RPH GLOBAL SOVEREIGN BOND FUND L.P.

Transcription

1 Financial Statements of RPH GLOBAL SOVEREIGN BOND FUND L.P.

2 KPMG LLP Telephone (416) Chartered Accountants Fax (416) Bay Adelaide Centre Internet Bay Street Suite 4600 Toronto ON M5H 2S5 Canada INDEPENDENT AUDITORS' REPORT To the Unitholders of RPH Global Sovereign Bond Fund L.P. We have audited the accompanying financial statements of RPH Global Sovereign Bond Fund L.P., which comprise the statements of net assets and investment portfolio as at December 31, 2010, the statements of operations and changes in net assets for the period from September 1, 2010 (date of commencement, and notes, comprising a summary of significant accounting policies and other explanatory information. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position and investments of RPH Global Sovereign Bond Fund L.P. as at December 31, 2010, and its results of operations and its changes in net assets for the period from September 1, 2010 (date of commencement in accordance with Canadian generally accepted accounting principles. Chartered Accountants, Licensed Public Accountants March 31, 2011 Toronto, Canada KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. KPMG Canada provides services to KPMG LLP.

3 Statement of Net Assets December 31, 2010 Assets Investments, at fair value (note 1) $ 610,816 Cash and cash equivalents 405,553 Interest receivable 22,536 1,038,905 Liabilities Unrealized loss on forward contracts 8,927 Accounts payable and accrued expenses 49,042 57,969 Net assets $ 980,936 Net assets per series: Limited Partners, Series A $ 980,936 Units outstanding: Limited Partners, Series A 100,000 Net assets per unit: Limited Partners, Series A $ 9.81 See accompanying notes to financial statements. 1

4 Statement of Operations Investment income: Interest $ 4,520 Expenses: Operating fees (note 2(c)) 49,042 Net investment loss (44,522) Realized and unrealized gains (losses) on investments, derivative contracts and foreign currency: Net realized gain on sale of investments, derivative contracts and foreign currency 91,691 Commissions and other portfolio transaction costs (672) Change in unrealized depreciation on investments, derivative contracts and foreign currency (65,562) Net realized and unrealized gain on investments, derivative contracts and foreign currency 25,457 Decrease in net assets from operations $ (19,065) Decrease in net assets from operations per series: Limited Partners, Series A $ (19,065) Decrease in net assets from operations per unit (based on the weighted average units outstanding): Limited Partners, Series A $ (0.19) See accompanying notes to financial statements. 2

5 Statement of Changes in Net Assets General Partner Limited Partners Net assets, beginning of period $ $ Decrease in net assets from operations (19,065) Unit transactions: Proceeds from issuance of units 1,000,001 Net assets, end of period $ $ 980,936 See accompanying notes to financial statements. 3

6 Statement of Investment Portfolio December 31, 2010 Underlying interest Number of on equity % of net Put option Expiry date Strike price options options Proceeds Fair value assets U.S. Treasury Bond March 2011 U.S. $ $ 10,000 $ 3,373 $ Coupon Average % of net International bond rate Maturity date Description Par value cost Fair value assets Greece: Hellenic Republic Government Bond 4.30% March 20, 2012 Euro $ 500,000 $ 661,891 $ 610, Less transaction costs 502 $ 661,389 $ 610,195 Currency Currency to be to be received - delivered - Unrealized % of net Expiration date CAD EUR loss assets Forward contract January 31, 2011 $ 634,230 $ 643,157 $ (8,927) (0.9) Total investments $ 664,762 $ 601, Other assets, net 379, Net assets $ 980, See accompanying notes to financial statements. 4

7 Notes to Financial Statements RPH Global Sovereign Bond Fund L.P. (the "Fund") is a limited partnership established under the laws of the Province of Ontario on August 26, Investors in the Fund will become limited partners of the Fund (the "Limited Partners") and will be bound by the terms of the Limited Partnership Agreement ("L.P. Agreement"). The Fund commenced operations on September 1, River Plate House Capital Management Inc. is the investment manager (the "Manager") of the Fund. River Plate G.P. Limited Partnership, a limited partnership formed under the laws of the Province of Ontario, is the general partner (the "General Partner") of the Fund. The General Partner has exclusive authority to manage the operations and affairs of the Fund, to make all decisions regarding the business of the Fund and to bind the Fund. The investment objective of the Fund is to provide long-term growth through capital appreciation by investing primarily in sovereign fixed income securities of global industrial, emerging and developed countries, and exchange traded and over-the-counter derivatives. 1. Significant accounting policies: These financial statements are prepared in accordance with Canadian generally accepted accounting principles ("GAAP"). The significant accounting policies are described below: (a) Accounting estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets during the period. Actual results could differ from those estimates. (b) Valuation of investments: For financial reporting purposes, investments are valued at their fair values in accordance with The Canadian Institute of Chartered Accountants' ("CICA") Handbook Section 3855, Financial Instruments - Recognition and Measurement ("Section 3855"). Investments are valued at the bid price recorded by the securities exchanges on which such investments are principally traded at the financial reporting date. Securities not traded on the valuation date are valued based on the results of valuation techniques, using observable market inputs, if the former is not available. Securities not listed on an exchange, or that are traded over-the-counter, are valued at their fair values thereof as determined by the Manager in accordance with the methodologies provided in Section

