9th May 2007 07:00
Prodesse Investment Limited09 May 2007 Prodesse Investment Limited Results for the Quarter Ended 31 March 2007 Highlights for first quarter 2007: • Core net income1 per average share of US$0.15 • Dividend per share of US$0.14 from net interest income - equates to an annualised dividend yield of 6.42%2 (FTSE All Share annualised dividend yield of 2.84%3) • Net income per average share of US$0.16 • NAV per share of US$8.22 (31 December 2006: US$8.08) • Issued 2.54 million new shares raising approximate net proceeds of US$21.8 million • Portfolio remains 100% implied "AAA" mortgage-backed securities. 1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities. 2 Based on annualisation of Q1 dividend, an exchange rate of 1.9686 US$ per Pound Sterling and a closing price of 443.0p on 31 March 2007 3 Based on closing share prices of the constituents of the FTSE All Share index on 31 March 2007 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,commented: "The investment strategy of Prodesse continues to generate positivemomentum. Our recently concluded successful equity offering occurred at the endof the quarter, which means the increase in dividend did not reflect the fullrun rate of that new capital, nevertheless we were able to increase our dividendfor the third quarter in a row. Given the backdrop of credit performance incertain sectors of the market, it is also particularly important to note that wecontinue to avoid the introduction of credit risk into our portfolio. All of ourassets are Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities,which carry an actual or implied "AAA" rating." Financial Highlights Q1 2007 Q4 2006 Q3 2006 Q2 2006 Q1 2006 $USDividend per share 0.14 0.13 0.12 0.10 0.12Core net income per average share 0.15 0.14 0.12 0.10 0.12Net income/(loss) per average share 0.16 0.19 0.25 (1.38) 0.12Net income/(loss) 4.0m 4.9m 6.4m (37.6m) 3.2mNet asset value per share 8.22 8.08 8.05 7.52 8.03 GBP Sterling4Dividend per share 7p 7p 6p 5p 7pCore net income per average share 8p 7p 6p 5p 7pNet income/(loss) per average share 8p 10p 13p (74p) 7pNet income/(loss) £2.0m £2.5m £3.4m (£20.4m) £1.8mNet asset value per share 417.6p 412.9p 430.1p 407.2p 461.8p 4 Illustration is based upon an exchange rate of 1.9686, 1.9569, 1.8718, 1.8469, and 1.7390 US$ per Pound Sterling at 31 March 2007, 31 December 2006, 30 September 2006, 30 June 2006, and 31 March 2006 respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests only in US$ denominated assets which produce US$ income. Should shareholders choose to receive their dividends in GBP Sterling they may elect to do so. Enquiries Investor RelationsRob Bailhache / Nick Henderson, Financial DynamicsTel: 020 7269 7200 / 020 7269 7114 Company Secretary and AdministratorSara 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 a conference call to discuss the results at 11:00 am UK time onWednesday 9 May 2007 and an audio webcast and presentation will be available viathe Prodesse website, www.prodesse.co.uk. The dial-in number for the conferencecall is +44 (0) 1452 562 717 / 0845 113 0070 and the passcode is 8005411. Company performance For the quarter ended 31 March 2007, Prodesse reported net income of US$4.0million (quarter ended 31 December 2006: US$4.9 million) or US$0.16 per averageshare (quarter ended 31 December 2006: US$0.19 per average share). Prodesse reported core net income, defined as net income excluding realised andunrealised gains and losses on securities, of US$4.0 million for the quarterended 31 March 2007 (quarter ended 31 December 2006: US$3.6 million) or US$0.15per average share (quarter ended 31 December 2006: US$0.14 per average share).During the quarter the Company sold US$34.1 million face amount of securities,resulting in a realised gain of approximately US$24,871. The Company delivered an annualised core return on average equity for thequarter ended 31 March 2007 of 7.25% (quarter ended 31 December 2006: 6.90%).For the quarter ended 31 March 2007, the annualised total return on averageequity (RoAE) was 7.29% (quarter ended 31 December 2006: 9.39%). 