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Queens Walk Inv Ltd (RECI)

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Tuesday 04 September, 2007

Queens Walk Inv Ltd

Results Quarter ended30/06/07

Queen's Walk Investment Limited
04 September 2007

This announcement replaces that issued at 07.02 on 4 September 2007, RNS no.
2312D. The headline now reads 'Financial Results for the Quarter Ended 30 June
2007.' The body of the text is unchanged.



4 September 2007



                        Queen's Walk Investment Limited

              Financial Results for the Quarter Ended 30 June 2007



Queen's Walk Investment Limited ('Queen's Walk') is a Guernsey-incorporated
investment company listed on the London Stock Exchange. Queen's Walk invests
primarily in a diversified portfolio of subordinated tranches of asset backed
securities, including the unrated 'equity' or 'first loss' residual income
positions typically retained by the banks or other financial institutions which
have originated the loan assets that collateralise a securitisation transaction.
The Company makes such investments where its investment manager, Cheyne Capital
Management (UK) LLP ('Cheyne Capital'), considers the coupon or cash flows from
the investment to be attractive relative to the credit exposure of the
underlying asset collateral.  For more information regarding Queen's Walk,
please visit www.queenswalkinv.com or call Caroline Villiers:  +44 20 7153 1521.



Highlights

  • Operating income for the quarter of €12.3 million, equating to operating
    income per share of €0.30.
  • Distributable income in the first quarter in the amount of €8.8 million or
    €0.22 per share compared to €9.6 million or €0.24 per share as at 31 March
    2007.
  • Net asset value decreased to €7.01 per share as at 30 June 2007 from €7.24
    per share as at 31 March 2007.
  • The Board of Directors has declared an interim dividend of €0.15 per share
    for the first quarter.
  • Fair value write-downs of the Company's investment portfolio in the first
    quarter totalled €10.9 million or approximately 3.0% of the adjusted 31
    March 2007 investment portfolio.  These write-downs resulted principally
    from further deterioration in the US sub-prime market and wider market
    discount rates applied to the Company's three ABS CDO residual positions.
  • The fair value of the Company's investments exposed, directly or
    indirectly, to the US sub-prime market accounted for €12.8m or 4.2% of the
    gross asset value of the investment portfolio.
  • The weighted average yield of the Company's investment portfolio as at 30
    June 2007 was 13.3% in local currency terms compared to 13.4% as at 31 March
    2007.
  • The Company's net leverage has been reduced from 25.9% as at 31 March 2007
    to 3.0% as at 30 June 2007.
  • The Company has secured a four year term financing facility and continues
    to have cash available for the purpose of buying back shares and to fund the
    proposed tender offer for which it is seeking shareholder approval.
  • 991,354 ordinary shares have been purchased for cancellation.
  • At the AGM held yesterday, the Company obtained authority from its
    shareholders to purchase up to a further 14.99 per cent of its issued share
    capital (the 'General Authority').
  • The Company has proposed a tender offer to purchase at least 10% of the
    Company's share capital. Details of the tender offer will be made available
    shortly.
  • The Company will not seek to buy back more than 24.99% of its issued share
    capital through any combination of the General Authority and the proposed
    tender offer without first obtaining further shareholder approval.



Commenting on the results, Tom Chandos, Chairman, said: 'The cashflows received
from the portfolio allow the Company to deliver continued dividends to
shareholders, as well as the ability to continue repurchasing shares.'


