Quarterly Results
Prodesse Investment Limited
01 February 2006
Prodesse Investment Limited
1 February 2006
Prodesse Investment Limited
Results for the 3 month period to 31 December 2005
Portfolio repositioned to new interest rate environment with intention to
improve future income for shareholders and reduce NAV volatility.
Highlights:
• Dividend per share of US$0.10 from net interest income - equates to an
annualised dividend yield of 5.25%1 (FTSE All Share annualised dividend yield
of 2.95%2)
• NAV per share of US$8.36 (30 Sept 05: US$9.03) reflects both realised
and unrealised losses in the market value of mortgage-backed securities as
short term US interest rates continued to rise
• Accelerated portfolio repositioning to new interest rate environment
in accordance with the established barbell strategy with the intention to
improve income generation and reduce NAV volatility
• Repositioning consists of asset sales of US$1.3 billion resulting in
realised losses of US$0.78 per share (US$0.44 included in 30 Sept 05
unrealised losses)
• Asset purchases subsequent to quarter-end-portfolio remains 100%
implied AAA mortgage-backed securities
• Programme to repurchase shares in the market for cancellation when
deemed beneficial to the Company remains in force following publication of
the year end audited accounts
1 Based on annualisation of Q4 dividend, an exchange rate of 1.7187 US$ per
Pound Sterling and a closing price of 443p on 30 December 2005.
2 Based on closing share prices of the constituents of the FTSE All Share index
on 30 December 2005 (JCF Datastream).
Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,
commented:
'The difficult market environment for financial institutions persisted during
the fourth quarter. US short-term interest rates continued to rise while
long-term rates stayed relatively stable causing a decline in the Company's net
income and pressure on NAV. In the fourth quarter, we have taken steps with
the intention of improving the income-producing ability of the portfolio and
reducing net asset value volatility as we continue forward through this phase of
the US interest rate cycle.'
Financial Highlights Q4 2005 Q3 2005
US$
Dividend per share 0.10 0.18
Net (loss)/income (18.8m) 5.1m
Net (loss)/income per share (0.68) 0.18
Net asset value per share 8.36 9.03
GBP Sterling3
Dividend per share 6p 10p
Net (loss)/income (£10.9m) £2.9m
Net (loss)/income per share (40)p 10p
Net asset value per share 486.4p 511.5p
Illustration is based upon an exchange rate of 1.7187 and 1.7653 US$ per Pound
Sterling at 30 December 2005 and 30 September 2005, respectively. Translation
to GBP Sterling is given for illustration purposes only as Prodesse invests in
US$ denominated assets only which produce US$ income.
This release does not constitute the preliminary announcement of annual audited
accounts in accordance with LSE listing rules.
Enquiries
Rob Bailhache / Nick Henderson, Financial Dynamics
Tel: 020 7269 200 / 020 7269 7114
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 Wednesday 01
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)20 7269 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)20 7365 1850 (UK
Participants) or +1 718 354 1172 (US Participants).
A web cast of the presentation will be available following the meeting at
www.prodesse.co.uk.
Company performance
Prodesse reported a net loss for the quarter ended 31 December 2005 of US$18.8
million (quarter ended 30 September 2005; net income of US$5.1 million) or a net
loss of US$0.68 per share (quarter ended 30 September 2005: US$0.18 net income
per share). Included in the results for the quarter ended 31 December 2005 is a
realised loss of US$21.7 million from the sale of securities, or US$0.78 per
share. Excluding the effects of the sale, net income was US$2.9 million or
US$0.10 per share.
The Company delivered an annualised return on average equity (RoAE) of negative
30.65% for the quarter ended 31 December 2005 (quarter ended 30 September 2005:
7.72%). Excluding the effects of realised losses, the Company delivered an
annualized RoAE of 4.69%.
