PRESS RELEASE
SOURCE: First Trust Strategic High Income Fund, First Trust Strategic High
Income Fund II and First Trust Strategic High Income Fund III
First Trust Strategic High Income Fund, First Trust Strategic High Income
Fund II and First Trust Strategic High Income Fund III adopt changes to their
Temporary Defensive Policy
LISLE, IL -- (BUSINESS WIRE) -- September 17, 2008 -- First Trust Strategic High
Income Fund (NYSE: FHI), First Trust Strategic High Income Fund II (NYSE: FHY)
and First Trust Strategic High Income Fund III (NYSE: FHO) (collectively, the
"Funds" and each a "Fund") today announced that their Boards of Trustees have
approved a change in the Funds' temporary defensive policy. Currently, the
temporary defensive policy of the Funds permits them to deviate from their
investment strategy and invest all or any portion of their managed assets in
cash or cash equivalents. Cash equivalents, in general terms, include: U.S.
Government securities, certificates of deposit, repurchase agreements,
commercial paper, bankers' acceptances, bank time deposits and money market
funds. Under the revised temporary defensive policy and as further described
below, the Funds may deviate from their investment strategy and invest all or
any portion of their total assets in cash, cash equivalents and certain other
defensive instruments, including manufactured home loan-backed securities;
certain securities guaranteed by the U.S. Government or its agencies or
instrumentalities; asset-backed securities representing direct or indirect
participations in, or secured by and payable from, pools of leases of aircrafts
and/or loans to purchase aircrafts; asset-backed securities representing direct
or indirect participations in, or secured by and payable from, loans or other
obligations of franchises; corporate bonds; and any other securities rated in
the AA category or better by at least one nationally recognized statistical
rating organization (collectively, the "Defensive Instruments," as described in
further detail below). In addition, the Funds may use cash and proceeds from the
sale of assets, including Defensive Instruments, to pay down leverage. The
revised temporary defensive policy and a summary of Fund risk disclosures are
included below.
Temporary Defensive Policy of each Fund:
During the period in which the net proceeds of any offering of Common
Shares, Preferred Shares, commercial paper or notes and/or borrowings, if any,
are being invested, or during periods in which First Trust Advisors L.P. (the
"Advisor") or Valhalla Capital Partners, LLC (the "Sub-Advisor") determines that
it is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so, the Fund may deviate from its investment strategy and
invest all or any portion of its Managed Assets in cash and Defensive
Instruments (as such term is defined below) and/or may use such cash and
proceeds from the sale of Defensive Instruments or other assets to pay down any
leverage of the Fund. The Advisor's or the Sub-Advisor's determination that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so will generally occur only in situations in which a market
disruption event has occurred and where trading in the securities selected
through application of the Fund's investment strategy is extremely limited or
absent. In such a case, the Fund may not pursue or achieve its investment
objectives.
Defensive Instruments are defined to include:
A. Cash Equivalents -
(1) U.S. Government securities, including bills, notes
and bonds differing as to maturity and rates of interest that
are either issued or guaranteed by the U.S. Treasury or by
U.S. Government agencies or instrumentalities. U.S. Government
agency securities include securities issued by: (a) the
Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business
Administration, and the Government National Mortgage
Association, whose securities are supported by the full faith
and credit of the United States; (b) the Federal Home Loan
Banks, Federal Intermediate Credit Banks, and the Tennessee
Valley Authority, whose securities are supported by the right
of the agency to borrow from the U.S. Treasury; (c) the
Federal National Mortgage Association, whose securities are
supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or
instrumentality; and (d) the Student Loan Marketing
Association, whose securities are supported only by its
credit. While the U.S. Government provides financial support
to such U.S. Government-sponsored agencies or
instrumentalities, no assurance can be given that it always
will do so since it is not so obligated by law. The U.S.
government, its agencies and instrumentalities do not
guarantee the market value of their securities. Consequently,
the value of such securities may fluctuate.
(2) Certificates of deposit issued against funds
deposited in a bank or a savings and loan association. Such
certificates are for a definite period of time, earn a
specified rate of return, and are normally negotiable. The
issuer of a certificate of deposit agrees to pay the amount
deposited plus interest to the bearer of the certificate on
the date specified thereon. Under current FDIC regulations,
the maximum insurance payable as to any one certificate of
deposit is $100,000; therefore, certificates of deposit
purchased by the Fund may not be fully insured.
