Preliminary Results
Prodesse Investment Limited
08 March 2007
Prodesse Investment Limited
Preliminary Results for the year ended 31 December 2006
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 2006 released on 13 February 2007. 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 2006.
The financial information for the year ended 31 December 2006 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 7
March 2007.
Income Statement
For the year ended 31 December 2006
Notes Year ended 31 22 February 2005*
December 2006 to 31 December 2005
US $'000 US $'000
Income:
Interest income 115,099 71,933
Interest expense (96,495) (53,722)
Net interest income 18,604 18,211
Realised loss on sale of available for sale investments 4 (10,022) (21,651)
Impairment loss on available for sale investments 4 (25,692) -
Realised gain on cash flow hedge 6 135 -
Total income (16,975) (3,440)
Expenses
Management, Custodian and Administration fees (5,014) (3,898)
Other operating expenses (1,104) (472)
Total expenses (6,118) (4,370)
Net loss for the year / period (23,093) (7,810)
Loss per Ordinary Share:
Basic - Loss per Ordinary Share 3 US$(0.87) US$(0.28)
Weighted Average Ordinary Shares outstanding
Basic 3 26,606,235 28,323,517
* Commencement of operations 08 April 2005.
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 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 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000
$'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 - - - - - - 28,022 - 28,022
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
Statement of Changes in Shareholders' Equity (continued)
For the period from 22 February 2005 to 31 December 2005*
Note Share Capital Share Distributable Accumulated Capital Revaluation Cash Total
capital redemption premium reserve profits Reserve - reserve - flow
reserve Realised Unrealised hedge
loss on loss on reserve
available available
for sale for sale
investments investments
US US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000
$'000
At 22 February
2005 - - - - - - - - -
Available for
sale investments:
- Unrealised loss
on revaluation
taken to
equity 4 - - - - - - (13,940) - (13,940)
Net loss for the
period - - - - (7,810) - - - (7,810)
Transfer of net
realised losses
to capital
reserve 8 - - - - 21,651 (21,651) - - -
Cash flow hedge
reserve 6 - - - - - - - (20) (20)
-Loss taken to
equity
Total recognised
income and
expenses for the
period - - - - 13,841 (21,651) (13,940) (20) (21,770)
Dividend paid 2 - - - - (10,868) - - - (10,868)
Issuance of
shares 8 286 - 285,814 - - - - - 286,100
Offering costs 8 - - (15,640) - - - - - (15,640)
Transfer from
share premium
account 8 - - (220,174) 220,174 - - - - -
Buyback of
shares 8 (9) 9 - (5,874) - - - - (5,874)
At 31 December
2005 8 277 9 50,000 214,300 2,973 (21,651) (13,940) (20) 231,948
* Commencement of operations 08 April 2005.
Balance Sheet
As at 31 December 2006
31 December 2006 31 December 2005
Notes US $'000 US $'000
Non-current assets
Available for sale investments 4 2,073,602 1,405,413
2,073,602 1,405,413
Current assets
Accrued income receivable 8,774 6,229
Receivable for principal paydowns 3,210 10,195
Prepaid expenses 27 35
Cash and cash equivalents 35 5
12,046 16,464
Total assets 2,085,648 1,421,877
Equity attributable to equity shareholders
Ordinary share capital 8 256 277
Capital redemption reserve 8 30 9
Share premium 8 50,000 50,000
Distributable reserve 8 198,681 214,300
Accumulated profits 8 3,720 2,973
Capital reserve - Realised loss on available for sale 8 (57,231) (21,651)
investments
Revaluation reserve 8 14,082 (13,940)
Cash flow hedge reserve 8 (2,445) (20)
Total equity 207,093 231,948
Current liabilities
Securities purchased payable 15,407 163,391
Reverse repurchase agreements 7 1,853,757 1,022,067
Accrued interest expense 5,563 3,509
Accrued expenses payable 1,383 942
Hedging instrument 6 2,445 20
Total liabilities 1,878,555 1,189,929
Total equity and liabilities 2,085,648 1,421,877
Net Assets US$207,093,095 US$231,947,815
Net Asset Value per Ordinary Share 9 US$8.08 US$8.36
Cash Flow Statement
For the year ended 31 December 2006
22 February 2005*
Year ended to
31 December 2006 31 December 2005
Notes US $'000 US $'000
Net cash inflow / (outflow) from operating activities 10 27,389 (253,713)
Cash flows from financing activities
Dividends paid to shareholders (11,740) (10,868)
Net proceeds from offering - 270,460
Own shares acquired (15,619) (5,874)
Net cash from financing activities (27,359) 253,718
Net increase in cash and cash equivalents 30 5
Cash and cash equivalents at the beginning of the year /
period 5 -
Cash and cash equivalents at the end of the year / period 35 5
* Commencement of operations 08 April 2005.
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 7 March 2007.
