TO THE UNITHOLDERS OF NORREP ENHANCED CREDIT FUND

Transcription

1 For the six months ended April 30, 2016

2 TO THE UNITHOLDERS OF NORREP ENHANCED CREDIT FUND This unaudited interim financial statement is as at April 30, The unaudited interim financial statement is prepared in accordance with International Financial Reporting Standards ( IFRS ) and includes the statement of financial position, statement of comprehensive income, changes in net assets attributable to unitholders and cash flows for the six months ended April 30, 2016 and notes to the interim financial statement, comprising a summary of significant accounting policies, schedule of investment portfolio and other explanatory information. The accompanying semi-annual financial statement has not been reviewed by the external auditors of the Fund. The external auditors will be auditing the annual financial statement of the Fund prepared in accordance with IFRS. We would be pleased to respond to any inquiries regarding this Fund. Norrep Enhanced Credit Fund June 27, 2016

3 Interim Statements of Financial Position (In Canadian dollars, except units outstanding) As at April 30, October 31, Assets Cash 1,053, ,753 Interest receivable 304, ,222 Portfolio assets sold 472,889 Unrealized gain on derivative instruments 755,759 Investments - long, at fair value through profit or loss 16,549,292 18,304,857 Total assets 19,135,743 18,875,832 Liabilities Accrued expenses (note 7) 28,650 30,450 Portfolio assets purchased 626,300 Units redeemed 1,044 Unrealized loss on derivative instruments 86,240 Total liabilities (excluding net assets attributable to holders of redeemable units) 655, ,690 Net assets attributable to holders of redeemable units 18,479,749 18,759,142 Net assets attributable to holders of redeemable units: Series A 1,714,771 1,628,307 Series F 1,532,015 1,711,392 Series I 15,232,963 15,419,443 Redeemable units outstanding (note 6): Series A 187, ,825 Series F 165, ,322 Series I 1,628,496 1,562,306 Net assets attributable to holders of redeemable units per unit: Series A Series F Series I See accompanying notes to interim financial statements. On behalf of the Board of Directors of Norrep Capital Management Ltd., as the Manager: Alex Sasso Keith Leslie 1 INTERIM FINANCIAL STATEMENTS OF NORREP ENHANCED CREDIT FUND April 30, 2016

4 Interim Statement of Comprehensive Income (in Canadian dollars) 2016 Interest for distribution purposes 738,952 Net gain (loss) on investments at fair value through profit or loss Net realized loss on investments (735,675) Net realized loss on derivative instruments (429,078) Net change in unrealized depreciation in fair value of investments (660,299) Net change in unrealized gain on derivative instruments 843,305 Investment loss (242,795) Management fees (note 7) 23,580 Custodial and recordkeeping 14,937 Administrative fees (note 7) 11,773 Audit and tax fees 5,750 Legal and filing fees 5,242 GST/HST 3,215 Computer services 3,213 Other 3,126 Risk management fees 2,561 Transaction costs 2,347 Independent review committee 914 Total operating expenses 76,658 Decrease in net assets attributable to holders of redeemable units (319,453) Change in net assets attributable to holders of redeemable units: Series A (34,261) Series F (57,527) Series I (227,665) Change in net assets attributable to holders of redeemable units per unit: Series A (0.19) Series F (0.35) Series I (0.14) See accompanying notes to interim financial statements. 2 INTERIM FINANCIAL STATEMENTS OF NORREP ENHANCED CREDIT FUND April 30, 2016

5 Interim Statement of Changes in Net Assets Attributable to Holders of Redeemable Units (in Canadian dollars) All Series Series A Series F Series I Net assets, beginning of period 18,759,142 1,628,307 1,711,392 15,419,443 Decrease in net assets, attributable to holders of redeemable units (319,453) (34,261) (57,527) (227,665) Issuance of redeemable units 671, , ,180 43,274 Reinvestments of distributions 698,053 62,303 61, ,497 Amounts paid on redemptions (630,999) (628,999) (2,000) 738, ,043 (60,566) 615,771 Distributions declared (698,188) (62,318) (61,284) (574,586) Net assets, end of period 18,479,749 1,714,771 1,532,015 15,232,963 Distributions per unit to holders of redeemable units See accompanying notes to interim financial statements. 3 INTERIM FINANCIAL STATEMENTS OF NORREP ENHANCED CREDIT FUND April 30, 2016

