See notes to financial statements.
NOTE
1—Significant Accounting Policies:
BNY Mellon Alcentra Global Credit Income 2024 Target Term
Fund, Inc. (the “fund”) is registered under the Investment Company Act of 1940, as amended
(the “Act”), as a diversified closed-end management investment company. The fund has a limited term
of approximately seven years. The fund’s investment objectives are to seek high current income and
to return at least $9.835 per share of Common Stock (the public offering price per Common Stock after
deducting a sales load of $0.165 per Common Stock but before deducting offering costs of $0.02 per Common
Stock) to holders of record of Common Shares on or about December 1, 2024 (subject to certain extensions).
BNY Mellon Investment Adviser, Inc. (the “Adviser”), a wholly-owned subsidiary of The Bank of New
York Mellon Corporation (“BNY Mellon”), serves as the fund’s investment adviser. Alcentra NY, LLC
(the “Sub-Adviser”), a wholly-owned subsidiary of BNY Mellon and affiliate of the Adviser, serves
as the fund’s sub-investment adviser. The fund’s Common Stock trades on the New York Stock Exchange
(the “NYSE”) under the ticker symbol DCF.
The Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) is the exclusive reference
of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to
be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange
Commission (“SEC”) under authority of federal laws are also sources of authoritative GAAP for SEC
registrants. The fund is an investment company and applies the accounting and reporting guidance of the
FASB ASC Topic 946 Financial Services-Investment Companies. The fund’s financial statements are prepared
in accordance with GAAP, which may require the use of management estimates and assumptions. Actual results
could differ from those estimates.
The fund enters into contracts
that contain a variety of indemnifications. The fund’s maximum exposure under these arrangements is
unknown. The fund does not anticipate recognizing any loss related to these arrangements.
(a)
Portfolio valuation: The fair value of a financial instrument is the amount that would be received
to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date (i.e., the exit price). GAAP establishes a fair value hierarchy that prioritizes
the inputs of valuation techniques used to measure fair value. This hierarchy gives the highest priority
to unadjusted quoted prices in
33
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
active markets for identical assets or liabilities (Level 1 measurements) and
the lowest priority to unobservable inputs (Level 3 measurements).
Additionally, GAAP
provides guidance on determining whether the volume and activity in a market has decreased significantly
and whether such a decrease in activity results in transactions that are not orderly. GAAP requires enhanced
disclosures around valuation inputs and techniques used during annual and interim periods.
Various
inputs are used in determining the value of the fund’s investments relating to fair value measurements.
These inputs are summarized in the three broad levels listed below:
Level 1—unadjusted 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 methodology used for valuing securities are not necessarily an indication of the risk associated
with investing in those securities.
Changes in valuation techniques may result
in transfers in or out of an assigned level within the disclosure hierarchy. Valuation techniques used
to value the fund’s investments are as follows:
Investments in debt securities and floating
rate loan interests, excluding short-term investments (other than U.S. Treasury Bills), and forward foreign
currency exchange contracts (“forward contracts”) are valued each business day by one or more independent
pricing services (each, a “Service”) approved by the fund’s Board of Directors (the “Board”).
Investments for which quoted bid prices are readily available and are representative of the bid side
of the market in the judgment of a Service are valued at the mean between the quoted bid prices (as obtained
by a Service from dealers in such securities) and asked prices (as calculated by a Service based upon
its evaluation of the market for such securities). Securities are valued as determined by a Service,
based on methods which include consideration of the following: yields or prices of securities of comparable
quality, coupon, maturity and type; indications as to values from dealers; and general market conditions.
These securities are generally categorized within Level 2 of the fair value hierarchy.
34
Investments in equity securities are valued at the last sales price on the securities
exchange or national securities market on which such securities are primarily traded. Securities listed
on the National Market System for which market quotations are available are valued at the official closing
price or, if there is no official closing price that day, at the last sales price. For open short positions,
asked prices are used for valuation purposes. Bid price is used when no asked price is available. Registered
investment companies that are not traded on an exchange are valued at their net asset value. All of the
preceding securities are generally categorized within Level 1 of the fair value hierarchy.
