HBanc Capital Securities Trust Semi-Annual Report February 28, 2014

Transcription

1 2014 HBanc Capital Securities Trust Semi-Annual Report February 28, 2014

2 HBanc Capital Securities Trust Message to Unitholders April 29, 2014 Dear Investor, We are pleased to provide you with the semi-annual report for HBanc Capital Securities Trust (the Fund ) for the six month period ended February 28, The Fund was established to provide investors with a high level of stable, tax-advantaged distributions through exposure to securities issued by HSBC Holdings plc ( HSBC ), a conservatively positioned and strongly capitalized global bank. Specifically, the Fund has exposure to two securities issued by HSBC: (i) 8.125% Perpetual Subordinated Capital Securities, Series 1 ( 8.125% HSBC Series 1 ); and (ii) the 8.00% Perpetual Subordinated Capital Securities, Series 2 ( 8.0% HSBC Series 2 ). The Fund s investment objectives are to (i) provide Unitholders with monthly, tax-advantaged distributions consisting primarily of returns of capital, initially representing a yield on the Unit issue price of 7.0% per annum, and (ii) provide exposure to the Capital Securities. The Fund does not have a fixed distribution, but intends to make monthly distributions based on the actual and expected distributions on the Capital Securities less the Fund s estimated expenses. The Fund generated a return of 1.8% during the period for the Class A/ Series 1 units and 2.9% for the Class U/ Series 1 units. The return was comprised of the distributions as well as some modest drop in price of the Fund s main holding (8.0% HSBC Series 2). The value of the underlying securities has remained strong as the market s perception of the credit risk of HSBC in particular and the financial system in general has gone down. As noted in the past, the two securities held by the Fund trade at premiums to the amount they can be called at. It is expected that these premiums will amortize as the call date approaches. In the case of 8.125% HSBC Series 1, we are past the first call date and HSBC can call the Series 1 at any time. As a result, the Fund s holdings of this security have been lowered. HSBC is one of the largest banking and financial services organizations in the world, with a market capitalization of U.S. $191 billion at April 28, HSBC s long-term senior debt is rated Aa3 by Moody s, A+ by Standard and Poor s and AA- by Fitch. In the year ended December 31, 2013 HSBC had an underlying profit of $22.6 billion, an increase of 9% from the previous year. Please check our website for quarterly investment updates and other timely information. Yours truly, W. Neil Murdoch Chief Executive Officer Aston Hill Capital Markets Inc. 1

3 Management Report of Fund Performance This semi-annual management report of fund performance for HBanc Capital Securities Trust (the Fund ) contains financial highlights but does not contain the complete semi-annual financial statements of the Fund. The semi-annual financial statements and accompanying notes are attached to this report. You can obtain a copy of the semi-annual financial statements at no cost by writing to Aston Hill Capital Markets Inc. (formerly Connor, Clark & Lunn Capital Markets Inc.) (the Manager ) to the following address: Aston Hill Capital Markets Inc., 77 King Street West, Suite 2110, PO Box 92, Toronto, Ontario, M5K 1G8 or calling or visiting the Manager s website at or by visiting Security holders may also contact us using one of these methods to request a copy of the Fund s proxy voting policies and procedures, proxy voting disclosure record or quarterly portfolio disclosure. Note that any reference to Net Assets or Net Assets per Unit or GAAP Net Assets means that the value was determined in accordance with the Canadian Generally Accepted Accounting Principles GAAP for financial statements purposes. Also, any reference to Net Asset Value or Net Asset Value per Unit or Transactional NAV means that the value was determined for valuation and transactional purposes in accordance with the Canadian Securities Administrators. An explanation of the difference between both values can be found in Note 3 to the financial statements. Investment Objectives and Strategies The Fund is a non-redeemable investment fund established under the laws of the Province of Ontario and governed by the Fund s Trust Agreement (the Trust Agreement ) dated September 28, 2010 between the Manager and RBC Investor & Treasury Services (formerly RBC Dexia Investor Services Trust ) (the Trustee ). The Fund is offered in two classes of Units, each of which was offered in two series: Class A Units, Series 1 and 2 at a price of $25.00 per Class A Unit and Class U Units, Series 1 and 2 at a price of U.S. $25.00 per Class U Unit. The only difference between the two series of each class of Units is the fees paid with respect to such series. The Class U Units are designed for investors wishing to make their investment in U.S. dollars. The Fund s investment objectives are to (i) provide Unitholders with monthly, tax-advantaged distributions consisting primarily of returns of capital, initially representing a yield on the Unit issue price of 7.0% per annum and (ii) provide exposure to the capital securities. In order to achieve the Fund s investment objectives, the Fund obtained exposure, in a tax-efficient manner, to the performance of a portfolio (the Portfolio ) held by CS Trust (the CS Trust or the Trust ). The Fund provides investors with a high level of stable, tax-advantaged distributions through exposure to CS Trust s Portfolio of securities issued by HSBC Holdings plc, a conservatively positioned and strongly capitalized global bank. Specifically, the Trust has exposure to (i) the 8.125% Perpetual Subordinated Capital Securities, Series 1 issued by HSBC and (ii) the 8.00% Perpetual Subordinated Capital Securities, Series 2, also issued by HSBC. The Fund does not invest directly in CS Trust; the Fund used the net proceeds of the initial public offering to pre-pay its purchase obligations under a forward purchase and sale agreement (the Forward Agreement ) with the Bank of Montreal (the Counterparty or BMO ). Under the Forward Agreement, the Fund will receive, on or before December 30, 2015, a specified portfolio consisting of securities of Canadian public issuers that are Canadian securities for the purposes of the Tax Act ( Canadian Securities ) in an amount equal to the net asset value of CS Trust. Partial settlements under the Forward Agreement are intended to ensure that Unitholders have economic exposure to the distributions effected by CS Trust. A fee of 0.35% per annum, calculated with reference to the net asset value of CS Trust, is payable to BMO under the Forward Agreement. The Fund does not have a fixed distribution but intends to make monthly distributions based on the actual and expected distributions on the capital securities less the Fund s estimated expenses. 2

