|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
25
|
Statement of assets and liabilities (unaudited)
March 31, 2020
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
Investments, at value (Cost — $96,235,221)
|
|
|
$90,779,350
|
|
|
Foreign currency, at value (Cost — $269,365)
|
|
|
234,717
|
|
|
Deposits with brokers for open reverse repurchase agreements
|
|
|
945,000
|
|
|
Deposits with brokers for centrally cleared swap contracts
|
|
|
876,332
|
|
|
Interest receivable
|
|
|
484,864
|
|
|
Deposits with brokers for open futures contracts and exchange-traded options
|
|
|
290,174
|
|
|
Receivable from broker — variation margin on centrally cleared swap contracts
|
|
|
85,835
|
|
|
Receivable from broker — variation margin on open futures contracts
|
|
|
18,710
|
|
|
Unrealized appreciation on forward foreign currency contracts
|
|
|
11,122
|
|
|
Foreign currency collateral for centrally cleared swap contracts, at value (Cost — $126)
|
|
|
123
|
|
|
Prepaid expenses
|
|
|
12,194
|
|
|
Total Assets
|
|
|
93,738,421
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
Payable for open reverse repurchase agreements (Note 3)
|
|
|
20,782,849
|
|
|
Payable for securities purchased
|
|
|
926,695
|
|
|
Distributions payable
|
|
|
361,801
|
|
|
Unrealized depreciation on forward foreign currency contracts
|
|
|
211,899
|
|
|
Investment management fee payable
|
|
|
60,960
|
|
|
Interest payable
|
|
|
43,050
|
|
|
Due to custodian
|
|
|
39,550
|
|
|
Written options, at value (premiums received — $75,743)
|
|
|
18,531
|
|
|
Directors’ fees payable
|
|
|
3,014
|
|
|
Accrued expenses
|
|
|
88,172
|
|
|
Total Liabilities
|
|
|
22,536,521
|
|
|
Total Net Assets
|
|
|
$71,201,900
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
Par value ($0.001 par value; 4,668,407 shares issued and outstanding; 100,000,000 shares authorized)
|
|
|
$ 4,668
|
|
|
Paid-in capital in excess of par value
|
|
|
90,219,240
|
|
|
Total distributable earnings (loss)
|
|
|
(19,022,008
|
)
|
|
Total Net Assets
|
|
|
$71,201,900
|
|
|
|
|
|
Shares Outstanding
|
|
|
4,668,407
|
|
|
|
|
|
Net Asset Value
|
|
|
$15.25
|
|
See Notes to Financial
Statements.
|
|
|
|
|
26
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
Statement of operations (unaudited)
For the
Six Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
Investment Income:
|
|
|
|
|
|
Interest
|
|
|
$ 2,338,920
|
|
|
Dividends
|
|
|
44,651
|
|
|
Total Investment Income
|
|
|
2,383,571
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Investment management fee (Note 2)
|
|
|
379,702
|
|
|
Interest expense (Note 3)
|
|
|
227,526
|
|
|
Audit and tax fees
|
|
|
40,296
|
|
|
Transfer agent fees
|
|
|
16,864
|
|
|
Directors’ fees
|
|
|
11,449
|
|
|
Shareholder reports
|
|
|
9,392
|
|
|
Fund accounting fees
|
|
|
9,201
|
|
|
Legal fees
|
|
|
9,094
|
|
|
Custody fees
|
|
|
8,071
|
|
|
Stock exchange listing fees
|
|
|
6,254
|
|
|
Excise tax (Note 1)
|
|
|
1,397
|
|
|
Insurance
|
|
|
933
|
|
|
Miscellaneous expenses
|
|
|
5,677
|
|
|
Total Expenses
|
|
|
725,856
|
|
|
Less: Fee waivers and/or expense reimbursements (Note 2)
|
|
|
(288
|
)
|
|
Net Expenses
|
|
|
725,568
|
|
|
Net Investment Income
|
|
|
1,658,003
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency
Contracts and Foreign Currency Transactions (Notes 1, 3 and 4):
|
|
|
|
|
|
Net Realized Gain (Loss) From:
|
|
|
|
|
|
Investment transactions
|
|
|
1,758
|
|
|
Futures contracts
|
|
|
155,533
|
|
|
Written options
|
|
|
64,685
|
|
|
Swap contracts
|
|
|
(412,652
|
)
|
|
Forward foreign currency contracts
|
|
|
29,230
|
|
|
Foreign currency transactions
|
|
|
1,137
|
|
|
Net Realized Loss
|
|
|
(160,309
|
)
|
|
Change in Net Unrealized Appreciation (Depreciation) From:
|
|
|
|
|
|
Investments
|
|
|
(10,273,314
|
)
|
|
Futures contracts
|
|
|
816,747
|
|
|
Written options
|
|
|
83,371
|
|
|
Swap contracts
|
|
|
(1,538,087
|
)
|
|
Forward foreign currency contracts
|
|
|
(171,328
|
)
|
|
Foreign currencies
|
|
|
(27,828
|
)
|
|
Change in Net Unrealized Appreciation (Depreciation)
|
|
|
(11,110,439
|
)
|
|
Net Loss on Investments, Futures Contracts, Written Options, Swap Contracts, Forward Foreign Currency Contracts and Foreign Currency
Transactions
|
|
|
(11,270,748
|
)
|
|
Decrease in Net Assets From Operations
|
|
|
$(9,612,745
|
)
|
See Notes to Financial
Statements.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
27
|
Statements of changes in net assets
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended March 31, 2020 (unaudited)
and the Year Ended September 30, 2019
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
Operations:
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
1,658,003
|
|
|
$
|
3,782,004
|
|
|
Net realized gain (loss)
|
|
|
(160,309)
|
|
|
|
91,816
|
|
|
Change in net unrealized appreciation (depreciation)
|
|
|
(11,110,439)
|
|
|
|
(1,479,013)
|
|
|
Increase (Decrease) in Net Assets From Operations
|
|
|
(9,612,745)
|
|
|
|
2,394,807
|
|
|
|
|
|
|
Distributions to Shareholders From (Note 1):
|
|
|
|
|
|
|
|
|
|
Total distributable earnings
|
|
|
(2,170,809)
|
|
|
|
(4,341,618)
|
|
|
Decrease in Net Assets From Distributions to
Shareholders
|
|
|
(2,170,809)
|
|
|
|
(4,341,618)
|
|
|
Decrease in Net Assets
|
|
|
(11,783,554)
|
|
|
|
(1,946,811)
|
|
|
|
|
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
82,985,454
|
|
|
|
84,932,265
|
|
|
End of period
|
|
$
|
71,201,900
|
|
|
$
|
82,985,454
|
|
See Notes to Financial
Statements.
|
|
|
|
|
28
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
Statement of cash flows (unaudited)
For the
Six Months Ended March 31, 2020
|
|
|
|
|
|
|
|
|
|
Increase (Decrease) in Cash:
|
|
|
|
|
|
Cash Provided (Used) by Operating Activities:
|
|
|
|
|
|
Net decrease in net assets resulting from operations
|
|
$
|
(9,612,745)
|
|
|
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided (used) by operating
activities:
|
|
|
|
|
|
Purchases of portfolio securities
|
|
|
(16,556,616)
|
|
|
Sales of portfolio securities
|
|
|
18,839,736
|
|
|
Net purchases, sales and maturities of short-term investments
|
|
|
684,605
|
|
|
Net amortization of premium (accretion of discount)
|
|
|
(164,804)
|
|
|
Decrease in receivable for securities sold
|
|
|
1,061,082
|
|
|
Decrease in interest receivable
|
|
|
78,683
|
|
|
Increase in receivable from broker — variation margin on centrally cleared swap contracts
|
|
|
(82,862)
|
|
|
Increase in prepaid expenses
|
|
|
(5,313)
|
|
|
Increase in receivable from broker — variation margin on open futures contracts
|
|
|
(18,710)
|
|
|
Decrease in payable for securities purchased
|
|
|
(446,724)
|
|
|
Decrease in investment management fee payable
|
|
|
(3,705)
|
|
|
Decrease in Directors’ fees payable
|
|
|
(241)
|
|
|
Decrease in interest payable
|
|
|
(13,893)
|
|
|
Increase in accrued expenses
|
|
|
41,453
|
|
|
Increase in premiums received from written options
|
|
|
60,475
|
|
|
Decrease in payable to broker — variation margin on open futures contracts
|
|
|
(7,814)
|
|
|
Net realized gain on investments
|
|
|
(1,758)
|
|
|
Change in net unrealized appreciation (depreciation) of investments, written options and forward foreign currency
contracts
|
|
|
10,361,271
|
|
|
Net Cash Provided by Operating Activities*
|
|
|
4,212,120
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
Distributions paid on common stock
|
|
|
(2,170,809)
|
|
|
Increase in due to custodian
|
|
|
39,550
|
|
|
Decrease in payable for reverse repurchase agreements
|
|
|
(638,300)
|
|
|
Net Cash Used in Financing Activities
|
|
|
(2,769,559)
|
|
|
Net Increase in Cash and Restricted Cash
|
|
|
1,442,561
|
|
|
Cash and restricted cash at beginning of period
|
|
|
903,785
|
|
|
Cash and restricted cash at end of period
|
|
$
|
2,346,346
|
|
|
*
|
Included in operating expenses is cash of $241,419 paid for interest on borrowings.
|
|
|
The following table provides a reconciliation of cash and restricted cash reported within the Statement of Assets and Liabilities that sums to the total
of such amounts shown on the Statement of Cash Flows.
