Seems that this and speculation that NAB is the likely bidder...

Seems that this and speculation that NAB is the likely bidder for the book is what is driving this stock up. Waiting to see what happens from here.... Interesting to note that the worst case in the funding is that they loose the portion that they cant refinance and according to reports the old RMBS at approx 50% of the book has very healthy and profitable margins.



Company: RAMS Home Loans Group Limited
ASX Code: RHG
Recommendation: Buy
Price at Review: $0.300
Current Price: $0.355
Change since review: +18.33%

Category: HIGH STAKES
Issue: 235
Date: 15 Oct 07


Fundamental risk:

Share price risk:






There is a lot of fear and misunderstanding swirling about this stock. But the facts are more comforting.


RMC’s liability is limited in every transaction document to the assets it has in relation to a particular series. In each transaction document, parties contracting with RMC undertake not to petition for RMC’s winding up in the event that the assets of the series are not sufficient to meet the liabilities of the RMC in respect of that series.


That legalistic paragraph from the fine-print end of the prospectus is an important one for RAMS shareholders. Reading the press and watching the share price fall, it’s easy to think RAMS is a basket case that’s about to go bust. We think that’s highly unlikely, and here’s why.


Understanding the funding

RAMS has funded its $14.5bn of mortgages using three separate sources; extendible commercial paper ($6bn), warehouse facilities ($4.2bn) and RMBSs (residential mortgage backed securities – $4.3bn).


The first two are short term funding sources that, thanks to the credit market dislocations, RAMS is having trouble refinancing. For the record, we think RAMS will refinance its short-term funding.


In a sign that things might be improving, an article from Bloomberg over the weekend reported several large US banks are looking to form a consortium to breathe life back into the asset backed commercial paper market. There are still four months left for RAMS to refinance its commercial paper and a lot can happen between now and then. But what if it doesn’t get the cash? And what if the providers of the warehouse facilities –$1.25bn of which is due to be refinanced at on 19 November – pull the pin as well?


Fine print

Well, this is where that fine print becomes important. Each source of funding has its own discrete pool of security. So if RAMS can’t refinance the $1.25bn, it has to sell the $1.25bn of specific mortgages pledged as security, with any shortfall borne by the lenders. There is no recourse to RAMS itself or, importantly, its portfolio of other mortgages.


So the worst case is that it can’t refinance any of the short term funding and is left with the part of its mortgage book that’s funded by RMBSs. Unlike the shorter term funding which has gotten the company into trouble, the mortgage backed securities match the profile of the underlying mortgages and the funding is locked in for the life of the loans. More of this kind of funding would have made RAMS a much more sustainable business proposition. But let’s stick to the facts as they stand.


The $4.3bn mortgage portfolio, backed by the RMBSs, is throwing off a healthy interest margin and is virtually certain to keep doing so. That’s because the cost of funds was locked in on the day the bonds were issued. Based on our calculations, that portfolio alone is worth 35 cents per share (we’re assuming the $140m from Westpac, if shareholders approve it, will offset the $138m of corporate debt).


Fear and panic are rife at the moment and there’s a real prospect that this stock might hit 20 cents over the next few months. But wild share price movements don’t scare us, in fact we rely on them to create buying opportunities.


At today’s price, the chance of this business not generating an adequate return for shareholders over the next few years is small, and that’s our definition of risk. The share price is down 55% since 2 Oct 07 (Speculative Buy – $0.66) and, at 30 cents, you have to start looking hard for left-field events for this to go wrong, such as some kind of legal action from float investors that ends up hitting RAMS rather than its directors. And while it may seem a strange proposition for those newer to value investing, the current low price removes much of the speculative element from the recommendation. The stock will likely remain highly volatile but, with RAMS’s business case stronger than what investors are giving it credit for, we’re upgrading to BUY for up to 5% of your portfolio. We’re also adding 15,500 shares at 30 cents, at a cost of $4,650, to our Growth portfolio