Preliminary Results
Prodesse Investment Limited
13 February 2007
Prodesse Investment Limited
Results for the Quarter Ended 31 December 2006
Highlights for fourth quarter 2006:
• Core net income1 per average share of US$0.14
• Dividend per share of US$0.13 from net interest income - equates to an
annualised dividend yield of 5.66%2 (FTSE All Share annualised dividend
yield of 2.86%3)
• Net income per average share of US$0.19
• NAV per share of US$8.08 (30 September 2006: US$8.05)
• Portfolio remains 100% implied 'AAA' mortgage-backed securities.
1 Core net income is defined as net income excluding realised and unrealised
gains and losses on securities.
2 Based on annualisation of Q4 dividend, an exchange rate of 1.9569 US$ per
Pound Sterling and a closing price of 469.8p on 29 December 2006
3 Based on closing share prices of the constituents of the FTSE All Share index
on 29 December 2006 (JCF Datastream).
Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,
commented: 'Relative market stability was the dominant driver of Prodesse's
financial performance in the fourth quarter, and a welcome change from the
investment landscape of prior quarters. During the Federal Reserve's tightening
campaign, our cost of funds continued to rise and the market values of our
short-duration assets came under pressure. Since the Federal Reserve paused its
tightening campaign, the investment strategy of Prodesse has performed as
expected: our cost of funds leveled out, net interest rate spread expanded and
asset values stabilized. As a result, Prodesse was able to increase its dividend
for the second quarter in a row. With the change in the market environment and
the Company's positive performance, we have also been gratified to see an
increase in investor interest in our strategy. It is our belief that performance
through current market conditions will serve to justify that interest.'
Financial Highlights
Q4 2006 Q3 2006 Q2 2006 Q1 2006 Q4 2005
US$
Dividend per share 0.13 0.12 0.10 0.12 0.10
Core net income per average share 0.14 0.12 0.10 0.12 0.10
Net income/(loss) per average share 0.19 0.25 (1.38) 0.12 (0.68)
Net income/(loss) 4.9m 6.4m (37.6m) 3.2m (18.8m)
Net asset value per share 8.08 8.05 7.52 8.03 8.36
GBP Sterling4
Dividend per share 7p 6p 5p 7p 6p
Core net income per average share 7p 6p 5p 7p 6p
Net income/(loss) per average share 10p 13p (74p) 7p (40p)
Net income/(loss) £2.5m £3.4m (£20.4m) £1.8m (£10.9m)
Net asset value per share 412.9p 430.1p 407.2p 461.8p 486.4p
4 Illustration is based upon an exchange rate of 1.9569, 1.8718, 1.8469, 1.7390
and 1.7187 US$ per Pound Sterling at 31 December 2006, 30 September 2006, 30
June 2006, 31 March 2006 and 31 December 2005 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.
This release does not constitute the preliminary announcement of annual audited
accounts in accordance with LSE listing rules.
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 an analyst presentation on the results at 10:00 am on 13 February
2006 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London WC2A
1PB. Those analysts wishing to attend, or to register are asked to contact Nick
Henderson at Financial Dynamics on +44 (0) 207 269 7114 or at
nick.henderson@fd.com.
The presentation will also be accessible via a conference call for those unable
to attend in person. To listen in please call +44 (0) 1452 562 717.
A web cast of the presentation will be available following the meeting at
www.prodesse.co.uk.
Company performance
For the quarter ended 31 December 2006, Prodesse reported net income of US$4.9
million (quarter ended 30 September 2006: US$6.4million) or US$0.19 per average
share (quarter ended 30 September 2006: US$0.25 per average share).
Prodesse reported core net income, defined as net income excluding realised and
unrealised gains and losses on securities, of US$3.6 million for the quarter
ended 31 December 2006 (quarter ended 30 September 2006: US$3.0 million) or
US$0.14 per average share (quarter ended 30 September 2006: US$0.12 per average
share). Core net income for the quarter was reduced by US$284 thousand or
US$0.01 per average share due to additional legal and other expenses related to
the Extraordinary General Meeting. During the quarter the Company sold US$156.9
million face amount of securities, resulting in a realised gain of approximately
US$1.3 million or US$0.05 per average share.
