Brookfield Investment Management

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1 Brookfield Investment Management 2015 High Yield Strategic Trust Interim Financial Statements For the period from January 1, 2015 to June 30, 2015

2 NOTICE TO READER These interim financial statements and related notes of High Yield Strategic Trust (the Trust ) for the six month period ended June 30, 2015 have been prepared by management of the Trust. The external auditors of the Trust have not audited or reviewed these interim financial statements. CONTENTS Financial Statements 2 Notes to Financial Statements 10 Trust Information Interim Financial Statements 1

3 STATEMENTS OF FINANCIAL POSITION As at June 30, 2015 and December 31, 2014 (Unaudited, Expressed in Canadian Dollars) As at As at June 30, 2015 December 31, 2014 $ $ Assets Current assets Financial assets at fair value through profit or loss 181,822, ,973,424 Cash and cash equivalents 4,419,430 6,224,428 Accrued investment income 3,126,360 2,908,822 Total assets 189,368, ,106,674 Liabilities Current liabilities Unrealized depreciation on forward currency contracts 5,549,199 4,273,547 M argin payable (Note 7) 58,055,820 45,460,487 Due to Broker 357,057 - Accounts payable and accrued liabilities 413, ,021 Total liabilities (excluding net assets attributable to holders of redeemable units) 64,375,237 50,096,055 Net assets attributable to holders of redeemable units 124,993, ,010,619 Number of redeemable units outstanding (Note 11) 10,380,755 10,806,803 Net assets attributable to holders of redeemable units per unit $ $ See accompanying notes to financial statements. Approved on behalf of the Manager, Brookfield Investment Management (Canada) Inc. Gail Cecil Director Jonathan Tyras Director 2015 Interim Financial Statements 2

4 STATEMENTS OF COMPREHENSIVE INCOME For the six months ended June 30, (Unaudited, Expressed in Canadian Dollars) $ $ Investment income Interest income 6,400,627 6,619,179 Dividend income 84, ,809 Net realized foreign exchange loss (284,619) (1,233,254) Net realized gain on sale of investments 6,729,823 7,122,144 Net realized loss on forward currency contracts (10,793,535) (7,029,506) Net change in unrealized depreciation on foreign exchange (35,988) (167,612) Net change in unrealized (depreciation) appreciation (562) 742,342 on foreign exchange on margin payable Net change in unrealized (depreciation) appreciation on (1,275,652) 7,139,380 forward currency contracts Net change in unrealized appreciation (depreciation) of investments 3,385,793 (1,038,783) Total income 4,210,769 12,392,699 Expenses (Note 9) M anagement fees 666, ,555 Performance fees - 642,931 Interest expense 369, ,297 Audit fees 11,992 14,910 Legal fees 9,527 4,774 Brokerage commissions and other charges 3,734 5,697 Other expenses 56,280 77,910 Total expenses 1,118,369 1,940,074 Operating profit 3,092,400 10,452,625 Withholding taxes (9,753) (12,921) Increase in net assets attributable to holders of redeemable units 3,082,647 10,439,704 Increase in net assets attributable to holders of redeemable units per unit $ 0.29 $ 0.92 See accompanying notes to financial statements Interim Financial Statements 3

5 STATEMENTS OF CHANGES IN NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS For the six months ended June 30, (Unaudited, Expressed in Canadian Dollars) $ $ Net assets attributable to holders of redeemable units, beginning of period $ 127,010,619 $ 133,618,770 Increase in net assets attributable to holders of redeemable units $ 3,082,647 $ 10,439,704 Redeemable unit transactions Amounts paid for redemption of units (5,100,000) (5,330,000) Net (decrease) increase from redeemable unit transactions (5,100,000) (5,330,000) Net (decrease) increase in net assets attributable to holders of redeemable units (2,017,353) 5,109,704 Net assets attributable to holders of redeemable units, end of period $ 124,993,266 $ 138,728,474 See accompanying notes to financial statements Interim Financial Statements 4

6 STATEMENTS OF CASH FLOWS For the six months ended June 30, (Unaudited, Expressed in Canadian Dollars) $ $ Cash flows provided by (used for): Cash flows from operating activities Increase in net assets attributable to holders of redeemable units 3,082,647 10,439,704 Adjustments for: Interest income (6,400,627) (6,619,179) Dividend income, net of withholding taxes (94,635) (225,888) Net realized (gain) on investments (6,729,823) (7,122,144) Net realized loss on forward contracts 10,793,535 - Change in unrealized depreciation (appreciation) 1,275,652 (7,139,380) on forward currency contracts Change in unrealized (appreciation) depreciation of investments (3,385,793) 1,038,783 Change in unrealized foreign exchange loss (gain) on margin payable 562 (742,342) Increase (decrease) in accounts payable and accrued liabilities 51,140 (908,631) Interest received 6,183,532 7,109,158 Dividends received, net of withholding taxes 94, ,285 Payments made on forward contracts (10,793,535) - Proceeds from sale of investments 32,062,160 44,632,312 Amounts paid for purchase of investments (35,438,775) (30,610,836) Net cash (used in) from operating activities (9,299,769) 10,071,842 Cash flows from financing activities M argin payable, net (repayments) borrowings and foreign exchange 12,594,771 (4,342,648) Amounts paid for redemption of units (5,100,000) (5,330,000) Net cash from (used in) financing activities 7,494,771 (9,672,648) Net (decrease) increase in cash and cash equivalents (1,804,998) 399,194 Cash and cash equivalents, beginning of period 6,224,428 2,868,102 Cash and cash equivalents, end of period 4,419,430 3,267,296 See accompanying notes to financial statements Interim Financial Statements 5

