0001710680falseN-CSRSAs referenced in Note 1, the Fund issued $145mm in preferred shares subject to the 200% Asset Coverage of Indebtedness requirements under the 1940 Act.For the six-month period ended December 31, 2018. Effective April 11, 2019, the Fund had a fiscal year change from June 30 to December 31. 0001710680 2023-01-01 2023-06-30 0001710680 cik0001710680:GainContingencyMember 2023-01-01 2023-06-30 0001710680 cik0001710680:ValuationRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:StructuredFinanceSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:ShortSalesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:SeniorLoansRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:SecuritiesLendingRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:RealEstateMarketRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:RealEstateInvestmentTrustRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:PreferredStockRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:PreferredShareRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:PandemicsAndAssociatedEconomicDisruptionMember 2023-01-01 2023-06-30 0001710680 cik0001710680:OptionsRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:NonUsSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:NonDiversificationRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:MortgageBackedSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:ManagementRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:LiborDiscontinuationRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:LeverageRiskMember 2023-01-01 2023-06-30 0001710680 us-gaap:InterestRateRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:IlliquidAndRestrictedSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:HighYieldDebtSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:HedgingRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:FinancialServicesIndustryRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:ExchangetradedFundsetfRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:EquitySecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:DistressedAndDefaultedSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:DerivativesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:CurrencyRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:CreditRiskOneMember 2023-01-01 2023-06-30 0001710680 cik0001710680:CounterpartyRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:ConcentrationInRealEstateSecuritiesRiskMember 2023-01-01 2023-06-30 0001710680 cik0001710680:CommonSharesMember 2023-01-01 2023-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2023-06-30 0001710680 cik0001710680:IncludingPreferredSharesMember 2023-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2022-12-31 0001710680 cik0001710680:IncludingPreferredSharesMember 2022-12-31 0001710680 cik0001710680:IncludingPreferredSharesMember 2021-12-31 0001710680 cik0001710680:ExcludingPreferredSharesMember 2021-12-31 0001710680 cik0001710680:ExcludingPreferredSharesMember 2020-12-31 0001710680 cik0001710680:IncludingPreferredSharesMember 2020-12-31 0001710680 cik0001710680:ExcludingPreferredSharesMember 2019-12-31 0001710680 cik0001710680:IncludingPreferredSharesMember 2019-12-31 0001710680 cik0001710680:ExcludingPreferredSharesMember 2018-12-31 0001710680 cik0001710680:IncludingPreferredSharesMember 2018-12-31 0001710680 cik0001710680:IncludingPreferredSharesMember 2018-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2018-06-30 0001710680 cik0001710680:IncludingPreferredSharesMember 2017-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2017-06-30 0001710680 cik0001710680:IncludingPreferredSharesMember 2016-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2016-06-30 0001710680 cik0001710680:IncludingPreferredSharesMember 2015-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2015-06-30 0001710680 cik0001710680:IncludingPreferredSharesMember 2014-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2014-06-30 0001710680 cik0001710680:IncludingPreferredSharesMember 2013-06-30 0001710680 cik0001710680:ExcludingPreferredSharesMember 2013-06-30 xbrli:shares iso4217:USD iso4217:USD xbrli:shares
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM N-CSR
 
 
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment
 
Company Act file number: 811-23268
 
 
HIGHLAND OPPORTUNITIES AND INCOME FUND
(Exact name of registrant as specified in charter)
 
 
300 Crescent Court
Suite 700
Dallas, Texas 75201
(Address of principal executive offices)(Zip code)
 
 
Frank Waterhouse Treasurer, Principal Accounting Officer, Principal Financial Officer, and Principal Executive Officer
300 Crescent Court
Suite 700
Dallas, Texas 75201
(Name and Address of Agent for Service)
 
 
Registrant’s telephone number,
 
including area code: (866) 351-4440
Date of fiscal year end: December 31
Date of reporting period: June 30, 2023

 
 
 

Item 1. Reports to Stockholders.
A copy of the Semi-Annual Report transmitted to
shareholders pursuant to Rule 30e-1 under the Investment Company
Act of 1940, as amended (the “1940 Act”), is attached herewith.
 

LOGO
 
Highland Opportunities and Income Fund
(formerly Highland Income Fund)
 
 
Semi-Annual Report
June 30, 2023
 
 

Highland Opportunities and Income Fund
 
TABLE OF CONTENTS
 
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     35  
     40  

Privacy Policy
We recognize and respect your privacy expectations, whether you are a visitor to our web site, a potential shareholder, a current shareholder or even a former shareholder.
Collection of Information. We may collect nonpublic personal information about you from the following sources:
 
 
 
Account applications and other forms, which may include your name, address and social security number, written and electronic correspondence and telephone contacts;
 
 
Web site information, including any information captured through the use of “cookies”; and
 
 
Account history, including information about the transactions and balances in your accounts with us or our affiliates.
Disclosure of Information. We may share the information we collect with our affiliates. We may also disclose this information as otherwise permitted by law. We do not sell your personal information to third parties for their independent use.
Confidentiality and Security of Information. We restrict access to nonpublic personal information about you to our employees and agents who need to know such information to provide products or services to you. We maintain physical, electronic and procedural safeguards that comply with federal standards to guard your nonpublic personal information, although you should be aware that data protection cannot be guaranteed.
Economic and market conditions change frequently.
There is no assurance that the trends described in this report will continue or commence.
 
 
A prospectus must precede or accompany this report. Please read the prospectus carefully before you invest.

FUND PROFILE (unaudited)
 
 
 
 
Highland Opportunities and Income Fund
 
Objective
Highland Opportunities and Income Fund seeks growth of capital along with income.
 
Net Assets as of June 30, 2023
$928.1 million
 
Portfolio Data as of June 30, 2023
The information below provides a snapshot of Highland Opportunities and Income Fund at the end of the reporting period. Highland Opportunities and Income Fund is actively managed and the composition of its portfolio will change over time. Current and future holdings are subject to risk.
 
Quality Breakdown as of 6/30/2023 (%)
(1)
 
BBB
       0.58  
BB
       2.73  
B
       16.52  
CCC
       5.70  
NR
       74.47  
Top 5 Sectors as of 6/30/2023 (%)
(1)(2)(3)
 
Real Estate
       70.8  
Collateralized Loan Obligations
       10.1  
Healthcare
       7.8  
LLC Interest
       6.4  
Information Technology
       5.8  
 
Top 10 Holdings as of 6/30/2023 (%)
(1)(2)(3)
 
NFRO Self Storage REIT, LLC (Common Stock)
       13.3  
NFRO SFR REIT, LLC (Common Stock)
       8.4  
NexPoint Real Estate Finance (Common Stock)
       7.3  
NFRO Holdings, LLC (Common Stock)
       6.9  
NexPoint SFR Operating Partnership, LP 7.50%, 5/24/2027
(U.S. Senior Loans)
       6.9  
EDS Legacy Partners 11.00%, 12/14/2023 (U.S. Senior Loans)
       6.6  
NFRO Diversified REIT, LLC (Common Stock)
       6.6  
IQHQ, Inc. (Common Stock)
       6.0  
NEXLS LLC (LLC Interest)
       5.4  
NHT Operating Partnership LLC Secured Promissory Note 4.21%, 2/14/2027 (U.S. Senior Loans)
       4.4  
 
(1)
 
Quality is calculated as a percentage of total credit instruments held by the portfolio. Sectors and holdings are calculated as a percentage of total net assets. The quality ratings reflected were issued by Standard & Poors, a nationally recognized statistical rating organization. Ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Quality ratings reflect the credit quality of the underlying bonds in the Fund’s portfolio and not that of the Fund itself. Credit quality ratings assigned by a rating agency are subjective opinions, not statements of fact, and are subject to change, including daily. The ratings assigned by credit rating agencies are but one of the considerations that the Fund’s investment adviser incorporates into its credit analysis process, along with such other issuer specific factors as cash flows, capital structure and leverage ratios, ability to deleverage through free cash flow, quality of management, market positioning and access to capital, as well as such security-specific factors as the terms of the security (e.g., interest rate, and time to maturity) and the amount of any collateral.
 
(2)
 
Sectors and holdings are calculated as a percentage of total net assets.
 
(3)
 
Excludes the Fund’s investment in a cash equivalent.
 
Semi-Annual Report
     
1

FINANCIAL STATEMENTS
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
A guide to understanding the Fund’s financial statements
 
Investment Portfolio
     The Investment Portfolio details all of the Fund’s holdings and its market value as of the last day of the reporting period. Portfolio holdings are organized by type of asset and industry to demonstrate areas of concentration and diversification.
Statement of Assets and Liabilities
     This statement details the Fund’s assets, liabilities, net assets and share price for each share class as of the last day of the reporting period. Net assets are calculated by subtracting all of the Fund’s liabilities (including any unpaid expenses) from the total of the Fund’s investment and noninvestment assets. The net asset value per share for each class is calculated by dividing net assets allocated to that share class by the number of shares outstanding in that class as of the last day of the reporting period.
Statement of Operations
     This statement reports income earned by the Fund and the expenses incurred by the Fund during the reporting period. The Statement of Operations also shows any net gain or loss the Fund realized on the sales of its holdings during the period as well as any unrealized gains or losses recognized over the period. The total of these results represents the Fund’s net increase or decrease in net assets from operations.
Statements of Changes in Net Assets
     These statements detail how the Fund’s net assets were affected by its operating results, distributions to shareholders and shareholder transactions (e.g., subscriptions, redemptions and distribution reinvestments) during the reporting periods. The Statements of Changes in Net Assets also details changes in the number of shares outstanding.
Statement of Cash Flows
     This statement reports net cash and foreign currency provided or used by operating, investing and financing activities and the net effect of those flows on cash and foreign currency during the period.
Financial Highlights
     The Financial Highlights demonstrate how the Fund’s net asset value per share was affected by the Fund’s operating results. The Financial Highlights also disclose the classes’ performance and certain key ratios (e.g., net expenses and net investment income as a percentage of average net assets).
Notes to Financial Statements
     These notes disclose the organizational background of the Fund, certain of its significant accounting policies (including those surrounding security valuation, income recognition and distributions to shareholders), federal tax information, fees and compensation paid to affiliates and significant risks and contingencies.
 
2
     
Semi-Annual Report

INVESTMENT PORTFOLIO (unaudited)
 
 
 
As of June 30, 2023
 
Highland Opportunities and Income Fund
 
    Shares    
 
    Value ($)    
 
 
Common Stocks - 60.7%
 
 
COMMUNICATION SERVICES - 1.2%
 
  194,300    
Telesat (a)
    1,830,306  
  27,134    
TerreStar Corporation (a)(b)(c)(d)
    9,185,130  
   
 
 
 
      11,015,436  
   
 
 
 
 
CONSUMER DISCRETIONARY - 0.0%
 
  1,450    
Toys ‘R’ Us (a)(b)(c)
    14,371  
   
 
 
 
 
ENERGY - 0.0%
 
  1,118,286    
Value Creation, Inc. (a)(b)(c)
     
   
 
 
 
 
GAMING/LEISURE - 0.5%
 
  34,512    
LLV Holdco LLC - Series A, Membership Interest (a)(b)(c)(e)
    4,334,559  
  436    
LLV Holdco LLC - Series B, Membership Interest (a)(b)(c)(e)
    54,716  
   
 
 
 
      4,389,275  
   
 
 
 
 
HEALTHCARE - 2.4%
 
  12,026,660    
CCS Medical Inc. (a)(b)(c)(e)
    22,730,387  
   
 
 
 
 
MATERIALS - 0.2%
 
  299,032    
MPM Holdings, Inc. (a)
    1,495,160  
   
 
 
 
 
REAL ESTATE - 56.4%
 
  1,474,379    
Allenby (a)(b)(c)(e)
     
  10,359,801    
Claymore (a)(b)(c)(e)
     
  112,225    
Elme Communities, REIT
    1,844,979  
  354,533    
Healthcare Realty Trust, Class A, REIT
    6,686,493  
  25,463    
Independence Realty Trust, Inc., REIT
    463,936  
  2,356,665    
IQHQ, Inc. (a)(b)(c)
    55,593,727  
  1,275,616    
NexPoint Diversified Real Estate Trust REIT (e)
    15,970,712  
  4,372,286    
NexPoint Real Estate Finance REIT (e)
    68,163,935  
  189,910    
NexPoint Residential Trust, Inc. REIT (e)
    8,637,107  
  32,203    
NexPoint Storage Partners, Inc. (a)(b)(c)(e)
    39,151,435  
  54,716,031    
NFRO Diversified REIT, LLC (a)(b)(c)(e)
    61,178,706  
  2,276,658    
NFRO Holdings, LLC (a)(b)(c)(e)
    64,377,663  
  90,436,434    
NFRO Self Storage REIT, LLC (a)(b)(c)(e)
    123,648,039  
  3,231,395    
NFRO SFR REIT, LLC (a)(b)(c)(e)
    78,129,424  
   
 
 
 
      523,846,156  
   
 
 
 
 
Total Common Stocks
(Cost $856,932,017)
    563,490,785  
   
 
 
 
    Principal Amount ($)    
 
 
U.S. Senior Loans (f) - 26.7%
 
 
COMMUNICATION SERVICES - 1.0%
 
  9,024,044    
TerreStar Corporation, Term Loan D, 1st Lien, 02/27/28 (b)(c)
    8,978,924  
  65,424    
TerreStar Corporation, Term Loan H, 1st Lien, 02/28/24 (b)(c)
    65,097  
  70,122    
TerreStar Corporation, Term Loan, 1st Lien, 02/28/24 (b)(c)
    69,771  
   
 
 
 
      9,113,792  
   
 
 
 
    Principal Amount ($)    
 
    Value ($)    
 
 
U.S. Senior Loans (continued)
 
 
ENERGY - 0.7%
 
  6,403,998    
Quarternorth Energy Holding, Term Loan, 2nd Lien, 08/27/26
    6,393,335  
   
 
 
 
 
GAMING/LEISURE - 1.6%
 
  16,067,396    
LLV Holdco LLC, Revolving Exit Loan, 12/31/23 (b)(c)(e)
    14,621,330  
   
 
 
 
 
HEALTHCARE - 3.0%
 
  16,404,781    
Carestream Health Inc., Term Loan, 1st Lien, 09/30/27
    12,008,300  
  15,977,051    
CCS Medical Inc., Junior Credit Term Loan, 1st Lien, 01/04/27 (b)(c)(e)
    15,977,051  
   
 
 
 
      27,985,351  
   
 
 
 
 
INFORMATION TECHNOLOGY - 6.6%
 
  61,411,237    
EDS Legacy Partners, LIBOR USD 3 Month + 2.750%, 12/14/23 (b)(c)(e)
    61,626,177  
   
 
 
 
 
