TRIO Finance Limited
PRELIMINARY ANNOUNCEMENT OF THE AUDITED RESULTS For The YEAR ENDED 30 SEPTEMBER
2007
TRIO Finance Limited (`TRIO') is a closed-ended real estate investment company
that invests primarily in a diversified portfolio of real estate debt,
including commercial and residential mortgage backed securities and commercial
real estate loans. The company also invests in the residual income pieces of
securitisation transactions. Lions Hill Limited (`Lions Hill'), TREAL PLC
(`TREAL'), Longlands Finance No 2 Limited (`Longlands') and Pheasantry Limited
are four of the subsidiaries of TRIO. TRIO is managed by Wharton Asset
Management Bermuda Limited.
Highlights
* A final dividend proposed on 20 November 2007 of US$0.44 per share for the
second half of the year on 8 million shares in issue. Since the IPO TRIO
will have returned US$24.6m to Shareholders.
* The worldwide credit crunch that started in the US has had a significant
impact on the Group's business. In this liquidity crisis financial
institutions have been far more cautious in making credit available as well
as making a market for assets on which they provide broker marks at which
the assets are valued.
* A number of assets owned by Lions Hill, an SPV controlled by TRIO, were
downgraded in the third quarter of the Company's financial year by the
rating agencies. Of the total impairment charge of US$42.8m during the
year, US$27.5m relates to assets within Lions Hill. All such impairment
charges are in respect of US assets. The remaining US$15.3m impairment
charges have been against residual income positions held by TRIO.
* Consolidated Net loss for the year of US$28.4m principally as result of
impairment charges of US$42.8m.
* Consolidated reported NAV per share as at 30 September 2007 under IFRS of
US$(1.79) compared to US$6.74 at 30 June 2007, US$9.00 at 31 March 2007 and
US$10.01 at 30 September 2006.
* Company NAV* of US$5.99 compared to US$7.20 at 30 June 2007, US$9.00 at 31
March 2007 and US$10.01 at 30 September 2006.
* Excluding Lions Hill, exposure to US assets is only 0.28% at 30 September
2007 and including Lions Hill exposure to US assets has been reduced
significantly from 61% at 30 September 2006 to 13.5% at 30 September 2007.
* During the year the Group sold its Somerfield PIK at a premium resulting in
a net cashflow of US$28.5m after the repayment of associated loans.
* Both borrowing facilities, within Lions Hill and TREAL have termed out to
10 year facilities.
* Following the EGM held on 10 September 2007 and immediately on payment of
the special dividend, the company undertook a share consolidation - for
every 5 existing shares 4 new shares were issued.
* Company NAV represents the NAV of the TRIO Finance Limited and excludes any
mark to market changes in excess of TRIO's interest in Lions Hill as explained
below.
Key Performance Indicators
* US$21m returned to Shareholders during the financial year:
* An interim dividend declared and paid in June 2007 of US$0.65 per share for
the first half of the year on 10 million shares in issue.
* A special dividend declared and paid in September 2007 of US$1.10 per Share
on 10 million shares in issue.
* A final dividend proposed on 20 November 2007 of US$0.44 per share for the
second half of the year on 8 million shares in issue. Since the IPO TRIO
will have returned US$24.6m to Shareholders.
* Basic and Fully Diluted Earnings per share of US$1.45 pre impairment
charges and US$(2.87) post impairment charges. The EPS for the previous
period was US$0.74.
* Investable funds fully committed at the end of the year.
* The portfolio had a weighted average life of 4.89 (2006: 5.4) years and
there were funding facilities in place with a weighted average life of 9.21
(2006:10.2) years.
Outlook
* Continue to generate cash returns primarily from the high yielding European
Commercial real estate.
* Availability of new financing expected to remain difficult in current
credit market.
* Focus remains on distributing cash to Shareholders.
Chairman's statement
TRIO had a strong first half but the worldwide credit crunch that started in
the US began to affect the Group's business from April 2007 onwards. The
Group's strategy of diversifying away from US assets to build a strong
portfolio of quality cash-generating European assets has nonetheless enabled us
to hit most of our key goals for our first full year of operations.
The first of these has been the payment of a dividend yield of at least 10 per
cent on the initial investment. The Company paid a first half dividend of
US$0.65 per share on 10 million shares and proposes a second half dividend of
US$0.44 per share on 8 million shares in issue. In addition the Company paid a
special dividend of US$1.10 per share on 10 million shares in issue which was
accompanied by a proportionate consolidation of the number of shares in issue.
Since IPO in June 2006, the total distribution will be US$24.6m.
During the first 8 months of the year, the Group took advantage of attractive
markets and strong opportunities in Europe by acquiring assets with good
yields, and successfully trading out of positions in the US. This took our US
exposure from 58% at the start of the year to 14% at the end of the second
quarter on a gross basis. Since March 2007 the markets have been turbulent and
the ability to make further sales in the US has been curtailed.
TRIO remains committed to high quality and transparent disclosure of its
results and strategy.
The good earnings from our cash generative European assets have been impacted
by the impairment charges that we have taken on our US portfolio. TRIO reports
a net consolidated loss for the year of US$28.4m post impairment charges of
US$42.8m and a net profit of US$14.4m before these impairments. This is
equivalent to Earnings per share of US$1.45 per share pre impairment charges
and US$(2.87) per share post impairment charges. All impairment charges have
been in respect of US assets and none are for the Group's portfolio of European
assets. The majority of the impairment charge - US$27.5m - is in respect of the
Lions Hill investments. An additional US$15.3m has been booked in respect of
the 3 residual income positions held directly by TRIO.
As at 30 September 2007, TRIO had fully written down its US$21m interest in
Lions Hill and continues to assume that no further income will be derived from
these assets. This reflects the rapid deterioration of the US sub prime
residential mortgage market which has resulted in the original credit ratings
of certain Lions Hill assets being downgraded and therefore a breach of its
funding covenants. Lions Hill is prevented from making any distributions to
TRIO or redeeming TRIO's participation notes.
Given that there is no further exposure to TRIO, the Board and Investment
Manager believe that it is appropriate also to follow the performance of TRIO
and its portfolio composition excluding any mark to market changes in the Lions
Hill portfolio in excess of the US$21m written off, which is effectively the
Company's NAV. This was US$5.99 as at 30 September 2007 compared to US$9.00 as
at 31 March 2007 and US$10.01 as at 30 September 2006. Without Lions Hill - as
at 30 September 2007, the portfolio comprises 99.7% European assets, which are
all B loans and the balance of 0.3% represents the fair value of the residual
income positions. The weighted average yield of the portfolio was 7.46% and
weighted average life was 4.35 years. With Lions Hill - as at 30 September
2007, the portfolio is 86% European assets and 14% US assets. The weighted
average yield of the portfolio was 7.37% and weighted average life of 4.89
years. The European portfolio which is 36% in the UK and 64% spread across
Sweden, Finland, Germany and France continues to perform in line with
expectations.
The Group's two long term funding facilities have both termed out to 10 years
and have a weighted average life of 9.2 years. The funding provides secure
finance for the existing assets. In the current market position, the Group
assumes that no further financing will be available for the foreseeable future.
This limits the Group's ability to add to or turn over its portfolio.
In this uncertain environment, with the constraints that it imposes, the
Company's objective for the coming year is to provide income returns to
shareholders in the form of semi-annual dividends. The European portfolio is
currently performing strongly and therefore provides the best possible basis to
deliver additional cash returns, although the current environment makes firm
prediction very difficult.
Further detail in relation to the Company's performance, investment portfolio,
financing and outlook is contained in the Investment Manager's Report.
Julian Waldron, Chairman
Investment Manager's Report
Investment Performance
The Company continued with its strategy of diversifying away from the US assets
and build a strong portfolio of European assets. However, the worldwide credit
crunch that started in the US had a significant impact on the Group's business.
The rapid deterioration of the US sub prime residential mortgage market has
resulted in the original credit ratings of twelve US RMBS assets within Lions
Hill being downgraded. In addition one UK CMBS was also downgraded. As
announced in August 2007, Lions Hill is now prevented by the covenants of its
bank facilities from making distributions of income to TRIO or redemption of
the TRIO Participation Notes and also requires permission to buy and sell any
assets within the Lions Hill portfolio. As at 30 September 2007, TRIO has fully
written down its interest in Lions Hill and it is assumed that no future income
will be derived from these assets. Nonetheless, under International Financial
Reporting Standards ("IFRS"), TRIO is deemed to have control of Lions Hill and
its assets and liabilities are consolidated, giving a reported consolidated NAV
under IFRS of US$(1.79) per share. Given that TRIO has taken the maximum loss
in this entity and that there is no further exposure for TRIO, the Board and
Manager believe that it is appropriate to follow the performance of TRIO
excluding any mark to market changes in the Lions Hill portfolio, as
represented by the NAV. The Company NAV as at 30 September 2007 is US$5.99 per
share and effectively represents the NAV of the Group after limiting TRIO's
loss in Lions Hill to US$21m i.e. writing down the fair value of TRIO's
investment in Lions Hill to US$nil.
Portfolio Composition and Diversification
Under IFRS, the Group has increased its investments to an aggregate market
value of US$569m, a net increase of US$59m from the end of the previous year
end. The average size per asset rose from US$5.4m to US$7m. During the year,
TRIO has diversified its portfolio by divesting out of US RMBS assets and
investing in European commercial real estate related assets.
About 68% of the portfolio is invested in European B loans compared to 27% at
the end of previous period end. All the B loans are secured on principally
commercial property in Europe.
During the year the following acquisitions were made:
* twelve European Commercial real estate loans with an aggregate value of
US$327m located in the UK, Germany, Sweden, France, Denmark and Finland;
* six Commercial Mortgage related securities purchased located in the UK and
Germany with a combined value of US$41m
* a rated tranche of a CDO with a value of US$2m.
During the year the following disposals took place and the proceeds were:
* Somerfield PIK �32m
* 27 US RMBS assets US$118.7m
Also during the year two European real estate loans with a value of SEK82.5m
and �3.95m were fully paid down.
The portfolio is analysed below both with and without Lions Hill assets. As
Lions Hill is operating under a standstill agreement and TRIO has fully written
down its investment in Lions Hill, it is more meaningful to consider the
company position excluding assets owned by Lions Hill.
