Last checked at 3 Nov 2009 07:00
Prodesse Investment Limited
Results for the Quarter Ended 30 September 2009
Highlights for third quarter 2009:
Core net income1 per average share2 of US$0.29
Dividend per share of US$0.28 from net interest income - equates to an annualised dividend yield of 15.54%3
NAV per share of US$8.19 (30 June 2009: US$7.69) before including the effect of the dividend declared for the quarter
Portfolio remains 100% implied "AAA" mortgage-backed securities.
Board considering bringing forward continuation vote currently scheduled for 2010 AGM
Ronald Kazel, Managing Director of FIDAC, Investment Manager to Prodesse, commented on the quarter's results: "Prodesse continues to benefit from current market conditions. The widening spread between the yield on our assets and the cost to finance them has contributed to a strong dividend, and the NAV per share has risen with the strong market appetite for Agency mortgage-backed securities."
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| 1 | Core net income is defined as net income excluding realised and unrealised gains and losses on securities and interest rate swaps. |
| 2 | The average share calculation is based on the sum of the shares for the period divided by the number of days in the period. |
| 3 | Based on annualisation of Q3 dividend, an exchange rate of 1.6016 US$ per Pound Sterling and a closing price of 450p on 30 September 2009. |
| 4 | Third dividend declared 3 November 2009 and not accrued in the third quarter 2009. |
| 5 | Illustration is based upon an exchange rate of 1.6016, 1.6463, 1.4299, 1.4575, and 1.7801 US$ per Pound Sterling at 30 September 2009, 30 June 2009, 31 March 2009, 31 December 2008 and 30 September 2008, respectively. Translation to GBP Sterling is given for illustration purposes only as Prodesse invests only in US$ denominated assets which produce US$ income. Should shareholders choose to receive their dividends in GBP Sterling they may elect to do so. |
Enquiries
Investor Relations
Rob Bailhache / Nick Henderson, Financial Dynamics
Tel: 020 7269 7200 / 020 7269 7114
Company Secretary and Administrator
Sara Bourne / Jean McMillan, BNP Paribas Fund Services (Guernsey) Limited
Tel: 01481 750850
About Prodesse
Prodesse Investment Limited is a limited liability Guernsey-incorporated closed-end investment company, the investments of which are managed by Fixed Income Discount Advisory Company. The Company's investment policy is to provide net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed securities and the cost of repurchase agreements entered into to finance the acquisition of such residential mortgage-backed securities.
Conference Call
There will be a conference call to discuss the results at 14:00 UK time on Tuesday 3 November 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 020 3037 9221 / +1 866 966 5335 and the password is "Prodesse".
Company performance
For the quarter ended 30 September 2009, Prodesse reported net income of US$7.8 million (quarter ended 30 June 2009: US$13.5 million) or US$0.25 per average share (quarter ended 30 June 2009: US$0.44 per average share). This income reflects the de-designation of the Company's interest rate swap agreements as cashflow hedges whereby unrealised gains (losses) are reflected in earnings from 1 October 2008 (previously all unrealised gains (losses) were taken to equity).
Prodesse reported core net income, defined as net income excluding realised and unrealised gains and losses on securities and interest rate swaps, of US$8.9 million for the quarter ended 30 September 2009 (quarter ended 30 June 2009: US$8.5 million) or US$0.29 per average share (quarter ended 30 June 2009: US$0.27 per average share).
The Company delivered an annualised core return on average equity for the quarter ended 30 September 2009 of 14.53% (quarter ended 30 June 2009: 14.80%). For the quarter ended 30 September 2009, the annualised total return on average equity (RoAE) was 12.67% (quarter ended 30 June 2009: 23.42%).
