Half Yearly Report
Real Estate Credit Investments Limited
(Formerly Queen's Walk Investment Limited)
Financial Results Announcement for the
Second Quarter Ended 30 September 2010 and Interim Report and Accounts
Real Estate Credit Investments Limited reports €3.1 million profit for quarter ended 30 September 2010
Real Estate Credit Investments Limited (the "Company" or "RECI"), a Guernsey-incorporated investment company, has reported a net profit of €3.1 million for the quarter ended 30 September 2010, compared to a net profit of €2.8 million for the quarter ended 30 June 2010. This represents the fifth consecutive quarter the Company has recorded a profit.
The Company's net asset value ("NAV") at quarter end was €1.69 per ordinary share1 compared to an adjusted NAV of €1.59 per new ordinary share following the completion of the Company's bonus issue of preference shares on 17 September 2010². This figure takes into account net fair value write-ups in the quarter of €0.8 million, compared to €0.4 million of write-downs for the quarter ended 30 June 2010. The investment portfolio generated gross cash flows of €4.5 million in the quarter compared with an estimate of €3.5 million and €6.1 million received in the previous quarter.
Subsequent to the extra-ordinary dividend of 14.5 cents per share already paid for the period 1 April 2010 to 15 September 2010, the Company has not declared an ordinary dividend for the second quarter. The Company has announced a preference dividend of 2.3p for the period 16 September 2010 to 31 December 2010 and currently intends to declare a second interim ordinary dividend in due course.³
RECI making progress on growth strategy
RECI is delivering on the objectives it laid out in September 2010. The €26.6 million capital raising that was completed on 15 September 2010 has put the Company in a position to invest in undervalued real estate debt.
As at 30 September, the Real Estate Debt Portfolio was valued at €37.4 million, or 37% of the investment portfolio, up from 31% three months earlier. RECI made €9.8 million of new bond purchases in the three months to 30 September. From 1 October to 15 November 2010, the Company has purchased a further €15.4 million of bonds, increasing the overall fair value of the Real Estate Debt Portfolio to €52.9 million or 45% of the investment portfolio⁴. At the same time RECI is actively managing its legacy assets in the SME, European Mortgage and UK Mortgage Portfolios, through identifying sales opportunities and diligent risk management. During the quarter the Company wrote up the fair value of residual assets by a net amount of €2.4 million.
Tom Chandos, Chairman of Real Estate Credit Investments Limited, said: "It is a sign of the growing strength of Real Estate Credit Investments Limited that it has delivered a fifth consecutive quarter of profit while laying the foundations for future growth with fresh investments in the Real Estate Debt Portfolio."
Highlights
· As at 15 November 2010, the Real Estate Debt Portfolio represented 45% of the investment portfolio and weighted average yield to maturity of 14%
· Real Estate Debt Portfolio holds bonds at an amortised cost value of €48.5 million and nominal value of €87.8 million
· Cash flows in the Portuguese Mortgage Portfolio were 1.8 times the expected cash flows
· Valuations in the UK mortgage portfolio increased by €3.5 million
Conference Call & Further Information
A conference call to review the Company's financial results for the second quarter ended 30 September 2010 will take place at 10.30 am London time on 30 November 2010. The conference call can be accessed by dialing + 44 (0)20 7153 8942, ten minutes prior to the scheduled start of the call. Please reference Real Estate Credit. A results presentation will be available on the Real Estate Credit Investment website: www.recreditinvest.com/investmentmanager
A webcast of the conference call will also be available on a listen-only basis at www.recreditinvest.com/investmentmanager. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call.
For further information please contact:
Public Relations: James Wallis +44 (0)20 7920 2329
Kate Ruck Keene +44 (0)20 7920 2322
Investor Relations: Natalie Withers +44 (0)20 7968 7348
Notes:
1. Calculations per share are based on the number of ordinary shares outstanding at the end of each respective period
2. The initial adjusted NAV per new ordinary share following the completion of the Company's bonus issue of preference shares was detailed in the Open Offer prospectus.
3. The Company's current intention is to declare the next interim ordinary dividend for the period 16 September to 31 December in due course.
4. This percentage assumes the value of the residual income positions remains unchanged from 30 September 2010.
About the Company
Real Estate Credit Investments Limited is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company's investment objective is to provide ordinary shareholders with a levered exposure to a portfolio of real estate credit investments and a diversified and amortising portfolio of Residual Income Positions, and to provide preference shareholders with stable returns in the form of quarterly dividends. The Company intends to focus on secured residential and commercial debt in the UK and Western Europe by exploiting opportunities in publically traded securities and real estate loans. In making these investments the Company uses the expertise and knowledge of its investment manger, Cheyne Capital Management (UK) LLP. The Company has adopted a long term strategic approach to investing and focuses on identifying value.
This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "forecasts", "estimates", "anticipates", "expects", "intends", "considers", "may", "will" or "should". By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).
Financial Highlights
|
|
Revenue |
Fair value gains and losses |
Total Quarter ended 30 September 2010 |
Revenue |
Fair value gains and losses |
Total Quarter ended 30 June 2010 |
|
Operating Income |
3,453,491 |
|
3,453,491 |
4,133,097 |
|
4,133,097 |
|
Gains and losses on fair value through profit or loss financial instruments |
|
753,489 |
753,489 |
|
(392,035) |
(392,035) |
|
|
3,453,491 |
753,489 |
4,206,980 |
4,133,097 |
(392,035) |
3,741,062 |
|
|
|
|
|
|
|
|
|
Operating Expenses |
(955,626) |
|
(955,626) |
(967,369) |
|
(967,369) |
|
Finance Costs |
(167,729) |
|
(167,729) |
(3,492) |
|
(3,492) |
|
Net profit / (loss) |
2,330,136 |
753,489 |
3,083,625 |
3,162,236 |
(392,035) |
2,770,201 |
|
|
|
|
||||
|
Total Assets |
133,839,935 |
104,672,202 |
||||
|
Total Liabilities¹ |
66,402,144 |
4,703,733 |
||||
|
Equity Capital |
67,437,791 |
99,968,469 |
||||
|
NAV per share |
1.69 |
3.75/1.59 adjusted² |
||||
|
Shares Outstanding |
39,966,985 |
26,644,657 |
||||
1. Total liabilities include the new preference shares issued on 17 September 2010
2. The initial adjusted NAV per new ordinary share of €1.59 following the completion of the Company's bonus issue of preference shares was detailed in the Open Offer prospectus.
Investment Portfolio
Below is a breakdown of the Company's investment portfolio as at 30 June 2010 and 30 September 2010 by jurisdiction (by reference to underlying asset originator). The Real Estate Debt Portfolio is included in the charts and detailed in the next section. Percentages for each asset class are in relation to the value of the Company's investment portfolio, as at the relevant date (excluding cash and hedges).
|
Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2010
|
|
|
Portugal |
33.3% |
|
UK |
27.5% |
|
Germany |
15.5% |
|
Holland |
12.4% |
|
Italy |
7.9% |
|
France |
3.3% |
|
Total (€mm) |
92.3 |
|
Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2010
|
|
|
UK |
34.1% |
|
Portugal |
28.9% |
|
Germany |
15.4% |
|
Holland |
11.9% |
|
Italy |
6.5% |
|
France |
3.1% |
|
Total (€mm) |
101.8 |
Below is a breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral). Percentages for each asset type are in relation to the value of the Company's investment portfolio, excluding cash and hedges.
|
Queen's Walk Portfolio Breakdown by Asset Type as at 30 June 2010
|
|
|
European Mortgages |
40.2% |
|
Real Estate Debt |
30.9% |
|
SME |
18.7% |
|
UK Mortgages |
10.2% |
|
|
|
|
Total (€mm) |
92.3 |
|
Queen's Walk Portfolio Breakdown by Asset Type as at 30 September 2010
|
|
|
Real Estate Debt |
36.8% |
|
European Mortgages |
34.4% |
|
SME |
17.9% |
|
UK Mortgages |
11.0% |
|
|
|
|
Total (€mm) |
101.8 |
Real Estate Debt Portfolio[1]
The Real Estate Debt Portfolio is gathering momentum in size and performance and is on course to comprise more than 50% of the Company's investment portfolio by the end of the calendar year. As at 30 September, it represented 37% of the investment portfolio, up from 31% three months earlier. This rose to 45% as at 15 November 2010.
New bond purchases totalled €9.8 million in the quarter ended 30 September, versus €12.5 million in the previous quarter. As at 30 September 2010 the average purchase price was 66 cents with a weighted average expected yield to maturity of 13.6%. Between 1 October and 15 November 2010, the Company invested a further €15.4 million at an average price of 57 cents and a weighted average expected yield to maturity of 14.9%.
The Real Estate Debt Portfolio recorded cash flows of €0.8 million in the quarter ended 30 September 2010, compared with €0.2 million in the previous quarter. Performance of the Real Estate Debt Portfolio has been strong with fair value gains of €1.1 million in the recent quarter or approximately 3.3% in the quarter.
As at 30 September 2010, the Real Estate Debt Portfolio comprised 56 bonds at an amortised cost value of €33.7 million and a nominal value of €58.8[2]million. As at 15 November 2010, the portfolio consisted of 78 bonds at an amortised cost value of €48.5 million and a nominal value of €87.8 million[3]. The following table details the bonds held by the Company as at 15 November 2010[4].The weighted average expected yield to maturity of the Real Estate Debt Portfolio as at 15 November 2010 was approximately 14.0% and the weighted average purchase price was 63.3.
