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 811-21539
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First Trust Senior Floating Rate Income Fund II
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(Exact name of registrant as specified in charter)
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Address of principal executive offices) (Zip code)
W. Scott Jardine, Esq.
First Trust Portfolios L.P.
120 East Liberty Drive, Suite 400
Wheaton, IL 60187
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(Name and address of agent for service)
registrant's telephone number, including area code: 630-765-8000
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Date of fiscal year end: May 31
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Date of reporting period: May 31, 2011
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
THE REPORT TO SHAREHOLDERS IS ATTACHED HEREWITH.
ANNUAL
REPORT
FOR THE YEAR ENDED
MAY 31, 2011
FIRST TRUST
SENIOR FLOATING RATE
INCOME FUND II
FIRST TRUST
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TABLE OF CONTENTS
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
ANNUAL REPORT
MAY 31, 2011
Shareholder Letter .......................................................... 1
At A Glance ................................................................. 2
Portfolio Commentary ........................................................ 3
Portfolio of Investments .................................................... 5
Statement of Assets and Liabilities ......................................... 16
Statement of Operations ..................................................... 17
Statements of Changes in Net Assets ......................................... 18
Statement of Cash Flows ..................................................... 19
Financial Highlights ........................................................ 20
Notes to Financial Statements ............................................... 21
Report of Independent Registered Public Accounting Firm ..................... 27
Additional Information ...................................................... 28
Board of Trustees and Officers .............................................. 30
Privacy Policy .............................................................. 32
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the meaning of
the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934,
as amended. Forward-looking statements include statements regarding the goals,
beliefs, plans or current expectations of First Trust Advisors L.P. ("First
Trust" or the "Advisor") and their respective representatives, taking into
account the information currently available to them. Forward-looking statements
include all statements that do not relate solely to current or historical fact.
For example, forward-looking statements include the use of words such as
"anticipate," "estimate," "intend," "expect," "believe," "plan," "may,"
"should," "would" or other words that convey uncertainty of future events or
outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Senior Floating Rate Income Fund II (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this report, you are cautioned not to place undue reliance on these
forward-looking statements, which reflect the judgment of the Advisor and its
representatives only as of the date hereof. We undertake no obligation to
publicly revise or update these forward-looking statements to reflect events and
circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund. See "Risk Considerations" in the Notes to
Financial Statements for a discussion of certain other risks of investing in the
Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. For the most recent month-end performance figures, please visit
http://www.ftportfolios.com or speak with your financial advisor. Investment
returns, net asset value and common share price will fluctuate and Fund shares,
when sold, may be worth more or less than their original cost.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment. It
includes details about the Fund and presents data and analysis that provide
insight into the Fund's performance and investment approach.
By reading the portfolio commentary by the portfolio management team of the
Fund, you may obtain an understanding of how the market environment affected the
Fund's performance. The statistical information that follows may help you
understand the Fund's performance compared to that of relevant market
benchmarks.
It is important to keep in mind that the opinions expressed by personnel of the
Advisor are just that: informed opinions. They should not be considered to be
promises or advice. The opinions, like the statistics, cover the period through
the date on the cover of this report. The risks of investing in the Fund are
spelled out in the prospectus, the statement of additional information, this
report and other Fund regulatory filings.
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SHAREHOLDER LETTER
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
LETTER FROM THE PRESIDENT
MAY 31, 2011
Dear Shareholders:
I am pleased to present you with the annual report for your investment in First
Trust Senior Floating Rate Income Fund II (the "Fund").
First Trust Advisors L.P. ("First Trust") has always believed that staying
invested in quality products and having a long-term horizon can help investors
reach their financial goals. Successful investors understand that the success
they have achieved is typically because of their long-term investment
perspective through all kinds of markets. While the past two years have been
challenging, the markets have been recovering from their lows of 2008-2009,
bringing relief to economists and investors alike.
The report you hold contains detailed information about your investment; a
portfolio commentary from the Fund's management team that provides a recap of
the period; a performance analysis and a market and Fund outlook. Additionally,
you will find the Fund's financial statements for the twelve months this report
covers. I encourage you to read this document and discuss it with your financial
advisor.
First Trust has been through many types of markets. That's why we remain
committed to being a long-term investor and investment manager and to bringing
you quality investment solutions regardless of the inevitable volatility the
market experiences. We offer a variety of products that may fit many financial
plans to help those investors seeking long-term investment success. You may want
to talk to your advisor about the investments First Trust offers that might also
fit your financial goals.
At First Trust we continue to be committed to making available up-to-date
information about your investments so you and your financial advisor have
current information on your portfolio. We value our relationship with you, and
we thank you for the opportunity to assist you in achieving your financial
goals. I look forward to the remainder of 2011 and to the next edition of your
Fund's report.
Sincerely,
/s/ James A. Bowen
James A. Bowen
President of First Trust Senior Floating Rate Income Fund II
Page 1
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
"AT A GLANCE"
AS OF MAY 31, 2011 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FCT
Common Share Price $14.82
Common Share Net Asset Value ("NAV") $14.76
Premium (Discount) to NAV 0.41%
Net Assets Applicable to Common Shares $373,902,129
Current Monthly Distribution per Common Share (1) $0.0700
Current Annualized Distribution per Common Share $0.8400
Current Distribution Rate on Closing Common Share Price (2) 5.67%
Current Distribution Rate on NAV (2) 5.69%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
5/31/10 12.31 13.91
6/4/2010 12.20 13.91
6/11/2010 12.59 13.81
6/18/2010 12.52 13.83
6/25/2010 12.68 13.84
7/2/2010 12.40 13.75
7/9/2010 12.56 13.76
7/16/2010 12.73 13.85
7/23/2010 12.99 13.91
7/30/2010 13.10 13.98
8/6/2010 13.08 13.97
8/13/2010 13.10 13.99
8/20/2010 13.21 14.02
8/27/2010 13.20 14.03
9/3/2010 13.22 14.03
9/10/2010 13.20 14.07
9/17/2010 13.10 14.12
9/24/2010 12.97 14.16
10/1/2010 13.20 14.17
10/8/2010 13.12 14.23
10/15/2010 13.13 14.27
10/22/2010 13.28 14.30
10/29/2010 13.30 14.39
11/5/2010 13.55 14.43
11/12/2010 13.38 14.45
11/19/2010 13.63 14.46
11/26/2010 13.74 14.47
12/3/2010 13.82 14.43
12/10/2010 13.75 14.46
12/17/2010 13.85 14.52
12/23/2010 13.95 14.55
12/31/2010 13.95 14.60
1/7/2011 14.02 14.65
1/14/2011 14.22 14.73
1/21/2011 14.34 14.76
1/28/2011 14.50 14.81
2/4/2011 14.71 14.79
2/11/2011 14.43 14.81
2/18/2011 14.75 14.85
2/25/2011 14.66 14.84
3/4/2011 14.68 14.77
3/11/2011 14.81 14.74
3/18/2011 14.7 14.68
3/25/2011 14.86 14.74
4/1/2011 14.95 14.73
4/8/2011 15.14 14.77
4/15/2011 15.11 14.79
4/21/2011 15.14 14.81
4/29/2011 15.41 14.83
5/6/2011 15.48 14.77
5/13/2011 15.36 14.77
5/20/2011 15.30 14.76
5/27/2011 14.85 14.75
5/31/2011 14.82 14.76
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended Inception (5/25/2004)
5/31/2011 5/31/2011 to 5/31/2011
FUND PERFORMANCE (3)
NAV 11.19% 1.77% 2.96%
Market Value 23.20% 3.41% 2.35%
INDEX PERFORMANCE
S&P/LSTA Leveraged Loan Index 9.28% 5.28% 5.31%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Health Care Providers & Services 10.7
Media 10.0
Chemicals 6.4
Diversified Consumer Services 6.3
Hotels, Restaurants & Leisure 6.2
Software 4.8
Diversified Telecommunication Services 4.5
Aerospace & Defense 4.2
Capital Markets 3.9
Electric Utilities 3.5
Diversified Financial Services 3.5
Specialty Retail 3.3
Containers & Packaging 2.6
IT Services 2.6
Automobiles 2.4
Food & Staples Retailing 2.3
Health Care Equipment & Supplies 2.3
Pharmaceuticals 2.2
Commercial Services & Supplies 2.1
Real Estate Management & Development 2.0
Road & Rail 1.6
Life Sciences Tools & Services 1.4
Oil, Gas & Consumable Fuels 1.1
Independent Power Producers & Energy Traders 1.1
Food Products 1.1
Machinery 1.0
Semiconductors & Semiconductor Equipment 1.0
Leisure Equipment & Products 0.9
Real Estate Investment Trusts (REITs) 0.9
Wireless Telecommunication Services 0.7
Computers & Peripherals 0.6
Metals & Mining 0.5
Paper & Forest Products 0.5
Health Care Technology 0.4
Building Products 0.4
Energy Equipment & Services 0.3
Insurance 0.3
Communications Equipment 0.2
Household Durables 0.2
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Total 100.0%
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% OF TOTAL
CREDIT QUALITY (S&P RATINGS) (4) INVESTMENTS
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BBB+ 0.5%
BBB 0.6
BBB- 4.4
BB+ 6.8
BB 15.5
BB- 26.1
B+ 26.1
B 12.1
B- 0.6
CCC+ 1.0
CCC 1.1
NR 1.4
NR (Privately rated securities) 3.8
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Total 100.0%
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% OF TOTAL
TOP 10 ISSUERS INVESTMENTS
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Reynolds Consumer Products Holdings, Inc. 1.6%
Nuveen Investments, Inc. 1.5
LPL Holdings, Inc. 1.5
Asurion Corp. 1.4
Brenntag Holding GmbH & Co. 1.4
MultiPlan, Inc. 1.4
Select Medical Corp. 1.3
Univision Corp. 1.2
CB Richard Ellis Services, Inc. 1.2
Carestream Health, Inc. 1.2
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Total 13.7%
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(1) Most recent distribution paid or declared through 5/31/2011. Subject to
change in the future.
(2) Distribution rates are calculated by annualizing the most recent
distribution paid or declared through the report date and then dividing by
Common Share Price or NAV, as applicable, as of 5/31/2011. Subject to
change in the future.
(3) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in NAV per share for net asset
value returns and changes in Common Share price for market value returns.
Total returns do not reflect sales load and are not annualized for periods
less than one year. Past performance is not indicative of future results.
(4) Ratings below BBB- by Standard & Poor's Ratings Group are considered to be
below investment grade.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
INVESTMENT MANAGER
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust is a registered investment advisor which
offers customized portfolio management using its structured, quantitative
approach to security selection. As of May 31, 2011, First Trust managed or
supervised $52.0 billion in assets. The First Trust Leveraged Finance Investment
Team began managing the First Trust Senior Floating Rate Income Fund II on
October 12, 2010. The experienced professionals comprising the First Trust
Leveraged Finance Investment Team hail from one of the largest managers in the
senior loan business and currently manage approximately $535 million in assets.
The team's experience includes managing senior secured floating-rate corporate
loans ("senior loans") in both the U.S. and Europe, managing high-yield debt and
corporate restructuring expertise. The team has managed institutional separate
accounts, comingled funds, structured products and retail funds.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA
SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
Mr. Housey joined First Trust in June 2010 as Senior Portfolio Manager in the
Leveraged Finance Investment Team and has nearly 15 years of investment
experience. Prior to joining First Trust, Mr. Housey was at Morgan Stanley/Van
Kampen Funds, Inc. for 11 years and served as Executive Director and
Co-Portfolio Manager. Mr. Housey has extensive experience in portfolio
management of both leveraged and unleveraged credit products, including senior
loans, high-yield bonds, credit derivatives and corporate restructurings. Mr.
Housey received a BS in Finance from Eastern Illinois University and an MBA in
Finance as well as Management and Strategy from Northwestern University's
Kellogg School of Business. Mr. Housey holds the Chartered Financial Analyst
("CFA") designation.
SCOTT D. FRIES, CFA
VICE PRESIDENT, PORTFOLIO MANAGER
Mr. Fries joined First Trust in June 2010 as Portfolio Manager in the Leveraged
Finance Investment Team and has over 15 years of investment industry experience.
Prior to joining First Trust, Mr. Fries spent 15 years and served as
Co-Portfolio Manager of Institutional Separately Managed Accounts for Morgan
Stanley/Van Kampen Funds, Inc. Mr. Fries received a BA in International Business
from Illinois Wesleyan University and an MBA in Finance from DePaul University.
Mr. Fries holds the Chartered Financial Analyst designation.
COMMENTARY
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
The primary investment objective of First Trust Senior Floating Rate Income Fund
II ("FCT" or the "Fund") is to seek a high level of current income. As a
secondary objective, the Fund attempts to preserve capital. The Fund pursues its
objectives by investing in a portfolio of senior loans. There can be no
assurance that the Fund's investment objectives will be achieved. The Fund may
not be appropriate for all investors.
MARKET RECAP
The senior loan market provided relatively strong returns over the twelve-month
reporting period. For the full-year period, the S&P/LSTA Leveraged Loan Index
(the "Index") (broad-based senior loan market index) returned 9.28%. The
reporting period began on a negative note (June 2010 index return was -0.47%)
due to potential sovereign risk in Europe, particularly Greece, which led to a
flight to quality. Since that time, the senior loan market has generally risen,
benefiting from improving credit quality and strong demand for the asset class.
A look at the default rate in the market provides a view to the improving credit
conditions over the reporting period. The default rate has steadily moved lower
throughout the reporting period. In June 2010, the trailing twelve-month default
rate stood at 4.02%; it declined to 0.91% as of May 2011. This puts the current
default rate well inside the historic average 3.66% default level for the
market. The date range for the historic average default rate is December
1998-May 2011. As this data suggests, corporate performance has generally
improved, with issuers showing the ability to grow revenues and cash flows in
recent periods.
Alongside improving credit conditions, we have seen demand increase for the
asset class, which has benefited secondary loan prices. A major factor regarding
demand has been the significant increase in retail senior loan mutual fund
flows. For the calendar year to date period, retail senior loan funds have taken
in $22.7 billion in new investor dollars. This compares to $4.4 billion over the
same five-month period in 2010. Retail investors are drawn to the potentially
attractive income and interest rate protection that these funds may offer. Along
with the increase in demand, the volume of new loan issuance has also increased
over the period with an impressive $25 billion in new loan issuance in the month
of May 2011 alone.
Page 3
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PORTFOLIO COMMENTARY - (Continued)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
Overall, the combination of improving credit conditions and strong investor
demand provided an environment for impressive returns over the period. Average
loan prices in the market have improved 5 points, from 90.4 cents on the dollar
at the beginning of the period to 95.4 cents on the dollar at the end of May
2011. With the increase in loan prices, the discounted spread of loans in the
market has tightened over the period. In June 2010, the discounted spread to a
three-year average life was 6.70%; it has declined steadily to 5.21% at the end
of May 2011.
PERFORMANCE ANALYSIS
For the twelve-month period ended May 31, 2011, the Fund generated a market
price total return of 23.20% and a net asset value (NAV) total return of 11.19%.
The Fund's market price return increased in the period as the market price began
the period trading at a -9.38% discount to NAV and improved to a +0.41% premium
to NAV at the end of the period.
From an income standpoint, the Fund increased the monthly distribution rate six
times over the twelve-month period. The Fund paid $0.039 cents per share in June
2010, and through the dividend increases, it paid $0.07 cents per share in May
2011. This equates to a 79% increase in the level of monthly distributions over
the period. These increases were made possible in part through a higher level of
coupons paid by holdings within the Fund. At the end of May 2011, the Fund's
distribution rate at NAV was 5.69% (5.67% at market price).