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Cash
|
|
$
|
234,717
|
|
|
Restricted cash
|
|
|
2,111,629
|
|
|
Total cash and restricted cash shown in the Statement of Cash Flows
|
|
$
|
2,346,346
|
|
Restricted cash consists of cash that has been segregated to cover the Fund’s collateral or margin obligations under derivative
contracts and for reverse repurchase agreements. It is separately reported on the Statement of Assets and Liabilities as Deposits with brokers.
See Notes to Financial Statements.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
29
|
Financial highlights
|
|
For a share of capital stock outstanding throughout each year ended September 30,
unless otherwise
noted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20201,2
|
|
|
20191
|
|
|
20181
|
|
|
20171
|
|
|
20161
|
|
|
20151
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
|
|
|
$17.78
|
|
|
|
$18.19
|
|
|
|
$18.31
|
|
|
|
$17.40
|
|
|
|
$17.54
|
|
|
|
$18.85
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
0.36
|
|
|
|
0.81
|
|
|
|
0.91
|
|
|
|
0.80
|
|
|
|
0.79
|
|
|
|
0.69
|
|
|
Net realized and unrealized gain (loss)
|
|
|
(2.42)
|
|
|
|
(0.29)
|
|
|
|
(0.10)
|
|
|
|
1.04
|
|
|
|
(0.14)
|
|
|
|
(1.12)
|
|
|
Total income (loss) from operations
|
|
|
(2.06)
|
|
|
|
0.52
|
|
|
|
0.81
|
|
|
|
1.84
|
|
|
|
0.65
|
|
|
|
(0.43)
|
|
|
|
|
|
|
|
|
|
|
Less distributions from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.47)
|
3
|
|
|
(0.93)
|
|
|
|
(0.93)
|
|
|
|
(0.93)
|
|
|
|
(0.74)
|
|
|
|
(0.66)
|
|
|
Return of capital
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.19)
|
|
|
|
(0.22)
|
|
|
Total distributions
|
|
|
(0.47)
|
|
|
|
(0.93)
|
|
|
|
(0.93)
|
|
|
|
(0.93)
|
|
|
|
(0.93)
|
|
|
|
(0.88)
|
|
|
|
|
|
|
|
|
|
|
Net increase due to shares repurchased through tender offer
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.14
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of period
|
|
|
$15.25
|
|
|
|
$17.78
|
|
|
|
$18.19
|
|
|
|
$18.31
|
|
|
|
$17.40
|
|
|
|
$17.54
|
|
|
|
|
|
|
|
|
|
|
Market price, end of period
|
|
|
$13.81
|
|
|
|
$16.25
|
|
|
|
$16.40
|
|
|
|
$17.39
|
|
|
|
$15.92
|
|
|
|
$15.56
|
|
|
Total return, based on NAV4,5
|
|
|
(11.87)
|
%
|
|
|
2.96
|
%
|
|
|
4.52
|
%
|
|
|
10.79
|
%
|
|
|
4.78
|
%6
|
|
|
(2.38)
|
%
|
|
Total return, based on Market Price7
|
|
|
(12.54)
|
%
|
|
|
4.96
|
%
|
|
|
(0.37)
|
%
|
|
|
15.49
|
%
|
|
|
8.53
|
%
|
|
|
(3.95)
|
%
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000s)
|
|
|
$71,202
|
|
|
|
$82,985
|
|
|
|
$84,932
|
|
|
|
$85,492
|
|
|
|
$81,238
|
|
|
|
$116,962
|
|
|
|
|
|
|
|
|
|
|
Ratios to average net assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.77
|
%8
|
|
|
2.12
|
%
|
|
|
2.05
|
%
|
|
|
1.89
|
%
|
|
|
1.94
|
%
|
|
|
1.12
|
%
|
|
Net expenses
|
|
|
1.77
|
8,9
|
|
|
2.12
|
|
|
|
2.05
|
|
|
|
1.89
|
|
|
|
1.94
|
|
|
|
1.12
|
|
|
Net investment income
|
|
|
4.05
|
8
|
|
|
4.52
|
|
|
|
4.97
|
|
|
|
4.47
|
|
|
|
4.57
|
|
|
|
3.76
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
16
|
%10
|
|
|
21
|
%10
|
|
|
27
|
%
|
|
|
30
|
%
|
|
|
21
|
%
|
|
|
30
|
%
|
|
1
|
Per share amounts have been calculated using the average shares method.
|
|
2
|
For the six months ended March 31, 2020 (unaudited).
|
|
3
|
The actual source of the Fund’s current fiscal year distributions may be from net investment income, return of capital or a combination of both.
Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year.
|
|
4
|
Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance
arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
5
|
The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of
less than one year are not annualized.
|
|
6
|
The total return based on NAV reflects the impact of the tender and repurchase of its shares by the Fund at the price equal to 98% of the net asset value per
share on November 20, 2015. Absent this tender offer, the total return based on NAV would have been 3.88%.
|
|
7
|
The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no
guarantee of future results. Total returns for periods of less than one year are not annualized.
|
|
9
|
Reflects fee waivers and/or expense reimbursements.
|
|
10
|
Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 17% for the six
months ended March 31, 2020 and 23% for the year ended September 30, 2019.
|
See Notes to Financial Statements.
|
|
|
|
|
30
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
Notes to financial statements (unaudited)
1. Organization and significant accounting policies
Western Asset Variable Rate Strategic Fund Inc. (the “Fund”) was incorporated in Maryland on August 3, 2004 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Board of Directors authorized 100 million shares of $0.001 par value common stock.
The Fund’s investment objective is to maintain a high level of current income. The Fund invests primarily in variable rate instruments of U.S. and non-U.S. issuers, including U.S. and non-U.S. investment grade and high-yield debt, senior loans, emerging market debt and derivatives related to these securities. On October 31, 2019, the Board of Directors of the Fund approved amendments to the
Fund’s bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange Commission’s website at www.sec.gov.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles
(“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. The valuations for fixed income securities (which may include, but are not limited to, corporate, government,
municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or
broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit
risks/spreads, default rates and quoted prices for similar securities. Investments in open-end funds are valued at the closing net asset value per share of each fund on the day of valuation. Futures contracts
are valued daily at the settlement price established by the board of trade or exchange on which they are traded. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the
primary market or exchange on which they trade. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third
party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers
or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been
significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures
approved by the Fund’s Board of Directors.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
31
|
Notes to financial statements
(unaudited) (cont’d)
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North Atlantic
Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s
pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing
vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing
methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted
cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts
and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same
class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the
security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations.
The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and
the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future
cash flows to present value.
|
|
|
|
|
32
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and
liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
|
•
|
|
Level 1 — quoted prices in active markets for identical investments
|
|
•
|
|
Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.)
|
|
•
|
|
Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
|
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those
securities.
The following is a summary of the inputs used in valuing the Fund’s assets and liabilities carried at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Long-Term Investments†:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds & Notes
|
|
|
—
|
|
|
$
|
30,864,214
|
|
|
|
—
|
|
|
$
|
30,864,214
|
|
|
Collateralized Mortgage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
|
|
|
—
|
|
|
|
30,199,098
|
|
|
|
—
|
|
|
|
30,199,098
|
|
|
Asset-Backed Securities
|
|
|
—
|
|
|
|
18,311,827
|
|
|
|
—
|
|
|
|
18,311,827
|
|
|
Senior Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Discretionary
|
|
|
—
|
|
|
|
209,752
|
|
|
$
|
197,029
|
|
|
|
406,781
|
|
|
Other Senior Loans
|
|
|
—
|
|
|
|
3,192,315
|
|
|
|
—
|
|
|
|
3,192,315
|
|
|
Mortgage-Backed Securities
|
|
|
—
|
|
|
|
2,772,491
|
|
|
|
—
|
|
|
|
2,772,491
|
|
|
Sovereign Bonds
|
|
|
—
|
|
|
|
2,748,535
|
|
|
|
—
|
|
|
|
2,748,535
|
|
|
Preferred Stocks
|
|
$
|
1,192,660
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,192,660
|
|
|
Total Long-Term Investments
|
|
|
1,192,660
|
|
|
|
88,298,232
|
|
|
|
197,029
|
|
|
|
89,687,921
|
|
|
Short-Term Investments†
|
|
|
1,091,429
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,091,429
|
|
|
Total Investments
|
|
$
|
2,284,089
|
|
|
$
|
88,298,232
|
|
|
$
|
197,029
|
|
|
$
|
90,779,350
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Futures Contracts
|
|
$
|
1,156,678
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
1,156,678
|
|
|
Forward Foreign Currency Contracts
|
|
|
—
|
|
|
$
|
11,122
|
|
|
|
—
|
|
|
|
11,122
|
|
|
Total Other Financial Instruments
|
|
$
|
1,156,678
|
|
|
$
|
11,122
|
|
|
|
—
|
|
|
$
|
1,167,800
|
|
|
Total
|
|
$
|
3,440,767
|
|
|
$
|
88,309,354
|
|
|
$
|
197,029
|
|
|
$
|
91,947,150
|
|
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
33
|
Notes to financial statements
(unaudited) (cont’d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
|
|
|
Description
|
|
Quoted Prices
(Level 1)
|
|
|
Other Significant
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
Total
|
|
|
Other Financial Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Written Options
|
|
$
|
18,531
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
18,531
|
|
|
Futures Contracts
|
|
|
353,203
|
|
|
|
—
|
|
|
|
—
|
|
|
|
353,203
|
|
|
Forward Foreign Currency Contracts
|
|
|
—
|
|
|
$
|
211,899
|
|
|
|
—
|
|
|
|
211,899
|
|
|
Centrally Cleared Interest Rate Swaps
|
|
|
—
|
|
|
|
3,979,415
|
|
|
|
—
|
|
|
|
3,979,415
|
|
|
Total
|
|
$
|
371,734
|
|
|
$
|
4,191,314
|
|
|
|
—
|
|
|
$
|
4,563,048
|
|
|
†
|
See Schedule of Investments for additional detailed categorizations.
