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, 2016
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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, 450 Fifth Street, NW,
Washington, DC 20549-0609. 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, 2016
FIRST TRUST
SENIOR FLOATING RATE
INCOME FUND II
(FCT)
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, 2016
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.............................................. 31
Privacy Policy.............................................................. 33
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 its 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 Additional
Information section of this report 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.
The Advisor may also periodically provide additional information on Fund
performance on the Fund's webpage at http://www.ftportfolios.com.
HOW TO READ THIS REPORT
This report contains information that may help you evaluate your investment in
the Fund. 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 material 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)
ANNUAL LETTER FROM THE CHAIRMAN AND CEO
MAY 31, 2016
Dear Shareholders:
Thank you for your investment in First Trust Senior Floating Rate Income Fund
(the "Fund").
First Trust Advisors L.P. ("First Trust") is pleased to provide you with the
annual report which contains detailed information about your investment for the
twelve months ended May 31, 2016, including a market overview and a performance
analysis for the period. We encourage you to read this report and discuss it
with your financial advisor.
While markets were up and down during 2015, we believe there are three important
things to remember. First, the U.S. economy grew, despite the massive decline in
oil prices. Second, the tapering that began in 2014 by the Federal Reserve (the
"Fed") did not stop growth in the U.S. economy. Finally, the long-anticipated
rate hike by the Fed in December had little effect on the money supply, and the
stock market was not shocked by the hike. Early in 2016, many investors were
concerned that the volatility we saw in the market in 2015 would continue, and
it did. From December 31, 2015 through February 11, 2016, the S&P 500(R) Index
declined by 10.27%. Since then, the market has made a steady comeback, and as of
May 31, 2016, the S&P 500(R) Index was up 15.43%.
First Trust believes that having a long-term investment horizon and being
invested in quality products can help you reach your goals, regardless of how
the market behaves. We have always maintained perspective about the markets and
believe investors should as well. We will continue to strive to provide quality
investment opportunities each and every day, which has been one of the hallmarks
of our firm since its inception 25 years ago.
Thank you for giving First Trust the opportunity to be a part of your investment
plan. We value our relationship with you and will continue to focus on helping
investors like you reach your financial goals.
Sincerely,
/s/ James A. Bowen
James A. Bowen
Chairman of the Board of Trustees
Chief Executive Officer of First Trust Advisors L.P.
Page 1
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
"AT A GLANCE"
AS OF MAY 31, 2016 (UNAUDITED)
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FUND STATISTICS
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Symbol on New York Stock Exchange FCT
Common Share Price $13.05
Common Share Net Asset Value ("NAV") $14.03
Premium (Discount) to NAV (6.99)%
Net Assets Applicable to Common Shares $374,685,368
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) 6.44%
Current Distribution Rate on NAV (2) 5.99%
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COMMON SHARE PRICE & NAV (WEEKLY CLOSING PRICE)
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Common Share Price NAV
5/15 $13.77 $14.71
13.63 14.62
13.53 14.59
13.46 14.59
6/15 13.33 14.59
13.17 14.50
13.21 14.51
13.21 14.56
13.15 14.54
7/15 13.30 14.51
13.08 14.42
13.26 14.40
13.10 14.38
8/15 13.15 14.38
13.00 14.33
12.88 14.38
12.97 14.35
9/15 12.98 14.30
12.50 14.05
12.73 14.08
12.74 14.07
12.72 14.08
10/15 12.52 14.08
12.47 13.99
12.23 13.90
12.34 13.80
11/15 12.32 13.78
12.22 13.75
12.06 13.63
12.28 13.54
12.20 13.53
12.16 13.52
12/15 12.35 13.55
12.11 13.51
11.80 13.46
12.01 13.40
1/16 12.00 13.42
12.12 13.37
11.87 13.22
12.10 13.23
2/16 11.98 13.29
12.27 13.42
12.45 13.60
12.87 13.68
3/16 12.72 13.71
12.76 13.68
12.55 13.74
12.69 13.82
12.81 13.95
4/16 12.83 13.99
12.66 13.90
12.75 13.92
13.15 13.96
5/16 13.05 14.05
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PERFORMANCE
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Average Annual Total Return
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1 Year Ended 5 Years Ended 10 Years Ended Inception (5/25/2004)
5/31/2016 5/31/2016 5/31/2016 to 5/31/2016
FUND PERFORMANCE (3)
NAV 2.36% 5.70% 3.72% 4.09%
Market Value 1.56% 4.07% 3.74% 3.06%
INDEX PERFORMANCE
S&P/LSTA Leveraged Loan Index 0.49% 3.71% 4.49% 4.65%
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SENIOR FLOATING-RATE
LOAN INTERESTS
AND CORPORATE
CREDIT QUALITY (S&P RATINGS) (4) BONDS AND NOTES
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BBB 3.9%
BBB- 2.5
BB+ 3.2
BB 9.5
BB- 19.2
B+ 19.2
B 27.4
B- 6.8
CCC+ 2.4
CCC 3.3
CCC- 0.1
CC 0.4
D 0.2
NR 0.5
Privately rated securities(5) 1.4
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Total 100.0%
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% OF TOTAL
TOP 10 ISSUERS INVESTMENTS
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Portillo's Holdings LLC 2.9%
New HB Acquisition LLC 2.5
Caesars Growth Partners LLC 2.4
Albertsons LLC 2.3
BJ's Wholesale Club, Inc. 2.3
BMC Software Finance, Inc. 2.2
Amaya Holdings B.V. 2.2
Dell, Inc. 2.1
Asurion LLC 2.0
Univision Communications, Inc. 1.9
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Total 22.8%
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% OF TOTAL
ASSET CLASSIFICATION INVESTMENTS
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Hotels, Restaurants & Leisure 13.9%
Health Care Providers & Services 11.3
Software 6.3
Media 5.9
Life Sciences Tools & Services 5.6
Pharmaceuticals 4.8
Food & Staples Retailing 4.6
Insurance 3.9
Diversified Telecommunication
Services 3.9
Specialty Retail 3.8
Food Products 3.6
Professional Services 2.9
Health Care Equipment & Supplies 2.9
Semiconductors & Semiconductor
Equipment 2.7
Diversified Consumer Services 2.4
Technology Hardware, Storage &
Peripherals 2.0
Capital Markets 1.8
Diversified Financial Services 1.7
Real Estate Management &
Development 1.7
Commercial Services & Supplies 1.7
Aerospace & Defense 1.6
Containers & Packaging 1.4
Road & Rail 1.3
Beverages 1.1
Building Products 1.0
Consumer Finance 0.9
Chemicals 0.7
Auto Components 0.6
Real Estate Investment
Trusts (REITs) 0.6
Electronic Equipment & Instruments 0.5
Health Care Technology 0.5
Diversified Business Services 0.4
Oil, Gas & Consumable Fuels 0.4
Electric Utilities 0.4
Independent Power and Renewable
Electricity Producers 0.4
Machinery 0.2
Household Products 0.2
Distributors 0.2
IT Services 0.1
Construction Materials 0.1
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Total 100.0%
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(1) Most recent distribution paid or declared through May 31, 2016. 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 May 31, 2016. 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 NAV
returns and changes in Common Share Price for market value returns. 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 Team of First Trust Advisors L.P. assumed the day-to-day
responsibility for management of the Fund's portfolio. Total returns do
not reflect sales load and are not annualized for periods of less than one
year. Past performance is not indicative of future results.
(4) The ratings are by Standard & Poor's except where otherwise indicated. A
credit rating is an assessment provided by a nationally recognized
statistical rating organization (NRSRO) of the creditworthiness of an
issuer with respect to debt obligations except for those debt obligations
that are only privately rated. Ratings are measured on a scale that
generally ranges from AAA (highest) to D (lowest). Investment grade is
defined as those issuers that have a long-term credit rating of BBB- or
higher. "NR" indicates no rating. The credit ratings shown relate to the
creditworthiness of the issuers of the underlying securities in the Fund,
and not to the Fund or its shares. Credit ratings are subject to change.
(5) Represents Senior Loans privately rated upon issuance. The rating agency
does not provide ongoing surveillance on the rating.
Page 2
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PORTFOLIO COMMENTARY
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
ANNUAL REPORT
MAY 31, 2016
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, 2016, First Trust managed or
supervised $97.35 billion in assets. The First Trust Leveraged Finance Team
began managing the First Trust Senior Floating Rate Income Fund II on October
12, 2010. The First Trust Leveraged Finance Team is comprised of twelve
experienced investment professionals specializing in below-investment grade
securities. The team is comprised of portfolio management, research, trading and
operations. As of May 31, 2016, the First Trust Leveraged Finance Team managed
or supervised approximately $2.20 billion in senior secured bank loans and
high-yield bonds. These assets are managed across various strategies, including
a closed-end fund, an open-end fund, four exchange-traded funds, one UCITS fund
and a series of unit investment trusts on behalf of retail and institutional
clients.
PORTFOLIO MANAGEMENT TEAM
WILLIAM HOUSEY, CFA
SENIOR VICE PRESIDENT, SENIOR PORTFOLIO MANAGER
SCOTT D. FRIES, CFA
SENIOR VICE PRESIDENT, PORTFOLIO MANAGER
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 primarily investing in a portfolio of floating-rate loan interests
("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 last 12 months proved to be challenging for the senior loan market, which
began with nine straight months of negative returns, followed by three strong
months of positive returns to finish the trailing twelve months in modestly
positive territory. The last 12 months' total return for the S&P/LSTA Leveraged
Loan Index ("senior loan index") was 0.49%. This compares to -0.88% for the BofA
Merrill Lynch U.S. High Yield Constrained Index ("high-yield bond index") and
1.72% for the S&P 500(R) Index over the same time period. The negative returns
experienced during the first nine months of the last 12 month period were driven
in part by what we believed to be a decoupling of market prices from
fundamentals. We observed that any hint of negative news for a given company or
industry in the non-investment grade markets (i.e. senior loans and high-yield
bonds) would lead to significant market price volatility. This price action was
warranted in some specific instances, but generally speaking, was in excess of
what we would have expected. Moreover, the inconsistent rhetoric from the U.S.
Federal Reserve (the "Fed") in the latter half of 2015 and the eventual start to
a new rate hike cycle contributed to overall instability in the broader
financial markets.
The start of 2016 proved to be quite eventful in the capital markets, as equity
market volatility early in the first quarter instilled fear in investors that
the U.S. economy might be slowing and led some to speculate that the U.S.
economy might be heading into a recession. On February 11, 2016, the low-point
for financial markets during 2016, the high-yield bond index was off 5.14% and
the senior loan index was off 1.36% year-to-date, according to Bloomberg. This
compared to the S&P 500(R) Index which was down 10.27% for the same period.
However, as the equity markets bottomed and reversed course, the credit markets
also rebounded and by the end of May 2016, the high-yield bond index and senior
loan index total returns from the trough on February 11th were 14.01% and 5.93%,
respectively. For comparison, the S&P 500(R) Index rallied 15.43% during that
same time period. Despite the increased volatility the high-yield index and
senior loan index total return for the 2016 year-to-date period through May 31,
2016 were 8.15% and 4.49%, respectively. The S&P 500(R) Index total return was
3.57% for the same time period.
SENIOR LOAN MARKET
The senior loan index returned 0.49% for the twelve-month period ending May 31,
2016. From a credit quality perspective the returns were mixed. Lower quality
CCC rated issues returned -2.97% in the period, underperforming the returns of
higher quality B rated issues at 0.51% and BB rated issues at 2.59%. The average
bid price of loans in the market began the period at $97.39 and, after bottoming
at $89.44 at the end of February, loan prices ended the period at $93.41. The
discounted spread to a 3-year life for the senior loan index began the period at
499 basis points above LIBOR ("L+499"), widened to L+775 at the end of February
and ended the period at L+573.(1)
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(1) The discounted spread to an assumed three-year maturity is the yield above
the London Interbank Offered Rate (LIBOR or LIBOR floor) and the current
loan price over a three-year period.
Page 3
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PORTFOLIO COMMENTARY (CONTINUED)
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FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
ANNUAL REPORT
MAY 31, 2016
CREDIT QUALITY/DEFAULT RATES
Default rates continue to remain below the long term average for senior loans.
