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REG-Eurocastle Inv. Ltd Final Results - Part 1
RNS Number:9742I 
Eurocastle Investment Limited 
24 February 2005 
                         EUROCASTLE INVESTMENT LIMITED 
                            Year End 2004 Highlights 
   -Initial public offering completed in June 2004, raising net proceeds of 
    e74.3 million. 
   -Total assets ended at e1,627.6 million, a e1,568.0 million increase from 
    31 December 2003. 
   -Equity book value total of e206.4 million, or e11.18 per share. 
   -Net earnings of e12.0 million, or e0.78 per diluted share, despite having 
    a significant amount of uninvested cash during the year. 
   -Declared total dividends of e0.63 per share. 
                         Fourth Quarter 2004 Highlights 
   -Total assets increased 87.3% from e869.0 million to e1,627.6 million 
    during the quarter. 
   -Net earnings of e5.1 million for the quarter, or e0.27 per diluted share. 
   -Increased fourth quarter dividend of e0.33 per share, or annualised rate 
    of e1.32 per share. 
   -Deployed substantially all of the IPO equity. 
   -Term financed a e318.5 million purchase of credit leased real estate 
-----------------------------                    ------------      ------------- 
Selected Financial Data                          Three Months       Year Ended 
                                                 Ended 31           31 December 
(amounts in e'000, except share data and         December 2004          2004 
supplemental data)                                  
-----------------------------                    ------------      ------------- 
Operating Data 
-----------------------------                    ------------      ------------- 
Net profit                                            5,062             12,031 
-----------------------------                    ------------      ------------- 
Earnings per diluted share                             0.27               0.78 
-----------------------------                    ------------      ------------- 
Weighted average number of shares 
outstanding, diluted                             19,088,970         15,495,783 
-----------------------------                    ------------      ------------- 
-----------------------------                    ------------      ------------- 
Balance Sheet Data                                    As of              As of 
                                                  31 December       30 September 
                                                      2004               2004 
-----------------------------                    ------------      ------------- 
Available-for-sale assets (includes 
cash to be invested)                              1,286,422            858,192 
-----------------------------                    ------------      ------------- 
Investment Properties                               318,514                  - 
-----------------------------                    ------------      ------------- 
Cash and cash equivalents                            10,293              1,619 
-----------------------------                    ------------      ------------- 
Total assets                                      1,627,619            868,961 
-----------------------------                    ------------      ------------- 
Debt obligations                                  1,154,310            654,027 
-----------------------------                    ------------      ------------- 
Shareholders' equity                                206,420            203,315 
-----------------------------                    ------------      ------------- 
-----------------------------                    ------------      ------------- 
Supplemental Total Real Estate and Other ABS Securities and Real Estate Loans 
Data as of 31 December 2004* 
Weighted average asset yield                               4.18% 
Weighted average liability cost                            2.73% 
Weighted average net spread                                1.45% 
Weighted average credit rating                             BBB+ 
Weighted average asset credit spread (above                1.99% 
Percentage investment grade                                  93% 
Number of securities                                         85 
* excludes short term investments with a maturity of less than 3 months and 
rated A-1+ by Standard & Poor's and P-1 by Moody's 
Eurocastle Investment Limited (LSE: ECT) reported net earnings for the quarter 
ended 31 December 2004 of e5.1 million or e0.27 per diluted share. Net earnings 
for the year ended 31 December 2004 totaled e12.0 million or e0.78 per diluted 
share. As of 31 December 2004, the Company's shareholders' equity was e206.4 
million or e11.18 per outstanding share. 
Eurocastle's core business strategy is to invest in a diverse portfolio 
consisting primarily of European real estate asset-backed securities and other 
European real estate related assets which we finance in a manner designed to 
match the terms of our assets and liabilities. In the year ended 31 December 
2004, Eurocastle purchased approximately e1,061 million of asset backed 
securities, e22 million of real estate related loans, and e318.5 million of 
credit leased real estate assets. 
