CORPORATE
HIGH YIELD
FUND II, INC.
FUND LOGO
Semi-Annual Report
February 28, 1997
This report, including the financial information herein, is
transmitted to the shareholders of Corporate High Yield Fund II,
Inc. for their information. It is not a prospectus, circular or
representation intended for use in the purchase of shares of the
Fund or any securities mentioned in the report. Past performance
results shown in this report should not be considered a
representation of future performance. The Fund has leveraged its
Common Stock to provide Common Stock shareholders with a potentially
higher rate of return. Leverage creates risk for Common Stock
shareholders, including the likelihood of greater volatility of net
asset value and market price of Common Stock shares, and the risk
that fluctuations in short-term interest rates may reduce the Common
Stock's yield. Statements and other information herein are as dated
and are subject to change.
<PAGE>
Corporate High
Yield Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
CORPORATE HIGH YIELD FUND II, INC.
The Benefits and
Risks of
Leveraging
Corporate High Yield Fund II, Inc. has the ability to utilize
leverage through borrowings or issuance of short-term debt
securities or shares of Preferred Stock. The concept of leveraging
is based on the premise that the cost of assets to be obtained from
leverage will be based on short-term interest rates, which normally
will be lower than the return earned by the Fund on its longer-term
portfolio investments. To the extent that the total assets of the
Fund (including the assets obtained from leverage) are invested in
higher-yielding portfolio investments, the Fund's Common Stock
shareholders will benefit from the incremental yield.
<PAGE>
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the Fund were to issue Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the Fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the Fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the Fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
DEAR SHAREHOLDER
High-Yield Market Overview
The high-yield market continued its upward trend during the six
months ended February 28, 1997. Pushed by extraordinarily strong
demand, the high-yield market returned +8.68% as measured by the
unmanaged First Boston High Yield Index. This performance is in
contrast to returns in the 10-year Treasury market, which were
5.60% during the same six-month period. Thus, the yield spread be-
tween high-yield bonds, as measured by the unmanaged First Boston
High Yield Index and Treasury securities, reached historically low
levels of 315 basis points (3.15%) at the end of February from 375
basis points at August 31, 1996. Investors are drawn to high-yield
issues by solid fundamentals, including low defaults and improving
credit quality among issuers. For example, last year Duff & Phelps
Credit Rating, a bond rating service that follows numerous high-
yield issuers, reported 138 credit upgrades compared to 65
downgrades. However, we believe that stretched valuation leaves the
high-yield market vulnerable to deteriorating conditions or
weakening fundamentals.
<PAGE>
Fund Performance
For the six months ended February 28, 1997, total investment return
on the Fund's Common Stock was +7.48%, based on a change in the per
share net asset value from $12.56 to $12.83, and assuming
reinvestment of $0.649 per share income dividends. During this
February period, the net annualized yield of the Fund's Common Stock
was 9.95%. The Fund's performance during the February period was
driven by both weakness in a few specific credits and our defensive
market posture, which determined both our leverage strategy and our
focus on low volatility bonds. We disposed of those credits where we
believe improved performance was unlikely and maintained our
positions in other credits where we believe upside still exists.
Leverage Strategy
Our leverage position is considerably lower than that of most other
closed-end, high-yield funds. On average, the Fund was 8% leveraged
over the six-month period ended February 28, 1997. Thus, the Fund
borrowed the equivalent of 8% of total assets invested, earning
incremental yield on the investments we made with the borrowed
funds. On February 28, 1997, the Fund was 7.7% leveraged, having
borrowed $9.3 million at a borrowing cost of 5.54%. Our reduced
leverage position reflects our caution on the direction of high-
yield bond prices. At this time our borrowings are invested
primarily in bonds that we believe have limited downside risk from
adverse interest rate moves or from earnings disappointments. While
such bonds generally have limited upside potential as well, we are
able to enhance somewhat the yield of the portfolio by earning the
modest spread between our borrowing cost and the yield on our
investments. (For a complete explanation of the benefits and risks
of leveraging, see page 1 of this report to shareholders.)
Investment Strategy
During the past six months, it became easier to find fully valued or
overvalued sale candidates than to locate acceptable replacements in
the market. We replaced low-yielding emerging market bonds with
higher-yielding emerging market bonds for a modest give-up in
rating. Toward the end of the February period, we began gradually
shifting into higher-quality companies in anticipation of market
weakness later in the year. Securities added to the portfolio
included Time Warner, Inc. (Preferred) (Series M) and BB-rated
Veritas Holdings, 9.625% due 2003.
Favorable financing interest rates and enhanced liquidity attracted
increasing numbers of overseas issuers to the US high-yield market
in recent years. Among these are US dollar-denominated bonds of
issuers from Canada, Great Britain, Germany and Australia, as well
as from emerging markets such as Mexico, Brazil and Argentina. To
benefit from the increased international focus of the high-yield
market, we received approval from the Fund's Board of Directors to
lift limitations on bonds of foreign issuers. At February 28, 1997,
the Fund had 27.4% of the portfolio invested in bonds of overseas
corporations, including 3.5% from European companies, 6.5% from
Canadian issuers and 12.8% from issuers in Latin America. Although
the concentration of the portfolio will remain US high-yield
issuers, we believe that Fund returns will be enhanced by increased
flexibility to invest selectively in attractive foreign-issuer bonds
denominated in US dollars.
