1. General Information
Monegy High Yield Bond Fund (the “Fund”) is a closed-end investment fund established as a trust under the laws of the province of Ontario pursuant to a declaration of trust on ●, 2016. BMO Nesbitt Burns Inc., as manager of the Fund (the “Manager”), will be responsible for, or arrange for, the management and administration of the Fund and implementing the investment strategies of the Fund. The Manager will appoint Monegy, Inc. as the portfolio manager of the Fund (the “Portfolio Manager”). The address of the Fund’s registered office is 1 First Canadian Place, 3rd Floor Podium, Toronto, Ontario, M5X 1H3.
The investment objectives of the Fund are to provide holders of Units (the “Unitholders”) with a high level of total return through a combination of: (i) monthly cash distributions; and (ii) the opportunity for capital appreciation, by investing in a portfolio comprised primarily of High Yield fixed income securities issued by U.S. corporations (the
“Portfolio”) actively managed by the Portfolio Manager.
“High Yield” in respect of a security means the security is rated below investment grade (lower than BBB by S&P or lower than Baa by Moody’s, or comparably rated by other designated rating organizations), or unrated but determined by the Portfolio Manager to be of comparable quality, provided that a determination by the Portfolio Manager that a security is High Yield shall be conclusive for purposes herein and provided that if a security receives different ratings from S&P or Moody’s, the Portfolio Manager will use the lower rating.
This financial statement was authorized for issue by the Board of Directors of the Manager on ●, 2016.
2. Summary of Significant Accounting Policies
The principal accounting policies applied in the preparation of this financial statement are set out below.
2.1 Basis of Preparation
The financial statement of the Fund has been prepared in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB), relevant to preparing a statement of financial position. The financial statement of the Fund has been prepared under the historical cost convention.
The net asset value (“NAV”) is the value of the total assets of the Fund less the value of its total liabilities determined on each valuation day in accordance with Part 14 of National Instrument 81-106 – Investment Fund Continuous Disclosure for the purpose of processing unitholder transactions. Net assets are determined in accordance with IFRS. As of ●, 2016, the Fund’s NAV is equal to its net assets.
2.2 Functional and Presentation Currency
The financial statement is presented in Canadian dollars, which is the Fund’s functional and presentation currency.
2.3 Financial Instruments
The Fund recognizes financial instruments at fair value upon initial recognition, plus transaction costs in the case of financial instruments measured at amortized cost. Regular way purchases and sales of financial assets are recognized at their trade date.
Cash is held by counsel in trust. Cash is classified as loans and receivables and is measured at amortized cost subsequent to initial recognition.
The Fund’s obligation for net assets attributable to holders of redeemable units is presented at the redemption amount that is payable if the holder exercises the right to put the units back to the Fund on the Annual Redemption Date (as defined below) or the Monthly Redemption Date (as defined below).
2.4 Redeemable Units
The Fund is authorized to issue units which are redeemable at the holder’s option, referred to as Class A Units (“Class A Units”) and Class T Units (“Class T Units”). The Class A Units and the Class T Units do not have identical features. Consequently, the Class A Units and the Class T Units are classified as financial liabilities in accordance with the requirements of International Accounting Standard 32, Financial Instruments: Presentation.
3. Fair Value
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 carrying values of cash and the Fund’s obligation for net assets attributable to holders of redeemable units approximate their fair values due to their short-term nature.
4. Risks associated with financial instruments
The Fund’s overall risk management program seeks to maximize the returns derived for the level of risk to which the Fund is exposed and seeks to minimize potential adverse effects on the Fund’s financial performance.
4.1 Credit risk
The Fund is exposed to credit risk, which is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. As at ●, 2016, the credit risk is considered limited as the cash balance represents a deposit in the trust account of legal counsel to the Fund and the Manager.
4.2 Liquidity risk
Liquidity risk is the risk that the Fund will encounter difficulty in meeting obligations associated with financial liabilities. The Fund maintains sufficient cash on hand to fund anticipated redemptions.
5. Capital Risk Management
The capital of the Fund is represented by the net assets attributable to holders of Class A Units and Class T Units.
The amount of net assets attributable to holders of redeemable units can change. In order to maintain the capital structure, the Fund allows monthly redemptions.