4 Risk Changes in the risk exposure of the Fund occurred in the following areas: Use of leverage The Fund s exposure to the securities in the Portfolio through the Forward Agreement may be increased to 15.0% of the levered notional amount (being the Net Asset Value of CS Trust) for the purposes of adding leverage to the Portfolio and such other short-term funding purposes as may be determined by the Investment Manager from time to time and in accordance with the Investment Strategy. If the borrowed amount exceeds 15.0% of the levered notional amount, the leverage amount will be reduced to ensure the leverage ratio is not greater than 15.0%. The use of leverage has the potential to enhance or reduce returns. During the six month period ended February 28, 2014, the Fund applied leverage in the range from 14.23% to 15.79% or U.S. $16,053,000 to U.S. $17,153,000 for Class A (the Canadian equivalent was 17,536,344 to $19,083,485) and 14.71% to 15.27% or U.S. $3,288,000 to U.S. $3,428,000 for Class U (the Canadian equivalent was $3,484,778 to $3,724,801). (13.16% to 14.19% or U.S. $21,383,000 to U.S. $21,528,000 for Class A, 14.31% to 15.16% for Class U and the borrowed amount remained the same at U.S. $3,791,000 for Class U during the six month period ended February 28, 2013). The leverage factor as of February 28, 2014 was 14.86% for Class A and the borrowed balance was U.S. $16,053,000 (the Canadian equivalent was $17,769,931). The leverage factor as of February 28, 2014 was 14.71% for Class U and the borrowed balance was U.S. $3,288,000 (the Canadian equivalent was $3,639,664). (13.89% for Class A and 14.67% for Class U as of February 28, 2013). For full disclosure of risks associated with an investment in the Fund s units, please refer to the Prospectus dated September 28, 2010 and to the Fund s most recent Annual Information Form. Both are available at Recent Developments Future accounting changes For the Fund s fiscal year ends following September 1, 2014, the Fund will prepare its financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and provide comparative statements on an IFRS basis (if applicable). The first IFRS financial statements for this Fund will be its interim financial statements for the six-month period ending February 28, The Manager has reviewed and developed its IFRS changeover plan that included performing an impact assessment and identifying differences between existing Canadian GAAP and IFRS. Management has monitored developments in IFRS and has assessed the likely impacts on accounting policies, implementation decisions, internal controls, information systems and training. Based on management s assessment to date, the more significant changes impacting the financial statements may be how the Fund measures fair values of its investments and the classification of net assets representing unitholders equity. The Manager does not consider this to be comprehensive list of the accounting changes when the Fund adopts IFRS but in the view of the Manager represent the key differences. The differences described in the sections that follow are based on Canadian GAAP as at December 31, 2013 and IFRS that are in effect as of January 1, Under Canadian GAAP, the Fund measures the fair values of its investments in accordance with the CPA Canada Handbook Section 3855, Financial Instruments Recognition and Measurement. This section requires the use of bid prices for the long positions and asks prices for the short positions to the extent such prices are available. In May 2011, the IASB issued IFRS 13 Fair Value Measurement, which defines fair value, sets out a single IFRS framework for measuring fair value and requires disclosures about fair value measurements. If an asset or a liability measured at fair value has a bid price and an ask price, it requires valuation to be based on a price within the bid-ask spread that is most representative of fair value. The standard allows the use of mid-market pricing or other pricing conventions that are used by market participants as a practical means for fair value measurements within a bid-ask spread. The impact of this may result in the elimination of the differences between the transactional NAV and net assets at the financial statements reporting dates. The Fund s outstanding redeemable unit entitlement includes a contractual obligation to deliver cash or another financial asset on the Fund s fixed termination date, and therefore the ongoing redemption feature is not the units only contractual 3

