new thoughts

There are a number of issues here

Funding
1. banks (NAB)
2. CS warehouse facility
3. Subordinated debt holders
4. Property backed debt

Loans
1. to various different players



At this stage, the property backed debt does not seem to be to much of an issue. Unless there are further write downs of course.... so let us leave that alone for now

Subordinated debt holders rank the lowest from banks and CS.
The subordinated debt has been triggered into default
if the note holders want their money.... they can not have it. If they force it, then CS will demand their money and NAB will demand their money and push the co into receivership, and the assets are firesaled then they will get nothing or virtually nothing as the note holders are last to get a bite (but before unit holders). Hence, they can not have their money and they can not force receivers in. They really have to come to a negotiation here with REU.

NAB will not want to force receivers in, and really can't unless there is a default present. Having said that CS default will trigger a NAB default. And an unrectified note holder default will trigger a CS default and hence an NAB default. Hence, NAB could call a default if CS or note holders are not happy. NAB will not want the bad publicity is one factor.

CS can call a default, if the note holders default. But CS does not really want to do this, because it will have to split the assets with NAB at firesale prices, and hence will / might not get back all it's money. CS has an undertaking from REU, that if it remains alive, then CS will get back all it's money by something like MAR 2009. Hence, CS really just wants to keep the beast alive for now.

The borrowers.......
the big aspect of the company which is really difficult.
I suspect with downgrades in property prices, then the borrowers would really be in a difficult position. I am sure (as per the releases) that they continue to pay interest. But when it comes to repayment, I think they will not be able to pay. Why.... well REU has probably offered them to buy back their loans at a significant discount maybe 15% - 30% or more, and non of them besides the previous mentioned 2 borrowers could do this. IE when it comes to payback time the borrowers WILL default. IE REU can not get their money back from the borrowers. SO what can REU do.... either push the borrowers into receivership (and risk losing their money) or renogiate new terms for the loans..... ie they will have to renegotiate new terms at higher rates.... as long as any other borrower does not invoke a default and push them into receivership.


So where does it all go from here.....

There will have to be significant renogiation with all parties... the note holders, CS, the banks and the lenders to keep the beast (REU) alive... and with time all parties will get their money... eventually. The unit holders will not get any dividend until this process is completely played out.

Alternatively, consider REU selling ALL property, for current valuation (569m euro, minus debt of 364m euro) leaves something like 200m euro left over. This will pay back note holders (50m euro), CS (68m euro) and most of the NAB (82m of the 91.5m owing). This is of course if there are continuance of interest payments by the borrowers.

This would leave a net debt position of about 10m euro to the NAB, and REU holding the loans in 7 tranches, and netting an income of $31.86m AUD per annum (this figure is derived from calculating all the loan amounts * rate and does not factor in renogiations for higher yields made to borrowers after they default).
It 6 months later there would be no NAB DEBT and $31.86m / year income. NAB would not want to lend money to REU given loan book would on paper be of very little value. Then potentially there would be a pay back of loans (maybe), which would yield $332m (if all loans are paid back), up to 5.7 years from now.

Of course, selling a lesser percentage of property, may be a better balance.


anyway
at 6 c the downside is very limited
seems crazy to not at the moment
there is a possibility that these will return up to 332m/490m shares ie 67c
the question is..... is that risk 1 in 10 in which case 6 c is the right price, or one in 20, in which case 3 c is the right price

ijudge