Final Results

25th Jun 2007 07:03

Queen's Walk Investment Limited25 June 2007 25 June 2007 Queen's Walk Investment Limited Preliminary Results for the Financial Year Ended 31 March 2007 Queen's Walk Investment Limited ("Queen's Walk") is a Guernsey-incorporatedinvestment company listed on the London Stock Exchange. Queen's Walk investsprimarily in a diversified portfolio of subordinated tranches of asset backedsecurities, including the unrated "equity" or "first loss" residual incomepositions typically retained by the banks or other financial institutions whichhave originated the loan assets that collateralise a securitisation transaction.The Company makes such investments where its investment manager, Cheyne CapitalManagement (UK) LLP ("Cheyne Capital"), considers the coupon or cash flows fromthe investment to be attractive relative to the credit exposure of theunderlying asset collateral. For more information regarding Queen's Walk, pleasevisit www.queenswalkinv.com or call Caroline Villiers: +44 20 7153 1521. Highlights •Net loss for the year of €67.7 million, principally as a result of fair value adjustments made to investments in 2007. This equates to a loss per share of €1.67. •Net asset value decreased to €7.24 as at 31 March 2007 from €9.90 as at 31 December 2006. •The Company's investments generated net operating income in the fourth quarter in the amount of €9.6 million or €0.24 per share. •The board of directors has declared an interim dividend of €0.15 per share for the fourth quarter, resulting in a cumulative interim dividend of €0.90 for the year ended 31 March 2007. •Fair value write-downs in the fourth quarter totalled €108.4 million. These write-downs resulted principally from significant developments affecting the UK and US mortgage markets. •Since 31 December 2006, the Company has sold three US investments and four UK investments for aggregate sale proceeds of approximately €116 million. As the 31 March 2007 fair values of the assets sold were determined on the basis of their sale prices, these sales have not reduced the Company's NAV post year end and are fully reflected in the €7.24 NAV figure. •Proceeds from asset sales have been applied to reduce indebtedness or to increase available cash. The Company's leverage has been reduced to approximately 6.6% as at 31 May 2007 (compared to 25.9% as at 31 March 2007, 28.5% as at 31 December 2006 and 17.9% as at 31 March 2006. •The weighted average yield of the Company's investment portfolio as at 31 March 2007 (after giving effect to all asset sales) was 13.4% in local currency terms (13.6% as at 31 December 2006). •The Company has sufficient cash and financing capacity to enable it to buy back shares up to 9.99% of its existing share capital upon receipt of the requisite approval from shareholders that such purchases can be made without requiring an offer to be made for the Company's shares by Cheyne ABS Opportunities Fund LP and parties deemed by the City Code on Takeover and Mergers to be acting in concert with it. The Company is sending a circular to shareholders shortly calling for an extraordinary general meeting of shareholders. Financial Highlights +-------------+------------+-----------+-----------+-----------+-----------+ | |Q4 - Quarter|Q3 - |Q2 - |Q1 - |Period from| | |ended 31 |Quarter |Quarter |Quarter |6 September| | |March 2007 |ended 31 |ended 30 |ended 30 |2005 to 31 | | |(•) |December |September |June 2006 |March 2006 | | | |2006 (•) |2006 (•) |(•) |(•) | | | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Operating |(93,563,917)| 14,484,653| 15,674,473| 14,992,921| 12,480,487| |(loss)/income| *| | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Operating | (2,700,658)|(2,658,532)|(3,349,855)|(2,813,090)|(2,455,408)| |expenses | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Finance costs| (2,541,463)|(2,317,658)|(1,772,011)|(1,182,461)| (260,052)| +-------------+------------+-----------+-----------+-----------+-----------+ |Net (loss)/ |(98,806,038)| 9,508,463| 10,552,607| 10,997,370| 9,765,027| |income | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Distributable| 9,596,406**| 9,508,463| 10,583,319| 10,599,894| 9,765,027| |income | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |(Loss)/ | (2.43)| 0.23| 0.26| 0.27| 0.24| |earnings per | | | | | | |share | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Distributable| 0.24| 0.23| 0.26| 0.26| 0.24| |earnings per | | | | | | |share | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ | | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Total assets | 427,104,698|534,777,898|520,550,381|531,153,613|493,842,561| +-------------+------------+-----------+-----------+-----------+-----------+ |Total | 132,951,013|132,475,401|117,194,951|127,789,393| 91,773,445| |liabilities | | | | | | |(incl. | | | | | | |financing) | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |Equity | 294,153,685|402,302,497|403,355,430|403,364,220|402,069,116| |capital | | | | | | +-------------+------------+-----------+-----------+-----------+-----------+ |NAV per share| 7.24| 9.90| 9.93| 9.93| 9.90| +-------------+------------+-----------+-----------+-----------+-----------+ *After net fair value losses on fair value through profit or loss financialinstruments in the amount of €108,402,444. **Net operating income from investments before deduction of net fair valuelosses through profit or loss financial instruments ((€98,806,038) +€108,402,444 = €9,596,406). Fourth Quarter Dividend The Board of Directors has declared an interim dividend for the quarter ended 31March 2007 of €0.15 payable on 31 July 2007 to shareholders of record on 6 July2007. Conference Call A conference call to review the Company's financial results for the year ended 31 March 2007 will take place at 10:30 A.M. London time today. The conference call can be accessed by dialing +44 (0)20 7138 0835 ten minutes prior to the scheduled start of the call; please reference Queen's Walk Investment Limited Financial Results. A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com). A webcast of the conference call will also be available on a listen-only basis at www.queenswalkinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call. For further information please contact: Investor Relations:Caroline Villiers +44 (0) 20 7153 1521 About the Company: Queen's Walk Investment Limited is a Guernsey-incorporated investment companylisted on the London Stock Exchange. Queen's Walk invests primarily in adiversified portfolio of subordinated tranches of asset backed securities,including the unrated "equity" or "first loss" residual income positionstypically retained by the banks or other financial institutions which haveoriginated the loan assets that collateralise a securitisation transaction. TheCompany makes such investments where its investment manager, Cheyne CapitalManagement (UK) LLP, considers the coupon or cash flows from the investment tobe attractive relative to the credit exposure of the underlying assetcollateral. The Company believes that its investment focus provides equityinvestors with exposure to a relatively new investment opportunity in this assetclass. The content of this announcement includes statements that are, or may be deemedto be, "forward-looking statements". These forward-looking statements can beidentified by the use of forward-looking terminology, including the terms"believes", "estimates", "anticipates", "expects", "intends", "considers","may", "will" or "should". They include the statement regarding the targetaggregate dividend. By their nature, forward-looking statements involve risksand uncertainties and readers are cautioned that any such forward-lookingstatements are not guarantees of future performance. The Company's actualresults and performance may differ materially from the impression created by theforward-looking statements. The Company undertakes no obligation to publiclyupdate or revise forward-looking statements, except as may be required byapplicable law and regulation (including the Listing Rules). The financial information set out in this announcement does not constitute theCompany's statutory accounts for the year ended 31 March 2007. The financialinformation for the year ended 31 March 2007 is derived from the financialstatements to be delivered to the UK Listing Authority. An extract from the audited annual report and accounts of the Company for theyear ended 31 March 2007 is set out below. This preliminary announcement was approved by the Board of Directors on 25 June2007. Chairman's Statement The results for Queen's Walk Investment Limited (the "Company") for the twelvemonths ended 31 March 2007, its first full year as a public company, reflect aperiod of exceptional turbulence in many of the asset-backed securities ("ABS")markets in which the Company has invested, primarily during the fourth quarterof the financial year. The Company incurred a net loss of Euro 67.7 million for the year, principallyas a result of the adjustments to fair value made to a number of its investmentsin 2007. The loss per share was Euro 1.67 and the net asset value ("NAV") fellto Euro 7.24 per share as at 31 March 2007 from Euro 9.90 as at both 31 December2006 and 31 March 2006. Notwithstanding the net loss for the year, the directors are mindful of theCompany's objective of providing shareholders with stable returns in the form ofquarterly dividends. Although the losses arising from the adjustments to fairvalue have been recognised in the income statement, the Company is nonethelessable to pay a dividend for the fourth quarter. To the extent that the dividendis covered by income from the Company's investments, the Company is able to paya dividend from the distributable reserves created upon cancellation of theCompany's share premium account at the time of the Company's IPO. As a consequence, the Board has declared an interim dividend of Euro 0.15 inrespect of the fourth quarter. This dividend will be payable on 31 July 2007 toshareholders of record on 6 July 2007. Following interim dividends amounting to Euro 0.75 per share that have beendeclared and paid in respect of the first three quarters of the financial year,the total dividend for the year of Euro 0.90 regrettably falls short of the Euro1.00 dividend target announced at the time of the Company's IPO. The directorsremain committed, however, to seeing that the Company continues to pay, as faras is possible, quarterly dividends at a level that takes future periods intoaccount but which represents a significant proportion of the Company'sdistributable income. Investment Portfolio Although the difficulties in the US sub-prime loan mortgage market in recentmonths have attracted the greatest public attention, the UK and certain of theContinental European mortgage markets have also seen developments (albeitlargely different from those in the US) that have affected the value of theCompany's investments in those markets. The report of the Company's Investment Manager, Cheyne Capital Management (UK)LLP ("Cheyne Capital"), details the performance of the Company's assets andanalyses the factors in the markets underlying this performance. A number ofinvestments have been sold (predominantly since the year end), including threeof the four US sub-prime mortgage positions. The exposure to the UK mortgagemarket, where a deteriorating trend in prepayment rates by borrowers becameapparent, has also been materially reduced. These asset sales, together with the cash flows from the continuing investmentportfolio, have caused the Company's leverage to fall from 25.9% of theCompany's total investment portfolio as at 31 March 2007 (17.9% as at 31 March2006) to approximately 6.6% as at 31 May 2007. The fall in fair value of the US and the UK assets contributed most of the lossreported for the year, although a small amount was accounted for by theCompany's holding of collateralised debt obligations ("CDOs") backed by ABS.While there has been no adverse impact on the cash generative capability ofthese assets (as noted in the Investment Manager's Report), they have suffered adownward valuation based on the higher discount rates being applied to ABS CDOassets generally in the current market. With regard to the balance of the Company's investment portfolio, regulatorychanges affecting mortgage prepayment charges in both Portugal and Italy havedepressed valuations in the Company's portfolio of residual investments backedby prime mortgage loans in those countries. However, the credit performance ofthe Company's Portuguese and Italian residual positions has, in the aggregate,exceeded original pricing expectations. Notwithstanding the regulatory changes,the aggregate fair value of these positions is in line with their original cost.The Company's portfolio of residuals backed by small-and-medium enterprise("SME") loans, which was accumulated over the course of the year as part of theCompany's diversification policy, has performed satisfactorily. Outlook The Company's investment policy has, from the outset, been to aim for a highdegree of risk diversification, for instance through the "granularity" of themany individual loans underlying each ABS investment, the geographical spread ofthe different positions and the inclusion in the Company's investment portfolioof ABS investments backed by assets other than residential mortgages. While thiswas not enough to prevent the disappointing performance that resulted from thevirtually simultaneous and significant market events that affected the Company'sthree core markets, the experience of recent months has reinforced theimportance of diversification. In seeking to deliver significant and stable cashreturns to investors, the Company will seek to achieve further diversificationin its investments while seeking high risk-adjusted returns. The asset sales over the past two months have significantly reduced theCompany's borrowings. This reduction enables the Company to apply future cashflows generated by the Company's investment portfolio in ways that will optimisevalue for shareholders. As announced on 6 March 2007, the directors intend to seek the approval ofshareholders (and, given the significant shareholding in the Company byinvestors connected with the Investment Manager, that of the Takeover Panel) forthe Company to buy back shares. The process of obtaining these approvals wasdelayed by, inter alia, the impact of the turbulent markets on the valuation ofthe Company's investments. The Company is sending a circular to shareholdersshortly calling for an extraordinary general meeting of shareholders. The directors will continue to assess how the cash flow from the Company'scontinuing investments can be used to the best advantage of all shareholders,whether through share buy backs or other forms of capital return or, if thecomparative returns justify it, for reinvestment in new assets. For as long asthe Company's share price is at a material discount to net asset value, thedirectors would expect to use surplus cash for share buybacks. Despite the disappointing results for the period and the difficult marketconditions behind them, the directors continue to believe that a broadlydiversified portfolio of ABS and other investments can provide investors withattractive returns. We will work with the Investment Manager to deliver thisoutcome. Board Stuart Fiertz has resigned from the board in order to be able to assume overallresponsibility at the Investment Manager in relation to the Company and theimplementation of the investment strategy outlined above. While we will miss hiscontribution in his capacity as a director, we welcome that he will now beleading the team at the Investment Manager drawing on the full range ofexpertise and specialisations within the firm. Annual General Meeting The Company's Annual General Meeting will