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006 to 31 March to 31 December 30 September to 30 June 2006 to 31 March 2007 2006 2006 2006Core net income US$4.0 million US$3.6 million US$3.0 million US$2.7 million US$3.2 millionCore net income per average share US$0.15 US$0.14 US$0.12 US$0.10 US$0.12Annualised core RoAE 7.25% 6.90% 6.07% 5.10% 5.64% Reported net income/(loss) US$4.0 million US$4.9 million US$6.4 million (US$37.6 US$3.2 million million)Net income/(loss) per average US$0.16 US$0.19 US$0.25 (US$1.38) US$0.12shareAnnualised RoAE 7.29% 9.39% 12.77% (71.80%) 5.64% Portfolio Performance For the quarter ended 31 March 2007, the annualised yield on average assets,which is calculated based on the annualised interest income for the perioddivided by the average interest earning assets for the period, was 5.81%(quarter ended 31 December 2006: 5.95%) and the annualised cost of funds on theaverage repurchase balance was 5.15% (quarter ended 31 December 2006: 5.30%)which equates to an interest rate spread of 0.66% (quarter ended 31 December2006: 0.65%). At 31 March 2007, the annualised yield on assets was 5.95% andthe annualised cost of funds on the repurchase balances was 5.16%, which equatesto an interest rate spread of 0.79%. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backedsecurities portfolio averaged 15% for the quarter ended 31 March 2007 (quarterended 31 December 2006: 14%). 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. 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006 to 31 March to 31 December 30 September 2006 to 30 June 2006 to 31 March 2007 2006 2006 Annualised yield on average 5.81% 5.95% 5.66% 5.24% 4.89%assetsAnnualised cost of funds on 5.15% 5.30% 5.31% 4.99% 4.58%average repurchase balanceInterest rate spread 0.66% 0.65% 0.35% 0.25% 0.31%CPR 15% 14% 13% 15% 18% As at 31 March 2007, all of the assets in the Company's portfolio were FannieMae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry animplied "AAA" rating. 31 March 31 December 2006 30 September 2006 30 June 2006 31 March 2006 2007 Fixed-rate mortgage-backed securities 69% 62% 63% 67% 61%Adjustable-rate mortgage-backed 8% 11% 8% 9% 25%securitiesFloating-rate mortgage-backed 23% 27% 29% 24% 14%securities Borrowings The ratio of average daily repurchase agreements to equity resulted in leverageof the Company of 9.3:1 during the quarter ended 31 March 2007 (quarter ended 31December 2006: 9.3:1). The leverage at 31 March 2007 was 8.1:1 (31 December2006: 9.0:1). 01 January 01 October 2006 01 July 2006 to 01 April 01 January 2006 2007 to 31 to 31 December 30 September 2006 2006 to 30 to 31 March 2006 March 2007 2006 June 2006 Average leverage for period 9.3:1 9.3:1 8.9:1 9.7:1 8.5:1Leverage at period end 8.1:1 9.0:1 8.5:1 8.7:1 8.9:1 As of 31 March 2007, the Company had entered into interest rate swap agreementstotalling US$811 million in notional amount in which the Company will pay anaverage rate of 5.17% and receive 1 month LIBOR on a monthly basis. As of 31December 2006, the Company had entered into interest rate swap agreementstotalling US$597 million in notional amount in which the Company would pay anaverage rate of 5.22% and receive 1 month LIBOR on a monthly basis. 31 March 2007 31 December 2006 30 September 2006 30 June 2006 31 March 2006 Notional amount US$811 million US$597 million US$603 million US$714 million US$554 millionAverage pay rate 5.17% 5.22% 5.23% 5.16% 4.82%Average receive rate 5.32% 5.35% 5.33% 5.22% 4.75% Capital At 31 March 2007, the Company had a net asset value per share of US$8.22 (31December 2006: US$8.08). After deducting the current dividends declared for thequarter of US$3,943,177 (for the quarter 31 December 2006: US$3,331,321),reported net asset value per share was US$8.08 (31 December 2006: US$7.95).During the quarter the Company issued 2,540,000 shares raising $21.8 million innet offering proceeds. 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006 to 31 March 2007 to 31 December to 30 June to 31 March 2006 30 September 2006 2006 2006 NAV per share US$8.22 US$8.08 US$8.05 US$7.52 US$8.03Dividends declared for the US$3,943,177 US$3,331,321 US$3,075,066 US$2,602,555 US$3,330,066periodNAV per share after deducting US$8.08 US$7.95 US$7.93 US$7.42 US$7.91dividends declared Dividend The Company has declared a dividend for the quarter ended 31 March 2007 ofUS$0.14 per share payable on 31 May 2007 to holders on the register on 18 May2007. Dividends are calculated and paid in US dollars. Shareholders wishingfor the conversion of dividend payments into Sterling should contactComputershare Investor Services (Channel Islands) Limited, Tel: 01534 825294. 