6 Interim Statement of Cash Flows (in Canadian dollars) 2016 Cash flows from (used in) operating activities Decrease in net assets attributable to holders of redeemable units (319,453) Adjustments for: Net realized loss on sale of investments at fair value through profit or loss 735,675 Net change in unrealized depreciation of investments at fair value through profit or loss 660,299 Net change in unrealized gain on derivative instruments (843,305) Purchases of investments (7,591,923) Proceeds from sale and maturity of investments 8,156,118 Interest receivable 50,621 Accrued expenses (1,800) Net cash from operating activities 846,232 Cash flows from (used in) financing activities Proceeds from issuance of redeemable units 671,194 Amounts paid on redemption of redeemable units (629,955) Distributions to holders of redeemable units (698,188) Reinvestment of distributions 698,053 Net cash from financing activities 41,104 Net increase in cash and cash equivalents 846,232 Effect of exchange rate changes on cash and cash equivalents (49,887) Cash and cash equivalents at beginning of period 215,753 Cash and cash equivalents at end of period 1,053,202 Interest received 789,573 See accompanying notes to interim financial statements. 4 INTERIM FINANCIAL STATEMENTS OF NORREP ENHANCED CREDIT FUND April 30, 2016

7 Interim Schedule of Investment Portfolio As at April 30, 2016 (in Canadian dollars) Description Number of Shares / Warrants /Par Value Cost ($) Fair Value ($) CANADIAN EQUITIES Industrials SkyLink Aviation Inc., Class 'A', Restricted % of Net Assets % Information Technology Xplornet Communications Inc., Warrants, 2017/05/ % TOTAL CANADIAN EQUITIES % CANADIAN BONDS (Par value in CAD except as otherwise stated) Corporate Air Canada, Callable, 6.750%, 2019/10/01 (Par value in USD) 505, , ,191 Canadian Energy Services & Technology Corp., Callable, 800, , , %, 2020/04/17 DHX Media Ltd., Restricted, Callable, 5.875%, 2021/12/02 500, , ,042 DirectCash Payments Inc., Callable, 8.125%, 2019/08/08 500, , ,750 GFL Environmental Corp., Restricted, Callable, 7.500%, 2018/06/18 199, , ,363 Great Canadian Gaming Corp., Callable, 6.625%, 2022/07/25 500, , ,833 IAMGOLD Corp., Callable, 6.750%, 2020/10/01 (Par value in USD) 500, , ,556 Lundin Mining Corp., Callable, 7.500%, 2020/11/01 (Par value in USD) 200, , ,278 Lundin Mining Corp., Callable, 7.875%, 2022/11/01 (Par value in USD) 150, , ,178 MEG Energy Corp., Callable, 7.000%, 2024/03/31 (Par Value in USD) 500, , ,090 Millar Western Forest Products Ltd., Callable, 8.500%, 2021/04/01 300, , ,132 (Par value in USD) North American Energy Partners Inc., Series '1', Callable, 9.125%, 2017/04/07 21,000 20,878 21,107 Precision Drilling Corp., Callable, 6.625%, 2020/11/15 (Par value in USD) 175, , ,462 River Cree Enterprises Ltd., Callable, %, 2021/01/20 350, , ,031 Sirius XM Canada Holdings Inc., Callable, 5.625%, 2021/04/23 500, , ,250 SkyLink Aviation Inc., %, 2016/03/15 450, SkyLink Aviation Inc., Callable, %, 2018/05/10 55, Teine Energy Ltd., Callable, 6.875%, 2022/09/30 (Par value in USD) 125, , ,486 Xplornet Communications Inc., %, 2017/05/15 936, , ,296 7,337,911 6,911, % TOTAL CANADIAN BONDS 7,337,911 6,911, % UNITED STATES BONDS (Par Value in USD) Alliance Date Systems Corp., Callable, 5.375%, 2022/08/01 500, , ,945 Cemex Finance LLC, Callable, 9.375%, 2022/10/12 550, , ,579 Cott Beverages Inc., Callable, 6.750%, 2020/01/01 600, , ,077 EarthLink Holdings Corp., Callable, 7.375%, 2020/06/01 900,000 1,175,304 1,183,708 Frontier Communications Corp., Callable, 6.875%, 2025/01/15 350, , ,620 Harland Clarke Holdings Corp., Callable, 9.250%, 2021/03/01 500, , ,612 NCR Corp., Callable, 5.000%, 2022/07/15 350, , ,698 NCR Corp., Callable, 6.375%, 2023/12/15 350, , ,138 Ruby Tuesday Inc., Callable, 7.625%, 2020/05/15 306, , ,797 Spectrum Brands Inc., Callable, 5.750%, 2025/07/15 305, , ,124 Vector Group Ltd., Callable, 7.750%, 2021/02/15 775,000 1,083,176 1,026,585 7,092,555 6,932, % TOTAL UNITED STATES BONDS 7,092,555 6,932, % 5 INTERIM FINANCIAL STATEMENTS OF NORREP ENHANCED CREDIT FUND April 30, 2016

