3rd Quarter Results
Prodesse Investment Limited
06 November 2007
This RNS replaces RNS no. 0698H, released at 07:00 on 06 November 2007.
Prodesse Investment Limited
Results for the Quarter Ended 30 September 2007
Highlights for third 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 6.92%2 (FTSE All Share annualised dividend
yield of 2.89%3)
* Net income per average share of US$0.20
* NAV per share of US$7.554 (30 June 2007: US$7.614)
* Portfolio remains 100% implied 'AAA' mortgage-backed securities.
Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,
commented: 'Third quarter results for Prodesse were strong, particularly given
the backdrop of volatility and uncertainty in the marketplace. The events of
this summer highlighted the competitive advantages of our strategy as the US
credit cycle got worse-the avoidance of credit risk and the use of relatively
moderate levels of gearing. Moreover, we believe our performance will benefit as
the markets and monetary policy react to continuing evidence of weakness in the
US economy. Indeed, the reduction in the Federal Funds target rate on 18
September, which had little impact on third quarter results, will be more fully
reflected in results for the fourth quarter. In addition, investment
opportunities in this environment continue to be attractive.'
Financial Highlights Q3 2007 Q2 2007 Q1 2007 Q4 2006 Q3 2006
$US
Dividend per share 0.16 0.16 0.14 0.13 0.12
Core net income per average 0.17 0.17 0.15 0.14 0.12
share
Net income per average share 0.20 0.18 0.16 0.19 0.25
Net income 5.8m 5.0m 4.0m 4.9m 6.4m
Net asset value per share 7.554 7.77 8.22 8.08 8.05
GBP Sterling5
Dividend per share 8p 8p 7p 7p 6p
Core net income per average 8p 8p 8p 7p 6p
share
Net income per average share 10p 9p 8p 10p 13p
Net income £2.8m £2.5m £2.0m £2.5m £3.4m
Net asset value per share 370.0p4 387.1p 417.6p 412.9p 430.1p
1 Core net income is defined as net income excluding realised and unrealised
gains and losses on securities.
2 Based on annualisation of Q3 dividend, an exchange rate of 2.0405 US$ per
Pound Sterling and a closing price of 453.0 on 28 September 2007.
3 Based on closing share prices of the constituents of the FTSE All Share index
on 28 September 2007 (JCF Datastream).
4 After deducting dividends declared for the period.
5 Illustration is based upon an exchange rate of 2.0405, 2.0071, 1.9686, 1.9569,
and 1.8718, US$ per Pound Sterling at 28 September 2007, 29 June 2007, 31 March
2007, 31 December 2006, and 30 September 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 14:00 UK time on
Tuesday 6 November 2007 and a live audio webcast and presentation will be
available via the Prodesse website, www.prodesse.co.uk. The dial-in number for
the conference call is 0845 146 2021 and the passcode is 21185517.
Company performance
For the quarter ended 30 September 2007, Prodesse reported net income of US$5.8
million (quarter ended 30 June 2007: US$5.0 million) or US$0.20 per average
share (quarter ended 30 June 2007: US$0.18 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 September 2007 (quarter ended 30 June 2007: US$4.9 million) or US$0.17
per average share (quarter ended 30 June 2007: US$0.17 per average share).
During the quarter the Company sold US$108.8 million in securities, resulting in
a realised gain of US$875,177.
The Company delivered an annualised core return on average equity for the
quarter ended 30 September 2007 of 9.07% (quarter ended 30 June 2007: 8.75%).
For the quarter ended 30 September 2007, the annualised total return on average
equity (RoAE) was 10.70% (quarter ended 30 June 2007: 8.82%).
