1st Quarter Results
Prodesse Investment Limited
08 May 2006
Prodesse Investment Limited
8 May 2006
Prodesse Investment Limited
Results for the 3 month period to 31 March 2006
Interim dividend increased 20% over prior quarter
Highlights:
• Dividend per share of US$0.12 from net interest income - equates to an
annualised dividend yield of 6.28%(1) FTSE All Share annualised dividend
yield of 2.92%(2))
• NAV per share of US$8.03 (31 Dec 05: US$8.36) reflects net unrealised
losses in the market value of mortgage-backed securities and interest rate
swaps as short term US interest rates continued to rise.
• Portfolio remains 100% implied AAA mortgage-backed securities
• Programme to repurchase shares in the market for cancellation when
accretive to NAV remains in force
(1) Based on annualisation of Q1 dividend, an exchange rate of 1.8210 US$ per
Pound Sterling and a closing price of 419.5p on 28 April 2006.
(2) Based on closing share prices of the constituents of the FTSE All Share
index on 28 April 2006 (JCF Datastream).
Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,
commented:
'With the continuation of the restrictive monetary policy in the US, we continue
to migrate the portfolio into higher yielding assets in addition to obtaining
more floating-rate exposure. This has resulted in improved performance over the
prior quarter even as conditions remain challenging. Interest rates run in
cycles, and we seek to manage Prodesse's portfolio to perform throughout the
current cycle as well as the next.'
Financial Highlights Q1 2006 Q4 2005
US$
Dividend per share 0.12 0.10
Net income /(loss) per share 0.12 (0.68)
Net income/(loss) 3.2m (18.8m)
Net asset value per share 8.03 8.36
GBP Sterling(3)
Dividend per share 7p 6p
Net income/(loss) per share 7p (40)p
Net income/(loss) £1.8 (£10.9m)
Net asset value per share 461.8p 486.4p
(3) Illustration is based upon an exchange rate of 1.7390 and 1.7187 US$ per
Pound Sterling at 31 March 2006 and 31 December 2005, respectively.
Translation to GBP Sterling is given for illustration purposes only as
Prodesse invests in US$ denominated assets only which produce US$ income.
Should shareholders choose to receive their dividends in GBP Sterling, the
Sterling dividend will be calculated based upon the prevailing exchange rate
on 22 May 2006.
Enquiries
Rob Bailhache / Nick Henderson, Financial Dynamics
Tel: 020 7269 200 / 020 7269 7114
Sara Radford / Paul Smith, RBSI Fund Services (Guernsey) Limited
Tel: 01481 743000
About Prodesse
Prodesse Investment Limited is a limited liability Guernsey-incorporated
closed-end investment company, the investments of which are managed by Fixed
Income Discount Advisory Company. The Company's investment policy is to provide
net income for distribution from the spread between the interest income earned
from a portfolio of residential mortgage-backed securities and the cost of
repurchase agreements entered into to finance the acquisition of such
residential mortgage-backed securities.
Conference Call
There will be an analyst presentation on the results at 10:00 am on Monday 08
May 2006 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, London
WC2A 1PB. Those analysts wishing to attend, or to register are asked to contact
Nick Henderson at Financial Dynamics on +44 (0)20 7269 7114 or at
nick.henderson@fd.com.
The presentation will also be accessible via a conference call for those unable
to attend in person. To listen-in please call +44 (0) 1452 562 717.
A web cast of the presentation will be available following the meeting at
www.prodesse.co.uk.
Company performance
Prodesse reported net income for the quarter ended 31 March 2006 of US$3.2
million (quarter ended 31 December 2005; net loss of US$18.8 million) or US$0.12
per share (quarter ended 31 December 2005: US$0.68 net loss per share).
The Company delivered an annualised return on average equity (RoAE) of 5.64% for
the quarter ended 31 March 2006 (quarter ended 31 December 2005: negative
30.65%).
