Financial Results
Queen's Walk Investment Limited
05 March 2008
5 March 2008
Queen's Walk Investment Limited
Financial Results for the
Quarter Ended 31 December 2007
Queen's Walk Investment Limited maintains dividend of 15 cents per share
following strong third quarter cash flows
Queen's Walk Investment Limited (Queen's Walk), the Guernsey incorporated
investment company, has reported operating income of €9.7 million for the
quarter ended 31 December 2007, unchanged from €9.7 million in the previous
quarter. The Company's net asset value remained unchanged at €6.90 per share.
Distributable income during the quarter was €7.0 million, down from €7.6 million
in the prior period. Queen's Walk's board of directors has decided to maintain
the dividend at the level of the previous quarter of €0.15 per share. Cash
generation for the quarter was solid with €21.4 million of cash proceeds
received.
Fair value write downs of the Company's investment portfolio for the quarter
totalled €8.3 million, up slightly from €8.0 million for the period ended 30
September 2007. Write downs were equivalent to approximately 2.6% of the 30
September 2007 gross asset value.
Highlights
• Operating income of €9.7 million, equating to operating income per share
of €0.28 compared to €9.7 million or €0.24 per share in the quarter ended 30
September 2007.
• Distributable income of €7.0 million or €0.20 per share compared to €7.6
million or €0.19 per share as at 30 September 2007.
• Loss of €1.2 million or €0.04 per share compared to a loss of €0.6 million
or €0.01 per share in the previous quarter.
• Net asset value at €6.90 per share, unchanged from the previous quarter
end. Subsequent to the tender offer, approved on 8 January 2008, the
pro-forma NAV per share is €7.03.
• Fair value write downs of the Company's investment portfolio of €8.3
million in the quarter compared to €8.0 million in the previous quarter.
• The Board of Directors has declared an interim dividend of €0.15 per share
for the quarter.
• From 18 July 2007 to 22 February 2008, the Company has returned in excess
of €66.7 million through share repurchases and dividends.
Conference Call
A conference call to review the Company's financial results for the quarter
ended 31 December 2007 will take place at 10am London time on 5 March 2008. The
conference call can be accessed by dialing +44 (0)20 7138 0819 ten minutes prior
to the scheduled start of the call. A results presentation will be available on
the Queen's Walk website (www.queenswalkinv.com).
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 ('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.
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'. By their nature, forward-looking statements involve
risks and uncertainties and readers are cautioned that any such forward-looking
statements are not guarantees of future performance. The Company's actual
results and performance may differ materially from the impression created by the
forward-looking statements and should not be relied upon. The Company undertakes
no obligation to publicly update or revise forward-looking statements, except as
may be required by applicable law and regulation (including the Listing Rules).
Financial Highlights
Total Total
Revenue Fair value Quarter ended Revenue Fair value Quarter ended
gains and 31 December gains and
losses 2007 losses 30 September 2007
Operating Income 9,729,137 - 9,729,137 9,672,694 - 9,672,694
Gains and losses on (8,449,046) (8,449,046) - (8,094,060) (8,094,060)
fair value through
profit or loss
financial instruments
9,729,137 (8,449,046) 1,280,091 9,672,694 (8,094,060) 1,578,634
Operating Expenses (1,768,133) - (1,768,133) (1,404,332) - (1,404,332)
Finance Costs (743,343) - (743,343) (741,929) - (741,929)
Net profit / (loss) 7,217,661 (8,449,046) (1,231,385) 7,526,433 (8,094,060) (567,627)
Distributable 7,019,676 7,577,972
income1,2
Distributable income €0.20 €0.19
per share
Total Assets €291,439,225 €326,577,355
Total Liabilities €50,856,664 €53,258,112
Equity Capital €240,582,561 €273,319,243
NAV per share €6.90 €6.90
1. Net profit from investments before deduction of net fair value losses
through profit or loss. For the quarter ended 30 September 2007, the
distributable income includes €51,540 of f/x gains and losses. For the quarter
ended 31 December 2007, the distributable income includes -€197,984 of f/x gains
and losses.
2. Refer to Note 4 of the quarterly report for the quarter ended 31 December
2007 for further details on the Company's distribution policy.
