TIDMQWIL
RNS Number : 4096I
Queen's Walk Investment Limited
11 March 2010
Queen's Walk Investment Limited
Financial Results Announcement and Accounts for the
Third Quarter Ended 31 December 2009
Queen's Walk Investment Limited reports EUR0.6 million profit for quarter ended 31
December 2009
Queen's Walk Investment Limited (the "Company"), a Guernsey-incorporated
investment company, has reported a net profit of EUR0.6 million, or EUR0.02 per
ordinary share (1), for the quarter ended 31 December 2009, compared to a net
profit of EUR3.6 million, or EUR0.14 per ordinary share (2), for the quarter ended
30 September 2009.
Fair value write-downs for the quarter were EUR2.4 million, compared to EUR0.6
million of write-ups for the quarter ended 30 September 2009. The Company's net
asset value ("NAV") at quarter end was EUR3.69 per share (2) compared to EUR3.75 per
share (3) at the previous quarter end.
The investment portfolio generated more cash than forecast. Total cash proceeds
of EUR8.3 million received in the quarter exceeded the forecast of EUR5 million. The
Company's overall cash position at the end of the quarter was EUR13.7 million,
compared with a forecast of EUR10.0 million. The cash position was EUR14.8 million
on 30 September 2009.
The Board of Directors of the Company has declared an interim dividend of EUR0.08
per share for the quarter ended 31 December 2009, unchanged from the previous
quarter.
(1). These calculations per share are based on the weighted average number of
Ordinary Shares as shown in Note 8 of the financial statements for the quarter
ended 31 December 2009.
(2). These calculations per share are based on the weighted average number of
Ordinary Shares as shown in Note 8 of the financial statements for the quarter
ended 31 December 2009.
(3). These calculations per share are based on the number of Ordinary Shares
outstanding at the end of each respective period.
Strategy of buying undervalued ABS bonds delivering profit
Since the end of the third quarter, Queen's Walk has realised gains on the
Investment Grade bonds it began acquiring in 2008. On 22 January 2010, the
Company sold EUR3.4 million (face value) of AAA RMBS bonds, recording an
annualised return on these investments of 28.2%. The average sale price was
92.4 cents versus an average purchase price of 74.2 cents. This return
highlights the Company's success in implementing its strategy of investing in
undervalued ABS bonds.
Tom Chandos, Chairman of Queen's Walk Investment Limited, said: "We are very
pleased that our strategy of investing in undervalued investment grade bonds is
proving successful and believe that market conditions will allow us to take
further advantage of these opportunities for the foreseeable future. The
portfolio as a whole continues to generate cash, enabling us to reduce our debt
and make regular dividend payments".
Sale of Portuguese mortgage portfolio supports NAV
On 26 February 2010, the Company sold its Magellan 2 mortgage portfolio to the
bank that originated these mortgages. The sale price was in-line with the
Company's 31 December 2009 valuation and underscores the NAV at the end of the
quarter. The Magellan 2 portfolio accounted for 8.5% of the investment
portfolio as at quarter end.
Third Quarter Highlights
· Quarterly dividend of EUR0.08 per share; total paid or declared dividends of
EUR2.37 per share since the IPO.
· Next quarter cash flow estimated at EUR4.5 million.
· Investment Grade portfolio made up 9.8% of assets under management as of 31
December 2009, up from 7.3%.
· Debt reduced to EUR8.6 million as at 1 March 2010, down from EUR22.0 million as
at 30 September 2009.
· Loss adjusted gross cash flow forecast of EUR161 million.
Conference Call & Further Information
A conference call to review the Company's financial results for the third
quarter ended 31 December 2009 will take place at 10:30 AM London time on 11
March 2010. The conference call can be accessed by dialing +44 (0) 20 7138
0817, ten minutes prior to the scheduled start of the call. Please reference
Queen's Walk Investment Limited Third Quarter Results. 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 7920 2321
About the Company
Queen's Walk Investment Limited 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" or the "Investment Manager"), considers
the coupon or cash flows from the investment to be attractive relative to the
credit exposure of the underlying asset collateral.
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 | Total | Revenue | Fair | Total |
| | | value | Quarter | | value | Quarter |
| | | gains | ended | | gains | ended |
| | | and | 30 | | and | 31 |
| | | losses | September | | losses | December |
| | | | 2009 | | | 2009 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Operating Income | 4,143,683 | | 4,143,683 | 4,106,756 | | 4,106,756 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Gains and losses | | 627,299 | 627,299 | | (2,375,133) | (2,375,133) |
| on fair value | | | | | | |
| through profit or | | | | | | |
| loss financial | | | | | | |
| instruments | | | | | | |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| | 4,143,683 | 627,299 | 4,770,982 | 4,106,756 | (2,375,133) | 1,731,623 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| | | | | | | |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Operating Expenses | (978,049) | | (978,049) | (979,731) | | (979,731) |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Finance Costs | (158,278) | | (158,278) | (119,116) | | (119,116) |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Net profit / | 3,007,356 | 627,299 | 3,634,655 | 3,007,909 | (2,375,133) | 632,776 |
| (loss) | | | | | | |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| | | | | | | |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Total Assets | | | 125,752,331 | | | 120,000,313 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Total Liabilities | | | 25,818,613 | | | 21,565,392 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Equity Capital | | | 99,933,718 | | | 98,434,921 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| NAV per share | | | 3.75 | | | 3.69 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
| Shares Outstanding | | | 26,644,657 | | | 26,644,657 |
+--------------------+-----------+---------+-------------+-----------+-------------+-------------+
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 in the next section. 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 Jurisdiction as |
| at 30 September 2009 |
| |
+-------------------------------------------------------+
| Portugal | 42.1% |
+--------------------+----------------------------------+
| Germany | 25.2% |
+--------------------+----------------------------------+
| Italy | 13.1% |
+--------------------+----------------------------------+
| UK | 10.3% |
+--------------------+----------------------------------+
| Holland | 8.6% |
+--------------------+----------------------------------+
| France | 0.6% |
+--------------------+----------------------------------+
| Total (EURmm) | 104.5 |
+--------------------+----------------------------------+
+--------------------+----------------------------------+
| Queen's Walk Portfolio Breakdown by Jurisdiction as |
| at 31 December 2009 |
| |
+-------------------------------------------------------+
| Portugal | 40.3% |
+--------------------+----------------------------------+
| Germany | 24.7% |
+--------------------+----------------------------------+
| Italy | 12.0% |
+--------------------+----------------------------------+
| Holland | 10.1% |
+--------------------+----------------------------------+
| UK | 12.0% |
+--------------------+----------------------------------+
| France | 0.6% |
+--------------------+----------------------------------+
| Spain | 0.3% |
+--------------------+----------------------------------+
| Ireland | 0.1% |
+--------------------+----------------------------------+
| Total (EURmm) | 102.8 |
+--------------------+----------------------------------+
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 and hedges.
+--------------------+----------------------------------+
| Queen's Walk Portfolio Breakdown by Asset Type as at |
| 30 September 2009 |
| |
+-------------------------------------------------------+
| Prime | 55.4% |
+--------------------+----------------------------------+
| SME | 30.7% |
+--------------------+----------------------------------+
| Investment Grade | 8.8% |
| Bonds | |
+--------------------+----------------------------------+
| SubPrime | 3.4% |
+--------------------+----------------------------------+
| NearPrime | 1.1% |
+--------------------+----------------------------------+
| Total (EURmm) | 104.5 |
+--------------------+----------------------------------+
+--------------------+----------------------------------+
| Queen's Walk Portfolio Breakdown by Asset Type as at |
| 31 December 2009 |
| |
+-------------------------------------------------------+
| Prime | 52.8% |
+--------------------+----------------------------------+
| SME | 30.3% |
+--------------------+----------------------------------+
| Investment Grade | 11.4% |
| Bonds | |
+--------------------+----------------------------------+
| SubPrime | 3.8% |
+--------------------+----------------------------------+
| NearPrime | 1.3% |
+--------------------+----------------------------------+
| Total (EURmm) | 102.8 |
+--------------------+----------------------------------+
N.B. 'Prime' indicates that the underlying pool of loans comprises mortgages
made to borrowers with good credit records and whose incomes were verified at
the time of the origination.
