1st Quarter Results

RNS Number : 8550S

Queen's Walk Investment Limited

17 September 2010

 



Queen's Walk Investment Limited

Financial Results Announcement for the

First Quarter Ended 30 June 2010

Queen's Walk Investment Limited reports €2.8 million profit for quarter ended 30 June 2010

Queen's Walk Investment Limited (the "Company"), a Guernsey-incorporated investment company, has reported a net profit of €2.8 million, or €0.10 per ordinary share¹ for the quarter ended 30 June 2010, compared to a net profit of €3.0 million, or €0.11 per ordinary share for the quarter ended 31 March 2010. This represents the fourth consecutive quarter the Company has recorded a profit.

The Company's net asset value ("NAV") at quarter end was €3.75 per share² compared to €3.73 per share at the previous quarter end. This figure takes into account net fair value write-downs in the quarter of €0.4 million, compared to €0.1 million of write-ups for the quarter ended 31 March 2010.

The investment portfolio generated €6.7 million in the quarter compared with an estimate of €4.0 million and €6.3 million received in the previous quarter. The Company realised additional cash proceeds of €10.5 million from asset sales.  The Board of Directors of the Company has declared an interim dividend of €0.145 per share for the quarter ended 30 June 2010³.

Successful completion of €27 million offer of ordinary shares and bonus issue of preference shares

On 15 September 2010, the Company's shareholders approved a 1 for 2 placing and open offer of ordinary shares at €2.00 per share. In conjunction with the placing and open offer, the Company has issued a bonus 8% seven year preference share, denominated in GBP, to qualifying shareholders. The Company intends to use the proceeds of the offer to invest in European real estate bonds. Accordingly, the Company intends to change its name to Real Estate Credit Investments Ltd to reflect this change in investment policy⁴.

Company is well positioned for a period of growth

The €26.6 million capital raising should allow the Company to enter a new phase of growth by taking advantage of dislocations in prices of real estate debt. The Company has been generating strong returns in investment grade securities since 2008. The Company believes that combining investment experience with higher cash reserves of €30⁵ million should enable QWIL to generate returns that translate into gains in NAV.

During the first quarter, growth of the Company's Real Estate Debt Portfolio has been gathering momentum. As of 30 June it represented 31% of assets, up from 15% three months earlier. New bond purchases have doubled quarter-on-quarter with 23 investments made in the three months up to 30 June. The bond portfolio has generated fair value gains of €2.2 million in the quarter and currently has a weighted average portfolio yield of 14.5%.

Tom Chandos, Chairman of Queen's Walk Investment Limited, said: "The Company is entering a stage in its life whereby its priority shifts to growth after the successful stabilisation strategy of the past two years. Through their support of our €27 million equity issue our investors have signalled their clear support for our growth strategy."

First Quarter Highlights

·    Quarterly dividend of €0.145 per share; total paid or declared dividends of €2.595 per share since the IPO

·    Real estate bond portfolio comprises approximately 31% of investment portfolio by value across 46 bond positions

·    Sales of SME loan portfolios accretive to NAV

·    Estimated cash flows of €3.5 million next quarter

Conference Call & Further Information

A conference call to review the Company's financial results for the first quarter ended 30 June 2010 will take place at 10.30am London time on 17 September 2010. The conference call can be accessed by dialing + 44 (0)20 7153 8942, ten minutes prior to the scheduled start of the call.  Please reference Queen's Walk Investment Limited.  A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com).

A webcast of the conference call will also be available on a listen-only basis at www.queenswalkinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call.

For further information please contact:

Public Relations:           Caroline Villiers [phone]
                                    James Wallis [phone]

Investor Relations:         Natalie Withers [phone]

Notes:

1.     Calculations per share based on weighted average number of Ordinary Shares outstanding as shown in the financial statements for the quarter ended 30 June 2010

2.     Calculations per share are based on the number of Ordinary Shares outstanding at the end of each respective period

3.     The amount of the dividend has been set to take into account income generated by the Company's investment portfolio in the period ending 30^th June and also the income expected to be generated by the Company's investment portfolio up to the date of the Company's extraordinary general meeting on 15 September 2010

4.     Name change subject to Guernsey regulatory approval

5.     Expected balance of €30 million at 30 September 2010 includes proceeds of capital raising

About the Company

Queen's Walk Investment Limited is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company's investment objective is to provide Ordinary Shareholders with a levered exposure to a portfolio of real estate credit investments and a diversified and amortising portfolio of Residual Income Positions, and to provide Preference Shareholders with stable returns in the form of quarterly dividends.  The Company intends to focus on secured residential and commercial debt in the UK and Western Europe by exploiting opportunities in publically traded securities and real estate loans.  In making these investments the Company uses the expertise and knowledge of its Investment Manger, Cheyne Capital Management Limited. The Company has adopted a long term strategic approach to investing and focuses on identifying value.

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "forecasts", "estimates", "anticipates", "expects", "intends", "considers", "may", "will" or "should". By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).

Financial Highlights

	Revenue	Fair value gains and losses	Total Quarter ended 31 March 2010	Revenue	Fair value gains and losses	Total Quarter ended 30 June 2010
Operating Income	3,747,279		3,747,279	4,133,097		4,133,097
Gains and losses on fair value through profit or loss financial instruments		115,472	115,472		(392,035)	(392,035)
	3,747,279	115,472	3,862,751	4,133,097	(392,035)	3,741,062
Operating Expenses	(769,041)		(769,041)	(967,369)		(967,369)
Finance Costs	(67,217)		(67,217)	(3,492)		(3,492)
Net profit / (loss)	2,911,021	115,472	3,026,493	3,162,236	(392,035)	2,770,201
Total Assets	111,336,170			104,672,202
Total Liabilities	12,006,329			4,703,733
Equity Capital	99,329,841			99,968,469
NAV per share	3.73			3.75
Shares Outstanding	26,644,657			26,644,657

Investment Portfolio

A breakdown of the Company's investment portfolio as at 31 March 2010 and 30 June 2010 by jurisdiction (by reference to underlying asset originator) is set out below. The Real Estate Debt Portfolio is included in the charts and is also detailed in the next section.  Percentages for each asset class are in relation to the value of the Company's investment portfolio, as at the relevant date excluding cash and hedges. 

Queen's Walk Portfolio Breakdown by Jurisdiction as at 31 March 2010
Portugal	36.0%
Germany	24.3%
UK	17.0%
Holland	12.2%
Italy	9.7%
France	0.7%
Switzerland	0.1%
Total (€mm)	92.5

Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2010
Portugal	33.3%
UK	27.5%
Germany	15.5%
Holland	12.4%
Italy	7.9%
France	3.3%
Switzerland	0.1%
Total (€mm)	92.3

A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Percentages for each asset class are in relation to the value of the Company's investment portfolio, excluding cash and hedges.