<PAGE>
Portfolio Characteristics
In the Fund's schedule of investments, we reclassified several of
the communications industry categories into more narrowly defined
sectors that more closely reflect fundamental industry categories.
Communications and media remains our largest broad industry
category, totaling near one-fourth of total long-term investments.
Of the narrowly classified sectors, the largest industries were:
energy, 9.6% of net assets; media & communications--international,
8.7%; utilities, 8.7%; transportation services, 7.6%; and cable--
international, 6.7%. Average portfolio maturity for Corporate High
Yield Fund II, Inc. was 6 years, 6 months during the six-month
period ended February 28, 1997.
In Conclusion
We thank you for your investment in Corporate High Yield Fund II,
Inc., and we look forward to assisting you with your financial needs
in the months and years ahead.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Vincent T. Lathbury III)
Vincent T. Lathbury III
Vice President and Portfolio Manager
<PAGE>
(Elizabeth M. Phillips)
Elizabeth M. Phillips
Vice President and Portfolio Manager
April 8, 1997
As of December 31, 1996, N. John Hewitt retired as Senior Vice
President of the Fund. His colleagues at Merrill Lynch Asset
Management, L.P. join the Fund's Board of Directors in wishing Mr.
Hewitt well in his retirement.
Proxy Results
<TABLE>
During the six-month period ended February 28, 1997, Corporate High
Yield Fund II, Inc. shareholders voted on the following proposals.
The proposals were approved at a special shareholders' meeting on
December 27, 1996. The description of each proposal and number of
shares voted are as follows:
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 4,117,731 63,508
Walter Mintz 4,117,731 63,508
Robert S. Salomon Jr. 4,117,731 63,508
Melvin R. Seiden 4,117,731 63,508
Stephen B. Swensrud 4,117,731 63,508
Arthur Zeikel 4,117,731 63,508
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To ratify the selection of Deloitte & Touche LLP as
the independent auditors of the Fund to serve for the 4,096,053 27,027 58,159
current fiscal year.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Airlines--1.0% B+ B1 $ 1,123,239 USAir Inc., 11.20% due 3/19/2005++ $ 988,451 $ 1,131,170
Automotive--0.6% B B3 625,000 Collins & Aikman Products, 11.50% due
4/15/2006 625,000 700,000
Broadcasting-- B- B2 1,250,000 EZ Communication, Inc., 9.75% due
Radio & 12/01/2005 1,265,625 1,321,875
Television-- NR+++ NR+++ 1,301,116 SCI Television Inc., 8.50% due
2.8% 6/30/1998+++++ 1,302,742 1,291,358
B B2 500,000 Sinclair Broadcasting Group Inc., 10% due
9/30/2005 494,375 522,500
------------ ------------
3,062,742 3,135,733
Broadcasting/ B- B3 875,000 Diamond Cable Communications PLC,
Cable--0.5% 10.773% due 12/15/2005* 610,239 603,750
Building BB B1 2,000,000 Building Materials Corporation, 10.447%
Materials--2.2% due 7/01/2004* 1,640,970 1,772,500
BB B1 625,000 Cemex S.A., 12.75% due 7/15/2006 (c) 625,000 729,688
------------ ------------
2,265,970 2,502,188
Cable--3.8% CCC+ Caa 2,823,149 American Telecasting, Inc., 13.646% due
6/15/2004* 2,118,660 846,945
B B2 500,000 Echostar Communications Corp., 11.519%
due 6/01/2004* 398,375 432,500
B B2 1,000,000 Intermedia Capital Partners, 11.25% due
8/01/2006 1,003,750 1,060,000
BB- B2 1,000,000 Lenfest Communications, Inc., 10.50% due
6/15/2006 1,014,375 1,075,000
B- B3 1,915,000 Wireless One Inc., 13.499% due
8/01/2006* (f) 1,075,066 842,600
------------ ------------
5,610,226 4,257,045
Cable-- CCC+ Caa 2,961,000 Australis Media Ltd., 14.09% due
International 5/15/2003* (e) 1,910,146 1,687,770
- --6.7% BB- B2 500,000 Bell Cablemedia PLC, 9.898% due 7/15/2004* 424,952 437,500
