1st Feb 2006 07:01
Prodesse Investment Limited01 February 2006 Prodesse Investment Limited1 February 2006 Prodesse Investment Limited Results for the 3 month period to 31 December 2005 Portfolio repositioned to new interest rate environment with intention to improve future income for shareholders and reduce NAV volatility. Highlights: • Dividend per share of US$0.10 from net interest income - equates to an annualised dividend yield of 5.25%1 (FTSE All Share annualised dividend yield of 2.95%2) • NAV per share of US$8.36 (30 Sept 05: US$9.03) reflects both realised and unrealised losses in the market value of mortgage-backed securities as short term US interest rates continued to rise • Accelerated portfolio repositioning to new interest rate environment in accordance with the established barbell strategy with the intention to improve income generation and reduce NAV volatility • Repositioning consists of asset sales of US$1.3 billion resulting in realised losses of US$0.78 per share (US$0.44 included in 30 Sept 05 unrealised losses) • Asset purchases subsequent to quarter-end-portfolio remains 100% implied AAA mortgage-backed securities • Programme to repurchase shares in the market for cancellation when deemed beneficial to the Company remains in force following publication of the year end audited accounts 1 Based on annualisation of Q4 dividend, an exchange rate of 1.7187 US$ perPound Sterling and a closing price of 443p on 30 December 2005. 2 Based on closing share prices of the constituents of the FTSE All Share indexon 30 December 2005 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,commented: "The difficult market environment for financial institutions persisted duringthe fourth quarter. US short-term interest rates continued to rise whilelong-term rates stayed relatively stable causing a decline in the Company's netincome and pressure on NAV. In the fourth quarter, we have taken steps withthe intention of improving the income-producing ability of the portfolio andreducing net asset value volatility as we continue forward through this phase ofthe US interest rate cycle." Financial Highlights Q4 2005 Q3 2005 US$Dividend per share 0.10 0.18Net (loss)/income (18.8m) 5.1mNet (loss)/income per share (0.68) 0.18Net asset value per share 8.36 9.03 GBP Sterling3Dividend per share 6p 10pNet (loss)/income (£10.9m) £2.9mNet (loss)/income per share (40)p 10pNet asset value per share 486.4p 511.5p Illustration is based upon an exchange rate of 1.7187 and 1.7653 US$ per PoundSterling at 30 December 2005 and 30 September 2005, respectively. Translationto GBP Sterling is given for illustration purposes only as Prodesse invests inUS$ denominated assets only which produce US$ income. This release does not constitute the preliminary announcement of annual audited accounts in accordance with LSE listing rules. EnquiriesRob Bailhache / Nick Henderson, Financial DynamicsTel: 020 7269 200 / 020 7269 7114 Sara Radford / Paul Smith, RBSI Fund Services (Guernsey) LimitedTel: 01481 743000 About Prodesse Prodesse Investment Limited is a limited liability Guernsey-incorporatedclosed-end investment company, the investments of which are managed by FixedIncome Discount Advisory Company. The Company's investment policy is to providenet income for distribution from the spread between the interest income earnedfrom a portfolio of residential mortgage-backed securities and the cost ofrepurchase agreements entered into to finance the acquisition of suchresidential mortgage-backed securities. Conference Call There will be an analyst presentation on the results at 10:00 am on Wednesday 01February 2006 at Financial Dynamics, Holborn Gate, 26 Southampton Buildings,London WC2A 1PB. Those analysts wishing to attend, or to register are asked tocontact Nick Henderson at Financial Dynamics on +44 (0)20 7269 7114 or [email protected]. The presentation will also be accessible via a conference call for those unableto attend in person. To listen-in please call +44 (0)20 7365 1850 (UKParticipants) or +1 718 354 1172 (US Participants). A web cast of the presentation will be available following the meeting atwww.prodesse.co.uk. Company performance Prodesse reported a net loss for the quarter ended 31 December 2005 of US$18.8million (quarter ended 30 September 2005; net income of US$5.1 million) or a netloss of US$0.68 per share (quarter ended 30 September 2005: US$0.18 net incomeper share). Included in the results for the quarter ended 31 December 2005 is arealised loss of US$21.7 million from the sale of securities, or US$0.78 pershare. Excluding the effects of the sale, net income was US$2.9 million orUS$0.10 per share. The Company delivered an annualised return on average equity (RoAE) of negative30.65% for the quarter ended 31 December 2005 (quarter ended 30 September 2005:7.72%). Excluding the effects of realised losses, the Company delivered anannualized RoAE of 4.69%. 