NOTE 1. ORGANIZATION
Blackstone / GSO Senior Floating Rate Term Fund (BSL), is a non-diversified, closed-end management investment company. BSL was organized as a Delaware statutory trust on March 4, 2010. BSL was
registered under the Investment Company Act of 1940, as amended (the 1940 Act), on March 5, 2010. BSL commenced operations on May 26, 2010. Prior to that date, BSL had no operations other than matters relating to its organization and the
sale and issuance of 5,236 common shares of beneficial interest in BSL to GSO / Blackstone Debt Funds Management LLC (the Adviser) at a price of $19.10 per share. The Adviser serves as BSLs investment adviser. BSLs common
shares are listed on the New York Stock Exchange (the Exchange) and trade under the ticker symbol BSL.
Absent
shareholder approval to extend the term of BSL, BSL will dissolve on or about May 31, 2020. Upon dissolution, BSL will distribute substantially all of its net assets to shareholders, after making appropriate provision for any liabilities. Pursuant
to BSLs Amended and Restated Agreement and Declaration of Trust (the Declaration of Trust), prior to the date of dissolution a majority of the Board of Trustees, with the approval of a majority of the shareholders entitled to vote
(as defined in the 1940 Act) may extend the life of BSL. If approved, the dissolution date of BSL may be extended by a period of two years or such shorter time as may be determined. However, the dissolution date of BSL may be extended an unlimited
number of times.
Blackstone / GSO Long-Short Credit Income Fund (BGX) is a non-diversified closed-end management investment
company. BGX was organized as a Delaware statutory trust on October 22, 2010. BGX was registered under the 1940 Act on October 26, 2010. BGX commenced operations on January 27, 2011. Prior to that, BGX had no operations other than matters relating
to its organization and the sale and issuance of 5,236 common shares of beneficial interest in BGX to the Adviser at a price of $19.10 per share. The Adviser serves as the investment adviser for BGX. BGXs common shares are listed on the
Exchange and trade under the ticker symbol BGX.
Blackstone / GSO Strategic Credit Fund (BGB and collectively
with BSL and BGX, the Funds) is a newly organized non-diversified closed-end management investment company. BGB was organized as a Delaware statutory trust on March 28, 2012. BGB was registered under the 1940 Act on April 6, 2012. BGB
commenced operations on September 26, 2012. Prior to that, BGB had no operations other than matters relating to its organization and the sale and issuance of 5,236 common shares of beneficial interest in BGB to the Adviser at a price of $19.10 per
share. The Adviser serves as the investment adviser for BGB. BGBs common shares are listed on the Exchange and trade under the ticker symbol BGB.
BGB will dissolve on or about September 15, 2027, absent shareholder approval to extend such term. Upon dissolution, BGB will distribute substantially all of its net assets to shareholders, after making appropriate
provision for any liabilities of the Fund. Pursuant to BGBs Agreement and Declaration of Trust, prior to the date of dissolution a majority of the Board of Trustees, with the approval of a majority of the outstanding voting securities entitled
to vote (as defined in the 1940 Act), may extend the life of BGB. If approved, the dissolution date of the Fund may be extended by a period of two years or such shorter time as may be determined. However, the dissolution date of the Fund may be
extended an unlimited number of times.
BSLs primary investment objective is to seek high current income, with a secondary
objective to seek preservation of capital, consistent with its primary goal of high current income. Under normal market conditions, at least 80% of BSLs assets will be invested in senior secured, floating rate loans (Senior Loans).
BGXs primary investment objective is to provide current income, with a secondary objective of capital appreciation. BGX seeks to
achieve its investment objectives by employing a dynamic long-short strategy in a diversified portfolio of loans and fixed-income instruments of predominantly U.S. corporate issuers, including first- and second-lien secured loans (Secured
Loans) and high-yield corporate debt securities of varying maturities. BGXs long positions in loans and fixed-income instruments will typically be rated below investment grade at the time of purchase. BGXs long positions, either
directly or through the use of derivatives, may total up to 130% of BGXs net assets. BGXs short positions, either directly or through the use of derivatives, may total up to 30% of BGXs net assets.
BGBs primary investment objective is to seek high current income, with a secondary objective to seek preservation of capital, consistent with
its primary goal of high current income. The Fund will seek to achieve its investment objectives by investing primarily in a diversified portfolio of loans and other fixed income instruments of predominantly U.S. corporate issuers, including first-
and second-lien secured loans (Senior Secured Loans) and high yield corporate bonds of varying maturities. Under normal market conditions, at least 80% of BGBs assets will be invested in credit investments comprised of
corporate fixed income instruments and other investments (including derivatives) with similar economic characteristics.
Senior Loans,
Secured Loans and Senior Secured Loans are referred to collectively as Loans throughout the Notes to Financial Statements.
The Funds are classified as non-diversified under the 1940 Act. As a result, each fund can invest a greater portion of its assets in
obligations of a single issuer than a diversified fund. The Funds may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political, or regulatory occurrence.
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37
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Blackstone / GSO Funds
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Notes to Financial Statements
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December 31, 2012
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When the Funds sell a floating rate loan interest they may pay an agency fee. The Funds earn facility and other fees on floating rate loan
interests, and facility fees are typically amortized to income over the term of the loan. Consent and amendment fees are also recorded to income as earned. All of these fees are shown on the Statement of Operations under
Facility and other
fees
.
Federal Income Taxes:
It is the policy of the Funds to continue to qualify as regulated investment companies by
complying with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies, and to distribute substantially all of their earnings to their shareholders. While no federal income tax
provision is required, for BGX it is anticipated that an excise tax liability for 2012 of approximately $35,450 will be paid in 2013. No federal income or excise tax provision is required for BSL or BGB.
Income distributions and capital gain distributions are determined in accordance with income tax regulations, which may differ from GAAP. These
differences are primarily due to differing treatments of income and gains on various investment securities held by the Funds, timing differences and differing characterization of distributions made by the Funds as a whole.
Management has concluded that the Funds have not taken any uncertain tax positions that require adjustment to the financial statements. The statute
of limitations on BSLs federal and state tax filings remains open for the fiscal years ended December 31, 2012 and December 31, 2011, and the fiscal period ended December 31, 2010. The statute of limitations on BGXs federal and state tax
filings remains open for the fiscal year ended December 31, 2012 and the fiscal period ended December 31, 2011. The statute of limitations on BGBs federal and state tax filings remains open for the fiscal period ended December 31, 2012. The
Funds will file income tax returns in the U.S. federal jurisdiction and New York.
Distributions to Shareholders:
The Funds make
monthly cash distributions of all or a portion of their net investment income to common shareholders. The Funds will distribute to common shareholders at least annually all or substantially all of their net investment income after the payment of
dividends and interest, if any, owed with respect to outstanding preferred shares and/or borrowings. The Funds intend to pay any capital gains distributions at least annually. If BSL realizes a long-term capital gain, it will be required to allocate
such gain between the common shares and term preferred shares issued by BSL in proportion to the total dividends paid to each class for the year in which the income is realized.
NOTE 3. MANAGEMENT FEES, ADMINISTRATION FEES, AND OTHER AGREEMENTS
The Adviser, a wholly-owned subsidiary of GSO Capital Partners LP (collectively with its affiliates, GSO), is a registered investment
adviser and is responsible for the day-to-day management of, and providing administrative and compliance oversight services to, the Funds. GSO is an affiliate of The Blackstone Group L.P. (collectively with its affiliates, Blackstone).
For BSL, the Adviser receives a monthly fee at the annual rate of 1.00% of the average daily value of BSLs total assets
(including any assets attributable to any leverage used) minus the sum of the BSLs accrued liabilities (other than Fund liabilities incurred for any leverage) (BSL Managed Assets). For BGX, the Adviser receives a monthly fee at the
annual rate of 1.20% of the average daily value of BGXs net assets (total assets of BGX minus liabilities including accrued expenses or dividends). For BGB, the Adviser receives a monthly fee at the annual rate of 1.00% of the average daily
value of BGBs total assets (including any assets attributable to any leverage used) minus the sum of BGBs accrued liabilities (other than Fund liabilities incurred for any leverage) (BGB Managed Assets).
Each Fund pays every Trustee who is not a director, officer, employee, or affiliate of GSO or ALPS (as defined below), a fee of $16,667 per annum,
plus $2,500 per joint meeting of the Board of Trustees. The Chairman of the Audit Committee and Chairman of the Nominating Committee also each receive $2,500 per annum from each fund. The Lead Independent Trustee receives $2,667 from each Fund. In
addition, for each joint meeting of a committee of the Board of Trustees that does not occur on a regular meeting or special meeting of the Funds, the Funds will each pay every committee member $750 for each such committee meeting attended. If such
committee meeting is not held jointly, the respective Fund will pay each committee member $1,000 for each such meeting attended. The Funds will also reimburse independent Trustees for travel and out-of-pocket expenses incurred in connection with
such meetings.
ALPS Fund Services, Inc. (ALPS) serves as administrator to the Funds. Under the administration agreement,
ALPS is responsible for calculating the net asset value of the common shares and generally managing the administrative affairs of the Funds. For BSL and BGB, ALPS receives a monthly fee at the annual rate of 0.15% of the average daily value of each
Managed Assets, subject to a minimum annual fee of $350,000, plus out-of-pocket expenses. For BGX, ALPS receives a monthly fee at the annual rate of 0.18% of the average daily value of BGXs net assets, also subject to a minimum annual fee of
$350,000, plus out-of-pocket expenses. ALPS is not considered an affiliate of the Funds, as defined under the 1940 Act.
The Bank of New
York Mellon serves as BSLs and BGBs custodian and JP Morgan Chase Bank, National Association serves as BGXs custodian. Computershare Shareowner Services, LLC, serves as the Funds transfer agent. The Bank of New York Mellon,
Computershare Shareowner Services, LLC, and JP Morgan Chase are not considered affiliates of the Funds as defined under the 1940 Act.
