Interim Management Statement

RNS Number : 2127N

Queen's Walk Investment Limited

12 February 2009

 



Queen's Walk Investment Limited (the 'Company')

12 February 2009

This interim management statement relates to the period from 30 September 2008 to 12 February 2009 and has been prepared solely in order to comply with the requirement (pursuant to the EU Transparency Directive as implemented by the Disclosure and Transparency Rules) for an interim management statement to be made by the Company no earlier than 10 December 2008 and no later than 17 February 2009. The Company is currently in the process of preparing its quarterly report for the period ended 31 December 2008 which is expected to be released in March 2009.  Unless otherwise noted herein, the financial information provided in this interim management statement (and the asset valuations underlying that financial information) are as at 30 September 2008 and such financial information (and underlying valuations) will be stated as at a more recent date in the Company's forthcoming quarterly report. 

Performance Summary

As at 30 September 2008, the Company's NAV was €4.95 per share down from a NAV of €6.32 per share as at 30 June 2008. The decrease in NAV reflected the expected deterioration in the UK and continental European mortgage markets in the Company's cash flow forecasts as at 30 September 2008. 

In the quarter ended 30 September 2008, the Company estimated cash flows for the December quarter of €7.0 million (using 31 December 2008 FX rates). Actual cash flows recorded in the quarter ended 31 December 2008 were €7.8 million. The Company had a net cash balance of €9.3m as at 12 February 2009 (following payment in January 2009 of €2.1 million for the September 2008 dividend, €1 million for the purchase of a partial option hedge against the MDAX index and payment of €5.5 million to reduce the principal of its financing facility).

In November 2008 the Company renegotiated its financing facility, thereby reducing its debt and agreeing to a flexible two year repayment schedule of the outstanding debt. The revised agreement reduced the risk associated with material change clauses that could have forced a repayment of the debt on unfavourable terms. Following the repayment of €5.5 million of the facility in January 2009, the current outstanding amount of €29.5 million is already significantly lower than the agreed target loan amount at 31 March 2009 of €33 million.

Investment Portfolio

The tables below summarise the Company's investment portfolio as at 30 September 2008.

Portfolio Composition by Jurisdiction as at 30 September 2008*

*By reference to underlying asset jurisdiction. Figures stated as a percentage of the fair value of the Company's residual investments including accrued interest.  

Jurisdiction	%
Portugal	35.1%
UK	13.9%
Germany	24.9%
Italy	15.0%
Holland	8.6%
CDO	2.0%
France	0.5%
US	0.0%

Portfolio Composition by Asset Type as at 30 September 2008*

*By reference to underlying asset collateral. Figures stated as a percentage of the fair value of the Company's residual investments including accrued interest. 

Portfolio Composition	%
Prime	51.0%
SME	31.8%
Investment Grade Bonds	6.1%
SubPrime	5.7%
NearPrime	3.4%
CDO	2.0%

As at 12 February 2009, the securitisations to which the Company had exposure through its residual investment portfolio were:

Issuer	Description of Underlying Assets
Alba 2005-1 plc	UK non-conforming* and buy-to-let residential mortgages
Alba 2006-1 plc	UK non-conforming residential mortgages, primarily first-ranking
Amstel Corporate Loan Offering BV 2006-1	Middle market corporate loans
Cheyne CLO Investments I Limited	Investment grade CLOs
Cheyne High Grade ABS CDO, Ltd	Investment grade ABS CDOs with exposure to the US sub-prime mortgage market
Earls Eight Limited (Tranche 312B)	SME loans
Eirles Three Limited (Tranche 227B)	SME loans
Eirles Three Limited (Tranche 236B)	SME loans
Eurosail 2006-1 plc	UK non-conforming and buy-to-let residential mortgages
Lusitano Mortgages No. 1 plc	First-ranking, fully amortising Portuguese residential mortgages
Lusitano Mortgages No. 2 plc	First-ranking, fully amortising Portuguese residential mortgages
Lusitano Mortgages No. 3 plc	First-ranking, fully amortising Portuguese residential mortgages
Magellan Mortgages No. 1 plc	First ranking, fully amortising Portuguese residential mortgages
Magellan Mortgages No. 2 plc	First ranking mortgage rights (or second-ranking where first-ranking is also transferred) Portuguese residential mortgages
Newgate Funding plc	UK non-conforming residential mortgages, primarily first-ranking
RASC Series 2006-KS2 Trust	US Sub-prime residential mortgages, primarily first-ranking
RMAC 2004-NSP4 plc	UK non-conforming residential mortgages, primarily first-ranking
RMAC 2005 NS3 plc	UK non-conforming residential mortgages, primarily first-ranking
RMAC 2005 NS4 plc	UK non-conforming residential mortgages, primarily first-ranking
Sestante Finance S.R.L.	First-ranking prime Italian residential mortgages

