Real Est.cred Regulatory News (RECI)

28 Nov 2008 07:00



Queen's Walk Investment Limited

Financial Results Announcement for the 

Second Quarter Ended 30 September 2008

Queen's Walk Investment Limited announces net loss of €38 million and new investment gains of €4.4 million

Queen's Walk Investment Limited (the "Company"), the Guernsey incorporated investment company, has reported a net loss of €37.7 million or €1.40 per ordinary share (1) for the quarter ended 30 September 2008, compared to a net profit of €0.8 million or €0.03 per share¹ in the previous quarter. 

The Company's cash position remains solid with approximately €18.7 million of cash on its balance sheet as at 30 September 2008. This is down from €35.9 million as at 30 June 2008, following the Company's €15 million tender offer for Ordinary Shares and purchase of €5.4 million of investment grade bonds. 

Cash generation for the quarter was in line with forecasts with total cash proceeds recorded from the investment portfolio in the quarter of €9.7 million. 

Fair value write-downs of the Company's residual investment portfolio rose in the quarter to €45.9 million, from €4.1 million for the quarter ended 30 June 2008. The Company has recorded a €4.4 million fair value gain on the bonds purchased prior to 30 September 2008. The Company's net asset value at quarter end was €4.95 per share¹ compared to €6.32 per share¹ in the previous quarter.

The Board of Directors of the Company has declared a dividend of €0.08 per share for the quarter, down from €0.15 the previous quarter. The reduced dividend payout will allow the Company to reduce debt and prioritise new investments.

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

Reducing Risk Profile While Improving Risk Adjusted Returns

Events of the past three months have radically changed the outlook for the global economy. The Company is focusing on three courses of action: 

Reducing debt

Improving the stability of the financing facility

Selectively acquiring assets undervalued by dislocated markets.

The Company has renegotiated its financing facility and has agreed to a two year repayment schedule and reduced the risk of a material change forcing a repayment on unfavourable terms.

Since commencing its new investment programme in August, Queen's Walk has invested €5.4 million in investment grade bonds by 30 September 2008 and a further €1 million thereafter.

Tom Chandos, Chairman of the Company said: "We have set Queen's Walk on a course through these difficult markets by balancing financial stability with the flexibility to take advantage of exceptional buying opportunities.  We believe these initiatives should position the Company as well as possible for this challenging environment."

Highlights

The Company has made a loss of €37.7 million in the quarter compared to a profit of €0.8 million in the previous quarter.

The Company has recorded €4.4 million of fair value gains against its investment grade bond portfolio. 

Cash balances remain solid and expected cash flows will support debt reduction, new investments and dividends. 

The Company has renegotiated its financing facility and aims to repay its debt within two years.

The Board of Directors has declared an interim dividend for the quarter ended 30 September 2008 of €0.08 per share.

Conference Call & Further Information

A conference call to review the Company's financial results for the quarter ended 30 September 2008 will take place at 10:30 AM London time on 28 November 2008. The conference call can be accessed by dialing +44 (0)20 7806 1951 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

	Revenue	Fair value gains and losses	Total Quarter ended 30 September 2008	Revenue	Fair value gains and losses	Total Quarter ended 30 June 2008
Operating Income	6,309,383		6,309,383	6,361,769		6,361,769
Gains and losses on fair value through profit or loss financial instruments		(42,116,535)	(42,116,535)		(3,461,435)	(3,461,435)
	6,309,383	(42,116,535)	(35,807,152)	6,361,769	(3,461,435)	2,900,334
Operating Expenses	(1,250,551)		(1,250,551)	(1,393,926)		(1,393,926)
Finance Costs	(660,478)		(660,478)	(659,328)		(659,328)
Net profit / (loss)	4,398,354	(42,116,535)	(37,718,181)	4,308,515	(3,461,435)	847,080
Total Assets			179,960,793			237,392,021
Total Liabilities			46,978,486			46,156,012
Equity Capital			132,982,307			191,236,009
NAV per share			4.95			6.32

Strategy Overview - Managing the Economic Crisis

The events of the past three months have radically changed the outlook for the global economy. The Investment Manager believes that it is right to address these extreme market conditions by balancing financial stability with the selective purchase of undervalued assets.

Conservative balance sheet management

The Company is managing its use of cash flow to reduce debt while achieving investment objectives and returning cash to shareholders where appropriate.

Given current market yields the Company is able to achieve its return objectives on new investments without the need for additional leverage. In addition, in today's highly volatile markets, the Company could have been exposed to material change clauses that might have triggered the requirement for the repayment of the facility on unfavourable terms. In light of these circumstances, the Company has successfully negotiated amended terms of the existing facility, involving a flexible two year repayment schedule of the outstanding debt and a reduction in the risk of a material change event forcing a repayment on unattractive terms. The Company believes that the renegotiated financing facility will deliver a more stable future. Please refer to the RNS statement of 28 November 2008 for further details.

In order to prioritise debt management and investment opportunities, the Company has also decided to reduce its quarterly dividend from €0.15 per share to €0.08 per share. 

Selectively acquiring undervalued assets

The Company remains an active buyer in the asset backed securities ("ABS") market. Since commencing its asset purchase programme in August the Company has purchased €6.4 million of investment grade bonds with a face value of €16.6 million. The weighted average rating of the bond portfolio is approximately A- and has an expected total return in excess of 25%. In the period up to 30 September 2008, the Company has taken fair value gains of €4.4 million against the bond portfolio. The investment grade bond portfolio should support the Company's dividend targets while also affording the opportunity for significant NAV appreciation.