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Blackstone / GSO Funds
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Notes to Financial Statements
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December 31, 2012
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NOTE 4. SECURITIES TRANSACTIONS
Investment transactions for the year ended December 31, 2012, excluding temporary short-term investments, were as follows:
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Fund
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Cost of
Investments
Purchased
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Proceeds from
Investments Sold
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Blackstone / GSO Senior Floating Rate Term Fund
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$
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306,114,170
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$
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314,030,388
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Blackstone / GSO Long-Short Credit Income Fund
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210,355,228
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204,803,923
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Blackstone / GSO Strategic Credit Fund
(a)
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1,010,502,007
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69,873,939
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(a)
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For the period September 26, 2012 (Commencement of Operations) to December 31, 2012.
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NOTE 5. CAPITAL
The Funds have authorized an unlimited number of $0.001 par value common shares.
Transactions in shares were as follows:
Blackstone / GSO Senior Floating Rate Term Fund
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For the
Year Ended
December 31, 2012
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For the
Year Ended
December 31, 2011
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Common shares outstanding - beginning of year
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15,166,193
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15,139,833
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Common shares issued as reinvestment of dividends
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27,798
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26,360
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Common shares outstanding - end of period
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15,193,991
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15,166,193
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Blackstone / GSO Long-Short Credit Income Fund
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For the
Year Ended
December 31, 2012
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For the Period
January 27, 2011
(Commencement of
Operations) to
December 31, 2011
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Common shares outstanding - beginning of year
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12,694,664
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5,236
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Common shares issued in connection with initial public offering
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12,630,200
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Common shares issued as reinvestment of dividends
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5,584
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|
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59,228
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Common shares outstanding - end of year
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12,700,248
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|
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12,694,664
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Blackstone / GSO Strategic Credit Fund
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For the Period
September 26, 2012
(Commencement of
Operations) to
December 31, 2012
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Common shares outstanding - beginning of year
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5,236
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Common shares issued in connection with initial public offering
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44,605,000
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Common shares issued as reinvestment of dividends
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6,341
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Common shares outstanding - end of year
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44,616,577
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NOTE 6. SENIOR AND SECURED FLOATING RATE LOANS
BSL defines Senior Loans as
first lien senior secured, floating rate loans that are made to U.S. and, to a limited extent, non-U.S. corporations, partnerships and other business entities (Borrowers), which operate in various industries and geographical regions. BGX
includes first and second lien secured, floating rate loans in its definition of Secured Loans. Under normal market conditions, at least 80% of BSLs Managed Assets will be invested in Senior Loans and 70% of BGXs managed
assets will be invested in Secured Loans. Under normal market conditions, at least 80% of BGBs Managed Assets will be invested in credit investments comprised of corporate fixed income instruments and other investments (including derivatives)
with similar economic characteristics. BGX defines its managed assets as net assets plus effective leverage obtained through securities lending, swap contract arrangements, and short selling or other derivative transactions (BGX Managed
Assets). At December 31, 2012, 85.95% of BSLs Managed Assets were held in Senior Loans, 70.42% of BGXs Managed Assets were held in Secured Loans, and 96.91% of BGBs Managed Assets were held in corporate fixed income
instruments and Loans.
Loans hold a senior position in the capital structure of a business entity, are secured with specific collateral
and have a claim on the assets and/or stock of the borrower that is senior to that held by unsecured creditors, subordinated debt holders and stockholders of the Borrower.
Loans often require prepayments from Borrowers excess cash flows or permit the Borrowers to repay at their election. The degree to which borrowers repay, whether as a contractual requirement or at their
election, cannot be predicted with accuracy. As a result, the actual remaining
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Annual
Report | December 31, 2012
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43
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Blackstone / GSO Funds
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Notes to Financial Statements
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December 31, 2012
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maturity may be substantially less than the stated maturities shown. However, floating rate loans typically have an expected average life of two to
four years. Floating rate loans typically have rates of interest which are re-determined periodically, either daily, monthly, quarterly or semi-annually by reference to a floating base lending rate, primarily London Interbank Offered Rate (LIBOR),
plus a premium or credit spread.
Loans are subject to the risk of payment defaults of scheduled interest or principal. Such non-payment
could result in a reduction of income, a reduction in the value of the investment and a potential decrease in the net asset value of either Fund. Risk of loss of income is generally higher for subordinated unsecured loans or debt, which are not
backed by a security interest in any specific collateral. There can be no assurance that the liquidation of any collateral securing a Loan would satisfy the Borrowers obligation to the Fund in the event of non-payment of scheduled interest or
principal payments, or that such collateral could be readily liquidated.
Second lien loans generally are subject to similar risks as
those associated with investments in first lien loans except that such loans are subordinated in payment and/or lower in lien priority to first lien holders. In the event of default on a second lien loan, the first priority lien holder has first
claim to the underlying collateral of the loan. Second lien loans are subject to the additional risk that the cash flow of the Borrower and property securing the loan or debt, if any, may be insufficient to meet scheduled payments after giving
effect to the senior unsecured or senior secured obligations of the Borrower. At December 31 2012, BSL, BGX and BGB had invested $20,006,430, $9,021,453 and $23,671,765, respectively, in second lien secured loans. Second lien secured loans are
considered Secured Loans for BGX and Senior Secured Loans for BGB, but are not considered Senior Loans for BSL.
Loans can be rated
below investment grade or may also be unrated. As a result, the risks associated with Loans may be similar to the risks of other below investment grade securities, although they are senior and secured in contrast to other below investment grade
securities, which are often subordinated or unsecured. BSL, BGX and BGB typically invest in Loans rated below investment grade, which are considered speculative because of the credit risk of their issuers. Such companies are more likely than
investment grade issuers to default on their payments of interest and principal owed to BSL, BGX and BGB, and such defaults could reduce net asset value and income distributions. The amount of public information available with respect to below
investment grade loans will generally be less extensive than that available for registered or exchange-listed securities. In evaluating the creditworthiness of Borrowers, the Adviser will consider, and may rely in part, on analyses performed by
others. The Advisers established best execution procedures and guidelines require trades to be placed for execution only with broker-dealer counterparties approved by the risk and valuation committee of the Adviser. The factors considered by
the committee when selecting and approving brokers and dealers include, but are not limited to: (i) quality, accuracy, and timeliness of execution, (ii) review of the reputation, financial strength and stability of the financial institution, (iii)
willingness and ability of the counterparty to commit capital, (iv) ongoing reliability and (v) access to underwritten offerings and secondary markets.
BSL, BGX and BGB may acquire Loans through assignments or participations. BSL, BGX and BGB typically acquire these Loans through assignment, and if a Fund acquires a Loan through participation, will elevate a
participation interest into an assignment as soon as practicably possible. The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect
to the debt obligation; however, the purchasers rights can be more restricted than those of the assigning institution, and BSL, BGX or BGB may not be able to unilaterally enforce all rights and remedies under the Loan and with regard to any
associated collateral. A participation typically results in a contractual relationship only with the institution participating out the interest, not with the Borrower. Sellers of participations typically include banks, broker-dealers, other
financial institutions and lending institutions. The Adviser has adopted best execution procedures and guidelines to mitigate credit and counterparty risk in the a typical situation when BSL, BGX or BGB must acquire a Loan through a participation.
The Adviser has established a risk and valuation committee that regularly reviews each broker-dealer counterparty for, among other things, its quality and the quality of its execution.
NOTE 7. TOTAL RETURN AND CREDIT DEFAULT SWAPS
BGX has entered into total return swaps as of December 31, 2012 in an aggregate notional amount equal to $23,450,601. In a total return swap, BGX
pays another party a fixed or floating short-term interest rate and receives in exchange the total return of underlying loans or debt securities. If the other party to a total return swap defaults, BGXs risk of loss consists of the net amount
of total return payments that BGX is contractually entitled to receive. BGX bears the risk of default on the underlying loans or debt securities, based on the notional amount of the swap. BGX would typically have to post collateral to cover this
potential obligation. BGX may use total return swaps for financing, hedging or investment purposes (see further information in Note 9 Leverage). For the purposes of Managed Assets, BGX will treat the value of a total return swap as the
notional amount of the swap.
BGX entered into credit default swaps during the year ended December 31, 2012. When used for hedging
purposes, BGX would be the buyer of a credit default swap contract. In that case, BGX would be entitled to receive the par (or other agreed-upon) value of a referenced debt obligation, index or other investment from the counterparty to the contract
in the event of a default by a third party, such as a U.S. or foreign issuer, on the referenced obligation. In return, BGX would pay to the counterparty a periodic stream of payments over the term of the contract provided that no event of default
has occurred. If no default occurs, BGX would have spent the stream of payments and received no benefit from the contract. When BGX is the seller of a credit default swap contract, it receives the stream of payments but is obligated to pay upon
default of the referenced obligation. As the seller, BGX would effectively add leverage to its portfolio because, in addition to its total assets, BGX would be subject to investment exposure on the notional amount of the swap.
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Blackstone / GSO Funds
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Notes to Financial Statements
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December 31, 2012
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The periodic swap payments received or made by BGX are recorded in the Statements of Operations as realized gains or losses, respectively. Any
upfront fees paid are recorded as assets and any upfront fees received are recorded as liabilities and amortized over the term of the swap. Swaps are marked-to-market daily and changes in value, including the accrual of periodic amounts of interest,
are recorded as unrealized appreciation (depreciation) and shown on BGXs Statement of Operations. When the swap is terminated, BGX will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing
transaction and BGXs basis in the contract, if any. Generally, the basis of the contracts is the unamortized premium received or paid.
Swap transactions involve, to varying degrees, elements of interest rate, credit and market risk in excess of the amounts recognized in the Statements of Assets and Liabilities. Such risks involve the possibility
that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of the contractual terms in the agreements, and that there may be unfavorable
changes in interest rates and/or market values associated with these transactions. BGX segregates sufficient assets as collateral to satisfy the current obligation with respect to total return and credit default swaps, and this is reflected as
Deposit held with broker for swap contracts on BGXs Statement of Assets and Liabilities.