The Company delivered an annualised core return on average equity for the
quarter ended 31 December 2006 of 6.90% (quarter ended 30 September 2006:
6.07%). For the quarter ended 31 December 2006, the annualised total return on
average equity (RoAE) was 9.39% (quarter ended 30 September 2006: 12.77%).
01 October 2006 to 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 to
31 December 2006 30 September to 30 June to 31 March 2006 31 December 2005
2006 2006
Core net income US$3.6 million US$3.0 million US$2.7 US$3.2 million US$2.9 million
million
Core net income per
average share US$0.14 US$0.12 US$0.10 US$0.12 US$0.10
Annualised core RoAE 6.90% 6.07% 5.10% 5.64% 4.69%
Reported net income/ US$4.9 million US$6.4 million (US$37.6 US$3.2 million (US$18.8 million)
(loss) million)
Net income/(loss) per
average share US$0.19 US$0.25 (US$1.38) US$0.12 (US$0.68)
Annualised RoAE 9.39% 12.77% (71.80%) 5.64% (30.65)%
Portfolio Performance
For the quarter ended 31 December 2006, 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 5.95%
(quarter ended 30 September 2006: 5.66%) and the annualised cost of funds on the
average repurchase balance was 5.30% (quarter ended 30 September 2006: 5.31%)
which equates to an interest rate spread of 0.65% (quarter ended 30 September
2006: 0.35%). At 31 December 2006, the annualised yield on assets was 5.81% and
the annualised cost of funds on the repurchase balances was 5.18%, which equates
to an interest rate spread of 0.63%.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 14% for the quarter ended 31 December 2006
(quarter ended 30 September 2006: 13%). 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 2006 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005
to 31 December 30 September to 30 June to 31 March 2006 to
2006 2006 2006 31 December 2005
Annualised yield on
average assets 5.95% 5.66% 5.24% 4.89% 4.49%
Annualised cost of funds
on average repurchase
balance 5.30% 5.31% 4.99% 4.58% 4.12%
Interest rate spread 0.65% 0.35% 0.25% 0.31% 0.37%
CPR 14% 13% 15% 18% 20%
As at 31 December 2006, all of the assets in the Company's portfolio were Fannie
Mae and Freddie Mac mortgage-backed securities, which carry an implied 'AAA'
rating.
31 December 2006 30 September 2006 30 June 31 March 2006 31 December 2005
2006
Fixed-rate mortgage-backed 62% 63% 67% 61% 38%
securities
Adjustable-rate mortgage-backed 11% 8% 9% 25% 43%
securities
Floating-rate mortgage-backed 27% 29% 24% 14% 19%
securities
Borrowings
The ratio of average daily repurchase agreements to equity resulted in leverage
of the Company of 9.3:1 during quarter ended 31 December 2006 (quarter ended 30
September 2006: 8.9:1). The leverage at 31 December 2006 was 9.0:1 (30 September
2006: 8.5:1).
01 October 2006 to 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 to
31 December 2006 30 September 2006 to 30 June to 31 March 2006 31 December 2005
2006
Average leverage for 9.3:1 8.9:1 9.7:1 8.5:1 9.3:1
period
Leverage at period 9.0:1 8.5:1 8.7:1 8.9:1 4.4:1
end
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 will
pay an average rate of 5.22% and receive 1 month LIBOR on a monthly basis. As
of 30 September 2006, the Company had entered into interest rate swap agreements
totalling US$603 million in notional amount in which the Company would pay an
average rate of 5.23% and receive 1 month LIBOR on a monthly basis.
