Real Est.cred Regulatory News (RECI)

4 Sep 2007 07:02

Queen's Walk Investment Limited04 September 2007 4 September 2007 Queen's Walk Investment Limited Preliminary Results for the Quarter Ended 30 June 2007 Queen's Walk Investment Limited ("Queen's Walk") is a Guernsey-incorporatedinvestment company listed on the London Stock Exchange. Queen's Walk investsprimarily in a diversified portfolio of subordinated tranches of asset backedsecurities, including the unrated "equity" or "first loss" residual incomepositions typically retained by the banks or other financial institutions whichhave originated the loan assets that collateralise a securitisation transaction.The Company makes such investments where its investment manager, Cheyne CapitalManagement (UK) LLP ("Cheyne Capital"), considers the coupon or cash flows fromthe investment to be attractive relative to the credit exposure of theunderlying asset collateral. For more information regarding Queen's Walk,please visit www.queenswalkinv.com or call Caroline Villiers: +44 20 7153 1521. Highlights • Operating income for the quarter of €12.3 million, equating to operating income per share of €0.30. • Distributable income in the first quarter in the amount of €8.8 million or €0.22 per share compared to €9.6 million or €0.24 per share as at 31 March 2007. • Net asset value decreased to €7.01 per share as at 30 June 2007 from €7.24 per share as at 31 March 2007. • The Board of Directors has declared an interim dividend of €0.15 per share for the first quarter. • Fair value write-downs of the Company's investment portfolio in the first quarter totalled €10.9 million or approximately 3.0% of the adjusted 31 March 2007 investment portfolio. These write-downs resulted principally from further deterioration in the US sub-prime market and wider market discount rates applied to the Company's three ABS CDO residual positions. • The fair value of the Company's investments exposed, directly or indirectly, to the US sub-prime market accounted for €12.8m or 4.2% of the gross asset value of the investment portfolio. • The weighted average yield of the Company's investment portfolio as at 30 June 2007 was 13.3% in local currency terms compared to 13.4% as at 31 March 2007. • The Company's net leverage has been reduced from 25.9% as at 31 March 2007 to 3.0% as at 30 June 2007. • The Company has secured a four year term financing facility and continues to have cash available for the purpose of buying back shares and to fund the proposed tender offer for which it is seeking shareholder approval. • 991,354 ordinary shares have been purchased for cancellation. • At the AGM held yesterday, the Company obtained authority from its shareholders to purchase up to a further 14.99 per cent of its issued share capital (the "General Authority"). • The Company has proposed a tender offer to purchase at least 10% of the Company's share capital. Details of the tender offer will be made available shortly. • The Company will not seek to buy back more than 24.99% of its issued share capital through any combination of the General Authority and the proposed tender offer without first obtaining further shareholder approval. Commenting on the results, Tom Chandos, Chairman, said: "The cashflows receivedfrom the portfolio allow the Company to deliver continued dividends toshareholders, as well as the ability to continue repurchasing shares." Financial Highlights Total Total Revenue Fair value Quarter ended Revenue return Fair value Quarter return gains and 30 June 2007 gains and ended losses losses 31 March 2007Operating Income 12,307,088 - 12,307,088 16,994,916 - 16,994,916Gains and losses onfair value throughprofit or loss financial instruments - (11,527,045) (11,527,045) - (110,558,833) (110,558,833) 12,307,088 (11,527,045) 780,043 16,994,916 (110,558,833) (93,563,917) Operating Expenses (2,668,568) - (2,668,568) (2,700,658) - (2,700,658)Finance Costs (1,336,435) - (1,336,435) (2,541,463) - (2,541,463)Net profit / (loss) 8,302,085 (11,527,045) (3,224,960) 11,752,795 (110,558,833) (98,806,038)Distributable 8,765,290 9,596,406income1,2Distributable income €0.22 €0.24per share Total Assets €360,911,412 €427,104,698Total Liabilities €76,075,800 €132,951,013Equity Capital €284,835,612 €294,153,685NAV per share €7.01 €7.24 1. Net profit from investments before deduction of net fair value lossesthrough profit or loss. For the quarter ended 31 March 2007, the distributableincome includes -€2,156,389 of f/x gains and losses. For the quarter ended 30June 2007, the distributable income includes €463,205 of f/x gains and losses. 2. Refer to Note 3 of the accounts for further details on the Company'sdistribution policy. First Quarter Dividend The Board of Directors has declared an interim dividend for the quarter ended 30June 2007 of €0.15 per share payable on 8 October 2007 to shareholders of recordon 14 September 2007. Conference Call A conference call to review the Company's financial results for the quarterended 30 June 2007 will take place at 9:30 A.M. London time on 4th September2007. The conference call can be accessed by dialing +44 (0)20 7806 1962 tenminutes prior to the scheduled start of the call. A results presentation will beavailable on the Queen's Walk website (www.queenswalkinv.com). A webcast of the conference call will also be available on a listen-only basisat www.queenswalkinv.com. Please allow extra time prior to the call to visitthe site and download the necessary software required to listen to the internetbroadcast. A replay of the webcast will be available for three months followingthe call. For further information please contact - Investor Relations: Caroline Villiers +44 (0) 20 7153 1521 About the Company Queen's Walk Investment Limited is a Guernsey-incorporated investment companylisted on the London Stock Exchange. Queen's Walk invests primarily in adiversified portfolio of subordinated tranches of asset backed