3rd Quarter Results

RNS Number : 9270C

Real Estate Credit Investments Ltd

15 March 2011

 



Real Estate Credit Investments Limited

Financial Results Announcement and Accounts for the Third Quarter Ended 31 December 2010

Real Estate Credit Investments Limited reports €4.6 million profit for quarter ended 31 December 2010

Real Estate Credit Investments Limited (the "Company" or "RECI"), has reported a net profit of €4.6 million for the quarter ended 31 December 2010, compared to a net profit of €3.1 million for the quarter ended 30 September 2010.  This represents the sixth consecutive quarter the Company has recorded a profit.

The Company's net asset value ("NAV") at quarter end was €1.80 per ordinary share¹ compared to €1.69 at 30 September 2010 and €1.59 per ordinary share following the completion of the Company's bonus issue of preference shares on 17 September 2010².  This figure takes into account net fair value write-ups in the quarter of €4.2 million, compared to €0.8 million of write-ups for the quarter ended 30 September 2010.  The investment portfolio generated gross cash flows of €7.7 million in the quarter compared to €4.5 million received in the previous quarter. Total cash at the quarter end was €7.7 million compared with €29.1 million at the end of the second quarter.

On 30 November 2010, the Company announced a preference dividend of 2.3p per preference share for the extended period 16 September 2010 to 31 December 2010. It declared a second preference dividend of 2.0p on 3 March 2011 for the period 1 January 2011 to 31 March 2011. The Company is announcing an Ordinary Dividend of €0.016 per ordinary share for the period 17 September 2010 to 31 December 2010.

Real Estate Debt Portfolio delivering positive results

During the third quarter, RECI made significant progress in delivering on its growth objectives set out in September 2010, by investing the net proceeds of the September 2010 placing and open offer (the "Issue") in undervalued real estate debt. RECI purchased €21.0million of new bonds in the three months to 31 December 2010. As at 31 December 2010 the Real Estate Debt Portfolio represented 48.8% of the investment portfolio, up from 36.8% on 30 September 2010.

New investment combined with fair value gains took the fair value of the Real Estate Debt Portfolio to €59.2 million on 31 December 2010, up from €37.4 million as at 30 September 2010.  The portfolio returned €3.6 million of fair value gains and cash flow of €1.9 million during the third quarter. Between 1 January and 28 February 2011, RECI purchased a further €13.2 million of bonds, increasing the overall fair value of the Real Estate Debt Portfolio to €68.3 million or 52.4% of the investment portfolio.³

RECI continues to actively manage its legacy assets in its SME, European Mortgage and UK Mortgage portfolios. These portfolios generated gross cash flows of €5.8 million in the quarter, compared with €3.7 million the previous quarter.

Tom Chandos, Chairman of Real Estate Credit Investments Limited, said: "This has been the first full quarter in which Real Estate Credit Investments' new investment strategy has been implemented. The strength of these results validates this strategy and the team's expertise in identifying undervalued assets."

Highlights

·     NAV up 7% in the quarter

·     Total investment portfolio rose 19.2% during the third quarter to €121.3 million

·     Real Estate Debt Portfolio accounted for approximately 50% of the investment portfolio and posted gains of 
6.5%

·     As at 28 February 2011, the Real Estate Debt Portfolio held bonds at a fair value of €68.3 million and a weighted average yield to maturity of 13.2%

·     Portuguese Mortgage assets represented 21.0% of the investment portfolio as at 31 December 2010, compared 
with 28.9% as at 30 September 2010

Conference Call & Further Information

A conference call to review the Company's financial results for the third quarter ended 31 December 2010 will take place at 10.30 am London time Tuesday 15 March 2011. 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 Real Estate Credit.  A results presentation will be available on the Real Estate Credit Investment website:

www.recreditinvest.com/investmentmanager

A webcast of the conference call will also be available on a listen-only basis at:

www.recreditinvest.com/investmentmanager

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:                              James Wallis                      [phone]
                                                                Kate Ruck Keene              [phone]

Investor Relations:                         Natalie Withers                [phone]

Notes:

1.     Calculations per share are based on the number of ordinary shares outstanding at the end of each respective period

2.     The initial adjusted NAV per new ordinary share following the completion of the Company's bonus issue of preference shares was detailed in the prospectus relating to the Issue

3.     This percentage assumes the value of the residual income positions remains unchanged from 31 December 2010

About the Company

Real Estate Credit Investments 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 (UK) LLP. 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 30 September 2010	Revenue	Fair value gains and losses	Total Quarter ended 31 December  2010
Operating Income	3,453,491		3,453,491	3,393,803		3,393,803
Gains and losses on fair value through profit or loss financial instruments		753,489	753,489		4,177,083	4,177,083
	3,453,491	753,489	4,206,980	3,393,803	4,177,083	7,570,886
Operating Expenses	(955,626)		(955,626)	(1,074,657)		(1,074,657)
Finance Costs	(167,729)		(167,729)	(1,864,126)		(1,864,126)
Net profit / (loss)	2,330,136	753,489	3,083,625	455,020	4,177,083	4,632,103
Total Assets	133,839,935			131,263,163
Total Liabilities	66,402,144			59,193,269
Equity Capital	67,437,791			72,069,894
NAV per share	1.69			1.80
Shares Outstanding	39,966,985			39,966,985

Investment Portfolio

A breakdown of the Company's investment portfolio as at 30 September 2010 and 31 December 2010 by jurisdiction (by reference to underlying asset originator) is set out below. The UK and German exposures have risen as a proportion of overall assets, following new investments in real estate securities backed by properties in these jurisdictions.  