8 Interim Schedule of Investment Portfolio (continued) As at April 30, 2016 (in Canadian dollars) Description Par Value Cost ($) Fair Value ($) INTERNATIONAL BONDS (Par Value in USD) Australia Bluescope Steel (Finance) Ltd., Callable, 6.500%, 2021/05/15 500, , ,392 % of Net Assets 627, , % Norway Petroleum Geo-Services ASA, Callable, 7.375%, 2018/12/15 350, , , , , % TOTAL INTERNATIONAL BONDS 1,022, , % TOTAL BONDS 15,452,851 14,808, % UNITED STATES TERM LOANS (Par Value in USD) Blue Ribbon LLC, Term Loan, 9.250%, 2022/11/14 575, , ,647 Travel Leaders Group LLC, Term Loan, 7%, 2020/12/05 493, , ,513 WIS International, Term Loan, %, 2019/06/20 500, , ,095 1,969,942 1,741, % TOTAL UNITED STATES TERM LOANS 1,969,942 1,741, % Less: Transaction costs included in average cost - TOTAL INVESTMENTS 17,422,801 16,549, % Derivative Assets 755, % Other Assets, less Liabilities 1,174, % TOTAL NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS 18,479, % 6 INTERIM FINANCIAL STATEMENTS OF NORREP ENCHANCED CREDIT FUND April 30, 2016

9 Interim Schedule of Derivative Instruments As at April 30, 2016 Counterparty Credit Rating Settlement Date Currency to be Delivered Fair value in Cdn Dollars Currency to be Received Contract Price Unrealized Gain Bank of Nova Scotia A-1 June 15, ,420,000 USD 11,799,492 12,497,796 CAD ,304 Bank of Nova Scotia A-1 June 15, ,000 USD 801, ,579 CAD ,915 Bank of Nova Scotia A-1 June 15, ,000 USD 662, ,165 CAD ,540 Net Unrealized Gain 755,759 7 INTERIM FINANCIAL STATEMENTS OF NORREP ENCHANCED CREDIT FUND April 30, 2016

10 1. Reporting Entity: Norrep Enhanced Credit Fund (the Fund ) is an open-ended mutual fund trust established under the laws of the Province of Ontario pursuant to a trust agreement dated January 30, 2015, as amended February 25, The Fund s principal place of business is Suite 4330, 77 King Street West, Toronto, Ontario, M5K 1H6. The Fund began operations on April 22, 2015, when it received the net assets held by Centurion Credit Class, which was a separate mutual fund class of Norrep Opportunities Corp., at fair market value, in exchange for 1,404,065 Series I Units of the Fund. The Centurion Credit Class then paid a dividend in kind to its sole shareholder, so that the shareholder now holds Series I Units of the Fund. The net assets transferred were as follows: April 22, 2015 Cash 3,717,910 Interest receivable 259,906 Investments - long, at fair value 14,797,089 Net accrued expenses and bonus (38,041) Investments short, at fair value (4,233,154) Value of assets received and Series I units issued 14,503,710 In addition, the start-up of operations also included $75,000 in seed money from each of the Series A and Series F unitholders to start those respective series. The Fund may issue an unlimited number of units ( Units ). Each unit represents an equal undivided interest in the net assets of the Fund; however, the value of a Unit in one Series may differ from the value of a Unit in another Series, depending on the Net Asset Value of that particular Series. Norrep Capital Management Ltd. ( Manager and Portfolio Manager ) provides investment management services and manages the day-to-day operation of the Fund. Valiant Trust Company is the trustee, CIBC Mellon Trust Company ( CIBC Mellon ) is the custodian and Scotia Capital Inc. is the prime broker of the Fund. 2. Basis of preparation: (a) Statement of compliance: These financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) as issued by the International Accounting Standards Board ( IASB ). These interim financial statements have also been prepared in accordance with International Accounting Standards ( IAS ) 34, Interim Financial Reporting. 1 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENHANCED CREDIT FUND April 30, 2016