Financial Highlights


                                                              Total                                           Total
                            Revenue      Fair value   Quarter ended  Revenue return      Fair value         Quarter 
                             return       gains and   30 June  2007                       gains and           ended
                                             losses                                          losses   31 March 2007
Operating Income         12,307,088               -      12,307,088      16,994,916               -      16,994,916
Gains and losses on
fair value through
profit or loss                    
financial instruments             -    (11,527,045)    (11,527,045)               -   (110,558,833)   (110,558,833)
                         12,307,088    (11,527,045)         780,043      16,994,916   (110,558,833)    (93,563,917)

Operating Expenses      (2,668,568)               -     (2,668,568)     (2,700,658)               -     (2,700,658)
Finance Costs           (1,336,435)               -     (1,336,435)     (2,541,463)               -     (2,541,463)
Net profit / (loss)       8,302,085    (11,527,045)     (3,224,960)      11,752,795   (110,558,833)    (98,806,038)
Distributable                                             8,765,290                                       9,596,406
income1,2
Distributable income                                          €0.22                                           €0.24
per share

Total Assets                                           €360,911,412                                    €427,104,698
Total Liabilities                                       €76,075,800                                    €132,951,013
Equity Capital                                         €284,835,612                                    €294,153,685
NAV per share                                                 €7.01                                           €7.24



1.  Net profit from investments before deduction of net fair value losses
through profit or loss.  For the quarter ended 31 March 2007, the distributable
income includes -€2,156,389 of f/x gains and losses.  For the quarter ended 30
June 2007, the distributable income includes €463,205 of f/x gains and losses.

2. Refer to Note 3 of the accounts for further details on the Company's
distribution policy.



First Quarter Dividend



The Board of Directors has declared an interim dividend for the quarter ended 30
June 2007 of €0.15 per share payable on 8 October 2007 to shareholders of record
on 14 September 2007.



Conference Call


A conference call to review the Company's financial results for the quarter
ended 30 June 2007 will take place at 9:30 A.M. London time on 4th September
2007.  The conference call can be accessed by dialing +44 (0)20 7806 1962 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 is a Guernsey-incorporated investment company
listed on the London Stock Exchange. Queen's Walk invests primarily in a
diversified portfolio of subordinated tranches of asset backed securities,
including the unrated 'equity' or 'first loss' residual income positions
typically retained by the banks or other financial institutions which have
originated the loan assets that collateralise a securitisation transaction. The
Company makes such investments where its investment manager, Cheyne Capital
Management (UK) LLP, considers the coupon or cash flows from the investment to
be attractive relative to the credit exposure of the underlying asset
collateral. The Company believes that its investment focus provides equity
investors with exposure to a relatively new investment opportunity in this asset
class.



The content of this announcement includes statements that are, or may be deemed
to be, 'forward-looking statements'. These forward-looking statements can be
identified by the use of forward-looking terminology, including the terms
'believes', 'estimates', 'anticipates', 'expects', 'intends', 'considers',
'may', 'will' or 'should'. 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).



Portfolio Review



As at 30 June 2007, the Company's portfolio of UK mortgage, European mortgage
and SME residual investments comprised 93.8% of the gross-asset value of the
Company's investment portfolio.  The Company's investments exposed to the US
sub-prime market, firstly, through a mortgage-backed residual position and
secondly, through two CDOs collateralised by asset pools containing US sub-prime
mortgage-backed bonds, accounted for 4.2% of the gross asset value of the
Company's investment portfolio.   A CDO, backed by US leveraged loans, accounts
for the balance of the portfolio (2.0% of the gross asset value of the Company's
investment portfolio).  The cash generative capability of the portfolio has
again been demonstrated with €22.3 million of cash proceeds being received in
the quarter ended 30 June 2007.  While the current market volatility may have a
negative impact on the fair value of the Company's portfolio in future periods,
the cash generative capability of the Company will not be affected by changes in
market discount rates.



The Company's net leverage has been reduced to 3.0% as at 30 June 2007 from
25.9% as at 31 March 2007. This reduction in leverage resulted from the
application of both the proceeds of asset sales which the Company has disclosed
previously, and the cash flows from the Company's investment portfolio.  In
addition to reducing leverage, the Company has also reduced financing risk since
the end of the quarter by replacing short-term repo financing arrangements with
a four-year, €135.0 million financing facility arranged and placed by Deutsche
Bank.  As at 31 August 2007, the Company had €31.2 million of cash on the
balance sheet and has drawn €45 million against its financing facility.










