Fourth Quarter 09 Results

RNS Number : 8541G

Prodesse Investment Limited

09 February 2010

 



Prodesse Investment Limited

Results for the Quarter Ended 31 December 2009

Highlights for fourth quarter 2009:

·      Core net income¹ per average share² of US$0.05

·      Dividend per share of US$0.04 from net interest income

·      Net loss per average share of US$0.02

·      NAV per share of US$8.33 (30 September 2009: US$8.19) before including the effect of the dividend declared for the quarter

·      Portfolio remains 100% implied "AAA" mortgage-backed securities.

Ronald Kazel, Managing Director of FIDAC, Investment Manager to Prodesse, commented on the quarter's results:  "As a result of the shareholder vote on 21 December 2009, the Company's mandate is to conduct an orderly realization of its assets. This quarter's results begin to reflect the execution of that mandate, including asset liquidation and leverage reduction, as well as the continued distribution of positive spread income generated by the portfolio. We continue to work toward a complete liquidation of the portfolio, after which the cash proceeds will be paid out to shareholders."

Financial Highlights Q4 2009 Q3 2009 Q2 2009 Q1 2009 Q4 2008 $US Dividend per share 0.04 0.28 0.27 0.23 0.19 Core net income per average share 0.05 0.29 0.27 0.23 0.19 Net (loss) income per average share (0.02) 0.25 0.44 0.25 (0.60) Net (loss) income (0.6m) 7.8m 13.5m 7.9m (18.5m) Net asset value per share 8.33 8.19 7.69 7.17 6.28 GBP Sterling3 Dividend per share 2p 17p 16p 16p 13p Core net income per average share 3p 18p 16p 16p 13p Net (loss) income per average share (1p) 16p 27p 17p (41p) Net (loss) income (£0.4m) £4.9m £8.2m £5.5m (£12.7m) Net asset value per share 515.9p 511.4p 467.1p 501.4p 430.9p

1	Core net income is defined as net income excluding realised and unrealised gains and losses on securities and interest rate swaps.
2	The average share calculation is based on the sum of the shares for the period divided by the number of days in the period.
3	Illustration is based upon an exchange rate of 1.6148, 1.6016, 1.6463, 1.4299 and 1.4575 US$ per Pound Sterling at 31 December 2009, 30 September 2009, 30 June 2009, 31 March 2009 and 31 December 2008 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: [phone]

Company Secretary and Administrator

Sara Bourne / Jean McMillan, BNP Paribas Fund Services (Guernsey) Limited

Tel: [phone]

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 14:00 UK time on Tuesday 9 February and a live audio webcast and presentation will be available via the Prodesse website, www.prodesse.co.uk. The dial-in number for the conference call is 0845 401 9097 (UK) / [phone] (International) and the password is "Prodesse.

Company performance

For the quarter ended 31 December 2009, Prodesse reported net loss of US$0.6 million (quarter ended 30 September 2009 income: US$7.8 million) or US$0.02 loss per average share (quarter ended 30 September 2009: US$0.25 income per average share).  This loss includes a charge of US$5.3 million resulting from the release of the majority of the Company's cash flow hedge reserve following the shareholder vote on 21 December 2009 to wind down the Company.

Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities and interest rate swaps, of US$1.4 million for the quarter ended 31 December 2009 (quarter ended 30 September 2009: US$8.9 million) or US$0.05 per average share (quarter ended 30 September 2009: US$0.29 per average share).  Core net income for the period also includes estimates for the various non-reoccurring winding down costs of the Company of US$6.4 million.  Excluding these charges, core net income is US$7.8 million or US$0.25 per average share.

The Company delivered an annualised core return on average equity for the quarter ended 31 December 2009 of 2.26% (quarter ended 30 September 2009: 14.53%).  Excluding the various non-reoccurring winding down costs of the Company, core return on average equity is 12.21%.  For the quarter ended 31 December 2009, the annualised total return on average equity (RoAE) including the various non- reoccurring wind down cost of the Company was (0.94%) (quarter ended 30 September 2009: 12.67%). 

