 1, 2018, LMPFA
implemented a voluntary investment management fee waiver of 0.025% that continued until November 30, 2019.
During the year ended April 30,
2020, fees waived and/or expenses reimbursed amounted to $146,620.
All officers and one Director of the Fund are employees of Legg Mason or its
affiliates and do not receive compensation from the Fund.
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Western Asset High Income Fund II Inc. 2020 Annual Report
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3. Investments
During the year ended April 30, 2020, 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
|
|
$
|
504,812,252
|
|
|
$
|
60,895,201
|
|
Sales
|
|
|
580,365,271
|
|
|
|
52,939,154
|
|
At April 30, 2020, 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
Depreciation
|
|
Securities
|
|
$
|
746,041,478
|
|
|
$
|
49,999,662
|
|
|
$
|
(61,176,706)
|
|
|
$
|
(11,177,044)
|
|
Forward foreign currency contracts
|
|
|
|
|
|
|
|
|
|
|
(60,665)
|
|
|
|
(60,665)
|
|
Transactions in reverse repurchase agreements for the Fund during the year ended April 30, 2020 were as follows:
|
|
|
|
|
Average Daily
Balance*
|
|
Weighted Average
Interest Rate*
|
|
Maximum Amount
Outstanding
|
$17,110,136
|
|
1.896%
|
|
$28,219,000
|
*
|
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding.
|
Interest rates on reverse repurchase agreements ranged from 0.520% to 2.600% during the year ended April 30, 2020. Interest expense incurred on reverse
repurchase agreements totaled $324,452.
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, 2020.
|
|
|
|
|
LIABILITY DERIVATIVES1
|
|
|
|
Foreign
Exchange Risk
|
|
Forward foreign currency contracts
|
|
$
|
60,665
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is
payables/net unrealized appreciation (depreciation).
|
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Western Asset High Income Fund II Inc. 2020 Annual Report
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45
|
Notes to financial statements (contd)
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, 2020. 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
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Total
|
|
Futures contracts
|
|
$
|
376,795
|
|
|
|
|
|
|
$
|
376,795
|
|
Forward foreign currency contracts
|
|
|
|
|
|
$
|
757,196
|
|
|
|
757,196
|
|
Total
|
|
$
|
376,795
|
|
|
$
|
757,196
|
|
|
$
|
1,133,991
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
Foreign
Exchange Risk
|
|
Forward foreign currency contracts
|
|
$
|
(129,475)
|
|
During the year ended April 30, 2020, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
Average Market
Value
|
|
Futures contracts (to sell)
|
|
$
|
4,300,870
|
|
Forward foreign currency contracts (to buy)
|
|
|
783,822
|
|
Forward foreign currency contracts (to sell)
|
|
|
10,965,490
|
|
|
At April 30, 2020, there were no open positions held in this derivative.
|
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, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Gross Assets
Subject to
Master
Agreements
|
|
|
Gross
Liabilities
Subject to
Master
Agreements1
|
|
|
Net Assets
(Liabilities)
Subject to
Master
Agreements
|
|
|
Collateral
Pledged
(Received)
|
|
|
Net
Amount2
|
|
Citibank N.A.
|
|
|
|
|
|
$
|
(60,665)
|
|
|
$
|
(60,665)
|
|
|
|
|
|
|
$
|
(60,665)
|
|
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. Loan
The Fund has a revolving credit
agreement with Pershing LLC 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
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|
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46
|
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Western Asset High Income Fund II Inc. 2020 Annual Report
|
interest on the loan is calculated at a variable rate based on the one-month LIBOR plus any applicable margin. 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, 2020 was $6,236,363. For the year ended April 30, 2020, the Fund had an average daily loan balance outstanding of $241,971,311 and the weighted average interest rate was 2.58%. At
April 30, 2020, the Fund had $208,000,000 of borrowings outstanding.
6. Distributions subsequent to April 30, 2020
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
|
|
4/23/2020
|
|
|
5/1/2020
|
|
|
$
|
0.0490
|
|
5/21/2020
|
|
|
6/1/2020
|
|
|
$
|
0.0490
|
|
6/23/2020
|
|
|
7/1/2020
|
|
|
$
|
0.0490
|
|
7/24/2020
|
|
|
8/3/2020
|
|
|
$
|
0.0490
|
|
8/24/2020
|
|
|
9/1/2020
|
|
|
$
|
0.0490
|
|
7. Stock repurchase program
On November 16, 2015, the Fund announced that the Funds Board of Directors (the Board) 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 April 30, 2020, the Fund repurchased and retired 1.08% of its common shares outstanding under the repurchase plan. The weighted average discount per share on these repurchases was 15.09% for the year April 30, 2020. Shares repurchased
and the corresponding dollar amount are included in the Statement of Changes in Net Assets. The anti-dilutive impact of these share repurchases is included in the Financial Highlights.
Since the commencement of the stock repurchase program through April 30, 2020, the Fund repurchased 1,964,984 shares or 2.28% of its common shares outstanding for a total amount of $10,774,478.
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|
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Western Asset High Income Fund II Inc. 2020 Annual Report
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47
|
Notes to financial statements (contd)
8. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended April 30, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
40,900,287
|
|
|
$
|
42,981,123
|
|
Tax return of capital
|
|
|
7,578,964
|
|
|
|
3,911,661
|
|
Total distributions paid
|
|
$
|
48,479,251
|
|
|
$
|
46,892,784
|
|
As of April 30, 2020, the components of distributable earnings (loss) on a tax basis were as follows:
|
|
|
|
|
Deferred capital losses*
|
|
$
|
(203,836,062)
|
|
Other book/tax temporary differences(a)
|
|
|
(4,109,435)
|
|
Unrealized appreciation (depreciation)(b)
|
|
|
(11,251,129)
|
|
Total distributable earnings (loss) net
|
|
$
|
(219,196,626)
|
|
*
|
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.
|
(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 certain foreign currency contracts, the difference between cash and accrual basis distributions paid 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 and the difference between book and tax amortization methods for premium on fixed income securities.
|
9. Other matters
On February 18, 2020, Franklin Resources, Inc. (Franklin
Resources) and Legg Mason announced that they have entered into a definitive agreement for Franklin Resources to acquire Legg Mason in an all-cash transaction. As part of this transaction, LMPFA and the
subadviser(s), each currently a subsidiary of Legg Mason, would become a subsidiary of Franklin Resources. The transaction is subject to approval by Legg Masons shareholders and customary closing conditions, including receipt of applicable
regulatory approvals. Subject to such approvals and the satisfaction of the other conditions, the transaction is expected to be consummated later this year.