01 July 01 April 01 January 01 October 01 July
2007 to 2007 to 2007 to 31 2006 to 31 2006 to 30
30 September 30 June March 2007 December September
2007 2007 2006 2006
Core net income US$4.9 US$4.9 US$4.0 US$3.6 US$3.0
million million million million million
Core net income US$0.17 US$0.17 US$0.15 US$0.14 US$0.12
per average share
Annualised core 9.07% 8.75% 7.25% 6.90% 6.07%
RoAE
Reported net US$5.8 US$5.0 US$4.0 US$4.9 US$6.4
income million million million million million
Net income per US$0.20 US$0.18 US$0.16 US$0.19 US$0.25
average share
Annualised RoAE 10.70% 8.82% 7.29% 9.39% 12.77%
Portfolio Performance
For the quarter ended 30 September 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
5.90% (quarter ended 30 June 2007: 5.83%) and the annualised cost of funds on
the average repurchase balance was 5.18% (quarter ended 30 June 2007: 5.15%)
which equates to an interest rate spread of 0.72% (quarter ended 30 June 2007:
0.68%). At 30 September 2007, the annualised yield on assets was 5.87% and the
annualised cost of funds with the effect of interest rate swaps on the
repurchase balances was 5.01%, which equates to an interest rate spread of
0.86%.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed
securities portfolio averaged 13% for the quarter ended 30 September 2007
(quarter ended 30 June 2007: 16%). 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 July 01 April 01 January 01 October 01 July
2007 to 30 2007 to 2007 to 31 2006 to 31 2006 to 30
September 30 June March 2007 December September
2007 2007 2006 2006
Annualised yield on 5.90% 5.83% 5.81% 5.95% 5.66%
average assets
Annualised cost of
funds on average 5.15%
repurchase balance 5.18% 5.15% 5.30% 5.31%
Interest rate 0.72% 0.68% 0.66% 0.65% 0.35%
spread
CPR 13% 16% 15% 14% 13%
As at 30 September 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 30 June 31 March 31 December 30
September 2007 2007 2006 September
2007 2006
Fixed-rate 66% 69% 69% 62% 63%
mortgage-backed
securities
Adjustable-rate 12% 11% 8% 11% 8%
mortgage-backed
securities
Floating-rate 22% 20% 23% 27% 29%
mortgage-backed
securities
Borrowings
The ratio of average daily repurchase agreements to equity resulted in average
leverage of the Company of 9.4:1 during the quarter ended 30 September 2007
(quarter ended 30 June 2007: 9.3:1). The leverage at 30 September 2007 was 9.0:1
(30 June 2007: 9.3:1).
01 July 01 April 01 January 01 October 01 July
2007 to 30 2007 to 2007 to 31 2006 to 31 2006 to 30
September March 2007 December September
2007 30 June 2006 2006
2007
Average leverage for 9.4:1 9.3:1 9.3:1 9.3:1 8.9:1
period
Leverage at period end 9.0:1 9.3:1 8.1:1 9.0:1 8.5:1
As of 30 September 2007, the Company had entered into interest rate swap
agreements totalling US$817 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
30 June 2007, the Company had entered into interest rate swap agreements
totalling US$821 million in notional amount in which the Company would pay an
average rate of 5.16% and receive 1 month LIBOR on a monthly basis.
30 September 30 June 2007 31 March 2007 31 December 30 September
2007 2006 2006
Notional amount US$817 US$821 US$811 US$597 US$603
million million million million million
Average pay rate 5.16% 5.16% 5.17% 5.22% 5.23%
Average receive 5.57% 5.32% 5.32% 5.35% 5.33%
rate
Capital
At 30 September 2007, the Company had a net asset value per share of US$7.55 (30
June 2007: US$7.61) after deducting the current dividends declared for the
quarter of US$4,506,488 (for the quarter 30 June 2007: US$4,506,488).
01 July 2007 01 April 01 January 01 October 01 July 2006
to 30 2007 to 2007 to 31 2006 to 31 to
September 30 June 2007 March 2007 December 30 September
2007 2006 2006
NAV per share US$7.551 US$7.77 US$8.22 US$8.08 US$8.05
Dividends declared US$4,506,488 US$4,506,488 US$3,943,177 US$3,331,321 US$3,075,066
for the period
NAV per share
after deducting
dividends declared US$7.55 US$7.61 US$8.08 US$7.95 US$7.93
1 After deducting dividends declared for the period. Dividends for the third
quarter were declared 20 September 2007. Unlike the other periods presented, the
NAV per share for the current period is represented ex-dividend.
Dividend
The Company has declared a dividend for the quarter ended 30 September 2007 of
US$0.16 per share that is payable on 15 November 2007 to holders on the register
on 28 September 2007. Dividends are calculated and paid in US dollars.
01 July 2007 01 April 2007 01 January 01 October 01 July 2006
to 30 to 2007 to 31 2006 to 31 to
September 30 June 2007 March 2007 December 2006 30 September 2006
2007
Core net US$0.17 US$0.17 US$0.15 US$0.14 US$0.12
income per
average share
Net income US$0.20 US$0.18 US$0.16 US$0.19 US$0.25
per average
share
Dividends per US$0.16 US$0.16 US$0.14 US$0.13 US$0.12
share
Outlook
'The Federal Reserve has not provided guidance on the future direction of
monetary policy,' said Wellington Denahan-Norris, Chief Investment Officer for
Prodesse's Investment Manager, FIDAC. 'Instead, the Fed's position has been that
it will remain data dependent until more definitive economic trends can be
demonstrated. To us, the data increasingly seem to suggest that a slowdown is at
hand, nevertheless the financial markets remain cautious and prone to bouts of
illiquidity in the more credit-sensitive sectors. In this environment,
Prodesse's chosen asset class of US Government Agency securities and its
portfolio composition of floating-rate, adjustable-rate and fixed-rate assets
are designed to prepare it for a range of possible outcomes.'
