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risk, while focusing on optimization of return relative to appropriate benchmarks. We constantly monitor the holdings in the portfolio and conduct daily, weekly and monthly meetings with portfolio managers and analysts, as well as with borrowers and loan sponsors.

    Utilizing our proprietary risk rating system, our analysts assign, continuously monitor and update probability of default and expected recovery ratings for every asset in the portfolio. Using the resulting risk-adjusted returns, analysts monitor positions relative to market levels to detect early sell signals in an attempt to minimize principal loss and maximize relative value.

 

 

Market conditions and your Trust

For the fiscal year ended February 28, 2013, the senior secured loan market, while experiencing periods of volatility, generated strong returns. During much of the first half of the reporting period, senior loans moved in lock-step with equities and other risk assets as correlation among these asset classes increased. This phenomenon was driven by sympathy to concerns about the eurozone and associated market volatility. At other times, however, loan correlations to the broader financial markets declined when investors adopted a “risk on” appetite, as loan prices were less reactive to macro-economic headlines from abroad. As the fiscal year progressed, the trend toward higher correlations reversed, and for the first time since the summer of 2007, price volatility of senior secured loans declined as collateralized loan obligation (CLO) issuance, a factor largely missing from the loan market since 2007, created stable demand for loans.

    The US Federal Reserve’s (the Fed) assurance to keep interest rates low through 2014 (and likely beyond) generally dampened demand for senior loan funds from retail investors in the first half of the reporting period; however, increased institutional demand, in the form of CLO buying and unlevered strategic allocations, remained strong. Due to

 

Portfolio Composition1
By credit quality, based on total investments
BBB				2.2	%
BB				30.5
B				53.6
CCC				5.0
D				0.5
Not Rated				7.2
Equity				1.0

Top Five Fixed Income Issuers
1.  Caesars Entertainment Operating Co.				3.1	%
2.  Reynolds Group Holdings Inc.				2.0
3.  Texas Competitive         Electric Holdings Co., LLC				2.0
4.  First Data Corp.				2.0
5.  Clear Channel Communications, Inc.				2.0

Total Net Assets				$930.4 million
Total Number of Holdings*				486

The Trust’s holdings are subject to change, and there is no assurance that the Trust will continue to hold any particular security.

*	Excluding money market fund holdings

 

the competitive yields offered by senior secured loans and an improving economic outlook, interest from retail investors picked up as the year progressed.

    Corporate issuers in the senior secured loan market have benefited from robust capital markets in the recent past, and during the reporting period, many corporate issuers maintained generally good credit performance, strengthened their balance sheets, improved liquidity and addressed near-term maturities. Over the reporting period, the default rate rose slightly, but at the close of the reporting period, loan defaults remained comfortably below historical averages.²

    One of the unique features of the senior secured loan asset class is that it provides investors with a positive component when interest rates are rising. The London Interbank Offered Rate (Libor) component of a senior secured loan interest payment is reset according to the loan contract – typically every 30 to 90 days – so investors may benefit from future increases in interest rates with little or no corresponding price exposure. The historically low Libor rates we have seen of late have had a negative impact on the performance of the senior secured loan asset class. We expect these rates will likely increase at some point in the future. However, the Fed has maintained an accommodative monetary policy amid concerns of a slowing economic recovery.

    With 2012 being a year of stability and “risk on” throughout the capital markets, we sought to be prudent in positioning the Trust with respect to credit quality and leverage. During the year, we continued to favor B-rated¹ credits given our view that the economic recovery was likely to hold but not be robust. At the same time, we held our leverage targets relatively constant throughout the year. In terms of specific credit holdings, our decision to exit many of the print media names hurt Trust performance relative to the CS Leveraged Loan Index. In comparison, most of our competitors had largely exited from these distressed holdings, and thus we do not believe our decision was harmful to shareholders. At the same time, our decision to hold onto, and at times add to Tribune (also in the media industry) was, we believed, the correct decision for the Trust’s investors. With respect to individual sectors, we ended the reporting period underweight the benchmark in health care, given our view that this sector is “priced for perfection” and yet is facing the possibility of systemic structural changes associated with changes in reimbursement.

    One important factor affecting the return of the Trust relative to its comparative index was the Trust’s use of financial leverage through the use of bank borrowings and Variable Rate Term Preferred (VRTP) shares. As of the close of the reporting period, leverage accounted for 26% of the Trust’s net asset value plus borrowings and VRTP shares.