Queen's Walk Portfolio Breakdown by Asset Type as at 31 March 2010
Prime	46.8%
SME	30.3%
Real Estate Debt	15.3%
SubPrime	5.8%
NearPrime	1.8%
Total (€mm)	92.5

Queen's Walk Portfolio Breakdown by Asset Type as at 30 June 2010
Prime	42.2%
Real Estate Debt	30.9%
SME	18.7%
SubPrime	5.8%
NearPrime	1.8%
Total (€mm)	92.3

N.B. 'Prime' indicates that the underlying pool of loans comprises mortgages made to borrowers with good credit records and whose incomes were verified at the time of the origination.

Real Estate Debt Portfolio (6)

The Real Estate Debt portfolio is gathering momentum in size and performance and is expected to comprise more than 50% of the Company's assets by the end of the calendar year. As of 30 June it represented 31% of the investment portfolio, up from 15% three months earlier.

New bond purchases have doubled quarter on quarter with 23 investments in the quarter totalling €12.5 million made in the quarter ended 30 June, up from 11 in the previous quarter. New purchases were spread evenly across mezzanine, UK RMBS bonds and CMBS bonds.  The average purchase price was 56.2 cents.

The Real Estate Debt Portfolio recorded cash flows of €0.2 million in the quarter ended 30 June 2010, compared with €0.2 million in the previous quarter. Performance of the Real Estate Debt Portfolio has been strong with fair value gains of €2.2 million in the recent quarter.   

As at 30 June 2010, the Real Estate Debt portfolio held 46 bonds at a cost value of €25.8 million and a nominal value of €45.9 (7) million.  As at 31 August 2010, the portfolio held 51 bonds at a cost value of €27.9 million and a nominal value of €50.2 million (7).  The following tables detail the bonds held by the Company as at 31 August 2010 (8). The weighted average yield of the portfolio is approx 14.5%.

Percentage of Portfolio by Cost Price            (as at 31 August 2010)

Rating by Type	UK Residential	European Residential	UK Commercial	European Commercial	SME	Total
AAA	12.3%	0.0%	3.3%	4.1%	0.0%	19.6%
AA	11.1%	0.4%	3.0%	5.9%	0.0%	20.3%
A	10.9%	0.0%	8.0%	7.1%	0.0%	25.9%
BBB	3.8%	0.0%	4.9%	5.7%	2.6%	17.1%
BB and Below	1.6%	0.0%	2.2%	13.3%	0.0%	17.0%
Total (9)	39.6%	0.4%	21.4%	36.1%	2.6%	100.0%

European Mortgage Portfolio

(6) The Real Estate Debt portfolio includes one bond collateralised by SME loans accounting for 2.6% of the portfolio

(7) Nominal shown is original notional using pool factor and FX rate at the time of purchase

(8) The tables include the bonds purchased at their cost using FX rates at the time of purchase

(9) The total value for each column or row may not sum to the total due to rounding differences

The Company's European mortgage residual income positions performed satisfactorily, generating cash flow of €2.9 million for the quarter ended 30 June 2010, compared to €1.8 million in the previous quarter. Write-downs in this portfolio totalled €2.9 million of which €2.2 million was in the Sestante mortgage portfolio.

In relation to the Sestante mortgage portfolio, the write-downs are a result of an increase in the discount rate from 15% to 20%.

Write-downs in the Portuguese portfolio stem from the Company's decision to slightly increase its assumption regarding losses suffered on defaulted loans. However the current lower Euribor rate has had a positive effect on the Portuguese mortgage portfolio, with fewer mortgage borrowers falling into arrears than in previous quarters. The lower level of arrears translated into lower defaults in the portfolio for the quarter.

The Company is closely following developments regarding fiscal deficits in Southern Europe and widening credit spreads.  The Company believes that the wider spreads should have no direct impact on its mortgage portfolios because the majority of its mortgage loans are indexed to short term Euribor rates.  The key risk to asset value remains an increase in unemployment and consequent mortgage defaults as a result of government austerity measures.

SME Portfolio Investments

Cash flows in the quarter ended 30 June 2010 totalled €1.8 million, compared with €1.7 million in the previous quarter. However, the Company recorded fair-value write-downs of €2.7 million in the quarter in anticipation of higher default rates in the Smart 2006-1 (Eirles 236-B) portfolio.

During the quarter the Company sold the Gate 06-1 and Gate 05-2 SME portfolios at levels that were accretive to NAV. Following those sales the SME portfolio as a whole made up 18.7% of the Company's investments as at 30 June, down from 30.3% on 31 March 2010.

The performance of the Amstel 06-01 investment has exceeded expectations with both more positive default rates and greater cash flows than previously estimated. Amstel represents 62% of the SME portfolio by value as at 30 June 2010. 

As highlighted previously the Company expects default rates in this portfolio to remain volatile.  The average default rate for the SME portfolio rose to 2.1%, from 0.6% in the previous quarter. The Smart 06-1 asset recorded a substantial increase in default rates from 0.7% to 4.1% with the majority of defaults occurring in Spain. 

The table below outlines the actual default rates in the SME portfolio and the intra-period volatility of default rates.  The valuations of the SME assets continue to maintain a conservative bias in our default rate forecast relative to historical averages.

	Dec 2009 Default Rate (annualised)	March 2010 Default Rate (annualised)	Jun 2010 Default Rate (annualised)	Average Default Rate in the Past Year
Amstel 06-1	0.3%	0.5%	0.0%	0.2%
Smart 06-1	1.3%	0.7%	4.1%	1.8%
Average	0.8%	0.6%	2.1%	1.0%

UK Mortgage Portfolio

The UK Mortgage residual income positions recorded cash flows of £0.9 million in the quarter ended 30 June 2010 compared to £1.6 million in the previous quarter.  

The Company has increased the valuation of its RMAC assets by €0.75 million, as a result of lower defaults in the first quarter versus our previous assumptions. The Company maintains conservative forecasts of defaults for the UK mortgage portfolio. The Company continues to work with mortgage originators to identify loans that do not satisfy the representations and warranties provided at the time of the securitisation.  

Portfolio Valuation

In accordance with the Company's valuation procedures, the fair value of the Company's investments is calculated on the basis of observable market data, market discount rates and the Investment Manager's expectations regarding future trends.  Given re-structurings at many investment banks, there is a lack of reliable, independent broker marks for assets in the residual income portfolio.  Therefore, the Company has elected to use a model-based approach to value its residual investments and employs an external valuation agent to review the underlying pricing assumptions.  The Company applies a discount rate to the loss-adjusted cash flows to calculate the fair value.  The Company received broker marks for all of its bonds.

