|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
21 |
Schedule of investments (contd)
April 30, 2022
Western Asset High Income Fund II Inc.
(Percentages shown based on Fund net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
Rate |
|
|
Maturity Date |
|
|
Face Amount |
|
|
Value |
|
Egypt 0.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Egypt Government International Bond, Senior Notes |
|
|
5.875 |
% |
|
|
2/16/31 |
|
|
|
2,230,000 |
|
|
$ |
1,638,571 |
(a) |
Ghana 0.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ghana Government International Bond, Senior Notes |
|
|
8.125 |
% |
|
|
3/26/32 |
|
|
|
1,080,000 |
|
|
|
668,088 |
(a)
|
Guatemala 0.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guatemala Government Bond, Senior Notes |
|
|
4.375 |
% |
|
|
6/5/27 |
|
|
|
970,000 |
|
|
|
956,231 |
(a)
|
Indonesia 0.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indonesia Treasury Bond |
|
|
6.500 |
% |
|
|
2/15/31 |
|
|
|
29,188,000,000 |
IDR |
|
|
1,943,920 |
|
Ivory Coast 0.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ivory Coast Government International Bond, Senior Notes |
|
|
5.750 |
% |
|
|
12/31/32 |
|
|
|
328,473 |
|
|
|
313,744 |
(a) |
Ivory Coast Government International Bond, Senior Notes |
|
|
6.125 |
% |
|
|
6/15/33 |
|
|
|
1,500,000 |
|
|
|
1,382,535 |
(a) |
Total Ivory Coast |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,696,279 |
|
Mexico 2.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexican Bonos, Bonds |
|
|
5.750 |
% |
|
|
3/5/26 |
|
|
|
156,870,000 |
MXN |
|
|
6,867,348 |
|
Nigeria 0.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nigeria Government International Bond, Senior Notes |
|
|
7.875 |
% |
|
|
2/16/32 |
|
|
|
1,130,000 |
|
|
|
952,025 |
(c)
|
Oman 0.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oman Government International Bond, Senior Notes |
|
|
5.625 |
% |
|
|
1/17/28 |
|
|
|
1,500,000 |
|
|
|
1,506,675 |
(a)
|
Panama 0.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Panama Government International Bond, Senior Notes |
|
|
3.298 |
% |
|
|
1/19/33 |
|
|
|
690,000 |
|
|
|
601,076 |
|
Russia 0.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russian Federal Bond OFZ |
|
|
7.050 |
% |
|
|
1/19/28 |
|
|
|
239,980,000 |
RUB |
|
|
222,826 |
*(h) |
Russian Federal Bond OFZ |
|
|
6.900 |
% |
|
|
5/23/29 |
|
|
|
176,840,000 |
RUB |
|
|
164,200 |
*(h) |
Total Russia |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
387,026 |
|
Turkey 0.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turkey Government International Bond, Senior Notes |
|
|
4.250 |
% |
|
|
4/14/26 |
|
|
|
2,400,000 |
|
|
|
2,127,953 |
|
Ukraine 0.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ukraine Government International Bond, Senior Notes |
|
|
7.375 |
% |
|
|
9/25/32 |
|
|
|
800,000 |
|
|
|
258,120 |
(a)
|
Total Sovereign Bonds (Cost
$45,674,448) |
|
|
|
|
|
|
|
|
|
|
|
39,223,887 |
|
See Notes to Financial
Statements.
|
|
|
22 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
Western Asset High Income Fund II Inc.
(Percentages shown based on Fund net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
Rate |
|
|
Maturity Date |
|
|
Face Amount |
|
|
Value |
|
U.S. Government & Agency Obligations 5.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government Obligations
5.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury Notes |
|
|
1.875 |
% |
|
|
8/31/22 |
|
|
|
3,400,000 |
|
|
$ |
3,407,892 |
(f) |
U.S. Treasury Notes |
|
|
1.625 |
% |
|
|
5/31/23 |
|
|
|
1,000,000 |
|
|
|
993,672 |
(f) |
U.S. Treasury Notes |
|
|
2.750 |
% |
|
|
8/31/23 |
|
|
|
4,000,000 |
|
|
|
4,016,406 |
(f) |
U.S. Treasury Notes |
|
|
2.125 |
% |
|
|
3/31/24 |
|
|
|
3,000,000 |
|
|
|
2,968,360 |
(f) |
U.S. Treasury Notes |
|
|
2.000 |
% |
|
|
6/30/24 |
|
|
|
3,000,000 |
|
|
|
2,952,656 |
(f) |
U.S. Treasury Notes |
|
|
0.750 |
% |
|
|
3/31/26 |
|
|
|
3,500,000 |
|
|
|
3,216,582 |
(f) |
Total U.S. Government & Agency Obligations
(Cost $17,833,159) |
|
|
|
17,555,568 |
|
Convertible Bonds & Notes 1.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communication Services 1.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media 1.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISH Network Corp., Senior Notes |
|
|
3.375 |
% |
|
|
8/15/26 |
|
|
|
4,475,000 |
|
|
|
3,848,500 |
|
Industrials 0.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airlines 0.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Spirit Airlines Inc., Senior Notes |
|
|
1.000 |
% |
|
|
5/15/26 |
|
|
|
2,230,000 |
|
|
|
2,037,105 |
|
Total Convertible Bonds & Notes (Cost
$5,891,944) |
|
|
|
|
|
|
|
5,885,605 |
|
Senior Loans 1.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrials 1.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Airlines 1.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mileage Plus Holdings LLC, Initial Term Loan (the greater of 3 mo. USD LIBOR or
1.000% + 5.250%) |
|
|
6.250 |
% |
|
|
6/21/27 |
|
|
|
500,000 |
|
|
|
519,625 |
(e)(i)(j) |
United Airlines Inc., Term Loan B (the greater of 3 mo. USD LIBOR or 0.750% +
3.750%) |
|
|
4.500 |
% |
|
|
4/21/28 |
|
|
|
3,034,325 |
|
|
|
3,016,741 |
(e)(i)(j) |
Total Senior Loans (Cost $3,539,838) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,536,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
Convertible Preferred Stocks 0.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy 0.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, Gas & Consumable Fuels
0.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Targa Resources Corp., Non Voting Shares (Cost $1,512,000) |
|
|
9.500 |
% |
|
|
|
|
|
|
1,440 |
|
|
|
1,544,259 |
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
23 |
Schedule of investments (contd)
April 30, 2022
Western Asset High Income Fund II Inc.
(Percentages shown based on Fund net assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Security |
|
|
|
|
Expiration Date |
|
|
Warrants |
|
|
Value |
|
Warrants 0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials 0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Markets
0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EG Acquisition Corp., Class A Shares (Cost $23,550) |
|
|
|
|
|
|
5/28/28 |
|
|
|
24,596 |
|
|
$ |
5,411 |
* |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
|
|
Common Stocks 0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy 0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy Equipment &
Services 0.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
KCAD Holdings I Ltd. (Cost $4,365,221) |
|
|
|
|
|
|
|
533,873,172 |
|
|
|
0 |
*(k)(l)(m)
|
Total Investments before Short-Term Investments
(Cost $504,960,930) |
|
|
|
508,147,079 |
|
|
|
|
|
|
|
|
Rate |
|
|
|
|
|
|
|
|
|
|
Short-Term Investments 2.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Western Asset Premier Institutional Government Reserves, Premium Shares (Cost
$7,012,556) |
|
|
0.198 |
% |
|
|
|
|
|
|
7,012,556 |
|
|
|
7,012,556 |
(n)
|
Total Investments 149.1% (Cost
$511,973,486) |
|
|
|
|
|
|
|
|
|
|
|
515,159,635 |
|
Liabilities in Excess of Other Assets
(49.1)% |
|
|
|
|
|
|
|
|
|
|
|
(169,754,136 |
) |
Total Net Assets 100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
345,405,499 |
|
See Notes to Financial
Statements.
|
|
|
24 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
Western Asset High Income Fund II Inc.
|
Face amount denominated in U.S. dollars, unless otherwise noted. |
|
Represents less than 0.1%. |
* |
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 6). |
(c) |
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. |
(d) |
Security has no maturity date. The date shown represents the next call date. |
(e) |
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.
|
(f) |
All or a portion of this security is held by the counterparty as collateral for open reverse repurchase agreements.
|
(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) |
The coupon payment on this security is currently in default as of April 30, 2022. |
(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) |
Security is valued in good faith in accordance with procedures approved by the Board of Directors (Note 1).
|
(l) |
Security is valued using significant unobservable inputs (Note 1). |
(m) |
Value is less than $1. |
(n) |
In this instance, as defined in the Investment Company Act of 1940, an Affiliated Company represents Fund
ownership of at least 5% of the outstanding voting securities of an issuer, or a company which is under common ownership or control with the Fund. At April 30, 2022, the total market value of investments in Affiliated Companies was $7,012,556
and the cost was $7,012,556 (Note 10). |
|
|
|
Abbreviation(s) used in this
schedule: |
|
|
GBP |
|
British Pound |
|
|
ICE |
|
Intercontinental Exchange |
|
|
IDR |
|
Indonesian Rupiah |
|
|
LIBOR |
|
London Interbank Offered Rate |
|
|
MXN |
|
Mexican Peso |
|
|
OFZ |
|
Obligatsyi Federalnovo Zaima (Russian Federal Loan Obligation) |
|
|
PIK |
|
Payment-In-Kind |
|
|
RUB |
|
Russian Ruble |
|
|
USD |
|
United States Dollar |
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
25 |
Schedule of investments (contd)
April 30, 2022
Western Asset High Income Fund II Inc.
At April 30, 2022, 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 AG |
|
|
0.450 |
% |
|
|
2/24/2022 |
|
|
5/24/2022 |
|
$ |
18,037,376 |
|
|
|
U.S. Government & Agency Obligations |
|
|
$ |
17,619,305 |
|
Goldman Sachs Group Inc. |
|
|
0.500 |
% |
|
|
10/15/2021 |
|
|
TBD*** |
|
|
6,834,307 |
|
|
|
Corporate Bonds & Notes Cash |
|
|
|
7,793,794 557,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
24,871,683 |
|
|
|
|
|
|
$ |
25,970,099 |
|
* |
Refer to the Schedule of Investments for positions held at the counterparty as collateral for reverse repurchase
agreements. |
** |
Including accrued interest. |
*** |
TBD To Be Determined; These reverse repurchase agreements have no maturity dates because they are renewed daily and
can be terminated by either the Fund or the counterparty in accordance with the terms of the agreements. The rates for these agreements are variable. The rate disclosed is the rate as of April 30, 2022. |
At April 30, 2022, the Fund had the following open forward foreign currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Purchased |
|
|
Currency Sold |
|
|
Counterparty |
|
Settlement Date |
|
|
Unrealized Appreciation (Depreciation) |
|
CAD |
|
|
2,453 |
|
|
USD |
|
|
1,963 |
|
|
Citibank N.A. |
|
|
7/19/22 |
|
|
$ |
(55 |
) |
CAD |
|
|
10,000 |
|
|
USD |
|
|
7,993 |
|
|
Citibank N.A. |
|
|
7/19/22 |
|
|
|
(211 |
) |
USD |
|
|
10,668,487 |
|
|
GBP |
|
|
8,165,762 |
|
|
Goldman Sachs Group Inc. |
|
|
7/19/22 |
|
|
|
396,843 |
|
EUR |
|
|
4,010,481 |
|
|
USD |
|
|
4,392,600 |
|
|
Morgan Stanley & Co. Inc. |
|
|
7/19/22 |
|
|
|
(143,716 |
) |
Total |
|
|
$ |
252,861 |
|
|
|
|
Abbreviation(s) used in this
table: |
|
|
CAD |
|
Canadian Dollar |
|
|
EUR |
|
Euro |
|
|
GBP |
|
British Pound |
|
|
USD |
|
United States Dollar |
See Notes to Financial Statements.
