Financial Results

Queen's Walk Investment Limited 28 November 2007 28 November 2007 Queen's Walk Investment Limited Financial Results for the Quarter Ended 30 September 2007 and Interim Report and Accounts Queen's Walk Investment Limited ('Queen's Walk') is a Guernsey-incorporated investment company listed on the London Stock Exchange. Queen's Walk invests primarily in a diversified portfolio of subordinated tranches of asset backed securities, including the unrated 'equity' or 'first loss' residual income positions typically retained by the banks or other financial institutions which have originated the loan assets that collateralise a securitisation transaction. The Company makes such investments where its investment manager, Cheyne Capital Management (UK) LLP ('Cheyne Capital'), considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. For more information regarding Queen's Walk, please visit www.queenswalkinv.com or call Caroline Villiers: +44 20 7153 1521. Highlights â€¢ Operating income for the quarter of â‚¬9.7 million, equating to operating income per share of â‚¬0.24 compared to â‚¬12.3 million or â‚¬0.30 per share in the previous quarter. â€¢ Earnings in the quarter of -â‚¬0.6 million or -â‚¬0.01 per share compared to -â‚¬3.2 million or -â‚¬0.08 per share in the previous quarter. â€¢ Distributable income in the quarter of â‚¬7.6 million or â‚¬0.19 per share compared to â‚¬8.8 million or â‚¬0.22 per share as at 30 June 2007. â€¢ Net asset value of â‚¬6.90 per share as at 30 September 2007 versus â‚¬7.01 per share as at 30 June 2007. Following the completion of the tender offer, approved on 8 October 2007, the NAV per share was â‚¬7.07. â€¢ The Board of Directors has declared an interim dividend of â‚¬0.15 per share for the quarter. â€¢ Fair value write-downs of the Company's investment portfolio in the quarter totalled â‚¬8 million or approximately 2.2% of the 30 June 2007 gross asset value. These write-downs resulted principally from continued deterioration in the US sub-prime market and wider market discount rates applied to the Company's three CDO residual positions. â€¢ As at 30 September 2007, the fair value of the Company's investments exposed, directly or indirectly, to the US sub-prime market accounted for â‚¬7.5 million or 2.3% of the Company's gross asset value. â€¢ The weighted average yield of the Company's investment portfolio as at 30 September 2007 was 13.1% in local currency terms compared to 13.3% as at 30 June 2007. â€¢ The Company's net leverage has increased from 3.0% as at 30 June 2007 to 8.6% as at 30 September 2007. â€¢ On 15 October 2007, the Company completed a tender offer pursuant to which approximately â‚¬25 million was returned to shareholders. â€¢ As of 15 November 2007, 5,701,637 ordinary shares have been purchased for cancellation since 30 June 2007. Financial Highlights Total Total Revenue Fair value Quarter ended Revenue Fair value Quarter ended gains and 30 September gains and losses 2007 losses 30 June 2007 Operating Income 9,672,694 - 9,672,694 12,307,088 - 12,307,088 Gains and losses on (8,094,060) (8,094,060) fair value through profit or loss - (11,527,045) (11,527,045) financial instruments 9,672,694 (8,094,060) 1,578,634 12,307,088 (11,527,045) 780,043 Operating Expenses (1,404,332) - (1,404,332) (2,668,568) - (2,668,568) Finance Costs (741,929) - (741,929) (1,336,435) - (1,336,435) Net profit / (loss) 7,526,433 (8,094,060) (567,627) 8,302,085 (11,527,045) (3,224,960) Distributable 7,577,972 8,765,290 income1,2 Distributable income â‚¬0.19 â‚¬0.22 per share Total Assets â‚¬326,577,355 â‚¬360,911,412 Total Liabilities â‚¬53,258,112 â‚¬76,075,800 Equity Capital â‚¬273,319,243 â‚¬284,835,612 NAV per share â‚¬6.90 â‚¬7.01 1. Net profit from investments before deduction of net fair value losses through profit or loss. For the quarter ended 30 June 2007, the distributable income includes â‚¬463,205 of f/x gains and losses. For the quarter ended 30 September 2007, the distributable income includes â‚¬51,540 of f/x gains and losses. 2. Refer to Note 3 of the quarterly report for the quarter ended 30 September 2007 for further details on the Company's distribution policy. Second Quarter Dividend The Board of Directors has declared an interim dividend for the quarter ended 30 September 2007 of â‚¬0.15 per share payable on 8 January 2008 to shareholders of record on 14 December 2007. Conference Call A conference call to review the Company's financial results for the quarter ended 30 September 2007 will take place at 2:00 P.M. London time on 28 November 2007. The conference call can be accessed by dialing +44 (0)20 7138 0837 ten minutes prior to the scheduled start of the call. A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com). A webcast of the conference call will also be available on a listen-only basis at www.queenswalkinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call. For further information please contact - Investor Relations: Caroline Villiers +44 (0) 20 7153 1521 About the Company Queen's Walk Investment Limited is a Guernsey-incorporated investment company listed on the London Stock Exchange. Queen's Walk invests primarily in a diversified portfolio of subordinated tranches of asset backed securities, including the unrated 'equity' or 'first loss' residual income positions typically retained by the banks or other financial institutions which have originated the loan assets that collateralise a securitisation transaction. The Company makes such investments where it's investment manager, Cheyne Capital Management (UK) LLP, considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. The Company believes that it's investment focus provides equity investors with exposure to a relatively new investment opportunity in this asset class. The content of 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', '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). Portfolio Review As at 30 September 2007, the Company's portfolio of UK mortgage, European mortgage and SME residual investments comprised 80.3% of the Company's gross-asset value. The Company's investments are exposed to the US sub-prime market through, firstly, a single mortgage-backed residual position and secondly, through two ABS CDOs collateralised by asset pools containing US sub-prime mortgage-backed bonds. These three bonds accounted for 2.3% of the Company's gross asset value. A CDO, backed by US leveraged loans, accounted for 1.4% of the Company's gross asset value. Cash balances accounted for 16.0% of the Company's gross asset value. The cash generative capability of the portfolio remains strong with â‚¬24.6 million of cash proceeds being received in the quarter ended 30 September 2007 compared to â‚¬22.3 million received in the previous quarter. While the current market volatility may have a negative impact on the fair value of the Company's portfolio in future periods, the cash generative capability of the Company's assets will not be affected by changes in market discount rates. The Company's net leverage has increased to 8.6%(1) as at 30 September 2007 from 3.0% as at 30 June 2007. As at 31 October 2007, the Company had â‚¬22.2 million of cash on the balance sheet and has drawn â‚¬45 million against its 4 year term financing facility. Investment Portfolio UK Mortgage Investments (33.3% of GAV) No significant changes to the pricing assumptions of the Company's UK mortgage-backed residual investments were made in the quarter. The prepayment data received in the quarter has been consistent with the Company's prepayment assumptions. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 September 2007. An extended dislocation in the UK mortgage market, if it were to occur, should, in the aggregate, be neutral in terms of its impact on the valuation of the Company's UK mortgage residual investments. Following a reduction in the availability of mortgage credit, the rate of mortgage prepayments would be expected to slow, extending the duration of the residuals, and thereby increasing their value. However, the gain in the residual values would be expected to be offset by an increase in arrears and defaults. The reduction in residual values due to weaker credit should be limited because of the house price appreciation that has occurred since the residuals were originated. For example, the Company has three residual investments in its UK mortgage portfolio with exposure to mortgages originated in the first half of 2006. The average LTV of these three residuals has reduced from 79% to 66% as a result of house price appreciation(2). To hedge against a substantial fall in UK house prices, the Company has purchased â‚¬28 million notional of out of the money put options referencing the Halifax house price index on 31 October 2007. European Mortgage Investments (31.1% of GAV) With respect to the European mortgage-backed residual portfolio, the fundamentals underlying the performance of these investments remain sound. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 September 2007. In the past quarter, we began to observe increased borrower prepayment behaviour associated with the Company's European mortgage portfolios. This increase in prepayment rates has been in line with expectations. The default and recovery experience in these investments has also been in line with expectations. SME Investments (15.9% of GAV) The Company's portfolio of SMEs residual investments is performing in line with or better than expectations. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 September 2007. The observed default rates for the Company's SME portfolios remain in line with expectations. Furthermore, the expected default rates for the Company's SME portfolios, based on the most recent credit scores for the underlying companies, are also in line with or better than original pricing assumptions. CDO Investments (2.8% of GAV) The Company holds residual positions in three CDOs, two of which are exposed to US mortgage assets. As a result of the continued deterioration in the US ABS markets, the credit performance of Cheyne ABS Investments I PLC ('ABS Investments I') has weakened. Since inception, seven of the bonds in the portfolio have been upgraded and one bond is on a positive rating watch with Moody's. However, at present, four bonds in the portfolio are on negative ratings watch. Depending on the extent of the weakness in the US housing market, bonds in the ABS Investments I portfolio may experience downgrades. The fair value assigned to ABS Investments I as at 30 September 2007, assumes interest deferral and downgrades of bonds in the portfolio. Cheyne High Grade CDO, Ltd ('High Grade CDO') is a CDO backed by AAA to A-rated ABS bonds and ABS Investments I is a CDO backed by the mezzanine tranches of US ABS CDOs (including US RMBS CDOs). As at 30 September 2007, the credit performance of High Grade CDO had been positive, with three rating upgrades and no negative credit actions on the bonds contained in its portfolio. Previously, the asset manager of High Grade CDO had identified two bonds in the collateral pool with potential credit issues. In the quarter ended 30 September 2007, these bonds were sold and replaced with two bonds with an improved credit profile. The market values of the two ABS CDO residuals have been adversely affected by the recent volatility in the ABS markets. In the quarter ended 30 September 2007, the fair value write-downs as a result of wider market discount rates and changes in expected future cash flows reduced the fair value of these two assets by 40.6%. Cheyne CLO Investments I Ltd ('CLO Investments I') is backed by AA- to BBB- rated US CLO bonds. The performance of this collateral has exceeded original pricing assumptions and two of the bonds in the portfolio have been upgraded from BBB to A and AA, respectively. There have been no downgrades or negative watch warnings on any of the bonds in the portfolio. The market discount rate for the asset increased again in the quarter, resulting in fair value write-downs reducing the fair value of the asset by approximately 20%. However, the cash generative ability of this residual investment remains positive and is in line with expectations. US Mortgage Investment (0.9% of GAV) The Company retains exposure to one US mortgage-backed residual investment. Following revisions to the pricing assumptions in the quarter ended 30 June 2007, actual credit losses have been slightly better than forecast. However, the lifetime cumulative loss assumption for the asset was unchanged in the quarter. In addition, the market discount rate increased again in the quarter. In the quarter ended 30 September 2007, the fair value write-downs as a result of wider market discount rates and changes in expected future cash flows reduced the fair value of this asset by 24.1%. Portfolio Valuation In accordance with the Company's valuation procedures, the fair value of the Company's investments has been evaluated on the basis of performance, observable market data and the Investment Manager's expectations regarding future trends. After giving effect to the fair value write-downs taken in the quarter, the NAV of the Company has decreased to â‚¬6.90 per share as at 30 September 2007 from â‚¬7.01 per share as at 30 June 2007 (a decrease of 1.6%). On 8 October 2007, the Company received approval from shareholders to proceed with the repurchase of shares through the tender offer. Following the tender offer, the NAV of the Company was â‚¬7.07 per share(3). The table below summarises the changes in fair values of the Company's investment portfolio by asset class: Asset Class 30 June 2007 30 September Fair Value % Change to Cashflows Cashflows Fair Value1,2 2007 Change Since 30 June 2007 Received in the Received in the (â‚¬mn) Fair Value2 (â‚¬ 30 June 2007 (â‚¬ Fair Value Quarter Ended Quarter Ended mn) mn) 30 June 2007 (â‚¬ 30 September mn) 2007 (â‚¬mn) UK Mortgages 123.7 108.8 -14.9 -12.0% 16.6 12.8 Euro Mortgages 103.7 101.4 -2.3 -2.2% 3.4 4.7 SME 52.3 51.9 -0.4 -0.8% 3.2 3.1 CDO 13.5 9.1 -4.4 -32.6% 0.9 1.1 US Mortgages 4.2 2.9 -1.3 -30.5% 0.5 0.6 Cash and Other Cash 54.8 52.3 -2.5 -4.7% Equivalents TOTAL3 352.2 326.4 -25.8 -7.3% 22.3 24.6 1. Fair values as at 30 June 2007 are expressed using 30 September 2007 f/x rates. 2. The fair value figures for 30 June 2007 and 30 September 2007 include accrued income and, in the case of the UK mortgage residuals, the value of the interest rate swaps. 3. The values for each column may not sum to the total due to rounding differences. Fair value changes since 30 June 2007 include principal amortisations of the residuals as a result of cash flows received in the quarter. There have been no material fair value write-downs of the UK mortgage, European mortgage or SME portfolios. The valuations of the US and ABS CDO portfolios continue to be affected by increases in market discount rates, and in the case of the three residuals with exposure to the US sub-prime mortgage market, deteriorations in the cash flow expectations which resulted in material fair value write-downs in the quarter. Portfolio Breakdowns A breakdown of the Company's investment portfolio by jurisdiction (by reference to underlying asset originator) is set out below. Percentages for each asset class are in relation to the gross asset value of the Company's investment portfolio. Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2007 (1) UK 42.3% US 1.5% CDO 4.7% Germany 12.4% Holland 4.9% Italy 8.4% Portugal 25.8% Total (â‚¬mn) 303.0 (1) Expressed using f/x rates as at 30 June 2007 Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2007 UK 39.7% US 1.1% Italy 9.3% Holland 5.3% Germany 13.7% Portugal 27.6% CDO 3.3% Total (â‚¬mn) 274.2 A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Percentages for each asset class are in relation to the gross asset value of the Company's investment portfolio. Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2007 (1) Near Prime 20.6% Sub Prime 21.0% CDO 4.7% SME 17.3% Prime 36.4% Total (â‚¬mn) 303.0 (1) Expressed using f/x rates as at 30 June 2007 Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2007 Near Prime 19.7% Sub Prime 19.2% CDO 3.3% SME 18.9% Prime 38.8% Total (â‚¬mn) 274.2 Share Repurchases On 8 October 2007, shareholders approved the Company's tender offer and on 15 October 2007, the Company repurchased for cancellation 4,504,500 shares at a price of â‚¬5.55 per share. As of 30 September 2007, the Company had purchased 991,354 shares through its buy back programme at an average price of â‚¬5.04 per share. Through the period from 1 October 2007 until 15 November 2007, the Company has purchased 205,783 shares at an average of â‚¬5.38 per share. Though the share buybacks have been accretive to NAV, the number of shares which the Company has been able to repurchase has been constrained by applicable limits on the number of shares that can be purchased on any particular day and by the price at which the Company can repurchase shares. While the share price trades at a material discount to NAV, the Company believes it is in the best interests of shareholders to continue with the share buy-backs. Strategy and Market Outlook The volatility in the ABS markets has continued in the quarter. The magnitude of the credit deterioration in the US sub-prime mortgage and US ABS CDO markets has increased substantially since 30 June 2007. What began as a dislocation in the US sub-prime mortgage market has now had a much broader impact on the credit markets. In both the European and US asset-backed markets, there is likely to be a long-term structural shift in the availability of credit to fund asset backed lending. These changes will continue to develop over the coming months, with the specific outcome difficult to predict at this stage. What is emerging appears to be a re-pricing of senior or AAA rated risk and a substantial withdrawal of mezzanine capital. We expect these changes to offer, in due course, the Company significant investment opportunities. However, with continued volatility in the ABS markets, the Company will refrain from purchasing new assets in the near term. At present, the discount to the NAV at which the share price is trading, is an opportunity for the Company to buyback shares and add value for existing shareholders. The Company intends to tender for â‚¬15 million of its issued share capital. Details of the tender offer will be sent to shareholders shortly. Unaudited Consolidated Income Statement For the quarter ended 30 September 2007 Total Total Revenue Fair Quarter Revenue Fair Quarter Note return value ended return value ended gains 30 gains 30 June 2007 and September and losses 2007 losses Euro Euro Euro Euro Euro Euro Operating 9,672,694 - 9,672,694 12,307,088 - 12,307,088 income Gains and - (8,094,060) (8,094,060) - (11,527,045) (11,527,045) losses on fair value through profit or loss financial instruments 9,672,694 (8,094,060) 1,578,634 12,307,088 (11,527,045) 780,043 Operating 5 (1,404,332) - (1,404,332) (2,668,568) - (2,668,568) expenses Finance costs 6 (741,929) - (741,929) (1,336,435) - (1,336,435) Net loss 7,526,433 (8,094,060) (567,627) 8,302,085 (11,527,045) (3,224,960) Loss per Ordinary Share Basic Euro (0.014) Euro (0.079) Diluted Euro (0.014) Euro (0.079) Weighted Number Number average Ordinary Shares outstanding Basic 40,132,525 40,620,756 Diluted 40,132,525 40,620,756 All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. Unaudited Consolidated Statement of Changes in Shareholders' Equity For the quarter ended 30 September 2007 Share Share Other Reserve Capital Accumulated Total Capital Premium Reserve Profits Euro Euro Euro Euro Euro Euro Balance at 1 April 2007 - - 384,678,304 7,672,500 (98,197,119) 294,153,685 Net loss for the quarter - - - - (3,224,960) (3,224,960) Transfers from distributable - - (12,186,226) - 12,186,226 - reserves to accumulated profits Distribution to the Ordinary - - - - (6,093,113) (6,093,113) Shareholders of the Company Balance at 30 June 2007 - - 372,492,078 7,672,500 (95,328,966) 284,835,612 Net loss for the quarter - - - - (567,627) (567,627) Redemption of ordinary shares - - (5,004,332) - - (5,004,332) Transfers from distributable - - (109,813,774) - 109,813,774 - reserves to accumulated profits Distribution to the Ordinary - - - - (5,944,410) (5,944,410) Shareholders of the Company Balance at 30 September 2007 - - 257,673,972 7,672,500 7,972,771 273,319,243 30 September 30 June 2007 2007 Euro Euro Non-current assets Investments at fair value through profit or loss 269,274,302 297,198,144 Current assets Cash and cash equivalents 52,250,434 56,685,553 Derivative financial assets - unrealised gain on forward exchange contracts 140,883 317,548 Derivative financial assets - unrealised gain on interest rate swap agreements 1,517,985 1,874,062 Other assets 3,393,751 4,836,105 57,303,053 63,713,268 Total assets 326,577,355 360,911,412 Equity and liabilities Equity Share capital - - Share premium account - - Other reserve 257,673,972 372,492,078 Capital reserve in respect of share options 7,672,500 7,672,500 Accumulated profits/(losses) 7,972,771 (95,328,966) 273,319,243 284,835,612 Current liabilities Repurchase agreements - 65,682,339 Distribution payable 5,944,410 6,093,113 Derivative financial liabilities - unrealised loss on forward 546,476 - exchange contracts Other liabilities 1,767,226 4,300,348 Total liabilities 8,258,112 76,075,800 Non-current liabilities Loans 45,000,000 - Total liabilities 53,258,112 76,075,800 Total equity and liabilities 326,577,355 360,911,412 1. General information Queen's Walk Investment Limited (the 'Company') was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is a closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 1994 and its Ordinary Shares are listed on the London Stock Exchange. The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. 