Salomon Brothers Emerging Markets Income Fund II

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM N-Q

 

QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED

MANAGEMENT INVESTMENT COMPANY

 

Investment Company Act file number 811-7686

 

Salomon Brothers Emerging Markets Income Fund II Inc.

(Exact name of registrant as specified in charter)

 

125 Broad Street, New York, NY 10004

(Address of principal executive offices) (Zip code)

 

Robert I. Frenkel, Esq.

Salomon Brothers Asset Management Inc.

300 First Stamford Place

Stamford, CT 06902

(Name and address of agent for service)

 

Registrant’s telephone number, including area code: 1-800-725-6666

 

Date of fiscal year end: May 31

Date of reporting period: February 28, 2005

 



ITEM 1.    SCHEDULE OF INVESTMENTS


SALOMON BROTHERS EMERGING

MARKETS INCOME FUND II INC.

 

FORM N-Q

FEBRUARY 28, 2005


SALOMON BROTHERS EMERGING MARKETS INCOME FUND II

 

Schedule of Investments (unaudited)   February 28, 2005

 

FACE

AMOUNT †


  

SECURITY (a)


   VALUE

LONG-TERM INVESTMENTS - 89.3%       
SOVEREIGN BONDS - 84.3%       
Argentina - 3.7%       
         Republic of Argentina ‡(b)(c):       
1,120,000    DEM       7.875% due 7/29/05    $ 243,022
170,000    DEM       11.250% due 4/10/06      37,464
450,000    EUR       8.000% due 2/26/08      192,995
450,000    EUR       0.000% due 7/22/08      174,561
575,000    DEM       9.000% due 11/19/08      120,867
280,000    EUR       8.250% due 7/6/10      117,899
240,000    DEM       10.250% due 2/6/49      52,890
3,605,000    DEM       7.000% due 3/18/49      776,117
1,275,000    EUR       9.000% due 6/20/49      532,635
870,000    EUR       8.5000% due 7/1/49      363,445
130,000    DEM       9.000% due 9/19/49      27,547
265,000    DEM       10.500% due 11/14/49      55,524
             Argentina Coupon:       
2,500,000    ARS           Series 2701, zero coupon due 1/2/49 (d)      0
2,500,000    ARS           Series 2780, zero coupon due 1/29/49 (d)      0
14,350,000            Discount Bond, Series L-GL, 3.500% due 3/31/23 (e)      8,430,625
             Medium-Term Notes:       
175,000    EUR           9.000% due 5/24/05 (f)      75,428
1,340,000,000    ITL           4.649% due 7/8/05 (e)      279,930
210,000    EUR           10.250% due 1/26/07      91,209
415,000    EUR           10.000% due 2/22/07      180,247
675,000,000    ITL           7.625% due 8/11/07      143,785
700,000,000    ITL           8.000% due 10/30/09      147,430
260,000    EUR           8.500% due 7/30/10      109,478
335,000    EUR           8.750% due 2/4/49      139,947
195,000,000    ITL           7.000% due 3/18/49      41,070
165,000    EUR           7.125% due 6/10/49      69,476
120,000    EUR           9.250% due 7/20/49      50,926
180,000    EUR           8.125% due 10/4/49      74,599
150,000    EUR           9.250% due 10/21/49      61,171
12,200,000            Par Bond, Series L-GP, 6.000% due 3/31/23      7,137,000
             

                19,727,287
             

Brazil - 19.6%       
         Federative of Republic of Brazil:       
2,000,000            12.750% due 1/15/20      2,670,000
15,605,000            12.250% due 3/6/30      20,364,525
42,297,945            C Bond, 8.000% due 4/15/14      43,091,032
10,866,263            DCB, Series L, 3.125% due 4/15/12 (e)      10,513,110

 

See Notes to Schedule of Investments.

 

1


SALOMON BROTHERS EMERGING MARKETS INCOME FUND II

 

Schedule of Investments (unaudited)(continued)   February 28, 2005

 

FACE

AMOUNT †


  

SECURITY (a)


   VALUE

Brazil - 19.6% (continued)       
     FLIRB, Series L:       
19,514,769            Bearer, 3.063% due 4/15/09 (e)    $ 19,197,654
8,600,539            Registered, 3.063% due 4/15/09 (e)      8,460,780
         

            104,297,101
         

Bulgaria - 0.5%       
2,225,000    Republic of Bulgaria, 8.250% due 1/15/15 (f)      2,803,500
         

Chile - 1.3%       
     Republic of Chile:       
1,325,000        5.500% due 1/15/13      1,380,103
5,450,000        Collective Action Securities, 3.110% due 1/28/08 (e)      5,496,325
         