(3) Repurchase agreements, which involve purchases of
debt securities. At the time the Fund purchases securities
pursuant to a repurchase agreement, it simultaneously agrees
to resell and redeliver such securities to the seller, who
also simultaneously agrees to buy back the securities at a
fixed price and time. This assures a predetermined yield for
the Fund during its holding period, since the resale price is
always greater than the purchase price and reflects an
agreed-upon market rate. Purchasing securities pursuant to a
repurchase agreement affords an opportunity for the Fund to
invest temporarily available cash. Pursuant to the Fund's
policies and procedures, the Fund may enter into repurchase
agreements only with respect to obligations of the U.S.
Government, its agencies or instrumentalities; certificates of
deposit; or bankers' acceptances in which the Fund may invest.
Repurchase agreements may be considered loans to the seller,
collateralized by the underlying securities. The risk to the
Fund is limited to the ability of the seller to pay the
agreed-upon sum on the repurchase date; in the event of
default, the repurchase agreement provides that the Fund is
entitled to sell the underlying collateral. If the seller
defaults under a repurchase agreement when the value of the
underlying collateral is less than the repurchase price, the
Fund could incur a loss of both principal and interest. The
Sub-Advisor monitors the value of the collateral at the time
the action is entered into and at all times during the term of
the repurchase agreement. The Sub-Advisor does so in an effort
to determine that the value of the collateral always equals or
exceeds the agreed-upon repurchase price to be paid to the
Fund. If the seller were to be subject to a federal bankruptcy
proceeding, the ability of the Fund to liquidate the
collateral could be delayed or impaired because of certain
provisions of the bankruptcy laws.
(4) Commercial paper, which consists of short-term
unsecured promissory notes, including variable rate master
demand notes issued by corporations to finance their current
operations. Master demand notes are direct lending
arrangements between the Fund and a corporation. There is no
secondary market for such notes. However, they are redeemable
by the Fund at any time. The Sub-Advisor will consider the
financial condition of the corporation (e.g., earning power,
cash flow, and other liquidity measures) and will continuously
monitor the corporation's ability to meet all its financial
obligations, because the Fund's liquidity might be impaired if
the corporation were unable to pay principal and interest on
demand. Investments in commercial paper will be limited to
commercial paper rated in the highest categories by a
nationally recognized statistical rating organization
("NRSRO") and which mature within one year of the date of
purchase or carry a variable or floating rate of interest.
(5) Bankers' acceptances, which are short-term credit
instruments used to finance commercial transactions.
Generally, an acceptance is a time draft drawn on a bank by an
exporter or an importer to obtain a stated amount of funds to
pay for specific merchandise. The draft is then "accepted" by
a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The
acceptance may then be held by the accepting bank as an asset
or it may be sold in the secondary market at the going rate of
interest for a specific maturity.
(6) Bank time deposits, which are monies kept on
deposit with banks or savings and loan associations for a
stated period of time at a fixed rate of interest. There may
be penalties for the early withdrawal of such time deposits,
in which case the yields of these investments will be reduced.
(7) Shares of money market funds purchased in
accordance with the provisions of the 1940 Act.
B. Manufactured Home Loan-Backed Securities - securities
representing a direct or indirect participation in, or secured
by and payable from, pools of loans used to purchase
manufactured housing and the security interest therein.*
C. Securities guaranteed by the U.S. Government or its agencies
or instrumentalities that are not included as cash equivalents
above or as residential mortgage-backed securities ("RMBS").*
D. Asset-backed securities representing direct or indirect
participations in, or secured by and payable from, pools of
leases of aircrafts and/or loans to purchase aircrafts.*
E. Asset-backed securities representing direct or indirect
participations in, or secured by and payable from, loans or
other obligations of franchises.*
F. Corporate bonds - debt obligations issued by corporations.*
G. Any other securities rated in the AA category or better by at
least one NRSRO.* If the rating on a security is subsequently
downgraded, the Advisor and/or Sub-Advisor will determine
whether to retain the security as a Defensive Instrument,
retain the security but not as a Defensive Instrument or
dispose of the security.
*To be eligible as a Defensive Instrument, the Sub-Advisor must
determine in each case at the time of purchase that the security to be
purchased is less risky than RMBS currently available in the
marketplace that would be consistent with the Fund's investment
strategy.
Funds assuming temporary defensive positions may not pursue or achieve
their investment objectives during such times and may deviate from their
investment strategies, including their concentration policy noted below.
