Predator Oil Regulatory News (PRD)

7 Aug 2007 07:01

Prodesse Investment Limited07 August 2007 Prodesse Investment Limited Results for the Quarter Ended 30 June 2007 Highlights for second quarter 2007: • Core net income1 per average share of US$0.17• Dividend per share of US$0.16 from net interest income - equates to an annualised dividend yield of 7.23%2 (FTSE All Share annualised dividend yield of 2.523%3)• Net income per average share of US$0.18• NAV per share of US$7.77 (31 March 2007: US$8.22)• Portfolio remains 100% implied "AAA" mortgage-backed securities. 1 Core net income is defined as net income excluding realised and unrealised gains and losses on securities. 2 Based on annualisation of Q2 dividend, an exchange rate of 2.0071 US$ per Pound Sterling and a closing price of 441.0p on 29 June 2007 3 Based on closing share prices of the constituents of the FTSE All Share index on 29 June 2007 (JCF Datastream). Michael A.J. Farrell, Chairman and CEO of FIDAC, Investment Manager to Prodesse,commented: "Interest rates in the US remain volatile. During the second quarter,the two-year Treasury ranged in yield from a low of 4.59% to a high of 5.10%,while the 10-year Treasury ranged in yield from a low of 4.62% to a high of5.30%. This volatility has continued subsequent to quarter-end. Economicconditions in the US have also been volatile, as the deterioration of housingand the subprime mortgage market has reverberated in GDP growth and in theinvestment returns of many investment vehicles. For Prodesse, this is a positiveoperating environment. Returns on new investments have become more attractivewith the recent increase in long-term interest rates and the stabilization ofour funding costs. In addition, the avoidance of credit risk, a hallmark of ourstrategy, should benefit performance as the US credit cycle worsens." Financial Highlights Q2 2007 Q1 2007 Q4 2006 Q3 2006 Q2 2006 $USDividend per share 0.16 0.14 0.13 0.12 0.10Core net income per average share 0.17 0.15 0.14 0.12 0.10Net income/(loss) per average share 0.18 0.16 0.19 0.25 (1.38)Net income/(loss) 5.0m 4.0m 4.9m 6.4m (37.6m)Net asset value per share 7.77 8.22 8.08 8.05 7.52 GBP Sterling4Dividend per share 8p 7p 7p 6p 5pCore net income per average share 8p 8p 7p 6p 5pNet income/(loss) per average share 9p 8p 10p 13p (74p)Net income/(loss) £2.5m £2.0m £2.5m £3.4m (£20.4m)Net asset value per share 387.1p 417.6p 412.9p 430.1p 407.2p 4 Illustration is based upon an exchange rate of 2.0071, 1.9686, 1.9569, 1.8718,and 1.8469US$ per Pound Sterling at 29 June 2007, 31 March 2007, 31 December2006, 30 September 2006, and 30 June 2006, respectively. Translation to GBPSterling is given for illustration purposes only as Prodesse invests only in US$denominated assets which produce US$ income. Should shareholders choose toreceive their dividends in GBP Sterling they may elect to do so. Enquiries Investor RelationsRob Bailhache / Nick Henderson, Financial DynamicsTel: 020 7269 7200 / 020 7269 7114 Company Secretary and AdministratorSara Radford / Paul Smith, 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 2 pm on Tuesday 7August 2007 and a live audio webcast and presentation will be available via theProdesse website, www.prodesse.co.uk. The dial in for the conference call is+44 (0) 845 146 2021 and the pass code is 10884271. Company performance For the quarter ended 30 June 2007, Prodesse reported net income of US$5.0million (quarter ended 31 March 2007: US$4.0 million) or US$0.18 per averageshare (quarter ended 31 March 2007: US$0.16 per average share). Prodesse reported core net income, defined as net income excluding realised andunrealised gains and losses on securities, of US$4.9 million for the quarterended 30 June 2007 (quarter ended 31 March 2007: US$4.0 million) or US$0.17 peraverage share (quarter ended 31 March 2007: US$0.15 per average share). Duringthe quarter the Company sold US$33.5 million in securities, resulting in arealised gain of US$38,496. The Company delivered an annualised core return on average equity for thequarter ended 30 June 2007 of 8.75% (quarter ended 31 March 2007: 7.25%). Forthe quarter ended 30 June 2007, the annualised total return on average equity(RoAE) was 8.82% (quarter ended 31 March 2007: 7.29%). 