01 October 2005 01 July 2005 to 08 April 2005
to to
31 December 2005 30 September 2005 30 June 2005
Reported Net (loss) income (US$18.8 million) US$5.1 million US$5.8 million
Net (loss) income per share (US$0.68) US$0.18 US$0.21
Annualised RoAE (30.65)% 7.72% 9.67%
Portfolio Performance
For the quarter ended 31 December 2005, the annualised yield on average assets
was 4.49% (quarter ended 30 September 2005: 4.23%) and the annualised cost of
funds on the average repurchase balance was 4.12% (quarter ended 30 September
2005: 3.57%), which equates to an interest rate spread of 0.37% (quarter ended
30 September 2005: 0.66%). This is a 0.29% decrease from the interest rate
spread for the quarter ended 30 September 2005. At 31 December 2005, the
annualized yield earned on assets was 4.97% and the annualised cost of funds on
the repurchase balance was 4.33%, which equates to an interest rate spread of
0.64%. 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 Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 20% for the quarter ended 31 December 2005
(quarter ended 30 September 2005: 23%). 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 October 2005 to 01 July 2005 to 08 April 2005 to
31 December 2005 30 September 2005 30 June 2005
Annualised Yield on Average
Assets
4.49% 4.23% 4.01%
Annualised Cost of Funds on
Average Repurchase Balance
4.12% 3.57% 2.67%
Interest Rate Spread 0.37% 0.66% 1.34%
CPR 20% 23% 20%
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.
01 October 2005 to 01 July 2005 to 30 08 April 2005 to
31 December 2005 September 2005 30 June 2005
Fixed-rate mortgage-backed 38% 32% 33%
securities
Adjustable-rate mortgage-backed 43% 61% 59%
securities
Floating-rate mortgage-backed 19% 7% 8%
securities
During the quarter, the Company sold approximately US$1.3 billion face amount of
securities resulting in a realised loss of US$21.7 million, or US$0.78 per
share. The securities sold were primarily adjustable-rate mortgage
backed-securities which, based on current and expected market conditions, were
deemed by the Investment Manager unlikely to recover to their amortised cost
basis or provide positive interest rate spread over their cost of borrowings.
Borrowings
The ratio of average daily reverse repos to equity resulted in leverage of the
Company of 9.3:1 during the quarter ended 31 December 2005 (quarter ended 30
September 2005: 8.9:1). The leverage at 31 December 2005 was 4.4:1 (30 September
2005: 9.4:1). The reduction of leverage at quarter end was due to the sale of
US$1.3 billion face amount of securities.
01 October 2005 to 01 July 2005 to 08 April 2005 to
31 December 2005 30 September 2005 30 June 2005
Average Leverage for 9.3:1 8.9:1 5.8:1
Period
Leverage at Period End 4.4:1 9.4:1 8.1:1
During the quarter, 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 1 month LIBOR on a monthly basis.
Capital
At 31 December 2005, the Company had a net asset value per share of US$8.36 (30
September 2005: US$9.03), after excluding the effect of current dividends
declared for the quarter of 31 December 2005 of US$2,775,055 (for the quarter 30
September 2005: US$5,146,209), reported net asset value per share is US$8.26 (30
September 2005: US$8.85). 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. During
the quarter, the Company purchased 859,450 shares, comprising approximately 3%
of shares outstanding as of 30 September 2005. The shares were purchased at a
weighted average price of US$6.81. The total cost of the ordinary shares
purchased was US$5,873,559. 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.
01 October 2005 to 01 July 2005 to 08 April 2005 to
31 December 2005 30 September 2005 30 June 2005
NAV US$8.36 US$9.03 US$9.56
Dividends declared for
the period
US$2,775,055 US$5,146,209 US$5,722,000
NAV excluding dividends
declared
US$8.26 US$8.85 US$9.36
Dividend
The Company has declared a dividend for the quarter ended 31 December 2005 of
US$0.10 per share payable on 23 February 2006 to holders on the register on 10
February 2006. 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 2005 to 01 July 2005 to 08 April 2005 to
31 December 2005 30 September 2005 30 June 2005
Net (loss) income per (US$0.68) US$0.18 US$0.21
share
Dividends per share US$0.10 US$0.18 US$0.20
Details of Repositioning
The persistence of the Federal Reserve's current stance of removing monetary
policy accommodation through raising the Federal Funds Rate, and the prospect
for further tightenings, has prompted the Company to reposition the portion of
its portfolio deemed unlikely to recover to their amortised cost basis or
provide positive interest rate spread over their cost of borrowing. During the
quarter, the Company sold approximately US$1.3 billion in mortgage-backed
securities and purchased approximately US$207.1 million. Subsequent to
quarter-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 during, and subsequent to, the quarter,
had a weighted average yield of 5.40%. A portion of the fixed-rate assets
purchased were for the purpose of swapping their fixed-rate coupons into
floating-rate cash flows. The Company has entered into a total of 4 interest
rate swap agreements totaling 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. The net result is that at 20 January 2006, approximately 34% of
the portfolio's cash flows are floating rate in nature.
