Q2 2007 Results
Prodesse Investment Limited
07 August 2007
Prodesse Investment Limited
Results for the Quarter Ended 30 June 2007
Highlights for second quarter 2007:
• Core net income1 per average share of US$0.17
• Dividend per share of US$0.16 from net interest income - equates to an
annualised dividend yield of 7.23%2 (FTSE All Share annualised dividend
yield of 2.523%3)
• Net income per average share of US$0.18
• NAV per share of US$7.77 (31 March 2007: US$8.22)
• Portfolio remains 100% implied 'AAA' mortgage-backed securities.
1 Core net income is defined as net income excluding realised and unrealised
gains and losses on securities.
2 Based on annualisation of Q2 dividend, an exchange rate of 2.0071 US$ per
Pound Sterling and a closing price of 441.0p on 29 June 2007
3 Based on closing share prices of the constituents of the FTSE All Share index
on 29 June 2007 (JCF Datastream).
Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,
commented: 'Interest rates in the US remain volatile. During the second quarter,
the two-year Treasury ranged in yield from a low of 4.59% to a high of 5.10%,
while the 10-year Treasury ranged in yield from a low of 4.62% to a high of
5.30%. This volatility has continued subsequent to quarter-end. Economic
conditions in the US have also been volatile, as the deterioration of housing
and the subprime mortgage market has reverberated in GDP growth and in the
investment returns of many investment vehicles. For Prodesse, this is a positive
operating environment. Returns on new investments have become more attractive
with the recent increase in long-term interest rates and the stabilization of
our funding costs. In addition, the avoidance of credit risk, a hallmark of our
strategy, should benefit performance as the US credit cycle worsens.'
Financial Highlights Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006
$US
Dividend per share 0.16 0.14 0.13 0.12 0.10
Core net income per average share 0.17 0.15 0.14 0.12 0.10
Net income/(loss) per average share 0.18 0.16 0.19 0.25 (1.38)
Net income/(loss) 5.0m 4.0m 4.9m 6.4m (37.6m)
Net asset value per share 7.77 8.22 8.08 8.05 7.52
GBP Sterling4
Dividend per share 8p 7p 7p 6p 5p
Core net income per average share 8p 8p 7p 6p 5p
Net income/(loss) per average share 9p 8p 10p 13p (74p)
Net income/(loss) £2.5m £2.0m £2.5m £3.4m (£20.4m)
Net asset value per share 387.1p 417.6p 412.9p 430.1p 407.2p
4 Illustration is based upon an exchange rate of 2.0071, 1.9686, 1.9569, 1.8718,
and 1.8469US$ per Pound Sterling at 29 June 2007, 31 March 2007, 31 December
2006, 30 September 2006, and 30 June 2006, respectively. Translation to GBP
Sterling is given for illustration purposes only as Prodesse invests only in US$
denominated assets which produce US$ income. Should shareholders choose to
receive their dividends in GBP Sterling they may elect to do so.
Enquiries
Investor Relations
Rob Bailhache / Nick Henderson, Financial Dynamics
Tel: 020 7269 7200 / 020 7269 7114
Company Secretary and Administrator
Sara Radford / Paul Smith, BNP Paribas Fund Services (Guernsey) Limited
Tel: 01481 743000
About Prodesse
Prodesse Investment Limited is a limited liability Guernsey-incorporated
closed-end investment company, the investments of which are managed by Fixed
Income Discount Advisory Company. The Company's investment policy is to provide
net income for distribution from the spread between the interest income earned
from a portfolio of residential mortgage-backed securities and the cost of
repurchase agreements entered into to finance the acquisition of such
residential mortgage-backed securities.
Conference Call
There will be a conference call to discuss the results at 2 pm on Tuesday 7
August 2007 and a live audio webcast and presentation will be available via the
Prodesse website, www.prodesse.co.uk. The dial in for the conference call is
+44 (0) 845 146 2021 and the pass code is 10884271.
Company performance
For the quarter ended 30 June 2007, Prodesse reported net income of US$5.0
million (quarter ended 31 March 2007: US$4.0 million) or US$0.18 per average
share (quarter ended 31 March 2007: US$0.16 per average share).