The default rate over the last 12 months in the senior loan index was 1.96%. The
long-term average default rate dating back to January 1999 is 3.13%. We believe
the default rate remains below the long-term average because overall corporate
fundamentals remain healthy, as evidenced by the fact that senior loan issuers,
that file their financial results publicly, have grown cash flows for 27
straight quarters through March 31, 2016. Despite the strength of cash flow
growth, the lack of near-term debt maturities, and favorable access to capital
markets, we believe the default rate for both senior loans and high-yield bonds
will drift higher in 2016 but the majority of defaults will be in sectors that
are exposed to volatile commodity prices and not systemic to the overall market.
PERFORMANCE ANALYSIS
The Fund outperformed the senior loan index on a net asset value (NAV) basis for
the trailing twelve-month period. The Fund generated a NAV return of 2.36% and a
market price return of 1.56% while the senior loan index generated a total
return of 0.49%. The Fund's discount to NAV ended the period 60 basis points
wider than one year ago. At the start of the period, the Fund's market price was
at a 6.39% discount to NAV and widened to a 6.99% discount to NAV by the end of
the period.
Contributing to the Fund's outperformance relative to the senior loan index over
the period was the Fund's use of leverage and issuer selection. The use of
leverage contributed positively as the total return of senior loans exceeded the
borrowing cost of leverage. Leverage at the end of May 2016 was approximately
26.8% of managed assets.
From an income perspective, the monthly announced distribution rate began the
period at $0.072 per share and ended at $0.070 per share. The driver behind the
distribution rate decline was the portfolio managers' decision to reduce overall
leverage in the Fund in reaction to the increased credit market volatility
prevalent at the end of the fourth quarter of 2015 and into the first half of
the first quarter of 2016. As the markets became more volatile, the Fund's
portfolio managers believed it was prudent to reduce leverage by approximately
2.00%. At the $0.070 per share monthly distribution rate, the annualized
distribution rate at the end of May 2016 was 5.99% at NAV and 6.44% at market
price.
MARKET AND FUND OUTLOOK
Credit markets appear well positioned for the intermediate term. We believe the
combination of strong technical tailwinds created by global central bank policy,
attractive valuations within the credit markets, a below-average default rate
environment, modest but healthy economic growth and sound corporate fundamentals
provide a firm backdrop for returns in the periods ahead. However, we believe
that the volatility that we have experienced since the second half of 2015 may
continue to persist throughout 2016. We believe that this volatility has and
should lead to some compelling valuations and opportunities in the U.S.
high-yield bond and senior bank loan markets. With that said, we believe credit
selection will be paramount to driving strong returns over the remainder of the
economic cycle. In the early years of the economic recovery, returns came
relatively easily. We believe returns can still be healthy for this portion of
the cycle, however, they will be harder to come by, accompanied by greater
volatility in the markets.
Based on current valuations (average price of $93.41 and spread of L+573(1)), we
believe senior loans, given their senior secured position in the capital
structure, floating interest rate, high income and limited commodity exposure
(energy, metals and mining only comprise 3.84% of the senior loan benchmark on a
market value basis), are well positioned to deliver attractive risk adjusted
returns. Retail investors have continued to reduce exposure to senior loans in
the wake of declining Treasury yields and continued dovish Fed rhetoric. We
believe that with further increases in the Federal Funds rate on the horizon,
even if they occur at a modest pace, investors in senior loans are likely to
benefit. We believe there remains a substantial asymmetry in the risk vs. reward
equation for long-duration fixed-income securities (those with the most rate
sensitivity). As a result, even modestly increasing interest rates can present
challenges for traditional fixed-income investors.
In summary, we believe that both the high-yield bond and senior loan markets
currently offer compelling opportunities, and specifically within actively
managed strategies where return opportunities can be realized and risk can be
appropriately managed. In a market where equity volatility is high, investors
may benefit from moving up the corporate capital structure into high-yield bonds
and senior loans to take advantage of the attractive valuations and lower
volatility.
As we evaluate new investment opportunities, decisions will continue to be
rooted in our rigorous bottom-up credit analysis and focus on the opportunities
that we believe offer the best risk and reward balance. Despite the many
distractions that ebb and flow every quarter, we remain firmly focused on
finding value in the high-yield bond and senior loan markets.
-----------------------------
(1) The discounted spread to an assumed three-year maturity is the yield above
the London Interbank Offered Rate (LIBOR or LIBOR floor) and the current
loan price over a three-year period.
Page 4
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS - 130.9%
AEROSPACE & DEFENSE - 2.2%
$ 400,000 B/E Aerospace, Inc., Term Loan.................................. 3.75% 12/16/21 $ 401,500
1,843,084 DynCorp International, Inc., Term Loan.......................... 6.25% 07/07/16 1,803,918
3,833,206 Transdigm, Inc., Term Loan C.................................... 3.75% 02/28/20 3,832,018
786,000 Transdigm, Inc., Tranche D Term Loan............................ 3.75% 06/04/21 785,411
1,474,545 Wencor Group LLC (Jazz Acquisition, Inc.), Term Loan
(First Lien)................................................. 4.50% 06/19/21 1,238,618
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8,061,465
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ALTERNATIVE CARRIERS - 1.5%
1,000,000 Level 3 Financing, Inc., Tranche B 2020 Term Loan............... 4.00% 01/15/20 1,003,250
4,476,697 Level 3 Financing, Inc., Tranche B-II 2022 Term Loan............ 3.50% 05/31/22 4,474,817
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5,478,067
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APPAREL RETAIL - 0.4%
1,543,821 Neiman Marcus Group, Inc., The, Other Term Loan................. 4.25% 10/25/20 1,413,878
250,000 Samsonite International S.A., Term Loan B....................... 4.00% 05/13/23 252,000
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1,665,878
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APPLICATION SOFTWARE - 3.4%
2,977,500 Epicor Software Corp., Term B Loan.............................. 4.75% 06/01/22 2,917,950
3,813,003 Infor (US), Inc., Tranche B-5 Term Loan......................... 3.75% 06/03/20 3,735,370
2,729,872 Informatica Corp. (Italic Merger Sub., Inc.), Dollar Term Loan.. 4.25% 08/05/22 2,696,322
2,286,538 Mitchell International, Inc., Initial Term Loan................. 4.50% 10/13/20 2,270,098
1,360,256 Triple Point Technologies, Inc., Term Loan...................... 5.25% 07/10/20 1,020,192
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12,639,932
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ASSET MANAGEMENT & CUSTODY BANKS - 2.4%
776,609 American Beacon Advisors, Inc., Term Loan B..................... 5.50% 03/15/22 768,843
1,316,250 Guggenheim Partners Investment Management Holdings LLC,
Initial Term Loan............................................ 4.25% 07/22/20 1,320,370
1,434,808 Hamilton Lane Advisors LLC, Initial Term Loan................... 4.25% 07/08/22 1,431,823
929,816 Mondrian Investment Partners Ltd. (MIPL Group Ltd.), Term
Loan B....................................................... 4.00% 03/09/20 929,239
4,625,000 Victory Capital Holdings (VCH Holdings LLC), Initial Term
Loan......................................................... 7.00% 10/29/21 4,517,099
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8,967,374
-------------
AUTO PARTS & EQUIPMENT - 0.6%
884,250 Cooper Standard Holdings (CS Intermediate Holdco 2 LLC),
Term Loan.................................................... 4.00% 04/04/21 884,807
1,264,626 Tower Automotive Holdings USA LLC, Initial Term Loan
(2014)....................................................... 4.00% 04/23/20 1,256,722
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2,141,529
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AUTOMOTIVE RETAIL - 0.6%
2,072,093 KAR Auction Services, Inc., Tranche B-3 Term Loan............... 4.25% 03/09/23 2,084,173
-------------
BROADCASTING - 4.5%
2,798,370 Cumulus Media Holdings, Inc., Term Loan......................... 4.25% 12/23/20 1,979,847
443,333 Gray Television, Inc., Term Loan C.............................. 4.25% 06/13/21 444,885
1,993,063 Media General, Inc., Term Loan B................................ 4.00% 07/31/20 1,994,059
1,050,751 Mission Broadcasting, Inc. (Nexstar Broadcasting Group, Inc.),
Term B-2 Loan................................................ 3.75% 10/01/20 1,049,438
1,191,569 Nexstar Broadcasting Group, Inc. (Mission Broadcasting, Inc.),
Term Loan B-2................................................ 3.75% 09/30/20 1,190,079
See Notes to Financial Statements Page 5
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
BROADCASTING (CONTINUED)
$ 749,628 Tribune Media Co., Term B Loan.................................. 3.75% 12/27/20 $ 750,880
2,636,842 Univision Communications, Inc., 2013 Incremental Term Loan...... 4.00% 03/01/20 2,633,546
6,929,958 Univision Communications, Inc., Replacement First-Lien Term
Loan......................................................... 4.00% 03/01/20 6,925,661
-------------
16,968,395
-------------
BUILDING PRODUCTS - 1.3%
421,071 Hillman Group, Inc., The, Initial Term Loan..................... 4.50% 06/30/21 416,861
4,610,160 Quikrete Holdings, Inc., Initial Loan (First Lien).............. 4.00% 09/28/20 4,619,749
-------------
5,036,610
-------------
CABLE & SATELLITE - 0.8%
498,750 Cequel Communications LLC (Altice US Finance I Corp.),
Initial Term Loan............................................ 4.25% 12/14/22 499,249
2,500,000 CSC Holdings, Inc. (Neptune Finco Corp.), Initial Term Loan..... 5.00% 10/09/22 2,518,225
-------------
3,017,474
-------------
CASINOS & GAMING - 7.8%
721,875 Amaya Holdings B.V., 2nd Lien TL................................ 8.00% 07/31/22 707,134
10,722,335 Amaya Holdings B.V., Initial Term B Loan (First Lien)........... 5.00% 08/01/21 10,378,362
7,997,188 Caesars Growth Partners LLC, Term B Loan (First Lien)........... 6.25% 05/08/21 7,477,371
2,316,388 CityCenter Holdings LLC, Term B Loan............................ 4.25% 10/16/20 2,322,179
384,615 MGM Growth Properties Operating Partnership LP, Term B
Loan......................................................... 4.00% 04/25/23 386,950
1,735,653 ROC Finance LLC, Funded Term B Loan............................. 5.00% 06/20/19 1,659,719
6,300,000 Station Casinos, Inc., Term Loan B.............................. 3.75% 06/08/23 6,307,875
-------------
29,239,590
-------------
COAL & CONSUMABLE FUELS - 0.3%
2,667,808 Arch Coal, Inc., Term Loan (d) (e).............................. 7.50% 05/16/18 1,170,501
-------------
COMMERCIAL PRINTING - 0.3%
1,233,333 Southern Graphic, Inc., Term Loan............................... 4.25% 10/17/19 1,227,944
-------------
COMPUTER HARDWARE - 2.8%
10,388,321 Dell, Inc., Term B-2 Loan....................................... 4.00% 04/29/20 10,390,191
-------------
CONSTRUCTION MATERIALS - 0.2%
645,125 Summit Materials, Inc., Restatement Effective Date Term Loans... 4.00% 07/15/22 645,731
-------------
