Real Est.cred Regulatory News (RECI)

18 Mar 2009 07:00



Queen's Walk Investment Limited

Financial Results Announcement for the 

Third Quarter Ended 31 December 2008

Queen's Walk Investment Limited records stronger than expected cash flows

Queen's Walk Investment Limited (the "Company"), the Guernsey-incorporated investment company, has reported a net loss of €20.6 million, or €0.77 per ordinary share(1) for the quarter ended 31 December 2008, compared to a net loss of €37.7 million or €1.28 per ordinary share(1) in the previous quarter. 

The investment portfolio generated more cash than forecast. Total cash proceeds were €8.1 million versus an expectation of €7.0 million. The Company's cash position remains solid with approximately €17.3 million of cash on its balance sheet as at 31 December 2008, compared with €18.7 million as at 30 September 2008. 

Fair value write-downs of the Company's portfolio fell in the quarter to €24.1 million, from €42.1 million for the quarter ended 30 September 2008. The majority of write-downs made in the quarter reflect changes in discount rates, rather than actual performance of assets in the portfolio. The Company's net asset value ("NAV") at quarter end was €4.12 per share (2) compared to €4.95 per share (2) in the previous quarter.

The Board of Directors of the Company has declared a dividend of €0.08 per share for the quarter, unchanged from the previous quarter. 

Progress on financial stability and investment targets

Queen's Walk is making progress in its stated goal to improve financial stability and take advantage of opportunities to purchase NAV-accretive bonds.

The Company is ahead of schedule on its debt reduction programme, with gross debt falling from €40.5 million at the end of September to €29.5 million as at 28 February 2009. The Company had agreed with its lenders a target outstanding loan amount of €33 million for 31 March 2009 and €31 million for 30 June 2009.

Queen's Walk invested €6.7 million in investment grade bonds by 31 December 2008, since commencing its new investment programme in August. It made a further €0.7 million of investments in the period to 28 February 2009 (3). The investment grade bond portfolio recorded a cash-on-cash yield of approximately 20% in the quarter ended 31 December 2008.

The Company has also taken steps to further mitigate risk in its SME portfolio, and has purchased a put option on the German MDAX index as a partial hedge against increased defaults in the Company's SME portfolios. 

Queen's Walk retains confidence in the portfolio's ability to generate strong cash flows with lifetime expected cash flows in excess of €200 million as at 31 December 2008. This compares with a market capitalisation of €18.3 million from the investment portfolio. 

Tom Chandos, Chairman of Queen's Walk Investment Limited, said: "Queen's Walk's current cash position and expected cash flows from the investment portfolio will continue to support the Company's strategy of repaying its financing facility while selectively purchasing investment grade bonds."

(1)These calculations per share are based on the weighted average number of Ordinary Shares as shown in Note 8 of the financials

(2) These calculations per share are based on the number of Ordinary Shares outstanding at the end of each respective period.

(3) Euro equivalent cost is calculated using exchange rates at dates of purchase.

Highlights

·; European mortgage portfolio generated improved cash flow of €2.8 million.

·; SME assets performed well providing €3.4 million of cash flow. 

·; Fair values of UK portfolio assets reduced further to reflect deteriorating UK economy.

·; Expected cash flows of €6.8 million for the quarter ending 31 March 2009.

·; Strong projected cash flow profile supports plans to repay debt and purchase NAV-accretive bonds.

Conference Call & Further Information

A conference call to review the Company's financial results for the quarter ended 31 December 2008 will take place at 10:30 AM London time on 18 March 2009. The conference call can be accessed by dialing +44 (0)20 7138 0816 ten minutes prior to the scheduled start of the call. A results presentation will be available on the Queen's Walk website (www.queenswalkinv.com). 

A webcast of the conference call will also be available on a listen-only basis at www.queenswalkinv.com. Please allow extra time prior to the call to visit the site and download the necessary software required to listen to the internet broadcast. A replay of the webcast will be available for three months following the call.

For further information please contact:

Investor Relations: Caroline Villiers +44 (0)20 7153 1521

About the Company

Queen's Walk Investment Limited (the "Company") is a Guernsey-incorporated investment company listed on the London Stock Exchange. The Company invests primarily in a diversified portfolio of subordinated tranches of asset-backed securities, including the unrated "equity" or "first loss" residual income positions typically retained by the banks or other financial institutions which have originated the loan assets that collateralise a securitisation transaction. The Company makes such investments where its investment manager, Cheyne Capital Management (UK) LLP ("Cheyne Capital"), considers the coupon or cash flows from the investment to be attractive relative to the credit exposure of the underlying asset collateral. 

The content of this announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "forecasts", "estimates", "anticipates", "expects", "intends", "considers", "may", "will" or "should". By their nature, forward-looking statements involve risks and uncertainties and readers are cautioned that any such forward-looking statements are not guarantees of future performance. The Company's actual results and performance may differ materially from the impression created by the forward-looking statements and should not be relied upon. The Company undertakes no obligation to publicly update or revise forward-looking statements, except as may be required by applicable law and regulation (including the Listing Rules).

 Financial Highlights

 

 

 

Investment Portfolio 

A breakdown of the Company's investment portfolio by jurisdiction (by reference to underlying asset originator) is set out below. The investment grade bonds are included in the charts and are also detailed further in the next section. Percentages for each asset class are in relation to the value of the Company's portfolio excluding cash and hedges.

Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 September 2008
Portugal	35.1%
Germany	24.9%
Italy	15.0%
UK	13.9%
Holland	8.6%
CDO	2.0%
France	0.4%
US	0.0%
Total (€mm)	157.8

Queen's Walk Portfolio Breakdown by Jurisdiction as at 31 December 2008
Portugal	37.0%
Germany	26.1%
Italy	17.6%
Holland	10.7%
UK	7.5%
France	0.6%
CDO	0.5%
US	0.0%
Total (€mm)	123.6

A breakdown of the Company's investment portfolio by asset type (by reference to underlying asset collateral) is set out below. Percentages for each asset class are in relation to the value of the Company's investment portfolio excluding cash and hedges.

Queen's Walk Portfolio Breakdown by Asset Type as at 30 September 2008
Prime	51.0%
SME	31.8%
Investment Grade Bonds	6.1%
SubPrime	5.7%
NearPrime	3.5%
CDO	2.0%
Total (€mm)	157.8

Queen's Walk Portfolio Breakdown by Asset Type as at 31 December 2008
Prime	55.3%
SME	34.7%
Investment Grade Bonds	5.1%
SubPrime	2.9%
NearPrime	1.5%
CDO	0.5%
Total (€mm)	123.6

N.B. The term 'Prime' indicates the underlying pool of loans consists of mortgages made to borrowers with good credit records and whose incomes were verified at the time of the origination.

European Mortgage Portfolio (45.4% of GAV)

The Company's European mortgage residuals continue to perform satisfactorily. Cash flows in the quarter totalled €2.8 million, compared to €2.3 million in the previous quarter.

On 5 December 2008, Banco Comercial Português ("BCP"), the originator of the Magellan 1 mortgage portfolio, chose not to refinance the securitisation. Had the transaction been refinanced, the Company would have been entitled to a payment of approximately €16.5 million. However, the transaction continues to perform well and we expect approximately €0.7 million per quarter from this asset until the transaction is refinanced by BCP.

In the quarter ended 31 December 2008, the average default rate of the underlying mortgage pools was approximately 1.06%. In contrast, the Company's current cash flow forecasts assume an expected default rate of 1.32%. 

Rising Euribor rates have caused arrears rates to increase across the European mortgage pools, as the cost for borrowers of servicing the mortgages increases. For example, on 8 October 2008, three month Euribor rates peaked at 5.4%, compared to an average three month Euribor rate of 3.6% when the loans were originated. Since then, ECB rate cuts have prompted three month Euribor rates to fall to 1.6% as at 13 March 2009.