Third Quarter Dividend Details
The Board of Directors has declared an interim dividend for the quarter ended 31
December 2007 of €0.15 per share payable on 8 April 2008 to shareholders of
record on 14 March 2008.
Portfolio Review - Cash flow from non-US assets holds steady
The portfolio's ability to generate cash remains strong with total cash proceeds
of approximately €21.4 million received in the quarter ended 31 December 2007
compared to €24.6 million received in the previous quarter. Cash flows in the
UK, European and SME investments were consistent with last quarter. The cash
flow performance of the Company's US sub-prime related assets was compromised by
continued deterioration in the US mortgage market.
The Company's investment portfolio consists largely of investments with exposure
to the UK and European mortgage markets and to the European SME sector. Assets
with exposure to the US sub-prime market account for approximately 1.5% of the
investment portfolio. The Company also has exposure to the US leverage loan
market through a residual investment in a CLO ('Collateralised Loan Obligation')
which accounts for 1.7% of the investment portfolio. All the securitisations to
which the Company has exposure are term financed and have no risk of additional
margin calls or refinancing risk.
The Company's net leverage has increased to 9.5%(1) as at 31 December 2007 from
8.6%(2) as at 30 September 2007. The Company's net indebtedness as at 31
December 2007 was €23.5 million compared to net indebtedness of €23.7 million as
at 30 September 2007. On 14 February 2008, the Company repaid €4.5 million of
its financing facility. As at 22 February 2008, the Company had total
borrowings of €40.5 million and a net leverage ratio of 10.0%.
A breakdown of the Company's investment portfolio by jurisdiction (by reference
to underlying asset originator) is set out below. Percentages for each asset
class are in relation to the value of the Company's investment portfolio
excluding cash.
Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2007
UK 39.7%
US 1.1%
Holland 5.3%
CDO 3.3%
Germany 13.7%
Italy 9.3%
Portugal 27.6%
Total (€mn) 274.2
Queen's Walk Portfolio Breakdown by Jurisdiction as at 31 December 2007
UK 35.9%
US 0.4%
Holland 5.7%
CDO 2.9%
Germany 15.1%
Italy 10.6%
Portugal 29.4%
Total (€mn) 247.1
A breakdown of the Company's investment portfolio by asset type (by reference to
underlying asset collateral) is set out below. Percentages for each asset class
are in relation to the value of the Company's investment portfolio excluding
cash.
Queen's Walk Portfolio Breakdown by Asset Type as at 30 September 2007
NearPrime 19.7%
SubPrime 19.2%
CDO 3.3%
SME 18.9%
Prime 38.8%
Total (€mn) 274.2
Queen's Walk Portfolio Breakdown by Asset Type as at 31 December 2007
NearPrime 18.3%
SubPrime 16.4%
CDO 2.9%
SME 20.9%
Prime 41.5%
Total (€mn) 247.1
Investment Portfolio
UK Mortgage Investments (30.4% of GAV)
The company's UK mortgage portfolio continued to be highly cash generative
contributing €13.4 million of the €21.4 million of cash generated across the
investment portfolio. Two of the RMAC assets, RMAC 04-NSP4 and RMAC 05-NS3 have
released a substantial amount of the cash trapped in the securitisation as a
result of positive underlying asset performance. The cash flows associated
with the remaining UK assets were in line with expectations.
The Company has previously indicated that the current dislocation in the
securitisation markets may cause a decrease in prepayment rates and an increase
in default rates in the underlying mortgage portfolios. To date, the Company
has seen no evidence to suggest that the expected change in prepayment or
default rates has occurred.
In October 2007, to hedge the portfolio against a drop in UK house prices, the
company entered into a two-year €28 million put option with a strike price of
90% of the 30 September 2007 Halifax House Price Non-Seasonally Adjusted Index
level. In the event that house prices do not fall below 10%, the cost of this
put option will amortise over the next two years. The 10% ratio reflects the
approximate gain in house prices for the least seasoned UK residual in the
portfolio. Since September 2007, house prices have fallen by approximately
4.4%.
European Mortgage Investments (34.0% of GAV)
The fundamentals underlying the performance of the Company's European mortgage
investments remain sound. Benign economic environments in Italy and Portugal
underpinned good asset credit performance. Default rates have not been affected
by the current credit crisis.
