evolving issues

Can I be the first to suggest anywhere.....that quickly, (within a couple of weeks or so) - there will be a major shift in the key issue and therefore share price driver for RAMS. (ie pre the Westpac shareholder late November vote.)

For example.....maybe what I am about to suggest, will be picked up by the broker and media communities sooner or later.

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Bits of info and media releases comng from the company since the Westpac announcement on Tuesday..... maybe hint that management had concerns that refinance of the XCP program due Feb/March 2008 would not be achieved at all.

Thus they reached out to Westpac to firstly contribute a big percentage of the paper, plus put their name behind it to likely secure the rest of the funding. (We all know the price/hurt paid by RAMS shareholders for THAT decision).

However in the subprime credit business...Tuesday was a LONG time ago. It actual fact RAMS management probably started talking to Westpac several days prior to Tuesday signing.

Veteran and highly respected UBS Financial Services Director Art Cashin stated on CNBC Business channnel last night......stated that he has seen a dramatic change in the commercial paper market in the last 2 weeks.

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And this story only 20 hours old.....needs to be read carefully.....all relevant but some aresa more so.

Friday, October 05, 2007
Jobs Report Makes Fed Rate Cut Less Likely

It seems like Wall Street is always anticipating a Fed rate cut. Until the Fed finally lowered rates September 18th, almost every financial article discussed the possibility. After the cut was made, all media could do was discuss that cut. Now that another FOMC meeting is imminent, talks of a rate cut have resumed.

Today's jobs report may have put the brakes on that thinking. Jobs were created in September at a level slightly above expectations and August's figures were revised up significantly.

Further supporting a Fed hold on rates is a statement by the Fed Vice Chairman, Donald Kohn. In a speech to the Philadelphia Chamber of Commerce, Kohn said, "But pending further evidence, a 50-basis-point easing was not an unreasonable first approximation of what might be required to keep the economy on a sustainable growth path."

Kohn continued by suggesting the Fed may reverse itself provided sufficient positive economic data is presented -

It would be better for the Fed to respond "too much or too rapidly" to the turmoil in financial markets rather than acting "too little or too slowly," said Kohn, the No. 2 official of the central bank.

With recent favorable inflation news, Kohn said he believes the Fed could reverse the recent rate cut if it turned out to be larger than needed.

Has the Fed's rate cut had the intended reactions? Overall, the answer is yes, but few mortgage holders are feeling the benefits.

Short term interest rates have come down and for those homeowners with an adjustable rate mortgage tied to Prime or a Treasury index there has been a benefit. Long term rates initially went up after the Fed rate cut and today's good jobs news has returned them to that level. Subprime ARMs, which are typically tied to LIBOR, are also about even, though a rising trend has been reversed.

Where the Fed's rate cut helped was in the psychology of the markets. Liquidity has returned somewhat to both the mortgage and commercial paper markets.

Since the September meeting, there have been "some signs of improvement in some markets" that had been disrupted over the summer, Kohn said.

Kohn cited how some asset-backed commercial paper is attracting investment and how some lending is available to banks.

Stock prices have also regained their substantial losses. It's too soon to know if we're out of trouble yet, but things are looking more hopeful overall than they have for some time. According to Brian Brady, even Jumbo loans are back. But Kohn warns,

"Beyond housing, it is too early to tell what effect financial market turmoil is having on household and business spending, though very preliminary and partial information suggest that thus far the effects seem to be limited."

We'll have to see how things shake out when the Fed next meets October 30 and 31.

Labels: economic indicators, federal reserve board, mortgage rates, unemployment

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and this story....big lenders desperate for better returns...how much longer is all this cash going to sit in the Reserve.


Money Market Datapoint of the Day
posted on: October 04, 2007

All that money has to go somewhere, right? I asked in September what was going to happen to all the money which used to be in asset-backed commercial paper and other short-dated asset-backed securities. It seems that a significant chunk of it has ended up at The Reserve, a money-market funds company. Justin Fox reports:

Concerns about safety at other money funds have boosted Reserve, which saw its assets rise $10 billion (to $76 billion) in just the past four weeks.

