Third Quarter Results

RNS Number : 3506H

Prodesse Investment Limited

04 November 2008

 

Prodesse Investment Limited

Results for the Quarter Ended 30 September 2008

Highlights for third quarter 2008:

• Core net income1 per average share2 of US$0.24

• Dividend per share of US$0.23 from net interest income - equates to an annualised dividend yield of  13.97%3 (FTSE All Share annualised dividend yield of 4.61%4)

• Net income per average share of US$0.25

• NAV per share of US$6.62 (30 June 2008: US$6.99)

• Portfolio remains 100% implied 'AAA' mortgage-backed securities.

Ronald Kazel, Managing Director of FIDAC, Investment Manager to Prodesse, commented: 'In a market that has been setting records for volatility and headlines, the third quarter of 2008 has been historic. Of all the events, perhaps the two most significant for Prodesse are the affirmation of the US government's role as the backstop of Fannie Mae and Freddie Mac and the massive and coordinated global effort by government finance ministers and central banks to support the world's financial institutions and facilitate liquidity and credit flows. Uncertainty and volatility still remain, but we believe that as the combination of these efforts takes hold in the marketplace, Prodesse's portfolio should benefit.'

Financial Highlights	Q3 2008	Q2 2008	Q1 2008	Q4 2007	Q3 2007
	$US
Dividend per share	0.23	0.23	0.22 5	0.21	0.16
Core net income per average share	0.24	0.24	0.27	0.21	0.17
Net income per average share	0.25	0.24	0.27	0.24	0.20
Net income	7.7m	7.5m	7.7m	6.7m	5.8m
Net asset value per share	6.62	6.99	6.91	7.70	7.556
	GBP Sterling7
Dividend per share	13p	12p	11p	11p	8p
Core net income per average share	13p	12p	14p	11p	8p
Net income per average share	14p	12p	14p	12p	10p
Net income	£4.3m	£3.8m	£3.8m	£3.4m	£2.8m
Net asset value per share	371.9p	351.1p	347.8p	388.0p	370.0p6

1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities.

2 The average share calculation is based on the sum of the shares for the period divided by the number of days in the period.

3 Based on annualisation of Q3 dividend, an exchange rate of 1.7801 US$ per Pound Sterling and a closing price of 370p on 30 September 2008. 

4 Based on closing share prices of the constituents of the FTSE All Share index on 30 September 2008 (JCF Datastream).

5 Disparity in dividend per share and core net income per average share relates to additional shares issued after quarter end 31 March 2008 which were eligible to receive the Q1 dividend.

6 After deducting dividends declared for the period.

7 Illustration is based upon an exchange rate of 1.7801, 1.9908, 1.9866, 1.9827 and 2.0405 US$ per Pound Sterling at 30 September 2008, 30 June 2008, 31 March 2008, 31 December 2007 and 28 September 2007 respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests only in US$ denominated assets which produce US$ income. Should shareholders choose to receive their dividends in GBP Sterling they may elect to do so.

Enquiries

Investor Relations

Rob Bailhache / Nick Henderson, Financial Dynamics 

Tel: [phone]

Company Secretary and Administrator

Sara Radford / Jean McMillan, BNP Paribas Fund Services (Guernsey) Limited

Tel: [phone]

About Prodesse

Prodesse Investment Limited is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company. The Company's investment policy is to provide net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed securities and the cost of repurchase agreements entered into to finance the acquisition of such residential mortgage-backed securities.

Conference Call

There will be a conference call to discuss the results at 10:00 UK time on Tuesday 4 November and a live audio webcast and presentation will be available via the Prodesse website, www.prodesse.co.uk.  The dial-in number for the conference call is [phone] and the passcode is 69234991.

Company performance

For the quarter ended 30 September 2008, Prodesse reported net income of US$7.7 million (quarter ended 30 June 2008: US$7.5 million) or US$ 0.25 per average share (quarter ended 30 June: US$0.24 per average share).  

Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities, of

US$7.5 million for the quarter ended 30 September 2008 (quarter ended 30 June 2008: US$7.5 million) or US$0.24 per average share (quarter ended 30 June 2008: US$0.24 per average share).  During the quarter the Company sold US$422.7 million in securities resulting in a net realised gain of US$197,000.

