Aberdeen Asia-Pacific Income Fund, Inc.

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:    811-04611
Exact name of registrant as specified in charter:    Aberdeen Asia-Pacific Income Fund, Inc.
Address of principal executive offices:    1735 Market Street, 32nd Floor
   Philadelphia, PA 19103
Name and address of agent for service:    Ms. Andrea Melia
   Aberdeen Asset Management Inc.
   1735 Market Street 32nd Floor
   Philadelphia, PA 19103
Registrant’s telephone number, including area code:    800-522-5465
Date of fiscal year end:    October 31
Date of reporting period:    October 31, 2016


Item 1 – Reports to Stockholders – The Report to Shareholders is attached herewith.


LOGO


Managed Distribution Policy (unaudited)

 

 

 

The Board of Directors of the Aberdeen Asia-Pacific Income Fund, Inc. (the “Fund”) has authorized a managed distribution policy (“MDP”) of paying monthly distributions at an annual rate set once a year. The Fund’s current monthly distribution is set at a rate of $0.035 per share. With each distribution, the Fund will issue a notice to shareholders and an accompanying press release which will provide detailed information regarding the amount and estimated composition of the distribution and other information required by the Fund’s MDP exemptive order. The Fund’s Board of Directors may amend or terminate the MDP at any time without prior notice to shareholders; however, at this time, there are no reasonably foreseeable circumstances that might cause the termination of the MDP. You should not draw any conclusions about the Fund’s investment performance from the amount of distributions or from the terms of the Fund’s MDP.

Distribution Disclosure Classification (unaudited)

 

 

The Fund’s policy is to provide investors with a stable monthly distribution out of current income, supplemented by realized capital gains and, to the extent necessary, paid-in capital.

The Fund is subject to U.S. corporate, tax and securities laws. Under U.S. tax rules, the amount applicable to the Fund and character of distributable income for each fiscal period depends on the actual exchange rates during the entire year between the U.S. Dollar and the currencies in which Fund assets are denominated and on the aggregate gains and losses realized by the Fund during the entire year.

Therefore, the exact amount of distributable income for each fiscal year can only be determined as of the end of the Fund’s fiscal year, October 31. Under Section 19 of the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund is required to indicate the sources of certain distributions to shareholders. The estimated distribution composition may vary from month to month because it may be materially impacted by future income, expenses and realized gains and losses on securities and fluctuations in the value of the currencies in which the Fund’s assets are denominated.

The distributions for the fiscal year ended October 31, 2016 consisted of 56% net investment income and 44% return of capital.

In January 2017, a Form 1099-DIV will be sent to shareholders, which will state the amount and composition of distributions and provide information with respect to their appropriate tax treatment for the 2016 calendar year.

Dividend Reinvestment and Direct Stock Purchase Plan (unaudited)

 

 

Computershare Trust Company, N.A. (“Computershare”), the Fund’s transfer agent, sponsors and administers a Dividend Reinvestment and Direct Stock Purchase Plan (the “Plan”), which is available to shareholders.

The Plan allows registered shareholders and first-time investors to buy and sell shares and automatically reinvest dividends and capital gains through the transfer agent. This is a cost-effective way to invest in the Fund.

Please note that for both purchase and reinvestment purposes, shares will be purchased in the open market at the current share price and cannot be issued directly by the Fund.

For more information about the Plan and a brochure that includes the terms and conditions of the Plan, please call Computershare at 1-800-647-0584 or visit www.computershare.com/buyaberdeen.


Letter to Shareholders (unaudited)

 

 

 

Dear Shareholder,

We present this Annual Report which covers the activities of Aberdeen Asia-Pacific Income Fund, Inc. (the “Fund”) for the fiscal year ended October 31, 2016. The Fund’s principal investment objective is to seek current income. The Fund may also achieve incidental capital appreciation.

Fund Updates

As of July 31, 2016, the Fund’s blended benchmark changed, as summarized below:

 

Index   

Previous

Weight

     New Index   

New

Weight

 

Bloomberg AusBond Composite1 Index

     45.00%      

Bloomberg AusBond Composite Index1

     35.00%   

JP Morgan Asian Credit Index2

     35.75%      

JP Morgan Asian Credit Index2

     40.00%   

Markit iBoxx Asia ex-Japan Government Bond Index3

     19.25%      

Markit iBoxx Asia Government Index3

     15.00%   
     

Markit iBoxx Asia Government India Index4

     5.00%   
             

Markit iBoxx Asia Government Indonesia Index5

     5.00%   

 

1   

The Bloomberg AusBond Composite Bond Index includes investment grade fixed interest bonds of all maturities issued in the Australian debt market under Australian law.

2   

The JP Morgan Asian Credit Index is a broad-based securities market index which consists of liquid US dollar-denominated debt securities issued out of Asia ex-Japan region.

3   

The Markit iBoxx Asia Government Index is a subset of the iBoxx Asia ex-Japan Index family investing in local currency sovereign bonds from China, Hong Kong, India, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand.

4   

The Markit iBoxx Asia Government India Index is a subset of the iBoxx Asia ex-Japan Index family investing in local currency sovereign bonds from India.

5   

The Markit iBoxx Asia Government Indonesia Index is a subset of the iBoxx Asia ex-Japan Index family investing in local currency sovereign bonds from Indonesia.

 

NAV Total Return Performance

The Fund’s total return, based on net asset value (“NAV”), net of fees, was 11.4% for the fiscal year ended October 31, 2016 and 8.2% per annum since inception, assuming the reinvestment of dividends and distributions. The Fund’s total return for the fiscal year ended October 31, 2016 and per annum since inception is based on the reported NAV on each financial reporting period end.

Share Price Total Return Performance & Discount

For the fiscal year ended October 31, 2016, based on market price, the Fund’s total return was 12.9%, assuming reinvestment of dividends and distributions. The Fund’s share price increased by 3.6% over the fiscal year, from $4.75 on October 31, 2015 to $4.92 on October 31, 2016. The Fund’s share price on October 31, 2016 represented a discount of 13.5% to the NAV per share of $5.69 on that date, compared with a discount of 14.7% to the NAV per share of $5.57 on October 31, 2015.

Portfolio Allocation

As of October 31, 2016, the Fund held 32.5% of its total investments in Australian debt securities, 62.8% in Asian debt securities, 4.4% in European debt securities and 0.3% in U.S. debt securities.

Of the Fund’s total investments, 40.6% were held in U.S. Dollar-denominated bonds issued by foreign issuers. The rest of the Fund’s currency exposure was 30.1% in the Australian Dollar and 29.3% in various Asian currencies.

Credit Quality

As of October 31, 2016, 48.7% of the Fund’s total investments were invested in securities where either the issue or the issuer was rated A or better by Standard & Poor’s1 or Moody’s Investors Services, Inc. (“Moodys”).2

 

 

 

1   

Standard & Poor’s credit ratings are expressed as letter grades that range from ‘AAA’ to ‘D’ to communicate the agency’s opinion of relative level of credit risk. Ratings from ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories. The investment grade category is a rating from ‘AAA’ to ‘BBB-’.

2   

Moody’s is an independent, unaffiliated research company that rates fixed income securities. Moody’s assigns ratings on the basis of risk and the borrower’s ability to make interest payments. Typically, securities are assigned a rating from ‘Aaa’ to ‘C’, with ‘Aaa’ being the highest quality and ‘C’ the lowest quality.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

1


Letter to Shareholders (unaudited) (continued)

 

 

 

 

Portfolio Management

The Fund is managed by Aberdeen’s Asia-Pacific fixed income team. The Asia-Pacific fixed income team works in a truly collaborative fashion; all team members have both portfolio management and research responsibilities. The team is responsible for the day-to-day management of the Fund.

Effective January 31, 2016, David Choi replaces John Manning. Mr Choi is responsible for overseeing day-to-day management and overall supervision of Australian Fixed Income team. He joins the team of Victor Rodriguez, Nick Bishop, Adam McCabe and Kenneth Akintewe. David Choi is the Head of Australian Macro on the Australia Fixed Income desk. David joined Aberdeen in 2011 after spending five years at NSW Treasury Corporation, where he was responsible for portfolio management of both asset and debt portfolios, and specialised in interest rate positioning with responsibility for tactical overlay strategies. David graduated with a Bachelor of Law/Commerce (Finance) from the University of NSW.

Managed Distribution Policy

Distributions to common shareholders for the twelve months ended October 31, 2016 totaled $0.42 per share. Based on the share price of $4.92 on October 31, 2016, the distribution rate over the twelve-month period ended October 31, 2016 was 8.5%. Since all distributions are paid after deducting applicable withholding taxes, the effective distribution rate may be higher for those U.S. investors who are able to claim a tax credit.

On November 9, 2016 and December 9, 2016, the Fund announced that it will pay on November 25, 2016 and January 11, 2017, respectively a distribution of U.S. $0.035 per share to all shareholders of record as of November 18, 2016 and December 30, 2016, respectively.

The Fund’s policy is to provide investors with a stable monthly distribution out of current income, supplemented by realized capital gains and, to the extent necessary, paid-in capital, which is a non-taxable return of capital. This policy is subject to an annual review as well as regular review at the Board’s quarterly meetings, unless market conditions require an earlier evaluation.

Fund’s Leverage

The table below summarizes certain key terms of the Fund’s current leverage:

 

    

Amount

($ in millions)

    Maturity  

Revolving Credit Facility

  $ 125        April 9, 2017   

7-year Series A Senior Secured Notes

  $ 100        June 12, 2020   

10-year Series B Senior Secured Notes

  $ 100        June 12, 2023   

5-year Term Loan A

  $ 100        June 12, 2018   

4-year Term Loan B

  $ 100        December 14, 2019   

10-year Series A Mandatory Redeemable Preferred Shares

  $ 50        June 27, 2023   

The Series A Mandatory Redeemable Preferred Shares, with a liquidation value of $50 million, are rated AA by Fitch Ratings3 and the combined $200 million 7- and 10-year Series A and B Senior Secured Notes are rated AAA by Fitch Ratings.

We believe the Fund has been able to lock in an attractive rate cost of borrowing and extend the maturity of the leverage facility while diversifying its borrowing structure during what we believe to be a favorable current interest rate environment. A more detailed description of the Fund’s leverage can be found in the Report of Investment Manager and the Notes to Financial Statements.

Open Market Repurchase Program

The Fund’s policy is generally to buy back Fund shares on the open market when the Fund trades at certain discounts to NAV and management believes such repurchases may enhance shareholder value. During the fiscal year ended October 31, 2016 and fiscal year ended October 31, 2015, the Fund repurchased 3,042,619 and 4,991,465 shares, respectively.

Portfolio Holdings Disclosure

The Fund’s complete schedule of portfolio holdings for the second and fourth quarters of each fiscal year is included in the Fund’s semi-annual and annual reports to shareholders. The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Form N-Q filings are available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The Fund makes the

 

 

3   

Fitch Ratings (“Fitch”) is an international credit rating agency. Fitch ratings range from AAA (reliable and stable) to D (high risk).

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

2


Letter to Shareholders (unaudited) (concluded)

 

 

 

information on Form N-Q available to shareholders on the Fund’s website or upon request and without charge by calling Investor Relations toll-free at 1-800-522-5465.

Proxy Voting

A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities, and information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve months ended June 30 is available by August 31 of the relevant year: (i) upon request and without charge by calling Investor Relations toll-free at 1-800-522-5465; and (ii) on the SEC’s website at http://www.sec.gov.

Unclaimed Share Accounts

Please be advised that abandoned or unclaimed property laws for certain states require financial organizations to transfer (escheat) unclaimed property (including Fund shares) to the state. Each state has its own definition of unclaimed property, and Fund shares could be considered “unclaimed property” due to account inactivity (e.g., no owner-generated activity for a certain period), returned mail (e.g., when mail sent to a shareholder is returned to the Fund’s transfer agent as undeliverable), or a combination of both. If your Fund shares are categorized as unclaimed, your financial advisor or the Fund’s transfer agent will follow the applicable state’s statutory requirements to contact you, but if unsuccessful, laws may require that the shares be escheated to the appropriate state. If this happens, you will have to contact the state to recover your property, which may involve time and expense. For more information on unclaimed property and how to maintain an active account, please contact your financial adviser or the Fund’s transfer agent.

Investor Relations Information

As part of Aberdeen’s commitment to shareholders, we invite you to visit the Fund on the web at www.aberdeenfax.com. Here, you can

view monthly fact sheets, quarterly commentary, distribution and performance information, updated daily data courtesy of Morningstar®, portfolio charting and other Fund literature.

Enroll in our email services today and be among the first to receive the latest closed-end fund news, announcements, videos and information. In addition, you can receive electronic versions of important Fund documents including annual reports, semi-annual reports, prospectuses, and proxy statements. Sign-up today at www.aberdeen-asset.us/aam.nsf/usclosed/email.

For your convenience, included within this report is a reply card with a postage paid envelope. Please take a minute to complete this card if you would like to be added to our enhanced email services from Aberdeen.

Contact Us:

 

 

Visit: www.cef.aberdeen-asset.us

 

Watch: www.aberdeen-asset.us/aam.nsf/usclosed/aberdeentv

 

Email: InvestorRelations@aberdeen-asset.com

 

Call: 1-800-522-5465 (toll-free in the U.S.)

Yours sincerely,

/s/ Christian Pittard

Christian Pittard

President

 

 

 

All amounts are U.S. Dollars unless otherwise stated.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

3


Report of the Investment Manager (unaudited)

 

 

 

Market/economic review

Asian fixed-income assets rallied over the 12-month period ended October 31, 2016, despite a volatile start attributable to an interest-rate hike by the U.S. Federal Reserve (Fed) in December 2015, sharp declines in Chinese equities, and the decline in commodity prices. Just when investor sentiment appeared to stabilize going into the second half of the reporting period, risk aversion spiked again, this time caused by the UK’s unexpected Brexit1 vote in June 2016. After a brief sell-off, Asian bonds rebounded as record-low interest rates in developed markets drove global fund flows in search of higher yields. Towards the end of the reporting period, caution rose ahead of the U.S. presidential election in early November. Republican Donald Trump subsequently won the election on November 8. Regional currencies ended the reporting period mixed against the U.S. dollar; the Indonesian rupiah, Malaysian ringgit and Thai baht led gains, but the Chinese yuan, Philippine peso and Indian rupee weakened.

In Australia, government bond yields fell as the central bank remained on a monetary policy easing path, cutting interest rates in attempts to boost growth amid deflationary pressures. Second-quarter 2016 gross domestic product (GDP) growth slowed as business investments remained a drag, but this was mitigated by good household spending and public investments in infrastructure. Although Standard & Poor’s2 downgraded the country’s credit rating outlook to negative, its impact was negligible.

In Asian bond markets, Indonesia and India were the strongest performers over the reporting period as their respective central banks continued to cut interest rates. The Indonesian market was further boosted by fiscal stimulus measures and the tax amnesty bill that investors hoped would encourage overseas asset repatriation. In India, reform momentum accelerated with the ratification of the bankruptcy code and the upper house’s approval of the goods and services tax (GST) bill. The market also reacted positively to the appointment of Urjit Patel as the new central bank governor and formation of the monetary policy committee. Chinese bonds were buttressed by ample liquidity and Beijing’s assurance that its economic growth targets would be met. In Malaysia, investor sentiment was lifted by the central bank’s interest-rate cut and

J.P. Morgan’s decision to include Islamic bonds in its emerging-market indices. Thai bond yields fell on hopes of easier monetary policy, which gained credence after King Bhumibol’s death in October.

Yields in Singapore also trended lower over the reporting period, even though the central bank removed the appreciation bias from its currency policy. Korean bonds benefited from the central banks’ policy rate cut and the government’s 20 trillion-won (about US$17 billion) stimulus package. However, gains were pared in the last few months of the period by protests calling for President Park Geun-hye’s resignation for allowing a friend to gain inappropriate access to government documents. Philippine bonds underperformed versus the overall market during the reporting period. Investors initially welcomed President Rodrigo Duterte’s election win, but his more strident invectives against the U.S. later reignited market jitters.

Asian credit markets strengthened over the reporting period, with spreads versus comparable-duration3 U.S. Treasuries narrowing substantially, led by the high-yield sector. As commodity prices rebounded and fears over Chinese economic growth subsided, investors’ risk appetite improved. Nevertheless, some headwinds emerged later, particularly rising concerns over overheating Chinese property prices and corporate bond defaults in the hard-hit oil and gas sector. Towards the end of the reporting period, gains were capped by increasingly stretched valuations.

Fund performance review

Fund performance for the reporting period was hindered by our strategies in Asian local-currency bonds and Asian U.S.-dollar credit. On a positive note, the Fund’s allocations to Australian and New Zealand bonds enhanced performance.

Within the Australia and New Zealand portfolio, our yield-curve and duration strategies bolstered Fund performance. In Asian local currency bonds, the Fund’s overweight exposure to India was the biggest positive contributor to performance. Conversely, the underweight to Thai, Singapore and Hong Kong bonds weighed on Fund performance for the reporting period. In currency management, the Fund’s overweight position in the Indian rupee detracted from performance, but was mitigated by the overweight to the rupiah and the positions in the Korean won and Singapore dollar.

 

 

1   

Brexit is an abbreviation of “British exit,” which refers to the June 23, 2016 referendum by British voters to exit the European Union.

2   

Standard & Poor’s credit ratings express the agency’s opinion about the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Typically, ratings are expressed as letter grades that range, for example, from “AAA” to “D” to communicate the agency’s opinion of relative level of credit risk. Ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

3   

Duration is an estimate of bond price sensitivity to changes in interest rates. The higher the duration, the greater the change (i.e., higher risk) in relation to interest-rate movements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

4


Report of the Investment Manager (unaudited) (continued)

 

 

 

In the Asian U.S.-dollar credit segment, security selection in high-yield industrial bonds and investment-grade sovereign issues detracted from Fund performance; however, the overweight to the investment-grade oil and gas sector curbed the losses.

