N-CSR 1 fp0039090_ncsr.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-CSR

 

CERTIFIED SHAREHOLDER REPORT OF REGISTERED

MANAGEMENT INVESTMENT COMPANIES

 

Investment Company Act file number: 811-22473

 

Stone Harbor Emerging Markets Income Fund

(Exact name of registrant as specified in charter)

 

1290 Broadway, Suite 1100

Denver, CO 80203 

(Address of principal executive offices) (Zip code)

 

Adam J. Shapiro, Esq.

c/o Stone Harbor Investment Partners LP

31 West 52nd Street, 16th Floor

New York, NY 10019

(Name and address of agent for service)

 

With copies To:

 

Michael G. Doherty, Esq.

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036

 

Registrant’s telephone number, including area code: (303) 623-2577

 

Date of fiscal year end: November 30

 

Date of reporting period: November 30, 2018 

 

Item 1. Report to Stockholders.

 

(Cover Page)

 

Beginning on January 1, 2021, as permitted by regulations adopted by the U.S. Securities and Exchange Commission, paper copies of the Fund’s annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Fund’s website www.shiplpcef.com, and you will be notified by mail each time a report is posted and provided with a website link to access the report.

 

If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically anytime by contacting your financial intermediary (such as a broker-dealer or bank) or, if you are a direct investor, by enrolling at www.shiplpcef.com.

 

You may elect to receive all future reports in paper free of charge. If you invest through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. If you invest directly with the Fund, you can call 1-866-390-3910 to let the Fund know you wish to continue receiving paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held in your account if you invest through your financial intermediary or all funds held with the fund complex if you invest directly with the Fund.

 

Distribution Policy

November 30, 2018

 

Stone Harbor Emerging Markets Income Fund (the “Fund”), acting pursuant to a U.S. Securities and Exchange Commission exemptive order and with the approval of the Fund’s Board of Trustees (the “Board”), has adopted a plan, consistent with its investment objectives and policies to support a level distribution of income, capital gains and/or return of capital (the “Plan”). In accordance with the Plan, the Fund currently distributes $0.18 per share on a monthly basis.

 

The fixed amount distributed per share is subject to change at the discretion of the Fund’s Board. Under the Plan, the Fund will typically distribute most or all of its available investment income to its shareholders, consistent with its primary investment objectives and as required by the Internal Revenue Code of 1986, as amended (the “Code”). The Fund may also distribute long term capital gains and short term capital gains and return capital to shareholders in order to maintain a level distribution. Each monthly distribution to shareholders is expected to be at the fixed amount established by the Board, except for extraordinary distributions and potential distribution rate increases or decreases to enable the Fund to comply with the distribution requirements imposed by the Code. In addition, the Fund may distribute more than its income and net realized capital gains, and therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the money that a shareholder invested in the Fund is paid back to that shareholder. A return of capital distribution does not necessarily reflect the Fund’s investment performance and should not be confused with ‘yield’ or ‘income’. The amounts and sources of distributions reported to shareholders during the fiscal year are only estimates and are not provided for tax or financial reporting purposes. The actual amounts and sources of the amounts for tax or financial reporting purposes will depend upon the Fund’s investment experience during the year and are subject to change.

 

Shareholders should not draw any conclusions about the Fund’s investment performance from the amount of these distributions or from the terms of the Plan. The Fund’s total return performance on net asset value is presented in its financial highlights table.

 

The Board may amend, suspend or terminate the Fund’s Plan without prior notice if it deems such action to be in the best interest of the Fund or its shareholders. The suspension or termination of the Plan could have the effect of creating a trading discount (if the Fund’s stock is trading at or above net asset value) or widening an existing trading discount. The Fund is subject to risks that could have an adverse impact on its ability to maintain level distributions. Examples of potential risks include, but are not limited to, economic downturns impacting the markets, investments in foreign securities, foreign currency fluctuations and changes in the Code. Please refer to the Fund’s prospectus for a more complete description of its risks.

 

 

 Table of Contents 

 

 

Shareholder Letter 2
Summary of Portfolio Holdings 4
Growth of $10,000 Investment 5
Report of Independent Registered Public Accounting Firm 6
Statement of Investments 7
Statement of Assets & Liabilities 14
Statement of Operations 15
Statements of Changes in Net Assets 16
Statement of Cash Flows 17
Financial Highlights 18
Notes to Financial Statements 19
Summary of Dividend Reinvestment Plan 30
Additional Information 31
Trustees & Officers 33
Benchmark Descriptions 36

 

Stone Harbor Emerging Markets Income Fund Shareholder Letter
 

November 30, 2018 (Unaudited)

 

Dear Investor,

 

The Stone Harbor Emerging Markets Income Fund (“EDF” or “Fund”) seeks to maximize total return, which consists of income on its investments and capital appreciation. The Fund invests in fixed income securities and related instruments that are economically tied to emerging markets (“EM”) countries, including sovereign external debt, local currency debt (non-U.S. dollar), and corporate debt from EM issuers.

 

Our investment thesis is straightforward - despite periods of high market volatility, we believe EM debt markets continue to offer attractive investment opportunities for total return investors. That investment thesis was tested during the Fund’s fiscal year ended November 30, 2018 as the market generated negative returns in all three major segments -- hard currency sovereign debt, local currency sovereign debt and corporate debt. In this report, we will review the major factors that drove those negative returns. Despite this challenging period, we continue to believe most EM countries maintain prudent debt levels and substantially lower fiscal deficits relative to the developed world. Furthermore, GDP growth of EM countries taken as a group continues to expand at a faster rate than in the developed world. In addition, EM debt still offers higher yields than advanced economy debt, even though EMs have better fundamentals in most cases, based on our analysis. So, while we believe our investment thesis remains intact, we believe that this has been one of those high volatility periods that tests investors’ commitment to the asset class.

 

We believe that a key advantage we have in managing EDF is the latitude to adjust the risk in the portfolio based on our fundamental economic and credit views, as well as our assessment of the macroeconomic environment. Our investment process focuses on allocating to three distinct sectors of EM debt - hard currency sovereigns, local currency sovereigns, and corporates - each of which tend to behave differently in various macroeconomic environments.

 

In addition, we can vary the amount of leverage used by the Fund, depending on our confidence in our return expectations. In general, we employ leverage to seek higher returns. However, when uncertainty rises, and with it greater perceived risks, we can also reduce leverage so that the Fund has less exposure to EM risk. Unfortunately, in a period of negative returns for all sectors in EM, any leverage increases the impact of those negative returns.

 

Performance Review

 

The total return on net asset value (NAV) of EDF for the twelve months ended November 30, 2018 was -15.35% (net of expenses). For the same period, the Fund maintained an average premium to its NAV of 11.42%(1). Market tracking indices for the three sectors of EM debt(2) — external sovereign debt, local currency debt, and corporate debt — delivered total returns of -4.84%, -5.55% and -2.04%, respectively, during the reporting period.

 

Unlike recent historical periods when market returns and our performance were driven primarily by macro developments, including oil price volatility, this period of negative returns was characterized by events in key countries as well as one important global factor. Our positions in Argentina, Brazil, and Turkey drove our performance for reasons that we will outline below. The one macro factor driving returns in EM debt during the period was US Dollar (USD) strength and the accompanying weakness in EM currencies. Every EM currency declined against the USD during the period with the declines ranging from -1.11% (Thailand) to -54% (Argentina). Other key macroeconomic themes that drove market volatility during the reporting period included escalating U.S.-China trade tensions, expectations for further U.S. monetary normalization, and widening of Italian bond spreads. While a recovery in EM debt markets in September occurred with easing of some of these macroeconomic factors, along with more positive domestic developments, the period proved to be a challenging one.