'Group' is defined as the Company and its subsidiary. At 30 September 2007, the Company's only subsidiary was Trebuchet Finance Limited. The Company's investment objective is to preserve capital and provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ('ABS') where the Investment Manager considers that the coupon or cash flows on the tranche are attractive relative to the underlying credit. These are and will be, in most cases, below investment grade or unrated and do or will, in many cases, represent the residual income positions typically retained by the originator of a securitisation transaction as the 'equity' or ' first loss' position. The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management Limited (the 'Investment Manager'), an investment management firm authorised and regulated by the Financial Services Authority. The Company 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 Company 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 Company has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the ' Administrator'). Investors Fund Services (Ireland) Limited (A State Street Company) provide certain administration services to the Company in its capacity as sub-administrator. 2. Significant accounting policies Basis of preparation The 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 dated 31 March 2007. The quarterly report of the Group is prepared on the historical cost or amortised cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit or loss. The majority of the Company'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, 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 balance sheet date. See notes 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. This quarterly report is presented in Euros 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 Euros. 2. Significant accounting policies (continued) Basis of consolidation Subsidiaries are entities controlled by the Company. Subsidiaries are included in the consolidated quarterly report from the date that control commences until the date that control ceases. At 30 September 2007, 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 accounts are therefore included in the consolidated quarterly report 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 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 Company is an investment company whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value. Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades. Cash and cash equivalents Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities. Derivative financial instruments Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. The Group may also enter into credit default or total return swap arrangements where the underlying asset or assets would otherwise be within the Group's investment policy in order to obtain substantially the same economic exposure to the returns and risks associated with holding such underlying asset or assets. 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 income statement. 2. Significant accounting policies (continued) Derivative financial instruments (continued) Fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Total return swap agreements and credit default swap agreements are fair valued on the date of valuation based upon the underlying market value of the reference asset using the approach explained under fair value. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement. 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, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. 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. The carrying 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 carrying 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 regarding defaults, delinquencies and prepayments received in respect of a given asset is markedly 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. Dealer 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. 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 income statement following the reassessment of the cash flows discounted at the current market rate estimated for the investment. 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. 2. Significant accounting policies (continued) Repurchase agreements The Group may finance the acquisition of some of its investments through the use of repurchase agreements. Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the balance sheet. Derecognition of a financial asset A transfer of a financial asset is accounted for as a derecognition 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 income statement over the period of the borrowings on an effective interest basis. Financing costs associated with the issuance of financings are deferred and amortised over the term of the financings using the effective interest rate method, in line with market practice. 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 balance sheet date are translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. 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. Transaction expenses The preliminary expenses of the Company directly attributable to its initial public offering and any costs associated with the establishment of the Company are charged to the share premium or other reserve account. Share options granted to the Investment Manager are treated as a transaction expense on the basis that they are granted by the Company as a fee for the Investment Manager's work in raising capital for the Company. The fair value of such options is charged to the share premium account. The share premium account is credited with the fair value of such options at the time that such options are vested. Interest income Interest income is accrued based on the fair value of the Group's financial assets and their contractual terms. 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 income statement 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 Value Added Tax (VAT) purposes under the VAT Act of 1972. 2. Significant accounting policies (continued) 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 Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs. Other accruals and payables Other accruals and payables are not interest-bearing and are stated at their nominal value. Business and geographical segments The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities and operates solely from Guernsey and therefore no segmental reporting is provided. 3. Critical accounting judgements and key sources of estimation uncertainty Critical accounting judgements in applying the Group's accounting policies In the process of applying the Groups accounting polices (described in note 2 above), the Company has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements: Income recognition The Company invests primarily in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ('ABS'). ABS 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 Company follows a policy of accounting for such investments 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'. Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position. 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 Company'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. Where quoted 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 comparative assets and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. The assumptions upon which the pricing models are based are described in note 2 (Fair Value) to the accounts. Any change to assumptions surrounding the pricing models may result in different fair values being attributed to the investments. 4. Distributable and non-distributable profits Under The Companies (Guernsey) Law, 1994 (the 'Companies Law'), dividends can be paid from profits available for the purpose. Following the Company's IPO, the Company passed a special resolution and obtained Royal Court approval for the cancellation of the amount standing to the credit of its share premium account. The Other Reserve created on cancellation (amounting to Euro 384,678,304) is available as distributable profits for all purposes permitted by the Companies Law including the payment of dividends and buy-back of shares. Under the UKLA Listing Rules, any dividend must be covered by income received from underlying investments. The Company's objective is to provide shareholders with stable returns in the form of quarterly dividends. The Company's dividend policy is to make dividend distributions from its distributable net income subject to retaining a portion of such income as a reserve for payment in subsequent periods. While these accounts reflect a net loss after realised losses and fair value adjustments, the dividend declared is covered by income received from underlying investments as required by the Listing Rules (as reflected in the Consolidated Income Statement) and the Company has sufficient reserves (in the form of the Other Reserve) from which the dividend can be paid. 5. Operating expenses Quarter ended Quarter ended 30 September 2007 30 June 2007 Euro Euro Investment management, custodian and administration fees Investment management and incentive fee 1,159,218 1,211,317 Custodian and administration fee 185,365 110,573 1,344,583 1,321,890 Other operating expenses Audit fees 42,849 42,383 Directors' fees payable to Directors of Queen's Walk Investment Limited 55,935 64,065 Directors' fees payable to Directors of Trebuchet Finance Limited 7,182 6,673 Legal fees 132,747 70,568 Pricing expenses (283,377) 462,616 Other expenses 104,413 700,373 59,749 1,346,678 Total operating expenses 1,404,332 2,668,568 The Company has no employees. 