5th Mar 2008 07:00
Queen's Walk Investment Limited05 March 2008 5 March 2008 Queen's Walk Investment Limited Financial Results for the Quarter Ended 31 December 2007 Queen's Walk Investment Limited maintains dividend of 15 cents per sharefollowing strong third quarter cash flows Queen's Walk Investment Limited (Queen's Walk), the Guernsey incorporatedinvestment company, has reported operating income of €9.7 million for thequarter ended 31 December 2007, unchanged from €9.7 million in the previousquarter. The Company's net asset value remained unchanged at €6.90 per share. Distributable income during the quarter was €7.0 million, down from €7.6 millionin the prior period. Queen's Walk's board of directors has decided to maintainthe dividend at the level of the previous quarter of €0.15 per share. Cashgeneration for the quarter was solid with €21.4 million of cash proceedsreceived. Fair value write downs of the Company's investment portfolio for the quartertotalled €8.3 million, up slightly from €8.0 million for the period ended 30September 2007. Write downs were equivalent to approximately 2.6% of the 30September 2007 gross asset value. Highlights • Operating income of €9.7 million, equating to operating income per share of €0.28 compared to €9.7 million or €0.24 per share in the quarter ended 30 September 2007. • Distributable income of €7.0 million or €0.20 per share compared to €7.6 million or €0.19 per share as at 30 September 2007. • Loss of €1.2 million or €0.04 per share compared to a loss of €0.6 million or €0.01 per share in the previous quarter. • Net asset value at €6.90 per share, unchanged from the previous quarter end. Subsequent to the tender offer, approved on 8 January 2008, the pro-forma NAV per share is €7.03. • Fair value write downs of the Company's investment portfolio of €8.3 million in the quarter compared to €8.0 million in the previous quarter. • The Board of Directors has declared an interim dividend of €0.15 per share for the quarter. • From 18 July 2007 to 22 February 2008, the Company has returned in excess of €66.7 million through share repurchases and dividends. Conference Call A conference call to review the Company's financial results for the quarterended 31 December 2007 will take place at 10am London time on 5 March 2008. Theconference call can be accessed by dialing +44 (0)20 7138 0819 ten minutes priorto the scheduled start of the call. A results presentation will be available onthe Queen's Walk website (www.queenswalkinv.com). A webcast of the conference call will also be available on a listen-only basisat www.queenswalkinv.com. Please allow extra time prior to the call to visitthe site and download the necessary software required to listen to the internetbroadcast. A replay of the webcast will be available for three months followingthe call. For further information please contact - Investor Relations: Caroline Villiers +44 (0) 20 7153 1521 About the Company 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. 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". By their nature, forward-looking statements involverisks and 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 and should not be relied upon. The Company undertakesno obligation to publicly update or revise forward-looking statements, except asmay be required by applicable law and regulation (including the Listing Rules). Financial Highlights Total Total Revenue Fair value Quarter ended Revenue Fair value Quarter ended gains and 31 December gains and losses 2007 losses 30 September 2007 Operating Income 9,729,137 - 9,729,137 9,672,694 - 9,672,694Gains and losses on (8,449,046) (8,449,046) - (8,094,060) (8,094,060)fair value throughprofit or lossfinancial instruments 9,729,137 (8,449,046) 1,280,091 9,672,694 (8,094,060) 1,578,634 Operating Expenses (1,768,133) - (1,768,133) (1,404,332) - (1,404,332)Finance Costs (743,343) - (743,343) (741,929) - (741,929)Net profit / (loss) 7,217,661 (8,449,046) (1,231,385) 7,526,433 (8,094,060) (567,627)Distributable 7,019,676 7,577,972income1,2Distributable income €0.20 €0.19per share Total Assets €291,439,225 €326,577,355Total Liabilities €50,856,664 €53,258,112Equity Capital €240,582,561 €273,319,243NAV per share €6.90 €6.90 1. Net profit from investments before deduction of net fair value lossesthrough profit or loss. For the quarter ended 30 September 2007, thedistributable income includes €51,540 of f/x gains and losses. For the quarterended 31 December 2007, the distributable income includes -€197,984 of f/x gainsand losses. 