With respect to some of the mortgage portfolios, there are early signs that arrears rates are stabilising, and in some cases, falling. However, it will take some time for the full impact of lower Euribor rates to emerge, as many of the mortgages are indexed to six month Euribor and have not reset their mortgage rates to the new lower levels. The forecasted default rates used in the Company's cash flow models will be lowered once a more definitive arrears trend emerges.

SME Portfolio Investments (28.9% of GAV)

SME assets continue to perform well, with cumulative default rates on the underlying asset pools better than, or in line with, expectations. Cash flows from the SME portfolio totalled €3.4 million in the December quarter versus €3.3 million in the previous quarter.

The table below summarises the actual default rates for the SME portfolio in the past 12 months and the default rates that the Company has used to determine the forecast cash flows in the September and December quarters.

Deal	Actual Default Rate In 2008	Forecast Annual Default Rate (September assumptions)	Forecast Annual Default Rate (December assumptions)
Amstel 06-1	0.19%	0.60%	0.60%
Smart 06-1	0.47%	1.40%	2.00%
Gate 06-1	0.32%	0.77%	1.04%
Gate 05-2	1.25%	2.00%	2.50%
Average	0.56%	1.19%	1.54%

The table below summarises the NPV of each SME asset assuming default rates increase by, on average, 175% from the 2008 levels (this is the assumption used in the December 2008 cash flow forecasts), and by 450% from the 2008 levels. In the event that default rates increase by 450% from current levels, the net present value (4) ("NPV") of the SME portfolio falls by 38% relative to the current forecast, or approximately €0.63 per share.

(4) Net present value is computed by discounting the expected future cash flows at the discount rate applied when the asset was purchased. The NPV may not be equal to the fair value recorded on the Company's balance sheet.

Net Present Value of SME Portfolio (using Different Default Rate Assumptions)

Deal	Default Rate Increases by 175% from 2008 levels (Current Pricing Assumption)	Default Rate Increases by 450% from 2008 levels
Amstel 06-1	14,296,304	10,157,137
Smart 06-1	9,548,162	2,047,545
Gate 06-1	10,600,404	8,048,566
Gate 05-2	9,843,371	7,285,231
Total	44,288,241	27,538,479

UK Mortgage Portfolio (4.3% of GAV) 

The Company's UK mortgage portfolio recorded cash flows of £1.3 million versus £2.9 million in the previous quarter which was in line with expectations. Cash flows in the March quarter are expected to fall by a further 50% from the December quarter.

Losses in the UK mortgage portfolio continued to increase in the quarter. The fair value of the mortgage portfolio was further reduced in the quarter to reflect continued deterioration in the UK economy. The Company has recorded a zero value against two of the UK mortgage portfolios, despite receiving cash flows of £90,000 in the December quarter from these assets.

The Investment Manager has made progress in persuading mortgage originators to voluntarily repurchase loans that did not satisfy representations and warranties provided at the time of the securitisation. The Company has been able to recover or avoid losses of approximately £0.7 million from the UK mortgage portfolio. These amounts will accrue to the benefit of the Company in the March quarter.

Investment Grade Bond Portfolio (4.2% of GAV)

As at 31 December 2008, the Company had spent €6.7 million on purchasing investment grade bonds, and has purchased a further €0.7 million of bonds in the period to 28 February 2009. The annualised cash-on-cash yield of the bond portfolio in the December quarter was approximately 20% (5). The tables below detail the European ABS bonds the Company has purchased (6). The weighted average rating of the portfolio (based on the invested amount) is approximately BBB+.

Percentage of Portfolio by Value

Rating by Vintage (7)	2003	2004	2005	2006	2007	Total
AAA	5.33%	10.47%	10.80%			26.60%
AA				28.35%		28.35%
A				18.19%		18.19%
BBB			11.05%		15.80%	26.85%
Total	5.33%	10.47%	21.85%	46.55%	15.80%	100.00%

Percentage of Portfolio by Value

Rating by Type	UK Prime RMBS	UK BTL RMBS	UK Non-Conforming RMBS	Euro Prime RMBS	Euro CMBS	Total
AAA		15.06%	1.79%	9.75%		26.60%
AA		28.35%				28.35%
A			14.09%		4.10%	18.19%
BBB	11.05%				15.80%	26.85%
Total	11.05%	43.41%	15.86%	9.75%	19.91%	100.00%

Following a general weakening of market prices in the quarter ended 31 December 2008, the Company recorded a fair value reduction of €3.4 million to the bond portfolio. As at 31 December 2008, the total fair value of the Company's bond portfolio remains approximately €0.56 million higher than its purchase price (8). The Company remains confident that the assets will continue to perform and achieve their expected returns. However, the Company expects the investment grade bond portfolio to have greater mark-to-market volatility given the technical selling pressures that exist in the ABS bond markets.

(5) Total cash proceeds received in the quarter divided by amortised cost value of the bonds.

(6) The tables include the bonds purchased at their cost using FX rates at the time of purchase.

(7) Vintage reflects the issue date of the bond.

(8) This figure is calculated using the 31 December 2008 prices less cost using FX rates at 31 December 2008.

Portfolio Valuation 

In accordance with the Company's valuation procedures, the fair value of the Company's investments has been calculated on the basis of observable market data, market discount rates and the Investment Manager's expectations regarding future trends. Given the considerable re-structurings ongoing at the investment banks, the Company has received marks on 13 out of 21 of its residual investments compared to 15 in the previous quarter. The Company received broker marks for all of the investment grade bonds.

After giving effect to fair value write-downs and principal pay-downs to the residual investment portfolio and the investment grade bond portfolio of €31.3 million in the quarter, the NAV of the Company was €4.12 per share as at 31 December 2008 (€4.95 per share as at 30 September 2008).

Discount rates in relation to the European mortgage portfolios, SME portfolio and investment grade bond portfolios increased by, on average, approximately 33%-50%. In some instances, discount rates have doubled since the September quarter.

The table below summarises the changes in fair values of the Company's investment portfolio by asset class:

Asset Class	30 Sep 2008 Fair Value (1,2) (€mm)	31 Dec 2008 Fair Value (2) (€mm)	Fair Value  Change Since  30 Sep 2008 (€mm)	Cash flows Received in the Quarter Ended  30 September 2008 (3) (€mm)	Cash flows Received in the Quarter Ended  31 December 2008 (€mm)
UK Mortgages	12.8	6.3	-6.5	3.0	1.4
Euro Mortgages	79.1	67.4	-11.6	2.3	2.8
SME	50.1	42.9	-7.2	3.3	3.4
CDO	3.2	0.7	-2.5	0.5	0.2
US Mortgages	0.0	0.0	0.0	0.0	0.0
Investment Grade Bonds	9.7	6.2	-3.4	0.2	0.3
TOTAL (4)	154.9	123.6	-31.3	9.3	8.1

1. Fair values as at 30 September 2008 are expressed using 31 December 2008 FX rates.

2. The fair value figures for 30 September 2008 and 31 December 2008 include accrued interest.

3. Cash flows for 30 September 2008 are expressed using 31 December 2008 FX rates. 

4. The values for each column may not sum to the total due to rounding differences.

Fair value changes since 30 September 2008 include principal amortisations of the residuals as a result of cash flows received in the quarter, as well as fair value adjustments related to the investment portfolio.

Share Repurchase Programme 

In the three months between 30 September 2008 and 31 December 2008, the Company repurchased 130,000 shares in total at an average price of €0.53 per share. Between July 2007, when the share repurchase programme began, and 28 February 2009, the Company has bought back 13,976,099 shares at a total cost of €71.8 million and an average price of €5.14 per share.

