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EVERGREEN INCOME ADVANTAGE FUND
SCHEDULE OF INVESTMENTS
continued
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July 31, 2009 (unaudited)
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At July 31, 2009, the Fund had the following credit default swap contracts outstanding:
Credit default swaps on debt obligations – Sell protection
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Expiration
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Counterparty
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Reference
Debt
Obligation
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Rating of
Reference
Debt
Obligation*
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Notional
Amount
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Fixed
Payments
Received
by the Fund
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Frequency
of
Payments
Received
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Market
Value
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Upfront
Premiums
Paid/
(Received)
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Unrealized
Gain (Loss)
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|
|
|
|
|
|
|
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|
06/20/2014
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|
Goldman
Sachs
|
|
Expedia, 7.46%,
08/15/2018 #
|
|
BB
|
|
$ 970,000
|
|
5.00%
|
|
Quarterly
|
|
$(203,904)
|
|
$(145,420)
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$ (58,484)
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|
06/20/2014
|
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UBS
|
|
Expedia, 7.46%,
08/15/2018 #
|
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BB
|
|
2,465,000
|
|
5.00%
|
|
Quarterly
|
|
(369,547)
|
|
(73,593)
|
|
(295,954)
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|
06/20/2014
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Goldman
Sachs
|
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Motorola, 6.50%,
09/01/2025 #
|
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BB+
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|
2,005,000
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1.00%
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Quarterly
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(77,239)
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57,310
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(134,549)
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06/20/2014
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JPMorgan
|
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Motorola, 6.50%,
09/01/2025 #
|
|
BB+
|
|
2,215,000
|
|
1.00%
|
|
Quarterly
|
|
(17,980)
|
|
63,313
|
|
(81,293)
|
|
*
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Reflects the ratings of a nationally recognized ratings agency at period end. A rating of D would most likely indicate a trigger event of default has occurred although circumstances including bankruptcy, failure to pay, obligation default, obligation acceleration, repudiation/moratorium and restructuring may also cause a credit event to take place.
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#
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The Fund entered into the swap contract for speculative purposes.
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On July 31, 2009, the aggregate cost of securities for federal income tax purposes was $854,171,395. The gross unrealized appreciation and depreciation on securities based on tax cost was $40,148,487 and $71,283,429, respectively, with a net unrealized depreciation of $31,134,942.
Valuation of investments
Portfolio debt securities acquired with more than 60 days to maturity are fair valued using matrix pricing methods determined by an independent pricing service which takes into consideration such factors as similar security prices, yields, maturities, liquidity and ratings. Securities for which valuations are not readily available from an independent pricing service may be valued by brokers which use prices provided by market makers or estimates of fair market value obtained from yield data relating to investments or securities with similar characteristics.
Listed equity securities are usually valued at the last sales price or official closing price on the national securities exchange where the securities are principally traded. If there has been no sale, the securities are valued at the mean between bid and asked prices.
Short-term securities of sufficient credit quality with remaining maturities of 60 days or less at the time of purchase are valued at amortized cost, which approximates fair value.
Investments in open-end mutual funds are valued at net asset value. Securities for which market quotations are not readily available or not reflective of current fair value are valued at fair value as determined by the investment advisor in good faith, according to procedures approved by the Board of Trustees.
The valuation techniques used by the Fund to measure fair value are consistent with the market approach, income approach and/or cost approach, where applicable, for each security type.
When-issued and delayed delivery transactions
The Fund records when-issued or delayed delivery securities as of trade date and maintains security positions such that sufficient liquid assets will be available to make payment for the securities purchased. Securities purchased on a when-issued or delayed delivery basis are marked-to-market daily and begin earning interest on the settlement date. Losses may occur on these transactions due to changes in market conditions or the failure of counterparties to perform under the contract.
Loans
The Fund may purchase loans through an agent, by assignment from another holder of the loan or as a participation interest in another holder’s portion of the loan. Loans are purchased on a when-issued or delayed delivery basis. Interest income is accrued based on the terms of the securities. Fees earned on loan purchasing activities are recorded as income when earned. Loans involve interest rate risk, liquidity risk and credit risk, including the potential default or insolvency of the borrower.
As of July 31, 2009, the Fund had unfunded loan commitments of $7,778,371.
