3rd Quarter Results

Prodesse Investment Limited 06 November 2007 Prodesse Investment Limited Results for the Quarter Ended 30 June 2007 Highlights for second quarter 2007: • Core net income1 per average share of US$0.17 • Dividend per share of US$0.16 from net interest income - equates to an annualised dividend yield of 7.23%2 (FTSE All Share annualised dividend yield of 2.523%3) • Net income per average share of US$0.18 • NAV per share of US$7.77 (31 March 2007: US$8.22) • Portfolio remains 100% implied 'AAA' mortgage-backed securities. 1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities. 2 Based on annualisation of Q2 dividend, an exchange rate of 2.0071 US$ per Pound Sterling and a closing price of 441.0p on 29 June 2007 3 Based on closing share prices of the constituents of the FTSE All Share index on 29 June 2007 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse, commented: 'Interest rates in the US remain volatile. During the second quarter, the two-year Treasury ranged in yield from a low of 4.59% to a high of 5.10%, while the 10-year Treasury ranged in yield from a low of 4.62% to a high of 5.30%. This volatility has continued subsequent to quarter-end. Economic conditions in the US have also been volatile, as the deterioration of housing and the subprime mortgage market has reverberated in GDP growth and in the investment returns of many investment vehicles. For Prodesse, this is a positive operating environment. Returns on new investments have become more attractive with the recent increase in long-term interest rates and the stabilization of our funding costs. In addition, the avoidance of credit risk, a hallmark of our strategy, should benefit performance as the US credit cycle worsens.' Financial Highlights Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006 $US Dividend per share 0.16 0.14 0.13 0.12 0.10 Core net income per average share 0.17 0.15 0.14 0.12 0.10 Net income/(loss) per average share 0.18 0.16 0.19 0.25 (1.38) Net income/(loss) 5.0m 4.0m 4.9m 6.4m (37.6m) Net asset value per share 7.77 8.22 8.08 8.05 7.52 GBP Sterling 4 Dividend per share 8p 7p 7p 6p 5p Core net income per average share 8p 8p 7p 6p 5p Net income/(loss) per average share 9p 8p 10p 13p (74p) Net income/(loss) £2.5m £2.0m £2.5m £3.4m (£20.4m) Net asset value per share 387.1p 417.6p 412.9p 430.1p 407.2p 4 Illustration is based upon an exchange rate of 2.0071, 1.9686, 1.9569, 1.8718, and 1.8469US$ per Pound Sterling at 29 June 2007, 31 March 2007, 31 December 2006, 30 September 2006, and 30 June 2006, respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests only in US$ denominated assets which produce US$ income. Should shareholders choose to receive their dividends in GBP Sterling they may elect to do so. Enquiries Investor Relations Rob Bailhache / Nick Henderson, Financial Dynamics Tel: 020 7269 7200 / 020 7269 7114 Company Secretary and Administrator Sara Radford / Paul Smith, BNP Paribas 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 a conference call to discuss the results at 2 pm on Tuesday 7 August 2007 and a live audio webcast and presentation will be available via the Prodesse website, www.prodesse.co.uk. Those wishing to register are asked to contact Nick Henderson at Financial Dynamics on +44 (0) 207 269 7114 or at nick.henderson@fd.com. Company performance For the quarter ended 30 June 2007, Prodesse reported net income of US$5.0 million (quarter ended 31 March 2007: US$4.0 million) or US$0.18 per average share (quarter ended 31 March 2007: US$0.16 per average share). Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities, of US$4.9 million for the quarter ended 30 June 2007 (quarter ended 31 March 2007: US$4.0 million) or US$0.17 per average share (quarter ended 31 March 2007: US$0.15 per average share). During the quarter the Company sold US$33.5 million in securities, resulting in a realised gain of US$38,496. The Company delivered an annualised core return on average equity for the quarter ended 30 June 2007 of 8.75% (quarter ended 31 March 2007: 7.25%). For the quarter ended 30 June 2007, the annualised total return on average equity (RoAE) was 8.82% (quarter ended 31 March 2007: 7.29%). 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to to 31 March 2007 to 31 December 30 September to 30 June 2006 2006 2006 30 June 2007 Core net income US$4.9 million US$4.0 million US$3.6 million US$3.0 million US$2.7 million Core net income per average US$0.17 US$0.15 US$0.14 US$0.12 US$0.10 share Annualised core RoAE 8.75% 7.25% 6.90% 6.07% 5.10% Reported net income/(loss) US$5.0 million US$4.0 million US$4.9 million US$6.4 million (US$37.6 million) Net income/(loss) per average US$0.18 US$0.16 US$0.19 US$0.25 (US$1.38) share Annualised RoAE 8.82% 7.29% 9.39% 12.77% (71.80%) Portfolio Performance For the quarter ended 30 June 2007, the annualised yield on average assets, which is calculated based on the annualised interest income for the period divided by the average value of interest earning assets for the period, was 5.83% (quarter ended 31 March 2007: 5.81%) and the annualised cost of funds on the average repurchase balance was 5.15% (quarter ended 31 March 2007: 5.15%) which equates to an interest rate spread of 0.68% (quarter ended 31 March 2007: 0.66%). At 30 June 2007, the annualised yield on assets was 5.93% and the annualised cost of funds on the repurchase balances was 5.12%, which equates to an interest rate spread of 0.81%. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 16% for the quarter ended 30 June 2007 (quarter ended 31 March 2007: 15%). 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. 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to to 31 March to 31 December 30 September to 30 June 2006 2007 2006 2006 30 June 2007 Annualised yield on average 5.83% 5.81% 5.95% 5.66% 5.24% assets Annualised cost of funds on 5.15% 5.15% 5.30% 5.31% 4.99% average repurchase balance Interest rate spread 0.68% 0.66% 0.65% 0.35% 0.25% CPR 16% 15% 14% 13% 15% As at 30 June 2007, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an implied 'AAA' rating. 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006 Fixed-rate mortgage-backed 69% 69% 62% 63% 67% securities Adjustable-rate mortgage-backed 11% 8% 11% 8% 9% securities Floating-rate mortgage-backed 20% 23% 27% 29% 24% securities Borrowings The ratio of average daily repurchase agreements to equity resulted in average leverage of the Company of 9.3:1 during the quarter ended 30 June 2007 (quarter ended 31 March 2007: 9.3:1). The leverage at 30 June 2007 was 9.3:1 (31 March 2007: 8.1:1). 01 April 2007 to 01 January 2007 01 October 2006 01 July 2006 to 01 April 30 June to 31 March to 31 December 30 September 2006 to 30 2007 2007 2006 2006 June 2006 Average leverage for period 9.3:1 9.3:1 9.3:1 8.9:1 9.7:1 Leverage at period end 9.3:1 8.1:1 9.0:1 8.5:1 8.7:1 As of 30 June 2007, the Company had entered into interest rate swap agreements totalling US$821 million in notional amount in which the Company will pay an average rate of 5.16% and receive 1 month LIBOR on a monthly basis. As of 31 March 2007, the Company had entered into interest rate swap agreements totalling US$811 million in notional amount in which the Company would pay an average rate of 5.17% and receive 1 month LIBOR on a monthly basis. 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006 Notional amount US$821 million US$811 million US$597 million US$603 million US$714 million Average pay rate 5.16% 5.17% 5.22% 5.23% 5.16% Average receive rate 5.32% 5.32% 5.35% 5.33% 5.22% Capital At 30 June 2007, the Company had a net asset value per share of US$7.77 (31 March 2007: US$8.22). After deducting the current dividends declared for the quarter of US$4,506,488 (for the quarter 31 March 2007: US$3,943,177), reported net asset value per share was US$7.61 (31 March 2007: US$8.08). 01 April 2007 to 01 January 2007 to 01 October 2006 to 01 July 2006 to 01 April 2006 to 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006 NAV per share US$7.77 US$8.22 US$8.08 US$8.05 US$7.52 Dividends declared for the period US$4,506,488 US$3,943,177 US$3,331,321 US$3,075,066 US$2,602,555 NAV per share after deducting dividends declared US$7.61 US$8.08 US$7.95 US$7.93 US$7.42 Dividend The Company has declared a dividend for the quarter ended 30 June 2007 of US$0.16 per share that was paid on 3 August 2007 to holders on the register on 13 July 2007. Dividends are calculated and paid in US dollars. 01 April 2007 01 January 2007 01 October 2006 to 01 July 2006 to 01 April 2006 to 30 June 2007 to 31 March 2007 31 December 2006 30 September 2006 to 30 June 2006 Core net income per average US$0.17 US$0.15 US$0.14 US$0.12 US$0.10 share Net income/(loss) per average US$0.18 US$0.16 US$0.19 US$0.25 (US$1.38) share Dividends per share US$0.16 US$0.14 US$0.13 US$0.12 US$0.10 Outlook 'Current indications from the Federal Reserve, whether in official statements, speeches or testimony, suggest that monetary policy will remain on hold for the foreseeable future,' said Wellington Denahan-Norris, Chief Investment Officer for Prodesse's Investment Manager, FIDAC. 'This, combined with the attractive price levels for new investments, has positive implications for our portfolio to continue to generate current income for our shareholders. Looking ahead, while we believe that the Company's portfolio, composed of fixed-rate, adjustable-rate and floating-rate assets, is prepared to perform in a range of possible interest rate outcomes, we are comfortable with the portfolio composition in current market conditions.' Prodesse Investment Limited Balance Sheet 30-Jun-07 31-Mar-07 31-Dec-06(1) 30-Sep-06 30-Jun-06 Note US $'000 US $'000 US $'000 US $'000 US $'000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) US$ US$ US$ US$ US$ ASSETS Current assets Available for sale investments 3 2,235,571 2,237,709 2,073,602 2,016,901 1,946,996 Accrued income receivable 10,236 9,302 8,774 8,001 9,056 Receivable for principal paydowns 6,613 