Hedging 

The Company has elected to partially hedge against the potential credit impact of higher default rates in its SME portfolios. The Company has purchased 3,385 put options on the German Mid Cap Index (MDAX) at a strike price of 4,750 points. To reduce the cost of this hedge, another put option of the same size was sold for a strike price of 4,000, with the same maturity. The net purchase price of both options was €1 million. These options were purchased on 22 January 2009 with a maturity of 18 September 2009. The MDAX index was quoted at 4,462 as at 13 March 2009.

In the quarter ended 31 December 2008 the Company updated its methodology and process in respect of hedging its foreign exchange risk. The foreign exchange (FX) risk arises from holding assets in different currencies to the Company's base currency of Euros. Previously, the Company used rolling quarterly forwards to hedge its FX exposure. However, recent large changes in exchange rates were creating excessive margin requirements and required the Company to maintain large cash balances. As a result, the Company has elected to hedge its FX exposure by purchasing a two year Euro:Sterling FX option. This approach enables the Company to remain hedged against increases in the Euro:Sterling FX rate, while being able to participate in favourable FX moves and not being subject to further margin calls. 

The strike price of the purchased EUR call / GBP put option was 0.9315, with an expiry of 29 December 2010. The strike price of the purchased option was at-the-money at the date of purchase. To reduce the cost of this hedge, an out-of-the-money EUR call / GBP put option was sold with the same notional and maturity but with a strike price of 1.3000. The net purchase price of both options was approximately €1 million.

The investment grade bonds the Company has purchased are typically indexed to three month Libor. To hedge against falling Libor rates, the Company has entered into a series of fixed to floating interest rate swaps. The notional for the swaps is determined at the time of purchase, and the Company could be under- or over-hedged in relation to the outstanding amount of the bonds. The interest rate swaps are reviewed and hedges will be adjusted as required.

Company and Market Outlook

Queen's Walk remains well-positioned to take advantage of the continued dislocation in the European ABS markets. In conjunction with repaying the Company's financing facility, the Investment Manager will continue to use available cash proceeds to purchase investment grade ABS. Current European ABS bond prices reflect credit scenarios that we believe are more pessimistic than economic forecasts suggest.

The investment grade bond purchases will be accretive to NAV over the life of the investments, and we expect that future investments will offer investors positive returns combined with a defensive risk profile. However, in the short term we expect the investment grade bond portfolio to be subject to significant mark-to-market volatility given technical pressures that exist in the ABS markets.

The Company expects economic conditions to deteriorate in the UK and Continental Europe in spite of fiscal and monetary policies intended to limit the scope and impact of recession. The Company has elected to substantially mark down its UK mortgage portfolio and has based its cash flow forecasts on assumptions that default rates increase in both the SME and continental European mortgage portfolios.

The expected default rate in the continental mortgage portfolio has been increased and the cash flow forecasts do not assume that credit quality will improve with falling Euribor rates. Default rates on the SME portfolio are also likely to increase. However, with historical default rates substantially below the forecasted default rates, the SME portfolio should be able to withstand a moderate increase in default rates in the coming quarters.

Overall, the Company remains confident that both the residual and investment grade bond portfolios will remain cash generative.

Unaudited Condensed Consolidated Income Statement

For the quarter ended 31 December 2008 and quarter ended 30 September 2008

	Note	Revenue return	Fair value gains and losses	Total  Quarter ended  31 December 2008	Revenue return	Fair value gains and losses	TOTAL  Quarter ended  30 September 2008
		Euro	Euro	Euro	Euro	Euro	Euro
Interest income	5	5,206,236	-	5,206,236	6,309,383	-	6,309,383
Gains and losses on fair value through profit or loss financial instruments	4	-	(24,141,155)	(24,141,155)	-	(42,116,535)	(42,116,535)
		5,206,236	(24,141,155)	(18,934,919)	6,309,383	(42,116,535)	(35,807,152)
Operating expenses	6	(1,116,604)	-	(1,116,604)	(1,250,551)	-	(1,250,551)
Finance costs	5	(593,538)	-	(593,538)	(660,478)	-	(660,478)
Net profit/(loss)		3,496,094	(24,141,155)	(20,645,061)	4,398,354	(42,116,535)	(37,718,181)
Profit/(loss) per Ordinary Share
Basic	8			Euro (0.77)			Euro (1.28)
Diluted	8			Euro (0.77)			Euro (1.28)
Weighted average Ordinary Shares outstanding				Number			Number
Basic	8			26,843,298			29,551,491
Diluted	8			26,843,298			29,551,491

All items in the above statement are derived from continuing operations.

All income is attributable to the Ordinary Shareholders of the Company.

Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity

For the Quarter ended 31 December 2008 and Quarter ended 30 September 2008

		Share Capital	Share Premium	Other Reserve	Capital Reserve	Accumulated Profits/(losses)	TOTAL
	Note	Euro	Euro	Euro	Euro	Euro	Euro
Balance at 30 June 2008		-	-	177,960,818	7,672,500	5,602,691	191,236,009
Net loss for the quarter		-	-	-	-	(37,718,181)	(37,718,181)
Buy back of ordinary shares	13,14	-	-	(16,505,072)	-		(16,505,072)
Transfer from accumulated profits/(losses)		-	-	4,500,000	-	(4,500,000)	-
Distribution to the Ordinary Shareholders of the Company	7	-	-	-	-	(4,030,449)	(4,030,449)
Balance at 30 September 2008		-	-	165,955,746	7,672,500	(40,645,939)	132,982,307
Net loss for the quarter		-	-	-	-	(20,645,061)	(20,645,061)
Buy back of ordinary shares	13,14	-	-	(69,138)	-	-	(69,138)
Distribution to the Ordinary Shareholders of the Company	7	-	-	-	-	(2,148,371)	(2,148,371)
Balance at 31 December 2008		-	-	165,886,608	7,672,500	(63,439,371)	110,119,737

Unaudited Condensed Consolidated Balance Sheet

As at 31 December 2008

	Note	31 December 2008		30 September 2008
		Euro		Euro
Non-current assets
Investments at fair value through profit or loss	10	126,721,800		158,140,235
Current assets
Cash and cash equivalents		17,265,152		18,714,369
Derivative financial assets-unrealised gain on interest rate swap agreements	11	2,332,305		212,900
Other assets		2,337,274		2,893,289
		21,934,731		21,820,558
Total assets		148,656,531		179,960,793
Equity and liabilities
Equity
Other reserve	14	165,886,608		165,955,746
Capital reserve in respect of share options		7,672,500		7,672,500
Accumulated losses		(63,439,371)		(40,645,939)
		110,119,737		132,982,307
Current liabilities
Distribution payable	7	2,148,373		4,030,449
Derivative financial liabilities-unrealised loss on foreign exchange forward contracts	11	85,901		745,765
Other liabilities		1,302,520		1,702,272
		3,536,794		6,478,486
Non-current liabilities
Loans	12	35,000,000		40,500,000
Total liabilities		38,536,794		46,978,486
Total equity and liabilities		148,656,531		179,960,793

Unaudited Condensed Consolidated Cash Flow Statement

For the Quarter ended 31 December 2008 and Quarter ended 30 September 2008

	Note		Quarter ended 31 December 2008		Quarter ended 30 September 2008
			Euro		Euro
Net cash inflow from operating activities	15		8,064,417		3,785,993
Financing activities
Net repayment of loans			(5,500,000)		-
Dividends paid to shareholders	7		(4,030,449)		(4,535,684)
Buyback and cancellation of Ordinary Shares			(69,138)		(16,505,072)
Cash out flows from financing activities			(9,599,587)		(21,040,756)
Net decrease in cash			(1,535,170)		(17,254,763)
Reconciliation of net cash flow to movement in net cash
Net decrease in cash and cash equivalents			(1,535,170)		(17,254,763)
Cash and cash equivalents at start of period			18,714,369		35,856,070
Effect of exchange rate fluctuations on cash and cash equivalents			85,953		113,062
Cash and cash equivalents at end of period			17,265,152		18,714,369

Notes to the Unaudited Condensed Quarterly Report

1.General information

Queen's Walk Investment Limited (the "Company") was registered on 6 September 2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands. The Company commenced its operations on 8 December 2005. The Company is a closed-ended investment company with limited liability formed under The Companies (Guernsey) Law, 2008 and its Ordinary Shares are listed on the London Stock Exchange. The registered office of the Company is Dorey Court, Admiral Park, St Peter Port, Guernsey, GY1 3BG, Channel Islands. "Group" is defined as the Group and its subsidiary. At 31 December 2008, the Group's only subsidiary was Trebuchet Finance Limited.