6. Finance costs Quarter ended Quarter ended 30 September 2007 30 June 2007 Euro Euro Finance costs arises from: Interest expense on loan 557,279 - Repurchase agreements 184,650 1,336,435 Total finance costs 741,929 1,336,435 QUEEN'S WALK INVESTMENT LIMITED INTERIM REPORT AND ACCOUNTS (UNAUDITED) FOR THE PERIOD ENDED 30 SEPTEMBER 2007 Directors and Advisers Directors and Advisers (continued) Directors Tom Chandos (Chairman) Stuart Fiertz (resigned on 22 June 2007) Graham Harrison John Hawkins Talmai Morgan Christopher Spencer Registered Office Dorey Court Admiral Park St. Peter Port Guernsey GY1 3BG Administrator and Secretary of the Company Kleinwort Benson (Channel Islands) Fund Services Limited Dorey Court Admiral Park St. Peter Port Guernsey GY1 3BG Investment Manager Cheyne Capital Management (UK) LLP Stornoway House 13 Cleveland Row London SW1A 1DH Corporate Brokers Citigroup Global Markets Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB Goldman Sachs International Peterborough Court 133 Fleet Street London EC4A 2BB Auditors Deloitte & Touche LLP Regency Court Glategny Esplanade St. Peter Port Guernsey GY1 3HW Registrar Capita IRG (CI) Limited 2nd Floor No. 1 Le Truchot St. Peter Port Guernsey GY1 4AE UK Transfer Agent Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Custodian Investors Trust & Custodial Services (Ireland) Limited Block D Iveagh Court Harcourt Road Dublin 2 Ireland Sub-Administrator Investors Fund Services (Ireland) Limited Block D Iveagh Court Harcourt Road Dublin 2 Ireland Chairman's Statement Following an extraordinarily turbulent time in the credit markets, Queen's Walk is reporting an operating income of â‚¬9.7 million (â‚¬0.24 per share) for the quarter ended 30 September 2007. Earnings were -â‚¬0.6 million (-â‚¬0.01 per share) compared to -â‚¬3.2 million (-â‚¬0.08 per share) for the quarter ended 30 June 2007. Distributable income was â‚¬7.6 million (â‚¬0.19 per share), compared to â‚¬8.8 million (â‚¬0.22 per share) for the quarter ended 30 June 2007. As a result the board has decided to declare an interim dividend of â‚¬0.15 per share for the quarter, the same level as for the previous quarter. NAV was â‚¬6.90 per share as at 30 September 2007, a fall of less than 2% of the NAV as at 30 June 2007. The tender offer launched in September closed shortly after the end of the quarter, returning â‚¬25 million of capital to shareholders through purchases at a strike price of â‚¬5.55. The effect of this was an increase in the NAV as at 8 October 2007, on a pro-forma basis to â‚¬7.07 per share. Conditions in the credit markets have further deteriorated since 30 September 2007, but the Company's assets are continuing to generate cash at a satisfactory rate. Given the current discount in the share price to NAV and the cash generative nature of the assets, the Company intends to continue with the re-purchase of its shares. In addition, to the share buyback programme, the Company plans to conduct a further tender offer to purchase â‚¬15 million of the Company's ordinary shares. Details of the tender offer will be mailed to shareholders shortly. Tom Chandos, Chairman 26 November 2007 Investment Manager's Report (continued) Highlights â€¢ Operating income for the quarter of â‚¬9.7 million, equating to operating income per share of â‚¬0.24 compared to â‚¬12.3 million or â‚¬0.30 per share in the previous quarter. â€¢ Earnings in the quarter of -â‚¬0.6 million or -â‚¬0.01 per share compared to -â‚¬3.2 million or -â‚¬0.08 per share in the previous quarter. â€¢ Distributable income in the quarter of â‚¬7.6 million or â‚¬0.19 per share compared to â‚¬8.8 million or â‚¬0.22 per share as at 30 June 2007. â€¢ Net asset value of â‚¬6.90 per share as at 30 September 2007 versus â‚¬7.01 per share as at 30 June 2007. Following the completion of the tender offer, approved on 8 October 2007, the NAV per share was â‚¬7.07. â€¢ The Board of Directors has declared an interim dividend of â‚¬0.15 per share for the quarter. â€¢ Fair value write-downs of the Company's investment portfolio in the quarter totalled â‚¬8 million or approximately 2.2% of the 30 June 2007 gross asset value. These write-downs resulted principally from continued deterioration in the US sub-prime market and wider market discount rates applied to the Company's three CDO residual positions. â€¢ As at 30 September 2007, the fair value of the Company's investments exposed, directly or indirectly, to the US sub-prime market accounted for â‚¬7.5 million or 2.3% of the Company's gross asset value. â€¢ The weighted average yield of the Company's investment portfolio as at 30 September 2007 was 13.1% in local currency terms compared to 13.3% as at 30 June 2007. â€¢ The Company's net leverage has increased from 3.0% as at 30 June 2007 to 8.6% as at 30 September 2007. â€¢ On 15 October 2007, the Company completed a tender offer pursuant to which approximately â‚¬25 million was returned to shareholders. â€¢ As of 15 November 2007, 5,701,637 ordinary shares have been purchased for cancellation since 30 June 2007. Portfolio Review As at 30 September 2007, the Company's portfolio of UK mortgage, European mortgage and SME residual investments comprised 80.3% of the Company's gross-asset value. The Company's investments are exposed to the US sub-prime market through, firstly, a single mortgage-backed residual position and secondly, through two ABS CDOs collateralised by asset pools containing US sub-prime mortgage-backed bonds. These three bonds accounted for 2.3% of the Company's gross asset value. A CDO, backed by US leveraged loans, accounted for 1.4% of the Company's gross asset value. Cash balances accounted for 16.0% of the Company's gross asset value. The cash generative capability of the portfolio remains strong with â‚¬24.6 million of cash proceeds being received in the quarter ended 30 September 2007 compared to â‚¬22.3 million received in the previous quarter. While the current market volatility may have a negative impact on the fair value of the Company's portfolio in future periods, the cash generative capability of the Company's assets will not be affected by changes in market discount rates. The Company's net leverage has increased to 8.6%(4) as at 30 September 2007 from 3.0% as at 30 June 2007. As at 31 October 2007, the Company had â‚¬22.2 million of cash on the balance sheet and has drawn â‚¬45 million against its financing facility. Investment Portfolio UK Mortgage Investments (33.3% of GAV) No significant changes to the pricing assumptions of the Company's UK mortgage-backed residual investments were made in the quarter. The prepayment data received in the quarter has been consistent with the Company's prepayment assumptions. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 September 2007. An extended dislocation in the UK mortgage market, if it were to occur, should, in the aggregate, be neutral in terms of its impact on the valuation of the Company's UK mortgage residual investments. Following a reduction in the availability of mortgage credit, the rate of mortgage prepayments would be expected to slow, extending the duration of the residuals, and thereby increasing their value. However, the gain in the residual values would be expected to be offset by an increase in arrears and defaults. The reduction in residual values due to weaker credit should be limited because of the house price appreciation that has occurred since the residuals were originated. For example, the Company has three residual investments in its UK mortgage portfolio with exposure to mortgages originated in the first half of 2006. The average LTV of these three residuals has reduced from 79% to 66% as a result of house price appreciation(5). To hedge against a substantial fall in UK house prices, the Company has purchased â‚¬28 million of out of the money put options referencing the Halifax house price index on 31 October 2007. European Mortgage Investments (31.1% of GAV) With respect to the European mortgage-backed residual portfolio, the fundamentals underlying the performance of these investments remain sound. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 September 2007. In the past quarter, we began to observe increased borrower prepayment behaviour associated with the Company's European mortgage portfolios. This increase in prepayment rates has been in line with expectations. The default and recovery experience in these investments has also been in line with expectations. SME Investments (15.9% of GAV) The Company's portfolio of SMEs residual investments is performing in line with or better than expectations. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 September 2007. The observed default rates for the Company's SME portfolios remain in line with expectations. Furthermore, the expected default rates for the Company's SME portfolios, based on the most recent credit scores for the underlying companies, are also in line with or better than original pricing assumptions. CDO Investments (2.8% of GAV) The Company holds residual positions in three CDOs, two of which are exposed to US mortgage assets. As a result of the continued deterioration in the US ABS markets, the credit performance of Cheyne ABS Investments I PLC ('ABS Investments I') has weakened. Since inception, seven of the bonds in the portfolio have been upgraded and one bond is on a positive rating watch with Moody's. However, at present, four bonds in the portfolio are on negative ratings watch. Depending on the extent of the weakness in the US housing market, bonds in the ABS Investments I portfolio may experience downgrades. The fair value assigned to ABS Investments I as at 30 September 2007, assumes interest deferral and downgrades of bonds in the portfolio. Cheyne High Grade CDO, Ltd ('High Grade CDO') is a CDO backed by AAA to A-rated ABS bonds and ABS Investments I is a CDO backed by the mezzanine tranches of US ABS CDOs (including US RMBS CDOs). As at 30 September 2007, the credit performance of High Grade CDO had been positive, with three rating upgrades and no negative credit actions on the bonds contained in its portfolio. Previously, the asset manager of High Grade CDO had identified two bonds in the collateral pool with potential credit issues. In the quarter ended 30 September 2007, these bonds were sold and replaced with two bonds with an improved credit profile. The market values of the two ABS CDO residuals have been adversely affected by the recent volatility in the ABS markets. In the quarter ended 30 September 2007, the fair value write-downs as a result of wider market discount rates and changes in expected future cash flows reduced the fair value of these two assets by 40.6%. Cheyne CLO Investments I Ltd ('CLO Investments I') is backed by AA- to BBB- rated US CLO bonds. The performance of this collateral has exceeded original pricing assumptions and two of the bonds in the portfolio have been upgraded from BBB to A and AA, respectively. There have been no downgrades or negative watch warnings on any of the bonds in the portfolio. The market discount rate for the asset increased again in the quarter, resulting in fair value write-downs reducing the fair value of the asset by approximately 20%. However, the cash generative ability of this residual investment remains positive and is in line with expectations. US Mortgage Investment (0.9% of GAV) The Company retains exposure to one US mortgage-backed residual investment. Following revisions to the pricing assumptions in the quarter ended 30 June 2007, actual credit losses have been slightly better than forecast. However, the lifetime cumulative loss assumption for the asset was unchanged in the quarter. In addition, the market discount rate increased again in the quarter. In the quarter ended 30 September 2007, the fair value write-downs as a result of wider market discount rates and changes in expected future cash flows reduced the fair value of this asset by 24.1%. Portfolio Valuation In accordance with the Company's valuation procedures, the fair value of the Company's investments has been evaluated on the basis of performance, observable market data and the Investment Manager's expectations regarding future trends. After giving effect to the fair value write-downs taken in the quarter, the NAV of the Company has decreased to â‚¬6.90 per share as at 30 September 2007 from â‚¬7.01 per share as at 30 June 2007 (a decrease of 1.6%). On 8 October 2007, the Company received approval from shareholders to proceed with the repurchase of shares through the tender offer. Following the tender offer, the NAV of the Company was â‚¬7.07 per share6. The table below summarises the changes in fair values of the Company's investment portfolio by asset class: Asset Class 30 June 2007 30 September Fair Value % Change to Cashflows Cashflows Fair Value1,2 2007 Change Since 30 June 2007 Received in the Received in the (â‚¬mn) Fair Value2 (â‚¬ 30 June 2007 (â‚¬ Fair Value Quarter Ended Quarter Ended mn) mn) 30 June 2007 (â‚¬ 30 September mn) 2007 (â‚¬mn) UK Mortgages 123.7 108.8 -14.9 -12.0% 16.6 12.8 Euro Mortgages 103.7 101.4 -2.3 -2.2% 3.4 4.7 SME 52.3 51.9 -0.4 -0.8% 3.2 3.1 CDO 13.5 9.1 -4.4 -32.6% 0.9 1.1 US Mortgages 4.2 2.9 -1.3 -30.5% 0.5 0.6 Cash and Other Cash 54.8 52.3 -2.5 -4.7% Equivalents TOTAL3 352.2 326.4 -25.8 -7.3% 22.3 24.6 3. Fair values as at 30 June 2007 are expressed using 30 September 2007 f/x rates. 