Predator Oil Regulatory News (PRD)

12 Feb 2008 07:00

Prodesse Investment Limited12 February 2008 Prodesse Investment Limited Results for the Quarter Ended 31 December 2007 Highlights for fourth quarter 2007: • Core net income1 per average share of US$0.21 • Dividend per share of US$0.21 from net interest income - equates to an annualised dividend yield of 11.11%2 (FTSE All Share annualised dividend yield of 3.05%3) • Net income per average share of US$0.24 • NAV per share of US$7.70 (30 September 2007: US$7.554) • Portfolio remains 100% implied "AAA" mortgage-backed securities. Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,commented: "We are pleased that during the fourth quarter Prodesse was able toincrease the dividend per share by over 30% despite the volatile and uncertainconditions in global financial markets. By the end of the year, the US FederalFunds target rate had been lowered to 4.25% as the Federal Reserve continued toutilize monetary policy tools to stimulate the economy and settle the markets.As a result of these actions our average cost of funds was lower during thequarter. We believe that the continued vigilance of the Federal Reserve will notonly serve to calm the markets but it should also help to continue to reduce ourcost of funds. In these conditions, Prodesse is poised to continue to perform." Financial Highlights Q4 2007 Q3 2007 Q2 2007 Q1 2007 Q4 2006 $USDividend per share 0.21 0.16 0.16 0.14 0.13Core net income per average share 0.21 0.17 0.17 0.15 0.14Net income per average share 0.24 0.20 0.18 0.16 0.19Net income 6.7m 5.8m 5.0m 4.0m 4.9mNet asset value per share 7.70 7.554 7.77 8.22 8.08 GBP Sterling5Dividend per share 11p 8p 8p 7p 7pCore net income per average share 11p 8p 8p 8p 7pNet income per average share 12p 10p 9p 8p 10pNet income £3.4m £2.8m £2.5m £2.0m £2.5m Net asset value per share 388.0p 370.0p4 387.1p 417.6p 412.9p 1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities. 2 Based on annualisation of Q4 dividend, an exchange rate of 1.9827 US$ per Pound Sterling and a closing price of 381.5 on 31 December 2007. 3 Based on closing share prices of the constituents of the FTSE All Share index on 31 December 2007 (JCF Datastream). 4 After deducting dividends declared for the period. 5 Illustration is based upon an exchange rate of 1.9827, 2.0405, 2.0071, 1.9686, and 1.9569 US$ per Pound Sterling at 31 December 2007, 28 September 2007, 29 June 2007, 31 March 2007 and 31 December 2006, 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. This release does not constitute the preliminary announcement of annual audited accounts in accordance with LSE listing rules. EnquiriesInvestor RelationsRob Bailhache / Nick Henderson, Financial DynamicsTel: 020 7269 7200 / 020 7269 7114 Company Secretary and AdministratorSara Radford / Jean McMillan, BNP Paribas 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 a conference call to discuss the results at 10.00am UK time on 12February and a live audio webcast and presentation will be available via theProdesse website, www.prodesse.co.uk. The dial-in number for the conferencecall is +44 (0) 1452 562716 and the passcode is 31786350. Company performance For the quarter ended 31 December 2007, Prodesse reported net income of US$6.7million (quarter ended 30 September 2007: US$5.8 million) or US$0.24 per averageshare (quarter ended 30 September 2007: US$0. 20 per average share). Prodesse reported core net income, defined as net income excluding realised andunrealised gains and losses on securities, of US$6.0 million for the quarterended 31 December 2007 (quarter ended 30 September 2007: US$4.9 million) orUS$0.21 per average share (quarter ended 30 September 2007: US$0.17 per averageshare). During the quarter the Company sold US$53.1 million in securities,resulting in a realised gain of US$725,000. The Company delivered an annualised core return on average equity for thequarter ended 31 December 2007 of 11.16% (quarter ended 30 September 2007:9.07%). For the quarter ended 31 December 2007, the annualised total return onaverage equity (RoAE) was 12.51% (quarter ended 30 September 2007: 10.70%). 