Preliminary Results
Prodesse Investment Limited
22 March 2006
Prodesse Investment Limited
Preliminary Results for the period from 22 February 2005 to 31 December 2005
About Prodesse Investment Limited ('Prodesse' or the 'Company')
Prodesse 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.
Prodesse releases results on a quarterly basis, with the results for the quarter
to 31 December released on 1 February 2006. Please refer to that and previous
quarterly announcements for operational highlights and management commentary on
the results of the Company.
The financial information set out in this announcement does not constitute the
Company's statutory accounts for the period from 22 February 2005 to 31 December
2005.
The financial information for period from 22 February 2005 to 31 December 2005
is derived from the financial statements delivered to the UK Listing Authority
and The Channel Islands Stock Exchange. The Auditors reported on those accounts,
their report was unqualified and did not contain a statement under section 65(3)
of The Companies (Guernsey) Law, 1994.
This preliminary announcement was approved by the directors of the Company on 20
March 2006.
Income Statement
for the period from 22 February 2005 to 31 December 2005
22 February 2005* to
Note 31 December 2005
US $'000
Income
Interest income 71,933
Interest expense (53,722)
-------------
Net interest income 18,211
Realised loss on sale of available for
sale investments 4 (21,651)
--------------
Expenses
Management, custodian and administration fees (3,898)
Other operating expenses (472)
--------------
Total expenses (4,370)
--------------
--------------
Net operating loss for the period (7,810)
--------------
Loss per Ordinary Share:
Basic - Loss per Ordinary Share 3 (0.28)
Weighted Average Ordinary Shares outstanding
Basic 3 28,323,517
*Commencement of operations 08 April 2005.
All items in the above statement are derived from continuing operations.
All income is attributable to the Ordinary Shareholders of the Company.
Statement of Changes in Shareholders' Equity
for the period from 22 February 2005 to 31 December 2005*
Capital Revaluation
Reserve - reserve -
Realised Unrealised
loss on loss on Cash
Capital Distri- Accumu- available available flow
Share redemption Share butable lated for sale for sale hedge
Note capital reserve premium reserve profits investments investments reserve Total
US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000
---------------------------------------------------------------------------------------------
At 22 February - - - - - - - - -
2005*
---------------------------------------------------------------------------------------------
Available for
sale
investments:
- Unrealised
loss on
revaluation
taken to
equity 4 - - - - - - (13,940) - (13,940)
Net loss for
the period - - - - (7,810) - - - (7,810)
Transfer of
net realised
losses to
capital
reserve 8 - - - - 21,651 (21,651) - - -
Cash flow
hedge
reserve
- Loss 6 - - - - - - - (20) (20)
taken to
equity
---------------------------------------------------------------------------------------------
Total
recognised
income and
expenses for
the period - - - - 13,841 (21,651) (13,940) (20) (21,770)
Dividend paid 2 - - - - (10,868) - - - (10,868)
Issuance of
shares 8 286 285,814 286,100
Offering costs 8 - - (15,640) - - - - - (15,640)
Transfer from
share premium
account 8 - - (220,174) 220,174 - - - - -
Buyback of
shares 8 (9) 9 - (5,874) - - - - (5,874)
---------------------------------------------------------------------------------------------
At 31 December
2005 8 277 9 50,000 214,300 2,973 (21,651) (13,940) (20) 231,948
---------------------------------------------------------------------------------------------
*Commencement of operations 08 April 2005
Balance Sheet
as at 31 December 2005
Note 31 December 2005
US $'000
Non-current assets
Available for sale investments 4 1,405,413
--------------
1,405,413
--------------
Current assets
Accrued income receivable 6,229
Receivable for principal paydowns 10,195
Prepaid expenses 35
Cash and cash equivalents 5
--------------
16,464
--------------
--------------
Total assets 1,421,877
--------------
Equity attributable to equity shareholders
Ordinary share capital 8 277
Capital redemption reserve 8 9
Share premium 8 50,000
Distributable reserve 8 214,300