The Fund’s use of derivatives was an overall detractor from performance during the reporting period. The impact of currency management in the Asian local currency bond segment via forwards4 was relatively flat. In the currency overlay,5 derivatives used for interest-rate management and currency management weighed on performance, particularly because of the long U.S. dollar-short Australian dollar position, given the Australian dollar’s strength for much of 2016.

As part of the liberalization of the domestic bond market, in February 2016, the People’s Republic of China (PRC) announced a new path for international investors to access onshore bonds through the China Interbank Bond Market (CIBM). Because more than 90% of current PRC bond trading activity is transacted in the CIBM, the Fund’s new ability to access PRC bonds (and other products) through CIBM provides greater flexibility and liquidity, while subjecting the Fund to similar risks associated with other methods of investing directly in China.

Outlook

Market reaction in the immediate aftermath of the U.S. presidential election reflected not only surprise over Donald Trump’s win but also elevated uncertainty that we believe could prevail going into 2017. U.S. Treasuries and some Asian bond markets initially rallied, but subsequently sold off, with current yields generally higher than their pre-election levels. The U.S. dollar weakened against its G106 peers but later reversed course, and recently was stronger against most G10 and emerging-market currencies. Credit spreads narrowed after initially widening immediately after the election. We believe that investors will need to wait for President-elect Trump to set policy direction when he takes office in January. Early assumptions are that the U.S. may embark on fiscal stimulus, which could prove inflationary and cause U.S. Treasury yields to rise further. The Fed is also expected to continue on its path of monetary policy normalization in December 2016, provided that market sentiment and financial conditions are stable. For Asia, we think that a key risk stems from a potential increase in U.S. protectionism and its impact on global trade. The Italian referendum on constitutional reform in

early December 2016, along with the Supreme Court ruling in the UK on the need for parliamentary approval to invoke Article 50,7 also present further headwinds, in our view. On a positive note, we think that central banks still have some room to cut interest rates if they choose. In Australia, however, we do not believe that low inflation alone will spur the central bank to ease monetary policy further, given the risks posed by the burgeoning residential housing supply.

Loan Facilities and the Use of Leverage

The amounts borrowed under the Revolving Credit Facility, the Term Loan Facility, the Notes and the Series A MRPS (each as defined below) may be invested to seek to return higher rates than the rates pursuant to which interests or dividends are paid under such forms of leverage. However, the cost of leverage could exceed the income earned by the Fund on the proceeds of such leverage. To the extent that the Fund is unable to invest the proceeds from the use of leverage in assets which pay interest at a rate which exceeds the rate paid on the leverage, the yield on the Fund’s common stock will decrease. In addition, in the event of a general market decline in the value of assets in which the Fund invests, the effect of that decline will be magnified in the Fund because of the additional assets purchased with the proceeds of the leverage.

The Fund employed leverage obtained via bank borrowing and other forms of leverage during the reporting period. On April 9, 2014, the Fund renewed its $150 million revolving credit facility for a 3-year period with a syndicate of banks (the “Revolving Credit Facility”). On June 12, 2013, the Fund entered into a note purchase agreement (the “Note Purchase Agreement”) with institutional investors relating to the private placement of $200 million of senior secured notes rated `AAA’ by Fitch Ratings, $100 million due June 12, 2020 and $100 million due June 12, 2023 (the “Notes”). On the same day, the Fund also entered into a term loan agreement providing for $200 million in secured term loans from Bank of America, N.A., $100 million due June 12, 2016 (on December 14, 2015, the maturity of this loan was extended to December 14, 2019) and $100 million due June 12, 2018 (the “Term Loan Facility”). On June 27, 2013, the Fund issued a private offering of 2 million shares of Series A Mandatory Redeemable Preferred Shares due June 25, 2023 (the “Series A MRPS”). The Series A MRPS have a liquidation value of $50 million and are rated ‘AA’ by Fitch Ratings. The Fund’s outstanding balance as of October 31, 2016 was $125 million on the Revolving Credit Facility.

 

 

4   

A currency forward is a binding contract in the foreign exchange market that locks in the exchange rate for the purchase or sale of a currency on a future date.

5   

A currency overlay segregates the currency component from other investments within a portfolio, allowing currency management to be separate from the management of other assets.

6   

The G10 nations include Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the UK and the U.S.

7   

Article 50 stipulates that “Any Member State may decide to withdraw from the [European] Union in accordance with its own constitutional requirements.”

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

5


Report of the Investment Manager (unaudited) (concluded)

 

 

 

The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having similar investment objectives and policies. The funds borrowed pursuant to the Revolving Credit Facility, the Term Loan Facility and the Notes may constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The Fund is limited in its ability to declare dividends or other distributions under the terms of the various forms of leverage. In the event of an event of default under either the Revolving Credit Facility or Term Loan Facility, the lenders have the right to cause a liquidation of the collateral (i.e., sell portfolio securities and other assets of the Fund) and, if any such default is not cured, the lenders may be able to control the liquidation as well. In the event of an event of default under the Note Purchase Agreement, the holders of the Notes have the right to cause a liquidation of the collateral (i.e., cause the sale of portfolio securities and other assets of the Fund).

Each of the Revolving Credit Facility Agreement, the Term Loan Agreement, the Note Purchase Agreement, and the Securities Purchase Agreement relating to the Series A MRPS includes usual and customary covenants for the applicable type of transaction. These covenants impose on the Fund asset coverage requirements, Fund composition requirements and limits on certain investments, such as illiquid investments, which are more stringent than those imposed on the Fund by the 1940 Act. The covenants or guidelines could impede the Fund’s investment manager, investment adviser, or sub-adviser from fully managing the Fund’s portfolio in accordance with the Fund’s investment objective and policies. Furthermore, non-compliance with such covenants or the occurrence of other events could lead to the cancellation of any and/or all of the forms of leverage. As of October 31, 2016, the Fund was in compliance with all covenants under the agreements relating to the various forms of leverage.

Interest Rate Swaps

The Fund may enter into interest rate swaps to efficiently gain interest rate exposure and hedge interest rate risk. On October 24, 2016, the Fund terminated a swap agreement with a notional value of $59 million maturing on October 24, 2016 and entered into a swap agreement with a notional value of $59 million maturing on October 28, 2026. As of October 31, 2016, the Fund held interest rate swap agreements with an aggregate notional amount of $125 million, which represented 100% of the Fund’s Revolving Credit Facility. Under the terms of the agreements currently in effect, the Fund receives a floating rate of interest (three-month USD-LIBOR BBA rate) and pays fixed rates of interest for the terms and based upon the notional amounts set forth below:

 

Remaining
Terms as of

October 31, 2016

   Amount
(in millions)
     Fixed Rate
Payable (%)
 

12 months

   $ 66.0         0.84   

120 months

     59.0         1.57   

A significant risk associated with interest rate swaps is the risk that the counterparty may default or file for bankruptcy, in which case the Fund would bear the risk of loss of the amount expected to be received under the swap agreements. There can be no assurance that the Fund will have an interest rate swap in place at any given time nor can there be any assurance that, if an interest rate swap is in place, it will be successful in hedging the Fund’s interest rate risk with respect to the loan facility. The implementation of this strategy is at the discretion of the Leverage Committee of the Board.

Aberdeen Asset Management Asia Limited

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

6


Total Investment Return (unaudited)

 

 

 

The following table summarizes the average annual Fund performance for the 1-year, 3-year, 5-year and 10-year periods as of October 31, 2016. The Fund’s principal investment objective is to seek current income. The Fund may also achieve incidental capital appreciation.

 

        1 Year        3 Years        5 Years        10 Years  

Net Asset Value (NAV)

       11.4%           1.5%           1.6%           6.0%   

Market Value

       12.9%           -1.1%           0.2%           5.1%   

Aberdeen Asset Management Inc. (“AAMI”), the Fund’s administrator, has entered into an agreement with the Fund to limit investor relations services fees, without which total return performance would be lower. For the fiscal year ended October 31, 2016, AAMI did not waive any investor relations services fees, because the Fund did not reach the capped amount. See Note 3 in the Notes to Financial Statements. Returns represent past performance. Total investment return at NAV is based on changes in the NAV of Fund shares and assumes reinvestment of dividends and distributions, if any, at market prices pursuant to the dividend reinvestment program. All return data at NAV includes fees charged to the Fund, which are listed in the Fund’s Statement of Operations under “Expenses.” The Fund’s total return is based on the reported NAV on each financial reporting period end. Total investment return at market value is based on changes in the market price at which the Fund’s shares traded on the NYSE MKT during the period and assumes reinvestment of dividends and distributions, if any, at market prices pursuant to the dividend reinvestment program. The Fund’s total investment return is based on the reported NAV on the financial reporting period end. Because the Fund’s shares trade in the stock market based on investor demand, the Fund may trade at a price higher or lower than its NAV. Therefore, returns are calculated based on both market price and NAV. Past performance is no guarantee of future results. The performance information provided does not reflect the deduction of taxes that a shareholder would pay on distributions received from the Fund. The current performance of the Fund may be lower or higher than the figures shown. The Fund’s yield, return, market price and NAV will fluctuate. Performance information current to the most recent month-end is available at www.aberdeenfax.com or by calling 800-522-5465.

The net operating expense ratio based on the fiscal year ended October 31, 2016 was 2.23%. The net operating expense ratio, excluding interest expense and distributions to Series A Mandatory Redeemable Preferred Shares, based on the fiscal year ended October 31, 2016 was 1.14%.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

7


Portfolio Composition (unaudited)

 

 

 

Quality of Investments(1)

As of October 31, 2016, 48.7% of the Fund’s total investments were invested in securities where either the issue or the issuer was rated “A” or better by Standard & Poor’s or Moody’s Investors Service, Inc. The table below shows the asset quality of the Fund’s portfolio as of October 31, 2016 compared with the previous six and twelve months:

 

Date     

AAA/Aaa

%

      

AA/Aa

%

      

A

%

      

BBB/Baa

%

      

BB/Ba*

%

      

B*

%

      

NR**

%

 

October 31, 2016

       31.6           7.9           9.2           25.0           3.6           3.6           19.1   

April 30, 2016

       37.2           11.2           10.3           22.4           6.4           4.1           8.4   

October 31, 2015

       36.9           12.4           9.2           22.9           7.5           5.4           5.7   

 

*   Below investment grade
**   Not Rated
(1)   

For financial reporting purposes, credit quality ratings shown above reflect the lowest rating assigned by either Standard & Poor’s or Moody’s Investor Service if ratings differ. These rating agencies are independent, nationally recognized statistical rating organizations and are widely used. Investment grade ratings are credit ratings of BBB/Baa or higher. Below investment grade ratings are credit ratings of BB/Ba or lower. Investments designated NR are not rated by either rating agency. Unrated investments do not necessarily indicate low credit quality. Credit quality ratings are subject to change. Aberdeen Asset Management Asia Limited (“AAMAL” or the “Investment Manager”) evaluated the credit quality of unrated investments based upon, but not limited to, credit ratings for similar investments.

Geographic Composition

The table below shows the geographical composition (with U.S. Dollar-denominated bonds issued by foreign issuers allocated into country of issuance) of the Fund’s total investments as of October 31, 2016, compared with the previous six and twelve months:

 

Date     

Australia

%

      

Asia
(including NZ)

%

      

Europe

%

      

United
States

%

       Canada
%
 

October 31, 2016

       32.5           62.8           4.4           0.3           0.0   

April 30, 2016

       37.7           56.1           4.5           1.7           0.0   

October 31, 2015

       34.6           57.7           3.8           3.8           0.1   

Currency Composition

The table below shows the currency composition of the Fund’s total investments as of October 31, 2016, compared with the previous six and twelve months:

 

Date     

Australian

Dollar

%

      

Asian Currencies
(including NZ Dollar)

%

       US Dollar*
%
 

October 31, 2016

       30.1           29.3           40.6   

April 30, 2016

       40.4           20.5           39.1   

October 31, 2015

       37.4           20.4           42.2   

 

*   Includes U.S. Dollar-denominated bonds issued by foreign issuers: 40.6% of the Fund’s total investments on October 31, 2016, 39.1% of the Fund’s total investments on April 30, 2016, 42.2% of the Fund’s total investments on October 31, 2015.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

8


Portfolio Composition (unaudited) (concluded)

 

 

 

Maturity Composition

As of October 31, 2016, the average maturity of the Fund’s total investments was 7.8 years, compared with 7.8 years at April 30, 2016, and 7.9 years at October 31, 2015. The following table shows the maturity composition of the Fund’s investments as of October 31, 2016, compared with the previous six and twelve months:

 

Date     

Under 3 Years

%

       3 to 5 Years
%
       5 to 10 Years
%
       10 Years & Over
%
 

October 31, 2016

       18.7           17.6           45.2           18.5   

April 30, 2016

       20.3           17.6           42.3           19.8   

October 31, 2015

       22.9           15.6           42.5           19.0   

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

9


Summary of Key Rates (unaudited)

 

 

 

The following table summarizes the movements of key interest rates and currencies from October 31, 2016 and the previous six and twelve month periods.

 

       

October 31, 2016

      

April 30, 2016

      

October 31, 2015

 

Australia

              

90 day Bank Bills

       1.75%           2.16%           2.11%   

10 yr bond

       2.06%           2.30%           2.40%   

Australian Dollar

       $0.76           $0.76           $0.71   

New Zealand

              

90 day Bank Bills

       2.14%           2.42%           2.98%   

10 yr bond

       2.71%           2.85%           3.30%   

New Zealand Dollar

       $0.72           $0.70           $0.68   

South Korea

              

90 day commercial paper

       1.39%           1.61%           1.57%   

10 yr bond

       1.68%           1.80%           2.11%   

South Korean Won*

       W1144.25           W1139.40           W1140.05   

Thailand

              

3 months deposit rate

       1.00%           1.00%           1.00%   

10 yr bond

       2.13%           1.80%           2.65%   

Thai Baht*

       B35.00           B34.93           B35.57   

Philippines

              

90 day T-Bills

       1.56%           1.91%           2.30%   

10 yr bond

       3.93%           4.58%           3.72%   

Philippine Peso*

       P48.42           P46.89           P46.82   

Malaysia

              

3-month T-Bills

       2.62%           2.48%           2.96%   

10 yr bond

       3.60%           3.88%           4.37%   

Malaysian Ringgit*

       R4.20           R3.91           R4.30   

Singapore

              

3-month T-Bills

       0.79%           0.70%           1.16%   

10 yr bond

       1.89%           2.00%           2.46%   

Singapore Dollar*

       S1.39           S1.34           S1.40   

U.S.$ Bonds**

              

Indonesia

       3.59%           3.96%           4.44%   

Philippines

       1.43%           1.34%           1.57%   

 

*   These currencies are quoted Asian currency per U.S. Dollar. The Australian and New Zealand Dollars are quoted U.S. Dollars per currency.
**   Sovereign issues.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

10


Portfolio of Investments

As of October 31, 2016

 

 

Principal
Amount
(000)
     Description   Value
(US$)
 

CORPORATE BONDS—59.4%

  

AUSTRALIA—2.9%

  

AUD

    2,500      

APT Pipelines Ltd., 7.75%, 07/22/2020

  $ 2,182,372   

AUD

    7,225      

Brisbane Square Finance Pty Ltd., Zero Coupon, 11/25/2025 (a)(b)(c)(d)

    6,050,223   

USD

    8,000      

Commonwealth Bank of Australia, 4.50%, 12/09/2025 (e)

    8,405,512   

AUD

    7,300      

Qantas Airways Ltd., 7.50%, 06/11/2021

    6,326,695   

AUD

    3,800      

RWH Finance Pty Ltd., 6.20%, 03/26/2017 (a)(b)(f)(g)

    2,881,004   

AUD

    2,000      

Telstra Corp. Ltd., 8.75%, 01/15/2020

    1,796,998   

USD

    5,965      

Transurban Finance Co. Pty Ltd., 3.38%, 12/22/2026 (e)(g)

    5,918,211   

USD

    4,499      

Virgin Australia Holdings Ltd., 7.88%, 10/15/2021 (e)

    4,598,878   

AUD

    4,000      

Westpac Banking Corp., 7.25%, 11/18/2016

    3,050,680   
                   41,210,573   

CHINA—12.4%

 

USD

    3,950      

Agile Group Holdings Ltd., 9.00%, 05/21/2018 (e)(g)

    4,339,972   

USD

    3,500      

Agile Group Holdings Ltd., 8.38%, 02/18/2017 (e)(g)

    3,679,389   

USD

    6,000      

China Aoyuan Property Group Ltd., 11.25%, 01/17/2017 (e)(g)

    6,390,318   

CNH

    11,250      

China Development Bank Corp., 3.60%, 11/13/2018

    1,656,589   

USD

    3,500      

China Hongqiao Group Ltd., 7.63%, 06/26/2017 (e)

    3,570,000   

USD

    7,000      

China Overseas Finance Cayman III Ltd., 5.38%, 10/29/2023 (e)

    7,900,753   

USD

    4,955      

China Resources Gas Group Ltd., 4.50%, 04/05/2022 (e)

    5,353,446   

USD

    7,500      

CNOOC Curtis Funding No 1 Pty Ltd., 4.50%, 10/03/2023 (e)

    8,197,102   

USD

    15,160      

CNOOC Nexen Finance 2014 ULC, 4.25%, 04/30/2024

    16,146,385   

USD

    5,400      

CNPC General Capital Ltd., 2.75%, 05/14/2019 (e)