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006 to 31 March 2007 to 31 December to 30 June to 31 March 2006 2006 30 September 2006 2006 Core net income per average US$0.15 US$0.14 US$0.12 US$0.10 US$0.12shareNet income/(loss) per average US$0.16 US$0.19 US$0.25 (US$1.38) US$0.12shareDividends per share US$0.14 US$0.13 US$0.12 US$0.10 US$0.12 Outlook "We are comfortable with the portfolio composition in current market conditions," said Wellington Denahan-Norris, Chief Investment Officer for Prodesse'sInvestment Manager, FIDAC. "The Federal Reserve has identified the risk ofrising inflation as its most important concern even as it has acknowledged aslowdown in economic growth. Thus, it is likely that the Federal Reserve willstay on hold until incoming data provide more direction. In this environment,our strategy of owning fixed-rate, adjustable-rate and floating-rate assets isdesigned to perform in a range of possible future outcomes. We were able toinvest the proceeds of our recent equity offering quickly, and we are still ableto invest amortizing principal in US Agency mortgage-backed securities atattractive levels." Prodesse Investment LimitedBalance Sheet 31-Mar-07 31-Dec-06 30-Sep-06 30-Jun-06 31-Mar-06 Note (Unaudited) (Audited) (Unaudited) (Unaudited) (Unaudited) US$ US$ US$ US$ US$ASSETSCurrent assetsAvailable for sale investments 3 2,237,709,321 2,073,602,089 2,016,901,365 1,946,995,591 2,190,680,570Accrued income receivable 9,301,841 8,773,585 8,001,243 9,055,816 9,853,640Receivable for principal paydowns 5,409,311 3,209,521 4,158,154 5,028,662 7,947,156Receivable for securities sold - - 68,692,786 70,277,068 -Hedging instruments 4 - - - 10,245,969 8,971,875Cash and cash equivalents 29,520 35,150 749,962 4,409 16,039Prepaid expenses 34,369 27,019 173,565 122,099 28,011 Total assets 2,252,484,362 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291 EQUITY AND LIABILITIES Capital and reservesShare capital:28,165,550 at 31 March 2007, 25,625,550 at 31 December 2006 and30 September 2006, 26,025,550 at30 June 2006, and 27,750,550 at 31March 2006 at US$ 0.01 281,655 256,255 256,255 260,255 277,506Capital redemption reserve 29,845 29,845 29,845 25,845 8,594Share premium 71,758,843 50,000,000 50,000,000 50,000,000 50,000,000Distributable reserve 198,680,545 198,680,545 198,680,545 201,412,622 214,300,104Accumulated profits 4,361,335 3,719,637 3,228,548 2,741,945 3,404,481Capital Reserve-Realised (loss)/ gain and impairment on availablefor sale investments (57,205,633) (57,230,504) (58,519,908) (61,890,519) (21,651,450)Revaluation reserve 18,198,441 14,082,163 15,713,694 (7,017,861) (32,478,359)Cash flow hedge reserve 4 (4,556,592) (2,444,846) (3,124,375) 10,245,970 8,971,875 Total shareholders' equity 231,548,439 207,093,095 206,264,604 195,778,257 222,832,751 Current liabilitiesSecurities purchased payable 136,626,297 15,406,579 124,033,750 134,680,584 -Repurchase agreements 5 1,872,007,000 1,853,757,000 1,759,089,000 1,706,674,000 1,983,618,000Accrued interest expense 6,067,974 5,563,044 4,809,009 3,220,249 9,633,997Accrued expenses payable 1,678,060 1,382,800 1,356,337 1,376,524 1,412,543Hedging instruments 4 4,556,592 2,444,846 3,124,375 - - Total liabilities 2,020,935,923 1,878,554,269 1,892,412,471 1,845,951,357 1,994,664,540 Total equity and liabilities 2,252,484,362 2,085,647,364 2,098,677,075 2,041,729,614 2,217,497,291 Net Assets 231,548,439 207,093,095 206,264,604 195,778,257 222,832,751Net Asset Value per share 6 8.22 8.08 8.05 7.52 8.03 Prodesse Investment Limited(unaudited) Income Statement 01 January 2007 01 October 2006 01 July 2006 to 01 April 01 January 2006 to 31 March 2007 to 31 December 30 September 2006 to 30 to 31 March 2006 2006 June 2006 2006 US$ US$ US$ US$ US$ IncomeInterest income 30,895,050 31,075,784 28,199,546 29,233,473 26,589,796Interest expense (24,970,781) (25,733,535) (23,701,645) (25,152,907) (21,906,790) Net interest income 5,924,269 5,342,249 4,497,901 4,080,566 4,683,006 Realised gain/(loss) on sale of available for sale investments andinterest rate swaps 24,871 1,289,404 3,370,611 (14,547,469) -Loss from impairment - - - (25,691,600) - Total income/(loss) 5,949,140 6,631,653 7,868,512 (36,158,503) 4,683,006 ExpensesManagement, custodian and administration fees 1,296,894 1,277,915 1,246,004 1,210,709 1,279,335Other operating expenses 654,356 501,569 202,739 202,393 197,087 Total expenses 1,951,250 1,779,484 1,448,743 1,413,102 1,476,422 Net income/(loss) for the period 3,997,890 4,852,169 6,419,769 (37,571,605) 3,206,584 Net income/(loss) per average share for the period 0.16 0.19 0.25 (1.38) 0.12 Dividend declared per share for the period 0.14 0.13 0.12 0.10 0.12 Average shares outstanding 