At 20 January 2006
Yield on Assets 5.08%
Cost of Funds 4.45%
Interest Rate Spread 0.63%
Leverage 8.5:1
Fixed-rate mortgage-backed securities as % of portfolio 60%
Adjustable-rate mortgage-backed securities as % of portfolio 26%
Floating-rate mortgage-backed securities as % of portfolio 14%
Notional Amount of Interest Rate Swap as % of portfolio 20%
Outlook
'We continue to be disciplined in executing the barbell strategy for long-term
performance,' said Wellington Denahan-Norris, Chief Investment Officer for
Prodesse's Investment Manager, FIDAC. 'The recent rebalancing is intended to
accelerate the process that naturally takes place through the resetting of
coupons and the reinvestment of principal and interest into the changing
interest rate environment. We believe that the rebalancing of Prodesse's
portfolio into more floating rate exposure will enable the Company to generate a
higher dividend than it otherwise would have been able to provide. This
prolonged tightening cycle and the elevated levels of prepayments have been
challenging for us, but these conditions have also created better value for
investment in mortgage-backed securities today.'
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 31 December 2005, 30 September 2005 and 30 June 2005
31-Dec-05 30-Sep-05 30-Jun-05
US$ US$ US$
ASSETS
Current assets
Available for sale investments 1,405,412,720 2,688,176,717 2,627,255,210
Accrued income receivable 6,228,846 11,644,460 10,559,381
Receivable for principal paydowns 10,195,316 13,448,335 8,327,274
Cash and cash equivalents 5,059 12,122 5,999
Prepaid expenses 34,904 66,798 98,256
Total assets 1,421,876,845 2,713,348,432 2,646,246,120
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
27,750,550 at 31 December, 2005, 277,506 286,100 286,100
28,610,000 at 30 September 2005 and 30
June 2005 @ USD 0.01
Capital redemption reserve 8,594 - -
Share premium 50,000,000 50,000,000 50,000,000
Distributable reserve 214,300,104 220,173,663 220,299,299
Accumulated profits 2,972,952 5,246,367 5,843,027
Capital Reserve-Realised (loss)/gain on
available for sale investments (21,651,450) 5,313 -
Revaluation reserve (13,940,391) (17,384,448) (2,843,493)
Cash flow hedge reserve (19,500) - -
Total shareholders' equity 231,947,815 258,326,995 273,584,933
Current liabilities
Securities purchased payable 163,391,316 11,560,141 162,120,786
Reverse repos 1,022,067,000 2,436,369,000 2,206,752,000
Accrued interest expense 3,509,041 5,551,769 2,759,461
Accrued expenses payable 942,173 1,540,527 1,028,940
Hedging instrument 19,500 - -
Total liabilities 1,189,929,030 2,455,021,437 2,372,661,187
Total equity and liabilities 1,421,876,845 2,713,348,432 2,646,246,120
Net Assets 231,947,815 258,326,995 273,584,933
Net Asset Value per share 8.36 9.03 9.56
Prodesse Investment Limited
(unaudited) Summary Income Statement
01 October 2005 to 01 July 2005 to 30 08 April 2005 to
31 December 2005 September 2005 30 June 2005*
Income
Interest income 27,307,521 28,394,099 16,231,405
Interest expense (23,306,345) (21,084,466) (9,330,907)
Net interest income 4,001,176 7,309,633 6,900,498
Realised (loss)/gain on sale of available for
sale investments (21,656,763) 5,313 -
Expenses
Management, custodian and administration fees 942,468 2,018,214 937,308
Other operating expenses 185,913 166,079 120,163
Total expenses 1,128,381 2,184,293 1,057,471
Net (loss)/income for the period (18,783,968) 5,130,653 5,843,027
Net (loss)/income per share for the period (0.68) 0.18 0.21
Dividend declared per share for the period 0.10 0.18 0.20
* commencement of operations 08 April 2005
Prodesse Investment Limited
Cash Flow Statement
(unaudited) from 01 October 2005 to 31 December 2005, 01 July 2005 to 30
September 2005, and 08 April 2005 to 30 June 2005.
