UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number

 

Angel Oak Financial Strategies Income Term Trust

(Exact name of registrant as specified in charter)

 

3344 Peachtree Rd. NE, Suite 1725

Atlanta, Georgia 30326

(Address of principal executive offices) (Zip code)

 

Dory S. Black, Esq., President

3344 Peachtree Rd. NE, Suite 1725

Atlanta, Georgia 30326

(Name and address of agent for service)

 

Douglas P. Dick

Stephen T. Cohen

Dechert LLP

1900 K Street NW

Washington, DC 20006

Registrant’s telephone number, including area code

Date of fiscal year end: January 31

Date of reporting period: July 31, 2022

 

 

 

(a)

 

Semi-Annual Report

July 31, 2022

 

Angel Oak Financial Strategies Income Term Trust

 

 

 

Angel Oak Capital Advisors, LLC

3344 Peachtree Road NE

Suite 1725

Atlanta, GA 30326

(404)

Table of Contents

 

Investment Results – (Unaudited)

Angel Oak Financial Strategies Income Term Trust

Total Return Based on a $10,000 Investment

 

 

Total Returns

(For the Period Ended July 31, 2022)

 

 

1

Investment Results – (Unaudited) (continued)

 

2

Portfolio Holdings – (Unaudited)

 

 

 

3

Angel Oak Financial Strategies Income Term Trust

Statement of Assets and Liabilities

July 31, 2022 (Unaudited)

 

 

 

4

Angel Oak Financial Strategies Income Term Trust

Statement of Operations

For the Period Ended July 31, 2022 (Unaudited)

 

 

 

5

Angel Oak Financial Strategies Income Term Trust

Statement of Cash Flows

For the Period Ended July 31, 2022 (Unaudited)

 

 

 

6

Angel Oak Financial Strategies Income Term Trust

Statements of Changes in Net Assets

 

 

 

 

7

Angel Oak Financial Strategies Income Term Trust

Financial Highlights

(For a share outstanding during each period)

 

 

 

 

8

Angel Oak Financial Strategies Income Term Trust

Schedule of Investments

July 31, 2022 (Unaudited)

 

 

 

9

Angel Oak Financial Strategies Income Term Trust

Schedule of Investments – (continued)

July 31, 2022 (Unaudited)

 

 

 

10

Angel Oak Financial Strategies Income Term Trust

Schedule of Investments – (continued)

July 31, 2022 (Unaudited)

 

 

 

11

Angel Oak Financial Strategies Income Term Trust

Schedule of Investments – (continued)

July 31, 2022 (Unaudited)

 

 

 

12

Angel Oak Financial Strategies Income Term Trust

Schedule of Investments – (continued)

July 31, 2022 (Unaudited)

 

LIBOR: London Inter-Bank Offered Rate

SOFR: Secured Overnight Financing Rate

SOFRINDX: Secured Overnight Financing Rate Compounded Index

TSFR3M: 3 Month Term Secured Overnight Financing Rate

H15T5Y: 5 Year Treasury Note Constant Maturity Rate

 

 

13

Angel Oak Financial Strategies Income Term Trust

Schedule of Investments – (continued)

July 31, 2022 (Unaudited)

 

Schedule of Open Reverse Repurchase Agreements

 

A reverse repurchase agreement, although structured as a sale and repurchase obligation, acts as a financing transaction under which the Fund will effectively pledge certain assets as collateral to secure a short-term loan. Generally, the other party to the agreement makes the loan in an amount less than the fair value of the pledged collateral. At the maturity of the reverse repurchase agreement, the Fund will be required to repay the loan and interest and correspondingly receive back its collateral. While used as collateral, the pledged assets continue to pay principal and interest which are for the benefit of the Fund.

 

 

14

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements

July 31, 2022 (Unaudited)

NOTE 1. ORGANIZATION

Angel Oak Financial Strategies Income Term Trust (“FINS”) (the “Trust” or the “Fund”) is organized as a Delaware statutory trust under a Declaration of Trust dated June 14, 2018. The Trust is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as a management investment company listed on the New York Stock Exchange (“NYSE”). Please see the table below for a summary of Fund specific information:

 

The Fund will terminate on or before May 31, 2031 (the “Termination Date”); provided, that if the Board of Trustees (the “Board”) believes that, under then-current market conditions, it is in the best interest of the Fund to do so, the Fund may extend the Termination Date: (i) once for up to one year (i.e., up to May 31, 2032), and (ii) once for up to an additional six months (i.e., up to November 30, 2032), in each case upon the affirmative vote of a majority of the Board and without Shareholder approval. In determining whether to extend the Termination Date, the Board may consider the inability to sell the Fund’s assets in a time frame consistent with termination due to lack of market liquidity or other extenuating circumstances. Additionally, the Board may determine that market conditions are such that it is reasonable to believe that, with an extension, the Fund’s remaining assets will appreciate and generate income in an amount that, in the aggregate, is meaningful relative to the cost and expense of continuing the operation of the Fund.