01 October 2007 01 July 2007 to 01 April 2007 01 January 2007 01 October 2006 to 31 December 30 September to 30 June to 31 March to 31 December 2007 2007 2007 2007 2006 Core net income US$6.0 million US$4.9 million US$4.9 million US$4.0 million US$3.6 millionCore net income per average US$0.21 US$0.17 US$0.17 US$0.15 US$0.14shareAnnualised core RoAE 11.16% 9.07% 8.75% 7.25% 6.90%Reported net income US$6.7 million US$5.8 million US$5.0 million US$4.0 million US$4.9 millionNet income per average share US$0.24 US$0.20 US$0.18 US$0.16 US$0.19Annualised RoAE 12.51% 10.70% 8.82% 7.29% 9.39% Portfolio Performance For the quarter ended 31 December 2007, the annualised yield on average assets,which is calculated based on the annualised interest income for the perioddivided by the average value of interest earning assets for the period, was5.83% (quarter ended 30 September 2007: 5.90%) and the annualised cost of fundson the average repurchase balance was 4.95% (quarter ended 30 September 2007:5.18%) which equates to an interest rate spread of 0.88% (quarter ended 30September 2007: 0.72%). At 31 December 2007, the annualised yield on assets was5.79% and the annualised cost of funds with the effect of interest rate swaps onthe repurchase balances was 4.83%, which equates to an interest rate spread of0.96%. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backedsecurities portfolio averaged 10% for the quarter ended 31 December 2007(quarter ended 30 September 2007: 13%). 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. 01 October 2007 01 July 2007 to 01 April 2007 01 January 2007 01 October 2006 to 31 December 30 September to 30 June to 31 March to 31 December 2007 2007 2007 2007 2006 Annualised yield on average 5.83% 5.90% 5.83% 5.81% 5.95%assetsAnnualised cost of funds onaverage repurchase balance 4.95% 5.18% 5.15% 5.15% 5.30% Interest rate spread 0.88% 0.72% 0.68% 0.66% 0.65%CPR 10% 13% 16% 15% 14% As at 31 December 2007, all of the assets in the Company's portfolio were FannieMae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry animplied "AAA" rating. 31 December 30 September 30 June 2007 31 March 2007 31 December 2006 2007 2007Fixed-rate mortgage-backed 63% 66% 69% 69% 62%securitiesAdjustable-rate mortgage-backed 15% 12% 11% 8% 11% securitiesFloating-rate mortgage-backed 22% 22% 20% 23% 27%securities Borrowings The ratio of average daily repurchase agreements to equity resulted in averageleverage of the Company of 9.6:1 during the quarter ended 31 December 2007(quarter ended 30 September 2007: 9.4:1). The leverage at 31 December 2007 was9.3:1 (30 September 2007: 9.0:1). 01 October 2007 01 July 2007 to 01 April 2007 to 01 January 2007 01 October 2006 to 31 December 30 September 2007 to 31 March 2007 to 31 December 2007 30 June 2007 2006Average leverage for 9.6:1 9.4:1 9.3:1 9.3:1 9.3:1periodLeverage at period end 9.3:1 9.0:1 9.3:1 8.1:1 9.0:1 As of 31 December 2007, the Company had entered into interest rate swapagreements totalling US$778 million in notional amount in which the Company willpay an average rate of 5.15% and receive 1 month LIBOR on a monthly basis. Asof 30 September 2007, the Company had entered into interest rate swap agreementstotalling US$817 million in notional amount in which the Company would pay anaverage rate of 5.16% and receive 1 month LIBOR on a monthly basis. 31 December 2007 30 September 30 June 2007 31 March 2007 31 December 2006 2007Notional amount US$778 million US$817 million US$821 million US$811 million US$597 millionAverage pay rate 5.15% 5.16% 5.16% 5.17% 5.22%Average receive rate 5.06% 5.57% 5.32% 5.32% 5.35% Capital At 31 December 2007, the Company had a net asset value per share of US$7.49 (30September 2007: US$7.55) after deducting the current dividends declared for thequarter of US$5,914,766 (for the quarter 30 September 2007: US$4,506,488). 31 December 2007 30 September 2007 30 June 2007 31 March 2007 31 December 2006NAV per share US$7.70 US$7.551 US$7.77 US$8.22 US$8.08Dividends declared forthe three month period US$5,914,766 US$4,506,488 US$4,506,488 US$3,943,177 US$3,331,321NAV per share afterdeducting dividends US$7.61declared US$7.49 US$7.55 US$8.08 US$7.95 1 After deducting dividends declared for the period. Dividends for the third quarter were declared 20 September 2007. Dividend The Company has declared a dividend for the quarter ended 31 December 2007 ofUS$0.21 per share that is payable on 7 March 2008 to holders on the register on22 February 2008. Dividends are calculated and paid in US dollars. 