	01 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
Core net income	US$1.4 million	US$8.9 million	US$8.5 million	US$7.1 million	US$6.0 million
Core net income per average share	US$0.05	US$0.29	US$0.27	US$0.23	US$0.19
Annualised core RoAE	2.26%	14.53%	14.80%	13.55%	12.07%
Reported net (loss) income	(US$0.6 million)	US$7.8 million	US$13.5 million	US$7.9 million	(US$18.5 million)
Net (loss) income per average share	(US$0.02)	US$0.25	US$0.44	US$0.25	(US$0.60)
Annualised RoAE	(0.94%)	12.67%	23.42%	15.11%	(36.95%)

Portfolio Performance

For the quarter ended 31 December 2009, the annualised yield on average assets, which is calculated based on the annualised interest income for the period divided by the average value of interest earning assets for the period, was 4.75% (quarter ended 30 September 2009: 4.48%) and the annualised cost of funds on the average repurchase balance was 2.83% (quarter ended 30 September 2009: 2.63%) which equates to an interest rate spread of 1.92% (quarter ended 30 September 2009: 1.85%).

The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 21% for the quarter ended 31 December 2009 (quarter ended 30 September 2009: 20%).  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 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
Annualised yield on average assets	4.75%	4.48%	4.33%	4.56%	5.24%
Annualised cost of funds on average  repurchase balance	2.83%	2.63%	2.68%	3.15%	3.92%
Interest rate spread	1.92%	1.85%	1.65%	1.41%	1.32%
CPR	21%	20%	21%	16%	9%

As at 31 December 2009, 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 December 2009	30 September 2009	30 June 2009	31 March 2009	31 December 2008
Fixed-rate mortgage-backed securities	61%	56%	54%	49%	49%
Adjustable-rate mortgage-backed securities	30%	27%	27%	27%	24%
Floating-rate mortgage-backed securities	9%	17%	19%	24%	27%

.

Borrowings

The ratio of average daily repurchase agreements to equity resulted in average leverage of the Company of 5.6:1 during the quarter ended 31 December 2009 (quarter ended 30 September 2009: 6.9:1). The leverage at 31 December 2009 was 5.3:1 (30 September 2009: 6.5:1).

	01 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
Average leverage for period	5.6:1	6.9:1	7.2:1	7.6:1	8.5:1
Leverage at period end	5.3:1	6.5:1	7.0:1	7.4:1	7.8:1

As of 31 December 2009, the Company had entered into interest rate swap agreements totalling US$534 million notional in which the Company will pay an average rate of 4.73% and receive 1 month LIBOR on a monthly basis.  As of 30 September 2009, the Company had entered into interest rate swap agreements totalling US$560 million notional in which the Company would pay an average rate of 4.76% and receive 1 month LIBOR on a monthly basis. 

	31 December 2009	30 September 2009	30 June 2009	31 March 2009	31 December 2008
Notional amount	US$534 million	US$560 million	US$567 million	US$544 million	US$563 million
Average pay rate	4.73%	4.76%	4.76%	4.96%	4.96%
Average receive rate	0.23%	0.25%	0.32%	0.53%	1.08%

Capital

At 31 December 2009, the Company had a net asset value per share of US$8.29 (30 September 2009: US$7.91) after deducting the current dividends declared for the quarter of US$1,239,282 (for the quarter 30 September 2009: US$8,674,974).   

	01 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
NAV per share	US$8.33	US$8.19	US$7.69	US$7.17	US$6.28
Dividends declared for the period	US$1,239,282	US$8,674,974	US$8,365,154	US$7,125,872	US$5,886,590
NAV per share after deducting dividends declared	US$8.29	US$7.91	US$7.42	US$6.94	US$6.09

Dividend

The Company has declared a dividend for the quarter ended 31 December 2009 of US$0.04 per share that is payable on 10 March 2010 to holders on the register on 19 February 2010.  Dividends are calculated and paid in US dollars. 