11 2. Basis of preparation (continued): (a) Statement of compliance (continued): The financial statements of the Fund were approved and authorized for issue by the Manager s Board of Directors on June 27, (b) Basis of measurement: The financial statements have been prepared on the historical cost basis, except for investments at fair value through profit or loss and derivative instruments which are measured at fair value. (c) Functional and presentation currency: The financial statements are presented in Canadian dollars, which is the Fund s functional currency, and all values are rounded to the nearest dollar except where otherwise indicated. (d) Use of judgments and estimates: This financial statement includes estimates and assumptions made by management that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses and gains and losses during the reporting period. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. Significant estimates include the valuation of investments and investment income accruals. Functional currency is the currency of the primary economic environment in which the Fund operates and requires judgment. If indicators of the primary environment are mixed, then management uses its judgment to determine the functional currency that most faithfully represents the economic effect of the underlying transactions, events and conditions. All of the Fund s operating expenses are denominated in Canadian dollars. Investments are a mixture of Canadian and United States securities. Investor subscriptions and redemptions are all in Canadian dollars. The Fund s NAV is calculated in Canadian dollars. Accordingly, management has determined that the functional currency of the Fund is Canadian dollars. 3. Significant accounting policies: The Fund has applied the following accounting policies in these financial statements. (a) Financial assets and financial liabilities: (i) Recognition and initial measurement Financial assets and financial liabilities at fair value through profit or loss are initially recognized on the trade date, which is the date on which the Fund becomes a party to the 2 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

12 3. Significant accounting policies (continued): (a) Financial assets and financial liabilities (continued): (a) Recognition and initial measurement (continued) contractual provisions of the instrument. Other financial assets and financial liabilities are recognized on the date on which they are originated. Financial assets and financial liabilities at fair value through profit or loss are initially recognized at fair value, with transaction costs recognized in profit or loss. (b) Classification The Fund classifies financial assets and financial liabilities into the following categories. Financial assets at fair value through profit or loss: Held for trading: derivatives Designated at fair value through profit and loss: all other investments Financial assets at amortized cost: Loans and receivables: cash and cash equivalents, receivables and units issued Financial liabilities at amortised cost: Other liabilities: all liabilities other than unrealized loss on derivative instruments and securities sold short, which are designated at fair value through profit or loss A financial instrument is classified as held for trading if: it is acquired or incurred principally for the purpose of selling or repurchasing it in the near term; on initial recognition, it is part of a portfolio that is managed together and for which there is evidence of a recent pattern of short-term profit taking; or it is a derivative, other than a designated and effective hedging instrument. The Fund designates all debt and equity investments at fair value through profit or loss on initial recognition because it manages these securities on a fair value basis in accordance with its documented investment strategy. Internal reporting and performance measurement of these securities is on a fair value basis. (c) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or, in its absence, the most advantageous market to which the Fund has access at that date. The fair value of a liability reflects its non-performance risk. 3 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

13 3. Significant accounting policies (continued): (a) Financial assets and financial liabilities (continued): (iii) Fair value measurement (continued) When available, the Fund measures the fair value of an instrument using the quoted price in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. The Fund measures instruments quoted in an active market at last traded price. For securities where market quotes are not available, the Fund values the initial investment at the amount paid. After initial investment, the Fund uses estimation techniques to determine fair value including observable market data, discounted cash flows and internal models that compare the investments to its peer group. Fair value of investments in restricted shares is determined using an economic model taking into account various factors including risk free rate of interest, volatility, market value and length of the restriction. Fair value of investments in share purchase warrants is determined using a recognized economic model taking into account various factors including risk free rate of interest, dividend rates, volatility, market value and trading volume of the underlying stock. Fair value of investments in bonds, asset-backed securities and secured loans represents a price that may fall between the last bid and ask price provided by an independent security pricing service, depending on which service provider is used. There is no difference between pricing NAV and accounting NAV. (iv) Amortized cost measurement The amortized cost of a financial asset or financial liability is the amount at which the financial asset or financial liability is measured at recognition, minus principal repayments (if applicable), plus or minus the cumulative amortization using the effective interest method of any difference between the initial amount recognized and the maturity amount (if applicable), minus any reduction for impairment (if applicable). (v) Specific instruments Cash and cash equivalents Cash and cash equivalents comprise deposits with banks and highly liquid financial assets with maturities of three months or less from the acquisition date that are subject to an insignificant risk of changes in their fair value and are used by the Fund in the management of short-term commitments, other than cash collateral provided in respect of derivatives and securities borrowing transactions. 4 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