|
|
|
26 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
Statement of assets and liabilities
April 30, 2022
|
|
|
|
|
|
|
Assets: |
|
|
|
|
Investments in unaffiliated securities, at value (Cost $504,960,930) |
|
$ |
508,147,079 |
|
Investments in affiliated securities, at value (Cost $7,012,556) |
|
|
7,012,556 |
|
Foreign currency, at value (Cost $705,659) |
|
|
701,440 |
|
Cash |
|
|
2,164,840 |
|
Receivable for securities sold |
|
|
13,890,103 |
|
Interest and dividends receivable from unaffiliated investments |
|
|
7,714,983 |
|
Deposits with brokers for open reverse repurchase agreements |
|
|
557,000 |
|
Unrealized appreciation on forward foreign currency contracts |
|
|
396,843 |
|
Dividends receivable from affiliated investments |
|
|
498 |
|
Prepaid expenses |
|
|
67,869 |
|
Total Assets |
|
|
540,653,211 |
|
|
|
Liabilities: |
|
|
|
|
Loan payable (Note 6) |
|
|
154,500,000 |
|
Payable for open reverse repurchase agreements (Note 3) |
|
|
24,871,683 |
|
Payable for securities purchased |
|
|
12,182,122 |
|
Distributions payable |
|
|
2,887,305 |
|
Investment management fee payable |
|
|
354,471 |
|
Interest expense payable |
|
|
182,853 |
|
Unrealized depreciation on forward foreign currency contracts |
|
|
143,982 |
|
Directors fees payable |
|
|
4,728 |
|
Accrued expenses |
|
|
120,568 |
|
Total Liabilities |
|
|
195,247,712 |
|
Total Net Assets |
|
$ |
345,405,499 |
|
|
|
Net Assets: |
|
|
|
|
Par value ($0.001 par value; 58,924,586 shares issued and outstanding; 100,000,000 shares
authorized) |
|
$ |
58,925 |
|
Paid-in capital in excess of par value |
|
|
552,481,389 |
|
Total distributable earnings (loss) |
|
|
(207,134,815) |
|
Total Net Assets |
|
$ |
345,405,499 |
|
|
|
Shares Outstanding |
|
|
58,924,586 |
|
|
|
Net Asset Value |
|
|
$5.86 |
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
27 |
Statement of operations
For the Year Ended April 30, 2022
|
|
|
|
|
|
|
Investment Income: |
|
|
|
|
Interest |
|
$ |
38,341,735 |
|
Dividends from unaffiliated investments |
|
|
216,176 |
|
Dividends from affiliated investments |
|
|
1,747 |
|
Less: Foreign taxes withheld |
|
|
(22,918) |
|
Total Investment
Income |
|
|
38,536,740 |
|
|
|
Expenses: |
|
|
|
|
Investment management fee (Note 2) |
|
|
4,668,416 |
|
Interest expense (Notes 3 and 6) |
|
|
1,462,425 |
|
Transfer agent fees (Note 9) |
|
|
169,074 |
|
Legal fees |
|
|
163,880 |
|
Directors fees |
|
|
127,084 |
|
Audit and tax fees |
|
|
77,668 |
|
Stock exchange listing fees |
|
|
25,600 |
|
Fund accounting fees |
|
|
8,000 |
|
Custody fees |
|
|
7,346 |
|
Insurance |
|
|
5,604 |
|
Shareholder reports |
|
|
3,012 |
|
Miscellaneous expenses |
|
|
8,565 |
|
Total Expenses |
|
|
6,726,674 |
|
Less: Fee waivers and/or expense reimbursements (Note 2) |
|
|
(2,197) |
|
Net Expenses |
|
|
6,724,477 |
|
Net Investment Income |
|
|
31,812,263 |
|
|
|
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 in unaffiliated securities |
|
|
(1,380,684) |
|
Futures contracts |
|
|
183,949 |
|
Forward foreign currency contracts |
|
|
47,209 |
|
Foreign currency transactions |
|
|
(14,925) |
|
Net Realized Loss |
|
|
(1,164,451) |
|
Change in Net Unrealized Appreciation (Depreciation) From: |
|
|
|
|
Investments in unaffiliated securities |
|
|
(71,951,521) |
|
Forward foreign currency contracts |
|
|
202,490 |
|
Foreign currencies |
|
|
(15,254) |
|
Change in Net Unrealized Appreciation
(Depreciation) |
|
|
(71,764,285) |
|
Net Loss on Investments, Futures Contracts, Forward Foreign Currency Contracts and Foreign Currency Transactions |
|
|
(72,928,736) |
|
Decrease in Net Assets From Operations |
|
$ |
(41,116,473) |
|
See Notes to Financial
Statements.
|
|
|
28 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
For the Years Ended April 30, |
|
2022 |
|
|
2021 |
|
|
|
|
Operations: |
|
|
|
|
|
|
|
|
Net investment income |
|
$ |
31,812,263 |
|
|
$ |
37,178,332 |
|
Net realized gain (loss) |
|
|
(1,164,451) |
|
|
|
5,941,309 |
|
Change in net unrealized appreciation (depreciation) |
|
|
(71,764,285) |
|
|
|
76,115,511 |
|
Increase (Decrease) in Net Assets From
Operations |
|
|
(41,116,473) |
|
|
|
119,235,152 |
|
|
|
|
Distributions to Shareholders From (Note 1): |
|
|
|
|
|
|
|
|
Total distributable earnings |
|
|
(31,284,412) |
|
|
|
(34,735,425) |
|
Return of capital |
|
|
(3,301,743) |
|
|
|
(7,277,376) |
|
Decrease in Net Assets From Distributions
to Shareholders |
|
|
(34,586,155) |
|
|
|
(42,012,801) |
|
|
|
|
Fund Share Transactions: |
|
|
|
|
|
|
|
|
Reinvestment of distributions (262,774 and 0 shares issued, respectively) |
|
|
1,834,300 |
|
|
|
|
|
Cost of shares repurchased through tender offer (0 and 25,577,060 shares repurchased,
respectively) (Note 5) |
|
|
|
|
|
|
(179,295,192) |
|
Increase (Decrease) in Net Assets From
Fund Share Transactions |
|
|
1,834,300 |
|
|
|
(179,295,192) |
|
Decrease in Net
Assets |
|
|
(73,868,328) |
|
|
|
(102,072,841) |
|
|
|
|
Net Assets: |
|
|
|
|
|
|
|
|
Beginning of year |
|
|
419,273,827 |
|
|
|
521,346,668 |
|
End of year |
|
$ |
345,405,499 |
|
|
$ |
419,273,827 |
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
29 |
Statement of cash flows
For the Year Ended April 30, 2022
|
|
|
|
|
|
|
Increase (Decrease) in Cash: |
|
|
|
|
Cash Flows from Operating Activities: |
|
|
|
|
Net decrease in net assets resulting from operations |
|
$ |
(41,116,473) |
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash
provided (used) by operating activities: |
|
|
|
|
Purchases of portfolio securities |
|
|
(313,171,607) |
|
Sales of portfolio securities |
|
|
339,253,738 |
|
Net purchases, sales and maturities of short-term investments |
|
|
(2,755,141) |
|
Return of capital |
|
|
55,745 |
|
Net amortization of premium (accretion of discount) |
|
|
(6,148,384) |
|
Increase in receivable for securities sold |
|
|
(12,063,500) |
|
Increase in interest and dividends receivable from unaffiliated investments |
|
|
(38,237) |
|
Increase in prepaid expenses |
|
|
(49,575) |
|
Increase in dividends receivable from affiliated investments |
|
|
(498) |
|
Decrease in payable for securities purchased |
|
|
(4,134,481) |
|
Decrease in investment management fee payable |
|
|
(34,122) |
|
Decrease in Directors fees payable |
|
|
(14,034) |
|
Increase in interest expense payable |
|
|
140,000 |
|
Decrease in accrued expenses |
|
|
(18,364) |
|
Net realized loss on investments |
|
|
1,380,684 |
|
Change in net unrealized appreciation (depreciation) of investments and forward foreign
currency contracts |
|
|
71,749,031 |
|
Net Cash Provided in Operating
Activities* |
|
|
33,034,782 |
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
Distributions paid on common stock (net of distributions payable) |
|
|
(32,738,979) |
|
Decrease in loan facility borrowings |
|
|
(3,500,000) |
|
Increase in payable for open reverse repurchase agreements |
|
|
6,311,433 |
|
Net Cash Used by Financing
Activities |
|
|
(29,927,546) |
|
Net Increase in Cash and Restricted Cash |
|
|
3,107,236 |
|
Cash and restricted cash at beginning of year |
|
|
316,044 |
|
Cash and restricted cash at end of year |
|
$ |
3,423,280 |
|
* |
Included in operating expenses is cash of $1,322,425 paid for interest on borrowings. |
|
The following table provides a reconciliation of cash (including foreign currency) and restricted cash reported within the
Statement of Assets and Liabilities that sums to the total of such amounts shown on the Statement of Cash Flows. |
|
|
|
|
|
|
|
April 30, 2022 |
|
Cash |
|
$ |
2,866,280 |
|
Restricted cash |
|
|
557,000 |
|
Total cash and restricted cash shown in the Statement of Cash Flows |
|
$ |
3,423,280 |
|
|
Restricted cash consists of cash that has been segregated to cover the Funds collateral or margin obligations under
derivative contracts and for reverse repurchase agreements. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers. |
See Notes to Financial Statements.
|
|
|
30 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
|
|
|
|
Non-Cash Financing Activities: |
|
|
|
|
Proceeds from reinvestment of distributions |
|
$ |
1,834,300 |
|
See Notes to Financial
Statements.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
31 |
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout each year ended April 30: |
|
|
|
20221 |
|
|
20211 |
|
|
20201 |
|
|
20191 |
|
|
20181 |
|
|
|
|
|
|
|
Net asset value, beginning of year |
|
|
$7.15 |
|
|
|
$6.19 |
|
|
|
$7.31 |
|
|
|
$7.39 |
|
|
|
$7.78 |
|
|
|
|
|
|
|
Income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
0.54 |
|
|
|
0.51 |
|
|
|
0.55 |
|
|
|
0.52 |
|
|
|
0.56 |
|
Net realized and unrealized gain (loss) |
|
|
(1.24) |
|
|
|
1.03 |
|
|
|
(1.11) |
|
|
|
(0.06) |
|
|
|
(0.37) |
|
Total income (loss) from
operations |
|
|
(0.70) |
|
|
|
1.54 |
|
|
|
(0.56) |
|
|
|
0.46 |
|
|
|
0.19 |
|
|
|
|
|
|
|
Less distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income |
|
|
(0.53) |
|
|
|
(0.46) |
|
|
|
(0.48) |
|
|
|
(0.50) |
|
|
|
(0.57) |
|
Return of capital |
|
|
(0.06) |
|
|
|
(0.13) |
|
|
|
(0.09) |
|
|
|
(0.05) |
|
|
|
(0.01) |
|
Total
distributions |
|
|
(0.59) |
|
|
|
(0.59) |
|
|
|
(0.57) |
|
|
|
(0.55) |
|
|
|
(0.58) |
|
Anti-dilutive impact of repurchase plan |
|
|
|
|
|
|
|
|
|
|
0.01 |
2 |
|
|
0.01 |
2 |
|
|
|
|
Anti-dilutive impact of tender offer |
|
|
|
|
|
|
0.01 |
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year |
|
|
$5.86 |
|
|
|
$7.15 |
|
|
|
$6.19 |
|
|
|
$7.31 |
|
|
|
$7.39 |
|
|
|
|
|
|
|
Market price, end of year |
|
|
$5.38 |
|
|
|
$7.09 |
|
|
|
$5.51 |
|
|
|
$6.69 |
|
|
|
$6.55 |
|
Total return, based on NAV4,5 |
|
|
(10.66) |
% |
|
|
25.68 |
% |
|
|
(8.11) |
% |
|
|
6.77 |
% |
|
|
2.41 |
% |
Total return, based on Market Price6 |
|
|
(17.20) |
% |
|
|
40.48 |
% |
|
|
(10.02) |
% |
|
|
11.29 |
% |
|
|
(4.15) |
% |
|
|
|
|
|
|
Net assets, end of year (millions) |
|
|
$345 |
|
|
|
$419 |
|
|
|
$521 |
|
|
|
$622 |
|
|
|
$637 |
|
|
|
|
|
|
Ratios to average net assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses |
|
|
1.66 |
% |
|
|
1.59 |
% |
|
|
2.57 |
%7 |
|
|
2.47 |
% |
|
|
1.97 |
% |
Net expenses8 |
|
|
1.66 |
9 |
|
|
1.59 |
9 |
|
|
2.55 |
7,9 |
|
|
2.45 |
9 |
|
|
1.97 |
|
Net investment income |
|
|
7.87 |
|
|
|
7.37 |
|
|
|
7.76 |
|
|
|
7.31 |
|
|
|
7.26 |
|
|
|
|
|
|
|
Portfolio turnover rate |
|
|
55 |
% |
|
|
50 |
% |
|
|
66 |
% |
|
|
105 |
% |
|
|
91 |
% |
|
|
|
|
|
Supplemental data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Outstanding, End of Year (000s) |
|
|
$154,500 |
|
|
|
$158,000 |
|
|
|
$208,000 |
|
|
|
$246,500 |
|
|
|
$235,000 |
|
Asset Coverage Ratio for Loan Outstanding10
|
|
|
324 |
% |
|
|
365 |
% |
|
|
351 |
% |
|
|
352 |
% |
|
|
371 |
% |
Asset Coverage, per $1,000 Principal Amount of Loan Outstanding10 |
|
|
$3,236 |
|
|
|
$3,654 |
|
|
|
$3,506 |
|
|
|
$3,524 |
|
|
|
$3,710 |
|
Weighted Average Loan (000s) |
|
|
$155,075 |
|
|
|
$178,800 |
|
|
|
$241,971 |
|
|
|
$242,889 |
|
|
|
$239,548 |
|
Weighted Average Interest Rate on Loan |
|
|
0.89 |
% |
|
|
0.86 |
% |
|
|
2.58 |
% |
|
|
3.08 |
% |
|
|
2.17 |
% |
See Notes to Financial
Statements.
