Australian non-bank lender launches $580 million IPO

After failing to find a private equity buyer, the founder of RAMS Home Loans chooses to list his billion-dollar mortgage lending business.
One of AustraliaÆs largest and most successful non-bank mortgage lenders is to list on the local stock exchange via an initial public offering arranged by UBS. RAMS Home Loans released its prospectus yesterday outlining a retail and institutional offer of 353.8 million shares at an offer price of A$2.50 each to raise a total of A$695.3 million ($580 million).

The offer opens on July 13, with trading in the shares expected to commence on July 31.

The move comes after nearly a year of speculation about whether RAMS would be sold to private equity interests or floated to the public. The company had been running a dual-track process up until a few weeks ago. It was reported that as many as four private equity bidders were in the running until the Carlyle Group and Babcock & Brown pulled out of the race earlier this month. Sources say the other two bidders û Kohlberg Kravis Roberts and a consortium of Nikko, PEP and Ironbridge û were unable to stomach the A$1 billion price tag.

RAMSÆ founder John Kinghorn, who currently owns 93.4% of the business which he started 16 years ago, will retain a 20% shareholding following the listing, giving the company a theoretical market capitalisation of A$884 million and an enterprise value of A$1.02 billion. Kinghorn says he will retain the 20% stake until at least the announcement of the 2008 financial results. He will also stay on as chairman.

At the end of March, RAMS had a loan book worth just over A$11 billion and it is expected to increase this book to A$15.6 billion by the end of the 2008 financial year. The company is forecasting an average loan book growth of around 33% for the next two years and says revenues will also increase by 18% in FY07 and 32% in FY08.

The company expects to make a net profit after tax of A$58.6 million in financial 2008, giving it a price earnings ratio of 15.1 times. Other listed mortgage companies û Mortgage Choice and FlexiGroup û currently trade at P/E multiples of about 20 times for FY08.

RAMS is promising to pay a fully franked divided per share of 13.2 cents, representing a dividend yield of 5.3%.

The IPO is structured to include a broker firm offer open to retail investors, a priority offer to employees and franchisees, and an institutional share offer. As yet, no details have been provided about the split between institutional and retail, however the prospectus says A$10 million worth of shares will be set aside for employees, including the companyÆs chief executive Greg Kolivos and family member Geoff Kinghorn.

RAMS is one of a number of non-bank lenders in Australia that have transformed home ownership in the country by providing mortgages to people who donÆt fit the rigid credit profile applied by the major banks. Others in the sector include names like Bluestone, Aussie Home Loans and Liberty Financial. RAMS distributes its loans through two channels û third party mortgage brokers and a franchise network that currently includes 51 franchisees.

There has been speculation about the sale of RAMS for several years. Last year, the company was in serious talks with National Australia Bank about a tie-up. ôThese bi-lateral discussions only went so far and then died down,ö says a source close to RAMS. ôDuring the process it became clear that there was a lot of interest in the business, so the owners decided to run a formal auction process.ö Sale documents were distributed to prospective buyers in mid-March but now the private sale option has been abandoned in favour of an IPO.

Unlike some of its competitors, RAMSÆ loan book is more diversified with a focus on traditional prime mortgages, but with flexible terms like lines of credit, honeymoon periods, and interest-only options. While it offers low-doc loans to people who are self-employed, it doesnÆt play in the non-conforming sector, which is experiencing a steady rise in delinquencies. The company has also used mortgage lendersÆ insurance to credit enhance its loan book.

The fact that Kinghorn has decided to sell has raised questions about whether this type of flexible lending has reached its peak. With steadily rising interest rates, Australians are finding it harder to pay off their mortgages. There is some concern that lenders have been too greedy and provided people with large loans with inadequate security and little regard for whether they can meet payments if the economy turns south.

The IPO prospectus says some of the risks facing shareholders include: margin compression brought about by increased competition and the introduction of new capital adequacy rules under Basel II; mortgage insurers reducing, denying or failing to pay claims; higher interest rates; and a major liquidity event that could cause RAMS to replace some or all of its short-term funding with more expensive longer-term funding.

RAMSÆ lending activities have been financed by an active mortgage-backed securities market in Australia. According to Standard & PoorÆs, the total number of residential mortgages underlying RMBS in the country reached A$155 billion at the end of 2006 û representing about 20% of the entire mortgage market. That means one in every five housing loans in Australia is securitised. The ability to package together mortgages and sell them in the capital markets means that RAMS only has debts of around A$125 million.
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