1st Quarter Results
Prodesse Investment Limited
09 May 2007
Prodesse Investment Limited
Results for the Quarter Ended 31 March 2007
Highlights for first quarter 2007:
• Core net income1 per average share of US$0.15
• Dividend per share of US$0.14 from net interest income - equates to an
annualised dividend yield of 6.42%2 (FTSE All Share annualised dividend
yield of 2.84%3)
• Net income per average share of US$0.16
• NAV per share of US$8.22 (31 December 2006: US$8.08)
• Issued 2.54 million new shares raising approximate net proceeds of
US$21.8 million
• Portfolio remains 100% implied 'AAA' mortgage-backed securities.
1 Core net income is defined as net income excluding realised and unrealised
gains and losses on securities.
2 Based on annualisation of Q1 dividend, an exchange rate of 1.9686 US$ per
Pound Sterling and a closing price of 443.0p on 31 March 2007
3 Based on closing share prices of the constituents of the FTSE All Share index
on 31 March 2007 (JCF Datastream).
Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,
commented: 'The investment strategy of Prodesse continues to generate positive
momentum. Our recently concluded successful equity offering occurred at the end
of the quarter, which means the increase in dividend did not reflect the full
run rate of that new capital, nevertheless we were able to increase our dividend
for the third quarter in a row. Given the backdrop of credit performance in
certain sectors of the market, it is also particularly important to note that we
continue to avoid the introduction of credit risk into our portfolio. All of our
assets are Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities,
which carry an actual or implied 'AAA' rating.'
Financial Highlights Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006
$US
Dividend per share 0.14 0.13 0.12 0.10 0.12
Core net income per average share 0.15 0.14 0.12 0.10 0.12
Net income/(loss) per average share 0.16 0.19 0.25 (1.38) 0.12
Net income/(loss) 4.0m 4.9m 6.4m (37.6m) 3.2m
Net asset value per share 8.22 8.08 8.05 7.52 8.03
GBP Sterling4
Dividend per share 7p 7p 6p 5p 7p
Core net income per average share 8p 7p 6p 5p 7p
Net income/(loss) per average share 8p 10p 13p (74p) 7p
Net income/(loss) £2.0m £2.5m £3.4m (£20.4m) £1.8m
Net asset value per share 417.6p 412.9p 430.1p 407.2p 461.8p
4 Illustration is based upon an exchange rate of 1.9686, 1.9569, 1.8718, 1.8469,
and 1.7390 US$ per Pound Sterling at 31 March 2007, 31 December 2006, 30
September 2006, 30 June 2006, and 31 March 2006 respectively. Translation to
GBP Sterling is given for illustration purposes only as Prodesse invests only in
US$ denominated assets which produce US$ income. Should shareholders choose to
receive their dividends in GBP Sterling they may elect to do so.
Enquiries
Investor Relations
Rob Bailhache / Nick Henderson, Financial Dynamics
Tel: 020 7269 7200 / 020 7269 7114
Company Secretary and Administrator
Sara Radford / Paul Smith, RBSI Fund Services (Guernsey) Limited
Tel: 01481 743000
About Prodesse
Prodesse Investment Limited is a limited liability Guernsey-incorporated
closed-end investment company, the investments of which are managed by Fixed
Income Discount Advisory Company. The Company's investment policy is to provide
net income for distribution from the spread between the interest income earned
from a portfolio of residential mortgage-backed securities and the cost of
repurchase agreements entered into to finance the acquisition of such
residential mortgage-backed securities.
Conference Call
There will be a conference call to discuss the results at 11:00 am UK time on
Wednesday 9 May 2007 and an audio webcast and presentation will be available via
the Prodesse website, www.prodesse.co.uk. The dial-in number for the conference
call is +44 (0) 1452 562 717 / 0845 113 0070 and the passcode is 8005411.
Company performance
For the quarter ended 31 March 2007, Prodesse reported net income of US$4.0
million (quarter ended 31 December 2006: US$4.9 million) or US$0.16 per average
share (quarter ended 31 December 2006: US$0.19 per average share).