14 3. Significant accounting policies (continued): (a) Financial assets and financial liabilities (continued): (v) Specific instruments (continued) Redeemable units The Fund classifies financial instruments issued as financial liabilities or equity instruments in accordance with the substance of the contractual terms of the instruments. The Fund has multiple classes of redeemable units that do not have identical features and therefore, do not qualify as equity under IAS 32, Financial Instruments. The redeemable units, which are classified as financial liabilities and measured at redemption amount, provide investors with the right to require redemption, subject to available liquidity, for cash at a unit price based on the Fund s valuation policies at each redemption date. The units represent the residual interest in the Fund. (b) Translation of foreign currency: Foreign currency amounts are expressed in Canadian dollars as follows: (i) fair value of investments and accrued receivables and payables and other assets and liabilities at the rate of exchange at the end of the period; and (ii) purchases and sales of investments and dividend and interest income at the rate of exchange prevailing on the respective dates of such transactions. (c) Income tax: The Fund is a mutual fund trust under the Income Tax Act (Canada) and, accordingly, will not be taxed on that portion of its taxable income that is paid or allocated to unitholders. The Fund expects to pay out sufficient net income and net realized capital gains so that it will not be subject to income taxes. Accordingly, no provision for income taxes has been made in these financial statements. (d) Future accounting pronouncements: IFRS 9 Financial Instruments; IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. The standard contains two primary measurement categories for financial assets: amortized cost and fair value. IFRS 9 (2010) introduces additions relating to financial liabilities. In July 2014 new requirements were added to address the impairment of financial assets. The mandatory effective date of IFRS 9 is for periods beginning on or after January 1, The Manager has not yet addressed the impact of the standard on the Fund. 5 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

15 4. Fair value measurement: (a) Investments The fair values of financial assets and financial liabilities that are traded on active markets are based on quoted market prices. For all other financial instruments, the Fund determines fair values using other valuation techniques. For financial instruments that trade infrequently and have little price transparency, fair value is less objective, and requires varying degrees of judgment depending on liquidity, uncertainty of market factors, pricing assumptions and other risks affecting the specific instrument. A three-tier hierarchy is used as a framework for disclosing fair value based on inputs used to value the Fund s investments. The hierarchy of inputs is summarized below: Inputs that are quoted prices (unadjusted) in active markets for identical instruments (Level 1); Inputs other than quoted prices included in Level 1 that are observable for instruments, either directly (i.e., as prices) or indirectly (i.e., derived from prices) (Level 2). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other valuation techniques in which all significant inputs are directly or indirectly observable from market data; and Inputs for the instruments that are not based on observable market data (unobservable inputs) (Level 3). This category includes all instruments for which the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on the quoted prices for similar instruments but for which significant unobservable adjustments or assumptions are required to reflect differences between the instruments. Changes in valuation methods may result in transfers into or out of an investment s assigned level. The Fund recognises transfers between levels of the fair value hierarchy as at the end of the reporting period during which the change occurred. (b) Valuation framework The Fund has an established control framework with respect to the measurement of fair values. This framework includes a portfolio valuation function, which is independent of front office management. Specific controls include: verification of observable pricing inputs; a review and approval process for new models and changes to existing models; analysis and investigation of significant daily valuation variations; and 6 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