4. The fair value figures for 30 June 2007 and 30 September 2007 include accrued income and, in the case of the UK mortgage residuals, the value of the interest rate swaps. 3. The values for each column may not sum to the total due to rounding differences. Fair value changes since 30 June 2007 include principal amortisations of the residuals as a result of cash flows received in the quarter. There have been no material fair value write-downs of the UK mortgage, European mortgage or SME portfolios. The valuations of the US and ABS CDO portfolios continue to be affected by increases in market discount rates, and in the case of the three residuals with exposure to the US sub-prime mortgage market, deteriorations in the cash flow expectations which resulted in material fair value write-downs in the quarter. 6 Given the materiality of the tender offer, a pro-forma NAV is shown as at 8 October 2007. The pro-forma NAV is computed using the 30 September 2007 fair values and by reducing the cash balance by â‚¬24,999,975 and the number of outstanding shares by 4,504,500. Portfolio Breakdowns A breakdown of the Company's investment portfolio by jurisdiction (by reference to underlying asset originator) is set out below. Percentages for each asset class are in relation to the gross asset value of the Company's investment portfolio. Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2007 (1) UK 42.3% US 1.5% CDO 4.7% Germany 12.4% Holland 4.9% Italy 8.4% Portugal 25.8% Total (â‚¬mn) 303.0 (1) Expressed using f/x rates as at 30 June 2007 Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2007 UK 39.7% US 1.1% Italy 9.3% Holland 5.3% Germany 13.7% Portugal 27.6% CDO 3.3% Total (â‚¬mn) 274.2 A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Percentages for each asset class are in relation to the gross asset value of the Company's investment portfolio. Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2007 (1) Near Prime 20.6% Sub Prime 21.0% CDO 4.7% SME 17.3% Prime 36.4% Total (â‚¬mn) 303.0 (1) Expressed using f/x rates as at 30 June 2007 Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2007 Near Prime 19.7% Sub Prime 19.2% CDO 3.3% SME 18.9% Prime 38.8% Total (â‚¬mn) 274.2 Share Repurchases On 8 October 2007, shareholders approved the Company's tender offer and on 15 October 2007, the Company repurchased for cancellation 4,504,500 shares at a price of â‚¬5.55 per share. As of 30 September 2007, the Company had purchased 991,354 shares through its buy back programme at an average price of â‚¬5.04 per share. Through the period from 1 October 2007 until 15 November 2007, the Company has purchased 205,783 shares at an average of â‚¬5.38 per share. Though the share buybacks have been accretive to NAV, the number of shares which the Company has been able to repurchase has been constrained by applicable limits on the number of shares that can be purchased on any particular day and by the price at which the Company can repurchase shares. While the share price trades at a material discount to NAV, the Company believes it is in the best interests of shareholders to continue with the share buy-backs. Related party transactions Related party transactions are disclosed in note 19 to the condensed set of financial statements. Strategy and Market Outlook The volatility in the ABS markets has continued in the quarter. The magnitude of the credit deterioration in the US sub-prime mortgage and US ABS CDO markets has increased substantially since 30 June 2007. What began as a dislocation in the US sub-prime mortgage market has now had a much broader impact on the credit markets. In both the European and US asset-backed markets, there is likely to be a long-term structural shift in the availability of credit to fund asset backed lending. These changes will continue to develop over the coming months, with the specific outcome difficult to predict at this stage. What is emerging appears to be a re-pricing of senior or AAA rated risk and a substantial withdrawal of mezzanine capital. We expect these changes to offer, in due course, the Company significant investment opportunities. However, with continued volatility in the ABS markets, the Company will refrain from purchasing new assets in the near term. At present, the discount to the NAV at which the share price is trading, is an opportunity for the Company to buyback shares and add value for existing shareholders. The Company intends to tender for â‚¬15 million of its issued share capital. Details of the tender offer will be sent to shareholders shortly. Directors' Responsibility Statement We confirm to the best of our knowledge: a) the interim accounts have been prepared in accordance with IAS 34; b) the interim management report (contained in the Chairman's Statement and Investment Manager's report) includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and c) the interim management report include a fair review of the information required by DTR 4.2.8R (disclosure of related party transactions and changes therein). By order of the Board Talmai Morgan Christopher Spencer Director Director 26 November 2007 26 November 2007 Independent review report to Queen's Walk Investment Limited We have been engaged by the company to review the condensed set of financial statements of Queen's Walk Investment Limited (the 'Company') in the half-yearly financial report for the six months ended 30 September 2007 which comprises the consolidated income statement, the consolidated balance sheet, the consolidated statement of changes in equity, the consolidated cash flow statement and related notes 1 to 20. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. This report is made solely to the company in accordance with International Standard on Review Engagements 2410 issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed. Directors' responsibilities The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdoms' Financial Services Authority. As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRS. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting'. Our responsibility Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim financial information is not prepared, in all material respects, in accordance with International Accounting Standard 34 and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority. Emphasis of matter - Fair value of investments Without qualifying our review conclusion we draw your attention to notes 2 and 3 to the interim accounts which describe the policy adopted by the Directors for fair valuing the Group's investments. In accordance with this policy and the requirements of International Accounting Standard 39 'Financial Instruments: Recognition and Measurement', the Directors have estimated the fair value of the investments at â‚¬269,274,302 at 30 September 2007. Emphasis of matter - Fair value of investments (continued) As described in notes 2 and 3 of the condensed set of financial statements, the market for sub-ordinated asset-backed securities, including residual interest positions is illiquid and there has been considerable volatility which has effects on the fair value of the investments. As a result of this the fair value estimates included in the interim accounts are subject to considerable uncertainty. Different assumptions will impact the measurement of the investments which may have an effect on the interim accounts. It is not possible to quantify the potential effects of the resolution of this uncertainty Deloitte & Touche LLP Chartered Accountants Guernsey, Channel Islands 26 November 2007 Notes: A review does not provide assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular on whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the directors but no control procedures can provide absolute assurance in this area. Legislation in the United Kingdom and Guernsey governing the preparation and dissemination of financial information differs from legislation in other jurisdictions. Unaudited Condensed Consolidated Income Statement For the period from 1 April 2007 to 30 September 2007 Total Total Revenue return Fair value gains Period ended 30 Period ended Note and losses September 2007 30 September 2006 Euro Euro Euro Euro Operating income 4 21,979,782 - 21,979,782 33,247,197 Gains and losses on 4 - (19,621,105) (19,621,105) (2,579,803) fair value through profit or loss financial instruments 21,979,782 (19,621,105) 2,358,677 30,667,394 Operating expenses 5 (4,072,900) - (4,072,900) (6,162,945) Finance costs 6 (2,078,364) - (2,078,364) (2,954,472) Net (loss)/profit 15,828,518 (19,621,105) (3,792,587) 21,549,977 (Loss)/Earnings per 8 Ordinary Share Basic Euro (0.09) Euro 0.53 Diluted Euro (0.09) Euro 0.53 Weighted average 8 Ordinary Shares Number Number outstanding Basic 40,376,640 40,620,756 Diluted 40,376,640 40,721,759 All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. The accompanying notes form an integral part of the financial statements. Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity For the period from 1 April 2007 to 30 September 2007 Share Share Premium Other Reserve Capital Accumulated Total Capital Reserve Profits Note Euro Euro Euro Euro Euro Euro Balance at 31 March 2007 - - 384,678,304 7,672,500 (98,197,119) 294,153,685 Net loss for the period - - - - (3,792,587) (3,792,587) Total recognised income and - - - - (3,792,587) (3,792,587) expense Repurchase of Ordinary 16 - - (5,004,332) - - (5,004,332) Shares Transfer from other 17 - - (122,000,000) - 122,000,000 - reserve to accumulated profits Distribution to the 7 - - - - (12,037,523) (12,037,523) Ordinary Shareholders of the Company Balance at 30 September 2007 - - 257,673,972 7,672,500 7,972,771 273,319,243 The accompanying notes form an integral part of the financial statements Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity (continued) For the period from 1 April 2006 to 30 September 2006 Share Share Premium Other Reserve Capital Accumulated Total Capital Reserve Profits Note Euro Euro Euro Euro Euro Euro Balance at 31 March 2006 - - 384,631,589 7,672,500 9,765,027 402,069,116 Net profit for the - - - - 21,549,977 21,549,977 period Total recognised income and - - - - 21,549,977 21,549,977 expense Overaccrual of costs - - 46,715 - - 46,715 related to issuance of Ordinary Shares Distribution to the 7 - - - - (20,310,378) (20,310,378) Ordinary Shareholders of the Company Balance at 30 September - - 384,678,304 7,672,500 11,004,626 403,355,430 2006 Unaudited Condensed Consolidated Balance Sheet As at 30 September 2007 Note 30 September 31 March 2007 2007 Euro Euro Non-current assets Investments at fair value through profit or loss 10 269,274,302 366,743,454 Current assets Cash and cash equivalents 52,250,434 22,026,122 Derivative financial assets - unrealised gain on forward exchange 12 contracts 140,883 5,330 Derivative financial assets - unrealised gain on interest rate swap 12 1,517,985 2,174,398 agreements Other assets 11 3,393,751 36,155,394 57,303,053 60,361,244 Total assets 326,577,355 427,104,698 Equity and liabilities Equity Share capital 16 - - Share premium account 17 - - Other reserve 17 257,673,972 384,678,304 Capital reserve in respect of share options 19 7,672,500 7,672,500 Accumulated profits/(losses) 7,972,771 (98,197,119) 273,319,243 294,153,685 Current liabilities Repurchase agreements 14 - 119,773,090 Distribution payable 7 5,944,410 9,342,774 Derivative financial liabilities - unrealised loss on forward 12 546,476 505,439 exchange contracts Other liabilities 15 1,767,226 3,329,710 Total liabilities 8,258,112 132,951,013 Non-current liabilities Loans 13 45,000,000 - Total liabilities 53,258,112 132,951,013 Total equity and liabilities 326,577,355 427,104,698 The accompanying notes form an integral part of the financial statements. These financial statements were approved by the Board of Directors on 26 November 2007. Signed on behalf of the Board of Directors by: Director Director Unaudited Condensed Consolidated Cash Flow Statement For the period ended 30 September 2007 Note Period ended 30 Period ended 30 September 2007 September 2006 Euro Euro Net cash inflow from operating activities 18 125,403,584 9,023,171 Financing activities Repurchase of ordinary shares 16 (5,004,332) - (Repayment of)/borrowings under repurchase agreements (119,773,090) 38,696,953 Proceeds from loans 13 45,000,000 - Dividends paid to shareholders (15,435,887) (20,310,378) Cash flows from financing activities (95,213,309) 18,386,575 Net increase in cash 30,190,275 27,409,746 Reconciliation of net cash flow to movement in net cash Net increase in cash and cash equivalents 30,190,275 27,409,746 Cash and cash equivalents at start of period 22,026,122 (13,852,740) Effect of exchange rate fluctuations on cash and cash 34,037 - equivalents Cash and cash equivalents at end of period 52,250,434 13,557,006 The accompanying notes form an integral part of the financial statements. 1. General information Queen's Walk Investment Limited (the 'Company') was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is a closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 1994 and its Ordinary Shares are listed on the London Stock Exchange. The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. 'Group' is defined as the Company and its subsidiary. At 30 September 2007, the Company's only subsidiary was Trebuchet Finance Limited. The Company's investment objective is to preserve capital and provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ('ABS') where the Investment Manager considers that the coupon or cash flows on the tranche are attractive relative to the underlying credit. These are and will be, in most cases, below investment grade or unrated and do or will, in many cases, represent the residual income positions typically retained by the originator of a securitisation transaction as the 'equity' or 'first loss' position. The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management (UK) LLP (the 'Investment Manager'), an investment management firm authorised and regulated by the Financial Services Authority. The Company 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 Company 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 Company has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the 'Administrator'). Investors Fund Services (Ireland) Limited provide certain administration services to the Company in its capacity as sub-administrator. 2. Significant accounting policies Basis of preparation The interim accounts have been prepared using accounting policies consistent with International Financial Reporting Standards ('IFRS') and in accordance with IAS 34 'Interim Financial Reporting'. The same accounting policies, presentation and methods of computation are followed in these interim accounts as applied in the Company's latest annual audited financial statements dated 31 March 2007. The Financial Statements of the Group are prepared on the historical cost or amortised cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit or loss. The majority of the Company'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, 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 balance sheet date. See notes 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. These financial statements are presented in Euros 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 Euros. 2. Significant accounting policies (continued) Basis of consolidation Subsidiaries are entities controlled by the Company (note 9). The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. At 30 September 2007, 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 Company. 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 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 Company is an investment company whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value. Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades. Cash and cash equivalents Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities. Derivative financial instruments Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. The Group may also enter into credit default or total return swap arrangements where the underlying asset or assets would otherwise be within the Group's investment policy in order to obtain substantially the same economic exposure to the returns and risks associated with holding such underlying asset or assets. 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 income statement. Fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement. 2. Significant accounting policies (continued) Derivative financial instruments (continued) The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Total return swap agreements and credit default swap agreements are fair valued on the date of valuation based upon the underlying market value of the reference asset using the approach explained under fair value. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement. 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, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. 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. The carrying 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 carrying 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 regarding defaults, delinquencies and prepayments received in respect of a given asset is markedly 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. Dealer 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. 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 income statement following the reassessment of the cash flows discounted at the current market rate estimated for the investment. 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. Repurchase agreements The Group may finance the acquisition of some of its investments through the use of repurchase agreements. Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the balance sheet. 2. Significant accounting policies (continued) Derecognition of a financial asset A transfer of a financial asset is accounted for as a derecognition 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 income statement over the period of the borrowings on an effective interest basis. Financing costs associated with the issuance of financings are deferred and amortised over the term of the financings using the effective interest rate method, in line with market practice. 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 balance sheet date are translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. 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. Transaction expenses The preliminary expenses of the Company directly attributable to its initial public offering and any costs associated with the establishment of the Company are charged to the share premium or other reserve account. Share options granted to the Investment Manager are treated as a transaction expense on the basis that they are granted by the Company as a fee for the Investment Manager's work in raising capital for the Company. The fair value of such options is charged to the share premium account. The share premium account is credited with the fair value of such options at the time that such options are vested. Interest income Interest income is accrued based on the fair value of the Group's financial assets and their contractual terms. 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 income statement 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 Value Added Tax (VAT) purposes under the 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. 2. Significant accounting policies (continued) Financial liabilities and equity Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs. Other accruals and payables Other accruals and payables are not interest-bearing and are stated at their nominal value. Business and geographical segments The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities and operates solely from Guernsey and therefore no segmental reporting is provided. 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 Company has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements: Income recognition The Group invests primarily in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ('ABS'). 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 Group follows a policy of accounting for such investments 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'. Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position. 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 Company'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. Where quoted 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 comparative assets and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. However broker marks may not be indicative of the price that those brokers would typically buy and sell the investments. The assumptions upon which the pricing models are based are described in note 2 (Fair Value) to the accounts. Any change to assumptions surrounding the pricing models may result in different fair values being attributed to the investments. 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 making 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. 