European Equity Tranche Income Share Discussion Threads

[nickcduk] 14/2/2008 10:45

MUMBAI (Thomson Financial) - Standard & Poor's Rating Services' fourth
quarter 2007 index report for the Italian residential mortgage-backed securities
(RMBS) market said average prepayments in the Italian RMBS market increased
slightly by 50 basis points to 9 pct.
Though the latest average prepayment increase is small, it confirms that a
structural change in prepayment levels has taken place in the Italian RMBS
market, S&P said.
In 2006, average prepayments were between 5.0 pct and 6.0 pct, and in 2007
they increased to 6.7 pct in the first half and to 8.75 pct in the second half.
Underpinning this shift in prepayment patterns are the lower costs
associated with lower prepayments, the interest rate environment, and the degree
of competition among mortgage lenders, S&P said.
S&P said the interest rate environment which is affecting prepayments is
also starting to put strain on certain mortgage products offered in the Italian
RMBS market, but added the Italian RMBS market has robust securitization
fundamentals.
The ongoing easing of money market rates should reduce the strain on
floating-rate mortgages going forward. Robust fundamentals should also
facilitate a return to securitization when investor appetite and market pricing
stability returns to this market, S&P said.
[e-mail]

[isa23] 31/1/2008 11:05

also, less NAV means less management fee etc...every little helps

[cerrito] 31/1/2008 10:58

Forgot that they have the proceeds of the E8m Austrian auto loan they sold in the second half..they do not say at what price they sold it except it generated a modest profit but it does mean they have some cash.

[badtime] 30/1/2008 22:25

erm rns's r linked near top of page

:)

[cerrito] 30/1/2008 22:08

Thanks SpectoACC for putting up the RNS...I was looking out for it and it was not on either their website nor www.investegate.co.uk. and so have just caught up with it.
pleasantly surprised that they are nailing their colours to the E.15 dividend mast..if I had been in their shoes I would have been tempted to pay either nothing or a token one and use the cash to repay debt...E6m of annual dividend would put a good hole in the amount owed to Citibank and they are very vulnerable here especially as you can imagine Citi's lending officers may get very heavy with them...
keeping under review and probably buy a small amount tomorrow

[isa23] 30/1/2008 13:05

that's 4.44p at todays exchange rate, or 16.5% at 27p. and we're getting the shares half price at the published NAV. Too good to be true maybe, but a good risk/reward ratio IMHO

[spectoacc] 30/1/2008 12:46

Seems reasonable, not withstanding points made above.

RNS Number:8725M
TIDMEET

European Equity Tranche Income Ltd.
30 January 2008


30 January 2008

European Equity Tranche Income Limited ("EETI" or the "Company")

Estimated NAV and Quarterly Dividend

Further to the investment update provided by the Company on 24 January 2008,
EETI today announces its quarterly dividend for the 3 months ended 31 December
2007 and its net asset value as at that date.

Estimated Net Asset Value ("NAV")

The estimated NAV of an Ordinary Share in the Company is calculated as being EUR
0.8291 as at 31 December 2007.

This estimated NAV of an Ordinary Share is provided for indication purposes only
and should not be relied upon for investment decisions. As some of the Company's
assets are not freely traded it is not possible to obtain prices from an
independent third party source and such assets have been valued by the
Investment Manager using pricing models designed by the Investment Manager and
reviewed by one of the Company's joint Auditors.

The above estimated NAV of an Ordinary Share has been calculated by the
Administrator using asset valuation information provided by the Investment
Manager which, whilst being considered as received from a reliable source, is
itself in part 'estimated' and accordingly none of the Company, the Investment
Manager, the joint Auditor nor the Administrator accept any responsibility for
the accuracy of the estimated NAV figure given, and neither is any
responsibility implied.

Quarterly Dividend

The Directors have declared an interim dividend of EUR 0.015 per each Ordinary
Share payable in respect of the quarter ended 31 December 2007. This dividend
will be payable on 29 February 2008 to holders of record on 8 February 2008. The
corresponding ex-dividend date will be on 6 February 2008.

The above estimated NAV and quarterly dividend have taken into account the
reduction in the aggregate book value of its Italian investments and the
consequent impact on the Company's earnings. As referred to in the recent
investment update, the impact of the reduction in cash flow is not expected to
prevent the Company from covering its costs and paying dividends. Accordingly,
in the absence of unforeseen circumstances the Board intends to target a
quarterly dividend of Eur 0.015 per Ordinary Share.

[spectoacc] 30/1/2008 07:54

Someone bought 250k yest - guessing it wasn't you e2?

