Preliminary Results

Queen's Walk Investment Limited 05 June 2006 5 June 2006 Queen's Walk Investment Limited ('Queen's Walk' or the 'Company') Preliminary Results for the Financial Year and Quarter Ended 31 March 2006 Queen's Walk announces a first dividend of â‚¬0.24 per share to be paid on 5 July 2006 Highlights for the Financial Year â€¢ Queen's Walk has exceeded the targets set at the time of its IPO in December 2005 and continues to deliver on its strategic objectives â€¢ The Company has generated a net profit of â‚¬9.765 million and earnings per ordinary share of â‚¬0.24 for the period ended 31 March 2006 â€¢ Dividend for the period ended 31 March 2006 increased from target at IPO by 20% to â‚¬0.24 per share â€¢ The pace of investment continues to exceed the Company's targets and total investment assets increased since the time of the IPO to 31 March 2006 by 89% to â‚¬496 million â€¢ Investments continue to perform at or better than expectations at the time of IPO â€¢ The portfolio has successfully diversified geographically and by underlying asset class Continued Strong Outlook for Further Investment Opportunities â€¢ Since 31 March 2006, additional investments of â‚¬33 million have been made, funded through debt facilities â€¢ The investment portfolio has now risen to â‚¬529 million and indebtedness to â‚¬122 million, representing approximately 23% of total assets â€¢ The Investment Manager has identified attractive new investment opportunities with a value of up to â‚¬150 million Tom Chandos, Chairman said: 'We are pleased that the strong performance since our IPO in December 2005 has enabled us to increase our dividend by 20% over the initial target and exceed our initial investment targets. The Company's established and strong sourcing franchise has proved a significant competitive advantage and provides continued access to attractive investment opportunities. The investment portfolio has grown with additional investments made since the year end and we have also identified a number of further attractive opportunities which would position the Company to further enhance shareholder returns.' Outlook The Company continues to believe that the global securitisation market offers attractive and diverse investment opportunities that are compatible with the Company's investment objective and policies and that the Company will remain at the forefront of investing in these areas. Since 31 March 2006, the Company has continued its origination and investment strategy and has made additional investments of â‚¬33 million, funded through debt facilities. The investment portfolio has increased to â‚¬529 million and the Company's indebtedness has risen to â‚¬122 million, representing approximately 23% of its investment portfolio. In addition, the Investment Manager has identified a number of attractive investment opportunities that would support future growth and which it believes would enhance shareholder returns. These investments would be consistent with the Company's stated investment policies and, in aggregate, would amount to a further investment of approximately â‚¬150 million increasing the investment portfolio to approximately â‚¬679m. The Company has now fully invested its IPO proceeds and will continue to ensure that any indebtedness is kept to prudent levels within the 30% limitation applicable to the Company's core investments. Therefore, any further sizeable investments will only be undertaken if the Company is able to do so on terms that would be incrementally accretive to shareholders and which would further improve the Company's target dividends for the financial year ending 31 March 2007. For further information please contact: Investor Relations: Tom Hampson +44 (0) 20 7153 1522 Cheyne Capital: Syd Hanna +44 (0) 20 7031 7423 About the Company: Queen's Walk Investment Limited is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company's investment objective is to preserve capital and to provide stable returns to shareholders in the form of quarterly dividends. To achieve this, 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 position 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 Limited, considers the coupon or cashflows 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 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', '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). Any target dividends are based on certain assumptions as to future events which may not prove to be realised. Due to the uncertainty surrounding these future events, the targets are not intended to be and should not be regarded as profits or earnings forecasts. There can be no assurance that these targets will be achieved or that the Company will be able to pay dividends at the target levels or at all. The payment of any target dividends is subject to the Company generating sufficient profits or having sufficient retained earnings and there can be no assurance that this will be the case. The Company may revise its dividend policy from time to time. * * * The following is an extract from the annual report and accounts of Queen's Walk Investment Limited for the period ended 31 March 2006. Chairman's Statement I am pleased to present the first annual report and accounts for Queen's Walk Investment Limited ('Queen's Walk'). Queen's Walk is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company successfully completed its initial public offering in December, having raised Euro 406 million, and we are pleased that our shareholders have seen our shares trading this year consistently above the Euro 10 issue price. The Company has generated a net profit of Euro 9.765 million and earnings per ordinary share of Euro 0.24 for the period ended 31 March 2006. Our market capitalisation as at 31 March 2006 was Euro 503 million, reflecting a share price of Euro 12.40. The Company has also surpassed key investment targets set at the time of its IPO, having acquired a larger and more diversified investment portfolio