Makes for interesting reading:-
"ASX Announcement Thursday, November 11, 2010
Chairman’s Address to 2010 AGM
As a consequence of the sale of its brand and origination business to Westpac, RHG ceased originating mortgages in 2007. Since that date, the company’s focus has been to increase its tangible net worth by refinancing its warehouses on acceptable terms and by maximising the income it receives from its mortgage book.
As at 30 June 2010, RHG had a mortgage book of $5.1 billion. The book is amortising at the rate of 2.9% per month. By 31 December 2011, provided it can be satisfactorily refinanced, the company expects its mortgage book to have reduced to $2.9 billion. At this level, the book will cease to make a meaningful contribution to the tangible net worth of the company.
The company’s non-compete undertaking with Westpac expires in January 2011. Your directors have been actively assessing the viability of re-entering the first mortgage home loan market.
The Australian conforming first mortgage home loan market comprises prime mortgages and self-certified mortgages (sometimes called low-doc mortgages). Under a self-certified mortgage, the borrower certifies his ability to repay. RHG’s competitive edge has always been in the self-certified sector of the mortgage market. However the recent introduction of the National Consumer Credit Protection Act, 2009 (“NCCP”) makes it an unacceptable risk for a lender to make self-certified loans. Under the NCCP, the lender (rather than the borrower) must determine the borrower’s ability to repay the loan and determine the suitability of the loan for the borrower. If the lender does not do so with the required level of diligence and documentary evidence, then the borrower’s obligation to repay the loan may be negated. Because of lack of history or lack of documentary evidence it is difficult for a lender to apply the required level of due diligence to loans to new entrants to the workforce, to itinerant employees, to part time employees, to contract employees and to the self employed. These are the persons who historically used self-certified home loans. Ultimately common sense will prevail and the NCCP will be amended. But until then, home loans will be denied to the majority of these borrowers.
Even if the company could originate acceptable credit home loans, it must also be able to fund those loans at a competitive rate. The alternative to bank funding is to securitise the mortgages and to issue Residential Mortgage Backed Securities (RMBS) into the capital markets. There is a small RMBS market in Australia but this is not available for self-certified loans and is not available to the non-bank sector. The principal RMBS markets are the Euro market and the US market. Both of these markets have been closed since the GFC with no likelihood of reopening in the foreseeable future. When they do ultimately reopen, it is believed that that they will reopen with a significantly higher premium for risk. It will be many years before RMBS will return as a competitive source of funding for Australian home loans.
At the 2009 Annual General Meeting, I advised that, if by 2011 the company has not identified a superior investment opportunity, your directors will distribute the company’s funds to shareholders in an optimal manner. Your directors do not believe it commercially prudent or commercially viable to re-enter the Australian mortgage market either now or in the foreseeable future. Similarly
your directors have not identified an alternative investment proposal which they believe to be superior. Consequently your directors now intend to return the company’s funds to shareholders.
The company’s assets are principally cash plus some non-cash assets. The non-cash assets consist of
The likely net future income from the company’s mortgage book
Some subordinated debt and cash collateral
Some impaired mortgages that the company has been unable to sell or refinance.
The value of these non-cash assets to a bank or financial institution that can refinance the warehouses is significantly greater than the value of these assets to the company. Consequently your directors have retained Deloitte Corporate Finance to seek a purchaser of these non-cash assets. The outcome of the Deloitte tender process should be known by early 2011.
In early 2011, if approved by shareholders, the company intends to make an Equal Access Buyback Offer to all shareholders. An income tax ruling is presently being sought to the proposed buyback offer. Subject to the income tax ruling and the outcome of the Deloitte tender process, the likely Equal Access Buyback Offer will be an offer to all shareholders to purchase all of their shares for not less than 88 cents per share (1 cent capital and 87 cents dividend) plus a franking credit of 30 cents per share.
The Equal Access Buyback Offer and the proposed sale (if any) of the company’s non-cash assets will be subject to approval by shareholders at an Extraordinary General Meeting. At that meeting, shareholders will be advised of the outcome of the Deloitte sale process and will be provided a report by an independent expert, a report by the independent directors and an update on the status of the income tax ruling.