4. Operating income and gains and losses on fair value through profit or loss financial instruments Period ended 30 Period ended 30 September 2007 September 2006 Euro Euro Interest income from cash and cash equivalents 479,326 147,289 Interest income from investments at fair value through profit or loss 20,262,753 32,063,787 Interest income from commercial paper - 240,196 Interest income from swap agreements 1,237,703 795,925 Interest income 21,979,782 33,247,197 Net realised gains from swap agreements - 78,052 Net realised foreign exchange gains/(losses) 4,843,070 (2,731,702) Net realised (losses)/gains on investments in asset-backed securities (32,199,740) 366,764 Realised loss on total return swap agreements (36,056,244) - Net realised losses on investments at fair value through profit or (63,412,914) (2,286,886) loss, swaps and foreign currency Net movement in unrealised losses on interest rate swap agreements (656,413) - (note 12) Net movement in unrealised gains on total return swap agreements 36,453,698 - Net movement in unrealised gains on investments at fair value through 7,198,458 - profit or loss Net movement in unrealised gains on foreign exchange bank balances 34,037 - Net movement in unrealised gains/(losses) on foreign exchange 762,029 (292,917) Net movement in unrealised gains/(losses) on investments at fair value 43,791,809 (292,917) through profit or loss, swaps and foreign currency Losses on fair value through profit or loss instruments (19,621,105) (2,579,803) 5. Operating expenses Period ended 30 Period ended 30 September 2007 September 2006 Euro Euro Investment management, custodian and administration fees Investment management (note 19) 2,370,535 3,099,819 Incentive fee (note 19) - 1,634,733 Administration fee (note 19) 288,987 180,210 Custodian fee (note 19) 6,951 55,399 2,666,473 4,970,161 Other operating expenses Audit fees 85,232 81,103 Non-audit fees - 248,668 Directors' fees payable to Directors of Queen's Walk 120,000 120,000 Investment Limited Directors' fees payable to Directors of Trebuchet Finance 13,855 25,000 Limited Legal fees 203,315 123,294 Pricing expenses 179,239 - Loan facility structuring fee 150,000 - Margin Commission 388,816 - Other expenses 265,970 594,719 1,406,427 1,192,784 Total operating expenses 4,072,900 6,162,945 The Company has no employees. 6. Finance costs Period ended 30 Period ended 30 September 2007 September 2006 Euro Euro Finance costs arises from: Total return swap agreements (note 10) - 224,748 Interest on loan facility 557,279 - Repurchase agreements 1,521,085 2,729,724 Total finance costs 2,078,364 2,954,472 7. Dividends Period ended 30 Period ended 30 September 2007 September 2006 Euro Euro Interim dividend for the period ended 31 March 2006 - 9,748,981 First interim dividend for the year ended 31 March 2007 - 10,561,397 Fourth interim dividend for the year ended 31 March 2007 6,093,113 - First interim dividend for the year ended 31 March 2008 5,944,410 - Amounts recognised as distributions to equity holders in the period 12,037,523 20,310,378 7. Dividends (continued) A fourth interim dividend for the year ended 31 March 2007 of Euro 6,093,113 was paid on 31 July 2007. A first interim dividend for the year ended 31 March 2008 of Euro 5,944,410 was paid on 5 October 2007. Under The Companies (Guernsey) Law, 1994 (the 'Companies Law'), dividends can be paid from profits available for the purpose. Following the Company's IPO, and as described in note 17, the Company passed a special resolution and obtained Royal Court approval for the cancellation of the amount standing to the credit of its share premium account. The Other Reserve created on cancellation (amounting to Euro 384,678,304) is available as distributable profits for all purposes permitted by the Companies Law including the payment of dividends and buy-back of shares. Under the UKLA Listing Rules, any dividend must be covered by income received from underlying investments. The Company's objective is to provide shareholders with stable returns in the form of quarterly dividends. The Company's dividend policy is to make dividend distributions from its distributable net income subject to retaining a portion of such income as a reserve for payment in subsequent periods. The Directors have declared a second interim dividend for the year ended 31 March 2008 of Euro 0.15 per share on 26 November 2007. 8. (Loss)/Earnings per share Period ended 30 Period ended 30 September 2007 September 2006 Euro Euro The calculation of the basic and diluted earnings per share is based on the following data: (Loss)/earnings for the purposes of basic earnings per share being net profit attributable to equity holders (3,792,587) 21,549,977 Weighted average number of Ordinary Shares for the purposes of 40,376,640 40,620,756 basic earnings per share Effect of dilutive potential Ordinary Shares: Share options - 101,003 Weighted average number of Ordinary Shares for the purposes of 40,376,640 40,721,759 diluted earnings per share There is no dilution as at 30 September 2007, as the share price was below the option price on that date. 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 Company has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Company have been appointed Directors of Trebuchet Finance Limited. To ensure that the Company will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the Company 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 at fair value through profit or loss: 30 September 31 March 2007 2007 Euro Euro Asset-backed securities (see note 13) 269,274,302 349,042,564 Total return swap agreements - 17,700,890 269,274,302 366,743,454 30 September 31 March 2007 2007 Asset-backed securities Euro Euro Opening cost 430,814,877 493,805,573 Purchases 21,118,567 89,062,259 Sales proceeds (51,946,007) (88,060,953) Realised loss (32,199,740) (3,673,475) Principal paydowns (23,939,540) (60,318,527) Closing cost 343,848,157 430,814,877 Unrealised losses (74,573,855) (81,772,313) Asset-backed securities at fair value 269,274,302 349,042,564 30 September 31 March 2007 2007 Total Return Swap agreements Euro Euro Opening cost 89,547,313 - Purchases - 91,716,543 Sales proceeds (53,491,069) - Realised loss (36,056,244) - Principal paydowns - (2,169,230) Closing cost - 89,547,313 Financing - (35,392,725) Unrealised losses - (36,453,698) Total Return Swap agreements at fair value - 17,700,890 The Group's policy is to hedge foreign exchange exposure resulting from non-Euro denominated investments by both entering into foreign exchange hedging arrangements and, where investments are financed, by entering into financing arrangements that are denominated in the same currencies. Unrealised foreign exchange losses are offset to the extent of net realised foreign exchange gains (as disclosed in note 4) and unrealised gains on foreign exchange contracts (as disclosed in note 12). 11. Other assets 30 September 2007 31 March 2007 Euro Euro Interest receivable 3,393,751 10,687,357 Amounts receivable on securities sold - 25,468,037 3,393,751 36,155,394 The Directors consider that the carrying amount of other assets approximates their fair value. 12. Derivative contracts The following foreign exchange forward contracts were unsettled at 30 September 2007: Maturity Date Amount Bought Amount Sold Unrealised Gain/ (Loss) Euro 31 December 2007 Euro 21,061,709 USD 29,800,000 140,883 31 December 2007 Euro 116,933,307 GBP 82,300,000 (546,476) The following foreign exchange forward contracts were unsettled at 31 March 2007: Maturity Date Amount Bought Amount Sold Unrealised Gain/ (Loss) Euro 29 June 2007 GBP 1,700,000 Euro 2,490,039 5,330 29 June 2007 Euro 172,345,570 GBP 117,600,000 (275,249) 29 June 2007 Euro 86,320,191 USD 115,600,000 (230,190) (505,439) On 1 December 2006, the Group entered into balance-guaranteed interest rate swap agreements with Lehman Brothers International (Europe) in respect of the cash flows associated with fixed rate mortgage loans contained in five transactions in which the Group holds a residual income position. The notional amount of each swap agreement is adjusted on a quarterly basis in accordance with the balance of fixed rate mortgage loans outstanding in the relevant transaction. The swaps hedge against interest rate risk on fixed rate mortgage loans. The terms of the interest rate swap agreements, each of which was effective from the September 2006 interest payment date for each respective transaction, are set out in the table below. Three balance-guaranteed interest rate swaps remain unsettled as at 30 September 2007. The aggregate fair value of these swap agreements as at 30 September 2007 was Euro 1,517,985 (31 March 2007 was Euro 2,174,398). The following balance-guaranteed interest rate swaps were unsettled at 30 September 2007: Termination Date Reference Transaction Initial Notional Unrealised Gain Amount (GBP) Euro 12 June 2008 RMAC 2005-NS3 4,064,632 38,575 12 June 2008 RMAC 2005-NS4 13,843,310 114,850 1 December 2008 Newgate 2006-1 275,208,993 1,364,560 1,517,985 12. Derivative contracts (continued) The following balance-guaranteed interest rate swaps were unsettled at 31 March 2007: Termination Date Reference Transaction Initial Notional Unrealised Gain/ (Loss) Amount (GBP) Euro 12 March 2008 RMAC 2005-NS1 81,999,602 - 12 March 2010 RMAC 2005-NSP2 372,598,197 (353,622) 12 June 2008 RMAC 2005-NS3 186,615,582 262,270 12 June 2008 RMAC 2005-NS4 107,028,288 244,588 1 December 2008 Newgate 2006-1 411,409,139 2,021,162 2,174,398 13. Loans On 17 July 2007, the Group drew down Euro 45,000,000 on its four year Euro 135,000,000 loan facility arranged and placed by Deutsche Bank AG, London. The assets of Queen's Walk Investment Limited are provided as security against the loan. Proceeds from the loan facility were used to repay the Company's short-term repurchase agreements. It is expected that the Company shall repay all outstanding loans in full and pay all other unpaid sums 12 months following the end of the reinvestment period, which is the fourth anniversary of the closing date or the date on which Investment Manager resigns. The fair value of the loan may be lower than the book value given that, at the present time, lenders are reluctant to provide financing for the type of assets held by the Group at the interest rate currently paid by the Group. However it is not practical or possible to measure the fair value of the loan due to the current market conditions. 14. Repurchase agreements 30 September 2007 31 March 2007 Euro Euro Repurchase agreements - 119,773,090 - 119,773,090 Asset-backed securities totalling Euro nil (31 March 2007: Euro 257,625,755) have been granted as security in relation to the repurchase agreements. The weighted average interest rates on the repurchase agreements as at 31 March 2007 were: Euro: 4.51%; GBP: 6.43%; and USD: 6.32%. The repurchase agreements outstanding at 31 March 2007 matured between 10 April 2007 and 18 April 2007. 