Accumulated income 8 2,973
Capital reserve - Realised loss on available for
sale investments 8 (21,651)
Revaluation reserve 8 (13,940)
Cash flow hedge reserve 8 (20)
--------------
Total equity 231,948
--------------
Current liabilities
Securities purchased payable 163,391
Reverse repurchase agreements 7 1,022,067
Accrued interest expense 3,509
Accrued expenses payable 942
Hedging instrument 6 20
--------------
Total liabilities 1,189,929
--------------
--------------
Total equity and liabilities 1,421,877
--------------
Net Assets 231,948
--------------
--------------
Net Asset Value per Ordinary Share 9 8.36
--------------
Cash Flow Statement
for the period from 22 February 2005 to 31 December 2005
Note 22 February 2005* to
31 December 2005
US $'000
Net cash outflow from operating
activities 10 (253,713)
--------------
Cash flows from financing activities
Dividends paid to shareholders (10,868)
Net proceeds from offering 270,459
Own shares acquired (5,873)
--------------
Net cash from financing
activities 253,718
--------------
Net increase in cash and cash
equivalents 5
Cash and cash equivalents at the beginning of the -
period
--------------
Cash and cash equivalents at
the end of the period 5
--------------
*Commencement of operations 08 April 2005.
Notes
1. Significant accounting policies
The preliminary announcement is prepared on the basis of the accounting policies
disclosed in the quarterly release for the period to 31 December 2005.
Whilst the financial information included in this preliminary announcement has
been computed in accordance with International Financial Reporting Standards
(IFRSs), this announcement does not itself contain sufficient information to
comply with IFRSs. The Company's full financial statements that comply with
IFRSs were approved by the directors on 20 March 2006.
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.
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, and therefore no segmental reporting is
provided.
2. Dividends
22 February 2005* to
31 December 2005
US $'000
Amounts recognised as distributions to equity shareholders in
the period:
First interim dividend for the year ended the 31 December 2005
of 20 cents per share 5,722
Second interim dividend for the year ended 31 December 2005 of 5,146
18 cents per share
-------------
10,868
-------------
*Commencement of operations 08 April 2005.
A third interim dividend of 10 cents per share, in respect of the final quarter
of 2005, was declared on 01 February 2006 and was paid on 23 February 2006.
3. Earnings Per Share
Basic earnings per share is calculated by dividing net profit available to
Ordinary Shareholders by the weighted average number of ordinary shares
outstanding during the period.
22 February 2005* to 31
31 December 2005
Number of shares
----------------
Weighted average number of Ordinary shares outstanding 28,323,517
----------------
*Commencement of operations 08 April 2005.
4. Available for Sale Investments
31 December 2005
US $'000
Cost at 22 February 2005 -
Purchases of investments 3,215,324
Proceeds from sale of investments (1,259,358)
Realised loss on sale of investments (21,651)
Principal paydowns (508,470)
Net amortisation of premiums (6,492)
------------
Amortised cost at 31 December 2005 1,419,353
Unrealised loss on available for sale investments (13,940)
------------
Market value at 31 December 2005 1,405,413
------------
Gross Gross
Amortised Unrealised Unrealised Estimated
At 31 December 2005 Cost Gain Loss Fair Value
US $'000 US $'000 US $'000 US $'000
Adjustable rate 882,032 3 (8,062) 873,973
Fixed rate 537,321 2 (5,883) 531,440
-------------------------------------------------------
Total 1,419,353 5 (13,945) 1,405,413
-------------------------------------------------------
As at 31 December 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.
Fixed-rate mortgage-backed securities 38%
Adjustable-rate mortgage-backed securities 43%
Floating-rate mortgage-backed securities 19%
As at 31 December 2005, investments totalling US$1.0 billion were pledged as
security in respect of reverse repurchase agreements (see note 7).
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.
5. Current Assets and Current Liabilities
The Directors consider that the carrying amount of other receivables
approximates their fair value.
