|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments in unaffiliated securities, at value (Cost — $316,842,329)
|
|
$
|
358,031,843
|
|
|
Investments in affiliated securities, at value (Cost — $1,285,530)
|
|
|
1,285,530
|
|
|
Foreign currency, at value (Cost — $811,595)
|
|
|
816,031
|
|
|
Interest and dividends receivable
|
|
|
5,056,898
|
|
|
Receivable for securities sold
|
|
|
2,894,684
|
|
|
Unrealized appreciation on forward foreign currency contracts
|
|
|
4,806
|
|
|
Prepaid expenses
|
|
|
8,615
|
|
|
Total Assets
|
|
|
368,098,407
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Payable for securities purchased
|
|
|
5,063,097
|
|
|
Distributions payable
|
|
|
2,140,561
|
|
|
Due to custodian
|
|
|
451,989
|
|
|
Investment management fee payable
|
|
|
244,849
|
|
|
Unrealized depreciation on forward foreign currency contracts
|
|
|
130,666
|
|
|
Directors’ fees payable
|
|
|
13,326
|
|
|
Accrued expenses
|
|
|
69,609
|
|
|
Total Liabilities
|
|
|
8,114,097
|
|
|
Total Net Assets
|
|
$
|
359,984,310
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
Par value ($0.001 par value; 22,651,444 shares issued and outstanding; 100,000,000 common shares
authorized)
|
|
$
|
22,651
|
|
|
Paid-in capital in excess of par value
|
|
|
423,270,964
|
|
|
Total distributable earnings (loss)
|
|
|
(63,309,305)
|
|
|
Total Net Assets
|
|
$
|
359,984,310
|
|
|
|
|
|
Shares Outstanding
|
|
|
22,651,444
|
|
|
|
|
|
Net Asset Value
|
|
|
$15.89
|
|
See Notes to Financial
Statements.
|
|
|
|
|
26
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
Statement of operations
For the Year Ended May 31, 2021
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
Interest from unaffiliated investments
|
|
$
|
25,616,848
|
|
|
Interest from affiliated investments
|
|
|
1
|
|
|
Dividends
|
|
|
90,084
|
|
|
Less: Foreign taxes withheld
|
|
|
(55,684)
|
|
|
Total Investment Income
|
|
|
25,651,249
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
2,833,781
|
|
|
Directors’ fees
|
|
|
125,932
|
|
|
Transfer agent fees
|
|
|
93,646
|
|
|
Legal fees
|
|
|
83,483
|
|
|
Audit and tax fees
|
|
|
53,170
|
|
|
Fund accounting fees
|
|
|
42,250
|
|
|
Shareholder reports
|
|
|
18,320
|
|
|
Stock exchange listing fees
|
|
|
14,506
|
|
|
Custody fees
|
|
|
12,484
|
|
|
Insurance
|
|
|
5,218
|
|
|
Interest expense
|
|
|
1,298
|
|
|
Miscellaneous expenses
|
|
|
1,764
|
|
|
Total Expenses
|
|
|
3,285,852
|
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(1,716)
|
|
|
Net Expenses
|
|
|
3,284,136
|
|
|
Net Investment Income
|
|
|
22,367,113
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Forward Foreign Currency Contracts and Foreign Currency Transactions (Notes 1, 3
and 4):
|
|
|
|
|
|
Net Realized Loss From:
|
|
|
|
|
|
Investment transactions in unaffiliated securities
|
|
|
(3,508,509)
|
|
|
Forward foreign currency contracts
|
|
|
(417,770)
|
|
|
Foreign currency transactions
|
|
|
(10,474)
|
|
|
Net Realized Loss
|
|
|
(3,936,753)
|
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
|
Investments in unaffiliated securities
|
|
|
33,074,130
|
|
|
Forward foreign currency contracts
|
|
|
(48,112)
|
|
|
Foreign currencies
|
|
|
25,256
|
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
33,051,274
|
|
|
Net Gain on Investments, Forward Foreign Currency Contracts and Foreign Currency Transactions
|
|
|
29,114,521
|
|
|
Increase in Net Assets From Operations
|
|
$
|
51,481,634
|
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
27
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended May 31,
|
|
2021
|
|
|
2020
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
22,367,113
|
|
|
$
|
25,666,028
|
|
|
Net realized loss
|
|
|
(3,936,753)
|
|
|
|
(26,024,236)
|
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
33,051,274
|
|
|
|
(4,234,714)
|
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
51,481,634
|
|
|
|
(4,592,922)
|
|
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(21,422,628)
|
|
|
|
(23,306,741)
|
|
|
Return of capital
|
|
|
(4,264,110)
|
|
|
|
(1,785,000)
|
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(25,686,738)
|
|
|
|
(25,091,741)
|
|
|
|
|
|
|
Fund Share Transactions:
|
|
|
|
|
|
|
|
|
|
Cost of shares repurchased (0 and 98,024 shares repurchased, respectively) (Note 6)
|
|
|
—
|
|
|
|
(1,040,253)
|
|
|
Decrease in Net Assets From Fund Share Transactions
|
|
|
—
|
|
|
|
(1,040,253)
|
|
|
Increase (Decrease) in Net Assets
|
|
|
25,794,896
|
|
|
|
(30,724,916)
|
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
334,189,414
|
|
|
|
364,914,330
|
|
|
End of year
|
|
$
|
359,984,310
|
|
|
$
|
334,189,414
|
|
See Notes to Financial
Statements.
|
|
|
|
|
28
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
Financial highlights
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For a share of capital stock outstanding throughout
each year ended May 31,
unless otherwise
noted:
|
|
|
|
|
20211
|
|
|
20201
|
|
|
20191
|
|
|
20181
|
|
|
20171,2
|
|
|
20161,3
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of year
|
|
$
|
14.75
|
|
|
$
|
16.04
|
|
|
$
|
16.18
|
|
|
$
|
16.93
|
|
|
$
|
16.46
|
|
|
$
|
16.96
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.99
|
|
|
|
1.13
|
|
|
|
1.14
|
|
|
|
1.10
|
|
|
|
0.88
|
|
|
|
1.28
|
|
|
Net realized and unrealized gain (loss)
|
|
|
1.28
|
|
|
|
(1.32)
|
|
|
|
(0.22)
|
|
|
|
(0.73)
|
|
|
|
0.53
|
|
|
|
(0.46)
|
|
|
Total income (loss) from operations
|
|
|
2.27
|
|
|
|
(0.19)
|
|
|
|
0.92
|
|
|
|
0.37
|
|
|
|
1.41
|
|
|
|
0.82
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.94)
|
|
|
|
(1.02)
|
|
|
|
(1.06)
|
|
|
|
(1.12)
|
|
|
|
(0.94)
|
|
|
|
(1.32)
|
|
|
Return of capital
|
|
|
(0.19)
|
|
|
|
(0.08)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total distributions
|
|
|
(1.13)
|
|
|
|
(1.10)
|
|
|
|
(1.06)
|
|
|
|
(1.12)
|
|
|
|
(0.94)
|
|
|
|
(1.32)
|
|
|
Anti-dilutive impact of repurchase plan
|
|
|
—
|
|
|
|
0.00
|
4,5
|
|
|
0.00
|
4,5
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year
|
|
$
|
15.89
|
|
|
$
|
14.75
|
|
|
$
|
16.04
|
|
|
$
|
16.18
|
|
|
$
|
16.93
|
|
|
$
|
16.46
|
|
|
Market price, end of year
|
|
$
|
15.48
|
|
|
$
|
14.15
|
|
|
$
|
14.46
|
|
|
$
|
14.55
|
|
|
$
|
15.44
|
|
|
$
|
15.32
|
|
|
Total return, based on NAV6,7
|
|
|
15.83
|
%
|
|
|
(1.28)
|
%
|
|
|
5.95
|
%
|
|
|
2.20
|
%
|
|
|
8.82
|
%
|
|
|
5.53
|
%
|
|
Total return, based on Market Price8
|
|
|
17.99
|
%
|
|
|
5.48
|
%
|
|
|
6.97
|
%
|
|
|
1.45
|
%
|
|
|
7.15
|
%
|
|
|
16.17
|
%
|
|
|
|
|
|
|
|
|
|
Net assets, end of year (millions)
|
|
$
|
360
|
|
|
$
|
334
|
|
|
$
|
365
|
|
|
$
|
369
|
|
|
$
|
386
|
|
|
$
|
375
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
0.93
|
%
|
|
|
0.91
|
%
|
|
|
0.90
|
%
|
|
|
0.92
|
%
|
|
|
0.91
|
%9
|
|
|
0.91
|
%
|
|
Net expenses
|
|
|
0.93
|
10
|
|
|
0.89
|
10
|
|
|
0.88
|
10
|
|
|
0.92
|
|
|
|
0.91
|
9
|
|
|
0.91
|
|
|
Net investment income
|
|
|
6.31
|
|
|
|
7.15
|
|
|
|
7.10
|
|
|
|
6.58
|
|
|
|
7.06
|
9
|
|
|
8.11
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
48
|
%
|
|
|
64
|
%
|
|
|
89
|
%
|
|
|
88
|
%
|
|
|
62
|
%
|
|
|
70
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the period September 1, 2016 through May 31, 2017.
|
|
3
|
For the year ended August 31.
|
|
4
|
Amount represents less than $0.005 per share.
|
|
5
|
The repurchase plan was completed at an average repurchase price of $11.07 for 98,024 shares and $1,040,253 for the year ended May 31, 2020 and $13.14 for
33,902 shares and $445,351 for the year ended May 31, 2019.
|
|
6
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
7
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of
less than one year are not annualized.
|
|
8
|
The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no
guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
10
|
Reflects fee waivers and/or expense reimbursements.
|
See Notes to Financial Statements.
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
29
|
Notes to financial statements
1. Organization and significant accounting policies
Western Asset High Yield Defined Opportunity Fund Inc. (the “Fund”) was incorporated in Maryland on July 20, 2010 and is registered as a non-diversified, limited-term, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund’s
primary investment objective is to provide high income. As a secondary investment objective, the Fund will seek capital appreciation. The Fund seeks to achieve its investment objectives by investing, under normal market conditions, at least 80% of
its net assets in a portfolio of high-yield corporate fixed income securities with varying maturities. Corporate securities include those securities that are issued or originated by U.S. or foreign public or private corporations and other business
entities. The Fund intends to liquidate on or about September 30, 2025 and distribute substantially all of its net assets to stockholders, after making appropriate provisions for any liabilities of the Fund. Effective August 14, 2020, the
Board of Directors of the Fund approved amendments to the Fund’s bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange
Commission’s website at www.sec.gov.
The following are significant accounting policies consistently followed by the Fund and are in conformity with
U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in
the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but
are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services,
which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves,
prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of
valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. When the Fund holds securities or other assets that
are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices
supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/ dealers or at the transaction price if the security has recently been purchased and no value has yet
been obtained from a pricing service or pricing broker. When reliable prices are not
|
|
|
|
|
30
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
readily available, such as when the value of a security has been significantly affected by events after the close of
the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Global Fund
Valuation Committee (formerly known as Legg Mason North Atlantic Fund Valuation Committee prior to March 1, 2021) (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is
responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by
the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible
methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or
fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the
issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions;
information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable
companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the
policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are
reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach
and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income
approach uses valuation techniques to discount estimated future cash flows to present value.