Over the coming months the Investment Manager will continue to use available cash to take advantage of opportunities in investment grade ABS. The current dislocation in the ABS markets continues to offer extremely attractive investment opportunities.

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.

Queen's Walk Portfolio Breakdown by Jurisdiction as at 30 June 2008
UK	28.3%
US	0.0%
Holland	6.8%
CDO	1.0%
Germany	18.6%
Italy	13.9%
Portugal	31.3%
Total (€mn)	197.5

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

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.

Queen's Walk Portfolio Breakdown by Asset Type as at 30 June 2008
NearPrime	14.7%
SubPrime	12.6%
CDO	1.0%
SME	25.5%
Prime	46.2%
Total (€mn)	197.5

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

New Investment - Investment Grade Bond Portfolio (5.4% of GAV)

As at 30 September 2008, the Company had spent €5.4 million on purchasing investment grade bonds, and has purchased a further €1 million of bonds subsequent to that date. With respect to the bonds purchased prior to 30 September, the Company has recorded a €4.4 million fair value gain. The write-ups of these bonds have been based on average prices supplied by market participants (2). The tables below detail all the European ABS bonds the Company has purchased. (3)

Percentage of Portfolio by Value

Rating by Vintage	2004	2005	2006	2007	Total
AAA	7.15%	3.50%			10.65%
AA			26.79%		26.79%
A			17.66%		17.66%
BBB		12.93%		31.95%	44.89%
Total	7.15%	16.43%	44.46%	31.95%	100.00%

Percentage of Portfolio by Value

Rating by Type	UK RMBS	UK BTL RMBS	UK Non-Conforming RMBS	Euro CMBS	Total
AAA		10.65%			10.65%
AA		26.79%			26.79%
A			14.91%	2.75%	17.66%
BBB	12.93%			31.95%	44.89%
Total	12.93%	37.45%	14.91%	34.71%	100.00%

The UK buy-to-let ("BTL") bonds the Company has purchased are collateralised by 2004 and 2005 buy-to-let mortgages. The mortgages in the portfolio have performed very strongly with the average 90+ day arrears of less than 0.3% and an average September 2008 indexed loan to value (4)  ("LTV") across the three bonds of 73%. Two of the bonds are currently amortising thus providing an immediate increase in NAV.

In relation to one of the "AAA" rated UK BTL bonds, for the Company to realise less than 100% of the initial investment, all 4,000 borrowers in the pool would need to default and house prices would need to fall a further 40% from September 2008 valuations (5). The maximum default rate in the last UK housing downturn in the early 1990s was 0.8% and the current 90+ day arrears level is approximately 0.3%.

As an example of the Company's exposure to European commercial real estate, the Company has purchased an "A" rated commercial mortgage backed security ("CMBS") at a substantial discount to par. This bond is backed by prime commercial real estate in Paris' traditional central business district and the modern office development area, La Defence. The indexed LTV for the Company exposure is approximately 57% on a December 2007 valuation and the rating of the bond was affirmed by S&P in October 2008. The breakeven rental yield for the bond is 11.0%, compared to market forecasts of a recessionary rental yield of 6.2% for prime Paris properties. 

(2) This write up includes a €2.1million fair value gain in respect of a single bond purchased on 29 September 2008, which the Company considers to have been a "forced sale".

(3) The tables include the seven bonds purchased prior to 30 September at their new fair value and the two bonds purchased after 30 September at cost.

(4) The indexed LTV is a ratio of the loan balance outstanding divided by the indexed value of the property as at September 2008. The indexation of the property value is calculated using the Halifax house price index

(5) Assumes foreclosure costs of 10%.

European Mortgage Portfolio (43.9% of GAV)

The Company's European mortgage residuals continue to perform satisfactorily. Total cash flows in the quarter totalled €2.3 million, compared to €1.8 million in the previous quarter.

In the quarter ended 30 September 2008, the expected default rates of the underlying mortgage pools were approximately 14% lower than the actual default rate recorded in the quarter. The Company has again increased the expected default rate such that it is 21% greater than the actual default rate.

Generally across the European mortgage pools, rising Euribor rates have caused arrears rates to increase as the cost 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. Following recent ECB rate cuts, three month Euribor rates as at 27 November 2008 are 3.9%. Further reductions in Euribor rates should have an improvement on the credit performance of these transactions as lower Euribor rates improve the affordability of the mortgages.

As previously announced, the Magellan 1 transaction is nearing its refinancing date on 5 December 2008. If the transaction is called, the Company should receive €11.5 million. However the Company cannot enforce the refinancing and is reliant on BCP, the originator of the mortgages, to refinance the transaction. Given current economic and financing conditions we do not expect BCP to refinance this transaction in the December period and it is difficult to predict when BCP will elect to refinance the mortgage portfolio. The transaction continues to perform well, and we expect approximately €700,000 per quarter from this asset, subsequent to the refinancing date.

SME Portfolio Investments (27.9% of GAV)

SME assets continue to perform well with cumulative default rates on the underlying asset pools better than, or in line with expectations.

The Company has seen no significant deterioration in the performance of residuals with exposure to the Spanish economy, with the Eirles Three Limited (236B) residual performing substantially better than expected with actual cumulative defaults of 23 basis points (bps) compared to expected cumulative defaults of 246bps.