|
(b) Purchased options. When the Fund purchases an option, an amount equal to the premium paid by the Fund is recorded as an investment on the
Statement of Assets and Liabilities, the value of which is marked-to-market to reflect the current market value of the option purchased. If the purchased option expires,
the Fund realizes a loss equal to the amount of premium paid. When an instrument is purchased or sold through the exercise of an option, the related premium paid is added to the basis of the instrument acquired or deducted from the proceeds of the
instrument sold. The risk associated with purchasing put and call options is limited to the premium paid.
(c) Written options.
When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily to reflect the current market value of the option written. If the option expires, the premium received is recorded as a realized gain. When a
written call option is exercised, the difference between the premium received plus the option exercise price and the Fund’s basis in the underlying security (in the case of a covered written call option), or the cost to purchase the underlying
security (in the case of an uncovered written call option), including brokerage commission, is recognized as a realized gain or loss. When a written put option is exercised, the amount of the premium received is subtracted from the cost of the
security purchased by the Fund from the exercise of the written put option to form the Fund’s basis in the underlying security purchased. The writer or buyer of an option traded on an exchange can liquidate the position before the exercise of
the option by entering into a closing transaction. The cost of a closing transaction is deducted from the original premium received resulting in a realized gain or loss to the Fund.
The risk in writing a covered call option is that the Fund may forego the opportunity of profit if the market price of the underlying security increases and the option is exercised. The risk in writing a put option
is that the Fund may incur a loss if the market price of the underlying security decreases and the option is exercised. The risk in writing an uncovered call option is that the Fund is exposed to the risk of loss if the market price of the
underlying security increases. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
|
|
|
|
|
34
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
(d) Futures contracts. The Fund uses futures contracts generally to gain
exposure to, or hedge against, changes in interest rates or gain exposure to, or hedge against, changes in certain asset classes. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a
specified date.
Upon entering into a futures contract, the Fund is required to deposit cash or securities with a broker in an amount equal to a certain
percentage of the contract amount. This is known as the ‘‘initial margin’’ and subsequent payments (‘‘variation margin’’) are made or received by the Fund each day, depending on the daily fluctuation in the
value of the contract. For certain futures, including foreign denominated futures, variation margin is not settled daily, but is recorded as a net variation margin payable or receivable. The daily changes in contract value are recorded as unrealized
gains or losses in the Statement of Operations and the Fund recognizes a realized gain or loss when the contract is closed.
Futures contracts involve,
to varying degrees, risk of loss in excess of the amounts reflected in the financial statements. In addition, there is the risk that the Fund may not be able to enter into a closing transaction because of an illiquid secondary market.
(e) Forward foreign currency contracts. The Fund enters into a forward foreign currency
contract to hedge against foreign currency exchange rate risk on its non-U.S. dollar denominated securities or to facilitate settlement of a foreign currency denominated portfolio transaction. A forward
foreign currency contract is an agreement between two parties to buy and sell a currency at a set price with delivery and settlement at a future date. The contract is
marked-to-market daily and the change in value is recorded by the Fund as an unrealized gain or loss. When a forward foreign currency contract is closed, through either
delivery or offset by entering into another forward foreign currency contract, the Fund recognizes a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value of the contract at the time
it is closed.
Non-deliverable forward foreign currency exchange contracts are settled with the counterparty in
cash without the delivery of foreign currency.
Forward foreign currency contracts involve elements of market risk in excess of the amounts reflected on
the Statement of Assets and Liabilities. The Fund bears the risk of an unfavorable change in the foreign exchange rate underlying the forward foreign currency contract. Risks may also arise upon entering into these contracts from the potential
inability of the counterparties to meet the terms of their contracts.
(f) Swap agreements. The Fund invests in swaps for the purpose of managing its exposure to interest rate, credit or market risk, or for other purposes. The use of swaps involves risks that are different from those associated with other
portfolio transactions.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
35
|
Notes to financial statements
(unaudited) (cont’d)
Swap agreements are privately negotiated in the over-the-counter market and may be
entered into as a bilateral contract (“OTC Swaps”) or centrally cleared (“Centrally Cleared Swaps”). Unlike Centrally Cleared Swaps, the Fund has credit exposure to the counterparties of OTC Swaps.
In a Centrally Cleared Swap, immediately following execution of the swap, the swap agreement is submitted to a clearinghouse or central counterparty (the
“CCP”) and the CCP becomes the ultimate counterparty of the swap agreement. The Fund is required to interface with the CCP through a broker, acting in an agency capacity. All payments are settled with the CCP through the broker. Upon
entering into a Centrally Cleared Swap, the Fund is required to deposit initial margin with the broker in the form of cash or securities.
Swap contracts
are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). The daily change in valuation of Centrally Cleared Swaps, if any,
is recorded as a receivable or payable for variation margin on the Statement of Assets and Liabilities. Gains or losses are realized upon termination of the swap agreement. Collateral, in the form of restricted cash or securities, may be required to
be held in segregated accounts with the Fund’s custodian in compliance with the terms of the swap contracts. Securities posted as collateral for swap contracts are identified in the Schedule of Investments and restricted cash, if any, is
identified on the Statement of Assets and Liabilities. Risks may exceed amounts recorded in the Statement of Assets and Liabilities. These risks include changes in the returns of the underlying instruments, failure of the counterparties to perform
under the contracts’ terms, and the possible lack of liquidity with respect to the swap agreements.
OTC swap payments received or made at the
beginning of the measurement period are reflected as a premium or deposit, respectively, on the Statement of Assets and Liabilities. These upfront payments are amortized over the life of the swap and are recognized as realized gain or loss in the
Statement of Operations. Net periodic payments received or paid by the Fund are recognized as a realized gain or loss in the Statement of Operations.
The Fund’s maximum exposure in the event of a defined credit event on a credit default swap to sell protection is the notional amount. As of March 31,
2020, the Fund did not hold any credit default swaps to sell protection.
For average notional amounts of swaps held during the six months ended
March 31, 2020, see Note 4.
Interest rate swaps
The Fund enters into interest rate swap contracts to manage its exposure to interest rate risk. Interest rate swaps are agreements between two parties to exchange cash flows based on a notional principal amount.
The Fund may elect to pay a fixed rate and receive a floating rate, receive a fixed rate and pay a floating rate, or pay and receive a floating rate, on a notional principal amount. Interest rate swaps are marked-to-market daily based upon
|
|
|
|
|
36
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
quotations from market makers and the change, if any, is recorded as an unrealized gain or loss in the Statement of Operations. When a swap contract is terminated early, the Fund records a
realized gain or loss equal to the difference between the original cost and the settlement amount of the closing transaction.
The risks of interest rate
swaps include changes in market conditions that will affect the value of the contract or changes in the present value of the future cash flow streams and the possible inability of the counterparty to fulfill its obligations under the agreement. The
Fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the counterparty over the contract’s remaining life, to the extent that amount is positive. This risk is mitigated
by the posting of collateral by the counterparty to the Fund to cover the Fund’s exposure to the counterparty.
(g) Loan
participations. The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a
participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement related to the loan, or any rights of off-set against the borrower and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.
The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender
selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any off-set between the lender and the borrower.
(h) Unfunded loan commitments. The Fund may enter into certain credit agreements where all or
a portion of the total amount committed may be unfunded. The Fund is obligated to fund these commitments at the borrower’s discretion. The commitments are disclosed in the accompanying Schedule of Investments. At March 31, 2020, the Fund
had sufficient cash and/or securities to cover these commitments.