ahead of schedule and having exceeded its dividend target for this period by 20% as a result of the better-than-expected performance of its investment portfolio. Strategy The Company's investment objective is to preserve capital and to provide attractive and stable returns to shareholders in the form of quarterly dividends. To achieve this, Queen's Walk has appointed an experienced investment manager, Cheyne Capital Management Limited, to undertake investments in a diversified portfolio of subordinated tranches of asset backed securities. These tranches are traditionally retained by the banks or other financial institutions that originate the mortgage loans or other assets that collateralise a securitisation transaction. The Company makes such investments where it considers the coupon or cashflows from the investment to be attractive relative to the credit profile of the underlying assets. We believe that this investment focus provides our shareholders with exposure to a relatively new investment opportunity. Investment Ramp-Up and Performance The Company successfully invested its IPO proceeds by the end of February 2006 (one month ahead of plan) and has continued to invest in target investments yielding attractive returns. Since acquiring the investment portfolio it purchased for approximately Euro 262 million at the time of its admission to listing, that portfolio has almost doubled in size. The Company's investment portfolio as at 31 March 2006 was approximately Euro 496 million, reflecting an increase of 89.3 per cent. While the Company was listed in December, we chose a 31 March financial year end in order to be able to report a full year of results as soon as possible after the Company became fully invested. In the stub period from admission to 31 March 2006, the Company's investment portfolio has performed at or better than initial expectations. The investment yield on new primary investments remains attractive and the returns generated for shareholders are ahead of expectations. On 28 February 2006, we announced that our target aggregate dividend for the fiscal year ending 31 March 2006 would be raised to Euro 0.24 per share from the previous target of Euro 0.20. The Board recommended a first interim dividend of Euro 0.24 on 5 June 2006, for payment on 5 July 2006 to shareholders of record on 16 June 2006. Portfolio Diversification The Company's investment portfolio has been further diversified geographically, with new investments undertaken in Italy, The Netherlands and Germany (in addition to the Company's investments in the UK, Portugal and the United States). The number of individual borrowers underlying the residential mortgage portfolios that collateralise the Company's RMBS investment portfolio now exceeds 173,000. Consistent with its investment objectives, the Company also seeks to diversify the portfolio in terms of asset classes. While the portfolio continues to be backed primarily by residential mortgages (80 per cent. as at 31 March 2006), we have undertaken investment in a new asset class. The Company has made investments backed by loans to small-and medium enterprises (SME) in both Germany and The Netherlands. Outlook The Company is well positioned to further enhance shareholder returns. We have built a significant global asset origination franchise and continue to develop new strategic relationships. We have undertaken follow-on transactions with several originators with whom we have existing relationships. We have entered into a series of financing arrangements with a number of counterparties to fund further investments and will seek to further diversify the Company's financing sources going forward. Looking to the future, we continue to see attractive investment opportunities. We will seek to broaden further our asset sourcing franchise and to evaluate investments in additional new asset classes. We will also seek to ensure that the Company retains sufficient financing flexibility (both debt and equity) to pursue these investment opportunities and to enhance shareholder returns. Annual General Meeting Our first Annual General Meeting will be held at the registered offices of the Company on 31 July 2006. The notice and form of proxy accompany the annual report. Tom Chandos, Chairman 5 June 2006 Investment Manager's Report Investment Objective The investment objective of Queen's Walk is to preserve capital and deliver stable returns to shareholders in the form of dividends. In seeking to achieve this, the Company invests 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 (referred to as 'RMBS') and commercial loans and receivables (including commercial mortgage loans ('CMBS') and loans to small-and-medium sized enterprises ('SMEs')). 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. The Company seeks to invest in residual income positions where the portfolio of assets backing the particular securitisation transaction is comprised of a significant number of loans. We refer to such positions as 'granular' and, where portfolios are sufficiently granular, this ensures that the Company is not unduly exposed to any single borrower. Granularity also enhances stability in the performance of the investment. Residual income positions with an appropriate level of granularity are the primary investment focus of Queen's Walk. Where such investments carry a targeted minimum annual return (currently 10 per cent per annum), they are referred to as Primary Target Investments. The Company's portfolio as at 31 March 2006, which is comprised entirely of residual income positions that are granular, has grown to approximately Euro 496 million. This represents an 89.3 per cent increase in the size of the Company's investment portfolio as compared to the time of the Company's initial public offering in December (the 'Initial ABS Portfolio'), which had an acquisition value of approximately Euro 262 million. Investment Performance The Company's performance has exceeded the targets set at the time