At a meeting of the Board on March 2022, the Board approved an Agreement and Plan of Reorganization (the “Plan”) providing for the transfer of all of the assets of Angel Oak Dynamic Financial Strategies Income Term Trust (“DYFN”) in exchange solely for newly issued common shares of beneficial interest of the Fund and the assumption by the Fund of the liabilities of DYFN and the distribution of common shares of beneficial interest of the Fund to the shareholders of DYFN and complete liquidation of DYFN (the “Reorganization”). The Plan was approved at a meeting of shareholders held on June 30, 2022.

The Reorganization closed as of the close of business July 29, 2022, as a event. The Fund and DYFN bore the expenses relating to the Reorganization. Each Fund bore expenses directly attributable to such Fund, and the Funds bore its pro rata portion of expenses attributable to both Funds based on the Funds’ relative net assets. As of July 31, 2022, $329,868 of reorganization expenses were included in Merger expense line item that is reflected in the Statement of Operations. Under the terms of the Plan, shareholders of DYFN received shares of the Fund equal in U.S. dollar value to the interests of such shareholders in DYFN as of July 29, 2022. For financial reporting purposes, assets received, and shares issued by the Fund were recorded at fair value. The following table illustrates the specifics of the Reorganization:

 

Because the combined investment portfolios have been managed as a single integrated portfolio since the Reorganization was completed, it is not practical to separate the amounts of revenue and earnings of DYFN that would have been included in the Fund’s Statement of Operations since July 29, 2022. Assuming the acquisition had been completed on February 1, 2022, the beginning of the annual reporting period of the Fund, the Fund’s pro forma results of operations for the current fiscal period would include net investment income (loss) of $3,858,197, net realized and unrealized gain (loss) on investments of $3,141,625, and net increase (decrease) in assets resulting from operations of $6,999,822.

NOTE 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 in accordance with the accounting principles generally accepted in the United States of America (“GAAP”). The Fund follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Codification Topic 946 “Financial Services-Investment Companies.”

 

15

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

: The Fund records its investments at fair value and in accordance with fair valuation accounting standards. The Fund has adopted fair valuation accounting standards which establish an authoritative definition of fair value and set out a hierarchy for measuring fair value. These standards require additional disclosures about the various inputs and valuation techniques used to develop the measurements of fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. In addition, these standards require expanded disclosure for each major category of assets. These inputs are summarized in the three broad levels listed below:

 

The inputs or methodology used for valuing securities are not an indication of the risks associated with investing in those securities.

Investments in registered management investment companies, including money market funds, will be valued based upon the NAV of such investments and are categorized as Level 1 of the fair value hierarchy.

Fair values for long-term debt securities, including asset-backed securities (“ABS”), collateralized loan obligations (“CLOs”), corporate obligations and trust preferred securities are normally determined on the basis of valuations provided by independent pricing services. Vendors typically value such securities based on one or more inputs, including but not limited to, benchmark yields, transactions, bids, offers, quotations from dealers and trading systems, new issues, spreads and other relationships observed in the markets among comparable securities; and pricing models such as yield measurers calculated using factors such as cash flows, financial or collateral performance and other reference data. In addition to these inputs, ABS may utilize cash flows, prepayment information, default rates, delinquency and loss assumptions, collateral characteristics, credit enhancements and specific deal information. Securities that use similar valuation techniques and inputs are categorized as Level 2 of the fair value hierarchy. To the extent the significant inputs are unobservable; the values generally would be categorized as Level 3.