31 December 2006 30 September 2006 30 June 2006 31 March 2006 31 December 2005
Notional amount US$597 million US$603 million US$714 million US$554 million US$65 million
Average pay rate 5.22% 5.23% 5.16% 4.82% 4.79%
Average receive 5.35% 5.33% 5.22% 4.75% 4.45%
rate
Capital
At 31 December 2006, the Company had a net asset value per share of US$8.08 (30
September 2006: US$8.05), after deducting the current dividends declared for the
quarter of US$3,331,322 (for the quarter 30 September 2006: US$3,075,066),
reported net asset value per share is US$7.95 (30 September 2006: US$7.93).
01 October 2006 to 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005
31 December 2006 30 September to 30 June to 31 March 2006 to
2006 2006 31 December 2005
NAV per share US$8.08 US$8.05 US$7.52 US$8.03 US$8.36
Dividends declared for US$3,331,322 US$3,075,066 US$2,602,555 US$3,330,066 US$2,775,055
the period
NAV per share after
deducting dividends
declared US$7.95 US$7.93 US$7.42 US$7.91 US$8.26
Dividend
The Company has declared a dividend for the quarter ended 31 December 2006 of
US$0.13 per share payable on 8 March 2007 to holders on the register on 23
February 2007. 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 October 2006 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005
to 31 December to 30 June to 31 March 2006 to 31 December
2006 30 September 2006 2006 2005
Core net income per
average share US$0.14 US$0.12 US$0.10 US$0.12 US$0.10
Net income/(loss) per
average share US$0.19 US$0.25 (US$1.38) US$0.12 (US$0.68)
Dividends per share US$0.13 US$0.12 US$0.10 US$0.12 US$0.10
Outlook
'Based on recent data, the economic outlook in the US is mixed,' said Wellington
Denahan-Norris, Chief Investment Officer for Prodesse's Investment Manager,
FIDAC. 'Thus, the Federal Reserve continues to signal that monetary policy will
stay on hold until it sees more evidence of a change in the balance of growth
and inflation. Our strategy of including fixed-rate, adjustable-rate and
floating-rate assets, which after taking into account the effect of our
interest-rate swap position, is 33%, 11% and 56% respectively, is designed to
prepare the portfolio to perform in a range of possible future outcomes. Even
though we continue to operate in an inverted US Treasury yield curve, we are
still able to find attractive opportunities for investment in US Agency
mortgage-backed securities.'
Prodesse Investment Limited
Balance Sheet
31-Dec-05
31-Dec-06 30-Sep-06 30-Jun-06 31-Mar-06 (Audited)
US$ US$ US$ US$ US$
ASSETS
Current assets
Available for sale investments 2,073,602,089 2,016,901,365 1,946,995,591 2,190,680,570 1,405,412,720
Accrued income receivable 8,773,585 8,001,243 9,055,816 9,853,640 6,228,846
Receivable for principal paydowns 3,209,521 4,158,154 5,028,662 7,947,156 10,195,316
Receivable for securities sold - 68,692,786 70,277,068 - -
Hedging instrument - - 10,245,969 8,971,875 -
Cash and cash equivalents 35,150 749,962 4,409 16,039 5,059
Prepaid expenses 27,019 173,565 122,099 28,011 34,904
Total assets 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291 1,421,876,845
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
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
and 31 December 2005 at US$ 0.01 256,255 256,255 260,255 277,506 277,506
Capital redemption reserve 29,845 29,845 25,845 8,594 8,594
Share premium 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000