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
31
|
Notes to financial statements (cont’d)
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at
measurement date. These inputs are summarized in the three broad levels listed below:
|
•
|
|
Level 1 — quoted prices in active markets for identical investments
|
|
•
|
|
Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
•
|
|
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Long-Term Investments†:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds & Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information Technology
|
|
|
—
|
|
|
$
|
12,012,246
|
|
|
$
|
0
|
*
|
|
$
|
12,012,246
|
|
|
Materials
|
|
|
—
|
|
|
|
21,703,991
|
|
|
|
0
|
*
|
|
|
21,703,991
|
|
|
Other Corporate Bonds & Notes
|
|
|
—
|
|
|
|
293,472,176
|
|
|
|
—
|
|
|
|
293,472,176
|
|
|
Sovereign Bonds
|
|
|
—
|
|
|
|
16,715,002
|
|
|
|
—
|
|
|
|
16,715,002
|
|
|
Senior Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Materials
|
|
|
—
|
|
|
|
—
|
|
|
|
777,201
|
|
|
|
777,201
|
|
|
Other Senior Loans
|
|
|
—
|
|
|
|
7,262,091
|
|
|
|
—
|
|
|
|
7,262,091
|
|
|
Convertible Bonds & Notes
|
|
|
—
|
|
|
|
3,455,230
|
|
|
|
—
|
|
|
|
3,455,230
|
|
|
Common Stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Energy
|
|
|
—
|
|
|
|
—
|
|
|
|
27,887
|
|
|
|
27,887
|
|
|
Materials
|
|
|
—
|
|
|
|
—
|
|
|
|
0
|
*
|
|
|
0
|
*
|
|
Other Common Stocks
|
|
$
|
1,000,388
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,000,388
|
|
|
Convertible Preferred Stocks
|
|
|
—
|
|
|
|
926,884
|
|
|
|
—
|
|
|
|
926,884
|
|
|
Preferred Stocks
|
|
|
678,747
|
|
|
|
—
|
|
|
|
—
|
|
|
|
678,747
|
|
|
Total Long-Term Investments
|
|
|
1,679,135
|
|
|
|
355,547,620
|
|
|
|
805,088
|
|
|
|
358,031,843
|
|
|
Short-Term Investments†
|
|
|
1,285,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,285,530
|
|
|
Total Investments
|
|
$
|
2,964,665
|
|
|
$
|
355,547,620
|
|
|
$
|
805,088
|
|
|
$
|
359,317,373
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts††
|
|
|
—
|
|
|
$
|
4,806
|
|
|
|
—
|
|
|
$
|
4,806
|
|
|
Total
|
|
$
|
2,964,665
|
|
|
$
|
355,552,426
|
|
|
$
|
805,088
|
|
|
$
|
359,322,179
|
|
|
|
|
|
|
32
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward Foreign Currency Contracts††
|
|
|
—
|
|
|
$
|
130,666
|
|
|
|
—
|
|
|
$
|
130,666
|
|
|
†
|
See Schedule of Investments for additional detailed categorizations.
|
|
*
|
Amount represents less than $1.
|
|
††
|
Reflects the unrealized appreciation (depreciation) of the instruments.
|
(b) Forward foreign currency contracts. The Fund enters into a forward foreign currency contract to hedge against foreign currency exchange
rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward foreign currency contract is an agreement between two
parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is marked-to-market daily and the change in value is
recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal
to the difference between the value of the contract at the time it was opened and the value of the contract at the time it is closed.
Forward foreign
currency contracts involve elements of market risk in excess of the amounts reflected on the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency
contract. Risks may also arise upon entering into these contracts from the potential inability of the counterparties to meet the terms of their contracts.
(c) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into
U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon
prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting
from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency
gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
33
|
Notes to financial statements (cont’d)
recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the
possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(d) Loan participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The
Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms
of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the
participation.
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned
between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set
between the lender and the borrower.
(e) Unfunded loan commitments. The Fund may
enter into certain credit agreements where all or a portion of the total amount committed may be unfunded. The Fund is obligated to fund these commitments at the borrower’s discretion. The commitments are disclosed in the accompanying Schedule
of Investments. At May 31, 2021, the Fund had sufficient cash and/or securities to cover these commitments.
(f) Securities
traded on a when-issued and delayed delivery basis. The Fund may trade securities on a when-issued or delayed delivery basis. In when-issued and delayed delivery transactions, the securities are
purchased or sold by the Fund with payment and delivery taking place in the future in order to secure what is considered to be an advantageous price and yield to the Fund at the time of entering into the transaction.
Purchasing such securities involves risk of loss if the value of the securities declines prior to settlement. These securities are subject to market fluctuations
and their current value is determined in the same manner as for other securities.
(g) Inflation-indexed bonds. Inflation-indexed bonds are fixed income securities whose principal value or interest rate is periodically adjusted according to the rate of inflation. As the index measuring inflation changes, the principal value
or interest rate of inflation-indexed bonds will be adjusted accordingly. Inflation adjustments to the principal amount of
|
|
|
|
|
34
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
inflation-indexed bonds are reflected as an increase or decrease to investment income on the Statement of Operations.
Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid
at maturity may be less than the original principal.
(h) Credit and market risk. The Fund invests in high-yield and emerging market instruments that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations
reflect, among other things, perceived credit and market risks. The Fund’s investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk related
to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market
prices of investments held by the Fund. The Fund’s investments in non-U.S. dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
(i) Foreign investment
risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may
require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund.
Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(j) Counterparty risk and credit-risk-related contingent features of derivative instruments. The Fund may invest in certain securities or engage in other transactions where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest
in securities of issuers, which may also be considered counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to
meet its contractual obligations. The Fund’s subadviser attempts to mitigate counterparty risk by (i) periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure
to each individual counterparty based on its assessment and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk
by the subadviser. In addition, declines in the values of underlying collateral received may expose the Fund to increased risk of loss.
With exchange
traded and centrally cleared derivatives, there is less counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
35
|
Notes to financial statements (cont’d)
seller of the contract; therefore, the credit risk is limited to failure of the clearinghouse. While offset rights may exist under
applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement (“ISDA Master Agreement”) or similar agreement, with certain of its
derivative counterparties that govern over-the-counter (“OTC”) derivatives and provide for general obligations, representations, agreements, collateral posting
terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a percentage decrease in the Fund’s net assets or net asset value
per share over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial instruments’ payables
and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA Master Agreements do not result in an offset of
reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearinghouse for exchange
traded derivatives while collateral terms are contract specific for OTC traded derivatives. Cash collateral that has been pledged to cover obligations of the Fund under derivative contracts, if any, will be reported separately in the Statement of
Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of May 31,
2021, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of $130,666. If a contingent feature in the master agreements would have been triggered, the Fund would have been required
to pay this amount to its derivatives counterparties.
(k) Security transactions and
investment income. Security transactions are accounted for on a trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Paydown gains and losses on mortgage- and asset-backed securities are recorded as
adjustments to interest income. Dividend income is recorded on the ex-dividend date for dividends received in cash and/or securities. Foreign dividend income is recorded on the
ex-dividend date or as soon as practicable after the Fund determines the existence of
|
|
|
|
|
36
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of
the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of
default or credit event.
(l) Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. Distributions of net realized gains, if any, are declared at least
annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(m) Compensating balance
arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash
on deposit with the bank.
(n) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to
regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax
provision is required in the Fund’s financial statements.
Management has analyzed the Fund’s tax positions taken on income tax returns for all
open tax years and has concluded that as of May 31, 2021, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the
applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Under
the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(o) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences
between financial and tax reporting. These reclassifications have no effect on net assets or net asset values per share. During the current year, the Fund had no reclassifications.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners
Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company, LLC (“Western Asset”) is the Fund’s subadviser. Western Asset Management Company Pte. Ltd. (“Western Asset
Singapore”), Western Asset Management Company Ltd (“Western Asset Japan”) and Western Asset Management Company Limited (“Western Asset Limited”) serve as additional subadvisers to the Fund, under additional subadvisory
agreements with Western Asset. As of July 31,
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
37
|
Notes to financial statements (cont’d)
2020, LMPFA, Western Asset, Western Asset Singapore, Western Asset Japan and Western Asset Limited are indirect, wholly-owned
subsidiaries of Franklin Resources, Inc. (“Franklin Resources”). Prior to July 31, 2020, LMPFA, Western Asset, Western Asset Singapore, Western Asset Japan and Western Asset Limited were wholly-owned subsidiaries of Legg Mason, Inc.
(“Legg Mason”). As of July 31, 2020, Legg Mason is a subsidiary of Franklin Resources.
LMPFA provides administrative and certain
oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.80% of the Fund’s average daily net assets.
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Singapore, Western Asset Japan and
Western Asset Limited provide certain subadvisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated debt securities. For its services, LMPFA pays Western
Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives from the Fund. In turn, Western Asset pays Western Asset Singapore, Western Asset Japan and Western Asset Limited a monthly subadvisory fee in an amount equal
to 100% of the management fee paid to Western Asset on the assets that Western Asset allocates to each such non-U.S. subadviser to manage.
The manager has agreed to waive the Fund’s management fee to an extent sufficient to offset the net management fee payable in connection with any investment in an affiliated money market fund.
During the year ended May 31, 2021, fees waived and/or expenses reimbursed amounted to $1,716.
As of July 31, 2020, all officers and one Director of the Fund are employees of Franklin Resources or its affiliates and do not receive compensation from the Fund. Prior to July 31, 2020, all officers and
one Director of the Fund were employees of Legg Mason and did not receive compensation from the Fund.
3. Investments
During the year ended May 31, 2021, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S.
Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
U.S. Government &
Agency Obligations
|
|
|
Purchases
|
|
$
|
159,002,639
|
|
|
$
|
7,813,551
|
|
|
Sales
|
|
|
162,643,591
|
|
|
|
8,247,205
|
|
|
|
|
|
|
38
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
At May 31, 2021, the aggregate cost of investments and the aggregate gross unrealized appreciation and
depreciation of investments for federal income tax purposes were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
(Depreciation)
|
|
|
Securities
|
|
$
|
321,221,367
|
|
|
$
|
43,541,847
|
|
|
$
|
(5,445,841)
|
|
|
$
|
38,096,006
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
|
4,806
|
|
|
|
(130,666)
|
|
|
|
(125,860)
|
|
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and Liabilities at May 31, 2021.
|
|
|
|
|
|
|
ASSET DERIVATIVES1
|
|
|
|
|
Foreign
Exchange Risk
|
|
|
Forward foreign currency contracts
|
|
$
|
4,806
|
|
|
|
|
|
|
|
|
LIABILITY DERIVATIVES1
|
|
|
|
|
Foreign
Exchange Risk
|
|
|
Forward foreign currency contracts
|
|
$
|
130,666
|
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation and for liability derivatives is payables/net unrealized
depreciation.
|
The following tables provide information about the effect of derivatives and hedging activities on the Fund’s
Statement of Operations for the year ended May 31, 2021. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives during the period. The second table provides additional information
about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Foreign
Exchange Risk
|
|
|
Forward foreign currency contracts
|
|
$
|
(417,770)
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Foreign
Exchange Risk
|
|
|
Forward foreign currency contracts
|
|
$
|
(48,112)
|
|
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
39
|
Notes to financial statements (cont’d)
During the year ended May 31, 2021, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
|
|
Average Market
Value
|
|
|
Forward foreign currency contracts (to buy)
|
|
$
|
1,365,609
|
|
|
Forward foreign currency contracts (to sell)
|
|
|
4,639,770
|
|
The following table presents the Fund’s OTC derivative assets and liabilities by counterparty net of amounts available for
offset under an ISDA Master Agreement and net of the related collateral pledged (received) by the Fund as of May 31, 2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Gross Assets
Subject to
Master
Agreements1
|
|
|
Gross
Liabilities
Subject to
Master
Agreements1
|
|
|
Net Assets
(Liabilities)
Subject to
Master
Agreements
|
|
|
Collateral
Pledged
(Received)
|
|
|
Net
Amount2
|
|
|
BNP Paribas SA
|
|
$
|
2,329
|
|
|
|
—
|
|
|
$
|
2,329
|
|
|
|
—
|
|
|
$
|
2,329
|
|
|
Goldman Sachs Group Inc.
