Preliminary Results
Prodesse Investment Limited
07 March 2008
Prodesse Investment Limited
Preliminary Results for the year ended 31 December 2007
About Prodesse Investment Limited ('Prodesse' or the 'Company')
Prodesse 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, while seeking to limit exposure to interest rate risk and credit
risk.
Prodesse releases results on a quarterly basis, with the results for the quarter
to 31 December 2007 released on 12 February 2008. Please refer to that and
previous quarterly announcements for operational highlights and management
commentary on the results of the Company.
The financial information set out in this announcement does not constitute the
Company's statutory accounts for the year ended 31 December 2007.
The financial information for the year ended 31 December 2007 is derived from
the financial statements delivered to the UK Listing Authority and The Channel
Islands Stock Exchange. The Auditors reported on those accounts, their report
was unqualified and did not contain a statement under section 65(3) of The
Companies (Guernsey) Law, 1994.
This preliminary announcement was approved by the directors of the Company on 6
March 2008.
Income Statement
For the year ended 31 December 2007
Notes
2007 2006
US $'000 US $'000
Income:
Interest income 130,149 115,099
Interest expense (103,337) (96,495)
Net interest income 26,812 18,604
Realised gain/(loss) on sale of available for sale investments 4 1,663 (10,022)
Impairment loss on available for sale investments 4 - (25,692)
Realised gain on cash flow hedge 6 - 135
Total income 28,475 (16,975)
Expenses
Management, Custodian and Administration fees (5,411) (5,014)
Other operating expenses (1,613) (1,104)
Total expenses (7,024) (6,118)
Net profit/(loss) for the year 21,451 (23,093)
Profit/(loss) per Ordinary Share 3 US$0.78 US$(0.87)
Weighted Average Ordinary Shares outstanding 3 27,574,043 26,606,235
All items in the above statement are derived from continuing operations.
All income is attributable to the Ordinary Shareholders of the Company.
Statement of Changes in Shareholders' Equity
For the year ended 31 December 2007
Note Share Capital Share Distributable Accumulated Capital Revaluation Cash Total
capital redemption premium reserve profits Reserve - reserve -flow
reserve Realised Unrealised hedge
gains on gain on reserve
available available
for sale for sale
investments investments
US$'000 US $'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
At 1 January 2007 256 30 50,000 198,681 3,720 (57,231) 14,082 (2,445) 207,093
Available for sale
investments:
- Unrealised gain on
revaluation taken to
equity 4 - - - - - - 3,992 - 3,992
- Realised gain on sale
of investments 4 - - - - - - (1,663) - (1,663)
Net profit for the year - - - - 21,451 - - - 21,451
Transfer of net realised
gains to capital reserve 8 - - - - (1,663) 1,663 - - -
Cash flow hedge reserve
- Loss taken to equity 6 - - - - - - - (19,521) (19,521)
Total recognised income
and expenses for the year - - - - 19,788 1,663 2,329 (19,521) 4,259
Dividend paid 2 - - - - (16,288) - - - (16,288)
Issuance of shares 8 26 - 21,837 - - - - - 21,863
Issue costs 8 - - (157) - - - - - (157)
Transfer to capital 8 - - - (57,168) - 57,168 - - -
reserve
At 31 December 2007 8 282 30 71,680 141,513 7,220 1,600 16,411 (21,966) 216,770
Statement of Changes in Shareholders' Equity
For the year ended 31 December 2006
Note Share Capital Share Distributable Accumulated Capital Revaluation Cash Total
capital redemption premium reserve profits Reserve - reserve - flow
reserve Realised Unrealised hedge
loss on gain (loss) reserve
available on
for sale available
investments for sale
investments
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US $'000
At 1 January 2006 277 9 50,000 214,300 2,973 (21,651) (13,940) (20) 231,948
Available for sale
investments:
- Unrealised gain
on revaluation
taken to equity 4 - - - - - - (7,558) - (7,558)
- Impairment of
investments taken
to income 4 - - - - - - 25,692 - 25,692
- Realised loss
on sale of
investments 4 - - - - - - 9,888 - 9,888
Net loss for the year - - - - (23,093) - - - (23,093)
Transfer of net
realised losses
to capital
reserve 8 - - - - (35,580) 35,580 - - -
Cash flow hedge
reserve
- Loss taken
to equity 6 - - - - - - - (2,425) (2,425)
Total recognised
income and
expenses for
the year - - - - 12,487 (35,580) 28,022 (2,425) 2,504
Dividend paid 2 - - - - (11,740) - - - (11,740)
Buyback of
shares 8 (21) 21 - (15,619) - - - - (15,619)
At
31 December 2006 8 256 30 50,000 198,681 3,720 (57,231) 14,082 (2,445) 207,093
Balance Sheet
As at 31 December 2007
2007 2006
Notes US $'000 US $'000
Non-current assets
Available for sale investments 4 2,280,046 2,073,602
2,280,046 2,073,602
Current assets 5
Accrued income receivable 10,541 8,774