International Cabletel Inc.:
NR+++ NR+++ 500,000 10% due 2/15/2007 (c) 500,313 505,000
B B3 1,250,000 Series B, 9.99% due 2/15/2007* 798,760 837,500
NR+++ NR+++ 625,000 Multicanal S.A., 10.50% due 2/01/2007 (c) 623,463 646,875
BB- B2 2,000,000 Rogers Communications Inc., 10.875% due
4/15/2004 2,005,000 2,095,000
B+ B3 1,515,000 Videotron Holdings PLC, 12% due 7/01/2004* 1,116,319 1,321,838
------------ ------------
7,378,953 7,531,483
<PAGE>
Computer BB- Ba1 1,000,000 Advanced Micro Devices Inc., 11% due
Services--2.0% 8/01/2003 1,038,750 1,115,000
B B2 1,000,000 Celestica International Inc., 10.50% due
12/31/2006 (c) 1,000,000 1,087,500
------------ ------------
2,038,750 2,202,500
Consumer B NR+++ 2,000,000 Coleman Holdings, Inc., 10.65% due
Products--5.7% 5/27/1998* 1,759,653 1,780,000
B- B2 1,708,000 Polymer Group Inc., 12.25% due 7/15/2002 1,699,770 1,887,340
B B2 2,000,000 Revlon Consumer Products Corp., 9.375%
due 4/01/2001 1,760,070 2,075,000
B- B2 547,000 Samsonite Corporation, 11.125% due
7/15/2005 528,910 616,742
------------ ------------
5,748,403 6,359,082
Consumer B B2 1,110,000 Affinity Group Inc., 11.50% due 10/15/2003 1,140,250 1,165,500
Services--1.0%
Diversified--1.3% NR+++ B3 1,250,000 Crain Industries, 13.50% due 8/15/2005 1,256,875 1,425,000
Electronic NR+++ NR+++ 750,000 Tracor, Inc., 8.50% due 3/01/2007 (c) 747,015 747,015
Component--0.7%
Energy--9.6% B B2 1,125,000 Benton Oil & Gas Co, 11.625% due
5/01/2003 (c) 1,125,000 1,260,000
B+ B2 1,000,000 Clark USA Inc., 10.875% due 12/01/2005 1,000,000 1,020,000
B- B1 1,250,000 KCS Energy Inc., 11% due 1/15/2003 1,279,375 1,368,750
BB- B1 750,000 Maxus Energy Corp., 11.50% due 11/15/2015 781,875 787,500
BBB- Baa3 2,000,000 Oleoducto Centrale S.A., 9.35% due
9/01/2005 (c) 2,000,000 2,097,500
NR+++ NR+++ 1,000,000 Transamerican Exploration Corp., 14%
due 9/19/1998 (b) 990,000 1,010,000
CCC+ Caa 1,000,000 Transamerican Refining Corporation,
16.50% due 2/15/2002+++++ 992,808 1,077,500
BB- B2 2,000,000 TransTexas Gas Corp., 11.50% due 6/15/2002 2,000,000 2,217,500
------------ ------------
10,169,058 10,838,750
<PAGE>
Financial NR+++ Ba3 1,508,000 First Nationwide Escrow, 10.625% due
Services--5.4% 10/01/2003 (c) 1,678,920 1,670,110
BB+ Ba 2,000,000 Penncorp Financial Group, Inc., 9.25% due
12/15/2003 2,000,000 2,060,000
BB- B1 2,000,000 Reliance Group Holdings Inc., 9.75% due
11/15/2003 2,010,000 2,110,000
BB- NR+++ 250,000 Veritas Holdings, 9.625% due 12/15/2003 (c) 252,188 256,875
------------ ------------
5,941,108 6,096,985
Food & B B3 500,000 Curtice Burns Foods, Inc., 12.25% due
Beverage--3.1% 2/01/2005 500,000 541,250
CCC+ Caa 3,000,000 Fresh Del Monte Produce Corp., 10% due
5/01/2003 2,875,000 2,985,000
------------ ------------
3,375,000 3,526,250
Gaming--5.0% B+ B2 2,000,000 GB Property Funding Corp., 10.875% due
1/15/2004 1,952,500 1,620,000
D Caa 2,000,000 Harrah's Jazz Company, 14.25% due
11/15/2001 (d) 2,000,000 940,000
B B2 500,000 Majestic Star Casino, 12.75% due 5/15/2003 537,500 542,500
BB- B1 2,000,000 Trump Atlantic City, 11.25% due 5/01/2006 2,000,000 1,930,000
NR+++ Caa 750,000 Trump Castle Funding Inc., 11.75% due
11/15/2003 697,741 660,000
------------ ------------
7,187,741 5,692,500
Health B B3 1,000,000 Imed Corp., 9.75% due 12/01/2006 (c) 1,007,500 1,037,500
Services--2.3% B+ B2 1,000,000 Quest Diagnostic Inc., 10.75% due
12/15/2006 1,000,000 1,047,500
BB B1 500,000 Quorum Health Group, 11.875% due 12/15/2002 552,500 549,375
------------ ------------
2,560,000 2,634,375
Independent BB- Ba3 500,000 AES China Generating Co., Ltd., 10.125%
Power Producers-- due 12/15/2006 499,520 532,500
1.0% BB Ba2 500,000 California Energy Company, Inc., 9.875%