30 September 2010

UK	34.1%
Portugal	28.9%
Germany	15.4%
Holland	11.9%
Italy	6.5%
France	3.1%
Total (€mm)	€101.8 mm

31 December 2010

UK	42.2%
Portugal	21.0%
Germany	20.4%
Holland	12.1%
Italy	3.7%
France	0.3%
Ireland	0.2%
Switzerland	0.1%
Total (€mm)	€121.3 mm

A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) as at 30 September 2010 and 31 December 2010 is set out below.  Percentages for each asset type are in relation to the value of the Company's investment portfolio (excluding cash and hedges).

30 September 2010

Real Estate Debt	36.8%
European Mortgages	34.4%
SME	17.9%
UK Mortgages	11.0%
Total (€mm)	€101.8 mm

31 December 2010

Real Estate Debt	48.8%
European Mortgages	23.8%
SME	16.0%
UK Mortgages	11.3%
Total (€mm)	€121.3 mm

The values in each of the above four charts may not sum to 100% due to rounding differences

Real Estate Debt Portfolio⁴

Following the investment of the net proceeds of the Issue, the Real Estate Debt Portfolio recorded a strong performance in the third quarter.  The portfolio was valued at €59.2 million, as at 31 December 2010, against which the Company recorded fair value gains of €3.6 million in the quarter.  The Real Estate Debt Portfolio recorded cash flows of €1.9 million in the quarter ended 31 December 2010, compared with €0.8 million in the previous quarter. As at 31 December 2010, the Real Estate Debt Portfolio represented 49% of the investment portfolio, up from 37% three months earlier. 

New bond purchases totalled €21.0 million in the third financial quarter, versus €9.8 million in the previous quarter.  As at 31 December 2010 the average purchase price of the portfolio was 62.5 cents with a weighted average expected yield to maturity of 13.8%. 

Between 1 January 2011 and 28 February 2011, the Company invested a further €13.2 million at an average price of 68.62 cents and a weighted average expected yield-to-maturity of 10.5%.  As at 28 February 2011, the portfolio consisted of 93 bonds at an amortised cost value of €59.5 million and a nominal value of €109.6 million⁵. The following table details the bonds held by the Company as at 28 February 2011⁶.The weighted average expected yield-to-maturity of the Real Estate Debt Portfolio as at 28 February 2011 was approximately 13.2%⁷ and the weighted average purchase price was 62.84 cents.

Ratings Distribution by Fair Value (as at 28 February 2011)

Current Rating	UK CMBS	UK RMBS	Euro CMBS	Euro RMBS	SME	Total	Total at 30 Sep 10
AAA	1.4%	5.8%	1.0%	0.0%	0.0%	8.3%	23.1%
AA	1.3%	5.6%	4.9%	0.1%	0.0%	11.9%	22.6%
A	2.6%	6.9%	10.1%	4.7%	0.0%	24.3%	19.7%
BBB	6.1%	7.4%	7.2%	0.8%	1.5%	23.1%	13.3%
BB and Below	6.6%	9.0%	16.7%	0.2%	0.0%	32.5%	21.3%
Total	18.0%	34.7%	39.9%	5.9%	1.5%	100.0%
Total at 30 Sep 10	19.3%	43.0%	34.9%	0.3%	2.6%

Totals may not sum due to rounding differences

⁴ The Real Estate Debt portfolio includes two bonds collateralised by SME loans accounting for 1.5% of the portfolio.
⁵ Cost and nominal shown are calculated with original notional using pool factor and FX rate at 28 February 2011.
⁶ The table includes the bonds at their fair value at 28 February 2011.
⁷ Weighted average yield to maturity calculated using yields at time of purchase.

European Mortgage Portfolio

The European Mortgage Portfolio generated cash flows of €3.4 million for the quarter ended 31 December 2010, compared to €2.0 million in the previous quarter and ahead of forecasts of €0.9 million. Write-downs in this portfolio totalled €4.0 million of which the Sestante mortgage portfolio accounted for €2.5 million.

The Company's Portuguese Mortgage Portfolio is seasoned having been originated between 1997-2004. The assets benefit from having low loan-to-value ratios with less than 10% of Portuguese mortgage loans having an LTV of more than 80%. As monthly mortgage payments are Euribor linked, Portuguese mortgage loans also benefit from carrying a low average weighted interest.

While cash flow remains positive, the Company is aware that Portuguese unemployment, which we view as the biggest risk to asset value, is rising. Fourth quarter unemployment increased to 11.1% from 10.9%. Accordingly, the Company has lowered the value of the Portuguese mortgage portfolio by €1.5 million.  The level of expected credit losses in the Lusitano 3 portfolio was increased by 2.5 times as a precaution against falls in house prices.  In addition, the expected refinancing date of the Magellan 1 was delayed by a further year.

