6th Nov 2007 07:54
Prodesse Investment Limited06 November 2007 This RNS replaces RNS no. 0698H, released at 07:00 on 06 November 2007. Prodesse Investment Limited Results for the Quarter Ended 30 September 2007 Highlights for third quarter 2007: * Core net income1 per average share of US$0.17 * Dividend per share of US$0.16 from net interest income - equates to an annualised dividend yield of 6.92%2 (FTSE All Share annualised dividend yield of 2.89%3) * Net income per average share of US$0.20 * NAV per share of US$7.554 (30 June 2007: US$7.614) * Portfolio remains 100% implied "AAA" mortgage-backed securities. Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,commented: "Third quarter results for Prodesse were strong, particularly giventhe backdrop of volatility and uncertainty in the marketplace. The events ofthis summer highlighted the competitive advantages of our strategy as the UScredit cycle got worse-the avoidance of credit risk and the use of relativelymoderate levels of gearing. Moreover, we believe our performance will benefit asthe markets and monetary policy react to continuing evidence of weakness in theUS economy. Indeed, the reduction in the Federal Funds target rate on 18September, which had little impact on third quarter results, will be more fullyreflected in results for the fourth quarter. In addition, investmentopportunities in this environment continue to be attractive." Financial Highlights Q3 2007 Q2 2007 Q1 2007 Q4 2006 Q3 2006 $US Dividend per share 0.16 0.16 0.14 0.13 0.12 Core net income per average 0.17 0.17 0.15 0.14 0.12 share Net income per average share 0.20 0.18 0.16 0.19 0.25 Net income 5.8m 5.0m 4.0m 4.9m 6.4m Net asset value per share 7.554 7.77 8.22 8.08 8.05 GBP Sterling5 Dividend per share 8p 8p 7p 7p 6p Core net income per average 8p 8p 8p 7p 6p share Net income per average share 10p 9p 8p 10p 13p Net income £2.8m £2.5m £2.0m £2.5m £3.4m Net asset value per share 370.0p4 387.1p 417.6p 412.9p 430.1p 1 Core net income is defined as net income excluding realised and unrealisedgains and losses on securities. 2 Based on annualisation of Q3 dividend, an exchange rate of 2.0405 US$ perPound Sterling and a closing price of 453.0 on 28 September 2007. 3 Based on closing share prices of the constituents of the FTSE All Share indexon 28 September 2007 (JCF Datastream). 4 After deducting dividends declared for the period. 5 Illustration is based upon an exchange rate of 2.0405, 2.0071, 1.9686, 1.9569,and 1.8718, US$ per Pound Sterling at 28 September 2007, 29 June 2007, 31 March2007, 31 December 2006, and 30 September 2006, respectively. Translation to GBPSterling is given for illustration purposes only as Prodesse invests only in US$denominated assets which produce US$ income. Should shareholders choose toreceive their dividends in GBP Sterling they may elect to do so. Enquiries Investor Relations Rob Bailhache / Nick Henderson, Financial Dynamics Tel: 020 7269 7200 / 020 7269 7114 Company Secretary and Administrator Sara Radford / Paul Smith, BNP Paribas Fund Services (Guernsey) Limited Tel: 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 14:00 UK time onTuesday 6 November 2007 and a live audio webcast and presentation will beavailable via the Prodesse website, www.prodesse.co.uk. The dial-in number forthe conference call is 0845 146 2021 and the passcode is 21185517. Company performance For the quarter ended 30 September 2007, Prodesse reported net income of US$5.8million (quarter ended 30 June 2007: US$5.0 million) or US$0.20 per averageshare (quarter ended 30 June 2007: US$0.18 per average share). Prodesse reported core net income, defined as net income excluding realised andunrealised gains and losses on securities, of US$4.9 million for the quarterended 30 September 2007 (quarter ended 30 June 2007: US$4.9 million) or US$0.17per average share (quarter ended 30 June 2007: US$0.17 per average share).During the quarter the Company sold US$108.8 million in securities, resulting ina realised gain of US$875,177. The Company delivered an annualised core return on average equity for thequarter ended 30 September 2007 of 9.07% (quarter ended 30 June 2007: 8.75%).For the quarter ended 30 September 2007, the annualised total return on averageequity (RoAE) was 10.70% (quarter ended 30 June 2007: 8.82%). 