As filed with the Securities and Exchange Commission on March 11, 2009
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 811-22228
PNMAC Mortgage Opportunity Fund, LP
27001 Agoura Rd. Suite 350
Calabasas, California 91301
Jeff Grogin, Secretary
PNMAC MORTGAGE OPPORTUNITY FUND, LP
27001 Agoura Rd, Suite 350 Calabasas, California 91301
Copies to:
Richard T. Prins, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
(818) 224-7050
Date of fiscal year end: December 31
Date of reporting period: December 31, 2008
Item 1. Reports to Stockholders.
PNMAC Mortgage Opportunity Fund, LP
Annual Report
December 31, 2008
PNMAC Mortgage Opportunity Fund, LP
Table of Contents
| Page(s) | |
| Financial Statements | |
| Statement of Assets and Liabilities | 2 |
| Schedule of Investments | 3 |
| Statement of Operations | 4 |
| Statement of Partners’ Capital | 5 |
| Statement of Cash Flows | 6 |
| Financial Highlights | 7 |
| Notes to Financial Statements | 8-19 |
| Report of Independent Registered Public Accounting Firm | 20 |
| Additional Information | 21 |
| Directors and Officers | 22-26 |
| Approval of Investment Management Agreement | 27 |
PNMAC Mortgage Opportunity Fund, LP
Statement of Assets and Liabilities
December 31, 2008
| Assets: | ||||
| Investments, at fair value (cost $149,908,075) | $ | 143,086,535 | ||
Other assets | 137,609 | |||
Dividends receivable | 2,473 | |||
| Total assets | 143,226,617 | |||
| Liabilities: | ||||
| Payable to investment manager | 2,462,500 | |||
| Payable to affiliate | 405,858 | |||
| Accrued expenses and other liabilities | 41,555 | |||
| Total liabilities | 2,909,913 | |||
| Partners’ Capital | $ | 140,316,704 | ||
| Partners’ Capital Consists of: | ||||
| General partner | $ | 985 | ||
| Limited partner | 140,315,719 | |||
| Total partners’ capital | $ | 140,316,704 | ||
The accompanying notes are an integral part of these financial statements.
2
PNMAC Mortgage Opportunity Fund, LP
Schedule of Investments
December 31, 2008
Description | Shares or Principal Amount | Fair Value | ||||||
| INVESTMENTS – 102.0%* | ||||||||
| Mortgage Investments – 101.4%* | ||||||||
| PNMAC Mortgage Co, LLC | $ | 119,956,594 | $ | 113,022,783 | ||||
| PNMAC Mortgage Co (FI), LLC | 29,147,705 | 29,259,976 | ||||||
| Total Mortgage Investments (Cost $149,104,299) | 149,104,299 | 142,282,759 | ||||||
| Short-Term Investments – 0.6%* | ||||||||
| BlackRock Liquidity Funds: TempFund Institutional Shares | 803,776 | 803,776 | ||||||
| Total Short-Term Investments (Cost $803,776) | 803,776 | 803,776 | ||||||
| TOTAL INVESTMENTS (Cost $149,908,075) | 143,086,535 | |||||||
| Liabilities in excess of other assets – (2.0%)* | (2,769,831 | ) | ||||||
| TOTAL PARTNERS’ CAPITAL – 100%* | $ | 140,316,704 | ||||||
* Percentages are stated as a percent of partners’ capital | ||||||||
The accompanying notes are an integral part of these financial statements.
3
PNMAC Mortgage Opportunity Fund, LP
Statement of Operations
For the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
| Investment income | ||||
| Dividend income | $ | 6,071,535 | ||
| Total investment income | 6,071,535 | |||
| Expenses: | ||||
| Investment advisory fees | 2,462,500 | |||
| Professional expenses | 311,609 | |||
| Administration and other expenses | 294,440 | |||
| Directors fees and expenses | 249,202 | |||
| Insurance expense | 175,452 | |||
| Custody fees | 2,012 | |||
| Total expenses | 3,495,215 | |||
| Net investment income | 2,576,320 | |||
| Change in unrealized losses on investments: | ||||
| Net change in unrealized depreciation on investments | (6,821,540 | ) | ||
| Net loss on investments | (6,821,540 | ) | ||
| Net decrease in partners’ capital resulting from operations | $ | (4,245,220 | ) | |
The accompanying notes are an integral part of these financial statements.
4
PNMAC Mortgage Opportunity Fund, LP
Statement of Partners’ Capital
For the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
General Partner | Limited Partner | Total | ||||||||||
| Partners’ capital, August 11, 2008 | $ | - | $ | - | $ | - | ||||||
| Capital contributions | 1,000 | 146,563,548 | 146,564,548 | |||||||||
| Return of capital distributions | - | (2,002,624 | ) | (2,002,624 | ) | |||||||
| Increase (decrease) in partners’ capital | ||||||||||||
| from operations: | ||||||||||||
| Net investment income | 43 | 2,576,277 | 2,576,320 | |||||||||
Net change in unrealized depreciation on investments | (58 | ) | (6,821,482 | ) | (6,821,540 | ) | ||||||
| Net decrease in partners’ capital | ||||||||||||
| from operations | (15 | ) | (4,245,205 | ) | (4,245,220 | ) | ||||||
| Partners’ capital, December 31, 2008 | $ | 985 | $ | 140,315,719 | $ | 140,316,704 | ||||||
The accompanying notes are an integral part of these financial statements.
5
PNMAC Mortgage Opportunity Fund, LP
Statement of Cash Flows
For the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
| Cash flows from operating activities: | ||||
| Net decrease in partners’ capital resulting from operations | $ | (4,245,220 | ) | |
| Adjustments to reconcile net decrease in partners’ capital resulting from | ||||
| operations to net cash used in operating activities: | ||||
| Purchases of Mortgage Investments | (149,104,299 | ) | ||
| Purchases of short-term investments | (5,518,353 | ) | ||
| Sales of short-term investments | 4,714,577 | |||
| Net change in unrealized depreciation on investments | 6,821,540 | |||
| Increase in other assets | (137,609 | ) | ||
| Increase in dividends receivable | (2,473 | ) | ||
| Increase in payable to investment manager | 2,462,500 | |||
| Increase in payable to affiliate | 405,858 | |||
| Increase in accrued expenses and other liabilities | 41,555 | |||
| Net cash used in operating activities | (144,561,924 | ) | ||
| Cash flows from financing activities: | ||||
| Capital contributions | 146,564,548 | |||
| Return of capital distributions | (2,002,624 | ) | ||
| Net cash provided by financing activities | 144,561,924 | |||
| Net increase in cash | - | |||
| Cash at beginning of period | - | |||
| Cash at end of period | $ | - | ||
The accompanying notes are an integral part of these financial statements.