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 | |
| Core net income | US$8.9 million | US$8.5 million | US$7.1 million | US$6.0 million | US$7.5 million |
| Core net income per average share | US$0.29 | US$0.27 | US$0.23 | US$0.19 | US$0.24 |
| Annualised core RoAE | 14.53% | 14.80% | 13.55% | 12.07% | 14.24% |
| Reported net income (loss) | US$7.8 million | US$13.5 million | US$7.9 million | (US$18.5 million) | US$7.7 million |
| Net income (loss) per average share | US$0.25 | US$0.44 | US$0.25 | (US$0.60) | US$0.25 |
| Annualised RoAE | 12.67% | 23.42% | 15.11% | (36.95%) | 14.62% |
Portfolio Performance
For the quarter ended 30 September 2009, the annualised yield on average assets, which is calculated based on the annualised interest income for the period divided by the average value of interest earning assets for the period, was 4.48% (quarter ended 30 June 2009: 4.33%) and the annualised cost of funds on the average repurchase balance was 2.63% (quarter ended 30 June 2009: 2.68%) which equates to an interest rate spread of 1.85% (quarter ended 30 June 2009: 1.65%).
The Constant Prepayment Rate, or CPR, on the Company's mortgage-backed securities portfolio averaged 20% for the quarter ended 30 September 2009 (quarter ended 30 June 2009: 21%). 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 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 | |
| Annualised yield on average assets | 4.48% | 4.33% | 4.56% | 5.24% | 5.21% |
| Annualised cost of funds on average repurchase balance | 2.63% | 2.68% | 3.15% | 3.92% | 3.73% |
| Interest rate spread | 1.85% | 1.65% | 1.41% | 1.32% | 1.48% |
| CPR | 20% | 21% | 16% | 9% | 10% |
As at 30 September 2009, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac and Ginnie Mae mortgage-backed securities, which carry an implied "AAA" rating.
| 30 September 2009 | 30 June 2009 | 31 March 2009 | 31 December 2008 | 30 September 2008 | |
| Fixed-rate mortgage-backed securities | 56% | 54% | 49% | 49% | 49% |
| Adjustable-rate mortgage-backed securities | 27% | 27% | 27% | 24% | 24% |
| Floating-rate mortgage-backed securities | 17% | 19% | 24% | 27% | 27% |
The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.
Borrowings
The ratio of average daily repurchase agreements to equity resulted in average leverage of the Company of 6.9:1 during the quarter ended 30 September 2009 (quarter ended 30 September 2009: 7.2:1). The leverage at 30 September 2009 was 6.5:1 (30 June 2009: 7.0:1).
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 | |
| Average leverage for period | 6.9:1 | 7.2:1 | 7.6:1 | 8.5:1 | 8.4:1 |
| Leverage at period end | 6.5:1 | 7.0:1 | 7.4:1 | 7.8:1 | 8.2:1 |
As of 30 September 2009, the Company had entered into interest rate swap agreements totalling US$560 million notional in which the Company will pay an average rate of 4.76% and receive 1 month LIBOR on a monthly basis. As of 30 June 2009, the Company had entered into interest rate swap agreements totalling US$567 million notional in which the Company would pay an average rate of 4.76% and receive 1 month LIBOR on a monthly basis.
| 30 September 2009 | 30 June 2009 | 31 March 2009 | 31 December 2008 | 30 September 2008 | |
| Notional amount | US$560 million | US$567 million | US$544 million | US$563 million | US$601 million |
| Average pay rate | 4.76% | 4.76% | 4.96% | 4.96% | 4.98% |
| Average receive rate | 0.25% | 0.32% | 0.53% | 1.08% | 2.79% |
Capital
At 30 September 2009, the Company had a net asset value per share of US$.7.91 (30 June 2009: US$7.42) after deducting the current dividends declared for the quarter of US$8,674,974 (for the quarter 30 June 2009: US$8,365,154).
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 | |
| NAV per share | US$8.19 | US$7.69 | US$7.17 | US$6.28 | US$6.62 |
| Dividends declared for the period | US$8,674,974 | US$8,365,154 | US$7,125,872 | US$5,886,590 | US$7,125,872 |
| NAV per share after deducting dividends declared | US$7.91 | US$7.42 | US$6.94 | US$6.09 | US$6.39 |
Dividend
The Company has declared a dividend for the quarter ended 30 September 2009 of US$0.28 per share that is payable on 2 December 2009 to holders on the register on 13 November 2009. Dividends are calculated and paid in US dollars.