The Company has increased the expected default rate of the Eirles Three Ltd (227) residual from 60bps to 77bps in the quarter. The loans in the portfolio are backed by German SME loans. The increase in the default rate was a result of a higher implied default rate based on the weighted average rating distribution of the companies in the underlying loan portfolio. The actual default rate in the quarter was 3bps.

UK Mortgage Portfolio (8.8% of GAV)

The Company's UK investment portfolio recorded cash flows of €3.7 million versus €7 million in the previous quarter.

Despite UK Government fiscal initiatives and sizable rate cuts by the Bank of England, the Company has aggressively cut valuations and cash flow estimates of its UK mortgage portfolio. This decision will facilitate cash flow planning, and allows the Company to have a conservative approach with respect to its valuations on this part of the investment portfolio.  

Higher expected credit losses in the portfolios have reduced the capacity of the Company's UK mortgage portfolios to generate cash. In aggregate, the Company expects cash flows from its UK mortgage portfolio to fall by approximately a half in the December quarter and by a further half in the March quarter.

The Company has reduced the asset values of its UK mortgage portfolio by between 29% and 92% with mortgage portfolios sponsored by investment banks being marked down the most.

Unfortunately, the hedges and value accretion due to slower prepayment rates do not offset the marked increase in credit losses. The Company's put option on the value of the Halifax house price index has increased in value by €0.9 million. (6)

The table below shows the loss rate for the Company's investment portfolio in the past three quarters.

Deal	March Loss Rate	June Loss Rate	September Loss Rate
Eurosail 06-1	0.71%	1.44%	2.33%
Alba 06-1	0.24%	0.80%	1.84%
Newgate 06-1	0.35%	1.24%	1.33%
Alba 05-1	0.81%	1.11%	0.81%
RMAC 04-NSP4	0.17%	0.34%	0.77%
RMAC 05-NS3	0.20%	0.70%	0.48%
RMAC 05-NS4	0.54%	0.82%	0.68%

Broker marks that the Company has received for UK mortgage residuals are approximately 50% higher than the values attributed to the asset by the Investment Manager. However, during this period of economic uncertainty the Company has elected to use the Investment Manger's more conservative model values in all cases. This lower valuation for the assets is reflected in the Company's cash flow forecasts. 

With respect to the put options purchased from Lehman Brothers (Europe) Inc., the Company has submitted a default notice for €3 million to the administrators. In the September quarter, the Company has recorded a value for the put option from Lehman Brothers at 8.6% of the value submitted to the administrators.

(6) This is the increase in value reported on the €14million notional HPI hedge the Company has with Credit Suisse, the Lehman option is discussed separately below.

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.

After giving effect to fair value write-downs to the residual investment portfolio of €45.9 million in the quarter, the NAV of the Company was €4.95 per share as at 30 September 2008 (€6.32 per share as at 30 June 2008).

The Company has elected to override the broker marks received for the Company's UK mortgage residuals and instead apply the Company's own model values in order to reflect a more conservative outlook on the UK economy. Were the Company to use the broker marks for valuation purposes the quarter end NAV would be €5.54 per share.

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

 

Asset Class	30 June 2008 Fair Value(1,2)(€mn)	30 Sept 2008 Fair Value(2) (€mn)	Fair Value Change Since 30 June 2008 (€mn)	Cash flows Received in the Quarter Ended 30 June 2008(3)(€mn)	Cash flows Received in the Quarter Ended 30 Sept 2008 (€mn)
UK Mortgages	56.2	15.8	-40.4	7.0	3.7
Euro Mortgages	89.2	79.1	-10.1	1.8	2.3
SME	50.3	50.1	-0.2	3.3	3.3
CDO	2.3	3.1	0.9	0.2	0.5
US Mortgages	0.0	0.0	0.0	0.0	0.0
Investment Grade Bonds(4)	0.0	9.7	4.4	0.0	0.0
TOTAL(5)	198.0	157.8	-45.5	12.3	9.7

 

(1) Fair values as at 30 June 2008 are expressed using 30 September 2008 F/X rates.

(2) The fair value figures for 30 June 2008 and 30 September 2008 include accrued interest.

(3) Cash flows for 30 June 2008 are expressed using 30 September 2008 F/X rates. 

(4) For investment grade bonds the fair value change since 30 June 2008 reflects the mark to market profit taken in the quarter ended 30 September 2008.

(5) The values for each column may not sum to the total due to rounding differences.

Fair value changes since 30 June 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 first six months between 31 March 2008 and 30 September 2008 the Company repurchased 3,846,391 shares in total at an average price of €4.86 per share. In the quarter between 30 June 2008 and 30 September 2008, the Company repurchased 3,378,241 shares in total at an average price of €4.88 per share. 

In July 2008, the Company announced that it was intending to conduct a €15 million fixed-price tender offer of €5 per share. On 12 August 2008, shareholders approved the terms of the tender offer and the Company repurchased a total of 2,999,981 shares. 

Excluding the tender offer, the Company repurchased 378,260 shares at an average price of €3.97 per share in the quarter between 30 June 2008 and 30 September 2008. In the quarter between 31 March 2008 and 30 June 2008 the Company repurchased 468,150 shares at an average price of €4.72 per share.

