UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21842
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First Trust Strategic High Income Fund II
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
Date of fiscal year end: October 31
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Date of reporting period: April 30, 2015
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FIRST TRUST
STRATEGIC
High Income
Fund II (FHY)
SEMI-ANNUAL
REPORT
FOR THE SIX MONTHS ENDED
APRIL 30, 2015
FIRST TRUST BROOKFIELD
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TABLE OF CONTENTS
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2015
Shareholder Letter ......................................................... 1
At a Glance ................................................................ 2
Portfolio Commentary ....................................................... 3
Portfolio of Investments ................................................... 6
Statement of Assets and Liabilities ........................................ 15
Statement of Operations .................................................... 16
Statements of Changes in Net Assets ........................................ 17
Statement of Cash Flows .................................................... 18
Financial Highlights ....................................................... 19
Notes to Financial Statements .............................................. 20
Additional Information ..................................................... 27
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and/or Brookfield Investment Management Inc.
("Brookfield" or the "Sub-Advisor") and their respective representatives, taking
into account the information currently available to them. Forward-looking
statements include all statements that do not relate solely to current or
historical fact. For example, forward-looking statements include the use of
words such as "anticipate," "estimate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Strategic High Income Fund II (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and/or
Sub-Advisor and their respective representatives only as of the date hereof. We
undertake no obligation to publicly revise or update these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Additional
Information section of this report for a discussion of certain other risks of
investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. It includes details about the Fund and presents data and analysis that
provide insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of
Brookfield are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The material risks of investing in the
Fund are spelled out in the prospectus, the statement of additional information,
this report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL LETTER FROM THE CHAIRMAN AND CEO
APRIL 30, 2015
Dear Shareholders:
Thank you for your investment in First Trust Strategic High Income Fund II.
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
semi-annual report which contains detailed information about your investment for
the six months ended April 30, 2015, including a market overview and a
performance analysis for the period. We encourage you to read this report and
discuss it with your financial advisor.
U.S. markets, fueled by accelerating growth and an accommodating Federal
Reserve, enjoyed a prosperous year in 2014. However, for the six months covered
by this report, some economic and global factors, including the continued
conflict in the Middle East and a sharp decline in oil prices, created
volatility in the U.S. and global markets. Another factor that has impacted
markets is the fact that many economists are predicting the Federal Reserve will
begin to raise interest rates this year.
As I have written previously, First Trust believes investors should maintain
perspective about the markets and have realistic expectations about their
investments. Markets will always go up and down, but we believe that having a
long-term investment horizon and being invested in quality products can help you
reach your goals.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value the relationship and will continue to focus on our disciplined
investment approach and long-term perspective to help investors reach their
financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
"AT A GLANCE"
AS OF APRIL 30, 2015 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FHY
Common Share Price $14.21
Common Share Net Asset Value ("NAV") $15.91
Premium (Discount) to NAV (10.69)%
Net Assets Applicable to Common Shares $134,576,663
Current Monthly Distribution per Common Share (1) $0.110
Current Annualized Distribution per Common Share $1.320
Current Distribution Rate on Closing Common Share Price (2) 9.29%
Current Distribution Rate on NAV (2) 8.30%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
4/14 16.07 17.35
16.03 17.28
16.07 17.35
16.15 17.39
16.14 17.39
5/14 16.25 17.40
16.11 17.38
16.22 17.41
16.31 17.50
6/14 16.34 17.49
16.14 17.35
15.96 17.25
7/14 16.01 17.26
15.56 16.94
15.50 17.00
15.65 17.18
8/14 15.72 17.27
15.60 17.08
15.38 16.94
15.54 16.96
9/14 15.38 16.68
15.25 16.64
15.20 16.42
15.10 16.50
15.47 16.65
10/14 15.60 16.64
15.30 16.51
15.25 16.49
15.26 16.36
11/14 15.36 16.33
14.83 15.97
14.05 15.43
14.35 15.75
12/14 14.51 15.85
14.54 15.73
14.47 15.73
14.37 15.65
14.34 15.70
1/15 14.43 15.73
14.37 15.79
14.48 15.87
14.48 15.93
2/15 14.56 16.02
14.33 15.86
14.27 15.77
14.30 15.78
3/15 14.19 15.82
14.12 15.71
14.09 15.82
14.15 15.85
14.24 15.90
4/15 14.21 15.91
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PERFORMANCE
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Average Annual Total Return
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6 Months Ended 1 Year Ended 5 Years Ended Inception (3/28/06)
4/30/15 4/30/15 4/30/15 to 4/30/15
FUND PERFORMANCE (3)
NAV 0.33% 0.72% 11.12% -1.83%
Market Value -4.42% -2.88% 10.63% -3.53%
INDEX PERFORMANCE
Barclays Capital Ba U.S. High Yield Index 2.43% 5.06% 8.56% 8.63%
BofA Merrill Lynch U.S. High Yield
Master II Index 1.51% 2.57% 8.18% 8.16%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Corporate Bonds and Notes 74.4%
Foreign Corporate Bonds and Notes 11.9
Residential Mortgage-Backed Securities 5.2
Manufactured Housing Loans 4.2
Senior Floating-Rate Loan Interests 2.0
Equity 1.6
Commercial Mortgage-Backed Securities 0.7
Collateralized Debt Obligations 0.0*
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Total 100.0%
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* Amount is less than 0.1%
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% OF TOTAL
FIXED-INCOME
CREDIT QUALITY (4) INVESTMENTS
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AAA 0.6%
BBB- 3.2
BB+ 7.5
BB 15.6
BB- 15.6
B+ 7.9
B 15.1
B- 14.6
CCC+ 8.7
CCC 3.2
CCC- 1.8
CC 1.4
C 1.1
D 0.8
NR 2.9
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Total 100.0%
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(1) Most recent distribution paid or declared through 4/30/2015. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share price or NAV, as applicable, as of 4/30/2015. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns. Total
returns do not reflect sales load and are not annualized for periods less
than one year. Past performance is not indicative of future results.
(4) The credit quality and ratings information presented above reflects the
ratings assigned by one or more nationally recognized statistical rating
organizations (NRSROs), including Standard & Poor's Ratings Group, a
division of the McGraw Hill Companies, Inc., Moody's Investors Service,
Inc., Fitch Ratings or a comparably rated NRSRO. For situations in which a
security is rated by more than one NRSRO and the ratings are not
equivalent, the highest ratings are used. Sub-investment grade ratings are
those rated BB+/Ba1 or lower. Investment grade ratings are those rated
BBB-/Baa3 or higher. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
NR Not rated.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
SEMI-ANNUAL REPORT
APRIL 30, 2015
SUB-ADVISOR
BROOKFIELD INVESTMENT MANAGEMENT INC.
Brookfield Investment Management Inc. (the "Firm" or the "Sub-Advisor") is a
registered investment advisor that invests in global listed real estate and
infrastructure equities, corporate credit and securitized credit strategies.
Headquartered in New York, NY, the Firm and its affiliates also maintain offices
and investment teams in Chicago, Boston and Toronto and had $19 billion of
assets under management as of March 31, 2015. The Firm has experience in the
management of institutional portfolios, retail mutual funds and various
commingled vehicles. The Sub-Advisor was established in 1989 and conducts the
public market activities of Brookfield Asset Management Inc.
The Firm is a wholly owned subsidiary of Brookfield Asset Management Inc., a
global alternative asset manager with over $200 billion in assets under
management as of March 31, 2015. Brookfield Asset Management has over a 100-year
history of owning and operating assets with a focus on property, renewable
power, infrastructure and private equity. The company offers a range of public
and private investment products and services, which leverage its expertise and
experience and provide it with a competitive advantage in the markets where it
operates.
PORTFOLIO MANAGEMENT TEAM
DANA E. ERIKSON, CFA - MANAGING DIRECTOR
ANTHONY BREAKS, CFA - SENIOR DIRECTOR
COMMENTARY
FIRST TRUST STRATEGIC HIGH INCOME FUND II
The primary investment objective of the First Trust Strategic High Income Fund
II ("FHY" or the "Fund") is to seek a high level of current income. The Fund
seeks capital growth as a secondary objective. The Fund seeks to achieve its
investment objectives by investing in a diversified 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. There can be no assurance that the Fund will achieve its
investment objectives. The Fund may not be appropriate for all investors.
MARKET RECAP AND OUTLOOK
High Yield
The six-month period ended April 30, 2015 saw rising interest rates following
the cessation of the Federal Reserve's program of quantitative easing despite
generally soft economic conditions in the United States toward the end of the
period. Equity markets were generally higher over the period due to improved
investor confidence, generally good earnings and an apparent bottoming in the
energy markets. Many strategists attributed the economic weakness to very severe
winter weather in parts of the country, so markets were generally willing to
look past the numbers in expectation of stronger growth ahead.
At the beginning of the six-month period, energy prices were declining rapidly,
but appeared to stabilize in December 2014, and moved moderately higher toward
the end of the period. This gave a lift to energy-related securities,
particularly in the high-yield market, where energy represents the largest
industry segment. Weakness continued in mining and metals prices, particularly
iron ore, steel and coal due to weak Chinese demand, along with stronger
emissions controls in North America tempering coal demand for power production.
The high-yield market produced a positive return of 1.51% for the six-month
period ended April 30, 2015, as measured by the BofA Merrill Lynch U.S. High
Yield Master II Index. The asset class benefitted from investor inflows and
renewed investor confidence despite higher interest rates. For the six-month
period, higher-quality BB bonds outperformed riskier CCC bonds as measured by
the BofA Merrill Lynch US High Yield BB Index and the BofA Merrill Lynch US High
Yield CCC Index, returning 2.4% and 0.7%, respectively. The market saw
outperformance in consumer-related industries such as consumer goods and retail
along with strong performance in the banking sector. Underperforming sectors
included energy, basic industry, and telecommunications.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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CREDIT CONDITIONS
The six-month period ended April 30, 2015 saw a decline in the high-yield
default rate, bringing the 12-month default rate to 1.8%, which remains well
below the long-term average of 3.9%.1 We believe lower energy prices may
increase credit distress in the energy and mining sector, which could increase
the overall default rate. We do not expect the default rate to rise above its
long-term average. We also believe the market is currently anticipating higher
defaults, as represented by relatively generous spreads, and that investors are
well aware of pressure in energy markets.