 

As we cited above, negative returns in Argentina, Brazil, and Turkey, combined with our overweight positions in each country were the primary drivers of our performance during the period. Argentina was the Fund’s best performer in fiscal 2017. Unfortunately, the market lost patience with the government’s gradual approach to fiscal and economic reform early in 2018. The subsequent sell-off in the peso caused the Argentines to raise domestic interest rates dramatically and reach an agreement with the International Monetary Fund (IMF) on a Stand-by Aid package totaling over $57 billion. The peso stabilized after these announcements but the damage to the currency’s value had already occurred. Investments in Brazil were negatively impacted by the effects of a prolonged recession, compounded by the fallout from the massive corruption scandal. Both of these factors weighed heavily in the chaotic presidential campaign. When former President Lula was ruled ineligible to stand for election, the market began to stabilize but Brazil’s real was down over 15% for the fiscal year. In Turkey, higher-than-expected inflation caused domestic interest rates to rise while the lira declined. A diplomatic row with the US over the detention of a pastor led the US to impose sanctions on Turkey and contributed to a 25% decline in the lira over the Fund’s fiscal year.

 

As we mentioned, asset allocation is an important decision in the management of the Fund. Our allocation to local currency denominated assets ranged between 32% and 51% during the period with our average monthly allocation approximately 45%. We continue to believe that local currency sovereign debt should provide the highest risk-adjusted total returns in the EM universe. Those returns will, however, likely be accompanied by the highest level of volatility, in our view.

 

 
2 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Shareholder Letter
 

November 30, 2018 (Unaudited)

 

Throughout the reporting period, leverage consisted primarily of short-term reverse repurchase agreements through which the Fund borrowed funds by selling securities under the obligation to repurchase them at a later date at a fixed price. The implied borrowing costs of the repurchase agreements averaged approximately 2.53% per annum for the fiscal year. The level of gross leverage reached a maximum of 33.3% of total assets on May 17, 2018 and a minimum of 21.5% on December 5, 2017. By the end of the reporting period, leverage was 33.1%. Net leverage (gross leverage less cash held) remained lower than gross leverage throughout the period. The Fund’s management team varied borrowing levels to reflect the team’s outlook on EM risk, increasing borrowings when it felt opportunities had improved and reducing borrowings when, in the team’s judgment, macroeconomic risks had risen.

 

The Fund uses various derivative instruments to implement its strategies. These derivatives are utilized to manage the Fund’s credit risk, interest rate risk, foreign exchange risk and efficiently gain certain investment exposure. These derivative positions may increase or decrease the Fund’s exposure to these risks. At the end of the reporting period the Fund had net exposure to these derivatives of approximately $1.9 million. Over the course of the reporting period these derivative positions generated net realized loss of approximately $2.6 million and $2.3 million in unrealized appreciation for a net decrease in operations of approximately $308 thousand.

 

Market Review and Outlook

 

In our view, the total returns for EM indices for the reporting period were driven by a combination of events in developed markets, country and company-specific news in some emerging markets, and valuations.

 

Macroeconomic developments in advanced economies are important inputs into our assessment of the outlook for EM debt returns. The impact of developments outside the emerging markets on emerging market valuations has been a critical variable in the performance of emerging market assets since the end of the 2008 financial crisis. These factors, including slow growth across most of the developed world and abnormally low interest rates in select countries helped underscore the higher yields and stronger fundamentals available in emerging markets.

 

Despite these headwinds from advanced economies, our fundamental positive views on emerging markets remain intact. We continue to believe that many EM country growth rates will improve in the next 12 to 18 months. In addition to good growth and solid fundamentals, emerging markets debt assets continue to offer attractive valuations, in our opinion.

 

In the past, we have detailed some of the key risks to our constructive outlook for EM debt. Today, those risks seem to emanate from both developed and EM countries. The uncertainties surrounding the timing and extent of increases in U.S. interest rates and the Trump administration policies on trade are potential risks for EM debt investors. The application of those trade policies, particularly with China will continue to be an important investor focus in the coming year. In assessing all these factors, our base case return scenarios for EM debt over the coming year remain positive. Our view derives from a disciplined investment process in which we review the ability and willingness of borrowers to repay their debts. We also assess whether current prices of EM bonds, currencies and local interest rates reflect adequate compensation for the risks the Fund is incurring. Based on this analysis, we continue to believe that EM debt will generate among the highest returns in the fixed income markets.

 

Other general risks of the Fund relate to our use of leverage and also to the longer-term prospects for a rise in global interest rates. Stone Harbor Investment Partners LP (“Adviser”) attempts to mitigate the risk of loss of principal due to the possibility of a general rise in global interest rates through our investment process that determines sector and country allocations, as well as security selection. We seek to reduce interest rate sensitivity during periods of rising interest rates. Notwithstanding these efforts, rising interest rates would increase the Fund’s cost of leverage and could also decrease the value of its portfolio securities, adversely affecting Fund performance.

 

We continue to believe that investing in EDF may offer an attractive means of capitalizing on further improvements in credit quality in EM. We thank you for your confidence in our ability to invest in these volatile markets and look forward to reporting on EDF in six months.

 

Sincerely,  
   
 
   
Thomas K. Flanagan  
Chairman of the Board of Trustees  

 

(1)Performance on a market value basis, or at market price, will differ from its results at NAV. Although market price returns typically reflect investment results over time, during shorter periods, returns at market price can also be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s shares, or changes in Fund dividends.
(2)JPMorgan EMBI Global Diversified Index, JPMorgan GBI EM Global Diversified Index, and JPMorgan CEMBI Broad Diversified Index.

 

 

Annual Report | November 30, 2018 3

 

Stone Harbor Emerging Markets Income Fund Summary of Portfolio Holdings
 

November 30, 2018 (Unaudited)

 

Fund Details  
Market Price $12.05
Net Asset Value (NAV) $10.58
Premium/(Discount) 13.89%
Current Distribution Rate(1) 17.93%
Net Assets (in millions) $171

 

Country Allocation

(as a % of Total Net Assets)(3)

Country Breakdown

% 
Argentina 18.39%
Ukraine 9.73%
Mexico 8.95%
Turkey 8.21%
Indonesia 8.03%
South Africa 8.03%
Ecuador 6.88%
Lebanon 6.49%
Uruguay 6.23%
Egypt 6.19%
Angola 5.48%
Russia 5.26%
Ghana 4.70%
Brazil 4.36%
Ivory Coast 4.20%
Nigeria 4.12%
Iraq 4.05%
Jordan 3.43%
Venezuela 2.88%
Kenya 2.79%
Gabon 2.04%
Zambia 1.91%
Cameroon 1.63%
Jamaica 1.40%
El Salvador 1.04%
Pakistan 0.99%
Tunisia 0.93%
Kazakhstan 0.85%
Spain 0.72%
New Guinea 0.53%
Colombia 0.47%
India 0.16%
Short Term Security 2.37%
Other Assets in Excess of Liabilities -43.44%
Total Net Assets 100.00%

Security Type Allocation(2)

 

 

Sector Allocation(2)

 

Regional Breakdown(2)

 

 

Sovereign Local Currency Breakdown(2)

 
Sovereign Local 30.10%   Latin America 35.12%   Argentine Peso 2.21%
Sovereign External 57.22%   Africa 23.86%   Colombian Peso 0.32%
Corporate 8.87%   Europe 16.39%   Egyptian Pound 2.13%

Cash & Equivalents/

    Middle East 14.28%   Indonesian Rupiah 3.89%
US Treasuries 3.81%   Asia 6.54%   Mexican Peso 4.05%
 

  Cash & Equivalents/   Russian Ruble 3.56%
      U.S. Treasuries 3.81%   South African Rand 5.54%
            Turkish New Lira 4.11%
            Uruguayan Peso 4.29%
            Total 30.10%


 

(1)Current Distribution Rate is based on the Fund’s current annualized monthly distribution divided by the Fund’s current market price. The Fund’s monthly distributions to its shareholders may be comprised of ordinary income, net realized capital gains and return of capital in order to maintain a level distribution.

