Highland Credit Opportunities Fund, Ltd. – Update


On December 19th, 2008 Highland Credit Opportunities CDO LP (“the Master Fund”), a limited partnership which currently has a substantial investment in the preferred shares of Highland Credit Opportunities CDO Ltd. (the “CDO”), completed a transaction with several of its primary equity holders to secure up to $218 million of additional funding for the CDO. Highland Credit Opportunities Fund, LTD invests substantially all of its equity in the Master Fund.


At close, approximately $117 million of Senior Secured Convertible Notes (“the Notes”) were issued, with approximately $101 million committed for one or more subsequent closings, subject to certain terms and conditions. $100 million of the closing proceeds was used to make an additional equity contribution to the CDO. The additional capital contribution was made in connection with a three-year forbearance agreed to by the majority of the controlling debt class of the CDO. The terms of the forbearance generally provide that the majority of the controlling class will not issue an Acceleration Notice or Liquidation Direction (each as defined in the indenture governing the notes issued by the CDO) due to a shortfall in the over-collateralization tests (“OC tests”) during the forbearance period. In addition to the capital contribution, the preferred shareholder and the Collateral Manager of the CDO have agreed not to make any additional draws on the Class A-1 revolving notes, nor declare or pay any additional dividends to the shareholder until the lower of the Class A OC Tests exceeds 110. Additionally, payment of existing redemptions of any direct or indirect investor in the Master Fund has been suspended through the earlier of March 31, 2010 or when the Class C OC test exceeds 120. Future redemptions, requested subsequent to the closing date but while the Note is still outstanding, are suspended unless the Class C OC test exceeds 120.


Highland believes that the financing has achieved its originally stated objectives. The transaction helped avoid a potential liquidation scenario in December 2008, preserved the CDO’s financing, and positioned the fund to capitalize on the recovery of the loan market over the first half of 2009. The net asset value of the Master Fund at April 30, 2009 was $18.9 million. The fund did not issue investor NAV statements for the months of January, February and March, because of the insignificant value associated with the fund during those months. The NAV was approximately zero in January, -$5 million in February and -$15 million in March.


We continue to be committed to the fund’s success and believe that the structure will continue to benefit from the stabilization of the credit environment, while continuing to make the interest and revolver commitment fee payments under the indenture.


Philip Braner, Director of Product Management

Highland Capital Management, L.P.