European Mortgage Portfolio (44.1% of GAV)
The Company's European mortgage residuals continue to perform satisfactorily,
generating cash flow for the quarter ended 31 December 2009 of EUR2.6 million.
This was in line with average cash flows of previous quarters.
The lower Euribor rate has had a positive effect on the Portuguese mortgage
portfolio, with fewer mortgage borrowers falling into arrears. The percentage
of loans in the portfolio which are 90 to 180 days in arrears has decreased
since its peak in 2008.
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| 90 - 180 days Arrears | | | | | | | | | | |
| (Normalised) | | | | | | | | | | |
+-------------------------------------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| | Dec-06 | Mar-07 | Jun-07 | Sep-07 | Dec-07 | Mar-08 | Jun-08 | Sep-08 | Dec-08 | Mar-09 | Jun-09 | Sep-09 | Dec-09 |
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| Magellan | 100.0% | 109.4% | 98.9% | 113.5% | 120.4% | 139.6% | 175.2% | 137.3% | 165.7% | 144.6% | 138.5% | 98.3% | 75.8% |
| 1 | | | | | | | | | | | | | |
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| Magellan | 100.0% | 123.5% | 115.5% | 148.9% | 160.2% | 164.9% | 206.9% | 224.2% | 165.9% | 166.4% | 181.0% | 178.2% | 170.0% |
| 2 | | | | | | | | | | | | | |
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| Lusitano | 100.0% | 125.5% | 112.7% | 90.2% | 98.7% | 110.5% | 140.1% | 163.7% | 118.5% | 126.9% | 152.6% | 153.1% | 117.9% |
| 1 | | | | | | | | | | | | | |
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| Lusitano | 100.0% | 101.5% | 118.9% | 149.9% | 146.6% | 134.6% | 149.5% | 155.0% | 179.0% | 161.3% | 174.8% | 156.9% | 137.7% |
| 2 | | | | | | | | | | | | | |
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
| Lusitano | 100.0% | 130.8% | 160.3% | 170.2% | 167.6% | 196.6% | 237.6% | 234.8% | 258.8% | 217.2% | 263.1% | 236.9% | 180.3% |
| 3 | | | | | | | | | | | | | |
+----------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+--------+
In the longer term, we expect lower arrears to translate to a lower default
rate, if Euribor rates remain low. For the short term, however, the Company is
still anticipating higher default rates. In the quarter ended 31 December 2009,
the average default rate of the Portuguese mortgage portfolio rose to 1.49% from
1.41% in the previous quarter. We have increased the default rate expectation
of the Lusitano 1 and Magellan 2 portfolio this quarter to reflect the
possibility of a further increase in defaults in the short term.
Write-downs of the Sestante Italian mortgage portfolio were EUR1.7 million as a
result of higher mortgage defaults. The originator of the mortgages,
Meliorbanca was recently purchased by Banca Popolare di Emilia Romagna which has
led to complications with respect to mortgage loan servicing. Cheyne is working
with Meliorbanca to improve the quality of servicing in the portfolio.
On 26 February 2010, the Company sold its Magellan 2 mortgage portfolio to the
bank that originated these mortgages. The sale price was in-line with the
Company's 31 December 2010 valuation. Through this sale, the Company's exposure
to the Portuguese market has fallen to 35.8% from 40.3% of the overall
investment portfolio.
Market concerns about Portuguese sovereign risk have led to materially wider
credit spreads in Portuguese government bonds and related credits. In the
short term, this should have no impact on the performance of the Portuguese
mortgage portfolios because a substantial majority of loans are indexed to
Euribor. The key risk to the portfolio remains an increase in unemployment and
resulting mortgage defaults as a result of possible austerity measures
introduced by the government.
SME Portfolio Investments (26.0% of GAV)
The Company's SME portfolio continues to perform in line with expectations.
Cash flows in the quarter ended 31 December 2009 totalled EUR1.8 million, compared
to EUR1.9 million in the previous quarter.
The portfolio has experienced volatility in default rates in line with
expectations set out by the Company in prior announcements. The average default
rate for the SME portfolio increased in the quarter ended 31 December 2009 to
1.84%, up from 0.63% in the previous quarter. Gate 05-2 produced the highest
rise in default rates, and was the main driver behind the increase in the
average across the portfolio. Gate 05-2's default rate increased to 5.71% from
0.55% in the prior quarter as a small number of loans, previously identified as
being in arrears, defaulted. Subsequent to these defaults, the balance of loans
in arrears has dropped from EUR6.0 million to EUR0.5 million.
Against a backdrop of continued economic uncertainty, we continue to use a
higher model default rate to forecast cash flows relative to actual default
rates in the December quarter. The Company intends not to lower its model
default rates until a more sustained trend towards improved credit quality is
evident. The table below summarises the actual default rates for the SME
portfolio in the past three quarters and the model default rates that the
Company has used to determine its cash flow estimates for the fourth quarter.
+---------+--------------+--------------+--------------+----------+
| | June | September | December | December |
| | 2009 | 2009 | 2009 | Model |
| | Default | Default | Default | Default |
| | Rate | Rate | Rate | Rate |
| | (annualised) | (annualised) | (annualised) | |
+---------+--------------+--------------+--------------+----------+
| Amstel | 0.38% | 0.00% | 0.25% | 0.60% |
| 06-1 | | | | |
+---------+--------------+--------------+--------------+----------+
| Smart | 0.71% | 1.13% | 1.33% | 2.00% |
| 06-1 | | | | |
+---------+--------------+--------------+--------------+----------+
| Gate | 1.28% | 0.83% | 0.06% | 1.15% |
| 06-1 | | | | |
+---------+--------------+--------------+--------------+----------+
| Gate | 2.52% | 0.55% | 5.71% | 4.00% |
| 05-2 | | | | |
+---------+--------------+--------------+--------------+----------+
| Average | 1.22% | 0.63% | 1.84% | 1.94% |
+---------+--------------+--------------+--------------+----------+
Investment Grade Bond Portfolio (9.8% of GAV)
The Investment Grade Bond portfolio recorded cash flows of EUR0.8 million in the
quarter ended 31 December 2009, up from EUR0.3 million in the previous quarter.
The annualised cash-on-cash yield of the bond portfolio in the quarter ended 31
December 2009 was approximately 28% (4).
Appetite for high quality AAA-rated ABS bonds increased substantially in the
early weeks of 2010. To take advantage of the resulting price rally, on 22
January 2010, the Company sold EUR3.4 million face value of AAA RMBS bonds. The
average sale price was 92.4 cents versus an average purchase price of 74.2
cents, giving an annualised return on the investments of 28.2%.
The Company began investing in ABS bonds in August 2008. As at 1 March 2010, the
Company held a portfolio of 18 bonds at a cost value of EUR10.6 million (5) and
with a face value of EUR21.2 million.
The following tables detail the European ABS bonds that were purchased by the
Company up to 10 March 2010 (6) and reflects the bonds sold in January 2010.
The weighted average rating of the portfolio (based on the invested amount) is
approximately BBB (7).
(4) Total cash proceeds received in the quarter divided by amortised cost value
of the bonds
(5) Net of sales completed in January 2010.
(6) The tables include the bonds purchased at their cost using FX rates at the
time of purchase.
