Results Quarter ended30/06/07

Queen's Walk Investment Limited 04 September 2007 4 September 2007 Queen's Walk Investment Limited Preliminary Results for the Quarter Ended 30 June 2007 Queen's Walk Investment Limited ('Queen's Walk') is a Guernsey-incorporated investment company listed on the London Stock Exchange. Queen's Walk invests primarily in a diversified portfolio of subordinated tranches of asset backed securities, including the unrated 'equity' or 'first loss' residual income positions typically retained by the banks or other financial institutions which have originated the loan assets that collateralise a securitisation transaction. The Company makes such investments where its investment manager, Cheyne Capital Management (UK) LLP ('Cheyne Capital'), considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. For more information regarding Queen's Walk, please visit www.queenswalkinv.com or call Caroline Villiers: +44 20 7153 1521. Highlights • Operating income for the quarter of €12.3 million, equating to operating income per share of €0.30. • Distributable income in the first quarter in the amount of €8.8 million or €0.22 per share compared to €9.6 million or €0.24 per share as at 31 March 2007. • Net asset value decreased to €7.01 per share as at 30 June 2007 from €7.24 per share as at 31 March 2007. • The Board of Directors has declared an interim dividend of €0.15 per share for the first quarter. • Fair value write-downs of the Company's investment portfolio in the first quarter totalled €10.9 million or approximately 3.0% of the adjusted 31 March 2007 investment portfolio. These write-downs resulted principally from further deterioration in the US sub-prime market and wider market discount rates applied to the Company's three ABS CDO residual positions. • The fair value of the Company's investments exposed, directly or indirectly, to the US sub-prime market accounted for €12.8m or 4.2% of the gross asset value of the investment portfolio. • The weighted average yield of the Company's investment portfolio as at 30 June 2007 was 13.3% in local currency terms compared to 13.4% as at 31 March 2007. • The Company's net leverage has been reduced from 25.9% as at 31 March 2007 to 3.0% as at 30 June 2007. • The Company has secured a four year term financing facility and continues to have cash available for the purpose of buying back shares and to fund the proposed tender offer for which it is seeking shareholder approval. • 991,354 ordinary shares have been purchased for cancellation. • At the AGM held yesterday, the Company obtained authority from its shareholders to purchase up to a further 14.99 per cent of its issued share capital (the 'General Authority'). • The Company has proposed a tender offer to purchase at least 10% of the Company's share capital. Details of the tender offer will be made available shortly. • The Company will not seek to buy back more than 24.99% of its issued share capital through any combination of the General Authority and the proposed tender offer without first obtaining further shareholder approval. Commenting on the results, Tom Chandos, Chairman, said: 'The cashflows received from the portfolio allow the Company to deliver continued dividends to shareholders, as well as the ability to continue repurchasing shares.' Financial Highlights Total Total Revenue Fair value Quarter ended Revenue return Fair value Quarter return gains and 30 June 2007 gains and ended losses losses 31 March 2007 Operating Income 12,307,088 - 12,307,088 16,994,916 - 16,994,916 Gains and losses on fair value through profit or loss financial instruments - (11,527,045) (11,527,045) - (110,558,833) (110,558,833) 12,307,088 (11,527,045) 780,043 16,994,916 (110,558,833) (93,563,917) Operating Expenses (2,668,568) - (2,668,568) (2,700,658) - (2,700,658) Finance Costs (1,336,435) - (1,336,435) (2,541,463) - (2,541,463) Net profit / (loss) 8,302,085 (11,527,045) (3,224,960) 11,752,795 (110,558,833) (98,806,038) Distributable 8,765,290 9,596,406 income1,2 Distributable income €0.22 €0.24 per share Total Assets €360,911,412 €427,104,698 Total Liabilities €76,075,800 €132,951,013 Equity Capital €284,835,612 €294,153,685 NAV per share €7.01 €7.24 1. Net profit from investments before deduction of net fair value losses through profit or loss. For the quarter ended 31 March 2007, the distributable income includes -€2,156,389 of f/x gains and losses. For the quarter ended 30 June 2007, the distributable income includes €463,205 of f/x gains and losses. 