Despite credit spreads of European asset backed securities at historically tight 
levels, we continue to find attractive opportunities to deploy capital at 
superior risk adjusted returns. We anticipate there will be increased supply of 
European CMBS in 2005. During the past 12 months there has been a substantial 
increase in activity with several new conduit programs being formed by a number 
of investment banks. The B-Note market is also developing in line with this 
increased securitisation activity and should offer investment possibilities 
during the current year. 
In addition to acquiring real estate and other asset backed securities and real 
estate related loans during the quarter, Eurocastle also completed its first 
sale-leaseback transaction in December for e318.5 million. The investment 
allowed us to substantially deploy the capital we raised in our IPO and generate 
attractive risk adjusted returns. It represents a long-term investment for 
Eurocastle and reflects our interest in Germany as well as other opportunities 
in Western Europe to acquire real estate leased to high credit tenants. 
Fourth Quarter 2004 Dividend 
The Board of Directors of Eurocastle declared a dividend of e0.33 per share for 
the quarter ended 31 December 2004. The record date for this dividend will be 4 
March 2005 and the payment date will be on 11 March 2005. Eurocastle paid a 
dividend of e0.30 per share for the third quarter on 5 November 2004. 
Our aim is to pay out all or substantially all of Eurocastle's earnings in the 
form of dividends to shareholders. Eurocastle intends to pay quarterly dividends 
to shareholders. 
Fourth Quarter Investment Activity 
During the fourth quarter of 2004, we acquired e534.8 million of real estate and 
other asset backed securities and real estate related assets. 
Real Estate and Other Asset Backed Securities and Real Estate Loans 
Total purchases in the quarter were e216.3 million in face amount of real estate 
securities, other asset backed securities and real estate loans, excluding short 
term investments (asset backed commercial paper). The securities purchased had 
an average credit rating of A- and an average credit spread above Euribor of 
1.64%. Purchases of CMBS amounted to e88.0 million with an average spread of 
1.25% and average rating of BBB+. RMBS purchases amounted to e30.3 million with 
an average spread of 1.62% and average rating of BBB. Other ABS purchases 
amounted to e75.8 million with an average spread of 0.76% and average rating of 
A+. Real estate related loans amounted to e22.2 million with an average spread 
of 6.17%. After allowing for sales of securities and principal redemptions, the 
net increase in face amount of real estate and other asset backed securities and 
real estate related loans during the quarter was approximately e181 million. 
Other Real Estate Related Assets 
Eurocastle also acquired a portfolio of 96 properties from Deutsche Bank AG for 
e318.5 million on 24 December 2004. The properties predominantly consist of 
office buildings and are largely occupied by Deutsche Bank. Deutsche Bank will 
continue to occupy most of their current space on a medium to long-term basis. 
The properties, totaling 300,000 square meters of leasable space, are located in 
90 cities and towns throughout Germany. The properties are generally in city 
centre pedestrian areas and are among the best located and highest quality 
assets in their respective markets. The portfolio has been term financed as 
described below. 
Capital Markets 
Eurocastle completed its initial public offering on 29 June 2004 with a net 
capital raise of approximately e74.3 million, despite difficult equity markets 
in Europe at that time. Further capital raises are expected during the current 
Consistent with the Company's funding discipline a e400 million non-recourse 
term debt offering was completed by Eurocastle CDO I in June 2004 to finance a 
portfolio of commercial mortgage backed securities and other asset backed 
In December 2004, Eurocastle entered into a 8.4 year term loan of e246.5 million 
with a major real estate lending bank to finance the acquisition of properties 
from Deutsche Bank. The term loan was set at a cost of Euribor plus 1.15%. After 
allowing for the cost of a term fixed rate interest rate swap on e210 million of 
the loan, the average cost of financing these properties at the year end was 
Eurocastle also entered into a revolving 364 day credit facility in December 
2004 for e35.0 million as a means of securing access to temporary working 
capital. The interest rate on drawn amounts was priced at Euribor plus 2.5%, 
with a commitment fee of 0.5% on undrawn amounts. 