Ratings Distribution by Fair Value (as at 15 November 2010)
|
Current Rating |
UK CMBS |
UK RMBS |
Euro CMBS |
Euro RMBS |
SME |
Total |
Total at 30 Jun 10 |
|
AAA |
3.1% |
6.8% |
9.4% |
0.0% |
0.0% |
19.3% |
18.9% |
|
AA |
1.6% |
7.4% |
6.1% |
0.2% |
0.0% |
15.4% |
25.2% |
|
A |
2.6% |
13.9% |
1.0% |
0.0% |
0.0% |
17.5% |
23.6% |
|
BBB |
5.6% |
6.8% |
4.5% |
0.0% |
1.9% |
18.9% |
11.7% |
|
BB and Below |
5.9% |
4.1% |
18.7% |
0.2% |
0.0% |
28.9% |
20.6% |
|
Total |
18.9% |
39.0% |
39.8% |
0.4% |
1.9% |
100.0% |
|
|
Total at 30 Jun 10 |
23.8% |
41.9% |
31.0% |
0.4% |
3.0% |
|
|
Totals may not sum due to rounding differences
European Mortgage Portfolio
The European Mortgage Portfolio, generated cash flow of €2.0 million for the quarter ended 30 September 2010, compared to €2.9 million in the previous quarter and ahead of forecasts of €1.1 million. Write-downs in this portfolio totalled €1.4 million, of which €1.1 million was from the Sestante mortgage portfolio.
Due to concerns about the servicing of the Sestante mortgage portfolio, the Company has lowered its recovery rate on defaulted loans. However, Meliorbanca is seeking to move the servicing of the portfolio to Italfondiario, a larger servicer in the Italian market.
Valuation of the Portuguese mortgage portfolio was largely unchanged and the portfolio continues to perform in line with expectations. All Portuguese loans in the European Mortgage Portfolio are seasoned having been originated between 1997-2004. The assets benefit from having low loan to value ratios. Less than 10% of Portuguese mortgage loans have an LTV of more than 80%. Due to being Euribor linked, Portuguese assets benefit from carrying a low average weighted interest rate with most 2.5% or lower.
The Company is closely following developments regarding fiscal deficits in Southern Europe and widening credit spreads. The Company believes that the wider spreads should have no direct impact on its mortgage portfolios because the majority of its mortgage loans are indexed to short term Euribor rates. The key risks to asset value remain a rise in Euribor and an increase in unemployment and consequent mortgage defaults as a result of government austerity measures.
SME Portfolio
Cash flows in the quarter ended 30 September 2010 totalled €0.3 million, compared with €1.8 million in the previous quarter. The fall reflects the sale of the two SME assets in the first quarter which had delivered gross cash flows of €1.4 million in the previous period.
The Company expects default rates in this portfolio to remain volatile. In the second quarter, defaults were lower than expected. The SME portfolio's average default rate fell to 0.24%, from 2.1% in the previous quarter. The Smart 06-1 asset recorded a substantial decrease in default rates from 4.1% to 0.5%. The default rate of the Amstel SME portfolio remained at 0%.
The table below outlines actual default rates in the SME portfolio and intra-period volatility of default rates. Valuations of SME assets continue to maintain a conservative bias in our default rate forecast relative to historical averages.
|
|
March 2010 Default Rate (annualised) |
June 2010 Default Rate (annualised) |
Sept 2010 Default Rate (annualised) |
|
Amstel 06-1 |
0.5% |
0.0% |
0.0% |
|
Smart 06-1 |
0.7% |
4.1% |
0.5% |
|
Average |
0.6% |
2.1% |
0.2% |
UK Mortgage Portfolio
The UK Mortgage Portfolio recorded cash flows of £1.3 million in the quarter ended 30 September 2010 compared to £0.9 million in the previous quarter.
The Company has increased its valuation of the UK mortgage portfolio by €3.5 million, as a result of out performing our assumptions. The Company increased the valuation of its RMAC assets as well as the Eurosail 2006-1 asset, previously marked at zero. The Company continues to work with mortgage originators to identify loans that do not satisfy the representations and warranties provided at the time of the securitisation.
Portfolio Valuation
In accordance with the Company's valuation procedures, the fair value of the Company's investments is calculated on the basis of observable market data, market discount rates and the Investment Manager's expectations regarding future trends. Given re-structurings at many investment banks, there is a lack of reliable, independent broker marks for assets in the residual income portfolio. Therefore, the Company has elected to use a model-based approach to value its residual investments and employs an external valuation agent to review the underlying pricing assumptions. The Company applies a discount rate to the loss-adjusted cash flows to calculate the fair value. The Company received broker marks for all of its bonds.
Increases in the balance sheet value of the residual portfolio between 30 June 2010 and 30 September 2010 (excluding sales) totalled €0.6 million. This comprised -€1.8 million of principal amortisation and fair value gains of €2.4 million. In relation to the Real Estate Debt Portfolio, the balance sheet value increased by €9.3 million. There were €9.8 million new purchases, fair value gains of €1.1 million, principal amortisations of -€0.7 million and sales of -€0.9 million. After giving effect to these balance sheet changes in the quarter ended 30 September 2010, the NAV of the Company was €1.69 per ordinary share as at 30 September 2010, versus €3.75per ordinary share as at 30 June 2010 and an adjusted NAV of 1.59 per ordinary share as at 17 September 2010.[5]
The Company recorded total cash flows of €6.1 million in the quarter, of which €4.5 million came from the investment portfolio (excluding hedges). The sale of one bond generated €0.9 million and a further €0.6 million came from interest rate swap hedges⁹. The table below summarises changes in balance sheet values of the Company's investment portfolio by asset class:
|
Asset Class |
30 Jun 2010 B/S Value1,2 (€mm) |
30 Sep 2010 |
Change to B/S Value Since |
Cash flows Received in the Quarter Ended |
Cash flows Received in the Quarter Ended |
|
UK Mortgages |
9.5 |
11.2 |
1.7 |
1.5 |
1.9 |
|
Euro Mortgages |
37.1 |
35.0 |
-2.1 |
2.0 |
1.8 |
|
SME |
17.3 |
18.2 |
0.9 |
0.3 |
1.7 |
|
Real Estate Debt |
28.1 |
37.4 |
9.3 |
0.8 |
0.2 |
|
TOTAL4 |
92.0 |
101.8 |
9.8 |
4.6 |
5.5 |
1. Balance sheet values as at 30 Jun 2010 are expressed using 30 Sep 2010 FX rates.
2. The balance sheet value figures for 30 Jun 2010 and 30 Sep 2010 include accrued interest.
3. Cash flows for 30 Jun 2010 are expressed using 30 Sep 2010 FX rates.
4. The values for each column may not sum to the total due to rounding differences.
Company Outlook -Real Estate Debt on course to become the flagship investment strategy
During the second quarter, RECI has made progress in laying foundations for long-term growth. The Company has deployed capital raised in September to add to its Real Estate Debt Portfolio, putting it firmly on course to become RECI's flagship strategy.
The Company will continue with this approach in the third quarter, with market conditions supporting our view that we can invest profitably in dislocated assets. We are optimistic that RECI will reach its target of growing the Real Estate Debt Portfolio to 50% of the Company's investment portfolio by the calendar year end.
The Company believes that real estate debt investments, in particular residential and commercial mortgage-backed bonds, should deliver investors improved returns and a more favourable risk/reward profile. The Company is confident it can find opportunities to invest at yields in excess of 12%. The shift towards publicly-traded securities is providing greater transparency of asset prices and more liquidity.
Our strategy remains to make two thirds of new investments in bonds backed by commercial real estate debt in the form of CMBS. One third of new investments are to be in bonds backed by residential mortgages in the form of RMBS. Geographically, investments focus on Northern Europe, including the UK.
RECI will continue to manage the SME, European Mortgage and UK Mortgage Portfolios with a high degree of diligence. The priority remains to identify the right opportunities to sell such assets. At the same time we are closely monitoring any developments that affect asset values, unemployment levels in Portugal and the Euribor rate. Furthermore, the Company will continue working with mortgage originators to identify loans that do not satisfy the representations and warranties provided at the time of the securitisation.
The Company is satisfied that NAV has improved during the quarter under review and is committed to maximising NAV through its growth strategy.
Unaudited Condensed Consolidated Statement of Comprehensive Income
For the period from 1 April 2010 to 30 September 2010
|
|
|
|
Note |
Period ended 30 September 2010 |
|
Period ended 30 September 2009 |
|
|
|
|
|
Euro |
|
Euro |
|
|
|
|
|
|
|
|
|
Interest income |
|
|
5 |
7,586,588 |
|
8,271,921 |
|
Gains and losses on fair value through profit or loss financial instruments |
4 |
361,454 |
|
(7,348,971) |
||
|
|
|
|
|
7,948,042 |
|
922,950 |
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
6 |
(1,922,995) |
|
(1,951,601) |
|
Finance costs |
|
|
5 |
(171,221) |
|
(359,576) |
|
|
|
|
|
|
|
|
|
Net profit/(loss) |
|
|
|
5,853,826 |
|
(1,388,227) |
|
|
|
|
|
|
|
|
|
Profit/(loss) per Ordinary Share |
|
|
|
|
|
|
|
Basic |
|
|
8 |
Euro 0.21 |
|
Euro (0.05) |
|
Diluted |
|
|
8 |
Euro 0.21 |
|
Euro (0.05) |
|
|
|
|
|
|
|
|
|
Weighted average Ordinary Shares outstanding |
|
|
|
Number |
|
Number |
|
Basic |
|
|
8 |
27,736,651 |
|
26,644,657 |
|
Diluted |
|
|
8 |
27,736,651 |
|
26,644,657 |
Unaudited Condensed Consolidated Statement of Changes in Equity
For the period from 1 April 2010 to 30 September 2010
|
|
|
Share Capital |
Reserves |
Total |
|
|
Note |
Euro |
Euro |
Euro |
||
|
|
|
|
|
||
|
Balance at 31 March 2009 |
- |
105,585,091 |
105,585,091 |
||
|
|
|
|
|
|
|
|
Net loss for the period |
|
- |
(1,388,227) |
(1,388,227) |
|
|
Distribution to the Ordinary Shareholders of the Company |
7 |
- |
(4,263,146) |
(4,263,146) |
|
|
|
|
|
|
|
|
|
Balance at 30 September 2009 * |
|
- |
99,933,718 |
99,933,718 |
|
|
|
|
|
|
|
|
|
Balance at 31 March 2010 |
- |
99,329,841 |
99,329,841 |
||
|
|
|
|
|
|
|
|
Net profit for the period |
|
- |
5,853,826 |
5,853,826 |
|
|
Issue of Ordinary Shares of the Company |
16 |
- |
26,644,656 |
26,644,656 |
|
|
Issue of Preference Shares of the Company |
16 |
- |
(57,665,484) |
(57,665,484) |
|
|
Shares issuance expenses allocated to the Ordinary Shareholders |
2 |
- |
(730,000) |
(730,000) |
|
|
Distribution to the Ordinary Shareholders of the Company |
7 |
- |
(5,995,048) |
(5,995,048) |
|
|
|
|
|
|
|
|
|
Balance at 30 September 2010 |
- |
67,437,791 |
67,437,791 |
||
The accompanying notes form an integral part of the condensed consolidated financial statements.