Prodesse reported core net income, defined as net income excluding realised and
unrealised gains and losses on securities, of US$4.9 million for the quarter
ended 30 June 2007 (quarter ended 31 March 2007: US$4.0 million) or US$0.17 per
average share (quarter ended 31 March 2007: US$0.15 per average share). During
the quarter the Company sold US$33.5 million in securities, resulting in a
realised gain of US$38,496.
The Company delivered an annualised core return on average equity for the
quarter ended 30 June 2007 of 8.75% (quarter ended 31 March 2007: 7.25%). For
the quarter ended 30 June 2007, the annualised total return on average equity
(RoAE) was 8.82% (quarter ended 31 March 2007: 7.29%).
01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006
to to to 31 December 30 September to
30 June 2007 31 March 2007 2006 2006 30 June 2006
Core net income US$4.9 million US$4.0 million US$3.6 million US$3.0 million US$2.7 million
Core net income per average US$0.17 US$0.15 US$0.14 US$0.12 US$0.10
share
Annualised core RoAE 8.75% 7.25% 6.90% 6.07% 5.10%
Reported net income/(loss) US$5.0 million US$4.0 million US$4.9 million US$6.4 million (US$37.6
million)
Net income/(loss) per average US$0.18 US$0.16 US$0.19 US$0.25 (US$1.38)
share
Annualised RoAE 8.82% 7.29% 9.39% 12.77% (71.80%)
Portfolio Performance
For the quarter ended 30 June 2007, 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
5.83% (quarter ended 31 March 2007: 5.81%) and the annualised cost of funds on
the average repurchase balance was 5.15% (quarter ended 31 March 2007: 5.15%)
which equates to an interest rate spread of 0.68% (quarter ended 31 March 2007:
0.66%). At 30 June 2007, the annualised yield on assets was 5.93% and the
annualised cost of funds on the repurchase balances was 5.12%, which equates to
an interest rate spread of 0.81%.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 16% for the quarter ended 30 June 2007 (quarter
ended 31 March 2007: 15%). 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 April 2007 to 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to
to 31 March 2007 to 31 December 30 September 30 June 2006
30 June 2007 2006 2006
Annualised yield on average 5.83% 5.81% 5.95% 5.66% 5.24%
assets
Annualised cost of funds on
average repurchase balance 5.15% 5.15% 5.30% 5.31% 4.99%
Interest rate spread 0.68% 0.66% 0.65% 0.35% 0.25%
CPR 16% 15% 14% 13% 15%
As at 30 June 2007, all of the assets in the Company's portfolio were Fannie
Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an
implied 'AAA' rating.
30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006
Fixed-rate mortgage-backed 69% 69% 62% 63% 67%
securities
Adjustable-rate mortgage-backed 11% 8% 11% 8% 9%
securities
Floating-rate mortgage-backed 20% 23% 27% 29% 24%
securities
Borrowings
The ratio of average daily repurchase agreements to equity resulted in average
leverage of the Company of 9.3:1 during the quarter ended 30 June 2007 (quarter
ended 31 March 2007: 9.3:1). The leverage at 30 June 2007 was 9.3:1 (31 March
2007: 8.1:1).
01 April 2007 to 01 January 2007 01 October 2006 01 July 2006 to 01 April
to 31 March 2007 to 31 December 30 September 2006 to 30
30 June 2007 2006 2006 June 2006
Average leverage for period 9.3:1 9.3:1 9.3:1 8.9:1 9.7:1
Leverage at period end 9.3:1 8.1:1 9.0:1 8.5:1 8.7:1
As of 30 June 2007, the Company had entered into interest rate swap agreements
totalling US$821 million in notional amount in which the Company will pay an
average rate of 5.16% and receive 1 month LIBOR on a monthly basis. As of 31
March 2007, the Company had entered into interest rate swap agreements totalling
US$811 million in notional amount in which the Company would pay an average rate
of 5.17% and receive 1 month LIBOR on a monthly basis.
30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006
Notional amount US$821 million US$811 million US$597 million US$603 million US$714 million
Average pay rate 5.16% 5.17% 5.22% 5.23% 5.16%
Average receive rate 5.32% 5.32% 5.35% 5.33% 5.22%
Capital
At 30 June 2007, the Company had a net asset value per share of US$7.77 (31
March 2007: US$8.22). After deducting the current dividends declared for the
quarter of US$4,506,488 (for the quarter 31 March 2007: US$3,943,177), reported
net asset value per share was US$7.61 (31 March 2007: US$8.08).