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005
------------------ ------------------ ----------------- ----------------
Reported Net income /(loss) US$3.2 million (US$18.8 million) US$5.1 million US$5.8 million
Net income (loss) per share US$0.12 (US$0.68) US$0.18 US$0.21
Annualised RoAE 5.64% (30.65)% 7.72% 9.67%
Portfolio Performance
For the quarter ended 31 March 2006, the annualised yield on average assets was
4.89% (quarter ended 31 December 2005: 4.49%) and the annualised cost of funds
on the average repurchase balance was 4.58% (quarter ended 31 December 2005:
4.12%), which equates to an interest rate spread of 0.31% (quarter ended 31
December 2005: 0.37%). This is a 0.06% decrease from the interest rate spread
for the quarter ended 31 December 2005. At 31 March 2006, the annualized yield
on assets was 5.26% and the annualized cost of funds on the repurchase balances,
including the effect of the swaps, was 4.77%, which equates to an interest rate
spread of 0.49%. Net income and yields stated in this press release do not
include net unrealised losses on investments. Net unrealised losses are
reflected in the equity in accordance with the accounting policies.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 18% for the quarter ended 31 March 2006 (quarter
ended 31 December 2005: 20%). Prepayment speeds on mortgage-backed securities,
as reflected by the CPR vary according to the type of investment, changes in
interest rates, conditions in the financial markets, competition and other
factors, none of which can be predicted with any certainty. In general, as
prepayment speeds on the Company's mortgage-backed securities portfolio
increase, related purchase premium amortization increases, thereby reducing the
net yield on such assets.
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005
------------------ ------------------ ----------------- ----------------
Annualised Yield on Average
Assets 4.89% 4.49% 4.23% 4.01%
Annualised Cost of Funds on
Average Repurchase Balance 4.58% 4.12% 3.57% 2.67%
Interest Rate Spread 0.31% 0.37% 0.66% 1.34%
CPR 18% 20% 23% 20%
As at 31 March 2006, all of the assets in the Company's portfolio were Fannie
Mae and Freddie Mac mortgage-backed securities, which carry an implied 'AAA'
rating.
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005
------------------ ------------------ ----------------- ----------------
Fixed-rate mortgage-backed
securities 61% 38% 32% 33%
Adjustable-rate mortgage-backed
securities 25% 43% 61% 59%
Floating-rate mortgage-backed
securities 14% 19% 7% 8%
Borrowings
The ratio of average daily repurchase agreements to equity resulted in leverage
of the Company of 8.5:1 during the quarter ended 31 March 2006 (quarter ended 31
December 2005: 9.3:1). The leverage at 31 March 2006 was 8.9:1 (31 December
2005: 4.4:1).
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005
------------------ ------------------ ----------------- ----------------
Average Leverage for Period 8.5:1 9.3:1 8.9:1 5.8:1
Leverage at Period End 8.9:1 4.4:1 9.4:1 8.1:1
As of 31 March 2006 the Company had entered into interest rate swap agreements
totalling US$554 million in notional amount in which the Company will pay an
average rate of 4.82% and receive 1 month LIBOR on a monthly basis.
01 January 2006 to 01 October 2005 to
31 March 2006 31 December 2005
------------- ------------
Notional Amount 554,000,000 65,000,000
Average pay rate 4.82% 4.79%
Average receive rate 4.75% 4.45%
Capital
At 31 March 2006, the Company had a net asset value per share of US$8.03 (31
December 2005: US$8.36). After deducting the current dividends declared for the
quarter of 31 March 2006 of US$3,330,066 (for the quarter 31 December 2005:
US$2,775,055), reported net asset value per share is US$7.91 (31 December 2005:
US$8.26). The Company currently has authority to undertake a share purchase of
up to 3,112,900 shares or 11.22% of the share capital of the Company and the
Board of Directors has approved the use of on-market purchases of ordinary
shares for cancellation at appropriate prices which will enhance net asset
value.
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005
------------------ ------------------ ----------------- ----------------
NAV per share US$8.03 US$8.36 US$9.03 US$9.56
Dividends declared for the period US$3,330,066 US$2,775,055 US$5,146,209 US$5,722,000
NAV per share after deducting
dividends declared US$7.91 US$8.26 US$8.85 US$9.36
Dividend
The Company has declared a dividend for the quarter ended 31 March 2006 of
US$0.12 per share payable on 5 June 2006 to holders on the register on 19 May
2006. Dividends are calculated and paid in US dollars. Shareholders resident
in the UK wishing for the conversion of dividend payments into Sterling should
contact Computershare Investor Services (Channel Islands) Limited. The exchange
rate for payment to those who have elected to receive their dividends in
Sterling will be set in the week beginning 22 May 2006.
