8th Mar 2007 07:02
Prodesse Investment Limited08 March 2007 Prodesse Investment Limited Preliminary Results for the year ended 31 December 2006 About Prodesse Investment Limited ("Prodesse" or the "Company") Prodesse is a limited liability Guernsey-incorporated closed-end investmentcompany, the investments of which are managed by Fixed Income Discount AdvisoryCompany. The Company's investment policy is to provide net income fordistribution from the spread between the interest income earned from a portfolioof residential mortgage-backed securities and the cost of repurchase agreementsentered into to finance the acquisition of such residential mortgage-backedsecurities, while seeking to limit exposure to interest rate risk and creditrisk. Prodesse releases results on a quarterly basis, with the results for the quarterto 31 December 2006 released on 13 February 2007. Please refer to that andprevious quarterly announcements for operational highlights and managementcommentary on the results of the Company. The financial information set out in this announcement does not constitute theCompany's statutory accounts for the year ended 31 December 2006. The financial information for the year ended 31 December 2006 is derived fromthe financial statements delivered to the UK Listing Authority and The ChannelIslands Stock Exchange. The Auditors reported on those accounts, their reportwas unqualified and did not contain a statement under section 65(3) of TheCompanies (Guernsey) Law, 1994. This preliminary announcement was approved by the directors of the Company on 7March 2007. Income StatementFor the year ended 31 December 2006 Notes Year ended 31 22 February 2005* December 2006 to 31 December 2005 US $'000 US $'000 Income:Interest income 115,099 71,933Interest expense (96,495) (53,722)Net interest income 18,604 18,211 Realised loss on sale of available for sale investments 4 (10,022) (21,651) Impairment loss on available for sale investments 4 (25,692) - Realised gain on cash flow hedge 6 135 - Total income (16,975) (3,440) ExpensesManagement, Custodian and Administration fees (5,014) (3,898)Other operating expenses (1,104) (472) Total expenses (6,118) (4,370) Net loss for the year / period (23,093) (7,810) Loss per Ordinary Share: Basic - Loss per Ordinary Share 3 US$(0.87) US$(0.28) Weighted Average Ordinary Shares outstanding Basic 3 26,606,235 28,323,517 * Commencement of operations 08 April 2005. All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. Statement of Changes in Shareholders' EquityFor the year ended 31 December 2006 Note Share Capital Share Distributable Accumulated Capital Revaluation Cash Total capital redemption premium reserve profits Reserve - reserve - flow reserve Realised Unrealised hedge loss on gain (loss) reserve available on for sale available investments for sale investments US US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 $'000 At 1 January 2006 277 9 50,000 214,300 2,973 (21,651) (13,940) (20) 231,948 Available for saleinvestments: - Unrealised gain onrevaluationtaken to equity 4 - - - - - - 28,022 - 28,022 Net loss for the year - - - - (23,093) - - - (23,093) Transfer of netrealised lossesto capital reserve 8 - - - - 35,580 (35,580) - - - Cash flow hedgereserve - Loss taken to equity 6 - - - - - - - (2,425) (2,425) Total recognisedincome andexpenses for theyear - - - - 12,487 (35,580) 28,022 (2,425) 2,504 Dividend paid 2 - - - - (11,740) - - - (11,740) Buyback of shares 8 (21) 21 - (15,619) - - - - (15,619) At 31 December 2006 8 256 30 50,000 198,681 3,720 (57,231) 14,082 (2,445) 207,093 Statement of Changes in Shareholders' Equity (continued)For the period from 22 February 2005 to 31 December 2005* Note Share Capital Share Distributable Accumulated Capital Revaluation Cash Total capital redemption premium reserve profits Reserve - reserve - flow reserve Realised Unrealised hedge loss on loss on reserve available available for sale for sale investments investments US US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 US $'000 $'000 At 22 February 2005 - - - - - - - - - Available forsale investments: - Unrealised losson revaluationtaken to equity 4 - - - - - - (13,940) - (13,940) Net loss for the period - - - - (7,810) - - - (7,810) Transfer of netrealised lossesto capital reserve 8 - - - - 21,651 (21,651) - - - Cash flow hedgereserve 6 - - - - - - - (20) (20) -Loss taken toequity Total recognisedincome andexpenses for theperiod - - - - 13,841 (21,651) (13,940) (20) (21,770) Dividend paid 2 - - - - (10,868) - - - (10,868) Issuance of shares 8 286 - 285,814 - - - - - 286,100 Offering costs 8 - - (15,640) - - - - - (15,640) Transfer fromshare premiumaccount 8 - - (220,174) 220,174 - - - - - Buyback of shares 8 (9) 9 - (5,874) - - - - (5,874) At 31 December 2005 8 277 9 50,000 214,300 2,973 (21,651) (13,940) (20) 231,948 * Commencement of operations 08 April 2005. Balance SheetAs at 31 December 2006 31 December 2006 31 December 2005 Notes US $'000 US $'000 Non-current assetsAvailable for sale investments 4 2,073,602 1,405,413 2,073,602 1,405,413 Current assetsAccrued income receivable 8,774 6,229Receivable for principal paydowns 3,210 10,195Prepaid expenses 27 35Cash and cash equivalents 35 5 12,046 16,464 Total assets 2,085,648 1,421,877 Equity attributable to equity shareholdersOrdinary share capital 8 256 277Capital redemption reserve 8 30 9Share premium 8 50,000 50,000Distributable reserve 8 198,681 214,300Accumulated profits 8 3,720 2,973Capital reserve - Realised loss on available for sale 8 (57,231) (21,651)investmentsRevaluation reserve 8 14,082 (13,940)Cash flow hedge reserve 8 (2,445) (20) Total equity 207,093 231,948 Current liabilitiesSecurities purchased payable 15,407 163,391Reverse repurchase agreements 7 1,853,757 1,022,067Accrued interest expense 5,563 3,509Accrued expenses payable 1,383 942Hedging instrument 6 2,445 20 Total liabilities 1,878,555 1,189,929 Total equity and liabilities 2,085,648 1,421,877 Net Assets US$207,093,095 US$231,947,815 Net Asset Value per Ordinary Share 9 US$8.08 US$8.36 Cash Flow StatementFor the year ended 31 December 2006 22 February 2005* Year ended to 31 December 2006 31 December 2005 Notes US $'000 US $'000 Net cash inflow / (outflow) from operating activities 10 27,389 (253,713) Cash flows from financing activities Dividends paid to shareholders (11,740) (10,868)Net proceeds from offering - 270,460Own shares acquired (15,619) (5,874) Net cash from financing activities (27,359) 253,718 Net increase in cash and cash equivalents 30 5 Cash and cash equivalents at the beginning of the year /period 5 - Cash and cash equivalents at the end of the year / period 35 5 * Commencement of operations 08 April 2005. Notes 1. Significant Accounting Policies The preliminary announcement is prepared on the basis of the accounting policiesdisclosed in the prior year financial statements. Whilst the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company's full financial statements that comply withIFRSs were approved by the Directors on 7 March 2007. Taxes The Company is exempt from Guernsey taxation under the Income Tax (ExemptBodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600. 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, issued by companies operating andgenerating revenue in the United States, and therefore no segmental reporting isprovided. 2. Dividends 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Amounts recognized as distributions to equity shareholders in the year/ period: Third interim dividend for the year ended 31 December 2005 of10 cents per share 2,775 - First interim dividend for the year ended 31 December 2006 of 12cents per share (2005: 20 cents per share) 3,330 5,722 Second interim dividend for the year ended 31 December 2006 of10 cents per share (2005: 18 cents per share) 2,563 5,146 Third interim dividend for the year ended 31 December 2006 of 12 centsper share 3,072 - 11,740 10,868 * Commencement of operations 08 April 2005. A fourth interim dividend of 13 cents per Ordinary share, in respect of thefinal quarter of 2006 was declared on 13 February 2007 and is payable on 8 March2007. 3. Earnings Per Share Basic earnings per share is calculated by dividing net loss available toOrdinary Shareholders by the weighted average number of ordinary sharesoutstanding during the year. Year ended 22 February 2005* to 31 December 2006 31 December 2005 Number of shares Number of shares Weighted average number of Ordinary Shares outstanding 26,606,235 28,323,517 * Commencement of operations 08 April 2005. 4. Available for Sale Investments 31 December 2006 31 December 2005 US $'000 US $'000 Cost at 1 January / 22 February 1,419,353 -Purchases of investments 2,424,455 3,215,324Proceeds from sale of investments (1,322,642) (1,259,358)Realised loss on sale of investments (10,022) (21,651)Loss from impairment (25,692) -Principal paydowns (423,788) (508,470)Net amortisation of premiums (2,144) (6,492)Amortised cost at 31 December 2,059,520 1,419,353Unrealised gain / (loss) on available for sale investments 14,082 (13,940) Market value at 31 December 2,073,602 1,405,413 Gross Unrealised Gross Unrealised Estimated FairAt 31 December 2006 Amortised Cost Gain Loss Value US $'000 US $'000 US $'000 US $'000 Adjustable rate 775,936 2,944 (401) 778,479Fixed rate 1,283,584 12,995 (1,456) 1,295,123 Total 2,059,520 15,939 (1,857) 2,073,602 Gross Unrealised Gross Unrealised Estimated FairAt 31 December 2005 Amortised Cost Gain Loss Value US $'000 US $'000 US $'000 US $'000 Adjustable rate 882,032 3 (8,062) 873,973Fixed rate 537,321 2 (5,883) 531,440 Total 1,419,353 5 (13,945) 1,405,413 As at 31 December 2006, all of the assets in the Company's portfolio were FannieMae and Freddie Mac mortgage-backed securities, which carry an implied "AAA"rating. 