NOTE 5. DERIVATIVE TRANSACTIONS
Balance Sheet Offsetting Information
During the ordinary course of business, the Fund may enter into transactions subject to enforceable netting agreements or other similar arrangements (“netting agreements”). Generally, the right to offset in netting agreements allows the Fund to offset any
22
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2024 (Unaudited)
NOTE 5. DERIVATIVE TRANSACTIONS – (continued)
exposure to a specific counterparty with any collateral received or delivered to that counterparty based on the terms of the agreement. Generally, the Fund manages its cash collateral and securities collateral on a counterparty basis. As of July 31, 2024, the Fund was not subject to any netting agreements.
The following table provides a summary of offsetting financial liabilities and derivatives and the effect of derivative instruments on the Statement of Assets and Liabilities as of July 31, 2024:
| | | | | | | | | | | | |
| | | | | | | | | Gross Amounts Not Offset in Statement of Assets and Liabilities |
| | | Gross Amounts of
Recognized Liabilities | | Gross Amounts Offset in
Statement of | | Liabilities Presented in
Statement of | | | | | | |
| Reverse Repurchase Agreements | | ($56,688,000) | | $– | | ($56,688,000) | | ($56,688,000) | | $– | | $– |
In some instances, the actual collateral received/pledged may be more than the amounts disclosed herein.
NOTE 6. FEES AND OTHER RELATED PARTY TRANSACTIONS
Under the terms of the investment advisory agreement, on behalf of the Fund (the “Agreement”), the Adviser manages the Fund’s investments subject to oversight of the Trustees. As compensation for its management services, the Fund is obligated to pay the Adviser a fee computed and accrued daily and paid monthly at an annual rate of 1.35% of the average daily Managed Assets of the Fund. Managed Assets includes total assets (including any assets attributable to borrowing for investment purposes) minus the sum of the Fund’s accrued liabilities (other than liabilities representing borrowings for investment purposes) (“Managed Assets”).
The Adviser has also contractually agreed to waive its fees and/or reimburse certain expenses (exclusive of any management fees, front-end sales loads, taxes, interest expenses, dividend and interest expenses related to short sales, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization, any transaction-related expenses and fees arising out of transactions effected on behalf of the Fund, litigation and potential litigation expenses, and other extraordinary expenses not incurred in the ordinary course of the Fund’s business) to limit the Fund’s Total Annual Fund Operating Expenses to 0.25% of the Fund’s Managed Assets (the “Expense Limit”) through at least May 31, 2025 (the “Limitation Period”). The Expense Limit may be eliminated at any time by the Board, on behalf of the Fund, upon 60 days’ written notice to the Adviser. Prior to the end of the Limitation Period, the Expense Limit may not be terminated by the Adviser without the consent of the Board of Trustees. The Expense Limit is subject to repayment by the Fund within 36 months following the month in which that particular waiver and/or reimbursement occurred, provided that the Fund is able to make the repayment without exceeding the expense limit described above or the expense limitation in effect at the time of the reimbursement (whichever is lower). During the period ended July 31, 2024, the Fund repaid $10,660 of previously waived expenses to the Adviser.
Destra Capital Advisors LLC (“Destra”) provides investor support services in connection with the ongoing operation of the Fund. Such services include providing ongoing contact with respect to the Fund and its performance with financial advisors that are representatives of financial intermediaries, and communicating with the NYSE specialist for the shares of the Fund, and with the
closed-end
fund analyst community regarding the Fund on a regular basis. The Fund pays Destra a service fee in an annual amount equal to 0.07% of the average daily value of the Fund’s Managed Assets.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”), an indirect wholly-owned subsidiary of U.S. Bancorp, serves as the Fund’s Administrator (“Administrator”) and, in that capacity, performs various administrative and accounting services for the Fund. Fund Services also serves as the Fund’s fund accountant and transfer agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund’s custodian; coordinates the preparation and payment of the Fund’s expenses and reviews the Fund’s expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee at an annual rate based upon the average daily net assets of the Fund. U.S. Bank, N.A. (the “Custodian”) serves as custodian to the Fund.
23
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2024 (Unaudited)
NOTE 6. FEES AND OTHER RELATED PARTY TRANSACTIONS – (continued)
The Fund makes reimbursement payments to the Adviser for the salary associated with the Chief Compliance Officer. The compliance fees expensed by the Fund during the period ended July 31, 2024, are included in the Statement of Operations.
Certain officers, Trustees and shareholders of the Fund are also owners or employees of the Adviser.