|
|
|
2,477
|
|
|
$
|
(111,130)
|
|
|
|
(108,653)
|
|
|
|
—
|
|
|
|
(108,653)
|
|
|
JPMorgan Chase & Co.
|
|
|
—
|
|
|
|
(19,536)
|
|
|
|
(19,536)
|
|
|
|
—
|
|
|
|
(19,536)
|
|
|
Total
|
|
$
|
4,806
|
|
|
$
|
(130,666)
|
|
|
$
|
(125,860)
|
|
|
|
—
|
|
|
$
|
(125,860)
|
|
|
1
|
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
|
|
2
|
Represents the net amount receivable (payable) from (to) the counterparty in the event of default.
|
5. Distributions subsequent to May 31, 2021
The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
|
5/21/2021
|
|
|
6/1/2021
|
|
|
$
|
0.0945
|
|
|
6/23/2021
|
|
|
7/1/2021
|
|
|
$
|
0.0945
|
|
|
7/23/2021
|
|
|
8/2/2021
|
|
|
$
|
0.0945
|
|
|
8/24/2021
|
|
|
9/1/2021
|
|
|
$
|
0.0945
|
|
6. Stock repurchase program
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s
outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes
may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the year ended May 31, 2021, the Fund did not repurchase any shares.
|
|
|
|
|
40
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
Since the commencement of the stock repurchase program through May 31, 2021, the Fund repurchased 131,926 shares
or 0.58% of its common shares outstanding for a total amount of $1,485,604.
7. Transactions with affiliated company
As defined by the 1940 Act, an affiliated company is one in which the Fund owns 5% or more of the outstanding voting securities, or a company which is under common
ownership or control with the Fund. The following company was considered an affiliated company for all or some portion of the year ended May 31, 2021. The following transactions were effected in such company for the year ended May 31,
2021.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Affiliate
Value at
May 31,
|
|
|
Purchased
|
|
|
Sold
|
|
|
|
|
2020
|
|
|
Cost
|
|
|
Shares
|
|
|
Cost
|
|
|
Shares
|
|
|
Western Asset Premier Institutional Government Reserves, Premium Shares
|
|
|
—
|
|
|
$
|
1,285,530
|
|
|
|
1,285,530
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(cont’d)
|
|
Realized
Gain (Loss)
|
|
|
Interest
Income
|
|
|
Net Increase
(Decrease) in
Unrealized
Appreciation
(Depreciation)
|
|
|
Affiliate
Value at
May 31,
2021
|
|
|
Western Asset Premier Institutional Government Reserves, Premium Shares
|
|
|
—
|
|
|
$
|
1
|
|
|
|
—
|
|
|
$
|
1,285,530
|
|
8. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended May 31, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
|
2020
|
|
|
Distributions paid from:
|
|
|
|
|
|
|
|
|
|
Ordinary income
|
|
$
|
21,422,628
|
|
|
$
|
23,306,741
|
|
|
Tax return of capital
|
|
|
4,264,110
|
|
|
|
1,785,000
|
|
|
Total distributions paid
|
|
$
|
25,686,738
|
|
|
$
|
25,091,741
|
|
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
41
|
Notes to financial statements (cont’d)
As of May 31, 2021, the components of distributable earnings (loss) on a tax basis were as follows:
|
|
|
|
|
|
|
Deferred capital losses*
|
|
$
|
(99,253,957)
|
|
|
Other book/tax temporary differences(a)
|
|
|
(2,036,583)
|
|
|
Unrealized appreciation (depreciation)(b)
|
|
|
37,981,235
|
|
|
Total distributable earnings (loss) — net
|
|
$
|
(63,309,305)
|
|
|
*
|
These capital losses have been deferred in the current year as either short-term or long-term losses. The losses will be deemed to occur on the first
day of the next taxable year in the same character as they were originally deferred and will be available to offset future taxable capital gains.
|
|
(a)
|
Other book/tax temporary differences are attributable to the tax deferral of losses on straddles, the difference between cash and accrual basis distributions
paid, the realization for tax purposes of unrealized gains (losses) on certain foreign currency contracts, the deferral of certain late year losses for tax purposes; book/tax differences in the accrual of interest income on securities in default;
and book/tax differences in the timing of the deductibility of various expenses.
|
|
(b)
|
The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax
deferral of losses on wash sales and the difference between book and tax amortization methods for premiums on fixed income securities.
|
9. Recent accounting pronouncement
In March 2020, the Financial Accounting Standards Board
issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting (the “ASU”). The
amendments in the ASU provide optional temporary financial reporting relief from the effect of certain types of contract modifications due to the planned discontinuation of the London Interbank Offered Rate and other interbank-offered based
reference rates as of the end of 2021. The ASU is effective for certain reference rate-related contract modifications that occur during the period March 12, 2020 through December 31, 2022. Management has reviewed the requirements and
believes the adoption of this ASU will not have a material impact on the financial statements.
10. Other matters
The outbreak of the respiratory illness COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly
spread around the world, causing considerable uncertainty for the global economy and financial markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not
known. The COVID-19 pandemic could adversely affect the value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
***
The Fund’s investments,
payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks. On
March 5, 2021, the
|
|
|
|
|
42
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of (i) the
overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023 and (ii) all other
LIBOR settings, including the one-week and two-month USD LIBOR settings, immediately following the LIBOR publication on Friday, December 31, 2021. There remains
uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or
the Fund’s investments cannot yet be determined.
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc. 2021 Annual Report
|
|
43
|
Report of independent registered public accounting firm
To the Board of Directors and Shareholders of Western Asset High
Yield Defined Opportunity Fund Inc.
|
|
|
|
|
Independent Directors†
|
|
|
|
|
|
|
Robert D. Agdern
|
|
|
|
|
|
|
Year of birth
|
|
1950
|
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, and Compliance Liaison, Class III
|
|
Term of office1 and length of time served
|
|
Since 2015
|
|
Principal occupation(s) during the past five years
|
|
Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (2002
to 2016); formerly, Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special
assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC)
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
|
Carol L. Colman
|
|
|
|
|
|
|
Year of birth
|
|
1946
|
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit and Compensation Committees, and Chair of Pricing and Valuation Committee, Class I
|
|
Term of office1 and length of time served
|
|
Since 2010
|
|
Principal occupation(s) during the past five years
|
|
President, Colman Consulting Company (consulting)
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
|
47
|
Additional information
(unaudited) (cont’d)
Information about Directors and Officers
|
|
|
|
|
Independent Directors† (cont’d)
|
|
|
|
|
|
|
Daniel P. Cronin
|
|
|
|
|
|
|
Year of birth
|
|
1946
|
|
Position(s) held with Fund1
|
|
Director and Member of Audit, Compensation and Pricing and Valuation Committees, and Chair of Nominating Committee, Class I
|
|
Term of office1 and length of time served
|
|
Since 2010
|
|
Principal occupation(s) during the past five years
|
|
Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004)
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
|
Paolo M. Cucchi
|
|
|
|
|
|
|
Year of birth
|
|
1941
|
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, and Pricing and Valuation Committees, and Chair of Compensation Committee, Class I
|
|
Term of office1 and length of time served
|
|
Since 2010
|
|
Principal occupation(s) during the past five years
|
|
Emeritus Professor of French and Italian (since 2014) and formerly, Vice President and Dean of The College of Liberal Arts (1984 to 2009) and
Professor of French and Italian (2009 to 2014) at Drew University
|
|
|
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
|
William R. Hutchinson
|
|
|
|
|
|
|
Year of birth
|
|
1942
|
|
Position(s) held with Fund1
|
|
Lead Independent Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class II
|
|
Term of office1 and length of time served
|
|
Since 2010
|
|
Principal occupation(s) during the past five years
|
|
President, W.R. Hutchinson & Associates Inc. (consulting) (since 2001)
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
Director (since 1994) and formerly, Non-Executive Chairman of the Board (December 2009 to April 2020),
Associated Banc-Corp. (financial services company)
|
|
|
|
|
|
48
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
|
|
|
|
|
Independent Directors† (cont’d)
|
|
|
|
|
|
|
Eileen A. Kamerick
|
|
|
|
|
|
|
Year of birth
|
|
1958
|
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Compensation and Pricing and Valuation Committees, and Chair of Audit Committee, Class III
|
|
Term of office1 and length of time served
|
|
Since 2013
|
|
Principal occupation(s) during the past five years
|
|
Chief Executive Officer, The Governance Partners, LLC (consulting firm) (since 2015); National Association of Corporate Directors Board Leadership
Fellow (since 2016) and financial expert; Adjunct Professor, Georgetown University Law Center (since 2021); Adjunct Professor, The University of Chicago Law School (since 2018); Adjunct Professor, Washington University in St. Louis and University of
Iowa law schools (since 2007); formerly, Senior Advisor to the Chief Executive Officer and Executive Vice President and Chief Financial Officer of ConnectWise, Inc. (software and services company) (2015 to 2016); Chief Financial Officer, Press Ganey
Associates (health care informatics company) (2012 to 2014); Managing Director and Chief Financial Officer, Houlihan Lokey (international investment bank) and President, Houlihan Lokey Foundation (2010 to 2012)
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
Director of ACV Auctions Inc. (since 2021); Trustee of AIG Funds and Anchor Series Trust (since 2018); Director of Hochschild Mining plc (precious
metals company) (since 2016); Director of Associated Banc-Corp (financial services company) (since 2007)
|
|
|
|
|
Nisha Kumar
|
|
|
|
|
|
|
Year of birth
|
|
1970
|
|
Position(s) held with Fund1
|
|
Director and Member of Nominating, Audit, Compensation and Pricing and Valuation Committees, Class II
|
|
Term of office1 and length of time served
|
|
Since 2019
|
|
Principal occupation(s) during the past five years
|
|
Managing Director and the Chief Financial Officer and Chief Compliance Officer of Greenbriar Equity Group, LP (since 2011); formerly, Chief
Financial Officer and Chief Administrative Officer of Rent the Runway, Inc. (2011); Executive Vice President and Chief Financial Officer of AOL LLC, a subsidiary of Time Warner Inc. (2007 to 2009), Member of the Council of Foreign
Relations
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
19
|
|
Other board memberships held by Director during the past five years
|
|
Director of The India Fund, Inc. (since 2016); formerly, Director of Aberdeen Income Credit Strategies Fund (2017-2018); and Director of The Asia
Tigers Fund, Inc. (2016 to 2018)
|
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
|
49
|
Additional information (unaudited)
(cont’d)
Information about Directors and Officers
|
|
|
|
|
Interested Director and Officer
|
|
|
|
|
|
|
Jane Trust, CFA2
|
|
|
|
|
|
|
Year of birth
|
|
1962
|
|
Position(s) held with Fund1
|
|
Director, Chairman, President and Chief Executive Officer, Class II
|
|
Term of office1 and length of time served
|
|
Since 2015
|
|
Principal occupation(s) during the past five years
|
|
Senior Vice President, Fund Board Management, Franklin Templeton (since 2020); Officer and/or Trustee/Director of 145 funds associated with LMPFA or
its affiliates (since 2015); President and Chief Executive Officer of LMPFA (since 2015); formerly, Senior Managing Director (2018 to 2020) and Managing Director (2016 to 2018) of Legg Mason & Co., LLC (“Legg Mason &
Co.”); Senior Vice President of LMPFA (2015)
|
|
Number of portfolios in fund complex overseen by Director (including the Fund)
|
|
143
|
|
Other board memberships held by Director during the past five years
|
|
None
|
|
|
|
|
|
Additional Officers
|
|
|
|
|
|
|
Fred Jensen
|
|
|
|
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
|
|
|
|
Year of birth
|
|
1963
|
|
Position(s) held with Fund1
|
|
Chief Compliance Officer
|
|
Term of office1 and length of time served
|
|
Since 2020
|
|
Principal occupation(s) during the past five years
|
|