CONSUMER FINANCE - 1.3%
2,527,065 Altisource Solutions S.A.R.L., Term B Loan...................... 4.50% 12/09/20 2,204,864
3,064,626 Walter Investment Management Corp., Tranche B Term Loan......... 4.75% 12/18/20 2,589,609
-------------
4,794,473
-------------
DATA PROCESSING & OUTSOURCED SERVICES - 0.2%
874,120 Sungard Availability Services Capital, Inc., Term Loan B........ 6.00% 03/29/19 781,970
-------------
DISTRIBUTORS - 0.2%
839,995 HD Supply, Inc., Term Loan...................................... 3.75% 08/13/21 840,625
-------------
DIVERSIFIED CHEMICALS - 0.1%
395,998 Ineos US Finance LLC, 2022 Dollar Term Loan..................... 4.25% 03/31/22 395,337
-------------
DIVERSIFIED SUPPORT SERVICES - 0.5%
1,905,214 SMG Holdings, Inc., Term Loan................................... 4.50%-6.00% 02/27/20 1,871,873
-------------
EDUCATION SERVICES - 0.1%
247,500 Bright Horizons Family Solutions, Inc., Term B-1 Loan........... 4.25% 01/30/20 248,275
-------------
Page 6 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
ELECTRIC UTILITIES - 0.5%
$ 4,241,410 TXU (Texas Competitive Electric Holdings Co. LLC), 2014 Term
Loan (Non-Extending) (d) (e)................................. 4.92% 10/10/14 $ 1,296,938
2,250,000 TXU (Texas Competitive Electric Holdings Co. LLC), 2017 Term
Loan (Extending) (d) (e)..................................... 4.92% 10/10/17 703,125
-------------
2,000,063
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS - 0.6%
498,750 Linxens LLC (Lully Finance LLC), Initial Term B-1 Loan
(First Lien)................................................. 5.00% 10/17/22 495,009
1,910,568 Zebra Technologies Corp., Initila Term Loan..................... 4.75% 10/27/21 1,919,529
-------------
2,414,538
-------------
ENVIRONMENTAL & FACILITIES SERVICES - 1.0%
492,524 PSSI (Packers Holdings LLC), Term Loan.......................... 5.00% 12/02/21 491,908
1,676,975 ServiceMaster Co., Initial Term Loan............................ 4.25% 07/01/21 1,683,264
1,564,000 WTG Holdings III Corp. (EWT Holdings III Corp.), Term Loan
(First Lien)................................................. 4.75% 01/15/21 1,560,090
-------------
3,735,262
-------------
FOOD RETAIL - 3.2%
11,856,240 Albertsons LLC, Term B-4 Loan................................... 5.50% 08/25/21 11,852,565
-------------
HEALTH CARE EQUIPMENT - 2.8%
1,351,829 Alere, Inc., Term B Loan........................................ 4.25% 06/15/22 1,347,773
3,275,250 DJO Finance LLC (ReAble Therapeutics Finance LLC), Initial
Term Loan.................................................... 4.25% 06/08/20 3,207,027
6,001,504 Kinetic Concepts, Inc., Dollar Term E-1 Loan.................... 4.50% 05/04/18 5,998,263
-------------
10,553,063
-------------
HEALTH CARE FACILITIES - 5.5%
1,246,875 Acadia Healthcare Co., Inc., Tranche B-2 Term Loan.............. 4.50% 02/16/23 1,252,336
1,089,655 Acadia Healthcare Company, Inc., Term Loan B1................... 3.75% 02/11/22 1,091,922
4,389,599 CHS/Community Health Systems, Inc., Incremental 2021 Term H
Loan......................................................... 4.00% 01/27/21 4,321,780
1,364,688 Concentra, Inc. (MJ Acquisition Corp.), Term Loan B............. 4.00%-5.50% 05/15/22 1,366,393
3,394,975 Kindred Healthcare, Inc., New Term Loan......................... 4.25% 04/09/21 3,388,626
2,717,709 National Veterinary Associates (NVA Holdings, Inc.), Term Loan
(First Lien)................................................. 4.75% 08/14/21 2,708,659
6,584,862 Select Medical Corp., Term Loan F............................... 6.00% 02/28/21 6,605,473
-------------
20,735,189
-------------
HEALTH CARE SERVICES - 8.5%
2,769,696 21st Century Oncology, Inc., Tranche B Term Loan................ 6.50% 04/30/22 2,541,196
3,473,750 Air Medical Group Holdings, Inc., Initial Term Loan............. 4.25% 04/28/22 3,435,747
3,963,351 CareCore National LLC, Term Loan................................ 5.50% 03/05/21 3,685,917
1,400,000 CHG Healthcare Services, Inc, Term Loan......................... 4.75% 06/07/23 1,405,250
3,217,500 Curo Health Services Holdings, Inc., Term B Loan (First Lien)... 6.50% 02/07/22 3,205,434
4,123,080 Envision Healthcare Corp. (Emergency Medical Services Corp.),
Initial Term Loan............................................ 4.25% 05/25/18 4,125,389
249,375 Envision Healthcare Corp. (Emergency Medical Services Corp.),
Tranche B-2 Term Loan........................................ 4.50% 10/28/22 250,175
4,682,453 Healogics, Inc. (CDRH Parent, Inc.), Initial Term Loan
(First Lien)................................................. 5.25% 07/01/21 4,284,445
See Notes to Financial Statements Page 7
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
HEALTH CARE SERVICES (CONTINUED)
$ 1,486,212 Surgery Centers Holdings, Inc., Initial Term Loan (First Lien).. 5.25% 11/03/20 $ 1,489,006
990,000 Surgical Care Affiliates LLC, Initial Term Loan................. 4.25% 03/17/22 988,149
2,161,823 Team Health, Inc., Term Loan B.................................. 3.75% 11/23/22 2,165,888
4,301,719 U.S. Renal Care, Inc., Term Loan B.............................. 5.25% 12/30/22 4,264,079
-------------
31,840,675
-------------
HEALTH CARE SUPPLIES - 0.6%
1,978,704 BSN Medical Luxembourg Holding S.A.R.L., Facility B1B........... 4.00% 08/28/19 1,972,114
451,113 ConvaTec, Inc., TLB............................................. 4.25% 06/30/20 450,974
-------------
2,423,088
-------------
HEALTH CARE TECHNOLOGY - 0.6%
2,416,406 Connolly Holdings, Inc. (Cotiviti Corp.), Term Loan B........... 4.50% 05/14/21 2,412,370
-------------
HOMEFURNISHING RETAIL - 0.6%
2,125,511 Serta Simmons Holdings LLC, Term Loan B......................... 4.25% 10/01/19 2,128,508
-------------
HOTELS, RESORTS & CRUISE LINES - 1.9%
5,000,000 Hilton Worldwide Finance LLC, Initial Term Loan................. 3.50% 10/25/20 5,013,550
1,975,000 Norwegian Cruise Lines (NCL Corp.), Term B Loan................. 4.00% 11/19/21 1,973,361
-------------
6,986,911
-------------
HOUSEHOLD PRODUCTS - 0.2%
841,914 Spectrum Brands, Inc., USD Term Loan............................ 3.50% 06/23/22 845,206
-------------
HYPERMARKETS & SUPER CENTERS - 3.1%
2,488,092 BJ's Wholesale Club, Inc., 2013 (November) Replacement Loan
(Second Lien)................................................ 8.50% 03/26/20 2,399,964
9,202,002 BJ's Wholesale Club, Inc., New 2013 (November) Replacement
Loan (First Lien)............................................ 4.50% 09/26/19 9,155,992
-------------
11,555,956
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS - 0.5%
1,985,000 Calpine Corp., Term Loan........................................ 3.50% 05/27/22 1,969,279
-------------
INDUSTRIAL MACHINERY - 0.3%
1,185,000 Douglas Dynamics LLC, Term Loan B............................... 5.25% 12/02/21 1,187,963
-------------
INSURANCE BROKERS - 4.7%
3,417,591 Amwins Group LLC, Term Loan..................................... 4.75% 09/06/19 3,429,689
3,883,296 Confie Seguros Holding II Co., Term B Loan (First Lien)......... 5.75% 11/09/18 3,828,270
2,541,140 HUB International Ltd., Initial Term Loan (New)................. 4.00% 10/02/20 2,522,539
396,000 Hyperion Finance S.A.R.L., Initial Term Loan.................... 5.50% 04/29/22 384,120
2,631,403 National Financial Partners Corp., 2014 Specified Refinancing
Term Loan.................................................... 4.50% 07/01/20 2,610,036
4,790,053 USI, Inc. (Compass Investors, Inc.), Initial Term Loan.......... 4.25% 12/27/19 4,763,133
-------------
17,537,787
-------------
INTEGRATED TELECOMMUNICATION SERVICES - 3.4%
2,925,000 Cincinnati Bell, Inc., Tranche B Term Loan...................... 4.00% 09/10/20 2,907,450
1,930,489 Hawaiian Telcom Communications, Inc., Term Loan................. 5.25% 06/06/19 1,926,879
4,886,154 Numericable U.S. LLC (Altice France S.A.), USD TLB-6............ 4.75% 02/10/23 4,892,261
3,147,600 Numericable U.S. LLC (Altice France S.A.), USD TLB-7 Loan....... 5.00% 01/15/24 3,155,469
-------------
12,882,059
-------------
LEISURE FACILITIES - 1.9%
3,799,887 ClubCorp Club Operations, Inc., Term Loan B..................... 4.25% 12/08/22 3,808,209
1,297,885 Life Time Fitness, Inc., Closing Date Term Loan................. 4.25% 06/10/22 1,291,395
Page 8 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
LEISURE FACILITIES (CONTINUED)
$ 1,920,925 Planet Fitness Holdings LLC, Term Loan.......................... 4.50% 03/31/21 $ 1,925,727
-------------
7,025,331
-------------
LIFE SCIENCES TOOLS & SERVICES - 7.1%
5,340,074 Immucor, Inc., Term B-2 Loan.................................... 5.00% 08/19/18 5,069,759
529,164 InVentiv Health, Inc., Term B-3 Loan............................ 7.75% 05/15/18 526,518
7,626,842 InVentiv Health, Inc., Term B-4 Loan............................ 7.75% 05/15/18 7,626,842
539,488 Millennium Laboratories LLC (New Millennium Holdco.), Closing
Date Term Loan (f)........................................... 7.50% 12/21/20 404,346
7,547,349 Ortho-Clinical Diagnostics, Inc. (Crimson Merger Sub, Inc.),
Initial Term Loan............................................ 4.75% 06/30/21 7,144,849
3,576,014 Pharmaceutical Product Development, Inc., Initial Term Loan..... 4.25% 08/18/22 3,578,982
2,189,000 Sterigenics International (STHI Intermediate Holding Corp.),
Initial Term Loan............................................ 4.25% 05/16/22 2,178,055
-------------
26,529,351
-------------
MANAGED HEALTH CARE - 0.4%
1,440,000 MultiPlan, Inc. (MPH Acquisition Holdings LLC), Term Loan....... 5.00% 06/07/23 1,450,080
-------------
METAL & GLASS CONTAINERS - 0.8%
612,742 Anchor Glass Container Corp., Term B Loan....................... 4.75% 07/01/22 614,782
372,000 Ardagh Holdings USA, Inc. (Ardagh Packaging Finance S.A.),
New Term Loan................................................ 4.00% 12/17/19 372,621
2,122,389 Berlin Packaging LLC, Initial Term Loan (First Lien)............ 4.50% 10/01/21 2,124,151
-------------
3,111,554
-------------
MOVIES & ENTERTAINMENT - 2.1%
281,917 AMC Entertainment, Inc., Term Loan B............................ 4.00% 12/10/22 282,872
1,185,000 Creative Artists Agency LLC (CAA Holdings LLC), Incremental
Term Loan.................................................... 5.50% 12/17/21 1,188,460
4,350,283 Formula One (Delta 2 Lux S.A.R.L.), Facility B3 (USD)........... 4.75% 07/30/21 4,285,725
1,958,549 WME IMG Worldwide, Inc., Term Loan (First Lien)................. 5.25% 05/06/21 1,964,053
-------------
7,721,110
-------------
OIL & GAS EXPLORATION & PRODUCTION - 0.2%
1,000,000 American Energy Marcellus Holdings LLC, Initial Loan
(First Lien)................................................. 5.25% 08/04/20 381,250
1,888,889 American Energy Marcellus Holdings LLC, Initial Loan
(Second Lien)................................................ 8.50% 08/04/21 276,250
-------------
657,500
-------------
OIL & GAS STORAGE & TRANSPORTATION - 0.1%
1,000,000 Fieldwood Energy LLC, Closing Date Loan (Second Lien)........... 8.38% 09/30/20 267,500
-------------
OTHER DIVERSIFIED FINANCIAL SERVICES - 2.0%
4,683,538 First Data Corp., 2021 New Dollar Term Loan..................... 4.44% 03/24/21 4,703,068
2,780,000 iPayment, Inc., Term Loan....................................... 6.75% 05/08/17 2,675,750
-------------
7,378,818
-------------
PACKAGED FOODS & MEATS - 4.9%
682,784 B&G Foods, Inc., Tranche B Term Loan............................ 3.75% 11/02/22 685,631
4,022,728 Ferrara Candy Co. (Candy Intermediate Holdings, Inc.), Initial
Term Loan.................................................... 7.50% 06/18/18 4,022,728
See Notes to Financial Statements Page 9
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
PACKAGED FOODS & MEATS (CONTINUED)
$ 9,476,190 New HB Acquisition LLC, Term B Loan (First Lien)................ 4.50% 08/03/22 $ 9,507,746
3,348,315 New HB Acquisition LLC, Term B Loan (Second Lien)............... 8.50% 08/03/23 3,314,832