01 October 2007 01 July 2007 to 01 April 2007 to 01 January 2007 to 31 01 October 2006 to 31 to 31 December 30 September 30 June 2007 March 2007 December 2006 2007 2007 Core net income per US$0.21 US$0.17 US$0.17 US$0.15 US$0.14average shareNet income per average US$0.24 US$0.20 US$0.18 US$0.16 US$0.19shareDividends per share US$0.21 US$0.16 US$0.16 US$0.14 US$0.13 Outlook "As we have discussed with investors for some time now, we believe that thesoftening US housing and mortgage markets and the weakening consumer financialcondition, pose significant downside risks to the US economy," said WellingtonDenahan-Norris, Chief Investment Officer for Prodesse's Investment Manager,FIDAC. "The Federal Reserve now has made it clear that it will act in a timelymanner to minimize these risks. To that end, the Fed has since lowered the FedFunds target rate to 3%, taking the extraordinary step of lowering the FederalFunds target rate by 75 basis points at an emergency meeting subsequent and byan additional 50 basis points at its regularly scheduled meeting on January 30.Moreover, the consensus view is that the Federal Reserve will likely need tocontinue to lower interest rates in 2008. All other things being equal, thisshould have the effect of further lowering Prodesse's cost of funds relative tothe yield on its portfolio, which is comprised of floating-rate, adjustable-rateand fixed-rate US Government Agency securities." Prodesse Investment LimitedBalance Sheet 31-Dec-07 30-Sep-07 30-Jun-07 31-Mar-07 31-Dec-061 US$'000 US $'000 US $'000 US $'000 US $'000 Note (Unaudited) (Unaudited) (Unaudited) (Unaudited) US$ US$ US$ US$ASSETSCurrent assetsAvailable for sale investments 3 2,280,046 2,227,999 2,235,571 2,237,709 2,073,602Accrued income receivable 10,541 10,131 10,236 9,302 8,774Receivable for principal paydowns 2,839 2,977 6,613 5,409 3,210Hedging instruments 4 - - 4,603 - -Cash and cash equivalents 48 205 11 30 35Prepaid expenses 77 154 236 34 27 Total assets 2,293,551 2,241,466 2,257,270 2,252,484 2,085,648 EQUITY AND LIABILITIES Capital and reservesShare capital:28,165,550 at 31 December 2007, 30September 2007, 30 June 2007 and 31March 2007, 25,625,550 at 31 December2006 , at US$ 0.01 282 282 282 282 256Capital redemption reserve 30 30 30 30 30Share premium 71,680 71,680 71,680 71,759 50,000Distributable reserve 141,513 141,513 141,513 198,681 198,681Accumulated profits 7,220 1,229 5,347 4,361 3,720Capital Reserve-Realised gain /(loss) and impairment on available for saleinvestments 1,600 875 - (57,206) (57,231)Revaluation reserve 16,411 5,578 (4,505) 18,198 14,082Cash flow hedge reserve 4 (21,966) (8,486) 4,603 (4,557) (2,445) Total shareholders' equity 216,770 212,701 218,950 231,548 207,093 Current liabilitiesSecurities purchased payable 31,882 92,122 - 136,626 15,407Repurchase agreements 5 2,011,384 1,915,579 2,030,082 1,872,007 1,853,757Accrued interest expense 9,823 6,475 6,706 6,068 5,563Accrued expenses payable 1,726 1,597 1,532 1,678 1,383Dividend payable 4 - 4,506 - - -Hedging instruments 21,966 8,486 - 4,557 2,445 Total liabilities 2,076,781 2,028,765 2,038,320 2,020,936 1,878,555 Total equity and liabilities 2,293,551 2,241,466 2,257,270 2,252,484 2,085,648 Net Assets 216,770 212,701 218,950 231,548 207,093Net Asset Value per share 6 7.70 7.55 7.77 8.22 8.08 1 Derived from the audited financial statements at December 31, 2006. Prodesse Investment Limited(unaudited) Income Statement 01 October 2007 01 July 2007 01 April 2007 01 January 2007 01 October 2006 to 31 December to 30 September to 30 June to 31 March to 31 December 2007 2007 2007 2007 2006 US $'000 US $'000 US $'000 US $'000 US $'000 IncomeInterest income 33,048 32,604 33,602 30,895 31,076Interest expense (25,381) (26,087) (26,898) (24,971) (25,733) Net interest income 7,667 6,517 6,704 5,924 5,343 Realised gain on sale of availablefor sale investments and interest rate swaps 725 875 38 25 1,289 Total income 8,392 7,392 6,742 5,949 6,632 Expenses Management, custodian and administration fees 1,362 1,301 1,453 1,297 1,278 Other operating expenses 314 322 323 654 502 Total expenses 1,676 1,623 1,776 1,951 1,780 Net income for the period 6,716 5,769 4,966 3,998 4,852 Net income per average share for theperiod 0.24 0.20 0.18 0.16 0.19 Dividend declared per share for theperiod 0.21 0.16 0.16 0.14 0.13 Average shares 28,165,550 28,165,550 28,165,550 25,766,661 25,625,550outstanding Prodesse Investment Limited(unaudited) Cash Flow Statement 01 October 2007 01 July 2007 to 01 April 2007 to 01 January 01 October 2006 to 31 December 30 September 30 June 2007 to 31 to 31 