2. Refer to Note 4 of the quarterly report for the quarter ended 31 December2007 for further details on the Company's distribution policy. Third Quarter Dividend Details The Board of Directors has declared an interim dividend for the quarter ended 31December 2007 of €0.15 per share payable on 8 April 2008 to shareholders ofrecord on 14 March 2008. Portfolio Review - Cash flow from non-US assets holds steady The portfolio's ability to generate cash remains strong with total cash proceedsof approximately €21.4 million received in the quarter ended 31 December 2007compared to €24.6 million received in the previous quarter. Cash flows in theUK, European and SME investments were consistent with last quarter. The cashflow performance of the Company's US sub-prime related assets was compromised bycontinued deterioration in the US mortgage market. The Company's investment portfolio consists largely of investments with exposureto the UK and European mortgage markets and to the European SME sector. Assetswith exposure to the US sub-prime market account for approximately 1.5% of theinvestment portfolio. The Company also has exposure to the US leverage loanmarket through a residual investment in a CLO ("Collateralised Loan Obligation")which accounts for 1.7% of the investment portfolio. All the securitisations towhich the Company has exposure are term financed and have no risk of additionalmargin calls or refinancing risk. The Company's net leverage has increased to 9.5%(1) as at 31 December 2007 from8.6%(2) as at 30 September 2007. The Company's net indebtedness as at 31December 2007 was €23.5 million compared to net indebtedness of €23.7 million asat 30 September 2007. On 14 February 2008, the Company repaid €4.5 million ofits financing facility. As at 22 February 2008, the Company had totalborrowings of €40.5 million and a net leverage ratio of 10.0%. A breakdown of the Company's investment portfolio by jurisdiction (by referenceto underlying asset originator) is set out below. Percentages for each assetclass are in relation to the value of the Company's investment portfolioexcluding cash. Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2007 UK 39.7%US 1.1%Holland 5.3%CDO 3.3%Germany 13.7%Italy 9.3%Portugal 27.6%Total (•mn) 274.2 Queen's Walk Portfolio Breakdown by Jurisdiction as at 31 December 2007 UK 35.9%US 0.4%Holland 5.7%CDO 2.9%Germany 15.1%Italy 10.6%Portugal 29.4%Total (•mn) 247.1 A breakdown of the Company's investment portfolio by asset type (by reference tounderlying asset collateral) is set out below. Percentages for each asset classare in relation to the value of the Company's investment portfolio excludingcash. Queen's Walk Portfolio Breakdown by Asset Type as at 30 September 2007 NearPrime 19.7%SubPrime 19.2%CDO 3.3%SME 18.9%Prime 38.8%Total (•mn) 274.2 Queen's Walk Portfolio Breakdown by Asset Type as at 31 December 2007 NearPrime 18.3%SubPrime 16.4%CDO 2.9%SME 20.9%Prime 41.5%Total (•mn) 247.1 Investment Portfolio UK Mortgage Investments (30.4% of GAV) The company's UK mortgage portfolio continued to be highly cash generativecontributing €13.4 million of the €21.4 million of cash generated across theinvestment portfolio. Two of the RMAC assets, RMAC 04-NSP4 and RMAC 05-NS3 havereleased a substantial amount of the cash trapped in the securitisation as aresult of positive underlying asset performance. The cash flows associatedwith the remaining UK assets were in line with expectations. The Company has previously indicated that the current dislocation in thesecuritisation markets may cause a decrease in prepayment rates and an increasein default rates in the underlying mortgage portfolios. To date, the Companyhas seen no evidence to suggest that the expected change in prepayment ordefault rates has occurred. In October 2007, to hedge the portfolio against a drop in UK house prices, thecompany entered into a two-year €28 million put option with a strike price of90% of the 30 September 2007 Halifax House Price Non-Seasonally Adjusted Indexlevel. In the event that house prices do not fall below 10%, the cost of thisput option will amortise over the next two years. The 10% ratio reflects theapproximate gain in house prices for the least seasoned UK residual in theportfolio. Since September 2007, house prices have fallen by approximately4.4%. European Mortgage Investments (34.0% of GAV) The fundamentals underlying the performance of the Company's European mortgageinvestments remain sound. Benign economic environments in Italy and Portugalunderpinned good asset credit performance. Default rates have not been affectedby the current credit crisis. After giving effect to cash flows received in the quarter and associatedprincipal amortisations, there has been no material change to the fair value ofthese investments as at 31 December 2007. SME Investments (17.7% of GAV) SME assets continued to perform well with cumulative default rates on theunderlying asset pools better than or in line with expectations. Approximately 75% of the Company's total SME exposure is concentrated in ninecountries of which seven are European. The largest geographic concentration isin German SMEs which account for 32.2% of the Company's total SME exposure. TheCompany also has significant exposure to Dutch, US, Spanish and UK SME companies(3). The majority of the Company's Spanish SME exposure results from the Smart06-1 SME investment. The Eirles Three Limited (236B) residual has exposure to the German, Italian andSpanish SME markets. In relation to Spain, approximately 13.8% of theunderlying collateral portfolio has