Due to concerns about the servicing of the Sestante mortgage portfolio, the Company has again lowered its recovery rate on defaulted loans. However, Meliorbanca is seeking to move the servicing of the portfolio to Italfondiario, a larger servicer in the Italian market, which should improve the credit quality of the portfolio.

The Company continues to closely follow developments regarding fiscal deficits in Southern Europe.  The key risks to asset value remain a rise in Euribor, rising unemployment and consequent mortgage defaults. 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. 

SME Portfolio

Cash flows in the quarter ended 31 December 2010 totalled €0.3 million, unchanged from the previous quarter.

The Company expects default rates in this portfolio to remain volatile.  The SME portfolio's average default rate increased to 0.94 %, from 0.24% in the previous quarter. The Smart 06-1 asset recorded a substantial increase in default rates from 0.5% to 1.9%, albeit this default rate remains within expectations.  The default rate of the Amstel SME portfolio remained at 0%.

The table below outlines actual default rates in the SME portfolio and intra-period volatility of default rates.  The valuations of the SME portfolio reflect a conservative forecast of future defaults relative to historical averages.

	June 2010 Default Rate (annualised)	Sept 2010 Default Rate (annualised)	Dec 2010 Default Rate (annualised)
Amstel 06-1	0.0%	0.0%	0.0%
Smart 06-1	4.1%	0.5%	1.9%
Average	2.1%	0.2%	0.9%

UK Mortgage Portfolio

The UK Mortgage Portfolio recorded cash flows of £1.9 million in the quarter ended 31 December 2010 compared to £1.3 million in the previous quarter. 

The Company has increased its valuation of the UK Mortgage Portfolio by €2.5 million, as a result of better than expected performance of the RMAC assets and the sale of Eurosail 2006-1.  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 obtains independent prices for all of its bonds.

Changes in the balance sheet value of the residual portfolio between 30 September 2010 and 31 December 2010 (excluding sales) totalled -€2.3 million.  This comprised -€3.3 million of principal amortisation and fair value gains of €1.0 million.  In relation to the Real Estate Debt Portfolio, the balance sheet value increased by €21.8 million. There were €21.0 million new purchases, fair value gains of €3.6 million, principal amortisations of -€1.5 million and sales of -€1.3 million.  After giving effect to these balance sheet changes in the quarter ended 31 December 2010, the NAV of the Company was €1.80 per ordinary share as at 31 December 2010, versus €1.69 per ordinary share as at 30 September 2010.⁸

The Company recorded total cash flows of €9.6 million in the quarter, of which €7.7 million came from the investment portfolio (excluding hedges). The sale of three bonds generated €1.3 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	30 Sep 2010 B/S Value1,2 (€mm)	31 Dec 2010  B/S Value2    (€mm)	Change to B/S Value Since 30 Sep 2010 (€mm)	Cash Flows Received in the Quarter Ended 31 Dec 2010 (€mm)	Cash Flows Received in the Quarter Ended 30 Sep 20103 (€mm)
UK Mortgages	11.2	13.7	2.5	2.2	1.5
Euro Mortgages	35.0	28.9	-6.1	3.4	2.0
SME	18.2	19.5	1.3	0.3	0.3
Real Estate Bonds	37.4	59.2	21.8	1.9	0.8
TOTAL4	101.8	121.3	19.5	7.7	4.6

1.        Balance sheet values as at 30 Sep 2010 are expressed using 31 Dec 2010 FX rates.

2.        The balance sheet value figures for 30 Sep 2010 and 31 Dec 2010 include accrued interest.

3.        Cash flows for 30 Sep 2010 are expressed using 31 Dec 2010 FX rates.

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

Company Outlook - Continued Opportunities in European Real Estate Debt 

RECI will build on the significant progress made during the third quarter, by continuing to invest cash flow in undervalued assets and achieving strong risk adjusted returns from its Real Estate Debt Portfolio.

The Company believes that fourth quarter market conditions will continue to support our strategy of investing profitably in dislocated assets. Moreover, we believe that growing demand for real estate assets will further support valuations of the overall debt portfolio. The dislocation in the European real estate financing markets, combined with the large degree of refinancing required over the next three years, will continue to provide attractive investment opportunities.

Our strategy remains to make two thirds of new investments in bonds backed by commercial real estate debt in the form of CMBS and one third of new investments in bonds backed by residential mortgages in the form of RMBS.  Investments will focus on Northern Europe, including the UK.  The Company will also consider investments in real estate loans in addition to real estate backed securities. 

⁸ The values may not sum to totals or sub-totals due to rounding differences. 

RECI will continue to manage the SME, European Mortgage and UK Mortgage Portfolios with a high degree of diligence. The priority remains to identify opportunities to sell these assets at attractive prices. In January 2011 the Company sold Eurosail 2006-1 at a sale price above its September valuation and accretive to NAV.

RECI will closely monitor any developments that affect asset values including unemployment levels in Portugal and the short-term Euribor rate. Furthermore, the Company will continue working with mortgage originators in the UK to identify loans that do not satisfy the representations and warranties provided at the time of the securitisation.

The Company is pleased that the NAV has improved during the quarter under review and is committed to increasing NAV through its growth strategy.

