RNS Number:8522Q
European Equity Tranche Income Ltd.
27 March 2008
European Equity Tranche Income Limited
HALF-YEARLY RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2007
The directors announce the statement of half-yearly results for the six months
ended 31 December 2007 as follows. A copy of this half-yearly financial report
is expected to be posted to shareholders shortly and a copy will be posted on
the Company's website www.eeti.co.uk.
ABOUT THE COMPANY
European Equity Tranche Income Limited (the "Company") was incorporated in
Guernsey as a closed-ended investment company on 17 March 2006 and issued its
prospectus for the raising of capital on 6 April 2006 (the "Prospectus"). The
Company commenced business on 26 April 2006 ("Admission") when 100,000,000
Ordinary shares of no par value ("Shares") were allotted to applicants pursuant
to the initial offering of Shares at an issue price of Euro1 each. The Company
purchased for cancellation 2,000,000 Ordinary shares in the capital of the
Company on 26 July 2007. The total number of Ordinary shares in issue is now
98,000,000. The Company does not have a fixed life. Shareholders will have the
opportunity to review the future of the Company after an initial period of seven
years following Admission and every second year thereafter.
The Company's Investment Manager is Ocean Capital Associates LLP, a United
Kingdom based investment management partnership authorised and regulated by the
Financial Services Authority of the United Kingdom.
INVESTMENT OBJECTIVE AND POLICY
The Company's investment objective is to deliver stable returns to shareholders
in the form of quarterly dividends and to preserve capital.
It intends to achieve this by investment in non-investment grade and equity
tranche (or "first loss") positions of residential mortgage-backed securities
("RMBS") and, to a limited extent, other asset-backed securities ("ABS") in
Europe. The directors intend that, once fully invested no less than 75 per cent.
of investments are made in RMBS and up to 25 per cent. in other ABS.
DIVIDENDS
During the period, dividends totalling Euro0.04 per share were declared and paid.
The last four dividend payments are shown below.
Declaration Quarter Ending Amount per Share Paid
16 April 2007 31 March 2007 Euro0.020 18 May 2007
16 July 2007 30 June 2007 Euro0.020 10 August 2007
19 October 2007 30 September 2007 Euro0.020 23 November 2007
30 January 2008 31 December 2007 Euro0.015 29 February 2008
INVESTMENT PERFORMANCE
As at 31 December 2007, the net asset value per share was Euro0.8291.
CHAIRMAN'S STATEMENT
As all our shareholders are aware these first six months have been a depressing
time for the Company. Credit, or perhaps more accurately liquidity, remains
incredibly tight. Indeed the current conditions in the debt markets are worse
than I have ever seen them. In the United States there has been continuing bad
news on the sub prime market and to the extent that European institutions got
involved in this market they have had to report significant losses. If the only
problem was the sub prime market, my judgment is that the situation would be
getting close to the time when we could start to have reasonable confidence that
we could scale the total problem and take the appropriate provisions. However,
this is the first market crisis we have had where 'mark to market accounting' is
in force. And whatever its benefits it has undoubtedly had a pro cyclical impact
on financial institutions. In addition there is a lack of confidence in the
rating agencies, with many securities trading well below the level their ratings
would indicate, and problems in the monoline industry have worsened the
situation, with financial institutions fearful that they may have to take
further write downs if monolines fail. To the best of my knowledge there have
been no mortgage securitizations sold to third party investors in Europe in the
first quarter of this year. This is because even 'AAA' buyers are holding back
because of their fear that they will have to take mark downs on their security,
even with no change in the credit environment. I have little doubt that in two
to three years there will be write backs amounting to many billions of dollars,
as liquidity finally comes into the market and securities start to trade in
sufficient volume to have some confidence in their pricing. Whether I am right
or wrong about the future the present is grim. There are four main issues we
have to address - credit, prepayments, the valuation of our securities and
financing.
Credit
As we have regularly advised our shareholders the default rates on our
investments are all within the tolerance of our models. The liquidity and credit
crisis affecting U.S. banks has not translated into higher default rates in
Europe.
Because of the situation in the property market in Spain we have had a number of
questions about our Spanish investments. The performance of the four
transactions issued by Banco Pastor remain sound. There have been no material
changes in the performance drivers since we purchased them. These investments
have low Loan to Value ratios ranging from 61% to 65%, and are second loss
positions. Geographical exposure and the quality of the originator/servicer are
also contributing to the robustness of these deals.
Prepayments
As you are all aware, because of a change in the law our Italian investments
have suffered much higher prepayment rates than we had modelled for. As a result
we took a significant write down (Euro15 million) on our Italian portfolio on the
assumption that prepayment rates would remain at around 10% as opposed to our
modelled rate of 5%. To the extent that prepayment rates on our Italian
portfolio change, each increase or decrease in the prepayment rate of 1% results
in a variation of around Euro2 million.
Valuation
Typically our investments were bought with a targeted internal rate of return of
around 10%. Since the liquidity crisis hit there have been no transactions where
equity residuals have been priced, although those that were shown to the market
were priced at similar levels to those we have used. As a consequence we have
not adjusted the internal rates of return at 31 December 2007 in the valuation
models. To the extent that we had evidence that a higher internal rate of return
should be used, each percentage increase would result in a mark down of about
Euro5.5 million. This of course would make little difference to our cash flow but,
as noted earlier, would result from the fair value accounting principles where
everything has to be marked to market, even if no such market exists.