|
|
|
32 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
1 |
Per share amounts have been calculated using the average shares method. |
2 |
The repurchase plan was completed at an average repurchase price of $4.91 for 917,344 shares and $4,506,248 for the year
ended April 30, 2020 and $5.98 for 1,047,640 shares and $6,268,230 for the year ended April 30, 2019. |
3 |
The tender offer was completed at a price of $7.01 for 25,577,060 shares and $179,295,192 for the year ended
April 30, 2021. |
4 |
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the
absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. |
5 |
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future
results. |
6 |
The total return calculation assumes that distributions are reinvested in accordance with the Funds dividend
reinvestment plan. Past performance is no guarantee of future results. |
7 |
Included in the expense ratios are certain non-recurring legal and transfer agent
fees that were incurred by the Fund during the period. Without these fees, the gross and net expense ratios would have been 2.37% and 2.35%, respectively. |
8 |
The manager has agreed to waive the Funds management fee to an extent sufficient to offset the net management fee
payable in connection with any investment in an affiliated money market fund. |
9 |
Reflects fee waivers and/or expense reimbursements. |
10 |
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.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
33 |
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.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles
(GAAP). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which
may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party
pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services typically use inputs that are observable such as issuer details, interest
rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each
fund on the day of valuation. 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.
The Board of Directors is responsible for the
valuation process and has delegated the supervision of the daily valuation process to the Global Fund Valuation Committee (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
|
|
|
34 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
determining the reliability of third party pricing
information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies
include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental
investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuers
financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts research and observations from financial institutions; information
regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the
existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of
Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of
Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the
type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount
estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and
liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
|
Level 1 quoted prices in active markets for identical investments |
|
|
Level 2 other significant observable inputs (including quoted prices for similar investments, interest rates,
prepayment speeds, credit risk, etc.) |
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair
value of investments) |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing
in those securities.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
35 |
Notes to financial statements (contd)
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 |
|
|
|
|
|
$ |
440,395,983 |
|
|
|
|
|
|
$ |
440,395,983 |
|
Sovereign Bonds |
|
|
|
|
|
|
39,223,887 |
|
|
|
|
|
|
|
39,223,887 |
|
U.S. Government & Agency Obligations |
|
|
|
|
|
|
17,555,568 |
|
|
|
|
|
|
|
17,555,568 |
|
Convertible Bonds & Notes |
|
|
|
|
|
|
5,885,605 |
|
|
|
|
|
|
|
5,885,605 |
|
Senior Loans |
|
|
|
|
|
|
3,536,366 |
|
|
|
|
|
|
|
3,536,366 |
|
Convertible Preferred Stocks |
|
|
|
|
|
|
1,544,259 |
|
|
|
|
|
|
|
1,544,259 |
|
Warrants |
|
$ |
5,411 |
|
|
|
|
|
|
|
|
|
|
|
5,411 |
|
Common Stocks |
|
|
|
|
|
|
|
|
|
$ |
0 |
* |
|
|
0 |
* |
Total Long-Term Investments |
|
|
5,411 |
|
|
|
508,141,668 |
|
|
|
|
|
|
|
508,147,079 |
|
Short-Term Investments |
|
|
7,012,556 |
|
|
|
|
|
|
|
|
|
|
|
7,012,556 |
|
Total Investments |
|
$ |
7,017,967 |
|
|
$ |
508,141,668 |
|
|
$ |
0 |
* |
|
$ |
515,159,635 |
|
Other Financial Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts |
|
|
|
|
|
$ |
396,843 |
|
|
|
|
|
|
$ |
396,843 |
|
Total |
|
$ |
7,017,967 |
|
|
$ |
508,538,511 |
|
|
$ |
0 |
* |
|
$ |
515,556,478 |
|
|
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 |
|
|
|
|
|
$ |
143,982 |
|
|
|
|
|
|
$ |
143,982 |
|
|
See Schedule of Investments for additional detailed categorizations. |
* |
Amount represents less than $1. |
|
Reflects the unrealized appreciation (depreciation) of the instruments. |
(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
appreciation or depreciation in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
|
|
|
36 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
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.
(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) Reverse repurchase agreements. The Fund may enter into reverse
repurchase agreements. Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed upon time and price. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the Funds use of the proceeds of the agreement may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the
Funds obligation to repurchase the securities. In entering into reverse repurchase agreements, the Fund will pledge cash, U.S. government securities or other liquid debt obligations at least equal in value to its obligations with respect to
reverse repurchase agreements or will take other actions permitted by law to cover its
|
|
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Western Asset High Income Fund II Inc. 2022 Annual Report |
|
37 |
Notes to financial statements (contd)
obligations. If the market value of the collateral declines during the period, the Fund may be
required to post additional collateral to cover its obligation. Cash collateral that has been pledged to cover obligations of the Fund under reverse repurchase agreements, if any, will be reported separately in the Statement of Assets and
Liabilities. Securities pledged as collateral are noted in the Schedule of Investments. Interest payments made on reverse repurchase agreements are recognized as a component of Interest expense on the Statement of Operations. In periods
of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund.
(f) 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 Statements of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash Flows.
(g) Foreign currency translation. Investment securities and other assets
and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign
currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not
isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net
realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and
losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded
on the Funds books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on
the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not
typically associated with those of U.S. dollar denominated transactions as a result of, 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.
(h) 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
|
|
|
38 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
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.
(i) 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 may 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.
(j) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other
transactions where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may
increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Funds subadviser attempts to mitigate counterparty risk by
(i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment and (iii) requiring collateral from the
counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values of underlying collateral received may expose
the Fund to increased risk of loss.
With exchange traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or
clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset
rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (ISDA Master Agreement) or
similar agreement, with certain of its derivative counterparties that govern over-the-counter (OTC) derivatives and provide for general obligations,
representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in
the Funds net assets or net asset value per share over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional
collateral.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
39 |
Notes to financial statements (contd)
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the
counterparty certain derivative financial instruments payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement,
the terms of the ISDA Master Agreements do not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The
enforceability of the right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by
the broker or exchange clearinghouse for exchange traded derivatives while collateral terms are contract specific for OTC traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any,
will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of April 30, 2022, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $143,982. 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.
(k) 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.
(l) 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.
(m) 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.
(n) 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
|
|
|
40 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
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, 2022, 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.
(o) 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.
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 indirect, wholly-owned subsidiaries of Franklin Resources, Inc. (Franklin Resources).
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.
The manager has agreed to waive the Funds management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an
affiliated money market fund.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
41 |
Notes to financial statements (contd)
During the year ended April 30, 2022, fees waived and/or expenses reimbursed amounted to
$2,197, all of which was an affiliated money market fund waiver.
All officers and one Director of the Fund are employees of Franklin Resources or its affiliates and
do not receive compensation from the Fund.
3. Investments
During the year ended April 30, 2022, 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 |
|
$ |
302,520,010 |
|
|
$ |
10,651,597 |
|
Sales |
|
|
327,086,684 |
|
|
|
12,167,054 |
|
At April 30, 2022, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of investments
for federal income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
|
Gross Unrealized Appreciation |
|
|
Gross Unrealized Depreciation |
|
|
Net Unrealized Appreciation (Depreciation) |
|
Securities |
|
$ |
516,458,536 |
|
|
$ |
23,592,570 |
|
|
$ |
(24,891,471) |
|
|
$ |
(1,298,901) |
|
Forward foreign currency contracts |
|
|
|
|
|
|
396,843 |
|
|
|
(143,982) |
|
|
|
252,861 |
|
Transactions in reverse repurchase agreements for the Fund during the year ended April 30, 2022 were as follows:
|
|
|
|
|
Average Daily Balance* |
|
Weighted Average Interest Rate* |
|
Maximum Amount Outstanding |
$23,585,994 |
|
0.254% |
|
$25,524,250 |
* |
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding. |
Interest rates on reverse repurchase agreements ranged from 0.070% to 0.750% during the year ended April 30, 2022. Interest expense incurred on reverse repurchase
agreements totaled $60,854.
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, 2022.
|
|
|
|
|
ASSET DERIVATIVES1 |
|
|
|
Foreign Exchange Risk |
|
Forward foreign currency contracts |
|
$ |
396,843 |
|
|
|
|
42 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
|
|
|
|
LIABILITY DERIVATIVES1 |
|
|
|
Foreign Exchange Risk |
|
Forward foreign currency contracts |
|
$ |
143,982 |
|
1 |
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability
derivatives is payables/net unrealized depreciation. |
The following tables provide information about the effect of derivatives and hedging
activities on the Funds Statement of Operations for the year ended April 30, 2022. 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 |
|
$ |
183,949 |
|
|
|
|
|
|
$ |
183,949 |
|
Forward foreign currency contracts |
|
|
|
|
|
$ |
47,209 |
|
|
|
47,209 |
|
Total |
|
$ |
183,949 |
|
|
$ |
47,209 |
|
|
$ |
231,158 |
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED |
|
|
|
Foreign Exchange Risk |
|
Forward foreign currency contracts |
|
$ |
202,490 |
|
During the year ended April 30, 2022, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
Average Market Value |
|
Futures contracts (to sell) |
|
$ |
9,356,135 |
|
Forward foreign currency contracts (to buy) |
|
|
4,960,295 |
|
Forward foreign currency contracts (to sell) |
|
|
7,067,235 |
|
At April 30, 2022, there were no open positions held in this derivative.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
43 |
Notes to financial statements (contd)
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, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
Gross Assets Subject to Master Agreements1 |
|
|
Gross Liabilities Subject to Master Agreements1 |
|
|
Net Assets (Liabilities) Subject to Master Agreements |
|
|
Collateral Pledged (Received) |
|
|
Net Amount2 |
|
Citibank N.A. |
|
|
|
|
|
$ |
(266) |
|
|
$ |
(266) |
|
|
|
|
|
|
$ |
(266) |
|
Goldman Sachs Group Inc. |
|
$ |
396,843 |
|
|
|
|
|
|
|
396,843 |
|
|
|
|
|
|
|
396,843 |
|
Morgan Stanley & Co. Inc. |
|
|
|
|
|
|
(143,716) |
|
|
|
(143,716) |
|
|
|
|
|
|
|
(143,716) |
|
Total |
|
$ |
396,843 |
|
|
$ |
(143,982) |
|
|
$ |
252,861 |
|
|
|
|
|
|
$ |
252,861 |
|
1 |
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in
the Statement of Assets and Liabilities. |
2 |
Represents the net amount receivable (payable) from (to) the counterparty in the event of default. |
5. Tender offer
On June 22, 2020, the
Funds Board of Directors (the Board) authorized (subject to certain conditions) a cash tender offer for up to 35% of the outstanding common stock (Shares) of the Fund at a price per Share equal to 99.5% of the
Funds net asset value per Share as of the business day immediately following the expiration date of the tender offer. On October 19, 2020, the Fund commenced its tender offer, which expired on November 16, 2020. On November 19,
2020, the Fund announced the final results of the tender offer. A total of 25,577,060 Shares were duly tendered and not withdrawn, representing approximately 30% of the Funds outstanding Shares. The Shares accepted for tender were repurchased
at a price of $7.01 equal to 99.5% of the per Share net asset value, $7.05, as of the close of the regular trading session of the New York Stock Exchange on November 17, 2020. Payment for such Shares was made on November 19, 2020. Shares
that were not tendered remain outstanding.