The effect of derivative instruments on the Statement of
Assets and Liabilities as of December 31, 2012 is as follows:
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Blackstone / GSO Long-Short Credit Income Fund
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Risk Exposure
|
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Statement of Assets and Liabilities Location
|
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Asset Derivatives
Gross Unrealized Appreciation
|
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Liability Derivatives
Gross Unrealized Depreciation
|
|
Credit Contracts
(Total Return Swap
Contracts)
|
|
Unrealized appreciation/ (depreciation)on total return swap contracts
|
|
$
|
175,110
|
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$
|
(391,877
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)
|
Total
|
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|
|
$
|
175,110
|
|
|
$
|
(391,877
|
)
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|
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|
Blackstone /GSO Long-Short Credit Income Fund
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Risk Exposure
|
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Statement of Operations Location
|
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Net Realized Gain/(Loss)
|
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Net Change in Unrealized
Appreciation/(Depreciation)
|
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Credit Contracts
(Credit Default Swap Contracts)
|
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Net realized gain/(loss) on: Credit default swap contracts/change in unrealized appreciation/ (depreciation) on:Credit default swap
contracts
|
|
$
|
(95,069
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)
|
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$
|
(2,475
|
)
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Credit Contracts
(Total Return Swap Contracts)
|
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Net realized gain/(loss) on: Total return swap contracts/change in unrealized appreciation/ (depreciation) on: Total return swap
contracts
|
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|
1,373,694
|
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|
|
1,054,258
|
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Total
|
|
|
|
$
|
1,278,625
|
|
|
$
|
1,051,783
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NOTE 8. SECURITIES LENDING
BGX may make secured loans of its
marginable securities to brokers, dealers and other financial institutions amounting to no more than 30% of its net assets. The risks in lending portfolio securities, as with other extensions of credit, consist of possible delay in recovery of the
securities or possible loss of rights in the collateral should the borrower fail financially. However, such loans will be made only to broker-dealers and other financial institutions that are believed by the Adviser to be of relatively high credit
standing.
Loans of securities are made to broker-dealers pursuant to agreements requiring that loans be continuously secured by
collateral consisting of U.S. Government securities, cash or cash equivalents (negotiable certificates of deposit, bankers acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal at all times to
the market value of the securities lent. The borrower pays to BGX, as the lender, an amount equal to any dividends or interest received on the securities lent. The collateral must have a market value at least equal to 100% of the market value of the
loaned securities at all times during the duration of the loan.
BGX invests the cash collateral received in accordance with its
investment objectives, subject to BGXs agreement with the borrower of the securities. In the case of cash collateral, BGX typically pays a rebate to the borrower. The reinvestment of cash collateral will result in a form of effective leverage
for BGX.
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Report | December 31, 2012
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45
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Blackstone / GSO Funds
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Notes to Financial Statements
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December 31, 2012
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Although voting rights or rights to consent with respect to the loaned securities pass to the borrower, BGX, as the lender, retains the right to
call the loans and obtain the return of the securities loaned at any time on reasonable notice, and it will do so in order that the securities may be voted by BGX if the holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. BGX may also call such loans in order to sell the securities involved. When engaged in securities lending, BGXs performance will continue to reflect changes in the value of the securities loaned and will
also reflect the receipt of interest through investment of cash collateral by BGX in permissible investments.
As of December 31, 2012,
BGX had securities on loan valued at $51,270,106 and received cash collateral with a value of $52,405,671, representing 21.28% and 21.75% of net assets, respectively.
NOTE 9. LEVERAGE
On August 13, 2010, BSL issued $96 million in aggregate principal amount of senior secured notes and 48,000 term preferred shares with an aggregate liquidation preference of $48 million, both rated AAA
by Fitch Ratings. The senior secured notes and term preferred shares in combination represent total leverage of approximately 33% of BSLs Managed Assets. BSL used the proceeds of the offerings to purchase additional assets for BSLs
portfolio. The final maturity date of the senior secured notes and the final redemption date of the term preferred shares is May 31, 2020, which coincides with the scheduled dissolution date of BSL.
Both the senior secured notes and the term preferred shares may be prepaid or redeemed at the option of BSL commencing the second anniversary of
issuance. In addition, both the senior secured notes and the term preferred shares are subject to mandatory prepayment or redemption, a) if BSL fails to meet certain overcollateralization tests, b) after the expiration of the BSLs reinvestment
period, which ends on May 31, 2017, c) if the senior secured notes and term preferred shares have not been fully prepaid/redeemed six months prior to the final maturity date (May 31, 2020), or d) if BSL fails to pay dividends on the term preferred
shares for six consecutive months. Should either the senior secured notes or the term preferred shares be prepaid/redeemed, either through an optional or mandatory prepayment/redemption, the remainder of the term preferred shares or the senior
secured notes shall also become payable/redeemable on a pro-rata basis.
In connection with BSLs issuance of senior secured notes
and term preferred shares, certain costs were incurred by BSL and have been recorded as a deferred asset. These costs are being amortized over the period beginning August 13, 2010 (day of issuance) through May 31, 2017, the date on which mandatory
prepayments commence. The deferred asset balance as of December 31, 2012 is shown on BSLs Statement of Assets and Liabilities under Deferred financing costs. The amount of expense amortized during the year ended December 31, 2012 is shown on
BSLs Statement of Operations under amortization of deferred financing costs.
The average cost of the $144 million aggregate
senior secured notes and term preferred shares is 1.78% over 3 month LIBOR. BSL pays quarterly, a floating rate interest of 1.55% over 3 month LIBOR on the senior secured notes and a floating rate dividend of 2.25% over 3 month LIBOR on the term
preferred shares. Due to the short term nature of the floating rate payments on the senior secured notes and term preferred shares, face value approximates fair value at December 31, 2012. This fair value is based on Level 2 inputs under the
three-tier fair valuation hierarchy (see Note 2).
BSL may prepay the Notes or Preferred Shares in whole or in part at any time on or
after the second anniversary of the Issuance Date at an optional prepayment price. The redemption price per share of the Term Preferred Shares and Notes, respectively is at a premium to the issuance price. The redemption price is equal to 102% of
the issuance price from the second anniversary date of the Issuance Date to but excluding the third anniversary date of the Issuance Date, and 101% of the issuance price from the third anniversary date of the Issuance Date to but excluding the
fourth anniversary date of the Issuance Date and on or after the fourth anniversary date of the Issuance Date, 100%
plus
, in each case, an amount equal to accrued, accumulated and unpaid dividends thereon, to, but not including, the
applicable Redemption Date.
According to the governing documents for the senior secured notes and term preferred shares, BSL must
adhere to certain limitations and restrictions while the leverage is outstanding. These compliance tests are performed by BSLs custodian, The Bank of New York Mellon Trust Company. These tests are in addition to any requirements outlined in
BSLs registration statement and the 1940 Act. As of December 31, 2012, BSL was in compliance with all required limitations and restrictions related to its leverage.
The holders of the term preferred shares are entitled to one vote per share and will vote with holders of common stock as a single class, except that the term preferred shares will vote separately as a class on
certain matters, as required by law or BSLs Declaration of Trust. The holders of term preferred shares, voting as a separate class, are entitled at all times to elect two Trustees of BSL.
On December 21, 2012, BGB entered into a Credit Agreement (Agreement) with a bank to borrow up to a limit of $425 million pursuant to a
364 day revolving line of credit. Borrowings under the Agreement are secured by the assets of BGB. Interest is charged at a rate of 0.875% above LIBOR, the period commencing on the date of the making of such LIBOR Loan (or the last date upon which
any other Loan was converted to, or continued as, such LIBOR Loan) and ending on the numerically corresponding day in the calendar month that is one (1) week or one (1), two (2), three (3), six(6) or nine (9) months thereafter, as BGB may elect, or
such other period as the lender may agree in its sole and absolute discretion. Under the terms of the Agreement, BGB must pay a commitment fee on any undrawn amounts. The commitment fee payable is 0.15% on the undrawn amounts when drawn amounts
exceed 50% of the borrowing limit and 0.25% on the undrawn amounts at any other time. Interest and fees are payable quarterly.
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46
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Blackstone / GSO Funds
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Notes to Financial Statements
|
|
|
December 31, 2012
|
At December 31, 2012, BGB had borrowings outstanding under the Agreement of $125 million at an interest rate of 1.08%. Due to the short term nature
of the Agreement, face value approximates fair value at December 31, 2012. This fair value is based on Level 2 inputs under the three-tier fair valuation hierarchy (see Note 2). For the period ended December 31, 2012 (beginning on December 27, 2012,
the date the first borrowing was made), the average borrowings under the Agreement and the average interest rate were $125,000,000, and 1.08%, respectively.
Under the Agreement, BGB has agreed to certain covenants and additional investment limitations while the leverage is outstanding. The Fund agrees to maintain asset coverage of three times over borrowings.
Compliance with the investment restrictions and calculations are performed by BGBs custodian, The Bank of New York Mellon. As of December 31, 2012, BGB was in compliance with all required investment limitations and asset coverage requirements
related to its leverage.
The use of borrowings to leverage the common shares can create risks. Changes in the value of BSLs and
BGBs portfolio, including securities bought with the proceeds of leverage, are borne entirely by the holders of common shares. All costs and expenses related to any form of leverage used by BSL and BGB are borne entirely by common
shareholders. If there is a net decrease or increase in the value of BSLs or BGBs investment portfolio, the leverage may decrease or increase, as the case may be, the net asset value per common share to a greater extent than if BSL or
BGB did not utilize leverage. During periods when BSL or BGB is using leverage, the fees paid to the Adviser for advisory services and to ALPS for administrative services are higher than if BSL or BGB did not use leverage because the fees paid are
calculated on the basis of BSLs or BGBs Managed Assets, which include the assets purchased through leverage.