Changes in the balance sheet value of the residual portfolio between 31 March 2010 and 30 June 2010 (excluding sales) totalled -€5.9 million. This comprised -€1.1 million of principal amortisation and fair value losses of -€4.8 million.  In relation to the Real Estate Debt portfolio, the balance sheet value increased by €13.7 million. There were €12.5 million new purchases, fair value gains of €2.2 million, principal amortisations of -€0.1 million and sales of -€0.9 million.  After giving effect to these balance sheet changes in the quarter ended 30 June 2010, the NAV of the Company was €3.75 per share as at 30 June 2010 (versus €3.73per share as at 31 March 2010). 

The Company recorded total cash flows of €17.2 million in the quarter, of which €6.1 million came from the investment portfolio (excluding hedges). The sale of the SME portfolios and one bond generated €10.5 million and a further €0.6 million came from interest rate swap hedges.  The table below summarises changes in balance sheet values of the Company's investment portfolio by asset class:

Asset Class	31 Mar 2010 B/S Value1,2 (€mm)	30 Jun 2010  B/S Value2    (€mm)	Change to B/S Value Since 31 Mar 2010 (€mm)	Cash flows Received in the Quarter Ended 30 Jun 2010 (€mm)	Cash flows Received in the Quarter Ended 31 Mar 20103 (€mm)
UK Mortgages	8.8	9.5	0.7	1.1	2.0
Euro Mortgages	41.6	37.1	-4.5	2.9	1.8
SME	19.4	18.4	-2.1	1.8	1.7
Real Estate Debt	14.8	28.0	13.7	0.2	0.2
TOTAL4	84.6	92.3	7.7	6.1	5.6

1.     Balance sheet values as at 31 March 2010 are expressed using 30 June 2010 FX rates.

2.     The balance sheet value figures for 31 March 2010 and 30 June 2010 include accrued interest.

3.     Cash flows for 31 March 2010 are expressed using 30 June 2010 FX rates.

4.     The values for each column may not sum to the total due to rounding differences.

Company Outlook - Real Estate Debt to become the flagship investment strategy 

The Company's increased focus on real estate debt investments, in particular mortgage-backed bonds, should deliver investors improved returns and a more favourable risk/reward profile. The shift towards publicly-traded securities will also provide greater transparency of asset prices and more liquidity.

Successfully completing the €26.6 million capital raising puts the Company in a position to act quickly in making significant changes to the composition and risk profile of its portfolio.  By the end of the year, the Company is aiming for real estate debt investments to account for more than 50% of its overall portfolio. 

The Company currently intends to make two thirds of new investments in bonds backed by commercial real estate debt in the form of CMBS. One third of new investments are to be made in bonds backed by residential mortgages in the form of RMBS. Geographically, investments will focus on Northern Europe, including the UK.

Investments already made over the past two years in mortgage-backed bond markets continue to perform well and the Company has had success in acquiring these investments at attractive prices. In recent months the Company has been purchasing mezzanine debt at a yield to maturity of more than 12%, and we expect to continue investing in this area.

Structured debt markets continue to be affected by technical imbalances that play to the Company's advantage. The Company expects these imbalances to be further compounded by increasing regulatory changes and continued de-leveraging. These catalysts should slow price appreciation thus providing continued opportunities for attractive investment opportunities in the short to medium term.

Unaudited Condensed Consolidated Statement of Comprehensive Income

For the quarter ended 30 June 2010 and quarter ended 31 March 2010

	Note	Quarter ended 30 June 2010	Quarter ended 31 March 2010
		Euro	Euro
Interest income	5	4,133,097	3,747,279
Gains and losses on fair value through profit or loss financial instruments	4	(392,035)	115,472
		3,741,062	3,862,751
Operating expenses	6	(967,369)	(769,041)
Finance costs	5	(3,492)	(67,217)
Net profit		2,770,201	3,026,493
Profit per Ordinary Share
Basic	8	Euro 0.10	Euro 0.11
Diluted	8	Euro 0.10	Euro 0.11
Weighted average Ordinary Shares outstanding		Number	Number
Basic	8	26,644,657	26,644,657
Diluted	8	26,644,657	26,644,657

All items in the above statement are derived from continuing operations.

All income is attributable to the Ordinary Shareholders of the Company.

Unaudited Condensed Consolidated Statement of Changes in Equity

For the quarter ended 30 June 2010 and quarter ended 31 March 2010

		Share Capital	Reserves	TOTAL
	Note	Euro	Euro	Euro
Balance at 31 December 2009		-	98,434,921	98,434,921
Net profit for the quarter		-	3,026,493	3,026,493
Distribution to the Ordinary Shareholders of the Company	7	-	(2,131,573)	(2,131,573)
Balance at 31 March 2010		-	99,329,841	99,329,841
Net profit for the quarter		-	2,770,201	2,770,201
Distribution to the Ordinary Shareholders of the Company	7	-	(2,131,573)	(2,131,573)
Balance at 30 June 2010		-	99,968,469	99,968,469

Unaudited Condensed Consolidated Statement of Financial Position

As at 30 June 2010

	Note	30 June 2010		31 March 2010
		Euro		Euro
Non-current assets
Investments at fair value through profit or loss	10	91,283,779		91,568,184
		91,283,779		91,568,184
Current assets
Cash and cash equivalents		10,025,291		15,718,951
Derivative financial assets - options held for trading	10	289,006		250,300
Derivative financial assets - unrealised gain on interest rate swap agreements	12	1,871,502		2,421,883
Other assets	11	1,202,624		1,376,852
		13,388,423		19,767,986
Total assets		104,672,202		111,336,170
Equity and liabilities
Equity
Reserves	16	99,968,469		99,329,841
		99,968,469		99,329,841
Current liabilities
Distribution payable	7	2,131,573		2,131,573
Other liabilities	14	2,572,160		1,231,789
		4,703,733		3,363,362
Non-current liabilities
Loans	13	-		8,642,967
Total liabilities		4,703,733		12,006,329
Total equity and liabilities		104,672,202		111,336,170

Unaudited Condensed Consolidated Statement of Cash Flows

For the quarter ended 30 June 2010 and quarter ended 31 March 2010

	Note		Quarter ended 30 June 2010		Quarter ended 31 March 2010
			Euro		Euro
Net cash inflow from operating activities	17		5,007,896		13,726,160
Financing activities
Net repayment of borrowings from loans			(8,642,967)		(9,657,598)
Dividends paid to shareholders	7		(2,131,573)		(2,131,573)
Cash flows from financing activities			(10,774,540)		(11,789,171)
Net (decrease)/increase in cash			(5,766,644)		1,936,989
Reconciliation of net cash flow to movement in net cash
Net (decrease)/increase in cash and cash equivalents			(5,766,644)		1,936,989
Cash and cash equivalents at start of period			15,718,951		13,741,922
Effect of exchange rate fluctuations on cash and cash equivalents			72,984		40,040
Cash and cash equivalents at end of period			10,025,291		15,718,951

Notes to the Unaudited Condensed Consolidated Quarterly Report

1.    General information

Queen's Walk Investment Limited (the "Company") was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is an authorised closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 2008 and its Ordinary Shares have a premium listing on the London Stock Exchange.  The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. "Group" is defined as the Company and its subsidiary. At 30 June 2010, the Company's only subsidiary was Trebuchet Finance Limited.