6. Loan
Pursuant to a Consent and Amendment Agreement dated March 14, 2022, the Funds Credit Agreement between the Fund and Pershing LLC, as lender, was amended to
transfer Pershing LLCs interest to The Bank of New York Mellon (BNYM). The amended Credit Agreement allows the Fund to borrow up to an aggregate amount of $300,000,000, subject to approval by BNYM, and renews daily for a 180-day term unless notice to the contrary is given to the Fund. The Credit Agreement will terminate effective May 11, 2022, absent subsequent notice to the contrary pursuant to notice received by the Fund on
November 12, 2021. The Fund pays interest on borrowings calculated based on the Overnight Bank Funding Rate plus applicable margin. The Overnight Bank Funding Rate means the Overnight Bank Funding Rate as reported by the New York Federal
Reserve in the FR2420 Report of Selected Money Market Rates or any successor report or website. Prior to June 20, 2021, the interest on the loan was 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 BNYM. The Funds Credit Agreement contains
customary covenants that,
|
|
|
44 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
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, 2022 was $1,401,056. For the year ended April 30, 2022, the Fund had an average daily loan balance outstanding of $155,075,343 and the weighted average interest rate was 0.89%. At
April 30, 2022, the Fund had $154,500,000 of borrowings outstanding.
7. Distributions subsequent to April 30, 2022
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 |
|
4/22/2022 |
|
|
5/2/2022 |
|
|
$ |
0.0490 |
|
5/23/2022 |
|
|
6/1/2022 |
|
|
$ |
0.0490 |
|
6/23/2022 |
|
|
7/1/2022 |
|
|
$ |
0.0490 |
|
7/22/2022 |
|
|
8/1/2022 |
|
|
$ |
0.0490 |
|
8/24/2022 |
|
|
9/1/2022 |
|
|
$ |
0.0490 |
|
8. 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 ended April 30, 2022, the Fund did not
repurchase any shares.
Since the commencement of the stock repurchase program through April 30, 2022, the Fund repurchased 1,964,984 shares or 2.28% of its
common shares outstanding for a total amount of $10,774,478.
9. Rights offering
On March 29, 2022, the Fund announced that the Funds Board of Directors had approved a transferable rights offering (the Offer). The Funds
investment manager and subadviser believe that the Offer may benefit the Fund and its stockholders in several ways. Among other benefits, increasing the Funds assets will provide additional capital for use in pursuing the Funds
investment objective of maximizing current income, with a secondary objective of capital appreciation to the extent consistent with the Funds primary objective. An increase in Fund assets may also have a positive impact on the Funds
expense ratio, as fixed costs will be distributed over a larger asset base. In addition, the additional shares of common stock issued could increase the liquidity of the shares of common stock on the New York Stock Exchange (NYSE), where
the shares of common stock are traded.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
45 |
Notes to financial statements (contd)
Pursuant to the Offer, each stockholder will receive one transferable right (the
Right) for each share of common stock held on April 8, 2022 (the Record Date). Three Rights plus the final subscription price per share of common stock (the Subscription Price) will be required to purchase
one additional share of common stock (the Primary Subscription); however, stockholders who hold fewer than three common shares on the Record Date will be entitled to subscribe for one common share, and fractional shares will not be
issued. The Subscription Price will be determined based upon a formula equal to 92.5% of the average of the last reported sales price per share of the Funds common stock on the NYSE on the Expiration Date (as defined below) and each of the
four preceding trading days (the Formula Price). If, however, the Formula Price is less than 90% of the net asset value per share of common stock at the close of trading on the NYSE on the Expiration Date, then the Subscription Price
will be 90% of the Funds net asset value per share of common stock at the close of trading on the NYSE on that day. Record date stockholders who fully exercise their Rights in the Primary Subscription will be eligible for an over-subscription
privilege entitling these stockholders to subscribe for any additional shares of common stock not purchased pursuant to the Primary Subscription, subject to certain limitations, allotment and the right of the Board of Directors to eliminate the
over-subscription privilege. Holders of Rights acquired in the secondary market may not participate in the over-subscription privilege. The Rights started to trade when issued on the NYSE beginning on April 6, 2022, and the
Funds shares of common stock traded Ex-Rights on the NYSE beginning on April 7, 2022. The Rights began trading for normal settlement on the NYSE (NYSE: HIX RT) on April 8, 2022. The
Offering expired at 5:00 PM Eastern Time on May 6, 2022 (the Expiration Date).
10. Transactions with affiliated company
As defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is
under common ownership or control with the Fund. The following company was considered an affiliated company for all or some portion of the year ended April 30, 2022. The following transactions were effected in such company for the year ended
April 30, 2022.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate Value at April 30, 2021 |
|
Purchased |
|
|
Sold |
|
|
Cost |
|
|
Shares |
|
|
Cost |
|
|
Shares |
|
Western Asset Premier Institutional Government Reserves, Premium Shares |
|
|
|
$ |
156,655,900 |
|
|
|
156,655,900 |
|
|
$ |
149,643,344 |
|
|
|
149,643,344 |
|
|
|
|
46 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
|
|
|
|
|
|
|
|
|
|
|
|
(contd) |
|
Realized Gain (Loss) |
|
Dividend Income |
|
|
Net Increase (Decrease) in Unrealized Appreciation (Depreciation) |
|
Affiliate Value at April 30, 2022 |
|
Western Asset Premier Institutional Government Reserves, Premium Shares |
|
|
|
$ |
1,747 |
|
|
|
|
$ |
7,012,556 |
|
11. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended April 30, was as follows:
|
|
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
Distributions paid from: |
|
|
|
|
|
|
|
|
Ordinary income |
|
$ |
31,284,412 |
|
|
$ |
34,735,425 |
|
Tax return of capital |
|
|
3,301,743 |
|
|
|
7,277,376 |
|
Total distributions paid |
|
$ |
34,586,155 |
|
|
$ |
42,012,801 |
|
As of April 30, 2022, the components of distributable earnings (loss) on a tax basis were as follows:
|
|
|
|
|
Deferred capital losses* |
|
$ |
(202,802,047) |
|
Other book/tax temporary differences(a) |
|
|
(3,267,538) |
|
Unrealized appreciation (depreciation)(b) |
|
|
(1,065,230) |
|
Total distributable earnings (loss) net |
|
$ |
(207,134,815) |
|
* |
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 foreign currency contracts, the difference between cash and accrual basis distributions paid, book/tax differences in the accrual of interest income on securities in default and book/tax differences in the
timing of the deductibility of various expenses. |
(b) |
The difference between book-basis and tax-basis unrealized appreciation
(depreciation) is attributable to the tax deferral of losses on wash sales, the difference between book and tax amortization methods for premium on fixed income securities and other book/tax basis adjustments. |
12. Recent accounting pronouncement
In March
2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform
on Financial Reporting. In January 2021, the FASB issued ASU No. 2021-01, with further amendments to Topic 848. The amendments in the ASUs provide optional temporary accounting recognition and
financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the LIBOR and other interbank-offered based reference rates as of the end of 2021 and 2023. The ASUs are effective for
certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
47 |
Notes to financial statements (contd)
reviewed the requirements and believes the adoption of these ASUs will not have a material impact
on the financial statements.
13. Other matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as coronavirus) has continued to rapidly
spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not
known. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively impact the Funds performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
* * *
The
Funds investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or LIBOR, which is the offered rate for short-term Eurodollar deposits between major
international banks. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023. All other LIBOR settings, including the one-week and two-month USD LIBOR settings, have ceased publication as of January 1, 2022. 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.
* * *
Russias military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict could
increase volatility and uncertainty in the financial markets and adversely affect regional and global economies. The United States and other countries have imposed broad-ranging economic sanctions on Russia and certain Russian individuals, banking
entities and corporations as a response to its invasion of Ukraine. The United States and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that support Russias military invasion. These
sanctions, as well as any other economic consequences related to the invasion, such as additional sanctions, boycotts or changes in consumer or purchaser preferences or cyberattacks on governments, companies or individuals, may further decrease the
value and liquidity of certain Russian securities and securities of issuers in other countries that are subject to economic sanctions related to the invasion. To the extent that the Fund has exposure to Russian investments or investments in
countries affected by the invasion, the Funds ability to price, buy, sell, receive or deliver such investments was impaired. The Fund could determine at any time that certain of the most affected securities have little or no value. In
addition, any exposure that the Fund may have to counterparties in Russia or in countries affected by the invasion could negatively impact the Funds portfolio. The extent and duration of Russias military actions and the repercussions of
such actions (including any retaliatory actions or countermeasures that
|
|
|
48 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
may be taken by those subject to sanctions) are
impossible to predict, but could result in significant market disruptions, including in the oil and natural gas markets, and may negatively affect global supply chains, inflation and global growth. These and any related events could significantly
impact the Funds performance and the value of an investment in the Fund, even beyond any direct exposure the Fund may have to Russian issuers or issuers in other countries affected by the invasion. At April 30, 2022, the Fund had 0.11% of
its net assets invested in securities with significant economic risk or exposure to Russia.
14. Subsequent events
On May 13, 2022, the Fund announced the final results of its transferable rights offering (the Offer). The Offer expired at 5:00 PM Eastern Time on
May 6, 2022 (the Expiration Date) and the Rights no longer trade on the New York Stock Exchange (NYSE). The final subscription price per share was $5.17, which was equal to 90% of the Funds net asset value per
share of common stock at the close of trading on the NYSE on May 6, 2022. The Offer resulted in the issuance of 6,001,836 shares of common stock. The gross proceeds of the Offer were $31,029,492. The shares of common stock subscribed were
issued on May 13, 2022.
* * *
Effective May 6, 2022, the Fund entered into a Margin Loan and Security Agreement (the BofA Credit Agreement) with the Bank of America, N.A.
(BofA). The Funds Credit Agreement with The Bank of New York Mellon was terminated. The BofA Credit Agreement allows the Fund to borrow up to an aggregate amount of $220,000,000 and renews daily for a
179-day term unless notice to the contrary is given to the Fund. The Fund pays interest on borrowings calculated based on SOFR plus 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 BofA. The BofA Credit Agreement contains customary covenants that, among other things, may limit the Funds ability to pay distributions in
certain circumstances, incur additional debt, change certain material 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 BofA 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.
|
|
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
|
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, 2022, the related statements of operations and cash flows for the year ended April 30, 2022, the statement of changes in net assets for each of the two years in the period ended April 30, 2022,
including the related notes, and the financial highlights for each of the five years in the period ended April 30, 2022 (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, 2022, 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, 2022 and the financial highlights for each of the five years in the period ended April 30, 2022 in conformity with accounting principles generally accepted in the United States of America.
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, 2022 by correspondence with the custodian, transfer agent, and brokers. We believe that our audits provide a reasonable basis for our opinion.
/s/PricewaterhouseCoopers LLP
Baltimore, Maryland
June 22, 2022
We have served as the auditor of one or more investment companies
in the Franklin Templeton Group of Funds since 1948.