(7) Calculated using Moody's WARF (weighted average risk factor) methodology
Percentage of Portfolio by Cost Price (as at 1 March 2010)
+-------------+----------+----------+----------+----------+----------+
| Rating by | 2004 | 2005 | 2006 | 2007 | Total |
| Vintage¹ | | | | | |
+-------------+----------+----------+----------+----------+----------+
| AAA | 0.0% | 0.0% | 11.66% | 0.0% | 11.66% |
+-------------+----------+----------+----------+----------+----------+
| AA | 2.15% | 0.0% | 19.57% | 0.0% | 21.72% |
+-------------+----------+----------+----------+----------+----------+
| A | 0.0% | 5.92% | 17.11% | 9.22% | 32.25% |
+-------------+----------+----------+----------+----------+----------+
| BBB | 0.0% | 7.58% | 15.78% | 11.01% | 34.37% |
+-------------+----------+----------+----------+----------+----------+
| Total | 2.15% | 13.50% | 64.12% | 20.23% | 100.00% |
+-------------+----------+----------+----------+----------+----------+
1. Vintage reflects the issue date of the bond. Rating at time of purchase.
Percentage of Portfolio by Cost Price (as at 1 March 2010)
+--------+--------+--------+----------------+--------+--------+--------+---------+
| Rating | UK | UK Buy | UK | UK | Euro | SME | Total |
| by | Prime | To Let | Non-Conforming | CMBS3 | CMBS3 | | |
| Type1 | RMBS2 | RMBS2 | RMBS2 | | | | |
+--------+--------+--------+----------------+--------+--------+--------+---------+
| AAA | 0.0% | 0.0% | 0.0% | 6.87% | 4.79% | 0.0% | 11.66% |
+--------+--------+--------+----------------+--------+--------+--------+---------+
| AA | 2.15% | 19.57% | 0.0% | 0.0% | 0.0% | 0.0% | 21.72% |
+--------+--------+--------+----------------+--------+--------+--------+---------+
| A | 0.0% | 0.0% | 2.93% | 6.61% | 22.71% | 0.0% | 32.25% |
+--------+--------+--------+----------------+--------+--------+--------+---------+
| BBB | 7.58% | 0.0% | 9.53% | 0.0% | 10.44% | 6.81% | 34.37% |
+--------+--------+--------+----------------+--------+--------+--------+---------+
| Total | 9.73% | 19.57% | 12.46% | 13.48% | 37.95% | 6.81% | 100.00% |
+--------+--------+--------+----------------+--------+--------+--------+---------+
1. Rating at time of purchase
2. Residential Mortgage Backed Securities
3. Commercial Mortgage Backed Securities
UK Mortgage Portfolio (5.8% of GAV)
The UK Mortgage portfolio recorded cash flows of GBP1.2 million in the quarter
ended 31 December 2009 compared to GBP1.0 million in the previous quarter.
The Company has increased the valuation of its RMAC assets by EUR1.3 million, as a
result of lower defaults in the current period and lower forecast defaults
versus our previous assumptions. The Company maintains conservative forecasts
of defaults for the UK mortgage portfolio.
Portfolio Valuation
In accordance with the Company's valuation procedures, the fair value of the
Company's investments is calculated on the basis of observable market data,
market discount rates and the Investment Manager's expectations regarding future
trends. Given the re-structurings at many investment banks, there is a lack of
reliable independent broker marks for the residual portfolio. Therefore, from
the year ended 31 March 2009 onwards, the Company has elected to use a
model-based approach to value its residual investments. An external valuation
agent has reviewed the underlying pricing assumptions. The Company has used a
15% discount rate for the European and UK mortgage portfolios and a 20% discount
rate for the SME portfolios. These discount rates are applied to the
loss-adjusted cash flows. The Company received broker marks for all of its
investment grade bonds.
Changes in the balance sheet value of the residual portfolio between 30
September and 31 December 2009 totalled -EUR4.2 million. This was divided between
-EUR2.1 million of principal amortisation and fair value losses of -EUR2.1 million.
In relation to the investment grade bond portfolio, the balance sheet value
increased by EUR2.4 million. There were EUR1.9 million new purchases, fair value
gains of EUR1.3 million and principal amortisations of -EUR0.8 million. After
giving effect to these balance sheet changes in the quarter ended 31 December
2009, the NAV of the Company was EUR3.69 per share as at 31 December 2009 (versus
EUR3.75per share as at 30 September 2009).
The Company recorded total cash flows of EUR8.3 million in the quarter, of which
EUR6.5 million came from the investment portfolio, EUR1.2 million were received at
the expiry of the UK house price put option and a further EUR0.6 million were
received from the interest rate swaps the Company purchased to hedge against a
fall in interest rates.
The table below summarises the changes in balance sheet values of the Company's
investment portfolio by asset class:
+------------+----------+--------+--------+-----------------------------+------------------------------+
| Asset | 30 Sep | 31 Dec | Change | Cash | Cash |
| Class | 2009 | 2009 | to B/S | flows | flows |
| | B/S | B/S | Value | Received | Received |
| | Value1,2 | Value2 | Since | in the | in the |
| | (EURmm) | (EURmm) | 30 Sep | Quarter | Quarter |
| | | | 2009 | Ended | Ended |
| | | | (EURmm) | 31 Dec | 30 Sep |
| | | | | 2009 | 20093 |
| | | | | (EURmm) | (EURmm) |
+------------+----------+--------+--------+-----------------------------+------------------------------+
| UK | 6.6 | 7.0 | 0.4 | 1.3 | 1.0 |
| Mortgages | | | | | |
+------------+----------+--------+--------+-----------------------------+------------------------------+
| Euro | 56.6 | 52.9 | -3.7 | 2.6 | 2.5 |
| Mortgages | | | | | |
+------------+----------+--------+--------+-----------------------------+------------------------------+
| SME | 32.1 | 31.2 | -0.9 | 1.8 | 1.9 |
+------------+----------+--------+--------+-----------------------------+------------------------------+
| Investment | 9.3 | 11.8 | 2.4 | 0.8 | 0.3 |
| Grade | | | | | |
| Bonds | | | | | |
+------------+----------+--------+--------+-----------------------------+------------------------------+
| TOTAL4 | 104.6 | 102.8 | -1.8 | 6.5 | 5.8 |
+------------+----------+--------+--------+-----------------------------+------------------------------+
1. Balance sheet values as at 30 September 2009 are expressed using 31
December 2009 FX rates.
2. The balance sheet value figures for 30 September 2009 and 31 December
2009 include accrued interest.
3. Cash flows for 30 September 2009 are expressed using 31 December 2009 FX
rates.
4. The values for each column may not sum to the total due to rounding
differences.
Company Outlook
Over the coming months, the Company plans to continue its strategy of
selectively purchasing mis-priced bonds in the ABS markets. Given the rally in
AAA-rated ABS bonds, the Company will consider purchases in AA to BBB rated
bonds, and in particular will focus on opportunities in commercial
mortgage-backed bonds. Should bond prices for a part of the portfolio
increase, the Company may seek to sell certain assets and use the proceeds to
repay debt or make new investments.
The Company expects to identify further buying opportunities in 2010 as rating
downgrades of ABS bonds and capital pressures prompt selling by banks and other
financial institutions. Given the continued ability of the investment portfolio
to generate cash flow, the Company remains well-positioned to take advantage of
these opportunities.
There are some early signs of stabilisation in the Portuguese mortgage
portfolios; however, sustained stability depends on continued global economic
growth and a low interest rate environment. The Company expects default levels
to rise in its SME portfolios and has maintained default rate forecasts at a
higher level than actual performance. We caution, however, that slowing growth
or a return to recession remain possibilities.