The Fund's NAV return for the period of 11.19% outperformed the S&P/LSTA
Leveraged Loan Index return of 9.28% by 191 basis points. While the Fund's
higher credit quality bias relative to the index detracted from returns in the
period (as lower quality loans generally outperformed), the Fund benefited from
the use of leverage over the period as loan prices increased.
MARKET AND FUND OUTLOOK
The First Trust Leveraged Finance Team believes that the senior loan market will
continue to benefit from the favorable market conditions that exist today.
Credit quality is likely to remain strong and we expect default rates to remain
at a modest level in the periods ahead. Strong demand for senior loans may
continue as investors seek the potential benefits of current income and
protection from rising interest rates (senior loans may benefit from rising
rates due to the fact they pay a floating interest rate). The combination of a
modest default rate and a supportive technical environment should provide a
positive backdrop for senior loan returns.
We believe the Fund is positioned well to benefit in what we expect to be a
positive environment for the asset class in the periods ahead. Through our
rigorous credit research, we seek to identify the best relative value
opportunities in the market as potential holdings for the Fund. The portfolio
construction process balances the goals of a high current income with portfolio
risk. In order to mitigate risk, we expect that the portfolio will remain well
diversified and maintain a higher average credit quality than the market as
represented by the Index. With loan prices trading, on average, below par,
defaults at a modest level, and credit quality generally strong, we believe
investors with an intermediate-time horizon will be rewarded by investing in the
senior loan asset class, as current market conditions appear to offer investors
a compelling value.
DISCLOSURE
The Fund's portfolio holdings are subject to change without notice. Any mention
of specific securities is not a recommendation or solicitation for any person to
buy, sell or hold any particular security. There is no assurance that the Fund
currently holds these securities.
The S&P/LSTA Leveraged Loan Index is a daily total return index that uses
LSTA/LPC Mark-to-Market Pricing to calculate market value change. On a real-time
basis, the Index tracks the current outstanding balance and spread over LIBOR
for fully funded term loans. The facilities included in the Index represent a
broad cross section of leveraged loans syndicated in the United States,
including dollar-denominated loans to overseas issuers. (Information gathered
from Standard & Poor's LCD.)
This report may contain information obtained from third parties, including
ratings from credit ratings agencies such as Standard & Poor's. Reproduction and
distribution of third party content in any form is prohibited except with the
prior written permission of the related third party. Third party content
providers do not guarantee the accuracy, completeness, timeliness or
availability of any information, including ratings, and are not responsible for
any errors or omissions (negligent or otherwise), regardless of the cause, or
for the results obtained from the use of such content. THIRD PARTY CONTENT
PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO,
ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE.
THIRD PARTY CONTENT PROVIDERS shall not be liable for any direct, indirect,
incidental, exemplary, compensatory, punitive, special or consequential damages,
costs, expenses, legal fees, or losses (including lost income or profits and
opportunity costs) in connection with any use of THEIR CONTENT, INCLUDING
ratings. Credit ratings are statements of opinions and are not statements of
fact or recommendations to purchase, hold or sell securities. They do not
address the suitability of securities or the suitability of securities for
investment purposes, and should not be relied on as investment advice.
Page 4
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - 152.4%
ADVERTISING - 2.1%
$ 6,784,151 Clear Channel Communications, Inc.,
Term Loan B................................. Caa1 CCC+ 3.84% 01/29/16 $ 5,929,538
2,000,000 Mood Media Corp., Term Loan, First Lien........ Ba3 B 7.75% 05/06/18 1,990,000
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7,919,538
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AEROSPACE & DEFENSE - 7.8%
2,000,000 Aeroflex, Inc., Term Loan B.................... B1 BB- 4.25% 05/09/18 2,000,000
1,582,109 DAE Aviation Holdings, Inc., Term Loan B1...... B2 B 5.28% 07/31/14 1,586,064
1,524,099 DAE Aviation Holdings, Inc., Term Loan B2...... B2 B 5.25%-5.28% 07/31/14 1,527,909
5,231,239 DynCorp International, Inc., Term Loan......... Ba1 BB 6.25% 07/07/16 5,257,395
2,319,621 GenCorp, Inc., Synthetic Letter of Credit...... Ba1 BB- 3.45% 04/30/13 2,267,430
1,179,819 GenCorp, Inc., Term Loan....................... Ba1 BB- 3.45% 04/30/13 1,153,273
1,995,000 Pelican Products, Inc., Term Loan.............. NR (f) NR (f) 5.00% 03/07/17 1,995,000
2,241,103 Robertson Fuel Systems, LLC, Term Loan......... NR (f) NR (f) 2.94% 04/19/13 2,190,678
4,224,547 Spirit Aerosystems, Inc., Term Loan B.......... Ba1 BBB- 3.53% 09/30/16 4,241,445
3,992,915 TASC, Inc., Term Loan B........................ Ba2 BB 4.50% 12/18/15 4,000,901
2,992,500 Transdigm, Inc., Term Loan B................... Ba2 BB- 4.00% 12/14/17 3,003,722
-------------
29,223,817
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AGRICULTURAL PRODUCTS - 1.1%
1,158,093 Dole Food Co., Inc., Term Loan B1.............. Ba2 BB- 5.00%-5.50% 03/02/17 1,163,150
2,876,412 Dole Food Co., Inc., Term Loan C1.............. Ba2 BB- 5.00%-5.50% 03/02/17 2,888,973
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4,052,123
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ALTERNATIVE CARRIERS - 2.8%
6,000,000 Intelsat Jackson Holdings S.A., Term Loan B.... B1 BB- 5.25% 04/02/18 6,034,164
1,000,000 Level 3 Financing, Inc., Term Loan A........... B1 B+ 2.53% 03/13/14 977,656
3,114,257 Telesat Canada, U.S. Term Loan I............... B1 BB- 3.20% 10/31/14 3,097,225
267,500 Telesat Canada, U.S. Term Loan II.............. B1 BB- 3.20% 10/31/14 266,037
-------------
10,375,082
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ALUMINUM - 0.8%
2,992,500 Novelis, Inc., Term Loan B..................... Ba2 BB- 4.00% 03/10/17 3,004,659
-------------
APPAREL RETAIL - 1.6%
1,995,000 Gymboree Corp., Term Loan, First Lien.......... B1 B+ 5.00% 02/23/18 1,954,685
4,000,000 Neiman Marcus Group, Term Loan................. B2 BB- 4.75% 05/16/18 3,973,332
-------------
5,928,017
-------------
APPLICATION SOFTWARE - 4.1%
1,995,000 Bentley Systems, Inc., Term Loan B............. Ba3 BB+ 5.75% 12/29/16 1,995,000
2,500,000 CCC Information Systems, Inc., Term Loan B..... B1 B+ 5.50% 11/11/15 2,507,812
4,000,000 Eagle Parent, Inc., Term Loan B................ Ba3 B+ 5.00% 05/16/18 3,955,000
1,995,000 Property Data, Inc., Term Loan................. Ba3 B+ 7.00% 01/04/17 1,989,181
2,500,000 Trizetto Group, Inc., Term Loan B.............. B1 BB- 4.75% 05/02/18 2,494,375
2,500,000 Verint Systems, Inc., Term Loan B, First Lien.. B1 B+ 4.50% 10/27/17 2,506,250
-------------
15,447,618
-------------
ASSET MANAGEMENT & CUSTODY BANKS - 6.0%
1,313,950 Grosvenor Capital Management Holdings, LLP,
Term Loan................................... NR (f) NR (f) 4.25% 12/05/16 1,307,380
2,369,531 Harbourvest Partners L.P., Term Loan B......... NR (f) NR (f) 6.25% 12/19/16 2,381,379
2,797,273 LPL Holdings, Inc., Extended Term Loan......... Ba3 BB- 4.25% 06/25/15 2,805,433
See Notes to Financial Statements Page 5
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
ASSET MANAGEMENT & CUSTODY BANKS - (Continued)
$ 5,773,049 LPL Holdings, Inc., Term Loan.................. Ba3 BB- 5.25% 06/28/17 $ 5,812,739
1,330,000 Munder Capital Management, Incremental
Term Loan................................... NR (f) NR (f) 6.00% 03/23/15 1,330,000
6,704,791 Nuveen Investments, Inc., Extended Term Loan... B2 B 5.76%-5.81% 05/13/17 6,731,328
2,000,000 Nuveen Investments, Inc., Term Loan............ B2 B 3.27%-3.31% 11/13/14 1,966,666
-------------
22,334,925
-------------
AUTO PARTS & EQUIPMENT - 2.7%
2,000,000 Delphi Corp., Term Loan B...................... Baa3 BBB- 3.50% 03/31/17 2,005,834
4,000,000 HHI Holdings, LLC, Term Loan B................. B2 B+ 7.00%-7.75% 03/21/17 3,990,000
1,995,000 Tomkins, PLC, Term Loan B...................... Ba2 BB 4.25% 09/29/16 1,999,573
1,995,000 Transtar Holding Co., Term Loan, First Lien.... Ba3 BB- 5.50% 12/21/16 2,009,962
-------------
10,005,369
-------------
AUTOMOBILE MANUFACTURERS - 1.1%
4,000,000 Metaldyne, LLC, Term Loan B.................... B1 B+ 5.25% 05/18/17 4,000,000
-------------
AUTOMOTIVE RETAIL - 1.2%
2,500,000 KAR Holdings, Inc., Term Loan B................ Ba3 BB- 5.00% 05/19/17 2,507,500
2,000,000 Pilot Travel Centers, LLC, Term Loan B......... Ba2 BB+ 4.25% 03/30/18 2,006,876
-------------
4,514,376
-------------
BIOTECHNOLOGY - 1.4%
5,000,000 Grifols, SA, Term Loan B....................... Ba3 BB 6.00% 12/31/16 5,038,540
-------------
BROADCASTING - 2.7%
4,423,344 FoxCo Acquisition, LLC, Term Loan B............ B1 B+ 4.75% 07/14/15 4,418,877
1,353,820 Gray Television, Inc., Term Loan B............. B2 B 3.71% 12/31/14 1,343,173
1,500,000 Hubbard Radio, LLC, Term Loan B................ Ba3 B+ 5.25% 04/28/17 1,509,375
2,000,000 Raycom TV Broadcasting, LLC, Term Loan B....... NR NR 4.50% 06/02/17 1,998,750
830,278 Sinclair Broadcasting Group, Term Loan B....... Baa3 BB+ 4.00% 10/28/16 830,278
-------------
10,100,453
-------------
BUILDING PRODUCTS - 0.5%
1,990,000 Goodman Global, Inc., Term Loan B.............. B1 B+ 5.75% 10/28/16 2,002,151
-------------
CABLE & SATELLITE - 5.2%
1,848,649 Atlantic Broadband Finance, LLC, Term Loan..... Ba3 B+ 4.00% 03/08/16 1,852,100
1,995,000 Bresnan Broadband Holdings, LLC, Term Loan..... Ba3 BB+ 4.50% 12/14/17 2,002,709
5,131,102 Charter Communications Operating, LLC,
Term Loan C................................. Ba1 BB+ 3.56% 09/06/16 5,133,478
5,605,485 CSC Holdings, Inc., Term Loan B3, Extended
Maturity.................................... Baa3 BBB- 2.06% 03/29/16 5,602,654
1,995,000 Knology, Inc., Term Loan B..................... B1 B+ 4.00% 08/18/17 1,992,506
838,594 UPC Broadband Holdings B.V., Term Loan T....... Ba3 B+ 3.71% 12/31/16 839,381
1,946,576 UPC Broadband Holdings B.V., Term Loan X....... Ba3 B+ 3.71% 12/31/17 1,944,954
-------------
19,367,782
-------------
CASINOS & GAMING - 5.2%
2,000,000 Ameristar Casinos, Inc., Term Loan B........... Ba3 BB+ 4.00% 04/16/18 2,008,558
3,000,000 CCM Merger, Inc., Term Loan B.................. B3 B+ 7.00% 03/01/17 3,040,500
5,000,000 Harrah's Entertainment, Inc., Term Loan B2..... B3 B 3.19%-3.27% 01/28/15 4,652,500
1,995,000 Isle of Capri Casinos, Term Loan B............. Ba3 BB- 4.75% 03/25/17 2,004,111
Page 6 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
CASINOS & GAMING - (Continued)
$ 4,900,965 VML US Finance, LLC, Term Loan B............... Ba3 BB- 4.70% 05/25/13 $ 4,896,882
3,000,000 Wynn Las Vegas, LLC, Term Loan B............... Ba3 BB+ 3.20% 08/17/15 2,992,500
-------------
19,595,051
-------------
COAL & CONSUMABLE FUELS - 0.8%
3,000,000 Walter Energy, Inc., Term Loan B............... B1 BB- 4.00% 04/02/18 3,006,135
-------------
COMMUNICATIONS EQUIPMENT - 0.3%
1,000,000 Commscope, Inc., Term Loan B................... Ba3 BB 5.00% 01/14/18 1,005,000
-------------
COMPUTER HARDWARE - 0.9%
3,325,259 CDW, LLC, Extended Term Loan................... B2 B 4.50% 07/15/17 3,312,789
-------------
DATA PROCESSING & OUTSOURCED SERVICES - 1.7%
904,762 Global Cash Access, Inc., Term Loan............ B1 BB- 7.00% 03/01/16 911,548
5,723,889 Harland Clarke Holdings Corp., Term Loan B..... B1 B+ 2.69%-2.81% 06/30/14 5,301,752
-------------
6,213,300
-------------
DIVERSIFIED CHEMICALS - 5.3%
637,174 Brenntag Holding GmbH & Co. KG,
Acquisition Term Loan....................... Ba2 BBB- 3.69%-3.96% 01/20/14 635,979
4,322,712 Brenntag Holding GmbH & Co. KG,
Term Loan B2................................ Ba2 BBB- 3.69%-3.75% 01/20/14 4,314,607
3,000,000 Brenntag Holding GmbH & Co. KG, Term Loan,
Second Lien................................. B1 BB- 6.43% 06/18/15 3,006,249
3,054,960 Celanese Holdings, LLC, Extended Term Loan..... Ba1 BBB- 3.30% 10/31/16 3,064,506
1,406,442 Ineos Group Limited, Term Loan B2.............. B1 B 7.50% 12/16/13 1,452,151
1,407,306 Ineos Group Limited, Term Loan C2.............. B1 B 8.00% 12/16/14 1,453,043