2. Refer to Note 3 of the accounts for further details on the Company's distribution policy. First Quarter Dividend The Board of Directors has declared an interim dividend for the quarter ended 30 June 2007 of €0.15 per share payable on 8 October 2007 to shareholders of record on 14 September 2007. Conference Call A conference call to review the Company's financial results for the quarter ended 30 June 2007 will take place at 9:30 A.M. London time on 4th September 2007. The conference call can be accessed by dialing +44 (0)20 7806 1962 ten minutes prior to the scheduled start of the call. A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com). A webcast of the conference call will also be available on a listen-only basis at www.queenswalkinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call. For further information please contact - Investor Relations: Caroline Villiers +44 (0) 20 7153 1521 About the Company Queen's Walk Investment Limited is a Guernsey-incorporated investment company listed on the London Stock Exchange. Queen's Walk invests primarily in a diversified portfolio of subordinated tranches of asset backed securities, including the unrated 'equity' or 'first loss' residual income positions typically retained by the banks or other financial institutions which have originated the loan assets that collateralise a securitisation transaction. The Company makes such investments where its investment manager, Cheyne Capital Management (UK) LLP, considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. The Company believes that its investment focus provides equity investors with exposure to a relatively new investment opportunity in this asset class. The content of this announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms 'believes', 'estimates', 'anticipates', 'expects', 'intends', 'considers', 'may', 'will' or 'should'. By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules). Portfolio Review As at 30 June 2007, the Company's portfolio of UK mortgage, European mortgage and SME residual investments comprised 93.8% of the gross-asset value of the Company's investment portfolio. The Company's investments exposed to the US sub-prime market, firstly, through a mortgage-backed residual position and secondly, through two CDOs collateralised by asset pools containing US sub-prime mortgage-backed bonds, accounted for 4.2% of the gross asset value of the Company's investment portfolio. A CDO, backed by US leveraged loans, accounts for the balance of the portfolio (2.0% of the gross asset value of the Company's investment portfolio). The cash generative capability of the portfolio has again been demonstrated with €22.3 million of cash proceeds being received in the quarter ended 30 June 2007. While the current market volatility may have a negative impact on the fair value of the Company's portfolio in future periods, the cash generative capability of the Company will not be affected by changes in market discount rates. The Company's net leverage has been reduced to 3.0% as at 30 June 2007 from 25.9% as at 31 March 2007. This reduction in leverage resulted from the application of both the proceeds of asset sales which the Company has disclosed previously, and the cash flows from the Company's investment portfolio. In addition to reducing leverage, the Company has also reduced financing risk since the end of the quarter by replacing short-term repo financing arrangements with a four-year, €135.0 million financing facility arranged and placed by Deutsche Bank. As at 31 August 2007, the Company had €31.2 million of cash on the balance sheet and has drawn €45 million against its financing facility. Investment Portfolio UK Mortgage Investments (35.5% of GAV) No significant changes to the pricing assumptions of the Company's UK mortgage-backed residual investments were made in the quarter. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 June 2007. Significant changes were made to prepayment assumptions in the quarter ended 31 March 2007 to reflect observed changes in the prepayment behaviour of borrowers exiting their discount interest rate period. The prepayment data received in the quarter has been consistent with those revised prepayment assumptions. While recent UK interest rate rises may still have a future impact on the growth of house prices in particular regions, the Company's UK mortgage residual investments have benefited from approximately 1.5 to 3.0 years (depending on when a particular residual has been purchased) of house price appreciation. Default rates observed in the quarter were in line with expectations, and given the house price appreciation in the portfolio we expect losses to remain within expectations. European Mortgage Investments (28.7% of GAV) With respect to the European mortgage-backed residual portfolio, the fundamentals underlying the performance of these investments remain sound. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 June 2007. Notwithstanding the changes in Portuguese and Italian legislation governing prepayment charges, we have not yet observed a significant change in borrower prepayment behaviour associated with the Company's mortgage portfolios. Default experience in these investments has been in line with expectations. Recovery rates on the few loans that have defaulted have also been in line with expectations. SME Investments (14.5% of GAV) The Company's portfolio of SMEs residual investments is performing in line with or better than expectations. After giving effect to cash flows received in the quarter and associated principal amortisations, there has been no material change to the fair value of these investments as at 30 June 2007. The observed default rates for the Company's SME portfolios remain in line with expectations. Furthermore, the expected default rates for the Company's SME portfolios, based on the most recent credit scores for the underlying companies, are also in line with original pricing assumptions. CDO Investments (4.0% of GAV) The Company holds residual positions in three ABS CDOs