due 6/30/2003 500,000 540,000
------------ ------------
999,520 1,072,500
Media & B+ B2 1,250,000 Call-Net Enterprises, Inc., 10.927% due
Communications-- 12/01/2004* 1,000,432 1,065,625
International--8.7% NR+++ NR+++ 1,000,000 Comtel Brasileira Ltd., 10.75% due
9/26/2004 (c) 1,000,000 1,065,000
B+ B2 750,000 Globo Communicacoes, 10.50% due
12/20/2006 (c) 748,143 768,750
BB Ba3 1,250,000 Grupo Televisa S.A., 11.375% due 5/15/2003 1,250,000 1,364,062
B B3 3,500,000 PanAmSat L.P., 10.65% due 8/01/2003* 3,002,627 3,290,000
BB- B1 2,000,000 Telefonica de Argentina S.A., 11.875% due
11/01/2004 1,960,160 2,265,000
------------ ------------
8,961,362 9,818,437
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Value
INDUSTRIES Rating Rating Amount Corporate Bonds Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Metals & B- B2 $ 2,000,000 Kaiser Aluminum & Chemical Corp., 12.75%
Mining--5.3% due 2/01/2003 $ 2,090,000 $ 2,200,000
Maxxam Group, Inc.:
B- B3 2,000,000 11.25% due 8/01/2003 1,990,000 2,100,000
B- B3 1,835,000 14.726% due 8/01/2003* 1,400,313 1,651,500
------------ ------------
5,480,313 5,951,500
Packaging--0.7% CCC- Caa 1,000,000 Anchor Glass Container Corp., 10.25% due
6/30/2002 695,000 775,000
Paper & Forest B B3 587,000 Crown Paper Co, 11% due 9/01/2005 546,644 570,857
Products--5.4% BB- Ba3 750,000 Doman Industries Ltd., 8.75% due
3/15/2004 685,312 727,500
BB- Ba3 625,000 Malette Inc., 12.25% due 7/15/2004 695,312 696,875
Repap New Brunswick, Inc.:
BB- B1 1,000,000 9.875% due 7/15/2000 1,000,000 1,010,000
B+ B3 500,000 10.625% due 4/15/2005 473,750 502,500
BB- B2 1,000,000 Repap Wisconsin Finance, Inc., 9.25% due
2/01/2002 872,500 995,000
B B2 500,000 Riverwood International Corp., 10.25% due
4/01/2006 483,750 480,000
B+ B1 1,000,000 S.D. Warren Co., 12% due 12/15/2004 1,000,000 1,105,000
------------ ------------
5,757,268 6,087,732
Publishing & B B3 750,000 MDC Communications Corp., 10.50% due
Printing--1.4% 12/01/2006 750,000 786,562
B- B3 750,000 Sun Media Corp., 9.50% due 2/15/2007 (c) 750,000 763,125
------------ ------------
1,500,000 1,549,687
Real Estate--1.4% NR+++ NR+++ 2,325,000 Rockefeller Center Properties, Inc.,
11.07% due 12/31/2000* (Convertible) 1,550,473 1,534,500
Specialty B- B3 1,500,000 Specialty Retailers, Inc., 11% due
Retailing--1.4% 8/15/2003 1,518,750 1,560,000
<PAGE>
Telephony-- NR+++ NR+++ 1,250,000 Nextlink Communications, 12.50% due
Competitive Local 4/15/2006 1,250,000 1,359,375
Exchange
Carrier--1.2%
Textiles--0.5% NR+++ B2 500,000 Synthetic Industries Inc., 9.25% due
2/15/2007 (c) 500,000 512,500
Transportation BB- Ba2 2,000,000 Eletson Holdings, Inc., 9.25% due
Services--7.6% 11/15/2003 2,030,000 2,040,000
BB- B1 1,250,000 Sea Containers Ltd., 12.50% due 12/01/2004 1,368,750 1,400,000
B- B3 4,271,000 Transtar Holdings, Inc., 12.75% due
12/15/2003* 3,026,527 3,406,122
B B2 1,750,000 Trism Inc., 10.75% due 12/15/2000 1,666,875 1,666,875
------------ ------------
8,092,152 8,512,997
Utilities--8.7% B+ B1 2,454,000 Beaver Valley Funding Corp., 9% due
6/01/2017 2,302,665 2,464,724
CTC Mansfield Funding Corp.:
B+ Ba3 698,000 10.25% due 3/30/2003 647,395 705,392
B+ Ba3 1,500,000 11.125% due 9/30/2016 1,612,937 1,588,650
B Ba3 1,042,000 First PV Funding Corp., 10.30% due
1/15/2014 1,109,116 1,112,335
BB- B1 1,500,000 Metrogas S.A., 12% due 8/15/2000 1,497,500 1,642,500
NR+++ NR+++ 2,359,520 Tucson Electric & Power Co., 10.21% due
1/01/2009++ (b) 2,312,331 2,267,051
------------ ------------
9,481,944 9,780,652
Wireless CCC- B3 1,000,000 Cencall Communications Corportaion,
Communications-- 13.935% due 1/15/2004* 670,539 760,000
Domestic Paging & B- B3 950,000 Nextel Communications, Inc., 13.486% due