REAL ESTATE CREDIT INVESTMENTS LIMITED

Unaudited Condensed Consolidated Statement of Comprehensive Income

For the quarter ended 31 December 2010 and the quarter ended 30 September 2010

	Note	Quarter ended 31 December 2010	Quarter ended 30 September 2010
		Euro	Euro
Interest income	5	3,393,803	3,453,491
Gains on fair value through profit or loss financial instruments	4	4,177,083	753,489
		7,570,886	4,206,980
Operating expenses	6	(1,074,657)	(955,626)
Finance costs	5	(1,864,126)	(167,729)
Net profit		4,632,103	3,083,625
Earnings per Ordinary Share
Basic	8	Euro 0.12	Euro 0.11
Diluted	8	Euro 0.12	Euro 0.11
Weighted average Ordinary Shares outstanding		Number	Number
Basic	8	39,966,985	28,816,776
Diluted	8	39,966,985	28,816,776

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

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

REAL ESTATE CREDIT INVESTMENTS LIMITED

Unaudited Condensed Consolidated Statement of Changes in Equity

For the quarter ended 31 December 2010 and the quarter ended 30 September 2010

		Share Capital	Reserves	TOTAL
	Note	Euro	Euro	Euro
Balance at 1 July 2010		-	99,968,469	99,968,469
Net profit for the quarter		-	3,083,625	3,083,625
Issue of Ordinary Shares of the Company	14	-	26,644,656	26,644,656
Issue of Preference Shares of the Company	14	-	(57,665,484)	(57,665,484)
Share issuance expenses allocated to the Ordinary Shareholders		-	(730,000)	(730,000)
Distribution to the Ordinary Shareholders of the Company	7	-	(3,863,475)	(3,863,475)
Balance at 30 September 2010		-	67,437,791	67,437,791
Net profit for the quarter		-	4,632,103	4,632,103
Balance at 31 December 2010		-	72,069,894	72,069,894

REAL ESTATE CREDIT INVESTMENTS LIMITED

Unaudited Condensed Consolidated Statement of Financial Position

As at 31 December 2010

	Note	31 December 2010		30 September 2010
		Euro		Euro
Non-current assets
Investments at fair value through profit or loss	10	119,591,781		100,599,597
		119,591,781		100,599,597
Current assets
Cash and cash equivalents		7,711,073		29,111,868
Derivative financial assets - options held for trading	10	1,337,654		1,431,399
Derivative financial assets - unrealised gain on interest rate swap agreements	12	738,314		1,290,421
Other assets	11	1,884,341		1,406,650
		11,671,382		33,240,338
Total assets		131,263,163		133,839,935
Equity and liabilities
Equity
Reserves	15	72,069,894		67,437,791
		72,069,894		67,437,791
Current liabilities
Distribution payable	7	-		3,863,475
Derivative financial liabilities - unrealised loss on forward foreign exchange contracts	12	146,513		109,917
Other liabilities	13	2,043,050		6,115,870
		2,189,563		10,089,262
Non-current liabilities
Preference Shares	14	57,003,706		56,312,882
Total liabilities		59,193,269		66,402,144
Total equity and liabilities		131,263,163		133,839,935

REAL ESTATE CREDIT INVESTMENTS LIMITED

Unaudited Condensed Consolidated Statement of Cash Flows

For the quarter ended 31 December 2010 and the quarter ended 30 September 2010

	Note		Quarter ended 31 December 2010		Quarter ended 30 September 2010
			Euro		Euro
Net cash outflow from operating activities	16		(18,293,060)		(2,585,237)
Financing activities
Issue of Ordinary Shares			-		26,644,656
Shares issuance expenses			-		(2,082,602)
Dividends paid to shareholders	7		(3,863,475)		(2,131,573)
Cash flows from financing activities			(3,863,475)		22,430,481
Net (decrease)/increase in cash			(22,156,535)		19,845,244
Reconciliation of net cash flow to movement in net cash
Net (decrease)/increase in cash and cash equivalents			(22,156,535)		19,845,244
Cash and cash equivalents at start of period			29,111,868		10,025,291
Effect of exchange rate fluctuations on cash and cash equivalents			755,740		(758,667)
Cash and cash equivalents at end of period			7,711,073		29,111,868

1.    General information

Queen's Walk Investment Limited was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. On 17 September 2010, the Company changed its name to Real Estate Credit Investments Limited (the "Company"). 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. Its Ordinary Shares have a premium listing on the London Stock Exchange and its Preference Shares have a standard listing.  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 31 December 2010, the Company's only subsidiary was Trebuchet Finance Limited.

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

Following the approval of the Placing and Open Offer, the Group changed its investment objective and the objective is to aim to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends.  The Group will seek to achieve this objective by investing primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom ("Real Estate Debt Investments"). The Real Estate Debt Investments may take different forms but will likely be: (i) securitised tranches of secured real estate related debt securities; and (ii) secured real estate loans, debentures or any other form of debt instrument.  At least 70% of the net asset value of the Group will be invested in Real Estate Debt Investments.

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 was administered by Kleinwort Benson (Channel Islands) Fund Services Limited until 8 March 2011. From 8 March 2011, State Street Fund Services (Guernsey) Limited was appointed Administrator and provides all administration services to the Group in this capacity.

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.

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.