securities,including the unrated "equity" or "first loss" residual income positionstypically retained by the banks or other financial institutions which haveoriginated the loan assets that collateralise a securitisation transaction. TheCompany makes such investments where its investment manager, Cheyne CapitalManagement (UK) LLP, considers the coupon or cash flows from the investment tobe attractive relative to the credit exposure of the underlying assetcollateral. The Company believes that its investment focus provides equityinvestors with exposure to a relatively new investment opportunity in this assetclass. The content of this announcement includes statements that are, or may be deemedto be, "forward-looking statements". These forward-looking statements can beidentified by the use of forward-looking terminology, including the terms"believes", "estimates", "anticipates", "expects", "intends", "considers","may", "will" or "should". By their nature, forward-looking statements involverisks and uncertainties and readers are cautioned that any such forward-lookingstatements are not guarantees of future performance. The Company's actualresults and performance may differ materially from the impression created by theforward-looking statements and should not be relied upon. The Company undertakesno obligation to publicly update or revise forward-looking statements, except asmay be required by applicable law and regulation (including the Listing Rules). Portfolio Review As at 30 June 2007, the Company's portfolio of UK mortgage, European mortgageand SME residual investments comprised 93.8% of the gross-asset value of theCompany's investment portfolio. The Company's investments exposed to the USsub-prime market, firstly, through a mortgage-backed residual position andsecondly, through two CDOs collateralised by asset pools containing US sub-primemortgage-backed bonds, accounted for 4.2% of the gross asset value of theCompany's investment portfolio. A CDO, backed by US leveraged loans, accountsfor the balance of the portfolio (2.0% of the gross asset value of the Company'sinvestment portfolio). The cash generative capability of the portfolio hasagain been demonstrated with €22.3 million of cash proceeds being received inthe quarter ended 30 June 2007. While the current market volatility may have anegative impact on the fair value of the Company's portfolio in future periods,the cash generative capability of the Company will not be affected by changes inmarket discount rates. The Company's net leverage has been reduced to 3.0% as at 30 June 2007 from25.9% as at 31 March 2007. This reduction in leverage resulted from theapplication of both the proceeds of asset sales which the Company has disclosedpreviously, and the cash flows from the Company's investment portfolio. Inaddition to reducing leverage, the Company has also reduced financing risk sincethe end of the quarter by replacing short-term repo financing arrangements witha four-year, €135.0 million financing facility arranged and placed by DeutscheBank. As at 31 August 2007, the Company had €31.2 million of cash on thebalance sheet and has drawn €45 million against its financing facility. Investment Portfolio UK Mortgage Investments (35.5% of GAV) No significant changes to the pricing assumptions of the Company's UKmortgage-backed residual investments were made in the quarter. After givingeffect to cash flows received in the quarter and associated principalamortisations, there has been no material change to the fair value of theseinvestments as at 30 June 2007. Significant changes were made to prepayment assumptions in the quarter ended 31March 2007 to reflect observed changes in the prepayment behaviour of borrowersexiting their discount interest rate period. The prepayment data received in thequarter has been consistent with those revised prepayment assumptions. While recent UK interest rate rises may still have a future impact on the growthof house prices in particular regions, the Company's UK mortgage residualinvestments have benefited from approximately 1.5 to 3.0 years (depending onwhen a particular residual has been purchased) of house price appreciation.Default rates observed in the quarter were in line with expectations, and giventhe house price appreciation in the portfolio we expect losses to remain withinexpectations. European Mortgage Investments (28.7% of GAV) With respect to the European mortgage-backed residual portfolio, thefundamentals underlying the performance of these investments remain sound.After giving effect to cash flows received in the quarter and associatedprincipal amortisations, there has been no material change to the fair value ofthese investments as at 30 June 2007. Notwithstanding the changes in Portuguese and Italian legislation governingprepayment charges, we have not yet observed a significant change in borrowerprepayment behaviour associated with the Company's mortgage portfolios. Defaultexperience in these investments has been in line with expectations. Recoveryrates on the few loans that have defaulted have also been in line withexpectations. SME Investments (14.5% of GAV) The Company's portfolio of SMEs residual investments is performing in line withor better than expectations. After giving effect to cash flows received in thequarter and associated principal amortisations, there has been no materialchange to the fair value of these investments as at 30 June 2007. The observed default rates for the Company's SME portfolios remain in line withexpectations. Furthermore, the expected default rates for the Company's SMEportfolios, based on the most recent credit scores for the underlying companies,are also in line with original pricing assumptions. CDO Investments (4.0% of GAV) The Company holds residual positions in three ABS CDOs managed by CheyneCapital, two of which are exposed to US mortgage assets, Cheyne High Grade CDO,Ltd ("High Grade CDO") and