16 4. Fair value measurement (continued): (b) Valuation framework (continued) review of unobservable inputs and valuation adjustments. When third party information, such as broker quotes or pricing services, is used to measure fair value, then the portfolio valuation function assesses and documents the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS. This includes: verifying that the broker or pricing service is approved by the Fund for use in pricing the relevant type of financial instrument; understanding how the fair value has been arrived at and the extent to which it represents actual market transactions; and if a number of quotes for the same financial instrument have been obtained, then how the fair value has been determined using those quotes. (c) Fair value hierarchy Financial instruments measured at fair value The table below analyzes investments measured at fair value at April 30, 2016 and October 31, 2015 by the level in the fair value hierarchy into which the fair value measurement is categorized. The amounts are based on the values recognized in the statement of financial position. (in Canadian dollars) (Level 1) (Level 2) (Level 3) Total April 30, 2016 Public securities - long Bonds and Secured Loans 16,549,284 16,549,284 Warrants 8 8 Unrealized gain on derivative instruments 755, ,759 Total investments 17,305,051 17,305,051 (in Canadian dollars) (Level 1) (Level 2) (Level 3) Total October 31, 2015 Public securities - long Bonds and Secured Loans 18,304,849 18,304,849 Warrants 8 8 Unrealized loss on derivative instruments (86,240) (86,240) Total investments 18,218,617 18,218,617 7 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

17 4. Fair value measurement (continued): (d) Financial instruments not measured at fair value The carrying values of cash and cash equivalents, dividends and interest receivable, accrued expenses, other receivables and payables approximate their fair values due to their short term nature. 5. Financial instruments and associated risks: The Fund s activities expose it to a variety of risks associated with financial instruments as follows: credit risk, liquidity risk and market risk (including currency risk, interest rate risk and price risk). The Fund s overall risk management program seeks to maximize the returns for the level of risk to which the Fund is exposed and seeks to minimize potential adverse effects on the Fund s financial performance. All investments result in a risk of loss of capital. The Fund also holds short positions which are subject to certain inherent risks. The ultimate cost to the Fund to acquire these securities may exceed the liability reflected in these financial statements. Credit risk: Credit risk is the risk that a counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Fund. The fair value of debt securities includes consideration of the credit worthiness of the debt issuer. The carrying amount of bonds and secured loans as presented on the schedule of investment portfolios, together with the carrying amount of cash and cash equivalents and receivables, represents the maximum credit risk exposure as at April 30, 2016 and October 31, A portion of the Fund's portfolio may consist of instruments that have a credit quality rating below investment grade by internationally recognized credit rating organizations or may be unrated. These securities involve significant risk exposure as there is uncertainty regarding the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. Low rated and unrated debt instruments generally offer a higher current yield than that available from higher grade issuers, but typically involve greater risk. As at April 30, 2016 and October 31, 2015, the Fund was invested in debt securities with the following credit rating: Debt Security by Credit Rating % of Assets Under Management in each category April 30, 2016 October 31, 2015 BB 31.0% 18.2% B 36.2% 58.7% CCC 11.5% 12.1% Unrated 10.8% 8.6% 8 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

18 5. Financial instruments and associated risks (continued): Credit risk (continued): Credit risk arising on transactions for units purchased and portfolio assets sold relates to transactions awaiting settlement, also known as settlement risk. Settlement risk is the risk of loss due to the failure of an entity to honour its obligations to deliver cash, securities or other assets as contractually agreed. Credit risk relating to unsettled transactions is considered small due to the short settlement period involved and the high credit quality of the brokers used. For the majority of the transactions, the Fund mitigates this risk by conducting settlements through a broker to ensure that a trade is settled only when both parties have fulfilled their contractual settlement obligations. Also, legal entitlement will not pass until all monies have been received for the units purchased or the portfolio assets sold. If either party does not meet its obligation then the transaction will fail. Substantially all of the assets of the Fund are held by CIBC Mellon, the custodian, or Scotia Capital Inc., the prime broker. Bankruptcy or insolvency of the custodian and prime broker may cause the Fund s rights with respect to securities held by the custodian and prime broker to be delayed or limited. The Fund monitors its risk by monitoring the credit quality and credit rating and financial positions of the custodian and prime broker. If the credit quality or the financial position deteriorates significantly then the Portfolio Manager will move the investment holdings to another financial institution. Liquidity risk: Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or other financial assets. The Fund is exposed to monthly cash redemptions of redeemable units. The Fund may invest in thinly-traded and relatively illiquid investments that may cease to be traded after the Fund invests. The Fund may acquire significant positions in one investment. In such cases, and in the event of extreme market volatility, the Fund may not be able to promptly liquidate its investments if the need should arise. The Fund believes it maintains sufficient cash and cash equivalent positions to maintain liquidity. The Fund s liquidity risk is managed on a daily basis by the Portfolio Manager. The Fund s redemption policy allows for redemptions on the last business day of any given month when at least 14 days notice is given by the unitholder. Market risk: Market risk embodies the potential for both losses and gains and includes currency risk, interest rate risk and price risk. 9 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