NOTE 7. INVESTMENT TRANSACTIONS
For the period ended July 31, 2024, purchases and sales of investment securities, other than short-term investments and short-term U.S. Government securities, were as follows:
For the period ended July 31, 2024, there were no long-term purchases or long-term sales of U.S. Government securities for the Fund.
NOTE 8. FEDERAL TAX INFORMATION
The tax characterization of distributions paid for the year ended January 31, 2024, and January 31, 2023, were as follows:
| | | | | | | | |
| | | | | | | |
| | | | | | | | |
| Ordinary Income | | | $17,813,675 | | | $ | 16,477,092 | |
| Net Long-Term Capital Gain | | | – | | | | – | |
| Return of Capital | | | 12,512,118 | | | | 11,365,728 | |
| | | $30,325,793 | | | $ | 27,842,820 | |
At January 31, 2024, the components of distributable earnings (accumulated deficit) on a tax basis were as follows:
| | |
| | | |
| Tax Cost of Investments | | $532,443,278 |
| Unrealized Appreciation* | | 1,578,843 |
| Unrealized Depreciation* | | (52,483,620) |
Net Unrealized Appreciation (Depreciation)* | | ($50,904,777) |
| Undistributed Ordinary Income | | – |
| Undistributed Long-Term Gain (Loss) | | – |
| | $– |
| Other Accumulated Gain (Loss) | | (16,767,116) |
Total Distributable Earnings (Accumulated Deficit) | | ($67,671,893) |
| * | Represents aggregated amounts of investments and reverse repurchase agreements in the Fund. |
The temporary differences between book basis and tax basis in the Fund are primarily attributable to amortization of callable bonds.
As of January 31, 2024, the Fund had available for federal tax purposes an unused capital loss carryforward of $16,756,992.
24
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2024 (Unaudited)
NOTE 8. FEDERAL TAX INFORMATION – (continued)
To the extent these carryforwards are used to offset futures gains, it is probable that the amount offset will not be distributed to shareholders. The carryforward expires as follows:
| | |
| | | |
| No expiration short-term | | $11,869,704 |
| No expiration long-term | | $4,887,288 |
| | $16,756,992 |
Certain capital losses incurred after October 31 and within the current taxable year, are deemed to arise on the first business day of the Fund’s following taxable year. For the tax year ended January 31, 2024, the Fund did not defer any post-October losses.
On July 8, 2021, the Fund issued senior unsecured notes (“Notes”) in an aggregate amount of $85,000,000 in two fixed-rate series. The Notes were issued in private placement offerings to institutional investors and are not listed on any exchange or automated quotation system. The note purchase agreement (the “Agreement”) contains various covenants related to other indebtedness and limits on the Fund’s overall leverage. Under the 1940 Act and the terms of the Notes, the Fund may not declare dividends or make other distributions on shares of its common stock or make purchases of such shares if, at any time of the declaration, distribution or purchase, asset coverage with respect to senior securities representing indebtedness (including the Notes) would be less than 300%.
The table below sets forth a summary of the key terms of each series of Notes outstanding at July 31, 2024.
| | | | | | | | | | | | |
| | Principal
Outstanding
07/31/24 | | | | Unamortized
Offering Costs | | | | | | |
| A | | $40,000,000 | | Semi-Annual | | $238,821 | | $37,495,214 | | 2.35% | | July 8, 2026 |
| B | | $45,000,000 | | Semi-Annual | | $269,309 | | $40,821,068 | | 2.80% | | July 8, 2028 |
The average daily balance of senior notes outstanding for the Fund during the period ended July 31, 2024, was $85,000,000 at a weighted average daily interest rate of 2.59%.
The carrying value of the Notes on the Statement of Assets and Liabilities is equal to the principal amount of the Notes less unamortized offering costs. The estimated fair value of the notes was calculated, for disclosure purposes, based on estimated market yields for comparable debt instruments with similar maturity and terms. The Fund would categorize the Senior Notes as Level 2 in the fair value hierarchy.
The Fund shall at all times maintain a current rating given by a Nationally Recognized Statistical Rating Organization (“NRSRO”) of at least Investment Grade with respect to the Notes and shall not at any time have any rating given by a NRSRO of less than Investment Grade with respect to the Notes. The Notes have been assigned an ‘A1’ long-term rating by Moody’s Investors Service.