The Group's investment objective is to preserve capital and provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ("ABS") where the Investment Manager considers that the coupon or cash flows on the tranche are attractive relative to the underlying credit. These are and will be, in most cases, below investment grade or unrated and do or will, in many cases, represent the residual income positions typically retained by the originator of a securitisation transaction as the "equity" or "first loss" position.

The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management (UK) LLP (the "Investment Manager"), an investment management firm authorised and regulated by the Financial Services Authority. The Group has entered into an Investment Management Agreement (the "Investment Management Agreement") under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Group has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and a quarterly performance-related fee. The Group has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the "Administrator"). State Street Fund Services (Ireland) Limited provide certain administration services to the Group in its capacity as Sub-Administrator.

2.    Significant accounting policies

Statement of compliance

The condensed consolidated quarterly report 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 this report as applied in the Company's latest annual audited financial statements for the year ended 31 March 2010.

This quarterly report does not comply fully with the requirements of IAS 34 "Interim Reporting".  Under IAS 34 the financial information is required to provide i) a statement of financial position as of the end of the current interim period and a comparative statement of financial position as of the end of the immediately preceding financial year; (ii) a statement of comprehensive income for the period and cumulatively for the period to date and the comparable periods in the prior year; (iii) a statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year; and (iv) a statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year. The Group has complied with some of the requirements in providing the comparative statement of financial position as at 31 March 2010, being the balance sheet of the immediately preceding financial year, and the current quarter information being the cumulative for the period 30 June 2010. The Group has only shown the current quarter information with comparative information for the previous financial quarter and hence not complied with the requirements to provide financial information for the comparable period in the prior year as the previous financial quarter is considered by the Directors to be a more appropriate comparative period for the activities of the Group.

Basis of preparation

The quarterly report of the Group is prepared on the historical cost basis modified by the following assets and liabilities which are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit or loss.

The majority of the Group's investments are financial instruments that are classified as fair value through profit or loss.  Where bid prices are not available from a third party in a liquid market, the fair value of the financial instrument is estimated by reference to market information, which includes but is not limited to broker marks, prices on comparable assets and a pricing model that incorporates discounted cash flow techniques.

These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset.  Where such pricing models are used, assumptions are reviewed and updated on the basis of actual performance data as it is received and on the basis of market conditions as at the Statement of Financial Position date.  See Note 2 - Fair value and Interest income and note 3 - Critical accounting judgements and key sources of estimation uncertainty for further information regarding assumptions and critical judgements.

The Directors believe it is appropriate to adopt the going concern basis in preparing the condensed consolidated quarterly report as, after due consideration, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. On 6 April 2010, the Company paid back the remaining EUR 8,642,967 and all interest due, terminating any further liabilities under the loan facility. In addition, the Directors note the cash resources currently available (Euro 10.0m), of which some will be used to pay the proposed dividend, which are sufficient to cover normal operational costs and current liabilities for the foreseeable future.

The condensed consolidated quarterly report is presented in Euro because that is the currency of the primary economic environment in which the Group operates.  The functional currency of the Group is also considered to be Euro.

Basis of consolidation

Subsidiaries are entities controlled by the Company (Note 9). The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. At 30 June 2010, the Group is made up of the Company and its only subsidiary, Trebuchet Finance Limited.  In accordance with the Standing Interpretations Committee Interpretation 12 "Consolidation-Special Purpose Entities" ("SIC 12"), the Company consolidates only entities over which control is indicated by activities, decision making, benefits and residual risks of ownership. In accordance with SIC 12 the Company does not consolidate an SPE in which it holds less than a substantial interest in the residual income position. Where it holds more than a substantial interest, it does not consolidate the SPE where the residual income position represents only a small part of the gross assets of the SPE and the Company was neither involved in the establishment of the SPE or the origination of the assets owned by the SPE, on the basis that the Company is not exposed to the majority of the risks and benefits of the assets owned by the SPE, provided control is not otherwise indicated by the Company's activities, decision making, benefits and residual risks or ownership.

Trebuchet Finance Limited, the Company's only subsidiary, is an SPE over which the Company exercises control and its financial statements are therefore included in the consolidated financial statements of the Group.  The Company does not consolidate any of the SPEs in which it holds a residual income position as it is not exposed to the majority of the risks and benefits of the assets owned by the relevant SPEs and does not control any of them.

Investments

Investments in residual interests and investment grade bonds are recognised initially at their acquisition cost (being fair value at acquisition date) as debt securities. Thereafter they are re-measured at fair value and are designated as fair value through profit or loss investments in accordance with the Amendment to International Accounting Standard 39 ("IAS 39") Financial Instruments: Recognition and Measurement-The Fair Value Option, as the Group is an investment Group whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value.

Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades.

Cash and cash equivalents

Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities.

Derivative financial instruments

Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Consolidated Statement of Comprehensive Income.

The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the Statement of Financial Position date, taking into account current interest rates and the current creditworthiness of the swap counterparties.

The fair value of options is their quoted market price at the date of the Consolidated Statement of Financial Position. Broker marks are obtained for these positions. The change in value is recorded in net gains/(losses) in the Consolidated Statement of Comprehensive Income. Realised gains and losses are recognised on the maturity or sale of the option.

Fair value

All financial assets carried at fair value are initially recognised at fair value and subsequently re-measured at fair value based on bid prices, where such bids are available from a third party in a liquid market. If bid prices are unavailable, the fair value of the financial asset is estimated by reference to market information which includes but is not limited to broker marks, prices on comparable assets and using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding asset‑specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. The objective of a fair value measurement is the price at which an orderly transaction would take place between market participants on the measurement date; it is not a forced liquidation or distressed sale. Where the Group has considered all available information and there is evidence that the transaction was forced, it will not use a transaction price as being determinative of fair value.