After giving effect to cash flows received in the quarter and associated
principal amortisations, there has been no material change to the fair value of
these investments as at 31 December 2007.
SME Investments (17.7% of GAV)
SME assets continued to perform well with cumulative default rates on the
underlying asset pools better than or in line with expectations.
Approximately 75% of the Company's total SME exposure is concentrated in nine
countries of which seven are European. The largest geographic concentration is
in German SMEs which account for 32.2% of the Company's total SME exposure. The
Company also has significant exposure to Dutch, US, Spanish and UK SME companies
(3). The majority of the Company's Spanish SME exposure results from the Smart
06-1 SME investment.
The Eirles Three Limited (236B) residual has exposure to the German, Italian and
Spanish SME markets. In relation to Spain, approximately 13.8% of the
underlying collateral portfolio has exposure to the Spanish construction and
building industries. However, this risk is mitigated by a weighted average BBB-
rating of the underlying Spanish companies and the short weighted average life
of the loans in the portfolio.
CDO Investments (2.4% of GAV)
The Company holds residual positions in three CDOs, two of which are exposed to
US mortgage assets.
The High Grade CDO is backed by AAA to A-rated ABS bonds. ABS Investments I is
a CDO backed by the mezzanine tranches of US ABS CDOs (including US RMBS CDOs).
As at 31 December 2007, the credit performance of High Grade CDO has weakened as
a result of more downgrades of higher rated ABS bonds. The credit performance
of ABS Investments I has deteriorated significantly following the substantial
downgrades of US mezzanine ABS bonds. The deterioration in the cash flow
performance of the bonds has been reflected in the fair values of these assets.
CLO Investments I is backed by AA- to BBB- rated US CLO bonds. The performance
of this collateral has exceeded original pricing assumptions and two of the
bonds in the portfolio have been upgraded from BBB to A and AA, respectively.
There have been no downgrades or negative watch warnings on any of the bonds in
the portfolio. The cash generative ability of this residual investment remains
positive and is in line with expectations.
US Mortgage Investment (0.3% of GAV)
The Company has one remaining US mortgage residual, RASC 2006-KS2. Actual loss
performance over the past quarter has not deviated significantly from our
previous projection. However, with an increase in the arrears pipeline the
forecast cumulative loss has been increased in the quarter.
The Company has worked with the originator of the loans to conduct a loan level
review of the portfolio, and identified 8 loans that breached representation &
warranties that were given by the originator. In light of these breaches, all 8
loans have been repurchased by the originator.
Portfolio Valuation
In accordance with the Company's valuation procedures, the fair value of the
Company's investments has been evaluated on the basis of performance, observable
market data and the Investment Manager's expectations regarding future trends.
After giving effect to fair value write-downs of €8.4 million (€8.3 million of
which were in relation to the investment portfolio) in the quarter, the NAV of
the Company was €6.90 per share as at 31 December 2007 (€6.90 per share as at 30
September 2007).
On 8 January 2008, the Company received approval from shareholders to proceed
with the repurchase of shares through the tender offer. Following the tender
offer, the pro-forma NAV of the Company was €7.03 per share(4).
The table below summarises the changes in fair values of the Company's
investment portfolio by asset class:
Asset Class 30 September 31 December Fair Value % Change to Cash flows Cash flows
2007 Fair 2007 Change Since 30 September Received in the Received in the
Value1,2 (€mn) Fair Value2 30 September 2007 Fair Quarter Ended Quarter Ended
(€mn) 2007 (€mn) Value 30 September 31 December 2007
2007 (€mn) (€mn)
UK Mortgages 103.4 88.5 -14.9 -14.4% 16.6 13.4
Euro Mortgages 101.4 99.0 -2.4 -2.3% 3.4 3.3
SME 51.9 51.5 -0.4 -0.8% 3.2 3.3
CDO 8.9 7.1 -1.8 -20.1% 0.9 1.2
US Mortgages 2.9 0.9 -1.9 -67.1% 0.5 0.2
Cash and Other Cash 51.3 41.7 0.0 -18.6%
Equivalents
TOTAL3 319.8 288.8 -21.4 -6.7% 24.6 21.4
1. Fair values as at 30 September 2007 are expressed using 31 December
2007 f/x rates.