* In line with IAS 34, the comparative period for the Consolidated Statement of Changes in Equity is the six months ended 30 September 2009. The balance at that period end will not equate to the balance at 31 March 2010, the date of the comparative Consolidated Statement of Financial Position on page 15.
Unaudited Condensed Consolidated Statement of Financial Position
As at 30 September 2010
|
|
Note |
30 September 2010 |
|
31 March 2010 |
|
|
|
Euro |
|
Euro |
|
Non-current assets |
|
|
|
|
|
Investments at fair value through profit or loss |
10 |
100,599,597 |
|
91,568,184 |
|
|
|
100,599,597 |
|
91,568,184 |
|
Current assets |
|
|
|
|
|
Cash and cash equivalents |
|
29,111,868 |
|
15,718,951 |
|
Derivative financial assets- options held for trading |
10 |
1,431,399 |
|
250,300 |
|
Derivative financial assets-unrealised gain on interest rate swap agreements |
12 |
1,290,421 |
|
2,421,883 |
|
Other assets |
11 |
1,406,650 |
|
1,376,852 |
|
|
|
33,240,338 |
|
19,767,986 |
|
|
|
|
|
|
|
Total assets |
|
133,839,935 |
|
111,336,170 |
|
|
|
|
|
|
|
Equity and liabilities |
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
Reserves |
17 |
67,437,791 |
|
99,329,841 |
|
|
|
67,437,791 |
|
99,329,841 |
|
Current liabilities |
|
|
|
|
|
Distribution payable |
7 |
3,863,475 |
|
2,131,573 |
|
Derivative financial liabilities - unrealised loss on forward foreign exchange contacts |
12 |
109,917 |
|
- |
|
Other liabilities |
15 |
6,115,870 |
|
1,231,789 |
|
|
|
10,089,262 |
|
3,363,362 |
|
|
|
|
|
|
|
Non-current liabilities |
|
|
|
|
|
Preference Shares |
16 |
56,312,882 |
|
- |
|
Loans |
13 |
- |
|
8,642,967 |
|
|
|
56,312,882 |
|
8,642,967 |
|
Total liabilities |
|
66,402,144 |
|
12,006,329 |
|
|
|
|
|
|
|
Total equity and liabilities |
|
133,839,935 |
|
111,336,170 |
|
|
|
|
|
|
Unaudited Condensed Consolidated Statement of Cash Flows
For the period from 1 April 2010 to 30 September 2010
|
|
Note |
|
Period ended 30 September 2010 |
|
Period ended 30 September 2009 |
|
|
|
|
Euro |
|
Euro |
|
Net cash inflow from operating activities |
18 |
|
2,422,659 |
|
7,787,392 |
|
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
|
Net repayment of borrowings from loans |
|
|
(8,642,967) |
|
(7,478,717) |
|
Issue of ordinary shares |
16 |
|
26,644,656 |
|
- |
|
Ordinary Shares issuance expenses |
|
|
(2,082,602) |
|
- |
|
Dividends paid to shareholders |
7 |
|
(4,263,146) |
|
(4,263,146) |
|
Cash flows from financing activities |
|
|
11,655,941 |
|
(11,741,863) |
|
|
|
|
|
|
|
|
Net increase/(decrease) in cash |
|
|
14,078,600 |
|
(3,954,471) |
|
|
|
|
|
|
|
|
Reconciliation of net cash flow to movement in net cash |
|
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
|
|
14,078,600 |
|
(3,954,471) |
|
Cash and cash equivalents at start of period |
|
|
15,718,951 |
|
18,661,098 |
|
Effect of exchange rate fluctuations on cash and cash equivalents |
|
|
(685,683) |
|
111,185 |
|
Cash and cash equivalents at end of period |
|
|
29,111,868 |
|
14,817,812 |
Notes to the Condensed Consolidated Unaudited Financial Statements
1. General information
Queen's Walk Investment Limited was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. On 17 September 2010, the Company changed its name to Real Estate Credit Investments Limited (the "Company"). The Company commenced its operations on 8 December 2005. The Company is an authorised closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 2008. Its Ordinary Shares have a premium listing on the London Stock Exchange and its Preference Shares have a standard listing. The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. "Group" is defined as the Company and its subsidiary. At 30 September 2010, the Company's only subsidiary was Trebuchet Finance Limited.
The investment objective of Queen's Walk Investment Limited was to preserve capital and provide stable returns to Shareholders in the form of quarterly dividends. It sought to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ("ABS") where the Investment Manager considered that the coupon or cash flows on the tranche were attractive relative to the underlying credit. These were, in most cases, below investment grade or unrated and in many cases, represented the residual income positions typically retained by the originator of a securitisation transaction as the "equity" or "first loss" position.
Following the approval of the Placing and Open Offer, the Group changed its investment objective and the objective will be to aim to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends. The Group will seek to achieve this objective by investing primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom ("Real Estate Debt Investments"). The Real Estate Debt Investments may take different forms but will likely be: (i) securitised tranches of secured real estate related debt securities; and (ii) secured real estate loans, debentures or any other form of debt instrument. At least 70% of the net asset value of the Group will be invested in Real Estate Debt Investments.
The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management (UK) LLP (the "Investment Manager"), an investment management firm authorised and regulated by the Financial Services Authority. The Group has entered into an Investment Management Agreement (the "Investment Management Agreement") under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Group has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and a quarterly performance-related fee. The Group has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the "Administrator"). State Street Fund Services (Ireland) Limited provide certain administration services to the Group in its capacity as Sub-Administrator.
2. Significant accounting policies
Basis of preparation
The condensed consolidated financial statements 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 this set of financial statements as applied in the Company's latest annual audited financial statements for the year ended 31 March 2010.
The Financial Statements of the Group are prepared on the historical cost basis modified by the following assets and liabilities which are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit or loss.
The majority of the Group's investments are financial instruments that are classified as fair value through profit or loss. Where bid prices are not available from a third party in a liquid market, the fair value of the financial instrument is estimatedby reference to market information, which includes but is not limited to broker marks, prices on comparable assets and a pricing model that incorporates discounted cash flow techniques.
These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. Where such pricing models are used, assumptions are reviewed and updated on the basis of actual performance data as it is received and on the basis of market conditions as at the Statement of Financial Position date. See Note 2 - Fair value and Interest income and Note 3 - Critical accounting judgements and key sources of estimation uncertainty for further information regarding assumptions and critical judgements.
The Directors believe it is appropriate to adopt the going concern basis in preparing the condensed consolidated financial statements as, after due consideration, the Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future. On 6 April 2010, the Company paid back the remaining Euro 8,642,967 and all interest due on the loan, terminating any further liabilities under the loan facility. In addition, the Directors note the cash resources available (Euro 29.1m as at 30 September 2010), of which some will be used to pay the proposed dividend, which are sufficient to cover normal operational costs and current liabilities for the foreseeable future.
These condensed consolidated financial statements are presented in Euro because that is the currency of the primary economic environment in which the Group operates. The functional currency of the Group is also considered to be Euro.
Changes in Accounting Standards
At the date of authorisation of these financial statements, the following Standards and Interpretations which have not been applied in these financial statements were in issue but not yet effective (and in some cases had not yet been adopted by the EU):
IFRS 1 (amended)/IAS 27 (amended) Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate
IFRS 3 (revised 2008) Business Combinations
IFRS 9 Financial Instruments
IAS 27 (revised 2008) Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IFRIC 17 Distributions of Non-cash Assets to Owners
Improvements to IFRSs (April 2009)
The Directors do not expect that the adoption of these Standards and Interpretations in future periods will have a material impact on the financial statements of the Group.
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 2010, the Group is made up of the Company and its only subsidiary, Trebuchet Finance Limited. In accordance with the Standing Interpretations Committee Interpretation 12 "Consolidation-Special Purpose Entities" ("SIC 12"), the Company consolidates only entities over which control is indicated by activities, decision making, benefits and residual risks of ownership. In accordance with SIC 12 the Company does not consolidate an SPE in which it holds less than a substantial interest in the residual income position.
Where it holds more than a substantial interest, it does not consolidate the SPE where the residual income position represents only a small part of the gross assets of the SPE and the Company was neither involved in the establishment of the SPE or the origination of the assets owned by the SPE, on the basis that the Company is not exposed to the majority of the risks and benefits of the assets owned by the SPE, provided control is not otherwise indicated by the Company's activities, decision making, benefits and residual risks or ownership.
Trebuchet Finance Limited, the Company's only subsidiary, is an SPE over which the Company exercises control and its financial statements are therefore included in the consolidated financial statements of the Group. The Company does not consolidate any of the SPEs in which it holds a residual income position as it is not exposed to the majority of the risks and benefits of the assets owned by the relevant SPEs and does not control any of them.