25,766,661 25,625,550 25,799,463 27,281,594 27,750,550 Prodesse Investment Limited(unaudited) Cash Flow Statement 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 01 January 2006 to 31 March to 31 December 30 September to 30 June 2006 to 31 March 2006 2007 2006 2006 US$ US$ US$ US$ US$Net cash (outflow)/inflow fromoperatingactivities (Note 1) (18,458,552) 2,356,864 6,040,184 16,205,851 2,786,035 FinancingOwn shares acquired - - (2,732,076) (12,887,481) -New shares issued 21,784,243Dividends paid (3,331,321) (3,071,676) (2,562,555) (3,330,000) (2,775,055) Net cash inflow/(outflow) from financing 18,452,922 (3,071,676) (5,294,631) (16,217,481) (2,775,055) (Decrease) /increase in cash and cash equivalents (5,630) (714,812) 745,553 (11,630) 10,980 Cash and cash equivalents, at beginning of period 35,150 749,962 4,409 16,039 5,059 Cash and cash equivalents, at end of period 29,520 35,150 749,962 4,409 16,039 Note 1Net income/(loss) for the period 3,997,890 4,852,169 6,419,769 (37,571,605) 3,206,584Net accretion/amortisation of premiums on available for saleinvestments (14,232) (214,870) 143,076 1,005,200 1,210,901Realised (gain)/loss on sale of available for sale investments (24,871) (2,507,548) (2,017,445) 14,547,469 -Realised gain in interest rate hedge - - (135,022) - -Loss from impairment - - - 25,691,600 -Purchases of investments (207,839,552) (432,026,305) (708,062,580) (349,722,450) (1,082,468,323)Proceeds from sale of investments 34,168,325 228,069,925 563,718,426 530,854,272 -Proceeds from sale of interest rate swaps - - 135,022 - -Principal paydowns 132,739,304 109,422,437 91,071,528 113,805,308 116,471,761Borrowings under reverse repurchase agreements 5,771,019,000 5,947,866,000 5,770,442,800 6,685,967,000 5,763,648,000Repayments under reverse repurchase agreements (5,752,769,000) (5,853,198,000) (5,718,027,800) (6,962,911,000) (4,802,097,000) Receivables(Increase)/decrease in accrued income receivable (528,256) (833,988) 835,303 1,083,913 (3,788,108)(Increase) /decrease in prepaid expenses (7,350) 146,545 (51,465) (94,089) 6,894 LiabilitiesIncrease/(decrease)in accrued interest expense 504,930 754,035 1,588,759 (6,413,748) 6,124,956Increase/(decrease)in accrued expenses payable 295,260 26,464 (20,187) (36,019) 470,370 Net cash (outflow)/inflow from operating activities (18,458,552) 2,356,864 6,040,184 16,205,851 2,786,035 Prodesse Investment LimitedStatement of Changes in Shareholders' Equity(unaudited) 01 January 2007 to 31 March 2007 Share Capital Share Distributable Capital Reserve capital redemption premium reserve - realised gain/ reserve (loss) on sales and impairment of available for sale investments US$ US$ US$ US$ US$ Balance at 31 December 2006 256,255 29,845 50,000,000 198,680,545 (57,230,504)Net income for the quarter - - - - -Available for sale investments:Transfer of realised gain to capital reserve - - - - 24,871Movement in unrealised gain on revaluation taken to equity - - - - -Cash flow hedge reserve - - - - - Total recognised income and expense - - - - 24,871 Issuance of new shares 25,400 - 21,758,843 - -Dividends paid - - - - - Balance at 31 March 2007 281,655 29,845 71,758,843 198,680,545 (57,205,633) Prodesse Investment LimitedStatement of Changes in Shareholders' Equity Continued(unaudited) 01 January 2007 to 31 March 2007 Revaluation Accumulated Cash flow Total reserve profits hedge reserve US$ US$ US$ US$ Balance at 31 December 2006 14,082,163 3,719,637 (2,444,846) 207,093,095Net income for the quarter - 3,997,890 - 3,997,890Available for sale investments:Transfer of realised gain to capital reserve - (24,871) - -Movement in unrealised gain on revaluation taken to equity 4,116,278 - - 4,116,278Cash flow hedge reserve - - (2,111,746) (2,111,746) Total recognised income and expense 4,116,278 3,973,019 (2,111,746) 6,002,422 Issuance of new shares - - - 21,784,243Dividends paid - (3,331,321) - (3,331,321) Balance at 31 March 2007 18,198,441 4,361,335 (4,556,592) 231,548,439 Notes to the financial statements 1. General Information Prodesse Investment Limited is a limited liability Guernsey-incorporatedclosed-end investment company, the investments of which are managed by FixedIncome Discount Advisory Company ("the Investment Manager"). The Company'sshare capital structure consists solely of Ordinary Shares. The Company has alisting on the London Stock Exchange and a listing on the Channel Islands StockExchange. The Company will have an indefinite life but Shareholders will havethe opportunity to vote on its continuation at the Annual General Meeting to beheld in 2010. The Company invests in a portfolio consisting primarily of implied "AAA" ratedmortgage-backed securities on a leveraged basis. The Company's investmentstrategy is to generate net income for distribution from the spread between theinterest income from the portfolio and the cost of borrowing pursuant to reverserepurchase agreements used to finance the portfolio. The Investment Managerwill seek to enhance returns through what it considers an appropriate amount ofleverage. 