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005
------------------ ------------------ ----------------- ----------------
Net income (loss) per share US$0.12 (US$0.68) US$0.18 US$0.21
Dividends per share US$0.12 US$0.10 US$0.18 US$0.20
Outlook
'The markets are currently anticipating that the US Federal Reserve is near the
end of what has been 23 months of increased Federal Funds rates,' said
Wellington Denahan-Norris, Chief Investment Officer for Prodesse's Investment
Manager, FIDAC. 'We share the markets' views on this, basing our belief on the
eventual slowdown of the US economy as the effects of a slowing residential
housing market begin to unfold. Should rates continue to rise as we wait for the
markets'(and our) expectations to materialize, we have increased the portfolio's
floating rate exposure in order to reduce asset value fluctuations and better
maintain spread income. After giving effect to the interest rate swaps, the
portfolio at 31 March was comprised of 36% fixed-rate, 25% adjustable-rate and
39% floating-rate exposure.'
This press release includes statements that are, or may be deemed to be,
''forward-looking statements''. These forward-looking statements can generally
be identified by the use of forward-looking terminology, including the terms
''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'',
''will'' or ''should'' or, in each case, their negative or other variations or
comparable terminology. These forward-looking statements include all matters
that are not historical facts. All forward-looking statements address matters
that involve risks and uncertainties, are only predictions, and you should not
rely unduly on them. Accordingly, there are or will be important factors that
could cause the Company's actual results to differ materially from those
indicated in these statements. These factors include but are not limited to
those described in the Company's prospectus under the heading ''Special
Considerations and Risk Factors''. Any forward-looking statements in this press
release reflect the Company's current views with respect to future events and
are subject to these and other risks, uncertainties and assumptions relating to
the Company's operations, results of operations, growth strategy and liquidity.
These forward-looking statements speak only as of the date of this press
release. Subject to any obligations under the Listing Rules, the Company
undertakes no obligation publicly to update or review any forward-looking
statement, whether as a result of new information, future developments or
otherwise. All subsequent written and oral forward-looking statements
attributable to the Company or FIDAC or individuals acting on behalf of the
Company or FIDAC are expressly qualified in their entirety by this paragraph.
Prospective investors should specifically consider the factors identified above
which could cause actual results to differ before making any investment
decision.
Prodesse Investment Limited
Balance Sheet
(unaudited) at 31 March 2006, 31 December 2005, 30 September 2005 and
30 June 2005
31-Mar-06 31-Dec-05 30-Sep-05 30-Jun-05
-------------------------------- ---------------- ---------------- ---------------- ----------------
US$ US$ US$ US$
ASSETS
Current assets
Available for sale investments 2,190,680,570 1,405,412,720 2,688,176,717 2,627,255,210
Accrued income receivable 9,853,640 6,228,846 11,644,460 10,559,381
Receivable for principal paydowns 7,947,156 10,195,316 13,448,335 8,327,274
Hedging instrument 8,971,875 - - -
Cash and cash equivalents 16,039 5,059 12,122 5,999
Prepaid expenses 28,011 34,904 66,798 98,256
---------------- ---------------- ---------------- ----------------
Total assets 2,217,497,291 1,421,876,845 2,713,348,432 2,646,246,120
---------------- ---------------- ---------------- ----------------
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
27,750,550 at 31 March 2006
and 31 December, 2005,
28,610,000 at 30 September
2005 and 30 June 2005 at
US$ 0.01 277,506 277,506 286,100 286,100
Capital redemption reserve 8,594 8,594 - -
Share premium 50,000,000 50,000,000 50,000,000 50,000,000
Distributable reserve 214,300,104 214,300,104 220,173,663 220,299,299
Accumulated profits 3,404,481 2,972,952 5,246,367 5,843,027
Capital Reserve-Realised
(loss)/gain on available
for sale investments (21,651,450) (21,651,450) 5,313 -
Revaluation reserve (32,478,359) (13,940,391) (17,384,448) (2,843,493)
Cash flow hedge reserve 8,971,875 (19,500) - -
---------------- ---------------- ---------------- ----------------
Total shareholders' equity 222,832,751 231,947,815 258,326,995 273,584,933
