1st Quarter Results

RNS Number : 0348E

Queen's Walk Investment Limited

23 September 2008

 



23 September 2008

Queen's Walk Investment Limited

Financial Results Announcement for the First Quarter Ended 30 June 2008

Queen's Walk Investment Limited announces net profits of €0.8 million and new investments

Queen's Walk Investment Limited (the 'Company'), the Guernsey incorporated investment company, has reported net profit of €0.8 million or €0.03 per ordinary share for the quarter ended 30 June 2008, compared to a loss of €17.1 million or -€0.56 per share in the previous quarter. 

The Company's cash position remained strong with approximately €35.9 million of cash on its balance sheet, up from €32.9 million as at 31 March 2008. Cash generation for the quarter was in line with forecasts with total cash proceeds recorded from the investment portfolio in the quarter of €12.3 million. 

Fair value write-downs of the Company's investment portfolio were significantly lower in the quarter totalling €4.1 million, compared with €22.1 million for the quarter ended 31 March 2008. The Company's net asset value at quarter end was €6.32 per share compared to €6.42 per share in the previous quarter.

On 12 August 2008, shareholders approved the Company's offer to repurchase approximately three million shares at €5 per share. The tender offer was accretive to shareholders in an amount of €0.15 per share.

The Board of Directors of the Company has declared a dividend of €0.15 per share for the quarter.

Queen's Walk exploiting ABS market dislocations with new investments

Subsequent to the quarter end, the Company has invested approximately €4.3 million in purchasing investment grade Asset Backed Securities ('ABS'). The current yield on these purchased bonds will satisfy the Company's investment profile with substantially lower risk. The purchased bonds are all performing and are not credit impaired. Given the dislocation and illiquidity in the ABS sector, the Company has been able to purchase these bonds at an unlevered cash on cash yield in excess of 13%. 

Tom Chandos, Chairman of the Company said: 'With our strong cash position and financing and the expertise of our manager, Queen's Walk is well positioned to take advantage of the opportunities that have arisen from the dislocation in the ABS market, through purchasing performing assets at substantial discounts.'

Highlights

 - The Company has made a profit of €0.8 million in the quarter compared to a loss of €17.1 million in the previous quarter.

 - The pro-forma NAV of the Company after taking into account the results of the tender offer is €6.47 per share.

 - Subsequent to the quarter end, the Company has made €4.3 million of new investments in asset-backed bonds which have an unlevered cash on cash yield in excess of 13%.

 - Cash balances remain strong and cash generation remains on track which will support continued share repurchases and new investments. 

 - The Board of Directors has declared an interim dividend for the quarter ended 30 June 2008 of €0.15 per share.

 Conference Call & Further Information

A conference call to review the Company's financial results for the quarter ended 30 June 2008 will take place at 10:30 AM London time on 23 September 2008. The conference call can be accessed by dialing [phone] ten minutes prior to the scheduled start of the call. A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com). 

The full financial results for the year ended 31 March 2008 are available in the Company's Annual Report which is also available on the Company's website.

A webcast of the conference call will also be available on a listen-only basis at www.queenswalkinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call.

For further information please contact:

Investor Relations: Caroline Villiers [phone]

About the Company

Queen's Walk Investment Limited (the 'Company') is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company invests primarily in a diversified portfolio of subordinated tranches of asset-backed securities, including the unrated 'equity' or 'first loss' residual income positions typically retained by the banks or other financial institutions which have originated the loan assets that collateralise a securitisation transaction. The Company makes such investments where its investment manager, Cheyne Capital Management (UK) LLP ('Cheyne Capital'), considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. 

The content of this announcement includes statements that are, or may be deemed to be, 'forward-looking statements'. These forward-looking statements can be identified by the use of forward-looking terminology, including the terms 'believes', 'forecasts', 'estimates', 'anticipates', 'expects', 'intends', 'considers', 'may', 'will' or 'should'. By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).

  Financial Highlights

	Revenue	Fair value gains and losses	Total Quarter ended 30 June 2008	Revenue	Fair value gains and losses	Total Quarter ended 31 March 2008
Operating Income	6,361,769	-	6,361,769	7,716,613	-	€7,716,613
Gains and losses on fair value through profit or loss financial instruments		(3,461,435)	(3,461,435)		(22,544,257)	€(22,544,257)
	6,361,769	(3,461,435)	2,900,334	7,716,613	(22,544,257)	€(14,827,644)
Operating Expenses	(1,393,926)		(1,393,926)	(1,565,714)		€(1,565,714)
Finance Costs	(659,328)		(659,328)	(678,756)		€(678,756)
Net profit / (loss)	4,308,515	(3,461,435)	847,080	5,472,143	(22,544,257)	€(17,072,114)
Total Assets			237,392,021			€243,291,581
Total Liabilities			46,156,012			€46,147,162
Equity Capital			191,236,009			€197,144,419
NAV per share			6.32			€6.42

Fourth Quarter Dividend Details

The Board of Directors of the Company has declared an interim dividend for the quarter ended 30 June 2008 of €0.15 per share payable on 24 October 2008 to shareholders of record on 3 October 2008.

Portfolio Review - Cash flows in line with expectations

The portfolio's ability to generate cash remains strong with total cash proceeds of approximately €12.3 million received in the quarter ended 30 June 2008 compared to €16.6 million received in the previous quarter. Cash flows from the UK, European and SME investments were in line with expectations. The absolute fall in the total cash received, reflects a smaller overall portfolio due to the expected amortisation of the Company's assets, and the expected fluctuation in the timing of cash flows generated by the assets. 

The Company's investment portfolio consists largely of investments with exposure to the UK and European mortgage markets and to the European SME sector. The Company also has exposure to the US leveraged loan market through a residual investment in a CLO ('Collateralised Loan Obligation') which accounts for 1.0% of the investment portfolio. Assets with exposure to the US sub-prime market, directly or indirectly, account for approximately 0.01% of the investment portfolio. 

The Company's net leverage has decreased to 4.8% (1) as at 30 June 2008 from 6.2% as at 31 March 2008. The Company's net indebtedness as at 30 June 2008 was €9.2 (2) million compared to net indebtedness of €12.2 million as at 31 March 2008.  The Company has not increased its borrowings since the quarter end.

(1)Net leverage calculated as total borrowings less available cash balances of €31.3 million (cash being net of the 31 March 2008 dividend payment which settled on 18 July 2008) divided by Equity Capital.

(2) Net indebtedness calculated as total borrowing less available cash balances of €31.3 million (cash being net of the 31 March 2008 dividend payment which settled on 18 July 2008).

A breakdown of the Company's investment portfolio by jurisdiction (by reference to underlying asset originator) is set out below. Percentages for each asset class are in relation to the value of the Company's investment portfolio excluding cash.  

Queen's Walk Portfolio Breakdown by Jurisdiction as at 31 March 2008
UK	30.6%
US	0.04%
Holland	6.7%
CDO	1.2%
Germany	17.9%
Italy	12.9%
Portugal	30.7%
Total (€mn)	207.1

Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2008
UK	28.3%
US	0.0%
Holland	6.8%
CDO	1.0%
Germany	18.6%
Italy	13.9%
Portugal	31.3%
Total (€mn)	197.5

A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Percentages for each asset class are in relation to the value of the Company's investment portfolio excluding cash.

Queen's Walk Portfolio Breakdown by Asset Type as at 31 March 2008
NearPrime	15.8%
SubPrime	13.6%
CDO	1.2%
SME	24.6%
Prime	44.9%
Total (€mn)	207.1

Queen's Walk Portfolio Breakdown by Asset Type as at 30 June 2008
NearPrime	14.7%
SubPrime	12.6%
CDO	1.0%
SME	25.5%
Prime	46.2%
Total (€mn)	197.5

Investment Portfolio 

European Mortgage Investments (37.6% of GAV)

In general, the European mortgage residual investments have performed satisfactorily. However, in the past two quarters the sector-wide themes of increasing arrears and slower prepayments are being echoed in the portfolio of Portuguese mortgage residuals. 

The Company's portfolio of Portuguese mortgage investments are predominantly collateralised by prime mortgages with more than three years of seasoning. However, recent increases in Euribor rates, higher inflation and slower economic growth have increased the arrears and default rates in the portfolio. The increase in arrears and default rates have been provided for in the Company's cash flow forecasts. 

The slowdown in the Portuguese mortgage market has also started to cause prepayment rates to slow. The Company has lowered its prepayment rate assumption on one of its five Portuguese mortgage investments and will look for evidence of further slowing over the next quarter before lowering prepayment rate assumptions across the entire portfolio. Generally the reduction in prepayments is a positive development for the Company, as it increases the total amount of cashflows expected to be received over the life of the asset.

The Company's largest investment, Sestante 1, also performed satisfactorily. The junior bonds in the securitisation were upgraded by Fitch in August 2008 and remain on positive outlook watch. Prepayment rates reached 19% in the first quarter, well below our long-term forecast prepayment rate of 28%.

UK Mortgage Investments (23.5% of GAV)

The Company's UK mortgage portfolio continued to be highly cash generative, contributing 57% of the total cash proceeds recorded although making up 28% of the investment portfolio. 

During the past quarter, the UK housing market has deteriorated substantially. As at 31 August 2008, house prices have fallen by approximately 12.8% from the peak as at 31 August 2007. In addition, gross mortgage lending volumes have fallen to their lowest level since 1999. The Company has anticipated these changes and, where possible, has tried to hedge against these negative trends. It has also factored these conditions into its cash flow forecasts. 

In October 2007, the Company purchased €28 million notional of two-year put options on the Halifax house price index (3) with a strike price of 90% of the September 2007 Halifax House Price Non-Seasonally Adjusted Index level. €14 million notional of the put option was purchased from Lehman Brothers International (Europe) and the remainder from Credit Suisse International. Please refer to the Company's disclosure on the Lehman Brothers Exposure on page 7 for further information.  If market forecasts for house price falls of 25% in the UK are realised, the expiry value of the put option purchased from Credit Suisse will be accretive to NAV by approximately €0.08 per share.   

As expected, the slow down in the UK mortgage and housing markets has caused an increase in default rates and a slowdown in prepayment rates. For the quarter ended 31 March 2008, the cash flow forecasts for the UK residual portfolio incorporated higher default rates but not lower prepayment rates. However, for the quarter ended 30 June 2008, our cash flow forecasts had been updated to reflect still higher default rates and lower prepayment rates. 

In the quarter ended 30 June 2008 the Company announced it was in discussions with mortgage originators in relation to loans whose quality fell short of the descriptions and warranties in documents accompanying the actual securitisation. Our discussions with mortgage originators and securitisation trustees are ongoing and reflect a broader issue with respect to the underwriting standards of the UK non-conforming mortgage market. Addressing this issue, with support from a broad base of mortgage bondholders, will be an important step towards rebuilding confidence in the quality of mortgages and in the securitisation market. 

(3) Based on the Halifax All House Non Seasonally Adjusted House Prime Index

The UK Government's recent announcement to waive stamp duty for house purchases less than £175,000 is a positive development for the UK residual portfolio. The removal of the stamp duty should support prices at the lower end of the house price market which is where the majority of non-conforming borrowers purchase their homes. For example, the average house price in the Newgate 06-1 portfolio at the time loans were originated was approximately £135,000. 

SME Investments (21.2% of GAV)

SME assets continued to perform well with cumulative default rates on the underlying asset pools better than, or inline with, expectations.

The Company has seen no significant deterioration in the performance of residuals with exposure to the Spanish economies, with the Eirles Three Limited (236B) residual performing substantially better than expected with actual defaults of 13bps compared to expected defaults of 236 bps. 

CDO Investments (0.9% of GAV)

CLO Investments I is a residual portfolio of AA- to BBB- rated US CLO bonds. This residual has performed better than expected and continues to benefit from upgrades of the underlying bond portfolio. The cash generative ability of this residual investment remains positive and is in line with expectations. However, the value of CLO Investments I has been depressed by a high market discount rate of approximately 65% applied by market participants. It is expected that the residual will recover its full value through the course of its investment period. 

The Company holds residual positions in two CDOs which are exposed to US mortgage assets. The value of these investments has been written-off to less than 0.01% of GAV. 

US Mortgage Investment (0.01% of GAV)

The Company has one remaining US mortgage residual, RASC 2006-KS2. Actual loss performance over the past quarter has not deviated significantly from our previous projections. However, with an increase in the arrears pipeline the forecast cumulative loss increased in the quarter.  

Portfolio Valuation 

In accordance with the Company's valuation procedures, the fair value of the Company's investments has been evaluated on the basis of observable market data, market discount rates and the Investment Manager's expectations regarding future trends.  

After giving effect to fair value write-downs of €3.5 million in the quarter, the NAV of the Company was €6.32 per share as at 30 June 2008 (€6.42 per share as at 31 March 2008).  Taking into account the results of the most recent tender offer, the pro-forma NAV as at 30 June 2008 was €6.47 per share.

The Company's long-standing policy is to account for assets and liabilities using different accounting treatments. The Company's investments are evaluated at fair value, whereas liabilities are held at amortised cost.

The table below summarises the changes in fair values of the Company's investment portfolio by asset class:

Asset Class	31 March 2008 Fair Value (1,2) (€mn)	30 June 2008  Fair Value (2) (€mn)	Fair Value  Change Since  31 March 2008 (5) (€mn)	Cashflows Received in the Quarter Ended  31 March 2008 (3) (€mn)	Cashflows Received in the Quarter Ended  30 June 2008 (€mn)
UK Mortgages	63.8	55.9	-7.9	10.0	7.0
Euro Mortgages	90.4	89.2	-1.2	2.8	1.8
SME	50.9	50.3	-0.6	3.3	3.3
CDO	2.5	2.0	-0.4	0.6	0.2
US Mortgages	0.1	0.0	-0.1	0.0	0.0
Cash and Other Cash Equivalents	32.9	35.9	0.0
TOTAL (4)	240.5	233.3	-10.1	16.7	12.3

(1)Fair values as at 31 March 2008 are expressed using 30 June 2008 F/X rates.

(2)The fair value figures for 31 March 2008 and 30 June 2008 include accrued income and, in the case of the UK mortgage residuals, the value of the interest rate swaps.

(3)Cash flows for 31 March 2008 are expressed using 30 June 2008 F/X rates.

(4)The values for each column may not sum to the total due to rounding differences.

(5)Total fair value changes exclude changes in the balance of cash and cash equivalents.

Fair value changes since 31 March 2008 include principal amortisations of the residuals as a result of cash flows received in the quarter as well as fair value write-downs related to the investment portfolio. 

Share Repurchase Programme 

In the period between 31 March 2008 and 30 June 2008, the Company repurchased 468,150 shares at an average price of €4.72 per share.

In July 2008, the Company announced that it was intending to conduct a €15 million fixed-price tender offer of €5 per share. On 12 August 2008, shareholders approved the terms of the tender offer and the Company repurchased a total of 2,999,981 shares. The tender offer was accretive to share holders by approximately €0.15 per share.

Exposure to Lehman Brothers

The Company has both direct and indirect exposure to Lehman Brothers and its subsidiaries.   On 15 September 2008, Lehman Brothers International (Europe) Limited entered into administration. There is still uncertainty about what this event will mean for its obligations and contracts with counterparties. The Company has direct exposure to Lehman Brothers International (Europe) Limited via €14 million notional of the HPI option (exposure valued at  30 June 2008 at €1,565,034), and an Interest Rate Swap (valued at 30 June 2008 at €92,288). Lehman Brothers Special Financing Inc provides the fixed to floating swap in the Eurosail 2006-1 securitisation. At the date of these accounts it remains unclear if this entity has specifically entered into administration. If swap payments are not made to the SPV, we expect cash flows for Eurosail 2006-1 to be materially affected until March 2009.  Capstone Mortgages Services Ltd.  ('Capstone'), a subsidiary of Lehman Brothers Holdings Inc. (the bank's holding company), is the servicer of the loans in the Eurosail 2006-1 mortgage pool. Capstone has not entered administration, and the Company is evaluating Capstone's ability to continue to service its mortgage loans without the backing of Lehman Brothers.

New Bond Investments 

Subsequent to the quarter ended 30 June 2008, the Company purchased four bonds with a total purchase price of €4.3 million. Two of the bonds purchased have exposure to prime mortgage loans in the UK. The ratings of these bonds are 'AA' and 'BBB'. The third bond has exposure to the UK non-conforming mortgage market with a rating of 'A'.   The remaining bond is a BBB rated commercial mortgage backed security (CMBS) backed by loans predominantly in France and Germany.

The new investments offer the Company attractive returns with a lower risk profile. The investments were purchased with pricing assumptions that are substantially more conservative than current asset performance. In addition, the purchased bonds are performing and are not on negative ratings watch by the agencies. The bonds currently have an unlevered cash on cash yield in excess of 13% although the total yield will improve if the bonds return principal before the legal final maturity of the bonds. 

Strategy and Market Outlook

While the outlook for the ABS markets remains challenging, the Company believes that further investment opportunities will appear in the coming months. Underlying economic fundamentals in a number of jurisdictions are likely to weaken further. Though we expect interest rate cuts in the UK and Eurozone to have a positive impact on the performance of our assets we do not foresee a material drop in interest rates until 2009. 

As asset performance weakens, we expect a further weakening of prices in the ABS sector combined with more sellers of ABS. We expect to see a rise in the number of sellers of ABS securities as we near year end. Liquidity is also unlikely to improve in the near term. These conditions will provide more opportunities for investors with cash, who have the ability to accurately analyse ABS structures to purchase assets at very attractive prices. 

Over the coming months the Investment Manager will continue to look for investment opportunities in investment grade ABS. For example, the Investment Manager is currently considering increasing investment in the CMBS sector. This asset class has very good transparency of the underlying assets and allows the Portfolio Manager to re-underwrite each loan in the portfolio.  Given the dislocation in the ABS markets, CMBS bonds are currently trading at substantial discounts. However, the Company will purchase bonds selectively and only where they offer attractive returns in relation to the credit risk. 

While the Company believes the total returns for the recent bond purchases are highly accretive, the bonds may experience some near term mark to market volatility if there is further broad based weakening of spreads in the ABS sector.  Forced sellers of ABS bonds may drive prices lower but this affords the Company an opportunity to buy assets at substantial discounts.

In conjunction with a renewed investment programme, the Company will also continue with its share repurchase programme. The share price is currently trading at a material discount to NAV and offers the Company an effective way to increase the NAV per share. The Company will re-balance the use of capital between share buybacks and new investments depending on the returns available to shareholders.

The Company is well positioned to take advantage of the current dislocation in the ABS markets and believes its current strategy will be accretive to shareholders.

QUEEN'S WALK INVESTMENT LIMITED

Unaudited Condensed Consolidated Income Statement

For the quarter ended 30 June 2008 and quarter ended 31 March 2008    

	Note	Revenue return	Fair value gains and losses	Total  Quarter ended 30 June 2008	Revenue return	Fair value gains and losses	Total  Quarter ended  31 March 2008
		Euro	Euro	Euro	Euro	Euro	Euro
Interest income	5	6,361,769	-	6,361,769	7,716,613	-	7,716,613
Gains and losses on fair value through profit or loss financial instruments	4	-	(3,461,435)	(3,461,435)	-	(22,544,257)	(22,544,257)
		6,361,769	(3,461,435)	2,900,334	7,716,613	(22,544,257)	(14,827,644)
Operating expenses	6	(1,393,926)	-	(1,393,926)	(1,565,714)	-	(1,565,714)
Finance costs	5	(659,328)	-	(659,328)	(678,756)	-	(678,756)
Net profit/(loss)		4,308,515	(3,461,435)	847,080	5,472,143	(22,544,257)	(17,072,114)
Profit/(loss) per Ordinary Share
Basic	8			Euro 0.03			Euro (0.53)
Diluted	8			Euro 0.03			Euro (0.53)
Weighted average Ordinary Shares outstanding				Number			Number
Basic	8			30,515,716			32,233,569
Diluted	8			30,515,716			32,233,569

All items in the above statement are derived from continuing operations.

All income is attributable to the Ordinary Shareholders of the Company.

QUEEN'S WALK INVESTMENT LIMITED

Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity

For the Quarter ended 30 June 2008 and Quarter ended 31 March 2008

	Share  Capital		Share Premium	Other Reserve	Capital Reserve	Accumulated Profits/(losses)	Total
Note		Euro	Euro	Euro	Euro	Euro	Euro
Balance at 1 January 2008		-	-	231,401,458	7,672,500	1,508,603	240,582,561
Net loss for the quarter		-	-	-	-	(17,072,114)	(17,072,114)
Buy back of ordinary shares		-	-	(21,720,835)	-	-	(21,720,835)
Transfer to accumulated profits / (losses)		-	-	(25,000,000)	-	25,000,000	-
Distribution to the Ordinary Shareholders of the Company	7	-	-	-	-	(4,645,193)	(4,645,193)
Balance at 31 March 2008		-	-	184,680,623	7,672,500	4,791,296	197,144,419
Net profit for the quarter		-	-	-	-	847,080	847,080
Buy back of ordinary shares	13,14	-	-	(2,219,805)	-	-	(2,219,805)
Transfer to accumulated profits / (losses)			-	(4,500,000)	-	4,500,000	-
Distribution to the Ordinary Shareholders of the Company	7	-	-	-	-	(4,535,685)	(4,535,685)
Balance at 30 June 2008		-	-	177,960,818	7,672,500	5,602,691	191,236,009

QUEEN'S WALK INVESTMENT LIMITED

Unaudited Condensed Consolidated Balance Sheet

As at 30 June 2008

	Note	30 June 2008		31 March 2008
		Euro		Euro
Non-current assets
Investments at fair value through profit or loss	10	198,230,825		206,962,464
Current assets
Cash and cash equivalents		35,856,070		32,934,817
Derivative financial assets-unrealised gain on interest rate swap agreements	11	92,288		8,344
Derivative financial assets-unrealised gain on forward foreign exchange contracts	11	151,533		990,215
Other assets		3,061,305		2,395,741
		39,161,196		36,329,117
Total assets		237,392,021		243,291,581
Equity and liabilities
Equity
Other reserve	14	177,960,818		184,680,623
Capital reserve in respect of share options		7,672,500		7,672,500
Accumulated profits		5,602,691		4,791,296
		191,236,009		197,144,419
Current liabilities
Distribution payable	7	4,535,685		4,645,193
Derivative financial liabilities-interest rate swap agreements	11	-		13,583
Other liabilities		1,120,327		988,386
		5,656,012		5,647,162
Non-current liabilities
Loans	12	40,500,000		40,500,000
Total liabilities		46,156,012		46,147,162
Total equity and liabilities		237,392,021		243,291,581

QUEEN'S WALK INVESTMENT LIMITED

Unaudited Condensed Consolidated Cash Flow Statement

For the Quarter ended 30 June 2008 and Quarter ended 31 March 2008

	Note		Quarter ended  30 June 2008		Quarter ended  31 March 2008
			Euro		Euro
Net cash inflow from operating activities	15		9,786,251		23,526,695
Financing activities
Net borrowings from loans			-		(4,500,000)
Dividends paid to shareholders	7		(4,645,193)		(5,232,784)
Buyback and cancellation of Ordinary Shares			(2,219,805)		(21,720,835)
Cash out flows from financing activities			(6,864,998)		(31,453,619)
Net increase/(decrease) in cash			2,921,253		(7,926,924)
Reconciliation of net cash flow to movement in net cash
Net increase/(decrease) in cash and cash equivalents			2,921,253		(7,926,924)
Cash and cash equivalents at start of period			32,934,817		40,861,741
Cash and cash equivalents at end of period			35,856,070		32,934,817

QUEEN'S WALK INVESTMENT LIMITED

Notes to the Unaudited Condensed Quarterly Report

1.    General information

Queen's Walk Investment Limited (the 'Company') was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is a closed-ended investment Company with limited liability formed under The Companies (Guernsey) Law, 2008 and its Ordinary Shares are listed on the London Stock Exchange.  The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. 'Group' is defined as the Group and its subsidiary. At 30 June 2008, the Group's only subsidiary was Trebuchet Finance Limited.

The Group's investment objective is to provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ('ABS') where the Investment Manager considers that the coupon or cash flows on the tranche are attractive relative to the underlying credit. These are and will be, in most cases, below investment grade or unrated and do or will, in many cases, represent the residual income positions typically retained by the originator of a securitisation transaction as the 'equity' or 'first loss' position.

The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management (UK) LLP (the 'Investment Manager'), an investment management firm authorised and regulated by the Financial Services Authority. The Group has entered into an Investment Management Agreement (the 'Investment Management Agreement') under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Group has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and a quarterly performance-related fee. The Group has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the 'Administrator'). Investors Fund Services (Ireland) Limited provide certain administration services to the Group in its capacity as sub-administrator.

2.    Significant accounting policies

Statement of compliance

The quarterly report 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 this report as applied in the Company's latest annual audited financial statements dated 31 March 2008.

This quarterly report does not comply with the requirements of IAS 34 'Interim Reporting' as the comparative information provided in the consolidated income statement, consolidated statement of changes in equity and consolidated cash flow statement is not in accordance with IAS34 as the comparative information included is for the quarter ended 31 March 2008 and not the quarter ended 30 June 2007 as required by the standard.

Basis of preparation

The quarterly report of the Group is prepared on the historical cost or amortised cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit and loss. 

The majority of the Group's investments are financial instruments that are classified as fair value through profit or loss. Where bid prices are not available from a third party in a liquid market, the fair value of the financial instrument is estimated by reference to market information, which includes but is not limited to broker marks, prices on comparable assets and a pricing model that incorporates discounted cash flow techniques. These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. Where such pricing models are used, assumptions are reviewed and updated on the basis of actual performance data as it is received and on the basis of market conditions as at the balance sheet date. See note 2 - Fair Value and Interest Income and note 3 - Critical accounting judgements and key sources of estimation uncertainty for further information regarding assumptions and critical judgements.

These financial statements are presented in Euro because that is the currency of the primary economic environment in which the Group operates. The functional currency of the Group is also considered to be Euro.

Basis of consolidation

Subsidiaries are entities controlled by the Group (note 9). The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. At 30 June 2008, the Group is made up of the Group and its only subsidiary, Trebuchet Finance Limited.

In accordance with the Standing Interpretations Committee Interpretation 12 'Consolidation-Special Purpose Entities' ('SIC 12'), the Group consolidates only entities over which control is indicated by activities, decision making, benefits and residual risks of ownership. In accordance with SIC 12 the Group does not consolidate an SPE in which it holds less than a substantial interest in the residual income position. Where it holds more than a substantial interest, it does not consolidate the SPE where the residual income position represents only a small part of the gross assets of the SPE and the Group was neither involved in the establishment of the SPE or the origination of the assets owned by the SPE, on the basis that the Group is not exposed to the majority of the risks and benefits of the assets owned by the SPE, provided control is not otherwise indicated by the Group's activities, decision making, benefits and residual risks or ownership.

Trebuchet Finance Limited, the Group's only subsidiary, is an SPE over which the Group exercises control and its financial statements are therefore included in the consolidated financial statements of the Group. The Group does not consolidate any of the SPEs in which it holds a residual income position as it is not exposed to the majority of the risks and benefits of the assets owned by the relevant SPEs and does not control any of them.

Investments

Investments in residual interests are recognised initially at their acquisition cost (being fair value at acquisition date) as debt securities. Thereafter they are re-measured at fair value and are designated as fair value through profit or loss investments in accordance with the Amendment to International Accounting Standard 39 ('IAS 39') Financial Instruments: Recognition and Measurement-The Fair Value Option, as the Group is an investment Group whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value.

Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades.

Cash and cash equivalents

Cash and cash equivalents include amounts held in interest bearing accounts and short term commercial paper.

Derivative financial instruments

Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. The Group may also enter into credit default or total return swap arrangements where the underlying asset or assets would otherwise be within the Group's investment policy in order to obtain substantially the same economic exposure to the returns and risks associated with holding such underlying asset or assets.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. 

Fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement.

The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties.

Total return swap agreements and credit default swap agreements are fair valued on the date of valuation based upon the underlying market value of the reference asset using the approach explained under fair value. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement.

Fair value of options is their quoted market price at the balance sheet date. Broker marks are obtained for these positions. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity or sale of the option.

Fair value

All financial assets carried at fair value are initially recognised at fair value and subsequently re-measured at fair value based on bid prices where such bids are available from a third party in a liquid market. If bid prices are unavailable, the fair value of the financial asset is estimated by reference to market information which includes but is not limited to broker marks, prices on comparable assets and using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding assetߛspecific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset.

With regard to residual income positions, historical performance and observable market data is analysed to determine the average level of these factors and their volatility over time. These assumptions are typically derived by reference to the historical delinquencies, defaults, recoveries and prepayments actually realised by the originator of the underlying assets and any empirical data available that may be available in respect of any of these factors for the particular asset class. 

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported within assets and liabilities when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Derecognition of a financial asset

A financial asset is derecognised only if substantially all of the asset's risks and rewards of ownership are transferred or control is transferred in the event that not substantially all of the asset's risks and rewards of ownership are transferred. However, if substantially all of the risks and rewards are retained, the asset is not derecognised. Control is transferred if the transferee has the practical ability to sell the asset unilaterally without needing to impose additional restrictions on the transfer.

Interest-bearing loans and borrowings

Interestߛbearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interestߛbearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. Financing costs associated with the issuance of financings are deferred and amortised over the term of the financings using the effective interest rate method, in line with market practice.

Foreign currency transactions

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Euro at foreign exchange rates ruling at the dates the fair value was determined.

Transaction expenses

The preliminary expenses of the Group directly attributable to its initial public offering and any costs associated with the establishment of the Group are charged to the share premium or other reserve account.

Share options granted to the Investment Manager are treated as a transaction expense on the basis that they are granted by the Group as a fee for the Investment Manager's work in raising capital for the Group. The fair value of such options is charged to the share premium account. The share premium account is credited with the fair value of such options at the time that such options are vested.

Interest income

Interest income is accrued based on the fair value of the Group's financial assets and their contractual terms. Interest income is accrued over the projected lives of the investments using the effective interest method as defined under International Accounting Standard 39. Where the Group adjusts its expected cash flow projections to take account of any change in underlying assumptions, such adjustments are recognised in the income statement by reflecting changes in a revised amortised cost value of the investment and applying the original effective interest rate to this revised amortised cost value for the purposes of calculating future income.

Taxation

The Group is a tax-exempt Guernsey limited Group. Accordingly, no provision for income taxes is made. Trebuchet Finance Limited is a 'qualifying Group' within the meaning of section 110 of the Irish Taxes Consolidation Act 1997 and accordingly its taxable profits are subject to tax at a rate of 25 per cent. Payments under the Participation Note are paid gross to the Group and the income portion of such payments is deductible by Trebuchet Finance Limited. Consequently, Trebuchet Finance Limited has a minimal amount of taxable income. The activities of Trebuchet Finance Limited are exempt for Value Added Tax (VAT) purposes under the VAT Act of 1972.

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.

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 Group 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.

Business and geographical segments 

The Directors are of the opinion that the Group is engaged in a single segment of business of investing in debt securities and operates solely from Guernsey and therefore no segmental reporting is provided.

3. Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies (described in note 2 above), the Group has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements:

Income recognition

The Group invests primarily in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ('ABS'). ABS are securities that are typically backed by consumer finance receivables (such as mortgage loans) and commercial loans and receivables (including commercial mortgage loans and loans to small-and-medium sized enterprises). Residual income positions are typically unrated or rated below investment grade and are often referred to as the 'equity' or 'first loss' position of a securitisation transaction.  

Unlike a more conventional debt instrument and the more senior tranches of ABS (which generally hold the rights to fixed levels of income), the cash flow profile of a residual income position does not generally include a contractually established schedule of fixed payments divided between interest and principal. Instead, the cash flows generally vary over time, and the periodic cash flows associated with a residual income position may include a significant element of principal repayment as well as income payments.

Where the cash payments generated by residual income positions do not typically follow the pattern of a standard cash-pay debt instrument (in that there is not a constant level of income in each period followed by a repayment of the principal amount at maturity), a given cash payment received in respect of a residual income position can generally be considered to represent a combination of the return on the investment and the repayment of some of the capital initially invested. As a result, the stream of expected cash flows associated with a particular residual income position may have an uneven payout profile, in that the cash payment expected in one period (and the proportion of that payment that represents principal repayment versus interest income) may vary significantly from the cash payments expected in other periods.

The Group follows a policy of accounting for such investments at fair value through profit or loss and has elected to recognise income on an effective interest rate ('EIR') method in accordance with paragraph 30 of IAS 18 'Revenue'. 

The carrying value of a residual income position at any given measurement date after the Group's initial acquisition of the asset reflects repayments of principal in accordance with the effective interest method. This revised carrying value (adjusted to account for the accrual of interest and principal paydowns) is subject to further adjustment on the basis of market conditions and other factors that are likely to affect the fair value of the asset. Where actual performance data or expectations regarding defaults, delinquencies and prepayments received in respect of a given asset is markedly different from the default, delinquency and prepayment assumptions incorporated in the pricing model for the asset, the assumptions are revised to reflect this data and the pricing model is updated accordingly. In addition to the actual performance data observed in respect of a particular asset, market factors are also taken into account within the model. Broker marks (where available) and any other available indicators are assessed to determine whether or not the market is attributing higher or lower default, delinquency or prepayment expectations to similar assets in determining whether or not the assumptions incorporated in the pricing model remain reasonable. 

Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position. The Group takes account of underlying changes in cash flows in its income recognition as soon as adverse factors are identified. Any such changes will impact the level of income recognised in each period.

Further disclosures of key assumptions and key sources of estimation uncertainty are set out in note 2 to the accounts under the heading 'Fair Value'.

Valuation of investments

The market for subordinated asset-backed securities, including residual income positions is illiquid and regular traded prices are generally not available for such investments. There is no active secondary market in residual income positions and, further, there is no industry standard agreed methodology to value residual income positions.

In accordance with the Group's accounting policies, fair value of financial assets is based on quoted bid prices where such bids are available from a third party in a liquid market. At 30 June 2008 bid prices were not available for any of the Group's investments. There is very limited information available in relation to transactions in comparable investments. As quoted bid prices are unavailable, the fair value of the investments is estimated by reference to market information, which includes but is not limited to broker marks, prices on comparative assets, estimated fair value from the previous period updated for current period cash flows and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. The Group may use all or a combination of the prices from these sources in estimating the fair value of the investments, with more prominence being assigned to market information such as broker marks. Broker marks are estimates of values provided by market participants who are typically the originators of the investments. Broker marks are not binding prices and there is no guarantee that the Group could transact at these prices in the current market. 

The assumptions upon which the pricing models are based are described in note 2 (Fair Value). Any change to assumptions surrounding the pricing models may result in different fair values being attributed to the investments. Where the fair value of the investment is written down due to changes in assumptions and expected cash flows, the change in the fair value is taken to the income statement following the reassessment of the cash flows discounted at the current market rate estimated for the investment.

The fair value of the Group's investments is set out in note 10. Given the number of individual investments and the number of individual parameters that making up each pricing model, the Group believes that it would be impractical to disclose the effects of changes to each assumption in respect of each individual investment and this would not provide meaningful additional disclosure.

4. Gains and losses on financial instruments

    The following table details the gains and losses, excluding interest income and finance costs, earned by the Group from financial assets and liabilities during the period:

		Quarter ended 30 June 2008		Quarter ended  31 March 2008
		Euro		Euro
Net realised gains/(losses)
Net realised /(losses) on Asset Backed Securities		-		(68)
Net realised (loss)/gains on foreign exchange instruments		(798,246)		4,667,565
Net realised (losses)/gains		(798,246)		4,667,497
Net unrealised gains/(losses)
Net unrealised gains/(losses) on swap agreements		97,527		(468,276)
Net unrealised gain/(losses) on investments at fair value through profit or loss		(1,922,034)		(27,353,841)
Net unrealised (losses)/gains foreign exchange instruments		(838,682)		610,363
Net unrealised gains/(losses)		(2,663,189)		(27,211,754)
Net realised and unrealised gains/(losses)		(3,461,435)		(22,544,257)

5. Interest income and finance costs

The following table details interest income and finance costs from financial assets and liabilities for the quarter ended:

		Quarter ended 30 June 2008		Quarter ended 31 March 2008
		Euro		Euro
Interest income
Investments designated at fair value through profit and loss upon initial recognition		6,023,663		6,945,771
Derivative financial assets		28,847		509,673
Loans and receivables (including cash and cash equivalents)		309,259		261,169
Total interest income		6,361,769		7,716,613

Finance costs:
Liabilities held at amortised cost:
Interest on loan	(587,666)		(607,356)
Other	(71,662)		(71,400)
Total finance costs	(659,328)		(678,756)

6.    Operating expenses    

		Quarter ended 30 June 2008		Quarter ended 31 March 2008
		Euro		Euro
Investment management, custodian and administration fees
Investment management and incentive fee (note 16)		846,300		903,785
Administration fee (note 16)		60,175		31,606
Custodian fee (note 16)		13,856		15,455
		920,331		950,846
Other operating expenses
Audit fees		42,383		36,019
Directors' fees payable to Directors of Queen's Walk Investment Limited		59,835		57,459
Directors' fees payable to Directors of Trebuchet Finance Limited		6,233		8,791
Legal fees		227,050		251,924
Pricing expenses		58,170		(140,152)
Other expenses		79,924		400,827
		473,595		614,868
Total operating expenses		1,393,926		1,565,714

The Group has no employees. 

  7. Dividends

		Quarter ended 30 June 2008		Quarter ended  31 March 2008
		Euro		Euro
Third interim dividend for the year ended 31 March 2008		-		4,645,193
Fourth interim dividend for the year ended 31 March 2008		4,535,685		-
Amounts recognised as distributions to equity holders in the quarter		4,535,685		4,645,193

The third interim dividend for the quarter ended 31 March 2008 of Euro 4,645,193 was declared on 5 March 2008 and was paid on 8 April 2008.

A fourth interim dividend for the year ended 31 March 2008 of Euro 4,535,685 was declared by the Directors on 19 June 2008 and was paid on 18 July 2008.

A dividend of Euro 0.15 per share has been declared by the Directors for the quarter ended 30 June 2008.

8.    Profit/(loss) per ordinary share

		Quarter ended  30 June 2008		Quarter ended  31 March 2008
		Euro		Euro
The calculation of the basic and diluted earnings per share is based on the following data:
Profit/(loss) for the purposes of basic earnings per share being net loss attributable to equity holders		847,080		(17,072,114)
Weighted average number of Ordinary Shares for the purposes of basic earnings per share		30,515,716		32,233,569
Effect of dilutive potential Ordinary Shares:
Share options		-		-
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share		30,515,716		32,233,569

There is no dilution as at 30 June 2008 as the share price was below the option price on that date. 

9.    Subsidiary

Trebuchet Finance Limited was incorporated in Ireland on 19 May 2005 and, pursuant to the Articles of Association of Trebuchet Finance Limited, the Group has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Group have been appointed Directors of Trebuchet Finance Limited. To ensure that the Group will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the Group has been allotted a single share in Trebuchet Finance Limited carrying the right to appoint a majority of the Board of Directors. Trebuchet Finance Limited was established for the sole purpose of acquiring and holding interests in certain assets. 

  10.    Investments

The following is a summary of the Group's investments at fair value through profit or loss:

		30 June 2008		31 March 2008
		Euro		Euro
Asset-backed securities		195,100,757		204,790,989
Options		3,130,068		2,171,475
		198,230,825		206,962,464

		30 June 2008		31 March 2008
Asset-backed securities		Euro		Euro
Opening cost		326,365,867		337,475,069
Principal Payups		1,142,717		897,116
Principal Paydowns		(7,952,322)		(12,006,318)
Closing cost		319,556,262		326,365,867
Unrealised gains/(losses)		(124,455,505)		(121,574,878)
Asset-backed securities at fair value		195,100,757		204,790,989

		30 June 2008		31 March 2008
Options		Euro		Euro
Opening cost		1,680,000		1,680,000
Closing cost		1,680,000		1,680,000
Unrealised gains		1,450,068		491,475
Options at fair value		3,130,068		2,171,475

The following options contracts were open as at 30 June 2008:

Counterparty	Expiration	Description		Currency		Notional Amount	Strike price		Unrealised Gains Euro
Credit Suisse	05 Nov 2009	Halifax HPI Put option		Euro		14,000,000	583.02		725,034
Lehman Brothers	31 Oct 2009	HBOS HPI Put option		Euro		14,000,000	583.02		725,034
									1,450,068

The following options contracts were open as at 31 March 2008:

Counterparty	Expiration	Description		Currency		Notional Amount	Strike price		Unrealised Gains Euro
Credit Suisse	05 Nov 2009	Halifax HPI Put option		Euro		14,000,000	583.02		245,738
Lehman Brothers	31 Oct 2009	HBOS HPI Put option		Euro		14,000,000	583.02		245,737
									491,475

The Halifax house price index option contracts were purchased during the year ended 31 March 2008 as a hedge against deterioration of the UK housing market.

Please see Note 17 Subsequent Events for further detail on the Lehman Brothers derivative exposure.

  11.    Derivative contracts

The following foreign exchange forward contracts were unsettled at 30 June 2008:

Maturity Date		Amount Bought	Amount Sold	Unrealised  Gain Euro
30 September 2008		EUR 52,428,779	GBP 41,500,000	126,216
30 September 2008		EUR 2,256,900	USD 3,500,000	25,317
				151,533

The following foreign exchange forward contracts were unsettled at 31 March 2008:

Maturity Date		Amount Bought	Amount Sold	Unrealised  Gain Euro
30 June 2008		Euro 75,364,155	GBP 59,500,000	952,319
30 June 2008		Euro 5,424,205	USD 8,500,000	37,896
				990,215

On 1 December 2006, the Group entered into balance-guaranteed interest rate swap agreements with Lehman Brothers International (Europe) in respect of the cash flows associated with fixed rate mortgage loans contained in five transactions in which the Group holds a residual income position. The notional amount of each swap agreement is adjusted on a quarterly basis in accordance with the balance of fixed rate mortgage loans outstanding in the relevant transaction. The terms of the remaining interest rate swap agreements, each of which was effective from the September 2006 interest payment date for each respective transaction, are set out in the table below. The aggregate fair value of these swap agreements as at 30 June 2008 was Euro 92,288 (31 March 2008: Euro (5,239)).

30 June 2008

Termination Date	Reference Transaction	Initial Notional Amount (GBP)			Unrealised Gain Euro
1 December 2008	Newgate 2006-1*	411,409,139			92,288
					92,288

31 March 2008

Termination Date	Reference Transaction	Initial Notional Amount (GBP)			Unrealised  Gain/(loss) Euro
12 June 2008	RMAC 2005-NS3*	186,615,582			5,775
12 June 2008	RMAC 2005-NS4*	107,028,288			2,569
1 December 2008	Newgate 2006-1*	411,409,139			(13,583)
					(5,239)

* The swaps pay a fixed interest rate and receive a floating one.

  12.    Loans

		30 June 2008		31 March 2008
		Euro		Euro
Loans		40,500,000		40,500,000
		40,500,000		40,500,000

During the year ended 31 March 2008 the Group arranged and drew down on a loan facility an amount of Euro 40,500,000 repayable by 13 July 2012. Collateral (Asset-backed securities and cash), totalling Euro 217,873,772 have been granted as security in relation to the loan. 

As the terms of the loan are confidential the Group cannot disclose these in the quarterly report. 

13.    Share capital

	30 June 2008	30 June 2008	31 March 2008	31 March 2008
	Number of Ordinary Shares	Euro	Number of Ordinary Shares	Euro
Ordinary shares of no par value each	Unlimited	-	Unlimited	-

Issued and fully paid
	Number of Ordinary Shares	Euro	Number of Ordinary Shares	Euro
Balance at 31 March 2008	30,706,048	-	34,882,719	-
Ordinary shares bought back during the quarter	(468,150)	-	(4,176,671)	-
Balance at 30 June 2008	30,237,898	-	30,706,048	-

Between 31 March 2008 and 30 June 2008 the Company had purchased and cancelled 468,150 (Quarter to 31 March 2008: 4,176,671) Ordinary Shares through its buyback programme at an average price of €4.72 (Quarter to 31 March 2008: €5.20) per Ordinary Share.

14.    Other reserve

		30 June 2008		31 March 2008
		Euro		Euro
Balance at start of period		184,680,623		231,401,458
Buy back of Ordinary Shares*		(2,219,805)		(21,720,835)
Transfer to distributable reserves		(4,500,000)		(25,000,000)
Balance at end of year/period		177,960,818		184,680,623

* Ordinary Shares bought back have been cancelled.

15.    Notes to cash flow statement

		Quarter ended 30 June 2008		Quarter ended  31 March 2008
		Euro		Euro
Net profit/(loss)		847,080		(17,072,114)
Adjustments for:
Net unrealised losses on investments at fair value through profit or loss		1,922,034		27,353,841
Unrealised losses/(gains) on foreign exchange contracts		838,682		(610,363)
Unrealised (gains)/losses on interest rate swap agreements		(97,527)		468,276
		3,510,269		10,139,640
Principal Payups		(1,142,717)		(897,116)
Principal Paydowns		7,952,322		12,006,318
		6,809,605		11,109,202
(Increase)/decrease in receivables		(665,564)		1,913,347
Increase in payables		131,941		364,506
		(533,623)		2,277,853
Net cash inflow from operating activities		9,786,251		23,526,695

Purchases and sales of investments are considered to be operating activities of the Group, given its purpose, rather than investing activities. 

Cash and cash equivalents includes amounts held in interest bearing accounts, short term commercial paper.

16.    Material agreements and related party transactions

Investment Manager

The Group and Trebuchet Finance Limited are parties to an Investment Management Agreement with the Investment Manager, dated 8 December 2005, pursuant to which each of the Group and Trebuchet Finance Limited has appointed the Investment Manager to manage their respective assets on a day-to-day basis in accordance with their respective investment objectives and policies, subject to the overall supervision and direction of their respective Boards of Directors.  

The Group pays the Investment Manager a Management Fee and Incentive Fee (see notes 6 and 17). During the quarter ended 30 June 2008, the Management Fee totalled Euro 846,300 (31 March 2008: Euro 903,785), of which Euro 272,831 (31 March 2008: Euro 291,551) was outstanding at the period end, and the Incentive Fee totalled Euro Nil (31 March 2008: Euro Nil).

Management Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Group an annual Management Fee of 1.75 per cent of the net asset value of the Group other than to the extent that such value is comprised of any investment where the underlying asset portfolio is managed by the Investment Manager (as is the case with Cheyne ABS Investments I plc, Cheyne Finance plc, Cheyne High Grade ABS CDO Ltd. and Cheyne CLO Investments I Limited). The Management Fee is calculated and payable monthly in arrears.

Incentive Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive an incentive compensation fee in respect of each incentive period that is paid quarterly in arrears. An incentive period will comprise each successive quarter, except the first such period was the period from admission to the London Stock Exchange to 31 March 2006. The Incentive Fee for each incentive period is an amount equivalent to 25 per cent of the amount by which A exceeds (B × C) where:

A =	The Group's consolidated net income taking into account any realised or unrealised losses (but only to the extent they have not been deducted in a prior incentive period) and excluding any gains from the revaluation of investments, as shown in the Group's latest consolidated management accounts for the relevant quarter, before payment of any Incentive Fee;
B =	An amount equal to a simple interest rate equal to two per cent per quarter, subject to the reset mechanic described below (the 'Hurdle Rate'); and
C =	The weighted average number of Shares outstanding during the relevant quarter multiplied by the weighted average offer price of such Shares.

For the purposes of calculating the Incentive Fee, the Hurdle Rate will be reset on 1 April 2009, and on each 1 April thereafter to equal the greater of (i) a simple interest rate equal two per cent per quarter, or (ii) one quarter of the sum of the then-prevailing yield per annum on ten-year German Bunds and 300 basis points. While the Group will not pay a Management Fee in respect of that portion of its portfolio that is comprised of investments where the Investment Manager receives fees for its management of the underlying asset portfolio, the income from such investments are included in the consolidated net income of the Group for the purpose of calculating the Incentive Fee.

The Incentive fee for the period was Euro Nil (31 March 2008: Euro Nil) of which Euro Nil (31 March 2008: Euro Nil) was outstanding at the quarter end.

Administration Fee

Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Group an administration fee of 0.125 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.0325 per cent of the gross asset value of the Group greater than Euro 80,000,000. Investors Fund Services (Ireland) Limited, the sub-administrator, is paid by the Administrator.

Investments in other entities managed by the Investment Manager

As at 30 June 2008 the Group held investments with a total value of Euro 2,185,193 (31 March 2008: Euro 4,479,375) in the following entities, which are managed by the Investment Manager: Cheyne ABS Investments I plc and Cheyne CLO Investments I Limited.

Custodian Fee

Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Group a custodian fee of 0.03 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Group greater than Euro 80,000,000, plus additional fees in relation to transaction fees, statutory reporting, corporate secretarial fees and other out of pocket expenses.

Investment Manager Options

In recognition of the work performed by the Investment Manager in raising capital for the Group, the Group granted to Cheyne Global Services Limited on 8 December 2005 options representing the right to acquire 2,250,000 Shares, being 10 per cent of the number of Offer Shares (that is, excluding the Shares issued to Cheyne ABS Opportunities Fund LP and the Shares issued to the Directors), at an exercise price per share equal to the Offer Price (Euro 10). The Investment Manager Options are fully vested and immediately exercisable on the date of admission to the London Stock Exchange and will remain exercisable until the 10th anniversary of that date. The Group may grant further Investment Manager Options in connection with any future offering of Shares. Such options, if any, will represent the right to acquire Shares equal to not more than 10 per cent of the number of Shares being offered in respect of that future offering and will have an exercise price equal to the offer price for that offering. The aggregate fair value of the options granted at the time of the Initial Public Offering using a Black-Scholes valuation model was Euro 7,672,500 (reflecting a valuation of Euro 3.41 per option). This amount has been treated as a cost of the Initial Public Offering. As at 30 June 2008, these options were out of the money as the share price was below the Offer Price of Euro 10.

Controlling Party

Cheyne ABS Opportunities Fund has a controlling interest in the Company.

17.    Subsequent Events

Subsequent to the quarter ended 30 June 2008, the Company purchased four bonds with a total purchase price of €4.3 million. Two of the bonds purchased have exposure to prime mortgage loans in the UK. The ratings or these bonds are 'AA' and 'BBB'. The third bond is an exposure to the UK non-conforming mortgage market with a rating of 'A'.  The last bond is an exposure to the European commercial mortgage market with a rating of 'BBB'.

The Company bought back 3,244,981 shares at an average price of 4.93 EUR between 30 June 2008 and 10 September 2008.

On 15 September 2008 Lehman Brothers International (Europe) Limited entered into administration. There is still uncertainly about what this event will mean for its obligations and contracts with counterparties. The Company has direct exposure to Lehman Brothers International (Europe)  Limited  via EUR 14m notional of the HPI option (exposure valued at 30 June 2008 at EUR 1,565,034), and an Interest Rate Swap (valued at 30 June 2008 at EUR 92,288). Lehman Brothers Special Financing Inc provides the fixed to floating swap in the Eurosail 2006-1 securitisation. At the date of these accounts it remains unclear if this entity has specifically entered into administration. If swap payments are not made to the SPV, we expect cashflows for Eurosail 2006-1 to be materially affected until March 2009.  Capstone Mortgages Services Ltd.  ('Capstone'), a subsidiary of Lehman Brothers Holdings Inc. (the bank's holding company), is the servicer of the loans in the Eurosail 2006-1 mortgage pool. Capstone has not entered administration, and the Company is evaluating Capstone's ability to continue to service its mortgage loans without the backing of Lehman Brothers.

There have been no other events subsequent to 30 June 2008 which require adjustment of or disclosure in the quarterly report or notes thereto.

 

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