Prodesse reported core net income, defined as net income excluding realised and
unrealised gains and losses on securities, of US$4.0 million for the quarter
ended 31 March 2007 (quarter ended 31 December 2006: US$3.6 million) or US$0.15
per average share (quarter ended 31 December 2006: US$0.14 per average share).
During the quarter the Company sold US$34.1 million face amount of securities,
resulting in a realised gain of approximately US$24,871.
The Company delivered an annualised core return on average equity for the
quarter ended 31 March 2007 of 7.25% (quarter ended 31 December 2006: 6.90%).
For the quarter ended 31 March 2007, the annualised total return on average
equity (RoAE) was 7.29% (quarter ended 31 December 2006: 9.39%).
01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006
to 31 March to 31 December 30 September to 30 June 2006 to 31 March
2007 2006 2006 2006
Core net income US$4.0 million US$3.6 million US$3.0 million US$2.7 million US$3.2 million
Core net income per average share US$0.15 US$0.14 US$0.12 US$0.10 US$0.12
Annualised core RoAE 7.25% 6.90% 6.07% 5.10% 5.64%
Reported net income/(loss) US$4.0 million US$4.9 million US$6.4 million (US$37.6 US$3.2 million
million)
Net income/(loss) per average US$0.16 US$0.19 US$0.25 (US$1.38) US$0.12
share
Annualised RoAE 7.29% 9.39% 12.77% (71.80%) 5.64%
Portfolio Performance
For the quarter ended 31 March 2007, the annualised yield on average assets,
which is calculated based on the annualised interest income for the period
divided by the average interest earning assets for the period, was 5.81%
(quarter ended 31 December 2006: 5.95%) and the annualised cost of funds on the
average repurchase balance was 5.15% (quarter ended 31 December 2006: 5.30%)
which equates to an interest rate spread of 0.66% (quarter ended 31 December
2006: 0.65%). At 31 March 2007, the annualised yield on assets was 5.95% and
the annualised cost of funds on the repurchase balances was 5.16%, which equates
to an interest rate spread of 0.79%.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 15% for the quarter ended 31 March 2007 (quarter
ended 31 December 2006: 14%). Prepayment speeds on mortgage-backed securities,
as reflected by the CPR, vary according to the type of investment, changes in
interest rates, conditions in the financial markets, competition and other
factors, none of which can be predicted with any certainty.
01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006
to 31 March to 31 December 30 September 2006 to 30 June 2006 to 31 March
2007 2006 2006
Annualised yield on average 5.81% 5.95% 5.66% 5.24% 4.89%
assets
Annualised cost of funds on 5.15% 5.30% 5.31% 4.99% 4.58%
average repurchase balance
Interest rate spread 0.66% 0.65% 0.35% 0.25% 0.31%
CPR 15% 14% 13% 15% 18%
As at 31 March 2007, all of the assets in the Company's portfolio were Fannie
Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an
implied 'AAA' rating.
31 March 31 December 2006 30 September 2006 30 June 2006 31 March 2006
2007
Fixed-rate mortgage-backed securities 69% 62% 63% 67% 61%
Adjustable-rate mortgage-backed 8% 11% 8% 9% 25%
securities
Floating-rate mortgage-backed 23% 27% 29% 24% 14%
securities
Borrowings
The ratio of average daily repurchase agreements to equity resulted in leverage
of the Company of 9.3:1 during the quarter ended 31 March 2007 (quarter ended 31
December 2006: 9.3:1). The leverage at 31 March 2007 was 8.1:1 (31 December
2006: 9.0:1).