Cheyne ABS Investments l PLC ("ABS Investments l")and one, which is backed by US CLO bonds, Cheyne CLO Investments l Ltd. ("CLOInvestments l"). The percentage of the collateral exposed to the US sub-primemarket in the High Grade CDO and ABS Investments I is approximately 56.9% and63.6%, respectively. CLO Investments I is backed by AA- to BBB- rated US CLO bonds. The performanceof this collateral has exceeded original pricing assumptions and two of thebonds in the portfolio have been upgraded from BBB to A and AA, respectively.There have been no downgrades or negative watch warnings on any of the bonds inthe portfolio. The cash generative ability of the residual investment remainspositive and is in line with expectations. High Grade CDO, Ltd. is a CDO backed by AAA to A-rated ABS bonds and ABSInvestments I is a CDO backed by the mezzanine tranches of US ABS CDOs(including US RMBS CDOs). As at 30 June 2007, the credit performance of HighGrade CDO had been positive, with three rating upgrades and no negative creditactions on the bonds contained in its portfolio. However, subsequent to thequarter end, the continued deterioration of the US sub-prime market has affectedthe credit quality of two bonds in the underlying portfolio. The expectedcashflows and the fair value of the residual have been adjusted accordingly. The credit performance of ABS Investments I has been stable. Since inception,seven of the bonds in the portfolio have been upgraded and two have positiverating watch actions. On 3 August 2007, Fitch Ratings downgraded one asset inthe ABS Investments I portfolio (ACA ABS 2003-2 A3) from A to BBB-. On 31 July2007, Standard and Poor's affirmed its rating of A for this same bond. The market values of the ABS CDO residuals have been adversely affected by therecent volatility in the ABS markets. In the quarter ended 30 June 2007, theaggregate fair value of these assets has reduced by 36.7% since 31 March 2007. US Mortgage Investment (1.2% of GAV) The Company retains exposure to one US mortgage-backed residual investment. Inlight of further evidence of continued deterioration in the US housing market,valuation assumptions regarding cumulative losses and the timing of losses wererevised in the quarter ended 30 June 2007. The fair value of the investment hasreduced by 52.7% since 31 March 2007. The cumulative loss assumption for theresidual position has been increased by 27.8% as a result of continuedsignificant weakness in the US sub-prime market since 31 March 2007. While theCompany continues to receive cash flows from this investment, the total cashflows we expect to receive over the expected life of the investment have beenreduced by 22.0%. Portfolio Valuation In accordance with the Company's valuation procedures, the fair value of theCompany's investments has been evaluated on the basis of performance, observablemarket data and the Investment Manager's expectations regarding future trends.After giving effect to the fair value write-downs taken in the quarter, the NAVof the Company has decreased to Euro 7.01 per share as at 30 June 2007 from Euro7.24 per share as at 31 March 2007 (a decrease of 3.2%). The table below summarises the changes in fair values of the Company'sinvestment portfolio by asset class: Asset Class 31 March 2007 30 June 2007 Fair Value % Change to Cashflows Cashflows Fair Value2 (• Change Since 31 March 2007 Received in the Received in the Fair Value1,2 • mn) 31 March 2007 (• Fair Value3 Quarter Ended Quarter Ended mn) mn) 3 31 March 2007 30 June 2007 (• (•mn) mn)UK Mortgages 133.00 128.26 -4.75 -3.6% 10.03 12.77Euro Mortgages 106.58 103.66 -2.92 -2.7% 4.70 4.73SME 52.92 52.34 -.58 -1.1% 3.07 3.06ABS CDO 22.52 14.26 -8.26 -36.7% 0.93 1.14US Mortgages 9.40 4.44 -4.95 -52.7% 2.30 .58Cash and 34.90 56.69 21.79 62.4%Other CashEquivalentsTOTAL 359.32 359.64 0.32 0.1% 21.02 22.28 1. The fair value of the portfolio as at 31 March 2007 excludes the fairvalue of the six residuals that were sold in the quarter ended 30 June 2007 andSouthern Pacific Financing 06-A plc which was sold on 30 March 2007. 2. The fair value figures for 31 March 2007 and 30 June 2007 includeaccrued income and, in the case of the UK mortgage residuals, the value of theinterest rate swaps. 3. Fair value changes since 31 March 2007 includes principalamortisations of the residual as a result of cash flows received in the quarter. Portfolio Breakdowns A breakdown of the Company's investment portfolio by jurisdiction (by referenceto underlying asset originator) is set out below. Percentages for each assetclass are in relation to the gross asset value of the Company's investmentportfolio. To view the full text of this press release including pie charts, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/2312d_1-2007-9-4.pdf A breakdown of the Company's investment portfolio by asset type (by reference tounderlying asset collateral) is set out below. Percentages for each asset classare in relation to the gross asset value of the Company's investment portfolio. To view the full text of this press release including pie charts, paste the following link into your web browser: http://www.rns-pdf.londonstockexchange.com/rns/2312d_1-2007-9-4.pdf Share Repurchases The Company began purchasing its shares on 18 July 2007. As of 31 August 2007,the Company purchased 991,354 shares for cancellation at an average price of€5.04 per share. Though the share buybacks have been accretive to NAV, thenumber of shares which the Company has been able to repurchase has beenconstrained by applicable limits on the number of shares that can be purchasedon any particular day and by the price at which the Company can repurchaseshares. The Company's shares continue to trade at a discount to NAV and the Company haselected to repurchase its shares via a tender offer. At an EGM held on 3September 2007, independent shareholders approved the waiver from Rule 9 of theCity Code on