|
|
|
50 |
|
Western Asset High Income Fund II Inc. 2022 Annual Report |
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) |
|
20 |
Other board memberships held by Director during the past five years |
|
None |
|
|
Carol L. Colman |
|
|
|
|
Year of birth |
|
1946 |
Position(s) held with Fund1 |
|
Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class III |
Term of office1 and length of time served |
|
Since 2002 |
Principal occupation(s) during the past five years |
|
President, Colman Consulting Company (consulting) |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
20 |
Other board memberships held by Director during the past five years |
|
None |
|
|
|
Western Asset High Income Fund II Inc. |
|
51 |
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
Independent Directors (contd) |
|
|
|
|
Daniel P. Cronin |
|
|
|
|
Year of birth |
|
1946 |
Position(s) held with Fund1 |
|
Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class I |
Term of office1 and length of time served |
|
Since 2007 |
Principal occupation(s) during the past five years |
|
Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004) |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
20 |
Other board memberships held by Director during the past five years |
|
None |
|
|
Paolo M. Cucchi |
|
|
|
|
Year of birth |
|
1941 |
Position(s) held with Fund1 |
|
Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class II |
Term of office1 and length of time served |
|
Since 2007 |
Principal occupation(s) during the past five years |
|
Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and Professor of French and Italian (2009 to 2014)
at Drew University |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
20 |
Other board memberships held by Director during the past five years |
|
None |
|
|
William R. Hutchinson |
|
|
|
|
Year of birth |
|
1942 |
Position(s) held with Fund1 |
|
Lead Independent Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class III |
Term of office1 and length of time served |
|
Since 2003 |
Principal occupation(s) during the past five years |
|
President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001) |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
20 |
Other board memberships held by Director during the past five years |
|
Director (1994 to 2021) and Non-Executive Chairman of the Board (December 2009 to April 2020), Associated Banc-Corp. (financial services
company) |
|
|
|
52 |
|
Western Asset High Income Fund II Inc. |
|
|
|
Independent Directors (contd) |
|
|
|
|
Eileen A. Kamerick |
|
|
|
|
Year of birth |
|
1958 |
Position(s) held with Fund1 |
|
Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee, Class I |
Term of office1 and length of time served |
|
Since 2013 |
Principal occupation(s) during the past five years |
|
Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership Fellow (since 2016, with Directorship
Certification since 2019 and NACD 2022 Directorship 100 honoree) and financial expert; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor,
Washington University in St. Louis and University of Iowa law schools (since 2007); formerly, Chief Financial Officer, Press Ganey Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan
Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012) |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
20 |
Other board memberships held by Director during the past five years |
|
Director of ACV Auctions Inc. (since 2021); Director of Hochschild Mining plc (precious metals company) (since 2016); Director of Associated Banc-Corp (financial services company) (since
2007); formerly Trustee of AIG Funds and Anchor Series Trust (2018 to 2021) |
|
|
Nisha Kumar |
|
|
|
|
Year of birth |
|
1970 |
Position(s) held with Fund1 |
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Coordinator of Alternative Investments, Class II |
Term of office1 and length of time served |
|
Since 2019 |
Principal occupation(s) during the past five years |
|
Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief Financial Officer and Chief Administrative
Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign Relations |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
20 |
Other board memberships held by Director during the past five years |
|
Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017-2018); and Director of The Asia Tigers Fund, Inc. (2016 to 2018) |
|
|
|
Western Asset High Income Fund II Inc. |
|
53 |
Additional information
(unaudited) (contd)
Information about Directors and Officers
|
|
|
Interested Director and Officer |
|
|
|
|
Jane Trust, CFA2 |
|
|
|
|
Year of birth |
|
1962 |
Position(s) held with Fund1 |
|
Director, Chairman, President and Chief Executive Officer, Class III |
Term of office1 and length of time served |
|
Since 2015 |
Principal occupation(s) during the past five years |
|
Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 131 funds associated with LMPFA or its affiliates (since 2015); President
and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg Mason & Co., LLC (Legg Mason & Co.); Senior Vice President of LMPFA
(2015) |
Number of portfolios in fund complex overseen by Director (including the Fund) |
|
129 |
Other board memberships held by Director during the past five years |
|
None |
|
|
|
Additional Officers |
|
|
|
|
Fred Jensen
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY
10018 |
|
|
|
|
Year of birth |
|
1963 |
Position(s) held with Fund1 |
|
Chief Compliance Officer |
Term of office1 and length of time served |
|
Since 2020 |
Principal occupation(s) during the past five years |
|
Director Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of Compliance, Legg Mason Office of the Chief
Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013); formerly, Chief Compliance Officer of The
Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker-dealer) (2000 to 2003) |
|
|
George P. Hoyt Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT
06902 |
|
|
|
|
Year of birth |
|
1965 |
Position(s) held with Fund1 |
|
Secretary and Chief Legal Officer |
Term of office1 and length of time served |
|
Since 2020 |
Principal occupation(s) during the past five years |
|
Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since
2020); formerly, Managing Director (2016 to 2020) and Associate General Counsel for Legg Mason & Co. and Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (2006 to 2020) |
|
|
|
54 |
|
Western Asset High Income Fund II Inc. |
|
|
|
Additional Officers (contd) |
|
|
|
|
Thomas C. Mandia* Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT
06902 |
|
|
|
|
Year of birth |
|
1962 |
Position(s) held with Fund1 |
|
Senior Vice President |
Term of office1 and length of time served |
|
Since 2022 |
Principal occupation(s) during the past five years |
|
Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds associated with Legg Mason & Co. or its
affiliates (since 2006); Secretary of LM Asset Services, LLC (LMAS) (since 2002) and Legg Mason Fund Asset Management, Inc. (LMFAM) (since 2013) (formerly registered investment advisers); formerly, Managing Director and
Deputy General Counsel of Legg Mason & Co. (2005 to 2020) and Assistant Secretary of certain funds in the fund complex (2006 to 2022) |
|
|
Christopher Berarducci Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY
10018 |
|
|
|
|
Year of birth |
|
1974 |
Position(s) held with Fund1 |
|
Treasurer and Principal Financial Officer |
Term of office1 and length of time served |
|
Since 2019 |
Principal occupation(s) during the past five years |
|
Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since 2019) of certain funds associated with Legg
Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co. |
|
|
Jeanne M. Kelly Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY
10018 |
|
|
|
|
Year of birth |
|
1951 |
Position(s) held with Fund1 |
|
Senior Vice President |
Term of office1 and length of time served |
|
Since 2007 |
Principal occupation(s) during the past five years |
|
U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice
President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM (2013 to 2015) |
|
Directors who are not interested persons of the Fund within the meaning of Section 2(a)(19) of the
Investment Company Act of 1940, as amended (the 1940 Act). |
* |
Effective February 10, 2022, Mr. Mandia became a Senior Vice President. |
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Western Asset High Income Fund II Inc. |
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55 |
Additional information
(unaudited) (contd)
Information about Directors and Officers
1 |
The Funds Board of Directors is divided into three classes: Class I, Class II and Class III. The
terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2023, year 2024 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. |
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56 |
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Western Asset High Income Fund II Inc. |
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.
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Western Asset High Income Fund II Inc. |
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57 |
Other shareholder communications regarding accounting matters (unaudited)
The Funds Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal
accounting controls or auditing matters (collectively, Accounting Matters). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (CCO). Persons who are
uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Funds Audit Committee Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 47th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.
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58 |
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Western Asset High Income Fund II Inc. |
Important information to shareholders (unaudited)
UPDATED DISCLOSURES FOR THE FUND
The following
additional information is provided for the Fund as of the fiscal year ended April 30, 2022.
Summary of Fund Expenses
|
|
|
|
|
Sales Load (as a percentage of offering price) |
|
|
|
% |
Offering Expense (as a percentage of offering price)(1) |
|
|
1.40 |
% |
Dividend Reinvestment Plan Fees(2) |
|
$ |
5.00 |
|
Annual Operating Expenses
|
|
|
|
|
|
|
Percentage of Net Assets Attributable to Common Shares |
|
Management Fees(3) |
|
|
1.16 |
% |
Interest Payments on Borrowed Funds(4) |
|
|
0.36 |
% |
Other Expenses(5) |
|
|
0.14 |
% |
Total Annual Fund Operating Expenses |
|
|
1.66 |
% |
(1) |
The Fund will pay all offering expenses in connection with the Rights offering and Common Stockholders, including those
who do not exercise their Rights, will indirectly bear such expenses. Offering expenses borne by the Fund are estimated to be approximately $434,000 in the aggregate. |
(2) |
Common Stockholders will pay brokerage charges if they direct the Plan Agent to sell shares of Common Stock held in a
dividend reinvestment account. There are no fees charged to stockholders for participating in the Funds dividend reinvestment plan. However, stockholders participating in the Plan that elect to sell their shares obtained pursuant to the plan
would pay $5.00 per transaction to sell shares. |
(3) |
The Investment Manager receives an annual fee, payable monthly, in an amount equal to 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. The Fund has utilized leverage in an aggregate amount of 31% of Managed Assets. Managed Assets
means net assets plus the amount of any outstanding borrowings used for leverage and assets attributable to any preferred stock that may be outstanding. If the Fund were to use leverage in excess of 31%, the amount of management fees paid to the
Investment Manager would be higher because the fees paid are calculated on the Funds Managed Assets, which include assets purchased with leverage. |
(4) |
The Fund has utilized Borrowings in an aggregate amount of 31% of its Managed Assets, which equals the average level of
leverage for the Funds fiscal year ended April 30, 2022. The expenses and rates associated with leverage may vary as and when Borrowings or issuances of Preferred Stock are made. |
(5) |
Other Expenses are based on amounts incurred in the fiscal year ended April 30, 2022.
|
Examples
An investor
would pay the following expenses on a $1,000 investment in the Fund, assuming a 5% annual return:
|
|
|
|
|
|
|
One Year |
|
Three Years |
|
Five Years |
|
Ten Years |
$17 |
|
$52 |
|
$90 |
|
$197 |
The above table and example are intended to assist investors in understanding the various costs and expenses directly or indirectly
associated with investing in Shares of the Fund. The Example assumes that all dividends and other distributions are reinvested at net asset value and that the percentage amounts listed in the table above under Total Annual Operating
Expenses remain the same in the years shown. The above table and example and
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Western Asset High Income Fund II Inc. |
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59 |
Important information to shareholders (unaudited) (contd)
the assumption in the example of a 5% annual return are required by regulations of the SEC that are applicable to all investment companies; the assumed 5% annual return
is not a prediction of, and does not represent, the projected or actual performance of the Funds Common Shares.
The example should not be considered a
representation of past or future expenses, and the Funds actual expenses may be greater than or less than those shown. The Funds actual rate of return may be greater or less than the hypothetical 5% return shown in the example.
Market Price and Net Asset Valuation (NAV) Information
The Funds Common Stock is traded on the NYSE under the symbol HIX. The following table sets forth for each of the periods indicated the range of high
and low closing sale price of the Funds Common Stock and the quarter-end sale price, each as reported on the NYSE, the net asset value per share of Common Stock and the premium or discount to net asset
value per share at which the Funds shares were trading.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Closing Sale Price |
|
|
Quarter-End Closing |
|
|
|
High |
|
|
Low |
|
|
Sale Price |
|
|
Net Asset Value Per Share of Common Stock(1) |
|
|
Premium/ (Discount) of Quarter- End Sale Price to Net Asset Value(2) |
|
Fiscal Year 2021: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2020 |
|
$ |
6.58 |
|
|
$ |
5.33 |
|
|
$ |
6.54 |
|
|
$ |
6.93 |
|
|
|
(5.63) |
% |
October 31, 2020 |
|
$ |
6.75 |
|
|
$ |
6.38 |
|
|
$ |
6.44 |
|
|
$ |
6.82 |
|
|
|
(5.57) |
% |
January 31, 2021 |
|
$ |
7.07 |
|
|
$ |
6.48 |
|
|
$ |
6.83 |
|
|
$ |
7.17 |
|
|
|
(4.74) |
% |
April 30, 2021 |
|
$ |
7.09 |
|
|
$ |
6.75 |
|
|
$ |
7.09 |
|
|
$ |
7.15 |
|
|
|
(0.84) |
% |
|
|
|
|
|
|
Fiscal Year 2022: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2021 |
|
$ |
7.40 |
|
|
$ |
7.04 |
|
|
$ |
7.38 |
|
|
$ |
7.19 |
|
|
|
2.64 |
% |
October 31, 2021 |
|
$ |
7.75 |
|
|
$ |
7.10 |
|
|
$ |
7.27 |
|
|
$ |
7.01 |
|
|
|
3.71 |
% |
January 31, 2022 |
|
$ |
7.30 |
|
|
$ |
6.35 |
|
|
$ |
6.70 |
|
|
$ |
6.62 |
|
|
|
1.21 |
% |
April 30, 2022 |
|
$ |
6.76 |
|
|
$ |
5.36 |
|
|
$ |
5.38 |
|
|
$ |
5.86 |
|
|
|
(8.19) |
% |
Source of market prices: Bloomberg.
(1) |
NAV per share is determined as of close of business on the last day of the relevant quarter and therefore may not reflect
the NAV per share on the date of the high and low closing sales prices, which may or may not fall on the last day of the quarter. |
(2) |
Calculated as of the quarter-end closing sales price divided by the quarter-end NAV. |
The NAV per Common Share on April 30, 2022 was $5.86 and the market price per Common Stock
at the close of business on April 30, 2022 was $5.38, representing a (8.19)% discount
|
|
|
60 |
|
Western Asset High Income Fund II Inc. |
from such net asset value. As of April 30,
2022, the Fund had 58,924,586 outstanding shares of Common Stock. Shares of a closed-end investment company may frequently trade at prices lower than NAV. The Funds Common Stock has traded in the market
below, at and above net asset value since the commencement of the Funds operations. However, it has recently been the case that the Funds Common Stock has traded at a discount from NAV. The Fund cannot predict whether its Stock will
trade in the future at a premium to or discount from NAV, or the level of any premium or discount. The Board regularly monitors the relationship between the market price and NAV of the Common Stock.