Cash and cash equivalents comprise bank balances held by the Company. The
carrying amount of these assets approximates their fair value.
Other payables principally comprise amounts outstanding on purchases of
investments awaiting settlement and ongoing costs. The Directors consider the
carrying amount of other payables approximates to their fair value.
6. 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.
During the period, the Company entered into a 5-year interest rate swap
agreement of US$65 million notional amount in which the Company will pay a rate
of 4.83% and receive one month LIBOR on a monthly basis.
The fair value of the swap entered into at 31 December 2005 is estimated at
US$19,500. This swap is designated and effective as a cashflow hedge and the
fair value thereof has been deferred in equity. The swap did not settle during
the period; therefore the Company did not pay or receive interest on the swap
during the period.
7. Reverse Repurchase Agreements
At December 31, 2005 the aggregate value of securities pledged by the Company
under reverse repurchase agreements exceeds the liability under such agreements
by approximately US$30,662,010 (approximately 103% of such liability). The
interest rates on the open reverse repurchase agreements at 31 December 2005
range from 4.28% to 4.35% and have maturity dates ranging from one day to one
month.
8. Issued Capital and Reserves
Ordinary Share Capital
31 December 2005
US $'000
Authorised
---------- -------------
60,000,000 Ordinary Shares of US$0.01 each 600
-------------
Issued
-------- -------------
27,750,550 Ordinary Shares of US$0.01 each 277
-------------
Issue of shares
---------------
The Company issued 2 Ordinary Shares of US$0.01 on incorporation on 22 February
2005 at par. Following the Initial Public Offering the Company issued 26,500,000
Ordinary Shares of US$0.01 each (including the previously issued Ordinary
Shares) on 8 April 2005 and a further 2,110,000 Ordinary Shares of US$0.01 were
issued on 9 May 2005 at a premium of US$9.99 per Ordinary Share.
The issue costs associated with the Initial Public Offering amounted to
US$15,640,237.
Repurchase of shares
--------------------
On 17 November 2005, the Company purchased for cancellation 70,000 of its
Ordinary Shares at a price of US$7.531429 per share. On 18 November 2005, the
Company purchased for cancellation 789,450 of its Ordinary Shares at a price of
US$6.75 per share.
The total cost of the Ordinary Shares purchased was US$5,873,559 has been
charged against the distributable reserve, which has been set up for this
purpose as described in the Prospectus (see below).
As required by The Companies (Purchase of Own Shares) Ordinance, 1998, the
nominal value of the Ordinary Shares purchased (US$8,594) has been credited to a
capital redemption reserve.
Authority to buyback 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.
Share Premium Account
22 Febraury 2005* to
31 December 2005
US $'000
Balance at 22 February 2005 -
Premium arising on issue of equity shares 285,814
Expenses incurred on issue of equity shares (15,640)
Reclassification of share premium (220,174)
------------
Balance at 31 December 2005 50,000
------------
*Comencement of operations 08 April 2005.
The Company applied to the Royal Court of Guernsey, immediately after the
placing of the shares, to reduce its share premium account in order to provide a
distributable reserve to repurchase its shares if and when it is considered
beneficial to do so by the Directors. As such, the share premium account, after
deduction of preliminary costs, was reduced by US$220,174,000 and a
distributable reserve created for this amount. The balance on the distributable
reserve following the repurchase of Ordinary Shares as described above is shown
below.
Distributable Reserve
22 February 2005* to
31 December 2005
US $'000
Balance at 22 February 2005 -
Reclassification of share premium (as noted above) 220,174
Repurchase of shares (5,874)
-------------
Balance at 31 December 2005 214,300
-------------
*Commencement of operations 08 April 2005.
Accumulated Profits
22 February 2005* to
31 December 2005
US $'000
Balance at 22 February 2005 -
Net losses for the period (7,810)
Realised losses transferred to non-distributable capital 21,651
reserve (see below)
Dividends paid (10,868)
-------------
Balance at 31 December 2005 2,973
-------------
*Commencement of operations 08 April 2005.