31 December 31 December 2006 2005 Fixed-rate mortgage-backed securities 62% 38% Adjustable-rate mortgage-backed securities 11% 43% Floating-rate mortgage-backed securities 27% 19% As at 31 December 2006, investments totalling US$1.9 billion (2005: US$1.0billion) were pledged as security in respect of reverse repurchase agreements(see note 7). Mortgage-backed securities are created when mortgages and their attendantstreams of interest and principal payments are pooled to serve as collateral forthe issuance of securities to investors. Interests in mortgage-backed securitiesdiffer from other forms of traditional debt securities, which normally providefor periodic payment of interest in fixed amounts with principal payments atmaturity or specified call dates. Instead, mortgage-backed securities typicallyprovide irregular cash flows consisting of both interest and principal. An investment consideration of any mortgage-backed security is the structure ofthe payment of the cash flow streams from the underlying mortgages to theholders of the mortgage-backed securities. The cash flows can be simply passedfrom the mortgage holder to the investor or they can be structured in a numberof different ways. The market values of the various structures will vary indifferent interest rate or prepayment environments, with the more derivative orcomplex structures (e.g., interest-only or principal-only securities) being moresensitive to movements in interest rates or rates of prepayment. Beyond the basic security of the mortgages and properties that underliemortgage-backed securities, a critical attribute of mortgage-backed securitiesissued by the US Agencies is the credit enhancement that the US Agenciesprovide. The holder of mortgage-backed securities issued or guaranteed by the USAgencies is guaranteed the timely payment of principal and interest. Ginnie Maeis the principal governmental (i.e., backed by the full credit of the USGovernment) guarantor of mortgage-backed securities. Fannie Mae and Freddie Macare the principal US Government-related (i.e. not backed by the full credit ofthe US Government) guarantors. Adjustable-rate and floating-rate mortgage-backed securities in which theCompany may invest include pass-through mortgage-backed securities issued by theUS Agencies backed by adjustable-rate mortgages and Floaters. The interest rateson adjustable-rate mortgage-backed securities are reset at periodic intervals toan increment over some predetermined reference interest rate. There are two maincategories of reference rates: (i) those based on US Treasury securities and(ii) those derived from a calculated measure such as a cost of funds index or amoving average of mortgage rates. Commonly utilised reference rates include theone-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates,such as the one-year Treasury Bill rate or LIBOR, closely mirror changes inmarket interest rate levels. Others tend to lag changes in market rate levelsand tend to be somewhat less volatile. Adjustable-rate mortgages frequently have upper and lower limits on the interestrates to which a residential borrower may be subject (i) in any reset oradjustment interval and (ii) over the life of the loan. These upper and lowerlimits are commonly known as ''caps'' and ''floors'' respectively. With the continued increase in the Federal Funds rate during the second quarterof 2006, the Company determined that it did not intend to hold certain of itssecurities until maturity and would reposition a portion of its assets. Thecompany recorded an impairment charge of US$25.7 million for these securitiesduring the second quarter of 2006. The remaining investments are not consideredother-than-temporarily-impaired since the Company currently has the ability andintent to hold the investments for a period of time or to maturity, ifnecessary, sufficient for a forecasted market price recovery up to or beyond thecost of the investments. 5. Current Assets and Current Liabilities The Directors consider that the carrying amount of other receivablesapproximates their fair value. Cash and cash equivalents comprise bank balances held by the Company. Thecarrying amount of these assets approximates their fair value. Other payables principally comprise amounts outstanding on purchases ofinvestments awaiting settlement and ongoing costs. The Directors consider thecarrying amount of other payables approximates to their fair value. 