486BPOS: Angel Oak Strategic Credit Fund Files Updated N-2 Registration, Details Continuous Offering and Strategic Partnership

Angel Oak Strategic Credit Fund has filed a post-effective amendment to its N-2 registration statement, providing updated information on its continuous offering of shares, investment strategies, and the impending change of control for its investment adviser.

Summary

• Angel Oak Strategic Credit Fund is a diversified, closed-end management investment company structured as an interval fund, seeking total return.
• The Fund invests at least 80% of its net assets, plus borrowings, in credit-related instruments, including corporate debt, residential and commercial mortgage-backed securities (RMBS/CMBS), collateralized loan obligations (CLOs), and other asset-backed securities (ABS).
• It may invest without limit in below investment grade (high-yield) and unrated fixed income instruments, and concentrates over 25% of its total assets in RMBS and CMBS.
• The Fund offers Class A, Institutional Class, Class U, and Class FI shares, with varying minimum initial investments ranging from $1,000 to $25,000,000 and different sales charge structures (Class A up to 2.25% sales charge, Class U up to 1.50% CDSC, Class FI up to 3.00% CDSC, Institutional Class no sales charge).
• As an interval fund, it conducts quarterly repurchase offers for 5% to 25% of outstanding shares at Net Asset Value (NAV) to provide limited liquidity, as its shares are not listed on any securities exchange.
• The Fund may use leverage up to 33 1/3% of its total assets.
• For the fiscal year ended January 31, 2025, the Institutional Class reported a total return of 10.26% and net assets of $80,667,000, while the Class FI reported a total return of 10.30% and net assets of $20,412,000.
• Angel Oak Capital Advisors, LLC, the investment adviser, had approximately $10.96 billion in assets under management as of January 31, 2025.
• A strategic partnership with Brookfield Asset Management Ltd. to acquire a majority of Angel Oak Companies, LP is expected to close by September 30, 2025, which will result in a change of control of the Adviser and necessitate shareholder approval for a new investment advisory agreement.

Sentiment

Score: 7

Explanation: The fund demonstrates strong recent historical performance and a clear, specialized investment strategy. However, the inherent illiquidity of its shares, the potential for return of capital in distributions, and the relatively high expense ratios, especially after the termination of the expense limitation agreement, present notable drawbacks. The upcoming change of control for the Adviser introduces a degree of uncertainty, despite the Board's approval of a new advisory agreement with similar terms.

Positives

• The Fund's Institutional Class and Class FI shares demonstrated strong positive total returns of 10.26% and 10.30% respectively for the fiscal year ended January 31, 2025.
• Net investment income to average net assets after waiver/reimbursement was robust at 8.74% for both Institutional Class and Class FI in the fiscal year ended January 31, 2025.
• The interval fund structure provides a mechanism for limited liquidity through quarterly repurchase offers (5% to 25% of outstanding shares at NAV), which is a key feature for an unlisted fund.
• The Fund's broad investment mandate across liquid and illiquid credit-related instruments allows for flexibility and opportunistic investing in various market conditions.
• The investment adviser, Angel Oak Capital Advisors, LLC, manages a significant amount of assets ($10.96 billion as of January 31, 2025) and employs an experienced team of portfolio managers.
• The Adviser incorporates environmental, social, and governance (ESG) and sustainability factors into its investment process, which may align with certain investor preferences.

Negatives

• The Fund's shares are not listed on any securities exchange, and no secondary trading market is expected to develop, making the investment illiquid outside of the limited quarterly repurchase offers.
• Quarterly repurchase offers may be oversubscribed, meaning shareholders might only be able to sell a portion of their tendered shares, leading to potential delays in liquidity.
• Distributions from the Fund may include a return of capital, which reduces a shareholder's cost basis and could result in a higher tax liability upon the sale of shares, even if the investment has experienced a net loss.
• The Fund's annual operating expenses are relatively high (2.15% for Class A, 1.90% for other classes), which can significantly impact overall returns.
• The expense limitation agreement, which previously capped expenses at 0.75%, was terminated effective January 1, 2023, potentially leading to higher ongoing costs for shareholders.
• The Fund's ability to use leverage (up to 33 1/3% of total assets) increases the volatility of its Net Asset Value and magnifies potential losses.
• Significant investments in below investment grade (high-yield/junk) securities and unrated securities expose the Fund to higher credit risk, default risk, and price volatility.