Investments
Investments in residual interests and real estate debt bonds are recognised initially at their acquisition cost (being fair value at acquisition date) as debt securities. Thereafter they are re-measured at fair value and are designated as fair value through profit or loss investments in accordance with the Amendment to International Accounting Standard 39 ("IAS 39") Financial Instruments: Recognition and Measurement-The Fair Value Option, as the Group is an investment Group whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value.
Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades.
Cash and cash equivalents
Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities.
Derivative financial instruments
Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. Derivative financial instruments are recognised initially at fair value.
Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the Condensed Consolidated Statement of Comprehensive Income.
The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the reporting date, taking into account current interest rates and the current creditworthiness of the swap counterparties.
The fair value of options is their quoted market price at the reporting date. Broker marks are obtained for these positions. The change in value is recorded in net gains/(losses) in the Condensed Consolidated Statement of Comprehensive Income. Realised gains and losses are recognised on the maturity or sale of the option.
The fair value of forward exchange contracts is their quoted market price at the Statement of Financial Position date, being the present value of the quoted forward price. The change in value is recorded in net gains/(losses) in the Condensed Consolidated Statement of Comprehensive Income. Realised gains and losses are recognised on the maturity of a contract, or when the contract is closed out and they are transferred to realised gains or losses in the Condensed Consolidated Statement of Comprehensive Income.
Fair value
All financial assets carried at fair value are initially recognised at fair value and subsequently re-measured at fair value based on bid prices, where such bids are available from a third party in a liquid market. If bid prices are unavailable, the fair value of the financial asset is estimated by reference to market information which includes but is not limited to broker marks, prices on comparable assets and using pricing models incorporating discounted cash flow techniques.
These pricing models apply assumptions regarding asset‑specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. The objective of a fair value measurement is the price at which an orderly transaction would take place between market participants on the measurement date; it is not a forced liquidation or distressed sale. Where the Group has considered all available information and there is evidence that the transaction was forced, it will not use a transaction price as being determinative of fair value.
Where a forced sale price is not used the Group will estimate the fair value with reference to other market data as described above.
With regard to residual income positions, historical performance and observable market data is analysed to determine the average level of these factors and their volatility over time. These assumptions are typically derived by reference to the historical delinquencies, defaults, recoveries and prepayments actually realised by the originator of the underlying assets and any empirical data available that may be available in respect of any of these factors for the particular asset class.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported within assets and liabilities when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
Derecognition of a financial asset
A financial asset is derecognised only if substantially all of the asset's risks and rewards of ownership are transferred or control is transferred in the event that not substantially all of the asset's risks and rewards of ownership are transferred. However, if substantially all of the risks and rewards are retained, the asset is not derecognised. Control is transferred if the transferee has the practical ability to sell the asset unilaterally without needing to impose additional restrictions on the transfer.
Interest-bearing loans and borrowings
Interest‑bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest‑bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the Condensed Consolidated Statement of Comprehensive Income using the effective interest rate method. Financing costs associated with the issuance of financings are recognised in the Consolidated Statement of Comprehensive Income using the effective interest rate method.
Preference Shares
The Company has made a Bonus Issue to Ordinary Shareholders of Preference Shares. The value of the Preference Shares represent an obligation on the Group to pay the Preference Share Notional Value on winding up of the Group or on redemption of the Preference Shares in accordance with their terms. The fair value of the Preference Shares amounts to the Notional Value of the Preference Shares translated into the functional currency of the Group on the day of issuance, less the costs arising from the issue of these shares. Subsequent to initial measurement, the Preference Shares are remeasured at amortised cost using the effective interest rate method over the life of the Preference Shares of seven years.
The Preference Shares have been classified as non-current liabilities in these financial statements. The amortisation of the Preference Share will be treated as a finance cost through the Statement of Comprehensive Income.
The Preference Shareholders are entitled to a Preference Dividend equal to 8% per annum of the Preference Share Notional Value. The Preference Dividend will be accrued at each valuation point using the effective interest method and paid quarterly. Dividends owing to Preference Shareholders are shown as a Finance Cost in the Condensed Consolidated Statement of Comprehensive Income on an accruals basis.
Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the Consolidated Statement of Financial Position date are translated to Euro at the foreign exchange rate ruling at that date.
Foreign exchange differences arising on translation are recognised in the Consolidated Statement of Comprehensive Income. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Euro at foreign exchange rates ruling at the dates the fair value was determined.
Expenses attributable to the Placing and Open Offer and the Bonus Issue
The expenses of the Company attributable to the Placing and Open Offer and the Bonus Issue are those which are necessary to implement the Placing and Open Offer and the Bonus Issue. Such expenses include registration, listing and admission fees, corporate finance fees, printing, advertising and distribution costs, legal fees and other applicable expenses.
These expenses have been allocated to the Ordinary and Preference Shareholders based on a pro-rata allocation. Expenses attributable to the Ordinary Shareholders have been expensed as incurred and are included as a reduction to Reserves in the Condensed Consolidated Statement of Changes in Equity. Expenses attributable to the Preference Shareholders will be amortised over the life of the Preference Shares of seven years and the amortisation is included in Operating Expenses in the Condensed Consolidated Statement of Comprehensive Income.
Interest income
Interest income is accrued over the projected lives of the investments using the effective interest method as defined under International Accounting Standard 39. Where the Group adjusts its expected cash flow projections to take account of any change in underlying assumptions, such adjustments are recognised in the Condensed Consolidated Statement of Comprehensive Income by reflecting changes in a revised amortised cost value of the investment and applying the original effective interest rate to this revised amortised cost value for the purposes of calculating future income.
Taxation
The Company is a tax-exempt Guernsey limited Company. Accordingly, no provision for income taxes is made. Trebuchet Finance Limited is a "qualifying Company" within the meaning of Section 110 of the Irish Taxes Consolidation Act 1997 and accordingly its taxable profits are subject to tax at a rate of 25 per cent. Payments under the Participation Note are paid gross to the Company and the income portion of such payments is deductible by Trebuchet Finance Limited. Consequently, Trebuchet Finance Limitedhas a minimal amount of taxable income. The activities of Trebuchet Finance Limited are exempt for Irish Value Added Tax (VAT) purposes under the Irish VAT Act of 1972.
Other receivables
Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs.
Other accruals and payables
Other accruals and payables are not interest-bearing and are stated at their accrued value.
Segment information
For management purposes, the Group is organised into two main operating segments, which invest in 1) Real Estate Debt Bonds and 2) in Residual Bonds. Each segment engages in separate business activities and the results of each segment are regularly reviewed by the Board of Directors who have assumed the role of Chief Operating Decision Maker for performance assessment purposes.
3. Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group's accounting policies (described in Note 2 above), the Group has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the condensed consolidated financial statements:
Income recognition of residual income positions and bonds
The Group invests in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ("ABS") and bonds. The Group follows a policy of accounting for such investments and bonds at fair value through profit or loss and has elected to recognise income on an effective interest rate ("EIR") method in accordance with paragraph 30 of IAS 18 "Revenue".
ABS are securities that are typically backed by consumer finance receivables (such as mortgage loans) and commercial loans and receivables (including commercial mortgage loans and loans to small-and-medium sized enterprises).
Residual income positions are typically unrated or rated below investment grade and are often referred to as the "equity" or "first loss" position of a securitisation transaction.
Unlike a more conventional debt instrument and the more senior tranches of ABS (which generally hold the rights to fixed levels of income), the cash flow profile of a residual income position does not generally include a contractually established schedule of fixed payments divided between interest and principal.
Instead, the cash flows generally vary over time, and the periodic cash flows associated with a residual income position may include a significant element of principal repayment as well as income payments.
Where the cash payments generated by residual income positions do not typically follow the pattern of a standard cash-pay debt instrument (in that there is not a constant level of income in each period followed by a repayment of the principal amount at maturity), a given cash payment received in respect of a residual income position can generally be considered to represent a combination of the return on the investment and the repayment of some of the capital initially invested.
As a result, the stream of expected cash flows associated with a particular residual income position may have an uneven payout profile, in that the cash payment expected in one period (and the proportion of that payment that represents principal repayment versus interest income) may vary significantly from the cash payments expected in other periods.
The amortised value of a residual income position at any given measurement date after the Group's initial acquisition of the asset reflects repayments of principal in accordance with the effective interest method. This revised amortised value (adjusted to account for the accrual of interest and principal paydowns) is subject to further adjustment on the basis of market conditions and other factors that are likely to affect the fair value of the asset.
Where actual performance data or expectations regarding defaults, delinquencies and prepayments received in respect of a given asset is notably different from the default, delinquency and prepayment assumptions incorporated in the pricing model for the asset, the assumptions are revised to reflect this data and the pricing model is updated accordingly. In addition to the actual performance data observed in respect of a particular asset, market factors are also taken into account within the model.
Broker marks (where available) and any other available indicators are assessed to determine whether or not the market is attributing higher or lower default, delinquency or prepayment expectations to similar assets in determining whether or not the assumptions incorporated in the pricing model remain reasonable.
Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position and bond. Where there is a carry value reduction driven by lower cashflow expectations, interest income will be reduced as it reflects the reduced cashflow expectations.
Valuation of investments
The market for subordinated asset-backed securities, including residual income positions is illiquid and regular traded prices are generally not available for such investments. There is no active secondary market in residual income positions and, further, there is no industry standard agreed methodology to value residual income positions.
In accordance with the Group's accounting policies, fair value of financial assets is based on quoted bid prices where such bids are available from a third party in a liquid market. At 30 September 2010 quoted bid prices were not available for any of the Group's residual portfolio investments.
There is very limited information available in relation to transactions in comparable investments. As quoted bid prices are unavailable, the fair value of the investments is estimated by reference to market information, which includes but is not limited to broker marks, prices of comparable assets, estimated fair value from the previous period updated for current period cash flows and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. The Group may use all or a combination of the prices from these sources in estimating the fair value of the investments. Broker marks are estimates of values provided by market participants who are typically the originators of the investments.
