Westpac Banking will buy the distribution arm of mortgage lender RAMS Home Loans Group, a high-profile Australian victim of the fallout from the U.S. subprime mortgage crisis, for A$140 million (US$125 million).
Westpac, Australia's fourth-largest bank, said on Tuesday it will fund up to A$500 million in mortgages and refinance up to A$1.5 billion of RAMS' debt under the deal.
RAMS shares, which have fallen more than 60% since listing in August, initially jumped more than 5% but quickly reversed and were trading as much as 20% lower. Westpac shares were over 2% higher.
The deal provides a lifeline for RAMS, which failed to refinance A$6.17 billion in debt after liquidity dried up in global credit markets in the wake of the subprime crisis.
Westpac will take over the RAMS brand name and its franchises and all new business after November, leaving RAMS with its existing A$14.5 billion loan book and to service any new business up to Nov. 14.
"On balance it is a positive for Westpac. It is all for future business rather than existing and provides an avenue for growth which is something they had been missing out," Ausbil Dexia fund manager Paul Xiradis said.
Like other non-bank lenders, RAMS used to borrow money in the short-term commercial paper market and lend it to home buyers for a longer duration. But the credit market problems pushed up borrowing costs and virtually shut down the commercial paper market.
RAMS has also been the subject of takeover talk.
Westpac said it will retain the RAMS brand under the deal, which increases its retail footprint by more than 10% with an additional 92 stores.
Westpac will provide up to A$2 billion in financing to fund new business and to refinance a part of RAMS' U.S. commercial paper program. The bank said its strong liquidity profile has sufficient capacity to meet the proposed funding.
RAMS is planning a A$250 million residential-mortgage-backed securities (RMBS) issue as it seeks funding for its business, a move that is seen as a test of investors' fragile appetite for
corporate debt in Australia.