Director - Global Compliance of Franklin Templeton (since 2020); Managing Director of Legg Mason & Co. (2006 to 2020); Director of
Compliance, Legg Mason Office of the Chief Compliance Officer (2006 to 2020); formerly, Chief Compliance Officer of Legg Mason Global Asset Allocation (prior to 2014); Chief Compliance Officer of Legg Mason Private Portfolio Group (prior to 2013);
formerly, Chief Compliance Officer of The Reserve Funds (investment adviser, funds and broker-dealer) (2004) and Ambac Financial Group (investment adviser, funds and broker- dealer) (2000 to 2003)
|
|
|
|
|
Jenna Bailey
|
|
|
|
Franklin Templeton
100 First Stamford Place, 5th Floor, Stamford, CT 06902
|
|
|
|
|
|
|
Year of birth
|
|
1978
|
|
Position(s) held with Fund1
|
|
Identity Theft Prevention Officer
|
|
Term of office1 and length of time served
|
|
Since 2015
|
|
Principal occupation(s) during the past five years
|
|
Senior Compliance Analyst of Franklin Templeton (since 2020); Identity Theft Prevention Officer of certain funds associated with Legg
Mason & Co. or its affiliates (since 2015); formerly, Compliance Officer of Legg Mason & Co. (2013 to 2020); Assistant Vice President of Legg Mason & Co. (2011 to 2020)
|
|
|
|
|
|
50
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
|
|
|
|
|
Additional Officers (cont’d)
|
|
|
|
|
|
|
George P. Hoyt*
Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT 06902
|
|
|
|
|
|
|
Year of birth
|
|
1965
|
|
Position(s) held with Fund1
|
|
Secretary and Chief Legal Officer
|
|
Term of office1 and length of time served
|
|
Since 2020
|
|
Principal occupation(s) during the past five years
|
|
Associate General Counsel of Franklin Templeton (since 2020); Secretary and Chief Legal Officer of certain mutual funds associated with Legg
Mason & Co. or its affiliates (since 2020); formerly, Managing Director (2016 to 2020) and Associate General Counsel for Legg Mason & Co. and Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or
its affiliates (2006 to 2020)
|
|
|
|
|
Thomas C. Mandia
Franklin Templeton
100 First Stamford Place, 6th Floor, Stamford, CT 06902
|
|
|
|
|
|
|
Year of birth
|
|
1962
|
|
Position(s) held with Fund1
|
|
Assistant Secretary
|
|
Term of office1 and length of time served
|
|
Since 2010
|
|
Principal occupation(s) during the past five years
|
|
Senior Associate General Counsel of Franklin Templeton (since 2020); Secretary of LMPFA (since 2006); Assistant Secretary of certain funds
associated with Legg Mason & Co. or its affiliates (since 2006); Secretary of LM Asset Services, LLC (“LMAS”) (since 2002) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (since 2013) (formerly registered investment
advisers); formerly, Managing Director and Deputy General Counsel of Legg Mason & Co. (2005 to 2020)
|
|
|
|
|
Christopher Berarducci
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
|
|
|
|
Year of birth
|
|
1974
|
|
Position(s) held with Fund1
|
|
Treasurer and Principal Financial Officer
|
|
Term of office1 and length of time served
|
|
Since 2019
|
|
Principal occupation(s) during the past five years
|
|
Vice President, Fund Administration and Reporting, Franklin Templeton (since 2020); Treasurer (since 2010) and Principal Financial Officer (since
2019) of certain funds associated with Legg Mason & Co. or its affiliates; formerly, Managing Director (2020), Director (2015 to 2020), and Vice President (2011 to 2015) of Legg Mason & Co.
|
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
|
51
|
Additional information
(unaudited) (cont’d)
Information about Directors and Officers
|
|
|
|
|
Additional Officers (cont’d)
|
|
|
|
|
|
|
Jeanne M. Kelly
Franklin Templeton
620 Eighth Avenue, 47th Floor, New York, NY 10018
|
|
|
|
|
|
|
Year of birth
|
|
1951
|
|
Position(s) held with Fund1
|
|
Senior Vice President
|
|
Term of office1 and length of time served
|
|
Since 2010
|
|
Principal occupation(s) during the past five years
|
|
U.S. Fund Board Team Manager, Franklin Templeton (since 2020); Senior Vice President of certain funds associated with Legg Mason & Co. or
its affiliates (since 2007); Senior Vice President of LMPFA (since 2006); President and Chief Executive Officer of LMAS and LMFAM (since 2015); formerly, Managing Director of Legg Mason & Co. (2005 to 2020); Senior Vice President of LMFAM
(2013 to 2015)
|
|
†
|
Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940, as
amended (the “1940 Act”).
|
|
*
|
Effective August 13, 2020, Mr. Hoyt became Secretary and Chief Legal Officer.
|
|
1
|
The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and
III Directors expire at the Annual Meetings of Stockholders in the year 2021, year 2022 and year 2023, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are
chosen each year, to hold office until their successors are duly elected and qualified.
|
|
2
|
Ms. Trust is an “interested person” of the Fund as defined in the 1940 Act because Ms. Trust is an officer of LMPFA and certain of its
affiliates.
|
|
|
|
|
|
52
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
Annual chief executive officer and
principal financial officer certifications (unaudited)
The Fund’s Chief
Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the Certifications of the Fund’s CEO and Principal Financial Officer required by Section 302 of the
Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.
|
|
|
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
|
53
|
Other shareholder communications regarding accounting
matters (unaudited)
The Fund’s Audit Committee has established guidelines and procedures
regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may
submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee
Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 47th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through
this number will be received by the CCO.
|
|
|
|
|
54
|
|
Western Asset High Yield Defined Opportunity Fund Inc.
|
Summary of information regarding the Fund (unaudited)
Investment Objectives
The Fund’s
primary investment objective is to provide high income. As a secondary investment objective, the Fund will seek capital appreciation. There can be no assurance the Fund will achieve its investment objectives.
Principal Investment Policies and Strategies
The Fund seeks to achieve its investment objectives by investing, under normal market conditions, at least 80% of its net assets in a portfolio of high-yield
corporate fixed income securities with varying maturities. “High-yield” refers to below investment grade quality (also commonly referred to as “junk bonds”). High-yield fixed income securities of below investment grade quality
are regarded as having predominately speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. “Fixed income securities” include bonds, debentures, notes, commercial paper and other similar
types of debt instruments, as well as preferred stock, convertible securities, Senior Loans, Second Lien Loans, loan participations, payment-in-kind securities, zero-coupon bonds, mortgage-backed securities, asset-backed securities, bank certificates of deposit, fixed time deposits and bankers’ acceptances. Corporate securities are those securities that are issued or
originated by U.S. or foreign public or private corporations and other business entities, and do not include securities issued by governments, agencies or supranational entities. Certain fixed income instruments, such as convertible securities, may
also include the right to participate in equity appreciation, and Western Asset will generally evaluate those instruments based primarily on their debt characteristics.
The Fund may invest in derivative instruments primarily for hedging and risk management purposes, although the Fund may also use derivative instruments for investment purposes. Investing in derivative instruments
is not a principal investment strategy of the Fund. Derivative instruments include options contracts, futures contracts, options on futures contracts, indexed securities, currency forwards, credit linked notes, credit default swaps and other swap
agreements. The Fund may use derivative instruments to gain exposure to or hedge its exposure to high-yield securities primarily through the use of credit default swaps, but may also use other derivative instruments, provided that the Fund’s
exposure to credit derivative instruments, as measured by the total notional amount of all such instruments, will not exceed 20% of its net assets. With respect to this limitation, the Fund may net derivatives with opposite exposure to the same
underlying instrument. Notwithstanding the foregoing limitation, the Fund may invest without limit in derivative instruments related to currencies and interest rates; provided that such currency and interest rate derivatives are used for hedging
purposes only. To the extent that the security or index underlying the derivative or synthetic instrument is or is composed of corporate high-yield fixed income securities, the Fund will include such derivative and synthetic instruments for the
purposes of the Fund’s policy to invest at least 80% of its net assets in a portfolio of high-yield corporate fixed income securities. Credit derivatives, by their design,
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Summary of information regarding the Fund (unaudited) (cont’d)
have a high correlation to the underlying securities. The Fund may not change its policy to invest, under normal market conditions, at least 80% of its net assets
in a portfolio of high-yield corporate fixed income securities with varying maturities unless it provides shareholders with at least 60 days’ written notice of such change.
Below investment grade fixed income securities are rated below “BBB-” by S&P or Fitch, below “Baa3” by Moody’s or comparably rated by another
NRSRO or, if unrated, determined by Western Asset to be of comparable quality. Below investment grade fixed income securities are commonly referred to as “high-yield” or “junk” bonds and are regarded as having predominantly
speculative characteristics with respect to the issuer’s capacity to pay interest and repay principal. In the event that a security receives different ratings from different NRSROs, the Fund will treat the security as being rated in the lowest
rating category received from an NRSRO.
Under normal market conditions, the Fund may also invest up to 20% of its net assets in fixed income securities
issued by U.S. or foreign governments, agencies and instrumentalities and/or fixed income securities that are investment grade quality.
The Fund may
invest up to 20% of its net assets in securities that, at the time of investment, are considered Illiquid Securities.
The Fund may invest up to 20% of
its net assets in government debt securities, including those of emerging market issuers or of other non-US issuers.
No more than 10% of the Fund’s net assets may be invested in any issuer, except securities issued by the U.S. government and its agencies.
The Fund may purchase equity securities (including but not limited to common stock, preferred stock, convertible securities, and warrants of U.S. and non-U.S. issuers)
directly. The Fund may sell certain equities or fixed income securities short including, but not limited to, U.S. Treasuries, for investment and/or hedging purposes.
The Fund may lend portfolio securities so long as the terms and the structure of such loans are not inconsistent with the requirements of the Investment Company Act of 1940, as amended (the “1940 Act”).
The Fund does not currently intend to make loans of portfolio securities with a value in excess of 33 1/3% of the value of its net assets (including such loans).
Temporary Defensive Strategies. At times Western Asset may judge that conditions in the markets for fixed income securities make pursuing the Fund’s primary investment strategy inconsistent with the
best interests of its shareholders. At such times Western Asset may, temporarily, use alternative strategies, primarily designed to reduce fluctuations in the value of the Fund’s assets. If the Fund takes a temporary defensive position, it may
be unable to achieve its investment objectives. In implementing these “defensive” strategies,
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the Fund may invest all or a portion of its assets in obligations of the U.S. government, its agencies or
instrumentalities; other investment grade debt securities; investment grade commercial paper; certificates of deposit and bankers’ acceptances; repurchase agreements with respect to any of the foregoing investments; or any other fixed income
securities that Western Asset considers consistent with this strategy. It is impossible to predict if, when or for how long the Fund will use these alternative strategies. There can be no assurance that such strategies will be successful.
