NAV & Second Quarter Earnings
Prodesse Investment Limited
03 November 2005
Prodesse Investment Limited
3 November 2005
Prodesse Investment Limited
Results for the 3 month period to 30 September 2005
'We are happy to see the barbell approach to our portfolio of fixed-, floating-
and adjustable-rate mortgage-backed securities is continuing to produce
significant shareholder value for Prodesse investors even in the current
challenging interest rate environment.'
- Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to
Prodesse
Financial Highlights:
• Q3 Net income of US$5.1 million or US$0.18 per share
• Q3 dividend of US$0.18 per share
• Net Asset Value per share of US$9.03. After excluding effects of current
quarter revenue items Net Asset Value per share is US$8.85
• Annualized return on average equity of 7.72%
• Average reverse repos:equity leverage of 8.9:1
• Portfolio composition as at 30 September 2005:
• 32% Fixed-rate mortgage-backed securities
• 61% Adjustable-rate mortgage-backed securities
• 7% LIBOR floating-rate collateralized mortgage obligations
• Portfolio securities ratings as at 30 September 2005:
• 100% implied AAA
• Continual gradual portfolio repositioning to new interest rate
environment
• Reviewing further shareholder value enhancements including, but not
limited to, a share repurchase of up to 14.99%
Note: Net income and yields stated above do not include net unrealised losses on
investments. Net unrealised losses are reflected in the equity in accordance
with the accounting policies.
Commenting on the results, Michael A.J. Farrell, said:
'This quarter has been a demanding one for all companies exposed to the US
financial markets, as the Federal Reserve has continued to raise short term
interest rates while long term rates have remained largely unchanged. Despite
the flattening yield curve, Prodesse has managed to deliver on its objectives
since its IPO in April 2005. As the portfolio is rebalanced into new interest
rate environments, we expect our barbell approach to produce significant returns
for Prodesse shareholders.'
Enquiries
Sara Radford / Paul Smith, RBSI Fund Services (Guernsey) Limited
Tel: 01481 740820
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
FIDAC, the Investment Manager of the Company, will host an earnings conference
call on Friday, 4 November 2005 at 2:30 P.M. London time (9:30 A.M. New York
time). All interested parties are welcome to participate on the live call. You
can access the conference call by dialing +1-732-694-1588 (from outside of the
U.S.) or +1-866-200-5830 (from within the U.S.) using the access code 599531.
For those who are not available to listen to the live call, a replay will be
available until 5:00 P.M. London time (12:200 noon New York time) on Tuesday, 8
November 2005 by dialing +1-732-694-1571 (from outside of the U.S.) or +1-866-
206-0173 (from within the U.S.); please reference access code 159950.
Company performance
Prodesse reported net income for the quarter ended 30 September 2005 of US$5.1
million (period ended 30 June 2005 : US$5.8 million) or US$0.18 net income per
share (period ended 30 June 2005 : US$0.21). Net income and yields stated in
this press release do not include net unrealised losses on investments. Net
unrealised losses are reflected in the equity in accordance with the accounting
policies.
The Company delivered an annualized return on average equity (RoAE) of 7.72% for
the quarter ended 30 September 2005 (period ended 30 June 2005 : 9.67%).
01 July 2005 to 08 April 2005 to
30 September 2005 30 June 2005
Reported Net Income US$5.1 million US$5.8 million
Net Income per share US$0.18 US$0.21
Annualised RoAE 7.72% 9.67%
The Company commenced operations on 8 April 2005 and for the period from
commencement of operations through 30 September 2005, the annualized return on
average equity was 8.71%.
Portfolio Performance
For the quarter ended 30 September 2005, the annualized yield on average earning
assets was 4.23% (period ended 30 June 2005 : 4.01%) and the annualized cost of
funds on the average repurchase balance was 3.57% (period ended 30 June 2005 :
2.67%), which equates to an interest rate spread of 66 basis points (period
ended 30 June 2005 : 134 basis points). This is a 68 basis point decrease over
the interest rate spread for the period ended 30 June 2005.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 23% for the quarter ended 30 September 2005
(period ended 30 June 2005 : 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. In general, as
prepayment speeds on the Company's mortgage-backed securities portfolio
increase, related purchase premium amortization increases, thereby reducing the
net yield on such assets.