Under the Investment Company Act of 1940, consummation of the transaction will result in the automatic termination of the Funds management contract, and any related subadvisory contract(s), where applicable.
Therefore, the Funds Board has approved new management and subadvisory contracts that have been presented to the shareholders of the Fund for their approval.
* * *
|
|
|
48
|
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Western Asset High Income Fund II Inc. 2020 Annual Report
|
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 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. Plans are underway to phase out the use of LIBOR by the end of 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.
|
|
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Western Asset High Income Fund II Inc. 2020 Annual Report
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49
|
Report of independent registered public
accounting firm
To the Board of Directors and Shareholders of Western Asset High Income Fund II Inc.
Opinion on the Financial Statements
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Western Asset High Income Fund II Inc. (the Fund) as of April 30, 2020, the related statements of operations and cash flows for the year ended April 30, 2020, the statement
of changes in net assets for each of the two years in the period ended April 30, 2020, including the related notes, and the financial highlights for each of the three years in the period ended April 30, 2020 (collectively referred to as
the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of April 30, 2020, the results of its operations and its cash flows for the year
then ended, the changes in its net assets for each of the two years in the period ended April 30, 2020 and the financial highlights for each of the three years in the period ended April 30, 2020 in conformity with accounting principles
generally accepted in the United States of America.
The financial statements of the Fund as of and for the year ended April 30, 2017 and the
financial highlights for each of the periods ended on or prior to April 30, 2017 (not presented herein, other than the financial highlights) were audited by other auditors whose report dated June 22, 2017 expressed an unqualified opinion
on those financial statements and financial highlights.
Basis for Opinion
These financial statements are the responsibility of the Funds management. Our responsibility is to express an opinion on the Funds financial statements
based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial
statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or
fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of April 30, 2020 by correspondence with the
custodian, agent banks, and brokers; when replies were not received, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
June 19, 2020
We have served as the auditor of one or more investment companies in Legg Mason investment company
group since at least 1973. We have not been able to determine the specific year we began serving as auditor.
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|
|
50
|
|
Western Asset High Income Fund II Inc. 2020 Annual Report
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Board approval of management and
subadvisory agreements (unaudited)
Background
The Investment Company Act of
1940, as amended (the 1940 Act), requires that the Board of Directors (the Board) of Western Asset High Income Fund II Inc. (the Fund), including a majority of its members who are not considered to be
interested persons under the 1940 Act (the Independent Directors) voting separately, approve on an annual basis the continuation of the investment management contract (the Management Agreement) with the
Funds manager, Legg Mason Partners Fund Advisor, LLC (the Manager), and the sub-advisory agreements (individually, a Sub-Advisory
Agreement, and collectively, the Sub-Advisory Agreements) with the Managers affiliates, Western Asset Management Company, LLC (Western Asset), Western Asset Management
Company Pte. Ltd. in Singapore (Western Asset Singapore), and Western Asset Management Company Limited in London (Western Asset London). Western Asset, Western Asset Singapore, and Western Asset London collectively are
hereinafter referred to as the Sub-Advisers, and Western Asset Singapore and Western Asset London together are hereinafter referred to as the Non-U.S. Sub-Advisers. At a meeting (the Contract Renewal Meeting) held in-person on November 13 and 14, 2019, the Board, including the Independent Directors,
considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period. To assist in its
consideration of the renewal of each of the Management Agreement and the Sub-Advisory Agreements, the Board received and considered a variety of information (together with the information provided at the
Contract Renewal Meeting, the Contract Renewal Information) about the Manager and the Sub-Advisers, as well as the management and sub-advisory arrangements
for the Fund and the other closed-end funds in the same complex under the Boards purview (the Legg Mason Closed-end Funds), certain portions of which
are discussed below. A presentation made by the Manager and Western Asset to the Board at the Contract Renewal Meeting in connection with the Boards evaluation of each of the Management Agreement and the
Sub-Advisory Agreements encompassed the Fund and other Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and
other information throughout the year related to the respective services rendered by the Manager and the Sub-Advisers to the Fund. The Boards evaluation took into account the information received
throughout the year and also reflected the knowledge and familiarity gained as members of the Boards of the Fund and other Legg Mason Closed-end Funds with respect to the services provided to the Fund by the
Manager and the Sub-Advisers.
At a meeting held by conference call on October 10, 2019, the Independent
Directors in preparation for the Contract Renewal Meeting met in a private session with their independent legal counsel to review the Contract Renewal Information concerning the Legg Mason Closed-end Funds,
including the Fund, received to date. No representatives of the Manager or the Sub-Advisers participated in this meeting. The discussion below reflects all of these reviews.
|
|
|
Western Asset High Income Fund II Inc.
|
|
51
|
Board approval of management and
subadvisory agreements (unaudited) (contd)
The Manager provides the Fund with investment advisory and administrative services
pursuant to the Management Agreement and the Sub-Advisers provide, or in the case of the Non-U.S. Sub-Advisers help to provide,
the Fund with certain investment sub-advisory services pursuant to the Sub-Advisory Agreements. The discussion below covers both the advisory and administrative
functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and the investment sub-advisory functions being rendered by the
Sub-Advisers.
Board Approval of Management Agreement and
Sub-Advisory Agreements
In its deliberations regarding the renewal of each of the Management Agreement and
the Sub-Advisory Agreements, the Board, including the Independent Directors, considered various factors, including those described below.
Nature, Extent and Quality of the Services Under the Management Agreement and Sub-Advisory Agreements
The Board received and considered Contract Renewal Information regarding the nature, extent, and quality of services provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, during the past year. The Board also reviewed Contract Renewal Information regarding
the Funds compliance policies and procedures established pursuant to the 1940 Act.
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 the Fund. The Board also considered, based on its
knowledge of the Manager and its affiliates, the Contract Renewal Information and the Boards discussions with the Manager and Western Asset at the Contract Renewal Meeting, the general reputation and investment performance records of the
Manager, Western Asset and their affiliates and the financial resources available to the corporate parent of the Manager and the Sub-Advisers, Legg Mason, Inc. (Legg Mason), to support their
activities in respect of the Fund and the other Legg Mason Closed-end Funds.