Investments in Funds assuming temporary defensive positions in reliance on their
temporary defensive policy remain subject to risks, including investment risk
and the possible loss of the money invested in the respective Fund. Some of the
risks related to the Funds have been set forth below.
Risk Considerations:
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Funds. For additional information about the
risks associated with investing in a Fund, please see the Fund's prospectus and
statement of additional information, as well as other Fund regulatory filings.
Investment Risk: An investment in a Fund's Common Shares is subject to
investment risk, including the possible loss of the entire principal invested.
An investment in Common Shares represents an indirect investment in the
securities owned by the Fund. The value of these securities, like other market
investments, may move up or down, sometimes rapidly and unpredictably. Common
Shares at any point in time may be worth less than the original investment, even
after taking into account the reinvestment of Fund dividends and distributions.
Security prices can fluctuate for several reasons including the general
condition of the securities markets, or when political or economic events
affecting the issuers occur. When the Advisor or Sub-Advisor determines that it
is temporarily unable to follow the Fund's investment strategy or that it is
impractical to do so (such as when a market disruption event has occurred and
trading in the securities is extremely limited or absent), the Fund may take
temporary defensive positions.
Residential Mortgage-Backed Securities Concentration Risk: Each Fund will invest
at least 25% of its total Managed Assets in residential mortgage-backed
securities under normal market conditions. A Fund may deviate from its
investment strategies, including its concentration policy, when engaging in
temporary defensive positions. A fund concentrated in a single industry is
likely to present more risks than a fund that is broadly diversified over
several industries. Mortgage-backed securities may have less potential for
capital appreciation than comparable fixed-income securities, due to the
likelihood of increased prepayments of mortgages as interest rates decline. If a
Fund buys mortgage-backed securities at a premium, mortgage foreclosures and
prepayments of principal by mortgagors (which usually may be made at any time
without penalty) may result in some loss of the Fund's principal investment to
the extent of the premium paid. Alternatively, in a rising interest rate
environment, the value of mortgage-backed securities may be adversely affected
when payments on underlying mortgages do not occur as anticipated, resulting in
the extension of the security's effective maturity and the related increase in
interest rate sensitivity of a longer-term instrument. The value of
mortgage-backed securities may also change due to shifts in the market's
perception of issuers and regulatory or tax changes adversely affecting the
markets as a whole. In addition, mortgage-backed securities are subject to the
credit risk associated with the performance of the underlying mortgage
properties. In certain instances, third-party guarantees or other forms of
credit support can reduce the credit risk. A Fund may also invest in
mortgage-backed securities which are interest-only ("IO") securities and
principal-only ("PO") securities. Generally speaking, when interest rates are
falling and prepayment rates are increasing, the value of a PO security will
rise and the value of an IO security will fall. Conversely, when interest rates
are rising and prepayment rates are decreasing, generally the value of a PO
security will fall and the value of an IO security will rise. In addition to the
foregoing, residential mortgage-backed securities are subject to additional
risks, including: (i) the United States residential mortgage market has recently
encountered various difficulties and changed economic conditions. In addition,
recently, residential property values in various states have declined or
remained stable, after extended periods of appreciation. A continued decline or
an extended flattening in those values may result in additional increases in
delinquencies and losses on residential mortgage loans generally; (ii) if a
residential mortgage obligation is secured by a junior lien it will be
subordinate to the rights of the mortgagees or beneficiaries under the related
senior mortgages or deeds of trust; and (iii) depending on the length of a
residential mortgage obligation underlying a residential mortgage-backed
security, unscheduled or early payments of principal and interest may shorten
the security's effective maturity and the prevailing interest rates may be
higher or lower than the current yield of the Fund's portfolio at the time the
Fund receives the payments for reinvestment.
Value Investing Risk: Each Fund focuses its investments on securities that the
Sub-Advisor believes are undervalued or inexpensive relative to other
investments. Such securities are subject to the risk of misestimating certain
fundamental factors. Disciplined adherence to a "value" investment mandate
during periods in which that style is "out of favor" can result in significant
underperformance relative to overall market indices and other managed investment
vehicles that pursue growth style investments and/or flexible style mandates.