7 SCHEDULE OF INVESTMENTS As at June 30, 2015 (Unaudited, Expressed in Canadian Dollars) Average Cost Fair Value % of Net Quantity Security $ $ Assets Bonds United States Dollar Denominated 1,750,000 Acco Brands Corp., 6.75%, 04/30/2020 1,848,618 2,294, ,950,000 AES Corp., 4.88%, 05/15/2023 2,106,115 2,288, ,850,000 Alpha Natural Resources Inc., 6.25%, 06/01/2021 1,619, , ,000 Alpha Natural Resources Inc., 7.50%, 08/01/ , , ,075,000 American Axle & M anufacturing Inc., 6.25%, 03/15/2021 2,243,557 2,720, ,000 AmeriGas Finance LLC, 7.00%, 05/20/ ,515 1,058, ,850,000 Arch Coal Inc., 7.25%, 06/15/2021 2,615, , ,000 Ardagh Packaging Finance PLC, 6.75%, 01/31/ , , ,850,000 Atlas Pipeline Partners L.P., 5.88%, 08/01/2023 1,791,827 2,427, ,000 Avis Budget Car Rental LLC, 5.50%, 04/01/ ,974 1,158, ,825,000 Blue Racer M idstream LLC, 6.12%, 11/15/2022 2,299,056 2,346, ,600,000 Boyd Gaming Corp., 9.00%, 07/01/2020 1,587,948 2,167, ,000 BreitBurn Energy Partners L.P., 7.88%, 04/15/ , , ,200,000 BreitBurn Energy Partners L.P., 8.62%, 10/15/2020 1,319,750 1,318, ,700,000 Cascades Inc., 5.50%, 07/15/2022 1,864,799 2,053, ,500,000 Casella Waste Systems Inc., 7.75%, 02/15/2019 1,454,081 1,891, ,750,000 CCO Holdings LLC, 6.62%, 01/31/2022 1,905,960 2,277, ,475,000 Cedar Fair L.P., 5.25%, 03/15/2021 1,941,932 1,892, ,950,000 CenturyLink Inc., 7.65%, 03/15/2042 1,983,993 2,203, ,000 Chesapeake Energy Corp., 4.88%, 04/15/ , , ,000 Community Health Systems Inc., 6.88%, 02/01/ , , ,550,000 Community Health Systems Inc., 7.12%, 07/15/2020 1,636,920 2,050, ,500,000 Crown Cork & Seal Co. Inc., 7.38%, 12/15/2026 1,615,466 2,102, ,550,000 Cumulus M edia Holdings Inc., 7.75%, 05/01/2019 1,520,634 1,775, ,000 CyrusOne L.P., 6.38%, 11/15/ , , ,000 DJO Finco Inc., 8.12%, 06/15/ , , ,150,000 Dynagas LNG Partners L.P., 6.25%, 10/30/2019 1,257,605 1,349, ,000 EP Energy LLLC, 6.38%, 06/15/ ,400 1,001, ,100,000 EV Energy Partners L.P., 8.00%, 04/15/2019 2,193,503 2,438, ,075,000 FairPoint Communications Inc., 8.75%, 08/15/2019 1,162,392 1,395, ,150,000 FCA US LLC, 8.25%, 06/15/2021 2,249,994 2,925, ,600,000 Ferrellgas Partners L.P., 8.62%, 06/15/2020 1,855,304 2,067, ,366,000 First Data Corp., 11.25, 01/15/2021 1,387,315 1,892, ,000 FM G Resources Pty Ltd., 6.88%, 04/01/ , , ,375,000 Frontier Communications Corp., 7.62%, 04/15/2024 2,751,969 2,616, ,925,000 Global Partners L.P., 6.25%, 07/15/2022 2,134,139 2,307, ,050,000 GLP Capital LP, 5.38%, 11/01/2023 2,246,456 2,629, Interim Financial Statements 6

8 1,750,000 H&E Equipment Services Inc., 7.00%, 09/01/2022 2,263,285 2,253, ,100,000 HCA Inc., 5.88%, 05/01/2023 2,436,813 2,785, ,000 Hexion US Finance Corp., 8.88%, 02/01/ , , ,100,000 Hexion US Finance Corp., 9.00%, 11/15/2020 1,910,678 1,887, ,500,000 iheartcommunications Inc., 9.00%, 03/01/2021 1,545,280 1,694, ,025,000 Intelsat Luxembourg SA, 7.75%, 06/01/2021 2,167,595 2,110, ,880 inventiv Health Inc., 10.00, 08/15/ , , ,000 inventiv Health Inc., 10.00, 08/15/ , , ,000 ION Geophysical Corp., 8.12%, 05/15/ , , ,000 Iron M ountain Inc., 8.38%, 08/15/ , , ,825,000 Iron M ountain Inc., 6.00%, 08/15/2023 2,107,086 2,380, ,000 Isle of Capri Casinos Inc., 5.88%, 03/15/ , , ,000 Jurassic Holdings III Inc., 6.88%, 02/15/ , , ,750,000 Kindred Healthcare Inc., 6.38%, 04/15/2022 1,960,760 2,182, ,000 L Brands Inc., 7.60%, 07/15/ , , ,750,000 Lamar M edia Corp., 5.38%, 01/15/2024 1,954,355 2,209, ,650,000 LBC Tank Terminals Holding Netherlands BV, 6.88%, 05/15/2023 1,925,799 2,126, ,250,000 Level 3 Financing Inc., 5.38%, 05/01/2025 2,799,083 2,707, ,450,000 Levi Strauss & Co., 6.88%, 05/01/2022 1,522,618 1,932, ,400,000 Linn Energy LLC, 7.75%, 02/01/2021 1,487,932 1,358, ,100,000 M astec Inc., 4.88%, 03/15/2023 2,277,219 2,392, ,150,000 M ediacom Broadband LLC, 6.38%, 04/01/2023 2,294,072 2,684, ,475,000 M GM Resorts International, 8.62%, 02/01/2019 1,618,301 2,080, ,350,000 M illar Western Forest Products Ltd., 8.50%, 04/01/2021 1,057,266 1,622, ,579,250 M TR Gaming Group Inc., 11.50, 08/01/2019 1,664,974 2,097, ,600,000 New Albertsons Inc., 7.75%, 06/15/2026 1,282,621 1,947, ,825,000 NRG Energy Inc., 6.25%, 07/15/2022 2,315,268 2,312, ,850,000 NRG Yield Operating LLC, 5.38%, 08/15/2024 2,339,886 2,326, ,600,000 Numericable Group SA, 6.00%, 05/15/2022 1,848,198 1,968, ,650,000 Post Holdings Inc., 7.38%, 02/15/2022 1,929,742 2,095, ,200,000 Precision Drilling Corp., 6.62%, 11/15/2020 1,285,752 1,468, ,700,000 PulteGroup Inc., 6.38%, 05/15/2033 1,731,409 2,148, ,000,000 Puma International Financing SA, 6.75%, 02/01/2021 1,170,080 1,271, ,000 Qwest Capital Funding Inc., 6.88%, 07/15/ , , ,150,000 Rki Exploration & Product, 8.50%, 08/01/2021 1,207,892 1,421, ,600,000 Roundy's Supermarkets Inc., 10.25, 12/15/2020 1,911,649 1,697, ,225,000 SBA Communications Corp., 4.88%, 07/15/2022 2,769,494 2,704, ,100,000 Service Corp. International, 8.00%, 11/15/2021 1,294,767 1,599, ,000 Sotheby's, 5.25%, 10/01/ ,357 1,101, ,800,000 Teekay Offshore Partners L.P., 6.00%, 07/30/2019 1,967,292 2,030, ,875,000 Terex Corp., 6.00%, 05/15/2021 1,988,283 2,352, ,825,000 TerraForm Power Operating LLC, 5.88%, 02/01/2023 2,308,745 2,312, ,800,000 Tesoro Logistics L.P., 6.12%, 10/15/2021 2,124,748 2,342, Interim Financial Statements 7