BGX currently
employs leverage through securities lending arrangements (see Note 8 Securities Lending) and swap arrangements (see Note 7 Total Return and Credit Default Swaps). All costs and expenses related to any form of leverage used by BGX are
borne entirely by holders of common shares. Although certain forms of effective leverage used by BGX, such as leverage incurred in securities lending, total return and credit default swap arrangements, other derivative transactions or short selling,
may not be considered senior securities under the 1940 Act, such effective leverage will be considered leverage for BGXs leverage limits. BGXs use of these forms of effective leverage will not exceed 30% of its net assets. As of December
31, 2012, BGXs effective leverage represented 24.80% of net assets. BGXs total leverage and short sale exposure, through securities lending, total return and credit default swap arrangements, other derivative transactions or short
selling (including the market value of securities BGX is obligated to repay through short sales even in transactions that do not result in leverage), will not exceed 67% of BGXs net assets.
Leverage creates risk for the common shareholders, including the likelihood of greater volatility of NAV and market price of the common shares, and
may affect the return to the common shareholders or result in fluctuations in the dividends paid on the common shares. To the extent total return exceeds the cost of leverage, the Funds return will be greater than if leverage had not been
used. Conversely, if the total return derived from the use of leverage is less than the cost of leverage, the Funds return will be less than if leverage had not been used, and therefore the amount available for distribution to common
shareholders as dividends and other distributions will be reduced. In the latter case, the Adviser in its best judgment nevertheless may determine to maintain the Funds leveraged position if it expects that the benefits to the Funds
common shareholders of maintaining the leveraged position will outweigh the current reduced return.
NOTE
10. TAX BASIS DISTRIBUTIONS
Ordinary income and
long-term capital gains are allocated to common stockholders after payment of the available amounts on any outstanding term preferred shares. To the extent that the amount distributed to common stockholders exceeds the amount of available ordinary
income and long-term capital gains after allocation to any outstanding term preferred shares, these distributions are treated as a tax return of capital. Additionally, to the extent that the amount distributed on any outstanding term preferred
shares exceeds the amount of available ordinary income and long-term capital gains, these distributions are treated as a tax return of capital.
As determined on December 31, 2012, certain permanent differences between financial and tax accounting were reclassified. These differences were primarily due to the differing tax treatment of certain investments.
The amounts reclassified did not affect net assets. The reclassifications were as follows:
|
|
|
|
|
|
|
|
|
Increase/(Decrease) Paid-in capital
|
|
Increase/(Decrease)
Accumulated net investment
income/(loss)
|
|
Increase/(Decrease) Accumulated
net realized gain/(loss)
|
Blackstone / GSO Senior Floating Rate Term Fund
|
|
$ (23,764)
|
|
$
(756,241)
|
|
$ 780,005
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
(20,278)
|
|
1,352,328
|
|
(1,332,050)
|
Blackstone / GSO Strategic Credit Fund
|
|
0
|
|
0
|
|
0
|
|
|
|
Annual
Report | December 31, 2012
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47
|
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Blackstone / GSO Funds
|
|
Notes to Financial Statements
|
|
|
December 31, 2012
|
The tax character of distributions paid by the Funds during the fiscal years ended December 31, 2012, and December 31, 2011, were as follows:
|
|
|
|
|
|
|
|
|
Blackstone / GSO Senior Floating Rate Term Fund
|
|
2012
|
|
|
2011
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
21,274,807
|
|
|
$
|
22,162,695
|
|
Long-term capital gain
|
|
|
1,607,742
|
|
|
|
0
|
|
Total
|
|
$
|
22,882,549
|
|
|
$
|
22,162,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
2012
|
|
|
2011
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
16,455,664
|
|
|
$
|
10,675,720
|
|
Tax return of capital
|
|
|
0
|
|
|
|
2,993,822
|
|
Total
|
|
$
|
16,455,664
|
|
|
$
|
13,669,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone / GSO Strategic Credit Fund
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
6,586,517
|
|
|
|
|
|
Tax return of capital
|
|
|
3,852,602
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
10,439,119
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012, the Funds had available for federal tax purposes unused capital loss carryforwards, which are
available to offset future realized gains. To the extent that these carryforwards are used to offset future gains, it is probable that the amount offset will not be distributed to shareholders. The carryforward losses are as follows:
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|
|
|
|
|
|
|
|
|
|
Short Term
|
|
|
Long Term
|
|
Blackstone / GSO Senior Floating Rate Term Fund
|
|
$
|
0
|
|
|
$
|
0
|
|
Blackstone / GSO Long-Short Credit Income Fund
|
|
|
148,416
|
|
|
|
3,047
|
|
Blackstone / GSO Strategic Credit Fund
|
|
|
0
|
|
|
|
0
|
|
Additionally, the Blackstone /GSO Long-Short Credit Income Fund elects to defer to the period ending December 31,
2013, capital losses recognized during the period November 1, 2011 through December 31, 2012 in the amount of $32,571.
At December 31, 2012, the
components of distributable earnings on a tax basis for the Funds were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone /GSO Senior
Floating Rate Term Fund
|
|
|
Blackstone /GSO Long-Short
Credit Income Fund
|
|
|
Blackstone /GSO
Strategic Credit Fund
|
|
Undistributed ordinary income
|
|
$
|
1,132,402
|
|
|
$
|
1,033,002
|
|
|
$
|
0
|
|
Accumulated capital gains/(loss)
|
|
|
175,364
|
|
|
|
(184,034)
|
|
|
|
0
|
|
Unrealized appreciation
|
|
|
2,686,607
|
|
|
|
932,664
|
|
|
|
9,838,733
|
|
Other Cumulative Effect of Timing Differences
|
|
|
(109,248)
|
|
|
|
216,746
|
|
|
|
0
|
|
Total
|
|
$
|
3,885,125
|
|
|
$
|
1,998,378
|
|
|
$
|
9,838,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount of net unrealized appreciation (depreciation) and the cost of investment securities for tax purposes,
including short-term securities at December 31, 2012, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Blackstone /GSO Senior
Floating Rate Term Fund
|
|
|
Blackstone /GSO Long-Short
Credit Income Fund
|
|
|
Blackstone /GSO
Strategic Credit Fund
|
|
Gross appreciation on investments (excess of value over tax cost)
|
|
$
|
7,305,134
|
|
|
$
|
7,336,538
|
|
|
$
|
12,273,975
|
|
Gross depreciation (excess of value over tax cost)
|
|
|
(4,618,527)
|
|
|
|
(6,187,107)
|
|
|
|
(2,435,242)
|
|
Net appreciation (depreciation) of foreign currency and derivatives
|
|
|
0
|
|
|
|
(216,767)
|
|
|
|
0
|
|
Net unrealized appreciation (depreciation)
|
|
|
2,686,607
|
|
|
|
932,664
|
|
|
|
9,838,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of investments for income tax purposes
|
|
$
|
415,282,683
|
|
|
$
|
274,102,136
|
|
|
$
|
941,218,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
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|
Blackstone /GSO Funds
|
|
Notes to Financial Statements
|
|
|
December 31, 2012
|
NOTE 11. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2011, the FASB issued ASU No. 2011-11 Disclosures about Offsetting Assets and Liabilities to expand current disclosure
requirements on the offsetting of certain assets and liabilities. The new disclosures will be required for investments and derivative financial instruments subject to master netting or similar agreements which are eligible for offset in the
Statements of Assets and Liabilities and will require an entity to disclose both gross and net information about such investments and transactions in the financial statements. The guidance is effective for financial statements with fiscal years
beginning on or after January 1, 2013, and interim periods within those fiscal years. Management is evaluating the impact of this guidance on the Funds financial statement disclosures.
NOTE 12. SUBSEQUENT EVENTS
Shareholder Distributions for BSL:
On February 28, 2013, BSL paid regularly scheduled distributions in the amount of $0.11 per share to shareholders of record as of February 15, 2013.
Shareholder Distributions for BGX:
On January 31, 2013 and February 28, 2013, BGX paid regularly scheduled distributions in the
amount of $0.108 per share to shareholders of record as of January 18, 2013 and February 15, 2013, respectively.
Shareholder
Distributions for BGB:
On January 31, 2013 and February 28, 2013, BGB paid regularly scheduled distributions in the amount of $0.117 per share to shareholders of record as of January 18, 2013 and February 15, 2013, respectively.
BGB Leverage:
On January 22, 2013 and February 22, 2013, BGB borrowed an additional $100,000,000 and $125,000,000, respectively, under the
existing Agreement, increasing leverage to a total of $350,000,000.
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Annual
Report | December 31, 2012
|
|
49
|
|
|
|
Blackstone / GSO Funds
|
|
Report of Independent Register
ed Public Accounting Firm
|
|
|
|
To the Shareholders and Board of
Trustees of Blackstone /GSO Senior Floating Rate Term Fund, Blackstone /GSO Long-Short Credit Income Fund and Blackstone / GSO Strategic Credit Fund:
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Blackstone / GSO Senior Floating Rate Term Fund, as of December 31, 2012, the related statements of
operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the two years in the period ended December 31, 2012 and the
period May 26, 2010 (commencement of operations) to December 31, 2010. We have also audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Blackstone /GSO Long-Short Credit Income Fund, as of
December 31, 2012, the related statements of operations and cash flows for the year then ended, and the statements of changes in net assets and the financial highlights for the year ended December 31, 2012 and for the period January 27, 2011
(commencement of operations) to December 31, 2011. We have also audited the accompanying statement of assets and liabilities, including the portfolio of investments, of Blackstone /GSO Strategic Credit Fund (collectively with Blackstone / GSO Senior
Floating Rate Term Fund and Blackstone /GSO Long-Short Credit Income Fund, the Funds), as of December 31, 2012, and the related statements of operations, cash flows, changes in net assets, and the financial highlights for the period
September 26, 2012 (commencement of operations) to December 31, 2012. These financial statements and financial highlights are the responsibility of the Funds management. Our responsibility is to express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Funds are not required
to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2012, by correspondence with the custodian, brokers and agent banks; where replies were not received from brokers or agent banks, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Blackstone / GSO Senior Floating Rate Term Fund, Blackstone / GSO Long-Short Credit Income Fund, and Blackstone / GSO Strategic Credit Fund as of December 31, 2012, the
results of their operations and their cash flows, the changes in their net assets, and the financial highlights, for each of the respective periods referred to above, in conformity with accounting principles generally accepted in the United States
of America.