(i) Stripped securities. The Fund may invest in ‘‘Stripped Securities,’’ a term used collectively for components, or strips, of fixed income securities. Stripped Securities can be principal only securities
(“PO”), which are debt obligations that have been stripped of unmatured interest coupons, or interest only securities (“IO”), which are unmatured interest coupons that have been stripped from debt obligations. The market value of
Stripped Securities will fluctuate in response to changes in economic conditions, rates of prepayment, interest rates and the market’s perception of the securities. However, fluctuations in response to interest rates may be greater in Stripped
Securities than for debt obligations of comparable maturities that pay interest currently. The amount of fluctuation may increase with a longer period of maturity.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
37
|
Notes to financial statements
(unaudited) (cont’d)
The yield to maturity on IO’s is sensitive to the rate of principal repayments (including prepayments) on the related underlying debt obligation and principal
payments may have a material effect on yield to maturity. If the underlying debt obligation experiences greater than anticipated prepayments of principal, the Fund may not fully recoup its initial investment in IO’s.
(j) Reverse repurchase agreements. The Fund may enter into reverse repurchase agreements.
Under the terms of a typical reverse repurchase agreement, a fund sells a security subject to an obligation to repurchase the security from the buyer at an agreed upon time and price. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the agreement may be restricted pending a determination by the counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to
repurchase the securities. In entering into reverse repurchase agreements, the Fund will maintain cash, U.S. government securities or other liquid debt obligations at least equal in value to its obligations with respect to reverse repurchase
agreements or will take other actions permitted by law to cover its obligations. If the market value of the collateral declines during the period, the Fund may be required to post additional collateral to cover its obligation. Cash collateral that
has been pledged to cover obligations of the Fund under reverse repurchase agreements, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral are noted in the Schedule of Investments.
Interest payments made on reverse repurchase agreements are recognized as a component of “Interest expense” on the Statement of Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security
by the counterparty, which may result in interest income to the Fund.
(k) Securities traded on a to-be-announced basis. The Fund may trade securities on a to-be-announced
(“TBA”) basis. In a TBA transaction, the Fund commits to purchasing or selling securities which have not yet been issued by the issuer and for which specific information, such as the face amount, maturity date and underlying pool of
investments in U.S. government agency mortgage pass-through securities, is not announced. Securities purchased on a TBA basis are not settled until they are delivered to the Fund. Beginning on the date the Fund enters into a TBA transaction, cash,
U.S. government securities or other liquid high-grade debt obligations are segregated in an amount equal in value to the purchase price of the TBA security. These securities are subject to market fluctuations and their current value is determined in
the same manner as for other securities.
(l) Mortgage dollar rolls. The Fund may
enter into mortgage dollar rolls in which the Fund sells mortgage-backed securities for delivery in the current month, realizing a gain or loss, and simultaneously entering into contracts to repurchase substantially similar (same type, coupon and
maturity) securities to settle on a specified future date.
|
|
|
|
|
38
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
The Fund executes its mortgage dollar rolls entirely in the TBA market, whereby the Fund makes a forward commitment to
purchase a security and, instead of accepting delivery, the position is offset by a sale of the security with a simultaneous agreement to repurchase at a future date. The Fund accounts for mortgage dollar rolls as purchases and sales.
The risk of entering into mortgage dollar rolls is that the market value of the securities the Fund is obligated to repurchase under the agreement may decline below
the repurchase price. In the event the buyer of securities under a mortgage dollar roll files for bankruptcy or becomes insolvent, the Fund’s use of the proceeds of the mortgage dollar roll may be restricted pending a determination by the
counterparty, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities.
(m) Cash flow
information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Statement of Cash Flows.
(n) Foreign currency translation. Investment securities and other assets and liabilities
denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are
translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that
portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and
unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses
on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date
of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not
typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or
economic instability.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
39
|
Notes to financial statements
(unaudited) (cont’d)
(o) Credit and market risk. The Fund invests in high-yield and emerging market instruments
that are subject to certain credit and market risks. The yields of high-yield and emerging market debt obligations reflect, among other things, perceived credit and market risks. The Fund’s investments in securities rated below investment grade
typically involve risks not associated with higher rated securities including, among others, greater risk related to timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The
consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investments in non-U.S. dollar denominated
securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.
Investments in securities that are
collateralized by real estate mortgages are subject to certain credit and liquidity risks. When market conditions result in an increase in default rates of the underlying mortgages and the foreclosure values of underlying real estate properties are
materially below the outstanding amount of these underlying mortgages, collection of the full amount of accrued interest and principal on these investments may be doubtful. Such market conditions may significantly impair the value and liquidity of
these investments and may result in a lack of correlation between their credit ratings and values.
(p) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign
currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and
earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the
investments.
(q) Other risks. Consistent with its objective to seek high current
income, the Fund may invest in instruments whose values and interest rates are linked to foreign currencies, interest rates, indices or some other financial indicator. The value at maturity or interest rates for these instruments will increase or
decrease according to the change in the indicator to which they are indexed, amongst other factors. These securities are generally more volatile in nature, and the risk of loss of principal may be greater.
(r) Counterparty risk and credit-risk-related contingent features of derivative instruments.
The Fund may invest in certain securities or engage in other transactions, where the Fund is exposed to counterparty credit risk in addition to broader market risks. The Fund may invest in securities of issuers, which may also be considered
counterparties as trading partners in other transactions. This may increase the risk of loss in the event of default or bankruptcy by the counterparty or if the counterparty otherwise fails to meet its contractual obligations. The Fund’s
subadviser attempts to mitigate counterparty risk by (i)
|
|
|
|
|
40
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
periodically assessing the creditworthiness of its trading partners, (ii) monitoring and/or limiting the amount of its net exposure to each individual counterparty based on its assessment
and (iii) requiring collateral from the counterparty for certain transactions. Market events and changes in overall economic conditions may impact the assessment of such counterparty risk by the subadviser. In addition, declines in the values
of underlying collateral received may expose the Fund to increased risk of loss.
With exchange traded and centrally cleared derivatives, there is less
counterparty risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, the credit risk is
limited to failure of the clearinghouse. While offset rights may exist under applicable law, the Fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default of the clearing broker or
clearinghouse.
The Fund has entered into master agreements, such as an International Swaps and Derivatives Association, Inc. Master Agreement
(“ISDA Master Agreement”) or similar agreement, with certain of its derivative counterparties that govern over-the-counter derivatives and provide for general
obligations, representations, agreements, collateral posting terms, netting provisions in the event of default or termination and credit related contingent features. The credit related contingent features include, but are not limited to, a
percentage decrease in the Fund’s net assets or NAV over a specified period of time. If these credit related contingent features were triggered, the derivatives counterparty could terminate the positions and demand payment or require additional
collateral.
Under an ISDA Master Agreement, the Fund may, under certain circumstances, offset with the counterparty certain derivative financial
instruments’ payables and/or receivables with collateral held and/or posted and create one single net payment. However, absent an event of default by the counterparty or a termination of the agreement, the terms of the ISDA Master Agreements do
not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the Fund and the applicable counterparty. The enforceability of the right to offset may
vary by jurisdiction.
Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange
clearinghouse for exchange traded derivatives while collateral terms are contract specific for over-the-counter traded derivatives. Cash collateral that has been pledged
to cover obligations of the Fund under derivative contracts, if any, will be reported separately in the Statement of Assets and Liabilities. Securities pledged as collateral, if any, for the same purpose are noted in the Schedule of Investments.
As of March 31, 2020, the Fund held forward foreign currency contracts with credit related contingent features which had a liability position of
$211,899. If a contingent feature in the master agreements would have been triggered, the Fund would have been required to pay this amount to its derivative counterparties.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
41
|
Notes to financial statements
(unaudited) (cont’d)
(s) Security transactions and investment income. Security transactions are accounted for on a
trade date basis. Interest income (including interest income from payment-in-kind securities), adjusted for amortization of premium and accretion of discount, is
recorded on the accrual basis. Paydown gains and losses on mortgage- and asset-backed securities are recorded as adjustments to interest income. Dividend income is recorded on the ex-dividend date for
dividends received in cash and/or securities. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after
exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional
interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(t)
Distributions to shareholders. Distributions from net investment income of the Fund, if any, are declared quarterly and paid on a monthly basis. The actual source of the Fund’s monthly
distributions may be from net investment income, return of capital or a combination of both. Shareholders will be informed of the tax characteristics of the distributions after the close of the fiscal year. Distributions of net realized gains, if
any, are declared at least annually. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(u) Compensating balance arrangements. The Fund has an arrangement with its
custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(v) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue
Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements
imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
However, due to the timing
of when distributions are made by the Fund, the Fund may be subject to an excise tax of 4% of the amount by which 98% of the Fund’s annual taxable income and 98.2% of net realized gains exceed the distributions from such taxable income and
realized gains for the calendar year. The Fund paid $1,397 of federal excise taxes attributable to calendar year 2019 in March 2020.
Management has
analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of September 30, 2019, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal
and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
|
|
|
|
|
42
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at
various rates.
(w) Reclassification. GAAP requires that certain components of net
assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share.