Other Investment Companies. The Fund may invest in securities of other closed-end or open-end investment companies, including exchange traded funds (“ETFs”), that invest primarily in bonds or other securities and instruments of the types in which the Fund may invest directly to the extent
permitted by the 1940 Act. The Fund will not consider an investment in securities of other closed-end or open-end investment companies toward meeting its policy of
investing at least 80% of its net assets in high-yield securities unless such closed-end or open-end investment company has a policy of investing at least 80% of its net
assets in high-yield securities.
The Fund may invest in other investment companies during periods when it has large amounts of uninvested cash, such as
the period shortly after the Fund receives the proceeds of the offering of its Common Stock, during periods when there is a shortage of attractive bonds available in the market, or when Western Asset believes share prices of other investment
companies offer attractive values. The Fund may invest in investment companies, including money market funds, that are advised by Western Asset or its affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the
SEC. As a shareholder in an investment company, the Fund will bear its ratable share of that investment company’s expenses, and would remain subject to payment of the Fund’s management fees and other expenses with respect to assets so
invested. Shareholders would therefore be subject to duplicative expenses to the extent the Fund invests in other investment companies. Western Asset will take expenses into account when evaluating the investment merits of an investment in an
investment company relative to available bond investments. In addition, the securities of other investment companies may also be leveraged and will therefore be subject to the same leverage risks described herein. The net asset value and market
value of leveraged shares will be more volatile and the yield to shareholders will tend to fluctuate more than the yield generated by unleveraged shares. Other investment companies may have investment policies that differ from those of the Fund. In
addition, to the extent the Fund invests in other investment companies, the Fund will be dependent upon the investment and research abilities of persons other than Western Asset.
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Summary of information regarding the Fund (unaudited) (cont’d)
The Fund has a limited term and as a fundamental policy intends to liquidate and distribute substantially all of its net assets to shareholders after making
appropriate provisions for any liabilities of the Fund on or about September 30, 2025.
Principal Risk Factors
There is no assurance that the Fund will meet its investment objectives. You may lose money on your investment in the Fund. The value of the Fund’s shares may
go up or down, sometimes rapidly and unpredictably. Market conditions, financial conditions of issuers represented in the Fund’s portfolio, investment strategies, portfolio management, and other factors affect the volatility of the Fund’s
shares. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.
The following section includes a summary of the principal risks of investing in the Fund.
Investment and Market
Risk. An investment in the Fund is subject to investment risk, including the possible loss of the entire amount that you invest. Your investment in Common Stock represents an indirect investment in the fixed income securities and other assets
owned by the Fund, most of which could be purchased directly. The value of the Fund’s portfolio securities may move up or down, sometimes rapidly and unpredictably. The Fund intends to take advantage of that Western Assets believes to be
current market dislocations by buying debt and other securities at depressed prices, but if such dislocations do not persist during the period when the Fund is investing the net proceeds of this offering, the Fund’s returns may be adversely
affected. In addition, if the current global economic downturn continues or deteriorates further, the ability of issuers to service their obligations could be materially and adversely affected. At any point in time, your Common Stock may be worth
less than your original investment, even after taking into account the reinvestment of Fund dividends and distributions.
Below Investment Grade
(High-Yield or Junk Bond) Securities Risk. High yield bonds, often called “junk” bonds, have a higher risk of issuer default or may be in default and are considered speculative. Changes in economic conditions or developments regarding
the individual issuer are more likely to cause price volatility and weaken the capacity of such securities to make principal and interest payments than is the case for higher grade debt securities. The value of lower-quality debt securities often
fluctuates in response to company, political, or economic developments and can decline significantly over short as well as long periods of time or during periods of general or regional economic difficulty. High yield bonds may also have lower
liquidity as compared to higher-rated securities, which means the Fund may have difficulty selling them at times, and it may have to apply a greater degree of judgment in establishing a price for purposes of valuing Fund shares. High yield bonds
generally are issued by less creditworthy issuers. Issuers of high yield bonds may have a larger amount of outstanding debt relative to their assets than issuers of
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investment grade bonds. In the event of an issuer’s bankruptcy, claims of other creditors may have priority over
the claims of high yield bond holders, leaving few or no assets available to repay high yield bond holders. The Fund may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting issuer. High
yield bonds frequently have redemption features that permit an issuer to repurchase the security from the Fund before it matures. If the issuer redeems high yield bonds, the Fund may have to invest the proceeds in bonds with lower yields and may
lose income.
Fixed Income Securities Risk. In addition to the risks described elsewhere in this section with respect to valuations and liquidity,
fixed income securities, including high-yield securities, are also subject to certain risks, including:
Issuer Risk. The value of fixed income
securities may decline for a number of reasons that directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer’s goods and services.
Interest Rate Risk. The market price of the Fund’s investments will change in response to changes in interest rates and other factors. During periods of
declining interest rates, the market price of fixed income securities generally rises. Conversely, during periods of rising interest rates, the market price of such securities generally declines. The magnitude of these fluctuations in the market
price of fixed income securities is generally greater for securities with longer maturities. Fluctuations in the market price of the Fund’s securities will not affect interest income derived from securities already owned by the Fund, but will
be reflected in the Fund’s net asset value. The Fund may utilize certain strategies, including investments in structured notes or interest rate swap or cap transactions, for the purpose of reducing the interest rate sensitivity of the portfolio
and decreasing the Fund’s exposure to interest rate risk, although there is no assurance that it will do so or that such strategies will be successful.
Prepayment Risk. During periods of declining interest rates, the issuer of a security may exercise its option to prepay principal earlier than scheduled, forcing the Fund to reinvest the proceeds from such
prepayment in lower yielding securities, which may result in a decline in the Fund’s income and distributions to shareholders. This is known as prepayment or “call” risk. Debt securities frequently have call features that allow the
issuer to redeem the security at dates prior to its stated maturity at a specified price (typically greater than par) only if certain prescribed conditions are met (“call protection”). An issuer may choose to redeem a debt security if, for
example, the issuer can refinance the debt at a lower cost due to declining interest rates or an improvement in the credit standing of the issuer. Senior Loans and Second Lien Loans typically do not have call protection. For premium bonds (bonds
acquired at prices that exceed their par or principal value) purchased by the Fund, prepayment risk may be enhanced.
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Reinvestment Risk. Reinvestment risk is the risk that income from the Fund’s portfolio will decline if and when the Fund invests the proceeds from
matured, traded or called fixed income securities at market interest rates that are below the portfolio’s current earnings rate. A decline in income could affect the Fund’s Common Stock price or its overall return.
Credit Risk. Credit risk is the risk that one or more fixed income securities in the Fund’s portfolio will decline in price or fail to pay interest or
principal when due because the issuer of the security experiences a decline in its financial status. If the recent adverse conditions in the credit markets continue to adversely affect the broader global economy, the credit quality of issuers of
fixed income securities in which the Fund may invest would be more likely to decline, all other things being equal. Changes by an NRSRO in its rating of securities and in the ability of an issuer to make scheduled payments may also affect the value
of the Fund’s investments. To the extent the Fund invests in below investment grade securities, it will be exposed to a greater amount of credit risk than a fund which invests solely in investment grade securities. The prices of lower grade
securities are generally more sensitive to negative developments, such as a decline in the issuer’s revenues or a general economic downturn, than are the prices of higher grade securities. Fixed income securities of below investment grade
quality are predominantly speculative with respect to the issuer’s capacity to pay interest and repay principal when due and therefore involve a greater risk of default.
Foreign Securities and Emerging Markets Risk. A fund that invests in foreign (non-U.S.) securities may experience more rapid and extreme changes in value than a fund
that invests exclusively in securities of U.S. companies. The securities markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. Investments in foreign securities
(including those denominated in U.S. dollars) are subject to economic and political developments in the countries and regions where the issuers operate or are domiciled, or where the securities are traded, such as changes in economic or monetary
policies. Values may also be affected by restrictions on receiving the investment proceeds from a foreign country. Less information may be publicly available about foreign companies than about U.S. companies. Foreign companies are generally not
subject to the same accounting, auditing and financial reporting standards as are U.S. companies. In addition, the Fund’s investments in foreign securities may be subject to the risk of nationalization or expropriation of assets, imposition of
currency exchange controls or restrictions on the repatriation of foreign currency, confiscatory taxation, political or financial instability and adverse diplomatic developments. In addition, there may be difficulty in obtaining or enforcing a court
judgment abroad. Dividends or interest on, or proceeds from the sale of, foreign securities may be subject to non-U.S. withholding taxes, and special U.S. tax considerations may apply.
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The risks of foreign investment are greater for investments in emerging markets. “Emerging market country”
is defined as any country which is, at the time of investment, it is (i) represented in the J.P. Morgan Emerging Markets Bond Index Global Diversified or the J.P. Morgan Corporate Emerging Market Bond Index Broad or (ii) categorized by the
World Bank in its annual categorization as middle- or low-income. Emerging market countries typically have economic and political systems that are less fully developed, and that can be expected to be less
stable, than those of more advanced countries. Low trading volumes may result in a lack of liquidity and in price volatility. Emerging market countries may have policies that restrict investment by foreigners, that require governmental approval
prior to investments by foreign persons, or that prevent foreign investors from withdrawing their money at will. An investment in emerging market securities should be considered speculative.
Foreign Currency Risk. The value of investments denominated in foreign currencies increases or decreases as the rates of exchange between those currencies and the U.S. dollar change. Currency conversion
costs and currency fluctuations could erase investment gains or add to investment losses. Currency exchange rates can be volatile, and are affected by factors such as general economic conditions, the actions of the U.S. and foreign governments or
central banks, the imposition of currency controls and speculation. The fund may be unable or may choose not to hedge its foreign currency exposure.
Repurchase Agreements Risk. Subject to its investment objective and policies, the Fund may invest in repurchase agreements for leverage or investment
purposes. Repurchase agreements typically involve the acquisition by the Fund of debt securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Fund will sell the
securities back to the institution at a fixed time in the future. The Fund does not bear the risk of a decline in the value of the underlying security unless the seller defaults under its repurchase obligation. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Fund could experience both delays in liquidating the underlying securities and losses, including (1) possible decline in the value of the underlying security during the period in which
the Fund seeks to enforce its rights thereto; (2) possible lack of access to income on the underlying security during this period; and (3) expenses of enforcing its rights. While repurchase agreements involve certain risks not associated
with direct investments in debt securities, the Fund follows procedures approved by the Fund’s Board of Directors that are designed to minimize such risks. These procedures include effecting repurchase transactions only with large,
well-capitalized and well-established financial institutions whose financial condition will be continually monitored by Western Asset. In addition, as described above, the value of the collateral underlying the repurchase agreement will be at least
equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund generally will seek to liquidate such collateral. However, the
exercise of the Fund’s right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could
suffer a loss.
