RNS Number:1302G
European Equity Tranche Income Ltd.
22 October 2007
EUROPEAN EQUITY TRANCHE INCOME LIMITED
PRELIMINARY ANNOUNCEMENT OF ANNUAL RESULTS
The directors announce the statement of results for the year ended 30 June 2007
as follows:-
ABOUT THE COMPANY
European Equity Tranche Income Limited (EETI or the "Company") was incorporated
in Guernsey as a closed-ended investment company on 17 March 2006. On 26 April
2006 the Company raised via an institutional offering EUR 100 million by the
issue of 100,000,000 Ordinary shares of no par value ("Shares") at an issue
price of EUR 1 each. 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, being on or after 26 April 2013 and every second year
thereafter.
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.
The Company achieves 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 with the remainder being in other ABS.
INVESTMENT PERFORMANCE
As at 30 June 2007, the net asset value of a Share was EUR 0.9734 (2006: EUR
0.9805).
CHAIRMAN'S STATEMENT
I am pleased to present the second annual report and accounts for European
Equity Tranche Income Limited . This has been a turbulent year in the market and
EETI has been tested in difficult conditions. However, I am glad to report that
as at 30 June 2007 our current portfolio had increased to EUR 129 million (on an
amortised cost basis) and the quality of our assets remains on target as
predicted by our models. It is also worth me reiterating yet again that we have
no exposure to sub-prime mortgages in the United States, and the only investment
we have made in the UK consists of EUR 8 million of a prime niche mortgage
securitisation.
As you will be aware from our earlier communication in July we marked down some
of our Italian investments by a total of EUR 2.7 million. This was due to the
Italian government introducing a new law significantly reducing prepayment
charges. This law not only affected new mortgages but was also, despite our
appeals, applied retrospectively. This write down was taken as a change in the
investment values in the final quarter.
We declared dividends in relation to the financial year amounting to a total of
EUR 0.0671. Our dividend payment in relation to the fourth quarter was EUR 0.02
per share, and whilst this was marginally more than our earnings excluding the
investment write down, given the increase in assets which occurred close to year
end we expect our income to rise in the current year. In July we also bought
back 2 million shares at a price of GBP 0.51, an approximate 20% discount to the
30 June 2007 post dividend NAV. As previously announced, it is the Board's
intention to maintain our dividend at EUR 0.02 per share until we have built up
the net asset value to a level of EUR 1.00 per share. As at 30 June 2007, our
net asset value was EUR 0.9734 per share before the dividend payment of EUR 0.02
per share.
INVESTMENT PERFORMANCE AND PORTFOLIO CHARACTERISTICS
At 30 June 2007, the Company's investment portfolio comprised 15 investments
with a value of EUR 129 million. Since that time we have sold one of our smaller
investments for a modest profit. The Company's portfolio is heavily weighted to
continental Europe and consists of individual investments in residual income
positions or subordinated tranches of RMBS. The underlying asset pools are
comprised of prime mortgages originated by established local banks in Italy,
Portugal, Spain, the Netherlands, Germany, UK and France. As all investments are
euro denominated or fully hedged, the fund currently has no foreign exchange
exposures.
The Company's investment portfolio has performed in line with initial
expectations and the fair values and effective yields attributed to each
investment at the time they were acquired have, with the exception of our
Italian mortgage portfolio noted earlier, not been adjusted since acquisition.
The current IRR of the portfolio is approximately 10% and the IRR of all assets
purchased is between 9% and 11%. These IRRs are booked under a base case,
loss-adjusted scenario determined by the Investment Manager and reviewed by the
Auditors of the Company.