Portfolio Analysis including Lions Hill assets
As at 30 September 2007 there were 81 securities and loans with a weighted
average life of 4.89 years. The portfolio was fully comprised of floating-rate
assets and the weighted average yield of the portfolio was 7.37%.
The amount invested in RMBS represented US$84.6m (2006:US$285.6m),
corresponding to 15% (2006:56%) of the total portfolio, while 68% (US$389m)
were real estate B Loans. The rest of the portfolio was composed by RIPs, ABS
and CMBS. The portfolio was geographically diversified with direct exposures of
14% in the US, 41% in the UK, 43% in Continental Europe and 2% in Eastern
Europe compared to 58%, 21%, 16% and 2% respectively as at 30 September 2006.
27% (2006:62%) of the portfolio had a weighted average rating between A2 and
Baa3, with only 4% (2006:3%) representing sub-investment grade assets. The
remaining 69% (2006:35%) of the portfolio was unrated, being the commercial
property loans and residual income positions.
At IPO, approximately 21% of the portfolio consisted of non-US investments. In
line with its strategy to increase its European real estate exposure, TRIO has
increased its non-US exposure to 86% compared to 42% a year ago. TRIO's
European investments have performed in-line with expectations.
Portfolio analysis excluding Lions Hill assets
As at 30 September 2007 there were 15 securities and loans with a weighted
average life of 4.35 years. The portfolio was fully comprised of floating-rate
assets and the weighted average yield of the portfolio was 7.46%.
As at 30 September 2007 99.72% was invested in 12 B loans, all unrated. The
rest of the portfolio was composed of 3 residual income positions. The
portfolio geographical exposure comprises 36% in the UK and 64% in Continental
Europe. All these European investments have performed in-line with
expectations.
The following tables show the asset composition as at 30 September 2007 for
both (a) Group excluding the assets owned by Lions Hill as well as (b) Group
with Lions Hill assets consolidated with comparisons for 30 September 2006.
Collateral type Credit ratings of assets held
(Moody's)
30 Sept 30 Sept 30 30 Sept 30 Sept 30 Sept
07 Inc 07 Exc Sept 07 Inc 07 Exc 06
Lions Lions 06 Lions Lions
Hill Hill Hill Hill
A2 5% 0% 2%
A3 0% 0% 6%
REAL ESTATE LOANS 69% 100% 27% B2 0% 0% 0%
EUROPE
RMBS US 12% 0% 52% Baa1 1% 0% 12%
CMBS EUROPE 11% 0% 4% Baa2 14% 0% 31%
ABS EUROPE 4% 0% 7% Baa3 7% 0% 11%
RIP US 0% 0% 4% Ba1 0% 0% 0%
RMBS EUROPE 3% 0% 4% Ba2 4% 0% 3%
CDO US 1% 0% 2% Unrated 69% 100% 35%
Total 100% 100% 100% Total 100% 100% 100%
Geographic location Currency
30 Sept 30 Sept 30 30 Sept 30 Sept 30 Sept
07 Inc 07 Exc Sept 07 Inc 07 Exc 06
Lions Lions 06 Lions Lions
Hill Hill Hill Hill
UK 41% 36% 21% GBP 42% 36% 21%
US 14% 0% 58% USD 14% 0% 62%
Finland and Sweden 16% 25% 7% EURO 38% 54% 15%
Germany 13% 19% 7% SEK 6% 10% 2%
Europe 14% 20% 2% Total 100% 100% 100%
Eastern Europe 2% 0% 2%
Global 0% 0% 3%
Total 100% 100% 100%
Top Ten Investments
A summary of the Group's ten largest investments excluding Lions Hill
representing 91.93% and including Lions Hill representing 57.84% of the gross
asset value of the portfolio is set out below.
Security description Asset Type Country Currency % %
portfolio portfolio
including excluding
Lions Lions Hill
Hill
CENTREPARCS LOAN UK GBP 10.73% 17.05%
VIOLET PROPCO LOAN UK GBP 7.20% 11.45%
SUNRISE DECO B LOAN LOAN GERMANY EUR 6.85% 10.89%
AURORA LOAN SWEDEN SEK 6.34% 10.08%
KAMPPI B LOAN LOAN FINLAND EUR 5.13% 8.15%
ROYAL MINT COURT LOAN UK GBP 4.75% 7.54%
MIROMESNIL LOAN FRANCE EUR 4.64% 7.38%
AURORA LOAN SWEDEN EUR 4.44% 7.06%
PROJECT MAY LOAN GERMANY EUR 4.39% 6.97%
SIGNAC LOAN FRANCE EUR 3.37% 5.36%
Out of the top ten investments, eight are European loans acquired since last
year in accordance with TRIO's strategy of investing further in European
assets.
Centreparcs
This is a B loan secured on a portfolio of 4 long-leasehold self-contained
holiday parks in England. The company has been in operation for over 20 years
and has considerable experience in management of such assets. In addition there
is very limited competition in this market.
Violet Propco
This is a B loan secured by a portfolio of over 50 stores across UK. Apax, R20
and Barclays are strong equity sponsors and it also has a large equity
participation from the experienced management team in place.
Sunrise Deco B Loan
This is a B Loan secured on a portfolio of commercial properties located in
West Germany and is very granular (61 properties, 468 tenants) both in terms of
the number of tenants and geographically. The portfolio can broadly be broken
into 4 sectors: High Street, Mixed Commercial, Shopping Centre and Retail
Warehouse. Dawnay, Day Treveria is a strong equity sponsor and a hands-on
experienced management team is behind this deal.
Aurora SEK and EUR
These are B loans secured by commercial properties across Sweden, Finland,
Denmark and Lithuania. The portfolio includes office, industrial, warehouses
and hotel properties. Northern European is the equity sponsor.
Kamppi B Loan
This is a B Loan secured on the Kamppi Shopping Centre, a newly developed
shopping centre in a prime location directly in the heart of Helsinki's retail
and business district with excellent connection to public transport and easy
accessibility. It has a great diversity of tenants, 151, and only 6.4% of the
rent is contributed by the largest tenant. The initial equity sponsors were
Boultbee and RBS.
Royal Mint Court
A B loan which is secured by 4 office properties in London. These are occupied
by high quality tenants.
Miromesnil
This is a B loan secured by 4 office properties in and around Paris. Lehman is
the sole equity sponsor.
Project May
This is a B loan secured by a wide variety of properties across Germany with an
equally diversified list of quality tenants. The properties are managed by a
focussed property manager with local knowledge.
Signac
A B loan which is secured by a newly constructed office building just outside
Paris. The property is still under the contractors guarantee and is fully let.
Financing
TREAL
During the year, TREAL drew on its existing facility to acquire more European
commercial real estate related assets. As at 30 September 2007 TRIO has Euro30m
subordinated notes in TREAL and has drawn Euro224m, just short of the Euro230m
available. In August 2007, TREAL requested an extension of the revolving
facility as required under the facility agreement. The lender did not respond
and consequently the extension was deemed to have been refused. Under the
agreement, the repayment date of the loan extended to 31 August 2016, ten years
from the date the facility was originally granted.
LONGLANDS
In December 2006, with the launch of Longlands, a further funding for the
Somerfield PIK, was secured at LIBOR +4% until October 2007 and LIBOR +5% from
thereon. The facility was available until the earlier of maturity of the PIK or
July 2014 with the key condition that the Loan to Value should not exceed 50%.
The initial funding of the PIK was 50% by TRIO and 50% from the lender. In July
2007, Somerfield PIK was sold and the proceeds were used to repay the loan plus
a prepayment fee.
LIONS HILL
On the first anniversary of the term loan, the lender did not renew the
facility for another year. Consequently in March 2007, Lions Hill elected to
exercise the Term Out Option under the loan facility agreement for a term of 10
years. Following the credit rating agency downgrades of some of the Lions Hill
assets, Lions Hill was in breach of the loan covenants in the facility
agreement. On 1 August 2007, Lions Hill entered into a standstill agreement
with the lender for a period to 19 January 2008. During this period, Lions Hill
cannot make any distributions to TRIO, no withdrawals can be made nor can any
subordinated notes be redeemed. In addition assets cannot be bought or sold
without the lender's permission.
Outlook
With the current credit crisis in the worldwide markets the real estate market
is unlikely to have new financing available in the short term. TRIO has written
down its investment in Lions Hill and it is assumed no further income will be
derived from this. However, should markets improve, there will be an upside and
potential income from this. TREAL has a term facility of 10 years and should
continue to generate good returns from its European real estate portfolio.
The financial information set out in this announcement does not constitute the
Company's statutory accounts for the year ended 30 September 2007.
The financial information for the year ended 30 September 2007 is derived from
the financial statements to be delivered to the UK Listing Authority. The
Auditors reported on those accounts, their report was unqualified and did not
contain a statement under section 65(3) of The Companies (Guernsey) Law, 1994.
However it includes an added emphasis paragraph regarding uncertainty over the
fair value of investments as described further in notes 2 and 3 to the
financial statements.
This preliminary announcement was approved by the directors of the Company on
21 November 2007.
Consolidated Income Statement
Note Year ended Period from
30 September 11 May 2006
2007 to
30 September
2006
US$ US$
Operating income
Interest income from cash and cash 531,531 116,553
equivalents
Interest income from investments 47,602,167 12,070,358
Net realised gains on investments 7,316,315 3,667,128
(including gains on initial portfolio)
Net foreign exchange losses (4,711,716) (3,185)
Impairment charges 7 (42,762,196) -
Total operating income 7,976,101 15,850,854
Operating expenses
Other operating expenses 4 (4,341,778) (1,414,879)
Finance costs 5 (32,054,094) (7,023,956)
Total operating expenses (36,395,872) (8,438,835)
Net (loss)/profit (28,419,771) 7,412,019
Earnings per Ordinary Share 8
Basic US$(2.87) US$0.74
Diluted US$(2.87) US$0.74
Weighted average Ordinary Shares 8 Number Number
outstanding
Basic 9,895,890 10,000,000
Diluted 9,895,890 10,033,349
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the financial statements.