Securities
not listed on an exchange or the national securities market, or securities for which there were no transactions,
are valued at the average of the most recent bid and asked prices. These securities are generally categorized
within Level 2 of the fair value hierarchy.
Each Service and independent valuation
firm is engaged under the general oversight of the Board.
Fair valuing of securities
may be determined with the assistance of a Service using calculations based on indices of domestic securities
and other appropriate indicators, such as prices of relevant American Depository Receipts and futures.
Utilizing these techniques may result in transfers between Level 1 and Level 2 of the fair value hierarchy.
When market quotations or official closing prices are not readily available, or
are determined not to accurately reflect fair value, 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 may value these investments at fair value
as determined in accordance with the procedures approved by the Board. Certain factors may be considered
when fair valuing investments such as: fundamental analytical data, the nature and duration of restrictions
on disposition, an evaluation of the forces that influence the market in which the securities are purchased
and sold, and public trading in similar securities of the issuer or comparable issuers. These securities
are either categorized within Level 2 or 3 of the fair value hierarchy depending on the relevant inputs
used.
For securities where observable inputs are limited, assumptions about market activity
and risk are used and such securities are generally categorized within Level 3 of the fair value hierarchy.
Investments denominated in foreign currencies are translated to U.S. dollars at
the prevailing rates of exchange.
35
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
Forward contracts are valued at the forward rate and are generally categorized
within Level 2 of the fair value hierarchy.
The following is a summary of the inputs used as of February
28, 2022 in valuing the fund’s investments:
| | | | | | |
| Level 1-Unadjusted Quoted
Prices | Level
2- Other Significant Observable Inputs | | Level 3-Significant Unobservable
Inputs | Total | |
Assets ($) | | |
Investments
in Securities:† | | |
Collateralized Loan Obligations | - | 35,167,947 | | - | 35,167,947 | |
Corporate Bonds | - | 72,711,765 | | - | 72,711,765 | |
Equity Securities - Common Stocks | 136,151 | - | | - | 136,151 | |
Exchange-Traded Funds | 860,303 | - | | - | 860,303 | |
Floating Rate Loan Interests | - | 81,771,848 | | 7,087 | 81,778,935 | |
Investment Companies | 2,616,111 | - | | - | 2,616,111 | |
Other Financial Instruments: | | |
Forward Foreign Currency Exchange Contracts†† | - | 470,784 | | - | 470,784 | |
Liabilities
($) | | |
Other Financial Instruments: | | |
Forward Foreign Currency Exchange Contracts†† | - | (107,955) | | - | (107,955) | |
† See
Statement of Investments for additional detailed categorizations, if any.
†† Amount shown represents unrealized appreciation (depreciation)
at period end, but only variation margin on exchange-traded and centrally cleared derivatives, if any,
are reported in the Statement of Assets and Liabilities.
36
The following is a reconciliation of Level 3 assets for which significant unobservable
inputs were used to determine fair value:
| |
Floating
Rate Loan Interests & Equity Securities-Common Stocks
($) |
Balance
as of 8/31/2021†† | 2,638,121 |
Net realized gain (loss) | 998 |
Change in unrealized appreciation (depreciation) | 4,528 |
Purchases/Issuances | 57,099 |
Sales/Dispositions | (208,227) |
Transfers into Level 3 | - |
Transfers
out of Level 3† | (2,485,432) |
Balance
as of 2/28/2022†† | 7,087 |
The amount of total
net gains (loss) for the period included in earnings attributable to the change in unrealized appreciation
(depreciation) relating to investments still held at 2/28/2022 | 154 |
† The
transfer out of Level 3 for the current period was due to the resumption of trading of a security.
†† Securities
deemed as Level 3 due to the lack of significant observable inputs by management assessment.