9 1,650,000 T-M obile USA Inc., 6.62%, 04/01/2023 1,726,186 2,139, ,100,000 Trinidad Drilling Ltd., 7.88%, 01/15/2019 1,216,724 1,373, ,775,000 United Rentals North America Inc., 7.62%, 04/22/2022 1,905,115 2,398, ,000 United Rentals North America Inc., 5.75%, 11/15/ , , ,800,000 USG Corp., 10000, 01/15/2018 1,933,737 2,556, ,310,000 W&T Offshore Inc., 8.50%, 06/15/2019 1,401,214 1,134, ,350,000 Watco Cos. LLC, 6.38%, 04/01/2023 1,713,053 1,706, ,000 Wind Acquisition Finance SA, 7.38%, 04/23/ , , ,450,000 Windstream Corp., 7.50%, 06/01/2022 2,667,974 2,687, ,475,000 Xerium Technologies Inc., 8.88%, 06/15/2018 1,496,397 1,905, ,400,000 Zayo Group LLC, 6.00%, 04/01/2023 1,722,916 1,726, ,362, ,192, Euro Denominated 800,000 Ardagh Packaging Finance PLC, 9.25%, 10/15/2020 1,007,751 1,177, ,200,000 Ineos Group Holdings SA, 6.50%, 08/15/2018 1,590,796 1,704, ,000 KM Germany Holdings GmbH, 8.75%, 12/15/ , , ,000 Unitymedia Hessen GmbH & Co. KG, 6.25%, 01/15/2029 1,118,591 1,250, ,620,274 5,072, Private Placements United States Dollar Denominated 1,286,000 Bumble Bee Holdings Inc., 9.00%, 12/15/2017 1,308,730 1,683, ,700,000 Calfrac Holdings L.P., 7.50%, 12/01/2020 1,690,426 1,959, ,750,000 Chester Downs & M arina LLC, 9.25%, 02/01/2020 1,732,260 1,704, ,125,000 Clear Channel Worldwide Holdings Inc., 7.62%, 03/15/2020 1,116,803 1,464, ,575,000 Palace Entertainment Holdings LLC, 8.88%, 04/15/2017 1,660,657 1,966, ,508,876 8,778, Asset-Backed and Mortgage-Backed Securities United States Dollar Denominated 1,421,204 GSAM P Trust, Class 'A2C', Series '2006-HE5', 0.34%, 08/25/ ,063 1,544, ,787 M ASTR Asset Backed Securities Trust, Class 'A3', 0.30%, 08/25/ , , ,531,640 M ASTR Asset Backed Securities Trust, Class 'A3', 0.35%, 11/25/ ,981 1,312, ,123 M ASTR Asset Backed Securities Trust, Class 'A5', 0.43%, 08/25/ , , ,636,124 M ASTR Asset Backed Securities Trust, Class 'A5', 0.40%, 10/25/ ,327 1,283, ,880 Securitized Asset Backed Receivables LLC Trust, Class 'A2A', 0.32%, , , ,067,098 Securitized Asset Backed Receivables LLC, Class 'A2', 0.42%, 02/25/ , , ,882 Securitized Asset Backed Receivables LLC, Class 'A2C', 0.34%, 07/25/ ,494 65, ,581,500 6,267, Interim Financial Statements 8

10 Equities United States Dollar Denominated 30,800 AES Corp. Equities 483, , ,660 CenturyLink Inc. Equities 424, , ,700 EV Energy Partner L.P. Equities 137,938 52, ,000 Ford M otor Co. Equities 500, , ,525 General Electric Co. Equities 484, , ,492 Iron M ountain Inc. Equities 486, , ,517,352 2,654, Canadian Dollar Denominated 77,000 Cascades Inc. 463, , , , Term Loans United States Dollar Denominated 567,845 Albertsons LLC., 05/09/ , , ,000 Caesar's Growth Partners, LLC, 05/08/ , , ,500 FairPoint Communications Inc., 02/14/ ,988 1,229, ,500,000 Four Seasons Holdings Inc., 12/27/2020 1,889,289 1,872, ,201 Roundy's Supermarkets Inc., 02/19/ , , ,865,226 5,307, Transaction Cost - Total investments 164,919, ,822, Accrued investment income 3,126, Cash and cash equivalents 4,419, Derivative instruments (5,549,199) (4.44) Liabilities, net of other assets (58,826,038) (47.06) Total net assets attributable to holders of redeemable units 124,993, SCHEDULE OF DERIVATIVE INSTRUMENTS As at June 30, 2015 (Unaudited, Expressed in Canadian Dollars) Forward Currency Contracts See accompanying notes to financial statements. Maturity Unrealized Gains /(Losses) Amount Bought Amount Sold Date $ CAD 9,013,138 EUR 6,591,177 9-Nov-2015 (188,922) CAD 180,830,611 USD 148,897,955 9-Nov-2015 (5,360,277) Total (5,549,199) 2015 Interim Financial Statements 9