The Board considered the
responsibilities of the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, including the Managers
coordination and oversight of the services provided to the Fund by the Sub-Advisers and other fund service providers and Western Assets coordination and oversight of the services provided to the Fund by
the Non-U.S. Sub-Advisers. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its investment advisory duties thereunder,
provided that the Manager, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Management
|
|
|
52
|
|
Western Asset High Income Fund II Inc.
|
Agreement, the Manager does not provide day-to-day portfolio management services to the Fund. Rather, portfolio
management services for the Fund are provided by Western Asset pursuant to the Sub-Advisory Agreement (the Western Asset Sub-Advisory Agreement) between the
Manager and Western Asset. The Western Asset Sub-Advisory Agreement permits Western Asset to delegate certain of its responsibilities, including its investment
sub-advisory duties thereunder, provided that Western Asset, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Western Asset
Sub-Advisory Agreement, each Non-U.S. Sub-Adviser helps Western Asset to provide certain portfolio management services to the
Fund pursuant to a separate Sub-Advisory Agreement with Western Asset.
In reaching its determinations regarding
continuation of the Management Agreement and the Sub-Advisory Agreements, the Board took into account that Fund stockholders, in pursuing their investment goals and objectives, likely purchased their shares of
the Fund based upon the reputation and the investment style, philosophy and strategy of the Manager and Western Asset, as well as the resources available to the Manager and the Sub-Advisers.
The Board concluded that, overall, the nature, extent, and quality of the management and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreements have been satisfactory under the circumstances.
Fund Performance
The Board received and considered information regarding Fund performance, including information and analyses (the Broadridge Performance
Information) for the Fund, as well as for a group of comparable funds (the Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company data. The
Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. The Performance Universe included the Fund and all leveraged high yield closed-end funds, as classified by Broadridge, regardless of asset size. The Performance Universe consisted of thirty-four funds, including the Fund, for the 1-year period
ended June 30, 2019, thirty-one funds, including the Fund, for the 3-year period ended on such date, and twenty-six funds,
including the Fund, for the 5-year period ended on such date. The Board noted that it had received and discussed with the Manager and Western Asset information throughout the year at periodic intervals
comparing the Funds performance against its benchmark and its peer funds as selected by Broadridge.
The Broadridge Performance Information
comparing the Funds performance to that of the Performance Universe based on net asset value per share showed, among other things, that among the funds in the Performance Universe the Funds performance was ranked in the first quintile
for the 1-year period ended June 30, 2019, in the second quintile for the 3-year
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period ended on such date, and in the fourth quintile for the 5-year period ended on such date. In these performance rankings, the first quintile represents funds with the highest performance among the funds in the Performance Universe and the fifth quintile represents funds
with lowest performance among the funds in the Performance Universe. The Funds performance was above the median performance of the Performance Universe for each of the 1- and 3-year periods ended June 30, 2019 but below the median performance of the Performance Universe for the 5-year period on such date. In addition to the Funds
performance relative to the Performance Universe, the Board considered the Funds performance in absolute terms and the Funds performance relative to its benchmark. On a net asset value basis, the Fund outperformed its benchmark for each
of the 1- and 3-year periods ended June 30, 2019 but underperformed its benchmark for the 5-year period ended on such date.
Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted above, the Board concluded, under
the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period would be consistent with the interests
of the Fund and its stockholders.
Management and Sub-Advisory Fees and Expense Ratios
The Board reviewed and considered the management fee (the Management Fee) payable by the Fund to the Manager under the Management
Agreement and the sub-advisory fees (the Sub-Advisory Fees) payable by the Manager and Western Asset, as applicable, to the
Sub-Advisers under the Sub-Advisory Agreements in view of the nature, extent and overall quality of the management, investment advisory and other services provided by
the Manager and the Sub-Advisers. The Board noted that the Sub-Advisory Fee payable to Western Asset under the Western Asset
Sub-Advisory Agreement is paid by the Manager, not the Fund, and, accordingly, that the retention of Western Asset does not increase the fees or expenses otherwise incurred by the Funds stockholders.
Similarly, the Board noted that the Sub-Advisory Fee payable to each of the Non-U.S. Sub-Advisers under its Sub-Advisory Agreement with Western Asset is paid by Western Asset, not the Fund, and, accordingly, that the retention of such Non-U.S.
Sub-Adviser does not increase the fees or expenses otherwise incurred by the Funds stockholders.
Additionally, the Board received and considered information and analyses prepared by Broadridge (the Broadridge Expense Information) comparing the
Management Fee and the Funds overall expenses with those of funds in an expense group (the Expense Group) selected and provided by Broadridge. The comparison was based upon the constituent funds latest fiscal years. The
Expense Group consisted of the Fund and nine other leveraged high yield closed-end funds, as classified by Broadridge. The ten funds in the Expense Group had average net common share assets ranging from
$295.9 million to $1.521 billion. Four of the other Expense Group funds were larger than the Fund and five funds were smaller.
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The Broadridge Expense Information,
comparing the Management Fee as well as the Funds actual total expenses to the Funds Expense Group, showed, among other things, that the Management Fee on a contractual basis was ranked fourth (first being lowest and, therefore, best in
these expense component rankings) among the funds in the Expense Group and was below the Expense Group median for that expense component. Among the Expense Group funds, the Funds actual Management Fee (i.e., giving effect to any voluntary fee
waivers implemented by the Manager with respect to the Fund and by the managers of the other Expense Group funds) was ranked fifth among the funds in the Expense Group whether compared on a common share assets only or on the basis of both common
share and leveraged assets. The Funds actual Management Fee whether compared on the basis of common share assets only or compared on the basis of common share and leveraged assets was below the Expense Group median for each expense component.
The Broadridge Expense Information further showed that, among the Expense Group funds, the Funds actual total expenses ranked sixth whether compared on the basis of common share assets only or compared on the basis of common share and
leveraged assets. In each case, the Funds actual total expenses were above the Expense Group median for that expense component. The Board noted that the small number of funds in the Expense Group made meaningful expense comparisons difficult.