2.    Significant accounting policies (continued)

Basis of preparation (continued)

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. The Directors note the cash resources available (Euro 7.7m as at 31 December 2010) and the income received on the investment portfolio, which the Directors believe should be sufficient to cover normal operational costs and current liabilities for the foreseeable future.

This 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 31 December 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 real estate debt 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.

2.    Significant accounting policies (continued)

Investments (continued)

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 Condensed 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 reporting 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 reporting date. Broker marks are obtained for these positions. The change in value is recorded in net gains/(losses) in the Condensed Consolidated Statement of Comprehensive Income. Realised gains and losses are recognised on the maturity or sale of the option.

The fair value of forward foreign exchange contracts is their quoted market price at the reporting date, being the present value of the quoted forward price.  The change in value is recorded in net gains/(losses) in the Condensed Consolidated Statement of Comprehensive Income.  Realised gains and losses are recognised on the maturity of a contract, or when the contract is closed out and they are transferred to realised gains or losses in the Condensed Consolidated Statement of Comprehensive Income.

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.

2.         Significant accounting policies (continued)

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 Condensed 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.

Preference Shares

The Company has made a Bonus Issue to Ordinary Shareholders of Preference Shares.  The value of the Preference Shares represent an obligation on the Group to pay the Preference Share Notional Value on winding up of the Group or on redemption of the Preference Shares in accordance with their terms. The fair value of the Preference Shares amounts to the Notional Value of the Preference Shares translated into the functional currency of the Group on the day of issuance, less the costs arising from the issue of these shares. Subsequent to initial measurement, the Preference Shares are re-measured at amortised cost using the effective interest rate method over the life of the Preference Shares of seven years.

The Preference Shares have been classified as non-current liabilities in this quarterly report.  The amortisation of the Preference Shares will be treated as a finance cost through the Statement of Comprehensive Income.

The Preference Shareholders are entitled to a Preference Dividend equal to 8% per annum of the Preference Share Notional Value.  The Preference Dividend will be accrued at each valuation point using the effective interest method and paid quarterly.  Dividends owing to Preference Shareholders are shown as a Finance Cost in the Condensed Consolidated Statement of Comprehensive Income on an accruals basis.

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.

Expenses attributable to the Placing and Open Offer and the Bonus Issue

The expenses of the Company attributable to the Placing and Open Offer and the Bonus Issue are those which are necessary to implement the Placing and Open Offer and the Bonus Issue.  Such expenses include registration, listing and admission fees, corporate finance fees, printing, advertising and distribution costs, legal fees and other applicable expenses.

2.    Significant accounting policies (continued)

Expenses attributable to the Placing and Open Offer and the Bonus Issue (continued)

These expenses have been allocated to the Ordinary and Preference Shareholders based on a pro-rata allocation.  Expenses attributable to the Ordinary Shareholders have been expensed as incurred and are included as a reduction to Reserves in the Condensed Consolidated Statement of Changes in Equity. Expenses attributable to the Preference Shareholders will be amortised over the life of the Preference Shares of seven years and the amortisation is included in Operating Expenses in the Condensed Consolidated Statement of Comprehensive Income.

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 Condensed 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) Real Estate Debt Bonds and 2) in Residual Interests. 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 condensed consolidated quarterly report:

3. Critical accounting judgements and key sources of estimation uncertainty (continued)

 

Income recognition of residual income positions and bonds

The Group invests 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.

3. Critical accounting judgements and key sources of estimation uncertainty (continued)

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 31 December 2010 quoted 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 Condensed 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. Net 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 31 December 2010		Quarter ended 30 September 2010
		Euro		Euro
Net realised (losses)/gains:
Net realised gains on investments at fair value through profit or loss		146,226		227,056
Net realised losses on options		(765,399)		-
Net realised losses on foreign exchange transactions		(861,575)		-
Net realised gains on interest rate swap agreements		-		163,256
Net realised (losses)/gains		(1,480,748)		390,312
Movement in net unrealised gains/(losses):
Net unrealised gains on investments at fair value through profit or loss		4,822,538		2,220,737
Net unrealised losses on interest rate swap agreements		(552,107)		(581,081)
Net unrealised gains/(losses) on options		668,256		(407,895)
Net unrealised gains/(losses) on foreign bank balances		755,740		(758,667)
Net unrealised losses on foreign exchange contracts		(36,596)		(109,917)
Net movement in unrealised gains		5,657,831		363,177
Net realised and movements in unrealised gains		4,177,083		753,489

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 31 December 2010		Quarter ended 30 September 2010
		Euro		Euro
Interest income
Investments designated at fair value through profit or loss upon initial recognition		3,392,110		3,450,480
Loans and receivables (including cash and cash equivalents)		1,693		3,011
Total interest income		3,393,803		3,453,491

Finance Costs
Liabilities held at amortised cost:
Preference Shares issuance expense amortised		48,827		3,398
Dividend owing to Preference Shareholders (Note 7)		1,176,700		164,331
Net unrealised loss on Preference Share due to foreign exchange fluctuations		638,599		-
Total finance costs		1,864,126		167,729

6. Operating expenses

Note		Quarter ended 31 December 2010		Quarter ended 30 September 2010
		Euro		Euro
Investment management, custodian and administration fees
Investment management fee	17	569,209		463,650
Administration fee	17	49,491		48,517
Custodian fee	17	9,210		9,210
		627,910		521,377
Other operating expenses
Audit fees		42,849		42,849
Directors' fees payable to Directors of Real Estate Credit Investment Limited		60,489		78,606
Directors' fees payable to Directors of Trebuchet Finance Limited		6,301		8,188
Legal fees		176,438		169,058
Pricing expenses		23,996		-
Other expenses		136,674		135,548
		446,747		434,249
Total operating expenses		1,074,657		955,626

The Group has no employees.