01 October 2005 01 July 2005 to 08 April 2005 to to 31 December 2005 30 September 2005 30 June 2005 Reported Net (loss) income (US$18.8 million) US$5.1 million US$5.8 million Net (loss) income per share (US$0.68) US$0.18 US$0.21 Annualised RoAE (30.65)% 7.72% 9.67% Portfolio Performance For the quarter ended 31 December 2005, the annualised yield on average assetswas 4.49% (quarter ended 30 September 2005: 4.23%) and the annualised cost offunds on the average repurchase balance was 4.12% (quarter ended 30 September2005: 3.57%), which equates to an interest rate spread of 0.37% (quarter ended30 September 2005: 0.66%). This is a 0.29% decrease from the interest ratespread for the quarter ended 30 September 2005. At 31 December 2005, theannualized yield earned on assets was 4.97% and the annualised cost of funds onthe repurchase balance was 4.33%, which equates to an interest rate spread of0.64%. Net income and yields stated in this press release do not include netunrealised losses on investments. Net unrealised losses are reflected in theequity in accordance with the accounting policies. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backedsecurities portfolio averaged 20% for the quarter ended 31 December 2005(quarter ended 30 September 2005: 23%). Prepayment speeds on mortgage-backedsecurities, as reflected by the CPR vary according to the type of investment,changes in interest rates, conditions in the financial markets, competition andother factors, none of which can be predicted with any certainty. In general,as prepayment speeds on the Company's mortgage-backed securities portfolioincrease, related purchase premium amortization increases, thereby reducing thenet yield on such assets. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 Annualised Yield on AverageAssets 4.49% 4.23% 4.01%Annualised Cost of Funds onAverage Repurchase Balance 4.12% 3.57% 2.67%Interest Rate Spread 0.37% 0.66% 1.34%CPR 20% 23% 20% As at 31 December 2005, all of the assets in the Company's portfolio were FannieMae and Freddie Mac mortgage-backed securities, which carry an implied "AAA"rating. 01 October 2005 to 01 July 2005 to 30 08 April 2005 to 31 December 2005 September 2005 30 June 2005Fixed-rate mortgage-backed 38% 32% 33%securitiesAdjustable-rate mortgage-backed 43% 61% 59%securitiesFloating-rate mortgage-backed 19% 7% 8%securities During the quarter, the Company sold approximately US$1.3 billion face amount ofsecurities resulting in a realised loss of US$21.7 million, or US$0.78 pershare. The securities sold were primarily adjustable-rate mortgagebacked-securities which, based on current and expected market conditions, weredeemed by the Investment Manager unlikely to recover to their amortised costbasis or provide positive interest rate spread over their cost of borrowings. Borrowings The ratio of average daily reverse repos to equity resulted in leverage of theCompany of 9.3:1 during the quarter ended 31 December 2005 (quarter ended 30September 2005: 8.9:1). The leverage at 31 December 2005 was 4.4:1 (30 September2005: 9.4:1). The reduction of leverage at quarter end was due to the sale ofUS$1.3 billion face amount of securities. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 Average Leverage for 9.3:1 8.9:1 5.8:1PeriodLeverage at Period End 4.4:1 9.4:1 8.1:1 During the quarter, the Company entered into a 5-year interest rate swapagreement of US$65 million notional amount in which the Company will pay a rateof 4.83% and receive 1 month LIBOR on a monthly basis. Capital At 31 December 2005, the Company had a net asset value per share of US$8.36 (30September 2005: US$9.03), after excluding the effect of current dividendsdeclared for the quarter of 31 December 2005 of US$2,775,055 (for the quarter 30September 2005: US$5,146,209), reported net asset value per share is US$8.26 (30September 2005: US$8.85). The