Investment Portfolio



UK Mortgage Investments (35.5% of GAV)



No significant changes to the pricing assumptions of the Company's UK
mortgage-backed residual investments were made in the quarter.  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 30 June 2007.



Significant changes were made to prepayment assumptions in the quarter ended 31
March 2007 to reflect observed changes in the prepayment behaviour of borrowers
exiting their discount interest rate period. The prepayment data received in the
quarter has been consistent with those revised prepayment assumptions.



While recent UK interest rate rises may still have a future impact on the growth
of house prices in particular regions, the Company's UK mortgage residual
investments have benefited from approximately 1.5 to 3.0 years (depending on
when a particular residual has been purchased) of house price appreciation.
Default rates observed in the quarter were in line with expectations, and given
the house price appreciation in the portfolio we expect losses to remain within
expectations.





European Mortgage Investments (28.7% of GAV)



With respect to the European mortgage-backed residual portfolio, the
fundamentals underlying the performance of these investments remain sound.
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 30 June 2007.



Notwithstanding the changes in Portuguese and Italian legislation governing
prepayment charges, we have not yet observed a significant change in borrower
prepayment behaviour associated with the Company's mortgage portfolios.  Default
experience in these investments has been in line with expectations.  Recovery
rates on the few loans that have defaulted have also been in line with
expectations.





SME Investments (14.5% of GAV)



The Company's portfolio of SMEs residual investments is performing in line with
or better than expectations.  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 30 June 2007.



The observed default rates for the Company's SME portfolios remain in line with
expectations.  Furthermore, the expected default rates for the Company's SME
portfolios, based on the most recent credit scores for the underlying companies,
are also in line with original pricing assumptions.




CDO Investments (4.0% of GAV)



The Company holds residual positions in three ABS CDOs managed by Cheyne
Capital, two of which are exposed to US mortgage assets, Cheyne High Grade CDO,
Ltd ('High Grade CDO') and Cheyne ABS Investments l PLC ('ABS Investments l')
and one, which is backed by US CLO bonds, Cheyne CLO Investments l Ltd. ('CLO
Investments l').  The percentage of the collateral exposed to the US sub-prime
market in the High Grade CDO and ABS Investments I is approximately 56.9% and
63.6%, respectively.



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 the residual investment remains
positive and is in line with expectations.



High Grade CDO, Ltd. is a CDO backed by AAA to A-rated ABS bonds and ABS
Investments I is a CDO backed by the mezzanine tranches of US ABS CDOs
(including US RMBS CDOs). As at 30 June 2007, the credit performance of High
Grade CDO had been positive, with three rating upgrades and no negative credit
actions on the bonds contained in its portfolio.  However, subsequent to the
quarter end, the continued deterioration of the US sub-prime market has affected
the credit quality of two bonds in the underlying portfolio.  The expected
cashflows and the fair value of the residual have been adjusted accordingly.



The credit performance of ABS Investments I has been stable.  Since inception,
seven of the bonds in the portfolio have been upgraded and two have positive
rating watch actions.  On 3 August 2007, Fitch Ratings downgraded one asset in
the ABS Investments I portfolio (ACA ABS 2003-2 A3) from A to BBB-.  On 31 July
2007, Standard and Poor's affirmed its rating of A for this same bond.



The market values of the ABS CDO residuals have been adversely affected by the
recent volatility in the ABS markets.  In the quarter ended 30 June 2007, the
aggregate fair value of these assets has reduced by 36.7% since 31 March 2007.



US Mortgage Investment (1.2% of GAV)



The Company retains exposure to one US mortgage-backed residual investment. In
light of further evidence of continued deterioration in the US housing market,
valuation assumptions regarding cumulative losses and the timing of losses were
revised in the quarter ended 30 June 2007.  The fair value of the investment has
reduced by 52.7% since 31 March 2007.  The cumulative loss assumption for the
residual position has been increased by 27.8% as a result of continued
significant weakness in the US sub-prime market since 31 March 2007.  While the
Company continues to receive cash flows from this investment, the total cash
flows we expect to receive over the expected life of the investment have been
reduced by 22.0%.