John Kinghorn
Chairman
Further media enquiries
Matthew Horan
0403 934 958"
"ASX Announcement Thursday, November 11, 2010
Chairman’s Address to 2010 AGM
As a consequence of the sale of its brand and origination business to Westpac, RHG ceased originating mortgages in 2007. Since that date, the company’s focus has been to increase its tangible net worth by refinancing its warehouses on acceptable terms and by maximising the income it receives from its mortgage book.
As at 30 June 2010, RHG had a mortgage book of $5.1 billion. The book is amortising at the rate of 2.9% per month. By 31 December 2011, provided it can be satisfactorily refinanced, the company expects its mortgage book to have reduced to $2.9 billion. At this level, the book will cease to make a meaningful contribution to the tangible net worth of the company.
The company’s non-compete undertaking with Westpac expires in January 2011. Your directors have been actively assessing the viability of re-entering the first mortgage home loan market.
The Australian conforming first mortgage home loan market comprises prime mortgages and self-certified mortgages (sometimes called low-doc mortgages). Under a self-certified mortgage, the borrower certifies his ability to repay. RHG’s competitive edge has always been in the self-certified sector of the mortgage market. However the recent introduction of the National Consumer Credit Protection Act, 2009 (“NCCP”) makes it an unacceptable risk for a lender to make self-certified loans. Under the NCCP, the lender (rather than the borrower) must determine the borrower’s ability to repay the loan and determine the suitability of the loan for the borrower. If the lender does not do so with the required level of diligence and documentary evidence, then the borrower’s obligation to repay the loan may be negated. Because of lack of history or lack of documentary evidence it is difficult for a lender to apply the required level of due diligence to loans to new entrants to the workforce, to itinerant employees, to part time employees, to contract employees and to the self employed. These are the persons who historically used self-certified home loans. Ultimately common sense will prevail and the NCCP will be amended. But until then, home loans will be denied to the majority of these borrowers.
Even if the company could originate acceptable credit home loans, it must also be able to fund those loans at a competitive rate. The alternative to bank funding is to securitise the mortgages and to issue Residential Mortgage Backed Securities (RMBS) into the capital markets. There is a small RMBS market in Australia but this is not available for self-certified loans and is not available to the non-bank sector. The principal RMBS markets are the Euro market and the US market. Both of these markets have been closed since the GFC with no likelihood of reopening in the foreseeable future. When they do ultimately reopen, it is believed that that they will reopen with a significantly higher premium for risk. It will be many years before RMBS will return as a competitive source of funding for Australian home loans.
At the 2009 Annual General Meeting, I advised that, if by 2011 the company has not identified a superior investment opportunity, your directors will distribute the company’s funds to shareholders in an optimal manner. Your directors do not believe it commercially prudent or commercially viable to re-enter the Australian mortgage market either now or in the foreseeable future. Similarly
your directors have not identified an alternative investment proposal which they believe to be superior. Consequently your directors now intend to return the company’s funds to shareholders.
The company’s assets are principally cash plus some non-cash assets. The non-cash assets consist of
The likely net future income from the company’s mortgage book
Some subordinated debt and cash collateral
Some impaired mortgages that the company has been unable to sell or refinance.
The value of these non-cash assets to a bank or financial institution that can refinance the warehouses is significantly greater than the value of these assets to the company. Consequently your directors have retained Deloitte Corporate Finance to seek a purchaser of these non-cash assets. The outcome of the Deloitte tender process should be known by early 2011.
In early 2011, if approved by shareholders, the company intends to make an Equal Access Buyback Offer to all shareholders. An income tax ruling is presently being sought to the proposed buyback offer. Subject to the income tax ruling and the outcome of the Deloitte tender process, the likely Equal Access Buyback Offer will be an offer to all shareholders to purchase all of their shares for not less than 88 cents per share (1 cent capital and 87 cents dividend) plus a franking credit of 30 cents per share.
The Equal Access Buyback Offer and the proposed sale (if any) of the company’s non-cash assets will be subject to approval by shareholders at an Extraordinary General Meeting. At that meeting, shareholders will be advised of the outcome of the Deloitte sale process and will be provided a report by an independent expert, a report by the independent directors and an update on the status of the income tax ruling.
John Kinghorn
Chairman
Further media enquiries
Matthew Horan
0403 934 958"