DELOITTE & TOUCHE LLP
Denver, Colorado
February 28, 2013
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50
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www.blackstone-gso.com
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|
Blackstone / GSO Funds
|
|
Summary of Divi
dend Reinvestment Plan
|
|
|
December 31, 2012 (Unaudited)
|
Pursuant to the Funds Dividend Reinvestment Plan (the DRIP), shareholders whose shares are registered in their own name may
opt-in to the plan and elect to reinvest all or a portion of their distributions in common shares by providing the required enrollment notice to Computershare, the DRIP administrator. Shareholders whose shares are held in the
name of a broker or other nominee may have distributions reinvested only if such a service is provided by the broker or the nominee or if the broker or the nominee permits participation in the DRIP. Shareholders whose shares are held in the name of
a broker or other nominee should contact the broker or nominee for details. A shareholder may terminate participation in the DRIP at any time by notifying the DRIP administrator before the record date of the next distribution through the Internet,
by telephone or in writing. All distributions to shareholders who do not participate in the DRIP, or have elected to terminate their participation in the DRIP, will be paid by check mailed directly to the record holder by or under the direction of
the DRIP administrator when the Funds Board of Trustees declares a distribution.
When the Funds declare a distribution,
shareholders who are participants in the applicable DRIP receive the equivalent of the amount of the distribution in common shares. If you participate in the DRIP, the number of common shares of the Funds that you will receive will be determined as
follows:
(1) If the market price of the common shares plus any brokerage commissions on the payable date (or, if the payable date is
not a New York Stock Exchange trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant distribution (the determination date) is equal to or exceeds 98% of the net asset
value per common share, the Fund will issue new common shares at a price equal to the greater of:
(a) 98% of the net
asset value per share at the close of trading on the New York Stock Exchange on the determination date or
(b) 95% of
the market price per common share on the determination date.
(2) If 98% of the net asset value per common share exceeds the market
price of the common shares plus any brokerage commissions on the determination date, the DRIP administrator will receive the distribution in cash and will buy common shares in the open market, on the New York Stock Exchange or elsewhere, for your
account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the distribution payment date, or (b) the record date for the next succeeding distribution
to be made to the shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price plus any brokerage commissions rises so that it equals or exceeds 98% of the net
asset value per common share at the close of trading on the New York Stock Exchange on the determination date before the DRIP administrator has completed the open market purchases or (ii) the DRIP administrator is unable to invest the full amount
eligible to be reinvested in open market purchases, the DRIP administrator will cease purchasing common shares in the open market and the Fund will issue the remaining common shares at a price per share equal to the greater of (a) 98% of the net
asset value per share at the close of trading on the New York Stock Exchange on the determination date or (b) 95% of the then current market price per share.
The DRIP administrator maintains all shareholder accounts in the dividend reinvestment plan and furnishes written confirmations of all transactions in the account, including information needed by shareholders for
personal and tax records. Common shares in the account of each DRIP participant are held by the DRIP administrator in non-certificated form in the name of the participant, and each shareholders proxy includes shares purchased pursuant to the
DRIP.
There is no charge to participants for reinvesting regular distributions and capital gains distributions. The fees of the DRIP
administrator for handling the reinvestment of regular distributions and capital gains distributions are included in the fee to be paid by us to our transfer agent. There are no brokerage charges with respect to shares issued directly by us as a
result of regular distributions or capital gains distributions payable either in shares or in cash. However, each participant bears a pro rata share of brokerage commissions incurred with respect to the DRIP administrators open market
purchases in connection with the reinvestment of such distributions. Shareholders that opt-in to the DRIP will add to their investment through dollar cost averaging. Because all dividends and distributions paid to such shareholder will be
automatically reinvested in additional common shares, the average cost of such shareholders common shares will decrease over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Funds net
asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
The automatic reinvestment of such dividends or distributions does not relieve participants of any income tax that may be payable on such dividends or distributions.
You may obtain additional information by contacting the DRIP administrator at the following address: Computershare, Attn: Sales Dept., P.O. Box
358035, Pittsburgh, PA 15252.
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Annual
Report | December 31, 2012
|
|
51
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|
Blackstone / GSO Funds
|
|
A
dditional Information
|
|
|
December 31, 2012 (Unaudited)
|
Portfolio Information.
The Funds file their complete schedules of portfolio holdings with the Securities and Exchange Commission (the
SEC) for the first and third quarters of each fiscal year on Form N-Q. The Funds Forms N-Q will be available (1) on the Funds website located at http://www.blackstone-gso.com; (2) on the SECs website at
http://www.sec.gov; or (3) for review and copying at the SECs Public Reference Room (the PRR) in Washington, DC. Information regarding the operation of the PRR may be obtained by calling 1-800-SEC-0330.
Proxy information.
The policies and procedures used to determine how to vote proxies relating to securities held by the Funds are available
(1) without charge, upon request, by calling 1-877-876-1121, or (2) on the Funds website located at http://www.blackstone-gso.com, and (3) on the SECs website at http://www.sec.gov. Information regarding how the Funds voted proxies
relating to portfolio securities during the most recent twelve-month period ended June 30 is available on Form N-PX by August 31 of each year (1) without charge, upon request, by calling 1-877-876-1121, or (2) on the Funds website located at
http://www.blacksone-gso.com, and (3) on the SECs website at http://www.sec.gov.
Senior Officer Code of Ethics.
The Funds
file a copy of their code of ethics that applies to the Funds principal executive officer, principal financial officer or controller, or persons performing similar functions, with the SEC as an exhibit to this and each other annual report on
Form N-CSR. This will be available on the SECs website at http://www.sec.gov.
Privacy Procedures.
Privacy is very
important to the Funds. To ensure our shareholders privacy the Funds have developed policies that are designed to protect confidentiality while allowing their shareholders needs to be served. In the course of providing their shareholders
with products and services, the Funds may obtain non-public personal information, such as address, social security number, assets and/or income information: (i) in the subscription document and related support documents; (ii) in correspondence and
conversations with the Funds or their representatives; and (iii) through transactions in and relating to the investment with the Funds.
The Funds do not disclose any of this personal information about shareholders to anyone other than to their affiliates, except as required for
everyday purposes or as permitted by law, such as to their attorneys, auditors, brokers, bankers, regulators, administrators and certain service providers, in each such case, only as necessary to facilitate the acceptance of the shareholders
investment or the management of the Funds. The Funds will also release information about a shareholder if such shareholder directs the Funds to do so, if compelled to do so by law, or in connection with any government or self-regulatory organization
request or investigation.
The Funds seek to carefully safeguard private information and, to that end, restrict access to non-public
personal information about the shareholders to those employees and other persons who need to know the information to enable the Funds to provide services to the shareholders. The Funds maintain physical, electronic and procedural safeguards to
protect each shareholders non-public personal information.
Tax Information.
Of the ordinary income (including short-term
capital gains) distributions made by BSL during the year ended December 31, 2012, 0% qualifies for the dividend received deduction available to stockholders. The amount of long-term capital gains paid for the year ended December 31, 2012 was
$1,607,742. For the year ended December 31, 2012, 0% of the taxable investment income qualifies for the 15% dividend tax rate.
Of the
ordinary income (including short-term capital gain) distributions made by BGX during the fiscal period ended December 31, 2012, 0% qualifies for the dividend received deduction available to stockholders. The amount of long-term capital gains paid
for the fiscal period ended December 31, 2012 was $0. For the fiscal period ended December 31, 2012, 0% of the taxable investment income qualifies for the 15% dividend tax rate.
Of the ordinary income (including short-term capital gain) distributions made by BGB during the fiscal period ended December 31, 2012, 0% qualifies
for the dividend received deduction available to stockholders. The amount of long-term capital gains paid for the fiscal period ended December 31, 2012 was $0. For the fiscal period ended December 31, 2012, 0% of the taxable investment income
qualifies for the 15% dividend tax rate.
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52
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www.blackstone-gso.com
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Blackstone / GSO Funds
|
|
Approval of Investment
Advisory Agreement
|
|
|
December 31, 2012 (Unaudited)
|
At an in-person meeting (the Organization Meeting) of the Board of Trustees (the Board) of BGB held on May 15, 2012, the
Board received a proposal to launch a non-diversified, closed-end management investment company registered under the 1940 Act. As part of this proposal, the Board at the Organization Meeting considered the initial approval for a two-year period of
BGBs investment advisory agreement (the Agreement) pursuant to which the Adviser provides BGB with investment advisory services. The Trustees who are not interested persons, as defined in the 1940 Act (the
Independent Trustees), of BGB were assisted in their review by BGBs counsel and independent legal counsel and met with independent legal counsel in executive sessions separate from representatives of the Adviser. Prior to the
Organization Meeting, the Independent Trustees received a memorandum from counsel to BGB describing their responsibilities in connection with the approval of the Agreement as well as information from the Adviser they deemed reasonably necessary for
their review of the Agreement.
Board Approval of the Agreement
In its deliberations regarding approval of the Agreement, the Board of BGB, including the Independent Trustees, considered various factors, including those set forth below.
Nature, Extent and Quality of the Services to be provided to the Fund under the Agreement
The Board received and considered information regarding the nature, extent and quality of the respective services to be provided to BGB and its
shareholders by the Adviser under the Agreement. The Independent Trustees evaluations also reflected the knowledge and familiarity gained as Board members of the other closed-end funds in the same complex with respect to the services provided
by the Adviser and its affiliates. The Board noted that BGB is newly organized and has no operating history. The Board reviewed information received from the Adviser and BGBs Chief Compliance Officer (the CCO) regarding the
compliance policies and procedures established pursuant to the 1940 Act and reviewed the investment programs of BGB and Adviser with the CCO.
As a newly organized fund, BGB had no historical performance information available at the time of the Organization Meeting for the Board to consider in its evaluation of the terms and conditions of the Agreement.
The Board reviewed the investment objectives and policies of BGB with the Adviser and the qualifications, backgrounds and responsibilities of the senior personnel of BGB and the portfolio management team of the Adviser that would be primarily
responsible for the day-to-day portfolio management of BGB. The Board members discussed with representatives of the Adviser the Advisers experience and capabilities in the management of funds and investment vehicles comparable to BGB and also
discussed the Advisers compliance capabilities. The Board considered the financial resources available to be employed by the Adviser and its affiliate, The Blackstone Group L.P., for the benefit of BGB.