Where a forced sale price is not used the Group will estimate the fair value with reference to other market data as described above. With regard to residual income positions, historical performance and observable market data is analysed to determine the average level of these factors and their volatility over time.  These assumptions are typically derived by reference to the historical delinquencies, defaults, recoveries and prepayments actually realised by the originator of the underlying assets and any empirical data available that may be available in respect of any of these factors for the particular asset class.

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported within assets and liabilities when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Derecognition of a financial asset

A financial asset is derecognised only if substantially all of the asset's risks and rewards of ownership are transferred or control is transferred in the event that not substantially all of the asset's risks and rewards of ownership are transferred. However, if substantially all of the risks and rewards are retained, the asset is not derecognised. Control is transferred if the transferee has the practical ability to sell the asset unilaterally without needing to impose additional restrictions on the transfer.

Interest-bearing loans and borrowings

Interest‑bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest‑bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Consolidated Statement of Comprehensive Income using the effective interest rate method. Financing costs associated with the issuance of financings are recognised in the Consolidated Statement of Comprehensive Income using the effective interest rate method.

Foreign currency transactions

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the Consolidated Statement of Financial Position date are translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the Consolidated Statement of Comprehensive Income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Euro at foreign exchange rates ruling at the dates the fair value was determined.

Interest income

Interest income is accrued over the projected lives of the investments using the effective interest method as defined under International Accounting Standard 39. Where the Group adjusts its expected cash flow projections to take account of any change in underlying assumptions, such adjustments are recognised in the Consolidated Statement of Comprehensive Income by reflecting changes in a revised amortised cost value of the investment and applying the original effective interest rate to this revised amortised cost value for the purposes of calculating future income.

Taxation

The Company is a tax-exempt Guernsey limited Company. Accordingly, no provision for income taxes is made. Trebuchet Finance Limited is a "qualifying Company" within the meaning of Section 110 of the Irish Taxes Consolidation Act 1997 and accordingly its taxable profits are subject to tax at a rate of 25 per cent. Payments under the Participation Note are paid gross to the Company and the income portion of such payments is deductible by Trebuchet Finance Limited. Consequently, Trebuchet Finance Limited has a minimal amount of taxable income. The activities of Trebuchet Finance Limited are exempt for Irish Value Added Tax (VAT) purposes under the Irish VAT Act of 1972.

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.

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 Group 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 accrued value.

Segment information

For management purposes, the Group is organised into two main operating segments, which invest in 1) Investment Grade Bonds and 2) in Residual Bonds. Each segment engages in separate business activities and the results of each segment are regularly reviewed by the Board of Directors who have assumed the role of Chief Operating Decision Maker for performance assessment purposes.

3. Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies (described in Note 2 above), the Group has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements:

Income recognition of residual income positions and bonds

The Group invests primarily in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ("ABS") and bonds.  The Group follows a policy of accounting for such investments and bonds at fair value through profit or loss and has elected to recognise income on an effective interest rate ("EIR") method in accordance with paragraph 30 of IAS 18 "Revenue".

ABS are securities that are typically backed by consumer finance receivables (such as mortgage loans) and commercial loans and receivables (including commercial mortgage loans and loans to small-and-medium sized enterprises).  Residual income positions are typically unrated or rated below investment grade and are often referred to as the "equity" or "first loss" position of a securitisation transaction. 

Unlike a more conventional debt instrument and the more senior tranches of ABS (which generally hold the rights to fixed levels of income), the cash flow profile of a residual income position does not generally include a contractually established schedule of fixed payments divided between interest and principal.

Instead, the cash flows generally vary over time, and the periodic cash flows associated with a residual income position may include a significant element of principal repayment as well as income payments.

Where the cash payments generated by residual income positions do not typically follow the pattern of a standard cash-pay debt instrument (in that there is not a constant level of income in each period followed by a repayment of the principal amount at maturity), a given cash payment received in respect of a residual income position can generally be considered to represent a combination of the return on the investment and the repayment of some of the capital initially invested.

As a result, the stream of expected cash flows associated with a particular residual income position may have an uneven payout profile, in that the cash payment expected in one period (and the proportion of that payment that represents principal repayment versus interest income) may vary significantly from the cash payments expected in other periods.

The amortised value of a residual income position at any given measurement date after the Group's initial acquisition of the asset reflects repayments of principal in accordance with the effective interest method. 

This revised amortised value (adjusted to account for the accrual of interest and principal paydowns) is subject to further adjustment on the basis of market conditions and other factors that are likely to affect the fair value of the asset.  Where actual performance data or expectations regarding defaults, delinquencies and prepayments received in respect of a given asset is notably different from the default, delinquency and prepayment assumptions incorporated in the pricing model for the asset, the assumptions are revised to reflect this data and the pricing model is updated accordingly. In addition to the actual performance data observed in respect of a particular asset, market factors are also taken into account within the model. 

Broker marks (where available) and any other available indicators are assessed to determine whether or not the market is attributing higher or lower default, delinquency or prepayment expectations to similar assets in determining whether or not the assumptions incorporated in the pricing model remain reasonable.

Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position and bond.  Where there is a carry value reduction driven by lower cashflow expectations, interest income will be reduced as it reflects the reduced cashflow expectations.

Valuation of investments

The market for subordinated asset-backed securities, including residual income positions is illiquid and regular traded prices are generally not available for such investments.  There is no active secondary market in residual income positions and, further, there is no industry standard agreed methodology to value residual income positions.

In accordance with the Group's accounting policies, fair value of financial assets is based on quoted bid prices where such bids are available from a third party in a liquid market. At 30 June 2010 bid prices were not available for any of the Group's  residual portfolio investments. There is very limited information available in relation to transactions in comparable investments. As quoted bid prices are unavailable, the fair value of the investments is estimated by reference to market information, which includes but is not limited to broker marks, prices of comparable assets, estimated fair value from the previous period updated for current period cash flows and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. The Group may use all or a combination of the prices from these sources in estimating the fair value of the investments. Broker marks are estimates of values provided by market participants who are typically the originators of the investments.

Broker marks are not binding prices and there is no guarantee that the Group could transact at these prices in the current market.  Due to the current market conditions, the Group has relied on pricing models to fair value its investments as broker marks become less reliable or unobtainable.

The assumptions upon which the pricing models are based are described in Note 2 (Fair Value). Any change to assumptions surrounding the pricing models may result in changes to the fair values being attributed to the investments. Where the fair value of the investment is written down due to changes in assumptions and expected cash flows, the change in the fair value is taken to the Consolidated Statement of Comprehensive Income following the reassessment of the cash flows discounted at the current market rate estimated for the investment.