REAL ESTATE - 13.8%
 
  65,000,000    
NexPoint SFR Operating Partnership, LP, 05/24/27 (b)(c)(e)
    64,220,000  
  11,000,000    
06/30/27 (b)(c)(e)
    10,868,000  
  6,400,000    
NHT Operating Partnership LLC Convertible Promissory Note, 09/30/42 (b)(c)(e)
    6,064,000  
  42,777,343    
NHT Operating Partnership LLC Secured Promissory Note, 02/14/27 (b)(c)(e)
    40,531,532  
  6,500,000    
NREF Operating IV REIT Sub, LLC, (b)(c)(e)
    6,500,000  
   
 
 
 
      128,183,532  
   
 
 
 
 
Total U.S. Senior Loans
(Cost $280,271,880)
    247,923,517  
   
 
 
 
 
Collateralized Loan Obligations - 10.1%
 
  5,800,000    
ACAS CLO, Series
2018-1A,
Class FRR ICE LIBOR USD 3 Month + 7.910%, 13.17%, 10/18/2028 (g)(h)
    2,694,680  
  2,000,000    
Apex Credit CLO, Series
2019-1A,
Class D ICE LIBOR USD 3 Month + 7.100%, 12.36%, 4/18/2032 (g)(h)
    1,639,000  
  1,500,000    
Atlas Senior Loan Fund, Series 2017-8A, Class F ICE LIBOR USD 3 Month + 7.150%, 12.41%, 1/16/2030 (g)(h)
    739,125  
  2,400,000    
Atlas Senior Loan Fund XII,
Series 2018-12A,
Class E ICE LIBOR USD 3 Month + 5.950%, 11.22%, 10/24/2031 (g)(h)
    1,560,000  
  1,250,000    
Cathedral Lake CLO,
Series 2017-1A,
Class DR ICE LIBOR USD 3 Month + 7.250%, 12.51%, 10/15/2029 (g)(h)
    774,500  
  2,000,000    
Cathedral Lake VII, Series
2021-7RA,
Class E ICE LIBOR USD 3 Month + 7.770%, 13.03%, 1/15/2032 (g)(h)
    1,680,000  
  3,000,000    
CIFC Funding, Series
2015-1A

0.00%, 1/22/2031 (g)(h)(i)(j)
    532,500  
  1,000,000    
CIFC Funding, Series 2018-1A, Class ER2 ICE LIBOR USD 3 Month + 5.850%,
11.11%, 1/18/2031 (g)(h)
    855,000  
 
See Glossary on page 7 for abbreviations along with accompanying Notes to Financial Statements.
     
3

INVESTMENT PORTFOLIO (unaudited) (continued)
 
 
 
As of June 30, 2023
 
Highland Opportunities and Income Fund
 
    Principal Amount ($)    
 
    Value ($)    
 
 
Collateralized Loan Obligations (continued)
 
  3,324,756    
CIFC Funding, Series
2014-4RA
0.00%, 1/17/2035 (g)(h)(i)(j)
    633,366  
  5,462,500    
CIFC Funding, Series
2013-2A,
Class SUB
0.00%, 10/18/2030 (g)(h)(i)
    874,000  
  2,500,000    
CIFC Funding, Series
2014-1A,
Class SUB 0.00%, 1/18/2031 (g)(h)(i)
    375,000  
  3,000,000    
Covenant Credit Partners CLO III,
Series 2017-1A,
Class F ICE LIBOR USD 3 Month + 7.950%,
13.21%, 10/15/2029 (g)(h)
    1,575,000  
  1,537,000    
Dryden 36 Senior Loan Fund,
Series 2019-36A,
Class ER2 TSFR3M + 7.142%, 12.13%, 4/15/2029 (g)(h)
    1,374,847  
  4,000,000    
Eaton Vance CLO, Series 2019-1A, Class F
ICE LIBOR USD 3 Month + 8.250%,
13.51%, 4/15/2031 (g)(h)
    3,480,000  
  31,785,405    
FREMF Mortgage Trust, Series 2021- KF103, Class CS SOFR30A + 6.250%, 11.29%, 1/25/2031 (g)(h)
    32,080,413  
  5,450,000    
Galaxy XXVI CLO, Series
2018-26A,
Class F
ICE LIBOR USD 3 Month + 8.000%,
13.38%, 11/22/2031 (g)(h)
    4,251,000  
  1,000,000    
GoldenTree Loan Management US CLO 3, Series
2018-3A,
Class F ICE LIBOR USD 3 Month + 6.500%,
11.75%, 4/20/2030 (g)(h)
    778,750  
  2,500,000    
GoldenTree Loan Opportunities IX,
Series 2018-9A,
Class FR2 ICE LIBOR USD 3 Month + 7.640%,
12.94%, 10/29/2029 (g)(h)
    2,045,675  
  2,125,000    
ICG US CLO, Series
2022-1A,
Class DJ
TSFR3M + 5.730%,
10.78%, 7/20/2035 (g)(h)
    1,983,029  
 
Jay Park CLO, Ltd., Series
2018-1A,
Class ER ICE LIBOR USD 3 Month + 7.350%, 4,000,000 12.60%, 10/20/2027 (g)(h)
    3,530,000  
  3,000,000    
KKR CLO 18, Series
2017-18,
Class E ICE LIBOR USD 3 Month + 6.450%,
11.71%, 7/18/2030 (g)(h)
    2,666,700  
  1,400,000    
Madison Park Funding XX,
Series 2018-20A,
Class ER ICE LIBOR USD 3 Month + 5.300%,
10.59%, 7/27/2030 (g)(h)
    1,206,240  
  2,350,000    
Madison Park Funding XXIV,
Series 2019-24A,
Class ER TSFR3M + 7.462%, 12.51%, 10/20/2029 (g)(h)
    2,190,552  
  2,000,000    
Madison Park Funding XXIX,
Series 2018-29A,
Class F ICE LIBOR USD 3 Month + 7.570%, 12.83%, 10/18/2030 (g)(h)
    1,690,000  
  1,000,000    
Madison Park Funding XXX,
Series 2018-30A,
Class F ICE LIBOR USD 3 Month + 6.850%, 12.11%, 4/15/2029 (g)(h)
    909,800  
  490,000    
Magnetite VII, Ltd., Series
2018-7A,
Class ER2 ICE LIBOR USD 3 Month + 6.500%, 11.76%, 1/15/2028 (g)(h)
    421,400  
    Principal Amount ($)    
 
    Value ($)    
 
 
Collateralized Loan Obligations (continued)
 
  2,500,000    
Man GLG US CLO, Series
2018-1A,
Class DR ICE LIBOR USD 3 Month + 5.900%, 11.15%, 4/22/2030 (g)(h)
    1,862,200  
  4,000,000    
Northwoods Capital
XII-B,
Ltd., Series 2018-12BA, Class F ICE LIBOR USD 3 Month + 8.170%, 13.72%, 6/15/2031 (g)(h)
    2,560,000  
  2,900,000    
OHA Credit Partners XII, Series 2018- 12A, Class FR ICE LIBOR USD 3 Month + 7.680%, 12.95%, 7/23/2030 (g)(h)
    2,324,350  
  3,110,000    
OZLM XXII, Ltd., Series
2018-22A,
Class E ICE LIBOR USD 3 Month + 7.390%, 12.65%, 1/17/2031 (g)(h)
    1,803,800  
  2,000,000    
Park Avenue Institutional Advisers CLO, Series
2021-2A,
Class E ICE LIBOR USD 3 Month + 7.010%,
12.27%, 7/15/2034 (g)(h)
    1,720,000  
  3,150,000    
Saranac CLO III, Ltd., Series
2018-3A,
Class ER ICE LIBOR USD 3 Month + 7.500%, 13.02%, 6/22/2030 (g)(h)
    1,561,613  
  2,000,000    
Symphony CLO XXVI, Series
2021-26A,
Class ER ICE LIBOR USD 3 Month + 7.500%, 12.75%, 4/20/2033 (g)(h)
    1,940,000  
  5,955,627    
THL Credit Wind River, Series
2014-2A,
Class SUB 0.00%, 1/15/2031 (g)(h)(i)
    893,344  
  1,000,000    
Vibrant CLO 1X, Series
2018-9A,
Class D TSFR3M + 6.512%, 11.56%, 7/20/2031 (g)(h)
    723,300  
  1,275,000    
Voya CLO, Series
2018-2A,
Class DR TSFR3M + 5.862%, 10.93%, 4/25/2031 (g)(h)
    976,267  
  1,000,000    
Webster Park CLO, Series
2018-1A,
Class ER ICE LIBOR USD 3 Month + 7.750%, 13.00%, 7/20/2030 (g)(h)
    740,000  
  3,000,000    
Zais CLO 3, Ltd., Series
2018-3A,
Class DR ICE LIBOR USD 3 Month + 6.910%, 12.17%, 7/15/2031 (g)(h)
    1,822,500  
  3,300,000    
Zais CLO 8, Ltd., Series
2018-1A,
Class E ICE LIBOR USD 3 Month + 5.250%, 10.51%, 4/15/2029 (g)(h)
    2,227,500  
   
 
 
 
 
Total Collateralized Loan Obligations
(Cost $113,058,473)
    93,695,451  
   
 
 
 
    Shares    
 
 
LLC Interest - 6.4%
 
  957    
NEXLS LLC (b)(c)(e)
    50,117,067  
  10,000,000    
SFR WLIF III, LLC (b)(c)(e)
    9,305,000  
   
 
 
 
 
Total LLC Interest
(Cost $47,084,362)
    59,422,067  
   
 
 
 
    Units    
 
 
Warrants - 3.5%
 
 
ENERGY - 3.5%
 
  5,801    
Arch Resources, Expires 10/08/2023 (a)
    360,706  
  85,465    
Quarternorth Energy Holding Inc. Tranche 1, Expires 08/27/2029 (a)
    1,566,873  
 
4
     
See Glossary on page 7 for abbreviations along with accompanying Notes to Financial Statements.

INVESTMENT PORTFOLIO (unaudited) (continued)
 
 
 
As of June 30, 2023
 
Highland Opportunities and Income Fund
 
    Units    
 
    Value ($)    
 
 
Warrants (continued)
 
 
ENERGY (continued)
 
  164,598    
Quarternorth Energy Holding Inc. Tranche 2, Expires 08/27/2029 (a)
    1,316,784  
  257,538    
Quarternorth Energy Holding Inc. Tranche 3, Expires 08/27/2029 (a)
    29,455,909  
   
 
 
 
 
Total Warrants
(Cost $31,433,055)
    32,700,272  
   
 
 
 
    Shares    
 
 
Preferred Stock - 3.4%
 
 
FINANCIALS - 0.4%
 
  3,980    
Eastland CLO 1.00%, 05/01/2022 (a)(b)(c)
    15,339  
  34,500    
Eastland CLO II (a)(b)(c)(k)(l)
    132,961  
  8,860    
Gleneagles CLO, 12/30/2049 (a)(b)(c)(k)
    47,404  
  40,000    
Granite Point Mortgage Trust REIT 7.00% (l)(m)
    703,600  
  62,600    
Grayson CLO , 11/01/2021 (a)(b)(c)(k)
    261,319  
  150,977    
NexPoint Real Estate Finance REIT 8.50% (e)(l)
    3,098,335  
  12,553    
Rockwall CDO, 08/01/2024 (a)(b)(c)(k)
    34,473  
  4,800    
Rockwall CDO (a)(b)(c)(k)(l)
    10,066  
   
 
 
 
      4,303,497  
   
 
 
 
 
HEALTHCARE - 2.4%
 
  414,378    
Apnimed (a)(b)(c)(k)(l)
    4,600,010  
  2,361,111    
Sapience Therapeutics Inc 8.00% (a)(b)(c)(l)
    7,862,500  
  3,440,476    
Sapience Therapeutics Inc, Class B 8.00% (a)(b)(c)(l)
    9,736,547  
   
 
 
 
      22,199,057  
   
 
 
 
 
REAL ESTATE - 0.6%
 
  325,976    
Braemar Hotels & Resorts, Inc., REIT 5.50% (a)(l)
    4,563,664  
  47,300    
Wheeler Real Estate Investment Trust, REIT 8.75%, 09/21/2023 (a)(l)(n)
    543,950  
  82,301    
Wheeler Real Estate Investment Trust, REIT 9.00% (a)(l)
    123,452  
   
 
 
 
      5,231,066  
   
 
 
 
 
Total Preferred Stock
(Cost $75,904,189)
    31,733,620  
   
 
 
 
    Principal Amount ($)    
 
 
Corporate Bonds & Notes - 0.4%
 
 
COMMUNICATION SERVICES - 0.0%
 
  3,100    
iHeartCommunications, Inc. 6.38%, 05/01/26
    2,604  
   
 
 
 
 
FINANCIALS - 0.4%
 
  4,000,000    
South Street Securities Funding LLC 6.25%, 12/30/26 (h)
    3,400,000  
   
 
 
 
 
INDUSTRIALS - 0.0%
 
  7,500,000    
American Airlines 12/31/49 (b)(c)(i)(o)(p)
     
   
 
 
 
    Principal Amount ($)    
 
    Value ($)    
 
 
UTILITIES - 0.0%
 
  15,222,107    
Bruce Mansfield Pass-Through Trust 6.85%, 06/01/34 (p)
     
   
 
 
 
 
Total Corporate Bonds & Notes
(Cost $4,095,337)
    3,402,604  
   
 
 
 
    Shares    
 
 
Master Limited Partnership - 0.3%
 
 
ENERGY - 0.3%
 
  179,200    
Energy Transfer L.P.
    2,275,840  
   
 
 
 
 
Total Master Limited Partnership
(Cost $1,869,174)
    2,275,840  
   
 
 
 
 
Registered Investment Company - 0.1%
 
  86,246    
Highland Global Allocation Fund (e)
    746,028  
   
 
 
 
 
Total Registered Investment Company (Cost $495,630)
    746,028  
   
 
 
 
    Units    
 
 
Rights - 0.0%
 
 
UTILITIES - 0.0%
 
  4,933    
Texas Competitive Electric Holdings Co., LLC (a)
    5,384  
   
 
 
 
 
Total Rights (Cost $—)
    5,384  
   
 
 
 
    Principal Amount ($)    
 
 
Repurchase Agreement (q)(r) - 0.0%
 
  8    
RBC
5.06%, dated 06/30/2023 to be repurchased on 07/03/2023, repurchase price $8 (collateralized by U.S. Government obligations, ranging in par value $0 - $2, 0.000% - 7.500%, 07/31/2023 - 05/20/2053; with total market value $8)
    8  
   
 
 
 
 
Total Repurchase Agreement (Cost $8)
    8  
   
 
 
 
    Shares    
 
 
Cash Equivalent - 1.3%
 
 
MONEY MARKET FUND(s) - 1.3%
 
  12,161,638    
Dreyfus Treasury Obligations Cash Management, Institutional Class 5.000%
    12,161,638  
   
 
 
 
 
Total Cash Equivalent
(Cost $12,161,638)
    12,161,638  
   
 
 
 
 
Total Investments - 112.9%
 
 
1,047,557,214
 
   
 
 
 
 
(Cost $1,423,305,763)
 
 
See Glossary on page 7 for abbreviations along with accompanying Notes to Financial Statements.
     
