UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

FORM N-Q

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

Registrant’s telephone number, including area code: (312) 827-0100

Date of fiscal year end: May 31

Date of reporting period: December 1, 2017 – February 28, 2018

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Attached hereto.

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The following table summarizes the inputs used to value the Fund's investments at February 28, 2018 (See Note 3 in the Notes to Schedule of Investments):

 

Investments in Securities (Assets)						Level 1 Quoted Prices				Level 2 Significant Observable Inputs				Level 2 - Other*				Level 3 Significant Unobservable Inputs				Total
Asset-Backed Securities						$	—			$	9,581,441			$	—			$	1,432,691			$	11,014,132
Common Stocks							990,938			─					—				432,753	**			1,423,691
Corporate Bonds							—				143,206,931				—				1,039,944				144,246,875
Forward Foreign Currency Exchange Contracts							—				—				105,229				—				105,229
Exchange-Traded Funds							5,002,235				—				—				—				5,002,235
Money Market Fund							1,294,958				—				—				—				1,294,958
Preferred Stocks							3,401,987				—				—				—				3,401,987
Senior Fixed Rate Interests							—				934,250				—				—				934,250
Senior Floating Rate Interests							—				58,406,225				—				9,560,798	**			67,967,023
Total Assets						$	10,690,118			$	212,128,847			$	105,229			$	12,466,186			$	235,390,380

 

Category

Ending Balance at February 28, 2018

Valuation Technique

Unobservable Inputs

Input Range

Weighted Average

Assets:

Asset-Backed Securities

$

1,432,691

Yield Analysis

Yield

6.1%-6.8

%

6.6

%

Common Stocks

431,311

Enterprise Value

Valuation Multiple

7.9x-8.9x

8.1

x

Common Stocks

1,442

Model Price

Liquidation Value

–

–

Corporate Bonds

1,034,292

Option Adjusted Spread

Indicative Quote

–

–

Corporate Bonds

5,652

Yield Analysis

Yield

10.0

%

10.0

%

Senior Floating Rate Interests

7,702,451

Yield Analysis

Yield

8.0%-11.1

%

9.2

%

Senior Floating Rate Interests

714,097

Model Price

Market Comparable Yields

5.3

%

–

Senior Floating Rate Interests

608,000

Model Price

Purchase Price

–

–

Senior Floating Rate Interests

536,250

Enterprise Value

Valuation Multiple

7.9x

–

Total

$

12,466,186

Liabilities:

Unfunded Loan Commitments

$

465,770

Model Price

Purchase Price

–

–

 

Summary of Fair Value Level 3 Activity

Following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value for the period ended February 28, 2018:

		Assets																				Liabilites
		Senior Floating Rate Interests				Asset-Backed Securities				Corporate Bonds				Common Stocks				Total				Unfunded Loan Commitments
Beginning Balance		$	14,048,028			$	855,012			$	4,013,632			$	1,386,620			$	20,303,292			$	(671,334	)
Purchases/Receipts			3,539,397				1,000,000				167				6,727				4,546,291				506,593
(Sales)/Fundings			(7,509,110	)			(60,651	)			(3,028,546	)			(515,633	)			(11,113,940	)			(406,474	)
Total realized gains or (losses) included in earnings			(202,322	)			-				69,998				(1,260,202	)			(1,392,526	)			234,722
Total change in unrealized gains or (losses) included in earnings			2,115,881				(64,131	)			(15,307	)			815,241				2,851,684				(88,450	)
Transfers into Level 3			34,642				-				-				-				34,642				(40,827	)
Transfers out of Level 3			(2,465,718	)			(297,539	)			-				-				(2,763,257	)			-
Ending Balance		$	9,560,798			$	1,432,691			$	1,039,944			$	432,753			$	12,466,186			$	(465,770	)
Net Change in unrealized appreciation (depreciation) for investments in securities still held at February 28, 2018		$	39,277			$	(24,576	)		$	(22,659	)		$	(536,319	)		$	(544,277	)		$	36,464

Affiliated Transactions

Transactions during the period ended February 28, 2018, in which the portfolio company is an "affiliated person", were as follows:

Security Name		Value 5/31/17				Additions				Reductions				Realized Gain (Loss)				Change in Unrealized				Value 2/28/18				Shares 2/28/18				Interest and Amortization on Included Income
Common Stock
Aspect Software Parent, Inc.1,5		$	862,445			$	–			$	–			$	–			$	(579,581	)		$	282,864				57,610			$	–
Targus Group International Equity, Inc.1			49,647				–				(2,514	)			1,166				29,101				77,400				32,060				–
Senior Floating Rate Interests
Aspect Software Parent, Inc. 12.15% (1 Month USD LIBOR + 10.50%) due 05/25/204			1,284,735				–				(24,611	)			–				62				1,260,186				1,263,345				113,190
Aspect Software Parent, Inc. 12.10% (1 Month USD LIBOR + 10.50%) due 05/25/184,5			385,000				151,250				–				–			─					536,250				536,250				48,262
Targus Group International Equity, Inc., 15.00% (Prime Rate + 10.50%) due 12/31/194			158,467				8,366				(166,833	)		─				─				─				─					9,669
Targus Group International, Inc., 15.00% (Prime Rate + 10.50%) due 05/24/162,3,4,5		─					–			─				─				─				─					383,723				–
		$	2,740,294			$	159,616			$	(193,958	)		$	1,166			$	(550,418	)		$	2,156,700							$	171,121

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Note 1 – Organization and Significant Accounting Policies

Organization
Guggenheim Credit Allocation Fund (the "Fund") was organized as a Delaware statutory trust on June 7, 2012, and commenced investment operations on June 26, 2013. The Fund is registered as a diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the "1940 Act").

Significant Accounting Policies
The Fund operates as an investment company and, accordingly, follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification Topic 946 Financial Services – Investment Companies. 

The following significant accounting policies are in conformity with U.S. generally accepted accounting principles ("U.S. GAAP") and are consistently followed by the Trust. This requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. All time references are based on Eastern Time.

(a) Valuation of Investments 
The Board of Trustees of the Fund (the "Board") has adopted policies and procedures for the valuation of the Fund's investments (the "Valuation Procedures"). Pursuant to the Valuation Procedures, the Board has delegated to a valuation committee, consisting of representatives from Guggenheim's investment management, fund administration, legal and compliance departments (the "Valuation Committee"), the day-to-day responsibility for implementing the Valuation Procedures, including, under most circumstances, the responsibility for determining the fair value of the Fund's securities and/or other assets.

Valuations of the Fund's securities are supplied primarily by pricing services appointed pursuant to the processes set forth in the Valuation Procedures. The Valuation Committee convenes monthly, or more frequently as needed, to review the valuation of all assets which have been fair valued for reasonableness. The Fund's officers, through the Valuation Committee and consistent with the monitoring and review responsibilities set forth in the Valuation Procedures, regularly review procedures used and valuations provided by the pricing services.

If the pricing service cannot or does not provide a valuation for a particular investment or such valuation is deemed unreliable, such investment is fair valued by the Valuation Committee.

Equity securities listed on an exchange (New York Stock Exchange ("NYSE") or American Stock Exchange) are valued at the last quoted sale price as of the close of business on the NYSE, usually 4:00 p.m. on the valuation date. Equity securities listed on the NASDAQ market system are valued at the NASDAQ Official Closing Price on the valuation date, which may not necessarily represent the last sale price. If there has been no sale on such exchange or NASDAQ on a given day, the security is valued at the closing bid price on that day.

Generally, trading in foreign securities markets is substantially completed each day at various times prior to the close of the NYSE. The values of foreign securities are determined as of the close of such foreign markets or the close of the NYSE, if earlier. All investments quoted in foreign currencies are valued in U.S. dollars on the basis of the foreign currency exchange rates prevailing at the close of U.S. business. Investments in foreign securities may involve risks not present in domestic investments. The Valuation Committee will determine the current value of such foreign securities by taking into consideration certain factors which may include those discussed above, as well as the following factors, among others: the value of the securities traded on other foreign markets, ADR trading, closed-end fund trading, foreign currency exchange activity, and the trading prices of financial products that are tied to foreign securities. In addition, under the Valuation Procedures, the Valuation Committee and Guggenheim Funds Investment Advisors, LLC (“GFIA”, or the “Adviser”) are authorized to use prices and other information supplied by a third party pricing vendor in valuing foreign securities.