847,875 Pinnacle Foods Finance LLC, Tranche I Term Loan................. 3.75% 01/13/23 851,538
-------------
18,382,475
-------------
PAPER PACKAGING - 1.0%
3,898,686 Reynolds Group Holdings, Inc., Incremental U.S. Term Loan....... 4.50% 12/01/18 3,912,409
-------------
PHARMACEUTICALS - 6.4%
1,682,692 Akorn, Inc., Loan............................................... 5.25% 04/16/21 1,691,106
812,500 AMAG Pharmaceuticals, Inc., Initial Term Loan................... 4.75% 08/17/21 806,406
3,600,616 Amneal Pharmaceuticals LLC, Term Loan B......................... 4.50% 11/01/19 3,591,615
2,292,506 Catalent Pharma Solutions, Inc., Dollar Term Loan............... 4.25% 05/20/21 2,297,160
4,056,500 Concordia Healthcare Corp., Initial Dollar Term Loan............ 5.25% 10/21/21 4,019,302
2,394,000 Endo Pharmaceuticals Holdings, Inc., 2015 Incremental Term B
Loan......................................................... 3.75% 06/27/22 2,359,790
3,512,114 Horizon Pharma, Inc., Term Loan B............................... 4.50% 04/30/21 3,450,652
1,375,500 Patheon, Inc. (JLL/Delta Dutch Newco B.V.), Initial Dollar
Term Loan.................................................... 4.25% 03/11/21 1,352,295
506,053 Valeant Pharmaceuticals International, Inc., Series C-2
Tranche B Term Loan.......................................... 4.75% 12/11/19 499,095
2,881,111 Valeant Pharmaceuticals International, Inc., Series F-1
Tranche B Term Loan.......................................... 5.00% 04/01/22 2,843,109
1,029,481 Valeant Pharmaceuticals International, Inc., Term Loan BD....... 4.50% 02/13/19 1,015,583
-------------
23,926,113
-------------
PROPERTY & CASUALTY INSURANCE - 1.0%
194,886 Cunningham Lindsey U.S., Inc., Initial Loan (Second Lien) (g)... 9.25% 06/10/20 100,041
2,809,495 Cunningham Lindsey U.S., Inc., Initial Term Loan (First Lien)... 5.00% 12/10/19 2,317,834
1,200,000 Sedgwick Claims Management Services, Inc., Initial Loan
(Second Lien)................................................ 6.75% 02/28/22 1,150,500
-------------
3,568,375
-------------
REAL ESTATE SERVICES - 2.3%
8,634,753 DTZ Worldwide LTD., 2015-1 Additional Term Loan................. 4.25% 11/04/21 8,605,999
-------------
RESEARCH & CONSULTING SERVICES - 4.0%
3,073,356 Acosta, Inc., Term Loan B....................................... 4.25% 09/26/21 3,055,100
5,829,567 Advantage Sales & Marketing, Inc., Initial Term Loan (First
Lien)........................................................ 4.25% 07/23/21 5,804,091
1,770,695 Information Resources, Inc., Term Loan.......................... 4.75% 09/30/20 1,771,811
4,346,168 TransUnion LLC, 2015 Term B-2 Loan.............................. 3.50% 04/09/21 4,344,952
-------------
14,975,954
-------------
RESTAURANTS - 6.0%
1,428,538 Burger King Corp. (1011778 B.C. ULC), Term B-2 Loan............. 3.75% 12/10/21 1,433,181
3,685,028 Focus Brands, Inc., Refinancing Term Loan (First Lien).......... 4.25% 02/21/18 3,681,969
1,450,000 Focus Brands, Inc., Term Loan (Second Lien)..................... 10.25% 08/21/18 1,446,375
8,341,454 Portillo's Holdings LLC, Second Lien Term Loan.................. 8.00% 08/15/22 7,924,381
6,994,082 Portillo's Holdings LLC, Term B Loan (First Lien)............... 4.75% 08/02/21 6,906,656
1,266,429 Red Lobster Management LLC, Initial Term Loan (First Lien)...... 6.25% 07/28/21 1,269,595
-------------
22,662,157
-------------
Page 10 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
RETAIL REITS - 0.8%
$ 1,050,000 Capital Automotive LLC, Term Loan (Second Lien)................. 6.00% 04/30/20 $ 1,053,938
1,816,361 Capital Automotive LLC, Tranche B-1 Term Loan Facility.......... 4.00% 04/10/19 1,823,554
-------------
2,877,492
-------------
SECURITY & ALARM SERVICES - 0.2%
178,750 Garda World Security Corp., Term B Delayed Draw Loan............ 4.00%-5.50% 11/06/20 175,958
698,750 Garda World Security Corp., Term Loan B......................... 4.00%-5.50% 11/08/20 687,835
-------------
863,793
-------------
SEMICONDUCTORS - 3.6%
9,333,333 Avago Technologies Cayman Ltd., Term B-1 Dollar Loan............ 4.25% 02/01/23 9,355,640
800,000 Micron Technology, Inc., Term Loan.............................. 6.46% 04/26/22 806,800
890,895 NXP B.V., Tranche B Loan........................................ 3.75% 12/07/20 893,372
2,550,000 Western Digital Corp., U.S. Term B Loan......................... 6.25% 04/29/23 2,539,647
-------------
13,595,459
-------------
SOFT DRINKS - 1.4%
5,358,133 Keurig Green Mountain, Inc. (Maple Holdings Acquisition Corp.),
Term B USD Loan.............................................. 5.25% 03/03/23 5,370,403
-------------
SPECIALIZED CONSUMER SERVICES - 2.8%
4,247,164 Asurion LLC, Incremental Tranche B-1 Term Loan.................. 5.00% 05/24/19 4,250,944
4,650,862 Asurion LLC, Incremental Tranche B-4 Term Loan.................. 5.00% 08/04/22 4,635,375
1,058,824 Asurion LLC, Term Loan (Second Lien)............................ 8.50% 03/03/21 1,033,941
660,321 Expert Global Solutions, Inc. (NCO Group, Inc.), Term B Advance
(First Lien)................................................. 8.50% 04/03/18 658,670
-------------
10,578,930
-------------
SPECIALIZED FINANCE - 1.0%
1,293,500 AlixPartners LLP, Initial Term Loan............................. 4.50% 07/15/22 1,297,057
2,263,894 Duff & Phelps Corp., Initial Term Loan.......................... 4.75% 04/23/20 2,258,234
-------------
3,555,291
-------------
SPECIALTY CHEMICALS - 0.8%
979,275 Omnova Solutions, Inc., Term B-1 Loan........................... 4.25% 05/31/18 980,499
1,575,160 Platform Specialty Products Corp. (fka: Macdermid, Inc.),
Tranche B-2 Term Loan........................................ 5.50% 06/07/20 1,570,434
529,333 Trinseo Materials Operating S.C.A., Term Loan B................. 4.25% 10/13/21 530,821
-------------
3,081,754
-------------
SPECIALTY STORES - 3.6%
994,945 Party City Holdings, Inc., Term Loan............................ 4.25% 08/06/22 991,840
8,651,077 PetSmart, Inc., Tranche B-1 Loan................................ 4.25% 03/11/22 8,651,077
2,308,460 Toys "R" US-Delaware, Inc., Term B-2 Loan....................... 5.25% 05/25/18 2,002,589
2,016,941 Toys "R" US-Delaware, Inc., Term B4 Loan........................ 9.75% 04/25/20 1,678,257
-------------
13,323,763
-------------
SYSTEMS SOFTWARE - 5.2%
530,398 Applied Systems, Inc., Initial Term Loan (First Lien)........... 4.00%-5.50% 01/25/21 529,295
533,266 Applied Systems, Inc., Initial Term Loan (Second Lien).......... 7.50% 01/24/22 529,491
1,492,500 Blue Coat Systems, Inc., Initial Term Loan...................... 4.50% 05/20/22 1,486,441
12,390,684 BMC Software Finance, Inc., Initial US Term Loan................ 5.00% 09/10/20 11,089,662
1,875,000 Compuware Corp., Term Loan B.................................... 6.25% 12/31/19 1,801,181
4,016,677 Vertafore, Inc., Term Loan 2013................................. 4.25% 10/03/19 4,013,825
-------------
19,449,895
-------------
See Notes to Financial Statements Page 11
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
PRINCIPAL STATED
VALUE DESCRIPTION RATE (b) MATURITY (c) VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
SENIOR FLOATING-RATE LOAN INTERESTS (CONTINUED)
TRUCKING - 1.8%
$ 2,211,429 Hertz Corp., The, Tranche B-1 Term Loan......................... 3.75% 03/11/18 $ 2,210,389
182,330 Kenan Advantage Group, Inc., Delayed Draw Term 1 Loan (h)....... 1.50%(i) 07/29/22 181,647
443,560 Kenan Advantage Group, Inc., Term Loan B-2...................... 4.00% 07/31/22 441,896
1,362,638 Kenan Advantage Group, Inc., Term Loan B1....................... 4.00% 07/31/22 1,357,528
2,562,642 SIRVA Worldwide, Inc., Loan (g)................................. 7.50% 03/27/19 2,428,104
-------------
6,619,564
-------------
TOTAL SENIOR FLOATING-RATE LOAN INTERESTS.................................................... 490,218,959
(Cost $505,471,053) -------------
PRINCIPAL STATED STATED
VALUE DESCRIPTION COUPON MATURITY VALUE
------------ ---------------------------------------------------------------- ----------- ------------ -------------
CORPORATE BONDS AND NOTES - 4.5%
ALTERNATIVE CARRIERS - 0.4%
2,000,000 Intelsat Luxembourg S.A. (Luxembourg)........................... 6.75% 06/01/18 1,444,380
-------------
AUTO PARTS & EQUIPMENT - 0.2%
250,000 American Axle & Manufacturing, Inc.............................. 6.25% 03/15/21 260,938
500,000 MPG Holdco I, Inc............................................... 7.38% 10/15/22 497,500
-------------
758,438
-------------
CABLE & SATELLITE - 0.6%
2,000,000 CCO Holdings LLC/CCO Holdings Capital Corp...................... 5.75% 01/15/24 2,085,000
-------------
CASINOS & GAMING - 1.2%
4,900,000 Caesars Growth Properties Holdings LLC/Caesars Growth
Properties Finance, Inc...................................... 9.38% 05/01/22 4,495,750
-------------
HEALTH CARE EQUIPMENT - 0.4%
1,800,000 Kinetic Concepts, Inc./KCI USA, Inc............................. 12.50% 11/01/19 1,656,000
-------------
HEALTH CARE FACILITIES - 0.8%
350,000 CHS/Community Health Systems, Inc............................... 6.88% 02/01/22 302,537
1,000,000 Select Medical Corp............................................. 6.38% 06/01/21 967,500
800,000 Tenet Healthcare Corp........................................... 6.00% 10/01/20 846,000
357,000 Tenet Healthcare Corp........................................... 8.13% 04/01/22 361,016
643,000 Tenet Healthcare Corp........................................... 6.75% 06/15/23 606,831
-------------
3,083,884
-------------
LIFE SCIENCES TOOLS & SERVICES - 0.5%
2,500,000 Crimson Merger Sub, Inc. (j).................................... 6.63% 05/15/22 2,046,875
-------------
PHARMACEUTICALS - 0.2%
620,000 Valeant Pharmaceuticals International, Inc. (Canada) (j)........ 5.38% 03/15/20 550,250
-------------
SECURITY & ALARM SERVICES - 0.2%
1,000,000 Garda World Security Corp. (Canada) (j)......................... 7.25% 11/15/21 817,500
-------------
TOTAL CORPORATE BONDS AND NOTES.............................................................. 16,938,077
(Cost $18,859,082) -------------
Page 12 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (a) (CONTINUED)
MAY 31, 2016
SHARES DESCRIPTION VALUE
------------ --------------------------------------------------------------------------------------------- -------------
COMMON STOCKS - 0.0%
COMMODITY CHEMICALS - 0.0%
20 LyondellBasell Industries N.V., Class A...................................................... $ 1,627
-------------
LIFE SCIENCES TOOLS & SERVICES - 0.0%
15,800 New Millennium Holdco, Inc. (f) (k) (l)...................................................... 72,585
-------------
TOTAL COMMON STOCKS.......................................................................... 74,212
(Cost $79,000) -------------
RIGHTS - 0.0%
LIFE SCIENCES TOOLS & SERVICES - 0.0%
1 New Millennium Holdco, Inc., Corporate Claim Trust (f) (g) (k) (m)........................... 0
1 New Millennium Holdco, Inc., Lender Claim Trust (f) (g) (k) (m).............................. 0
-------------
TOTAL RIGHTS................................................................................. 0
(Cost $0) -------------
WARRANTS - 0.0%
BROADCASTING - 0.0%
1,449 Cumulus Media, Inc. (g) (k) (m) (n).......................................................... 0
(Cost $0) -------------
TOTAL INVESTMENTS - 135.4%................................................................... 507,231,248
(Cost $524,409,135) (o) -------------
OUTSTANDING LOAN - (36.6%)................................................................... (137,000,000)
NET OTHER ASSETS AND LIABILITIES - 1.2%...................................................... 4,454,120
-------------
NET ASSETS - 100.0%.......................................................................... $ 374,685,368
=============
-----------------------------
(a) All or a portion of the securities are available to serve as collateral on
the outstanding loan.