(2)Based on managed assets and investment manager’s sector classifications including derivative exposure. For purposes of this example, managed assets include total net assets plus any borrowings attributed to the use of reverse repurchase agreements and the notional values of interest rate swaps as described on page 12 and page 13.

(3)Country refers to country of primary risk exposure, as determined by Stone Harbor. In certain instances, a security’s country of incorporation may be different from its country of risk.

 

 

4 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Growth of $10,000 Investment
 

November 30, 2018 (Unaudited)

 

Comparison of Change in Value of $10,000 Investment in Stone Harbor Emerging Markets Income Fund and the JPMorgan Emerging Markets Bond Indices: JPMorgan EMBI Global Diversified Index, JPMorgan CEMBI Broad Diversified Index, and JPMorgan GBI-EM Global Diversified Index (Please refer to the Benchmark Descriptions section for detailed benchmark descriptions).

 

 

Total Returns as of November 30, 2018 (Inception Date December 22, 2010)

 

    Average Annual Return
  6 Month One Year Three Year Five Year

Since

Inception

Stone Harbor Emerging Markets Income Fund – NAV -10.24% -15.35% 4.80% 2.09% 2.21%
Stone Harbor Emerging Markets Income Fund – Market Price -6.02% -6.89% 14.07% 5.93% 3.30%
JPMorgan CEMBI Broad Diversified Index 0.12% -2.04% 4.52% 4.25% 4.70%
JPMorgan EMBI Global Diversified Index -1.51% -4.84% 4.20% 4.62% 5.18%
JPMorgan GBI-EM Global Diversified Index -3.87% -5.55% 4.66% -1.32% -0.01%

 

Past performance is no guarantee of future results. Current performance may be lower or higher than the performance shown. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. The calculation assumes that all income dividends, capital gain and return of capital distributions, if any, have been reinvested and includes all fee waivers and expense reimbursements. Total return does not reflect the deduction of taxes that a shareholder would pay on Fund distributions or broker commissions or sales charges in connection with the purchase or sale of Fund shares. Investment return and principal value will vary, and shares, when sold, may be worth more or less than their original cost. Total returns for a period of less than one year are not annualized. Index returns do not include the effects of sales charges, management fees and fund expenses or transaction costs. It is not possible to invest directly in an index.

 

Performance at market price will differ from its results at NAV. Although market price returns typically reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about the Fund, market conditions, supply and demand for the Fund’s shares, or changes in Fund dividends.

 

An investment in the Fund involves risk, including the loss of principal. Total return, market price, market price yield and NAV will fluctuate with changes in market conditions. This data is provided for information purposes only and is not intended for trading purposes. Closed-end funds, unlike open-end funds, are not continuously offered. There is a onetime public offering and once issued, shares of closed-end funds are traded in the open market through a stock exchange. NAV is equal to total assets attributable to common shareholders less total liabilities divided by the number of common shares outstanding. Holdings are subject to change daily.

 

 

Annual Report | November 30, 2018 5

 

Stone Harbor Emerging Markets Income Fund

Report of Independent Registered

Public Accounting Firm

 

 

To the shareholders and the Board of Trustees of Stone Harbor Emerging Markets Income Fund:

 

Opinion on the Financial Statements and Financial Highlights

 

We have audited the accompanying statement of assets and liabilities of Stone Harbor Emerging Markets Income Fund (the “Fund”), including the statement of investments, as of November 30, 2018, the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the five years in the period then ended, and the related notes. In our opinion, the financial statements and financial highlights present fairly, in all material respects, the financial position of the Fund as of November 30, 2018, and the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements and financial highlights based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements and financial highlights, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements and financial highlights. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and financial highlights. Our procedures included confirmation of securities owned as of November 30, 2018, by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.

 

 
Denver, Colorado  
January 28, 2019  

 

We have served as the auditor of one or more Stone Harbor Investment Partners investment companies since 2008.

 

 
6 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Statement of Investments

 

November 30, 2018

 

   Currency  Rate   Maturity Date  Principal  Amount/Shares*  

Value

(Expressed in USD)

 
SOVEREIGN DEBT OBLIGATIONS - 111.87%                   
Angola - 5.48%                   
Republic of Angola:                   
   USD  6M US L + 7.50%  07/01/23  7,366,154  $ 8,130,392(1) 
   USD  8.25%  05/09/28  759,000    734,332(2) 
   USD  9.38%  05/08/48  517,000    502,783(2) 
                  9,367,507 
                    
Argentina - 18.39%                   
Argentina Treasury Bill:                   
   ARS  0.00%  12/28/18  96,000,000    2,822,851(3) 
   ARS  0.00%  02/28/19  97,400,000    2,848,530(3) 
Provincia del Chaco  USD  9.38%  08/18/24  2,360,000    1,752,300(4)(5) 
Republic of Argentina:                   
   USD  6.88%  04/22/21  1,000,000    948,750 
   USD  7.50%  04/22/26  337,000    286,450 
   USD  5.88%  01/11/28  2,250,000    1,687,500(5) 
   USD  8.28%  12/31/33  5,608,152    4,801,980(5) 
   EUR  7.82%  12/31/33  1,444,909    1,446,304 
   USD  8.28%  12/31/33  17,120,114    14,380,895(5) 
   EUR  2.26%  12/31/38  509,052    316,056(6) 
   USD  6.88%  01/11/48  232,000    167,330 
                  31,458,946 
                    
Cameroon - 1.63%                   
Republic of Cameroon  USD  9.50%  11/19/25  2,743,000    2,787,574(2)(5) 
                    
Ecuador - 5.55%                   
Republic of Ecuador:                   
   USD  10.75%  03/28/22  890,000    921,150(4)(5) 
   USD  10.75%  03/28/22  520,000    538,200(2) 
   USD  7.95%  06/20/24  1,100,000    984,500(4) 
   USD  9.65%  12/13/26  5,549,000    5,182,766(4)(5) 
   USD  9.65%  12/13/26  1,998,000    1,866,132(2)(5) 
                  9,492,748 
                    
Egypt - 3.00%                   
Republic of Egypt:                   
   EUR  5.63%  04/16/30  591,000    593,800(2) 
   USD  8.50%  01/31/47  395,000    361,919(4) 
   USD  8.50%  01/31/47  4,548,000    4,167,105(2)(5) 
                  5,122,824 
                    
El Salvador - 1.04%                   
Republic of El Salvador  USD  7.65%  06/15/35  1,910,000    1,775,622(4)(5) 
                    
Gabon - 2.04%                   
Republic of Gabon:                   
   USD  6.38%  12/12/24  602,000    529,760(2) 
   USD  6.95%  06/16/25  3,332,000    2,950,902(2)(5) 
                  3,480,662 
                    
Ghana - 3.89%                   
Republic of Ghana  USD  10.75%  10/14/30  5,807,000    6,656,274(2)(5) 

 

See Notes to Financial Statements.

