Last checked at 
4 Aug 2008 11:22
Queen's Walk Investment Limited (the "Company")
4 August 2008
This interim management statement relates to the period from 31 March 2008 to 4 August 2008 and has been prepared solely in order to comply with the requirement (pursuant to the EU Transparency Directive as implemented by the Disclosure and Transparency Directive) for an interim management statement to be made by the Company no earlier than 9 June 2008 and no later than 19 August 2008. The Company is currently in the process of preparing its quarterly report for the period ended 30 June 2008 and this is expected to be released in September 2008. The Company wishes to make clear that unless otherwise noted, the financial information provided in this interim management statement (and the asset valuations underlying that financial information) are as at 31 March 2008 and that such financial information (and underlying valuations) will be stated as at a more recent date in the Company's forthcoming quarterly report.
Performance Summary
In the quarter ended 31 March 2008, the Company estimated cash flows for the June quarter of €12 million. Actual cash flows recorded in the quarter ended 30 June 2008 exceeded €12.2 million. The Company had a net cash balance in excess of €31m at 30 June 2008 (after taking into account payment of the dividend on 18 July 2008). Net leverage as at 31 March 2008 was 6.2%.
As at 31 March 2008, the company's NAV was €6.42 per share down from a NAV of €6.90 per share as at 31 December 2007. A significant proportion of the fair value write downs that have been effected by the Company in the quarter ended 31 March 2008 are attributable to higher market discount rates and therefore do not impact the ability of the assets to generate cash. The Company reflected the expected deterioration in the UK and continental European mortgage markets in its cash flow forecasts as at 31 March 2008.
Since 18 July 2007, the Company has returned in excess of €50 million of capital to shareholders using a combination of on-market share repurchases pursuant to its general authority and off-market tender offers. In the past year, the Company has completed two tender offers of €20 million and €15 million respectively. At present, the discount in the share price to the 31 March 2008 NAV, provides an opportunity for the Company to continue with its share buyback programme and add value for existing shareholders. On 21 July 2008, the Company announced its intention to conduct a fixed price tender offer of €15 million at €5 per share. The Company will hold an EGM on 12 August 2008 to seek shareholder approval of the proposed tender offer.
Given current market opportunities the Company intends to balance the return of capital with new investments. The Company will continue with its share buy back programme in the near term and will seek approval at its forthcoming AGM on 4 September 2008 for a general buyback authority to repurchase up to 14.99% of shares outstanding at that date.
Investment Portfolio
The tables below summarise the Company's investment portfolio as at 31 March 2008.
Portfolio Composition by Jurisdiction as at 31 March 2008*
*By reference to underlying asset jurisdiction. Figures stated as a percentage of the fair value of the Company's residual investments including accrued interest.
| Jurisdiction | % |
| Portugal | 30.7% |
| UK | 30.6% |
| Germany | 17.9% |
| Italy | 12.9% |
| Holland | 6.7% |
| CDO | 1.2% |
| US | 0.04% |
Portfolio Composition by Asset Type as at 31 March 2008*
*By reference to underlying asset collateral. Figures stated as a percentage of the fair value of the Company's residual investments including accrued interest.