be held at the registered offices ofthe Company on 3 September 2007. The notice of the Annual General Meeting is setout at the end of the annual report and a form of proxy accompanies the annualreport. Tom Chandos, Chairman25 June 2007 Investment Manager's Report Overview After four quarters of good performance since its IPO, the Company faced achallenging set of circumstances in the quarter ended 31 March 2007. Significantmarket events affected the Company's investments backed by UK and US mortgages,and regulatory changes affected the Company's Continental Europeanmortgage-backed investments. Apart from the highly-publicised events in the USsub-prime mortgage market, the Company's UK investments have been affected by achange in the prepayment behaviour of UK mortgage borrowers. Recent regulatorychanges in both Portugal and Italy have affected the level of prepayment chargesthat banks can charge to borrowers who prepay their mortgages, and these changeshave also had an adverse (albeit lesser) impact on the Company's investmentsbacked by mortgages in those countries. The aggregate value of the Company's UK, US and European mortgage-backedinvestments accounted for approximately 86% of the Company's investmentportfolio by gross asset value ("GAV") at 31 December 2006. While CheyneCapital, as part of its investment strategy, had sought to diversify theCompany's investment portfolio in terms of both asset type and geography inorder to minimise the impact of any single event in a particular market, thealmost simultaneous occurrence of three significant events in the Company'sthree core markets, and the full extent of their impact on the Company'sinvestments, was unexpected. These events contributed to increased price volatility and decreased liquidity.In the case of the well-publicised events affecting the US sub-prime mortgagemarket, they led to a significant deterioration in value and a market re-pricingof US sub-prime mortgage-backed investments. Although the Company's investmentportfolio was not insulated from these market events, Cheyne Capital had madeportfolio management decisions in previous quarters that to some extentmitigated their ultimate impact. We chose to stop purchasing US residuals inFebruary 2006, thereby reducing the Company's exposure to 2006 vintage assetsand the Company's relative exposure to the US market. Following the challenges of the past quarter, we believe that participants inthe mortgage residual market have taken a more conservative view in pricing therisk of residual assets. The Company is well positioned to take advantage ofthis re-pricing of the residual market going forward. Investment Portfolio US investments - Impacted by increased loss assumptions The sudden and rapid deterioration of the US sub-prime mortgage markethighlighted the substantial deficiencies in underwriting standards in 2006 andthe extent to which credit losses in the 2006 vintage mortgage portfolios arelikely to be much higher than market participants had originally expected. TheCompany purchased its last US mortgage residual in February 2006 and was thusnot materially exposed to loans originated throughout 2006. The 2006 vintage,however, cannot be viewed in isolation, as the impact of the deterioration inthe US sub-prime mortgage market has been much broader. There has been amaterial reduction in the availability of credit for sub-prime mortgages as theweaker capitalised originators have exited the market and underwritingguidelines have tightened among the remaining mortgage lenders. This reductionin the availability of credit has contributed to weaker housing marketfundamentals. As a result of changes in underlying market conditions, CheyneCapital increased the loss assumptions associated with the Company's US mortgageresiduals. Given the resulting change to the risk/reward profile of the majorityof these assets and the risk of further value deterioration, we decided to sellall but one of the Company's US investments. UK investments - Impacted by changes in borrower prepayment behaviour With respect to the UK mortgage residual portfolio, the Company has previouslynoted the changes that Cheyne Capital has observed in borrower prepaymentbehaviour. Borrowers are increasingly waiting until the end of their mortgagediscount (or "teaser") period to refinance their mortgage loans. While thistrend is likely to have been driven by a number of factors, we believe that keydrivers include the increased competition in the non-conforming mortgage market(which has increased mortgage choice for sub-prime borrowers) as well as thechanging interest rate environment. Each of the Company's UK mortgage residual exposures includes cash flows fromearly repayment charges typically charged to borrowers who prepay their mortgageloans in the discount period, in addition to the excess spread earned in thesecuritisation transaction (being the income from the underlying mortgageportfolio after servicing of the debt issued as part of the securitisation).Where there is a general increase in prepayment rates over the life of asecuritisation transaction, the increased cash flows received from earlyrepayment charges act as a hedge against the overall reduction in the excessspread cash flows (which have been reduced because mortgages have been repaidand no longer form part of the mortgage pool). Where the increase in prepayment rates occurs soon after (rather than during)the discount or "teaser" period, however, this has two adverse impacts on thevalue of the investment. In addition to receiving fewer early repayment charges,the absolute level of excess spread on the portfolio will have been reduced.Consequently, with borrowers prepaying their mortgages at a higher rate afterthe end of the teaser period, the duration of the excess spread cash flows hasbeen reduced relative to Cheyne Capital's original pricing assumptions, with noincrease in early repayment charges to mitigate these reduced cash flows. Thischange to the timing of borrower prepayments and the magnitude of the repaymentsfollowing the end of the teaser period are the principal causes of the fairvalue adjustments that the Company has made in respect of its UK investments.The change in prepayment behaviour does not appear to be confined to a singleoriginator or loan type and has had an impact on all of the Company's UKresidual positions. In addition, the rise in UK interest rates over the last nine months may have animpact on the level of defaults in the Company's portfolio. While many of theunderlying loans that collateralise the Company's UK investments are wellseasoned (i.e., over two years old) and benefit from increased equity in theunderlying properties as a result of higher UK house prices, an increase ininterest rates will have a negative impact on the affordability of the mortgageloans for some borrowers. Cheyne Capital has increased the assumed default ratesand cumulative loss levels for the UK mortgage residuals and this increase isalso reflected in the asset valuations as of 31 March 2007. Continental European Investments - Impacted by regulatory changes to prepaymentcharges With respect to the Continental European mortgage residual portfolio (the"Continental MBS Portfolio"), the introduction of legislation that caps earlyrepayment charges in both Portugal and Italy has had an impact on the value ofthe Company's assets. Portugal passed legislation in April 2007 limiting theprepayment charges that banks can charge to mortgage borrowers to 50 basispoints. Italy has passed similar legislation and, in May 2007, the Italianbanking and consumer associations reached an agreement (mandated by legislation)similarly capping prepayment charges on existing mortgages at 50 basis points.The Company holds five investments backed by Portuguese mortgages and oneinvestment backed by Italian mortgages. While we have increased prepaymentassumptions where necessary in light of these developments, it is important tonote that the Company receives early repayment charge cash flows from only threeof its investments. The relevant investments are quite seasoned and expectedcash flows from early repayment charges are a relatively small component ofoverall value. The Continental MBS Portfolio is now quite seasoned. Strong house price growthin Italy, and to a lesser extent in Portugal, has resulted in low initialloan-to-value ("LTV") portfolios having even lower LTVs today. This is apositive factor for both default and recovery rates and, to date, recoveries ofliquidated mortgages in the portfolio have exceeded expectations. Notwithstanding the negative impact of reducing early repayment charge cashflows and increasing prepayment assumptions where appropriate, the aggregatefair value of the Company's Portuguese and Italian asset portfolio remains inline with original cost. The negative impact of the regulatory changes has beenoffset by the continuing credit outperformance of the majority of the assetsrelative to our initial pricing assumptions and by the tightening of yields inthe sector relative to the wider yields at which these now seasoned assets werepurchased. Apart from the Company's mortgage residual portfolio, 5.9% of the portfolio asat 31 March 2007 was invested in three CDO residual positions managed by CheyneCapital (12% as at 31 March 2006) and 12.6% of the portfolio was invested in SMEresidual positions (12.0% as at 31 March 2006). This asset diversification hasbenefited the Company in the past quarter, as the cash flow generativecapability of these assets has not been affected by the changes in the US, UK orEuropean mortgage markets. The CDO investments comprise one CLO-squared transaction (a CDO transactioncomprised of underlying collateralised loan obligation (or "CLO") exposures),with underlying exposure to US leveraged loans, and two ABS CDOs. Consistentwith many ABS CDO investments, the Company's ABS CDO residual investments areexposed to the US sub-prime market. While the ABS CDO sector has sufferedgenerally from increased price volatility and illiquidity as a result of thisexposure, the Company's ABS CDO investments can be distinguished by reference totwo important factors. Both of the Company's ABS CDO investments are performingin line with expectations and there have been no downgrades to any of the CDOassets that collateralise these investments (although there have been severalupgrades). There is also a high degree of seasoning of the underlying ABS CDOassets in both investments and therefore a relatively small exposure to the 2006vintage sub-prime transactions that have been the focus of recent concern. Whilethis limited exposure has resulted in the cash generative capability of theCompany's ABS CDO investments having been relatively unaffected by the turmoilin the US sub-prime market, the market discount rate for ABS CDO assets hasincreased and, consequently, the fair value of the Company's ABS CDO investmentsis lower than their amortised value. The Company's portfolio of SME residuals is performing in line with, or betterthan, expectations. Unlike mortgage residuals, the Company's SME residualpositions carry limited prepayment risk, as the transactions are generallyrevolving (with underlying assets replaced as they are repaid, subject to ratingagency qualification criteria). While the Company's SME assets are exposed to potential losses in the underlyingportfolios and to the timing of those losses, the track record of the banks thathave originated the SME transactions in which the Company has invested is strongand these banks have an alignment of interest with the Company, typicallythrough shared residual investment or exposure to the underlying credits outsidethe securitisation. Portfolio Valuation and Asset Sales Portfolio Valuation In accordance with the Company's valuation procedures, we reviewed the fairvalue of the Company's investments in light of their performance, observablemarket data and our expectations regarding future trends. Cash flows received inrespect of each investment were allocated between income and principal on thebasis of their carrying values and booking yields, resulting in amortisedcarrying values for the Company's residual income positions as at 31 March 2007.The differences between these amortised carrying values and the fair values ofthe assets as at 31 March 2007 have been recorded as fair value adjustments inthe Company's income statement. Following the valuation adjustments made to the Company's portfolio, the NAV ofthe Company has decreased to Euro 7.24 per share from Euro 9.90 per share as at31 December 2006 (a decrease of 26.8%). The valuation adjustments made inrespect of the Company's assets reflect Cheyne Capital's revised credit,prepayment and discount rate assumptions. These assumptions have also beenassessed in light of actual sale prices obtained in asset sales that took placeboth during and after the quarter ended 31 March 2007. Assets sold since 31March 2007 have been valued as at 31 March 2007 on the basis of the sale pricesat which they were actually sold (adjusted to take account of income accrued forthe quarter ended 31 March 2007 and cash flows received during that quarter).The Company's asset sales are described in further detail in the next section. The table below summarises the reduction in the value of the Company's portfolioby asset class: Asset Class 31 31 March 31 March Fair Value % Change to % Change December 2007 2007 Fair Adjustment 31 March relative to 2006 Book Amortised Value (Euro) 2007 31 March Value Book Value (Euro) Amortised 2007 Total (Euro) (Euro) 1 Book Value Portfolio Amortised Book Value 2UK3 302.2 289.5 214.94 -74.6 -25.8% -13.1%US 65.1 61.2 32.2 -29.0 -47.4% -5.1%Continental 105.8 104.6 105.2 0.7 0.6% 0.1%MBSSME 52.5 51.5 51.4 -0.1 -0.1% 0.0%ABS CDO 29.4 29.2 23.8 -5.4 -18.5% -0.9%Cash and 15.7 34.9 34.9 0.0 0.0%OtherAssets 0.0%Total 570.9 571.0 462.5 5 -108.4 6 -19.0% -19.0% 1 Amortised Book Value as at 31 March 2007 reflects carrying value of the assetsas at 31 December 2006 after taking into account income accrued for the quarterended 31 March 2007 and cash flows received during that quarter 2 Percentage figures reflect fair value change for each asset class relative tothe aggregate 31 March 2007 Amortised Book Value of the Company's entireinvestment portfolio. 3 Inclusive of proceeds from the sale of Southern Pacific Financing 06-A plc.This asset was sold on 30 March 2007 but has been included in this total fairvalue calculation as at 31 March 2007 in order to provide a complete summary offair value changes on the UK portfolio as a whole (including both realised andunrealised losses). 4 Inclusive of assets held synthetically pursuant to total return swapagreements. See Note 10 to the financial statements. 5 The total asset amount reflected on the consolidated balance sheet (€427.1million) is net of indebtedness effected through total return swap agreements(€35.4 million). (See note 10 to the financial statements.) 