8th May 2006 07:01
Prodesse Investment Limited08 May 2006 Prodesse Investment Limited8 May 2006 Prodesse Investment Limited Results for the 3 month period to 31 March 2006 Interim dividend increased 20% over prior quarter Highlights: • Dividend per share of US$0.12 from net interest income - equates to an annualised dividend yield of 6.28%(1) FTSE All Share annualised dividend yield of 2.92%(2)) • NAV per share of US$8.03 (31 Dec 05: US$8.36) reflects net unrealised losses in the market value of mortgage-backed securities and interest rate swaps as short term US interest rates continued to rise. • Portfolio remains 100% implied AAA mortgage-backed securities • Programme to repurchase shares in the market for cancellation when accretive to NAV remains in force (1) Based on annualisation of Q1 dividend, an exchange rate of 1.8210 US$ per Pound Sterling and a closing price of 419.5p on 28 April 2006.(2) Based on closing share prices of the constituents of the FTSE All Share index on 28 April 2006 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,commented: "With the continuation of the restrictive monetary policy in the US, we continueto migrate the portfolio into higher yielding assets in addition to obtainingmore floating-rate exposure. This has resulted in improved performance over theprior quarter even as conditions remain challenging. Interest rates run incycles, and we seek to manage Prodesse's portfolio to perform throughout thecurrent cycle as well as the next." Financial Highlights Q1 2006 Q4 2005 US$Dividend per share 0.12 0.10Net income /(loss) per share 0.12 (0.68)Net income/(loss) 3.2m (18.8m)Net asset value per share 8.03 8.36 GBP Sterling(3)Dividend per share 7p 6pNet income/(loss) per share 7p (40)pNet income/(loss) £1.8 (£10.9m)Net asset value per share 461.8p 486.4p (3) Illustration is based upon an exchange rate of 1.7390 and 1.7187 US$ per Pound Sterling at 31 March 2006 and 31 December 2005, respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests in US$ denominated assets only which produce US$ income. Should shareholders choose to receive their dividends in GBP Sterling, the Sterling dividend will be calculated based upon the prevailing exchange rate on 22 May 2006. EnquiriesRob Bailhache / Nick Henderson, Financial DynamicsTel: 020 7269 200 / 020 7269 7114 Sara Radford / Paul Smith, RBSI Fund Services (Guernsey) LimitedTel: 01481 743000 About Prodesse Prodesse Investment Limited is a limited liability Guernsey-incorporatedclosed-end investment company, the investments of which are managed by FixedIncome Discount Advisory Company. The Company's investment policy is to providenet income for distribution from the spread between the interest income earnedfrom a portfolio of residential mortgage-backed securities and the cost ofrepurchase agreements entered into to finance the acquisition of suchresidential mortgage-backed securities. Conference Call There will be an analyst presentation on the results at 10:00 am on Monday 08May 2006 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings, LondonWC2A 1PB. Those analysts wishing to attend, or to register are asked to contactNick Henderson at Financial Dynamics on +44 (0)20 7269 7114 or [email protected]. The presentation will also be accessible via a conference call for those unableto attend in person. To listen-in please call +44 (0) 1452 562 717. A web cast of the presentation will be available following the meeting atwww.prodesse.co.uk. Company performance Prodesse reported net income for the quarter ended 31 March 2006 of US$3.2million (quarter ended 31 December 2005; net loss of US$18.8 million) or US$0.12per share (quarter ended 31 December 2005: US$0.68 net loss per share). The Company delivered an annualised return on average equity (RoAE) of 5.64% forthe quarter ended 31 March 2006 (quarter ended 31 December 2005: negative30.65%). 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005 ------------------ ------------------ ----------------- ----------------Reported Net income /(loss) US$3.2 million (US$18.8 million) US$5.1 million US$5.8 millionNet income (loss) per share US$0.12 (US$0.68) US$0.18 US$0.21 Annualised RoAE 5.64% (30.65)% 7.72% 9.67% Portfolio Performance For the quarter ended 31 March 2006, the annualised yield on average assets was4.89% (quarter ended 31 December 2005: 4.49%) and the annualised cost of fundson the average repurchase balance was 4.58% (quarter ended 31 December 2005:4.12%), which equates to an interest rate spread of 0.31% (quarter ended 31December 2005: 0.37%). This is a 0.06% decrease from the interest rate spreadfor the quarter ended 31 December 2005. At 31 March 2006, the annualized yieldon assets was 5.26% and the annualized cost of funds on the repurchase balances,including the effect of the swaps, was 4.77%, which equates to an interest ratespread of 0.49%. Net income and yields stated in this press release do not include net unrealised losses on investments. Net unrealised losses are reflected in the equity in accordance with the accounting policies. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backedsecurities portfolio averaged 18% for the quarter ended 31 March 2006 (quarterended 31 December 2005: 20%). Prepayment speeds on mortgage-backed securities,as reflected by the CPR vary according to the type of investment, changes ininterest rates, conditions in the financial markets, competition and otherfactors, none of which can be predicted with any certainty. In general, asprepayment speeds on the Company's mortgage-backed securities portfolioincrease, related purchase premium amortization increases, thereby reducing thenet yield on such assets. 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005 ------------------ ------------------ ----------------- ----------------Annualised Yield on Average Assets 4.89% 4.49% 4.23% 4.01% Annualised Cost of Funds on Average Repurchase Balance 4.58% 4.12% 3.57% 2.67% Interest Rate Spread 0.31% 0.37% 0.66% 1.34% CPR 18% 20% 23% 20% As at 31 March 2006, all of the assets in the Company's portfolio were FannieMae and Freddie Mac mortgage-backed securities, which carry an implied "AAA"rating. 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005 ------------------ ------------------ ----------------- ---------------- Fixed-rate mortgage-backed securities 61% 38% 32% 33%Adjustable-rate mortgage-backed securities 25% 43% 61% 59%Floating-rate mortgage-backed securities 14% 19% 7% 8% Borrowings The ratio of average daily repurchase agreements to equity resulted in leverageof the Company of 8.5:1 during the quarter ended 31 March 2006 (quarter ended 31December 2005: 9.3:1). The leverage at 31 March 2006 was 8.9:1 (31 December2005: 4.4:1). 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005 ------------------ ------------------ ----------------- ---------------- Average Leverage for Period 8.5:1 9.3:1 8.9:1 5.8:1Leverage at Period End 8.9:1 4.4:1 9.4:1 8.1:1 As of 31 March 2006 the Company had entered into interest rate swap agreementstotalling US$554 million in notional amount in which the Company will pay anaverage rate of 4.82% and receive 1 month LIBOR on a monthly basis. 01 January 2006 to 01 October 2005 to 31 March 2006 31 December 2005 ------------- ------------Notional Amount 554,000,000 65,000,000Average pay rate 4.82% 4.79%Average receive rate 4.75% 4.45% Capital At 31 March 2006, the Company had a net asset value per share of US$8.03 (31December 2005: US$8.36). After deducting the current dividends declared for thequarter of 31 March 2006 of US$3,330,066 (for the quarter 31 December 2005:US$2,775,055), reported net asset value per share is US$7.91 (31 December 2005:US$8.26). The Company currently has authority to undertake a share purchase ofup to 3,112,900 shares or 11.22% of the share capital of the Company and theBoard of Directors has approved the use of on-market purchases of ordinaryshares for cancellation at appropriate prices which will enhance net assetvalue. 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005 ------------------ ------------------ ----------------- ---------------- NAV per share US$8.03 US$8.36 US$9.03 US$9.56Dividends declared for the period US$3,330,066 US$2,775,055 US$5,146,209 US$5,722,000NAV per share after deducting dividends declared US$7.91 US$8.26 US$8.85 US$9.36 Dividend The Company has declared a dividend for the quarter ended 31 March 2006 ofUS$0.12 per share payable on 5 June 2006 to holders on the register on 19 May2006. Dividends are calculated and paid in US dollars. Shareholders residentin the UK wishing for the conversion of dividend payments into Sterling shouldcontact Computershare Investor Services (Channel Islands) Limited. The exchange rate for payment to those who have elected to receive their dividends in Sterling will be set in the week beginning 22 May 2006. 