7. Dividends

The first interim dividend for the year ended 31 March 2011 of Euro 0.145 per share was declared on 3 September 2010 and an amount of Euro 3,863,475 was paid to shareholders on 22 October 2010. This dividend was paid in respect of the period from 1 April 2010 to 15 September 2010.

A dividend of Euro 0.016 per share was declared on 15 March 2011 for the period from 16 September to 31 December 2010. The liability in respect of the second interim dividend has not yet been recognised in the Consolidated Statement of Financial Position of the Group for the quarter ended 31 December 2010 since this dividend had neither been declared nor approved at the quarter end date.

Under Guernsey Law, companies can pay dividends in excess of accounting profit provided they satisfy the solvency test prescribed under The Companies (Guernsey) Law, 2008. The solvency test considers whether a company is able to pay its debts when they become due and whether the value of a company's assets are greater than its liabilities. The Company passed the solvency test for each dividend payment for the period ended 31 December 2010.

The Group's objective is to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends. 

7. Dividends (continued)

Preference Dividends

The Preference Shareholders are entitled to a Preference Dividend equal to 8% per annum of the Preference Share Notional Value.  The Preference Dividend will be accrued at each valuation point and paid quarterly.  Dividends owing to Preference Shareholders are shown as a Finance Cost in the Condensed Consolidated Statement of Comprehensive Income on an accrual basis.

The Preference Dividend in respect of the period from 15 September 2010 (the date when the Preference Shares were issued) to 31 December 2010 amounting to Euro 1,341,031 was paid on 31 December 2010. 

8. Profit per Ordinary Share

		Quarter ended 31 December 2010		Quarter ended 30 September 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		4,632,103		3,083,625
Weighted average number of Ordinary Shares for the purposes of basic earnings per share		39,966,985		28,816,776
Effect of dilutive potential Ordinary Shares:
Share options		-		-
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share		39,966,985		28,816,776

There is no dilution as at 31 December 2010 or 30 September 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:

		31 December 2010		30 September 2010
		Euro		Euro
Asset-backed securities and bonds at fair value through profit or loss		119,591,781		100,599,597
Options purchased held for trading		1,623,178		1,876,471
Options written held for trading		(285,524)		(445,072)
Total options at fair value		1,337,654		1,431,399
Total investments		120,929,435		102,030,996

Asset-backed securities and bonds
Opening cost		246,300,971		239,205,890
Purchases		20,824,212		9,836,369
Sales proceeds		(1,334,799)		(1,243,242)
Realised gain on sales		146,226		227,056
Principal payups		1,043,492		993,960
Principal paydowns		(6,509,485)		(2,719,062)
Closing cost		260,470,617		246,300,971
Unrealised losses		(140,878,836)		(145,701,374)
Asset-backed securities and bonds at fair value		119,591,781		100,599,597

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 31% (30 September 2010: 63%) of the total assets. One of the structures, comprising approximately 3% (30 September 2010: 9%) 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 31 December 2010:

Counterparty	Expiration	Description	Currency	Notional Amount	Strike price	Unrealised Gains/(Losses) Euro
JP Morgan	31 Dec 2011	EUR Call GBP Put	Euro	14,000,000	0.9315	(352,662)
Goldman Sachs	31 Dec 2011	EUR Call GBP Put	GBP	14,000,000	1.300	(5,330)
Goldman Sachs	18 Sep 2017	EUR Put GBP Call	GBP	12,500,000	0.8333	(448,066)
JP Morgan	31 Dec 2011	EUR Call GBP Put (Written option)	Euro	14,000,000	1.300	37,494
Goldman Sachs	31 Dec 2011	EUR Call GBP Put (Written option)	GBP	14,000,000	0.9315	(39,069)
Net unrealised loss on option contracts						(807,633)
Premium on option contracts						2,145,287
Options at fair value						1,337,654

10.  Investments (continued)

The following options contracts were open as at 30 September 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	(1,094,780)
JP Morgan	31 Dec 2010	EUR Call GBP Put	Euro	10,000,000	1.300	(10,000)
JP Morgan	31 Dec 2011	EUR Call GBP Put	Euro	14,000,000	0.9315	(247,424)
Goldman Sachs	31 Dec 2011	EUR Call GBP Put	GBP	14,000,000	1.300	6,820
Goldman Sachs	18 Sep 2017	EUR Put GBP Call	GBP	12,500,000	0.8333	(359,382)
Goldman Sachs	31 Dec 2010	EUR Call GBP Put (Written option)	Euro	10,000,000	1.300	161,970
JP Morgan	31 Dec 2010	EUR Call GBP Put (Written option)	Euro	10,000,000	0.9315	182,110
JP Morgan	31 Dec 2011	EUR Call GBP Put (Written option)	Euro	14,000,000	1.300	29,262
Goldman Sachs	31 Dec 2011	EUR Call GBP Put (Written option)	GBP	14,000,000	0.9315	(144,465)
Net unrealised loss on option contracts						(1,475,889)
Premium on option contracts						2,907,288
Options at fair value						1,431,399

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

11.  Other assets

		31 December 2010		30 September 2010
		Euro		Euro
Interest receivable on investment portfolio		1,651,691		1,194,722
Interest receivable on cash and cash equivalents		232,650		211,928
		1,884,341		1,406,650

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 31 December 2010.