exposure to the Spanish construction andbuilding industries. However, this risk is mitigated by a weighted average BBB-rating of the underlying Spanish companies and the short weighted average lifeof the loans in the portfolio. CDO Investments (2.4% of GAV) The Company holds residual positions in three CDOs, two of which are exposed toUS mortgage assets. The High Grade CDO is backed by AAA to A-rated ABS bonds. ABS Investments I isa CDO backed by the mezzanine tranches of US ABS CDOs (including US RMBS CDOs).As at 31 December 2007, the credit performance of High Grade CDO has weakened asa result of more downgrades of higher rated ABS bonds. The credit performanceof ABS Investments I has deteriorated significantly following the substantialdowngrades of US mezzanine ABS bonds. The deterioration in the cash flowperformance of the bonds has been reflected in the fair values of these assets. CLO Investments I is backed by AA- to BBB- rated US CLO bonds. The performanceof this collateral has exceeded original pricing assumptions and two of thebonds in the portfolio have been upgraded from BBB to A and AA, respectively.There have been no downgrades or negative watch warnings on any of the bonds inthe portfolio. The cash generative ability of this residual investment remainspositive and is in line with expectations. US Mortgage Investment (0.3% of GAV) The Company has one remaining US mortgage residual, RASC 2006-KS2. Actual lossperformance over the past quarter has not deviated significantly from ourprevious projection. However, with an increase in the arrears pipeline theforecast cumulative loss has been increased in the quarter. The Company has worked with the originator of the loans to conduct a loan levelreview of the portfolio, and identified 8 loans that breached representation &warranties that were given by the originator. In light of these breaches, all 8loans have been repurchased by the originator. Portfolio Valuation In accordance with the Company's valuation procedures, the fair value of theCompany's investments has been evaluated on the basis of performance, observablemarket data and the Investment Manager's expectations regarding future trends.After giving effect to fair value write-downs of €8.4 million (€8.3 million ofwhich were in relation to the investment portfolio) in the quarter, the NAV ofthe Company was €6.90 per share as at 31 December 2007 (€6.90 per share as at 30September 2007). On 8 January 2008, the Company received approval from shareholders to proceedwith the repurchase of shares through the tender offer. Following the tenderoffer, the pro-forma NAV of the Company was €7.03 per share(4). The table below summarises the changes in fair values of the Company'sinvestment portfolio by asset class: Asset Class 30 September 31 December Fair Value % Change to Cash flows Cash flows 2007 Fair 2007 Change Since 30 September Received in the Received in the Value1,2 (•mn) Fair Value2 30 September 2007 Fair Quarter Ended Quarter Ended (•mn) 2007 (•mn) Value 30 September 31 December 2007 2007 (•mn) (•mn) UK Mortgages 103.4 88.5 -14.9 -14.4% 16.6 13.4Euro Mortgages 101.4 99.0 -2.4 -2.3% 3.4 3.3SME 51.9 51.5 -0.4 -0.8% 3.2 3.3CDO 8.9 7.1 -1.8 -20.1% 0.9 1.2US Mortgages 2.9 0.9 -1.9 -67.1% 0.5 0.2Cash and Other Cash 51.3 41.7 0.0 -18.6%Equivalents TOTAL3 319.8 288.8 -21.4 -6.7% 24.6 21.4 1. Fair values as at 30 September 2007 are expressed using 31 December2007 f/x rates. 2. The fair value figures for 30 September 2007 and 31 December 2007include accrued income and, in the case of the UK mortgage residuals, the valueof the interest rate swaps. 3. The values for each column may not sum to the total due to roundingdifferences. Fair value changes since 31 December 2007 include principal amortisations of theresiduals as a result of cash flows received in the quarter as well as fairvalue write-downs related to the investment portfolio. The valuations of the USand ABS CDO portfolios continue to be affected by deteriorations in the cashflow expectations which resulted in material fair value write-downs in thequarter. There have been no material fair value write downs during the quarterto the non-US assets, comprising UK mortgage, European mortgage and SMEportfolios, with the majority of fair value changes a result of cash flowsreceived in the quarter. Share Repurchase Programme On 8 January 2008, shareholders approved the Company's tender offer and on 15January 2008, the Company repurchased for cancellation 2,777,771 shares at aprice of €5.40 per share. As of 31 December 2007, the Company had purchased 5,738,037 shares through itsbuy back programme and previous tender offer at an average price of €5.45 pershare. Through the period from 1 January 2008 until 22 February 2008, theCompany has purchased 598,000 shares through its buy back programme at anaverage price of €5.31 per share. Though the share buybacks have been accretiveto NAV, the number of shares which the Company repurchases has been constrainedby limits on the volume of shares that can be purchased on any particular