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005 ------------------ ------------------ ----------------- ---------------- Net income (loss) per share US$0.12 (US$0.68) US$0.18 US$0.21Dividends per share US$0.12 US$0.10 US$0.18 US$0.20 Outlook "The markets are currently anticipating that the US Federal Reserve is near theend of what has been 23 months of increased Federal Funds rates," saidWellington Denahan-Norris, Chief Investment Officer for Prodesse's InvestmentManager, FIDAC. "We share the markets' views on this, basing our belief on theeventual slowdown of the US economy as the effects of a slowing residentialhousing market begin to unfold. Should rates continue to rise as we wait for themarkets'(and our) expectations to materialize, we have increased the portfolio'sfloating rate exposure in order to reduce asset value fluctuations and bettermaintain spread income. After giving effect to the interest rate swaps, theportfolio at 31 March was comprised of 36% fixed-rate, 25% adjustable-rate and39% floating-rate exposure." This press release includes statements that are, or may be deemed to be,''forward-looking statements''. These forward-looking statements can generallybe identified by the use of forward-looking terminology, including the terms''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'',''will'' or ''should'' or, in each case, their negative or other variations orcomparable terminology. These forward-looking statements include all mattersthat are not historical facts. All forward-looking statements address mattersthat involve risks and uncertainties, are only predictions, and you should notrely unduly on them. Accordingly, there are or will be important factors thatcould cause the Company's actual results to differ materially from thoseindicated in these statements. These factors include but are not limited tothose described in the Company's prospectus under the heading ''SpecialConsiderations and Risk Factors''. Any forward-looking statements in this pressrelease reflect the Company's current views with respect to future events andare subject to these and other risks, uncertainties and assumptions relating tothe Company's operations, results of operations, growth strategy and liquidity.These forward-looking statements speak only as of the date of this pressrelease. Subject to any obligations under the Listing Rules, the Companyundertakes no obligation publicly to update or review any forward-lookingstatement, whether as a result of new information, future developments orotherwise. All subsequent written and oral forward-looking statementsattributable to the Company or FIDAC or individuals acting on behalf of theCompany or FIDAC are expressly qualified in their entirety by this paragraph.Prospective investors should specifically consider the factors identified abovewhich could cause actual results to differ before making any investmentdecision. Prodesse Investment Limited Balance Sheet(unaudited) at 31 March 2006, 31 December 2005, 30 September 2005 and 30 June 2005 31-Mar-06 31-Dec-05 30-Sep-05 30-Jun-05-------------------------------- ---------------- ---------------- ---------------- ---------------- US$ US$ US$ US$ASSETSCurrent assetsAvailable for sale investments 2,190,680,570 1,405,412,720 2,688,176,717 2,627,255,210Accrued income receivable 9,853,640 6,228,846 11,644,460 10,559,381Receivable for principal paydowns 7,947,156 10,195,316 13,448,335 8,327,274Hedging instrument 8,971,875 - - -Cash and cash equivalents 16,039 5,059 12,122 5,999Prepaid expenses 28,011 34,904 66,798 98,256 ---------------- ---------------- ---------------- ----------------Total assets 2,217,497,291 1,421,876,845 2,713,348,432 2,646,246,120 ---------------- ---------------- ---------------- ---------------- EQUITY AND LIABILITIES Capital and reservesShare capital: 27,750,550 at 31 March 2006and 31 December, 2005,28,610,000 at 30 September2005 and 30 June 2005 atUS$ 0.01 277,506 277,506 286,100 286,100Capital redemption reserve 8,594 8,594 - -Share premium 50,000,000 50,000,000 50,000,000 50,000,000Distributable reserve 214,300,104 214,300,104 220,173,663 220,299,299Accumulated profits 3,404,481 2,972,952 5,246,367 5,843,027Capital Reserve-Realised (loss)/gain on availablefor sale investments (21,651,450) (21,651,450) 5,313 -Revaluation reserve (32,478,359) (13,940,391) (17,384,448) (2,843,493)Cash flow hedge reserve 8,971,875 (19,500) - - ---------------- ---------------- ---------------- ----------------Total shareholders' equity 222,832,751 231,947,815 258,326,995 273,584,933 ---------------- ---------------- ---------------- ---------------- Current liabilitiesSecurities purchased payable - 163,391,316 11,560,141 162,120,786Repurchase agreements 1,983,618,000 1,022,067,000 2,436,369,000 2,206,752,000Accrued interest expense 9,633,997 3,509,041 5,551,769 2,759,461Accrued expenses payable 1,412,543 942,173 1,540,527 1,028,940Hedging instrument - 19,500 - - ---------------- ---------------- ---------------- ----------------Total liabilities 1,994,664,540 1,189,929,030 2,455,021,437 2,372,661,187 ---------------- ---------------- ---------------- ----------------Total equity and liabilities 2,217,497,291 1,421,876,845 2,713,348,432 2,646,246,120 ---------------- ---------------- ---------------- ---------------- Net Assets 222,832,751 231,947,815 258,326,995 273,584,933Net Asset Value per share 8.03 8.36 9.03 9.56 Prodesse Investment