Termination Date	Counterparty	Initial Notional Amount (GBP)	Unrealised Gain Euro
25 January, 2013	Goldman Sachs	451,431	17,345
15 October, 2011	Goldman Sachs	5,500,000	89,123
15 November, 2011	Goldman Sachs	1,300,000	20,690
25 January, 2013	Goldman Sachs	1,226,713	66,060
15 October, 2011	Goldman Sachs	2,900,000	58,033
12 September, 2011	Goldman Sachs	1,700,000	27,020
27 March, 2011	Goldman Sachs	17,348,100	156,527
15 February, 2011	Goldman Sachs	7,564,274	67,156
15 January, 2011	Goldman Sachs	25,502,525	236,360
			738,314

12.  Derivative contracts (continued)

The following interest rate and balanced guaranteed interest rate swaps were unsettled at 30 September 2010:

Termination Date	Counterparty	Initial Notional Amount (GBP)	Unrealised Gain Euro
25 January, 2013	Goldman Sachs	451,431	20,052
15 October, 2011	Goldman Sachs	5,500,000	111,359
15 November, 2011	Goldman Sachs	1,300,000	25,629
25 January, 2013	Goldman Sachs	1,226,713	79,984
15 October, 2011	Goldman Sachs	3,000,000	74,053
12 September, 2011	Goldman Sachs	1,700,000	36,038
27 March, 2011	Goldman Sachs	17,348,100	313,729
15 February, 2011	Goldman Sachs	8,282,152	143,858
15 January, 2011	Goldman Sachs	26,198,025	485,719
			1,290,421

The following foreign exchange forward contracts were unsettled at 31 December 2010.

Maturity Date	Amount Bought	Amount Sold	Unrealised Loss Euro
31 March 2011	GBP 5,250,000	EUR 6,254,728	(130,193)
31 March 2011	GBP 1,014,660	EUR 1,200,000	(16,320)
			(146,513)

The following foreign exchange forward contract was unsettled at 30 September 2010.

Maturity Date	Amount Bought	Amount Sold	Unrealised Loss Euro
10 December 2010	GBP 7,000,000	Euro 8,189,769	(109,917)
			(109,917)

13. Other liabilities

		31 December 2010		30 September 2010
		Euro		Euro
Dividend owing to Preference Shareholders		-		164,307
Due to related parties - Investment Manager (Note 17)		194,093		161,041
Payable for investments purchased		-		3,773,045
Accrued expenses		1,848,957		2,017,477
		2,043,050		6,115,870

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.

14.  Share capital

The capital structure of the Company consists of cash and cash equivalents and equity attributable to equity holders, comprising issued share capital (Ordinary), liabilities due to Preference Shareholders and reserves, as disclosed on the Condensed Consolidated Statement of Financial Position.

The Company does not have any externally imposed capital requirements.  At 31 December 2010 the Company had equity reserves of Euro 72,069,894 (30 September 2010: Euro 67,437,791).

The investment objective is to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends. The Group will seek to achieve this objective by investing primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom.

The Group's dividend policy has been amended so that available income is first used to pay any Preference Dividend that is due and payable and then, if the Directors in their sole discretion so resolve, to Ordinary Shareholders.

Authorised Share Capital

	31 December 2010	31 December 2010		30 September 2010	30 September 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	39,966,985	-		26,644,657	-
Ordinary shares issued during the quarter	-	-		13,322,328	-
Balance at end of period	39,966,985	-		39,966,985	-

In terms of the Placing and Open Offer, the Ordinary Shares were issued at Euro 2.00 per share.

No ordinary shares were bought back or cancelled during the period.

The Company made a Bonus Issue to Ordinary Shareholders of Preference Shares pro rata to their holding of Ordinary Shares following the completion of the Placing and Open Offer.

Preference Shares Issued and fully paid

	31 December 2010	31 December 2010		30 September 2010	30 September 2010
	Number of Preference Shares	Euro		Number of Preference Shares	Euro
Preference shares issued at par	49,958,704	57,665,484		-	-
Preference shares issued during the quarter at par	-	-		49,958,704	57,665,484
Remaining unamortised issue costs allocated to Preference Shares	-	(1,300,377)		-	(1,352,602)
Net unrealised gains/(losses) due to foreign exchange fluctuations	-	638,599		-	-
Balance at end of period	49,958,704	57,003,706		49,958,704	56,312,882

14.  Share capital (continued)

During the period ending 30 September 2010 49,958,704 Preference Shares were issued with a par value of £1 (EUR 1.154) per share.  All issued shares are fully paid.  Expenses arising as a result of the Bonus Issue have been allocated to the Ordinary and Preference Shareholders based on a pro-rata allocation.  Expenses borne by the Preference Shareholders will be amortised over the life of the Preference Shares, being seven years.  The initial recognised fair value of the Preference Shares has been reduced by the amount of expenses accrued at 31 December 2010.