Equity securities, including preferred stocks, that are traded on a national securities exchange, except those listed on the Nasdaq Global Market, Nasdaq Global Select Market, and the Nasdaq Capital Market exchanges (collectively, “Nasdaq”), are valued at the last sale price at the close of that exchange. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price. If, on a particular day, an exchange-listed or Nasdaq security does not trade, then: (i) the security shall be valued at the mean between the most recent quoted bid and asked prices at the close of the exchange; or (ii) the security shall be valued at the latest sales price on the Composite Market (defined below) for the day such security is being valued. “Composite Market” means a consolidation of the trade information provided by national securities and foreign exchanges and markets as published by a pricing service. In the event market quotations or Composite Market pricing are not readily available, fair value will be determined in accordance with the procedures adopted by the Board. All equity securities that are not traded on a listed exchange are valued at the last sale price at the close of the counter market. If a listed security does not trade on a particular day, then the mean between the last quoted bid and asked price will be used as long as it continues to reflect the value of the security. If the mean is not available, then bid price can be used as long as the bid price continues to reflect the value of the security. Otherwise, fair value will be determined in accordance with the procedures adopted by the Board. These securities will generally be categorized as Level 3 securities. When using the market quotations or close prices provided by the pricing service and when the market is considered active, the security will be classified as a Level 1 security. Sometimes, an equity security owned by the Fund will be valued by the pricing service with factors other than market quotations or when the market is considered inactive. When this happens, the security will be classified as a Level 2 security.

Short term debt securities having a maturity of 60 days or less are generally valued at amortized cost, which approximates fair market value. These investments are categorized as Level 2 of the fair value hierarchy. Reverse repurchase agreements and repurchase agreements are priced at their acquisition cost, and assessed for credit adjustments, which represents fair value. These securities will generally be categorized as Level 2 securities.

 

16

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

Participation Loans are priced by a third-party pricing service. These firms primarily obtain their market color from model inputs based on business, economic, market, and other conditions. The principal sources of information used to conduct valuation include historical and projected financial information, governing legal documents, discussions with related personnel, remittance data and various other documents and schedules available from public or private sources. These securities will be categorized as Level 2 securities.

Securities may be fair valued in accordance with the fair valuation procedures approved by the Board. The Valuation and Risk Management Oversight Committee is generally responsible for overseeing the Fund’s valuation processes and reports quarterly to the Board. The Valuation and Risk Management Oversight Committee has delegated to the Valuation Committee of the Valuation Designee the responsibilities for making all necessary determinations of the fair value of portfolio securities and other assets for which market quotations are not readily available or if the prices obtained from independent pricing services are deemed to be unreliable indicators of market or fair value. Representatives of the Valuation Designee’s Valuation Committee report quarterly to the Valuation and Risk Management Oversight Committee.

The following is a summary of the investments by their inputs used to value the Fund’s net assets as of July 31, 2022:

 

See the Schedule of Investments for further disaggregation of investment categories. During the period ended July 31, 2022, the Fund recognized $4,743,559 of transfers from Level 3 to Level 2 due to an increase in relevant market activity. See the summary of quantitative information about Level 3 Fair Value Measurements for more information.

The following is a reconciliation of investments in which significant unobservable inputs (Level 3) were used in determining fair value:

 

The total change in unrealized appreciation (depreciation) included in the Statement of Operations attributable to Level 3 investments still held at July 31, 2022 is ($423,738).

 

17

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

The following is a summary of quantitative information about Level 3 Fair Value Measurements:

 

The Fund intends to elect and continue to qualify to be taxed as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986, as amended. If so qualified, the Fund generally will not be subject to federal income tax to the extent it distributes substantially all of its net investment income and capital gains to shareholders. The Fund generally intends to operate in a manner such that it will not be liable for federal income or excise taxes.

The Fund has adopted financial reporting rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the Statement of Operations. During the period ended July 31, 2022, the Fund did not incur any interest or penalties. The Fund has reviewed all open tax years and major jurisdictions and concluded that no provision for income tax is required in the Fund’s financial statements. The Fund’s Federal and state income and Federal excise tax returns for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.

Investment security transactions are accounted for on trade date. Gains and losses realized on sales of securities are determined on a specific identification basis. Interest income and expense is recorded on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized using the effective yield method, based on each security’s estimated life and recoverable principal and recorded in interest income on the Statement of Operations. Dividend income and corporate transactions, if any, are recorded on the Paydown gains and losses on mortgage related and other ABS are recorded as components of interest income on the Statement of Operations. Payments received from certain investments held by the Fund may be comprised of dividends, capital gains and return of capital. The Fund originally estimates the expected classification of such payments. The amounts may subsequently be reclassified upon receipt of the information from the issuer. The actual character of distributions to the Fund’s shareholders will be reflected in the Form 1099 received by shareholders after the end of the calendar year.