	01 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
Core net income per average share	US$0.05	US$0.29	US$0.27	US$0.23	US$0.19
Net (loss) income per average share	(US$0.02)	US$0.25	US$0.44	US$0.25	(US$0.60)
Dividends per share	USS0.04	USS0.28	USS0.27	USS0.23	USS0.19

Prodesse Investment Limited
Balance Sheet
	Note	31-Dec-09 US$'000 (Unaudited)	30-Sep-09 US$'000 (Unaudited)	30-Jun-09 US$'000 (Unaudited)	31-Mar-09 US$'000 (Unaudited)	31-Dec-081 US$'000
ASSETS
Current assets
Available for sale investments	3	1,600,489	1,951,692	2,014,890	1,919,800	1,709,479
Accrued income receivable		8,072	8,818	8,785	8,371	7,785
Receivable for principal paydowns		3,945	3,782	5,525	4,307	1,519
Receivable for securities sold		43,173	-	-	-	19,426
Cash and cash equivalents		129	195	215	244	19,173
Prepaid expenses		211	275	363	138	139
Total assets		1,656,019	1,964,762	2,029,778	1,932,860	1,757,521
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
30,982,050 at US$ 0.01		310	310	310	310	310
Capital redemption reserve		30	30	30	30	30
Share premium		91,560	91,560	91,560	91,560	91,560
Distributable reserve		141,513	141,513	141,513	141,513	141,513
Accumulated (losses) profits		(17,509)	(7,889)	(7,314)	(13,670)	(15,656)
Capital reserve-realised gain on available for sale investments and interest rate swaps		2,258	1,913	1,899	1,899	1,899
Revaluation reserve-unrealised gain (losses) on available for sale investments		40,017	33,968	20,470	13,446	(10,104)
Cash flow hedge reserve	4	(142)	(7,784)	(10,209)	(12,872)	(15,012)
Total shareholders' equity		258,037	253,621	238,259	222,216	194,540
Current liabilities
Securities purchased payable		-	23,640	86,484	19,420	-
Repurchase agreements	5	1,363,000	1,653,409	1,669,657	1,647,962	1,515,351
Accrued interest expense		3,989	4,228	4,010	4,372	5,958
Accrued expenses payable		2,090	2,071	2,296	2,189	2,015
Provision for winding down expenses	7	6,364	-	-	-	-
Fair value of interest rate swaps	4	22,539	27,793	29,072	36,701	39,657
Total liabilities		1,397,982	1,711,141	1,791,519	1,710,644	1,562,981
Total equity and liabilities		1,656,019	1,964,762	2,029,778	1,932,860	1,757,521
Net Assets		258,037	253,621	238,259	222,216	194,540
Net Asset Value per share	6	8.33	8.19	7.69	7.17	6.28

¹Derived from 2008 audited financial statements.

Prodesse Investment Limited
(unaudited) Income Statement - discontinuing activities
	01 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
	US $'000	US $'000	US $'000	US $'000	US $'000
Income
Interest income	19,695	21,543	21,221	21,132	22,447
Interest expense	(10,559)	(11,110)	(11,192)	(12,639)	(15,056)
Net interest income	9,136	10,433	10,029	8,493	7,391
Net realised profit on sale of available for sale investments and termination of interest rate swaps	345	14	-	-	162
Amortisation of de-designation of cashflow hedge	(7,642)	(2,425)	(2,663)	(2,140)	(1,949)
Unrealised gain/(loss) on interest rate swaps	5,254	1,279	7,629	2,956	(22,696)
Total income/(loss)	7,093	9,301	14,995	9,309	(17,092)
Expenses
Management, custodian and administration fees	1,008	1,177	1,197	1,123	1,045
Other operating expenses	320	320	316	313	319
Provision for winding down expenses	6,364	-	-	-	-
Total expenses	7,692	1,497	1,513	1,436	1,364
Net (loss)/income for the period	(599)	7,804	13,482	7,873	(18,456)
Net (loss)/income per average share for the period	(0.02)	0.25	0.44	0.25	(0.60)
Dividend declared per share for the period	0.04	0.28	0.27	0.23	0.19
Average shares outstanding	30,982,050	30,982,050	30,982,050	30,982,050	30,982,050

