1st Quarter Results
25 September 2008
Queen's Walk Investment Limited
Financial Results Announcement for the
First Quarter Ended 30 June 2008
Queen's Walk Investment Limited announces net profits of €0.8million and new
investments
Queen's Walk Investment Limited (the "Company"), the Guernsey incorporated
investment company, has reported net profit of €0.8 million or €0.03 per
ordinary share for the quarter ended 30 June 2008, compared to a loss of €17.1
million or -€0.56 per share in the previous quarter.
The Company's cash position remained strong with approximately €35.9 million of
cash on its balance sheet, up from €32.9 million as at 31 March 2008. Cash
generation for the quarter was in line with forecasts with total cash proceeds
recorded from the investment portfolio in the quarter of €12.3 million.
Fair value write downs of the Company's investment portfolio were significantly
lower in the quarter totalling €4.1 million, compared with €22.1 million for
the quarter ended 31 March 2008. The Company's net asset value at quarter end
was €6.32 per share compared to €6.42 per share in the previous quarter.
On 12 August 2008, shareholders approved the Company's offer to repurchase
approximately three million shares at €5 per share. The tender offer was
accretive to shareholders in an amount of €0.15 per share.
The Board of Directors of the Company has declared a dividend of €0.15 per
share for the quarter.
Queen's Walk exploiting ABS market dislocations with newinvestments
Subsequent to the quarter end, the Company has invested approximately €4.3
million in purchasing investment grade Asset Backed Securities ("ABS"). The
current yield on these purchased bonds will satisfy the Company's investment
profile with substantially lower risk. The purchased bonds are all performing
and are not credit impaired. Given the dislocation and illiquidity in the ABS
sector, the Company has been able to purchase these bonds at an unlevered cash
on cash yield in excess of 13%.
Tom Chandos, Chairman of the Company said: "With our strong cash position and
financing and the expertise of our manager, Queen's Walk is well positioned to
take advantageof the opportunities that have arisen from the dislocation in the
ABS market, through purchasing performing assets at substantial discounts."
Highlights
* The Company has made a profit of €0.8 million in the quarter compared to a
loss of €17.1 million in the previous quarter.
* The pro-forma NAV of the Company after taking into account the results of
the tender offer is €6.47 per share.
* Subsequent to the quarter end, the Company has made €4.3 million of new
investments in asset-backed bonds which have an unlevered cash on cash
yield of in excess of 13%.
* Cash balances remain strong and cash generation remains on track which will
support continued share repurchases and new investments.
* The Board of Directors has declared an interim dividend for the quarter
ended 30 June 2008 of €0.15 per share.
Conference Call & Further Information
A conference call to review the Company's financial results for the quarter
ended 30 June 2008 will take place at 10:30 AM London time on 23 September
2008. The conference call can be accessed by dialing +44 (0)20 7806 1958 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).
The full financial results for the year ended 31 March 2008 are available in
the Company's Annual Report which is also available on the Company's website.
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 (the "Company") is a Guernsey-incorporated
investment company listed on the London Stock Exchange. The Company 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.
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", "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 Total Revenue Fair value Total
gains and gains and
losses Quarter losses Quarter
ended 30 ended 31
June2008 March 2008
Operating 6,361,769 - 6,361,769 7,716,613 - 7,716,613
Income
Gains and (3,461,435) (3,461,435) (22,544,257) (22,544,257)
losses on fair
value through
profit or loss
financial
instruments
6,361,769 (3,461,435) 2,900,334 7,716,613 (22,544,257) (14,827,644)
Operating (1,393,926) (1,393,926) (1,565,714) (1,565,714)
Expenses
Finance Costs (659,328) (659,328) (678,756) (678,756)
Net profit / 4,308,515 (3,461,435) 847,080 5,472,143 (22,544,257) (17,072,114)
(loss)
Total Assets 237,392,021 €243,291,581
Total 46,156,012 €46,147,162
Liabilities
Equity Capital 191,236,009 €197,144,419
NAV per share 6.32 €6.42
Fourth Quarter Dividend Details
The Board of Directors of the Company has declared an interim dividend for the
quarter ended 30 June 2008 of €0.15 per share payable on 24 October 2008 to
shareholders of record on 3 October 2008.