Broker marks are not binding prices and there is no guarantee that the Group could transact at these prices in the current market. Due to the current market conditions, the Group has relied on pricing models to fair value its investments as broker marks become less reliable or unobtainable.
The assumptions upon which the pricing models are based are described in Note 2 (Fair Value). Any change to assumptions surrounding the pricing models may result in changes to the fair values being attributed to the investments. Where the fair value of the investment is written down due to changes in assumptions and expected cash flows, the change in the fair value is taken to the Condensed Consolidated Statement of Comprehensive Income following the reassessment of the cash flows discounted at the current market rate estimated for the investment.
The fair value of the Group's investments is set out in Note 10. Given the number of individual investments and the number of individual parameters that make up each pricing model, the Group believes that it would be impractical to disclose the effects of changes to each assumption in respect of each individual investment and this would not provide meaningful additional disclosure. However, general assumptions used in the pricing models are disclosed with sensitivities in the Group's annual report and consolidated financial statements.
4. Gains and losses on financial instruments
The following table details the gains and losses, excluding interest income and finance costs, earned by the Group from financial assets and liabilities during the period:
|
|
Period ended 30 September 2010 |
Period ended 30 September 2009 |
||
|
|
|
Euro |
|
Euro |
|
Net realised gains/(losses) |
|
|
|
|
|
Net realised gains/(losses) on investments at fair value through profit or loss |
2,027,787 |
|
(181,039) |
|
|
Net realised losses on options |
|
- |
|
(778,736) |
|
Net realised losses on foreign exchange instruments |
|
(47,451) |
|
(151,348) |
|
Net realised gains/(losses) |
|
1,980,336 |
|
(1,111,123) |
|
|
|
|
|
|
|
Net movement in unrealised gains/(losses) |
|
|
|
|
|
Net unrealised gains/(losses) on investments at fair value through profit or loss |
1,062,369 |
|
(4,004,323) |
|
|
Net unrealised losses on interest rate swap agreements |
|
(1,131,462) |
|
(343,523) |
|
Net unrealised losses on options |
|
(754,189) |
|
(2,001,187) |
|
Net unrealised (losses)/gains on foreign bank balances |
|
(685,683) |
|
111,185 |
|
Net unrealised losses on foreign exchange contracts |
|
(109,917) |
|
- |
|
Net unrealised losses |
|
(1,618,882) |
|
(6,237,848) |
|
|
|
|
|
|
|
Net realised and movement in unrealised gains/(losses) |
|
361,454 |
|
(7,348,971) |
5. Interest income and finance costs
The following table details interest income and finance costs from financial assets and liabilities during the period:
|
|
Period ended 30 September 2010 |
Period ended 30 September 2009 |
||
|
|
|
Euro |
|
Euro |
|
Interest income |
|
|
|
|
|
Investments designated at fair value through profit or loss upon initial recognition |
|
7,582,415 |
|
8,266,047 |
|
Loans and receivables (including cash and cash equivalents) |
|
4,173 |
|
5,874 |
|
Total interest income |
|
7,586,588 |
|
8,271,921 |
5. Interest income and finance costs (continued)
|
|
Period ended 30 September 2010 |
Period ended 30 September 2009 |
||
|
Finance costs: |
|
Euro |
|
Euro |
|
Liabilities held at amortised cost: |
|
|
|
|
|
Interest on loan |
|
3,492 |
|
359,576 |
|
Preference Shares issuance expense amortised |
|
3,398 |
|
- |
|
Dividend owing to Preference Shareholders |
|
164,331 |
|
- |
|
Total finance costs |
|
171,221 |
|
359,576 |
6. Operating expenses
|
|
Period ended 30 September 2010 |
Period ended 30 September 2009 |
||
|
Note |
Euro |
|
Euro |
|
|
Investment management, custodian and administration fees |
|
|
|
|
|
Investment management and incentive fee |
19 |
905,131 |
|
891,730 |
|
Administration fee |
19 |
99,016 |
|
98,302 |
|
Custodian fee |
19 |
18,320 |
|
18,120 |
|
|
|
1,022,467 |
|
1,008,152 |
|
Other operating expenses |
|
|
|
|
|
Audit fees |
|
85,232 |
|
84,301 |
|
Directors' fees payable to Directors of Real Estate Credit Investments Limited |
|
138,444 |
|
119,013 |
|
Directors' fees payable to Directors of Trebuchet Finance Limited |
|
14,421 |
|
12,397 |
|
Legal fees |
|
343,578 |
|
347,122 |
|
Pricing expenses |
|
48,255 |
|
114,575 |
|
Other expenses |
|
270,598 |
|
266,041 |
|
|
|
900,528 |
|
943,449 |
|
|
|
|
|
|
|
Total operating expenses |
|
1,922,995 |
|
1,951,601 |
The Group has no employees.
7. Dividends
Ordinary Dividends
The third interim dividend for the year ended 31 March 2010 of Euro 0.08 (2009: Euro 0.08) per share was declared on 11 March 2010 and an amount of Euro 2,131,573 was paid on 16 April 2010.
The fourth interim dividend for the year ended 31 March 2010 of Euro 0.08 (2009: Euro 0.08) per share was declared on 9 June 2010 and an amount of Euro 2,131,573 was paid on 30 June 2010.
A dividend of Euro 0.145 (2009: Euro 0.08) per share was declared on 3 September 2010 as a first interim dividend for the year ended 31 March 2011 and an amount of Euro 3,863,475 was paid to shareholders on 22 October 2010. This dividend was paid in respect of the period from 1 April 2010 to 15 September 2010.
Under Guernsey Law, companies can pay dividends in excess of accounting profit provided they satisfy the solvency test prescribed under The Companies (Guernsey) Law, 2008. The solvency test considers whether a company is able to pay its debts when they become due and whether the value of a company's assets are greater than its liabilities. The Company passed the solvency test for each dividend payment for the period ended 30 September 2010.
It is the Directors intention to declare an interim ordinary dividend in respect of the period from 16 September 2010 to 31 December 2010.
The Group's objective is to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends.
Preference Dividends
The Preference Shareholders are entitled to a Preference Dividend equal to 8% per annum of the Preference Share Notional Value. The Preference Dividend will be accrued at each valuation point and paid quarterly. Dividends owing to Preference Shareholders are shown as a Finance Cost in the Condensed Consolidated Statement of Comprehensive Income on an accrual basis.
The Preference Dividend in respect of the period from 15 September 2010 (the date when the Preference Shares were issued) to 30 September 2010 amounting to Euro 164,311 has been accrued for in these financial statements and will be paid with the Preference Dividend for 31 December 2010.
8. Profit/(loss) per Ordinary share
|
|
|
Period ended 30 September 2010 |
Period ended 30 September 2009 |
|
|
|
|
Euro |
|
Euro |
|
The calculation of the basic and diluted earnings per share is based on the following data: |
|
|
|
|
|
Profit/(loss) for the purposes of basic earnings per Ordinary Share being net loss attributable to equity holders |
|
5,853,826 |
|
(1,388,227) |
|
|
|
|
|
|
|
Weighted average number of Ordinary Shares for the purposes of basic earnings per share |
|
27,736,651 |
|
26,644,657 |
|
|
|
|
|
|
|
Effect of dilutive potential Ordinary Shares: |
|
|
|
|
|
Share options |
|
- |
|
- |
|
|
|
|
|
|
|
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share |
|
27,736,651 |
|
26,644,657 |
There is no dilution as at 30 September 2010 or 30 September 2009, as the share price was below the option price for the period.
9. Subsidiary
Trebuchet Finance Limited was incorporated in Ireland on 19 May 2005 and, pursuant to the Articles of Association of Trebuchet Finance Limited, the Group has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Company have been appointed Directors of Trebuchet Finance Limited.
To ensure that the Group will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the 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:
|
|
|
30 September 2010 |
|
31 March 2010 |
|
|
|
Euro |
|
Euro |
|
Securities at fair value through profit or loss |
|
100,599,597 |
|
91,568,184 |
|
Options purchased held for trading |
|
1,876,471 |
|
301,610 |
|
Options written held for trading |
|
(445,072) |
|
(51,310) |
|
|
|
102,030,996 |
|
91,818,484 |
|
|
|
Period ended 30 September 2010 |
|
Year ended 31 March 2010 |
|
|
|
Euro |
|
Euro |
|
Movement in Asset-backed securities |
|
|
|
|
|
Opening cost |
|
238,331,927 |
|
250,110,675 |
|
Purchases |
|
21,491,574 |
|
12,415,474 |
|
Sales Proceeds |
|
(10,843,242) |
|
(14,166,837) |
|
Realised gain/(loss) |
|
2,027,787 |
|
448,834 |
|
Principal payups |
|
2,220,417 |
|
5,788,194 |
|
Principal paydowns |
|
(6,927,492) |
|
(16,264,413) |
|
Closing cost |
|
246,300,971 |
|
238,331,927 |
|
Cumulative unrealised losses |
|
(145,701,374) |
|
(146,763,743) |
|
Securities at fair value |
|
100,599,597 |
|
91,568,184 |
Concentration of credit risk
The Group is subject to concentration of credit risk in that the four largest structures within the asset backed securities portfolio comprise approximately 63% (31 March 2010: 48%) of the total assets. One of the structures, comprising approximately 9% of its asset-backed securities portfolio has had a temporary suspension in cash flows as a result of prepayment rate triggers being breached (31 March 2010: 21%).