Financing
We currently have loans outstanding from Citibank of Euro36 million where we are
paying 250 basis points over EURIBOR. At the end of 2008 if we have not been
able to find a method of securitizing this debt, the financing remains in
place for another year but the pricing increases to 500 basis points. We are
currently in discussion with Citibank about amending our financing arrangements.
I would like to finish by telling you how most of our troubles are behind us,
and we are striding confidently into sunlit uplands. Alas, this is not the case.
The situation in debt markets is bleak and is likely to remain so for some time.
Some of our shareholders have argued that we should sell some of our securities
to reduce our gearing, and I am sympathetic to this argument. However, in a
market where selling AAA securities is a challenge, the discount we would have
to take on the sale of any of our much more lowly rated securities, even if we
could get a bid which is doubtful, would be so high as to make the transaction
unviable. All I can assure our shareholders is that we are and will be looking
for any opportunities that do arise.
Robin Monro-Davies
Chairman
REPORT OF THE INVESTMENT MANAGER
As indicated in the estimated net asset value ("NAV") announcement of 24 January
2008, the Company's NAV amounted to approximately Euro81 million, or Euro0.8291 per
share, as at 31 December 2007. The investment portfolio has not changed since
that date and the estimated distribution of net income, based on the Board's
quarterly dividend target of Euro0.015 per share, is approximately Euro6 million for
the calendar year 2008.
We expect the credit market conditions to remain very challenging for the whole
of 2008. In our opinion, the financial system will continue the deleveraging
process started over the summer of 2007 with further worsening of the credit
performance expected in the United States for the coming months. Liquidity in
the European asset-backed securities ("ABS") market remains tight as a
consequence of global credit concerns and liquidity crunch. The primary market
remains shut. The rare new issues are retained by the issuers, as they use the
financing window offered by the European Central Bank.
The most affected part of the ABS market will continue to be the senior tranches
of securitised transactions as exceptional volatility and sizeable mark to
market losses to date on these bonds have temporarily dried up the appetite of
traditional buyers. In addition, the ongoing de-leveraging of collateralised
debt obligations and other levered structures may contribute to a further
deterioration of that supply and demand imbalance. Trading in mezzanine and
subordinated tranches of European ABS has remained very scarce. To our
knowledge, no equity tranche of prime continental residential mortgage-backed
securities ("RMBS") has been offered or sold to investors and the Company has
not purchased any new investments.
In Western European markets, delinquencies, defaults and loss rates have not
materially increased for prime assets, including the investments held by the
Company. As explained by the Chairman, this comment also extends to the
Company's four transactions originated by Banco Pastor in Spain, where the
overall RMBS market seems more exposed to deteriorating performance. The
evolution of prepayment rates in Europe has however proved more volatile;
prepayments have risen in Italy and to a lesser extent in Portugal in recent
months, while latest data indicates a clear slowdown in prepayment rates across
Spanish RMBS. Market participants anticipate that the credit crisis will reduce
materially the refinancing capacity of European banks and thus their appetite
for new credit production, but this trend has not materialised so far in some of
our key markets.
Against the dramatic share price fall and discount to NAV suffered in the first
quarter of 2008, we are evaluating opportunities to maximise the cash returned
to shareholders on an ongoing basis. Plans to dispose of selected assets, of the
whole portfolio or of the Company itself, in the current market situation, would
only further impair the share price and destroy the value of the assets on a
permanent basis. As regards the Company's funding strategy our priority has
been, and remains, to secure a stable debt funding and maintain a high dividend
pay out. We are currently exploring opportunities with the Company's lender to
amend the terms of the facility renewed last December, in order to give the
Company additional financial flexibility. We will communicate as soon as
practicable on our progress.
In the current volatile environment we remain confident that the quality of the
investments, our negotiation on the debt package and the asset surveillance work
will preserve the long term value of the Company.
Ocean Capital Associates LLP
Investment Manager
UNAUDITED CONSOLIDATED INCOME STATEMENT for the period ended 31 December 2007
1 Jul 2007 1 Jul 2006
to 31 Dec 2007 to 31 Dec 2006
Notes Euro Euro
Operating income 2 6,656,553 3,611,495
Losses on fair value
through profit and loss
financial instruments (15,105,590) -
Realised gain on disposal
of financial instruments 27,606 -
Operating expenses 3 (898,658) (867,872)
Loan interest payable (1,289,474) (16,891)
--------- ---------
Net (loss)/profit for the
period transferred to
reserves (10,609,563) 2,726,732
--------- ---------
Basic and diluted (losses)/
earnings per share for the
period 7 (0.1079) 0.0272
In arriving at the results for the financial period, all amounts above relate to
continuing operations.
There have been no gains or losses in the period that are not included in the
Income Statement.