The Company estimates cash balances will be approximately EUR16.5 million at 31
March 2010 and expects to reduce its outstanding debt to approximately EUR5.0
million following the 31 March 2010 quarter end, versus a target loan balance of
EUR25 million. The Company projects cash flow of approximately EUR4.5 million per
quarter for the coming quarters.
QUEEN'S WALK INVESTMENT LIMITED
Unaudited Condensed Consolidated Statement of Comprehensive Income
For the quarter ended 31 December 2009 and quarter ended 30 September 2009
+-------------------------------------+------+--------------+--------------+
| |Note | Quarter | Quarter |
| | | ended | ended |
| | | 31 December | 30 September |
| | | 2009 | 2009 |
+-------------------------------------+------+--------------+--------------+
| | | Euro | Euro |
+-------------------------------------+------+--------------+--------------+
| | | | |
+-------------------------------------+------+--------------+--------------+
| Interest income | 5 | 4,106,756 | 4,143,683 |
+-------------------------------------+------+--------------+--------------+
| (Losses)/gains on fair value | 4 | (2,375,133) | 627,299 |
| through profit or loss financial | | | |
| instruments | | | |
+-------------------------------------+------+--------------+--------------+
| | | 1,731,623 | 4,770,982 |
+-------------------------------------+------+--------------+--------------+
| | | | |
+-------------------------------------+------+--------------+--------------+
| Operating expenses | 6 | (979,731) | (978,049) |
+-------------------------------------+------+--------------+--------------+
| Finance costs | 5 | (119,116) | (158,278) |
+-------------------------------------+------+--------------+--------------+
| Net profit | | 632,776 | 3,634,655 |
+-------------------------------------+------+--------------+--------------+
| | | | |
+-------------------------------------+------+--------------+--------------+
| Profit per Ordinary Share | | | |
+-------------------------------------+------+--------------+--------------+
| Basic | 8 | Euro 0.02 | Euro 0.14 |
+-------------------------------------+------+--------------+--------------+
| Diluted | 8 | Euro 0.02 | Euro 0.14 |
+-------------------------------------+------+--------------+--------------+
| | | | |
+-------------------------------------+------+--------------+--------------+
| Weighted average Ordinary Shares | | | |
| outstanding | | Number | Number |
+-------------------------------------+------+--------------+--------------+
| Basic | 8 | 26,644,657 | 26,644,657 |
+-------------------------------------+------+--------------+--------------+
| Diluted | 8 | 26,644,657 | 26,644,657 |
+-------------------------------------+------+--------------+--------------+
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 Equity
For the quarter ended 31 December 2009 and quarter ended 30 September 2009
+-------------------------------+-------+-----------+-------------+-------------+
| | | | | |
| | | Share | Reserves | TOTAL |
| | | Capital | | |
+-------------------------------+-------+-----------+-------------+-------------+
| | Note | Euro | Euro | Euro |
+-------------------------------+-------+-----------+-------------+-------------+
| | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| Balance at 30 June 2009 | | - | 98,430,636 | 98,430,636 |
+-------------------------------+-------+-----------+-------------+-------------+
| | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| Net profit for the quarter | | - | 3,634,655 | 3,634,655 |
+-------------------------------+-------+-----------+-------------+-------------+
| Distribution to the Ordinary | 7 | - | (2,131,573) | (2,131,573) |
| Shareholders of the Company | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| Balance at 30 September 2009 | - | 99,933,718 | 99,933,718 |
+---------------------------------------+-----------+-------------+-------------+
| | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| Net profit for the quarter | | - | 632,776 | 632,776 |
+-------------------------------+-------+-----------+-------------+-------------+
| Distribution to the Ordinary | 7 | - | (2,131,573) | (2,131,573) |
| Shareholders of the Company | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| | | | | |
+-------------------------------+-------+-----------+-------------+-------------+
| Balance at 31 December 2009 | - | 98,434,921 | 98,434,921 |
+-------------------------------+-------+-----------+-------------+-------------+
Unaudited Condensed Consolidated Statement of Financial Position
As at 31 December 2009
+-------------------------------------+------+--------------+----------+--------------+
| |Note | 31 December | | 30 September |
| | | 2009 | | 2009 |
+-------------------------------------+------+--------------+----------+--------------+
| | | Euro | | Euro |
+-------------------------------------+------+--------------+----------+--------------+
| Non-current assets | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Investments at fair value through | 10 | 101,639,329 | | 103,272,053 |
| profit or loss | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| | | 101,639,329 | | 103,272,053 |
+-------------------------------------+------+--------------+----------+--------------+
| Current assets | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Cash and cash equivalents | | 13,741,922 | | 14,817,812 |
+-------------------------------------+------+--------------+----------+--------------+
| Derivative financial assets - | 10 | 343,900 | | 2,878,420 |
| options held for trading | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Derivative financial assets - | 12 | 2,671,501 | | 3,169,257 |
| unrealised gain on interest rate | | | | |
| swap agreements | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Other assets | 11 | 1,603,661 | | 1,614,789 |
+-------------------------------------+------+--------------+----------+--------------+
| | | 18,360,984 | | 22,480,278 |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Total assets | | 120,000,313 | | 125,752,331 |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Equity and liabilities | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Equity | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Reserves | 16 | 98,434,921 | | 99,933,718 |
+-------------------------------------+------+--------------+----------+--------------+
| | | 98,434,921 | | 99,933,718 |
+-------------------------------------+------+--------------+----------+--------------+
| Current liabilities | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Distribution payable | 7 | 2,131,573 | | 2,131,573 |
+-------------------------------------+------+--------------+----------+--------------+
| Other liabilities | 14 | 1,133,254 | | 1,659,718 |
+-------------------------------------+------+--------------+----------+--------------+
| | | 3,264,827 | | 3,791,291 |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Non-current liabilities | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Loans | 13 | 18,300,565 | | 22,027,322 |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Total liabilities | | 21,565,392 | | 25,818,613 |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
| Total equity and liabilities | | 120,000,313 | | 125,752,331 |
+-------------------------------------+------+--------------+----------+--------------+
| | | | | |
+-------------------------------------+------+--------------+----------+--------------+
Unaudited Condensed Consolidated Statement of Cash Flows
For the quarter ended 31 December 2009 and quarter ended 30 September 2009
+--------------------------------------+------+----------+--------------+----------+--------------+
| |Note | | Quarter | | Quarter |
| | | | ended | | ended |
| | | | 31 December | | 30 September |
| | | | 2009 | | 2009 |
+--------------------------------------+------+----------+--------------+----------+--------------+
| | | | Euro | | Euro |
+--------------------------------------+------+----------+--------------+----------+--------------+
| | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Net cash inflow from operating | 17 | | 4,743,622 | | 5,312,183 |
| activities | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Financing activities | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Net repayment of borrowings from | | | (3,726,757) | | (1,531,197) |
| loans | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Dividends paid to shareholders | 7 | | (2,131,573) | | (2,131,573) |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Cash flows from financing activities | | | (5,858,330) | | (3,662,770) |
+--------------------------------------+------+----------+--------------+----------+--------------+
| | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Net (decrease)/increase in cash | | | (1,114,708) | | 1,649,413 |
+--------------------------------------+------+----------+--------------+----------+--------------+
| | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Reconciliation of net cash flow to | | | | |
| movement in net cash | | | | |
+---------------------------------------------+----------+--------------+----------+--------------+
| Net (decrease)/increase in cash and | | | (1,114,708) | | 1,649,413 |
| cash equivalents | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Cash and cash equivalents at start | | | 14,817,812 | | 13,263,228 |
| of period | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Effect of exchange rate fluctuations | | | 38,818 | | (94,829) |
| on cash and cash | | | | | |
| equivalents | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
| Cash and cash equivalents at end of | | | 13,741,922 | | 14,817,812 |
| period | | | | | |
+--------------------------------------+------+----------+--------------+----------+--------------+
Unaudited Condensed Consolidated Statement of Cash Flows
For the quarter ended 31 December 2009 and quarter ended 30 September 2009
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 Company and its subsidiary. At 31 December 2009, the Company'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 condensed consolidated 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 2009.