5,985,000 Univar, Inc., Term Loan B...................... B2 B 5.00% 06/30/17 5,981,792
-------------
19,908,327
-------------
DIVERSIFIED SUPPORT SERVICES - 0.5%
1,995,000 Brickman Group Holdings, Inc., Term Loan B..... B1 B+ 7.25% 10/14/16 2,024,303
-------------
ELECTRIC UTILITIES - 5.4%
2,000,000 AES Corp., Term Loan B......................... Ba1 BB+ 5.50% 06/01/18 1,998,126
4,000,000 Calpine Corp., Term Loan B..................... B1 B+ 4.50% 04/01/18 4,008,000
1,912,682 Great Point Power, LLC, Term Loan.............. Ba1 BB+ 4.25% 06/04/17 1,922,245
5,947,687 NRG Energy, Inc., Extended Synthetic
Letter of Credit............................ Baa3 BB+ 3.56% 08/31/15 5,946,759
414,192 NRG Energy, Inc., Extended Term Loan B......... Baa3 BB+ 3.46%-3.56% 08/31/15 414,256
2,977,612 Race Point Power, LLC, Term Loan............... Ba2 BB 8.25% 01/11/18 2,985,056
3,000,000 Star West Generation, LLC, Term Loan B......... Ba3 B+ 6.00% 05/24/18 2,977,500
-------------
20,251,942
-------------
ELECTRONIC EQUIPMENT & INSTRUMENT - 0.8%
3,000,000 iPayment, Inc., Term Loan B.................... Ba2 B+ 5.75% 05/08/17 3,013,749
-------------
ENVIRONMENTAL & FACILITIES SERVICES - 2.1%
5,955,000 EnergySolutions, LLC, Term Loan................ Ba2 BB+ 6.25% 08/15/16 5,979,814
2,000,000 Waste Industries USA, Inc., Term Loan B........ B1 B+ 4.75% 03/17/17 2,003,700
-------------
7,983,514
-------------
See Notes to Financial Statements Page 7
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
FOOD DISTRIBUTORS - 0.4%
$ 1,500,000 General Nutrition Centers, Inc., Term Loan B... B1 B+ 4.25% 03/02/18 $ 1,501,125
-------------
FOOD RETAIL - 3.0%
4,176,456 SUPERVALU, Inc., Extended Term Loan B2......... B1 BB 3.46% 10/05/15 4,134,148
3,752,324 Univision Corp., Term Loan..................... B2 B+ 2.19% 09/29/14 3,626,183
3,541,272 Univision Corp., Extended Term Loan............ B2 B+ 4.44% 03/31/17 3,419,541
-------------
11,179,872
-------------
FOREST PRODUCTS - 0.8%
2,799,430 Georgia-Pacific Corp., Term Loan C............. Baa2 BBB+ 3.56% 12/23/14 2,802,929
-------------
GENERAL MERCHANDISE STORES - 0.3%
1,000,000 Savers, Inc., Term Loan B...................... Ba3 B+ 4.25% 03/04/17 1,003,733
-------------
HEALTH CARE EQUIPMENT - 3.5%
3,660,306 Biomet, Inc., Dollar Term Loan................. B1 BB- 3.19%-3.31% 03/25/15 3,637,869
7,000,000 Carestream Health, Inc., Term Loan B........... B1 BB- 5.00% 02/28/17 6,651,946
2,984,576 DJO Finance, LLC, Term Loan.................... Ba2 BB- 3.19% 05/20/14 2,962,812
-------------
13,252,627
-------------
HEALTH CARE FACILITIES - 7.3%
2,558,605 CHS/Community Health Systems, Inc.,
Extended Term Loan.......................... Ba3 BB 3.69%-3.75% 01/25/17 2,493,440
3,000,000 Golden Living Drumm Investors, LLC,
Term Loan................................... B1 B+ 5.00% 05/04/18 2,952,000
3,291,558 HCA, Inc., Term Loan B2........................ Ba2 BB 3.56% 03/31/17 3,270,986
1,750,000 HCR ManorCare, LLC, Term Loan B................ Ba3 B+ 5.00% 04/06/18 1,724,170
3,500,000 Kindred Healthcare, Inc., Term Loan B.......... Ba3 B+ 5.25% 06/01/18 3,493,875
3,000,000 Select Medical Corp., Term Loan B.............. Ba3 BB- 5.50% 06/01/18 2,977,500
4,417,640 Select Medical Corp., Term Loan B1............. Ba2 BB- 3.92%-6.00% 08/22/14 4,419,482
5,940,225 Vanguard Health Systems, Inc., Term Loan B..... Ba2 BB- 5.00% 01/29/16 5,936,512
-------------
27,267,965
-------------
HEALTH CARE SERVICES - 5.1%
997,500 Davita, Inc., Term Loan B...................... Ba2 BB 4.50% 10/20/16 1,003,111
5,000,000 Emergency Medical Services Corp., Term Loan B.. B1 B+ 5.25% 05/25/18 4,988,395
3,974,843 Gentiva Health Services, Inc., Term Loan B..... Ba2 BB- 4.75% 08/17/16 3,988,508
1,915,000 Healthways, Inc., Term Loan B.................. Ba2 BB 1.81% 12/01/13 1,838,400
2,395,325 MedAssets, Inc., Term Loan B................... Ba3 BB- 5.25% 11/19/16 2,408,300
997,500 Renal Advantage Holdings, Inc., Term Loan B.... Ba3 B 5.75% 12/10/16 1,003,111
997,500 Rural Metro Corp., Term Loan B................. B1 B+ 6.00% 11/24/16 1,001,241
1,990,000 Sheridan Healthcare, Inc., Incremental Term Loan B1 B 4.00% 06/15/14 1,980,050
102,041 Vantage Oncology Holdings, LLC, Delayed
Draw Term Loan.............................. B2 B 0.75% 01/31/17 101,530
895,714 Vantage Oncology Holdings, LLC, Term Loan...... B2 B 6.25% 01/31/17 891,236
-------------
19,203,882
-------------
HEALTH CARE SUPPLIES - 0.5%
1,995,000 ConvaTec, Inc., Term Loan B.................... Ba3 B+ 5.75% 12/22/16 1,999,987
-------------
HOME ENTERTAINMENT SOFTWARE - 0.5%
2,000,000 NDS Group, Inc., Term Loan B................... Ba2 BB- 4.00% 03/12/18 2,003,750
-------------
Page 8 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
HOMEBUILDING - 0.2%
$ 957,179 Mattamy Funding Partnership, Term Loan......... NR (f) NR (f) 2.56% 04/11/13 $ 923,678
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 1.6%
3,423,502 Dynegy Holdings, Inc., Synthetic Letter of Credit B2 CCC 4.03% 04/02/13 3,389,743
3,241,410 Texas Competitive Electric Holdings Company,
LLC, Term Loan B3........................... B2 CCC 3.74% 10/10/14 2,745,069
-------------
6,134,812
-------------
INDUSTRIAL MACHINERY - 1.6%
2,000,000 Douglas Dynamics, LLC, Term Loan............... B1 BB 5.75% 04/18/18 1,995,000
3,937,500 Intelligrated, Inc., Term Loan B............... B2 B+ 7.50% 02/17/17 3,917,812
-------------
5,912,812
-------------
INTEGRATED TELECOMMUNICATION SERVICES - 3.2%
1,324,297 Avaya, Inc., Term Loan B1...................... B1 B 3.00% 10/24/14 1,277,450
2,660,123 Avaya, Inc., Term Loan B3...................... B1 B 4.76% 10/26/17 2,588,815
2,992,500 Global TelLink, Inc., Term Loan B.............. B1 B 5.00% 11/10/16 2,979,408
2,992,414 nTelos, Inc., Term Loan B...................... Ba3 BB 4.00% 08/07/15 2,992,414
2,000,000 Securus Technologies, Inc., Term Loan B........ B1 B+ 5.25% 06/07/17 1,996,250
-------------
11,834,337
-------------
INTERNET SOFTWARE & SERVICES - 0.8%
3,000,000 AVG Technologies, Term Loan B.................. B1 B+ 7.50% 03/15/16 2,910,000
-------------
IT CONSULTING & OTHER SERVICES - 1.2%
443,424 Apptis (DE), Inc., Term Loan................... B1 B+ 6.50% 12/20/12 442,316
3,000,000 Presidio, Inc., Term Loan B.................... Ba3 B+ 7.25% 03/31/17 2,996,250
984,034 West Corp., Term Loan B5....................... Ba3 BB- 4.52%-4.71% 07/15/16 987,724
-------------
4,426,290
-------------
LEISURE FACILITIES - 2.3%
967,231 London Arena and Waterfront Finance, LLC,
Term Loan A................................. NR (f) NR (f) 2.71% 03/08/12 964,813
3,870,130 Six Flags, Inc., Term Loan B................... B1 BB 5.25% 06/30/16 3,897,221
3,560,000 Universal City Development Partners, Ltd.,
Term Loan................................... Ba2 B+ 5.50% 11/06/14 3,580,025
-------------
8,442,059
-------------
LEISURE PRODUCTS - 1.4%
2,990,000 Live Nation Entertainment, Inc., Term Loan B... Ba2 BB- 4.50% 11/07/16 2,997,439
1,259,415 LodgeNet Entertainment Corp., Term Loan........ B3 B 6.50% 04/04/14 1,204,316
840,096 Sram, LLC, Term Loan B......................... Ba3 BB- 5.00%-5.50% 04/30/15 837,996
-------------
5,039,751
-------------
LIFE & HEALTH INSURANCE - 0.5%
1,733,333 CNO Financial Group, Inc., Term Loan........... B1 B 6.25% 09/30/16 1,736,583
-------------
LIFE SCIENCES TOOLS & SERVICES - 2.1%
1,985,025 inVentiv Health, Inc., Term Loan............... Ba3 BB- 4.75% 08/04/16 1,988,128
332,500 inVentiv Health, Inc., Term Loan B1............ Ba3 BB- 4.75% 08/04/16 331,669
666,667 inVentiv Health, Inc., Term Loan B2............ Ba3 BB- 1.63% 08/04/16 665,833
1,421,375 Quintiles Transnational Corp., Term Loan B,
First Lien.................................. Ba2 BB 2.31% 03/31/13 1,416,489
See Notes to Financial Statements Page 9
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
LIFE SCIENCES TOOLS & SERVICES - (Continued)
$ 3,500,000 Quintiles Transnational Corp., Term Loan B,
First Lien.................................. B1 BB- 5.00% 06/02/18 $ 3,475,937
-------------
7,878,056
-------------
MANAGED HEALTH CARE - 2.1%
7,818,510 MultiPlan, Inc., Term Loan..................... Ba3 B 4.75% 08/26/17 7,803,850
-------------
MOVIES & ENTERTAINMENT - 2.0%
1,642,750 AMC Entertainment, Inc., Term Loan............. Ba2 BB- 3.44% 12/15/16 1,633,715
1,419,231 Filmyard Holdings, LLC, Term Loan B............ Ba2 BB- 7.75% 06/22/16 1,436,971
1,496,250 Regal Cinemas Corp., Term Loan................. Ba2 BB- 3.56% 08/23/17 1,495,315
2,992,500 TWCC Holding Corp., Term Loan B................ Ba3 BB- 4.25% 02/11/17 3,008,710
-------------
7,574,711
-------------
OFFICE SERVICES & SUPPLIES - 0.5%
841,176 Pike Electric, Inc., Term Loan B............... NR (f) NR (f) 1.75% 07/01/12 828,559
950,843 Pike Electric, Inc., Term Loan C............... NR (f) NR (f) 1.75% 12/10/12 936,580
-------------
1,765,139
-------------
OIL & GAS EQUIPMENT & SERVICES - 0.5%
1,984,257 Aquilex Holdings, LLC, Term Loan............... Ba3 BB- 6.00% 04/01/16 1,976,816
-------------
OIL & GAS EXPLORATION & PRODUCTION - 0.4%
1,433,407 SemCrude, L.P., Prefunded Synthetic Letter of
Credit...................................... NR NR 8.50% 11/30/12 1,433,407
160,508 SemCrude, L.P., Term Loan, Second Lien (g)..... NR NR 9.00% 11/30/16 161,010
-------------
1,594,417
-------------
OIL & GAS REFINING & MARKETING - 0.4%
105,833 Alon USA, Inc., Term Loan (Edgington Facility). B1 B+ 2.44%-2.50% 08/05/13 94,853
846,667 Alon USA, Inc., Term Loan (Paramount Facility). B1 B+ 2.44%-2.50% 08/05/13 758,825
602,421 Citgo Petroleum Corporation, Term Loan B....... Ba2 BB+ 8.00% 06/24/15 613,967
-------------
1,467,645
-------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 4.3%
2,995,000 Fifth Third Processing Solutions, LLC, Term
Loan B...................................... Ba3 BB- 4.50% 11/03/16 3,002,487
4,898,611 First American Payment Systems, L.P., Term
Loan B...................................... B1 B+ 6.75% 11/01/16 4,935,351
938,593 First Data Corp., Term Loan B2................. B1 B+ 2.94% 09/24/14 876,998
5,631,559 First Data Corp., Term Loan B3................. B1 B+ 2.94% 09/24/14 5,264,922
1,000,000 Moneygram International, Term Loan B........... Ba1 BB- 4.50% 11/18/17 1,004,375
1,000,000 WorldPay U.S., Inc., Facility B2A (USD)........ Ba2 BB 6.25% 11/30/17 1,001,875
-------------
16,086,008
-------------
PACKAGED FOODS & MEATS - 2.1%
3,875,273 Dean Foods Co., Term Loan B.................... Ba3 BB- 3.56% 04/02/16 3,819,566
2,000,000 Del Monte Foods Company, Term Loan B........... Ba3 B+ 4.50% 03/08/18 1,999,362
1,000,000 Farley and Sathers Candy Co., Inc., Term Loan B B1 B+ 6.50% 03/30/18 1,005,000
1,000,000 JBS USA, LLC, Term Loan B...................... Ba3 BB 4.25% 05/25/18 999,375
-------------
7,823,303
-------------
Page 10 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
PAPER PACKAGING - 4.0%
$ 2,039,594 Graham Packaging Holdings Co., Term Loan C..... B1 B+ 6.75% 04/05/14 $ 2,044,681
2,000,000 RanPak Corp., Term Loan B...................... NR (f) NR (f) 4.75% 04/20/17 1,990,000
9,000,000 Reynolds Consumer Products Holdings, Inc.,
Term Loan E................................. Ba3 BB 4.25% 02/09/18 8,994,375
2,000,000 Rock-Tenn Co., Term Loan B..................... Baa3 BBB 3.50% 05/27/18 2,005,750
-------------
15,034,806
-------------
PHARMACEUTICALS - 3.3%
1,975,000 Amneal Pharmaceuticals, LLC, Term Loan B....... NR NR 6.25% 12/16/15 1,965,125
2,822,518 Catalent Pharma Solutions, Inc., Dollar Term
Loan........................................ Ba3 BB- 2.44% 04/10/14 2,744,193
2,499,419 IMS Health, Term Loan B........................ Ba3 BB 4.50% 08/26/17 2,504,105
1,698,313 Mylan, Inc., Term Loan B....................... Baa3 BBB 3.56% 10/02/14 1,703,729
1,600,000 Warner Chilcott, PLC, Term Loan B1............. Ba3 BBB- 4.25% 03/15/18 1,602,991
800,000 Warner Chilcott, PLC, Term Loan B2............. Ba3 BBB- 4.25% 03/15/18 801,495
1,100,000 Warner Chilcott, PLC, Term Loan B3............. Ba3 BBB- 4.25% 03/15/18 1,102,056
-------------
12,423,694
-------------
PUBLISHING - 1.4%
2,992,500 Cenveo Corporation, Term Loan.................. Ba3 BB- 6.25% 12/21/16 3,012,699
1,990,000 Getty Images, Inc., Term Loan B................ Ba3 BB- 5.25% 11/09/16 2,001,194
792,542 Yell Group, PLC, Term Loan B1.................. Caa1 B- 3.94% 07/31/14 320,187
-------------
5,334,080
-------------
REAL ESTATE OPERATING COMPANIES - 0.8%
2,992,500 ClubCorp Corp Operations, Inc., Term Loan...... Ba2 BB 6.00% 11/30/16 3,009,333
-------------
REAL ESTATE SERVICES - 2.2%
1,990,000 CB Richard Ellis Services, Inc., Term Loan B... Ba1 BB 3.45% 11/10/16 1,983,781
2,000,000 CB Richard Ellis Services, Inc., Term Loan C... Ba1 BB 1.63% 03/04/18 1,987,500