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to to to 31 December 30 September to 30 June 2007 31 March 2007 2006 2006 30 June 2006 Core net income US$4.9 million US$4.0 million US$3.6 million US$3.0 million US$2.7 millionCore net income per average US$0.17 US$0.15 US$0.14 US$0.12 US$0.10shareAnnualised core RoAE 8.75% 7.25% 6.90% 6.07% 5.10% Reported net income/(loss) US$5.0 million US$4.0 million US$4.9 million US$6.4 million (US$37.6 million)Net income/(loss) per average US$0.18 US$0.16 US$0.19 US$0.25 (US$1.38)shareAnnualised RoAE 8.82% 7.29% 9.39% 12.77% (71.80%) Portfolio Performance For the quarter ended 30 June 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 31 March 2007: 5.81%) and the annualised cost of funds onthe average repurchase balance was 5.15% (quarter ended 31 March 2007: 5.15%)which equates to an interest rate spread of 0.68% (quarter ended 31 March 2007:0.66%). At 30 June 2007, the annualised yield on assets was 5.93% and theannualised cost of funds on the repurchase balances was 5.12%, which equates toan interest rate spread of 0.81%. The Constant Prepayment Rate, or CPR, on the Company's mortgage-backedsecurities portfolio averaged 16% for the quarter ended 30 June 2007 (quarterended 31 March 2007: 15%). Prepayment speeds on mortgage-backed securities, asreflected by the CPR, vary according to the type of investment, changes ininterest rates, conditions in the financial markets, competition and otherfactors, none of which can be predicted with any certainty. 01 April 2007 to 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to to 31 March 2007 to 31 December 30 September 30 June 2006 30 June 2007 2006 2006 Annualised yield on average 5.83% 5.81% 5.95% 5.66% 5.24%assetsAnnualised cost of funds onaverage repurchase balance 5.15% 5.15% 5.30% 5.31% 4.99%Interest rate spread 0.68% 0.66% 0.65% 0.35% 0.25%CPR 16% 15% 14% 13% 15% As at 30 June 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. 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006Fixed-rate mortgage-backed 69% 69% 62% 63% 67%securitiesAdjustable-rate mortgage-backed 11% 8% 11% 8% 9%securitiesFloating-rate mortgage-backed 20% 23% 27% 29% 24%securities Borrowings The ratio of average daily repurchase agreements to equity resulted in averageleverage of the Company of 9.3:1 during the quarter ended 30 June 2007 (quarterended 31 March 2007: 9.3:1). The leverage at 30 June 2007 was 9.3:1 (31 March2007: 8.1:1). 01 April 2007 to 01 January 2007 01 October 2006 01 July 2006 to 01 April to 31 March 2007 to 31 December 30 September 2006 to 30 30 June 2007 2006 2006 June 2006 Average leverage for period 9.3:1 9.3:1 9.3:1 8.9:1 9.7:1Leverage at period end 9.3:1 8.1:1 9.0:1 8.5:1 8.7:1 As of 30 June 2007, the Company had entered into interest rate swap agreementstotalling US$821 million in notional amount in which the Company will pay anaverage rate of 5.16% and receive 1 month LIBOR on a monthly basis. As of 31March 2007, the Company had entered into interest rate swap agreements totallingUS$811 million in notional amount in which the Company would pay an average rateof 5.17% and receive 1 month LIBOR on a monthly basis. 