UNAUDITED CONSOLIDATED BALANCE SHEET As at 31 December 2007
31 Dec 2007 30 Jun 2007 31 Dec 2006
Notes Euro Euro Euro
ASSETS
Non-current assets
Investments designated at
fair value through the 9 111,528,768 129,069,538 105,406,811
Income Statement
Current assets
Trade and other
receivables 10 3,041,436 3,375,740 1,081,470
Cash and cash
equivalents 11 3,396,130 1,757,210 3,271,071
--------- --------- ---------
6,437,566 5,132,950 4,352,541
--------- --------- ---------
Total assets 117,966,334 134,202,488 109,759,352
--------- --------- ---------
EQUITY AND LIABILITIES
Equity
Issued share capital 12 - - -
Share premium 50,000,000 50,000,000 50,000,000
Retained earnings 31,257,095 47,344,025 49,458,285
--------- --------- ---------
81,257,095 97,344,025 99,458,285
Current liabilities
Bank loans and
overdrafts 13 36,238,827 36,238,827 9,912,160
Trade and other payables 14 470,412 619,636 388,907
--------- --------- ---------
36,709,239 36,858,463 10,301,067
--------- --------- ---------
Total equity and
liabilities 117,966,334 134,202,488 109,759,352
--------- --------- ---------
The financial statements were approved by the Board of Directors on 26 March
2008
UNAUDITED CONSOLIDATED CASH FLOW STATEMENT for the period ended 31 December 2007
1 Jul 2007 1 Jul 2006
to 31 Dec 2007 to 31 Dec 2006
Euro Euro
Cash flows from operating activities
Net (loss)/profit for the
period transferred to
reserves (10,609,563) 2,726,732
Losses on fair value through
profit and loss financial
instruments 15,105,590 -
Realised gain on disposal of
investment (27,606) -
Less: Accrued interest
written off (57,432) (510,088)
Less: (Decrease) / Increase
in accrued expenses (149,224) 65,138
Add: Increase / (Decrease) in
prepayments and accrued
income 334,304 (473,445)
Less: Interest capitalised
written back (1,221,821) -
--------- ---------
Net cash inflow from
operating activities 3,374,248 1,808,337
--------- ---------
Cash flows from investing activities
Interest received 57,432 510,088
Purchase of non-current
assets (7,354,795) (52,551,910)
Sale of non-current assets 8,100,000 -
Capital repayments received
from investments 2,939,402 2,249,382
--------- ---------
Net cash inflow/(outflow)
from investing activities 3,742,039 (49,792,440)
--------- ---------
Cash flows from financing activities
Redemption of share capital (1,517,367) -
Dividends (3,960,000) (1,320,000)
Bank loan - 9,912,160
--------- ---------
Net cash (out)/inflow from
financing activities (5,477,367) 8,592,160
--------- ---------
Cash and cash equivalents at
the beginning of the period 1,757,210 42,663,014
Increase in cash and cash
equivalents 1,638,920 (39,391,943)
--------- ---------
Cash and cash equivalents at
the end of the period 3,396,130 3,271,071
--------- ---------
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY for the period ended
31 December 2007
Share Accumulated
Premium Profits Total
Euro Euro Euro
Balance at 1 July 2007 50,000,000 47,344,025 97,344,025
Net loss for the period - (10,609,563) (10,609,563)
Redemption of share capital - (1,517,367) (1,517,367)
Distribution to ordinary
shareholders - (3,960,000) (3,960,000)
--------- ----------- ---------
Balance at 31 December 2007 50,000,000 31,257,095 81,257,095
--------- ----------- ---------
NOTES TO THE UNAUDITED FINANCIAL STATEMENTS As at 31 December 2007
1 ACCOUNTING POLICIES
(a) Basis of preparation
The financial statements of European Equity Tranche Income Limited, a closed -
ended investment company registered in Guernsey, Channel Islands have been
prepared in conformity with International Financial Reporting Standards ("IFRS")
issued by the International Accounting Standards Board, as adopted by the
European Union, and the Interpretations of International Financial Reporting
Standards issued by the Standing Interpretations Committee of the International
Accounting Standards Board and applicable requirements of Guernsey Law.
The financial statements have been prepared on an historical cost basis except
for the measurement at fair value of investments designated at fair value
through the Income Statement. The accounting policies have been applied
consistently by the Company in the accounting period which is from 1 July 2007
to 31 December 2007. The financial statements have been prepared in its
functional currency, Euro, as this reflects the Company's primary activity of
investing in Euro financial instruments. The Directors believe that IFRS's and
International Financial Reporting Interpretations Committee ("IFRIC")
pronouncements which are in issue but not yet operative or adopted by the
Company will not have a material impact on the financial statements of the
Company.
The preparation of financial statements in conformity with IFRS requires the
company to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
(b) Foreign currencies
Transactions in foreign currencies are translated into Euros, which is deemed to
be the functional currency, at the rates of exchange ruling on the date on which
the transactions occur. At the balance sheet date, foreign currency monetary
items are translated into Euros at the foreign exchange rate ruling at the
balance sheet date. Foreign exchange differences arising on translation are
recognised in the Income Statement in the period in which they arise. At the
balance sheet date, non-monetary items which are carried at fair value
denominated in foreign currency are reported using the exchange rates that
existed at the date when the fair values were determined.