    The Trust uses leverage because we believe that, over time, leveraging can provide opportunities for additional income and total return for shareholders. However, the use of leverage also can expose shareholders to additional volatility. For example, if the prices of securities held by a trust decline, the negative impact of these valuation changes on share NAV and shareholder total return is magnified by the use of leverage. Conversely, leverage may enhance share returns during periods when the prices of securities held by a trust generally are rising.

    During the reporting period, the Trust used leverage, which enhanced returns as loan prices increased during the reporting period. Leverage involves borrowing at a floating short-term rate and reinvesting the proceeds at a higher rate. Unlike other fixed income asset classes, using leverage in conjunction with senior loans does not involve the same degree of risk from rising short-term interest rates since the income from senior loans generally adjusts to changes in interest rates, as do the rates which determine the Trust’s borrowing costs. However, as mentioned earlier, the use of leverage can increase the Trust’s volatility. For more information about the Trust’s use of leverage, see the Notes to Financial Statements later in this report.

    The Trust uses derivatives as part of implementing its investment strategy. A derivative instrument is a security whose value is derived from the value of an underlying asset, reference rate or index. The Trust uses derivative instruments for a variety of reasons, such as to attempt to protect against possible changes in market value or in an effort to generate a gain. During the period reported, the Trust had exposure to credit default swaps in an effort to gain credit exposure. Using credit default swaps can be more liquid and cost effective than buying individual bonds or loans. While total exposure to credit default swaps was small relative to the Trust’s total assets, the impact of these transactions was favorable to overall results.

    As always, we appreciate your continued participation in Invesco Senior Income Trust.

 

1

Standard & Poor’s. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest); ratings are subject to change without notice. “Non-Rated” indicates the debtor was not rated, and should not be interpreted as indicating low quality. For more information on Standard & Poor’s rating methodology, please visit standardandpoors.com and select “Understanding Ratings” under Rating Resources on the homepage.

2	Source: Standard & Poor’s LCD

The views and opinions expressed in management’s discussion of Trust performance are those of Invesco Advisers, Inc. These views and opinions are subject to change at any time based on factors such as market and economic conditions. These views and opinions may not be relied upon as investment advice or recommendations, or as an offer for a particular security. The information is not a complete analysis of every aspect of any market, country, industry, security or the Trust. Statements of fact are from sources considered reliable, but Invesco Advisers, Inc. makes no representation or warranty as to their completeness or accuracy. Although historical performance is no guarantee of future results, these insights may help you understand our investment management philosophy.

See important Trust and, if applicable, index disclosures later in this report.

 

		Thomas Ewald Portfolio manager, is manager of Invesco Senior Income Trust. He has been associated with Invesco
or its investment advisory affiliates since 2000 and began managing the Trust in 2010. He earned a BA from Harvard College and an MBA from University of Virginia Darden School of Business.

 

		Philip Yarrow Chartered Financial Analyst, portfolio manager, is manager of Invesco Senior Income Trust. He joined Invesco in 2010. Mr.
Yarrow was associated with the Trust’s previous investment adviser or its investment advisory affiliates in an investment management capacity from 2005 to 2010 and began managing the Trust in 2007. He earned a BS in mathematics and economics from the University of Nottingham and a Master of Management degree in finance from Northwestern University.

Effective April 29, 2013, Scott Baskind joined the portfolio management team.

 

 

About indexes used in this report

n

The CS Leveraged Loan Index represents tradable, senior-secured, US-dollar-denominated, non-investment-grade loans.

n

The Trust is not managed to track the performance of any particular index, including the index(es) described here, and consequently, the performance of the Trust may deviate significantly from the performance of the index(es).

n

A direct investment cannot be made in an index. Unless otherwise indicated, index results include reinvested dividends, and they do not reflect sales charges. Performance of the peer group, if applicable, reflects trust expenses; performance of a market index does not.

 

 

Other information

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The returns shown in management’s discussion of Trust performance are based on net asset values calculated for shareholder transactions. Generally accepted accounting principles require adjustments to be made to the net assets of the Trust at period end for financial reporting purposes, and as such, the net asset values for shareholder transactions and the returns based on those net asset values may differ from the net asset values and returns reported in the Financial Highlights.