2. Significant Accounting Policies Basis of Accounting The financial statements of the Company are 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 Standing InterpretationsCommittee interpretations approved by the International Accounting StandardsCommittee ("IASC") that remain in effect, together with applicable legal andregulatory requirements of Guernsey Law and the Listing Rules of the UK ListingAuthority and Channel Islands Stock Exchange. The financial statements are prepared on the historical cost basis except forthe revaluation of certain financial instruments. The principal accountingpolicies are set out below. The preparation of financial statements inconformity with IFRS requires the Company to make estimates and assumptions thataffect the reported amounts of assets and liabilities at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period. Actual results could differ from those estimates. The financial statements are presented in US Dollars because that is thecurrency of the primary economic environment in which the Company operates. Thefunctional currency of the Company is also considered to be US Dollars. Investments The Company invests in securities issued by the United States GovernmentSponsored Enterprises such as the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae") and theFederal Home Loan Banks ("FHLB") as well as Ginnie Mae, a US GovernmentCorporation. Freddie Mac, Fannie Mae, and FHLB, although chartered and sponsoredby Congress, are not Companies funded by congressional appropriations and thedebt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLBare neither guaranteed nor insured by the United States Government. The payment of principal and interest on the Freddie Mac and Fannie Maemortgage-backed securities are backed by those respective agencies, the paymentof principal and interest on the Ginnie Mae mortgage backed securities arebacked by 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. Expensesincidental to the acquisition of available for sale investments are includedwithin the cost of that investment. Realised and Unrealised Gains and Losses on Investments Unrealised gains or losses arising on the revaluation of investments areincluded in equity. Unrealised losses on investment securities that areconsidered other than temporary, as measured by the amount of decline in fairvalue attributable to factors other than temporary, are recognised as animpairment loss in the income statement and the cost basis of themortgage-backed securities is adjusted. The impairment loss is then transferredto a non-distributable capital reserve in accordance with the Memorandum andArticles of Association of the Company. 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. When-Issued/Delayed Securities The Company may purchase or sell securities on a when-issued or delayed deliverybasis, including "TBA" securities. TBA Securities are mortgaged-backedsecurities for which details about the underlying mortgages have not yet beenannounced. Securities traded on a when-issued basis are traded for deliverybeyond the normal settlement date at a stated price and yield, and no incomeaccrues to the purchaser prior to delivery. Purchasing or selling securities on a when-issued or delayed delivery basisinvolves the risk that the market price at the time of delivery may be lower orhigher than the agreed upon price, in which case an unrealised loss may beincurred. The Company did not transact in when-issued or delayed deliverysecurities during the quarter ended 31 March 2007. Security Transactions and Investment Income Recognition Security transactions are recorded on the trade date. Realised and unrealisedgains and losses are calculated based on specific identified cost. Interestincome is recorded as earned. Interest income and expense includes amortisationof market discount and premium as calculated using a hybrid methodologyutilising the principles of effective interest