Company currently has authority to undertake ashare purchase of up to 14.99% of the share capital of the Company and the Boardof Directors has approved the use of on-market purchases of ordinary shares forcancellation at appropriate prices which will enhance net asset value. Duringthe quarter, the Company purchased 859,450 shares, comprising approximately 3%of shares outstanding as of 30 September 2005. The shares were purchased at aweighted average price of US$6.81. The total cost of the ordinary sharespurchased was US$5,873,559. As required by The Companies (Purchase of OwnShares) Ordinance, 1998, the nominal value of the ordinary shares purchased(US$8,594) has been credited to a capital redemption reserve. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 NAV US$8.36 US$9.03 US$9.56Dividends declared forthe period US$2,775,055 US$5,146,209 US$5,722,000NAV excluding dividendsdeclared US$8.26 US$8.85 US$9.36 Dividend The Company has declared a dividend for the quarter ended 31 December 2005 ofUS$0.10 per share payable on 23 February 2006 to holders on the register on 10February 2006. Dividends are calculated and paid in US dollars. Shareholdersresident in the UK wishing for the conversion of dividend payments into Sterlingshould contact the Company's administrator. 01 October 2005 to 01 July 2005 to 08 April 2005 to 31 December 2005 30 September 2005 30 June 2005 Net (loss) income per (US$0.68) US$0.18 US$0.21shareDividends per share US$0.10 US$0.18 US$0.20 Details of Repositioning The persistence of the Federal Reserve's current stance of removing monetarypolicy accommodation through raising the Federal Funds Rate, and the prospectfor further tightenings, has prompted the Company to reposition the portion ofits portfolio deemed unlikely to recover to their amortised cost basis orprovide positive interest rate spread over their cost of borrowing. During thequarter, the Company sold approximately US$1.3 billion in mortgage-backedsecurities and purchased approximately US$207.1 million. Subsequent toquarter-end, the Company purchased approximately US$891.0 million inmortgage-backed securities consisting of US$822.0 million of fixed-ratemortgage-backed securities and US$69.0 million of floating-rate mortgage-backedsecurities. The securities purchased during, and subsequent to, the quarter,had a weighted average yield of 5.40%. A portion of the fixed-rate assetspurchased were for the purpose of swapping their fixed-rate coupons intofloating-rate cash flows. The Company has entered into a total of 4 interestrate swap agreements totaling US$456 million notional amount in which theCompany will pay a weighted average rate of 4.79% and receive 1 month LIBOR on amonthly basis. The net result is that at 20 January 2006, approximately 34% ofthe portfolio's cash flows are floating rate in nature. At 20 January 2006Yield on Assets 5.08%Cost of Funds 4.45%Interest Rate Spread 0.63%Leverage 8.5:1Fixed-rate mortgage-backed securities as % of portfolio 60%Adjustable-rate mortgage-backed securities as % of portfolio 26%Floating-rate mortgage-backed securities as % of portfolio 14%Notional Amount of Interest Rate Swap as % of portfolio 20% Outlook "We continue to be disciplined in executing the barbell strategy for long-termperformance," said Wellington Denahan-Norris, Chief Investment Officer forProdesse's Investment Manager, FIDAC. "The recent rebalancing is intended toaccelerate the process that naturally takes place through the resetting ofcoupons and the reinvestment of principal and interest into the changinginterest rate environment. We believe that the rebalancing of Prodesse'sportfolio into more floating rate exposure will enable the Company to generate ahigher dividend than it otherwise would have been able to provide. Thisprolonged tightening cycle and the elevated levels of prepayments have beenchallenging for us, but these conditions have also created better value forinvestment in mortgage-backed securities today." This press release includes statements that are, or may be deemed to be,''forward-looking statements''. These forward-looking statements can generallybe identified by the use of forward-looking terminology, including the terms''believes'', ''estimates'', ''anticipates'', ''expects'', ''intends'', ''may'',''will'' or ''should'' or, in each case, their negative or other variations orcomparable terminology. These