of the Company's initial public offering. Specifically, the investment of the remaining IPO proceeds following the Company's acquisition of the Initial ABS Portfolio outpaced the Company's targets, with proceeds having been fully invested by the end of February 2006, one month ahead of plan. The Company's investment portfolio has also performed at, or better than, initial expectations. In addition, as noted under Financing Strategy below, the Company's use of leverage since investing the IPO proceeds to purchase additional investments has further enhanced returns on the investment portfolio. While the performance of the Company's investment portfolio has been in line with or better than expected, the fair values and effective yields attributed to each investment at the time they were acquired have not been increased or adjusted in this period given the short history of the Company's operations. This treatment is consistent with the Company's conservative approach to both income recognition and asset valuation. Portfolio Diversification The Company's portfolio is comprised of 24 investments in total, reflecting a significant increase from, and diversification of, the 13 investments contained in the portfolio purchased by the Company at the time of its initial public offering in December. In seeking to expand its asset sourcing capability, the Company has made investments with new origination partners and has also entered into follow-on investments with originators it has transacted with previously. In seeking to fulfil its objective of a global franchise, the Company has further diversified its investment portfolio both geographically and by asset class. In addition to making investments in Italy, The Netherlands and Germany, Queen's Walk has added investments in granular SME transactions to its portfolio. The portfolio continues to be backed predominantly by residential mortgages - the largest European asset class. QWIL Portfolio by Asset Type as at 31 March 2006 RMBS 80% ABS 11% SME 9% QWIL Portfolio by Jurisdiction as at 31 March 2006 UK 35.6% US 18.3% Portugal 16.8% Diversified ABS 10.6% Holland 10.0% Italy 5.7% Germany 3.1% Top Ten Investments A summary of the Company's ten largest investments, which account for 58.4% of the total portfolio by gross asset value, is set out in the following table. Issuer Asset Fair % of ABS Underlying Collateral Servicer/ Type value as Portfolio Administrator at 31 March 2006 (â‚¬000's) Newgate Funding UK RMBS 45,861 9.24 Approximately 5,900 Mortgages Plc Plc residential mortgage loans RMAC 2004-NSP4 Plc UK RMBS 32,506 6.55 Approximately 8,100 Homeloan Management Limited residential mortgage loans Smile 2005 Dutch SME 30,491 6.14 Approximately 16,000 SME ABN Amro Synthetic B.V. loans Sestante Finance Italian 28,510 5.74 Approximately 3,500 Meliorbanca S.p.A. S.R.L. RMBS residential mortgage loans Southern Pacific UK RMBS 28,280 5.70 Approximately 4,500 Capstone Mortgage Services Financing 06-A plc residential mortgage loans Limited RMAC 2005-NS1 Plc UK RMBS 28,104 5.66 Approximately 7,800 Homeloan Management Limited residential mortgage loans Southern Pacific UK RMBS 25,422 5.12 Approximately 3,000 Southern Pacific Mortgage Financing 05-B plc residential mortgage loans Limited and Homeloan Management Limited RASC Series US RMBS 23,980 4.83 Approximately 7,000 Residential Funding 2006-KS2 Trust residential mortgage loans Corporation Argent Securities US RMBS 23,467 4.73 Approximately 10,400 Ameriquest Mortgage Company Trust 2006-W1 residential mortgage loans Morgan Stanley ABS US RMBS 23,222 4.68 Approximately 4,100 Countrywide Home Loans Capital I Inc. residential mortgage loans Servicing LP; HomEq Servicing Trust 2005-HE5 Corporation; JPMorgan Chase Bank, NA Financing Strategy While the Company's investment portfolio generates significant amounts of cash to be reinvested, the Company has also used leverage to finance its continued acquisition of Primary Target Investments since fully investing the IPO proceeds. The Company has used, and will continue to use, leverage to finance its portfolio where it believes this will enhance returns to shareholders, subject to the leverage limits contained in the Company's investment policy. The Company's policy with regard to leverage is that leverage as a percentage of its total portfolio that comprises Primary Target Investments will not exceed 30 per cent (provided that no single Primary Target Investment is more than 50 per cent. funded with leverage). Leverage as a percentage of the Company's total portfolio that comprises assets that are not Primary Target Investments is limited to 95 per cent. Since investing the IPO proceeds, the Company has financed its further purchase of Primary Target Investments principally through uncommitted repurchase agreements with various counterparties. The Company views this as a cost-effective source of financing pending its review of capital requirements over the medium to longer term. While these repo arrangements are short term in nature, the Company manages the risk that funding through such repurchase agreements may not be available by maintaining financing relationships with a number of counterparties and by staggering the maturity of its repurchase agreement obligations. The risk is also mitigated by the Company's ability to apply principal repayments to meet repurchase obligations in the short term. As at 31 March 2006, the Company's indebtedness totalled Euro 88.9 million, representing leverage of the Company's total investment portfolio of 17.9 per cent. (See Note 11 and 12 to the Financial Statements regarding indebtedness and interest rate risk). Outlook While rising interest rates and high levels of personal indebtedness (particularly in the US and UK) have given rise to higher rates of personal bankruptcy in certain markets, mortgage performance has remained strong, highlighting the stability of this asset class. The cyclical nature of financial asset performance is a key driver of