(b)
Foreign currency transactions: The fund does not isolate that portion of the results of
operations resulting from changes in foreign exchange rates on investments from the fluctuations arising
from changes in the 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, currency gains or losses realized on
securities transactions between trade and settlement date, 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 value of assets and liabilities other than investments resulting from changes
in exchange rates. Foreign currency gains and losses on foreign currency transactions are also included
with net realized and unrealized gain or loss on investments.
(c) Securities transactions
and investment income: Securities transactions are recorded on a trade date basis. Realized gains and
losses from securities transactions are recorded on the identified cost basis. Dividend income is recognized
on the ex-dividend date and interest income, including, where applicable, accretion of discount and amortization
of premium on investments, is recognized on the accrual basis. Interest income from investments in collateralized
loan obligation (“CLO”) equity is recorded based upon an effective yield to maturity utilizing assumed
cash flows. The Adviser monitors the expected cash flows from its CLO equity investments and effective
yield is determined
37
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
and adjusted as needed. Securities purchased or sold on a when-issued or delayed
delivery basis may be settled a month or more after the trade date.
(d) Affiliated issuers: Investments in other
investment companies advised by the Adviser are considered “affiliated” under the Act.
(e)
Risk: An investment in the fund is subject to investment risk, including the possible
loss of the entire amount that you invest. Your investment in Common Shares represents an indirect investment
in the credit instruments and other investments and assets owned by the fund. The value of the fund’s
portfolio investments may move up or down, sometimes rapidly and unpredictably. The value of the instruments
in which the fund invests may be affected by political, regulatory, economic and social developments,
and developments that impact specific economic sectors, industries or segments of the market. In addition,
turbulence in financial markets and reduced liquidity in equity, credit and/or fixed income markets may
negatively affect many issuers, which could adversely affect the fund. Global economies and financial
markets are becoming increasingly interconnected, and conditions and events in one country, region or
financial market may adversely impact issuers in a different country, region or financial market. These
risks may be magnified if certain events or developments adversely interrupt the global supply chain;
in these and other circumstances, such risks might affect companies world-wide. Recent examples include
pandemic risks related to COVID-19 and aggressive measures taken world-wide in response by governments,
including closing borders, restricting international and domestic travel and imposing prolonged quarantines
of large populations, and by businesses, including changes to operations and reducing staff. The effects
of COVID-19 have contributed to increased volatility in global markets and will likely affect certain
countries, companies, industries and market sectors more dramatically than others. The COVID-19 pandemic
has had, and any other outbreak of an infectious disease or other serious public health concern could
have, a significant negative impact on economic and market conditions and could trigger a prolonged period
of global economic slowdown. To the extent the fund has significant investments in certain countries,
regions, companies, industries or market sectors, such positions will increase the risk of loss from
adverse developments affecting those countries, regions, companies, industries or sectors.
The fund invests primarily in credit instruments, which are subject to credit
risk. Credit risk is the risk that one or more credit instruments in the fund’s portfolio will decline
in price or fail to pay interest or principal when due because the issuer of the instrument experiences
a decline in its financial status. Losses may occur because the market value of a credit instrument is
38
affected by the creditworthiness or perceived creditworthiness of the issuer and
by general economic and specific industry conditions and the fund’s investments will often be subordinate
to other debt in the issuer’s capital structure. Because the fund generally expects to invest a significant
portion of its Managed Assets (as defined below) in below investment grade instruments, it will be exposed
to a greater amount of credit risk than a fund which invests in investment grade securities. The prices
of below investment grade instruments are more sensitive to negative developments, such as a decline
in the issuer’s revenues or a general economic downturn, than are the prices of investment grade instruments,
which may reduce the fund's net asset value.
The fund invests in floating rate loan interests. The floating
rate loans in which the fund invests typically are below investment grade quality, and inherently speculative.
In the event of the bankruptcy or insolvency of a borrower, the fund could experience delays or limitations
with respect to its ability to realize the benefits of the collateral securing the borrower’s loan.