01 July 01 April 01 January 01 October 01 July 2007 to 2007 to 2007 to 31 2006 to 31 2006 to 30 30 September 30 June March 2007 December September 2007 2007 2006 2006 Core net income US$4.9 US$4.9 US$4.0 US$3.6 US$3.0 million million million million million Core net income US$0.17 US$0.17 US$0.15 US$0.14 US$0.12 per average share Annualised core 9.07% 8.75% 7.25% 6.90% 6.07% RoAE Reported net US$5.8 US$5.0 US$4.0 US$4.9 US$6.4 income million million million million million Net income per US$0.20 US$0.18 US$0.16 US$0.19 US$0.25 average share Annualised RoAE 10.70% 8.82% 7.29% 9.39% 12.77% Portfolio Performance For the quarter ended 30 September 2007, the annualised yield on average assets,which is calculated based on the annualised interest income for the perioddivided by the average value of interest earning assets for the period, was5.90% (quarter ended 30 June 2007: 5.83%) and the annualised cost of funds onthe average repurchase balance was 5.18% (quarter ended 30 June 2007: 5.15%)which equates to an interest rate spread of 0.72% (quarter ended 30 June 2007:0.68%). At 30 September 2007, the annualised yield on assets was 5.87% and theannualised cost of funds with the effect of interest rate swaps on therepurchase balances was 5.01%, which equates to an interest rate spread of0.86%. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backedsecurities portfolio averaged 13% for the quarter ended 30 September 2007(quarter ended 30 June 2007: 16%). Prepayment speeds on mortgage-backedsecurities, as reflected by the CPR, vary according to the type of investment,changes in interest rates, conditions in the financial markets, competition andother factors, none of which can be predicted with any certainty. 01 July 01 April 01 January 01 October 01 July 2007 to 30 2007 to 2007 to 31 2006 to 31 2006 to 30 September 30 June March 2007 December September 2007 2007 2006 2006 Annualised yield on 5.90% 5.83% 5.81% 5.95% 5.66% average assets Annualised cost of funds on average 5.15% repurchase balance 5.18% 5.15% 5.30% 5.31% Interest rate 0.72% 0.68% 0.66% 0.65% 0.35% spread CPR 13% 16% 15% 14% 13% As at 30 September 2007, all of the assets in the Company's portfolio wereFannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carryan implied "AAA" rating. 30 30 June 31 March 31 December 30 September 2007 2007 2006 September 2007 2006 Fixed-rate 66% 69% 69% 62% 63% mortgage-backed securities Adjustable-rate 12% 11% 8% 11% 8% mortgage-backed securities Floating-rate 22% 20% 23% 27% 29% mortgage-backed securities Borrowings The ratio of average daily repurchase agreements to equity resulted in averageleverage of the Company of 9.4:1 during the quarter ended 30 September 2007(quarter ended 30 June 2007: 9.3:1). The leverage at 30 September 2007 was 9.0:1(30 June 2007: 9.3:1). 01 July 01 April 01 January 01 October 01 July 2007 to 30 2007 to 2007 to 31 2006 to 31 2006 to 30 September March 2007 December September 2007 30 June 2006 2006 2007 Average leverage for 9.4:1 9.3:1 9.3:1 9.3:1 8.9:1period Leverage at period end 9.0:1 9.3:1 8.1:1 9.0:1 8.5:1 As of 30 September 2007, the Company had entered into interest rate swapagreements totalling US$817 million in notional amount in which the Company willpay an average rate of 5.16% and receive 1 month LIBOR on a monthly basis. As of30 June 2007, the Company had entered into interest rate swap agreementstotalling US$821 million in notional amount in which the Company would pay anaverage rate of 5.16% and receive 1 month LIBOR on a monthly basis. 30 September 30 June 2007 31 March 2007 31 December 30 September 2007 2006 2006 Notional amount US$817 US$821 US$811 US$597 US$603 million million million million million Average pay rate 5.16% 5.16% 5.17% 5.22% 5.23% Average receive 5.57% 5.32% 5.32% 5.35% 5.33% rate Capital At 30 September 2007, the Company had a net asset value per share of US$7.55 (30June 2007: US$7.61) after deducting the current dividends declared for thequarter of US$4,506,488 (for the quarter 30 June 2007: US$4,506,488). 