01 October 2005 to 01 July 2005 to 30 08 April 2005 to
31 December 2005 September 2005 30 June 2005*
US$ US$ US$
Net cash inflow/(outflow) from operating 11,012,705 5,853,758 (270,579,400)
activities (Note 1)
Financing
Net proceeds from offering - - 270,585,399
Offering Cost (125,635)
Own shares acquired (5,873,559) - -
Dividends paid (5,146,209) (5,722,000) -
Net cash (outflow)/inflow from financing (11,019,768) (5,847,635) 270,585,399
(Decrease)/increase in cash and cash equivalents (7,063) 6,123 5,999
Cash and cash equivalents, at beginning of period 12,122 5,999 -
Cash and cash equivalents, at end of period 5,059 12,122 5,999
Note 1
Net (loss)/income for the period (18,783,968) 5,130,653 5,843,027
Net amortisation of premiums on available for sale
investments 3,123,879 2,655,987 712,000
Realised loss/(gain) on sale of available for sale
investments 21,656,763 (5,313) -
Purchases of investments (55,678,354) (453,612,318) (2,542,805,196)
Proceeds from sale of investments 1,253,691,106 5,666,667 -
Principal paydowns 218,359,667 214,429,874 65,484,813
Borrowings under reverse repurchase agreements 6,231,988,000 7,229,892,000 5,090,251,000
Repayments under reverse repurchase agreements (7,646,290,000) (7,000,275,000) (2,883,499,000)
Receivables
Decrease/(increase) in accrued income receivable 5,554,800 (1,364,146) (10,256,189)
Decrease/(increase) in prepaid expenses 31,894 31,459 (98,256)
Liabilities
(Decrease)/increase in accrued interest expense (2,042,728) 2,792,308 2,759,461
(Decrease)/increase in accrued expenses payable (598,354) 511,587 1,028,940
Net cash inflow/(outflow) from operating activities 11,012,705 5,853,758 (270,579,400)
* commencement of operations 08 April 2005
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) from 08 April 2005 to 31 December 2005
Share Capital Share premium Distributable
capital redemption reserve
reserve
US$ US$ US$ US$
Balance at 08 April 2005 - - - -
Net income for the period - - - -
Available for sale investments:
Unrealised loss on revaluation
taken to Equity - - - -
Total recognised income and expenses
for the period - - - -
Issuance of shares 286,100 - 285,813,900 -
Offering costs - - (15,514,601) -
Reclassification of share premium - - (220,299,299) 220,299,299
Balance at period ended 30 June 2005 286,100 - 50,000,000 220,299,299
Available for sale investments:
Unrealised loss on revaluation
taken to equity - - - -
Transfer of realised gains to - - - -
capital reserve
Net income for the period - - - -
Total recognised income and expenses - - - -
for the period
Offering cost - - (125,636) -
Transfer to share premium account - - 125,636 (125,636)
Dividend paid - - - -
Balance at quarter ended 30 September
2005 286,100 - 50,000,000 220,173,663
Available for sale investments:
Unrealised loss on revaluation - - - -
taken to
Equity
Transfer of realised gain to - - - -
capital reserve
Net loss for the period - - - -
Cash flow hedge reserve - - - -
Total recognised income and expenses - - - -
for the period
Dividend paid - - - -
Buyback of shares (8,594) 8,594 - (5,873,559)
Balance at quarter ended 31 December
2005 277,506 8,594 50,000,000 214,300,104
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) from 08 April 2005 to 31 December 2005
Capital Reserve - Revaluation Accumulated Cash flow Total
realised gain/ reserve - profits hedge
(loss) on sales Unrealised gain
of available for /(loss) on reserve
sale investments available for
sale
investments
US$ US$ US$ US$ US$
Balance at 08 April 2005 - - - -
-
Net income for the period - - 5,843,027 - 5,843,027
Available for sale investments:
Unrealised loss on revaluation
taken to Equity - (2,843,493) - (2,843,493)
Total recognised income and expenses
for the period - (2,843,493) 5,843,027 - 2,999,534
Issuance of shares - - - - 286,100,000
Offering costs - - - - (15,514,601)
Reclassification of share premium - - - - -
Balance at period ended 30 June 2005 - ( 2,843,493) 5,843,027 - 273,584,933
Available for sale investments:
Unrealised loss on revaluation
taken to equity - (14,540,955) - - (14,540,955)
Transfer of realised gains to 5,313 - (5,313) - -
capital reserve
Net income for the period - - 5,130,653 - 5,130,653
Total recognised income and expenses 5,313 (14,540,955) 5,125,340 (9,410,302)
for the period
Offering cost - - - - (125,636)
Transfer to share premium account - - - - -
Dividend paid - - (5,722,000) - (5,722,000)
Balance at quarter ended 30
September 2005 5,313 (17,384,448) 5,246,367 - 258,326,995
Available for sale investments:
Unrealised loss on revaluation
taken to Equity - 3,444,057 - - 3,444,057
Transfer of realised gain to
capital reserve (21,656,763) - 21,656,763 - -
