RAMS faces a sub-prime shearing
THE nation's biggest non-bank lender, RAMS, is the latest victim of the global liquidity contagion, unveiling a profit and dividend warning yesterday less than three weeks after an $885 million stock exchange listing.
Addressing a hurriedly convened briefing for investors in Sydney, RAMS founder John Kinghorn said "life was cool" until last Thursday, when the contagion spread rapidly from the US sub-prime market to "all bank and sub-prime borrowers".
"The inter-bank market in London closed down and central banks had to free up the banking system," Mr Kinghorn said, reassuring investors that the RAMS business was "not at risk".
In its recent prospectus, RAMS said it expected to earn a net profit of $43.4 million in 2007, rising to $58.6 million in the current financial year.
The 2008 dividend is a forecast 23.4c. But Mr Kinghorn said he didn't know if the dividend commitment could be met.
"All I can tell you is that what's happening in the market is more likely to be negative than positive," he said.
"I don't know if it will be the same cents per share."
As for the profit figure, he said that if current conditions were to persist, the downgrade was likely to be around 15 per cent.
RAMS, which accounts for 2-2.5 per cent of mortgage lending in Australia, is the second non-bank lender in two days to feel the impact of tightening liquidity due to the sub-prime mortgage crisis in the US.
yesterday revealed that low-doc lender Bluestone had told borrowers it would lift home lending rates by 17-55 basis points due to higher funding costs.
RAMS' funding model is different to Bluestone's, which largely relies on securitisation.
Of RAMS' $14.2 billion lending book, $6.2 billion is short-to-medium-term funding sourced from so-called extendible commercial paper (XCP) transactions in US debt-capital markets.
RAMS said this XCP market had been experiencing "unprecedented disruptions" in recent weeks, resulting in "material increases in spreads and shortages of liquidity".
"Despite these difficult conditions, RAMS has continued to successfully place its short-term extendible paper, albeit at spreads materially higher than forecast.
"RAMS continues to evaluate its options for existing and future funding arrangements."
Contrary to recent market speculation, and unlike three recent cases in the US, Mr Kinghorn said RAMS had not invoked a funding clause to force its lenders to roll over its short-term paper.
He conceded that the holiday season in Europe had "caused us angst", as RAMS tried to plan its strategy to steer through the crisis.
However, there were encouraging signs of stability, even though it could be "on for young and old again" if unexpected exposures were to emerge, like last week's suspension of some investment funds by France's largest bank, BNP Paribas.
RAMS' other activities are funded by $3.9 billion of warehouse transactions, or interim financing, before potential placement in securitised transactions.
A further $4.1 billion is supported by residential mortgage-backed securities, or longer-term funding deals in the Australian, European and US debt-capital markets.
While it was too early to assess the financial impact of the liquidity contagion, RAMS said it was likely to be "material", and the company pledged to keep the share market informed. Its results will be released on August 28.
Analysts said Australia's banks should be insulated from the problems facing RAMS.
"I would have thought this was, on balance, positive for the banks because if some of their competition is having trouble because they are limited with regard to the sources of funding, then the banks should relatively benefit because they have alternatives," said Wilson HTM's Brett Le Mesurier.
Standard & Poor's analyst Leah Rhodes said RAMS was the only Australian company with a US dollar extendible commercial paper program. She said S&P was closely monitoring the RAMS commercial paper program, which is rated A1+ and stable by the agency.