Company Income Statement
Note Year ended Period from
30 September 11 May 2006
2007 to
30 September
2006
US$ US$
Operating income
Interest income from cash and cash 78,687 58,815
equivalents
Interest income from investments 18,550,960 1,478,419
Net realised gains on investments 30,800 -
Net realised foreign exchange losses (2,178,281) (2,524)
Net unrealised foreign exchange (losses)/ (409,191) 135,677
gains
Impairment charges 7 (42,836,947) -
Total operating (loss)/income (26,763,972) 1,670,387
Operating expenses
Other operating expenses 4 (3,578,234) (1,337,312)
Total operating expenses (3,578,234) (1,337,312)
Net (loss)/profit (30,342,206) 333,075
Earnings per Ordinary Share 8
Basic US$(3.07) US$0.03
Diluted US$(3.07) US$0.03
Weighted average Ordinary Shares 8 Number Number
outstanding
Basic 9,895,890 10,000,000
Diluted 9,895,890 10,033,349
All items in the above statement are derived from continuing operations.
The accompanying notes form an integral part of the financial statements.
Consolidated Statement of Changes in Shareholders Equity
Share Share Other Capital Net Accumulated Total
premium reserve reserve unrealised
capital gain/(loss) profits/
on available
for sale (losses)
investments
Note US$ US$ US$ US$ US$ US$ US$
Balance at incorporation - - - - - - -
Net profit for the period - - - - - 7,412,019 7,412,019
Net unrealised gain on 10 - - - - 131,173 - 131,173
available for sale
securities
Total recognised income and - - - - 131,173 7,412,019 7,543,192
expense for the period
Issuance of Ordinary Shares 15,16 - 100,000,000 - - - - 100,000,000
Warrants granted 16,18 - (350,872) - 350,872 - - -
Costs related to issuance of 16 - (7,397,458) - - - - (7,397,458)
Ordinary Shares and Warrants
Cancellation of share 16 - (92,251,670) 92,251,670 - - - -
premium
Balance at 30 September 2006 - - 92,251,670 350,872 131,173 7,412,019 100,145,734
Net loss for the year - - - - - (28,419,771) (28,419,771)
Net unrealised loss on 10 - - - - (64,962,738) - (64,962,738)
available for sale
securities
Total Recognised income and - - - - (64,962,738) (28,419,771) (93,382,509)
expense for the year
Distribution to Ordinary 6 - - - - - (10,100,000) (10,100,000)
Shareholders of the Company
Special distribution to 6 - - (11,000,000) - - - (11,000,000)
Ordinary Shareholders
Transfer to accumulated 16 - - (43,629,131) - - 43,629,131 -
profit
Balance at 30 September 2007 - - 37,622,539 350,872 (64,831,565) 12,521,379 (14,336,775)
The accompanying notes form an integral part of the financial statements.
Company Statement of Changes in Shareholders' Equity
Note Share Share Other Capital Net Accumulated Total
Capital premium reserve reserve unrealised
gain/(loss) profits/
on available
for sale (losses)
investments
and
investments
in
subsidiaries
US$ US$ US$ US$ US$ US$ US$
Balance at incorporation - - - - - - -
Net profit for the period - - - - - 333,075 333,075
Net unrealised gain on - - - - 7,210,117 - 7,210,117
available for sale
securities
Total recognised income and - - - - 7,210,117 333,075 7,543,192
expense for the period
Issuance of Ordinary Shares 15,16 - 100,000,000 - - - - 100,000,000
Warrants granted 16,18 - (350,872) - 350,872 - - -
Costs related to issuance 16 - (7,397,458) - - - - (7,397,458)
of Ordinary Shares and
Warrants
Cancellation of share 16 - (92,251,670) 92,251,670 - - - -
premium
Balance at 30 September - - 92,251,670 350,872 7,210,117 333,075 100,145,734
2006
Net loss for the year - - - - - (30,342,206) (30,342,206)
Net unrealised loss on - - - - (781,901) - (781,901)
available for sale
securities
Total Recognised income and - - - - (781,901) (30,342,206) (31,124,107)
expense for the year
Distribution to Ordinary 6 - - - - - (10,100,000) (10,100,000)
Shareholders of the Company
Special distribution to 6 - - (11,000,000) - - - (11,000,000)
Ordinary Shareholders
Transfer to accumulated 16 - - (43,629,131) - - 43,629,131 -
profit
Balance at 30 September - - 37,622,539 350,872 6,428,216 3,520,000 47,921,627
2007
Consolidated Balance Sheet
Note 30 September 30 September
2007 2006
US$ US$
Non-current assets
Available for sale investments 10 568,629,899 509,920,365
Current assets
Cash and cash equivalents 15,107,862 37,696,939
Other assets 11 8,354,726 3,479,777
23,462,588 41,176,716
Total assets 592,092,487 551,097,081
Equity and liabilities
Equity
Share capital 15 - -
Share premium account 16 - -
Other reserve 16 37,622,539 92,251,670
Capital reserve 18 350,872 350,872
Net unrealised (loss)/gain on available for 10 (64,831,565) 131,173
sale investments
Accumulated profits 12,521,379 7,412,019
(14,336,775) 100,145,734
Current liabilities
Interest on loans 12 7,321,454 1,544,814
Interest on subordinated notes 157,684 -
Loans 12 - 420,506,195
Amounts payable on investments purchased - 27,665,820
Other liabilities 14 965,418 1,234,518
8,444,556 450,951,347
Non-current liabilities
Loans 12 597,984,706 -
Total liabilities 606,429,262 450,951,347
Total equity and liabilities 592,092,487 551,097,081
The accompanying notes form an integral part of the financial statements.
These financial statements were approved and authorised for issue by the Board
of Directors on 21 November 2007.
Company Balance Sheet
Note 30 September 30 September
2007 2006
US$ US$
Non-current assets
Investments in subsidiaries 9 40,525,339 60,691,454
Available for sale investments 10 1,012,659 20,000,000
41,537,998 80,691,454
Current assets
Cash and cash equivalents 6,343,272 19,921,870
Other assets 11 791,295 689,405
7,134,567 20,611,275
Total assets 48,672,565 101,302,729
Equity and liabilities
Equity
Share capital 15 - -
Share premium account 16 - -
Other reserve 16 37,622,539 92,251,670
Capital reserve 18 350,872 350,872
Net unrealised gain on investments 9,10 6,428,216 7,210,117
Accumulated profits 3,520,000 333,075
47,921,627 100,145,734
Current liabilities
Other liabilities 14 750,938 1,156,995
Total liabilities 750,938 1,156,995
Total equity and liabilities 48,672,565 101,302,729
The accompanying notes form an integral part of the financial statements.
These financial statements were approved and authorised for issue by the Board
of Directors on 21 November 2007.
Consolidated Cash Flow Statement
Note Year ended 30 Period from
September
2007 11 May 2006
to
30 September
2006
US$ US$
Net cash outflow from operating activities 17 (152,847,818) (469,932,656)
Financing activities
Proceeds from issuance of Ordinary Shares 15,16 - 100,000,000
Costs related to issuance of Ordinary 16 - (7,397,458)
Shares
Dividends paid to Shareholders 6 (10,100,000) -
Payment of special dividend to Shareholders 6 (11,000,000) -
Net borrowings under loan facilities 177,478,511 420,506,195
Interest paid on loans (26,119,770) (5,479,142)
Cash flows from financing activities 130,258,741 507,629,595
Net (decrease)/increase in cash (22,589,077) 37,696,939
Reconciliation of net cash flow to movement
in net cash
Net (decrease)/increase in cash and cash (22,589,077) 37,696,939
equivalents
Cash and cash equivalents at 30 September 37,696,939 -
2006
Cash and cash equivalents at 30 September 15,107,862 37,696,939
2007
The accompanying notes form an integral part of the financial statements.
Company Cash Flow Statement
Note Year ended Period from
30 September
2007 11 May 2006
to
30 September
2006
US$ US$
Net cash inflow/(outflow) from operating 17 7,521,402 (72,680,672)
activities
Financing activities
Proceeds from issuance of Ordinary Shares 15,16 - 100,000,000
Costs related to issuance of Ordinary Shares 16 - (7,397,458)
Dividends paid to Shareholders 6 (10,100,000) -
Payment of special dividend to Shareholders 6 (11,000,000) -
Cash flows from financing activities (21,100,000) 92,602,542
Net (decrease)/increase in cash (13,578,598) 19,921,870
Reconciliation of net cash flow to movement
in net cash
Net (decrease)/increase in cash and cash (13,578,598) 19,921,870
equivalents
Cash and cash equivalents at 30 September 19,921,870 -
2006
Cash and cash equivalents at 30 September 6,343,272 19,921,870
2007
Notes to the Financial Statements
1. General information
TRIO Finance Limited (the "Company") was registered on 11 May 2006 with
registered number 44776 and is domiciled in Guernsey, Channel Islands, and
commenced its operations on 5 June 2006. The Company is a closed-ended
investment company incorporated in Guernsey with limited liability under The
Companies (Guernsey) Law 1994 and its Ordinary Shares are listed on the London
Stock Exchange. The registered office of the Company is Dorey Court, Admiral
Park, St. Peter Port, Guernsey, GY1 3BG, Channel Islands. "Group" is defined as
the Company and its subsidiaries: Lions Hill Limited ("Lions Hill"), TREAL
Public Limited Company ("TREAL") and Longlands Finance No. 2 Limited
("Longlands"). Another subsidiary, Pheasantry Limited is dormant at the year
end.
On 27 February 2007, the Company reclassified its listing from it previous
listing under Chapter 15 of the Listing Rules to that of an overseas company
listed under Chapter 14 of the Listing Rules.
The Group's investment objective is to provide stable income returns to
Shareholders in the form of semi-annual dividends and the potential for capital
growth. The Group invests predominantly in investment grade asset-backed
securities (with a primary focus on real estate mortgage-backed securities) and
real estate related financial assets including B-loans. It seeks to achieve
this by investing both in residual income positions of CDOs or fund structures
(in particular targeting CDOs or funds managed by the Investment Manager or its
affiliates) and investing in one or more special purpose vehicles or CDOs
established by the Group. The Group also makes direct acquisitions of such
securities. Target assets may be in cash or synthetic form. The Group also
invests directly in synthetic instruments, subject to the restrictions on
exposure set out in the prospectus at the IPO.
The Group's investment management activities are managed by its Investment
Manager, Wharton Asset Management Bermuda Limited (the "Investment Manager"), a
private limited company incorporated in Bermuda. The Group has entered into an
Investment Management Agreement (the "Investment Management Agreement") under
which the Investment Manager manages its day-to-day investment operations,
subject to the supervision of the Company's Board of Directors. The Investment
Manager has appointed Wharton Asset Management UK Limited, an investment
management company incorporated in the United Kingdom and authorised and
regulated by the Financial Services Authority, to perform certain
sub-management functions. The Group has no direct employees. For its services,
the Investment Manager receives a monthly management fee (which includes a
reimbursement of expenses) and a quarterly performance-related fee. The Group
has no ownership interest in the Investment Manager. The Group is administered
by Kleinwort Benson (Channel Islands) Fund Services Limited (the
"Administrator"). Investors Fund Services (Ireland) Limited are the
sub-administrator.