5

INVESTMENT PORTFOLIO (unaudited) (concluded)
 
 
 
As of June 30, 2023
 
Highland Opportunities and Income Fund
 
    Shares    
 
    Value ($)    
 
 
Securities Sold Short - (0.8)%
 
 
Common Stocks - (0.8)%
 
 
INFORMATION TECHNOLOGY - (0.8)%
 
  (41,100)    
Texas Instruments, Inc.
    (7,398,822
   
 
 
 
 
Total Common Stocks
(Proceeds $4,920,256)
    (7,398,822
   
 
 
 
 
Total Securities Sold Short - (0.8)%
(Proceeds $4,920,256)
    (7,398,822
   
 
 
 
 
Other Assets & Liabilities, Net - (12.1)% (t)
 
 
(112,099,766
   
 
 
 
 
Net Assets - 100.0%
 
 
928,058,626
 
   
 
 
 
 
(a)
Non-income producing security.
(b)
Securities with a total aggregate value of $770,042,725, or 83.0% of net assets, were classified as Level 3 within the three-tier fair value hierarchy. Please see Notes to Financial Statements for an explanation of this hierarchy, as well as a list of unobservable inputs used in the valuation of these instruments.
(c)
Represents fair value as determined by the Investment Adviser pursuant to the policies and procedures approved by the Board of Trustees (the “Board”). The Board has designated the Investment Adviser as “valuation designee” for the Fund pursuant to Rule 2a-5 of the Investment Company Act of 1940, as amended. The Investment Adviser considers fair valued securities to be securities for which market quotations are not readily available and these securities may be valued using a combination of observable and unobservable inputs. Securities with a total aggregate value of $770,042,725, or 83.0% of net assets, were fair valued under the Fund’s valuation procedures as of June 30, 2023. Please see Notes to Financial Statements.
(d)
Restricted Securities. These securities are not registered and may not be sold to the public. There are legal and/or contractual restrictions on resale. The Fund does not have the right to demand that such securities be registered. The values of these securities are determined by valuations provided by pricing services, brokers, dealers, market makers, or in good faith under the policies and procedures established by the Board. Additional Information regarding such securities follows:
 
Restricted
Security
 
Security Type
   
Acquisition
Date
   
Cost of
Security
   
Fair Value at
Period End
   
Percent
of Net
Assets
 
TerreStar Corporation
    Common Stock     3/16/2018   $ 3,093,276   $ 9,185,130     1.0 %
 
(e)
Affiliated issuer. Assets with a total aggregate fair value of $770,051,203, or 83.0% of net assets, were affiliated with the Fund as of June 30, 2023.
(f)
Senior loans (also called bank loans, leveraged loans, or floating rate loans) in which the Fund invests generally pay interest at rates which are periodically determined by reference to a base lending rate plus a spread (unless otherwise identified, all senior loans carry a variable rate of interest). These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate (“LIBOR”) or (iii) the Certificate of Deposit rate. As of June 30, 2023, the LIBOR USD 3 Month rate was 5.55%. Senior loans, while exempt from registration under the Securities Act of 1933, as amended (the “1933 Act”), contain certain restrictions on resale and cannot be sold publicly. Senior secured floating rate loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, the actual remaining maturity maybe substantially less than the stated maturity shown.
(g)
Variable or floating rate security. The rate shown is the effective interest rate as of period end. The rates on certain securities are not based on published reference rates and spreads and are either determined by the issuer or agent based on current market conditions; by using a formula based on the rates of underlying loans; or by adjusting periodically based on prevailing interest rates.
(h)
Securities exempt from registration under Rule 144A of the 1933 Act. These securities may only be resold in transactions exempt from registration to qualified institutional buyers. The Board has determined these investments to be liquid. At June 30, 2023, these securities amounted to $97,095,451 or 10.5% of net assets.
(i)
No interest rate available.
(j)
Interest only security (“IO”). These types of securities represent the right to receive the monthly interest payments on an underlying pool of mortgages. Payments of principal on the pool reduce the value of the “interest only” holding.
(k)
There is currently no rate available.
(l)
Perpetual security with no stated maturity date.
(m)
Variable or floating rate security. The base lending rates are generally the lending rate offered by one or more European banks such as the LIBOR. The interest rate shown reflects the rate in effect June 30, 2023.
(n)
Step Coupon Security. Coupon rate will either increase (step-up bond) or decrease (step-down bond) at regular intervals until maturity. Interest rate shown reflects the rate currently in effect.
(o)
Represents value held in escrow pending future events. No interest is being accrued.
(p)
The issuer is, or is in danger of being, in default of its payment obligation.
(q)
Tri-Party Repurchase Agreement.
(r)
This security was purchased with cash collateral held from securities on loan. The total value of such securities as of June 30, 2023 was $8.
(s)
Rate reported is 7 day effective yield.
(t)
As of June 30, 2023, $7,266,069 in cash was segregated or on deposit with the brokers to cover investments sold short and is included in “Other Assets & Liabilities, Net”.
 
Reverse Repurchase Agreement outstanding as of June 30, 2023 was as follows:
 
Counterparty
  
Collateral Pledged
  
Interest
Rate %
    
Trade
Date
    
Repurchase
Amount
   
Principal
Amount
   
Value
 
Mizuho Securities    FREMF Mortgage Trust, Series 2021-KF103, Class CS, 02/01/2023      7.09        06/23/2023      $ (19,119,000   $ (19,119,000   $ (19,119,000
             
 
 
   
 
 
 
Total Reverse Repurchase Agreement
           $ (19,119,000   $ (19,119,000
             
 
 
   
 
 
 
 
6
     
See Glossary on page 7 for abbreviations along with accompanying Notes to Financial Statements.

GLOSSARY: (abbreviations that may be used in the preceding statements) (unaudited)
 
 
 
Other Abbreviations:
CDO   Collateralized Debt Obligation
ICE   Intercontinental Exchange
LIBOR   London Interbank Offered Rate
REIT   Real Estate Investment Trust
SOFR30A   Secured Overnight Financing Rate
30-Day
Average
TSFR3M   Term Secured Overnight Financing Rate 3 Month
USD   United States Dollar
 
Semi-Annual Report
     
7

STATEMENT OF ASSETS AND LIABILITIES (unaudited)
 
 
 
As of June 30, 2023
 
Highland Opportunities and Income Fund
 
     
$
 
Assets
  
Investments from unaffiliated issuers, at value
     265,344,365  
Affiliated investments, at value (Note 9)
     770,051,203  
  
 
 
 
Total Investments, at value (Cost $1,411,144,117)
     1,035,395,568  
Repurchase Agreement, at value
     8  
Cash equivalent (Note 2)
     12,161,638  
Cash
     213,364  
Restricted Cash - Securities Sold Short (Note 2)
     7,266,069  
Receivable for:
  
Dividends and interest
     40,530,982  
Fund shares sold
     117,724  
Prepaid expenses and other assets
     306,895  
  
 
 
 
Total assets
     1,095,992,248  
  
 
 
 
Liabilities:
  
Securities sold short, at value (Proceeds $4,920,256) (Note 2)
     7,398,822  
Reverse Repurchase Agreements (Note 3)
     19,119,000  
Payable for:
  
Investment advisory and administration fees (Note 6)
     801,805  
Legal fees
     545,057  
Printing fees
     165,586  
Collateral from securities loaned (Note 4)
     8  
Accrued expenses and other liabilities
     147,095  
  
 
 
 
Total liabilities
     28,177,373  
  
 
 
 
Mezzanine Equity:
  
Cumulative preferred shares (Series A), net of deferred financing costs (Notes 1 and 2)
     139,756,249  
  
 
 
 
Net Assets
  
 
928,058,626
 
  
 
 
 
Net Assets Consist of:
  
Paid-in
capital
     1,455,543,124  
Total accumulated losses
     (527,484,498
  
 
 
 
Net Assets
  
 
928,058,626
 
  
 
 
 
Investments, at cost
     312,333,418  
Affiliated investments, at cost (Note 9)
     1,098,810,699  
Cash equivalent, at cost (Note 2)
     12,161,638  
Repurchase Agreement, at cost
     8  
Proceeds from securities sold short
     4,920,256  
Common Shares
  
Shares outstanding ($0.001 par value; unlimited authorization)
     68,202,454  
Net asset value per share (Net assets/shares outstanding)
     13.61  
 
8
     
See accompanying Notes to Financial Statements.

STATEMENT OF OPERATIONS (unaudited)
 
 
 
For the Six Months Ended June 30, 2023
 
Highland Opportunities and Income Fund
 
     
$
 
Investment Income
  
Income:
  
Dividends from unaffiliated issuers
     7,564,002  
Dividends from affiliated issuers (Note 9).
     7,816,109  
Less: Foreign taxes withheld
     147,027  
Securities lending income (Note 4)
     6,778  
Interest from unaffiliated issuers
     10,292,785  
Interest from affiliated issuers (Note 9)
     7,794,154  
Interest paid in kind from unaffiliated issuers
     406,191  
Interest paid in kind from affiliated issuers (Note 9)
     673,421  
  
 
 
 
Total income
     34,700,467  
  
 
 
 
Expenses:
  
Investment advisory (Note 6)
     3,390,617  
Administration fees (Note 6)
     1,082,144  
Interest expense, commitment fees, and financing costs
     667,770  
Legal fees
     539,498  
Accounting services fees
     328,178  
Insurance
     157,633  
Trustees fees (Note 6)
     145,188  
Reports to shareholders
     120,967  
Audit fees
     109,821  
Dividends and fees on securities sold short (Note 2)
     101,928  
Transfer agent fees
     80,631  
Pricing fees
     38,113  
Registration fees
     34,711  
Custodian/wire agent fees
     12,033  
  
 
 
 
Total operating expenses
     6,809,232  
  
 
 
 
Net investment income
     27,891,235  
  
 
 
 
Preferred dividend expenses
     (3,896,875
Net Realized and Unrealized Gain (Loss)
  
Realized gain (loss) on:
  
Investments from unaffiliated issuers
     (2,667,515
  
 
 
 
Net realized loss
     (2,667,515
  
 
 
 
Net Change in Unrealized Appreciation (Depreciation) on:
  
Investments
     212,374  
Investments in affiliated issuers
     (8,118,056
Securities sold short (Note 2)
     (608,280
  
 
 
 
Net change in unrealized appreciation (depreciation)
     (8,513,962
  
 
 
 
Net realized and unrealized gain (loss)
     (11,181,477
  
 
 
 
Total increase in net assets resulting from operations
     12,812,883  
  
 
 
 
 
See accompanying Notes to Financial Statements.
     
9

STATEMENTS OF CHANGES IN NET ASSETS
 
 
 
    
 
Highland Opportunities and Income Fund
 
    
Six Months Ended
June 30, 2023
(unaudited)
($)
    
Year Ended
December 31, 2022
($)
 
Increase (Decrease) in Net Assets
     
Operations:
     
Net investment income
     27,891,235        92,061,653  
Preferred dividend expenses
     (3,896,875      (7,793,750
Net realized gain (loss)
     (2,667,515      135,802,706  
Net change in unrealized appreciation (depreciation)
     (8,513,962      (189,165,222
  
 
 
    
 
 
 
Net increase from operations
     12,812,883        30,905,387  
  
 
 
    
 
 
 
Distributions Declared to Common Shareholders:
     
Distributions
     (31,489,216      (35,874,540
Return of capital
            (27,155,040
  
 
 
    
 
 
 
Total distributions:
     (31,489,216      (63,029,580
  
 
 
    
 
 
 
Decrease in net assets from operations and distributions
     (18,676,333      (32,124,193
  
 
 
    
 
 
 
Share transactions:
     
Value of distributions reinvested
     747,282        1,718,646  
Shares repurchased of
closed-end
fund (Note 1)
            (24,643,897
Gains from the retirement of repurchased shares
            5,422,282  
  
 
 
    
 
 
 
Net increase (decrease) from shares transactions
     747,282        (17,502,969
  
 
 
    
 
 
 
Total decrease in net assets
     (17,929,051      (49,627,162
  
 
 
    
 
 
 
Net Assets
     
Beginning of period
     945,987,677        995,614,839  
  
 
 
    
 
 
 
End of period
     928,058,626        945,987,677  
  
 
 
    
 
 
 
Change in Common Shares:
     
Issued for distribution reinvested
     81,146        152,754  
Shares redeemed (Note 1)
            (1,679,705
  
 
 
    
 
 
 
Net increase (decrease) in fund shares
     81,146        (1,526,951
  
 
 
    
 
 
 
 
10
     
See accompanying Notes to Financial Statements.

STATEMENT OF CASH FLOWS (unaudited)
 
 
 
For the Six Months Ended June 30, 2023
 
Highland Opportunities and Income Fund
 
     
$
 
Cash Flows Provided by Operating Activities:
  
Net increase in net assets resulting from operations
     12,812,883  
Adjustments to Reconcile Net Increase in Net Assets Resulting from Operations to Net Cash Provided by Operating Activities:
  
Purchases of investment securities from unaffiliated issuers
     (1,148,597
Purchases of investment securities from affiliated issuers
     (101,921,335
Interest paid in kind from unaffiliated issuers
     (406,191
Interest paid in kind from affiliated issuers
     (673,421
Proceeds from disposition of investment securities from unaffiliated issuers
     41,250,978  
Paydowns at cost
     9,343,372  
Net (amortization) accretion of discount
     (631,382
Proceeds from return of capital of investment securities from affiliated issuers
     74,997,073  
Proceeds from sales of repurchase agreements, net
     402,711  
Net realized (gain) loss on Investments from unaffiliated issuers
     2,667,515  
Net change in unrealized (appreciation) depreciation on investments, investments in affiliated issuers, and securities sold short
     8,513,962  
(Increase) Decrease in receivable for dividends and interest
     (12,484,807
(Increase) Decrease in due from broker
     6,886  
(Increase) Decrease in prepaid expenses and other assets
     50,628  
Increase (Decrease) in payable for investments purchased
     (13,100,000
Increase (Decrease) in payable to investment advisory
     (63,359
Increase (Decrease) in payable for upon return of securities loaned
     (402,711
Increase (Decrease) in payable for printing fees
     6,451  
Increase (Decrease) in payable for audit fees
     (155,000
Increase (Decrease) in payable for legal fees
     200,327  
Increase (Decrease) in accrued expenses and other liabilities
     (150,028
  
 
 
 
Net cash flow provided by operating activities
     19,115,955  
  
 
 
 
Cash Flows Used In Financing Activities:
  
Distributions paid in cash, net of distributions reinvested
     (30,741,934
Proceeds from shares sold, net of receivable
     6,391  
Proceeds from reverse repurchase agreements
     (2,603,000
  
 
 
 
Net cash flow used in financing activities
     (33,338,543
  
 
 
 
Net decrease in cash
     (14,222,588
  
 
 
 
Cash, cash equivalent, and restricted cash:
  
Beginning of period
     33,863,659  
  
 
 
 
End of period
     19,641,071  
  
 
 
 
End of period cash balances:
  
Cash
     213,364  
Cash equivalent
     12,161,638  
Restricted cash
     7,266,069  
  
 
 
 
End of period
     19,641,071  
  
 
 
 
Supplemental disclosure of cash flow information:
  
Reinvestment of distributions
     747,282  
  
 
 
 
Cash paid during the period for interest expense and commitment fees
     667,770  
  
 
 
 
 
See accompanying Notes to Financial Statements.
     