01 January 01 October 2006 01 July 2006 to 01 April 01 January 2006
2007 to 31 to 31 December 30 September 2006 2006 to 30 to 31 March 2006
March 2007 2006 June 2006
Average leverage for period 9.3:1 9.3:1 8.9:1 9.7:1 8.5:1
Leverage at period end 8.1:1 9.0:1 8.5:1 8.7:1 8.9:1
As of 31 March 2007, the Company had entered into interest rate swap agreements
totalling US$811 million in notional amount in which the Company will pay an
average rate of 5.17% and receive 1 month LIBOR on a monthly basis. As of 31
December 2006, the Company had entered into interest rate swap agreements
totalling US$597 million in notional amount in which the Company would pay an
average rate of 5.22% and receive 1 month LIBOR on a monthly basis.
31 March 2007 31 December 2006 30 September 2006 30 June 2006 31 March 2006
Notional amount US$811 million US$597 million US$603 million US$714 million US$554 million
Average pay rate 5.17% 5.22% 5.23% 5.16% 4.82%
Average receive rate 5.32% 5.35% 5.33% 5.22% 4.75%
Capital
At 31 March 2007, the Company had a net asset value per share of US$8.22 (31
December 2006: US$8.08). After deducting the current dividends declared for the
quarter of US$3,943,177 (for the quarter 31 December 2006: US$3,331,321),
reported net asset value per share was US$8.08 (31 December 2006: US$7.95).
During the quarter the Company issued 2,540,000 shares raising $21.8 million in
net offering proceeds.
01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006
to 31 March 2007 to 31 December to 30 June to 31 March
2006 30 September 2006 2006
2006
NAV per share US$8.22 US$8.08 US$8.05 US$7.52 US$8.03
Dividends declared for the US$3,943,177 US$3,331,321 US$3,075,066 US$2,602,555 US$3,330,066
period
NAV per share after deducting US$8.08 US$7.95 US$7.93 US$7.42 US$7.91
dividends declared
Dividend
The Company has declared a dividend for the quarter ended 31 March 2007 of
US$0.14 per share payable on 31 May 2007 to holders on the register on 18 May
2007. Dividends are calculated and paid in US dollars. Shareholders wishing
for the conversion of dividend payments into Sterling should contact
Computershare Investor Services (Channel Islands) Limited, Tel: 01534 825294.
01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006
to 31 March 2007 to 31 December to 30 June to 31 March 2006
2006 30 September 2006 2006
Core net income per average US$0.15 US$0.14 US$0.12 US$0.10 US$0.12
share
Net income/(loss) per average US$0.16 US$0.19 US$0.25 (US$1.38) US$0.12
share
Dividends per share US$0.14 US$0.13 US$0.12 US$0.10 US$0.12
Outlook
'We are comfortable with the portfolio composition in current market conditions,
' said Wellington Denahan-Norris, Chief Investment Officer for Prodesse's
Investment Manager, FIDAC. 'The Federal Reserve has identified the risk of
rising inflation as its most important concern even as it has acknowledged a
slowdown in economic growth. Thus, it is likely that the Federal Reserve will
stay on hold until incoming data provide more direction. In this environment,
our strategy of owning fixed-rate, adjustable-rate and floating-rate assets is
designed to perform in a range of possible future outcomes. We were able to
invest the proceeds of our recent equity offering quickly, and we are still able
to invest amortizing principal in US Agency mortgage-backed securities at
attractive levels.'