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006 Notional amount US$821 million US$811 million US$597 million US$603 million US$714 millionAverage pay rate 5.16% 5.17% 5.22% 5.23% 5.16%Average receive rate 5.32% 5.32% 5.35% 5.33% 5.22% Capital At 30 June 2007, the Company had a net asset value per share of US$7.77 (31March 2007: US$8.22). After deducting the current dividends declared for thequarter of US$4,506,488 (for the quarter 31 March 2007: US$3,943,177), reportednet asset value per share was US$7.61 (31 March 2007: US$8.08). 01 April 2007 to 01 January 2007 to 01 October 2006 to 01 July 2006 to 01 April 2006 to 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006 NAV per share US$7.77 US$8.22 US$8.08 US$8.05 US$7.52Dividends declared for US$4,506,488 US$3,943,177 US$3,331,321 US$3,075,066 US$2,602,555the periodNAV per share afterdeducting dividends US$7.61 US$8.08 US$7.95 US$7.93 US$7.42declared Dividend The Company has declared a dividend for the quarter ended 30 June 2007 ofUS$0.16 per share that was paid on 3 August 2007 to holders on the register on13 July 2007. Dividends are calculated and paid in US dollars. 01 April 2007 01 January 2007 01 October 2006 to 01 July 2006 to 01 April 2006 to to to 30 June 2007 31 March 2007 31 December 2006 30 September 2006 30 June 2006 Core net income per average US$0.17 US$0.15 US$0.14 US$0.12 US$0.10shareNet income/(loss) per average US$0.18 US$0.16 US$0.19 US$0.25 (US$1.38)shareDividends per share US$0.16 US$0.14 US$0.13 US$0.12 US$0.10 Outlook "Current indications from the Federal Reserve, whether in official statements,speeches or testimony, suggest that monetary policy will remain on hold for theforeseeable future," said Wellington Denahan-Norris, Chief Investment Officerfor Prodesse's Investment Manager, FIDAC. "This, combined with the attractiveprice levels for new investments, has positive implications for our portfolio tocontinue to generate current income for our shareholders. Looking ahead, whilewe believe that the Company's portfolio, composed of fixed-rate, adjustable-rateand floating-rate assets, is prepared to perform in a range of possible interestrate outcomes, we are comfortable with the portfolio composition in currentmarket conditions." Prodesse Investment LimitedBalance Sheet 30-Jun-07 31-Mar-07 31-Dec-06(1) 30-Sep-06 30-Jun-06 Note US $'000 US $'000 US $'000 US $'000 US $'000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) US$ US$ US$ US$ US$ASSETSCurrent assetsAvailable for sale investments 3 2,235,571 2,237,709 2,073,602 2,016,901 1,946,996Accrued income receivable 10,236 9,302 8,774 8,001 9,056Receivable for principal paydowns 6,613 5,409 3,210 4,158 5,029Receivable for securities sold - - - 68,693 70,277Hedging instruments 4 4,603 - - - 10,246Cash and cash equivalents 11 30 35 750 4Prepaid expenses 236 34 27 174 122 Total assets 2,257,270 2,252,484 2,085,648 2,098,677 2,041,730 EQUITY AND LIABILITIES Capital and reservesShare capital:28,165,550 at 30 June 2007 and 31March 2007, 25,625,550 at 31 December2006 and 30 September 2006,26,025,550 at 30 June 2006 at US$ 0.01 282 282 256 256 260Capital redemption reserve 30 30 30 30 26Share premium 71,680 71,759 50,000 50,000 50,000Distributable reserve 141,513 198,681 198,681 198,681 201,413Accumulated profits 5,347 4,361 3,720 3,229 2,742Capital Reserve-Realised (loss) and impairment on available for sale - (57,206) (57,231) (58,520) (61,890) investments Revaluation reserve (4,505) 18,198 14,082 15,714 (7,019)Cash flow hedge reserve 4 4,603 (4,557) (2,445) (3,124) 10,246 Total shareholders' equity 218,950 231,548 207,093 206,266 195,778 Current liabilitiesSecurities purchased payable - 136,626 15,407 124,034 134,681Repurchase agreements 5 2,030,082 1,872,007 1,853,757 1,759,089 1,706,674Accrued interest expense 6,706 6,068 5,563 4,809 3,220Accrued expenses payable 1,532 1,678 1,383 1,355 1,377Hedging instruments 4 - 4,557 2,445 3,124 - Total liabilities 2,038,320 2,020,936 1,878,555 1,892,411 1,845,952 Total equity and liabilities 2,257,270 