    5,504,258   

USD

    8,350      

CNPC General Capital Ltd., 3.40%, 04/16/2023 (e)

    8,601,761   

USD

    1,810      

Country Garden Holdings Co. Ltd., 7.25%, 10/04/2017 (e)(g)

    1,912,012   

USD

    4,348      

CRCC Yuxiang Ltd., 3.50%, 05/16/2023 (e)

    4,446,426   

USD

    15,143      

ENN Energy Holdings Ltd., 6.00%, 05/13/2021 (e)

    17,077,427   

USD

    10,700      

Franshion Investment Ltd., 4.70%, 10/26/2017 (e)

    10,914,834   

USD

    5,876      

Future Land Development Holdings Ltd., 10.25%, 07/21/2017 (e)(g)

    6,397,319   

USD

    3,674      

Kunlun Energy Co. Ltd., 3.75%, 05/13/2025 (e)

    3,810,967   

USD

    3,800      

Logan Property Holdings Co. Ltd., 11.25%, 06/04/2017 (e)(g)

    4,141,741   

USD

    18,800      

Proven Honour Capital Ltd., 4.13%, 05/19/2025 (e)

    19,676,832   

USD

    14,434      

Semiconductor Manufacturing International Corp., 4.13%, 10/07/2019 (e)

    14,994,963   

USD

    1,250      

Shimao Property Holdings Ltd., 6.63%, 01/14/2017 (e)(g)

    1,295,084   

USD

    5,200      

Sinopec Capital 2013 Ltd., 144A, 3.13%, 04/24/2023 (e)

    5,273,403   

USD

    4,109      

Sinopec Capital 2013 Ltd., REG S, 3.13%, 04/24/2023 (e)

    4,167,003   

USD

    1,600      

Sinopec Group Overseas Development 2012 Ltd., 3.90%, 05/17/2022 (e)

    1,711,162   

USD

    4,400      

Sinopec Group Overseas Development 2013 Ltd., 4.38%, 10/17/2023 (e)

    4,807,009   

USD

    5,900      

Sinopec Group Overseas Development 2014 Ltd., 4.38%, 04/10/2024 (e)

    6,428,770   
                   178,394,925   

GERMANY—3.4%

 

AUD

    7,500      

KfW, 3.75%, 07/18/2018 (h)

    5,872,276   

AUD

    5,000      

KfW, 6.00%, 08/20/2020 (h)

    4,305,032   

AUD

    10,600      

KfW, 6.25%, 02/23/2018 (h)

    8,507,632   

AUD

    10,500      

KfW, 6.25%, 12/04/2019 (h)

    8,959,568   

AUD

    15,000      

KfW, 6.25%, 05/19/2021 (h)

    13,278,167   

AUD

    10,000      

Landwirtschaftliche Rentenbank, 4.75%, 04/08/2024 (f)

    8,594,645   
                   49,517,320   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

11


Portfolio of Investments (continued)

As of October 31, 2016

 

 

Principal
Amount
(000)
     Description   Value
(US$)
 

CORPORATE BONDS (continued)

  

HONG KONG—5.9%

 

USD

    4,103      

Champion Ltd., 3.75%, 01/17/2023 (e)

  $ 4,202,789   

USD

    5,326      

FPC Treasury Ltd., 4.50%, 04/16/2023 (e)

    5,457,456   

USD

    8,800      

Green Dragon Gas Ltd., 10.00%, 11/30/2016 (b)(e)(g)

    7,040,000   

USD

    17,000      

HLP Finance Ltd., 4.75%, 06/25/2022 (e)

    18,289,943   

USD

    12,000      

Hongkong Electric Finance Ltd., 2.88%, 05/03/2026 (e)

    11,858,484   

USD

    1,600      

Hongkong Land Finance Cayman Islands Co. Ltd. (The), 4.50%, 06/01/2022

    1,773,171   

USD

    15,500      

Hutchison Whampoa Finance CI Ltd., 7.50%, 08/01/2027 (e)

    21,181,680   

USD

    2,880      

Hutchison Whampoa International Ltd., 7.45%, 11/24/2033 (e)

    4,137,011   

USD

    3,973      

Hutchison Whampoa International Ltd., 7.63%, 04/09/2019 (e)

    4,518,263   

USD

    5,600      

Shimao Property Holdings Ltd., 8.38%, 02/10/2019 (e)(g)

    6,314,442   
                   84,773,239   

INDIA—11.0%

 

USD

    4,060      

Adani Transmission Ltd., 4.00%, 08/03/2026 (e)

    4,041,089   

INR

    300,000      

Axis Bank Ltd., 8.85%, 12/05/2024

    4,851,253   

USD

    13,340      

Bharat Petroleum Corp. Ltd., 4.00%, 05/08/2025 (e)

    13,676,888   

USD

    3,652      

Bharti Airtel International Netherlands BV, 5.35%, 05/20/2024 (e)

    3,966,810   

USD

    3,923      

Bharti Airtel Ltd., 4.38%, 06/10/2025 (e)

    4,036,434   

USD

    6,487      

GCX Ltd., 7.00%, 12/01/2016 (e)(g)

    6,276,017   

USD

    12,000      

HDFC Bank Ltd., 3.00%, 03/06/2018 (e)

    12,139,080   

INR

    50,000      

HDFC Bank Ltd., 7.95%, 09/21/2026

    762,055   

INR

    250,000      

Housing Development Finance Corp. Ltd., 8.75%, 01/13/2020 (g)

    3,856,962   

USD

    10,700      

ICICI Bank Ltd., 4.00%, 03/18/2026 (e)

    10,875,994   

INR

    250,000      

ICICI Bank Ltd., 9.15%, 08/06/2024

    4,068,187   

INR

    100,000      

Indiabulls Housing Finance Ltd., 9.00%, 04/29/2026

    1,488,828   

INR

    250,000      

Indian Railway Finance Corp. Ltd., 8.83%, 03/25/2023

    3,994,291   

USD

    3,400      

NTPC Ltd., 4.75%, 10/03/2022 (e)

    3,719,246   

INR

    200,000      

NTPC Ltd., 8.49%, 03/25/2025

    3,179,391   

INR

    100,000      

NTPC Ltd., 8.73%, 03/07/2023

    1,584,666   

INR

    100,000      

NTPC Ltd., 9.17%, 09/22/2024

    1,639,644   

USD

    10,600      

ONGC Videsh Ltd., 4.63%, 07/15/2024 (e)

    11,339,541   

INR

    250,000      

Power Finance Corp. Ltd., 8.39%, 04/19/2025

    3,893,002   

INR

    400,000      

Power Finance Corp. Ltd., 8.65%, 12/28/2024

    6,400,210   

USD

    7,280      

Power Grid Corp. of India Ltd., 3.88%, 01/17/2023 (e)

    7,547,074   

INR

    200,000      

Power Grid Corp. of India Ltd., 8.93%, 10/20/2022

    3,243,587   

INR

    300,000      

Power Grid Corp. of India Ltd., 9.30%, 09/04/2024

    4,970,010   

USD

    6,600      

Reliance Industries Ltd., 4.13%, 01/28/2025 (e)

    6,809,774   

INR

    100,000      

Reliance Jio Infocomm Ltd., 8.95%, 10/04/2020

    1,564,607   

INR

    200,000      

Rural Electrification Corp. Ltd., 8.44%, 12/04/2021

    3,124,856   

INR

    150,000      

Rural Electrification Corp. Ltd., 9.34%, 08/25/2024

    2,489,881   

INR

    270,000      

Rural Electrification Corp. Ltd., 9.35%, 06/15/2022

    4,419,758   

USD

    6,050      

Samvardhana Motherson Automotive Systems Group BV, 4.88%, 06/16/2019 (e)(g)

    6,155,875   

INR

    100,000      

Tata Motors Ltd., 9.73%, 10/01/2020

    1,596,630   

USD

    10,575      

UPL Corp. Ltd., 3.25%, 10/13/2021 (e)

    10,568,137   
                   158,279,777   

INDONESIA—2.1%

 

IDR

    24,000,000      

Bank OCBC Nisp Tbk PT, 9.40%, 02/10/2017

    1,843,396   

USD

    1,200      

Jababeka International BV, 6.50%, 10/05/2020 (e)(g)

    1,224,012   

IDR

    30,000,000      

Lembaga Pembiayaan Ekspor Indonesia, 9.50%, 03/13/2020

    2,369,559   

USD

    3,150      

Majapahit Holding BV, 7.88%, 06/29/2037 (e)

    4,071,375   

USD

    1,000      

MPM Global Pte Ltd., 6.75%, 09/19/2017 (e)(g)

    1,044,423   

USD

    6,034      

Pertamina Persero PT, 6.00%, 05/03/2042 (e)

    6,362,105   

USD

    9      

Perusahaan Listrik Negara PT, 5.25%, 10/24/2042 (e)

    8,950   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

12


Portfolio of Investments (continued)

As of October 31, 2016

 

 

Principal
Amount
(000)
     Description   Value
(US$)
 

CORPORATE BONDS (continued)

  

INDONESIA (continued)

 

USD

    4,000      

Pratama Agung Pte Ltd., 6.25%, 02/24/2018 (e)(g)

  $ 4,210,104   

USD

    4,000      

Star Energy Geothermal Wayang Windu Ltd., 6.13%, 03/28/2017 (e)(g)

    4,150,000   

USD

    4,164      

TBG Global Pte Ltd., 5.25%, 02/10/2019 (e)(g)

    4,359,096   
                   29,643,020   

MALAYSIA—1.5%

 

MYR

    5,000      

Cagamas Bhd, 4.20%, 10/22/2018

    1,208,007   

USD

    3,360      

Malaysia Sovereign Sukuk Bhd, 3.04%, 04/22/2025 (e)

    3,413,088   

USD

    4,150      

Malaysia Sukuk Global Bhd, 3.18%, 04/27/2026 (e)(h)

    4,265,370   

USD

    900      

Petroliam Nasional Bhd, 7.63%, 10/15/2026 (e)

    1,269,408   

USD

    50      

Petronas Capital Ltd., 5.25%, 08/12/2019 (e)

    54,633   

USD

    2,400      

Petronas Global Sukuk Ltd., 2.71%, 03/18/2020 (e)

    2,439,454   

MYR

    5,000      

Putrajaya Holdings Sdn Bhd, 5.10%, 04/22/2019

    1,227,723   

USD

    7,000      

Wakala Global Sukuk Bhd, 4.65%, 07/06/2021 (e)

    7,772,100   
                   21,649,783   

NORWAY—0.6%

 

AUD

    9,788      

Kommunalbanken AS, 6.50%, 04/12/2021

    8,664,819   
                   8,664,819   

PHILIPPINES—3.0%

 

USD

    3,700      

Energy Development Corp., 6.50%, 01/20/2021 (e)

    4,185,625   

USD

    7,000      

ICTSI Treasury BV, 5.88%, 09/17/2025 (e)

    7,519,729   

USD

    3,446      

International Container Terminal Services, Inc., 7.38%, 03/17/2020 (e)

    3,924,932   

USD

    13,086      

Megaworld Corp., 4.25%, 04/17/2023 (e)

    13,218,142   

USD

    3,072      

PLDT, Inc., 8.35%, 03/06/2017

    3,110,400   

USD

    8,534      

Power Sector Assets & Liabilities Management Corp., 7.39%, 12/02/2024 (e)(h)

    11,351,125   
                   43,309,953   

REPUBLIC OF SOUTH KOREA—4.3%

 

USD

    8,400      

Busan Bank Co. Ltd., 3.63%, 07/25/2026 (e)

    8,261,400   

USD

    7,218      

Doosan Heavy Industries & Construction Co. Ltd., 2.13%, 04/27/2020 (e)

    7,193,415   

USD

    10,552      

Hyundai Capital Services, Inc., 2.63%, 09/29/2020 (e)

    10,713,762   

USD

    1,400      

Korea Gas Corp., 2.88%, 07/29/2018 (e)

    1,430,722   

USD

    2,000      

Korea Hydro & Nuclear Power Co. Ltd., 2.88%, 10/02/2018 (e)

    2,043,938   

USD

    6,658      

Korea Hydro & Nuclear Power Co. Ltd., 3.00%, 09/19/2022 (e)

    6,958,908   

USD

    2,305      

Korea Hydro & Nuclear Power Co. Ltd., 3.25%, 06/15/2025 (e)

    2,420,345   

USD

    13,652      

Korea National Oil Corp., 2.63%, 04/14/2026 (e)

    13,713,065   

USD

    3,000      

KT Corp., 2.50%, 07/18/2026 (e)

    2,965,575   

USD

    6,390      

Minera y Metalergica del Boleo SA de CV, 2.88%, 05/07/2019 (e)

    6,521,219   
                   62,222,349   

SINGAPORE—2.7%

 

SGD

    2,750      

CapitaMalls Asia Treasury Ltd., 3.95%, 08/24/2017 (e)

    2,011,391   

USD

    12,000      

Global Logistic Properties Ltd., 3.88%, 06/04/2025 (e)

    12,261,984   

USD

    5,608      

HPHT Finance 15 Ltd., 2.88%, 03/17/2020 (e)

    5,722,527   

USD

    8,900      

Oversea-Chinese Banking Corp. Ltd., 3.15%, 03/11/2018 (a)(e)(f)(g)

    9,025,668   

USD

    9,000      

United Overseas Bank Ltd., 3.50%, 09/16/2021 (a)(e)(f)(g)

    9,175,158   
                   38,196,728   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

13


Portfolio of Investments (continued)

As of October 31, 2016

 

 

Principal
Amount
(000)
     Description   Value
(US$)
 

CORPORATE BONDS (continued)

  

SUPRANATIONAL—5.3%

 

AUD

    14,000      

Asian Development Bank, 5.00%, 03/09/2022

  $ 11,994,760   

AUD

    16,800      

Asian Development Bank, 6.25%, 03/05/2020

    14,434,352   

AUD

    15,000      

Inter-American Development Bank, 6.00%, 02/26/2021

    13,102,286   

AUD

    11,200      

Inter-American Development Bank, 6.50%, 08/20/2019

    9,532,685   

AUD

    10,000      

International Bank for Reconstruction & Development, 4.25%, 06/24/2025

    8,492,422   

AUD

    6,900      

International Bank for Reconstruction & Development, 5.75%, 10/21/2019

    5,797,909   

AUD

    15,600      

International Finance Corp., 5.75%, 07/28/2020

    13,330,464   
                   76,684,878   

THAILAND—2.5%

 

USD

    2,400      

Bangkok Bank PCL, 4.80%, 10/18/2020 (e)

    2,624,414   

USD

    4,800      

Bangkok Bank PCL, 9.03%, 03/15/2029 (e)

    6,960,648   

USD

    17,170      

Krung Thai Bank PCL, 5.20%, 12/26/2019 (a)(e)(f)(g)

    17,977,471   

USD

    4,500      

Siam Commercial Bank Ltd., 3.38%, 09/19/2017 (e)

    4,560,930   

USD

    4,002      

Siam Commercial Bank PCL, 3.50%, 04/07/2019 (e)

    4,135,991   
                   36,259,454   

UNITED KINGDOM—1.8%

 

USD

    12,962      

HSBC Holdings PLC, 6.38%, 03/30/2025 (a)(f)(g)(i)

    13,010,608   

USD

    5,149      

Standard Chartered PLC, 3.95%, 01/11/2023 (e)

    5,125,165   

USD

    5,000      

Standard Chartered PLC, 4.05%, 04/12/2026 (e)

    5,145,440   

USD

    2,871      

Standard Chartered PLC, 144A, 3.95%, 01/11/2023 (e)

    2,857,710   
                   26,138,923   
            

Total Corporate Bonds—59.4% (cost $866,141,889)

    854,945,741   

GOVERNMENT BONDS—77.2%

 

AUSTRALIA—36.4%

 

AUD

    34,700      

Australia Government Bond, 3.25%, 04/21/2025 (e)

    28,397,201   

AUD

    30,300      

Australia Government Bond, 3.25%, 04/21/2029 (e)

    24,854,648   

AUD

    91,900      

Australia Government Bond, 3.75%, 04/21/2037 (e)

    78,643,007   

AUD

    29,800      

Australia Government Bond, 4.50%, 04/21/2033 (e)

    27,992,861   

AUD

    7,000      

Australia Government Bond, 5.50%, 04/21/2023 (e)

    6,429,070   

AUD

    35,300      

Australia Government Bond, 5.75%, 07/15/2022 (e)

    32,333,877   

AUD

    71,200      

Australia Government Bond, 6.00%, 02/15/2017 (e)

    54,837,766   

AUD

    7,500      

New South Wales Treasury Corp., 4.00%, 05/20/2026 (e)

    6,421,822   

AUD

    46,000      

New South Wales Treasury Corp., 6.00%, 02/01/2018

    36,828,162   

AUD

    15,000      

New South Wales Treasury Corp., 6.00%, 03/01/2022

    13,662,439   

AUD

    22,850      

Queensland Treasury Corp., 6.00%, 02/21/2018 (e)

    18,322,200   

AUD

    31,190      

Queensland Treasury Corp., 6.00%, 06/14/2021 (e)(h)

    27,968,239   

AUD

    47,100      

Queensland Treasury Corp., 6.25%, 06/14/2019 (h)

    39,946,784   

AUD

    24,330      

Queensland Treasury Corp., 6.25%, 02/21/2020 (e)

    21,048,396   

AUD

    61,500      

Treasury Corp. of Victoria, 5.75%, 11/15/2016

    46,859,763   

AUD

    14,250      

Treasury Corp. of Victoria, 6.00%, 06/15/2020

    12,401,145   

AUD

    35,350      

Treasury Corp. of Victoria, 6.00%, 10/17/2022

    32,762,869   

AUD

    15,000      

Western Australian Treasury Corp., 7.00%, 07/15/2021

    13,868,889   
                   523,579,138   

BANGLADESH—0.1%

 