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 | |
| Core net income per average share | US$0.29 | US$0.27 | US$0.23 | US$0.19 | US$0.24 |
| Net income (loss) per average share | US$0.25 | US$0.44 | US$0.25 | (US$0.60) | US$0.25 |
| Dividends per share | USS0.28 | USS0.27 | USS0.23 | USS0.19 | US$0.23 |
Outlook
"While conditions are currently favourable to the fundamentals of Prodesse's strategy," said Kris Konrad, managing director and co-head of portfolio management at FIDAC, "we remain vigilant in monitoring the markets for any changes to those conditions. In particular, we continue to watch primary mortgage rates and prepayment speeds, and the trajectory of US government policy as it relates to participation in the Agency MBS market."
Board Activity
As part of its ongoing fiduciary duty to maximize shareholder returns, the Board, in consultation with the Company's Investment Manager, FIDAC, is considering the possibility of bringing forward the Company's continuation vote which is currently scheduled to be held at the 2010 AGM. No decision has yet been made and the Board will update shareholders in due course as to the outcome of these considerations after consulting with its advisers.
| Prodesse Investment Limited | ||||||
| Balance Sheet | ||||||
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| Note | 30-Sep-09 US$'000 (Unaudited) | 30-Jun-09 US$'000 (Unaudited) | 31-Mar-09 US$'000 (Unaudited) | 31-Dec-081 US$'000 | 30-Sep-08 US$'000 (Unaudited) |
| ASSETS | ||||||
| Current assets | ||||||
| Available for sale investments | 3 | 1,951,692 | 2,014,890 | 1,919,800 | 1,709,479 | 1,725,038 |
| Accrued income receivable | 8,818 | 8,785 | 8,371 | 7,785 | 8,722 | |
| Receivable for principal paydowns | 3,782 | 5,525 | 4,307 | 1,519 | 2,168 | |
| Receivable for securities sold | - | - | - | 19,426 | 183,193 | |
| Cash and cash equivalents | 195 | 215 | 244 | 19,173 | 4,956 | |
| Prepaid expenses | 275 | 363 | 138 | 139 | 206 | |
| Total assets | 1,964,762 | 2,029,778 | 1,932,860 | 1,757,521 | 1,924,283 | |
| EQUITY AND LIABILITIES | ||||||
| Capital and reserves | ||||||
| Share capital: | ||||||
| 30,982,050 at 30 September 2009, 30 June 2009, 31 March 2009, 31 December 2008, and 30 September 2008 at US$ 0.01 | 310 | 310 | 310 | 310 | 310 | |
| Capital redemption reserve | 30 | 30 | 30 | 30 | 30 | |
| Share premium | 91,560 | 91,560 | 91,560 | 91,560 | 91,560 | |
| Distributable reserve | 141,513 | 141,513 | 141,513 | 141,513 | 141,513 | |
| Accumulated (losses) profits | (7,889) | (7,314) | (13,670) | (15,656) | 10,088 | |
| Capital reserve-Realised gain on available for sale investments and interest rate swaps | 1,913 | 1,899 | 1,899 | 1,899 | 1,737 | |
| Revaluation reserve-Unrealised gain (losses) on available for sale investments | 33,968 | 20,470 | 13,446 | (10,104) | (23,276) | |
| Cash flow hedge reserve | 4 | (7,784) | (10,209) | (12,872) | (15,012) | (16,961) |
| Total shareholders' equity | 253,621 | 238,259 | 222,216 | 194,540 | 205,001 | |
| Current liabilities | ||||||
| Securities purchased payable | 23,640 | 86,484 | 19,420 | - | 6,582 | |
| Repurchase agreements | 5 | 1,653,409 | 1,669,657 | 1,647,962 | 1,515,351 | 1,687,721 |
| Accrued interest expense | 4,228 | 4,010 | 4,372 | 5,958 | 6,030 | |
| Accrued expenses payable | 2,071 | 2,296 | 2,189 | 2,015 | 1,988 | |
| Fair value of interest rate swaps | 4 | 27,793 | 29,072 | 36,701 | 39,657 | 16,961 |
| Total liabilities | 1,711,141 | 1,791,519 | 1,710,644 | 1,562,981 | 1,719,282 | |
| Total equity and liabilities | 1,964,762 | 2,029,778 | 1,932,860 | 1,757,521 | 1,924,283 | |
| Net Assets | 253,621 | 238,259 | 222,216 | 194,540 | 205,001 | |
| Net Asset Value per share | 6 | 8.19 | 7.69 | 7.17 | 6.28 | 6.62 |
1Derived from 2008 audited financial statements
| Prodesse Investment Limited | |||||
| (unaudited) Income Statement | |||||
|