Cellular--2.2% 8/15/2004* 600,584 695,875
B- B3 1,000,000 Western Wireless Corp., 10.50% due
2/01/2007 995,937 1,043,750
------------ ------------
2,267,060 2,499,625
Wireless CCC+ B3 2,250,000 Cellular Communications International
Communications-- Inc., 11.885% due 8/15/2000* 1,504,202 1,597,500
International B+ B3 2,070,000 Comunicacion Celular, 13.153% due
Paging & 11/15/2003* 1,287,319 1,443,825
Cellular--5.2% NR+++ B3 2,000,000 Microcell Telecommunications Inc., 13.471%
due 6/01/2006* 1,089,879 1,100,000
B- B3 1,250,000 Millicom International Celular S.A., 14.62%
due 6/01/2006* (c) 683,701 843,750
B B3 1,250,000 Occidente y Caribe Celular S.A., 13.15% due
3/15/2004* 677,883 843,750
------------ ------------
5,242,984 5,828,825
Total Investments in Corporate Bonds--104.4% 114,002,607 117,392,656
<PAGE>
Shares
Held Stocks & Warrants
Broadcasting-- 1,250 Paxson Communications (Convertible
Radio & Television-- Preferred)++++ (c) 1,236,250 1,256,250
1.1%
Cable--0.1% 18,350 American Telecasting, Inc. (Warrants) (a) 0 43,581
Energy--0.0% 8,417 Transamerican Refining Corporation
(Warrants) (a) 20,193 16,834
Entertainment--1.6% 11,766 On Command Corporation (d) 3,186,975 158,841
5,447 On Command Corporation (Warrants) (a) 43,576 34,044
1,425 Time Warner Inc. (Preferred) (Series M) 1,560,500 1,581,750
------------ ------------
4,791,051 1,774,635
Supermarkets--0.1% 35,348 Grand Union Co. (d) 2,103,750 121,509
Telephone 5,000 Occidente y Caribe Celular S.A.
Communications-- (Warrants) (a)(c) 84,253 1
0.0%
Wireless 1,250 Cellular Communications International
Communications-- Inc. (Warrants) (a) 30,163 18,750
International 2,070 Comunicacion Celular S.A. (Warrants)(a)(c) 2,261 14,490
Paging & 16,000 Microcell Telecommunications Inc.
Cellular--0.1% (Warrants) (a) 112,629 120,000
------------ ------------
145,053 153,240
Total Investments in Stocks & Warrants--3.0% 8,380,550 3,366,050
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial $ 156,000 General Electric Capital Corp., 5.38% due
Paper**--0.1% 3/03/1997 $ 156,000 $ 156,000
Total Investments in Short-Term
Securities--0.1% 156,000 156,000
Total Investments--107.5% $122,539,157 120,914,706
============
Liabilities in Excess of Other Assets--(7.5%) (8,459,701)
------------
Net Assets--100.0% $112,455,005
<PAGE> ============
<FN>
*Represents a zero coupon or step bond; the interest rate
shown is the effective yield at the time of purchase by
the Fund.
**Commercial Paper is traded on a discount basis; the
interest rate shown is the discount rate paid at the
time of purchase by the Fund.
++Subject to principal paydowns.
++++Represents a pay-in-kind security which may pay interest
in additional shares.
+++Not Rated.
+++++Interest rate resets periodically. The interest rate
shown is the rate in effect at February 28, 1997.
(a)Warrants entitle the Fund to purchase a predetermined
number of shares of common stock/face amount of bonds.
The purchase price and the number of shares/face amount
are subject to adjustment under certain conditions until
the expiration date.
(b)Restricted security as to resale. The value of the
Fund's investment in restricted securities was
approximately $3,277,000, representing 2.9% of net
assets.
<CAPTION>
Acquisition Value
Issue Date Cost (Note 1a)
<S> <S> <C> <C>
Transamerican Exploration Corp., 14% due 9/19/1998 9/17/1996 $ 990,000 $1,010,000
Tucson Electric & Power Co., 10.21% due 1/01/2009 3/23/1994 2,312,331 2,267,051
Total $3,302,331 $3,277,051
========== ==========
(c)The security may be offered and sold to "qualified
institutional buyers" under Rule 144A of the Securities
Act of 1933.
(d)Non-income producing security.
(e)Each $1,000 face amount contains one warrant of Australis
Media Ltd.