Prodesse Investment Limited
Balance Sheet
31-Mar-07 31-Dec-06 30-Sep-06 30-Jun-06 31-Mar-06
Note (Unaudited) (Audited) (Unaudited) (Unaudited) (Unaudited)
US$ US$ US$ US$ US$
ASSETS
Current assets
Available for sale investments 3 2,237,709,321 2,073,602,089 2,016,901,365 1,946,995,591 2,190,680,570
Accrued income receivable 9,301,841 8,773,585 8,001,243 9,055,816 9,853,640
Receivable for principal paydowns 5,409,311 3,209,521 4,158,154 5,028,662 7,947,156
Receivable for securities sold - - 68,692,786 70,277,068 -
Hedging instruments 4 - - - 10,245,969 8,971,875
Cash and cash equivalents 29,520 35,150 749,962 4,409 16,039
Prepaid expenses 34,369 27,019 173,565 122,099 28,011
Total assets 2,252,484,362 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
28,165,550 at 31 March 2007,
25,625,550 at 31 December 2006 and
30 September 2006, 26,025,550 at
30 June 2006, and 27,750,550 at 31
March 2006 at US$ 0.01 281,655 256,255 256,255 260,255 277,506
Capital redemption reserve 29,845 29,845 29,845 25,845 8,594
Share premium 71,758,843 50,000,000 50,000,000 50,000,000 50,000,000
Distributable reserve 198,680,545 198,680,545 198,680,545 201,412,622 214,300,104
Accumulated profits 4,361,335 3,719,637 3,228,548 2,741,945 3,404,481
Capital Reserve-Realised (loss)/
gain and impairment on available
for sale investments (57,205,633) (57,230,504) (58,519,908) (61,890,519) (21,651,450)
Revaluation reserve 18,198,441 14,082,163 15,713,694 (7,017,861) (32,478,359)
Cash flow hedge reserve 4 (4,556,592) (2,444,846) (3,124,375) 10,245,970 8,971,875
Total shareholders' equity 231,548,439 207,093,095 206,264,604 195,778,257 222,832,751
Current liabilities
Securities purchased payable 136,626,297 15,406,579 124,033,750 134,680,584 -
Repurchase agreements 5 1,872,007,000 1,853,757,000 1,759,089,000 1,706,674,000 1,983,618,000
Accrued interest expense 6,067,974 5,563,044 4,809,009 3,220,249 9,633,997
Accrued expenses payable 1,678,060 1,382,800 1,356,337 1,376,524 1,412,543
Hedging instruments 4 4,556,592 2,444,846 3,124,375 - -
Total liabilities 2,020,935,923 1,878,554,269 1,892,412,471 1,845,951,357 1,994,664,540
Total equity and liabilities 2,252,484,362 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291
Net Assets 231,548,439 207,093,095 206,264,604 195,778,257 222,832,751
Net Asset Value per share 6 8.22 8.08 8.05 7.52 8.03
Prodesse Investment Limited
(unaudited) Income Statement
01 January 2007 01 October 2006 01 July 2006 to 01 April 01 January 2006
to 31 March 2007 to 31 December 30 September 2006 to 30 to 31 March
2006 2006 June 2006 2006
US$ US$ US$ US$ US$
Income
Interest income 30,895,050 31,075,784 28,199,546 29,233,473 26,589,796
Interest expense (24,970,781) (25,733,535) (23,701,645) (25,152,907) (21,906,790)
Net interest income 5,924,269 5,342,249 4,497,901 4,080,566 4,683,006
Realised gain/(loss) on sale of
available for sale investments and
interest rate swaps 24,871 1,289,404 3,370,611 (14,547,469) -
Loss from impairment - - - (25,691,600) -
Total income/(loss) 5,949,140 6,631,653 7,868,512 (36,158,503) 4,683,006
Expenses
Management, custodian and
administration fees 1,296,894 1,277,915 1,246,004 1,210,709 1,279,335
Other operating expenses 654,356 501,569 202,739 202,393 197,087
Total expenses 1,951,250 1,779,484 1,448,743 1,413,102 1,476,422
Net income/(loss) for the period 3,997,890 4,852,169 6,419,769 (37,571,605) 3,206,584
Net income/(loss) per average share
for the period 0.16 0.19 0.25 (1.38) 0.12
Dividend declared per share for the
period 0.14 0.13 0.12 0.10 0.12
Average shares outstanding 25,766,661 25,625,550 25,799,463 27,281,594 27,750,550
Prodesse Investment Limited
(unaudited) Cash Flow Statement
01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006
to 31 March to 31 December 30 September to 30 June 2006 to 31 March 2006
2007 2006 2006
US$ US$ US$ US$ US$
Net cash (outflow)/inflow from
operating
activities (Note 1) (18,458,552) 2,356,864 6,040,184 16,205,851 2,786,035
Financing
Own shares acquired - - (2,732,076) (12,887,481) -
New shares issued 21,784,243