Receivable for principal paydowns 2,839 3,210
Prepaid expenses 77 27
Cash and cash equivalents 48 35
13,505 12,046
Total assets 2,293,551 2,085,648
Equity attributable to equity shareholders
Ordinary share capital 8 282 256
Capital redemption reserve 8 30 30
Share premium 8 71,680 50,000
Distributable reserve 8 141,513 198,681
Accumulated profits 8 7,220 3,720
Capital reserve - Realised gain/(loss) on available for sale
investments
8 1,600 (57,231)
Revaluation reserve 8 16,411 14,082
Cash flow hedge reserve 8 (21,966) (2,445)
Total equity 216,770 207,093
Current liabilities 5
Securities purchased payable 31,882 15,407
Reverse repurchase agreements 7 2,011,384 1,853,757
Accrued interest expense 9,823 5,563
Accrued expenses payable 1,726 1,383
Hedging instrument 6 21,966 2,445
Total liabilities 2,076,781 1,878,555
Total equity and liabilities 2,293,551 2,085,648
Net Assets US$216,770 US$ 207,093
Net Asset Value per Ordinary Share 9 US$7.70 US$ 8.08
Cash Flow Statement
For the year ended 31 December 2007
2007 2006
(as restated)
Notes US $'000 US $'000
Net cash outflow from operating activities 10 (163,032) (804,301)
Cash flows from financing activities
Borrowings under reverse repurchase agreements 22,734,860 24,167,924
Repayments under reverse repurchase agreements (22,577,233) (23,336,234)
Dividends paid to shareholders (16,288) (11,740)
Issue of shares / (own shares acquired) 21,706 (15,619)
Net cash from financing activities 163,045 804,331
Net increase in cash and cash equivalents 13 30
Cash and cash equivalents at the beginning of the year 35 5
Cash and cash equivalents at the end of the year 48 35
Notes
1. Significant Accounting Policies
The preliminary announcement is prepared on the basis of the accounting policies
disclosed in the prior year financial statements.
Whilst the financial information included in this preliminary announcement has
been computed in accordance with International Financial Reporting Standards
(IFRSs), this announcement does not itself contain sufficient information to
comply with IFRSs. The Company's full financial statements that comply with
IFRSs were approved by the Directors on 6 March 2008.
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.
Business and Geographical Segments
The Directors are of the opinion that the Company is engaged in a single segment
of business of investing in debt securities, issued by companies operating and
generating revenue in the United States, and therefore no segmental reporting is
provided.
2. Dividends
2007 2006
US $'000 US $'000
Amounts recognized as distributions to equity shareholders in the year:
Final interim dividend for the period ended 31 December 2006 of
13 cents per share (2005: 10 cents per share) 3,331 2,775
First interim dividend for the year ended 31 December 2007 of 14 cents
per share (2006: 12 cents per share) 3,943 3,330
Second interim dividend for the year ended 31 December 2007 of
16 cents per share (2006: 10 cents per share) 4,507 2,563
Third interim dividend for the year ended 31 December 2007 of 16 cents
per share (2006: 12 cents per share) 4,507 3,072
16,288 11,740
A fourth interim dividend of $0.21 cents per Ordinary share, in respect of the
final quarter of 2007 was declared on 12 February 2008 and is payable on 7 March
2008.
3. Earnings Per Share
Basic earnings per share is calculated by dividing net profit available to
Ordinary Shareholders by the weighted average number of ordinary shares
outstanding during the year.
2007 2006
Number of shares Number of shares
Weighted average number of Ordinary Shares outstanding 27,574,043 26,606,235
4. Available for Sale Investments
2007 2006
US $'000 US $'000
Cost at 1 January 2,059,520 1,419,353
Purchases of investments 861,374 2,424,455
Proceeds from sale of investments (229,534) (1,322,642)
Realised gain/(loss) on sale of investments 1,663 (10,022)
Loss from impairment - (25,692)
Principal paydowns (429,069) (423,788)
Net amortisation of premiums (319) (2,144)
Amortised cost at 31 December 2,263,635 2,059,520
Unrealised gain on available for sale investments 16,411 14,082
Market value at 31 December 2,280,046 2,073,602
Gross Unrealised Gross Unrealised Estimated Fair
At 31 December 2007 Amortised Cost Gain Loss Value
US $'000 US $'000 US $'000 US $'000
Adjustable rate 846,490 2,136 (5,047) 843,579
Fixed rate 1,417,145 19,616 (294) 1,436,467
Total 2,263,635 21,752 (5,341) 2,280,046
Gross Unrealised Gross Unrealised Estimated Fair
At 31 December 2006 Amortised Cost Gain Loss Value
US $'000 US $'000 US $'000 US $'000
Adjustable rate 775,936 2,944 (401) 778,479
Fixed rate 1,283,584 12,995 (1,456) 1,295,123
Total 2,059,520 15,939 (1,857) 2,073,602
As at 31 December 2007, all of the assets in the Company's portfolio were Fannie
Mae and Freddie Mac mortgage-backed securities, which carry an implied 'AAA'
rating.