Portfolio Review - Cash flows in line with expectations
The portfolio's ability to generate cash remains strong with total cash
proceeds of approximately €12.3 million received in the quarter ended 30 June
2008 compared to €16.6 million received in the previous quarter. Cash flows
from the UK, European and SME investments were in line with expectations. The
absolute fall in the total cash received, reflects a smaller overall portfolio
due to the expected amortisation of the Company's assets, and the expected
fluctuation in the timing of cash flows generated by the assets.
The Company's investment portfolio consists largely of investments with
exposure to the UK and European mortgage markets and to the European SME
sector. The Company also has exposure to the US leveraged loan market through a
residual investment in a CLO ("Collateralised Loan Obligation") which accounts
for 1.0% of the investment portfolio. Assets with exposure to the US sub-prime
market, directly or indirectly, account for approximately 0.01% of the
investment portfolio.
The Company's net leverage has decreased to 4.8% as at 30 June 2008 from 6.2%
as at 31 March 2008. The Company's net indebtedness as at 30 June 2008 was €9.2
million compared to net indebtedness of €12.2 million as at 31 March 2008. The
Company has not increased its borrowings since the quarter end.
Investment Portfolio
European Mortgage Investments (37.6% of GAV)
In general, the European mortgage residual investments have performed
satisfactorily. However, in the past two quarters the sector-wide themes of
increasing arrears and slower prepayments are being echoed in the portfolio of
Portuguese mortgage residuals.
The Company's portfolio of Portuguese mortgage investments are predominantly
collateralised by prime mortgages with more than three years of seasoning.
However, recent increases in Euribor rates, higher inflation and slower
economic growth have increased the arrears and default rates in the portfolio.
The increase in arrears and default rates have been provided for in the
Company's cash flow forecasts.
The slowdown in the Portuguese mortgage market has also started to cause
prepayment rates to slow. The Company has lowered its prepayment rate
assumption on one of its five Portuguese mortgage investments and will look for
evidence of further slowing over the next quarter before lowering prepayment
rate assumptions across the entire portfolio. Generally the reduction in
prepayments is a positive development for the Company, as it increases the
total amount of cashflows expected to be received over the life of the asset.
The Company's largest investment, Sestante 1, also performed satisfactorily.
The junior bonds in the securitisation were upgraded by Fitch in August 2008
and remain on positive outlook watch. Prepayment rates reached 19% in the first
quarter, well below our long-term forecast prepayment rate of 28%.
UK Mortgage Investments (23.5% of GAV)
The Company's UK mortgage portfolio continued to be highly cash generative,
contributing 57% of the total cash proceeds recorded although making up 28% of
the investment portfolio.
During the past quarter, the UK housing market has deteriorated substantially.
As at 31 August 2008, house prices have fallen by approximately 12.8% from the
peak as at 31 August 2007. In addition, gross mortgage lending volumes have
fallen to their lowest level since 1999. The Company has anticipated these
changes and, where possible, has tried to hedge against these negative trends.
It has also factored these conditions into its cash flow forecasts.
In October 2007, the Company purchased €28 million of two-year put options on
the Halifax house price index with a strike price of 90% of the September 2007
Halifax House Price Non-Seasonally Adjusted Index level. €14 million of the put
option were purchased from Lehman Brothers International (Europe) and the
remainder from Credit Suisse International. As at the time of this
announcement, the value of the put option purchased from Lehman Brother
International (Europe) is uncertain (refer to the Company's disclosure on the
Lehman Brothers Exposure on page 7 for further information). If market
forecasts for house price falls of 25% in the UK are realised, the expiry value
of the put option purchased from Credit Suisse will be accretive to NAV by
approximately €0.08 per share.
As expected, the slow down in the UK mortgage and housing markets has caused an
increase in default rates and a slowdown in prepayment rates. For the quarter
ended 31 March 2008, the cash flow forecasts for the UK residual portfolio
incorporated higher default rates but not lower prepayment rates. However, for
the quarter ended 30 June 2008, our cash flow forecasts had been updated to
reflect still higher default rates and lower prepayment rates.