At the date of authorisation of these financial statements, the following
Standards, which have not been applied in these financial statements, were in
issue but not yet effective:
IFRS 7 Financial Instruments: Disclosures; and the related amendment to IAS 1
on capital disclosures
The Directors anticipate that the adoption of the above Standard in future
periods will not have a material impact on the financial statements of the
Company and Group except for additional disclosures on capital and financial
instruments when the Standard comes into force for periods commencing on or
after 1 January 2007.
IFRS 8 Operating Segments
The Directors anticipate that the adoption of the above Standard in future
years will not have a material impact on the financial statements of the
Company when the Standard comes into force for the period commencing 1 January
2009.
The Directors believe that other 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 comparative figures disclosed relate to the period from 11 May 2006
(incorporation) to 30 September 2006.
2. Significant accounting policies
Statement of compliance
The financial statements of the Group have been prepared in accordance with
International Financial Reporting Standards ("IFRS"), which comprise standards
and interpretations approved by the International Accounting Standards Board
("the IASB"), and International Accounting Standards and Standing
Interpretations Committee interpretations approved by the International
Accounting Standards Committee ("IASC") that remain in effect, together with
applicable legal and regulatory requirements of Guernsey Law and the Listing
Rules of the UK Listing Authority.
Basis of preparation
The financial statements of the Group are prepared under IFRS on the historical
cost or amortised cost basis except that the following assets and liabilities
are stated at their fair value: derivative financial instruments, financial
instruments held for trading and financial instruments classified as available
for sale.
The preparation of financial statements in conformity with IFRS requires the
Group 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. The details of
these estimates and assumptions are described below and in Notes 3 and 13.
Actual results could differ from those estimates.
These financial statements are presented in US Dollars and the functional
currency of the Group is also considered to be US Dollars.
Basis of consolidation
Subsidiaries are entities controlled by the Company. The financial statements
of subsidiaries are included in the consolidated financial statements from the
date that control commences until the date that control ceases.
In accordance with the Standing Interpretations Committee Interpretation 12
"Consolidation-Special Purpose Entities" ("SIC 12"), the Company consolidates
only entities over which control is indicated by activities, decision making,
benefits and residual risks of ownership. Where the Company does consolidate a
special purpose entity ("SPE"), the interest in the notes not held by the
Company will be shown as a liability in the balance sheet. Any income or
expenses attributable to these note holders will be shown as an expense in the
income statement. In accordance with SIC 12 the Company does not consolidate an
SPE in which it holds less than a substantial interest in the residual income
position. Where it holds more than a substantial interest, it does not
consolidate the SPE where the residual income position represents only a small
part of the gross assets of the SPE and the Company was neither involved in the
establishment of the SPE or the origination of the assets owned by the SPE, on
the basis that the Company is not exposed to the majority of the risks and
benefits of the assets owned by the SPE, provided control is not otherwise
indicated by the Company's activities, decision making, benefits and residual
risks or ownership.
Investments
Financial assets are classified as available for sale and are stated at fair
value, with any resultant gain or loss being recognised directly in equity,
except for impairment losses and, in the case of monetary items such as debt
securities, foreign exchange gains and losses which are taken to the income
statement. When these investments are derecognised, the cumulative gain or loss
previously recognised directly in equity is recognised in the income statement.
Where these investments are interest-bearing, interest calculated using the
effective interest method is recognised in the income statement. Expenses
incidental to the acquisition of available for sale investments are included
within the cost of that investment.
Further details of the factors and assumptions surrounding the estimation
uncertainty in valuations is set out in Note 3.
Financial assets are recognised/derecognised by the Group on the date it
commits to purchase/sell the investments in regular way trades.
Investments in subsidiaries are stated at fair value, including any interest in
subordinated notes.
Cash and cash equivalents
Cash and cash equivalents includes amounts held in interest bearing accounts,
including any cash collateral held for forward foreign exchange contracts. The
maximum amount to be held as collateral is 2% of the notional value of the
forward foreign exchange contracts plus mark to market value of the contracts.
Derivative financial instruments
Derivative financial instruments used by the Group to hedge its exposure to
foreign exchange and interest rate risks arising from operational, financing
and investment activities that do not qualify for hedge accounting are
accounted for as trading instruments. The Group may also enter into credit
default or total return swap arrangements where the underlying asset or assets
would otherwise be within the Group 's investment policy in order to obtain
substantially the same economic exposure to the returns and risks associated
with holding such underlying asset or assets.
Derivative financial instruments (including embedded derivatives) are
recognised initially at fair value. Subsequent to initial recognition,
derivative financial instruments are stated at fair value. The gain or loss on
remeasurement to fair value is recognised immediately in the income statement.
However, where derivatives qualify for hedge accounting, recognition of any
resultant gain or loss depends on the nature of the item being hedged.
Forward exchange contracts
Fair value of forward exchange contracts is their quoted market price at the
balance sheet date, being the present value of the quoted forward price.
Fair value
All financial assets carried at fair value are initially recognised at fair
value and subsequently re-measured at fair value based on quoted bid prices
where such bids are available from a third party in a liquid market. Where
quoted bids are not available, broker marks are sought, and where multiple
marks are available the lowest such mark is taken. If quoted bid prices or
broker marks are unavailable, the fair value of the financial asset is
estimated using pricing models incorporating discounted cash flow techniques.
These pricing models apply assumptions 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. Where such pricing models are used, inputs
are based on market related measures at the balance sheet date.
Where actual performance data regarding defaults, delinquencies and prepayments
received in respect of a given asset is markedly different from the default,
delinquency and prepayment assumptions incorporated in the pricing model for
the asset, the assumptions are revised to reflect this data and the pricing
model is updated accordingly. In addition to the actual performance data
observed in respect of a particular asset, market factors are also taken into
account within the model. Dealer marks (where available) and any other
available indicators are assessed to determine the fair value of the
investment.
Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported within
assets and liabilities when there is a legally enforceable right to set off the
recognised amounts and there is an intention to settle on a net basis, or
realise the asset and settle the liability simultaneously.
Interest-bearing loans and borrowings
Interest-bearing borrowings are recognised initially at fair value less
attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost with any difference
between cost and redemption value being recognised in the income statement over
the period of the borrowings on an effective interest basis.
Financing costs associated with the issuance of financings are deferred and
amortised over the term of the financings using the effective interest rate
method.
Foreign currency transactions
Transactions in foreign currencies are translated at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies at the balance sheet date are translated to
US Dollars at the foreign exchange rate ruling at that date. Foreign exchange
differences arising on translation are recognised in the income statement.
Impairment
The carrying amounts of the Group's available for sale assets are reviewed at
each balance sheet date to determine whether there is any indication of
impairment.
When a decline in the fair value of an available for sale financial asset has
been recognised directly in equity and there is objective evidence that the
asset is impaired, the cumulative loss that had been recognised directly in
equity is recognised in the income statement even though the financial asset
has not been derecognised. The amount of the cumulative loss that is recognised
in the income statement is the difference between the acquisition cost and the
current fair value, less any impairment loss on that financial asset previously
recognised in the income statement.
Reversals of impairment
An impairment loss in respect of an investment in an equity instrument
classified as available for sale is not reversed through the income statement.
If the fair value of a debt instrument classified as available for sale
increased and the increase can be objectively related to an event occurring
after the impairment loss was recognised in profit or loss, the impairment loss
is reversed, with the amount of the reversal recognised in the income
statement.
An impairment loss is reversed only to the extent that the asset's carrying
amount does not exceed the carrying amount that would have been determined, net
of amortisation, if no impairment loss had been recognised.
Transaction expenses
The preliminary expenses of the Group directly attributable to its initial
public offering and any costs associated with the establishment of the Group
are charged to the share premium account.
Share warrants have been granted to an affiliate of the Investment Manager have
been treated as a transaction expense on the basis that they were granted by
the Group as a fee for the affiliate's role as promoter and indemnification of
certain costs, liabilities and losses in connection with raising capital for
the Group. The fair value of such warrants is charged to the share premium
account. The share premium account is credited with the fair value of such
warrants at the time that such warrants are vested.
Interest income
Interest income is accrued based on the outstanding principal amount of the
Group's financial assets and their contractual terms. Premiums and discounts
associated with the purchase of financial assets are amortised or accreted into
interest income over the projected lives of the investments using the effective
interest method as defined under International Accounting Standard 39. The
Group's policy for estimating prepayment speeds for calculating the effective
yield is to evaluate historical performance, market consensus indicators and
current market conditions. Where the Group adjusts its effective yield
calculation to take account of any change in underlying assumptions, such
adjustments are recognised in the income statement.
Other receivables
Other receivables do not carry any interest and are short-term in nature and
are accordingly stated at their nominal value as reduced by appropriate
allowances for estimated irrecoverable amounts.
Financial liabilities and equity
Financial liabilities and equity are classified according to the substance of
the contractual arrangements entered into. An equity instrument is any contract
that evidences a residual interest in the assets of the Group after deducting
all of its liabilities. Financial liabilities and equity are recorded at the
proceeds received, net of issue costs.
Other accruals and payables
Other accruals and payables are not interest-bearing and are stated at their
nominal value. Expenses are accrued for in the period in which they were
incurred.
Segmental reporting
The Directors are of the opinion that the Company and its Group are engaged in
a single segment of business of investing in debt securities and operates
solely from Guernsey and therefore no segmental reporting is provided.
3. Critical accounting judgements and key sources of estimation uncertainty
In the process of applying the Group's accounting policies (described in Note 2
above), the Group has determined that the following judgements and estimates
have the most significant effect on the amounts recognised in the financial
statements:
Income recognition
The Group's available for sale investments are stated at fair value and all the
investments are floating rate assets except the residual income positions. As
stated in Note 2, interest income on investments held (except residual interest
positions) is accrued based on the outstanding principal amount and their
contractual terms. Income is recognised for the residual interest positions
on an effective interest rate ("EIR") method in accordance with paragraph 30 of
IAS18 "Revenue". In addition, the amortisation of any premium or discount is
based on the effective interest rate ("EIR"). The EIR is taken as the effective
interest rate on the acquisition of the asset and remains unchanged throughout
the holding period except where the LIBOR/ EURIBOR rate has changed
significantly.