6
PNMAC Mortgage Opportunity Fund, LP
Financial Highlights
For the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
| SUPPLEMENTAL DATA AND RATIOS | Total | General Partner(5) | Limited Partner | |||||||||
Total return (1), (3) | (3.53 | %) | (1.46 | %) | (3.53 | %) | ||||||
Internal rate of return (4) | (9.68 | %) | (3.70 | %) | (9.68 | %) | ||||||
| Partners’ capital, end of period | $140,316,704 | $985 | $140,315,719 | |||||||||
Ratio of expenses to weighted average partners’ capital (2) | 6.88 | % | 2.10 | % | 6.88 | % | ||||||
Ratio of net investment income to weighted average partners’ capital (2) | 5.07 | % | 10.40 | % | 5.07 | % | ||||||
Portfolio turnover rate (1) | 0.00 | % | ||||||||||
| (1) | Not annnualized. | ||||||||||||
| (2) | Annualized. | ||||||||||||
| (3) | Total return is calculated for each partner class taken as a whole. An investor’s return may vary from these returns based on different fee arrangements (as applicable) and the timing of capital transactions. | ||||||||||||
| (4) | Internal rate of return was computed based on the actual dates of the cash inflows (capital contributions), outflows (return of capital distributions) and the ending net assets at the end of the period of the partners’ capital accounts. | ||||||||||||
| (5) | Not all expenses are allocated to the General Partner in accordance with the Partnership Agreement. | ||||||||||||
The accompanying notes are an integral part of these financial statements.
7
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
| 1. | Organization |
PNMAC Mortgage Opportunity Fund, LP (the “Master Fund”) is a limited liability partnership organized under the laws of the state of Delaware. The Master Fund is registered under the Investment Fund Act of 1940, as amended. Interest in the Master Fund are issued solely in private placement transactions that do not involve any “public offering” within the meaning of Section 4(2) of the Securities Act of 1933, as amended (the “1933 Act”). The investment objective of the Master Fund is to achieve attractive total returns by capitalizing on dislocations in the mortgage market through opportunistic investments primarily in U.S. residential mortgages and related assets, instruments and entities.
The Master Fund is managed by PNMAC Capital Management, LLC (the “Investment Manager”). The Investment Manager is a registered investment adviser with the Securities and Exchange Commission. The general partner of the Master Fund is PNMAC Opportunity Fund Associates, LLC (the “General Partner”), a Delaware limited liability company that is a controlled subsidiary of Private National Mortgage Acceptance Company, LLC.
The Master Fund operates as a master fund in a master-feeder fund structure. The Master Fund acts as a central investment mechanism for (i) PNMAC Mortgage Opportunity Fund, LLC (the “Fund” or “Limited Partner”) and (ii) the General Partner. The Fund owned 99.99% of the Master Fund at December 31, 2008 and is the sole limited partner. The General Partner has the exclusive right to conduct the operations of the Master Fund.
The Master Fund conducts its operations through investments in PNMAC Mortgage Co, LLC and PNMAC Mortgage Co (FI), LLC (collectively, the “Mortgage Investments”). PNMAC Mortgage Co, LLC is a wholly owned limited liability company. PNMAC Mortgage Co, LLC acquires, holds and works-out distressed U.S. residential mortgages. PNMAC Mortgage Co (FI), LLC is an investment company that was formed to pool investor capital and take an interest in the proceeds of FNBN I, LLC (“FNBN”). FNBN is a limited liability company formed to own a $558 million pool of residential loans in partnership with the Federal Deposit Insurance Corporation (the “FDIC”). The FDIC owns a substantial participation interest in the proceeds of the loans held by FNBN that depends on the amount of proceeds collected; the remaining share is owned by PNMAC Mortgage Co (FI), LLC. As mortgages owned by PNMAC Mortgage Co, LLC become performing, PNMAC Mortgage Co, LLC may transfer them to the Master Fund for securitization for financing purposes or sale. The Master Fund may directly or indirectly hold interests in pools of such securities mortgages and will also invest directly in other mortgage-related investment securities. At December 31, 2008, the Master Fund owned 100% of PNMAC Mortgage Co, LLC and 67.4% of PNMAC Mortgage Co (FI), LLC.
The Master Fund commenced operations on August 11, 2008 and will continue in existence through December 31, 2016, subject to three one year extensions by the Investment Manager in its discretion, in accordance with the terms of the Limited Partnership Agreement.
| 2. | Significant Accounting Policies |
The Master Fund prepares its financial statements in accordance with accounting principles generally accepted in The United States of America. The Master Fund reports its investments in the Mortgage Investments in accordance with S-X Rules 6-03(c)(1) Special Rules of General Application to Registered Investment Companies, and the AICPA Audit and Accounting Guide: Investment Companies. These rules do not permit the Master Fund to consolidate its ownership interest in such investments. Following are the significant accounting policies adopted by the Master Fund:
8
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in The United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, recognition of distribution income and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
Investment Valuation
The Master Fund adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements (“SFAS 157”), effective at the commencement of operations. The Master Fund has elected to defer the election of SFAS 157 for non-financial assets and liabilities in accordance.
Due to the inherent uncertainty of valuation, the estimated fair value of the Mortgage Investments would differ significantly from the value that may be realized if the Master Fund is liquidated and this difference could be material. Fair value considerations of investments held are further discussed in Footnote 3 – Fair Value of Investments.
Security Transactions and Investment Income
The Master Fund records investment and contractual transactions on the trade/contract date of the investment purchase or sale. The cost of investments sold is determined by use of the specific identification method for both financial reporting and income tax purposes. Dividend income is recorded on the ex-dividend date or, using reasonable diligence, when known to the Master Fund. Distributions of $6,069,052 from the PNMAC Mortgage Co, LLC is included in dividend income on the Statement of Operations.
Illiquid Securities
The Master Fund’s and Mortgage Investments’ include assets that are considered illiquid. These investments may trade in limited markets or have restrictions on resale or transfer and may not be able to be liquidated on demand if needed. The value assigned to these investments may differ significantly from the values that would have been used had a ready market existed and such differences could be material to the financial statements.
Distributions and Carried Interest
For the period from the commencement of operations through December 31, 2008, the Master Fund paid the Limited Partner a $2,002,624 return of capital distribution pursuant to the following distribution priority policy. Distributions are made in accordance with the following distribution priorities but may be recalled by the Master Fund for purposes of making new investments until December 31, 2011:
| 1. | First, 100% to such Limited Partner until such Limited Partner has received 100% of such Limited Partner’s Capital Contributions (irrespective of whether such Capital Contributions were used to make investment, pay Management Fees and expenses or any other purpose); |
| 2. | Second, 100% to such Limited Partner, until such Limited Partner has received a preferred return on the amounts described in (1) above calculated at a rate of 8%, compounded annually; |
| 3. | Third, 100% to the General Partner until the General Partner has received an amount equal to 20% of the profits distributed to the Limited Partner pursuant to (2) above; and |
| 4. | Thereafter, (i) 80% to such Limited Partner and (ii) 20% to the General Partner (the “Carried Interest”. |
The Carried Interest will be allocated (and subsequently distributed) by the Master Fund to the General Partner as an allocable shares of the Master Fund’s gains, not as a performance fee paid to a third party. As of December 31, 2008, the Master Fund has not earned, paid or accrued any carried interest to the General Partner.