The Board also reviewed Contract Renewal Information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class
similar to that of the Fund, including, where applicable, institutional and separate accounts. The Board was advised that the fees paid by such institutional, separate account and other clients (collectively, institutional clients)
generally are lower, and may be significantly lower, than the Management Fee. The Contract Renewal Information generally attributed the fee differential to differences in the scope of services provided to the Fund and to institutional clients. Among
other things, institutional clients have fewer compliance, administration and other needs than the Fund and the Fund is subject not only to heightened regulatory requirements relative to institutional clients but also to requirements for listing on
the New York Stock Exchange. The Contract Renewal Information noted further that the Fund is provided with administrative services, office facilities, Fund officers (including the Funds chief executive, chief financial and chief compliance
officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Contract Renewal Information included information regarding management fees paid by
open-end mutual funds in the same complex (the Legg Mason Open-end Funds) and such information indicated that the management fees paid by the Legg Mason Closed-end Funds generally were higher than those paid by the Legg Mason Open-end Funds. The Contract Renewal Information noted that the Legg Mason Closed-end Funds
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typically incur expenses that usually are not incurred by the Legg Mason Open-end Funds, such as those related to the annual stockholder meeting, compliance with securities exchange listing requirements and the management and monitoring of leverage. The Board considered the fee
comparisons in view 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 Management Fee and the Sub-Advisory Fees were reasonable in view of the nature, extent and overall quality of the management, investment advisory and other services provided by
the Manager and the Sub-Advisers to the Fund under the Management Agreement and the Sub-Advisory Agreements, respectively.
Manager Profitability
The Board, as part of
the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Managers fiscal years ended March 31, 2018 and March 31, 2019. The Board also
received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Managers revenue and cost allocation methodologies used in preparing
such profitability data. The profitability to each of the Sub-Advisers was not considered to be a material factor in the Boards considerations since Western Assets
Sub-Advisory Fee is paid by the Manager, not the Fund, and the Sub-Advisory Fees for the Non-U.S.
Sub-Advisers are paid by Western Asset, not the Fund. The profitability analysis presented to the Board as part of the Contract Renewal Information indicated that the
pre-tax profitability of the Fund to the Manager had decreased in fiscal year 2019 from the level in fiscal year 2018 and remained at a level that the Board did not consider to be excessive in view of judicial
guidance and the nature, extent and overall quality of the investment advisory and other services provided to the Fund but merited continued monitoring at its current level.
Economies of Scale
The Board received and discussed Contract Renewal Information concerning
whether the Manager realizes economies of scale if the Funds assets grow. The Board noted that because the 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 the Funds investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the
Management Fee structure, which incorporates no breakpoints reducing the Management Fee at specified increased asset levels, was appropriate under the circumstances.
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Other Benefits to the
Manager and the Sub-Advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their relationship with the Fund and did not regard such benefits as excessive.
* * *
In view of all of the foregoing and other relevant factors, the Board
determined, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements would be consistent with the interests of the Fund and its stockholders and unanimously voted
to continue each Agreement for an additional one-year period. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve continuation of the
Management Agreement and the Sub-Advisory Agreements, and each Board member may have attributed different weights to the various factors.
The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to the Contract Renewal Meeting, the Board received a memorandum prepared by the Manager discussing its
responsibilities in connection with its consideration of the continuation of the Management Agreement and the Sub-Advisory Agreements as part of the Contract Renewal Information and the Independent Directors
separately received a memorandum discussing such responsibilities from their independent legal counsel. Prior to voting, the Independent Directors also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreements in private sessions with their independent legal counsel at which no representatives of the Manager or any Sub-Adviser were present.
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Background
On March 9, 2020, during a
telephonic meeting of the Boards of Directors (each, a Board and each Board member, a Director or a Board Member) of the closed-end funds under the Boards purview
(each, a Fund and together, the Funds), Board Members discussed with management of Legg Mason, Inc. (Legg Mason) and certain representatives of Franklin Resources, Inc. and its subsidiaries (together,
Franklin Templeton) the acquisition of Legg Mason by Franklin Templeton (the Transaction) and Franklin Templetons plans and intentions regarding the Funds and Legg Masons asset management business, including the
preservation and continued investment autonomy of the investment advisory businesses conducted by Legg Masons separate investment advisory subsidiaries and the combination of Legg Masons and Franklin Templetons distribution
resources. The Board of each Fund was advised that the Transaction, if completed, would constitute a change of control under the Investment Company Act of 1940, as amended (the 1940 Act), that would result in the termination of the
current management agreement between each Fund and Legg Mason Partners Fund Advisor, LLC (the Manager) (the Current Management Agreements) and the current subadvisory agreements with each Funds subadviser or subadvisers
(each, a Subadviser and together, the Subadvisers) (the Current Subadvisory Agreements).
At
meetings held on April 1, 2020 the Board of each Fund, including a majority of the Board Members who are not interested persons of the Fund or the Manager as defined in the 1940 Act (the Independent Board Members),
approved the new management agreement between each Fund and the Manager (each, a New Management Agreement) and each new subadvisory agreement between each Funds Manager and its Subadviser or Subadvisers relating to the Fund (each,
a New Subadvisory Agreement).1 (The New Management Agreement for a
Fund and the New Subadvisory Agreement or Agreements for the Fund are referred to, collectively, as the New Agreements, the Current Management Agreement for a Fund and the Current Subadvisory Agreement or Agreements for the Fund are
referred to, collectively, as the Current Agreements, and the Manager and the Subadviser or Subadvisers for a Fund are referred to, collectively, as the Advisers.)
At these meetings, which included meetings of the full Board of each Fund and separate meetings of the Independent Board Members, the Board considered, among other things, whether it would be in the best interests
of each Fund and its respective shareholders to approve the New Agreements, and the anticipated impacts of the Transaction on the Funds and their shareholders. To assist the Board of each Fund in its consideration of the New
1
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This meeting was held telephonically in reliance on an exemptive order issued by the Securities and Exchange Commission on March 13, 2020. Reliance on the
exemptive order is necessary and appropriate due to circumstances related to current or potential effects of COVID-19. All Board Members participating in the telephonic meeting were able to hear each other
simultaneously during the meeting. Reliance on the exemptive order requires Board Members, including a majority of the Independent Board Members, to ratify actions taken pursuant to the exemptive order by vote cast at the next in-person meeting.