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | |
| Income | |||||
| Interest income | 21,543 | 21,221 | 21,132 | 22,447 | 24,979 |
| Interest expense | (11,110) | (11,192) | (12,639) | (15,056) | (15,997) |
| Net interest income | 10,433 | 10,029 | 8,493 | 7,391 | 8,982 |
| Net realised profit on sale of available for sale investments and termination of interest rate swaps | 14 | - | - | 162 | 197 |
| Amortisation of de-designation of cashflow hedge | (2,425) | (2,663) | (2,140) | (1,949) | - |
| Unrealised gain (loss) on interest rate swaps | 1,279 | 7,629 | 2,956 | (22,696) | - |
| Total income/(loss) | 9,301 | 14,995 | 9,309 | (17,092) | 9,179 |
| Expenses | |||||
| Management, custodian and administration fees | 1,177 | 1,197 | 1,123 | 1,045 | 1,157 |
| Other operating expenses | 320 | 316 | 313 | 319 | 319 |
| Total expenses | 1,497 | 1,513 | 1,436 | 1,364 | 1,476 |
| Net income/(loss) for the period | 7,804 | 13,482 | 7,873 | (18,456) | 7,703 |
| Net income/(loss) per average share for the period | 0.25 | 0.44 | 0.25 | (0.60) | 0.25 |
| Dividend declared per share for the period | 0.28 | 0.27 | 0.23 | 0.19 | 0.23 |
| Average shares outstanding | 30,982,050 | 30,982,050 | 30,982,050 | 30,982,050 | 30,982,050 |
| Prodesse Investment Limited | |||||
| (unaudited) Statement of Comprehensive Income | |||||
|
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | |
| Profit for the period | 7,804 | 13,482 | 7,873 | (18,456) | 7,703 |
| Available for sale financial assets: | |||||
| Gains (losses) on revaluation | 13,484 | 7,024 | 23,550 | 13,010 | (13,279) |
| Transfer of net realised gain to capital reserve | 14 | - | - | 162 | 197 |
| 13,498 | 7,024 | 23,550 | 13,172 | (13,082) | |
| Cash flow hedges: | |||||
| Gains arising during the period | - | - | - | - | 896 |
| Amortisation of de-designated cash flow hedge | 2,425 | 2,663 | 2,140 | 1,949 | - |
| 2,425 | 2,663 | 2,140 | 1,949 | 896 | |
| Total comprehensive income for the period | 23,727 | 23,169 | 33,563 | (3,335) | (4,483) |
| Prodesse Investment Limited | ||||||
| (unaudited) Cash Flow Statement | ||||||
|
| ||||||
|
| 01 July 2009 to 30 September 2009 | 01 April 2009 to 30 June 2009 | 01 January 2009 to 31 March 2009 | 01 October 2008 to 31 December 2008 | 01 July 2008 to 30 September 2008 | |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | ||
| Net cash inflow (outflow) from operating activities (Note 1) | 24,593 | (14,598) | (145,653) | 193,713 | 100,858 | |
| Financing | ||||||
| Borrowings under reverse repurchase agreements | 2,918,101 | 3,699,892 | 3,261,580 | 3,536,104 | 4,250,132 | |
| Repayments under reverse repurchase agreements | (2,934,349) | (3,678,197) | (3,128,969) | (3,708,474) | (4,338,997) | |
| Dividends paid | (8,365) | (7,126) | (5,887) | (7,126) | (7,126) | |
| Net cash (outflow) inflow from financing activities | (24,613) | 14,569 | 126,724 | (179,496) | (95,991) | |
| (Decrease)/increase in cash and cash equivalents | (20) | (29) | (18,929) | 14,217 | 4,867 | |
| Cash and cash equivalents, at beginning of period | 215 | 244 | 19,173 | 4,956 | 89 | |
| Cash and cash equivalents, at end of period | 195 | 215 | 244 | 19,173 | 4,956 | |
| Note 1 | ||||||
| Net income (loss) for the period | 7,804 | 13,482 | 7,873 | (18,456) | 7,703 | |
| Net accretion/amortisation of premiums on available for sale investments | 1,700 | 1,390 | 140 | 552 | 542 | |
| Unrealised loss (gain) on interest rate swaps | 1,146 | (4,966) | (816) | 24,645 | - | |
| Net realised (gain) loss on sale of available for sale investments and termination of interest rate swaps | (14) | - | - | (162) | (197) | |
| Purchases of investments | (143,581) | (189,304) | (254,490) | (53,376) | (196,543) | |
| Proceeds from sale of investments | 6,405 | - | 19,429 | 205,638 | 241,012 | |
| Principal paydowns | 151,085 | 165,694 | 84,208 | 33,913 | 47,353 | |
| Receivables | ||||||