11

FINANCIAL HIGHLIGHTS
 
 
 
 
Highland Opportunities and Income Fund
 
Selected data for a share outstanding throughout each year/period is as follows:
 
   
For the
Six Months
Ended
June 30,
2023
(Unaudited)
   
For the Years Ended December 31,
   
For the

Period

Ended

December 31,
2018**
   
For the
Year

Ended
June 30,
2018*‡
 
 
2022
   
2021
   
2020
   
2019
 
Net Asset Value, Beginning of Year/Period
  $ 13.89     $ 14.29     $ 13.32     $ 13.88     $ 14.28     $ 15.12     $ 15.01  
Income from Investment Operations:
             
Net investment income
(a)
    0.41       1.35       0.72       0.54       0.85       0.42       0.75  
Preferred dividend expense
    (0.06     (0.11     (0.11     (0.11     (0.05            
Net realized and unrealized gain (loss)
    (0.17     (0.80     1.21       (0.10     (0.29     (0.80     0.18  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total Income from Investment Operations
    0.18       0.44       1.82       0.33       0.51       (0.38     0.93  
Less Distributions Declared to shareholders:
             
From net investment income
    (0.46     (0.52     (0.22     (0.43     (0.81     (0.45     (0.72
From return of capital
          (0.40     (0.70     (0.49     (0.11     (0.01     (0.10
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total distributions declared to shareholders
    (0.46     (0.92     (0.92     (0.92     (0.92     (0.46     (0.82
Capital Share Transactions:
             
Retirement of Tendered Shares
(a)
  $     $ 0.08     $ 0.07     $ 0.03     $ 0.01     $     $  
Net Asset Value, End of Year/Period
(b)
  $ 13.61     $ 13.89     $ 14.29     $ 13.32     $ 13.88     $ 14.28     $ 15.12  
Market Value, End of Year/Period
  $ 9.03     $ 10.30     $ 10.99     $ 10.28     $ 12.43     $ 12.80     $ 15.62  
Market Value Total Return
(c)
    (7.87 )%      1.70     16.35     (8.29 )%      4.30     (15.44 )%
(d)
 
    9.77
Ratios based on Average Managed Assets
             
Gross operating expenses
(e)(f)
    0.72     1.15     1.44     1.83     2.28     N/A       N/A  
Net investment income
(e)
    2.95     7.87     4.53     2.89     3.98     N/A       N/A  
Ratios to Average Net Assets / Supplemental Data:
(g)(h)
             
Net Assets, End of Year/Period (000’s)
  $ 928,059     $ 945,988     $ 995,615     $ 950,348     $ 995,405     $ 1,026,412     $ 1,085,547  
Gross operating expenses
(e)(f)
    1.45     1.32     1.67     2.68     3.39     3.10     1.79
Net investment income
(e)
    5.95     8.98     5.26     4.22     5.93     5.48     4.98
Portfolio turnover rate
    8     45     38     22     18     27 %
(d)
 
    177
Average commission rate paid
(i)
  $ 0.0296     $ 0.0092     $ 0.0348     $ 0.0969     $ 0.0032     $ 0.0243     $ 0.0300  
 
*
Per share data prior to November 3, 2017 has been adjusted to give effect to an approximately 2 to 1 reverse stock split as part of the conversion to a closed-end fund.
**
For the six-month period ended December 31, 2018. Effective April 11, 2019, the Fund had a fiscal year change from June 30 to December 31.
Reflects the financial highlights of Class Z of the open-end fund prior to the conversion.
(a)
Per share data was calculated using average shares outstanding during the period.
(b)
The Net Asset Value per share and total return have been calculated based on net assets which include adjustments made in accordance with U.S. Generally Accepted Accounting Principles required at period end for financial reporting purposes. These figures do not necessarily reflect the Net Asset Value per share or total return experienced by the shareholder at period end.
(c)
Total return is based on market value per share for periods after November 3, 2017. Distributions are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s Dividend Reinvestment Plan. Prior to November 3, 2017, total return is at net asset value assuming all distributions are reinvested. For periods with waivers/reimbursements, had the Fund’s investment adviser not waived or reimbursed a portion of expenses, total return would have been lower.
(d)
Not annualized.
(e)
Excludes 12b-1 fees from partial period operating as an open-end fund. Following the conversion on November 3, 2017, the Fund is no longer subject to 12b-1 fees.
(f)
Includes dividends and fees on securities sold short.
(g)
All ratios for the period have been annualized, unless otherwise indicated.
(h)
Supplemental expense ratios are shown below.
(i)
Represents the total dollar amount of commissions paid on portfolio transactions divided by total number of portfolio shares purchased and sold for which commissions were charged. The period prior to the Conversion Date is not presented.
 
12
     
See accompanying Notes to Financial Statements.

FINANCIAL HIGHLIGHTS (concluded)
 
 
 
 
Highland Opportunities and Income Fund
 
Supplemental Expense Ratios:
 
   
For the
Six Months
Ended
June 30,
2023

(Unaudited)
   
For the Years Ended December 31,
   
For the
Period

Ended
December 31,
2018**
   
For the
Year

Ended
June 30,
2018*‡
 
 
2022
   
2021
   
2020
   
2019
 
Ratios based on Average Managed Assets
             
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses)
    0.72     1.15     1.44     1.83     2.28     N/A       N/A  
Interest expense and commitment fees, and preferred dividend expense
    0.48     0.70     0.74     1.17     1.27     N/A       N/A  
Dividends and fees on securities sold short
    0.01     0.02     0.02     0.02     0.01     N/A       N/A  
Ratios to Average Net Assets
             
Net operating expenses (net of waiver/reimbursement, if applicable, but gross of all other operating expenses)
    1.45     1.32     1.67     2.68     3.39     3.10     1.79
Interest expense and commitment fees, and preferred dividend expense
    0.97     0.80     0.86     1.71     1.90     1.63     0.49
Dividends and fees on securities sold short
    0.02     0.02     0.02     0.03     0.01     %
(j)
 
    %
(j)
 
Borrowing at end of year/period:
             
Aggregate Amount Outstanding Excluding
             
Preferred Shares*
    19,119,000       21,722,000             200,000,000       419,796,600       496,141,100       498,563,423  
Asset Coverage Per $1,000*
    49,550.53       44,549.75             5,751.74       3,371.16       3,068.79       3,177.35  
Aggregate Amount Outstanding Including
             
Preferred Shares*
    164,119,000       166,722,000       145,000,000       345,000,000       564,796,600       496,141,100       498,563,423  
Asset Coverage Per $1,000*
    6,655.88       6,674.04       7,859.92       3,754.63       2,762.41       3,068.79       3,177.35  
 
*
See Note 10 for further details.
(j)
Represents less than 0.005%.
 
See accompanying Notes to Financial Statements.
     
13

NOTES TO FINANCIAL STATEMENTS (unaudited)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Note 1. Organization
Highland Opportunities and Income Fund (the “Fund”) is organized as an unincorporated business trust under the laws of The Commonwealth of Massachusetts. The Fund is registered with the U.S. Securities and Exchange Commission (the “SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as a
non-diversified,
closed-end
management investment company. On September 25, 2017, the Fund acquired the assets of Highland Floating Rate Opportunities Fund (the “Predecessor Fund”), a series of NexPoint Funds I (formerly Highland Funds I), a Delaware statutory trust. The Fund is the successor to the accounting and performance information of the Predecessor Fund.
On June 15, 2023, the Fund changed its name from Highland Income Fund to Highland Opportunities Income Fund.
On July 29, 2019, the Fund issued 5.4 million 5.375% Series A Cumulative Preferred shares (NYSE: HFRO.PR.A) with an aggregate liquidation value of $135 million. Subsequently on August 9, 2019, the underwriters exercised their option to purchase additional overallotment shares of $10mm, resulting in a total Preferred outstanding offering of $145mm.
The Series A Cumulative Preferred shares are perpetual,
non-
callable for five years, and have a liquidation preference of $25.00 per share. Distributions are scheduled quarterly, with payments beginning on September 30, 2019. Series A Preferred shares trade on the NYSE. Moody’s Investors Service has assigned an A1 rating to the preferred shares.
On May 16, 2023, the Fund announced that the Fund’s Board of Trustees (the “Board”) approved a repurchase program pursuant to which the Fund may repurchase up to $100 million of its stock in open-market transactions over a
two-
year period.
Note 2. Significant Accounting Policies
The following summarizes the significant accounting policies consistently followed by the Fund in the preparation of its financial statements.
Use of Estimates
The Fund is an investment company that follows the investment company accounting and reporting guidance of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services — Investment Companies applicable to investment companies. The Fund’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which require NexPoint Asset Management, L.P. (“NexPoint” or the “Investment Adviser”) to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of increases or decreases in net assets from operations during the reporting period. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ materially.
Fund Valuation
The net asset value (“NAV”) of the Fund’s common shares is calculated daily on each day that the NYSE is open for business as of the close of the regular trading session on the NYSE, usually 4:00 PM, Eastern Time. The NAV is calculated by dividing the value of the Fund’s net assets attributable to common shares by the numbers of common shares outstanding.
Valuation of Investments
Pursuant to Rule
2a-5
under the 1940 Act, the Board has designated NexPoint as the Fund’s valuation designee to perform the fair valuation determination for securities and other assets held by the Fund. NexPoint acting through its “Valuation Committee,” is responsible for determining the fair value of investments for which market quotations are not readily available. The Valuation Committee is comprised of officers of NexPoint and certain of NexPoint’s affiliated companies and determines fair value and oversees the calculation of the NAV. The Valuation Committee is subject to Board oversight and certain reporting and other requirements intended to provide the Board the information it needs to oversee NexPoint’s fair value determinations.
The Fund’s investments are recorded at fair value. In computing the Fund’s net assets attributable to shares, securities with readily available market quotations on the NYSE, National Association of Securities Dealers Automated Quotation (“NASDAQ”) or other nationally recognized exchange, use the closing quotations on the respective exchange for valuation of those securities. Securities for which there are no readily available market quotations will be valued pursuant to policies and procedures adopted by NexPoint and approved by the Board. Typically, such securities will be valued at the mean between the most recently quoted bid and ask prices provided by the principal market makers. If there is more than one such principal market maker, the value shall be the average of such means. Securities without a sale price or quotations from principal market makers on the valuation day may be priced by an independent pricing service. Generally, the Fund’s loan and bond positions are not traded on exchanges and consequently are valued based on a mean of the bid and ask price from the third-party pricing services or broker-dealer sources that the Investment Adviser has determined to have the capability to provide appropriate pricing services.
 
14
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Securities for which market quotations are not readily available, or for which the Fund has determined that the price received from a pricing service or broker-dealer is “stale” or otherwise does not represent fair value (such as when events materially affecting the value of securities occur between the time when market price is determined and calculation of the Fund’s NAV, will be valued by the Fund at fair value, as determined by the Valuation Committee in good faith in accordance with policies and procedures established by NexPoint and approved by the Board, taking into account factors reasonably determined to be relevant, including, but not limited to: (i) the fundamental analytical data relating to the investment; (ii) the nature and duration of restrictions on disposition of the securities; and (iii) an evaluation of the forces that influence the market in which these securities are purchased and sold. In these cases, the Fund’s NAV will reflect the affected portfolio securities’ fair
value as determined in the judgment of the Valuation Committee instead of being determined by the market. Using a fair value pricing methodology to value securities may result in a value that is different from a security’s most recent sale price and from the prices used by other investment companies to calculate their NAVs. Determination of fair value is uncertain because it involves subjective judgments and estimates.
There can be no assurance that the Fund’s valuation of a security will not differ from the amount that it realizes upon the sale of such security. Those differences could have a material impact to the Fund. The NAV shown in the Fund’s financial statements may vary from the NAV published by the Fund as of its period end because portfolio securities transactions are accounted for on the trade date (rather than the day following the trade date) for financial statement purposes.
 
Deferred Financing Costs on the Preferred Stock
Deferred financing costs on the preferred shares consist of fees and expenses incurred in connection with the closing of the preferred stock offerings, and are capitalized at the time of payment. Based on ASC
480-10-S99,
preferred stock that, by its terms, is contingently redeemable upon the occurrence of an event that is outside of the issuer’s control should be classified as mezzanine equity; therefore, these costs are only amortized once it is probable the shares will become redeemable. As of June 30, 2023, the Fund is compliant with all contingent redemption provisions of the preferred offering, therefore the financing costs are currently unamortized until probable. Deferred financing costs of $5.2 million are presented net with the mezzanine equity on the Statement of Assets and Liabilities.
 
Issuer
 
Shares at
December 31,
2022
   
Beginning
Value as of
December 31,
2022
   
Issuance Net
Liquidation
Value
   
Deferred
Issuance
Costs
   
Paydowns
   
Balance net of
Deferred Financing
Costs at
June 30, 2023
   
Shares at
June 30,
2023
 
Cumulative preferred shares (Series A)
    5,800,000     $ 139,756,249     $ 145,000,000     $ 5,243,751     $     —     $ 139,756,249       5,800,000  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
Fair Value Measurements
The Fund has performed an analysis of all existing investments and derivative instruments to determine the significance and character of inputs to their fair value determination. The levels of fair value inputs used to measure the Fund’s investments are characterized into a fair value hierarchy. Where inputs for an asset or liability fall into more than one level in the fair value hierarchy, the investment is classified in its entirety based on the lowest level input that is significant to that investment’s valuation. The three levels of the fair value hierarchy are described below:
 
Level 1
 —
Quoted unadjusted prices for identical instruments in active markets to which the Fund has access at the date of measurement;
 
Level
 2 —
Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active, but are valued based on executed trades; broker
  quotations that constitute an executable price; and alternative pricing sources supported by observable inputs are classified within Level 2. Level 2 inputs are either directly or indirectly observable for the asset in connection with market data at the measurement date; and
 
Level
 3
 —
Model derived valuations in which one or more significant inputs or significant value drivers are unobservable. In certain cases, investments classified within Level 3 may include securities for which the Fund has obtained indicative quotes from broker-dealers that do not necessarily represent prices the broker may be willing to trade on, as such quotes can be subject to material management judgment. Unobservable inputs are those inputs that reflect the Fund’s own assumptions that market participants would use to price the asset or liability based on the best available information.
 