(b) Senior Floating-Rate Loan Interests ("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 LIBOR rate. The interest rate shown
reflects the rate in effect at May 31, 2016. When a range of rates is
disclosed, the Fund holds more than one contract within the same tranche
at varying rates.
(c) 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.
(d) This issuer has filed for protection in federal bankruptcy court.
(e) This issuer is in default but interest is still being accrued by the Fund
and paid by the issuer.
(f) On December 21, 2015, Millennium Health, LLC completed a Bankruptcy Plan
of Reorganization. As part of the Bankruptcy Plan of Reorganization, the
holders of Millennium Laboratories LLC, Tranche B Term Loan received a
portion of a new term loan and a pro rata share of the newly issued common
equity shares in New Millennium Holdco, Inc., the new company. Each lender
was also issued a beneficial interest in the Corporate Claim Trust
entitling it, as holder of such beneficial interest, to receive Corporate
Claim Trust Distributions when and if net cash proceeds from the pursuit
of Retained Corporate Causes of Action are available to make such a
distribution. In addition, each lender was issued a beneficial interest in
the Lender Claim Trust entitling it, as holder of such beneficial
interest, to receive Lender Claim Trust Distributions when and if net cash
proceeds from the pursuit of Retained Lender Causes of Action are
available to make such a distribution.
(g) Pursuant to procedures adopted by the Fund's Board of Trustees, this
security has been determined to be illiquid by First Trust Advisors L.P.
(the "Advisor").
(h) Delayed Draw Loan (see Note 2C - Unfunded Loan Commitments in the Notes to
Financial Statements).
(i) Represents commitment fee rate on unfunded loan commitment. The commitment
fee rate steps up at predetermined time intervals.
See Notes to Financial Statements Page 13
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016
(j) This security, sold within the terms of a private placement memorandum, is
exempt from registration upon resale under Rule 144A under the Securities
Act of 1933, as amended (the "1933 Act"), and may be resold in
transactions exempt from registration, normally to qualified institutional
buyers. Pursuant to procedures adopted by the Fund's Board of Trustees,
this security has been determined to be liquid by the Advisor. Although
market instability can result in periods of increased overall market
illiquidity, liquidity for each security is determined based on
security-specific factors and assumptions, which require subjective
judgment. At May 31, 2016, securities noted as such amounted to $3,414,625
or 0.9% of net assets.
(k) Non-income producing security.
(l) Security received in a transaction exempt from registration under the 1933
Act. The security may be resold pursuant to an exemption from registration
under the 1933 Act, typically to qualified institutional buyers. Pursuant
to procedures adopted by the Fund's Board of Trustees, this security has
been determined to be liquid by the Advisor. Although market instability
can result in periods of increased overall market illiquidity, liquidity
for the security is determined based on security-specific factors and
assumptions, which require subjective judgment. At May 31, 2016, security
noted as such amounted to $72,585 or 0.0% of net assets.
(m) This security is fair valued by the Pricing Committee of the Advisor in
accordance with procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the Investment Company Act of 1940, as
amended. At May 31, 2016, investments noted as such are valued at $0 or
0.0% of net assets.
(n) This security is restricted and cannot be offered for public sale without
first being registered under the 1933 Act. Prior to registration,
restricted securities may only be resold in transactions exempt from
registration (See Note 2D - Restricted Securities in the Notes to
Financial Statements).
(o) Aggregate cost for federal income tax purposes is $524,729,991. As of May
31, 2016, the aggregate gross unrealized appreciation for all securities
in which there was an excess of value over tax cost was $2,079,077 and the
aggregate gross unrealized depreciation for all securities in which there
was an excess of tax cost over value was $19,577,820.
-----------------------------
VALUATION INPUTS
A summary of the inputs used to value the Fund's investments as of May 31, 2016
is as follows (see Note 2A - Portfolio Valuation in the Notes to Financial
Statements):
LEVEL 2 LEVEL 3
TOTAL LEVEL 1 SIGNIFICANT SIGNIFICANT
VALUE AT QUOTED OBSERVABLE UNOBSERVABLE
INVESTMENTS 5/31/2016 PRICES INPUTS INPUTS
------------------------------------------------- ------------- ------------- ------------- -------------
Senior Floating-Rate Loan Interests:
Property & Casualty Insurance $ 3,568,375 $ -- $ 3,468,334 $ 100,041
Trucking 6,619,564 -- 4,191,460 2,428,104
Other Industry Categories* 480,031,020 -- 480,031,020 --
------------- ------------- ------------- -------------
Total Senior Floating-Rate Loan Interests 490,218,959 -- 487,690,814 2,528,145
Corporate Bonds and Notes* 16,938,077 -- 16,938,077 --
Common Stocks:
Commodity Chemicals 1,627 1,627 -- --
Life Sciences Tools & Services 72,585 -- 72,585 --
------------- ------------- ------------- -------------
Total Common Stocks 74,212 1,627 72,585 --
Rights* -- ** -- -- -- **
Warrants* -- ** -- -- ** --
------------- ------------- ------------- -------------
Total Investments $ 507,231,248 $ 1,627 $ 504,701,476 $ 2,528,145
============= ============= ============= =============
* 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.
** Investment is valued at $0.
All transfers in and out of the Levels during the period are assumed to be
transferred on the last day of the period at their current value. As of May 31,
2016, the Fund transferred Senior Floating-Rate Loan Interests valued at
$2,528,145 from Level 2 to Level 3 of the fair value hierarchy. The Senior
Floating-Rate Loan Interests that transferred from Level 2 to Level 3 did so
primarily as a result of a change in information obtained from an independent
third-party pricing service relating to the market activity of individual Senior
Floating-Rate Loan Interests and a lack of trading activity in certain Senior
Floating-Rate Loan Interests.
Level 3 Senior Floating-Rate Loan Interests that are fair valued by the
Advisor's Pricing Committee are footnoted in the Portfolio of Investments. Level
3 Senior Floating-Rate Loan Interests are valued based on either third-party
pricing service prices obtained from dealer runs and indicative sheets from
brokers or are valued using broker quotes. The values are based on unobservable
and non-quantitative inputs. The Trust's Board of Trustees has adopted valuation
procedures that are utilized by the Advisor's Pricing Committee to oversee the
day-to-day valuation of the Fund's investments. The Advisor's Pricing Committee,
through the Fund's fund accounting agent, monitors the daily pricing via
tolerance checks and stale and unchanged price reviews. The Advisor's Pricing
Committee also reviews monthly back testing of pricing service prices by
comparing sales prices of the Fund's investments to prior day pricing service
prices. Additionally, the Advisor's Pricing Committee reviews periodic
information from the Fund's third-party pricing service that compares secondary
market trade prices to their daily valuations.
Page 14 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2016
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:
BEGINNING BALANCE AT MAY 31, 2015
Senior Floating-Rate Loan Interests $ 3,412,500
Rights --
NET REALIZED GAIN (LOSS)
Senior Floating-Rate Loan Interests 16,072
Rights --
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION
Senior Floating-Rate Loan Interests --
Rights --
PURCHASES
Senior Floating-Rate Loan Interests --
Rights --
SALES
Senior Floating-Rate Loan Interests (3,428,572)
Rights --
TRANSFERS IN
Senior Floating-Rate Loan Interests 2,528,145
Rights -- **
TRANSFERS OUT
Senior Floating-Rate Loan Interests --
Rights --
ENDING BALANCE AT MAY 31, 2016
Senior Floating-Rate Loan Interests 2,528,145
Rights -- **
------------
TOTAL LEVEL 3 HOLDINGS $ 2,528,145
============
** Investment is valued at $0.
Net change in unrealized appreciation/depreciation from Level 3 investments held
as of May 31, 2016 was $(251,833) 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 (FCT)
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2016
ASSETS:
Investments, at value
(Cost $524,409,135)......................................................................... $ 507,231,248
Cash........................................................................................... 3,968,851
Receivables:
Investment securities sold.................................................................. 14,767,403
Interest.................................................................................... 3,408,574
Dividends................................................................................... 17
Prepaid expenses............................................................................... 12,907
-------------
Total Assets................................................................................ 529,389,000
-------------
LIABILITIES:
Outstanding loan............................................................................... 137,000,000
Payables:
Investment securities purchased............................................................. 16,787,099
Investment advisory fees.................................................................... 323,374
Unfunded loan commitments................................................................... 181,647
Interest and fees on loan................................................................... 181,032
Audit and tax fees.......................................................................... 78,400
Administrative fees......................................................................... 70,798
Printing fees............................................................................... 29,858
Legal fees.................................................................................. 29,152
Custodian fees.............................................................................. 11,272
Transfer agent fees......................................................................... 4,514
Trustees' fees and expenses................................................................. 3,297
Financial reporting fees.................................................................... 771
Other liabilities.............................................................................. 2,418
-------------
Total Liabilities........................................................................... 154,703,632
-------------
NET ASSETS..................................................................................... $ 374,685,368
=============
NET ASSETS CONSIST OF:
Paid-in capital................................................................................ $ 500,378,972
Par value...................................................................................... 266,970
Accumulated net investment income (loss)....................................................... (251,040)
Accumulated net realized gain (loss) on investments............................................ (108,531,647)
Net unrealized appreciation (depreciation) on investments...................................... (17,177,887)
-------------
NET ASSETS..................................................................................... $ 374,685,368
=============
NET ASSET VALUE, per Common Share (par value $0.01 per Common Share)........................... $ 14.03
=============
Number of Common Shares outstanding (unlimited number of Common Shares has been authorized).... 26,696,982
=============
Page 16 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MAY 31, 2016
INVESTMENT INCOME:
Interest....................................................................................... $ 28,361,767
Dividends ..................................................................................... 64
Other.......................................................................................... 614,169
-------------
Total investment income..................................................................... 28,976,000
-------------
EXPENSES:
Investment advisory fees....................................................................... 3,895,030
Interest and fees on loan...................................................................... 1,955,926
Administrative fees............................................................................ 397,854
Printing fees.................................................................................. 101,202
Audit and tax fees............................................................................. 84,600
Legal fees..................................................................................... 71,636
Custodian fees................................................................................. 68,032
Transfer agent fees............................................................................ 30,720
Trustees' fees and expenses.................................................................... 19,577
Financial reporting fees....................................................................... 9,250
Other.......................................................................................... 55,774
-------------
Total expenses.............................................................................. 6,689,601
-------------
NET INVESTMENT INCOME (LOSS)................................................................... 22,286,399
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain (loss) on investments..................................................... (5,807,937)
Net change in unrealized appreciation (depreciation) on investments......................... (10,999,208)
-------------
NET REALIZED AND UNREALIZED GAIN (LOSS)........................................................ (16,807,145)
-------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS............................... $ 5,479,254
=============
See Notes to Financial Statements Page 17
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
5/31/2016 5/31/2015
-------------- --------------
OPERATIONS:
Net investment income (loss)........................................................ $ 22,286,399 $ 23,335,452
Net realized gain (loss)............................................................ (5,807,937) (846,861)
Net change in unrealized appreciation (depreciation)................................ (10,999,208) (6,404,484)
-------------- --------------
Net increase (decrease) in net assets resulting from operations..................... 5,479,254 16,084,107
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income............................................................... (23,493,344) (22,405,442)
-------------- --------------
Total distributions to shareholders................................................. (23,493,344) (22,405,442)
-------------- --------------
Total increase (decrease) in net assets............................................. (18,014,090) (6,321,335)
NET ASSETS:
Beginning of period................................................................. 392,699,458 399,020,793
-------------- --------------
End of period....................................................................... $ 374,685,368 $ 392,699,458
============== ==============
Accumulated net investment income (loss) at end of period........................... $ (251,040) $ 888,380
============== ==============
CAPITAL TRANSACTIONS WERE AS FOLLOWS:
Common Shares at end of period...................................................... 26,696,982 26,696,982
============== ==============
Page 18 See Notes to Financial Statements
