Unless someone comes along to buy RHG's loan book (something which is looking increasingly unlikely anytime soon), they are in run-off mode, with long-term assets and short-term borrowings.
I've seen insurers and reinsurers in run-off mode. No-one (and I do mean no-one) knows whether there is any value in their books until they are down to the final portion of their policy liability run-off. During that time, they pay no dividends, have zero capital growth, survive on the smell of an oily rag (staff, premises, equipment, etc.) and pray like hell that their actuaries have done a reasonable reserving job.
What you don't ascribe enough importance to in your analysis is that RHG, whilst having a big loan book, has an equally big debt and over $10bn of it is very short-term.
You can somewhat predict their income (attrition of the book via people refinancing is a bit of an unknown, but a company in run-off doesn't mind that too much - allows them to reduce their debt faster), however you cannot predict their borrowing costs, as they are all very short-term. Another shock in the markets, a failure to refinance any portion of their debt at rollover periods, one of their warehousing banks pulling the plug, a spike in short-term rates - any of these short-term factors can put RHG into insolvency, regardless of how large its long-term income streams are.
So, RHG investors looking for short-term capital growth are either deceiving themselves, or counting on someone buying the loan book. There is no other possible way that RHG will go up from here.
In fact, in the event that they do survive, there will be a gradual decline in their price over the next 5-7 years, while the book is gradually wound-down and we see whether there is anything left over at the end of the day. If not bought out, no-one will see a cent back from this company until it is almost at the end of its run-off.
It's nothing more than a punt and, personally, I see a lot of other companies on the board which look like far more promising punts, to me.
RHG Price at posting:
0.0¢ Sentiment: Sell Disclosure: Not Held