OUTLOOK
The current credit cycle has lasted longer than the 1990s credit cycle, which
was a relatively long cycle. Currently, high-yield spreads represent substantial
premiums to those usually seen at this stage of the cycle. Re-risking on the
part of issuers remains muted compared with prior cycles. Defaults are very low
compared to historical averages, and corporate credit has substantial
flexibility as a result of actively refinancing balance sheets over the last six
years.
We continue to watch events in the oil patch with interest. While many
exploration and production companies continue to enjoy reasonably high product
prices due to past hedging, many will suffer a hit should oil prices not recover
in calendar year 2015. We are growing increasingly concerned by events in metals
and mining, where difficulties among coal producers, who have been struggling
against emissions standards, are now struggling against much lower energy
prices. We have also seen large declines in the realized prices of iron ore
producers due to weak demand out of the Far East.
On balance, we believe there are substantial opportunities in the high-yield
market but caution investors to maintain diligent credit discipline in order to
maneuver through potentially elevated credit pitfalls ahead.
SECURITIZED PRODUCTS
Within the Securitized Products universe, non-Agency Residential Mortgage-Backed
Securities ("non-Agency RMBS") and Commercial Mortgage-Backed Securities
("CMBS") had strong returns for the past six months driven by improving
collateral performance and strong investor demand.
Prices of non-Agency RMBS have benefited from improving home prices. Prices of
single family homes were up 4.5% in 2014 per CoreLogic HPI Data. This follows
gains of 11.2% in 2013 and 9.2% in 2012. This has substantially improved
homeowner equity and consequently, we have seen improved performance on the
underlying loans. According to the Mortgage Bankers Association, the total
delinquency number for the first quarter of 2015 was 5.41%, which was down from
5.68% in the fourth quarter of 2014, extending a low not seen since 2007. We
believe that home price appreciation will slow in 2015, leveling off in the 3%
to 5% range. That said, we believe the odds may favor a surprise to the upside,
as continued low interest rates may drive additional refinancing or
unanticipated wage inflation that may improve access to credit and ability to
service existing debt.
Access to credit for residential borrowers has remained stubbornly limited. This
is the strongest argument against the idea that home prices are approaching
bubble territory. Regulation, litigation and other issues all continue to limit
access to mortgage credit continuing to weigh on housing metrics like new home
sales. While new home sales have remained weak, data related to housing supply
has been very supportive. Limited building and a reduction in distressed
inventory, such as bank foreclosures, has reduced supply for existing homes and
this has contributed to home price index increases. Given current conditions, we
expect home prices to continue to improve, albeit at a more stable 4% per annum
rate. Increasing home prices result in lower loan-to-value ratios which continue
to help more borrowers regain lost equity, and come closer to meeting standards
required to refinance at historically low mortgage rates.
Like residential real estate, commercial real-estate markets in the U.S.
continue to improve in 2015. CMBS delinquency rates are down to 5.6%, from a
peak of 10.3% seen in 2012. The aggregate index for commercial property prices
is now above the peak seen prior to the global financial crisis, as measured by
Moody's CPPI, a widely followed index of commercial real-estate prices. For
commercial real estate, credit is readily available and access to credit
continues to expand along with the allowed leverage.
We believe the expansion in credit, combined with an aggressive buyer base for
new issues, has facilitated relatively unrestrained commercial property lending.
With risk retention requirements on the horizon in 2016, we believe there will
be additional pressure on lenders to be aggressive, and on buyers of new CMBS to
invest before risk retention interferes. As
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1 J.P. Morgan, High Yield Market Monitor, November
1, 2014, page 3.
Page 4
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PORTFOLIO COMMENTARY (CONTINUED)
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such, we prefer more seasoned securities that may benefit from loans refinancing
into the strong new issue market rather than extending or defaulting. We are
also focused on a particular type of new issue backed by large loans on single
properties. The collateral for these securities is a large, high quality, well
understood asset. The loan to value ratio for the security, a measure of credit
protection, is much lower than it would be in a tradition CMBS transaction.
The interest rate environment has been very supportive of real-estate assets
with low rates persisting longer than was anticipated. Now the focus for the
rates market is on when the Federal Reserve will raise short-term interest rates
and how quickly it will introduce subsequent hikes. First quarter economic data
was tepid, with some weakness in employment and manufacturing numbers. The
severe winter, a sharp decline in oil prices, and an increase in the U.S. dollar
are credited with weighing on GDP in the first quarter. Economic drivers for
mortgages and ABS tend to follow consumer and consumption trends. We note that
on balance, savings to consumers from cheaper gas prices is not being spent.
Instead we see continued deleveraging of the household balance sheet and a
somewhat higher savings rate.
We remain positive on most securitized products for this year, based on
continued improvement in forecasts for collateral performance. Expansion of
credit for borrowers has slowed versus market expectations and this remains an
area of potential improvement for our markets, though likely not in the near
term. Banks have been slow to expand borrowing beyond agency eligible loans and
non-agency eligible loans to otherwise very clean, typically high net worth
borrowers. Rents have been rising for several years, and with interest rates
still low, many households have a financial incentive to purchase rather than
rent. The first time home buyer has a number of Agency eligible programs to
facilitate that purchase. These dynamics support the current increase in home
prices and potential for further increases, though likely at a more measured
pace than 2012 and 2013.
PERFORMANCE ANALYSIS
For the six-month period ended April 30, 2015, the Fund had a total return(2) of
0.33% based on net asset value ("NAV"). For the period, the Fund traded from a
discount to NAV of -6.25% to a discount of -10.69%, resulting in a total return
of -4.42% based on market price. The total return for the Fund's benchmark, the
Barclays Capital Ba U.S. High Yield Index, was 2.43% for the six-month period
ended April 30, 2015.
An important factor impacting the return of the Fund relative to its benchmark
was the Fund's use of financial leverage through the use of bank borrowings. As
of April 30, 2015, the Fund's leverage was approximately 28.20% of Managed
Assets. Leverage contributed positively to the Fund's income during the period.
The Fund may utilize leverage in an amount up to 33.33% of Managed Assets. The
Fund uses leverage because its managers believe that, over time, leverage
provides opportunities for additional income and capital growth for common
shareholders. However, the use of leverage also can expose common shareholders
to additional volatility. For example, if the prices of securities held by the
Fund decline, as they did during this semi-annual period, the negative impact of
the valuation changes on common share net asset value and common shareholder
total return is magnified by the use of leverage. Conversely, leverage may
enhance common share returns during periods when the prices of securities held
by the Fund are rising generally.
Contributors to relative performance over the last six months included the
Fund's allocation to the real-estate sector, as well as the Fund's holdings of
higher quality BBB-rated securities.
Detractors from performance included the Fund's overweight in the basic industry
sector, where the Fund's holdings of bonds in the coal industry underperformed.
Additionally, the Fund's holdings in the leisure sector detracted from
performance due to weakness in gaming securities. The Fund also saw
underperformance from its credit weighting, due to an overweight in the
underperforming B and CCC sectors.
The Fund's portfolio holdings are subject to change without notice. The mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities. These views represent the opinions of
Brookfield Investment Management Inc. and are not intended to predict or depict
the performance of any investment. These views are as of the close of business
on April 30, 2015 and subject to change based on subsequent developments.
-----------------------------
(2) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for NAV
returns and changes in Common Share price for market value returns and
does not reflect sales load. Past performance is not indicative of future
results.