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 the fair value write-downs taken in the quarter, the NAV
of the Company has decreased to Euro 7.01 per share as at 30 June 2007 from Euro
7.24 per share as at 31 March 2007 (a decrease of 3.2%).




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


Asset Class       31 March 2007    30 June 2007        Fair Value     % Change to       Cashflows         Cashflows
                                 Fair Value2 (€      Change Since   31 March 2007 Received in the   Received in the
                Fair Value1,2 €             mn)  31 March 2007 (€     Fair Value3   Quarter Ended     Quarter Ended
                            mn)                             mn) 3                   31 March 2007   30 June 2007 (€
                                                                                            (€mn)               mn)
UK Mortgages             133.00          128.26             -4.75           -3.6%           10.03             12.77
Euro Mortgages           106.58          103.66             -2.92           -2.7%            4.70              4.73
SME                       52.92           52.34              -.58           -1.1%            3.07              3.06
ABS CDO                   22.52           14.26             -8.26          -36.7%            0.93              1.14
US Mortgages               9.40            4.44             -4.95          -52.7%            2.30               .58
Cash and                  34.90           56.69             21.79           62.4%
Other Cash
Equivalents
TOTAL                    359.32          359.64              0.32            0.1%           21.02             22.28



1.        The fair value of the portfolio as at 31 March 2007 excludes the fair
value of the six residuals that were sold in the quarter ended 30 June 2007 and
Southern Pacific Financing 06-A plc which was sold on 30 March 2007.

2.        The fair value figures for 31 March 2007 and 30 June 2007 include
accrued income and, in the case of the UK mortgage residuals, the value of the
interest rate swaps.

3.        Fair value changes since 31 March 2007 includes principal
amortisations of the residual as a result of cash flows received in the quarter.



Portfolio Breakdowns



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 gross asset value of the Company's investment
portfolio.

To view the full text of this press release including pie charts, paste the 
following link into your web browser:

http://www.rns-pdf.londonstockexchange.com/rns/2312d_1-2007-9-4.pdf

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 gross asset value of the Company's investment portfolio.

To view the full text of this press release including pie charts, paste the 
following link into your web browser:

http://www.rns-pdf.londonstockexchange.com/rns/2312d_1-2007-9-4.pdf


Share Repurchases



The Company began purchasing its shares on 18 July 2007. As of 31 August 2007,
the Company purchased 991,354 shares for cancellation at an average price of
€5.04 per share.  Though the share buybacks have been accretive to NAV, the
number of shares which the Company has been able to repurchase has been
constrained by applicable limits on the number of shares that can be purchased
on any particular day and by the price at which the Company can repurchase
shares.



The Company's shares continue to trade at a discount to NAV and the Company has
elected to repurchase its shares via a tender offer.  At an EGM held on 3
September 2007, independent shareholders approved the waiver from Rule 9 of the
City Code on Takeovers and Mergers in respect of repurchases of up to 24.99% of
the Company's issued share capital.  Accordingly, the Company will be entitled
to purchase up to 24.99% of its ordinary shares pursuant to a combination of the
General Authority and the proposed tender offer.  The Company is committed to
buying not less than 10% of its current issued share capital under the tender
offer.  Full details of the tender offer will be sent to shareholders shortly.



While the share price trades at a material discount to NAV, the Company believes
it is in the best interests of shareholders to continue with the tender offer
and share buy-backs.





