Second Quarter Results

11th Aug 2009 07:00



Prodesse Investment Limited

Results for the Quarter Ended 30 June 2009

Highlights for second quarter 2009:

Core net income1 per average share2 of US$0.27

NAV per share of US$7.69 (31 March 2009: US$7.17) before excluding the dividend declared for the quarter

Portfolio remains 100% implied "AAA" mortgage-backed securities.

Ronald Kazel, Managing Director of FIDAC, Investment Manager to Prodesse, commented: "The strong second quarter results of Prodesse reflect a continuation of favourable market conditions for our strategy of investing in US Government Agency mortgage-backed securities. While we will continue to manage the portfolio for a wide range of possible outcomes, we believe that current market conditions are expected to persist in the near term." 

Financial Highlights	Q2 2009	Q1 2009	Q4 2008	Q3 2008	Q2 2008
	$US
Dividend per share	0.274	0.23	0.19	0.23	0.23
Core net income per average share	0.27	0.23	0.19	0.24	0.24
Net income (loss) per average share	0.44	0.25	(0.60)	0.25	0.24
Net income (loss)	13.5m	7.9m	(18.5m)	7.7m	7.5m
Net asset value per share	7.69	7.17	6.28	6.62	6.99
	GBP Sterling5
Dividend per share	16p	16p	13p	13p	12p
Core net income per average share	16p	16p	13p	13p	12p
Net income (loss) per average share	27p	17p	(41p)	14p	12p
Net income (loss)	£8.2m	£5.5m	(£12.7m)	£4.3m	£3.8m
Net asset value per share	467.1p	501.4p	430.9p	371.9p	351.1p

1	Core net income is defined as net income excluding realised and unrealised gains and losses on securities and interest rate swaps.
2	The average share calculation is based on the sum of the shares for the period divided by the number of days in the period.
3	Based on annualisation of Q2 dividend, an exchange rate of 1.6463 US$ per Pound Sterling and a closing price of 430p on 30 June 2009.
4	Second dividend declared 11 August 2009 and not accrued in the second quarter 2009.
5	Illustration is based upon an exchange rate of 1.6463, 1.4299, 1.4575, 1.7801 and 1.9908 US$ per Pound Sterling at 30 June 2009, 31 March 2009, 31 December 2008, 30 September 2008 and 30 June 2008, respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests only in US$ denominated assets which produce US$ income. Should shareholders choose to receive their dividends in GBP Sterling they may elect to do so.

Enquiries

Investor Relations

Rob Bailhache / Nick Henderson, Financial Dynamics 

Tel: 020 7269 7200 / 020 7269 7114

Company Secretary and Administrator

Sara Radford / Jean McMillan, BNP Paribas Fund Services (Guernsey) Limited

Tel: 01481 750850

About Prodesse

Prodesse Investment Limited is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company. The Company's investment policy is to provide net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed securities and the cost of repurchase agreements entered into to finance the acquisition of such residential mortgage-backed securities.

Conference Call

There will be a conference call to discuss the results at 14:00 UK time on Tuesday 11 August and a live audio webcast and presentation will be available via the Prodesse website, www.prodesse.co.uk. The dial-in number for the conference call is +44 (0) 1452 568 061 / +1 866 224 2972 and the passcode is 22091634.

 

Company performance

For the quarter ended 30 June 2009, Prodesse reported net income of US$13.5 million (quarter ended 31 March 2009: US$7.9 million) or US$0.44 per average share (quarter ended 31 March 2009: US$0.25 per average share). This income reflects the de-designation of the Company's interest rate swap agreements as cashflow hedges whereby unrealised gains (losses) are reflected in earnings from 1 October 2008 (previously all unrealised gains (losses) were taken to equity).

Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities and interest rate swaps, of US$8.5 million for the quarter ended 30 June 2009 (quarter ended 31 March 2009: US$7.1 million) or US$0.27 per average share (quarter ended 31 March 2009: US$0.23 per average share). 

The Company delivered an annualised core return on average equity for the quarter ended 30 June 2009 of 14.80% (quarter ended 31 March 2009: 13.55%). For the quarter ended 30 June 2009, the annualised total return on average equity (RoAE) was 23.42% (quarter ended 31 March 2009: 15.11%).