2007 2006
Fixed-rate mortgage-backed securities 63% 62%
Adjustable-rate mortgage-backed securities 15% 11%
Floating-rate mortgage-backed securities 22% 27%
As at 31 December 2007, investments totalling US$2.0 billion (2006: US$1.9
billion) were pledged as security in respect of reverse repurchase agreements
(see note 7).
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.
5. Current Assets and Current Liabilities
The Directors consider that the carrying amount of other receivables
approximates their fair value.
Cash and cash equivalents comprise bank balances held by the Company. The
carrying amount of these assets approximates their fair value.
Other payables principally comprise amounts outstanding on purchases of
investments awaiting settlement and ongoing costs. The Directors consider the
carrying amount of other payables approximates to their fair value.
6. 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 31 December 2007, the Company had interest swap agreements of US$778 million
notional amount (2006: US$597 million) in which the Company will pay a weighted
average rate of 5.15% (2006: 5.22%) and receive a weighted average rate of 5.06%
(2006: 5.35%).
The fair value of the swaps entered into at 31 December 2007 is estimated at
US$21,966,934 loss (2006: US$2,444,846 loss). These swaps are designated and
effective as cashflow hedges and the fair value thereof has been deferred in
equity. The realised gain on swaps in the year was US$Nil (2006: US$ 135,022).
7. Reverse Repurchase Agreements
At 31 December 2007 the aggregate value of securities pledged by the Company
under reverse repurchase agreements exceeds the liability under such agreements
by approximately US$60.3 million (2006: US$55.6 million) (approximately 3% of
such liability). The interest rates on the open reverse repurchase agreements
at 31 December 2007 range from 4.47% to 5.15.% (2006: from 4.56% to 5.39%) and
have maturity dates ranging from 2 days to 1,520 days (2006: 3 days to 289
days).
The current situation in the sub-prime mortgage sector, and the current weakness
in the broader mortgage market, could adversely affect one or more of the
Company's lenders and could cause one or more of the Company's lenders to be
unwilling or unable to provide it with additional financing. This could
potentially increase the Company's financing costs and reduce liquidity.
8. Issued Capital and Reserves
Ordinary Share Capital
2007 2006
US $'000 US $'000
Authorised
60,000,000 Ordinary Shares of US$0.01 each 600 600
Issued
28,165,550 (2006: 25,625,550) Ordinary Shares of US$0.01 each 282 256
Issue of shares
The Company issued 2,540,000 Ordinary Shares of US$0.01 on 27 March 2007 at
£4.40 each raising US$21.9 million. The issue costs associated with the issue
amounted to US$157,210.
Repurchase of shares
The Company has not purchased shares for cancellation in the current year to 31
December 2007.
On 26 May 2006, the Company purchased for cancellation 500,000 of its Ordinary
Shares at a price of US$7.611819 per share. On 8 June 2006, the Company
purchased for cancellation 725,000 of its Ordinary Shares at a price of
US$7.417783 per share. On 15 June 2006, the Company purchased for cancellation
500,000 of its Ordinary Shares at a price of US$7.407359 per share. On 10 August
2006, the Company purchased for cancellation 400,000 of its Ordinary Shares at a
price of US$6.83019 per share.
The total cost of the Ordinary Shares purchased has been charged against the
distributable reserve, which has been set up for this purpose.
As required by The Companies (Purchase of Own Shares) Ordinance, 1998, the
nominal value of the Ordinary Shares purchased in 2006 of US$21,250 has been
credited to a capital redemption reserve.
Authority to buyback shares
The Company currently has authority to undertake a share purchase of up to
14.99% of the share capital of the Company and the Board of Directors has
approved the use of on-market purchases of Ordinary Shares for cancellation at
appropriate prices which will enhance net asset value.