The fair value of the Group's investments is set out in Note 10. Given the number of individual investments and the number of individual parameters that make up each pricing model, the Group believes that it would be impractical to disclose the effects of changes to each assumption in respect of each individual investment and this would not provide meaningful additional disclosure. However, general assumptions used in the pricing models are disclosed with sensitivities in the Group's annual report and consolidated financial statements.

4. (Losses)/gains on financial instruments

The following table details the gains and losses, excluding interest income and finance costs, earned by the Group from financial assets and liabilities during the period:

		Quarter ended 30 June 2010		Quarter ended 31 March 2010
		Euro		Euro
Net realised gains/(losses):
Net realised gains on asset backed securities and bonds		1,800,731		427,673
Net realised (losses)/gains on foreign exchange instruments		(210,707)		586,482
Net realised gains on interest rate swap agreements		-		29,674
Net realised gains		1,590,024		1,043,829
Movement in net unrealised gains/(losses):
Net unrealised losses on investments at fair value through profit or loss		(1,158,368)		(625,179)
Net unrealised losses on interest rate swap agreements		(550,381)		(249,618)
Net unrealised losses on options		(346,294)		(93,600)
Net unrealised gains on foreign bank balances		72,984		40,040
Net unrealised losses		(1,982,059)		(928,357)
Net realised and unrealised (losses)/gains		(392,035)		115,472

5. Interest income and finance costs

The following table details interest income and finance costs from financial assets and liabilities during the period ended:

		Quarter ended 30 June 2010		Quarter ended 31 March 2010
		Euro		Euro
Interest income
Investments designated at fair value through profit or loss upon initial recognition		4,131,935		3,744,976
Loans and receivables (including cash and cash equivalents)		1,162		2,303
Total interest income		4,133,097		3,747,279

Finance Costs
Liabilities held at amortised cost:
Interest on loan		3,492		67,217
Total finance costs		3,492		67,217

6. Operating expenses

	Note	Quarter ended 30 June 2010		Quarter ended 31 March 2010
		Euro		Euro
Investment management, custodian and administration fees
Investment management fee	18	441,481		432,494
Administration fee	18	50,499		48,125
Custodian fee	18	9,110		9,210
		501,090		489,829
Other operating expenses
Audit fees		42,383		42,850
Directors' fees payable to Directors of Queen's Walk Investment Limited		59,838		60,048
Directors' fees payable to Directors of Trebuchet Finance Limited		6,233		6,255
Legal fees		174,520		76,442
Pricing expenses		48,747		(43,140)
Other expenses		134,558		136,757
		466,279		279,212
Total operating expenses		967,369		769,041

The Group has no employees.

7. Dividends

The third interim dividend for the year ended 31 March 2010 of Euro 0.08 per share was declared on 11 March 2010 and an amount of Euro 2,131,573 was paid on 16 April 2010.

The fourth interim dividend for the year ended 31 March 2010 of Euro 0.08 per share was declared on 9 June 2010 and an amount of Euro 2,131,573 was paid on 22 July 2010.

A dividend of Euro 0.145 per share has been declared by the Directors for the quarter ended 30 June 2010 on 3 September 2010. The amount of the dividend has been set to take into account income generated by the Company's investment portfolio in the period ending 30 June 2010 and also the income expected to be generated by the Company's investment portfolio up to the date of the Company's extraordinary general meeting on 15 September 2010 (see note 20). The liability in respect of the first interim dividend has not yet been recognised in the Consolidated Statement of Financial Position of the Group for the quarter ended 30 June 2010 since the dividend had neither been declared nor approved at the quarter end date.

The Group's objective is to provide Shareholders with stable returns in the form of quarterly dividends.  The Group's dividend policy is to make dividend distributions from its distributable net income subject to retaining a portion of such income as a reserve for payment in subsequent periods.

8. Profit per Ordinary Share

		Quarter ended 30 June 2010		Quarter ended 31 March 2010
		Euro		Euro
The calculation of the basic and diluted earnings per ordinary share is based on the following data:
Profit for the purposes of basic earnings per ordinary share being net loss attributable to equity holders		2,770,201		3,026,493
Weighted average number of Ordinary Shares for the purposes of basic earnings per share		26,644,657		26,644,657
Effect of dilutive potential Ordinary Shares:
Share options		-		-
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share		26,644,657		26,644,657

There is no dilution as at 30 June 2010 or 31 March 2010, as the share price was below the option price for the period.

9.    Subsidiary

Trebuchet Finance Limited was incorporated in Ireland on 19 May 2005 and, pursuant to the Articles of Association of Trebuchet Finance Limited, the Group has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Group have been appointed Directors of Trebuchet Finance Limited. To ensure that the Group will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the Group has been allotted a single share in Trebuchet Finance Limited carrying the right to appoint a majority of the Board of Directors. Trebuchet Finance Limited was established for the sole purpose of acquiring and holding interests in certain assets.

10.  Investments

The following is a summary of the Group's investments:

		30 June 2010		31 March 2010
		Euro		Euro
Asset-backed securities and bonds at fair value through profit or loss		91,283,779		91,568,184
Options purchased held for trading		354,178		301,610
Options written held for trading		(65,172)		(51,310)
		91,572,785		91,818,484

Asset-backed securities and bonds
Opening cost		238,331,927		247,777,893
Purchases		11,655,205		6,524,973
Sales proceeds		(9,600,000)		(14,166,837)
Realised gain on sales		1,800,731		427,673
Principal payups		1,226,457		1,298,460
Principal paydowns		(4,208,430)		(3,530,235)
Closing cost		239,205,890		238,331,927
Unrealised losses		(147,922,111)		(146,763,743)
Asset-backed securities and bonds at fair value		91,283,779		91,568,184

Concentration of credit risk

The Group is subject to concentration of credit risk in that the four largest structures within the asset backed securities portfolio comprise approximately 38% (31 March 2010: 48%) of the total assets. The concentration of credit risk is substantially unchanged compared to the prior quarter. Two of the structures, comprising approximately 16% (31 March 2010: 21%) of its asset-backed securities portfolio have had a temporary suspension in cash flows from these structures as a result of prepayment rate triggers being breached.