Page 5
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES - 100.2%
AUTOMOTIVE - 4.6%
$ 1,275,000 American Axle & Manufacturing, Inc. (a)....... 6.25% 03/15/21 $ 1,348,313
1,050,000 American Axle & Manufacturing, Inc. (a)....... 6.63% 10/15/22 1,120,875
1,750,000 FCA US LLC/CG Co-Issuer, Inc. (a)............. 8.25% 06/15/21 1,935,937
1,500,000 Ford Motor Co. (a)............................ 6.50% 08/01/18 1,714,235
------------
6,119,360
------------
BASIC INDUSTRY - 10.5%
800,000 Alpha Natural Resources, Inc. (a) (b)......... 7.50% 08/01/20 296,000
2,075,000 Alpha Natural Resources, Inc. (a)............. 6.25% 06/01/21 404,625
3,275,000 Arch Coal, Inc. (a)........................... 7.25% 06/15/21 728,687
1,000,000 Associated Materials LLC/AMH New Finance,
Inc. (a)................................... 9.13% 11/01/17 855,000
500,000 Building Materials Corp. of America (a) (b)... 6.75% 05/01/21 533,125
775,000 Hexion, Inc................................... 8.88% 02/01/18 692,656
2,450,000 Hexion, Inc. (a).............................. 9.00% 11/15/20 1,776,250
428,000 Huntsman International LLC (a)................ 8.63% 03/15/21 455,820
500,000 Ply Gem Industries, Inc....................... 6.50% 02/01/22 491,875
1,540,000 Polymer Group, Inc. (a)....................... 7.75% 02/01/19 1,597,750
2,100,000 Pulte Group, Inc. (a)......................... 6.38% 05/15/33 2,184,000
2,100,000 USG Corp. (a) (c)............................. 9.75% 01/15/18 2,441,250
1,650,000 Xerium Technologies, Inc. (a)................. 8.88% 06/15/18 1,714,969
------------
14,172,007
------------
CAPITAL GOODS - 4.9%
1,700,000 Crown Cork & Seal Co., Inc. (a)............... 7.38% 12/15/26 1,963,500
1,775,000 H&E Equipment Services, Inc................... 7.00% 09/01/22 1,868,187
590,000 Tekni-Plex, Inc. (b).......................... 9.75% 06/01/19 635,725
650,000 Terex Corp.................................... 6.50% 04/01/20 682,500
1,350,000 Terex Corp. (a)............................... 6.00% 05/15/21 1,377,000
------------
6,526,912
------------
CONSUMER GOODS - 7.1%
2,000,000 ACCO Brands Corp. (a)......................... 6.75% 04/30/20 2,115,000
1,775,000 L Brands, Inc. (a)............................ 7.60% 07/15/37 2,072,312
1,800,000 New Albertsons, Inc. (a)...................... 7.75% 06/15/26 1,755,000
1,850,000 Post Holdings, Inc. (a)....................... 7.38% 02/15/22 1,926,313
1,900,000 Roundy's Supermarkets, Inc. (a) (b)........... 10.25% 12/15/20 1,700,500
------------
9,569,125
------------
ENERGY - 20.2%
2,100,000 Atlas Pipeline Partners LP/Atlas Pipeline
Finance Corp. (a).......................... 5.88% 08/01/23 2,121,000
1,775,000 Blue Racer Midstream LLC/Blue Racer
Finance Corp. (b).......................... 6.13% 11/15/22 1,854,875
1,750,000 Breitburn Energy Partners LP/Breitburn
Finance Corp. (a).......................... 8.63% 10/15/20 1,487,500
250,000 Breitburn Energy Partners LP/Breitburn
Finance Corp. (a).......................... 7.88% 04/15/22 206,250
1,925,000 Calfrac Holdings L.P. (a) (b)................. 7.50% 12/01/20 1,756,562
950,000 Chesapeake Energy Corp........................ 4.88% 04/15/22 881,125
2,410,000 EV Energy Partners LP/EV Energy
Finance Corp. (a).......................... 8.00% 04/15/19 2,325,650
Page 6 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES (CONTINUED)
ENERGY (CONTINUED)
$ 1,850,000 Ferrellgas Partners LP/Ferrellgas Partners
Finance Corp. (a).......................... 8.63% 06/15/20 $ 1,937,875
1,950,000 Global Partners LP/GLP Finance Corp. (a)...... 6.25% 07/15/22 1,930,500
1,700,000 Hilcorp Energy I LP/Hilcorp Finance
Co. (a) (b)................................ 8.00% 02/15/20 1,768,000
1,000,000 ION Geophysical Corp.......................... 8.13% 05/15/18 785,000
950,000 Linn Energy LLC/Linn Energy Finance
Corp. (a).................................. 8.63% 04/15/20 869,839
800,000 Linn Energy LLC/Linn Energy Finance Corp...... 7.75% 02/01/21 692,000
1,750,000 NRG Energy, Inc............................... 6.25% 07/15/22 1,824,375
1,775,000 NRG Yield Operating LLC (b)................... 5.38% 08/15/24 1,850,438
1,275,000 Pioneer Natural Resources Co. (a)............. 6.65% 03/15/17 1,393,977
1,300,000 RKI Exploration & Production LLC/RKI Finance
Corp. (b).................................. 8.50% 08/01/21 1,293,500
1,850,000 Tesoro Logistics LP/Tesoro Logistics Finance
Corp. (a).................................. 6.13% 10/15/21 1,947,125
415,000 W&T Offshore, Inc............................. 8.50% 06/15/19 298,800
------------
27,224,391
------------
HEALTHCARE - 8.8%
1,925,000 CHS/Community Health Systems, Inc. (a)........ 7.13% 07/15/20 2,066,969
1,375,000 DJO Finance LLC/DJO Finance Corp. (a)......... 9.88% 04/15/18 1,443,750
150,000 DJO Finco, Inc./DJO Finance LLC/DJO Finance
Corp. (b).................................. 8.13% 06/15/21 152,625
1,750,000 HCA, Inc. (a)................................. 8.00% 10/01/18 2,038,750
1,000,000 HCA, Inc. (a)................................. 5.88% 05/01/23 1,083,750
643,420 inVentiv Health, Inc. (b) (d)................. 10.00% 08/15/18 661,114
438,000 inVentiv Health, Inc. (b)..................... 11.00% 08/15/18 420,480
1,725,000 Jaguar Holdings Co./Merger (a) (b)............ 9.50% 12/01/19 1,860,844
2,000,000 Kindred Healthcare, Inc. (a).................. 6.38% 04/15/22 2,070,000
------------
11,798,282
------------
LEISURE - 9.8%
2,000,000 Boyd Gaming Corp. (a)......................... 9.00% 07/01/20 2,170,000
1,800,000 Cedar Fair L.P./Canada's Wonderland Co./Magnum
Management Corp............................ 5.25% 03/15/21 1,876,500
1,950,000 Chester Downs & Marina LLC (a) (b)............ 9.25% 02/01/20 1,511,250
2,450,000 GLP Capital LP/GLP Financing II, Inc. (a)..... 5.38% 11/01/23 2,560,250
1,300,000 MGM Resorts International (a)................. 7.63% 01/15/17 1,400,490
1,786,979 MTR Gaming Group, Inc. (a).................... 11.50% 08/01/19 1,934,404
1,725,000 Palace Entertainment Holdings LLC/Palace
Entertainment Holdings Corp. (a) (b)....... 8.88% 04/15/17 1,745,485
------------
13,198,379
------------
MEDIA - 8.4%
1,850,000 Cablevision Systems Corp. (a)................. 8.63% 09/15/17 2,090,500
1,875,000 Cumulus Media Holdings, Inc. (a).............. 7.75% 05/01/19 1,811,719
1,700,000 iHeartCommunications, Inc. (a)................ 9.00% 03/01/21 1,636,250
1,875,000 Lamar Media Corp.............................. 5.38% 01/15/24 1,966,687
See Notes to Financial Statements Page 7
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
CORPORATE BONDS AND NOTES (CONTINUED)
MEDIA (CONTINUED)
$ 2,350,000 Mediacom Broadband LLC/Mediacom Broadband
Corp....................................... 6.38% 04/01/23 $ 2,502,750
1,250,000 National Cinemedia LLC........................ 6.00% 04/15/22 1,300,000
------------
11,307,906
------------
SERVICES - 7.8%
1,000,000 Avis Budget Car Rental LLC/Avis Budget
Finance, Inc. (a).......................... 5.50% 04/01/23 1,024,690
1,850,000 Casella Waste Systems, Inc. (a)............... 7.75% 02/15/19 1,896,250
2,275,000 Iron Mountain, Inc. (a)....................... 6.00% 08/15/23 2,431,406
950,000 Jurassic Holdings III (b)..................... 6.88% 02/15/21 821,750
2,025,000 MasTec, Inc. (a).............................. 4.88% 03/15/23 1,923,750
1,000,000 Sotheby's (b)................................. 5.25% 10/01/22 1,002,500
369,000 United Rentals North America, Inc............. 8.25% 02/01/21 399,904
900,000 United Rentals North America, Inc. (a)........ 7.63% 04/15/22 996,750
------------
10,497,000
------------
TECHNOLOGY & ELECTRONICS - 1.7%
500,000 CyrusOne LP/CyrusOne Finance Corp............. 6.38% 11/15/22 529,375
1,570,000 First Data Corp. (a).......................... 11.25% 01/15/21 1,770,175
------------
2,299,550
------------
TELECOMMUNICATIONS - 12.2%
2,000,000 Centurylink, Inc. (a)......................... 7.65% 03/15/42 2,020,000
936,000 Cincinnati Bell, Inc. (a)..................... 8.75% 03/15/18 957,364
1,200,000 FairPoint Communications, Inc. (a) (b)........ 8.75% 08/15/19 1,290,000
1,750,000 Frontier Communications Corp. (a)............. 7.13% 03/15/19 1,916,250
900,000 Frontier Communications Corp. (a)............. 7.13% 01/15/23 909,000
1,750,000 Level 3 Communications, Inc. (a).............. 8.88% 06/01/19 1,835,313
475,000 Level 3 Financing, Inc........................ 6.13% 01/15/21 504,094
500,000 Qwest Capital Funding, Inc.................... 6.88% 07/15/28 520,000
1,875,000 T-Mobile USA, Inc. (a)........................ 6.63% 04/01/23 1,956,000
2,825,000 Windstream Corp. (a).......................... 7.50% 06/01/22 2,701,406
1,850,000 Zayo Group LLC/Zayo Capital, Inc. (a) (b)..... 6.00% 04/01/23 1,868,500
------------
16,477,927
------------
TRANSPORTATION - 1.4%
1,800,000 Watco Cos. LLC/Watco Finance Corp. (a) (b).... 6.38% 04/01/23 1,833,750
------------
UTILITY - 2.8%
2,025,000 AES Corp. (a)................................. 4.88% 05/15/23 1,983,234
1,750,000 TerraForm Power Operating LLC (b)............. 5.88% 02/01/23 1,828,750
------------
3,811,984
------------
TOTAL CORPORATE BONDS AND NOTES............................................. 134,836,573
(Cost $137,015,705) ------------
Page 8 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL
VALUE
(LOCAL STATED STATED VALUE
CURRENCY) DESCRIPTION COUPON MATURITY (US DOLLAR)
---------------- ---------------------------------------------- --------- ------------ ------------
FOREIGN CORPORATE BONDS AND NOTES - 16.0%
AUTOMOTIVE - 1.0%
1,117,997 Servus Luxembourg Holding S.C.A. (EUR) (b).... 7.75% 06/15/18 $ 1,313,818
------------
BASIC INDUSTRY - 4.3%
1,540,000 Cascades, Inc. (USD) (a)...................... 7.88% 01/15/20 1,609,300
1,000,000 Cascades, Inc. (USD) (a) (b).................. 5.50% 07/15/22 1,016,250
1,150,000 FMG Resources (August 2006) Pty Ltd.