 

Annual Report | November 30, 2018 7

 

Stone Harbor Emerging Markets Income Fund Statement of Investments

 

November 30, 2018

 

   Currency  Rate    Maturity Date   Principal Amount/Shares* 

Value

(Expressed in USD)

 
Indonesia - 5.81%                   
Republic of Indonesia:                   
   IDR  8.25%   05/15/29  131,000,000,000  $9,418,353 
   IDR  8.25%   05/15/36  7,440,000,000   518,888 
                  9,937,241 
                    
Iraq - 0.53%                   
Republic of Iraq  USD  5.80%   01/15/28  1,006,000   915,460(4) 
                    
Ivory Coast - 4.20%                   
Ivory Coast Government:                   
   USD  6.13%   06/15/33  602,000   503,423(4) 
   USD  6.13%   06/15/33  7,977,000   6,670,766(2)(5) 
                  7,174,189 
                    
Jordan - 3.43%                   
Kingdom of Jordan  USD  7.38%   10/10/47  6,609,000   5,857,226(2)(5) 
                    
Kenya - 2.79%                   
Republic of Kenya:                   
   USD  6.88%   06/24/24  2,596,000   2,446,730(2)(5) 
   USD  6.88%   06/24/24  2,350,000   2,214,875(4)(5) 
   USD  7.25%   02/28/28  116,000   104,110(2) 
                  4,765,715 
                    
Lebanon - 6.49%                   
Lebanese Republic:                   
   USD  8.25%   04/12/21  1,447,000   1,356,562(4) 
   USD  6.40%   05/26/23  2,196,000   1,825,425(5) 
   USD  6.20%   02/26/25  8,461,000   6,578,428(5) 
   USD  6.85%   05/25/29  1,820,000   1,334,970 
                  11,095,385 
                    
Mexico - 2.18%                   
Mexican Bonos  MXN  7.50%   06/03/27  83,980,000   3,729,173 
                    
New Guinea - 0.53%                   
Independent State of Papua New Guinea  USD  8.38%   10/04/28  902,000   899,312(2) 
                    
Nigeria - 4.12%                   
Republic of Nigeria:                   
   USD  7.63%   11/28/47  4,477,000   3,799,854(2)(5) 
   USD  7.63%   11/28/47  3,823,000   3,244,771(4)(5) 
                  7,044,625 
                    
Pakistan - 0.99%                   
Republic of Pakistan  USD  6.88%   12/05/27  1,889,000   1,693,016(4)(5) 
                    
Russia - 5.26%                   
Russian Federation:                   
   RUB  7.05%   01/19/28  79,480,000   1,077,725 
   RUB  7.70%   03/23/33  572,000,000   7,922,627 
                  9,000,352 
                    
South Africa - 8.03%                   
Republic of South Africa  ZAR  8.75%   01/31/44  212,350,000   13,736,362 

 

See Notes to Financial Statements.

 

8 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Statement of Investments
 

November 30, 2018

 

   Currency  Rate   Maturity Date  Principal Amount/Shares* 

Value

(Expressed in USD)

 
Tunisia - 0.93%                  
Banque Centrale de Tunisie  USD  5.75%  01/30/25  1,900,000  $1,588,875(4) 
                   
Turkey - 8.21%                  
European Bank for Reconstruction & Development:                  
   TRY  28.50%  07/10/19  9,350,000   1,851,608 
   TRY  27.50%  10/02/19  42,000,000   8,303,756 
Republic of Turkey  USD  4.88%  10/09/26  4,583,000   3,886,957(5) 
                 14,042,321 
                   
Ukraine - 7.51%                  
Ukraine Government:                  
   USD  7.75%  09/01/22  2,898,000   2,687,895(2)(5) 
   USD  7.75%  09/01/26  3,225,000   2,781,562(2)(5) 
   USD  7.75%  09/01/26  225,000   194,063(4) 
   USD  7.75%  09/01/27  1,347,000   1,146,634(2) 
   USD  7.38%  09/25/32  1,749,000   1,418,876(2) 
   USD  7.38%  09/25/32  697,000   565,441(4) 
   USD  0.00%  05/31/40  5,299,000   2,967,175(3) 
Ukreximbank Via Biz Finance PLC  USD  9.75%  01/22/25  1,150,000   1,084,968(4) 
                 12,846,614 
                   
Uruguay - 6.23%                  
Republic of Uruguay  UYU  4.38%  12/15/28  61,000,000   3,480,004 
Uruguay Monetary Regulation Bill  UYU  0.00%  01/11/19  25,700,000   790,613(3) 
Uruguay Notas del Tesoro  UYU  13.90%  07/29/20  192,000,000   6,375,516 
                 10,646,133 
                   
Venezuela - 1.70%                  
Republic of Venezuela:                  
   USD  7.75%  10/13/19  2,400,000   565,380(7) 
   USD  9.00%  05/07/23  10,200,000   2,346,000(7) 
                 2,911,380 
                   
Zambia - 1.91%                  
Republic of Zambia  USD  5.38%  09/20/22  4,500,000   3,268,125(4)(5) 
                   
TOTAL SOVEREIGN DEBT OBLIGATIONS                191,293,661 
(Cost $205,576,364)                  
                   
CORPORATE BONDS - 22.49%                  
Brazil - 4.36%                  
Cosan Luxembourg SA  USD  7.00%  01/20/27  1,000,000   996,250(2) 
Gol Finance, Inc.  USD  7.00%  01/31/25  1,500,000   1,331,250(2) 
GTL Trade Finance, Inc.  USD  7.25%  04/16/44  1,000,000   1,040,000(2) 
JSL Europe SA  USD  7.75%  07/26/24  750,000   699,442(2) 
Marfrig Holdings Europe BV  USD  8.00%  06/08/23  397,000   400,474(2) 
Minerva Luxembourg SA  USD  6.50%  09/20/26  3,250,000   2,990,000(2)(5) 
                 7,457,416 
                   
Colombia - 0.47%                  
Empresas Publicas de Medellin ESP  COP  7.63%  09/10/24  2,700,000,000   799,474(4) 
                   
Ecuador - 1.33%                  
Petroamazonas EP  USD  4.63%  02/16/20  2,338,000   2,281,444(2)(5) 
                   
Ghana - 0.81%                  
Tullow Oil PLC  USD  6.25%  04/15/22  1,431,000   1,376,443(4) 

 

See Notes to Financial Statements.

 

Annual Report | November 30, 2018 9

 

Stone Harbor Emerging Markets Income Fund Statement of Investments
 

November 30, 2018

 

   Currency  Rate   Maturity Date  Principal Amount/Shares* 

Value

(Expressed in USD)

 
India - 0.16%                  
Vedanta Resources PLC  USD  6.38%  07/30/22  300,000  $276,375(2) 
                   
Indonesia - 2.22%                  
Indo Energy Finance II BV  USD  6.38%  01/24/23  458,000   435,100(4) 
PT Bakrie & Brothers TBK  IDR  0.00%  12/22/22  27,175,847,000   195(3)(8) 
PT Bumi Resources TBK (Eterna Capital Pte, Ltd.):                  
   USD  8.00% PIK   12/11/22  1,491,770   1,379,451(9) 
   USD  6.50% Cash + 1.00% PIK   12/11/22  1,998,207   1,988,216(9) 
                 3,802,962 
                   
Jamaica - 1.40%                  
Digicel Group, Ltd.  USD  8.25%  09/30/20  3,550,000   2,387,375(2) 
                   
Kazakhstan - 0.85%                  
Nostrum Oil & Gas Finance BV  USD  7.00%  02/16/25  2,138,000   1,457,902(2)(5) 
                   
Mexico - 6.77%                  
Cometa Energia SA de CV  USD  6.38%  04/24/35  1,117,284   1,040,471(2) 
Petroleos Mexicanos:                  
   MXN  7.65%  11/24/21  67,000,000   3,066,359(4) 
   MXN  7.47%  11/12/26  89,000,000   3,424,508 
   USD  6.75%  09/21/47  3,133,000   2,600,390(5) 
Sixsigma Networks Mexico SA de CV  USD  7.50%  05/02/25  1,541,000   1,444,688(2) 
                 11,576,416 
                   
Spain - 0.72%                  
AI Candelaria Spain SLU  USD  7.50%  12/15/28  1,250,000   1,222,125(2) 
                   
Ukraine - 2.22%                  
Metinvest BV  USD  7.75%  04/23/23  2,059,000   1,871,116(2) 
State Savings Bank of Ukraine Via SSB #1 PLC  USD  9.63%  03/20/25  2,023,000   1,920,839(4)(6)  
                 3,791,955 
                   
Venezuela - 1.18%                  
Petroleos de Venezuela SA:                  
   USD  6.00%  05/16/24  4,622,575   753,480(4)(7) 
   USD  6.00%  11/15/26  2,550,000   420,750(4)(7) 
   USD  9.75%  05/17/35  4,200,000   850,500(4)(7) 
                 2,024,730 
                   
TOTAL CORPORATE BONDS                38,454,617 
(Cost $43,400,109)                  
                   
CREDIT LINKED NOTES - 6.71%                  
Egypt - 3.19%                  
Republic of Egypt (Counterparty: Goldman Sachs)  EGP  0.00%  04/16/19  106,000,000   5,460,036(3) 
                   
Iraq - 3.52%                  
Republic of Iraq (Counterparty: Bank of America - Merrill Lynch)  JPY  2.86%  01/01/28  936,519,363   6,010,257(1)(8) 
                   
TOTAL CREDIT LINKED NOTES                11,470,293 
(Cost $14,549,330)                  

 

See Notes to Financial Statements.