Distributable reserve 198,680,545 198,680,545 201,412,622 214,300,104 214,300,104
Accumulated profits 3,719,637 3,228,548 2,741,945 3,404,481 2,972,952
Capital Reserve-Realised (loss)/gain and
impairment on available for sale (57,230,504) (58,519,908) (61,890,519) (21,651,450) (21,651,450)
investments
Revaluation reserve 14,082,163 15,713,694 (7,017,861) (32,478,359) (13,940,391)
Cash flow hedge reserve (2,444,846) (3,124,375) 10,245,970 8,971,875 (19,500)
Total shareholders' equity 207,093,095 206,264,604 195,778,257 222,832,751 231,947,815
Current liabilities
Securities purchased payable 15,406,579 124,033,750 134,680,584 - 163,391,316
Repurchase agreements 1,853,757,000 1,759,089,000 1,706,674,000 1,983,618,000 1,022,067,000
Accrued interest expense 5,563,044 4,809,009 3,220,249 9,633,997 3,509,041
Accrued expenses payable 1,382,800 1,356,337 1,376,524 1,412,543 942,173
Hedging instrument 2,444,846 3,124,375 - - 19,500
Total liabilities 1,878,554,269 1,892,412,471 1,845,951,357 1,994,664,540 1,189,929,030
Total equity and liabilities 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291 1,421,876,845
Net Assets 207,093,095 206,264,604 195,778,257 222,832,751 231,947,815
Net Asset Value per share 8.08 8.05 7.52 8.03 8.36
Prodesse Investment Limited
(unaudited) Income Statement
01 October 2006 01 July 2006 to 01 April 01 January 01 October 2005
to 31 December 30 September 2006 to 30 2006 to 31 to 31 December
2006 2006 June 2006 March 2006 2005
US$ US$ US$ US$ US$
Income
Interest income 31,075,784 28,199,546 29,233,473 26,589,796 27,307,521
Interest expense (25,733,535) (23,701,645) (25,152,907) (21,906,790) (23,306,345)
Net interest income 5,342,249 4,497,901 4,080,566 4,683,006 4,001,176
Realised gain/(loss) on sale of
available 1,289,404 3,370,611 (14,547,469) - (21,656,763)
for sale investments and interest
rate swaps
Loss from impairment - - (25,691,600) - -
Total income/(loss) 6,631,653 7,868,512 (36,158,503) 4,683,006 (17,655,587)
Expenses
Management, custodian and
administration fees 1,277,915 1,246,004 1,210,709 1,279,335 942,468
Other operating expenses 501,569 202,739 202,393 197,087 185,913
Total expenses 1,779,484 1,448,743 1,413,102 1,476,422 1,128,381
Net income/(loss) for the period 4,852,169 6,419,769 (37,571,605) 3,206,584 (18,783,968)
Net income/(loss) per average share
for the period 0.19 0.25 (1.38) 0.12 (0.68)
Dividend declared per share for the
period 0.13 0.12 0.10 0.12 0.10
Average shares outstanding 25,625,550 25,799,463 27,281,594 27,750,550 28,180,275
Prodesse Investment Limited
(unaudited) Cash Flow Statement
01 October 2006 01 July 2006 to 01 April 2006 to 01 January 2006 01 October 2005
to 31 December 30 September 30 June 2006 to 31 March 2006 to 31 December
2006 2006 2005
US$ US$ US$ US$ US$
Net cash inflows from operating
activities (Note 1) 2,356,864 6,040,184 16,205,851 2,786,035 11,012,705
Financing
Offering Cost - - - - -
Own shares acquired - (2,732,076) (12,887,481) - (5,873,559)
Dividends paid (3,071,676) (2,562,555) (3,330,000) (2,775,055) (5,146,209)
Net cash (outflow) from financing (3,071,676) (5,294,631) (16,217,481) (2,775,055) (11,019,768)
Increase/(decrease) in cash and (714,812) 745,553 (11,630) 10,980 (7,063)
cash equivalents
Cash and cash equivalents, at 749,962 4,409 16,039 5,059 12,122
beginning of period
Cash and cash equivalents, at end 35,150 749,962 4,409 16,039 5,059