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Agreements, Franklin Templeton provided
materials and information about Franklin Templeton, including its financial condition and asset management capabilities and organization, Legg Mason provided materials and information about Legg Mason, including performance and expense comparison
data and profitability information by Fund and with respect to the Legg Mason fund complex as a whole, and Franklin Templeton and Legg Mason provided materials and information about the proposed Transaction between Legg Mason and Franklin Templeton.
Before and during the April 1, 2020 meetings, the Board of each Fund sought certain information as it deemed necessary and appropriate. In
connection with their consideration of the New Agreements, the Independent Board Members worked with their independent legal counsel to prepare requests for additional information that were submitted to Franklin Templeton and Legg Mason. The
requests for information of the Board of each Fund sought information relevant to the Boards consideration of the New Agreements and other anticipated impacts of the Transaction on the Funds and their shareholders. Franklin Templeton and Legg
Mason provided documents and information in response to these requests for information. Following their review of this information, the Independent Board Members requested additional information from Franklin Templeton and Legg Mason. Franklin
Templeton and Legg Mason provided further information in response to these requests, which the Board of each Fund reviewed. Senior management representatives from Franklin Templeton and Legg Mason participated in a portion of each of these meetings
and addressed various questions raised by the Board of each Fund.
At the April 1, 2020 meeting of the Board of each Fund, representatives of Legg
Mason and Franklin Templeton made presentations to, and responded to questions from, the Board. After the presentations and after reviewing the written materials provided, the Independent Board Members met in executive session with their counsel to
consider the New Agreements.
Board Approval of New Management Agreements and New Subadvisory Agreements
Each Funds Boards evaluation of the New Agreements reflected the information provided specifically in connection with their review of the New
Agreements, as well as, where relevant, information that was previously furnished to the Board in connection with the most recent renewal of the Current Agreements at in-person meetings held on
November 14, 2019 and at other Board meetings throughout the prior year.
Among other things, the Board Members considered:
(i)
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the reputation, experience, financial strength and resources of Franklin Templeton and its investment advisory subsidiaries;
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(ii)
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that Franklin Templeton has informed the Board of each Fund that it intends to maintain the investment autonomy of the Legg Mason investment advisory
subsidiaries;
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(iii)
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that Franklin Templeton and Legg Mason have informed the Board of each Fund that, following the Transaction, there is not expected to be any diminution
in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and have represented that there are not
expected to be any changes in the portfolio management personnel managing the Funds as a result of the Transaction;
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(iv)
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that Franklin Templeton and Legg Mason have informed the Board of each Fund regarding transition plans, including Legg Masons provision of
retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templetons provision of long-term retention mechanisms for certain personnel following the closing;
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(v)
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that there are not expected to be any changes to any Funds custodian or other service providers as a result of the Transaction;
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(vi)
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that Franklin Templeton has informed the Board of each Fund that it has no present intention to alter currently effective expense waivers and
reimbursements after their expiration, and, while it reserves the right to do so in the future, it would consult with the applicable Funds Board before making any changes;
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(vii)
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that Franklin Templeton does not expect to propose any changes to the investment objective(s) of any Fund or any changes to the principal investment
strategies of any Fund as a result of the Transaction;
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(viii)
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the potential benefits to Fund shareholders from being part of a combined fund family with Franklin Templeton-sponsored funds and access to a broader
array of investment opportunities;
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(ix)
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that Franklin Templeton and Legg Mason will each derive benefits from the Transaction and that, as a result, they have a financial interest in the
matters that were being considered;
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(x)
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the fact that each Funds contractual management fee rates will remain the same and will not increase by virtue of the New Agreements;
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(xi)
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the terms and conditions of the New Agreements, including that each New Agreement is identical to its corresponding Current Agreement except for their
respective dates of execution, effectiveness and termination;
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(xii)
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the support expressed by the current senior management team at Legg Mason for the Transaction and Legg Masons recommendation that the Board of
each Fund approve the New Agreements;
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(xiii)
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that the Current Agreements, except in the case of newer Funds, are the product of multiple years of review and negotiation and information received and
considered by the applicable Funds Board in the exercise of their business judgment during those years, and that within the past six-months the Board of each Fund had performed a full review of and
approved the Current Agreements as required by the 1940 Act and had determined in the exercise of the Board Members business judgment that each applicable Adviser had the capabilities, resources and personnel necessary to provide the services
provided to each Fund, and that the management and subadvisory fees paid by or in respect of the Fund, taking into account any applicable agreed-upon fee reductions, represented reasonable compensation to the applicable Adviser in light of the
services provided, the costs to the Adviser of providing those services, the fees and other expenses paid by similar funds, and such other matters as the Board Members considered relevant in the exercise of their business judgment, and represented
an appropriate sharing between Fund shareholders and the Advisers of any economies of scale in the management of the Fund at current and anticipated asset levels;
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(xiv)
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that the Current Agreements were considered and approved as recently as November 2019, except in the case of one Fund, which is currently in the initial
term of its agreement;
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(xv)
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that the Funds will not bear the costs of obtaining shareholder approval of the New Agreements, including proxy solicitation costs, legal fees and the
costs of printing and mailing the proxy statement, regardless of whether the Transaction is consummated; and
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(xvi)
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that under the a definitive agreement between Legg Mason and Franklin Templeton (the Transaction Agreement), Franklin Templeton has
acknowledged that Legg Mason had entered into the Transaction Agreement in reliance upon the benefits and protections provided by Section 15(f) of the 1940 Act, and that, in furtherance of the foregoing, Franklin Templeton agreed to use
reasonable best efforts to conduct its business so that (a) for a period of not less than three years after the closing of the Transaction no more than 25% of the members of the Board of any Fund shall be interested persons (as
defined in the 1940 Act) of any investment adviser for a Fund, and (b) for a period of not less than two years after the closing, neither Franklin Templeton nor any of its affiliates shall impose an unfair burden (within the meaning
of the 1940 Act, including any interpretations or no-action letters of the Securities and Exchange Commission) on any Fund as a result of the transactions contemplated by the Transaction Agreement or any
express or implied terms, conditions or understandings applicable thereto.
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Certain of these considerations are discussed in more detail below.