The aggregate accrued interest payable on the Notes as of July 31, 2024, was $140,556 and is included in the Interest Payable for senior notes line item in the Statement of Assets and Liabilities. The Fund paid an origination fee of $854,000 and other expenses on July 13, 2021, which was paid upfront and is being amortized for daily over the life of the Notes. During the period ended July 31, 2024, $1,206,429 of interest expense and amortization of origination fees were included in the Interest and commissions expense line item that is reflected in the Statement of Operations.
At July 31, 2024, the Fund was in compliance with all covenants under the Agreement.
25
Angel Oak Financial Strategies Income Term Trust
Notes to the Financial Statements - (continued)
July 31, 2024 (Unaudited)
NOTE 10. CAPITAL TRANSACTIONS
For the period ended July 31, 2024, there were no capital transactions.
The Board approved a rights offering to participating shareholders of record as of September 20, 2021, which were in turn allowed to subscribe for new common shares of the Fund. Record date shareholders received one right for each common share held on record date. For every three rights held, a holder of the rights was entitled to buy one new common share of the Fund. Record date shareholders who fully exercised all rights initially issued to them in the primary subscription were entitled to buy those common shares that were not purchased by other record date shareholders. The subscription price per common share (the “Subscription Price”) was determined based on a formula equal to 92.5% of the average of the last reported sales price of a common share of the Fund on the NYSE on the layoff/expiration dates and each of the four immediately preceding trading days (the “Formula Price”). However, the Formula Price was less than 86% of the Fund’s NAV per common share at the close of trading on the NYSE on the layoff/expiration dates, therefore the Subscription Price used was based on 86% of the Fund’s NAV per common share at the close of trading on the NYSE on those days. Offering costs were charged to paid-in-capital upon the exercise of the rights.
The shares of common stock issued, subscription price, and offering costs for the rights offering were as follows:
| | | | | | |
| | | | | | |
| October 6, 2021 | | 410,000 | | $16.15 | | $37,920 |
| October 11, 2021 | | 300,000 | | $16.10 | | $27,746 |
| October 14, 2021 | | 4,366,333 | | $16.06 | | $403,834 |
NOTE 11. ACCOUNTING PRONOUNCEMENTS AND/OR REGULATORY UPDATES
In December 2022, the FASB issued an Accounting Standards Update,
ASU 2022-06, Reference Rate Reform (Topic 848) – Deferral of the Sunset Date of Topic 848
(“ASU 2022-06”). ASU 2022-06 is an amendment to ASU 2020-04, which provided optional guidance to ease the potential accounting burden due to the discontinuation of the LIBOR and other interbank-offered based reference rates and which was effective as of March 12, 2020, through December 31, 2022. ASU 2022-06 extends the effective period through December 31, 2024. Management is currently evaluating the impact, if any, of applying ASU 2022-06.
NOTE 12. SUBSEQUENT EVENTS
Management of the Fund has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or adjustments.
26
Additional Information (Unaudited)
1. Shareholder Notification of Federal Tax Status
For the taxable year ended January 31, 2024, certain dividends paid by the Fund may be subject to a maximum tax rate of 23.80% as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The Fund intends to designate the maximum amount allowable as taxed at a maximum rate of 23.80%.
For the taxable year ended January 31, 2024, the Fund paid qualified dividend income of 0.00%.
For the taxable year ended January 31, 2024, the percentage of ordinary income dividends paid by the Fund that qualifies for the dividends received deduction available to corporations was 0.00%.
For the taxable year ended January 31, 2024, the Fund did not pay any ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)2(c).
For the taxable year ended January 31, 2024, the percentage of taxable ordinary income distributions that are designated as interest related dividends under Internal Revenue 871(k)1(c) was 86.80%.
2. Disclosure of Portfolio Holdings
The Fund will file a complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Part F of Form
N-PORT.
The Fund’s Part F of Form
N-PORT
is available on the SEC’s website at
http://www.sec.gov
and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling
(800) SEC-0230.
The SEC permits funds to deliver only one copy of certain shareholder documents, including shareholder reports, to fund investors with multiple accounts at the same residential or post office box address. This practice is often called “householding” and it helps eliminate duplicate mailings to shareholders. Unless you have instructed the Fund otherwise, only one copy of a shareholder report will be mailed to multiple Fund shareholders of record who share the same mailing address. If you would like additional copies of a shareholder report, please contact your participating broker-dealer firm or other financial intermediary or, if you hold Fund shares directly with the Fund, you may write to the Fund c/o U.S. Bank Global Fund Services at P.O. Box 701, Milwaukee, WI 53201-0701 or call toll-free (855)751-4324.
4. Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio securities and information regarding how the Fund voted those proxies during the most recent twelve month period ended June 30, is available without charge upon request by (1) calling the Fund at (855)
751-4324
and (2) from Fund documents filed with the SEC on the SEC’s website at
www.sec.gov
.
5. Annual Meeting of Shareholders
At the Annual Meeting of Shareholders held on June 25, 2024, shareholders approved the election of Alvin R. Albe, Jr. and Cheryl M. Pate as Class I Trustees to the Board of Trustees to serve a three-year term expiring in 2027 based on the following results:
| | | | | | | | | | | | |
| | | | | | | | | | |
| To Elect Alvin R. Albe, Jr. | | | 16,256,587 | | | | 5,567,707 | | | | 218,782 | |
| To Elect Cheryl M. Pate | | | 16,281,505 | | | | 5,536,445 | | | | 225,127 | |
Shareholders also ratified the selection of Cohen & Company, Ltd. as the Fund’s independent registered public accounting firm for the fiscal year ending January 31, 2025, based on the following results:
| | | | | | | | | | | | |
| | | | | | | | | | |
| To Approve Cohen & Company, Ltd. | | | 20,948,157 | | | | 891,773 | | | | 203,150 | |
27
6. Dividend Reinvestment Plan
Pursuant to the Fund’s Dividend Reinvestment Plan (the “Plan”), distributions of dividends and capital gains are automatically reinvested in Shares of the Fund by Fund Services, as Plan Agent. Unless a shareholder indicates another option on the account application or otherwise
opts-out,
shareholders holding at least one full Share of the Fund will be automatically enrolled in the Plan. Shareholders who do not participate in the Plan will receive all distributions in cash.
If the Fund declares a dividend or distribution payable either in cash or in Shares of the Fund and the market price of Shares on the payment date for the distribution or dividend equals or exceeds the Fund’s NAV per Share, the Fund will issue Shares to participants at a value equal to the higher of NAV or 95% of the market price. The number of additional Shares to be credited to each participant’s account will be determined by dividing the dollar amount of the distribution or dividend by the higher of NAV or 95% of the market price. If the market price is lower than NAV, or if dividends or distributions are payable only in cash, then participants will receive Shares purchased by the Plan Agent on participants’ behalf on the NYSE or otherwise on the open market. If the market price exceeds NAV before the Plan Agent has completed its purchases, the average per Share purchase price may exceed NAV, resulting in fewer Shares being acquired than if the Fund had issued new Shares.
There are no brokerage charges with respect to Shares issued directly by the Fund. However, whenever Shares are purchased or sold on the NYSE or otherwise on the open market, each participant will pay a pro rata portion of brokerage trading fees. Currently, dividend reinvestment plan participants that direct the sale of Shares through the Plan Agent are subject to a $25.00 fee plus a sales commission of $4.95.
The reinvestment of dividends and net capital gains distributions does not relieve participants of any income tax that may be payable on such dividends or distributions. Purchases of additional Shares of the Fund will be made on the open market. There is no transaction fee, and each participant will pay a pro rata share of brokerage commissions incurred in connection with purchases made on the open market. Shareholders can also sell Fund Shares held in the Plan account at any time by contacting the Plan Agent by telephone or in writing. The Plan Agent will mail a check to you (less applicable brokerage trading fees) on the settlement date, which is three business days after your Shares have been sold. If you choose to sell your Shares through your broker, you will need to request that the Plan Agent electronically transfer your Shares to your broker through the Direct Registration System.
Shareholders participating in the Plan may withdraw from the Plan at any time by contacting the Plan Agent by telephone or in writing. Such termination will be effective immediately if the notice is received by the Plan Agent prior to any dividend or distribution record date; otherwise, such termination will be effective on the first trading day after the payment date for such dividend or distribution, with respect to any subsequent dividend or distribution. If you withdraw, your Shares will be credited to your account; or, if you wish, the Plan Agent will sell your full and fractional Shares and send you the proceeds, less a fee currently set at $25.00 and less a sales commission currently set at $4.95. If a shareholder does not maintain at least one whole Share in the Plan account, the Plan Agent may terminate such shareholder’s participation in the Plan after written notice. Upon termination, shareholders will be sent a check for the cash value of any fractional Share in the Plan account, less any applicable broker commissions and taxes. Experience under the Plan may indicate that changes are desirable. Accordingly, the Fund and the Plan Agent reserve the right to amend or terminate the Plan. Participants generally will receive written notice at least 60 days before the effective date of any amendment. In the case of termination, participants will receive written notice at least 60 days before the record date for the payment of any dividend or distribution by the Funds.