 

 

NOT FDIC INSURED | MAY LOSE VALUE | NO BANK GUARANTEE

 

NYSE Symbol		VVR

 

 

Plan benefits

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Add to your account:

You may increase the amount of shares in your Trust easily and automatically with the Plan.

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Low transaction costs:

Transaction costs are low because the new shares are generally bought in blocks and the per share fee is shared among all participants.

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Convenience:

You will receive a detailed account statement from Computershare Trust Company, N.A. (the Agent) which administers the Plan. The statement shows your total Distributions, date of investment, shares acquired, and price per share, as well as the total number of shares in your reinvestment account. You can also access your account at invesco.com/us.

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Safekeeping:

The Agent will hold the shares it has acquired for you in safekeeping.

 

 

How to participate in the Plan

If you own shares in your own name, you can participate directly in the Plan. If your shares are held in “street name” – in the name of your brokerage firm, bank, or other financial institution – you must instruct that entity to participate on your behalf. If they are unable to participate on your behalf, you may request that they reregister your shares in your own name so that you may enroll in the Plan.

 

 

How to enroll

To enroll in the Plan, please read the Terms and Conditions in the Plan Brochure. You can enroll in the Plan by visiting invesco.com/us, calling toll-free 800 341 2929 or notifying us in writing at Invesco Closed-End Funds, Computershare Trust Company, N.A., P.O. Box 43078, Providence, Rl 02940-3078. Please include your Trust name and account number and ensure that all shareholders listed on the account sign these written instructions. Your participation in the Plan will begin with the next Distribution payable after the Agent receives your authorization, as long as they receive it before the “record date,” which is generally 10 business days before such dividend is paid. If your authorization arrives after such record date, your participation in the Plan will begin with the following Distributions.

 

How the Plan Works

If you choose to participate in the Plan, whenever your Trust declares such Distributions, it will be invested in additional shares of your Trust that are purchased on the open market.

 

 

Costs of the Plan

There is no direct charge to you for reinvesting Distributions because the Plan’s fees are paid by your Trust. However, you will pay your portion of any per share fees incurred when the new shares are purchased on the open market. These fees are typically less than the standard brokerage charges for individual transactions, because shares are purchased for all Participants in blocks, resulting in lower fees for each individual Participant. Any per share or service fees are added to the purchase price. Per share fees include any applicable brokerage commissions the Agent is required to pay.

 

 

Tax implications

The automatic reinvestment of Distributions does not relieve you of any income tax that may be due on Distributions. You will receive tax information annually to help you prepare your federal income tax return.

Invesco does not offer tax advice. The tax information contained herein is general and is not exhaustive by nature. It was not intended or written to be used, and it cannot be used, by any taxpayer for avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Federal and state tax laws are complex and constantly changing. Shareholders should always consult a legal or tax adviser for information concerning their individual situation.

 

 

How to withdraw from the Plan

You may withdraw from the Plan at any time by calling 800 341 2929, visiting invesco.com/us or by writing to Invesco Closed-End Funds, Computershare Trust Company, N.A., P.O. Box 43078, Providence, Rl 02940-3078. Simply indicate that you would like to withdraw from the Plan, and be sure to include your Trust name and account number. Also, ensure that all shareholders listed on the account have signed these written instructions. If you withdraw, you have three options with regard to the shares held in the Plan:

1.

If you opt to continue to hold your non-certificated whole shares (Investment Plan Book Shares), they will be held by the Agent electronically as Direct Registration Book-Shares (Book-Entry Shares) and fractional shares will be sold at the then current market price. Proceeds will be sent via check to your address of record after deducting applicable fees.

2.

If you opt to sell your shares through the Agent, we will sell all full and fractional shares and send the proceeds via check to your address of record after deducting a $2.50 service fee and per share fees. Per share fees include any applicable brokerage commissions the Agent is required to pay.

3.

You may sell your shares through your financial adviser through the Direct Registration System (DRS). DRS is a service within the securities industry that allows Trust shares to be held in your name in electronic format. You retain full ownership of your shares, without having to hold a share certificate. You should contact your financial adviser to learn more about any restrictions or fees that may apply.

Note that the Plan may be amended or supplemented by the Trust at any time upon 30 days’ written notice to Plan participants.

To obtain a complete copy of the current Dividend Reinvestment Plan, please call our Client Services department at 800 341 2929 or visit invesco.com/us.