| (Increase) decrease in accrued income receivable | (33) | (414) | (586) | 937 | 266 | |
| Decrease (increase) in prepaid expenses | 88 | (225) | 1 | 67 | 123 | |
| Liabilities | ||||||
| Increase (decrease) in accrued interest expense | 218 | (362) | (1,586) | (72) | 391 | |
| (Decrease) increase in accrued expenses payable | (225) | 107 | 174 | 27 | 208 | |
| Net cash inflow (outflow) from operating activities | 24,593 | (14,598) | (145,653) | 193,713 | 100,858 | |
Prodesse Investment Limited
Statement of Changes in Shareholders' Equity
(unaudited) 01 July 2009 to 30 September 2009
|
| Share capital | Capital redemption reserve | Share premium | Distributable reserve | Capital Reserve - realised gain on sales and impairment of available for sale investments | Revaluation reserve | Accumulated (losses)/ profits | Cash flow hedge Reserve - de-designated | Total |
| US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | US $'000 | |
| Balance at 1 July 2009 | 310 | 30 | 91,560 | 141,513 | 1,899 | 20,470 | (7,314) | (10,209) | 238,259 |
| Net income for the quarter | - | - | - | - | - | - | 7,804 | - | 7,804 |
| Amortisation of de-designated cash flow hedge | - | - | - | - | - | - | - | 2,425 | 2,425 |
| Movement in unrealised gain on revaluation taken to equity | - | - | - | - | - | 13,484 | - | - | 13,484 |
| Realised gains and losses | - | - | - | - | - | 14 | - | - | 14 |
| Transfer of realised gain to capital reserve | - | - | - | - | 14 | - | (14) | - | - |
| Total recognised income and expense | - | - | - | - | 14 | 13,498 | 7,790 | 2,425 | 23,727 |
| Dividends paid | - | - | - | - | - | - | (8,365) | - | (8,365) |
| Balance at 30 September 2009 | 310 | 30 | 91,560 | 141,513 | 1,913 | 33,968 | (7,889) | (7,784) | 253,621 |
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 has 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 seeks to enhance returns through what it considers an appropriate amount of leverage.
2. Significant Accounting Policies
Basis of Accounting
The financial statements included in the quarterly press release have been prepared using accounting policies consistent with International Financial Reporting Standards ("IFRS"). The same accounting policies, presentation and methods of computation are followed in the quarterly press release as applied in the Company's latest annual audited financial statements except as described below.
The financial statements are presented in US Dollars because that is the currency of the primary economic environment in which the Company operates. The functional currency of the Company is also considered to be US Dollars.
Changes in accounting policy
In 2009, the Company adopted International Financial Reporting Standard 8 "Operating Segments" and International Accounting Standard 1 "Presentation of Financial Statements" (revised 2007).
IFRS 8 requires operating segments to be identified on the basis of internal reports about components of the Company that are regularly reviewed by the Directors to allocate resources to the segments and to assess their performance. In contrast, the predecessor Standard IAS 14 "Segmental Reporting" required the Company to identify two sets of segments (business and geographical), using a risks and rewards approach, with the Company's system of internal financial reporting to Directors serving only as the starting point for the identification of such segments. However, as the Company is engaged in a single segment of business and no such segmental reporting is undertaken, this has not resulted in any changes to the financial information provided.
IAS 1 (revised) requires the presentation of a statement of changes in equity as primary statement, separate from the income statement and statement of comprehensive income. As a result, a statement of comprehensive income has been included in the primary statements, showing changes in each component of equity for each period presented.