Prodesse Investment Limited
Balance Sheet
30-Sep-07 30-Jun-07 31-Mar-07 31-Dec-061 30-Sep-06
US $'000 US $'000 US $'000 US $'000 US $'000
Note (Unaudited) (Unaudited) (Unaudited) (Unaudited)
US$ US$ US$ US$ US$
ASSETS
Current assets
Available for sale 3 2,227,999 2,235,571 2,237,709 2,073,602 2,016,901
investments
Accrued income receivable 10,131 10,236 9,302 8,774 8,001
Receivable for principal 2,977 6,613 5,409 3,210 4,158
paydowns
Receivable for securities - - - - 68,693
sold
Hedging instruments 4 - 4,603 - - -
Cash and cash equivalents 205 11 30 35 750
Prepaid expenses 154 236 34 27 174
Total assets 2,241,466 2,257,270 2,252,484 2,085,648 2,098,677
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
28,165,550 at 30 September
2007, 30 June 2007 and 31
March 2007, 25,625,550 at 31
December 2006 and 30
September 2006, at US$ 0.01 282 282 282 256 256
Capital redemption reserve 30 30 30 30 30
Share premium 71,680 71,680 71,759 50,000 50,000
Distributable reserve 141,513 141,513 198,681 198,681 198,681
Accumulated profits 1,229 5,347 4,361 3,720 3,229
Capital Reserve-Realised
gain / (loss) and
impairment on available for
sale 875 (57,206) (57,231) (58,520)
investments
Revaluation reserve 5,578 (4,505) 18,198 14,082 15,714
Cash flow hedge reserve 4 (8,486) 4,603 (4,557) (2,445) (3,124)
Total shareholders' equity 212,701 218,950 231,548 207,093 206,266
Current liabilities
Securities purchased payable 92,122 - 136,626 15,407 124,034
Repurchase agreements 5 1,915,579 2,030,082 1,872,007 1,853,757 1,759,089
Accrued interest expense 6,475 6,706 6,068 5,563 4,809
Accrued expenses payable 1,597 1,532 1,678 1,383 1,355
Dividend payable 4,506 - - - -
Hedging instruments 4 8,486 - 4,557 2,445 3,124
Total liabilities 2,028,765 2,038,320 2,020,936 1,878,555 1,892,411
Total equity and liabilities 2,241,466 2,257,270 2,252,484 2,085,648 2,098,677
Net Assets 212,701 218,950 231,548 207,093 206,266
Net Asset Value per share 6 7.55 7.77 8.22 8.08 8.05
1 Derived from the audited financial statements at December 31, 2006.
Prodesse Investment Limited
(unaudited) Income Statement
01 October 01 July 2006
2006 to 31 to 30
01 July 2007 01 April 01 January December September
to 30 2007 to 2007 to 31 2006 2006
September 30 June March 2007
2007 2007
US $'000 US $'000 US $'000 US $'000 US $'000
Income
Interest income 32,604 33,602 30,895 31,076 28,200
Interest expense (26,087) (26,898) (24,971) (25,733) (23,702)
Net interest income 6,517 6,704 5,924 5,343 4,498
Realised gain on sale of
available 875 38 25 1,289 3,371
for sale investments and
interest rate swaps
Total income 7,392 6,742 5,949 6,632 7,869
Expenses
Management, custodian and
administration fees 1,301 1,453 1,297 1,278 1,246
Other operating expenses 322 323 654 502 203
Total expenses 1,623 1,776 1,951 1,780 1,449
Net income for the period 5,769 4,966 3,998 4,852 6,420
Net income per average
share for the period 0.20 0.18 0.16 0.19 0.25
Dividend declared per
share for the period 0.16 0.16 0.14 0.13 0.12
Average shares 28,165,550 28,165,550 25,766,661 25,625,550 25,799,463
outstanding
Prodesse Investment Limited
(unaudited) Cash Flow Statement
01 July 01 April 01 January 01 October 01 July
2007 to 2007 to 2007 to 31 2006 to 31 2006 to 30
30 30 June March 2007 December September
September 2007 2006 2006
2007
US $'000 US $'000 US $'000 US $'000 US $'000
Net cash inflow / ( outflow)
from operating
activities (Note 1) 119,203 (154,072) (36,709) (92,311) (46,374)
Financing
Borrowings under reverse 5,772,535 6,197,781 5,771,019 5,947,866 5,770,443
repurchase agreements
Repayments under reverse (5,887,038) (6,039,706) (5,752,769) (5,853,198) (5,718,028)
repurchase agreements
Own shares acquired - - - - (2,732)
New shares issued - - 21,863 - -
Issue costs - (79) (78) - -
Dividends paid (4,506) (3,943) (3,331) (3,072) (2,563)
Net cash (outflow) / inflow (119,009) 154,053 36,704 91,596 47,120
from financing
Increase / (decrease) in cash 194 (19) (5) (715) 746
