Preliminary Results

Prodesse Investment Limited 13 February 2007 Prodesse Investment Limited Results for the Quarter Ended 31 December 2006 Highlights for fourth quarter 2006: • Core net income1 per average share of US$0.14 • Dividend per share of US$0.13 from net interest income - equates to an annualised dividend yield of 5.66%2 (FTSE All Share annualised dividend yield of 2.86%3) • Net income per average share of US$0.19 • NAV per share of US$8.08 (30 September 2006: US$8.05) • Portfolio remains 100% implied 'AAA' mortgage-backed securities. 1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities. 2 Based on annualisation of Q4 dividend, an exchange rate of 1.9569 US$ per Pound Sterling and a closing price of 469.8p on 29 December 2006 3 Based on closing share prices of the constituents of the FTSE All Share index on 29 December 2006 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse, commented: 'Relative market stability was the dominant driver of Prodesse's financial performance in the fourth quarter, and a welcome change from the investment landscape of prior quarters. During the Federal Reserve's tightening campaign, our cost of funds continued to rise and the market values of our short-duration assets came under pressure. Since the Federal Reserve paused its tightening campaign, the investment strategy of Prodesse has performed as expected: our cost of funds leveled out, net interest rate spread expanded and asset values stabilized. As a result, Prodesse was able to increase its dividend for the second quarter in a row. With the change in the market environment and the Company's positive performance, we have also been gratified to see an increase in investor interest in our strategy. It is our belief that performance through current market conditions will serve to justify that interest.' Financial Highlights Q4 2006 Q3 2006 Q2 2006 Q1 2006 Q4 2005 US$ Dividend per share 0.13 0.12 0.10 0.12 0.10 Core net income per average share 0.14 0.12 0.10 0.12 0.10 Net income/(loss) per average share 0.19 0.25 (1.38) 0.12 (0.68) Net income/(loss) 4.9m 6.4m (37.6m) 3.2m (18.8m) Net asset value per share 8.08 8.05 7.52 8.03 8.36 GBP Sterling4 Dividend per share 7p 6p 5p 7p 6p Core net income per average share 7p 6p 5p 7p 6p Net income/(loss) per average share 10p 13p (74p) 7p (40p) Net income/(loss) £2.5m £3.4m (£20.4m) £1.8m (£10.9m) Net asset value per share 412.9p 430.1p 407.2p 461.8p 486.4p 4 Illustration is based upon an exchange rate of 1.9569, 1.8718, 1.8469, 1.7390 and 1.7187 US$ per Pound Sterling at 31 December 2006, 30 September 2006, 30 June 2006, 31 March 2006 and 31 December 2005 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. This release does not constitute the preliminary announcement of annual audited accounts in accordance with LSE listing rules. Enquiries Investor Relations Rob Bailhache / Nick Henderson, Financial Dynamics Tel: 020 7269 7200 / 020 7269 7114 Company Secretary and Administrator 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 13 February 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) 207 269 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 For the quarter ended 31 December 2006, Prodesse reported net income of US$4.9 million (quarter ended 30 September 2006: US$6.4million) or US$0.19 per average share (quarter ended 30 September 2006: US$0.25 per average share). Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities, of US$3.6 million for the quarter ended 31 December 2006 (quarter ended 30 September 2006: US$3.0 million) or US$0.14 per average share (quarter ended 30 September 2006: US$0.12 per average share). Core net income for the quarter was reduced by US$284 thousand or US$0.01 per average share due to additional legal and other expenses related to the Extraordinary General Meeting. During the quarter the Company sold US$156.9 million face amount of securities, resulting in a realised gain of approximately US$1.3 million or US$0.05 per average share. The Company delivered an annualised core return on average equity for the quarter ended 31 December 2006 of 6.90% (quarter ended 30 September 2006: 6.07%). For the quarter ended 31 December 2006, the annualised total return on average equity (RoAE) was 9.39% (quarter ended 30 September 2006: 12.77%). 