Net loss for the period - - (18,783,968) - (18,783,968)
Cash flow hedge reserve - - - (19,500) (19,500)
Total recognised income and expenses
for the period (21,656,763) 3,444,057 2,872,795 (19,500) (15,359,411)
Dividend paid - - (5,146,210) (5,146,210)
Buyback of shares - - - - (5,873,559)
Balance at quarter ended 31 December
2005 (21,651,450) (13,940,391) 2,972,952 (19,500) 231,947,815
Prodesse Investment Limited
Footnotes to the quarterly report ended 31 December 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 actual or 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
The financial statements of the Company have been 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'), together with applicable legal and
regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing
Authority and the Channel Islands Stock Exchange.
The financial statements have been prepared on the historical cost basis except
for the revaluation of certain financial instruments. A summary of the
significant principal accounting policies are set out below. 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.
(a) Government Sponsored Enterprises: The Company invests in securities
issued by the Government National Mortgage Association ('Ginnie Mae'), a US
Government corporation and US Government sponsored entities such as the Federal
Home Loan Mortgage Corporation ('Freddie Mac') , 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, and the payment of
principal and interest on the Ginnie Mae mortgage backed securities are backed
by the full-faith-and-credit of the US Government. 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 gains or losses on paydowns are 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.
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 in the accompanying
balance sheet 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 unrealised loss may
be incurred. The Company did not transact in when-issued or delayed delivery
securities during the period from 8 April 2005 (inception) to 31 December 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: include 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 Investment Securities is adjusted. There were no Investment
Securities that were considered to be other than temporarily impaired at 31
December 2005.
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) 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. It does not use derivative instruments
for speculative purposes
The use of financial derivatives is governed by the Company's policies approved
by the Board of Directors. Changes in the fair value of derivative financial
instruments that are designated and effective as hedges of future cash flows
arerecognised directly in equity and any ineffective portion is recognised
immediately in the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated or exercised or no longer qualifies for hedge accounting.
(i) 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 at the end of the quarter.
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 US$400 million of
value of gross assets, 0.0225 per cent. per annum on the next US$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 US$2 billion payable monthly in arrears (subject to a
minimum annual fee of US$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 losses 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 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 31 December 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 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.
6. Mortgage-Backed Securities
Gross Gross Estimated
Unrealised Unrealised Fair Value
At 31 December 2005 Amortised Gain Loss
Cost
(US dollars)
Adjustable rate 882,031,839 2,425 (8,061,814) 873,972,450
Fixed rate 537,321,272 2,134 (5,883,136) 531,440,270
Total 1,419,353,111 4,559 (13,944,950) 1,405,412,720
Gross Unrealised Gain Gross Unrealised Estimated Fair
Loss Value
At 30 September 2005 Amortised Cost
(US dollars)
Adjustable rate 1,844,461,670 2,475 (10,481,608) 1,833,982,537
Fixed rate 861,099,495 1,780 (6,907,095) 854,194,180
Total 2,705,561,165 4,255 (17,388,703) 2,688,176,717
7. Interest Rate Swaps
When the Company enters into a Swap, it agrees to pay a fixed rate of interest
and to receive a variable interest rate, generally based on the one month 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 quarter ended 31 December 2005, 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 1 month LIBOR
on a monthly basis. The market value of the swap at 31 December 2005 was
negative 19,500.
This information is provided by RNS
The company news service from the London Stock Exchange