2. The fair value figures for 30 September 2007 and 31 December 2007
include accrued income and, in the case of the UK mortgage residuals, the value
of the interest rate swaps.
3. The values for each column may not sum to the total due to rounding
differences.
Fair value changes since 31 December 2007 include principal amortisations of the
residuals as a result of cash flows received in the quarter as well as fair
value write-downs related to the investment portfolio. The valuations of the US
and ABS CDO portfolios continue to be affected by deteriorations in the cash
flow expectations which resulted in material fair value write-downs in the
quarter. There have been no material fair value write downs during the quarter
to the non-US assets, comprising UK mortgage, European mortgage and SME
portfolios, with the majority of fair value changes a result of cash flows
received in the quarter.
Share Repurchase Programme
On 8 January 2008, shareholders approved the Company's tender offer and on 15
January 2008, the Company repurchased for cancellation 2,777,771 shares at a
price of €5.40 per share.
As of 31 December 2007, the Company had purchased 5,738,037 shares through its
buy back programme and previous tender offer at an average price of €5.45 per
share. Through the period from 1 January 2008 until 22 February 2008, the
Company has purchased 598,000 shares through its buy back programme at an
average price of €5.31 per share. Though the share buybacks have been accretive
to NAV, the number of shares which the Company repurchases has been constrained
by limits on the volume of shares that can be purchased on any particular day
and by the price at which the Company can repurchase shares.
Strategy and Market Outlook
The upcoming quarters will remain challenging for the ABS markets and also for
the broader financial system as a whole. The de-leveraging of the financial
system that commenced in the second half of 2007 is likely to continue in 2008.
The Company benefits from having its investment portfolio term funded and having
no margin or collateral calls that would require the sale of assets in an
illiquid market.
The change in asset prices in the European ABS markets has been largely
technical in nature. However, for many market participants it has been
increasingly difficult to continue with existing operations under current market
conditions. Asset managers with capital / liability mismatches are increasingly
under pressure to dispose of assets at distressed levels. Similarly, finance
companies are experiencing difficulties in raising debt in current markets.
Over the coming months, the Company will evaluate new investment opportunities,
and where those opportunities are accretive to NAV, deploy capital accordingly.
The combination of healthy cash flows and term financing should allow the
Company to capture value in the current market dislocation.
Unaudited Condensed Consolidated Income Statement
For the quarter ended 31 December 2007 and the quarter ended 30 September 2007
Total Total
Revenue Fair value Quarter ended Revenue Fair value Quarter ended
return gains and 31 December return gains and 30 September
Note losses 2007 losses 2007
Euro Euro Euro Euro Euro Euro
Operating income 9,729,137 - 9,729,137 9,672,694 - 9,672,694
Gains and losses on fair value
through profit or loss financial
instruments - (8,449,046) (8,449,046) - (8,094,060) (8,094,060)
9,729,137 (8,449,046) 1,280,091 9,672,694 (8,094,060) 1,578,634
Operating expenses 5 (1,768,133) - (1,768,133) (1,404,332) - (1,404,332)
Finance costs 6 (743,343) - (743,343) (741,929) - (741,929)
Net Loss 7,217,661, (8,449,046) (1,231,385) 7,526,433 (8,094,060) (567,627)
Loss per Ordinary Share
Basic 9 Euro (0.035) Euro (0.014)
Diluted 9 Euro (0.035) Euro (0.014)
Weighted average Ordinary Shares outstanding Number Number
Basic 9 35,630,467 40,132,525
Diluted 9 35,630,467 40,132,525
All items in the above statement are derived from continuing operations.
All income is attributable to the Ordinary Shareholders of the Company.
Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity
For the period from 1 July 2007 to 31 December 2007
Share Share Other Reserve Capital Accumulated
Capital Premium Reserve Profits Total
Euro Euro Euro Euro Euro Euro
Balance at 1 July 2007 - - 372,492,078 7,672,500 (95,328,966) 284,835,612
Net loss for the quarter - - - - (567,627) (567,627)
Redemption of ordinary shares - - (5,004,332) - - (5,004,332)
Transfers from distributable - - (109,813,774) - 109,813,774 -
reserves to accumulated profits
Distribution to the Ordinary - - - - (5,944,410) (5,944,410)
Shareholders of the Company
Balance at 30 September 2007 - - 257,673,972 7,672,500 7,972,771 273,319,243
Net loss for the quarter - - - (1,231,385) (1,231,385)
Redemption of ordinary shares - - (14,086,288) - (12,186,226) (26,272,514)
Transfers from distributable - - (12,186,226) - 18,279,339 6,093,113
reserves to accumulated profits
Distribution to the Ordinary - - - (11,325,896) (11,325,896)
Shareholders of the Company
Balance at 31 December 2007 - - 231,401,458 7,672,500 1,508,603 240,582,561
Unaudited Condensed Consolidated Balance Sheet
As at 31 December 2007
31 December 30 September
2007 2007
Euro Euro
Non-current assets
Investments at fair value through profit or loss 245,272,192 269,274,302
Current assets
Cash and cash equivalents 40,822,361 52,250,434
Derivative financial assets - unrealised gain on forward exchange
contracts 873,979 140,883
Derivative financial assets - unrealised gain on interest rate swap
agreements 463,037 1,517,985
Receivable from brokers - margin on forward exchange contracts 921,364 -
Other assets 3,086,292 3,393,751
46,167,033 57,303,053
Total assets 291,439,225 326,577,355
Equity and liabilities
Equity
Share capital - -
Share premium account - -
Other reserve 231,401,458 257,673,972
Capital reserve in respect of share options 7,672,500 7,672,500
Accumulated profits/(losses) 1,508,603 7,972,771
240,582,561 273,319,243
Current liabilities
Repurchase agreements - -
Distribution payable 5,232,783 5,944,410
Derivative financial liabilities - unrealised loss on forward - 546,476
exchange contracts
Other liabilities 623,881 1,767,226
Total liabilities 5,856,664 8,258,112
Non-current liabilities
Loans 45,000,000 45,000,000
Total liabilities 50,856,664 53,258,112
Total equity and liabilities 291,439,225 326,577,355
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 December 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 Limited (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 (A State Street
Company) provide certain administration services to the Company in its capacity
as sub-administrator.
2. Significant accounting policies
Basis of preparation
The quarterly report has been prepared using accounting policies consistent with
International Financial Reporting Standards ('IFRS') and in accordance with IAS
34 'Interim Financial Reporting'. The same accounting policies, presentation
and methods of computation are followed in this report as applied in the
Company's latest annual audited financial statements dated 31 March 2007.
The quarterly report of the Group is prepared on the historical cost or
amortised cost basis except that the following assets and liabilities are stated
at their fair value: derivative financial instruments, financial instruments
held for trading and financial instruments classified or designated as fair
value through profit 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 by reference to market information, which includes but
is not limited to broker marks, prices on comparable assets and a pricing model
that incorporates discounted cash flow techniques. These pricing models apply
assumptions regarding asset-specific factors and economic conditions generally,
including delinquency rates, prepayment rates, default rates, maturity profiles,
interest rates and other factors that may be relevant to each financial asset.
Where such pricing models are used, assumptions are reviewed and updated on the
basis of actual performance data as it is received and on the basis of market
conditions as at the balance sheet date. See note 2 - Fair Value and Interest
Income and note 3 - Critical accounting judgements and key sources of estimation
uncertainty for further information regarding assumptions and critical
judgements.
This quarterly report is 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.
2. Significant accounting policies (continued)
Basis of consolidation
Subsidiaries are entities controlled by the Company. Subsidiaries are included
in the consolidated quarterly report from the date that control commences until
the date that control ceases. At 31 December 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 accounts are therefore included in the
consolidated quarterly report of the Group. 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 other
derivative 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. The Group has entered into an option trade on the
Halifax Price Index in order to hedge against adverse movement in the UK housing
market.
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.
2. Significant accounting policies (continued)
Derivative financial instruments (continued)
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.