The Group's investment objective is to preserve capital and provide stable returns to Shareholders in the form of quarterly dividends. It seeks to achieve this by investing primarily in a diversified portfolio of tranches of asset-backed securities ("ABS") where the Investment Manager considers that the coupon or cash flows on the tranche are attractive relative to the underlying credit. These are and will be, in most cases, below investment grade or unrated and do or will, in many cases, represent the residual income positions typically retained by the originator of a securitisation transaction as the "equity" or "first loss" position.

The Group's investment management activities are managed by its Investment Manager, Cheyne Capital Management (UK) LLP (the "Investment Manager"), an investment management firm authorised and regulated by the Financial Services Authority. The Group has entered into an Investment Management Agreement (the "Investment Management Agreement") under which the Investment Manager manages its day-to-day investment operations, subject to the supervision of the Company's Board of Directors. The Group has no direct employees. For its services, the Investment Manager receives a monthly management fee (which includes a reimbursement of expenses) and a quarterly performance-related fee. The Group has no ownership interest in the Investment Manager. The Company is administered by Kleinwort Benson (Channel Islands) Fund Services Limited (the "Administrator"). Investors Fund Services (Ireland) Limited provide certain administration services to the Group in its capacity as sub-administrator.

2.Significant accounting policies

Statement of compliance

The quarterly report 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 this report as applied in the Company's latest annual audited financial statements dated 31 March 2008.

This quarterly report does not comply with the requirements of IAS 34 "Interim Reporting". Under IAS 34 the financial information is required to provide i) a statement of financial position as of the end of the current interim period and a comparative statement of financial position as of the end of the immediately preceding financial year; (ii) an income statement for the period and cumulatively for the period to date and the comparable periods in the prior year; (iii) a statement of changes in equity cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year; and (iv) a statement of cash flows cumulatively for the current financial year to date, with a comparative statement for the comparable year-to-date period of the immediately preceding financial year. The Group has only shown the current quarter information with comparative information for the previous financial quarter.

Basis of preparation

The quarterly report of the Group is prepared on the historical cost or amortised cost basis except that the following assets and liabilities are stated at their fair value: derivative financial instruments, financial instruments held for trading and financial instruments classified or designated as fair value through profit or loss. 

The majority of the Group's investments are financial instruments that are classified as fair value through profit or loss. Where bid prices are not available from a third party in a liquid market, the fair value of the financial instrument is estimated by reference to market information, which includes but is not limited to broker marks, prices on comparable assets and a pricing model that incorporates discounted cash flow techniques. 

These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. Where such pricing models are used, assumptions are reviewed and updated on the basis of actual performance data as it is received and on the basis of market conditions as at the balance sheet date. See note 2 - Fair Value and Interest Income and note 3 - Critical accounting judgements and key sources of estimation uncertainty for further information regarding assumptions and critical judgements.

These financial statements are presented in Euro because that is the currency of the primary economic environment in which the Group operates. The functional currency of the Group is also considered to be Euro.

Basis of consolidation

Subsidiaries are entities controlled by the Company (note 9). The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. At 31 December 2008, the Group is made up of the Company and its only subsidiary, Trebuchet Finance Limited.

In accordance with the Standing Interpretations Committee Interpretation 12 "Consolidation-Special Purpose Entities" ("SIC 12"), the Company consolidates only entities over which control is indicated by activities, decision making, benefits and residual risks of ownership. In accordance with SIC 12 the Company does not consolidate an SPE in which it holds less than a substantial interest in the residual income position. Where it holds more than a substantial interest, it does not consolidate the SPE where the residual income position represents only a small part of the gross assets of the SPE and the Company was neither involved in the establishment of the SPE or the origination of the assets owned by the SPE, on the basis that the Company is not exposed to the majority of the risks and benefits of the assets owned by the SPE, provided control is not otherwise indicated by the Company's activities, decision making, benefits and residual risks or ownership.

Trebuchet Finance Limited, the Company's only subsidiary, is an SPE over which the Company exercises control and its financial statements are therefore included in the consolidated financial statements of the Company. The Company does not consolidate any of the SPEs in which it holds a residual income position as it is not exposed to the majority of the risks and benefits of the assets owned by the relevant SPEs and does not control any of them.

Investments

Investments in residual interests are recognised initially at their acquisition cost (being fair value at acquisition date) as debt securities. Thereafter they are re-measured at fair value and are designated as fair value through profit or loss investments in accordance with the Amendment to International Accounting Standard 39 ("IAS 39") Financial Instruments: Recognition and Measurement-The Fair Value Option, as the Group is an investment Group whose business is investing in financial assets with a view to profiting from their total return in the form of interest and changes in fair value.

Financial assets classified as at fair value through profit or loss are recognised/derecognised by the Group on the date it commits to purchase/sell the investments in regular way trades.

Cash and cash equivalents

Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities.

Derivative financial instruments

Derivative financial instruments used by the Group to hedge its exposure to foreign exchange and interest rate risks arising from operational, financing and investment activities that do not qualify for hedge accounting are accounted for as trading instruments. The Group may also enter into credit default or total return swap arrangements where the underlying asset or assets would otherwise be within the Group's investment policy in order to obtain substantially the same economic exposure to the returns and risks associated with holding such underlying asset or assets.

Derivative financial instruments are recognised initially at fair value. Subsequent to initial recognition, derivative financial instruments are stated at fair value. The gain or loss on remeasurement to fair value is recognised immediately in the income statement. 

Fair value of forward exchange contracts is their quoted market price at the balance sheet date, being the present value of the quoted forward price. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement.

The fair value of interest rate swaps is the estimated amount that the Group would receive or pay to terminate the swap at the balance sheet date, taking into account current interest rates and the current creditworthiness of the swap counterparties.

Total return swap agreements and credit default swap agreements are fair valued on the date of valuation based upon the underlying market value of the reference asset using the approach explained under fair value. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity of a contract, or when a contract is closed out and they are transferred to realised gains or losses in the income statement.

Fair value of options is their quoted market price at the balance sheet date. Broker marks are obtained for these positions. The change in value is recorded in net gains/(losses) in the income statement. Realised gains and losses are recognised on the maturity or sale of the option.

Fair value

All financial assets carried at fair value are initially recognised at fair value and subsequently re-measured at fair value based on bid prices where such bids are available from a third party in a liquid market. If bid prices are unavailable, the fair value of the financial asset is estimated by reference to market information which includes but is not limited to broker marks, prices on comparable assets and using pricing models incorporating discounted cash flow techniques. These pricing models apply assumptions regarding asset-specific factors and economic conditions generally, including delinquency rates, severity rates, prepayment rates, default rates, maturity profiles, interest rates and other factors that may be relevant to each financial asset. The objective of a fair value measurement is the price at which an orderly transaction would take place between market participants on the measurement date; it is not a forced liquidation or distressed sale. Where the Company has considered all available information and there is evidence that the transaction was forced, it will not use a transaction price as being determinative of fair value. Where a forced sale price is not used the Company will estimate the fair value with reference to other market data as described above.