Capital Redemption Reserve
2007 2006
US $'000 US $'000
Balance at 1 January 30 9
Buyback of shares - 21
Balance at 31 December 30 30
Share Premium
2007 2006
US $'000 US $'000
Balance at 1 January 50,000 50,000
Premium arising on issue of equity shares 21,837 -
Expenses incurred on issue of equity shares (157) -
Balance at 31 December 71,680 50,000
Distributable Reserve
2007 2006
US $'000 US $'000
Balance at 1 January 198,681 214,300
Transfer to capital reserve (57,168) -
Repurchase of shares - (15,619)
Balance at 31 December 141,513 198,681
The Distributable Reserve was set up following the cancellation of the share
premium account following the Initial Public Offering. A transfer has been made
from the Distributable Reserve to the Capital Reserve - Realised Gain/(Loss) on
Available for Sale Investments to make good the realised loss on investments.
Accumulated Profits
2007 2006
US $'000 US $'000
Balance at 1 January 3,720 2,973
Net profit for the year 21,451 (23,093)
Realised(gains)/losses transferred to non-distributable capital (1,663) 35,580
reserve (see below)
Dividends paid (16,288) (11,740)
Balance at 31 December 7,220 3,720
Capital Reserve - Realised Gains on Available for Sale Investments
2007 2006
US $'000 US $'000
Balance at 1 January (57,231) (21,651)
Transfer from distributable reserve (see above) 57,168 -
Net gains/(losses) on sale of available for sale investments and
impairment of available for sale investments transferred from
accumulated profits 1,663 (35,715)
Realised gain on cash flow hedge transferred from accumulated profits
- 135
Balance at 31 December 1,600 (57,231)
Realised gains or losses arising on the sale of investments are initially
recognised in the income statement as required under International Financial
Reporting Standards but are transferred to a non-distributable capital reserve
in accordance with the Memorandum and Articles of Association of the Company.
Revaluation Reserve - Unrealised Gain on Available for Sale Investments
2007 2006
US $'000 US $'000
Balance at 1 January 14,082 (13,940)
Unrealised gains/(losses) on revaluation taken to equity 3,992 (7,558)
Transferred to income statement on sale of investments (1,663) 9,888
Transferred to income statement on impairment of investments - 25,692
Balance at 31 December 16,411 14,082
Cash Flow Hedge Reserve
2007 2006
US $'000 US $'000
Balance at 1 January (2,445) (20)
Decrease in fair value of hedging instrument taken to equity (19,521) (2,425)
Balance at 31 December (21,966) (2,445)
9. Net Asset Value
The net asset value per Ordinary Share is based on net assets at the year end
and on 28,165,550 (2006: 25,625,550) Ordinary Shares, being the number of
Ordinary Shares in issue at the year end.
At 31 December 2007, the reported net asset value per Ordinary Share (before
excluding the dividend declared for the quarter ended 31 December 2007 is
US$7.70 (2006: US$8.08).
At 31 December 2007, the Company had a net asset value per Ordinary Share of
US$7.49 (2006: US$7.95), after including the effect of the dividend declared for
the quarter of 31 December 2007 of US$5,914,766 (2006: US$3,331,322).
10. Cash Flows from Operating Activities
2007 2006
(as restated)
US $'000 US $'000
Net profit/(loss) for the year 21,451 (23,093)
Net amortisation of premiums on available for sale investments 319 2,144
Realised (gain)/loss on available for sale investments (1,663) 35,715
Realised gain on cash flow hedge - (135)
(1,344) 37,724
Purchases of investments (844,899) (2,572,439)
Proceeds from sale of investments 229,534 1,322,777
(615,365) (1,249,662)
Principal paydowns 429,440 430,772
Increase in receivables (1,817) (2,537)
Increase in payables 4,603 2,495
2,786 (42)
Net cash outflow from operating activities (163,032) (804,301)
11. Notes to the Cash Flow Statement
Purchases and sale of investments are considered to be operating activities of
the Company, given its purpose, rather than investing activities. The cash
flows arising from these activities are shown in Note 10 above. Cash and cash
equivalents (which are presented as a single class on the face of the balance
sheet) comprise cash at bank.
The comparative cash flow statement has been restated to reclassify the net
borrowings under repurchase agreements of US$831,690,000 for the year ended 31
December 2006 from net cash outflow from operating activities to cash flows from
financing activities.
12. Ten largest investments as at 31 December 2007
Summary details of the ten largest investments as at 31 December 2007:
Summary Details of the ten largest investments as at 31 December 2007
Description Market Value US $'000s % of Portfolio Current Coupon
FG A48575 72,959 3.20% 6.00
FNR 2005-47 FG 69,158 3.03% 5.37
FNR 2005-96 UA 60,037 2.63% 5.50
FHR 3167 QE 55,943 2.45% 6.00
FN 256233 43,468 1.91% 6.00
FN 924848 40,804 1.79% 6.50
FHR 3061 DA 38,941 1.71% 5.50
FN 944035 38,922 1.71% 7.00
FN 256492 37,047 1.62% 6.00
FN 850642 36,485 1.60% 6.00
This information is provided by RNS
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