3,000,000 CB Richard Ellis Services, Inc., Term Loan D... Ba1 BB 1.75% 09/04/19 2,981,250
1,393,829 Realogy Corp., Term Loan, First Lien........... B1 B- 4.52% 10/10/16 1,295,514
-------------
8,248,045
-------------
RESTAURANTS - 2.0%
1,995,000 Burger King Corp., Term Loan B................. Ba3 BB- 4.50% 10/19/16 1,989,286
2,246,250 Dunkin' Brands, Inc., Term Loan B.............. B2 B 4.25% 11/23/17 2,247,654
3,389,764 Focus Brands, Inc., Term Loan B................ B2 B 5.25%-6.25% 11/05/16 3,402,476
-------------
7,639,416
-------------
RETAIL REITS - 1.3%
4,948,672 Capital Automotive L.P., Term Loan B........... Ba3 B+ 5.00% 03/11/17 4,908,464
-------------
SEMICONDUTORS - 1.5%
3,977,392 Freescale Semiconductor, Inc., Extended Term
Loan........................................ B1 B 4.46% 12/01/16 3,960,612
1,622,804 Intersil Corporation, Term Loan................ Ba2 BB+ 4.75% 04/27/16 1,629,904
-------------
5,590,516
-------------
See Notes to Financial Statements Page 11
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (Continued)
SPECIALIZED CONSUMER SERVICES - 9.6%
$ 2,000,000 Acosta, Inc., Term Loan B...................... NR (f) NR (f) 4.75% 03/01/18 $ 2,002,000
5,985,000 Advantage Sales & Marketing, Inc., Term Loan,
First Lien.................................. NR (f) B+ 5.25% 12/17/17 6,002,895
6,509,440 Affinion Group, Inc., Term Loan B.............. Ba3 BB- 5.00% 10/09/16 6,504,557
226,464 ARAMARK Corp., Prefunded Synthetic Letter
of Credit 2................................. Ba3 BB 3.51% 07/26/16 226,110
3,443,529 ARAMARK Corp., Term Loan B..................... Ba3 BB 3.56% 07/26/16 3,438,150
6,000,000 Asurion Corp., Term Loan B..................... NR (f) B+ 5.50% 05/24/18 5,942,466
2,000,000 Asurion Corp., Term Loan, Second Lien.......... NR (f) B- 9.00% 05/24/19 2,017,084
1,960,531 Language Line, LLC, Term Loan B................ Ba3 B+ 6.25% 06/20/16 1,970,334
2,715,625 Nielsen Finance, LLC, Dollar Term Loan B....... Ba2 BB 3.96% 05/02/16 2,715,625
1,473,769 Nielsen Finance, LLC, Dollar Term Loan C....... Ba2 BB 3.46% 05/02/16 1,469,558
1,529,285 Protection One, Inc., Term Loan................ Ba3 BB 6.00% 06/04/16 1,531,835
2,000,000 Symphony IRI Group, Inc., Term Loan B-2........ B1 B+ 5.00% 12/01/17 2,000,000
-------------
35,820,614
-------------
SPECIALTY CHEMICALS - 4.0%
1,774,468 Arizona Chemical, Inc., Term Loan B............ B1 B+ 4.75% 11/19/16 1,781,122
1,991,424 Houghton International, Inc., Term Loan B...... B1 B 6.75% 01/31/16 2,002,626
1,972,881 Nusil Technology, LLC, Term Loan, First Lien... NR (f) NR (f) 5.25% 04/07/17 1,980,280
1,492,500 Omnova Solutions, Inc., Term Loan B............ Ba2 B+ 5.75% 05/31/17 1,504,627
2,000,000 Rockwood Specialties Goup, Inc., Term Loan B... Ba1 BBB- 3.75% 02/09/18 2,012,858
3,485,294 Solutia, Inc., Term Loan....................... Ba1 BB+ 3.50% 08/01/17 3,491,519
1,995,000 Styron Corp., Term Loan B...................... B1 B+ 6.00% 08/02/17 2,005,687
-------------
14,778,719
-------------
SPECIALTY STORES - 2.5%
2,000,000 Jo-Ann Stores, Inc., Term Loan B............... B1 B+ 4.75% 03/16/18 1,978,500
3,491,250 NBTY, Inc., Term Loan B........................ Ba3 BB- 4.25% 10/01/17 3,489,047
3,960,000 Petco Animal Supplies, Inc., Term Loan......... B1 B 4.50% 11/24/17 3,956,464
-------------
9,424,011
-------------
SYSTEMS SOFTWARE - 2.6%
1,021,024 Open Solutions, Inc., Term Loan, First Lien.... B1 BB- 2.39% 01/23/14 890,333
500,000 SunGard Data Systems, Inc., Incremental Term
Loan........................................ Ba3 BB 3.71% 02/28/14 501,250
4,260,021 SunGard Data Systems, Inc., Term Loan B........ Ba3 BB 3.86%-3.89% 02/28/16 4,256,473
3,990,000 Vertafore, Inc., Term Loan, First Lien......... B1 B+ 5.25% 07/29/16 4,004,962
-------------
9,653,018
-------------
TRUCKING - 2.5%
4,000,000 Hertz Corp., Term Loan B....................... Ba1 BB 3.75% 03/11/18 3,999,976
3,000,000 Sirva Worldwide, Inc., Term Loan B............. NR (f) NR (f) 10.75% 03/31/16 2,917,500
2,358,385 Swift Transportation Co., Inc., Term Loan B.... B1 BB- 6.00% 12/21/16 2,370,149
-------------
9,287,625
-------------
WIRELESS TELECOMMUNICATION SERVICES - 2.0%
3,495,000 MetroPCS Wireless, Inc., Term Loan B........... Ba1 BB 4.00% 03/18/18 3,478,982
2,992,500 Syniverse Technologies, Inc., Term Loan B...... B1 BB- 5.25% 12/22/17 3,007,463
1,000,000 TowerCo Finance, LLC, Term Loan B.............. Ba3 BB- 5.25% 02/02/17 1,002,188
-------------
7,488,633
-------------
Page 12 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
RATINGS
PRINCIPAL (UNAUDITED) (c) STATED
VALUE DESCRIPTION MOODY'S S&P RATE (d) MATURITY (e) VALUE
------------ ----------------------------------------------- --------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - (CONTINUED)
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS................................................... $ 569,815,671
(Cost $569,651,859) -------------
PRINCIPAL STATED
VALUE DESCRIPTION RATE (d) MATURITY (e) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
NOTES - 0.0%
HOMEBUILDING - 0.0%
$ 727,273 TOUSA, Inc. (Payment-In-Kind Election Note) (h) (i) (j) (k)..... 14.75% 07/01/15 $ 0
-------------
TOTAL NOTES.................................................................................. 0
(Cost $436,364) -------------
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------------------------------------------------- -------------
COMMON STOCKS - 0.6%
DIVERSIFIED CHEMICALS - 0.5%
38,260 LyondellBasell Industries AF S.C.A., Class B................................................. 1,676,170
-------------
OIL & GAS EXPLORATION & PRODUCTION - 0.1%
19,828 SemGroup Corp., Class A (l).................................................................. 504,623
-------------
TOTAL COMMON STOCKS.......................................................................... 2,180,793
(Cost $1,129,017) -------------
WARRANTS - 0.0%
BROADCASTING - 0.0%
1,449 Cumulus Media, Inc. (h) (j).................................................................. 4,073
-------------
TOTAL WARRANTS............................................................................... 4,073
(Cost $0) -------------
PREFERRED STOCKS - 0.0%
HOMEBUILDING - 0.0%
4,273 TOUSA, Inc. (8.0%, Series A Convertible Payment-In-Kind Preferred Stock) (h) (i)(j) (l)...... 0
-------------
TOTAL PREFERRED STOCKS....................................................................... 0
(Cost $2,563,636) -------------
TOTAL INVESTMENTS - 153.0%................................................................... 572,000,537
(Cost $573,780,876) (m) -------------
OUTSTANDING LOAN - (42.8%)................................................................... (160,000,000)
NET OTHER ASSETS AND LIABILITIES - (10.2%)................................................... (38,098,408)
-------------
NET ASSETS - 100.0%.......................................................................... $ 373,902,129
=============
---------------------
(a) All percentages shown in the Portfolio of Investments are based on net
assets.
(b) All or a portion of the securities are available to serve as collateral on
the outstanding loan.
(c) Ratings below Baa3 by Moody's Investors Service, Inc. or BBB- by Standard
& Poor's Ratings Group are considered to be below investment grade.
See Notes to Financial Statements Page 13
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS - (Continued)
MAY 31, 2011
(d) Senior Loans in which the Fund invests pay interest at rates which are
periodically predetermined by reference to a base lending rate plus a
premium. These base lending rates are generally (i) the lending rate
offered by one or more major European banks, such as the London Inter-Bank
Offered Rate ("LIBOR"), (ii) the prime rate offered by one or more United
States banks or (iii) the certificate of deposit rate. Certain Senior
Loans are subject to a LIBOR floor that establishes a minimum base LIBOR
rate.
(e) Senior Loans generally are subject to mandatory and/or optional
prepayment. As a result, the actual remaining maturity of Senior Loans may
be substantially less than the stated maturities shown.
(f) This Senior Loan Interest was privately rated upon issuance. The rating
agency does not provide ongoing surveillance on the rating.
(g) Interest for the period commencing on November 30, 2009 and ending on
December 31, 2011 shall be payable, at the Borrowers' option, (i) in cash
at a rate per annum equal to 9% ("Cash Interest") or (ii) in
Payment-in-Kind interest at a rate per annum equal to 11%. Commencing on
January 1, 2012, interest shall be payable as Cash Interest.
(h) This security is fair valued in accordance with procedures adopted by the
Fund's Board of Trustees.
(i) This borrower has filed for protection in federal bankruptcy court.
(j) This security is restricted and cannot be offered for public sale without
first being registered under the Securities Act of 1933, as amended. Prior
to registration, restricted securities may only be resold in transactions
exempt from registration (See Note 1 D - Restricted Investments in the
Notes to Financial Statements).
(k) This security is a Senior Subordinated Payment-in-Kind Election Note
whereby 1.00% of interest per annum will be paid in cash and 13.75% of
interest per annum shall be paid by the issuer, at its option (i) entirely
in cash, (ii) entirely in Payment-in-Kind interest or (iii) in a
combination thereof. Interest is to be paid semi-annually; however, the
issuer is in default and income is not being accrued.
(l) Non-income producing security.
(m) Aggregate cost for federal income tax purposes is $573,989,886. As of May
31, 2011, the aggregate gross unrealized appreciation for all investments
in which there was an excess of value over tax cost was $4,153,529 and the
aggregate gross unrealized depreciation for all investments in which there
was an excess of tax cost over value was $6,142,878.
NR Not Rated
Page 14 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
PORTFOLIO OF INVESTMENTS (a) (b) - (Continued)
MAY 31, 2011
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2011
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT
VALUE AT QUOTED LEVEL 2 SIGNIFICANT UNOBSERVABLE
5/31/2011 PRICES OBSERVABLE INPUTS INPUTS
------------ ---------- ------------------- ------------
Senior Floating-Rate Loan Interests:
Application Software $ 15,447,618 $ -- $ 13,452,618 $ 1,995,000
Asset Management & Custody Banks 22,334,925 -- 17,316,166 5,018,759
Electric Utilities 20,251,942 -- 15,344,641 4,907,301
Health Care Services 19,203,882 -- 16,372,716 2,831,166
Homebuilding 923,678 -- -- 923,678
Internet Software & Services 2,910,000 -- -- 2,910,000
Leisure Products 5,039,751 -- 4,201,755 837,996
Movies & Entertainment 7,574,711 -- 6,137,740 1,436,971
Office Services & Supplies 1,765,139 -- -- 1,765,139
Other Diversified Financial Services 16,086,008 -- 11,150,657 4,935,351
Paper Packaging 15,034,806 -- 13,044,806 1,990,000
Pharmaceuticals 12,423,694 -- 10,458,569 1,965,125
Trucking 9,287,625 -- 6,370,125 2,917,500
Other Industry Categories* 421,531,892 -- 421,531,892 --
------------ ---------- ------------ ------------
Total Senior Floating-Rate Loan Interests 569,815,671 -- 535,381,685 34,433,986
Common Stocks* 2,180,793 2,180,793 -- --
Warrants* 4,073 -- 4,073 --
------------ ---------- ------------ ------------
Total Investments $572,000,537 $2,180,793 $535,385,758 $ 34,433,986
============ ========== ============ ============
* See the Portfolio of Investments for the industry breakout. Industry
categories are only shown separately if they include holdings in two or more
levels or have holdings in only Level 3.
All transfers in and out of Level 3 during the period are assumed to be
transferred on the last day of the period at their current value. The following
table presents the Fund's investments measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) for the period presented:
CHANGE IN
INVESTMENTS AT FAIR VALUE TRANSFERS NET UNREALIZED NET
USING SIGNIFICANT UNOBSERVABLE BALANCE AS OF IN (OUT) NET REALIZED APPRECIATION PURCHASES BALANCE AS OF
INPUTS (LEVEL 3) MAY 31, 2010 OF LEVEL 3 GAINS (LOSSES) (DEPRECIATION) (SALES) MAY 31, 2011
------------------------------ ------------- ---------- -------------- -------------- --------- -------------
Senior Floating-Rate
Loan Interests $17,428,350 $(2,992,694) $1,972 $883,185 $19,113,173 $34,433,986
Net change in unrealized appreciation/depreciation from Level 3 investments held
as of May 31, 2011 was $353,334 and is included in "Net change in unrealized
appreciation (depreciation) on investments" on the Statement of Operations.