The fund invests in CDOs, including CLOs. CDOs may be thinly traded or have a
limited trading market. CDOs, such as CLOs, are typically privately offered and sold, and thus are not
registered under the securities laws. As a result, investments in CLOs and other types of CDOs may be
characterized by the fund as illiquid securities, especially investments in mezzanine and subordinated/equity
tranches of CLOs; however, an active dealer market may exist for certain investments and more senior
CLO tranches, which would allow such securities to be considered liquid in some circumstances. In addition
to the general risks associated with credit instruments discussed herein, CLOs and other types of CDOs
carry additional risks, including, but not limited to: (i) the possibility that distributions from collateral
securities will not be adequate to make interest or other payments; (ii) the quality of the collateral
may decline in value or default; (iii) the possibility that the class of CLO or CDO held by the fund
is subordinate to other classes; and (iv) the complex structure of the security may not be fully understood
at the time of investment and may produce disputes with the issuer or unexpected investment results.
(f)
Dividends and distributions to Common Shareholders: Dividends and distributions are recorded
on the ex-dividend date. Dividends from net investment income are normally declared and paid monthly.
Dividends from net realized capital gains, if any, are normally declared and paid annually, but the fund
may make distributions on a more frequent basis to comply with the distribution requirements of the Internal
Revenue Code of 1986, as amended (the “Code”). To the extent that net realized capital
39
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
gains can be offset by capital loss carryovers, it is the policy of the fund not
to distribute such gains. Income and capital gain distributions are determined in accordance with income
tax regulations, which may differ from GAAP.
Common Shareholders will have their distributions
reinvested in additional shares of the fund, unless such Common Shareholders elect to receive cash, at
the lower of the market price or net asset value per share (but not less than 95% of the market price).
If market price is equal to or exceeds net asset value, shares will be issued at net asset value. If
net asset value exceeds market price, Computershare Inc., the transfer agent, will buy fund shares in
the open market and reinvest those shares accordingly.
On February 24, 2022,
the Board declared a cash dividend of $0.050 per share from undistributed net investment income, payable
on March 24, 2022 to Common Shareholders of record as of the close of business on March 10, 2022. The
ex-dividend date was March 9, 2022.
(g) Federal income taxes: It is the policy of
the fund to continue to qualify as a regulated investment company, if such qualification is in the best
interests of its shareholders, by complying with the applicable provisions of the Code, and to make distributions
of taxable income and net realized capital gain sufficient to relieve it from substantially all federal
income and excise taxes.
As of and during the period ended February
28, 2022, the fund did not have any liabilities for any uncertain tax positions. The fund recognizes
interest and penalties, if any, related to uncertain tax positions as income tax expense in the Statement
of Operations. During the period ended February 28, 2022, the fund did not incur any interest or penalties.
Each tax year in the three-year period ended August 31, 2021 remains subject to
examination by the Internal Revenue Service and state taxing authorities.
The
fund is permitted to carry forward capital losses for an unlimited period. Furthermore, capital loss
carryovers retain their character as either short-term or long-term capital losses.
The
fund has an unused capital loss carryover of $12,114,415 available for federal income tax purposes to
be applied against future net realized capital gains, if any, realized subsequent to August 31, 2021.
The fund has $1,263,484 of short-term capital losses and $10,850,931 of long-term capital losses which
can be carried forward for an unlimited period.
The tax character of distributions paid
to shareholders during the fiscal year ended August 31, 2021 was as follows: ordinary income $8,980,401.
40
The tax character of current year distributions will be determined at the end
of the current fiscal year.