19 5. Financial instruments and associated risks (continued): Market risk (continued): The Fund s strategy on the management of investment risk is driven by the Fund s investment objective. The Fund is designed to provide holders of the units with risk-adjusted returns with a portfolio largely invested in secured and unsecured high yield bonds, secured senior loans and other debt obligations of investment grade and non-investment grade issuers. In addition to the core long portfolio of High Yield Debt, the Fund will establish positions in other securities to improve the risk-return profile of the Fund which may include short positions in North American government bonds, corporate debt and preferred equities and long positions in North American government bonds. No material change that would adversely affect the interest of the Unitholders of the Fund may be made without the approval of the unitholders. An approval is not required if the Manager provides the Unitholders with at least 60 days written notice of such proposed change and the right to redeem all Units prior to the effective date of the change. The Manager may alter the Fund s investment objectives, strategies and restrictions without prior approval by Unitholders in certain circumstances. The Fund s market risk is managed on a daily basis by the Portfolio Manager in accordance with the policies and procedures in place. Details of the nature of the Fund s investment portfolio at April 30, 2016 are disclosed in the schedule of investment portfolio. (a) Currency risk: The Fund may invest in financial instruments and enter into transactions denominated in currencies other than the Canadian dollar. Consequently, the Funds are exposed to risks that the exchange rate of the Canadian dollar to other foreign currencies may fluctuate. The Fund uses forward contracts to hedge a portion of the Fund s foreign exchange risk. At the reporting date the Fund had 1.9% (October 31, %) of its net asset value in U.S. currency. Sensitivity Analysis: At April 30, 2016, had the Canadian dollar strengthened or weakened by 1% in relation to all currencies, with all other variables held constant, net assets attributable to the unitholders would have increased or decreased by $3,471 (October 31, $3,674). In practice, the actual trading results may differ from this sensitivity analysis and the difference could be material. 10 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

20 5. Financial instruments and associated risks (continued): Market risk (continued): (b) Interest rate risk: Interest rate risk arises on interest-bearing financial instruments. The Fund is exposed to the risk that the value of interest-bearing financial instruments will fluctuate due to changes in the prevailing market interest rates. High yield corporate bond prices are impacted by the credit metrics, liquidity and business fundamentals of the corporate entity with a minimal correlation to interest rates. Thus, the high yield corporate bonds held in the Fund are empirically correlated with the related stock indices for those corporate investments. The table below summarizes the Fund s exposure to interest rate risks. It includes the Fund s assets at fair values, categorized by the maturity dates. Less than 1 to 3 3 to 5 > 5 As at April 30, year years years years Total All amounts stated in Canadian dollars Corporate bonds/secured loans 21,107 1,499,368 8,784,037 6,244,772 16,549,284 Less than 1 to 3 3 to 5 > 5 As at October 31, year years years years Total All amounts stated in Canadian dollars Corporate bonds/secured loans 1,215,108 7,000,435 10,089,306 18,304,849 (c) Other price risk: Other price risk is the risk that the value of the instrument will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk), whether caused by factors specific to an individual investment or its issuer, or factors affecting all instruments traded in the market. All securities present a risk of loss of capital. Price risk is managed by the Fund s Portfolio Manager by constructing a diverse portfolio of securities. The price of a security is affected by individual company developments and by general economic and financial conditions in those industries and countries where the issuer of the security is located, does business or where the security, if applicable, is listed for trading. Certain securities are not listed on any prescribed stock exchange and thus a liquid market for resale may not exist. 11 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