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners
Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. Western Asset Management Company, LLC (“Western Asset”), Western Asset Management Company Limited (“Western Asset Limited”) and Western Asset Management
Company Pte. Ltd. (“Western Asset Singapore”) are the Fund’s subadvisers. LMPFA, Western Asset, Western Asset Limited and Western Asset Singapore are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an
annual rate of 0.75% of the Fund’s average daily net assets plus the proceeds of any outstanding borrowings used for leverage and any proceeds from the issuance of preferred stock.
LMPFA delegates to Western Asset the day-to-day portfolio management of the Fund. Western Asset Limited and Western Asset Singapore
provide certain subadvisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated debt securities. Western Asset Limited and Western Asset Singapore do not
receive any compensation from the Fund. For its services, LMPFA pays Western Asset a fee monthly, at an annual rate equal to 70% of the net management fee it receives from the Fund. Western Asset pays Western Asset Limited and Western Asset
Singapore a monthly subadvisory fee in an amount equal to 100% of the management fee paid to Western Asset on the assets that Western Asset allocates to each such non-U.S. subadviser to manage.
During the six months ended March 31, 2020, fees waived and/or expenses reimbursed amounted to $288.
During periods in which the Fund utilizes financial leverage, the fees paid to LMPFA will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Fund’s
assets, including those investments purchased with leverage.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and
do not receive compensation from the Fund.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
43
|
Notes to financial statements
(unaudited) (cont’d)
3. Investments
During the six months ended
March 31, 2020, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) and U.S. Government & Agency Obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
|
|
|
U.S. Government &
Agency Obligations
|
|
|
Purchases
|
|
$
|
10,589,990
|
|
|
$
|
5,966,626
|
|
|
Sales
|
|
|
11,742,783
|
|
|
|
7,096,953
|
|
At March 31, 2020, the aggregate cost of investments and the aggregate gross unrealized appreciation and depreciation of
investments for federal income tax purposes were substantially as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost/Premiums
Paid (Received)
|
|
|
Gross
Unrealized
Appreciation
|
|
|
Gross
Unrealized
Depreciation
|
|
|
Net
Unrealized
Appreciation
(Depreciation)
|
|
|
Securities
|
|
$
|
96,235,221
|
|
|
$
|
2,308,883
|
|
|
$
|
(7,764,754)
|
|
|
$
|
(5,455,871)
|
|
|
Swap contracts
|
|
|
(126,279)
|
|
|
|
—
|
|
|
|
(3,979,415)
|
|
|
|
(3,979,415)
|
|
|
Written options
|
|
|
(75,743)
|
|
|
|
57,212
|
|
|
|
—
|
|
|
|
57,212
|
|
|
Futures contracts
|
|
|
—
|
|
|
|
1,156,678
|
|
|
|
(353,203)
|
|
|
|
803,475
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
|
11,122
|
|
|
|
(211,899)
|
|
|
|
(200,777)
|
|
Transactions in reverse repurchase agreements for the Fund during the six months ended March 31, 2020 were as follows:
|
|
|
|
|
|
Average Daily
Balance*
|
|
Weighted Average
Interest Rate*
|
|
Maximum Amount
Outstanding
|
|
$19,382,267
|
|
2.348%
|
|
$21,815,240
|
|
*
|
Averages based on the number of days that the Fund had reverse repurchase agreements outstanding.
|
Interest rates on reverse repurchase agreements ranged from 1.100% to 3.087% during the six months ended March 31, 2020. Interest expense incurred on reverse
repurchase agreements totaled $227,526.
4. Derivative instruments and hedging activities
Below is a table, grouped by derivative type, that provides information about the fair value and the location of derivatives within the Statement of Assets and
Liabilities at March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSET DERIVATIVES1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Total
|
|
|
Futures contracts2
|
|
$
|
1,156,678
|
|
|
|
—
|
|
|
$
|
1,156,678
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
11,122
|
|
|
|
11,122
|
|
|
Total
|
|
$
|
1,156,678
|
|
|
$
|
11,122
|
|
|
$
|
1,167,800
|
|
|
|
|
|
|
44
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITY DERIVATIVES1
|
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Total
|
|
|
Written options
|
|
$
|
18,531
|
|
|
|
—
|
|
|
$
|
18,531
|
|
|
Futures contracts2
|
|
|
353,203
|
|
|
|
—
|
|
|
|
353,203
|
|
|
Centrally cleared swap contracts3
|
|
|
3,979,415
|
|
|
|
—
|
|
|
|
3,979,415
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
211,899
|
|
|
|
211,899
|
|
|
Total
|
|
$
|
4,351,149
|
|
|
$
|
211,899
|
|
|
$
|
4,563,048
|
|
|
1
|
Generally, the balance sheet location for asset derivatives is receivables/net unrealized appreciation (depreciation) and for liability derivatives is
payables/net unrealized appreciation (depreciation).
|
|
2
|
Includes cumulative appreciation (depreciation) of futures contracts as reported in the Schedule of Investments. Only variation margin is reported within the
receivables and/or payables on the Statement of Assets and Liabilities.
|
|
3
|
Includes cumulative appreciation (depreciation) of centrally cleared swap contracts as reported in the Schedule of Investments. Only variation margin is reported
within the receivables and/or payables on the Statement of Assets and Liabilities.
|
The following tables provide information about the
effect of derivatives and hedging activities on the Fund’s Statement of Operations for the six months ended March 31, 2020. The first table provides additional detail about the amounts and sources of gains (losses) realized on derivatives
during the period. The second table provides additional information about the change in unrealized appreciation (depreciation) resulting from the Fund’s derivatives and hedging activities during the period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMOUNT OF REALIZED GAIN (LOSS) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Total
|
|
|
Purchased options1
|
|
$
|
(39,001)
|
|
|
|
—
|
|
|
$
|
(39,001)
|
|
|
Written options
|
|
|
64,685
|
|
|
|
—
|
|
|
|
64,685
|
|
|
Futures contracts
|
|
|
155,533
|
|
|
|
—
|
|
|
|
155,533
|
|
|
Swap contracts
|
|
|
(412,652)
|
|
|
|
—
|
|
|
|
(412,652)
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
29,230
|
|
|
|
29,230
|
|
|
Total
|
|
$
|
(231,435)
|
|
|
$
|
29,230
|
|
|
$
|
(202,205)
|
|
|
1
|
Net realized gain (loss) from purchased options is reported in net realized gain (loss) from investment transactions in the Statement of Operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) ON DERIVATIVES RECOGNIZED
|
|
|
|
|
Interest
Rate Risk
|
|
|
Foreign
Exchange Risk
|
|
|
Total
|
|
|
Purchased options1
|
|
$
|
(31,804)
|
|
|
|
—
|
|
|
$
|
(31,804)
|
|
|
Written options
|
|
|
83,371
|
|
|
|
—
|
|
|
|
83,371
|
|
|
Futures contracts
|
|
|
816,747
|
|
|
|
—
|
|
|
|
816,747
|
|
|
Swap contracts
|
|
|
(1,538,087)
|
|
|
|
—
|
|
|
|
(1,538,087)
|
|
|
Forward foreign currency contracts
|
|
|
—
|
|
|
$
|
(171,328)
|
|
|
|
(171,328)
|
|
|
Total
|
|
$
|
(669,773)
|
|
|
$
|
(171,328)
|
|
|
$
|
(841,101)
|
|
|
1
|
The change in unrealized appreciation (depreciation) from purchased options is reported in the change in net unrealized appreciation (depreciation) from
investments in the Statement of Operations.
|
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
45
|
Notes to financial statements
(unaudited) (cont’d)
During the six months ended March 31, 2020, the volume of derivative activity for the Fund was as follows:
|
|
|
|
|
|
|
|
|
Average Market
Value
|
|
|
Purchased options†
|
|
$
|
23,089
|
|
|
Written options
|
|
|
30,592
|
|
|
Futures contracts (to buy)
|
|
|
48,333,928
|
|
|
Futures contracts (to sell)
|
|
|
28,298,452
|
|
|
Forward foreign currency contracts (to buy)
|
|
|
1,646,862
|
|
|
Forward foreign currency contracts (to sell)
|
|
|
223,771
|
|
|
|
|
|
|
|
Average Notional
Balance
|
|
|
Interest rate swap contracts
|
|
$
|
30,618,857
|
|
|
†
|
At March 31, 2020, there were no open positions held in this derivative.
|
The following table presents the Fund’s OTC derivative assets and liabilities by counterparty net of amounts available for offset under an ISDA Master
Agreement and net of the related collateral pledged (received) by the Fund as of March 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty
|
|
Gross Assets
Subject to
Master
Agreements1
|
|
|
Gross
Liabilities
Subject to
Master
Agreements1
|
|
|
Net Assets
(Liabilities)
Subject to
Master
Agreements
|
|
|
Collateral
Pledged
(Received)
|
|
|
Net
Amount2
|
|
|
Citibank N.A.
|
|
$
|
11,118
|
|
|
$
|
(66,257)
|
|
|
$
|
(55,139)
|
|
|
|
—
|
|
|
$
|
(55,139)
|
|
|
Goldman Sachs Group Inc.