(h) New accounting pronouncements: In March 2020, the FASB issued Accounting
Standards Update 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference
Rate Reform on Financial Reporting (“ASU 2020-04”), and in January 2021, the FASB issued Accounting
Standards Update 2021-01, Reference Rate Reform (Topic 848): Scope (“ASU 2021-01”), which provides
optional, temporary relief with respect to the financial reporting of contracts subject to certain types
of modifications due to the planned discontinuation of the LIBOR and other interbank offered rates as
of the end of 2021. The temporary relief provided by ASU 2020-04 and ASU 2021-01 is effective for certain
reference rate-related contract modifications that occur during the period from March 12, 2020 through
December 31, 2022. Management is evaluating the impact of ASU 2020-04 and ASU 2021-01 on
the fund’s investments, derivatives, debt and other contracts that will undergo reference rate-related
modifications as a result of the reference rate reform. Management is also currently actively working
with other financial institutions and counterparties to modify contracts as required by applicable regulation
and within the regulatory deadlines.
NOTE 2—Borrowings:
The fund has a $68,000,000
Revolving Credit Facility Credit Agreement with Societe Generale (the “Agreement”), which terminates
on November 18, 2022 (or the prior business day, as necessary). Under the terms of the Agreement, the
fund may borrow “Loans” on collateralized basis. The interest to be paid by the fund on such Loans
is determined with reference to the principal amount of each Loan outstanding from time to time. The
fund also pays additional fees pursuant to the Agreement.
During the period ended
February 28, 2022, total fees pursuant to the Agreement amounted to $587,469 inclusive of $503,030 of
interest expense and $84,439 of loan fees. These fees are included in Interest expense and loan fees
in the Statement of Operations.
The average amount of borrowings outstanding
under the Agreement during the period ended February 28, 2022 was $58,000,000, with a related weighted
average annualized interest rate of 1.75%. The fund’s borrowings under the Agreement are secured by
its portfolio holdings.
41
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
NOTE
3—Investment Management Fee, Sub-Investment Advisory Fee and Other Transactions with Affiliates:
(a)
Pursuant
to an Investment Management Agreement with the Adviser, the management fee is computed at the annual
rate of 0.85% of the value of the fund’s “Managed Assets” and is payable monthly. “Managed Assets”
of the fund means the total assets of the fund, including any assets attributable to leverage (i.e.,
any loans from certain financial institutions and/or the issuance of debt securities (collectively, “Borrowings”),
preferred stock or other similar preference securities (“Preferred Shares”), or the use of derivative
instruments that have the economic effect of leverage), minus the fund’s accrued liabilities, other
than any liabilities or obligations attributable to leverage obtained through (i) indebtedness of any
type (including, without limitation, Borrowings), (ii) the issuance of Preferred Shares, and/or (iii)
any other means, all as determined in accordance with generally accepted accounting principles.
Pursuant to a sub-investment advisory agreement between the Adviser and the Sub-Adviser,
the Adviser pays the Sub-Adviser a fee at the annual rate of 0.425% of the value of the fund’s average
daily Managed Assets and is payable monthly.
(b) The fund has an arrangement with the custodian
whereby the fund will receive interest income or be charged overdraft fees when cash balances are maintained.
For financial reporting purposes, the fund includes this interest income and overdraft fees, if any,
as interest income in the Statement of Operations.
The fund compensates BNY Mellon under a
custody agreement for providing custodial services for the fund. These fees are determined based on net
assets and transaction activity. During the period ended February 28, 2022, the fund was charged
$136,490 pursuant to the custody agreement.
During the period ended
February 28, 2022, the fund was charged $4,352 for services performed by the Chief Compliance Officer
and his staff. These fees are included in Chief Compliance Officer fees in the Statement of Operations.
The components of “Due to BNY Mellon Investment Adviser, Inc. and affiliates”
in the Statement of Assets and Liabilities consist of: management fees of $126,600, custodian fees of
$98,032 and Chief Compliance Officer fees of $3,627.
42
(c)
Each Board member also serves as a Board member of other funds in the BNY Mellon Family of Funds complex.
Annual retainer fees and attendance fees are allocated to each fund based on net assets.
NOTE
4—Securities Transactions:
The aggregate amount of purchases and sales (including paydowns)
of investment securities, excluding short-term securities and forward contracts, during the period ended
February 28, 2022, amounted to $52,284,711 and $50,144,256, respectively.