            6,876,428
         

Colombia - 4.7%       
     Republic of Colombia:       
175,000        10.750% due 1/15/13      204,794
900,000        11.750% due 2/25/20      1,138,500
550,000        8.125% due 5/21/24      528,000
20,500,000        10.375% due 1/28/33      23,344,375
         

            25,215,669
         

Costa Rica - 1.2%       
     Republic of Costa Rica:       
3,500,000        8.050% due 1/31/13 (f)      3,710,000
1,625,000        6.548% due 3/20/14 (f)      1,560,000
800,000        9.995% due 8/1/20 (f)      933,000
         

            6,203,000
         

Ecuador - 2.3%       
12,125,000    Republic of Ecuador, 12.000% due 11/15/12 (f)      12,340,219
         

El Salvador - 0.6%       
2,975,000    Republic of El Salvador, 8.250% due 4/10/32 (f)      3,131,187
         

Malaysia - 1.5%       
7,025,000    Federation of Malaysia, 8.750% due 6/1/09      8,161,130
         

Mexico - 10.7%       
     United Mexican States:       
14,025,000        6.625% due 3/3/15      15,038,306
1,925,000        11.375% due 9/15/16      2,834,563
         Medium-Term Notes:       
30,250,000            8.300% due 8/15/31      36,534,437
2,723,000            Series A, 5.875% due 1/15/14      2,785,629
         

            57,192,935
         

 

See Notes to Schedule of Investments.

 

2


SALOMON BROTHERS EMERGING MARKETS INCOME FUND II

 

Schedule of Investments (unaudited)(continued)   February 28, 2005

 

FACE
AMOUNT †


  

SECURITY (a)


   VALUE

Panama - 3.2%       
     Republic of Panama:       
2,275,000        7.250% due 3/15/15    $ 2,343,250
4,656,000        9.375% due 1/16/23      5,587,200
6,120,000        8.875% due 9/30/27      6,946,200
1,700,000        9.375% due 4/1/29      2,057,000
         

            16,933,650
         

Peru - 3.4%       
     Republic of Peru:       
8,650,000        FLIRB, 4.500% due 3/7/17 (e)      8,131,000
10,406,000        PDI, 5.000% due 3/7/17 (e)      9,963,745
         

            18,094,745
         

The Philippines - 3.7%       
     Republic of the Philippines:       
15,500,000        8.250% due 1/15/14      15,606,562
3,625,000        10.625% due 3/16/25      4,055,469
         

            19,662,031
         

Russia - 16.1%       
20,100,000   

Aries Vermogensverwaltungs GmbH, Russian Federation Credit-Linked Notes, Series C,
9.600%, due 10/25/14 (f)

     24,957,591
58,000,000    Russian Federation, 5.000% due 3/31/30 (e)(f)      60,990,625
         

            85,948,216
         

South Africa - 1.5%       
7,400,000    Republic of South Africa, 6.500% due 6/2/14      8,121,500
         

Turkey - 4.5%       
     Republic of Turkey:       
1,500,000        11.875% due 1/15/30      2,175,000
17,925,000        Collective Action Securities, 9.500% due 1/15/14      21,599,625
         

            23,774,625
         

Ukraine - 1.4%       
     Republic of Ukraine:       
3,056,754        11.000% due 3/15/07 (f)      3,270,727
3,700,000        6.365% due 8/5/09 (e)(f)      3,986,750
         

            7,257,477
         

Uruguay - 0.7%       
4,110,745    Republic of Uruguay, Benchmark Bond, 7.875% due 1/15/33 (g)      3,874,377
         

Venezuela - 3.7%       
     Bolivarian Republic of Venezuela:       
75,000        5.375% due 8/7/10      69,469
9,776,000        8.500% due 10/8/14      10,044,840
3,425,000        9.250% due 9/15/27      3,534,600

 

See Notes to Schedule of Investments.