2,252,484 2,085,648 2,098,677 2,041,730 Net Assets 218,950 231,548 207,093 206,266 195,778Net Asset Value per share 6 7.77 8.22 8.08 8.05 7.52 (1) Derived from the audited financial statements at December 31, 2006. Prodesse Investment Limited(unaudited) Income Statement 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April 2006 to to 31 March to 31 December 30 September to 30 June 30 June 2007 2007 2006 2006 2006 US $'000 US $'000 US $'000 US $'000 US $'000 IncomeInterest income 33,602 30,895 31,076 28,200 29,233Interest expense (26,898) (24,971) (25,733) (23,702) (25,153) Net interest income 6,704 5,924 5,343 4,498 4,080 Realised gain/(loss) on sale ofavailable 38 25 1,289 3,371 (14,547) for sale investments and interestrate swapsLoss from impairment - - - - (25,692) Total income/(loss) 6,742 5,949 6,632 7,869 (36,159) ExpensesManagement, custodian and 1,453 1,297 1,278 1,246 1,211 administration fees Other operating expenses 323 654 502 203 202 Total expenses 1,776 1,951 1,780 1,449 1,413 Net income/(loss) for the period 4,966 3,998 4,852 6,420 (37,572) Net income/(loss) per average sharefor the period 0.18 0.16 0.19 0.25 (1.38) Dividend declared per share for theperiod 0.16 0.14 0.13 0.12 0.10 Average shares outstanding 28,165,550 25,766,661 25,625,550 25,799,463 27,281,594 Prodesse Investment Limited(unaudited) Cash Flow Statement 01 April 2007 01 January 2007 01 October 2006 01 July 2006 to 01 April to to to 31 December 30 September 2006 to 30 30 June 2007 31 March 2007 2006 2006 June 2006 US $'000 US $'000 US $'000 US $'000 US $'000Net cash (outflow) / inflow fromoperating (154,072) (36,709) (92,311) (46,374) 293,149activities (Note 1) FinancingBorrowings under reverse repurchase 6,197,781 5,771,019 5,947,866 5,770,443 6,685,967agreementsRepayments under reverse repurchase (6,039,706) (5,752,769) (5,853,198) (5,718,028) (6,962,911)agreementsOwn shares acquired - - - (2,732) (12,887)New shares issued - 21,863 - - -Issue costs (79) (78) - - -Dividends paid (3,943) (3,331) (3,072) (2,563) (3,330) Net cash inflow / (outflow) from 154,053 36,704 91,596 47,120 (293,161)financing (Decrease) /increase in cash and (19) (5) (715) 746 (12)cash equivalents Cash and cash equivalents, at 30 35 750 4 16beginning of period Cash and cash equivalents, at end of 11 30 35 750 4period Note 1Net income/(loss) for the period 4,966 3,998 4,852 6,420 (37,572)Net accretion/amortisation ofpremiums on available for sale (35) (14) (215) 143 1,005investments Realised (gain)/loss on sale ofavailable for sale investments (38) (25) (2,508) (2,017) 14,547Realised gain in interest rate hedge - - - (135) -Loss from impairment - - - - 25,692Purchases of investments (328,449) (207,840) (432,026) (708,063) (349,722)Proceeds from sale of investments 33,493 34,168 228,070 563,718 530,854Proceeds from sale of interest rate - - - 135 -swapsPrincipal paydowns 136,635 132,739 109,422 91,072 113,805Receivables(Increase)/decrease in accrued (934) (528) (834) 835 1,084income receivable(Increase) /decrease in prepaid (202) (7) 147 (51) (94)expensesLiabilitiesIncrease/(decrease) in accrued 638 505 754 1,589 (6,414)interest expense(Decrease)/increase in accrued (146) 295 27 (20) (36)expenses payable Net cash (outflow) / inflow from (154,072) (36,709) (92,311) (46,374) 293,149operating activities Prodesse Investment LimitedStatement of Changes in Shareholders' Equity (unaudited) 01 April 2007 to 30 June 2007 Share Capital Share Distributable Capital Reserve capital redemption premium reserve - realised gain/ reserve (loss) on sales and impairment of available for sale investments US $'000 US $'000 US $'000 US $'000 US $'000 Balance at 31 March 2007 282 30 71,759 198,681 (57,206) Net income for the quarter - - - - - Available for sale investments: Transfer of realised gain to capital - - - - 