Quarterly Results

Prodesse Investment Limited 01 February 2006 Prodesse Investment Limited 1 February 2006 Prodesse Investment Limited Results for the 3 month period to 31 December 2005 Portfolio repositioned to new interest rate environment with intention to improve future income for shareholders and reduce NAV volatility. Highlights: • Dividend per share of US$0.10 from net interest income - equates to an annualised dividend yield of 5.25%1 (FTSE All Share annualised dividend yield of 2.95%2) • NAV per share of US$8.36 (30 Sept 05: US$9.03) reflects both realised and unrealised losses in the market value of mortgage-backed securities as short term US interest rates continued to rise • Accelerated portfolio repositioning to new interest rate environment in accordance with the established barbell strategy with the intention to improve income generation and reduce NAV volatility • Repositioning consists of asset sales of US$1.3 billion resulting in realised losses of US$0.78 per share (US$0.44 included in 30 Sept 05 unrealised losses) • Asset purchases subsequent to quarter-end-portfolio remains 100% implied AAA mortgage-backed securities • Programme to repurchase shares in the market for cancellation when deemed beneficial to the Company remains in force following publication of the year end audited accounts 1 Based on annualisation of Q4 dividend, an exchange rate of 1.7187 US$ per Pound Sterling and a closing price of 443p on 30 December 2005. 2 Based on closing share prices of the constituents of the FTSE All Share index on 30 December 2005 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse, commented: 'The difficult market environment for financial institutions persisted during the fourth quarter. US short-term interest rates continued to rise while long-term rates stayed relatively stable causing a decline in the Company's net income and pressure on NAV. In the fourth quarter, we have taken steps with the intention of improving the income-producing ability of the portfolio and reducing net asset value volatility as we continue forward through this phase of the US interest rate cycle.' Financial Highlights Q4 2005 Q3 2005 US$ Dividend per share 0.10 0.18 Net (loss)/income (18.8m) 5.1m Net (loss)/income per share (0.68) 0.18 Net asset value per share 8.36 9.03 GBP Sterling3 Dividend per share 6p 10p Net (loss)/income (£10.9m) £2.9m Net (loss)/income per share (40)p 10p Net asset value per share 486.4p 511.5p Illustration is based upon an exchange rate of 1.7187 and 1.7653 US$ per Pound Sterling at 30 December 2005 and 30 September 2005, respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests in US$ denominated assets only which produce US$ income. This release does not constitute the preliminary announcement of annual audited accounts in accordance with LSE listing rules. Enquiries Rob Bailhache / Nick Henderson, Financial Dynamics Tel: 020 7269 200 / 020 7269 7114 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 Wednesday 01 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)20 7269 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)20 7365 1850 (UK Participants) or +1 718 354 1172 (US Participants). A web cast of the presentation will be available following the meeting at www.prodesse.co.uk. Company performance Prodesse reported a net loss for the quarter ended 31 December 2005 of US$18.8 million (quarter ended 30 September 2005; net income of US$5.1 million) or a net loss of US$0.68 per share (quarter ended 30 September 2005: US$0.18 net income per share). Included in the results for the quarter ended 31 December 2005 is a realised loss of US$21.7 million from the sale of securities, or US$0.78 per share. Excluding the effects of the sale, net income was US$2.9 million or US$0.10 per share. The Company delivered an annualised return on average equity (RoAE) of negative 30.65% for the quarter ended 31 December 2005 (quarter ended 30 September 2005: 7.72%). Excluding the effects of realised losses, the Company delivered an annualized RoAE of 4.69%. 01 October 2005 01 July 2005 to 08 April 2005 to to 31 December 2005 30 September 2005 30 June 2005 Reported Net (loss) income (US$18.8 million) US$5.1 million US$5.8 million Net (loss) income per share (US$0.68) US$0.18 US$0.21 Annualised RoAE (30.65)% 7.72% 9.67% Portfolio Performance For the quarter ended 31 December 2005, the annualised yield on average assets was 4.49% (quarter ended 30 September 2005: 4.23%) and the annualised cost of funds on the average repurchase balance was 4.12% (quarter ended 30 September 2005: 3.57%), which equates to an interest rate spread of 0.37% (quarter ended 30 September 2005: 0.66%). This is a 0.29% decrease from the interest rate spread for the quarter ended 30 September 2005. At 31 December 2005, the annualized yield earned on assets was 4.97% and the annualised cost of funds on the repurchase balance was 4.33%, which equates to an interest rate spread of 0.64%. Net income and yields stated in this press release do not include net unrealised losses on investments. Net unrealised losses are reflected in the equity in accordance with the accounting policies. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 20% for the quarter ended 31 December 2005 (quarter ended 30 September 2005: 23%). 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. In general, as prepayment speeds on the Company's mortgage-backed securities portfolio increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 Annualised Yield on Average Assets 4.49% 4.23% 4.01% Annualised Cost of Funds on Average Repurchase Balance 4.12% 3.57% 2.67% Interest Rate Spread 0.37% 0.66% 1.34% CPR 20% 23% 20% As at 31 December 2005, all of the assets in the Company's portfolio were Fannie Mae and Freddie Mac mortgage-backed securities, which carry an implied 'AAA' rating. 01 October 2005 to 01 July 2005 to 30 08 April 2005 to 31 December 2005 September 2005 30 June 2005 Fixed-rate mortgage-backed 38% 32% 33% securities Adjustable-rate mortgage-backed 43% 61% 59% securities Floating-rate mortgage-backed 19% 7% 8% securities During the quarter, the Company sold approximately US$1.3 billion face amount of securities resulting in a realised loss of US$21.7 million, or US$0.78 per share. The securities sold were primarily adjustable-rate mortgage backed-securities which, based on current and expected market conditions, were deemed by the Investment Manager unlikely to recover to their amortised cost basis or provide positive interest rate spread over their cost of borrowings. Borrowings The ratio of average daily reverse repos to equity resulted in leverage of the Company of 9.3:1 during the quarter ended 31 December 2005 (quarter ended 30 September 2005: 8.9:1). The leverage at 31 December 2005 was 4.4:1 (30 September 2005: 9.4:1). The reduction of leverage at quarter end was due to the sale of US$1.3 billion face amount of securities. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 Average Leverage for 9.3:1 8.9:1 5.8:1 Period Leverage at Period End 4.4:1 9.4:1 8.1:1 During the quarter, the Company entered into a 5-year interest rate swap agreement of US$65 million notional amount in which the Company will pay a rate of 4.83% and receive 1 month LIBOR on a monthly basis. Capital At 31 December 2005, the Company had a net asset value per share of US$8.36 (30 September 2005: US$9.03), after excluding the effect of current dividends declared for the quarter of 31 December 2005 of US$2,775,055 (for the quarter 30 September 2005: US$5,146,209), reported net asset value per share is US$8.26 (30 September 2005: US$8.85). 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. During the quarter, the Company purchased 859,450 shares, comprising approximately 3% of shares outstanding as of 30 September 2005. The shares were purchased at a weighted average price of US$6.81. The total cost of the ordinary shares purchased was US$5,873,559. As required by The Companies (Purchase of Own Shares) Ordinance, 1998, the nominal value of the ordinary shares purchased (US$8,594) has been credited to a capital redemption reserve. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 NAV US$8.36 US$9.03 US$9.56 Dividends declared for the period US$2,775,055 US$5,146,209 US$5,722,000 NAV excluding dividends declared US$8.26 US$8.85 US$9.36 Dividend The Company has declared a dividend for the quarter ended 31 December 2005 of US$0.10 per share payable on 23 February 2006 to holders on the register on 10 February 2006. 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 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 Net (loss) income per (US$0.68) US$0.18 US$0.21 share Dividends per share US$0.10 US$0.18 US$0.20 Details of Repositioning The persistence of the Federal Reserve's current stance of removing monetary policy accommodation through raising the Federal Funds Rate, and the prospect for further tightenings, has prompted the Company to reposition the portion of its portfolio deemed unlikely to recover to their amortised cost basis or provide positive interest rate spread over their cost of borrowing. During the quarter, the Company sold approximately US$1.3 billion in mortgage-backed securities and purchased approximately US$207.1 million. Subsequent to quarter-end, the Company purchased approximately US$891.0 million in mortgage-backed securities consisting of US$822.0 million of fixed-rate mortgage-backed securities and US$69.0 million of floating-rate mortgage-backed securities. The securities purchased during, and subsequent to, the quarter, had a weighted average yield of 5.40%. A portion of the fixed-rate assets purchased were for the purpose of swapping their fixed-rate coupons into floating-rate cash flows. The Company has entered into a total of 4 interest rate swap agreements totaling US$456 million notional amount