Debt securities with a maturity of greater than 60 days at acquisition are valued at prices that reflect broker-dealer supplied valuations or are obtained from independent pricing services, which may consider the trade activity, treasury spreads, yields or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Short-term debt securities with a maturity of 60 days or less at acquisition are

NOTES TO SCHEDULE OF INVESTMENTS (Unaudited)
	February 28, 2018

valued at amortized cost, provided such amount approximates market value. Money market funds are valued at net asset value.

Typically, loans are valued using information provided by an independent third party pricing service which uses broker quotes in a non-active market.

Investments for which market quotations are not readily available are fair-valued as determined in good faith by GI, under the direction of the Board, using methods established or ratified by the Board. Valuations in accordance with these methods are intended to reflect each security's (or asset's or liability's) "fair value". Each such determination is based on a consideration of all relevant factors, which are likely to vary from one pricing context to another. Examples of such factors may include, but are not limited to market prices; sale prices; broker quotes; and models which derive prices based on inputs such as prices of securities with comparable maturities and characteristics, or based on inputs such as anticipated cash flows or collateral, spread over Treasuries, and other information analysis.

In connection with derivative investments, such factors may include obtaining information as to how (a) these contracts and other derivative investments trade in the futures or other derivative markets, respectively, and (b) the securities underlying these contracts and other derivative investments trade in the cash market.

Note 2 – Financial Instruments and Derivatives

As part of its investment strategy, the Fund utilizes and derivative instruments. These investments involve, to varying degrees, elements of market risk. Valuation and accounting treatment of these instruments can be found under Significant Accounting Policies in Note 1 of these Notes to Schedule of Investments.

Derivatives
Derivatives are instruments whose values depend on, or are derived from, in whole or in part, the value of one or more other assets, such as securities, currencies, commodities or indices. Derivative instruments may be used to increase investment flexibility (including to maintain cash reserves while maintaining exposure to certain other assets), for risk management (hedging) purposes, to facilitate trading, to reduce transaction costs and to pursue higher investment returns. Derivative instruments may also be used to mitigate certain investment risks, such as foreign currency exchange rate risk, interest rate risk and credit risk. U.S. GAAP requires disclosures to enable investors to better understand how and why a Fund uses derivative instruments, how these derivative instruments are accounted for and their effects on the Fund's financial position and results of operations.

NOTES TO SCHEDULE OF INVESTMENTS (Unaudited)
	February 28, 2018

Forward Foreign Currency Exchange Contracts
A forward foreign currency exchange contract is an agreement between two parties to exchange two designated currencies at a specific time in the future. Certain types of contracts may be cash settled, in an amount equal to the change in exchange rates during the term of the contract. The contracts can be used to hedge or manage exposure to foreign currency risks with portfolio investments or to gain exposure to foreign currencies.

The market value of a forward foreign currency exchange contract changes with fluctuations in foreign currency exchange rates. Furthermore, the Fund may be exposed to risk if the counterparties cannot meet the contract terms or if the currency value changes unfavorably as compared to the U.S. dollar.

In conjunction with the use short sales and of derivative instruments, the Fund is required to maintain collateral in various forms. The Fund uses, where appropriate, depending on the financial instrument utilized and the broker involved, margin deposits at the broker, cash and/or securities segregated at the custodian bank, discount notes or repurchase agreements allocated to the Fund.

The Fund has established counterparty credit guidelines and enters into transactions only with financial institutions of investment grade or better. The Trust monitors the counterparty credit risk.

Note 3 – Fair Value Measurement  

In accordance with U.S. GAAP, fair value is defined as the price that the Fund would receive to sell an investment or pay to transfer a liability in an orderly transaction with an independent buyer in the principal market, or in the absence of a principal market, the most advantageous market for the investment or liability. U.S. GAAP establishes a three-tier fair value hierarchy based on the types of inputs used to value assets and liabilities and requires corresponding disclosure. The hierarchy and the corresponding inputs are summarized below:

Level 1 — quoted prices in active markets for identical assets or liabilities.