9
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Expenses
The Master Fund is charged for those expenses that are directly attributable to it, such as, but not limited to, advisory and custody fees. Expenses that are not directly attributable to the Master Fund are generally allocated among the entities in proportion to their respective capital commitments. All general and administrative expenses are recognized on an accrual basis of accounting.
Income Taxes
The Master Fund tax year end is December 31. The Master Fund intends to be treated as a partnership for Federal income tax purposes. Each partner is responsible for the tax liability or benefit relating to such partner’s distributive share of taxable income or loss. Accordingly, no provision for Federal income taxes is reflected in the accompanying financial statements. No distributions will be made by the Master Fund to cover any taxes due on Limited Partners’ investments in the Master Fund. Investors may not redeem capital from the Master Fund, and they must have other sources of capital available to them in order to pay such taxes.
In July, 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FIN 48”). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Master Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current period. The Master Fund adopted FIN 48 as of the commencement of its operations.
FIN 48 requires the Master Fund to analyze all open tax years. Open tax years are those that are open for examination by the relevant income taxing authority. As of December 31, 2008, open Federal and state income tax years include the tax year ended December 31, 2008. The Master Fund has no examination in progress.
The Master Fund has reviewed all open tax years and major jurisdictions and concluded that the adoption of FIN 48 resulted in no effect to the Master Fund’s financial position or results of operations. There is no tax liability resulting from unrecognized tax benefits relating to uncertain income tax positions taken or expected to be taken on the tax return for the fiscal year-end December 31, 2008. The Master Fund is also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months. If applicable, the Master Fund will recognize interest accrued related to unrecognized tax benefits in “interest expense” and penalties in “other expenses” on the Statement of Operations.
Partners’ Capital
Net profits or net losses of the Master Fund for each month are allocated to the capital accounts of partners as of the last day of each month in accordance with partners’ respective investment percentages of the Master Fund. Net profits or net losses are measured as the net change in the value of the partners’ capital of the Master Fund during the fiscal period, before giving effect to any repurchases of interest in the Master Fund, and excluding the amount of any items to be allocated to the capital accounts of the partners of the Master Fund, other than in accordance with the partners’ respective investment percentages.
10
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Indemnifications
Under the Master Fund’s organizational documents, its officers and directors are indemnified against certain liabilities arising out of the performance of their duties to the Master Fund. In addition, in the normal course of business, the Master Fund may enter into contracts that provide general indemnification to other parties. The Master Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Master Fund that have not yet occurred, and may not occur. However, the Master Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Recent Accounting Pronouncements
In March 2008, SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS 161”) was issued and is effective for fiscal years beginning after November 15, 2008. SFAS 161 is intended to improve financial reporting for derivative instruments by requiring enhanced disclosure that enables investors to understand how and why an entity uses derivatives, how derivatives are accounted for, and how derivative instruments affect an entity’s results of operations and financial position Management is currently evaluating the implications of SFAS 161. The Master Fund does not expect the adoption of SAFS 161 to have a significant impact on its financial statements and did not hold any derivative instruments as of December 31, 2008.
In October 2008, the FASB issued FASB Staff Position No. 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active (“FSP 157-3”). The staff position clarifies the application of SFAS 157 in inactive markets and provides an illustrative example of how the fair value of a financial asset is determined in an inactive market. FSP 157-3 is effective immediately, including prior periods for which financial statements have not been issued. The issuance of this staff position affects the Master Fund as a significant portion of the Master Fund’s financial assets and liabilities are measured at fair value using market value approaches based on active markets. Availability of observable market inputs has diminished considerably as a result of the increasing inactivity in the secondary market for mortgage loans, mortgage-backed securities and other real estate related assets. The lack of observable market inputs requires that the Master Fund rely heavily on its own internal assumptions of the future cash flows and appropriate risk-adjusted discount rates market participants would apply in measuring the fair value of financial assets and liabilities in orderly market transactions that are not forced liquidations or distressed sales. A significant portion of the Master Fund’s financial assets were classified as Level 3 fair value measurements as a result of market inactivity and the lack of availability of observable market inputs.
In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS162 will be effective 60 days after the U.S. Securities and Exchange Commission approves the Public Company Accounting Oversight Board’s amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” The Master Fund does not expect the adoption of SAFS 162 to have a significant impact on its financial statements.
In April 2008, the FASB voted to eliminate qualifying special purpose entities (QSPEs) from the guidance in FASB Statement No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities (“SFAS 140”). While the revised standard has not been finalized and the FASB’s proposals will be subject to a public comment period, this change may have a significant impact on the Master Fund’s financial statements as it may lose sales treatment for future sales. An effective date for any proposed revisions has not been determined by the FASB.
11
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
In connection with the proposed changes to SFAS 140, the FASB also is proposing three key changes to the consolidation model in FASB Interpretations No. 46(R), Consolidation of Variable Interest Entities (revised December 2003) – an interpretations of ARB No. 51 (“FIN 46(R)”). First, the FASB has proposed to include former QSPEs in the scope of FIN 46(R). In addition, the FASB supports amending FIN 46(R) to change the method of analyzing which party to a variable interest entity (VIE) should consolidate the VIE to a primarily qualitative determination of control instead of today’s risks and rewards model. Finally, the proposed amendment is expected to require all VIEs and their primary beneficiaries to be reevaluated quarterly. The previous rules required reconsideration only when specified reconsideration events occurred. As of December 31, 2008, the Master Fund did not own any unconsolidated VIEs, however, the Master Fund is considered as a VIE for the Fund as of December 31, 2008. The Master Fund, through its investment in PNMAC Mortgage Co (FI), LLC also invests in FNBN, which is a VIE. The Master Fund, through its investment in PNMAC Mortgage Co, LLC, also has a variable interest in PennyMac Loan Services, LLC. The Master Fund will be evaluating the impact of these changes on the Master Fund’s financial statements once the standard is approved and issued.
| 3. | Fair Value of Investments |
Investments for which no quotations are readily available are valued by the Valuation Committee in good faith at fair value using methods and procedures approved by the Board of Directors. These methods generally include, but are not limited to, the fundamental analytical data relating to the investment; the nature and duration of restrictions in the market in which the investment is traded (including the time needed to dispose of the investment, methods of soliciting offers and mechanics of transfer); the evaluation of the forces which influence the market in which these investments may be purchased or sold, including the economic outlook and the condition of the industry in which the issuer participates. Although the procedures used by the Valuation Committee to fair value investments are believed to be appropriate and reasonable, the actual values that may be realized upon the ultimate liquidation of the investment may not represent the amount that is reflected in the statement of operations, and the differences could be material.
