Last checked at 5 Aug 2008 07:00
Prodesse Investment Limited
Results for the Quarter Ended 30 June 2008
Highlights for second quarter 2008:
Ronald Kazel, Managing Director of FIDAC, Investment Manager to Prodesse, commented: "With the backdrop of extreme volatility in the financial markets, Prodesse's results powerfully demonstrate the value of our portfolio strategy, particularly asset selection and gearing discipline. Since inception, Prodesse has exclusively maintained a portfolio of high credit quality assets which have maintained their value relatively well and, as evidenced by our dividend increase in the second quarter, enabled us to take advantage of the changing shape of the yield curve.
| Financial Highlights | Q2 2008 | Q1 2008 | Q4 2007 | Q3 2007 | Q2 2007 |
| | $US | ||||
| Dividend per share | 0.23 | 0.22 5 | 0.21 | 0.16 | 0.16 |
| Core net income per average share | 0.24 | 0.27 | 0.21 | 0.17 | 0.17 |
| Net income per average share | 0.24 | 0.27 | 0.24 | 0.20 | 0.18 |
| Net income | 7.5m | 7.7m | 6.7m | 5.8m | 5.0m |
| Net asset value per share | 6.99 | 6.91 | 7.70 | 7.556 | 7.77 |
| | | ||||
| | GBP Sterling7 | ||||
| Dividend per share | 12p | 11p | 11p | 8p | 8p |
| Core net income per average share | 12p | 14p | 11p | 8p | 8p |
| Net income per average share | 12p | 14p | 12p | 10p | 9p |
| Net income | £3.8m | £3.8m | £3.4m | £2.8m | £2.5m |
| Net asset value per share | 351.1p | 347.8p | 388.0p | 370.0p6 | 387.1p |
| | | | | | |
1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities.
2 The average share calculation is based on the sum of the shares for the period divided by the number of days in the period
3 Based on annualisation of Q2 dividend, an exchange rate of 1.9908 US$ per Pound Sterling and a closing price of 380p on 30 June 2008.
4 Based on closing share prices of the constituents of the FTSE All Share index on 30 June 2008 (JCF Datastream).
5 Disparity in dividend per share and core net income per average share relates to additional shares issued after quarter end 31 March 2008 which are eligible to receive the Q1 dividend.
6 After deducting dividends declared for the period.
7 Illustration is based upon an exchange rate of 1.9908, 1.9866, 1.9827, 2.0405 and 2.0071 US$ per Pound Sterling at 30 June 2008, 31 March 2008, 31 December 2007, 28 September 2007 and, 29 June 2007 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 5 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 569 103 and the passcode is 57181377.
Company performance
For the quarter ended 30 June 2008, Prodesse reported net income of US$7.5 million (quarter ended 31 March 2008: US$7.7 million) or US$ 0.24 per average share (quarter ended 31 March: US$0.27 per average share).
Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities, of
US$7.5 million for the quarter ended 30 June 2008 (quarter ended 31 March 2008: US$7.7 million) or US$0.24 per average share (quarter ended 31 March 2008: US$0.27 per average share).
The Company delivered an annualised core return on average equity for the quarter ended 30 June 2008 of 14.59% (quarter ended 31 March 2008: 15.00%). For the quarter ended 30 June 2008, the annualised total return on average equity (RoAE) was 14.58% (quarter ended 31 March 2008: 14.90%). .
| 01 April 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 | |
| Core net income | US$7.5 million | US$7.7 million | US$6.0 million | US$4.9 million | US$4.9 million |
| Core net income per average share | US$0.24 | US$0.27 | US$0.21 | US$0.17 | US$0.17 |
| Annualised core RoAE | 14.59% | 15.00% | 11.16% | 9.07% | 8.75% |
| Reported net income | US$7.5 million | US$7.7 million | US$6.7 million | US$5.8 million | US$5.0 million |
| Net income per average share | US$0.24 | US$0.27 | US$0.24 | US$0.20 | US$0.18 |
| Annualised RoAE | 14.58% | 14.90% | 12.51% | 10.70% | 8.82% |
Portfolio Performance
For the quarter ended 30 June 2008, 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 5.02% (quarter ended 31 March 2008: 5.57%) and the annualised cost of funds on the average repurchase balance was 3.66% (quarter ended 31 March 2008: 4.35%) which equates to an interest rate spread of 1.36% (quarter ended 31 March 2008: 1.22%). At 30 June 2008, the annualised yield on assets was 4.99% and the annualised cost of funds with the effect of interest rate swaps on the repurchase balances was 3.63%, which equates to an interest rate spread of 1.36%.