dayand by the price at which the Company can repurchase shares. Strategy and Market Outlook The upcoming quarters will remain challenging for the ABS markets and also forthe broader financial system as a whole. The de-leveraging of the financialsystem that commenced in the second half of 2007 is likely to continue in 2008.The Company benefits from having its investment portfolio term funded and havingno margin or collateral calls that would require the sale of assets in anilliquid market. The change in asset prices in the European ABS markets has been largelytechnical in nature. However, for many market participants it has beenincreasingly difficult to continue with existing operations under current marketconditions. Asset managers with capital / liability mismatches are increasinglyunder pressure to dispose of assets at distressed levels. Similarly, financecompanies are experiencing difficulties in raising debt in current markets.Over the coming months, the Company will evaluate new investment opportunities,and where those opportunities are accretive to NAV, deploy capital accordingly. The combination of healthy cash flows and term financing should allow theCompany to capture value in the current market dislocation. Unaudited Condensed Consolidated Income StatementFor the quarter ended 31 December 2007 and the quarter ended 30 September 2007 Total Total Revenue Fair value Quarter ended Revenue Fair value Quarter ended return gains and 31 December return gains and 30 September Note losses 2007 losses 2007 Euro Euro Euro Euro Euro Euro Operating income 9,729,137 - 9,729,137 9,672,694 - 9,672,694 Gains and losses on fair value through profit or loss financialinstruments - (8,449,046) (8,449,046) - (8,094,060) (8,094,060) 9,729,137 (8,449,046) 1,280,091 9,672,694 (8,094,060) 1,578,634 Operating expenses 5 (1,768,133) - (1,768,133) (1,404,332) - (1,404,332) Finance costs 6 (743,343) - (743,343) (741,929) - (741,929) Net Loss 7,217,661, (8,449,046) (1,231,385) 7,526,433 (8,094,060) (567,627) Loss per Ordinary ShareBasic 9 Euro (0.035) Euro (0.014)Diluted 9 Euro (0.035) Euro (0.014) Weighted average Ordinary Shares outstanding Number NumberBasic 9 35,630,467 40,132,525Diluted 9 35,630,467 40,132,525 All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. Unaudited Condensed Consolidated Statement of Changes in Shareholders' EquityFor the period from 1 July 2007 to 31 December 2007 Share Share Other Reserve Capital Accumulated Capital Premium Reserve Profits Total Euro Euro Euro Euro Euro Euro Balance at 1 July 2007 - - 372,492,078 7,672,500 (95,328,966) 284,835,612 Net loss for the quarter - - - - (567,627) (567,627) Redemption of ordinary shares - - (5,004,332) - - (5,004,332) Transfers from distributable - - (109,813,774) - 109,813,774 -reserves to accumulated profits Distribution to the Ordinary - - - - (5,944,410) (5,944,410)Shareholders of the Company Balance at 30 September 2007 - - 257,673,972 7,672,500 7,972,771 273,319,243 Net loss for the quarter - - - (1,231,385) (1,231,385) Redemption of ordinary shares - - (14,086,288) - (12,186,226) (26,272,514) Transfers from distributable - - (12,186,226) - 18,279,339 6,093,113reserves to accumulated profits Distribution to the Ordinary - - - (11,325,896) (11,325,896)Shareholders of the Company Balance at 31 December 2007 - - 231,401,458 7,672,500 1,508,603 240,582,561 Unaudited Condensed Consolidated Balance SheetAs at 31 December 2007 31 December 30 September 2007 2007 Euro EuroNon-current assetsInvestments at fair value through profit or loss 245,272,192 269,274,302 Current assetsCash and cash equivalents 40,822,361 52,250,434Derivative financial assets - unrealised gain on forward exchangecontracts 873,979 140,883Derivative financial assets - unrealised gain on interest rate swapagreements 463,037 1,517,985Receivable from brokers - margin on forward exchange contracts 921,364 -Other assets 3,086,292 3,393,751 46,167,033 57,303,053 Total assets 291,439,225 326,577,355 Equity and liabilities EquityShare capital - -Share premium account - -Other reserve 231,401,458 257,673,972Capital reserve in respect of share options 7,672,500 7,672,500Accumulated profits/(losses) 1,508,603 7,972,771 240,582,561 273,319,243Current liabilitiesRepurchase agreements - -Distribution payable 5,232,783 5,944,410Derivative financial liabilities - unrealised loss on forward - 546,476exchange contractsOther liabilities 623,881 1,767,226Total liabilities 5,856,664 8,258,112 Non-current liabilitiesLoans 45,000,000 45,000,000 Total liabilities 50,856,664 53,258,112 Total equity and liabilities 291,439,225 326,577,355 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 December 2007, the Company's onlysubsidiary was 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 Limited (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 (A State StreetCompany) provide certain administration services to the Company in its capacityas sub-administrator. 