Risks

• **Fixed-Income Instruments Risks**: Value varies inversely with interest rates; longer duration means more sensitivity; prepayment risk (reinvestment at lower rates); extension risk (reinvestment at higher rates); subordinated debt has lower priority.
• **General Market Risk**: Securities underperform due to inflation/deflation, interest rates, global demand, market instability, debt crises, trade barriers, geopolitical events, war, terrorism, natural disasters, infectious diseases.
• **Credit Risk**: Issuer/guarantor/counterparty inability/unwillingness to meet financial obligations; downgrade of credit rating.
• **Interest Rate Risk**: Rising interest rates extend duration, increase volatility, and adversely affect performance; rates falling below zero have unpredictable effects.
• **Prepayment Risk**: Principal paid earlier than expected, forcing reinvestment at lower prevailing interest rates.
• **Structured Products Risks**: Distributions may be inadequate, collateral quality may decline/default, subordination to other classes, volatile values, disputes with issuer, high risk for most subordinate tranches, illiquidity, potential consolidation of financial statements, reliance on collateral manager.
• **Borrowing Risks and Leverage Risks**: Increased NAV volatility, losses if earnings don't cover borrowing costs, limited by 300% asset coverage under 1940 Act.
• **Extension Risk**: Principal paid later than expected, decreasing value and inability to reinvest in higher-yielding securities.
• **Concentration in Certain Mortgage-Backed Securities**: Susceptibility to changes in lending standards, interest rates, and market perception of issuers/creditworthiness in RMBS/CMBS.
• **U.S. Government Securities Risks**: Some agency/GSE obligations not backed by full faith and credit of U.S. Treasury; potential for issuers not to meet obligations.
• **Mortgage-Backed and Asset-Backed Securities Risks**: Value affected by prepayment rates, changes in lending standards, interest rates, creditworthiness; subprime exposure increases credit/valuation/liquidity risk; private issuers lack government guarantee.
• **Unrated Securities Risks**: Less liquid, Adviser may not accurately evaluate credit quality, greater reliance on Adviser's analysis.
• **Residential Loans and Mortgages Risk**: Collateral value decline, liquidity variation, greater risks for subprime loans, difficulty disposing of loans, extended settlement periods, reliance on third-party originators for compliance, potential assignee liability for originator violations, geographic concentration risk.
• **Management Risk**: Performance reflects Adviser's ability to make decisions; potential underperformance compared to other funds with similar objectives.
• **Valuation Risk**: Difficulty in fair valuing securities lacking central trading place; fair value may not approximate actual sale price; reliance on third-party pricing services.
• **Floating or Variable Rate Securities Risk**: Less sensitive to interest rate changes but may decline if rates don't rise as quickly; subject to credit, liquidity, default risk; LIBOR transition risk (no assurance alternative rates will be similar or have same liquidity).
• **Liquidity and Valuation Risks**: Difficulty purchasing/selling investments within reasonable time at favorable price; reduced market maker capacity; difficulty assigning accurate daily value; reliance on third-party pricing services; potential for losses from operational failures.
• **Rating Agencies Risk**: Rating agencies may fail to make timely changes in credit ratings; inherent conflict of interest due to compensation by issuers.
• **Distressed and Defaulted Investments Risk**: Substantial risk of default or already in default; additional expenses for recovery; potential for loss of entire investment; difficulty obtaining true financial condition information.
• **Illiquid Securities Risks**: Difficulty disposing of securities at fair price; increased amount of assets in illiquid securities; more volatile market price; more difficult to value; restricted ability to take advantage of market opportunities; forced sales to meet shareholder repurchase requests.
• **Regulatory and Legal Risks**: New regulations (e.g., Dodd-Frank Act) may adversely affect the Fund's investments, strategies, costs, or taxation.
• **International Securities Risks**: Undeveloped/inefficient/less liquid foreign markets, greater price volatility, less public information, different accounting standards, less government supervision, withholding/foreign taxes, expropriation, political/economic instability, exchange controls, trade tensions.
• **Foreign Currency Risks**: Fluctuations in exchange rates adversely affect U.S. dollar value of foreign investments; costs of currency conversions; exchange controls.
• **High-Yield Securities Risks**: Predominantly speculative, susceptible to economic downturns, higher risk of default, less liquid secondary market, difficult to value, adverse publicity.
• **Financials Sector Risk**: Subject to extensive governmental regulation, interest rate increases, loan losses, decreased money/asset valuations, credit rating downgrades, cyber attacks, management changes, litigation, competition.