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 17% for the quarter ended 30 June 2008 (quarter ended 31 March 2008: 13%). 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 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 | |
| Annualised yield on average assets | 5.02% | 5.57% | 5.83% | 5.90% | 5.83% |
| Annualised cost of funds on average repurchase balance | 3.66% | 4.35% | 4.95% | 5.18% | 5.15% |
| Interest rate spread | 1.36% | 1.22% | 0.88% | 0.72% | 0.68% |
| CPR | 17% | 13% | 10% | 13% | 16% |
As at 30 June 2008, 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 2008 | 31 March 2008 | 31 December 2007 | 30 September 2007 | 30 June 2007 | |
| Fixed-rate mortgage-backed securities | 55% | 54% | 63% | 66% | 69% |
| Adjustable-rate mortgage-backed securities | 19% | 16% | 15% | 12% | 11% |
| Floating-rate mortgage-backed securities | 26% | 30% | 22% | 22% | 20% |
Borrowings
The ratio of average daily repurchase agreements to equity resulted in average leverage of the Company of 8.3:1 during the quarter ended 30 June 2008 (quarter ended 31 March 2008: 9.6:1). The leverage at 30 June 2008 was 8.2:1 (31 March 2008: 8.4:1).
| 01 April 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 | |
| Average leverage for period | 8.3:1 | 9.6:1 | 9.6:1 | 9.4:1 | 9.3:1 |
| Leverage at period end | 8.2:1 | 8.4:1 | 9.3:1 | 9.0:1 | 9.3:1 |
As of 30 June 2008, the Company had entered into interest rate swap agreements totalling US$560 million notional in which the Company will pay an average rate of 5.13% and receive 1 month LIBOR on a monthly basis. As of 31 March 2008, the Company had entered into interest rate swap agreements totalling US$588 million notional in which the Company would pay an average rate of 5.14% and receive 1 month LIBOR on a monthly basis.
|
| 30 June 2008 | 31 March 2008 | 31 December 2007 | 30 September 2007 | 30 June 2007 |
| Notional amount | US$560 million | US$588 million | US$778 million | US$817 million | US$821 million |
| Average pay rate | 5.13% | 5.14% | 5.15% | 5.16% | 5.16% |
| Average receive rate | 2.47% | 2.84% | 5.06% | 5.57% | 5.32% |
Capital
At 30 June 2008, the Company had a net asset value per share of US$6.76 (31 March 2008: US$6.67) after deducting the current dividends declared for the quarter of US$7,125,872 (for the quarter 31 March 2008: US$6,816,051). All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating.
| 01 April 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 | |
| NAV per share | US$6.99 | US$6.91 | US$7.70 | US$7.551 | US$7.77 |
| Dividends declared for the period | US$7,125,872 | US$6,816,051 | US$5,914,766 | US$4,506,488 | US$4,506,488 |
| NAV per share after deducting dividends declared | US$6.76 | US$6.67 | US$7.49 | US$7.55 | US$7.61 |
1After deducting dividends declared for the period. Dividends for the third quarter were declared 20 September 2007.
During quarter end 30 June 2008, the Company issued 2,816,500 shares raising US$19.9 million in net offering proceeds.
Dividend
The Company has declared a dividend for the quarter ended 30 June 2008 of US$0.23per share that is payable on 29 August 2008 to holders on the register on 15 August 2008. Dividends are calculated and paid in US dollars.
| 01 April 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 | |
| Core net income per average share | US$0.24 | US$0.27 | US$0.21 | US$0.17 | US$0.17 |
| Net income per average share | US$0.24 | US$0.27 | US$0.24 | US$0.20 | US$0.18 |
| Dividends per share | US$0.23 | US$0.22 | US$0.21 | US$0.16 | US$0.16 |
Outlook
"Market conditions were quieter in the second quarter of 2008," said Kristopher Konrad, Managing Director and Co-head of Portfolio Management for Prodesse's Investment Manager, FIDAC. "The policy actions taken in the first quarter, including easing monetary policy, introducing new liquidity facilities and expanding the GSE's buying capacity, began to have the desired effect of strengthening confidence. The Agency mortgage market in particular continued to outperform other sectors of the credit markets. The US economy still has downside risks to growth and we will continue to monitor the Federal Reserve's response to the situation. In this environment, we believe Prodesse's portfolio composition will enable the company to perform in a wide range of interest rate outcomes. After taking into account the effect of interest rate swaps, the company's portfolio consists of 27% fixed-rate, 54% floating-rate and 19% adjustable-rate Agency mortgage-backed securities."