21 5. Financial instruments and associated risks (continued): Market risk (continued): (c) Other price risk (continued): The Portfolio Manager will monitor these factors daily and make decisions regarding the portfolio based on their knowledge of the market conditions and diversify the portfolio of investments accordingly. The risk resulting from financial instruments is equivalent to their fair value. The Fund will primarily invest in corporate debt securities of varying types. The following table details the breakdown of the investment assets and liabilities held by the Fund as at April 30, 2016 and October 31, 2015: % of Net Assets April 30, 2016 October 31, 2015 Investments: Listed debt instruments Over-the-counter debt instruments 89.5% 97.6% Sensitivity analysis: A 1% increase or decrease in the Blended Index: the Merrill Lynch Canada High Yield Canadian Issuers Index (25%), the Merrill Lynch High Yield Masters II Index (25%), and the Credit Suisse Leveraged Loan Index (50%) at April 30, 2016 would have impacted the net assets attributable to unitholders by approximately $165,493 (October 31, $183,049). The Fund s financial assets exposed to other price risk were concentrated in the following industries at April 30, 2016 and October 31, 2015: Bonds and Secured Loans 100% 100% 6. Net assets attributable to unitholders of redeemable units: Redeemable units The authorized capital of the Fund consists of an unlimited number of Units, each representing an equal undivided interest in the net assets of the Fund. Currently, there are three series outstanding, Series A, Series F and Series I. Each series ranks equally, on a per-series basis, with respect to distributions and return of capital in the event of liquidation, dissolution or winding up based on their respective series net asset values. Each series pays its own fees and expenses. The general expenses that are not series specific are allocated in proportion to the annual weighted average units of each series. Series A is sold under the front end sales charge 12 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

22 6. Net assets attributable to unitholders of redeemable units (continued): Redeemable units (continued) option. A commission ranging from 0% to 2% is paid by the investor to the dealer with a 3% redemption fee being charged if the Units are redeemed in the first 180 days. Series F is sold without commission provided the purchaser is enrolled in a fee-for-service or wrap program with the dealer. A 3% redemption fee is charged if the Series F is redeemed in the first 180 days. Series I units are sold with commissions negotiated between the investor and the dealer and are available to certain investors at the Portfolio Manager s discretion. A 3% redemption fee is charged if the units are redeemed in the first 180 days. The rights attached to the Units are as follows: The Units may be redeemed monthly at the net asset value per Unit of the respective series upon 14 days notice; Units carry a right to receive notice of, attend and vote at meetings called in accordance with the Declaration of Trust; The holders of Units are entitled to receive all distributions declared by the Fund. Distributions the Fund makes will be allocated among each Series in such manner as the Manager considers appropriate and equitable. Distributions paid in cash will be paid in the currency in which the investor bought the units. The analysis of movements in the number of Units and net assets attributable to holders of redeemable units during the period was as follows: Series A Series F Series I Balance, opening 166, ,322 1,562,306 Issued on distributions reinvested 6,900 6,723 62,537 Issued for cash 13,802 55,560 3,870 Redeemed for cash (70,957) (217) Balance, April , ,648 1,628, NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

23 7. Management fees, expenses and key contracts: (a) Manager and management fees: The Series A paid an annual management fee to the Manager of 2% of the net asset value of the series. Series F paid an annual management fee to the Manager of 1.0% of the net asset value of the series. The management fee is calculated and paid monthly. No management fee is charged to the Series I. Instead, the investors pay a management fee directly to the Manager in an amount determined through negotiation with the Manager. Included in accrued expenses is $4,057 (October 31, $3,034) related to these fees. The Fund will pay the Manager a Performance Fee if the series return of the Fund exceeds the return of a specified benchmark ( the Benchmark ) during the relevant period. The Performance Fee is based on the performance of the Fund determined at the end of each calendar quarter. If the series performance exceeds the Benchmark, 10% of this amount will be multiplied by the average series net asset value during the Performance Measurement Period, as defined. The Performance Fee charged to the Fund was $nil during the six months ended April 30, 2016 (October 31, $nil). (b) Expenses: All fees and expenses applicable to the administration and operation of the Fund, including recordkeeping and communication costs, custodian fees, legal and filing fees, audit, applicable taxes and bank charges are payable by the Fund. The Manager has charged the Fund for administration services. Included in accrued expenses is $2,011 (October 31, $1,660) related to these fees. 8. Brokerage commissions on securities transactions: The Fund paid $nil brokerage commissions in connection with portfolio transactions during the period. 9. Filing of financial statements: The Fund is relying on the exemption provided by Section 2.11 of National Instrument and therefore does not file its financial statements with the Ontario Securities Commission. 14 NOTES TO INTERIM FINANCIAL STATEMENTS OF NORREP ENAHNCED CREDIT FUND April 30, 2016

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