*Non-conforming relates to subprime and near prime residential mortgages.

Since July 2008, the Company has spent €6.5 million (using FX rates at dates of purchase) purchasing ten investment grade asset backed securities (ABS). These securities have exposure to residential and commercial mortgage portfolios. The table below summarises the Company's ABS exposure by sector and rating at the time of purchase.

Percentage of Portfolio by Value

Rating by Type	UK RMBS	UK Buy to Let	UK Non-Conforming RMBS	EUR CMBS	Total
AAA		16.86%		1.98%	18.84%
AA		31.83%			31.83%
A			15.50%	4.52%	20.02%
BBB	12.33%			16.99%	29.31%
Total	12.33%	48.69%	15.50%	23.48%	100.00%

Outlook

The global economy has experienced a significant slowdown as the effects of the credit crisis are no longer confined to the financial sector. The housing market in countries such as the US, UK, Spain and Ireland has deteriorated considerably and house prices in these regions are expected to continue declining.  Banks have continued to reduce the availability of credit and tightened lending standards in response to weaker fundamentals and deteriorating capital bases.  

In 2008, the European securitisation markets for the issuance of transactions to third party investors came to a near standstill. Securitisations that have been completed are often retained and used for collateral with either the Bank of England or the European Central Bank. Given continued market conditions, the securitisation markets remain unlikely to provide financial institutions with an attractive source of funding in 2009.

In the quarter ended 30 September 2008, the Company's write-downs to the UK mortgage portfolio reflected an expectation of substantial deterioration in the UK economy. With respect to the European mortgage portfolio, the expected default rate was increased in the September quarter and the cash flow forecasts do not assume that credit quality will improve with falling Euribor rates.

The default rates of the SME portfolio remain below or in line with the forecasted default rates. As such, the SME portfolio should be able to withstand a moderate increase in default rates in the coming quarters. However, to partially hedge against any potential credit impact on the SME enterprises from the underlying pool of loans, the Company has purchased 3,385 put options on the German Mid Cap Index (MDAX) at a strike price of 4,750 points, for an aggregate purchase price of €1 million.

The Company remains focused on reducing debt and continuing to selectively acquire assets undervalued by dislocated markets. In November 2008, the Company renegotiated its financing facility and agreed to a two year repayment schedule, which reduced the risk of a material change forcing a repayment on unfavourable terms. As at 12 February 2009 the Company had made further repayments and the outstanding debt amount had been reduced to €29.5 million.

Since commencing its new investment programme in July 2008, Queen's Walk has invested €6.5 million in ten investment grade bonds. In conjunction with prudent management of the Company's financing facility, the Investment Manager will continue to use available cash proceeds to take advantage of investment opportunities in investment grade ABS. Current European ABS bond prices reflect credit scenarios that we believe are more pessimistic than economic forecasts suggest and also substantially worse than previous recessions.

Overall, Queen's Walk continues to be well positioned to take advantage of the current dislocation in the European ABS markets. The Company has taken pro-active steps to minimise its financing risk and will continue to take a prudent approach in managing its cash balances.  

 

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