The holders of Preference Shares are entitled to receive dividends of 8% per annum of the Preference Share Notional Value.  Preference Shares do not carry the right to vote.  The holders of Preference Shares participate only to the extent of the face value of the shares.  The Preference Shares are classified as liabilities.

The Preference Shares shall be redeemed by the Company in the following circumstances:

a)   at any time, by way of the purchase of any such Preference Shares by the Company through the facilities of the London Stock Exchange; or

b)   upon a change of control of the Company (defined as the acquisition by a single person or persons acting in concert of more than 50% of the voting rights attached to the Ordinary Shares), but only if a majority of Preference Shareholders attending and voting at a special class meeting of Preference Shareholders (which shall be convened within 60 days of the change of control) so resolve by way of an ordinary resolution, at a price equal to the Repayment Amount; or

c)   if more than 75% of the Preference Shares have been redeemed before the expiration of the seven year period referred to under paragraph (d) below, by way of a mandatory redemption programme launched by the Company at its sole discretion, at a price equal to the higher of (i) the Repayment Amount, or (ii) the average mid-market closing price over the five Business Days prior to the announcement of the launch of such programme; or

d)   if not redeemed earlier pursuant to paragraphs (a), (b) or (c) above, on a date that is seven years after their  issue at the Repayment Amount.

15.  Reserves

	Quarter ended 31 December 2010
	Accumulated Reserves		Capital Reserves		Total Reserves
	Euro		Euro		Euro
Balance at start of period	59,765,291		7,672,500		67,437,791
Net profit for the period	4,632,103		-		4,632,103
Balance at end of period	64,397,394		7,672,500		72,069,894

	Quarter ended 30 September 2010
	Accumulated Reserves		Capital Reserves		Total Reserves
	Euro		Euro		Euro
Balance at start of period	92,295,969		7,672,500		99,968,469
Net profit for the period	3,083,625		-		3,083,625
Issue of Ordinary Shares of the Company	26,644,656		-		26,644,656
Issue of Preference Share of the Company	(57,665,484)		-		(57,665,484)
Ordinary Shares issuance expenses	(730,000)		-		(730,000)
Distribution to the Ordinary Shareholders of the Company	(3,863,475)		-		(3,863,475)
Balance at end of period	59,765,291		7,672,500		67,437,791

16. Notes to Statement of Cash Flows

	Quarter ended 31 December 2010		Quarter ended 30 September 2010
	Euro		Euro
Net profit	4,632,103		3,083,625
Adjustments for:
Preference Shares issuance expense amortised	48,827		-
Net realised gains on sale of asset backed securities and bonds	(146,226)		(227,056)
Net realised loss on expired option	765,399		-
Movement in net unrealised gains on investments at fair value through profit or loss	(4,822,538)		(2,220,737)
Net unrealised losses on Preference Shares due to foreign exchange fluctuations	638,599		-
Unrealised losses on interest rate swap agreements	552,107		581,081
Unrealised (gains)/losses on options	(668,256)		407,895
Unrealised (gains)/losses on foreign bank balances	(755,740)		758,667
Unrealised losses on foreign exchange contracts	36,596		109,917
	280,871		2,493,392
Purchases of investments	(24,597,257)		(7,382,301)
Sales proceeds from investments	1,334,799		1,243,242
Purchase of options	-		(1,794,237)
Options Written	-		243,949
Principal paydowns	6,509,485		2,719,062
Principal payups	(1,043,492)		(993,960)
	(17,796,465)		(5,964,245)
Increase in receivables	(477,691)		(204,026)
(Decrease)/Increase in payables	(299,775)		1,089,642
	(777,466)		885,616
Net cash outflow from operating activities	(18,293,060)		(2,585,237)

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.

17.  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 31 December 2010, the Management Fee totalled Euro 569,209 (30 September 2010: Euro 463,650), of which Euro 194,093 (30 September 2010: Euro 161,041) was outstanding at the period end. There was no Incentive Fee charged during the quarter ended 31 December 2010 or the quarter ended 30 September 2010.

17.  Material agreements and related party transactions (continued)

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 December 2010 or during the quarter ended 30 September 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 and other out of pocket expenses.

17.  Material agreements and related party transactions (continued)

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 31 December 2010, these options were out of the money as the share price was below the Offer Price of Euro 10.

Significant Shareholder

Cheyne ABS Opportunities Fund, a Company that is managed by Cheyne Asset Management (UK) LLP, held 15,773,804 shares in the Company at 31 December 2010.

18.  Significant Events during the period

There were no significant events to report during the period.

19.  Events after the Reporting Period

There have been no events subsequent to 31 December 2010 which require adjustment of or disclosure in the quarterly report or the notes thereto.

20.  Comparative figures

The comparative figures are for the quarter ended 30 September 2010.

21.  Unaudited Financial Statements

The financial statements contained in this report are unaudited.

 

END

 

 

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