See Notes to Financial Statements Page 15
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2011
ASSETS:
Investments, at value
(Cost $573,780,876)......................................................................... $572,000,537
Cash........................................................................................... 4,649,541
Prepaid expenses............................................................................... 588,346
Receivables:
Investment securities sold.................................................................. 9,317,712
Interest.................................................................................... 2,478,785
------------
Total Assets............................................................................. 589,034,921
------------
LIABILITIES:
Outstanding loan............................................................................... 160,000,000
Payables:
Investment securities purchased............................................................. 54,461,145
Investment advisory fees.................................................................... 339,470
Interest and fees on loan................................................................... 135,541
Audit and tax fees.......................................................................... 73,389
Administrative fees......................................................................... 31,621
Printing fees............................................................................... 26,889
Legal fees.................................................................................. 21,884
Custodian fees.............................................................................. 19,698
Trustees' fees and expenses................................................................. 9,766
Transfer agent fees......................................................................... 3,734
Other liabilities.............................................................................. 9,655
------------
Total Liabilities........................................................................ 215,132,792
------------
NET ASSETS..................................................................................... $373,902,129
============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $480,876,196
Par value...................................................................................... 253,352
Accumulated net investment income (loss)....................................................... 1,018,448
Accumulated net realized gain (loss) on investments............................................ (106,465,528)
Net unrealized appreciation (depreciation) on investments...................................... (1,780,339)
------------
NET ASSETS..................................................................................... $373,902,129
============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 14.76
============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 25,335,277
============
Page 16 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2011
INVESTMENT INCOME:
Interest....................................................................................... $ 24,275,595
Dividends (net of foreign withholding tax of $574)............................................. 3,252
Other.......................................................................................... 1,476,102
------------
Total investment income..................................................................... 25,754,949
------------
EXPENSES:
Investment advisory fees....................................................................... 3,880,280
Interest and fees on loan...................................................................... 2,423,752
Administrative fees............................................................................ 356,522
Legal fees..................................................................................... 101,646
Printing fees.................................................................................. 96,771
Custodian fees................................................................................. 78,163
Audit and tax fees............................................................................. 60,971
Trustees' fees and expenses.................................................................... 39,590
Transfer agent fees............................................................................ 25,478
Other.......................................................................................... 138,551
------------
Total expenses.............................................................................. 7,201,724
------------
NET INVESTMENT INCOME (LOSS)................................................................... 18,553,225
------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... 596,325
Net change in unrealized appreciation (depreciation) on investments......................... 18,626,513
------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ 19,222,838
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 37,776,063
============
See Notes to Financial Statements Page 17
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
STATEMENTS OF CHANGES IN NET ASSETS
YEAR YEAR
ENDED ENDED
5/31/2011 5/31/2010
------------ ------------
OPERATIONS:
Net investment income (loss)....................................................... $ 18,553,225 $ 11,942,860
Net realized gain (loss)........................................................... 596,325 (26,152,489)
Net change in unrealized appreciation (depreciation)............................... 18,626,513 80,382,463
------------ ------------
Net increase (decrease) in net assets resulting from operations.................... 37,776,063 65,757,625
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.............................................................. (17,618,839) (10,749,074)
Net realized gain.................................................................. -- --
Return of capital.................................................................. -- --
------------ ------------
Total distributions to shareholders................................................ (17,618,839) (10,749,074)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from Common Shares reinvested............................................. 639,102 --
------------ ------------
Net increase (decrease) in net assets resulting from capital transactions.......... 639,102 --
------------ ------------
Total increase (decrease) in net assets............................................ 20,796,326 55,008,551
NET ASSETS:
Beginning of period................................................................ 353,105,803 298,097,252
------------ ------------
End of period...................................................................... $373,902,129 $353,105,803
============ ============
Accumulated net investment income (loss) at end of period.......................... $ 1,018,448 $ (152,524)
============ ============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at beginning of period............................................... 25,291,939 25,291,939
Common Shares issued as reinvestment under the Dividend Reinvestment Plan.......... 43,338 --
------------ ------------
Common Shares at end of period..................................................... 25,335,277 25,291,939
============ ============
Page 18 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations.................... $ 37,776,063
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments..................................................... (511,794,168)
Sales, maturities and paydowns of investments................................ 499,869,412
Net amortization/accretion of premiums/discounts on investments.............. (2,767,993)
Net realized gain/loss on investments........................................ (596,325)
Net change in unrealized appreciation/depreciation on investments............ (18,626,513)
CHANGES IN ASSETS AND LIABILITIES:
Increase in interest receivable.............................................. (658,501)
Increase in prepaid expenses................................................. (189,440)
Decrease in interest and fees on loan payable................................ (54,831)
Increase in investment advisory fees payable................................. 20,741
Increase in audit and tax fees payable....................................... 5,189
Decrease in legal fees payable............................................... (25,043)
Decrease in printing fees payable............................................ (5,107)
Increase in administrative fees payable.............. ........................ 4,288
Increase in custodian fees payable........................................... 6,576
Increase in transfer agent fees payable...................................... 1,411
Increase in Trustees' fees and expenses payable.............................. 13
Increase in other liabilities................................................ 3,836
------------
CASH PROVIDED BY OPERATING ACTIVITIES.............................................. $ 2,969,608
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Common Shares reinvested....................................... 639,102
Distributions to Common Shareholders ........................................ (17,618,839)
Proceeds from borrowings..................................................... 67,500,000
Repayment of borrowings...................................................... (61,000,000)
------------
CASH USED IN FINANCING ACTIVITIES.................................................. (10,479,737)
------------
Decrease in cash................................................................... (7,510,129)
Cash at beginning of period........................................................ 12,159,670
------------
CASH AT END OF PERIOD.............................................................. $ 4,649,541
============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees.................................. $ 2,659,661
============
See Notes to Financial Statements Page 19
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
5/31/2011 (a) 5/31/2010 5/31/2009 5/31/2008 5/31/2007
------------- --------- --------- --------- ---------
Net asset value, beginning of period ................. $ 13.96 $ 11.79 $ 16.42 $ 18.91 $ 19.00
--------- --------- --------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ......................... 0.73 0.47 0.87 1.45 1.66
Net realized and unrealized gain (loss) .............. 0.77 2.15 (4.63) (2.37) (0.04)
Distributions paid to AMP (b) Shareholders from:
Net investment income ........................... -- (0.02) (0.09) (0.20) (0.21)
--------- --------- --------- --------- ---------
Total from investment operations ..................... 1.50 2.60 (3.85) (1.12) 1.41
--------- --------- --------- --------- ---------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income ................................ (0.70) (0.43) (0.78) (1.37) (1.50)
Net realized gain..................................... -- -- -- -- --
Return of capital..................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Total distributions to Common Shareholders............ (0.70) (0.43) (0.78) (1.37) (1.50)
--------- --------- --------- --------- ---------
Net asset value, end of period ....................... $ 14.76 $ 13.96 $ 11.79 $ 16.42 $ 18.91
========= ========= ========= ========= =========
Market value, end of period .......................... $ 14.82 $ 12.65 $ 10.04 $ 14.76 $ 18.81
========= ========= ========= ========= =========
Total return based on net asset value (c)............. 11.19% 22.99% (22.07)% (5.19)% 8.04%
========= ========= ========= ========= =========
Total return based on market value (c)................ 23.20% 30.76% (26.11)% (14.32)% 15.95%
========= ========= ========= ========= =========
-----------------------
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON SHARES:
Ratio of total expenses to average net assets ........ 1.98% 2.42% 3.40% 3.63% 3.55%
Ratio of total expenses to average net assets
excluding interest expense ........................ 1.31% 1.39% 1.62% 1.54% 1.45%
Ratio of net investment income (loss) to average
net assets 5.09% 3.49% 7.34% 8.52% 8.80%
Ratio of net investment income (loss) to average
net assets net of AMP Shares dividends (d)......... N/A 3.37% 6.60% 7.34% 7.70%
SUPPLEMENTAL DATA:
Portfolio turnover rate .............................. 95% 52% 15% 31% 78%
Net assets, end of period (in 000's).................. $ 373,902 $ 353,106 $ 298,097 $ 415,187 $ 478,169
Ratio of total expenses to total average Managed
Assets (e)......................................... 1.39% 1.77% 2.02% 2.22% 2.26%
Ratio of total expenses to total average Managed
Assets excluding interest expense (e).............. 0.92% 1.01% 0.96% 0.94% 0.92%
PREFERRED SHARES AND LOAN OUTSTANDING
Total AMP Shares outstanding (f)...................... N/A N/A 3,200 4,000 4,000
Liquidation and market value per AMP share (g)........ N/A N/A $ 25,018 $ 25,039 $ 25,045
Asset coverage per share.............................. N/A N/A $ 118,155 (h) $ 128,797 (h) $ 179,792 (i)
Total loan outstanding (in 000's) .................... $ 160,000 $ 153,500 $ 57,050 $ 175,000 $ 141,000
Asset coverage per $1,000 of loan outstanding (j)..... $ 3,337 $ 3,300 $ 7,627 $ 3,944 $ 5,100
-----------------------
(a) From inception to October 12, 2010, Four Corners Capital Management, LLC
served as the Fund's sub-advisor. Effective October 12, 2010, the
Leveraged Finance Investment Team of First Trust Advisors L.P. assumed the
day-to-day responsibility for management of the Fund's portfolio. (See
Note 3 in the Notes to Financial Statements).
(b) Auction Market Preferred ("AMP") Shares.
(c) Total return is based on the combination of reinvested dividend, capital
gain and return of capital distributions, if any, at prices obtained by
the Dividend Reinvestment Plan and changes in net asset value per share
for net asset value returns and changes in Common Share price for market
value returns. Total returns do not reflect sales load and are not
annualized for periods less than one year. Past performance is not
indicative of future results.
(d) Ratio reflects the effect of distributions to AMP Shareholders.
(e) Managed Assets are calculated by taking the Fund's average daily total
asset value (which includes assets attributable to the Fund's AMP Shares,
if AMP Shares are outstanding, and the principal amount of borrowings),
minus the sum of the Fund's accrued and unpaid dividends on any
outstanding AMP Shares, if AMP Shares are outstanding, and liabilities,
other than the principal amount of borrowings.
(f) As of November 18, 2009, the Fund no longer has any Series A or Series B
AMP Shares outstanding.
(g) Includes accumulated and unpaid distributions to AMP Shareholders.
(h) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value), and dividing
by the number of AMP Shares outstanding. If this methodology had been used
historically, fiscal year 2007 would have been $144,542.
(i) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value and the loan
outstanding) and dividing by the number of AMP Shares outstanding.
(j) Calculated by taking the Fund's total assets less the Fund's total
liabilities (not including the AMP Shares liquidation value and the loan
outstanding) and dividing by the outstanding loan balance in 000's.
N/A Not applicable.
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
1. FUND DESCRIPTION
First Trust Senior Floating Rate Income Fund II (formerly known as First
Trust/Four Corners Senior Floating Rate Income Fund II) (the "Fund") is a
diversified, closed-end management investment company organized as a
Massachusetts business trust on March 25, 2004, and is registered with the
Securities and Exchange Commission ("SEC") under the Investment Company Act of
1940, as amended (the "1940 Act"). The Fund trades under the ticker symbol FCT
on the New York Stock Exchange ("NYSE").
The Fund's primary investment objective is to seek a high level of current
income. As a secondary objective, the Fund attempts to preserve capital. The
Fund pursues these objectives by investing in a portfolio of senior secured
floating-rate corporate loans ("Senior Loans")1. There can be no assurance that
the Fund will achieve its investment objectives. Investing in Senior Loans
involves credit risk and, during periods of generally declining credit quality,
it may be particularly difficult for the Fund to achieve its secondary
investment objective. The Fund may not be appropriate for all investors.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures in
the financial statements. Actual results could differ from those estimates.
A. PORTFOLIO VALUATION:
The net asset value ("NAV") of the Common Shares of the Fund is determined daily
as of the close of regular trading on the NYSE, normally 4:00 p.m. Eastern time,
on each day the NYSE is open for trading. If the NYSE closes early on a
valuation day, the NAV is determined as of that time. Domestic debt securities
and foreign securities are priced using data reflecting the earlier closing of
the principal markets for those securities. The NAV per Common Share is
calculated by dividing the value of all assets of the Fund (including accrued
interest and dividends), less all liabilities (including accrued expenses,
dividends declared but unpaid and any borrowings of the Fund), by the total
number of Common Shares outstanding.
The Fund's investments are valued daily in accordance with valuation procedures
adopted by the Fund's Board of Trustees, and in accordance with provisions of
the 1940 Act. The Senior Loans in which the Fund invests are not listed on any
securities exchange or board of trade. Senior Loans are typically bought and
sold by institutional investors in individually negotiated private transactions
that function in many respects like an over-the-counter secondary market,
although typically no formal market-makers exist. This market, while having
grown substantially since its inception, generally has fewer trades and less
liquidity than the secondary market for other types of securities. Some Senior
Loans have few or no trades, or trade infrequently, and information regarding a
specific Senior Loan may not be widely available or may be incomplete.
Accordingly, determinations of the fair value of Senior Loans may be based on
infrequent and dated information. Because there is less reliable, objective data
available, elements of judgment may play a greater role in valuation of Senior
Loans than for other types of securities. Typically, Senior Loans are valued
using information provided by a third party pricing service. The third party
pricing service primarily uses broker quotes to value the Senior Loans.
Common stocks and other securities listed on any national or foreign exchange
(excluding the NASDAQ National Market ("NASDAQ") and the London Stock Exchange
Alternative Investment Market ("AIM") are valued at the last sale price on the
exchange on which they are principally traded. If there are no transactions on
the valuation day, the securities are valued at the mean between the most recent
bid and asked prices. Securities listed on the NASDAQ or the AIM are valued at
the official closing price. If there is no official closing price on the
valuation day, the securities are valued at the mean between the most recent bid
and asked prices. Securities traded in the over-the-counter market are valued at
their closing bid prices.
Debt securities having a remaining maturity of sixty days or less when purchased
are valued at cost adjusted for amortization of premiums and accretion of
discounts.
In the event that market quotations are not readily available, the pricing
service does not provide a valuation, or the valuations received are deemed
unreliable, the Fund's Board of Trustees has designated First Trust Advisors
L.P. ("First Trust") to use a fair value method to value the Fund's securities.
Additionally, if events occur after the close of the principal markets for
certain securities (e.g., domestic debt securities and foreign securities) that
could materially affect the Fund's NAV, First Trust may use a fair value method
to value the Fund's securities. The use of fair value pricing is governed by
valuation procedures adopted by the Fund's Board of Trustees, and in accordance
with the provisions of the 1940 Act. As a general principle, the fair value of a
security is the amount which the Fund might reasonably expect to receive for the
security upon its current sale. However, in light of the judgment involved in
fair valuations, there can be no assurance that a fair value assigned to a
particular security will be the amount which the Fund might be able to receive
upon its current sale. Fair valuation of a security is based on the
consideration of all available information, including, but not limited to, the
following:
1 The terms "security" and "securities" used throughout the Notes to
Financial Statements includes Senior Loans.
Page 21
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NOTES TO FINANCIAL STATEMENTS - (Continued)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
1) the fundamental business data relating to the issuer;
2) an evaluation of the forces which influence the market in which these
securities are purchased and sold;
3) the type, size and cost of the security;
4) the financial statements of the issuer;
5) the credit quality and cash flow of the issuer, based on the Advisor's or
external analysis;
6) the information as to any transactions in or offers for the security;
7) the price and extent of public trading in similar securities (or equity
securities) of the issuer/borrower, or comparable companies;
8) the coupon payments;
9) the quality, value and salability of collateral, if any, securing the
security;
10) the business prospects of the issuer, including any ability to obtain
money or resources from a parent or affiliate and an assessment of the
issuer's management;
11) the prospects for the issuer's industry, and multiples (of earnings and/or
cash flows) being paid for similar businesses in that industry; and
12) other relevant factors.
The Fund is subject to fair value accounting standards that define fair value,
establish the framework for measuring fair value and provide a three-level
hierarchy for fair valuation based upon the inputs to the valuation as of the
measurement date. The three levels of the fair value hierarchy are as follows:
o Level 1 - Level 1 inputs are quoted prices in active markets for
identical securities. An active market is a market in which
transactions for the security occur with sufficient frequency and
volume to provide pricing information on an ongoing basis.
o Level 2 - Level 2 inputs are observable inputs, either directly or
indirectly, and include the following:
o Quoted prices for similar securities in active markets.
o Quoted prices for identical or similar securities in markets
that are non-active. A non-active market is a market where
there are few transactions for the security, the prices are
not current, or price quotations vary substantially either
over time or among market makers, or in which little
information is released publicly.
o Inputs other than quoted prices that are observable for the
security (for example, interest rates and yield curves
observable at commonly quoted intervals, volatilities,
prepayment speeds, loss severities, credit risks, and default
rates).
o Inputs that are derived principally from or corroborated by
observable market data by correlation or other means.
o Level 3 - Level 3 inputs are unobservable inputs. Unobservable
inputs may reflect the reporting entity's own assumptions about the
assumptions that market participants would use in pricing the
security.