(f)Each $1,000 face amount contains one warrant of Wireless
One Inc.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS, LIABILITIES AND CAPITAL
As of February 28, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$122,539,157) (Note 1a) $120,914,706
Cash 345
Receivables:
Interest $ 2,130,665
Securities sold 305,450 2,436,115
------------
Deferred organization expenses (Note 1e) 26,189
Prepaid expenses and other assets 26,493
------------
Total assets 123,403,848
------------
Liabilities: Payables:
Loans (Note 5) 9,300,000
Securities purchased 1,548,882
Investment adviser (Note 2) 45,590
Interest on loans (Note 5) 34,886 10,929,358
------------
Accrued expenses and other liabilities 19,485
------------
Total liabilities 10,948,843
------------
Net Assets: Net assets $112,455,005
============
Capital: Common stock, par value $.10 per share, 200,000,000 shares
authorized $ 876,399
Paid-in capital in excess of par 121,892,815
Undistributed investment income--net 552,738
Accumulated realized capital losses on investments--net (Note 6) (9,242,496)
Unrealized depreciation on investments--net (1,624,451)
------------
Net Assets--Equivalent to $12.83 per share based on 8,763,988
shares of capital stock outstanding (market price $13.375) $112,455,005
============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended February 28, 1997
<S> <S> <C>
Investment Income Interest and discount earned $ 6,153,459
(Note 1d): Other 115,248
------------
Total income 6,268,707
------------
Expenses: Investment advisory fees (Note 2) 296,946
Loan interest expense (Note 5) 273,568
Professional fees 36,239
Accounting services (Note 2) 29,347
Borrowing cost (Note 5) 28,626
Printing and shareholder reports 24,455
Directors' fees and expenses 20,918
Transfer agent fees 15,883
Custodian fees 6,134
Amortization of organization expenses (Note 1e) 6,112
Pricing services 2,432
Listing fees 130
Other 17,067
------------
Total expenses 757,857
------------
Investment income--net 5,510,850
------------
Realized & Realized loss on investments--net (3,133,760)
Unrealized Change in unrealized depreciation on investments--net 5,635,620
Gain (Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 8,012,710
(Notes 1b, 1d & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OFCHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Feb. 28, 1997 Aug. 31, 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 5,510,850 $ 11,504,639
Realized loss on investments--net (3,133,760) (430,981)
Change in unrealized depreciation on investments--net 5,635,620 1,676,281
------------ ------------
Net increase in net assets resulting from operations 8,012,710 12,749,939
------------ ------------
<PAGE>
Dividends to Investment income--net (5,639,989) (11,768,201)
Shareholders ------------ ------------
(Note 1f): Net decrease in net assets resulting from dividends to
shareholders (5,639,989) (11,768,201)
------------ ------------
Capital Share Value of shares sold to Common Stock shareholders in reinvestment
Transactions of dividends 1,691,607 1,355,059
(Note 4): ------------ ------------
Net increase in net assets derived from capital share
transactions 1,691,607 1,355,059
------------ ------------
Net Assets: Total increase in net assets 4,064,328 2,336,797
Beginning of period 108,390,677 106,053,880
------------ ------------
End of period* $112,455,005 $108,390,677
============ ============
<FN>
*Undistributed investment income--net $ 552,738 $ 681,877
============ ============
</TABLE>
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
For the Six Months Ended February 28, 1997
<S> <S> <C>
Cash Provided Net increase in net assets resulting from operations $ 8,012,710
by Operating Adjustments to reconcile net increase (decrease) in net assets resulting
Activities: from operations to net cash provided by operating activities:
Decrease in receivables 427,641
Decrease in other liabilities (91,261)
Realized and unrealized gain on investments--net (2,501,860)
Amortization of discount (1,658,131)
------------
Net cash provided by operating activities 4,189,099
------------
Cash Used for Proceeds from sales of long-term investments 40,244,330
Investing Purchases of long-term investments (41,464,129)
Activities: Purchases of short-term investments (87,083,135)
Proceeds from sales and maturities of short-term investments 87,962,000
------------
Net cash used for investing activities (340,934)
------------
<PAGE>
Cash Used for Cash receipts from borrowings 21,650,000
Financing Cash payments on borrowings (21,600,000)
Activities: Dividends paid to shareholders (3,948,382)
------------
Net cash used for financing activities (3,898,382)
------------
Cash: Net decrease in cash (50,217)
Cash at beginning of period 50,562
------------
Cash at end of period $ 345
============
Cash Flow Cash paid for interest $ 294,693
Information: ============
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $ 1,691,607
Financing ============
Activities:
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have
been derived from information provided in For the Period
the financial statements. For the Six For the Year Nov. 26,
Months Ended Ended Aug. 31, 1993++++ to
Increase (Decrease) in Net Assets Value: Feb. 28, 1997++ 1996 1995 Aug. 31, 1994
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 12.56 $ 12.44 $ 12.37 $ 14.18
Operating ----------- ----------- ----------- -----------
Performance: Investment income--net .63 1.35 1.40 1.06
Realized and unrealized gain (loss) on
investments--net .29 .15 .10 (1.91)
----------- ----------- ----------- -----------
Total from investment operations .92 1.50 1.50 (.85)
----------- ----------- ----------- -----------
Less dividends from investment income--net (.65) (1.38) (1.43) (.94)
----------- ----------- ----------- -----------
Capital charge resulting from the issuance
of Common Stock -- -- -- (.02)
----------- ----------- ----------- -----------
Net asset value, end of period $ 12.83 $ 12.56 $ 12.44 $ 12.37
=========== =========== =========== ===========
Market price per share, end of period $ 13.375 $ 13.00 $ 12.00 $ 12.125
=========== =========== =========== ===========
<PAGE>
Total Investment Based on net asset value per share 7.48%+++ 12.71% 13.41% (6.27%)+++
Return:** =========== =========== =========== ===========
Based on market price per share 8.25%+++ 20.94% 11.61% (13.15%)+++
=========== =========== =========== ===========
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding interest expense .82%* .81% .86% .50%*
=========== =========== =========== ===========
Expenses, net of reimbursement 1.28%* 1.65% 2.49% 1.68%*
=========== =========== =========== ===========
Expenses 1.28%* 1.65% 2.49% 2.00%*
=========== =========== =========== ===========
Investment income--net 9.28%* 9.15% 8.73% 8.75%*
=========== =========== =========== ===========
Leverage: Amount of borrowings (in thousands) $ 9,300 $ 9,250 $ 19,750 $ 45,000
=========== =========== =========== ===========
Average amount of borrowings outstanding
during the period (in thousands) $ 9,592 $ 16,948 $ 21,336 $ 41,935
=========== =========== =========== ===========
Average amount of borrowings outstanding
per share during the period $ 1.10 $ 1.98 $ 2.55 $ 5.10
=========== =========== =========== ===========
Supplemental Net assets, end of period (in thousands) $ 112,455 $ 108,391 $ 106,054 $ 101,696
Data: =========== =========== =========== ===========
Portfolio turnover 34.44% 69.75% 61.97% 42.21%
=========== =========== =========== ===========
<FN>
++Based on average shares outstanding during the period.