When a Company purchases or writes an option, an amount equal to the premium
paid (or received) by the Company is reflected as an asset and an equivalent
liability. The amount of the asset or liability is subsequently marked to market
to reflect the current market value of the option. When a security is purchased
or sold through the exercise of an option, the related premium paid (or
received) is added to (or deducted from) the cost of the security acquired or
deducted from (or added to) the proceeds of the security sold. When an option
expires (or a Company enters into a closing transaction), the Company realises a
gain or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Fair value
All financial assets carried at fair value are initially recognised at fair
value and subsequently re-measured at fair value based on bid prices where such
bids are available from a third party in a liquid market. If bid prices are
unavailable, the fair value of the financial asset is estimated by reference to
market information which includes but is not limited to broker marks, prices on
comparable assets and using pricing models incorporating discounted cash flow
techniques. These pricing models apply assumptions regarding 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 or expectations regarding defaults, delinquencies and
prepayments received in respect of a given asset is markedly different from the
default, delinquency and prepayment assumptions incorporated in the pricing
model for the asset, the assumptions are revised to reflect this data and the
pricing model is updated accordingly. In addition to the actual performance data
observed in respect of a particular asset, market factors are also taken into
account within the model. 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.
2. Significant accounting policies (continued)
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.
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.
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.
2. Significant accounting policies (continued)
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
Critical accounting judgements in applying the Group's accounting policies
In the process of applying the Group's accounting polices (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 Company invests primarily in a diversified portfolio of residual income
positions, being the subordinated tranches of asset-backed securities ('ABS').
ABS 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 Company 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. Where there is a carry value
reduction driven by lower cash flow expectations, interest income will be
reduced as it reflects the reduced cash flow expectations.
3. Critical accounting judgements and key sources of estimation uncertainty
(continued)
Valuation of investments
The market for subordinated asset-backed securities, including residual income
positions is illiquid and regular traded prices are generally not available for
such investments. There is no active secondary market in residual income
positions and, further, there is no industry standard agreed methodology to
value residual income positions.
In accordance with the 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. At 31 December 2007 bid prices were not available for
any of the Company's investments. There is very limited information available in
relation to transactions in comparable investments. As quoted bid prices are
unavailable, the fair value of the investments is estimated by reference to
market information, which includes but is not limited to broker marks, prices on
comparative assets, estimated fair value from the previous period updated for
current period cash flows and a pricing model, that incorporates discounted cash
flow techniques as required by IAS 39. The Company may use all or a combination
of the prices from these sources in estimating the fair value of the
investments. Broker marks are estimates of values provided by market
participants who are typically the originators of the investments. Broker marks
are not binding prices and there is no guarantee that the Company could transact
at these prices in the current market.
The assumptions upon which the pricing models are based are described in note 2
(Fair Value) to the accounts. Any change to assumptions surrounding the pricing
models may result in different fair values being attributed to the investments
4. Distributable and non-distributable profits
Under The Companies (Guernsey) Law, 1994 (the 'Companies Law'), dividends can be
paid from profits available for the purpose. Following the Company's IPO, 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 231,401,458) is
available as distributable profits for all purposes permitted by the Companies
Law including the payment of dividends and buy-back of shares.
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 was covered by income received from
underlying investments as required by the Listing Rules (as reflected in the
Condensed Consolidated Income Statement) and the Company had sufficient reserves
(in the form of the Other Reserve) from which the dividend was paid.
5. Operating expenses
Quarter ended Quarter ended
31 December 2007 30 September 2007
Euro Euro
Investment management, custodian and administration fees
Investment management and incentive fee 1,043,161 1,159,218
Custodian and administration fee 80,123 185,365
1,123,284 1,344,583
Other operating expenses
Audit fees 42,849 42,849
Directors' fees payable to Directors of Queen's Walk Investment
Limited 61,315 55,935
Directors' fees payable to Directors of Trebuchet Finance Limited 6,387 7,182
Legal fees 255,168 132,747
Advisory fees 104,043 -
Pricing expenses 137,743 (283,377)
Other expenses 37,344 104,413
644,849 59,749
Total operating expenses 1,768,133 1,404,332
6. Finance costs
Quarter ended Quarter ended
31 December 2007 30 September 2007
Euro Euro
Finance costs arises from:
Interest expense on loan 743,343 557,279
Repurchase agreements - 184,650
Total finance costs 743,343 741,929
7. Dividends
Period from 1
July 2007 to
31 December 2007
Euro
Fourth interim dividend for the year ended 31 March 2007 6,093,113
First interim dividend for the year ended 31 March 2008 5,944,410
Second interim dividend for the year ended 31 March 2008 5,232,783
Amounts recognised as distributions to equity holders in the period 17,270,306
On 28 November 2007 the Directors declared that a dividend of €5,232,783 (€0.15
per share based on 34,885,219 shares) will be paid on 7 January 2008 to
Shareholders.