The Master Fund reported investments, recorded at fair value, in the accompanying financial statements as follows:
Mortgage Investments valued at $142,282,759 (99% of total assets) as of December 31, 2008 have been estimated by management in the absence of readily determinable fair values. Management’s estimates are based on the proportionate share of the discounted cash flow projections of the assets and liabilities of the Master Fund’s Mortgage Investments. These Mortgage Investments are valued based on the proportionate share of the discounted cash-flow projections of the underlying assets and liabilities of FNBN I, LLC and PNMAC Mortgage Co, LLC (“Mortgage Companies”) given that the loans or loan participation interest held by the Mortgage Companies represent substantially all of the net asset value held by these entities. Further disclosure regarding the valuation policies of the mortgage loans and the loan participation interests held by the Mortgage Companies is discussed in Footnote 4, Mortgage Companies.
Short-term investments which represent money market funds are valued at the number of shares multiplied by the value per share published by the manager of the money market funds on the valuation date. Fair value of such funds also include assessment of liquidity and credit risk, including lockout provisions, if any, related to these funds.
In accordance with SFAS 157, the Master Fund established a hierarchy that prioritizes the inputs to valuation techniques giving the highest priority to readily available unadjusted quoted prices in active market for identical assets (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements) when market prices are not readily available or reliable. The three levels of the hierarchy under SFAS 157 are described below:
12
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Level 1 – Quoted prices in active market for identical securities.
Level 2 – Prices determined using other significant observable inputs. Observable inputs are inputs that other market participants would use in pricing a security. These may include quoted prices for similar securities, interest rates, prepayments speeds, credit risk and others.
Level 3 – Prices determined using significant unobservable inputs. In situations where quoted prices or observable inputs are unavailable (for example, when there is little or no market activity for an investment at the end of the period), unobservable inputs may be used. Unobservable inputs reflect the Master Fund’s own assumptions about the factors market participants would use in pricing an investment, and would be based on the best information available.
Changes in valuation techniques may also result in transfer in or out of an investment’s assigned level within the hierarchy. The pricing level used for valuing an asset may not be an indication of the risk associated with investing in the asset. The following is a summary of the pricing levels used, as of December 31, 2008, for valuing the assets of Master Fund:
| Description | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Short-term investments | $ | 803,776 | $ | 803,776 | $ | - | $ | - | ||||||||
| Mortgage Investments | 142,282,759 | - | - | 142,282,759 | ||||||||||||
| Total investments | $ | 143,086,535 | $ | 803,776 | $ | - | $ | 142,282,759 | ||||||||
The following is a reconciliation of investments for which Level 3 inputs were used to determine value:
Mortgage Investments | Total | |||||||
| Balance at August 11, 2008, commencement of operations | $ | - | $ | - | ||||
| Net purchases, sales and paydowns | 149,104,299 | 149,104,299 | ||||||
| Transfers in/(out) | - | - | ||||||
| Gains/(losses) | ||||||||
| Amortization of discount/(premium) | - | - | ||||||
| Realized | - | - | ||||||
| Unrealized | (6,821,540 | ) | (6,821,540 | ) | ||||
| Balance at December 31, 2008 | $ | 142,282,759 | $ | 142,282,759 | ||||
The information used in the above reconciliation represents commencement of operations to date activity for any Investments identified as using Level 3 inputs at either the beginning or the end of the current fiscal period. Transfer in or out of Level 3 represents either the beginning value (for transfer in), or the ending value (for transfer out) of any investments where a change in the pricing level occurred from the beginning to the end of the period.
13
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
| 4. | Mortgage Companies |
The Mortgage Companies adopted the provisions of SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities (“SFAS 159”), effective at the commencement of operations. SFAS 159 permits fair value accounting to be irrevocably elected for certain financial assets and liabilities on an individual contract basis at the time of acquisition or at a remeasurement event date. For those instruments for which fair value accounting is elected, changes in fair value will be recognized in earnings and fees and costs associated with origination or acquisition will be recognized as incurred rather than deferred.
Mortgage loans held by the Mortgage Companies are classified as held for sale at the time of acquisition. Loans that are not committed to be sold are valued using a discounted cash flow valuation model on a monthly basis. Inputs to the model can be classified into directly and non-directly observable inputs. Directly observable inputs are inputs that can be taken directly from observable data or market sources such as, current interest rates, loan amount, payment statuses and property type. Non-directly observable inputs are inputs that cannot be taken directly from observable data or market sources such as, forecasts of future interest rates, home prices, prepayment speeds, defaults and loss severities. Loans which are committed to be sold are valued at their quoted market price or market price equivalent.
The Mortgage Companies have assumed a concentration of credit risk in connection with their investments in loans held for sale. Through their mortgage servicing agreements with PennyMac Loan Services, LLC, the Mortgage Companies proactively work with borrowers to perform loss mitigation activities in order to minimize credit losses. Such activities include the development of loan modification programs and workout options that have the highest probably of successful resolution for both borrowers and the Mortgage Companies.