Below-Investment Grade Securities Risk: Each Fund invests in below-investment
grade securities. The market values for high-yield securities tend to be very
volatile, and these securities are less liquid than investment grade debt
securities. For these reasons, your investment in a Fund is subject to the
following specific risks: (a) increased price sensitivity to changing interest
rates and to a deteriorating economic environment; (b) greater risk of loss due
to default or declining credit quality; (c) adverse issuer specific events are
more likely to render the issuer unable to make interest and/or principal
payments; and (d) a negative perception of the high-yield market may depress the
price and liquidity of high-yield securities.
Distressed Securities Risk: Each Fund may invest in securities issued by
companies in a bankruptcy reorganization proceeding, subject to some other form
of a public or private debt restructuring or otherwise in default or in
significant risk of default in the payment of interest or repayment of principal
or trading at prices substantially below other below-investment grade debt
securities of companies in similar industries. Distressed securities frequently
do not produce income while they are outstanding. A Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent a Fund seeks capital appreciation through
investment in distressed securities, its ability to achieve current income may
be diminished.
Economic Conditions Risk: Adverse changes in economic conditions are more likely
to lead to a weakened capacity of a high-yield issuer to make principal payments
and interest payments than an investment grade issuer. An economic downturn
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. Under adverse
market or economic conditions, the secondary market for high-yield securities
could contract further, independent of any specific adverse changes in the
condition of a particular issuer and these securities may become illiquid. As a
result, a Fund could find it more difficult to sell these securities or may be
able to sell the securities only at prices lower than if such securities were
widely traded.
Fixed-Income Securities Risk: Debt securities, including high yield securities,
are subject to certain risks, including: (i) issuer risk, which is the risk that
the value of fixed-income securities may decline for a number of reasons which
directly relate to the issuer, such as management performance, financial
leverage and reduced demand for the issuer's goods and services or, in the case
of asset-backed issuers, a decline in the value and/or cash flows of the
underlying assets; (ii) reinvestment risk, which is the risk that income from
the Fund's portfolio will decline if the Fund invests the proceeds from matured,
traded or called bonds at market interest rates that are below the Fund
portfolio's current earnings rate; (iii) prepayment risk, which is the risk that
during periods of declining interest rates, the issuer of a security may
exercise its option to prepay principal earlier than scheduled, forcing the Fund
to reinvest in lower yielding securities; and (iv) credit risk, which is the
risk that a security in the Fund's portfolio will decline in price or the issuer
fails to make interest payments when due because the issuer of the security
experiences a decline in its financial status.
Interest Rate Risk: Each Fund is also subject to interest rate risk. Interest
rate risk is the risk that fixed-income securities will decline in value because
of changes in market interest rates. Investments in debt securities with
long-term maturities may experience significant price declines if long-term
interest rates increase.
Fund Investment Objectives:
Each Fund is a diversified, closed-end management investment company that seeks
to provide a high level of current income. As a secondary objective, each Fund
seeks to provide capital growth. First Trust Strategic High Income Fund pursues
these investment objectives by investing at least 80% of its managed assets in a
portfolio of high income producing securities that the Sub-Advisor believes
offer attractive yield and capital appreciation potential. First Trust Strategic
High Income Fund II pursues these investment objectives by investing its managed
assets in a portfolio of below-investment grade and investment grade debt
securities and equity securities that the Sub-Advisor believes offer attractive
yield and/or capital appreciation potential. First Trust Strategic High Income
Fund III pursues these investment objectives by investing its managed assets in
a portfolio of below-investment grade and investment grade debt securities and
equity securities that the Sub-Advisor believes offer attractive yield and/or
capital appreciation potential. Each Fund concentrates in RMBS under normal
market conditions. First Trust Strategic High Income Fund currently employs
leverage.
The Advisor:
FTA has served as each Fund's investment advisor since the Fund's inception.
FTA, along with its affiliate First Trust Portfolios L.P., are privately-held
companies which provide a variety of investment services, including asset
management, financial advisory services, and municipal and corporate investment
banking, with collective assets under management or supervision of over $30
billion as of August 31, 2008, through closed-end funds, unit investment trusts,
mutual funds, separate managed accounts and exchange-traded funds.
The Funds' daily closing New York Stock Exchange price and net asset value per
share as well as other information can be found at www.ftportfolios.com or by
calling 1-800-988-5891.
Contact:
First Trust Strategic High Income Fund, First Trust Strategic High Income
Fund II and First Trust Strategic High Income Fund III
Press Inquiries: Jane Doyle, 630-241-8775
Analyst Inquiries: Jeff Margolin, 630-915-6784
Broker Inquiries: Jeff Margolin, 630-915-6784