Limited(unaudited) Income Statement 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005* US$ US$ US$ US$ ------------------ ------------------ ----------------- ---------------- IncomeInterest income 26,589,796 27,307,521 28,394,099 16,231,405Interest expense (21,906,790) (23,306,345) (21,084,466) (9,330,907) ------------------ ------------------ ----------------- ----------------Net interest income 4,683,006 4,001,176 7,309,633 6,900,498 ------------------ ------------------ ----------------- ----------------Realised (loss)/gain onsale of available for saleinvestments - (21,656,763) 5,313 - ------------------ ------------------ ----------------- ----------------Expenses Management,custodian and administrationfees 1,279,335 942,468 2,018,214 937,308Other operating expenses 197,087 185,913 166,079 120,163 ------------------ ------------------ ----------------- ----------------Total expenses 1,476,422 1,128,381 2,184,293 1,057,471 ------------------ ------------------ ----------------- ----------------Net income/(loss) for the period 3,206,584 (18,783,968) 5,130,653 5,843,027 ------------------ ------------------ ----------------- ----------------Net income/(loss) per share for the period 0.12 (0.68) 0.18 0.21 ------------------ ------------------ ----------------- ---------------- Dividend declared per share for the period 0.12 0.10 0.18 0.20 ------------------ ------------------ ----------------- ---------------- * commencement of operations on 08 April 2005 Prodesse Investment Limited Cash Flow Statement(unaudited) from 01 January 2006 to 31 March 2006, 01 October 2005 to 31 December 2005,01 July 2005 to 30 September 2005, and 08 April 2005 to 30 June 2005. 01 January 2006 to 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 March 2006 31 December 2005 30 September 2005 30 June 2005* US$ US$ US$ US$ ------------------ ------------------ ----------------- ----------------Net cash inflow/(outflow) fromoperating activities (Note 1) 2,786,035 11,012,705 5,853,758 (270,579,400) ------------------ ------------------ ----------------- ----------------FinancingNet proceeds from offering - - - 270,585,399Offering Cost - - (125,635) -Own shares acquired - (5,873,559) - -Dividends paid (2,775,055) (5,146,209) (5,722,000) - ------------------ ------------------ ----------------- ----------------Net cash (outflow)/inflow fromfinancing (2,775,055) (11,019,768) (5,847,635) 270,585,399 ------------------ ------------------ ----------------- ----------------Increase/(decrease) in cashand cash equivalents 10,980 (7,063) 6,123 5,999 Cash and cash equivalents,at beginning of period 5,059 12,122 5,999 - ------------------ ------------------ ----------------- ----------------Cash and cash equivalents,at end of period 16,039 5,059 12,122 5,999 ------------------ ------------------ ----------------- ---------------- Note 1--------Net income/(loss) for the period 3,206,584 (18,783,968) 5,130,653 5,843,027Net amortisation of premiums onavailable for saleinvestments 1,210,901 3,123,879 2,655,987 712,000Realised loss/(gain) on sale ofavailable for sale investments - 21,656,763 (5,313) -Purchases of investments (1,082,468,323) (55,678,354) (453,612,318) (2,542,805,196)Proceeds from sale ofinvestments - 1,253,691,106 5,666,667 -Principal paydowns 116,471,761 218,359,667 214,429,874 65,484,813Borrowings under reverse repurchase agreements 5,763,648,000 6,231,988,000 7,229,892,000 5,090,251,000Repayments under reverserepurchase agreements (4,802,097,000) (7,646,290,000) (7,000,275,000) (2,883,499,000)Receivables (Increase)/decrease) in accrued income receivable (3,788,108) 5,554,800 (1,364,146) (10,256,189)Decrease/(increase) in prepaidexpenses 6,894 31,894 31,459 (98,256)Liabilities Increase/(decrease) in accrued interest expense 6,124,956 (2,042,728) 2,792,308 2,759,461Increase/(decrease) in accruedexpenses payable 470,370 (598,354) 511,587 1,028,940 ------------------ ------------------ ----------------- ----------------Net cash inflow/(outflow) fromoperating activities 2,786,035 11,012,705 5,853,758 (270,579,400) ------------------ ------------------ ----------------- ---------------- * commencement of operations 08 April 2005 Prodesse Investment LimitedStatement of Changes in Shareholders' Equity(unaudited) 01 January 2006 to 31 March 2006 Capital Reserve - realised gain/ (loss) on sales of Cash Capital available flow Share redemption Share Distributable for sale Revaluation Accumulated hedge capital reserve premium reserve investments reserve profits reserve Total ------- -------- -------- --------- ---------- --------- -------- ------- --------Balance at 31 December 2005 277,506 8,594 50,000,000 214,300,104 (21,651,450)(13,940,391) 2,972,952 (19,500)231,947,815 Net income for the quarter - - - - - - 3,206,584 - 3,206,584Available for saleinvestments:Unrealised loss onrevaluation taken toequity - - - - - (18,537,968) - - (18,537,968) Cash flowhedge reserve - - - - - - - 8,991,375 8,991,375 ------- -------- -------- --------- ---------- --------- -------- ------- --------Totalrecognisedincome andexpenses forthe period - - - - - (18,537,968) - 8,991,375 (6,340,009) ------- -------- -------- --------- ---------- --------- -------- ------- --------Dividends paid - - - - - - (2,775,055) - (2,775,055) ------- -------- -------- --------- ---------- --------- -------- ------- -------- Balance at 31March 2006 277,506 8,594 50,000,000 214,300,104 (21,651,450)(32,478,359) 3,404,481 8,971,875 222,832,751 ------- -------- -------- --------- ---------- --------- -------- ------- -------- Prodesse Investment LimitedFootnotes to the quarterly report ended 31 March 2006 (Unaudited) 1. Organisation and Investment Objective Prodesse Investment Limited (the "Company") is a limited liabilityGuernsey-incorporated closed-end investment company, the investments of whichare managed by Fixed Income Discount Advisory Company (the "InvestmentManager"). The Company's share capital structure consists solely of OrdinaryShares. The Company has a listing on the London Stock Exchange and a listing onthe Channel Islands Stock Exchange. The Company will have an indefinite life butShareholders will have the opportunity to vote on its continuation at the AnnualGeneral Meeting to be held in 2010. The Company invests in a portfolio consisting primarily of actual or impliedAAA-rated mortgage-backed securities on a leveraged basis. The Company'sinvestment strategy is to generate net income for distribution from the spreadbetween the interest income from the portfolio and the cost of borrowingpursuant to reverse repurchase agreements used to finance the portfolio. TheInvestment Manager will seek to enhance returns through what it considers anappropriate amount of leverage. 2. Significant Accounting Policies The financial statements of the Company have been prepared in accordance withInternational Financial Reporting Standards ("IFRS"), which comprise standardsand interpretations approved by the International Accounting Standards Board(the "IASB"), and International Accounting Standards and StandingInterpretations Committee interpretations approved by the InternationalAccounting Standards Committee ("IASC"), together with applicable legal andregulatory requirements of Guernsey Law and the Listing Rules of the UK ListingAuthority and the Channel Islands Stock Exchange. The financial statements have been prepared on the historical cost basis exceptfor the revaluation of certain financial instruments. A summary of thesignificant principal accounting policies are set out below. The preparation offinancial statements in conformity with IFRS requires the Company to makeestimates and assumptions that affect the reported amounts of assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates. (a) Government Sponsored Enterprises: The Company invests in securitiesissued by the Government National Mortgage Association ("Ginnie Mae"), a USGovernment corporation and US Government sponsored entities such as the FederalHome Loan Mortgage Corporation ("Freddie Mac") , Federal National MortgageAssociation ("Fannie Mae") and the Federal Home Loan Banks ("FHLB"). FreddieMac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are notcompanies by congressional appropriations and the debt and mortgage-backedsecurities issued by Freddie Mac, Fannie Mae and FHLB are neither guaranteed norinsured by the United States Government. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgagebacked securities are backed by those respective agencies, and the payment ofprincipal and interest on the Ginnie Mae mortgage backed securities are backedby the full-faith-and-credit of the US Government. Although the Companygenerally intends to hold most of its securities until maturity, it may, fromtime to time, sell any of its mortgage-backed securities as part of its overallmanagement strategy. Accordingly the Company classifies all its mortgage-backedsecurities as available for sale and these are reported at fair value. The Investment Manager uses internally generated pricing tools and matrices thattake into account such factors as duration, convexity, interest rate levels andthe experience of its portfolio managers. External information is then comparedto internally generated tools to compare pricing reasonableness. (b) Security Transactions and Investment Income: Security transactions arerecorded on trade date. Realised and unrealised gains and losses are calculatedbased on specific identified cost. Interest income is recorded as earned.Interest income and expense