BDT

    100,000      

Bangladesh Treasury Bond, 11.78%, 08/14/2018 (b)

    1,412,876   
                   1,412,876   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

14


Portfolio of Investments (continued)

As of October 31, 2016

 

 

Principal
Amount
(000)
     Description   Value
(US$)
 

GOVERNMENT BONDS (continued)

 

CHINA—4.2%

 

CNH

    13,000      

China Development Bank, 3.35%, 03/20/2017

  $ 1,911,082   

CNY

    15,000      

China Government Bond, 2.85%, 01/28/2026

    2,233,569   

CNY

    20,000      

China Government Bond, 3.14%, 09/08/2020

    3,029,994   

CNY

    50,000      

China Government Bond, 3.28%, 08/05/2020 (j)

    7,610,179   

CNY

    10,000      

China Government Bond, 3.36%, 05/24/2022 (j)

    1,537,186   

CNY

    40,000      

China Government Bond, 3.41%, 06/24/2020 (j)

    6,111,372   

CNY

    3,000      

China Government Bond, 3.46%, 07/11/2020 (j)

    459,153   

CNY

    2,000      

China Government Bond, 3.57%, 11/17/2021 (j)

    309,997   

CNY

    88,000      

China Government Bond, 3.64%, 04/09/2025 (j)

    13,881,081   

CNY

    60,000      

China Government Bond, 4.08%, 08/22/2023 (j)

    9,625,273   

CNY

    30,000      

China Government Bond, 4.10%, 09/27/2032 (j)

    5,028,212   

CNY

    20,000      

China Government Bond, 4.13%, 09/18/2024 (j)

    3,247,356   

CNY

    20,000      

China Government Bond, 4.15%, 04/28/2031 (j)

    3,345,070   

CNH

    13,000      

Export-Import Bank of China (The), 3.25%, 01/17/2021

    1,915,685   
                   60,245,209   

INDIA—9.9%

 

INR

    150,000      

Export-Import Bank of India, 7.62%, 09/01/2026

    2,272,998   

INR

    750,000      

India Government Bond, 7.68%, 12/15/2023

    11,752,046   

INR

    1,000,000      

India Government Bond, 7.72%, 05/25/2025

    15,698,966   

INR

    2,026,780      

India Government Bond, 8.08%, 08/02/2022

    32,076,939   

INR

    1,885,000      

India Government Bond, 8.12%, 12/10/2020

    29,635,480   

INR

    1,000,000      

India Government Bond, 8.17%, 12/01/2044

    16,671,288   

INR

    1,782,130      

India Government Bond, 8.27%, 06/09/2020

    28,045,536   

INR

    16,000      

India Government Bond, 8.33%, 06/07/2036

    267,781   

INR

    360,440      

India Government Bond, 8.40%, 07/28/2024

    5,839,876   

INR

    9,230      

India Government Bond, 9.20%, 09/30/2030

    162,147   
                   142,423,057   

INDONESIA—12.3%

 

USD

    3,500      

Indonesia Government International Bond, 5.25%, 01/17/2042 (e)

    3,832,616   

USD

    6,900      

Indonesia Government International Bond, 6.63%, 02/17/2037 (e)

    8,662,881   

IDR

    200,000,000      

Indonesia Treasury Bond, 7.00%, 05/15/2022

    15,264,562   

IDR

    120,000,000      

Indonesia Treasury Bond, 7.00%, 05/15/2027

    8,966,891   

IDR

    47,000,000      

Indonesia Treasury Bond, 8.25%, 06/15/2032

    3,771,628   

IDR

    260,000,000      

Indonesia Treasury Bond, 8.25%, 05/15/2036

    20,698,116   

IDR

    114,000,000      

Indonesia Treasury Bond, 8.38%, 03/15/2024

    9,278,663   

IDR

    258,224,000      

Indonesia Treasury Bond, 8.38%, 09/15/2026

    21,055,883   

IDR

    120,400,000      

Indonesia Treasury Bond, 8.38%, 03/15/2034

    9,665,773   

IDR

    340,600,000      

Indonesia Treasury Bond, 8.75%, 05/15/2031

    29,170,792   

IDR

    100,000,000      

Indonesia Treasury Bond, 8.75%, 02/15/2044

    8,523,483   

IDR

    30,000,000      

Indonesia Treasury Bond, 9.00%, 03/15/2029

    2,547,517   

IDR

    21,000,000      

Indonesia Treasury Bond, 9.50%, 07/15/2031

    1,848,847   

USD

    2,050      

Perusahaan Penerbit SBSN Indonesia III, 4.00%, 11/21/2018 (e)

    2,129,540   

USD

    14,981      

Perusahaan Penerbit SBSN Indonesia III, 4.35%, 09/10/2024 (e)

    15,730,050   

USD

    7,809      

Perusahaan Penerbit SBSN Indonesia III, 4.55%, 03/29/2026 (e)

    8,218,972   

USD

    8,000      

Perusahaan Penerbit SBSN Indonesia III, 4.55%, 03/29/2026 (e)

    8,420,000   
                   177,786,214   

MALAYSIA—1.9%

 

MYR

    15,000      

Malaysia Government Bond, 4.23%, 06/30/2031

    3,657,783   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

15


Portfolio of Investments (continued)

As of October 31, 2016

 

 

Principal
Amount
(000)
     Description          Value
(US$)
 

GOVERNMENT BONDS (continued)

   

MALAYSIA (continued)

   

MYR

    50,000      

Malaysia Government Bond, 4.25%, 05/31/2035

    $ 11,818,832   

MYR

    50,500      

Malaysia Government Bond, 4.74%, 03/15/2046

            12,388,451   
                           27,865,066   

PHILIPPINES—1.4%

   

PHP

    347,040      

Philippine Government Bond, 5.75%, 11/24/2021

      7,964,859   

PHP

    543      

Philippine Government Bond, 6.38%, 01/19/2022

      12,558   

PHP

    251,000      

Philippine Government International Bond, 3.63%, 03/21/2033

      4,790,675   

USD

    4,747      

Philippine Government International Bond, 9.50%, 02/02/2030

            7,935,033   
                           20,703,125   

REPUBLIC OF SOUTH KOREA—7.2%

   

KRW

    37,000,000      

Korea Treasury Bond, 2.25%, 12/10/2025

      33,839,164   

KRW

    46,000,000      

Korea Treasury Bond, 3.00%, 09/10/2024

      44,119,920   

KRW

    10,300,000      

Korea Treasury Bond, 3.38%, 09/10/2023

      10,034,752   

KRW

    7,000,000      

Korea Treasury Bond, 3.50%, 03/10/2024

      6,912,134   

KRW

    3,300,000      

Korea Treasury Bond, 3.75%, 06/10/2022

      3,219,909   

KRW

    1,500,000      

Korea Treasury Bond, 3.75%, 12/10/2033

      1,699,229   

KRW

    3,500,000      

Korea Treasury Bond, 4.25%, 06/10/2021

            3,425,806   
                           103,250,914   

SINGAPORE—1.8%

   

SGD

    14,500      

Singapore Government Bond, 2.13%, 06/01/2026

      10,626,767   

SGD

    20,000      

Singapore Government Bond, 3.00%, 09/01/2024

            15,662,175   
                           26,288,942   

SRI LANKA—1.5%

   

USD

    5,254      

Sri Lanka Government Bonds, 6.13%, 06/03/2025 (e)

      5,267,576   

LKR

    471,000      

Sri Lanka Government Bonds, 8.00%, 11/15/2018

      3,006,305   

LKR

    230,000      

Sri Lanka Government Bonds, 8.50%, 04/01/2018

      1,506,340   

LKR

    388,000      

Sri Lanka Government Bonds, 8.50%, 07/15/2018

      2,524,550   

LKR

    293,000      

Sri Lanka Government Bonds, 8.75%, 05/15/2017

      1,967,167   

LKR

    80,000      

Sri Lanka Government Bonds, 11.20%, 07/01/2022

      527,675   

LKR

    1,020,000      

Sri Lanka Government Bonds, 11.40%, 01/01/2024

            6,738,807   
                           21,538,420   

THAILAND—0.5%

   

THB

    203,400      

Thailand Government Bond, 3.65%, 06/20/2031

            6,537,236   
            

Total Government Bonds—77.2% (cost $1,161,040,958)

            1,111,630,197   

SHORT-TERM INVESTMENT—0.6%

  

UNITED STATES—0.6%

  

State Street Institutional U.S. Government Money Market Fund (k)

    8,956,514        8,956,514   
                           8,956,514   
            

Total Short-Term Investment—0.6% (cost $8,956,514)

            8,956,514   
            

Total Investments—137.2% (cost $2,036,139,361)

            1,975,532,452   
    

Long Term Debt Securities

      (525,000,000
    

Mandatory Redeemable Preferred Stock at Liquidation Value

      (50,000,000
            

Other Assets in Excess of Liabilities—2.8%

            39,818,971   
            

Net Assets—100.0%

          $ 1,440,351,423   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

16


Portfolio of Investments (continued)

As of October 31, 2016

 

 

 

AUD—Australian Dollar   INR—Indian Rupee   SGD—Singapore Dollar
BDT—Bangladesh Taka   KRW—South Korean Won   THB—Thai Baht
CNH—Chinese Yuan Renminbi Offshore   LKR—Sri Lanka Rupee   USD—U.S. Dollar
CNY—Chinese Yuan Renminbi   MYR—Malaysian Ringgit  
IDR—Indonesian Rupiah   PHP—Philippine Peso  

 

(a)   Variable or Floating Rate Security. Rate disclosed is as of October 31, 2016.
(b)   Illiquid security.
(c)   For this security the annuity payments increase by 3.25% every year, until the asset amortizes to zero.
(d)   Inflation linked security.
(e)   Denotes a restricted security.
(f)   The maturity date presented for these instruments is the later of the next date on which the security can be redeemed at par or the next date on which the rate of interest is adjusted.
(g)   The maturity date presented for these instruments represents the next call/put date.
(h)   This security is government guaranteed.
(i)   Perpetual bond. This is a bond that has no maturity date, is redeemable and pays a steady stream of interest indefinitely.
(j)   China A securities. These securities are issued in local currency, traded in the local markets and are held through a qualified foreign institutional investor license.
(k)   Registered investment company advised by State Street Global Advisors.

At October 31, 2016, the Fund held the following futures contracts:

 

Futures Contracts      Counterparty        Number of
Contracts
Long (Short)
       Expiration
Date
       Unrealized
Appreciation/
(Depreciation)
 

United States Treasury Note 6%—2 year

       UBS           586           12/30/2016         $ 15,515   

United States Treasury Note 6%—5 year

       UBS           56           12/30/2016           (30,317

United States Treasury Note 6%—10 year

       UBS           (1,492        12/20/2016           1,537,524   

United States Treasury Note 6%—30 year

       UBS           272           12/20/2016           (1,785,653
                                        $ (262,931

At October 31, 2016, the Fund’s open forward foreign currency exchange contracts were as follows:

 

Purchase Contracts
Settlement Date*
   Counterparty    Amount
Purchased
     Amount Sold      Fair Value      Unrealized
Appreciation/
(Depreciation)
 

Chinese Yuan Renminbi Offshore/United States Dollar

  

        
11/10/2016   

Royal Bank of Canada

     CNH21,464,000         USD3,200,000       $ 3,164,647       $ (35,353

Indonesian Rupiah/United States Dollar

  

        
11/18/2016   

Standard Chartered Bank

     IDR140,805,000,000         USD10,500,000         10,769,222         269,222   

Malaysian Ringgit/United States Dollar

  

        
01/20/2017   

BNP Paribas

     MYR13,491,200         USD3,200,000         3,204,307         4,307   
01/20/2017   

Credit Suisse

     MYR67,666,190         USD16,300,000         16,071,457         (228,543
01/20/2017   

Royal Bank of Canada

     MYR54,008,972         USD12,940,000         12,827,719         (112,281

Philippine Peso/United States Dollar

  

        
11/14/2016   

Standard Chartered Bank

     PHP1,208,826,400         USD24,800,000         24,964,864         164,864   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

17


Portfolio of Investments (concluded)

As of October 31, 2016

 

 

Purchase Contracts
Settlement Date*
   Counterparty    Amount
Purchased
     Amount Sold      Fair Value      Unrealized
Appreciation/
(Depreciation)
 

Singapore Dollar/United States Dollar

  

        
12/15/2016   

Goldman Sachs

     SGD3,810,377         USD2,800,000       $ 2,740,021       $ (59,979
12/15/2016   

Royal Bank of Canada

     SGD19,184,037         USD14,100,000         13,795,132         (304,868
12/15/2016   

Standard Chartered Bank

     SGD10,404,750         USD7,500,000         7,481,997         (18,003

South Korean Won/United States Dollar

  

        
12/02/2016   

Credit Suisse

     KRW4,293,620,000         USD3,800,000         3,752,672         (47,328

Thai Baht/United States Dollar

  

        
11/23/2016   

Goldman Sachs

     THB1,178,542,000         USD34,000,000         33,659,604         (340,396
                            $ 132,431,642       $ (708,358
Sale Contracts               

United States Dollar/Australian Dollar

           
12/22/2016   

State Street

     USD88,300,000         AUD115,769,876         87,953,959         346,041   

United States Dollar/Chinese Renminbi

           
11/10/2016   

State Street

     USD30,800,000         CNY205,389,800         30,324,038         475,962   

United States Dollar/Chinese Yuan Renminbi Offshore

  

        
11/10/2016   

Credit Suisse

     USD1,300,000         CNH8,657,870         1,276,514         23,486   

United States Dollar/Indian Rupee

           
01/25/2017   

Standard Chartered Bank

     USD8,100,000         INR547,212,510         8,095,399         4,601   

United States Dollar/Philippine Peso

           
11/14/2016   

Standard Chartered Bank

     USD18,900,000         PHP921,242,700         19,025,642         (125,642

United States Dollar/Singapore Dollar

           
12/15/2016   

Goldman Sachs

     USD9,500,000         SGD12,905,750         9,280,452         219,548   

United States Dollar/South Korean Won

           
12/02/2016   

BNP Paribas

     USD42,000,000         KRW46,787,544,000         40,892,841         1,107,159   
12/02/2016   

Standard Chartered Bank

     USD7,800,000         KRW8,667,360,000         7,575,370         224,630   

United States Dollar/Thai Baht

           
11/23/2016   

Goldman Sachs

     USD39,100,000         THB1,357,474,900         38,769,995         330,005   
                            $ 243,194,210       $ 2,605,790   

 

*   Certain contracts with different trade dates and like characteristics have been shown net.

At October 31, 2016, the Fund’s interest rate swaps were as follows:

 

Currency    Notional
Amount
     Expiration
Date
     Counterparty      Receive (Pay)
Floating Rate
     Floating Rate Index     

Fixed

Rate

     Unrealized
Appreciation/
(Depreciation)
 

Over-the-Counter swap agreements:

  

           

USD

     66,000,000         11/01/2017         Barclays Bank         Receive         3-month LIBOR Index         0.84%       $ (44,835

Centrally cleared swap agreements:

  

           

USD

     59,000,000         10/28/2026         Citibank         Receive         3-month LIBOR Index         1.57%         618,397   
       $ 573,562   

 

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

18


Statement of Assets and Liabilities

As of October 31, 2016

 

 

Assets

        

Investments, at value (cost $2,027,182,847)

   $ 1,966,575,938   

Short-term investments, at value (cost $8,956,514)

     8,956,514   

Foreign currency, at value (cost $8,273,605)

     8,241,711   

Cash at broker for interest rate swaps

     3,340,248   

Cash at broker for futures contracts

     1,835,645   

Cash at broker for China A shares

     67,980   

Interest receivable

     26,262,385   

Receivable for investments sold

     3,844,801   

Due from broker

     4,340,117   

Unrealized appreciation on forward foreign currency exchange contracts

     3,169,825   

Prepaid expenses in connection with revolving credit facility, senior secured notes, term loans and Series A Mandatory Redeemable Preferred Shares

     2,182,759   

Variation margin receivable for futures contracts

     1,553,039   

Other receivables

     149,824   

Prepaid expenses and other assets

     190,842   

Total assets

     2,030,711,628   

Liabilities

  

Senior secured notes payable (Note 8)

     200,000,000   

Revolving credit facility payable (Note 9)

     125,000,000   

4-year term loan payable (Note 9)

     100,000,000   

5-year term loan payable (Note 9)

     100,000,000   

Series A Mandatory Redeemable Preferred Shares ($25.00 liquidation value per share; 2,000,000 shares outstanding) (Note 7)

     50,000,000   

Due to custodian

     6,346,246   

Interest payable on revolving credit facility, senior secured notes and term loans

     3,180,751   

Variation margin payable for futures contracts

     1,815,970   

Unrealized depreciation on forward foreign currency exchange contracts

     1,272,393   

Investment management fees payable (Note 3)

     916,870   

Deferred foreign capital gains tax

     823,052   

Dividend payable on Series A Mandatory Redeemable Preferred Shares

     194,792   

Administration fee payable (Note 3)

     192,691   

Variation margin payable for centrally cleared interest rate swaps

     104,200   

Unrealized depreciation on over-the-counter interest rate swaps

     44,835   

Investor relations fees payable (Note 3)

     33,179   

Director fees payable

     250   

Accrued expenses

     434,976   

Total liabilities

     590,360,205   
          

Net Assets Applicable to Common Shareholders

   $ 1,440,351,423   

Composition of Net Assets:

  

Common stock (par value $0.01 per share) (Note 5)

