30th Mar 2007 07:04
Queen's Walk Investment Limited30 March 2007 30 March 2007 Queen's Walk Investment Limited ("Queen's Walk")Trading Update - Withdrawal of Dividend Target Guidance Queen's Walk intends to publish its accounts for the fiscal year ended 31 March 2007 in mid-June. In the 6 March 2007 announcement of its results for the quarter ended 31 December 2006, the Company noted the impact on its investment portfolio of the market discount rates and implied cumulative loss rates that were being observed in the US sub-prime market and changes to borrower prepayment patterns in the UK market. Market volatility has been sustained and the Company's investment manager, Cheyne Capital Management (UK) LLP ("Cheyne Capital") continues to observe changing loss and prepayment behaviour in these markets. Current market conditions have made it considerably more difficult for the Company to ascribe a fair value to its investments, as market movements have been driven not only by changes to loss or prepayment assumptions but also by the market simply attributing a higher discount rate to mortgage-backed investments. The Company has observed that several markets are pricing implied losses at levels substantially higher than historical averages, with little or no consistency between the cash and synthetic markets and market indices. The distinction between pricing assumptions and changes in discount factors is a particularly important one in the case of Queen's Walk, as a change to loss or prepayment assumptions on the Company's investments (as opposed to market discount factors that have no impact on projected cash flows) will affect the effective yield recognised for a particular asset. Changes to the effective yield of an asset will have an impact on the distributable profits of the Company This impact is exacerbated by the fact that the Company's accounting policy requires any changes to effective yield to be corrected (or "caught up") in the current period for all prior periods. Consequently, even in circumstances where the value of an asset remains relatively stable over its life, changes to the effective yield for that asset recorded in any given quarter can have a disproportionate impact on the distributable profit of the Company for that quarter (particularly where effective yields are changed on assets that have been held for some time). The Company is thus subject to potentially significant swings in distributable profits, and the dividends it can pay out of those profits, where it makes changes to loss and prepayment assumptions. In the 6 March announcement, the Company noted that increased discount rates and implied future cumulative loss rates had been observed in the US sub-prime market and that these increased rates might have a material adverse effect on the valuation of the Company's US assets for the quarter ended 31 March 2007. The Company also stated, however, that it did not expect that any significant adjustments would need to be made to distributable profits or the amount of future dividends as a result of valuation adjustments to its US investments (which account for approximately 12% of the investment portfolio). Since the time of that announcement, there has been a significant furtherincrease in market projected cumulative loss rates for US sub-prime mortgageloans. Although these market implied loss rates are higher than loss ratescurrently being observed on the Company's US assets or which have been observedhistorically, the Company has decided to increase its cumulative lossassumptions on US assets in order to reflect these higher market expectations.While Cheyne Capital continues to evaluate developments in the US sub-primemarket, it has determined that the adjustment of assumptions to current marketprojections and the impact of these adjustments on income recognised in respectof the Company's US investments in prior periods may have a material adverseimpact on the Company's distributable profits for the quarter ended 31 March2007. The Company also noted in the 6 March announcement that performance datareceived in respect of UK investments had reflected an upturn in prepaymentrates by borrowers whose mortgages had reverted from discounted rates tofully-indexed mortgage interest rates. It was noted that Cheyne Capital wascontinuing to assess the impact of this prepayment activity and its impact onthe effective yield and valuation of particular assets. For this reason, theCompany provided a range for its dividend target for the quarter ended 31 March2007. Given the continued uncertainty with respect to borrower prepaymentbehaviour in the UK, Cheyne Capital believes that further adjustments will berequired to its prepayment assumptions and the effective yields that have beenbooked for the Company's UK investments. These adjustments are likely to furtherreduce the Company's distributable profits for the quarter ended 31 March 2007. For these reasons, the Company is withdrawing its dividend target of €0.22 to€0.25 per share for the quarter ended 31 March 2007 and its dividend target ofnot less than €1.00 for the financial year ended 31 March 2008. The Company willrevisit dividend