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net increase (decrease) in net assets resulting from operations ................. $ 5,479,254
Adjustments to reconcile net increase (decrease) in net assets resulting from
operations to net cash provided by operating activities:
Purchases of investments.................................................. (238,464,317)
Sales, maturities and paydowns of investments............................. 255,760,583
Net amortization/accretion of premiums/discounts on investments........... (959,858)
Net realized gain/loss on investments..................................... 5,807,937
Net change in unrealized appreciation/depreciation on investments......... 10,999,208
CHANGES IN ASSETS AND LIABILITIES:
Decrease in interest receivable........................................... 282,540
Increase in dividends receivable.......................................... (1)
Decrease in prepaid expenses.............................................. 7,884
Increase in interest and fees on loan payable............................. 90,616
Decrease in investment advisory fees payable.............................. (30,600)
Increase in audit and tax fees payable.................................... 3,200
Increase in legal fees payable............................................ 20,152
Decrease in printing fees payable......................................... (820)
Decrease in administrative fees payable................................... (7,884)
Decrease in custodian fees payable........................................ (11,891)
Increase in transfer agent fees payable................................... 1,576
Decrease in Trustees' fees and expenses payable........................... (202)
Decrease in other liabilities............................................. (556)
--------------
CASH PROVIDED BY OPERATING ACTIVITIES........................................... $ 38,976,821
--------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to Common Shareholders ..................................... (23,493,344)
Proceeds from borrowing................................................... 79,000,000
Repayment of borrowing.................................................... (101,000,000)
--------------
CASH USED IN FINANCING ACTIVITIES............................................... (45,493,344)
--------------
Decrease in cash................................................................ (6,516,523)
Cash at beginning of period..................................................... 10,485,374
--------------
CASH AT END OF PERIOD........................................................... $ 3,968,851
==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest and fees............................... $ 1,865,310
==============
See Notes to Financial Statements Page 19
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
5/31/2016 5/31/2015 5/31/2014 5/31/2013 5/31/2012
----------- ----------- ----------- ----------- ------------
Net asset value, beginning of period............ $ 14.71 $ 14.95 $ 15.14 $ 14.49 $ 14.76
--------- --------- --------- --------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss).................... 0.83 0.87 0.84 1.01 0.91
Net realized and unrealized gain (loss)......... (0.63) (0.27) (0.08) 0.64 (0.31)
--------- --------- --------- --------- ----------
Total from investment operations................ 0.20 0.60 0.76 1.65 0.60
--------- --------- --------- --------- ----------
DISTRIBUTIONS PAID TO SHAREHOLDERS FROM:
Net investment income........................... (0.88) (0.84) (0.95) (1.03) (0.87)
--------- --------- --------- --------- ----------
Total distributions to Common Shareholders...... (0.88) (0.84) (0.95) (1.03) (0.87)
--------- --------- --------- --------- ----------
Premium from shares sold in at Common Share
offering..................................... -- -- 0.00 (a) 0.03 --
--------- --------- --------- --------- ----------
Net asset value, end of period.................. $ 14.03 $ 14.71 14.95 $ 15.14 $ 14.49
========= ========= ========= ========= ==========
Market value, end of period..................... $ 13.05 $ 13.77 14.00 $ 15.37 $ 14.34
========= ========= ========= ========= ==========
TOTAL RETURN BASED ON NET ASSET VALUE (b)....... 2.36% 4.68% 5.35% 11.92% (4.45)%
========= ========= ========= ========= ==========
TOTAL RETURN BASED ON MARKET VALUE (b).......... 1.56% 4.64% (2.82)% 14.80% (2.95)%
========= ========= ========= ========= ==========
-----------------------------
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON SHAREHOLDERS:
Ratio of total expenses to average net assets... 1.79% 1.69% 1.80% 1.85% 1.88%
Ratio of total expenses to average net assets
excluding interest expense................... 1.27% 1.28% 1.36% 1.38% 1.33%
Ratio of net investment income (loss) to average
net assets................................... 5.98% 5.96% 5.60% 6.77% 6.38%
Portfolio turnover rate......................... 43% 63% 90% 125% 63%
Net assets, end of period (in 000's)............ $ 374,685 $ 392,699 $ 399,021 $ 400,825 $ 367,172
Ratio of total expenses to total average Managed
Assets (c)................................... 1.29% 1.18% 1.25% 1.30% 1.31%
Ratio of total expenses to total average Managed
Assets excluding interest expense (c)........ 0.91% 0.89% 0.96% 0.97% 0.93%
INDEBTEDNESS:
Total loan outstanding (in 000's)............... $ 137,000 $ 159,000 $ 174,000 $ 174,000 $ 158,000
Asset coverage per $1,000 of indebtedness (d)... $ 3,735 $ 3,470 $ 3,293 $ 3,304 $ 3,324
-----------------------------
(a) Amount is less than $0.01.
(b) 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 of less than one year. Past performance is not
indicative of future results.
(c) Managed Assets are calculated by taking the Fund's total asset value,
including assets attributable to the principal amount of borrowings, minus
the sum of the Fund's liabilities, other than the principal amount of
borrowings.
(d) Calculated by taking the Fund's total assets less the Fund's total
liabilities, not including the loan outstanding, and dividing by the
outstanding loan balance in 000's.
Page 20 See Notes to Financial Statements
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016
1. ORGANIZATION
First Trust 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 primarily in a portfolio of senior
floating-rate loan interests ("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 Fund, which is an investment company within the scope of Financial
Accounting Standards Board ("FASB") Accounting Standards Update 2013-08, follows
accounting and reporting guidance under FASB Accounting Standards Codification
Topic 946, "Financial Services-Investment Companies." 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 ("U.S. GAAP") 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 Fund's 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 at market value or, in the absence of
market value with respect to any portfolio securities, at fair value. Market
value prices represent last sale or official closing prices from a national or
foreign exchange (i.e., a regulated market) and are primarily obtained from
third-party pricing services. Fair value prices represent any prices not
considered market value prices and are either obtained from a third-party
pricing service or are determined by the Pricing Committee of the Fund's
investment advisor, First Trust Advisors L.P. ("First Trust" or the "Advisor"),
in accordance with valuation procedures adopted by the Fund's Board of Trustees,
and in accordance with provisions of the 1940 Act. Investments valued by the
Advisor's Pricing Committee, if any, are footnoted as such in the footnotes to
the Portfolio of Investments. The Fund's investments are valued as follows:
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 market 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 fair
valued using information provided by a third-party pricing service. The
third-party pricing service primarily uses over-the-counter pricing from
dealer runs and broker quotes from indicative sheets to value the Senior
Loans. If the pricing service cannot or does not provide a valuation for a
particular Senior Loan or such valuation is deemed unreliable, the
Advisor's Pricing Committee may value such Senior Loan at a fair value
according to procedures adopted by the Fund's Board of Trustees, and in
accordance with the provisions of the 1940 Act. Fair valuation of a Senior
Loan is based on the consideration of all available information,
including, but not limited to the following:
1) the fundamental business data relating to the borrower/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 a security;
4) the financial statements of the borrower/issuer;
5) the credit quality and cash flow of the borrower/issuer, based on
the Advisor's or external analysis;
6) the information as to any transactions in or offers for the
security;
-----------------------------
(1) The terms "security" and "securities" used throughout the Notes to
Financial Statements include 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, 2016
7) the price and extent of public trading in similar securities (or
equity securities) of the borrower/issuer, 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 borrower/issuer, including any ability
to obtain money or resources from a parent or affiliate and an
assessment of the borrower's/issuer's management;
11) the prospects for the borrower's/issuer's industry, and multiples
(of earnings and/or cash flows) being paid for similar businesses in
that industry;
12) borrower's/issuer's competitive position within the industry;
13) borrower's/issuer's ability to access additional liquidity through
public and/or private markets; and
14) other relevant factors.
Common stocks and other equity securities listed on any national or
foreign exchange (excluding The Nasdaq Stock Market LLC ("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
or, for Nasdaq and AIM securities, the official closing price. Securities
traded on more than one securities exchange are valued at the last sale
price or official closing price, as applicable, at the close of the
securities exchange representing the principal market for such securities.
Securities traded in an over-the-counter market are fair valued at the
mean of their most recent bid and asked price, if available, and otherwise
at their closing bid price.
Corporate bonds, corporate notes and other debt securities are valued on
the basis of valuations provided by dealers who make markets in such
securities or by a third-party pricing service approved by the Fund's
Board of Trustees, which may use the following valuation inputs when
available:
1) benchmark yields;
2) reported trades;
3) broker/dealer quotes;
4) issuer spreads;
5) benchmark securities;
6) bids and offers; and
7) reference data including market research publications.
Fixed-income and other debt securities having a remaining maturity of 60
days or less when purchased are fair valued at cost adjusted for
amortization of premiums and accretion of discounts (amortized cost),
provided the Advisor's Pricing Committee has determined that the use of
amortized cost is an appropriate reflection of fair value given market and
issuer-specific conditions existing at the time of the determination.
Factors that may be considered in determining the appropriateness of the
use of amortized cost include, but are not limited to, the following:
1) the credit conditions in the relevant market and changes thereto;
2) the liquidity conditions in the relevant market and changes thereto;
3) the interest rate conditions in the relevant market and changes
thereto (such as significant changes in interest rates);
4) issuer-specific conditions (such as significant credit
deterioration); and
5) any other market-based data the Advisor's Pricing Committee
considers relevant. In this regard, the Advisor's Pricing Committee
may use last-obtained market-based data to assist it when valuing
portfolio securities using amortized cost.
Certain securities may not be able to be priced by pre-established pricing
methods. Such securities may be valued by the Fund's Board of Trustees or its
delegate, the Advisor's Pricing Committee, at fair value. These securities
generally include, but are not limited to, restricted securities (securities
which may not be publicly sold without registration under the Securities Act of
1933, as amended (the "1933 Act")) for which a pricing service is unable to
provide a market price; securities whose trading has been formally suspended; a
security whose market or fair value price is not available from a
pre-established pricing source; a security with respect to which an event has
occurred that is likely to materially affect the value of the security after the
market has closed but before the calculation of the Fund's NAV or make it
difficult or impossible to obtain a reliable market quotation; and a security
whose price, as provided by the pricing service, does not reflect the security's
fair value. As a general principle, the current fair value of a security would
appear to be the amount which the owner might reasonably expect to receive for
the security upon its current sale. When fair value prices are used, generally
they will differ from market quotations or official closing prices on the
applicable exchanges. A variety of factors may be considered in determining the
fair value of such securities, including, but not limited to, the following:
1) the type of security;
2) the size of the holding;
3) the initial cost of the security;
Page 22
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016
4) transactions in comparable securities;
5) price quotes from dealers and/or pricing services;
6) relationships among various securities;
7) information obtained by contacting the issuer, analysts, or the
appropriate stock exchange;
8) an analysis of the issuer's financial statements; and
9) the existence of merger proposals or tender offers that might affect
the value of the security.
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 investments. An active market is a market in which
transactions for the investment 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 investments in active markets.
o Quoted prices for identical or similar investments in markets
that are non-active. A non-active market is a market where
there are few transactions for the investment, 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
investment (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
investment.
The inputs or methodologies used for valuing investments are not necessarily an
indication of the risk associated with investing in those investments. A summary
of the inputs used to value the Fund's investments as of May 31, 2016, 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 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, delayed delivery or forward purchase commitments. The Fund
had no when-issued, delayed-delivery, or forward purchase commitments as of May
31, 2016.
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
$181,647 as of May 31, 2016.
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 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, 2016, the Fund held restricted securities as
shown in the following table. The Fund does not have the right to demand that
such securities be 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 date and yield for this issuer.
% 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 $ 0.00 $ -- $ -- 0.00%
Page 23
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016
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 U.S.
GAAP. 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 significantly modified 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
fiscal year ended May 31, 2016, resulting in book and tax accounting
differences, have been reclassified at year end to reflect an increase in
accumulated net investment income (loss) of $67,525, an increase in accumulated
net realized gain (loss) on investments of $717,665, and a decrease to paid-in
capital of $785,190. Net assets were not affected by these reclassifications.