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 Statement of Financial Position 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.
The Directors believe it is appropriate to adopt the going concern basis in
preparing the condensed consolidated quarterly report as, after due
consideration, the Directors consider that the Group has adequate resources to
continue in operational existence for the foreseeable future. Regarding the
ongoing funding (per notes 13 and 19) the Directors have taken into account the
current cash balance, the forecast cash inflows from the investments and
liquidity of the bond portfolio, the required financing repayments and operating
expenses, and consider the Company able to meet the required repayment of the
loan in accordance with the agreed schedule of repayments. In addition, the
Directors note the cash resources currently available (Euro 13.7m), of which
some will be used to pay the proposed dividend, which are sufficient to cover
normal operational costs and current liabilities.
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 2009, 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 and investment grade bonds 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 Consolidated Statement of Comprehensive Income.
The fair value of interest rate swaps is the estimated amount that the Group
would receive or pay to terminate the swap at the Statement of Financial
Position date, taking into account current interest rates and the current
creditworthiness of the swap counterparties.
The fair value of options is their quoted market price at the date of the
Statement of Financial Position. Broker marks are obtained for these positions.
The change in value is recorded in net gains/(losses) in the Consolidated
Statement of Comprehensive Income. 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 Group 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 Group 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.
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
Interest-bearing 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 Consolidated Statement
of Comprehensive Income using the effective interest rate method. Financing
costs associated with the issuance of financings are recognised in the
Consolidated Statement of Comprehensive Income 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 Statement of Financial Position date
are translated to Euro at the foreign exchange rate ruling at that date. Foreign
exchange differences arising on translation are recognised in the Consolidated
Statement of Comprehensive Income. 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
Consolidated Statement of Comprehensive Income 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.
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 2009 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.
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 Group has
relied 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 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
Consolidated Statement of Comprehensive Income 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
make 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 with sensitivities
in the Group's annual report and financial statements.
4. (Losses)/gains 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 | | Quarter |
| | | ended | | ended |
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+--------------------------------------+-+-------------+----------+--------------+
| | | Euro | | Euro |
+--------------------------------------+-+-------------+----------+--------------+
| Net realised gains/(losses) | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net realised gains/(losses) on asset | 202,200 | | (210,923) |
| backed securities and bonds | | | |
+----------------------------------------+-------------+----------+--------------+
| Net realised gains/(losses) on | | 349,119 | | (778,736) |
| options | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net realised losses on foreign | | (418,075) | | (73,309) |
| exchange instruments | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net realised gains/(losses) | | 133,244 | | (1,062,968) |
+--------------------------------------+-+-------------+----------+--------------+
| | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net unrealised gains/(losses) | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net unrealised (losses)/gains on | | (354,919) | | 878,307 |
| investments at fair value through | | | | |
| profit or loss | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net unrealised losses on interest | | (497,756) | | (68,476) |
| rate swap agreements | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net unrealised (losses)/gains on | | (1,694,520) | | 975,265 |
| options | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net unrealised gains/(losses) on | | 38,818 | | (94,829) |
| foreign bank balances | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net unrealised (losses)/gains | | (2,508,377) | | 1,690,267 |
+--------------------------------------+-+-------------+----------+--------------+
| | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Net realised and unrealised | | (2,375,133) | | 627,299 |
| (losses)/gains | | | | |
+--------------------------------------+-+-------------+----------+--------------+
5. Interest income and finance costs
The following table details interest income and finance costs from financial
assets and liabilities during the period ended:
+--------------------------------------+-+-------------+----------+--------------+
| | | Quarter | | Quarter |
| | | ended | | ended |
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+--------------------------------------+-+-------------+----------+--------------+
| | | Euro | | Euro |
+--------------------------------------+-+-------------+----------+--------------+
| Interest income | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Investments designated at fair value | | 4,104,448 | | 4,140,805 |
| through profit or loss upon initial | | | | |
| recognition | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Loans and receivables (including | | 2,308 | | 2,878 |
| cash and cash equivalents) | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Total interest income | | 4,106,756 | | 4,143,683 |
+--------------------------------------+-+-------------+----------+--------------+
+--------------------------------------+-+-------------+----------+--------------+
| Finance Costs | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Liabilities held at amortised cost: | | | | |
+--------------------------------------+-+-------------+----------+--------------+
| Interest on loan | | 119,116 | | 158,278 |
+--------------------------------------+-+-------------+----------+--------------+
| Total finance costs | | 119,116 | | 158,278 |
+--------------------------------------+-+-------------+----------+--------------+
6. Operating expenses
+------------------------------------+------+--------------+------------+--------------+
| |Note | Quarter | | Quarter |
| | | ended | | ended |
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+------------------------------------+------+--------------+------------+--------------+
| | | Euro | | Euro |
+------------------------------------+------+--------------+------------+--------------+
| | | | | |
+------------------------------------+------+--------------+------------+--------------+
| Investment management, custodian | | | | |
| and administration fees | | | | |
+------------------------------------+------+--------------+------------+--------------+
| Investment management fee | 18 | 442,339 | | 441,031 |
+------------------------------------+------+--------------+------------+--------------+
| Administration fee | 18 | 48,784 | | 49,442 |
+------------------------------------+------+--------------+------------+--------------+
| Custodian fee | 18 | 9,210 | | 9,210 |
+------------------------------------+------+--------------+------------+--------------+
| | | 500,333 | | 499,683 |
+------------------------------------+------+--------------+------------+--------------+
| Other operating expenses | | | | |
+------------------------------------+------+--------------+------------+--------------+
| Audit fees | | 42,849 | | 42,849 |
+------------------------------------+------+--------------+------------+--------------+
| Directors' fees payable to | | 60,939 | | 60,493 |
| Directors of Queen's Walk | | | | |
| Investment Limited | | | | |
+------------------------------------+------+--------------+------------+--------------+
| Directors' fees payable to | | 6,348 | | 6,301 |
| Directors of Trebuchet Finance | | | | |
| Limited | | | | |
+------------------------------------+------+--------------+------------+--------------+
| Legal fees | | 176,436 | | 176,438 |
+------------------------------------+------+--------------+------------+--------------+
| Pricing expenses | | 56,785 | | 56,785 |
+------------------------------------+------+--------------+------------+--------------+
| Other expenses | | 136,041 | | 135,500 |
+------------------------------------+------+--------------+------------+--------------+
| | | 479,398 | | 478,366 |
+------------------------------------+------+--------------+------------+--------------+
| | | | | |
+------------------------------------+------+--------------+------------+--------------+
| Total operating expenses | | 979,731 | | 978,049 |
+------------------------------------+------+--------------+------------+--------------+
The Group has no employees.
7. Dividends
The fourth interim dividend for the year ended 31 March 2009 of Euro 0.08 (2008:
Euro 0.15) per share was declared on 16 June 2009 and an amount of Euro
2,131,573 was paid on 17 July 2009.
The first interim dividend for the year ended 31 March 2010 of Euro 0.08 per
share was declared on 15 September 2009 and an amount of Euro 2,131,573 was paid
to shareholders on 16 October 2009.
The second interim dividend for the year ended 31 March 2010 of Euro 0.08 per
share was declared on 25 November 2009 and an amount of Euro 2,131,573 was paid
to shareholders on 8 January 2010.