5 obligation. The impact of the requirements of International Auditing Standards 32 - Financial Instruments Presentation is on classification only and does not impact net assets per unit. Management will continue to monitor the Fund's IFRS changeover plan to address the key elements of the IFRS conversion. Federal Budget Announcement On March 21, 2013, the Minister of Finance announced proposals in a federal budget that would treat the gain realized by a mutual fund under such forward agreements as ordinary income rather than a capital gain, if the forward agreement was entered into or extended on or after March 21, On July 11, 2013, the Department of Finance announced proposed technical changes to the transitional rules related to character conversion transactions announced in the federal budget. One of the announced changes includes the extension of the transition period for short-term agreements. The extended grandfathered period allows investment funds, whose forward agreements were entered into prior to March 21, 2013 and the terms of which provide for settlement or are a part of series of agreements that provide for settlement prior to 2015, to extend their forward agreements until end of For longer-dated forward agreements, the grandfathering transitional period will not extend beyond March 21, Grandfathering is subject to certain growth rules with which the Fund intend to comply. The federal budget, part of Bill C-4, was enacted into law on December 12, The Manager is currently assessing the impact and implications of these changes to the Fund. Results of Operations Caution regarding forward-looking statements The analysis in the document includes forward-looking statements. The use of any of the words anticipate, may, will, expect, estimate, should, believe and similar expressions are intended to identify forward-looking statements. Such statements reflect the opinion of the Investment Manager regarding factors that might be reasonably expected to affect the performance and the distributions on units of the Fund and are based on information available at the time of writing. The Investment Manager believes that the expectations reflected in these forward-looking statements and in the analysis are reasonable but no assurance can be given that these expectations or the analysis will prove to be correct and accordingly, they should not be unduly relied on. These statements speak only as of the date of this report. Actual events and outcomes may differ materially from those described in these forward-looking statements or analysis. Manager s Commentary (April 2014) 2013 Results HSBC reported business as usual results for 2013 that nevertheless disappointed the market, missing profit expectations by about $2 billion and sending the Group s share price down 4.5% on announcement day. Reported profit before tax was up 9% year over year, to US$22.6 billion. Underlying profit before tax rose 41%, to $21.6 billion, benefitting from lower bad debt charges, as well as a respite from 2012 s spate of fines, penalties and customer redress charges. The Group s core tier 1 capital ratio climbed from 12.3% to 13.6% over the year, and the common equity tier 1 ratio went from 9.5% to 10.9%. According to Chief Executive Stuart Gulliver s statement: Our performance in 2013 reflects the strategic measures we have taken over the past three years. Today the Group is leaner and simpler than in 2011 with strong potential for growth. Our strong capital generation continues to support our progressive dividend policy and reinforces HSBC s status as one of the best capitalized banks in the world. Profit came in higher in three of the Group s four global businesses and in every region except Latin America. Global Private Banking saw profit drop $700 million while working through legacy issues and the repositioning of its business model and client base. In Latin America, slower economic growth and inflation were the culprits as the Group continued to hone its focus on Brazil, Mexico and Argentina. Overall, the Group benefitted from lower loan impairment costs; the declining impact of legacy issues such as UK consumer redress and running off the US Consumer Mortgages and Lending portfolio; and improved collaboration among 4

6 global business units. HSBC took advantage of its leading position in Hong Kong to become the number one international bank for renminbi business (AsiaMoney survey, 2013), and to take first place in the ranking for dim sum bond issuance as well as first place in the Hong Kong M&A tables. Strategy 2014 begins the second phase of HSBC s strategy implementation. The strategy put forward in May 2011 aimed to capitalize on increasing international trade and capital flows, and wealth creation in Asia, the Middle East and Latin America. Its implementation has seen HSBC considerably simplified, with the closure of 63 non-core businesses resulting in a 9% reduction in risk-weighted assets. The effort at simplification included removing layers of management. The number of full time employees was reduced from 295 thousand to 254 thousand. Annual sustainable cost savings have reached almost $5 billion due to these changes. Two of the Group s key targets were not met. The cost efficiency ratio, targeted at 48% to 52% in 2011 and revised to the mid-50 s last year, remains close to 60%. Return on equity was 9.2 percent in 2013, well below the 12% to 15% target. Both measures were hit by one-time costs including $3.5 billion to compensate customers for mis-sold product and a $1.9 billion fine for breaching money-laundering rules. The requirements for increased equity capital under Basel III and a substantial increase in the UK s banks levy will continue to impact both measures. The phase of implementation emphasizes three priorities. The first is to grow the business and dividends by increasing the return on risk-weighted assets. Second, to continue to implement the Global Standards program by investing in risk management and compliance capabilities globally, and to increase vigilance against potential financial crime. Third, to further simplify and streamline the overall business, delivering sustainable cost savings of a further $2 to $3 billion. Progress Against Strategic Plan The following chart shows progress against HSBC s key strategic scorecard targets: Target Cost efficiency ratio mid 50 s 55.2% 57.5% 62.8% 59.6% ROE 12% to 15% 9.5% 10.9% 8.4% 9.2% Common Equity tier 1 Ratio 9.5 to 10.5 n/a n/a 9.5% 10.9% Core tier 1 ratio % 10.1% 12.3% 13.6% Dividend payout ratio 40% to 60% 46.6% 42.4% 55.4% 57.1% Advances (loans) to deposits <90% 78.1% 75.0% 74.4% 72.9% Sustainable cost savings total US$2.5 to 3.5bn n/a 2.0bn 3.4bn 4.9bn Cost Efficiency Ratio - Total operating expenses divided by net operating income before loan impairment charges and other credit risk provisions. Cost efficiency lagged in 2012 due in part to high compliance and regulatory expenses. The 48% to 52% target is challenging but HSBC has elected to keep it in place until ROE - Return on average ordinary shareholders equity. Common Equity Tier 1 Ratio (CET1) - This ratio is different than the familiar core tier 1 equity ratio, adjusting the concept of core capital to fit the more stringent Basel III regulatory environment. CET1 represents the most subordinated claim in liquidation of the bank, and the bank must do nothing to create an expectation that qualifying instruments will be bought back, redeemed or cancelled. Dividend Payout Ratio - The percentage of earning paid out to shareholders as dividends. Advances to Deposits - The ratio of customer advances (loans) to customer accounts (deposits). 5

7 Capital Strength The following chart shows HSBC s progress on core tier 1 capital since Credit Ratings This chart shows the Moody s and S&P long term debt rating on a number of the top global banks and is ranked by the March 31 st price of their 5-year credit default swap (CDS) spreads. The CDS spread gives an indication of how the market perceives the riskiness of each banks debt, with a lower number showing less risk. HSBC holds the highest Moody s rating (Aa3) in this group, shares the top S&P rating (A+), and also has a CDS spread near the lowest of the group. Credit Rating Bank 5-year CDS Spread Moody's S&P JPMorgan Chase & Co 56.4 A3 A UBS AG 61.5 A2 A Bank of America Corp 64.7 Baa2 A- HSBC Bank PLC 68.8 Aa3 A+ Credit Suisse Group AG 69.5 A1 A Lloyds Bank PLC 75.4 A2 A BNP Paribas SA 76.5 A1 A+ Deutsche Bank AG 77.3 A2 A Citigroup Inc 77.7 Baa2 A- Morgan Stanley 85.7 Baa2 A- Barclays Bank PLC 86.5 A2 A Credit Agricole SA 86.5 A2 A Goldman Sachs Group Inc 94.1 Baa1 A- Societe Generale SA 96.5 A2 A Banco Santander SA Baa1 BBB HSBC s Series 1 and Series 2 capital securities are rated BBB+ by S&P. 6