---------------- ---------------- ---------------- ----------------
Current liabilities
Securities purchased payable - 163,391,316 11,560,141 162,120,786
Repurchase agreements 1,983,618,000 1,022,067,000 2,436,369,000 2,206,752,000
Accrued interest expense 9,633,997 3,509,041 5,551,769 2,759,461
Accrued expenses payable 1,412,543 942,173 1,540,527 1,028,940
Hedging instrument - 19,500 - -
---------------- ---------------- ---------------- ----------------
Total liabilities 1,994,664,540 1,189,929,030 2,455,021,437 2,372,661,187
---------------- ---------------- ---------------- ----------------
Total equity and liabilities 2,217,497,291 1,421,876,845 2,713,348,432 2,646,246,120
---------------- ---------------- ---------------- ----------------
Net Assets 222,832,751 231,947,815 258,326,995 273,584,933
Net Asset Value per share 8.03 8.36 9.03 9.56
Prodesse Investment Limited
(unaudited) Income Statement
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005*
US$ US$ US$ US$
------------------ ------------------ ----------------- ----------------
Income
Interest income 26,589,796 27,307,521 28,394,099 16,231,405
Interest expense (21,906,790) (23,306,345) (21,084,466) (9,330,907)
------------------ ------------------ ----------------- ----------------
Net interest income 4,683,006 4,001,176 7,309,633 6,900,498
------------------ ------------------ ----------------- ----------------
Realised (loss)/gain on
sale of available for sale
investments - (21,656,763) 5,313 -
------------------ ------------------ ----------------- ----------------
Expenses Management,
custodian and administration
fees 1,279,335 942,468 2,018,214 937,308
Other operating expenses 197,087 185,913 166,079 120,163
------------------ ------------------ ----------------- ----------------
Total expenses 1,476,422 1,128,381 2,184,293 1,057,471
------------------ ------------------ ----------------- ----------------
Net income/(loss) for the
period 3,206,584 (18,783,968) 5,130,653 5,843,027
------------------ ------------------ ----------------- ----------------
Net income/(loss) per share
for the period 0.12 (0.68) 0.18 0.21
------------------ ------------------ ----------------- ----------------
Dividend declared per share for
the period 0.12 0.10 0.18 0.20
------------------ ------------------ ----------------- ----------------
* commencement of operations on 08 April 2005
Prodesse Investment Limited
Cash Flow Statement
(unaudited) from 01 January 2006 to 31 March 2006, 01 October 2005 to 31 December 2005,
01 July 2005 to 30 September 2005, and 08 April 2005 to 30 June 2005.
01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to
31 March 2006 31 December 2005 30 September 2005 30 June 2005*
US$ US$ US$ US$
------------------ ------------------ ----------------- ----------------
Net cash inflow/(outflow) from
operating activities (Note 1) 2,786,035 11,012,705 5,853,758 (270,579,400)
------------------ ------------------ ----------------- ----------------
Financing
Net proceeds from offering - - - 270,585,399
Offering Cost - - (125,635) -
Own shares acquired - (5,873,559) - -
Dividends paid (2,775,055) (5,146,209) (5,722,000) -
------------------ ------------------ ----------------- ----------------
Net cash (outflow)/inflow from
financing (2,775,055) (11,019,768) (5,847,635) 270,585,399
------------------ ------------------ ----------------- ----------------
Increase/(decrease) in cash
and cash equivalents 10,980 (7,063) 6,123 5,999
Cash and cash equivalents,
at beginning of period 5,059 12,122 5,999 -
------------------ ------------------ ----------------- ----------------
Cash and cash equivalents,
at end of period 16,039 5,059 12,122 5,999
------------------ ------------------ ----------------- ----------------
Note 1
--------
Net income/(loss) for the
period 3,206,584 (18,783,968) 5,130,653 5,843,027
Net amortisation of premiums on
available for sale
investments 1,210,901 3,123,879 2,655,987 712,000
Realised loss/(gain) on sale of
available for sale investments - 21,656,763 (5,313) -
Purchases of investments (1,082,468,323) (55,678,354) (453,612,318) (2,542,805,196)
Proceeds from sale of
investments - 1,253,691,106 5,666,667 -
Principal paydowns 116,471,761 218,359,667 214,429,874 65,484,813
Borrowings under reverse
repurchase agreements 5,763,648,000 6,231,988,000 7,229,892,000 5,090,251,000
Repayments under reverse
repurchase agreements (4,802,097,000) (7,646,290,000) (7,000,275,000) (2,883,499,000)
Receivables (Increase)/decrease)
in accrued income receivable (3,788,108) 5,554,800 (1,364,146) (10,256,189)
Decrease/(increase) in prepaid
expenses 6,894 31,894 31,459 (98,256)