managed by Cheyne Capital, two of which are exposed to US mortgage assets, Cheyne High Grade CDO, Ltd ('High Grade CDO') and Cheyne ABS Investments l PLC ('ABS Investments l') and one, which is backed by US CLO bonds, Cheyne CLO Investments l Ltd. ('CLO Investments l'). The percentage of the collateral exposed to the US sub-prime market in the High Grade CDO and ABS Investments I is approximately 56.9% and 63.6%, respectively. CLO Investments I is backed by AA- to BBB- rated US CLO bonds. The performance of this collateral has exceeded original pricing assumptions and two of the bonds in the portfolio have been upgraded from BBB to A and AA, respectively. There have been no downgrades or negative watch warnings on any of the bonds in the portfolio. The cash generative ability of the residual investment remains positive and is in line with expectations. High Grade CDO, Ltd. is a CDO backed by AAA to A-rated ABS bonds and ABS Investments I is a CDO backed by the mezzanine tranches of US ABS CDOs (including US RMBS CDOs). As at 30 June 2007, the credit performance of High Grade CDO had been positive, with three rating upgrades and no negative credit actions on the bonds contained in its portfolio. However, subsequent to the quarter end, the continued deterioration of the US sub-prime market has affected the credit quality of two bonds in the underlying portfolio. The expected cashflows and the fair value of the residual have been adjusted accordingly. The credit performance of ABS Investments I has been stable. Since inception, seven of the bonds in the portfolio have been upgraded and two have positive rating watch actions. On 3 August 2007, Fitch Ratings downgraded one asset in the ABS Investments I portfolio (ACA ABS 2003-2 A3) from A to BBB-. On 31 July 2007, Standard and Poor's affirmed its rating of A for this same bond. The market values of the ABS CDO residuals have been adversely affected by the recent volatility in the ABS markets. In the quarter ended 30 June 2007, the aggregate fair value of these assets has reduced by 36.7% since 31 March 2007. US Mortgage Investment (1.2% of GAV) The Company retains exposure to one US mortgage-backed residual investment. In light of further evidence of continued deterioration in the US housing market, valuation assumptions regarding cumulative losses and the timing of losses were revised in the quarter ended 30 June 2007. The fair value of the investment has reduced by 52.7% since 31 March 2007. The cumulative loss assumption for the residual position has been increased by 27.8% as a result of continued significant weakness in the US sub-prime market since 31 March 2007. While the Company continues to receive cash flows from this investment, the total cash flows we expect to receive over the expected life of the investment have been reduced by 22.0%. Portfolio Valuation In accordance with the Company's valuation procedures, the fair value of the Company's investments has been evaluated on the basis of performance, observable market data and the Investment Manager's expectations regarding future trends. After giving effect to the fair value write-downs taken in the quarter, the NAV of the Company has decreased to Euro 7.01 per share as at 30 June 2007 from Euro 7.24 per share as at 31 March 2007 (a decrease of 3.2%). The table below summarises the changes in fair values of the Company's investment portfolio by asset class: Asset Class 31 March 2007 30 June 2007 Fair Value % Change to Cashflows Cashflows Fair Value2 (€ Change Since 31 March 2007 Received in the Received in the Fair Value1,2 € mn) 31 March 2007 (€ Fair Value3 Quarter Ended Quarter Ended mn) mn) 3 31 March 2007 30 June 2007 (€ (€mn) mn) UK Mortgages 133.00 128.26 -4.75 -3.6% 10.03 12.77 Euro Mortgages 106.58 103.66 -2.92 -2.7% 4.70 4.73 SME 52.92 52.34 -.58 -1.1% 3.07 3.06 ABS CDO 22.52 14.26 -8.26 -36.7% 0.93 1.14 US Mortgages 9.40 4.44 -4.95 -52.7% 2.30 .58 Cash and 34.90 56.69 21.79 62.4% Other Cash Equivalents TOTAL 359.32 359.64 0.32 0.1% 21.02 22.28 1. The fair value of the portfolio as at 31 March 2007 excludes the fair value of the six residuals that were sold in the quarter ended 30 June 2007 and Southern Pacific Financing 06-A plc which was sold on 30 March 2007. 2. The fair value figures for 31 March 2007 and 30 June 2007 include accrued income and, in the case of the UK mortgage residuals, the value of the interest rate swaps. 3. Fair value changes since 31 March 2007 includes principal amortisations of the residual as a result of cash flows received in the quarter. Portfolio Breakdowns A breakdown of the Company's investment portfolio by jurisdiction (by reference to underlying asset originator) is set out below. Percentages for each asset class are in relation to the gross asset value of the Company's investment portfolio. To view the full text of this press release including pie charts, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/2312d_1-2007-9-4.pdf A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Percentages for each asset class are in relation to the gross asset value of the Company's investment portfolio. To view the full text of this press release including pie charts, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/2312d_1-2007-9-4.pdf Share Repurchases The Company