Going Concern
The Directors believe it is appropriate to adopt the going concern basis in preparing the financial statements as, after due consideration, of all relevant facts, the Directors consider that the Company has adequate resources to continue operational existence for the foreseeable future. These facts include the consideration of application of the Statement of Recommended Practice for Financial Statements of Investment Trust Companies and Venture Capital Trusts issued by the Association of Investment Companies to the mandatory continuation vote to be held in 2010, and any decision to bring that vote forward, whereby the going concern basis of preparation of the financial statements is considered appropriate until a mandatory vote is passed to discontinue a company. Whilst the Company is reliant on the availability of short term financing, currently in the form of repurchase agreements, the Directors believe that this form of financing will remain available to the Company for the foreseeable future.
The Company's non-cash assets are largely actual or implied AAA assets, and accordingly, the Directors have not had, nor do they anticipate having, difficulty in converting the Company's assets to cash. The balance sheet also generates liquidity on an on-going basis through mortgage principal repayments and net earnings held prior to payment as dividends. Should the Company's needs ever exceed these on-going sources of liquidity plus the immediate sources of liquidity discussed above, the Directors believe that in most circumstances the Company's investments could be sold to raise cash.
Investments
The Company invests in securities issued by the United States Government Sponsored Enterprises such as the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Banks ("FHLB") as well as the Government National Mortgage Association ("Ginnie Mae"), a US Government Corporation.
On 7 September 2008, the Federal Housing Finance Agency ("FHFA") was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to $100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.
The payment of principal and interest on the debt of FHLB is backed by that agency, the debt and mortgage-backed securities issued by Freddie Mac and Fannie Mae are backed by those respective agencies, which are operating under the conservatorship of FHFA, and the payment of principal and interest on the Ginnie Mae mortgage backed securities are backed by the full-faith-and-credit of the US Government. Although the Company currently intends to hold most of its securities until maturity, it may, from time to time, sell any of its mortgage-backed securities as part of its overall management strategy. Accordingly the Company classifies all its mortgage-backed securities as available for sale and these are reported at fair value. Expenses incidental to the acquisition of available for sale investments are included within the cost of that investment.
Realised and Unrealised Gains and Losses on Investments
Unrealised gains or losses arising on the revaluation of investments are included in equity. Unrealised losses on investment securities that are considered other than temporary, as measured by the amount of decline in fair value attributable to factors other than temporary, are recognised as an impairment loss in the income statement and the cost basis of the mortgage-backed securities is adjusted.
Realised gains or losses arising on the sale of investments are recognised in the income statement but will be transferred to a non-distributable capital reserve in accordance with the Memorandum and Articles of Association of the Company.
When-Issued/Delayed Securities
The Company may purchase or sell securities on a when-issued or delayed delivery basis, including to be announced 'TBA" securities. TBA Securities are mortgage-backed securities for which details about the underlying mortgages have not yet been announced. Securities traded on a when-issued basis are traded for delivery beyond the normal settlement date at a stated price and yield, and no income accrues to the purchaser prior to delivery.
Purchasing or selling securities on a when-issued or delayed delivery basis involves the risk that the market price at the time of delivery may be lower or higher than the agreed upon price, in which case an unrealised loss may be incurred.
Security Transactions and Investment Income Recognition
Security transactions are recorded on the trade date. Realised and unrealised gains and losses are calculated based on specific identified cost. Interest income is recorded as earned. Interest income and expense includes accretion and amortisation of market discount and premium as calculated using a hybrid methodology utilising the principles of the effective interest method.
Other Receivables
Other receivables do not carry any interest and are short-term in nature and are accordingly stated at their nominal value as reduced by appropriate allowances for estimated irrecoverable amounts.
Cash and Cash Equivalents
Cash includes amounts held in interest bearing overnight accounts.
Financial Liabilities and Equity
Financial liabilities and equity are classified according to the substance of the contractual arrangements entered into. An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all of its liabilities. Financial liabilities and equity are recorded at the proceeds received, net of issue costs.
Other Accruals and Payables
Other accruals and payables are not interest-bearing and are stated at their nominal value.