6. Hedging Instruments The Company uses interest rate swaps to manage its exposure to interest ratemovements. When the Company enters into an interest rate swap, it agrees to paya fixed rate of interest and to receive a variable interest rate, generallybased on the London Interbank Offered Rate ("LIBOR"). The Company's swaps aredesignated as cash flow hedges against the benchmark interest rate riskassociated with the Company's borrowings. At 31 December 2006, the Company had interest swap agreements of US$597 millionnotional amount (2005: US$65 million) in which the Company will pay a weightedaverage rate of 5.22% (2005: 4.83%) and receive a weighted average rate of 5.35%(2005: one month LIBOR). The fair value of the swaps entered into at 31 December 2006 is estimated atUS$2,444,846 loss (2005: US$19,500 loss). These swaps are designated andeffective as cashflow hedges and the fair value thereof has been deferred inequity. The realised gain on swaps in the year was US$135,022 (2005: US$ Nil). 7. Reverse Repurchase Agreements At 31 December 2006 the aggregate value of securities pledged by the Companyunder reverse repurchase agreements exceeds the liability under such agreementsby approximately US$ 55.6 million (2005: US$30.6 million) (approximately 3% ofsuch liability). The interest rates on the open reverse repurchase agreementsat 31 December 2006 range from 4.56% to 5.39% (2005: from 4.28% to 4.35%) andhave maturity dates ranging from 3 days to 289 days (2005: from one day to onemonth). 8. Issued Capital and Reserves Ordinary Share Capital 31 December 2006 31 December 2005 US $'000 US $'000Authorised60,000,000 Ordinary Shares of US$0.01 each 600 600 Issued25,625,550 (2005: 27,750,550) Ordinary Shares of US$0.01 each 256 277 Issue of shares The Company issued 2 Ordinary Shares of US$0.01 on incorporation on 22 February2005 at par. Following the Initial Public Offering the Company issued26,500,000 Ordinary Shares of US$0.01 each (including the previously issuedOrdinary Shares) on 8 April 2005 and a further 2,110,000 Ordinary Shares ofUS$0.01 were issued on 9 May 2005 at a premium of US$9.99 per Ordinary Share. The issue costs associated with the Initial Public Offering amounted toUS$15,640,237. Repurchase of shares On 17 November 2005, the Company purchased for cancellation 70,000 of itsOrdinary Shares at a price of US$7.531429 per share. On 18 November 2005, theCompany purchased for cancellation 789,450 of its Ordinary Shares at a price ofUS$6.75 per share. On 26 May 2006, the Company purchased for cancellation 500,000 of its OrdinaryShares at a price of US$7.611819 per share. On 8 June 2006, the Companypurchased for cancellation 725,000 of its Ordinary Shares at a price ofUS$7.417783 per share. On 15 June 2006, the Company purchased for cancellation500,000 of its Ordinary Shares at a price of US$7.407359 per share. On 10 August2006, the Company purchased for cancellation 400,000 of its Ordinary Shares at aprice of US$6.83019 per share. The total cost of the Ordinary Shares purchased was US$15,619,559 (2005:US$5,873,559) has been charged against the distributable reserve, which has beenset up for this purpose as described below. As required by The Companies (Purchase of Own Shares) Ordinance, 1998, thenominal value of the Ordinary Shares purchased US$21,250 (2005: US$8,594) has been credited to a capital redemption reserve. Authority to buyback shares The Company currently has authority to undertake a share purchase of up to14.99% of the share capital of the Company and the Board of Directors hasapproved the use of on-market purchases of Ordinary Shares for cancellation atappropriate prices which will enhance net asset value. Capital Redemption Reserve 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Balance at 1 January / 22 February 9 -Buyback of shares 21 9Balance at 31 December 30 9 *Commencement of operations 08 April 2005 Share Premium Account 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Balance at 1 January / 22 February 50,000 -Premium arising on issue of equity shares - 285,814Expenses incurred on issue of equity shares - (15,640)Reclassification of share premium - (220,174) Balance at 31 December 50,000 50,000 *Commencement of operations 08 April 2005 In 2005, the Company applied to the Royal Court of Guernsey, immediately afterthe placing of the shares, to reduce its share premium account in order toprovide a distributable reserve to repurchase its shares if and when it isconsidered beneficial to do so by the Directors. As such, the share premiumaccount, after deduction