01 July 2007 01 April 01 January 01 October 01 July 2006 to 30 2007 to 2007 to 31 2006 to 31 to September 30 June 2007 March 2007 December 30 September 2007 2006 2006 NAV per share US$7.551 US$7.77 US$8.22 US$8.08 US$8.05 Dividends declared US$4,506,488 US$4,506,488 US$3,943,177 US$3,331,321 US$3,075,066for the period NAV per share after deducting dividends declared US$7.55 US$7.61 US$8.08 US$7.95 US$7.93 1 After deducting dividends declared for the period. Dividends for the thirdquarter were declared 20 September 2007. Unlike the other periods presented, theNAV per share for the current period is represented ex-dividend. Dividend The Company has declared a dividend for the quarter ended 30 September 2007 ofUS$0.16 per share that is payable on 15 November 2007 to holders on the registeron 28 September 2007. Dividends are calculated and paid in US dollars. 01 July 2007 01 April 2007 01 January 01 October 01 July 2006 to 30 to 2007 to 31 2006 to 31 to September 30 June 2007 March 2007 December 2006 30 September 2006 2007 Core net US$0.17 US$0.17 US$0.15 US$0.14 US$0.12income per average share Net income US$0.20 US$0.18 US$0.16 US$0.19 US$0.25per average share Dividends per US$0.16 US$0.16 US$0.14 US$0.13 US$0.12share Outlook "The Federal Reserve has not provided guidance on the future direction ofmonetary policy," said Wellington Denahan-Norris, Chief Investment Officer forProdesse's Investment Manager, FIDAC. "Instead, the Fed's position has been thatit will remain data dependent until more definitive economic trends can bedemonstrated. To us, the data increasingly seem to suggest that a slowdown is athand, nevertheless the financial markets remain cautious and prone to bouts ofilliquidity in the more credit-sensitive sectors. In this environment,Prodesse's chosen asset class of US Government Agency securities and itsportfolio composition of floating-rate, adjustable-rate and fixed-rate assetsare designed to prepare it for a range of possible outcomes." Prodesse Investment Limited Balance Sheet 30-Sep-07 30-Jun-07 31-Mar-07 31-Dec-061 30-Sep-06 US $'000 US $'000 US $'000 US $'000 US $'000 Note (Unaudited) (Unaudited) (Unaudited) (Unaudited) US$ US$ US$ US$ US$ASSETS Current assets Available for sale 3 2,227,999 2,235,571 2,237,709 2,073,602 2,016,901investments Accrued income receivable 10,131 10,236 9,302 8,774 8,001Receivable for principal 2,977 6,613 5,409 3,210 4,158paydowns Receivable for securities - - - - 68,693sold Hedging instruments 4 - 4,603 - - -Cash and cash equivalents 205 11 30 35 750Prepaid expenses 154 236 34 27 174 Total assets 2,241,466 2,257,270 2,252,484 2,085,648 2,098,677 EQUITY AND LIABILITIES Capital and reserves Share capital: 28,165,550 at 30 September 2007, 30 June 2007 and 31 March 2007, 25,625,550 at 31 December 2006 and 30 September 2006, at US$ 0.01 282 282 282 256 256 Capital redemption reserve 30 30 30 30 30 Share premium 71,680 71,680 71,759 50,000 50,000 Distributable reserve 141,513 141,513 198,681 198,681 198,681 Accumulated profits 1,229 5,347 4,361 3,720 3,229 Capital Reserve-Realised gain / (loss) and impairment on available for sale 875 (57,206) (57,231) (58,520)investments Revaluation reserve 5,578 (4,505) 18,198 14,082 15,714 Cash flow hedge reserve 4 (8,486) 4,603 (4,557) (2,445) (3,124) Total shareholders' equity 212,701 218,950 231,548 207,093 206,266 Current liabilities Securities purchased payable 92,122 - 136,626 15,407 124,034Repurchase agreements 5 1,915,579 2,030,082 1,872,007 1,853,757 1,759,089Accrued interest expense 6,475 6,706 6,068 5,563 4,809Accrued expenses payable 1,597 1,532 1,678 1,383 1,355Dividend payable 4,506 - - - - Hedging instruments 4 8,486 - 4,557 2,445 3,124 Total liabilities 2,028,765 2,038,320 2,020,936 1,878,555 1,892,411 Total equity and liabilities 2,241,466 2,257,270 2,252,484 2,085,648 2,098,677 Net Assets 212,701 218,950 231,548 207,093 206,266 Net Asset Value per share 6 7.55 7.77 8.22 8.08 8.05 1 Derived from the audited financial statements at December 31, 2006. Prodesse Investment Limited (unaudited) Income Statement 01 October 01 July 2006 2006 to 31 to 30 01 July 2007 01 April 01 January December September to 30 2007 to 2007 to 31 2006 2006 September 30 June March 2007 2007 2007 US $'000 US $'000 US $'000 US $'000 US $'000 Income Interest income 32,604 33,602 30,895 31,076 28,200Interest expense (26,087) (26,898) (24,971) (25,733) (23,702) Net interest income 6,517 6,704 5,924 5,343 4,498 Realised