2. Significant accounting policies Basis of preparation The quarterly report has been prepared using accounting policies consistent withInternational Financial Reporting Standards ("IFRS") and in accordance with IAS34 "Interim Financial Reporting". The same accounting policies, presentationand methods of computation are followed in this report as applied in theCompany's latest annual audited financial statements dated 31 March 2007. The quarterly report of the Group is prepared on the historical cost oramortised cost basis except that the following assets and liabilities are statedat their fair value: derivative financial instruments, financial instrumentsheld for trading and financial instruments classified or designated as fairvalue 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 by reference to market information, which includes butis not limited to broker marks, prices on comparable assets and a pricing modelthat incorporates 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.Where such pricing models are used, assumptions are reviewed and updated on thebasis of actual performance data as it is received and on the basis of marketconditions as at the balance sheet date. See note 2 - Fair Value and InterestIncome and note 3 - Critical accounting judgements and key sources of estimationuncertainty for further information regarding assumptions and criticaljudgements. This quarterly report is presented in Euros because that is the currency of theprimary economic environment in which the Group operates. The functionalcurrency of the Group is also considered to be Euros. 2. Significant accounting policies (continued) Basis of consolidation Subsidiaries are entities controlled by the Company. Subsidiaries are includedin the consolidated quarterly report from the date that control commences untilthe date that control ceases. At 31 December 2007, the Group is made up of theCompany 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 accounts are therefore included in theconsolidated quarterly report of the Group. The Company does not consolidateany of the SPEs in which it holds a residual income position as it is notexposed to the majority of the risks and benefits of the assets owned by therelevant 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 otherderivative 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. The Group has entered into an option trade on theHalifax Price Index in order to hedge against adverse movement in the UK housingmarket. 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. 2. Significant accounting policies (continued) Derivative financial instruments (continued) 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. When a Company purchases or writes an option, an amount equal to the premiumpaid (or received) by the Company is reflected as an asset and an equivalentliability. The amount of the asset or liability is subsequently marked to marketto reflect the current market value of the option. When a security is purchasedor sold through the exercise of an option, the related premium paid (orreceived) is added to (or deducted from) the cost of the security acquired ordeducted from (or added to) the proceeds of the security sold. When an optionexpires (or a Company enters into a closing transaction), the Company realises again or loss on the option to the extent of the premiums received or paid (orgain or loss to the extent the cost of the closing transaction exceeds thepremium paid or received). 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 by reference tomarket information which includes but is not limited to broker marks, prices oncomparable assets and 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. 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 byreference to the historical delinquencies, defaults, recoveries and prepaymentsactually realised by the originator of the underlying assets and any empiricaldata available 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 or expectations regarding defaults, delinquencies andprepayments received in respect of a given asset is markedly different from thedefault, delinquency and prepayment assumptions incorporated in the pricingmodel for the asset, the assumptions are revised to reflect this data and thepricing model is updated accordingly. In addition to the actual performance dataobserved in respect of a particular asset, market factors are also taken intoaccount within the model. Dealer marks (where available) and any otheravailable indicators are assessed to determine whether or not the market isattributing higher or lower default, delinquency or prepayment expectations tosimilar assets in determining whether or not the assumptions incorporated in thepricing model remain reasonable. Where the fair value of the investment iswritten down due to changes in assumptions and expected cash flows, the changein the fair value is taken to the income statement following the reassessment ofthe cash flows discounted at the current market rate estimated for theinvestment. 2. Significant accounting policies (continued) 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. 