	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
Core net income	US$8.5 million	US$7.1 million	US$6.0 million	US$7.5 million	US$7.5 million
Core net income per average share	US$0.27	US$0.23	US$0.19	US$0.24	US$0.24
Annualised core RoAE	14.80%	13.55%	12.07%	14.24%	14.59%
Reported net income (loss)	US$13.5 million	US$7.9 million	(US$18.5 million)	US$7.7 million	US$7.5 million
Net income (loss) per average share	US$0.44	US$0.25	(US$0.60)	US$0.25	US$0.24
Annualised RoAE	23.42%	15.11%	(36.95%)	14.62%	14.58%

Portfolio Performance

For the quarter ended 30 June 2009, the annualised yield on average assets, which is calculated based on the annualised interest income for the period divided by the average value of interest earning assets for the period, was 4.33% (quarter ended 31 March 2009: 4.56%) and the annualised cost of funds on the average repurchase balance was 2.68% (quarter ended 31 March 2009: 3.15%) which equates to an interest rate spread of 1.65% (quarter ended 31 March 2009: 1.41%).

The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 21% for the quarter ended 30 June 2009 (quarter ended 31 March 2009: 16%). Prepayment speeds on mortgage-backed securities, as reflected by the CPR, vary according to the type of investment, changes in interest rates, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
Annualised yield on average assets	4.33%	4.56%	5.24%	5.21%	5.02%
Annualised cost of funds on average repurchase balance	2.68%	3.15%	3.92%	3.73%	3.66%
Interest rate spread	1.65%	1.41%	1.32%	1.48%	1.36%
CPR	21%	16%	9%	10%	17%

As at 30 June 2009, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an implied "AAA" rating. 

	30 June 2009	31 March 2009	31 December 2008	30 September 2008	30 June 2008
Fixed-rate mortgage-backed securities	54%	49%	49%	49%	55%
Adjustable-rate mortgage-backed securities	27%	27%	24%	24%	19%
Floating-rate mortgage-backed securities	19%	24%	27%	27%	26%

The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.

 

Borrowings

The ratio of average daily repurchase agreements to equity resulted in average leverage of the Company of 7.2:1 during the quarter ended 30 June 2009 (quarter ended 31 March 2009: 7.6:1). The leverage at 30 June 2009 was 7.0:1 (31 March 2009: 7.4:1). 

	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
Average leverage for period	7.2:1	7.6:1	8.5:1	8.4:1	8.3:1
Leverage at period end	7.0:1	7.4:1	7.8:1	8.2:1	8.2:1

As of 30 June 2009, the Company had entered into interest rate swap agreements totalling US$567 million notional in which the Company will pay an average rate of 4.76% and receive 1 month LIBOR on a monthly basis. As of 31 March 2009, the Company had entered into interest rate swap agreements totalling US$544 million notional in which the Company would pay an average rate of 4.96% and receive 1 month LIBOR on a monthly basis.

	30 June 2009	31 March 2009	31 December 2008	30 September 2008	30 June 2008
Notional amount	US$567 million	US$544 million	US$563 million	US$601 million	US$560 million
Average pay rate	4.76%	4.96%	4.96%	4.98%	5.13%
Average receive rate	0.32%	0.53%	1.08%	2.79%	2.47%

Capital

At 30 June 2009, the Company had a net asset value per share of US$7.42 (31 March 2009: US$6.94) after deducting the current dividends declared for the quarter of US$8,365,154 (for the quarter 31 March 2009: US$7,125,872).

	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
NAV per share	US$7.69	US$7.17	US$6.28	US$6.62	US$6.99
Dividends declared for the period	US$8,365,154	US$7,125,872	US$5,886,590	US$7,125,872	US$7,125,872
NAV per share after deducting dividends declared	US$7.42	US$6.94	US$6.09	US$6.39	US$6.76

Dividend

The Company has declared a dividend for the quarter ended 30 June 2009 of US$0.27 per share that is payable on 9 September 2009 to holders on the register on 21 August 2009. Dividends are calculated and paid in US dollars.

