bell potter research

please don't shoot the messenger and call me a downramper here if you don't like the sound of this research. i am posting because i am sure some holders would like to get as much info/research on this stock as possible, and there doesn't seem that much about . have copied and pasted here.


Suspension of distributions and asset sales to reduce gearing
RAT’s full year result was overshadowed by the revelation that it needed drastic action to
immediately improve the liquidity position of the trust, which is potentially in a significantly
worse position that we previously understood.
We no longer have any confidence in the manager, which appears to have destroyed
significant equity value and failed to fully disclose finance risks in RAT or the other trusts
under Rubicon/Allco management. We believe it is impossible to make any cash flow
projections for the trust and we consider any investment in RAT as Speculative.
The root cause of RAT’s ills
RAT's auditor, PricewaterhouseCoopers, has warned of "significant uncertainty regarding
continuation as a going concern", noting that current liabilities exceeded current assets by
$144.3m and that the leverage ratio on its USD269m of subordinated debt facilities has
"little headroom" above covenants. If default is declared, RAT has 30 days to “cure” the
situation or debt holders may call for immediate repayment. RAT has still not disclosed the
details of this at-risk covenant.
We note that in a “Debt profile update” released by RAT’s manager on December 18,
2007, RAT stated that less than 2% of its debt matured in CY08 and made absolutely no
mention of any covenants that may be at risk. In hindsight, the manager was selective with
the information made available and did not provide investors with all the relevant
information regarding the risk attached to RAT’s financial position.
The auditor has also categorised USD204.8m outstanding in RAT’s warehouse loan facility
as current. While this facility expires in January 2010, RAT has previously disclosed that it is
cancellable with 364 days notice.
Emergency action
We had been looking for some statement accompanying RAT’s results regarding asset sales
to reduce gearing in the trust. But the drastic action plan announced came as a surprise as it
has been forced upon RAT by its exposure to the at-risk debt covenant not previously
disclosed. The announced course of action is to:
�� Suspend 2008 distributions, to preserve $30m cash.
�� Asset sales of between $600-800m of the $1.7bn portfolio over the next 12 months
�� Eliminate exposure to its US$305m mezzanine loan portfolio through a combination of
repayments and orderly sale of loan assets
�� Unwinding existing FX capital and income hedges to release $20m cash
�� Buy-back of up to $50m
While management stated these initiatives have the potential to raise net cash of between
$200-$250m, asset sales will also result in realisation of deferred tax liabilities of up to
$20m. Value may also be lost given the strong AUD against the USD. We expect net
proceeds will primarily go towards repayment of short term debt.
Speculative rating, property NTA post disposals potentially $0.44
We now rate RAT as speculative. The magnitude of proposed asset sales makes it very
difficult to provide meaningful forecasts. The investment case for RAT has changed from
being suitable for investors seeking yield with an above average risk tolerance to an
investment solely dependent on orderly asset sales (into what is predicted to be a falling
market) to restore distributions from 2009. While we have not set a price target, if we
assume office assets are sold at 10% below book value and a 30% discount for mezzanine
loans, we obtain a potential property NTA of $0.44.