The following options contracts were open as at 30 June 2010:

Counterparty	Expiration	Description	Currency	Notional Amount	Strike price	Unrealised Gains/(Losses) Euro
Goldman Sachs	31 Dec 2011*	EUR Call GBP Put	Euro	10,000,000	0.9315	(1,085,080)
JP Morgan	31 Dec 2010	EUR Call GBP Put	Euro	10,000,000	1.300	(9,990)
JP Morgan	31 Dec 2011	EUR Call GBP Put	Euro	14,000,000	0.9315	(337,752)
Goldman Sachs	31 Dec 2010	EUR Call GBP Put (Written option)	Euro	10,000,000	1.300	160,320
JP Morgan	31 Dec 2010	EUR Call GBP Put (Written option)	Euro	10,000,000	1.300	174,840
JP Morgan	31 Dec 2011	EUR Call GBP Put (Written option)	Euro	14,000,000	0.9315	29,668
						(1,067,994)

The following options contracts were open as at 31 March 2010:

Counterparty	Expiration	Description	Currency	Notional Amount	Strike price	Unrealised Gains/ (Losses) Euro
Goldman Sachs	31 Dec 2011*	EUR Call GBP Put	Euro	10,000,000	0.9315	(840,390)
Goldman Sachs	29 Dec 2010	EUR Call GBP Put (Written option)	Euro	10,000,000	1.300	118,690
						(721,700)

* On 6 April 2010, the Group extended the maturity to 31 December 2011.

11.  Other assets

		30 June 2010		31 March 2010
		Euro		Euro
Interest receivable on investment portfolio		1,002,747		877,917
Lehman claim*		-		328,230
Interest receivable on cash and cash equivalents		199,877		170,705
		1,202,624		1,376,852

* The Lehman claim was sold on 30 March 2010 for Euro 328,230.

The Directors consider that the carrying amount of other assets approximates their fair value.

12.  Derivative contracts

The following interest rate and balance guaranteed interest rate swaps were unsettled at 30 June 2010.

Termination Date	Counterparty	Initial Notional Amount (GBP)	Unrealised Gain Euro
25 January, 2013	Goldman Sachs	451,431	23,097
15 October, 2011	Goldman Sachs	5,500,000	142,489
15 November, 2011	Goldman Sachs	1,300,000	32,894
25 January, 2013	Goldman Sachs	1,226,713	82,234
15 October, 2011	Goldman Sachs	3,000,000	88,811
12 September, 2011	Goldman Sachs	1,700,000	43,844
27 March, 2011	Goldman Sachs	17,348,100	475,268
15 February, 2011	Goldman Sachs	9,001,820	231,289
15 January, 2011	Goldman Sachs	26,886,484	751,576
			1,871,502

The following interest rate and balanced guaranteed interest rate swaps were unsettled at 31 March 2010:

Termination Date	Counterparty	Initial Notional Amount (GBP)	Unrealised Gain Euro
25 January, 2013	Goldman Sachs	451,431	21,760
15 October, 2011	Goldman Sachs	5,500,000	163,068
15 November, 2011	Goldman Sachs	1,300,000	37,473
25 January, 2013	Goldman Sachs	1,226,713	65,943
15 October, 2011	Goldman Sachs	3,000,000	88,536
12 September, 2011	Goldman Sachs	1,700,000	45,234
27 March, 2011	Goldman Sachs	17,348,100	642,940
15 February, 2011	Goldman Sachs	9,700,584	330,394
15 January, 2011	Goldman Sachs	27,568,395	1,026,535
			2,421,883

13.  Loans

		30 June 2010		31 March 2010
		Euro		Euro
Loans		-		8,642,967
		-		8,642,967

On 6 April 2010 the Company repaid the remaining EUR 8,642,967 together with all interest due, terminating any further liabilities under the loan facility.

14. Other liabilities

		30 June 2010		31 March 2010
		Euro		Euro
Interest payable		-		42,778
Due to related parties - Investment Manager (Note 18)		143,997		147,854
Payable for investments purchased		1,318,977		-
Accrued expenses		1,109,186		1,041,157
		2,572,160		1,231,789

Other liabilities principally comprise amounts outstanding in respect of interest payable and ongoing costs. The Directors consider the carrying amount of other liabilities approximates their fair value.

15.  Share capital

The capital structure of the Company consists of cash and cash equivalents, a bank loan and equity attributable to equity holders, comprising issued share capital and reserves, as disclosed on the Consolidated Statement of Financial Position.

The Company does not have any externally imposed capital requirements.  At 30 June 2010 the Company had capital of Euro 99,968,469 (31 March 2010: Euro 99,329,841).

The investment objective of the Company is to provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investment in a diversified portfolio of tranches of asset-backed securities.

Where appropriate, the Company may utilise leverage for the purpose of financing its portfolio and enhancing returns to Shareholders. The Company intends to reduce exposure to interest rate and currency fluctuations through the use of currency and interest rate hedging arrangements for the purposes of efficient portfolio management.

The Company aims to deliver its objective by investing available cash whilst maintaining sufficient liquidity to meet on-going expenses and dividend payments.

Authorised Share Capital

	30 June 2010	30 June 2010		31 March 2010	31 March 2010
	Number of Ordinary Shares	Euro		Number of Ordinary Shares	Euro
Ordinary shares of no par value each	Unlimited	-		Unlimited	-

Issued and fully paid
Balance at beginning of period	26,644,657	-		26,644,657	-
Ordinary shares bought back during the quarter	-	-		-	-
Balance at end of period	26,644,657			26,644,657	-

Between 31 March 2010 and 30 June 2010 the Company did not purchase and cancel any of its Ordinary Shares through its buyback programme.

16.  Reserves

	Quarter ended 30 June 2010
	Accumulated Reserves		Capital Reserves		Total Reserves
	Euro		Euro		Euro
Balance at start of period	91,657,341		7,672,500		99,329,841
Net profit for the period	2,770,201		-		2,770,201
Distribution to the Ordinary Shareholders of the Company	(2,131,573)		-		(2,131,573)
Balance at end of period	92,295,969		7,672,500		99,968,469

	Quarter ended 31 March 2010
	Accumulated Reserves		Capital Reserves		Total Reserves
	Euro		Euro		Euro
Balance at start of period	90,762,421		7,672,500		98,434,921
Net profit for the period	3,026,493		-		3,026,493
Distribution to the Ordinary Shareholders of the Company	(2,131,573)	-	-		(2,131,573)
Balance at end of period	91,657,341		7,672,500		99,329,841

17. Notes to Statement of Cash Flows

	Quarter ended 30 June 2010		Quarter ended 31 March 2010
	Euro		Euro
Net profit	2,770,201		3,026,493
Adjustments for:
Net realised gains on sale of asset backed securities and bonds	(1,800,731)		(427,673)
Movement in net unrealised losses on investments at fair value through profit or loss	1,158,368		625,179
Unrealised losses on interest rate swap agreements	550,381		249,618
Unrealised losses on options	346,294		93,600
Unrealised gains on foreign bank balances	(72,984)		(40,040)
	2,951,529		3,527,177
Purchases of bonds	(10,336,228)		(6,524,973)
Sales proceeds from asset backed securities	9,600,000		14,166,837
Purchase of options	(645,000)		-
Options Written	260,000		-
Principal payups	(1,226,457)		(1,298,460)
Principal paydowns	4,208,430		3,530,235
	1,860,745		9,873,639
Decrease in receivables	174,228		226,809
Increase in payables	21,394		98,535
	195,622		325,344
Net cash inflow from operating activities	5,007,896		13,726,160

Purchases and sales of investments are considered to be operating activities of the Group, given its purpose, rather than investing activities. Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities.