Exposure to Lehman Brothers

The Company has both direct and indirect exposure to Lehman Brothers and its subsidiaries. On 15 September 2008, Lehman Brothers International (Europe) Limited entered into administration. There is still uncertainty about what this event will mean for its obligations and contracts with counterparties. The Company has direct exposure to Lehman Brothers International (Europe) Limited via €14 million notional of the House Price Index ("HPI") option, and an Interest Rate Swap. On 3 October 2008, the Company submitted a default notice of €3,084,093 in relation to the HPI hedge. The Company is carrying this claim on its balance sheet at a value of €266,003 which implies a recovery rate of 8.6%.

Lehman Brothers Special Financing Inc provides the fixed to floating swap in the Eurosail 2006-1 securitisation. We expect cash flows for Eurosail 2006-1 to be materially affected until March 2009. The impact of this swap on the valuation of the Eurosail 2006-1 asset is approximately €320,000.

Capstone Mortgages Services Ltd. ("Capstone"), a subsidiary of Lehman Brothers Holdings Inc. (the bank's holding company), is the servicer of the loans in the Eurosail 2006-1 mortgage pool. Capstone has not entered administration.

Risk and Uncertainty

There are a number of potential risks and uncertainties which could have a material impact on the Company's performance over the remaining six months of the financial year. Further information of the principal long term risks and uncertainties of the Company are included in the last annual report dated 31 March 2008.

The Company is exposed to financing risk in respect of the terms of its amended loan facility. If at any time the sum of the Carrying Value (7) of the collateral assets multiplied by the relevant Applicable Percentage, plus the Company's cash balances is less than the balance outstanding on the loan, the Company would have 20 days to cure the breach. Failure to cure the breach would be an event of default under the terms of the facility. In addition, if the balance of the loan exceeds the amortisation schedule agreed with the lender, the Company's dividend yield will be limited to 8% of the share price prevailing at the end of the quarter. Please refer to the RNS statement of 28 November 2008 for further details. A failure to meet the loan amortisation schedule would not trigger an event of default.

Expected levels of prepayment rates of the loans that collateralise the securitisation transactions have been reviewed in the period 30 September 2008.  Prepayment rates have been in line with expectations. A decrease in prepayment rates below the Company's expectations would generally cause a rise in the Company's asset values.

Expected levels of default risk in the loan portfolio that collateralise the securitisation transactions have been monitored and updated in the period ended 30 September 2008.  An increase in default rates above the Company's expectations would cause a fall in the Company's asset values.

The Company's UK mortgage portfolios benefit from a put option with the mortgage originators. This put option entitles QWIL to put the proceeds of the reserve fund to the originator, when the notional of the mortgage portfolio is 10% of the original face value. If the originator were to become insolvent, the Company would be unable to receive the proceeds of the reserve fund until the last bond in the portfolio was paid off.

The other risks to which the Company is exposed (interest rate, liquidity, residual interest) have not changed materially in the period 30 September 2008. These risks are inherent in the portfolio, as such they are likely to remain present in the next six months, and will continue to be monitored.

(7) Refer to Note 3 of the Accounts for a description of the calculation of Carrying Value.

Company and Market Outlook

The Company recognises that central banks and governments are applying monetary and fiscal measures to limit the impact of a global recession. Nonetheless, the Company has elected to substantially mark down its UK mortgage portfolio and expects default rates to increase in both the SME and continental mortgage European portfolios.

With respect to the UK mortgage portfolio, the write-downs reflect an expectation of substantial deterioration in the UK economy. With respect to the continental mortgage portfolio, the expected default rate 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 may increase, but the cumulative default rates remain substantially below the forecasted cumulative default rates. As such, the SME portfolio should be able to withstand a moderate increase in default rates in the coming quarters.

In conjunction with prudent management of the Company's financing facility, the Investment Manager will continue to use available cash proceeds to take advantage of investment opportunities in investment grade ABS. Current European ABS bond prices reflect credit scenarios that we believe are more pessimistic than economic forecasts suggest and also substantially worse than previous recessions.

Overall, Queen's Walk is well positioned to take advantage of the current dislocation in the European ABS markets. The Company has taken pro-active steps to minimise its financing risk and will take a prudent approach in managing its cash balances. The investment grade bond purchases have been accretive to NAV and we expect that future investments will offer investors positive returns combined with a defensive risk profile.

Unaudited Condensed Consolidated Income Statement

For the period from 1 April 2008 to 30 September 2008

	Note	Revenue return	Fair value gains and losses	Total Period ended 30 September 2008		Total Period ended  30 September  2007
		Euro	Euro	Euro		Euro
Interest income	5	12,671,152	-	12,671,152		21,979,782
Gains and losses on fair value through profit or loss financial instruments	4	-	(45,577,970)	(45,577,970)		(19,621,105)
		12,671,152	(45,577,970)	(32,906,818)		2,358,677
Operating expenses	6	(2,644,477)	-	(2,644,477)		(4,072,900)
Finance costs	5	(1,319,806)	-	(1,319,806)		(2,078,364)
Net profit/(loss)		8,706,869	(45,577,970)	(36,871,101)		(3,792,587)
Loss per Ordinary Share	8
Basic				Euro (1.25)		Euro (0.09)
Diluted				Euro (1.25)		Euro (0.09)
Weighted average Ordinary Shares outstanding	8			Number		Number
Basic				29,551,491		40,376,640
Diluted				29,551,491		40,376,640