++++Commencement of Operations.
*Annualized.
**Total investment returns based on market value, which can
be significantly greater or lesser than the net asset
value, may result in substantially different returns. Total
investment return excludes the effect of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
<PAGE>
1. Significant Accounting Policies:
Corporate High Yield Fund II, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, closed-end
management investment company. These unaudited financial statements
reflect all adjustments which are, in the opinion of management,
necessary to a fair statement of the results for the interim period
presented. All such adjustments are of a normal recurring nature.
The Fund determines and makes available for publication the net
asset value of its Common Stock on a weekly basis. The Fund's Common
Stock is listed on the New York Stock Exchange under the symbol KYT.
(a) Valuation of investments--Portfolio securities (other than short-
term obligations but including listed issues) may be valued on the
basis of prices furnished by one or more pricing services which
determine prices for normal, institutional-size trading units of
such securities using market information, transactions for
comparable securities and various relationships between securities
which are generally recognized by institutional traders. In certain
circumstances, portfolio securities are valued at the last sale
price on the exchange that is the primary market for such
securities, or the last quoted bid price for those securities for
which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The
value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by
obtaining a bank quotation. Options written are valued at the last
sale price in the case of exchange-traded options or, in the case of
options traded in the over-the-counter market, the last asked price.
Options purchased are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last bid price. Obligations with
remaining maturities of sixty days or less are valued at amortized
cost, which approximates market value, unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost
plus accrued interest. Rights or warrants to acquire stock, or stock
acquired pursuant to the exercise of a right or warrant, may be
valued taking into account various factors such as original cost to
the Fund, earnings and net worth of the issuer, market prices for
securities of similar issuers, assessment of the issuer's future
prosperity, liquidation value or third party transactions involving
the issuer's securities. Securities for which there exist no price
quotations or valuations and all other assets including futures
contracts and related options, are valued at fair value as
determined in good faith by or on behalf of the Board of Directors
of the Fund.
(b) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
<PAGE>
* Options--The Fund is authorized to write and purchase call and put
options. When the Fund writes an option, an amount equal to the
premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margin and are recorded by the Fund as unrealized
gains or losses. When the contract is closed, the Fund records a
realized gain or loss equal to the difference between the value of
the contract at the time it was opened and the value at the time it
was closed.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(c) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to shareholders. Therefore, no Federal income tax
provision is required.
<PAGE>
(d) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Dividend income is recorded on the ex-
dividend dates. Interest income (including amortization of discount)
is recognized on the accrual basis. Realized gains and losses on
security transactions are determined on the identified cost basis.
(e) Deferred organization expenses--Deferred organization expenses
are amortized on a straight-line basis over a five-year period.
(f) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund
Asset Management, L.P. ("FAM"). The general partner of FAM is
Princeton Services, Inc. ("PSI"), an indirect wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the
limited partner.
FAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services the Fund pays a monthly fee at an annual rate of 0.50% of
the Fund's average weekly net assets plus the proceeds of any
outstanding principal borrowed.
During the six months ended February 28, 1997, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), $1,353 for security price
quotations to compute the net asset value of the Fund.
Accounting services are provided to the Fund by FAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended February 28, 1997 were $42,449,538 and
$40,549,781, respectively.
Net realized and unrealized losses as of February 28, 1997 were as
follows:
<PAGE>
Realized Unrealized
Losses Losses
Long-term investments $ (3,133,760) $ (1,624,451)
------------ ------------
Total $ (3,133,760) $ (1,624,451)
============ ============
As of February 28, 1997, net unrealized depreciation Federal income
tax purposes aggregated $1,624,451, of which $6,840,377 related to
appreciated securities and $8,464,828 related to depreciated
securities. The aggregate cost of investments at February 28, 1997
for Federal income tax purposes was $122,539,157.
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock,
par value $.10, all of which were initially classified as Common
Stock. The Board of Directors is authorized, however, to classify
and reclassify any unissued shares of capital stock without approval
of the holders of Common Stock.
For the six months ended February 28, 1997, shares issued and
outstanding increased by 133,137 to 8,763,988 as a result of
dividend reinvestment. At February 28, 1997, total paid-in capital
amounted to $122,769,214.