Semi-Annual Report
     
15

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
The Investment Adviser has established policies and procedures, as described above and approved by the Board, to ensure that valuation methodologies for investments and financial instruments that are categorized within all levels of the fair value hierarchy are fair and consistent. A Valuation Committee has been established to provide oversight of the valuation policies, processes and procedures, and is comprised of personnel from the Investment Adviser and its affiliates. The Valuation Committee meets monthly to review the proposed valuations for investments and financial instruments and is responsible for evaluating the overall fairness and consistent application of established policies.
As of June 30, 2023, the Fund’s investments consisted of common stocks, U.S. senior loans, collateralized loan obligations, LLC interests, warrants, preferred stock, corporate bonds and notes, a master limited partnership, a registered investment company, rights, a repurchase agreement, a cash equivalent, and a reverse repurchase agreement. The fair value of the Fund’s senior loans and bonds are generally based on quotes received from brokers or independent pricing services. Loans, bonds and asset- backed securities with quotes that are based on actual trades with a sufficient level of activity on or near the measurement date are classified as Level 2 assets. Loans and bonds that are priced using quotes derived from implied values, indicative bids, or a limited number of actual trades are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. The fair value of the Fund’s futures contracts are valued based on the settlement price established each day by the board of trade or exchange on which they principally trade and are classified as Level 1 liabilities.
The fair value of the Fund’s common stocks, registered investment companies, rights and warrants that are not actively traded on national exchanges are generally priced using quotes derived from implied values, indicative bids, or a limited amount of actual trades and are classified as Level 3 assets because the inputs used by the brokers and pricing services to derive the values are not readily observable. Exchange-traded options are valued based on the last trade price on the primary exchange on which they trade. If an option does not trade, the
mid-price,
which is the mean of the bid and ask price, is utilized to value the option.
At the end of each calendar quarter, the Investment Adviser evaluates the Level 2 and 3 assets and liabilities for changes in liquidity, including but not limited to: whether a broker is willing to execute at the quoted price, the depth and consistency of prices from third party services, and the existence of contemporaneous, observable trades in the market. Additionally, the Investment Adviser evaluates the Level 1 and 2 assets and liabilities on a quarterly basis for changes in listings or delistings on national exchanges.
Reverse repurchase agreements are priced at their acquisition cost, and assessed for credit adjustments, which represent fair value. These investments will generally be categorized as Level 2 liabilities.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of the Fund’s investments may fluctuate from period to period. Additionally, the fair value of investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values the Fund may ultimately realize. Further, such investments may be subject to legal and other restrictions on resale or otherwise be less liquid than publicly traded securities.
 
16
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund’s assets and liabilities as of June 30, 2023, is as follows:
 
       
Total value at
June 30, 2023 ($)
      
Level 1
Quoted
Price ($)
      
Level 2
Significant
Observable
Inputs ($)
      
Level 3
Significant
Unobservable
Inputs ($)
 
Highland Opportunities and Income Fund
                   
Assets
                   
Common Stocks
                   
Communication Services
       11,015,436          1,830,306                   9,185,130  
Consumer Discretionary
       14,371                            14,371  
Energy
                                 
(1)
 
Gaming/Leisure
       4,389,275                            4,389,275  
Healthcare
       22,730,387                            22,730,387  
Materials
       1,495,160                   1,495,160           
Real Estate
       523,846,156          101,767,162                   422,078,994  
U.S. Senior Loans
                   
Communication Services
       9,113,792                            9,113,792  
Energy
       6,393,335                   6,393,335           
Gaming/Leisure
       14,621,330                            14,621,330  
Healthcare
       27,985,351                   12,008,300          15,977,051  
Information Technology
       61,626,177                            61,626,177  
Real Estate
       128,183,532                            128,183,532  
Collateralized Loan Obligations
       93,695,451                   93,695,451           
LLC Interest
       59,422,067                            59,422,067  
Warrants
                   
Energy
       32,700,272                   32,700,272           
Preferred Stock
                   
Financials
       4,303,497          3,098,335          703,600          501,562  
Healthcare
       22,199,057                            22,199,057  
Real Estate
       5,231,066          4,563,664          667,402           
Corporate Bonds & Notes
                   
Communication Services
       2,604                   2,604           
Financials
       3,400,000                   3,400,000           
Industrials
                                 
(1)
 
Utilities
                         _
(1)
 
        
Master Limited Partnerships
                   
Energy
       2,275,840          2,275,840                    
Registered Investment Company
       746,028          746,028                    
Rights
                   
Utilities
       5,384                   5,384           
Repurchase Agreement
       8          8                    
Cash Equivalent
       12,161,638          12,161,638                    
    
 
 
      
 
 
      
 
 
      
 
 
 
Total Assets
       1,047,557,214          126,442,981          151,071,508          770,042,725  
    
 
 
      
 
 
      
 
 
      
 
 
 
Liabilities
                   
Securities Sold Short
                   
Common Stocks
                   
Information Technology
       (7,398,822        (7,398,822                  
Reverse Repurchase Agreement
       (19,119,000                 (19,119,000         
    
 
 
      
 
 
      
 
 
      
 
 
 
Total Liabilities
       (26,517,822        (7,398,822        (19,119,000         
    
 
 
      
 
 
      
 
 
      
 
 
 
Total
       1,021,039,392          119,044,159          131,952,508          770,042,725  
    
 
 
      
 
 
      
 
 
      
 
 
 
 
(1)
 
This category includes securities with a value of zero.
 
Semi-Annual Report
     
17

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
The table below sets forth a summary of changes in the Fund’s assets measured at fair value using significant unobservable inputs (Level 3) for the six months ended June 30, 2023.
 
    
Balance
as of
December 31,
2022
$
   
Transfers Into
Level 3
$
   
Transfers
Out
of Level 3
$
   
Accrued
Discounts
(Premiums)
$
   
Distribution
to Return
Capital
$
   
Realized
Gain
(Loss)
$
   
Net Change in
Unrealized
Appreciation
(Depreciation)
$
   
Net
Purchases
$
   
Net
Sales
$
   
Balance
as of
June 30,
2023
$
   
Change in
Unrealized
Appreciation
(Depreciation)
from
Investments
held at
June 30, 2023
$
 
Common Stocks
 
Communication Services
    9,887,358           —           —           —                   (702,228               —       9,185,130       (702,228
Consumer Discretionary
    13,895                                     476                   14,371       476  
Gaming/Leisure
    5,635,995                                     (1,246,720                 4,389,275       (1,246,720
Healthcare
    22,261,348                                     469,039                   22,730,387       469,039  
Real Estate
    427,422,662                         (74,892,009       (10,154,419     79,702,760             422,078,994       (10,154,419
U.S. Senior Loans
 
Communication Services
    8,616,085                   7                   4,460       493,240             9,113,792       4,460  
Gaming/Leisure
    13,833,090                                     389,664       398,576             14,621,330       389,664  
Healthcare
    15,408,657                                     93,010       475,384             15,977,051       93,010  
Information Technology
    59,271,980                                     2,354,197                   61,626,177       2,354,197  
Real Estate
    108,158,431                                     2,297,758       17,727,343             128,183,532       2,297,758  
LLC Interest
    59,010,136                                     (3,378,069     3,790,000             59,422,067       (3,378,069
Preferred Stock
 
Financials
    1,266,246                                     (764,684                 501,562       (764,684
Healthcare
    22,083,025                                     116,032                   22,199,057       116,032  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
    752,868,908                   7       (74,892,009           (10,521,484     102,587,303             770,042,725       (10,521,484
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
 
Investments designated as Level 3 may include assets valued using quotes or indications furnished by brokers which are based on models or estimates without observable inputs and may not be executable prices. In light of the developing market conditions, the Investment Adviser continues to
search for observable data points and evaluate broker quotes and indications received for portfolio investments.
For the six months ended June 30, 2023, there were no positions that transferred into or out of Level 3.
 
18
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Determination of fair value is uncertain because it involves subjective judgements and estimates that are unobservable. The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:
 
Category
 
Fair Value at
06/30/23
$
   
Valuation Technique
 
Unobservable Inputs
 
Range Input
Value(s)
(Average
Input
Value)
 
Common Stocks
    458,398,157     Multiples Analysis   Unadjusted Price/MHz-PoP    
$0.09 - $0.90 ($0.50)
 
      NAV / sh multiple    
1.10x - 1.45x (1.28x)
 
      Revenue Multiples    
0.33x - 0.43x (0.38x)
 
    Net Asset Value   N/A     $28.00  
    Liquidation Analysis   Recovery Rate    
40% - 100% (70%)
 
    Discounted Cash Flow   Discount Rate    
7.50% - 32.50% (13.30%)
 
      Capitalization Rate    
5.25% - 9.50% (6.83%)
 
    Transaction Analysis   Multiple of EBITDA less CAPEX    
8.00x - 10.50x (9.25x)
 
      Price per Sq. Ft.    
$22.00 - $33.00 ($28.67)
 
    Transaction Indication of Value   Enterprise Value ($mm)    
$788 - $1,010 ($899)
 
      Cost Price ($mm)     $14.90
U.S. Senior Loans
    229,521,882     Discounted Cash Flow   Discount Rate    
7.50% - 20.00% (10.23%)
 
    Volatility Analysis   Volatility    
25.00% - 60.00% (42.50%)
 
Preferred Stock
    22,700,619     NAV Approach   Discount Rate     70.0%  
    Option Pricing Model   Volatility    
40% - 60% (50%)
 
    Transaction Indication of Value   Recap Price     $11.10  
LLC Interest
    59,422,067     Discounted Cash Flow   Discount Rate    
5.48% - 14.00% (9.72%)
 
 
 
 
       
    770,042,725        
 
In addition to the unobservable inputs utilized for various valuation methodologies, the Fund frequently uses a combination of two or more valuation methodologies to determine fair value for a single holding. In such instances, the Fund assesses the methodologies and ascribes weightings to each methodology. The weightings ascribed to any individual methodology ranged from as low as 20% to as high as 80% as of June 30, 2023. The selection of weightings is an inherently subjective process, dependent on professional judgement. These selections may have a material impact to the concluded fair value for such holdings.
The significant unobservable inputs used in the fair value measurement of the Company’s Preferred Stock are: the discount rate, volatility and recap price. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Company’s U.S. Senior Loans are: the discount rate and volatility. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the Company’s common stock are: the unadjusted price/MHz-PoP multiple, EBITDA multiple, revenue multiple, recovery rate, discount rate, price per sq. ft.,
enterprise value, NAV per share multiple, capitalization rate and cost price. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the risk discount is accompanied by a directionally opposite change in the assumption for the price/MHz-PoP multiple.
The significant unobservable input used in the fair value measurement of the Company’s LLC interests is the discount rate. Significant decreases (increases) in any of those inputs in isolation could result in a significantly higher (lower) fair value measurement.
Security Transactions
Security transactions are accounted for on the trade date. Realized gains/(losses) on investments sold are recorded on the basis of the specific identification method for both financial statement and U.S. federal income tax purposes taking into account any foreign taxes withheld.
Income Recognition
Corporate actions (including cash dividends) are recorded on the
ex-dividend
date, net of applicable withholding taxes, except for certain foreign corporate actions, which are recorded as soon after
ex-dividend
date as such information becomes available and is verified. Interest income and PIK are recorded on the accrual basis.
 
Semi-Annual Report
     
19

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Accretion of discount on taxable bonds and loans is computed to the maturity date, while amortization of premium on taxable bonds and loans is computed to the earliest call date, whichever is shorter, both using the effective yield method. Withholding taxes on foreign dividends have been provided for in accordance with the Fund’s understanding of the applicable country’s tax rules and rates.
The Fund records distributions received from investments in real estate investment trusts (“REIT”) and partnerships in excess of income from underlying investments as a reduction of cost of investments and/or realized gain. Such amounts are based on estimates if actual amounts are not available, and actual amounts of income, realized gain and return of capital may differ from the estimated amounts. The Fund adjusts the estimated amounts once the issuers provide information about the actual composition of the distributions.
U.S. Federal Income Tax Status
The Fund is treated as a separate taxpayer for U.S. federal income tax purposes. The Fund intends to qualify each year as a “regulated investment company” under Subchapter M of the Internal Revenue Code of 1986 (the “Code”), as amended, and will distribute substantially all of its taxable income and gains, if any, for the tax year, and as such will not be subject to U.S. federal income taxes. In addition, the Fund intends to distribute, in each calendar year, all of its net investment income, capital gains and certain other amounts, if any, such that the Fund should not be subject to U.S. federal excise tax. Therefore, no U.S. federal income or excise tax provisions are recorded. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits as income tax expense in Statement of Operations. There were no interest or penalties during the six months ended June 30, 2023.
The Investment Adviser has analyzed the Fund’s tax positions taken on U.S. federal income tax returns for all open tax years (current and prior three tax years), and has concluded that no provision for U.S. federal income tax is required in the Fund’s financial statements. The Fund’s U.S. federal and state income and U.S. 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. Furthermore, the Investment Adviser of the Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next 12 months.
Distributions to Shareholders
The Fund plans to pay distributions from net investment income monthly and net realized capital gains annually to
common shareholders. To permit the Fund to maintain more stable monthly distributions and annual distributions, the Fund may from time to time distribute less than the entire amount of income and gains earned in the relevant month or year, respectively. The undistributed income and gains would be available to supplement future distributions. In certain years, this practice may result in the Fund distributing, during a particular taxable year, amounts in excess of the amount of income and gains earned therein. Such distributions would result in a portion of each distribution occurring in that year to be treated as a return of capital to shareholders. Shareholders of the Fund will automatically have all distributions reinvested in Common Shares of the Fund issued by the Fund in accordance with the Fund’s Dividend Reinvestment Plan (the “Plan”) unless an election is made to receive cash. The number of newly issued Common Shares to be credited to each participant’s account will be determined by dividing the dollar amount of the dividend by the lesser of (i) the NAV per Common Share determined on the Declaration Date and (ii) the market price per Common Share as of the close of regular trading on the NYSE on the Declaration Date. Participants in the Plan requesting a sale of securities through the plan agent of the Plan are subject to a sales fee and a brokerage commission.
Statement of Cash Flows
Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is the amount included within the Fund’s Statement of Assets and Liabilities and includes cash on hand at its custodian bank and/or
sub-custodian
bank(s) cash equivalents, foreign currency and restricted cash held at broker(s).
Cash & Cash Equivalents
The Fund considers liquid assets deposited with a bank and certain short-term debt instruments of sufficient credit quality with original maturities of three months or less to be cash equivalents. These investments represent amounts held with financial institutions that are readily accessible to pay Fund expenses or purchase investments. Cash and cash equivalents are valued at cost plus accrued interest, which approximates fair value. The value of cash equivalents denominated in foreign currencies is determined by converting to U.S. dollars on the date of this financial report.
These balances may exceed the federally insured limits under the Federal Deposit Insurance Corporation (“FDIC”).
Foreign Currency
Accounting records of the Fund are maintained in U.S. dollars. Foreign currencies, investments and other assets and liabilities denominated in foreign currencies are translated
 