| Portfolio Composition | % |
| Prime | 44.9% |
| SME | 24.6% |
| NearPrime | 15.8% |
| SubPrime | 13.6% |
| CDO | 1.2% |
As at 28 July 2008, the securitisations to which the Company had exposure through its investment portfolio were:
| Issuer | Description of Underlying Assets |
| Alba 2005-1 plc | UK non-conforming and buy-to-let residential mortgages |
| Alba 2006-1 plc | UK non-conforming residential mortgages, primarily first-ranking |
| Amstel Corporate Loan Offering BV 2006-1 | Middle market corporate loans |
| Cheyne CLO Investments I Limited | Investment grade CLOs |
| Cheyne High Grade ABS CDO, Ltd | Investment grade ABS CDOs with exposure to the US sub-prime mortgage market |
| Earls Eight Limited (Tranche 312B) | SME loans |
| Eirles Three Limited (Tranche 227B) | SME loans |
| Eirles Three Limited (Tranche 236B) | SME loans |
| Eurosail 2006-1 plc | UK non-conforming and buy-to-let residential mortgages |
| Lusitano Mortgages No. 1 plc | First-ranking, fully amortising Portuguese residential mortgages |
| Lusitano Mortgages No. 2 plc | First-ranking, fully amortising Portuguese residential mortgages |
| Lusitano Mortgages No. 3 plc | First-ranking, fully amortising Portuguese residential mortgages |
| Magellan Mortgages No. 1 plc | First ranking, fully amortising Portuguese residential mortgages |
| Magellan Mortgages No. 2 plc | First ranking mortgage rights (or second-ranking where first-ranking is also transferred) Portuguese residential mortgages |
| Newgate Funding plc | UK non-conforming residential mortgages, primarily first-ranking |
| RASC Series 2006-KS2 Trust | US Sub-prime residential mortgages, primarily first-ranking |
| RMAC 2004-NSP4 plc | UK non-conforming residential mortgages, primarily first-ranking |
| RMAC 2005 NS3 plc | UK non-conforming residential mortgages, primarily first-ranking |
| RMAC 2005 NS4 plc | UK non-conforming residential mortgages, primarily first-ranking |
| Sestante Finance S.R.L. | First-ranking prime Italian residential mortgages |
The Company sold Cheyne ABS Investments I plc in the period from 31 March 2008 to 4 August 2008. Other than this the Company did not buy or sell any assets in its Investment Portfolio during that period.
In October 2007, the Company purchased €28 million notional of two year put options struck against 90% of the September 2007 value of the Halifax UK house price index. This hedge is intended to minimise portfolio losses in the event that house prices give up the gains that occurred between early 2006 and mid to late 2007. As at 30 June 2008, the value of the UK house price index was 90.8% of its September 2007 value. The value of the put option has increased since the date the Company purchased the option.
Outlook
The current credit crisis has continued to spread beyond the sub-prime mortgage market and has begun to have a significant impact on the US and European economies. The housing market in countries such as the US, UK, Spain and Ireland has deteriorated considerably and house price falls in these regions are expected to continue. As expected, banks have reduced the availability of credit and tightened lending standards in response to weaker fundamentals and deteriorating capital bases.
In the European securitisation markets, issuance of transactions to third party investors has come to a near standstill. Securitisations that are completed are often retained and used for collateral with either the Bank of England or the European Central Bank. Given current market conditions, the securitisation markets are unlikely to provide financial institutions with an attractive source of funding in 2008.
Tighter lending conditions in mortgage markets in both the UK and continental Europe have started to result in fewer house purchases and mortgage transactions. In the UK, refinancing of mortgages slowed for the first time in May 2008 and is currently below the 6 months rolling average. There have been similar slowdowns of mortgage lending activity in Spain. In general the slowdown in mortgage repayments will be beneficial to the Company's portfolio of residual investments.
We expect the weakening of the real economy to lead to increased tiering, in both performance and price, between different asset types and securitisation transactions. To identify value between these transactions requires considerable amounts of data, analytical modelling and structural analysis. As a consequence of the lack of liquidity in the ABS markets, combined with a high hurdle to entry, spreads of mezzanine ABS bonds are trading at historical wides. From an absolute return perspective, investments in A-rated ABS assets have an expected total return of 15-20% per year. In addition, there are an increasing number of long-short strategies that take advantage of distinctions in asset performance between originators and transaction structures. Given the continued illiquidity in the ABS sector, these investments are better suited for investors with a longer term investment horizon.
The Company has also been approached to facilitate transactions that allow banks to deconsolidate a significant portion of their AAA-rated ABS risk and release balance sheet as well as regulatory capital. These investments are typically structured as equity investments in a term funded portfolio of AAA-rated bonds. The Company's target returns for these types of assets are in excess of 20%.
The Investment Manager is also exploring the purchase of fundamentally sound credit assets at substantial discounts from distressed sellers in order to realise their fair value over time.
The Company is in a strong position to take advantage of these market opportunities, and believes that now is the right time to commit capital. The Company's analytical infrastructure combined with extensive loan level data, allows for detailed analysis of portfolios and identification of relative value. The Company has already identified pricing and structural anomalies that it is able to exploit. The current dislocations in the ABS markets offer investors a superior risk return profile without significant leverage requirements. Exploiting these opportunities will help the Company to achieve its return targets with a reduced risk profile.