method. Other Receivables Other receivables do not carry any interest and are short-term in nature and areaccordingly stated at their nominal value as reduced by appropriate allowancesfor estimated irrecoverable amounts. Cash and Cash Equivalents Cash includes amounts held in interest bearing overnight accounts. Financial Liabilities and Equity Financial liabilities and equity are classified according to the substance ofthe contractual arrangements entered into. An equity instrument is any contractthat evidences a residual interest in the assets of the Company after deductingall of its liabilities. Financial liabilities and equity are recorded at theproceeds received, net of issue costs. Other Accruals and Payables Other accruals and payables are not interest-bearing and are stated at theirnominal value. Reverse Repurchase Agreements The Company enters into reverse repurchase agreements with qualified third partyfinancial institutions to finance its investment in mortgage-backed securities.The agreements are secured by the value of the Company's mortgage-backedsecurities. A repurchase agreement involves the sale by the Company ofsecurities that it holds with an agreement by the Company to repurchase the samesecurities at an agreed price and date. Such an agreement involves the riskthat the value of the securities sold by the Company may decline in value belowthe price of the securities. Interest on the principal value of reverse repurchase agreements issued andoutstanding is based upon competitive market rates at the time of issuance.When the 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 is recorded as aseparate line item. Securities sold subject to repurchase agreements are retained in the financialstatements as available for sale securities and the counterparty liability isincluded in liabilities under repurchase agreements. Derivative Financial Instruments and Hedge Accounting The Company's activities expose it primarily to the financial risks of changesin interest rates. The Company uses interest rate swap contracts to hedge theseexposures. The Company does not use derivative financial instruments forspeculative purposes. The use of financial derivatives is governed by the Company's policies approvedby the board of directors, which provide written principles on the use offinancial derivatives. Changes in the fair value of derivative financial instruments that aredesignated and effective as hedges of future cash flows are recognised directlyin equity and any ineffective portion is recognised immediately in the incomestatement. The amount in equity is released to income when the forecasttransaction impacts profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualified for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument recognised in equityfor cash flow hedges is retained in equity until the forecasted transactionoccurs. If a hedged transaction is no longer expected to occur, the netcumulative gain or loss recognised in equity is transferred to net profit orloss in the period. Taxes The Company is exempt from Guernsey taxation under the Income Tax (ExemptBodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600. Set-up and Issue Costs The preliminary expenses of the Company directly attributable to the equitytransaction and costs associated with the establishment of the Company thatwould otherwise have been avoided are taken to the share premium account. Costs directly attributable to the issue of Ordinary Shares are expensed againstthe share premium account as allowed by with The Companies (Guernsey) Law, 1994. 3. Available for Sale Investments Gross Gross EstimatedAt 31 March 2007 Amortised Cost Unrealised Gain Unrealised Loss Fair Value US$ US$ US$ US$ Adjustable rate 691,920,046 2,881,386 (213,458) 694,587,974Fixed rate 1,527,590,834 16,594,176 (1,063,663) 1,543,121,347Total 2,219,510,880 19,475,562 (1,277,121) 2,237,709,321 As at 31 March 2007, all of the assets in the Company's portfolio were FannieMae and Freddie Mac mortgage-backed securities, which carry an implied "AAA"rating. During the quarter ended 31 March 2007, the Company did not have anysecurities that it deemed to be other-than-temporarily impaired. Mortgage-backed securities are created when mortgages and their attendantstreams of interest and principal payments are pooled to serve as collateral forthe issuance of securities to investors. Interests in mortgage-backed securitiesdiffer from other forms of traditional debt securities, which