our conservative approach to pricing residual income positions (i.e., we assume that performance will be worse than current levels when pricing investments, thereby building in a cushion for an economic downturn). We believe that our pricing assumptions remain conservative in the current environment. Continued growth in consumer financing and commercial mortgage lending in continental Europe, the United Kingdom and the United States over the short and medium term will result in more assets available for securitisation. Furthermore, robust demand for ABS and the resultant tight yield spreads on issued debt continues to make securitisation an attractive financing tool for originators of financial assets. The changes to the regulatory capital requirements for banks brought by the new Basel II regulatory framework and the harmonisation of international accounting standards have incentivised banks and other originators to consider disposing of the residual income positions they have traditionally retained. These incentives, coupled with the continued growth of the securitisation markets, should ensure continued supply of residual income positions available for investment. As a dedicated hold-to-maturity investor in residual income positions, Queen's Walk works closely with asset originators seeking to optimise their securitisation platforms. The Company's success thus far can be measured to a significant extent by the fact that some of the asset originators with whom the Company has transacted view Queen's Walk as one of their strategic partners. We believe that the Company's existing asset sourcing platform and its efforts to enhance that platform across Europe and other jurisdictions will enable it to continue to secure residual income positions at attractive levels for the foreseeable future. Investment Process Asset Sourcing Cheyne Capital sources investment opportunities on behalf of the Company through a variety of channels, including Cheyne Capital's network of direct relationships with major commercial and investment banks. In addition to our broad access to the market for residual income positions (arising out of both new and legacy securitisation transactions), Cheyne Capital's securitisation expertise would allow us, on behalf of the Company, to source direct purchases of financial asset portfolios that are suitable for securitisation and which, consequently, are capable of being funded at attractive long-term financing rates. Our ability to complete these transactions directly with asset originators, rather than through an intermediary, results in the elimination or reduction of the transaction fees and costs that would otherwise be payable to third parties, thereby enhancing returns on the investment. Pre-Screening Prior to making any investment, we conduct a pre-screening of the potential investment against our asset allocation strategy to assess its risk/return profile against the Company's existing investment portfolio. We also conduct a preliminary evaluation of the macro-economic environment, the asset class, the relevant servicer (as well as the originator, where the servicer and the originator are not the same entity) and the stability of the relevant asset class. In conducting our preliminary assessment of the servicer, we review the servicer's reputation, track record and infrastructure, focussing primarily on the servicer's management, personnel and information systems and, generally, its ability to administer the underlying asset portfolio going forward. Sensitivity Analysis and Pricing Cheyne Capital conducts extensive due diligence and financial modelling prior to making any investment having regard to the fact that the Company generally expects to hold each of its investments until maturity and not for trading purposes. A detailed sensitivity analysis of expected cash flows forms a significant part of our pricing process. The financial model developed for each asset allows us to input the stress factors that we consider appropriate to the potential transaction, such as delinquencies, defaults, recoveries, prepayments and interest rates. (The performance of the assets is not directly affected in any way by conditions in the traded debt or equity markets.) Cheyne Capital analyses historical data to determine the average level of the stress factors used in pricing and the volatility of these factors over time. From this information, we derive a set of assumptions to use as our 'pricing case'. These assumptions are typically derived by reference to the actual delinquencies, defaults, recoveries and prepayments that the originator has realised on the relevant portfolio and any empirical data available to us. We believe that our pricing case assumptions are more conservative than the assumptions that would be derived from extrapolation of the historical experience of an originator in that we assume higher default rates, lower recoveries and/or higher prepayments than those typically experienced by the originator. Due Diligence An extensive due diligence exercise is undertaken to decide whether a particular investment would be attractive for the Company. When conducting due diligence, Cheyne Capital validates the assumptions made in the pricing analysis and the risks inherent in the investment, including servicer risk. We also evaluate the relevant tax, accounting and legal issues applicable to the relevant investment. This due diligence process includes, among other things, evaluation of the quality and historical performance of the underlying asset portfolio, a more in-depth review of the servicer's ability to administer that portfolio and a review of the relevant documentation and acquisition structure. We thank the Board for their continued confidence in our ability to source investments for the Company and to manage the Company's investment portfolio. Cheyne Capital Management Limited 5 June 2006 Directors' Report The Directors present their annual report and the audited consolidated financial statements for the period from incorporation on 6 September 2005 to 31 March 2006. 