Senior Securities Table
The Fund engaged in
senior securities during the prior ten years as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended |
|
Total Amount Outstanding |
|
|
Asset Coverage per 1,000 |
|
|
Average Market Value Per Unit** |
|
Revolving Credit Facility: |
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2022* |
|
$ |
154,500,000 |
|
|
$ |
3,236 |
|
|
|
N/A |
|
April 30, 2021* |
|
$ |
158,000,000 |
|
|
$ |
3,654 |
|
|
|
N/A |
|
April 30, 2020* |
|
$ |
208,000,000 |
|
|
$ |
3,506 |
|
|
|
N/A |
|
April 30, 2019* |
|
$ |
246,500,000 |
|
|
$ |
3,524 |
|
|
|
N/A |
|
April 30, 2018 |
|
$ |
235,000,000 |
|
|
$ |
3,710 |
|
|
|
N/A |
|
April 30, 2017 |
|
$ |
240,000,000 |
|
|
$ |
3,796 |
|
|
|
N/A |
|
April 30, 2016 |
|
$ |
240,000,000 |
|
|
$ |
3,557 |
|
|
|
N/A |
|
April 30, 2015* |
|
$ |
260,000,000 |
|
|
$ |
3,840 |
|
|
|
N/A |
|
April 30, 2014* |
|
$ |
255,000,000 |
|
|
$ |
4,201 |
|
|
|
N/A |
|
April 30, 2013* |
|
$ |
215,000,000 |
|
|
$ |
4,825 |
|
|
|
N/A |
|
April 30, 2012* |
|
$ |
215,000,000 |
|
|
$ |
4,518 |
|
|
|
N/A |
|
* |
The Fund had open reverse repurchase agreements at April 30, 2022, 2021, 2020, 2019, 2015, 2014, 2013 and 2012.
|
** |
Not applicable, as these senior securities were not registered for public trading. |
UNRESOLVED STAFF COMMENTS
The Fund believes that
there are no material unresolved written comments, received 180 days or more before April 30, 2022, from the Staff of the Securities and Exchange Commission regarding any of its periodic or current reports under the Securities Exchange Act of
1934 or the 1940 Act, or its registration statement.
|
|
|
Western Asset High Income Fund II Inc. |
|
61 |
Summary of information regarding the Fund (unaudited)
Investment Objectives
The Funds primary
investment objective is to maximize current income by investing at least 80% of its net assets, plus any borrowings for investment purposes, in high-yield debt securities. As a secondary objective, the Fund seeks capital appreciation to the extent
consistent with its objective of seeking to maximize current income.
Principal Investment Policies and Strategies
Under normal conditions, the Fund will invest at least 80% of its net assets plus any borrowings for investment purposes in high-yield debt securities. The Funds
investment manager is free to invest in debt securities of any maturity. Certain of the debt securities purchased by the Fund may be rated as low as C by Moodys Investor Service (Moodys) or D by
Standard & Poors Ratings Services (S&P) or may be comparable to securities so rated. The Fund is not required to dispose of a debt security if its credit rating or credit quality declines.
The Fund invests up to 35% of its total assets in debt securities of issuers located in emerging market countries. Emerging market country is defined to
include any country which is, at the time of investment, (i) represented in the J.P. Morgan Emerging Market Bond Index Global or the J.P. Morgan Corporate Emerging Market Bond Index Broad or (ii) categorized by the World Bank in its annual
categorization as middle- or low-income. The Fund may also invest in securities denominated in currencies of emerging market countries. There is no minimum rating criteria for the Funds investments in
such securities. The Funds investments in debt securities of emerging market issuers may include dollar and non-dollar-denominated (a) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing authority or by their agencies or instrumentalities, including Brady bonds; (b) debt obligations of supranational entities; (c) debt obligations and other fixed-income
securities of foreign corporate issuers; (d) debt obligations of U.S. corporate issuers; and (e) debt securities issued by corporations that generate significant profits from emerging market countries.
The Fund may invest up to 30% of its assets in zero coupon securities, pay-in-kind bonds
and deferred payment securities. The Fund may also invest up to 20% of its total assets in common stock, convertible securities, warrants, preferred stock or other equity securities of U.S. and foreign issuers when consistent with its objectives.
The Fund may invest in high-yield foreign and U.S. corporate securities including bonds, debentures, notes, commercial paper and preferred stock and will generally
be unsecured. The Fund may invest in corporate debt securities with variable rates of interest or which involve equity features, such as contingent interest or participations based on revenues, sales or profits (i.e., interest or other payments,
often in addition to a fixed rate of return, that are based on the borrowers attainment of specified levels of revenues, sales or profits
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62 |
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Western Asset High Income Fund II Inc. |
and thus enable the holder of the security to share
in the potential success of the venture). The Fund may invest in high-yield debt securities with floating interest rates.
The Fund may invest in Brady bonds, which
are debt securities issued under the framework of the Brady Plan as a means for debtor nations to restructure their outstanding external indebtedness; participations in loans between emerging market governments and financial institutions; or
fixed-income securities issued by supranational entities such as the World Bank or the European Economic Community.
The Fund may invest in fixed and floating rate
loans arranged through private negotiations between a corporate borrower or a foreign sovereign entity and one or more financial institutions in the form of participations in loans and assignments of all or a portion of loans from third parties.
In times of adverse market conditions, the Fund may employ alternative strategies, including investment of a substantial portion of the Funds assets in
securities rated higher than Baa by Moodys or BBB by S&P, or in unrated securities of comparable quality. In addition, in order to maintain liquidity, the Fund may invest up to 35% of its total assets in
high-quality short-term money market instruments. Such instruments may include obligations of the U.S. Government or its agencies or instrumentalities; commercial paper of issuers rated, at the time of purchase,
A-2 or better by S&P or P-2 or better by Moodys or which, in the opinion of management, are of comparable creditworthiness; certificates of deposit,
bankers acceptances or time deposits of United States banks with total assets of at least $1 billion (including obligations of foreign branches of such banks) and of the 75 largest foreign commercial banks in terms of total assets
(including domestic branches of such banks); and repurchase agreements with respect to the foregoing obligations.
In times of adverse market conditions, the Fund
may invest its assets without limit in high-quality short-term money market instruments.
The Fund may use leverage through borrowings in an aggregate amount of up
to approximately 33 1/3% of the Funds total assets less all liabilities and indebtedness not represented by senior securities (for these purposes, total net assets) immediately after such borrowings. Furthermore, the Fund may use
leverage through the issuance of preferred stock in an aggregate amount of liquidation preference attributable to the preferred stock combined with the aggregate amount of any borrowings of up to approximately 50% of the Funds total net assets
immediately after such issuance.
The Fund may, in addition to engaging in the transactions described above, borrow money for temporary or emergency purposes
(including, for example, clearance of transactions, share repurchases or payments of dividends to stockholders) in an amount not exceeding 5% of the value of the funds total assets (including the amount borrowed).
|
|
|
Western Asset High Income Fund II Inc. |
|
63 |
Summary of information regarding the Fund (unaudited) (contd)
The Fund may enter into repurchase agreements for cash management purposes. Reverse repurchase agreements and similar investment management techniques that may provide
leverage are not subject to the foregoing 33 1/3% limitation so long as the Fund has covered its commitment with respect to such techniques by segregating or earmarking liquid assets, entering into offsetting transactions or owning positions
covering related obligations or, after August 19, 2022, if the Fund treats all reverse repurchase agreements or similar financing transactions as derivatives transactions for all purposes of compliance with new Rule 18f-4 under the 1940 Act.
The Fund may engage in currency transactions with counterparties to hedge the value of portfolio
securities denominated in particular currencies against fluctuations in relative value or to generate income or gain. Currency transactions include currency forward contracts, exchange-listed currency futures contracts and options thereon,
exchange-listed and OTC options on currencies and currency swaps.
The Fund may use a variety of derivative instruments as part of its investment strategies or for
hedging or risk management purposes. Examples of derivative instruments that the fund may use include options contracts, futures contracts, options on futures contracts, credit default swaps and other swap agreements. The Fund may purchase and sell
futures contracts, purchase and sell (or write) exchange-listed and over-the-counter put and call options on securities, financial indices and futures contracts, enter
into various interest rate and currency transactions and enter into other similar transactions which may be developed in the future to the extent the management determines that they are consistent with the funds investment objectives and
policies and applicable regulatory requirements. The Fund may use any or all of these techniques at any time, and the use of any particular derivative transaction will depend on market conditions.
The Fund may enter into interest rate swaps and may purchase interest rate caps, floors and collars and may sell interest rate caps, floors and collars that it has
purchased.
The Fund may also enter into (a) contracts for the purchase or sale for future delivery (futures contracts) of debt securities,
aggregates of securities, indices based upon the prices thereof and other financial indices and (b) put or call options on such futures contracts.
The Fund may
purchase or sell exchange-traded or over-the-counter put or call options on securities and indices based upon the prices, yields or spreads of securities.
The Fund may purchase securities on a firm commitment basis, including when-issued securities. The Fund may also invest in delayed-delivery securities.
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|
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64 |
|
Western Asset High Income Fund II Inc. |
The Fund may lend portfolio securities to brokers or
dealers or other financial institutions. The Fund does not currently intend to make loans of portfolio securities with a value in excess of 33 1/3% of the value of its total assets.
The Fund may invest, without limitation, in illiquid securities, which are securities that cannot be sold within seven days at a price which the fund would determine to
be fair value. The Fund may purchase Rule 144A securities for which there is a secondary market of qualified institutional buyers, as defined in Rule 144A promulgated under the Securities Act. The Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the public.
The Fund may invest in dollar rolls, asset-backed securities and
mortgage-backed securities.
Principal Risk Factors
There is no assurance that the Fund will meet its investment objectives. You may lose money on your investment in the Fund. The value of the Funds shares may go up
or down, sometimes rapidly and unpredictably. Market conditions, financial conditions of issuers represented in the Funds portfolio, investment strategies, portfolio management, and other factors affect the volatility of the Funds
shares. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The following section includes a summary of the principal risks of investing in the Fund.
Investment Risk and Market Risk. An investment in the Fund is subject to investment risk, including the possible loss of the entire principal amount that you
invest. Your investment in the Fund represents an indirect investment in the securities owned by the Fund. The value of these securities may increase or decrease, at times rapidly and unexpectedly. Your investment in the Fund may at any point in the
future be worth less than your original investment even after taking into account the reinvestment of dividends and distributions.
Below Investment Grade
Securities (High-Yield) Risk. At any one time, substantially all of the Funds managed assets may be invested in high-yield debt securities. High yield debt securities are generally subject to greater credit risks than higher-grade debt
securities, including the risk of default on the payment of interest or principal. High yield debt securities are considered speculative, typically have lower liquidity and are more difficult to value than higher grade bonds. High yield debt
securities tend to be volatile and more susceptible to adverse events, credit downgrades and negative sentiments and may be difficult to sell at a desired price, or at all, during periods of uncertainty or market turmoil.
Low Rated and Unrated Securities. The Fund may invest in instruments that are low rated or unrated. Debt securities of emerging market issuers may be considered
to have a credit quality rated below investment grade by internationally recognized credit rating
|
|
|
Western Asset High Income Fund II Inc. |
|
65 |
Summary of information regarding the Fund (unaudited) (contd)
organizations such as Moodys and S&P. Non-investment grade securities (that is, rated Ba1 or lower by Moodys or
BB+ or lower by S&P) are commonly referred to as junk bonds and are regarded as predominantly speculative with respect to the issuers capacity to pay interest and repay principal in accordance with the terms of the obligations
and involve major risk exposure to adverse conditions. Some of the emerging market issuer securities held by the Fund, which may not be paying interest currently or may be in payment default, may be comparable to securities rated as low as C by
Moodys or CCC or lower by S&P. These securities are considered to have extremely poor prospects of ever attaining any real investment standing, to have a current identifiable vulnerability to default, to be unlikely to have the capacity to
pay interest and repay principal when due in the event of adverse business, financial or economic conditions and/or to be in default or not current in the payment of interest or principal.
Low rated and unrated debt instruments generally offer a higher current yield than that available from higher grade issues, but typically involve greater risk. Low rated
and unrated securities are especially subject to adverse changes in general economic conditions, to changes in the financial condition of their issuers and to price fluctuation in response to changes in interest rates. During periods of economic
downturn or rising interest rates, issuers of low rated and unrated instruments may experience financial stress that could adversely affect their ability to make payments of principal and interest and increase the possibility of default. Adverse
publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and liquidity of low rated and unrated securities especially in a market characterized by a low volume of trading.