Level 2 — significant other observable inputs (for example quoted prices for securities that are similar based on characteristics such as interest rates, prepayment speeds, credit risk, etc.).

Level 3 — significant unobservable inputs based on the best information available under the circumstances, to the extent observable inputs are not available, which may include assumptions.

The types of inputs available depend on a variety of factors, such as the type of security and the characteristics of the markets in which it trades, if any. Fair valuation determinations that rely on fewer or no observable inputs require greater judgment. Accordingly, fair value determinations for Level 3 securities require the greatest amount of judgment.

Independent pricing services are used to value a majority of the Fund's investments. When values are not available from a pricing service, they may be computed by the Fund's investment adviser or an affiliate.  In any event, values may be determined using a variety of sources and techniques, including: market prices; broker quotes; and models which derive prices based on inputs such as prices of securities with comparable maturities and characteristics or based on inputs such as anticipated cash flows or collateral, spread over Treasuries, and other information and analysis. A significant portion of the Fund's assets and liabilities are categorized as Level 2 or Level 3, as indicated in this report.

Indicative quotes from broker-dealers, adjusted for fluctuations in criteria such as credit spreads and interest rates, may be also used to value the Fund's assets and liabilities, i.e. prices provided by a broker-dealer or other market participant who has not committed to trade at that price. Although indicative quotes are typically received from established market participants, the Fund may not have the transparency to view the underlying inputs which support the market quotations. Significant changes in an indicative quote would generally result in significant changes in the fair value of the security.

Certain fixed income securities are valued by obtaining a monthly indicative quote from a broker-dealer, adjusted for fluctuations in criteria such as credit spreads and interest rates.

The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The suitability of the techniques and sources employed to determine fair valuation are regularly monitored and subject to change. 

NOTES TO SCHEDULE OF INVESTMENTS (Unaudited)
	February 28, 2018

Note 4 – Federal Income Tax Information

The Fund intends to comply with the provisions of Subchapter M of the Internal Revenue Code applicable to regulated investment companies and will distribute substantially all taxable net investment income and capital gains sufficient to relieve the Fund from all, or substantially all, federal income, excise and state income taxes. Therefore, no provision for federal or state income tax is required.

Tax positions taken or expected to be taken in the course of preparing the Fund's tax returns are evaluated to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Management has analyzed the Fund's tax positions taken, or to be taken, on federal income tax returns for all open tax years, and has concluded that no provision for income tax is required in the Fund's financial statements. The Fund's federal tax returns are subject to examination by the Internal Revenue Service for a period of three years after they are filed.

At February 28, 2018, the cost of securities for federal income tax purposes, the aggregate gross unrealized gain for all securities for which there was an excess of value over tax cost, and the aggregate gross unrealized loss for all securities for which there was an excess of tax cost over value were as follows:

	Tax Cost	Tax Unrealized Gain	Tax Unrealized Loss	Net Unrealized Loss
	$242,053,571	$5,508,239	$(12,171,430)	$(6,663,191)

Note 5 – Unfunded Loan Commitments

Pursuant to the terms of certain loan agreements, the Fund held unfunded loan commitments as of February 28, 2018. The Fund is obligated to fund these loan commitments at the borrower's discretion.

 

 

NOTES TO SCHEDULE OF INVESTMENTS (Unaudited)
	February 28, 2018

Note 6 – Restricted Securities

The securities below are considered illiquid and restricted under guidelines established by the Board:

 

(a)

The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended) as of a date within 90 days of the filing date of this report and have concluded, based on such evaluation, that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-Q was recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b)

There was no change in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940, as amended) that occurred during the registrant’s last fiscal quarter that has materially affected or is reasonably likely to materially affect the registrant’s internal control over financial reporting.

A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Investment Company Act of 1940, as amended (17 CFR 270.30a-2(a)), is attached hereto.

 

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

By:          /s/ Brian E. Binder                

Brian E. Binder

President and Chief Executive Officer

Date:       4/30/18

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:          /s/ Brian E. Binder                

                Brian E. Binder

                President and Chief Executive Officer

Date:       4/30/18

By:          /s/ John L. Sullivan              

John L. Sullivan

Chief Financial Officer, Chief Accounting Officer & Treasurer

Date:       4/30/18