| Prodesse Investment Limited | ||||||
| Balance Sheet | ||||||
|
|
Note | 30-Jun-08 US$'000 (Unaudited) | 31-Mar-08 US$'000 (Unaudited) | 31-Dec-071 US$'000 | 30-Sep-07 US $'000 (Unaudited) | 30-Jun-07 US $'000 (Unaudited) |
| ASSETS | ||||||
| Current assets | ||||||
| Available for sale investments | 3 | 2,005,510 | 1,802,505 | 2,280,046 | 2,227,999 | 2,235,571 |
| Accrued income receivable | 8,988 | 7,878 | 10,541 | 10,131 | 10,236 | |
| Receivable for principal paydowns | 3,556 | 3,583 | 2,839 | 2,977 | 6,613 | |
| Receivable for securities sold | - | 52,668 | - | - | - | |
| Hedging instruments | 4 | - | - | - | - | 4,603 |
| Cash and cash equivalents | 89 | 31 | 48 | 205 | 11 | |
| Prepaid expenses | 329 | 6 | 77 | 154 | 236 | |
| Total assets | 2,018,472 | 1,866,671 | 2,293,551 | 2,241,466 | 2,257,270 | |
| EQUITY AND LIABILITIES | ||||||
| Capital and reserves | ||||||
| Share capital: | ||||||
| 30,982,050 at 30 June 2008, 28,165,550 at 31 March 2008, 31 December 2007, 30 September 2007and 30 June 2007 at US$ 0.01 | 309 | 282 | 282 | 282 | 282 | |
| Capital redemption reserve | 30 | 30 | 30 | 30 | 30 | |
| Share premium | 91,561 | 71,680 | 71,680 | 71,680 | 71,680 | |
| Distributable reserve | 141,513 | 141,513 | 141,513 | 141,513 | 141,513 | |
| Accumulated profits | 9,708 | 9,022 | 7,220 | 1,229 | 5,347 | |
| Capital reserve-Realised gain on available for sale investments and interest rate swaps | 1,540 | 1,546 | 1,600 | 875 | - | |
| Revaluation reserve-Unrealised (loss)/gain on available for sale investments | (10,194) | 3,800 | 16,411 | 5,578 | (4,505) | |
| Cash flow hedge reserve | 4 | (17,857) | (33,168) | (21,966) | (8,486) | 4,603 |
| Total shareholders' equity | 216,610 | 194,705 | 216,770 | 212,701 | 218,950 | |
| Current liabilities | ||||||
| Securities purchased payable | - | - | 31,882 | 92,122 | - | |
| Repurchase agreements | 5 | 1,776,586 | 1,628,689 | 2,011,384 | 1,915,579 | 2,030,082 |
| Accrued interest expense | 5,639 | 5,523 | 9,823 | 6,475 | 6,706 | |
| Accrued expenses payable | 1,780 | 1,586 | 1,726 | 1,597 | 1,532 | |
| Swap termination expense payable | - | 3,000 | - | - | - | |
| Dividend payable | - | - | - | 4,506 | - | |
| Hedging instruments | 4 | 17,857 | 33,168 | 21,966 | 8,486 | - |
| Total liabilities | 1,801,862 | 1,671,966 | 2,076,781 | 2,028,765 | 2,038,320 | |
| Total equity and liabilities | 2,018,472 | 1,866,671 | 2,293,551 | 2,241,466 | 2,257,270 | |
| Net Assets | 216,610 | 194,705 | 216,770 | 212,701 | 218,950 | |
| Net Asset Value per share | 6 | 6.99 | 6.91 | 7.70 | 7.55 | 7.77 |
1Derived from 2007 audited financial statements.