	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
Core net income per average share	US$0.27	US$0.23	US$0.19	US$0.24	US$0.24
Net income (loss) per average share	US$0.44	US$0.25	(US$0.60)	US$0.25	US$0.24
Dividends per share	USS0.27	USS0.23	USS0.19	US$0.23	US$0.23

Outlook

"Although our Constant Prepayment Rate rose modestly during the quarter, prepayment speeds generally are coming in slower than expectations. Moreover, the Mortgage Bankers Association Refinancing Index fell 77% during the second quarter, portending a decline in CPR in future quarters. The yield curve in the United States became more positively sloped during the quarter. While there will be variability in this going forward, it is likely that the steep yield curve persists. We believe that our portfolio strategy of owning a barbell of fixed-rate, adjustable-rate and floating rate assets will enable Prodesse to continue to provide competitive returns to our shareholders."

The current weakness in the mortgage market could adversely affect one or more of our lenders and could cause one or more of our lenders to be unwilling or unable to provide us with additional financing. This could potentially increase our financing costs and reduce liquidity. If one or more major market participants fail it could negatively impact the marketability of all fixed income securities, including government mortgage securities, and this could negatively impact the value of the securities in our portfolio, thus reducing its net book value. Furthermore, if many of our lenders are unwilling or unable to provide us with additional financing, we could be forced to sell our Investment Securities at an inopportune time when prices are depressed. Even with the current situation in the mortgage sector we do not anticipate having difficulty converting our assets to cash or extending financing term, due to the fact that our investment securities have an actual or implied "AAA" rating and principal payment is guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae.

Prodesse Investment Limited
Balance Sheet
	Note	30-Jun-09 US$'000 (Unaudited)	31-Mar-09 US$'000 (Unaudited)	31-Dec-081 US$'000	30-Sep-08 US$'000 (Unaudited)	30-Jun-08 US$'000 (Unaudited)
ASSETS
Current assets
Available for sale investments	3	2,014,890	1,919,800	1,709,479	1,725,038	2,005,510
Accrued income receivable		8,785	8,371	7,785	8,722	8,988
Receivable for principal paydowns		5,525	4,307	1,519	2,168	3,556
Receivable for securities sold		-	-	19,426	183,193	-
Cash and cash equivalents		215	244	19,173	4,956	89
Prepaid expenses		363	138	139	206	329
Total assets		2,029,778	1,932,860	1,757,521	1,924,283	2,018,472
EQUITY AND LIABILITIES
Capital and reserves
Share capital:
30,982,050 at 30 June 2009, 31 March 2009, 31 December 2008, 30 September 2008 and 30 June 2008 at US$ 0.01		310	310	310	310	310
Capital redemption reserve		30	30	30	30	30
Share premium		91,560	91,560	91,560	91,560	91,560
Distributable reserve		141,513	141,513	141,513	141,513	141,513
Accumulated (losses) profits		(7,314)	(13,670)	(15,656)	10,088	9,708
Capital reserve-Realised gain on available for sale investments and interest rate swaps		1,899	1,899	1,899	1,737	1,540
Revaluation reserve-Unrealised (loss)/gain on available for sale investments		20,470	13,446	(10,104)	(23,276)	(10,194)
Cash flow hedge reserve	4	(10,209)	(12,872)	(15,012)	(16,961)	(17,857)
Total shareholders' equity		238,259	222,216	194,540	205,001	216,610
Current liabilities
Securities purchased payable		86,484	19,420	-	6,582	-
Repurchase agreements	5	1,669,657	1,647,962	1,515,351	1,687,721	1,776,586
Accrued interest expense		4,010	4,372	5,958	6,030	5,639
Accrued expenses payable		2,296	2,189	2,015	1,988	1,780
Fair value of interest rate swaps	4	29,072	36,701	39,657	16,961	17,857
Total liabilities		1,791,519	1,710,644	1,562,981	1,719,282	1,801,862
Total equity and liabilities		2,029,778	1,932,860	1,757,521	1,924,283	2,018,472
Net Assets		238,259	222,216	194,540	205,001	216,610
Net Asset Value per share	6	7.69	7.17	6.28	6.62	6.99

1Derived from 2008 audited financial statements.  