|
|
|
4
|
|
|
|
(145,642)
|
|
|
|
(145,638)
|
|
|
|
—
|
|
|
|
(145,638)
|
|
|
Total
|
|
$
|
11,122
|
|
|
$
|
(211,899)
|
|
|
$
|
(200,777)
|
|
|
|
—
|
|
|
$
|
(200,777)
|
|
|
1
|
Absent an event of default or early termination, derivative assets and liabilities are presented gross and not offset in the Statement of Assets and Liabilities.
|
|
2
|
Represents the net amount receivable (payable) from (to) the counterparty in the event of default.
|
5. Distributions subsequent to March 31, 2020
The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
|
|
|
|
|
|
|
|
|
|
|
Record Date
|
|
Payable Date
|
|
|
Amount
|
|
|
3/24/2020
|
|
|
4/1/2020
|
|
|
$
|
0.0775
|
|
|
4/23/2020
|
|
|
5/1/2020
|
|
|
$
|
0.0775
|
|
|
5/21/2020
|
|
|
6/1/2020
|
|
|
$
|
0.0775
|
|
|
6/23/2020
|
|
|
7/1/2020
|
|
|
$
|
0.0775
|
|
|
7/24/2020
|
|
|
8/3/2020
|
|
|
$
|
0.0775
|
|
|
8/24/2020
|
|
|
9/1/2020
|
|
|
$
|
0.0775
|
|
|
|
|
|
|
46
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
6. Stock repurchase program
On November 16, 2015, the Fund announced that the Fund’s Board of Directors (the “Board”) had authorized the Fund to repurchase in the open market up to approximately 10% of the Fund’s
outstanding common stock when the Fund’s shares are trading at a discount to net asset value. The Board has directed management of the Fund to repurchase shares of common stock at such times and in such amounts as management reasonably believes
may enhance stockholder value. The Fund is under no obligation to purchase shares at any specific discount levels or in any specific amounts. During the six months ended March 31, 2020, the Fund did not repurchase any shares.
7. Deferred capital losses
As of
September 30, 2019, the Fund had deferred capital losses of $8,200,313, which have no expiration date, that will be available to offset future taxable capital gains.
8. Other matters
On February 18, 2020, Franklin Resources, Inc. (“Franklin
Resources”) and Legg Mason announced that they have entered into a definitive agreement for Franklin Resources to acquire Legg Mason in an all-cash transaction. As part of this transaction, LMPFA and the
subadviser(s), each currently a subsidiary of Legg Mason, would become a subsidiary of Franklin Resources. The transaction is subject to approval by Legg Mason’s shareholders and customary closing conditions, including receipt of applicable
regulatory approvals. Subject to such approvals and the satisfaction of the other conditions, the transaction is expected to be consummated later this year.
Under the Investment Company Act of 1940, consummation of the transaction will result in the automatic termination of the Fund’s management contract, and any related subadvisory contract(s), where applicable.
Therefore, the Fund’s Board has approved new management and subadvisory contracts, where applicable, that will be presented to the shareholders of the Fund for their approval.
* * *
The outbreak of the
respiratory illness COVID-19 (commonly referred to as “coronavirus”) has continued to rapidly spread around the world, causing considerable uncertainty for the global economy and financial markets.
The ultimate economic fallout from the pandemic, and the long-term impact on economies, markets, industries and individual issuers, are not known. The COVID-19 pandemic could adversely affect the value and
liquidity of the Fund’s investments and negatively impact the Fund’s performance. In addition, the outbreak of COVID-19, and measures taken to mitigate its effects, could result in disruptions to the
services provided to the Fund by its service providers.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
|
47
|
Notes to financial statements
(unaudited) (cont’d)
* * *
The Fund’s
investments, payment obligations, and financing terms may be based on floating rates, such as the London Interbank Offered Rate, or “LIBOR,” which is the offered rate for short-term Eurodollar deposits between major international banks.
Plans are underway to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the nature of any replacement rate and the impact of the transition from LIBOR on the Fund’s transactions and the financial markets
generally. As such, the potential effect of a transition away from LIBOR on the Fund or the Fund’s investments cannot yet be determined.
9. Subsequent event
On April 1, 2020, the Board of Directors of the Fund approved
amendments to the Fund’s bylaws. The amended and restated bylaws were subsequently filed on Form 8-K and are available on the Securities and Exchange Commission’s website at www.sec.gov.
|
|
|
|
|
48
|
|
Western Asset Variable Rate Strategic Fund Inc. 2020 Semi-Annual Report
|
Board approval of management and subadvisory agreements (unaudited)
Background
The Investment Company Act of
1940, as amended (the “1940 Act”), requires that the Board of Directors (the “Board”) of Western Asset Variable Rate Strategic Fund Inc. (the “Fund”), including a majority of its members who are not considered to be
“interested persons” under the 1940 Act (the “Independent Directors”) voting separately, approve on an annual basis the continuation of the investment management contract (the “Management Agreement”) with the
Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreements (individually, a “Sub-Advisory
Agreement,” and collectively, the “Sub-Advisory Agreements”) with the Manager’s affiliates, Western Asset Management Company, LLC (“Western Asset”), Western Asset Management
Company Limited in London (“Western Asset London”) and Western Asset Management Company Pte. Ltd. in Singapore (“Western Asset Singapore”). Western Asset, Western Asset Singapore, and Western Asset London collectively are
hereinafter referred to as the “Sub-Advisers,” and Western Asset Singapore and Western Asset London together are hereinafter referred to as the “Non-U.S. Sub-Advisers.” At a meeting (the “Contract Renewal Meeting”) held in-person on November 13 and 14, 2019, the Board, including the Independent Directors,
considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period. To assist in its
consideration of the renewal of each of the Management Agreement and the Sub-Advisory Agreements, the Board received and considered a variety of information (together with the information provided at the
Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and the Sub-Advisers, as well as the management and sub-advisory arrangements
for the Fund and the other closed-end funds in the same complex under the Board’s purview (the “Legg Mason Closed-end Funds”), certain portions of which
are discussed below. A presentation made by the Manager and Western Asset to the Board at the Contract Renewal Meeting in connection with the Board’s evaluation of each of the Management Agreement and the
Sub-Advisory Agreements encompassed the Fund and other Legg Mason Closed-end Funds. In addition to the Contract Renewal Information, the Board received performance and
other information throughout the year related to the respective services rendered by the Manager and the Sub-Advisers to the Fund. The Board’s evaluation took into account the information received
throughout the year and also reflected the knowledge and familiarity gained as members of the Boards of the Fund and other Legg Mason Closed-end Funds with respect to the services provided to the Fund by the
Manager and the Sub-Advisers.
At a meeting held by conference call on October 10, 2019, the Independent
Directors in preparation for the Contract Renewal Meeting met in a private session with their independent legal counsel to review the Contract Renewal Information concerning the Legg Mason Closed-end Funds,
including the Fund, received to date. No representatives of the Manager or the Sub-Advisers participated in this meeting. The discussion below reflects all of these reviews.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
49
|
Board approval of management and subadvisory agreements (unaudited) (cont’d)
The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the
Sub-Advisers provide, or in the case of the Non-U.S. Sub-Advisers help to provide, the Fund with certain investment sub-advisory services pursuant to the Sub-Advisory Agreements. The discussion below covers both the advisory and administrative functions being rendered by the Manager, each
such function being encompassed by the Management Agreement, and the investment sub-advisory functions being rendered by the Sub-Advisers.
Board Approval of Management Agreement and Sub-Advisory Agreements
In its deliberations regarding the renewal of each of the Management Agreement and the Sub-Advisory Agreements, the Board,
including the Independent Directors, considered various factors, including those described below.
Nature, Extent and Quality of the
Services Under the Management Agreement and Sub-Advisory Agreements
The Board received and considered
Contract Renewal Information regarding the nature, extent, and quality of services provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and the
Sub-Advisory Agreements, respectively, during the past year. The Board also reviewed Contract Renewal Information regarding the Fund’s compliance policies and procedures established pursuant to the 1940
Act.
The Board reviewed the qualifications, backgrounds, and responsibilities of the Fund’s senior personnel and the portfolio management team
primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the Contract Renewal Information and the
Board’s discussions with the Manager and Western Asset at the Contract Renewal Meeting, the general reputation and investment performance records of the Manager, Western Asset and their affiliates and the financial resources available to the
corporate parent of the Manager and the Sub-Advisers, Legg Mason, Inc. (“Legg Mason”), to support their activities in respect of the Fund and the other Legg Mason
Closed-end Funds.
The Board considered the responsibilities of the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, including the Manager’s coordination and oversight of the services provided to
the Fund by the Sub-Advisers and other fund service providers and Western Asset’s coordination and oversight of the services provided to the Fund by the Non-U.S. Sub-Advisers. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its investment advisory duties thereunder, provided that the Manager, in each case, will supervise
the activities of the delegee. Pursuant to this provision of the Management
|
|
|
|
|
50
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
Agreement, the Manager does not provide day-to-day portfolio management services to the Fund. Rather, portfolio
management services for the Fund are provided by Western Asset pursuant to the Sub-Advisory Agreement (the “Western Asset Sub-Advisory Agreement”) between the
Manager and Western Asset. The Western Asset Sub-Advisory Agreement permits Western Asset to delegate certain of its responsibilities, including its investment
sub-advisory duties thereunder, provided that Western Asset, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Western Asset
Sub-Advisory Agreement, each Non-U.S. Sub-Adviser helps Western Asset to provide certain portfolio management services to the
Fund pursuant to a separate Sub-Advisory Agreement with Western Asset.