| Prodesse Investment Limited | |||||
| (unaudited) Income Statement | |||||
|
| 01 April 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | |
| Income | |||||
| Interest income | 24,761 | 31,451 | 33,048 | 32,604 | 33,602 |
| Interest expense | (15,753) | (22,302) | (25,381) | (26,087) | (26,898) |
| Net interest income | 9,008 | 9,149 | 7,667 | 6,517 | 6,704 |
| Net realised (loss)/profit on sale of available for sale investments and termination of interest rate swaps | (6) | (54) | 725 | 875 | 38 |
| Total income | 9,002 | 9,095 | 8,392 | 7,392 | 6,742 |
| Expenses | |||||
| Management, custodian and administration fees | 1,192 | 1,124 | 1,362 | 1,301 | 1,453 |
| Other operating expenses | 313 | 308 | 314 | 322 | 323 |
| Total expenses | 1,505 | 1,432 | 1,676 | 1,623 | 1,776 |
| Net income for the period | 7,497 | 7,663 | 6,716 | 5,769 | 4,966 |
| Net income per average share for the period | 0.24 | 0.27 | 0.24 | 0.20 | 0.18 |
| Dividend declared per share for the period | 0.23 | 0.22 | 0.21 | 0.16 | 0.16 |
| Average shares Outstanding | 30,672,545 | 28,165,550 | 28,165,550 | 28,165,550 | 28,165,550 |
| Prodesse Investment Limited | |||||
| (unaudited) Cash Flow Statement | |||||
|
| |||||
|
| 01 April 2008 to 30 June 2008 | 01 January 2008 to 31 March 2008 | 01 October 2007 to 31 December 2007 | 01 July 2007 to 30 September 2007 | 01 April 2007 to 30 June 2007 |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | |
| Net cash (outflow)/inflow from operating activities (Note 1) | (160,930) | 388,593 | (91,456) | 119,203 | (154,072) |
| Financing | |||||
| Borrowings under reverse repurchase agreements | 4,363,375 | 5,683,953 | 4,993,525 | 5,772,535 | 6,197,781 |
| Repayments under reverse repurchase agreements | (4,215,478) | (6,066,648) | (4,897,720) | (5,887,038) | (6,039,706) |
| New shares issued | 20,525 | - | - | - | - |
| Issue costs | (617) | - | - | - | (79) |
| Dividends paid | (6,817) | (5,915) | (4,506) | (4,506) | (3,943) |
| Net cash inflow/(outflow) from financing activities | 160,988 | (388,610) | 91,299 | (119,009) | 154,053 |
| Increase/(decrease) in cash and cash equivalents | 58 | (17) | (157) | 194 | (19) |
| Cash and cash equivalents, at beginning of period | 31 | 48 | 205 | 11 | 30 |
| Cash and cash equivalents, at end of period | 89 | 31 | 48 | 205 | 11 |
| Note 1 | |||||
| Net profit for the period | 7,497 | 7,663 | 6,716 | 5,769 | 4,966 |
| Net accretion/amortisation of premiums on available for sale investments | 559 | (102) | 180 | 139 | (35) |
| Net realised loss/(gain) on sale of available for sale investments and termination of interest rate swaps | 6 | 54 | (725) |
(875) | (38) |
| Purchases of investments | (310,025) | (210,825) | (215,290) | (93,321) | (328,449) |
| Termination of swap | - | (6,775) | - | - | - |
| Proceeds from sale of investments | 49,229 | 513,853 | 53,110 | 108,812 | 33,493 |
| Principal paydowns | 92,927 | 86,431 | 61,409 | 98,658 | 136,635 |
| Receivables | |||||
| (Increase)/decrease in accrued income receivable | (1,110) | 2,663 | (410) | 105 | (934) |
| (Increase)/decrease in prepaid expenses | (323) | 71 | 77 | 82 | (202) |
| Liabilities | |||||
| (Decrease)/increase in accrued interest expense | 116 | (4,300) | 3,348 | (231) | 638 |
| (Decrease)/increase in accrued expenses payable | 194 | (140) | 129 | 65 | (146) |
| Net cash (outflow)/inflow from operating activities | (160,930) | 388,593 | (91,456) | 119,203 | (154,072) |
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 January 2008 to 30 June 2008
|
| 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 profits | Cash flow hedge reserve | Total |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | |
| Balance at 1 January 2008 | 282 | 30 | 71,680 | 141,513 | 1,600 | 16,411 | 7,220 | (21,966) | 216,770 |
| Net income for the quarter | - | - | - | - | - | - | 7,663 | - | 7,663 |
| Loss on termination of hedge transferred to income account | 6,775 | 6,775 | |||||||
| Hedge reserve revalued | - | - | - | - | - | - | - | (17,977) | (17,977) |
| Transfer of realised gain to capital reserve | - | - | - | - | (54) | 54 | - | - | |
| Movement in unrealised gain on revaluation taken to equity | - | - | - | - | - | (5,890) | - | - | (5,890) |
| Realised gains and losses | - | - | - | - | - | (6,721) | - | - | (6,721) |
| Total recognised income and expense | - | - | - | - | (54) | (12,611) | 7,717 | (11,202) | (16,150) |
| Dividends Paid | - | - | - | - | - | - | (5,915) | - | (5,915) |
| Balance at 31 March 2008 | 282 | 30 | 71,680 | 141,513 | 1,546 | 3,800 | 9,022 | (33,168) | 194,705 |
| Net income for the quarter | - | - | - | - | - | - | 7,497 | - | 7,497 |