Investment Portfolio 
As of 31 December 2004, Eurocastle's total securities and loans portfolio of 
e1,286.4 million, which represents 79.0% of the Company's total assets, included 
e526.2 million of commercial mortgage backed securities, e254.1 million of asset 
backed commercial paper, e475.0 million of other asset backed securities, e21.9 
million of loans, and e9.2 million of cash held within Eurocastle CDO I pending 
investment in additional real estate securities and other asset backed 
securities during the ramp-up period. 
The investment portfolio is well diversified with 85 issues and an average life 
of 4.0 years; 95% of the portfolio comprises floating-rate securities. The 
portfolio is geographically diversified with direct exposures of 39% in the UK, 
25% in Italy, 13% Pan European, 10% in Germany, and 6% in France. The average 
credit quality of the securities portfolio is BBB+ and 93% of the securities are 
rated investment grade. The weighted average credit spread was 1.99% as of 31 
December 2004. The weighted average credit spread represents the yield premium 
on our securities over Euribor. 
Our real estate securities portfolio continues to perform. As of 31 December 
2004, none of our securities or loans defaulted, and there have been no 
principal losses to date. We continue to seek investments that will generate 
superior risk adjusted returns with a long-term objective of capital 
preservation and earnings stability in varying interest rate and credit cycles. 
With the exception of Germany, where developments have reflected a cautious view 
of economic prospects, major property markets in Europe have been benign for 
investors, with falling yield expectations reflecting unsatisfied demand for 
stable, good quality assets. Our expectations are for continued stability with 
moderate growth prospects. 
About Eurocastle 
Eurocastle Investment Limited is an investment company that invests in and 
manages a diverse portfolio consisting primarily of European real estate related 
asset-backed securities and other European real estate related assets. 
Eurocastle is managed by Fortress Investment Group LLC, a global alternative 
investment and asset management firm with approximately US$12 billion of equity 
capital currently under management. 
Conference Call 
Management will conduct a conference call on Thursday 24 February 2005 to review 
the Company's financial results for the year ended 31 December 2004.  The 
conference call is scheduled for 1:30 P.M. London time (8:30 A.M. New York 
time).  All interested parties are welcome to participate on the live call.  You 
can access the conference call by dialing US (888) 428-4473 or International 
(612) 332-0923 ten minutes prior to the scheduled start of the call; please 
reference "Eurocastle Fourth Quarter 2004 Earnings Call." 
For those who are not available to listen to the live call, a replay will be 
available until 11:59 P.M. New York time on 3 March 2005 by dialing US (800) 
475-6701 or International (320) 365-3844; please reference access code "771573." 
                                         Notes          Unaudited       8 August 2003 
                                                       Year Ended          (Formation 
                                                 31 December 2004            Date) to 
                                                                     31 December 2003 
                                                            e'000               e'000 
---------------------------              ------      -------------      -------------- 
Operating income 
Interest income                                            23,902                  50 
Rental income                                                 344                   - 
Realised gain on securities portfolio 
contract                                    15              4,141                 611 
Loss on foreign currency translation                         (613)                  - 
Realised gain on disposal of 
available-for-sale securities                               1,356                   - 
---------------------------               ------      -------------      -------------- 
Total operating income                                     29,130                 661 
---------------------------               ------      -------------      -------------- 
Operating expenses 
Interest expense                                           13,663                   - 
Property operating expense                                     33                   - 
Other operating expenses                     3              3,403                 759 
---------------------------               ------      -------------      -------------- 
Total operating expenses                                   17,099                 759 
---------------------------               ------      -------------      -------------- 
---------------------------               ------      -------------      -------------- 
Net profit (loss)                                          12,031                 (98) 
===========================               ======      =============      ============== 
Earnings per ordinary share 
(adjusted for share consolidation) 
Basic                                       12               0.79               (0.01) 
Diluted                                     12               0.78               (0.01) 
Weighted average ordinary shares 
(adjusted for share consolidation) 
Basic                                       13         15,214,818          11,857,670 