5,409 3,210 4,158 5,029 Receivable for securities sold - - - 68,693 70,277 Hedging instruments 4 4,603 - - - 10,246 Cash and cash equivalents 11 30 35 750 4 Prepaid expenses 236 34 27 174 122 Total assets 2,257,270 2,252,484 2,085,648 2,098,677 2,041,730 EQUITY AND LIABILITIES Capital and reserves Share capital: 28,165,550 at 30 June 2007 and 31 282 282 256 256 260 March 2007, 25,625,550 at 31 December 2006 and 30 September 2006, 26,025,550 at 30 June 2006 at US$ 0.01 Capital redemption reserve 30 30 30 30 26 Share premium 71,680 71,759 50,000 50,000 50,000 Distributable reserve 141,513 198,681 198,681 198,681 201,413 Accumulated profits 5,347 4,361 3,720 3,229 2,742 Capital Reserve-Realised (loss) and impairment on available for sale investments - (57,206) (57,231) (58,520) (61,890) Revaluation reserve (4,505) 18,198 14,082 15,714 (7,019) Cash flow hedge reserve 4 4,603 (4,557) (2,445) (3,124) 10,246 Total shareholders' equity 218,950 231,548 207,093 206,266 195,778 Current liabilities Securities purchased payable - 136,626 15,407 124,034 134,681 Repurchase agreements 5 2,030,082 1,872,007 1,853,757 1,759,089 1,706,674 Accrued interest expense 6,706 6,068 5,563 4,809 3,220 Accrued expenses payable 1,532 1,678 1,383 1,355 1,377 Hedging instruments 4 - 4,557 2,445 3,124 - Total liabilities 2,038,320 2,020,936 1,878,555 1,892,411 1,845,952 Total equity and liabilities 2,257,270 2,252,484 2,085,648 2,098,677 2,041,730 Net Assets 218,950 231,548 207,093 206,266 195,778 Net Asset Value per share 6 7.77 8.22 8.08 8.05 7.52 (1) Derived from the audited financial statements at December 31, 2006. Prodesse Investment Limited (unaudited) Income Statement 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to 30 June to 31 March to 31 December 30 September to 30 June 2007 2007 2006 2006 2006 US $'000 US $'000 US $'000 US $'000 US $'000 Income Interest income 33,602 30,895 31,076 28,200 29,233 Interest expense (26,898) (24,971) (25,733) (23,702) (25,153) Net interest income 6,704 5,924 5,343 4,498 4,080 Realised gain/(loss) on sale of 38 25 1,289 3,371 (14,547) available for sale investments and interest rate swaps Loss from impairment - - - - (25,692) Total income/(loss) 6,742 5,949 6,632 7,869 (36,159) Expenses Management, custodian and 1,453 1,297 1,278 1,246 1,211 administration fees Other operating expenses 323 654 502 203 202 Total expenses 1,776 1,951 1,780 1,449 1,413 Net income/(loss) for the period 4,966 3,998 4,852 6,420 (37,572) Net income/(loss) per average share 0.18 0.16 0.19 0.25 (1.38) for the period Dividend declared per share for the 0.16 0.14 0.13 0.12 0.10 period Average shares outstanding 28,165,550 25,766,661 25,625,550 25,799,463 27,281,594 Prodesse Investment Limited (unaudited) Cash Flow Statement 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to 30 June to 31 March to 31 December 30 September to 30 June 2007 2007 2006 2006 2006 US $'000 US $'000 US $'000 US $'000 US $'000 Net cash (outflow) / inflow from (154,072) (36,709) (92,311) (46,374) 293,149 operating activities (Note 1) Financing Borrowings under reverse repurchase 6,197,781 5,771,019 5,947,866 5,770,443 6,685,967 agreements Repayments under reverse repurchase (6,039,706) (5,752,769) (5,853,198) (5,718,028) (6,962,911) agreements Own shares acquired - - - (2,732) (12,887) New shares issued - 21,863 - - - Issue costs (79) (78) - - - Dividends paid (3,943) (3,331) (3,072) (2,563) (3,330) Net cash inflow / (outflow) from 154,053 36,704 91,596 47,120 (293,161) financing (Decrease) /increase in cash and (19) (5) (715) 746 (12) cash equivalents Cash and cash equivalents, at 30 35 750 4 16 beginning of period Cash and cash equivalents, at end of 11 30 35 750 4 period Note 1 Net income/(loss) for the period 4,966 3,998 4,852 6,420 (37,572) Net accretion/amortisation of (35) (14) (215) 143 1,005 premiums on available for sale investments Realised (gain)/loss on sale of (38) (25) (2,508) (2,017) 14,547 available for sale investments Realised gain in interest rate hedge - - - (135) - Loss from impairment - - - - 25,692 Purchases of investments (328,449) (207,840) (432,026) (708,063) (349,722) Proceeds from sale of investments 33,493 34,168 228,070 563,718 530,854 Proceeds from sale of interest rate - - - 135 - swaps Principal paydowns 136,635 132,739 109,422 91,072 113,805 Receivables (Increase)/decrease in accrued (934) (528) (834) 835 1,084 income receivable (Increase) /decrease in prepaid (202) (7) 147 (51) (94) expenses Liabilities Increase/(decrease) in accrued 638 505 754 1,589 (6,414) interest expense (Decrease)/increase in accrued (146) 295 27 (20) (36) expenses payable Net cash (outflow) / inflow from (154,072) (36,709) (92,311) (46,374) 293,149 operating activities Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) 01 April 2007 to 30 June 2007 Capital Reserve - realised gain/(loss) on sales and impairment Capital of available Cash flow Share redemption Share Distributable for sale Revaluation Accumulated hedge capital reserve premium reserve