Takeovers and Mergers in respect of repurchases of up to 24.99% ofthe Company's issued share capital. Accordingly, the Company will be entitledto purchase up to 24.99% of its ordinary shares pursuant to a combination of theGeneral Authority and the proposed tender offer. The Company is committed tobuying not less than 10% of its current issued share capital under the tenderoffer. Full details of the tender offer will be sent to shareholders shortly. While the share price trades at a material discount to NAV, the Company believesit is in the best interests of shareholders to continue with the tender offerand share buy-backs. Strategy and Market Outlook The current volatility in the ABS markets is likely to persist for the comingmonths. The availability of the capital to purchase ABS debt securities hassignificantly reduced in the past few weeks and the magnitude of this reductionhas been sufficiently large to affect historically stable funding platforms.Prices for European ABS securities are increasingly trading on technicals drivenby one way supply and demand dynamics. Generally, prices for European and UKresiduals have not been affected by this market volatility, however the outlookin the coming months remains highly uncertain and events outside the control ofthe Company could have a material impact on the fair value of the Company'sportfolio. The current volatility in the ABS markets offers challenges as well assubstantial opportunities for the Company. As liquidity in the European marketsreduces in the coming months, there will be more opportunities for the Companyto invest its capital in asset backed mezzanine and equity investments withattractive risk return profiles. ABS investors with sufficient capital andstable financing platforms should be well positioned to take advantage of thedislocation in market prices. In the UK, we expect that the flow of mortgage-backed residuals will continue asa large number of mortgage originators rely on the sale of residuals as a keypart of their financing and capital management strategies. In the short-term theavailability of residuals may be limited as the volume of mortgage loans isreduced as a result of higher financing costs in the ABS markets. However, asand when liquidity returns to the ABS markets, the increased competition in theUK mortgage market will result in more originators selling UK residualpositions. The Company is aware of several originators who are waiting for thecurrent dislocation in the European ABS markets to subside before selling theirmortgage residuals. This will result in either a large supply of residualsappearing at the same time or some originators being forced to sell some oftheir residuals at significant discounts to return capital into their ownbusinesses. The imbalance between the supply of mortgage residuals and the lackof risk capital will return pricing power to residual investors. The pricing of European prime mortgage residuals remains tight as sellers ofthese residuals continue to have strong demand from smaller European banks andfinancial institutions. Given the continued uncertainty around changes toprepayment rates, the Company is unlikely to increase its exposure by purchasingresiduals at current markets prices. The Company's SME portfolio continues to perform in line with expectations.Where there is an opportunity to increase exposure to this asset class atattractive rates of return the Company may do so. The Company is seeing an increasing number of attractive investmentopportunities in the European and UK specialised finance area as liquidity inthe asset-backed markets is reduced. Investments in this area are typicallystructured as mezzanine loan facilities secured against granular asset poolswith a warrant or equity participation to provide the potential for NAVaccretion. The Investment Manager is well positioned in terms of availablecapital to take advantage of these opportunities. Following completion of the proposed tender offer, the Company will seek to makethe best use of its capital either through purchasing its own shares or bymaking new investments. Unaudited Consolidated Income StatementFor the quarter ended 30 June 2007 Total Total Revenue Fair value Quarter Revenue Fair value Quarter ended return gains and ended 30 return gains and 31 March 2007 Note losses* June 2007 losses* Euro Operating income 12,307,088 - 12,307,088 16,994,916 - 16,994,916 Gains and losses on fair - (11,527,045) (11,527,045) - (110,558,833) (110,558,833)value through profit or loss financial instruments* 12,307,088 (11,527,045) 780,043 16,994,916 (110,558,833) (93,563,917) Operating expenses 5 (2,668,568) - (2,668,568) (2,700,658) - (2,700,658) Finance costs 6 (1,336,435) - (1,336,435) (2,541,463) - (2,541,463) Net Profit/(loss) 8,302,085 (11,527,045) (3,224,960) 11,752,795 (110,558,833) (98,806,038) Loss per Ordinary Share Basic Euro (0.079) Euro (2.432)Diluted Euro (0.079) Euro (2.432) Weighted average Ordinary Number NumberShares outstanding Basic 40,620,756 40,620,756Diluted 40,620,756 40,620,756 All items in the above statement are derived from continuing operations. All income is attributable to the Ordinary Shareholders of the Company. Unaudited Consolidated Statement of Changes in Shareholders' EquityFor the quarter ended 30 June 2007 Share Share Other Reserve Capital Accumulated Total Capital Premium Reserve Profits Euro Euro Euro Euro Euro Euro Balance at 1 April 2007 - - 384,678,304 7,672,500 (98,197,119) 294,153,685 Net loss for the quarter - - - - (3,224,960) (3,224,960) Transfers from distributable - - (12,186,226) - 12,186,226 -reserves to accumulatedprofits in respect ofdividends paid/payable Distribution to the Ordinary - - - - (6,093,113) (6,093,113)Shareholders of the Company Balance at 30 June 2007 - - 372,492,078 7,672,500 (95,328,966) 284,835,612 Unaudited Consolidated Balance SheetAs at 30 June 2007 30 June 2007 31 March 2007 Euro EuroNon-current