Diluted                                     13         15,495,783          11,857,670 
===========================               ======      =============      ============== 
See notes to the consolidated financial statements 
                                              Notes    Unaudited    31 December 
                                                       31 December     2003 
                                                           e'000        e'000 
-----------------------------                -------   ----------    --------- 
Cash and cash equivalents                                 10,293        1,690 
Restricted cash                                            2,812            - 
Securities portfolio contract                    15            -       57,611 
Asset backed securities, 
available-for-sale (includes cash to be 
invested)                                         4    1,264,484            - 
Real estate related loans, 
available-for-sale                                5       21,938            - 
Investment property                               7      318,514            - 
Other assets                                      6        9,578          316 
-----------------------------                 -------   ----------    --------- 
Total assets                                           1,627,619       59,617 
=============================                 =======   ==========    ========= 
Equity and Liabilities 
Capital and Reserves 
Issued capital, no par value, unlimited 
number of shares authorised, 18,463,670 
shares issued and outstanding at 31 
December 2004                                     
(11,857,670 at 31 December 2003, adjusted 
for share consolidation)                         13      192,709       59,027 
Net unrealised gain on 
available-for-sales securities and 
hedge instruments                              4, 5        7,317            - 
Accumulated profit (loss)                                  6,394          (98) 
-----------------------------                 -------   ----------    --------- 
Total equity                                             206,420       58,929 
-----------------------------                 -------   ----------    --------- 
Minority Interests                                             2            - 
CDO bonds payable                                 8      347,877            - 
Bank borrowings                                   9      608,849            - 
Repurchase agreements                            10      197,584            - 
Trade and other payables                         11      266,887          688 
-----------------------------                 -------   ----------    --------- 
Total liabilities                                      1,421,197          688 
-----------------------------                 -------   ----------    --------- 
Total equity and liabilities                           1,627,619       59,617 
=============================                 =======   ==========    ========= 
See notes to the consolidated financial statements 
                                          Unaudited Year    8 August 2003 
                                                   Ended   (Formation Date) 
                                               31 December      31 December 
                                                    2004             2003 
                                                   e'000            e'000 
             ----------------------------     ------------     ------------ 
Cash Flows From Operating Activities 
Net profit (loss)                                 12,031              (98) 
Adjustments for: 
Unrealised gain on securities portfolio 
contract                                               -             (611) 
Unrealised gain on foreign currency 
contracts                                           (275)               - 
Accretion of discounts on securities                (790)               - 
Amortisation of borrowing costs                      224                - 
Gain on disposal of available-for-sale 
securities                                        (1,356)               - 
Gain on securities portfolio contract             (4,141)               - 
Shares granted to Directors                           72                - 
Net change in operating assets and 
Increase in restricted cash                       (2,812)               - 
Increase in other assets                          (8,271)            (113) 
Increase in trade and other payables               9,223              688 
----------------------------                  ------------     ------------ 
Net cash flows used in operating 
activities                                         3,905             (134) 
----------------------------                  ------------     ------------ 
Cash Flows From Investing Activities 
Purchase of investment property                 (315,589)               - 
Securities portfolio contract deposit 
paid                                             (59,000)         (57,000) 
Proceeds on securities portfolio 
contract deposit                                 120,752                - 
Purchase of available-for-sale 
securities/loans                              (1,082,651)               - 
Proceeds from sale of available-for-sale 
securities                                        39,667 
Repayment of security principal                   19,363                - 
----------------------------                  ------------     ------------ 
Net cash flows used in investing              (1,277,458)         (57,000) 