Default Risk. Investments in fixed-income securities are subject to the risk that the issuer of the security could default on its obligations, causing a fund to
sustain losses on those investments. A default could impact both interest and principal payments. High-yield fixed-income securities (commonly known as junk bonds) are considered speculative with respect to the issuers capacity to
pay interest and repay principal in accordance with the terms of the obligations. This means that, compared to issuers of higher rated securities, issuers of medium and lower rated securities are less likely to have the capacity to pay interest and
repay principal when due in the event of adverse business, financial or economic conditions and/or may be in default or not current in the payment of interest or principal.
The market values of medium and lower rated securities tend to be more sensitive to company-specific developments and changes in economic conditions than higher rated
securities. The companies that issue these securities often are highly leveraged, and their ability to service their debt obligations during an economic downturn or periods of rising interest rates may be impaired. In addition, these companies may
not have access to more traditional methods of financing, and may be unable to repay debt at maturity by
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|
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66 |
|
Western Asset High Income Fund II Inc. |
refinancing. The risk of loss due to default in
payment of interest or principal by these issuers is significantly greater than with higher rated securities because medium and lower rated securities generally are unsecured and subordinated to senior debt.
Default, or the markets perception that an issuer is likely to default, could reduce the value and liquidity of securities held by the Fund, thereby reducing the
value of your investment in the Common Stock. In addition, default may cause the Fund to incur expenses in seeking recovery of principal or interest on its portfolio holdings.
Foreign (Non-U.S.) Investment Risk. A fund that invests in foreign (non-U.S.)
securities may experience more rapid and extreme changes in value than a fund that invests exclusively in securities of U.S. companies. The securities markets of many foreign countries are relatively small, with a limited number of companies
representing a small number of industries. Investments in foreign securities (including those denominated in U.S. dollars) are subject to economic and political developments in the countries and regions where the issuers operate or are domiciled, or
where the securities are traded, such as changes in economic or monetary policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country. Less information may be publicly available about foreign
companies than about U.S. companies. Foreign companies are generally not subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, the Funds investments in foreign securities may be subject
to the risk of nationalization or expropriation of assets, imposition of currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic
developments. In addition, there may be difficulty in obtaining or enforcing a court judgment abroad. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S.
withholding taxes, and special U.S. tax considerations may apply.
The risks of foreign investment are greater for investments in emerging markets. Emerging market
countries typically have economic and political systems that are less fully developed, and that can be expected to be less stable, than those of more advanced countries. Low trading volumes may result in a lack of liquidity and in price volatility.
Emerging market countries may have policies that restrict investment by foreigners, that require governmental approval prior to investments by foreign persons, or that prevent foreign investors from withdrawing their money at will. An investment in
emerging market securities should be considered speculative.
Economic and Political Risks. The economies of individual emerging market countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies
of developing countries generally are heavily dependent upon international trade and, accordingly, have
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been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures
imposed or negotiated by the countries with which they trade. These economies also have been and may continue to be adversely affected by economic conditions in the countries with which they trade.
With respect to any emerging market country, there is the possibility of nationalization, expropriation or confiscatory taxation, political changes, governmental
regulation, social instability or diplomatic developments (including war) which could affect adversely the economies of such countries or the value of the Funds investments in those countries.
Investment Controls; Repatriation. Foreign investment in certain emerging market issuers is restricted or controlled to varying degrees. These restrictions or
controls may at times limit or preclude foreign investment in certain emerging market issuers and increase the costs and expenses of the Fund. Certain emerging market countries require governmental approval prior to investments by foreign persons in
a particular issuer, limit the amount of investment by foreign persons in a particular issuer, limit the investment by foreign persons only to a specific class of securities of an issuer that may have less advantageous rights than the classes
available for purchase by domiciliaries of the countries and/or impose additional taxes on foreign investors. Certain emerging market countries may also restrict investment opportunities in issuers in industries deemed important to national
interests.
Emerging market countries may require governmental approval for the repatriation of investment income, capital or the proceeds of sales of securities by
foreign investors. In addition, if a deterioration occurs in an emerging market countrys balance of payments, the country could impose temporary restrictions on foreign capital remittances. The Fund could be adversely affected by delays in, or
a refusal to grant, any restrictions on investments. Investing in local markets in emerging market countries may require the Fund to adopt special procedures, seek local government approvals or take other actions, each of which may involve
additional costs to the Fund.
Market Illiquidity. No established secondary markets may exist for many of the emerging market issuer securities in which the
Fund may invest. Reduced secondary market liquidity may have an adverse effect on market price and the Funds ability to dispose of particular instruments when necessary to meet its liquidity requirements or in response to specific economic
events such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain emerging market issuer securities may also make it more difficult for the Fund to obtain accurate market quotations for purposes of
valuing its portfolio and calculating its net asset value. Market quotations are generally available on many emerging market issuer securities only from a limited number of dealers and may not necessarily represent firm bids of those dealers or
prices for actual sales.
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Currency Devaluations and Fluctuations. The
value of investments in securities denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency conversion costs and currency fluctuations could erase investment
gains or add to investment losses. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or central banks, the imposition of currency controls and
speculation. The Fund may be unable or may choose not to hedge its foreign currency exposure.
Financial Information and Standards. Issuers in emerging market
countries generally are subject to accounting, auditing and financial standards and requirements that differ, in some cases significantly, from those applicable to U.S. issuers. In particular, the assets and profits appearing on the financial
statements of an emerging market country issuer may not reflect its financial position or results of operations in the way they would be reflected had the financial statements been prepared in accordance with U.S. generally accepted accounting
principles. In addition, for an issuer that keeps accounting records in local currency, inflation accounting rules may require, for both tax and accounting purposes, that certain assets and liabilities be restated on the issuers balance sheet
in order to express items in terms of currency of constant purchasing power. Inflation accounting may indirectly generate losses or profits. Consequently, financial data may be materially affected by restatements for inflation and may not accurately
reflect the real condition of those issuers and securities markets. Substantially less information may be publicly available about issuers in emerging market countries than is available about U.S. issuers.
Smaller Company Risk. The general risks associated with income-producing securities are particularly pronounced for securities issued by companies with smaller
market capitalizations. These companies may have limited product lines, markets or financial resources or they may depend on a few key employees. As a result, they may be subject to greater levels of credit, market and issuer risk. Securities of
smaller companies may trade less frequently and in lesser volume than more widely held securities and their values may fluctuate more sharply than other securities. Companies with medium-sized market
capitalizations may have risks similar to those of smaller companies.
Interest Rate Risk. The market price of the Funds investments will change in
response to changes in interest rates and other factors. During periods of declining interest rates, the market price of fixed income securities generally rises. Conversely, during periods of rising interest rates, the market price of such
securities generally declines. The magnitude of these fluctuations in the market price of fixed income securities is generally greater for securities with longer maturities. Additionally, such risk may be greater during the current period of
historically low interest rates. Fluctuations in the market price of the Funds securities will not affect interest income derived from securities already owned by the Fund,
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Summary of information regarding the Fund (unaudited) (contd)
but will be reflected in the Funds net asset value. The Fund may utilize certain strategies, including investments in structured notes or interest rate swap or cap
transactions, for the purpose of reducing the interest rate sensitivity of the portfolio and decreasing the Funds exposure to interest rate risk, although there is no assurance that it will do so or that such strategies will be successful.
Credit Risk and Counterparty Risk. If an issuer or guarantor of a security held by the Fund or a counterparty to a financial contract with the Fund defaults
or its credit is downgraded, or is perceived to be less creditworthy, or if the value of the assets underlying a security declines, the value of your investment will typically decline. Changes in actual or perceived creditworthiness may occur
quickly. The Fund could be delayed or hindered in its enforcement of rights against an issuer, guarantor or counterparty. Subordinated securities are more likely to suffer a credit loss than non-subordinated
securities of the same issuer and will be disproportionately affected by a default, downgrade or perceived decline in creditworthiness.
Reinvestment Risk.
Reinvestment risk is the risk that income from the Funds portfolio will decline if and when the Fund invests the proceeds from matured, traded or called debt obligations at market interest rates that are below the portfolios current
earnings rate. A decline in income could affect the price of Common Stock or the Funds overall return.
Liquidity Risk. The Fund has no limit on its
ability to purchase illiquid securities. Liquidity risk exists when particular investments are difficult to sell. Securities may become illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid
investments, the portfolio may be harder to value, especially in changing markets, and if the Fund is forced to sell these investments in order to segregate assets or for other cash needs, the Fund may suffer a loss.
Duration Risk. The duration of a fixed-income security is a measure of the portfolios sensitivity to changes in interest rates. Prices of fixed-income
securities with longer effective maturities are more sensitive to interest rate changes than those with shorter effective maturities. Holding long duration investments may expose the Fund to certain magnified risks. These include interest rate risk,
credit risk and liquidity risk, as discussed above.
Management Risk. The Fund is subject to management risk because it is an actively managed investment
portfolio. The Manager and each individual portfolio manager will apply investment techniques and risk analyses in making investment decisions for the Fund, but there can be no guarantee that these will produce the desired results.
Leverage Risk. The Fund generally utilizes leverage, and is authorized to use leverage in amounts of up to approximately 33 1/3% of its total assets
immediately after such borrowing and/or issuance, and under current market conditions intends to continue to use
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leverage. The value of your investment may be more
volatile if the fund borrows or uses instruments, such as derivatives, that have a leveraging effect on the funds portfolio. Other risks described in the Prospectus also will be compounded because leverage generally magnifies the effect of a
change in the value of an asset and creates a risk of loss of value on a larger pool of assets than the fund would otherwise have had. The fund may also have to sell assets at inopportune times to satisfy its obligations created by the use of
leverage or derivatives. The use of leverage is considered to be a speculative investment practice and may result in the loss of a substantial amount, and possibly all, of the funds assets. In addition, the funds portfolio will be
leveraged if it exercises its right to delay payment on a redemption, and losses will result if the value of the funds assets declines between the time a redemption request is deemed to be received by the fund and the time the fund liquidates
assets to meet redemption requests.
Derivatives Risk. The Fund may utilize a variety of derivative instruments for investment or risk management purposes,
such as options, futures contracts, swap agreements and credit default swaps. Using derivatives can increase Fund losses and reduce opportunities for gains when market prices, interest rates, currencies, or the derivatives themselves behave in a way
not anticipated by the Fund. Using derivatives also can have a leveraging effect and increase Fund volatility. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Derivatives may not be
available at the time or price desired, may be difficult to sell, unwind or value, and the counterparty may default on its obligations to the Fund. Derivatives are generally subject to the risks applicable to the assets, rates, indices or other
indicators underlying the derivative. The value of a derivative may fluctuate more than the underlying assets, rates, indices or other indicators to which it relates. Use of derivatives may have different tax consequences for the Fund than an
investment in the underlying security, and those differences may affect the amount, timing and character of income distributed to shareholders. The U.S. government and foreign governments are in the process of adopting and implementing regulations
governing derivatives markets, including mandatory clearing of certain derivatives, margin and reporting requirements. The ultimate impact of the regulations remains unclear. Additional regulation of derivatives may make derivatives more costly,
limit their availability or utility, otherwise adversely affect their performance or disrupt markets.
The Securities and Exchange Commission adopted a new rule on
October 28, 2020 that mandates that a funds derivatives risk management program provide for specific items as required by the rule, including compliance with a VaR test. Compliance with these new requirements will be required after a
transition period that ends on August 19, 2022. Following the compliance date, these requirements may limit the ability of the Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its
investment strategies. These requirements may increase the cost of the Funds investments in derivatives, which could adversely affect shareholders.
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Credit default swap contracts involve heightened risks and may result in losses to the Fund. Credit default swaps may be illiquid and difficult to value. When the Fund
sells credit protection via a credit default swap, credit risk increases since the Fund has exposure to both the issuer whose credit is the subject of the swap and the counterparty to the swap.
Dollar Rolls, Asset-Backed Securities and Mortgage-Backed Securities Risk. The Fund may invest in dollar rolls, asset-backed securities and mortgage-backed
securities. Under a dollar roll transaction, the Fund sells securities for delivery in the current month, or sells securities it has purchased on a
to-be-announced basis, and simultaneously contracts to repurchase substantially similar (same type and coupon) securities on a specified future date. During
the roll period, the Fund forgoes principal and interest paid on the purchased securities. Dollar rolls are speculative techniques involving leverage, and are considered borrowings by the Fund if the Fund does not establish and maintain a segregated
account. In addition, dollar rolls involve the risk that the market value of the securities the Fund is obligated to repurchase may decline below the repurchase price. In the event the buyer of securities under a dollar roll files for bankruptcy or
becomes insolvent, the Funds use of proceeds may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Funds obligation to repurchase the securities. Successful use of dollar rolls
may depend upon the ability of the Funds investment manager to correctly predict interest rates and prepayments. There is no assurance that dollar rolls can be successfully employed.