Geographical Breakdown as of 30 June 2007:
Country % of Portfolio Book Value
Italy 32%
Portugal 21%
Spain 15%
Netherlands 9%
Germany 8%
Austria 6%
UK 6%
France 3%
Total 100%
FINANCING STRATEGY
As at 30 June 2007, the Company had approximately EUR 2 million in cash,
representing principal payments received on its investments and the Company's
indebtedness was EUR 36 million. While our prospectus noted that we could
increase our leverage to 240% of shareholders' equity, the Board is going to be
cautious about increasing its present leverage. We have recently renewed our EUR
70 million facility with Citibank until December 2008. The Company has mandated
Citibank to rate this facility and issue long-term senior debt as soon as debt
markets permit. To the extent that market conditions are unfavourable for such a
take out, any increase in borrowing is likely to be modest.
ASSET SALE
The Company's investment manager, Ocean Capital, sold one investment after the
year-end. This was a EUR 8.1 million auto loan Austrian rated bond. The
investment yield was no longer attractive for EETI once our borrowing had
increased. This disposal generated a modest profit of circa EUR 25,000.
OUTLOOK
The implementation of the Basle II framework continues to provide opportunities
for us to increase our portfolio in a prudent manner and EETI has developed a
network of relationships with blue chip banks and issuers across Europe which
should serve us well.
The market we operate in is highly specialised. The expertise provided by our
investment manager, Ocean Capital, combined with careful oversight by your
Board, has enabled EETI to weather the storm which has recently hit the markets
in which we operate. There are some limited signs that the credit market is
starting to stabilise and when that happens we will be in a strong position to
build up our assets and provide excellent returns to our shareholders. However,
for the time being we are going to be extremely cautious both with regard to our
investments and leverage.
ANNUAL GENERAL MEETING
Your second Annual General Meeting will be held at the registered office of the
Company on 5 December 2007. The Notice of the Annual General Meeting is set out
at the end of the annual report and a form of proxy accompanies the annual
report.
Robin Monro-Davies, Chairman
INVESTMENT MANAGER'S REPORT
MARKET OUTLOOK
The first half of 2007 has again set a record for ABS issuance. Primary RMBS
issuance in Continental Europe and the UK represented a total volume of
approximately EUR 160m in the six months to June 30, 2007* , compared with EUR
87 billion for the same period in 2006; issuance volume for the whole of 2006
was approximately EUR 245bn. The UK continued to lead RMBS issuance over the
period, with approximately 78% of the total. The main issuing countries in
Continental Europe were Spain (EUR 31bn), Italy (EUR 21bn) and the Netherlands
(EUR 16bn). The growth of the market was also noticeable in the non-investment
grade and equity tranches segment of securitisations as issuing banks were
getting prepared for the implementation of Basle II.
Since the end of June 2007, performance issues in the US Subprime RMBS markets
have triggered an unprecedented crisis in the global ABS markets leading to a
global liquidity crisis. The crisis has affected almost all asset classes of the
structured finance markets, including CDOs and CLOs. The liquidity crunch,
combined with mark to market losses has forced the majority of levered investors
(including SIVs) to liquidate positions, accelerating a downward spiral in asset
prices. In Europe spreads have widened to an all time high in spite of a
collateral performance that remains overall extremely strong.
As a consequence of the crisis the primary market for European RMBS has been
shut since the beginning of August, which triggered the debacle of some UK
mortgage lenders using securitisation as their main funding source, notably
Northern Rock. On the continent commercial banks which dominate origination in
the prime RMBS sector are currently relying on other sources of funding until
spreads come back to acceptable levels.
In the second half of September, as market participants welcomed the collective
efforts of Central Banks to provide liquidity, spreads tightened significantly
with some markets regaining almost half of the losses incurred since the
beginning of the market dislocation.
During the turmoil the main market in which EETI operates, namely equity
tranches of prime RMBS in continental Europe, recorded no activity at all, both
on the secondary and primary markets. As a matter of fact Ocean Capital has not
been in contact with any opportunity since its last purchase in July. In the
secondary market the forced selling was concentrated on investment grade assets,
mostly in AAAs. Leverage loans CLOs and ABS CDOs, which are all arbitrage-based
transactions, were hit across the entire capital structure due to mark to market
losses on their underlying collateral. As the primary markets have been shut
since August no opportunity arose.