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Summary of information regarding the Fund (unaudited) (cont’d)
Derivatives Risk. The Fund may utilize a variety of derivative instruments, primarily for hedging and risk management purposes although the Fund may also use
derivative instruments for investment purposes. Derivative instruments include options contracts, derivative instruments related to currencies, forward contracts, futures contracts, options on futures contracts, indexed securities, credit linked
notes, credit default swaps and other swap agreements. A derivative is a financial contract whose value depends on changes in the value of one or more underlying assets or reference rates. Derivatives are subject to a number of risks described
elsewhere in this prospectus, such as liquidity risk, interest rate risk, credit risk and management risk. Derivatives are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual
obligation. Changes in the credit quality of the companies that serve as the Fund’s counterparties with respect to its derivative transactions will affect the value of those instruments. By using derivatives that expose the Fund to
counterparties, the Fund assumes the risk that its counterparties could experience financial hardships that could call into question their continued ability to perform their obligations. In addition, in the event of the insolvency of a counterparty
to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If the Fund is owed this fair market value in the termination of the derivative transaction and its claim is unsecured, the Fund will be
treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. As a result, concentrations of such derivatives in any one counterparty would subject the Fund to an additional degree of risk
with respect to defaults by such counterparty. Derivatives also involve the risk of mispricing or improper valuation and the risk that changes in the value of a derivative may not correlate perfectly with an underlying asset, interest rate or index.
Suitable derivative transactions may not be available in all circumstances and there can be no assurance that the Fund will engage in these transactions to reduce exposure to other risks when that would be beneficial. If the Fund invests in a
derivative instrument, it could lose more than the principal amount invested. Derivative instruments can be illiquid, may disproportionately increase losses, and may have a potentially large impact on Fund performance.
The Securities and Exchange Commission adopted a new rule on October 28, 2020 that mandates that a fund’s derivatives risk management program provide for
specific items as required by the rule, including compliance with a VaR test. Compliance with these new requirements will be required after a transition period that ends on August 19, 2022. Following the compliance date, these requirements may
limit the ability of the Fund to use derivatives and reverse repurchase agreements and similar financing transactions as part of its investment strategies. These requirements may increase the cost of the Fund’s investments in derivatives, which
could adversely affect shareholders.
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Leverage Risk. As a fundamental policy, the Fund will not leverage its capital structure by issuing senior
securities such as preferred shares or debt instruments. However, the Fund may borrow for temporary or emergency purposes as permitted by the 1940 Act. The Fund may take on leveraging risk by, among other things, purchasing securities on a
when-issued or delayed delivery basis, entering into credit default swaps or futures contracts, engaging in short sales or writing options on portfolio securities. When the Fund engages in transactions that have a leveraging effect on the
Fund’s portfolio, the value of the Fund will be more volatile and all other risks will tend to be compounded. This is because leverage generally magnifies the effect of any increase or decrease in the value of the Fund’s underlying asset
or creates investment risk with respect to a larger pool of assets than the Fund would otherwise have. Engaging in such transactions may cause the Fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations or
meet segregation requirements.
Liquidity Risk. Liquidity risk exists when particular investments are difficult to sell. Securities may become
illiquid after purchase by the Fund, particularly during periods of market turmoil. When the Fund holds illiquid investments, the portfolio may be harder to value, especially in changing markets, and if the Fund is forced to sell these investments
in order to segregate assets or for other cash needs, the Fund may suffer a loss.
Management Risk. The Fund is subject to management risk because
it is an actively managed investment portfolio. Western Asset, the Non-U.S. Subadvisers and each individual portfolio manager may not be successful in selecting the best performing securities or investment
techniques, and the Fund’s performance may lag behind that of similar funds.
Government Intervention in Financial Markets Risk. The recent
instability in the financial markets has led the U.S. government and foreign governments to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme
volatility, and in some cases a lack of liquidity. The impact of these measures is not yet known and cannot be predicted. U.S. federal and state governments and foreign governments, their regulatory agencies or self-regulatory organizations may take
additional actions that affect the regulation of the securities in which the Fund invests, or the issuers of such securities, in ways that are unforeseeable. Legislation or regulation may also change the way in which the Fund itself is regulated.
Such legislation or regulation could limit or preclude the Fund’s ability to achieve its investment objectives. Western Asset will monitor developments and seek to manage the Fund’s portfolio in a manner consistent with achieving the
Fund’s investment objectives, but there can be no assurance that it will be successful in doing so.
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Summary of information regarding the Fund (unaudited) (cont’d)
Limited Term Risk. Unless the termination date is amended by shareholders in accordance with the Articles, the Fund will be terminated on or about
September 30, 2025. As the assets of the Fund will be liquidated in connection with its termination, the Fund may be required to sell portfolio securities when it otherwise would not, including at times when market conditions are not favorable,
which may cause the Fund to lose money. As the Fund approaches its termination date, the portfolio composition of the Fund may change, which may cause the Fund’s returns to decrease and the market price of the Common Stock to fall. Rather than
reinvesting the proceeds of its securities, the Fund may distribute the proceeds in one or more liquidating distributions prior to the final liquidation, which may cause the Fund’s fixed expenses to increase when expressed as a percentage of
net assets attributable to Common Stock, or the Fund may invest the proceeds in lower yielding securities or hold the proceeds in cash or cash equivalents, which may adversely affect the performance of the Fund. Upon its termination, the Fund will
distribute substantially all of its net assets to shareholders which may be more than, equal to or less than $20 per share. In addition, other provisions of the Articles may permit the Fund (with shareholder approval) to take certain actions that
could have the effect of changing the termination date, such as through merger, consolidation or liquidation.
Asset-Backed, Mortgage-Backed or
Mortgage-Related Securities Risk. To the extent the Fund invests in asset-backed, mortgage-backed or mortgage-related securities, its exposure to prepayment and extension risks may be greater than other investments in fixed income securities.
Mortgage derivatives held by the Fund may have especially volatile prices and may have a disproportionate effect on the Fund’s share price. Rising interest rates tend to extend the duration of mortgage-related securities, making them more
sensitive to changes in interest rates. In addition, mortgage-related securities are subject to prepayment risk—the risk that borrowers may pay off their mortgages sooner than expected, particularly when interest rates decline. This can reduce
the Fund’s returns because the Fund may have to reinvest that money at lower prevailing interest rates. The Fund’s investments in other asset-backed securities are subject to risks similar to those associated with mortgage-backed
securities.
Market Price Discount from Net Asset Value Risk. Shares of closed-end investment companies
frequently trade at a discount from their net asset value. This risk is separate and distinct from the risk that the Fund’s net asset value could decrease as a result of its investment activities and may be a greater risk to investors expecting
to sell their Common Stock in a relatively short period following completion of this offering. Whether investors will realize gains or losses upon the sale of the Common Stock will depend not upon the Fund’s net asset value but upon whether the
market price of the Common Stock at the time of sale is above or below the investor’s purchase price for the Common Stock. Because the market price of the Common Stock will be determined by factors such as relative supply of and demand for the
Common Stock in the market, general market and economic conditions
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and other factors beyond the control of
the Fund, the Fund cannot predict whether the Common Stock will trade at, above or below net asset value or at, above or below the initial public offering price. The Fund’s Common Stock is designed primarily for long-term investors and you
should not view the Fund as a vehicle for trading purposes.
Non-Diversification Risk. The Fund is
classified as “non-diversified” under the 1940 Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. The Fund may
therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence. The Fund intends to qualify for the special tax treatment available to “regulated
investment companies” under Subchapter M of the Code, and thus intends to satisfy the diversification requirements of Subchapter M, including the less stringent diversification requirement that applies to the percent of its total assets that
are represented by cash and cash items (including receivables), U.S. government securities, the securities of other regulated investment companies and certain other securities.
Anti-Takeover Provisions. The Fund’s Charter and Bylaws include provisions that are designed to limit the ability of other entities or persons to acquire control of the Fund for short-term objectives,
including by converting the Fund to open-end status or changing the composition of the Board, that may be detrimental to the Fund’s ability to achieve its primary investment objective. Such provisions may
limit the ability of shareholders to sell their shares at a premium over prevailing market prices by discouraging a third party from seeking to obtain control of the Fund. There can be no assurance, however, that such provisions will be sufficient
to deter activist investors that seek to cause the Fund to take actions that may not be aligned with the interests of long-term shareholders.
U.S.
Government Debt Securities Risk. U.S. government debt securities generally do not involve the credit risks associated with investments in other types of debt securities, although, as a result, the yields available from U.S. government debt
securities are generally lower than the yields available from other securities. Like other debt securities, however, the values of U.S. government securities change as interest rates fluctuate. Fluctuations in the value of portfolio securities will
not affect interest income on existing portfolio securities but will be reflected in the Fund’s net asset value. Since the magnitude of these fluctuations will generally be greater at times when the Fund’s average maturity is longer, under
certain market conditions the Fund may, for temporary defensive purposes, accept lower current income from short-term investments rather than investing in higher yielding long-term securities.
Non-U.S. Government Debt Securities Risk. The Fund intends to invest in non-U.S. government debt securities. The ability of a
government issuer, especially in an emerging market country, to make timely and complete payments on its debt obligations will be strongly influenced by the government issuer’s balance of payments, including export
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performance, its access to international credits and investments, fluctuations of interest rates and the extent of its foreign reserves. A country whose exports are
concentrated in a few commodities or whose economy depends on certain strategic imports could be vulnerable to fluctuations in international prices of these commodities or imports. To the extent that a country receives payment for its exports in
currencies other than U.S. dollars, its ability to make debt payments denominated in U.S. dollars could be adversely affected. If a government issuer cannot generate sufficient earnings from foreign trade to service its external debt, it may need to
depend on continuing loans and aid from foreign governments, commercial banks, and multinational organizations. There are no bankruptcy proceedings similar to those in the United States by which defaulted
non-U.S. government debt may be collected. Additional factors that may influence a government issuer’s ability or willingness to service debt include, but are not limited to, a country’s cash flow
situation, the availability of sufficient foreign exchange on the date a payment is due, the relative size of its debt service burden to the economy as a whole, and the issuer’s policy towards the International Monetary Fund, the International
Bank for Reconstruction and Development and other international agencies to which a government debtor may be subject.
Senior Loans Risk. The Fund
may invest in Senior Loans issued by banks, other financial institutions, and other investors to corporations, partnerships, limited liability companies and other entities to finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock
repurchases, debt refinancings and, to a lesser extent, for general operating and other purposes. An investment in Senior Loans involves risk that the borrowers under Senior Loans may default on their obligations to pay principal or interest when
due. In the event a borrower fails to pay scheduled interest or principal payments on a Senior Loan held by the Fund, the Fund will experience a reduction in its income and a decline in the market value of the Senior Loan, which will likely reduce
dividends and lead to a decline in the net asset value of the Fund. If the Fund acquires a Senior Loan from another lender, for example, by acquiring a participation, the Fund may also be subject to credit risks with respect to that lender.
The Fund will generally invest in Senior Loans that are secured with specific collateral. However, there can be no assurance that liquidation of
collateral would satisfy the borrower’s obligation in the event of non-payment or that such collateral could be readily liquidated. In the event of the bankruptcy of a borrower, the Fund could experience
delays and limitations on its ability to realize the benefits of the collateral securing the Senior Loan. Senior Loans are typically structured as floating rate instruments in which the interest rate payable on the obligation fluctuates with
interest rate changes. As a result, the yield on Senior Loans will generally decline in a falling interest rate environment causing the Fund to experience a reduction in the income it receives from a Senior Loan. Senior Loans are generally of below
investment grade quality and may be unrated at the time of investment; are generally not registered with the SEC or state securities commissions; and are generally not listed on any securities exchange. In addition, the amount of public information
available on Senior Loans is generally less extensive than that available for other types of assets.
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Second Lien Loans Risk. Second
Lien Loans generally are subject to similar risks as those associated with investments in Senior Loans. Because Second Lien Loans are subordinated or unsecured and thus lower in priority of payment to Senior Loans, they 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 secured obligations of the borrower. This risk is generally higher for
subordinated unsecured loans or debt, which are not backed by a security interest in any specific collateral. Second Lien Loans generally have greater price volatility than Senior Loans and may be less liquid. There is also a possibility that
originators will not be able to sell participations in Second Lien Loans, which would create greater credit risk exposure for the holders of such loans. Second Lien Loans share the same risks as other below investment grade securities.