20
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
into U.S. dollars at exchange rates using the current 4:00 PM London Time Spot Rate. Fluctuations in the value of the foreign currencies and other assets and liabilities resulting from changes in exchange rates, between trade and settlement dates on securities transactions and between the accrual and payment dates on dividends, interest income and foreign withholding taxes, are recorded as unrealized foreign currency gains/(losses). Realized gains/(losses) and unrealized appreciation/(depreciation) on investment securities and income and expenses are translated on the respective dates of such transactions. The effects of changes in foreign currency exchange rates on investments in securities are not segregated in the Statement of Operations from the effects of changes in market prices of those securities, but are included with the net realized and unrealized gain or loss on investment securities.
Securities Sold Short
The Fund may sell securities short. A security sold short is a transaction in which the Fund sells a security it does not own in anticipation that the market price of that security will decline. When the Fund sells a security short, it must borrow the security sold short from a broker-dealer and deliver it to the buyer upon conclusion of the transaction. The Fund may have to pay a fee to borrow particular securities and is obligated to pay over any dividends or other payments received on such borrowed securities. In some circumstances, the Fund may be allowed by its prime broker to utilize proceeds from securities sold short to purchase additional investments, resulting in leverage. Cash held as collateral for securities sold short is classified as restricted cash on the Statement of Assets and Liabilities, as applicable. Restricted cash in the amount of $7,266,069 was held with the broker for the Fund. There were no securities posted in the Fund’s segregated account as collateral as of June 30, 2023.
Other Fee Income
Fee income may consist of origination/closing fees, amendment fees, administrative agent fees, transaction
break-up
fees and other miscellaneous fees. Origination fees, amendment fees, and other similar fees are nonrecurring fee sources. Such fees are received on a transaction by transaction basis and do not constitute a regular stream of income and are recognized when incurred.
Note 3. Derivative Transactions
The Fund is subject to equity securities risk, interest rate risk and currency risk in the normal course of pursuing its investment objectives. The Fund enters into derivative transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, to gain market exposure for residual and accumulating cash positions and for managing the duration of fixed income investments.
Futures Contracts
A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date. The Fund may invest in interest rate, financial and stock or bond index futures contracts subject to certain limitations. The Fund invests in futures contracts to manage its exposure to the stock and bond markets and fluctuations in currency values. Buying futures tends to increase the Fund’s exposure to the underlying instrument while selling futures tends to decrease the Fund’s exposure to the underlying instrument, or economically hedge other Fund investments. With futures contracts, there is minimal counterparty credit risk to the Fund since futures contracts are exchange-traded and the exchange’s clearinghouse, as counterparty to all traded futures, guarantees the futures against default. The Fund’s risks in using these contracts include changes in the value of the underlying instruments,
non-performance
of the counterparties under the contracts’ terms and changes in the liquidity of the secondary market for the contracts. Futures contracts are valued at the settlement price established each day by the board of trade or exchange on which they principally trade.
Upon entering into a financial futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount, known as initial margin deposit. Subsequent payments, known as variation margins, are made or can be received by the Fund each day, depending on the daily fluctuation in the fair value of the underlying security. The Fund records an unrealized gain/(loss) equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may incur a loss. The Fund recognizes a realized gain/(loss) on the expiration or closing of a futures contract.
During the six months ended June 30, 2023, the Fund did not enter into futures transactions for the purpose of hedging against the effects of changes in the value of portfolio securities due to anticipated changes in market conditions, and to gain market exposure for residual and accumulating cash positions. Cash held as collateral for futures contracts is shown on the Statement of Assets and Liabilities as “Restricted Cash—Futures.” As of June 30, 2023, the Fund did not have any cash held as collateral for futures contracts.
Options
The Fund may utilize options on securities or indices to varying degrees as part of their principal investment strategy. An option on a security is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the security underlying the option at a specified
 
Semi-Annual Report
     
21

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
exercise or “strike” price. The writer of an option on a security has the obligation upon exercise of the option to deliver the underlying security upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security. The Fund may hold options, write option contracts, or both.
If an option written by the Fund expires unexercised, the Fund realizes on the expiration date a capital gain equal to the premium received by the Fund at the time the option was written. If an option purchased by the Fund expires unexercised, the Fund realizes a capital loss equal to the premium paid. Prior to the earlier of exercise or expiration, an exchange-traded option may be closed out by an offsetting purchase or sale of an option of the same series (type, underlying security, exercise price and expiration). There can be no assurance, however, that a closing purchase or sale transaction can be effected when the Fund desires.
The Fund will realize a capital gain from a closing purchase transaction if the cost of the closing option is less than the premium received from writing the option, or, if the cost of the closing option is more than the premium received from writing the option, a capital loss. The Fund will realize a capital gain from a closing sale transaction if the premium received from the sale is more than the original premium paid when the option position was opened, or a capital loss, if the premium received from a sale is less than the original premium paid.
As of June 30, 2023, the Fund did not hold written options.
Reverse Repurchase Agreements
The Fund may engage in reverse repurchase agreement transactions with respect to instruments that are consistent with the Fund’s investment objective or policies. This creates leverage for the Fund because the cash received can be used to purchase other securities.
A reverse repurchase transaction is a repurchase transaction in which the Fund is the seller of securities or other assets and agrees to repurchase them at a date certain or on demand. Pursuant to the Repurchase Agreement, the Fund may agree to sell securities or other assets to Mizuho Securities for an agreed upon price (the “Purchase Price”), with a simultaneous agreement to repurchase such securities or other assets from Mizuho Securities for the Purchase Price plus a price differential that is economically similar to interest. The price differential is negotiated for each transaction. This creates leverage for the Fund because the cash received can be used to purchase other securities.
At June 30, 2023, the Fund had investments in a reverse repurchase agreement with a gross value of $19,119,000, which is reflected as reverse repurchase agreements on the statement of assets and liabilities. The value of the related
collateral exceeded the value of the reverse repurchase agreements at June 30, 2023. The collateral pledged for the reverse repurchase agreements includes Agency Collateralized Mortgage Obligations and cash, both of which are reflected on the statement of assets and liabilities. The Fund’s average daily balance was $20,348,222 at a weighted average interest rate of 6.62% for the days outstanding.
Additional Derivative Information
The Fund is required to disclose; a) how and why an entity uses derivative instruments; b) how derivative instruments and related hedged items are accounted for; c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows; and d) how the netting of derivatives subject to master netting arrangements (if applicable) affects the net exposure of the Fund related to the derivatives.
Note 4. Securities Lending
Effective January, 7, 2020, the Fund entered into a securities lending agreement with The Bank of New York Mellon (“BNY” or the “Lending Agent”).
Securities lending transactions are entered into by the Fund under the Securities Lending Agreement (“SLA”), which permits the Fund, under certain circumstances such as an event of default, to offset amounts payable by the Fund to the same counterparty against amounts receivable from the counterparty to create a net payment due to or from the Fund.
The following is a summary of securities lending agreements held by the Fund, with cash collateral of overnight maturities, which would be subject to offset as of June 30, 2023:
 
Gross Amount
of Recognized
Assets (Value
of Securities
on Loan)
 
Value of
Cash
Collateral
Received
(1)
 
Value of
Non-Cash

Collateral
Received
 
Net
Amount
$—   $—   $—   $—
 
(1)
 
Collateral received in excess of market value of securities on loan is not presented in this table. The total cash collateral received by the Fund is disclosed in the Statement of Assets and Liabilities.
Amounts designated as (—) are $0.
 
22
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
The value of loaned securities and related collateral outstanding at June 30, 2023 are shown in the Investment Portfolio. The value of the collateral held may be temporarily less than that required under the lending contract. As of June 30, 2023, the cash collateral was invested in repurchase agreements with the following maturities:
Remaining Contractual Maturity of the Agreements, as of June 30, 2023
 
    
Overnight
and
Continuous
   
<30 Days
   
Between
30 & 90
Days
   
>90 Days
   
Total
 
Repurchase Agreement
  $ 8     $     $     $     $ 8  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Total
  $ 8     $     $     $     $ 8  
 
 
 
   
 
 
   
 
 
   
 
 
   
 
 
 
Amounts designated as (—) are $0.
The Fund could seek additional income by making secured loans of its portfolio securities through its custodian. Such loans would be in an amount not greater than
one-third
of the value of the Fund’s total assets. BNY would charge a fund fees based on a percentage of the securities lending income.
The fair value of the loaned securities is determined at the close of each business day of the Fund and any additional required collateral is delivered to the Fund, or excess collateral is returned by the Fund, on the next business day.
The Fund would receive collateral consisting of cash (U.S. and foreign currency), securities issued or guaranteed by the U.S. government or its agencies or instrumentalities, sovereign debt, convertible bonds, irrevocable bank letters of credit or such other collateral as may be agreed on by the parties to a securities lending arrangement, initially with a value of 102% or 105% of the market value of the loaned securities and thereafter maintained at a value of 100% of the market value of the loaned securities. If the collateral consists of
non-cash
collateral, the borrower would pay the Fund a loan premium fee. If the collateral consists of cash, BNY would reinvest the cash in repurchase agreements and money market accounts. Although voting rights, or rights to consent, with respect to the loaned securities pass to the borrower, the Fund would recall the loaned securities upon reasonable notice in order that the securities could be voted by the Fund if the holders of such securities are asked to vote upon or consent to matters materially affecting the investment. The Fund also could call such loans in order to sell the securities involved.
Securities lending transactions were entered into pursuant to SLAs, which would provide the right, in the event of default (including bankruptcy or insolvency) for the
non-defaulting
party to liquidate the collateral and calculate a net exposure to the defaulting party or request additional
collateral. In the event that a borrower defaulted, the Fund, as lender, would offset the market value of the collateral received against the market value of the securities loaned. The value of the collateral is typically greater than that of the market value of the securities loaned, leaving the lender with a net amount payable to the defaulting party. However, bankruptcy or insolvency laws of a particular jurisdiction may impose restrictions on or prohibitions against such a right of offset in the event of an SLA counterparty’s bankruptcy or insolvency. Under the SLA, the Fund can reinvest cash collateral, or, upon an event of default, resell or repledge the collateral, and the borrower can resell or repledge the loaned securities. The risks of securities lending also include the risk that the borrower may not provide additional collateral when required or may not return the securities when due. To mitigate this risk, the Fund benefits from a borrower default indemnity provided by BNY. BNY’s indemnity generally provides for replacement of securities lent or the approximate value thereof.
Note 5. U.S. Federal Income Tax Information
The character of income and gains to be distributed is determined in accordance with income tax regulations which may differ from GAAP. These differences include (but are not limited to) investments organized as partnerships for tax purposes, tax treatment of organizational
start-up
costs, losses deferred due to wash sale transactions, and tax attributes from Fund reorganizations. Reclassifications are made to the Fund’s capital accounts to reflect income and gains available for distribution (or available capital loss carryovers) under income tax regulations. These reclassifications have no impact on net investment income, realized gains or losses, or NAV of the Fund. The calculation of net investment income per share in the Financial Highlights table excludes these adjustments.
For the year ended December 31, 2022, permanent differences chiefly resulting from return of capital distributions paid by the Fund were identified and reclassified among the components of the Fund’s net assets as follows:
 
Distributable Earnings
(Accumulated Losses)
 
Paid-in-Capital
 
$4,877,268   $ (4,877,268
At December 31, 2022, the Fund’s most recent tax year end, components of distributable earnings (accumulated losses) on a tax basis are as follows:
 
Other
Temporary
Losses
 
Accumulated
Capital Losses
   
Unrealized
Appreciation
(Depreciation)
(1)
 
$—   $ (193,465,924   $ (315,342,241
 
(1)
 
Any differences between book-basis and
tax-basis
net unrealized appreciation/(depreciation) are primarily due to wash sales,
non-taxable
dividends, partnerships, PFICs, REIT basis adjustments and difference in premium amortization methods for book and tax.
 
Semi-Annual Report
     
23

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
As of December 31, 2022, the Fund has capital loss carryovers as indicated below. The capital loss carryovers are available to offset future realized capital gains to the extent provided in the Code and regulations promulgated thereunder. To the extent that these carryover losses are used to offset future capital gains, the gains offset will not be distributed to shareholders. During the year ended December 31, 2022, the Fund utilized $142,321,291 of capital carryforwards to offset capital gains.
 
No Expiration
Short-Term
 
No Expiration
Long-Term
   
Total
 
$—   $ (193,465,924   $ (193,465,924
The tax character of distributions paid during the last two fiscal years ended December 31, is as follows:
 
    
Ordinary
Income
   
Long-term

Capital Gain
   
Return of
Capital
 
2022
  $ 35,874,540     $     $ 27,155,040  
2021
    15,595,827             50,110,849  
Amounts designated as (—) are $0.
Unrealized appreciation (depreciation) at June 30, 2023, based on cost of investments, securities sold short and foreign currency transactions for U.S. federal income tax purposes was:
 
Gross
Appreciation
 
Gross
Depreciation
   
Net
Appreciation/
(Depreciation)
   
Cost
 
$128,000,247   $ (503,748,796   $ (375,748,549   $ 1,423,305,763  
Qualified Late Year Ordinary and Post October Losses
Under current laws, certain capital losses and specified losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the fiscal year ended December 31, 2022, the Fund did not defer any qualified late year ordinary nor post October losses.
Note 6. Investment Advisory, Administration and Trustee Fees
For its investment advisory services, the Fund pays the Investment Adviser a monthly fee, computed and accrued daily, based on an annual rate of the Fund’s Average Daily Managed Assets. Average Daily Managed Assets of a Fund means the average daily value of the total assets of a Fund less all accrued liabilities of a Fund (other than the aggregate amount of any outstanding borrowings constituting financial leverage). On occasion, the Investment Adviser voluntarily waives additional fees to the extent assets are invested in certain affiliated investments.
The table below shows the Fund’s contractual advisory fee with the Investment Adviser for the six months ended June 30, 2023:
 
Annual Fee
Rate to the
Investment Advisor
 
> 1 Billion
   
> 2 Billion
 
0.65%     0.60     0.55
Administration Fee
The Investment Adviser provides administrative services to the Fund. For its services, the Investment Adviser receives an annual fee, payable monthly, in an amount equal to 0.20% of the average weekly value of the Fund’s Managed Assets. Under a separate
sub-administration
agreement, the Investment Adviser delegates certain administrative functions and pays the
sub-administrator
directly for these subadministration services. Effective October 1, 2018, the Investment Adviser entered into an administrative services agreement with SEI Investments Global Funds Services, a wholly owned subsidiary of SEI Investments Company.
Fees Paid to Officers and Trustees
Each Trustee who oversees all of the funds in the NexPoint Fund Complex receives an annual retainer of $150,000 payable in quarterly installments and allocated among each portfolio in the NexPoint Fund Complex based on relative net assets. The annual retainer for a Trustee who does not oversee all of the funds in the NexPoint Fund Complex is prorated based on the portion of the $150,000 annual retainer allocable to the funds overseen by such Trustee. The Chairman of the Audit Committee and the Chairman of the Board each receive an additional annual payment of $10,000 payable in quarterly installments and allocated among each portfolio in the NexPoint Fund Complex based on relative net assets. The “NexPoint Fund Complex” consists of all of the registered investment companies advised by the Investment Adviser or its affiliated advisers as of the date of this report and NexPoint Capital, Inc., a
closed-end
management investment company that has elected to be treated as a business development company under the 1940 Act.
The Fund pays no compensation to its officers, all of whom are employees of the Investment Adviser or one of its affiliates.
Trustees are reimbursed for actual
out-of-pocket
expenses relating to attendance at meetings.
The Trustees do not receive any separate compensation in connection with service on Committees or for attending Board or Committee Meetings. The Trustees do not have any pension or retirement plan.
 