| Hedge reserve revalued | - | - | - | - | - | - | - | 15,311 | 15,311 |
| Transfer of realised gain to capital reserve | - | - | - | - | (6) | - | 6 | - | - |
| Movement in unrealised gain on revaluation taken to equity | - | - | - | - | - | (14,000) | - | - | (14,000) |
| Realised gains and losses | 6 | 6 | |||||||
| Total recognised income and expense | - | - | - | - | (6) | (13,994) | 7,503 | 15,311 | 8,814 |
| Dividends Paid | - | - | - | - | - | - | (6,817) | - | (6,817) |
| New issue of shares | 27 | - | 20,498 | - | - | - | - | - | 20,525 |
| Issue cost | - | - | (617) | - | - | - | - | - | (617) |
| Balance at 30 June 2008 | 309 | 30 | 91,561 | 141,513 | 1,540 | (10,194) | 9,708 | (17,857) | 216,610 |
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
This quarterly press release has 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.
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.
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. Freddie Mac, Fannie Mae, and FHLB, although chartered and sponsored by Congress, are not companies funded by congressional appropriations and the debt and mortgage-backed securities issued by Freddie Mac, Fannie Mae and FHLB are neither guaranteed nor insured by the United States Government.
The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are backed by those respective agencies, 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. The impairment loss is then transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.
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.
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 (104% 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.
Changes in the fair value of derivative financial instruments that are designated and effective as hedges of future cash flows are recognised directly in equity and any ineffective portion is recognised immediately in the income statement. The amount in equity is released to income when the forecast transaction 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 that time, 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.
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$1,195).
Set-up and Issue Costs
The preliminary expenses of the Company directly attributable to the equity transaction and costs associated with the establishment of the Company that would otherwise have been avoided are taken to the share premium account.
Costs directly attributable to the issue of Ordinary Shares are expensed against the share premium account as allowed by with The Companies (Guernsey) Law, 1994.
3. Available for Sale Investments
| At 30 June 2008 | Amortised Cost | Gross Unrealised Gain | Gross Unrealised Loss | Estimated Fair Value |
| US $'000 | US $'000 | US $'000 | US $'000 | |
| Adjustable rate | 898,555 | 2,427 | (19,003) | 881,979 |
| Fixed rate | 1,117,149 | 9,688 | (3,306) | 1,123,531 |
| Total | 2,015,704 | 12,115 | (22,309) | 2,005,510 |
As at 30 June 2008, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry a "AAA" or implied "AAA" rating. During the quarter ended 30 June 2008, 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. Fannie Mae and Freddie Mac are the principal US Government-related (i.e. not backed by the full credit of the US Government) guarantors.
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.
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 are designated as cash flow hedges against the benchmark interest rate risk associated with the Company's borrowings.
At 30 June 2008, the Company had interest rate swap agreements of US$560 million notional amount in which the Company will pay a weighted average rate of 5.13% and have a weighted average receive rate of 2.47%.
5. Repurchase Agreements
At 30 June 2008 the aggregate value of securities pledged by the Company under repurchase agreements exceeds the liability under such agreements by approximately US$70.7million (approximately 4.0% of such liability). The interest rates on the repurchase agreements at 30 June 2008 range from 2.15% to 4.57% and have maturity dates ranging from 1 day to 1338 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.
6. Net Asset Value
The net asset value per Ordinary Share is based on net assets at 30 June 2008 and on 30,982,050 Ordinary Shares, being the number of Ordinary Shares in issue at the period end.
At 30 June 2008, the reported net asset value per Ordinary Share (before excluding the dividend declared for the quarter ended 30 June 2008) is US$6.99
At 30 June 2008, the Company had a net asset value per Ordinary Share of US$6.76, after including the effect of the dividend declared for the quarter ended 30 June 2008 of US$7,125,872.