 

10 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Statement of Investments
 

November 30, 2018

 

   Currency  Rate    Maturity Date  Principal Amount/Shares* 

Value

(Expressed in USD)

 
SHORT TERM INVESTMENTS - 2.37%                   
Money Market Mutual Funds - 2.37%                   
State Street Institutional Liquid Reserves Fund - Institutional Class (7-Day Yield)  USD  2.34%   N/A  4,051,399  $4,051,399 
                    
TOTAL SHORT TERM INVESTMENTS                 4,051,399 
(Cost $4,051,097)                   
                    
Total Investments - 143.44%                 245,269,970 
(Cost $267,576,900)                   
Liabilities in Excess of Other Assets - (43.44)%                 (74,277,471)(10)
                    
Net Assets - 100.00%                $170,992,499 

 

*The principal amount/shares of each security is stated in the currency in which the security is denominated.

 

Currency Abbreviations:
ARS - Argentine Peso
COP - Colombian Peso
EGP - Egyptian Pound
EUR - Euro Currency
IDR - Indonesian Rupiah
JPY - Japanese Yen
MXN - Mexican Peso
RUB - Russian Ruble
TRY - New Turkish Lira
USD - United States Dollar
UYU - Uruguayan Peso
ZAR - South African Rand

 

Investment Abbreviations:

LIBOR - London Interbank Offered Rate

 

Libor Rates:

6M US L - 6 Month LIBOR as of November 30, 2018 was 2.89%

 

(1)Floating or variable rate security. The reference rate is described above. The rate in effect as of November 30, 2018 is based on the reference rate plus the displayed spread as of the security's last reset date. Certain variable rate securities are not based on a published reference rate and spread but are determined by the issuer or agent and are based on current market conditions. These securities do not indicate a reference rate and spread in their description.
(2)Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may normally be sold to qualified institutional buyers in transactions exempt from registration. Total market value of Rule 144A securities amounts to $68,578,739, which represents approximately 40.11% of net assets as of November 30, 2018.
(3)Issued with a zero coupon. Income is recognized through the accretion of discount.
(4)Securities were originally issued pursuant to Regulation S under the Securities Act of 1933, which exempts securities offered and sold outside of the United States from registration. Such securities cannot be sold in the United States without either an effective registration statement filed pursuant to the Securities Act of 1933, or pursuant to an exemption from registration. As of November 30, 2018, the aggregate market value of those securities was $37,230,781, which represents approximately 21.77% of net assets.
(5)On November 30, 2018, securities valued at $103,079,377 were pledged as collateral for reverse repurchase agreements.
(6)Step bond. Coupon changes periodically based upon a predetermined schedule. Interest rate disclosed is that which is in effect as of November 30, 2018.
(7)Security is in default and therefore is non-income producing.

 

See Notes to Financial Statements.

 

Annual Report | November 30, 2018 11

 

Stone Harbor Emerging Markets Income Fund Statement of Investments

 

November 30, 2018

 

(8)The level 3 assets were valued using significant unobservable inputs as a result of unavailable quoted prices from an active market or the unavailability of other significant observable inputs.
(9)Payment-in-kind securities.
(10)Includes cash which is being held as collateral for derivatives.

  

OUTSTANDING FORWARD FOREIGN CURRENCY CONTRACTS

 

Counterparty 

Settlement

Date

 

Fund

Receiving

  

U.S. $ Value at November 30,

2018

  

Fund

Delivering

  

U.S. $ Value at November 30,

2018

  

Unrealized

Appreciation/

(Depreciation)

 
J.P. Morgan Chase & Co.  12/12/18  ARS    377,312    USD    352,497   $24,815 
Citigroup Global Markets  01/11/19  USD    6,381,960    JPY    6,326,667    55,293 
                         $80,108 
J.P. Morgan Chase & Co.  12/12/18  USD    362,199    ARS    377,312    (15,113)
                         $(15,113)

  

REVERSE REPURCHASE AGREEMENTS

 

Counterparty  Interest Rate   Acquisition Date  Maturity Date  Amount 
Credit Suisse First Boston   3.000%   09/27/2018  09/28/2019  $23,245,253 
Credit Suisse First Boston   3.000%   10/16/2018  10/17/2019   4,054,694 
Credit Suisse First Boston   3.000%   10/17/2018  10/18/2019   15,556,112 
Credit Suisse First Boston   3.000%   10/18/2018  10/19/2019   7,514,057 
Credit Suisse First Boston   2.750%   10/19/2018  10/22/2019   1,406,250 
Credit Suisse First Boston   3.000%   10/19/2018  10/22/2019   2,868,808 
Credit Suisse First Boston   3.000%   11/01/2018  11/02/2019   1,524,836 
Credit Suisse First Boston   3.000%   11/08/2018  11/09/2019   2,762,458 
Goldman Sachs & Co.   1.800%   03/28/2018  03/29/2019   1,982,540 
J.P. Morgan Chase & Co.   3.100%   06/14/2018  06/15/2019   2,396,621 
J.P. Morgan Chase & Co.   2.850%   06/15/2018  06/18/2019   2,340,371 
J.P. Morgan Chase & Co.   2.900%   06/15/2018  06/18/2019   3,946,532 
J.P. Morgan Chase & Co.   2.200%   11/22/2018  08/24/2019   775,190 
J.P. Morgan Chase & Co.   3.100%   09/27/2018  09/28/2019   5,725,978 
J.P. Morgan Chase & Co.   3.150%   09/27/2018  09/28/2019   3,541,158 
J.P. Morgan Chase & Co.   2.900%   10/09/2018  10/04/2019   1,979,969 
J.P. Morgan Chase & Co.   2.750%   10/16/2018  10/17/2019   3,066,157 
              $84,686,984 

 

All agreements can be terminated by either party on demand at value plus accrued interest.

 

INTEREST RATE SWAP CONTRACTS (CENTRALLY CLEARED) 

 

Pay/Receive

Floating Rate

  Clearing House  Floating Rate  

Expiration

Date

 

Notional

Amount

  Currency  Fixed Rate   Value  

Unrealized

Appreciation/

(Depreciation)

 
Receive*  Chicago Mercantile Exchange  3 Month LIBOR  02/21/2027  13,500,000  USD   2.427%   $602,926   $602,926 
Receive*  Chicago Mercantile Exchange  3 Month LIBOR  02/01/2027  20,400,000  USD   2.427%     902,320    902,320 
Receive*  Chicago Mercantile Exchange  3 Month LIBOR  03/28/2028  45,000,000  USD   2.892%    622,632    622,632 
                       $2,127,878   $2,127,878 

 

*Interest rate swaps pay quarterly.

 

See Notes to Financial Statements.

 
12 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Statement of Investments

 

November 30, 2018 

 

CREDIT DEFAULT SWAP CONTRACTS ON SOVEREIGN DEBT OBLIGATIONS ISSUE - SELL PROTECTION (OVER THE COUNTER)(1) 

 

Reference

Obligations

  Counterparty 

Fixed Deal

Receive Rate

   Currency  Maturity Date 

Implied Credit

Spread at

November 30,

2018(2)

  

Notional

Amount**(3)

  Value  

Upfront

Premiums

Received/(Paid)

  

Unrealized

Appreciation

 
Republic Of Ecuador CDS SR 1Y(4)  Credit Suisse First Boston   5.000%   USD  12/20/2019   5.456%    2,100,000  $(9,708)  $39,456   $29,748 
                          $(9,708)  $39,456   $29,748 

 

Credit default swaps pay quarterly.