(USD) (a) (b).............................. 6.88% 04/01/22 875,437
875,000 Millar Western Forest Products Ltd. (USD)..... 8.50% 04/01/21 883,750
1,283,000 Trinseo Materials Operating S.C.A./Trinseo
Materials Finance, Inc. (USD) (a).......... 8.75% 02/01/19 1,361,597
------------
5,746,334
------------
CAPITAL GOODS - 2.2%
2,000,000 Ardagh Packaging Finance PLC/Ardagh Holdings
USA, Inc. (USD) (a) (b).................... 6.75% 01/31/21 2,085,000
720,000 KraussMaffei Group GmbH (EUR)................. 8.75% 12/15/20 887,277
------------
2,972,277
------------
ENERGY - 2.9%
1,800,000 LBC Tank Terminals Holding Netherlands BV
(USD) (b).................................. 6.88% 05/15/23 1,854,000
645,000 Precision Drilling Corp. (USD)................ 6.63% 11/15/20 653,062
1,350,000 Puma International Financing S.A. (USD) (b)... 6.75% 02/01/21 1,410,750
------------
3,917,812
------------
MEDIA - 1.4%
1,900,000 Numericable-SFR SAS (b)....................... 6.00% 05/15/22 1,948,688
------------
TELECOMMUNICATIONS - 1.8%
1,900,000 Intelsat Luxembourg S.A. (USD) (a)............ 7.75% 06/01/21 1,752,750
700,000 Wind Acquisition Finance S.A. (USD) (b)....... 7.38% 04/23/21 718,375
------------
2,471,125
------------
TRANSPORTATION - 2.4%
1,550,000 Dynagas LNG Partners LP/Dynagas Finance, Inc.
(USD) (a).................................. 6.25% 10/30/19 1,402,750
2,000,000 Teekay Offshore Partners LP/Teekay Offshore
Finance Corp. (USD) (a).................... 6.00% 07/30/19 1,802,500
------------
3,205,250
------------
TOTAL FOREIGN CORPORATE BONDS AND NOTES..................................... 21,575,304
(Cost $22,586,931) ------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
MORTGAGE-BACKED SECURITIES - 8.0%
COLLATERALIZED MORTGAGE OBLIGATIONS - 7.0%
Citicorp Mortgage Securities, Inc.
$ 1,608,952 Series 2007-2, Class 1A3................... 6.00% 02/25/37 $ 1,650,481
Countrywide Alternative Loan Trust
923,847 Series 2006-29T1, Class 2A6................ 6.50% 10/25/36 825,798
149,136 Series 2007-11T1, Class A37 (e)............ 38.93% 05/25/37 312,648
1,031,742 Series 2007-OA3, Class 1A1 (e)............. 0.32% 04/25/47 877,267
See Notes to Financial Statements Page 9
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
MORTGAGE-BACKED SECURITIES (CONTINUED)
Countrywide Home Loan Mortgage Pass-Through Trust
$ 184,063 Series 2006-21, Class A8................... 5.75% 02/25/37 $ 174,645
HarborView Mortgage Loan Trust
90,300 Series 2005-9, Class B10 (e) (f) (g) (h)... 1.93% 06/20/35 1
Home Equity Asset Trust
1,190,000 Series 2006-4, Class 2A4 (e)............... 0.46% 08/25/36 1,011,057
1,261,000 Series 2006-7, Class 2A3 (e)............... 0.33% 01/25/37 959,186
Nomura Resecuritization Trust
2,748,218 Series 2014-1R, Class 2A11 (b) (e)......... 0.34% 02/26/37 1,446,099
Residential Accredit Loans, Inc.
152,708 Series 2007-Q56, Class A2 (e).............. 54.07% 04/25/37 338,207
Securitized Asset Backed Receivables LLC Trust
1,293,340 Series 2007, Class BR4 (e)................. 0.38% 05/25/37 864,580
Washington Mutual Alternative Mortgage
Pass-Through Certificates
45,461 Series 2007-5, Class A11 (e)............... 38.39% 06/25/37 87,810
Wells Fargo Mortgage Backed Securities Trust
638,553 Series 2006-8, Class A15................... 6.00% 07/25/36 645,688
256,343 Series 2007-8, Class 2A2................... 6.00% 07/25/37 252,878
------------
9,446,345
------------
COMMERCIAL MORTGAGE-BACKED SECURITIES - 1.0%
Greenwich Capital Commercial Funding Corp.
1,180,000 Series 2007-GG11, Class AJ (e)............. 6.05% 12/10/49 1,250,897
------------
1,250,897
------------
TOTAL MORTGAGE-BACKED SECURITIES............................................ 10,697,242
(Cost $9,539,992) ------------
ASSET-BACKED SECURITIES - 5.6%
Ace Securities Corp.
909,797 Series 2003-MH1, Class A4 (b)............. 6.50% 08/15/30 1,009,182
BankAmerica Manufactured Housing Contract Trust II
2,300,000 Series 1997-1, Class B1 (g)............... 6.94% 06/10/21 2,820,934
Bombardier Capital Mortgage Securitization
269,762 Corp. Series 1999-B, Class A1B............. 6.61% 12/15/29 139,762
Citigroup Mortgage Loan Trust, Inc.
2,301,000 Series 2003-HE3, Class M4 (e).............. 3.18% 12/25/33 1,186,729
Green Tree Financial Corp.
70,940 Series 1997-4, Class B1 (h)................ 7.23% 02/15/29 5,023
669,822 Series 1998-4, Class M1 (h)................ 6.83% 04/01/30 443,266
1,156,684 Series 1999-3, Class M1 (h)................ 6.96% 02/01/31 69,436
GSAMP Trust
2,895,038 Series 2006-S5, Class A1 (e)............... 0.36% 09/25/36 81,282
IMC Home Equity Loan Trust
2,020,157 Series 1997-3, Class B..................... 7.87% 08/20/28 1,051,017
2,177,498 Series 1997-5, Class B (f) (g)............. 7.59% 11/20/28 509,904
Oakwood Mortgage Investors, Inc.
697,216 Series 1999-B, Class M1.................... 7.18% 12/15/26 247,131
------------
TOTAL ASSET-BACKED SECURITIES............................................... 7,563,666
(Cost $5,298,229) ------------
Page 10 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
SENIOR FLOATING-RATE LOAN INTERESTS - 2.7%
CONSUMER GOODS - 0.9%
$ 668,271 Albertsons, Inc., Term Loan B-1 (e)........... 5.38% 03/21/19 $ 673,464
531,707 Roundy's Supermarkets, Tranche B Term
Loan (e)................................... 5.75% 02/21/21 512,719
------------
1,186,183
------------
SERVICES - 0.7%
992,500 Caesars Growth Properties, LLC, Term
Loan B (e)................................. 6.25% 05/08/21 886,799
------------
TELECOMMUNICATIONS - 0.7%
980,000 Fairpoint Communications, Inc., Term
Loan (e)................................... 7.50% 02/14/19 997,150
------------
UTILITY - 0.4%
834,744 Texas Competitive Electric Holdings Co., LLC,
Tranche B2 (e) (i)......................... 4.67% 10/10/17 516,022
------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................... 3,586,154
(Cost $3,990,378) ------------
SHARES/UNITS DESCRIPTION VALUE
---------------- ---------------------------------------------------------------------------- ------------
COMMON STOCKS - 2.1%
AUTOMOTIVE - 0.4%
33,500 Ford Motor Co............................................................... 529,300
------------
BASIC INDUSTRY - 0.4%
94,150 Cascades, Inc............................................................... 546,249
------------
CAPITAL GOODS - 0.4%
20,275 General Electric Co......................................................... 549,047
------------
ENERGY - 0.2%
7 Thunderbird Resources Equity, Inc. (h) (j) (k).............................. 277,348
------------
SERVICES - 0.4%
14,208 Iron Mountain Reit, Inc..................................................... 490,034
------------
UTILITY - 0.3%
36,000 AES Corp.................................................................... 477,000
------------
TOTAL COMMON STOCKS......................................................... 2,868,978
(Cost $3,371,284) ------------
MASTER LIMITED PARTNERSHIPS - 0.1%
ENERGY - 0.1%
4,411 EV Energy Partners, LP...................................................... 77,589
------------
TOTAL MASTER LIMITED PARTNERSHIPS........................................... 77,589
(Cost $148,599) ------------
PREFERRED SECURITIES - 0.0%
4,000 Soloso CDO, Ltd., Series 2005-1 (k) (l) (m)................................. 2,500
------------
TOTAL PREFERRED SECURITIES.................................................. 2,500
(Cost $0) ------------
See Notes to Financial Statements Page 11
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
---------------- ---------------------------------------------- --------- ------------ ------------
STRUCTURED NOTES - 0.0%
$ 5,750,000 Preferred Term Securities XXV, Ltd. (k) (m)... (l) 06/22/37 $ 449
Preferred Term Securities XXVI, Ltd.
2,500,000 Subordinated Note (k) (m).................. (l) 09/22/37 1,563
------------
TOTAL STRUCTURED NOTES...................................................... 2,012
(Cost $0) ------------
TOTAL INVESTMENTS - 134.7%.................................................. 181,210,018
(Cost $181,951,118) (n)
OUTSTANDING LOAN - (39.3%).................................................. (52,850,000)
NET OTHER ASSETS AND LIABILITIES - 4.6%..................................... 6,216,645
------------
NET ASSETS - 100.0%......................................................... $134,576,663
============
-----------------------------
(a) All or a portion of this security serves as collateral on the outstanding
loan.
(b) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. Pursuant to procedures adopted by the Fund's Board of Trustees,
this security has been determined to be liquid by Brookfield Investment
Management Inc. ("Brookfield"), the Fund's sub-advisor. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security specific
factors and assumptions, which require subjective judgment. At April 30,
2015, securities noted as such amounted to $40,363,372 or 29.99% of net
assets.
(c) Multi-Step Coupon Bond - Coupon steps up or down based upon ratings
changes by Standard & Poor's Ratings Group or Moody's Investors Service,
Inc. The interest rate shown reflects the rate in effect at April 30,
2015.
(d) This security is a Payment-in-Kind ("PIK") Toggle Note whereby the issuer
may elect to pay interest in cash at the stated coupon or in PIK Interest
at 12.00%. For the six months ended April 30, 2015, the Fund received
$36,420 PIK Interest.
(e) Floating rate security. The interest rate shown reflects the rate in
effect at April 30, 2015.
(f) Income is not being accrued.