15. Other liabilities 30 September 2007 31 March 2007 Euro Euro Interest payable 129,263 357,873 Due to related parties - Investment Manager (note 19) 1,174,297 968,826 Accrued expenses 463,666 2,003,011 1,767,226 3,329,710 Other liabilities principally comprise amounts outstanding in respect of interest payable and ongoing costs. The Directors consider the carrying amount of other liabilities approximates to their fair value. 16. Share capital Ordinary shares of no par value each Authorised share capital 30 September 31 March 2007 2007 Number Number Balance at of start and end of period/year Unlimited Unlimited Ordinary shares of no par value each Issued and fully paid 30 September 31 March 2007 2007 Number Number Balance at of start period/year 40,620,756 40,620,756 Repurchase of Ordinary Shares (991,354) - Balance at end of period/year 39,629,402 40,620,756 Upon incorporation 2 Ordinary Shares of no par value were issued. On 13 December 2005 the Company issued 22,500,000 Ordinary Shares for subscription in its Initial Public Offering at an Offer Price of Euro 10 per share. In addition, the Company simultaneously issued 17,900,754 Ordinary Shares to Cheyne ABS Opportunities Fund LP (along with transferring the two Ordinary Shares issued on incorporation) in exchange for a portfolio of investments and 220,000 Ordinary Shares were also issued to the Directors. In recognition of the work performed by the Investment Manager in raising capital for the Company, the Company 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. During the period 18 July 2007 to 31 August 2007 the Company repurchased 991,354 of its existing Ordinary Shares out of reserves, at an average price of Euro 5.04. Once purchased, these Ordinary Shares were cancelled and are not available for re-issue. The purpose of this share buy back is to reduce the capital of the Company. Another share repurchase agreement was entered into on 28 September 2007. Under Guernsey law a capital redemption reserve is created for the redemption of these Ordinary Shares. As the nominal value of these Ordinary Shares is Euro nil, the amount to be transferred to this reserve is Euro nil. 17. Share premium account and other reserve Share Premium account 30 September 2007 31 March 2007 Euro Euro Balance at start of period/year - - Premium arising from issue of Ordinary Shares - 406,207,540 Expenses of issue of Ordinary Shares - (13,903,451) Share options granted on issue of Ordinary Shares - (7,672,500) Cancellation of share premium transferred to other reserve - (384,631,589) Balance at end of period/year - - Other Reserve 30 September 2007 31 March 2007 Euro Euro Balance at start of period/year 384,678,304 384,631,589 Overaccrual of costs related to issuance of Ordinary Shares - 46,715 Repurchase of Ordinary Shares (note 16) (5,004,332) - Transfers from distributable reserves to accumulated profits (122,000,0000 Balance at end of period/year 257,673,972 384,678,304 The Ordinary Shares of the Company have no par value. As such, the proceeds of the Initial Public Offering represent the premium on the issue of the Ordinary Shares. In accordance with the accounting policies of the Company and as allowed by The Companies (Guernsey) Law, 1994, the costs of the Initial Public Offering have been expensed against the share premium account. The issue costs associated with the Initial Public Offering amounted to Euro 13,856,736 (as adjusted for an overaccrual of Euro 46,715) and share options with a value of Euro 7,672,500 (notes 16 and 19). The transfer to the accumulated profit/loss reserve has been made by the Directors to satisfy the requirements of the Companies (Guernsey) Law, 1994, that the Group has sufficient distributable reserve available for the payment of its dividends. The Company passed a special resolution cancelling the amount standing to the credit of its share premium account immediately following admission to the London Stock Exchange. In accordance with The Companies (Guernsey) Law, 1994 (as amended) (the 'Companies Law'), the Directors applied to the Royal Court in Guernsey for an order confirming such cancellation of the share premium account following admission. The Other reserve created on cancellation is available as distributable profits to be used for all purposes permitted by the Companies Law, including the buy back of Ordinary Shares and the payment of dividends. 18. Notes to cash flow statement Period ended 30 Period ended September 2007 30 September 2006 Euro Euro Net (loss)/profit (3,792,587) 21,549,977 Adjustments for: Net realised losses/(gains) on sale of asset backed securities 32,199,740 (366,764) Net realised losses on total return swap agreements 36,056,244 - Movement in unrealised gains on asset backed securities (7,198,458) - Movement in unrealised gains on total return swap agreements (36,453,698) - Movement in unrealised losses on interest rate swap agreements 656,413 - Movement in unrealised gains on foreign currency bank balances (34,037) 72,241 Movement in unrealised gains on foreign exchange forward contracts (94,516) (67,798) 21,339,101 21,187,656 Purchases of asset-backed securities (21,118,567) (38,187,842) Sales proceeds from asset-backed securities 77,414,044 35,940,947 Principal paydowns 23,939,540 31,239,686 Net sales on total return swap agreements 18,098,345 - Purchases of total return swap agreements - (41,755,253) 98,333,362 (12,762,462) Decrease in receivables 7,293,606 382,599 (Decrease)/increase in payables (1,562,484) 215,378 5,731,122 597,977 Net cash inflow from operating activities 125,403,584 9,023,171 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. 19. 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 each of 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 Company pays the Investment Manager a Management Fee and Incentive Fee (see notes 5 and 15). During the period ended 30 September 2007, the Management Fee totalled Euro 2,370,535 (2006: Euro 3,099,819) of which Euro 1,174,297 (2006: Euro 968,826) is payable at period end. The Incentive Fee totalled Euro nil (2006: Euro 1,634,733). Management Fee Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Company an annual Management Fee of 1.75 per cent of the net asset value of the Company 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 ABS Investments I plc, 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. 19. Material agreements and related party transactions (continued) 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 Company'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 Company'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 will be reset on 1 April 2009, and 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 Company 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 Company for the purpose of calculating the Incentive Fee. Administration Fee Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Company an administration fee of 0.125 per cent of the gross asset value of the Company up to Euro 80,000,000 and 0.0325 per cent of the gross asset value of the Company greater than Euro 80,000,000. Investors Fund Services (Ireland) Limited, the sub-administrator, is paid by the Administrator. Investments in other entities managed by the Investment Manager As at 30 September 2007, the Company held investments with a total value of Euro 12,833,331 (31 March 2007: Euro 23,846,289) in the following entities, which are managed by the Investment Manager: Cheyne ABS Investments I plc; Cheyne High Grade ABS CDO Ltd.; and Cheyne CLO Investments I Limited. Custodian Fee Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Company a custodian fee of 0.03 per cent of the gross asset value of the Company up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Company greater than Euro 80,000,000, plus additional fees in relation to transaction fees, statutory reporting, corporate secretarial fees and other out of pocket expenses. 19. 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 Company, the Company 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 Company may grant further Investment Manager Options in connection with any future offering of Shares. Such options, if any, will represent the right to acquire Shares equal to not more than 10 per cent of the number of Shares being offered in respect of that future offering and will have an exercise price equal to the offer price for that offering. The aggregate fair value of the options granted at the time of the Initial Public Offering using a Black-Scholes valuation model was Euro 7,672,500 (reflecting a valuation of Euro 3.41 per option). This amount has been treated as a cost of the Initial Public Offering. As at 30 September 2007, these options were out of the money as the share price was below the Offer Price of Euro 10. Initial ABS Portfolio On 23 November 2005, the Company entered into an agreement with Cheyne ABS Opportunities Fund LP (which was amended and restated on 7 December 2005) to acquire a portfolio of investments, for an aggregate price of Â£62,235,000, Euro 90,212,000 and US$90,793,000 (which was Euro 259,007,560) (together with interest of 13.1 per cent per annum from 7 November 2005 until the date of admission to the London Stock Exchange). The consideration for the purchase was settled by the delivery of 17,900,754 Ordinary Shares by the Company and the payment of the balance in cash out of the net proceeds from the offer of Ordinary Shares by the Company. 20. Subsequent Events The Company, through a Tender Offer, returned Euro 24,999,975 in cash through a purchase of 4,504,500 of its existing Ordinary Shares. Those Ordinary Shares were cancelled and will not be available for re-issue. The shareholders approved the Tender Offer at an EGM held on 8 October 2007. Through the period from 1 October 2007 until 15 November 2007, the Company has purchased an additional 205,783 shares at an average price of Euro 5.38 per share. On 31 October 2007, the Company purchased Euro 28 million of out of the money put options on the Halifax house price index. -------------------------- (1) Net of cash proceeds required to settle the tender offer and pay the 30 June 2007 dividend. (2) House price appreciation is calculated by applying the house price change as provided in the Nationwide or Halifax House Price Indices, to each loan in the portfolio based on its regional classification and date of completion of the mortgage loan. (3) Given the materiality of the tender offer, a pro-forma NAV is shown as at 8 October 2007. The pro-forma NAV is computed using the 30 September 2007 fair values and by reducing the cash balance by â‚¬24,999,975 and the number of outstanding shares by 4,504,500. (4) Net of cash proceeds required to settle the tender offer and pay the 30 June 2007 dividend. (5) House price appreciation is calculated by applying the house price change as provided in the Nationwide or Halifax House Price Indices, to each loan in the portfolio based on its regional classification and date of completion of the mortgage loan. This information is provided by RNS The company news service from the London Stock Exchange

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