8 HSBC 8.125% Series 1 Capital Securities HSBC s Series 1 capital securities, originally callable for $25 on April 14, 2013, remain outstanding. Had the securities been called as scheduled, the market premium over the call price, which stood at 37 cents per capital security on December 31, 2012 would have amortized to zero. At a current price of $25.96, the premium stands at 96 cents and the Fund continues to benefit from this investment s high current yield. HSBC commented at the time that the rules governing capital securities were in disarray. Although Basel III recommendations were out, regulations and directives required to implement them, which are issued by individual countries, were not fully in place. HSBC has not expressed any expectation that it will call the securities, but may do so at any time. Capital transactions On October 13, 2010, the Fund completed an initial public offering pursuant to the Prospectus dated September 28, The following table shows the details of the offering: Class A () Class U () Series 1 Series 2 Total Series 1 Series 2 Total Units issued 5,797, ,500 5,902,893 1,042,724 10,565 1,053,289 Offering price per unit Gross Proceeds 144,934,825 2,637, ,572,325 26,068, ,125 26,332,225 Agents fee and issue expenses (8,192,469) (69,960) (8,262,429) (1,473,200) (6,951) (1,480,151) Net Proceeds 136,742,356 2,567, ,309,896 24,594, ,174 24,852,074 Opening NAV per unit On April 27, 2012, the Fund completed a private placement and issued an additional 220,200 Class U/ Series 1 Units for gross proceeds of $5,136,723. The issuance expense associated with the private placement was $141,829. The following tables show the details of the capital transactions for the Fund during the six month periods ended February 28, 2014 and February 28, 2014: Class A Class U Series 1 Series 2 Series 1 Series 2 Units issued Total value Units converted to Class A Series 1 224,596 (5,200) (208,994) Total value 5,395,451 (122,985) (5,272,466) Units redeemed/ repurchased (4,000) Total value (91,481) February 28, 2013: Class A Class U Series 1 Series 2 Series 1 Series 2 Units issued Total value Units converted to Class A Series 1 28,149 (6,600) (21,700) Total value 696,270 (161,031) (535,239) Units redeemed/ repurchased (6,000) Total value (131,009) Net Assets The net assets per unit is calculated as the value of the prepaid amount to the Counterparty under the Forward Agreement plus any other investments held by the Fund, plus the value of any gain or loss on the Forward Agreement, less any net liabilities of the Fund, divided by the number of units outstanding. 7

9 Since the Fund can at any time terminate the Forward Agreement with the Counterparty in exchange for the value of CS Trust, the value of the Forward Agreement to the Fund is equal to the transactional value of CS Trust less the value of the prepaid amount to the Counterparty under the Forward Agreement. On February 28, 2014, the value of the prepaid amount to the Counterparty under the Forward Agreement balance was $114,910,659 and the unrealized gain on the Forward Agreement balance was $30,349,420. Other liabilities net of other assets in the Fund totalled $22,211,003, leaving net assets of $123,049,076. This amount is assigned to the Class A, Series 1 and 2 and Class U, Series 1 and 2 Unitholders using an allocation percentage that takes into consideration any class level specific expenses and foreign exchange hedging unrealized gains and losses. On February 28, 2014, the GAAP Net assets per unit were $22.43 for Class A/ Series 1, $23.01 for Class A/ Series 2, $25.07 or U.S. $22.65 for Class U/ Series 1 and $26.32 or U.S. $23.77 for Class U/ Series 2. (On August 31, 2013, the value of the prepaid amount to the Counterparty under the Forward Agreement balance was $120,602,328 and the unrealized gain on the Forward Agreement balance was $26,810,932. Liabilities net of other assets in the Fund totalled $22,555,081, leaving net assets of $124,858,179. This amount is assigned to the Class A, Series 1 and 2 and Class U, Series 1 and 2 Unitholders using an allocation percentage that takes into consideration any class level specific expenses and foreign exchange hedging unrealized gains and losses. On August 31, 2013, the GAAP Net assets per unit were $22.91 for Class A/ Series 1, $23.58 for Class A/ Series 2, $24.13 or U.S. $22.87 for Class U/ Series 1 and $24.90 or U.S. $23.60 for Class U/ Series 2.) Distributions The Fund made regular monthly distributions of $ per Class A, Series 1 and 2 Unit and U.S. $ per Class U, Series 1 and 2 Unit thereafter, representing a return of 7.0% per annum on the Class A, Series 1 and 2 and Class U, Series 1 and 2 Unit issue prices. The Fund has made all its scheduled distributions during the six month period ended February 28, 2014 paying $ per Class A, Series 1 and 2 Unit and U.S. $ per Class U, Series 1 and 2 Unit ($ per Class A, Series 1 and 2 Unit and U.S. $ per Class U, Series 1 and 2 Unit during the six month period ended February 28, 2013). Recommendations or Reports by the Independent Review Committee The Independent Review Committee of the Fund tabled no special reports and made no extraordinary material recommendations to management of the Fund during the six month period ended February 28, Related Party Transactions Management Fees In consideration for management services and investment advice, the Manager receives a management fee from the Fund and CS Trust equal in the aggregate to 0.40% per annum of the applicable Net Asset Value, (0.15% from the Fund and 0.25% from the Trust) calculated daily and payable monthly in arrears, plus applicable taxes. The management fees charged to the Fund and CS Trust on a combined basis during the six month period ended February 28, 2014 were $ 243,654 plus applicable taxes ($306,928 plus applicable taxes during the six month period ended February 28, 2013). Service Fees The Fund pays to the Manager a service fee, calculated quarterly and paid as soon as practicable after the end of each calendar quarter, solely with respect to the Series 2 of the Class A and Class U Units, equal to 0.30% per annum of the Net Asset Value attributable to the Series 2 of the Class A and Class U Units. The service fee is applied by the Manager to pay a service fee in an equivalent aggregate amount to brokers based on the number of Series 2 of the Class A and Class U Units held by clients of such brokers at the end of the relevant quarter. No service fee is payable in respect of the Series 1 of the Class A and Class U Units. The service fees charged to the Fund during the six month period ended February 28, 2014 were $1,717 ($3,451 during the six month period ended February 28, 2013). 8