Commencing in 2019, Class T Units (and, in 2019, Class A Units) may be surrendered annually for redemption during the period from ● until 5:00 p.m. (Toronto time) on the last Business Day in ● of each year (the “Annual Redemption Notice Period”) subject to the Fund’s right to suspend redemptions in certain circumstances. Class T Units (and, in 2019, Class A Units) properly surrendered for redemption during the Annual Redemption Notice Period will be redeemed on the second last Business Day in ● of each year (the “Annual Redemption Date”) and the Unitholder will receive payment on or before the 15th Business Day following the Annual Redemption Date.
Redeeming Unitholders will receive a redemption price per Class T Unit equal to the net asset value per Class T Unit on the Annual Redemption Date, less any costs and expenses incurred by the Fund in order to fund such redemption, including brokerage costs, if any.
Units may also be surrendered at any time for redemption on the second last Business Day of any month (other than the month of the Annual Redemption Date) (a “Monthly Redemption Date”), subject to certain conditions. In order to effect such a redemption, the Units must be surrendered by no later than 5:00 p.m. (Toronto time) on the date which is the last Business Day of the month preceding the month in which the Monthly Redemption Date falls, subject to the Fund’s right to suspend redemptions in certain circumstances. Units properly surrendered for
redemption within such period will be redeemed on the Monthly Redemption Date and the Unitholder surrendering such Units will receive payment on or before the 15th day of the month following the Monthly Redemption Date.
Unitholders surrendering a Class T Unit for redemption on a Monthly Redemption Date will receive a redemption price per Class T Unit equal to the lesser of (i) 95% of the Market Price of the Class T Unit, and (ii) 100% of the Closing Market Price of the Class T Unit on the applicable Monthly Redemption Date (the “Class T Monthly Redemption Amount”) less, in each case, any costs and expenses incurred by the Fund in order to fund such redemption, including brokerage costs and the Class T Monthly Redemption Fee, if any.
“Market Price” in respect of a security on a date means the weighted average trading price on the Toronto Stock Exchange (“TSX”) (or such other stock exchange on which such security is listed), for the 10 trading days immediately preceding such date. “Closing Market Price” means, in respect of a security on a particular date, the closing price of such security on the TSX on such date (or such other stock exchange on which such security is listed) or, if there was no trade on the relevant date, the average of the last bid and the last asking prices of the security on the TSX on such date (or such other stock exchange on which the security is listed).
Unitholders surrendering a Class A Unit for redemption on a Monthly Redemption Date will receive a redemption price per Class A Unit equal to the product of (i) the Class T Monthly Redemption Amount, and (ii) a fraction, the numerator of which is the most recently calculated NAV per Class A Unit and the denominator of which is the most recently calculated NAV per Class T Unit (the “Class A Monthly Redemption Amount”) less any costs and expenses incurred by the Fund in order to fund such redemption, including brokerage costs and the Early Exchange Fee.
Notwithstanding the foregoing, the Class T Monthly Redemption Amount and the Class A Monthly Redemption Amount shall not be greater than the NAV per Class T Unit or NAV per Class A Unit, as applicable, on the relevant Monthly Redemption Date.
Any monthly redemption of Class A Units will be subject to an early exchange fee payable by the Unitholder (the
“Early Exchange Fee”) per Class A Unit redeemed equal to: (i) 3% of NAV per Class A Unit from Closing until and including the last Business Day of the 12th month following Closing; (ii) 2% of NAV per Class A Unit from the first Business day of the 13th month following Closing until and including the last Business Day of the 24th month following Closing; and (iii) 1% of NAV per Class A Unit from the first Business Day of the 25th month following Closing until the Automatic Conversion Date.
Any monthly redemption of Class T Units will be subject to a redemption fee payable by the Unitholder (the “Class T Monthly Redemption Fee”) equal to 3.0% of the NAV of the Class T Units redeemed.
The Early Exchange Fee or the Class T Monthly Redemption Fee, as applicable, will be deducted by the Fund from the amount otherwise payable to a redeeming Unitholder and will be remitted by the Fund on behalf of the Unitholder, to the Manager. However, no redemption fee will be payable by Unitholders, nor will any fee be payable by the Fund, upon a termination of the Fund by the Manager. No redemption fee will be payable by Unitholders once the Manager has received, together with any fees in respect of market purchases, an aggregate amount equal to the fees and expenses paid by it in relation to the Offering or any future offerings.
On the redemption of Units, the Fund may in its sole discretion, allocate and/or designate as payable to redeeming Unitholders any net realized capital gains realized by the Fund to facilitate the redemption of Units. Any such allocation and designation will reduce the redemption price otherwise payable to the redeeming Unitholder.