5. Short-Term Borrowings:
On January 31, 1997 the Fund entered into a credit agreement with
Merrill Lynch International Bank Limited, an affiliate of MLPF&S,
for an unsecured revolving credit facility. The agreement provides
for a $50,000,000 unsecured revolving credit facility bearing
interest at the Federal Funds Rate plus 0.25% and/or LIBOR plus
0.25%. The proceeds of the new facility were used, in part, to
refinance the Fund's existing credit facility. For the six months
ended February 28, 1997, the maximum amount borrowed under the
Fund's new and old facilities was $15,000,000, the average amount
borrowed was approximately $9,592,000 and the daily weighted average
interest rate was 5.75%. For the six months ended February 28, 1997,
facility and commitment fees aggregated approximately $29,000.
6. Capital Loss Carryforward:
At August 31, 1996, the Fund had a net capital loss carryforward of
approximately $6,096,000, of which $2,725,000 expires in 2003 and
$3,371,000 expires in 2004. This amount will be available to offset
like amounts of any future taxable gains.
7. Subsequent Event:
On March 10, 1997, the Fund's Board of Directors declared an
ordinary income dividend to Common Stock shareholders in the amount
of $.096852 per share, payable on March 31, 1997 to shareholders on
record as of March 20, 1997.
<PAGE>
<TABLE>
PORTFOLIO INFORMATION
<CAPTION>
Percent of Total
As of February 28, 1997 Long-Term Investments
<S> <S> <S> <C>
Ten Largest Maxxam Group, Inc. Maxxam is a holding company whose affiliate,
Holdings 11.25% 8/01/2003 Kaiser Aluminum, is a leading producer of aluminum.
14.726% 8/01/2003 Kaiser's common stock secures these bonds. Through
subsidiaries, Pacific Lumber and Britt Lumber, Maxxam
is the largest producer of premium-grade redwood lumber
in the world. 3.1%
Transtar Holdings, Inc. Transtar is a transportation holding company with seven
12.75% 12/15/2003 railroads, a Great Lakes shipping fleet and an inland barge
operation. Transtar provides sole rail access and primary
water transport for nearly all the steel plants of USX. 2.8%
PanAmSat L.P. PanAmSat operates communications satellites covering an area
10.65% 8/01/2003 that includes 97% of the world's population, especially focused
on Latin America and Asia. The company recently agreed to be
acquired by Hughes Galaxy. 2.7%
Fresh Del Monte Fresh Del Monte is a world leader in fresh tropical fruits,
Produce Corp. primarily bananas, but also pineapples and melon. The company
10% 5/01/2003 is the third-largest marketer of bananas in the world. 2.5%
Beaver Valley Beaver Valley Funding II finances Centerior Energy's share in
Funding Corp. Beaver Valley II, a nuclear power plant in Ohio. Our bonds are
9% 6/01/2017 secured lease obligation bonds. BBB-rated Ohio Edison and Centerior
Energy are awaiting regulatory approval to merge. 2.0%
CTC Mansfield CTC Mansfield is a subsidiary of Centerior Energy Corp., a utility
Funding Corp. in the Midwest that has recently agreed to merge with Ohio Edison
10.25% 3/30/2003 Co. Our bonds are secured lease obligation bonds secured by an
11.125% 9/30/2016 economically viable, fully scrubbed, coal-fired power generating
plant. 1.9%
Tucson Electric This electric utility serves Tucson, Arizona, and surrounding areas.
& Power Co. Our bonds are secured lease obligation bonds on the company's
10.21% 1/01/2009 Springerville coal fired power generation plant. 1.9%
Telefonica de Telefonica de Argentina provides monopoly telephone service to the
Argentina S.A. southern half of Argentina, including about half the Buenos Aires
11.875% 11/01/2004 metropolitan area where nearly one third of Argentina's population
is located. 1.9%
<PAGE>
TransTexas Gas Corp. TransTexas is an independent exploration and production company
11.50% 6/15/2002 with operations primarily in the Lower Wilcox Lobo Trend in South
Texas. The company also owns a pipeline and gathering
system and a drilling services operation. 1.8%
Kaiser Aluminum & Kaiser, an affiliate of Maxxam Inc., is one of the world's largest
Chemical Corp. leading producers of aluminum. The company mines and refines bauxite
12.75% 2/01/2003 into alumina, produces aluminum from alumina and manufactures
fabricated aluminum products. 1.8%
</TABLE>
Quality
Ratings
The quality ratings of securities in the Fund as of February 28,
1997 were as follows:
Rating++ Percent of Net Assets
B or lower 62%
BB 31
BBB 2
NR(Not Rated) 13
[FN]
++The quality ratings shown are weighted averages by Standard
& Poor's Corp. and Moody's Investors Service, Inc.
OFFICERS AND DIRECTORS
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Terry K. Glenn, Executive Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Vincent T. Lathbury III, Vice President
Elizabeth M. Phillips, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
<PAGE>
Custodian & Transfer Agent
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
NYSE Symbol
KYT