A dividend of Euro 0.08 per share has been declared by the Directors for the
quarter ended 31 December 2009. The liability in respect of the third interim
dividend has not yet been recognised in the Consolidated Statement of Financial
Position of the Group for the quarter ended 31 December 2009 since this dividend
had neither been declared nor approved at the quarter end 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 31 December 2009, the solvency test was satisfied.
8. Profit per Ordinary Share
+---------------------------------+-----+--------------+----------+--------------+
| | | Quarter | | Quarter |
| | | ended | | ended |
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+---------------------------------+-----+--------------+----------+--------------+
| | | Euro | | Euro |
+---------------------------------+-----+--------------+----------+--------------+
| The calculation of the basic | | | | |
| and diluted earnings per | | | | |
| ordinary share is based on the | | | | |
| following data: | | | | |
+---------------------------------+-----+--------------+----------+--------------+
| Profit for the purposes of | | 632,776 | | 3,634,655 |
| basic earnings per ordinary | | | | |
| share being net loss | | | | |
| attributable to equity holders | | | | |
+---------------------------------+-----+--------------+----------+--------------+
| | | | | |
+---------------------------------+-----+--------------+----------+--------------+
| Weighted average number of | | 26,644,657 | | 26,644,657 |
| Ordinary Shares for the | | | | |
| purposes of basic earnings per | | | | |
| share | | | | |
+---------------------------------+-----+--------------+----------+--------------+
| | | | | |
+---------------------------------+-----+--------------+----------+--------------+
| Effect of dilutive potential | | | | |
| Ordinary Shares: | | | | |
+---------------------------------+-----+--------------+----------+--------------+
| Share options | | - | | - |
+---------------------------------+-----+--------------+----------+--------------+
| Weighted average number of | | 26,644,657 | | 26,644,657 |
| Ordinary Shares for the | | | | |
| purposes of diluted earnings | | | | |
| per share | | | | |
+---------------------------------+-----+--------------+----------+--------------+
There is no dilution as at 31 December 2009 or 30 September 2009, 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:
+---------------------------------------+-+-------------+----------+--------------+
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+---------------------------------------+-+-------------+----------+--------------+
| | | Euro | | Euro |
+---------------------------------------+-+-------------+----------+--------------+
| Asset-backed securities and bonds at | 101,639,329 | | 103,272,053 |
| fair value through profit or loss | | | |
+-----------------------------------------+-------------+----------+--------------+
| Options purchased held for trading | | 414,400 | | 2,973,630 |
+---------------------------------------+-+-------------+----------+--------------+
| Options written held for trading | | (70,500) | | (95,210) |
+---------------------------------------+-+-------------+----------+--------------+
| | | 101,983,229 | | 106,150,473 |
+---------------------------------------+-+-------------+----------+--------------+
+---------------------------------------+-+---------------+----------+---------------+
| Asset-backed securities and bonds | | | | |
+---------------------------------------+-+---------------+----------+---------------+
| Opening cost | | 249,055,698 | | 250,441,322 |
+---------------------------------------+-+---------------+----------+---------------+
| Purchases | | 1,914,988 | | 2,578,135 |
+---------------------------------------+-+---------------+----------+---------------+
| Realised gain/(loss) | | 202,200 | | (210,923) |
+---------------------------------------+-+---------------+----------+---------------+
| Principal payups | | 1,513,743 | | 1,388,468 |
+---------------------------------------+-+---------------+----------+---------------+
| Principal paydowns | | (4,908,736) | | (5,141,304) |
+---------------------------------------+-+---------------+----------+---------------+
| Closing cost | | 247,777,893 | | 249,055,698 |
+---------------------------------------+-+---------------+----------+---------------+
| Unrealised losses | | (146,138,564) | | (145,783,645) |
+---------------------------------------+-+---------------+----------+---------------+
| Asset-backed securities and bonds at | | 101,639,329 | | 103,272,053 |
| fair value | | | | |
+---------------------------------------+-+---------------+----------+---------------+
Concentration of credit risk
The Group is subject to concentration of credit risk in that the four largest
structures within the asset backed securities portfolio comprise approximately
38% (30 September 2009: 37.62%) of the total assets. The concentration of credit
risk is substantially unchanged compared to the prior quarter. Two of the
structures, comprising approximately 20% (30 September 2009: 21%) of its
asset-backed securities portfolio have had a temporary suspension in cash flows
from these structures as a result of prepayment rate triggers being breached.
The following options contracts were open as at 31 December 2009:
+--------------+------------+--------------------+----------+------------+--------+----------------+
| Counterparty |Expiration | Description | | Notional | Strike | Unrealised |
| | | | | Amount | price | Gains/(Losses) |
| | | | Currency | | | Euro |
+--------------+------------+--------------------+----------+------------+--------+----------------+
| Goldman | 29 Dec | EUR Call GBP Put | Euro | 10,000,000 | 0.9315 | (727,600) |
| Sachs | 2010 | | | | | |
+--------------+------------+--------------------+----------+------------+--------+----------------+
| Goldman | 29 Dec | EUR Call GBP Put | Euro | 10,000,000 | 1.300 | 99,500 |
| Sachs | 2010 | (Written Option) | | | | |
+--------------+------------+--------------------+----------+------------+--------+----------------+
| | | | | | | (628,100) |
+--------------+------------+--------------------+----------+------------+--------+----------------+
The following options contracts were open as at 30 September 2009:
+--------------+------------+--------------------+----------+------------+--------+------------+
| Counterparty | Expiration | Description | | Notional | Strike | Unrealised |
| | | | | Amount | price | Gains/ |
| | | | | | | (Losses) |
| | | | Currency | | | Euro |
+--------------+------------+--------------------+----------+------------+--------+------------+
| Credit | 05 Nov | Halifax HPI Put | Euro | 14,000,000 | 583.02 | 1,574,020 |
| Suisse | 2009 | option | | | | |
+--------------+------------+--------------------+----------+------------+--------+------------+
| Goldman | 29 Dec | EUR Call GBP Put | Euro | 10,000,000 | 0.9315 | (582,390) |
| Sachs | 2010 | | | | | |
+--------------+------------+--------------------+----------+------------+--------+------------+
| Goldman | 29 Dec | EUR Call GBP Put | Euro | 10,000,000 | 1.300 | 74,790 |
| Sachs | 2010 | (Written option) | | | | |
+--------------+------------+--------------------+----------+------------+--------+------------+
| | | | | | | 1,066,420 |
+--------------+------------+--------------------+----------+------------+--------+------------+
11. Other assets
+--------------------------------+-----+--------------+----------+---------------+
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+--------------------------------+-----+--------------+----------+---------------+
| | | Euro | | Euro |
+--------------------------------+-----+--------------+----------+---------------+
| Interest receivable on | | 1,184,232 | | 1,216,167 |
| investment portfolio | | | | |
+--------------------------------+-----+--------------+----------+---------------+
| Lehman claim | | 268,998 | | 268,915 |
+--------------------------------+-----+--------------+----------+---------------+
| Interest receivable on cash | | 150,431 | | 129,707 |
| and cash equivalents | | | | |
+--------------------------------+-----+--------------+----------+---------------+
| | | 1,603,661 | | 1,614,789 |
+--------------------------------+-----+--------------+----------+---------------+
The Directors consider that the carrying amount of other assets approximates
their fair value.
12. Derivative contracts
The following interest rate and balance guaranteed interest rate swaps were
unsettled at 31 December 2009.