With regard to residual income positions, historical performance and observable market data is analysed to determine the average level of these factors and their volatility over time. These assumptions are typically derived by reference to the historical delinquencies, defaults, recoveries and prepayments actually realised by the originator of the underlying assets and any empirical data available that may be available in respect of any of these factors for the particular asset class. 

Offsetting financial instruments

Financial assets and liabilities are offset and the net amount reported within assets and liabilities when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.

Repurchase agreements

The Group may finance the acquisition of some of its investments through the use of repurchase agreements. Repurchase agreements are treated as collateralised financing transactions and are carried at their contractual amounts, including accrued interest, as specified in the respective agreements. Accrued interest is recorded as a separate line item on the balance sheet.

Derecognition of a financial asset

A financial asset is derecognised only if substantially all of the asset's risks and rewards of ownership are transferred or control is transferred in the event that not substantially all of the asset's risks and rewards of ownership are transferred. However, if substantially all of the risks and rewards are retained, the asset is not derecognised. Control is transferred if the transferee has the practical ability to sell the asset unilaterally without needing to impose additional restrictions on the transfer.

Interest-bearing loans and borrowings

Interestߛbearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement using the effective interest rate method. Financing costs associated with the issuance of financings are recognised in the income statement using the effective interest rate method. 

Foreign currency transactions

Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Euro at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to Euro at foreign exchange rates ruling at the dates the fair value was determined.

Transaction expenses

The preliminary expenses of the Group directly attributable to its initial public offering and any costs associated with the establishment of the Group are charged to the share premium or other reserve account.

Share options granted to the Investment Manager are treated as a transaction expense on the basis that they are granted by the Group as a fee for the Investment Manager's work in raising capital for the Group. The fair value of such options is charged to the share premium account. The share premium account is credited with the fair value of such options at the time that such options are vested.

Interest income

Interest income is accrued over the projected lives of the investments using the effective interest method as defined under International Accounting Standard 39. Where the Group adjusts its expected cash flow projections to take account of any change in underlying assumptions, such adjustments are recognised in the income statement by reflecting changes in a revised amortised cost value of the investment and applying the original effective interest rate to this revised amortised cost value for the purposes of calculating future income.

Taxation

The Company is a tax-exempt Guernsey limited Company. Accordingly, no provision for income taxes is made. Trebuchet Finance Limited is a "qualifying Company" within the meaning of section 110 of the Irish Taxes Consolidation Act 1997 and accordingly its taxable profits are subject to tax at a rate of 25 per cent. Payments under the Participation Note are paid gross to the Company and the income portion of such payments is deductible by Trebuchet Finance Limited. Consequently, Trebuchet Finance Limited has a minimal amount of taxable income. The activities of Trebuchet Finance Limited are exempt for Irish Value Added Tax (VAT) purposes under the Irish VAT Act of 1972.

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.

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 Group 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 accrued value.

Business and geographical segments 

The Directors are of the opinion that the Group is engaged in a single segment of business of investing in debt securities and operates solely from Guernsey and therefore no segmental reporting is provided.

3. Critical accounting judgements and key sources of estimation uncertainty

In the process of applying the Group's accounting policies (described in note 2 above), the Group has determined that the following judgements and estimates have the most significant effect on the amounts recognised in the financial statements:

Income recognition

The Group invests primarily in a diversified portfolio of residual income positions, being the subordinated tranches of asset-backed securities ("ABS"). ABS are securities that are typically backed by consumer finance receivables (such as mortgage loans) and commercial loans and receivables (including commercial mortgage loans and loans to small-and-medium sized enterprises). Residual income positions are typically unrated or rated below investment grade and are often referred to as the "equity" or "first loss" position of a securitisation transaction.

Unlike a more conventional debt instrument and the more senior tranches of ABS (which generally hold the rights to fixed levels of income), the cash flow profile of a residual income position does not generally include a contractually established schedule of fixed payments divided between interest and principal. Instead, the cash flows generally vary over time, and the periodic cash flows associated with a residual income position may include a significant element of principal repayment as well as income payments.

Where the cash payments generated by residual income positions do not typically follow the pattern of a standard cash-pay debt instrument (in that there is not a constant level of income in each period followed by a repayment of the principal amount at maturity), a given cash payment received in respect of a residual income position can generally be considered to represent a combination of the return on the investment and the repayment of some of the capital initially invested. As a result, the stream of expected cash flows associated with a particular residual income position may have an uneven payout profile, in that the cash payment expected in one period (and the proportion of that payment that represents principal repayment versus interest income) may vary significantly from the cash payments expected in other periods.

The Group follows a policy of accounting for such investments at fair value through profit or loss and has elected to recognise income on an effective interest rate ("EIR") method in accordance with paragraph 30 of IAS 18 "Revenue". 

The carrying value of a residual income position at any given measurement date after the Group's initial acquisition of the asset reflects repayments of principal in accordance with the effective interest method. This revised carrying value (adjusted to account for the accrual of interest and principal paydowns) is subject to further adjustment on the basis of market conditions and other factors that are likely to affect the fair value of the asset. Where actual performance data or expectations regarding defaults, delinquencies and prepayments received in respect of a given asset is notably different from the default, delinquency and prepayment assumptions incorporated in the pricing model for the asset, the assumptions are revised to reflect this data and the pricing model is updated accordingly. In addition to the actual performance data observed in respect of a particular asset, market factors are also taken into account within the model. Broker marks (where available) and any other available indicators are assessed to determine whether or not the market is attributing higher or lower default, delinquency or prepayment expectations to similar assets in determining whether or not the assumptions incorporated in the pricing model remain reasonable. 

Interest income is recorded based on the original EIR calculated on acquisition for each individual residual income position. Where there is a carry value reduction driven by lower cashflow expectations, interest income will be reduced as it reflects the reduced cashflow expectations.

Valuation of investments

The market for subordinated asset-backed securities, including residual income positions is illiquid and regular traded prices are generally not available for such investments. There is no active secondary market in residual income positions and, further, there is no industry standard agreed methodology to value residual income positions.

In accordance with the Group's accounting policies, fair value of financial assets is based on quoted bid prices where such bids are available from a third party in a liquid market. At 31 December 2008 bid prices were not available for any of the Group's investments. There is very limited information available in relation to transactions in comparable investments. As quoted bid prices are unavailable, the fair value of the investments is estimated by reference to market information, which includes but is not limited to broker marks, prices of comparable assets, estimated fair value from the previous period updated for current period cash flows and a pricing model, that incorporates discounted cash flow techniques as required by IAS 39. The Group may use all or a combination of the prices from these sources in estimating the fair value of the investments, with more prominence being assigned to market information such as broker marks. Broker marks are estimates of values provided by market participants who are typically the originators of the investments. Broker marks are not binding prices and there is no guarantee that the Group could transact at these prices in the current market. Due to the current market conditions, the Company has relied more heavily on pricing models to fair value its investments as broker marks become less reliable or unobtainable

The assumptions upon which the pricing models are based are described in note 2 (Fair Value). Any change to assumptions surrounding the pricing models may result in different fair values being attributed to the investments. Where the fair value of the investment is written down due to changes in assumptions and expected cash flows, the change in the fair value is taken to the income statement following the reassessment of the cash flows discounted at the current market rate estimated for the investment.

The fair value of the Group's investments is set out in note 10. Given the number of individual investments and the number of individual parameters that making up each pricing model, the Group believes that it would be impractical to disclose the effects of changes to each assumption in respect of each individual investment and this would not provide meaningful additional disclosure. However, general assumptions used in the pricing models are disclosed in the Company's annual report and financial statements.