In their deliberations, the Board Members considered information received in connection with the most recent approval or continuation of each Current Agreement in
addition to information provided by Franklin Templeton and Legg Mason in connection with their evaluation of the terms and conditions of the New Agreements. In connection with the most recent approval or continuation of each Current Agreement, and
in connection with their review of each New Agreement, the Board Members did not identify any particular information that was all-important or controlling, and each Board Member may have attributed different
weights to the various factors. The Board Members evaluated all information available to them on a Fund-by-Fund basis with respect to their consideration of the Current
Agreements and the New Agreements, and their determinations were made separately in respect of each Fund.
The information provided and presentations
made to the Board of each Fund encompassed each Fund and all other Funds for which the Board has responsibility. The discussion below covers both the advisory and the administrative functions rendered by the Manager for each Fund, both of which
functions are encompassed by the New Management Agreement for the Fund, as well as the advisory functions rendered by the Subadviser(s) pursuant to the New Subadvisory Agreement(s) for the Fund. The Independent Board Members of each Fund considered
the New Management Agreement and the New Subadvisory Agreement(s) separately in the course of their review. In doing so, they considered the respective roles and compensation of the Manager and the Subadviser(s) in providing services to the Fund.
The Independent Board Members were advised by separate independent legal counsel throughout the process. Prior to voting, the Independent Board Members
of each Fund received a memorandum from their independent legal counsel discussing the legal standards for their consideration of the New Agreements for the Fund. The Independent Board Members of each Fund, including Western Asset High Income Fund
II Inc. (the Western Asset Fund), reviewed the proposed approval of the New Agreements for the Fund on multiple occasions with their independent legal counsel in private sessions at which no representatives of Franklin Templeton, Legg
Mason, or the Manager or Subadviser(s) for the Fund were present.
Nature, Extent and Quality of the Services under the New Agreements
The Board of each Fund received and considered information regarding the nature, extent and quality of services provided to the Fund by the Manager
and the Subadviser(s) under the Current Agreements. In evaluating the nature, quality and extent of the services to be provided by the Advisers under the New Agreements, the Board Members considered, among other things, the expected impact, if any,
of the Transaction on the operations, facilities, organization and personnel of each Adviser, and that Franklin Templeton and Legg Mason have advised the Board of each Fund that, following the Transaction, there is not
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expected to be any diminution in the nature, quality and extent of services provided to the Funds and their shareholders by the Advisers, including compliance and other non-advisory services, and that there are not expected to be any changes in portfolio management personnel as a result of the Transaction. In this regard, the Board of each Fund took into account that Franklin
Templeton and Legg Mason have informed the Board regarding Legg Masons provision of retention incentives for certain Legg Mason corporate personnel until the Transaction closes, and Franklin Templetons provision of long-term retention
mechanisms for certain personnel following the closing. The Board of each Fund has received information at regular meetings throughout the past year related to the services rendered by the Manager in its management of the Funds affairs and the
Managers role in coordinating the activities of the Funds other service providers. Each Funds Boards evaluation of the services provided by the Manager and the Subadviser(s) took into account the Board Members knowledge
gained as Board Members of other Funds in the Legg Mason fund complex, including knowledge gained regarding the scope and quality of the investment management and other capabilities of the Manager and the Subadviser(s), and the quality of the
Managers administrative and other services. The Board of each Fund observed that the scope of services provided by the Manager and the Subadviser(s), and the undertakings required of the Manager and Subadviser(s) in connection with those
services, including maintaining and monitoring their own and the Funds compliance programs, liquidity management programs and cybersecurity programs, had expanded over time as a result of regulatory, market and other developments. The Board of
each Fund has received and reviewed on a regular basis information from the Manager and the Subadviser(s) regarding the Funds compliance policies and procedures established pursuant to Rule 38a-1 under
the 1940 Act, and took that information into account in its evaluation of the New Agreements. The Board of each Fund also considered the risks associated with the Fund borne by the Advisers and their affiliates (such as entrepreneurial, operational,
reputational, litigation and regulatory risk), as well as the risk management processes of the Manager and Subadviser(s).
The Board of each Fund
considered information provided by Franklin Templeton regarding its business and operating structure, scale of operation, leadership and reputation, distribution capabilities, and financial condition (pre- and
post-closing).
The Board of each Fund also reviewed the qualifications, backgrounds and responsibilities of the senior personnel of the Manager and the
Subadviser(s) and the team of investment professionals primarily responsible for the day-to-day portfolio management of the Fund. The Board of each Fund noted in
particular that following the Transaction, Franklin Templeton is expected to have resources that will provide it with substantial capacity to invest across the business. The Board of each Fund also considered the financial resources of Legg Mason
and Franklin Templeton and the importance of having a Fund manager with, or with access to, significant organizational and financial resources.
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The Board also considered the benefits to each Fund of being part of a larger combined
organization with greater financial resources following the Transaction, particularly during periods of market disruptions and volatility. In addition, the Board also considered Franklin Templetons significant experience in dealing with issues
unique to the management of closed-end funds.
The Board of each Fund also considered the policies and practices
of the Manager and the Subadvisers regarding the selection of brokers and dealers and the execution of portfolio transactions for the Fund.
The Board of
each Fund received performance information for the Fund, as well as for a group of funds (the Performance Universe) selected by Broadridge Financial Solutions, Inc. (Broadridge), an independent provider of investment company
data, based on classifications provided by Thomson Reuters Lipper (Lipper). The Board of each Fund was provided with a description of the methodology used to determine the similarity of the Fund with the funds included in the Performance
Universe. It was noted that while the Board of each Fund has found the Broadridge data generally useful they recognized its limitations, including that the data may vary depending on the end date selected and that the results of the performance
comparisons may vary depending on the selection of the peer group and its composition over time. It was also noted that the Board of each Fund has received and discussed with management information throughout the year at periodic intervals comparing
the Funds performance against its benchmark and against the Funds peers. In addition, the Board of each Fund considered the Funds performance in light of overall financial market conditions. Where a Funds performance was
below the median during one or more specified periods, the Funds Board noted the explanations from the Advisers concerning the Funds relative performance versus the peer group for the various periods
Based on their review of the materials provided and the assurances they had received from Franklin Templeton and Legg Mason, the Board Members of each Fund
determined that the Transaction was not expected to affect adversely the nature, extent and quality of services provided by each Adviser and that the Transaction was not expected to have an adverse effect on the ability of the Advisers to provide
those services, and the Board of each Fund, including the Western Asset Fund, concluded that, overall, the nature, extent and quality of services expected to be provided, including performance, under the New Agreements for the Fund were sufficient
for approval.