assetsInvestments at fair value through profit or loss 297,198,144 366,743,454 Current assetsCash and cash equivalents 56,685,553 22,026,122Other assets 7,027,715 38,335,122 63,713,268 60,361,244 Total assets 360,911,412 427,104,698 Equity and liabilities EquityShare capital - -Share premium account - -Other reserve 372,492,078 384,678,304Capital reserve in respect of share options 7,672,500 7,672,500Accumulated losses (95,328,966) (98,197,119) 284,835,612 294,153,685Current liabilitiesRepurchase agreements 65,682,339 119,773,090Distribution payable 6,093,113 9,342,774Other liabilities 4,300,348 3,835,149Total liabilities 76,075,800 132,951,013 Total equity and liabilities 360,911,412 427,104,698 Notes to the Unaudited Financial Statements 1. General information Queen's Walk Investment Limited (the "Company") was registered on 6 September2005 with registered number 43634 and is domiciled in Guernsey, Channel Islands.The Company commenced its operations on 8 December 2005. The Company is aclosed-ended investment company with limited liability formed under TheCompanies (Guernsey) Law, 1994 and its Ordinary Shares are listed on the LondonStock Exchange. The registered office of the Company is Dorey Court, AdmiralPark, St Peter Port, Guernsey, GY1 3BG, Channel Islands. "Group" is defined asthe Company and its subsidiary. At 30 June 2007, the Company's only subsidiarywas Trebuchet Finance Limited. The Company's investment objective is to preserve capital and provide stablereturns to Shareholders in the form of quarterly dividends. It seeks to achievethis by investing primarily in a diversified portfolio of tranches ofasset-backed securities ("ABS") where the Investment Manager considers that thecoupon or cash flows on the tranche are attractive relative to the underlyingcredit. These are and will be, in most cases, below investment grade or unratedand do or will, in many cases, represent the residual income positions typicallyretained by the originator of a securitisation transaction as the "equity" or "first loss" position. The Group's investment management activities are managed by its InvestmentManager, Cheyne Capital Management Limited (the "Investment Manager"), aninvestment management firm authorised and regulated by the Financial ServicesAuthority. The Company has entered into an Investment Management Agreement (the"Investment Management Agreement") under which the Investment Manager managesits day-to-day investment operations, subject to the supervision of theCompany's Board of Directors. The Company has no direct employees. For itsservices, the Investment Manager receives a monthly management fee (whichincludes a reimbursement of expenses) and a quarterly performance-related fee.The Company has no ownership interest in the Investment Manager. The Company isadministered by Kleinwort Benson (Channel Islands) Fund Services Limited (the "Administrator"). Investors Fund Services (Ireland) Limited (A State StreetCompany) provide certain administration services to the Company in its capacityas sub-administrator. 2. Significant accounting policies Basis of preparation The quarterly report has been prepared using accounting policies consistent withInternational Financial Reporting Standards ("IFRS"). The same accountingpolicies, presentation and methods of computation are followed in this report asapplied in the Company's latest annual audited financial statements dated 31March 2007. The quarterly report of the Group is prepared on the historical cost oramortised cost basis except that the following assets and liabilities are statedat their fair value: derivative financial instruments, financial instrumentsheld for trading and financial instruments classified or designated as fairvalue through profit or loss. The majority of the Company's investments are financial instruments that areclassified as fair value through profit or loss. Where bid prices are notavailable from a third party in a liquid market, the fair value of the financialinstrument is estimated using pricing models incorporating discounted cash flowtechniques. These pricing models apply assumptions regarding asset-specificfactors and economic conditions generally, including delinquency rates,prepayment rates, default rates, maturity profiles, interest rates and otherfactors that may be relevant to each financial asset. Where such pricing modelsare used, assumptions are reviewed and updated on the basis of actualperformance data as it is received and on the basis of market conditions as atthe balance sheet date. 2. Significant accounting policies (continued) Basis of preparation (continued) This quarterly report is presented in Euros because that is the currency of theprimary economic environment in which the Group operates. The functionalcurrency of the Group is also considered to be Euros. Basis of consolidation Subsidiaries are entities controlled by the Company. Subsidiaries are includedin the consolidated quarterly report from the date that control commences untilthe date that control ceases. At 30 June 2007, the Group is made up of theCompany and its only subsidiary, Trebuchet Finance Limited. In accordance with the Standing Interpretations Committee Interpretation 12"Consolidation-Special Purpose Entities" ("SIC 12"), the Company consolidatesonly entities over which control is indicated by activities, decision making,benefits and residual risks of ownership. In accordance with SIC 12 the Companydoes not consolidate an SPE in which it holds less than a substantial interestin the residual income position. Where it holds more than a substantialinterest, it does not consolidate the SPE where the residual income positionrepresents only a small part of the gross assets of the SPE and the Company wasneither involved in the establishment of the SPE or the origination of theassets owned by the SPE, on the basis that the Company is not exposed to themajority of the risks and