10 Past Performance The following bar charts show the Fund s annual performance of the Class A/ Series 1, Class A/ Series 2, Class U/ Series 1 and Class U/ Series 2 Units as well as the semi-annual performance for the six month period ended February 28, 2014, assuming all the distributions made by the Fund were reinvested. The performance information does not take into account sales, redemptions, distributions or other optional charges that would have reduced returns or performance. The bar charts show, in percentage terms, how much an investment made on the first day of the period would have grown or decreased by the last day of the period. Past performance is not necessarily indicative of future performance. 9

11 Financial Highlights The following tables show selected key financial information about the Fund and are intended to aid in understanding the Fund s financial performance since inception. This information is derived from the Fund s audited semi-annual financial statements: Class A/ Series 1: The Fund s Net Assets per Class A/ Series 1 Unit: February 28, August 31, August 31, August 31, 2014 (2) (1) Net Assets, beginning of period Unit issue expense (3) (1.41) Increase (decrease) from operations: Total revenues Total expenses (0.10) (0.21) (0.20) (0.18) Realized gains (losses) for the period Unrealized gains (losses) for the period Total increase (decrease) from operations (4) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital (0.87) (1.75) (1.75) (1.54) Total Distributions (5) (0.87) (1.75) (1.75) (1.54) Net Assets, end of period (6) (1) (2) (3) (4) (5) (6) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, Issue expenses of $8,192,469 incurred in connection with the Class A/ Series 1 units issuance. The full amount of issue expenses was deducted from the unit capital for accounting purposes and is amortized over a period of five years for tax purposes. Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase / decrease from operations is based on the weighted average number of 4,648,646 Class A/ Series 1 units outstanding as of February 28, 2014 (August 31, ,254,807 units). The percentages used to allocate distributions among income, dividends, capital gain and return on capital are based on estimates. This is not a reconciliation between the opening and the closing net assets per unit. Ratios and Supplemental Data (Class A/ Series 1 Units): February 28, August 31, August 31, August 31, 2014 (2) (1) Net asset value (000's) 106, , , ,879 Number of units outstanding 4,749,017 4,524,421 5,616,599 5,831,734 Base Management expense ratio (3) (4) 0.71% 0.72% 0.68% 0.71% Issue expenses ratio (3) (4) 0.00% 0.00% 0.00% 6.10% Interest expense ratio (3) (4) 0.16% 0.17% 0.20% 0.15% Management expense ratio (annualized) (4) 0.87% 0.89% 0.88% 6.96% Management expense ratio before waivers or absorptions (annualized) (4) 0.87% 0.89% 0.88% 6.96% Portfolio turnover rate (5) 0.00% 0.00% 0.00% 0.00% Trading expense ratio (6) 0.00% 0.00% 0.00% 0.00% Net asset value per unit (7) Closing market price (TSX) (1) (2) (3) (4) (5) (6) (7) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, A separate base management expense ratio has been presented to include the normal operating expenses and exclude the Issue expense ratio: representing all agents fees and unit issue expenses and Interest expense ratio: representing cost of leverage. Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Unit issue expenses, representing all Agents fees and other offering expenses, which are one-time expenses, have not been annualized. The Fund s turnover rate indicates how actively the Fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund s buying and selling all of the securities (including fixed income) in its portfolio once in the course of the year. There is not necessarily a relationship between turnover rate and the performance of the Fund. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The net asset value (Transactional NAV) per unit is based on the last traded price for the day of the underlying portfolio. 10