Management Fees and Expense Ratios
The Board of each Fund considered that it had reviewed the Funds management fee and total expense ratio at the November 2019 contract renewal meeting. The Board of each Fund considered that the New Management
Agreement does not change any Funds management fee rate or the computation method for calculating such fees, and that there is no present intention to alter expense waiver and reimbursement arrangements that are
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currently in effect. The Board of each Fund noted that by their terms none of the current expense waiver and reimbursement arrangements would expire before December 2020 and that Franklin
Templeton had indicated that it would consult with the applicable Funds Board before making any changes to the Funds current expense waiver and reimbursement arrangements.
The Board of each Fund reviewed and considered the contractual management fee and the actual management fees paid by the Fund to the Manager in light of the nature, extent and quality of the management and
subadvisory services to be provided by the Manager and the Subadviser(s). The Board of each Fund also noted that the compensation paid to the Subadviser(s) is the responsibility and expense of the Manager, or in some cases another Subadviser, and
not the Fund. In addition, the Board of each Fund received and considered information provided by Broadridge comparing the contractual management fee and the actual management fee for the Fund, as well as the total actual expenses for the Fund, with
those of funds in both the relevant expense group and a broader group of funds, each selected by Broadridge based on classifications provided by Lipper. It was noted that, while the Board of each Fund has found the Broadridge data generally useful,
it recognized its limitations, including that the data may vary depending on the selection of the peer group. The Board of each Fund also considered the overall management fee, the fees of each Subadviser and the portion of the management fee
retained by the Manager after payment of the subadvisory fees, in each case in light of the services rendered for those amounts. The Board of each Fund also received an analysis of Legg Mason complex-wide management fees for Funds with a similar
strategy provided by the Manager, which, among other things, set out a framework of fees based on asset classes.
The Board of each Fund reviewed
information regarding fees charged by the Manager and/or the Subadviser(s) to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, separate accounts. The Manager reviewed with the Board
of each Fund the differences in services provided to these different types of accounts, including that the Fund is provided with certain administrative services, office facilities, and Fund officers (including the Funds chief executive, chief
financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other Fund service providers. The Board of each Fund considered the fee comparisons in light of the differences in
management of these different types of accounts and the differences in associated risks borne by the Advisers.
In evaluating the costs of the services
to be provided by the Advisers under the New Agreements, the Board Members considered, among other things, whether management fees or other expenses would change as a result of the Transaction. Based on their review of the materials provided and the
assurances they had received from Franklin Templeton
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and Legg Mason, the Board Members determined that the Transaction would not increase
the total fees payable by any Fund for management services.
Taking all of the above into consideration, as well as the factors identified below, the
Board of each Fund, including the Western Asset Fund, determined that the management fee and the subadvisory fees for the Fund were reasonable in light of the nature, extent and quality of the services to be provided to the Fund under the New
Agreements.
Profitability and Economies of Scale
The Board of each Fund received and considered an analysis of the profitability of the Manager and its affiliates in providing services to the Fund. The Board of each Fund also received profitability information
with respect to the Legg Mason fund complex as a whole. In addition, the Board of each Fund received information with respect to the Managers allocation methodologies used in preparing this profitability data. It was noted that the allocation
methodologies had been previously reviewed by an outside consultant. The profitability of the Manager and its affiliates was considered by each Funds Board not to be excessive in light of the nature, extent and quality of the services provided
to the Fund, including the Western Asset Fund.
The Board of each Fund received and considered information concerning whether the Advisers realize
economies of scale as the Funds assets grow. In conjunction with their most recent or prior deliberations concerning the Current Agreements, the Board Members have noted that advisory or management fee reductions had been implemented for
certain Funds, as well as expense limitations, and that after taking those reductions and expense limitations into account, the Board Members had determined that the total fees for management services, and administrative services for the applicable
Funds, were reasonable in light of the services provided to the Funds, including the Western Asset Fund, and that any economies of scale were being shared appropriately.
The Board Members noted that Franklin Templeton and Legg Mason expected to realize cost savings from the Transaction based on synergies of operations, primarily at the holding company distribution level, as well as
to benefit from possible growth of the Funds resulting from enhanced distribution capabilities. The Board of each Fund took into account that cost synergies were not the primary driver of the Transaction. However, they noted that other factors could
also affect profitability and potential economies of scale, and that it was not possible to predict with any degree of certainty how the Transaction would affect the Advisers profitability from their relationship with the Funds, nor to
quantify at this time any possible future economies of scale. The Board Members noted they will have the opportunity to periodically re-examine such profitability and any economies of scale going forward.
|
|
|
66
|
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Western Asset High Income Fund II Inc.
|
Other Benefits to the
Advisers
The Board of each Fund considered other benefits received by the Manager, the Subadviser(s) and their affiliates as a result of their
relationship with the Fund, including the opportunity to offer additional products and services to Fund shareholders. In light of the costs of providing investment management and other services to the Funds and the ongoing commitment of the Manager
and the Subadviser(s) to the Funds, the Board of each Fund considered that the ancillary benefits that the Manager, the Subadviser(s) and their affiliates received as a result of their relationship with the Fund, including the Western Asset Fund,
were reasonable. In evaluating the fall-out benefits to be received by the Advisers under the New Agreements, the Board Members considered whether the Transaction would have an impact on the fall-out benefits received by virtue of the Current Agreements.
The Board of each Fund considered that Franklin
Templeton may derive reputational and other benefits from its ability to use the Legg Mason investment affiliates names in connection with operating and marketing the Funds. The Board of each Fund considered that the Transaction, if completed,
would significantly increase Franklin Templetons assets under management and expand Franklin Templetons investment capabilities.