In reaching its determinations regarding
continuation of the Management Agreement and the Sub-Advisory Agreements, the Board took into account that Fund stockholders, in pursuing their investment goals and objectives, likely purchased their shares of
the Fund based upon the reputation and the investment style, philosophy and strategy of the Manager and Western Asset, as well as the resources available to the Manager and the Sub-Advisers.
The Board concluded that, overall, the nature, extent, and quality of the management and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreements have been satisfactory under the circumstances.
Fund Performance
The Board received and considered information regarding Fund performance, including information and analyses (the “Broadridge Performance
Information”) for the Fund, as well as for a group of comparable funds (the “Performance Universe”) selected by Broadridge Financial Solutions, Inc. (“Broadridge”), an independent provider of investment company data. The
Board was provided with a description of the methodology Broadridge used to determine the similarity of the Fund with the funds included in the Performance Universe. The Performance Universe included the Fund and all leveraged global income closed-end funds, as classified by Broadridge, regardless of asset size. The Performance Universe consisted of thirteen funds, including the Fund, for the 1-year period ended
June 30, 2019 and twelve funds, including the Fund, for each of the 3- and 5-year periods ended on such date. The Board noted that it had received and discussed
with the Manager and Western Asset information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and its peer funds as selected by Broadridge.
The Broadridge Performance Information comparing the Fund’s performance to that of the Performance Universe based on net asset value per share showed, among
other things, that among the funds in the Performance Universe, the Fund’s performance was ranked last (first being best in these performance rankings) for the 1-year period ended June 30, 2019;
fifth among the funds in the Performance Universe for the 3-year period ended on such date; and
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
51
|
Board approval of management and
subadvisory agreements (unaudited) (cont’d)
sixth among the funds in the Performance Universe for the 5-year period ended on such date. The Fund’s performance was above the Performance Universe median for each of the 3- and 5-year
periods ended June 30, 2019 but its performance for the 1-year period ended on such date was below the Performance Universe median for that period. Among other things, the Manager has noted that unlike
the other Performance Universe funds at least 80% of the Fund’s assets generally must be invested in floating rate instruments and its assets consist primarily of U.S. corporate and structured products. According to the Manager, this
requirement and the Fund’s maintenance of a short portfolio duration of about 1 year in pursuit of its investment objective differentiates the Fund from, and may put the Fund at a disadvantage relative to, the other Performance Universe funds.
In this regard, the other Performance Universe funds primarily consisted of global government bond funds with longer portfolio durations, which have performed well in the declining global interest rate environment in recent years. Since the
financial crisis in 2008, the Manager noted, global government bond yields have declined to near zero or even negative yields. The Board considered that the Fund’s dissimilarity from the other funds comprising the small Performance Universe
made meaningful performance comparisons difficult. In addition to the Fund’s performance relative to the Performance Universe, the Board considered the Fund’s performance in absolute terms and the Fund’s performance relative to its
benchmark. On a net asset value basis, the Fund outperformed its benchmark for each of the 1-, 3- and 5-year periods ended
June 30, 2019.
Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted above, the
Board concluded, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period would be
consistent with the interests of the Fund and its stockholders.
Management and Sub-Advisory
Fees and Expense Ratios
The Board reviewed and considered the management fee (the “Management Fee”) payable by the Fund to the Manager
under the Management Agreement and the sub-advisory fees (the “Sub-Advisory Fees”) payable by the Manager and Western Asset, as applicable, to the Sub-Advisers under the Sub-Advisory Agreements in view of the nature, extent and overall quality of the management, investment advisory and other services provided by the
Manager and the Sub-Advisers. The Board noted that the Sub-Advisory Fee payable to Western Asset under the Western Asset
Sub-Advisory Agreement is paid by the Manager, not the Fund, and, accordingly, that the retention of Western Asset does not increase the fees or expenses otherwise incurred by the Fund’s stockholders.
Similarly, the Board noted that the Sub-Advisory Fee payable to each of the Non-U.S. Sub-Advisers under its Sub-Advisory Agreement with Western Asset is paid by Western Asset, not the Fund, and, accordingly, that the retention of such Non-U.S.
Sub-Adviser does not increase the fees or expenses otherwise incurred by the Fund’s stockholders.
|
|
|
|
|
52
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
Additionally, the Board received and
considered information and analyses prepared by Broadridge (the “Broadridge Expense Information”) comparing the Management Fee and the Fund’s overall expenses with those of funds in an expense group (the “Expense Group”)
selected and provided by Broadridge. The comparison was based upon the constituent funds’ latest fiscal years. The Expense Group consisted of the Fund and five other leveraged global income closed-end
funds, as classified by Broadridge. The six funds in the Expense Group had average net common share assets ranging from $76.4 million to $324.8 million. Four of the other Expense Group funds were larger than the Fund and one was smaller.
The Broadridge Expense Information, comparing the Management Fee as well as the Fund’s actual total expenses to the Fund’s Expense Group,
showed, among other things, that the Management Fee on a contractual basis was ranked first (first being lowest and, therefore, best in these expense component rankings) among the six funds in the Expense Group assets and that the Management Fee on
an actual basis (i.e., giving effect to any voluntary fee waivers implemented by the Manager with respect to the Fund and by the managers of the other Expense Group funds) was ranked second among the Funds in the Expense Group whether compared on
the basis of common share assets only or on the basis of common share and leveraged assets. The Broadridge Expense Information further showed that the Fund’s actual total expenses ranked second among the funds in the Expense Group when compared
on a common share assets only basis and third when compared on the basis of common share and leveraged assets. Each of the Fund’s expense components was below the Expense Group median for that expense component. The Manager noted that the small
number and varying sizes of funds comprising the Expense Group made meaningful expense comparisons difficult.
The Board also reviewed Contract Renewal
Information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, institutional and separate accounts. The Board was advised that the fees paid by
such institutional, separate account and other clients (collectively, “institutional clients”) generally are lower, and may be significantly lower, than the Management Fee. The Contract Renewal Information generally attributed the fee
differential to differences in the scope of services provided to the Fund and to institutional clients. Among other things, institutional clients have fewer compliance, administration and other needs than the Fund and the Fund is subject not only to
heightened regulatory requirements relative to institutional clients but also to requirements for listing on the New York Stock Exchange. The Contract Renewal Information noted further that the Fund is provided with administrative services, office
facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Contract
Renewal Information included information regarding management fees paid by open-end mutual funds in the same complex (the “Legg Mason Open-end
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
53
|
Board approval of management and subadvisory agreements (unaudited) (cont’d)
Funds”) and such information indicated that the management fees paid by the Legg Mason Closed-end Funds generally were
higher than those paid by the Legg Mason Open-end Funds. The Contract Renewal Information noted that the Legg Mason Closed-end Funds typically incur expenses that
usually are not incurred by the Legg Mason Open-end Funds, such as those related to the annual stockholder meeting, compliance with securities exchange listing requirements and the management and monitoring of
leverage. The Board considered the fee comparisons in view of the different services provided in managing these other types of clients and funds.
Taking
all of the above into consideration, the Board determined that the Management Fee and the Sub-Advisory Fees were reasonable in view of the nature, extent and overall quality of the management, investment
advisory and other services provided by the Manager and the Sub-Advisers to the Fund under the Management Agreement and the Sub-Advisory Agreements, respectively.
Manager Profitability
The Board,
as part of the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Manager’s fiscal years ended March 31, 2018 and March 31, 2019. The
Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in
preparing such profitability data. The profitability to each of the Sub-Advisers was not considered to be a material factor in the Board’s considerations since Western Asset’s Sub-Advisory Fee is paid by the Manager, not the Fund, and the Sub-Advisory Fees for the Non-U.S.
Sub-Advisers are paid by Western Asset, not the Fund. The profitability analysis presented to the Board as part of the Contract Renewal Information indicated that the
pre-tax profitability of the Fund to the Manager had decreased in fiscal year 2019 from the level in fiscal year 2018 and remained at a level that the Board did not consider to be excessive in view of judicial
guidance and the nature, extent and overall quality of the investment advisory and other services provided to the Fund.
Economies of
Scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s
assets grow. The Board noted that because the Fund is a closed-end fund with no current plans to seek additional assets beyond maintaining its dividend reinvestment plan, any significant growth in its assets
generally will occur through appreciation in the value of the Fund’s investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the Management Fee structure, which incorporates no breakpoints reducing
the Management Fee at specified increased asset levels, was appropriate under the circumstances.
|
|
|
|
|
54
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
Other Benefits to the
Manager and the Sub-Advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their relationship with the Fund and did not regard such benefits as excessive.