Prodesse Investment Limited
(unaudited) Income Statement
	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
	US $'000	US $'000	US $'000	US $'000	US $'000
Income
Interest income	21,221	21,132	22,447	24,979	24,761
Interest expense	(11,192)	(12,639)	(15,056)	(15,997)	(15,753)
Net interest income	10,029	8,493	7,391	8,982	9,008
Net realised profit/(loss) on sale of available for sale investments and termination of interest rate swaps	-	-	162	197	(6)
Amortisation of de-designation of cashflow hedge	(2,663)	(2,140)	(1,949)	-	-
Unrealised gain (loss) on interest rate swaps	7,629	2,956	(22,696)	-	-
Total income/(loss)	14,995	9,309	(17,092)	9,179	9,002
Expenses
Management, custodian and  administration fees	1,197	1,123	1,045	1,157	1,192
Other operating expenses	316	313	319	319	313
Total expenses	1,513	1,436	1,364	1,476	1,505
Net income/(loss) for the period	13,482	7,873	(18,456)	7,703	7,497
Net income/(loss) per average share for the period	0.44	0.25	(0.60)	0.25	0.24
Dividend declared per share for the period	0.27	0.23	0.19	0.23	0.23
Average shares outstanding	30,982,050	30,982,050	30,982,050	30,982,050	30,672,545

Prodesse Investment Limited
(unaudited) Statement of Comprehensive Income
	01 April 2009 to 30 June 2009	01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
	US $'000	US $'000	US $'000	US $'000	US $'000
Profit for the period	13,482	7,873	(18,456)	7,703	7,497
Available for sale financial assets:
Gains/(losses) arising during the period	7,024	23,550	13,010	(13,279)	(14,000)
Transfer of net realised gain / (loss) to capital reserve	-	-	162	197	6
	7,024	23,550	13,172	(13,082)	(13,994)
Cash flow hedges:
Gains arising during the period	-	-	-	896	15,311
Amortisation of de-designated cash flow hedge	2,663	2,140	1,949	-	-
	2,663	2,140	1,949	896	15,311
Total comprehensive income for the period	23,169	33,563	(3,335)	(4,483)	8,814

 

Prodesse Investment Limited
(unaudited) Cash Flow Statement
	01 April 2009 to 30 June 2009		01 January 2009 to 31 March 2009	01 October 2008 to 31 December 2008	01 July 2008 to 30 September 2008	01 April 2008 to 30 June 2008
	US $'000		US $'000	US $'000	US $'000	US $'000
Net cash (outflow)/inflow from operating  activities (Note 1)	(14,598)		(145,653)	193,713	100,858	(160,930)
Financing
Borrowings under reverse repurchase agreements	3,699,892		3,261,580	3,536,104	4,250,132	4,363,375
Repayments under reverse repurchase agreements	(3,678,197)		(3,128,969)	(3,708,474)	(4,338,997)	(4,215,478)
New shares issued	-		-	-	-	20,525
Issue costs	-		-	-	-	(617)
Dividends paid	(7,126)		(5,887)	(7,126)	(7,126)	(6,817)
Net cash inflow/(outflow) from financing activities	14,569		126,724	(179,496)	(95,991)	160,988
(Decrease)/increase in cash and cash equivalents	(29)		(18,929)	14,217	4,867	58
Cash and cash equivalents, at beginning of period	244		19,173	4,956	89	31
Cash and cash equivalents, at end of period	215		244	19,173	4,956	89
Note 1
Net income/(loss) for the period	13,482		7,873	(18,456)	7,703	7,497
Net accretion/amortisation of premiums on available for sale investments	1,390		140	552	542	559
Unrealised (gain)/loss on interest rate swaps	(4,966)		(816)	24,645	-	-
Net realised (gain)/loss on sale of available for sale investments and termination of interest rate swaps	-		-	(162)	(197)	6
Purchases of investments	(189,304)		(254,490)	(53,376)	(196,543)	(310,025)
Proceeds from sale of investments	-		19,429	205,638	241,012	49,229
Principal paydowns	165,694		84,208	33,913	47,353	92,927
Receivables
(Increase)/decrease in accrued income receivable	(414)		(586)	937	266	(1,110)
(Increase)/decrease in prepaid expenses	(225)		1	67	123	(323)
Liabilities
(Decrease)/increase in accrued interest expense	(362)		(1,586)	(72)	391	116
Increase/(decrease) in accrued expenses payable	107		174	27	208	194
Net cash (outflow)/inflow from operating activities	(14,598)		(145,653)	193,713	100,858	(160,930)