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 difference between costand redemption value being recognised in the income statement over the period ofthe borrowings on an effective interest basis. Financing costs associated withthe issuance of financings are deferred and amortised over the term of thefinancings using the effective interest rate method, in line with marketpractice. 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. 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. 2. Significant accounting policies (continued) 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 Critical accounting judgements in applying the Group's accounting policies In the process of applying the Group's accounting polices (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 Company invests primarily in a diversified portfolio of residual incomepositions, being the subordinated tranches of asset-backed securities ("ABS").ABS securities that are typically backed by consumer finance receivables (suchas mortgage loans) and commercial loans and receivables (including commercialmortgage loans and loans to small-and-medium sized enterprises). Residualincome positions are typically unrated or rated below investment grade and areoften referred to as the "equity" or "first loss" position of a securitisationtransaction. 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 Company 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. Where there is a carry valuereduction driven by lower cash flow expectations, interest income will bereduced as it reflects the reduced cash flow expectations. 3. Critical accounting judgements and key sources of estimation uncertainty(continued) Valuation of investments The market for subordinated asset-backed securities, including residual incomepositions is illiquid and regular traded prices are generally not available forsuch investments. There is no active secondary market in residual incomepositions and, further, there is no industry standard agreed methodology tovalue 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. At 31 December 2007 bid prices were not available forany of the Company's investments. There is very limited information available inrelation to transactions in comparable investments. As quoted bid prices areunavailable, the fair value of the investments is estimated by reference tomarket information, which includes but is not limited to broker marks, prices oncomparative assets, estimated fair value from the previous period updated forcurrent period cash flows and a pricing model, that incorporates discounted cashflow techniques as required by IAS 39. The Company may use all or a combinationof the prices from these sources in estimating the fair value of theinvestments. Broker marks are estimates of values provided by marketparticipants who are typically the originators of the investments. Broker marksare not binding prices and there is no guarantee that the Company could transactat these prices in the current market. 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 4. Distributable and non-distributable profits Under The Companies (Guernsey) Law, 1994 (the "Companies Law"), dividends can bepaid from profits available for the purpose. Following the Company's IPO, theCompany passed a special resolution and obtained Royal Court approval for thecancellation of the amount standing to the credit of its share premium account.The Other Reserve created on cancellation (amounting to Euro 231,401,458) isavailable as distributable profits for all purposes permitted by the CompaniesLaw including the payment of dividends and buy-back of shares. 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 was covered by income received fromunderlying investments as required by the Listing Rules (as reflected in theCondensed Consolidated Income Statement) and the Company had sufficient reserves(in the form of the Other Reserve) from which the dividend was paid. 5. Operating expenses Quarter ended Quarter ended 31 December 2007 30 September 2007 Euro EuroInvestment management, custodian and administration feesInvestment management and incentive fee 1,043,161 1,159,218Custodian and administration fee 80,123 185,365 1,123,284 1,344,583Other operating expensesAudit fees 42,849 42,849Directors' fees payable to Directors of Queen's Walk InvestmentLimited 61,315 55,935Directors' fees payable to Directors of Trebuchet Finance Limited 6,387 7,182Legal fees 255,168 132,747Advisory fees 104,043 -Pricing expenses 137,743 (283,377)Other expenses 37,344 104,413 644,849 59,749 Total operating expenses 1,768,133 1,404,332 6. Finance costs Quarter ended Quarter ended 31 December 2007 30 September 2007 Euro EuroFinance costs arises from: Interest expense on loan 743,343 557,279 Repurchase agreements - 184,650 Total finance costs 743,343 741,929 7. Dividends Period from 1 July 2007 to 31 December 2007 EuroFourth interim dividend for the year ended 31 March 2007 6,093,113First interim dividend for the year ended 31 March 2008 5,944,410Second interim dividend for the year ended 31 March 2008 5,232,783Amounts recognised as distributions to equity holders in the period 17,270,306 On 28 November 2007 the Directors declared that a dividend of €5,232,783 (€0.15per share based on 34,885,219 shares) will be paid on 7 January 2008 toShareholders. On 4 March 2008, the Directors declared a dividend of €0.15 per share which willbe paid on 8 April 2008 to shareholders on record on 14 March 2008. 