gain on sale of available 875 38 25 1,289 3,371for sale investments and interest rate swaps Total income 7,392 6,742 5,949 6,632 7,869 Expenses Management, custodian and administration fees 1,301 1,453 1,297 1,278 1,246Other operating expenses 322 323 654 502 203 Total expenses 1,623 1,776 1,951 1,780 1,449 Net income for the period 5,769 4,966 3,998 4,852 6,420 Net income per average share for the period 0.20 0.18 0.16 0.19 0.25 Dividend declared per share for the period 0.16 0.16 0.14 0.13 0.12 Average shares 28,165,550 28,165,550 25,766,661 25,625,550 25,799,463 outstanding Prodesse Investment Limited (unaudited) Cash Flow Statement 01 July 01 April 01 January 01 October 01 July 2007 to 2007 to 2007 to 31 2006 to 31 2006 to 30 30 30 June March 2007 December September September 2007 2006 2006 2007 US $'000 US $'000 US $'000 US $'000 US $'000Net cash inflow / ( outflow) from operating activities (Note 1) 119,203 (154,072) (36,709) (92,311) (46,374) Financing Borrowings under reverse 5,772,535 6,197,781 5,771,019 5,947,866 5,770,443repurchase agreements Repayments under reverse (5,887,038) (6,039,706) (5,752,769) (5,853,198) (5,718,028)repurchase agreements Own shares acquired - - - - (2,732)New shares issued - - 21,863 - -Issue costs - (79) (78) - -Dividends paid (4,506) (3,943) (3,331) (3,072) (2,563) Net cash (outflow) / inflow (119,009) 154,053 36,704 91,596 47,120from financing Increase / (decrease) in cash 194 (19) (5) (715) 746and cash equivalents Cash and cash equivalents, at 11 30 35 750 4beginning of period Cash and cash equivalents, at 205 11 30 35 750end of period Note 1 Net income for the period 5,769 4,966 3,998 4,852 6,420Net accretion/amortisation of premiums on available for (35) sale investments 139 (14) (215) 143Realised gain on sale of available for sale (38) investments (875) (25) (2,508) (2,017)Realised gain in interest - - - - (135)rate hedge Purchases of investments (93,321) (328,449) (207,840) (432,026) (708,063)Proceeds from sale of 108,812 33,493 34,168 228,070 563,718investments Proceeds from sale of - - - - 135interest rate swaps Principal paydowns 98,658 136,635 132,739 109,422 91,072Receivables Decrease / (increase) in 105 (934) (528) (834) 835accrued income receivable Decrease / (increase) in 82 (202) (7) 147 (51)prepaid expenses Liabilities (Decrease) / increase in (231) 638 505 754 1,589accrued interest expense Increase / (decrease) in 65 (146) 295 27 (20)accrued expenses payable Net cash inflow / (outflow) 119,203 (154,072) (36,709) (92,311) (46,374)from operating activities Prodesse Investment Limited Statement of Changes in Shareholders' Equity (unaudited) 01 July 2007 to 30 September 2007 Share Capital Share Distributable Capital Revaluation Accumulated Cash Total capital redemption premium reserve Reserve - reserve profits flow reserve realised hedge gain on reserve sales and impairment of available for sale investments US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 Balance at 30 282 30 71,680 141,513 - (4,505) 5,347 4,603 218,950June 2007 Net income - - - - - - 5,769 - 5,769for the quarter Hedge reserve - - - - - - - (13,089) (13,089)revalued Transfer of - - - - 875 - (875) - -realised gain to capital reserve Movement in - - - - - 10,083 - - 10,083unrealised gain on revaluation taken to equity Total - - - - 875 10,083 4,894 (13,089) 2,763recognised income and expense Dividends - - - - - - (4,506) - (4,506)paid Dividends - - - - - - (4,506) - (4,506)payable Balance at 30 282 30 71,680 141,513 875 5,578 1,229 (8,486) 212,701September 2007 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's sharecapital structure consists solely of Ordinary Shares. The Company has a listingon 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 Manager willseek to enhance returns through what it considers an appropriate amount ofleverage. 2. Significant Accounting Policies Basis of Accounting This quarterly press release has been prepared using accounting policiesconsistent with International Financial Reporting Standards ("IFRS"). The sameaccounting policies, presentation and methods ofcomputation are followed in the quarterly press release as applied in theCompany's latest annual audited financial statements except for the change inreclassification of the net borrowings under repurchaseagreements in the cashflow statement. 