+--------------------+--------------+-----------------+------------------+
| Termination Date | | Initial | Unrealised Gain |
| | Counterparty | Notional | Euro |
| | | Amount (GBP) | |
+--------------------+--------------+-----------------+------------------+
| 25 January, 2013 | Goldman | 451,431 | 15,848 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 30 October 2010 | Goldman | 388,684 | 2,119 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 October, 2011 | Goldman | 5,500,000 | 138,038 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 November, 2011 | Goldman | 1,300,000 | 30,545 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 25 January, 2013 | Goldman | 1,226,713 | 39,612 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 October, 2011 | Goldman | 3,000,000 | 69,134 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 12 September, 2011 | Goldman | 1,700,000 | 34,182 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 November, 2011 | Goldman | 1,100,000 | 21,314 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 27 March, 2011 | Goldman | 17,348,100 | 722,488 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 February, 2011 | Goldman | 10,424,462 | 394,976 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 January, 2011 | Goldman | 28,266,450 | 1,203,245 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| | | | 2,671,501 |
+--------------------+--------------+-----------------+------------------+
The following interest rate and balanced guaranteed interest rate swaps were
unsettled at 30 September 2009:
+--------------------+--------------+-----------------+------------------+
| Termination Date | Counterparty | Initial | Unrealised Gain |
| | | Notional | Euro |
| | | Amount (GBP) | |
+--------------------+--------------+-----------------+------------------+
| 25 January, 2013 | Goldman | 451,431 | 17,102 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 October, 2011 | Goldman | 5,500,000 | 153,611 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 November, 2011 | Goldman | 1,300,000 | 34,434 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 30 October, 2010 | Goldman | 416,768 | 2,454 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 25 January , 2013 | Goldman | 1,226,713 | 39,111 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 October, 2011 | Goldman | 3,000,000 | 69,046 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 12 September, 2011 | Goldman | 1,700,000 | 36,086 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 November, 2011 | Goldman | 1,100,000 | 22,292 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 27 March, 2011 | Goldman | 17,348,100 | 868,631 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 February, 2011 | Goldman | 11,150,877 | 487,899 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| 15 January, 2011 | Goldman | 28,963,861 | 1,438,591 |
| | Sachs | | |
+--------------------+--------------+-----------------+------------------+
| | | | 3,169,257 |
+--------------------+--------------+-----------------+------------------+
Since 30 June 2008, the Group entered into EUR interest rate swaps with Goldman
Sachs as detailed in the tables above. 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.
13. Loans
+------------------------------------+--+---------------+----------+--------------+
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+------------------------------------+--+---------------+----------+--------------+
| | | Euro | | Euro |
+------------------------------------+--+---------------+----------+--------------+
| Loans | | 18,300,565 | | 22,027,322 |
+------------------------------------+--+---------------+----------+--------------+
| | | 18,300,565 | | 22,027,322 |
+------------------------------------+--+---------------+----------+--------------+
On 27 November 2008 the Company negotiated amended terms on a reduced facility,
involving a flexible two year repayment schedule of the outstanding debt and
amendments to material change clauses to reduce refinancing risk . The Company
has committed to repay the outstanding balance of the facility by October 2011
(by March 2011 if Magellan 1 is refinanced), pursuant to an agreed loan
amortisation schedule and will not make any further draw downs.
In addition, 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 ("Applicable Percentage") and the value of the
investment portfolio plus cash (the "Borrowing Base"). As at 31 December 2009,
the Company's Borrowing Base is approximately Euro 49.9 million versus a loan
balance of Euro 18.3 million. At the end of each calendar quarter, the Company
has agreed a target loan amount ("Target Loan Amount") with the lenders. The
Company has also agreed to an Applicable Percentage for every quarter. The
Target Loan Amount and Applicable Percentage Schedule are detailed below:
+----------------------------+--+----------------------------+------------+
| Date | | Target | Applicable |
| | | Loan | Percentage |
| | | Amount | for |
| | | | Residuals |
+----------------------------+--+----------------------------+------------+
| 30 September 2009 | | 28,500,000 | 30% |
+----------------------------+--+----------------------------+------------+
| 31 December 2009 | | 27,000,000 | 27.5% |
+----------------------------+--+----------------------------+------------+
| 31 March 2010 | | 25,000,000 | 20% |
+----------------------------+--+----------------------------+------------+
| 30 June 2010 | | 12,000,000 | 20% |
+----------------------------+--+----------------------------+------------+
| 30 September 2010 | | 10,000,000 | 20% |
+----------------------------+--+----------------------------+------------+
| 31 December 2010 | | 0 | 20% |
+----------------------------+--+----------------------------+------------+
| 31 March 2011 | | 0 | 10% |
+----------------------------+--+----------------------------+------------+
The Applicable Percentage for the Company's investment grade bond portfolio will
be 50%, 40%, 30% and 15% for AA and above, A and above, BBB and above and BB and
above; rated bonds respectively. The Target Loan Amount will reduce by Euro11
million in the event that the Magellan 1 transaction is re-financed by the
originator, BCP Millennium, before June 2010. The Applicable Percentage for
residuals will reduce to 25% if the Magellan 1 transaction is re-financed by BCP
Millennium before 31 December 2009. The Company has committed to use a
percentage of its Free Cash (cash proceeds in a quarter less dividends and
operating expenses) to amortise the facility.
Prior to the Magellan 1 transaction being refinanced, 75% of the Company's Free
Cash will be used to repay the facility. After the Magellan 1 transaction is
called, 66% of the Free Cash will be used to repay the debt, and in this case
once the outstanding balance of the facility is below Euro 22 million, 50% of
the Free Cash will be used to repay the facility. If the outstanding balance of
the loan facility is less than the Target Loan Amount on the relevant date, the
dividend will be capped at Euro 2.25 million per quarter (or approximately a 19%
dividend yield on the share price as at 26 November 2008). If the outstanding
balance of the loan is greater than the Target Loan Amount, the dividend will be
capped at 8% on the share price prevailing at the end of each quarter. A failure
to meet the Target Loan Amount would not trigger an event of default. In the
event that the balance of the facility is greater than the Borrowing Base, the
Company will have 20 business days to remedy the breach. Failure to remedy the
breach would constitute an event of default. No such breaches occurred during
the period thereafter.
14. Other liabilities
+-------------------------------------+----------+--------------+-+--------------+
| | | 31 December | | 30 September |
| | | 2009 | | 2009 |
+-------------------------------------+----------+--------------+-+--------------+
| | | Euro | | Euro |
+-------------------------------------+----------+--------------+-+--------------+
| | | | | |
+-------------------------------------+----------+--------------+-+--------------+
| Interest payable | | 89,691 | | 117,469 |
+-------------------------------------+----------+--------------+-+--------------+
| Due to related parties - Investment | | 146,522 | | 143,741 |
| Manager (note 18) | | | | |
+-------------------------------------+----------+--------------+-+--------------+
| Payable for investments purchased | | - | | 734,336 |
+-------------------------------------+----------+--------------+-+--------------+
| Accrued expenses | | 897,041 | | 664,172 |
+-------------------------------------+----------+--------------+-+--------------+
| | | 1,133,254 | | 1,659,718 |
+-------------------------------------+----------+--------------+-+--------------+
Other liabilities principally comprise amounts outstanding in respect of
interest payable and ongoing costs. The Directors consider the carrying amount
of other liabilities approximates their fair value.