6 This figure reflects adjustments to fair value made in the fourth quarter. Netunrealised losses on investments at fair value through profit or loss for theyear ended 31 March 2007 totalled €112.3 million (see note 4 to the financialstatements). Asset Sales As noted above, we determined that certain assets were no longer attractive froma risk/reward perspective in light of market events. We also viewed certainassets as having significant potential for further deterioration. Furthermore,our analysis and review of originator concentrations prompted us to reduce theCompany's exposure to certain individual originators. Finally, in light of theincreased illiquidity of residuals brought about by market events, we determinedthat it would be prudent to sell assets in order to reduce the Company'sleverage. The proceeds of all asset sales have been used to repay indebtednessor to increase cash available to the Company. Further details of these sales areset out below. The Company's exposure to US mortgage residuals was reduced because of ourconcerns regarding the state of the US sub-prime market and the housing marketin general. As stated above, while the market initially expressed concernsregarding the underwriting quality of 2006 vintage mortgage loans, the impact onthe broader market was far wider, with concerns subsequently having spread toother vintages and to the credit quality of US sub-prime mortgage assetsgenerally. Subsequent to 31 March 2007, the Company sold three of its four USresidual positions. Since 31 March 2007, the Company has also sold three UK residual positions inaddition to one UK residual position, Southern Pacific Financing 06-A plc, whichwas sold on 30 March 2007. (The sale of half of the Company's investment in RMAC2004-NSP4 plc announced on 3 April 2007, which was subject to contract, was notcompleted.) A complete list of assets sold by the Company since 31 March 2007 isset out below. Investment Sold Description of Underlying Assets US Positions Argent Securities Trust 2006-W1 Approximately 10,400 sub-prime mortgage loans, primarily first-ranking First Franklin Mortgage Loan Trust Approximately 3,400 sub-prime mortgage loans, primarily first-ranking Morgan Stanley ABS Capital I Inc Approximately 4,100 sub-prime Trust 2005-HE5 mortgage loans, primarily first-ranking UK Positions RMAC 2005 NSP2 plc Approximately 6,300 sub-prime mortgage loans/3,700 prime mortgage loans RMAC 2005-NS1 plc Approximately 7,800 sub-prime mortgage loans Southern Pacific Financing 05-B plc Approximately 3,000 near-prime mortgage loans The aggregate proceeds from the sale of the US investments (all of which tookplace after 31 March 2007) totalled Euro 22.8 million, reflecting a 53.0%reduction in gross asset value relative to the adjusted book value of theseinvestments as at 31 December 2006. As the fair value of these investments as at31 March 2007 was determined on the basis of the prices at which these assetswere sold, these sales have not reduced the net asset value of the Company postyear end. While the investments were sold at a significant loss relative to 31December 2006 carrying values, they were sold for prices that exceeded the fairvalues that Cheyne Capital had assigned to them as at 31 March 2007. Theaggregate sale price reflected a premium of 13.3% above the Euro 20.1 millionaggregate model value that Cheyne Capital had assigned to these investments asat 31 March 2007. The aggregate proceeds from the sale of the UK investments (inclusive of thesale of Southern Pacific Financing 06-A plc) totalled Euro 93.2 million,reflecting a 24.3% reduction in gross asset value relative to the adjusted bookvalue of these investments as at 31 December 2006. Similar to the sale of USinvestments, the fair value of these investments as at 31 March 2007 was alsodetermined on the basis of the prices at which the assets were sold and,consequently, these sales have not reduced the net asset value of the Companypost year end. These investments were also sold for prices that exceeded thefair values that Cheyne Capital had assigned to them as at 31 March 2007. Theaggregate sale price reflected a premium of 4.4% above the Euro 89.3 millionaggregate model value that Cheyne Capital had assigned to these investments asat 31 March 2007. Portfolio Yield The weighted average yield of the Company's investment portfolio in localcurrency terms after giving effect to all asset sales (including those whichtook place after 31 March 2007) is 13.4%. This weighted average yield has beencalculated on the basis of the original effective interest rate booked for eachasset, with all changes to underlying cash flow assumptions having beenreflected in the amortised cost value of each asset.* While the Company hasreported the weighted average portfolio yield in prior quarters on the basis ofeffective yields for each asset as they were adjusted to reflect changes incashflow assumptions, the Company believes that a calculation based on originaleffective interest rates enables it to provide more meaningful comparativeinformation. The equivalent weighted average yield of the Company's investmentportfolio as at 31 December 2006 was 13.6%. *Where the Company adjusts expected cash flow projections to take account of anychange in underlying assumptions, such adjustments are recognised in the incomestatement by reflecting changes in a revised amortised cost value of theinvestment and applying the original effective interest rate to the revisedamortised cost value for the purposes of calculating income. The Company takesaccount of underlying changes in cash flows in its income recognition as soon asadverse factors are identified. (See notes 2, 3 and 14 to the financialstatements.) Portfolio Breakdowns A summary of the Company's ten largest investment positions as at 31 March 2007,which account for 57.1% of the total portfolio by gross asset value, is set outin the following table. Investment Description of Underlying AssetsInvestments individuallyaccounting for 7 to 9% oftotal investment portfolio RMAC 2005-NSP2 plc* Approximately 6,300 sub-prime/3,700 prime UK mortgage loans. Newgate Funding plc Approximately 5,900 near prime and non-conforming UK mortgage loans Investments individuallyaccounting for 5 to 7% oftotal investment portfolio Eurosail 2006-1 plc Approximately 9,800 prime, non-conforming and buy-to-let (UK) mortgage loans Sestante Finance S.R.L. Approximately 3,500 prime Italian mortgage loans RMAC 2004-NSP4 plc Approximately 8,100 prime, non-conforming and buy-to-let mortgage loans Investments individuallyaccounting for less than 5%of total investmentportfolio Magellan Mortgages No. 2 plc Approximately 23,000 prime Portuguese mortgage loans Lusitano Mortgages No. 1 plc Approximately 23,900 prime Portuguese mortgage loans Magellan Mortgages No. 1 plc Approximately 23,000 prime Portuguese mortgage loans Southern Pacific Financing Approximately 3,000 near-prime UK 05-B plc* mortgage loans Eirles Three Limited Approximately 1,400 SME loans(Tranche 227B) * Asset sold after 31 March 2007. A breakdown of the Company's investment portfolio by jurisdiction (by referenceto underlying asset originator) is set out below. Adjusted 31 March 2007* UK 41%Portugal 25%Italy 8%Germany 11%CDO 7%Holland 5%US 3% *Adjusted to reflect asset sales post year end and assetpaydowns between 31 March 2007 and 31 May 2007. 31 March 2007 UK 47%Portugal 20%Italy 6%Germany 9%CDO 6%Holland 4%US 8% 31 December 2006 UK 54%Portugal 14%Italy 5%Germany 7%CDO 5% Holland 3%US 12% 31 March 2006 UK 35%Portugal 17%Italy 6%Germany 3%CDO 11%Holland 10%US 18% A breakdown of the Company's investment portfolio by asset type (by reference tounderlying asset collateral) is set out below. Adjusted 31 March 2007* Prime 35%SME 16%CDO 7%SubPrime 23%NearPrime 9% *Adjusted to reflect asset sales post year end and assetpaydowns between 31 March 2007 and 31 May 2007. 31 March 2007 Prime 30%SME 13%CDO 6%SubPrime 31%NearPrime 20% 31 December 2006 Prime 24%SME 9%CDO 5%SubPrime 38%NearPrime 24% 31 March 2006 Prime 25%SME 9%CDO 11%SubPrime 34%NearPrime 21% Financing The Company's leverage as at 31 March 2007 was 25.9% (17.9% as at 31 March2006). Inclusive of proceeds from the asset sales that have taken place since 31March 2007, the Company's cash balance has increased to approximately Euro 53.7million and leverage has been reduced to approximately 6.6% as at 31 May 2007.While financing is currently provided through uncommitted repo facilities, theCompany is in the process of negotiating longer-term financing of its investmentportfolio. While longer-term facilities will increase the Company's financingcosts, we believe that the increased costs of a long-term committed facility arejustified and that such facilities will enable the Company to reduce refinancingrisk. Strategy and Market Outlook Cheyne Capital remains committed to creating a diversified portfolio ofasset-backed residuals. While the Company's investment portfolio was largelycomprised of mortgage-backed residuals at the time of its IPO, the portfolio hassince been diversified into additional asset classes such as SMEs. In the UK, we expect that the flow of mortgage-backed residuals will continueunabated as more non-conforming mortgage originators enter the market. Webelieve that the increased competition in the mortgage market that will result,and the evolution of the UK mortgage market generally, will produce new UKresidual positions that will be markedly different from the positions now ownedby the Company in terms of both credit and pricing. We will seek to purchasethese assets for the Company only where the credit and prepayment risks of theposition are accurately reflected in pricing. Despite changes to legislation that have affected prepayment charges in Portugaland Italy, we expect the pricing of European prime mortgage residuals to remainaggressive. We do not expect to add positions in this sector in the near future.We will also remain cautious towards the US mortgage residual market untilpricing more appropriately reflects the risk of the underlying loan collateral. Within the ABS CDO sector, transactions have undergone a fundamental re-pricingin light of the concerns regarding US sub-prime mortgages and, in particular,those containing material exposure to 2006 vintage transactions. This has leftthe market with a technical oversupply of a broad range of CDO equity positions,including transactions beyond the mortgage sector. While this may create anattractive investment opportunity in time, these positions are currently subjectto a high degree of price volatility. We will consider making selectiveinvestments in this sector once the market has stabilised. As originationvolumes in European CDOs are expected to increase, these assets may also providean opportunity for further diversification of the Company's investmentportfolio. The Company's SME residual positions have performed in line with or better thanour pricing cases and we continue to favour this asset class. We will lookincreasingly at sourcing these residuals by dealing directly with originators. We are very disappointed with the results for the financial year. While theCompany faced an unprecedented and extraordinary combination of market events inthe final quarter, the securitisation market remains robust and we believe thatthe Company's strategy of investing primarily in ABS residual positions remainsviable. We will look to further diversify the Company's residual portfolio byadding new asset classes. We will also look to enhance the investment portfolioby adding new ABS and other investments offering attractive returns. Cheyne Capital Management (UK) LLP25 June 2007Directors' Report The Directors present their annual report and the audited consolidated financialstatements for the year ended 31 March 2007. Queen's Walk Investment Limited (the "Company") was registered on 6 September2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands,and commenced its operations on 8 December 2005. The Company is a closed-endedinvestment company with limited liability formed under The Companies (Guernsey)Law, 1994 and its Ordinary Shares are listed on the London Stock Exchange. Theregistered office of the Company is Dorey Court, Admiral Park, St Peter Port,Guernsey, GY1 3BG, Channel Islands. "Group" is defined as the Company and itssubsidiary, Trebuchet Finance Limited. Principal activity and business review The principal activity of the Group during the year was that of an investmentcompany. The Group is expecting to continue its activities in the coming year. Areview of the year is provided in the Investment Manager's Report. Results and dividends The results for the year and the Group's financial position at the end of theyear, are shown on pages 24 to 26. Dividends totalling Euro 40,214,548 were paid/declared during the year, included in this amount is the third interim dividendof Euro 9,342,774, which was paid on 9 April 2007. A fourth interim dividend forthe year ended 31 March 2007 of (Euro 0.x) per share was declared by theDirectors on 25 June 2007 and has not been included as a liability in thesefinancial statements. While these accounts reflect a net loss after realised losses and fair valueadjustments, the Directors have declared a fourth interim dividend in seeking tofulfil the Company's objective of providing shareholders with stable returns inthe form of quarterly dividends and in accordance with the Company's dividendpolicy. The dividend declared is covered by income received from underlyinginvestments and the Company has sufficient reserves (in the form of the OtherReserve) from which the dividend may be paid. (See note 7 to the financialstatements for further information.) Directors The Directors of the Company who served during the year were: Tom Chandos (Chairman)Stuart FiertzGraham HarrisonJohn HawkinsTalmai MorganChristopher Spencer The Directors' interests in the share capital of the Company at 31 March 2007(some of which are held directly or by entities in which the Directors may havea beneficial interest) were: Number of Ordinary SharesTom Chandos (Chairman) 19,000Stuart Fiertz 200,000Talmai Morgan 1,000Christopher Spencer 1,000Graham Harrison 1,000John Hawkins 1,000 Substantial interests in share capital As at 30 May 2007 the following holdings representing more than 3 per cent ofthe Company's issued share capital had been reported: Number of Ordinary Percentage Shares heldCheyne ABS Opportunities Fund LP 17,900,756 44.07%WestLB AG 2,700,000 6.65%Goldman Sachs Securities (Nominees) Limited 2,275,700 5.60%State Street Nominees Limited (re account OM02) 2,009,852 4.95%State Street Nominees Limited (re account WJC2) 1,495,500 3.68% The Investment Manager The Directors have reviewed the performance of the Investment Manager and aresatisfied that the continued appointment of the Investment Manager on the termsagreed is in the best interests of the shareholders and the Company. Auditors Following the transfer of their business to Deloitte & Touche LLP with effect on1 October 2006, Deloitte & Touche resigned as auditors on 5 March 2007 and theDirectors resolved to appoint their successors Deloitte & Touche LLP as auditorswith effect from that date. A resolution for the reappointment of Deloitte &Touche LLP as auditors will be proposed at the forthcoming Annual GeneralMeeting. Listing Requirements On 13 December 2005 the Company's Ordinary Shares were admitted to the OfficialList of The London Stock Exchange. Authorised and Issued Share Capital There has been no movement in the authorised and issued share capital during theyear. On behalf of the Board on 25 June 2007 Christopher Spencer Director Talmai MorganDirector Corporate Governance Statement The Directors are committed to ensuring that high standards of corporategovernance are maintained and have made it Company policy to comply with bestpractice on corporate governance, insofar as the Directors believe it isrelevant and appropriate to the Company, and notwithstanding the fact that theCompany is not obliged to and has availed itself of the exemption not to complywith the "Combined Code" (i.e. the Code of Best Practice published by theCommittee on the Financial Aspects of Corporate Governance) as it is a Guernseyregistered company. However the Company complies with the corporate governance guidelines issued bythe Guernsey Financial Services Commission on 10 December 2004, whose underlyingprinciples are similar to those of the Combined Code. In addition, theDirectors, in accordance with best practice, comply with the Combined Codeprovisions as far as possible. Going Concern The Directors believe it is appropriate to adopt the going concern basis inpreparing the financial statements as, after