includes amortisation of market discount and premiumas calculated using a hybrid methodology utilising the principles of effectiveinterest method. Realised gains or losses on paydowns are reclassified fromgains to income. (c) Repurchase Agreements: The Company enters into reverse repurchaseagreements with qualified third party financial institutions to finance itsinvestment in mortgage-backed securities. The agreements are secured by thevalue of the Company's mortgage-backed securities. Interest on the principal value of reverse repurchase agreements issued andoutstanding is based upon competitive market rates at the time of issuance. Whenthe Company enters into a reverse repurchase agreement, it establishes andmaintains a segregated account with the lender containing securities having avalue not less than the repurchase price, including accrued interest, of thereverse repurchase agreement. Repurchase agreements are treated as collateralised financing transactions andare carried at their contractual amounts, including accrued interest, asspecified in the repurchase agreements. Accrued interest in the accompanyingbalance sheet is recorded as a separate line item. Securities sold subject to repurchase agreement are retained in the financialstatements as available for sale securities and the counter party liability isincluded in liabilities under repurchase agreements. (d) When-Issued/Delayed Delivery Securities: The Company may purchase or sellsecurities on a when-issued or delayed delivery basis, including "TBA"securities. TBA securities are mortgage-backed securities for which detailsabout the underlying mortgages have not yet been announced. Securities traded ona when-issued basis are traded for delivery beyond the normal settlement date ata stated price and yield, and no income accrues to the purchaser prior todelivery. Purchasing or selling securities on a when-issued or delayed deliverybasis involves the risk that the market price at the time of delivery may belower or higher than the agreed upon price, in which case an unrealised loss maybe incurred. (e) Taxes: The Company is exempt from Guernsey taxation under the Income Tax(Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of£600. (f) Cash and cash equivalents: The Company considers amounts held ininterest bearing overnight accounts as cash and cash equivalents . (g) Realised and unrealised gains and losses on investments: Unrealised gainsor losses arising on the revaluation of investments are included in equity.Unrealised losses on investment that are considered other than temporary, asmeasured by the amount of decline in fair value attributable to factors otherthan temporary, are recognised in the income statement and the cost basis of theinvestment is adjusted. There were no investment that were considered to beother than temporarily impaired at 31 March 2006. Realised gains or losses arising on the sale of investments are recognised inthe income statement but will be transferred to a non-distributable capitalreserve in accordance with the Memorandum and Articles of Association of theCompany. (h) Hedge accounting: The Company's activities expose it primarily to thefinancial risks of changes in interest rates. The Company uses interest rateswap contracts to hedge these exposures. It does not use derivative instrumentsfor speculative purposes. The use of financial derivatives is governed by the Company's policies approvedby the Board of Directors. Changes in the fair value of derivative financialinstruments that are designated and effective as hedges of future cash flows arerecognised directly in equity and any ineffective portion is recognisedimmediately in the income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated or exercised or no longer qualifies for hedge accounting. (i) Set up costs: The preliminary expenses of the Company directlyattributable to the equity transaction and costs associated with theestablishment of the Company that would otherwise have been avoided are taken tothe share premium account. 3. Investment Management, Accounting and Administration, and Custodian Fees Fixed Income Discount Advisory Company ("FIDAC"), a Delaware corporation, servesas the Investment Manager to the Company. Pursuant to the terms of theInvestment Management Agreement, the Investment Manager is paid periodic fees,quarterly in arrears, at a rate equivalent to 0.2 per cent per annum of thevalue of the gross assets of the Company at the end of the quarter. The Bank of New York (the "Custodian") serves as the Company's custodian and ispaid a monthly accounting and administration fee, exclusive of out-of-pocketexpenses. The Custodian is entitled to receive a fee at a rate equivalent to 1basis point per annum on the value of the gross assets of the Company (plustransaction charges). RBSI Fund Services (Guernsey) Limited ("the Administrator") serves as theCompany's administrator. The Administrator is entitled to a fee calculated onthe value of the gross assets of the Company of 0.04 per cent per annum on thefirst US$400 million of value of gross assets, 0.0225 per cent per annum on thenext US$1.6 billion of value of the gross assets and 0.01 per cent per annum onany value of the gross assets in excess of US$2 billion payable monthly inarrears (subject to a minimum annual fee of US$250,000). 