(c) Interest income
Interest income is accounted for on an accruals basis on cash and cash
equivalents. Interest income is accrued based on the fair value of the Company's
investments and their contractual terms. Interest income is accrued over the
projected lives of the investments using the effective interest method as
defined under International Accounting Standard 39 ("IAS 39"). Where the Company
adjusts expected cash flow projections to take account of any change in
underlying assumptions, such adjustments are recognised in the Income Statement
by reflecting changes in a revised amortised cost value of the investment and
applying the original effective interest rate to this revised amortised cost
value for the purposes of calculating future income. The Company's policy for
estimating prepayment speeds for calculating the effective yield is to evaluate
historical performance, market consensus indicators and current market
conditions.
Premiums and discounts associated with the purchase of investments/assets are
amortised or accreted into interest income over the projected term of the
investment.
(d) Fair Value of Financial instruments
Under IAS 39, the Company's investments are measured initially at cost, which is
the fair value of whatever was paid to acquire them. Associated transaction
costs are written off to the Income Statement. All purchases and sales of
investments are recognised using trade date accounting. After initial
recognition the Company's investments are measured at fair value through the
Income Statement. The Company's investments are designated to this category at
inception, as the Company is an investment Company whose business is investing
in financial assets with a view to profiting from the yield and increase in fair
value.
Investments, which principally comprise investments in residual income
positions, are fair valued using financial pricing models that reflect
assumptions including the Investment Manager's assessment of the nature of the
investment and the collateral, security position, risk profile, historical
default rates and the originator and servicer. Each of these factors involves
subjective judgements and forward-looking determinations by the Investment
Manager and these assumptions may not be supported by prices from observable
current market data.
Where the fair value of the investment is written down due to changes in
assumptions and expected cash flows, the change in the fair value is taken to
the Income Statement following the reassessment of the cash flow discounted at
the current market rate estimated.
Derivative financial instruments are used by the Company solely to hedge its
exposure to foreign exchange and interest rate risks arising from operational,
financing and investment activities and are accounted for under hedge accounting
principles.
(e) Cash and Cash Equivalent
Cash and cash equivalents are carried at cost. Cash and cash equivalents are
defined as cash and deposits at bank.
(f) Trade and other receivables and payables
Trade and other receivables and payables are carried at cost. Cost is considered
to approximate fair value.
(g) Bank loans and associated borrowing costs
Bank loans are raised to support funding of investments. They are recognised as
current liabilities as they are due for repayment within one year. Finance
charges are charged to the Income Statement on an accruals basis using the
effective interest method and are added to the carrying amount of the instrument
to the extent that they are not settled in the period in which they arise.
Interest payable on loans is also recognised in the Income Statement on an
accruals basis.
(h) Taxation
The Company has been granted exemption under the Income Tax (Exempt Bodies)
(Guernsey) Ordinance, 1989 from Guernsey Income Tax, and is charged an annual
fee of �600.
In June 2006 the States of Guernsey agreed that, from 1 January 2008, the
standard rate of income tax on company profits will be 0%, with only a limited
number of specific banking activities being taxed at 10%. This is what is
referred to as the "Zero-Ten" regime. Therefore, for the foreseeable future the
Company will continue to have no tax payable in Guernsey.
(i) Earnings per share
The Company calculates both basic and diluted earnings per share in accordance
with IAS 33 'Earnings per share'. Under IAS 33 basic earnings per share is
computed using the weighted average number of shares outstanding during the
period. Diluted earnings per share is computed using the weighted average number
of shares outstanding during the period plus the dilutive effect of any
instruments outstanding during the period.
(j) Segmental reporting
In the opinion of the Directors the Company has only one business segment being
investment in asset backed securities ("ABS"), in particular residential
mortgage backed securities ("RMBS").
(k) Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Company's accounting policies, the Company has
determined that the following judgements and estimates have the most significant
effect on the amounts recognised in the financial statements.
Income recognition
The Company invests primarily in a diversified portfolio of residual income
positions, being the subordinated tranches of ABS, principally RMBS. Residual
income positions are typically unrated or rated below investment grade and are
often referred to as the "equity" or "first loss" position of securitisation
structures.
Unlike more conventional bonds 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 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 principal repayment as well as income payments which
fluctuate over time.
A given cash payment received in respect of a residual income position
represents 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 Company 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 IAS18 "Revenue".
Interest income is recorded based on the original EIR, as set out in Note 1(c)
above.
Further disclosures of key assumptions and key sources of estimation uncertainty
are set out in Note 16 under the headings "Residual Interest Risk" and
"Liquidity Risk".
Valuation of investments
As described in Note 16 to the accounts, the market for RMBS, 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 Company'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. Where quoted bid prices are unavailable, the fair
value of the financial asset is estimated by reference to a valuation model that
incorporates discounted cash flow techniques as required by IAS39.
The key assumptions upon which the valuation models are based are described in
Note 1(e) to the accounts. Any change to assumptions surrounding the pricing
models may result in different fair values being attributed to the investments.
The fair value of the Company's investments is set out in Note 9 and a further
description of the risks associated with the Company's investments is provided
in Note 16. The Company considers that it would be impractical to disclose the
effects of changes to each assumption in respect of each investment valuation
model.