The Company delivered an annualised core return on average equity for the quarter ended 30 September 2008 of 14.24% (quarter ended 30 June 2008: 14.59%). For the quarter ended 30 September 2008, the annualised total return on average equity (RoAE) was 14.62% (quarter ended 30 June 2008: 14.58%).  

	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008	01 January 2008 to 31 March 2008	01 October 2007 to 31 December 2007	01 July 2007 to 30 September 2007
Core net income	US$7.5 million	US$7.5 million	US$7.7 million	US$6.0 million	US$4.9 million
Core net income per average share	US$0.24	US$0.24	US$0.27	US$0.21	US$0.17
Annualised core RoAE	14.24%	14.59%	15.00%	11.16%	9.07%
Reported net income	US$7.7 million	US$7.5 million	US$7.7 million	US$6.7 million	US$5.8 million
Net income per average share	US$0.25	US$0.24	US$0.27	US$0.24	US$0.20
Annualised RoAE	14.62%	14.58%	14.90%	12.51%	10.70%

Portfolio Performance

For the quarter ended 30 September 2008, the annualised yield on average assets, which is calculated based on the annualised interest income for the period divided by the average value of interest earning assets for the period, was 5.21% (quarter ended 30 June 2008: 5.02%) and the annualised cost of funds on the average repurchase balance was 3.73% (quarter ended 30 June 2008: 3.66%) which equates to an interest rate spread of 1.48% (quarter ended 30 June 2008: 1.36%). At 30 September 2008, the annualised yield on assets was 5.10% and the annualised cost of funds with the effect of interest rate swaps on the repurchase balances was 3.89%, which equates to an interest rate spread of 1.21%. 

The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 10% for the quarter ended 30 September 2008 (quarter ended 30 June 2008: 17%). Prepayment speeds on mortgage-backed securities, as reflected by the CPR, vary according to the type of investment, changes in interest rates, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008	01 January 2008 to 31 March 2008	01 October 2007 to 31 December 2007	01 July 2007 to 30 September 2007
Annualised yield on average assets	5.21%	5.02%	5.57%	5.83%	5.90%
Annualised cost of funds on average repurchase balance	3.73%	3.66%	4.35%	4.95%	5.18%
Interest rate spread	1.48%	1.36%	1.22%	0.88%	0.72%
CPR	10%	17%	13%	10%	13%

As at 30 September 2008, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an implied 'AAA' rating. 

	30 September                    2008	30 June               2008	31 March                  2008	31 December                2007	30 September                    2007
Fixed-rate mortgage-backed securities	49%	55%	54%	63%	66%
Adjustable-rate mortgage-backed   securities	24%	19%	16%	15%	12%
Floating-rate mortgage-backed securities	27%	26%	30%	22%	22%

The decline in value of these securities is primarily due to market conditions and not the quality of the assets. All of the Mortgage-Backed Securities are 'AAA' rated or carry an implied 'AAA' rating. The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.

Borrowings

The ratio of average daily repurchase agreements to equity resulted in average leverage of the Company of 8.4:1 during the quarter ended 30 September 2008 (quarter ended 30 June 2008: 8.3:1). The leverage at 30 September 2008 was 8.2:1 (30 June 2008: 8.2:1). 

	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008	01 January 2008 to 31 March 2008	01 October 2007 to 31 December 2007	01 July 2007 to 30 September 2007
Average leverage for period	8.4:1	8.3:1	9.6:1	9.6:1	9.4:1
Leverage at period end	8.2:1	8.2:1	8.4:1	9.3:1	9.0:1

As of 30 September 2008, the Company had entered into interest rate swap agreements totalling US$601 million notional in which the Company will pay an average rate of 4.98% and receive 1 month LIBOR on a monthly basis. As of 30 June 2008, the Company had entered into interest rate swap agreements totalling US$560 million notional in which the Company would pay an average rate of 5.13% and receive 1 month LIBOR on a monthly basis.  