Prodesse Investment Limited

Statement of Changes in Shareholders' Equity

(unaudited) 01 April 2009 to 30 June 2009

	Share capital	Capital redemption reserve	Share premium	Distributable reserve	Capital Reserve - realised gain on sales and impairment of available for sale investments	Revaluation reserve	Accumulated (losses)/profits	Cash flow hedge Reserve - de-designated	Total
	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000	US $'000
Balance at 1 April 2009	310	30	91,560	141,513	1,899	13,446	(13,670)	(12,872)	222,216
Net income for the quarter	-	-	-	-	-	-	13,482	-	13,482
Amortisation of de-designated cash flow hedge	-	-	-	-	-	-	-	2,663	2,663
Movement in unrealised gain on revaluation taken to equity	-	-	-	-	-	7,024	-	-	7,024
Total recognised income and expense	-	-	-	-	-	7,024	13,482	2,663	23,169
Dividends paid	-	-	-	-	-	-	(7,126)	-	(7,126)
Balance at 30 June 2009	310	30	91,560	141,513	1,899	20,470	(7,314)	(10,209)	238,259

Notes to the financial information

1. General Information

Prodesse Investment Limited (the "Company") is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company ("the Investment Manager"). The Company's share capital structure consists solely of Ordinary Shares. The Company has a listing on the London Stock Exchange and a listing on the Channel Islands Stock Exchange. The Company will have an indefinite life but Shareholders will have the opportunity to vote on its continuation at the Annual General Meeting to be held in 2010.

The Company invests in a portfolio consisting of implied "AAA" rated mortgage-backed securities on a leveraged basis. The Company's investment strategy is to generate net income for distribution from the spread between the interest income from the portfolio and the cost of borrowing pursuant to reverse repurchase agreements used to finance the portfolio. The Investment Manager will seek to enhance returns through what it considers an appropriate amount of leverage.

2. Significant Accounting Policies

Basis of Accounting

The financial statements included in the quarterly press release have been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRS").  The same accounting policies, presentation and methods of computation are followed in the quarterly press release as applied in the Company's latest annual audited financial statements except as described below.

The financial statements are presented in US Dollars because that is the currency of the primary economic environment in which the Company operates. The functional currency of the Company is also considered to be US Dollars.

Changes in accounting policy

In the current financial period, the Company has adopted International Financial Reporting Standard 8 "Operating Segments" and International Accounting Standard 1 "Presentation of Financial Statements" (revised 2007).

IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the Directors to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard IAS 14 "Segmental Reporting" required the Company to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Company's system of internal financial reporting to Directors serving only as the starting point for the identification of such segments. However, as the Company is engaged in a single segment of business and no such segmental reporting is undertaken, this has not resulted in any changes to the financial information provided.

IAS 1 (revised) requires the presentation of a statement of changes in equity as primary statement, separate from the income statement and statement of comprehensive income. As a result, a statement of comprehensive income has been included in the primary statements, showing changes in each component of equity for each period presented.

Going Concern

The Directors believe it is appropriate to adopt the going concern basis in preparing the financial statements as, after due consideration, the Directors consider that the Company has adequate resources to continue in operational existence for the foreseeable future. Whilst the Company is reliant on the availability of short term financing, currently in the form of repurchase agreements, the Directors believe that this form of financing will remain available to the Company for the foreseeable future. 

The Company's non-cash assets are largely actual or implied AAA assets, and accordingly, the Directors have not had, nor do they anticipate having, difficulty in converting the Company's assets to cash. The balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should the Company's needs ever exceed these on-going sources of liquidity plus the immediate sources of liquidity discussed above, the Directors believe that in most circumstances the Company's investments could be sold to raise cash. 

Investments 

The Company invests in securities issued by the United States Government Sponsored Enterprises such as the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Banks ("FHLB") as well as the Government National Mortgage Association ("Ginnie Mae"), a US Government Corporation. 

On September 6, 2008, the Federal Housing Finance Agency ("FHFA") was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets. 