began purchasing its shares on 18 July 2007. As of 31 August 2007, the Company purchased 991,354 shares for cancellation at an average price of €5.04 per share. Though the share buybacks have been accretive to NAV, the number of shares which the Company has been able to repurchase has been constrained by applicable limits on the number of shares that can be purchased on any particular day and by the price at which the Company can repurchase shares. The Company's shares continue to trade at a discount to NAV and the Company has elected to repurchase its shares via a tender offer. At an EGM held on 3 September 2007, independent shareholders approved the waiver from Rule 9 of the City Code on Takeovers and Mergers in respect of repurchases of up to 24.99% of the Company's issued share capital. Accordingly, the Company will be entitled to purchase up to 24.99% of its ordinary shares pursuant to a combination of the General Authority and the proposed tender offer. The Company is committed to buying not less than 10% of its current issued share capital under the tender offer. Full details of the tender offer will be sent to shareholders shortly. While the share price trades at a material discount to NAV, the Company believes it is in the best interests of shareholders to continue with the tender offer and share buy-backs. Strategy and Market Outlook The current volatility in the ABS markets is likely to persist for the coming months. The availability of the capital to purchase ABS debt securities has significantly reduced in the past few weeks and the magnitude of this reduction has been sufficiently large to affect historically stable funding platforms. Prices for European ABS securities are increasingly trading on technicals driven by one way supply and demand dynamics. Generally, prices for European and UK residuals have not been affected by this market volatility, however the outlook in the coming months remains highly uncertain and events outside the control of the Company could have a material impact on the fair value of the Company's portfolio. The current volatility in the ABS markets offers challenges as well as substantial opportunities for the Company. As liquidity in the European markets reduces in the coming months, there will be more opportunities for the Company to invest its capital in asset backed mezzanine and equity investments with attractive risk return profiles. ABS investors with sufficient capital and stable financing platforms should be well positioned to take advantage of the dislocation in market prices. In the UK, we expect that the flow of mortgage-backed residuals will continue as a large number of mortgage originators rely on the sale of residuals as a key part of their financing and capital management strategies. In the short-term the availability of residuals may be limited as the volume of mortgage loans is reduced as a result of higher financing costs in the ABS markets. However, as and when liquidity returns to the ABS markets, the increased competition in the UK mortgage market will result in more originators selling UK residual positions. The Company is aware of several originators who are waiting for the current dislocation in the European ABS markets to subside before selling their mortgage residuals. This will result in either a large supply of residuals appearing at the same time or some originators being forced to sell some of their residuals at significant discounts to return capital into their own businesses. The imbalance between the supply of mortgage residuals and the lack of risk capital will return pricing power to residual investors. The pricing of European prime mortgage residuals remains tight as sellers of these residuals continue to have strong demand from smaller European banks and financial institutions. Given the continued uncertainty around changes to prepayment rates, the Company is unlikely to increase its exposure by purchasing residuals at current markets prices. The Company's SME portfolio continues to perform in line with expectations. Where there is an opportunity to increase exposure to this asset class at attractive rates of return the Company may do so. The Company is seeing an increasing number of attractive investment opportunities in the European and UK specialised finance area as liquidity in the asset-backed markets is reduced. Investments in this area are typically structured as mezzanine loan facilities secured against granular asset pools with a warrant or equity participation to provide the potential for NAV accretion. The Investment Manager is well positioned in terms of available capital to take advantage of these opportunities. Following completion of the proposed tender offer, the Company will seek to make the best use of its capital either through purchasing its own shares or by making new investments. Unaudited Consolidated Income Statement For the quarter ended 30 June 2007 Total Total Revenue Fair value Quarter Revenue Fair value Quarter ended return gains and ended 30 return gains and 31 March 2007 Note losses* June 2007 losses* Euro Operating income 12,307,088 - 12,307,088 16,994,916 - 16,994,916 Gains and losses on fair - (11,527,045) (11,527,045) - (110,558,833) (110,558,833) value through profit or loss financial instruments* 