4. Gains and losses on financial instruments

The following table details the gains and losses, excluding interest income and finance costs, earned by the Group from financial assets and liabilities during the period:

 

		Quarter ended 31 December 2008		Quarter ended 30 September 2008
		Euro		Euro
Net realised gains/(losses)
Net realised gains/(losses) on Asset Backed Securities		30,743		(15,270,866)
Net realised losses on options (1)		(840,000)		-
Net realised gains/(losses) on foreign exchange instruments		3,430,458		(337,885)
Net realised gains/(losses)		2,621,201		(15,608,751)
Net unrealised gains/(losses)
Net unrealised losses on investments at fair value through profit or loss		(31,935,017)		(25,757,768)
Net unrealised gains on swaps investments		2,119,405		120,612
Net unrealised gains/(losses) on options		2,307,439		(86,392)
Net unrealised gains on foreign exchange bank balances		85,953		113,062
Net unrealised gains/(losses) foreign exchange instruments		659,864		(897,298)
Net unrealised losses		(26,762,356)		(26,507,784)
Net realised and unrealised losses		(24,141,155)		(42,116,535)

(1) Following an event of default notice submitted on 3 October 2008 to Lehman Brothers International (Europe) under the option contract, the Group wrote the value of the Lehman HPI option down to an estimate of the recoverable amount. The estimated recoverable amount, 8.625%, has been transferred from options to other assets in the balance sheet.

5. Interest income and finance costs

The following table details interest income and finance costs from financial assets and liabilities for the quarter ended:

		Quarter ended  31 December 2008		Quarter ended  30 September 2008
		Euro		Euro
Interest income
Investments designated at fair value through profit or loss upon initial recognition		5,174,506		5,967,452
Investments held for trading		-		32,154
Loans and receivables (including cash and cash equivalents)		31,730		309,777
Total interest income		5,206,236		6,309,383

Finance Costs
Liabilities held at amortised cost:
Interest on loan		(526,808)		(589,602)
Investments held for trading		(21,843)		-
Other		(44,887)		(70,876)
Total finance costs		(593,538)		(660,478)

6.Operating expenses

	Note	Quarter ended  31 December 2008		Quarter ended  30 September 2008
		Euro		Euro
Investment management, custodian and administration fees
Investment management and incentive fee	16	554,930		740,239
Administration fee	16	80,667		79,685
Custodian fee	16	10,883		13,607
		646,480		833,531
Other operating expenses
Audit fees		42,849		42,849
Directors' fees payable to Directors of Queen's Walk Investment Limited		60,493		60,165
Directors' fees payable to Directors of Trebuchet Finance Limited		6,301		6,267
Legal fees		212,080		279,681
Pricing expenses		58,809		58,809
Other expenses		89,592		(30,751)
		470,124		417,020
Total operating expenses		1,116,604		1,250,551

The Group has no employees. 

7. Dividends

		Quarter ended  31 December 2008		Quarter ended  30 September 2008
		Euro		Euro
First interim dividend for the year ended 31 March 2009		-		4,030,449
Second interim dividend for the year ended 31 March 2009		2,148,371		-
Amounts recognised as distributions to equity holders in the quarter		2,148,371		4,030,449

A dividend of Euro 0.15 per share was declared on 23 September 2008 as a first interim dividend for the year ended 31 March 2009 and an amount of Euro 4,030,449 was paid to shareholders on 24 October 2008.

A dividend of Euro 0.08 per share was declared on 27 November 2008 as a second interim dividend for the year ended 31 March 2009 and an amount of Euro 2,148,371 was paid to shareholders on 8 January 2009. 

A dividend of Euro 0.08 per share has been declared by the Directors for the quarter ended 31 December 2008.

The Group's objective is to provide shareholders with stable returns in the form of quarterly dividends. The Group's dividend policy is to make dividend distributions from its distributable net income subject to retaining a portion of such income as a reserve for payment in subsequent periods. 

Following the introduction of The Companies (Guernsey) Law, 2008, the Group is only able to pay a dividend if the Board of Directors is satisfied that the Company will, immediately after the payment, satisfy the solvency test and any other requirement in is Memorandum and Articles. The Board is satisfied that, in every respect of the proposed dividend and the dividend paid in respect of the quarter ended 31 December 2008 that the solvency test was satisfied. 

8.Loss per Ordinary Share

		Quarter ended  31 December 2008		Quarter ended  30 September 2008
		Euro		Euro
The calculation of the basic and diluted earnings per ordinary share is based on the following data:
Loss for the purposes of basic earnings per ordinary share being net profit/(loss) attributable to equity holders		(20,645,061)		(37,718,181)
Weighted average number of Ordinary Shares for the purposes of basic earnings per share		26,843,298		29,551,491
Effect of dilutive potential Ordinary Shares:
Share options		-		-
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share		26,843,298		29,551,491

There is no dilution as at 31 December 2008 as the share price was below the option price for the period. 

9.Subsidiary

Trebuchet Finance Limited was incorporated in Ireland on 19 May 2005 and, pursuant to the Articles of Association of Trebuchet Finance Limited, the Group has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Group have been appointed Directors of Trebuchet Finance Limited. To ensure that the Group will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the Group has been allotted a single share in Trebuchet Finance Limited carrying the right to appoint a majority of the Board of Directors. Trebuchet Finance Limited was established for the sole purpose of acquiring and holding interests in certain assets. 

10.Investments

The following is a summary of the Group's investments at fair value through profit or loss:

		31 December 2008		30 September 2008
		Euro		Euro
Asset-backed securities		121,589,499		155,447,373
Options purchased		5,327,975		2,692,862
Options written		(195,674)		-
		126,721,800		158,140,235

		31 December 2008		30 September 2008
Asset-backed securities		Euro		Euro
Opening cost		305,309,832		319,556,262
Purchases		1,554,999		5,405,350
Sales proceeds		(52,996)		(424)
Realised gain / (loss)		30,743		(15,270,866)
Principal payups		1,328,077		1,762,429
Principal paydowns		(4,783,680)		(6,142,919)
Closing cost		303,386,975		305,309,832
Unrealised losses		(181,797,476)		(149,862,459)
Asset-backed securities at fair value		121,589,499		155,447,373

		31 December 2008		30 September 2008
Options		Euro		Euro
Opening cost		1,680,000		1,680,000
Transfer of Lehman Brothers option		(840,000)		-
Purchases		1,142,000		-
Sales		(170,000)		-
Closing cost		1,812,000		1,680,000
Unrealised gains		3,320,301		1,012,862
Options at fair value		5,132,301		2,692,862

The following options contracts were open as at 31 December 2008:

Counterparty	Expiration	Description	Currency	Notional Amount	Strike price	Unrealised Gains/(Losses) Euro
Credit Suisse	05 Nov 2009	Halifax HPI Put Option	Euro	14,000,000	583.02	3,337,875
Goldman Sachs	29 Dec 2010	EUR Call GBP Put	Euro	10,000,000	0.9315	8,100
Goldman Sachs(2)	29 Dec 2010	EUR Call GBP Put (Written option)	Euro	10,000,000	1.300	(25,674)
						3,320,301

In the quarter ended 31 December 2008 the Company updated its methodology and process in respect of hedging its foreign exchange risk. The foreign exchange (FX) risk arises from holding assets in different currencies to the Company's base currency of Euros. Previously, the Company used rolling quarterly forwards to hedge its FX exposure. However, recent large changes in exchange rates were creating excessive margin requirements and required the Company to maintain large cash balances. As a result, the Company has elected to hedge its FX exposure by purchasing a two year Euro:Sterling FX option. This approach enables the Company to remain hedged against increases in the Euro:Sterling FX rate, while being able to participate in favourable FX moves and not being subject to further margin calls. To reduce the cost of this hedge, an out-of-the-money EUR call / GBP put option was sold with the same notional and maturity.