guidance and whether it is in a position to provide furtherguidance on target dividends going forward in the course of finalising itsresults for the financial year ended 31 March 2007. As noted above, to the extent the market value of an asset is driven by changesto loss or prepayment assumptions, this will give rise to an adjustment thataffects distributable profits. To the extent the market value is driven bymarket discount rates that have no impact on projected cash flows, the valuationadjustment will have no impact to distributable profits but will reduce the netasset value of the Company. Anticipated changes to the valuation of theCompany's US assets and certain assets in its UK investment portfolio may have amaterial adverse impact on the Company's net asset value, which was €9.90 pershare as 31 December 2006. However, the shares of Queen's Walk are alreadytrading at a significant discount to the net asset value of the Company as atthat date. The Company is continuing its efforts to seek the approval of shareholders, inaccordance with the "whitewash" procedures of the City Code on Takeovers andMergers (the "Code"), to effect repurchases of shares in circumstances where, asa result of such repurchases, the holdings of Cheyne ABS Opportunities Funds LP(which holds 44.1% of the Company's shares) and parties deemed by the Code to beacting in concert with it may increase. While Company is seeking to obtain thisapproval as soon as possible, there may be a delay in the Company's ability todeliver the requisite information circular to shareholders if the Company'saccounts for the fiscal year ended 31 March 2007 are required to be included inthat circular. Until the Company obtains this approval, Cheyne Capital will seekto manage the Company's investment portfolio with this objective in mind. There will be a conference call for investors at 2pm London time today. It canbe accessed by dialling +44 (0)20 7138 0819 or +1 718 354 1361 from the US tenminutes prior to the scheduled call; please reference Queen's Walk InvestmentLimited Trading Update. A replay of the call will be available for two weeksfrom today by accessing +44 (0)20 7806 1970 or +1 718 354 1112 from the US usingpasscode 9674937#. For further information please contact: Investor Relations:Caroline Villiers +44 20 7153 1521 Cheyne Capital:Andrea Bonafe +44 20 7031 7480 About the Company: Queen's Walk Investment Limited is a Guernsey-incorporated investment companylisted on the London Stock Exchange. The Company's investment objective is topreserve capital and to provide stable returns to shareholders in the form ofquarterly dividends. To achieve this, Queen's Walk invests primarily in adiversified portfolio of subordinated tranches of asset backed securities,including the unrated "equity" or "first loss" residual income positiontypically retained by the banks or other financial institutions which haveoriginated the loan assets that collateralise a securitisation transaction. TheCompany makes such investments where its investment manager, Cheyne CapitalManagement (UK) LLP, considers the coupon or cashflows from the investment to beattractive relative to the credit exposure of the underlying asset collateral.The Company believes that its investment focus provides equity investors withexposure to a relatively new investment opportunity in this asset class. The content of this announcement includes statements that are, or may be deemedto be, "forward-looking statements". These forward-looking statements can beidentified by the use of forward-looking terminology, including the terms"believes", "estimates", "anticipates", "expects", "intends", "may", "will" or"should". They include the statement regarding the target aggregate dividend. Bytheir nature, forward-looking statements involve risks and uncertainties andreaders are cautioned that any such forward-looking statements are notguarantees of future performance. The Company's actual results and performancemay differ materially from the impression created by the forward-lookingstatements. The Company undertakes no obligation to publicly update or reviseforward-looking statements, except as may be required by applicable law andregulation (including the Listing Rules). Any target dividends are based on certain assumptions as to future events, whichmay not prove to be realised. Due to the uncertainty surrounding these futureevents, the targets are not intended to be and should not be regarded as profitsor earnings forecasts. There can be no assurance that these targets will beachieved or that the Company will be able to pay dividends at the target levelsor at all. The payment of any target dividends is subject to the Companygenerating sufficient profits or having sufficient retained earnings and therecan be no assurance that this will be the case. Any target dividends that theCompany may announce from time to time should not be regarded as providing anyguidance regarding the level of the Company's distributable net income for anyperiod. The Company may revise its dividend policy from time to time. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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