   $ 2,532,665   

Paid-in capital in excess of par

     1,458,337,533   

Distributions in excess of net investment income

     (1,118,257

Accumulated net realized loss from investments, interest rate swaps and futures contracts

     (62,095,946

Net unrealized appreciation on investments, futures contracts and interest rate swaps

     73,179,957   

Accumulated net realized foreign exchange gains

     101,849,395   

Net unrealized foreign exchange and forward foreign currency contract loss

     (132,333,924

Net Assets Applicable to Common Shareholders

   $ 1,440,351,423   

Net asset value per share based on 253,266,519 shares issued and outstanding

   $ 5.69   

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

19


Statement of Operations

For the Year Ended October 31, 2016

 

 

Net Investment Income

        

Income

  

Interest and amortization of discount and premium and other income (net of foreign withholding taxes of $1,381,647)

   $ 93,735,111   
       93,735,111   

Expenses

  

Investment management fee (Note 3)

     10,715,073   

Administration fee (Note 3)

     2,253,990   

Revolving credit facility, senior secured notes, term loans and Series A Mandatory Redeemable Preferred Shares fees and expenses

     846,421   

Custodian fees and expenses

     534,887   

Investor relations fees and expenses (Note 3)

     513,710   

Insurance expense

     367,289   

Reports to shareholders and proxy solicitation

     307,742   

Director fees and expenses

     246,577   

Legal fees and expenses

     185,671   

Transfer agent fees and expenses

     138,622   

Independent auditor fees and expenses

     88,250   

Miscellaneous

     186,172   

Total operating expenses, excluding interest expense

     16,384,404   

Interest expense (Notes 8 & 9)

     13,643,587   

Distributions to Series A Mandatory Redeemable Preferred Shares (Note 7)

     2,016,664   

Net operating expenses

     32,044,655   
          

Net investment income applicable to common shareholders

     61,690,456   

Net Realized and Unrealized Gains/(Losses) on Investments and Foreign Currency Related Transactions

  

Net realized gain/(loss) from:

  

Investment transactions (including $443,327 capital gains tax)

     36,483,242   

Interest rate swaps

     (732,550

Futures contracts

     9,780   

Forward and spot foreign currency exchange contracts

     (20,625,170

Foreign currency transactions

     (72,031,900
       (56,896,598

Net change in unrealized appreciation/(depreciation) on:

  

Investments (including $(10,387) change in deferred capital gains tax)

     17,731,274   

Interest rate swaps

     1,296,065   

Futures contracts

     (40,710

Forward foreign currency exchange rate contracts

     1,302,169   

Foreign currency translation

     109,075,832   
       129,364,630   

Net gain from investments, interest rate swaps, futures contracts and foreign currencies

     72,468,032   

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations

   $ 134,158,488   

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

20


Statements of Changes in Net Assets

 

 

 

      For the
Year Ended
October 31, 2016
     For the
Year Ended
October 31, 2015
 

Increase/(Decrease) in Net Assets Applicable to Common Shareholders

     

Operations:

     

Net investment income

   $ 61,690,456       $ 72,157,952   

Net realized gain/(loss) from investments, interest rate swaps and futures contracts

     35,760,472         (2,917,607

Net realized loss from foreign currency transactions

     (92,657,070      (68,765,179

Net change in unrealized appreciation/(depreciation) on investments, interest rate swaps and futures contracts

     18,986,629         (16,449,951

Net change in unrealized appreciation/(depreciation) on foreign currency translation

     110,378,001         (140,478,054

Net increase/(decrease) in net assets applicable to common shareholders resulting from operations

     134,158,488         (156,452,839

Distributions to Common Shareholders from:

     

Net investment income

     (59,990,293      (102,766,980

Tax return of capital

     (46,911,791      (5,766,249

Net decrease in net assets applicable to common shareholders from distributions

     (106,902,084      (108,533,229

Common Stock Transactions:

     

Repurchase of common stock resulting in the reduction of 3,042,619 and 4,991,465 shares of common stock, respectively (Note 6)

     (14,553,549      (26,309,672

Change in net assets from common stock transactions

     (14,553,549      (26,309,672

Change in net assets applicable to common shareholders resulting from operations

     12,702,855         (291,295,740

Net Assets Applicable to Common Shareholders:

     

Beginning of year

     1,427,648,568         1,718,944,308   

End of year (including distributions in excess of net investment income of ($1,118,257) and ($474,699), respectively)

   $ 1,440,351,423       $ 1,427,648,568   

Amounts listed as “—” are $0 or round to $0.

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

21


Statement of Cash Flows

For the Year Ended October 31, 2016

 

 

Increase/(Decrease) in Cash (Including Foreign Currency)

  

Cash flows provided from (used for) operating activities:

  

Interest received (excluding discount and premium amortization of $10,173,348)

   $ 102,329,544   

Operating expenses paid

     (29,405,196

Dividends paid to Series A Mandatory Redeemable Preferred Shares

     (2,578,125

Payments paid to broker for collateral on interest rate swaps

     (5,907,768

Purchases of short-term portfolio investments

     (10,566,609,346

Sales of short-term portfolio investments

     10,633,971,832   

Purchases of long-term portfolio investments

     (1,088,823,021

Proceeds from sales of long-term portfolio investments

     1,138,292,996   

Realized losses on forward foreign currency exchange contracts closed

     (15,438,545

Realized losses on interest rate swap transactions

     (732,550

Payments paid to broker for futures contracts

     (937,947

Decrease in cash collateral held at broker for China A shares

     3,588   

Decrease in prepaid expenses and other assets

     9,094   

Net cash provided from operating activities

     164,174,556   

Cash flows provided from (used for) financing activities

  

Repurchase of common stock

     (14,553,549

Dividends paid to common shareholders

     (106,902,084

Change in payable due to custodian

     6,232,179   

Net cash used for financing activities

     (115,223,454

Effect of exchange rate on cash

     (76,851,331

Net decrease in cash

     (27,900,229

Cash at beginning of year

     36,141,940   

Cash at end of year

   $ 8,241,711   

Reconciliation of Net Increase in Net Assets from Operations to Net Cash (Including Foreign Currency) Provided from (Used for) Operating Activities

  

Net increase in total net assets resulting from operations

   $ 134,158,488   

Decrease in investments

     139,424,058   

Net realized gain on investment transactions

     (36,483,242

Net realized foreign exchange losses

     77,218,525   

Net change in unrealized appreciation/depreciation on investments

     (17,731,274

Net change in unrealized foreign exchange gains/losses

     (110,378,001

Increase in interest and other receivable

     (1,578,915

Decrease in receivable for investments sold

     1,983,993   

Decrease in interest payable on bank loan, senior secured notes and term loans

     (190,417

Decrease in dividend payable to preferred shares

     (561,461

Net change in variation margin on future contracts

     40,710   

Decrease in prepaid expenses and other assets

     9,094   

Decrease in payable for investments purchased

     (14,402,242

Change in interest receivable/payable for closed interest rate swaps

     (4,235,917

Payments made to broker for interest rate swaps

     (2,967,916

Payments made to broker for futures contracts

     (947,727

Decrease in cash collateral held at broker for China A shares

     3,588   

Decrease in prepaid expenses in connection with revolving credit facility, senior secured notes, term loans and Series A Mandatory Redeemable Preferred Shares

     963,331   

Decrease in accrued expenses and other liabilities

     (150,119

Total adjustments

     30,016,068   

Net cash provided from operating activities

   $ 164,174,556   

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

22


 

 

[THIS PAGE INTENTIONALLY LEFT BLANK]

 

 

 


Financial Highlights

 

 

 

     For the Fiscal Years Ended October 31,  
     2016     2015     2014     2013     2012  

Per Share Operating Performance(a):

                                        
Net asset value per common share, beginning of year      $5.57        $6.58        $6.89        $7.78        $7.48   
Net investment income      0.24        0.28        0.28        0.30        0.36   
Net realized and unrealized gains/(losses) on investments, interest rate swaps, futures contracts and foreign currency transactions      0.29        (0.88     (0.18     (0.77     0.36   
Total from investment operations applicable to common shareholders      0.53        (0.60     0.10        (0.47     0.72   
Distributions to common shareholders from:           
Net investment income      (0.24     (0.40     (0.42     (0.42     (0.42
Tax return of capital      (0.18     (0.02                     
Total distributions to shareholders      (0.42     (0.42     (0.42     (0.42     (0.42

Capital Share Transactions:

          
Impact due to open market repurchase policy (Note 6)      0.01        0.01        0.01                 
Total capital share transactions      0.01        0.01        0.01                 
Net asset value per common share, end of year      $5.69        $5.57        $6.58        $6.89        $7.78   
Market value, end of year      $4.92        $4.75        $5.88        $6.44        $7.90   
Total Investment Return Based on(b):           
Market value      12.90%        (12.38%     (2.17%     (13.37%     20.47%   
Net asset value      11.35%        (8.19%     2.33%        (5.89% )(c)      9.92% (c) 
Ratio to Average Net Assets Applicable to Common Shareholders/Supplementary Data(d):           
Net assets applicable to common shareholders, end of year (000 omitted)      $1,440,351        $1,427,649        $1,718,944        $1,842,470        $2,042,337   
Average net assets applicable to common shareholders (000 omitted)      $1,433,905        $1,549,308        $1,771,852        $1,953,410        $1,965,038   
Net operating expenses      2.23%        2.15% (e)      1.97%        1.50%        1.38%   
Net operating expenses, excluding interest expense and distributions to Series A Mandatory Redeemable Preferred Shares      1.14%        1.14% (e)      1.09%        1.03%        1.01%   
Net investment income      4.30%        4.65%        4.14%        4.07%        4.85%   
Portfolio turnover      52%        45%        49%        42%        38%   
Leverage (senior securities) outstanding (000 omitted)      $525,000        $525,000        $550,000        $550,000        $600,000   
Leverage (preferred stock) outstanding (000 omitted)      $50,000        $50,000        $50,000        $50,000        $–   
Asset coverage ratio on long-term debt obligations at year end(f)      384%        381%        422%        444%        440%   
Asset coverage per $1,000 on long-term debt obligations at year end      $3,839        $3,815        $4,216        $4,441        $4,404   
Asset coverage ratio on total leverage at year end(g)      350%        348%        386%        407%          
Asset coverage per share on total leverage at year end      $3,505        $3,483        $3,862        $4,071        $–   

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

24


Financial Highlights (concluded)

 

 

 

 

(a)   Based on average shares outstanding.
(b)   Total investment return based on market value is calculated assuming that shares of the Fund’s common stock were purchased at the closing market price as of the beginning of the period, dividends, capital gains, and other distributions were reinvested as provided for in the Fund’s dividend reinvestment plan and then sold at the closing market price per share on the last day of the period. The computation does not reflect any sales commission investors may incur in purchasing or selling shares of the Fund. The total investment return based on the net asset value is similarly computed except that the Fund’s net asset value is substituted for the closing market value.
(c)   The total return shown above includes the impact of financial statement rounding of the NAV per share and/or financial statement adjustments.
(d)   Ratios calculated on the basis of income, expenses and preferred share dividends applicable to both the common and preferred shares relative to the average net assets of common shareholders. For the fiscal years ended October 31, 2016, 2015, 2014, 2013 and 2012, the ratios of net investment income before preferred stock dividends to average net assets of common shareholders were 4.16%, 4.79%, 4.26%, 4.10% and 4.85%, respectively.
(e)   The expense ratio includes a one-time expense associated with the August 2011 shelf offering costs attributable to the registered but unsold shares expiring in August 2014.
(f)   Asset coverage ratio is calculated by dividing net assets plus the amount of any borrowings, including Series A Mandatory Redeemable Preferred Shares, for investment purposes by the amount of any long-term debt obligations, which includes the senior secured notes, revolving credit facility and term loans.
(g)   Asset coverage ratio is calculated by dividing net assets plus the amount of any borrowings, including Series A Mandatory Redeemable Preferred Shares, for investment purposes by the amount of any borrowings.

Amounts listed as “—” are $0 or round to $0.

See Notes to Financial Statements.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

25


Notes to Financial Statements

October 31, 2016

 

 

1. Organization

Aberdeen Asia-Pacific Income Fund, Inc. (the “Fund”) was incorporated in Maryland on March 14, 1986 as a closed-end, non-diversified management investment company. The Fund’s principal investment objective is to seek current income. The Fund may also achieve incidental capital appreciation. To achieve its investment objectives, the Fund normally invests at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in Asian debt securities, Australian debt securities and New Zealand debt securities. This 80% investment policy is a non-fundamental policy of the Fund and may be changed by the Fund’s Board of Directors (the “Board”) upon 60 days’ prior written notice to shareholders. There can be no assurance that the Fund will achieve its investment objectives. The ability of issuers of debt securities held by the Fund to meet their obligations may be affected by economic developments in a specific industry, country or region.

The Fund may invest up to 80% of its total assets, plus the amount of any borrowings for investment purposes, in “Asian debt securities,” which include: (1) debt securities of an Asian Country (as defined below) issuers, including securities issued by Asian Country governmental entities, as well as by banks, companies and other entities which are located in Asian Countries, whether or not denominated in an Asian Country currency; (2) debt securities of other issuers denominated in, or linked to, the currency of an Asian Country, including securities issued by supranational issuers, such as The World Bank and derivative debt securities that replicate, or substitute for, the currency of an Asian Country; (3) debt securities issued by entities which, although not located in an Asian Country, derive at least 50% of their revenues from Asian Countries or have at least 50% of their assets located in Asian Countries; and (4) debt securities issued by a wholly-owned subsidiary of an entity located in an Asian Country, provided that the debt securities are guaranteed by the parent entity located in the Asian Country. With reference to items (3) and (4) above, Asian debt securities may be denominated in an Asian Country currency or in Australian, New Zealand or U.S. Dollars. The maximum country exposure to any one Asian Country (other than Korea) is limited to 20% of the Fund’s total assets and the maximum currency exposure to any one Asian Country currency (other than Korea) is limited to 10% of the Fund’s total assets. The maximum country exposure for Korea is limited to 40% of the Fund’s total assets, and the maximum currency exposure for Korea is limited to 25% of the Fund’s total assets.

“Asian Countries” (each, an “Asian Country”) include Bangladesh, China, Hong Kong, India, Indonesia, Japan, Malaysia, Pakistan, the Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam, Sri Lanka, Kazakhstan and Mongolia, and such other countries on the

Asian continent approved for investment by the Board upon the recommendation of Aberdeen Asset Management Asia Limited, the Fund’s investment manager (“AAMAL” or the “Investment Manager”).

2. Summary of Significant Accounting Policies

The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. The policies conform to accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses for the period. Actual results could differ from those estimates. The accounting records of the Fund are maintained in U.S. Dollars and the U.S. Dollar is used as both the functional and reporting currency. However, the Australian Dollar is the functional currency for U.S. federal tax purposes.

a. Security Valuation:

The Fund values its securities at current market value or fair value, consistent with regulatory requirements. “Fair Value” is defined in the Fund’s Valuation and Liquidity Procedures as the price that could be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants without a compulsion to contract at the measurement date.

In accordance with the authoritative guidance on fair value measurements and disclosures under GAAP, the Fund discloses the fair value of its investments using a three-level hierarchy that classifies the inputs to valuation techniques used to measure the fair value. The hierarchy assigns Level 1 measurements to valuations based upon unadjusted quoted prices in active markets for identical assets, Level 2 measurements to valuations based upon other significant observable inputs, including adjusted quoted prices in active markets for similar assets, and Level 3 measurements to valuations based upon unobservable inputs that are significant to the valuation. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability, which are 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 asset or liability developed based on the best information available in the circumstances. A financial instrument’s level within the fair value hierarchy is based upon the lowest level of any input that is significant to the fair value measurement.

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

26


Notes to Financial Statements (continued)

October 31, 2016

 

 

 

Long-term debt and other fixed-income securities are valued at the last quoted or evaluated bid price on the valuation date provided by an independent pricing service provider approved by the Board. Pricing services generally price debt securities assuming orderly transactions of an institutional “round lot” size, but some trades occur in smaller “odd lot” sizes at lower prices than institutional round lot trades. If there are no current day bids, the security is valued at the previously applied bid. Short-term debt securities (such as commercial paper and U.S. treasury bills) having a remaining maturity of 60 days or less are valued at amortized cost, if it represents the best approximation of fair value. Debt and other fixed-income securities are generally determined to be Level 2 investments.

Short-term investments are comprised of cash and cash equivalents invested in short-term investment funds which are redeemable daily. The Fund sweeps available cash into the State Street Institutional U.S. Government Money Market Fund; a “government money market fund” pursuant to Rule 2a-7 under the Investment Company Act of 1940, as amended, which has an objective to maintain a $1.00 per share net asset value (“NAV”), which is not guaranteed. Registered investment companies are valued at their net asset value as reported by such company. Generally, these investment types are categorized as Level 1 investments.

Derivatives are valued at fair value. Exchange traded derivatives are generally Level 1 investments and over-the-counter derivatives are

generally Level 2 investments. Forward foreign currency contracts are generally valued based on the bid price of the forward rates and the current spot rate. Forward exchange rate quotations are available for scheduled settlement dates, such as 1-, 3-, 6-, 9- and 12-month periods. An interpolated valuation is derived based on the actual settlement dates of the forward contracts held. Futures contracts are valued at the settlement price or at the last bid price if no settlement price is available. Interest rate swaps agreements are generally valued by an approved pricing agent based on the terms of the swap agreement (including future cash flows).

In the event that a security’s market quotations are not readily available or are deemed unreliable, the security is valued at fair value as determined by the Fund’s Pricing Committee, taking into account the relevant factors and surrounding circumstances using valuation policies and procedures approved by the Board. A security that has been fair valued by the Fund’s Pricing Committee may be classified as Level 2 or Level 3 depending on the nature of the inputs. The three-level hierarchy of inputs is summarized below:

Level 1 – quoted prices in active markets for identical investments;

Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, and credit risk); or

Level 3 – significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments).