forward-looking statements include all mattersthat are not historical facts. All forward-looking statements address mattersthat involve risks and uncertainties, are only predictions, and you should notrely unduly on them. Accordingly, there are or will be important factors thatcould cause the Company's actual results to differ materially from thoseindicated in these statements. These factors include but are not limited tothose described in the Company's prospectus under the heading ''SpecialConsiderations and Risk Factors''. Any forward-looking statements in this pressrelease reflect the Company's current views with respect to future events andare subject to these and other risks, uncertainties and assumptions relating tothe Company's operations, results of operations, growth strategy and liquidity.These forward-looking statements speak only as of the date of this pressrelease. Subject to any obligations under the Listing Rules, the Companyundertakes no obligation publicly to update or review any forward-lookingstatement, whether as a result of new information, future developments orotherwise. All subsequent written and oral forward-looking statementsattributable to the Company or FIDAC or individuals acting on behalf of theCompany or FIDAC are expressly qualified in their entirety by this paragraph.Prospective investors should specifically consider the factors identified abovewhich could cause actual results to differ before making any investmentdecision. Prodesse Investment LimitedBalance Sheet(unaudited) at 31 December 2005, 30 September 2005 and 30 June 2005 31-Dec-05 30-Sep-05 30-Jun-05 US$ US$ US$ASSETSCurrent assetsAvailable for sale investments 1,405,412,720 2,688,176,717 2,627,255,210Accrued income receivable 6,228,846 11,644,460 10,559,381Receivable for principal paydowns 10,195,316 13,448,335 8,327,274Cash and cash equivalents 5,059 12,122 5,999Prepaid expenses 34,904 66,798 98,256 Total assets 1,421,876,845 2,713,348,432 2,646,246,120 EQUITY AND LIABILITIES Capital and reservesShare capital:27,750,550 at 31 December, 2005, 277,506 286,100 286,10028,610,000 at 30 September 2005 and 30June 2005 @ USD 0.01Capital redemption reserve 8,594 - -Share premium 50,000,000 50,000,000 50,000,000Distributable reserve 214,300,104 220,173,663 220,299,299Accumulated profits 2,972,952 5,246,367 5,843,027Capital Reserve-Realised (loss)/gain on available for sale investments (21,651,450) 5,313 - Revaluation reserve (13,940,391) (17,384,448) (2,843,493)Cash flow hedge reserve (19,500) - - Total shareholders' equity 231,947,815 258,326,995 273,584,933 Current liabilitiesSecurities purchased payable 163,391,316 11,560,141 162,120,786Reverse repos 1,022,067,000 2,436,369,000 2,206,752,000Accrued interest expense 3,509,041 5,551,769 2,759,461Accrued expenses payable 942,173 1,540,527 1,028,940Hedging instrument 19,500 - - Total liabilities 1,189,929,030 2,455,021,437 2,372,661,187 Total equity and liabilities 1,421,876,845 2,713,348,432 2,646,246,120 Net Assets 231,947,815 258,326,995 273,584,933 Net Asset Value per share 8.36 9.03 9.56 Prodesse Investment Limited (unaudited) Summary Income Statement 01 October 2005 to 01 July 2005 to 30 08 April 2005 to 31 December 2005 September 2005 30 June 2005* IncomeInterest income 27,307,521 28,394,099 16,231,405Interest expense (23,306,345) (21,084,466) (9,330,907) Net interest income 4,001,176 7,309,633 6,900,498 Realised (loss)/gain on sale of available for sale investments (21,656,763) 5,313 - ExpensesManagement, custodian and administration fees 942,468 2,018,214 937,308Other operating expenses 185,913 166,079 120,163 Total expenses 1,128,381 2,184,293 1,057,471 Net (loss)/income for the period (18,783,968) 5,130,653 5,843,027 Net (loss)/income per share for the period (0.68) 0.18 0.21 Dividend declared per share for the period 0.10 0.18 0.20 * commencement of operations 08 April 2005 Prodesse Investment Limited Cash Flow Statement (unaudited) from 01 October 2005 to 31 December 2005, 01 July 2005 to 30September 2005, and 08 April 2005 to 30 June 2005. 