01 October 2006 to 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 to 31 December 2006 30 September to 30 June to 31 March 2006 31 December 2005 2006 2006 Core net income US$3.6 million US$3.0 million US$2.7 US$3.2 million US$2.9 million million Core net income per average share US$0.14 US$0.12 US$0.10 US$0.12 US$0.10 Annualised core RoAE 6.90% 6.07% 5.10% 5.64% 4.69% Reported net income/ US$4.9 million US$6.4 million (US$37.6 US$3.2 million (US$18.8 million) (loss) million) Net income/(loss) per average share US$0.19 US$0.25 (US$1.38) US$0.12 (US$0.68) Annualised RoAE 9.39% 12.77% (71.80%) 5.64% (30.65)% Portfolio Performance For the quarter ended 31 December 2006, the annualised yield on average assets, which is calculated based on the annualised interest income for the period divided by the average interest earning assets for the period, was 5.95% (quarter ended 30 September 2006: 5.66%) and the annualised cost of funds on the average repurchase balance was 5.30% (quarter ended 30 September 2006: 5.31%) which equates to an interest rate spread of 0.65% (quarter ended 30 September 2006: 0.35%). At 31 December 2006, the annualised yield on assets was 5.81% and the annualised cost of funds on the repurchase balances was 5.18%, which equates to an interest rate spread of 0.63%. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 14% for the quarter ended 31 December 2006 (quarter ended 30 September 2006: 13%). 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 October 2006 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 to 31 December 30 September to 30 June to 31 March 2006 to 2006 2006 2006 31 December 2005 Annualised yield on average assets 5.95% 5.66% 5.24% 4.89% 4.49% Annualised cost of funds on average repurchase balance 5.30% 5.31% 4.99% 4.58% 4.12% Interest rate spread 0.65% 0.35% 0.25% 0.31% 0.37% CPR 14% 13% 15% 18% 20% As at 31 December 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. 31 December 2006 30 September 2006 30 June 31 March 2006 31 December 2005 2006 Fixed-rate mortgage-backed 62% 63% 67% 61% 38% securities Adjustable-rate mortgage-backed 11% 8% 9% 25% 43% securities Floating-rate mortgage-backed 27% 29% 24% 14% 19% securities Borrowings The ratio of average daily repurchase agreements to equity resulted in leverage of the Company of 9.3:1 during quarter ended 31 December 2006 (quarter ended 30 September 2006: 8.9:1). The leverage at 31 December 2006 was 9.0:1 (30 September 2006: 8.5:1). 01 October 2006 to 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 to 31 December 2006 30 September 2006 to 30 June to 31 March 2006 31 December 2005 2006 Average leverage for 9.3:1 8.9:1 9.7:1 8.5:1 9.3:1 period Leverage at period 9.0:1 8.5:1 8.7:1 8.9:1 4.4:1 end As of 31 December 2006, the Company had entered into interest rate swap agreements totalling US$597 million in notional amount in which the Company will pay an average rate of 5.22% and receive 1 month LIBOR on a monthly basis. As of 30 September 2006, the Company had entered into interest rate swap agreements totalling US$603 million in notional amount in which the Company would pay an average rate of 5.23% and receive 1 month LIBOR on a monthly basis. 31 December 2006 30 September 2006 30 June 2006 31 March 2006 31 December 2005 Notional amount US$597 million US$603 million US$714 million US$554 million US$65 million Average pay rate 5.22% 5.23% 5.16% 4.82% 4.79% Average receive 5.35% 5.33% 5.22% 4.75% 4.45% rate Capital At 31 December 2006, the Company had a net asset value per share of US$8.08 (30 September 2006: US$8.05), after deducting the current dividends declared for the quarter of US$3,331,322 (for the quarter 30 September 2006: US$3,075,066), reported net asset value per share is US$7.95 (30 September 2006: US$7.93). 