38reserve Movement in unrealised gain on - - - - - revaluation taken to equity Cash flow hedge reserve - - - - -Total recognised income and expense - - - - 38 Issuance costs - - (79) - - Dividends paid - - - - - Transfer to capital reserve - - - (57,168) 57,168 Balance at 30 June 2007 282 30 71,680 141,513 - Revaluation Accumulated Cash flow Total reserve profits hedge reserve US $'000 US $'000 US $'000 US $'000 Balance at 31 March 2007 18,198 4,361 (4,557) 231,548 Net income for the quarter - 4,966 - 4,966 Available for sale investments: Transfer of realised gain to capital - (38) - -reserve Movement in unrealised gain on (22,703) - - (22,703) revaluation taken to equity Cash flow hedge reserve - - 9,160 9,160Total recognised income and expense (22,703) 4,928 9,160 (8,577) Issuance costs - - - (79) Dividends paid - (3,942) - (3,942) Transfer to capital reserve - - - - Balance at 30 June 2007 (4,505) 5,347 4,603 218,950 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 ofcomputation are followed in the quarterly press release as applied in theCompany's latest annual audited financial statements except for the change inreclassification of the net borrowings under repurchaseagreements 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 the current financial year, the Company will adopt International FinancialReporting Standard 7 "Financial Instruments and Disclosures" ("IFRS7") for thefirst time. As IFRS 7 is a disclosure standard, thereis no impact of that change in accounting policy on the quarterly press release. Full details of the change will be disclosed in the Company's annual report forthe 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. The Company did not transact in when-issued or delayed deliverysecurities during the quarter ended 30 June 2007. 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 of changesin interest rates. The Company uses interest rate swap contracts to hedge theseexposures. The Company does not use derivative financial instruments forspeculative 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 30 June 2007 Amortised Cost Gain Unrealised Loss Fair Value US $'000 US $'000 US $'000 US $'000 Adjustable rate 692,566 3,163 (552) 695,177Fixed rate 1,547,510 4,427 (11,543) 1,540,394 Total 2,240,076 7,590 (12,095) 2,235,571 As at 30 June 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 30 June 2007, the Company didnot have any securities that it deemed to be other-than-temporarily impaired. 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 30 June 2007, the Company had interest rate swap agreements of US$821 millionnotional amount in which the Company will pay a weighted average rate of 5.16%and have a weighted average receive rate of 5.32%. 5. Reverse Repurchase Agreements At 30 June 2007 the aggregate value of securities pledged by the Company underreverse repurchase agreements exceeds the liability under such agreements byapproximately US$60.9 million (approximately 3% of such liability). Theinterest rates on the reverse repurchase agreements at 30 June 2007 range from4.47% to 5.45% and have maturity dates ranging from 3 days to 1,704 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 $300 million. 6. Net Asset Value The net asset value per Ordinary Share is based on net assets at 30 June 2007and on 28,165,550 Ordinary Shares, being the number of Ordinary Shares in issueat the period end. At 30 June 2007, the reported net asset value per Ordinary Share (beforeexcluding the dividend declared for the quarter ended 30 June 2007) is US$7.77. At 30 June 2007, the Company had a net asset value per Ordinary Share ofUS$7.61, after including the effect of the dividend declared for the quarterended 30 June 2007 of US$4,506,488. This information is provided by RNS The company news service from the London Stock Exchange