----------------------------                  ------------     ------------ 
Cash Flows From Financing Activities 
Proceeds from issuance of ordinary 
shares                                           138,488           59,288 
Costs related to issuance of ordinary 
shares                                            (4,878)            (261) 
Issuance of bonds                                347,658                -                   
Borrowings under repurchase agreements           197,584                - 
Proceeds from bank borrowings                    608,843                - 
Payment of deferred financing costs                    -             (203) 
Dividends paid to shareholders                    (5,539)               - 
----------------------------                  ------------     ------------ 
Net cash flows from financing activities       1,282,156           58,824 
----------------------------                  ------------     ------------ 
Net Increase in Cash and Cash 
Equivalents                                        8,603            1,690 
Cash and Cash Equivalents, Beginning of 
Year                                               1,690                - 
Cash and Cash Equivalents, End of Year            10,293            1,690 
----------------------------                  ------------     ------------ 
                        Issued Capital 
                           Ordinary                 Net    Hedging Accumulated   Total 
                             Shares           Unrealised   Reserves   Profit      Equity 
                      (adjusted for              Gains                (Loss) 
                              share   Amount 
                     consolidation)   e'000      e'000      e'000       e'000     e'000 
---------------         ----------   -------   --------    -------   ---------  -------- 
At 8 August 2003         
(Date of Formation)             -         -          -          -           -         - 
Issuance of 
ordinary shares         11,857,670    59,288          -          -           -    59,288 
Costs related 
to issuance of 
ordinary shares                 -      (261)         -          -           -      (261) 
Net loss                        -         -          -          -         (98)      (98) 
---------------          ----------   -------   --------    -------   ---------  -------- 
At 31 December 2003     11,857,670    59,027          -          -         (98)   58,929 
---------------          ----------   -------   --------    -------   ---------  -------- 
At 1 January 2004       11,857,670    59,027          -          -         (98)   58,929 
Second capital 
call on existing 
shares                          -    59,288          -          -           -    59,288 
Issuance of 
shares on IPO           6,600,000    79,200          -          -           -    79,200 
Costs related 
to issuance of 
shares on IPO                   -    (4,878)         -          -           -    (4,878) 
Issuance of 
shares to 
Directors                   6,000        72          -          -           -        72 
Net unrealised 
gain on 
securities                      -         -      6,604          -           -     6,604 
Net unrealised 
gain on hedge 
instruments                     -         -          -        713           -       713 
Dividends paid                  -         -          -          -      (5,539)   (5,539) 
Net profit                      -         -          -          -      12,031    12,031 
---------------        ----------   -------   --------    -------   ---------  -------- 
At 31 December 
2004 (unaudited)        18,463,670   192,709      6,604       713       6,394   206,420 
===============        ==========   =======   ========    =======   =========  ======== 
Eurocastle Investment Limited (the "Company") was incorporated in Guernsey, 
Channel Islands on 8 August 2003 and commenced its operations on 21 October 
2003. The principal activities of the Company include the investing in, 
financing and managing of European real estate securities and other real estate 
related assets and other asset backed securities. The directors consider the 
Company to operate in three business segments, being real estate and other asset 
backed securities, real estate related loans, and investment properties, and one 
geographical segment, being Europe. 
The Company is externally managed by its manager, Fortress Investment Group LLC 
(the "Manager"). The Company has entered into a management agreement (the 
"Management Agreement") under which the Manager advises the Company on various 
aspects of its business and manages its day-to-day operations, subject to the 
supervision of the Company's Board of Directors. The Company has no direct 
employees. For its services, the Manager receives an annual management fee 
(which includes a reimbursement for expenses) and incentive compensation, as 
described in the Management Agreement. The Company has no ownership interest in 
the Manager. 
In October 2003, the Company issued 118,576,700 ordinary shares through a 
private offering to qualified investors at a price of e1 per share. Pursuant to 
a written resolution of the Company dated 18 June 2004, the shareholders 
resolved to receive one share in exchange for every ten shares previously held 
by them. Immediately following this resolution, the Manager and its employees 
held 1,356,870 ordinary shares. In June 2004 the Company issued 6,600,000 
ordinary shares in its initial public offering at a price of e12.00 per share, 
for net proceeds of e74.3 million. 