The tax character of distributions paid during the fiscal years ended May 31,
2016 and 2015 is as follows:
Distributions paid from: 2016 2015
------------ ------------
Ordinary income................................. $ 23,493,344 $ 22,405,442
As of May 31, 2016, the components of distributable earnings and net assets on a
tax basis were as follows:
Undistributed ordinary income................... $ 61,467
Undistributed capital gains..................... --
------------
Total undistributed earnings.................... 61,467
Accumulated capital and other losses............ (108,523,298)
Net unrealized appreciation (depreciation)...... (17,498,743)
------------
Total accumulated earnings (losses)............. (125,960,574)
Other........................................... --
Paid-in capital................................. 500,645,942
------------
Net assets...................................... $374,685,368
============
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 and state income taxes. However, due to the
timing and amount of distributions, the Fund may be subject to an excise tax of
4% of the amount by which approximately 98% of the Fund's taxable income exceeds
the distributions from such taxable income for the calendar year.
Under the Regulated Investment Company Modernization Act of 2010 (the "Act"),
net capital losses arising in taxable years after December 31, 2010, may be
carried forward indefinitely, and their character is retained as short-term
and/or long-term losses. Previously, net capital losses were carried forward for
up to eight years and treated as short-term losses. As a transition rule, the
Act requires that post-enactment net capital losses be used before pre-enactment
net capital losses. At May 31, 2016, for federal income tax purposes, the Fund
had capital loss carryforwards available that are shown in the following table,
to the extent provided by regulation, to offset future capital gains through the
years indicated. To the extent that these loss carryforwards are used to offset
future capital gains, it is probable that the capital gains offset will not be
distributed to the Fund shareholders.
CAPITAL LOSS AVAILABLE THROUGH
---------------------------------------------------
POST-EFFECTIVE TOTAL CAPITAL
2017 2018 2019 (NO EXPIRATION) LOSS AVAILABLE
----------------------------------------------------------------------------------------
$ 25,585,953 $ 68,278,827 $ 4,665,052 $ 4,442,562 $ 102,972,394
At the taxable year ended May 31, 2016, the Fund had $422,155 of pre-enactment
capital loss carryforward that expired.
The Fund is subject to certain limitations under the 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.
Page 24
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016
Certain losses realized during the current fiscal year may be deferred and
treated as occurring the first day of the following fiscal year for federal
income tax purposes. For the fiscal year ended May 31, 2016, the Fund incurred
and elected to defer net ordinary and capital losses as follows:
Qualified Late Year Losses:
Ordinary Losses $ --
Capital Losses 5,550,904
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 ended 2013, 2014,
2015 and 2016 remain open to federal and state audit. As of May 31, 2016,
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.
G. EXPENSES
The Fund will pay all expenses directly related to its operations.
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. The Charger Corporation is an Illinois corporation
controlled by James A. Bowen, Chief Executive Officer of First Trust. First
Trust is responsible for the selection and 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.
BNY Mellon Investment Servicing (US) Inc. ("BNYM IS") serves as the Fund's
administrator, fund accountant and transfer agent in accordance with certain fee
arrangements. As administrator and fund accountant, BNYM IS is responsible for
providing certain administrative and accounting services to the Fund, including
maintaining the Fund's books of account, records of the Fund's securities
transactions, and certain other books and records. As transfer agent, BNYM IS is
responsible for maintaining shareholder records for the Fund. The Bank of New
York Mellon ("BNYM") serves as the Fund's custodian in accordance with certain
fee arrangements. As custodian, BNYM is responsible for custody of the Fund's
assets. BNYM IS and BNYM are subsidiaries of The Bank of New York Mellon
Corporation, a financial holding company.
Each Trustee who is not an officer or employee of First Trust, any sub-advisor
or any of their affiliates ("Independent Trustees") is paid a fixed annual
retainer that is allocated equally among each fund in the First Trust Fund
Complex. Prior to January 1, 2016, the fixed annual retainer was allocated pro
rata based on each fund's net assets. Each Independent Trustee is also paid an
annual per fund fee that varies based on whether the fund is a closed-end or
other actively managed fund, or is an index fund.
Additionally, the Lead Independent Trustee and the Chairmen of the Audit
Committee, Nominating and Governance Committee and Valuation Committee are paid
annual fees to serve in such capacities, with such compensation allocated pro
rata among each fund in the First Trust Fund Complex based on net assets.
Independent Trustees are reimbursed for travel and out-of-pocket expenses in
connection with all meetings. The Lead Independent Trustee and Committee
Chairmen rotate every three years. The officers and "Interested" Trustee receive
no compensation from the Fund for acting in such capacities.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of investments, excluding short-term
investments, for the year ended May 31, 2016, were $223,757,450 and
$242,678,448, respectively.
5. BORROWINGS
The Fund has a Revolving Credit and Security Agreement (the "Credit Facility")
with Liberty Street Funding LLC as conduit lender and The Bank of Nova Scotia as
secondary lender and agent for the secured parties under the agreement. 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 terms of the
Credit Facility, the loans under the Credit Facility bear interest for each
settlement period at a rate per annum based on the commercial paper rate of the
conduit lender. Effective July 10, 2015, the Credit Facility was amended,
whereby the expiration date of the Credit Facility was extended until July 8,
2016 and the total commitment was reduced from $185,000,000 to $180,000,000. The
Credit Facility may be renewed annually. Under the requirements of the 1940 Act,
the Fund, immediately after any such borrowings, must have "asset coverage" of
at least 300% (33-1/3% of the Fund's total assets after borrowings). The Fund
pays a utilization fee at a per annum rate of 0.3625% of the daily average of
Page 25
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NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016
the aggregate outstanding principal amount of the advances during the prior
calendar month, and a commitment fee at a per annum rate of the product of (i)
0.3625% of the daily average of the total commitment in effect (or if
terminated, the aggregate outstanding principal amount of the advances funded or
maintained) during the preceding calendar month and (ii) 1.02.
For the year ended May 31, 2016, the average amount outstanding under the Credit
Facility was $146,568,306. As of May 31, 2016, the Fund had outstanding
borrowings of $137,000,000. The high and low annual interest rates for the loan
under the Credit Facility funded by the conduit lender during the year ended May
31, 2016, were 0.68% and 0.24%, respectively, with a weighted average interest
rate of 0.45%. The annual interest rate in effect for the loan at May 31, 2016,
was 0.68%.
6. 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.
7. LITIGATION
The Fund has been named as a defendant in litigation pending in the Bankruptcy
Court for the Southern District of New York as part of the General Motors
bankruptcy case. The plaintiff, the Motors Liquidation Company Avoidance Action
Trust, is an entity formed under the bankruptcy plan of reorganization to
prosecute "avoidance" actions such as preference actions. The lawsuit arises
from years of ancillary litigation concerning whether the former holders of a
term loan to General Motors ("GM"), for which JP Morgan acted as agent, lost
their lien on GM collateral when a Uniform Commercial Code release was
mistakenly filed terminating their interest in certain collateral securing the
term loan. On January 21, 2015, the federal appeals court in New York ruled that
the term lenders' collateral interest was, indeed, terminated.
By virtue of the federal appellate court's decision, all of the former holders
of the term loan, including the Fund, are now being sued in the bankruptcy court
in New York for the avoidance and return of certain payments they received both
before and after the GM bankruptcy filing. The bankruptcy court lawsuit is
premised on the assertion that the term lenders received payments on account of
their status as fully secured creditors when in fact they should not have
received the payments because they were not in fact secured.
The Fund was first served following the filing of the First Amended Complaint on
May 20, 2015. The payments which were received by the Fund in 2009 and which the
plaintiff seeks to recover from the Fund total $8,057,298.44. The Fund has
engaged counsel to assist with its defense of this matter. Based on the current
status of the litigation, the Fund cannot predict the outcome of the litigation
at this time or the impact to Fund net assets, if any.
8. SUBSEQUENT EVENTS
Management has evaluated the impact of all subsequent events to the Fund through
the date the financial statements were issued, and has determined that there
were the following subsequent events:
Effective July 8, 2016, the Credit Facility was amended whereby the expiration
date was extended until July 7, 2017 and the total commitment was reduced from
$180,000,000 to $170,000,000.
On June 20, 2016, the Fund declared a distribution of $0.07 per share to Common
Shareholders of record on July 6, 2016, payable July 15, 2016.
On July 20, 2016, the Fund declared a distribution of $0.07 per share to Common
Shareholders of record on August 3, 2016, payable August 15, 2016.
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"), including the portfolio
of investments, as of May 31, 2016, 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, 2016 by correspondence with the Fund's
custodian, brokers, and agent banks; when 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 First
Trust Senior Floating Rate Income Fund II as of May 31, 2016, 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 the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
Chicago, Illinois
July 25, 2016
Page 27
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ADDITIONAL INFORMATION
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016 (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
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016 (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 September 16, 2015, 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 Meeting of Shareholders for the Fund was held on September 14, 2015
(the "meeting"). At the meeting, Trustee Niel B. Nielson was elected as Class II
Trustee for a three-year term expiring at the Fund's annual meeting of
shareholders in 2018. The number of votes cast in favor of Mr. Nielson was
21,882,909, the number of votes against Mr. Nielson was 500,819, and the number
of broker non-votes was 4,313,254. Thomas R. Kadlec, Richard E. Erickson, James
A. Bowen and Robert F. Keith are current and continuing Trustees. Messrs. Bowen
and Keith are currently the Class III Trustees of the Fund for a term expiring
at the Fund's annual meeting of shareholders in 2016. Messrs. Kadlec and
Erickson are currently the Class I Trustees of the Fund for a term expiring at
the Fund's annual meeting of shareholders in 2017.
TAX INFORMATION
Of the ordinary income (including short-term capital gain) distributions made by
the Fund during the year ended May 31, 2016, none qualify for the corporate
dividends received deduction available to corporate shareholders or as qualified
dividend income.
Distributions paid to foreign shareholders between the period January 1, 2016,
and May 31, 2016, that were properly designated by the Fund as "interest-related
dividends" or "short-term capital gain dividends," may not be subject to federal
income tax provided that the income was earned directly by such foreign
shareholders.
RISK CONSIDERATIONS
Risks are inherent in all investing. The following summarizes some, but not all,
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 securities owned by the Fund. The value of these securities, like other
market investments, may move up or down, sometimes rapidly and unpredictably.
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. Security prices can fluctuate for several reasons including
the general condition of the securities markets, or when political or economic
events affecting the issuers occur. When the Advisor or Sub-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 securities is extremely limited or absent), the Fund may take
temporary defensive positions.
HIGH-YIELD SECURITIES RISK: The Fund may invest up to 100% of its Managed Assets
in lower grade debt securities, which may also be referred to as below
investment grade debt securities. 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 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 high yield securities in
which the Fund invests are not listed on a national securities exchange. Due to
the smaller, less liquid market for the high yield securities, the bid-offer
spread on such securities is generally greater than it is for investment grade
securities and the purchase or sale of such securities may take longer to
complete. As of the fourth quarter of 2015, the market for high yield debt has
experienced decreased liquidity, and investor perception of increased risk has
caused yield spreads to widen.
Page 29
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ADDITIONAL INFORMATION (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016 (UNAUDITED)
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 market 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.
CREDIT RISK: Credit risk is the risk that an issuer of a security held by the
Fund will be unable or unwilling to make dividend, interest and/or principal
payments when due and the related risk that the value of a security may decline
because of concerns about the issuer's ability to make such payments. Credit
risk may be heightened for the Fund because it invests a substantial portion of
its net assets in "high yield" or "junk" debt; such securities involve greater
risks, including the possibility of dividend or interest deferral, default or
bankruptcy, and are regarded as predominantly speculative with respect to the
issuer's capacity to pay dividends or interest and repay principal. Credit risk
is heightened for loans in which the Fund invests because companies that issue
such loans tend to be highly leveraged and thus are more susceptible to the
risks of interest deferral, default and/or bankruptcy.
INTEREST RATE RISK: The Fund's portfolio is also subject to interest rate risk.
Interest rate risk is the risk that fixed-income securities will decline in
value because of changes in market interest rates. Investments in debt
securities with long-term maturities may experience significant price declines
if long-term interest rates increase.
PRE-PAYMENT RISK: Loans are subject to pre-payment risk. The degree to which
borrowers prepay loans, whether as a contractual requirement or at their
election, may be affected by general business conditions, the financial
condition of the borrower and competitive conditions among loan investors, among
others. As such, prepayments cannot be predicted with accuracy. Upon a
prepayment, either in part or in full, the actual outstanding debt on which the
Fund derives interest income will be reduced. The Fund may not be able to
reinvest the proceeds received on terms as favorable as the prepaid loan.