01 October 2005 to 01 July 2005 to 30 08 April 2005 to 31 December 2005 September 2005 30 June 2005* US$ US$ US$ Net cash inflow/(outflow) from operating 11,012,705 5,853,758 (270,579,400) activities (Note 1) FinancingNet proceeds from offering - - 270,585,399Offering Cost (125,635)Own shares acquired (5,873,559) - -Dividends paid (5,146,209) (5,722,000) - Net cash (outflow)/inflow from financing (11,019,768) (5,847,635) 270,585,399 (Decrease)/increase in cash and cash equivalents (7,063) 6,123 5,999 Cash and cash equivalents, at beginning of period 12,122 5,999 - Cash and cash equivalents, at end of period 5,059 12,122 5,999 Note 1Net (loss)/income for the period (18,783,968) 5,130,653 5,843,027Net amortisation of premiums on available for sale investments 3,123,879 2,655,987 712,000 Realised loss/(gain) on sale of available for sale investments 21,656,763 (5,313) - Purchases of investments (55,678,354) (453,612,318) (2,542,805,196)Proceeds from sale of investments 1,253,691,106 5,666,667 -Principal paydowns 218,359,667 214,429,874 65,484,813Borrowings under reverse repurchase agreements 6,231,988,000 7,229,892,000 5,090,251,000Repayments under reverse repurchase agreements (7,646,290,000) (7,000,275,000) (2,883,499,000)ReceivablesDecrease/(increase) in accrued income receivable 5,554,800 (1,364,146) (10,256,189)Decrease/(increase) in prepaid expenses 31,894 31,459 (98,256)Liabilities(Decrease)/increase in accrued interest expense (2,042,728) 2,792,308 2,759,461(Decrease)/increase in accrued expenses payable (598,354) 511,587 1,028,940 Net cash inflow/(outflow) from operating activities 11,012,705 5,853,758 (270,579,400)* commencement of operations 08 April 2005 Prodesse Investment LimitedStatement of Changes in Shareholders' Equity(unaudited) from 08 April 2005 to 31 December 2005 Share Capital Share premium Distributable capital redemption reserve reserve US$ US$ US$ US$Balance at 08 April 2005 - - - -Net income for the period - - - -Available for sale investments: Unrealised loss on revaluation taken to Equity - - - - Total recognised income and expenses for the period - - - -Issuance of shares 286,100 - 285,813,900 -Offering costs - - (15,514,601) -Reclassification of share premium - - (220,299,299) 220,299,299Balance at period ended 30 June 2005 286,100 - 50,000,000 220,299,299Available for sale investments: Unrealised loss on revaluation taken to equity - - - - Transfer of realised gains to - - - -capital reserveNet income for the period - - - -Total recognised income and expenses - - - -for the periodOffering cost - - (125,636) - Transfer to share premium account - - 125,636 (125,636) Dividend paid - - - -Balance at quarter ended 30 September 2005 286,100 - 50,000,000 220,173,663 Available for sale investments: Unrealised loss on revaluation - - - -taken to Equity Transfer of realised gain to - - - -capital reserveNet loss for the period - - - -Cash flow hedge reserve - - - -Total recognised income and expenses - - - -for the periodDividend paid - - - -Buyback of shares (8,594) 8,594 - (5,873,559) Balance at quarter ended 31 December 2005 277,506 8,594 50,000,000 214,300,104 Prodesse Investment LimitedStatement of Changes in Shareholders' Equity(unaudited) from 08 April 2005 to 31 December 2005 Capital Reserve - Revaluation Accumulated Cash flow Total realised gain/ reserve - profits hedge (loss) on sales Unrealised gain of available for /(loss) on reserve sale investments available for sale investments US$ US$ US$ US$ US$Balance at 08 April 2005 - - - - -Net income for the period - - 5,843,027 - 5,843,027Available for sale investments: Unrealised loss on revaluation taken to Equity - (2,843,493) - (2,843,493) Total recognised income and expenses for the period - (2,843,493) 5,843,027 - 2,999,534 Issuance of shares - - - - 286,100,000 Offering costs - - - - (15,514,601) Reclassification of share premium - - - - - Balance at period ended 30 June 2005 - ( 2,843,493) 5,843,027 - 273,584,933Available for sale investments: Unrealised loss on revaluation taken to equity - (14,540,955) - - (14,540,955) Transfer of realised gains to 5,313 - (5,313) - -capital reserve Net income for the period - - 5,130,653 - 5,130,653 Total recognised income and expenses 5,313 (14,540,955) 5,125,340 (9,410,302)for the period Offering cost - - - - (125,636) Transfer to share premium account - - - - - Dividend paid - - (5,722,000) - (5,722,000) Balance at quarter ended 30 September 2005 5,313 (17,384,448) 5,246,367 - 258,326,995 Available for sale investments: Unrealised loss on revaluation taken to Equity - 3,444,057 - - 3,444,057 Transfer of realised gain to capital reserve (21,656,763) - 21,656,763 - - Net loss for the period - - (18,783,968) - (18,783,968)Cash flow hedge