views on the days trading direction, page-7

Nicleeson,

One possible scenario (from today's Australian):-

Westpac has offered to provide up to $500 million in funding, via a new warehouse facility, for mortgages settled from November 15, until the formal completion of the acquisition. Westpac will also provide assistance in refinancing a $6.1 billion US Extendable Commercial Paper program maturing in the first half of next year. Westpac will fund up to $1.5 billion of the refinancing at commercial rates.

A "commercial rate" could be anywhere between 30 to 50 basis points above its cost of funding - in perpetuity - which could be very profitable for Westpac.

RAMS is attempting to sell a $250 million residential mortgage backed security (RMBS) at a low 50 basis points spread above benchmark. If RAMS' entire loan book was refinanced at these spreads, its profit would be virtually wiped out.

Another interesting point is that RAMS has a corporate debt of $138 million, which it needs to pay back. Its directors are yet to determine what they will do with the $140 million proceeds from Westpac, but a strong possibility is it will have to pay at least $108 million of this corporate debt back to the Royal Bank of Scotland.

RAMS chief executive Greg Kolivos said the company was in discussions with the bank about whether they wanted to keep it on or repay the loan. He said the debt was secured.

Yet another interesting element in the RAMS/Westpac deal is the decision by Westpac to pay $15 million in trailing fees to existing commissions to RAMS brokers.

These actions suggest that it feels that there is an unacceptable risk that RAMS will not be able to continue to pay trailing commissions on its existing book. The implication is Westpac thinks there is a chance that RAMS shareholders may be left with little.

Not good.