of period
Note 1
Net income/(loss) for the period 4,852,169 6,419,769 (37,571,605) 3,206,584 (18,783,968)
Net accretion/amortisation of
premiums on available for sale
investments (214,870) 143,076 1,005,200 1,210,901 3,123,879
Realised (gain)/loss on sale of
available for sale investments (2,507,548) (2,017,445) 14,547,469 - 21,656,763
Realised gain in interest rate - (135,022) - - -
hedge
Loss from impairment - - 25,691,600 - -
Purchases of investments (432,026,305) (708,062,580) (349,722,450) (1,082,468,323) (55,678,354)
Proceeds from sale of investments 228,069,925 563,718,426 530,854,272 - 1,253,691,106
Proceeds from sale of interest - 135,022 - - -
rate swaps
Principal paydowns 109,422,437 91,071,528 113,805,308 116,471,761 218,359,667
Borrowings under reverse 5,947,866,000 5,770,442,800 6,685,967,000 5,763,648,000 6,231,988,000
repurchase agreements
Repayments under reverse (5,853,198,000) (5,718,027,800) (6,962,911,000) (4,802,097,000) (7,646,290,000)
repurchase agreements
Receivables
Decrease/(Increase) in accrued (833,988) 835,303 1,083,913 (3,788,108) 5,554,800
income receivable
(Increase)/decrease in prepaid 146,545 (51,465) (94,089) 6,894 31,894
expenses
Liabilities
Increase/(Decrease) in accrued 754,035 1,588,759 (6,413,748) 6,124,956 (2,042,728)
interest expense
(Decrease)/Increase in accrued 26,464 (20,187) (36,019) 470,370 (598,354)
expenses payable
Net cash inflow from operating 2,356,864 6,040,184 16,205,851 2,786,035 11,012,705
activities
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 January 2006 to 31 December 2006
Share Capital Share premium Distributable Capital Reserve
capital redemption reserve - realised gain/
reserve (loss) on sales
and impairment
of available for
sale investments
US$ US$ US$ US$ US$
Balance at 31 December 2005 277,506 8,594 50,000,000 214,300,104 (21,651,450)
Net income for the quarter - - - - -
Available for sale investments:
Movement in unrealised gain/(loss) - - - - -
on revaluation taken to equity
Cash flow hedge reserve - - - - -
Dividends paid - - - - -
Balance at 31 March 2006 277,506 8,594 50,000,000 214,300,104 (21,651,450)
Net loss for the quarter - - - - -
Available for sale investments:
Transfer of impairment loss to - - - - (25,691,600)
capital reserve
Transfer of realised loss to capital - - - - (14,547,469)
reserve
Movement in unrealised loss on - - - - -
revaluation taken to equity
Cash flow hedge reserve - - - - -
Buyback of shares (17,251) 17,251 - (12,887,482) -
Dividends paid - - - - -
Balance at 30 June 2006 260,255 25,845 50,000,000 201,412,622 (61,890,519)
Net income for the quarter - - - - -
Available for sale investments:
Transfer of realised gain to capital - - - - 3,370,611
reserve
Movement in unrealised loss on - - - - -
revaluation taken to equity
Cash flow hedge reserve - - - - -
Buyback of shares (4,000) 4,000 - (2,732,077) -
Dividends paid - - - - -
Balance at 30 September 2006 256,255 29,845 50,000,000 198,680,545 (58,519,908)
Net income for the quarter - - - - -
Available for sale investments:
Transfer of realised gain to capital - - - - 1,289,404
reserve
Movement in unrealised loss on - - - - -
revaluation taken to equity
Cash flow hedge reserve - - - - -
Dividends paid - - - - -
Balance at 31 December 2006 256,255 29,845 50,000,000 198,680,545 (57,230,504)
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 January 2006 to 31 December 2006 cont.