Valuation of investments
In accordance with the Group's accounting policies, fair value of financial
assets is primarily based on quoted bid prices where such bids are available
from a third party. Where quoted bids are not available, broker marks are
sought, and where multiple marks are available the lowest such mark is taken.
The vast majority of the investments are real estate backed loans and real
estate backed securities. The remainder are residual income positions. Given
the illiquidity and widening of spreads due to recent and current market
conditions, these quoted marks from brokers may not necessarily represent the
realisation value of such assets as of the balance sheet date.
As described in Note 13 to the financial statements, the market for
subordinated asset-backed securities and the Group's ability to deal in
investments may be limited. There is no active secondary market in residual
income positions and, further, there is no industry standard agreed methodology
to value residual income positions. Prices for the residual income positions
are obtained from the lead trustee bank.
As an additional indication of fair value, the Group performs discounted
cashflow models for each of the assets. The cash flow data for these models is
obtained from data providers such as Intex, trustee reports and in some cases
information provided by the originator. Where actual performance data regarding
defaults, delinquencies, recovery rates and prepayments received in respect of
a given asset is markedly different from the default, delinquency and
prepayment assumptions incorporated in the pricing model for the asset, the
assumptions are revised to reflect this data and the pricing model is updated
accordingly. The key assumptions within the model are voluntary and involuntary
prepayment speeds, severity on liquidations, changes in pipeline of
delinquencies, call option and changes in interest rates. In addition to the
actual performance data observed in respect of a particular asset, market
factors such as house price indices and refinancing opportunities are also
taken into account within the model.
If the discounted cash flows based on the assumed EIR is less than the book
amortised cost (reduced by any impairment charges to date) then the difference
results in an impairment charge to the income statement and the amortised cost
is reduced.
A comparison is made of this reduced amortised cost with the fair value derived
from broker marks and the lower of the two is taken as fair value.
In addition, these cash flow may lead to a changing pattern of future
amortisation of premium/ discounts and therefore affect future interest income.
The fair value of the Group's investments is set out in Note 10 and a further
description of the risks associated with the Group's investments is provided in
Note 13. Given the number of individual investments and the number of
individual parameters that make up each pricing model, the Directors believe
that it would be impractical to disclose the effects of changes to each
assumption in respect of each individual investment and this would not provide
meaningful additional disclosure.
Further disclosures of key assumptions and key sources of estimation
uncertainty are set out in Note 2 to the financial statements under the heading
"Fair Value" and Note 13.
4. Other operating expenses
Group Group Period
from
Year ended
30 September 11 May 2006 to
2007
30 September
2006
US$ US$
Investment management, custodian and
administration fees
Investment management and incentive fee (Note 2,470,847 1,038,301
18)
Administration fee (Note 18) 353,681 108,738
Custodian fee (Note 18) 32,783 9,740
2,857,311 1,156,779
Other operating expenses
Audit fees 109,434 75,000
Interim review fees 23,834 -
Tax fees 12,000 -
Directors' fees payable to the directors of 190,000 76,376
TRIO Finance Limited
Directors' fees payable to the directors of the 61,907 -
Subsidiaries
Legal fees 203,063 20,000
Special purpose vehicles set up costs 228,471 6614
Professional fees - secondary offer 500,000 -
Other expenses 155,758 80,110
1,484,467 258,100
Total other operating expenses 4,341,778 1,414,879
The Group has no employees.
Company Company Period
from 11 May 2006
Year ended to
30 September
2007 30 September
2006
US$ US$
Investment management, custodian and
administration fees
Investment management and incentive fee (Note 2,470,847 1,038,301
18)
Administration fee (Note 18) 146,338 47,795
Custodian fee (Note 18) 15,205 3,294
2,632,390 1,089,390
Other operating expenses
Audit fees 79,984 75,000
Interim review fees 23,834 -
Tax fees 3,000 -
Directors' fees payable to the directors of 190,000 76,376
TRIO Finance Limited
Legal fees 67,200 20,000
Special purpose vehicles set up costs 33,386 6,614
Professional fees - secondary offer 500,000 -
Other expenses 48,440 69,932
945,844 247,922
Total other operating expenses 3,578,234 1,337,312
Amounts paid to Deloitte & Touche in respect of acting as reporting accountants
were US$nil (2006: US$138,255) (in respect of work relating to the Company's
Initial Public Offering). This amount reduced the share premium account along
with other listing costs in accordance with the accounting policies of the
Group. In 2007 US$81,024 (2006: US$nil) was paid to Deloitte & Touche LLP in
respect of work relating to the secondary offer.
5. Finance costs
Group Group
Year ended 30 Period from
September 2007
11 May 2006 to
30 September
2006
US$ US$
Finance costs arises from:
Loans 30,526,908 7,023,956
Subordinated note 1,527,186 -
Total finance costs 32,054,094 7,023,956
There were no finance costs for the Company.
6. Dividends
Dividends of US$0.36 per share on 10 million shares (US$3,600,000 in total) and
US$0.65 per share on 10 million shares (US$6,500,000 in total) were proposed by
directors and paid during the year. A dividend was proposed of US$0.44 per
share on 8 million shares by directors on 20 November 2007 and has not been
included as a liability in these financial statements.
A special dividend of US$1.10 per share on 10 million shares (US$11,000,000)
was proposed by the directors on 9 August 2007 and paid on 26 September 2007
out of other reserves.
7. Impairment charges
Group impairment charges comprise US$27,466,951 in relation to investments held
by Lions Hill and US$15,295,245 in relation to investments held by TRIO Finance
Limited, the holding company. There were no impairment charges in the period
ended 30 September 2006. Impairment charges are where there has been a
permanent diminution in the value of the asset and the charge is the extent to
which this is not recoverable. They represent the difference between amortised
cost and expected cash flows of the financial asset discounted at its effective
interest rate.
Company impairment charges comprise US$15,295,245 in relation to investments
held by TRIO Finance Limited and US$27,541,702 in relation to TRIO Finance
Limited's investment in its subsidiary Lions Hill.
8. Earnings per ordinary share
Group Group
Year ended 30 Period from
September 2007
11 May 2006 to
30 September
2006
US$ US$
The calculation of the basic and diluted
earnings per share is based on the
following data:
Earnings for the purposes of basic and (28,419,771) 7,412,019
diluted earnings per share being net profit
attributable to equity holders
Weighted average number of Ordinary Shares 9,895,890 10,000,000
for the purposes of basic and diluted
earnings per share
Effect of dilutive potential Ordinary
Shares
Warrants - 33,349
Weighted average number of Ordinary Shares 9,895,890 10,033,349
for the purpose of diluted earnings per
share
Company Company
Year ended 30 Period from
September 2007
11 May 2006 to
30 September
2006
US$ US$
The calculation of the basic and diluted
earnings per share is based on the
following data:
Earnings for the purposes of basic and (30,342,206) 333,075
diluted earnings per share being net profit
attributable to equity holders
Weighted average number of Ordinary Shares 9,895,890 10,000,000
for the purposes of basic and diluted
earnings per share
Effect of dilutive potential Ordinary
Shares
Warrants - 33,349
Weighted average number of Ordinary Shares 9,895,890 10,033,349
for the purpose of diluted earnings per
share
A payment of a special dividend of US$11,000,000 on 16 August 2007, was
followed by a share consolidation whereby 4 new shares were issued for 5 old
shares on 11 September 2007, resulting in reduction of shares from 10,000,000
to 8,000,000.
There is no share dilution in 2007, as the market price of the shares is below
the exercise price of the warrants.
9. Investments in subsidiaries
Lions Hill Limited ("Lions Hill") was incorporated in Ireland on 19 December
2005 and, pursuant to the Articles of Association of Lions Hill, the Company
has the right to appoint a majority of the Board of Directors of Lions Hill.
Two of the Directors of the Company have been appointed directors of Lions
Hill. To ensure that the Company will be able to maintain a majority of the
Board of Directors of Lions Hill in the future, the Company has been allocated
three "B" ordinary shares in Lions Hill carrying the right to appoint a
majority of the Board of Directors. Lions Hill was established for the sole
purpose of acquiring and holding interests in certain assets, including assets
comprised in the initial portfolio. However, Lions Hill is subject to a
standstill agreement with its lenders until 19 January 2008. Under this the
lender has imposed certain conditions as explained in Note 12.
TREAL Public Limited Company ("TREAL") was incorporated in Ireland on 19 July
2006 and, pursuant to the Articles of Association of TREAL, the Company has the
right to appoint a majority of the Board of Directors of TREAL. Two of the
Directors of the Company have been appointed directors of TREAL. To ensure that
the Company will be able to maintain a majority of the Board of Directors of
TREAL in the future, the Company has been allocated all ordinary shares in
TREAL carrying the right to appoint a majority of the Board of Directors. TREAL
was established for the sole purpose of acquiring and holding interests in
certain assets, which to date have been all real estate loans.
Longlands Finance No. 2 Limited ("Longlands") was incorporated in Ireland on 5
December 2006 and, pursuant to the Articles of Association of Longlands, the
Company owns all of the voting shares in Longlands and has two Directors on the
Board of Directors of Longlands. Longlands was established for the sole purpose
of acquiring and holding interests in certain assets. A single real estate loan
was acquired and disposed of during the year. Longlands does not hold any
securities at 30 September 2007.
Pheasantry Limited ("Pheasantry") was incorporated in Cayman Islands on 28
April 2006 and, pursuant to the Articles of Association of Pheasantry, the
Company owns all of the voting shares in Pheasantry. Pheasantry was established
for the sole purpose of acquiring and holding interests in real estate related
funds for a temporary period while opportunities arose for acquiring real
estate related securities. The single investment held by Pheasantry was in Y2K
Finance Inc. and disposed of during the year (note 18). Pheasantry does not
hold any securities at 30 September 2007.