• **Reverse Repurchase Agreement Risks**: Creates leverage, increased volatility, counterparty failure to return securities, potential loss if collateral value is less than repurchase price, increased expenses, restricted use of proceeds in bankruptcy.
• **Derivatives Risks**: Leverage, market, counterparty, liquidity, operational, legal risks; imperfect correlation, loss of principal, counterparty default, illiquidity, margin requirements, mispricing/valuation complexity, regulatory changes (Rule 18f-4, CFTC position limits).
• **RIC-Related Risks of Investments Generating Non-Cash Taxable Income**: May recognize taxable income without cash receipt (e.g., OID, PFICs, CFCs), potentially requiring asset sales or capital raises to meet distribution requirements.
• **Risks Relating to the Funds RIC Status**: Failure to meet source-of-income, asset diversification, or annual distribution requirements could result in loss of RIC status and corporate-level taxation.
• **Conflicts of Interest Risk**: Portfolio managers devoting unequal time, limited investment opportunities, Adviser/affiliates holding other interests in Structured Products, material non-public information restrictions, broker selection for research.
• **Repurchase Offers Risk**: No guarantee of selling all desired shares, illiquid investment, decreased assets/increased expense ratio, untimely sales, limited new opportunities, compounded leverage effects, interest on borrowing for repurchases, pro rata repurchases if oversubscribed, NAV fluctuations between request and pricing dates.
• **Distributions Risk**: Distributions may include return of capital, reducing cost basis and increasing expense ratio; potential for tax even with net loss; shareholders may misunderstand source of distribution.
• **Uncertain Tax Treatment**: Special tax issues for below investment grade instruments (accruing interest, OID, market discount, bad debts, default allocations, bankruptcy exchanges).
• **Non-Fundamental Policies Risk**: Non-fundamental policies (e.g., 80% investment policy) can change without shareholder approval, leading to unanticipated strategies and limited disposal means.
• **Non-Listed Closed-end Interval Fund; Liquidity Risks**: No public trading market, illiquid investment, limited quarterly repurchase offers.
• **Risk of Not Being Treated as a Publicly Offered Regulated Investment Company**: If not publicly offered, individual/trust/estate shareholders treated as receiving dividend for allocable share of management fees/expenses, treated as miscellaneous itemized deductions (not deductible before 2026).
• **Subordinated Debt, Senior Debt and Preferred Securities of Banks and Diversified Financials Companies Risk**: Lower priority in payment, inherent bank risks (regulation, competition, interest rates, loan losses), unrated/high-yield, sensitive to common stock values, discretionary coupon payments on CoCos, illiquidity.
• **Subsidiary Risk**: Exposure to risks of Subsidiary's investments (residential/commercial real estate loans), not registered as investment companies under the 1940 Act, changes in laws.
• **Repurchase Agreement Risks**: Default/bankruptcy by seller, delays/costs in liquidating collateral, potential loss if collateral value declines, increased expenses, potential for underlying securities to be deemed not within Fund's control in bankruptcy.
• **Municipal Securities Risks**: General obligation vs. revenue bonds, private activity bonds, municipal leases (non-appropriation clauses), less public information, less liquid secondary market, state/municipal financial stress, bankruptcy risk, enforcement costs.
• **Cybersecurity Risks**: Loss of proprietary info, data corruption, operational capacity loss, regulatory penalties, reputational damage, compliance costs, financial loss, reliance on third-party providers.
• **Large Shareholder Transactions Risk**: Large purchases/repurchases may force sales at unfavorable prices, impact NAV/liquidity, increase transaction costs, adverse tax consequences (capital loss carryforwards).
• **Other Investment Companies Risks**: Indirectly bear fees/expenses of underlying funds, performance tied to underlying funds, ETFs (tracking error, market price vs. NAV, volatility), termination risk of underlying funds, conflicts of interest for Adviser/portfolio managers, limitations under Rule 12d1-4.
• **Short Sales Risks**: Losses may exceed investment, unlimited loss potential, difficulty covering positions, pledged assets unavailable, counterparty default, negative cost of carry, dividend expenses not covered by expense limitation, market/economic/regulatory conditions may hinder strategy.
• **Consumer Loans Risk**: Unsecured loans (greater nonpayment risk), contractual resale restrictions, illiquid market, longer settlement periods, reliance on third-party originators for compliance, potential assignee liability for originator violations.
• **Second Lien Risk**: Higher loss risk than first lien, greater price volatility, less liquid, generally below investment grade.