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. Changes in accounting policies In the current financial year, the Company will adopt International FinancialReporting Standard 7 "Financial Instruments and Disclosures" ("IFRS7") for thefirst time. As IFRS 7 is a disclosure standard, thereis no impact of that change in accounting policy on the quarterly press release. Full details of the change will be disclosed in the Company's annual report forthe year ended 31 December 2007. 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 the Government National MortgageAssociation ("Ginnie Mae"), a US Government Corporation. Freddie Mac, FannieMae, and FHLB, although chartered and sponsored by Congress, are not Companiesfunded 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 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 mortgage-backed securitiesfor which details about the underlying mortgages have not yet been announced.Securities traded on a when-issued basis are traded for delivery beyond thenormal settlement date at a stated price and yield, and no income accrues to thepurchaser 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. 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 the 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. 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 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 associatedwith changes in interest rates. The Company uses interest rate swap contracts tohedge these exposures. The Company does not use derivative financial instrumentsfor speculative 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 Estimated Unrealised At 30 September 2007 Amortised Gain Unrealised Fair Value Cost Loss US $'000 US $'000 US $'000 US $'000 Adjustable rate 766,409 1,123 (3,404) 764,128Fixed rate 1,456,012 11,101 (3,242) 1,463,871Total 2,222,421 12,224 (6,646) 2,227,999 As at 30 September 2007, all of the assets in the Company's portfolio wereFannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry a"AAA" or implied "AAA" rating. During the quarter ended 30 September 2007, theCompany did not have any securities that it deemed to be other-than-temporarilyimpaired. 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 and floating rate mortgage-backed securities are reset atperiodic intervals to an increment over some predetermined reference interestrate. There are two main categories of reference rates: (i) those based on USTreasury securities and (ii) those derived from a calculated measure such as acost of funds index or a moving average of mortgage rates. Commonly utilisedreference rates include the one-year Treasury Bill rate or one-month US dollarLIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR,closely mirror changes in market interest rate levels. Others tend to lagchanges in market rate levels and 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 30 September 2007, the Company had interest rate swap agreements of US$817million notional amount in which the Company will pay a weighted average rate of5.16% and have a weighted average receive rate of 5.57%. 5. Reverse Repurchase Agreements At 30 September 2007 the aggregate value of securities pledged by the Companyunder reverse repurchase agreements exceeds the liability under such agreementsby approximately US$57.5 million (approximately 3% of such liability). Theinterest rates on the reverse repurchase agreements at 30 September 2007 rangefrom 4.47% to 5.75% and have maturity dates ranging from 1 day to 1612 days. The Company has entered into repurchase agreements which provide thecounterparty with the right to call the balance prior to maturity date. Theserepurchase agreements totalled US$300 million. 6. Net Asset Value The net asset value per Ordinary Share is based on net assets at 30 September2007 and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares inissue at the period end. At 30 September 2007, the Company had a net asset value per Ordinary Share ofUS$7.55, after including the effect of the dividend declared for the quarterended 30 September 2007 of US$4,506,488. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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