Liabilities Increase/(decrease)
in accrued interest expense 6,124,956 (2,042,728) 2,792,308 2,759,461
Increase/(decrease) in accrued
expenses payable 470,370 (598,354) 511,587 1,028,940
------------------ ------------------ ----------------- ----------------
Net cash inflow/(outflow) from
operating activities 2,786,035 11,012,705 5,853,758 (270,579,400)
------------------ ------------------ ----------------- ----------------
* commencement of operations 08 April 2005
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 January 2006 to 31 March 2006
Capital
Reserve -
realised
gain/
(loss) on
sales of Cash
Capital available flow
Share redemption Share Distributable for sale Revaluation Accumulated hedge
capital reserve premium reserve investments reserve profits reserve Total
------- -------- -------- --------- ---------- --------- -------- ------- --------
Balance at
31 December
2005 277,506 8,594 50,000,000 214,300,104 (21,651,450)(13,940,391) 2,972,952 (19,500)231,947,815
Net income
for the
quarter - - - - - - 3,206,584 - 3,206,584
Available
for sale
investments:
Unrealised
loss on
revaluation
taken to
equity - - - - - (18,537,968) - - (18,537,968)
Cash flow
hedge reserve - - - - - - - 8,991,375 8,991,375
------- -------- -------- --------- ---------- --------- -------- ------- --------
Total
recognised
income and
expenses for
the period - - - - - (18,537,968) - 8,991,375 (6,340,009)
------- -------- -------- --------- ---------- --------- -------- ------- --------
Dividends paid - - - - - - (2,775,055) - (2,775,055)
------- -------- -------- --------- ---------- --------- -------- ------- --------
Balance at 31
March 2006 277,506 8,594 50,000,000 214,300,104 (21,651,450)(32,478,359) 3,404,481 8,971,875 222,832,751
------- -------- -------- --------- ---------- --------- -------- ------- --------
Prodesse Investment Limited
Footnotes to the quarterly report ended 31 March 2006 (Unaudited)
1. Organisation and Investment Objective
Prodesse Investment Limited (the 'Company') is a limited liability
Guernsey-incorporated closed-end investment company, the investments of which
are managed by Fixed Income Discount Advisory Company (the 'Investment
Manager'). The Company's share capital structure consists solely of Ordinary
Shares. The Company has a listing on the London Stock Exchange and a listing on
the Channel Islands Stock Exchange. The Company will have an indefinite life but
Shareholders will have the opportunity to vote on its continuation at the Annual
General Meeting to be held in 2010.
The Company invests in a portfolio consisting primarily of actual or implied
AAA-rated mortgage-backed securities on a leveraged basis. The Company's
investment strategy is to generate net income for distribution from the spread
between the interest income from the portfolio and the cost of borrowing
pursuant to reverse repurchase agreements used to finance the portfolio. The
Investment Manager will seek to enhance returns through what it considers an
appropriate amount of leverage.
2. Significant Accounting Policies
The financial statements of the Company have been prepared in accordance with
International Financial Reporting Standards ('IFRS'), which comprise standards
and interpretations approved by the International Accounting Standards Board
(the 'IASB'), and International Accounting Standards and Standing
Interpretations Committee interpretations approved by the International
Accounting Standards Committee ('IASC'), together with applicable legal and
regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing
Authority and the Channel Islands Stock Exchange.
The financial statements have been prepared on the historical cost basis except
for the revaluation of certain financial instruments. A summary of the
significant principal accounting policies are set out below. The preparation of
financial statements in conformity with IFRS requires the Company to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(a) Government Sponsored Enterprises: The Company invests in securities
issued by the Government National Mortgage Association ('Ginnie Mae'), a US
Government corporation and US Government sponsored entities such as the Federal
Home Loan Mortgage Corporation ('Freddie Mac') , Federal National Mortgage
Association ('Fannie Mae') and the Federal Home Loan Banks ('FHLB'). Freddie
Mac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are not
companies by congressional appropriations and the debt and mortgage-backed
securities issued by Freddie Mac, Fannie Mae and FHLB are neither guaranteed nor
insured by the United States Government.