All correspondence or additional information about the Plan should be directed to Fund Services in writing at 615 East Michigan Street, Milwaukee, Wisconsin 53202.
7. Compensation of Trustees
Each Trustee who is not an “interested person” (i.e., an “Independent Trustee”) of the Fund Complex (which includes affiliated registrants not discussed in this report) receives an annual retainer of $65,000
(pro-rated
for any periods less than one year) paid quarterly as well as $12,000 for attending each regularly scheduled meeting in connection with his or her service on the Board. In addition, each Committee Chair as well as the Chair of the Board receives additional annual compensation of $12,000
(pro-rated
for any periods less than one year). Independent Trustees are permitted for reimbursement of
expenses incurred in connection with attendance at meetings.
28
The business of the Fund is managed under the oversight of the Board. The Board meets periodically to review the Fund’s performance, monitor investment activities and practices, and discuss other matters affecting the Fund. The Trustees are fiduciaries for the Fund’s shareholders and are governed by the laws of the State of Delaware in this regard. The names and addresses of the Trustees and officers of the Fund are listed below along with a description of their principal occupations over at least the last five years. The address of each Trustee and Officer of the Fund is c/o Angel Oak Capital Advisors, LLC, 3344 Peachtree Road NE, Suite 1725, Atlanta, GA 30326.
| | | | | | | | | | |
| | | | | | | | | | |
|
Ira P. Cohen 1959 | | Independent Trustee, Chair (Class III) | | Trustee since 2018, Chair since 2019; 3 year term | | Executive Vice President, Recognos Financial (investment industry data analysis provider) (2015-2021); Independent financial services consultant (since 2005). | | 9 | | Trustee, Valued Advisers Trust (since 2010); Trustee, Apollo Diversified Real Estate Fund (formerly, Griffin Institutional Access Real Estate Fund) (since 2014); Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Strategic Credit Fund (since 2017); Trustee, U.S. Fixed Income Trust (since 2019); Trustee, Angel Oak Credit Opportunities Term Trust (since 2021); Trustee, Angel Oak Dynamic Financial Strategies Income Term Trust (2019-2022); Trustee, Apollo Credit Fund (formerly, Griffin Institutional Access Credit Fund) (2017-2022). |
Alvin R. Albe, Jr. 1953 | | Independent Trustee (Class I) | | Since 2018; 3 year term | | Retired. | | 9 | | Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Strategic Credit Fund (since 2017); Trustee, Angel Oak Credit Opportunities Term Trust (since 2021); Trustee, Angel Oak Dynamic Financial Strategies Income Term Trust (2019-2022). |
29
| | | | | | | | | | |
| | | | | | | | | | |
Keith M. Schappert 1951 | | Independent Trustee (Class II) | | Since 2018; 3 year term | | President, Schappert Consulting LLC (investment industry consulting) (since 2008); Retired, President and CEO of JP Morgan Investment Management. | | 9 | | Trustee, Angel Oak Funds Trust (since 2014); Trustee, Angel Oak Strategic Credit Fund (since 2017); Trustee, Angel Oak Credit Opportunities Term Trust (since 2021); Trustee, Angel Oak Dynamic Financial Strategies Income Term Trust (2019-2022); Director, Commonfund Capital, Inc. (2015-2022); Trustee, Mirae Asset Discovery Funds (2010-2023). |
Andrea N. Mullins 1967 | | Independent Trustee (Class II) | | Since 2019; 3 year term | | Private Investor; Independent Contractor, SWM Advisors (since 2014). | | 9 | | Trustee and Audit Committee Chair, Valued Advisers Trust (since 2013, Chair since 2017); Trustee, Angel Oak Funds Trust (since 2019); Trustee, Angel Oak Strategic Credit Fund (since 2019); Angel Oak Credit Opportunities Term Trust (since 2021); Trustee and Audit Committee Chair, NXG Cushing Midstream Energy Fund (formerly, Cushing MLP & Infrastructure Fund) (since 2021); Trustee and Audit Committee Chair, NXG NextGen Infrastructure Income Fund (formerly, Cushing NextGen Infrastructure Income Fund) (since 2021); Trustee, Angel Oak Dynamic Financial Strategies Income Term Trust (2019-2022); Trustee and Audit Committee Chair, Cushing Mutual Funds Trust(2021-2023). |
30