due consideration, the Directorsconsider that the Company has adequate resources to continue in operationalexistence for the foreseeable future. Board effectiveness For the purposes of assessing compliance with the Combined Code, the Boardconsiders all of the Directors, other than Mr Fiertz, as independent of theInvestment Manager and free from any business or other relationship that couldmaterially interfere with the exercise of their independent judgement. In accordance with the Combined Code, the Board has established an AuditCommittee and a Nomination Committee, in each case with formally delegatedduties and responsibilities within written terms of reference. The Board has notestablished a remuneration committee as the Company has no executive directorsor employees. The Audit Committee is chaired by Mr Spencer and its other members are Mr Morganand Mr Hawkins. Only independent Directors serve on the Audit Committee andmembers of the Audit Committee have no links with the Company's externalauditors and are independent of the Investment Manager. The terms of referencestate that the Audit Committee will meet not less than twice a year and willmeet the external auditors at least once a year, without the non-independentdirector present. The Audit Committee is responsible for overseeing the Company's relationshipwith the external auditors, including making recommendations to the Board on theappointment of the external auditors and their remuneration. The Audit Committeeis required to consider the nature, scope and results of the auditors' work andreviews, and develop and implement policy on the supply of any non-auditservices that are to be provided by the external auditors. It receives andreviews reports from the Investment Manager and the Company's external auditorsrelating to the Company's annual report and accounts. The Audit Committeefocuses particularly on compliance with legal requirements, accounting standardsand the Listing Rules and ensuring that an effective system of internalfinancial and non-financial controls is maintained. The Company does not have aninternal audit function but due to internal control processes put in place bythe Administrator, Sub-Administrator, Custodian and Investment Manager, theBoard has decided to place reliance on their systems and internal controlprocedures. The Nomination Committee is chaired by Mr Chandos and its other members are MrMorgan and Mr Spencer. The members of the nomination committee are and will beindependent Directors. The terms of reference state that the NominationCommittee will meet not less than once a year, will have responsibility forconsidering the size, structure and composition of the Board, and retirementsand appointments of additional and replacement Directors and that the NominationCommittee will make appropriate recommendations to the Board. The following table shows the number of meetings held by the Board and eachcommittee for the year ended 31 March 2007 as well as the number of attendancesat each meeting. Number of meetings Number of attendancesBoard of DirectorsTom Chandos 4 4Stuart Fiertz 4 4Talmai Morgan 4 3Christopher Spencer 4 3Graham Harrison 4 4John Hawkins 4 4 Number of meetings Number of attendancesAudit CommitteeTalmai Morgan 2 2Christopher Spencer 2 2John Hawkins 2 2 Given the relatively short operating history of the Company, there were noNomination Committee meetings held during the year. The holders of the position of the Chairman of the committees referred to abovewill be reviewed on an annual basis. The membership of these committees andtheir terms of reference will be kept under review. The performance of theChairman of the Board will be assessed by another of the independent Directorsthrough discussions with the other Directors. The Company has appointed M:Communications as public relations consultant andCitigroup and Goldman Sachs as corporate brokers. From these parties and theInvestment Manager, the Board expects to be informed of the views of theCompany's major shareholders. Internal Controls The Directors acknowledge that they are responsible for establishing andmaintaining the Company's system of internal control and reviewing itseffectiveness. The Directors review not just internal controls but all controlsincluding operations, compliance and risk management. The key proceduresestablished to provide internal control are: Investment management is provided by Cheyne Capital Management (UK) LLP. TheBoard is responsible for setting the overall investment policy and monitors theactions of the Investment Manager at regular Board meetings. Administration andcompany secretarial services are provided by Kleinwort Benson (Channel Islands)Fund Services Limited. The Sub-Administrator to which certain functions aredelegated is Investors Fund Services (Ireland) Limited. Custody of assets isundertaken by Investors Trust & Custodial Services (Ireland) Limited. Regularcompliance reports are received by the Board. The Directors of the Company clearly define the duties and responsibilities oftheir agents and advisers, whose appointments are made by the Board after dueconsideration. The Board monitors the ongoing performance of such agents andadvisers. Each of the above agents and advisers maintain their own systems ofinternal control on which they report to the Board. The systems are designed toensure effectiveness and efficient operation, internal control and compliancewith laws and regulations. In establishing the systems of internal control,regard is paid to the materiality of relevant risks, the likelihood of costsbeing incurred and costs of control. It follows, therefore, that the systems ofinternal control can only provide reasonable but not absolute assurance againstthe risk of material misstatement or loss. Directors' Remuneration Report This report describes how the Board has applied the Principles of GoodGovernance relating to Directors' remuneration. A resolution to approve thereport will be proposed at the Annual General Meeting of the Company at whichthe financial statements will be presented for approval. Each of the Directors has signed a letter of appointment with the Companysetting out the terms of their appointment. The Chairman will receive an annualfee of Euro 120,000 and each of Mr Morgan, Mr Spencer, Mr Harrison and MrHawkins will receive an annual fee of Euro 30,000, in each case payablequarterly in equal instalments in arrears. Mr Fiertz will not receive a fee forthe performance of his duties as a member of the Board. The Company has not established a Remuneration Committee as the Company does nothave any executive Directors or employees. The total amounts for the Directors'remuneration for the year were as follows: Year ended Period from 31 March 6 September 2007 2005 to 31 March 2006 Euro EuroTom Chandos 120,000 67,824Graham Harrison 30,000 16,957John Hawkins 30,000 16,957Talmai Morgan 30,000 16,957Christopher Spencer 30,000 16,957Total Directors' 240,000 135,652emoluments During the year, Talmai Morgan and Graham Harrison each received Euro 12,500 intheir capacity as directors of Trebuchet Finance Limited. Statement of Directors' Responsibilities The Directors are responsible for preparing financial statements for eachfinancial year which give a true and fair view of the state of affairs of theGroup as at the end of the financial reporting period and of the profit and lossof the Group for that period in accordance with International FinancialReporting Standards and which are in accordance with applicable laws. Inpreparing those financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable and prudent; • state whether applicable accounting standards have been followed; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business. The Directors are responsible for keeping proper accounting records whichdisclose with reasonable accuracy at any time the financial position of theCompany and to enable them to ensure that the financial statements have beenproperly prepared in accordance with The Companies (Guernsey) Law, 1994. Theyare also responsible for safeguarding the assets of the Company and hence fortaking reasonable steps for the prevention and detection of fraud and otherirregularities. Independent auditors' report to the members of Queen's Walk Investment Limited We have audited the consolidated financial statements of Queens' Walk InvestmentLimited (the "financial statements") for the year ended 31 March 2007 whichcomprise the Consolidated Income Statement, Consolidated Statement of Changes inShareholders' Equity, Consolidated Balance Sheet, Consolidated Cash FlowStatement and related notes 1 to 20. These financial statements have beenprepared under the accounting policies set out therein. This report is made solely to the Company's members, as a body, in accordancewith Section 64 of The Companies (Guernsey) Law, 1994. Our audit work has beenundertaken so that we might state to the Company's members those matters we arerequired to state to them in an Auditors' Report and for no other purpose. Tothe fullest extent permitted by law, we do not accept or assume responsibilityto anyone other than the Company and the Company's members as a body, for ouraudit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and Auditors The Directors' responsibilities for preparing the annual report and thefinancial statements in accordance with International Financial ReportingStandards and applicable Guernsey law are set out in the statement of Directors'Responsibilities. Our responsibility is to audit the financial statements in accordance withrelevant Guernsey legal and regulatory requirements and International Standardson Auditing (UK and Ireland). We report to you our opinion as to whether the financial statements give a trueand fair view in accordance with the International Financial Reporting Standardsand whether the financial statements have been properly prepared in accordancewith The Companies (Guernsey) Law, 1994. We also report to you if, in ouropinion, the Directors' report is not consistent with the financial statements,if the Company has not kept proper accounting records, or if we have notreceived all the information and explanations we require for our audit. We read the other information accompanying the financial statements and considerwhether it is consistent with those statements. The other information comprisesonly the Chairman's Statement, Investment Manager's Report, Directors' Report,the Corporate Governance Statement and the Directors' Remuneration Report. Weconsider the implications for our report if we become aware of any apparentmisstatements or material inconsistencies with the financial statements. Ourresponsibilities do not extend to any other information. Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing(UK and Ireland) issued by the Auditing Practices Board. An audit includesexamination, on a test basis, of evidence relevant to the amounts anddisclosures in the financial statements. It also includes an assessment of thesignificant estimates and judgements made by the Directors in the preparation ofthe financial statements, and of whether the accounting policies are appropriateto the Group's circumstances, consistently applied and adequately disclosed. Weare not required to review any Corporate Governance disclosures required by TheListing Rules of the Financial Services Authority as the Company has availeditself of an exemption, as an overseas company, from the requirement to publisha statement of compliance with The Combined Code. We planned and performed our audit so as to obtain all the information andexplanations which we considered necessary in order to provide us withsufficient evidence to give reasonable assurance that the financial statementsare free from material misstatement, whether caused by fraud or otherirregularity or error. In forming our opinion we also evaluated the overalladequacy of the presentation of information in the financial statements. Opinion In our opinion the financial statements give a true and fair view in accordancewith International Financial Reporting Standards of the state of the Group'saffairs as at 31 March 2007 and of the Group's loss for year ended 31 March 2007and have been properly prepared in accordance with The Companies (Guernsey) Law,1994. Deloitte & Touche LLPChartered AccountantsGuernsey, Channel IslandsDate: 25 June 2007 Neither an audit nor a review provides assurance on the maintenance andintegrity of the website, including controls used to achieve this, and inparticular whether any changes may have occurred to the financial informationsince first published. These matters are the responsibility of the Directors butno control procedures can provide absolute assurance in this area. Legislation in Guernsey governing the preparation and dissemination of financialinformation differs from legislation in other jurisdictions. Consolidated Income StatementFor the year ended 31 March 2007 Total Total Period from Revenue Fair value Year ended 31 6 September return gains and March 2007 2005 to 31 Note losses* March 2006 Euro Euro Interest income 4 66,955,077 - 66,955,077 13,862,617 Gains and losses 4 on fair valuethrough profit orloss financialinstruments* - (115,366,947) (115,366,947) (1,382,130) 66,955,077 (115,366,947) (48,411,870) 12,480,487 Operating expenses 5 (11,522,135) - (11,522,135) (2,455,408) Finance costs 6 (7,813,593) - (7,813,593) (260,052) Net (loss)/profit 47,619,349 (115,366,947) (67,747,598) 9,765,027 (Loss)/earningsper Ordinary Share 8Basic Euro (1.67) Euro 0.24Diluted Euro (1.67) Euro 0.24 Weighted averageOrdinary Sharesoutstanding 8 Number NumberBasic 40,620,756 40,620,756Diluted 40,620,756 41,063,527 All items in the above statement are derived from continuing operations.All income is attributable to the Ordinary Shareholders of the Company.The accompanying notes form an integral part of the financial statements. * See note 7 to the financial statements. Consolidated Statement of Changes in Shareholders' EquityFor the year ended 31 March 2007 Share Share Other Capital Accumulated Total Capital Premium Reserve Reserve Profits Note Euro Euro Euro Euro Euro EuroNet profit for the - - - - 9,765,027 9,765,027period sinceincorporationTotal recognised income - - - - 9,765,027 9,765,027and expense Issuance of 16,17 - 406,207,540 - - - 406,207,540OrdinaryShares Share options 16,19 - - - 7,672,500 - 7,672,500issued Costs related 17 - (21,575,951) - - - (21,575,951)to issuance ofOrdinaryShares Cancellation 17 - (384,631,589) 384,631,589 - - -of sharepremium Balance at 31 March - - 384,631,589 7,672,500 9,765,027 402,069,1162006 Net loss for the - - - - (67,747,598) (67,747,598)yearTotal recognised income - - - - (67,747,598) (67,747,598)and expense Overaccrual of - - 46,715 - - 46,715costs related toissuance ofOrdinary Shares Distribution to 7 - - - - (40,214,548) (40,214,548)the OrdinaryShareholders ofthe Company Balance at 31 March - - 384,678,304 7,672,500 (98,197,119) 294,153,6852007 The accompanying notes form an integral part of the financial statements. Consolidated Balance SheetAs at 31 March 2007 Note 31 March 31 March 2007 2006 Euro EuroNon-current assetsInvestments at fair value through profit or loss 10 366,743,454 487,890,499 Current assetsCash and cash equivalents 18 22,026,122 -Derivative financial assets - unrealised gain on 12 5,330 680,569forward exchange contracts Derivative financial assets - unrealised gain on 12 2,174,398 -interest rate swap agreementsOther assets 11 36,155,394 5,271,493 60,361,244 5,952,062 Total assets 427,104,698 493,842,561 Equity and liabilities EquityShare capital 16 - -Share premium account 17 - -Other reserve 17 384,678,304 384,631,589Capital reserve in respect of share options 7,672,500 7,672,500Accumulated (losses)/profits (98,197,119) 9,765,027 294,153,685 402,069,116Current liabilitiesOverdraft and repurchase agreements 13 119,773,090 88,880,531Distribution payable 7 9,342,774 -Derivative financial liabilities - unrealised 12 505,439 -loss on forward exchange contractsOther liabilities 15 3,329,710 2,892,914Total liabilities 132,951,013 91,773,445 Total equity and liabilities 427,104,698 493,842,561 The accompanying notes form an integral part of the financial statements.These financial statements were approved by the Board of Directors on 25 June2007. Signed on behalf of the Board of Directors by: Christopher Spencer Director Talmai MorganDirector Consolidated Cash Flow StatementFor the year ended 31 March 2007 Note Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 (restated - see Note 1) Euro EuroNet cash inflow/(outflow) from operating 18 21,941,079 (302,177,060)activities Financing activitiesProceeds from issuance of Ordinary Shares - 227,199,980Overaccrual/(costs) related to issuance of 46,715 (13,903,451)OrdinarySharesNet borrowings under repurchase agreements 44,745,299 75,027,791Dividends paid to shareholders 7 (30,871,774) -Cash flows from financing activities 13,920,240 288,324,320 Net increase/(decrease) in cash 35,861,319 (13,852,740) Reconciliation of net cash flow to movementin net cashNet increase/(decrease) in cash and cash 35,861,319 (13,852,740)equivalentsCash and cash equivalents at start of year/ (13,852,740) -periodEffect of exchange rate fluctuations on 17,543 -cash and cashequivalentsCash and cash equivalents at end of year/ 22,026,122 (13,852,740)period The accompanying notes form an integral part of the financial statements. 