Reconsidering Rams

Rams Home Loans Group has fast become an icon of the Australian capital market: the final float of consequence in a bull market; a company that occupies a unique niche in the complex mortgage-funding chain, and fast-becoming one of the shortest lived listings on the ASX ever.

Nineteen per cent of the shares in Rams changed hands in a kind of crazy day's trading in which the share actually traded higher, to $1.29 in the first half an hour.  Rams did not clarify until half an hour after the market opened that the company had to invoke its right to extend its US$6 billion commercial paper borrowings in the US and that it would pay a spread of 25 basis points over Libor for doing so. Rams also said it negotiated a temporary increase in warehouse loans from banks.

The consequences of making use of the provision to extend are mostly misunderstood. Contrary to the whisperings of some of Rams competitors this is not an event of default; Standard & Poor's, at least, reiterated an A1+ rating on the Rams commercial paper; and three banks (ABN Amro, Royal Bank of Scotland and National Australia Bank) all ultimately have to refinance these loans if for some reason Rams cannot get set in the debt capital market over the next six months.

That disclosure proved the catalyst for yesterday's initial fall of five per cent on the ASX, with Rams trading at its lowest at 55 cents, or little more than a fifth of the price paid by investors in the company's float late last month. Rams shares ended yesterday at 87 cents, still 36 per cent lower than Wednesday's price.

The huge turnover in the stock reinforces the prospect that a credible takeover bid for Rams would succeed. Really every line of stock other than the 25 per cent or so held by directors and management has to be in the hands of investors who either regret the investment or are now counting on a fast profit.

If Rams were still privately-held the funding issues facing the company, while important, would be too exotic for much sustained media interest and the company's brand.

Now Rams may be suffering reputation damage by dint of repetitive and generally gloomy commentary.

As it is Rams may be more dependent on short-term marketing gimmicks such as its "Home loan winter sale" for "August only", which is about to crash into the spring market tactics of every other lender seeking to make the most of the prime lending season of the year.