 

**The notional amount of each security is stated in the currency in which the security is denominated.
(1)If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.
(2)Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on sovereign issues of an emerging country as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.
(3)The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.
(4)Based on Republic of Ecuador REGS Sovereign Debt Obligation, USD denominated 7.875% fixed coupon, 01/23/2028 maturity.

 

See Notes to Financial Statements.

 

Annual Report | November 30, 2018 13

 

Stone Harbor Emerging Markets Income Fund Statement of Assets & Liabilities

 

November 30, 2018

 

ASSETS:    
Investments, at value(1)  $245,269,970 
Unrealized appreciation on credit default swap contracts   29,748 
Unrealized appreciation on forward foreign currency contracts   80,108 
Receivable for investments sold   2,555,438 
Deposits with brokers for interest rate swap contracts   1,943,575 
Deposits with brokers for reverse repurchase agreements   3,877,000 
Receivable on credit default swap contracts   21,000 
Interest receivable   5,664,350 
Prepaid and other assets   2,174 
Total Assets   259,443,363 
      
LIABILITIES:     
Bank overdraft   1,586,293 
Payable for reverse repurchase agreements   84,686,984 
Interest payable on reverse repurchase agreements   456,970 
Payable due to brokers for forward foreign currency contracts   20,000 
Swap premium received   39,456 
Payable for investments purchased   1,141,475 
Unrealized depreciation on forward foreign currency contracts   15,113 
Variation margin payable on interest rate swap contracts   109,791 
Payable to adviser   213,052 
Payable to administrator   36,162 
Other payables   145,568 
Total Liabilities   88,450,864 
Net Assets  $170,992,499 
      
NET ASSETS CONSIST OF:     
Paid-in capital  $274,617,766 
Total distributable earnings   (103,625,267)
Net Assets  $170,992,499 
      
PRICING OF SHARES:     
Net Assets  $170,992,499 
Shares of beneficial interest outstanding (unlimited number of shares, par value of $0.001 per share authorized)   16,168,916 
Net assets value, offering and redemption price per share  $10.58 
      
(1) Cost of Investments  $267,576,900 

 

See Notes to Financial Statements. 

 

14 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Statement of Operations

 

For the Year Ended November 30, 2018

 

INVESTMENT INCOME:     
Interest (net of foreign withholding tax of $5,491)  $24,319,718 
Total Investment Income   24,319,718 
      
EXPENSES:     
Investment advisory fees   2,947,105 
Interest on reverse repurchase agreements   2,242,985 
Administration fees   448,563 
Custodian fees   104,597 
Professional fees   146,357 
Printing fees   100,492 
Trustee fees   33,114 
Transfer agent fees   19,894 
Insurance fees   29,677 
Other   73,862 
Total Expenses   6,146,646 
Net Investment Income   18,173,072 
      
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:     
Net realized gain/(loss) on:     
Investments   (21,439,127)
Credit default swap contracts   8,750 
Interest rate swap contracts   (306,770)
Forward foreign currency contracts   (2,346,213)
Foreign currency transactions   (768,303)
Net realized loss   (24,851,663)
Net change in unrealized appreciation/(depreciation) on:     
Investments   (26,917,426)
Credit default swap contracts   29,748 
Interest rate swap contracts   2,191,140 
Forward foreign currency contracts   114,986 
Translation of assets and liabilities denominated in foreign currencies   43,939 
Net change in unrealized depreciation   (24,537,613)
Net Realized and Unrealized Loss on Investments   (49,389,276)
Net Decrease in Net Assets Resulting from Operations  $(31,216,204)

 

See Notes to Financial Statements.

 

Annual Report | November 30, 2018 15

 

Stone Harbor Emerging Markets Income Fund Statements of Changes in Net Assets

 

 

  

For the

Year Ended

November 30, 2018

  

For the

Year Ended

November 30, 2017

 
OPERATIONS:        
Net investment income  $18,173,072   $22,217,858 
Net realized gain/(loss)   (24,851,663)   3,387,816 
Net change in unrealized appreciation/(depreciation)   (24,537,613)   23,098,485 
Net increase/(decrease) in net assets resulting from operations   (31,216,204)   48,704,159 
           
DISTRIBUTIONS TO SHAREHOLDERS:          
From distributable earnings   (6,798,725)   (17,202,568)(1)
From tax return of capital   (27,881,362)   (17,146,179)
Net decrease in net assets from distributions to shareholders   (34,680,087)   (34,348,747)
           
Net asset value of common shares issued to stockholders from reinvestment of dividends   2,608,149    1,977,164 
Net increase in net assets from capital share transactions   2,608,149    1,977,164 
           
Net Increase/(Decrease) in Net Assets   (63,288,142)   16,332,576 
           
NET ASSETS:          
Beginning of period   234,280,641    217,948,065 
End of period  $170,992,499   $234,280,641(2) 
           
OTHER INFORMATION:          
Share Transactions:          
Beginning shares   15,973,492    15,843,749 
Shares issued as reinvestment of dividends   195,424    129,743 
Shares outstanding - end of period   16,168,916    15,973,492 

 

(1)For the year ended November 30, 2017, total distributions from distributable earnings consisted of Net Investment Income of $17,202,568, and Net Realized Gains of $-.
(2)For the year ended November 30, 2017, Net Assets included distributions in excess of net investment income of $617,828.

 

See Notes to Financial Statements. 

 

16 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Statement of Cash Flows

 

November 30, 2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:    
Net decrease in net assets from operations  $(31,216,204)
Purchase of investment securities   (369,438,291)
Proceeds from disposition of investment securities   370,681,803 
Net purchase of short-term investment securities   (2,541,433)
Net amortization of discounts, accretion of premiums and inflation income   (2,763,140)
Net realized (gain)/loss on:     
Investments   21,439,127 
Net change in unrealized (appreciation)/depreciation on:     
Investments   26,917,426 
Credit default swap contracts   (29,748)
Forward foreign currency contracts   (114,986)
Increase in deposits with brokers for interest rate swap contracts, reverse repurchase agreements   (3,933,001)
Decrease in interest receivable   837,913 
Increase in receivable on credit default swap contracts   (21,000)
Increase in prepaid and other assets   (20)
Decrease in payable due to brokers for reverse repurchase agreements   (109,000)
Increase in payable due to brokers for forward foreign currency contracts   20,000 
Increase in variation margin payable on interest rate swap contracts   216,416 
Decrease in payable to adviser   (37,638)
Decrease in payable to administrator   (48,612)
Decrease in other payables   (52,031)
Increase in interest payable on reverse repurchase agreements   95,062 
Increase in premiums received for credit default swap contracts   39,456 
Net cash provided by operating activities   9,942,099 
      
CASH FLOWS FROM FINANCING ACTIVITIES:     
Cash payments for reverse repurchase agreements   (456,230,437)
Cash payments from reverse repurchase agreements   476,412,410 
Cash distributions paid   (32,071,938)
Borrowings from bank overdraft   1,577,397 
Net cash used in financing activities   (10,312,568)
      
Effect of exchange rates on cash   4,936 
      
Net decrease in cash   (365,533)
Cash, beginning balance   365,533 
Cash, ending balance  $ 
      
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:     
Cash paid during the period for interest expense on reverse repurchase agreements:  $2,147,923 
Non-cash financing activities not included herein consist of reinvestment of dividends and distributions of:  $2,608,149 

 

See Notes to Financial Statements.

 
Annual Report | November 30, 2018 17

 

Stone Harbor Emerging Markets Income Fund Financial Highlights
 

For a share outstanding throughout the periods presented.