The Board also considered the responsibilities of the Adviser under the Agreement, including the Advisers coordination and oversight of
services provided to BGB by others.
The Board concluded that, overall, it was satisfied with the nature, extent and high quality of the
respective services expected to be provided by the Adviser under the Agreement.
Management Fees
The Board reviewed and considered the contractual investment advisory fee (the Contractual Advisory Fee) payable by BGB to the Adviser
under the Agreement in light of the nature, extent and high quality of the management and services expected to be provided by the Adviser to BGB. The Board also considered the complexity of the proposed investment program for BGB. The Contractual
Advisory Fee is an annual fee, payable monthly, in an amount equal to 1.00% of BGBs average daily value of BGBs Managed Assets. The Board noted that the Adviser will provide BGB, or cause BGB to be provided with, regulatory compliance
and administrative services, office facilities and officers (including the chief financial, chief legal and chief compliance officers), and that the Adviser will coordinate and oversee the provision of services to BGB by other fund service
providers.
The Board received and considered information comparing the Contractual Advisory Fee on a gross basis with those of a group
of comparable funds and investment vehicles. The Board obtained confirmation from the Adviser that the fees and expenses of BGB are in line with those of comparable funds and investment vehicles. The Board noted that during periods when BGB is using
leverage through borrowings or the issuance of preferred stock, the fees paid to the Adviser for advisory services will be higher than if BGB did not use leverage because the fees paid will be calculated on the basis of BGBs managed assets,
which includes the principal amount of the borrowings and any assets attributable to the issuance of preferred stock. The Adviser discussed the expected expense ratio of BGB and the costs of organization. The Adviser also discussed with the Board
BGBs proposed underwriting arrangements. Underwriters were to receive a sales load of 4.50% of the offering price of each share. The Board noted a proposal by the Adviser to pay (i) all of BGBs organizational expenses and (ii) BGBs
offering expenses (other than sales load) in excess of $0.04 per share.
Profitability
Because BGB was newly organized, the Board noted that the Adviser had no historical profitability information available for the Board to consider at
the time of the Organization Meeting. The Board was provided with pro forma information regarding the projected profitability to the Adviser of its services to BGB. The pro forma information indicated that the Advisers relationship with BGB
would not be profitable to the Adviser during the first year of its operations. The Board noted that the profitability information was pro forma in nature, and therefore speculative, and did not give the information significant weight. Under the
circumstances, profitability was not a significant factor in the Boards evaluation of the Agreement.
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Annual
Report | December 31, 2012
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53
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Blackstone / GSO Funds
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Approval of Investment Advisory Agreement
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December 31, 2012 (Unaudited)
|
Economies of Scale
The Adviser stated that
if BGBs assets increase over time, BGB and its shareholders should realize economies of scale as certain expenses, such as fixed fund fees, become a smaller percentage of overall assets. However, the Board noted that because BGB is a
closed-end fund with no current plans to seek additional assets beyond the possible borrowings under a credit facility and maintaining its dividend reinvestment plan, any other significant growth in its assets will generally occur through
appreciation in the value of BGBs investment portfolio, rather than sales of beneficial shares of BGB. The Board concluded the Contractual Advisory Fee structure, which incorporates no breakpoints to reflect the potential for realization of
economies of scale, was appropriate at that time.
Taking all of the above into consideration, the Board determined that the Contractual
Advisory Fee was reasonable in light of the information presented and the nature, extent and high quality of the services expected to be provided by the Adviser under the Agreement.
Other Benefits to the Adviser
The Board considered other benefits expected to be received by
the Adviser and its affiliates as a result of the Advisers relationship with BGB. In light of the expected costs of providing investment management and other services to BGB and the Advisers commitment to BGB, the other ancillary
benefits that the Adviser and its affiliates expect to receive were not considered excessive under the circumstances. Based on their discussions and considerations, including those described above, the Board, including the Independent Trustees,
determined that the Agreement was in the best interests of BGBs shareholders and unanimously voted to approve the Agreement.
No
single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve the Agreement, and each Board member attributed different weights to the various factors.
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54
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www.blackstone-gso.com
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Item 7.
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Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
|
Attached, as Exhibit Item 7, is a copy of the registrants policies and procedures.
Item 8.
|
Portfolio Managers of Closed-End Management Investment Companies.
|
(a)(1) As of: December 31, 2012
The lead Portfolio Manager for the
Fund is Lee Shaiman, who is primarily responsible for the day-to-day management of the Fund. The Advisers US Credit Investment Committee (Investment Committee) is also included below. The investment Committee approves investments
made by the Fund, but is not primarily responsible for the Funds day-to-day management.
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Portfolio Managers
Name
|
|
Title
|
|
Length of
Service
|
|
Business Experience: 5
Years
|
Daniel H. Smith, Jr.
|
|
Investment Committee Member, President and Chief Executive Officer
|
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Since Inception
|
|
Mr. Smith is a Senior Managing Director, Head of GSO / Blackstone Debt Funds Management
LLC (the Adviser).
Mr. Smith joined the Adviser from Royal Bank of Canada in July 2005 where he was a Managing Partner and Co-head of RBC Capital Markets Alternative Investments Unit. Mr. Smith has over 25 years of experience in
investment management, including high yield bank loans and bonds, investment grade debt, mezzanine and private debt, public and private equities and limited partnership investments.
Mr. Smith received a Masters in Management from the J.L. Kellogg
Graduate School of Management at Northwestern University and a B.S. in
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Petroleum Engineering from the University of Southern
California.
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Lee M. Shaiman
|
|
Portfolio Manager, Investment Committee Member, Executive Vice President and Assistant Secretary
|
|
Since Inception
|
|
Mr. Shaiman is a Managing Director of the Adviser. Mr. Shaiman joined the Adviser from
Royal Bank of Canada in July 2005 where he was a Managing Partner and Head of Portfolio Management and Credit Research in the Debt Investments group. He is a Certified Public Accountant, licensed in the State of New Jersey. Mr. Shaiman has over 30
years experience in leveraged finance, including structuring and placement of senior bank loans and bridge financing, private placements, high yield bonds and equity co-investments. Mr. Shaiman received a Masters of Science in Accounting and
Taxation from the Wharton School of the University of Pennsylvania and a B.S. in Economics, cum laude,
Phi Beta Kappa, from Rutgers College.
|
James M. Didden, Jr.
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|
Portfolio Manager and Investment Committee Member
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|
Since Inception
|
|
Mr. Didden is a Senior Managing Director of the Adviser. Before joining the Adviser in
2005, Mr. Didden was a Managing Director in High Yield Sales & Trading at Deutsche Bank. Prior to joining Deutsche Bank, Mr. Didden was a Partner at J. & W. Seligman, serving as Portfolio Manager and Head Trader for the firms
multi-billion dollar High Yield Portfolio. Before joining
J. & W. Seligman, Mr. Didden practiced Corporate Tax Law at Kelley, Drye & Warren where he worked on numerous leveraged finance transactions.
Mr. Didden received a
Masters
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|
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in Tax Law from the New York University School of Law, a
J.D., cum laude, from American University Law School and a B.A. from Boston College.
|
Brad Marshall
|
|
Investment Committee Member
|
|
Since Inception
|
|
Mr. Marshall is a Managing Director of the Adviser. Before joining the Adviser in 2005,
Mr. Marshall worked in various roles at RBC, including fixed income research and business development within RBCs private equity funds effort. Prior to RBC, Mr. Marshall helped develop a private equity funds business for TAL Global, a Canadian
asset management division of CIBC, and prior to that, he co-founded a microchip verification software company where he served as chief financial officer.
Mr. Marshall received an M.B.A. from McGill University in Montreal where he was an Academic
All-Canadian and a B.A. (Honors) in Economics from Queens University in Kingston, Canada.
|
Daniel T. McMullen
|
|
Investment Committee Member
|
|
Since Inception
|
|
Mr. McMullen is a Managing Director of the Adviser and leader of the groups capital
markets effort. Before joining the Adviser in 2002, Mr. McMullen worked at CIBC World Markets, most recently as a Director and Senior Investment Analyst for the structured investment vehicles managed by Trimaran Advisors, L.L.C. Mr. McMullen has
earned his Certified Financial Analyst designation and received a B.A. from the University of Rochester where he graduated cum laude.
|
Robert Zable
|
|
Investment Committee Member
|
|
Since January 2011
|
|
Mr. Zable a Managing Director of the Adviser. Before joining the Adviser,
Mr. Zable was
a Vice President at
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FriedbergMilstein LLC, where he was responsible for credit
opportunity investments and junior capital origination and execution. Prior to that, Mr. Zable was a Principal with Abacus Advisors Group, a restructuring and distressed investment firm.
Mr. Zable began his career at
JP Morgan Securities Inc.,
where he focused on leveraged finance in New York and London. Mr. Zable received a BS from Cornell University, and an MBA in Finance from The Wharton School at the University of Pennsylvania.
|
(a)(2) As of December 31, 2012, the Portfolio Managers listed above are also responsible for the
day-to-day management of the following:
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
Advisory Fee Based
on
Performance
|
|
|
Type of Accounts
|
|
Number
of
Accounts
|
|
Total
Assets
|
|
Number
of
Accounts
|
|
Total
Assets
|
|
Material
Conflicts if
Any
|
Daniel H. Smith, Jr.
|
|
|
|
|
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|
|
|
|
See below
(1)
|
Registered Investment Companies
|
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0
|
|
0
|
|
0
|
|
0
|
|
|
Other Pooled Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other
Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lee
M. Shaiman
|
|
|
|
|
|
|
|
|
|
See below
(1)
|
Registered Investment Companies
|
|
3
|
|
$1.7 billion
*
|
|
0
|
|
0
|
|
|
Other Pooled Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other
Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
M. Didden, Jr.
|
|
|
|
|
|
|
|
|
|
See below
(1)
|
Registered Investment Companies
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other Pooled Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other
Accounts
|
|
1
|
|
$0.1 billion
|
|
1
|
|
$0.1 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brad
Marshall
|
|
|
|
|
|
|
|
|
|
See below
(1)
|
Registered Investment Companies
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other Pooled Accounts
|
|
3
|
|
$5.9 billion
|
|
3
|
|
$5.9 billion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Accounts
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel T. McMullen
|
|
|
|
|
|
|
|
|
|
See below
(1)
|
Registered Investment Companies
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other Pooled Accounts
|
|
2
|
|
$0.8 billion
|
|
0
|
|
0
|
|
|
Other
Accounts
|
|
9
|
|
$2.9 billion
|
|
0
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert Zable
|
|
|
|
|
|
|
|
|
|
See below
(1)
|
Registered Investment Companies
|
|
0
|
|
0
|
|
0
|
|
0
|
|
|
Other Pooled Accounts
|
|
16
|
|
$8.3 billion
|
|
16
|
|
$8.3 billion
|
|
|
Other
Accounts
|
|
2
|
|
$0.5 billion
|
|
0
|
|
0
|
|
|
* Including the registrant.