December 2007 2007 2007 March 2007 2006 US $'000 US $'000 US $'000 US $'000 US $'000Net cash (outflow)/inflow fromoperating activities (Note 1) (91,456) 119,203 (154,072) (36,709) (92,311) FinancingBorrowings under reverse 4,993,525 5,772,535 6,197,781 5,771,019 5,947,866repurchase agreementsRepayments under reverse (4,897,720) (5,887,038) (6,039,706) (5,752,769) (5,853,198)repurchase agreements New shares issued - - - 21,863 -Issue costs - - (79) (78) -Dividends paid (4,506) (4,506) (3,943) (3,331) (3,072) Net cash inflow/(outflow) from 91,299 (119,009) 154,053 36,704 91,596financing (Decrease)/increase in cash and (157) 194 (19) (5) (715)cash equivalents Cash and cash equivalents, at 205 11 30 35 750beginning of period Cash and cash equivalents, at end 48 205 11 30 35of period Note 1Net income for the period 6,716 5,769 4,966 3,998 4,852Net accretion/amortisation ofpremiums on available for sale (35)investments 180 139 (14) (215)Realised gain on sale of availablefor sale investments (725) (875) (38) (25) (2,508) Purchases of investments (215,290) (93,321) (328,449) (207,840) (432,026)Proceeds from sale of investments 53,110 108,812 33,493 34,168 228,070Principal paydowns 61,409 98,658 136,635 132,739 109,422Receivables (Increase)/decrease in accrued (410) 105 (934) (528) (834)income receivableDecrease / (increase) in prepaid 77 82 (202) (7) 147expensesLiabilitiesIncrease/(decrease) in accrued 3,348 (231) 638 505 754interest expenseIncrease / (decrease) in accrued 129 65 (146) 295 27expenses payable Net cash (outflow)/inflow from (91,456) 119,203 (154,072) (36,709) (92,311)operating activities Prodesse Investment LimitedStatement of Changes in Shareholders' Equity(unaudited) 01 October 2007 to 31 December 2007 Share Capital Share Distributable Capital Reserve capital redemption premium reserve - realised gain reserve on sales and impairment of available for sale investments US $'000 US $'000 US $'000 US $'000 US $'000Balance at 30 September 2007 282 30 71,680 141,513 875Net income for the quarter - - - - -Hedge reserve revalued - - - - -Transfer of realised gain to capital - - - - 725reserveMovement in unrealised gain on - - - - -revaluation taken to equityTotal recognised income and expense - - - - 725 Balance at 31 December 2007 282 30 71,680 141,513 1,600 Prodesse Investment LimitedStatement of Changes in Shareholders' Equity(unaudited) 01 October 2007 to 31 December 2007 Revaluation Accumulated Cash flow Total reserve profits hedge reserve US $'000 US $'000 US $'000 US $'000 Balance at 30 September 2007 5,578 1,229 (8,486) 212,701 Net income for the quarter - 6,716 - 6,716Hedge reserve revalued - - (13,480) (13,480)Transfer of realised gain to capital - (725) - -reserveMovement in unrealised gain on revaluation 10,833 - 10,833taken to equity -Total recognised income and expense 10,833 5,991 (13,480) 4,069 Balance at 31 December 2007 16,411 7,220 (21,966) 216,770 Notes to the financial statements 1. General Information 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 implied "AAA" ratedmortgage-backed securities on a leveraged basis. The Company's investmentstrategy is to generate net income for distribution from the spread between theinterest income from the portfolio and the cost of borrowing pursuant to reverserepurchase agreements used to finance the portfolio. The Investment Managerwill seek to enhance returns through what it considers an appropriate amount ofleverage. 2. Significant Accounting Policies Basis of Accounting This quarterly press release has been prepared using accounting policiesconsistent with International Financial Reporting Standards ("IFRS"). The sameaccounting policies, presentation and methods of computation are followed in thequarterly press release as applied in the Company's latest annual auditedfinancial statements except for the change in reclassification of the netborrowings under repurchase agreements in the cashflow statement. The financial statements are presented in US Dollars because that is thecurrency of the primary economic environment in which the Company operates. Thefunctional currency of the Company is also considered to be US Dollars. Changes in accounting policies In its financial statements for the year ended 31 December 2007, the Companywill adopt International Financial Reporting Standard 7 "Financial Instrumentsand Disclosures" ("IFRS7") for the first time. As IFRS 7 is a disclosurestandard, there