8. Share capital Ordinary shares of no par value each Authorised share capital 31 December 2007 30 September 2007 Number NumberBalance at of start and end of quarter Unlimited Unlimited Ordinary shares of no par value each Issued and fully paid 31 December 30 September 2007 2007 Number NumberBalance at of start quarter 39,629,402 40,620,756Repurchase of Ordinary Shares (4,746,683) (991,354)Balance at end of quarter 34,882,719 39,629,402 During the period 18 July 2007 to 31 August 2007 the Company repurchased 991,354of its existing Ordinary Shares out of reserves, at an average price of Euro5.07. Once purchased, these Ordinary Shares were cancelled and are not availablefor re-issue. The purpose of the share buy backs is to reduce the capital of theCompany. Another share repurchase agreement was entered into on 28 September2007. The Company, through a Tender Offer, returned Euro 24,999,975 in cash through apurchase of 4,504,500 of its existing Ordinary Shares. Those Ordinary Shareswere cancelled and will not be available for re-issue. The shareholders approvedthe Tender Offer at an EGM held on 8 October 2007. Through the period from 1 October 2007 until 21 December 2007, the Company haspurchased an additional 242,183 shares at an average price of Euro 5.15 pershare. Under Guernsey law a capital redemption reserve is created for the redemption ofthese Ordinary Shares. As the nominal value of these Ordinary Shares is Euronil, the amount to be transferred to this reserve is Euro nil. 9. Earnings per share Quarter ended 31 Quarter ended 30 December 2007 September 2007 Euro EuroThe calculation of the basic and diluted earnings per share is basedon the following data:Loss for the purposes of basic earnings per share being net loss (1,231,385) (567,627)attributable to equity holders Weighted average number of Ordinary Shares for the purposes of basicearnings per share 35,630,467 40,132,525 Effect of dilutive potential Ordinary Shares:Share options - -Weighted average number of Ordinary Shares for the purposes of 35,630,467 40,132,525diluted earnings per share 11. 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 (seenote 5). During the quarter ended 31 December 2007, the Management Fee totalledEuro 1,043,161 (30 September 2007: Euro 1,159,218) of which Euro 348,250 (30September 2007: Euro 1,174,297) is payable at quarter end. The Incentive Feetotalled Euro nil (30 September 2007: Euro nil) of which Euro nil (30 September2007: Euro nil) is payable at the quarter 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 ' 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 and 300basis points. While the Company will not pay a Management Fee in respect of thatportion of its portfolio that is comprised of investments where the InvestmentManager receives fees for its management of the underlying asset portfolio, theincome from such investments are included in the consolidated net income of theCompany 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. 11. Material agreements and related party transactions (continued) Investments in other entities managed by the Investment Manager As at 31 December 2007, the Company held investments with a total value of Euro6,624,478 (30 September 2007: Euro 8,566,579) in the following entities, whichare managed by the Investment Manager: Cheyne ABS Investments I plc; Cheyne HighGrade ABS CDO 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 December 2007, theseoptions were out of the money as the share price was below the Offer Price ofEuro 10. 12. Subsequent Events On 8 January the Company completed a tender offer repaying Euro 15 million toshareholders following the repurchase of 2,777,771 shares at a price of €5.40per share. In addition in the period from 9 January 2008 to 26 February 2008 theCompany has repurchased 728,000 shares at an average price of €5.23 per shareunder its buy back programme. On 14 February 2008, the Company repaid Euro 4.5 million (or 10% of the drawnbalance) on its loan facility. -------------------------- (1) Net of cash proceeds required to settle the tender offer and pay the 31December 2007 dividend. (2) Net of cash proceeds required to settle the tender offer and pay the 30September 2007 dividend. (3) Countries to which the Company has a geographic concentration greater than5% of the total SME portfolio. (4) Given the materiality of the tender offer, a pro-forma NAV is shown as at 8January 2008. The pro-forma NAV is computed using the 31 December 2007 fairvalues and by reducing the cash balance by €14,999,963.40 and the number ofoutstanding shares by 2,777,771. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Real Est.cred