(1)
Potential
Conflicts of Interest
The portfolio managers and the Investment Committee (together,
portfolio managers) have interests which may conflict with the interests of the Fund. There is no guarantee that the policies and procedures adopted by the Adviser and the Fund will be able to identify or mitigate these conflicts of
interest. Some examples of material conflicts of interest include:
Broad and Wide-Ranging
Activities.
The portfolio managers, the Adviser, Blackstone and their affiliates engage in a broad spectrum of activities. In the ordinary course of their business activities, the portfolio managers, the Adviser, Blackstone and their
affiliates may engage in activities where the interests of certain divisions of the Adviser, Blackstone and its affiliates or the interests of their clients may conflict with the interests of the shareholders of the Fund. Other present and future
activities of the Adviser, Blackstone and their affiliates may give rise to additional conflicts of interest. In the event that a conflict of interest arises, the Adviser will attempt to resolve such conflicts in a fair and equitable manner, subject
to the limitations of the Investment Company Act. The Adviser will have the power to resolve, or consent to the resolution of, conflicts of interest on behalf of, and such resolution will be binding on, the Fund, subject to the limitations of the
Investment Company Act. Shareholders of the Fund should be aware that conflicts will not necessarily be resolved in favor of the Funds interests.
The Firms Policies and Procedures
Specified policies and procedures
implemented by the Adviser, Blackstone and their affiliates to mitigate potential conflicts of interest and address certain regulatory requirements and contractual restrictions may reduce the advantages across the Adviser, Blackstone and their
affiliates various businesses that the Fund expects to draw on for purposes of pursuing attractive investment opportunities. Because the Adviser, Blackstone and their affiliates has many different asset management, advisory and businesses, it
is subject to a number of actual and potential conflicts of interest, greater regulatory oversight and more legal and contractual restrictions than that to which it would otherwise be subject if it had just one line of business. In addressing these
conflicts and regulatory, legal and contractual requirements across its various businesses, the Adviser, Blackstone and their affiliates have implemented certain policies and procedures (e.g., information walls) that
may reduce the benefits that the Fund expects to utilize for purposes of finding and managing its investments. For example, the Adviser, Blackstone and their affiliates may come into possession
of material non-public information with respect to companies in which the Fund may be considering making an investment or companies that are the Adviser, Blackstone and their affiliates advisory clients. As a consequence, that information,
which could be of benefit to the Fund, might become restricted to those other businesses and otherwise be unavailable to the Fund, and could also restrict the Funds activities. Additionally, the terms of confidentiality or other agreements
with or related to companies in which any fund of the Adviser, Blackstone and their affiliates has or has considered making an investment or which is otherwise an advisory client of the Adviser, Blackstone and their affiliates and its affiliates may
restrict or otherwise limit the ability of the Fund and/or its portfolio companies and their affiliates to engage in businesses or activities competitive with such companies.
Allocation of Investment Opportunities.
Certain inherent conflicts of interest arise from the fact that the
portfolio managers, the Adviser, Blackstone and their affiliates provide investment management services both to the Fund and other clients, including, other funds, as well as, client accounts, proprietary accounts and any other investment vehicles
that the Adviser and its affiliates may establish from time to time managed by the Adviser and its affiliates in which the Fund will not have an interest (such other clients, funds and accounts, collectively the Other Adviser Accounts).
In addition, Blackstone and its affiliates provide investment management services to other clients, including other funds, and any other investment vehicles that Blackstone or any of its affiliates may establish from time to time (the Other
Blackstone Funds), client accounts, and proprietary accounts in which the Fund will not have an interest (such other clients, funds and accounts, collectively the Other Blackstone Accounts and together with the Other Adviser
Accounts, the Other Accounts). The respective investment programs of the Fund and the Other Accounts may or may not be substantially similar. The portfolio managers, the Adviser, Blackstone and their affiliates may give advice and
recommend securities to Other Accounts which may differ from advice given to, or securities recommended or bought for, the Fund, even though their investment objectives may be the same or similar to those of the Fund.
While the Adviser will seek to manage potential conflicts of interest in good faith, the portfolio strategies employed by
the portfolio managers, the Adviser and Blackstone in managing its respective Other Accounts could conflict with the transactions and strategies employed by the portfolio managers in managing the Fund and may affect the prices and availability of
the securities and instruments in which the Fund invests. Conversely, participation in specific investment opportunities may be appropriate, at times, for both the Fund and Other Accounts. It is the policy of the Adviser to generally share
appropriate investment opportunities (and sale opportunities) with the Other Accounts. In general and except as provided below, this means that such opportunities will be allocated pro rata among the Fund and the Other Accounts based on available
capacity for such investment in each fund, taking into account available cash and the relative capital of the respective funds. Nevertheless, investment and/or opportunities may be allocated other than on a pro rata basis, if the Adviser deems in
good faith that a different allocation among the Fund and the Other Accounts is appropriate, taking into account, among other considerations (a) risk-return profile of the proposed investment and the Funds or the Other Accounts
current risk profile; (b) the Funds or the Other Accounts investment guidelines, restrictions and
objectives, including whether such objectives are considered solely in light of the specific investment under consideration or in the context of the portfolios overall holdings;
(c) the potential for the proposed investment to create an industry, sector or issuer imbalance in the Funds and the Other Accounts portfolios; (d) liquidity requirements of the Fund and Other Accounts, including during a
wind-down of the Fund or Other Account; (e) tax consequences; (f) regulatory restrictions; (g) the need to re-size risk in the Funds or Other Accounts portfolios; (h) redemption/withdrawal requests from Other Accounts
and anticipated future contributions into the Fund and Other Accounts; (i) proximity of the Fund or an Other Account to the end of its specified term/commitment period; (j) when a pro rata allocation could result in de minimis or odd lot
allocations; (k) degree of leverage availability and any requirements or other terms of any existing leverage facilities; (l) the nature and extent of involvement in the transaction on the part of the respective teams of investment
professionals dedicated to the Fund or an Other Account; (m) available cash and (n) other considerations deemed relevant by the Adviser or the applicable investment adviser. Because of these and other factors, certain Other Accounts may
effectively have priority in investment allocations over the Fund, notwithstanding the Advisers policy of
pro rata
distribution. The Adviser may also have a conflict of interest in allocating investment opportunities between the Fund
and Other Accounts in cases where Other Accounts offer more attractive incentive fees to the Adviser or its affiliates.
Orders may be combined for all such accounts, and if any order is not filled at the same price, they may be allocated on an average price basis. Similarly, if an order on behalf of more than one account
cannot be fully executed under prevailing market conditions, securities may be allocated among the different accounts on a basis which the Adviser or its affiliates consider equitable. From time to time, the Fund and Other Accounts may make
investments at different levels of an issuers capital structure or otherwise in different classes of an issuers securities, subject to the limitations of the Investment Company Act. Such investments may inherently give rise to conflicts
of interest or perceived conflicts of interest between or among the various classes of securities that may be held by such entities.
Allocation of Personnel.
Although the professional staff of the Adviser will devote as much time to the management of the Fund and the Adviser deems appropriate to perform its duties in
accordance with the investment advisory agreement and in accordance with reasonable commercial standards, the professional staff of the Adviser may have conflicts in allocating its time and services among the Fund and the Advisers other
investment vehicles and accounts. The Adviser and its affiliates are not restricted from forming additional investment funds, from entering into other investment advisory relationships or from engaging in other business activities, even though such
activities may be in competition with the Fund and/or may involve substantial time and resources of the Adviser and its professional staff. These activities could be viewed as creating a conflict of interest in that the time and effort of the
members of the Adviser and their officers and employees will not be devoted exclusively to the business of the Fund but will be allocated between the business of the Fund and the management of the monies of other clients of the Adviser.
Pursuit of Differing Strategies.
At times, the portfolio managers may determine that an investment
opportunity may be appropriate for only some of the accounts, clients, entities, funds and/or investment companies for which he or she exercises investment
responsibility, or may decide that certain of the accounts, clients, entities, funds and/or investment companies should take differing positions with respect to a particular security. In these
cases, the portfolio manager may place separate transactions for one or more accounts, clients, entities, funds and/or investment companies which may affect the market price of the security or the execution of the transaction, or both, to the
detriment or benefit of one or more other accounts, clients, entities, funds and/or investment companies. For example, a portfolio manager may determine that it would be in the interest of another account to sell a security that the Fund holds long,
potentially resulting in a decrease in the market value of the security held by the Fund.
Investment
Banking, Advisory and Other Relationships.