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
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Amounts recognized as distributions to equity shareholders in
the year/ period:
Third interim dividend for the year ended 31 December 2005 of
10 cents per share 2,775 -
First interim dividend for the year ended 31 December 2006 of 12
cents per share (2005: 20 cents per share) 3,330 5,722
Second interim dividend for the year ended 31 December 2006 of
10 cents per share (2005: 18 cents per share) 2,563 5,146
Third interim dividend for the year ended 31 December 2006 of 12 cents
per share 3,072 -
11,740 10,868
* Commencement of operations 08 April 2005.
A fourth interim dividend of 13 cents per Ordinary share, in respect of the
final quarter of 2006 was declared on 13 February 2007 and is payable on 8 March
2007.
3. Earnings Per Share
Basic earnings per share is calculated by dividing net loss available to
Ordinary Shareholders by the weighted average number of ordinary shares
outstanding during the year.
Year ended 22 February 2005* to
31 December 2006 31 December 2005
Number of shares Number of shares
Weighted average number of Ordinary Shares outstanding 26,606,235 28,323,517
* Commencement of operations 08 April 2005.
4. Available for Sale Investments
31 December 2006 31 December 2005
US $'000 US $'000
Cost at 1 January / 22 February 1,419,353 -
Purchases of investments 2,424,455 3,215,324
Proceeds from sale of investments (1,322,642) (1,259,358)
Realised loss on sale of investments (10,022) (21,651)
Loss from impairment (25,692) -
Principal paydowns (423,788) (508,470)
Net amortisation of premiums (2,144) (6,492)
Amortised cost at 31 December 2,059,520 1,419,353
Unrealised gain / (loss) on available for sale investments 14,082 (13,940)
Market value at 31 December 2,073,602 1,405,413
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
Gross Unrealised Gross Unrealised Estimated Fair
At 31 December 2005 Amortised Cost Gain Loss Value
US $'000 US $'000 US $'000 US $'000
Adjustable rate 882,032 3 (8,062) 873,973
Fixed rate 537,321 2 (5,883) 531,440
Total 1,419,353 5 (13,945) 1,405,413
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 31 December
2006 2005
Fixed-rate mortgage-backed securities 62% 38%
Adjustable-rate mortgage-backed securities 11% 43%
Floating-rate mortgage-backed securities 27% 19%
As at 31 December 2006, investments totalling US$1.9 billion (2005: US$1.0
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.
With the continued increase in the Federal Funds rate during the second quarter
of 2006, the Company determined that it did not intend to hold certain of its
securities until maturity and would reposition a portion of its assets. The
company recorded an impairment charge of US$25.7 million for these securities
during the second quarter of 2006. The remaining investments are not considered
other-than-temporarily-impaired since the Company currently has the ability and
intent to hold the investments for a period of time or to maturity, if
necessary, sufficient for a forecasted market price recovery up to or beyond the
cost of the investments.
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 2006, the Company had interest swap agreements of US$597 million
notional amount (2005: US$65 million) in which the Company will pay a weighted
average rate of 5.22% (2005: 4.83%) and receive a weighted average rate of 5.35%
(2005: one month LIBOR).
The fair value of the swaps entered into at 31 December 2006 is estimated at
US$2,444,846 loss (2005: US$19,500 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$135,022 (2005: US$ Nil).
7. 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 (2005: US$30.6 million) (approximately 3% of
such liability). The interest rates on the open reverse repurchase agreements
at 31 December 2006 range from 4.56% to 5.39% (2005: from 4.28% to 4.35%) and
have maturity dates ranging from 3 days to 289 days (2005: from one day to one
month).
8. Issued Capital and Reserves
Ordinary Share Capital
31 December 2006 31 December 2005
US $'000 US $'000
Authorised
60,000,000 Ordinary Shares of US$0.01 each 600 600
Issued
25,625,550 (2005: 27,750,550) Ordinary Shares of US$0.01 each 256 277
Issue of shares
The Company issued 2 Ordinary Shares of US$0.01 on incorporation on 22 February
2005 at par. Following the Initial Public Offering the Company issued
26,500,000 Ordinary Shares of US$0.01 each (including the previously issued
Ordinary Shares) on 8 April 2005 and a further 2,110,000 Ordinary Shares of
US$0.01 were issued on 9 May 2005 at a premium of US$9.99 per Ordinary Share.
The issue costs associated with the Initial Public Offering amounted to
US$15,640,237.
Repurchase of shares
On 17 November 2005, the Company purchased for cancellation 70,000 of its
Ordinary Shares at a price of US$7.531429 per share. On 18 November 2005, the
Company purchased for cancellation 789,450 of its Ordinary Shares at a price of
US$6.75 per share.
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 was US$15,619,559 (2005:
US$5,873,559) has been charged against the distributable reserve, which has been
set up for this purpose as described below.
As required by The Companies (Purchase of Own Shares) Ordinance, 1998, the
nominal value of the Ordinary Shares purchased US$21,250 (2005: US$8,594) 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
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Balance at 1 January / 22 February 9 -
Buyback of shares 21 9
Balance at 31 December 30 9
*Commencement of operations 08 April 2005
Share Premium Account
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Balance at 1 January / 22 February 50,000 -
Premium arising on issue of equity shares - 285,814
Expenses incurred on issue of equity shares - (15,640)
Reclassification of share premium - (220,174)
Balance at 31 December 50,000 50,000
*Commencement of operations 08 April 2005
In 2005, the Company applied to the Royal Court of Guernsey, immediately after
the placing of the shares, to reduce its share premium account in order to
provide a distributable reserve to repurchase its shares if and when it is
considered beneficial to do so by the Directors. As such, the share premium
account, after deduction of preliminary costs, was reduced by US$220,174,000 and
a distributable reserve created for this amount. The balance on the
distributable reserve following the repurchase of Ordinary Shares as described
above is shown below.
Distributable Reserve
22 February 2005*
Year ended to
31 December 31 December
2006 2005
US $'000 US $'000
Balance at 1 January / 22 February 214,300 -
Reclassification of share premium - 220,174
Repurchase of shares (15,619) (5,874)
Balance at 31 December 198,681 214,300
*Commencement of operations 08 April 2005
Accumulated Profits
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Balance at 1 January / 22 February 2,973 -
Net losses for the year / period (23,093) (7,810)
Realised losses transferred to non-distributable capital reserve (see 35,580 21,651
below)
Dividends paid (11,740) (10,868)
Balance at 31 December 3,720 2,973
*Commencement of operations 08 April 2005
Capital Reserve - Realised Loss on Available for Sale Investments
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Balance at 1 January / 22 February (21,651) -
Net losses on sale of available for sale investments and impairment of
available for sale investments transferred from accumulated profits (35,715) (21,651)
Realised gain on cash flow hedge transferred from accumulated profits 135 -
Balance at 31 December (57,231) (21,651)
*Commencement of operations 08 April 2005
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 (Loss) on Available for Sale Investments
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Balance at 1 January / 22 February (13,940) -
Unrealised losses on revaluation taken to equity (7,558) (35,591)
Transferred to income statement on sale of investments 9,888 21,651
Transferred to income statement on impairment of investments 25,692 -
Balance at 31 December 14,082 (13,940)
*Commencement of operations 08 April 2005
Cash Flow Hedge Reserve
22 February 2005*
Year ended to
31 December 2006 31 December 2005
US $'000 US $'000
Balance at 1 January / 22 February (20) -
Decrease in fair value of hedging instrument taken to equity (2,425) (20)
Balance at 31 December (2,445) (20)
*Commencement of operations 08 April 2005
9. Net Asset Value
The net asset value per Ordinary Share is based on net assets at the year end
and on 25,625,550 Ordinary Shares, being the number of Ordinary Shares in issue
at the year 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 (2005: US$8.36).
At 31 December 2006, the Company had a net asset value per Ordinary Share of
US$7.95 (2005: US$8.26), after including the effect of the dividend declared for
the quarter of 31 December 2006 of US$3,331,322 (2005: US$2,775,055).
10. Cash Flows from Operating Activities
31 December 2006 31 December 2005
US $'000 US $'000
Net loss for the year / period (23,093) (7,810)
Net amortisation of premiums on available for sale investments 2,144 6,492
Realised loss on available for sale investments 35,715 21,651
Realised gain on cash flow hedge (135) -
37,724 28,143
Purchases of investments (2,572,439) (3,051,933)
Proceeds from sale of investments 1,322,777 1,259,358
(1,249,662) (1,792,575)
Principal paydowns 430,772 498,275
Borrowings under reverse repurchase agreements 24,167,924 18,552,131
Repayments under reverse repurchase agreements (23,336,234) (17,530,064)
1,262,462 1,520,342
Increase in receivables (2,537) (6,264)
Increase in payables 2,495 4,451
(42) (1,813)
Net cash inflow / (outflow) from operating activities 27,389 (253,713)
Purchases and sale of investments are considered to be operating activities of
the Company, given its purpose, rather than investing activities.
Cash and cash equivalents (which are presented as a single class on the face of
the balance sheet) comprise cash at bank.
11. Ten largest investments as at 31 December 2006
Summary details of the ten largest investments as at 31 December 2006:
Description Market Value US $'000s % of portfolio Current coupon
FN 850568 116,713 5.63% 5.50%
FG A48575 81,914 3.95% 6.00%
FNR 2005-47 FG 79,108 3.81% 5.85%
FHR 2005-96 UA 73,305 3.54% 5.50%
FHR 3167 QE 55,193 2.66% 6.00%
FN 256233 48,869 2.36% 6.00%
FHR 2961 FC 47,001 2.27% 5.80%
FHR 3061 DA 46,393 2.24% 5.50%
FN 256492 41,506 2.00% 6.00%
FNR 2006-58 FY 41,296 1.99% 5.92%
This information is provided by RNS
The company news service from the London Stock Exchange
Monday, 20th May 2024
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