The following is a summary of the condensed balance sheet of the Master Fund’s investments in PNMAC Mortgage Co, LLC and PNMAC Mortgage Co (FI), LLC as of December 31, 2008:
| Condensed Balance Sheet | PNMAC Mortgage Co, LLC | PNMAC Mortgage Co (FI), LLC | ||||||
| Mortgage loans, at fair value | $ | 110,389,898 | $ | 43,403,757 | ||||
| Other assets, less liabilities | 2,632,884 | 589 | ||||||
| Members' equity | $ | 113,022,783 | $ | 43,404,346 | ||||
Master Fund's investment in Mortgage Investments at December 31, 2008 | $ | 113,022,783 | $ | 29,259,976 | ||||
The following is a summary of the distribution of loans included in the Mortgage Companies’ portfolios as measured by fair value at December 31, 2008:
14
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Occupancy | Fair Value | % NAV | Average Note Rate | ||||||
| Owner Occupied | $101,585,322 | 72.40% | 7.77% | ||||||
| Investment Property | 30,215,996 | 21.53% | 8.20% | ||||||
| Second Property | 7,636,243 | 5.44% | 8.28% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
| Loan Type | Fair Value | % NAV | Average Note Rate | ||||||
ARM / Hybrid1 | $ 92,841,605 | 66.17% | 7.61% | ||||||
| Fixed | 42,755,453 | 30.47% | 7.66% | ||||||
| Balloon | 3,840,502 | 2.74% | 10.95% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
| Lien Position | Fair Value | % NAV | Average Note Rate | ||||||
| 1st Lien | $138,994,560 | 99.06% | 7.61% | ||||||
| 2nd Lien | 443,000 | 0.32% | 10.65% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
Loan Age2 | Fair Value | % NAV | Average Note Rate | ||||||
| Less than 6 months | $ 88,919 | 0.06% | 4.78% | ||||||
| 6 - 11 months | 23,491,596 | 16.74% | 7.13% | ||||||
| 12 - 17 months | 52,792,115 | 37.62% | 7.80% | ||||||
| 18 - 23 months | 47,548,547 | 33.89% | 8.03% | ||||||
| 24 Months and Greater | 15,516,382 | 11.06% | 7.94% | ||||||
| Total Portfolio | $ 139,437,560 | 99.37% | 7.89% | ||||||
| Origination FICO Score | Fair Value | % NAV | Average Note Rate | ||||||
| Less than 600 | $ 15,616,034 | 11.13% | 8.44% | ||||||
| 600 - 649 | 18,002,719 | 12.83% | 8.00% | ||||||
| 650 - 699 | 37,722,460 | 26.88% | 7.90% | ||||||
| 700 - 749 | 34,864,406 | 24.85% | 7.52% | ||||||
| 750 or Greater | 33,231,939 | 23.68% | 7.14% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
Current Loan-to-Value3 | Fair Value | % NAV | Average Note Rate | ||||||
| Less than 80% | $ 24,327,684 | 17.34% | 7.37% | ||||||
| 80 - 99.99% | 45,273,140 | 32.26% | 7.41% | ||||||
| 100 - 119.99% | 34,968,047 | 24.92% | 7.56% | ||||||
| 120% or Greater | 34,868,690 | 24.85% | 8.23% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
15
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Geographic Distribution | Fair Value | % NAV | Average Note Rate | ||||||
| California | $ 41,767,248 | 29.77% | 7.28% | ||||||
| Florida | 10,923,433 | 7.78% | 8.32% | ||||||
| New York | 8,467,685 | 6.03% | 8.08% | ||||||
| Arizona | 7,577,346 | 5.40% | 7.74% | ||||||
| New Jersey | 4,141,296 | 2.95% | 8.08% | ||||||
| Illinois | 6,805,423 | 4.85% | 7.89% | ||||||
| Other | 59,755,128 | 42.59% | 7.98% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
| Payment Status | Fair Value | % NAV | Average Note Rate | ||||||
Current4 | $116,049,134 | 82.71% | 7.52% | ||||||
| 30 days delinquent | 7,350,021 | 5.24% | 7.95% | ||||||
| 60 days delinquent | 4,360,307 | 3.11% | 7.93% | ||||||
| 90 days or more delinquent | 5,679,244 | 4.05% | 8.99% | ||||||
In Foreclosure5 | 5,998,853 | 4.28% | 8.43% | ||||||
| Total Portfolio | $139,437,560 | 99.37% | 7.89% | ||||||
| 1 | Based on a percentage of loan count, ARMs/Hybrids had a distribution of interest rate reset dates after December 31, 2008 as follows: 7.73% in 1-6 months, 10.64% in 7-12 months, 4.12% in 13-24 months, 77.51% in more than 24 months. |
| 2 | Loan Age reflects the age of the loan as of December 31, 2008. |
| 3 | Current Loan-to-Value measures the ratio of the current balance of the loan and all superior liens ("Loan") to the estimate of the value of the property securing the liens ("Value" as of December 31, 2008. |
| 4 | Current loans include loans in and adhering to a forbearance plan as of December 31, 2008. |
| 5 | Loans "In Foreclosure" includes loans for which foreclosure proceedings had begun, but for which ownership had not yet been transferred as of December 31, 2008. This category does not include Real Estate Owned ("REO"). |
| 5. | Investment Transactions |
For the period from August 11, 2008 (commencement of operations) to December 31, 2008, the Master Fund purchased investments in the amount of $149,104,299.
| 6. | Administration and Custodian Fees |
The Master Fund entered into an Investment Management Agreement with PNMAC Capital Management, LLC. Under the terms of the agreement, the Master Fund will pay the Investment Manager a fee equal to an annual rate of 1.5% on capital commitments until December 31, 2011 and thereafter a fee equal to an annual rate of 1.5% of the Master Fund’s net asset value so long as the fee does not exceed 1.5% of the aggregate capital contributions to the Master Fund. The management fee is accrued monthly and paid quarterly. Investment advisory fees for the period ended December 31, 2008 were $2,462,500.
The Master Fund has engaged U.S. Bancorp Fund Services, LLC to serve as the Master Fund's administrator, fund accountant, transfer agent, and dividend paying agent. The Master Fund pays the administrator a monthly fee computed at an annual rate of 0.04% of the first $1,000,000,000 of the Master Fund's total monthly net assets, 0.03% on the next $1,000,000,000 of the Master Fund's total monthly net assets and 0.02% on the balance of the Master Fund's total monthly net assets subject to an annual minimum fee of $180,000.
16
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
The Master Fund has engaged U.S. Bank, N.A. to provide mortgage loan accounting to the investments held in the Mortgage Subsidiary. The Master Fund pays U.S. Bank, N.A. a monthly fee computed at an annual rate of 0.9% of assets subject to an annual minimum fee of $20,000.
U.S. Bank, N.A. serves as the Master Fund's custodian. The Master Fund pays the custodian a monthly fee computed at an annual rate of 0.01% on the Fund's average daily market value subject to an annual minimum fee of $4,800.
| 7. | Directors and Officers |
The Master Fund’s Board of Directors has overall responsibility for monitoring and overseeing the investment program of the Master Fund and its management and operations. The Fund and Master Fund share the same Board of Directors. All Directors fees and expenses are paid by the Master Fund. The Independent Directors are each paid an annual retainer of $60,000 and a fee per meeting of the Board of Directors of $2,000 for each regular meeting and $1,000 for each telephonic meeting, subject to a cap of $15,000 per year for all telephonic meetings, plus reasonable out-of-pocket expenses. Directors are reimbursed by the Master Fund for their travel expenses related to Board meetings. The total Directors fees and expenses incurred for the period from August 11, 2008 (commencement of operations) through December 31, 2008 was $249,202. One of the Directors is an officer of the Advisor and the Master Fund and receives no compensation from the Master Fund for serving as a Director.
Certain officers of the Master Fund are affiliated with the Investment Manager. Such officers receive no compensation from the Master Fund for serving in their respective roles. The Board of Directors appointed a Chief Compliance Officer to the Master Fund in accordance with federal securities regulations.
| 8. | Transactions With Affiliates |
As of the December 31, 2008, the payable to affiliate of $405,858 represents funds owed to Private National Mortgage Acceptance Company, LLC for offering and organization expenses paid on the Master Fund’s behalf. The Investment Manager is a wholly owned subsidiary of Private National Mortgage Acceptance Company, LLC.
PennyMac Loan Services, LLC acts as the principal mortgage servicer for all mortgages owned by the Mortgage Companies. PennyMac Loan Services, LLC is a controlled subsidiary of Private National Mortgage Acceptance Company, LLC.