Lions Hill TREAL Longlands Pheasantry Total
US$ US$ US$ US$ US$
Balance at - - - - -
incorporation
Purchases 34,800,000 12,780,000 - 16,000,000 63,580,000
Sales (10,000,000) - - - (10,000,000)
Unrealised gain/ 6,541,702 (17,768) - 587,520 7,111,454
(loss)
Fair value as at 30 31,341,702 12,762,232 - 16,587,520 60,691,454
September 2006
Purchases 200,000 37,253,740 22,885,421 - 60,339,161
Sales (4,000,000) (10,224,000) (22,885,421) (16,000,000) (53,109,421)
Realised and - 711,162 22,205 (587,520) 145,847
unrealised gain/
(loss)
Impairment charge (27,541,702) - - - (27,541,702)
Fair value as at 30 - 40,503,134 22,205 - 40,525,339
September 2007
The investments in subsidiaries are stated at the fair value of the Company's
investment. Lions Hill has been written down to US$nil.
10. Available for sale investments
The following is a summary of the Group's investments at 30 September 2007:
Group Group
30 September 30 September
2007 2006
US$ US$
Cost as at start of year/period 511,157,493 -
Purchases 369,698,251 536,487,327
Sales proceeds (243,913,675) (25,157,888)
Realised gains 7,316,315 (171,946)
Amortisation of premium/discount (1,293,669) -
Impairment charge (42,762,196) -
Cost as at end of year/period 600,202,519 511,157,493
Unrealised gains/(losses) on foreign exchange 33,258,945 (1,368,301)
Unrealised (losses)/gains on market values (64,831,565) 131,173
Fair value as end of year/period 568,629,899 509,920,365
The following is a summary of the Company's investments at 30 September 2007:
Company Company
30 September 30 September
2007 2006
US$ US$
Cost as at start of year/period 19,901,337 -
Purchases - 19,750,000
Amortisation of premium/discount (2,764,348) 151,337
Impairment charge (15,295,245) -
Cost as at end of year/period 1,841,744 19,901,337
Unrealised (losses)/gains on market values (829,085) 98,663
Fair value as end of year/period 1,012,659 20,000,000
11. Other assets
Group Group
30 September 30 September
2007 2006
US$ US$
Interest receivable 8,313,529 3,327,420
Derivative financial assets - unrealised gain on - 151,880
forward foreign exchange contracts
Other assets 41,197 477
8,354,726 3,479,777
Company Company
30 September 30 September
2007 2006
US$ US$
Interest receivable 785,036 553,251
Derivative financial assets - unrealised gain on - 135,677
forward foreign exchange contracts
Other assets 6,259 477
791,295 689,405
The following forward foreign exchange contracts in the Group and Company were
unsettled at 30 September 2007:
Maturity Date Amount Bought Amount Sold Unrealised
Loss
US$
26 October 2007 US$ 42,417,000 EUR (273,514)
30,000,000
(273,514)
The following forward foreign exchange contracts in the Group were unsettled at
30 September 2006:
Maturity Date Amount Bought Amount Sold Unrealised
Gain
US$
5 December 2006 US$ 12,847,100 EUR 135,677
10,000,000
19 October 2006 US$ 819,591 GBP 430,000 16,203
151,880
The following forward foreign exchange contracts in the Company were unsettled
at 30 September 2006:
Maturity Date Amount Bought Amount Sold Unrealised
Gain
US$
5 December 2006 US$ 12,847,100 EUR 10,000,000 135,677
The Directors consider that the carrying amount of other receivables
approximates their fair value.
12. Loans
As at 30 September 2007, the Group had the following floating rate loan
facilities in Lions Hill and TREAL:
Lions Hill
On 13 March 2007, Lions Hill elected to exercise the Term Out Option under the
loan facility agreement for a term of 10 years from the last day of the
interest period which ended immediately following the date of exercise of the
Term out Option. The assets of Lions Hill (US$211,281,896) are provided as
security against these loans. The outstanding facilities as at 30 September
2007 were as follows:
Loan Principal Loan Interest Total Maturity Weighted
Principal payable outstanding date average
interest rate
USD
equivalent
USD 137,617,058 2,159,594 139,776,652 23 March 6.010000
137,617,058 2017
EURO 25,492,039 235,251 25,727,290 25 April 4.885630
17,925,000 2017
GBP 56,320,735 114,745,049 1,433,809 116,178,858 25 April 6.707200
2017
GBP 500,000 1,018,675 12,729 1,031,404 2 May 2017 6.707200
278,872,821 3,841,383 282,714,204
In July 2007, some of the Lions Hill assets were downgraded by the rating
agencies resulting in a breach of the loan covenants in the facility agreement
with the lender. Subsequently, on 1 August 2007, Lions Hill entered into a
standstill agreement with its lender for a period to 19 January 2008. The main
undertakings entered into by Lions Hill were for it not to:
- dispose of any assets without the lender's consent;
- withdraw any funds without the lender's consent;
- make any distributions including dividends;
- redeem any subordinated loan notes; and
- make any other payments other than certain operational and legal costs.
The assets of Lions Hill are pledged as collateral and could be called.
As at 30 September 2006, Lions Hill drew down US$251,850,000, EUR10,982,291 and
GBP43,917,500. The terms of these loans ranged from 38 to 100 days and the
interest rates ranged from 3.82% to 6.03% depending on the currency that was
drawn down.
TREAL
In August 2007, TREAL requested an extension of the revolving facility as
required under the facility agreement. The lender did not respond and
consequently the extension was deemed to have been refused. Under the
agreement, the repayment date of the loan extended to 31 August 2016, ten years
from the date the facility was originally granted. The assets of TREAL
(US$357,474,951) are provided as security against these loans. The outstanding
facilities as at 30 September 2007 were as follows:
As at 30 September 2006, TREAL drew down SEK82,500,000, EUR27,655,305 and
GBP14,143,303. The terms of these loans ranged from 42 to 53 days and the
interest rates ranged from 3.36% to 5.61% depending on the currency that was
drawn down.
Loan Principal Loan Interest Total Maturity Weighted
Principal payable outstanding date average
interest rate
USD
equivalent
EURO 39,032,266 337,434 39,369,700 31 August 4.94000
27,445,956 2016
EURO 746,688 1,061,902 9,627 1,071,529 31 August 4.94500
2016
EURO 85,304,219 812,477 86,116,696 31 August 4.93000
59,982,574 2016
EURO 15,074,790 128,772 15,203,562 31 August 4.96000
10,600,000 2016
EURO 8,000,000 11,377,200 43,549 11,420,749 31 August 5.30000
2016
GBP 14,010,375 28,544,038 368,961 28,912,999 31 August 6.74000
2016
GBP 20,347,764 41,455,517 617,313 42,072,830 31 August 6.71013
2016
GBP 30,000,000 61,120,500 847,105 61,967,605 31 August 6.74500
2016
SEK 36,141,453 314,833 36,456,286 31 August 4.48000
233,800,877 2016
319,111,885 3,480,071 322,591,956
Amounts due Amounts due Total
after more than within one year
one year 30 September
2007
Lions Hill 278,872,821 3,841,383 282,714,204
TREAL 319,111,885 3,480,071 322,591,956
597,984,706 7,321,454 605,306,160
Amounts due Amounts due Total
after more than within one year
one year 30 September
2006
Lions Hill - 349,138,131 349,138,131
TREAL - 72,912,878 72,912,878
- 422,051,009 422,051,009*
*Includes interest payable of US$1,544,814.
The fair value of loans may be greater than the book cost given that lenders
are unwilling to provide financing at these interest rates for these assets at
the present time. However it is not practical or possible to measure the fair
value of such loans.
13. Financial instruments
The principal risks to which the Group and Company will be exposed are market
risk, interest rate risk, currency risk, credit risk and certain counterparty
risks. In certain instances as described more fully below, the Group and
Company will enter into derivative transactions in order to mitigate particular
types of risk.
Market risk
The Group's and Company's exposure to market risk is comprised mainly of
movements in the value of its investments and, to the extent that the Group and
Company incur indebtedness in the future, changes in interest rates that either
increase its cost of borrowing or, in the event the Group and Company make any
fixed interest investments in the future, may decrease its interest income.
Most of the Group's and Company's investments are floating rate or backed by
floating rate assets and, as such, will be valued based on a market credit
spread over a benchmark (such as LIBOR or EURIBOR). Increases in the credit
spreads above such benchmarks may affect the Group's net equity or net income
directly through their impact on unrealised gains or losses on investments
within the portfolio, and therefore the Group's and Company's ability to make
gains on such investments, or indirectly through their impact on the Group's
and Company's ability to borrow and access capital.
Interest rate risk
To the extent that the Group and Company incurs indebtedness in the future,
changes in interest rates can affect the Group's net interest income, which is
the difference between the interest income earned on interest-earning
investments and the interest expense incurred on interest-bearing liabilities.
Changes in the level of interest rates also can affect, among other things, the
Group's and Company's ability to acquire loans and investments, the value of
its investments and the Group's and Company's ability to realise gains from the
settlement of such assets.
The Group and Company may enter into hedging transactions for the purposes of
efficient portfolio management, where appropriate, to protect its borrowings
from interest rate fluctuations. These instruments will be used to hedge as
much of the interest rate risk as the Investment Manager determines is in the
best interests of the Group, given the cost of such hedges. The Group and
Company may bear a level of interest rate risk that could otherwise be hedged
when the Investment Manager believes, based on all relevant facts, that bearing
such risks is advisable.
As at 30 September 2007 and 30 September 2006 there were no interest rate
hedges.
Interest rate profile Group - 30 September 2007
US$ US$ US$
Fixed Floating Non-interest Weighted
bearing Average
Rate
Available for sale - 568,629,899 - 7.37%
investments
Cash equivalents - 15,107,862 - 5.20%
Loans and interest on loans - (605,306,160) - 5.90%
Interest rate profile Group - 30 September 2006
US$ US$ US$
Fixed Floating Non-interest Weighted
bearing Average
Rate
Available for sale - 509,920,365 - 7.22%
investments
Cash equivalents - 37,696,939 - 5.00%
Loans and interest on loans - (422,051,009) - 5.59%
Interest rate profile Company - 30 September 2007
US$ US$ US$
Fixed Floating Non-interest Weighted
bearing Average Rate
Investments in subsidiaries - 40,525,339 - 17.03%
Available for sale - 1,012,659 - 23.64%
investments
Cash equivalents - 6,343,272 - 4.57%
Interest rate profile Company - 30 September 2006
US$ US$ US$
Fixed Floating Non-interest Weighted
bearing Average Rate
Investments in subsidiaries - 60,691,454 - 37.12%
Available for sale - 20,000,000 - 15.20%
investments
Cash equivalents - 19,921,870 - 5.10%
Interest rate risk
Although investments in residual income positions have been treated as floating
rate investments in the above table, income on these investments is based on
the effective interest method after taking into account historical performance,
market indicators and current market conditions (see Note 2 - Interest income).