Loan Participations and Assignments Risk. The Fund may invest in participations in loans or assignments of all or a portion of loans from third parties. In
connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off
against the borrower, and the Fund may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is
selling the participation. In the event of the insolvency of the lender selling a participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the
lender and the borrower. Certain participations may be structured in a manner designed to avoid purchasers of participations being subject to the credit risk of the lender with respect to the participation, but even under such a structure, in the
event of the lender’s insolvency, the lender’s servicing of the participation may be delayed and the assignability of the participation impaired. The Fund will acquire participations only if the lender interpositioned between the Fund and
the borrower is determined by Western Asset to be creditworthy.
Common Stock Risk. The Fund may purchase equity securities (including but not
limited to common stock, preferred stock, convertible securities, and warrants of U.S. and non-U.S. issuers) directly. An adverse event, such as an unfavorable earnings report, may depress the value of a
particular common stock held by the Fund. In addition, the prices of common stocks are sensitive to general movements in the stock market, and a drop in the stock market may depress the prices of common stocks to which the Fund has exposure. Common
stock prices fluctuate for several reasons including changes in investors’ perceptions of the financial condition of an issuer or the general condition of the relevant stock market, or when political or economic events affecting an issuer
occur. In addition, common stock
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67
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Summary of information regarding the Fund (unaudited) (cont’d)
prices may be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase. The value of the common stocks in which
the Fund may invest will be affected by changes in the stock markets generally, which may be the result of domestic or international political or economic news, changes in interest rates or changing investor sentiment. At times, stock markets can be
volatile and stock prices can change substantially. The common stocks of smaller companies are more sensitive to these changes than those of larger companies. Common stock risk will affect the Fund’s net asset value per share, which will
fluctuate as the value of the securities held by the Fund change.
Preferred Stock Risk. The Fund may invest in preferred stock. Preferred stocks
are unique securities that combine some of the characteristics of both common stocks and bonds. Preferred stocks generally pay a fixed rate of return and are sold on the basis of current yield, like bonds. However, because they are equity
securities, preferred stock provides equity ownership of a company, and the income is paid in the form of dividends. Preferred stocks typically have a yield advantage over common stocks as well as comparably-rated fixed income investments. Preferred
stocks are typically subordinated to bonds and other debt instruments in a company’s capital structure, in terms of priority to corporate income, and therefore will be subject to greater credit risk than those debt instruments. Unlike interest
payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred stocks also may be subject to optional or mandatory redemption provisions. Certain of the preferred stocks in
which the Fund may invest may be convertible preferred stocks, which have risks similar to convertible securities as described below in “—Convertible Securities Risk.”
Convertible Securities Risk. The Fund may invest in convertible securities. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a
prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. Before conversion, convertible securities have characteristics similar to nonconvertible
income securities in that they ordinarily provide a stable stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower yields than comparable nonconvertible securities. Similar to traditional
fixed income securities, the market values of convertible securities tend to decline as interest rates increase and, conversely, to increase as interest rates decline. However, when the market price of the common stock underlying a convertible
security exceeds the conversion price, the convertible security tends to reflect the market price of the underlying common stock. As the market price of the underlying common stock declines, the convertible security tends to trade increasingly on a
yield basis and thus may not decline in price to the same extent as the underlying common stock. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. Convertible securities
rank senior to common stock in a corporation’s capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities may be subject to redemption at the option of the issuer at a price established in the
convertible security’s governing instrument.
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Short Sales Risk. To the extent
the Fund makes use of short sales for investment and/or risk management purposes, the Fund may be subject to risks associated with selling short. Short sales are transactions in which the Fund sells securities or other instruments that the Fund does
not own. Short sales expose the Fund to the risk that it will be required to cover its short position at a time when the securities have appreciated in value, thus resulting in a loss to the Fund. The Fund may engage in short sales where it does not
own or have the right to acquire the security sold short at no additional cost. The Fund’s loss on a short sale theoretically could be unlimited in a case where the Fund is unable, for whatever reason, to close out its short position. In
addition, the Fund’s short selling strategies may limit its ability to benefit from increases in the markets. If the Fund engages in short sales, it will segregate liquid assets, enter into offsetting transactions, own positions covering its
obligations or otherwise cover such obligations; however, such segregation and cover requirements will not limit or offset losses on related positions. Short selling also involves a form of financial leverage that may exaggerate any losses realized
by the Fund. Also, there is the risk that the counterparty to a short sale may fail to honor its contractual terms, causing a loss to the Fund.
Risk
of Short Economic Exposure Through Derivatives. The use by the Fund of derivatives such as options, forwards or futures contracts for investment and/or risk management purposes may subject the Fund to risks associated with short economic
exposure through such derivatives. Taking a short economic position through derivatives exposes the Fund to the risk that it will be obligated to make payments to its counterparty if the underlying asset appreciates in value, thus resulting in a
loss to the Fund. The Fund’s loss on a short position using derivatives theoretically could be unlimited.
Counterparty Risk. Changes in the
credit quality of the companies that serve as the Fund’s counterparties with respect to derivatives or other transactions supported by another party’s credit will affect the value of those instruments. Certain entities that have served as
counterparties in the markets for these transactions have recently incurred significant financial hardships including bankruptcy and losses as a result of exposure to sub-prime mortgages and other lower
quality credit investments that have experienced recent defaults or otherwise suffered extreme credit deterioration. If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial
difficulties, the Fund may experience significant delays in obtaining any recovery under the derivative contract in a bankruptcy or other reorganization proceeding. The Fund may obtain only a limited recovery or may obtain no recovery in such
circumstances.
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Western Asset High Yield Defined Opportunity Fund Inc.
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69
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Summary of information regarding the Fund (unaudited) (cont’d)
Credit Default Swap Risk. The Fund may invest in credit default swap transactions for hedging or investment purposes. Credit default swap agreements involve
greater risks than if the Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risk. The “buyer” in a credit
default contract is obligated to pay the “seller” a periodic stream of payments over the term of the contract, provided that no event of default on an underlying reference obligation has occurred. If an event of default occurs, the seller
must pay the buyer the full notional value, or “par value,” of the reference obligation through either physical settlement or cash settlement. The Fund may be either the buyer or seller in a credit default swap transaction. If the Fund is
a buyer and no event of default occurs, the Fund will have made a series of periodic payments and recover nothing of monetary value. However, if an event of default occurs, the Fund (if the buyer) will receive the full notional value of the
reference obligation either through a cash payment in exchange for the asset or a cash payment in addition to owning the reference assets. As a seller, the Fund receives a fixed rate of income throughout the term of the contract, which typically is
between six months and five years, provided that there is no event of default. The sale of a credit default swap is a form of leverage. The Fund currently intends to segregate assets on the Fund’s records in the form of cash, cash equivalents
or liquid securities in an amount equal to the notional value of the credit default swaps of which it is the seller or otherwise cover such obligations. If such assets are not fully segregated or otherwise covered by the Fund, the use of credit
default swap transactions could then be considered senior securities for purposes of the 1940 Act.
Structured Notes and Related Instruments Risk.
The Fund may invest in “structured” notes and other related instruments, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset, market or
interest rate (an “embedded index”), such as selected securities, an index of securities or specified interest rates, or the differential performance of two assets or markets, such as indexes reflecting bonds. Structured instruments may be
issued by corporations, including banks, as well as by governmental agencies. Structured instruments frequently are assembled in the form of medium-term notes, but a variety of forms are available and may be used in particular circumstances. The
terms of such structured instruments normally provide that their principal and/or interest payments are to be adjusted upwards or downwards (but ordinarily not below zero) to reflect changes in the embedded index while the structured instruments are
outstanding. As a result, the interest and/or principal payments that may be made on a structured product may vary widely, depending on a variety of factors, including the volatility of the embedded index and the effect of changes in the embedded
index on principal and/or interest payments. The rate of return on structured notes may be determined by applying a multiplier to the performance or differential performance of the referenced index(es) or other asset(s). Application of a multiplier
involves leverage that will serve to magnify the potential for gain and the risk of loss.
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Inflation/Deflation Risk.
Inflation risk is the risk that the value of certain assets or income from the Fund’s investments will be worth less in the future as inflation decreases the value of money. As inflation increases, the real value of the Common Stock and
distributions on the Common Stock can decline. In addition, during any periods of rising inflation, the dividend rates or borrowing costs associated with the Fund’s use of leverage would likely increase, which would tend to further reduce
returns to shareholders. Deflation risk is the risk that prices throughout the economy decline over time—the opposite of inflation. Deflation may have an adverse effect on the creditworthiness of issuers and may make issuer defaults more
likely, which may result in a decline in the value of the Fund’s portfolio.
Risks of Futures and Options on Futures. The use by the Fund of
futures contracts and options on futures contracts to hedge interest rate risks involves special considerations and risks, as described below.
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•
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Successful use of hedging transactions depends upon Western Asset’s ability to correctly predict the direction of changes in interest rates. There can be no
assurance that any particular hedging strategy will succeed.
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•
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There might be imperfect correlation, or even no correlation, between the price movements of a futures or option contract and the movements of the interest rates
being hedged. Such a lack of correlation might occur due to factors unrelated to the interest rates being hedged, such as market liquidity and speculative or other pressures on the markets in which the hedging instrument is traded.
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•
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Hedging strategies, if successful, can reduce risk of loss by wholly or partially offsetting the negative effect of unfavorable movements in the interest rates
being hedged. However, hedging strategies can also reduce opportunity for gain by offsetting the positive effect of favorable movements in the hedged interest rates.
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•
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There is no assurance that a liquid secondary market will exist for any particular futures contract or option thereon at any particular time. If the Fund were
unable to liquidate a futures contract or an option on a futures contract position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. The Fund would continue to be subject to market
risk with respect to the position.
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•
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There is no assurance that the Fund will use hedging transactions. For example, if the Fund determines that the cost of hedging will exceed the potential benefit
to the Fund, the Fund will not enter into such transactions.
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Western Asset High Yield Defined Opportunity Fund Inc.
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71
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Summary of information regarding the Fund (unaudited) (cont’d)
When-Issued and Delayed-Delivery Transactions Risk. The Fund may purchase fixed income securities on a when-issued basis, and may purchase or sell those
securities for delayed delivery. When-issued and delayed-delivery transactions occur when securities are purchased or sold by the Fund with payment and delivery taking place in the future to secure an advantageous yield or price. Securities
purchased on a when-issued or delayed-delivery basis may expose the Fund to counterparty risk of default as well as the risk that securities may experience fluctuations in value prior to their actual delivery. The Fund will not accrue income with
respect to a when-issued or delayed-delivery security prior to its stated delivery date. Purchasing securities on a when-issued or delayed-delivery basis can involve the additional risk that the price or yield available in the market when the
delivery takes place may not be as favorable as that obtained in the transaction itself.
Portfolio Turnover Risk. Changes to the investments of
the Fund may be made regardless of the length of time particular investments have been held. A high portfolio turnover rate may result in increased transaction costs for the Fund in the form of increased dealer spreads and other transactional costs,
which may have an adverse impact on the Fund’s performance. In addition, high portfolio turnover may result in the realization of net short-term capital gains by the Fund which, when distributed to shareholders, will be taxable as ordinary
income. A high portfolio turnover may increase the Fund’s current and accumulated earnings and profits, resulting in a greater portion of the Fund’s distributions being treated as a dividend to the Fund’s shareholders. The portfolio
turnover rate of the Fund will vary from year to year, as well as within a given year.