2 OPERATING INCOME 1 Jul 2007 1 Jul 2006
to 31 Dec 2007 to 31 Dec 2006
Euro Euro
Interest on investments in asset backed securities 6,599,121 3,101,407
Interest from cash and cash equivalents 57,432 510,088
----------- -----------
6,656,553 3,611,495
----------- -----------
3 OPERATING EXPENSES 1 Jul 2007 1 Jul 2006
to 31 Dec 2007 to 31 Dec 2006
Euro Euro
Investment managers fees 589,044 615,495
Directors' remuneration 58,748 62,790
Directors expenses 2,253 2,386
Directors & Officers insurance 13,922 16,779
Audit fees 22,840 59,307
Investment transaction costs - 152
Administration fees 42,292 21,568
Registration fees 10,593 6,813
Legal and professional fees 75,824 1,022
Other operating expenses 83,142 81,560
----------- -----------
898,658 867,872
----------- -----------
4 INVESTMENT MANAGER'S FEES
Management Fee
Under the terms of the Investment Management Agreement, a management fee is
payable to the Investment Manager at an annual rate of 1.25 per cent. of the
lower of (i) the Net Asset Value of the Company immediately following Admission
and (ii) the Net Asset Value of the Company on 31 March, 30 June, 30 September
and 31 December (before deduction of accruals in respect of the management fee
for the current period and any performance fee) (excluding current period
income).
The management fee accrues daily and is payable quarterly in arrears.
Performance Fee
Under the terms of the Investment Management Agreement, the Investment Manager
is entitled to receive a performance related fee in respect of each performance
period which will be paid quarterly in arrears.
A performance period will comprise each successive quarter.
The performance fee for each performance period will be an amount equal to 20
per cent. of the amount by which the Company's net income (as calculated for
these purposes) after tax for the relevant period, before payment of any
performance fee, exceeds an amount equal to a simple interest rate of two per
cent. per quarter (the "quarterly hurdle") multiplied by the weighted average
number of Ordinary Shares outstanding during the relevant period multiplied by
the weighted average offer price of such Ordinary Shares subject to the Net
Asset Value of an Ordinary Share at the end of the relevant performance period
being no less than the Net Asset Value of an Ordinary Share immediately
following Admission.
The sum of quarterly performance fees based on the quarterly hurdle payable to
the Investment Manager for any full financial period will be capped at that
amount which would be payable based on 20 per cent. of the amount by which the
Company's net income after tax for the relevant period (before payment of any
performance fees) exceeds an amount equal to an annualised simple interest rate
of eight per cent. (the "annual hurdle") multiplied by the weighted average
number of Ordinary Shares outstanding during the relevant full financial period
multiplied by the weighted average offer price of such Ordinary Shares.
Where the sum of quarterly performance fees paid for any financial period based
on the quarterly hurdle exceeds that amount which would have been payable based
on the annual hurdle, the Investment Manager shall repay to the Company any such
excess.
The performance fee, if any, will be calculated on behalf of the Company by the
Administrator.
Where there is a difference between the Company's net income for the relevant
performance period as shown in the Company's quarterly management accounts
compared to the Company's audited annual accounts, the net income for the
relevant performance period as reflected in the audited accounts shall prevail.
Any excess performance fee paid or any additional performance fee due in respect
of any performance period attributable to any such difference will be repaid by
or paid to the Investment Manager, as the case may be.
No performance fees were payable during the period.
5 STAFF COSTS
The Company has no employees other than the Directors. Their expenses totalled
Euro2,253 (2006: Euro2,386)
6 DIRECTORS' REMUNERATION
Unless otherwise decided by the Company by ordinary resolution, the Company
shall pay to the Directors (but not alternate directors) for their services as
Directors out of the funds of the Company by way of fees such sums as the Board
decides (not exceeding �200,000 per annum in aggregate or such larger amount as
the Company may by ordinary resolution decide). The aggregate fees will be
divided among the Directors in such proportions as the Board decides or, if no
decision is made, equally. Directors remuneration totalled Euro58,748 (2006:
Euro62,790) in the period.
7 EARNINGS PER SHARE
The (losses)/earnings per share is based on the net loss for the period of
Euro10,609,563 (earnings in 2006:Euro2,726,732) and on 98,326,087 (2006:100,000,000)
shares, being the weighted average number of shares in issue during the period.
There were no dilutive instruments in issue in the period.
8 DIVIDENDS
During the period, the following dividend payments were made:
Date Amount per Total dividend
share distribution
Euro Euro
10 August 2007 0.02 2,000,000
23 November 2007 0.02 1,960,000
---------
3,960,000
=========
9 INVESTMENTS DESIGNATED AS FAIR VALUE THROUGH THE INCOME STATEMENT
31 Dec 2007 30 Jun 2007 31 Dec 2006
Unquoted investments in RMBS and ABS Euro Euro Euro
Cost / value brought forward at
July 2007/6 129,069,538 55,104,283 55,104,283
Additions - cost 7,354,795 82,027,000 52,551,910
Disposals - cost (8,072,394) - -
Capital repayments (2,939,402) (5,392,861) (2,249,382)
Loss on revaluation for the
period (13,883,769) (2,668,884) -
----------- ---------- ----------
111,528,768 129,069,538 105,406,811
----------- ---------- ----------
Income derived from these investments is based on their expected internal rate
of return (IRR) over their estimated life. The IRR reflects a number of
collateral performance and other assumptions, which may be adjusted over time.