Mortgage-backed securities may be issued by private companies or by agencies of the U.S. Government and represent direct or indirect participations in, or are
collateralized by and payable from, mortgage loans secured by real property. Asset-backed securities represent participations in, or are secured by and payable from, assets such as installment sales or loan contracts, leases, credit card receivables
and other categories of receivables. Certain debt instruments may only pay principal at maturity or may only represent the right to receive payments of principal or payments of interest on underlying pools of mortgages, assets or government
securities, but not both. The value of these types of instruments may change more drastically than debt securities that pay both principal and interest during periods of changing interest rates. The Fund may obtain a below market yield or incur a
loss on such instruments during periods of declining interest rates. Principal only and interest only instruments are subject to extension risk. For mortgage derivatives and structured securities that have imbedded leverage features, small changes
in interest or prepayment rates may cause large and sudden price movements. Mortgage derivatives may be illiquid and hard to value in declining markets.
Interest
Rate Transactions Risk. The Fund may enter into a swap or cap transaction to attempt to protect itself from increasing interest expenses on borrowings resulting from increasing short-term interest rates or dividend expenses on any preferred
shares. A decline
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in interest rates may result in a decline in net
amounts receivable by the Fund from the counterparty under the swap or cap (or an increase in the net amounts payable by the Fund to the counterparty under the swap), which may result in a decline in the net asset value of the Fund.
Risks of Warrants and Rights. Warrants and rights are subject to the same market risks as stocks, but may be more volatile in price. Warrants and rights do not
carry the right to dividends or voting rights with respect to their underlying securities, and they do not represent any rights in the assets of the issuer. An investment in warrants or rights may be considered speculative. In addition, the value of
a warrant or right does not necessarily change with the value of the underlying security and a warrant or right ceases to have value if it is not exercised prior to its expiration date. The purchase of warrants or rights involves the risk that the
Fund could lose the purchase value of a warrant or right if the right to subscribe to additional shares is not exercised prior to the warrants or rights expiration. Also, the purchase of warrants and rights involves the risk that the
effective price paid for the warrant or right added to the subscription price of the related security may exceed the value of the subscribed securitys market price such as when there is no movement in the price of the underlying security.
Market Price Discount from Net Asset Value. Shares of closed-end investment companies frequently trade at a discount from
their net asset value. This risk is separate and distinct from the risk that the Funds net asset value could decrease as a result of its investment activities and may be a greater risk to investors expecting to sell their Common Stock in a
relatively short period following completion of this offering. Whether investors will realize gains or losses upon the sale of the Common Stock will depend not upon the Funds net asset value but upon whether the market price of the Common
Stock at the time of sale is above or below the investors purchase price for the Common Stock.
Inflation/Deflation Risk. Inflation risk is the risk
that the value of certain assets or income from the Funds investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Stock and distributions on the Common Stock
can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Funds use of leverage would likely increase, which would tend to further reduce returns to stockholders. Deflation risk
is the risk that prices throughout the economy decline over timethe opposite of inflation.
Deflation may have an adverse effect on the creditworthiness of
issuers and may make issuer defaults more likely, which may result in a decline in the value of the Funds portfolio.
Market Events Risk. The market
values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events, governmental actions or intervention, actions taken by the U.S.
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Summary of information regarding the Fund (unaudited) (contd)
Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor sentiment, the global and
domestic effects of a pandemic, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political
events, trading and tariff arrangements, public health events, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the Fund invests in
securities of issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Funds investments may be negatively affected.
The rapid and global spread of a highly contagious novel coronavirus respiratory disease, designated COVID-19, first detected in
China in December 2019, has resulted in extreme volatility in the financial markets and severe losses; reduced liquidity of many instruments; restrictions on international and, in some cases, local travel, significant disruptions to business
operations (including business closures); strained healthcare systems; disruptions to supply chains, consumer demand and employee availability; and widespread uncertainty regarding the duration and long-term effects of this pandemic. Some sectors of
the economy and individual issuers have experienced particularly large losses. In addition, the COVID-19 pandemic may result in a sustained economic downturn or a global recession, domestic and foreign
political and social instability, damage to diplomatic and international trade relations and increased volatility and/or decreased liquidity in the securities markets. The ultimate economic fallout from the pandemic, and the long-term impact on
economies, markets, industries and individual issuers, are not known. Certain risks, such as interest rate risk, credit risk, liquidity risk and counterparty risk, may be heightened as a result of such market events. The U.S. government and the
Federal Reserve, as well as certain foreign governments and central banks, are taking extraordinary actions to support local and global economies and the financial markets in response to the COVID-19 pandemic,
including by pushing interest rates to very low levels. This and other government intervention into the economy and financial markets to address the COVID-19 pandemic may not work as intended, particularly if
the efforts are perceived by investors as being unlikely to achieve the desired results. The COVID-19 pandemic could adversely affect the value and liquidity of the Funds investments and negatively
impact the Funds performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
Legislative and Regulatory Risk. Prices for high-yield securities may be affected by legislative and regulatory developments which could adversely affect the
Funds net asset value and investment practices, the secondary market for high-yield securities, the financial condition of issuers of these securities and the value of outstanding high-yield securities. These risks generally are higher than
issuers in emerging market countries.
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Anti-Takeover Provisions Risk. The
Funds Charter and Bylaws include provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term objectives, including by converting the Fund to
open-end status or changing the composition of the Board, that may be detrimental to the Funds ability to achieve its primary investment objective. Such provisions may limit the ability of shareholders
to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund. There can be no assurance, however, that such provisions will be sufficient to deter activist investors that
seek to cause the Fund to take actions that may not be aligned with the interests of long-term shareholders.
LIBOR Risk. The Funds investments, payment
obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or LIBOR, which is the offered rate for short-term Eurodollar deposits between major international banks. On March 5, 2021,
the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of (i) the overnight and one-, three-, six- and twelve-month
USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023 and (ii) all other LIBOR settings, including the one-week and two-month
USD LIBOR settings, immediately following the LIBOR publication on Friday, December 31, 2021. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Funds transactions and
the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Funds investments cannot yet be determined.
Operational Risk. The valuation of the Funds investments may be negatively impacted because of the operational risks arising from factors such as processing
errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service providers or trading counterparties. It is not possible to identify all
of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted as a result.
Cybersecurity Risk. Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain access to Fund assets, Fund or
proprietary information, cause the Fund, Western Asset, the Sub-Advisers and/or their service providers to suffer data breaches, data corruption or loss of operational functionality or prevent fund investors
from purchasing, redeeming or exchanging shares or receiving distributions. The Fund, Western Asset, and the Sub-Advisers have limited ability to prevent or mitigate cybersecurity incidents affecting third
party service providers, and such third party service providers may have limited indemnification obligations to the fund or the manager. Cybersecurity incidents may result in financial losses to the Fund and its shareholders, and substantial costs
may be
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Western Asset High Income Fund II Inc. |
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Summary of information regarding the Fund (unaudited) (contd)
incurred in an effort to prevent or mitigate future cybersecurity incidents. Issuers of securities in which the fund invests are also subject to cybersecurity risks, and
the value of these securities could decline if the issuers experience cybersecurity incidents.
More Information
For a complete list of the Funds fundamental investment restrictions and more detailed descriptions of the Funds investment policies, strategies and risks,
see the Funds registration statement on Form N-14 that was declared effective by the SEC on July 25, 2008. The Funds fundamental investment restrictions may not be changed without the approval
of the holders of a majority of the outstanding voting securities, as defined in the 1940 Act.
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Dividend reinvestment plan
(unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and return
of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the Plan Agent), in additional shares of Common Stock under the Funds Dividend
Reinvestment Plan (the Plan). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare Trust
Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date is not a NYSE trading day, the
immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal to the greater of (a) the
net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close of
trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading day
following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders; except
when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the Common
Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the
Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the day
prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by the Plan Agent
in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e., opt-out)
by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at
1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business
days prior to any dividend or distribution record date;
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Dividend reinvestment plan
(unaudited) (contd)
otherwise such withdrawal will be effective as soon as practicable after the Plan Agents
investment of the most recently declared dividend or distribution on the Common Stock.
Plan participants who sell their shares will be charged a service charge
(currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions
in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional
shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time
if the Funds net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions. Investors
will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of
Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund
for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan
Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151.
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Important tax information
(unaudited)
By mid-February, tax information related to a shareholders proportionate share of distributions paid during the preceding
calendar year will be received, if applicable. Please also refer to www.franklintempleton.com for per share tax information related to any distributions paid during the preceding calendar year. Shareholders are advised to consult with their tax
advisors for further information on the treatment of these amounts on their tax returns.
The following tax information for the Fund is required to be furnished to
shareholders with respect to income earned and distributions paid during its fiscal year.
The Fund hereby reports the following amounts, or if subsequently
determined to be different, the maximum allowable amounts, for the fiscal year ended April 30, 2022:
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Pursuant to: |
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Amount Reported |
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Income Eligible for Dividends Received Deduction (DRD) |
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§854(b)(1)(A) |
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$196,437 |
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Qualified Dividend Income Earned (QDI) |
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§854(b)(1)(B) |
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$196,437 |
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Qualified Net Interest Income (QII) |
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§871(k)(1)(C) |
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$16,841,188 |
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Section 163(j) Interest Earned |
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§163(j) |
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$38,143,079 |
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Western Asset High Income Fund II Inc. |
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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
George P. Hoyt
Secretary and Chief Legal Officer
Thomas C. Mandia*
Senior Vice President
Jeanne M. Kelly
Senior Vice President
* |
Effective February 10, 2022, Mr. Mandia became a Senior Vice President |
Western Asset High Income Fund II Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Western Asset Management Company, LLC
Western Asset Management Company
Limited
Western Asset Management Company Pte. Ltd.
Custodian
The Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett
LLP
900 G Street NW
Washington, DC 20001
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, Franklin Distributors, LLC, as well as Legg Mason-sponsored closed-end funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited
to:
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Personal information included on applications or other forms; |
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Account balances, transactions, and mutual fund holdings and positions; |
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Bank account information, legal documents, and identity verification documentation; |
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Online account access user IDs, passwords, security challenge question responses; and |
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of
an individuals total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other
financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services
you have authorized or as permitted or required by law.
The Funds may disclose information about you to:
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Employees, agents, and affiliates on a need to know basis to enable the Funds to conduct ordinary business, or
to comply with obligations to government regulators; |
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Service providers, including the Funds affiliates, who assist the Funds as part of the ordinary course of business
(such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds behalf, including companies that may perform statistical analysis, market research and marketing services solely
for the Funds; |
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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds
employees, agents and affiliates and service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators; |
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The Funds representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary
business, or to comply with obligations to government regulators; |
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
Except as otherwise permitted by applicable law, companies acting on the Funds behalf,
including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to
perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory
request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds
practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds Privacy and Security Practices
The Funds will notify you annually of their privacy policy as
required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard
your nonpublic personal information. The Funds internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to
them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary, so you can take appropriate protective steps. If you have
consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is
incomplete, not accurate or not current, if you have questions about the Funds privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email the Funds by
clicking on the Contact Us section of the Funds website at www.franklintempleton.com, or contact the Fund at
1-888-777-0102.
Revised April 2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is nonpublic personal information subject to federal law, residents of California may, in certain
circumstances, have additional rights under the California Consumer Privacy Act (CCPA). For example, if you are a broker,
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NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (contd)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the account of any
other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your personal
information (as defined by the CCPA).
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In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the
categories and specific pieces of personal information we have collected about you. |
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You also have the right to request the deletion of the personal information collected or maintained by the Funds.
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If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set
forth below. The rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process
described below. We do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a request
on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or other
applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an agent if
suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this Privacy Policy, the Legg
Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone: 1-800-396-4748
Revised October 2020
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NOT PART OF THE ANNUAL REPORT |
Western Asset High Income Fund II Inc.
Western Asset High Income Fund II Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market
prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (SEC) for the first
and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Funds Forms N-PORT are available on the SECs website at www.sec.gov.
To obtain information on Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.franklintempleton.com and (3) on the SECs website at www.sec.gov.
Quarterly performance, semi-annual and annual reports, current net asset value and other information regarding the Fund may be found on Franklin Templetons website,
which can be accessed at www.franklintempleton.com. Any reference to Franklin Templetons website in this report is intended to allow investors public access to information regarding the Fund and does not, and is not intended to, incorporate
Franklin Templetons website in this report.
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 6/22 SR22-4430