Distributions from the Fund’s net investment income are declared and paid monthly. The Fund intends to distribute its net realized long term capital gains and net realized short term capital gains, if any, at least annually. Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the date. The treatment for financial reporting purposes of distributions made to shareholders during the period from net investment income or net realized capital gains may differ from their ultimate treatment for federal income tax purposes. These differences are caused primarily by differences in the timing of the recognition of certain components of income, expense or realized capital gain for federal income tax purposes. Where such differences are permanent in nature, they are reclassified in the components of the net assets based on their ultimate characterization for federal income tax purposes. Any such reclassifications will have no effect on net assets, results of operations or net asset value per share of the Fund. For the year ended January 31, 2022, certain differences were reclassified. These differences were primarily related to distribution reclassifications and return of capital distributions; the amounts did not affect net assets. The reclassifications were as follows:

 

 

18

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 2. SIGNIFICANT ACCOUNTING POLICIES – (continued)

 

: The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding, rounded to the nearest cent. The Fund’s NAV will not be calculated on the days on which the New York Stock Exchange is closed for trading.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of income and expenses during the period. Actual results could differ from those estimates.

Under the Fund’s organizational documents, the Fund will indemnify its officers and trustees for certain liabilities that may arise from performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties which provide general indemnifications. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred.

Cash and cash equivalents are highly liquid assets including coin, currency and short-term investments that typically mature in days. Short-term investments can include U.S. Government and government agency securities, investment grade money market instruments, investment grade fixed-income securities, repurchase agreements, commercial paper and cash equivalents. Cash equivalents are extremely low risk assets that are liquid and easily converted into cash. These investments are only considered equivalents if they are readily available and are not restricted by some agreement. When the Adviser believes market, economic or political conditions are unfavorable for investors, the Adviser may invest up to 100% of a Fund’s net assets in cash, cash equivalents or other short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, or the U.S. economy. The Adviser also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. Included in Investments in unaffiliated securities at fair value on the Statement of Assets and Liabilities are investments in First American money market funds held at major financial institutions totaling $1,489,064.

A reverse repurchase agreement is the sale by the Fund of a security to a party for a specified price, with the simultaneous agreement by the Fund to repurchase that security from that party on a future date at a higher price. Proceeds from securities sold under reverse repurchase agreements are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made are recorded as a component of interest expense on the Statement of Operations. Reverse repurchase agreements involve the risk that the counterparty will become subject to bankruptcy or other insolvency proceedings or fail to return a security to the Fund. In such situations, the Fund may incur losses as a result of a possible decline in the value of the underlying security during the period while the Fund seeks to enforce their rights, a possible lack of access to income on the underlying security during this period, or expenses of enforcing its rights. The Fund will segregate assets determined to be liquid by the Adviser or otherwise cover its obligations under reverse repurchase agreements.

The gross obligations for secured borrowing by the type of collateral pledged and remaining time to maturity on reverse repurchase contracts is as follows:

 

 

19

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 3. RISKS ASSOCIATED WITH PORTFOLIO ASSETS – (continued)

 

NOTE 4. FUND CERTIFICATION

The Fund is listed for trading on the NYSE and has filed with the NYSE its annual chief executive officer certification regarding compliance with the NYSE’s listing standards. The Fund filed with the SEC the certification of its chief executive officer and principal financial officer required by Section 302 of the Sarbanes-Oxley Act.

 

20

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 5. DERIVATIVE TRANSACTIONS

Balance Sheet Offsetting Information

During the ordinary course of business, the Fund may enter into transactions subject to enforceable netting agreements or other similar arrangements (“netting agreements”). Generally, the right to offset in netting agreements allows the Fund to offset any exposure to a specific counterparty with any collateral received or delivered to that counterparty based on the terms of the agreement. Generally, the Fund manages its cash collateral and securities collateral on a counterparty basis. As of July 31, 2022, the Fund was not subject to any netting agreements.

The following table provides a summary of offsetting financial liabilities and derivatives and the effect of derivative instruments on the Statement of Assets and Liabilities as of July 31, 2022.

 

In some instances, the actual collateral received/pledged may be more than the amounts disclosed herein.