Revaluation Accumulated Cash flow Total
reserve profits hedge
reserve
US$ US$ US$ US$
Balance at 31 December 2005 (13,940,391) 2,972,952 (19,500) 231,947,815
Net income for the quarter - 3,206,584 - 3,206,584
Available for sale investments:
Movement in unrealised gain/(loss) (18,537,968) - - (18,537,968)
on revaluation taken to equity
Cash flow hedge reserve - - 8,991,375 8,991,375
Dividends paid - (2,775,055) - (2,775,055)
Balance at 31 March 2006 (32,478,359) 3,404,481 8,971,875 222,832,751
Net loss for the quarter - (37,571,605) - (37,571,605)
Available for sale investments:
Transfer of impairment loss to - 25,691,600 - -
capital reserve
Transfer of realised loss to - 14,547,469 - -
capital reserve
Movement in unrealised loss on 25,460,498 - - 25,460,498
revaluation taken to equity
Cash flow hedge reserve - - 1,274,095 1,274,095
Buyback of shares - - - (12,887,482)
Dividends paid - (3,330,000) - (3,330,000)
Balance at 30 June 2006 (7,017,861) 2,741,945 10,245,970 195,778,257
Net income for the quarter - 6,419,769 - 6,419,769
Available for sale investments:
Transfer of realised gain to - (3,370,611) - -
capital reserve
Movement in unrealised loss on 22,731,555 - - 22,731,555
revaluation taken to equity
Cash flow hedge reserve - - (13,370,345) (13,370,345)
Buyback of shares - - - (2,732,077)
Dividends paid - (2,562,555) - (2,562,555)
Balance at 30 September 2006 15,713,694 3,228,548 (3,124,375) 206,264,604
Net income for the quarter - 4,852,169 - 4,852,169
Available for sale investments:
Transfer of realised gain to - (1,289,404) - -
capital reserve
Movement in unrealised loss on (1,631,531) - - (1,631,531)
revaluation taken to equity
Cash flow hedge reserve - - 679,529 679,529
Dividends paid - (3,071,676) - (3,071,676)
Balance at 31 December 2006 14,082,163 3,719,637 (2,444,846) 207,093,095
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.
At the date of authorisation of these financial statements, the following
Standard, which has not been applied in these financial statements, was in issue
but not yet effective:
IFRS 7 Financial Instruments: Disclosures; and the related amendment to
IAS 1 on capital disclosures
The directors anticipate that the adoption of the above Standard in future years
will not have a material impact on the financial statements of the Company
except for additional disclosures on capital and financial instruments when the
Standard comes into force for the period commencing 1 January 2007.
IFRS 8 Operating Segments
The directors anticipate that the adoption of the above Standard in future years
will not have a material impact on the financial statements of the Company when
the Standard comes into force for the period commencing 1 January 2009.
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 year ended 31 December 2006.
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 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. Available for Sale Investments
Gross Unrealised Gross Estimated
At 31 December 2006 Amortised Cost Gain Unrealised Loss Fair Value
US$ US$ US$ US$
Adjustable rate 775,936,369 2,943,851 (400,787) 778,479,433
Fixed rate 1,283,583,558 12,995,264 (1,456,166) 1,295,122,656
Total 2,059,519,927 15,939,115 (1,856,953) 2,073,602,089
As at 31 December 2006, 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 December 2006, 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 Instrument
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 December 2006, the Company had interest rate swap agreements of US$597
million notional amount in which the Company will pay a weighted average rate of
5.22% and have a weighted average receive rate of 5.35%.
5. Reverse Repurchase Agreements
At 31 December 2006 the aggregate value of securities pledged by the Company
under reverse repurchase agreements exceeds the liability under such agreements
by approximately US$55.6 million (approximately 3% of such liability). The
interest rates on the reverse repurchase agreements at 31 December 2006 range
from 4.56% to 5.39% and have maturity dates ranging from 3 days to 289 days.
6. Net Asset Value
The net asset value per Ordinary Share is based on net assets at 31 December
2006 and on 25,625,550 Ordinary Shares, being the number of Ordinary Shares in
issue at the period end.
At 31 December 2006, the reported net asset value per Ordinary Share (before
excluding the dividend declared for the quarter ended 31 December 2006) is
US$8.08.
At 31 December 2006, the Company had a net asset value per Ordinary Share of
US$7.95, after including the effect of the dividend declared for the quarter
ended 31 December 2006 of US$3,331,322.
This information is provided by RNS
The company news service from the London Stock Exchange