reserve - - - (19,500) (19,500)Total recognised income and expenses for the period (21,656,763) 3,444,057 2,872,795 (19,500) (15,359,411) Dividend paid - - (5,146,210) (5,146,210)Buyback of shares - - - - (5,873,559)Balance at quarter ended 31 December 2005 (21,651,450) (13,940,391) 2,972,952 (19,500) 231,947,815 Prodesse Investment LimitedFootnotes to the quarterly report ended 31 December 2005 1. Organisation and Investment Objective Prodesse Investment Limited is a limited liability Guernsey-incorporatedclosed-end investment company, the investments of which are managed by FixedIncome Discount Advisory Company ("the Investment Manager"). The Company'sshare capital structure consists solely of Ordinary Shares. The Company has alisting on the London Stock Exchange and a listing on the Channel Islands StockExchange. The Company will have an indefinite life but Shareholders will havethe opportunity to vote on its continuation at the Annual General Meeting to beheld in 2010. The Company invests in a portfolio consisting primarily of actual or impliedAAA-rated mortgage-backed securities on a leveraged basis. The Company'sinvestment strategy is to generate net income for distribution from the spreadbetween the interest income from the portfolio and the cost of borrowingpursuant to reverse repurchase agreements used to finance the portfolio. TheInvestment Manager will seek to enhance returns through what it considers anappropriate amount of leverage. 2. Significant Accounting Policies The financial statements of the Company 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"), together with applicable legal andregulatory requirements of Guernsey Law and the Listing Rules of the UK ListingAuthority and the Channel Islands Stock Exchange. The financial statements have been prepared on the historical cost basis exceptfor the revaluation of certain financial instruments. A summary of thesignificant principal accounting policies are set out below. The preparation offinancial statements in conformity with International Financial ReportingStandards requires the Company to make estimates and assumptions that affect thereported amounts of assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates. (a) Government Sponsored Enterprises: The Company invests in securitiesissued by the Government National Mortgage Association ("Ginnie Mae"), a USGovernment corporation and US Government sponsored entities such as the FederalHome Loan Mortgage Corporation ("Freddie Mac") , Federal National MortgageAssociation ("Fannie Mae") and the Federal Home Loan Banks ("FHLB"). FreddieMac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are notCompanies by congressional appropriations and the debt and mortgage-backedsecurities issued by Freddie Mac, Fannie Mae and FHLB are neither guaranteed norinsured by the United States Government. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgagebacked securities are backed by those respective agencies, and the payment ofprincipal and interest on the Ginnie Mae mortgage backed securities are backedby the full-faith-and-credit of the US Government. Although the Companygenerally intends to hold most of its securities until maturity, it may, fromtime to time, sell any of its mortgage-backed securities as part of its overallmanagement strategy. Accordingly the Company classifies all its mortgage-backedsecurities as available for sale and these are reported at fair value. The Investment Manager uses internally generated pricing tools and matrices thattake into account such factors as duration, convexity, interest rate levels andthe experience of its portfolio managers. External information is then comparedto internally generated tools to compare pricing reasonableness. (b) Security Transactions and Investment Income: Security transactions arerecorded on trade date. Realised and unrealised gains and losses are calculatedbased on specific identified cost. Interest income is recorded as earned.Interest income and expense includes amortisation of market discount and premiumas calculated using a hybrid methodology utilising the principles of effectiveinterest method. Realised gains or losses on paydowns are reclassified fromgains to income. (c) Reverse Repurchase Agreements: The Company enters into reverserepurchase agreements with qualified third party financial institutions tofinance its investment in