Strategy and Market Outlook



The current volatility in the ABS markets is likely to persist for the coming
months.  The availability of the capital to purchase ABS debt securities has
significantly reduced in the past few weeks and the magnitude of this reduction
has been sufficiently large to affect historically stable funding platforms.
Prices for European ABS securities are increasingly trading on technicals driven
by one way supply and demand dynamics. Generally, prices for European and UK
residuals have not been affected by this market volatility, however the outlook
in the coming months remains highly uncertain and events outside the control of
the Company could have a material impact on the fair value of the Company's
portfolio.



The current volatility in the ABS markets offers challenges as well as
substantial opportunities for the Company.  As liquidity in the European markets
reduces in the coming months, there will be more opportunities for the Company
to invest its capital in asset backed mezzanine and equity investments with
attractive risk return profiles. ABS investors with sufficient capital and
stable financing platforms should be well positioned to take advantage of the
dislocation in market prices.



In the UK, we expect that the flow of mortgage-backed residuals will continue as
a large number of  mortgage originators rely on the sale of residuals as a key
part of their financing and capital management strategies. In the short-term the
availability of residuals may be limited as the volume of mortgage loans is
reduced as a result of higher financing costs in the ABS markets.  However, as
and when liquidity returns to the ABS markets, the increased competition in the
UK mortgage market will result in more originators selling UK residual
positions.  The Company is aware of several originators who are waiting for the
current dislocation in the European ABS markets to subside before selling their
mortgage residuals.  This will result in either a large supply of residuals
appearing at the same time or some originators being forced to sell some of
their residuals at significant discounts to return capital into their own
businesses. The imbalance between the supply of mortgage residuals and the lack
of risk capital will return pricing power to residual investors.



The pricing of European prime mortgage residuals remains tight as sellers of
these residuals continue to have strong demand from smaller European banks and
financial institutions.  Given the continued uncertainty around changes to
prepayment rates, the Company is unlikely to increase its exposure by purchasing
residuals at current markets prices.



The Company's SME portfolio continues to perform in line with expectations.
Where there is an opportunity to increase exposure to this asset class at
attractive rates of return the Company may do so.



The Company is seeing an increasing number of attractive investment
opportunities in the European and UK specialised finance area as liquidity in
the asset-backed markets is reduced.   Investments in this area are typically
structured as mezzanine loan facilities secured against granular asset pools
with a warrant or equity participation to provide the potential for NAV
accretion.  The Investment Manager is well positioned in terms of available
capital to take advantage of these opportunities.



Following completion of the proposed tender offer, the Company will seek to make
the best use of its capital either through purchasing its own shares or by
making new investments.

Unaudited Consolidated Income Statement
For the quarter ended 30 June 2007

                                                                 Total                                    Total
                                     Revenue   Fair value      Quarter      Revenue    Fair value Quarter ended
                                      return    gains and     ended 30       return     gains and 31 March 2007         
                          Note                    losses*    June 2007                    losses*          Euro
                                                                                                           
                                                                                                               
Operating income                  12,307,088            -   12,307,088   16,994,916             -    16,994,916
                                                                                                               
Gains and losses on fair                   - (11,527,045) (11,527,045)            - (110,558,833) (110,558,833)
value through profit or                                                                                        
loss financial                                                                                                 
instruments*                                                                                                   
                                  12,307,088 (11,527,045)      780,043   16,994,916 (110,558,833)  (93,563,917)
                                                                                                               
Operating expenses           5   (2,668,568)            -  (2,668,568)  (2,700,658)             -   (2,700,658)
                                                                                                               
Finance costs                6   (1,336,435)            -  (1,336,435)  (2,541,463)             -   (2,541,463)
                                                                                                               
Net Profit/(loss)                  8,302,085 (11,527,045)  (3,224,960)   11,752,795 (110,558,833)  (98,806,038)
                                                                                                               
Loss per Ordinary Share                                                                                        
Basic                                                     Euro (0.079)                             Euro (2.432)
Diluted                                                   Euro (0.079)                             Euro (2.432)
                                                                                                               