18.  Material agreements and related party transactions

Investment Manager

The Company and Trebuchet Finance Limited are parties to an Investment Management Agreement with the Investment Manager, dated 8 December 2005, pursuant to which both the Company and Trebuchet Finance Limited has appointed the Investment Manager to manage their respective assets on a day-to-day basis in accordance with their respective investment objectives and policies, subject to the overall supervision and direction of their respective Boards of Directors. 

The Group pays the Investment Manager a Management Fee and Incentive Fee (see Note 6). During the quarter ended 30 June 2010, the Management Fee totalled Euro 441,481 (31 March 2010: Euro 432,494), of which Euro 143,997 (31 March 2010: Euro 147,854) was outstanding at the period end. There was no Incentive Fee charged during the quarter ended 30 June 2010 or the quarter ended 31 March 2010.

Management Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Group an annual Management Fee of 1.75 per cent of the net asset value of the Group other than to the extent that such value is comprised of any investment where the underlying asset portfolio is managed by the Investment Manager (as is the case with Cheyne Finance plc, Cheyne High Grade ABS CDO Ltd. and Cheyne CLO Investments I Limited). The Management Fee is calculated and payable monthly in arrears.

Incentive Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive an incentive compensation fee in respect of each incentive period that is paid quarterly in arrears. An incentive period will comprise each successive quarter, except the first such period was the period from admission to the London Stock Exchange to 31 March 2006. The Incentive Fee for each incentive period is an amount equivalent to 25 per cent of the amount by which A exceeds (B ´ C) where:

A =	The Group's consolidated net income taking into account any realised or unrealised losses (but only to the extent they have not been deducted in a prior incentive period) and excluding any gains from the revaluation of investments, as shown in the Group's latest consolidated management accounts for the relevant quarter, before payment of any Incentive Fee;
B =	An amount equal to a simple interest rate equal to two per cent per quarter, subject to the reset mechanic described below (the "Hurdle Rate"); and
C =	The weighted average number of Shares outstanding during the relevant quarter multiplied by the weighted average offer price of such Shares.

For the purposes of calculating the Incentive Fee, the Hurdle Rate was reset on 1 April 2010, and will be reset on each 1 April thereafter to equal the greater of (i) a simple interest rate equal two per cent per quarter, or (ii) one quarter of the sum of the then-prevailing yield per annum on ten-year German Bunds and 300 basis points. While the Group will not pay a Management Fee in respect of that portion of its portfolio that is comprised of investments where the Investment Manager receives fees for its management of the underlying asset portfolio, the income from such investments are included in the consolidated net income of the Group for the purpose of calculating the Incentive Fee.

There was no Incentive Fee charged during the quarter ended 31 June 2010 or during the quarter ended 31 March 2010.

Administration Fee

Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Group an administration fee of 0.125 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.0325 per cent of the gross asset value of the Group greater than Euro 80,000,000. State Street Fund Services (Ireland) Limited, the sub-administrator, is paid by the Administrator.

Custodian Fee

Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Group a custodian fee of 0.03 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Group greater than Euro 80,000,000, plus additional fees in relation to transaction fees, statutory reporting, corporate secretarial fees and other out of pocket expenses.

Investment Manager Options

In recognition of the work performed by the Investment Manager in raising capital for the Group, the Group granted to Cheyne Global Services Limited on 8 December 2005 options representing the right to acquire 2,250,000 Shares, being 10 per cent of the number of Offer Shares (that is, excluding the Shares issued to Cheyne ABS Opportunities Fund LP and the Shares issued to the Directors), at an exercise price per share equal to the Offer Price (Euro 10). The Investment Manager Options are fully vested and immediately exercisable on the date of admission to the London Stock Exchange and will remain exercisable until the 10th anniversary of that date. The Group may grant further Investment Manager Options in connection with any future offering of Shares. Such options, if any, will represent the right to acquire Shares equal to not more than 10 per cent of the number of Shares being offered in respect of that future offering and will have an exercise price equal to the offer price for that offering.

The aggregate fair value of the options granted at the time of the Initial Public Offering using a Black-Scholes valuation model was Euro 7,672,500 (reflecting a valuation of Euro 3.41 per option). This amount has been treated as a cost of the Initial Public Offering. As at 30 June 2010, these options were out of the money as the share price was below the Offer Price of Euro 10.

Controlling Party

Cheyne ABS Opportunities Fund, a Company that is managed by Cheyne Asset Management (UK) LLP, has a controlling interest in the Company.

19.  Significant Events during the period

On 6 April 2010 the Company repaid the remaining EUR 8,642,967 together with all interest due, terminating any further liabilities under the loan facility. 

On 28 May 2010, the Company sold the Gate 06-1 SME portfolio at a price that exceeded the 31 March 2010 valuation.

20.  Events after the Reporting Period

On 17 August 2010, the Company published a prospectus and circular relating to a Placing and Open Offer. The Company is proposing, subject to the consent of Ordinary Shareholders to change its investment policy with the result that the Company's primary focus for new investments will be Real Estate Debt Investments and undertaking a Placing and Open Offer of New Ordinary Shares to raise capital to invest in accordance with the proposed investment policy. 

On 15 September 2010, the Company's shareholders approved a 1 for 2 placing and open offer of ordinary shares at EUR 2.00 per share. In conjunction with the placing and open offer, the Company has issued a bonus 8% seven year preference share, denominated in GBP, to qualifying shareholders. The Company intends to use the proceeds of the offer to invest in European real estate bonds. Accordingly, the Company intends to change its name (subject to Guernsey regulatory approval) to Real Estate Credit Investments Ltd to reflect this change in investment policy.

Other than the above, there have been no events subsequent to 30 June 2010 which require adjustment to or disclosure in the quarterly report or the notes thereto.

21.  Comparative figures

The comparative figures are for the quarter ended 31 March 2010.

22.  Unaudited Financial Statements

The financial statements contained in this report are unaudited.

 

END

 

 

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