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 period from 1 April 2008 to 30 September 2008

	Share  Capital		Share Premium	Other Reserve	Capital Reserve	Accumulated Profits/(losses)		Total
Note		Euro	Euro	Euro	Euro	Euro		Euro
Balance at 31 March 2008		-	-	184,680,623	7,672,500	4,791,296	197,144,419
Net loss for the period		-	-	-	-	(36,871,101)		(36,871,101)
Total recognised income and expense		-	-	-	-	(36,871,101)		(36,871,101)
Buy back of Ordinary Shares	15,16	-	-	(18,724,877)	-	-		(18,724,877)
Distribution to the Ordinary Shareholders of the Company	7	-	-	-	-	(8,566,134)		(8,566,134)
Balance at  30 September 2008		-	-	165,955,746	7,672,500	(40,645,939)		132,982,307

The accompanying notes form an integral part of the condensed set of financial statements.

Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity (continued)

For the period from 1 April 2007 to 30 September 2007

		Share  Capital		Share Premium	Other Reserve	Capital Reserve	Accumulated Profits/(Losses)	Total
Note			Euro	Euro	Euro	Euro	Euro	Euro
Balance at 31 March 2007			-	-	384,678,304	7,672,500	(98,197,119)	294,153,685
Net loss for the period			-	-	-	-	(3,792,587)	(3,792,587)
Total recognised income and expense			-	-	-	-	(3,792,587)	(3,792,587)
Buy back of Ordinary Shares	15,16		-	-	(5,004,332)	-	-	(5,004,332)
Transfer to accumulated profits/ (losses)	16		-	-	(122,000,000)	-	122,000,000	-
Distribution to the Ordinary Shareholders of the Company	7		-	-	-	-	(12,037,523)	(12,037,523)
Balance at  30 September 2007			-	-	257,673,972	7,672,500	7,972,771	273,319,243

The accompanying notes form an integral part of the condensed set of financial statements.

Unaudited Condensed Consolidated Balance Sheet

As of 30 September 2008

	Note	30 September 2008		31 March 2008
		Euro		Euro
Non-current assets
Investments at fair value through profit or loss	10	158,140,235		206,962,464
Current assets
Cash and cash equivalents		18,714,369		32,934,817
Derivative financial assets-unrealised gain on forward exchange contracts	12	-		990,215
Derivative financial assets-unrealised gain on interest rate swap agreements	12	212,900		8,344
Other assets	11	2,893,289		2,395,741
		21,820,558		36,329,117
Total assets		179,960,793		243,291,581
Equity and liabilities
Equity
Share capital	15	-		-
Share premium account	16	-		-
Other reserve	16	165,955,746		184,680,623
Capital reserve in respect of share options		7,672,500		7,672,500
Accumulated profits/(losses)		(40,645,939)		4,791,296
		132,982,307		197,144,419
Current liabilities
Distribution payable	7	4,030,449		4,645,192
Derivative financial liabilities-unrealised loss on forward exchange contracts	12	745,765		-
Derivative financial liabilities-unrealised loss on interest rate swap agreements	12	-		13,583
Other liabilities	14	1,702,272		988,387
		6,478,486		5,647,162
Non-current liabilities
Loans	13	40,500,000		40,500,000
Total liabilities		46,978,486		46,147,162
Total equity and liabilities		179,960,793		243,291,581

The accompanying notes form an integral part of the condensed set of financial statements.

This condensed set of financial statements were approved by the Board of Directors on 27 November 2008.

Unaudited Condensed Consolidated Cash Flow Statement

For the period from 1 April 2008 to 30 September 2008

	Note		Period ended 30 September 2008		Period ended 30 September 2007
			Euro		Euro
Net cash inflow from operating activities	17		13,572,244		125,403,584
Financing activities
Net borrowings from loans			-		45,000,000
Borrowings under/(repayment of) repurchase agreements			-		(119,773,090)
Dividends paid to shareholders			(9,180,877)		(15,435,887)
Buy back of share capital			(18,724,877)		(5,004,332)
Cash flows from financing activities			(27,905,754)		(95,213,309)
Net (decrease)/increase in cash			(14,333,510)		30,190,275
Reconciliation of net cash flow to movement in net cash
Net (decrease)/increase in cash and cash equivalents			(14,333,510)		30,190,275
Cash and cash equivalents at start of period			32,934,817		22,026,122
Effect of exchange rate fluctuations on cash and cash Equivalents			113,062		34,037
Cash and cash equivalents at end of period			18,714,369		52,250,434

The accompanying notes form an integral part of the condensed set of financial statements.

The Company'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 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, 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 Euros 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 Euros.

Basis of consolidation

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 bonds and 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 company 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 assetߛspecific factors and economic conditions generally, including delinquency 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 transfer of a financial asset is accounted for as a derecognition 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, interestߛbearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings on an effective interest basis. 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 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 accrued value.

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 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 Company 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 recognises 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 30 September 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 on comparative 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. With respect to the investment grade bonds purchased in the second quarter, the Company has recorded a Euro 4.4 million fair value gain. The write-ups of these bonds have been based on average prices supplied by market participants. This write-up includes a Euro 2.1 million fair value gain in respect of a single bond purchased on 29 September 2008, which the Company considers to be a "forced sale" situation.

The assumptions upon which the pricing models are based are described in note 2 (Fair Value) to the accounts. Any change to assumptions surrounding the pricing models may result in changes to the 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.