in which the Company will pay a weighted average rate of 4.79% and receive 1 month LIBOR on a monthly basis. The net result is that at 20 January 2006, approximately 34% of the portfolio's cash flows are floating rate in nature. At 20 January 2006 Yield on Assets 5.08% Cost of Funds 4.45% Interest Rate Spread 0.63% Leverage 8.5:1 Fixed-rate mortgage-backed securities as % of portfolio 60% Adjustable-rate mortgage-backed securities as % of portfolio 26% Floating-rate mortgage-backed securities as % of portfolio 14% Notional Amount of Interest Rate Swap as % of portfolio 20% Outlook 'We continue to be disciplined in executing the barbell strategy for long-term performance,' said Wellington Denahan-Norris, Chief Investment Officer for Prodesse's Investment Manager, FIDAC. 'The recent rebalancing is intended to accelerate the process that naturally takes place through the resetting of coupons and the reinvestment of principal and interest into the changing interest rate environment. We believe that the rebalancing of Prodesse's portfolio into more floating rate exposure will enable the Company to generate a higher dividend than it otherwise would have been able to provide. This prolonged tightening cycle and the elevated levels of prepayments have been challenging for us, but these conditions have also created better value for investment in mortgage-backed securities today.' This press release includes statements that are, or may be deemed to be, ''forward-looking statements''. These forward-looking statements can generally be identified by the use of forward-looking terminology, including the terms ''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'', ''will'' or ''should'' or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. All forward-looking statements address matters that involve risks and uncertainties, are only predictions, and you should not rely unduly on them. Accordingly, there are or will be important factors that could cause the Company's actual results to differ materially from those indicated in these statements. These factors include but are not limited to those described in the Company's prospectus under the heading ''Special Considerations and Risk Factors''. Any forward-looking statements in this press release reflect the Company's current views with respect to future events and are subject to these and other risks, uncertainties and assumptions relating to the Company's operations, results of operations, growth strategy and liquidity. These forward-looking statements speak only as of the date of this press release. Subject to any obligations under the Listing Rules, the Company undertakes no obligation publicly to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or FIDAC or individuals acting on behalf of the Company or FIDAC are expressly qualified in their entirety by this paragraph. Prospective investors should specifically consider the factors identified above which could cause actual results to differ before making any investment decision. Prodesse Investment Limited Balance Sheet (unaudited) at 31 December 2005, 30 September 2005 and 30 June 2005 31-Dec-05 30-Sep-05 30-Jun-05 US$ US$ US$ ASSETS Current assets Available for sale investments 1,405,412,720 2,688,176,717 2,627,255,210 Accrued income receivable 6,228,846 11,644,460 10,559,381 Receivable for principal paydowns 10,195,316 13,448,335 8,327,274 Cash and cash equivalents 5,059 12,122 5,999 Prepaid expenses 34,904 66,798 98,256 Total assets 1,421,876,845 2,713,348,432 2,646,246,120 EQUITY AND LIABILITIES Capital and reserves Share capital: 27,750,550 at 31 December, 2005, 277,506 286,100 286,100 28,610,000 at 30 September 2005 and 30 June 2005 @ USD 0.01 Capital redemption reserve 8,594 - - Share premium 50,000,000 50,000,000 50,000,000 Distributable reserve 214,300,104 220,173,663 220,299,299 Accumulated profits 2,972,952 5,246,367 5,843,027 Capital Reserve-Realised (loss)/gain on available for sale investments (21,651,450) 5,313 - Revaluation reserve (13,940,391) (17,384,448) (2,843,493) Cash flow hedge reserve (19,500) - - Total shareholders' equity 231,947,815 258,326,995 273,584,933 Current liabilities Securities purchased payable 163,391,316 11,560,141 162,120,786 Reverse repos 1,022,067,000 2,436,369,000 2,206,752,000 Accrued interest expense 3,509,041 5,551,769 2,759,461 Accrued expenses payable 942,173 1,540,527 1,028,940 Hedging instrument 19,500 - - Total liabilities 1,189,929,030 2,455,021,437 2,372,661,187 Total equity and liabilities 1,421,876,845 2,713,348,432 2,646,246,120 Net Assets 231,947,815 258,326,995 273,584,933 Net Asset Value per share 8.36 9.03 9.56 Prodesse Investment Limited (unaudited) Summary Income Statement 01 October 2005 to 01 July 2005 to 30 08 April 2005 to 31 December 2005 September 2005 30 June 2005* Income Interest income 27,307,521 28,394,099 16,231,405 Interest expense (23,306,345) (21,084,466) (9,330,907) Net interest income 4,001,176 7,309,633 6,900,498 Realised (loss)/gain on sale of available for sale investments (21,656,763) 5,313 - Expenses Management, custodian and administration fees 942,468 2,018,214 937,308 Other operating expenses 185,913 166,079 120,163 Total expenses 1,128,381 2,184,293 1,057,471 Net (loss)/income for the period (18,783,968) 5,130,653 5,843,027 Net (loss)/income per share for the period (0.68) 0.18 0.21 Dividend declared per share for the period 0.10 0.18 0.20 * commencement of operations 08 April 2005 Prodesse Investment Limited Cash Flow Statement (unaudited) from 01 October 2005 to 31 December 2005, 01 July 2005 to 30 September 2005, and 08 April 2005 to 30 June 2005. 