That's a huge rise – more than 15% in less than a month – but it's not surprising in the context of a broader flight to quality, if The Reserve indeed has been good at staying away from subprime.

Interestingly, Bruce Bent, the founder of The Reserve, says that subprime-backed assets really aren't that risky at all. He stayed away from them himself not because they could fall in value, but because his investors might not like them:

A money fund could go into a subprime and it could take the top tranche from a credit point of view and not have a risk of losing principal, but what they do lose is the commitment to the soundness of the sleep of the investors.

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What is the point of all of the above.......well is it not obvious that the commercial paper credit crisis IS slowly but surely coming to an end.

The Westpac vote is still several weeks ago.....lots can happen in that time.

There is potential that this company can secure their XCP paper in 4 months without Westpac....not only that, it could come at a very acceptable pricing.

I think Rams have guided about $55 nett profit 2007/8. Thats going to be trimmed regardless...but subject to on going stabilisation in paper, we may have a company with a long term future

at todays market capitalisation on forward PE of 3 or 4.
Shareprice would get back to $1.60

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In a previous post I suggested contact would be made withy the company. I did that on Friday:

What I was told and not by views:

# RAMS mortagees retain their loan commissions, should the Westpac deal go through. Why would they try to move "old" RAMS customers over to Westpac.

#RAMS managment and mortagees own alot of shares in RHG. These people want to retain value in their holdings and think they have alot of management capacity to do so.

# No suggestion of widespread churn right now, whatsoever.

# Old RAMS customers will have some security in likely belief Wpac is behind the company. eg that significant paper support, provided by Westpac.

# Sharp management right now....to look after their own personal interests with current business and Westpac incorporation.

Other stuff I was told, whereby RAMS people believe the current book after 10 years in RAMS work still has high value.

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Anyway I don't think the vote will get up because of a near back to normal freeing up of commercial backed securites come late November. This is the prime issue I believe for current investors to focus on.

Another usual and informative story here:



New RAMS shareholders left bleatingFont Size: Decrease Increase Print Page: Print Bryan Frith | August 15, 2007

THERE will no doubt be some unhappy shareholders poring over the recent RAMS Home Loans Group initial public offer prospectus following the company's warning that it may be the latest local casualty of the US sub-prime mortgage crisis.

The crisis has caused volatility and a jump in interest rates on global debt markets.

Yesterday RAMS, which only joined the ASX lists late last month, warned its 2008 profit was likely to be materially lower than its forecast $58.6 million if current market conditions continued.

Already skittish investors reacted by slashing the RAMS share price by 34c, or 19.4 per cent, to $1.41, after sales as low as $1.19. The turnover was a hefty 40 million shares.

RAMS listed on July 27, less than three weeks ago, after raising $695 million through an offering at $2.50 a share. Since then it has been downhill all the way.

Company's founder John Kinghorn retained a 20 per cent stake, so RAMS initially had a market capitalisation of $880 million. It is now down to $498 million -- a drop of more than $380 million, or 43 per cent.

RAMS ran a dual-track sale process, through UBS, considering both a trade sale and a initial public offer.

It went for the offer after potential private equity buyers wouldn't bite at the asking price, reputed to be about $1 billion.

UBS was the offer's underwriter and lead manager.

Apart from Kinghorn, the main shareholders are Perpetual Trustees with almost 6 per cent of the capital, Suncorp-Metway with 5.5 per cent and Commonwealth Bank with 5.8 per cent.

Luckily for the mum-and-dad investors there was no offer to the general public.

Instead there were three tranches: a priority offer to employees, franchisees and investors who were invited by the directors to participate; a broker firm offer, the only portion in which retail investors got a look in; and an institutional offer.

The RAMS shares were offered by J Kinghorn and Co Pty, as trustee for the Kinghorn family trust, Strategic Marketing Services and Greg Jones. The prospectus was dated June 25.