investments reserve profits reserve Total US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 Balance at 31 March 2007 282 30 71,759 198,681 (57,206) 18,198 4,361 (4,557) 231,548 Net income for the quarter - - - - - - 4,966 - 4,966 Available for sale investments: Transfer of realised gain - - - - 38 - (38) - - to capital reserve Movement in unrealised - - - - - (22,703) - - (22,703) gain on revaluation taken to equity Cash flow hedge reserve - - - - - - - 9,160 9,160 Total recognised income and - - - - 38 (22,703) 4,928 9,160 (8,577) expense Issuance costs - - (79) - - - - - (79) Dividends paid - - - - - - (3,942) - (3,942) Transfer to capital - - - (57,168) 57,168 - - - - reserve Balance at 30 June 2007 282 30 71,680 141,513 - (4,505) 5,347 4,603 218,950 Notes to the financial statements 1. General Information 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 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 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 Basis of Accounting This quarterly press release 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 the quarterly press release as applied in the Company's latest annual audited financial statements except for the change in reclassification of the net borrowings under repurchase agreements in the cashflow statement. The financial statements are presented in US Dollars because that is the currency of the primary economic environment in which the Company operates. The functional currency of the Company is also considered to be US Dollars. Changes in accounting policies In the current financial year, the Company will adopt International Financial Reporting Standard 7 'Financial Instruments and Disclosures' ('IFRS7') for the first time. As IFRS 7 is a disclosure standard, there is no impact of that change in accounting policy on the quarterly press release. Full details of the change will be disclosed in the Company's annual report for the year ended 31 December 2007. Investments The Company invests in securities issued by the United States Government Sponsored Enterprises such as the Federal Home Loan Mortgage Corporation (' Freddie Mac'), Federal National Mortgage Association ('Fannie Mae') and the Federal Home Loan Banks ('FHLB') as well as the Government National Mortgage Association ('Ginnie Mae'), a US Government Corporation. Freddie Mac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are not Companies funded 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, 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. Expenses incidental to the acquisition of available for sale investments are included within the cost of that investment. 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 securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognised as an impairment loss in the income statement and the cost basis of the mortgage-backed securities is adjusted. The impairment loss is then transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company. 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. When-Issued/Delayed 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. The Company did not transact in when-issued or delayed delivery securities during the quarter ended 30 June 2007. Security Transactions and Investment Income Recognition Security transactions are recorded on the 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 the effective interest method. 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. Cash and Cash Equivalents Cash includes amounts held in interest bearing overnight accounts. 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. Reverse 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. A repurchase agreement involves the sale by the Company of securities that it holds with an agreement by the Company to repurchase the same securities at an agreed price and date. Such an agreement involves the risk that the value of the securities sold by the Company may decline in value below the price of the 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 is recorded as a separate line item. Securities sold subject to repurchase agreements are retained in the financial statements as available for sale securities and the counterparty liability is included in liabilities under repurchase agreements. Derivative Financial Instruments and 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. The Company does not use derivative financial instruments for speculative purposes. The use of financial derivatives is governed by the Company's policies approved by the board of directors, which provide written principles on the use of financial derivatives. 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. The amount in equity is released to income when the forecast transaction impacts profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualified for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity for cash flow hedges is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss in the period. 