The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage
backed securities are backed by those respective agencies, and the payment of
principal and interest on the Ginnie Mae mortgage backed securities are backed
by the full-faith-and-credit of the US Government. Although the Company
generally intends to hold most of its securities until maturity, it may, from
time to time, sell any of its mortgage-backed securities as part of its overall
management strategy. Accordingly the Company classifies all its mortgage-backed
securities as available for sale and these are reported at fair value.
The Investment Manager uses internally generated pricing tools and matrices that
take into account such factors as duration, convexity, interest rate levels and
the experience of its portfolio managers. External information is then compared
to internally generated tools to compare pricing reasonableness.
(b) Security Transactions and Investment Income: Security transactions are
recorded on trade date. Realised and unrealised gains and losses are calculated
based on specific identified cost. Interest income is recorded as earned.
Interest income and expense includes amortisation of market discount and premium
as calculated using a hybrid methodology utilising the principles of effective
interest method. Realised gains or losses on paydowns are reclassified from
gains to income.
(c) Repurchase Agreements: The Company enters into reverse repurchase
agreements with qualified third party financial institutions to finance its
investment in mortgage-backed securities. The agreements are secured by the
value of the Company's mortgage-backed securities.
Interest on the principal value of reverse repurchase agreements issued and
outstanding is based upon competitive market rates at the time of issuance. When
the Company enters into a reverse repurchase agreement, it establishes and
maintains a segregated account with the lender containing securities having a
value not less than the repurchase price, including accrued interest, of the
reverse repurchase agreement.
Repurchase agreements are treated as collateralised financing transactions and
are carried at their contractual amounts, including accrued interest, as
specified in the repurchase agreements. Accrued interest in the accompanying
balance sheet is recorded as a separate line item.
Securities sold subject to repurchase agreement are retained in the financial
statements as available for sale securities and the counter party liability is
included in liabilities under repurchase agreements.
(d) When-Issued/Delayed Delivery Securities: The Company may purchase or sell
securities on a when-issued or delayed delivery basis, including 'TBA'
securities. TBA securities are mortgage-backed securities for which details
about the underlying mortgages have not yet been announced. Securities traded on
a when-issued basis are traded for delivery beyond the normal settlement date at
a stated price and yield, and no income accrues to the purchaser prior to
delivery. Purchasing or selling securities on a when-issued or delayed delivery
basis involves the risk that the market price at the time of delivery may be
lower or higher than the agreed upon price, in which case an unrealised loss may
be incurred.
(e) Taxes: The Company is exempt from Guernsey taxation under the Income Tax
(Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of
£600.
(f) Cash and cash equivalents: The Company considers amounts held in
interest bearing overnight accounts as cash and cash equivalents .
(g) Realised and unrealised gains and losses on investments: Unrealised gains
or losses arising on the revaluation of investments are included in equity.
Unrealised losses on investment that are considered other than temporary, as
measured by the amount of decline in fair value attributable to factors other
than temporary, are recognised in the income statement and the cost basis of the
investment is adjusted. There were no investment that were considered to be
other than temporarily impaired at 31 March 2006.
Realised gains or losses arising on the sale of investments are recognised in
the income statement but will be transferred to a non-distributable capital
reserve in accordance with the Memorandum and Articles of Association of the
Company.
(h) Hedge accounting: The Company's activities expose it primarily to the
financial risks of changes in interest rates. The Company uses interest rate
swap contracts to hedge these exposures. It does not use derivative instruments
for speculative purposes.
The use of financial derivatives is governed by the Company's policies approved
by the Board of Directors. Changes in the fair value of derivative financial
instruments that are designated and effective as hedges of future cash flows are
recognised directly in equity and any ineffective portion is recognised
immediately in the income statement.
Hedge accounting is discontinued when the hedging instrument expires or is sold,
terminated or exercised or no longer qualifies for hedge accounting.
(i) Set up costs: The preliminary expenses of the Company directly
attributable to the equity transaction and costs associated with the
establishment of the Company that would otherwise have been avoided are taken to
the share premium account.
3. Investment Management, Accounting and Administration, and Custodian Fees
Fixed Income Discount Advisory Company ('FIDAC'), a Delaware corporation, serves
as the Investment Manager to the Company. Pursuant to the terms of the
Investment Management Agreement, the Investment Manager is paid periodic fees,
quarterly in arrears, at a rate equivalent to 0.2 per cent per annum of the
value of the gross assets of the Company at the end of the quarter.