is no impact of that change in accounting policy on thequarterly press release. Full details of the change will be disclosed in theCompany's annual report for the year ended 31 December 2007. Investments The Company invests in securities issued by the United States GovernmentSponsored Enterprises such as the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae") and theFederal Home Loan Banks ("FHLB") as well as the Government National MortgageAssociation ("Ginnie Mae"), a US Government Corporation. Freddie Mac, FannieMae, and FHLB, although chartered and sponsored by Congress, are not Companiesfunded 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 Maemortgage-backed securities are backed by those respective agencies, the paymentof principal and interest on the Ginnie Mae mortgage backed securities arebacked by 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. Expensesincidental to the acquisition of available for sale investments are includedwithin the cost of that investment. Realised and Unrealised Gains and Losses on Investments Unrealised gains or losses arising on the revaluation of investments areincluded in equity. Unrealised losses on investment securities that areconsidered other than temporary, as measured by the amount of decline in fairvalue attributable to factors other than temporary, are recognised as animpairment loss in the income statement and the cost basis of themortgage-backed securities is adjusted. The impairment loss is then transferredto a non-distributable capital reserve in accordance with the Memorandum andArticles of Association of the Company. 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. When-Issued/Delayed Securities The Company may purchase or sell securities on a when-issued or delayed deliverybasis, including "TBA" securities. TBA Securities are mortgage-backed securitiesfor which details about the underlying mortgages have not yet been announced.Securities traded on a when-issued basis are traded for delivery beyond thenormal settlement date at a stated price and yield, and no income accrues to thepurchaser prior to delivery. Purchasing or selling securities on a when-issued or delayed delivery basisinvolves the risk that the market price at the time of delivery may be lower orhigher than the agreed upon price, in which case an unrealised loss may beincurred. Security Transactions and Investment Income Recognition Security transactions are recorded on the trade date. Realised and unrealisedgains and losses are calculated based on specific identified cost. Interestincome is recorded as earned. Interest income and expense includes amortisationof market discount and premium as calculated using a hybrid methodologyutilising the principles of the effective interest method. Other Receivables Other receivables do not carry any interest and are short-term in nature and areaccordingly stated at their nominal value as reduced by appropriate allowancesfor estimated irrecoverable amounts. 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 ofthe contractual arrangements entered into. An equity instrument is any contractthat evidences a residual interest in the assets of the Company after deductingall of its liabilities. Financial liabilities and equity are recorded at theproceeds received, net of issue costs. Other Accruals and Payables Other accruals and payables are not interest-bearing and are stated at theirnominal value. Reverse Repurchase Agreements The Company enters into reverse repurchase agreements with qualified third partyfinancial institutions to finance its investment in mortgage-backed securities.The agreements are secured by the value of the Company's mortgage-backedsecurities. A repurchase agreement involves the sale by the Company ofsecurities that it holds with an agreement by the Company to repurchase the samesecurities at an agreed price and date. Such an agreement involves the riskthat the value of the securities sold by the Company may decline in value belowthe price of the 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 is recorded as aseparate line item. Securities sold subject to repurchase agreements are retained in the financialstatements as available for sale securities and the counterparty liability isincluded in liabilities under repurchase agreements. Derivative Financial Instruments and Hedge Accounting The Company's activities expose it primarily to the financial