Weighted average Ordinary                                       Number                                   Number
Shares outstanding                                                                                             
Basic                                                       40,620,756                               40,620,756
Diluted                                                     40,620,756                               40,620,756





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



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




Unaudited Consolidated Statement of Changes in Shareholders' Equity
For the quarter ended 30 June 2007



                                  Share        Share Other Reserve     Capital       Accumulated             Total
                                Capital      Premium                   Reserve           Profits
                                   Euro         Euro          Euro        Euro              Euro              Euro

Balance at 1 April 2007               -            -   384,678,304   7,672,500      (98,197,119)       294,153,685

Net loss for the quarter              -            -             -           -       (3,224,960)       (3,224,960)

Transfers from distributable          -            -  (12,186,226)           -        12,186,226                 -
reserves to accumulated
profits in respect of
dividends paid/payable

Distribution to the Ordinary          -            -             -           -       (6,093,113)       (6,093,113)
Shareholders of the Company

Balance at 30 June 2007               -            -   372,492,078   7,672,500      (95,328,966)       284,835,612


Unaudited Consolidated Balance Sheet
As at 30 June 2007



                                                                                 30 June 2007        31 March 2007
                                                                                         Euro                 Euro
Non-current assets
Investments at fair value through profit or loss                                  297,198,144          366,743,454

Current assets
Cash and cash equivalents                                                          56,685,553           22,026,122
Other assets                                                                        7,027,715           38,335,122
                                                                                   63,713,268           60,361,244

Total assets                                                                      360,911,412          427,104,698

Equity and liabilities

Equity
Share capital                                                                               -                    -
Share premium account                                                                       -                    -
Other reserve                                                                     372,492,078          384,678,304
Capital reserve in respect of share options                                         7,672,500            7,672,500
Accumulated losses                                                               (95,328,966)         (98,197,119)
                                                                                  284,835,612          294,153,685
Current liabilities
Repurchase agreements                                                              65,682,339          119,773,090
Distribution payable                                                                6,093,113            9,342,774
Other liabilities                                                                   4,300,348            3,835,149
Total liabilities                                                                  76,075,800          132,951,013

Total equity and liabilities                                                      360,911,412          427,104,698



Notes to the Unaudited Financial Statements

1.    General information

Queen's Walk Investment Limited (the 'Company') was registered on 6 September
2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands.
The Company commenced its operations on 8 December 2005.  The Company is a
closed-ended investment company with limited liability formed under The
Companies (Guernsey) Law, 1994 and its Ordinary Shares are listed on the London
Stock Exchange.  The registered office of the Company is Dorey Court, Admiral
Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. 'Group' is defined as
the Company and its subsidiary. At 30 June 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').  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 using pricing models incorporating discounted cash flow
techniques. These pricing models apply assumptions regarding asset-specific
factors and economic conditions generally, including delinquency rates,
prepayment rates, default rates, maturity profiles, interest rates and other
factors that may be relevant to each financial asset.  Where such pricing models
are used, assumptions are reviewed and updated on the basis of actual
performance data as it is received and on the basis of market conditions as at
the balance sheet date.




2.    Significant accounting policies (continued)

Basis of preparation (continued)

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.



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 30 June 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 total
return swap arrangements where the underlying asset or assets would otherwise be
within the Group's investment policy in order to obtain substantially the same
economic exposure to the returns and risks associated with holding such
underlying asset or assets.



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






2.    Significant accounting policies (continued)

Derivative financial instruments (continued)

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



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



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



Fair value

All financial assets carried at fair value are initially recognised at fair
value and subsequently re-measured at fair value based on bid prices where such
bids are available from a third party in a liquid market. If bid prices are
unavailable, the fair value of the financial asset is estimated using pricing
models incorporating discounted cash flow techniques. These pricing models apply
assumptions regarding asset-specific factors and economic conditions generally,
including delinquency rates, prepayment rates, default rates, maturity profiles,
interest rates and other factors that may be relevant to each financial asset.