12,307,088 (11,527,045) 780,043 16,994,916 (110,558,833) (93,563,917) Operating expenses 5 (2,668,568) - (2,668,568) (2,700,658) - (2,700,658) Finance costs 6 (1,336,435) - (1,336,435) (2,541,463) - (2,541,463) Net Profit/(loss) 8,302,085 (11,527,045) (3,224,960) 11,752,795 (110,558,833) (98,806,038) Loss per Ordinary Share Basic Euro (0.079) Euro (2.432) Diluted Euro (0.079) Euro (2.432) Weighted average Ordinary Number Number Shares outstanding Basic 40,620,756 40,620,756 Diluted 40,620,756 40,620,756 All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. Unaudited Consolidated Statement of Changes in Shareholders' Equity For the quarter ended 30 June 2007 Share Share Other Reserve Capital Accumulated Total Capital Premium Reserve Profits Euro Euro Euro Euro Euro Euro Balance at 1 April 2007 - - 384,678,304 7,672,500 (98,197,119) 294,153,685 Net loss for the quarter - - - - (3,224,960) (3,224,960) Transfers from distributable - - (12,186,226) - 12,186,226 - reserves to accumulated profits in respect of dividends paid/payable Distribution to the Ordinary - - - - (6,093,113) (6,093,113) Shareholders of the Company Balance at 30 June 2007 - - 372,492,078 7,672,500 (95,328,966) 284,835,612 Unaudited Consolidated Balance Sheet As at 30 June 2007 30 June 2007 31 March 2007 Euro Euro Non-current assets Investments at fair value through profit or loss 297,198,144 366,743,454 Current assets Cash and cash equivalents 56,685,553 22,026,122 Other assets 7,027,715 38,335,122 63,713,268 60,361,244 Total assets 360,911,412 427,104,698 Equity and liabilities Equity Share capital - - Share premium account - - Other reserve 372,492,078 384,678,304 Capital reserve in respect of share options 7,672,500 7,672,500 Accumulated losses (95,328,966) (98,197,119) 284,835,612 294,153,685 Current liabilities Repurchase agreements 65,682,339 119,773,090 Distribution payable 6,093,113 9,342,774 Other liabilities 4,300,348 3,835,149 Total liabilities 76,075,800 132,951,013 Total equity and liabilities 360,911,412 427,104,698 Notes to the Unaudited Financial Statements 1. General information Queen's Walk Investment Limited (the 'Company') was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is a closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 1994 and its Ordinary Shares are listed on the London Stock Exchange. The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. 'Group' is defined as the Company and its subsidiary. At 30 June 2007, the Company's only subsidiary was Trebuchet Finance Limited. The Company's investment objective is to preserve capital and provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ('ABS') where the Investment Manager considers that the coupon or cash flows on the tranche are attractive relative to the underlying credit. These are and will be, in most cases, below investment grade or unrated and do or will, in many cases, represent the residual income positions typically retained by the originator of a securitisation transaction as the 'equity' or ' first loss' position. The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management Limited (the 'Investment Manager'), an investment management firm authorised and regulated by the Financial Services Authority. The Company has entered into an Investment Management Agreement (the 'Investment Management Agreement') under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Company has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and a quarterly performance-related fee. The Company has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the 'Administrator'). Investors Fund Services (Ireland) Limited (A State Street Company) provide certain administration services to the Company in its capacity as sub-administrator. 2. Significant accounting policies Basis of preparation The quarterly report has been prepared using accounting policies consistent with International Financial Reporting Standards ('IFRS'). The same accounting policies, presentation and methods of computation are followed in this report as applied in the Company's latest annual audited financial statements dated 31 March 2007. The quarterly report of the Group is prepared on the historical cost or amortised cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit or loss. The majority of the Company's investments are financial instruments that are classified as fair value through profit or loss. Where bid prices are not available from a third party in a liquid market, the fair value of the financial instrument is estimated using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. Where such pricing models are used, assumptions are reviewed and updated on the basis of actual performance data as it is received and on the basis of market conditions as at the balance sheet date. 2. Significant accounting policies (continued) Basis of preparation (continued) This quarterly report is presented in Euros because that is the currency of the primary economic environment in which the Group operates. The functional currency of the Group is also considered to be Euros. Basis of consolidation Subsidiaries are entities controlled by the Company. Subsidiaries are included in the consolidated quarterly report from the date that control commences until the date that control ceases. At 30 June 