benefits of the assets owned by the SPE, providedcontrol 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 whichthe Company exercises control and its accounts are therefore included in theconsolidated quarterly report of the Group. The Company does not consolidateany of the SPEs in which it holds a residual income position as it is notexposed to the majority of the risks and benefits of the assets owned by therelevant SPEs and does not control any of them. Investments Investments in residual interests are recognised initially at their acquisitioncost (being fair value at acquisition date) as debt securities. Thereafter theyare re-measured at fair value and are designated as fair value through profit orloss investments in accordance with the Amendment to International AccountingStandard 39 ("IAS 39") Financial Instruments: Recognition and Measurement-TheFair Value Option, as the Company is an investment company whose business isinvesting in financial assets with a view to profiting from their total returnin the form of interest and changes in fair value. Financial assets classified as at fair value through profit or loss arerecognised/derecognised by the Group on the date it commits to purchase/sell theinvestments in regular way trades. Cash and cash equivalents Cash and cash equivalents includes amounts held in interest bearing accounts andoverdraft facilities. Derivative financial instruments Derivative financial instruments used by the Group to hedge its exposure toforeign exchange and interest rate risks arising from operational, financing andinvestment activities that do not qualify for hedge accounting are accounted foras trading instruments. The Group may also enter into credit default or totalreturn swap arrangements where the underlying asset or assets would otherwise bewithin the Group's investment policy in order to obtain substantially the sameeconomic exposure to the returns and risks associated with holding suchunderlying asset or assets. Derivative financial instruments are recognised initially at fair value.Subsequent to initial recognition, derivative financial instruments are statedat fair value. The gain or loss on remeasurement to fair value is recognisedimmediately in the income statement. 2. Significant accounting policies (continued) Derivative financial instruments (continued) Fair value of forward exchange contracts is their quoted market price at thebalance sheet date, being the present value of the quoted forward price. Thechange in value is recorded in net gains/(losses) in the income statement.Realised gains and losses are recognised on the maturity of a contract, or whena contract is closed out and they are transferred to realised gains or losses inthe income statement. The fair value of interest rate swaps is the estimated amount that the Groupwould receive or pay to terminate the swap at the balance sheet date, takinginto account current interest rates and the current creditworthiness of the swapcounterparties. Total return swap agreements and credit default swap agreements are fair valuedon the date of valuation based upon the underlying market value of the referenceasset using the approach explained under fair value. The change in value isrecorded in net gains/(losses) in the income statement. Realised gains andlosses are recognised on the maturity of a contract, or when a contract isclosed out and they are transferred to realised gains or losses in the incomestatement. Fair value All financial assets carried at fair value are initially recognised at fairvalue and subsequently re-measured at fair value based on bid prices where suchbids are available from a third party in a liquid market. If bid prices areunavailable, the fair value of the financial asset is estimated using pricingmodels incorporating discounted cash flow techniques. These pricing models applyassumptions regarding asset-specific factors and economic conditions generally,including delinquency rates, prepayment rates, default rates, maturity profiles,interest rates and other factors that may be relevant to each financial asset. With regard to residual income positions, historical performance and observablemarket data is analysed to determine the average level of these factors andtheir volatility over time. These assumptions are typically derived byreference to the historical delinquencies, defaults, recoveries and prepaymentsactually realised by the originator of the underlying assets and any empiricaldata available that may be available in respect of any of these factors for theparticular asset class. The carrying value of a residual income position at any given measurement dateafter the Group's initial acquisition of the asset reflects repayments ofprincipal in accordance with the effective interest method. This revisedcarrying value (adjusted to account for the accrual of interest and principalpaydowns) is subject to further adjustment on the basis of market conditions andother factors that are likely to affect the fair value of the asset. Whereactual performance data regarding defaults, delinquencies and prepaymentsreceived in respect of a given asset is markedly different from the default,delinquency and prepayment assumptions incorporated in the pricing model for theasset, the assumptions are revised to reflect this data and the pricing model isupdated accordingly. In addition to the actual performance data observed inrespect of a particular asset, market factors are also taken into account withinthe model. Dealer marks (where available) and any other available indicatorsare assessed to determine whether or not the market is attributing higher orlower default, delinquency or prepayment expectations to similar assets indetermining whether or not the assumptions incorporated in the pricing modelremain reasonable. Where the fair value of the investment is written down dueto changes in assumptions and expected cash flows, the change in the fair valueis taken to the income statement following the reassessment of the cash flowsdiscounted at the current market rate estimated for the investment. Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported withinassets and liabilities when there is a legally enforceable right to set off therecognised amounts and there is an intention to settle on a net basis, orrealise the asset and settle the liability simultaneously. 2. Significant accounting policies (continued) Repurchase agreements The Group may finance the acquisition of some of its investments through the useof repurchase agreements. Repurchase agreements are treated as collateralisedfinancing transactions and are carried at their contractual amounts, includingaccrued interest, as specified in the respective agreements. Accrued interest isrecorded as a separate line item on the balance sheet. Derecognition of a financial asset A transfer of a financial asset is accounted for as a derecognition only ifsubstantially all of the asset's risks and rewards of ownership are transferredor control is transferred in the event that not substantially all of the asset'srisks and rewards of ownership are transferred. However, if substantially all ofthe risks and rewards are retained, the asset is not derecognised. Control istransferred if the transferee has the practical ability to sell the assetunilaterally without needing to impose additional restrictions on the transfer. Interest-bearing loans and borrowings Interest-bearing borrowings are recognised initially at fair value lessattributable transaction costs. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between costand redemption value being recognised in the income statement over the period ofthe borrowings on an effective interest basis. Financing costs associated withthe issuance of financings are deferred and amortised over the term of thefinancings using the effective interest rate method, in line with marketpractice. Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rateruling at the date of the transaction. Monetary assets and liabilitiesdenominated in foreign currencies at the balance sheet date are translated toEuro at the foreign exchange rate ruling at that date. Foreign exchangedifferences arising on translation are recognised in the income statement.Non-monetary assets and liabilities that are measured in terms of historicalcost in a foreign currency are translated using the exchange rate at the date oftransaction. Non-monetary assets and liabilities denominated in foreigncurrencies that are stated at fair value are translated to Euro at foreignexchange rates ruling at the dates the fair value was determined. Transaction expenses The preliminary expenses of the Company directly attributable to its initialpublic offering and any costs associated with the establishment of the Companyare charged to the share premium or other reserve account. Share options granted to the Investment Manager are treated as a transactionexpense on the basis that they are granted by the Company as a fee for theInvestment Manager's work in raising capital for the Company. The fair value ofsuch options is charged to the share premium account. The share premium accountis credited with the fair value of such options at the time that such optionsare vested. Interest income Interest income is accrued based on the fair value of the Group's financialassets and their contractual terms. Interest income is accrued over theprojected lives of the investments using the effective interest method asdefined under International Accounting Standard 39. Where the Group adjusts itsexpected cash flow projections to take account of any change in underlyingassumptions, such adjustments are recognised in the income statement byreflecting changes in a revised amortised cost value of the investment andapplying the original effective interest rate to this revised amortised costvalue for the purposes of calculating future income. Taxation The Company is a tax-exempt Guernsey limited company. Accordingly, no provisionfor income taxes is made. Trebuchet Finance Limited is a "qualifying company"within the meaning of section 110 of the Irish Taxes Consolidation Act 1997 andaccordingly 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 theincome 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 Value Added Tax (VAT)purposes under the VAT Act of 1972. 2. Significant accounting policies (continued) Other receivables Other receivables do not carry any interest and are short-term in nature and areaccordingly stated at their nominal value as reduced by appropriate allowancesfor estimated irrecoverable amounts. Financial liabilities and equity Financial liabilities and equity are classified according to the substance ofthe contractual arrangements entered into. An equity instrument is any contractthat evidences a residual interest in the assets of the Company after deductingall of its liabilities. Financial liabilities and equity are recorded at theproceeds received, net of issue costs. Other accruals and payables Other accruals and payables are not interest-bearing and are stated at theirnominal value. Business and geographical segments The Directors are of the opinion that the Company is engaged in a single segmentof business of investing in debt securities and operates solely from Guernseyand therefore no segmental reporting is provided. 3. Critical accounting judgements and key sources of estimation uncertainty Critical accounting judgements in applying the Group's accounting policies In the process of applying the Groups accounting polices (described in note 2above), the Company has determined that the following judgements and estimateshave the most significant effect on the amounts recognised in the financialstatements: Income recognition The Company invests primarily in a diversified portfolio of residual incomepositions, being the subordinated tranches of asset-backed securities ("ABS").ABS securities that are typically backed by consumer finance receivables (suchas mortgage loans) and commercial loans and receivables (including commercialmortgage loans and loans to small-and-medium sized enterprises). Residualincome positions are typically unrated or rated below investment grade and areoften referred to as the "equity" or "first loss" position of a securitisationtransaction. 