The range of the weighted average floating interest rate is between 9% and 11%.
In order to hedge a foreign currency exposure in respect of an investment
denominated in Sterling, the Company entered into a total return swap at the
date of acquisition of the underlying investment. Accordingly there is no
unrealised foreign exchange gain or loss at the period end.
10 TRADE AND OTHER RECEIVABLES 31 Dec 2007 30 Jun 2007 31 Dec 2006
Euro Euro Euro
Prepayments 214,668 116,429 10,220
Accrued interest - Investments 2,791,334 3,241,158 1,071,250
Accrued interest - Cash 8,531 4,807 -
Withholding tax debtor 13,557 - -
Sundry debtors 13,346 13,346 -
---------- ---------- ----------
3,401,436 3,357,740 1,081,470
---------- ---------- ----------
11 CASH AT BANK 31 Dec 2007 30 Jun 2007 31 Dec 2006
Euro Euro Euro
Bank balances 786,615 83,657 954,060
Call deposits 2,609,515 1,673,553 2,317,011
---------- ---------- ----------
3,396,130 1,757,210 3,271,071
---------- ---------- ----------
The weighted average floating interest rate on call deposits was 1.93%. Call
deposits are due on demand.
12 SHARE CAPITAL
31 Dec 2007 30 June 2007 31 Dec 2006
Authorised, issued and fully paid Euro Euro Euro
100,000 ordinary shares of no par value - - -
---------- ---------- ----------
As the Company will have only one class of shares, the holders of its shares
will under general law be entitled to participate in any surplus assets in a
winding-up in proportion to their shareholdings.
The Company has passed a special resolution reducing the amount standing to the
credit of the share premium account to Euro50,000,000, and that the surplus created
form a distributable reserve. 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 reduction of the share premium
account following admission. The distributable 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.
13 BANK LOANS AND OVERDRAFTS
In December 2006, Citibank was appointed to structure and arrange a senior
financing facility for the Company to be secured on the Company's investments.
Prior to the closing of the senior term financing, a loan facility has been
provided. The loan facility was increased from Euro40m to Euro70m on 26 July 2007.
The Loan facility is in the form of a secured loan agreement. As at 31 December
2007 total drawdowns under the loan facility were Euro36,238,827.
The loan is interest bearing, and the interest rate applied is a margin of 2.5%
above EURIBOR taking into account any mandatory costs. The interest periods are
three months from the utilisation date and quarterly thereafter. The Company
must pay accrued interest on the last day of each interest period. The annual
average rate applied during the period was 6.905%.
The loan facility is currently due to mature on 15 December 2008, with a further
extension to December 2009 available at an increased margin of 5% above EURIBOR.
The Company is currently exploring opportunities with Citibank to amend the
terms of the facility.
14 TRADE AND OTHER PAYABLES 31 Dec 2007 30 June 2007 31 Dec 2006
Euro Euro Euro
Accrued investment managers
fees 293,426 304,402 307,747
Accrued audit fees 34,763 59,990 37,813
Accrued administration fees 5,891 5,972 3,404
Accrued registration fees 1,360 1,572 959
Other accrued expenses 40,365 43,438 22,093
Accrued Loan Interest 94,607 204,262 16,891
----------- ---------- ---------
470,412 619,636 388,907
----------- ---------- ---------
15 FINANCIAL INSTRUMENTS
The Company's main financial instruments comprise:
(a) Cash and cash equivalents that arise directly from the Company's operations;
(b) Non-investment grade and equity tranches of RMBS in Continental Europe, and
(c) Bank loans and overdrafts.
16 FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
The most important types of risks to which the Company is exposed are market
price risk, credit risk, liquidity risk, interest rate risk, residual interest
risk, currency risk and political risk. Save where the Company purchases
synthetic securities to gain exposure to an underlying cash asset or assets,
derivative transactions will only be used for the purposes of hedging risks or
for efficient portfolio management. The Company will not enter into derivative
transactions for speculative purposes.
(a) Market Price Risk
The Company's exposure to market risk is comprised mainly of movements in the
value of its investments and, to the extent that the Company utilises leverage,
changes in interest rates that either increase its cost of borrowing or decrease
any interest income. Several of the Company's investments are backed by floating
rate assets and, as such, will be valued based on a market credit spread over a
benchmark (such as EURIBOR). Increases in the credit spreads above such
benchmarks may affect the Company's net equity or net income directly through
their impact on unrealised gains or losses on investments within the portfolio,
and therefore the Company's ability to make gains on such investments, or
indirectly through their impact on the Company's ability to borrow and access
capital.
Price sensitivity
The following details the Company's sensitivity to a 1% increase and decrease in
the yield of its constituent financial assets and liabilities.