The Master Fund’s short-term investment, the BlackRock Liquidity Funds: TempFund Institutional Shares, is managed by BlackRock Institutional Management Corporation which a wholly owned subsidiary of Blackrock, Inc. BlackRock Inc. is an affiliate of the Master Fund.
| 9. | Risk Factors |
The Master Fund’s investment activities expose it to the various types of risk, which are associated with the financial instruments and markets in which it invests.
Investments in mortgage loans (loan assignments and participations) have exposure to certain degrees of risk, including interest rate, market risk and the potential non-payment of principal and interest, including default or bankruptcy of the issuer or the intermediary in the case of a participation. Mortgage loans are subject to prepayment risk, which will affect the maturity of such investments.
17
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
Real estate investments are subject to various risk factors. Generally, real estate investments could be adversely affected by a recession or general economic downturn where the properties are located. Real estate investment performance is also subject to the success that a particular property manager has in managing the property. At December 31, 2008, the Master Fund and the Mortgage Investments did not hold any real estate investments.
The Master Fund is subject to interest rate risk. Interest rate risk is the risk that investment in loans held by the Mortgage Investments will decline in value because of changes in market interest rates. Investments in mortgage loans with long-term maturities may experience significant price declines if long-term interest rates increase.
Market risk represents the potential loss in value of financial instruments caused by movements in market factors including, but not limited to, market liquidity, investor sentiment, interest and foreign exchange rates. The Master Fund’s portfolio includes certain investments which are generally illiquid and have a greater amount of market risk than more liquid investments. These investments may trade in limited markets or have restrictions on resale or transfer and may not be able to be liquidated on demand if needed. The value assigned to these investments may differ significantly from the values that would have been used had a ready market existed and such differences could be material to the financial statements.
Adverse changes in economic conditions are more likely to lead to a weakened capacity of borrowers to make principal payments and interest payments. An economic downturn could severely affect the ability of a highly leveraged borrower to service their debt obligations or to repay their obligations. Under adverse market or economic conditions, the secondary market could contract further as well, increasing the illiquid nature of the loans. As a result, the Mortgage Investments could find it more difficult to sell loans or may be able to sell only at prices lower than if such investments were widely traded.
An investment in the Master Fund is subject to investment risk, including the possible loss of the entire principal invested. An investment in the Master Fund represents an indirect investment in the loans held by the Mortgage Companies. The value like other market investments, may move up or down, sometimes rapidly and unpredictably. An investment in the Master Fund at any point in time may be worth less than the original investment. Investment values can fluctuate for several reasons including the general condition of the mortgage market, or when political or economic events affecting the issuers occur.
As part of its investment strategy, the Master Fund may utilize leverage. Master Fund investments may also use leverage in the ordinary course of their operations. The use of leverage may materially affect the operations of the Master Fund or the investment and thus its ultimate value. Financing may not always be available on acceptable terms, in the necessary amounts, or for the duration needed. This could have a material negative impact on the performance of the Master Fund. For the period from the commencement of operations through December 31, 2008, the Master Fund and the Mortgage Investments did not utilize leverage.
The Master Fund clears substantially all of its investment purchases and sales and maintains substantially all its investments and cash positions at U.S. Bank, N.A. Credit risk is measured by the loss the Master Fund would record if U.S. Bank, N.A. failed to perform pursuant to terms of their obligations.
Due to the nature of the master fund/feeder fund structure the Master Fund could be materially affected by subscription or redemption activity in the Fund.
18
PNMAC Mortgage Opportunity Fund, LP
Notes to Financial Statements
As of and for the Period from August 11, 2008 (commencement of operations)
to December 31, 2008
In light of financial market events that occurred in 2008 and the United States government’s involvement in supporting the financial markets, it is reasonably possible that the investment management industry will be subject to future regulation. The impact of potential regulation may have a negative impact on the ability to unwind the investments of the Master Fund and Mortgage Investments, but such impact is not quantifiable.
******
19
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
PNMAC Mortgage Opportunity Fund, LP:
We have audited the accompanying statement of assets and liabilities of PNMAC Mortgage Opportunity Fund, LP (the “Master Fund”), including the schedule of investments, as of December 31, 2008, and the related statements of operations, changes in partners’ capital, cash flows, and financial highlights for the period from August 11, 2008 (commencement of operations) to December 31, 2008. These financial statements and financial highlights are the responsibility of the Master Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit.
We conducted our audit 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. The Master Fund is not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Master Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of investments owned as of December 31, 2008, by correspondence with the custodian. We believe that our audit provides 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 PNMAC Mortgage Opportunity Fund, LP as of December 31, 2008, the results of its operations, changes in its partners’ capital, cash flows, and financial highlights for the period from August 11, 2008 (commencement of operations) to December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the financial statements, the financial statements include investments valued at $142,282,759 (99% of total assets) as of December 31, 2008, whose fair value have been estimated by management in the absence of readily determinable fair values. Management’s estimates are based on expected proportionate share of the discounted cash flow projections of the assets and liabilities of the Master Fund’s investments.
/s/ Deloitte & Touche LLP
February 27, 2009
Los Angeles, California
20
PNMAC Mortgage Opportunity Fund, LP
Additional Information
(Unaudited)
Form N-Q
The Master Fund files its complete schedule of portfolio holdings for the first and third quarters of each fiscal year with the SEC on Form N-Q. The Master Fund’s Form N-Q is available without charge by visiting the SEC’s Web site at www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C. You may obtain information on the operation of the Public Reference Room by calling (800) SEC-0330.
Proxy Voting
A description of the policies and procedures that the Master Fund uses to determine how to vote proxies relating to portfolio securities owned by the Master Fund and information regarding how the Master Fund voted proxies relating to the portfolio of securities are available to stockholders (i) without charge, upon request by calling the Master Fund collect at (818) 224-7442; and (ii) on the SEC’s Web site at www.sec.gov.
Board of Directors
The Master Fund’s Form N-2 includes additional information about the Master Fund’s directors and is available upon request without charge by calling the Master Fund collect at (818) 224-7442 or by visiting the SEC’s Web site at www.sec.gov.
Forward-Looking Statements
This report contains "forward-looking statements,'' which are based on current management expectations. Actual future results, however, may prove to be different from expectations. You can identify forward-looking statements by words such as "may'', "will'', "believe'', "attempt'', "seem'', "think'', "ought'', "try'' and other similar terms. The Master Fund cannot promise future returns. Management’s opinions are a reflection of its best judgment at the time this report is compiled, and it disclaims any obligation to update or alter forward-looking statements as a result of new information, future events, or otherwise.