 

3


SALOMON BROTHERS EMERGING MARKETS INCOME FUND II

 

Schedule of Investments (unaudited)(continued)   February 28, 2005

 

FACE
AMOUNT +


  

SECURITY (a)


   VALUE

Venezuela - 3.7% (continued)       
     Collective Action Securities:       
350,000        3.693% due 4/20/11 (c)(d)    $ 320,250
3,500,000        10.750% due 9/19/13      4,051,250
1,025,000        9.375% due 1/13/34      1,060,875
850,000    Par Bond, Series A, 6.750% due 3/31/20      842,031
         

            19,923,315
         

    

TOTAL SOVEREIGN BONDS

    (Cost - $425,218,529)

     449,538,392
         

CORPORATE BONDS - 4.6%       
     PEMEX Project Funding Master Trust:       
18,300,000    7.375% due 12/15/14      20,358,750
3,300,000    9.500% due 9/15/27 (f)      4,314,750
         

    

TOTAL SOVEREIGN BONDS

    (Cost - $24,085,312)

     24,673,500
         

LOAN PARTICIPATION (e)(h) - 0.2%       
Morocco - 0.2%       
1,263,042    Kingdom of Morocco, Tranche A, 3.803% due 1/2/09       
         (CS First Boston Corp.) (Cost - $1,251,007)      1,247,254
         

WARRANTS

  
WARRANTS (c) - 0.2%       
2,000   

Asia Pulp & Paper (Exercise price of $7.8375 per share expiring on 3/15/05. Each warrant exercisable for 12.914 shares of common stock.) (d)(f)

     0
65,335   

Bolivarian Republic of Venezuela, (Oil-Linked payment obligations expires 4/15/20)

     980,025
         

     TOTAL WARRANTS       
         (Cost - $183,500)      980,025
         

     TOTAL LONG-TERM INVESTMENTS       
         (Cost - $450,738,348)      476,439,171
         

FACE
AMOUNT


         
REPURCHASE AGREEMENTS - 10.7%       
14,500,000   

Deutsche Bank Securities Inc. dated 2/28/05, 2.620% due 3/1/05; Proceeds at maturity - $14,501,055; (Fully collateralized by various U.S. Treasury obligations, 0.000% to 3.000% due 7/15/12 to 8/15/19; Market value - $14,887,712)

     14,500,000
14,500,000   

Merrill Lynch Government Securities Inc. dated 2/28/05, 2.600% due 3/1/05; Proceeds at maturity - $14,501,047; (Fully collateralized by various U.S. government agency obligations, 1.500% to 6.000% due 6/15/05 to 1/21/25; Market value - $14,790,072)

     14,500,000
13,708,000   

Morgan Stanley dated 2/28/05, 2.600% due 3/1/05; Proceeds at maturity - $13,708,990; (Fully collateralized by various U.S. government agency obligations, 0.000% to 7.625% due 3/9/05 to 2/15/35; Market value - $13,983,734)

     13,708,000

 

See Notes to Schedule of Investments.

 

4


SALOMON BROTHERS EMERGING MARKETS INCOME FUND II

 

Schedule of Investments (unaudited)(continued)   February 28, 2005

 

FACE
AMOUNT


  

SECURITY (a)


   VALUE

  REPURCHASE AGREEMENTS - 10.7% (continued)       
$ 14,500,000   

UBS Securities LLC dated 2/28/05, 2.630% due 3/1/05; Proceeds at maturity - $14,501,059; (Fully collateralized by various U.S. government agency obligations, 2.000% to 5.000% due 1/15/06 to 10/15/14; Market value - $14,790,060)

   $ 14,500,000
           

      

TOTAL REPURCHASE AGREEMENTS

    (Cost - $57,208,000)

     57,208,000
           

      

TOTAL INVESTMENTS - 100.0%

    (Cost - $507,946,348*)

   $ 533,647,171
           

 

Face amount denominated in U.S. dollars unless otherwise indicated.

 

All Argentina bonds had been tendered as of February 25, 2005 under a plan of reorganization of Argentina.

 

(a) All securities are segregated as collateral pursuant to a loan agreement, futures contracts and/or reverse repurchase agreements.

 

(b) Security is currently in default.

 

(c) Non-income producing security.

 

(d) Security is valued in accordance with fair valuation procedures.

 

(e) Rate shown reflects current rate on instrument with variable rate or step coupon rates.

 

(f) Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers.

 

(g) Payment-in-kind security for which all or part of the income earned may be paid as additional principle.

 

(h) Participation interests were acquired through the financial institutions indicated parenthetically.

 

* Aggregate cost for federal income tax purposes is substantially the same.

 

     Abbreviations used in this schedule:

 

ARS   - Argentina Peso.
C Bond   - Capitalization Bond.
DCB   - Debt Conversion Bond.
DEM   - German Mark.
EUR   - Euro.
FLIRB   - Front-Loaded Interest Reduction Bond.
IRB   - Interest Reduction Bond.
ITL   - Italian Lira.
PDI   - Past Due Interest.

 

See Notes to Schedule of Investments.