* * * * * *
In view of all of the foregoing and other relevant factors, the
Board determined, under the circumstances, that continuation of the Management Agreement and the Sub-Advisory Agreements would be consistent with the interests of the Fund and its stockholders and unanimously
voted to continue each Agreement for an additional one-year period. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve continuation of
the Management Agreement and the Sub-Advisory Agreements, and each Board member may have attributed different weights to the various factors. The Independent Directors were advised by separate independent
legal counsel throughout the process. Prior to the Contract Renewal Meeting, the Board received a memorandum prepared by the Manager discussing its responsibilities in connection with its consideration of the continuation of the Management Agreement
and the Sub-Advisory Agreements as part of the Contract Renewal Information and the Independent Directors separately received a memorandum discussing such responsibilities from their independent legal counsel.
Prior to voting, the Independent Directors also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreements in private sessions with their independent legal counsel at which
no representatives of the Manager or any Sub-Adviser were present.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
55
|
Additional shareholder information (unaudited)
Results of annual meeting of shareholders
The Annual Meeting of Shareholders of Western Asset Variable Rate Strategic Fund Inc. was held on March 20, 2020 for the purpose of considering and voting upon
proposals presented at the Meeting. The following table provides information concerning the matter voted upon at the Meeting:
Election of Directors
|
|
|
|
|
|
|
|
|
|
|
Nominees
|
|
Votes For
|
|
|
Votes
Withheld
|
|
|
William R. Hutchinson
|
|
|
2,851,750
|
|
|
|
1,514,486
|
|
|
Nisha Kumar
|
|
|
2,843,139
|
|
|
|
1,523,097
|
|
|
Jane Trust
|
|
|
2,841,373
|
|
|
|
1,524,863
|
|
At March 31, 2020, in addition to William R. Hutchinson, Nisha Kumar and Jane Trust, the other Directors of the Fund were as
follows:
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
Eileen A. Kamerick
Ratification of Selection of
Independent Registered Public Accountants
To ratify the selection of PricewaterhouseCoopers LLP (“PwC”) as independent registered public
accountants of the Fund for the fiscal year ended September 30, 2020.
|
|
|
|
|
|
|
|
|
Votes For
|
|
Abstain
|
|
|
|
2,859,344
|
|
1,506,892
|
|
|
|
|
|
56
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash (i.e., opt-out), all dividends, including any capital gain dividends and
return of capital distributions, on your Common Stock will be automatically reinvested by Computershare Trust Company, N.A., as agent for the stockholders (the “Plan Agent”), in additional shares of Common Stock under the Fund’s
Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by Computershare
Trust Company, N.A., as dividend paying agent.
If you participate in the Plan, the number of shares of Common Stock you will receive will be determined
as follows:
(1) If the market price of the Common Stock (plus $0.03 per share commission) on the payment date (or, if the payment date
is not a NYSE trading day, the immediately preceding trading day) is equal to or exceeds the net asset value per share of the Common Stock at the close of trading on the NYSE on the payment date, the Fund will issue new Common Stock at a price equal
to the greater of (a) the net asset value per share at the close of trading on the NYSE on the payment date or (b) 95% of the market price per share of the Common Stock on the payment date.
(2) If the net asset value per share of the Common Stock exceeds the market price of the Common Stock (plus $0.03 per share commission) at the close
of trading on the NYSE on the payment date, the Plan Agent will receive the dividend or distribution in cash and will buy Common Stock in the open market, on the NYSE or elsewhere, for your account as soon as practicable commencing on the trading
day following the payment date and terminating no later than the earlier of (a) 30 days after the dividend or distribution payment date, or (b) the payment date for the next succeeding dividend or distribution to be made to the stockholders;
except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price (plus $0.03 per share commission) rises so that it equals or exceeds the net asset value per share of the
Common Stock at the close of trading on the NYSE on the payment date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases,
the Plan Agent will cease purchasing Common Stock in the open market and the Fund shall issue the remaining Common Stock at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the NYSE on the
day prior to the issuance of shares for reinvestment or (b) 95% of the then current market price per share.
Common Stock in your account will be held by
the Plan Agent in non-certificated form. Any proxy you receive will include all shares of Common Stock you have received under the Plan. You may withdraw from the Plan (i.e.,
opt-out) by notifying the Plan Agent in writing at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at 1-888-888-0151. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such
withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Stock.
|
|
|
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
|
57
|
Dividend reinvestment plan
(unaudited) (cont’d)
Plan participants who sell their shares will be charged a service charge (currently $5.00 per transaction) and the Plan Agent is authorized to deduct brokerage
charges actually incurred from the proceeds (currently $0.05 per share commission). There is no service charge for reinvestment of your dividends or distributions in Common Stock. However, all participants will pay a pro rata share of brokerage
commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional shares of Common Stock, this allows you to add to your investment through dollar cost
averaging, which may lower the average cost of your Common Stock over time. Dollar cost averaging is a technique for lowering the average cost per share over time if the Fund’s net asset value declines. While dollar cost averaging has definite
advantages, it cannot assure profit or protect against loss in declining markets.
Automatically reinvesting dividends and distributions does not mean
that you do not have to pay income taxes due upon receiving dividends and distributions. Investors will be subject to income tax on amounts reinvested under the Plan.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. The Plan may be terminated, amended or supplemented by the Fund upon notice in
writing mailed to stockholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination or amendment is to be effective. Upon any termination, you will be sent cash for any
fractional share of Common Stock in your account. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your Common Stock on your behalf. Additional information about the Plan and your
account may be obtained from the Plan Agent at 462 South 4th Street, Suite 1600, Louisville, KY 40202 or by calling the Plan Agent at
1-888-888-0151.
|
|
|
|
|
58
|
|
Western Asset Variable Rate Strategic Fund Inc.
|
(This page intentionally left blank.)
(This page intentionally left blank.)
(This page intentionally left blank.)
(This page intentionally left blank.)
Western Asset
Variable Rate Strategic Fund Inc.
Directors
Robert D. Agdern
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
William R. Hutchinson
Eileen A. Kamerick
Nisha Kumar
Jane Trust
Chairman
Officers
Jane Trust
President and Chief Executive Officer
Christopher Berarducci
Treasurer and Principal Financial Officer
Fred Jensen*
Chief Compliance Officer
Jenna Bailey
Identity Theft Prevention Officer
Robert I.
Frenkel
Secretary and Chief Legal Officer
Thomas
C. Mandia
Assistant Secretary
Jeanne M. Kelly
Senior Vice President
* Effective April 17, 2020, Mr. Jensen became Chief Compliance Officer.
Western Asset Variable Rate Strategic Fund Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
Western Asset Management
Company, LLC
Western Asset Management Company Limited
Western Asset Management Company Pte. Ltd.
Custodian
The Bank of New York Mellon
Transfer agent
Computershare
Inc.
462 South 4th Street, Suite 1600
Louisville, KY
40202
Independent registered public accounting firm
PricewaterhouseCoopers LLP
Baltimore, MD
Legal counsel
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
New York Stock Exchange Symbol
GFY
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to
nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end
funds. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and
maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
|
•
|
|
Personal information included on applications or other forms;
|
|
•
|
|
Account balances, transactions, and mutual fund holdings and positions;
|
|
•
|
|
Bank account information, legal documents, and identity verification documentation;
|
|
•
|
|
Online account access user IDs, passwords, security challenge question responses; and
|
|
•
|
|
Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt,
payment history, etc.).
|
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial
institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have
authorized or as permitted or required by law. The Funds may disclose information about you to:
|
•
|
|
Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or to comply with obligations to
government regulators;
|
|
•
|
|
Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or
processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform statistical analysis, market research and marketing services solely for the Funds;
|
|
•
|
|
Permit access to transfer, whether in the United States or countries outside of the United States to such Funds’ employees, agents and affiliates and
service providers as required to enable the Funds to conduct ordinary business, or to comply with obligations to government regulators;
|
|
•
|
|
The Funds’ representatives such as legal counsel, accountants and auditors to enable the Funds to conduct ordinary business, or to comply with obligations
to government regulators;
|
|
•
|
|
Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust.
|
|
|
|
NOT PART OF THE
SEMI-ANNUAL REPORT
|
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’
behalf, including those outside the United States, are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them
to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as
permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be
required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will
remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they
will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data
security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event
of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications
or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account
information is incomplete, not accurate or not current, if you have questions about the Funds’ privacy practices, or our use of your nonpublic personal information, write the Funds using the contact information on your account statements, email
the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Funds at
1-888-777-0102.
Revised April
2018
|
|
|
NOT PART OF THE
SEMI-ANNUAL REPORT
|
Western Asset Variable Rate Strategic Fund Inc.
Western Asset Variable Rate Strategic Fund Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Notice is hereby given in accordance with
Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its stock.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each
fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at www.sec.gov. To obtain information on
Form N-PORT, shareholders can call the Fund at 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th
of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of Western Asset Variable Rate Strategic Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report.
Computershare Inc.
462 South 4th Street, Suite 1600
Louisville, KY 40202
WAS04036 5/20 SR20-3880