 

 

A summary of standard inputs is listed below:

 

Security Type    Standard Inputs
   

Debt and other fixed-income securities

   Reported trade data, broker-dealer price quotations, benchmark yields, issuer spreads on comparable securities, credit quality, yield, and maturity.
   

Forward foreign currency contracts

   Forward exchange rate quotations.
   

Swap agreements

   Market information pertaining to the underlying reference assets, i.e., credit spreads, credit event probabilities, fair values, forward rates, and volatility measures.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

27


Notes to Financial Statements (continued)

October 31, 2016

 

 

The following is a summary of the inputs used as of October 31, 2016 in valuing the Fund’s investments and other financial instruments at fair value. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. Please refer to the Portfolio of Investments for a detailed breakout of the security types:

 

Investments, at Value      Level 1        Level 2        Level 3        Total  

Fixed Income Investments

                     

Corporate Bonds

     $         $ 854,945,741         $         $ 854,945,741   

Government Bonds

                 1,111,630,197                     1,111,630,197   

Total Fixed Income Investments

                 1,966,575,938                     1,966,575,938   

Short-Term Investment

       8,956,514                               8,956,514   

Total Investments

     $ 8,956,514         $ 1,966,575,938         $         $ 1,975,532,452   

Other Financial Instruments

                     

Futures Contracts

       1,553,039                               1,553,039   

Forward Foreign Currency Exchange Contracts

                 3,169,825                     3,169,825   

Interest Rate Swap Agreements

                 618,397                     618,397   

Total Other Financial Instruments

     $ 1,553,039         $ 3,788,222         $         $ 5,341,261   

Total Assets

     $ 10,509,553         $ 1,970,364,160         $         $ 1,980,873,713   

Liabilities

                     

Other Financial Instruments

                     

Futures Contracts

       (1,815,970                            (1,815,970

Forward Foreign Currency Exchange Contracts

                 (1,272,393                  (1,272,393

Interest Rate Swap Agreements

                 (44,835                  (44,835

Total Liabilities

     $ (1,815,970      $ (1,317,228      $         $ (3,133,198

 

Amounts listed as “–” are $0 or round to $0.

For movements between the Levels within the fair value hierarchy, the Fund has adopted a policy of recognizing transfers at the end of each fiscal period. During the fiscal year ended October 31, 2016, Green Dragon Gas Ltd. transferred from Level 3 to Level 2 because the security was evaluated by an independent pricing agent using a single broker price at October 31, 2015 and at October 31, 2016 the security was evaluated by an independent pricing agent using multiple inputs. For the fiscal year ended October 31, 2016, there were no significant changes to the fair valuation methodologies.

b. Restricted Securities:

Restricted securities are privately-placed securities whose resale is restricted under U.S. securities laws. The Fund may invest in restricted securities, including unregistered securities eligible for resale without registration pursuant to Rule 144A and privately-placed securities of U.S. and non-U.S. issuers offered outside the U.S. without registration pursuant to Regulation S under the Securities Act of 1933, as amended (the “1933 Act”). Rule 144A securities may be freely traded among certain qualified institutional investors, such as the Fund, but resale of such securities in the U.S. is permitted only in limited circumstances.

c. Foreign Currency Translation:

Foreign securities, currencies, and other assets and liabilities denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of said currencies against the U.S. Dollar, as of the “Valuation Time,” as provided by an independent pricing service approved by the Board. The Valuation Time is as of the close of regular trading on the New York Stock Exchange (usually 4:00 p.m. Eastern Time).

Foreign currency amounts are translated into U.S. Dollars on the following basis:

 

(i)   market value of investment securities, other assets and liabilities – at the current daily rates of exchange at the Valuation Time; and

 

(ii)   purchases and sales of investment securities, income and expenses – at the relevant rates of exchange prevailing on the respective dates of such transactions.

The Fund isolates that portion of the results of operations arising from changes in the foreign exchange rates due to the fluctuations in the market prices of the securities held at the end of the reporting period. Similarly, the Fund isolates the effect of changes in foreign

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

28


Notes to Financial Statements (continued)

October 31, 2016

 

 

exchange rates from the fluctuations arising from changes in the market prices of portfolio securities sold during the reporting period.

Net exchange gain/(loss) is realized from sales and maturities of portfolio securities, sales of foreign currencies, settlement of securities transactions, dividends, interest and foreign withholding taxes recorded on the Fund’s books. Net unrealized foreign exchange appreciation/(depreciation) includes changes in the value of portfolio securities and other assets and liabilities arising as a result of changes in the exchange rate. The net realized and unrealized foreign exchange gain/(loss) shown in the composition of net assets represents foreign exchange gain/(loss) for book purposes that may not have been recognized for tax purposes.

Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of domestic origin, including unanticipated movements in the value of the foreign currency relative to the U.S. Dollar. Generally, when the U.S. Dollar rises in value against foreign currency, the Fund’s investments denominated in that currency will lose value because its currency is worth fewer U.S. Dollars; the opposite effect occurs if the U.S. Dollar falls in relative value.

d. Derivative Financial Instruments:

The Fund is authorized to use derivatives to manage currency, interest rate and credit risk and as a substitute for physical securities. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. The use of derivative instruments involves, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities.

Forward Foreign Currency Exchange Contracts:

A forward foreign currency exchange contract (“forward contract”) involves an obligation to purchase and sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Forward contracts are used to manage the Fund’s currency exposure in an efficient manner. They are used to sell unwanted currency exposure that comes with holding securities in a market, or to buy currency exposure where the exposure from holding securities is insufficient to give the desired currency exposure either in absolute terms or relative to the benchmark. The use of forward contracts allows the separation of decision-making between markets and their currencies.

The forward contract is marked-to-market daily and the change in market value is recorded by the Fund as unrealized appreciation or depreciation. Forward contracts’ prices are received daily from an

independent pricing provider. When the forward contract is closed, the Fund records a realized gain or loss equal to the difference between the value at the time it was opened and the value at the time it was closed. These realized and unrealized gains and losses are reported on the Statement of Operations. The Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts or from unanticipated movements in exchange rates. During the fiscal year ended October 31, 2016, the Fund used forward contracts to hedge and efficiently manage Australian and certain Asian currency exposure.

While the Fund may enter into forward contracts to seek to reduce currency exchange rate risks, transactions in such contracts involve certain risks. The Fund could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts and from unanticipated movements in exchange rates. Thus, while the Fund may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Fund than if it had not engaged in any such transactions. Moreover, there may be imperfect correlation between the Fund’s portfolio holdings or securities quoted or denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may prevent the Fund from achieving a complete hedge, which will expose the Fund to the risk of foreign exchange loss.

Forward contracts are subject to the risk that a counterparty to such contracts may default on their obligations. Since a forward foreign currency exchange contract is not guaranteed by an exchange or clearing house, a default on the contract would deprive the Fund of unrealized profits, transaction costs or the benefits of a currency hedge or force the Fund to cover its purchase or sale commitments, if any, at the market price at the time of the default.

Futures Contracts:

The Fund may invest in financial futures contracts (“futures contracts”) for the purpose of hedging its existing portfolio securities, or securities that the Fund intends to purchase, against fluctuations in value caused by changes in prevailing market interest rates or prices. Futures contracts may also be entered into for non-hedging purposes, however, in those instances, (a) either the aggregate initial margin and premiums required to establish the Fund’s position may not exceed 5% of the Fund’s NAV after taking into account unrealized profits and unrealized losses on any such contract into which it has entered into, or (b) the aggregate net notional value of the Funds’ position may not exceed 100% of the Fund’s NAV after taking into account unrealized profits and unrealized losses on any such contract which it has entered into.

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

29


Notes to Financial Statements (continued)

October 31, 2016

 

 

Upon entering into a futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount. This payment is known as initial margin. Subsequent payments, known as “variation margin,” are calculated each day, depending on the daily fluctuations in the fair value/market value of the underlying assets. An unrealized gain/(loss) equal to the variation margin is recognized on a daily basis. When the contract expires or is closed, the gain/(loss) is realized and is presented in the Statement of Operations as a net realized gain/(loss) on futures contracts. Futures contracts are valued daily at their last quoted sale price on the exchange on which they are traded.

A “sale” of a futures contract means a contractual obligation to deliver the securities or foreign currency called for by the contract at a fixed price at a specified time in the future. A “purchase” of a futures contract means a contractual obligation to acquire the securities or foreign currency at a fixed price at a specified time in the future. During the fiscal year ended October 31, 2016, the Fund used U.S. Treasury futures to efficiently manage U.S. interest rate exposure and hedge the U.S. interest rate risk.

There are significant risks associated with the Fund’s use of futures contracts, including the following: (1) the success of a hedging strategy may depend on the ability of the Fund’s investment adviser and/or sub-adviser to predict movements in the prices of individual securities, fluctuations in markets and movements in interest rates; (2) there may be an imperfect or no correlation between the movement in the price of futures contracts, interest rates and the value/market value of the securities held by the Fund; (3) there may not be a liquid secondary market for a futures contract; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict trading in futures contracts. In addition, should market conditions change unexpectedly, the Fund may not achieve the anticipated benefits of the futures contracts and may realize a loss.

Swaps:

A swap is an agreement that obligates two parties to exchange a series of cash flows and/or meet certain obligations at specified intervals based upon or calculated by reference to changes in specified prices or rates (interest rates in the case of interest rate swaps, currency exchange rates in the case of currency swaps) or the occurrence of a credit event with respect to an underlying reference obligation (in the case of a credit default swap) for a specified amount of an underlying asset or notional principal amount. The Fund will enter into swaps only on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the amount of the difference between the two payments. Except for currency swaps and credit

default swaps, the notional principal amount is used solely to calculate the payment streams but is not exchanged. With respect to currency swaps, actual principal amounts of currencies may be exchanged by the counterparties at the initiation, and again upon the termination of the transaction.

Traditionally, swaps were customized, privately negotiated agreements executed between two parties (“OTC Swaps”) but since 2013, certain swaps are required to be cleared pursuant to rules and regulations related to the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd Frank”) and/or Regulation (EU) No 648/2012 on OTC Derivatives, Central Counterparties and Trade Repositories (“EMIR”) (“Cleared Swaps”). Like OTC Swaps, Cleared Swaps are negotiated bilaterally. Unlike OTC Swaps, the act of clearing results in two swaps executed between each of the parties and a central counterparty (“CCP”), and thus the counterparty credit exposure of the parties is to the CCP rather than to one another. Upon entering into a Cleared Swap, the Fund is required to pledge an amount of cash and/or other assets equal to a certain percentage of the contract amount. This payment is known as “initial margin”. Subsequent payments, known as “variation margin,” are calculated each day, depending on the daily fluctuations in the fair value/market value of the underlying assets. An unrealized gain or loss equal to the variation margin is recognized on a daily basis. When the contract matures or is terminated, the gain or loss is realized and is presented in the Statements of Operations as a net realized gain or loss on swap contracts. As of March 2017, the Fund may be required to provide variation and/or initial margin for OTC Swaps pursuant to further rules and regulations related to Dodd Frank and EMIR. The margin requirements associated with OTC Swaps and Cleared Swaps may not be the same.

The rights and obligations of the parties to a swap are memorialized in either an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) for OTC Swaps or a futures agreement with an OTC addendum for Cleared Swaps (“Clearing Agreement”). These agreements are with certain counterparties whose creditworthiness is monitored on an ongoing basis by risk professionals. Both the ISDA and Clearing Agreement maintain provisions for general obligations, representations, agreements, collateral, and events of default or termination. The occurrence of a specified event of default or termination by one party may give the other party the right to terminate and settle all of its contracts.

Entering into swap agreements involves, to varying degrees, elements of credit, market and interest risk in excess of the amounts reported on the Statement of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

30


Notes to Financial Statements (continued)

October 31, 2016

 

 

on its obligation to perform and that there may be unfavorable changes in the value of the index or securities underlying the agreement. The Funds’ maximum risk of loss from counterparty risk related to swaps is the fair value of the contract. This risk is mitigated by the posting of collateral by the counterparties to the Funds to cover the Funds’ exposure to the counterparty.

Interest Rate Swaps

The Fund uses interest rate swap contracts to manage its exposure to interest rates. Interest rate swap contracts typically represent the exchange between the Fund and a counterparty of respective commitments to make variable rate and fixed rate payments with respect to a notional amount of principal. Interest rate swap contracts may have a term that is greater than one year, but typically require periodic interim settlement in cash, at which time the specified value of the variable interest rate is reset for the next settlement period. Net payments of interest are recorded as realized gains or losses. During the period that the swap contract is open, the contract is marked-to-market as the net amount due to or from the

Fund and changes in the value of swap contracts are recorded as unrealized gains or losses. During the fiscal year ended October 31, 2016, the Fund used interest rate swaps to hedge the interest rate risk on the Fund’s Revolving Credit Facility (as defined below).

Credit Default Swaps

A credit default swap is an agreement whereby one party, the buyer, is obligated to pay the other party, the seller, a periodic stream of payments over the term of the contract in return for a contingent payment upon the occurrence of a credit event with respect to an underlying reference obligation. The Fund might use credit default swap contracts to limit or to reduce risk exposure of the Fund to defaults of corporate and sovereign issues (i.e., to reduce risk when the Fund owns or has exposure to such issuers). The Fund also might use credit default swap contracts to create direct or synthetic short or long exposure to domestic or foreign corporate debt securities or certain sovereign debt securities to which the Fund is not otherwise exposed. During the fiscal year ended October 31, 2016, the Fund did not invest in credit default swaps.

 

Summary of Derivative Instruments:

The Fund may use derivatives for various purposes as noted above. The following is a summary of the fair value of Derivative Instruments, not accounted for as hedging instruments, as of October 31, 2016:

 

     Asset Derivatives      Liability Derivatives  
     Year Ended October 31, 2016      Year Ended October 31, 2016  
Derivatives not accounted for
as hedging instruments and
risk exposure
   Statement of Assets
and Liabilities Location
   Fair Value      Statement of Assets
and Liabilities Location
   Fair Value  

Interest rate swaps
(interest rate risk)

   Variation margin
receivable for centrally
cleared swaps
   $       Variation margin
payable for centrally
cleared swaps
   $ 104,200   

Interest rate swaps
(interest rate risk)

   Unrealized appreciation
on over-the-counter interest rate swaps
           Unrealized depreciation
on over-the-counter interest rate swaps
     44,835   

Forward foreign exchange contracts
(foreign exchange risk)

   Unrealized appreciation
on forward currency
exchange contracts
     3,169,825       Unrealized depreciation
on forward currency
exchange contracts
     1,272,393   

Futures contracts
(Interest Rate Risk)

   Unrealized appreciation
on futures contracts
     1,553,039       Unrealized depreciation
on futures contracts
     1,815,970   

Total

        $ 4,722,864            $ 3,237,398   

Amounts listed as “–” are $0 or round to $0.

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

31


Notes to Financial Statements (continued)

October 31, 2016

 

 

The Fund has transactions that may be subject to enforceable master netting agreements. A reconciliation of the gross amounts on the Statement of Assets and Liabilities as of October 31, 2016 to the net amounts by broker and derivative type, including any collateral received or pledged, is included in the following tables:

 

          Gross Amounts Not Offset
in Statement of
Assets & Liabilities
          Gross Amounts Not Offset
in Statement of
Assets and Liabilities
 
Description   Gross Amounts
of Assets
Presented in
Statement of
Financial
Position
    Financial
Instruments
    Collateral
Received (1)
    Net
Amount (3)
    Gross Amounts
of Liabilities
Presented in
Statement of
Financial
Position
    Financial
Instruments
    Collateral
Pledged (1)
    Net
Amount (3)
 
    Assets     Liabilities  

Forward foreign currency (2)

  

             

BNP Paribas

  $ 1,111,466      $      $      $ 1,111,466      $      $      $      $   

Credit Suisse

    23,486        (23,486                   275,871        (23,486            252,385   

Goldman Sachs

    549,553        (400,375            149,178        400,375        (400,375              

Royal Bank of Canada

                                452,502                      452,502   

Standard Chartered Bank

    663,317        (143,645            519,672        143,645        (143,645              

State Street

    822,003                      822,003                               

Interest rate swaps (2)

               

Barclays Bank

  $      $      $      $      $ 44,835      $      $ (40,000   $ 4,835   

 

1.   In some instances, the actual collateral received and/or pledged may be more than the amount shown here due to overcollateralization.
2.   Includes financial instruments (swaps and forwards) which are not subject to a master netting arrangement across funds, or other another similar arrangement.
3.   Net amounts represent the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from financial derivative instruments can only be netted across transactions governed under the same master netting arrangements with the same legal entity.

The Effect of Derivative Instruments on the Statement of Operations for the fiscal year ended October 31, 2016:

 

Derivatives not accounted for as
hedging instruments
     Location of Gain or (Loss)
on Derivatives
     Realized
Gain or
(Loss) on
Derivatives
       Change in
Unrealized
Appreciation/
(Depreciation)
on Derivatives
 
     Realized/Unrealized Gain/(Loss) from Investments, Interest Rate Swaps, Futures Contracts and Foreign Currencies          

Interest rate swaps (credit risk)

          $ (732,550      $ 1,296,065   

Forward foreign exchange contracts
(foreign exchange risk)

            (15,381,044        1,302,169   

Futures contracts (Interest Rate Risk)

              9,780           (40,710

Total

            $ (16,103,814      $ 2,557,524   

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

32


Notes to Financial Statements (continued)

October 31, 2016

 

 

Information about derivatives reflected as of the date of this report is generally indicative of the type of activity for the fiscal year ended October 31, 2016. The table below summarizes the weighted average values of derivatives holdings for the Fund during the fiscal year ended October 31, 2016.