Valid points you make; can argue some of it for lots of things though, re marking to bid. At the complete other end of the scale, if Barclays had to pay back every deposit all at once, they'd be bust. If a comm prop fund had to sell into this market (which seemingly has no buyers) they'd be in trouble - hence the Unit Trust versions having mostly stopped redemptions.

I don't disagree with much of what you say mind; particularly the bit about credit markets & EET's potentially precarious position even before the Italian "issues". However, everything has a price.

[simon gordon] 29/1/2008 19:26

e2,

Excellent post.

Could never understand EET, even though I saw it tipped a few times as a rock solid high yielder.

[cerrito] 28/1/2008 21:16

Bought some late on to get into the swimming pool. Would have bought more if I had been more comfortable about their cash position. Given the difficulties announced in Italy seem unlikely they will get the E5.3m capital repayments this current FY; with the need to pay E1.7m in operating expenses and the November dividend costing E1.3m am interested to see what they say this week about next dividend.
will continue to follow

[stemis] 28/1/2008 16:52

Fair points, which is why I'm now completely out of the stock.

[cerrito] 27/1/2008 17:08

As a holder of QWIL I have found the EET announcement interesting especially as both QWIL and EET have assets in common in their holdings. Both are in Sestante Finance and Lusitano Mortgages( But in different tranches in the latter case)
I have no exposure to EET at the moment but am looking at this as a matter of urgency given the recent price drop. I have reduced my exposure in QWIL and now do not have much; Portugal(see below) is what is making me nervous on QWIL.
Interested that Investec sold out eet as they were gungho on this.
I need to say that EET provide much more info than QWIL on their Italian and Portuguese mortgage holding.
The Achilles heel for both is Portugal where mortgage lending has been as exuberant as anywhere else and competition high as evidenced in the Dec 13 EET investment update and I am delighted that this last week's EET update did not highlight any problems in Portugal. I also took comfort in the LTV ratios in Portugal.
QWIL's Italian mortgage portfolio is 9.1% so they will be less affected by developments in Italy than EET. In the last Nov 28 report and teleconference, QWIL did comment on an increase in prepayments but said that it was within tolerable limits so not sure if this is a recent phenomenon or reflects different tranches in the Sestante pool. Saw that EET made write downs for Italian prepayments in year ending 607. QWIL have not made any write downs.

[spectoacc] 26/1/2008 15:52

Good thread, thanks for comments. Been in these for a long time & very disappointed so far.

Obviously even knocking 15m Euros off NAV leaves a figure way above the current s/p; any takers for requisitioning an EGM to either liquidate the fund, remove the directors, or both?

Would need 10% to do so, am a long way short, any large holders? I know it's hardly a seller's market for this sort of instrument, but strewth - you can't say "possible 2m Euro hit", then "only 1.6m", then "actually it's 15m Euros" without looking like total fools.

[davebowler] 24/1/2008 15:28

Part of the prepayment stream which would have come our way under the old rules has evaporated .When Italian mortgagors redeem early they pay a penalty (which was previously worth 3% ) but is now reduced by legislation to .5%

[ilancas] 24/1/2008 15:19

tiltonboy > thankyou for taking the trouble to reply to my question.

My guess is that EET will be avoided for the most part until the credit squeeze/mortgage-backed asset crisis is near its end.

[stemis] 24/1/2008 14:21

I think I understand (and maybe tiltonboy will correct me if I'm wrong).

What EET effectively own is part of the future interest payments on the mortgages. The principal (and presumably a bit of the future interest) is essentially owned by the bond holders. If mortgage holders repay the mortgage in advance then there are no future interest payments and what EET hold is worthless?

[davebowler] 24/1/2008 13:56

I had a similar call to yours, tiltonboy, with Ocean,and was reassured that the same risk - of 'ill thought out legislation' would not impact other foreign tranches.

[isa23] 24/1/2008 13:54

tiltonboy has said it all.

[tiltonboy] 24/1/2008 13:32

ilancas,

I've had a call from the asset manager, rather than Arbuthnot's, who I had been chasing.

Basically, more people have been switching mortgages to cheaper rates, and this has affected the Italian tranches. Historically prepayments were in the range of 1.4% - 2.4%. Ocean Capital believed they were being conservative by modelling for prepayments of 5%, when the fund was set up. Following the legislation charges last year, prepayments have risen, and have amounted to 9.8% on one tranche, to 12.5% on another.

The problem arises with the structure of the overall package. We are holders of the equity tranche. Above the equity tranche lies a BBB bond, which takes priority. Once prepayments exceed 8% in any one quarter, the equity tranche receives no income.

The write-down in capital value has been derived by taking the possibility that prepayments will continue at 12.5% for the next three years.

The fund managers believe this unprecedented level of prepayments will fall, and if they can get back below 8%, then value can be written back in to equity shareholders.