Dividends paid (3,331,321) (3,071,676) (2,562,555) (3,330,000) (2,775,055)
Net cash inflow/(outflow) from
financing 18,452,922 (3,071,676) (5,294,631) (16,217,481) (2,775,055)
(Decrease) /increase in cash and
cash equivalents (5,630) (714,812) 745,553 (11,630) 10,980
Cash and cash equivalents, at
beginning of period 35,150 749,962 4,409 16,039 5,059
Cash and cash equivalents, at end of
period 29,520 35,150 749,962 4,409 16,039
Note 1
Net income/(loss) for the period 3,997,890 4,852,169 6,419,769 (37,571,605) 3,206,584
Net accretion/amortisation of
premiums on available for sale
investments (14,232) (214,870) 143,076 1,005,200 1,210,901
Realised (gain)/loss on sale of
available for sale investments (24,871) (2,507,548) (2,017,445) 14,547,469 -
Realised gain in interest rate hedge - - (135,022) - -
Loss from impairment - - - 25,691,600 -
Purchases of investments (207,839,552) (432,026,305) (708,062,580) (349,722,450) (1,082,468,323)
Proceeds from sale of investments 34,168,325 228,069,925 563,718,426 530,854,272 -
Proceeds from sale of interest rate
swaps - - 135,022 - -
Principal paydowns 132,739,304 109,422,437 91,071,528 113,805,308 116,471,761
Borrowings under reverse repurchase
agreements 5,771,019,000 5,947,866,000 5,770,442,800 6,685,967,000 5,763,648,000
Repayments under reverse repurchase
agreements (5,752,769,000) (5,853,198,000) (5,718,027,800) (6,962,911,000) (4,802,097,000)
Receivables
(Increase)/decrease in accrued
income receivable (528,256) (833,988) 835,303 1,083,913 (3,788,108)
(Increase) /decrease in prepaid
expenses (7,350) 146,545 (51,465) (94,089) 6,894
Liabilities
Increase/(decrease)in accrued
interest expense 504,930 754,035 1,588,759 (6,413,748) 6,124,956
Increase/(decrease)in accrued
expenses payable 295,260 26,464 (20,187) (36,019) 470,370
Net cash (outflow)/inflow from
operating activities (18,458,552) 2,356,864 6,040,184 16,205,851 2,786,035
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 January 2007 to 31 March 2007
Share Capital Share Distributable Capital Reserve
capital redemption premium reserve - realised gain/
reserve (loss) on sales
and impairment
of available for
sale investments
US$ US$ US$ US$ US$
Balance at 31 December 2006 256,255 29,845 50,000,000 198,680,545 (57,230,504)
Net income for the quarter - - - - -
Available for sale investments:
Transfer of realised gain to capital
reserve - - - - 24,871
Movement in unrealised gain on
revaluation taken to equity - - - - -
Cash flow hedge reserve - - - - -
Total recognised income and expense - - - - 24,871
Issuance of new shares 25,400 - 21,758,843 - -
Dividends paid - - - - -
Balance at 31 March 2007 281,655 29,845 71,758,843 198,680,545 (57,205,633)
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity Continued
(unaudited) 01 January 2007 to 31 March 2007
Revaluation Accumulated Cash flow Total
reserve profits hedge
reserve
US$ US$ US$ US$
Balance at 31 December 2006 14,082,163 3,719,637 (2,444,846) 207,093,095
Net income for the quarter - 3,997,890 - 3,997,890
Available for sale investments:
Transfer of realised gain to capital
reserve - (24,871) - -
Movement in unrealised gain on revaluation
taken to equity 4,116,278 - - 4,116,278
Cash flow hedge reserve - - (2,111,746) (2,111,746)
Total recognised income and expense 4,116,278 3,973,019 (2,111,746) 6,002,422
Issuance of new shares - - - 21,784,243
Dividends paid - (3,331,321) - (3,331,321)
Balance at 31 March 2007 18,198,441 4,361,335 (4,556,592) 231,548,439
Notes to the financial statements
1. General Information
Prodesse Investment Limited is a limited liability Guernsey-incorporated
closed-end investment company, the investments of which are managed by Fixed
Income Discount Advisory Company ('the Investment Manager'). The Company's
share capital structure consists solely of Ordinary Shares. The Company has a
listing on the London Stock Exchange and a listing on the Channel Islands Stock
Exchange. The Company will have an indefinite life but Shareholders will have
the opportunity to vote on its continuation at the Annual General Meeting to be
held in 2010.