	30 September 2008	30 June 2008	31 March 2008	31 December 2007	30 September 2007
Notional amount	US$601 million	US$560 million	US$588 million	US$778 million	US$817 million
Average pay rate	4.98%	5.13%	5.14%	5.15%	5.16%
Average receive rate	2.79%	2.47%	2.84%	5.06%	5.57%

Capital

At 30 September 2008, the Company had a net asset value per share of US$6.39 (30 June 2008: US$6.76) after deducting the current dividends declared for the quarter of US$7,125,872 (for the quarter 30 June 2008: US$7,125,872). All of the Mortgage-Backed Securities are 'AAA' rated or carry an implied 'AAA' rating.

	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008	01 January 2008 to 31 March 2008	01 October 2007 to 31 December 2007	01 July 2007 to 30 September 2007
NAV per share	US$6.62	US$6.99	US$6.91	US$7.70	US$7.551
Dividends declared for the period	US$7,125,872	US$7,125,872	US$6,816,051	US$5,914,766	US$4,506,488
NAV per share after deducting dividends declared	US$6.39	US$6.76	US$6.67	US$7.49	US$7.55

1After deducting dividends declared for the period. Dividends for the third quarter were declared 20 September 2007.  

Dividend

The Company has declared a dividend for the quarter ended 30 September 2008 of US$0.23 per share that is payable on 28 November 2008 to holders on the register on 14 November 2008. Dividends are calculated and paid in US dollars.  

	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008	01 January 2008 to 31 March 2008	01 October 2007 to 31 December 2007	01 July 2007 to 30 September 2007
Core net income per average share	US$0.24	US$0.24	US$0.27	US$0.21	US$0.17
Net income per average share	US$0.25	US$0.24	US$0.27	US$0.24	US$0.20
Dividends per share	US$0.23	US$0.23	US$0.22	US$0.21	US$0.16

Outlook

'Market conditions worsened in the third quarter of 2008,' said Kristopher Konrad, Managing Director and Co-head of Portfolio Management for Prodesse's Investment Manager, FIDAC. 'As investors made a flight to quality and safety, even Agency MBS spreads widened, which put pressure on asset values. The elevated level of LIBOR resulted in a slightly higher cost of funds, but our floating rate assets also benefited and offset that increase. Leverage has been trending lower as we manage through this period of volatility.  In these circumstances, we believe Prodesse's barbell of various types of Agency mortgage-backed securities will enable the company to perform. After taking into account the effect of interest rate swaps, the company's portfolio consists of 14% fixed-rate, 62% floating-rate and 24% adjustable-rate Agency mortgage-backed securities.'

The current weakness in the mortgage market could adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with additional financing. This could potentially increase our financing costs and reduce liquidity. If one or more major market participants fails it could negatively impact the marketability of all fixed income securities, including government mortgage securities, and this could negatively impact the value of the securities in our portfolio, thus reducing its net book value. Furthermore, if many of our lenders are unwilling or unable to provide us with additional financing, we could be forced to sell our Investment Securities at an inopportune time when prices are depressed. Even with the current situation in the mortgage sector we do not anticipate having difficulty converting our assets to cash or extending financing term, due to the fact that our investment securities have an actual or implied 'AAA' rating and principal payment is guaranteed FHLMC, FNMA, or GNMA.

Subsequent Events

Prodesse has received notice from a substantial shareholder that the Board should requisition an EGM. The object of the EGM is to propose a) the removal of a number of the Company's directors and b) for the Board to consider changing the investment policy of the Company to realise the existing portfolio of investments in an immediate, but orderly, fashion to return cash to shareholders. The directors of Prodesse are opposed to both of these proposals on the grounds that it would disadvantage shareholders and crystallise unrealised losses which will not otherwise be incurred given the principal amounts of securities are US Government backed. 

The quarterly financial information does not include any estimate of the costs of realisation nor any adjustment to the value of the investments or other assets of the Company which may result from the decision to realise the Company's portfolio. It is not possible to quantify the value of these uncertainties at this time.

For further details please refer to the press release filed on 4 November 2008.  

Additionally, a press release was filed on 4 November 2008 to report the Net Asset Value as of 31 October 2008 of US$5.55.  The Net Asset Value has declined by 16% from the Net Asset Value of US$6.62 at September 30, 2008. The decline in the value of the Company's securities is primarily due to current market conditions including the volatility of movements in LIBOR, and not the quality of the assets.  All of the Mortgage-Backed Securities are 'AAA' rated or carry an implied 'AAA' rating and the principal is US Government backed..  The Company's investment strategy is to generate net income 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.  Consequently, market value fluctuation seen in the Net Asset Value of the Company is not expected to affect the Company's investment strategy and intention to hold assets to maturity to recoup the principal amounts guaranteed by the US Government.

Prodesse Investment Limited
Balance Sheet
	Note	30-Sep-08 US$'000 (Unaudited)	30-Jun-08 US$'000 (Unaudited)	31-Mar-08 US$'000 (Unaudited)	31-Dec-071 US$'000	30-Sep-07 US $'000  (Unaudited)
ASSETS
Current assets
Available for sale investments	3	1,725,038	2,005,510	1,802,505	2,280,046	2,227,999
Accrued income receivable		8,722	8,988	7,878	10,541	10,131
Receivable for principal paydowns		2,168	3,556	3,583	2,839	2,977
Receivable for securities sold		183,193	-	52,668	-	-
Cash and cash equivalents		4,956	89	31	48	205
Prepaid expenses		206	329	6	77	154
Total assets		1,924,283	2,018,472	1,866,671	2,293,551	2,241,466
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
30,982,050 at 30 September 2008, 30 June 2008, 28,165,550 at 31 March 2008, 31 December 2007 and 30 September 2007 at US$ 0.01		310	310	282	282	282
Capital redemption reserve		30	30	30	30	30
Share premium		91,560	91,560	71,680	71,680	71,680
Distributable reserve		141,513	141,513	141,513	141,513	141,513
Accumulated profits		10,088	9,708	9,022	7,220	1,229
Capital reserve-Realised gain on available for sale investments and interest rate swaps		1,737	1,540	1,546	1,600	875
Revaluation reserve-Unrealised (loss)/gain on available for sale investments		(23,276)	(10,194)	3,800	16,411	5,578
Cash flow hedge reserve	4	(16,961)	(17,857)	(33,168)	(21,966)	(8,486)
Total shareholders' equity		205,001	216,610	194,705	216,770	212,701
Current liabilities
Securities purchased payable		6,582	-	-	31,882	92,122
Repurchase agreements	5	1,687,721	1,776,586	1,628,689	2,011,384	1,915,579
Accrued interest expense		6,030	5,639	5,523	9,823	6,475
Accrued expenses payable		1,988	1,780	1,586	1,726	1,597
Swap termination expense payable		-	-	3,000	-	-
Dividend payable		-	-	-	-	4,506
Hedging instruments	4	16,961	17,857	33,168	21,966	8,486
Total liabilities		1,719,282	1,801,862	1,671,966	2,076,781	2,028,765
Total equity and liabilities		1,924,283	2,018,472	1,866,671	2,293,551	2,241,466
Net Assets		205,001	216,610	194,705	216,770	212,701
Net Asset Value per share	6	6.62	6.99	6.91	7.70	7.55

1Derived from 2007 audited financial statements.

Prodesse Investment Limited
(unaudited) Income Statement
	01 July 2008 to  30 September2008	01 April 2008 to  30 June 2008	01 January 2008 to  31 March 2008	01 October2007 to  31 December 2007	01 July 2007 to  30 September2007
	US $'000	US $'000	US $'000	US $'000	US $'000
Income
Interest income	24,979	24,761	31,451	33,048	32,604
Interest expense	(15,997)	(15,753)	(22,302)	(25,381)	(26,087)
Net interest income	8,982	9,008	9,149	7,667	6,517
Net realised profit/(loss) on sale of available for sale investments and termination of interest rate swaps	197	(6)	(54)	725	875
Total income	9,179	9,002	9,095	8,392	7,392
Expenses
Management, custodian and  administration fees	1,157	1,192	1,124	1,362	1,301
Other operating expenses	319	313	308	314	322
Total expenses	1,476	1,505	1,432	1,676	1,623
Net income for the period	7,703	7,497	7,663	6,716	5,769
Net income per average share for the period	0.25	0.24	0.27	0.24	0.20
Dividend declared per share for the period	0.23	0.23	0.22	0.21	0.16
Average shares   outstanding	30,982,050	30,672,545	28,165,550	28,165,550	28,165,550

Prodesse Investment Limited
(unaudited) Cash Flow Statement
	01 July 2008 to      30 September                    2008		01 April 2008 to                  30 June                       2008	01 January 2008 to  31 March 2008	01October2007 to         31 December                  2007	01 July 2007  to 30 September 2007
	US $'000		US $'000	US $'000	US $'000	US $'000
Net cash  inflow/(outflow) from operating activities (Note 1)	100,858		(160,930)	388,593	(91,456)	119,203
Financing
Borrowings under reverse repurchase agreements	4,250,132		4,363,375	5,683,953	4,993,525	5,772,535
Repayments under reverse repurchase agreements	(4,338,997)		(4,215,478)	(6,066,648)	(4,897,720)	(5,887,038)
New shares issued	-		20,525	-	-	-
Issue costs	-		(617)	-	-	-
Dividends paid	(7,126)		(6,817)	(5,915)	(4,506)	(4,506)
Net cash (outflow)/inflow from financing activities	(95,991)		160,988	(388,610)	91,299	(119,009)
Increase/(decrease) in cash and cash equivalents	4,867		58	(17)	(157)	194
Cash and cash equivalents, at beginning of period	89		31	48	205	11
Cash and cash equivalents, at end of period	4,956		89	31	48	205
Note 1
Net profit for the period	7,703		7,497	7,663	6,716	5,769
Net accretion/amortisation of premiums on available for sale investments	542		559	(102)	180	139
Net realised (gain)/loss on sale of available for sale investments and termination of interest rate swaps	(197)		6	54	(725)	(875)
Purchases of investments	(196,543)		(310,025)	(210,825)	(215,290)	(93,321)
Termination of swap	-		-	(6,775)	-	-
Proceeds from sale of investments	241,012		49,229	513,853	53,110	108,812
Principal paydowns	47,353		92,927	86,431	61,409	98,658
Receivables
Decrease/(increase) in accrued income receivable	266		(1,110)	2,663	(410)	105
Decrease/(increase) in prepaid expenses	123		(323)	71	77	82
Liabilities
Increase/(decrease) in accrued interest expense	391		116	(4,300)	3,348	(231)
Increase/(decrease) in accrued expenses payable	208		194	(140)	129	65
Net cash  inflow/(outflow) from operating activities	100,858		(160,930)	388,593	(91,456)	119,203

Prodesse Investment Limited

Statement of Changes in Shareholders' Equity

(unaudited) 01 July 2008 to 30 September 2008

	Share capital	Capital redemption reserve	Share premium	Distributable reserve	Capital Reserve - realised gain on sales and impairment of available for sale investments
	US $’000	US $’000	US $’000	US $’000	US $’000
Balance at 1 July 2008	310	30	91,560	141,513	1,540
Net income for the quarter	-	-	-	-	-
Hedge reserve revalued	-	-	-	-	-
Transfer of realised gain to capital reserve	-	-	-	-	197
Movement in unrealised gain on revaluation taken to equity	-	-	-	-	-
Realised gains and losses	-	-	-	-	-
Total recognised income and expense	-	-	-	-	197
Dividends paid	-	-	-	-	-
Balance at 30 September 2008	310	30	91,560	141,513	1,737

 

 

	Revaluation reserve	Accumulated profits	Cash flow hedge          reserve	Total
	US $’000	US $’000	US $’000	US $’000
Balance at 1 July 2008	(10,194)	9,708	(17,857)	216,610
Net income for the quarter	-	7,703	-	7,703
Hedge reserve revalued	-	-	896	896
Transfer of realised gain to capital reserve		(197)	-	-
Movement in unrealised gain on revaluation taken to equity	(13,279)	-	-	(13,279)
Realised gains and losses	197	-	-	197
Total recognised income and expense	(13,082)	7,506	896	(4,483)
Dividends paid	-	(7,126)	-	(7,126)
Balance at 30 September 2008	(23,276)	10,088	(16,961)	205,001

 

Notes to the financial information

1. General Information

Prodesse Investment Limited (the 'Company') 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 of implied 'AAA' rated mortgage-backed securities on a leveraged basis. The Company's investment strategy is to generate net income for distribution from the spread between the interest income from the portfolio and the cost of borrowing pursuant to reverse repurchase agreements used to finance the portfolio. The Investment Manager will seek to enhance returns through what it considers an appropriate amount of leverage.

2. Significant Accounting Policies

Basis of Accounting

This quarterly press release has been prepared using accounting policies consistent with International Financial Reporting Standards ('IFRS').  The same accounting policies, presentation and methods of computation are followed in the quarterly press release as applied in the Company's latest annual audited financial statements.

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 the Government National Mortgage Association ('Ginnie Mae'), a US Government Corporation. 

On September 6, 2008, the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets. 

The payment of principal and interest on the debt of FHLB is backed by that agency, the debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae are backed by those respective agencies, which are operating under the conservatorship of FHFA, 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.  Expenses incidental to the acquisition of available for sale investments are included within the cost of that investment.

Realised and Unrealised Gains and Losses on Investments

Unrealised gains or losses arising on the revaluation of investments are included in equity. Unrealised losses on investment securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognised as an impairment loss in the income statement and the cost basis of the mortgage-backed securities is adjusted. The impairment loss is then transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.

Realised gains or losses arising on the sale of investments are recognised in the income statement but will be transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.

When-Issued/Delayed Securities

The Company may purchase or sell securities on a when-issued or delayed delivery basis, including 'TBA' securities. TBA Securities are mortgage-backed securities for which details about the underlying mortgages have not yet been announced. Securities traded on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the purchaser prior to delivery. 

Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price at the time of delivery may be lower or higher than the agreed upon price, in which case an unrealised loss may be incurred.

Security Transactions and Investment Income Recognition

Security transactions are recorded on the trade date. Realised and unrealised gains and losses are calculated based on specific identified cost. Interest income is recorded as earned. Interest income and expense includes accretion and amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of the effective interest method.  

Other Receivables

Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

Cash and Cash Equivalents

Cash includes amounts held in interest bearing overnight accounts.  

Financial Liabilities and Equity

Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs.

Other Accruals and Payables

Other accruals and payables are not interest-bearing and are stated at their nominal value.

Repurchase Agreements

The Company enters into repurchase agreements with qualified third party financial institutions to finance its investment in mortgage-backed securities. The agreements are secured by the value (104% of the repo principal) 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 repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. When the Company enters into a 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 repurchase agreement.

Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the repurchase agreements. Accrued interest is recorded as a separate line item.

Securities sold subject to repurchase agreements are retained in the financial statements as available for sale securities and the counterparty liability is included in liabilities under repurchase agreements.

Derivative Financial Instruments and Hedge Accounting

The Company's activities expose it primarily to the financial risks associated with changes in interest rates. The Company uses interest rate swap contracts to hedge these exposures. The Company does not use derivative financial instruments for speculative purposes.

The use of financial derivatives is governed by the Company's policies approved by the board of directors, which provide written principles on the use of financial derivatives.

Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. The amount in equity is released to income when the forecast transaction impacts profit or loss.

Hedge accounting is discontinued when the hedging instrument expires or is sold, terminated, or exercised, or no longer qualified for hedge accounting. At that time, any cumulative gain or loss on the hedging instrument recognised in equity for cash flow hedges is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss in the period.

Taxes

The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600 (estimated US$1,068).

Set-up and Issue Costs

The preliminary expenses of the Company directly attributable to the equity transaction and costs associated with the establishment of the Company that would otherwise have been avoided are taken to the share premium account.

Costs directly attributable to the issue of Ordinary Shares are expensed against the share premium account as allowed by with The Companies (Guernsey) Law, 2008.

3. Available for Sale Investments

At 30 September 2008	Amortised Cost	Gross Unrealised Gain	Gross  Unrealised Loss	Estimated  Fair Value
	US $'000	US $'000	US $'000	US $'000
Adjustable rate	899,371	888	(26,923)	873,336
Fixed rate	848,943	4,992	(2,233)	851,702
Total	1,748,314	5,880	(29,156)	1,725,038

As at 30 September 2008, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry a 'AAA' or implied 'AAA' rating. During the quarter ended 30 September 2008, 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 fair 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. On September 6, 2008, the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.

Adjustable-rate and floating-rate mortgage-backed securities in which the Company may invest include pass-through mortgage-backed securities issued by the US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates on adjustable-rate and floating rate mortgage-backed securities are reset at periodic intervals to an increment over some predetermined reference interest rate. There are two main categories of reference rates: (i) those based on US Treasury securities and (ii) those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilised reference rates include the one-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile.

Adjustable-rate mortgages frequently have upper and lower limits on the interest rates to which a residential borrower may be subject (i) in any reset or adjustment interval and (ii) over the life of the loan. These upper and lower limits are commonly known as ''caps'' and ''floors'' respectively. 

The decline in value of these securities is primarily due to market conditions and not the quality of the assets. All of the Mortgage-Backed Securities are 'AAA' rated or carry an implied 'AAA' rating. The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.

4. Hedging Instruments 

The Company uses interest rate swaps to manage its exposure to interest rate movements.  When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate ('LIBOR'). The Company's swaps are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings.  

At 30 September 2008, the Company had interest rate swap agreements of US$601 million notional amount in which the Company will pay a weighted average rate of 4.98% and have a weighted average receive rate of 2.79%.  

5. Repurchase Agreements

At 30 September 2008 the aggregate value of securities pledged by the Company under repurchase agreements exceeds the liability under such agreements by approximately US$74.5million (approximately 4.42% of such liability). The interest rates on the repurchase agreements at 30 September 2008 range from 2.40% to 4.57% and have maturity dates ranging from 1 day to 1246 days.

The Company has entered into repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. These repurchase agreements totalled US$300 million.

6. Net Asset Value 

The net asset value per Ordinary Share is based on net assets at 30 September 2008 and on 30,982,050 Ordinary Shares, being the number of Ordinary Shares in issue at the period end.

At 30 September 2008, the reported net asset value per Ordinary Share (before excluding the dividend declared for the quarter ended 30 September 2008) is US$6.62

At 30 September 2008, the Company had a net asset value per Ordinary Share of US$6.39, after including the effect of the dividend declared for the quarter ended 30 September 2008 of US$7,125,872.  

7. Subsequent Events

Prodesse has received notice from a substantial shareholder that the Board should requisition an EGM. The object of the EGM is to propose a) the removal of a number of the Company's directors and b) for the Board to consider changing the investment policy of the Company to realise the existing portfolio of investments in an immediate, but orderly, fashion to return cash to shareholders. The directors of Prodesse are opposed to both of these proposals on the grounds that it would disadvantage shareholders and crystallise unrealised losses which will not otherwise be incurred given the principal amounts of securities are US Government backed. 

The quarterly financial information does not include any estimate of the costs of realisation nor any adjustment to the value of the investments or other assets of the Company which may result from the decision to realise the Company's portfolio. It is not possible to quantify the value of these uncertainties at this time.

For further details please refer to the press release filed on 4 November 2008.  

Additionally, a press release was filed on 4 November 2008 to report the Net Asset Value as of 31 October 2008 of US$5.55. The Net Asset Value has declined by 16% from the Net Asset Value of US$6.62 at September 30, 2008. The decline in the value of the Company's securities is primarily due to current market conditions including the volatility of movements in LIBOR, and not the quality of the assets.  All of the Mortgage-Backed Securities are 'AAA' rated or carry an implied 'AAA' rating and the principal is US Government backed..  The Company's investment strategy is to generate net income 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.  Consequently, market value fluctuation seen in the Net Asset Value of the Company is not expected to affect the Company's investment strategy and intention to hold assets to maturity to recoup the principal amounts guaranteed by the US Government.

 

END

 

 

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