The payment of principal and interest on the debt of FHLB is backed by that agency, the debt and mortgage-backed securities issued by Freddie Mac and Fannie Mae are backed by those respective agencies, which are operating under the conservatorship of FHFA, and the payment of principal and interest on the Ginnie Mae mortgage backed securities are backed by the full-faith-and-credit of the US Government. Although the Company generally intends to hold most of its securities until maturity, it may, from time to time, sell any of its mortgage-backed securities as part of its overall management strategy. Accordingly the Company classifies all its mortgage-backed securities as available for sale and these are reported at fair value. Expenses incidental to the acquisition of available for sale investments are included within the cost of that investment.

Realised and Unrealised Gains and Losses on Investments

Unrealised gains or losses arising on the revaluation of investments are included in equity. Unrealised losses on investment securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognised as an impairment loss in the income statement and the cost basis of the mortgage-backed securities is adjusted. 

Realised gains or losses arising on the sale of investments are recognised in the income statement but will be transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.

When-Issued/Delayed Securities

The Company may purchase or sell securities on a when-issued or delayed delivery basis, including "TBA" securities. TBA Securities are mortgage-backed securities for which details about the underlying mortgages have not yet been announced. Securities traded on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the purchaser prior to delivery. 

Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price at the time of delivery may be lower or higher than the agreed upon price, in which case an unrealised loss may be incurred.

Security Transactions and Investment Income Recognition

Security transactions are recorded on the trade date. Realised and unrealised gains and losses are calculated based on specific identified cost. Interest income is recorded as earned. Interest income and expense includes accretion and amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of the effective interest method.

Other Receivables

Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.

Cash and Cash Equivalents

Cash includes amounts held in interest bearing overnight accounts.

Financial Liabilities and Equity

Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs.

Other Accruals and Payables

Other accruals and payables are not interest-bearing and are stated at their nominal value.

Reverse Repurchase Agreements

The Company enters into repurchase agreements with qualified third party financial institutions to finance its investment in mortgage-backed securities. The agreements are secured by the value (106% of the repo principal) of the Company's mortgage-backed securities. A repurchase agreement involves the sale by the Company of securities that it holds with an agreement by the Company to repurchase the same securities at an agreed price and date. Such an agreement involves the risk that the value of the securities sold by the Company may decline in value below the price of the securities.

Interest on the principal value of repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. When the Company enters into a repurchase agreement, it establishes and maintains a segregated account with the lender containing securities having a value not less than the repurchase price, including accrued interest, of the repurchase agreement.

Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the repurchase agreements. Accrued interest is recorded as a separate line item.

Securities sold subject to repurchase agreements are retained in the financial statements as available for sale securities and the counterparty liability is included in liabilities under repurchase agreements.

Derivative Financial Instruments and Hedge Accounting

The Company's activities expose it primarily to the financial risks associated with changes in interest rates. The Company uses interest rate swap contracts to hedge these exposures. The Company does not use derivative financial instruments for speculative purposes.

The use of financial derivatives is governed by the Company's policies approved by the board of Directors, which provide written principles on the use of financial derivatives.

The Company voluntarily discontinued hedge accounting in the fourth quarter of 2008 through a combination of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges. In respect of the de-designation of cash flow hedges, IAS 39 requires that any cumulative gain or loss on the hedging instrument recognised in equity for cash flow hedges is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss in the period. The Company continues to hold repurchase agreements in excess of swap contracts and has no indication that interest payments on the hedged repurchase agreements are in jeopardy of discontinuing. Therefore, the unrealised losses related to the cashflow hedges that have been de-designated are not recognised immediately and these losses are expected to be reclassified into earnings during the contractual terms of the swap agreements starting as of 1 October 2008.  Changes in the fair value of the interest rate swaps subsequent to 30 September 2008 are reflected in the Company's income statement.

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 (estimated US$988).

Business and Geographical Segments

The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities, issued by companies operating and generating revenue in the United States. In addition no separate segmental reporting to Directors is carried out and therefore no segmental reporting is provided.

3. Available for Sale Investments

At 30 June 2009	Amortised Cost	Gross Unrealised Gain	Gross  Unrealised Loss	Estimated  Fair Value
	US $'000	US $'000	US $'000	US $'000
Adjustable rate	532,949	4,955	(1,262)	536,642
Floating rate	365,241	-	(9,651)	355,590
Fixed rate	1,096,230	26,965	(537)	1,122,658
Total	1,994,420	31,920	(11,450)	2,014,890

As at 30 June 2009, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry an "AAA" or implied "AAA" rating. During the quarter ended 30 June 2009, the Company did not have any securities that it deemed to be other-than-temporarily impaired.