 

Forward foreign
exchange contracts
(Average
Notional Value)
     Futures contracts
(Average
Notional Value)
     Swap contracts
(Average
Notional Value)
 
$ 644,736,056       $ 7,983,333       $ 125,000,000   

e. Bank Loans:

The Fund may invest in bank loans. Bank loans include floating and fixed-rate debt obligations. Floating rate loans are debt obligations issued by companies or other entities with floating interest rates that reset periodically. Bank loans may include, but are not limited to, term loans, delayed funding loans, bridge loans and revolving credit facilities. Loan interest will primarily take the form of assignments purchased in the primary or secondary market but may include participants. Floating rate loans are secured by specific collateral of the borrower and are senior to most other securities of the borrower (e.g., common stock or debt instruments) in the event of bankruptcy. Floating rate loans are often issued in connection with recapitalizations, acquisitions, leveraged buyouts, and refinancings. Floating rate loans are typically structured and administered by a financial institution that acts as the agent of the lenders participating in the floating rate loan. Floating rate loans may be acquired directly through the agent, as an assignment from another lender who holds a direct interest in the floating rate loan, or as a participation interest in another lender’s portion of the floating rate loan.

The Fund may also enter into, or acquire participation in, delayed funding loans and revolving credit facilities. Delayed funding loans and revolving credit facilities are borrowings in which the Fund agrees to make loans up to a maximum amount upon demand by the borrowing issuer for a specified term. A revolving credit facility differs from a delayed funding loan in that as the borrowing issuer repays the loan, an amount equal to the repayment is again made available to the borrowing issuer under the facility. The borrowing issuer may at any time borrow and repay amounts so long as, in the aggregate, at any given time the amount borrowed does not exceed the maximum amount established by the loan agreement. Delayed funding loans and revolving credit facilities usually provide for floating or variable rates of interest.

There are a number of risks associated with an investment in bank loans including credit risk, interest rate risk, illiquid securities risk, and prepayment risk. There is also the possibility that the collateral

securing a loan, if any, may be difficult to liquidate or be insufficient to cover the amount owed under the loan. These risks could cause the Fund to lose income or principal on a particular investment, which in turn could affect the Fund’s returns. In addition, bank loans may settle on a delayed basis, resulting in the proceeds from the sale of such loans not being readily available to make additional investments or to meet the Fund’s redemption obligations. To the extent the extended settlement process gives rise to short-term liquidity needs, the Fund may hold additional cash, sell investments or temporarily borrow from banks or other lenders.

As of October 31, 2016, the Fund held no unfunded commitments or bridge loans.

f. Security Transactions, Investment Income and Expenses:

Security transactions are recorded on the trade date. Realized and unrealized gains/(losses) from security and currency transactions are calculated on the identified cost basis. Interest income and expenses are recorded on an accrual basis. Discounts and premiums on securities purchased are accreted or amortized on an effective yield basis over the estimated lives of the respective securities. Expenses are accrued on a daily basis.

g. Distributions:

The Fund has a managed distribution policy to pay distributions from net investment income supplemented by net realized foreign exchange gains, net realized short-term capital gains and return of capital distributions, if necessary, on a monthly basis. The managed distribution policy is subject to regular review by the Board. The Fund will also declare and pay distributions at least annually from net realized gains on investment transactions and net realized foreign exchange gains, if any. Dividends and distributions to shareholders are recorded on the ex-dividend date.

Dividends and distributions to shareholders are determined in accordance with federal income tax regulations, which may differ from GAAP. These differences are primarily due to differing treatments for foreign currencies, loss deferrals and recognition of market discount and premium.

Distributions to Series A Mandatory Redeemable Preferred Shares (the “Series A MRPS”) shareholders are accrued daily and paid quarterly based on an annual rate of 4.125%. The Fund may not pay distributions to its preferred shareholders unless (i) the pro forma asset coverage ratios for the Series A MRPS, as calculated in accordance with the Fitch Ratings total and net overcollateralization tests per the ‘AA’ rating guidelines outlined in Fitch Rating’s closed-end fund criteria, is in excess of 100%, and (ii) the Fund’s asset coverage ratios for the Series A MRPS, as calculated in accordance

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

33


Notes to Financial Statements (continued)

October 31, 2016

 

 

with the Investment Company Act of 1940, as amended (“1940 Act”), is in excess of 225%. The character of distributions to Series A MRPS shareholders made during the fiscal year may differ from their ultimate characterization for federal income tax purposes. For tax purposes, the Fund’s distributions to Series A MRPS shareholders for the fiscal year ended October 31, 2016 were 100% net investment income.

h. Federal Income Taxes:

For U.S. federal income purposes, the Fund is comprised of a separately identifiable unit called Qualified Business Unit (“QBU”) (see the Internal Revenue Code of 1986, as amended (“IRC”) section 987). The Fund has operated with a QBU for U.S. federal income purposes since 1990. The home office of the Fund is designated as the United States and of the QBU is Australia with a functional currency of Australian dollar. The securities held within the Fund reside within either the QBU or the home office depending on certain factors including geographic region. As an example, New Zealand and Indonesian securities reside within the Australian QBU. When sold, Australian dollar denominated securities within the Australian QBU generate capital gain/loss (which are translated for U.S. federal income tax purposes into U.S. Dollars based on the weighted average exchange rate for the period) but not currency gain/loss. When a New Zealand security is sold within the Australian QBU, the sale generates capital gain/loss as well as currency gain/loss based on the currency exchange between the New Zealand dollar and the Australian dollar.

Currency gain/loss related to currency exchange between the U.S. Dollar and the QBU functional currency is generated when money is transferred from a QBU to the home office. The currency gain/loss would result from the difference between the current exchange rate and the fiscal year to date average exchange rate until which profits are utilized and the pooled U.S. Dollar basis in the QBU (which is generally computed based on the currency exchange rates from when money was transferred into such QBU and from gain/losses generated within such QBU based on the weighted average exchange rates for the periods such gain/loss was recognized). Based on the QBU structure, there may be sizable differences in the currency gain/loss recognized for U.S. federal income tax purposes and what is reported within the financial statements under GAAP. As of the Fund’s fiscal year-end, the calculation of the composition of distributions to shareholders is finalized and reported in the Fund’s annual report to shareholders.

The Fund intends to continue to qualify as a “regulated investment company” by complying with the provisions available to certain investment companies, as defined in Subchapter M of the IRC, and to make distributions of net investment income and net realized capital

gains sufficient to relieve the Fund from all federal income taxes. Therefore, no federal income tax provision is required. Since tax authorities can examine previously filed tax returns, the Fund’s U.S. federal and state tax returns for each of the four fiscal years up to the most recent fiscal year ended October 31 are subject to such review.

i. Foreign Withholding Tax:

Dividend and interest income from non-U.S. sources received by the Fund are generally subject to non-U.S. withholding taxes. In addition, the Fund may be subject to capital gains tax in certain countries in which it invests. The above taxes may be reduced or eliminated under the terms of applicable U.S. income tax treaties with some of these countries. The Fund accrues such taxes when the related income is earned.

In addition, when the Fund sells securities within certain countries in which it invests, the capital gains realized may be subject to tax. Based on these market requirements and as required under GAAP, the Fund accrues deferred capital gains tax on securities currently held that have unrealized appreciation within these countries. The amount of deferred capital gains tax accrued is reported on the Statement of Operations as part of the Net Change in Unrealized Appreciation/Depreciation on Investments.

j. Cash Flow Information:

The Fund invests in securities and distributes dividends from net investment income and net realized gains on investment and currency transactions which are paid in cash or are reinvested at the discretion of shareholders. These activities are reported in the Statements of Changes in Net Assets and additional information on cash receipts and cash payments is presented in the Statement of Cash Flows. Cash includes domestic and foreign currency but does not include cash at brokers in segregated accounts for financial futures contracts because it is designated as collateral.

k. Repurchase Agreements

The Fund may enter into repurchase agreements under the terms of a Master Repurchase Agreement. It is the Fund’s policy that its custodian/counterparty segregate the underlying collateral securities, the value of which exceeds the principal amount of the repurchase transaction, including accrued interest. The repurchase price generally equals the price paid by the Fund plus interest negotiated on the basis of current short-term rates. To the extent that any repurchase transaction exceeds one business day, the collateral is valued on a daily basis to determine its adequacy. Under the Master Repurchase Agreement, if the counterparty defaults and the value of the collateral declines, or if bankruptcy proceedings are commenced with respect to the counterparty of the security, realization of the collateral by the Fund may be delayed or limited. Repurchase

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

34


Notes to Financial Statements (continued)

October 31, 2016

 

 

agreements are subject to contractual netting arrangements with the counterparty, Fixed Income Clearing Corp. To the extent the Fund enters into repurchase agreements, additional information on individual repurchase agreements is included in the Statements of Investments.

3. Agreements and Transactions with Affiliates

a. Investment Manager, Investment Adviser, and Investment Sub-Adviser:

AAMAL serves as investment manager to the Fund, pursuant to a management agreement. Aberdeen Asset Management Limited (the “Investment Adviser”) serves as the investment adviser and Aberdeen Asset Managers Limited (“AAML” or the “Sub-Adviser”) serves as the sub-adviser, pursuant to an advisory agreement and a sub-advisory agreement, respectively, with the Investment Manager. The Investment Manager, the Investment Adviser and the Sub-Adviser (collectively, the “Advisers”) are wholly-owned subsidiaries of Aberdeen Asset Management PLC.

The Investment Manager makes investment decisions on behalf of the Fund on the basis of recommendations and information furnished to it by the Investment Adviser, including the selection of and the placement of orders with brokers and dealers to execute portfolio transactions on behalf of the Fund. The Sub-Adviser manages the portion of the Fund’s assets that the Investment Manager allocates to it. The Investment Adviser and Sub-Adviser are paid by the Investment Manager, not the Fund.

The management agreement provides the Investment Manager with a fee, payable monthly by the Fund, at the following annual rates: 0.65% of the Fund’s average weekly Managed Assets up to $200 million, 0.60% of Managed Assets between $200 million and $500 million, 0.55% of Managed Assets between $500 million and $900 million, 0.50% of Managed Assets between $900 million and $1.75 billion and 0.45% of Managed Assets in excess of $1.75 billion. Managed Assets is defined in the management agreement to mean total assets of the Fund, including any form of investment leverage, minus all accrued expenses incurred in the normal course of operations, but not excluding any liabilities or obligations attributable to investment leverage obtained through (i) indebtedness of any type (including, without limitation, borrowing through a credit facility or the issuance of debt securities), (ii) the issuance of preferred stock or other similar preference securities, (iii) the reinvestment of collateral received for securities loaned in accordance with the Fund’s investment objectives and policies, and/or (iv) any other means.

For the fiscal year ended October 31, 2016, AAMAL earned $10,715,073 from the Fund for investment management fees.

b. Fund Administration:

Aberdeen Asset Management Inc. (“AAMI”), an affiliate of the Investment Manager, Investment Adviser and Sub-Adviser, is the Fund’s Administrator pursuant to an agreement under which AAMI receives a fee, payable monthly by the Fund, at an annual fee rate of 0.125% of the Fund’s average weekly Managed Assets up to $1 billion, 0.10% of the Fund’s average weekly Managed Assets between $1 billion and $2 billion, and 0.075% of the Fund’s average weekly Managed Assets in excess of $2 billion. For the fiscal year ended October 31, 2016, AAMI earned $2,253,990 from the Fund for administration fees.

c. Investor Relations:

Under the terms of the Investor Relations Services Agreement, AAMI provides and pays third parties to provide enhanced investor relations services to the Fund and certain other funds advised by AAMAL or its affiliates as part of an Investor Relations Program. Under the Investor Relations Services Agreement, the Fund owes a portion of the fees related to the Investor Relations Program (the “Fund’s Portion”). However, investor relations services fees are capped by AAMI so that the Fund will only pay up to an annual rate of 0.05% of the Fund’s average weekly net assets. Any difference between the capped rate of 0.05% of the Fund’s average weekly net assets and the Fund’s Portion is paid for by AAMI.

Pursuant to the terms of the Investor Relations Services Agreement, AAMI provides, among other things, objective and timely information to shareholders based on publicly-available information; provides information efficiently through the use of technology while offering shareholders immediate access to knowledgeable investor relations representatives; develops and maintains effective communications with investment professionals from a wide variety of firms; creates and maintains investor relations communication materials such as fund manager interviews, films and webcasts, published white papers, magazine articles and other relevant materials discussing the Fund’s investment results, portfolio positioning and outlook; develops and maintains effective communications with large institutional shareholders; responds to specific shareholder questions; and reports activities and results to the Board and management detailing insight into general shareholder sentiment.

During the fiscal year ended October 31, 2016, the Fund incurred investor relations fees of approximately $492,192. For the fiscal year ended October 31, 2016, AAMI did not waive any investor relations

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

35


Notes to Financial Statements (continued)

October 31, 2016

 

 

fees because the Fund did not reach the capped amount. Investor relations fees and expenses in the Statement of Operations include certain out-of-pocket expenses.

4. Investment Transactions

Purchases and sales of investment securities (excluding short-term securities) for the fiscal year ended October 31, 2016, were $974,804,562 and $1,004,710,894, respectively.

5. Capital

The authorized capital of the Fund is 400 million shares of $0.01 par value common stock. During the fiscal year ended October 31, 2016, the Fund repurchased 3,042,619 shares pursuant to its Open Market Repurchase Program, see Note 6 for further information. As of October 31, 2016, there were 253,266,519 shares of common stock issued and outstanding.

6. Open Market Repurchase Program

On March 1, 2001, the Board approved a stock repurchase program. The Board amended the program on December 12, 2007. The stock repurchase program allows the Fund to repurchase up to 10% of its outstanding common stock in the open market during any 12-month period. The Fund reports repurchase activity on the Fund’s website on a monthly basis.

For the fiscal year ended October 31, 2016 and fiscal year ended October 31, 2015, the Fund repurchased 3,042,619 and 4,991,465 shares, respectively, through this program.

7. Preferred Shares

At October 31, 2016, the Fund had 2,000,000 shares of Series A MRPS outstanding with an aggregate liquidation preference of $50,000,000 ($25.00 per share). The following table shows the mandatory redemption date, annual fixed rate, aggregate liquidation preference and estimated fair value of the Series A MRPS at October 31, 2016.

 

Mandatory
Redemption
Date
     Annual Fixed
Rate
    Aggregate
Liquidation
Preference
     Estimated Fair
Value
 
  June 27, 2023         4.125   $ 50,000,000       $ 51,035,844   

Holders of the Series A MRPS are entitled to receive quarterly cumulative cash dividend payments on the first business day following each calendar quarter at an annual fixed rate of 4.125% until maturity. The Series A MRPS were issued in private placement offerings to institutional investors and are not listed on any exchange or automated quotation system. Distributions are accrued daily and paid quarterly and are presented in the Statement of

Assets and Liabilities as a dividend payable to preferred shareholders. For the fiscal year ended October 31, 2016, the Fund paid $2,016,664 in distributions to preferred shareholders.

The Series A MRPS rank senior to all of the Fund’s outstanding shares of common stock and on a parity with shares of any other series of preferred stock as to the payment of dividends to which the shares are entitled and the distribution of assets upon dissolution, liquidation or winding up of the affairs of the Fund.

The estimated fair value of Series A MRPS was calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the current U.S. Treasury rate with an equivalent maturity date, plus the spread between the U.S. insurance and financial debt rate and the U.S. Treasury rate plus a market spread for the issuance of preferred shares.

The Series A MRPS are redeemable in certain circumstances at the option of the Fund. The Series A MRPS are also subject to mandatory redemption, unless otherwise prohibited by the 1940 Act, if the Fund fails to maintain (1) asset coverage, as determined in accordance with Section 18(h) of the 1940 Act, of at least 225%, with respect to all outstanding preferred stock, as of the last day of any month or (2) eligible assets with an aggregate agency discounted value at least equal to the basic maintenance amount as provided in the Fund’s rating agency guidelines. As of October 31, 2016, the Fund was in compliance with the asset coverage and basic maintenance requirements of the Series A MRPS.

Except for matters which do not require the vote of the holders of the Series A MRPS under the 1940 Act and except as otherwise provided in the Fund’s Charter or Bylaws, or as otherwise required by applicable law, holders of the Series A MRPS have one vote per share and generally vote together with holders of common stock as a single class on all matters submitted to the Fund’s stockholders. The holders of the Series A MRPS, voting separately as a single class, have the right to elect at least two directors of the Fund.

8. Senior Secured Notes

At October 31, 2016, the Fund had $200,000,000 in aggregate principal amount of senior secured notes rated ‘AAA’ by Fitch Ratings outstanding ($100,000,000 in 3.05% Series A Senior Secured Notes due June 12, 2020 and $100,000,000 in 3.69% Series B Senior Secured Notes due June 12, 2023) (collectively, the “Notes”). The Notes are secured obligations of the Fund and, upon liquidation, dissolution or winding up of the Fund, will rank senior to all unsecured and unsubordinated indebtedness and senior to any common or preferred stock pari passu in priority and security with all other secured indebtedness. Holders of the Notes are entitled to receive cash interest payments semi-annually until maturity. The

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

36


Notes to Financial Statements (continued)

October 31, 2016

 

 

Series A Notes and the Series B Notes accrue interest at annual fixed rates of 3.05% and 3.69%, respectively.

The Notes were issued in private placement offerings to institutional investors and are not listed on any exchange or automated quotation system.