 

  

For the Year

Ended

November 30,

2018

  

For the Year

Ended

November 30,

2017

  

For the Year

Ended

November 30,

2016

  

For the Year

Ended

November 30,

2015

  

For the Year

Ended

November 30,

2014

 
Net asset value - beginning of period  $14.67   $13.76   $14.55   $18.56   $19.60 
Income/(loss) from investment operations:                        
Net investment income(1)   1.13    1.40    1.42    2.24    2.05 
Net realized and unrealized gain/(loss) on investments   (3.06)   1.67    (0.05)   (4.09)   (0.93)
Total income/(loss) from investment operations   (1.93)   3.07    1.37    (1.85)   1.12 
                          
Less distributions to shareholders:                         
From net investment income   (0.42)   (1.08)   (0.35)   (0.33)   (1.90)
From tax return of capital   (1.74)   (1.08)   (1.81)   (1.83)   (0.26)
Total distributions   (2.16)   (2.16)   (2.16)   (2.16)   (2.16)
Net Increase/(Decrease) in Net Asset Value   (4.09)   0.91    (0.79)   (4.01)   (1.04)
Net asset value - end of period  $10.58   $14.67   $13.76   $14.55   $18.56 
Market price - end of period  $12.05   $15.19   $14.09   $12.86   $17.80 
                          
Total Return - Net Asset Value(2)   (15.35%)   22.74%   10.87%   (9.27%)   6.03%
Total Return - Market Price(2)   (6.89%)   24.11%   28.45%   (16.38%)   7.45%
                          
Ratios/Supplemental Data:                         
Net assets, end of period (in millions)  $171   $234   $218   $230   $293 
Ratio of expenses to average net assets   2.96%(3)   2.59%(3)   2.18%(3)   2.13%(3)   2.07%
Ratio of net investment income to average net assets   8.76%   9.47%   10.03%   14.08%   10.42%
Ratio of expenses to average managed assets(4)   2.09%(3)   1.85%(3)   1.62%(3)   1.46%(3)   1.44%
Portfolio turnover rate   130%   107%   105%   89%   97%
                          
Borrowings at End of Period                         
Aggregate Amount Outstanding (in millions)  $85   $65   $101   $90   $137 
Asset Coverage  $3   $5   $3   $4   $3 

 

(1)Calculated using average shares throughout the period.
(2)Total investment return is calculated assuming a purchase of common share at the opening on the first day and a sale at closing on the last day of each period reported. Dividends and distributions, if any, are assumed for purposes of this calculation to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment returns do not reflect brokerage commissions, if any.
(3)For the years ended 2018, 2017, 2016, and 2015, includes borrowing costs of 1.08%, 0.74%, 0.41% and 0.30% to average net assets and 0.76%, 0.53%, 0.30% and 0.21% to average managed assets, respectively.
(4)Average managed assets represent average net assets applicable to common shares plus average amount of borrowings during the period.

 

See Notes to Financial Statements.

 

18 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Notes to Financial Statements

 

November 30, 2018

 

1. ORGANIZATION

 

 

The Fund is a closed-end management investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Fund is organized as a Massachusetts business trust pursuant to an Agreement and Declaration of Trust governed by the laws of The Commonwealth of Massachusetts (the “Declaration of Trust”). The Fund’s inception date is December 22, 2010. Prior to that, the Fund had no operations other than matters relating to its organization and the sale and issuance of 4,188 shares of beneficial interest (“Common Shares”) in the Fund to the Stone Harbor Investment Partners LP (the “Adviser” or “Stone Harbor”) at a price of $23.88 per share. The Fund’s common shares are listed on the New York Stock Exchange (the “Exchange”) and trade under the ticker symbol “EDF”.

 

The Fund’s investment objective is to maximize total return, which consists of income on its investments and capital appreciation. The Fund will normally invest at least 80% of its net assets (plus any borrowings made for investment purposes) in emerging markets securities. Emerging markets securities include fixed income securities and other instruments (including derivatives) that are economically tied to emerging market countries, which are denominated in the predominant currency of the local market of an emerging market country or whose performance is linked to those countries’ markets, currencies, economies or ability to repay loans. A security or instrument is economically tied to an emerging market country if it is principally traded on the country’s securities markets or if the issuer is organized or principally operates in the country, derives a majority of its income from its operations within the country or has a majority of its assets within the country.

 

The Fund is classified as “non-diversified” under the 1940 Act. As a result, it can invest a greater portion of its assets in obligations of a single issuer than a “diversified” fund. The Fund may therefore be more susceptible than a diversified fund to being adversely affected by any single corporate, economic, political or regulatory occurrence.

 

2. SIGNIFICANT ACCOUNTING POLICIES AND RISK DISCLOSURES

 

 

The following is a summary of significant accounting policies consistently followed by the Fund in the preparation of its financial statements. The Fund is considered an investment company for financial reporting purposes under generally accepted accounting principles in the United States of America (“GAAP”). The policies are in conformity with GAAP. The preparation of the financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

 

Investment Valuation: Sovereign debt obligations, corporate bonds, and convertible corporate bonds, are generally valued at the mean between the closing bid and asked prices provided by an independent pricing service. The pricing service generally uses market models that consider trade data, yields, spreads, quotations from dealers and active market makers, credit worthiness, market information on comparable securities, and other relevant security specific information. Bank Loans are primarily valued by a loan pricing provider using a composite loan price at the mean of the bid and ask prices from one or more brokers of dealers. Credit Linked securities are generally valued using quotations from the broker through which the Fund executed the transaction. The broker’s quotation considers cash flows, default and recovery rates, and other security specific information. Equity securities for which market quotations are available are generally valued at the last sale price or official closing price on the primary market or exchange on which they trade. If on a given day, a closing price is not available on the exchange, the equity security is valued at the mean between the closing bid and ask prices, as such prices are provided by a pricing service. Publicly traded foreign government debt securities are typically traded internationally in the over the counter market and are valued at the mean between the bid and asked prices as of the close of business of that market. When prices are not readily available, or are determined not to reflect fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board. Short term obligations with maturities of 60 days or less are valued at amortized cost, which approximates market value. Exchange Traded Funds (“ETFs”) are valued at the close price on the exchange it is listed. Money market mutual funds are valued at their net asset value. Over the counter traded derivatives (primarily swaps and foreign currency options) are generally priced by an independent pricing service. OTC traded credit default swaps are valued by the independent pricing source using a mid price that is calculated based on data an independent pricing source receives from dealers. OTC traded foreign currency options are valued by an independent pricing source using mid foreign exchange rates against USD for all currencies at 4:00 p.m. EST. Derivatives which are cleared by an exchange are priced by using the last price on such exchange. Foreign currency positions including forward currency contracts are priced at the mean between the closing bid and asked prices at 4:00 p.m. Eastern time.

 

A three-tier hierarchy has been established to measure fair value based on the extent of use of “observable inputs” as compared to “unobservable inputs” for disclosure purposes and requires additional disclosures about these valuations measurements. Inputs refer broadly to the assumptions that market participants would use in pricing a security. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the security developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the security developed based on the best information available in the circumstances.

 

 

Annual Report | November 30, 2018 19

 

Stone Harbor Emerging Markets Income Fund Notes to Financial Statements

 

November 30, 2018

 

The three-tier hierarchy is summarized as follows:

 

Level 1Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.

 

Level 2Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.

 

Level 3Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability and would be based on the best information available.