(2) Please refer to Note 17 for further details on the option written.

The following options contracts were open as at 30 September 2008:

Counterparty	Expiration	Description	Currency	Notional Amount	Strike price		Unrealised Gains/ (Losses) Euro
Credit Suisse	05 Nov 2009	Halifax HPI Put option	Euro	14,000,000	583.02		1,586,859
Lehman Brothers(3)	31 Oct 2009	HBOS HPI Put option	Euro	14,000,000	583.02		(573,997)
							1,012,862

(3) Following an event of default notice submitted on 3 October 2008 to Lehman Brothers International (Europe) under the option contract, the Group wrote the value of the Lehman HPI option down to an estimate of the recoverable amount. The estimated recoverable amount has been transferred from options to other assets in the balance sheet.

 

11. Derivative contracts

The following foreign exchange forward contracts were unsettled at 31 December 2008:

Maturity Date		Amount Bought	Amount Sold	Unrealised Gains/(Losses) Euro
31 March 2009		EUR 511,718	GBP 500,000	(5,975)
31 March 2009		EUR 2,444,988	USD 3,500,000	(79,926)
				(85,901)

The following foreign exchange forward contracts were unsettled at 30 September 2008:

Maturity Date		Amount Bought	Amount Sold	Unrealised Gains/(Losses)
				Euro
31 December 2008		EUR 52,552,552	GBP 42,000,000	(673,744)
31 December 2008		Euro 2,763,958	USD 4,000,000	(72,021)
				(745,765)

Since 30 June 2008, the Group entered into EUR interest rate swaps with Goldman Sachs as detailed in the tables below. These swap floating rate for fixed on the notional of reference assets (being the SME residuals and some of the investment grade bonds) held in the portfolio. The investment grade bonds the Company has purchased are typically indexed to three month Libor. To hedge against falling Libor rates, the Company has entered into a series of fixed to floating interest rate swaps. The notional for the swaps is determined at the time of purchase, and the Company could be under- or over-hedged in relation to the outstanding amount of the bonds. The interest rate swaps are reviewed and hedges will be adjusted as required. The fair value of these swap agreements on 31 December 2008 was EUR 2,332,305 (30 September 2008: EUR 209,523).

On 1 December 2006, the Group entered into balance-guaranteed interest rate swap agreements with Lehman Brothers International (Europe) in respect of the cash flows associated with fixed rate mortgage loans contained in five transactions in which the Group holds a residual income position. The aggregate fair value of these swap agreements as at 31 December 2008 was Euro Nil (30 September 2008: Euro 3,377) as these swaps have now matured.

 

The following interest rate and balance guaranteed interest rate swaps were unsettled at 31 December 2008.

 

31 December 2008

Termination Date	Counterparty	Initial Notional Amount (GBP)	Unrealised Loss
			Euro
25 January, 2013	Goldman Sachs	451,431	2,845
15 October, 2011	Goldman Sachs	5,500,000	5,289
15 November, 2011	Goldman Sachs	1,300,000	766
25 January, 2013	Goldman Sachs	1,226,713	23,538
15 October, 2011	Goldman Sachs	3,000,000	5,301
12 September, 2011	Goldman Sachs	1,900,000	2,595
15 November, 2011	Goldman Sachs	1,200,000	2,124
27 March, 2011	Goldman Sachs	17,348,100	760,360
15 February, 2011	Goldman Sachs	13,054,947	431,080
15 January, 2011	Goldman Sachs	29,725,589	1,098,407
			2,332,305

30 September 2008

Termination Date	Counterparty	Initial Notional Amount (GBP)	Unrealised Gain
Interest Rate Swaps
27 March 2011	Goldman Sachs	17,348,100	60,631
15 February 2011	Goldman Sachs	13,054,947	42,892
15 January 2011	Goldman Sachs	29,725,589	106,000
Balance Guaranteed Interest Rate Swap			209,523
1 December 2008	Lehman Brothers(4)	411,409,139	3,377
			212,900

(4) Following an event of default notice submitted on 3 October 2008 to Lehman Brothers International (Europe) under the option contract, the Group wrote the value of the Lehman HPI option down to an estimate of the recoverable amount. The estimated recoverable amount has been transferred from options to other assets in the balance sheet.

 

12. Loans

		31 December 2008		30 September 2008
		Euro		Euro
Loans		35,000,000		40,500,000
		35,000,000		40,500,000

During the year ended 31 March 2008 the Group arranged and drew down on a loan facility an amount of Euro 40,500,000 repayable by 13 July 2012. Collateral (Asset-backed securities and cash), totalling Euro 131,282,587 (30 September 2008: Euro 168,057,005) have been granted as security in relation to the loan. 

On 27 November 2008 the Company negotiated amended terms on a reduced facility, involving a flexible two year repayment schedule of the outstanding debt. This repayment plan enables the Company to remove Material Change clauses from the loan agreement which could have required repayment on less attractive terms. The Company has committed to repay the outstanding balance of the facility by October 2011, pursuant to an agreed upon loan amortisation schedule and will not make any further draw downs. At the end of each quarter, 

the Company has pledged to keep the outstanding balance of the financing facility below the product of the then applicable advance rate and the value of the investment portfolio plus cash. As at 18 March 2009, the Company's Borrowing Base is approximately €52.8 million versus a loan balance of €29.5 million. At the end of each calendar quarter, the Company has agreed a target loan amount with the lenders. The Company has also agreed to an Applicable Percentage for every quarter. Please refer to the RNS statement of 28 November 2008 for further details. 

13. Share capital

 

Authorised shares

	31 December 2008			30 September 2008
	Number of Ordinary Shares	Euro		Number of Ordinary Shares	Euro
Ordinary shares of no par value each	Unlimited	-		Unlimited	-

Issued and fully paid
Balance at beginning of period	26,859,657	-		30,237,898	-
Ordinary shares bought back during the quarter	(130,000)	-		(3,378,241)	-
Balance at end of period	26,729,657	-		26,859,657	-

Between 30 September 2008 and 31 December 2008 the Company had purchased and cancelled 130,000 (Quarter to 30 September 2008: 3,378,241) Ordinary Shares through its buyback programme at an average price of €0.53 (Quarter to 30 September 2008: €4.89) per Ordinary Share.

14. Other reserve

		31 December 2008		30 September 2008
		Euro		Euro
Balance at start of period		165,955,746		177,960,818
Buy back of Ordinary Shares (5)		(69,138)		(16,505,072)
Transfer to distributable reserves		-		4,500,000
Balance at end of period		165,886,608		165,955,746

(5) Ordinary Shares bought back have been cancelled.

The Ordinary Shares of the Group have no par value. As such, the proceeds of the Initial Public Offering represent the premium on the issue of the Ordinary Shares. In accordance with the accounting policies of the Group and as allowed by Guernsey Companies Law, the costs of the Initial Public Offering have been expensed against the share premium account. 

The Group passed a special resolution cancelling the amount standing to the credit of its share premium account immediately following admission to the London Stock Exchange. The Directors applied to the Royal Court in Guernsey for an order confirming such cancellation of the share premium account following admission. The Other reserve created on cancellation is available as distributable profits to be used for all purposes permitted by the Guernsey Companies Law, including the buy back of Ordinary Shares and the payment of dividends. As discussed in note 13, the Company bought back 130,000 Ordinary Shares of no par value at an average price of €0.53 per Ordinary Share. Under Guernsey Companies Law a capital redemption reserve is created for the redemption of these Ordinary Shares. As the nominal value of these Ordinary Shares is Euro Nil, the amount transferred to this reserve is Euro Nil.