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. Set-up and Issue 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. Costs directly attributable to the issue of Ordinary Shares are expensed against the share premium account as allowed by with The Companies (Guernsey) Law, 1994. 3. Available for Sale Investments Gross Unrealised Gross Estimated At 30 June 2007 Amortised Cost Gain Unrealised Loss Fair Value US $'000 US $'000 US $'000 US $'000 Adjustable rate 692,566 3,163 (552) 695,177 Fixed rate 1,547,510 4,427 (11,543) 1,540,394 Total 2,240,076 7,590 (12,095) 2,235,571 As at 30 June 2007, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry a 'AAA' or implied 'AAA' rating. During the quarter ended 30 June 2007, the Company did not have any securities that it deemed to be other-than-temporarily impaired. Mortgage-backed securities are created when mortgages and their attendant streams of interest and principal payments are pooled to serve as collateral for the issuance of securities to investors. Interests in mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, mortgage-backed securities typically provide irregular cash flows consisting of both interest and principal. An investment consideration of any mortgage-backed security is the structure of the payment of the cash flow streams from the underlying mortgages to the holders of the mortgage-backed securities. The cash flows can be simply passed from the mortgage holder to the investor or they can be structured in a number of different ways. The market values of the various structures will vary in different interest rate or prepayment environments, with the more derivative or complex structures (e.g., interest-only or principal-only securities) being more sensitive to movements in interest rates or rates of prepayment. Beyond the basic security of the mortgages and properties that underlie mortgage-backed securities, a critical attribute of mortgage-backed securities issued by the US Agencies is the credit enhancement that the US Agencies provide. The holder of mortgage-backed securities issued or guaranteed by the US Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae is the principal governmental (i.e., backed by the full credit of the US Government) guarantor of mortgage-backed securities. Fannie Mae and Freddie Mac are the principal US Government-related (i.e. not backed by the full credit of the US Government) guarantors. Adjustable-rate and floating-rate mortgage-backed securities in which the Company may invest include pass-through mortgage-backed securities issued by the US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates on adjustable-rate and floating rate mortgage-backed securities are reset at periodic intervals to an increment over some predetermined reference interest rate. There are two main categories of reference rates: (i) those based on US Treasury securities and (ii) those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilised reference rates include the one-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile. Adjustable-rate mortgages frequently have upper and lower limits on the interest rates to which a residential borrower may be subject (i) in any reset or adjustment interval and (ii) over the life of the loan. These upper and lower limits are commonly known as ''caps'' and ''floors'' respectively. 4. Hedging Instruments The Company uses interest rate swaps to manage its exposure to interest rate movements. When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the 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. At 30 June 2007, the Company had interest rate swap agreements of US$821 million notional amount in which the Company will pay a weighted average rate of 5.16% and have a weighted average receive rate of 5.32%. 5. Reverse Repurchase Agreements At 30 June 2007 the aggregate value of securities pledged by the Company under reverse repurchase agreements exceeds the liability under such agreements by approximately US$60.9 million (approximately 3% of such liability). The interest rates on the reverse repurchase agreements at 30 June 2007 range from 4.47% to 5.45% and have maturity dates ranging from 3 days to 1,704 days. The Company has entered into repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. These repurchase agreements totalled $300 million. 6. Net Asset Value The net asset value per Ordinary Share is based on net assets at 30 June 2007 and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares in issue at the period end. At 30 June 2007, the reported net asset value per Ordinary Share (before excluding the dividend declared for the quarter ended 30 June 2007) is US$7.77. At 30 June 2007, the Company had a net asset value per Ordinary Share of US$7.61, after including the effect of the dividend declared for the quarter ended 30 June 2007 of US$4,506,488. This information is provided by RNS The company news service from the London Stock Exchange

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