I'm not a buyer at these levels(yet), but I am happier than I was prior to the call. The next announcement should confirm that dividends of around 1.6 euro cents will be paid, but the end March quarter prepayment levels will be more eagerly awaited.

Hope that helps.

tiltonboy

[ilancas] 24/1/2008 13:08

From what you say, ISA, a 20% price hit seems overdone. But I guess investors (including me) don't really understand the inner workings of this share and will continue to steer clear.

Can you explain what these prepayments are?

[isa23] 24/1/2008 11:37

just called the asset manager & got the reassurance I wanted. The news this morning relates to just one quarter. Basically, if the level of prepayements exceeds a certain percentage in a given quarter(8% in this particular case), then the equity part of the mortgage (which ranks lower) recieves no income. This has happened last quarter, but there is no guarentee that it will happen next quarter, or the quarter after that etc. All the assumptions (15m euro charge to capital / 2m a year earning hit)are based on the worst case scenario of prepayments in Italy continuing to exceed 8% for the next 12 quarters (the next 3 years). I was told that such a pattern is unlikely. On that basis, the share price at current level seems to discount the worst that can happen to the Italian portfolio in the next 12 quarters! A screeming buy IMHO for those who can stomach such risks.

[isa23] 24/1/2008 10:33

I find it odd too. They can surely put the repayments into other investments, or at least in the bank & earn interest!! Better still, they can use it to buy back shares for cancellation.

[stemis] 24/1/2008 09:45

I find this hard to understand

in the last quarter prepayments increased significantly and as a consequence EETI received no cash flow from its Italian investments

Surely EET received the value of the prepayment? How come the prepayment of the mortgages leads to no cash for EET? Who gets the cash?

if the prepayment rates stay at these current high levels, the Company's Investment Manager estimates that the change will result in a reduction in the region of Eur 15 million to the aggregate book value of these investments.

At the last investment update investments were Eur 130m of which 33.7% were Italian i.e. Eur 44m. They plan to reduce this by Eur 15m i.e. 34%! That some loss! Surely they receive some moneys from the prepayment of these mortgages.

In addition, the Company's earnings would be reduced by approximately Eur 0.5 million per quarter.

That about 25% of the underlying profits, so presumably the quarterly dividend will be cut accordingly to Eur 0.015.

[ilancas] 24/1/2008 08:53

Ouch!

RNS Number:4302M
European Equity Tranche Income Ltd.
24 January 2008

For release on 24 January 2008

European Equity Tranche Income Limited ("EETI" or the "Company")

Investment Update

In its investment update in May 2007 EETI reported that retrospective changes in
the law in Italy had significantly reduced the prepayment penalties for
mortgages. At that time, a charge of Eur 2.7 million was taken to the aggregate
book value of the Company's Italian investments. While the impact of the change
on the future level of prepayments was uncertain, in the last quarter
prepayments increased significantly and as a consequence EETI received no cash
flow from its Italian investments. If prepayment rates continue at the levels
experienced in the last quarter, it is estimated that EETI would receive no cash
flow from these investments for a period of approximately 3 years. On just two
quarter's data it is very difficult to assess how much this retrospective change
in legislation is going to impact consumer behaviour in Italy. It is clear that
prepayment rates are likely to increase more than had been originally
anticipated, but it is not at all certain whether this last quarter is a
temporary spike or part of a long term trend.

For the purpose of estimating the financial effect on the Company, if the
prepayment rates stay at these current high levels, the Company's Investment
Manager estimates that the change will result in a reduction in the region of
Eur 15 million to the aggregate book value of these investments. In addition,
the Company's earnings would be reduced by approximately Eur 0.5 million per
quarter. The impact of the reduction in cash flow is not expected to prevent the
Company from covering its costs and paying dividends. EETI expects to announce
its quarterly dividend for the 3 months ended 31 December 2007 and its net asset
value as at that date in the week commencing 28 January 2008.

The Company has also reviewed the remainder of its portfolio and other than the
Italian investments referred to above, all are within model expectations.
Accordingly, EETI can see no reason, in the light of prepayments or default
trends, to make any changes to the book value of its other investments.

It is clearly regrettable that such ill-thought out legislation should have been
passed in the Italian parliament. However, there is very little the Company can
do about this and even if it were to pursue legal steps, the likelihood is it
would take many years to settle.


Enquiries:

Ocean Capital Associates LLP
Edouard Bridel 020 7307 0880

Arbuthnot Securities Limited
Alastair Moreton 020 7012 2138

Anson Fund Managers Limited
Company Secretary 01481 722260




This information is provided by RNS
The company news service from the London Stock Exchange

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