Temporary Defensive Strategies Risk. When Western Asset
anticipates unusual market or other conditions, the Fund may temporarily depart from its principal investment strategies as a defensive measure and invest all or a portion of its assets in obligations of the U.S. government, its agencies or
instrumentalities; other investment grade debt securities; investment grade commercial paper; certificates of deposit and bankers’ acceptances; repurchase agreements with respect to any of the foregoing investments or any other fixed income
securities that Western Asset considers consistent with this strategy. To the extent that the Fund invests defensively, it may not achieve its investment objectives.
Rating Agency Risk. Credit ratings are issued by rating agencies which are private services that provide ratings of the credit quality of debt obligations, including convertible securities. Ratings assigned
by a rating agency are not absolute standards of credit quality and do not evaluate market risks or the liquidity of securities. Rating agencies may fail to make timely changes in credit ratings and an issuer’s current financial condition may
be better or worse than a rating indicates. In addition, in recent years there have been instances in which the initial rating assigned by a rating agency to a security failed to take account of adverse economic developments which subsequently
occurred, leading to losses that were not anticipated based on the initial rating. To the extent that the issuer of a security pays a
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Western Asset High Yield Defined Opportunity Fund Inc.
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rating agency for the analysis of its
security, an inherent conflict of interest may exist that could affect the reliability of the rating. The ratings of a debt security may change over time. As a result, debt instruments held by the Fund could receive a higher rating or a lower rating
during the period in which they are held. The Fund will not necessarily sell a security when its rating is reduced below its rating at the time of purchase.
Market Events Risk. The market values of securities or other assets will fluctuate, sometimes sharply and unpredictably, due to changes in general market conditions, overall economic trends or events,
governmental actions or intervention, actions taken by the U.S. Federal Reserve or foreign central banks, market disruptions caused by trade disputes or other factors, political developments, investor sentiment, the global and domestic effects of a
pandemic, and other factors that may or may not be related to the issuer of the security or other asset. Economies and financial markets throughout the world are increasingly interconnected. Economic, financial or political events, trading and
tariff arrangements, public health events, terrorism, natural disasters and other circumstances in one country or region could have profound impacts on global economies or markets. As a result, whether or not the Fund invests in securities of
issuers located in or with significant exposure to the countries directly affected, the value and liquidity of the Fund’s investments may be negatively affected.
The rapid and global spread of a highly contagious novel coronavirus respiratory disease, designated COVID-19, first detected in China in December 2019, has resulted in
extreme volatility in the financial markets and severe losses; reduced liquidity of many instruments; restrictions on international and, in some cases, local travel, significant disruptions to business operations (including business closures);
strained healthcare systems; disruptions to supply chains, consumer demand and employee availability; and widespread uncertainty regarding the duration and long-term effects of this pandemic. Some sectors of the economy and individual issuers have
experienced particularly large losses. In addition, the COVID-19 pandemic may result in a sustained economic downturn or a global recession, domestic and foreign political and social instability, damage to
diplomatic and international trade relations and increased volatility and/or decreased liquidity in the securities markets. The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual
issuers, are not known. Certain risks, such as interest rate risk, credit risk, liquidity risk and counterparty risk, may be heightened as a result of such market events. The U.S. government and the Federal Reserve, as well as certain foreign
governments and central banks, are taking extraordinary actions to support local and global economies and the financial markets in response to the COVID-19 pandemic, including by pushing interest rates to very
low levels. This and other government intervention into the economy and financial markets to address the COVID-19 pandemic may not work as intended, particularly if the efforts are perceived by investors as
being unlikely to achieve the desired results. The COVID-19 pandemic could adversely affect the
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Western Asset High Yield Defined Opportunity Fund Inc.
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73
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Summary of information regarding the Fund (unaudited) (cont’d)
value and liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of
COVID-19, and measures taken to mitigate its effects, could result in disruptions to the services provided to the Fund by its service providers.
LIBOR Risk. The Fund’s investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate
for short-term Eurodollar deposits between major international banks. On March 5, 2021, the ICE Benchmark Administration, the administrator of LIBOR, stated that it will cease the publication of (i) the overnight and one-, three-, six- and twelve-month USD LIBOR settings immediately following the LIBOR publication on Friday, June 30, 2023 and (ii) all other LIBOR settings,
including the one-week and two-month USD LIBOR settings, immediately following the LIBOR publication on Friday, December 31, 2021. There remains uncertainty
regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets generally. As such, the potential effect of a transition away from LIBOR on the Fund or the
Fund’s investments cannot yet be determined.
Operational Risk. The valuation of the Fund’s investments may be negatively impacted
because of the operational risks arising from factors such as processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third party service
providers or trading counterparties. It is not possible to identify all of the operational risks that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its
shareholders could be negatively impacted as a result.
Cybersecurity Risk. Cybersecurity incidents, both intentional and unintentional, may allow
an unauthorized party to gain access to Fund assets, Fund or proprietary information, cause the Fund, LMPFA and the subadvisers and/or their service providers to suffer data breaches, data corruption or loss of operational functionality or prevent
Fund investors from purchasing, redeeming or exchanging shares or receiving distributions. The Fund, LMPFA and the subadvisers have limited ability to prevent or mitigate cybersecurity incidents affecting third party service providers, and such
third party service providers may have limited indemnification obligations to the Fund or LMPFA. Cybersecurity incidents may result in financial losses to the Fund and its shareholders, and substantial costs may be incurred in order to prevent any
future cybersecurity incidents. Issuers of securities in which the Fund invests are also subject to cybersecurity risks, and the value of these securities could decline if the issuers experience cybersecurity incidents.
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More Information
For a complete list of the Fund’s fundamental investment restrictions and more detailed descriptions of the Fund’s investment policies,
strategies and risks, see the Fund’s registration statement on Form N-2 that was declared effective by the SEC on October 26, 2010. The Fund’s fundamental investment restrictions may not be
changed without the approval of the holders of a majority of the outstanding voting securities, as defined in the 1940 Act.
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Western Asset High Yield Defined Opportunity Fund Inc.
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75
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Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and
return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s
Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare
Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined
as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date
is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal
to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close
of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading
day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders;
except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the
Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases,
the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the
day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by
the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e.,
opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such
withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.
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Western Asset High Yield Defined Opportunity Fund Inc.
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Plan participants who sell their shares
will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment
of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be
automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for
lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions.
Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the
judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or
distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such
termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by
calling the Plan Agent at 1-888-888-0151.
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Western Asset High Yield Defined Opportunity Fund Inc.
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77
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Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended May 31, 2021:
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Record date:
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Monthly
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Monthly
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June 2020 -
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January 2021 -
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Payable date:
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December 2020
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May 2021
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Ordinary Income:
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Qualified Dividend Income for Individuals
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1.51%
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4.27%
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Dividends Qualifying for the Dividends
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Received Deduction for Corporations
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1.31%
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4.27%
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Tax Return of Capital
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—
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49.80%
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The following information is applicable to non U.S. resident shareholders:
The following ordinary income distributions paid monthly by the Fund represent Interest-related dividends eligible for exemption from U.S. withholding tax for
nonresident shareholders and foreign corporations:
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Record date:
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Monthly
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Monthly
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June 2020 -
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January 2021 -
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Payable date:
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December 2020
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May 2021
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Interest-related Dividends
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36.00%
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100.00%
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Western Asset High Yield Defined Opportunity Fund Inc.
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Western Asset
High Yield Defined Opportunity Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred
Jensen
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
George P.
Hoyt*
Secretary and Chief Legal Officer
Thomas
C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
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*
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Effective August 13, 2020, Mr. Hoyt became Secretary and Chief Legal Officer.
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Western Asset High Yield Defined Opportunity Fund Inc.
620 Eighth Avenue
47th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Western Asset Management
Company, LLC
Western Asset Management Company Limited
Western Asset Management Company Ltd
Western Asset Management
Company Pte. Ltd.
Custodian
The
Bank of New York Mellon
Transfer agent
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher &
Bartlett LLP
425 Lexington Avenue
New York, NY 10017
New York Stock Exchange Symbol
HYI
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end
funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and
maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
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Personal information included on applications or other forms;
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Account balances, transactions, and mutual fund holdings and positions;
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Bank account information, legal documents, and identity verification documentation;
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Online account access user IDs, passwords, security challenge question responses; and
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Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt,
payment history, etc.).
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How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law.
The Funds may disclose information about you to:
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Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business, or to comply with obligations to
government regulators;
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Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;
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Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and
service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;
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The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations
to government regulators;
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Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
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NOT PART OF THE ANNUAL REPORT
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Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’
behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them
to perform. The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory
request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’
practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify
you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The
Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized
employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal
information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds
will attempt to notify you as necessary, so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the
most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information
accurate is very important. If you believe that your account information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds
using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at
1-888-777-0102.
Revised April
2018
Legg Mason California Consumer Privacy Act Policy
Although much of the personal information we collect is “nonpublic personal information” subject to federal law, residents of California may, in certain circumstances, have additional rights under the
California Consumer Privacy Act (“CCPA”). For example, if you are a broker,
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NOT PART OF THE ANNUAL REPORT
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Legg Mason Funds Privacy and Security Notice (cont’d)
dealer, agent, fiduciary, or representative acting by or on behalf of, or for, the
account of any other person(s) or household, or a financial advisor, or if you have otherwise provided personal information to us separate from the relationship we have with personal investors, the provisions of this Privacy Policy apply to your
personal information (as defined by the CCPA).
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In addition to the provisions of the Legg Mason Funds Security and Privacy Notice, you may have the right to know the categories and specific pieces of personal
information we have collected about you.
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You also have the right to request the deletion of the personal information collected or maintained by the Funds.
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If you wish to exercise any of the rights you have in respect of your personal information, you should advise the Funds by contacting them as set forth below. The
rights noted above are subject to our other legal and regulatory obligations and any exemptions under the CCPA. You may designate an authorized agent to make a rights request on your behalf, subject to the identification process described below. We
do not discriminate based on requests for information related to our use of your personal information, and you have the right not to receive discriminatory treatment related to the exercise of your privacy rights.
We may request information from you in order to verify your identity or authority in making such a request. If you have appointed an authorized agent to make a
request on your behalf, or you are an authorized agent making such a request (such as a power of attorney or other written permission), this process may include providing a password/passcode, a copy of government issued identification, affidavit or
other applicable documentation, i.e. written permission. We may require you to verify your identity directly even when using an authorized agent, unless a power of attorney has been provided. We reserve the right to deny a request submitted by an
agent if suitable and appropriate proof is not provided.
For the 12-month period prior to the date of this
Privacy Policy, the Legg Mason Funds have not sold any of your personal information; nor do we have any plans to do so in the future.
Contact
Information
Address: Data Privacy Officer, 100 International Dr., Baltimore, MD 21202
Email: DataProtectionOfficer@franklintempleton.com
Phone:
1-800-396-4748
Revised
October 2020
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NOT PART OF THE ANNUAL REPORT
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Western Asset High Yield Defined Opportunity Fund Inc.
Western Asset High Yield Defined Opportunity Fund Inc.
620 Eighth
Avenue
47th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at
market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission
(“SEC”) for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the
SEC’s website at www.sec.gov. To obtain information on Form N-PORT, shareholders can call the Fund at
1-888-777-0102.
Information on
how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to
vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102,
(2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset High Yield
Defined Opportunity Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
WASX013977 7/21 SR21-4198