11 NOTES TO THE INTERIM FINANCIAL STATEMENTS 1. THE TRUST High Yield Strategic Trust (the Trust ) is an investment trust established under the laws of the Province of Ontario pursuant to a Declaration of Trust dated May 23, The Trust began operations on June 19, 2012 when it issued 12,502,069 units (the U nits ) on June 19 and subsequently issued 427,936 Units pursuant to an over-allotment option on June 29 at $9.41 per Unit for gross proceeds of $121,671,348. The investment objectives of the Trust are (i) to maximize total return for holders of Units ( Unitholders ) through capital appreciation and (ii) to preserve capital. The Trust was created to invest in a portfolio comprised primarily of North American high yield debt (the Portfolio ). Brookfield Investment Management (Canada) Inc. ( BIM Canada ) is the manager (the Manager ) and the trustee of the Trust. Brookfield Investment Management Inc. ( BIM ) is the investment manager (the Investment Manager ) of the Trust. The Investment Manager makes all of the investment and trading decisions on behalf of the Trust. These financial statements were authorized for issue by the Manager on August 26, BASIS OF PRESENTATION These financial statements have been prepared in compliance with International Financial Reporting Standards ("IFRS"). The financial statements have been prepared on the historical cost basis, except for the revaluation of certain financial instruments. Historical cost is generally based on the fair value of the consideration given in exchange for assets. In applying IFRS, management makes estimates and assumptions that may affect the amounts of assets, liabilities, income and expenses reported in these financial statements. The most significant estimates relate to the valuation of investments. Actual results may differ from the estimates. 3. SIGNIFICANT ACCOUNTING POLICIES Financial Instruments The Trust s investments in equity and fixed income securities are designated at fair value through profit or loss ( FVTPL ) at inception. The Trust s derivatives are categorized as held for trading. As a result of such designation and categorization, the Trust s investments and derivatives are measured at FVTPL. The Trust s accounting policies for measuring the fair value of its investments and derivatives are identical to those used in measuring its published Net Asset Value (NAV). Offsetting Financial assets and liabilities are offset and the net amount presented in the Statements of Financial Position only when the Trust has a legal right to offset the amounts and intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In the normal course of business, the Trust enters into various master netting agreements or similar agreements that do not meet the criteria for offsetting in the Statements of Financial Position but still allow for the related amounts to be offset in certain circumstances, such as bankruptcy or termination of contracts Interim Financial Statements 10

12 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. The fair value of financial assets and liabilities traded in active markets (such as publi cly traded marketable securities) are based on quoted market prices at the close of trading on the reporting date. However, if (i) a fair value or price is not readily available, (ii) the available quotations are not believed to be reflective of fair value by the Investment Manager, or (iii) a significant event has occurred that would materially affect the value of the security, the security is fair valued, as determined in good faith, by the Trust s Valuation Committee. The Trust s Valuation Committee is comprised of senior members of the Investment Manager s management team. The price determined by the Valuation Committee is an estimate and may differ from the actual price used in a purchase or sale transaction. The Trust s policy is to recognize transfers into and out of the fair value hierarchy levels as of the last day of the reporting period. The fair value of financial assets and liabilities that are not traded in an active market including overthe-counter derivatives is determined using established valuation procedures. The Trust uses a variety of methods and makes assumptions that are based on market conditions existing at each measurement date. Valuation techniques include the use of comparable recent arm s length transactions, reference to other instruments that are substantially the same and others commonly used by market participants and which make the maximum use of observable inputs. Refer to Note 6 for further information about the Trust s fair value measurements. All investment transactions are accounted for on the trade date. Realized gains and losses from investment transactions and unrealized appreciation or depreciation in the value of investments are calculated on an average cost basis, excluding transaction costs and the effect of foreign exchange fluctuations, which are disclosed separately. Other assets and liabilities For the purpose of categorization, accrued investment income is recorded at cost or amortized cost. Similarly, margin payable, payables for securities purchased, distributions payable and accounts payable and accrued liabilities are deemed to be other financial liabilities and reported at amortized cost. All other financial assets and liabilities are measured at amortized cost. Under this method, financial assets and liabilities reflect the amounts required to be received or paid, discounted when appropriate, at the financial instrument s effective interest rate. The fair values of the Trust s financial assets and liabilities that are not carried at FVTPL approximate their carrying amounts due to their short-term nature. Revenue recognition All investment transactions are accounted for on the trade date. Dividend income is recognized on the ex-dividend date and the interest for distribution purposes shown on the Statements of Comprehensive Income represents the coupon interest received by the Trust accounted for on an accrual basis. The Trust does not amortize premiums paid or discounts received on the purchase of fixed income securities except for zero coupon bonds which are amortized on a straight line basis. Transaction costs Transaction costs, such as brokerage commissions incurred in the purchase and sale of securities by the Trust, are expensed and are included in operating expenses in the Statements of Comprehensive Income. Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of an investment, which include fees and commissions paid to agents, advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Functional and presentation currency The performance of the Trust is measured and reported to the investors in Canadian dollar. The Manager considers the Canadian dollar as the currency that most faithfully represents the economic 2015 Interim Financial Statements 11