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



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



Offsetting financial instruments

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




2.    Significant accounting policies (continued)

Repurchase agreements

The Group may finance the acquisition of some of its investments through the use
of repurchase agreements. Repurchase agreements are treated as collateralised
financing transactions and are carried at their contractual amounts, including
accrued interest, as specified in the respective agreements. Accrued interest is
recorded as a separate line item on the balance sheet.



Derecognition of a financial asset

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



Interest-bearing loans and borrowings

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



Foreign currency transactions

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



Transaction expenses

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



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



Interest income

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



Taxation

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






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 Groups 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'.






3.    Critical accounting judgements and key sources of estimation uncertainty
(continued)

Income recognition (continued)

Interest income is recorded based on the original EIR calculated on acquisition
for each individual residual income position.  Where there is a fair value
reduction (as has occurred in the current year), interest income will be reduced
as it reflects the EIR on a lower fair value.  The income accrual is adjusted
where there is a change in fair value and as such the  Company takes account of
underlying changes in yield in its income recognition as soon as adverse factors
are identified pending the measurement of fair value changes. Any such changes
will impact the level of income recognised in each period.



Valuation of investments

In recent months, there has been a significant increase in volatility and
partial dislocation in the broader credit market.  There is also no active
secondary market in residual income positions and, further, there is no industry
standard agreed methodology to value residual income positions.  As a result of
this, the fair value estimates included in the quarterly report are subject to
considerable uncertainty.



In accordance with the Company's accounting policies, fair value of financial
assets is based on quoted bid prices or broker marks where such bids are
available from a third party in a liquid market.  Where quoted bid prices are
unavailable, the fair value of the financial asset is estimated by reference to
a pricing model that incorporates discounted cash flow techniques as required by
IAS 39.



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 384,678,304) is
available as distributable profits for all purposes permitted by the Companies
Law including the payment of dividends and buy-back of shares. Under the UKLA
Listing Rules, any dividend must be covered by income received from underlying
investments.



The Company's objective is to provide shareholders with stable returns in the
form of quarterly dividends. The Company's dividend policy is to make dividend
distributions from its distributable net income subject to retaining a portion
of such income as a reserve for payment in subsequent periods.



While these accounts reflect a net loss after realised losses and fair value
adjustments, the dividend declared is covered by income received from underlying
investments as required by the Listing Rules (as reflected in the Consolidated
Income Statement) and the Company has sufficient reserves (in the form of the
Other Reserve) from which the dividend can be paid.






5.    Operating expenses
                                                                             Quarter ended           Quarter ended
                                                                              30 June 2007           31 March 2007
                                                                                      Euro                    Euro
Investment management, custodian and administration fees
Investment management and incentive fee                                          1,211,317               1,530,532
Administration fee                                                                  80,457                  83,457
Custodian fee                                                                       30,116                  29,785
                                                                                 1,321,890               1,643,774
Other operating expenses
Audit fees                                                                          42,383                 393,682
Directors' fees payable to Directors of Queen's Walk Investment
Limited                                                                             64,065                  48,187
Directors' fees payable to Directors of Trebuchet Finance Limited                    6,673                  12,546
Legal fees                                                                          70,568                 815,244
Credit facility expenses                                                           445,674                       -
Fees relating to corporate advisory services*                                            -                  31,248
Validation expenses                                                                462,616                 264,647
Other expenses                                                                     254,699               (508,670)
                                                                                 1,346,678               1,056,884

Total operating expenses                                                         2,668,568               2,700,658



The Company has no employees.



* These fees were payable to Deloitte & Touche LLP.



6.    Finance costs
                                                                            Quarter ended            Quarter ended
                                                                             30 June 2007            31 March 2007
                                                                                     Euro                     Euro
Finance costs arises from:
Total return swap agreements                                                            -                  575,062
     Repurchase agreements                                                      1,336,435                1,966,401
     Total finance costs                                                        1,336,435                2,541,463






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