8 1. Significant accounting policies (continued): For all other purposes, including the processing of Limited Partner transactions, the Fund values securities using the methods prescribed in its L.P. Agreement, which are based on the last traded price of the security on the principal exchange or market on which it trades. (c) Unit valuation: Net assets per unit ("GAAP NAV") is calculated for financial reporting purposes. GAAP NAV is computed by dividing the net assets attributable to the series determined in accordance with GAAP, by the total number of units of the series outstanding. Net increase (decrease) in GAAP NAV from operations represents the net increase (decrease) in net assets of the series from operations for the period divided by the units outstanding. Net asset value per unit ("pricing NAV"), which is utilized for shareholder reporting and transactional purposes, is computed by dividing the net asset value attributable to the series of the Fund, determined for the purchase and redemption of units in accordance with the Fund's Offering Memorandum and L.P. Agreement, by the total number of units of the series outstanding. This amount may be different from the GAAP NAV calculation which is presented on the statement of net assets. The difference is due to valuing investments at bid and ask prices for GAAP purposes while pricing NAV typically utilizes closing price to determine fair value for the purchase and redemption of units and differences in treatment of certain operating fees. The difference between pricing NAV and GAAP NAV does not affect investor balances. A comparison between GAAP NAV and pricing NAV is included in note 5. (d) Forward contracts: The Partnership may enter into forward contracts for hedging purposes or to establish an exposure to a particular currency. Upon closing of a contract, the gain or loss is included in net realized gain on sale of investments and derivative contracts in the statement of operations. Outstanding settlement amounts on the close out of forward contracts are included in unrealized gain or unrealized loss in the statement of net assets. Forward contracts are valued based on the difference between the contract forward rate and the forward bid rate (for currency held) and the forward ask rate (for currency sold short). 6

9 1. Significant accounting policies (continued): (e) Written put option: The premium received upon writing a put option is recorded as a deferred credit. Upon expiry of the option or when the option is exercised by its holder, the premium is recognized as a gain and is included in net realized gain on sale of investments and derivative contracts in the statement of operations. (f) Fair value measurements: In accordance with CICA Handbook Section 3862, Financial Instruments - Disclosures, the Fund's investments are categorized in a three-tier hierarchy based on inputs to value the investments. The hierarchy of inputs is summarized below: Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is one in which transactions for the assets occur with sufficient frequency and volume to provide pricing information on an ongoing basis; Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liability; and Level 3 - inputs for the asset or liability that are not based on observable market data. The following tables summarize the inputs used as at December 31, 2010 in valuing the Funds' investments at fair value. Level 1 Level 2 Level 3 Total Bonds $ $ 610,195 $ $ 610,195 Forward contracts (8,927) (8,927) Options $ 621 $ 601,268 $ $ 601,889 During the period ended December 31, 2010, no financial assets and liabilities were transferred between Level 1 and Level 2. 7

10 1. Significant accounting policies (continued): (g) Accounts payable and accrued expenses: Accounts payable and accrued expenses represent the operating fees recoverable by the Manager as described in note 2. (h) Investment income and expenses: Interest income and expenses are recorded on an accrual basis. (i) Foreign currency: Investment transactions and income and expenses in foreign currencies have been translated into Canadian dollars at the rate of exchange prevailing at the time of the transactions. The market value of investments quoted in foreign currencies has been translated to Canadian dollars at the rate of exchange prevailing at period end. Foreign exchange gains and losses on the sale of investments are included in the net realized gain or loss of investments, derivative contracts and foreign currency. (j) Transaction costs: Commissions and other 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, levies by regulatory agencies and securities exchanges, and transfer taxes and duties. Transaction costs are expensed in the statement of operations. (k) Taxation of the Fund: The financial statements include the results of operations of the Fund. However, they do not include all the assets, liabilities, revenue and expenses of the individual partners. Income taxes are not eligible at the Fund level and, accordingly, no provision is recorded in these financial statements. 8