With the gradual reopening of the European prime RMBS markets, some issuers are
considering selling residual positions before year-end. Unfortunately it is not
envisaged that EETI will be able to purchase assets at wider spreads as equity
tranches of prime continental RMBS sold for balance sheet management purposes by
strong institutions remain a highly sought after asset class. There still remain
a few buyers apparently unaffected by the liquidity crisis and attracted by the
prospect of ongoing excellent performance of underlying collateral.
VALUATION OF INVESTMENTS
The recent market conditions have stressed the importance of using a consistent
and coherent methodology to monitor the value of EETI's assets. EETI's residual
RMBS investments are directly backed by residential mortgages representing a
granular and statistical risk. Those assets, being illiquid, are valued using a
"mark to model" methodology. The value of each investment is a function of the
three following variables:
1. Credit assumptions (defaults, recoveries, prepayments, etc)
2. Cash flow pattern of each transaction
3. Rate or yield at which cash flows are discounted
The first two elements have remained very stable in EETI's portfolio and the
quarterly cash generation of the portfolio is in line with our models. The
discount rate could be considered more volatile at present and we are monitoring
the evolution of the market on a daily basis. Even though spreads have been
wider in all securitisation markets (senior notes of European RMBS, mezzanine
and equity tranches of CDOs and CLOs) Ocean Capital has no evidence that the
same has happened in EETI's targeted market which comprises equity tranches of
Prime RMBS issued in continental Europe by strong financial institutions. In
spite of constant discussion with investment banks and issuers, we have not been
shown or offered any transactions since early August on the primary or the
secondary market. In addition, no sub-investment grade tranches of similar
transactions (which could have served as a spread guidance) have traded in
relevant quantities. We believe that our targeted issuers are not sellers of
those prime assets at wider spreads, nor are asset managers with a stable
funding base, such as EETI. As a consequence, EETI has not been able to purchase
assets at wider IRRs.
In this context the investment manager has recommended to the Board to take no
action on the current booking IRR of the current investments. With the expected
and gradual reopening of the market in the fourth quarter of 2007 we anticipate
having further evidence that our "niche market" has not been impacted by last
summer's crisis and still offers yields similar to those at which EETI currently
books its investments.
We have in the past not hesitated to recognise immediate impairment on our
Italian assets when necessary and would react in a similar way should we have
evidence of a change in our market in the future.
EETI DEBT FINANCING
In December 2006 EETI mandated Citi to arrange a debt-financing package
articulated as follows:
1. A Euro 40 million one year facility (raised to 70 million), of which Euro 36
million is currently drawn.
2. A structured, rated, capital market term refinancing to be launched when the
portfolio is further invested.
Ocean Capital has since worked with Citi and Standard and Poor's to assess the
credit quality of the current portfolio as backing for the term refinancing. The
preliminary results, based on the analysis of 75% of the portfolio, are quite
encouraging and show that more than half of EETI's portfolio could be financed
by debt rated BBB or higher.
However the current liquidity condition of the market makes the capital market
term financing unlikely before the year-end. Therefore Ocean Capital has
recently negotiated with Citi an extension of the facility until December 2008,
with an option for EETI to extend it, if necessary, until 2009.
The terms and conditions of the extended facility include some triggers based on
the value of the portfolio. Although the levels of the triggers are quite far
from the current value of EETI's investments (at our current debt level sale of
assets could be required if N.A.V. was to go down by more than 30%), Ocean
Capital will propose to the board an investment plan with the objective of
minimizing EETI's liquidity risk while it continues its investment program and
until the term refinancing is completed.
We expect the financing markets will show signs of recovery by the first half of
2008 and term refinancing to be completed within this time frame.