01 April 2007 to 01 January 2007 to 01 October 2006 to 01 July 2006 to 01 April 2006 to
30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006
NAV per share US$7.77 US$8.22 US$8.08 US$8.05 US$7.52
Dividends declared for US$4,506,488 US$3,943,177 US$3,331,321 US$3,075,066 US$2,602,555
the period
NAV per share after
deducting dividends US$7.61 US$8.08 US$7.95 US$7.93 US$7.42
declared
Dividend
The Company has declared a dividend for the quarter ended 30 June 2007 of
US$0.16 per share that was paid on 3 August 2007 to holders on the register on
13 July 2007. Dividends are calculated and paid in US dollars.
01 April 2007 01 January 2007 01 October 2006 to 01 July 2006 to 01 April 2006
to to to
30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006
Core net income per average US$0.17 US$0.15 US$0.14 US$0.12 US$0.10
share
Net income/(loss) per average US$0.18 US$0.16 US$0.19 US$0.25 (US$1.38)
share
Dividends per share US$0.16 US$0.14 US$0.13 US$0.12 US$0.10
Outlook
'Current indications from the Federal Reserve, whether in official statements,
speeches or testimony, suggest that monetary policy will remain on hold for the
foreseeable future,' said Wellington Denahan-Norris, Chief Investment Officer
for Prodesse's Investment Manager, FIDAC. 'This, combined with the attractive
price levels for new investments, has positive implications for our portfolio to
continue to generate current income for our shareholders. Looking ahead, while
we believe that the Company's portfolio, composed of fixed-rate, adjustable-rate
and floating-rate assets, is prepared to perform in a range of possible interest
rate outcomes, we are comfortable with the portfolio composition in current
market conditions.'
Prodesse Investment Limited
Balance Sheet
30-Jun-07 31-Mar-07 31-Dec-06(1) 30-Sep-06 30-Jun-06
Note US $'000 US $'000 US $'000 US $'000 US $'000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
US$ US$ US$ US$ US$
ASSETS
Current assets
Available for sale investments 3 2,235,571 2,237,709 2,073,602 2,016,901 1,946,996
Accrued income receivable 10,236 9,302 8,774 8,001 9,056
Receivable for principal paydowns 6,613 5,409 3,210 4,158 5,029
Receivable for securities sold - - - 68,693 70,277
Hedging instruments 4 4,603 - - - 10,246
Cash and cash equivalents 11 30 35 750 4
Prepaid expenses 236 34 27 174 122
Total assets 2,257,270 2,252,484 2,085,648 2,098,677 2,041,730
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
28,165,550 at 30 June 2007 and 31
March 2007, 25,625,550 at 31 December
2006 and 30 September 2006,
26,025,550 at 30 June 2006 at US$ 0.01 282 282 256 256 260
Capital redemption reserve 30 30 30 30 26
Share premium 71,680 71,759 50,000 50,000 50,000
Distributable reserve 141,513 198,681 198,681 198,681 201,413
Accumulated profits 5,347 4,361 3,720 3,229 2,742
Capital Reserve-Realised (loss) and
impairment on available for sale - (57,206) (57,231) (58,520) (61,890)
investments
Revaluation reserve (4,505) 18,198 14,082 15,714 (7,019)
Cash flow hedge reserve 4 4,603 (4,557) (2,445) (3,124) 10,246
Total shareholders' equity 218,950 231,548 207,093 206,266 195,778
Current liabilities
Securities purchased payable - 136,626 15,407 124,034 134,681
Repurchase agreements 5 2,030,082 1,872,007 1,853,757 1,759,089 1,706,674
Accrued interest expense 6,706 6,068 5,563 4,809 3,220
Accrued expenses payable 1,532 1,678 1,383 1,355 1,377
Hedging instruments 4 - 4,557 2,445 3,124 -
Total liabilities 2,038,320 2,020,936 1,878,555 1,892,411 1,845,952
Total equity and liabilities 2,257,270 2,252,484 2,085,648 2,098,677 2,041,730
Net Assets 218,950 231,548 207,093 206,266 195,778
Net Asset Value per share 6 7.77 8.22 8.08 8.05 7.52
(1) Derived from the audited financial statements at December 31, 2006.