Reverse Repurchase Agreements
The Company enters into repurchase agreements with qualified third party financial institutions to finance its investment in mortgage-backed securities. The agreements are secured by the value 105% (30 June 2009: 105%)of the repo principal of the Company's mortgage-backed securities. A repurchase agreement involves the sale by the Company of securities that it holds with an agreement by the Company to repurchase the same securities at an agreed price and date. Such an agreement involves the risk that the value of the securities sold by the Company may decline in value below the price of the securities.
Interest on the principal value of repurchase agreements issued and outstanding is based upon competitive market rates at the time of issuance. When the Company enters into a repurchase agreement, it establishes and maintains a segregated account with the lender containing securities having a value not less than the repurchase price, including accrued interest, of the repurchase agreement.
Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the repurchase agreements. Accrued interest is recorded as a separate line item.
Securities sold subject to repurchase agreements are retained in the financial statements as available for sale securities and the counterparty liability is included in liabilities under repurchase agreements.
Derivative Financial Instruments and Hedge Accounting
The Company's activities expose it primarily to the financial risks associated with changes in interest rates. The Company uses interest rate swap contracts to hedge these exposures. The Company does not use derivative financial instruments for speculative purposes.
The use of financial derivatives is governed by the Company's policies approved by the board of Directors, which provide written principles on the use of financial derivatives.
The Company voluntarily discontinued hedge accounting in the fourth quarter of 2008 through a combination of de-designating previously defined hedge relationships and not designating new contracts as cash flow hedges. In respect of the de-designation of cash flow hedges, IAS 39 requires that any cumulative gain or loss on the hedging instrument recognised in equity for cash flow hedges is retained in equity until the forecasted transaction occurs. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to net profit or loss in the period. The Company continues to hold repurchase agreements in excess of swap contracts and has no indication that interest payments on the hedged repurchase agreements are in jeopardy of discontinuing. Therefore, the unrealised losses related to the cashflow hedges that have been de-designated are not recognised immediately and these losses are expected to be reclassified into earnings during the contractual terms of the swap agreements starting as of 1 October 2008. Changes in the fair value of the interest rate swaps subsequent to 30 September 2008 are reflected in the Company's income statement.
Taxes
The Company is exempt from Guernsey taxation under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 for which it pays an annual fee of £600 (estimated US$961). Guernsey's corporate tax regime is currently under review.
Business and Geographical Segments
The Directors are of the opinion that the Company is engaged in a single segment of business of investing in debt securities, issued by companies operating and generating revenue in the United States. In addition no separate segmental reporting to Directors is carried out and therefore no segmental reporting is provided.
3. Available for Sale Investments
| At 30 September 2009 | Amortised Cost | Gross Unrealised Gain | Gross Unrealised Loss | Estimated Fair Value |
| US $'000 | US $'000 | US $'000 | US $'000 | |
| Adjustable rate | 504,278 | 8,639 | (817) | 512,100 |
| Floating rate | 310,813 | - | (7,766) | 303,047 |
| Fixed rate | 1,102,633 | 33,944 | (32) | 1,136,545 |
| Total | 1,917,724 | 42,583 | (8,615) | 1,951,692 |
As at 30 September 2009, all of the assets in the Company's portfolio were Fannie Mae, Freddie Mac, or Ginnie Mae mortgage-backed securities, which carry an "AAA" or implied "AAA" rating. During the quarter ended 30 September 2009, the Company did not have any securities that it deemed to be other-than-temporarily impaired.
Mortgage-backed securities are created when mortgages and their attendant streams of interest and principal payments are pooled to serve as collateral for the issuance of securities to investors. Interests in mortgage-backed securities differ from other forms of traditional debt securities, which normally provide for periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, mortgage-backed securities typically provide irregular cash flows consisting of both interest and principal.
An investment consideration of any mortgage-backed security is the structure of the payment of the cash flow streams from the underlying mortgages to the holders of the mortgage-backed securities. The cash flows can be simply passed from the mortgage holder to the investor or they can be structured in a number of different ways. The fair values of the various structures will vary in different interest rate or prepayment environments, with the more derivative or complex structures (e.g., interest-only or principal-only securities) being more sensitive to movements in interest rates or rates of prepayment.