Statement of Compliance 
The consolidated financial statements of the Company have been prepared in 
accordance with International Financial Reporting Standards (IFRS), which 
comprise standards and interpretations approved by the International Accounting 
Standards Board (IASB), and International Accounting Standards and Standing 
Interpretations Committee interpretations approved by IASB's predecessor, the 
International Accounting Standards Committee, that remain in effect. In 
preparing financial statements, the same accounting principles and methods of 
computation are applied as in the financial statements as at 31 December 2003 
and for the period then ended. The consolidated financial statements are 
presented in euros, the functional currency of the Company, because the Company 
conducts its business predominantly in euros. 
Basis of Preparation 
The consolidated financial statements are prepared on a fair value basis for 
derivative financial instruments, financial assets and liabilities held for 
trading, and available-for-sale assets. Other financial assets and liabilities 
and non-financial assets and liabilities are stated at amortised or historical 
Basis of Consolidation 
The consolidated financial statements comprise the financial statements of 
Eurocastle Investment Limited and its subsidiaries for the year ended 31 
December 2004. 
Subsidiaries are consolidated from the date on which control is transferred to 
the Company and cease to be consolidated from the date on which control is 
transferred out of the Company. 
At 31 December 2004, the Company's subsidiaries consisted of its investment in 
Eurocastle Funding Limited ("EFL"), a limited company incorporated in Ireland, 
Eurocastle CDO I PLC ("CDO I"), Eurocastle CDO II PLC ("CDO II") and Eurocastle 
CDO III PLC ("CDO III"), all limited companies incorporated in Ireland. The 
ordinary share capital of EFL held by outside parties has no associated voting 
rights. The Company retains control over EFL as the sole beneficial holder of 
secured notes issued by EFL. In accordance with the Standards Interpretation 
Committee Interpretation 12 Consolidation - Special Purpose Entities the Company 
consolidates CDO I, CDO II and CDO III as it retains control over these entities 
and retains the residual risks of ownership of these entities. 
Eurocastle acquired its real estate properties through two German limited 
liability companies, Longwave Acquisition GmbH ("Longwave") and Shortwave 
Acquisition GmbH ("Shortwave") which are held through two Luxembourg companies 
(Eurobarbican and Luxgate), set up as societes a responsabilite limitee. 
Longwave and Shortwave each own German companies which have been used to hold 
one or several of the investment properties. These companies were established as 
special purpose vehicles limited to holding the single or multiple real estate 
investment properties acquired at the end of December 2004. Longwave has 60 
subsidiaries and Shortwave has 2 subsidiaries. Luxgate owns all of the ordinary 
share capital of Eurobarbican which in turn owns all of the share capital of 
Longwave and Shortwave. Also see Note 19. 
Financial Instruments 
Financial assets and liabilities held for trading are those instruments that the 
Company principally holds for the purpose of short-term profit taking. These 
include securities portfolio contracts and forward foreign exchange contracts 
that are not designated as effective hedging instruments. 
Available-for-sale assets are financial assets that are not held for trading 
purposes, originated by the Company, or held to maturity. Available-for-sale 
instruments include real estate and other asset backed securities and real 
estate related loans. 
The Company recognises financial assets held for trading and available-for-sale 
assets on the date it commits to purchase the assets (trade date). From this 
date any gains and losses arising from changes in fair value of the assets are 
A financial liability is recognised on the date the Company becomes party to 
contractual provisions of the instrument. 
Financial instruments are measured initially at cost, including transaction 
Subsequent to initial recognition all trading instruments and available-for-sale 
assets are measured at fair value, except that any instrument that does not have 
a quoted market price in an active market and whose fair value cannot be 
reliably measured is stated at cost, including transaction costs, less 
impairment losses. 
All financial assets other than trading instruments and available-for-sale 
assets are measured at amortised cost less impairment losses. Amortised cost is 
calculated on the effective interest rate method. Premiums and discounts, 
including initial transaction costs, are included in the carrying amount of the 
related instrument and amortised based on the effective interest rate of the 
Fair value measurement principles 
The fair value of financial instruments is based on their quoted market price at 
the balance sheet date without any deduction for transaction costs. If a quoted 
market price is not available, the fair value of the instrument is estimated 
using pricing models or discounted cash flow techniques, as applicable. 