13 effects of the underlying transactions, event and conditions. These financial statements are presented in Canadian dollars, which is the Trust s functional currency. Foreign currency translation Investments and other assets denominated in foreign currencies are translated into Canadian dollars using the rate of exchange prevailing on the trade date. Investment transactions and income and expenses are translated at the rate of exchange on the date of such transactions. The fair values of investments and other assets and liabilities in foreign currencies are translated at the period-end exchange rates. Forward currency contracts Forward currency contracts, if applicable, are valued at current market value on each valuation date. The value is determined as the gain or loss that would be realized, if on the valuation date, the position of the forward currency contracts were closed out. Redeemable Units The Trust s redeemable units are classified as financial liabilities. Distributions to holders of redeemable units are recognized in Statement of Changes in Net Assets Attributable to Holders of Redeemable Units when they are authorized. New standards and interpretations not yet adopted: The final version of IFRS 9, Financial Instruments, was issued by the International Accounting Standards Board in July 2014 and will replace IAS 39, Financial Instruments: Recognition and Measurement. IFRS 9 introduces a model for classification and measurement, a single, forward-looking expected loss impairment model and a substantially reformed approach to hedge accounting. The new single, principle based approach for determining the classification of financial assets is driven by cash flow characteristics and the business model in which an asset is held. The new model also results in a single impairment model being applied to all financial instruments, which will require more timely recognition of expected credit losses. It also includes changes in respect of own credit risk in measuring liabilities elected to be measured at fair value, so that gains caused by the deterioration of an entity s own credit risk on such liabilities are no longer recognized in profit or loss. IFRS 9 is effective for annual periods beginning on or after January 1, 2018, however, is available for early adoption. In addition, the entity s own credit changes can be early applied in isolation without otherwise changing the accounting for financial instruments. The Trust is in the process of assessing the impact of IFRS 9 and has not yet determined when it will adopt the new standard. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of financial statements in conformity with IFRS requires the Manager to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognized in the period in which the estimates are revised and in any future period affected. Fair Value Measurement of Derivatives and Securities Not Quoted in an Active Market The Trust may hold financial instruments that are not quoted in active markets. Fair values of such instruments are determined using valuation techniques and may be determined using reputable pricing sources (such as pricing agencies) or indicative prices from market markers. Broker quotes as obtained from the pricing sources may be indicative and not executable or binding Interim Financial Statements 12

14 5. MANAGEMENT OF FINANCIAL RISKS The Trust is exposed to various financial risks, including market risk (consisting of currency risk, interest rate risk, and other price risk), credit risk and liquidity risk. The Trust s overall risk management programme seeks to minimize potentially adverse effects of those risks on the Trust s financial performance by employing experienced portfolio managers and by continuous monitoring of the Trust s securities positions and markets. The Manager maintains a corporate governance structure that oversees the Trust s investment activities. The Trust may use derivative financial instruments to mitigate certain risk exposures and is currently engaged in a series of forward currency contracts as described below. Currency risk Currency risk is the risk that the value of an investment will change due to fluctuations in foreign exchange rates. The Trust s net assets attributable to holders of redeemable units are measured in Canadian dollars and payments to Unitholders are made in Canadian dollars. The Trust is exposed to currency risks as it may hold assets or have liabilities denominated in currencies other than in Canadian dollars. As at June 30, 2015 and December 31, 2014, the Trust was exposed to currency risk as the value of any assets or liabilities denominated in currencies other than the Canadian dollar will vary due to changes in foreign exchange rates. Currency risks of the Trust can be mitigated with the use of forward currency contracts. The following tables summarize the Trust s exposure to currency risks, as at June 30, 2015 and December 31, 2014: June 30, 2015 Investments Cash *Other Net Assets includes borrowings of $7,800. *Other Net Assets includes borrowings of $7,206. Other Net Assets/ (Liabilities)* Derivative Instruments Total Net Asset $ $ $ $ $ % U.S. Dollar 176,199,284 2,903,876 2,654,484 (186,190,888) (4,433,244) (3.55) Euro 5,072,879 1,503, ,232 (9,202,060) (2,523,081) (1.99) Total 181,272,163 4,407,744 2,756,716 (195,392,948) (6,956,325) (5.54) December 31, 2014 Investments Cash Other Net Assets/ (Liabilities)* Derivative Instruments Total Net Asset $ $ $ $ $ % U.S. Dollar 159,382,487 5,216,157 2,735,524 (172,637,829) (5,303,661) (4.18) Euro 8,050, , ,049 (9,275,539) (948,024) (0.75) Total 167,432,884 5,327,226 2,901,573 (181,913,368) (6,251,685) (4.93) As at June 30, 2015, had the Canadian dollar strengthened or weakened by 1% against each of the other currencies with all other variables remaining constant, net assets of the Trust would have increased or decreased by $69,563 (December 31, $62,517). The Investment Manager will hedge not less than 70% of the Portfolio s investments denominated in currencies other than the Canadian dollar back to the Canadian dollar. As at June 30, 2015, the Trust had entered into forward currency contracts with a net unrealized loss of $5,549,199 ($4,273,547 as at December 31, 2014) to deliver currencies at specified future dates. For further information regarding forward currency contracts, see the Schedule of Derivative Instruments Interim Financial Statements 13

15 Interest rate risk Interest rate risk arises from the possibility that changes in interest rates will affect future cash flows or fair values of financial instruments. The Trust is exposed to interest rate risk from its holdings of fixed-rate debt instruments, the values of which fluctuate due to changes in prevailing levels of market interest rates. As at June 30, 2015, the Trust s debt instruments remaining terms to maturity were as follows: Debt Instruments $ % of Net Assets Less than 1 year 1 to 3 years 9,518, to 5 years 29,523, Greater than 5 years 139,576, Total 178,618, As at December 31, 2014, the Trust s debt instruments remaining terms to maturity were as follows: Debt Instruments $ Interest rate risk of the Trust is currently mitigated by the relatively short duration and high credit spread of the high yield bonds in the Portfolio. These characteristics make the Portfolio s sensitivity to interest rate risk relatively less than what would be experienced by a portfolio with longer duration investments that trade at tighter spreads to government-backed fixed income securities. It would also be possible to hedge interest rate risk by shorting government-backed fixed income securities or engaging in various interest rate derivatives. As at June 30, 2015 and December 31, 2014, the Trust had no such hedges in place. At June 30, 2015, if the prevailing interest rates had risen or declined by 0.25%, assuming a parallel shift in the yield curve, with all other variables held constant, the Trust s net assets would have decreased or increased, respectively, by approximately $2,567,636 (December 31, $1,900,958). The Trust s sensitivity to interest rate changes was estimated using the weighted average duration of the bonds. In practice, the actual results may differ from this sensitivity analysis and the differences could be material. Other price risk Other price risk is the risk that the value of financial instruments will fluctuate as a result of changes in market prices (other than those arising from interest rate risk or currency risk). Such changes may be the result of factors affecting multiple instruments traded in a market, market segment or asset class. As at June 30, 2015, had the market increased or decreased by 5% with all other variables remaining constant, the net assets of the Trust would have increased or decreased by $9,091,136 (December 31, $8,398,671). The Trust is exposed to other price risk in the Portfolio. The Trust may take outright long or short positions in any of its investments, which may include derivative instruments for purposes consistent with its investment objectives and investment strategy and subject to its investment restrictions. % of Net Assets Less than 1 year 1 to 3 years 4,584, to 5 years 41,576, Greater than 5 years 117,362, Total 163,523, Interim Financial Statements 14