Beyond the basic security of the mortgages and properties that underlie mortgage-backed securities, a critical attribute of mortgage-backed securities issued by the US Agencies is the credit enhancement that the US Agencies provide. The holder of mortgage-backed securities issued or guaranteed by the US Agencies is guaranteed the timely payment of principal and interest. Ginnie Mae is the principal governmental (i.e., backed by the full credit of the US Government) guarantor of mortgage-backed securities. On September 7, 2008, the Federal Housing Finance Agency (FHFA) was appointed as conservator of Freddie Mac and Fannie Mae. In addition, the US Department of the Treasury agreed to provide up to US$100 billion of capital to each company as needed to ensure they continue to provide liquidity to the housing and mortgage markets.
Adjustable-rate and floating-rate mortgage-backed securities in which the Company may invest include pass-through mortgage-backed securities issued by the US Agencies backed by adjustable-rate mortgages and Floaters. The interest rates on adjustable-rate and floating rate mortgage-backed securities are reset at periodic intervals to an increment over some predetermined reference interest rate. There are two main categories of reference rates: (i) those based on US Treasury securities and (ii) those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilised reference rates include the one-year Treasury Bill rate or one-month US dollar LIBOR. Some reference rates, such as the one-year Treasury Bill rate or LIBOR, closely mirror changes in market interest rate levels. Others tend to lag changes in market rate levels and tend to be somewhat less volatile.
Adjustable-rate mortgages frequently have upper and lower limits on the interest rates to which a residential borrower may be subject (i) in any reset or adjustment interval and (ii) over the life of the loan. These upper and lower limits are commonly known as ''caps'' and ''floors'', respectively.
The increase in value of these securities is primarily due to market sentiment and the purchase of MBS securities by the US government. All of the Mortgage-Backed Securities are "AAA" rated or carry an implied "AAA" rating. The investments are not considered other-than-temporarily impaired because the Company currently has the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments. Also, the Company is guaranteed payment of the principal amount of the securities by the government agency which created them.
The Company uses interest rate swaps to manage its exposure to interest rate movements. When the Company enters into an interest rate swap, it agrees to pay a fixed rate of interest and to receive a variable interest rate, generally based on the London Interbank Offered Rate ("LIBOR"). The Company's swaps were designated as cash flow hedges up until 1 October 2008 against the benchmark interest rate risk associated with the Company's borrowings. From 1 October 2008 the swaps are no longer designated as cashflow hedges.
The amortisation taken into income is the present value of the cash flows for each swap calculated monthly. The amortisation adjustment is applied quarterly and taken into income and reduces the Cash flow hedge reserve balance in the equity section.
At 30 September 2009, the Company had interest rate swap agreements of US$560 million notional (30 June 2009 US$567 million notional) amount in which the Company will pay a weighted average rate of 4.76% notional (30 June 2009 average rate of 4.76% notional) and have a weighted average receive rate of 0.25% (30 June 2009 average receive rate of 0.32%).
The fair value of the swaps entered into at 30 September 2009 is estimated at US$27,792,895 loss (30 June 2009: US$29,071,883 loss).
5. Repurchase Agreements
At 30 September 2009 the aggregate value of securities pledged by the Company under repurchase agreements exceeds the liability under such agreements by approximately US$89.6 million approximately 5.42% of such liability (30 June 2009: US$96.3 million, approximately 5.77% of such liability). The interest rates on the repurchase agreements at 30 September 2009 range from 0.2% to 4.57% (30 June 2009: 0.2% to 4.57%) and have maturity dates ranging from 1 day to 881 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. (30 June 2009: US$300 million)
6. Net Asset Value
The net asset value per Ordinary Share is based on net assets at 30 September 2009 and on 30,982,050 (30 June 2009: 30,982,050) Ordinary Shares, being the number of Ordinary Shares in issue at the period end.
At 30 September 2009, the reported net asset value per Ordinary Share (before including the effect of the dividend declared for the quarter ended 30 September 2009) is US$8.19 (30 June 2009: US$7.69).
At 30 September 2009, the Company had a net asset value per Ordinary Share of US$7.91 (30 June 2009: US$7.42), after including the effect of the dividend declared for the quarter ended 30 September 2009 of US$8,674,974 (30 June 2009: US$8,365,154).