Future Outlook

The Fund intends to fully invest substantially all of the net proceeds from its continuous offering within three months of receipt, though investments may be delayed by an additional three months due to market conditions or lack of suitable opportunities. A strategic partnership involving Brookfield Asset Management Ltd. acquiring a majority stake in Angel Oak Companies, LP is expected to close by September 30, 2025, which will result in a change of control for the Adviser and require shareholder approval for a new investment advisory agreement.

Management Comments

• The Fund believes that an unlisted closed-end structure is most appropriate in light of the long-term nature of the Fund's strategy and the characteristics of its portfolio.
• The Fund believes that these repurchase offers are generally beneficial to the Fund's Shareholders.

Industry Context

The Angel Oak Strategic Credit Fund operates within the specialized and often less liquid segments of the fixed income and structured credit markets. Its focus on instruments like RMBS, CMBS, CLOs, and high-yield corporate debt positions it within the alternative credit space, which has seen increased investor interest seeking higher yields and diversification away from traditional fixed income. The ongoing transition from LIBOR to alternative reference rates like SOFR impacts the valuation and liquidity of many floating-rate instruments in which the Fund invests. The strategic partnership with Brookfield Asset Management Ltd. reflects a broader trend of consolidation and strategic alliances within the asset management industry, particularly in specialized investment areas.

Comparison to Industry Standards

• The document does not provide specific industry benchmarks or comparable companies/projects for performance comparison. The Fund's performance should be assessed against relevant structured credit and high-yield indices, which are not provided in this filing.

Management Changes

Corporate Governance

Related Party Transactions

• The Adviser may pay fees to financial intermediaries for services not directly covered by the Fund's expenses, potentially creating incentives for intermediaries to recommend the Fund.
• The Adviser has contractually agreed to waive management fees to offset proportionate management fees incurred by the Fund through investments in underlying funds for which the Adviser also serves as investment adviser.
• The Fund may purchase Structured Products sponsored by the Adviser or its affiliates from third parties in secondary market transactions, but not directly from the issuer.
• The Adviser or its affiliates may hold other interests in Structured Products in which the Fund invests, which could give rise to conflicts of interest.
• The Adviser may direct securities transactions to particular broker-dealers, potentially considering the receipt of research or participation interests in initial public offerings that may or may not directly benefit the Fund.
• The Adviser or its affiliates may make 'Additional Payments' (revenue-sharing payments) to financial intermediaries for services or marketing advantages, which could create potential conflicts of interest for selling agents.
• The Fund may acquire and hold securities issued by its regular brokers and dealers or their parent companies.
• The Fund may effect brokerage transactions through affiliates of the Adviser.
• U.S. Bank National Association (Custodian) and U.S. Bancorp Fund Services, LLC (Administrator, Transfer Agent, Fund Accountant) are affiliated entities under common control and may participate in revenue sharing arrangements with service providers of mutual funds in which the Fund may invest.

Stakeholder Impact

• **Shareholders**: Face illiquidity risk due to unlisted shares, rely on quarterly repurchase offers for limited liquidity, and are subject to potential return of capital in distributions. They bear the Fund's operating expenses, which increased after the termination of the expense cap. They will vote on the new investment advisory agreement.
• **Investment Adviser (Angel Oak Capital Advisors, LLC)**: Continues to receive a management fee (1.25% of average daily net assets) and benefits from the Fund's assets under management. The upcoming change of control due to the Brookfield acquisition will alter its ownership structure.
• **Financial Intermediaries**: Benefit from sales charges, dealer concessions, and potential 'Additional Payments' (revenue-sharing) from the Adviser/Distributor, which may incentivize them to recommend the Fund to clients.
• **Employees of the Adviser**: Portfolio managers receive base salaries, benefits, and discretionary bonuses, with some having ownership interests in the Adviser's parent company, aligning their interests with firm profitability.
• **Service Providers (e.g., U.S. Bank Global Fund Services, U.S. Bank National Association)**: Receive fees for their administrative, transfer agent, fund accounting, and custodial services, contributing to the Fund's operating expenses.

Next Steps

• Shareholder approval for the new investment advisory agreement due to the change of control of the Adviser.
• Closing of the strategic partnership between Angel Oak Companies, LP and Brookfield Asset Management Ltd. by September 30, 2025.
• Quarterly repurchase offers will occur in the months of March, June, September, and December.
• The Board will conduct an annual review of the Investment Advisory Agreement.
• The Fund will file a Form N-PX with its complete proxy voting record for the 12 months ended June 30, no later than August 31st of each year.
• Unaudited semi-annual and audited annual reports will be prepared and transmitted to shareholders within 60 days after the close of the respective periods.
• The Fund may offer additional classes of shares in the future.

Key Dates

Keywords

Angel Oak Strategic Credit Fund, Interval Fund, Closed-End Fund, Credit-Related Instruments, Mortgage-Backed Securities, RMBS, CMBS, High-Yield Securities, Junk Bonds, Structured Products, Corporate Debt, Asset-Backed Securities, Fixed Income, SEC Filing, Form N-2, Investment Management, Financial Services, Brookfield Asset Management