Prodesse Investment Limited
(unaudited) Statement of Comprehensive Income
	01 October 2009 to 31 December 2009	01 July 2009 to 30 September 2009	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008
	US $'000	US $'000	US $'000	US $'000	US $'000
(Loss)/profit for the period	(599)	7,804	13,482	7,873	(18,456)
Available for sale financial assets:
Gains on revaluation	5,704	13,484	7,024	23,550	13,010
Transfer of net realised gain to capital reserve	345	14	-	-	162
Total Comprehensive Income for the period	6,049	13,498	7,024	23,550	13,172
Cash flow hedges:
Amortisation of de-designated cash flow hedge	7,642	2,425	2,663	2,140	1,949
	7,642	2,425	2,663	2,140	1,949
Total comprehensive income for the period	13,092	23,727	23,169	33,563	(3,335)

Prodesse Investment Limited
(unaudited) Cash Flow Statement
	01 October 2009 to 31 December 2009		01 July 2009 to 30 September  2009	01 April 2009 to 30 June  2009	01 January 2009 to 31 March  2009	01 October 2008 to 31 December  2008
	US $'000		US $'000	US $'000	US $'000	US $'000
Net cash inflow/(outflow) from operating activities (Note 1)	299,019		24,593	(14,598)	(145,653)	193,713
Financing
Borrowings under reverse repurchase agreements	2,046,057		2,918,101	3,699,892	3,261,580	3,536,104
Repayments under reverse repurchase agreements	(2,336,466)		(2,934,349)	(3,678,197)	(3,128,969)	(3,708,474)
Dividends paid	(8,676)		(8,365)	(7,126)	(5,887)	(7,126)
Net cash (outflow)/inflow from financing activities	(299,085)		(24,613)	14,569	126,724	(179,496)
(Decrease)/increase in cash and cash equivalents	(66)		(20)	(29)	(18,929)	14,217
Cash and cash equivalents, at beginning of period	195		215	244	19,173	4,956
Cash and cash equivalents, at end of period	129		195	215	244	19,173
Note 1
Net (loss)/income for the period	(599)		7,804	13,482	7,873	(18,456)
Net accretion/amortisation of premiums on available for sale investments	2,062		1,700	1,390	140	552
Unrealised loss/(gain) on interest rate swaps	2,389		1,146	(4,966)	(816)	24,645
Net realised gain on sale of available for sale investments and termination of interest rate swaps	(345)		(14)	-	-	(162)
Purchases of investments	(24,509)		(143,581)	(189,304)	(254,490)	(53,376)
Proceeds from sale of investments	182,679		6,405	-	19,429	205,638
Principal paydowns	130,388		151,085	165,694	84,208	33,913
Receivables
Decrease/(increase) in accrued income receivable	746		(33)	(414)	(586)	937
Decrease/(increase) in prepaid expenses	64		88	(225)	1	67
Liabilities
(Decrease)/increase in accrued interest expense	(239)		218	(362)	(1,586)	(72)
Increase/(decrease) in accrued expenses payable	6,383		(225)	107	174	27
Net cash inflow/(outflow) from operating activities	299,019		24,593	(14,598)	(145,653)	193,713

Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) 01 October 2009 to 31 December 2009	Share capital	Capital redemption reserve	Share premium	Distributable reserve	Capital Reserve - realised gain on sales and impairment of available for sale investments	Revaluation reserve	Accumulated (losses)/ profits	Cash flow hedge Reserve - de-designated	Total
	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000
Balance at 1 October 2009	310	30	91,560	141,513	1,913	33,968	(7,889)	(7,784)	253,621
Net loss for the quarter	-	-	-	-	-	-	(599)	-	(599)
Amortisation of de-designated cash flow hedge	-	-	-	-	-	-	-	7,642	7,642
Movement in unrealised gain on revaluation taken to equity	-	-	-	-	-	5,704	-	-	5,704
Realised gains and losses	-	-	-	-	-	345	-	-	345
Transfer of realised gain to capital reserve	-	-	-	-	345	-	(345)	-	-
Total recognised income and expense	-	-	-	-	345	6,049	(944)	7,642	13,092
Dividends paid	-	-	-	-	-	-	(8,676)	-	(8,676)
Balance at 31 December 2009	310	30	91,560	141,513	2,258	40,017	(17,509)	(142)	258,037

Notes to the financial information

1.   General Information

Prodesse Investment Limited (the "Company") 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.  On 21 December 2009, an Extraordinary General Meeting was held at which resolutions were proposed (1) to authorise the Directors to commence a programme of realisation of the Company's assets and amend the investment policy of the Company accordingly, and (2) to amend Article 149(A) of the Articles of Incorporation of the Company to postpone the obligation to propose the scheduled continuation resolution from the 2010 annual general meeting to the 2015 annual general meeting.  Both resolutions were passed by the shareholders of the Company.