risks associatedwith changes in interest rates. The Company uses interest rate swap contracts tohedge these exposures. The Company does not use derivative financial instrumentsfor speculative purposes. The use of financial derivatives is governed by the Company's policies approvedby the board of directors, which provide written principles on the use offinancial derivatives. Changes in the fair value of derivative financial instruments that aredesignated and effective as hedges of future cash flows are recognised directlyin equity and any ineffective portion is recognised immediately in the incomestatement. The amount in equity is released to income when the forecasttransaction impacts profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold,terminated, or exercised, or no longer qualified for hedge accounting. At thattime, any cumulative gain or loss on the hedging instrument recognised in equityfor cash flow hedges is retained in equity until the forecasted transactionoccurs. If a hedged transaction is no longer expected to occur, the netcumulative gain or loss recognised in equity is transferred to net profit orloss in the period. 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. Set-up and Issue Costs The preliminary expenses of the Company directly attributable to the equitytransaction and costs associated with the establishment of the Company thatwould otherwise have been avoided are taken to the share premium account. Costs directly attributable to the issue of Ordinary Shares are expensed againstthe share premium account as allowed by with The Companies (Guernsey) Law, 1994. 3. Available for Sale Investments Gross Unrealised Gross EstimatedAt 31 December 2007 Amortised Cost Gain Unrealised Loss Fair Value US $'000 US $'000 US $'000 US $'000 Adjustable rate 846,490 2,136 (5,047) 843,579Fixed rate 1,417,145 19,616 (294) 1,436,467Total 2,263,635 21,752 (5,341) 2,280,046 As at 31 December 2007, all of the assets in the Company's portfolio were FannieMae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry a "AAA"or implied "AAA" rating. During the quarter ended 31 December 2007, the Companydid not have any securities that it deemed to be other-than-temporarilyimpaired. 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 and floating rate mortgage-backed securities are reset atperiodic intervals to an increment over some predetermined reference interestrate. There are two main categories of reference rates: (i) those based on USTreasury securities and (ii) those derived from a calculated measure such as acost of funds index or a moving average of mortgage rates. Commonly utilisedreference rates include the one-year Treasury Bill rate or one-month US dollarLIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR,closely mirror changes in market interest rate levels. Others tend to lagchanges in market rate levels and 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. 4. 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 2007, the Company had interest rate swap agreements of US$778million notional amount in which the Company will pay a weighted average rate of5.15% and have a weighted average receive rate of 5.06%. 5. Reverse Repurchase Agreements At 31 December 2007 the aggregate value of securities pledged by the Companyunder reverse repurchase agreements exceeds the liability under such agreementsby approximately US$60.3 million (approximately 3% of such liability). Theinterest rates on the reverse repurchase agreements at 31 December 2007 rangefrom 4.47% to 5.15% and have maturity dates ranging from 2 day to 1520 days. The Company has entered into repurchase agreements which provide thecounterparty with the right to call the balance prior to maturity date. Theserepurchase agreements totalled US$300 million. 6. Net Asset Value The net asset value per Ordinary Share is based on net assets at 31 December2007 and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares inissue at the period end. At 31 December 2007, the reported net asset value per Ordinary Share (beforeexcluding the dividend declared for the quarter ended 31 December 2007) isUS$7.70 At 31 December 2007, the Company had a net asset value per Ordinary Share ofUS$7.49, after including the effect of the dividend declared for the quarterended 31 December 2007 of US$5,914,766. This information is provided by RNS The company news service from the London Stock Exchange