In the quarter ended 30 June 2008 the Company announced it was in discussions
with mortgage originators in relation to loans whose quality fell short of the
descriptions and warranties in documents accompanying the actual
securitisation. Our discussions with mortgage originators and securitisation
trustees are ongoing and reflect a broader issue with respect to the
underwriting standards of the UK non-conforming mortgage market. Addressing
this issue, with support from a broad base of mortgage bondholders, will be an
important step towards rebuilding confidence in the quality of mortgages and in
the securitisation market.
The UK government's recent announcement to waive stamp duty for house purchases
less than £175,000 is a positive development for the UK residual portfolio. The
removal of the stamp duty should support prices at the lower end of the house
price market which is where the majority of non-conforming borrowers purchase
their homes. For example, the average house price in the Newgate 06-1 portfolio
at the time loans were originated was approximately £135,000.
SME Investments (21.2% of GAV)
SME assets continued to perform well with cumulative default rates on the
underlying asset pools better than, or inline with, expectations.
The Company has seen no significant deterioration in the performance of
residuals with exposure to the Spanish economies, with the Eirles Three Limited
(236B) residual performing substantially better than expected with actual
defaults of 13bps compared to expected defaults of 236 bps.
CDO Investments (0.9% of GAV)
CLO Investments I is a residual portfolio of AA- to BBB- rated US CLO bonds.
This residual has performed better than expected and continues to benefit from
upgrades of the underlying bond portfolio. The cash generative ability of this
residual investment remains positive and is in line with expectations. However,
the value of CLO Investments I has been depressed by a high market discount
rate of approximately 65% applied by market participants. It is expected that
the residual will recover its full value through the course of its investment
period.
The Company holds residual positions in two CDOs which are exposed to US
mortgage assets. The value of these investments has been written-off to less
than 0.01% of GAV.
US Mortgage Investment (0.01% of GAV)
The Company has one remaining US mortgage residual, RASC 2006-KS2. Actual loss
performance over the past quarter has not deviated significantly from our
previous projections. However, with an increase in the arrears pipeline the
forecast cumulative loss increased in the quarter.
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 observable market
data, market discount rates and the Investment Manager's expectations regarding
future trends.
After giving effect to fair value write downs of €3.5 million in the quarter,
the NAV of the Company was €6.32 per share as at 30 June 2008 (€6.42 per share
as at 31 March 2008). Taking into account the results of the most recent tender
offer, the pro-forma NAV as at 30 June 2008 was €6.47 per share.
The Company's long-standing policy is to account for assets and liabilities
using different accounting treatments. The Company's investments are evaluated
at fair value, whereas liabilities are held at amortised cost.
The table below summarises the changes in fair values of the Company's
investment portfolio by asset class:
Asset Class 31 March 30 June 2008 Fair Value Cashflows Cashflows
2008 Fair Fair Value2 Change Since Received in Received in
Value1,2 (€ (€mn) 31 March the Quarter the Quarter
mn) 20085 (€mn) Ended Ended
31 March 30 June 2008
20082 (€mn) (€mn)
UK Mortgages 63.8 55.9 -7.9 10.0 7.0
Euro 90.4 89.2 -1.2 2.8 1.8
Mortgages
SME 50.9 50.3 -0.6 3.3 3.3
CDO 2.5 2.0 -0.4 0.6 0.2
US Mortgages 0.1 0.0 -0.1 0.0 0.0
Cash and 32.9 35.9 0.0
Other Cash
Equivalents
TOTAL4 240.5 233.3 -10.1 16.7 12.3
1. Fair values as at 31 March 2008 are expressed using 30 June 2008 F/X rates.
2. The fair value figures for 31 March 2008 and 30 June 2008 include accrued
income and, in the case of the UK mortgage residuals, the value of the
interest rate swaps.
3. Cash flows for 31 March 2008 are expressed using 30 June 2008 F/X rates.
4. The values for each column may not sum to the total due to rounding
differences.
5. Total fair value changes exclude changes in the balance of cash and cash
equivalents.
Fair value changes since 31 March 2008 include principal amortisations of the
residuals as a result of cash flows received in the quarter as well as fair
value write downs related to the investment portfolio.
Share Repurchase Programme
In the period between 31 March 2008 and 30 June 2008, the Company repurchased
468,150 shares at an average price of €4.72 per share.