1. General information Queen's Walk Investment Limited (the "Company") was registered on 6 September2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands.The Company commenced its operations on 8 December 2005. The Company is aclosed-ended investment company with limited liability formed under TheCompanies (Guernsey) Law, 1994 and its Ordinary Shares are listed on the LondonStock Exchange. The registered office of the Company is Dorey Court, AdmiralPark, St Peter Port, Guernsey, GY1 3BG, Channel Islands. "Group" is defined asthe Company and its subsidiary. At 31 March 2007, the Company's only subsidiarywas Trebuchet Finance Limited. The Company's investment objective is to preserve capital and provide stablereturns to Shareholders in the form of quarterly dividends. It seeks to achievethis by investing primarily in a diversified portfolio of tranches ofasset-backed securities ("ABS") where the Investment Manager considers that thecoupon or cash flows on the tranche are attractive relative to the underlyingcredit. These are and will be, in most cases, below investment grade or unratedand do or will, in many cases, represent the residual income positions typicallyretained by the originator of a securitisation transaction as the "equity" or"first loss" position. The Group's investment management activities are managed by its InvestmentManager, Cheyne Capital Management (UK) LLP (the "Investment Manager"), aninvestment management firm authorised and regulated by the Financial ServicesAuthority. The Company has entered into an Investment Management Agreement (the"Investment Management Agreement") under which the Investment Manager managesits day-to-day investment operations, subject to the supervision of theCompany's Board of Directors. The Company has no direct employees. For itsservices, the Investment Manager receives a monthly management fee (whichincludes a reimbursement of expenses) and a quarterly performance-related fee.The Company has no ownership interest in the Investment Manager. The Company isadministered by Kleinwort Benson (Channel Islands) Fund Services Limited (the"Administrator"). Investors Fund Services (Ireland) Limited provide certainadministration services to the Company in its capacity as sub-administrator. At the date of authorisation of these financial statements, the followingStandard, which has not been applied in these financial statements, was in issuebut not yet effective: IFRS 7 Financial Instruments: Disclosures; and the related amendment to IAS 1 oncapital disclosures. The Directors anticipate that the adoption of the above Standard in futureperiods will not have a material impact on the financial statements of theCompany and Group except for additional disclosures on capital and financialinstruments when the Standard comes into force for periods commencing on orafter 1 January 2007. The Directors believe that other pronouncements which are in issue but not yetoperative or adopted by the Company will not have a material impact on thefinancial statements of the Company. The comparative period figures disclosed relate to the period from incorporation(6 September 2005) to 31 March 2006. The comparative period cash flow statement has been restated to exclude theinvestments that were acquired in an equity settled transaction as disclosed inthe Initial ABS Portfolio section of note 19. This restatement in theConsolidated Cash Flow Statement and in note 18 reduces the proceeds fromissuance of Ordinary Shares and the purchase of investments and swap agreementsby Euro 179,007,560. The comparative cash flow statement has also been restatedto reclassify the net borrowings under repurchase agreements of Euro 75,027,791from net cash inflow/(outflow) from operating activities to cash flows fromfinancing activities. 2. Significant accounting policies Statement of compliance The financial statements of the Group 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") that remain in effect, together withapplicable legal and regulatory requirements of Guernsey Law and the ListingRules of the UK Listing Authority. Basis of preparation The Financial Statements of the Group are prepared under International FinancialReporting Standards on the historical cost or amortised cost basis except thatthe following assets and liabilities are stated at their fair value: derivativefinancial instruments, financial instruments held for trading and financialinstruments classified or designated as fair value through profit or loss. The majority of the Company's investments are financial instruments that areclassified as fair value through profit or loss. Where bid prices are notavailable from a third party in a liquid market, the fair value of the financialinstrument is estimated using pricing models incorporating discounted cash flowtechniques. These pricing models apply assumptions regarding asset-specificfactors and economic conditions generally, including delinquency rates,prepayment rates, default rates, maturity profiles, interest rates and otherfactors that may be relevant to each financial asset. Where such pricing modelsare used, assumptions are reviewed and updated on the basis of actualperformance data as it is received and on the basis of market conditions as atthe balance sheet date. See notes 2 - Fair Value and Interest Income, note 3 -Critical accounting judgements and key sources of estimation uncertainty andnote 14 - Residual Interest Risk for further information regarding assumptionsand critical judgements. These financial statements are presented in Euros because that is the currencyof the primary economic environment in which the Group operates. The functionalcurrency of the Group is also considered to be Euros. Basis of consolidation Subsidiaries are entities controlled by the Company (note 9). The financialstatements of subsidiaries are included in the consolidated financial statementsfrom the date that control commences until the date that control ceases. At 31March 2007, the Group is made up of the Company and its only subsidiary,Trebuchet Finance Limited. In accordance with the Standing Interpretations Committee Interpretation 12"Consolidation-Special Purpose Entities" ("SIC 12"), the Company consolidatesonly entities over which control is indicated by activities, decision making,benefits and residual risks of ownership. In accordance with SIC 12 the Companydoes not consolidate an SPE in which it holds less than a substantial interestin the residual income position. Where it holds more than a substantialinterest, it does not consolidate the SPE where the residual income positionrepresents only a small part of the gross assets of the SPE and the Company wasneither involved in the establishment of the SPE or the origination of theassets owned by the SPE, on the basis that the Company is not exposed to themajority of the risks and benefits of the assets owned by the SPE, providedcontrol is not otherwise indicated by the Company's activities, decision making,benefits and residual risks or ownership. Trebuchet Finance Limited, the Company's only subsidiary, is an SPE over whichthe Company exercises control and its financial statements are thereforeincluded in the consolidated financial statements of the Company. The Companydoes not consolidate any of the SPEs in which it holds a residual incomeposition as it is not exposed to the majority of the risks and benefits of theassets owned by the relevant SPEs and does not control any of them. Investments Investments in residual interests are recognised initially at their acquisitioncost (being fair value at acquisition date) as debt securities. Thereafter theyare re-measured at fair value and are designated as fair value through profit orloss investments in accordance with the Amendment to International AccountingStandard 39 ("IAS 39") Financial Instruments: Recognition and Measurement-TheFair Value Option, as the Company is an investment company whose business isinvesting in financial assets with a view to profiting from their total returnin the form of interest and changes in fair value. Financial assets classified as at fair value through profit or loss arerecognised/derecognised by the Group on the date it commits to purchase/sell theinvestments in regular way trades. Cash and cash equivalents Cash and cash equivalents includes amounts held in interest bearing accounts andoverdraft facilities. Derivative financial instruments Derivative financial instruments used by the Group to hedge its exposure toforeign exchange and interest rate risks arising from operational, financing andinvestment activities that do not qualify for hedge accounting are accounted foras trading instruments. The Group may also enter into credit default or totalreturn swap arrangements where the underlying asset or assets would otherwise bewithin the Group's investment policy in order to obtain substantially the sameeconomic exposure to the returns and risks associated with holding suchunderlying asset or assets. Derivative financial instruments are recognised initially at fair value.Subsequent to initial recognition, derivative financial instruments are statedat fair value. The gain or loss on remeasurement to fair value is recognisedimmediately in the income statement. Fair value of forward exchange contracts is their quoted market price at thebalance sheet date, being the present value of the quoted forward price. Thechange in value is recorded in net gains/(losses) in the income statement.Realised gains and losses are recognised on the maturity of a contract, or whena contract is closed out and they are transferred to realised gains or losses inthe income statement. The fair value of interest rate swaps is the estimated amount that the Groupwould receive or pay to terminate the swap at the balance sheet date, takinginto account current interest rates and the current creditworthiness of the swapcounterparties. Total return swap agreements and credit default swap agreements are fair valuedon the date of valuation based upon the underlying market value of the referenceasset using the approach explained under fair value. The change in value isrecorded in net gains/(losses) in the income statement. Realised gains andlosses are recognised on the maturity of a contract, or when a contract isclosed out and they are transferred to realised gains or losses in the incomestatement. Fair value All financial assets carried at fair value are initially recognised at fairvalue and subsequently re-measured at fair value based on bid prices where suchbids are available from a third party in a liquid market. If bid prices areunavailable, the fair value of the financial asset is estimated using pricingmodels incorporating discounted cash flow techniques. These pricing models applyassumptions regarding asset-specific factors and economic conditions generally,including delinquency rates, prepayment rates, default rates, maturity profiles,interest rates and other factors that may be relevant to each financial asset. With regard to residual income positions, historical performance and observablemarket data is analysed to determine the average level of these factors andtheir volatility over time. These assumptions are typically derived by referenceto the historical delinquencies, defaults, recoveries and prepayments actuallyrealised by the originator of the underlying assets and any empirical dataavailable that may be available in respect of any of these factors for theparticular asset class. The carrying value of a residual income position at any given measurement dateafter the Group's initial acquisition of the asset reflects repayments ofprincipal in accordance with the effective interest method. This revisedcarrying value (adjusted to account for the accrual of interest and principalpaydowns) is subject to further adjustment on the basis of market conditions andother factors that are likely to affect the fair value of the asset. Whereactual performance data regarding defaults, delinquencies and prepaymentsreceived in respect of a given asset is markedly different from the default,delinquency and prepayment assumptions incorporated in the pricing model for theasset, the assumptions are revised to reflect this data and the pricing model isupdated accordingly. In addition to the actual performance data observed inrespect of a particular asset, market factors are also taken into account withinthe model. Dealer marks (where available) and any other available indicators areassessed to determine whether or not the market is attributing higher or lowerdefault, delinquency or prepayment expectations to similar assets in determiningwhether or not the assumptions incorporated in the pricing model remainreasonable. Where the fair value of the investment is written down due tochanges in assumptions and expected cash flows, the change in the fair value istaken to the income statement following the reassessment of the cash flowsdiscounted at the current market rate estimated for the investment. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported withinassets and liabilities when there is a legally enforceable right to set off therecognised amounts and there is an intention to settle on a net basis, orrealise the asset and settle the liability simultaneously. Repurchase agreements The Group may finance the acquisition of some of its investments through the useof repurchase agreements. Repurchase agreements are treated as collateralisedfinancing transactions and are carried at their contractual amounts, includingaccrued interest, as specified in the respective agreements. Accrued interest isrecorded as a separate line item on the balance sheet. Derecognition of a financial asset A transfer of a financial asset is accounted for as a derecognition only ifsubstantially all of the asset's risks and rewards of ownership are transferredor control is transferred in the event that not substantially all of the asset'srisks and rewards of ownership are transferred. However, if substantially all ofthe risks and rewards are retained, the asset is not derecognised. Control istransferred if the transferee has the practical ability to sell the assetunilaterally without needing to impose additional restrictions on the transfer. Interest-bearing loans and borrowings Interest-bearing borrowings are recognised initially at fair value lessattributable transaction costs. Subsequent to initial recognition,interest-bearing borrowings are stated at amortised cost with any differencebetween cost and redemption value being recognised in the income statement overthe period of the borrowings on an effective interest basis. Financing costsassociated with the issuance of financings are deferred and amortised over theterm of the financings using the effective interest rate method, in line withmarket practice. Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated toEuro at the foreign exchange rate ruling at that date. Foreign exchangedifferences arising on translation are recognised in the income statement.Non-monetary assets and liabilities that are measured in terms of historicalcost in a foreign currency are translated using the exchange rate at the date oftransaction. Non-monetary assets and liabilities denominated in foreigncurrencies that are stated at fair value are translated to Euro at foreignexchange rates ruling at the dates the fair value was determined. Transaction expenses The preliminary expenses of the Company directly attributable to its initialpublic offering and any costs associated with the establishment of the Companyare charged to the share premium or other reserve account. Share options granted to the Investment Manager are treated as a transactionexpense on the basis that they are granted by the Company as a fee for theInvestment Manager's work in raising capital for the Company. The fair value ofsuch options is charged to the share premium account. The share premium accountis credited with the fair value of such options at the time that such optionsare vested. Interest income Interest income is accrued based on the fair value of the Group's financialassets and their contractual terms. Interest income is accrued over theprojected lives of the investments using the effective interest method asdefined under International Accounting Standard 39. Where the Group adjusts itsexpected cash flow projections to take account of any change in underlyingassumptions, such adjustments are recognised in the income statement byreflecting changes in a revised amortised cost value of the investment andapplying the original effective interest rate to this revised amortised costvalue for the purposes of calculating future income. Taxation The Company is a tax-exempt Guernsey limited company. Accordingly, no provisionfor income taxes is made. Trebuchet Finance Limited is a "qualifying company"within the meaning of section 110 of the Irish Taxes Consolidation Act 1997 andaccordingly its taxable profits are subject to tax at a rate of 25 per cent.Payments under the Participation Note are paid gross to the Company and theincome portion of such payments is deductible by Trebuchet Finance Limited.Consequently, Trebuchet Finance Limited has a minimal amount of taxable income.The activities of Trebuchet Finance Limited are exempt for Value Added Tax (VAT)purposes under the VAT Act of 1972. Other receivables Other receivables do not carry any interest and are short-term in nature and areaccordingly stated at their nominal value as reduced by appropriate allowancesfor estimated irrecoverable amounts. 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. Business and geographical segments The Directors are of the opinion that the Company is engaged in a single segmentof business of investing in debt securities and operates solely from Guernseyand therefore no segmental reporting is provided. 3. Critical accounting judgements and key sources of estimation uncertainty In the process of applying the Group's accounting policies (described in note 2above), the Company has determined that the following judgements and estimateshave the most significant effect on the amounts recognised in the financialstatements: Income recognition The Group invests primarily in a diversified portfolio of residual incomepositions, being the subordinated tranches of asset-backed securities ("ABS").ABS are securities that are typically backed by consumer finance receivables(such as mortgage loans) and commercial loans and receivables (includingcommercial mortgage loans and loans to small-and-medium sized enterprises).Residual income positions are typically unrated or rated below investment gradeand are often referred to as the "equity" or "first loss" position of asecuritisation transaction. Unlike a more conventional debt instrument and the more senior tranches of ABS(which generally hold the rights to fixed levels of income), the cash flowprofile of a residual income position does not generally include a contractuallyestablished schedule of fixed payments divided between interest and principal.Instead, the cash flows generally vary over time, and the periodic cash flowsassociated with a residual income position may include a significant element ofprincipal repayment as well as income payments. Where the cash payments generated by residual income positions do not typicallyfollow the pattern of a standard cash-pay debt instrument (in that there is nota constant level of income in each period followed by a repayment of theprincipal amount at maturity), a given cash payment received in respect of aresidual income position can generally be considered to represent a combinationof the return on the investment and the repayment of some of the capitalinitially invested. As a result, the stream of expected cash flows associatedwith a particular residual income position may have an uneven payout profile, inthat the cash payment expected in one period (and the proportion of that paymentthat represents principal repayment versus interest income) may varysignificantly from the cash payments expected in other periods. The Group follows a policy of accounting for such investments at fair valuethrough profit or loss and has elected to recognise income on an effectiveinterest rate ("EIR") method in accordance with paragraph 30 of IAS 18"Revenue". Interest income is recorded based on the original EIR calculated on acquisitionfor each individual residual income position. The Group takes account ofunderlying changes in cash flows in its income recognition as soon as adversefactors are identified. Any such changes will impact the level of incomerecognised in each period. Further disclosures of key assumptions and key sources of estimation uncertaintyare set out in note 2 to the accounts under the heading "Fair Value" and note 14under the headings "Residual Interest Risk" and "Liquidity Risk". Valuation of investments As described in note 14 to the accounts, the market for subordinatedasset-backed securities, including residual income positions is illiquid andregular traded prices are generally not available for such investments. There isno active secondary market in residual income positions and, further, there isno industry standard agreed methodology to value residual income positions. In accordance with the Company's accounting policies, fair value of financialassets is based on quoted bid prices where such bids are available from a thirdparty in a liquid market. Where quoted bid prices are unavailable, the fairvalue of the financial asset is estimated by reference to a pricing model thatincorporates discounted cash flow techniques as required by IAS 39. The assumptions upon which the pricing models are based are described in note 2(Fair Value) to the accounts. Any change to assumptions surrounding the pricingmodels may result in different fair values being attributed to the investments. The fair value of the Group's investments is set out in note 10 and a furtherdescription of the risks associated with the Group's investments is provided innote 14. Given the number of individual investments and the number of individualparameters that making up each pricing model, the Group believes that it wouldbe impractical to disclose the effects of changes to each assumption in respectof each individual investment and this would not provide meaningful additionaldisclosure. A summary of the impact of changes to assumptions by reference toasset category is provided in note 14. 4. Interest income and gains and losses on fair value through profit or lossfinancial instruments Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro Euro Interest income from cash and cash 261,275 78,188equivalentsInterest income from investments at fairvalue through profit or loss 66,693,531 13,299,260Interest income from commercial paper 271 485,169Interest income 66,955,077 13,862,617 Net realised (losses)/gains from swap (1,459,293) 36,923agreementsNet realised foreign exchange gains 1,972,104 3,710,904Net realised losses on investments at fair (3,673,475) -value through profit or lossNet realised (losses)/gains on investments at (3,160,664) 3,747,827fair value through profit or loss, swaps andforeign currency Net unrealised gains on interest rate swap 2,174,398 -agreements (note 12)Net unrealised losses on investments at fair (112,310,937) (5,915,074)value through profit or lossNet unrealised (losses)/gains on foreign (2,069,744) 785,117exchangeNet unrealised losses on investments at fair (112,206,283) (5,129,957)value through profit or loss, swaps andforeign currency Gains and losses on fair value through profit (115,366,947) (1,382,180)or loss instruments 5. Operating expenses Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro EuroInvestment management, custodian andadministration feesInvestment management and incentive fee(note 19) 8,347,360 1,814,524Administration fee (note 19) 308,605 97,785Custodian fee (note 19) 109,237 29,356 8,765,202 1,941,665Other operating expensesAudit fees 130,751 54,467Non-audit fees 466,163 -Directors' fees payable to Directors ofQueen's Walk Investment Limited 240,000 135,652Directors' fees payable to Directors ofTrebuchet Finance Limited 32,527 8,500Legal fees 917,709 189,210Fees relating to corporate advisory services* 248,955 -Validation expenses 506,020 111,601Other expenses 214,808 14,313 2,756,933 513,743 Total operating expenses 11,522,135 2,455,408 The Company has no employees.* These fees were payable to Deloitte & Touche LLP. 6. Finance costs Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro EuroFinance costs arises from:Overdraft - 2,713Total return swap agreements (note 10) 1,293,615 -Repurchase agreements 6,519,978 257,339Total finance costs 7,813,593 260,052 7. Dividends Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro EuroInterim dividend for the period ended 31 9,748,981 -March 2006First interim dividend for the year ended 31 10,561,397 -March 2007Second interim dividend for the year ended 31 10,561,396 -March 2007Third interim dividend for the year ended 31 9,342,774 -March 2007Amounts recognised as distributions to equityholders in the year 40,214,548 - The third interim dividend for the year ended 31 March 2007 of Euro 9,342,774was paid on 9 April 2007. A fourth interim dividend for the year ended 31 March 2007 of 0.15 per share wasdeclared by the Directors on 25 June 2007 and has not been included as aliability in these financial statements. Under The Companies (Guernsey) Law, 1994 (the "Companies Law"), dividends can bepaid from profits available for the purpose. Following the Company's IPO, and asdescribed in note 17, the Company passed a special resolution and obtained RoyalCourt approval for the cancellation of the amount standing to the credit of itsshare premium account. The Other Reserve created on cancellation (amounting toEuro 384,678,304) is available as distributable profits for all purposespermitted by the Companies Law including the payment of dividends and buy-backof shares. Under the UKLA Listing Rules, any dividend must be covered by incomereceived from underlying investments. The Company's objective is to provide shareholders with stable returns in theform of quarterly dividends. The Company's dividend policy is to make dividenddistributions from its distributable net income subject to retaining a portionof such income as a reserve for payment in subsequent periods. While these accounts reflect a net loss after realised losses and fair valueadjustments, the dividend declared is covered by income received from underlyinginvestments as required by the Listing Rules (as reflected in the ConsolidatedIncome Statement) and the Company has sufficient reserves (in the form of theOther Reserve) from which the dividend can be paid. 8. (Loss)/earnings per share Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 Euro EuroThe calculation of the basic and dilutedearnings per share is based on the followingdata:(Loss)/earnings for the purposes of basicearnings per share being net profitattributable to equity holders (67,747,598) 9,765,027 Weighted average number of Ordinary Shares 40,620,756 40,620,756for the purposes of basic earnings per share Effect of dilutive potential Ordinary Shares:Share options - 442,771Weighted average number of Ordinary Shares for the purposes of diluted earnings pershare 40,620,756 41,063,527 There is no dilution as at 31 March 2007, as the share price was below theoption price on that date. 9. Subsidiary Trebuchet Finance Limited was incorporated in Ireland on 19 May 2005 and,pursuant to the Articles of Association of Trebuchet Finance Limited, theCompany has the right to appoint a majority of the Board of Directors ofTrebuchet Finance Limited. Two of the Directors of the Company have beenappointed Directors of Trebuchet Finance Limited. To ensure that the Companywill be able to maintain a majority of the Board of Directors of TrebuchetFinance Limited in the future, the Company has been allotted a single share inTrebuchet Finance Limited carrying the right to appoint a majority of the Boardof Directors. Trebuchet Finance Limited was established for the sole purpose ofacquiring and holding interests in certain assets. 10. Investments The following is a summary of the Group's investments at fair value throughprofit or loss: 31 March 2007 31 March 2006 Euro Euro Asset-backed securities 349,042,564 487,890,499Total return swap agreements 17,700,890 - 366,743,454 487,890,499 31 March 2007 31 March 2006Asset-backed securities Euro Euro Opening cost 493,805,573 -Purchases 89,062,259 512,741,882Sales proceeds (88,060,953) -Realised loss (3,673,475) -Principal paydowns (60,318,527) (18,936,309)Closing cost 430,814,877 493,805,573Unrealised losses (81,772,313) (5,915,074)Asset-backed securities at fair value 349,042,564 487,890,499 On 9 August 2006, the Company's subsidiary, Trebuchet Finance Limited("Trebuchet"), entered into three total return swap transactions with CitigroupFinancial Products Inc. ("Citigroup") at a cost of Euro 54,154,588. All of thetransactions provide Trebuchet with economic ownership of the reference assetsand two of the transactions effect leverage. The transactions are summarised inthe following table. Reference Asset % of Reference Reference Servicer/ Notional Amount Asset Purchase Asset Type AdministratorReference Asset Price Posted as CollateralRMAC 2005-NS4 Plc GBP 8,970,000 50% UK Residual HomeloanResidual Mortgage ManagementCertificates and Backed LimitedMortgage Early SecuritiesRedemptionCertificatesRMAC 2005-NS3 Plc GBP 17,565,000 50% UK Residual HomeloanResidual Mortgage ManagementCertificates and Backed LimitedMortgage Early SecuritiesRedemptionCertificatesRMAC 2005-NSP2 GBP 35,330,000 100% UK Residual HomeloanPlc Residual Mortgage ManagementCertificates and Backed LimitedMortgage Early SecuritiesRedemptionCertificates The fair value of the total return swap agreements at the year end was Euro17,700,890 (gross asset value of Euro 53,093,615 net of indebtedness in theamount of Euro 35,392,725). The Group's policy is to hedge foreign exchange exposure resulting from non-Eurodenominated investments by both entering into foreign exchange hedgingarrangements and, where investments are financed, by entering into financingarrangements that are denominated in the same currencies. Unrealised foreignexchange losses are offset to the extent of net realised foreign exchange gains(as disclosed in note 4) and unrealised gains on foreign exchange contracts (asdisclosed in note 12). The currency profile of the Group's net asset positionsas at 31 March 2007 is set out in note 14. 