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:

		Period ended 30 September 2008		Period ended 30 September 2007
		Euro		Euro
Net realised gains/(losses)
Net realised losses on Asset Backed Securities		(15,270,866)		(32,199,740)
Net realised losses on Total Return Swaps		-		(36,056,244)
Net realised (losses)/gains on foreign exchange		(1,136,131)		4,843,070
Net realised losses		(16,406,997)		(63,412,914)
Net unrealised gains/(losses)
Net unrealised (losses)/gains on investments at fair  value through profit or loss		(27,766,194)		7,198,458
Net unrealised gains on Total Return Swaps		-		36,453,698
Net unrealised gains/(losses) on Interest Rate Swaps		218,139		(656,413)
Net unrealised gains on foreign exchange bank balances		113,062		34,037
Net unrealised (losses)/gains foreign exchange instruments		(1,735,980)		762,029
Net unrealised (losses)/gains		(29,170,973)		43,791,809
Net realised and unrealised losses		(45,577,970)		(19,621,105)

The following table details interest income and finance costs from financial assets and liabilities during the period:

		Period ended 30 September 2008		Period ended 30 September 2007
		Euro		Euro
Interest income
Investments designated at fair value through profit or loss upon initial recognition		11,991,115		20,262,753
Investments held for trading		61,001		1,237,703
Loans and receivables (including cash and cash equivalents)		619,036		479,326
Total interest income		12,671,152		21,979,782
Finance costs:
Liabilities held at amortised cost:
Interest on loan		1,177,268		557,279
Interest on repurchase agreements		-		1,521,085
Other		142,538		-
Total finance costs		1,319,806		2,078,364

 

6. Operating expenses

		Period ended 30 September 2008		Period ended 30 September 2007
		Euro		Euro
Investment management, custodian and administration fees
Investment management (note 18)		1,586,539		2,370,535
Administration fee (note 18)		139,860		288,987
Custodian fee (note 18)		27,463		6,951
		1,753,862		2,666,473
Other operating expenses
Audit fees		85,232		85,232
Directors' fees payable to Directors of Queen's Walk Investment Limited		120,000		120,000
Directors' fees payable to Directors of Trebuchet Finance Limited		12,500		13,855
Legal fees		506,731		203,315
Pricing expenses		116,979		179,239
Loan facility structuring fee		-		150,000
Margin commission		-		388,816
Other expenses		49,173		265,970
		890,615		1,406,427
Total operating expenses		2,644,477		4,072,900

The Group has no employees. 

7. Dividends

A dividend of Euro 0.15 (2007: Euro 0.23) per share was declared on 5 March 2008 as a third interim divided for the year ended 31 March 2008 and an amount of Euro 4,645,192 was paid to shareholders on 8 April 2008.

A dividend of Euro 0.15 (2007: Euro 0.15) per share was declared on 19 June 2008 as a final dividend for the year ended 31 March 2008 and a total of Euro 4,535,685 was paid to shareholders on 18 July 2008.

A dividend of Euro 0.15 (2007: 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.

The directors have declared a second interim dividend for the year ended 31 March 2009 of Euro 0.08 per share on 27 November 2008. The liability in respect of the second interim dividend has not been recognised in the balance sheet of the Group for the half year ended 30 September 2008 since this dividend had neither been declared nor approved at the balance sheet date.

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 its Memorandum and Articles. The Board is satisfied that, in respect of the proposed dividend and the dividend paid in respect of the quarter ended 30 June 2008 that the solvency test was satisfied.

8. Loss per share

 

		Period ended 30 September 2008		Period ended 30 September 2007
		Euro		Euro
The calculation of the basic and diluted earnings per share is based on the following data:
Loss for the purposes of basic earnings per share being net loss attributable to equity holders		(36,871,101)		(3,792,587)
Weighted average number of Ordinary Shares for the purposes of basic earnings per share		29,551,491		40,376,640
Effect of dilutive potential Ordinary Shares:
Share options		-		-
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share		29,551,491		40,376,640

There is no dilution as at 30 September 2008, as the share price was below the option price for the period. 

Trebuchet Finance Limited was incorporated in Ireland on 19 May 2005 and, pursuant to the Articles of Association of Trebuchet Finance Limited, the Company has the right to appoint a majority of the Board of Directors of Trebuchet Finance Limited. Two of the Directors of the Company have been appointed Directors of Trebuchet Finance Limited. To ensure that the Company will be able to maintain a majority of the Board of Directors of Trebuchet Finance Limited in the future, the Company 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. 

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

		30 September 2008		31 March 2008
		Euro		Euro
Asset-backed securities		155,447,373		204,790,989
Options		2,692,862		2,171,475
		158,140,235		206,962,464

		30 September 2008		31 March 2008
Asset-backed securities		Euro		Euro
Opening cost		326,365,867		430,814,877
Purchases		5,405,350		21,118,567
Sales proceeds		(424)		(51,946,581)
Realised Loss		(15,270,866)		(24,994,142)
Principal Paydowns		(14,095,241)		(48,626,854)
Principal Payups		2,905,146		-
Closing cost		305,309,832		326,365,867
Unrealised gains/(losses)		(149,862,459)		(121,574,878)
Asset-backed securities at fair value		155,447,373		204,790,989

With respect to the investment grade bonds purchased in the second quarter, the Company has recorded a Euro 4.4 million fair value gain. The write-ups of these bonds have been based on average prices supplied by market participants. This write-up includes a Euro 2.1 million fair value gain in respect of a single bond purchased on 29 September 2008, which the Company considers to be a "forced sale" situation.