of preliminary costs, was reduced by US$220,174,000 anda distributable reserve created for this amount. The balance on thedistributable reserve following the repurchase of Ordinary Shares as describedabove is shown below. Distributable Reserve 22 February 2005* Year ended to 31 December 31 December 2006 2005 US $'000 US $'000 Balance at 1 January / 22 February 214,300 -Reclassification of share premium - 220,174Repurchase of shares (15,619) (5,874)Balance at 31 December 198,681 214,300 *Commencement of operations 08 April 2005 Accumulated Profits 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Balance at 1 January / 22 February 2,973 -Net losses for the year / period (23,093) (7,810)Realised losses transferred to non-distributable capital reserve (see 35,580 21,651below)Dividends paid (11,740) (10,868)Balance at 31 December 3,720 2,973 *Commencement of operations 08 April 2005 Capital Reserve - Realised Loss on Available for Sale Investments 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Balance at 1 January / 22 February (21,651) -Net losses on sale of available for sale investments and impairment ofavailable for sale investments transferred from accumulated profits (35,715) (21,651) Realised gain on cash flow hedge transferred from accumulated profits 135 - Balance at 31 December (57,231) (21,651) *Commencement of operations 08 April 2005 Realised gains or losses arising on the sale of investments are initiallyrecognised in the income statement as required under International FinancialReporting Standards but are transferred to a non-distributable capital reservein accordance with the Memorandum and Articles of Association of the Company. Revaluation Reserve - Unrealised Gain (Loss) on Available for Sale Investments 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Balance at 1 January / 22 February (13,940) -Unrealised losses on revaluation taken to equity (7,558) (35,591)Transferred to income statement on sale of investments 9,888 21,651Transferred to income statement on impairment of investments 25,692 - Balance at 31 December 14,082 (13,940) *Commencement of operations 08 April 2005 Cash Flow Hedge Reserve 22 February 2005* Year ended to 31 December 2006 31 December 2005 US $'000 US $'000 Balance at 1 January / 22 February (20) -Decrease in fair value of hedging instrument taken to equity (2,425) (20) Balance at 31 December (2,445) (20) *Commencement of operations 08 April 2005 9. Net Asset Value The net asset value per Ordinary Share is based on net assets at the year endand on 25,625,550 Ordinary Shares, being the number of Ordinary Shares in issueat the year end. At 31 December 2006, the reported net asset value per Ordinary Share (beforeexcluding the dividend declared for the quarter ended 31 December 2006) isUS$8.08 (2005: US$8.36). At 31 December 2006, the Company had a net asset value per Ordinary Share ofUS$7.95 (2005: US$8.26), after including the effect of the dividend declared forthe quarter of 31 December 2006 of US$3,331,322 (2005: US$2,775,055). 10. Cash Flows from Operating Activities 31 December 2006 31 December 2005 US $'000 US $'000 Net loss for the year / period (23,093) (7,810) Net amortisation of premiums on available for sale investments 2,144 6,492Realised loss on available for sale investments 35,715 21,651Realised gain on cash flow hedge (135) - 37,724 28,143 Purchases of investments (2,572,439) (3,051,933)Proceeds from sale of investments 1,322,777 1,259,358 (1,249,662) (1,792,575) Principal paydowns 430,772 498,275Borrowings under reverse repurchase agreements 24,167,924 18,552,131Repayments under reverse repurchase agreements (23,336,234) (17,530,064) 1,262,462 1,520,342 Increase in receivables (2,537) (6,264)Increase in payables 2,495 4,451 (42) (1,813) Net cash inflow / (outflow) from operating activities 27,389 (253,713) Purchases and sale of investments are considered to be operating activities ofthe Company, given its purpose, rather than investing activities. Cash and cash equivalents (which are presented as a single class on the face ofthe balance sheet) comprise cash at bank. 11. Ten largest investments as at 31 December 2006 Summary details of the ten largest investments as at 31 December 2006: Description Market Value US $'000s % of portfolio Current couponFN 850568 116,713 5.63% 5.50%FG A48575 81,914 3.95% 6.00%FNR 2005-47 FG 79,108 3.81% 5.85%FHR 2005-96 UA 73,305 3.54% 5.50%FHR 3167 QE 55,193 2.66% 6.00%FN 256233 48,869 2.36% 6.00%FHR 2961 FC 47,001 2.27% 5.80%FHR 3061 DA 46,393 2.24% 5.50%FN 256492 41,506 2.00% 6.00%FNR 2006-58 FY 41,296 1.99% 5.92% This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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