01 October 2006 to 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 31 December 2006 30 September to 30 June to 31 March 2006 to 2006 2006 31 December 2005 NAV per share US$8.08 US$8.05 US$7.52 US$8.03 US$8.36 Dividends declared for US$3,331,322 US$3,075,066 US$2,602,555 US$3,330,066 US$2,775,055 the period NAV per share after deducting dividends declared US$7.95 US$7.93 US$7.42 US$7.91 US$8.26 Dividend The Company has declared a dividend for the quarter ended 31 December 2006 of US$0.13 per share payable on 8 March 2007 to holders on the register on 23 February 2007. Dividends are calculated and paid in US dollars. Shareholders resident in the UK wishing for the conversion of dividend payments into Sterling should contact the Company's administrator. 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006 01 October 2005 to 31 December to 30 June to 31 March 2006 to 31 December 2006 30 September 2006 2006 2005 Core net income per average share US$0.14 US$0.12 US$0.10 US$0.12 US$0.10 Net income/(loss) per average share US$0.19 US$0.25 (US$1.38) US$0.12 (US$0.68) Dividends per share US$0.13 US$0.12 US$0.10 US$0.12 US$0.10 Outlook 'Based on recent data, the economic outlook in the US is mixed,' said Wellington Denahan-Norris, Chief Investment Officer for Prodesse's Investment Manager, FIDAC. 'Thus, the Federal Reserve continues to signal that monetary policy will stay on hold until it sees more evidence of a change in the balance of growth and inflation. Our strategy of including fixed-rate, adjustable-rate and floating-rate assets, which after taking into account the effect of our interest-rate swap position, is 33%, 11% and 56% respectively, is designed to prepare the portfolio to perform in a range of possible future outcomes. Even though we continue to operate in an inverted US Treasury yield curve, we are still able to find attractive opportunities for investment in US Agency mortgage-backed securities.' Prodesse Investment Limited Balance Sheet 31-Dec-05 31-Dec-06 30-Sep-06 30-Jun-06 31-Mar-06 (Audited) US$ US$ US$ US$ US$ ASSETS Current assets Available for sale investments 2,073,602,089 2,016,901,365 1,946,995,591 2,190,680,570 1,405,412,720 Accrued income receivable 8,773,585 8,001,243 9,055,816 9,853,640 6,228,846 Receivable for principal paydowns 3,209,521 4,158,154 5,028,662 7,947,156 10,195,316 Receivable for securities sold - 68,692,786 70,277,068 - - Hedging instrument - - 10,245,969 8,971,875 - Cash and cash equivalents 35,150 749,962 4,409 16,039 5,059 Prepaid expenses 27,019 173,565 122,099 28,011 34,904 Total assets 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291 1,421,876,845 EQUITY AND LIABILITIES Capital and reserves Share capital: 25,625,550 at 31 December 2006 and 30 September 2006, 26,025,550 at 30 June 2006, and 27,750,550 at 31 March 2006 and 31 December 2005 at US$ 0.01 256,255 256,255 260,255 277,506 277,506 Capital redemption reserve 29,845 29,845 25,845 8,594 8,594 Share premium 50,000,000 50,000,000 50,000,000 50,000,000 50,000,000 Distributable reserve 198,680,545 198,680,545 201,412,622 214,300,104 214,300,104 Accumulated profits 3,719,637 3,228,548 2,741,945 3,404,481 2,972,952 Capital Reserve-Realised (loss)/gain and impairment on available for sale (57,230,504) (58,519,908) (61,890,519) (21,651,450) (21,651,450) investments Revaluation reserve 14,082,163 15,713,694 (7,017,861) (32,478,359) (13,940,391) Cash flow hedge reserve (2,444,846) (3,124,375) 10,245,970 8,971,875 (19,500) Total shareholders' equity 207,093,095 206,264,604 195,778,257 222,832,751 231,947,815 Current liabilities Securities purchased payable 