During the quarter ended 30 June 2008, a transfer from the distributable reserves to the accumulated profit/(loss) reserve was made by the Directors to satisfy the requirements of The Companies (Guernsey) Law, 1994, that the Company has sufficient distributable reserves available for the payment of its dividends. Following the introduction of a solvency test for the payment of dividends following the introduction of The Companies (Guernsey) Law, 2008 from 1 July 2008, the transfer was reversed in the quarter ended 30 September 2008. 

15.Notes to cash flow statement

 

		Quarter ended 31 December 2008		Quarter ended 30 September 2008
		Euro		Euro
Net loss		(20,645,061)		(37,718,181)
Adjustments for:
Net realised (gains)/losses on sale of asset backed securities		(30,743)		15,270,866
Transfer of options		840,000		-
Net unrealised losses on investments at fair value through profit or loss		31,935,017		25,757,768
Unrealised (gains)/losses on foreign exchange contracts		(659,864)		897,298
Unrealised (gains)/losses on options		(2,307,439)		86,392
Unrealised gains on interest rate swap agreements		(2,119,405)		(120,612)
Unrealised gains on foreign exchange bank balances		(85,953)		(113,062)
		6,926,552		4,060,469
Purchases of asset backed securities		(1,554,999)		(4,587,375)
Purchase of options		(1,142,000)		-
Sale of options		170,000		-
Disposal proceeds from asset backed securities		-		424
Principal Payups		(1,328,077)		(1,762,429)
Principal Paydowns		4,836,676		6,142,919
		981,600		(206,461)
Decrease in receivables		556,015		168,016
Decrease in payables		(399,750)		(236,031)
		156,265		(68,015)
Net cash inflow from operating activities		8,064,417		3,785,993

Purchases and sales of investments are considered to be operating activities of the Group, given its purpose, rather than investing activities. 

Cash and cash equivalents includes amounts held in interest bearing accounts and overdraft facilities.

16. Material agreements and related party transactions

Investment Manager

The Company and Trebuchet Finance Limited are parties to an Investment Management Agreement with the Investment Manager, dated 8 December 2005, pursuant to which each of the Company and Trebuchet Finance Limited has appointed the Investment Manager to manage their respective assets on a day-to-day basis in accordance with their respective investment objectives and policies, subject to the overall supervision and direction of their respective Boards of Directors.

The Group pays the Investment Manager a Management Fee and Incentive Fee (see note 6). During the quarter ended 31 December 2008, the Management Fee totalled Euro 554,930 (30 September 2008: Euro 740,239), of which Euro 357,516 (30 September 2008: Euro 186,819) was outstanding at the period end, and the Incentive Fee totalled Euro Nil (30 September 2008: Euro Nil).

Management Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Group an annual Management Fee of 1.75 per cent of the net asset value of the Group other than to the extent that such value is comprised of any investment where the underlying asset portfolio is managed by the Investment Manager (as is the case with Cheyne ABS Investments I plc, Cheyne Finance plc, Cheyne High Grade ABS CDO Ltd. and Cheyne CLO Investments I Limited). The Management Fee is calculated and payable monthly in arrears.

Incentive Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive an incentive compensation fee in respect of each incentive period that is paid quarterly in arrears. An incentive period will comprise each successive quarter, except the first such period was the period from admission to the London Stock Exchange to 31 March 2006. The Incentive Fee for each incentive period is an amount equivalent to 25 per cent of the amount by which A exceeds (B x C) where:

A =	The Group's consolidated net income taking into account any realised or unrealised losses (but only to the extent they have not been deducted in a prior incentive period) and excluding any gains from the revaluation of investments, as shown in the Group's latest consolidated management accounts for the relevant quarter, before payment of any Incentive Fee;
B =	An amount equal to a simple interest rate equal to two per cent per quarter, subject to the reset mechanic described below (the "Hurdle Rate"); and
C =	The weighted average number of Shares outstanding during the relevant quarter multiplied by the weighted average offer price of such Shares.

For the purposes of calculating the Incentive Fee, the Hurdle Rate will be reset on 1 April 2009, and on each 1 April thereafter to equal the greater of (i) a simple interest rate equal two per cent per quarter, or (ii) one quarter of the sum of the then-prevailing yield per annum on ten-year German Bunds and 300 basis points. While the Group will not pay a Management Fee in respect of that portion of its portfolio that is comprised of investments where the Investment Manager receives fees for its management of the underlying asset portfolio, the income from such investments are included in the consolidated net income of the Group for the purpose of calculating the Incentive Fee.

The Incentive fee for the period was Euro Nil (30 September 2008: Euro Nil) of which Euro Nil (30 September 2008: Euro Nil) was outstanding at the quarter end.

Administration Fee

Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Group an administration fee of 0.125 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.0325 per 

cent of the gross asset value of the Group greater than Euro 80,000,000. Investors Fund Services (Ireland) Limited, the sub-administrator, is paid by the Administrator.

Investments in other entities managed by the Investment Manager

As at 31 December 2008 the Group held investments with a total value of Euro 674,588 (30 September 2008: Euro 2,906,812) in the following entities, which are managed by the Investment Manager: Cheyne CLO Investments I Limited.

Custodian Fee

Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Group a custodian fee of 0.03 per cent of the gross asset value of the Group up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Group greater than Euro 80,000,000, plus additional fees in relation to transaction fees, statutory reporting, corporate secretarial fees and other out of pocket expenses.

Investment Manager Options

In recognition of the work performed by the Investment Manager in raising capital for the Group, the Group granted to Cheyne Global Services Limited on 8 December 2005 options representing the right to acquire 2,250,000 Shares, being 10 per cent of the number of Offer Shares (that is, excluding the Shares issued to Cheyne ABS Opportunities Fund LP and the Shares issued to the Directors), at an exercise price per share equal to the Offer Price (Euro 10). The Investment Manager Options are fully vested and immediately exercisable on the date of admission to the London Stock Exchange and will remain exercisable until the 10th anniversary of that date. The Group may grant further Investment Manager Options in connection with any future offering of Shares. Such options, if any, will represent the right to acquire Shares equal to not more than 10 per cent of the number of Shares being offered in respect of that future offering and will have an exercise price equal to the offer price for that offering. The aggregate fair value of the options granted at the time of the Initial Public Offering using a Black-Scholes valuation model was Euro 7,672,500 (reflecting a valuation of Euro 3.41 per option). This amount has been treated as a cost of the Initial Public Offering. As at 31 December 2008, these options were out of the money as the share price was below the Offer Price of Euro 10.

Controlling Party

Cheyne ABS Opportunities Fund has a controlling interest in the Company.

17.Significant Events during the period

The Company changed from using quarterly rolling forward hedges to manage its FX exposure, purchasing a two year GBP put / EUR call option. The Company paid down EUR 5.5 million of its outstanding loan balance during the period.

18.Subsequent Events

The Company has purchased 3,385 put options on the German Mid Cap Index (MDAX) at a strike price of 4,750 points to partially hedge against the potential credit impact of higher default rates in its SME portfolios. To reduce the cost of this hedge, another put option was sold for a strike price of 4,000, with the same maturity and of the same size. The aggregate purchase price of both options was €1 million. These options were purchased on 22 January 2009 for a maturity of 18 September 2009. 

The Company has paid down a further €5.5 million of its outstanding loan balance and the balance outstanding as at 16 March 2009 was € 29.5 million. The Company had agreed with its lenders a target outstanding loan of €33 million for 31 March 2009 and €31 million for 30 June 2009. 

19.Comparative figures

The comparative figures are for the quarter ended 30 September 2008.

20.Unaudited Financial Statements 

The financial statements contained in this report are unaudited.

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