These effective yield calculations are adjusted periodically to take account of
any changes in underlying assumptions.
Given the subordinated nature of residual income positions and the fact that
many of them do not carry a fixed or stated coupon, the Group and Company
calculate the weighted average rate of the portfolio on the basis of: (i) for
investments that are unrated and which do not have a stated coupon, the gross
asset value of the investment multiplied by the interest
rate derived from using the effective interest method (see Note 2 - Interest
income); and (ii) for investments that carry a fixed coupon, the net asset
value of the investment after leverage multiplied by the stated coupon.
Currency risk
The Group's and Company's accounts are denominated in US Dollar while
investments are made and realised in both US Dollar and other currencies.
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 Group's and Company's non-US Dollar-denominated
investments. The Group's and Company's principal non-US Dollar currency
exposures are to euros, pounds sterling and Swedish kroner but this may change
from time to time.
The Group's and Company's policy is to finance assets in the same underlying
currency as the asset itself and to hedge any currency risk on a case by case
basis and also, where the Investment Manager considers appropriate, on an
overall portfolio basis. The Group may bear a level of currency risk that could
otherwise be hedged where it considers that bearing such risks is advisable.
Group currency profile - 30 September 2007
Total US$ GBP EUR SEK
(in US$) (in US$) (in US$) (in US$) (in US$)
Available for sale 568,629,899 80,803,166 235,173,554 216,511,724 36,141,455
investments
Cash equivalents 15,107,862 11,537,758 3,080,313 489,791 -
Other assets 8,354,726 1,099,712 3,680,948 3,006,203 567,863
Foreign exchange (273,514) 42,417,000 - (42,690,514) -
contracts
Loans and interest (605,306,160) (139,776,652) (250,163,696) (178,909,526) (36,456,286)
on loans
Other liabilities (849,588) (849,588) - - -
(14,336,775) (4,768,604) (8,228,881) (1,592,322) 253,032
Group currency profile - 30 September 2006
Total US$ GBP EUR SEK
(in US$) (in US$) (in US$) (in US$) (in US$)
Available for sale 509,920,365 314,148,998 108,266,093 76,248,126 11,257,148
investments
Cash equivalents 37,696,939 24,315,782 670,249 12,710,908 -
Other assets 3,327,897 1,546,650 1,236,198 507,602 37,447
Foreign exchange 151,880 13,666,690 (803,387) (12,711,423) -
contracts
Loans and interest (422,051,009) (252,862,934) (108,848,390) (49,062,379) (11,277,306)
on loans
Other liabilities (28,900,338) (1,234,518) - (27,665,820) -
100,145,734 99,580,668 520,763 27,014 17,289
Company currency profile - 30 September 2007
Total US$ GBP EUR SEK
(in US$) (in US$) (in US$) (in US$) (in US$)
Investment in 40,525,339 - 22,205 40,503,134 -
subsidiaries*
Available for sale 1,012,659 1,012,659 - - -
investments
Cash and cash 6,343,272 5,881,065 274,995 187,212 -
equivalents
Other assets 791,295 785,036 - 6,259 -
Other liabilities (750,938) (750,938) - - -
47,921,627 6,927,822 297,200 40,696,605 -
Company currency profile - 30 September 2006
Total US$ GBP EUR SEK
(in US$) (in US$) (in US$) (in US$) (in US$)
Investment in 60,691,454 47,929,222 - 12,762,232 -
subsidiaries*
Available for sale 20,000,000 20,000,000 - - -
investments
Cash and cash 19,921,870 19,921,194 676 - -
equivalents
Other assets 689,405 689,405 - - -
Other liabilities (1,156,995) (1,156,995) - - -
100,145,734 87,382,826 676 12,762,232 -
* The investment in subsidiaries is subject to underlying currency risk based
on its investments and loan facility (as described in note 12).
The Group hedges its exposure to foreign exchange movements with the use of
forward foreign exchange contracts. Unsettled contracts at 30 September 2007
and 2006 are disclosed in note 11.
Credit risk
The Group and Company are subject to credit risk with respect to its
investments. The Group and Company seek to mitigate credit risk by actively
monitoring its portfolio of investments and the underlying credit quality of
its holdings. The Group and Company seek to minimise credit risk further by
ensuring its investment portfolio is diversified by asset type, geography,
industry and issuer or borrower. The Group and Company do not generally intend
to undertake any credit hedging activities other than from time to time
entering into transactions to hedge their credit exposure in relation to
individual investments.
The Group's and Company's hedging transactions using derivative instruments and
any credit default or total return swap arrangements entered into by the Group
or Company or any of its funding vehicles may involve certain additional risks,
including counterparty credit risk. The Group and Company enters into
derivative arrangements with counterparties that are major financial
institutions with investment grade credit ratings and with which the Investment
Manager is familiar. As a result, the Group and Company do not anticipate that
any such counterparties will fail to meet their obligations.
Residual interest risk
Some of the Group's and 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 Group and Company. Some
of the Group's and 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 Group and Company
anticipate receiving from their investment portfolio, which may lead to the
Group and Company having less income to distribute to Shareholders.
Residual interest risk (continued)
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 Group's and Company's investments.
Liquidity risk
The market for subordinated asset-backed securities, including real estate
loans and residual income positions, is illiquid. Accordingly, many of the
Group's investments are illiquid. In addition, investments that the Group and
Company purchase 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 Group's and 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 Group acquires investments for which there is not a
readily available market, the Group'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.
Maturity profile Group - 30 September 2007
Within one Within one One to One to five Over five
year year five years years
years
Total Fixed Floating Fixed Floating Floating
US$ US$ US$ US$ US$ US$
Available for 568,629,899 - 3,735,736 - 358,685,596 206,208,567
sale
investments
Cash 15,107,862 - 15,107,862 - - -
equivalents
Loans and (605,306,160) (7,321,454) - - - (597,984,706)
interest
Other assets 7,231,624 - 7,231,624 - - -
and other
liabilities
(14,336,775) (7,321,454) 26,075,222 - 358,685,596 (391,776,139)
Maturity profile Group - 30 September 2006
Within Within one One to One to five Over five
one year year five years years
years
Total Fixed Floating Fixed Floating Floating
US$ US$ US$ US$ US$ US$
Available for 509,920,365 - - - 272,979,421 236,940,944
sale
investments
Cash 37,696,939 - 37,696,939 - - -
equivalents
Loans and (422,051,009) - (422,051,009) - - -
interest
Other assets (25,420,561) - (25,420,561) - - -
and other
liabilities
100,145,734 - (409,774,631) - 272,979,421 236,940,944
Maturity profile Company - 30 September 2007
Within Within one One to One to Over five
one year year five five years
years years
Total Fixed Floating Fixed Floating Floating
US$ US$ US$ US$ US$ US$
Investment in 40,525,339 - 40,525,339 - - -
subsidiaries
Available for 1,012,659 - 212,659 - 800,000 -
sale
investments
Cash 6,343,272 - 6,343,272 - - -
equivalents
Other assets 40,357 - 40,357 - - -
and other
liabilities
47,921,627 - 47,121,627 - 800,000 -
Maturity profile Company - 30 September 2006
Within Within one One to One to Over five
one year year five five years years
years
Total Fixed Floating Fixed Floating Floating
US$ US$ US$ US$ US$ US$
Investment in 60,691,454 - 60,691,454 - - -
subsidiaries
Available for 20,000,000 - - - 20,000,000 -
sale
investments
Cash 19,921,870 - 19,921,870 - - -
equivalents
Other assets (467,590) - (467,590) - - -
and other
liabilities
100,145,734 - 80,145,734 - 20,000,000 -
As described in note 12, following credit agency downgrades of certain of Lions
Hill's assets, Lions Hill was in breach of the loan covenants in its facility
agreement. It has entered a standstill arrangement with its lender and as part
of that arrangement is currently unable to make distributions to TRIO and no
assets can be bought or sold without the lender's authority. This arrangement
will remain in place until 19 January 2008. At the present time the liabilities
of Lions Hill are in excess of its assets. However as the losses of Lions Hill
attributable to the Company are limited to the value of the Company's
participation notes in Lions Hill, the Directors are of the opinion that the
Group and Company has adequate liquidity to continue in operational existence
for the foreseeable future.
14. Other liabilities
Group Group
30 September 30 September
2007 2006
US$ US$
Derivative financial assets - unrealised loss on 273,514 -
forward foreign exchange contracts - Note 11
Investment management and incentive fee payable 127,484 621,976
Administration fee payable 77,200 109,148
Custodian fee payable 7,951 9,740
Audit fees payable 100,000 75,000
Directors fee payable 70,320 76,016
Legal fees payable 129,017 20,000
Tax fees 12,000 -
Accrued expenses 167,932 322,638
965,418 1,234,518
Company Company
30 September 30 September
2007 2006
US$ US$
Derivative financial assets - unrealised loss on 273,514 -
forward foreign exchange contracts
Investment management and incentive fee payable 127,484 621,976
Audit fees payable 80,000 75,000
Administration fee payable 40,000 52,032
Directors fee payable 47,500 64,265
Legal fees payable 9,018 20,000
Custodian fee payable 4,000 3,294
Tax fees 3,000 -
Accrued expenses 166,422 320,428
750,938 1,156,995
15. Share capital
Authorised share capital
Number of 30 September Number of 30 September
Ordinary 2007 Ordinary 2006
Shares Shares
US$ US$
Ordinary shares of no par Unlimited - Unlimited -
value each
Issued and fully paid 30 September 30 September 30 September 30 September
2007 2007 2006 2006
Number of US$ Number of US$
Ordinary Ordinary
Shares Shares
Balance at 1 October 2006 10,000,000 - 2 -
Share consolidation during (2,000,000) - 9,999,998 -
the year
Balance at 30 September 8,000,000 - 10,000,000 -
2007
On 16 August 2007, the directors proposed the payment of a special interim
dividend of US$11,000,000 (equivalent to US$1.10 per existing ordinary share)
out of the other reserve account. Following this, at an Extraordinary General
Meeting of the Company held on 10 September 2007, a share consolidation was
approved to reduce the number of existing Ordinary Shares by 20 per cent with
the result that shareholders receive four new Ordinary Shares for every five
existing Ordinary Shares held on 11 September 2007.