11. Other assets 31 March 2007 31 March 2006 Euro Euro Interest receivable 10,687,357 4,777,493Amounts receivable on securities sold 25,468,037 -Margin amounts held with brokers - 494,000 36,155,394 5,271,493 The Directors consider that the carrying amount of other assets approximatestheir fair value. 12. Derivative contracts The following foreign exchange forward contracts were unsettled at 31 March2007: Maturity Date Amount Bought Amount Sold Unrealised Gain /(Loss) Euro29 June 2007 GBP 1,700,000 Euro 2,490,039 5,330 29 June 2007 Euro 172,345,570 GBP 117,600,000 (275,249) 29 June 2007 Euro 86,320,191 USD 115,600,000 (230,190) (505,439) The following foreign exchange forward contracts were unsettled at 31 March2006: Maturity Date Amount Bought Amount Sold Unrealised Gain Euro 30 June 2006 Euro 151,895,106 GBP106,000,000 594,86030 June 2006 Euro 123,390,779 USD150,000,000 85,709 680,569 On 1 December 2006, the Group entered into balance-guaranteed interest rate swapagreements with Lehman Brothers International (Europe) in respect of the cashflows associated with fixed rate mortgage loans contained in five transactionsin which the Group holds a residual income position. The notional amount of eachswap agreement is adjusted on a quarterly basis in accordance with the balanceof fixed rate mortgage loans outstanding in the relevant transaction. The termsof the interest rate swap agreements, each of which was effective from theSeptember 2006 interest payment date for each respective transaction, are setout in the table below. The aggregate fair value of these swap agreements as at31 March 2007 was Euro 2,174,398. Termination Reference Transaction Initial UnrealisedDate Notional Gain/(Loss) Amount (GBP) Euro 12 March 2008 RMAC 2005-NS1 81,999,602 -12 March 2010 RMAC 2005-NSP2 372,598,197 (353,622)12 June 2008 RMAC 2005-NS3 186,615,582 262,27012 June 2008 RMAC 2005-NS4 107,028,288 244,5881 December 2008 Newgate 2006-1 411,409,139 2,021,162 2,174,398 13. Overdraft and repurchase agreements 31 March 2007 31 March 2006 Euro Euro Net overdraft and cash equivalents - 13,852,740Repurchase agreements 119,773,090 75,027,791 119,773,090 88,880,531 Asset-backed securities totalling Euro 257,625,755 (2006: Euro 75,204,791) havebeen granted as security in relation to the repurchase agreements. The weightedaverage interest rates on the repurchase agreements as at 31 March 2007 were:Euro: 4.51% (2006: 2.91%); GBP: 6.43% (2006: 5.43%); and USD: 6.32% (2006:5.67%). The repurchase agreements outstanding at 31 March 2007 matured between10 April 2007 and 18 April 2007. 14. Financial instruments The principal risks to which the Group are exposed are market risk, interestrate risk, liquidity risk, currency risk, credit risk, prepayment andre-investment risk and residual interest risk. In certain instances as describedmore fully below, the Group will enter into derivative transactions in order tomitigate particular types of risk. Save where the Group enters into swaparrangements to gain exposure to an underlying cash asset or assets, or tocomply with asset transfer restrictions or similar legal restrictions whichprevent the Group from owning a target investment directly, derivativetransactions will only be used for the purpose of efficient portfoliomanagement. Market risk The Group's exposure to market risk is comprised mainly of movements in thevalue of its investments and changes in interest rates that either increase itscost of borrowing or, in the event the Group makes any fixed interestinvestments (which are not Primary Target Investments) in the future, maydecrease its interest income. Interest rate risk Changes in interest rates can affect the Group's net interest income, which isthe difference between the interest income earned on interest-earninginvestments and the interest expense incurred on interest-bearing liabilities.Changes in the level of interest rates also can affect, among other things, theGroup's ability to acquire loans and investments, the value of its investmentsand the Group's ability to realise gains from the settlement of such assets. The Group may enter into hedging transactions for the purposes of efficientportfolio management, where appropriate, to protect its borrowings from interestrate fluctuations. These instruments are used to hedge as much of the interestrate risk as the Investment Manager determines is in the best interests of theGroup, given the cost of such hedges. The Group may bear a level of interestrate risk that could otherwise be hedged when the Investment Manager believes,based on all relevant facts, that bearing such risks is advisable. Interest rate profile The interest rate profile at 31 March 2007 was as follows: Euro Euro Euro Fixed Floating Non-interest Weighted bearing Average Rate Investments at fair value - 366,743,454 - 13.58%through profit or lossDerivative financial assets - 2,174,398 - 7.36% - interest rate swapagreements (receive)- interest rate swap (2,174,398) - - 7.27%agreements (pay)Cash and cash equivalents - 22,026,122 - 2.73%Repurchase agreements - (119,773,090) - 6.35% The interest rate profile at 31 March 2006 was as follows: Euro Euro Euro Fixed Floating Non-interest Weighted bearing Average Rate Investments at fair value - 487,890,499 - 13.64%through profit or lossOverdraft - (13,852,740) - 5.68%Repurchase agreements - (75,027,791) - 4.24% Although investments in residual income positions have been treated as floatingrate investments in the above table, income on these investments is based on theeffective interest rate (see note 2). Given the subordinated nature of residual income positions and the fact thatmany of them do not carry a fixed or stated coupon, the Group calculates theweighted average rate of the portfolio on the basis of the fair value of eachinvestment multiplied by its effective interest rate (see note 2). Maturity profile The maturity profile at 31 March 2007 was as follows: Within one One to five Over five year years years Total Floating Floating Floating Euro Euro Euro Euro Investments at fair 366,743,454 54,125,553 12,381,829 300,236,072value through profitor lossDerivative financial 2,174,398 - 2,174,398 -assets - interestrate swap agreementsCash and cash 22,026,122 22,026,122 - -equivalentsRepurchase (119,773,090) (119,773,090) - -agreements 271,170,884 (43,621,415) 14,556,227 300,236,072 Maturity profile The maturity profile at 31 March 2006 was as follows: Within one One to five Over five year years years Total Floating Floating Floating Euro Euro Euro Euro Investments at fair value 487,890,499 - 75,273,771 412,616,728through profit or lossOverdraft and cash (13,852,740) (13,852,740) - -equivalentsRepurchase agreements (75,027,791) (75,027,791) - - 399,009,968 (88,880,531) 75,273,771 412,616,728 The maturity dates for residual income positions have been determined on thebasis of the maturity dates stated in the offering documents for the relevanttransactions. Liquidity risk The market for subordinated asset-backed securities, including residual incomepositions, is illiquid. Accordingly, many of the Group's investments areilliquid. In addition, investments that the Group purchases in privatelynegotiated (also called "over the counter" or "OTC") transactions may not beregistered under relevant securities laws or otherwise may not be freelytradable, resulting in restrictions on their transfer, sale, pledge or otherdisposition except in a transaction that is exempt from the registrationrequirements of, or is otherwise in accordance with, those laws. As a result ofthis illiquidity, the Group's ability to vary its portfolio in a timely fashionand to receive a fair price in response to changes in economic and otherconditions may be limited. Furthermore, where the Group acquires investments for which there is not areadily available market, the Group's ability to deal in any such investment orobtain reliable information about the value of such investment or risks to whichsuch investment is exposed may be limited. The Group enters into repurchase agreements, as disclosed in note 13, andasset-backed securities are granted as security in relation to these agreements.In the event the Group is unable to refinance repurchase agreements as theymature, the Group may have to sell some of its assets to repay these amounts. Currency risk The Group's accounts are denominated in Euro while investments are made andrealised in both Euro and other currencies. Changes in rates of exchange mayhave an adverse effect on the value, price or income of the investments. Achange in foreign currency exchange rates may adversely impact returns on theGroup's non-Euro-denominated investments. The Group's principal non-Eurocurrency exposures are to US dollars and pounds sterling, but this may changefrom time to time. The Group's policy is to hedge currency risk on a case by case basis. The Groupmay bear a level of currency risk that could otherwise be hedged where itconsiders that bearing such risks is advisable. Currency profile The currency profile at 31 March 2007 was as follows: Total Euro GBP USD (in Euro) (in Euro) (in Euro) (in Euro) Investments at fair 366,743,454 156,662,792 153,999,469 56,081,193value through profit orlossDerivative financial 2,174,398 - 2,174,398 -assets - interest rateswap agreementsOther assets 36,155,394 2,299,148 33,014,846 841,400Foreign exchange (500,109) 256,175,723 (170,125,450) (86,550,382)forward contractsCash and cash 22,026,122 10,788,712 9,419,899 1,817,511equivalentsRepurchase agreements (119,773,090) (4,500,000) (106,071,009) (9,202,081)Distribution payable (9,342,774) (9,342,774) - -Other liabilities (3,329,710) (2,973,530) (316,917) (39,263) 294,153,685 409,110,071 (77,904,764) (37,051,622) In the period from 10 April 2007 to 19 April 2007, the following additionalforeign exchange forward contracts were entered into: Maturity Date Amount Bought Amount Sold 29 June 2007 GBP 51,460,000 Euro 75,482,05229 June 2007 USD 49,700,000 Euro 36,874,234 The currency profile at 31 March 2006 was as follows: Total Euro GBP USD (in Euro) (in Euro) (in Euro) (in Euro) Investments at fair 487,890,499 171,020,403 175,227,971 141,642,125value through profit orlossOther assets 5,271,493 2,383,604 1,321,964 1,565,925Foreign exchange forward 680,569 275,285,885 (151,300,247) (123,305,069)contractsOverdraft and cash (13,852,740) 2,792,510 (17,196,168) 550,918equivalentsRepurchase agreements (75,027,791) (37,800,000) (13,723,244) (23,504,547)Other liabilities (2,892,914) (2,779,965) (4,784) (108,165) 402,069,116 410,902,437 (5,674,508) (3,158,813) Credit risk The Group is subject to credit risk with respect to its investments. The Groupseeks to mitigate credit risk by actively monitoring its portfolio ofinvestments and the underlying credit quality of its holdings. The Group seeksto minimise credit risk further by ensuring its investment portfolio isdiversified by asset type, geography, industry and issuer or borrower. The Groupdoes not generally intend to undertake any credit hedging activities other thanfrom time to time entering into transactions to hedge its credit exposure inrelation to individual investments. The Group's hedging transactions using derivative instruments and any creditdefault or total return swap arrangements entered into by the Group or any ofits funding vehicles may involve certain additional risks, includingcounterparty credit risk. The Group enters into derivative arrangements withcounterparties that are major financial institutions with investment gradecredit ratings and with which the Investment Manager is familiar. As a result,the Group does not anticipate that any such counterparties will fail to meettheir obligations. Prepayment and re-investment risk While the Group's valuations take into account expected levels of prepayment,the Group's investments and the assets that collateralise them may be prepaidmore quickly than expected. Prepayment rates are influenced by changes ininterest rates and a variety of economic, geographic and other factors beyondthe Group's control and consequently cannot be predicted with certainty. Thelevel and timing of prepayments made by borrowers in respect of the mortgageloans that collateralise certain of the Group's investments may have an adverseimpact on the income earned by the Group from those investments. Earlyprepayments may also give rise to increased re-investment risk with respect tocertain investments, as the Group may realise excess cash earlier than expected.If the Group is unable to reinvest such cash in a new investment with anexpected rate of return at least equal to that of the investment repaid, thismay reduce the Group's net income and, consequently, could have an adverseimpact on the Group's ability to pay dividends. Residual interest risk The majority of the Group's investments consists of interests in and/or economicexposures to limited recourse securities that are subordinated in right ofpayment and ranked junior to other securities that are secured by or representownership in the same pool of assets. In the event of default by an issuer inrelation to such investments, holders of the issuer's more senior securities areentitled to payments in priority to the Group. Some of the Group's investmentsalso have structural features that divert payments of interest and/or principalto more senior classes of securities secured by or representing ownership in thesame pool of assets when the delinquency or loss experience of the pool exceedscertain levels. This may lead to interruptions in the income stream that theGroup anticipates receiving from its investment portfolio, which may lead to theGroup having less income to distribute to Shareholders. The Group does not control the portfolios of assets underlying the ABS in whichit invests and relies on the servicers of the ABS to administer and review theportfolios. Particularly in the case of residual income positions, the actionsof the servicer, including its ability to identify and report on issuesaffecting the portfolio on a timely basis, may affect the Group's return on itsinvestments, in some cases significantly. In addition, concentration of asignificant number of the Group's investments with one servicer could affect theGroup adversely in the event that the servicer fails to fulfil its functioneffectively or at all. In the event of fraud by any entity in which the Groupinvests or by other parties involved with the entity, such as servicers or cashmanagers, the Group may suffer a partial or total loss of the amounts investedin that entity. Although holders of asset-backed securities generally have the benefit of firstranking security (or other priority rights) over any collateral, control of thetiming and manner of the disposal of such collateral upon a default typicallywill devolve to the holders of the senior class of securities outstanding. Therecan be no assurance that the proceeds of any such sale of collateral areadequate to repay in full the Group's investments. Effect of Changes in Assumptions on Fair Value of Investments During the year, the Group revised assumptions in the pricing model for each ofthe residual income positions in the Group's investment portfolio. With respectto UK investments, prepayment and default rate assumptions were revised.Prepayment rate assumptions have been adjusted to reflect lower prepayments byborrowers during the period