Floating Rate Loan Interests:
Floating rate instruments are loans and other securities with interest rates that adjust or “float”
periodically. Floating rate loans are made by banks and other financial institutions to their corporate
clients. The rates of interest on the loans adjust periodically by reference to a base lending rate,
such as the LIBOR plus a premium or credit spread. Floating rate loans reset on periodic set dates, typically
30 to 90 days, but not to exceed one year. The fund may invest in multiple series or tranches of a loan.
A different series or tranche may have varying terms and carry different associated risks.
The fund may enter into certain credit agreements all or a portion of which may
be unfunded. The fund is obligated to fund these commitments at the borrower’s discretion. The commitments
are disclosed in the accompanying Statement of Investments. At February 28, 2022, the fund had sufficient
cash and/or securities to cover these commitments.
Derivatives: A derivative is a financial
instrument whose performance is derived from the performance of another asset. The fund enters into International
Swaps and Derivatives Association, Inc. Master Agreements or similar agreements (collectively, “Master
Agreements”) with its over-the-counter (“OTC”) derivative contract counterparties in order to,
among other things, reduce its credit risk to counterparties. Master Agreements include provisions for
general obligations, representations, collateral and events of default or termination. Under a Master
Agreement, the fund may offset with the counterparty certain derivative financial instruments’ payables
and/or receivables with collateral held and/or posted and create one single net payment in the event
of default or termination.
Each type of derivative instrument that
was held by the fund during the period ended February 28, 2022 is discussed below.
Forward Foreign Currency
Exchange Contracts: The fund enters into forward contracts in order to hedge its exposure to changes
in foreign currency exchange rates on its foreign portfolio holdings, to settle foreign currency transactions
or as a part of its investment strategy. When
43
NOTES
TO FINANCIAL STATEMENTS (Unaudited) (continued)
executing forward contracts, the fund is obligated to buy or sell a foreign currency
at a specified rate on a certain date in the future. With respect to sales of forward contracts, the
fund incurs a loss if the value of the contract increases between the date the forward contract is opened
and the date the forward contract is closed. The fund realizes a gain if the value of the contract decreases
between those dates. With respect to purchases of forward contracts, the fund incurs a loss if the value
of the contract decreases between the date the forward contract is opened and the date the forward contract
is closed. The fund realizes a gain if the value of the contract increases between those dates. Any realized
or unrealized gains or losses which occurred during the period are reflected in the Statement of Operations.
The fund is exposed to foreign currency risk as a result of changes in value of underlying financial
instruments. The fund is also exposed to credit risk associated with counterparty nonperformance on these
forward contracts, which is generally limited to the unrealized gain on each open contract. This risk
may be mitigated by Master Agreements, if any, between the fund and the counterparty and the posting
of collateral, if any, by the counterparty to the fund to cover the fund’s exposure to the counterparty.
Forward Contracts open at February 28, 2022 are set forth in the Statement of Investments.
The
provisions of ASC Topic 210 “Disclosures about Offsetting Assets and Liabilities” require disclosure
on the offsetting of financial assets and liabilities. These disclosures are required for certain investments,
including derivative financial instruments subject to Master Agreements which are eligible for offsetting
in the Statement of Assets and Liabilities and require the fund to disclose both gross and net information
with respect to such investments. For financial reporting purposes, the fund does not offset derivative
assets and derivative liabilities that are subject to Master Agreements in the Statement of Assets and
Liabilities.
At February 28, 2022, derivative assets and liabilities (by
type) on a gross basis are as follows:
The following tables present derivative assets and liabilities net of amounts
available for offsetting under Master Agreements and net of related collateral received or pledged, if
any, as of February 28, 2022:
At February 28, 2022, accumulated net unrealized depreciation
on investments inclusive of derivative contracts was $6,233,048, consisting of $2,085,434 gross unrealized
appreciation and $8,318,482 gross unrealized depreciation.
At February 28, 2022,
the cost of investments for federal income tax purposes was substantially the same as the cost for financial
reporting purposes (see the Statement of Investments).