		30 September 2008		31 March 2008
Options		Euro		Euro
Opening cost		1,680,000		1,680,000
Closing cost		1,680,000		1,680,000
Unrealised gains		1,012,862		491,475
Options at fair value		2,692,862		2,171,475

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**	31 Oct 2009	HBOS HPI Put option		Euro		14,000,000	583.02		(573,997)
									1,012,862

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

Counterparty	Expiration	Description		Currency		Notional Amount	Strike price		Unrealised Gains Euro
Credit Suisse	05 Nov 2009	Halifax HPI Put option		Euro		14,000,000	583.02		245,738
Lehman Brothers	31 Oct 2009	HBOS HPI Put option		Euro		14,000,000	583.02		245,737
									491,475

The Halifax house price index option contracts were purchased during the year ended 31 March 2008 as a hedge against deterioration of the UK housing market.

** Please see Note 19 Significant events during the period for further detail on the Lehman Brothers derivative exposure.

 

11. Other assets

 

		30 September 2008		31 March  2008
		Euro		Euro
Interest receivable on investment portfolio		2,328,658		2,344,222
Interest receivable on cash and cash equivalents		37,145		51,519
Other interest receivable		47,486		-
Variation margin receivable		480,000		-
		2,893,289		2,395,741

The Directors consider that the carrying amount of other assets approximates their fair value.

 

 

12. Derivative contracts

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

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

Maturity Date		Amount Bought	Amount Sold	Unrealised  Gain Euro
30 June 2008		Euro 75,364,155	GBP 59,500,000	952,319
30 June 2008		Euro 5,424,205	USD 8,500,000	37,896
				990,215

On 22 August 2008, the Group entered into three EUR interest rate swaps with Goldman Sachs. These swap floating rate for fixed on the notional of three reference assets held in the portfolio. The fair value of these swap agreements at 30 September 2008 was 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 notional amount of each swap agreement was adjusted on a quarterly basis in accordance with the balance of fixed rate mortgage loans outstanding in the relevant transaction. The swaps hedged against interest rate risk on fixed rate mortgage loans. One balance-guaranteed interest rate swap remained unsettled as at 30 September 2008. The fair value of this swap agreement as at 30 September 2008 was Euro 3,377 (31 March 2008: Euro 5,239).

The following interest rate and balance guaranteed interest rate swaps were unsettled at 30 September 2008:

Termination Date Interest Rate Swaps	Reference Transaction	Counterparty	Initial Notional Amount (EUR)		Unrealised Gain Euro
27 March 2011	Eirles Three 236B	Goldman Sachs	17,348,100		60,631
15 February 2011	Earls Eight Limited  (Gate Repack)	Goldman Sachs	13,054,947		42,892
15 January 2011	Eirles Three 227  (Gate Repack)	Goldman Sachs	29,725,589		106,000
Balance-guaranteed Interest Rate Swaps					209,523
1 December 2008	Newgate 2006-1*	Lehman Brothers**	411,409,139		3,377
					3,377
					212,900

The following balance-guaranteed interest rate swaps were unsettled at 31 March 2008:

Termination Date	Reference Transaction	Counterparty	Initial Notional Amount (GBP)		Unrealised  Gain/(loss) Euro
12 June 2008	RMAC 2005-NS3*	Lehman Brothers	186,615,582		5,775
12 June 2008	RMAC 2005-NS4*	Lehman Brothers	107,028,288		2,569
1 December 2008	Newgate 2006-1*	Lehman Brothers	411,409,139		(13,583)
					(5,239)

* The swaps pay a fixed interest rate and receive a floating one.

** Please see Note 19 Significant events during the period for further detail on the Lehman Brothers derivative exposure.

13. Loans

		30 September 2008		31 March 2008
		Euro		Euro
Loans		40,500,000		40,500,000
		40,500,000		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 168,057,005 have been granted as security in relation to the loan.

As the terms of the loan are confidential the Group cannot disclose these in the interim report. 

		30 September 2008		31 March 2008
		Euro		Euro
Interest payable		130,838		130,221
Due to related parties - Investment Manager (note 18)		186,819		291,551
Amounts payable for securities purchased		817,975		-
Amounts payable for shares repurchased		68,437		-
Accrued expenses		498,203		566,615
		1,702,272		988,387

Other liabilities principally comprise amounts outstanding in respect of interest payable and ongoing costs. The Directors consider the carrying amount of other liabilities approximates to their fair value.

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

Issued and fully paid
	Number of Ordinary Shares	Euro	Number of Ordinary Shares	Euro
Balance at 31 March 2008	30,706,048	-	40,620,756	-
Ordinary shares bought back during the period	(3,846,391)	-	(9,914,708)	-
Balance at 30 September 2008	26,859,657	-	30,706,048	-

Between 31 March 2008 and 30 September 2008, the Company purchased and cancelled 3,846,391 (Period to 30 September 2007: 991,354) Ordinary Shares through its buyback programme and a tender offer at an average price of €4.86 (Period to 30 September 2007: €5.04) per Ordinary Share.