The inputs or methodology used for valuing portfolio investments are not
necessarily an indication of the risks associated with investing in those
investments. A summary of the inputs used to value the Fund's portfolio
investments as of May 31, 2011 is included with the Fund's Portfolio of
Investments.
B. SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are recorded as of the trade date. Realized gains and
losses from securities transactions are recorded on the identified cost basis.
Interest income is recorded on the accrual basis. Market premiums and discounts
are amortized over the expected life of each respective borrowing.
Securities purchased or sold on a when-issued, delayed-delivery or forward
purchase commitment basis may have extended settlement periods. The value of the
security so purchased is subject to market fluctuations during this period. Due
to the nature of the Senior Loan market, the actual settlement date may not be
certain at the time of the purchase or sale for some of the Senior Loans.
Interest income on such Senior Loans is not accrued until settlement date. The
Fund maintains liquid assets with a current value at least equal to the amount
of its when-issued or delayed-delivery or forward purchase commitments.
C. UNFUNDED LOAN COMMITMENTS:
The Fund may enter into certain credit agreements, all or a portion of which may
be unfunded. The Fund is obligated to fund these loan commitments at the
borrower's discretion. The Fund had unfunded delayed draw loan commitments of
$5,736,114 as of May 31, 2011.
D. RESTRICTED SECURITIES:
The Fund invests in restricted securities, which are securities that may not be
offered for public sale without first being registered under the Securities Act
of 1933, as amended (the "1933 Act"). Prior to registration, restricted
securities may only be resold in transactions exempt from registration under
Rule 144A under the 1933 Act, normally to qualified institutional buyers. As of
May 31, 2011, the Fund held restricted securities as shown in the following
table. The Fund does not have the right to demand that such securities be
Page 22
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NOTES TO FINANCIAL STATEMENTS - (Continued)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
registered. These securities are valued according to the valuation procedures as
stated in the Portfolio Valuation footnote (Note 2A) and are not expressed as a
discount to the carrying value of a comparable unrestricted investment. There
are no unrestricted investments with the same maturity dates and yields for
these issuers.
% OF
NET ASSETS
APPLICABLE
ACQUISITION PRINCIPAL VALUE CURRENT TO COMMON
SECURITY DATE VALUE/SHARES PER SHARE CARRYING COST VALUE SHARES
-----------------------------------------------------------------------------------------------------------
Cumulus Media, Inc. - Warrants 6/29/09 1,449 $ 2.81 $ -- $ 4,073 0.00% *
TOUSA, Inc. - Notes 7/31/07(1) $ 727,273 -- 436,364 -- 0.00
TOUSA, Inc. - Preferred Stocks 7/31/07(1) 4,273 -- 2,563,636 -- 0.00
--------------------------------
$ 3,000,000 $ 4,073 0.00% *
================================
* Amount is less than 0.01%.
(1) Security was acquired through a restructuring that was effective on July
31, 2007.
E. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
The Fund will distribute to holders of its Common Shares monthly dividends of
all or a portion of its net income after the payment of interest and dividends
in connection with leverage, if any. Distributions of any net long-term capital
gains earned by the Fund are distributed at least annually. Distributions will
automatically be reinvested into additional Common Shares pursuant to the Fund's
Dividend Reinvestment Plan unless cash distributions are elected by the
shareholder.
Distributions from net investment income and realized capital gains are
determined in accordance with income tax regulations, which may differ from
accounting principles generally accepted in the United States of America.
Certain capital accounts in the financial statements are periodically adjusted
for permanent differences in order to reflect their tax character. These
permanent differences are primarily due to the varying treatment of income and
gain/loss on portfolio securities held by the Fund and have no impact on net
assets or net asset value per share. Temporary differences, which arise from
recognizing certain items of income, expense and gain/loss in different periods
for financial statement and tax purposes, will reverse at some time in the
future. Permanent differences incurred during the year ended May 31, 2011,
resulting in book and tax accounting differences, have been reclassified at year
end to reflect an increase in accumulated net investment income (loss) of
$236,586, a decrease in accumulated net realized gain (loss) on investments of
$246,403 and an increase to paid-in capital of $9,817. Net assets were not
affected by these reclassifications.
The tax character of distributions paid during the fiscal years ended May 31,
2011 and 2010 is as follows:
Distributions paid from: 2011 2010
------------- ------------
Ordinary income............. $ 17,618,839 $ 11,164,283
As of May 31, 2011, the components of distributable earnings and net assets on a
tax basis were as follows:
Undistributed ordinary income.................. $ 1,062,013
Undistributed capital gains.................... --
--------------
Total undistributed earnings................... 1,062,013
Accumulated capital and other losses........... (106,300,083)
Net unrealized appreciation (depreciation)..... (1,989,349)
--------------
Total accumulated earnings (losses)............ (107,227,419)
Other.......................................... --
Paid-in capital................................ 481,129,548
--------------
Net assets..................................... $ 373,902,129
==============
F. INCOME TAXES:
The Fund intends to continue to qualify as a regulated investment company by
complying with the requirements under Subchapter M of the Internal Revenue Code
of 1986, as amended, which includes distributing substantially all of its net
investment income and net realized gains to shareholders. Accordingly, no
provision has been made for federal or state income taxes.
Page 23
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NOTES TO FINANCIAL STATEMENTS - (Continued)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
The Fund intends to utilize provisions of the federal income tax laws, which
allow it to carry realized capital losses forward for eight years following the
year of loss and offset such loss against any future realized capital gains. The
Fund is subject to certain limitations under U.S. tax rules on the use of
capital loss carryforwards and net unrealized built-in losses. These limitations
apply when there has been a 50% change in ownership. At May 31, 2011, the Fund
had a capital loss carryforward for federal income tax purposes of $106,124,058,
expiring as follows:
EXPIRATION DATE AMOUNT
May 31, 2014 $ 3,984,460
May 31, 2016 $ 3,611,723
May 31, 2017 $ 25,585,953
May 31, 2018 $ 68,278,827
May 31, 2019 $ 4,663,095
Certain 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 May 31, 2011, the Fund intends to elect to defer net realized losses
incurred between November 1, 2010 and May 31, 2011 of $176,025.
The Fund is subject to accounting standards that establish a minimum threshold
for recognizing, and a system for measuring, the benefits of a tax position
taken or expected to be taken in a tax return. Taxable years ending 2008, 2009,
2010 and 2011 remain open to federal and state audit. As of May 31, 2011,
management has evaluated the application of these standards to the Fund, and has
determined that no provision for income tax is required in the Fund's financial
statements for uncertain tax positions.
On December 22, 2010, President Obama signed into law the Regulated Investment
Company Modernization Act of 2010 effective for tax years beginning after
December 22, 2010. Management is currently evaluating the impact the Act will
have on future financial statements, if any.
G. EXPENSES:
The Fund pays all expenses directly related to its operations.
H. ACCOUNTING PRONOUNCEMENT:
In January 2010, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2010-06 "Improving Disclosures about
Fair Value Measurements." ASU 2010-06 amends FASB Accounting Standards
Codification Topic 820, Fair Value Measurements and Disclosures, to require
additional disclosures regarding fair value measurements. Certain disclosures
required by ASU No. 2010-06 are effective for fiscal years beginning after
December 15, 2010, and for interim periods within those fiscal years. Management
is currently evaluating the impact ASU No. 2010-06 will have on the Fund's
financial statement disclosures, if any. All other disclosures required by ASU
2010-06 were adopted on June 1, 2010 and are reflected in the financial
statements and footnotes.
3. INVESTMENT ADVISORY FEE, AFFILIATED TRANSACTIONS AND OTHER FEE ARRANGEMENTS
First Trust, the investment advisor to the Fund, is a limited partnership with
one limited partner, Grace Partners of DuPage L.P., and one general partner, The
Charger Corporation. First Trust is responsible for the ongoing monitoring of
the Fund's investment portfolio, managing the Fund's business affairs and
providing certain administrative services necessary for the management of the
Fund. For these investment management services, First Trust is entitled to a
monthly fee calculated at an annual rate of 0.75% of the Fund's Managed Assets
(the average daily total asset value of the Fund minus the sum of the Fund's
liabilities other than the principal amount of borrowings). First Trust also
provides fund reporting services to the Fund for a flat annual fee in the amount
of $9,250.
Four Corners Capital Management, LLC ("Four Corners") served as the Fund's
investment sub-advisor and managed the Fund's portfolio subject to First Trust's
supervision until October 12, 2010. Four Corners received an annual portfolio
management fee of 0.38% of Managed Assets that was paid monthly by First Trust
from its investment advisory fee.
James A. Bowen, the President of First Trust, on October 12, 2010, acquired 100%
of the voting stock of The Charger Corporation, the general partner of First
Trust (the "Transaction"). The consummation of the Transaction was deemed to be
an "assignment" (as defined in the 1940 Act) of the Fund's investment management
agreement and investment sub-advisory agreement and resulted in the automatic
termination of the agreements. The Transaction did not impact the day-to-day
operations of the Fund.
The Board of Trustees of the Fund approved an interim investment management
agreement with First Trust which was entered into effective upon the closing of
the Transaction and would be in effect for a maximum period of 150 days absent
shareholder approval. A new investment management agreement with First Trust was
approved by the Board of Trustees of the Fund and was submitted to shareholders
Page 24
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NOTES TO FINANCIAL STATEMENTS - (Continued)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
of the Fund as of the record date (September 30, 2010) for approval to take
effect upon such shareholder approval. An annual shareholder meeting of the Fund
to vote on a proposal to approve the new investment management agreement was
held on December 20, 2010, at which time the new investment management agreement
was approved by the Fund's shareholders. Until December 20, 2010, advisory fees
payable to First Trust were held in escrow. See Submission of Matters to a Vote
of Shareholders, in the Additional Information section of this report, for the
results.
Also, effective October 12, 2010, the Leveraged Finance Investment Team of First
Trust assumed the day-to-day responsibility for management of the Fund's
portfolio. Additionally, effective October 12, 2010, the Fund's name was changed
from First Trust/Four Corners Senior Floating Rate Income Fund II to "First
Trust Senior Floating Rate Income Fund II." The Fund continues to trade under
the same ticker symbol "FCT."
BNY Mellon Investment Servicing (US) Inc. (formerly PNC Global Investment
Servicing (U.S.) Inc.) serves as the Fund's Administrator, Fund Accountant and
Transfer Agent in accordance with certain fee arrangements. PFPC Trust Company,
which was renamed BNY Mellon Investment Servicing Trust Company effective July
1, 2011, serves as the Fund's Custodian in accordance with certain fee
arrangements.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustee") is paid an annual retainer of
$10,000 per trust for the first 14 trusts of the First Trust Fund Complex and an
annual retainer of $7,500 per trust for each subsequent trust in the First Trust
Fund Complex. The annual retainer is allocated equally among each of the trusts.
No additional meeting fees are paid in connection with Board or Committee
meetings.
Additionally, the Lead Independent Trustee is paid $10,000 annually, the
Chairman of the Audit Committee is paid $5,000 annually, and each of the
Chairmen of the Nominating and Governance Committee and the Valuation Committee
is paid $2,500 annually to serve in such capacities, with such compensation paid
by the trusts in the First Trust Fund Complex and divided among those trusts.
Trustees are also reimbursed by the trusts in the First Trust Fund Complex for
travel and out-of-pocket expenses in connection with all meetings. The Lead
Independent Trustee and each Committee Chairman will serve two-year terms before
rotating to serve as Chairman of another committee or as Lead Independent
Trustee. The officers and "Interested" Trustee receive no compensation from the
Fund for serving in such capacities.
4. PURCHASES AND SALES OF INVESTMENTS
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the fiscal year ended May 31, 2011 were $539,574,942 and
$505,103,416, respectively.
5. BORROWINGS
The Fund has entered into a Revolving Credit Facility ("Credit Facility") with
various lenders and Citicorp North America Inc., as agent, to be used as
leverage for the Fund. The Credit Facility has an expiration date of May 9, 2012
and may be renewed annually. The Credit Facility provides for a secured line of
credit for the Fund, where Fund assets are pledged against advances made to the
Fund. Under the requirements of the 1940 Act, the Fund, immediately after any
such borrowings, must have an "asset coverage" of at least 300% (33-1/3% of the
Fund's total assets after borrowings). The total commitment under the Credit
Facility was $160,000,000. Effective May 11, 2011, the total commitment under
the Credit Facility was increased to $170,000,000. For the fiscal year ended May
31, 2011, the average amount outstanding was $153,065,753. The loans under the
Credit Facility funded by CRC Funding, LLC (the "Conduit Lender") bear interest
for each settlement period at a rate per annum based on the commercial paper
rate of the Conduit Lender. The loans under the Credit Facility funded by
Citibank, N.A. (the "Secondary Lender") bear interest for each settlement period
at a per annum rate equal to (i) the Eurodollar rate for the settlement period
plus 0.60% or (ii) the alternate base rate plus 0.60%. For the fiscal year ended
May 31, 2011, the Fund had no loans under the Credit Facility funded by the
Secondary Lender. The high and low annual interest rates for the loans under the
Credit Facility funded by the Conduit Lender during the fiscal year ended May
31, 2011, were 0.46% and 0.18%, respectively, with a weighted average interest
rate of 0.31%. The annual interest rate in effect for such loans at May 31, 2011
was 0.27%. The Fund also pays additional borrowing costs, which includes a
program fee of 0.30% of the amount outstanding and a liquidity fee of 0.30% of
the total commitment under the Credit Facility per year. On May 11, 2011, the
Fund extended the expiration date of the Credit Facility for another year and
paid upfront closing fees of $595,000. Such fees are amortized over a one year
period and are included with the other borrowing costs in "Interest and fees on
loan" on the Statement of Operations.
6. RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some of the risks
that should be considered for the Fund. For additional information about the
risks associated with investing in the Fund, please see the Fund's prospectus
and statement of additional information, as well as other Fund regulatory
filings.
INVESTMENT AND MARKET RISK: An investment in the Fund's Common Shares is subject
to investment risk, including the possible loss of the entire principal
invested. An investment in Common Shares represents an indirect investment in
the investments owned by the Fund. The value of these investments, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
Page 25
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NOTES TO FINANCIAL STATEMENTS - (Continued)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011
Common Shares at any point in time may be worth less than the original
investment, even after taking into account the reinvestment of Fund dividends
and distributions. Investment prices can fluctuate for several reasons including
the general condition of the bond market, or when political or economic events
affecting the issuers occur. When the Advisor determines that it is temporarily
unable to follow the Fund's investment strategy or that it is impractical to do
so (such as when a market disruption event has occurred and trading in the
investments is extremely limited or absent), the Fund may take temporary
defensive positions.
HIGH-YIELD SECURITIES RISK: The Senior Loans in which the Fund invests are
generally rated below investment grade by one or more rating agencies and are
considered to be "high-yield" securities. High-yield securities should be
considered speculative as their low ratings indicate a quality of less than
investment grade, and therefore carry an increased risk of default as compared
to investment grade issues. Because high-yield securities are generally
subordinated obligations and are perceived by investors to be riskier than
higher rated securities, their prices tend to fluctuate more than higher rated
securities and are affected by short-term credit developments to a greater
degree.
High-yield securities are subject to greater market fluctuations and risk of
loss than securities with higher investment ratings. A reduction in an issuer's
creditworthiness may result in the bankruptcy of an issuer or the default by an
issuer on the interest and principal payments. The market for high-yield
securities is smaller and less liquid than that for investment grade securities.