12 Class A/ Series 2: The Fund s Net Assets per Class A/ Series 2 Unit: February 28, August 31, August 31, August 31, 2014 (2) (1) Net Assets, beginning of period Unit issue expense (3) (0.66) Increase (decrease) from operations: Total revenues Total expenses (0.15) (0.31) (0.29) (0.18) Realized gains (losses) for the period Unrealized gains (losses) for the period Total increase (decrease) from operations (4) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital (0.87) (1.75) (1.75) (1.54) Total Distributions (5) (0.87) (1.75) (1.75) (1.54) Net Assets, end of period (6) (1) (2) (3) (4) (5) (6) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, Issue expenses of $69,960 incurred in connection with the Class A/ Series 2 units issuance. The full amount of issue expenses was deducted from the unit capital for accounting purposes and is amortized over a period of five years for tax purposes. Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase / decrease from operations is based on the weighted average number of 37,834 Class A/ Series 2 units outstanding as of February 28, 2014 (August 31, ,094 units). The percentages used to allocate distributions among income, dividends, capital gain and return on capital are based on estimates. This is not a reconciliation between the opening and the closing net assets per unit. Ratios and Supplemental Data (Class A/ Series 2 Units): February 28, August 31, August 31, August 31, 2014 (2) (1) Net asset value (000's) ,703 2,430 Number of units outstanding 35,200 40,400 70, ,300 Base Management expense ratio (3) (4) 1.11% 1.11% 1.06% 1.11% Issue expenses ratio (3) (4) 0.00% 0.00% 0.00% 2.78% Interest expense ratio (3) (4) 0.16% 0.16% 0.20% 0.15% Management expense ratio (annualized) (4) 1.27% 1.27% 1.26% 4.04% Management expense ratio before waivers or absorptions (annualized) (4) 1.27% 1.27% 1.26% 4.04% Portfolio turnover rate (5) 0.00% 0.00% 0.00% 0.00% Trading expense ratio (6) 0.00% 0.00% 0.00% 0.00% Net asset value per unit (7) (1) (2) (3) (4) (5) (6) (7) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, A separate base management expense ratio has been presented to include the normal operating expenses and exclude the Issue expense ratio: representing all agents fees and unit issue expenses and Interest expense ratio: representing cost of leverage. Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Unit issue expenses, representing all Agents fees and other offering expenses, which are one-time expenses, have not been annualized. The Fund s turnover rate indicates how actively the Fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund s buying and selling all of the securities (including fixed income) in its portfolio once in the course of the year. There is not necessarily a relationship between turnover rate and the performance of the Fund. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The net asset value (Transactional NAV) per unit is based on the last traded price for the day of the underlying portfolio. 11

13 Class U/ Series 1: The Fund s Net Assets per Class U/ Series 1 Unit: February 28, August 31, August 31, August 31, 2014 (2) (1) Net Assets, beginning of period Unit issue expense (3) (0.16) (1.44) Increase (decrease) from operations: Total revenues 0.01 Total expenses (0.13) (0.26) (0.22) (0.18) Realized gains (losses) for the period (0.05) Unrealized gains (losses) for the period Total increase (decrease) from operations (4) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital (0.87) (1.75) (1.75) (1.54) Total Distributions (5) (0.87) (1.75) (1.75) (1.54) Net Assets, end of period (6) (1) (2) (3) (4) (5) (6) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, Issue expenses of $1,473,200 incurred in connection with the Class U/ Series 1 units issuance. Additional issue expenses of $141,829 incurred in connection with the Class U/ Series 1 private placement issuance. The full amount of issue expenses was deducted from the unit capital for accounting purposes and is amortized over a period of five years for tax purposes. Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase / decrease from operations is based on the weighted average number of 720,647 Class U/ Series 1 units outstanding as of February 28, 2014 (August 31, ,076 units). The percentages used to allocate distributions among income, dividends, capital gain and return on capital are based on estimates. This is not a reconciliation between the opening and the closing net assets per unit. Ratios and Supplemental Data (Class U/ Series 1 Units): February 28, August 31, August 31, August 31, 2014 (2) (1) Net asset value (000's) 14,161 19,172 21,848 23,192 Number of units outstanding 625, , ,619 1,009,424 Base Management expense ratio (3) (4) 0.93% 0.94% 0.76% 0.69% Issue expenses ratio (3) (4) 0.00% 0.00% 0.69% 6.31% Interest expense ratio (3) (4) 0.20% 0.18% 0.21% 0.17% Management expense ratio (annualized) (4) 1.13% 1.12% 1.66% 7.17% Management expense ratio before waivers or absorptions (annualized) (4) 1.13% 1.12% 1.66% 7.17% Portfolio turnover rate (5) 0.00% 0.00% 0.00% 0.00% Trading expense ratio (6) 0.00% 0.00% 0.00% 0.00% Net asset value per unit (7) (1) (2) (3) (4) (5) (6) (7) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, A separate base management expense ratio has been presented to include the normal operating expenses and exclude the Issue expense ratio: representing all agents fees and unit issue expenses and Interest expense ratio: representing cost of leverage. Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Unit issue expenses, representing all Agents fees and other offering expenses, which are one-time expenses, have not been annualized. The Fund s turnover rate indicates how actively the Fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund s buying and selling all of the securities (including fixed income) in its portfolio once in the course of the year. There is not necessarily a relationship between turnover rate and the performance of the Fund. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The net asset value (Transactional NAV) per unit is based on the last traded price for the day of the underlying portfolio. 12