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 Law of Guernsey 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 period was that of an investment company. The Group is expecting to continue its activities in the coming year. Results and dividends The results for the period, and the Group's financial position at the end of the period, are shown on pages 20 to 23. The Directors propose the payment of an interim ordinary dividend amounting to Euro 0.24 per Ordinary Share in respect of the period from incorporation to 31 March 2006. Directors The Directors of the Company during the period were: Tom Chandos (Chairman) (appointed 6 September 2005) Stuart Fiertz (appointed 6 September 2005) Talmai Morgan (appointed 6 September 2005) Christopher Spencer (appointed 6 September 2005) Graham Harrison (appointed 6 September 2005) John Hawkins (appointed 6 September 2005) The Directors' interests in the share capital of the Company at 31 March 2006 (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) 16,000 Stuart Fiertz 200,000 Talmai Morgan 1,000 Christopher Spence r 1,000 Graham Harrison 1,000 John Hawkins 1,000 Substantial interests in share capital As at 10 May 2006 the following holdings representing more than 3 per cent of the Company's issued share capital had been reported: Number of Ordinary Shares Percentage held Cheyne ABS Opportunities Fund LP 17,900,756 44.1% State Street Nominees Limited 3,815,317 9.4% HSBC Global Custody Nominee (UK) Limited 1,734,489 4.3% Goldman Sachs Securities (Nominees) Limited 1,406,600 3.5% The Bank of New York (Nominees) Limited 1,369,520 3.4% 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 A resolution to re-appoint Deloitte & Touche as Auditors will be put to the forthcoming Annual General Meeting. Administrator and Secretary Kleinwort Benson (Channel Islands) Fund Services Limited was appointed as administrator and secretary on 8 December 2005. Investors Fund Services (Ireland) Limited is the sub-Administrator of the Company. Custodian Investors Trust & Custodial Services (Ireland) Limited was appointed custodian on 8 December 2005. Listing Requirements On 13 December 2005 the Company's Ordinary Shares were admitted to the Official List of The London Stock Exchange. Authorised Share Capital 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 in exchange for a portfolio of investments as disclosed in Note 17, and 220,000 Ordinary Shares were also issued to the Directors both at a price of Euro 10 per Ordinary Share. On behalf of the Board on 5 June 2006 Christopher Spencer Talmai Morgan Director 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 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 period from incorporation to 31 March 2006 as well as the number of attendances at each meeting. Number of meetings Number of attendances Board of Directors Tom Chandos 3 2 Stuart Fiertz 3 1 Talmai Morgan 3 3 Christopher Spencer 3 1 Graham Harrison 3 2 John Hawkins 3 3 As the Company is recently established, the Audit Committee and the Nomination Committee did not meet during the period under review. 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 Limited. 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. Director's 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 period were as follows: 2006 Euro Tom Chandos 67,824 Graham Harrison 16,957 John Hawkins 16,957 Talmai Morgan 16,957 Christopher Spencer 16,957 ------- Total Directors' emoluments 135,652 ------- 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 period from 6 September 2005 to 31 March 2006 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 17. 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 2006 and of the Group's profit for period from the date of incorporation on 6 September 2005 to 31 March 2006 and have been properly prepared in accordance with The Companies (Guernsey) Law, 1994. Deloitte & Touche Chartered Accountants Guernsey, Channel Islands Date: 5 June 2006 Consolidated Income Statement For the period from 6 September 2005 to 31 March 2006 Note Period from 6 September 2005 to 31 March 2006 Euro Operating income 3 12,480,487 ----------- Operating expenses Other operating expenses 4 (2,455,408) Finance costs 5 (260,052) ----------- Total operating expenses (2,715,460) ----------- ----------- Net profit 9,765,027 =========== Earnings per ordinary share 7 Basic Euro 0.24 Diluted Euro 0.24 Weighted average Ordinary Shares outstanding 7 Number Basic 40,620,756 Diluted 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. Consolidated Statement of Changes in Shareholders' Equity For the period from 6 September 2005 to 31 March 2006 Share Share Other Capital Accumulated Total Capital Premium Reserve Reserve Profits Note Euro Euro Euro Euro Euro Euro Net profit - - - - 9,765,027 9,765,027 for the period ------ --------- -------- ------- --------- -------- Total - - - - 9,765,027 9,765,027 recognised income and expense Issuance of 14, 15 - 406,207,540 - - - 406,207,540 Ordinary Shares Share options 15, 17 - - - 7,672,500 - 7,672,500 issued Costs related 15 - (21,575,951) - - - (21,575,951) to issuance of Ordinary Shares Cancellation 15 - (384,631,589) 384,631,589 - - - of share premium ------ --------- --------- -------- --------- --------- Balance at 31 - - 384,631,589 7,672,500 9,765,027 402,069,116 March 2006 ====== ========= ========= ======== ========= ========= The accompanying notes form an integral part of the financial statements. Consolidated Balance Sheet As at 31 March 2006 Note 31 March 2006 Euro Non-current assets Investments at fair value through profit or loss 9 487,890,499 -------- Current assets Other assets 10 5,952,062 -------- -------- Total assets 493,842,561 -------- Equity and liabilities Equity Share capital 14 - Share premium account 15 - Other reserve 15 384,631,589 Capital reserve in respect of share options 17 7,672,500 Accumulated profits 9,765,027 -------- 402,069,116 -------- Current liabilities Overdraft and repurchase agreements 11 88,880,531 Other liabilities 13 2,892,914 -------- Total liabilities 91,773,445 -------- -------- Total equity and liabilities 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 5 June 2006. Signed on behalf of the Board of Directors by: Christopher Spencer Talmai Morgan Director Director Consolidated Cash Flow Statement For the period from 6 September 2005 to 31 March 2006 Note Period from 6 September 2005 to 31 March 2006 Euro Net cash outflow from operating activities 16 (406,156,829) Financing activities Proceeds from issuance of Ordinary Shares 15 406,207,540 Costs related to issuance of Ordinary Shares 15 (13,903,451) Dividends paid to shareholders - ------------ Cash flows from financing activities 392,304,089 ------------ Net decrease in cash (13,852,740) ------------ Reconciliation of net cash flow to movement in net cash Net decrease in cash and cash equivalents (13,852,740) Cash and cash equivalents at 6 September 2005 - Effect of exchange rate fluctuations on cash and cash - equivalents ------------ Cash and cash equivalents at 31 March 2006 11 (13,852,740) ------------ 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 Law of Guernsey 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 2006, 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'). 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. 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 as fair value through profit or loss. A Company-only Balance Sheet, Cash Flow Statement and Statement of Changes in Shareholders' Equity has not been included in these financial statements as the results and reserves of the Company are not materially different from those of the consolidated Group. The principal accounting policies are set out below. The preparation of financial statements in conformity with IFRS requires the Group to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. 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. Where the Company does consolidate a special purpose entity ('SPE'), the interest in the notes not held by the Company will be shown as a liability in the balance sheet. Any income or expenses attributable to these note holders will be shown as an expense in the income statement. 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. Investments Financial assets are classified as at fair value through profit or loss and are stated at fair value, with any resultant gain or loss being recognised in the income statement. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in the income statement. 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. Non-tradeable loans provided by the Group to third parties are accounted for at amortised cost. Cash and cash equivalents Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities. 2. Significant accounting policies (continued) 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 (including embedded derivatives) 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. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of the item being hedged. Forward exchange contracts 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. Fair value All financial assets carried at fair value are initially recognised at fair value and subsequently re-measured at fair value based on quoted bid prices where such bids are available from a third party in a liquid market. If quoted 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. Where such pricing models are used, inputs are based on market related measures at the balance sheet date. 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 Company 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. 2. Significant accounting policies (continued) 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. Provisions A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation, and the obligation can be reliably measured. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. 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 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 outstanding principal amount of the Company's financial assets and their contractual terms. Premiums and discounts associated with the purchase of financial assets are amortised or accreted into interest income over the projected lives of the investments using the effective interest method as defined under International Accounting Standard 39. The Company's policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, market consensus indicators and current market conditions. Where the Company adjusts its effective yield calculation to take account of any change in underlying assumptions, such adjustments are recognised in the income statement. 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. 3. Operating Income Period from 6 September 2005 to 31 March 2006 Euro Interest income from cash and cash equivalents 78,188 Interest income from investments in asset-backed securities 13,299,260 Interest income from commercial paper 485,169 Interest income from swap agreements 36,923 Net realised foreign exchange gains / (losses) 3,710,904 Net unrealised foreign exchange gains / (losses) (5,129,957) ------------ Total operating income 12,480,487 ------------ 4. Other operating expenses Period from 6 September 2005 to 31 March 2006 Euro Investment management, custodian and administration fees Investment management fee (Note 17) 1,814,524 Administration fee (Note 17) 97,785 Custodian fee (Note 17) 29,356 ------------ 1,941,665 ------------ Other operating expenses Audit fees 54,467 Directors' fees payable to Directors of Queen's Walk 135,652 Investment Limited Directors' fees payable to Directors of Trebuchet Finance 8,500 Limited Legal fees 189,210 Other expenses 125,914 ------------ 513,743 ------------ ------------ Total other operating expenses 2,455,408 ------------ The Company has no employees. Amounts paid to Deloitte & Touche in respect of non-audit services were Euro 357,105 in respect of work relating to the Company's IPO. This amount has been expensed against the share premium account along with other listing costs in accordance with the accounting policies of the Company. 