LEVERAGE RISK: The use of leverage results in additional risks and can magnify
the effect of any losses. If the income and gains from the securities and
investments purchased with such proceeds do not cover the cost of leverage, the
Common Shares' return will be less than if leverage had not been used. The Fund
borrowed pursuant to a leverage borrowing program, which constitutes a
substantial lien and burden by reason of their prior claim against the income of
the Fund and against the net assets of the Fund in liquidation. The rights of
lenders to receive payments of interest on and repayments of principal on any
borrowings made by the Fund under a leverage borrowing program are senior to the
rights of holders of Common Shares, with respect to the payment of dividends or
upon liquidation. If the Fund is not in compliance with certain Credit Facility
provisions, the Fund may not be permitted to declare dividends or other
distributions, including dividends and distributions with respect to Common
Shares or purchase Common Shares. The use of leverage by the Fund increases the
likelihood of greater volatility of NAV and market price of the Common Shares.
Leverage also increases the risk that fluctuations in interest rates on
borrowings and short-term debt that the Fund may pay will reduce the return to
the Common Shareholders or will result in fluctuations in the dividends paid on
the Common Shares.
SENIOR LOAN RISK: In the event a borrower fails to pay scheduled interest or
principal payments on a Senior Loan held by the Fund, the Fund will experience a
reduction in its income and a decline in the value of the Senior Loan, which
will likely reduce dividends and lead to a decline in the net asset value of the
Fund's Common Shares. If the Fund acquires a Senior Loan from another lender,
for example, by acquiring a participation, the Fund may also be subject to
credit risks with respect to that lender. Although Senior Loans may be secured
by specific collateral, the value of the collateral may not equal the Fund's
investment when the Senior Loan is acquired or may decline below the principal
amount of the Senior Loan subsequent to the Fund's investment. Also, to the
extent that collateral consists of stock of the borrower or its subsidiaries or
affiliates, the Fund bears the risk that the stock may decline in value, be
relatively illiquid, and/or may lose all or substantially all of its value,
causing the Senior Loan to be under collateralized. Therefore, the liquidation
of the collateral underlying a Senior Loan may not satisfy the issuer's
obligation to the Fund in the event of non-payment of scheduled interest or
principal, and the collateral may not be readily liquidated.
7. INDEMNIFICATION
The Fund has a variety of indemnification obligations under contracts with its
service providers. The Fund's maximum exposure under these arrangements is
unknown. However, the Fund has not had prior claims or losses pursuant to these
contracts and expects the risk of loss to be remote.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events on the Fund through
the date the financial statements were issued, and has determined that there was
the following subsequent event:
On June 20, 2011, the Fund declared a dividend of $0.0700 per share to Common
Shareholders of record on July 6, 2011, payable July 15, 2011.
Page 26
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF FIRST TRUST SENIOR FLOATING RATE
INCOME FUND II:
We have audited the accompanying statement of assets and liabilities of First
Trust Senior Floating Rate Income Fund II ("the Fund") (formerly known as First
Trust/Four Corners Senior Floating Rate Income Fund II), including the portfolio
of investments, as of May 31, 2011, and the related statements of operations and
cash flows for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. The Fund
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of May 31, 2011 by correspondence with the Fund's
custodian, agent banks, and brokers; where replies were not received, we
performed other auditing procedures. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
First Trust Senior Floating Rate Income Fund II as of May 31, 2011, the results
of its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in then ended, in conformity with
accounting principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
July 25, 2011
Page 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011 (UNAUDITED)
DIVIDEND REINVESTMENT PLAN
If your Common Shares are registered directly with the Fund or if you hold your
Common Shares with a brokerage firm that participates in the Fund's Dividend
Reinvestment Plan (the "Plan"), unless you elect, by written notice to the Fund,
to receive cash distributions, all dividends, including any capital gain
distributions, on your Common Shares will be automatically reinvested by BNY
Mellon Investment Servicing (US) Inc. (the "Plan Agent"), in additional Common
Shares under the Plan. If you elect to receive cash distributions, you will
receive all distributions in cash paid by check mailed directly to you by the
Plan Agent, as the dividend paying agent.
If you decide to participate in the Plan, the number of Common Shares you will
receive will be determined as follows:
(1) If Common Shares are trading at or above net asset value ("NAV") at
the time of valuation, the Fund will issue new shares at a price
equal to the greater of (i) NAV per Common Share on that date or
(ii) 95% of the market price on that date.
(2) If Common Shares are trading below NAV at the time of valuation,
the Plan Agent will receive the dividend or distribution in cash and
will purchase Common Shares in the open market, on the NYSE or
elsewhere, for the participants' accounts. It is possible that the
market price for the Common Shares may increase before the Plan
Agent has completed its purchases. Therefore, the average purchase
price per share paid by the Plan Agent may exceed the market price
at the time of valuation, resulting in the purchase of fewer shares
than if the dividend or distribution had been paid in Common Shares
issued by the Fund. The Plan Agent will use all dividends and
distributions received in cash to purchase Common Shares in the open
market within 30 days of the valuation date except where temporary
curtailment or suspension of purchases is necessary to comply with
federal securities laws. Interest will not be paid on any uninvested
cash payments.
You may elect to opt-out of or withdraw from the Plan at any time by giving
written notice to the Plan Agent, or by telephone at (866) 340-1104, in
accordance with such reasonable requirements as the Plan Agent and the Fund may
agree upon. If you withdraw or the Plan is terminated, you will receive a
certificate for each whole share in your account under the Plan, and you will
receive a cash payment for any fraction of a share in your account. If you wish,
the Plan Agent will sell your shares and send you the proceeds, minus brokerage
commissions.
The Plan Agent maintains all Common Shareholders' accounts in the Plan and gives
written confirmation of all transactions in the accounts, including information
you may need for tax records. Common Shares in your account will be held by the
Plan Agent in non-certificated form. The Plan Agent will forward to each
participant any proxy solicitation material and will vote any shares so held
only in accordance with proxies returned to the Fund. Any proxy you receive will
include all Common Shares you have received under the Plan.
There is no brokerage charge for reinvestment of your dividends or distributions
in Common Shares. However, all participants will pay a pro rata share of
brokerage commissions incurred by the Plan Agent when it makes open market
purchases.
Automatically reinvesting dividends and distributions does not mean that you do
not have to pay income taxes due upon receiving dividends and distributions.
Capital gains and income are realized although cash is not received by you.
Consult your financial advisor for more information.
If you hold your Common Shares with a brokerage firm that does not participate
in the Plan, you will not be able to participate in the Plan and any dividend
reinvestment may be effected on different terms than those described above.
The Fund reserves the right to amend or terminate the Plan if in the judgment of
the Board of Trustees the change is warranted. There is no direct service charge
to participants in the Plan; however, the Fund reserves the right to amend the
Plan to include a service charge payable by the participants. Additional
information about the Plan may be obtained by writing BNY Mellon Investment
Servicing (US) Inc., 301 Bellevue Parkway, Wilmington, Delaware 19809.
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND PROCEDURES
A description of the policies and procedures that the Fund uses to determine how
to vote proxies and information on how the Fund voted proxies relating to
portfolio investments during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling (800) 988-5891; (2) on
the Fund's website located at http://www.ftportfolios.com; and (3) on the
Securities and Exchange Commission's ("SEC") website located at
http://www.sec.gov.
Page 28
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION - (Continued)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011 (UNAUDITED)
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the
first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q
are available (1) by calling (800) 988-5891; (2) on the Fund's website located
at http://www.ftportfolios.com; (3) on the SEC's website at http://www.sec.gov;
and (4) for review and copying at the SEC's Public Reference Room ("PRR") in
Washington, DC. Information regarding the operation of the PRR may be obtained
by calling (800) SEC-0330.
NYSE CERTIFICATION INFORMATION
In accordance with Section 303A-12 of the New York Stock Exchange ("NYSE")
Listed Company Manual, the Fund's President has certified to the NYSE that, as
of January 4, 2011, he was not aware of any violation by the Fund of NYSE
corporate governance listing standards. In addition, the Fund's reports to the
SEC on Forms N-CSR, N-CSRS and N-Q contain certifications by the Fund's
principal executive officer and principal financial officer that relate to the
Fund's public disclosure in such reports and are required by Rule 30a-2 under
the 1940 Act.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
The Annual Shareholder Meeting for the Fund was held on December 6, 2010 (the
"meeting"). At the meeting, Trustee James A. Bowen was elected a Class III
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2013. In addition, Trustees Thomas R. Kadlec and Robert F. Keith
(previously elected as "Preferred Trustees" at the 2009 annual meeting of
shareholders of the Fund) were elected as "Common Share Trustees." Thomas R.
Kadlec was elected a Class I Trustee for a one-year term expiring at the Fund's
annual meeting of shareholders in 2011, and Robert F. Keith was elected a Class
III Trustee serving a three-year term expiring at the Fund's annual meeting of
shareholders in 2013. The number of votes cast in favor of Mr. Bowen was
13,360,934 and the number of abstentions was 1,394,726. The number of votes cast
in favor of Mr. Keith was 13,362,646 and the number of abstentions was
1,393,014. The number of votes cast in favor of Mr. Kadlec was 13,364,342 and
the number of abstentions was 1,391,318.
The meeting was continued to December 20, 2010, at which time shareholders
approved a new Investment Management Agreement for the Fund. The number of votes
cast in favor of the New Investment Management Agreement was 10,116,685, the
number of votes against was 763,734, and the number of abstentions was 371,087.
The terms of the New Investment Management Agreement are substantially similar
to the terms of the previous agreements.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended May 31, 2011, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
Page 29
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011 (UNAUDITED)
NUMBER OF
PORTFOLIOS IN THE OTHER
TERM OF OFFICE FIRST TRUST TRUSTEESHIPS OR
AND FUND COMPLEX DIRECTORSHIPS
NAME, ADDRESS, DATE OF BIRTH LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY HELD BY
AND POSITION WITH THE FUND SERVICE(1) DURING PAST 5 YEARS TRUSTEE TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Term Physician; President, Wheaton Orthopedics; 82 None
c/o First Trust Advisors L.P. Co-owner and Co-Director (January 1996
120 E. Liberty Drive, o Since Fund to May 2007), Sports Med Center for Fitness;
Suite 400 Inception Limited Partner, Gundersen Real Estate
Wheaton, IL 60187 Limited Partnership; Member,
D.O.B.: 04/51 Sportsmed LLC
Thomas R. Kadlec, Trustee o Three Year Term President (March 2010 to Present), Senior 82 Director of
c/o First Trust Advisors L.P. Vice President and Chief Financial Officer ADM Investor
120 E. Liberty Drive, o Since Fund (May 2007 to March 2010), Vice President Services, Inc.
Suite 400 Inception and Chief Financial Officer (1990 to May and ADM
Wheaton, IL 60187 2007), ADM Investor Services, Inc. Investor
D.O.B.: 11/57 (Futures Commission Merchant) Services
International
Robert F. Keith, Trustee o Three Year Term President (2003 to Present), Hibs 82 None
c/o First Trust Advisors L.P. Enterprises (Financial and Management
120 E. Liberty Drive, o Since June 2006 Consulting)
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three Year Term President (June 2002 to Present), Covenant 82 Director of
c/o First Trust Advisors L.P. College Covenant
120 E. Liberty Drive, o Since Fund Transport Inc.
Suite 400 Inception
Wheaton, IL 60187
D.O.B.: 03/54
------------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
------------------------------------------------------------------------------------------------------------------------------------
James A. Bowen, Trustee, o Three Year Chief Executive Officer (December 2010 to 82 Trustee of
President, Chairman of the Trustee Term Present), President (until December 2010), Wheaton
Board and CEO(2) and Indefinite First Trust Advisors L.P. and First Trust College
120 E. Liberty Drive, Officer Term Portfolios L.P.; Chairman of the Board of
Suite 400 Directors, BondWave LLC (Software
Wheaton, IL 60187 o Since Fund Development Company/Investment
D.O.B.: 09/55 Inception Advisor) and Stonebridge Advisors LLC
(Investment Advisor)
------------
(1) Currently, Thomas R. Kadlec and Richard E. Ericson, as Class I Trustees,
are serving as trustees until the Fund's 2011 annual meeting of
shareholders. Niel B. Nielson, as Class II Trustee, is serving as trustee
until the Fund's 2012 annual meeting of shareholders. James A. Bowen and
Robert R. Keith, as Class III Trustees, are serving as trustees until the
Fund's 2013 annual meeting of shareholders. Officers of the Fund have an
indefinite term. The term "officer" means the president, vice president,
secretary, treasurer, controller or any other officer who performs a
policy making function.
(2) Mr. Bowen is deemed an "interested person" of the Fund due to his position
of Chief Executive Officer of First Trust Advisors L.P., investment
advisor of the Fund.
Page 30
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS - (Continued)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2011 (UNAUDITED)
NAME, ADDRESS POSITION AND OFFICES TERM OF OFFICE AND PRINCIPAL OCCUPATIONS
AND DATE OF BIRTH WITH FUND LENGTH OF SERVICE DURING PAST 5 YEARS
------------------------------------------------------------------------------------------------------------------------------------
OFFICERS WHO ARE NOT TRUSTEES(3)
------------------------------------------------------------------------------------------------------------------------------------
Mark R. Bradley Treasurer, Chief Financial o Indefinite term Chief Operations Officer (December 2010 to
120 E. Liberty Drive, Officer and Chief Present) and Chief Financial Officer, First
Suite 400 Accounting Officer o Since Fund Inception Trust Advisors L.P. and First Trust
Wheaton, IL 60187 Portfolios L.P.; Chief Financial Officer,
D.O.B.: 11/57 BondWave LLC (Software Development Company/
Investment Advisor) and Stonebridge
Advisors LLC (Investment Advisor)
Erin E. Chapman Assistant Secretary o Indefinite term Assistant General Counsel (October 2007 to
120 E. Liberty Drive, Present), Associate Counsel (March 2006 to
Suite 400 o Since June 2009 October 2007), First Trust Advisors L.P. and
Wheaton, IL 60187 First Trust Portfolios L.P.; Associate
D.O.B.: 08/76 Attorney (November 2003 to March 2006),
Doyle & Bolotin, Ltd.
James M. Dykas Assistant Treasurer o Indefinite term Controller (January 2011 to Present), Senior
120 E. Liberty Drive, Vice President (April 2007 to January 2011),
Suite 400 o Since Fund Inception Vice President (January 2005 to April 2007),
Wheaton, IL 60187 First Trust Advisors L.P. and First Trust
D.O.B.: 01/66 Portfolios L.P.
Christopher R. Fallow Assistant Vice President o Indefinite term Assistant Vice President (August 2006 to
120 E. Liberty Drive, Present), Associate (January 2005 to August
Suite 400 o Since Fund Inception 2006), First Trust Advisors L.P. and First
Wheaton, IL 60187 Trust Portfolios L.P.
D.O.B.: 04/79
W. Scott Jardine Secretary o Indefinite term General Counsel, First Trust Advisors L.P.,
120 E. Liberty Drive, First Trust Portfolios L.P. and BondWave LLC
Suite 400 o Since Fund Inception (Software Development Company/Investment
Wheaton, IL 60187 Advisor); Secretary of Stonebridge Advisors
D.O.B.: 05/60 LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite term Senior Vice President (September 2005 to
120 E. Liberty Drive, Present), First Trust Advisors L.P. and
Suite 400 o Since Fund Inception First Trust Portfolios L.P.