14 Class U/ Series 2: The Fund s Net Assets per Class U/ Series 2 Unit: February 28, August 31, August 31, August 31, 2014 (2) (1) Net Assets, beginning of period Unit issue expense (3) (0.66) Increase (decrease) from operations: Total revenues 0.02 Total expenses (0.17) (0.47) (0.34) (0.18) Realized gains (losses) for the period (0.06) Unrealized gains (losses) for the period Total increase (decrease) from operations (4) Distributions: From income (excluding dividends) From dividends From capital gains Return of capital (0.87) (1.75) (1.75) (1.54) Total Distributions (5) (0.87) (1.75) (1.75) (1.54) Net Assets, end of period (6) (1) (2) (3) (4) (5) (6) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, Issue expenses of $6,951 incurred in connection with the Class U/ Series 2 units issuance. The full amount of issue expenses was deducted from the unit capital for accounting purposes and is amortized over a period of five years for tax purposes. Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase / decrease from operations is based on the weighted average number of 1,400 Class U/ Series 2 units outstanding as of February 28, 2014 (August 31, ,951 units). The percentages used to allocate distributions among income, dividends, capital gain and return on capital are based on estimates. This is not a reconciliation between the opening and the closing net assets per unit. Ratios and Supplemental Data (Class U/ Series 2 Units): February 28, August 31, August 31, August 31, 2014 (2) (1) Net asset value (000's) Number of units outstanding 1,400 1,400 5,401 10,565 Base Management expense ratio (3) (4) 1.23% 1.76% 1.28% 1.10% Issue expenses ratio (3) (4) 0.00% 0.00% 0.00% 2.79% Interest expense ratio (3) (4) 0.20% 0.18% 0.21% 0.17% Management expense ratio (annualized) (4) 1.43% 1.94% 1.49% 4.06% Management expense ratio before waivers or absorptions (annualized) (4) 1.43% 1.94% 1.49% 4.06% Portfolio turnover rate (5) 0.00% 0.00% 0.00% 0.00% Trading expense ratio (6) 0.00% 0.00% 0.00% 0.00% Net asset value per unit (7) (1) (2) (3) (4) (5) (6) (7) Results for the period from October 13, 2010 (commencement of operations) to August 31, Results for the six month period ended February 28, A separate base management expense ratio has been presented to include the normal operating expenses and exclude the Issue expense ratio: representing all agents fees and unit issue expenses and Interest expense ratio: representing cost of leverage. Management expense ratio is based on total expenses for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. Unit issue expenses, representing all Agents fees and other offering expenses, which are one-time expenses, have not been annualized. The Fund s turnover rate indicates how actively the Fund s portfolio advisor manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the Fund s buying and selling all of the securities (including fixed income) in its portfolio once in the course of the year. There is not necessarily a relationship between turnover rate and the performance of the Fund. The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. The net asset value (Transactional NAV) per unit is based on the last traded price for the day of the underlying portfolio. 13

15 Summary of Investment Portfolio as of February 28, 2014 The summary of investment portfolio may change due to ongoing portfolio transactions of the Fund. A quarterly update is available at Investment portfolio of the Fund Fair % value of $ NAV Portfolio by Category Derivative Contracts 145,260, % Cash 100, % Bank indebtedness (21,409,595) -17.4% Other liabilities net of other assets (902,361) -0.7% Top 25 Holdings Prepaid forward agreement 145,260, % Cash and cash equivalents 100, % Net asset value 123,049,076 The Fund obtained exposure to the performance of the portfolio held by CS Trust through the Forward Agreement (see Investment Objectives and Strategies). The following is the summary of investment portfolio for CS Trust as of February 28, 2014: Investment portfolio of CS Trust Fair %of value NAV of $ CS Trust Portfolio by Category Financials 152,911, % Foreign currency forward contracts (10,533,314) -7.3% Cash 199, % Other assets net of other liabilities 2,682, % Top 25 Holdings HSBC Holdings PLC, Series 2, 8.000%, December 15, 2015 (1) 145,679, % HSBC Holdings PLC, Series 1, 8.125% (2) 7,232, % Cash 199, % Bought 137,525,694, sold 131,944,444 (10,533,314) -7.3% Net asset value 145,260,079 (1) (2) First call date. This security is past its call date and is callable at any time. 14

16 HBanc Capital Securities Trust Semi-Annual Report Financial Statements (Unaudited) February 28, 2014 Notice to Reader: These interim financial statements and related notes for the six month period ended February 28, 2014 have been prepared by Management of Aston Hill Capital Markets Inc. The auditors of the Fund have not audited or reviewed these interim financial statements. 15

17 HBanc Capital Securities Trust Statements of Net Assets (Unaudited) As at February 28, 2014 and August 31, $ $ Assets Cash 100,953 73,596 Prepaid forward agreement (note 8) 145,260, ,413,260 Subscription receivable due to units conversion 5,325,064 - Prepaid expenses and other assets - 8, ,686, ,495,234 Liabilities Bank indebtedness (note 5) 21,409,595 21,710,831 Interest payable 15,382 17,849 Distributions payable 798, ,678 Subscription payable due to units conversion 5,325,064 - Accounts payable and accrued liabilities 42,954 57,341 Forward fees payable 38,747 43,884 Management fees payable 6,616 12,472 27,637,020 22,637,055 Net assets and unitholders' equity 123,049, ,858,179 Net Assets Class A / Series 1 106,526, ,646,272 Class A / Series 2 810, ,763 Class U / Series 1 15,675,706 20,224,284 Class U / Series 2 36,843 34,860 Class U / Series 1 () 14,161,119 19,171,812 Class U / Series 2 () 33,284 33,046 Units issued and outstanding (note 6) Class A / Series 1 4,749,017 4,524,421 Class A / Series 2 35,200 40,400 Class U / Series 1 625, ,156 Class U / Series 2 1,400 1,400 Net assets per unit Class A / Series Class A / Series Class U / Series Class U / Series Class U / Series 1 () Class U / Series 2 () Unitholders' equity (note 6) Unit Capital 93,847,631 98,695,108 Retained Earnings 29,201,445 26,163,071 Total Unitholders' equity 123,049, ,858,179 Approved on behalf of the Manager, Aston Hill Capital Markets Inc. Director Director (See accompanying notes to financial statements) 16