Mortgage-backed securities are created when mortgages and their attendant streams of interest and principal payments are pooled to serve as collateral for the issuance of securities to investors. Interests in mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, mortgage-backed securities typically provide irregular cash flows consisting of both interest and principal. 

An investment consideration of any mortgage-backed security is the structure of the payment of the cash flow streams from the underlying mortgages to the holders of the mortgage-backed securities. The cash flows can be simply passed from the mortgage holder to the investor or they can be structured in a number of different ways. The fair values of the various structures will vary in different interest rate or prepayment environments, with the more derivative or complex structures (e.g., interest-only or principal-only securities) being more sensitive to movements in interest rates or rates of prepayment. 

Beyond the basic security of the mortgages and properties that underlie mortgage-backed securities, a critical attribute of mortgage-backed securities issued by the US Agencies is the credit enhancement that the US Agencies provide. The holder of mortgage-backed securities issued or guaranteed by the US Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae is the principal governmental (i.e., backed by the full credit of the US Government) guarantor of mortgage-backed securities. On September 6, 2008, the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.

Adjustable-rate and floating-rate mortgage-backed securities in which the Company may invest include pass-through mortgage-backed securities issued by the US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates on adjustable-rate and floating rate mortgage-backed securities are reset at periodic intervals to an increment over some predetermined reference interest rate. There are two main categories 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 a moving average of mortgage rates. Commonly utilised reference rates include the one-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 in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile.

Adjustable-rate mortgages frequently have upper and lower limits on the interest rates to which a residential borrower may be subject (i) in any reset or adjustment interval and (ii) over the life of the loan. These upper and lower limits are commonly known as ''caps'' and ''floors'' respectively. 

The increase in value of these securities is primarily due to market sentiment and the purchase of MBS securities by the US government. All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating. The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.

4. Hedging Instruments 

The Company uses interest rate swaps to manage its exposure to interest rate movements. When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate ("LIBOR"). The Company's swaps were designated as cash flow hedges up until 1 October 2008 against the benchmark interest rate risk associated with the Company's borrowings. From 1 October 2008 the swaps are no longer designated as cashflow hedges.

 

The amortisation taken into income is the Present Value of the cash flows for each swap calculated monthly. The amortisation adjustment is applied quarterly and taken into income and reduces the Cash flow hedge reserve - de-designated balance in the equity section.

At 30 June 2009, the Company had interest rate swap agreements of US$567 million notional (31 March 2009 US$544 million notional) amount in which the Company will pay a weighted average rate of 4.76% notional (31 March 2009 average rate of 4.96% notional) and have a weighted average receive rate of 0.32% (31 March 2009 average receive rate of 0.53%). 

The fair value of the swaps entered into at 30 June 2009 is estimated at US$29,071,883 loss (31 March 2009: US$36,701,361 loss).

 

5. Repurchase Agreements

At 30 June 2009 the aggregate value of securities pledged by the Company under repurchase agreements exceeds the liability under such agreements by approximately US$96.3 million (approximately 5.77% of such liability). The interest rates on the repurchase agreements at 30 June 2009 range from 0.2% to 4.57% (31 March 2009: 0.34% to 4.57%) and have maturity dates ranging from 1 day to 973 days.

The Company has entered into repurchase agreements which provide the counterparty with the right to call the balance prior to maturity date. These repurchase agreements totalled US$300 million. (31 March 2009: US$305 million)

6. Net Asset Value 

The net asset value per Ordinary Share is based on net assets at 30 June 2009 and on 30,982,050 Ordinary Shares, being the number of Ordinary Shares in issue at the period end.

At 30 June 2009, the reported net asset value per Ordinary Share (before including the effect of the dividend declared for the quarter ended 30 June 2009) is US$7.69 (31 March 2009: US$7.17).

At 30 June 2009, the Company had a net asset value per Ordinary Share of US$7.42 (31 March 2009: US$6.94), after including the effect of the dividend declared for the quarter ended 30 June 2009 of US$8,365,154 (31 March 2009: US$7,125,872).

---

ENDIR URSWRKWRWAAR

---

Related Shares:

Predator Oil