21
PNMAC Mortgage Opportunity Fund, LP
Directors and Officers
(Unaudited)
Name, Age and Address | Position(s) Held with Master Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Master Fund Complex Overseen by Director | Other Directorships/ Trusteeships Held | |||||
| Independent Directors | ||||||||||
Heather Campion (51) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Director; Audit Committee Member | Indefinite Term. Served since May 29, 2008. | Group Executive Vice President and Director of Corporate Affairs of Citizens Financial Group until 2007. | 2 | Institute of Politics at Harvard University, the John F. Kennedy Presidential Library Foundation, AAA of Southern New England, and the Isabella Stewart Gardner Museum | |||||
Thomas P. Gybel (40) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Director; Audit Committee Member | Indefinite Term. Served since May 29, 2008. | Managing Director of White Mountains Capital Inc. since March 2008, Managing Director of Global Corporate Finance for Deutsche Bank Securities Inc. from July 2004 to May 2007, and a consultant to MMC Capital, Inc. (now Stone Point Capital) and Managing Director of Danish Re Syndicates Ltd. from November 2002 to June 2004. | 2 | None |
Peter W. McClean (64) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Director; Audit Committee Chairman | Indefinite Term. Served since May 29, 2008. | Managing Director of Gulfstream Advisors LLC since 2004 and President and Chief Executive Officer of Measurisk LLC from 2001 through 2003. | 2 | Member of Board of Directors of Cyrus Reinsurance, Family Health International, Allianz Variable Insurance Products Trust, and Allianz Variable Products Fund of Funds Trust |
22
PNMAC Mortgage Opportunity Fund, LP
Directors and Officers
(Unaudited)
Richard A. Victor, J.D., Ph.D. (58) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Director; Audit Committee Member | Indefinite Term. Served since May 29, 2008. | Executive Director of the Workers Compensation Institute since 1983. | 2 | None |
23
PNMAC Mortgage Opportunity Fund, LP
Directors and Officers
(Unaudited)
Name, Age and Address | Position(s) Held with Master Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past Five Years | Number of Portfolios in Master Fund Complex Overseen by Director | Other Directorships/ Trusteeships Held |
| Interested Directors | ||||||||||
David A. Spector (45) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Director, President, Chief Financial Officer, Authorized Person | Indefinite Term. Served since May 29, 2008. | Chief Investment Officer of the Investment Adviser; formerly, Co-Head of Global Residential Mortgages for Morgan Stanley and Senior Managing Director, Secondary Markets for Countrywide Financial Corporation. | 2 | None | |||||
Officers | ||||||||||
Stanford L. Kurland (56) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Executive Officer, Authorized Person | Indefinite Term. Served since May 29, 2008. | Founder, Chairman and Chief Executive Officer of the Investment Adviser; formerly, Chief Financial Officer and Chief Operating Officer of Countrywide Financial Corporation. | 2 | None | |||||
Michael L. Muir (43) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Capital Markets Officer | Indefinite Term. Served since May 29, 2008. | Chief Capital Markets Officer of the Investment Adviser; formerly, Chief Financial Officer, Treasurer and Chief Investment Officer for Countrywide Bank, N.A. and Senior Vice President of Countrywide Home Loans. | 2 | None |
24
PNMAC Mortgage Opportunity Fund, LP
Directors and Officers
(Unaudited)
David M. Walker (53) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Credit Officer | Indefinite Term. Served since May 29, 2008. | Chief Credit Officer of the Investment Adviser; formerly, Chief Lending Officer, Chief Credit Officer and Executive Vice President of Secondary Marketing for Countrywide Bank, N.A. | 2 | None | |||||
James S. Furash (43) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Development Officer | Indefinite Term. Served since May 29, 2008. | Chief Development Officer of the Investment Adviser; formerly, Co-founder, President and Chief Executive Officer of Countrywide Bank, N.A. | 2 | None | |||||
Mark P. Suter (35) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Portfolio Strategy Officer | Indefinite Term. Served since May 29, 2008. | Chief Portfolio Strategy Officer of the Investment Adviser; formerly, Chief Strategy Officer, Chief Governance Officer, Chief Retail Officer and Head of Diversified Lending for Countrywide Bank, N.A. | 2 | None |
25
PNMAC Mortgage Opportunity Fund, LP
Directors and Officers
(Unaudited)
Andy S. Chang (31) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Fund Administration Officer | Indefinite Term. Served since May 29, 2008. | Chief Fund Administration Officer of the Investment Adviser; formerly, Director at Blackrock and leader of its Advisory Services practice. | 2 | None | |||||
Jeff Grogin (48) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Secretary, Authorized person | Indefinite Term. Served since May 29, 2008. | Independent Counsel | 2 | None | |||||
Julianne Fries (46) c/o PNMAC Capital Management, LLC, 27001 Agoura Road, Suite 350, Calabasas, California 91301 | Chief Compliance Officer | Indefinite Term. Served since May 29, 2008. | Chief Compliance Officer of the Investment Advisor; formerly, Managing Director, Chief Compliance Officer of Countrywide Capital Markets. | 2 | None |
26
PNMAC Mortgage Opportunity Fund, LLC
Approval of Investment Management Agreement
(Unaudited)
On May 29, 2008, the Board of Directors of the Master Fund and the Fund (collectively, the “Funds”), including the “non-interested” Directors (the “Independent Directors”), voted to approve the Investment Management Agreements for an initial two-year term.
In considering whether to recommend approval of the Management Agreements, the Independent Directors reviewed materials provided by the Investment Advisor, fund counsel and independent counsel. The Directors also met with senior personnel of the Investment Advisor and discussed a number of topics affecting their determination, including the following.
| (i) | The nature, extent and quality of services expected to be provided by the Investment Advisor. The Independent Directors reviewed the services that the Investment Advisor are expected to provide to the Funds. In addition, the Independent Directors considered the size, education, background and experience of the Investment Advisor’s staff. Lastly, the Independent Directors reviewed the Investment Advisor’s ability to attract and retain quality and experienced personnel. The Independent Directors concluded that the scope of services expected to be provided by the Investment Advisor to the Funds and the experience and expertise of the personnel performing such services was consistent with the nature, extent and quality expected of an Investment Advisor of investment vehicles such as the Funds. |
| (ii) | Cost of the services to be provided and profits to be realized by the Investment Advisor and its affiliates from the relationship with the Funds. The Independent Directors considered the estimated cost of the services provided by the Investment Advisor. As part of their analysis, the Independent Directors gave substantial consideration to the compensation payable to the Investment Advisor, the terms of which are summarized in the footnotes to the financial statements included in this report. In reviewing the management compensation, the Independent Directors considered the management fees and operating expense ratios of other registered and non-registered funds managed by other advisors that had somewhat comparable investment programs. |
| The Independent Directors concluded that the proposed management fee and carried interest for the Investment Advisor were reasonable. |
In view of the absence of any historical operations by the Funds or the Investment Advisor, the Independent Directors considered the mortgage finance and capital markets experience of the Advisor’s senior management team. However, no single factor was determinative to the decision of the Directors. Rather, after weighing all of the reasons discussed above, the Independent Directors unanimously recommended approval of each of the Management Agreements.
27
Item 2. Code of Ethics.
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer and principal financial officer. The registrant has not made any amendments to its code of ethics during the period covered by this report. The registrant has not granted any waivers from any provisions of the code of ethics during the period covered by this report. A copy of the registrant’s Code of Ethics is filed herewith.