24
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Expedited Settlement Agreements
On June 15, 2017 and May 14, 2019, the Fund entered into Expedited Settlement Agreements with two major dealers in the floating rate loan market, pursuant to which the Fund has the right to designate certain loans it sells to the dealer to settle on or prior to three days from the trade date in exchange for a quarterly fee (the “Expedited Settlement Agreements”). The Expedited Settlement Agreements are designed to reduce settlement times from the standard seven days to three days for eligible loans. For the six months ended June 30, 2023, the Expedited Settlement Agreement was not used by the Fund.
While the Expedited Settlement Agreements are intended to provide the Fund with additional liquidity with respect to such loans, and may not represent the exclusive method of expedited settlement of such loans, no assurance can be given that the Expedited Settlement Agreements or other methods for expediting settlements will provide the Fund with sufficient liquidity in the event of abnormally large redemptions.
Other Matters
NexPoint has entered into a Services Agreement (the “Services Agreement”) with Skyview Group (“Skyview”), effective February 25, 2021, pursuant to which NexPoint will receive administrative and operational support services to enable it to provide the required advisory services to the Fund. The Investment Adviser, and not the Fund, will compensate all Investment Adviser and Skyview personnel who provide services to the Fund.
Effective July 12, 2022, certain Skyview personnel became dual-employees of NexPoint Services, Inc., a wholly-owned subsidiary of the Investment Adviser. The same services are being performed by the dual-employees. The Investment Adviser, and not the Fund, will compensate all Investment Adviser, Skyview, and dual-employee personnel who provide services to the Fund.
Indemnification
Under the Fund’s organizational documents, the officers and Trustees have been granted certain indemnification rights against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund may enter into contracts with service providers that contain a variety of indemnification clauses. The Fund’s maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated.
Note 7. Disclosure of Significant Risks and Contingencies
The Fund’s investments expose the Fund to various risks, certain of which are discussed below. Please refer to the Fund’s Prospectus and Statement of Additional Information for a full listing of risks associated with the Fund’s investments.
Concentration in Real Estate Securities Risk
Although the Fund does not invest directly in real estate, the Fund will concentrate its investments in investment vehicles that invest principally in real estate and real estate related securities, its portfolio will be significantly impacted by the performance of the real estate market and may experience more volatility and be exposed to greater risk than a more diversified portfolio. The values of companies engaged in the real estate industry are affected by: (i) changes in general economic and market conditions; (ii) changes in the value of real estate properties; (iii) risks related to local economic conditions, overbuilding and increased competition; (iv) increases in property taxes and operating expenses; (v) changes in zoning laws; (vi) casualty and condemnation losses; (vii) variations in rental income, neighborhood values or the appeal of property to tenants; (viii) the availability of financing and (ix) changes in interest rates and leverage.
Counterparty Risk
Counterparty risk is the potential loss the Fund may incur as a result of the failure of a counterparty or an issuer to make payments according to the terms of a contract. Counterparty risk is measured as the loss the Fund would record if its counterparties failed to perform pursuant to the terms of their obligations to the Fund. Because the Fund may enter into
over-the-counter
forwards, options, swaps and other derivative financial instruments, the Fund may be exposed to the credit risk of its counterparties. To limit the counterparty risk associated with such transactions, the Fund conducts business only with financial institutions judged by the Investment Adviser to present acceptable credit risk.
Credit Risk
The value of debt securities owned by the Fund may be affected by the ability of issuers to make principal and interest payments and by the issuer’s or counterparty’s credit quality. If an issuer cannot meet its payment obligations or if its credit rating is lowered, the value of its debt securities may decline. Lower quality bonds are generally more sensitive to these changes than higher quality bonds. Nonpayment would result in a reduction of income to the Fund, a reduction in the value of the obligation experiencing nonpayment and a potential decrease in the Fund’s net asset value and the market price of the Fund’s shares.
 
Semi-Annual Report
     
25

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Currency Risk
A portion of the Fund’s assets may be quoted or denominated in
non-U.S.
currencies. These securities may be adversely affected by fluctuations in relative currency exchange rates and by exchange control regulations. The Fund’s investment performance may be negatively affected by a devaluation of a currency in which the Fund’s investments are quoted or denominated. Further, the Fund’s investment performance may be significantly affected, either positively or negatively, by currency exchange rates because the U.S. dollar value of securities quoted or denominated in another currency will increase or decrease in response to changes in the value of such currency in relation to the U.S. dollar.
Derivatives Risk
Derivatives risk is a combination of several risks, including the risks that: (1) an investment in a derivative instrument may not correlate well with the performance of the securities or asset class to which the Fund seeks exposure, (2) derivative contracts, including options, may expire worthless and the use of derivatives may result in losses to the Fund, (3) a derivative instrument entailing leverage may result in a loss greater than the principal amount invested, (4) derivatives not traded on an exchange may be subject to credit risk, for example, if the counterparty does not meet its obligations (see also “Counterparty Risk”), and (5) derivatives not traded on an exchange may be subject to liquidity risk and the related risk that the instrument is difficult or impossible to value accurately.
Effective August 19, 2022 (the “Compliance Date”), Rule
18f-4
under the 1940 Act (the “Derivatives Rule”) replaced the asset segregation regime of Investment Company Act Release No. 10666 (Release 10666) with a new framework for the use of derivatives by registered funds. As of the Compliance Date, the SEC rescinded Release 10666 and withdrew
no-action
letters and similar guidance addressing a fund’s use of derivatives and began requiring funds to satisfy the requirements of the Derivatives Rule. As a result, on or after the Compliance Date, the Fund will no longer engage in “segregation” or “coverage” techniques with respect to derivatives transactions and will instead comply with the applicable requirements of the Derivatives Rule.
The Derivatives Rule mandates that a fund adopt and/or implement:
(i) value-at-risk
limitations (VaR); (ii) a written derivatives risk management program; (iii) new Board oversight responsibilities; and (iv) new reporting and recordkeeping requirements. In the event that a fund’s derivative exposure is 10% or less of its net assets, excluding certain currency and interest rate hedging transactions, it can elect to be classified as a limited derivatives user (Limited Derivatives User) under the Derivatives Rule, in which case the fund is not subject to the full requirements of the
Derivatives Rule. Limited Derivatives Users are excepted from VaR testing, implementing a derivatives risk management program, and certain Board oversight and reporting requirements mandated by the Derivatives Rule. However, a Limited Derivatives User is still required to implement written compliance policies and procedures reasonably designed to manage its derivatives risks.
Distressed and Defaulted Securities Risk
The Fund may invest in companies that are troubled, in distress or bankrupt. As such, they are subject to a multitude of legal, industry, market, environmental and governmental forces that make analysis of these companies inherently difficult. Further, the Investment Adviser relies on company management, outside experts, market participants and personal experience to analyze potential investments for the Fund. There can be no assurance that any of these sources will prove credible, or that the resulting analysis will produce accurate conclusions.
Equity Securities Risk
The risk that stock prices will fall over short or long periods of time. In addition, common stocks represent a share of ownership in a company, and rank after bonds and preferred stock in their claim on the company’s assets in the event of bankruptcy. In addition to these risks, preferred stock and convertible securities are also subject to the risk that issuers will not make payments on securities held by the Fund, which could result in losses to the Fund. The credit quality of preferred stock and convertible securities held by the Fund may be lowered if an issuer’s financial condition changes, leading to greater volatility in the price of the security.
Exchange-Traded Funds (“ETF”) Risk
The risk that the price movement of an ETF may not exactly track the underlying index and may result in a loss. In addition, shareholders bear both their proportionate share of the Fund’s expenses and similar expenses of the underlying investment company when the Fund invests in shares of another investment company.
Financial Services Industry Risk
The risk associated with the fact that the Fund’s investments in Senior Loans are arranged through private negotiations between a borrower (“Borrower”) and several financial institutions. Investments in the financial services sector may be subject to credit risk, interest rate risk, and regulatory risk, among others. Banks and other financial institutions can be affected by such factors as downturns in the U.S. and foreign economies and general economic cycles, fiscal and monetary policy, adverse developments in the real estate market, the deterioration or failure of other financial institutions, and changes in banking or s
ecurit
ies regulations. The financial services industry is subject to extensive government regulation,
 
26
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
which can limit both the amounts and types of loans and other financial commitments financial services companies can make and the interest rates and fees they can charge. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Because financial services companies are highly dependent on short-term interest rates, they can be adversely affected by downturns in the U.S. and foreign economies or changes in banking regulations. Losses resulting from financial difficulties of Borrowers can negatively affect financial services companies. The financial services industry is currently undergoing relatively rapid change as existing distinctions between financial service segments become less clear. This change may make it more difficult for the Investment Adviser to analyze investments in this industry. Additionally, the recently increased volatility in the financial markets and implementation of the recent financial reform legislation may affect the financial services industry as a whole in ways that may be difficult to predict.
Hedging Risk
The Fund may engage in “hedging,” the practice of attempting to offset a potential loss in one position by establishing an opposite position in another investment. Hedging strategies in general are usually intended to limit or reduce investment risk, but can also be expected to limit or reduce the potential for profit. For example, if the Fund has taken a defensive posture by hedging its portfolio, and stock prices advance, the return to investors will be lower than if the portfolio had not been hedged. No assurance can be given that any particular hedging strategy will be successful, or that the Investment Adviser will elect to use a hedging strategy at a time when it is advisable.
High Yield Debt Securities Risk
The risk that below investment grade securities or unrated securities of similar credit quality (commonly known as “high yield securities” or “junk securities”) are more likely to default than higher rated securities. The Fund’s ability to invest in high-yield debt securities generally subjects the Fund to greater risk than securities with higher ratings. Such securities are regarded by the rating organizations as predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation. The market value of these securities is generally more sensitive to corporate developments and economic conditions and can be volatile. Market conditions can diminish liquidity and make accurate valuations difficult to obtain.
Illiquid and Restricted Securities Risk
Certain investments made by the Fund may be illiquid, and consequently the Fund may not be able to sell such investments at prices that reflect the Investment Adviser’s assessment of their value or the amount originally paid for
such investments by the Fund. Illiquidity may result from the absence of an established market for the investments as well as legal, contractual or other restrictions on their resale and other factors. Furthermore, the nature of the Fund’s investments, especially those in financially distressed companies, may require a long holding period prior to profitability.
Restricted securities (
i.e
., securities acquired in private placement transactions) and illiquid securities may offer higher yields than comparable publicly traded securities. The Fund, however, may not be able to sell these securities when the Investment Adviser considers it desirable to do so or, to the extent they are sold privately, may have to sell them at less than the price of otherwise comparable securities.
Restricted securities are subject to limitations on resale which can have an adverse effect on the price obtainable for such securities. Also, if in order to permit resale the securities are registered under the Securities Act at the Fund’s expense, the Fund’s expenses would be increased.
Interest Rate Risk
The risk that fixed income securities will decline in value because of changes in interest rates. When interest rates decline, the value of fixed rate securities already held by the Fund can be expected to rise. Conversely, when interest rates rise, the value of existing fixed rate portfolio securities can be expected to decline. A fund with a longer average portfolio duration will be more sensitive to changes in interest rates than a fund with a shorter average portfolio duration.
Leverage Risk
The Fund may use leverage in its investment program, including the use of borrowed funds and investments in certain types of options, such as puts, calls and warrants, which may be purchased for a fraction of the price of the underlying securities. While such strategies and techniques increase the opportunity to achieve higher returns on the amounts invested, they also increase the risk of loss. To the extent the Fund purchases securities with borrowed funds, its net assets will tend to increase or decrease at a greater rate than if borrowed funds are not used. If the interest expense on borrowings were to exceed the net return on the portfolio securities purchased with borrowed funds, the Fund’s use of leverage would result in a lower rate of return than if the Fund were not leveraged.
LIBOR Discontinuation Risk
Certain debt securities, derivatives and other financial instruments have traditionally utilized LIBOR as the reference or benchmark rate for interest rate calculations. However, following allegations of manipulation and concerns regarding liquidity, in July 2017 the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it would cease its
 