16 As at June 30, 2015, the Trust had no direct exposure to derivatives other than forward currency contracts (as at December 31, 2014, there was no direct exposure to derivatives other than forward contracts) described above to mitigate price risks and had no securities sold short; however, all investments in securities present a risk of loss of capital. The Investment Manager seeks to mitigate this risk through careful selection of securities and other financial instruments. Credit risk Credit risk is the risk of non-payment of scheduled interest and/or principal payments. The Trust is exposed to several types of credit risks including the risk that one or more investments in the Portfolio will decline in price, or fail to pay interest or principal when due, because the issuer of the security experiences a decline in its financial status. As at June 30, 2015, the maximum exposure to any one debt issuer in the Portfolio was $2,925,742 (December 31, 2014 $2,757,938); representing 2.34% (December 31, %) of net assets net assets attributable to holders of redeemable units. The performance of the Trust is also subject to general economic and specific industry conditions that could impact the fair value of one or more debt securities in the Portfolio. Securities with lower ratings tend to be more sensitive to these kinds of risks. As at June 30, 2015 and December 31, 2014, the Trust was invested in debt securities with the following credit ratings. The following chart was consolidated for comparative purposes: June 30, 2105 Debt Instruments by S&P Rating* % of Net Assets Total $ * Or, if not rated by S&P, the comparable rating from Fitch Ratings Inc ** Not rated by Standard & Poor s, Moody s Investors Service or Fitch Ratings Inc December 31, 2014 % of Net Assets Total $ BBB- or better ,629, ,457,517 BB ,334, ,456,763 B ,465, ,279,154 CCC or lower ,935, ,198,227 Not Rated** ,253, ,131,618 Total ,618, ,523,279 The Investment Manager seeks to mitigate the above credit risk through the careful selection of investments, through the employment of experienced portfolio managers and through continuous monitoring of the Trust s securities positions and markets. Another type of credit risk is exposure to the creditworthiness of the Trust s trading counterparties. All securities transactions executed by the Trust are settled upon delivery using approved brokers. The risk of payment default is considered negligible, as delivery of securities sold is only made once the broker has received payment on behalf of the Trust. Payment is not made on a purchase until the securities have been received by the broker on behalf of the Trust. The trade will fail if either party fails to meet its obligation. The Trust may enter into forward currency exchange contracts primarily to hedge against foreign currency exchange rate risks on its non-canadian dollar denominated investment securities. In addition to currency and market risk, forward currency exchange contracts involve risks arising from the possible inability of counterparties to meet the terms of their contracts from movement in currency, security values, and interest rates. The Trust seeks to mitigate this risk through the careful selection of its derivative counterparties Interim Financial Statements 15

17 Liquidity risk Liquidity risk is the risk that the Trust may not be able to settle or meet its obligation on time or at a reasonable price. The Trust has current financial liabilities outstanding, including but not limited to, margin loans and interest payable on its margin loans, accounts payable and accrued liabilities. The Manager seeks to mitigate this liquidity risk by ensuring that a reasonable portion of the Trust s investments trade in active markets and can be sold readily. There can be no assurance that an adequate market for the investments will exist at all times, or that the prices at which the investments trade, accurately reflect their fair value. Low trading volumes of the investments could also make it difficult to liquidate holdings quickly. As required by IFRS 7 Financial Instruments, the Trust s financial liabilities should be categorized into relevant maturity groupings based on the remaining years as at June 30, 2015 and December 31, 2014 to the contractual maturity date. However, as all liabilities, including liabilities for redeemable units tendered for redemption as of the applicable balance sheet date (of which there were none as at June 30, 2015 and December 31, 2014), are due in less than one year, this analysis is not required in this instance. In accordance with the Trust s policy, the Investment Manager monitors the Trust s overall liquidity risk on a continuous basis. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Trust uses a three-tier hierarchy as a framework for disclosing fair value which reflects the significance of the inputs used in making the measurements. The hierarchy has the following levels: Level 1 - quoted prices in an active market (Level 1 unadjusted inputs), Level 2 - inputs other than quoted prices (Level 2 directly or indirectly derived from observational market data), Level 3 - inputs not based on observable market data (Level 3 unobservable inputs). In addition to the above disclosure requirements, IFRS 7 Financial Instruments: Disclosures, requires disclosure of significant transfers between Levels 1 and 2 since the prior reporting period, as well as reconciliation of Level 3 assets, disclosing separately changes during the reporting period attributable to: (i) (ii) (iii) total gains or losses recognized in net income, and a description of where they are presented in the income statement, purchases, sales, issues and settlements, transfers into or out of Level 3 and the reasons for those transfers. Any significant transfers between Level 1 and Level 2 are disclosed. Further, for fair value measurements in Level 3, if changing one or more type of the inputs to reasonably possible alternative assumptions would change fair value significantly, the entity shall state this fact and disclose both the effect of those changes and how the effect was calculated Interim Financial Statements 16