01 October 2005 to 01 July 2005 to 30 08 April 2005 to 31 December 2005 September 2005 30 June 2005* US$ US$ US$ Net cash inflow/(outflow) from operating 11,012,705 5,853,758 (270,579,400) activities (Note 1) Financing Net proceeds from offering - - 270,585,399 Offering Cost (125,635) Own shares acquired (5,873,559) - - Dividends paid (5,146,209) (5,722,000) - Net cash (outflow)/inflow from financing (11,019,768) (5,847,635) 270,585,399 (Decrease)/increase in cash and cash equivalents (7,063) 6,123 5,999 Cash and cash equivalents, at beginning of period 12,122 5,999 - Cash and cash equivalents, at end of period 5,059 12,122 5,999 Note 1 Net (loss)/income for the period (18,783,968) 5,130,653 5,843,027 Net amortisation of premiums on available for sale investments 3,123,879 2,655,987 712,000 Realised loss/(gain) on sale of available for sale investments 21,656,763 (5,313) - Purchases of investments (55,678,354) (453,612,318) (2,542,805,196) Proceeds from sale of investments 1,253,691,106 5,666,667 - Principal paydowns 218,359,667 214,429,874 65,484,813 Borrowings under reverse repurchase agreements 6,231,988,000 7,229,892,000 5,090,251,000 Repayments under reverse repurchase agreements (7,646,290,000) (7,000,275,000) (2,883,499,000) Receivables Decrease/(increase) in accrued income receivable 5,554,800 (1,364,146) (10,256,189) Decrease/(increase) in prepaid expenses 31,894 31,459 (98,256) Liabilities (Decrease)/increase in accrued interest expense (2,042,728) 2,792,308 2,759,461 (Decrease)/increase in accrued expenses payable (598,354) 511,587 1,028,940 Net cash inflow/(outflow) from operating activities 11,012,705 5,853,758 (270,579,400) * commencement of operations 08 April 2005 Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) from 08 April 2005 to 31 December 2005 Share Capital Share premium Distributable capital redemption reserve reserve US$ US$ US$ US$ Balance at 08 April 2005 - - - - Net income for the period - - - - Available for sale investments: Unrealised loss on revaluation taken to Equity - - - - Total recognised income and expenses for the period - - - - Issuance of shares 286,100 - 285,813,900 - Offering costs - - (15,514,601) - Reclassification of share premium - - (220,299,299) 220,299,299 Balance at period ended 30 June 2005 286,100 - 50,000,000 220,299,299 Available for sale investments: Unrealised loss on revaluation taken to equity - - - - Transfer of realised gains to - - - - capital reserve Net income for the period - - - - Total recognised income and expenses - - - - for the period Offering cost - - (125,636) - Transfer to share premium account - - 125,636 (125,636) Dividend paid - - - - Balance at quarter ended 30 September 2005 286,100 - 50,000,000 220,173,663 Available for sale investments: Unrealised loss on revaluation - - - - taken to Equity Transfer of realised gain to - - - - capital reserve Net loss for the period - - - - Cash flow hedge reserve - - - - Total recognised income and expenses - - - - for the period Dividend paid - - - - Buyback of shares (8,594) 8,594 - (5,873,559) Balance at quarter ended 31 December 2005 277,506 8,594 50,000,000 214,300,104 Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) from 08 April 2005 to 31 December 2005 Capital Reserve - Revaluation Accumulated Cash flow Total realised gain/ reserve - profits hedge (loss) on sales Unrealised gain of available for /(loss) on reserve sale investments available for sale investments US$ US$ US$ US$ US$ Balance at 08 April 2005 - - - - - Net income for the period - - 5,843,027 - 5,843,027 Available for sale investments: Unrealised loss on revaluation taken to Equity - (2,843,493) - (2,843,493) Total recognised income and expenses for the period - (2,843,493) 5,843,027 - 2,999,534 Issuance of shares - - - - 286,100,000 Offering costs - - - - (15,514,601) Reclassification of share premium - - - - - Balance at period ended 30 June 2005 - ( 2,843,493) 5,843,027 - 273,584,933 Available for sale investments: Unrealised loss on revaluation taken to equity - (14,540,955) - - (14,540,955) Transfer of realised gains to 5,313 - (5,313) - - capital reserve Net income for the period - - 5,130,653 - 5,130,653 Total recognised income and expenses 5,313 (14,540,955) 5,125,340 (9,410,302) for the period Offering cost - - - - (125,636) Transfer to share premium account - - - - - Dividend paid - - (5,722,000) - (5,722,000) Balance at quarter ended 30 September 2005 5,313 (17,384,448) 5,246,367 - 258,326,995 Available for sale investments: Unrealised loss on revaluation taken to Equity - 3,444,057 - - 3,444,057 Transfer of realised gain to capital reserve (21,656,763) - 21,656,763 - - Net loss for the period - - (18,783,968) - (18,783,968) Cash flow hedge reserve - - - (19,500) (19,500) Total recognised income and expenses for the period (21,656,763) 3,444,057 2,872,795 (19,500) (15,359,411) Dividend paid - - (5,146,210) (5,146,210) Buyback of shares - - - - (5,873,559) Balance at quarter ended 31 December 2005 (21,651,450) (13,940,391) 2,972,952 (19,500) 231,947,815 Prodesse Investment Limited Footnotes to the quarterly report ended 31 December 2005 1. Organisation and Investment Objective 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 actual or 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 The financial statements of the Company have been 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'), together with applicable legal and regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing Authority and the Channel Islands Stock Exchange. The financial statements have been prepared on the historical cost basis except for the revaluation of certain financial instruments. A summary of the significant principal accounting policies are set out below. The preparation of financial statements in conformity with International Financial Reporting Standards 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. (a) Government Sponsored Enterprises: The Company invests in securities issued by the Government National Mortgage Association ('Ginnie Mae'), a US Government corporation and US Government sponsored entities such as the Federal Home Loan Mortgage Corporation ('Freddie Mac') , Federal National Mortgage Association ('Fannie Mae') and the Federal Home Loan Banks ('FHLB'). Freddie Mac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are not Companies 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, and 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. The Investment Manager uses internally generated pricing tools and matrices that take into account such factors as duration, convexity, interest rate levels and the experience of its portfolio managers. External information is then compared to internally generated tools to compare pricing reasonableness. (b) Security Transactions and Investment Income: Security transactions are recorded on 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. Realised gains or losses on paydowns are reclassified from gains to income. (c) 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. 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 in the accompanying balance sheet is recorded as a separate line item. Securities sold subject to repurchase agreement are retained in the financial statements as available for sale securities and the counter party liability is included in liabilities under repurchase agreements. (d) When-Issued/Delayed Delivery Securities: The Company may purchase or sell securities on a when-issued or delayed delivery basis, including 'TBA' securities. TBA securities are mortgage-backed securities for which details about the underlying mortgages have not yet been announced. Securities traded on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the purchaser prior to delivery. Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price at the time of delivery may be lower or higher than the agreed upon price, in which case an unrealised loss may be incurred. The Company did not transact in when-issued or delayed delivery securities during the period from 8 April 2005 (inception) to 31 December 2005. (e) 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. (f) Cash and cash equivalents: include amounts held in interest bearing overnight accounts. (g) 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 in the income statement and the cost basis of the Investment Securities is adjusted. There were no Investment Securities that were considered to be other than temporarily impaired at 31 December 2005. 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. (h) 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. It does not use derivative instruments for speculative purposes The use of financial derivatives is governed by the Company's policies approved by the Board of Directors. Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows arerecognised directly in equity and any ineffective portion is recognised immediately in the income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated or exercised or no longer qualifies for hedge accounting. (i) 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. Investment Management, Accounting and Administration, and Custodian Fees Fixed Income Discount Advisory Company ('FIDAC'), a Delaware corporation, serves as the Investment Manager to the Company. Pursuant to the terms of the Investment Management Agreement, the Investment Manager is paid periodic fees, quarterly in arrears, at a rate equivalent to 0.2 per cent. per annum of the value of the gross assets of the Company at the end of the quarter. The Bank of New York serves as the Company's custodian and is paid a monthly accounting and administration fee, exclusive of out-of-pocket expenses. The Custodian is entitled to receive a fee at a rate equivalent to 1 basis point per annum on the value of the gross assets of the Company (plus transaction charges). RBSI Fund Services (Guernsey) Limited serves as the Company's administrator. The Administrator is entitled to a fee calculated on the value of the gross assets of the Company of 0.04 per cent, per annum on the first US$400 million of value of gross assets, 0.0225 per cent. per annum on the next US$1.6 billion of value of the gross assets and 0.01 per cent. per annum on any value of the gross assets in excess of US$2 billion payable monthly in arrears (subject to a minimum annual fee of US$250,000). 4. Risk Factors The market price of the Ordinary Shares and the income derived from them can fluctuate and there is no guarantee that the market price of Ordinary Shares in the Company will reflect fully their underlying Net Asset Value. All or substantially all of the Company's assets are denominated in US dollars. The Company accounts for its assets and determines the value of its Shares and of dividends thereon in US dollars. For investors resident outside the United States or whose functional currency is not the US dollar, fluctuations in the value of the US dollar may affect the value of their investment. The Directors do not hedge any foreign exchange risk. The Company is subject to risks associated with change in interest rates. An increase in the interest payments on the Company's financings relative to the interest earned on its mortgage-backed securities may adversely affect profitability. The Company enters into reverse repurchase agreements in order to increase the amount of capital available for investment. The use of leverage has the potential to magnify the gains or the losses on the Company's investments. The Company may invest in, or sell short, various interest rate derivative instruments and futures contracts. Should interest rates move unexpectedly, the Company may not achieve the anticipated benefits of the hedging instruments and may realise a loss. Further, the use of such derivative instruments involves the risk of imperfect correlation in movements in the price of the instruments, interest rates and the underlying hedged assets. The Company may transact in various financial instruments including futures contracts, swap contracts and options. With these financial instruments, the Company is exposed to market risk in excess of the amounts recorded in the statement of assets, liabilities and capital. Further, the Company is exposed to credit risk from potential counterparty nonperformance. At the balance sheet date, credit risk is limited to amounts recorded in the balance sheet. 5. Reverse Repurchase Agreements At 31 December 2005 the aggregate value of securities pledged by the Company under reverse repurchase agreements exceeds the liability under such agreements by approximately US$30,662,010 (approximately 103% of such liability). The interest rates on the reverse repurchase agreements at 31 December 2005 range from 4.28% to 4.35% and have maturity dates ranging from one day to one month. 6. Mortgage-Backed Securities Gross Gross Estimated Unrealised Unrealised Fair Value At 31 December 2005 Amortised Gain Loss Cost (US dollars) Adjustable rate 882,031,839 2,425 (8,061,814) 873,972,450 Fixed rate 537,321,272 2,134 (5,883,136) 531,440,270 Total 1,419,353,111 4,559 (13,944,950) 1,405,412,720 Gross Unrealised Gain Gross Unrealised Estimated Fair Loss Value At 30 September 2005 Amortised Cost (US dollars) Adjustable rate 1,844,461,670 2,475 (10,481,608) 1,833,982,537 Fixed rate 861,099,495 1,780 (6,907,095) 854,194,180 Total 2,705,561,165 4,255 (17,388,703) 2,688,176,717 7. Interest Rate Swaps When the Company enters into a Swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the one month 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. During the quarter ended 31 December 2005, the Company entered into a 5-year interest rate swap agreement of US$65 million notional amount in which the Company will pay a rate of 4.83% and receive 1 month LIBOR on a monthly basis. The market value of the swap at 31 December 2005 was negative 19,500. This information is provided by RNS The company news service from the London Stock Exchange

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