The registrant undertakes to provide to any person without charge, upon request, a copy of its code of ethics by mail when they call the registrant at 1-818-224-7442.
Item 3. Audit Committee Financial Expert.
The registrant’s board of trustees has determined that there is at least one audit committee financial expert serving on its audit committee. Mr. Peter W. McClean is the “audit committee financial expert” and is considered to be “independent” as each term is defined in Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
The registrant has engaged its principal accountant to perform audit services, audit-related services, tax services and other services during the past two fiscal years. “Audit services” refer to performing an audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years. “Audit-related services” refer to the assurance and related services by the principal accountant that are reasonably related to the performance of the audit. “Tax services” refer to professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. The following table details the aggregate fees billed or expected to be billed for each of the last two fiscal years for audit fees, audit-related fees, tax fees and other fees by the principal accountant.
| FYE 12/31/2008 | FYE 12/31/2007 | |
| Audit Fees | $210,367 | N/A |
| Audit-Related Fees | $77,147 | N/A |
| Tax Fees | $0 | N/A |
| All Other Fees | $0 | N/A |
The audit committee has adopted pre-approval policies and procedures that require the audit committee to pre-approve all audit and non-audit services of the registrant, including services provided to any entity affiliated with the registrant.
The percentage of fees billed by Deloitte & Touche LLP applicable to non-audit services pursuant to waiver of pre-approval requirement were as follows:
| FYE 12/31/2008 | FYE 12/31/2007 | |
| Audit-Related Fees | 0% | N/A |
| Tax Fees | 0% | N/A |
| All Other Fees | 0% | N/A |
All of the principal accountant’s hours spent on auditing the registrant’s financial statements were attributed to work performed by full-time permanent employees of the principal accountant.
The following table indicates the non-audit fees billed or expected to be billed by the registrant’s accountant for services to the registrant and to the registrant’s investment adviser (and any other controlling entity, etc.—not sub-adviser) for the last two years. The audit committee of the board of trustees/directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser is compatible with maintaining the principal accountant's independence and has concluded that the provision of such non-audit services by the accountant has not compromised the accountant’s independence.
| Non-Audit Related Fees | FYE 12/31/2008 | FYE 12/31/2007 |
| Registrant | None | None |
| Registrant’s Investment Adviser | None | None |
Item 5. Audit Committee of Listed Registrants.
Not applicable to registrants who are not listed issuers (as defined in Rule 10A-3 under the Securities Exchange Act of 1934).
Item 6. Investments.
| (a) | Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Investment Companies
| (a) | (1) The five persons with the most significant responsibility for the day-to-day management of the Registrant’s portfolio are Stanford L. Kurland, David A. Spector, Michael L. Muir, David M. Walker, and James S. Furash. The titles, business experience, and length of service of Messrs. Kurland, Spector, Muir, Walker, and Furash are included in the “Directors and Officers” section of the Annual Shareholder Report in Item 1. |
| (2) The following table provides information about the other accounts managed on a day-to-day basis by each of the portfolio managers as of December 31, 2008: |
| Name of Manager | Total Number of Accounts Managed | Total Assets in Accounts Managed | Number of Accounts for Which Advisory Fee is Based on Performance | Assets in Accounts for Which Advisory Fee is Based on Performance |
| Stanford L. Kurland | ||||
| Registered investment companies | 2 | $150,430,552 | 2 | $150,430,552 |
| Other pooled investment vehicles | 2 | $109,616,391 | 2 | $109,616,391 |
| Other accounts | 0 | $0 | 0 | $0 |
| David A. Spector | ||||
| Registered investment companies | 2 | $150,430,552 | 2 | $150,430,552 |
| Other pooled investment vehicles | 2 | $109,616,391 | 2 | $109,616,391 |
| Other accounts | 0 | $0 | 0 | $0 |
| Michael L. Muir | ||||
| Registered investment companies | 2 | $150,430,552 | 2 | $150,430,552 |
| Other pooled investment vehicles | 2 | $109,616,391 | 2 | $109,616,391 |
| Other accounts | 0 | $0 | 0 | $0 |
| David M. Walker | ||||
| Registered investment companies | 2 | $150,430,552 | 2 | $150,430,552 |
| Other pooled investment vehicles | 2 | $109,616,391 | 2 | $109,616,391 |
| Other accounts | 0 | $0 | 0 | $0 |
| James S. Furash | ||||
| Registered investment companies | 2 | $150,430,552 | 2 | $150,430,552 |
| Other pooled investment vehicles | 2 | $109,616,391 | 2 | $109,616,391 |
| Other accounts | 0 | $0 | 0 | $0 |
(3) Potential Material Conflicts of Interests:
The Investment Adviser and its respective affiliates, members and employees may manage or advise other clients, including other investment vehicles and entities ("Other Accounts"). While it is the general intention of the Investment Adviser that investment opportunities will be apportioned among the Fund and Other Accounts on a fair and reasonable basis, there is no assurance that the Fund will be offered any specific investment opportunities that come to the attention of the Investment Adviser or that the Fund will be permitted to invest the full amount it desires to invest in any such opportunity that is made available.
(4) Compensation:
Messrs. Kurland, Spector, Muir, Walker, and Furash receive a fixed salary from Private National Mortgage Acceptance Company, LLC (“PennyMac”), the parent company of the Investment Adviser. Additionally, each of the managers will receive pro rata distributions of the profits of PennyMac based on his equity interest therein. None of Messrs. Kurland, Spector, Muir, Walker, and Furash receives any direct compensation from the Registrant or any other of the managed accounts reflected in the table above.
(5) The following table provides information about the dollar range of equity securities in the registrant beneficially owned by each of the portfolio managers as of December 31, 2008:
| Name of Manager | Aggregate Dollar Range of Holdings in the Registrant |
| Stanford L. Kurland | None |
| David A. Spector | None |
| Michael L. Muir | None |
| David M. Walker | None |
| James S. Furash | None |
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
The registrant’s nominating committee charter does not contain any procedures by which shareholders may recommend nominees to the registrant’s board of directors/trustees.
Item 11. Controls and Procedures.
| (a) | The Registrant’s Chief Executive Officer and Chief Financial Officer have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider. |
| (b) | There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting. |
Item 12. Exhibits.
| (a) | (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Filed herewith. |
| (2) A separate certification for each principal executive and principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith. | |
| (3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies. |
| (b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
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.
(Registrant) PNMAC Mortgage Opportunity Fund, LP
By (Signature and Title)* /s/ Stanford L. Kurland
Stanford L. Kurland, CEO
Date March 10, 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.
By (Signature and Title)* /s/ Stanford L. Kurland
Stanford L. Kurland, CEO
Date March 10, 2009
By (Signature and Title)* /s/ David A.Spector
David A. Spector, CFO
Date March 10, 2009
* Print the name and title of each signing officer under his or her signature.