Capital Reserve - Realised Loss on Available for Sale
Investments
22 February 2005* to
31 December 2005
US $'000
Balance at 22 February 2005 -
Net losses on sale of available for sale investments
transferred from accumulated profits (21,651)
-------------
Balance at 31 December 2005 (21,651)
-------------
*Commencement of operations 08 April 2005.
Realised gains or losses arising on the sale of investments are initially
recognised in the income statement as required under International Financial
Reporting Standards but are transferred to a non-distributable capital reserve
in accordance with the Memorandum and Articles of Association of the Company
Revaluation Reserve - Unrealised Loss on Available for Sale
Investments
22 February 2005* to
31 December 2005
US $'000
Balance at 22 February 2005 -
Unrealised losses on revaluation taken to equity (35,591)
Transferred to income statement on sale of investments 21,651
-------------
Balance at 31 December 2005 (13,940)
-------------
*Commencement of operations 08 April 2005.
Cash Flow Hedge Reserve
22 February 2005* to
31 December 2005
US $'000
Balance at 22 February 2005 -
Decrease in fair value of hedging instrument taken to (20)
equity
-------------
Balance at 31 December 2005 (20)
-------------
*Commencement of operations 08 April 2005.
9. Net Asset Value
The net asset value per Ordinary Share is based on net assets at the year end
and on 27,750,550 Ordinary Shares, being the number of Ordinary Shares in issue
at the year end.
At 31 December 2005, the reported net asset value per Ordinary Share (before
deducting the dividend declared for the quarter ended 31 December 2005) is
US$8.36.
At 31 December 2005, the Company had a net asset value per Ordinary Share of
US$8.26, after including the effect of the dividend declared for the quarter of
31 December 2005 of US$2,775,055.
10. Cash Flows from Operating Activities
31 December 2005
US $'000
Net loss for the period (7,810)
Net amortisation of premiums on available for sale
investments 6,492
Realised loss on available for sale investments 21,651
-------------
28,143
Purchases of investments (3,051,933)
Proceeds from sale of investments 1,259,358
-------------
(1,792,575)
Principal paydowns 498,275
Borrowings under reverse repurchase agreements 18,552,131
Repayments under reverse repurchase agreements (17,530,064)
-------------
1,520,342
Increase in receivables (6,264)
Increase in payables 4,451
-------------
(1,813)
-------------
Net cash outflow from operating activities (253,713)
-------------
Purchases and sales of investments are considered to be operating activities of
the Company, given its purpose, rather than investing activities.
Cash and cash equivalents (which are presented as a single class on the face of
the balance sheet) comprise cash at bank.
11. Events after the Balance Sheet date
Subsequent to period-end, the Company purchased approximately US$891.0 million
in mortgage-backed securities consisting of US$822.0 million of fixed-rate
mortgage-backed securities and US$69.0 million of floating-rate mortgage-backed
securities.
The securities purchased subsequent to 31 December 2005 have a weighted average
yield of 5.40%. The Company has entered into a total of four interest rate swap
agreements totalling US$456 million notional amount in which the Company will
pay a weighted average rate of 4.79% and receive 1 month LIBOR on a monthly
basis.
12. Ten largest investments as at 31 December 2005
Summary details of the ten largest investments as at 31 December 2005
Pool Description Market Value % of portfolio Current coupon
US$ '000
FNMA 2005-47 FG 112,126 7.98% 4.88%
FHLMC 2904 CM 63,745 4.54% 5.00%
FNMA 821113 55,729 3.97% 4.86%
FHLMC 2005-123 FN 55,095 3.92% 4.81%
FHLMC 1L0112 53,879 3.83% 5.03%
FHLMC 2975 EA 49,892 3.55% 5.00%
FNMA 2002-9 PC 47,521 3.38% 6.00%
FNMA 821110 42,096 3.00% 4.98%
FHLMC 3084 YB 35,726 2.54% 5.50%
FNMA 2005-43 EC 35,294 2.51% 5.00%
This information is provided by RNS
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