11 1. Significant accounting policies (continued): (l) Future accounting standards: International Financial Reporting Standards ("IFRS"): On February 13, 2008, the CICA Accounting Standards Board ("AcSB") confirmed that the use of IFRS will be required for all Canadian publicly accountable enterprises for fiscal years beginning on or after January 1, IFRS uses a conceptual framework similar to GAAP, but there may be significant differences on recognition, measurement and disclosures that may materially impact the net assets of the Fund. The AcSB has confirmed the ability to defer the adoption of IFRS to fiscal periods beginning on or after January 1, 2013 for entities applying Accounting Guideline 18, Investment Companies. The Manager intends to have the Fund adopt IFRS on January 1, The Manager has developed an IFRS changeover plan, which addresses key elements of the conversion to IFRS and includes identifying and assessing the impact of the significant differences between IFRS and GAAP that are expected to impact financial reporting. Based on the Manager's current evaluation of the differences between GAAP and IFRS, the Manager believes there will be no material impact on the net assets of the Fund. However, management is of the view that the conversion to IFRS will result in some additional disclosures and potentially different presentation of Limited Partners' interests and other items. 2. Related party transactions: (a) Management fees: The Manager is entitled to a fee from each Limited Partner of the Fund at the rate of 1% per annum based on the pricing NAV per series of unit of each outstanding Series A unit and Series B unit on each valuation day. These fees are determined in accordance with each Subscription Agreement and paid directly by the Limited Partners. For the period ended December 31, 2010, these fees were waived by the Manager. 9

12 2. Related party transactions (continued): (b) Performance allocation to General Partner: The General Partner is entitled to receive a distribution on each performance redemption date equal to the sum of 10% of the increase, if any, in the pricing NAV per unit of each outstanding unit since the later of: (i) the date of issuance, and (ii) the preceding highwater mark date. For the period ended December 31, 2010, these fees were waived by the General Partner. (c) Operating fees: The Fund is responsible for the payment of all costs, charges, and expenses incurred in connection with the Fund, which include expenses relating to the continuing offering of units, brokerage fees and commission, bid/offer spreads, banking fees, insurance premiums, taxes, interest expense on borrowings, commitment fees, any third party consulting or research related expenses, the cost of business travel related to the Fund's operations and marketing and investment due diligence, custodial fees, fund administration fees, auditors fees, registration and filing fees, printing costs, legal fees, registrar and transfer agent fees, accounting and valuation fees, and other similar expenses. For the period ended December 31, 2010, the Manager paid all operating expenses on behalf of the Fund of which $49,042 is payable to the Manager at December 31, The Manager intends to continue to incur all operating costs of the Fund in future periods and seek reimbursement of these operating expenses incurred at a maximum rate of 50 basis points per annum. 3. Units of the Fund: The capital of the Fund is divided into an unlimited number of units, issuable in series. An unlimited number of Series A units, Series B units and Series I units are currently offered. Each unit entitles the holder to the same obligations as a holder of any other unit of the same series. The General Partner may from time to time create and issue units in different series with differing investment management fees, distribution and redemption provisions and other features particular to each series without the consent of Limited Partners. Each issued and outstanding unit of a series shall be equal to each other unit of the same series with respect to all matters. 10

13 3. Units of the Fund (continued): The units may be purchased as of the first Business Day of each month or at such other times as the General Partner, in its discretion, may permit at the applicable subscription price. The Limited Partners may redeem from the Fund at the applicable redemption price on the Redemption Day (last Business Day in any calendar month) provided written notice is received by the Administrator no later than 20 days prior to the specified Redemption Day. The General Partner may, at any time, suspend the calculation of the net assets of the Fund, the redemption of units and the payment of redemptions as described in the Offering Memorandum of the Fund. The net assets of the Fund will be calculated on a monthly basis as of the last Business Day of each month or on such other dates as the General Partner deems appropriate. The following table summarizes the changes in the number of units for the period ended December 31, 2010: Series A General Partner Limited Partners Units outstanding, beginning of period Units issued and paid 1 100,000 Units outstanding, end of period 1 100,000 As at December 31, 2010, 100% of the Fund's outstanding units were held by one institutional investor. 4. Limited Partners' entitlements: The Limited Partners' entitlements with respect to the net asset value and distribution of income are generally as follows: (a) Entitlement in respect of net asset value: Each Limited Partner is entitled to a pro-rata share of the net asset value of the Fund in the proportion that each Limited Partners' equity bears to the aggregate partners' equity. 11