Prodesse Investment Limited
(unaudited) Income Statement
01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006
to to 31 March to 31 December 30 September to 30 June
30 June 2007 2007 2006 2006 2006
US $'000 US $'000 US $'000 US $'000 US $'000
Income
Interest income 33,602 30,895 31,076 28,200 29,233
Interest expense (26,898) (24,971) (25,733) (23,702) (25,153)
Net interest income 6,704 5,924 5,343 4,498 4,080
Realised gain/(loss) on sale of
available 38 25 1,289 3,371 (14,547)
for sale investments and interest
rate swaps
Loss from impairment - - - - (25,692)
Total income/(loss) 6,742 5,949 6,632 7,869 (36,159)
Expenses
Management, custodian and 1,453 1,297 1,278 1,246 1,211
administration fees
Other operating expenses 323 654 502 203 202
Total expenses 1,776 1,951 1,780 1,449 1,413
Net income/(loss) for the period 4,966 3,998 4,852 6,420 (37,572)
Net income/(loss) per average share
for the period 0.18 0.16 0.19 0.25 (1.38)
Dividend declared per share for the
period 0.16 0.14 0.13 0.12 0.10
Average shares outstanding 28,165,550 25,766,661 25,625,550 25,799,463 27,281,594
Prodesse Investment Limited
(unaudited) Cash Flow Statement
01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April
to to to 31 December 30 September 2006 to 30
30 June 2007 31 March 2007 2006 2006 June 2006
US $'000 US $'000 US $'000 US $'000 US $'000
Net cash (outflow) / inflow from
operating (154,072) (36,709) (92,311) (46,374) 293,149
activities (Note 1)
Financing
Borrowings under reverse repurchase 6,197,781 5,771,019 5,947,866 5,770,443 6,685,967
agreements
Repayments under reverse repurchase (6,039,706) (5,752,769) (5,853,198) (5,718,028) (6,962,911)
agreements
Own shares acquired - - - (2,732) (12,887)
New shares issued - 21,863 - - -
Issue costs (79) (78) - - -
Dividends paid (3,943) (3,331) (3,072) (2,563) (3,330)
Net cash inflow / (outflow) from 154,053 36,704 91,596 47,120 (293,161)
financing
(Decrease) /increase in cash and (19) (5) (715) 746 (12)
cash equivalents
Cash and cash equivalents, at 30 35 750 4 16
beginning of period
Cash and cash equivalents, at end of 11 30 35 750 4
period
Note 1
Net income/(loss) for the period 4,966 3,998 4,852 6,420 (37,572)
Net accretion/amortisation of
premiums on available for sale (35) (14) (215) 143 1,005
investments
Realised (gain)/loss on sale of
available for sale investments (38)
(25) (2,508) (2,017) 14,547
Realised gain in interest rate hedge - - - (135) -
Loss from impairment - - - - 25,692
Purchases of investments (328,449) (207,840) (432,026) (708,063) (349,722)
Proceeds from sale of investments 33,493 34,168 228,070 563,718 530,854
Proceeds from sale of interest rate - - - 135 -
swaps
Principal paydowns 136,635 132,739 109,422 91,072 113,805
Receivables
(Increase)/decrease in accrued (934) (528) (834) 835 1,084
income receivable
(Increase) /decrease in prepaid (202) (7) 147 (51) (94)
expenses
Liabilities
Increase/(decrease) in accrued 638 505 754 1,589 (6,414)
interest expense
(Decrease)/increase in accrued (146) 295 27 (20) (36)
expenses payable
Net cash (outflow) / inflow from (154,072) (36,709) (92,311) (46,374) 293,149
operating activities
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 April 2007 to 30 June 2007
Share Capital Share Distributable Capital Reserve
capital redemption premium reserve - realised gain/
reserve (loss) on sales
and impairment
of available for
sale investments
US $'000 US $'000 US $'000 US $'000 US $'000
Balance at 31 March 2007 282 30 71,759 198,681 (57,206)
Net income for the quarter - - - - -
Available for sale investments:
Transfer of realised gain to capital - - - - 38
reserve
Movement in unrealised gain on - - - - -
revaluation taken to equity
Cash flow hedge reserve - - - - -
Total recognised income and expense - - - - 38
Issuance costs - - (79) - -
Dividends paid - - - - -
Transfer to capital reserve - - - (57,168) 57,168
Balance at 30 June 2007 282 30 71,680 141,513 -
Revaluation Accumulated Cash flow Total
reserve profits hedge
reserve
US $'000 US $'000 US $'000 US $'000
Balance at 31 March 2007 18,198 4,361 (4,557) 231,548
Net income for the quarter - 4,966 - 4,966
Available for sale investments:
Transfer of realised gain to capital - (38) - -
reserve
Movement in unrealised gain on (22,703) - - (22,703)
revaluation taken to equity
Cash flow hedge reserve - - 9,160 9,160
Total recognised income and expense (22,703) 4,928 9,160 (8,577)
Issuance costs - - - (79)
Dividends paid - (3,942) - (3,942)
Transfer to capital reserve - - - -