(g) Security missed one or more of its interest payments.
(h) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by Brookfield.
(i) This borrower has filed for protection in federal bankruptcy court.
(j) Non-income producing security.
(k) This security is fair valued by the Advisor's Pricing Committee in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At April 30, 2015, securities noted as such are valued at
$281,860 or 0.21% of net assets.
(l) Zero coupon security.
(m) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the 1933 Act,
and may be resold in transactions exempt from registration, normally to
qualified institutional buyers (see Note 2C - Restricted Securities in the
Notes to Financial Statements).
(n) Aggregate cost for federal income tax purposes, which approximates the
aggregate cost for federal income tax purposes. As of April 30, 2015, the
aggregate gross unrealized appreciation for all securities in which there
was an excess of value over tax cost was $9,180,844 and the aggregate
gross unrealized depreciation for all securities in which there was an
excess of tax cost over value was $9,921,944.
CDO Collateralized Debt Obligation
CAD Canadian Dollar
EUR Euro
USD United States Dollar
Page 12 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of April 30,
2015 is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
4/30/2015 PRICES INPUTS INPUTS
------------- ------------- ------------- -------------
Corporate Bonds and Notes*......................... $ 134,836,573 $ -- $ 134,836,573 $ --
Foreign Corporate Bonds and Notes*................. 21,575,304 -- 21,575,304 --
Mortgage-Backed Securities:
Collateralized Mortgage Obligations............. 9,446,345 -- 9,446,345 --
Commercial Mortgage-Backed Securities........... 1,250,897 -- 1,250,897 --
Asset-Backed Securities............................ 7,563,666 -- 7,563,666 --
Senior Floating-Rate Loan Interests*............... 3,586,154 -- 3,586,154 --
Common Stocks:
Energy.......................................... 277,348 -- -- 277,348
Other industry categories*...................... 2,591,630 2,591,630 -- --
Master Limited Partnerships........................ 77,589 77,589 -- --
Preferred Securities............................... 2,500 -- -- 2,500
Structured Notes................................... 2,012 -- -- 2,012
------------- ------------- ------------- -------------
Total Investments.................................. 181,210,018 2,669,219 178,258,939 281,860
Forward Foreign Currency Contracts**............... 264,865 -- 264,865 --
------------- ------------- ------------- -------------
Total.............................................. $ 181,474,883 $ 2,669,219 $ 178,523,804 $ 281,860
============= ============= ============= =============
* See Portfolio of Investments for industry breakout.
** See the table of Forward Foreign Currency Contracts for contract and
currency detail.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of April
30, 2015, the Fund transferred a security valued at $277,348 from Level 2 to
Level 3 of the fair value hierarchy. The security that transferred from Level 2
to Level 3 did so primarily as a result of being fair value priced by the
Advisor's Pricing Committee in accordance with procedures adopted by the Fund's
Board of Trustees, and in accordance with the provisions of the Investment
Company Act of 1940, as amended, and not from an independent third-party pricing
service.
Level 3 Structured Notes and Preferred Securities are valued using broker
quotes. These values are based on unobservable and non-quantitative inputs. The
Fund's Board of Trustees has adopted valuation procedures that are utilized by
the Advisor's Pricing Committee to oversee the day-to-day valuation of the
Fund's investments. The Advisor's Pricing Committee, through the Fund's fund
accounting agent, monitors daily pricing via tolerance checks and stale and
unchanged price reviews. The Advisor's Pricing Committee also reviews monthly
back testing of pricing services prices by comparing sales prices of Fund
investments to prior day pricing service prices. Additionally, the Advisor's
Pricing Committee reviews periodic information from the Fund's third-party
pricing service that compares secondary market trade prices to their daily
valuations.
See Notes to Financial Statements Page 13
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
PORTFOLIO OF INVESTMENTS (CONTINUED)
APRIL 30, 2015 (UNAUDITED)
The following table presents the activity of the Fund's investments measured at
fair value on a recurring basis using significant unobservable inputs (Level 3)
for the period presented.
BEGINNING BALANCE AT OCTOBER 31, 2014
Preferred Securities $ 40,000
Structured Notes 825
Net Realized Gain (Loss) --
Net Change in Unrealized Appreciation/(Depreciation)
Preferred Securities (37,500)
Structured Notes 1,187
Purchases --
Sales --
Transfers In
Common Stocks 277,348
Transfers Out --
ENDING BALANCE AT APRIL 30, 2015
Preferred Securities 2,500
Structured Notes 2,012
Common Stocks 277,348
----------
Total Level 3 holdings $ 281,860
==========
There was a net change of ($36,313) in unrealized appreciation (depreciation)
from Level 3 investments held as of April 30, 2015.
FORWARD FOREIGN CURRENCY CONTRACTS - (see Note 2F - Forward Foreign Currency
Contracts in the Notes to Financial Statements):
FORWARD FOREIGN CURRENCY CONTRACTS
---------------------------------------------------
PURCHASE SALE UNREALIZED
SETTLEMENT AMOUNT AMOUNT VALUE AS OF VALUE AS OF APPRECIATION/
DATE COUNTERPARTY PURCHASED (a) SOLD (a) APRIL 30, 2015 APRIL 30, 2015 (DEPRECIATION)
---------- ------------ --------------- -------------- ---------------- ---------------- --------------
05/11/15 BNYM USD 498,547 CAD 566,030 $ 498,547 $ 469,078 $ 29,469
05/11/15 BNYM USD 2,250,241 EUR 1,794,143 2,250,241 2,014,845 235,396
--------------
Net unrealized appreciation (depreciation)........................................................ $ 264,865
==============
(a) Please see Portfolio of Investments for currency description.
Counterparty Abbreviations:
BNYM Bank of New York Mellon
Page 14 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF ASSETS AND LIABILITIES
APRIL 30, 2015 (UNAUDITED)
ASSETS:
Investments, at value
(Cost $181,951,118)......................................................................... $ 181,210,018
Cash........................................................................................... 2,531,181
Foreign currency (Cost $161,215)............................................................... 169,803
Unrealized appreciation on forward foreign currency contracts.................................. 264,865
Receivables:
Interest.................................................................................... 3,090,963
Investment securities sold.................................................................. 565,544
Dividends................................................................................... 5,025
Prepaid expenses............................................................................... 20,462
-------------
Total Assets................................................................................ 187,857,861
-------------
LIABILITIES:
Outstanding loan............................................................................... 52,850,000
Payables:
Investment securities purchased............................................................. 150,000
Investment advisory fees.................................................................... 138,155
Administrative fees......................................................................... 54,400
Audit and tax fees.......................................................................... 38,326
Printing fees............................................................................... 14,394
Custodian fees.............................................................................. 10,020
Transfer agent fees......................................................................... 7,880
Interest and fees on loan................................................................... 7,585
Legal fees.................................................................................. 6,447
Trustees' fees and expenses................................................................. 1,789
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 1,431
-------------
Total Liabilities........................................................................... 53,281,198
-------------
NET ASSETS..................................................................................... $ 134,576,663
=============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 189,158,694
Par value...................................................................................... 84,589
Accumulated net investment income (loss)....................................................... 7,319,953
Accumulated net realized gain (loss) on investments, forward foreign currency
contracts and foreign currency transactions.................................................. (61,518,480)
Net unrealized appreciation (depreciation) on investments, forward foreign
currency contracts and foreign currency translation.......................................... (468,093)
-------------
NET ASSETS..................................................................................... $ 134,576,663
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 15.91
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 8,458,869
=============
See Notes to Financial Statements Page 15
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
INVESTMENT INCOME:
Interest....................................................................................... $ 6,854,660
Dividends (net of foreign withholding tax of $948)............................................. 5,374
Other.......................................................................................... 7,800
-------------
Total investment income..................................................................... 6,867,834
-------------
EXPENSES:
Investment advisory fees....................................................................... 845,200
Interest and fees on loan...................................................................... 418,233
Administrative fees............................................................................ 87,269
Audit and tax fees............................................................................. 34,716
Printing fees.................................................................................. 34,535
Transfer agent fees............................................................................ 20,081
Custodian fees................................................................................. 12,187
Trustees' fees and expenses.................................................................... 9,175
Legal fees..................................................................................... 5,347
Financial reporting fees....................................................................... 4,625
Other.......................................................................................... 35,572
-------------
Total expenses.............................................................................. 1,506,940
-------------
NET INVESTMENT INCOME (LOSS)................................................................... 5,360,894
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on:
Investments................................................................................. 404,672
Forward foreign currency contracts.......................................................... 6,966
Foreign currency transactions............................................................... (29,789)
-------------
Net realized gain (loss)....................................................................... 381,849
-------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................. (6,024,434)
Forward foreign currency contracts.......................................................... 27,675
Foreign currency translation................................................................ 15,018
-------------
Net change in unrealized appreciation (depreciation)........................................... (5,981,741)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (5,599,892)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ (238,998)
=============
Page 16 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS
ENDED YEAR
4/30/2015 ENDED
(UNAUDITED) 10/31/2014
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 5,360,894 $ 11,670,244
Net realized gain (loss)............................................................ 381,849 (1,230,195)
Net change in unrealized appreciation (depreciation)................................ (5,981,741) (5,760,646)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... (238,998) 4,679,403
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (5,921,208) (10,063,829)
Return of capital................................................................... -- (2,116,942)
-------------- --------------
Total distributions to shareholders................................................. (5,921,208) (12,180,771)
-------------- --------------
Total increase (decrease) in net assets............................................. (6,160,206) (7,501,368)
NET ASSETS:
Beginning of period................................................................. 140,736,869 148,238,237
-------------- --------------
End of period....................................................................... $ 134,576,663 $ 140,736,869
============== ==============
Accumulated net investment income (loss) at end of period........................... $ 7,319,953 $ 7,880,267
============== ==============
COMMON SHARES:
Common Shares at end of period...................................................... 8,458,869 8,458,869
============== ==============
See Notes to Financial Statements Page 17
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY) STATEMENT OF CASH FLOWS FOR THE
SIX MONTHS ENDED APRIL 30, 2015 (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash flows from operating activities:
Net increase (decrease) in net assets resulting from operations $ (238,998)
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments...................................................... (22,372,619)
Sales, maturities and paydowns of investments................................. 29,829,219
Net amortization/accretion of premiums/discounts on investments............... (203,576)
Net realized gain/loss on investments......................................... (404,672)
Net change in unrealized appreciation/depreciation on forward foreign
currency contracts......................................................... (27,675)
Net change in unrealized appreciation/depreciation on investments............. 6,024,434
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable............................................... 300,664
Decrease in dividends receivable.............................................. 48,928
Increase in prepaid expenses.................................................. (12,994)
Increase in interest and fees on loan payable................................. 239
Decrease in investment advisory fees payable.................................. (13,804)
Decrease in audit and tax fees payable........................................ (31,874)
Increase in legal fees payable................................................ 2,771
Decrease in printing fees payable............................................. (6,621)
Increase in administrative fees payable....................................... 28,928
Increase in custodian fees payable............................................ 3,955
Increase in transfer agent fees payable....................................... 1,537
Increase in Trustees' fees and expenses payable............................... 274
Increase in other liabilities payable......................................... 644
--------------
CASH PROVIDED BY OPERATING ACTIVITIES............................................... $ 12,928,760
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders from net investment income............... (5,921,208)
Repayment of borrowing........................................................ (6,000,000)
--------------
CASH USED IN FINANCING ACTIVITIES................................................... (11,921,208)
--------------
Decrease in cash and foreign currency (a)........................................... 1,007,552
Cash and foreign currency at beginning of period.................................... 1,693,432
--------------
Cash and foreign currency at end of period.......................................... $ 2,700,984
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees................................... $ 417,994
==============
(a) Includes net change in unrealized appreciation (depreciation) on foreign
currency of $9,633.