4. Risk Factors The market price of the Ordinary Shares and the income derived from them canfluctuate and there is no guarantee that the market price of Ordinary Shares inthe Company will reflect fully their underlying Net Asset Value. All or substantially all of the Company's assets are denominated in US dollars.The Company accounts for its assets and determines the value of its Shares andof dividends thereon in US dollars. For investors resident outside the UnitedStates or whose functional currency is not the US dollar, fluctuations in thevalue of the US dollar may affect the value of their investment. The Board ofDirectors do not hedge any foreign exchange risk. The Company is subject to risks associated with changes in interest rates. Anincrease in the interest payments on the Company's financing relative to theinterest earned on its mortgage-backed securities may adversely affectprofitability. The Company enters into reverse repurchase agreements in order to increase theamount of capital available for investment. The use of leverage has thepotential to magnify the gains or the losses on the Company's investments.The Company may invest in, or sell short, various interest rate derivativeinstruments and futures contracts. Should interest rates move unexpectedly, theCompany may not achieve the anticipated benefits of the hedging instruments andmay realise a loss. Further, the use of such derivative instruments involves therisk of imperfect correlation in movements in the price of the instruments,interest rates and the underlying hedged assets. The Company may transact in various financial instruments including futurescontracts, swap contracts and options. With these financial instruments, theCompany is exposed to market risk in excess of the amounts recorded in theBalance Sheet. Further, the Company is exposed to credit risk from potentialcounterparty nonperformance. At the balance sheet date, credit risk is limitedto amounts recorded in the balance sheet. 5. Reverse Repurchase Agreements At 31 March 2006 the aggregate value of securities pledged by the Company underreverse repurchase agreements exceeds the liability under such agreements byapproximately US$59,508,540 (approximately 103% of such liability). The interestrates on the reverse repurchase agreements at 31 March 2006 range from 4.65% to4.91% and have maturity dates ranging from one day to one month. 6. Mortgage-Backed Securities At 31 Amortised Cost Gross Unrealised Gain Gross Unrealised Loss Estimated Fair ValueMarch -------------- --------------------- --------------------- --------------------2006 (US dollars)Adjustablerate 871,456,230 1,318,460 (9,825,336) 862,949,354 Fixed rate 1,351,702,699 - (23,971,483) 1,327,731,216 -------------- --------------------- --------------------- -------------------- Total 2,223,158,929 1,318,460 (33,796,819) 2,190,680,570 ============== ===================== ===================== ==================== At 31 Amortised Cost Gross Unrealised Gain Gross Unrealised Loss Estimated Fair ValueDecember -------------- --------------------- --------------------- --------------------2005 (US dollars)Adjustablerate 882,031,839 2,425 (8,061,814) 873,972,450 Fixed 537,321,272 2,134 (5,883,136) 531,440,270rate -------------- --------------------- --------------------- -------------------- Total 1,419,353,111 4,559 (13,944,950) 1,405,412,720 ============== ===================== ===================== ==================== 7. Interest Rate Swaps When the Company enters into a Swap, it agrees to pay a fixed rate of interestand to receive a variable interest rate, generally based on the one month LondonInterbank Offered Rate ("LIBOR"). The Company's Swaps are designated as cashflow hedges against the benchmark interest rate risk associated with theCompany's borrowings. As of 31 March 2006, the Company entered into interestrate swap agreements of US$554 million notional amount in which the Company willpay a rate of 4.83% and receive 1 month LIBOR on a monthly basis. The marketvalue of the swap agreements at 31 March 2006 was US$9.0 million. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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