The Bank of New York (the 'Custodian') serves as the Company's custodian and is
paid a monthly accounting and administration fee, exclusive of out-of-pocket
expenses. The Custodian is entitled to receive a fee at a rate equivalent to 1
basis point per annum on the value of the gross assets of the Company (plus
transaction charges).
RBSI Fund Services (Guernsey) Limited ('the Administrator') serves as the
Company's administrator. The Administrator is entitled to a fee calculated on
the value of the gross assets of the Company of 0.04 per cent per annum on the
first US$400 million of value of gross assets, 0.0225 per cent per annum on the
next US$1.6 billion of value of the gross assets and 0.01 per cent per annum on
any value of the gross assets in excess of US$2 billion payable monthly in
arrears (subject to a minimum annual fee of US$250,000).
4. Risk Factors
The market price of the Ordinary Shares and the income derived from them can
fluctuate and there is no guarantee that the market price of Ordinary Shares in
the Company will reflect fully their underlying Net Asset Value.
All or substantially all of the Company's assets are denominated in US dollars.
The Company accounts for its assets and determines the value of its Shares and
of dividends thereon in US dollars. For investors resident outside the United
States or whose functional currency is not the US dollar, fluctuations in the
value of the US dollar may affect the value of their investment. The Board of
Directors do not hedge any foreign exchange risk.
The Company is subject to risks associated with changes in interest rates. An
increase in the interest payments on the Company's financing relative to the
interest earned on its mortgage-backed securities may adversely affect
profitability.
The Company enters into reverse repurchase agreements in order to increase the
amount of capital available for investment. The use of leverage has the
potential to magnify the gains or the losses on the Company's investments.
The Company may invest in, or sell short, various interest rate derivative
instruments and futures contracts. Should interest rates move unexpectedly, the
Company may not achieve the anticipated benefits of the hedging instruments and
may realise a loss. Further, the use of such derivative instruments involves the
risk of imperfect correlation in movements in the price of the instruments,
interest rates and the underlying hedged assets.
The Company may transact in various financial instruments including futures
contracts, swap contracts and options. With these financial instruments, the
Company is exposed to market risk in excess of the amounts recorded in the
Balance Sheet. Further, the Company is exposed to credit risk from potential
counterparty nonperformance. At the balance sheet date, credit risk is limited
to amounts recorded in the balance sheet.
5. Reverse Repurchase Agreements
At 31 March 2006 the aggregate value of securities pledged by the Company under
reverse repurchase agreements exceeds the liability under such agreements by
approximately US$59,508,540 (approximately 103% of such liability). The interest
rates on the reverse repurchase agreements at 31 March 2006 range from 4.65% to
4.91% and have maturity dates ranging from one day to one month.
6. Mortgage-Backed Securities
At 31 Amortised Cost Gross Unrealised Gain Gross Unrealised Loss Estimated Fair Value
March -------------- --------------------- --------------------- --------------------
2006
(US dollars)
Adjustable
rate 871,456,230 1,318,460 (9,825,336) 862,949,354
Fixed rate 1,351,702,699 - (23,971,483) 1,327,731,216
-------------- --------------------- --------------------- --------------------
Total 2,223,158,929 1,318,460 (33,796,819) 2,190,680,570
============== ===================== ===================== ====================
At 31 Amortised Cost Gross Unrealised Gain Gross Unrealised Loss Estimated Fair Value
December -------------- --------------------- --------------------- --------------------
2005
(US dollars)
Adjustable
rate 882,031,839 2,425 (8,061,814) 873,972,450
Fixed 537,321,272 2,134 (5,883,136) 531,440,270
rate -------------- --------------------- --------------------- --------------------
Total 1,419,353,111 4,559 (13,944,950) 1,405,412,720
============== ===================== ===================== ====================
7. Interest Rate Swaps
When the Company enters into a Swap, it agrees to pay a fixed rate of interest
and to receive a variable interest rate, generally based on the one month London
Interbank Offered Rate ('LIBOR'). The Company's Swaps are designated as cash
flow hedges against the benchmark interest rate risk associated with the
Company's borrowings. As of 31 March 2006, the Company entered into interest
rate swap agreements of US$554 million notional amount in which the Company will
pay a rate of 4.83% and receive 1 month LIBOR on a monthly basis. The market
value of the swap agreements at 31 March 2006 was US$9.0 million.
This information is provided by RNS
The company news service from the London Stock Exchange
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