14 4. Limited Partners' entitlements (continued): (b) Distributions: Distributions will be made at the sole discretion of the General Partner. The Partnership does not intend to make regular distributions. The General Partner has waived the income allocation for the period ended December 31, Comparison of net assets per unit and NAV per unit: The reasons for the difference between NAV per unit and net asset per unit are described in note 1(c): GAAP NAV Pricing NAV Series A $ 9.81 $ Financial instruments and risk management: Management of financial instruments risks: The Fund's activities expose it to a variety of financial risks including market risk, which includes currency risk, interest rate risk, counterparty risk, credit risk, other price risk and liquidity risk. The investment objective of the Fund is to provide long-term growth through capital appreciation by investing primarily in sovereign fixed income securities of global industrial, emerging and developed countries, and exchange traded and over-the-counter derivatives. In seeking to achieve the Fund's investment objective, the Manager will employ a global macro/fixed income investment strategy. The Fund's overall risk management program seeks to minimize the potentially adverse effect of risk on the Fund's financial performance in a manner consistent with the Fund's investment objective. 12

15 6. Financial instruments and management (continued): Market risk: (i) Currency risk: Investments denominated in currencies other than the Canadian dollar, which is the Fund's functional currency, expose the Fund to fluctuations in foreign exchange rates. Trading in foreign markets exposes the Fund to currency risk as the price in local terms is converted to Canadian dollars to determine fair value. The table below indicates the currencies to which the Fund had exposure as at December 31, 2010: Currency risk exposed Forward % of net holdings contracts Net exposure assets Euro $ 610,195 $ (643,157) $ (32,962) (3) U.S. dollar 141, , $ 751,512 $ (643,157) $ 108, As at December 31, 2010, had the Canadian dollar strengthened or weakened by 5% in relation to all currencies, with all other variables held constant, net assets would have decreased or increased by approximately $5,418, respectively. In practice, the actual trading results may differ from this sensitivity analysis and the difference could be material. (ii) Interest rate risk: Interest rate risk refers to the effect on the fair value of the Fund's assets and liabilities due to fluctuations in interest rates. The table below summarizes the Fund's exposure to interest rate risk at December 31, They include the Fund's assets and trading liabilities at fair values, categorized by its maturity dates. Less than More than 1 year years years 5 years Total Interest rate exposure $ $ 610,195 $ $ $ 610,195 13

16 6. Financial instruments and management (continued): As at December 31, 2010, if the prevailing interest rates have been raised or lowered by 1%, assuming a parallel shift in the yield curve, with all other factors remaining constant, net assets could possibly have decreased or increased by approximately 0.76%, respectively. The Fund's interest rate sensitivity was determined based on portfolio weighted duration. In practice, actual results may differ from the sensitivity analysis and the difference could be material. (iii) Counterparty risk: The Fund has relationships with multiple counterparties, each having an interest over certain assets of the Fund held by them as collateral for the Fund's indebtedness to the counterparties. The Fund may engage in transactions pursuant to which it will borrow securities from the counterparties that it will sell short or enter in financing transactions in the form of repurchase agreements with a counterparty or enter into forward contracts with the counterparty. Either the Fund or the counterparty to the Fund or the counterparty may default on their obligations and cause losses to the Fund. To minimize the Fund's counterparty risk, the Manager will utilize multiple counterparties with high credit ratings. As of December 31, 2010, the Fund's forward contracts are held at a financial institution with an S&P rating of A1. (iv) Credit risk: Credit risk is the risk that the counterparty to a financial instrument will fail to discharge an obligation or commitment that it has entered into with the Fund. It arises principally from debt securities held and also from cash and cash equivalent balances. The Fund invests in debt instruments and derivatives which represents the main exposure to credit risk. The market value of debt instruments and derivatives includes consideration of the credit worthiness of the issuer, and accordingly, represents the maximum credit risk exposure to the Fund. As of December 31, 2010, the Fund was invested in debt securities with the following credit quality as determined by S&P: Portfolio by category rating % of net assets BB+ or higher

17 6. Financial instruments and risk management (continued): (v) Liquidity risk: Liquidity risk exists when a Fund may not be able to settle or meet its obligation on time or at a reasonable price. The Fund is exposed to monthly cash redemptions of redeemable units. The units of the Fund are issued and redeemed on demand at the then current NAV per unit at the option of the Limited Partner. Liquidity risk is managed by investing the majority of the Fund's assets in investments that are traded in an active market and can be readily disposed of. The Fund retains sufficient cash and cash equivalent positions to maintain adequate liquidity. All financial liabilities of the Fund mature in three months or less. 7. Notice of filing exemption: On behalf of the Fund, the Manager has advised the Ontario Securities Commission ("OSC") that the Fund is relying on the filing exemption in accordance with Part 2.11 of National Instrument Consequently, these financial statements will not be filed with the OSC. 15