SYDNEY, Oct 2 (Reuters) Westpac Banking Corp will buy the brand and distribution business of RAMS Home Loans Group Ltd , swooping on assets of the lender which struggled to refinance its debt following the U.S. subprime mortgage crisis.
RAMS shares tumbled as much as 22 percent on Tuesday after Westpac, Australia's fourth-largest bank, said it would take over the RAMS franchise and its future loan business for A$140 million ($125 million) and refinance some of its debt, but not take on its existing mortgage book.
The deal was hailed as a cheap buy for Westpac which is seeking to expand its mortgages arm, but will leave RAMS as an operation with no new business from November that will service only existing loans.
''RAMS looks like a business in run-down, it doesn't have much of a future at all,'' said Argo Investments Managing Director Rob Patterson.
''I'm surprised they couldn't cut a better deal elsewhere, but it's symptomatic of the times in credit markets.'' RAMS shares were trading 18.8 percent weaker at A$0.69 at 0407 GMT, less than a third of their August listing price.
Westpac rose 2.7 percent to A$29.24.
RAMS failed to refinance A$6.17 billion in debt earlier this year after liquidity dried up in global credit markets in the wake of the subprime crisis, sending its shares plummetting and prompting takeover talk.
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.
At the end of July, there was around A$881 billion of housing loans outstanding in Australia. RAMS' mortgage book accounted for about 1.6 percent of that.
BOOK ONLY The deal leaves RAMS with its existing A$14.5 billion loan book and to service any new business up to Nov. 14. It will remain a separately-listed company.
''RAMS has to ensure it can get liquidity, but I think with a cornerstone investor the size of Westpac, that will strengthen its position quite considerably,'' Australian Treasurer Peter Costello told reporters in Melbourne.
Westpac will own RAMS' 92 stores and 53 franchisees under the deal, increasing its retail footprint by 10 percent for, analysts said, less than the cost of expanding from scratch.
Westpac will also retain some RAMS staff and infrastructure.
Westpac, which has tighter lending criteria than RAMS, will provide up to A$2 billion in financing to fund new business and to refinance a part of RAMS' U.S. commercial paper programme.
The bank said its strong liquidity profile has sufficient capacity to meet the proposed funding.
Fund managers said the deal would give Westpac scope to grow its mortgages business, but it was unlikely to adopt RAMS' riskier pending patterns such as low documentation loans.
''Westpac may pull back their horns in low doc lending where RAMS was pro-active. I would not imagine Westpac willing to step-in to a massive low-doc loan programme. They are more expensive to fund and investors may be more wary of them,'' Nick Bishop, bond portfolio manager at Aberdeen Asset Management said.
Westpac Chief Executive David Morgan, who has previously said he expected opportunities from the global credit squeeze to outweigh the risks, told reporters there would be cost savings from introducing a broader product range.
The deal would be earnings per share accretive in the second year, he said.
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.
ABN AMRO advised Westpac on the deal and Credit Suisse advised RAMS.
($1=A$1.12) REUTERS KR HS1211