Page 18 See Notes to Financial Statements
FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR
4/30/2015 ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 10/31/2014 10/31/2013 10/31/2012 10/31/2011 10/31/2010 (a) (b)
------------ ---------- ---------- ---------- ---------- -------------------
Net asset value, beginning of period...... $ 16.64 $ 17.52 $ 17.06 $ 16.17 $ 15.87 $ 14.22
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).............. 0.63 1.38 1.48 1.52 0.59 1.86
Net realized and unrealized gain (loss)... (0.66) (0.82) 0.43 0.90 0.32 1.17
-------- -------- -------- -------- -------- --------
Total from investment operations.......... (0.03) 0.56 1.91 2.42 0.91 3.03
-------- -------- -------- -------- -------- --------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income..................... (0.70) (1.19) (0.66) (0.61) (0.54) --
Return of capital......................... -- (0.25) 0.79) (0.94) (0.07) (1.38)
-------- -------- -------- -------- -------- --------
Total distributions....................... (0.70) (1.44) (1.45) (1.55) (0.61) (1.38)
-------- -------- -------- -------- -------- --------
Premiums from shares sold in at the
market offerings....................... -- -- 0.00 (c) 0.02 -- --
-------- -------- -------- -------- -------- --------
Net asset value, end of period............ $ 15.91 $ 16.64 $ 17.52 $ 17.06 $ 16.17 $ 15.87
======== ======== ======== ======== ======== ========
Market value, end of period............... $ 14.21 $ 15.60 $ 15.97 $ 17.69 $ 4.51 $ 14.49
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON NET ASSET
VALUE (d).............................. 0.33% 4.03% 12.19% 16.11% 13.60% 23.46%
======== ======== ======== ======== ======== ========
TOTAL RETURN BASED ON MARKET
VALUE (d).............................. (4.42)% 6.99% (1.38)% 34.16% 11.64% 21.71%
======== ======== ======== ======== ======== ========
-----------------------------
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTAL DATA:
Net assets, end of period (in 000's)...... $134,577 $140,737 $148,238 $144,205 $131,109 $ 50,468
Ratio of total expenses to average net
assets................................. 2.26% (e) 2.34% 2.22% 2.52% 2.35% 2.29%
Ratio of total expenses to average net
assets excluding interest expense......... 1.63% (e) 1.77% 1.71% 1.93% 1.93% 2.21%
Ratio of net investment income (loss)
to average net assets.................. 8.04% (e) 8.00% 8.55% 9.52% 9.65% 12.54%
Portfolio turnover rate................... 12% 28% 27% 33% 49% 332% (f)
INDEBTEDNESS:
Total loan outstanding (in 000's)......... $ 52,850 $ 58,850 $ 55,400 $ 54,400 $ 54,400 N/A
Asset coverage per $1,000 of
indebtedness (g)....................... $ 3,546 $ 3,391 $ 3,676 $ 3,651 $ 3,410 N/A
-----------------------
(a) On September 20, 2010, the Fund's Board of Trustees approved a new
investment management agreement with First Trust Advisors L.P. and a new
sub-advisory agreement with Brookfield Investment Management Inc.
("Brookfield"), and on December 20, 2010, the shareholders voted to
approve both agreements.
(b) All share amounts, net asset values and market values have been adjusted
as a result of the 1-for-3 reverse share split on September 30, 2011.
(c) Amount represents less than $0.01 per share.
(d) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions,if any, at prices obtained by the
Dividend Reinvestment Plan, and changes in net asset value per share for
net asset value returns and changes in Common Share price for market value
returns. Total returns do not reflect sales load and are not annualized
for periods less than one year. Past performance is not indicative of
future results.
(e) Annualized.
(f) For the fiscal year ended October 31, 2010, the Fund's portfolio turnover
rate reflects mortgage pool forward commitments as purchases and sales.
This caused the reported portfolio turnover rate to be higher than in
subsequent fiscal years. The turnover rate may vary greatly from year to
year as well as within a year.
(g) Calculated by subtracting the Fund's total liabilities (not including the
loan outstanding) from the Fund's total assets, and dividing by the
outstanding loan balance in 000's.
N/A Not applicable.
See Notes to Financial Statements Page 19
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NOTES TO FINANCIAL STATEMENTS
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
1. ORGANIZATION
First Trust Strategic High Income Fund II (the "Fund") is a diversified,
closed-end management investment company organized as a Massachusetts business
trust on January 18, 2006, and is registered with the Securities and Exchange
Commission ("SEC") under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund trades under the ticker symbol "FHY" on the New York Stock
Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. The Fund seeks capital growth as a secondary objective. The Fund seeks
to achieve its investment objectives by investing in a diversified portfolio of
below-investment grade and investment grade debt securities, and equity
securities that Brookfield Investment Management Inc. ("Brookfield" or the
"Sub-Advisor") believes offer attractive yield and/or capital appreciation
potential. The Fund may invest up to 100% of its Managed Assets in
below-investment grade debt securities (commonly referred to as "high-yield" or
"junk" bonds). Managed Assets means the average daily total asset value of the
Fund minus the sum of the Fund's liabilities other than the principal amount of
borrowings or reverse repurchase agreements, if any. There can be no assurance
that the Fund will achieve its investment objectives. The Fund may not be
appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America ("U.S. GAAP") requires
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements. Actual results could differ from
those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined
daily, as of the close of regular trading on the NYSE, normally 4:00 p.m.
Eastern time, on each day the NYSE is open for trading. If the NYSE closes early
on a valuation day, the NAV is determined as of that time. Domestic debt
securities and foreign securities are priced using data reflecting the earlier
closing of the principal markets for those securities. The NAV per Common Share
is calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
Corporate bonds, notes, U.S. government securities, mortgage-backed
securities, asset-backed securities and other debt securities are fair
valued on the basis of valuations provided by dealers who make markets in
such securities or by an independent pricing service approved by the
Fund's Board of Trustees, which may use the following valuation inputs
when available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The NASDAQ(R) Stock Market LLC ("NASDAQ") and
the London Stock Exchange Alternative Investment Market ("AIM")) are
valued at the last sale price on the exchange on which they are
principally traded or, for NASDAQ and AIM securities, the official closing
price. Securities traded on more than one securities exchange are valued
at the last sale price or official closing price, as applicable, at the
close of the securities exchange representing the principal market for
such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Page 20
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
The Senior Floating-Rate Loan interests ("Senior Loans")(1) held in the
Fund are not listed on any securities exchange or board of trade. Senior
Loans are typically bought and sold by institutional investors in
individually negotiated private transactions that function in many
respects like an over-the-counter secondary market, although typically no
formal market-makers exist. This market, while having grown substantially
since its inception, generally has fewer trades and less liquidity than
the secondary market for other types of securities. Some Senior Loans have
few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the market value of Senior Loans may be
based on infrequent and dated information. Because there is less reliable,
objective data available, elements of judgment may play a greater role in
valuation of Senior Loans than for other types of securities. Typically,
Senior Loans are fair valued using information provided by a third party
pricing service. The third party pricing service primarily uses
over-the-counter pricing from dealer runs and broker quotes from
indicative sheets to value the Senior Loans.
Forward foreign currency contracts are fair valued at the current day's
interpolated foreign exchange rate, as calculated using the current day's
spot rate, and the thirty, sixty, ninety, and one-hundred eighty day
forward rates provided by an independent pricing service.
Fixed income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto; 2)
the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. The use of fair value prices by the Fund
generally results in prices used by the Fund that may differ from current market
quotations or official closing prices on the applicable exchanges. A variety of
factors may be considered in determining the fair value of such securities,
including, but not limited to, the following:
1) the fundamental business data relating to the borrower/issuer;
2) an evaluation of the forces which influence the market in which
these securities are purchased and sold;
3) the type, size and cost of a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Sub-Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
7) the price and extent of public trading in similar securities (or
equity securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing
the security;
10) the business prospects of the borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) the borrower's/issuer's competitive position within the industry;
13) the borrower's/issuer's ability to access additional liquidity
through public and/or private markets; and
14) other relevant factors.
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include Senior Loans.
Page 21
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
The Fund invests a significant portion of its assets in below-investment grade
debt securities, including structured finance securities and corporate bonds.