5. Finance costs Period from 6 September 2005 to 31 March 2006 Euro Finance costs arises from: Overdraft 2,713 Repurchase agreements 257,339 ------------- Total finance costs 260,052 ------------- 6. Dividends Period from 6 September 2005 to 31 March 2006 Euro Interim amounts recognised as distributions to equity holders - in the period Proposed interim dividend for the period ended 31 March 2006 9,748,981 of Euro 0.24 per share The interim dividend was proposed by directors on 5 June 2006 and has not been included as a liability in these financial statements. 7. Earnings per share Period from 6 September 2005 to 31 March 2006 Euro The calculation of the basic and diluted earnings per share is based on the following data: Earnings for the purposes of basic earnings per share being 9,765,027 net profit attributable to equity holders ------------- Weighted average number of Ordinary Shares for the purposes of 40,620,756 basic earnings per share Effect of dilutive potential Ordinary Shares: Share options 442,771 ------------- Weighted average number of Ordinary Shares for the purposes of 41,063,527 diluted earnings per share ------------- 8. 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, including certain assets in the Initial ABS Portfolio (see Note 17). 9. Investments Investments are classified as at fair value through profit or loss and are stated at fair value, with any resultant gain or loss being recognised in the income statement. Where these investments are interest-bearing, interest calculated using the effective interest method is recognised in the income statement. The following is a summary of the Group's investments at fair value through profit or loss at 31 March 2006: 31 March 2006 Asset-backed securities EUR Opening amortised cost - Purchases(1) 512,741,882 Principal paydown received (18,936,309) Unrealised foreign exchange losses(2) (5,915,074) --------- Closing amortised cost 487,890,499 --------- (1)Euro 259,007,560 relates to the acquisition of the Initial ABS Portfolio, as described in Note 17. (2)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 3) and unrealised gains on foreign exchange contracts (as disclosed in Note 10). The currency profile of the Group's net asset positions as at 31 March 2006 is set out in Note 12. The Company has entered into a credit default swap agreement with Lehman Brothers International (Europe) referencing a notional amount of Euro 3,800,000 of Class G Notes issued by Stichting Memphis 2006-1. The credit default swap agreement has a maturity date of April 2015 and the Company has posted collateral in the amount of Euro 494,000 in respect of its obligations under the agreement. (See Note 10). 10. Other assets 31 March 2006 Euro Interest receivable 4,777,493 Derivative financial assets - unrealised gain on forward exchange 680,569 contracts Margin amounts held with brokers (Note 9) 494,000 --------- 5,952,062 --------- The Directors consider that the carrying amount of other receivables approximates their fair value. 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 ----------- 11. Overdraft and repurchase agreements 31 March 2006 Euro Net overdraft and cash equivalents 13,852,740 Repurchase agreements 75,027,791 --------- 88,880,531 --------- The overdraft of Euro 17,196,168 was short-term and unsecured and interest at a rate of 5.68% was charged on this amount. This overdraft amount was repaid fully on 4 April 2006. Positive cash balances of Euro 3,343,428 are reflected in the net overdraft balance of Euro 13,852,740. Asset-backed securities totalling 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 2006 were 2.91% (Euro), 5.43% (GBP) and 5.67% (USD). The repurchase agreements outstanding at 31 March 2006 matured between 3 April 2006 and 28 April 2006 and have been rolled with maturity dates falling between 5 June 2006 and 25 July 2006. 12. Financial instruments The principal risks to which the Group will be exposed are market risk, interest rate risk, currency risk, credit risk and certain risks relating to derivatives. 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. The Group will not enter into derivative transactions for speculative purposes. Market risk The Group's exposure to market risk is comprised mainly of movements in the value of its investments and, to the extent that the Group incurs indebtedness in the future, 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 future, may decrease its interest income. Most of the Group's investments will be floating rate or backed by floating rate assets and, as such, will be valued based on a market credit spread over a benchmark (such as LIBOR or EURIBOR). Increases in the credit spreads above such benchmarks may affect the Group's net equity or net income directly through their impact on unrealised gains or losses on investments within the portfolio, and therefore the Group's ability to make gains on such investments, or indirectly through their impact on the Group's ability to borrow and access capital. Interest rate risk To the extent that the Group incurs indebtedness in the future, 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 will be 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. 12. Financial instruments (continued) Interest rate profile 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 method after taking into account historical performance, market indicators and current market conditions (see Note 2 - Interest income). These effective yield calculations are adjusted periodically to take account of any changes in underlying assumptions. 