2007, the Group is made up of the Company and its only subsidiary, Trebuchet Finance Limited. In accordance with the Standing Interpretations Committee Interpretation 12 'Consolidation-Special Purpose Entities' ('SIC 12'), the Company consolidates only entities over which control is indicated by activities, decision making, benefits and residual risks of ownership. In accordance with SIC 12 the Company does not consolidate an SPE in which it holds less than a substantial interest in the residual income position. Where it holds more than a substantial interest, it does not consolidate the SPE where the residual income position represents only a small part of the gross assets of the SPE and the Company was neither involved in the establishment of the SPE or the origination of the assets owned by the SPE, on the basis that the Company is not exposed to the majority of the risks and benefits of the assets owned by the SPE, provided control is not otherwise indicated by the Company's activities, decision making, benefits and residual risks or ownership. Trebuchet Finance Limited, the Company's only subsidiary, is an SPE over which the Company exercises control and its accounts are therefore included in the consolidated quarterly report of the Group. The Company does not consolidate any of the SPEs in which it holds a residual income position as it is not exposed to the majority of the risks and benefits of the assets owned by the relevant SPEs and does not control any of them. Investments Investments in residual interests are recognised initially at their acquisition cost (being fair value at acquisition date) as debt securities. Thereafter they are re-measured at fair value and are designated as fair value through profit or loss investments in accordance with the Amendment to International Accounting Standard 39 ('IAS 39') Financial Instruments: Recognition and Measurement-The Fair Value Option, as the Company is an investment company whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value. Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades. Cash and cash equivalents Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities. Derivative financial instruments Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. The Group may also enter into credit default or total return swap arrangements where the underlying asset or assets would otherwise be within the Group's investment policy in order to obtain substantially the same economic exposure to the returns and risks associated with holding such underlying asset or assets. Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. 2. Significant accounting policies (continued) Derivative financial instruments (continued) Fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement. The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties. Total return swap agreements and credit default swap agreements are fair valued on the date of valuation based upon the underlying market value of the reference asset using the approach explained under fair value. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement. Fair value All financial assets carried at fair value are initially recognised at fair value and subsequently re-measured at fair value based on bid prices where such bids are available from a third party in a liquid market. If bid prices are unavailable, the fair value of the financial asset is estimated using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. With regard to residual income positions, historical performance and observable market data is analysed to determine the average level of these factors and their volatility over time. These assumptions are typically derived by reference to the historical delinquencies, defaults, recoveries and prepayments actually realised by the originator of the underlying assets and any empirical data available that may be available in respect of any of these factors for the particular asset class. The carrying value of a residual income position at any given measurement date after the Group's initial acquisition of the asset reflects repayments of principal in accordance with the effective interest method. This revised carrying value (adjusted to account for the accrual of interest and principal paydowns) is subject to further adjustment on the basis of market conditions and other factors that are likely to affect the fair value of the asset. Where actual performance data regarding defaults, delinquencies and prepayments received in respect of a given asset is markedly different from the default, delinquency and prepayment assumptions incorporated in the pricing model for the asset, the assumptions are revised to reflect this data and the pricing model is updated accordingly. In addition to the actual performance data observed in respect of a particular asset, market factors are also taken into account within the model. Dealer marks (where available) and any other available indicators are assessed to determine whether or not the market is attributing higher or lower default, delinquency or prepayment expectations to similar assets in determining whether or not the assumptions incorporated in the pricing model remain reasonable. Where the fair value of the investment is written down due to changes in assumptions and expected cash flows, the change in the fair value is taken to the income statement following the reassessment of the cash flows discounted at the current market rate estimated for the investment. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported within assets and liabilities when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. 2. Significant accounting policies (continued) Repurchase agreements The Group may finance the acquisition of some of its investments through the use of repurchase agreements. Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the balance sheet. Derecognition of a financial asset A transfer of a financial asset is accounted for as a derecognition only if substantially all of the asset's risks and rewards of ownership are transferred or control is transferred in the event that not substantially all of the asset's risks and rewards of ownership are transferred. However, if substantially all of the risks and rewards are retained, the asset is not derecognised. Control is transferred if the transferee has the practical ability to sell the asset unilaterally without needing to impose additional restrictions on the transfer. Interest-bearing loans and borrowings Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest- bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Financing costs associated with the issuance of financings are deferred and amortised over the term of the financings using the effective interest rate method, in line with market practice. Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Euro at foreign exchange rates ruling at the dates the fair value was determined. Transaction expenses The preliminary expenses of the Company directly attributable to its initial public offering and any costs associated with the establishment of the Company are charged to the share premium or other reserve account. Share options granted to the Investment Manager are treated as a transaction expense on the basis that they are granted by the Company as a fee for the Investment Manager's work in raising capital for the Company. The fair value of such options is charged to the share premium account. The share premium account is credited with the fair value of such options at the time that such options are vested. Interest income Interest income is accrued based on the fair value of the Group's financial assets and their contractual terms. Interest income is accrued over the projected lives of the investments using the effective interest method as defined under International Accounting Standard 39. Where the Group adjusts its expected cash flow projections to take account of any change in underlying assumptions, such adjustments are recognised in the income statement by reflecting changes in a revised amortised cost value of the investment and applying the original effective interest rate to this revised amortised cost value for the purposes of calculating future income. Taxation The Company is a tax-exempt Guernsey limited company. Accordingly, no provision for income taxes is made. Trebuchet Finance Limited is a 'qualifying company' within the meaning of section 110 of the Irish Taxes Consolidation Act 1997 and accordingly its taxable profits are subject to tax at a rate of 25 per cent. Payments under the Participation Note are paid gross to the Company and the income portion of such payments is deductible by Trebuchet Finance Limited. Consequently, Trebuchet Finance Limited has a minimal amount of taxable income. The activities of Trebuchet Finance Limited are exempt for Value Added Tax (VAT) purposes under the VAT Act of 1972. 2. Significant accounting policies (continued) Other receivables Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts. Financial liabilities and equity Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs. Other accruals and payables Other accruals and payables are not interest-bearing and are stated at their nominal value. Business and geographical segments The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities and operates solely from Guernsey and therefore no segmental reporting is provided. 3. Critical accounting judgements and key sources of estimation uncertainty Critical accounting judgements in applying the Group's accounting policies In the process of applying the Groups accounting polices (described in note 2 above), the Company has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements: Income recognition The Company invests primarily in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ('ABS'). ABS securities that are typically backed by consumer finance receivables (such as mortgage loans) and commercial loans and receivables (including commercial mortgage loans and loans to small-and-medium sized enterprises). Residual income positions are typically unrated or rated below investment grade and are often referred to as the 'equity' or 'first loss' position of a securitisation transaction. Unlike a more conventional debt instrument and the more senior tranches of ABS (which generally hold the rights to fixed levels of income), the cash flow profile of a residual income position does not generally include a contractually established schedule of fixed payments divided between interest and principal. Instead, the cash flows generally