mortgage-backed securities. The agreements aresecured by the value of the Company's mortgage-backed securities. Interest on the principal value of reverse repurchase agreements issued andoutstanding is based upon competitive market rates at the time of issuance.When the Company enters into a reverse repurchase agreement, it establishes andmaintains a segregated account with the lender containing securities having avalue not less than the repurchase price, including accrued interest, of thereverse repurchase agreement. Repurchase agreements are treated as collateralised financing transactions andare carried at their contractual amounts, including accrued interest, asspecified in the repurchase agreements. Accrued interest in the accompanyingbalance sheet is recorded as a separate line item. Securities sold subject to repurchase agreement are retained in the financialstatements as available for sale securities and the counter party liability isincluded in liabilities under repurchase agreements. (d) When-Issued/Delayed Delivery Securities: The Company may purchase or sellsecurities on a when-issued or delayed delivery basis, including "TBA"securities. TBA securities are mortgage-backed securities for which detailsabout the underlying mortgages have not yet been announced. Securities tradedon a when-issued basis are traded for delivery beyond the normal settlement dateat a stated price and yield, and no income accrues to the purchaser prior todelivery. Purchasing or selling securities on a when-issued or delayed deliverybasis involves the risk that the market price at the time of delivery may belower or higher than the agreed upon price, in which case an unrealised loss maybe incurred. The Company did not transact in when-issued or delayed deliverysecurities during the period from 8 April 2005 (inception) to 31 December 2005. (e) Taxes: The Company is exempt from Guernsey taxation under the Income Tax(Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of£600. (f) Cash and cash equivalents: include amounts held in interest bearingovernight accounts. (g) Realised and unrealised gains and losses on investments: Unrealisedgains or losses arising on the revaluation of investments are included inequity. Unrealised losses on Investment Securities that are considered otherthan temporary, as measured by the amount of decline in fair value attributableto factors other than temporary, are recognised in the income statement and thecost basis of the Investment Securities is adjusted. There were no InvestmentSecurities that were considered to be other than temporarily impaired at 31December 2005. Realised gains or losses arising on the sale of investments are recognised inthe income statement but will be transferred to a non-distributable capitalreserve in accordance with the Memorandum and Articles of Association of theCompany. (h) Hedge accounting: The Company's activities expose it primarily to thefinancial risks of changes in interest rates, The Company uses interest rateswap contracts to hedge these exposures. It does not use derivative instrumentsfor speculative purposes The use of financial derivatives is governed by the Company's policies approvedby the Board of Directors. Changes in the fair value of derivative financialinstruments that are designated and effective as hedges of future cash flows arerecognised directly in equity and any ineffective portion is recognisedimmediately in the income statement. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated or exercised or no longer qualifies for hedge accounting. (i) Set up costs: The preliminary expenses of the Company directlyattributable to the equity transaction and costs associated with theestablishment of the Company that would otherwise have been avoided are taken tothe share premium account. 