At 31 December 2007, if the yield of the non-current asset investments had been
1% higher with all the other variables held constant, the loss transferred to
reserves for the period would have been c. Euro5,500,000 (2006: Euro5,300,000) higher,
arising due to the decrease in the fair value of financial assets at fair value
through profit or loss.
If the yield of the non-current asset investments had been 1% lower with all the
other variables held constant, the profit transferred to reserves for the period
would have been c. Euro5,500,000 (2006: c. Euro5,300,000) higher, arising mainly due
to the increase in the fair value of financial assets at fair value through
profit or loss.
The sensitivity is higher in 2007 than in 2006 because of an increase in the net
financial assets and liabilities at fair value through profit or loss at the
balance sheet date.
(b) Credit Risk
Credit risk refers to each individual borrower's ability to make the required
interest and principal payments on the scheduled due dates. The Company seeks to
mitigate credit risk by actively monitoring its portfolio of investments and the
underlying credit quality of its holdings. The Company seeks to minimise credit
risk further by ensuring its investment portfolio is diversified by geography,
originator, servicer and issuer. The Company does not intend to undertake any
credit hedging activities other than from time to time entering into
transactions to hedge its credit exposure in relation to individual investments.
A further credit risk arises from the Company's use of a Special Purpose Vehicle
("SPV") to hold title to certain investments. There is a risk that the SPV may
not pass the cash flows generated by the underlying investments back to the
Company. There is also a risk that the SPV may fail to achieve the tax savings
that it was designed for.
(c) Liquidity Risk
Liquidity risk is the risk that the Company will encounter difficulty in
realising assets or otherwise raising funds to meet financial commitments. The
market for subordinated asset-backed securities, including residual income
positions, is illiquid. Accordingly, many of the Company's investments are
illiquid. In addition, investments that the Company purchases in privately
negotiated (also called "over the counter" or "OTC") transactions may not be
registered under relevant securities laws or otherwise may not be freely
tradable, resulting in restrictions on their transfer, sale, pledge or other
disposition except in a transaction that is exempt from the registration
requirements of, or is otherwise in accordance with, those laws. As a result of
this illiquidity, the Company's ability to vary its portfolio in a timely
fashion and to receive a fair price in response to changes in economic and other
conditions may be limited.
Furthermore, where the Company acquires investments for which there is not a
readily available market, the Company's ability to deal in any such investment
or obtain reliable information about the value of such investment or risks to
which such investment is exposed may be limited.
The main financial commitments of the Company are the interest and capital
payments on the bank loan from Citibank and the meeting of ongoing operational
costs. These commitments are met by the cash flows received from the
investments, which are monitored by the Investment Manager.
The following illustrates the maturity analysis of the Company's financial
assets and liabilities as at the period end:
Due on Due within Due between Due between Due> Total
demand 3 months 3 and 12 1 and 5 5 years
months years
Euro Euro Euro Euro Euro Euro
ASSETS
Investments
designated
at fair value - - - 14,970,264 96,558,504 111,528,768
Trade
and other
receivables - 2,799,865 241,571 - - 3,041,436
Cash and
cash
equivalents 3,396,130 - - - - 3,396,130
Total -------- -------- --------- -------- -------- --------
assets 3,396,130 2,799,865 241,571 14,970,264 96,558,504 117,966,334
-------- -------- --------- -------- -------- --------
Liabilities
Bank loans
and
overdrafts - - 36,238,827 - - 36,238,827
Trade and
other - - 470,412 - - 470,412
payables
Total -------- -------- --------- -------- -------- --------
liabilities - - 36,709,239 - - 36,709,239
-------- -------- --------- -------- -------- --------
(d) Interest Rate Risk
Changes in interest rates do not affect the Company's ability to acquire loans
and investments, the value of its investments and the Company's ability to
realise gains from the settlement of such assets.
The weighted average effective interest rate for cash and bank balances as at 31
December 2007 was 1.93% (2006: 3.31%).
If interest rates had been 100 basis points higher and all other variables were
held constant, the Company's increase in net assets attributable for the period
ended 31 December 2007 would have increased by Euro34,765 (2006: Euro712,295) due to
an increase in the amount of interest receivable on the bank balances.
If interest rates had been 100 basis points lower and all other variables were
held constant, the Company's increase in net assets attributable for the period
ended 31 December 2007 would have decreased by Euro34,765 (2006: Euro712,295) due to a
decrease in the amount of interest receivable on the bank balances.
The Company's sensitivity to interest rates is lower in 2007 than in 2006
because of a decrease in the amount of cash balances held.
(e) Residual Interest Risk
The majority of the Company's investments consist of interests in and/or
economic exposures to limited recourse securities that are subordinated in right
of payment and ranked junior to other securities that are secured by or
represent ownership in the same pool of assets. In the event of default by an
issuer in relation to such investments, holders of the issuer's more senior
securities are entitled to payments in priority to the Company. Some of the
Company's investments also have structural features that divert payments of
interest and/or principal to more senior classes of securities secured by or
representing ownership in the same pool of assets when the delinquency or loss
experience of the pool exceeds certain levels. This may lead to interruptions in
the income stream that the Company anticipates receiving from its investment
portfolio, which may lead to the Company having less income to distribute to
shareholders.