*Figures are based on The International Securitisation Report of July 2007
INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2007
Period from
Year ended 30 17 Mar 2006
June 2007 to 30 Jun 2006
EUR EUR
Operating income 8,779,107 778,122
Gains and losses on fair value through profit
and loss financial instruments (2,668,884) -
Operating expenses (1,754,493) (402,906)
Loan interest payable (353,258) -
Net profit for the year / period 4,002,472 375,216
Retained profit transferred to reserves 4,002,472 375,216
Basic and diluted earnings per share for the
year/period 0.0400 0.0060
Proforma basic and diluted earnings per
share for the year / period 0.0400 0.0037
In arriving at the results for the financial year, all amounts above relate to
continuing operations.
BALANCE SHEET AS AT 30 JUNE 2007
30 June 2007 30 June 2007 30 June 2006 30 June 2006
EUR EUR EUR EUR
ASSETS
NON-CURRENT ASSETS
Investments designated
at fair value
through the income
statement 129,069,538 55,104,283
CURRENT ASSETS
Trade and other
receivables 3,375,740 608,025
Cash and cash
equivalents 1,757,210 42,663,014
5,132,950 43,271,039
TOTAL ASSETS 134,202,488 98,375,322
EQUITY AND LIABILITIES
EQUITY
Issued share capital - -
Share premium 50,000,000 50,000,000
Retained earnings 47,344,025 48,051,553
97,344,025 98,051,553
CURRENT LIABILITIES
Bank loans and
overdrafts 36,238,827 -
Trade and other
payables 619,636 323,769
TOTAL EQUITY AND
LIABILITIES 134,202,488 98,375,322
CASH FLOW STATEMENT FOR THE YEAR ENDED 30 JUNE 2007
Period from
Year ended 17 Mar 2006 to
30 Jun 2007 30 Jun 2006
EUR EUR
Cash flows from operating activities
Profit for the year / period 4,002,472 375,216
Gains and losses on fair value through profit and
loss
financial instruments 2,668,884 -
Increase in accrued expenses 295,867 323,769
(Increase) in prepayments and accrued income (2,767,715) (608,025)
Purchases of non-current assets (82,027,000) (55,343,773)
Capital repayments 5,392,861 239,490
Net cash flow from operating activities (72,434,631) (55,013,323)
Cash flows from financing activities
Proceeds of issue of ordinary shares - 100,000,000
Costs related to the issuance of ordinary shares - (2,323,663)
Dividends (4,710,000) -
Bank loan drawdowns 36,238,827 -
Net cash flow from financing activities 31,528,827 97,676,337
Cash and cash equivalents at the beginning of the
year /
period 42,663,014 -
Net increase / (decrease) in cash and cash
equivalents (40,905,804) 42,663,014
Cash and cash equivalents at the end of the year /
period 1,757,210 42,663,014
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE YEAR ENDED 30 JUNE 2007
Share Share Accumulated
Capital Premium Profits Total
EUR EUR EUR EUR
Net profit for the period
since
incorporation - - 375,216 375,216
TOTAL RECOGNISED
INCOME AND EXPENSE - - 375,216 375,216
Issuance of ordinary shares - 100,000,000 - 100,000,000
Costs related to issuance of
ordinary shares - (2,323,663) - (2,323,663)
Cancellation of share - (47,676,337) 47,676,337 -
premium
Balance at 30 June 2006 - 50,000,000 48,051,553 98,051,553
Net profit for the year - - 4,002,472 4,002,472
TOTAL RECOGNISED
INCOME AND EXPENSE - - 4,002,472 4,002,472
Distribution to ordinary
shareholders - - (4,710,000) (4,710,000)
Balance at 30 June 2007 - 50,000,000 47,344,025 97,344,025
For further information contact:
Alastair Moreton
Arbuthnot Securities Limited
Nominated Adviser
Tel: 020 7012 2000
Anson Fund Managers Limited
Company Secretary.
Tel: 01481 722260
22 October 2007
E&OE - in transmission
This information is provided by RNS
The company news service from the London Stock Exchange
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