 

5


Notes to Schedule of Investments (unaudited)

 

1. Organization and Significant Accounting Policies

 

Salomon Brothers Emerging Markets Income Fund II Inc. (“Fund”) was incorporated in Maryland on April 27, 1993 and is registered as a non-diversified, closed-end, investment management company under the Investment Company Act of 1940, as amended.

 

The following are significant accounting policies consistently followed by the Fund. These policies are in conformity with U.S. generally accepted accounting principles (“GAAP”).

 

(a) Investment Valuation. In valuing the Fund’s assets, all securities and derivatives for which market quotations are readily available are valued (i) at the last sale price prior to the time of determination if there was a sale on the date of determination, (ii) at the mean between the last current bid and asked price if there was no sales price on such date and bid and asked quotations are available, and (iii) at the bid price if there was no sales price on such date and only bid quotations are available. Publicly traded foreign government debt securities are typically traded internationally in the over-the-counter market, and are valued at the mean between the last current bid and asked price as of the close of business of that market. However, where the spread between bid and asked price exceeds five percent of the par value of the security, the security is valued at the bid price.

 

Securities may also be valued by independent pricing services which use prices provided by market makers or estimates of market values obtained from yield data relating to instruments or securities with similar characteristics. When market quotations are not readily available, or are determined not to reflect accurately fair value, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund may value these investments at fair value as determined in accordance with the procedures approved by the Fund’s Board of Directors. Short-term investments having a maturity of 60 days or less are valued at amortized cost, which approximates market value.

 

(b) Repurchase Agreements. When entering into repurchase agreements, it is the Fund’s policy that a custodian take possession of the underlying collateral securities, the value of which at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction exceeds one business day, the value of the collateral is marked-to-market to ensure the adequacy of the collateral. If the seller defaults and the value of the collateral declines or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.

 

(c) Reverse Repurchase Agreements. The Fund may enter into reverse repurchase agreements in which the Fund sells portfolio securities and agrees to repurchase them from the buyer at a specified date and price. Whenever the Fund enters into a reverse repurchase agreement, the Fund’s custodian delivers liquid assets to the counterparty in an amount at least equal to the repurchase price marked-to-market daily (including accrued interest), and the counterparty subsequently monitors the account to ensure that such equivalent value is maintained. The Fund pays interest on amounts obtained pursuant to reverse repurchase agreements. Reverse repurchase agreements are considered to be borrowings by the Fund. Reverse repurchase agreements involve leverage risk and the risk that the market value of securities purchased with the proceeds from the reverse repurchase agreement may decline below the repurchase price of the securities sold by the Fund which it is obligated to repurchase.

 

6


Notes to Schedule of Investments (unaudited)(continued)

 

(d) Futures Contracts. The Fund may enter into futures contracts to the extent permitted by its investment policies and objectives. Upon entering into a futures contract, the Fund is required to deposit cash or securities as initial margin. Additional securities are also segregated up to the current market value of the futures contracts. Subsequent payments, which are dependent on the daily fluctuations in the value of the underlying financial instrument, are made or received by the Fund each day (daily variation margin) and are recorded as unrealized gains or losses until the contracts are closed. When the contracts are closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund’s basis in the contracts. The Fund enters into such contracts typically to hedge a portion of the portfolio. The risks associated wit h entering into futures contracts include the possibility that a change in the value of the contract may not correlate with the changes in the value of the underlying instruments. In addition, investing in futures contracts involves the risk that the Fund could lose more than the original margin deposit and subsequent payments required for a futures transaction.

 

(e) Loan Participations. The Fund invests in fixed and floating rate loans arranged through private negotiations between a foreign sovereign entity and one or more financial institutions (“lenders”). The Fund’s investment in any such loan may be in the form of a participation in or an assignment of the loan. In connection with purchasing loan participations, the Fund generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the Fund may not benefit directly from any collateral supporting the loan in which it has purchased the participation. As a result, the Fund will assume the credit risk of both the borrower and the lender that is selling the participation.

 

In the event of the insolvency of the lender selling the participation, the Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. When the Fund purchases assignments from lenders, the Fund will acquire direct rights against the borrower on the loan, except that under certain circumstances such rights may be more limited than those held by the assigning lender. The Fund may have difficulty disposing of participations/assignments because the market for certain instruments may not be highly liquid.

 

(f) Credit, Exchange Rate, and Market Risk. The yields of emerging market debt obligations and high-yield corporate debt obligations reflect, among other things, perceived credit and market risk. The Fund’s investment in securities rated below investment grade typically involves risks not associated with higher rated securities including, among others, overall greater risk of timely and ultimate payment of interest and principal, greater market price volatility and less liquid secondary market trading. The consequences of political, social, economic or diplomatic changes may have disruptive effects on the market prices of investments held by the Fund. The Fund’s investment in non-dollar denominated securities may also result in foreign currency losses caused by devaluations and exchange rate fluctuations.