The Notes may be prepaid in certain limited circumstances at the option of the Fund. The Notes are also subject to optional prepayment to the extent needed to satisfy certain requirements if the Fund fails to meet an asset coverage ratio required by the terms of the Notes and is not able to cure the coverage deficiency by the applicable deadline.

The estimated fair value of each series of fixed-rate Notes was calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the current U.S. Treasury rate with an equivalent maturity date, plus either 1) the spread between the interest rate on recently issued debt and the U.S. Treasury rate with a similar maturity date or 2) if there has not been a recent debt issuance, the spread between the AAA corporate finance debt rate and the U.S. Treasury rate with an equivalent maturity date. The following table shows the maturity date, interest rate, notional/carrying amount and estimated fair value for each series of Notes outstanding at October 31, 2016.

 

Series     Maturity
Date
    Interest
Rate
    Notional/
Carrying
Amount
    Estimated
Fair Value
 
  Series A        June 12, 2020        3.05   $ 100,000,000      $ 101,271,004   
  Series B        June 12, 2023        3.69   $ 100,000,000      $ 103,339,995   

9. Credit Facility

On April 9, 2014, the Fund renewed its credit agreement providing for a $150,000,000 senior secured revolving credit loan facility (the “Revolving Credit Facility”) with a syndicate of banks with Bank of America Merrill Lynch, N.A., acting as administrative agent. On June 12, 2013 the Fund entered into a term loan agreement (the “Term Loan Agreement”) providing for $200,000,000 of senior secured term loans (the “Term Loan Facility”) from Bank of America, N.A. At October 31, 2016, the Fund had $125,000,000 outstanding under the Revolving Credit Facility and $200,000,000 outstanding under the Term Loan Facility. Under the terms of the Revolving Credit Facility and the Term Loan Agreement and applicable regulations, the Fund is required to maintain certain asset coverage ratios for the amount of its outstanding borrowings.

For the fiscal year ended October 31, 2016, the average interest rate on the Revolving Credit Facility was 1.44% and the average balance

of the Revolving Credit Facility was $125,000,000. Pursuant to the Term Loan Agreement, the Term Loan Facility consists of two separate facilities: $100,000,000 term loan facility which accrues interest at 2.80% per annum (the “Term A Facility”) and a $100,000,000 term loan facility which accrues interest at 2.38% per annum (the “Term B Facility”). On December 14, 2015 this term loan was extended to December 14, 2019. The rate prior to this renewal was 2.16%. The average rate on the Term B Facility for the year ended October 31, 2016 was 2.35%. For the fiscal year ended October 31, 2016, the average interest rate on the Term Loan Facility was 2.58% and the average balance of the Term Loan Facility was $200,000,000. The interest expense is accrued on a daily basis and is payable on a monthly basis or on the last date of the respective LIBOR period, as applicable, for the Revolving Credit Facility, and payable on the last business day of each March, June, September and December and the maturity date for the Term Loan Facility.

The estimated fair value of each Term Loan Facility was calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the current U.S. Treasury rate with an equivalent maturity date, the spread between the U.S. insurance and financial debt rate and the U.S. Treasury rate. The following table shows the maturity date, interest rate, notional/carrying amount and estimated fair value for each Term Loan Facility outstanding as of October 31, 2016.

 

Series     Maturity
Date
    Interest
Rate
    Notional/
Carrying
Amount
    Estimated
Fair Value
 
 

 

Term A

Facility

  

  

    June 12, 2018        2.80   $ 100,000,000      $ 100,829,701   
 

 

Term B

Facility

  

  

    December 14,
2019
       2.38   $ 100,000,000      $ 99,538,581   

The Revolving Credit Facility has a term of 3-years and is not a perpetual form of leverage; there can be no assurance that the Revolving Credit Facility will be available for renewal on acceptable terms, if at all. The Term A Facility has a 5-year term. The Term B Facility, which initially had a 3-year term, was recently extended to December 14, 2019. Bank loan fees and expenses included in the Statement of Operations include fees for the renewal of the Revolving Credit Facility as well as commitment fees for any portion of the loan facility not drawn upon at any time during the period.

The estimated fair value of the Revolving Credit Facility was calculated, for disclosure purposes, by discounting future cash flows by a rate equal to the current U.S. Treasury rate with an equivalent maturity date, the spread between the U.S. insurance and financial debt rate and the U.S. Treasury rate. The following table shows the

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

37


Notes to Financial Statements (continued)

October 31, 2016

 

 

maturity date, interest rate, notional/carrying amount and estimated fair value outstanding as of October 31, 2016.

 

Maturity Date      Interest Rate     Notional/
Carrying
Amount
     Estimated
Fair Value
 
  April 9, 2017         1.55   $ 125,000,000       $ 124,824,726   

10. Risks of Leveraged Capital Structure

The amounts borrowed under the Revolving Credit Facility, the Term Loan Facility and the Notes and other funds obtained through various forms of leverage, including the Series A MRPS, may be invested to return higher rates than the rates pursuant to which interests or dividends are paid under such forms of leverage. However, the cost of leverage could exceed the income earned by the Fund on the proceeds of such leverage. To the extent that the Fund is unable to invest the proceeds from the use of leverage in assets which pay interest at a rate which exceeds the rate paid on the leverage, the yield on the Fund’s common stock will decrease. In addition, in the event of a general market decline in the value of assets in which the Fund invests, the effect of that decline will be magnified in the Fund because of the additional assets purchased with the proceeds of the leverage.

The Fund’s leveraged capital structure creates special risks not associated with unleveraged funds having similar investment objectives and policies. The funds borrowed pursuant to the Revolving Credit Facility, the Term Loan Facility and the Notes may constitute a substantial lien and burden by reason of their prior claim against the income of the Fund and against the net assets of the Fund in liquidation. The Fund is limited in its ability to declare dividends or other distributions under the terms of the various forms of leverage. In the event of an event of default under either the Revolving Credit Facility or Term Loan Facility, the lenders have the right to cause a liquidation of the collateral (i.e., sell portfolio securities and other assets of the Fund) and, if any such default is not cured, the lenders may be able to control the liquidation as well. In the event of an event of default under the Note Purchase Agreement, the holders of the Notes have the right to cause a liquidation of the collateral (i.e., sell portfolio securities and other assets of the Fund).

Each of the Revolving Credit Facility Agreement, the Term Loan Agreement, the Note Purchase Agreement or the Securities Purchase Agreement relating to the Series A MRPS includes usual and customary covenants for the applicable type of transaction. These covenants impose on the Fund asset coverage requirements, Fund composition requirements and limits on certain investments, such as illiquid investments, which are more stringent than those imposed on

the Fund by the 1940 Act. The covenants or guidelines could impede the Investment Manager, Investment Adviser, or Sub-Adviser from fully managing the Fund’s portfolio in accordance with the Fund’s investment objective and policies. Furthermore, non-compliance with such covenants or the occurrence of other events could lead to the cancellation of any and/or all of the forms of leverage. As of October 31, 2016, the Fund was in compliance with all covenants under the agreements relating to the various forms of leverage.

During the fiscal year ended October 31, 2016, the Fund incurred fees of approximately $746,638 for the Revolving Credit Facility, Term Loan Facility and Notes.

11. Portfolio Investment Risks

a. Credit and Market Risk:

A debt instrument’s price depends, in part, on the credit quality of the issuer, borrower, counterparty, or underlying collateral and can decline in response to changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral, or changes in specific or general market, economic, industry, political, regulatory, geopolitical, or other conditions. Funds that invest in high yield and emerging market instruments are subject to certain additional credit and market risks. The yields of high yield and emerging market debt obligations reflect, among other things, perceived credit risk. The Fund’s investments in securities rated below investment grade typically involve risks not associated with higher rated securities including, among others, greater risk of not receiving timely and/or ultimate payment of interest and principal, greater market price volatility, and less liquid secondary market trading.

b. Interest Rate Risk:

The prices of fixed income securities respond to economic developments, particularly interest rate changes, as well as to perceptions about the creditworthiness of individual issuers, including governments. Generally, the Fund’s fixed income securities will decrease in value if interest rates rise and vice versa, and the volatility of lower-rated securities is even greater than that of higher-rated securities. Also, longer-term securities are generally more volatile, so the average maturity or duration of these securities affects risk.

The Fund may be subject to a greater risk of rising interest rates due to current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.

c. Risks Associated with Foreign Securities and Currencies:

Investments in securities of foreign issuers carry certain risks not ordinarily associated with investments in securities of U.S. issuers.

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

38


Notes to Financial Statements (continued)

October 31, 2016

 

 

These risks include future political and economic developments, and the possible imposition of exchange controls or other foreign governmental laws and restrictions. In addition, with respect to certain countries, there is the possibility of expropriation of assets, confiscatory taxation, and political or social instability or diplomatic developments, which could adversely affect investments in those countries.

Certain countries also may impose substantial restrictions on investments in their capital markets by foreign entities, including restrictions on investments in issuers of industries deemed sensitive to relevant national interests. These factors may limit the investment opportunities available and result in a lack of liquidity and high price volatility with respect to securities of issuers from developing countries.

The value of foreign currencies relative to the U.S. Dollar fluctuates in response to market, economic, political, regulatory, geopolitical or other conditions. A decline in the value of a foreign currency versus the U.S. Dollar reduces the value in U.S. Dollars of investments denominated in that foreign currency. This risk may impact the Fund more greatly to the extent the Fund does not hedge its currency risk, or hedging techniques used by the Advisers are unsuccessful.

d. Focus Risk:

The Fund may have elements of risk not typically associated with investments in the United States due to focused investments in a limited number of countries or regions subject to foreign securities or currencies risks. Such focused investments may subject the Fund to additional risks resulting from political or economic conditions in such countries or regions and the possible imposition of adverse governmental laws or currency exchange restrictions could cause the securities and their markets to be less liquid and their prices to be more volatile than those of comparable U.S. securities.

e. Risks Associated with Mortgage-backed Securities:

The value of mortgage-backed securities can fall if the owners of the underlying mortgages default or pay off their mortgages sooner than expected, which could happen when interest rates fall.

f. High-Yield Bonds and Other Lower-Rated Securities Risk

The Fund’s investments in high-yield bonds (commonly referred to as “junk bonds”) and other lower-rated securities will subject the Fund to substantial risk of loss. Investments in high-yield bonds are speculative and issuers of these securities are generally considered to be less financially secure and less able to repay interest and principal than issuers of investment-grade securities. Prices of high-yield bonds tend to be very volatile. These securities are less liquid than investment-grade debt securities and may be difficult to price or sell, particularly in times of negative sentiment toward high-yield securities.

12. Contingencies

In the normal course of business, the Fund may provide general indemnifications pursuant to certain contracts and organizational documents. The Fund’s maximum exposure under these arrangements is dependent on future claims that may be made against the Fund, and therefore, cannot be estimated; however, based on experience, the risk of loss from such claims is considered remote.

13. Tax Information

The U.S. federal income tax basis of the Fund’s investments and the net unrealized appreciation as of October 31, 2016 were as follows:

 

Tax Basis of
Investments
     Appreciation      Depreciation    

Net

Unrealized

Appreciation

 
  $1,921,529,358         $65,968,554       $ (11,965,460   $ 54,003,094   
 

 

The tax character of distributions paid during the fiscal years ended October 31, 2016 and October 31, 2015 was as follows:

 

        October 31, 2016        October 31, 2015  

Distributions paid from:

         

Ordinary Income

     $ 59,990,293         $ 102,766,980   

Net long-term capital gains

                   

Tax return of capital

       46,911,791           5,766,249   

Total tax character of distributions

     $ 106,902,084         $ 108,533,229   

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

39


Notes to Financial Statements (concluded)

October 31, 2016

 

 

As of October 31, 2016, the components of accumulated earnings on a tax basis were as follows:

 

Undistributed ordinary income – net

     $   

Undistributed long-term capital gains – net

         

Total undistributed earnings

     $   

Capital loss carryforward

       (39,184,958 )* 

Other currency gains

       101,849,395   

Other temporary differences

       (6,198,819

Unrealized appreciation/(depreciation) – securities

       57,240,702 ** 

Unrealized appreciation/(depreciation) – currency

       (134,225,095 )** 

Total accumulated earnings/(losses) – net

     $ (20,518,775

 

*   On October 31, 2016, the Fund has a net capital loss carryforward of $(39,184,958) which will be available to offset like amounts of any future taxable gains. Under the Regulated Investment Company Modernization Act of 2010, the Fund is permitted to carry forward capital losses incurred in taxable years beginning after December 22, 2010 for an unlimited period. However, any losses incurred during those future taxable years will be required to be utilized prior to the losses incurred in pre-enactment taxable years. As a result of this ordering rule, pre-enactment capital loss carryforwards may be more likely to expire unused. Additionally, post-enactment capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term as under previous law. Capital loss carryforwards expire as follows:

 

Amounts    Expires  

$17,991,164

     2017 (Short-Term)   

$21,193,794

     2019 (Short-Term)   

 

**   The difference between book-basis and tax-basis unrealized appreciation/(depreciation) is attributable to the difference between book and tax amortization methods for premiums and discounts on fixed income securities, differing treatments for foreign currencies, the tax deferral of wash sales and straddles, the realization of unrealized gains on certain futures and forward contacts, and other timing differences.

GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. Accordingly, the table below details the necessary reclassifications, which are a result of permanent differences primarily attributable to foreign currency gains and losses, capital gains tax, distributions in excess of current year earnings and profits, premium amortization and swap reclasses. These reclassifications have no effect on net assets or net asset values per share.

 

Paid-in capital     Accumulated net
investment loss
    Accumulated net
realized loss
    Accumulated net
realized foreign
exchange loss
 
  $(15,913,186)        $(2,343,721)      $ (717,468   $ 18,974,375   

 

14. Subsequent Events

Management has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date the financial statements were issued. Based on this evaluation, no disclosures or adjustments were required to the financial statements as of October 31, 2016, other than those listed below.

 

On November 9, 2016 and December 9, 2016, the Fund announced that it will pay on November 25, 2016 and January 11, 2017, a distribution of US $0.035 per share to all shareholders of record as of November 18, 2016 and December 30, 2016, respectively.

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

40


Report of Independent Registered Public Accounting Firm

 

 

 

The Board of Directors and Shareholders of

Aberdeen Asia-Pacific Income Fund, Inc.:

 

We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Aberdeen Asia-Pacific Income Fund, Inc. (the “Fund”), as of October 31, 2016, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, the statement of cash flows for the year then ended, and the financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of October 31, 2016, by

correspondence with the custodian and brokers or by other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of October 31, 2016, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, its cash flows for the year then ended, and the financial highlights for each of the years in the five-year period then ended, in conformity with U.S. generally accepted accounting principles.

 

LOGO

Philadelphia, Pennsylvania

December 29, 2016

 

 

Aberdeen Asia-Pacific Income Fund, Inc.

 

41


Federal Tax Information: Dividends and Distributions (unaudited)

 

 

 

The following information is provided with respect to the distributions paid by the Aberdeen Asia-Pacific Income Fund, Inc. during the fiscal year ended October 31, 2016:

Common Shareholders

 

Payable Date    Foreign Taxes Paid†*     Foreign Source Income**  

11/30/15-1/12/16

     1.858%        59.46%   

1/28/16-10/28/16

     3.854%        28.91%   

 

  Expressed as a percentage of the distributions paid.
*   The foreign taxes paid represent taxes incurred by the Fund on interest received from foreign sources. Foreign taxes paid may be included in taxable income with an offsetting deduction from gross income or may be taken as a credit for taxes paid to foreign governments. You should consult your tax advisor regarding the appropriate treatment of foreign taxes paid.
**   Expressed as a percentage of ordinary distributions paid grossed-up for foreign taxes paid.

Supplemental Information (unaudited)

 

 

 

Board of Directors’ Consideration of Advisory and Sub-Advisory Agreements

At an in-person meeting of the Board of Directors (the “Board”) of Aberdeen Asia-Pacific Fund, Inc. (“FAX” or the “Fund”) held on September 7, 2016, the Board, including a majority of the Directors who are not considered to be “interested persons” of the Fund (the “Independent Directors”) under the Investment Company Act of 1940, as amended (the “1940 Act”), approved for an annual period the continuation of the Fund’s management agreement with Aberdeen Asset Management Asia Limited (the “Investment Manager”), the investment advisory agreement among the Fund, the Investment Manager and Aberdeen Asset Management Limited (the “Investment Adviser”), and the investment sub-advisory agreement among the Fund, the Investment Manager and Aberdeen Asset Managers Limited (the “Sub-Adviser”). Collectively, the Investment Manager, the Investment Adviser and the Sub-Adviser are referred to herein as the “Advisers” and the aforementioned agreements with the Advisers are referred to as the “Advisory Agreements.” The Investment Adviser and the Sub-Adviser are affiliates of the Investment Manager.

In considering whether to approve the renewal of the Fund’s Advisory Agreements, the Board reviews a variety of information provided by the Advisers relating to FAX, the Advisory Agreements and the Advisers, including comparative performance, fee and expense information and other information regarding the nature, extent and quality of services provided by the Advisers under their respective Advisory Agreements. The materials provided to the Board generally include, among other items: (i) information on the

investment performance of the Fund and the performance of peer groups of funds and the Fund’s performance benchmarks; (ii) information on the Fund’s advisory fees and other expenses, including information comparing the Fund’s expenses to those of a peer group of funds and information about any applicable expense limitations and fee “breakpoints”; (iii) information about the profitability of the Advisory Agreements to the Advisers; (iv) a report prepared by the Advisers in response to a request submitted by the Independent Directors’ independent legal counsel on behalf of such Directors; and (v) a memorandum from the Independent Directors’ independent legal counsel on the responsibi