01 July 2005 to 08 April 2005 to
30 September 30 June 2005
2005
Annualised yield on Average Earning Assets 4.23% 4.01%
Annualised Cost of Funds on Average
Repurchase Balance 3.57% 2.67%
Interest Rate Spread (basis points) 66bp 134bp
CPR 23% 20%
As at 30 September 2005, all of the assets in the Company's portfolio were
Fannie Mae and Freddie Mac mortgage-backed securities, which carry an implied
'AAA' rating.
30 September 2005 At 30 June 2005
Fixed-rate mortgage-backed securities 32% 33%
Adjustable-rate mortgage backed
securities 61% 59%
LIBOR floating-rate collateralized
mortgage obligations 7% 8%
Borrowings
The average daily reverse repos:equity leverage of the Company was 8.9:1 during
the quarter ended 30 September 2005 (for the period ended 30 June 2005 : 5.8:1).
The leverage at 30 September 2005 was 9.4:1 (30 June 2005 : 8.1:1).
30 September 2005 30 June 2005
Average for Period 8.9:1 5.8:1
At Period End 9.4:1 8.1:1
Capital
At 30 September 2005, the Company had a net asset value per share of US$9.03 (30
June 2005 : US$9.56). After excluding the effect of current period revenue items
(net income for the quarter of US$5,130,653) (for the period 30 June 2005 :
US$5,843,027) the reported net asset value per share is US$8.85 (30 June 2005
US$9.36).
For or at the For or at the
period ended period ended
01 July 2005 to 08 April 2005 to
30 September 2005 30 June 2005
NAV US$9.03 US$9.56
Net income for the period US$5,130,653 US$5,843,027
NAV ex. current period net income US$8.85 US$9.36
Dividend
As previously announced, dividends declared for the quarter ended 30 September
2005 were US$0.18 per share payable on 2 December 2005 to holders on the
register on 4 November 2005. Dividends are calculated and paid in US dollars.
Shareholders resident in the UK wishing for the conversion of dividend payments
into sterling should contact the Company's administrator.
01 July 2005 to 08 April 2005 to
30 September 2005 30 June 2005
Net Income per share US$0.18 US$0.21
Dividend per share US$0.18 US$0.20
Review to Improve Shareholder Returns
The Company's investment strategy 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 to finance their acquisition.
In addition to overseeing the Company's investment activities, the Board of
Directors is currently reviewing additional options to further enhance
Shareholder Returns, which includes but is not limited to, the purchase of
Company shares. The Company currently has authority to undertake a share
purchase of up to 14.99% of the share capital of the Company and the Board of
Directors has approved the use of on-market purchases of ordinary shares for
cancellation at appropriate prices which will enhance Net Asset Value.
Outlook
'We believe that the true performance of Prodesse's investment strategy will be
recognized by the Company's investors from the dividend yield they receive over
the long term,' said Wellington Denahan-Norris, chief investment officer for
Prodesse's Investment Manager, FIDAC.
'We continue to employ all of the portfolio management tools available to us in
order to maximize long-term financial performance and deliver shareholder value.
In this phase of the interest rate cycle, our investment team is working to
position the Company's portfolio for not only current market conditions, but for
expected market conditions as well.'
This press release includes statements that are, or may be deemed to be,
''forward-looking statements''. These forward-looking statements can generally
be identified by the use of forward-looking terminology, including the terms
''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'',
''will'' or ''should'' or, in each case, their negative or other variations or
comparable terminology. These forward-looking statements include all matters
that are not historical facts. All forward-looking statements address matters
that involve risks and uncertainties, are only predictions, and you should not
rely unduly on them. Accordingly, there are or will be important factors that
could cause the Company's actual results to differ materially from those
indicated in these statements. These factors include but are not limited to
those described in the Company's prospectus under the heading ''Special
Considerations and Risk Factors''. Any forward-looking statements in this press
release reflect the Company's current views with respect to future events and
are subject to these and other risks, uncertainties and assumptions relating to
the Company's operations, results of operations, growth strategy and liquidity.
