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                      +44 (0)20 7920 2329
                                                                Kate Ruck Keene              +44 (0)20 7920 2322

Investor Relations:                         Natalie Withers                +44 (0)20 7968 7348

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






131,263,163


133,839,935


















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










Preference Shares

14

57,003,706


56,312,882


59,193,269


66,402,144







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)



(3,863,475)


22,430,481









(22,156,535)


19,845,244












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)


         

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



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.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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