In July 2008, the Company announced that it was intending to conduct a €15
million fixed-price tender offer of €5 per share. On 12 August 2008,
shareholders approved the terms of the tender offer and the Company repurchased
a total of 2,999,981 shares. The tender offer was accretive to share holders by
approximately €0.15 per share.
Exposure to Lehman Brothers
The Company has both direct and indirect exposure to Lehman Brothers and its
subsidiaries. On 15 September 2008, Lehman Brothers International (Europe)
Limited entered into administration. There is still uncertainly about what
this event will mean for its obligations and contracts with counterparties. The
Company has direct exposure to Lehman Brothers International (Europe) Limited
via EUR 14m notional of the HPI option (exposure valued at 30 June 2008 at EUR
1,565,034), and an Interest Rate Swap (valued at 30 June 2008 at EUR 92,288).
Lehman Brothers Special Financing Inc provides the fixed to floating swap in
the Eurosail 2006-1 securitisation. At the date of these accounts it remains
unclear if this entity has specifically entered into administration. If swap
payments are not made to the SPV, we expect cash flows for Eurosail 2006-1 to
be materially affected until March 2009. Capstone Mortgages Services Ltd.
("Capstone"), a subsidiary of Lehman Brothers Holdings Inc. (the bank's holding
company), is the servicer of the loans in the Eurosail 2006-1 mortgage
pool. Capstone has not entered administration, and the Company is evaluating
Capstone's ability to continue to service its mortgage loans without the
backing of Lehman Brothers.
New Bond Investments
Subsequent to the quarter ended 30 June 2008, the Company purchased four bonds
with a total purchase price of €4.3 million. Two of the bonds purchased are
exposure to prime mortgage loans in the UK. The ratings of these bonds are `AA'
and `BBB'. The third bond is an exposure to the UK non-conforming mortgage
market with a rating of `A'. The remaining bond is a BBB rated commercial
mortgage backed security (CMBS) backed by loans predominantly in France and
Germany.
The new investments offer the Company attractive returns with a lower risk
profile. The investments were purchased with pricing assumptions that are
substantially more conservative than current asset performance. In addition,
the purchased bonds are performing and are not on negative ratings watch by the
agencies. The bonds currently have an unlevered cash on cash yield in excess of
13% although the total yield will improve if the bonds return principal before
the legal final maturity of the bonds.
Strategy and Market Outlook
While the outlook for the ABS markets remains challenging, the Company believes
that further investment opportunities will appear in the coming months.
Underlying economic fundamentals in a number of jurisdictions are likely to
weaken further. Though we expect interest rate cuts in the UK and Eurozone to
have a positive impact on the performance of our assets we do not foresee a
material drop in interest rates until 2009.
As asset performance weakens, we expect a further weakening of prices in the
ABS sector combined with more sellers of ABS. We expect to see a rise in the
number of sellers of ABS securities as we near year end. Liquidity is also
unlikely to improve in the near term. These conditions will provide more
opportunities for investors with cash, who have the ability to accurately
analyse ABS structures to purchase assets at very attractive prices.
Over the coming months the Investment Manager will continue to look for
investment opportunities in investment grade ABS. For example, the Investment
Manager is currently considering increasing investment in the CMBS sector. This
asset class has very good transparency of the underlying assets and allows the
Portfolio Manager to re-underwrite each loan in the portfolio. Given the
dislocation in the ABS markets, CMBS bonds are currently trading at substantial
discounts. However, the Company will purchase bonds selectively and only where
they offer attractive returns in relation to the credit risk.
While the Company believes the total returns for the recent bond purchases are
highly accretive, the bonds may experience some near term mark to market
volatility if there is further broad based weakening of spreads in the ABS
sector. Forced sellers of ABS bonds may drive prices lower but this affords the
Company an opportunity to buy assets at substantial discounts.
In conjunction with a renewed investment programme, the Company will also
continue with its share repurchase programme. The share price is currently
trading at a material discount to NAV and offers the Company an effective way
to increase the NAV per share. The Company will re-balance the use of capital
between share buybacks and new investments depending on the returns available
to shareholders.
The Company is well positioned to take advantage of the current dislocation in
the ABS markets and believes its current strategy will be accretive to
shareholders.
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