and cash equivalents
Cash and cash equivalents, at 11 30 35 750 4
beginning of period
Cash and cash equivalents, at 205 11 30 35 750
end of period
Note 1
Net income for the period 5,769 4,966 3,998 4,852 6,420
Net accretion/amortisation of
premiums on available for (35)
sale investments 139 (14) (215) 143
Realised gain on sale of
available for sale (38)
investments (875) (25) (2,508) (2,017)
Realised gain in interest - - - - (135)
rate hedge
Purchases of investments (93,321) (328,449) (207,840) (432,026) (708,063)
Proceeds from sale of 108,812 33,493 34,168 228,070 563,718
investments
Proceeds from sale of - - - - 135
interest rate swaps
Principal paydowns 98,658 136,635 132,739 109,422 91,072
Receivables
Decrease / (increase) in 105 (934) (528) (834) 835
accrued income receivable
Decrease / (increase) in 82 (202) (7) 147 (51)
prepaid expenses
Liabilities
(Decrease) / increase in (231) 638 505 754 1,589
accrued interest expense
Increase / (decrease) in 65 (146) 295 27 (20)
accrued expenses payable
Net cash inflow / (outflow) 119,203 (154,072) (36,709) (92,311) (46,374)
from operating activities
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 July 2007 to 30 September 2007
Share Capital Share Distributable Capital Revaluation Accumulated Cash Total
capital redemption premium reserve Reserve - reserve profits flow
reserve realised hedge
gain on reserve
sales and
impairment
of
available
for sale
investments
US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000
Balance at 30 282 30 71,680 141,513 - (4,505) 5,347 4,603 218,950
June 2007
Net income - - - - - - 5,769 - 5,769
for the
quarter
Hedge reserve - - - - - - - (13,089) (13,089)
revalued
Transfer of - - - - 875 - (875) - -
realised gain
to capital
reserve
Movement in - - - - - 10,083 - - 10,083
unrealised
gain on
revaluation
taken to
equity
Total - - - - 875 10,083 4,894 (13,089) 2,763
recognised
income and
expense
Dividends - - - - - - (4,506) - (4,506)
paid
Dividends - - - - - - (4,506) - (4,506)
payable
Balance at 30 282 30 71,680 141,513 875 5,578 1,229 (8,486) 212,701
September
2007
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.
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 associated
with 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 Gross Estimated
Unrealised
At 30 September 2007 Amortised Gain Unrealised Fair Value
Cost Loss
US $'000 US $'000 US $'000 US $'000
Adjustable rate 766,409 1,123 (3,404) 764,128
Fixed rate 1,456,012 11,101 (3,242) 1,463,871
Total 2,222,421 12,224 (6,646) 2,227,999
As at 30 September 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 September 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 September 2007, the Company had interest rate swap agreements of US$817
million notional amount in which the Company will pay a weighted average rate of
5.16% and have a weighted average receive rate of 5.57%.
5. Reverse Repurchase Agreements
At 30 September 2007 the aggregate value of securities pledged by the Company
under reverse repurchase agreements exceeds the liability under such agreements
by approximately US$57.5 million (approximately 3% of such liability). The
interest rates on the reverse repurchase agreements at 30 September 2007 range
from 4.47% to 5.75% and have maturity dates ranging from 1 day to 1612 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 US$300 million.
6. Net Asset Value
The net asset value per Ordinary Share is based on net assets at 30 September
2007 and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares in
issue at the period end.
At 30 September 2007, the Company had a net asset value per Ordinary Share of
US$7.55, after including the effect of the dividend declared for the quarter
ended 30 September 2007 of US$4,506,488.
This information is provided by RNS
The company news service from the London Stock Exchange
Monday, 20th May 2024
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