The Coalition of Concerned Stockholders of Highland Income Fund (NYSE: HFRO) today issued the following letter urging all stockholders to vote against the proposed conversion to a holding company.

Dear Fellow Stockholder of Highland Income Fund (HFRO):

After the close of business on June 14, 2021, HFRO announced a plan to change from a registered investment company to a diversified holding company. The next day HFRO’s stock price fell 7.65 % from $11.89 to $10.98 (even though the net asset value (NAV) was only down a penny) and the discount to NAV widened from 13.97% to 20.49%. On June 28 the stock price hit a low of $9.92 and the discount reached almost 28%. I think there are good reasons for investors’ pessimism and consequently good reasons to vote down this ill-advised proposal at the stockholder meeting on August 20.

• HFRO’s current structure as a regulated investment company provides important protections for stockholders. Among the many protections that will be lost if the proposed conversion is implemented are: (1) a prohibition on using excessive leverage, (2) a prohibition on secondary offerings that dilute existing stockholders, (3) a prohibition on self-dealing (joint) transactions, (4) the right of stockholders to fire the investment advisor at any time with no penalty, and (5) a requirement that the at least 40% of the trustees must be independent of management.
• James Dondero is the “face” of both HFRO and NexPoint Strategic Opportunities Fund (NHF), another closed-end fund. Moreover, all of the trustees of HFRO are also trustees of NHF. One year ago, NHF’s trustees proposed deregistering that fund as an investment company, a proposal they said was intended to increase stockholder value and address NHF’s trading discount. NHF’s stockholders voted to approve the proposal but the results have been very disappointing. NHF currently trades at a discount of almost 40% to its NAV.
• Mr. Dondero, the proposed President and CEO of HFRO post-conversion, has a long history contentious litigation. On October 16, 2019, Highland Capital Management, L.P. (“HCMLP”), an investment advisor controlled by Mr. Dondero, filed for Chapter 11 bankruptcy protection. The judge in that case ordered him to stay away from HCMLP’s business during the bankruptcy. On June 7, 2021, the judge found Mr. Dondero in contempt for knowingly violating that court order. The judge also found that he improperly disposed of a company-issued cell phone that may have contained evidence. And just a few days ago, the judge again found Mr. Dondero in contempt of court, this time for violating an order barring him from suing HCLMP’s replacement CEO without the court’s permission.

Rather than voting for a radical change in HFRO’s business which may well result in a lower stock price, I believe there are actions that can be taken that are more likely to enhance stockholder value including the following:

1. I believe Mr. Dondero’s association with HFRO is the primary reason its shares trade at a large discount to NAV. While litigation is sometimes unavoidable, Mr. Dondero’s frequent and aggressive use of litigation must be distracting. Therefore, HFRO’s current investment advisory agreement with his firm should be terminated and an advisor that will focus on enhancing stockholder value should be hired.
2. Mr. Dondero has caused a significant percentage of HFRO’s portfolio to consist illiquid hard-to-value assets. Investors tend to assign a large discount to the “fair value” of such assets. Consequently, the new investment advisor should actively seek to monetize HFRO’s illiquid investments and redeploy the capital into liquid income producing securities.
3. Excess cash from asset sales should also be used to aggressively repurchase HFRO’s common stock when it trades at a wide discount from its NAV.

As Shakespeare famously wrote in Julius Caesar, “The fault, dear Brutus, is not in our stars / But in ourselves, that we are underlings.” In short, there is nothing wrong with HFRO that cannot be fixed by getting rid of Mr. Dondero. If stockholders vote to convert HFRO to a holding company led by Mr. Dondero, they will likely regret it just like many stockholders of NHF probably regret voting to deregister that fund. To send a message to the board that Mr. Dondero must go, I urge you to vote against the proposal to convert HFRO from a registered closed-end fund to a holding company.

IF YOU HAVE ALREADY RETURNED YOUR PROXY CARD AND VOTED FOR CONVERSION, YOU CAN CHANGE YOUR VOTE AT ANY TIME BEFORE THE MEETING. IF YOU HAVE ANY QUESTIONS ABOUT HOW TO VOTE YOUR PROXY, PLEASE CALL INVESTORCOM AT 1-877-972-0090.

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