15,406,579 124,033,750 134,680,584 - 163,391,316 Repurchase agreements 1,853,757,000 1,759,089,000 1,706,674,000 1,983,618,000 1,022,067,000 Accrued interest expense 5,563,044 4,809,009 3,220,249 9,633,997 3,509,041 Accrued expenses payable 1,382,800 1,356,337 1,376,524 1,412,543 942,173 Hedging instrument 2,444,846 3,124,375 - - 19,500 Total liabilities 1,878,554,269 1,892,412,471 1,845,951,357 1,994,664,540 1,189,929,030 Total equity and liabilities 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291 1,421,876,845 Net Assets 207,093,095 206,264,604 195,778,257 222,832,751 231,947,815 Net Asset Value per share 8.08 8.05 7.52 8.03 8.36 Prodesse Investment Limited (unaudited) Income Statement 01 October 2006 01 July 2006 to 01 April 01 January 01 October 2005 to 31 December 30 September 2006 to 30 2006 to 31 to 31 December 2006 2006 June 2006 March 2006 2005 US$ US$ US$ US$ US$ Income Interest income 31,075,784 28,199,546 29,233,473 26,589,796 27,307,521 Interest expense (25,733,535) (23,701,645) (25,152,907) (21,906,790) (23,306,345) Net interest income 5,342,249 4,497,901 4,080,566 4,683,006 4,001,176 Realised gain/(loss) on sale of available 1,289,404 3,370,611 (14,547,469) - (21,656,763) for sale investments and interest rate swaps Loss from impairment - - (25,691,600) - - Total income/(loss) 6,631,653 7,868,512 (36,158,503) 4,683,006 (17,655,587) Expenses Management, custodian and administration fees 1,277,915 1,246,004 1,210,709 1,279,335 942,468 Other operating expenses 501,569 202,739 202,393 197,087 185,913 Total expenses 1,779,484 1,448,743 1,413,102 1,476,422 1,128,381 Net income/(loss) for the period 4,852,169 6,419,769 (37,571,605) 3,206,584 (18,783,968) Net income/(loss) per average share for the period 0.19 0.25 (1.38) 0.12 (0.68) Dividend declared per share for the period 0.13 0.12 0.10 0.12 0.10 Average shares outstanding 25,625,550 25,799,463 27,281,594 27,750,550 28,180,275 Prodesse Investment Limited (unaudited) Cash Flow Statement 01 October 2006 01 July 2006 to 01 April 2006 to 01 January 2006 01 October 2005 to 31 December 30 September 30 June 2006 to 31 March 2006 to 31 December 2006 2006 2005 US$ US$ US$ US$ US$ Net cash inflows from operating activities (Note 1) 2,356,864 6,040,184 16,205,851 2,786,035 11,012,705 Financing Offering Cost - - - - - Own shares acquired - (2,732,076) (12,887,481) - (5,873,559) Dividends paid (3,071,676) (2,562,555) (3,330,000) (2,775,055) (5,146,209) Net cash (outflow) from financing (3,071,676) (5,294,631) (16,217,481) (2,775,055) (11,019,768) Increase/(decrease) in cash and (714,812) 745,553 (11,630) 10,980 (7,063) cash equivalents Cash and cash equivalents, at 749,962 4,409 16,039 5,059 12,122 beginning of period Cash and cash equivalents, at end 35,150 749,962 4,409 16,039 5,059 of period Note 1 Net income/(loss) for the period 4,852,169 6,419,769 (37,571,605) 3,206,584 (18,783,968) Net accretion/amortisation of premiums on available for sale investments (214,870) 143,076 1,005,200 1,210,901 3,123,879 Realised (gain)/loss on sale of available for sale investments (2,507,548) (2,017,445) 14,547,469 - 21,656,763 Realised gain in interest rate - (135,022) - - - hedge Loss from impairment - - 25,691,600 - - Purchases of investments (432,026,305) (708,062,580) (349,722,450) (1,082,468,323) (55,678,354) Proceeds from sale of investments 228,069,925 563,718,426 530,854,272 - 1,253,691,106 Proceeds from sale of interest - 135,022 - - - rate swaps Principal paydowns 109,422,437 91,071,528 113,805,308 116,471,761 218,359,667 Borrowings under reverse 5,947,866,000 5,770,442,800 6,685,967,000 5,763,648,000 6,231,988,000 repurchase agreements Repayments under reverse (5,853,198,000) (5,718,027,800) (6,962,911,000) (4,802,097,000) (7,646,290,000) repurchase agreements Receivables Decrease/(Increase) in accrued (833,988) 835,303 1,083,913 (3,788,108) 5,554,800 income receivable (Increase)/decrease in prepaid 146,545 (51,465) (94,089) 6,894 31,894 expenses Liabilities Increase/(Decrease) in accrued 754,035 1,588,759 (6,413,748) 6,124,956 (2,042,728) interest expense (Decrease)/Increase in accrued 26,464 (20,187) (36,019) 470,370 (598,354) expenses payable Net cash inflow from operating 2,356,864 6,040,184 16,205,851 2,786,035 11,012,705 activities Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) 01 January 2006 to 31 December 2006 Share Capital Share premium Distributable Capital Reserve capital redemption reserve - realised gain/ reserve (loss) on sales and impairment of available for sale investments US$ US$ US$ US$ US$ Balance at 31 December 2005 277,506 8,594 50,000,000 214,300,104 (21,651,450) Net income for the quarter - - - - - Available for sale investments: Movement in unrealised gain/(loss) - - - - - on revaluation taken to equity Cash flow hedge reserve - - - - - Dividends paid - - - - - Balance at 31 March 2006 277,506 8,594 50,000,000 214,300,104 (21,651,450) Net loss for the quarter - - - - - Available for sale investments: Transfer of impairment loss to - - - - (25,691,600) capital reserve Transfer of realised loss to capital - - - - (14,547,469) reserve Movement in unrealised loss on - - - - - revaluation taken to equity Cash flow hedge reserve - - - - - Buyback of shares (17,251) 17,251 - (12,887,482) - Dividends paid - - - - - Balance at 30 June 2006 260,255 25,845 50,000,000 201,412,622 (61,890,519) Net income for the quarter - - - - - Available for sale investments: Transfer of realised gain to capital - - - - 3,370,611 reserve Movement in unrealised loss on - - - - - revaluation taken to equity Cash flow hedge reserve - - - - - Buyback of shares (4,000) 4,000 - (2,732,077) - Dividends paid - - - - - Balance at 30 September 2006 256,255 29,845 50,000,000 198,680,545 (58,519,908) Net income for the quarter - - - - - Available for sale investments: Transfer of realised gain to capital - - - - 1,289,404 reserve Movement in unrealised loss on - - - - - revaluation taken to equity Cash flow hedge reserve - - - - - Dividends paid - - - - - Balance at 31 December 2006 256,255 29,845 50,000,000 198,680,545 (57,230,504) Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) 01 January 2006 to 31 December 2006 cont. Revaluation Accumulated Cash flow Total reserve profits hedge reserve US$ US$ US$ US$ Balance at 31 December 2005 (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: Movement in unrealised gain/(loss) (18,537,968) - - (18,537,968) on revaluation taken to equity Cash flow hedge reserve - - 8,991,375 8,991,375 Dividends paid - (2,775,055) - (2,775,055) Balance at 31 March 2006 (32,478,359) 3,404,481 8,971,875 222,832,751 Net loss for the quarter - (37,571,605) - (37,571,605) Available for sale investments: Transfer of impairment loss to - 25,691,600 - - capital reserve Transfer of realised loss to - 14,547,469 - - capital reserve Movement in unrealised loss on 25,460,498 - - 25,460,498 revaluation taken to equity Cash flow hedge reserve - - 1,274,095 1,274,095 Buyback of shares - - - (12,887,482) Dividends paid - (3,330,000) - (3,330,000) Balance at 30 June 2006 (7,017,861) 2,741,945 10,245,970 195,778,257 Net income for the quarter - 6,419,769 - 6,419,769 Available for sale investments: Transfer of realised gain to - (3,370,611) - - capital reserve Movement in unrealised loss on 22,731,555 - - 22,731,555 revaluation taken to equity Cash flow hedge reserve - - (13,370,345) (13,370,345) Buyback of shares - - - (2,732,077) Dividends paid - (2,562,555) - (2,562,555) Balance at 30 September 2006 15,713,694 3,228,548 (3,124,375) 206,264,604 Net income for the quarter - 4,852,169 - 4,852,169 Available for sale investments: Transfer of realised gain to - (1,289,404) - - capital reserve Movement in unrealised loss on (1,631,531) - - (1,631,531) revaluation taken to equity Cash flow hedge reserve - - 679,529 679,529 Dividends paid - (3,071,676) - (3,071,676) Balance at 31 December 2006 14,082,163 3,719,637 (2,444,846) 207,093,095 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. At the date of authorisation of these financial statements, the following Standard, which has not been applied in these financial statements, was in issue but not yet effective: IFRS 7 Financial Instruments: Disclosures; and the related amendment to IAS 1 on capital disclosures The directors anticipate that the adoption of the above Standard in future years will not have a material impact on the financial statements of the Company except for additional disclosures on capital and financial instruments when the Standard comes into force for the period commencing 1 January 2007. IFRS 8 Operating Segments The directors anticipate that the adoption of the above Standard in future years will not have a material impact on the financial statements of the Company when the Standard comes into force for the period commencing 1 January 2009. 2. Significant Accounting Policies Basis of Accounting The financial statements of the Company are 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') that remain in effect, together with applicable legal and regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing Authority and Channel Islands Stock Exchange. The financial statements are prepared on the historical cost basis except for the revaluation of certain financial instruments. The 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. 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. 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 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 mortgaged-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 year ended 31 December 2006. 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 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 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. Available for Sale Investments Gross Unrealised Gross Estimated At 31 December 2006 Amortised Cost Gain Unrealised Loss Fair Value US$ US$ US$ US$ Adjustable rate 775,936,369 2,943,851 (400,787) 778,479,433 Fixed rate 1,283,583,558 12,995,264 (1,456,166) 1,295,122,656 Total 2,059,519,927 15,939,115 (1,856,953) 2,073,602,089 As at 31 December 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. During the quarter ended 31 December 2006, 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 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 Instrument 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 31 December 2006, the Company had interest rate swap agreements of US$597 million notional amount in which the Company will pay a weighted average rate of 5.22% and have a weighted average receive rate of 5.35%. 5. Reverse Repurchase Agreements At 31 December 2006 the aggregate value of securities pledged by the Company under reverse repurchase agreements exceeds the liability under such agreements by approximately US$55.6 million (approximately 3% of such liability). The interest rates on the reverse repurchase agreements at 31 December 2006 range from 4.56% to 5.39% and have maturity dates ranging from 3 days to 289 days. 6. Net Asset Value The net asset value per Ordinary Share is based on net assets at 31 December 2006 and on 25,625,550 Ordinary Shares, being the number of Ordinary Shares in issue at the period end. At 31 December 2006, the reported net asset value per Ordinary Share (before excluding the dividend declared for the quarter ended 31 December 2006) is US$8.08. At 31 December 2006, the Company had a net asset value per Ordinary Share of US$7.95, after including the effect of the dividend declared for the quarter ended 31 December 2006 of US$3,331,322. This information is provided by RNS The company news service from the London Stock Exchange

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