The Company invests in a portfolio consisting primarily of implied 'AAA' rated
mortgage-backed securities on a leveraged basis. The Company's investment
strategy is to generate net income for distribution from the spread between the
interest income from the portfolio and the cost of borrowing pursuant to reverse
repurchase agreements used to finance the portfolio. The Investment Manager
will seek to enhance returns through what it considers an appropriate amount of
leverage.
2. Significant Accounting Policies
Basis of Accounting
The financial statements of the Company are prepared in accordance with
International Financial Reporting Standards ('IFRS'), which comprise standards
and interpretations approved by the International Accounting Standards Board ('
the IASB'), and International Accounting Standards and Standing Interpretations
Committee interpretations approved by the International Accounting Standards
Committee ('IASC') that remain in effect, together with applicable legal and
regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing
Authority and Channel Islands Stock Exchange.
The financial statements are prepared on the historical cost basis except for
the revaluation of certain financial instruments. The principal accounting
policies are set out below. The preparation of financial statements in
conformity with IFRS requires the Company to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
The financial statements are presented in US Dollars because that is the
currency of the primary economic environment in which the Company operates. The
functional currency of the Company is also considered to be US Dollars.
Investments
The Company invests in securities issued by the United States Government
Sponsored Enterprises such as the Federal Home Loan Mortgage Corporation ('
Freddie Mac'), Federal National Mortgage Association ('Fannie Mae') and the
Federal Home Loan Banks ('FHLB') as well as Ginnie Mae, a US Government
Corporation. Freddie Mac, Fannie Mae, and FHLB, although chartered and sponsored
by Congress, are not Companies funded by congressional appropriations and the
debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLB
are neither guaranteed nor insured by the United States Government.
The payment of principal and interest on the Freddie Mac and Fannie Mae
mortgage-backed securities are backed by those respective agencies, the payment
of principal and interest on the Ginnie Mae mortgage backed securities are
backed by the full-faith-and-credit of the US Government. Although the Company
generally intends to hold most of its securities until maturity, it may, from
time to time, sell any of its mortgage-backed securities as part of its overall
management strategy. Accordingly the Company classifies all its mortgage-backed
securities as available for sale and these are reported at fair value. Expenses
incidental to the acquisition of available for sale investments are included
within the cost of that investment.
Realised and Unrealised Gains and Losses on Investments
Unrealised gains or losses arising on the revaluation of investments are
included in equity. Unrealised losses on investment securities that are
considered other than temporary, as measured by the amount of decline in fair
value attributable to factors other than temporary, are recognised as an
impairment loss in the income statement and the cost basis of the
mortgage-backed securities is adjusted. The impairment loss is then transferred
to a non-distributable capital reserve in accordance with the Memorandum and
Articles of Association of the Company.
Realised gains or losses arising on the sale of investments are recognised in
the income statement but will be transferred to a non-distributable capital
reserve in accordance with the Memorandum and Articles of Association of the
Company.
When-Issued/Delayed Securities
The Company may purchase or sell securities on a when-issued or delayed delivery
basis, including 'TBA' securities. TBA Securities are mortgaged-backed
securities for which details about the underlying mortgages have not yet been
announced. Securities traded on a when-issued basis are traded for delivery
beyond the normal settlement date at a stated price and yield, and no income
accrues to the purchaser prior to delivery.