Conclusion
After consideration of the factors described above as well as other factors, and in
the exercise of their business judgment, the Board Members, including the Independent Board Members, concluded that the New Agreements, including the fees payable thereunder, were fair and reasonable to each Fund and that entering into the New
Agreements for each Fund, including the Western Asset Fund, was in the best interests of the Funds shareholders, and they voted to approve the New Agreements for each Fund and to recommend that the Funds shareholders approve the New
Agreements.
|
|
|
Western Asset High Income Fund II Inc.
|
|
67
|
Additional information (unaudited)
Information about Directors and Officers
The business and affairs of Western Asset High Income Fund II Inc. (the Fund) are conducted by management under the supervision and subject to the
direction of its Board of Directors. The business address of each Director is c/o Jane Trust, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth
below.
The Funds annual proxy statement includes additional information about Directors and is available, without charge, upon request by calling
the Fund at 1-888-777-0102.
|
|
|
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)
|
|
24
|
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)
|
|
24
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
68
|
|
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)
|
|
24
|
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)
|
|
24
|
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)
|
|
24
|
Other board memberships held by Director during the past five years
|
|
Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp.
(banking) (since 1994)
|
|
|
|
Western Asset High Income Fund II Inc.
|
|
69
|
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
|
|
National Association of Corporate Directors Board Leadership Fellow (since 2016) and financial expert; 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)
|
|
24
|
Other board memberships held by Director during the past five years
|
|
Trustee of AIG Funds and Anchor Series Trust (since 2018); Hochschild Mining plc (precious metals company) (since 2016); Director of Associated
Banc-Corp (financial services company) (since 2007); Westell Technologies, Inc. (technology company) (2003 to 2016)
|
|
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)
|
|
24
|
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 to 2018); Director of The Asia
Tigers Fund, Inc. (2016 to 2018)
|
|
|
|
70
|
|
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 Managing Director of Legg Mason & Co., LLC (Legg Mason & Co.) (since 2018); Managing Director of Legg
Mason & Co. (2016 to 2018); Officer and/or Trustee/Director of 145 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 Vice President of LMPFA (2015); Director of ClearBridge, LLC (formerly, Legg Mason Capital Management, LLC) (2007 to 2014); Managing Director of Legg Mason Investment Counsel & Trust Co. (2000 to 2007)
|
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*
Legg Mason
620 Eighth Avenue, 49th 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
|
|
Managing Director of Legg Mason & Co. (since 2006); Director of Compliance, Legg Mason Office of the Chief Compliance Officer (since 2006);
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
Legg Mason
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
|
|
Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2015); Compliance
Officer of Legg Mason & Co. (since 2013); Assistant Vice President of Legg Mason & Co. (since 2011); formerly, Associate Compliance Officer of Legg Mason & Co. (2011 to 2013)
|
|
|
|
Western Asset High Income Fund II Inc.
|
|
71
|
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
Additional Officers contd
|
|
Robert I. Frenkel
Legg Mason
100 First Stamford Place, 6th Floor, Stamford, CT 06902
|
|
|
Year of birth
|
|
1954
|
Position(s) held with Fund1
|
|
Secretary and Chief Legal Officer
|
Term of office1 and length of time served
|
|
Since 2003
|
Principal occupation(s) during the past five years
|
|
Vice President and Deputy General Counsel of Legg Mason, Inc. (since 2006); Managing Director and General Counsel U.S. Mutual Funds for Legg
Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason &
Co. predecessors (prior to 2006)
|
|
Thomas C. Mandia
Legg Mason
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
|
|
Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005);
Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of LM Asset Services, LLC
(LMAS) (since 2002) and Legg Mason Fund Asset Management, Inc. (LMFAM) (since 2013) (formerly registered investment advisers)
|
|
Christopher Berarducci**
Legg Mason
620 Eighth Avenue, 49th 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
|
|
Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain mutual funds associated with Legg Mason & Co. or its
affiliates; Managing Director (since 2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co.; formerly, Assistant Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates
(prior to 2010)
|
|
|
|
72
|
|
Western Asset High Income Fund II Inc.
|
|
|
|
Additional Officers contd
|
|
Jeanne M. Kelly
Legg Mason
620 Eighth Avenue, 49th 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
|
|
Senior Vice President of certain mutual 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); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); formerly, 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 April 17, 2020, Mr. Jensen became Chief Compliance Officer.
|
**
|
Effective September 27, 2019, Mr. Berarducci became Treasurer and Principal Financial 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 2020, 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.
|
|
73
|
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.
|
|
|
74
|
|
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, 49th 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.
|
|
|
Western Asset High Income Fund II Inc.
|
|
75
|
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;
|
|
|
76
|
|
Western Asset High Income Fund II Inc.
|
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.
|
|
|
Western Asset High Income Fund II Inc.
|
|
77
|
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended April 30, 2020:
|
|
|
|
|
|
|
|
|
Record date:
|
|
|
Monthly
|
|
|
|
Monthly
|
|
Payable date:
|
|
|
May 2019 to
December 2019
|
|
|
|
January 2020
to April 2020
|
|
Ordinary income:
|
|
|
|
|
|
|
|
|
Qualified dividend income for individuals
|
|
|
2.49
|
%
|
|
|
16.25
|
%*
|
Dividends qualifying for the dividends
|
|
|
|
|
|
|
|
|
received deduction for corporations
|
|
|
2.31
|
%
|
|
|
16.25
|
%*
|
Tax return of capital
|
|
|
|
|
|
|
61.03
|
%**
|
The following information is applicable to non-U.S. resident shareholders:
|
|
|
|
|
Record date:
|
|
Monthly
|
|
Monthly
|
Payable date:
|
|
May 2019 to
December 2019
|
|
January 2020
to April 2020
|
Qualified net interest income
|
|
32.00%
|
|
50.00%*
|
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 aliens and foreign corporations.
*
|
Expressed as a percentage of the distributions paid reduced by the return of capital.
|
**
|
Expressed as a percentage of the cash distributions paid.
|
|
|
|
78
|
|
Western Asset High Income Fund II Inc.
|
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
Robert I.
Frenkel
Secretary and Chief Legal Officer
Thomas
C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
*
|
Effective September 27, 2019, Mr. Berarducci became Treasurer and Principal Financial Officer.
|
**
|
Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer.
|
Western Asset High Income Fund II Inc.
620 Eighth Avenue 49th 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:
|
|
Personal information included on applications or other forms;
|
|
|
Account balances, transactions, and mutual fund holdings and positions;
|
|
|
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
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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 Funds at 1-888-777-0102.
Revised April 2018
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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
49th 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 6/20 SR20-3882