 

(g) Investment Transactions. Investment transactions are recorded on a trade date basis.

 

(h) Foreign Currency Translation. The books and records of the Funds are maintained in U.S. dollars. Transactions denominated in foreign currencies are recorded at the current prevailing exchange rates. All assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the current exchange rates at the end of the period.

 

7


Notes to Schedule of Investments (unaudited)(continued)

 

2. Investments

 

At February 28, 2005, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were substantially as follows:

 

Gross unrealized appreciation

   $ 26,088,951  

Gross unrealized depreciation

     (388,128 )
    


Net unrealized appreciation

   $ 25,700,823  
    


 

At February 28, 2005, the Fund had the following open reverse repurchase agreements:

 

FACE

AMOUNT


 

SECURITY


   VALUE

$ 41,090,000  

Reverse Repurchase Agreement with JPMorgan Chase & Co., dated 2/17/05 bearing 2.250% to be repurchased at $42,027,366 on 2/17/06, collateralized by: $35,000,000 Federative Republic of Brazil, C Bond 8.000% due 4/15/14; Market value (including accrued interest) - $36,708,794

   $ 41,090,000
  10,866,666  

Reverse Repurchase Agreement with JPMorgan Chase & Co., dated 2/18/05 bearing 2.500% to be repurchased at $11,142,107 on 2/18/06, collateralized by: $10,000,000 Russian Federation, 5.000% due 3/31/30; Market value (including accrued interest) - $10,725,570

     10,866,666
  51,666,667  

Reverse Repurchase Agreement with JPMorgan Chase & Co., dated 2/25/05 bearing 2.600% to be repurchased at $51,685,324 on 3/2/05, collateralized by: $48,000,000 Russian Federation, 5.000% due 3/31/30; Market value (including accrued interest) - $51,482,735

     51,666,667
          

      Total Reverse Repurchase Agreements (Cost - $103,623,333)    $ 103,623,333
          

 

Transactions in reverse repurchase agreements for the Fund during the period ended February 28, 2005 were as follows:

 

Average

Daily

    Balance    


  

Weighted

Average

Interest Rate


  

Maximum

Amount

Outstanding


$ 75,461,943    1.37%    $ 103,623,333

 

Interest rates on reverse repurchase agreements ranged from 0.80% to 2.60% during the period ended February 28, 2005.

 

8


Notes to Schedule of Investments (unaudited)(continued)

 

At February 28, 2005, the Fund had the following open futures contracts:

 

    

# of

Contracts


  

Expiration

Date


  

Basis

Value


  

Market

Value


  

Unrealized

Gain


Contracts to sell:

                              

U.S. Treasury 10 Year

                              

Notes

   1,000    3/05    $ 111,598,540    $ 110,875,000    $ 723,540

 

At February 28, 2005, the Fund held one loan participation with a total cost of $1,251,007 and a total market value of $1,247,254.

 

3. Loan

 

At February 28, 2005, the Fund had a $110,000,000 loan available pursuant to a revolving credit and security agreement, of which the Fund had $75,000,000 outstanding with CXC, LLC, (the “Lenders”), an affiliate of Citigroup, a commercial paper conduit issuer for which Citicorp North America, Inc., an affiliate of the Adviser, acts as administrative agent. The loans generally bear interest at a variable rate based on the weighted average interest rates of the underlying commercial paper or LIBOR, plus any applicable margin. Securities held by the Fund are subject to a lien, granted to the lenders, to the extent of the borrowing outstanding and any additional expenses.

 

9


ITEM 2.     CONTROLS AND PROCEDURES.

 

  (a) The registrant’s principal executive officer and principal financial officer have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a- 3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934

 

  (b) There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the registrant’s last fiscal quarter that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting.

 

ITEM 3.     EXHIBITS.

 

Certifications pursuant to Rule 30a-2(a) under the Investment Company Act of 1940, as amended, are attached hereto.


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.

 

Salomon Brothers Emerging Markets Income Fund II Inc.

 

By  

/s/    R. JAY GERKEN


    R. Jay Gerken
    Chief Executive Officer
Date April 27, 2005

 

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  

/s/    R. JAY GERKEN


    R. Jay Gerken
    Chief Executive Officer
Date April 27, 2005
By  

/s/    FRANCES M. GUGGINO


    Frances M. Guggino
    Chief Financial Officer
Date April 27, 2005