Credit default swaps
The Fund is subject to credit risk in the normal course of pursuing its investment objectives. The Fund may enter into credit default swap contracts for hedging or speculative purposes to provide or receive a measure of protection against default on a referenced entity, obligation or index or for investment gains. Credit default swaps involve an exchange of a stream of payments for protection against the loss in value of an underlying security or index. Under the terms of the swap, one party acts as a guarantor (referred to as the seller of protection) and receives a periodic stream of payments, provided that there is no credit event, from another party (referred to as the buyer of protection) that is a fixed percentage applied to a notional principal amount over the term of the swap. An index credit default swap references all the names in the index, and if a credit event is
triggered, the credit event is settled based on that name’s weight in the index. A credit event includes bankruptcy, failure to pay, obligation default, obligation acceleration, repudiation/moratorium, and restructuring. The Fund may enter into credit default swaps as either the seller of protection or the buyer of protection. As the seller of protection, the Fund is subject to investment exposure on the notional amount of the swap and has assumed the risk of default of the underlying security or index. As the buyer of protection, the Fund could be exposed to risks if the seller of the protection defaults on its obligation to perform, or if there are unfavorable changes in the fluctuation of interest rates or in the price of the underlying security or index. The maximum potential amount of future payments (undiscounted) that the Fund as the seller of protection could be required to make under the credit default swap contract would be an amount equal to the notional amount of the
swap contract. The Fund’s maximum risk of loss from counterparty risk, either as the protection seller or as the protection buyer, is the fair value of the contract. This risk is mitigated by having a master netting arrangement between the Fund and the counterparty and by having the counterparty post collateral to cover the Fund’s exposure to the counterparty.
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EVERGREEN INCOME ADVANTAGE FUND
SCHEDULE OF INVESTMENTS
continued
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July 31, 2009 (unaudited)
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If the Fund is the seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will pay to the buyer of protection the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index. If the Fund is the buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will receive from the seller of protection the notional amount of the swap and deliver the referenced obligation or underlying securities comprising the referenced index.
Any premiums paid or received on the transactions are recorded as an asset or liability on the Statement of Assets and Liabilities and amortized. The value of the swap contract is marked-to-market daily based on quotations from an independent pricing service or market makers and any change in value is recorded as an unrealized gain or loss. Periodic payments made or received are recorded as realized gains or losses. In addition, payments received or made as a result of a credit event or termination of the contract are recognized as realized gains or losses.
Certain credit default swap contracts entered into by the Fund provide for conditions that result in events of default or termination that enable the counterparty to the agreement to cause an early termination of the transactions under those agreements. Any election by the counterparty to terminate early may impact the amounts reported on the financial statements.
Valuation hierarchy
Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(“FAS 157”) establishes a single authoritative definition of fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 establishes a fair value hierarchy based upon the various inputs used in determining the value of the Fund’s investments. These inputs are summarized into three broad levels as follows:
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Level 1 –
quoted prices in active markets for identical securities
Level 2 –
other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 –
significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments)
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The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
As of July 31, 2009, the inputs used in valuing the Fund’s assets, which are carried at fair value, were as follows:
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Investments in Securities
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Quoted Prices
(Level 1)
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Significant
Other Observable
Inputs
(Level 2)
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Significant
Unobservable
Inputs
(Level 3)
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Total
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Equity securities
|
|
|
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Common stocks
|
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$
|
151,185
|
|
$
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0
|
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$0
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$
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151,185
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Mutual fund shares
|
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4,586,406
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0
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0
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4,586,406
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Corporate debt securities
|
|
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0
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|
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786,495,171
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0
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786,495,171
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Short-term investments
|
|
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31,803,691
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|
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0
|
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0
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31,803,691
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|
|
|
|
|
|
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$
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36,541,282
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|
$
|
786,495,171
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$0
|
|
$
|
823,036,453
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|
|
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|
|
|
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As of July 31, 2009, the inputs used in valuing the Fund’s other financial instruments, which are carried at fair value, were as follows:
|
|
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Quoted Prices
(Level 1)
|
|
Significant
Other Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
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Total
|
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|
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Other financial instruments*
|
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$0
|
|
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$(570,280)
|
|
$0
|
|
$
|
(570,280)
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|
|
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|
|
|
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*
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Other financial instruments include swap contracts.
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Item 2 - Controls and Procedures
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(a)
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The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-Q was recorded, processed, summarized, and reported timely.
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(b)
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There has been no change in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) that occurred during the registrant’s last fiscal quarter that has materially affected, or is reasonable likely to materially affect, the registrant’s internal control over financial reporting.
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Item 3 - Exhibits
File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated.
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(a)
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Separate certifications for the registrant’s principal executive officer and principal financial officer, as required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached as EX-99.CERT.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Evergreen Income Advantage Fund
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By:
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/s/ W. Douglas Munn
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W. Douglas Munn
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Principal Executive Officer
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Date: September 28, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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By:
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/s/ W. Douglas Munn
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W. Douglas Munn
|
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Principal Executive Officer
|
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Date: September 28, 2009
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By:
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/s/ Jeremy DePalma
|
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Jeremy DePalma
|
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Principal Financial Officer
|
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Date: September 28, 2009