15. Share capital
Authorised shares
+-------------------------+------------+-----------+----------+------------+-----------+
| | 31 | 31 | | 30 | 30 |
| | December | December | | September | September |
| | 2009 | 2009 | | 2009 | 2009 |
+-------------------------+------------+-----------+----------+------------+-----------+
| | Number of | Euro | | Number of | Euro |
| | Ordinary | | | Ordinary | |
| | Shares | | | Shares | |
+-------------------------+------------+-----------+----------+------------+-----------+
| Ordinary shares of no | Unlimited | - | | Unlimited | - |
| par value each | | | | | |
+-------------------------+------------+-----------+----------+------------+-----------+
+-------------------------+------------+------------+----------+------------+----------+
| Issued and fully paid | | | | | |
+-------------------------+------------+------------+----------+------------+----------+
| Balance at beginning of | 26,644,657 | - | | 26,644,657 | - |
| period | | | | | |
+-------------------------+------------+------------+----------+------------+----------+
| Ordinary shares bought | - | - | | - | - |
| back during the quarter | | | | | |
+-------------------------+------------+------------+----------+------------+----------+
| Balance at end of | 26,644,657 | - | | 26,644,657 | - |
| period | | | | | |
+-------------------------+------------+------------+----------+------------+----------+
Between 30 September 2009 and 31 December 2009 the Company did not purchase and
cancel any of its Ordinary Shares through its buyback programme.
16. Reserves
+-----------------------------+--------------+----------+--------------+----------+--------------+
| | Quarter ended 31 December 2009 |
+-----------------------------+------------------------------------------------------------------+
| | Accumulated | | Capital | | Total |
| | Reserves | | Reserves | | Reserves |
+-----------------------------+--------------+----------+--------------+----------+--------------+
| | Euro | | Euro | | Euro |
+-----------------------------+--------------+----------+--------------+----------+--------------+
| | | | | | |
+-----------------------------+--------------+----------+--------------+----------+--------------+
| Balance at start of period | 92,261,218 | | 7,672,500 | | 99,933,718 |
+-----------------------------+--------------+----------+--------------+----------+--------------+
| Net profit for the period | 632,776 | - | - | | 632,776 |
+-----------------------------+--------------+----------+--------------+----------+--------------+
| Distribution to the | (2,131,573) | - | - | | (2,131,573) |
| ordinary Shareholders of | | | | | |
| the Company | | | | | |
+-----------------------------+--------------+----------+--------------+----------+--------------+
| Balance at end of period | 90,762,421 | | 7,672,500 | | 98,434,921 |
+-----------------------------+--------------+----------+--------------+----------+--------------+
+-----------------------------+--------------+----------+--------------+----------+-------------+
| | Quarter ended 30 September 2009 |
+-----------------------------+-----------------------------------------------------------------+
| | Accumulated | | Capital | | Total |
| | Reserves | | Reserves | | Reserves |
+-----------------------------+--------------+----------+--------------+----------+-------------+
| | | | Euro | | Euro |
| | Euro | | | | |
+-----------------------------+--------------+----------+--------------+----------+-------------+
| | | | | | |
+-----------------------------+--------------+----------+--------------+----------+-------------+
| Balance at start of period | 90,758,136 | | 7,672,500 | | 98,430,636 |
+-----------------------------+--------------+----------+--------------+----------+-------------+
| Net gain for the period | 3,634,655 | | - | | 3,634,655 |
+-----------------------------+--------------+----------+--------------+----------+-------------+
| Distribution to the | (2,131,573) | | - | | (2,131,573) |
| ordinary Shareholders of | | | | | |
| the Company | | | | | |
+-----------------------------+--------------+----------+--------------+----------+-------------+
| Balance at end of period | 92,261,218 | | 7,672,500 | | 99,933,718 |
+-----------------------------+--------------+----------+--------------+----------+-------------+
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 The Companies (Guernsey) Law, 1994, 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. In accordance with The Companies (Guernsey) Law, 1994
(as amended) (the "Companies Law"), 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 Companies
Law, including the buy back of Ordinary Shares and the payment of dividends.
Under Guernsey 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.
Following the introduction of the Companies (Guernsey) Law, 2008, the Group is
no longer required to maintain separate classes of reserves. As such, the
previously reported classes of reserves have been amalgamated into a single
class on the Consolidated Statement of Financial Position.
17. Notes to cash flow statement
+--------------------------------------------+--------------+----------+--------------+
| | Quarter | | Quarter |
| | ended | | ended |
| | 31 December | | 30 September |
| | 2009 | | 2009 |
+--------------------------------------------+--------------+----------+--------------+
| | Euro | | Euro |
+--------------------------------------------+--------------+----------+--------------+
| | | | |
+--------------------------------------------+--------------+----------+--------------+
| Net profit | 632,776 | | 3,634,655 |
+--------------------------------------------+--------------+----------+--------------+
| Adjustments for: | | | |
+--------------------------------------------+--------------+----------+--------------+
| Net realised (gains)/losses on bonds | (202,200) | | 210,923 |
+--------------------------------------------+--------------+----------+--------------+
| Net realised gains on matured options | (349,119) | | 778,736 |
+--------------------------------------------+--------------+----------+--------------+
| Net unrealised losses/(gains) on | 354,919 | | (878,307) |
| investments at fair value through profit | | | |
| or loss | | | |
+--------------------------------------------+--------------+----------+--------------+
| Unrealised losses on interest rate swap | 497,756 | | 68,476 |
| agreements | | | |
+--------------------------------------------+--------------+----------+--------------+
| Unrealised losses/(gains) on options | 1,694,520 | | (975,265) |
+--------------------------------------------+--------------+----------+--------------+
| Unrealised (gains)/losses on foreign | (38,818) | | 94,829 |
| exchange instruments | | | |
+--------------------------------------------+--------------+----------+--------------+
| | 2,589,834 | | 2,934,047 |
+--------------------------------------------+--------------+----------+--------------+
| | | | |
+--------------------------------------------+--------------+----------+--------------+
| Purchases of bonds | (1,914,988) | | (2,578,135) |
+--------------------------------------------+--------------+----------+--------------+
| Purchase of options | - | | 199,867 |
+--------------------------------------------+--------------+----------+--------------+
| Options matured | 1,189,119 | | - |
+--------------------------------------------+--------------+----------+--------------+
| Principal Payups | (1,513,743) | | (1,388,468) |
+--------------------------------------------+--------------+----------+--------------+
| Principal Paydowns | 4,908,736 | | 5,141,304 |
+--------------------------------------------+--------------+----------+--------------+
| | 2,669,124 | | 1,374,568 |
+--------------------------------------------+--------------+----------+--------------+
| | | | |
+--------------------------------------------+--------------+----------+--------------+
| Decrease in receivables | 11,128 | | 94,831 |
+--------------------------------------------+--------------+----------+--------------+
| (Decrease)/Increase in payables | (526,464) | | 908,737 |
+--------------------------------------------+--------------+----------+--------------+
| | (515,336) | | 1,003,568 |
+--------------------------------------------+--------------+----------+--------------+
| Net cash inflow from operating activities | 4,743,622 | | 5,312,183 |
+--------------------------------------------+--------------+----------+--------------+
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.
18. 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 2009, the Management Fee totalled
Euro 442,339 (30 September 2009: Euro 441,031), of which Euro 146,522 (30
September 2009: Euro 143,741) was outstanding at the period end, and the
Incentive Fee totalled Euro Nil (30 September 2009: 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 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 2010, 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 2009: Euro Nil) of
which Euro Nil (30 September 2009: 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.
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.
Investment Manager Options
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 2009, 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.
19. Significant Events during the period
On 2 October 2009 the Company paid back a further Euro 3,726,757 of the loan,
leaving a loan amount outstanding at 31 December 2009 of Euro 18,300,565.
20. Subsequent Events
Subsequent to 31 December 2009 the Company paid back a further Euro 9,657,598 of
the loan, leaving a loan outstanding amount at 9 March 2010 of Euro 8,642,967.
On 3 March 2010, the Company sold the Magellan 2 ABS portfolio at a price in
line with its 31 December 2009 valuation.
There have been no other events subsequent to 31 December 2009 which require
adjustment of or disclosure in the quarterly report or the notes thereto.
21. Comparative figures
The comparative figures are for the quarter ended 30 September 2009.
22. Unaudited Financial Statements
The financial statements contained in this report are unaudited.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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