These forward-looking statements speak only as of the date of this press
release. Subject to any obligations under the Listing Rules, the Company
undertakes no obligation publicly to update or review any forward-looking
statement, whether as a result of new information, future developments or
otherwise. All subsequent written and oral forward-looking statements
attributable to the Company or FIDAC or individuals acting on behalf of the
Company or FIDAC are expressly qualified in their entirety by this paragraph.
Prospective investors should specifically consider the factors identified above
which could cause actual results to differ before making any investment
decision.
Prodesse Investment
Limited
Balance Sheet
(unaudited) at 30 September 2005 and
30 June 2005
30-Sep-05 30-Jun-05
---------------------------------------------------------------------------------------
US$ US$
ASSETS
Current assets
Available for
sale
investments 2,688,176,717 2,627,255,210
Receivables
Accrued income
receivable 11,644,460 10,559,381
Receivable for
principal
paydowns 13,448,335 25,092,795 8,327,274 18,886,655
------------- -------------
Cash and cash
equivalents 12,122 5,999
Prepaid
expenses 66,798 98,256
--------------- ---------------
Total assets 2,713,348,432 2,646,246,120
--------------- ---------------
EQUITY AND
LIABILITIES
Capital and
reserves
Share capital:
28,610,000 @
USD 0.01 286,100 286,100
Share premium 50,000,000 50,000,000
Distributable
reserve 220,173,663 220,299,299
Accumulated
profits 5,246,367 5,843,027
Capital
Reserve-Realis
ed gain on
available for
sale
investments 5,313 -
Revaluation
reserve (17,384,448) (2,843,493)
------------- -------------
Total
shareholders'
equity 258,326,995 273,584,933
--------------- ---------------
Current
liabilities
Securities
purchased
payable 11,560,141 162,120,786
Reverse repos 2,436,369,000 2,206,752,000
Accrued
interest
expense 5,551,769 2,759,461
Accrued
expenses
payable 1,540,527 1,028,940
------------- -------------
Total
liabilities 2,455,021,437 2,372,661,187
--------------- ---------------
Total equity
and --------------- ---------------
liabilities 2,713,348,432 2,646,246,120
--------------- ---------------
Net Assets 258,326,995 273,584,933
Net Asset
Value per
share 9.02926 9.56256
Prodesse Investment Limited
Summary Income Statement
(unaudited) from 01 July 2005 to 30 September 2005 and from the date of incorporation
22 February 2005 to 30 June 2005*
01 July 2005 08 April 2005
to 30 to 30
September June
2005 2005
---------------------------------------------------------------------------------------
US$ US$
Income
Interest
income 28,394,099 16,231,405
Interest
expense (21,084,466) (9,330,907)
Realised gain
on sale of
available for
sale
investments 5,313 -
------------ ------------
Total income 7,314,946 6,900,498
------------ ------------
Expenses
Management,
Custodian and
Administration
fee 2,018,214 937,308
Other
operating
expenses 166,079 120,163
------------ ------------
Total expenses 2,184,293 1,057,471
------------ ------------
------------ ------------
Net income for
the period 5,130,653 5,843,027
------------ ------------
Net income per
share for the
period 0.18 0.21
------------ ------------
* commencement of operations 08 April 2005
Prodesse Investment Limited
Statement of changes in shareholders' equity
Capital Revaluation
Reserve reserve
- Realised - Unrealised
gain (loss) gain (loss)
on available on available
Share Share Distributable for sale for sale Accumulated
capital premium reserve investments investments profits Total
US$ US$ US$ US$ US$ US$ US$
-------------------------------------------------------------------------------------------------------------
At 8 April 2005 - - - - - - -
Issuance of 286,100 285,813,900 - - - - 286,100,000
shares
Offering cost - (15,514,601) - - - - (15,514,601)
Reclassification - (220,299,299) 220,299,299 - - - -
of share premium
Profit for the - - - - - 5,843,027 5,843,027
period
Available for
sale
investments:
Unrealised loss - - - - (2,843,493) - (2,843,493)
