The Manager's Commentary - October 31, 2009

While equity markets continue to rally and respond enthusiastically to central bank liquidity taps being left wide open, credit markets are still pricing risk with a discerning eye. Yes, both investment grade and non-investment grade corporate bonds have recovered strongly since March of this year. However, spreads still remain at elevated levels for both investment grade, at over 200 basis points, and noninvestment grade, at 750 basis points. Granted, a big improvement from the over 600 and 2,100 basis point spreads that investment grade and non-investment grade corporate bonds were at earlier in the year.

However, while equity markets continue to climb, the looming refinancing of over US$ 1 trillion of corporate debt over the next five years, combined with the omission of sales growth, driving recent earnings surprises, will, in our estimation, keep spreads elevated. This environment of above-average spreads will create the opportunity for the Pender Corporate Bond Fund to continue to harvest attractive bond investments.

One such example is Algonquin Power & Utilities, the owner of a diverse portfolio of renewable power generation assets in North America. The company has recently converted from an income trust to a corporation. Prior to the conversion, Pender built a position in Algonquin’s old 6.65% convertible bonds (conversion price of $10.65) due in July 2011, knowing that we were going to receive $105 new convertible bonds with a 7.5% coupon for each $100 of old converts, if the conversion was voted through. The maturity date moves out to December 2015 on the new convertibles, but the conversion price moves down to $4.08. With the replacement value of the hydro assets covering most of the enterprise value of the company (approx. CDN$700 million) we believe this is exceptional security for a bond that has a good coupon and the potential to generate strong capital appreciation over the next year or two.

As always, if you have any questions or comments about your investment in the fund, please do not hesitate to call.

Matthew Shandro
October 31st, 2009