The Company invests in a portfolio consisting of implied "AAA" rated mortgage-backed securities on a leveraged basis.  The Company's investment strategy was 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 seeks to enhance returns through what it considers an appropriate amount of leverage.

2.   Significant Accounting Policies

Basis of Accounting

The financial statements included in the quarterly press release have been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRS").  The same accounting policies, presentation and methods of computation are followed in the quarterly press release as applied in the Company's latest annual audited financial statements except as described below.

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.

Changes in accounting policy

In 2009, the Company adopted International Financial Reporting Standard 8 "Operating Segments" and International Accounting Standard 1 "Presentation of Financial Statements" (revised 2007).

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the Directors to allocate resources to the segments and to assess their performance.  In contrast, the predecessor Standard IAS 14 "Segmental Reporting" required the Company to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Company's system of internal financial reporting to Directors serving only as the starting point for the identification of such segments.  However, as the Company is engaged in a single segment of business and no such segmental reporting is undertaken, this has not resulted in any changes to the financial information provided.

IAS 1 (revised) requires the presentation of a statement of changes in equity as primary statement, separate from the income statement and statement of comprehensive income.  As a result, a statement of comprehensive income has been included in the primary statements, showing changes in each component of equity for each period presented.

 

Going Concern

An Extraordinary General Meeting was held at which resolutions were proposed (1) to authorise the Directors to commence a programme of realisation of the Company's assets and amend the investment policy of the Company accordingly, and (2) to amend Article 149(A) of the Articles of Incorporation of the Company to postpone the obligation to propose the scheduled continuation resolution from the 2010 annual general meeting to the 2015 annual general meeting.  Both resolutions were passed by the shareholders of the Company.

As a result of the passing of the vote to wind up the Company, the financial statements have been prepared on a basis other than of a going concern.

No asset impairments were required to be posted in respect to the passing of the vote by shareholders on 21 December 2009.  The MBS investments have been transferred in the balance sheet from "Non current assets" to "Current assets."

Provision has also been made for any contractual commitments that have been onerous at the end of the reporting period.  Such provisions relate to a provision for US$6.3m in respect of costs to terminate the structured repurchase agreement which is scheduled to mature on 28 February 2012.

The financial statements do not include any provision for the future costs of terminating the business of the Company except to the extent that such costs were committed at the end of the reporting period. 

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 the Government National Mortgage Association ("Ginnie Mae"), a US Government Corporation.

On 7 September 2008, the Federal Housing Finance Agency ("FHFA") was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.

The payment of principal and interest on the debt of FHLB is backed by that agency, the debt and mortgage-backed securities issued by Freddie Mac and Fannie Mae are backed by those respective agencies, which are operating under the conservatorship of FHFA, and 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.  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. As a result of the passing of the shareholder vote on 21 December 2009 to commence a programme of realisation of the Company's investments, the investments in MBSs have been transferred in the balance sheet from "non current assets" to "current assets."

Realised and Unrealised Gains and Losses on Investments

As at 31 December 2009 and 31 December 2008, 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.

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 to be announced 'TBA" securities. TBA Securities are mortgage-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.

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 accretion and amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of the 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 repurchase agreements with qualified third party financial institutions to finance its investment in mortgage-backed securities.  The agreements are secured by the value 105% (30 September 2009: 105%) of the repo principal 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 repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance.  When the Company enters into a 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 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 associated with 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.

The Company voluntarily discontinued hedge accounting in the fourth quarter of 2008 through a combination of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges.  In respect of the de-designation of cash flow hedges, IAS 39 requires that 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.  Changes in the fair value of the interest rate swaps subsequent to 30 September 2008 are reflected in the Company's income statement.

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 (estimated US$969).  Guernsey's corporate tax regime is currently under review.