The following options contracts were open as at 30 September 2010:
|
Counterparty |
Expiration |
Description |
Currency |
Notional Amount |
Strike price |
Unrealised Gains/(Losses) Euro |
|
Goldman Sachs |
31 Dec 2011* |
EUR Call GBP Put |
Euro |
10,000,000 |
0.9315 |
(1,094,780) |
|
JP Morgan |
31 Dec 2010 |
EUR Call GBP Put |
Euro |
10,000,000 |
1.300 |
(10,000) |
|
JP Morgan |
31 Dec 2011 |
EUR Call GBP Put |
Euro |
14,000,000 |
0.9315 |
(247,424) |
|
Goldman Sachs |
31 Dec 2011 |
EUR Call GBP Put |
GBP |
14,000,000 |
1.300 |
6,820 |
|
Goldman Sachs |
30 Sep 2017 |
EUR Put GBP Call |
GBP |
12,500,000 |
0.8333 |
(359,382) |
|
Goldman Sachs |
31 Dec 2010 |
EUR Call GBP Put (Written option) |
Euro |
10,000,000 |
1.300 |
161,970 |
|
JP Morgan |
31 Dec 2010 |
EUR Call GBP Put (Written option) |
Euro |
10,000,000 |
0.9315 |
182,110 |
|
JP Morgan |
31 Dec 2011 |
EUR Call GBP Put (Written option) |
Euro |
14,000,000 |
1.300 |
29,262 |
|
Goldman Sachs |
31 Dec 2011 |
EUR Call GBP Put (Written option) |
GBP |
14,000,000 |
0.9315 |
(144,465) |
|
Net unrealised loss on options contracts |
(1,475,889) |
|||||
|
Premium on options contracts |
2,907,288 |
|||||
|
Options at fair value |
1,431,399 |
|||||
|
|
|
|
|
|
|
|
The following options contracts were open as at 31 March 2010:
|
Counterparty |
Expiration |
Description |
Currency |
Notional Amount |
Strike price
|
Unrealised Gains/(Losses) Euro |
||
|
Goldman Sachs |
29 Dec 2011* |
EUR Call GBP Put |
Euro |
10,000,000 |
0.9315 |
(840,390) |
||
|
Goldman Sachs |
29 Dec 2010 |
EUR Call GBP Put (Written option) |
Euro |
10,000,000 |
1.300 |
118,690 |
||
|
Net unrealised loss on options contracts |
|
|
(721,700) |
|||||
|
Premium on options contracts |
972,000 |
|||||||
|
Options at fair value |
250,300 |
|||||||
* On 6 April 2010, the Group extended the maturity to 31 December 2011.
11. Other assets
|
|
|
30 September 2010 |
|
31 March 2010 |
|
|
|
Euro |
|
Euro |
|
Interest receivable on investment portfolio |
|
1,194,722 |
|
877,917 |
|
Lehman Claim* |
|
- |
|
328,230 |
|
Interest receivable on cash and cash equivalents |
|
211,928 |
|
170,705 |
|
|
|
1,406,650 |
|
1,376,852 |
* Since 31 March 2010, the Lehman claim was sold for Euro 328,230.
The Directors consider that the carrying amount of other assets approximates their fair value.
12. Derivative contracts
The following interest rate and balanced guaranteed interest rate swaps were unsettled at 30 September 2010:
|
Termination Date |
Counterparty |
Initial Notional Amount (GBP) |
|
|
Unrealised Gain Euro |
|
25 January, 2013 |
Goldman Sachs |
451,431 |
|
|
20,052 |
|
15 October, 2011 |
Goldman Sachs |
5,500,000 |
|
|
111,359 |
|
15 November, 2011 |
Goldman Sachs |
1,300,000 |
|
|
25,629 |
|
25 January, 2013 |
Goldman Sachs |
1,226,713 |
|
|
79,984 |
|
15 October, 2011 |
Goldman Sachs |
3,000,000 |
|
|
74,053 |
|
12 September, 2011 |
Goldman Sachs |
1,700,000 |
|
|
36,038 |
|
27 March, 2011 |
Goldman Sachs |
17,348,100 |
|
|
313,729 |
|
15 February, 2011 |
Goldman Sachs |
8,282,152 |
|
|
143,858 |
|
15 January, 2011 |
Goldman Sachs |
26,198,025 |
|
|
485,719 |
|
|
|
|
|
|
1,290,421 |
The following interest rate and balanced guaranteed interest rate swaps were unsettled at 31 March 2010:
|
Termination Date |
Counterparty |
Initial Notional Amount (GBP) |
|
|
Unrealised Gain/(Loss) Euro |
|
25 January, 2013 |
Goldman Sachs |
451,431 |
|
|
21,760 |
|
15 October, 2011 |
Goldman Sachs |
5,500,000 |
|
|
163,068 |
|
15 November, 2011 |
Goldman Sachs |
1,300,000 |
|
|
37,473 |
|
25 January, 2013 |
Goldman Sachs |
1,226,713 |
|
|
65,943 |
|
15 October, 2011 |
Goldman Sachs |
3,000,000 |
|
|
88,536 |
|
12 September, 2011 |
Goldman Sachs |
1,700,000 |
|
|
45,234 |
|
27 March, 2011 |
Goldman Sachs |
17,348,100 |
|
|
642,940 |
|
15 February, 2011 |
Goldman Sachs |
9,700,584 |
|
|
330,394 |
|
15 January, 2011 |
Goldman Sachs |
27,568,395 |
|
|
1,026,535 |
|
|
|
|
|
|
2,421,883 |
The following foreign exchange forward contracts were unsettled at 30 September 2010 (31 March 2010: Nil):
|
Maturity Date |
|
Amount Bought |
Amount Sold |
|
Unrealised Loss Euro |
|
10 December 2010 |
|
GBP 7,000,000 |
Euro 8,189,769 |
|
(109,917) |
|
|
|
|
|
|
(109,917) |
13. Loans
|
|
|
30 September 2010 |
|
31 March 2010 |
|
|
|
Euro |
|
Euro |
|
Loans |
|
- |
|
8,642,967 |
On 6 April 2010 the Company repaid the remaining EUR 8,642,967 and all interest due, terminating any further liabilities under the loan facility.
14. Segmental Reporting
The Group has adopted IFRS 8 'Operating Segments'. The standard requires a 'management approach', under which segment information is presented on the same basis as that used for internal reporting purposes.
The Board of Directors is charged with setting the Group's investment strategy in accordance with the Prospectus. They have delegated the day to day implementation of this strategy to its Investment Manager but retain responsibility to ensure that adequate resources of the Group are directed in accordance with their decisions. The investment decisions of the Investment Manager are reviewed on a regular basis to ensure compliance with the policies and legal responsibilities of the Board. The Investment Manager has been given full authority to act on behalf of the Group, including the authority to purchase and sell securities and other investments on behalf of the Group and to carry out other actions as appropriate to give effect thereto.
Whilst the Investment Manager may make the investment decisions on a day to day basis regarding the allocation of funds to different investments, any changes to the investment strategy or major allocation decisions have to be approved by the Board, even though they may be proposed by the Investment Manager. The Board retains full responsibility as to the major allocation decisions made on an ongoing basis.
The Group has two reportable segments, being the Investment Grade Bond Portfolio and the Residuals Income Portfolio. For each of the sub-portfolios, the Board of Directors reviews internal management reports on a quarterly basis. The Chairman's Statement and Investment Manager's Report further break down the Residuals Portfolio into European Mortgages, UK Mortgages and SMEs. Each of these residuals is individually monitored by the Investment Manager and performance analysed separately but all are managed as one sub portfolio. When assets are purchased it does not matter what type of asset it is only whether the asset is suitable for the Group's requirements.
Information regarding the results of each reportable segment is included below. Performance is measured based on segment profit/loss, as included in the internal management reports that are reviewed by the Board of Directors. Segment profit/loss is used to measure performance as management believes that such information is the most relevant in evaluating the results. Segment information is measured on the same basis as that used in the preparation of the Group's financial statements
|
|
|
Real Estate Debt Bonds |
|
Residual Income Portfolio |
|
Total |
|
Period Ended 30 September 2010 |
|
Euro |
|
Euro |
|
Euro |
|
Reportable segment profit |
|
4,414,725 |
|
5,126,384 |
|
9,541,109 |
|
|
|
|
|
|
|
|
|
Period Ended 30 September 2009 |
|
|
|
|
|
|
|
Reportable segment profit |
|
794,341 |
|
2,942,821 |
|
3,737,162 |
|
|
|
Real Estate Debt Bonds |
|
Residual Income Portfolio |
|
Total |
|
As at 30 September 2010 |
|
Euro |
|
Euro |
|
Euro |
|
Reportable segment assets |
|
38,706,810 |
|
64,377,930 |
|
103,084,740 |
|
|
|
|
|
|
|
|
|
As at 31 March 2010 |
|
|
|
|
|
|
|
Reportable segment assets |
|
14,088,157 |
|
80,779,827 |
|
94,867,984 |
There have been no changes to the basis of segmentation or the measurement basis for the segment profit or loss since 31 March 2010.
All segment revenues are from external sources. There are no inter-segment transactions between the reportable segments during the year.
Certain income and expenditure is not considered part of the performance of an individual segment. This includes net foreign exchange gains/loss, expenses and interest on borrowings. The following table provides a reconciliation between net reportable income and operating profits.
|
|
Period Ended 30 September 2010 |
|
Period Ended 30 September 2009 |
||
|
|
|
Euro |
|
Euro |
|
|
|
|
|
|
|
|
|
Reportable Segment profit/(loss) |
|
9,541,109 |
|
3,737,162 |
|
|
Interest income from loans and receivables |
|
4,173 |
|
5,874 |
|
|
Net foreign exchange losses |
|
(843,051) |
|
(40,163) |
|
|
Net losses on options |
|
(754,189) |
|
(2,779,923) |
|
|
|
|
7,948,042 |
|
922,950 |
|
|
|
|
|
|
|
|
|
Expenses |
|
(1,922,995) |
|
(1,951,601) |
|
|
Finance costs |
|
(171,221) |
|
(359,576) |
|
|
Total profit/(loss) |
|
5,853,826 |
|
(1,388,227) |
|
Certain assets and liabilities are not considered to be attributable to a particular segment, these include, other receivables and prepayments, cash and cash equivalents, and derivative financial assets - options held for trading.