Semi-Annual Report
     
27

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
active encouragement of banks to provide the quotations needed to sustain LIBOR. The ICE Benchmark Administration Limited, the administrator of LIBOR, ceased publishing most liquid U.S. LIBOR maturities on June 30, 2023. It is possible that a subset of U.S. dollar LIBOR settings will continue to be published on a “synthetic” basis. It is expected that market participants transitioned to the use of alternative reference or benchmark rates prior to the applicable LIBOR publication cessation date. Additionally, although regulators have encouraged the development and adoption of alternative rates such as the Secured Overnight Financing Rate (“SOFR”), the future utilization of LIBOR or of any particular replacement rate remains uncertain.
Although the transition process away from LIBOR became increasingly well-defined in advance of the discontinuation dates, the impact on certain debt securities, derivatives and other financial instruments remains uncertain. Market participants have adopted alternative rates such as SOFR or otherwise amended financial instruments referencing LIBOR to include fallback provisions and other measures that contemplated the discontinuation of LIBOR or other similar market disruption events, but neither the effect of the transition process nor the viability of such measures is known. Further, uncertainty and risk remain regarding the willingness and ability of issuers and lenders to include alternative rates and revised provisions in new and existing contracts or instruments. To facilitate the transition of legacy derivatives contracts referencing LIBOR, the International Swaps and Derivatives Association, Inc. launched a protocol to incorporate fallback provisions. However, there are obstacles to converting certain longer term securities and transactions to a new benchmark or benchmarks and the effectiveness of one alternative reference rate versus multiple alternative reference rates in new or existing financial instruments and products has not been determined. Certain proposed replacement rates to LIBOR, such as SOFR, which is a broad measure of secured overnight U.S. Treasury repo rates, are materially different from LIBOR, and changes in the applicable spread for financial instruments transitioning away from LIBOR will need to be made to accommodate the differences. Furthermore, the risks associated with the expected discontinuation of LIBOR and transition to replacement rates may be exacerbated if an orderly transition to an alternative reference rate is not completed in a timely manner.
The utilization of an alternative reference rate, or the transition process to an alternative reference rate, may adversely affect the Fund’s performance.
Alteration of the terms of a debt instrument or a modification of the terms of other types of contracts to replace LIBOR or another interbank offered rate (“IBOR”) with a new reference rate could result in a taxable exchange and the realization of
income and gain/loss for U.S. federal income tax purposes. The Internal Revenue Service (the “IRS”) has issued final regulations regarding the tax consequences of the transition from IBOR to a new reference rate in debt instruments and non-debt contracts. Under the final regulations, alteration or modification of the terms of a debt instrument to replace an operative rate that uses a discontinued IBOR with a qualified rate (as defined in the final regulations) including true up payments equalizing the fair market value of contracts before and after such IBOR transition, to add a qualified rate as a fallback rate to a contract whose operative rate uses a discontinued IBOR or to replace a fallback rate that uses a discontinued IBOR with a qualified rate would not be taxable.
The IRS may provide additional guidance, with potential retroactive effect.
Management Risk
The risk associated with the fact that the Fund relies on the Investment Adviser’s ability to achieve its investment objective. The Investment Adviser may be incorrect in its assessment of the intrinsic value of the companies whose securities the Fund holds, which may result in a decline in the value of fund shares and failure to achieve its investment objective.
Mortgage-Backed Securities Risk
The risk of investing in mortgage-backed securities, and includes interest rate risk, liquidity risk and credit risk, which may be heightened in connection with investments in loans to “subprime” borrowers. Certain mortgage-backed securities are also subject to prepayment risk. Mortgage-backed securities, because they are backed by mortgage loans, are also subject to risks related to real estate, and securities backed by private-issued mortgages may experience higher rates of default on the underlying mortgages than securities backed by government-issued mortgages. The Fund could lose money if there are defaults on the mortgage loans underlying these securities.
Non-Diversification
Risk
The risk that an investment in the Fund could fluctuate in value more than an investment in a diversified fund. As a
non-diversified
fund for purposes of the 1940 Act, the Fund may invest a larger portion of its assets in the securities of fewer issuers than a diversified fund. The Fund’s investments in fewer issuers may result in the Fund’s shares being more sensitive to the economic results of those issuers. An investment in the Fund could fluctuate in value more than an investment in a diversified fund.
Non-U.S.
Securities Risk
The Fund may invest in
non-U.S.
securities. Investing in
non-U.S.
securities involves certain risks not involved in
 
28
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
domestic investments, including, but not limited to: fluctuations in foreign exchange rates; future foreign economic, financial, political and social developments; different legal systems; the possible imposition of exchange controls or other foreign governmental laws or restrictions; lower trading volume; much greater price volatility and illiquidity of certain
non-U.S.
securities markets; different trading and settlement practices; less governmental supervision; changes in currency exchange rates; high and volatile rates of inflation; fluctuating interest rates; less publicly available information; and different accounting, auditing and financial recordkeeping standards and requirements.
Options Risk
There are several risks associated with transactions in options on securities. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A transaction in options or securities may be unsuccessful to some degree because of market behavior or unexpected events.
When the Fund writes a covered call option, the Fund forgoes, during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but retains the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation and once an option writer has received an exercise notice, it must deliver the underlying security in exchange for the strike price.
When the Fund writes a covered put option, the Fund bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Fund could incur a loss if it is required to purchase the stock underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Fund’s potential gain in writing a covered put option is limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price of the option minus the put premium.
Pandemics and Associated Economic Disruption
An outbreak of respiratory disease caused by a novel coronavirus
(“COVID-19”)
was first detected in China in late 2019 and subsequently spread globally. This coronavirus has resulted in, and may continue to result in, closed borders, enhanced health screenings, disruptions to healthcare service preparation and delivery, quarantines, cancellations,
and disruptions to supply chains, workflow operations and consumer activity, as well as general concern and uncertainty. The impact of this coronavirus has resulted in substantial economic volatility. Health crises caused by outbreaks, such as the coronavirus outbreak, may exacerbate other
pre-existing
political, social and economic risks. The impact of this outbreak, and other epidemics and pandemics that may arise in the future, could continue to negatively affect the worldwide economy, as well as the economies of individual countries, individual companies, including certain Fund service providers and issuers of the Fund’s investments, and the markets in general in significant and unforeseen ways. In addition, governments, their regulatory agencies, or self-regulatory organizations may take actions in response to the pandemic, including significant fiscal and monetary policy changes, that may affect the instruments in which the Fund invests or the issuers of such instruments. Any such impact could adversely affect the Fund’s performance.
Preferred Share Risk
The risk associated with the issuance of preferred shares to leverage the common shares. When preferred shares are issued, the NAV and market value of the common shares become more volatile, and the yield to the holders of common shares will tend to fluctuate with changes in the shorter-term dividend rates on the preferred shares. The Fund will pay (and the holders of common shares will bear) all costs and expenses relating to the issuance and ongoing maintenance of the preferred shares, including higher advisory fees. Accordingly, the issuance of preferred shares may not result in a higher yield or return to the holders of the common shares. If the dividend rate and other costs of the preferred shares approach the net rate of return on the Fund’s investment portfolio, the benefit of leverage to the holders of the common shares would be reduced. If the dividend rate and other costs of the preferred shares exceed the net rate of return on the Fund’s investment portfolio, the leverage will result in a lower rate of return to the holders of common shares than if the Fund had not issued preferred shares.
Preferred Stock Risk
Preferred stock, which may include preferred stock in real estate transactions, represents an equity or ownership interest in an issuer that pays dividends at a specified rate and that has precedence over common stock in the payment of dividends. In the event an issuer is liquidated or declares bankruptcy, the claims of creditors and owners of bonds take precedence over the claims of those who own preferred and common stock. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of
 
Semi-Annual Report
     
29

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
preferred stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed prior to its maturity, which can have a negative impact on the stock’s price when interest rates decline. Unlike interest on debt securities, preferred stock dividends are payable only if declared by the issuer’s board. The value of convertible preferred stock can depend heavily upon the value of the security into which such convertible preferred stock is converted, depending on whether the market price of the underlying security exceeds the conversion price.
Real Estate Investment Trust Risk
Real estate investments are subject to various risk factors. Generally, real estate investments could be adversely affected by a recession or general economic downturn where the properties are located. Real estate investment performance is also subject to the success that a particular property manager has in managing the property.
Real Estate Market Risk
The Fund is exposed to economic, market and regulatory changes that impact the real estate market generally through its investment in NFRO REIT Sub, LLC, NFRO REIT Sub II, LLC, and NFRO SFR REIT, LLC (together the “REIT Subsidiaries”), which may cause the Fund’s operating results to suffer. A number of factors may prevent the REIT Subsidiaries’ properties and other real estate-related investments from generating sufficient net cash flow or may adversely affect their value, or both, resulting in less cash available for distribution, or a loss, to us. These factors include: national, regional and local economic conditions; changing demographics; the ability of property managers to provide capable management and adequate maintenance; the quality of a property’s construction and design; increases in costs of maintenance, insurance, and operations (including energy costs and real estate taxes); potential environmental and other legal liabilities; the level of financing used by the REIT Subsidiary and the availability and cost of refinancing; potential instability, default or bankruptcy of tenants in the properties owned by each REIT Subsidiary; the relative illiquidity of real estate investments in general, which may make it difficult to sell a pro
pe
rty at an attractive price or within a reasonable time frame.
Securities Lending Risk
The Fund may make secured loans of its portfolio securities. Any decline in the value of a portfolio security that occurs while the security is out on loan is borne by the Fund, and will adversely affect performance. Also, there may be delays in recovery of securities loaned, losses in the investment of collateral, and loss of rights in the collateral should the borrower of the securities fail financially while holding the security.
Senior Loans Risk
The risk associated with Senior Loans, which are typically below investment grade and are considered speculative because of the credit risk of their issuers. As with any debt instrument, Senior Loans are generally subject to the risk of price declines and as interest rates rise, the cost of borrowing increases, which may increase the risk of default. In addition, the interest rates of floating rate loans typically only adjust to changes in short-term interest rates; long-term interest rates can vary dramatically from short-term interest rates. The secondary market for loans is generally less liquid than the market for higher grade debt. Less liquidity in the secondary trading market could adversely affect the price at which the Fund could sell a loan, and could adversely affect the NAV of the Fund’s shares. The volume and frequency of secondary market trading in such loans varies significantly over time and among loans. Declines in interest rates may increase prepayments of debt obligations and require the Fund to invest assets at lower yields. No active trading market may exist for certain Senior Loans, which may impair the ability of the Fund to realize full value in the event of the need to liquidate such assets. Adverse market conditions may impair the liquidity of some actively traded Senior Loans.
Short Sales Risk
Short sales by the Fund that are not made where there is an offsetting long position in the asset that it is being sold short theoretically involve unlimited loss potential since the market price of securities sold short may continuously increase. Short selling allows the Fund to profit from declines in market prices to the extent such decline exceeds the transaction costs and costs of borrowing the securities. However, since the borrowed securities must be replaced by purchases at market prices in order to close out the short position, any appreciation in the price of the borrowed securities would result in a loss. Purchasing securities to close out the short position can itself cause the price of securities to rise further, thereby exacerbating the loss. The Fund may mitigate such losses by replacing the securities sold short before the market price has increased significantly. Under adverse market conditions, the Fund might have difficulty purchasing securities to meet margin calls on its short sale delivery obligations, and might have to sell portfolio securities to raise the capital necessary to meet its short sale obligations at a time when fundamental investment considerations would not favor such sales.
If other short positions of the same security are closed out at the same time, a “short squeeze” can occur where demand exceeds the supply for the security sold short. A short squeeze makes it more likely that the Fund will need to replace the borrowed security at an unfavorable price.
 
30
     
Semi-Annual Report

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Structured Finance Securities Risk
A portion of the Fund’s investments may consist of equipment trust certificates, collateralized mortgage obligations, collateralized bond obligations, collateralized loan obligations or similar instruments. Such structured finance securities are generally backed by an asset or a pool of assets, which serve as collateral. Depending on the type of security, the collateral may take the form of a portfolio of mortgage loans or bonds or other assets. The Fund and other investors in structured finance securities ultimately bear the credit risk of the underlying collateral. In some instances, the structured finance securities are issued in multiple tranches, offering investors various maturity and credit risk characteristics, often categorized as senior, mezzanine and subordinated/equity according to their degree of risk. The riskiest securities are the equity tranche, which bears the bulk of defaults from the bonds or loans serving as collateral, and thus may protect the other, more senior tranches from default. If there are defaults or the relevant collateral otherwise underperforms, scheduled payments to senior tranches of such securities take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. A senior tranche typically has higher ratings and lower yields than the underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, other tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to previous defaults and the disappearance of protecting tranches, market anticipation of defaults and aversion to certain structured finance securities as a class.
Valuation Risk
Certain of the Fund’s assets are fair valued, including the Fund’s investment in equity issued by TerreStar Corporation (“TerreStar”). TerreStar is a nonoperating company that does not currently generate substantial revenue and which primarily derives its value from licenses for use of two spectrum frequencies, the license with respect to one of which was granted a conditional waiver by the FCC on April 30, 2020. The fair valuation of TerreStar involves significant uncertainty as it is materially dependent on estimates of the value of both spectrum licenses.
Gain Contingency
Claymore Holdings, LLC, a partially-owned affiliate of the Fund, is engaged in ongoing litigation that could result in a possible gain contingency to the Fund. The probability, timing, and potential amount of recovery, if any, are unknown.
Note 8. Investment Transactions
Purchases & Sales of Securities
The cost of purchases and the proceeds from sales of investments, other than short-term securities for the six months ended June 30, 2023, were as follows:
 
U.S Government
Securities
   
Other Securities
 
Purchases
 
Sales
   
Purchases
   
Sales
 
$—     $ —       $ 84,751,594     $ 107,827,369  
 
Semi-Annual Report
     
31

NOTES TO FINANCIAL STATEMENTS (unaudited) (continued)
 
 
 
June 30, 2023
 
Highland Opportunities and Income Fund
 
Note 9. Affiliated Issuers
Under Section 2(a)(3) of the 1940 Act, as amended, a portfolio company is defined as “affiliated” if a fund owns five percent or more of its outstanding voting securities or if the portfolio company is under common control. The table below shows affiliated issuers of the Fund as of June 30, 2023:
 
Issuer
 
Shares at
December 31,
2022
   
Beginning
Value as of
December 31,
2022
$
   
Purchases
at Cost
$
   
Proceeds
from
Sales
$
   
Distribution
to Return
of Capital
$
   
Net
Realized
Gain/
(Loss) on
Sales
$
   
Change in
Unrealized
Appreciation/
(Depreciation)
$
   
Ending
Value as of
June 30,
2023
$
   
Shares at
June 30,
2023
   
Affiliated
Income
$
 
Majority Owned, Not Consolidated
                   
Allenby (Common Stocks)
    1,474,379                                                 1,474,379        
Claymore (Common Stocks)
    10,359,801                                                 10,359,801        
Other Affiliates
                   
CCS Medical, Inc. (U.S. Senior Loans & Common Stocks)
    27,528,327       37,670,005       475,385                         562,048       38,707,438       28,003,711       893,659  
EDS Legacy Partners (U.S. Senior Loans)
    61,411,237       59,271,980                               2,354,197       61,626,177       61,411,237       3,267,163  
Highland Global Allocation Fund (Registered Investment Company)
    48,649       458,274       375,218                         (87,464     746,028       86,246       40,310  
LLV Holdco LLC
(U.S. Senior Loans & Common Stocks)
    15,508,203       19,469,085       594,142                         (1,052,622     19,010,605       16,102,344       592,019  
NEXLS LLC
(LLC Interest)
    882       49,601,366       3,790,000                         (3,274,299     50,117,067       957        
NexPoint Diversified Real Estate Trust REIT (Common Stocks)
    1,275,616       14,299,655                               1,671,057       15,970,712       1,275,616       382,685  
NexPoint Real Estate Finance REIT (Common Stocks & Preferred Stock)
    4,523,263       72,294,165                               (1,031,895     71,262,270       4,523,263       6,150,445  
NexPoint Residential Trust, Inc. (Common Stocks)
    186,372       8,110,910       157,251             (105,064           474,010       8,637,107       189,910       52,228  
NexPoint SFR Operating Partnership, LP
(U.S. Senior Loans)
    65,000,000