in which their mortgage loans carry a discountedinterest rate and higher prepayments after those mortgage loans revert to theirfull margin. Default rate assumptions have also been increased in anticipationof higher interest rates in the UK. By reference to carrying values as at 31December 2006, after taking into account income accrued for the quarter ended 31March 2007 and cash flows received in that quarter, the impact of these changesreduced the fair value of the Group's UK investment portfolio by approximatelyEuro 74.6 million (or 25.8%). With respect to US investments, prepayment curves and cumulative lossassumptions were revised to reflect an observed slowdown in prepayments and themarket's expectation of higher cumulative loss rates. By reference to carryingvalues as at 31 December 2006, after taking into account income accrued for thequarter ended 31 March 2007 and cash flows received in that quarter, the impactof these changes reduced the fair value of the Group's US investment portfolioby approximately Euro 29.0 million (or 47.4%). Three of the Group's four USinvestments were sold after 31 March 2007. (See note 20). Pricing models for the Group's European mortgage-backed investments wereadjusted to reflect both an anticipated increase in prepayment rates and reducedincome from early repayment charges following the introduction of legislation inPortugal and Italy that limits the amount that banks can charge to borrowers whorepay their mortgage loans. The Group also adjusted default and recovery rateson certain of the investments to better reflect historical experience. Byreference to carrying values as at 31 December 2006, after taking into accountincome accrued for the quarter ended 31 March 2007 and cash flows received inthat quarter, the impact of these changes increased the fair value of theGroup's European mortgage-backed investment portfolio by approximately Euro 0.7million (0.6%). With respect to the balance of the Group's investment portfolio, there have beenno significant changes to the pricing or performance assumptions contained inthe pricing models for the Group's ABS CDO investments. The fair value of theseinvestments, however, reflects the application of higher discount rates giventhe increased market discount rates being attributed by the market to thisinvestment sector as a whole. The application of these higher discount rateresulted in a fair value reduction of approximately Euro 5.4 million (or 18.5%)relative to adjusted 31 December 2006 carrying values, after taking into accountincome accrued for the quarter ended 31 March 2007 and cash flows received inthat quarter. As the Group's SME investments performed in line with, or better than,expectations, no significant changes were made to the assumptions contained inthe pricing models for these investments. 15. Other liabilities 31 March 2007 31 March 2006 Euro Euro Interest payable 357,873 196,634Due to related parties - Investment Manager (note 968,826 1,814,52419)Accrued expenses 2,003,011 881,756 3,329,710 2,892,914 Other liabilities principally comprise amounts outstanding in respect ofinterest payable and ongoing costs. The Directors consider the carrying amountof other liabilities approximates to their fair value. 16. Share capital Authorised share capital 31 March 2007 31 March 2007 Number of Euro Ordinary SharesOrdinary shares of no par value each Unlimited - Issued and fully paid Number of Euro Ordinary SharesBalance at start and end of year 40,620,756 - Authorised share capital 31 March 2006 31 March 2006 Number of Euro Ordinary SharesOrdinary shares of no par value each Unlimited - Issued and fully paid Number of Euro Ordinary SharesBalance at date of incorporation 2 -Issue of new Ordinary Shares with no par value during 40,620,754 -the periodBalance at 31 March 2006 40,620,756 - Upon incorporation 2 Ordinary Shares of no par value were issued. On 13 December2005 the Company issued 22,500,000 Ordinary Shares for subscription in itsInitial Public Offering at an Offer Price of Euro 10 per share. In addition, theCompany simultaneously issued 17,900,754 Ordinary Shares to Cheyne ABSOpportunities Fund LP (along with transferring the two Ordinary Shares issued onincorporation) in exchange for a portfolio of investments and 220,000 OrdinaryShares were also issued to the Directors. In recognition of the work performed by the Investment Manager in raisingcapital for the Company, the Company granted to Cheyne Global Services Limitedon 8 December 2005 options representing the right to acquire 2,250,000 Shares,being 10 per cent of the number of Offer Shares (that is, excluding the Sharesissued to Cheyne ABS Opportunities Fund LP and the Shares issued to theDirectors), at an exercise price per share equal to the Offer Price. 17. Share premium account 31 March 31 March 2006 2007 Euro Euro Balance at start of year/period - -Premium arising from issue of Ordinary Shares - 406,207,540Expenses of issue of Ordinary Shares - (13,903,451)Share options granted on issue of Ordinary - (7,672,500)SharesCancellation of share premium transferred to - (384,631,589)other reserveBalance at end of year/period - - The Ordinary Shares of the Company have no par value. As such, the proceeds ofthe Initial Public Offering represent the premium on the issue of the OrdinaryShares. In accordance with the accounting policies of the Company and as allowedby The Companies (Guernsey) Law, 1994, the costs of the Initial Public Offeringhave been expensed against the share premium account. The issue costs associatedwith the Initial Public Offering amounted to Euro 13,856,736 (as adjusted for anoveraccrual of Euro 46,715) and share options with a value of Euro 7,672,500(notes 16 and 19). The Company passed a special resolution cancelling the amount standing to thecredit of its share premium account immediately following admission to theLondon Stock Exchange. In accordance with The Companies (Guernsey) Law, 1994 (asamended) (the "Companies Law"), the Directors applied to the Royal Court inGuernsey for an order confirming such cancellation of the share premium accountfollowing admission. The Other reserve created on cancellation is available asdistributable profits to be used for all purposes permitted by the CompaniesLaw, including the buy back of Ordinary Shares and the payment of dividends. 18. Notes to cash flow statement Year ended 31 Period from 6 March 2007 September 2005 to 31 March 2006 (restated - see Note 1) Euro Euro Net (loss)/profit (67,747,598) 9,765,027Adjustments for:Net realised losses on investments at fair value 3,673,475 -through profit or lossUnrealised losses on investments at fair value 112,310,937 5,915,074through profit or lossUnrealised gains on interest rate swap agreements (2,174,398) -Unrealised gains on foreign currency bank balances (17,543) -Unrealised losses/(gains) on foreign exchange 1,180,678 (680,569)forward contracts 47,225,551 14,999,532 Purchases of asset-backed securities (89,062,259) (333,734,322)Sales proceeds from asset-backed securities 62,592,916 -Principal paydowns 60,318,527 18,936,309Purchases of total return swap agreements (54,154,588) - (20,305,404) (314,798,013) Increase in receivables (5,415,864) (5,271,493)Increase in payables 436,796 2,892,914 (4,979,068) (2,378,579) Net cash inflow/(outflow) from operating activities 21,941,079 (302,177,060) Purchases and sales of investments are considered to be operating activities ofthe Group, given its purpose, rather than investing activities. Cash and cash equivalents includes amounts held in interest bearing accounts andoverdraft facilities. Non cash transactions: In the prior period the Company issued Ordinary Sharesfor the purchase of the Initial Portfolio as disclosed in note 19. 19. Material agreements and related party transactions Investment Manager The Company and Trebuchet Finance Limited are parties to an InvestmentManagement Agreement with the Investment Manager, dated 8 December 2005,pursuant to which each of the Company and Trebuchet Finance Limited hasappointed the Investment Manager to manage their respective assets on aday-to-day basis in accordance with their respective investment objectives andpolicies, subject to the overall supervision and direction of their respectiveBoards of Directors. The Company pays the Investment Manager a Management Fee and Incentive Fee (seenotes 5 and 15). During the year ended 31 March 2007, the Management Feetotalled Euro 6,251,190 (2006: Euro 1,814,524), of which Euro 968,826 (2006:Euro 1,814,524) was outstanding at the year end and the Incentive Fee totalledEuro 2,096,170 (2006: Euro Nil), none of which was payable at the year end. Management Fee Under the terms of the Investment Management Agreement, the Investment Manageris entitled to receive from the Company an annual Management Fee of 1.75 percent of the net asset value of the Company other than to the extent that suchvalue is comprised of any investment where the underlying asset portfolio ismanaged by the Investment Manager (as is the case with Cheyne ABS Investments Iplc, Cheyne Finance plc, Cheyne High Grade ABS CDO Ltd. and Cheyne CLOInvestments I Limited). The Management Fee is calculated and payable monthly inarrears. Incentive Fee Under the terms of the Investment Management Agreement, the Investment Manageris entitled to receive an incentive compensation fee in respect of eachincentive period that is paid quarterly in arrears. An incentive period willcomprise each successive quarter, except the first such period was the periodfrom admission to the London Stock Exchange to 31 March 2006. The Incentive Feefor each incentive period is an amount equivalent to 25 per cent of the amountby which A exceeds (B x C) where: A= The Company's consolidated net income taking into account any realised or unrealised losses (but only to the extent they have not been deducted in a prior incentive period) and excluding any gains from the revaluation of investments, as shown in the Company's latest consolidated management accounts for the relevant quarter, before payment of any Incentive Fee;B= An amount equal to a simple interest rate equal to two per cent per quarter, subject to the reset mechanic described below (the "Hurdle Rate"); andC= The weighted average number of Shares outstanding during the relevant quarter multiplied by the weighted average offer price of such Shares. For the purposes of calculating the Incentive Fee, the Hurdle Rate will be reseton 1 April 2009, and on each 1 April thereafter to equal the greater of (i) asimple interest rate equal two per cent per quarter, or (ii) one quarter of thesum of the then-prevailing yield per annum on ten-year German Bunds and300 basis points. While the Company will not pay a Management Fee in respect ofthat portion of its portfolio that is comprised of investments where theInvestment Manager receives fees for its management of the underlying assetportfolio, the income from such investments are included in the consolidated netincome of the Company for the purpose of calculating the Incentive Fee. Administration Fee Under the terms of the Administration Agreement, the Administrator is entitledto receive from the Company an administration fee of 0.125 per cent of the grossasset value of the Company up to Euro 80,000,000 and 0.0325 per cent of thegross asset value of the Company greater than Euro 80,000,000. Investors FundServices (Ireland) Limited, the sub-administrator, is paid by the Administrator. Investments in other entities managed by the Investment Manager As at 31 March 2007, the Company held investments with a total value of Euro23,846,289 (2006: Euro 51,081,598) in the following entities, which are managedby the Investment Manager: Cheyne ABS Investments I plc; Cheyne High Grade ABSCDO Ltd.; and Cheyne CLO Investments I Limited. Custodian Fee Under the terms of the Custodian Agreement, the Custodian is entitled to receivefrom the Company a custodian fee of 0.03 per cent of the gross asset value ofthe Company up to Euro 80,000,000 and 0.02 per cent of the gross asset value ofthe Company greater than Euro 80,000,000, plus additional fees in relation totransaction fees, statutory reporting, corporate secretarial fees and other outof pocket expenses. Investment Manager Options In recognition of the work performed by the Investment Manager in raisingcapital for the Company, the Company granted to Cheyne Global Services Limitedon 8 December 2005 options representing the right to acquire 2,250,000 Shares,being 10 per cent of the number of Offer Shares (that is, excluding the Sharesissued to Cheyne ABS Opportunities Fund LP and the Shares issued to theDirectors), at an exercise price per share equal to the Offer Price (Euro 10).The Investment Manager Options are fully vested and immediately exercisable onthe date of admission to the London Stock Exchange and will remain exercisableuntil the 10th anniversary of that date. The Company may grant furtherInvestment Manager Options in connection with any future offering of Shares.Such options, if any, will represent the right to acquire Shares equal to notmore than 10 per cent of the number of Shares being offered in respect of thatfuture offering and will have an exercise price equal to the offer price forthat offering. The aggregate fair value of the options granted at the time ofthe Initial Public Offering using a Black-Scholes valuation model was Euro7,672,500 (reflecting a valuation of Euro 3.41 per option). This amount has beentreated as a cost of the Initial Public Offering. As at 31 March 2007, theseoptions were out of the money as the share price was below the Offer Price ofEuro 10. Initial ABS Portfolio On 23 November 2005, the Company entered into an agreement with Cheyne ABSOpportunities Fund LP (which was amended and restated on 7 December 2005) toacquire a portfolio of investments, for an aggregate price of £62,235,000, Euro90,212,000 and US$90,793,000 (which was Euro 259,007,560) (together withinterest of 13.1 per cent per annum from 7 November 2005 until the date ofadmission to the London Stock Exchange). The consideration for the purchase wassettled by the delivery of 17,900,754 Ordinary Shares by the Company and thepayment of the balance in cash out of the net proceeds from the offer ofOrdinary Shares by the Company. 20. Subsequent Events A list of investments sold by the Company in the ordinary course of businessafter 31 March 2007 is set out below. As the fair values of these investments asat 31 March 2007 were based on their sale prices (as market values were deemedto reflect fair value), these sales have not reduced the net asset value of theCompany post year end. Investment Sold Description of Underlying Assets US Positions Argent Securities Trust 2006-W1 Approximately 10,400 sub-prime mortgage loans, primarily first-ranking First Franklin Mortgage Loan Trust Approximately 3,400 sub-prime mortgage loans, primarily first-ranking Morgan Stanley ABS Capital I Inc. Approximately 4,100 sub-prime mortgage loans,Trust 2005-HE5 primarily first-ranking UK Positions RMAC 2005 NSP2 plc Approximately 6,300 sub-prime mortgage loans/ 3,700 prime mortgage loans RMAC 2005-NS1 plc Approximately 7,800 sub-prime mortgage loans Southern Pacific Financing 05-B Approximately 3,000 near-prime mortgageplc loans The aggregate proceeds from the sale of the US investments totalled Euro 22.8million, reflecting a 53.0% reduction in gross asset value relative to theadjusted book value of these investments as at 31 December 2006. The aggregate proceeds from the sale of the UK investments totalled Euro 67.8million, reflecting a 28.6% reduction in gross asset value relative to theadjusted book value of these investments as at 31 December 2006. This information is provided by RNS The company news service from the London Stock Exchange

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