LIQUIDITY RISK: The Fund invests a substantial portion of its assets in
lower-quality debt issued by companies that are highly leveraged. Lower-quality
debt tends to be less liquid than higher-quality debt. Moreover, smaller debt
issues tend to be less liquid than larger debt issues. Although the resale, or
secondary market for Senior Loans is growing, it is currently limited. There is
no organized exchange or board of trade on which Senior Loans are traded.
Instead, the secondary market for Senior Loans is an unregulated inter-dealer or
inter-bank resale market. In addition, Senior Loans in which the Fund invests
may require the consent of the borrower and/or agent prior to the settlement of
the sale or assignment. These consent requirements can delay or impede the
Fund's ability to settle the sale of Senior Loans. If the economy experiences a
sudden downturn, or if the market for the Senior Loans in which the Fund invests
becomes distressed, the Fund may have difficulty disposing of Senior Loans if it
needs cash to repay debt, to pay dividends, to pay expenses or to take advantage
of new investment opportunities.
Page 30
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BOARD OF TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016 (UNAUDITED)
NUMBER OF OTHER
PORTFOLIOS IN THE TRUSTEESHIPS OR
FIRST TRUST DIRECTORSHIPS
NAME, ADDRESS TERM OF OFFICE FUND COMPLEX HELD BY
DATE OF BIRTH AND AND LENGTH OF PRINCIPAL OCCUPATIONS OVERSEEN BY TRUSTEE DURING
POSITION WITH THE FUND SERVICE(1) DURING PAST 5 YEARS TRUSTEE PAST 5 YEARS
-----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
-----------------------------------------------------------------------------------------------------------------------------------
Richard E. Erickson, Trustee o Three Year Term Physician; President, Wheaton 125 None
c/o First Trust Advisors L.P. Orthopedics; Limited Partner, Gundersen
120 E. Liberty Drive, o Since Fund Real Estate Limited Partnership;
Suite 400 Inception Member, Sportsmed LLC
Wheaton, IL 60187
D.O.B.: 04/51
Thomas R. Kadlec, Trustee o Three Year Term President, ADM Investor Services, Inc. 125 Director of
c/o First Trust Advisors L.P. (Futures Commission Merchant) ADM Investor
120 E. Liberty Drive, o Since Fund Services, Inc.,
Suite 400 Inception ADM Investor
Wheaton, IL 60187 Services
D.O.B.: 11/57 International, and
Futures Industry
Association
Robert F. Keith, Trustee o Three Year Term President, Hibs Enterprises (Financial 125 Director of Trust
c/o First Trust Advisors L.P. and Management Consulting) Company of
120 E. Liberty Drive, o Since June, 2006 Illinois
Suite 400
Wheaton, IL 60187
D.O.B.: 11/56
Niel B. Nielson, Trustee o Three Year Term Managing Director and Chief Operating 125 Director of
c/o First Trust Advisors L.P. Officer (January 2015 to Present), Pelita Covenant
120 E. Liberty Drive, o Since Fund Harapan Education Foundation (Education Transport, Inc.
Suite 400 Inception Products and Services); President and (May 2003 to
Wheaton, IL 60187 Chief Executive Officer (June 2012 to May 2014)
D.O.B.: 03/54 September 2014), Servant Interactive LLC
(Educational Products and Services);
President and Chief Executive Officer
(June 2012 to September 2014), Dew
Learning LLC (Educational Products
and Services); President (June 2002 to
June 2012), Covenant College
-----------------------------------------------------------------------------------------------------------------------------------
INTERESTED TRUSTEE
-----------------------------------------------------------------------------------------------------------------------------------
James A. Bowen(2), Trustee o Three Year Term Chief Executive Officer, First Trust 125 None
and Chairman of the Board Advisors L.P. and First Trust Portfolios
120 E. Liberty Drive, o Since Fund L.P.; Chairman of the Board of Directors,
Suite 400 Inception BondWave LLC (Software Development Company/
Wheaton, IL 60187 Investment Advisor) and Stonebridge
D.O.B.: 09/55 Advisors LLC (Investment Advisor)
-----------------------------
(1) Currently, James A. Bowen and Robert F. Keith, as Class III Trustees, are
serving as trustees until the Fund's 2016 annual meeting of shareholders.
Thomas R. Kadlec and Richard E. Erickson , as Class I Trustees, are
serving as trustees until the Fund's 2017 annual meeting of shareholders.
Niel B. Nielson, as Class II Trustee, is serving as trustee until the
Fund's 2018 annual meeting of shareholders.
(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 31
--------------------------------------------------------------------------------
BOARD OF TRUSTEES AND OFFICERS (CONTINUED)
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016 (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(3)
-----------------------------------------------------------------------------------------------------------------------------------
James M. Dykas President and Chief o Indefinite Term Managing Director and Chief Financial
120 E. Liberty Drive, Executive Officer Officer (January 2016 to Present), Controller
Suite 400 o Since January 2016 (January 2011 to January 2016), Senior
Wheaton, IL 60187 Vice President (April 2007 to January 2016),
D.O.B.: 01/66 First Trust Advisors L.P. and First Trust
Portfolios L.P.
Donald P. Swade Treasurer, Chief o Indefinite Term Vice President (April 2012 to Present),
120 E. Liberty Drive, Financial Officer and First Trust Advisors L.P. and First Trust
Suite 400 Chief Accounting Officer o Since January 2016 Portfolios L.P., Vice President (September
Wheaton, IL 60187 2006 to April 2012), Guggenheim Funds
D.O.B.: 008/72 Investment Advisors, LLC/Claymore
Securities, Inc.
W. Scott Jardine Secretary and Chief o Indefinite Term General Counsel, First Trust Advisors L.P.
120 E. Liberty Drive, Legal Officer and First Trust Portfolios L.P.; Secretary
Suite 400 o Since Fund Inception and General Counsel, BondWave LLC
Wheaton, IL 60187 (Software Development Company/Investment
D.O.B.: 05/60 Advisor); Secretary of Stonebridge Advisors
LLC (Investment Advisor)
Daniel J. Lindquist Vice President o Indefinite Term Managing Director (July 2012 to Present),
120 E. Liberty Drive, Senior Vice President (September 2005 to
Suite 400 o Since September 2005 Present), First Trust Advisors L.P. and First
Wheaton, IL 60187 Trust Portfolios L.P.
D.O.B: 02/70
Kristi A. Maher Chief Compliance Officer o Indefinite Term Deputy General Counsel, First Trust
120 E. Liberty Drive, and Assistant Secretary Advisors L.P. and First Trust Portfolios L.P.
Suite 400 o Chief Compliance
Wheaton, IL 60187 Officer Since
D.O.B.: 12/66 January 2011
o Assistant Secretary
Since Fund Inception
-----------------------------
(3) 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.
Page 32
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PRIVACY POLICY
--------------------------------------------------------------------------------
FIRST TRUST SENIOR FLOATING RATE INCOME FUND II (FCT)
MAY 31, 2016 (UNAUDITED)
PRIVACY POLICY
First Trust values our relationship with you and considers your privacy an
important priority in maintaining that relationship. We are committed to
protecting the security and confidentiality of your personal information.
SOURCES OF INFORMATION
We collect nonpublic personal information about you from the following sources:
o Information we receive from you and 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 under 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, proxy
services, solicitors 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 within First Trust.
PRIVACY ONLINE
We allow third-party companies, including AddThis (a social media sharing
service), to collect certain anonymous information when you visit our website.
These companies may use non-personally identifiable information during your
visits to this and other websites in order to provide advertisements about goods
and services likely to be of greater interest to you. These companies typically
use a cookie, third party web beacon or pixel tags, to collect this information.
To learn more about this behavioral advertising practice, you can visit
www.networkadvertising.org.
CONFIDENTIALITY AND SECURITY
With regard to our internal security procedures, First Trust restricts access to
your nonpublic personal information to those First Trust employees 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
1-800-621-1675 (First Trust Portfolios) or 1-800-222-6822 (First Trust
Advisors).
Page 33
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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
The Bank of New York Mellon
101 Barclay Street, 20th Floor
New York, NY 10286
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 $70,000 for 2015 and
$70,000 for 2016.
(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 2015 and $0 for 2016.
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 2015 and $0 for 2016.
(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 2015 and $5,200 for 2016. 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 2015 and $0 for 2016.
(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 2015 and $0 for 2016.
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 2015 and $0 for 2016.
(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 the fiscal year
ended May 31, 2015 were $5,200 for the Registrant and $12,700 for the
Registrant's investment adviser and for the fiscal year ended May 31, 2016 were
$5,200 for the Registrant and $14,300 for the Registrant's investment adviser.
(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 MAY 31, 2016
The First Trust Advisors Leveraged Finance Investment team manages a portfolio
comprised primarily of U.S. dollar denominated, senior secured floating-rate
loans. The Portfolio Managers are responsible for directing the investment
activities within the Fund. 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 the
First Trust Advisors Leveraged Finance investment staff, including 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, operations personnel and portfolio
managers report to Mr. Housey.
William Housey, CFA
Senior Vice President, Senior Portfolio Manager
Mr. Housey joined First Trust in June 2010 as the Senior Portfolio Manager for
the Leveraged Finance Investment Team and has 19 years of investment experience.
Mr. Housey is a Senior Vice President of First Trust. 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 bank 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 and Management and Strategy from
Northwestern University's Kellogg School of Business. He holds the FINRA Series
7, Series 52 and Series 63 licenses and the Chartered Financial Analyst
designation. He is a member of the CFA Institute and the CFA Society of Chicago.
Scott D. Fries, CFA
Vice President, Portfolio Manager
Mr. Fries, CFA, joined First Trust in June 2010 as a Portfolio Manager in the
Leveraged Finance Investment Team and has 21 years of investment industry
experience. Mr. Fries is a Senior Vice President of First Trust. Prior to
joining First Trust, Mr. Fries spent 15 years at Morgan Stanley/Van Kampen
Funds, Inc, where he most recently served as Executive Director and Co-Portfolio
Manager of Institutional Separately Managed Accounts. 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. He is a member of the CFA Institute and the CFA Society of Chicago.
(A)(2) Other Accounts Managed by Portfolio Manager(s) or Management Team Member
and Potential Conflicts of Interest
INFORMATION PROVIDED AS OF MAY 31, 2016
Total Assets
# of Accounts for which
Name of Portfolio Total Managed for which Advisory Fee
Manager or Team # of Accounts Advisory Fee is Based is Based on
Member Type of Accounts Managed* Assets on Performance Performance
--------------------- ----------------- ------------- ------------ --------------------- -----------
1. William Housey, CFA Registered 7 $1.65B 0 $0
Investment
Companies:
Other Pooled 0 $0 0 $0
Investment
Vehicles:
Other Accounts: 0 $0 0 $0
2. Scott Fries, CFA Registered 7 $1.65B 0 $0
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. The First Trust Leveraged Finance Team
adheres to its trade allocation policy utilizing a pro-rata methodology to
address this conflict.
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
Team currently 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 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 restricted list of all issuers for which the
First Trust Advisors L.P. Leveraged Finance Team has material non-public
information in its possession and all transactions executed for a product
advised or supervised by First Trust or FTP are compared daily against the
restricted list.
(A)(3) COMPENSATION STRUCTURE OF PORTFOLIO MANAGER(S) OR MANAGEMENT TEAM MEMBERS
INFORMATION PROVIDED AS OF MAY 31, 2016
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 First Trust Advisors L.P. Leveraged Finance Team are not based
upon criteria such as performance of the Registrant and are not directly tied to
the value of assets of the Fund.
(A)(4) DISCLOSURE OF SECURITIES OWNERSHIP AS OF MAY 31, 2016
--------------------------------- --------------------------------------------------
Name of Portfolio Manager or Dollar ($) Range of Fund Shares Beneficially
Team Member Owned
----------- ------
--------------------------------- --------------------------------------------------
William Housey $10,001 - $50,000
--------------------------------- --------------------------------------------------
Scott Fries $0 (0 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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: July 19, 2016
---------------
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 M. Dykas
----------------------------------------
James M. Dykas, President and
Chief Executive Officer
(principal executive officer)
Date: July 19, 2016
---------------
By (Signature and Title)* /s/ Donald P. Swade
----------------------------------------
Donald P. Swade, Treasurer,
Chief Financial Officer and
Chief Accounting Officer
(principal financial officer)
Date: July 19, 2016
---------------
*Print the name and title of each signing officer under his or her signature.