Balance at 30 June 2007 (4,505) 5,347 4,603 218,950
Notes to the financial statements
1. General Information
Prodesse Investment Limited is a limited liability Guernsey-incorporated
closed-end investment company, the investments of which are managed by Fixed
Income Discount Advisory Company ('the Investment Manager'). The Company's
share capital structure consists solely of Ordinary Shares. The Company has a
listing on the London Stock Exchange and a listing on the Channel Islands Stock
Exchange. The Company will have an indefinite life but Shareholders will have
the opportunity to vote on its continuation at the Annual General Meeting to be
held in 2010.
The Company invests in a portfolio consisting primarily of implied 'AAA' rated
mortgage-backed securities on a leveraged basis. The Company's investment
strategy is to generate net income for distribution from the spread between the
interest income from the portfolio and the cost of borrowing pursuant to reverse
repurchase agreements used to finance the portfolio. The Investment Manager
will seek to enhance returns through what it considers an appropriate amount of
leverage.
2. Significant Accounting Policies
Basis of Accounting
This quarterly press release has 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 for the change in
reclassification of the net borrowings under repurchase
agreements in the cashflow statement.
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 policies
In the current financial year, the Company will adopt International Financial
Reporting Standard 7 'Financial Instruments and Disclosures' ('IFRS7') for the
first time. As IFRS 7 is a disclosure standard, there
is no impact of that change in accounting policy on the quarterly press release.
Full details of the change will be disclosed in the Company's annual report for
the year ended 31 December 2007.
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. 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 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. The Company did not transact in when-issued or delayed delivery
securities during the quarter ended 30 June 2007.
Security Transactions and Investment Income Recognition
Security transactions are recorded on the trade date. Realised and unrealised
gains and losses are calculated based on specific identified cost. Interest
income is recorded as earned. Interest income and expense includes amortisation
of market discount and premium as calculated using a hybrid methodology
utilising the principles of 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 reverse repurchase agreements with qualified third party
financial institutions to finance its investment in mortgage-backed securities.
The agreements are secured by the value of the Company's mortgage-backed
securities. A repurchase agreement involves the sale by the Company of
securities that it holds with an agreement by the Company to repurchase the same
securities at an agreed price and date. Such an agreement involves the risk
that the value of the securities sold by the Company may decline in value below
the price of the securities.
Interest on the principal value of reverse repurchase agreements issued and
outstanding is based upon competitive market rates at the time of issuance.
When the Company enters into a reverse repurchase agreement, it establishes and
maintains a segregated account with the lender containing securities having a
value not less than the repurchase price, including accrued interest, of the
reverse repurchase agreement.
Repurchase agreements are treated as collateralised financing transactions and
are carried at their contractual amounts, including accrued interest, as
specified in the repurchase agreements. Accrued interest is recorded as a
separate line item.
Securities sold subject to repurchase agreements are retained in the financial
statements as available for sale securities and the counterparty liability is
included in liabilities under repurchase agreements.
Derivative Financial Instruments and Hedge Accounting
The Company's activities expose it primarily to the financial risks of changes
in interest rates. The Company uses interest rate swap contracts to hedge these
exposures. The Company does not use derivative financial instruments for
speculative purposes.
The use of financial derivatives is governed by the Company's policies approved
by the board of directors, which provide written principles on the use of
financial derivatives.