16. Other reserve

		30 September 2008		31 March 2008
		Euro		Euro
Balance at start of period/year		184,680,623		384,678,304
Buy back of Ordinary Shares*		(18,724,877)		(52,997,681)
Transfer to distributable reserves		-		(147,000,000)
Balance at end of period/year		165,955,746		184,680,623

* 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 15, the Company bought back 3,846,391 Ordinary Shares of no par value at an average price of €4.86 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.

 In the prior year the transfer 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, no such transfer has been made in the period ended 30 September 2008.

 

		Period ended 30 September 2008		Period ended 30 September 2007
		Euro		Euro
Net loss		(36,871,101)		(3,792,587)
Adjustments for:
Net realised losses/(gains) on sale of asset backed securities		15,270,866		32,199,740
Net realised losses on total return swap agreements		-		36,056,244
Movement in unrealised gains on investments at fair value through profit or loss		27,766,194		(7,198,458)
Movement in unrealised gains on total return swap agreements		-		(36,453,698)
Movement in unrealised (gains)/ losses on interest rate swap agreements		(218,139)		656,413
Movement in unrealised gains on foreign currency bank balances		(113,062)		(34,037)
Movement in unrealised (gains)/ losses on foreign exchange forward contracts		1,735,980		(94,516)
		7,570,738		21,339,101
Purchases of asset-backed securities		(4,587,375)		(21,118,567)
Sales proceeds from asset-backed securities		424		77,414,044
Principal paydowns		14,095,241		23,939,540
Principal payups		(2,905,146)		-
Net sales on total return swap agreements		-		18,098,344
		6,603,144		98,333,361
(Increase)/decrease in receivables		(497,548)		7,293,606
Decrease in payables		(104,090)		(1,562,484)
		(601,638)		5,731,122
Net cash inflow from operating activities		13,572,244		125,403,584

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.

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 Company pays the Investment Manager a Management Fee and Incentive Fee (see note 6). During the period ended 30 September 2008, the Management Fee totalled Euro 1,586,539 (2007: Euro 2,370,535) of which Euro 186,819 (31 March 2008: Euro 291,551) is payable at period end. The Incentive Fee totalled Euro Nil (2007: Euro nil).

Management Fee

Under the terms of the Investment Management Agreement, the Investment Manager is entitled to receive from the Company an annual Management Fee of 1.75 per cent of the net asset value of the Company 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 × 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 Company 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 Company for the purpose of calculating the Incentive Fee. 

Administration Fee

Under the terms of the Administration Agreement, the Administrator is entitled to receive from the Company an administration fee of 0.125 per cent of the gross asset value of the Company up to Euro 80,000,000 and 0.0325 per cent of the gross asset value of the Company 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 30 September 2008, the Company held investments with a total value of Euro 2,906,812 (31 March 2008: Euro 4,479,375) in the following entities, which are managed by the Investment Manager: Cheyne CLO Investments I Limited (31 March 2008: Cheyne ABS Investments I plc; Cheyne High Grade ABS CDO Ltd.; and Cheyne CLO Investments I Limited.)

Custodian Fee

Under the terms of the Custodian Agreement, the Custodian is entitled to receive from the Company a custodian fee of 0.03 per cent of the gross asset value of the Company up to Euro 80,000,000 and 0.02 per cent of the gross asset value of the Company 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 Company, the Company 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 Company 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 30 September 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.

The Company has both direct and indirect exposure to Lehman Brothers and its subsidiaries. On 15 September 2008, Lehman Brothers International (Europe) Limited entered into administration. There is still uncertainly about what this event will mean for its obligations and contracts with counterparties. The Company has direct exposure to Lehman Brothers International (Europe) Limited via Euro 14m notional of the HPI option, and an Interest Rate Swap. On 3 October 2008, the Company submitted a default notice of Euro 3,084,093 in relation to the HPI hedge. The Company is carrying this claim on its balance sheet at a value of Euro 266,003 which implies a recovery rate of 8.6%, the Interest Rate Swap is also valued at this recovery rate (valued at 30 September 2008 at Euro 3,377). Lehman Brothers Special Financing Inc provides the fixed to floating swap in the Eurosail 2006-1 securitisation. We expect cash flows for Eurosail 2006-1 to be materially affected until March 2009. The impact of this swap on the valuation of the Eurosail 2006-1 asset is approximately EUR 320,000. Capstone Mortgages Services Ltd. ("Capstone"), a subsidiary of Lehman Brothers Holdings Inc. (the bank's holding company), is the servicer of the loans in the Eurosail 2006-1 mortgage pool. Capstone has not entered administration.

The Company bought back 5,000 shares at a price of 3.25 Euro between 30 September 2008 and 27 November 2008.

The Company has submitted an event of default notice and valuation claim to Lehman Brothers International (Europe) Limited in respect of the Euro 14m HPI option and the BGS position it held with Lehman Brothers International (Europe) Limited when it entered administration.

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 27 November 2008, the Company's Borrowing Base is approximately €62.9 million versus a loan balance of €40.5 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.

There have been no other events subsequent to 30 September 2008 which require adjustment of or disclosure in the interim report or notes thereto.

21. Foreign exchange Rates

The following foreign exchange rates relative to the Euro were used as at 30 September 2008:

British pound 0.78804

US Dollar 1.40465

22. Approval of the Financial Statements The financial statements were approved by the Directors on 27 November 2008.

 

ENDIR FKOKDNBDBQDB