on revaluation
taken to equity
Total recognised 286,100 50,000,000 220,299,299 - (2,843,493) 5,843,027 273,584,933
income and
expenses
At 30 June 2005 286,100 50,000,000 220,299,299 - (2,843,493) 5,843,027 273,584,933
Available for
sale
investments:
Unrealised loss - - - - (14,540,955) - (14,540,955)
on revaluation
taken to equity
Transfer of - - - 5,313 - (5,313) -
realised gains
to capital
reserve
- - - 5,313 (14,540,955) (5,313) (14,540,955)
Offering cost - (125,636) - - - - (125,636)
Transfer to - 125,636 (125,636) - - - -
share premium
account
Profit for the - - - - - 5,130,653 5,130,653
period
Total recognised - - (125,636) 5,313 (14,540,955) 5,125,340 (9,535,938)
income and
expenses
Dividend paid - - - - - (5,722,000) (5,722,000)
At 30 September 286,100 50,000,000 220,173,663 5,313 (17,384,448) 5,246,367 258,326,995
2005
Prodesse Investment Limited
Cash Flow Statement
(unaudited) from 01 July 2005 to 30 September 2005
01 July 2005 to
30 September 2005
US$
Net cash inflow from operating activities
(Note 1) 5,853,758
Financing
Offering Cost (125,635)
Dividends paid (5,722,000)
Net cash outflow from financing (5,847,635)
---------------
Increase in cash and cash equivalents 6,123
Cash and cash equivalents, at beginning
of period 5,999
---------------
Cash and cash equivalents, at end of
period 12,122
---------------
Note 1
--------
Net income 5,130,653
Net amortisation of premium 2,655,987
Realised gain on revaluation of available
for sale investments (5,313)
Purchases of investments (453,612,318)
Proceeds from sale of investment 5,666,667
Principal paydowns 214,429,874
Borrowings under reverse repurchase
agreements 7,229,892,000
Repayments under reverse repurchase
agreements (7,000,275,000)
Receivables
Accrued income receivable (1,364,146)
Prepaid expenses 31,459
Liabilities
Accrued interest expense 2,792,308
Accrued expenses payable 511,587
---------------
Net cash inflow from operating activities (Note 1) 5,853,758
---------------
Prodesse Investment Limited
Footnotes to the quarterly report ended 30 September 2005
1. Organisation and Investment Objective
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 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
The financial statements are prepared in accordance with the International
Financial Reporting Standards issued by, or adopted by, the International
Accounting Standards Board ('the IASB'), interpretations issued by the
International Financial Reporting Standards committed, applicable legal and
regulatory requirements of Guernsey Law and the Listing Rules of the UK
Listing Authority.
The preparation of financial statements in conformity with International
Financial Reporting Standards 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 following is a summary of the significant accounting
policies followed by the Company.
(a) Government Sponsored Enterprises: The Company invests in securities
issued by the Federal Home Loan Mortgage Corporation ('Freddie Mac') and
similar United States Government sponsored entities such as Federal
National Mortgage Association ('Fannie Mae') and the Federal Home Loan
Banks ('FHLB'). Freddie Mac, Fannie Mae, and FHLB, although chartered and
sponsored by Congress, are not Companies 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.
The Investment Manager uses internally generated pricing tools and matrices
that take into account such factors as duration, convexity, interest rate
levels and the experience of its portfolio managers. External information
is then compared to internally generated tools to compare pricing
reasonableness.
(b) Security Transactions and Investment Income: Security transactions are
recorded on 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. Realised gain or loss on paydowns
is reclassified from gains to income.
(c) 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 agreement are retained in the
financial statements as available for sale securities and the counter party
liability is included in liabilities under repurchase agreements.