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: (i) for investments that are unrated and which do not have a stated coupon, the gross asset value of the investment multiplied by the interest rate derived from using the effective interest method (see Note 2 - Interest income); and (ii) for investments that carry a fixed coupon, the net asset value of the investment after leverage multiplied by the stated coupon. Maturity profile 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 equivalents (13,852,740) (13,852,740) - - Repurchase agreements (75,027,791) (75,027,791) - - ---------- ---------- ---------- ---------- 399,009,968 (88,880,531) 75,273,771 412,616,728 ---------- ---------- ---------- ---------- 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 Company'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 and also, where the Investment Manager considers appropriate, on an overall portfolio basis. The Group may bear a level of currency risk that could otherwise be hedged where it considers that bearing such risks is advisable. 12. Financial instruments (continued) Currency profile Total Euro GBP USD (in Euro) (in Euro) (in Euro) (in Euro) Investments at fair value 487,890,499 171,020,403 175,227,971 141,642,125 through profit or loss Other assets 5,271,493 2,383,604 1,321,964 1,565,925 Foreign exchange contracts 680,569 275,285,885 (151,300,247) (123,305,069) 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. 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. 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 will be adequate to repay in full the Group's investments. 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. 12. Financial instruments (continued) Risks Relating to Derivatives 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. 13. Other liabilities 31 March 2006 Euro Interest payable 196,634 Due to related parties - Investment Manager (Note 17) 1,814,524 Accrued expenses 881,756 --------- 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. 14. Share capital Authorised share capital Number of 31 March Ordinary 2006 Shares Euro Ordinary shares of no par value each Unlimited - --------- -------- Issued and fully paid 31 March 31 March 2006 2006 Number of Euro Ordinary Shares Balance at date of incorporation 2 - Issue of new Ordinary Shares with no par value during the 40,620,754 - 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 as disclosed in Note 17, 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. 15. Share premium account 31 March 2006 Euro Balance at date of incorporation - 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 Shares (7,672,500) Cancellation of share premium transferred to Other (384,631,589) reserve --------- Balance at 31 March 2006 - --------- 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 written off against the share premium account. The issue costs associated with the Initial Public Offering amounted to Euro 13,903,451 and share options with a value of Euro 7,672,500 (Notes 14 and 17). The Company has 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. 16. Notes to cashflow statement Period from 6 September 2005 to 31 March 2006 Euro Net profit 9,765,027 Adjustments for: Unrealised foreign exchange losses 5,915,074 Unrealised gains on derivatives (680,569) --------- 14,999,532 Purchases of investments (512,741,882) Principal paydown received 18,936,309 --------- (493,805,573) Net borrowings under repurchase agreements 75,027,791 --------- Increase in receivables (5,271,493) Increase in payables 2,892,914 --------- (2,378,579) --------- Net cash outflow from operating activities (406,156,829) --------- 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 (which are presented as a single class on the face of the balance sheet) comprise bank overdrafts and cash balances as described in Note 11. 17. Material agreements and related parties 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 4 and 13). There was no Incentive Fee accrued or paid during the period. 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 will be paid quarterly in arrears. An incentive period will comprise each successive quarter, except the first such period shall be 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 to 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 will be 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. 17. Material agreements and related parties (continued) Investments in other entities managed by the Investment Manager As at 31 March 2006, the Company held investments with a total value of Euro 51,081,598 in the following entities, which are managed by the Investment Manager: Cheyne Finance Plc; 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. 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. As at 31 March 2006, 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. 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. Directors and Advisers Directors Tom Chandos (Chairman) Stuart Fiertz Talmai Morgan Christopher Spencer Graham Harrison John Hawkins Registered Office Dorey Court Admiral Park St. Peter Port Guernsey GY1 3BG Administrator and Secretary of the Company Kleinwort Benson (Channel Islands) Fund Services Limited Dorey Court Admiral Park St. Peter Port Guernsey GY1 3BG Investment Manager Cheyne Capital Management Limited Stornoway House 13 Cleveland Row London SW1A 1DH Corporate Brokers Citigroup Global Markets Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB Goldman Sachs International Peterborough Court 133 Fleet Street London EC4A 2BB Auditors Deloitte & Touche Regency Court Glategny Esplanade St. Peter Port Guernsey GY1 3HW Registrar Capita IRG (CI) Limited 2nd Floor No. 1 Le Truchot St. Peter Port Guernsey GY1 4AE UK Transfer Agent Capita Registrars The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Custodian Investors Trust & Custodial Services (Ireland) Limited Block D Iveagh Court Harcourt Road Dublin 2 Ireland Sub-Administrator Investors Fund Services (Ireland) Limited Block D Iveagh Court Harcourt Road Dublin 2 Ireland This information is provided by RNS The company news service from the London Stock Exchange

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