Structured finance securities include: asset-backed securities, including home
equity, manufactured housing, etc.; commercial mortgage-backed securities;
residential mortgage-backed or private-label collateralized mortgage
obligations; and collateralized debt obligations. The value and related income
of these securities is sensitive to changes in economic conditions, including
delinquencies and/or defaults.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical investments. An active market is a market in which
transactions for the investment occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
investment (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of April 30, 2015, is
included with the Fund's Portfolio of Investments.
B. SECURITIES TRANSACTIONS AND INVESTMENT INCOME:
Securities transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded daily on the accrual basis. Amortization of premiums
and accretion of discounts are recorded using the effective interest method.
The Fund invests in certain lower credit quality securitized assets (for
example, asset-backed securities, collateralized mortgage obligations and
commercial mortgage-backed securities), as well as interest-only securities,
that have contractual cash flows. For these securities, if there is a change in
the estimated cash flows, based on an evaluation of current information, then
the estimated yield is adjusted. Additionally, if the evaluation of current
information indicates a permanent impairment of the security, the cost basis of
the security is written down and a loss is recognized. Debt obligations may be
placed on non-accrual status, and related interest income may be reduced by
ceasing current accruals and amortization/accretion and writing off interest
receivables when the collection of all or a portion of interest has become
doubtful based on consistently applied procedures. A debt obligation is removed
from non-accrual status when the issuer resumes interest payments or when
collectability of interest is reasonably assured.
Securities purchased on a when-issued, delayed-delivery or forward purchase
commitment basis may have extended settlement periods. The value of the security
so purchased is subject to market fluctuations during this period. The Fund
maintains liquid assets with a current value at least equal to the amount of its
when-issued, delayed-delivery or forward purchase commitments until payment is
made. At April 30, 2015, the Fund had no when-issued, delayed-delivery or
forward purchase commitments.
C. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the 1933 Act. Prior
to registration, restricted securities may only be resold in transactions exempt
from registration under Rule 144A under the 1933 Act, normally to qualified
institutional buyers. As of April 30, 2015, the Fund held restricted securities
as shown in the following table that the Sub-Advisor has deemed illiquid
pursuant to procedures adopted by the Fund's Board of Trustees. Although market
instability can result in periods of increased overall market illiquidity,
liquidity for each security is determined based on security-specific factors and
assumptions, which require subjective judgment. The Fund does not have the right
to demand that such securities be registered. These securities are valued
according to the valuation procedures as stated in the Portfolio Valuation note
(Note 2A) and are not expressed as a discount to the carrying value of a
comparable unrestricted security. There are no unrestricted securities with the
same maturity dates and yields for these issuers.
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
% OF
ACQUISITION PRINCIPAL CARRYING NET
SECURITY DATE VALUE/SHARES PRICE COST VALUE ASSETS
------------------------------------------------------------------------------------------------------------------------
Preferred Term Securities XXV, Ltd.
Zero Coupon, 06/22/37 03/27/07 $ 5,750,000 0.00* $ -- $ 449 0.00%**
Preferred Term Securities XXVI, Ltd.
Subordinated Note, Zero Coupon, 09/22/37 06/06/07 $ 2,500,000 0.00* -- 1,5630.00 0.00 **
Soloso CDO, Ltd., Series 2005-1 04/24/06 4,000 0.625 -- 2,5000.00 0.00 **
---------- --------- ----------
$ -- $ 4,512 0.00%
========== ========= ==========
* Amount is less than $0.01.
** Amount is less than 0.01%.
D. INTEREST-ONLY SECURITIES:
An interest-only security ("IO Security") is the interest-only portion of a
mortgage-backed security that receives some or all of the interest portion of
the underlying mortgage-backed security and little or no principal. A reference
principal value called a notional value is used to calculate the amount of
interest due to the IO Security. IO Securities are sold at a deep discount to
their notional principal amount. Generally speaking, when interest rates are
falling and prepayment rates are increasing, the value of an IO Security will
fall. Conversely, when interest rates are rising and prepayment rates are
decreasing, generally the value of an IO Security will rise. These securities,
if any, are identified on the Portfolio of Investments.
E. COLLATERALIZED DEBT OBLIGATIONS:
A collateralized debt obligation ("CDO") is an asset-backed security whose
underlying collateral is typically a portfolio of bonds or bank loans. Where the
underlying collateral is a portfolio of bonds, a CDO is referred to as a
collateralized bond obligation ("CBO"). Where the underlying collateral is a
portfolio of bank loans, a CDO is referred to as a collateralized loan
obligation ("CLO"). Investors in CDOs bear the credit risk of the underlying
collateral. Multiple tranches of securities are issued by the CDO, offering
investors various maturity and credit risk characteristics. Tranches are
categorized as senior, mezzanine, and subordinated/equity, according to their
degree of risk. If there are defaults or the CDO's collateral otherwise
underperforms, scheduled payments to senior tranches take precedence over those
of mezzanine tranches, and scheduled payments to mezzanine tranches take
precedence over those to subordinated/equity tranches. CDOs, similar to other
asset-backed securities, are subject to prepayment risk.
F. FORWARD FOREIGN CURRENCY CONTRACTS:
The Fund is subject to foreign currency risk in the normal course of pursuing
its investment objectives. Forward foreign currency contracts are agreements
between two parties ("Counterparties") to exchange one currency for another at a
future date and at a specified price. The Fund uses forward foreign currency
contracts to facilitate transactions in foreign securities and to manage the
Fund's foreign currency exposure. These contracts are valued daily, and the
Fund's net equity therein, representing unrealized gain or loss on the contracts
as measured by the difference between the forward foreign exchange rates at the
dates of entry into the contracts and the forward rates at the reporting date,
is included in "Unrealized appreciation on forward foreign currency contracts"
on the Statement of Assets and Liabilities. When the forward contract is closed,
the Fund records a realized gain or loss equal to the difference between the
proceeds from (or the cost of) the closing transaction and the Fund's basis in
the contract. This realized gain or loss is included in "Net realized gain
(loss) on forward foreign currency contracts" on the Statement of Operations.
Risks arise from the possible inability of counterparties to meet the terms of
their contracts and from movement in currency and securities values and interest
rates. Due to the risks, the Fund could incur losses in excess of the net
unrealized value shown on the Forward Foreign Currency Contracts table in the
Portfolio of Investments. In the event of default by the Counterparty, the Fund
will provide notice to the Counterparty of the Fund's intent to convert the
currency held by the Fund into the currency that the Counterparty agreed to
exchange with the Fund. If a Counterparty becomes bankrupt or otherwise fails to
perform its obligations due to financial difficulties, the Fund may experience
significant delays in obtaining any recovery in a bankruptcy or other
reorganization proceeding. The Fund may obtain only limited recovery or may
obtain no recovery in such circumstances.
G. FOREIGN CURRENCY:
The books and records of the Fund are maintained in U.S. dollars. Foreign
currencies, investments and other assets and liabilities are translated into
U.S. dollars at the exchange rates prevailing at the end of the period.
Purchases and sales of investments and items of income and expense are
translated on the respective dates of such transactions. Unrealized gains and
losses on assets and liabilities, other than investments in securities, which
result from changes in foreign currency exchange rates have been included in
"Net change in unrealized appreciation (depreciation) on foreign currency
translation" on the Statement of Operations. Unrealized gains and losses on
investments in securities which result from changes in foreign exchange rates
are included with fluctuations arising from changes in market price and are
shown in "Net change in unrealized appreciation (depreciation) on investments"
on the Statement of Operations. Net realized foreign
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
currency gains and losses include the effect of changes in exchange rates
between trade date and settlement date on investment security transactions,
foreign currency transactions and interest and dividends received. The portion
of foreign currency gains and losses related to fluctuation in exchange rates
between the initial purchase trade date and subsequent sale trade date is
included in "Net realized gain (loss) on foreign currency transactions" on the
Statement of Operations.
H. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions will automatically be
reinvested into additional Common Shares pursuant to the Fund's Dividend
Reinvestment Plan unless cash distributions are elected by the shareholder.
Distributions from income and capital gains are determined in accordance with
income tax regulations, which may differ from U.S. GAAP. Certain capital
accounts in the financial statements are periodically adjusted for permanent
differences in order to reflect their tax character. These permanent differences
are primarily due to the varying treatment of income and gain/loss on portfolio
securities held by the Fund and have no impact on net assets or NAV per share.
Temporary differences, which arise from recognizing certain items of income,
expense and gain/loss in different periods for financial statement and tax
purposes, will reverse at some point in the future.
The tax character of distributions paid during the fiscal year ended October 31,
2014 was as follows:
Distributions paid from:
Ordinary income.................................. $ 10,063,829
Capital gain..................................... --
Return of capital................................ 2,116,943
As of October 31, 2014, the distributable earnings and net assets on a tax basis
were as follows:
Undistributed ordinary income.................... $ --
Undistributed capital gains...................... --
--------------
Total undistributed earnings..................... --
Accumulated capital and other losses............. (34,094,115)
Net unrealized appreciation (depreciation)....... (14,412,299)
--------------
Total accumulated earnings (losses).............. (48,506,414)
Other............................................ --
Paid-in capital.................................. 189,243,283
--------------
Net assets....................................... $ 140,736,869
==============
I. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 22, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward up
to eight years and treated as short-term losses. As a transition rule, the Act
requires that post-enactment net capital losses be used before pre-enactment net
capital losses. At October 31, 2014, for federal income tax purposes, the Fund
had capital loss carryforwards available that are shown in the table below, to
the extent provided by regulations, to offset future capital gains through the
years indicated. To the extent that these loss carryforwards are used to offset
future capital gains, it is probable that the capital gains offset will not be
distributed to Fund shareholders.