Any unpaid distribution payable to holders of Units on record on or before the Annual Redemption Date or the Monthly Redemption Date, as applicable, in respect of Units tendered for redemption on such redemption date will also be paid on the same day as the redemption proceeds are paid.
6. Authorized Units
The Fund’s authorized units issued are as follows:
Class A Units 1 10.00 10.00
Class T Units 1 10.00 10.00
The Fund is authorized to issue an unlimited number of classes of units of the Fund.
Initially, Class A Units and Class T Units have been authorized for issuance and the Fund is authorized to issue an unlimited number of Units of each class. Each Unit entitles the holder to the same rights and obligations as any other Unitholder and no Unitholder is entitled to any privilege, priority or preference in relation to any other Unitholder, subject to Unitholders of a class being entitled to redemptions based on the Net Asset Value per Unit of the particular class, as the case may be, and the distributions being different as described below. Each Unitholder is entitled to one vote for each Unit held except for meetings at which only Unitholders of another class are entitled to vote separately as a class and is entitled to participate equally with respect to any and all distributions made by the Fund on a class of Units, including distributions of net realized capital gains or income, if any. On the redemption of Units, however, the Fund may in its sole discretion, allocate and/or designate as payable to redeeming Unitholders any net realized capital gains realized by the Fund to facilitate the redemption of Units. Any such allocation and designation will reduce the redemption price otherwise payable to the redeeming Unitholder. The monthly distributions are initially targeted to be $0.05 per Class A Unit ($0.60 per annum per Class A Unit) representing an annual yield of 6.0% on the $10.00 per Class A Unit issue price and $0.0583 per Class T Unit ($0.70 per annum per Class T Unit) representing an annual yield of 7.0% on the $10.00 per Class T Unit issue price. On termination or liquidation of the Fund, the Unitholders of record are entitled to receive on a pro rata basis with holders of Units of that class all of the assets of the Fund attributable to that class remaining after payment of all debts, liabilities and liquidation expenses of the Fund.
All issued Class A Units and Class T Units are fully paid. In accordance with the objectives outlined in Note 1 and the risk management policies in Note 4, the Fund endeavours to invest the subscriptions received in appropriate investments while maintaining sufficient liquidity to meet redemptions, such liquidity being augmented by short-term borrowings or disposal of securities held where necessary.
Class A Units will be automatically converted into Class T Units on ●, 2019 (the “Automatic Conversion Date”), with no Early Exchange Fee. Holders of Class T Units cannot convert Class T Units into Class A Units.
The initial purchases of the Fund’s units by a director of the Manager are as follows:
Units Consideration ($) Price per Unit ($)
Class A Units 1 10.00 10.00
Class T Units 1 10.00 10.00
7. Related Party Transactions
As at ●, 2016, a director of the Manager held all of the issued and outstanding units of the Fund.
The Fund will pay to the Manager an annual management fee equal to 1.0% per annum of the NAV of the Class T Units and 2.0% per annum of the NAV of the Class A Units, as applicable, accrued and calculated daily and payable monthly in arrears, plus applicable taxes.
8. Agency Agreement
The Fund has engaged BMO Nesbitt Burns Inc., CIBC World Markets Inc., National Bank Financial Inc., Scotia Capital Inc., Canaccord Genuity Corp., GMP Securities L.P., Raymond James Ltd., Desjardins Securities Inc., Global Securities Corporation, Industrial Alliance Securities Inc., Laurentian Bank Securities Inc., Mackie Research Capital Corporation, Manulife Securities Incorporated and PI Financial Corp. (collectively, the “Agents”) as agents to offer (the “Offering”) Units for sale to the public pursuant to a prospectus dated ●, 2016 and pursuant to which the Fund has agreed to create, issue and sell a minimum of 1,000,000 Units at $10.00 per Class T Unit and Class A Unit. Prospective purchasers may purchase the Units by cash payment only.
The Fund will bear the expenses incurred in connection with the Offering subject to a maximum of 0.50% of the gross proceeds of the Offering.
The Manager will pay a fee equal to $0.20 per Class T Unit and $0.45 per Class A Unit to the Agents and the Agents will be reimbursed for out-of-pocket expenses incurred by them. In addition to the Agents’ fees, the Manager will pay all expenses of the Offering exceeding 0.50% of the gross proceeds of the Offering.
CERTIFICATE OF THE FUND, THE MANAGER AND THE PROMOTER