3. Investment Management, Accounting and Administration, and Custodian Fees Fixed Income Discount Advisory Company ("FIDAC"), a Delaware corporation, servesas the Investment Manager to the Company. Pursuant to the terms of theInvestment Management Agreement, the Investment Manager is paid periodic fees,quarterly in arrears, at a rate equivalent to 0.2 per cent. per annum of thevalue of the gross assets of the Company at the end of the quarter. The Bank of New York serves as the Company's custodian and is paid a monthlyaccounting and administration fee, exclusive of out-of-pocket expenses. TheCustodian is entitled to receive a fee at a rate equivalent to 1 basis point perannum on the value of the gross assets of the Company (plus transactioncharges). RBSI Fund Services (Guernsey) Limited serves as the Company's administrator.The Administrator is entitled to a fee calculated on the value of the grossassets of the Company of 0.04 per cent, per annum on the first US$400 million ofvalue of gross assets, 0.0225 per cent. per annum on the next US$1.6 billion ofvalue of the gross assets and 0.01 per cent. per annum on any value of the grossassets in excess of US$2 billion payable monthly in arrears (subject to aminimum annual fee of US$250,000). 4. Risk Factors The market price of the Ordinary Shares and the income derived from them canfluctuate and there is no guarantee that the market price of Ordinary Shares inthe Company will reflect fully their underlying Net Asset Value. All or substantially all of the Company's assets are denominated in US dollars.The Company accounts for its assets and determines the value of its Shares andof dividends thereon in US dollars. For investors resident outside the UnitedStates or whose functional currency is not the US dollar, fluctuations in thevalue of the US dollar may affect the value of their investment. The Directorsdo not hedge any foreign exchange risk. The Company is subject to risks associated with change in interest rates. Anincrease in the interest payments on the Company's financings relative to theinterest earned on its mortgage-backed securities may adversely affectprofitability. The Company enters into reverse repurchase agreements in order to increase theamount of capital available for investment. The use of leverage has thepotential to magnify the gains or the losses on the Company's investments. The Company may invest in, or sell short, various interest rate derivativeinstruments and futures contracts. Should interest rates move unexpectedly, theCompany may not achieve the anticipated benefits of the hedging instruments andmay realise a loss. Further, the use of such derivative instruments involvesthe risk of imperfect correlation in movements in the price of the instruments,interest rates and the underlying hedged assets. The Company may transact in various financial instruments including futurescontracts, swap contracts and options. With these financial instruments, theCompany is exposed to market risk in excess of the amounts recorded in thestatement of assets, liabilities and capital. Further, the Company is exposed tocredit risk from potential counterparty nonperformance. At the balance sheetdate, credit risk is limited to amounts recorded in the balance sheet. 5. Reverse Repurchase Agreements At 31 December 2005 the aggregate value of securities pledged by the Companyunder reverse repurchase agreements exceeds the liability under such agreementsby approximately US$30,662,010 (approximately 103% of such liability). Theinterest rates on the reverse repurchase agreements at 31 December 2005 rangefrom 4.28% to 4.35% and have maturity dates ranging from one day to one month. 6. Mortgage-Backed Securities Gross Gross Estimated Unrealised Unrealised Fair ValueAt 31 December 2005 Amortised Gain Loss Cost (US dollars)Adjustable rate 882,031,839 2,425 (8,061,814) 873,972,450 Fixed rate 537,321,272 2,134 (5,883,136) 531,440,270 Total 1,419,353,111 4,559 (13,944,950) 1,405,412,720 Gross Unrealised Gain Gross Unrealised Estimated Fair Loss ValueAt 30 September 2005 Amortised Cost (US dollars)Adjustable rate 1,844,461,670 2,475 (10,481,608) 1,833,982,537 Fixed rate 861,099,495 1,780 (6,907,095) 854,194,180 Total 2,705,561,165 4,255 (17,388,703) 2,688,176,717 7. Interest Rate Swaps When the Company enters into a Swap, it agrees to pay a fixed rate of interestand to receive a variable interest rate, generally based on the one month LondonInterbank Offered Rate ("LIBOR"). The Company's Swaps are designated as cashflow hedges against the benchmark interest rate risk associated with theCompany's borrowings. During the quarter ended 31 December 2005, the Companyentered into a 5-year interest rate swap agreement of US$65 million notionalamount in which the Company will pay a rate of 4.83% and receive 1 month LIBORon a monthly basis. The market value of the swap at 31 December 2005 wasnegative 19,500. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Predator Oil