18 HBanc Capital Securities Trust Statements of Operations (Unaudited) For the six month periods ended February 28, 2014 and $ $ Expenses Forward fees (note 8) 253, ,122 Interest expense (note 5) 101, ,245 Management fees (note 10) 91, ,507 Custodial and other unitholder fees 28,551 26,639 Administration fees 15,777 12,652 Harmonized sales tax 15,236 42,816 Audit fees 9,919 10,624 Transfer agent fees 9,194 8,618 TSX fees 8,944 11,792 Filing fees 6,465 6,465 Printing and mailing fees 5,775 5,635 Other fees 3,706 3,063 Legal fees 2,479 2,479 Service fees (note 11) 1,717 3,451 IRC fees 1,536 4, , ,003 Investment gain (loss) (556,669) (701,003) Unrealized gain (loss) on investments Change in unrealized gain (loss) on foreign exchange (1,066,635) (1,043,092) Change in unrealized gain (loss) on forward agreement (note 8) 3,538,488 8,173,511 2,471,853 7,130,419 Realized gain (loss) on investments Net realized gain (loss) on forward agreement (note 8) 1,138, ,486 Net realized gain (loss) on foreign exchange 2,587 (22,195) 1,140, ,291 Net gain (loss) on investments 3,612,819 7,995,710 Increase (decrease) in net assets from operations 3,056,150 7,294,707 Increase (decrease) in net assets from operations for Class A / Series 1 1,566,845 5,581,019 Class A / Series 2 12,964 65,213 Class U / Series 1 1,473,045 1,639,708 Class U / Series 2 3,296 8,767 Class U / Series 1 () * 1,385,782 1,651,629 Class U / Series 2 () * 3,101 8,831 Increase (decrease) in net assets from operations per unit ** Class A / Series Class A / Series Class U / Series Class U / Series Class U / Series 1 () * Class U / Series 2 () * * (based on average exchange rate for the period) ** (based on weighted average number of units outstanding during the period) (See accompanying notes to financial statements) 17

19 HBanc Capital Securities Trust Statements of Changes in Net Assets and Retained Earnings (Unaudited) For the six month periods ended February 28, 2014 and 2013 Class A Series 1 Series 2 Total Series 1 Series 2 Total $ $ $ $ $ $ Increase (decrease) in net assets from operations 1,566,845 12,964 1,579,809 5,581,019 65,213 5,646,232 Distributions to unitholders from: (note 9) Return of capital (4,082,065) (32,718) (4,114,783) (4,930,334) (57,649) (4,987,983) Unitholders' transactions (note 6) Transfers from Class A/ Series 2, Class U/ Series 1 and Class U/ Series 2 to Class A/ Series 1 5,395,451 (122,985) 5,272, ,270 (161,031) 535,239 5,395,451 (122,985) 5,272, ,270 (161,031) 535,239 Change in net assets during the period 2,880,231 (142,739) 2,737,492 1,346,955 (153,467) 1,193,488 Net assets - beginning of period 103,646, , ,599, ,049,305 1,703, ,752,539 Net assets - end of period 106,526, , ,336, ,396,260 1,549, ,946,027 Retained Earnings, beginning of period 21,081, ,307 21,348,681 18,345, ,048 18,628,295 Increase in net assets from operations 1,566,845 12,964 1,579,809 5,581,019 65,213 5,646,232 Cost of shares redeemed in excess of average price per unit Retained Earnings, end of period 22,648, ,271 22,928,490 23,926, ,261 24,274,527 Class U Series 1 Series 2 Total Series 1 Series 2 Total $ $ $ $ $ $ Increase (decrease) in net assets from operations 1,473,045 3,296 1,476,341 1,639,708 8,767 1,648,475 Distributions to unitholders from: (note 9) Return of capital (657,676) (1,313) (658,989) (793,500) (4,697) (798,197) Unitholders' transactions (note 6) Transfers from Class A/ Series 2, Class U/ Series 1 and Class U/ Series 2 to Class A/ Series 1 (5,272,466) - (5,272,466) (535,239) - (535,239) Payments on redemption of units (91,481) - (91,481) (131,009) - (131,009) (5,363,947) - (5,363,947) (666,248) - (666,248) Change in net assets during the period (4,548,578) 1,983 (4,546,595) 179,960 4, ,030 Net assets - beginning of period 20,224,284 34,860 20,259,144 21,561, ,345 21,690,419 Net assets - end of period 15,675,706 36,843 15,712,549 21,741, ,415 21,874,449 Retained Earnings, beginning of period 4,780,236 34,154 4,814,390 2,552,647 24,980 2,577,627 Increase in net assets from operations 1,473,045 3,296 1,476,341 1,639,708 8,767 1,648,475 Cost of shares redeemed in excess of average price per unit - (17,776) (17,776) (8,192) - (8,192) Retained Earnings, end of period 6,253,281 19,674 6,272,955 4,184,163 33,747 4,217,910 (See accompanying notes to financial statements) 18

20 HBanc Capital Securities Trust Statements of Changes in Net Assets and Retained Earnings Continued (Unaudited) For the six month periods ended February 28, 2014 and 2013 Total $ $ Increase (decrease) in net assets from operations 3,056,150 7,294,707 Distributions to unitholders from: (note 9) Return of capital (4,773,772) (5,786,180) Unitholders' transactions (note 6) Transfers from Class A/ Series 2, Class U/ Series 1 and Class U/ Series 2 to Class A/ Series Payments on redemption of units (91,481) (131,009) (91,481) (131,009) Change in net assets during the period (1,809,103) 1,377,518 Net assets - beginning of period 124,858, ,442,958 Net assets - end of period 123,049, ,820,476 Retained Earnings, beginning of period 26,163,071 21,205,922 Increase in net assets from operations 3,056,150 7,294,707 Cost of shares redeemed in excess of average price per unit (17,776) (8,192) Retained Earnings, end of period 29,201,445 28,492,437 (See accompanying notes to financial statements) 19