Changes in the fair value of derivative financial instruments that are
designated and effective as hedges of future cash flows are recognised directly
in equity and any ineffective portion is recognised immediately in the income
statement. The amount in equity is released to income when the forecast
transaction impacts profit or loss.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated, or exercised, or no longer qualified for hedge accounting. At that
time, any cumulative gain or loss on the hedging instrument recognised in equity
for cash flow hedges is retained in equity until the forecasted transaction
occurs. If a hedged transaction is no longer expected to occur, the net
cumulative gain or loss recognised in equity is transferred to net profit or
loss in the period.
Taxes
The Company is exempt from Guernsey taxation under the Income Tax (Exempt
Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600.
Set-up and Issue Costs
The preliminary expenses of the Company directly attributable to the equity
transaction and costs associated with the establishment of the Company that
would otherwise have been avoided are taken to the share premium account.
Costs directly attributable to the issue of Ordinary Shares are expensed against
the share premium account as allowed by with The Companies (Guernsey) Law, 1994.
3. Available for Sale Investments
Gross Unrealised Gross Estimated
At 30 June 2007 Amortised Cost Gain Unrealised Loss Fair Value
US $'000 US $'000 US $'000 US $'000
Adjustable rate 692,566 3,163 (552) 695,177
Fixed rate 1,547,510 4,427 (11,543) 1,540,394
Total 2,240,076 7,590 (12,095) 2,235,571
As at 30 June 2007, all of the assets in the Company's portfolio were Fannie
Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry a 'AAA'
or implied 'AAA' rating. During the quarter ended 30 June 2007, the Company did
not have any securities that it deemed to be other-than-temporarily impaired.
Mortgage-backed securities are created when mortgages and their attendant
streams of interest and principal payments are pooled to serve as collateral for
the issuance of securities to investors. Interests in mortgage-backed securities
differ from other forms of traditional debt securities, which normally provide
for periodic payment of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, mortgage-backed securities typically
provide irregular cash flows consisting of both interest and principal.
An investment consideration of any mortgage-backed security is the structure of
the payment of the cash flow streams from the underlying mortgages to the
holders of the mortgage-backed securities. The cash flows can be simply passed
from the mortgage holder to the investor or they can be structured in a number
of different ways. The market values of the various structures will vary in
different interest rate or prepayment environments, with the more derivative or
complex structures (e.g., interest-only or principal-only securities) being more
sensitive to movements in interest rates or rates of prepayment.
Beyond the basic security of the mortgages and properties that underlie
mortgage-backed securities, a critical attribute of mortgage-backed securities
issued by the US Agencies is the credit enhancement that the US Agencies
provide. The holder of mortgage-backed securities issued or guaranteed by the US
Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae
is the principal governmental (i.e., backed by the full credit of the US
Government) guarantor of mortgage-backed securities. Fannie Mae and Freddie Mac
are the principal US Government-related (i.e. not backed by the full credit of
the US Government) guarantors.
Adjustable-rate and floating-rate mortgage-backed securities in which the
Company may invest include pass-through mortgage-backed securities issued by the
US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates
on adjustable-rate 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.
4. Hedging Instruments
The Company uses interest rate swaps to manage its exposure to interest rate
movements. When the Company enters into an interest rate swap, it agrees to pay
a fixed rate of interest and to receive a variable interest rate, generally
based on the London Interbank Offered Rate ('LIBOR'). The Company's swaps are
designated as cash flow hedges against the benchmark interest rate risk
associated with the Company's borrowings.
At 30 June 2007, the Company had interest rate swap agreements of US$821 million
notional amount in which the Company will pay a weighted average rate of 5.16%
and have a weighted average receive rate of 5.32%.
5. Reverse Repurchase Agreements
At 30 June 2007 the aggregate value of securities pledged by the Company under
reverse repurchase agreements exceeds the liability under such agreements by
approximately US$60.9 million (approximately 3% of such liability). The
interest rates on the reverse repurchase agreements at 30 June 2007 range from
4.47% to 5.45% and have maturity dates ranging from 3 days to 1,704 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 $300 million.
6. Net Asset Value
The net asset value per Ordinary Share is based on net assets at 30 June 2007
and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares in issue
at the period end.
At 30 June 2007, the reported net asset value per Ordinary Share (before
excluding the dividend declared for the quarter ended 30 June 2007) is US$7.77.
At 30 June 2007, the Company had a net asset value per Ordinary Share of
US$7.61, after including the effect of the dividend declared for the quarter
ended 30 June 2007 of US$4,506,488.
This information is provided by RNS
The company news service from the London Stock Exchange