The Company has authority to buy back up to 14.99% of the issued share capital
until the next Annual General Meeting. The Company will propose a special
resolution at the next annual general meeting to renew this authority.
16. Share premium account and other reserve
Share premium account Group and Group and
Company Company
30 September 30 September
2007 2006
US$ US$
Balance at date of incorporation - -
Premium arising from issue of Ordinary Shares - 100,000,000
Expenses of issue of Ordinary Shares - (7,397,458)
Warrants granted on issue of Ordinary Shares - (350,872)
Cancellation of share premium transferred to - (92,251,670)
other reserve
Balance at 30 September 2007 - -
Other reserve account Group and Group and
Company Company
30 September 30 September
2007 2006
US$ US$
Balance at date of beginning of year/ 92,251,670 -
incorporation
Cancellation of share premium - 92,251,670
Special distribution to ordinary shareholders (11,000,000) -
Transfer to accumulated profits/(losses) (43,629,131) -
Balance at 30 September 2007 37,622,539 92,251,670
The Ordinary Shares of the Company have no par value. As such, the proceeds of
the Initial Public Offering represent the premium on the issue of the Ordinary
Shares. In accordance with the accounting policies of the Company and as
allowed by The Companies (Guernsey) Law, 1994, the costs of the Initial Public
Offering have been written off against the share premium account. The issue
costs associated with the Initial Public Offering amounted to US$7,397,458 and
warrants with a value of US$350,872 (Notes 15 and 18).
The Company passed a special resolution cancelling the amount standing to the
credit of its share premium account immediately following admission to the
London Stock Exchange. In accordance with The Companies (Guernsey) Law, 1994
(as amended) (the "Companies Law"), the Directors applied to the Royal Court in
Guernsey for an order confirming such cancellation of the share premium account
following admission. The other reserve created on cancellation is available as
distributable profits to be used for all purposes permitted by the Companies
Law, including the buy back of Ordinary Shares and the payment of dividends.
The transfer to the accumulated profit reserve has been made by the Directors
to satisfy the requirements of The Companies (Guernsey) Law, 1994, that the
Company has sufficient profits available for the payment of its dividends.
17. Notes to cash flow statement
The following is the Group's notes to cash flow statement
Group Group
Year ended 30 Period from
September
2007 11 May 2006 to
30 September
2006
US$ US$
Net (loss)/profit (28,419,771) 7,412,019
Adjustments for:
Realised (gain)/loss on investments (7,316,315) 171,946
Amortisation of (premium)/discount (note 10) 1,293,669 -
Impairment charges (note 10) 42,762,196 -
Unrealised foreign exchange (gains)/losses on (34,627,246) 1,368,301
investments
Interest expense on loans 32,054,094 7,023,956
Unrealised losses/(gains) on derivatives (Note 425,394 (151,880)
11)
6,172,021 15,824,342
Purchases of investments (note 10) (397,364,071) (508,821,507)
Sale of investments (note 10) 243,913,675 25,157,888
(153,450,396) (483,663,619)
Increase in receivables (5,026,829) (3,327,897)
(Decrease)/increase in payables (542,614) 1,234,518
(5,569,443) (2,093,379)
Net cash outflow from operating activities (152,847,818) (469,932,656)
The following is the Company's notes to cash flow statement
Company Company
Year ended Period from
30 September
2007 11 May 2006 to
30 September
2006
US$ US$
Net (loss)/profit (30,342,206) 333,075
Adjustments for:
Impairment charges (note 10) 42,836,947 -
Amortisation of (premium)/discount (note 10) 2,764,348 (151,337)
Unrealised losses/(gains) on derivatives (note 409,191 (135,677)
11)
15,668,280 46,061
Purchases of investments (note 9 & 10) (60,339,161) (83,330,000)
Sale of investments (note 9 & 10) 53,109,421 10,000,000
(7,229,740) (73,330,000)
Increase in receivables (237,567) (553,728)
(Decrease)/increase in payables (679,571) 1,156,995
(917,138) 603,267
Net cash inflow/(outflow) from operating 7,521,402 (72,680,672)
activities
Purchases and sales of investments are considered to be operating activities of
the Group, given its purpose, rather than investing activities.
18. Material agreements and related parties
Investment Manager
The Group is party to an Investment Management Agreement with Wharton Asset
Management Bermuda Limited, dated 31 May 2006, pursuant to which the Group has
appointed the Investment Manager to manage the assets and liabilities and
obligations of the Group in accordance with, inter alia, the investment
objective and policy of the Group, subject to the overall supervision and
direction of the Board of Directors of the Group.
The Group pays the Investment Manager a Management Fee and Incentive Fee (see
Notes 4 and 14).
Management Fee
The Investment Manager will be entitled to receive from the Group an annual
management fee of 1.75 per cent. of the gross equity of the Group (the
"Management Fee") calculated and payable monthly in arrears. For these
purposes, gross equity means the aggregate gross proceeds to the Group of all
issues of shares in the capital of the Group (less any capital distribution
made by the Group). The Management Fee charge for the year was US$1,724,915
(2006: US$561,442), of which US$127,484 (2006: US$145,117) was outstanding at
the year end.
Investments in other entities managed by the Investment Manager
As at 30 September 2007, the Company held investments with a total value of
US$998,450 (2006: US$15,000,000) in the following entities, which are managed
by the Investment Manager: G Square Finance 2006-1 Limited and G Square Finance
Limited.
During the year, Pheasantry's investment in Y2K Finance Inc., an entity managed
by the Investment Manager was disposed of for US$16,000,000 (cost:
US$16,000,000).
Incentive Fee
The Investment Manager is also entitled to receive an incentive compensation
fee (the "Incentive Fee") in respect of each incentive period that will be paid
quarterly in arrears. An incentive period will comprise each successive
quarter, except the first such period shall be the period from Admission to 30
September 2006.
The Incentive Fee for each incentive period will be an amount equivalent to 25
per cent. of the amount by which A exceeds (B � C) where:
A = the Group's consolidated net income excluding any realised and unrealised
gains or losses (but only to the extent they have not been deducted in a
prior incentive period) as shown in the Group's latest consolidated
management accounts for the relevant quarter, before payment of any
Incentive Fee;
B = the time-weighed gross equity of the Group; and
C = one per cent. plus one quarter of three month LIBOR (as at the beginning
of the relevant incentive period).
Where there is a difference between the Group's consolidated net income for the
relevant incentive period as shown in the Group's quarterly management accounts
compared to the Group's audited annual accounts, the consolidated net income
for the relevant incentive period as reflected in the audited accounts shall
prevail. Any excess Incentive Fee paid or any additional Incentive Fee due in
respect of any incentive period attributable to any such difference will be
repaid by or paid to the Investment Manager, as the case may be. The Incentive
Fee charge for the year was US$745,932 (2006: US$476,859), of which US$nil
(2006: US$476,859) was outstanding at the year end. The incentive fee for the
quarter to 30 September 2007 is US$nil as Lions Hill income has been excluded
from the Group's consolidated net income for the purposes of calculating
incentive fees by concession of the Investment Manager.
Administration Fee
The Group is party to an Administration Agreement with Kleinwort Benson
(Channel Islands) Fund Services Limited dated 31 May 2006, pursuant to which
the Administrator has agreed to provide for the day-to-day administration of
the Group, including maintenance of accounts and provision of a company
secretary. For the provision of services under the Administration Agreement,
the Administrator is entitled to receive fees which will be agreed in writing
from time to time between the Group and the Administrator. The initial fee has
been agreed to be 0.125 per cent. per annum of the Group's gross assets and
0.025 per cent. of Lions Hill's gross assets (subject in each case to a minimum
monthly fee of US$10,000), plus certain additional charges for ancillary
services. The Administration Fee for the year was US$353,681 (2006:
US$108,738), of which US$77,200 (2006: US$109,148) was outstanding at the year
end.
Custodian Fee
The Group is party to a Custody Agreement with Investors Trust & Custodial
Services (Ireland) Limited dated 31 May 2006, pursuant to which the Custodian
has agreed to be responsible for providing custodial services which include
being global custodian of all the investments and property of the Company and
its subsidiaries and SPVs, the safekeeping and registration of property for the
Group and the settlement of all transactions relating to the property. For the
provision of services under the Custody Agreement, the Custodian is entitled to
receive a fee which will be agreed in writing from time to time between the
Group and the Custodian. The initial fee will be 0.005 per cent. per annum of
DTCC deliverable gross assets and 0.015 per cent. per annum of Euroclear
deliverable gross assets plus certain transaction fees.
On 2 July 2007, State Street Corporation completed the acquisition of Investors
Financial Services Corporation, the parent company of the Sub-Administrator and
Custodian.
Investment Manager Warrants
In recognition of the promoter role and indemnification of certain costs,
liabilities and losses incurred by the affiliate of the Investment Manager,
Trident Capital Limited, in raising capital for the Company, the Company
granted on 31 May 2006 warrants to that affiliate. The warrants represent the
right to acquire 1,000,000 Shares, being 10 per cent of the number of Offer
Shares, at an exercise price equal to the Offer Price. The warrants are fully
vested and immediately exercisable on the date of admission to the London Stock
Exchange and will remain exercisable until the 10th anniversary of that date.
The Company may grant further warrants in connection with any future offering
of Shares. Such warrants, if any will represent the right to acquire Shares
equal to no more than 10 per cent of the number of Shares being offered in
respect of that future offering and will have an exercise price equal to the
offer price for that offering. As at the date of admission, the aggregate fair
value of the warrants granted at the time of the Initial Public Offering using
a Black-Scholes valuation model was US$350,872 (reflecting a valuation of
US$0.35 per warrant). This amount has been treated as a cost of the Initial
Public Offering.
Subordinated Note
Carmen General Partner Limited, a limited liability company incorporated under
the laws of England and Wales acting in its capacity as general partner of the
Carmen Limited Partnership (collectively, "Carmen"), entered into a note
purchase agreement dated 2 February 2007 with TREAL. Pursuant to the note
purchase agreement, Carmen acquired EUR10,000,000 in principal amount of
participating term notes issued by TREAL for a cash consideration of
EUR10,000,000. On 6 September 2007, the whole EUR10,000,000 participating term
notes were redeemed for a cash consideration of EUR10,000,000.
END
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