18 The following tables provide a summary of the investments based on the inputs used as at June 30, 2015 and December 31, 2014 in valuing the Trust s investments carried at fair value: Level 1 Level 2 Level 3 Total As at June 30, 2015 $ $ $ $ Investments, at fair value: Bonds 167,043, ,043,108 M ortgages 6,267,911 6,267,911 Equities 3,204,556 3,204,556 Term Loans 5,307,138 5,307,138 Total Investments, at fair value 3,204, ,618, ,822,713 Derivative assets Derivative liabilities (5,549,199) (5,549,199) Total 3,204, ,068, ,273,514 Level 1 Level 2 Level 3 Total As at December 31, 2014 $ $ $ $ Investments, at fair value: Bonds 153,480, ,480,839 M ortgages 6,819,796 6,819,796 Equities 4,450,145 4,450,145 Term Loans 3,222,644 3,222,644 Total Investments, at fair value 4,450, ,523, ,973,424 Derivative assets Derivative liabilities (4,273,547) (4,273,547) Total 4,450, ,249, ,699,877 The carrying values of cash, subscriptions receivable, interest receivable, payable for investments purchased, redemptions payable, distributions payable, accrued expenses and the Trusts obligations for Net Assets attributable to holders of redeemable Units approximates their fair values due to their short-term nature. During the Period, there were no Level 3 assets held by the Trust, nor were there significant transfers between levels The following provides details of the categorization in the fair value hierarchy by asset classes: a) Equities The Trust s equity positions are classified as Level 1 when the security is actively traded and a reliable price is observable. b) Fixed income Fixed income includes primarily corporate bonds, and also Term Loans which are valued at the bid price provided by recognized investment dealers. These prices are observable and therefore the Trusts corporate bonds and term loans have been classified as Level Interim Financial Statements 17

19 c) Derivative assets and liabilities Derivative assets and liabilities consist of forward currency contracts which are valued based primarily on the contract notional amount, the difference between the contract rate and the forward market rate for the same currency, interest rates and credit spreads. Contracts for which counterparty credit spreads are observable and reliable, or for which credit-related inputs are determined not to be significant to fair value are classified as Level BORROWINGS The Trust subsequently added leverage to the Portfolio through the margining of certain securities. Leverage is restricted to 33% of the total assets of the Trust. Accordingly, at the time of borrowing, the maximum amount of leverage that the Trust could employ is 1.50:1 (total long positions, including leveraged positions, divided by net assets of the Trust). As at June 30, 2015, the Trust had employed leverage equal to 30.7% (December 31, %) of the total assets of the Trust, equating to $58.1 million (December 31, $45.5 million). The minimum and maximum amount of borrowings outstanding during the six months ended June 30, 2015 was $43.8 million and $58.1 million, respectively. The minimum and maximum amount of borrowings outstanding during the year ended December 31, 2014 was $41.1 million and $58.7 million, respectively. The borrowings were used to grow the Trust s investments and for working capital needs. Adding a controlled amount of leverage to the Trust is consistent with the Trust s objectives. 8. INCOME TAXES The Trust is not subject to tax on the portion of its income, including net realized capital gains for its taxation year, that is paid or payable to Unitholders. It is the intention of the Trust to pay all net taxable income and sufficient net taxable gains so that the Trust will not be subject to income taxes. No provision for income taxes has been recorded in the accompanying financial statements as all income and net realized capital gains are to be distributed to the Unitholders. Capital losses realized in excess of those utilized to offset realized capital gains in the current taxation year can be carried forward indefinitely and may be applied against future years capital gains. Non-capital losses may be carried forward for a period of 20 years and applied against future years taxable income. Certain dividends received by the Trust are subject to withholding tax imposed in the country of origin. Such income and gains are recorded on a gross basis and the related withholding taxes are shown separately in the Statements of Comprehensive Income. 9. EXPENSES OF THE TRUST The Manager is entitled to an annual management fee equal to % per annum based on the net asset value of the Trust. These fees are calculated daily and payable monthly in arrears, plus applicable taxes. The management fee totaled $666,876 and $713,555 for the six months ended June 30, 2015 and 2014, respectively. The Trust pays for all ordinary expenses incurred in connection with its operation and administration, including, but not limited to, all costs of Portfolio transactions, fees payable to the Manager, administrator and other third party service providers, custodial fees, legal, accounting, audit and valuation fees, other administrative expenses and any extraordinary expenses that the Trust may incur. The Manager is also eligible in each fiscal year to receive from the Trust a performance fee (the "Performance Fee") that shall be calculated and accrued monthly and be paid annually, if applicable. The Performance Fee for a given year will, subject to some exceptions regarding redemptions and issuances of Units, be equal to 15% of the amount by which the net asset value per Unit (calculated 2015 Interim Financial Statements 18

20 without taking into account any Performance Fee) exceeds 106.5% of the Threshold Amount. The Threshold Amount will be the greater of: (i) $10.00; and (ii) the net asset valu e per Unit at the end of the last fiscal year in which a Performance Fee was paid (after payment of such Performance Fee). Please refer to the Trust s Prospectus for additional information on the Performance Fee. The Performance Fee accrued totaled $0 and $642,931 for the six months ended June 30, 2015 and 2014, respectively. 10. RELATED PARTY DISCLOSURE The Manager and the Investment Manager are wholly-owned subsidiaries of Brookfield Asset Management Inc. ( Brookfield ) and the Investment Manager manages the investment and trading activities of the Trust pursuant to a management agreement. Due to Brookfield s ability to control the Trust, Brookfield, and its affiliates over which it has the ability to exercise control or significant influence, are related parties of the Trust by virtue of common control or common significant influence. Transactions with related parties, including investment transactions, are conducted in the normal course of operations and are recorded at exchange amounts, which are equivalent to normal market terms. Please refer to Note 9, Expenses of the Trust, which outlines the fees paid to the Manager by the Trust. There were no other transactions conducted with related parties during the six months ended June 30, 2015 or for the twelve months ended December REDEEMABLE UNITS AND NET ASSETS ATTRIBUTABLE TO HOLDERS OF REDEEMABLE UNITS The Trust is authorized to issue an unlimited number of redeemable and transferable Units of a single class, each of which represents an equal, undivided interest in the net assets of the Trust. Each Unit is entitled to one vote at all meetings of Unitholders and is entitled to participate equally with respect to any and all distributions made by the Trust. On the redemption of Units, however, the Trust may in its sole discretion designate payable to redeeming Unitholders, as part of the redemption price, any capital gains realized by the Trust in the taxation year in which the redemption occurred. On termination or liquidation of the Trust, the holders of outstanding Units of record are entitled to receive, on a pro rata basis, all of the assets of the Trust remaining after payment of all debts, liabilities and liquidation expenses of the Trust. The Declaration of Trust provides that the Trust may not issue additional Units following closing of the offering except: i) for net proceeds not less than 100% of the net asset value per Unit calculated as of the close of business on the business day immediately prior to the pricing of such offering; (ii) by way of Unit distributions; or (iii) with the approval of Unitholders. Unitholders are entitled to redeem Unit s outstanding on any business day and will receive a redemption price equal to the net asset value per Unit of the Trust. Changes in the number of Units outstanding for the Trust for the Period consisted of the following: For the period ended For the period ended June 30, 2015 December 31, 2014 Beginning balance 10,806,803 11,678,791 Subscription of Units Redemption of Units (426,048) (871,988) Number of Units outstanding, end of period 10,380,755 10,806, Interim Financial Statements 19