By that stage the sub-prime problems were starting to make themselves felt in the global debt markets.

Early that month the flow-on from the sub-prime crisis brought two hedge funds of Bear Stearns undone, and they were forced to suspend redemptions because of a lack of liquidity. It was also in June that the remaining members of the private equity consortium looking to bid for Coles pulled out because of the rising cost of debt for leveraged acquisitions.

For the same reason, Permira pulled out the Wesfarmers consortium, forcing the West Australian-based conglomerate to go it alone with a bid for Coles.

The private equity debt market has now completely dried up, and the banks are left with $US250 million ($298 million) to $US300 million of loans, which they are finding impossible to on-sell.

Public speculation began about the threat of contagion.

That led to liquidity drying up, forcing central banks to pump liquidity into the system. Interest rates spreads widened even further.

RAMS has been affected by those changes in the market conditions.

Yesterday the company pointed out that it had no sub-prime exposure and all its loans were 100 per cent mortgage-insured. But it was a borrower on the US capital markets and the increased borrowing costs were cutting its profits.

Of its $14.16 billion loan book, $US6.17 billion, or 43 per cent, is funded through the XCP (extendible commercial paper) market, which caters for short-to-medium term funding through the US debt capital markets.

RAMS says the XCP market in the US has been experiencing unprecedented disruptions in recent weeks, which has resulted in a material increase in spreads and shortages of liquidity. RAMS has continued to place its short XCPs but at materially higher spreads than forecast.

The directors say it's too soon to judge with certainty the extent of the likely negative impact on the 2008 earnings forecast, but if the current market conditions continue "it is likely to be material".

Hapless shareholders trawling through the prospectus to see, given the market problems already emerging, what sort of warnings they may have received, they will find that in several places RAMS stressed that one of the risks associated with the business is the possibility of "a major liquidity event in the capital markets".

They document warns that in the event of a major liquidity disruption it may be forced to replace some or all of its short-term funding with long-term funding at a higher cost.

Nevertheless, one of the assumptions used in preparing the 2008 earnings forecast was that there would be no material change in global RMBS (long-term residential-backed mortgages, which account for $4.07 billion of the company's loan book) and XCP markets.

A sensitivity analysis accompanying the forecast showed that a 1 basis point margin compression on the existing book would reduce the profit and cash flow by $1.2 million. The same margin compression for new business would reduce profit by $300,000.

XCPs allow borrowers to extend the maturity but the market views any such action as a last resort, caused by borrowers being unable to roll over the securities by issuing new paper.

In the past week three XCP borrowers, American Home Mortgage, Luminent Mortgage and Aladdin Capital, took the unprecedented step of delaying payoffs on maturing paper.

That spooked the market and caused the rates on XCP paper to balloon. Traditionally such paper has been priced 3 to 5 basis points above the Federal Reserve Board's overnight lending rate, but in the past week or two the spread has soared to 25-30 basis points above the overnight rate.

A margin compression of that magnitude on the RAMS loan book would imply a fall in profit of the order of $30 million.

Applying it to 40 per cent of the book -- that is, the amount tied up in XCPs -- would still come out at a reduction of about $12million.

While, as the directors maintain, it may be premature to try to assess the likely extent of the reduction in the 2008 earnings forecast, the company arguably should have given shareholders and investors some idea of the impact if the spreads remained at their present level.

The ASX should seek further clarification from the company in the interests of an informed market. The ASX could also seek comment from the company on whether it expected to maintain the forecast dividend.

RAMS forecast a fully franked 2008 payout of 13.2c a share, which would require $46 million.

A profit fall of 20 per cent would reduce the 2008 profit to $46 million, sufficient to pay the dividend on a 100 per cent payout ratio.

The existing turmoil in the US capital markets suggests RAMS may be at risk of a profit fall of at least that magnitude, which in turn poses the question whether the company will be able to deliver its forecast dividend rate.

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