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 flowprofile of a residual income position does not generally include a contractuallyestablished schedule of fixed payments divided between interest and principal.Instead, the cash flows generally vary over time, and the periodic cash flowsassociated with a residual income position may include a significant element ofprincipal repayment as well as income payments. Where the cash payments generated by residual income positions do not typicallyfollow the pattern of a standard cash-pay debt instrument (in that there is nota constant level of income in each period followed by a repayment of theprincipal amount at maturity), a given cash payment received in respect of aresidual income position can generally be considered to represent a combinationof the return on the investment and the repayment of some of the capitalinitially invested. As a result, the stream of expected cash flows associatedwith a particular residual income position may have an uneven payout profile, inthat the cash payment expected in one period (and the proportion of that paymentthat represents principal repayment versus interest income) may varysignificantly from the cash payments expected in other periods. The Company follows a policy of accounting for such investments at fair valuethrough profit or loss and has elected to recognise income on an effectiveinterest rate ("EIR") method in accordance with paragraph 30 of IAS 18 "Revenue". 3. Critical accounting judgements and key sources of estimation uncertainty(continued) Income recognition (continued) Interest income is recorded based on the original EIR calculated on acquisitionfor each individual residual income position. Where there is a fair valuereduction (as has occurred in the current year), interest income will be reducedas it reflects the EIR on a lower fair value. The income accrual is adjustedwhere there is a change in fair value and as such the Company takes account ofunderlying changes in yield in its income recognition as soon as adverse factorsare identified pending the measurement of fair value changes. Any such changeswill impact the level of income recognised in each period. Valuation of investments In recent months, there has been a significant increase in volatility andpartial dislocation in the broader credit market. There is also no activesecondary market in residual income positions and, further, there is no industrystandard agreed methodology to value residual income positions. As a result ofthis, the fair value estimates included in the quarterly report are subject toconsiderable uncertainty. In accordance with the Company's accounting policies, fair value of financialassets is based on quoted bid prices or broker marks where such bids areavailable from a third party in a liquid market. Where quoted bid prices areunavailable, the fair value of the financial asset is estimated by reference toa pricing model that incorporates discounted cash flow techniques as required byIAS 39. 4. Distributable and non-distributable profits Under The Companies (Guernsey) Law, 1994 (the "Companies Law"), dividends can bepaid from profits available for the purpose. Following the Company's IPO, theCompany passed a special resolution and obtained Royal Court approval for thecancellation of the amount standing to the credit of its share premium account.The Other Reserve created on cancellation (amounting to Euro 384,678,304) isavailable as distributable profits for all purposes permitted by the CompaniesLaw including the payment of dividends and buy-back of shares. Under the UKLAListing Rules, any dividend must be covered by income received from underlyinginvestments. The Company's objective is to provide shareholders with stable returns in theform of quarterly dividends. The Company's dividend policy is to make dividenddistributions from its distributable net income subject to retaining a portionof such income as a reserve for payment in subsequent periods. While these accounts reflect a net loss after realised losses and fair valueadjustments, the dividend declared is covered by income received from underlyinginvestments as required by the Listing Rules (as reflected in the ConsolidatedIncome Statement) and the Company has sufficient reserves (in the form of theOther Reserve) from which the dividend can be paid. 5. Operating expenses Quarter ended Quarter ended 30 June 2007 31 March 2007 Euro EuroInvestment management, custodian and administration feesInvestment management and incentive fee 1,211,317 1,530,532Administration fee 80,457 83,457Custodian fee 30,116 29,785 1,321,890 1,643,774Other operating expensesAudit fees 42,383 393,682Directors' fees payable to Directors of Queen's Walk InvestmentLimited 64,065 48,187Directors' fees payable to Directors of Trebuchet Finance Limited 6,673 12,546Legal fees 70,568 815,244Credit facility expenses 445,674 -Fees relating to corporate advisory services* - 31,248Validation expenses 462,616 264,647Other expenses 254,699 (508,670) 1,346,678 1,056,884 Total operating expenses 2,668,568 2,700,658 The Company has no employees. * These fees were payable to Deloitte & Touche LLP. 6. Finance costs Quarter ended Quarter ended 30 June 2007 31 March 2007 Euro EuroFinance costs arises from:Total return swap agreements - 575,062 Repurchase agreements 1,336,435 1,966,401 Total finance costs 1,336,435 2,541,463 This information is provided by RNS The company news service from the London Stock Exchange