21 Capital management Units issued and outstanding represent the capital for the Trust. The Trust has no restrictions or specific capital requirements and is authorized to issue an unlimited number of transferable Units. Restrictions and specific requirements on the redemption of Units are described above. The Statement of Changes in Net Assets and the above table outline the relevant changes of the Trust s Units for the period. The Trust manages its capital in accordance with its investment objectives and strategies and the risk management practices outlined in Note 5 while maintaining sufficient liquidity to meet Unitholder redemptions. 12. DISTRIBUTIONS Unitholders will be entitled to receive distributions if, as and when declared by the Trust from time to time. All distributions will be paid in Units. Immediately after any distribution in Units, the number of outstanding Units will be consolidated such that each Unitholder will hold after the consolidation the same number of Units as it held before the distribution. 13. FINANCIAL INSTRUMENTS BY CATEGORY The following table presents the carrying amounts of the Trust s financial assets by category as at June 30, 2015 and December 31, All of the Trust's financial liabilities, other than its net assets attributable to holders of redeemable units At FVTPL At Amortized Cost Held for Designated Financial Assets as at June 30, 2015 Trading at Inception Total Total $ $ $ $ Financial assets at fair value through profit or loss 181,822, ,822,713 Cash and cash equivalents 4,419,430 Accrued investment income 3,126,360 Total - 181,822, ,822,713 7,545,790 Held for Designated Financial Liabilities as at June 30, 2015 Trading at Inception Total Total $ $ $ $ Unrealized depreciation on forward currency contracts 5,549,199 5,549,199 Margin payable 58,055,820 Due to broker 357,057 Accounts payable and accrued liabilities 413,161 Total 5,549,199 5,549,199 58,826, Interim Financial Statements 20

22 At FVTPL At Amortized Cost Held for Designated Financial Assets as at December 31, 2014 Trading at Inception Total Total $ $ $ $ Financial assets at fair value through profit or loss 167,973, ,973,424 Cash and cash equivalents 6,224,428 Accrued investment income 2,908,822 Total - 167,973, ,973,424 9,133,250 Held for Designated Financial Liabilities as at December 31, 2014 Trading at Inception Total Total $ $ $ $ Unrealized depreciation on forward currency contracts 4,273,547 4,273,547 Margin payable 45,460,487 Accounts payable and accrued liabilities 362,021 Total 4,273,547 4,273,547 45,822,508 The following table presents the net gains (losses) on financial instruments at FVTPL by category for the periods ended June 30, 2015 and June 30, 2014: Category Financial assets and liabilities at FVTPL: Net gains (losses) $ $ Held for Trading (12,069,187) 109,874 Designated at inception 10,115,616 6,083,361 Total Financial assets and liabilities at FVTPL (1,953,571) 6,193,235 The Trust entered into various master netting arrangements in connection with its forward currency and swap derivative contracts. These agreements, such as the International Swaps and Derivatives Association agreements, do meet the criteria for offsetting in the Statements of Financial Position and allow for the related amounts to be settled on a net basis. Other financial assets and financial liabilities do not meet the criteria for offsetting but may be set off under certain circumstances, such as bankruptcy or termination of the contracts. As at June 30, 2015, the trust had no financial instruments that were offset on the Fund s Statement of Financial Position. The following table presents the recognized financial instruments that are offset, or subject to enforceable master netting agreements or other similar agreements, as at December 31, The "Net amount presented" column represents the amount after offsetting, as stated in the Fund s Statements of Financial Position. The "Net" column represents what the impact on the Trust s Statements of Financial Position would be if all set-off rights were exercised Interim Financial Statements 21

23 Financial assets and liabilities December 31, 2014 Net unrealized depreciation on Amounts offset Gross 14. EVENTS AFTER STATEMENT OF FINANCIAL POSITION DATE Management has evaluated subsequent events in the preparation of the Trust s interim financial statements and has determined that other than the items listed herein; there are no events that require recognition or disclosure in the interim financial statements. Net Amounts not offset Gross assets/liabilities Amounts Financial Cash collateral assets/liabilities offset presented Instruments received Net $ $ $ $ $ $ forward currency contracts (2,542,222) 10,523 (2,531,699) - - (2,531,699) (2,542,222) 10,523 (2,531,699) - - (2,531,699) 2015 Interim Financial Statements 22

24 TRUST INFORMATION MANAGER, TRUSTEE, TRANSFER AGENT, AND REGISTRAR Brookfield Investment Management (Canada) Inc. Gail Cecil Director, President & Chief Executive Officer Jonathan Tyras Director, Chief Financial Officer, Treasurer, and Secretary Craig Noble Director INDEPENDENT REVIEW COMMITTEE John P. Barratt (Chair) Corporate Director James L. R. Kelly President Earth Power Inc. Frank Lochan Corporate Director CONTACT INFORMATION High Yield Strategic Trust welcomes inquiries from Unitholders, analysts, media representatives or other interested parties. Investment Manager Brookfield Investment Management Inc. Brookfield Place 250 Vesey Street, 15 th Floor New York, New York t w Interim Financial Statements 23

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