vary over time, and the periodic cash flows associated with a residual income position may include a significant element of principal repayment as well as income payments. Where the cash payments generated by residual income positions do not typically follow the pattern of a standard cash-pay debt instrument (in that there is not a constant level of income in each period followed by a repayment of the principal amount at maturity), a given cash payment received in respect of a residual income position can generally be considered to represent a combination of the return on the investment and the repayment of some of the capital initially invested. As a result, the stream of expected cash flows associated with a particular residual income position may have an uneven payout profile, in that the cash payment expected in one period (and the proportion of that payment that represents principal repayment versus interest income) may vary significantly from the cash payments expected in other periods. The Company follows a policy of accounting for such investments at fair value through profit or loss and has elected to recognise income on an effective interest rate ('EIR') method in accordance with paragraph 30 of IAS 18 'Revenue'. 3. Critical accounting judgements and key sources of estimation uncertainty (continued) Income recognition (continued) Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position. Where there is a fair value reduction (as has occurred in the current year), interest income will be reduced as it reflects the EIR on a lower fair value. The income accrual is adjusted where there is a change in fair value and as such the Company takes account of underlying changes in yield in its income recognition as soon as adverse factors are identified pending the measurement of fair value changes. Any such changes will impact the level of income recognised in each period. Valuation of investments In recent months, there has been a significant increase in volatility and partial dislocation in the broader credit market. There is also no active secondary market in residual income positions and, further, there is no industry standard agreed methodology to value residual income positions. As a result of this, the fair value estimates included in the quarterly report are subject to considerable uncertainty. In accordance with the Company's accounting policies, fair value of financial assets is based on quoted bid prices or broker marks where such bids are available from a third party in a liquid market. Where quoted bid prices are unavailable, the fair value of the financial asset is estimated by reference to a pricing model that incorporates discounted cash flow techniques as required by IAS 39. 4. Distributable and non-distributable profits Under The Companies (Guernsey) Law, 1994 (the 'Companies Law'), dividends can be paid from profits available for the purpose. Following the Company's IPO, the Company passed a special resolution and obtained Royal Court approval for the cancellation of the amount standing to the credit of its share premium account. The Other Reserve created on cancellation (amounting to Euro 384,678,304) is available as distributable profits for all purposes permitted by the Companies Law including the payment of dividends and buy-back of shares. Under the UKLA Listing Rules, any dividend must be covered by income received from underlying investments. The Company's objective is to provide shareholders with stable returns in the form of quarterly dividends. The Company's dividend policy is to make dividend distributions from its distributable net income subject to retaining a portion of such income as a reserve for payment in subsequent periods. While these accounts reflect a net loss after realised losses and fair value adjustments, the dividend declared is covered by income received from underlying investments as required by the Listing Rules (as reflected in the Consolidated Income Statement) and the Company has sufficient reserves (in the form of the Other Reserve) from which the dividend can be paid. 5. Operating expenses Quarter ended Quarter ended 30 June 2007 31 March 2007 Euro Euro Investment management, custodian and administration fees Investment management and incentive fee 1,211,317 1,530,532 Administration fee 80,457 83,457 Custodian fee 30,116 29,785 1,321,890 1,643,774 Other operating expenses Audit fees 42,383 393,682 Directors' fees payable to Directors of Queen's Walk Investment Limited 64,065 48,187 Directors' fees payable to Directors of Trebuchet Finance Limited 6,673 12,546 Legal fees 70,568 815,244 Credit facility expenses 445,674 - Fees relating to corporate advisory services* - 31,248 Validation expenses 462,616 264,647 Other expenses 254,699 (508,670) 1,346,678 1,056,884 Total operating expenses 2,668,568 2,700,658 The Company has no employees. * These fees were payable to Deloitte & Touche LLP. 6. Finance costs Quarter ended Quarter ended 30 June 2007 31 March 2007 Euro Euro Finance costs arises from: Total return swap agreements - 575,062 Repurchase agreements 1,336,435 1,966,401 Total finance costs 1,336,435 2,541,463 This information is provided by RNS The company news service from the London Stock Exchange
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