(d) When-Issued/Delayed Delivery Securities: The Company may purchase or sell
securities on a when-issued or delayed delivery basis, including '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 unrealized loss may be incurred. The Company did
not transact in when-issued or delayed delivery securities during the
period ended September 30, 2005.
(e) 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.
(f) Cash and cash equivalents: Cash includes amounts held in interest
bearing overnight accounts.
(g) 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 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.
(h) Set up 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.
3. Investment Management, Accounting and Administration, and Custodian Fees
Fixed Income Discount Advisory Company ('FIDAC'), a Delaware corporation,
serves as the Investment Manager to the Company. Pursuant to the terms of
the Investment Management Agreement, the Investment Manager is paid
periodic fees, quarterly in arrears, at a rate equivalent to 0.2 per cent.
per annum of the value of the gross assets of the Company.
The Bank of New York serves as the Company's custodian and is paid a
monthly accounting and administration fee, exclusive of out-of-pocket
expenses. The Custodian is entitled to receive a fee at a rate equivalent
to 1 basis point per annum on the value of the gross assets of the Company
(plus transaction charges).
RBSI Fund Services (Guernsey) Limited serves as the Company's administrator.
The Administrator is entitled to a fee calculated on the value of the gross
assets of the Company of 0.04 per cent, per annum on the first $400 million
of value of gross assets, 0.0225 per cent. per annum on the next $1.6
billion of value of the gross assets and 0.01 per cent. per annum on any
value of the gross assets in excess of $2 billion payable monthly in
arrears (subject to a minimum annual fee of $250,000).
4. Risk Factors
The market price of the Ordinary Shares and the income derived from them
can fluctuate and there is no guarantee that the market price of Ordinary
Shares in the Company will reflect fully their underlying Net Asset Value.
All or substantially all of the Company's assets are denominated in US
dollars. The Company accounts for its assets and determines the value of
its Shares and of dividends thereon in US dollars. For investors resident
outside the United States or whose functional currency is not the US
dollar, fluctuations in the value of the US dollar may affect the value of
their investment. The Directors do not hedge any foreign exchange risk.
The Company is subject to risks associated with change in interest rates.
An increase in the interest payments on the Company's financings relative
to the interest earned on its mortgage-backed securities may adversely
affect profitability.
The Company enters into reverse repurchase agreements in order to increase
the amount of capital available for investment. The use of leverage has the
potential to magnify the gains or the loss on the Company's investments.
The Company may invest in, or sell short, various interest rate derivative
instruments and futures contracts. Should interest rates move unexpectedly,
the Company may not achieve the anticipated benefits of the hedging
instruments and may realise a loss. Further, the use of such derivative
instruments involves the risk of imperfect correlation in movements in the
price of the instruments, interest rates and the underlying hedged assets.
The Company may transact in various financial instruments including futures
contracts, swap contracts and options. With these financial instruments,
the Company is exposed to market risk in excess of the amounts recorded in
the statement of assets, liabilities and partners' capital. Further, the
Company is exposed to credit risk from potential counterparty
nonperformance. At the balance sheet date, credit risk is limited to
amounts recorded in the balance sheet.
5. Reverse Repurchase Agreements
At September 30, 2005 the aggregate value of securities pledged by the
Company under reverse repurchase agreements exceeds the liability under
such agreements by approximately $73,091,070 (approximately 103% of such
liability). The interest rates on the open reverse repurchase agreements at
September 30, 2005 range from 3.66% to 3.97% and have maturity dates
ranging from one day to one month.
6. Mortgage Backed Securities
Amortised Cost Gross Unrealised Gain Gross Unrealised Loss Estimated Fair Value
-------------------------------------------------------------------------------------
(dollars in thousands)
Adjustable
rate 1,844,461,670 2,475 (10,481,608) 1,833,982,537
Fixed 861,099,495 1,780 (6,907,095) 854,194,180
rate
-------------------------------------------------------------------------------------
Total 2,705,561,165 4,255 (17,388,703) 2,688,176,717
=====================================================================================
This information is provided by RNS
The company news service from the London Stock Exchange