Where discounted cash flow techniques are used, estimated future cash flows are 
based on management's best estimates and the discount rate is a market related 
rate at the balance sheet date for an instrument with similar terms and 
conditions. Where pricing models are used, inputs are based on market related 
measures at the balance sheet date. 
The fair value of derivatives that are not exchange traded is estimated at the 
amount that the Company would receive or pay to terminate the contract at the 
balance sheet date taking into account current market conditions and the current 
creditworthiness of the counterparties. 
Gains and losses on subsequent measurement 
Gains and losses arising from a change in the fair value of trading instruments 
are recognised directly in the income statement. Gains and losses arising from a 
change in the fair value of available-for-sale securities are recognised 
directly in equity until the investment is derecognised (sold, collected, or 
otherwise disposed of) or impaired, at which time the cumulative gain or loss 
previously recognised in equity is included in the income statement for the 
A financial asset is derecognised when the Company loses control over the 
contractual rights that comprise that asset. This occurs when the rights are 
realised, expire or are surrendered. A financial liability is derecognised when 
it is extinguished. 
Assets held for trading and available-for-sale assets that are sold are 
derecognised and corresponding receivables from the buyer for the payment are 
recognised as of the date the Company commits to sell the assets. The Company 
uses the specific identification method to determine the gain or loss on 
Financial assets are reviewed at each balance sheet date to determine whether 
there is objective evidence of impairment. If any such indication exists, the 
asset's recoverable amount is estimated. Impairment loss is the difference 
between the net carrying value of an asset and its recoverable amount. Any such 
impairment loss is recognised in the income statement. 
Securities and loans are considered to be impaired, for financial reporting 
purposes, when it is probable that the Company will be unable to collect all 
principal or interest when due according to the contractual terms of the 
original agreements, or, for securities or loans purchased at a discount for 
credit losses, when it determines that it is probable that it will be unable to 
collect as anticipated. Upon determination of impairment an allowance is 
established based on the recoverable amount of the underlying investment using a 
discounted cash flow analysis. 
Hedge accounting 
Where there is a hedging relationship between a derivative instrument and a 
related item being hedged, the hedging instrument is measured at fair value. The 
fair value of a derivative hedging instrument is calculated in the same way as 
the fair value of trading instruments (refer to accounting policy above). 
Where a derivative financial instrument hedges the exposure to variability in 
the cash flows of recognised assets or liabilities, the effective part of any 
gain or loss on remeasurement of the hedging instrument is recognised directly 
in equity. The ineffective part of any gain or loss is recognised in the income 
The gains or losses that are recognised in equity are transferred to the income 
statement in the same period in which the hedged firm commitment affects the net 
profit and loss. 
Cash and Cash Equivalents 
Cash and cash equivalents comprise cash at banks and in hand and short-term 
deposits with an original maturity of three months or less. 
Available-For-Sale Securities 
Securities available-for-sale which are owned directly by the consolidated 
special purpose vehicles as shown separately in Note 5. 
Investment Properties 
Investment properties comprise land and buildings. In accordance with IAS 40, 
property held to earn rentals and/or for capital appreciation is categorised as 
investment property. Investment property acquired at the end of December 2004 
has been recognised at cost, being the fair value of the consideration given, 
including real estate transfer taxes, professional advisory fees and other 
acquisition costs. After initial recognition, investment properties are measured 
at fair value, with unrealised gains and losses recognised in the consolidated 
income statement. Fair values for the properties have been assessed by the 
company to be in line with the initial cost of the properties including 
acquisition costs, and as such, no profit or loss arising from changes in value 
has been brought to account in the current period. 
The value of investment property incorporates five properties which are 
considered finance or operating leases. As the company has assumed substantially 
all the risks and rewards associated with these assets, and it has treated these 
as investment property under IAS 17 and IAS 40. These properties have been 
recognised at fair value in the same manner as freehold property. An associated 
liability representing the present value of lease payments to the freehold owner 
has been included in the balance sheet. 
More to follow, for following part double-click [nRN1X9742I] 
small e before a number denotes euros