Although holders of asset-backed securities generally have the benefit of first
ranking security (or other priority rights) over any collateral, control of the
timing and manner of the disposal of such collateral upon a default typically
will devolve to the holders of the senior class of securities outstanding. There
can be no assurance that the proceeds of any such sale of collateral will be
adequate to repay in full the Company's investments.
(f) Currency Risk
The Company's accounts are denominated in Euros while investments may be made
and realised in both Euros and Sterling. Changes in rates of exchange may have
an adverse effect on the value, price or income of the investments. A change in
foreign currency exchange rates may adversely impact returns on the Company's
non-Euro-denominated investments.
The Company will seek to reduce the currency risk by financing investments in
the same currency as the relevant investment where commercially practical or
enter into hedging transactions for whole or part of the currency exposure. The
Investment Manager may elect, however, to have the Company bear a level of
currency risk that could otherwise be hedged where it considers that bearing
such risks is acceptable.
At the balance sheet date the Company had no material financial assets or
liabilities not denominated in Euros, other than those covered by the hedging
agreement detailed below.
On 7 December 2006, the Company entered into a QUANTO FX deal with a
counterparty which was structured as a Total Return Swap and which will
terminate on 31 December 2013. The purpose of the agreement is to hedge a
foreign exchange transaction entered into by the Company involving �5,525,000
worth of investments secured over Mortgage-only repayment certificates due 2060
and Residual certificates due 2060.
The counterparty will own the securities through a Total Swap Return Agreement
which will be cash collateralised in full by the Company, so therefore the
Company will have the right to receive all the flows converted into Euros
through the QUANTO FX trade.
(g) Political Risk
Retrospective political law changes may have an adverse effect on the value of
the Company's investments. For example, in its investment update in May 2007,
the Company reported that retrospective changes in law in Italy had
significantly reduced the prepayment penalties for mortgages. It is difficult to
assess exactly how these changes will impact consumer behaviour, it is possible
that prepayment rates will increase impacting the expected cash flows from
investments and the ability of the Company to maintain the same level of
dividend payments.
(h) Collateral
Under the terms of the deed of assignment dated 15 February 2007 and the
amendments dated 25 July 2007 and 17 December 2007 entered into between the
Company and Citibank N.A., the Company has assigned absolutely the unquoted
investments in RMBS and ABS and all rights, title and interest, present and
future, without limitation, and its right to receive monies or securities to
Citibank N.A as security for the loan facility. Where there is an event of
default in respect of the company under the loan facility, Citibank N.A. will be
entitled to enforce its security over the collateral.
(i) Capital management
The Company monitors capital on the basis of the carrying amount of equity as
presented on the face of the balance sheet. Capital for the reporting periods
under review is summarised as follows:
31 Dec 2007 30 Jun 2007
Euro Euro
Share premium 50,000,000 50,000,000
Retained earnings 31,257,095 47,344,025
----------- ----------
81,257,095 97,344,025
----------- ----------
17 RELATED PARTY TRANSACTIONS
Anson Fund Managers Limited is the Company's administrator and secretary and
Anson Registrars Limited is the Company's registrar, transfer agent and paying
agent. John R Le Prevost is a director of Anson Fund Managers Limited and of
Anson Registrars Limited. Euro52,885 (2006:Euro28,381) of fees were incurred by the
Company with these related parties in the period, of which Euro7,251 (2006:Euro4,363)
was due to these related parties as at 31 December 2007.
Tanguy Boullet is a partner in the Investment Manager, Ocean Capital Associates
LLP. Euro589,044 (2006:Euro615,495) in fees were incurred by the Company with the
Investment Manager in the period, of which Euro293,426 (2006:Euro307,747) was due to
the Investment Manager as at 31 December 2007. Tanguy Boullet received no fees
as a director.
18 SUBSIDIARY UNDERTAKINGS
On 4 July 2007, the Company purchased two Pass-Through Notes from EETI Finance
Limited, ("EETIFL"), a special purpose vehicle incorporated in Ireland, and
transferred in exchange five investments at book value to EETIFL (with a value
at the balance sheet date of Euro34,792,396 million), under a Purchase Agreement
and a Support Deed. Under the Pass-Through Notes, the cash flow from the
underlying five investments revert to the Company.
The investment policy of EETIFL is directed by the Investment Manager on behalf
of the Company and all the risks and rewards of the ownership of the investments
of EETIFL pass to the Company. In accordance with SIC12, EETIFL is considered to
be a subsidiary of the Company even though it is not legally owned by the
Company.
Under the terms of the Support Deed the Company has underwritten all running
costs to be incurred by EETIFL during its life, which are estimated to be in the
region of Euro41,000 per annum.
For further information contact:
Ocean Capital Associates LLP
Edouard Bridel 020 7307 0880
Alastair Moreton
Arbuthnot Securities Limited
Nominated Adviser
Tel: 020 7012 2000
Anson Fund Managers Limited
Secretary
Tel: Guernsey 01481 722260
27 March 2008
E&OE - in transmission
END OF ANNOUNCEMENT
This information is provided by RNS
The company news service from the London Stock Exchange
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