Purchasing or selling securities on a when-issued or delayed delivery basis
involves the risk that the market price at the time of delivery may be lower or
higher than the agreed upon price, in which case an unrealised loss may be
incurred. The Company did not transact in when-issued or delayed delivery
securities during the quarter ended 31 March 2007.
Security Transactions and Investment Income Recognition
Security transactions are recorded on the trade date. Realised and unrealised
gains and losses are calculated based on specific identified cost. Interest
income is recorded as earned. Interest income and expense includes amortisation
of market discount and premium as calculated using a hybrid methodology
utilising the principles of effective interest method.
Other Receivables
Other receivables do not carry any interest and are short-term in nature and are
accordingly stated at their nominal value as reduced by appropriate allowances
for estimated irrecoverable amounts.
Cash and Cash Equivalents
Cash includes amounts held in interest bearing overnight accounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the substance of
the contractual arrangements entered into. An equity instrument is any contract
that evidences a residual interest in the assets of the Company after deducting
all of its liabilities. Financial liabilities and equity are recorded at the
proceeds received, net of issue costs.
Other Accruals and Payables
Other accruals and payables are not interest-bearing and are stated at their
nominal value.
Reverse Repurchase Agreements
The Company enters into reverse repurchase agreements with qualified third party
financial institutions to finance its investment in mortgage-backed securities.
The agreements are secured by the value of the Company's mortgage-backed
securities. A repurchase agreement involves the sale by the Company of
securities that it holds with an agreement by the Company to repurchase the same
securities at an agreed price and date. Such an agreement involves the risk
that the value of the securities sold by the Company may decline in value below
the price of the securities.
Interest on the principal value of reverse repurchase agreements issued and
outstanding is based upon competitive market rates at the time of issuance.
When the Company enters into a reverse repurchase agreement, it establishes and
maintains a segregated account with the lender containing securities having a
value not less than the repurchase price, including accrued interest, of the
reverse repurchase agreement.
Repurchase agreements are treated as collateralised financing transactions and
are carried at their contractual amounts, including accrued interest, as
specified in the repurchase agreements. Accrued interest is recorded as a
separate line item.
Securities sold subject to repurchase agreements are retained in the financial
statements as available for sale securities and the counterparty liability is
included in liabilities under repurchase agreements.
Derivative Financial Instruments and Hedge Accounting
The Company's activities expose it primarily to the financial risks of changes
in interest rates. The Company uses interest rate swap contracts to hedge these
exposures. The Company does not use derivative financial instruments for
speculative purposes.
The use of financial derivatives is governed by the Company's policies approved
by the board of directors, which provide written principles on the use of
financial derivatives.
Changes in the fair value of derivative financial instruments that are
designated and effective as hedges of future cash flows are recognised directly
in equity and any ineffective portion is recognised immediately in the income
statement. The amount in equity is released to income when the forecast
transaction impacts profit or loss.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualified for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
for cash flow hedges is retained in equity until the forecasted transaction
occurs. If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognised in equity is transferred to net profit or
loss in the period.
Taxes
The Company is exempt from Guernsey taxation under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600.
Set-up and Issue Costs
The preliminary expenses of the Company directly attributable to the equity
transaction and costs associated with the establishment of the Company that
would otherwise have been avoided are taken to the share premium account.
Costs directly attributable to the issue of Ordinary Shares are expensed against
the share premium account as allowed by with The Companies (Guernsey) Law, 1994.
3. Available for Sale Investments
Gross Gross Estimated
At 31 March 2007 Amortised Cost Unrealised Gain Unrealised Loss Fair Value
US$ US$ US$ US$
Adjustable rate 691,920,046 2,881,386 (213,458) 694,587,974
Fixed rate 1,527,590,834 16,594,176 (1,063,663) 1,543,121,347
Total 2,219,510,880 19,475,562 (1,277,121) 2,237,709,321
As at 31 March 2007, all of the assets in the Company's portfolio were Fannie
Mae and Freddie Mac mortgage-backed securities, which carry an implied 'AAA'
rating. During the quarter ended 31 March 2007, the Company did not have any
securities that it deemed to be other-than-temporarily impaired.