The following table provides a reconciliation between net total segment assets and total assets.
|
|
As at 30 September 2010 |
|
As at 31 March 2010 |
||
|
|
|
Euro |
|
Euro |
|
|
|
|
|
|
|
|
|
Total segment assets |
|
103,084,740 |
|
94,867,984 |
|
|
Other receivables and prepayments |
|
211,928 |
|
498,935 |
|
|
Cash and cash equivalents |
|
29,111,868 |
|
15,718,951 |
|
|
Derivative financial assets - options held for trading |
|
1,431,399 |
|
250,300 |
|
|
|
|
133,839,935 |
|
111,336,170 |
|
The following is a summary of the movements in the Group's investments analysed by the residual portfolio and the Investment Grade Portfolio:
|
Period Ended 30 September 2010 |
Real Estate Debt Bonds |
|
Residual Income Portfolio |
|
Total |
|
|
Euro |
|
Euro |
|
Euro |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening cost |
14,065,417 |
|
224,266,510 |
|
238,331,927 |
|
Purchases |
21,491,574 |
|
- |
|
21,491,574 |
|
Sales proceeds |
(1,243,242) |
|
(9,600,000) |
|
(10,843,242) |
|
Realised gain/(loss) |
397,763 |
|
1,630,024 |
|
2,027,787 |
|
Principal payups |
494,305 |
|
1,726,112 |
|
2,220,417 |
|
Principal paydowns |
(399,994) |
|
(6,527,498) |
|
(6,927,492) |
|
Closing cost |
34,805,823 |
|
211,495,148 |
|
246,300,971 |
|
Unrealised gains/(losses) |
2,895,440 |
|
(148,596,814) |
|
(145,701,374) |
|
Asset-backed securities at fair value |
37,701,263 |
|
62,898,334 |
|
100,599,597 |
|
Year Ended 31 March 2010 |
Real Estate Debt Bonds |
|
Residual Income Portfolio |
|
Total |
|
|
Euro |
|
Euro |
|
Euro |
|
Asset-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Opening cost |
7,229,936 |
|
242,880,739 |
|
250,110,675 |
|
Purchases |
12,415,474 |
|
- |
|
12,415,474 |
|
Sales proceeds |
(5,418,136) |
|
(8,748,701) |
|
(14,166,837) |
|
Realised gain/(loss) |
1,225,098 |
|
(776,264) |
|
448,834 |
|
Principal payups |
- |
|
5,788,194 |
|
5,788,194 |
|
Principal paydowns |
(1,386,955) |
|
(14,877,458) |
|
(16,264,413) |
|
Closing cost |
14,065,417 |
|
224,266,510 |
|
238,331,927 |
|
Unrealised losses |
(450,184) |
|
(146,313,559) |
|
(146,763,743) |
|
Asset-backed securities at fair value |
13,615,233 |
|
77,952,951 |
|
91,568,184 |
In presenting information on the basis of geographical segments, segment revenue and segment assets are based on the countries of the underlying collateral. The SMEs and ABS Bonds have cross border exposures and so these have been grouped into a combined 'Europe' segment, exposures in this segment include UK, Germany, Italy, Spain, Switzerland, The Netherlands. It is not possible to split the reporting further without significant cost with limited benefit to the user of the accounts.
|
|
Segmental Revenues |
Segmental Assets |
|||||
|
|
Period ended 30 September 2010 |
Period ended 30 September 2009 |
As at 30 September 2010 |
As at 31 March 2010 |
|||
|
|
Euro |
Euro |
Euro |
Euro |
|||
|
Italy |
(2,652,584) |
2,621,719 |
5,731,140 |
8,383,724 |
|||
|
Portugal |
1,266,378 |
(4,255,900) |
29,254,190 |
33,197,921 |
|||
|
United Kingdom |
4,187,641 |
4,354,458 |
10,893,049 |
10,742,343 |
|||
|
Europe |
6,739,674 |
|
1,016,885 |
|
57,206,361 |
|
42,543,996 |
|
|
9,541,109 |
|
3,737,162 |
|
103,084,740 |
|
94,867,984 |
15. Other liabilities
|
|
|
30 September 2010 |
|
31 March 2010 |
|
|
|
Euro |
|
Euro |
|
|
|
|
|
|
|
Interest payable |
|
- |
|
42,778 |
|
Dividend owing to preference shareholders |
|
164,307 |
|
- |
|
Due to related parties - Investment Manager (Note 19) |
|
161,041 |
|
147,854 |
|
Payable for investments purchased |
|
3,773,045 |
|
- |
|
Accrued expenses |
|
2,017,477 |
|
1,041,157 |
|
|
|
6,115,870 |
|
1,231,789 |
Other liabilities principally comprise amounts outstanding in respect of interest payable and ongoing costs. The Directors consider the carrying amount of other liabilities approximates their fair value.
16. Share capital
The capital structure of the Company consists of cash and cash equivalents and equity attributable to equity holders, comprising issued share capital (Ordinary), liabilities due to Preference Shareholders and reserves, as disclosed on the Condensed Consolidated Statement of Financial Position.
The Company does not have any externally imposed capital requirements. At 30 September 2010 the Company had capital of Euro 67,437,791 (31 March 2010: Euro 99,329,841).
The investment objective is to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends. The Group will seek to achieve this objective by investing primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom.
The Group's dividend policy has been amended so that available income is first used to pay any Preference Dividend that is due and payable and then, if the Directors in their sole discretion so resolve, to Ordinary Shareholders.
|
Authorised shares |
|
|
|
|
|
|
|
30 September 2010 |
30 September 2010 |
|
31 March 2010 |
31 March 2010 |
|
|
Number of Ordinary Shares |
Euro |
|
Number of Ordinary Shares |
Euro |
|
Ordinary Shares of no par value each |
Unlimited |
- |
|
Unlimited |
- |
|
Issued and fully paid |
30 September 2010 |
30 September 2010 |
|
31 March 2010 |
31 March 2010 |
|
|
Number of Ordinary Shares |
Euro |
|
Number of Ordinary Shares |
Euro |
|
Balance at beginning of period/year |
26,644,657 |
- |
|
26,644,657 |
- |
|
Ordinary Shares issued during the period |
13,322,328 |
- |
|
- |
- |
|
Balance at end of period/year |
39,966,985 |
- |
|
26,644,657 |
- |
In terms of the Placing and Open Offer, the ordinary shares were issued at Euro 2.00 per share.
No ordinary shares were bought back or cancelled during the period.
The Company made a Bonus Issue to Ordinary Shareholders of Preference Shares pro rata to their holding of Ordinary Shares following the completion of the Placing and Open Offer.
|
Preference Shares Issued and fully paid |
|
|
|
||
|
|
30 September 2010 |
30 September 2010 |
|
31 March 2010 |
31 March 2010 |
|
|
Number of Preference Shares |
Euro |
|
Number of Preference Shares |
Euro |
|
Balance at beginning of period |
- |
- |
|
- |
- |
|
Preference Shares issued during the period |
49,958,704 |
57,665,484 |
|
- |
- |
|
Issue costs allocated to Preference Shares |
- |
(1,352,602) |
|
- |
- |
|
Balance at end of period |
49,958,704 |
56,312,882 |
|
- |
- |
During the period ending 30 September 2010 49,958,704 Preference Shares were issued with a par value of £1 (EUR 1.154) per share. All issued shares are fully paid. Expenses arising as a result of the Bonus Issue have been allocated to the Ordinary and Preference Shareholders based on a pro-rata allocation. Expenses borne by the Preference Shareholders will be amortised over the life of the Preference Shares, being seven years. The initial recognised fair value of the Preference Shares has been reduced by the amount of expenses accrued at 30 September 2010.
The holders of Preference Shares are entitled to receive dividends of 8% per annum of the Preference Share Notional Value. Preference shares do not carry the right to vote. The holders of Preference Shares participate only to the extent of the face value of the shares. The Preference Shares are classified as liabilities.
The Preference Shares shall be redeemed by the Company in the following circumstances:
a) at any time, by way of the purchase of any such Preference Shares by the Company through the facilities of the London Stock Exchange; or
b) upon a change of control of the Company (defined as the acquisition by a single person or persons acting in concert of more than 50% of the voting rights attached to the Ordinary Shares), but only if a majority of Preference Shareholders attending and voting at a special class meeting of Preference Shareholders (which shall be convened within 60 days of the change of control) so resolve by way of an ordinary resolution, at a price equal to the Repayment Amount; or
c) if more than 75% of the Preference Shares have been redeemed before the expiration of the seven year period referred to under paragraph (d) below, by way of a mandatory redemption programme launched by the Company at its sole discretion, at a price equal to the higher of (i) the Repayment Amount, or (ii) the average mid-market closing price over the five Business Days prior to the announcement of the launch of such programme; or
d) if not redeemed earlier pursuant to paragraphs (a), (b) or (c) above, on a date that is seven years after their issue at the Repayment Amount.
17. Reserves
|
|
|
30 September 2010 |
|
|
|
|
|
Accumulated Reserves
|
|
Capital Reserves |
|
Total Reserves |
|
|
Euro |
|
Euro |
|
Euro |
|
Balance at start of period |
91,657,341 |
|
7,672,500 |
|
99,329,841 |
|
Net profit for the period |
5,853,826 |
|
- |
|
5,853,826 |
|
Issue of Ordinary Shares of the Company |
26,644,656 |
|
- |
|
26,644,656 |
|
Issue of Preference Shares of the Company |
(57,665,484) |
|
- |
|
(57,665,484) |
|
Ordinary Shares issuance expenses |
(730,000) |
|
- |
|
(730,000) |
|
Distribution to the Ordinary Shareholders of the Company |
(5,995,048) |
|
- |
|
(5,995,048) |
|
Balance at end of period |
59,765,291 |
|
7,672,500 |
|
67,437,791 |
|
|
|
|
31 March 2010 |
|
|
|
|
Accumulated Reserves
|
|
Capital Reserves |
|
Total Reserves |
|
|
Euro |
|
Euro |
|
Euro |
|
Balance at start of year |
97,912,591 |
|
7,672,500 |
|
105,585,091 |
|
Net profit for the year |
2,271,042 |
|
- |
|
2,271,042 |
|
Distribution to the Ordinary Shareholders of the Company |
(8,526,292) |
|
- |
|
(8,526,292) |
|
Balance at end of year |
91,657,341 |
|
7,672,500 |
|
99,329,841 |
As the Ordinary Shares of the Company have no par value and since the Group is not required to maintain separate classes of reserves, the proceeds from the open offer have been classified as reserves.