As part of its regular business, Blackstone provides a broad range of investment banking, advisory, and other services. In the regular course of its investment banking and advisory businesses,
Blackstone represents potential purchasers, sellers and other involved parties, including corporations, financial buyers, management, shareholders and institutions, with respect to transactions that could give rise to investments that are suitable
for the Fund. In such a case, a Blackstone client would typically require Blackstone to act exclusively on its behalf, thereby precluding the Fund from participating in such transactions. Blackstone will be under no obligation to decline any such
engagements in order to make an investment opportunity available to the Fund. In connection with its investment banking, advisory and other businesses, Blackstone may come into possession of information that limits its ability to engage in potential
transactions. The Funds activities may be constrained as a result of the inability of Blackstone personnel to use such information. For example, employees of Blackstone may be prohibited by law or contract from sharing information with members
of the Funds investment team. Additionally, there may be circumstances in which one or more of certain individuals associated with Blackstone will be precluded from providing services related to the Funds activities because of certain
confidential information available to those individuals or to other parts of Blackstone. In certain sell-side and fundraising assignments, the seller may permit the Fund to act as a participant in such transaction, which would raise certain
conflicts of interest inherent in such a situation (including as to the negotiation of the purchase price) and also be subject to the limitations of the Investment Company Act. Blackstone has long-term relationships with a significant number of
corporations and their senior management. In determining whether to invest in a particular transaction on behalf of the Fund, the Adviser and portfolio managers will consider those relationships, which may result in certain transactions that the
Adviser and portfolio managers will not undertake on behalf of the Fund in view of such relationships.
Blackstone may
represent creditors or debtors in proceedings under Chapter 11 of the Bankruptcy Code or prior to such filings. From time to time Blackstone may serve as advisor to creditor or equity committees. This involvement, for which Blackstone may be
compensated, may limit or preclude the flexibility that the Fund may otherwise have to participate in restructurings or the Fund may be required to liquidate any existing positions of the applicable issuer to avoid a subsequent conflict of interest.
The inability to transact in any security, derivative or loan held by the Fund could result in significant losses to the Fund.
Service Providers.
The Funds service providers (including lenders, brokers, attorneys, and investment banking firms) may be sources of investment opportunities and
counterparties therein. This may influence the Adviser in deciding whether to select such a service provider. Notwithstanding the foregoing, investment transactions for the Fund that require the
use of a service provider, will generally be allocated to service providers on the basis of best execution (and possibly to a lesser extent in consideration of such service providers provision of certain investment-related services that the
Adviser believes to be of benefit to the Fund).
Variation in Financial and Other Benefits.
A
conflict of interest arises where the financial or other benefits available to portfolio managers differ among the accounts, clients, entities, funds and/or investment companies that he or she manages. If the amount or structure of the management
fee and/or a portfolio managers compensation differs among accounts, clients, entities, funds and/or investment companies (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio
manager might be motivated to help certain accounts, clients, entities, funds and/or investment companies over others. Similarly, the desire to maintain assets under management or to enhance the portfolio managers performance record or to
derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those accounts, clients, entities, funds and/or investment companies that could most significantly benefit the portfolio
manager. A portfolio manager may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such accounts, clients, entities, funds and/or investment companies. Also, the
desire of a portfolio manager or the Adviser to increase assets under management could influence the portfolio manager to keep a fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the
portfolio manager might be motivated to favor accounts, clients, entities, funds and/or investment companies in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely,
if a portfolio manager does not personally hold an investment in the fund, the portfolio managers conflicts of interest with respect to the Fund may be more acute.
Material, Non-Public Information.
The Adviser or certain of its affiliates may come into possession of
material non-public information with respect to an issuer. Should this occur, the Adviser would be restricted from buying or selling securities, derivatives or loans of the issuer on behalf of the Fund until such time as the information became
public or was no longer deemed material to preclude the Fund from participating in an investment. Disclosure of such information to the personnel responsible for the affairs of the Fund will be on a need-to-know basis only, and the Fund may not be
free to act upon any such information. Therefore, the Fund may not have access to material non-public information in the possession of the Adviser or certain of its affiliates which might be relevant to an investment decision to be made by the Fund,
and the Fund may initiate a transaction or sell an investment which, if such information had been known to it, may not have been undertaken. Due to these restrictions, the Fund may not be able to initiate a transaction that it otherwise might have
initiated and may not be able to sell an investment that it otherwise might have sold.
Trading by Firm
Personnel
. The officers, directors, members, managers, and employees of the Adviser may trade in securities for their own accounts, subject to restrictions and reporting requirements as may be required by law and the policies of the Adviser and
its affiliates, or otherwise determined from time to time by the Adviser.
Possible Future Activities.
The Adviser and its affiliates may
expand the range of services that it provides over time. Except as provided herein, the Adviser and its affiliates will not be restricted in the scope of its business or in the performance of any such services (whether now offered or undertaken in
the future) even if such activities could give rise to conflicts of interest, and whether or not such conflicts are described herein. The Adviser and its affiliates have, and will continue to develop, relationships with a significant number of
companies, financial sponsors and their senior managers, including relationships with clients who may hold or may have held investments similar to those intended to be made by the Fund. These clients may themselves represent appropriate investment
opportunities for the Fund or may compete with the Fund for investment opportunities.
Transactions with
Other Funds
. From time to time, the Fund may enter into purchase and sale transactions with other funds managed by the Adviser or its affiliates. Such transactions will be conducted in accordance with, and subject to, the Advisers
fiduciary obligations to the Fund and the Investment Company Act.
Other Affiliate
Transactions.
The Fund may acquire a Senior Loan from a Borrower in which a separate equity or junior debt investment has been made by other GSO or Blackstone affiliates. When making such investments, the Fund and other GSO or Blackstone
affiliates may have conflicting interests. For example, conflicts could arise where the Fund becomes a lender to a company when an affiliate of the Adviser owns equity securities of such a company. In this circumstance, for example, if such company
goes into bankruptcy, becomes insolvent or is otherwise unable to meet its payment obligations or comply with its debt covenants, conflicts of interest could arise between the holders of different types of securities as to what actions the company
should take. There can be no assurance that the return on the Funds investment will be equivalent to or better than the returns obtained by the other affiliates.
Further conflicts could arise once the Fund and other affiliates have made their respective investments. For example, if
a company goes into bankruptcy or reorganization, becomes insolvent or otherwise experiences financial distress or is unable to meet its payment obligations or comply with covenants relating to securities held by the Fund or by the other affiliates,
such other affiliates may have an interest that conflicts with the interests of the Fund. If additional financing is necessary as a result of financial or other difficulties, it may not be in the best interests of the Fund to provide such additional
financing. If the other affiliates were to lose their respective investments as a result of such difficulties, the ability of the Adviser to recommend actions in the best interests of the Fund might be impaired.
In addition, the Investment Company Act limits the Funds ability to enter into certain transactions with certain of
our affiliates. As a result of these restrictions, we may be prohibited from buying or selling any security directly from or to any portfolio company of a private equity fund managed by Blackstone, GSO or one or more of the Blackstone / GSO
Related Parties. However, the Fund may under certain circumstances purchase any such portfolio companys loans or securities in the secondary market, which could create a conflict for the Adviser between its interests in the Fund and the
portfolio company, in that the ability of the Adviser to recommend actions in the best interest of the Fund might be impaired. The Investment Company Act also prohibits certain joint transactions with certain of our affiliates, which
could include investments in the same
portfolio company (whether at the same or different times). These limitations may limit the scope of investment opportunities that would otherwise be available to us.
Representing Creditors and Debtors.
Blackstone and its affiliates may represent creditors or debtors in
proceedings under Chapter 11 of the Bankruptcy Code or prior to such filings. From time to time, the Adviser, Blackstone and their affiliates may serve as advisor to creditor or equity committees. This involvement, for which the Adviser,
Blackstone and their affiliates may be compensated, may limit or preclude the flexibility that the Fund may otherwise have to participate in restructurings.
The Adviser and the portfolio managers may also face other potential conflicts of interest in managing the Fund, and the description above is not a complete description of every conflict of interest that
could be deemed to exist in managing both a Fund and the other accounts listed above.
Restrictions Arising
under the Securities Laws.
The activities of Blackstone and GSO (including, without limitation, the holding of securities positions or having one of its employees on the board of directors of a company) could result in securities law
restrictions on transactions in securities held by the Fund, affect the prices of such securities or the ability of such entities to purchase, retain or dispose of such investments, or otherwise create conflicts of interest, any of which could have
an adverse impact on the performance of the Fund and thus the return to the shareholders.
Additional
Potential Conflicts.
The officers, directors, members, managers, and employees of the Adviser may trade in securities for their own accounts, subject to restrictions and reporting requirements as may be required by law or otherwise
determined from time to time by the Adviser.
(a)(3) Portfolio Manager Compensation as of December 31, 2012
.
The Advisers financial arrangements with its portfolio managers, its competitive compensation and its career path emphasis at all
levels reflect the value senior management places on key resources. Compensation may include a variety of components and may vary from year to year based on a number of factors. The principal components of compensation include a base salary and a
discretionary bonus.
Base Compensation.
Generally, portfolio managers receive base compensation
and employee benefits based on their individual seniority and/or their position with the firm.
Discretionary Compensation.
In addition to base compensation, portfolio managers may receive discretionary
compensation. Discretionary compensation is based on individual seniority, contributions to the Adviser and performance of the client assets that the portfolio manager has primary responsibility for. These compensation guidelines are structured to
closely align the interests of employees with those of the Adviser and its clients.
(a)(4) Dollar Range of Securities Owned as of
December 31, 2012.
|
|
|
Portfolio Managers
|
|
Dollar Range of the Registrants Securities
Owned by the Portfolio Managers
|
Daniel H. Smith, Jr.
|
|
$100,001-$500,000
|
|
|
|
Lee M. Shaiman
|
|
$10,001-$50,000
|
Robert Zable
|
|
$0
|
Daniel T. McMullen
|
|
$0
|
James M. Didden, Jr.
|
|
$0
|
Brad Marshall
|
|
$0
|
Item 9.
|
Purchases of Equity Securities by Closed-End Management Investment Companies and Affiliated Purchasers.
|
None
Item 10.
|
Submission of Matters to Vote of Security Holders.
|
There have been no material changes to the procedures by which shareholders may recommend nominees to the Registrants Board of Trustees, where those changes were implemented after the Registrant
last provided disclosure in response to the requirements of Item 407(c)(2) of Regulation S-K, or this Item.