Wheaton, IL 60187
D.O.B: 02/70
Coleen D. Lynch Assistant Vice President o Indefinite term Assistant Vice President (January 2008 to
120 E. Liberty Drive, Present), First Trust Advisors L.P. and
Suite 400 o Since Fund Inception First Trust Portfolios L.P.; Vice President
Wheaton, IL 60187 (May 1998 to January 2008), Van Kampen Asset
DOB: 07/58 Management and Morgan Stanley Investment
Management
Kristi A. Maher Assistant Secretary and o Indefinite term Deputy General Counsel (May 2007 to
120 E. Liberty Drive, Chief Compliance Officer Present), Assistant General Counsel (March
Suite 400 o Assistant Secretary 2004 to May 2007), First Trust Advisors L.P.
Wheaton, IL 60187 since Fund Inception and First Trust Portfolios L.P.
D.O.B.: 12/66
o Chief Compliance
Officer since January
2011
------------
(3) The term "officer" means the president, vice president, secretary,
treasurer, controller or any other officer who performs a policy making
function.
Page 31
--------------------------------------------------------------------------------
PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II
MAY 31, 2011 (UNAUDITED)
PRIVACY POLICY
The open-end and closed-end funds advised by First Trust Advisors L.P. (each a
"Fund") value our relationship with you and consider your privacy an important
priority in maintaining our relationship. We are committed to protecting the
security and confidentiality of your personal information.
SOURCES OF INFORMATION
We may collect nonpublic personal information about you from the following
sources:
o Information we receive from you or your broker-dealer, investment
advisor or financial representative through interviews,
applications, agreements or other forms;
o Information about your transactions with us, our affiliates or
others;
o Information we receive from your inquiries by mail, e-mail or
telephone; and
o Information we collect on our website through the use of "cookies."
For example, we may identify the pages on our website that your
browser requests or visits.
INFORMATION COLLECTED
The type of data we collect may include your name, address, social security
number, age, financial status, assets, income, tax information, retirement and
estate plan information, transaction history, account balance, payment history,
investment objectives, marital status, family relationships and other personal
information.
DISCLOSURE OF INFORMATION
We do not disclose any nonpublic personal information about our customers or
former customers to anyone, except as permitted by law. In addition to using
this information to verify your identity (as required by law), the permitted
uses may also include the disclosure of such information to unaffiliated
companies for the following reasons:
o In order to provide you with products and services and to effect
transactions that you request or authorize, we may disclose your
personal information as described above to unaffiliated financial
service providers and other companies that perform administrative or
other services on our behalf, such as transfer agents, custodians
and trustees, or that assist us in the distribution of investor
materials such as trustees, banks, financial representatives and
printers.
o We may release information we have about you if you direct us to do
so, if we are compelled by law to do so, or in other legally limited
circumstances (for example to protect your account from fraud).
In addition, in order to alert you to our other financial products and services,
we may share your personal information with affiliates of the Fund.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, the Fund restricts access to
your nonpublic personal information to those individuals who need to know that
information to provide products or services to you. We maintain physical,
electronic and procedural safeguards to protect your nonpublic personal
information.
POLICY UPDATES AND INQUIRIES
As required by federal law, we will notify you of our privacy policy annually.
We reserve the right to modify this policy at any time; however if we do change
it, we will tell you promptly. For questions about our policy, or for additional
copies of this notice, please go to www.ftportfolios.com, or contact us at (800)
621-1675 (First Trust Portfolios) or (800) 222-6822 (First Trust Advisors).
Page 32
FIRST TRUST
INVESTMENT ADVISOR
First Trust Advisors L.P.
120 E. Liberty Drive, Suite 400
Wheaton, IL 60187
ADMINISTRATOR,
FUND ACCOUNTANT &
TRANSFER AGENT
BNY Mellon Investment Servicing (US) Inc.
301 Bellevue Parkway
Wilmington, DE 19809
CUSTODIAN
BNY Mellon Investment Servicing Trust Company
(formerly PFPC Trust Company)
8800 Tinicum Boulevard
Philadelphia, PA 19153
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
111 S. Wacker Drive
Chicago, IL 60606
LEGAL COUNSEL
Chapman and Cutler LLP
111 W. Monroe Street
Chicago, IL 60603
[Blank Back Cover]
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report,
has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by
the registrant or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, and
that relates to any element of the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial
officer, principal accounting officer or controller, or persons
performing similar functions, regardless of whether these
individuals are employed by the registrant or a third party, that
relates to one or more of the items set forth in paragraph (b) of
this item's instructions.
(e) Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's Board of
Trustees has determined that Thomas R. Kadlec and Robert F. Keith are qualified
to serve as audit committee financial experts serving on its audit committee and
that each of them is "independent," as defined by Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) AUDIT FEES (REGISTRANT) -- The aggregate fees billed for each of the
last two fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's annual
financial statements or services that are normally provided by the
accountant in connection with statutory and regulatory filings or
engagements were $63,500 for 2010 and $55,000 for 2011.
(b) AUDIT-RELATED FEES (REGISTRANT) -- The aggregate fees billed in each
of the last two fiscal years, for assurance and related services by
the principal accountant that are reasonably related to the
performance of the audit of the registrant's financial statements
and are not reported under paragraph (a) of this Item were $0 for
2010 and $0 for 2011.
AUDIT-RELATED FEES (INVESTMENT ADVISER) -- The aggregate fees billed in
each of the last two fiscal years of the registrant for assurance and related
services by the principal accountant that are reasonably related to the
performance of the audit of the Registrant's financial statements and are not
reported under paragraph (a) of this Item were $0 for 2010 and $0 for 2011.
(c) TAX FEES (REGISTRANT) -- The aggregate fees billed in each of the
last two fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and tax
planning to the registrant were $5,200 for 2010 and $0 for 2011.
These fees were for tax consultation and tax preparation.
TAX FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each of the
last two fiscal years of the registrant for professional services rendered by
the principal accountant for tax compliance, tax advice, and tax planning to the
registrant's adviser were $0 for 2010 and $0 for 2011.
(d) ALL OTHER FEES (REGISTRANT) -- The aggregate fees billed in each of
the last two fiscal years for products and services provided by the
principal accountant to the registrant, other than the services
reported in paragraphs (a) through (c) of this Item were $0 for 2010
and $0 for 2011.
ALL OTHER FEES (INVESTMENT ADVISER) -- The aggregate fees billed in each
of the last two fiscal years for products and services provided by the principal
accountant to the Registrant's investment adviser, other than services reported
in paragraphs (a) through (c) of this Item were $0 for 2010 and $0 for 2011.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
Pursuant to its charter and its Audit and Non-Audit Services Pre-Approval
Policy, the Audit Committee (the "Committee") is responsible for the
pre-approval of all audit services and permitted non-audit services (including
the fees and terms thereof) to be performed for the Registrant by its
independent auditors. The Chairman of the Committee is authorized to give such
pre-approvals on behalf of the Committee up to $25,000 and report any such
pre-approval to the full Committee.
The Committee is also responsible for the pre-approval of the independent
auditor's engagements for non-audit services with the Registrant's adviser (not
including a sub-adviser whose role is primarily portfolio management and is
sub-contracted or overseen by another investment adviser) and any entity
controlling, controlled by or under common control with the investment adviser
that provides ongoing services to the Registrant, if the engagement relates
directly to the operations and financial reporting of the Registrant, subject to
the de minimis exceptions for non-audit services described in Rule 2-01 of
Regulation S-X. If the independent auditor has provided non-audit services to
the Registrant's adviser (other than any sub-adviser whose role is primarily
portfolio management and is sub-contracted with or overseen by another
investment adviser) and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
Registrant that were not pre-approved pursuant to its policies, the Committee
will consider whether the provision of such non-audit services is compatible
with the auditor's independence.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) for the Registrant and the Registrant's investment
adviser of this Item that were approved by the audit committee
pursuant to the pre-approval exceptions included in paragraph
(c)(7)(i)(c) or paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X
are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the
most recent fiscal year that were attributed to work performed by
persons other than the principal accountant's full-time, permanent
employees was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that
provides ongoing services to the Registrant for 2010 were $5,200 and
$36,000 for the Registrant and the Registrant's investment adviser,
respectively, and for 2011 were $15.18 and $0 for the Registrant and
the Registrant's investment adviser, respectively.
(h) The Registrant's audit committee of its Board of Trustees determined
that the provision of non-audit services that were rendered to the
Registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the Registrant that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
(a) The registrant has a separately designated standing audit committee
consisting of all the independent trustees of the registrant. The
members of the audit committee are: Thomas R. Kadlec, Niel B.
Nielson, Richard E. Erickson and Robert F. Keith.
ITEM 6. INVESTMENTS.
(a) Schedule of Investments in securities of unaffiliated issuers as of
the close of the reporting period is included as part of the report
to shareholders filed under Item 1 of this form.
(b) Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
(a)(1) IDENTIFICATION OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
AND DESCRIPTION OF ROLE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBERS
INFORMATION PROVIDED AS OF JULY 29, 2011
On October 12, 2010, the Leveraged Finance Investment Team of First Trust
Advisors L.P. ("First Trust") took over the portfolio management of the
Registrant, responsible for directing the investment activities within the
Registrant. William Housey is the Senior Portfolio Manager and has primary
responsibility for investment decisions. Scott Fries assists Mr. Housey and is
also a Senior Credit Analyst assigned to certain industries, The Portfolio
Managers are supported in their portfolio management activities by a team of
credit analysts, a designated trader and operations personnel. Senior Credit
Analysts are assigned industries and Associate Credit Analysts support the
Senior Credit Analysts. All credit analysts report to Mr. Housey.
William Housey, CFA
Senior Vice President, Senior Portfolio Manager
Mr. Housey joined First Trust in June 2010 as Senior Portfolio Manager in the
Leveraged Finance Investment Team and has nearly 15 years of investment
experience. Prior to joining First Trust, Mr. Housey was at Morgan Stanley/Van
Kampen Funds, Inc. for 11 years and served as Executive Director and
Co-Portfolio Manager. Mr. Housey has extensive experience in portfolio
management of both leveraged and unleveraged credit products, including senior
loans, high-yield bonds, credit derivatives and corporate restructurings. Mr.
Housey received a BS in Finance from Eastern Illinois University and an MBA in
Finance as well as Management and Strategy from Northwestern University's
Kellogg School of Business. Mr. Housey holds the Chartered Financial Analyst
("CFA") designation.
Scott D. Fries, CFA
Vice President, Portfolio Manager
Mr. Fries joined First Trust in June 2010 as Portfolio Manager in the Leveraged
Finance Investment Team and has over 15 years of investment industry experience.
Prior to joining First Trust, Mr. Fries spent 15 years and served as
Co-Portfolio Manager of Institutional Separately Managed Accounts for Morgan
Stanley/Van Kampen Funds, Inc. Mr. Fries received a BA in International Business
from Illinois Wesleyan University and an MBA in Finance from DePaul University.
Mr. Fries holds the Chartered Financial Analyst designation.
(a)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team
Member and Potential Conflicts of Interest
INFORMATION PROVIDED AS OF MAY 31, 2011
Name of Portfolio Total # of Accounts Managed for Total Assets for which
Manager or Team # of Accounts Total which Advisory Fee is Based Advisory Fee is Based on
Member Type of Accounts* Managed** Assets on Performance Performance
-------------------- ----------------- ------------- ------ --------------------------- ------------------------
1. William Housey, Registered 0 $0 0 $0
CFA Investment
Companies:
Other Pooled 0 $0 0 $0
Investment
Vehicles:
Other Accounts: 0 $0 0 $0
2. Scott Fries, Registered 0 $0 0 $0
CFA Investment
Companies:
Other Pooled 0 $0 0 $0
Investment
Vehicles:
Other Accounts: 0 $0 0 $0
** Information excludes the registrant.
POTENTIAL CONFLICTS OF INTERESTS
Potential conflicts of interest may arise when a portfolio manager of the
Registrant has day-to-day management responsibilities with respect to one or
more other funds or other accounts. Currently, the Leveraged Finance Investment
Team of First Trust does not manage or oversee any other funds or accounts.
Accordingly, there should not be material conflicts in the allocation of
investment opportunities between the Registrant and other accounts managed by
the Leveraged Finance Investment Team.
First Trust and its affiliate, First Trust Portfolios L.P. ("FTP"), have in
place a joint Code of Ethics and Insider Trading Policies and Procedures that
are designed to (a) prevent First Trust personnel from trading securities based
upon material inside information in the possession of such personnel and (b)
ensure that First Trust personnel avoid actual or potential conflicts of
interest or abuse of their positions of trust and responsibility that could
occur through such activities as front running securities trades for the
Registrant. Personnel are required to have duplicate confirmations and account
statements delivered to First Trust and FTP compliance personnel who then
compare such trades to trading activity to detect any potential conflict
situations. In addition to the personal trading restrictions specified in the
Code of Ethics and Insider Trading Policies and Procedures, employees in the
Leveraged Finance Investment Team are prohibited from buying or selling equity
securities (including derivative instruments such as options, warrants and
futures) and corporate bonds for their personal account and in any accounts over
which they exercise control. Employees in the Leveraged Finance Investment Team
are also prohibited from engaging in any personal transaction while in
possession of material non-public information regarding the security or the
issuer of the security.
First Trust and FTP also maintain a confidential watch list of all issuers for
which the Leveraged Finance Investment Team has material non-public information
in its possession an all transactions executed for a product advised or
supervised by First Trust or FTP are compared daily against the watch list.
(a)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM
MEMBERS INFORMATION PROVIDED AS OF JULY 29, 2011
The compensation structure for the Leveraged Finance Investment Team of First
Trust is based upon a fixed salary as well as a discretionary bonus determined
by the management of First Trust.
Salaries are determined by management and are based upon an individual's
position and overall value to the firm. Bonuses are also determined by
management and are based upon an individual's overall contribution to the
success of the firm and the profitability of the firm. Salaries and bonuses for
members of the Leveraged Finance Investment Team are not based upon criteria
such as performance of the Registrant or the value of assets of the Fund,
although discretionary bonuses for Leveraged Finance Team members are based on
the profitability of the leveraged finance department.
(a)(4) DISCLOSURE OF SECURITIES OWNERSHIP AS OF MAY 31, 2011
------------------------------ ---------------------------------
Name of Portfolio Manager or Dollar ($) Range of Fund Shares
Team Member Beneficially Owned
------------------------------ ---------------------------------
William Housey $0 (0 shares)
------------------------------ ---------------------------------
Scott Fries $10,001 - $50,000 (1,000 shares)
------------------------------ ---------------------------------
(b) Not applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's Board of Trustees, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial
officers, or persons performing similar functions, have concluded
that the registrant's disclosure controls and procedures (as defined
in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of
a date within 90 days of the filing date of the report that includes
the disclosure required by this paragraph, based on their evaluation
of these controls and procedures required by Rule 30a-3(b) under the
1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934, as amended (17 CFR
240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act
(17 CFR 270.30a-3(d)) that occurred during the registrant's second
fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect,
the registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes- Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) First Trust Senior Floating Rate Income Fund II
-------------------------------------------------------------------
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date July 18, 2011
-------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ James A. Bowen
------------------------------------------------------
James A. Bowen, Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Date July 18, 2011
-------------------
By (Signature and Title)* /s/ Mark R. Bradley
------------------------------------------------------
Mark R. Bradley, Treasurer, Chief Financial
Officer and Chief Accounting Officer
(principal financial officer)
Date July 18, 2011
-------------------
* Print the name and title of each signing officer under his or her signature.