18. Notes to cash flow statement
|
|
Note |
Period ended 30 September 2010 |
|
Period ended 30 September 2009 |
|
|
|
Euro |
|
Euro |
|
Net profit/(loss) |
|
5,853,826 |
|
(1,388,227) |
|
Adjustments for: |
|
|
|
|
|
Net realised (gains)/losses on sale of investments |
4 |
(2,027,787) |
|
181,039 |
|
Net unrealised (gains)/losses on investments at fair value through profit or loss |
4 |
(1,062,369) |
|
4,004,323 |
|
Unrealised losses on interest rate swap agreements |
4 |
1,131,462 |
|
343,523 |
|
Unrealised losses/(gains) on foreign bank balances |
4 |
685,683 |
|
(111,185) |
|
Unrealised losses on options |
4 |
754,189 |
|
2,001,187 |
|
Unrealised losses on foreign exchange contracts |
4 |
109,917 |
|
- |
|
|
|
5,444,921 |
|
5,030,660 |
|
|
|
|
|
|
|
Purchases of investments |
10 |
(17,718,529) |
|
(3,975,513) |
|
Sales proceeds from investments |
10 |
10,843,242 |
|
- |
|
Purchase of options |
|
(2,439,237) |
|
|
|
Options Written |
|
503,949 |
|
978,603 |
|
Principal paydowns |
10 |
6,927,492 |
|
7,825,442 |
|
Principal payups |
10 |
(2,220,417) |
|
(2,975,991) |
|
|
|
(4,103,500) |
|
1,852,541 |
|
|
|
|
|
|
|
(Increase)/Decrease in receivables |
|
(29,798) |
|
48,707 |
|
Increase in payables |
|
1,111,036 |
|
855,484 |
|
|
|
1,081,238 |
|
904,191 |
|
Net cash inflow from operating activities |
|
2,422,659 |
|
7,787,392 |
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 Group pays the Investment Manager a Management Fee and Incentive Fee (see Note 6). During the period ended 30 September 2010, the Management Fee totalled Euro 905,131 (period ended 30 September 2009: Euro 891,730) of which Euro 161,041 (31 March 2010: Euro 147,854) was outstanding at the period end, and the Incentive Fee totalled Euro Nil (2009: Euro Nil).
Management Fee
Under the terms of the Investment Management Agreement, the Investment Manager was entitled to receive from the Group an annual Management Fee of 1.75 per cent of the net asset value of the Group other than to the extent that such value was comprised of any investment where the underlying asset portfolio was managed by the Investment Manager (as is the case with Cheyne Finance plc, Cheyne High Grade ABS CDO Ltd. and Cheyne CLO Investments I Limited).
Following completion of the Bonus Issue of Preference Shares, the Group amended the calculation of the Management Fee set out above so that the Management Fee payable will be equal to 1.75 per cent. per annum of the Adjusted NAV 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. The Adjusted NAV will be equal to the prevailing NAV calculated in accordance with the Company's accounting policies increased by an amount equal to the number of Preference Shares in issue (excluding Preference Shares held in treasury) multiplied by the Preference Share Notional Value. The Management Fee is calculated and payable monthly in arrears.
Incentive Fee
Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive an incentive compensation fee in respect of each incentive period that is paid quarterly in arrears. An incentive period will comprise each successive quarter, except the first such period was the period from admission to the London Stock Exchange to 31 March 2006. The Incentive Fee for each incentive period is an amount equivalent to 25 per cent of the amount by which A exceeds (B ´ C) where:
|
A = |
The Group's consolidated net income taking into account any realised or unrealised losses (but only to the extent they have not been deducted in a prior incentive period) and excluding any gains from the revaluation of investments, as shown in the Group's latest consolidated management accounts for the relevant quarter, before payment of any Incentive Fee; |
|
B = |
An amount equal to a simple interest rate equal to two per cent per quarter, subject to the reset mechanic described below (the "Hurdle Rate"); and |
|
C = |
The weighted average number of Shares outstanding during the relevant quarter multiplied by the weighted average offer price of such Shares. |
For the purposes of calculating the Incentive Fee, the Hurdle Rate will be reset on 1 April 2011, 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 Group will not pay a Management Fee in respect of that portion of its portfolio that is comprised of investments where the Investment Manager receives fees for its management of the underlying asset portfolio, the income from such investments are included in the consolidated net income of the Group for the purpose of calculating the Incentive Fee.
There was no incentive fee charged during the period ended 30 September 2010 or 30 September 2009.
Administration Fee
Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Group an administration fee of 0.125 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.0325 per cent of the gross asset value of the Group greater than Euro 80,000,000. State Street Fund Services (Ireland) Limited, the sub-administrator, is paid by the Administrator.
Custodian Fee
Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Group a custodian fee of 0.03 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Group greater than Euro 80,000,000 plus additional fees in relation to transaction fees, statutory reporting, corporate secretarial fees and other out of pocket expenses.
Investment Manager Options
In recognition of the work performed by the Investment Manager in raising capital for the Group, the Group granted to Cheyne Global Services Limited on 8 December 2005 options representing the right to acquire 2,250,000 Shares, being 10 per cent of the number of Offer Shares (that is, excluding the Shares issued to Cheyne ABS Opportunities Fund LP and the Shares issued to the Directors), at an exercise price per share equal to the Offer Price (Euro 10). The Investment Manager Options are fully vested and immediately exercisable on the date of admission to the London Stock Exchange and will remain exercisable until the 10th anniversary of that date.
The Group may grant further Investment Manager Options in connection with any future offering of Shares. Such options, if any, will represent the right to acquire Shares equal to not more than 10 per cent of the number of Shares being offered in respect of that future offering and will have an exercise price equal to the offer price for that offering. The aggregate fair value of the options granted at the time of the Initial Public Offering using a Black-Scholes valuation model was Euro 7,672,500 (reflecting a valuation of Euro 3.41 per option). This amount has been treated as a cost of the Initial Public Offering. As at 30 September 2010, these options were out of the money as the share price was below the Offer Price of Euro 10.
Controlling Party
Cheyne ABS Opportunities Fund, a Company that is also managed by Cheyne Asset Management (UK) LLP, has a controlling interest in the Company.
20. Significant Events during the period
On 15 September 2010, the Company's shareholders approved a 1 for 2 Placing and Open Offer of ordinary shares at EUR 2.00 per share. In conjunction with the Placing and Open Offer, the Company has issued a bonus 8% seven year Preference Share, denominated in GBP, to qualifying shareholders. The Bonus Issue amounted to 1.25 Preference Shares for every Ordinary Share held. The Company intends to use the proceeds of the offer to invest in European real estate debt investments. Accordingly, the Company changed its name to Real Estate Credit Investments Limited to reflect its change in investment policy which is now toaimed to provide Ordinary Shareholders with a levered exposure to a diversified and amortising portfolio of Residual Income Positions and a growing portfolio of Real Estate Debt Investments and to provide Preference Shareholders with stable returns in the form of quarterly dividends. The Group will seek to achieve this objective by investing primarily in debt secured by commercial or residential properties in Western Europe and the United Kingdom ("Real Estate Debt Investments").
The Group has amended its dividend policy. The Group's dividend policy was to pay out a majority of its net income (but excluding any realised or unrealised surpluses from the sale, realisation or revaluation of investments held directly by the Company) to Ordinary Shareholders in the form of quarterly dividends, subject to having distributable profits available for this purpose and any Financial Services Authority or other legal limitations. Following completion of the Bonus Issue of Preference Shares, the Company currently intends that available income is first used to pay any Preference Dividend that is due and payable and then, if the Directors in their sole discretion so resolve, to pay dividends to Ordinary Shareholders. It is expected that any future dividends payable to Ordinary Shareholders, following payment of any Preference Dividend, will be substantially reduced as compared to the dividends that have been previously paid in respect of the Ordinary Shares.
However, the Directors do currently intend that the Company continues to pay a dividend to Ordinary Shareholders when it is able and appropriate to do so. The Company further intends, subject to the performance of the Investment Portfolio, that the amount of dividends paid, if any, to Ordinary Shareholders following the change to the dividend policy should be adjusted from time to time in line with any increase or decrease in interest income from the Investment Portfolio, subject to applicable law and regulation.
On 6 April 2010, the Company paid back Euro 8,642,967 and all interest due on the loan, terminating any further liabilities under the loan facility.
21. Subsequent Events
There have been no events subsequent to 30 September 2010 which require adjustment of or disclosure in the quarterly report or notes thereto.
22. Foreign Exchange Rates
The following Foreign Exchange rates relative to the Euro were used as at 30 September 2010:
British Pound 0.86635
US Dollar 1.36520
The following Foreign Exchange rates relative to the Euro were used as at 30 September 2009:
British Pound 0.91393
US Dollar 1.46170
23. Approval of the Financial Statements
The financial statements were approved by the Directors on 29 November 2010.
[1] The Real Estate Debt portfolio includes one bond collateralised by SME loans accounting for 2.6% of the portfolio
[2] Cost and nominal shown is original notional using pool factor and FX rate at 30 September 2010.
[3] Cost and nominal shown is original notional using pool factor and FX rate at 15 November 2010.
[4] The table includes thebonds at their fair value at 15 November 2010.
[5] The values may not sum to totals or sub-totals due to rounding differences.
This information is provided by RNS
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