normally providefor periodic payment of interest in fixed amounts with principal payments atmaturity or specified call dates. Instead, mortgage-backed securities typicallyprovide irregular cash flows consisting of both interest and principal. An investment consideration of any mortgage-backed security is the structure ofthe payment of the cash flow streams from the underlying mortgages to theholders of the mortgage-backed securities. The cash flows can be simply passedfrom the mortgage holder to the investor or they can be structured in a numberof different ways. The market values of the various structures will vary indifferent interest rate or prepayment environments, with the more derivative orcomplex structures (e.g., interest-only or principal-only securities) being moresensitive to movements in interest rates or rates of prepayment. Beyond the basic security of the mortgages and properties that underliemortgage-backed securities, a critical attribute of mortgage-backed securitiesissued by the US Agencies is the credit enhancement that the US Agenciesprovide. The holder of mortgage-backed securities issued or guaranteed by the USAgencies is guaranteed the timely payment of principal and interest. Ginnie Maeis the principal governmental (i.e., backed by the full credit of the USGovernment) guarantor of mortgage-backed securities. Fannie Mae and Freddie Macare the principal US Government-related (i.e. not backed by the full credit ofthe US Government) guarantors. Adjustable-rate and floating-rate mortgage-backed securities in which theCompany may invest include pass-through mortgage-backed securities issued by theUS Agencies backed by adjustable-rate mortgages and Floaters. The interest rateson adjustable-rate mortgage-backed securities are reset at periodic intervals toan increment over some predetermined reference interest rate. There are two maincategories of reference rates: (i) those based on US Treasury securities and(ii) those derived from a calculated measure such as a cost of funds index or amoving average of mortgage rates. Commonly utilised reference rates include theone-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates,such as the one-year Treasury Bill rate or LIBOR, closely mirror changes inmarket interest rate levels. Others tend to lag changes in market rate levelsand tend to be somewhat less volatile. Adjustable-rate mortgages frequently have upper and lower limits on the interestrates to which a residential borrower may be subject (i) in any reset oradjustment interval and (ii) over the life of the loan. These upper and lowerlimits are commonly known as ''caps'' and ''floors'' respectively. 4. Hedging Instruments The Company uses interest rate swaps to manage its exposure to interest ratemovements. When the Company enters into an interest rate swap, it agrees to paya fixed rate of interest and to receive a variable interest rate, generallybased on the London Interbank Offered Rate ("LIBOR"). The Company's swaps aredesignated as cash flow hedges against the benchmark interest rate riskassociated with the Company's borrowings. At 31 March 2007, the Company had interest rate swap agreements of US$811million notional amount in which the Company will pay a weighted average rate of5.17% and have a weighted average receive rate of 5.32%. 5. Reverse Repurchase Agreements At 31 March 2007 the aggregate value of securities pledged by the Company underreverse repurchase agreements exceeds the liability under such agreements byapproximately US$56.2 million (approximately 3% of such liability). Theinterest rates on the reverse repurchase agreements at 31 March 2007 range from4.33% to 5.44% and have maturity dates ranging from 2 days to 1795 days. The Company has entered into repurchase agreements which provide thecounterparty with the right to call the balance prior to maturity date. Therepurchase agreements totalled $300 million. 6. Net Asset Value The net asset value per Ordinary Share is based on net assets at 31 March 2007and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares in issueat the period end. At 31 March 2007, the reported net asset value per Ordinary Share (beforeexcluding the dividend declared for the quarter ended 31 March 2007) is US$8.22. At 31 March 2007, the Company had a net asset value per Ordinary Share ofUS$8.08, after including the effect of the dividend declared for the quarterended 31 March 2007 of US$3,943,177. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Predator Oil