Business and Geographical Segments

The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities, issued by companies operating and generating revenue in the United States.  In addition no separate segmental reporting to Directors is carried out and therefore no segmental reporting is provided.

3.   Available for Sale Investments

As a result of the shareholder vote on 21 December 2009, the investments were transferred from "Non current assets" to "Current assets".

At 31 December 2009	Amortised Cost	Gross Unrealised Gain	Gross Unrealised Loss	Estimated Fair Value
	US $'000	US $'000	US $'000	US $'000
Adjustable rate	468,254	10,201	(152)	478,303
Floating rate	143,907	-	(3,217)	140,690
Fixed rate	948,311	33,245	(60)	981,496
Total	1,560,472	43,446	(3,429)	1,600,489

As at 31 December 2009, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry an "AAA" or implied "AAA" rating.  During the quarter ended 31 December 2009, the Company did not have any securities that it deemed to be 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 fair 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. On September 7, 2008, the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to US$100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.

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 and floating 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.

The increase in value of these securities is primarily due to market sentiment and the purchase of MBS securities by the US government. All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating. The investments are not considered impaired because the Company currently has the ability to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.

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 were designated as cash flow hedges up until 1 October 2008 against the benchmark interest rate risk associated with the Company's borrowings.   From 1 October 2008 the swaps are no longer designated as cashflow hedges.

The amortisation taken into income is the present value of the cash flows for each swap calculated monthly.  The amortisation adjustment is applied quarterly and taken into income and reduces the Cash flow hedge reserve balance in the equity section.

As a result of the vote to wind up the company being passed on 21 December 2009, interest rate swaps with a total carrying value of US$5.3m loss failed the hedge effectiveness test and the cumulative loss was released from equity to profit and loss for the period ended 31 December 2009.

As of 31 December 2009, the total carrying value of interest rate swaps is $22.5 million loss. At 31 December 2009, the Company had interest rate swap agreements of US$534 million notional (30 September 2009 US$560 million notional) amount in which the Company will pay a weighted average rate of 4.73% notional (30 September 2009 average rate of 4.76% notional) and have a weighted average receive rate of 0.23% (30 September 2009 average receive rate of 0.25%).

The fair value of the swaps entered into at 31 December 2009 is estimated at US$22,538,936 loss (30 September 2009: US$27,792,895 loss). 

5.   Repurchase Agreements

At 31 December 2009 the aggregate value of securities pledged by the Company under repurchase agreements exceeds the liability under such agreements by approximately US$68.5 million approximately 5.03% of such liability (30 September 2009: US$89.6 million, approximately 5.42% of such liability).  The interest rates on the repurchase agreements at 31 December 2009 range from 0.06% to 4.57% (30 September 2009: 0.2% to 4.57%) and have maturity dates ranging from 1 day to 105 days.

The Company has entered into repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date.  These repurchase agreements totalled US$300 million. (30 September 2009: US$300 million)

6.   Net Asset Value

The net asset value per Ordinary Share is based on net assets at 31 December 2009 and on 30,982,050 (30 September 2009: 30,982,050) Ordinary Shares, being the number of Ordinary Shares in issue at the period end.

At 31 December 2009, the reported net asset value per Ordinary Share (before including the effect of the dividend declared for the quarter ended 31 December 2009) is US$8.33 (30 September 2009: US8.19).

At 31 December 2009, the Company had a net asset value per Ordinary Share of US$8.29 (30 September 2009: US$7.91), after including the effect of the dividend declared for the quarter ended 31 December 2009 of US$1,239,282 (30 September 2009: US$8,674,974). 

 

7.   Winding down of Activities

On 21 December 2009, an Extraordinary General Meeting was held and the shareholders passed all the resolutions proposed and recommended by the Board in the shareholder circular dated 23 November 2009.   The Circular recommended that the fund begin the winding down of the activities of the Company.   The table below reflects various known expenses relating to the winding down of the Company. The amounts in section 7 are estimates, the numbers are subject to change as the wind down continues.

Vendor	Amount	Description
Liquidation Agent	20,000	Liquidation Fees
Ogier Group L.P.	19,440	Legal
Dechert, LLP	32,400	Legal
Citi Group	6,292,330	Payoff structured repo
	6,364,170

 

END

 

 

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