NOTE 6. FEES AND OTHER RELATED PARTY TRANSACTIONS

Under the terms of the investment advisory agreement, on behalf of the Fund (the “Agreement”), the Adviser manages the Fund’s investments subject to oversight of the Trustees. As compensation for its management services, the Fund is obligated to pay the Adviser a fee computed and accrued daily and paid monthly at an annual rate of 1.35% of the average daily Managed Assets (as defined below) of the Fund. Managed Assets includes total assets (including any assets attributable to borrowing for investment purposes) minus the sum of the Fund’s accrued liabilities (other than liabilities representing borrowings for investment purposes) (“Managed Assets”).

The Adviser has also contractually agreed to waive its fees and/or reimburse certain expenses (exclusive of any management fees, taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization and extraordinary expenses) to limit the Fund’s Total Annual Fund Operating Expenses to 0.25% of the Fund’s Managed Assets through at least May 31, 2023 (the “Limitation Period”). Separately, the Adviser contractually agreed to waive its fees and/or reimburse certain expenses (exclusive of any sales loads, taxes, interest on borrowings, dividends on securities sold short, brokerage commissions, acquired fund fees and expenses, expenses incurred in connection with any merger or reorganization and extraordinary expenses) to limit the Fund’s Total Annual Fund Operating Expenses to 2.50% of the Fund’s net assets (together with the 0.25% expense limitation, the “Expense Limits”) through June 5, 2022. The 0.25% Expense Limit may be eliminated at any time by the Board, on behalf of the Funds, upon 60 days’ written notice to the Adviser. Prior to the end of the Limitation Period, the Expense Limits may not be terminated by the Adviser without the consent of the Board of Trustees. Each Expense Limit is subject to repayment by the Fund within 36 months following the month in which that particular waiver and/or reimbursement occurred, provided that the Fund is able to make the repayment without exceeding the expense limitations described above or the expense limitation in effect at the time of the reimbursement (whichever is lower).

In addition, the Adviser has contractually agreed to waive the amount of the Fund’s management fee to the extent necessary to offset the proportionate share of the management fees incurred by the Fund through its investment in underlying funds for which the Adviser also serves as investment adviser (affiliated investments). This contractual waiver is not subject to recoupment by the Adviser. This arrangement may only be changed or eliminated by the Board of Trustees upon 60 days’ written notice to the Adviser. During the period ended July 31, 2022, the Adviser waived $1,673 of management fees of underlying funds.

Destra Capital Investments LLC (“Destra”) provides investor support services in connection with the ongoing operation of the Fund. Such services include providing ongoing contact with respect to the Fund and its performance with financial advisors that

 

21

Angel Oak Financial Strategies Income Term Trust

Notes to the Financial Statements - (continued)

July 31, 2022 (Unaudited)

 

NOTE 6. FEES AND OTHER RELATED PARTY TRANSACTIONS – (continued)

 

are representatives of financial intermediaries, and communicating with the NYSE specialist for the Shares, and with the fund analyst community regarding the Fund on a regular basis. The Fund paid Destra a service fee in an annual amount equal to 0.07% of the average daily value of the Fund’s Managed Assets through the applicable termination date.

U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”), an indirect wholly-owned subsidiary of U.S. Bancorp, serves as the Fund’s Administrator (“Administrator”) and, in that capacity, performs various administrative and accounting services for the Fund. Fund Services also serves as the Fund’s fund accountant and transfer agent. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Fund’s custodian; coordinates the preparation and payment of the Fund’s expenses and reviews the Fund’s expense accruals. As compensation for its services, the Administrator is entitled to a monthly fee at an annual rate based upon the average daily net assets of the Fund. U.S. Bank, N.A. (the “Custodian”) serves as custodian to the Fund.

Certain officers, Trustees and shareholders of the Fund are also owners or employees of the Adviser.

NOTE 7. INVESTMENT TRANSACTIONS

For the period ended July 31, 2022, purchases and sales of investment securities, other than short-term investments and short-term U.S. Government securities, were as follows:

 

For the period ended July 31, 2022, there were no long-term purchases or long-term sales of U.S. Government securities for the Fund.

NOTE 8. INVESTMENTS IN AFFILIATES

The Fund’s ownership of shares of affiliates represents holdings for which the Fund and the underlying investee fund have the same investment adviser or where the investee fund’s investment adviser is under common control with the Fund’s investment adviser.

The Fund had the following investments in affiliates during the period ended July 31, 2022: