Final Results

Queen's Walk Investment Limited 25 June 2007 25 June 2007 Queen's Walk Investment Limited Preliminary Results for the Financial Year Ended 31 March 2007 Queen's Walk Investment Limited ('Queen's Walk') is a Guernsey-incorporated investment company listed on the London Stock Exchange. Queen's Walk 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. For more information regarding Queen's Walk, please visit www.queenswalkinv.com or call Caroline Villiers: +44 20 7153 1521. Highlights â€¢Net loss for the year of â‚¬67.7 million, principally as a result of fair value adjustments made to investments in 2007. This equates to a loss per share of â‚¬1.67. â€¢Net asset value decreased to â‚¬7.24 as at 31 March 2007 from â‚¬9.90 as at 31 December 2006. â€¢The Company's investments generated net operating income in the fourth quarter in the amount of â‚¬9.6 million or â‚¬0.24 per share. â€¢The board of directors has declared an interim dividend of â‚¬0.15 per share for the fourth quarter, resulting in a cumulative interim dividend of â‚¬0.90 for the year ended 31 March 2007. â€¢Fair value write-downs in the fourth quarter totalled â‚¬108.4 million. These write-downs resulted principally from significant developments affecting the UK and US mortgage markets. â€¢Since 31 December 2006, the Company has sold three US investments and four UK investments for aggregate sale proceeds of approximately â‚¬116 million. As the 31 March 2007 fair values of the assets sold were determined on the basis of their sale prices, these sales have not reduced the Company's NAV post year end and are fully reflected in the â‚¬7.24 NAV figure. â€¢Proceeds from asset sales have been applied to reduce indebtedness or to increase available cash. The Company's leverage has been reduced to approximately 6.6% as at 31 May 2007 (compared to 25.9% as at 31 March 2007, 28.5% as at 31 December 2006 and 17.9% as at 31 March 2006. â€¢The weighted average yield of the Company's investment portfolio as at 31 March 2007 (after giving effect to all asset sales) was 13.4% in local currency terms (13.6% as at 31 December 2006). â€¢The Company has sufficient cash and financing capacity to enable it to buy back shares up to 9.99% of its existing share capital upon receipt of the requisite approval from shareholders that such purchases can be made without requiring an offer to be made for the Company's shares by Cheyne ABS Opportunities Fund LP and parties deemed by the City Code on Takeover and Mergers to be acting in concert with it. The Company is sending a circular to shareholders shortly calling for an extraordinary general meeting of shareholders. Financial Highlights +-------------+------------+-----------+-----------+-----------+-----------+ | |Q4 - Quarter|Q3 - |Q2 - |Q1 - |Period from| | |ended 31 |Quarter |Quarter |Quarter |6 September| | |March 2007 |ended 31 |ended 30 |ended 30 |2005 to 31 | | |(â‚¬) |December |September |June 2006 |March 2006 | | | |2006 (â‚¬) |2006 (â‚¬) |(â‚¬) |(â‚¬) | | | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Operating |(93,563,917)| 14,484,653| 15,674,473| 14,992,921| 12,480,487| |(loss)/income| *| | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Operating | (2,700,658)|(2,658,532)|(3,349,855)|(2,813,090)|(2,455,408)| |expenses | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Finance costs| (2,541,463)|(2,317,658)|(1,772,011)|(1,182,461)| (260,052)| +-------------+------------+-----------+-----------+-----------+-----------+ |Net (loss)/ |(98,806,038)| 9,508,463| 10,552,607| 10,997,370| 9,765,027| |income | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Distributable| 9,596,406**| 9,508,463| 10,583,319| 10,599,894| 9,765,027| |income | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |(Loss)/ | (2.43)| 0.23| 0.26| 0.27| 0.24| |earnings per | | | | | | |share | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Distributable| 0.24| 0.23| 0.26| 0.26| 0.24| |earnings per | | | | | | |share | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ | | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Total assets | 427,104,698|534,777,898|520,550,381|531,153,613|493,842,561| +-------------+------------+-----------+-----------+-----------+-----------+ |Total | 132,951,013|132,475,401|117,194,951|127,789,393| 91,773,445| |liabilities | | | | | | |(incl. | | | | | | |financing) | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Equity | 294,153,685|402,302,497|403,355,430|403,364,220|402,069,116| |capital | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |NAV per share| 7.24| 9.90| 9.93| 9.93| 9.90| +-------------+------------+-----------+-----------+-----------+-----------+ *After net fair value losses on fair value through profit or loss financial instruments in the amount of â‚¬108,402,444. **Net operating income from investments before deduction of net fair value losses through profit or loss financial instruments ((â‚¬98,806,038) + â‚¬108,402,444 = â‚¬9,596,406). Fourth Quarter Dividend The Board of Directors has declared an interim dividend for the quarter ended 31 March 2007 of â‚¬0.15 payable on 31 July 2007 to shareholders of record on 6 July 2007. Conference Call A conference call to review the Company's financial results for the year ended 31 March 2007 will take place at 10:30 A.M. London time today. The conference call can be accessed by dialing +44 (0)20 7138 0835 ten minutes prior to the scheduled start of the call; please reference Queen's Walk Investment Limited Financial Results. A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com). 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 +44 (0) 20 7153 1521 About the Company: Queen's Walk Investment Limited is a Guernsey-incorporated investment company listed on the London Stock Exchange. Queen's Walk 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, considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. The Company believes that its investment focus provides equity investors with exposure to a relatively new investment opportunity in this asset class. 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', 'estimates', 'anticipates', 'expects', 'intends', 'considers', 'may', 'will' or 'should'. They include the statement regarding the target aggregate dividend. 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. 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). The financial information set out in this announcement does not constitute the Company's statutory accounts for the year ended 31 March 2007. The financial information for the year ended 31 March 2007 is derived from the financial statements to be delivered to the UK Listing Authority. An extract from the audited annual report and accounts of the Company for the year ended 31 March 2007 is set out below. This preliminary announcement was approved by the Board of Directors on 25 June 2007. Chairman's Statement The results for Queen's Walk Investment Limited (the 'Company') for the twelve months ended 31 March 2007, its first full year as a public company, reflect a period of exceptional turbulence in many of the asset-backed securities ('ABS') markets in which the Company has invested, primarily during the fourth quarter of the financial year. The Company incurred a net loss of Euro 67.7 million for the year, principally as a result of the adjustments to fair value made to a number of its investments in 2007. The loss per share was Euro 1.67 and the net asset value ('NAV') fell to Euro 7.24 per share as at 31 March 2007 from Euro 9.90 as at both 31 December 2006 and 31 March 2006. Notwithstanding the net loss for the year, the directors are mindful of the Company's objective of providing shareholders with stable returns in the form of quarterly dividends. Although the losses arising from the adjustments to fair value have been recognised in the income statement, the Company is nonetheless able to pay a dividend for the fourth quarter. To the extent that the dividend is covered by income from the Company's investments, the Company is able to pay a dividend from the distributable reserves created upon cancellation of the Company's share premium account at the time of the Company's IPO. As a consequence, the Board has declared an interim dividend of Euro 0.15 in respect of the fourth quarter. This dividend will be payable on 31 July 2007 to shareholders of record on 6 July 2007. Following interim dividends amounting to Euro 0.75 per share that have been declared and paid in respect of the first three quarters of the financial year, the total dividend for the year of Euro 0.90 regrettably falls short of the Euro 1.00 dividend target announced at the time of the Company's IPO. The directors remain committed, however, to seeing that the Company continues to pay, as far as is possible, quarterly dividends at a level that takes future periods into account but which represents a significant proportion of the Company's distributable income. Investment Portfolio Although the difficulties in the US sub-prime loan mortgage market in recent months have attracted the greatest public attention, the UK and certain of the Continental European mortgage markets have also seen developments (albeit largely different from those in the US) that have affected the value of the Company's investments in those markets. The report of the Company's Investment Manager, Cheyne Capital Management (UK) LLP ('Cheyne Capital'), details the performance of the Company's assets and analyses the factors in the markets underlying this performance. A number of investments have been sold (predominantly since the year end), including three of the four US sub-prime mortgage positions. The exposure to the UK mortgage market, where a deteriorating trend in prepayment rates by borrowers became apparent, has also been materially reduced. These asset sales, together with the cash flows from the continuing investment portfolio, have caused the Company's leverage to fall from 25.9% of the Company's total investment portfolio as at 31 March 2007 (17.9% as at 31 March 2006) to approximately 6.6% as at 31 May 2007. The fall in fair value of the US and the UK assets contributed most of the loss reported for the year, although a small amount was accounted for by the Company's holding of collateralised debt obligations ('CDOs') backed by ABS. While there has been no adverse impact on the cash generative capability of these assets (as noted in the Investment Manager's Report), they have suffered a downward valuation based on the higher discount rates being applied to ABS CDO assets generally in the current market. With regard to the balance of the Company's investment portfolio, regulatory changes affecting mortgage prepayment charges in both Portugal and Italy have depressed valuations in the Company's portfolio of residual investments backed by prime mortgage loans in those countries. However, the credit performance of the Company's Portuguese and Italian residual positions has, in the aggregate, exceeded original pricing expectations. Notwithstanding the regulatory changes, the aggregate fair value of these positions is in line with their original cost. The Company's portfolio of residuals backed by small-and-medium enterprise ('SME') loans, which was accumulated over the course of the year as part of the Company's diversification policy, has performed satisfactorily. Outlook The Company's investment policy has, from the outset, been to aim for a high degree of risk diversification, for instance through the 'granularity' of the many individual loans underlying each ABS investment, the geographical spread of the different positions and the inclusion in the Company's investment portfolio of ABS investments backed by assets other than residential mortgages. While this was not enough to prevent the disappointing performance that resulted from the virtually simultaneous and significant market events that affected the Company's three core markets, the experience of recent months has reinforced the importance of diversification. In seeking to deliver significant and stable cash returns to investors, the Company will seek to achieve further diversification in its investments while seeking high risk-adjusted returns. The asset sales over the past two months have significantly reduced the Company's borrowings. This reduction enables the Company to apply future cash flows generated by the Company's investment portfolio in ways that will optimise value for shareholders. As announced on 6 March 2007, the directors intend to seek the approval of shareholders (and, given the significant shareholding in the Company by investors connected with the Investment Manager, that of the Takeover Panel) for the Company to buy back shares. The process of obtaining these approvals was delayed by, inter alia, the impact of the turbulent markets on the valuation of the Company's investments. The Company is sending a circular to shareholders shortly calling for an extraordinary general meeting of shareholders. The directors will continue to assess how the cash flow from the Company's continuing investments can be used to the best advantage of all shareholders, whether through share buy backs or other forms of capital return or, if the comparative returns justify it, for reinvestment in new assets. For as long as the Company's share price is at a material discount to net asset value, the directors would expect to use surplus cash for share buybacks. Despite the disappointing results for the period and the difficult market conditions behind them, the directors continue to believe that a broadly diversified portfolio of ABS and other investments can provide investors with attractive returns. We will work with the Investment Manager to deliver this outcome. Board Stuart Fiertz has resigned from the board in order to be able to assume overall responsibility at the Investment Manager in relation to the Company and the implementation of the investment strategy outlined above. While we will miss his contribution in his capacity as a director, we welcome that he will now be leading the team at the Investment Manager drawing on the full range of expertise and specialisations within the firm. Annual General Meeting The Company's Annual General Meeting will be held at the registered offices of the Company on 3 September 2007. The notice of the Annual General Meeting is set out at the end of the annual report and a form of proxy accompanies the annual report. Tom Chandos, Chairman 25 June 2007 Investment Manager's Report Overview After four quarters of good performance since its IPO, the Company faced a challenging set of circumstances in the quarter ended 31 March 2007. Significant market events affected the Company's investments backed by UK and US mortgages, and regulatory changes affected the Company's Continental European mortgage-backed investments. Apart from the highly-publicised events in the US sub-prime mortgage market, the Company's UK investments have been affected by a change in the prepayment behaviour of UK mortgage borrowers. Recent regulatory changes in both Portugal and Italy have affected the level of prepayment charges that banks can charge to borrowers who prepay their mortgages, and these changes have also had an adverse (albeit lesser) impact on the Company's investments backed by mortgages in those countries. The aggregate value of the Company's UK, US and European mortgage-backed investments accounted for approximately 86% of the Company's investment portfolio by gross asset value ('GAV') at 31 December 2006. While Cheyne Capital, as part of its investment strategy, had sought to diversify the Company's investment portfolio in terms of both asset type and geography in order to minimise the impact of any single event in a particular market, the almost simultaneous occurrence of three significant events in the Company's three core markets, and the full extent of their impact on the Company's investments, was unexpected. These events contributed to increased price volatility and decreased liquidity. In the case of the well-publicised events affecting the US sub-prime mortgage market, they led to a significant deterioration in value and a market re-pricing of US sub-prime mortgage-backed investments. Although the Company's investment portfolio was not insulated from these market events, Cheyne Capital had made portfolio management decisions in previous quarters that to some extent mitigated their ultimate impact. We chose to stop purchasing US residuals in February 2006, thereby reducing the Company's exposure to 2006 vintage assets and the Company's relative exposure to the US market. Following the challenges of the past quarter, we believe that participants in the mortgage residual market have taken a more conservative view in pricing the risk of residual assets. The Company is well positioned to take advantage of this re-pricing of the residual market going forward. Investment Portfolio US investments - Impacted by increased loss assumptions The sudden and rapid deterioration of the US sub-prime mortgage market highlighted the substantial deficiencies in underwriting standards in 2006 and the extent to which credit losses in the 2006 vintage mortgage portfolios are likely to be much higher than market participants had originally expected. The Company purchased its last US mortgage residual in February 2006 and was thus not materially exposed to loans originated throughout 2006. The 2006 vintage, however, cannot be viewed in isolation, as the impact of the deterioration in the US sub-prime mortgage market has been much broader. There has been a material reduction in the availability of credit for sub-prime mortgages as the weaker capitalised originators have exited the market and underwriting guidelines have tightened among the remaining mortgage lenders. This reduction in the availability of credit has contributed to weaker housing market fundamentals. As a result of changes in underlying market conditions, Cheyne Capital increased the loss assumptions associated with the Company's US mortgage residuals. Given the resulting change to the risk/reward profile of the majority of these assets and the risk of further value deterioration, we decided to sell all but one of the Company's US investments. UK investments - Impacted by changes in borrower prepayment behaviour With respect to the UK mortgage residual portfolio, the Company has previously noted the changes that Cheyne Capital has observed in borrower prepayment behaviour. Borrowers are increasingly waiting until the end of their mortgage discount (or 'teaser') period to refinance their mortgage loans. While this trend is likely to have been driven by a number of factors, we believe that key drivers include the increased competition in the non-conforming mortgage market (which has increased mortgage choice for sub-prime borrowers) as well as the changing interest rate environment. Each of the Company's UK mortgage residual exposures includes cash flows from early repayment charges typically charged to borrowers who prepay their mortgage loans in the discount period, in addition to the excess spread earned in the securitisation transaction (being the income from the underlying mortgage portfolio after servicing of the debt issued as part of the securitisation). Where there is a general increase in prepayment rates over the life of a securitisation transaction, the increased cash flows received from early repayment charges act as a hedge against the overall reduction in the excess spread cash flows (which have been reduced because mortgages have been repaid and no longer form part of the mortgage pool). Where the increase in prepayment rates occurs soon after (rather than during) the discount or 'teaser' period, however, this has two adverse impacts on the value of the investment. In addition to receiving fewer early repayment charges, the absolute level of excess spread on the portfolio will have been reduced. Consequently, with borrowers prepaying their mortgages at a higher rate after the end of the teaser period, the duration of the excess spread cash flows has been reduced relative to Cheyne Capital's original pricing assumptions, with no increase in early repayment charges to mitigate these reduced cash flows. This change to the timing of borrower prepayments and the magnitude of the repayments following the end of the teaser period are the principal causes of the fair value adjustments that the Company has made in respect of its UK investments. The change in prepayment behaviour does not appear to be confined to a single originator or loan type and has had an impact on all of the Company's UK residual positions. In addition, the rise in UK interest rates over the last nine months may have an impact on the level of defaults in the Company's portfolio. While many of the underlying loans that collateralise the Company's UK investments are well seasoned (i.e., over two years old) and benefit from increased equity in the underlying properties as a result of higher UK house prices, an increase in interest rates will have a negative impact on the affordability of the mortgage loans for some borrowers. Cheyne Capital has increased the assumed default rates and cumulative loss levels for the UK mortgage residuals and this increase is also reflected in the asset valuations as of 31 March 2007. Continental European Investments - Impacted by regulatory changes to prepayment charges With respect to the Continental European mortgage residual portfolio (the 'Continental MBS Portfolio'), the introduction of legislation that caps early repayment charges in both Portugal and Italy has had an impact on the value of the Company's assets. Portugal passed legislation in April 2007 limiting the prepayment charges that banks can charge to mortgage borrowers to 50 basis points. Italy has passed similar legislation and, in May 2007, the Italian banking and consumer associations reached an agreement (mandated by legislation) similarly capping prepayment charges on existing mortgages at 50 basis points. The Company holds five investments backed by Portuguese mortgages and one investment backed by Italian mortgages. While we have increased prepayment assumptions where necessary in light of these developments, it is important to note that the Company receives early repayment charge cash flows from only three of its investments. The relevant investments are quite seasoned and expected cash flows from early repayment charges are a relatively small component of overall value. The Continental MBS Portfolio is now quite seasoned. Strong house price growth in Italy, and to a lesser extent in Portugal, has resulted in low initial loan-to-value ('LTV') portfolios having even lower LTVs today. This is a positive factor for both default and recovery rates and, to date, recoveries of liquidated mortgages in the portfolio have exceeded expectations. Notwithstanding the negative impact of reducing early repayment charge cash flows and increasing prepayment assumptions where appropriate, the aggregate fair value of the Company's Portuguese and Italian asset portfolio remains in line with original cost. The negative impact of the regulatory changes has been offset by the continuing credit outperformance of the majority of the assets relative to our initial pricing assumptions and by the tightening of yields in the sector relative to the wider yields at which these now seasoned assets were purchased. Apart from the Company's mortgage residual portfolio, 5.9% of the portfolio as at 31 March 2007 was invested in three CDO residual positions managed by Cheyne Capital (12% as at 31 March 2006) and 12.6% of the portfolio was invested in SME residual positions (12.0% as at 31 March 2006). This asset diversification has benefited the Company in the past quarter, as the cash flow generative capability of these assets has not been affected by the changes in the US, UK or European mortgage markets. The CDO investments comprise one CLO-squared transaction (a CDO transaction comprised of underlying collateralised loan obligation (or 'CLO') exposures), with underlying exposure to US leveraged loans, and two ABS CDOs. Consistent with many ABS CDO investments, the Company's ABS CDO residual investments are exposed to the US sub-prime market. While the ABS CDO sector has suffered generally from increased price volatility and illiquidity as a result of this exposure, the Company's ABS CDO investments can be distinguished by reference to two important factors. Both of the Company's ABS CDO investments are performing in line with expectations and there have been no downgrades to any of the CDO assets that collateralise these investments (although there have been several upgrades). There is also a high degree of seasoning of the underlying ABS CDO assets in both investments and therefore a relatively small exposure to the 2006 vintage sub-prime transactions that have been the focus of recent concern. While this limited exposure has resulted in the cash generative capability of the Company's ABS CDO investments having been relatively unaffected by the turmoil in the US sub-prime market, the market discount rate for ABS CDO assets has increased and, consequently, the fair value of the Company's ABS CDO investments is lower than their amortised value. The Company's portfolio of SME residuals is performing in line with, or better than, expectations. Unlike mortgage residuals, the Company's SME residual positions carry limited prepayment risk, as the transactions are generally revolving (with underlying assets replaced as they are repaid, subject to rating agency qualification criteria). While the Company's SME assets are exposed to potential losses in the underlying portfolios and to the timing of those losses, the track record of the banks that have originated the SME transactions in which the Company has invested is strong and these banks have an alignment of interest with the Company, typically through shared residual investment or exposure to the underlying credits outside the securitisation. Portfolio Valuation and Asset Sales Portfolio Valuation In accordance with the Company's valuation procedures, we reviewed the fair value of the Company's investments in light of their performance, observable market data and our expectations regarding future trends. Cash flows received in respect of each investment were allocated between income and principal on the basis of their carrying values and booking yields, resulting in amortised carrying values for the Company's residual income positions as at 31 March 2007. The differences between these amortised carrying values and the fair values of the assets as at 31 March 2007 have been recorded as fair value adjustments in the Company's income statement. Following the valuation adjustments made to the Company's portfolio, the NAV of the Company has decreased to Euro 7.24 per share from Euro 9.90 per share as at 31 December 2006 (a decrease of 26.8%). The valuation adjustments made in respect of the Company's assets reflect Cheyne Capital's revised credit, prepayment and discount rate assumptions. These assumptions have also been assessed in light of actual sale prices obtained in asset sales that took place both during and after the quarter ended 31 March 2007. Assets sold since 31 March 2007 have been valued as at 31 March 2007 on the basis of the sale prices at which they were actually sold (adjusted to take account of income accrued for the quarter ended 31 March 2007 and cash flows received during that quarter). The Company's asset sales are described in further detail in the next section. The table below summarises the reduction in the value of the Company's portfolio by asset class: Asset Class 31 31 March 31 March Fair Value % Change to % Change December 2007 2007 Fair Adjustment 31 March relative to 2006 Book Amortised Value (Euro) 2007 31 March Value Book Value (Euro) Amortised 2007 Total (Euro) (Euro) 1 Book Value Portfolio Amortised Book Value 2 UK3 302.2 289.5 214.94 -74.6 -25.8% -13.1% US 65.1 61.2 32.2 -29.0 -47.4% -5.1% Continental 105.8 104.6 105.2 0.7 0.6% 0.1% MBS SME 52.5 51.5 51.4 -0.1 -0.1% 0.0% ABS CDO 29.4 29.2 23.8 -5.4 -18.5% -0.9% Cash and 15.7 34.9 34.9 0.0 0.0% Other Assets 0.0% Total 570.9 571.0 462.5 5 -108.4 6 -19.0% -19.0% 1 Amortised Book Value as at 31 March 2007 reflects carrying value of the assets as at 31 December 2006 after taking into account income accrued for the quarter ended 31 March 2007 and cash flows received during that quarter 2 Percentage figures reflect fair value change for each asset class relative to the aggregate 31 March 2007 Amortised Book Value of the Company's entire investment portfolio. 3 Inclusive of proceeds from the sale of Southern Pacific Financing 06-A plc. This asset was sold on 30 March 2007 but has been included in this total fair value calculation as at 31 March 2007 in order to provide a complete summary of fair value changes on the UK portfolio as a whole (including both realised and unrealised losses). 4 Inclusive of assets held synthetically pursuant to total return swap agreements. See Note 10 to the financial statements. 5 The total asset amount reflected on the consolidated balance sheet (â‚¬427.1 million) is net of indebtedness effected through total return swap agreements (â‚¬35.4 million). (See note 10 to the financial statements.) 6 This figure reflects adjustments to fair value made in the fourth quarter. Net unrealised losses on investments at fair value through profit or loss for the year ended 31 March 2007 totalled â‚¬112.3 million (see note 4 to the financial statements). Asset Sales As noted above, we determined that certain assets were no longer attractive from a risk/reward perspective in light of market events. We also viewed certain assets as having significant potential for further deterioration. Furthermore, our analysis and review of originator concentrations prompted us to reduce the Company's exposure to certain individual originators. Finally, in light of the increased illiquidity of residuals brought about by market events, we determined that it would be prudent to sell assets in order to reduce the Company's leverage. The proceeds of all asset sales have been used to repay indebtedness or to increase cash available to the Company. Further details of these sales are set out below. The Company's exposure to US mortgage residuals was reduced because of our concerns regarding the state of the US sub-prime market and the housing market in general. As stated above, while the market initially expressed concerns regarding the underwriting quality of 2006 vintage mortgage loans, the impact on the broader market was far wider, with concerns subsequently having spread to other vintages and to the credit quality of US sub-prime mortgage assets generally. Subsequent to 31 March 2007, the Company sold three of its four US residual positions. Since 31 March 2007, the Company has also sold three UK residual positions in addition to one UK residual position, Southern Pacific Financing 06-A plc, which was sold on 30 March 2007. (The sale of half of the Company's investment in RMAC 2004-NSP4 plc announced on 3 April 2007, which was subject to contract, was not completed.) A complete list of assets sold by the Company since 31 March 2007 is set out below. Investment Sold Description of Underlying Assets US Positions Argent Securities Trust 2006-W1 Approximately 10,400 sub-prime mortgage loans, primarily first-ranking First Franklin Mortgage Loan Trust Approximately 3,400 sub-prime mortgage loans, primarily first-ranking Morgan Stanley ABS Capital I Inc Approximately 4,100 sub-prime Trust 2005-HE5 mortgage loans, primarily first-ranking UK Positions RMAC 2005 NSP2 plc Approximately 6,300 sub-prime mortgage loans/3,700 prime mortgage loans RMAC 2005-NS1 plc Approximately 7,800 sub-prime mortgage loans Southern Pacific Financing 05-B plc Approximately 3,000 near-prime mortgage loans The aggregate proceeds from the sale of the US investments (all of which took place after 31 March 2007) totalled Euro 22.8 million, reflecting a 53.0% reduction in gross asset value relative to the adjusted book value of these investments as at 31 December 2006. As the fair value of these investments as at 31 March 2007 was determined on the basis of the prices at which these assets were sold, these sales have not reduced the net asset value of the Company post year end. While the investments were sold at a significant loss relative to 31 December 2006 carrying values, they were sold for prices that exceeded the fair values that Cheyne Capital had assigned to them as at 31 March 2007. The aggregate sale price reflected a premium of 13.3% above the Euro 20.1 million aggregate model value that Cheyne Capital had assigned to these investments as at 31 March 2007. The aggregate proceeds from the sale of the UK investments (inclusive of the sale of Southern Pacific Financing 06-A plc) totalled Euro 93.2 million, reflecting a 24.3% reduction in gross asset value relative to the adjusted book value of these investments as at 31 December 2006. Similar to the sale of US investments, the fair value of these investments as at 31 March 2007 was also determined on the basis of the prices at which the assets were sold and, consequently, these sales have not reduced the net asset value of the Company post year end. These investments were also sold for prices that exceeded the fair values that Cheyne Capital had assigned to them as at 31 March 2007. The aggregate sale price reflected a premium of 4.4% above the Euro 89.3 million aggregate model value that Cheyne Capital had assigned to these investments as at 31 March 2007. Portfolio Yield The weighted average yield of the Company's investment portfolio in local currency terms after giving effect to all asset sales (including those which took place after 31 March 2007) is 13.4%. This weighted average yield has been calculated on the basis of the original effective interest rate booked for each asset, with all changes to underlying cash flow assumptions having been reflected in the amortised cost value of each asset.* While the Company has reported the weighted average portfolio yield in prior quarters on the basis of effective yields for each asset as they were adjusted to reflect changes in cashflow assumptions, the Company believes that a calculation based on original effective interest rates enables it to provide more meaningful comparative information. The equivalent weighted average yield of the Company's investment portfolio as at 31 December 2006 was 13.6%. *Where the Company adjusts 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 the revised amortised cost value for the purposes of calculating income. The Company takes account of underlying changes in cash flows in its income recognition as soon as adverse factors are identified. (See notes 2, 3 and 14 to the financial statements.) Portfolio Breakdowns A summary of the Company's ten largest investment positions as at 31 March 2007, which account for 57.1% of the total portfolio by gross asset value, is set out in the following table. Investment Description of Underlying Assets Investments individually accounting for 7 to 9% of total investment portfolio RMAC 2005-NSP2 plc* Approximately 6,300 sub-prime/3,700 prime UK mortgage loans. Newgate Funding plc Approximately 5,900 near prime and non-conforming UK mortgage loans Investments individually accounting for 5 to 7% of total investment portfolio Eurosail 2006-1 plc Approximately 9,800 prime, non-conforming and buy-to-let (UK) mortgage loans Sestante Finance S.R.L. Approximately 3,500 prime Italian mortgage loans RMAC 2004-NSP4 plc Approximately 8,100 prime, non-conforming and buy-to-let mortgage loans Investments individually accounting for less than 5% of total investment portfolio Magellan Mortgages No. 2 plc Approximately 23,000 prime Portuguese mortgage loans Lusitano Mortgages No. 1 plc Approximately 23,900 prime Portuguese mortgage loans Magellan Mortgages No. 1 plc Approximately 23,000 prime Portuguese mortgage loans Southern Pacific Financing Approximately 3,000 near-prime UK 05-B plc* mortgage loans Eirles Three Limited Approximately 1,400 SME loans (Tranche 227B) * Asset sold after 31 March 2007. A breakdown of the Company's investment portfolio by jurisdiction (by reference to underlying asset originator) is set out below. Adjusted 31 March 2007* UK 41% Portugal 25% Italy 8% Germany 11% CDO 7% Holland 5% US 3% *Adjusted to reflect asset sales post year end and asset paydowns between 31 March 2007 and 31 May 2007. 31 March 2007 UK 47% Portugal 20% Italy 6% Germany 9% CDO 6% Holland 4% US 8% 31 December 2006 UK 54% Portugal 14% Italy 5% Germany 7% CDO 5% Holland 3% US 12% 31 March 2006 UK 35% Portugal 17% Italy 6% Germany 3% CDO 11% Holland 10% US 18% A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Adjusted 31 March 2007* Prime 35% SME 16% CDO 7% SubPrime 23% NearPrime 9% *Adjusted to reflect asset sales post year end and asset paydowns between 31 March 2007 and 31 May 2007. 31 March 2007 Prime 30% SME 13% CDO 6% SubPrime 31% NearPrime 20% 31 December 2006 Prime 24% SME 9% CDO 5% SubPrime 38% NearPrime 24% 31 March 2006 Prime 25% SME 9% CDO 11% SubPrime 34% NearPrime 21% Financing The Company's leverage as at 31 March 2007 was 25.9% (17.9% as at 31 March 2006). Inclusive of proceeds from the asset sales that have taken place since 31 March 2007, the Company's cash balance has increased to approximately Euro 53.7 million and leverage has been reduced to approximately 6.6% as at 31 May 2007. While financing is currently provided through uncommitted repo facilities, the Company is in the process of negotiating longer-term financing of its investment portfolio. While longer-term facilities will increase the Company's financing costs, we believe that the increased costs of a long-term committed facility are justified and that such facilities will enable the Company to reduce refinancing risk. Strategy and Market Outlook Cheyne Capital remains committed to creating a diversified portfolio of asset-backed residuals. While the Company's investment portfolio was largely comprised of mortgage-backed residuals at the time of its IPO, the portfolio has since been diversified into additional asset classes such as SMEs. In the UK, we expect that the flow of mortgage-backed residuals will continue unabated as more non-conforming mortgage originators enter the market. We believe that the increased competition in the mortgage market that will result, and the evolution of the UK mortgage market generally, will produce new UK residual positions that will be markedly different from the positions now owned by the Company in terms of both credit and pricing. We will seek to purchase these assets for the Company only where the credit and prepayment risks of the position are accurately reflected in pricing. Despite changes to legislation that have affected prepayment charges in Portugal and Italy, we expect the pricing of European prime mortgage residuals to remain aggressive. We do not expect to add positions in this sector in the near future. We will also remain cautious towards the US mortgage residual market until pricing more appropriately reflects the risk of the underlying loan collateral. Within the ABS CDO sector, transactions have undergone a fundamental re-pricing in light of the concerns regarding US sub-prime mortgages and, in particular, those containing material exposure to 2006 vintage transactions. This has left the market with a technical oversupply of a broad range of CDO equity positions, including transactions beyond the mortgage sector. While this may create an attractive investment opportunity in time, these positions are currently subject to a high degree of price volatility. We will consider making selective investments in this sector once the market has stabilised. As origination volumes in European CDOs are expected to increase, these assets may also provide an opportunity for further diversification of the Company's investment portfolio. The Company's SME residual positions have performed in line with or better than our pricing cases and we continue to favour this asset class. We will look increasingly at sourcing these residuals by dealing directly with originators. We are very disappointed with the results for the financial year. While the Company faced an unprecedented and extraordinary combination of market events in the final quarter, the securitisation market remains robust and we believe that the Company's strategy of investing primarily in ABS residual positions remains viable. We will look to further diversify the Company's residual portfolio by adding new asset classes. We will also look to enhance the investment portfolio by adding new ABS and other investments offering attractive returns. Cheyne Capital Management (UK) LLP 25 June 2007 Directors' Report The Directors present their annual report and the audited consolidated financial statements for the year ended 31 March 2007. Queen's Walk Investment Limited (the 'Company') was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands, and commenced its operations on 8 December 2005. The Company is a closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 1994 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 Company and its subsidiary, Trebuchet Finance Limited. Principal activity and business review The principal activity of the Group during the year was that of an investment company. The Group is expecting to continue its activities in the coming year. A review of the year is provided in the Investment Manager's Report. Results and dividends The results for the year and the Group's financial position at the end of the year, are shown on pages 24 to 26. Dividends totalling Euro 40,214,548 were paid /declared during the year, included in this amount is the third interim dividend of Euro 9,342,774, which was paid on 9 April 2007. A fourth interim dividend for the year ended 31 March 2007 of (Euro 0.x) per share was declared by the Directors on 25 June 2007 and has not been included as a liability in these financial statements. While these accounts reflect a net loss after realised losses and fair value adjustments, the Directors have declared a fourth interim dividend in seeking to fulfil the Company's objective of providing shareholders with stable returns in the form of quarterly dividends and in accordance with the Company's dividend policy. The dividend declared is covered by income received from underlying investments and the Company has sufficient reserves (in the form of the Other Reserve) from which the dividend may be paid. (See note 7 to the financial statements for further information.) Directors The Directors of the Company who served during the year were: Tom Chandos (Chairman) Stuart Fiertz Graham Harrison John Hawkins Talmai Morgan Christopher Spencer The Directors' interests in the share capital of the Company at 31 March 2007 (some of which are held directly or by entities in which the Directors may have a beneficial interest) were: Number of Ordinary Shares Tom Chandos (Chairman) 19,000 Stuart Fiertz 200,000 Talmai Morgan 1,000 Christopher Spencer 1,000 Graham Harrison 1,000 John Hawkins 1,000 Substantial interests in share capital As at 30 May 2007 the following holdings representing more than 3 per cent of the Company's issued share capital had been reported: Number of Ordinary Percentage Shares held Cheyne ABS Opportunities Fund LP 17,900,756 44.07% WestLB AG 2,700,000 6.65% Goldman Sachs Securities (Nominees) Limited 2,275,700 5.60% State Street Nominees Limited (re account OM02) 2,009,852 4.95% State Street Nominees Limited (re account WJC2) 1,495,500 3.68% The Investment Manager The Directors have reviewed the performance of the Investment Manager and are satisfied that the continued appointment of the Investment Manager on the terms agreed is in the best interests of the shareholders and the Company. Auditors Following the transfer of their business to Deloitte & Touche LLP with effect on 1 October 2006, Deloitte & Touche resigned as auditors on 5 March 2007 and the Directors resolved to appoint their successors Deloitte & Touche LLP as auditors with effect from that date. A resolution for the reappointment of Deloitte & Touche LLP as auditors will be proposed at the forthcoming Annual General Meeting. Listing Requirements On 13 December 2005 the Company's Ordinary Shares were admitted to the Official List of The London Stock Exchange. Authorised and Issued Share Capital There has been no movement in the authorised and issued share capital during the year. On behalf of the Board on 25 June 2007 Christopher Spencer Director Talmai Morgan Director Corporate Governance Statement The Directors are committed to ensuring that high standards of corporate governance are maintained and have made it Company policy to comply with best practice on corporate governance, insofar as the Directors believe it is relevant and appropriate to the Company, and notwithstanding the fact that the Company is not obliged to and has availed itself of the exemption not to comply with the 'Combined Code' (i.e. the Code of Best Practice published by the Committee on the Financial Aspects of Corporate Governance) as it is a Guernsey registered company. However the Company complies with the corporate governance guidelines issued by the Guernsey Financial Services Commission on 10 December 2004, whose underlying principles are similar to those of the Combined Code. In addition, the Directors, in accordance with best practice, comply with the Combined Code provisions as far as possible. Going Concern The Directors believe it is appropriate to adopt the going concern basis in preparing the financial statements as, after due consideration, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. Board effectiveness For the purposes of assessing compliance with the Combined Code, the Board considers all of the Directors, other than Mr Fiertz, as independent of the Investment Manager and free from any business or other relationship that could materially interfere with the exercise of their independent judgement. In accordance with the Combined Code, the Board has established an Audit Committee and a Nomination Committee, in each case with formally delegated duties and responsibilities within written terms of reference. The Board has not established a remuneration committee as the Company has no executive directors or employees. The Audit Committee is chaired by Mr Spencer and its other members are Mr Morgan and Mr Hawkins. Only independent Directors serve on the Audit Committee and members of the Audit Committee have no links with the Company's external auditors and are independent of the Investment Manager. The terms of reference state that the Audit Committee will meet not less than twice a year and will meet the external auditors at least once a year, without the non-independent director present. The Audit Committee is responsible for overseeing the Company's relationship with the external auditors, including making recommendations to the Board on the appointment of the external auditors and their remuneration. The Audit Committee is required to consider the nature, scope and results of the auditors' work and reviews, and develop and implement policy on the supply of any non-audit services that are to be provided by the external auditors. It receives and reviews reports from the Investment Manager and the Company's external auditors relating to the Company's annual report and accounts. The Audit Committee focuses particularly on compliance with legal requirements, accounting standards and the Listing Rules and ensuring that an effective system of internal financial and non-financial controls is maintained. The Company does not have an internal audit function but due to internal control processes put in place by the Administrator, Sub-Administrator, Custodian and Investment Manager, the Board has decided to place reliance on their systems and internal control procedures. The Nomination Committee is chaired by Mr Chandos and its other members are Mr Morgan and Mr Spencer. The members of the nomination committee are and will be independent Directors. The terms of reference state that the Nomination Committee will meet not less than once a year, will have responsibility for considering the size, structure and composition of the Board, and retirements and appointments of additional and replacement Directors and that the Nomination Committee will make appropriate recommendations to the Board. The following table shows the number of meetings held by the Board and each committee for the year ended 31 March 2007 as well as the number of attendances at each meeting. Number of meetings Number of attendances Board of Directors Tom Chandos 4 4 Stuart Fiertz 4 4 Talmai Morgan 4 3 Christopher Spencer 4 3 Graham Harrison 4 4 John Hawkins 4 4 Number of meetings Number of attendances Audit Committee Talmai Morgan 2 2 Christopher Spencer 2 2 John Hawkins 2 2 Given the relatively short operating history of the Company, there were no Nomination Committee meetings held during the year. The holders of the position of the Chairman of the committees referred to above will be reviewed on an annual basis. The membership of these committees and their terms of reference will be kept under review. The performance of the Chairman of the Board will be assessed by another of the independent Directors through discussions with the other Directors. The Company has appointed M:Communications as public relations consultant and Citigroup and Goldman Sachs as corporate brokers. From these parties and the Investment Manager, the Board expects to be informed of the views of the Company's major shareholders. Internal Controls The Directors acknowledge that they are responsible for establishing and maintaining the Company's system of internal control and reviewing its effectiveness. The Directors review not just internal controls but all controls including operations, compliance and risk management. The key procedures established to provide internal control are: Investment management is provided by Cheyne Capital Management (UK) LLP. The Board is responsible for setting the overall investment policy and monitors the actions of the Investment Manager at regular Board meetings. Administration and company secretarial services are provided by Kleinwort Benson (Channel Islands) Fund Services Limited. The Sub-Administrator to which certain functions are delegated is Investors Fund Services (Ireland) Limited. Custody of assets is undertaken by Investors Trust & Custodial Services (Ireland) Limited. Regular compliance reports are received by the Board. The Directors of the Company clearly define the duties and responsibilities of their agents and advisers, whose appointments are made by the Board after due consideration. The Board monitors the ongoing performance of such agents and advisers. Each of the above agents and advisers maintain their own systems of internal control on which they report to the Board. The systems are designed to ensure effectiveness and efficient operation, internal control and compliance with laws and regulations. In establishing the systems of internal control, regard is paid to the materiality of relevant risks, the likelihood of costs being incurred and costs of control. It follows, therefore, that the systems of internal control can only provide reasonable but not absolute assurance against the risk of material misstatement or loss. Directors' Remuneration Report This report describes how the Board has applied the Principles of Good Governance relating to Directors' remuneration. A resolution to approve the report will be proposed at the Annual General Meeting of the Company at which the financial statements will be presented for approval. Each of the Directors has signed a letter of appointment with the Company setting out the terms of their appointment. The Chairman will receive an annual fee of Euro 120,000 and each of Mr Morgan, Mr Spencer, Mr Harrison and Mr Hawkins will receive an annual fee of Euro 30,000, in each case payable quarterly in equal instalments in arrears. Mr Fiertz will not receive a fee for the performance of his duties as a member of the Board. The Company has not established a Remuneration Committee as the Company does not have any executive Directors or employees. The total amounts for the Directors' remuneration for the year were as follows: Year ended Period from 31 March 6 September 2007 2005 to 31 March 2006 Euro Euro Tom Chandos 120,000 67,824 Graham Harrison 30,000 16,957 John Hawkins 30,000 16,957 Talmai Morgan 30,000 16,957 Christopher Spencer 30,000 16,957 Total Directors' 240,000 135,652 emoluments During the year, Talmai Morgan and Graham Harrison each received Euro 12,500 in their capacity as directors of Trebuchet Finance Limited. Statement of Directors' Responsibilities The Directors are responsible for preparing financial statements for each financial year which give a true and fair view of the state of affairs of the Group as at the end of the financial reporting period and of the profit and loss of the Group for that period in accordance with International Financial Reporting Standards and which are in accordance with applicable laws. In preparing those financial statements, the Directors are required to: â€¢ select suitable accounting policies and then apply them consistently; â€¢ make judgements and estimates that are reasonable and prudent; â€¢ state whether applicable accounting standards have been followed; and â€¢ prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and to enable them to ensure that the financial statements have been properly prepared in accordance with The Companies (Guernsey) Law, 1994. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. Independent auditors' report to the members of Queen's Walk Investment Limited We have audited the consolidated financial statements of Queens' Walk Investment Limited (the 'financial statements') for the year ended 31 March 2007 which comprise the Consolidated Income Statement, Consolidated Statement of Changes in Shareholders' Equity, Consolidated Balance Sheet, Consolidated Cash Flow Statement and related notes 1 to 20. These financial statements have been prepared under the accounting policies set out therein. This report is made solely to the Company's members, as a body, in accordance with Section 64 of The Companies (Guernsey) Law, 1994. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an Auditors' Report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors The Directors' responsibilities for preparing the annual report and the financial statements in accordance with International Financial Reporting Standards and applicable Guernsey law are set out in the statement of Directors' Responsibilities. Our responsibility is to audit the financial statements in accordance with relevant Guernsey legal and regulatory requirements and International Standards on Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a true and fair view in accordance with the International Financial Reporting Standards and whether the financial statements have been properly prepared in accordance with The Companies (Guernsey) Law, 1994. We also report to you if, in our opinion, the Directors' report is not consistent with the financial statements, if the Company has not kept proper accounting records, or if we have not received all the information and explanations we require for our audit. We read the other information accompanying the financial statements and consider whether it is consistent with those statements. The other information comprises only the Chairman's Statement, Investment Manager's Report, Directors' Report, the Corporate Governance Statement and the Directors' Remuneration Report. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the Directors in the preparation of the financial statements, and of whether the accounting policies are appropriate to the Group's circumstances, consistently applied and adequately disclosed. We are not required to review any Corporate Governance disclosures required by The Listing Rules of the Financial Services Authority as the Company has availed itself of an exemption, as an overseas company, from the requirement to publish a statement of compliance with The Combined Code. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view in accordance with International Financial Reporting Standards of the state of the Group's affairs as at 31 March 2007 and of the Group's loss for year ended 31 March 2007 and have been properly prepared in accordance with The Companies (Guernsey) Law, 1994. Deloitte & Touche LLP Chartered Accountants Guernsey, Channel Islands Date: 25 June 2007 Neither an audit nor a review provides assurance on the maintenance and integrity of the website, including controls used to achieve this, and in particular whether any changes may have occurred to the financial information since first published. These matters are the responsibility of the Directors but no control procedures can provide absolute assurance in this area. Legislation in Guernsey governing the preparation and dissemination of financial information differs from legislation in other jurisdictions. Consolidated Income Statement For the year ended 31 March 2007 Total Total Period from Revenue Fair value Year ended 31 6 September return gains and March 2007 2005 to 31 Note losses* March 2006 Euro Euro Interest income 4 66,955,077 - 66,955,077 13,862,617 Gains and losses 4 on fair value through profit or loss financial instruments* - (115,366,947) (115,366,947) (1,382,130) 66,955,077 (115,366,947) (48,411,870) 12,480,487 Operating expenses 5 (11,522,135) - (11,522,135) (2,455,408) Finance costs 6 (7,813,593) - (7,813,593) (260,052) Net (loss)/profit 47,619,349 (115,366,947) (67,747,598) 9,765,027 (Loss)/earnings per Ordinary Share 8 Basic Euro (1.67) Euro 0.24 Diluted Euro (1.67) Euro 0.24 Weighted average Ordinary Shares outstanding 8 Number Number Basic 40,620,756 40,620,756 Diluted 40,620,756 41,063,527 All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. The accompanying notes form an integral part of the financial statements. * See note 7 to the financial statements. Consolidated Statement of Changes in Shareholders' Equity For the year ended 31 March 2007 Share Share Other Capital Accumulated Total Capital Premium Reserve Reserve Profits Note Euro Euro Euro Euro Euro Euro Net profit for the - - - - 9,765,027 9,765,027 period since incorporation Total recognised income - - - - 9,765,027 9,765,027 and expense Issuance of 16,17 - 406,207,540 - - - 406,207,540 Ordinary Shares Share options 16,19 - - - 7,672,500 - 7,672,500 issued Costs related 17 - (21,575,951) - - - (21,575,951) to issuance of Ordinary Shares Cancellation 17 - (384,631,589) 384,631,589 - - - of share premium Balance at 31 March - - 384,631,589 7,672,500 9,765,027 402,069,116 2006 Net loss for the - - - - (67,747,598) (67,747,598) year Total recognised income - - - - (67,747,598) (67,747,598) and expense Overaccrual of - - 46,715 - - 46,715 costs related to issuance of Ordinary Shares Distribution to 7 - - - - (40,214,548) (40,214,548) the Ordinary Shareholders of the Company Balance at 31 March - - 384,678,304 7,672,500 (98,197,119) 294,153,685 2007 The accompanying notes form an integral part of the financial statements. Consolidated Balance Sheet As at 31 March 2007 Note 31 March 31 March 2007 2006 Euro Euro Non-current assets Investments at fair value through profit or loss 10 366,743,454 487,890,499 Current assets Cash and cash equivalents 18 22,026,122 - Derivative financial assets - unrealised gain on 12 5,330 680,569 forward exchange contracts Derivative financial assets - unrealised gain on 12 2,174,398 - interest rate swap agreements Other assets 11 36,155,394 5,271,493 60,361,244 5,952,062 Total assets 427,104,698 493,842,561 Equity and liabilities Equity Share capital 16 - - Share premium account 17 - - Other reserve 17 384,678,304 384,631,589 Capital reserve in respect of share options 7,672,500 7,672,500 Accumulated (losses)/profits (98,197,119) 9,765,027 294,153,685 402,069,116 Current liabilities Overdraft and repurchase agreements 13 119,773,090 88,880,531 Distribution payable 7 9,342,774 - Derivative financial liabilities - unrealised 12 505,439 - loss on forward exchange contracts Other liabilities 15 3,329,710 2,892,914 Total liabilities 132,951,013 91,773,445 Total equity and liabilities 427,104,698 493,842,561 The accompanying notes form an integral part of the financial statements. These financial statements were approved by the Board of Directors on 25 June 2007. Signed on behalf of the Board of Directors by: Christopher Spencer Director Talmai Morgan Director Consolidated Cash Flow Statement For the year ended 31 March 2007 Note Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 (restated - see Note 1) Euro Euro Net cash inflow/(outflow) from operating 18 21,941,079 (302,177,060) activities Financing activities Proceeds from issuance of Ordinary Shares - 227,199,980 Overaccrual/(costs) related to issuance of 46,715 (13,903,451) Ordinary Shares Net borrowings under repurchase agreements 44,745,299 75,027,791 Dividends paid to shareholders 7 (30,871,774) - Cash flows from financing activities 13,920,240 288,324,320 Net increase/(decrease) in cash 35,861,319 (13,852,740) Reconciliation of net cash flow to movement in net cash Net increase/(decrease) in cash and cash 35,861,319 (13,852,740) equivalents Cash and cash equivalents at start of year/ (13,852,740) - period Effect of exchange rate fluctuations on 17,543 - cash and cash equivalents Cash and cash equivalents at end of year/ 22,026,122 (13,852,740) period The accompanying notes form an integral part of the financial statements. 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, 1994 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 Company and its subsidiary. At 31 March 2007, the Company's only subsidiary was Trebuchet Finance Limited. The Company's investment objective is to preserve capital and 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 Company 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 Company 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 Company 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 Company in its capacity as sub-administrator. At the date of authorisation of these financial statements, the following Standard, which has not been applied in these financial statements, was in issue but not yet effective: IFRS 7 Financial Instruments: Disclosures; and the related amendment to IAS 1 on capital disclosures. The Directors anticipate that the adoption of the above Standard in future periods will not have a material impact on the financial statements of the Company and Group except for additional disclosures on capital and financial instruments when the Standard comes into force for periods commencing on or after 1 January 2007. The Directors believe that other pronouncements which are in issue but not yet operative or adopted by the Company will not have a material impact on the financial statements of the Company. The comparative period figures disclosed relate to the period from incorporation (6 September 2005) to 31 March 2006. The comparative period cash flow statement has been restated to exclude the investments that were acquired in an equity settled transaction as disclosed in the Initial ABS Portfolio section of note 19. This restatement in the Consolidated Cash Flow Statement and in note 18 reduces the proceeds from issuance of Ordinary Shares and the purchase of investments and swap agreements by Euro 179,007,560. The comparative cash flow statement has also been restated to reclassify the net borrowings under repurchase agreements of Euro 75,027,791 from net cash inflow/(outflow) from operating activities to cash flows from financing activities. 2. Significant accounting policies Statement of compliance The financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ('IFRS'), which comprise standards and interpretations approved by the International Accounting Standards Board ('the IASB'), and International Accounting Standards and Standing Interpretations Committee interpretations approved by the International Accounting Standards Committee ('IASC') that remain in effect, together with applicable legal and regulatory requirements of Guernsey Law and the Listing Rules of the UK Listing Authority. Basis of preparation The Financial Statements of the Group are prepared under International Financial Reporting Standards 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 or loss. The majority of the Company'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 using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency 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 notes 2 - Fair Value and Interest Income, note 3 - Critical accounting judgements and key sources of estimation uncertainty and note 14 - Residual Interest Risk for further information regarding assumptions and critical judgements. These financial statements are presented in Euros 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 Euros. Basis of consolidation Subsidiaries are entities controlled by the Company (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 31 March 2007, the Group is made up of the Company and its only subsidiary, Trebuchet Finance Limited. In accordance with the Standing Interpretations Committee Interpretation 12 'Consolidation-Special Purpose Entities' ('SIC 12'), the Company consolidates only entities over which control is indicated by activities, decision making, benefits and residual risks of ownership. In accordance with SIC 12 the Company 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 Company was neither involved in the establishment of the SPE or the origination of the assets owned by the SPE, on the basis that the Company 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 Company's activities, decision making, benefits and residual risks or ownership. Trebuchet Finance Limited, the Company's only subsidiary, is an SPE over which the Company exercises control and its financial statements are therefore included in the consolidated financial statements of the Company. The Company 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 Company is an investment company 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 includes amounts held in interest bearing accounts and overdraft facilities. 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 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 using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency 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. 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 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. Dealer 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. 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. 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. Repurchase agreements The Group may finance the acquisition of some of its investments through the use of repurchase agreements. Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the balance sheet. Derecognition of a financial asset A transfer of a financial asset is accounted for as a derecognition 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 Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing 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 Company directly attributable to its initial public offering and any costs associated with the establishment of the Company 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 Company as a fee for the Investment Manager's work in raising capital for the Company. 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 Company is a tax-exempt Guernsey limited company. Accordingly, no provision for income taxes is made. Trebuchet Finance Limited is a 'qualifying company' 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 Company 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 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. Business and geographical segments The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities 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 Company 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'. 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' and note 14 under the headings 'Residual Interest Risk' and 'Liquidity Risk'. Valuation of investments As described in note 14 to the accounts, 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 Company'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. Where quoted bid prices are unavailable, the fair value of the financial asset is estimated by reference to a pricing model that incorporates discounted cash flow techniques as required by IAS 39. The assumptions upon which the pricing models are based are described in note 2 (Fair Value) to the accounts. Any change to assumptions surrounding the pricing models may result in different fair values being attributed to the investments. The fair value of the Group's investments is set out in note 10 and a further description of the risks associated with the Group's investments is provided in note 14. 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. A summary of the impact of changes to assumptions by reference to asset category is provided in note 14. 4. Interest income and gains and losses on fair value through profit or loss financial instruments Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro Euro Interest income from cash and cash 261,275 78,188 equivalents Interest income from investments at fair value through profit or loss 66,693,531 13,299,260 Interest income from commercial paper 271 485,169 Interest income 66,955,077 13,862,617 Net realised (losses)/gains from swap (1,459,293) 36,923 agreements Net realised foreign exchange gains 1,972,104 3,710,904 Net realised losses on investments at fair (3,673,475) - value through profit or loss Net realised (losses)/gains on investments at (3,160,664) 3,747,827 fair value through profit or loss, swaps and foreign currency Net unrealised gains on interest rate swap 2,174,398 - agreements (note 12) Net unrealised losses on investments at fair (112,310,937) (5,915,074) value through profit or loss Net unrealised (losses)/gains on foreign (2,069,744) 785,117 exchange Net unrealised losses on investments at fair (112,206,283) (5,129,957) value through profit or loss, swaps and foreign currency Gains and losses on fair value through profit (115,366,947) (1,382,180) or loss instruments 5. Operating expenses Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro Euro Investment management, custodian and administration fees Investment management and incentive fee (note 19) 8,347,360 1,814,524 Administration fee (note 19) 308,605 97,785 Custodian fee (note 19) 109,237 29,356 8,765,202 1,941,665 Other operating expenses Audit fees 130,751 54,467 Non-audit fees 466,163 - Directors' fees payable to Directors of Queen's Walk Investment Limited 240,000 135,652 Directors' fees payable to Directors of Trebuchet Finance Limited 32,527 8,500 Legal fees 917,709 189,210 Fees relating to corporate advisory services* 248,955 - Validation expenses 506,020 111,601 Other expenses 214,808 14,313 2,756,933 513,743 Total operating expenses 11,522,135 2,455,408 The Company has no employees. * These fees were payable to Deloitte & Touche LLP. 6. Finance costs Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro Euro Finance costs arises from: Overdraft - 2,713 Total return swap agreements (note 10) 1,293,615 - Repurchase agreements 6,519,978 257,339 Total finance costs 7,813,593 260,052 7. Dividends Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro Euro Interim dividend for the period ended 31 9,748,981 - March 2006 First interim dividend for the year ended 31 10,561,397 - March 2007 Second interim dividend for the year ended 31 10,561,396 - March 2007 Third interim dividend for the year ended 31 9,342,774 - March 2007 Amounts recognised as distributions to equity holders in the year 40,214,548 - The third interim dividend for the year ended 31 March 2007 of Euro 9,342,774 was paid on 9 April 2007. A fourth interim dividend for the year ended 31 March 2007 of 0.15 per share was declared by the Directors on 25 June 2007 and has not been included as a liability in these financial statements. Under The Companies (Guernsey) Law, 1994 (the 'Companies Law'), dividends can be paid from profits available for the purpose. Following the Company's IPO, and as described in note 17, the Company passed a special resolution and obtained Royal Court approval for the cancellation of the amount standing to the credit of its share premium account. The Other Reserve created on cancellation (amounting to Euro 384,678,304) is available as distributable profits for all purposes permitted by the Companies Law including the payment of dividends and buy-back of shares. Under the UKLA Listing Rules, any dividend must be covered by income received from underlying investments. The Company's objective is to provide shareholders with stable returns in the form of quarterly dividends. The Company's dividend policy is to make dividend distributions from its distributable net income subject to retaining a portion of such income as a reserve for payment in subsequent periods. While these accounts reflect a net loss after realised losses and fair value adjustments, the dividend declared is covered by income received from underlying investments as required by the Listing Rules (as reflected in the Consolidated Income Statement) and the Company has sufficient reserves (in the form of the Other Reserve) from which the dividend can be paid. 8. (Loss)/earnings per share Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro Euro The calculation of the basic and diluted earnings per share is based on the following data: (Loss)/earnings for the purposes of basic earnings per share being net profit attributable to equity holders (67,747,598) 9,765,027 Weighted average number of Ordinary Shares 40,620,756 40,620,756 for the purposes of basic earnings per share Effect of dilutive potential Ordinary Shares: Share options - 442,771 Weighted average number of Ordinary Shares for the purposes of diluted earnings per share 40,620,756 41,063,527 There is no dilution as at 31 March 2007, 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 Company has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Company have been appointed Directors of Trebuchet Finance Limited. To ensure that the Company will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the Company 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: 31 March 2007 31 March 2006 Euro Euro Asset-backed securities 349,042,564 487,890,499 Total return swap agreements 17,700,890 - 366,743,454 487,890,499 31 March 2007 31 March 2006 Asset-backed securities Euro Euro Opening cost 493,805,573 - Purchases 89,062,259 512,741,882 Sales proceeds (88,060,953) - Realised loss (3,673,475) - Principal paydowns (60,318,527) (18,936,309) Closing cost 430,814,877 493,805,573 Unrealised losses (81,772,313) (5,915,074) Asset-backed securities at fair value 349,042,564 487,890,499 On 9 August 2006, the Company's subsidiary, Trebuchet Finance Limited ('Trebuchet'), entered into three total return swap transactions with Citigroup Financial Products Inc. ('Citigroup') at a cost of Euro 54,154,588. All of the transactions provide Trebuchet with economic ownership of the reference assets and two of the transactions effect leverage. The transactions are summarised in the following table. Reference Asset % of Reference Reference Servicer/ Notional Amount Asset Purchase Asset Type Administrator Reference Asset Price Posted as Collateral RMAC 2005-NS4 Plc GBP 8,970,000 50% UK Residual Homeloan Residual Mortgage Management Certificates and Backed Limited Mortgage Early Securities Redemption Certificates RMAC 2005-NS3 Plc GBP 17,565,000 50% UK Residual Homeloan Residual Mortgage Management Certificates and Backed Limited Mortgage Early Securities Redemption Certificates RMAC 2005-NSP2 GBP 35,330,000 100% UK Residual Homeloan Plc Residual Mortgage Management Certificates and Backed Limited Mortgage Early Securities Redemption Certificates The fair value of the total return swap agreements at the year end was Euro 17,700,890 (gross asset value of Euro 53,093,615 net of indebtedness in the amount of Euro 35,392,725). The Group's policy is to hedge foreign exchange exposure resulting from non-Euro denominated investments by both entering into foreign exchange hedging arrangements and, where investments are financed, by entering into financing arrangements that are denominated in the same currencies. Unrealised foreign exchange losses are offset to the extent of net realised foreign exchange gains (as disclosed in note 4) and unrealised gains on foreign exchange contracts (as disclosed in note 12). The currency profile of the Group's net asset positions as at 31 March 2007 is set out in note 14. 11. Other assets 31 March 2007 31 March 2006 Euro Euro Interest receivable 10,687,357 4,777,493 Amounts receivable on securities sold 25,468,037 - Margin amounts held with brokers - 494,000 36,155,394 5,271,493 The Directors consider that the carrying amount of other assets approximates their fair value. 12. Derivative contracts The following foreign exchange forward contracts were unsettled at 31 March 2007: Maturity Date Amount Bought Amount Sold Unrealised Gain /(Loss) Euro 29 June 2007 GBP 1,700,000 Euro 2,490,039 5,330 29 June 2007 Euro 172,345,570 GBP 117,600,000 (275,249) 29 June 2007 Euro 86,320,191 USD 115,600,000 (230,190) (505,439) The following foreign exchange forward contracts were unsettled at 31 March 2006: Maturity Date Amount Bought Amount Sold Unrealised Gain Euro 30 June 2006 Euro 151,895,106 GBP106,000,000 594,860 30 June 2006 Euro 123,390,779 USD150,000,000 85,709 680,569 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 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 31 March 2007 was Euro 2,174,398. Termination Reference Transaction Initial Unrealised Date Notional Gain/(Loss) Amount (GBP) Euro 12 March 2008 RMAC 2005-NS1 81,999,602 - 12 March 2010 RMAC 2005-NSP2 372,598,197 (353,622) 12 June 2008 RMAC 2005-NS3 186,615,582 262,270 12 June 2008 RMAC 2005-NS4 107,028,288 244,588 1 December 2008 Newgate 2006-1 411,409,139 2,021,162 2,174,398 13. Overdraft and repurchase agreements 31 March 2007 31 March 2006 Euro Euro Net overdraft and cash equivalents - 13,852,740 Repurchase agreements 119,773,090 75,027,791 119,773,090 88,880,531 Asset-backed securities totalling Euro 257,625,755 (2006: Euro 75,204,791) have been granted as security in relation to the repurchase agreements. The weighted average interest rates on the repurchase agreements as at 31 March 2007 were: Euro: 4.51% (2006: 2.91%); GBP: 6.43% (2006: 5.43%); and USD: 6.32% (2006: 5.67%). The repurchase agreements outstanding at 31 March 2007 matured between 10 April 2007 and 18 April 2007. 14. Financial instruments The principal risks to which the Group are exposed are market risk, interest rate risk, liquidity risk, currency risk, credit risk, prepayment and re-investment risk and residual interest risk. In certain instances as described more fully below, the Group will enter into derivative transactions in order to mitigate particular types of risk. Save where the Group enters into swap arrangements to gain exposure to an underlying cash asset or assets, or to comply with asset transfer restrictions or similar legal restrictions which prevent the Group from owning a target investment directly, derivative transactions will only be used for the purpose of efficient portfolio management. Market risk The Group's exposure to market risk is comprised mainly of movements in the value of its investments and changes in interest rates that either increase its cost of borrowing or, in the event the Group makes any fixed interest investments (which are not Primary Target Investments) in the future, may decrease its interest income. Interest rate risk Changes in interest rates can affect the Group's net interest income, which is the difference between the interest income earned on interest-earning investments and the interest expense incurred on interest-bearing liabilities. Changes in the level of interest rates also can affect, among other things, the Group's ability to acquire loans and investments, the value of its investments and the Group's ability to realise gains from the settlement of such assets. The Group may enter into hedging transactions for the purposes of efficient portfolio management, where appropriate, to protect its borrowings from interest rate fluctuations. These instruments are used to hedge as much of the interest rate risk as the Investment Manager determines is in the best interests of the Group, given the cost of such hedges. The Group may bear a level of interest rate risk that could otherwise be hedged when the Investment Manager believes, based on all relevant facts, that bearing such risks is advisable. Interest rate profile The interest rate profile at 31 March 2007 was as follows: Euro Euro Euro Fixed Floating Non-interest Weighted bearing Average Rate Investments at fair value - 366,743,454 - 13.58% through profit or loss Derivative financial assets - 2,174,398 - 7.36% - interest rate swap agreements (receive) - interest rate swap (2,174,398) - - 7.27% agreements (pay) Cash and cash equivalents - 22,026,122 - 2.73% Repurchase agreements - (119,773,090) - 6.35% The interest rate profile at 31 March 2006 was as follows: Euro Euro Euro Fixed Floating Non-interest Weighted bearing Average Rate Investments at fair value - 487,890,499 - 13.64% through profit or loss Overdraft - (13,852,740) - 5.68% Repurchase agreements - (75,027,791) - 4.24% Although investments in residual income positions have been treated as floating rate investments in the above table, income on these investments is based on the effective interest rate (see note 2). Given the subordinated nature of residual income positions and the fact that many of them do not carry a fixed or stated coupon, the Group calculates the weighted average rate of the portfolio on the basis of the fair value of each investment multiplied by its effective interest rate (see note 2). Maturity profile The maturity profile at 31 March 2007 was as follows: Within one One to five Over five year years years Total Floating Floating Floating Euro Euro Euro Euro Investments at fair 366,743,454 54,125,553 12,381,829 300,236,072 value through profit or loss Derivative financial 2,174,398 - 2,174,398 - assets - interest rate swap agreements Cash and cash 22,026,122 22,026,122 - - equivalents Repurchase (119,773,090) (119,773,090) - - agreements 271,170,884 (43,621,415) 14,556,227 300,236,072 Maturity profile The maturity profile at 31 March 2006 was as follows: Within one One to five Over five year years years Total Floating Floating Floating Euro Euro Euro Euro Investments at fair value 487,890,499 - 75,273,771 412,616,728 through profit or loss Overdraft and cash (13,852,740) (13,852,740) - - equivalents Repurchase agreements (75,027,791) (75,027,791) - - 399,009,968 (88,880,531) 75,273,771 412,616,728 The maturity dates for residual income positions have been determined on the basis of the maturity dates stated in the offering documents for the relevant transactions. Liquidity risk The market for subordinated asset-backed securities, including residual income positions, is illiquid. Accordingly, many of the Group's investments are illiquid. In addition, investments that the Group purchases in privately negotiated (also called 'over the counter' or 'OTC') transactions may not be registered under relevant securities laws or otherwise may not be freely tradable, resulting in restrictions on their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. As a result of this illiquidity, the Group's ability to vary its portfolio in a timely fashion and to receive a fair price in response to changes in economic and other conditions may be limited. Furthermore, where the Group acquires investments for which there is not a readily available market, the Group's ability to deal in any such investment or obtain reliable information about the value of such investment or risks to which such investment is exposed may be limited. The Group enters into repurchase agreements, as disclosed in note 13, and asset-backed securities are granted as security in relation to these agreements. In the event the Group is unable to refinance repurchase agreements as they mature, the Group may have to sell some of its assets to repay these amounts. Currency risk The Group's accounts are denominated in Euro while investments are made and realised in both Euro and other currencies. Changes in rates of exchange may have an adverse effect on the value, price or income of the investments. A change in foreign currency exchange rates may adversely impact returns on the Group's non-Euro-denominated investments. The Group's principal non-Euro currency exposures are to US dollars and pounds sterling, but this may change from time to time. The Group's policy is to hedge currency risk on a case by case basis. The Group may bear a level of currency risk that could otherwise be hedged where it considers that bearing such risks is advisable. Currency profile The currency profile at 31 March 2007 was as follows: Total Euro GBP USD (in Euro) (in Euro) (in Euro) (in Euro) Investments at fair 366,743,454 156,662,792 153,999,469 56,081,193 value through profit or loss Derivative financial 2,174,398 - 2,174,398 - assets - interest rate swap agreements Other assets 36,155,394 2,299,148 33,014,846 841,400 Foreign exchange (500,109) 256,175,723 (170,125,450) (86,550,382) forward contracts Cash and cash 22,026,122 10,788,712 9,419,899 1,817,511 equivalents Repurchase agreements (119,773,090) (4,500,000) (106,071,009) (9,202,081) Distribution payable (9,342,774) (9,342,774) - - Other liabilities (3,329,710) (2,973,530) (316,917) (39,263) 294,153,685 409,110,071 (77,904,764) (37,051,622) In the period from 10 April 2007 to 19 April 2007, the following additional foreign exchange forward contracts were entered into: Maturity Date Amount Bought Amount Sold 29 June 2007 GBP 51,460,000 Euro 75,482,052 29 June 2007 USD 49,700,000 Euro 36,874,234 The currency profile at 31 March 2006 was as follows: Total Euro GBP USD (in Euro) (in Euro) (in Euro) (in Euro) Investments at fair 487,890,499 171,020,403 175,227,971 141,642,125 value through profit or loss Other assets 5,271,493 2,383,604 1,321,964 1,565,925 Foreign exchange forward 680,569 275,285,885 (151,300,247) (123,305,069) contracts Overdraft and cash (13,852,740) 2,792,510 (17,196,168) 550,918 equivalents Repurchase agreements (75,027,791) (37,800,000) (13,723,244) (23,504,547) Other liabilities (2,892,914) (2,779,965) (4,784) (108,165) 402,069,116 410,902,437 (5,674,508) (3,158,813) Credit risk The Group is subject to credit risk with respect to its investments. The Group seeks to mitigate credit risk by actively monitoring its portfolio of investments and the underlying credit quality of its holdings. The Group seeks to minimise credit risk further by ensuring its investment portfolio is diversified by asset type, geography, industry and issuer or borrower. The Group does not generally intend to undertake any credit hedging activities other than from time to time entering into transactions to hedge its credit exposure in relation to individual investments. The Group's hedging transactions using derivative instruments and any credit default or total return swap arrangements entered into by the Group or any of its funding vehicles may involve certain additional risks, including counterparty credit risk. The Group enters into derivative arrangements with counterparties that are major financial institutions with investment grade credit ratings and with which the Investment Manager is familiar. As a result, the Group does not anticipate that any such counterparties will fail to meet their obligations. Prepayment and re-investment risk While the Group's valuations take into account expected levels of prepayment, the Group's investments and the assets that collateralise them may be prepaid more quickly than expected. Prepayment rates are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond the Group's control and consequently cannot be predicted with certainty. The level and timing of prepayments made by borrowers in respect of the mortgage loans that collateralise certain of the Group's investments may have an adverse impact on the income earned by the Group from those investments. Early prepayments may also give rise to increased re-investment risk with respect to certain investments, as the Group may realise excess cash earlier than expected. If the Group is unable to reinvest such cash in a new investment with an expected rate of return at least equal to that of the investment repaid, this may reduce the Group's net income and, consequently, could have an adverse impact on the Group's ability to pay dividends. Residual interest risk The majority of the Group's investments consists of interests in and/or economic exposures to limited recourse securities that are subordinated in right of payment and ranked junior to other securities that are secured by or represent ownership in the same pool of assets. In the event of default by an issuer in relation to such investments, holders of the issuer's more senior securities are entitled to payments in priority to the Group. Some of the Group's investments also have structural features that divert payments of interest and/or principal to more senior classes of securities secured by or representing ownership in the same pool of assets when the delinquency or loss experience of the pool exceeds certain levels. This may lead to interruptions in the income stream that the Group anticipates receiving from its investment portfolio, which may lead to the Group having less income to distribute to Shareholders. The Group does not control the portfolios of assets underlying the ABS in which it invests and relies on the servicers of the ABS to administer and review the portfolios. Particularly in the case of residual income positions, the actions of the servicer, including its ability to identify and report on issues affecting the portfolio on a timely basis, may affect the Group's return on its investments, in some cases significantly. In addition, concentration of a significant number of the Group's investments with one servicer could affect the Group adversely in the event that the servicer fails to fulfil its function effectively or at all. In the event of fraud by any entity in which the Group invests or by other parties involved with the entity, such as servicers or cash managers, the Group may suffer a partial or total loss of the amounts invested in that entity. Although holders of asset-backed securities generally have the benefit of first ranking security (or other priority rights) over any collateral, control of the timing and manner of the disposal of such collateral upon a default typically will devolve to the holders of the senior class of securities outstanding. There can be no assurance that the proceeds of any such sale of collateral are adequate to repay in full the Group's investments. Effect of Changes in Assumptions on Fair Value of Investments During the year, the Group revised assumptions in the pricing model for each of the residual income positions in the Group's investment portfolio. With respect to UK investments, prepayment and default rate assumptions were revised. Prepayment rate assumptions have been adjusted to reflect lower prepayments by borrowers during the period in which their mortgage loans carry a discounted interest rate and higher prepayments after those mortgage loans revert to their full margin. Default rate assumptions have also been increased in anticipation of higher interest rates in the UK. By reference to carrying values as at 31 December 2006, after taking into account income accrued for the quarter ended 31 March 2007 and cash flows received in that quarter, the impact of these changes reduced the fair value of the Group's UK investment portfolio by approximately Euro 74.6 million (or 25.8%). With respect to US investments, prepayment curves and cumulative loss assumptions were revised to reflect an observed slowdown in prepayments and the market's expectation of higher cumulative loss rates. By reference to carrying values as at 31 December 2006, after taking into account income accrued for the quarter ended 31 March 2007 and cash flows received in that quarter, the impact of these changes reduced the fair value of the Group's US investment portfolio by approximately Euro 29.0 million (or 47.4%). Three of the Group's four US investments were sold after 31 March 2007. (See note 20). Pricing models for the Group's European mortgage-backed investments were adjusted to reflect both an anticipated increase in prepayment rates and reduced income from early repayment charges following the introduction of legislation in Portugal and Italy that limits the amount that banks can charge to borrowers who repay their mortgage loans. The Group also adjusted default and recovery rates on certain of the investments to better reflect historical experience. By reference to carrying values as at 31 December 2006, after taking into account income accrued for the quarter ended 31 March 2007 and cash flows received in that quarter, the impact of these changes increased the fair value of the Group's European mortgage-backed investment portfolio by approximately Euro 0.7 million (0.6%). With respect to the balance of the Group's investment portfolio, there have been no significant changes to the pricing or performance assumptions contained in the pricing models for the Group's ABS CDO investments. The fair value of these investments, however, reflects the application of higher discount rates given the increased market discount rates being attributed by the market to this investment sector as a whole. The application of these higher discount rate resulted in a fair value reduction of approximately Euro 5.4 million (or 18.5%) relative to adjusted 31 December 2006 carrying values, after taking into account income accrued for the quarter ended 31 March 2007 and cash flows received in that quarter. As the Group's SME investments performed in line with, or better than, expectations, no significant changes were made to the assumptions contained in the pricing models for these investments. 15. Other liabilities 31 March 2007 31 March 2006 Euro Euro Interest payable 357,873 196,634 Due to related parties - Investment Manager (note 968,826 1,814,524 19) Accrued expenses 2,003,011 881,756 3,329,710 2,892,914 Other liabilities principally comprise amounts outstanding in respect of interest payable and ongoing costs. The Directors consider the carrying amount of other liabilities approximates to their fair value. 16. Share capital Authorised share capital 31 March 2007 31 March 2007 Number of Euro Ordinary Shares Ordinary shares of no par value each Unlimited - Issued and fully paid Number of Euro Ordinary Shares Balance at start and end of year 40,620,756 - Authorised share capital 31 March 2006 31 March 2006 Number of Euro Ordinary Shares Ordinary shares of no par value each Unlimited - Issued and fully paid Number of Euro Ordinary Shares Balance at date of incorporation 2 - Issue of new Ordinary Shares with no par value during 40,620,754 - the period Balance at 31 March 2006 40,620,756 - Upon incorporation 2 Ordinary Shares of no par value were issued. On 13 December 2005 the Company issued 22,500,000 Ordinary Shares for subscription in its Initial Public Offering at an Offer Price of Euro 10 per share. In addition, the Company simultaneously issued 17,900,754 Ordinary Shares to Cheyne ABS Opportunities Fund LP (along with transferring the two Ordinary Shares issued on incorporation) in exchange for a portfolio of investments and 220,000 Ordinary Shares were also issued to the Directors. In recognition of the work performed by the Investment Manager in raising capital for the Company, the Company 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. 17. Share premium account 31 March 31 March 2006 2007 Euro Euro Balance at start of year/period - - Premium arising from issue of Ordinary Shares - 406,207,540 Expenses of issue of Ordinary Shares - (13,903,451) Share options granted on issue of Ordinary - (7,672,500) Shares Cancellation of share premium transferred to - (384,631,589) other reserve Balance at end of year/period - - The Ordinary Shares of the Company have no par value. As such, the proceeds of the Initial Public Offering represent the premium on the issue of the Ordinary Shares. In accordance with the accounting policies of the Company and as allowed by The Companies (Guernsey) Law, 1994, the costs of the Initial Public Offering have been expensed against the share premium account. The issue costs associated with the Initial Public Offering amounted to Euro 13,856,736 (as adjusted for an overaccrual of Euro 46,715) and share options with a value of Euro 7,672,500 (notes 16 and 19). The Company passed a special resolution cancelling the amount standing to the credit of its share premium account immediately following admission to the London Stock Exchange. In accordance with The Companies (Guernsey) Law, 1994 (as amended) (the 'Companies Law'), the Directors applied to the Royal Court in Guernsey for an order confirming such cancellation of the share premium account following admission. The Other reserve created on cancellation is available as distributable profits to be used for all purposes permitted by the Companies Law, including the buy back of Ordinary Shares and the payment of dividends. 18. Notes to cash flow statement Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 (restated - see Note 1) Euro Euro Net (loss)/profit (67,747,598) 9,765,027 Adjustments for: Net realised losses on investments at fair value 3,673,475 - through profit or loss Unrealised losses on investments at fair value 112,310,937 5,915,074 through profit or loss Unrealised gains on interest rate swap agreements (2,174,398) - Unrealised gains on foreign currency bank balances (17,543) - Unrealised losses/(gains) on foreign exchange 1,180,678 (680,569) forward contracts 47,225,551 14,999,532 Purchases of asset-backed securities (89,062,259) (333,734,322) Sales proceeds from asset-backed securities 62,592,916 - Principal paydowns 60,318,527 18,936,309 Purchases of total return swap agreements (54,154,588) - (20,305,404) (314,798,013) Increase in receivables (5,415,864) (5,271,493) Increase in payables 436,796 2,892,914 (4,979,068) (2,378,579) Net cash inflow/(outflow) from operating activities 21,941,079 (302,177,060) 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 and overdraft facilities. Non cash transactions: In the prior period the Company issued Ordinary Shares for the purchase of the Initial Portfolio as disclosed in note 19. 19. Material agreements and related party transactions Investment Manager The Company 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 Company 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 Company pays the Investment Manager a Management Fee and Incentive Fee (see notes 5 and 15). During the year ended 31 March 2007, the Management Fee totalled Euro 6,251,190 (2006: Euro 1,814,524), of which Euro 968,826 (2006: Euro 1,814,524) was outstanding at the year end and the Incentive Fee totalled Euro 2,096,170 (2006: Euro Nil), none of which was payable at the year end. Management Fee Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Company an annual Management Fee of 1.75 per cent of the net asset value of the Company 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 x C) where: A= The Company'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 Company'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 Company 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 Company for the purpose of calculating the Incentive Fee. Administration Fee Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Company an administration fee of 0.125 per cent of the gross asset value of the Company up to Euro 80,000,000 and 0.0325 per cent of the gross asset value of the Company 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 31 March 2007, the Company held investments with a total value of Euro 23,846,289 (2006: Euro 51,081,598) in the following entities, which are managed by the Investment Manager: Cheyne ABS Investments I plc; Cheyne High Grade ABS CDO Ltd.; and Cheyne CLO Investments I Limited. Custodian Fee Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Company a custodian fee of 0.03 per cent of the gross asset value of the Company up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Company 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 Company, the Company 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 Company 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 31 March 2007, these options were out of the money as the share price was below the Offer Price of Euro 10. Initial ABS Portfolio On 23 November 2005, the Company entered into an agreement with Cheyne ABS Opportunities Fund LP (which was amended and restated on 7 December 2005) to acquire a portfolio of investments, for an aggregate price of Â£62,235,000, Euro 90,212,000 and US$90,793,000 (which was Euro 259,007,560) (together with interest of 13.1 per cent per annum from 7 November 2005 until the date of admission to the London Stock Exchange). The consideration for the purchase was settled by the delivery of 17,900,754 Ordinary Shares by the Company and the payment of the balance in cash out of the net proceeds from the offer of Ordinary Shares by the Company. 20. Subsequent Events A list of investments sold by the Company in the ordinary course of business after 31 March 2007 is set out below. As the fair values of these investments as at 31 March 2007 were based on their sale prices (as market values were deemed to reflect fair value), these sales have not reduced the net asset value of the Company post year end. Investment Sold Description of Underlying Assets US Positions Argent Securities Trust 2006-W1 Approximately 10,400 sub-prime mortgage loans, primarily first-ranking First Franklin Mortgage Loan Trust Approximately 3,400 sub-prime mortgage loans, primarily first-ranking Morgan Stanley ABS Capital I Inc. Approximately 4,100 sub-prime mortgage loans, Trust 2005-HE5 primarily first-ranking UK Positions RMAC 2005 NSP2 plc Approximately 6,300 sub-prime mortgage loans/ 3,700 prime mortgage loans RMAC 2005-NS1 plc Approximately 7,800 sub-prime mortgage loans Southern Pacific Financing 05-B Approximately 3,000 near-prime mortgage plc loans The aggregate proceeds from the sale of the US investments totalled Euro 22.8 million, reflecting a 53.0% reduction in gross asset value relative to the adjusted book value of these investments as at 31 December 2006. The aggregate proceeds from the sale of the UK investments totalled Euro 67.8 million, reflecting a 28.6% reduction in gross asset value relative to the adjusted book value of these investments as at 31 December 2006. This information is provided by RNS The company news service from the London Stock Exchange

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