 

The following is a summary of the Fund’s investment and financial instruments based on the three-tier hierarchy as of November 30, 2018:

 

Investments in Securities at Value*  Level 1   Level 2   Level 3   Total 
Sovereign Debt Obligations  $   $191,293,661   $   $191,293,661 
Corporate Bonds                    
Indonesia       3,802,767    195    3,802,962 
Other       34,651,655        34,651,655 
Credit Linked Notes                    
Iraq           6,010,257    6,010,257 
Other       5,460,036        5,460,036 
Short Term Investments   4,051,399            4,051,399 
Total  $4,051,399   $235,208,119   $6,010,452   $245,269,970 
                     
Other Financial Instruments**                    
Assets                    
Forward Foreign Currency Contracts  $   $80,108   $   $80,108 
Credit Default Swap       29,748        29,748 
Interest Rate Swap Contracts       2,127,878        2,127,878 
                     
Liabilities                    
Forward Foreign Currency Contracts       (15,113)       (15,113)
Total  $   $2,222,621   $   $2,222,621 

 

*For detailed country descriptions, see accompanying Statement of Investments.
**Other financial instruments are derivative instruments reflected in the Statement of Investments. The derivatives shown in this table are reported at their unrealized appreciation/(depreciation) at measurement date, which represents the change in the contract's value from trade date. For liabilities arising from bank overdrafts and reverse repurchase agreements, the carrying amount approximates fair value due to the relatively short-term maturity of these financial instruments. As of November 30, 2018, the liabilities related to bank overdrafts and reverse repurchase agreements used level 2 inputs.

 

The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used in determining fair value:

 

Asset Type 

Balance as of November 30,

2017

  

Accrued Discount/

premium

  

Realized

Gain/(Loss)

  

Change in Unrealized

Appreciation/

Deperciation

   Purchases  

Sales

Proceeds

  

Balance as of November 30,

2018

  

Net change in unrealized

appreciation/(depreciation)

included in the Statements of Operations at November 30, 2018

 
Stone Harbor Emerging Markets Income                         
Bank Loans  $5,398,293   $   $(977,857)  $993,769   $   $(5,414,205)  $   $ 
Corporate Bonds               (9)   204        195    (9)
Credit Linked Notes   7,347,481    133,391    (48,673)   (526,849)       (895,093)   6,010,257    (526,849)
Total  $12,745,774   $133,391   $(1,026,530)  $466,911   $204   $(6,309,298)  $6,010,452   $(526,858)

 

 
20 www.shiplpcef.com

 

Stone Harbor Emerging Markets Income Fund Notes to Financial Statements

 

November 30, 2018

 

All level 3 investments have values determined utilizing third-party pricing information without adjustment.

 

The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

In the event a Board approved independent pricing service is unable to provide an evaluated price for a security or the Adviser believes the price provided is not reliable, the Adviser may seek to find an alternative independent source, such as a broker/dealer to provide a price quote, or use evaluated pricing models similar to the techniques and models used by the independent pricing service. These fair value measurement techniques may utilize unobservable inputs (Level 3).

 

On at least a quarterly basis, the Adviser presents the factors considered in determining the fair value measurements and presents that information to the Board which meets at least quarterly.

 

Security Transactions and Investment Income: Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. If applicable, any foreign capital gains taxes are accrued, net of unrealized gains, and are payable upon the sale of such investments. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults on an expected interest payment, the Fund’s policy is to generally halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default.

 

Foreign Currency Translation: The books and records of the Fund are maintained in U.S. dollars. Investment valuations and other assets and liabilities initially expressed in foreign currencies are converted each business day into U.S. dollars based upon current exchange rates. Prevailing foreign exchange rates may generally be obtained at the close of the NYSE (normally 4:00 p.m. Eastern time).

 

The portion of realized and unrealized gains or losses on investments due to fluctuations in foreign currency exchange rates is not separately disclosed and is included in realized and unrealized gains or losses on investments, when applicable.

 

Foreign Securities: The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The risks include possible revaluation of currencies, the ability to repatriate funds, less complete financial information about companies and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than those of securities of comparable U.S. issuers.

 

Credit Linked Notes: The Fund may invest in credit linked notes to obtain economic exposure to high yield, emerging markets or other securities. Investments in a credit linked note typically provide the holder with a return based on the return of an underlying reference instrument, such as an emerging market bond. Like an investment in a bond, investments in credit linked securities represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. In addition to the risks associated with the underlying reference instrument, an investment in a credit linked note is also subject to liquidity risk, market risk, interest rate risk and the risk that the counterparty will be unwilling or unable to meet its obligations under the note.

 

Loan Participations and Assignments: The Fund may invest in loans arranged through private negotiation between one or more financial institutions. The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, or any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation.

 

While some loans are collateralized and senior to an issuer’s other debt securities, other loans may be unsecured and/or subordinated to other securities. Some senior loans, such as bank loans, may be illiquid and generally tend to be less liquid than many other debt securities.

 

The Fund assumes the credit risk of the borrower, the lender that is selling the participation and any other persons interpositioned between the Fund and the borrower. In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. Loans may not be considered “securities”, and purchasers, such as the Fund, therefore may not be entitled to rely on the anti-fraud protections of the federal securities laws.

 

Segregation and Collateralization: In cases in which the 1940 Act and the interpretive positions of the U.S. Securities and Exchange Commission (“SEC”) require that the Fund either delivers collateral or segregates assets in connection with certain investments (e.g., foreign currency exchange contracts, securities with extended settlement periods, and swaps) or certain borrowings (e.g., reverse repurchase agreements), the Fund will segregate collateral or designate on its books and record cash or other liquid securities having a value at least equal to the amount that is required to be physically segregated for the benefit of the counterparty. Furthermore, based on requirements and agreements with certain exchanges and third party broker-dealers, each party has requirements to deliver/deposit cash or securities as collateral for certain investments. Cash collateral that has been pledged to cover obligations of the Fund and cash collateral received from the counterparty, if any, is reported separately on the Statement of Assets and Liabilities as “Deposits with brokers” or “Payable due to brokers”, respectively. Securities collateral pledged for the same purpose is noted on the Statement of Investments.

 

 
Annual Report | November 30, 2018 21

 

Stone Harbor Emerging Markets Income Fund Notes to Financial Statements
 

November 30, 2018

 

Leverage: The Fund may borrow from banks and other financial institutions and may also borrow additional funds by entering into reverse repurchase agreements or the issuance of debt securities (collectively, “Borrowings”) in an amount that does not exceed 33 1/3% of the Fund’s Managed Assets (defined in Note 5) immediately after such transactions. It is possible that following such Borrowings, the assets of the Fund will decline due to market conditions such that this 33 1/3% limit will be exceeded. In that case, the leverage risk to Common Shareholders will increase.

 

In a reverse repurchase agreement, the Fund delivers a security in exchange for cash to a financial institution, the counterparty, with a simultaneous agreement to repurchase the same or substantially the same security at an agreed upon price and date. The Fund is entitled to receive principal and interest payments, if any, made on the security delivered to the counterparty during the term of the agreement. Cash received in exchange for securities delivered plus accrued interest payments to be made by the Fund to counterparties are reflected as a liability on the Statement of Assets and Liabilities. Interest payments made by the Fund to counterparties are recorded as a component of interest expense on the Statement of Operations. In periods of increased demand for the security, the Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund. The Fund will segregate assets determined to be liquid to cover its obligations under reverse repurchase agreements. The segregated assets are found on the Fund’s Statement of Investments as full or partially pledge securities. The total amount of securities pledged at November 30, 2018 was $103,079,377. As all agreements can be terminated by either party on demand, face value approximates fair value at November 30, 2018. This fair value is based on Level 2 inputs under the three-tier fair valuation hierarchy described above. For the year ended November 30, 2018, the average amount of reverse repurchase agreements outstanding was $87,145,562, at a weighted average interest rate of 2.53%.

 

The following table indicates the total amount of reverse repurchased agreements, reconciled to gross liability as of November 30, 2018:

 

Remaining contractual maturity of the lending agreement

 

  

Overnight &

Continuous

   Up to 30 days   30-90 days  

Greater than

90 days

   Total 
Stone Harbor Emerging Markets Income Fund                   
Sovereign Debt Obligations  $40,742,271   $   $   $   $40,742,271 
Corporate Debt   43,944,713