On 4 March 2008, the Directors declared a dividend of €0.15 per share which will
be paid on 8 April 2008 to shareholders on record on 14 March 2008.
8. Share capital
Ordinary shares of no par value each Authorised share capital
31 December 2007 30 September
2007
Number Number
Balance at of start and end of quarter Unlimited Unlimited
Ordinary shares of no par value each Issued and fully paid
31 December 30 September
2007 2007
Number Number
Balance at of start quarter 39,629,402 40,620,756
Repurchase of Ordinary Shares (4,746,683) (991,354)
Balance at end of quarter 34,882,719 39,629,402
During the period 18 July 2007 to 31 August 2007 the Company repurchased 991,354
of its existing Ordinary Shares out of reserves, at an average price of Euro
5.07. Once purchased, these Ordinary Shares were cancelled and are not available
for re-issue. The purpose of the share buy backs is to reduce the capital of the
Company. Another share repurchase agreement was entered into on 28 September
2007.
The Company, through a Tender Offer, returned Euro 24,999,975 in cash through a
purchase of 4,504,500 of its existing Ordinary Shares. Those Ordinary Shares
were cancelled and will not be available for re-issue. The shareholders approved
the Tender Offer at an EGM held on 8 October 2007.
Through the period from 1 October 2007 until 21 December 2007, the Company has
purchased an additional 242,183 shares at an average price of Euro 5.15 per
share.
Under Guernsey law a capital redemption reserve is created for the redemption of
these Ordinary Shares. As the nominal value of these Ordinary Shares is Euro
nil, the amount to be transferred to this reserve is Euro nil.
9. Earnings per share
Quarter ended 31 Quarter ended 30
December 2007 September 2007
Euro Euro
The calculation of the basic and diluted earnings per share is based
on the following data:
Loss for the purposes of basic earnings per share being net loss (1,231,385) (567,627)
attributable to equity holders
Weighted average number of Ordinary Shares for the purposes of basic
earnings per share 35,630,467 40,132,525
Effect of dilutive potential Ordinary Shares:
Share options - -
Weighted average number of Ordinary Shares for the purposes of 35,630,467 40,132,525
diluted earnings per share
11. 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
note 5). During the quarter ended 31 December 2007, the Management Fee totalled
Euro 1,043,161 (30 September 2007: Euro 1,159,218) of which Euro 348,250 (30
September 2007: Euro 1,174,297) is payable at quarter end. The Incentive Fee
totalled Euro nil (30 September 2007: Euro nil) of which Euro nil (30 September
2007: Euro nil) is payable at the quarter 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 ' 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.
11. Material agreements and related party transactions (continued)
Investments in other entities managed by the Investment Manager
As at 31 December 2007, the Company held investments with a total value of Euro
6,624,478 (30 September 2007: Euro 8,566,579) 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 December 2007, these
options were out of the money as the share price was below the Offer Price of
Euro 10.
12. Subsequent Events
On 8 January the Company completed a tender offer repaying Euro 15 million to
shareholders following the repurchase of 2,777,771 shares at a price of €5.40
per share. In addition in the period from 9 January 2008 to 26 February 2008 the
Company has repurchased 728,000 shares at an average price of €5.23 per share
under its buy back programme.
On 14 February 2008, the Company repaid Euro 4.5 million (or 10% of the drawn
balance) on its loan facility.
--------------------------
(1) Net of cash proceeds required to settle the tender offer and pay the 31
December 2007 dividend.
(2) Net of cash proceeds required to settle the tender offer and pay the 30
September 2007 dividend.
(3) Countries to which the Company has a geographic concentration greater than
5% of the total SME portfolio.
(4) Given the materiality of the tender offer, a pro-forma NAV is shown as at 8
January 2008. The pro-forma NAV is computed using the 31 December 2007 fair
values and by reducing the cash balance by €14,999,963.40 and the number of
outstanding shares by 2,777,771.
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