Mortgage-backed securities are created when mortgages and their attendant
streams of interest and principal payments are pooled to serve as collateral for
the issuance of securities to investors. Interests in mortgage-backed securities
differ from other forms of traditional debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, mortgage-backed securities typically
provide irregular cash flows consisting of both interest and principal.
An investment consideration of any mortgage-backed security is the structure of
the payment of the cash flow streams from the underlying mortgages to the
holders of the mortgage-backed securities. The cash flows can be simply passed
from the mortgage holder to the investor or they can be structured in a number
of different ways. The market values of the various structures will vary in
different interest rate or prepayment environments, with the more derivative or
complex structures (e.g., interest-only or principal-only securities) being more
sensitive to movements in interest rates or rates of prepayment.
Beyond the basic security of the mortgages and properties that underlie
mortgage-backed securities, a critical attribute of mortgage-backed securities
issued by the US Agencies is the credit enhancement that the US Agencies
provide. The holder of mortgage-backed securities issued or guaranteed by the US
Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae
is the principal governmental (i.e., backed by the full credit of the US
Government) guarantor of mortgage-backed securities. Fannie Mae and Freddie Mac
are the principal US Government-related (i.e. not backed by the full credit of
the US Government) guarantors.
Adjustable-rate and floating-rate mortgage-backed securities in which the
Company may invest include pass-through mortgage-backed securities issued by the
US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates
on adjustable-rate mortgage-backed securities are reset at periodic intervals to
an increment over some predetermined reference interest rate. There are two main
categories of reference rates: (i) those based on US Treasury securities and
(ii) those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly utilised reference rates include the
one-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates,
such as the one-year Treasury Bill rate or LIBOR, closely mirror changes in
market interest rate levels. Others tend to lag changes in market rate levels
and tend to be somewhat less volatile.
Adjustable-rate mortgages frequently have upper and lower limits on the interest
rates to which a residential borrower may be subject (i) in any reset or
adjustment interval and (ii) over the life of the loan. These upper and lower
limits are commonly known as ''caps'' and ''floors'' respectively.
4. Hedging Instruments
The Company uses interest rate swaps to manage its exposure to interest rate
movements. When the Company enters into an interest rate swap, it agrees to pay
a fixed rate of interest and to receive a variable interest rate, generally
based on the London Interbank Offered Rate ('LIBOR'). The Company's swaps are
designated as cash flow hedges against the benchmark interest rate risk
associated with the Company's borrowings.
At 31 March 2007, the Company had interest rate swap agreements of US$811
million notional amount in which the Company will pay a weighted average rate of
5.17% and have a weighted average receive rate of 5.32%.
5. Reverse Repurchase Agreements
At 31 March 2007 the aggregate value of securities pledged by the Company under
reverse repurchase agreements exceeds the liability under such agreements by
approximately US$56.2 million (approximately 3% of such liability). The
interest rates on the reverse repurchase agreements at 31 March 2007 range from
4.33% to 5.44% and have maturity dates ranging from 2 days to 1795 days.
The Company has entered into repurchase agreements which provide the
counterparty with the right to call the balance prior to maturity date. The
repurchase agreements totalled $300 million.
6. Net Asset Value
The net asset value per Ordinary Share is based on net assets at 31 March 2007
and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares in issue
at the period end.
At 31 March 2007, the reported net asset value per Ordinary Share (before
excluding the dividend declared for the quarter ended 31 March 2007) is US$8.22.
At 31 March 2007, the Company had a net asset value per Ordinary Share of
US$8.08, after including the effect of the dividend declared for the quarter
ended 31 March 2007 of US$3,943,177.
This information is provided by RNS
The company news service from the London Stock Exchange