CAPITAL LOSS CAPITAL LOSS CAPITAL LOSS
AVAILABLE AVAILABLE AVAILABLE POST EFFECTIVE - TOTAL CAPITAL
THROUGH 2017 THROUGH 2018 THROUGH 2019 NO EXPIRATION LOSS AVAILABLE
-------------- -------------- -------------- ---------------- ---------------
$ 5,621,803 $ 15,342,938 $ 7,053,888 $ 6,075,486 $ 34,094,115
Of these losses, $27,984,014 is subject to loss limitations resulting from
reorganization activity. These limitations generally reduce the utilization of
these losses to a maximum of $4,318,194 per year.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
The Fund is subject to certain limitations under the U.S. tax rules on the use
of capital loss carryforwards and net unrealized built-in losses. These
limitations apply when there has been a 50% change in ownership.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2011, 2012,
2013 and 2014 remain open to federal and state audit. As of April 30, 2015,
management has evaluated the application of these standards to the Fund and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
J. EXPENSES:
The Fund will pay all expenses directly related to its operations.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the ongoing monitoring of the Fund's investment
portfolio, managing the Fund's business affairs and providing certain
administrative services necessary for the management of the Fund. For these
investment management services, First Trust is entitled to a monthly fee
calculated at an annual rate of 0.90% of the Fund's Managed Assets. First Trust
also provides fund reporting services to the Fund for a flat annual fee in the
amount of $9,250.
Brookfield serves as the Fund's sub-advisor and manages the Fund's portfolio
subject to First Trust's supervision. The Sub-Advisor receives a portfolio
management fee at an annual rate of 0.45% of Managed Assets that is paid by
First Trust from its investment advisory fee.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated pro rata among each fund in the First Trust Fund
Complex based on net assets. Each Independent Trustee is also paid an annual per
fund fee that varies based on whether the fund is a closed-end or other actively
managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
additional annual fees to serve in such capacities, with such compensation
allocated pro rata among each fund in the First Trust Fund Complex based on net
assets. Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Trust for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of securities, excluding
short-term investments, for the six months ended April 30, 2015, were
$22,522,619 and $30,394,763, respectively.
5. DERIVATIVES TRANSACTIONS
The following table presents the type of derivative held by the Fund at April
30, 2015, the primary underlying risk exposure and the location of these
instruments as presented on the Statement of Assets and Liabilities.
ASSET DERIVATIVES LIABILITY DERIVATIVES
-------------------------------------- --------------------------------------
DERIVATIVE STATEMENT OF ASSETS AND STATEMENT OF ASSETS AND
INSTRUMENT RISK EXPOSURE LIABILITIES LOCATION FAIR VALUE LIABILITIES LOCATION FAIR VALUE
------------------ --------------- -------------------------- ---------- -------------------------- ----------
Unrealized appreciation on Unrealized depreciation on
Forward foreign forward foreign currency forward foreign currency
currency contracts Currency Risk contracts $ 264,865 contracts $ --
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
The following table presents the amount of net realized gain (loss) and change
in net unrealized appreciation (depreciation) recognized for the six months
ended April 30, 2015, on derivative instruments, as well as the primary
underlying risk exposure associated with each instrument.
STATEMENT OF OPERATIONS LOCATION
--------------------------------------------------------------------------------
CURRENCY RISK EXPOSURE
Net realized gain (loss) on forward foreign currency contracts $ 6,966
Net change in unrealized appreciation (depreciation) on forward
foreign currency contracts 27,675
During the six months ended April 30, 2015, the notional values of forward
foreign currency contracts opened and closed were $2,748,788 and $3,716,513,
respectively.
6. BORROWINGS
The Fund entered into a committed facility agreement with BNP Paribas Prime
Brokerage Inc. ("BNP") that has a maximum commitment amount of $66,000,000.
Absent certain events of default or failure to maintain certain collateral
requirements, BNP may not terminate the committed facility agreement except upon
180 calendar days' prior notice. Effective July 24, 2013, $13,850,000 of the
commitment was converted to fixed-rate financing of 2.79% for a seven-year
period. The borrowing rate on the floating rate financing amount is equal to
1-month LIBOR plus 70 basis points. Under the facility, the Fund pays a
commitment fee of 0.80% on the undrawn amount of such facility.
The average amount outstanding for the six months ended April 30, 2015 was
$54,805,801 with a weighted average interest rate of 1.35%. As of April 30,
2015, the Fund had outstanding borrowings of $52,850,000 under this committed
facility agreement. On the floating rate financing amount, the high and low
annual interest rates for the six months ended April 30, 2015 were 0.88% and
0.85%, respectively. The weighted average interest rate at April 30, 2015 was
1.38%.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On May 20, 2015, the Fund declared a distribution of $0.11 per share to Common
Shareholders of record on June 3, 2015, payable June 15, 2015.
Page 26
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ADDITIONAL INFORMATION
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation, the
Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 27
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Joint Annual Meeting of Shareholders of the Common Shares of Macquarie/First
Trust Global Infrastructure/Utilities Dividend & Income Fund, First Trust Energy
Income and Growth Fund, First Trust Enhanced Equity Income Fund, First
Trust/Aberdeen Global Opportunity Income Fund, First Trust Mortgage Income Fund,
First Trust Strategic High Income Fund II, First Trust/Aberdeen Emerging
Opportunity Fund, First Trust Specialty Finance and Financial Opportunities
Fund, First Trust Dividend and Income Fund, First Trust High Income Long/Short
Fund, First Trust Energy Infrastructure Fund, First Trust MLP and Energy Income
Fund, First Trust Intermediate Duration Preferred & Income Fund and First Trust
New Opportunities MLP & Energy Fund was held on April 20, 2015 (the "Annual
Meeting"). At the Annual Meeting, Richard E. Erickson and Thomas R. Kadlec were
elected by the Common Shareholders of the First Trust Strategic High Income Fund
II as the Class II Trustees for a three-year term expiring at the Fund's annual
meeting of shareholders in 2018. The number of votes cast in favor of Mr.
Erickson was 7,013,790, the number of votes against was 287,582 and the number
of broker non-votes was 1,157,497. The number of votes cast in favor of Mr.
Kadlec was 7,013,400, the number of votes against was 287,972 and the number of
broker non-votes was 1,157,497. James A. Bowen , Robert F. Keith and Niel B.
Nielson are the other current and continuing Trustees.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the 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, including the risk that borrowers do not pay
their mortgages. 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 Advisor or
Sub-Advisor may take temporary defensive positions.
RESIDENTIAL MORTGAGE-BACKED SECURITIES RISK: MBS's 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
the Fund buys MBS's 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
MBS's 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 MBS's 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, MBS's 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. The Fund may also invest in MBS's which are interest-only
securities ("IO") 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 will fall and the value of an IO security will rise. In
addition to the foregoing, residential MBS's are subject to additional risks,
including, but not limited to: (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
Page 28
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
trust; and (iii) depending on the length of a residential mortgage obligation
underling a residential MBS, unscheduled or early payments of principal and
interest may shorten the security's effective maturity and 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: The Sub-Advisor focuses the Fund's investments on
securities that they believe 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: The 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, an investment in the 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: The 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. The Fund may be required to
incur certain extraordinary expenses in order to protect and recover its
investment. Therefore, to the extent the Sub-Advisor seeks capital appreciation
through investment in distressed securities; the 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, the Sub-Advisor 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 proceeds from matured, traded or called
bonds are reinvested at market interest rates that are below the 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 reinvestment 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: The Fund's portfolio 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.
LEVERAGE RISK: The Fund may borrow an amount up to 33-1/3% (or such other
percentage as permitted by law) of its assets (including the amount borrowed)
less liabilities other than borrowings. The Fund may use leverage for investment
purposes and to meet cash requirements. Its leveraged capital structure creates
special risks not associated with unleveraged funds having similar investment
objectives and policies. These include the possibility of higher volatility of
the NAV of the Fund. The Fund previously leveraged its assets through the use of
reverse repurchase agreements. Reverse repurchase agreements are subject to the
risks that the market value of the securities sold by the Fund may decline below
the price of the securities the Fund is obligated to repurchase, and that the
securities may not be returned to the Fund. The Fund may from time to time
consider changing the amount of the leverage in response to actual or
anticipated changes in interest rates or the value of the Fund's investment
portfolio. There can be no assurance that the leverage strategies will be
successful.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
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FIRST TRUST STRATEGIC HIGH INCOME FUND II (FHY)
APRIL 30, 2015 (UNAUDITED)
FOREIGN SECURITIES RISK: The Fund may invest in securities (equity or debt) of
foreign issuers. Investing in securities of foreign issuers, which are generally
denominated in foreign currencies, may involve certain risks not typically
associated with investing in securities of U.S. issuers. These risks include:
(i) there may be less publicly available information about foreign issuers or
markets due to less rigorous disclosure or accounting standards or regulatory
practices; (ii) foreign markets may be smaller, less liquid and more volatile
than the U.S. market; (iii) potential adverse effects of fluctuations in
currency exchange rates or controls on the value of the Fund's investments; (iv)
the economies of foreign countries may grow at slower rates than expected or may
experience a downturn or recession; (v) the impact of economic, political,
social or diplomatic events; (vi) certain foreign countries may impose
restrictions on the ability of foreign issuers to make payments of principal and
interest to investors located in the United States due to blockage of foreign
currency exchanges or otherwise; and (vii) withholding and other foreign taxes
may decrease the Fund's return. These risks may be more pronounced to the extent
that the Fund invests a significant amount of its assets in companies located in
one region and to the extent that the Fund invests in securities of issuers in
emerging markets.
Page 30
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FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
INVESTMENT SUB-ADVISOR
Brookfield Investment Management Inc.
Brookfield Place
250 Vesey Street, 15th Floor
New York, NY 10281
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[BLANK BACK COVER]
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of
the close of the reporting period is included as part of the report
to shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the
portfolios managers identified in response to paragraph (a)(1) of this Item in
the Registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(1)(a) Not applicable.
(2)(a) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(3)(a) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Strategic High Income Fund II
-------------------------------------------------------
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 22, 2015
--------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Mark R. Bradley
----------------------------------------
Mark R. Bradley, President and
Chief Executive Officer
(principal executive officer)
Date: June 22, 2015
--------------------
By (Signature and Title)* /s/ James M. Dykas
----------------------------------------
James M. Dykas, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: June 22, 2015
--------------------
* Print the name and title of each signing officer under his or her signature.