New mortgage strategy ‘key’ to YBR growth

In a target statement released on the Australian Stock Exchange (ASX), Yellow Brick Road (YBR) has sought to assure shareholders of its growth potential by outlining its plan to secure its place in the mortgage market through its “new strategic initiative”.

The group is in the middle of a takeover bid from Mercantile Investment Company, which is seeking to acquire all of its ordinary shares for 0.09 cents.

YBR’s executive chairman, Mark Bouris, said that the offer was “unsolicited”, and in the view of the board of directors of YBR, “materially undervalues the existing and future value of the company and is opportunistic in its nature, timing and pricing”.

In a bid to dissuade shareholders from offloading their stake to the takeover aspirant, YBR has highlighted the “potential future benefits” that its shareholders could reap if they resist Mercantile’s offer.

The group has said that its intention to pursue securitisation as a source of additional funds for mortgage lending will be a “key value-enhancing component in YBR’s overall mortgage strategy”.

“It will afford YBR a deeper ownership of the mortgage value chain, whereby YBR would gain greater control over the underlying mortgages and obtain a ‘net interest margin’ similar to a bank, as opposed to solely being a broker and the recipient of commission-based income,” the group stated.

YBR recently revealed that it entered into negotiations with a major bank to secure a $300 million mortgage warehouse facility, after negotiations with another unnamed major “terminated”.

However, the franchise has noted that commencing a securitisation program would be subject to “YBR being able to enter into definitive legally binding transaction documentation with the warehouse lender and all other relevant third parties and satisfying any related conditions that will be included in the transaction documentation”.

YBR said that, pending the successful execution of the securitisation program, it expects to attain an additional 120 bps of value to its underlying loan book.

“That is a measure of the additional portion of borrower interest payments that YBR would expect to earn from loans funded by a YBR Group [Resi] securitisation program,” YBR noted.

The financial services franchise added that “one critical step” to executing the securitisation program would be to secure “one or more” warehouse facilities.

Additionally, it said that other critical steps for YBR’s securitisation plans include the need to source mezzanine and equity “skin-in-the-game” funding for the program as well as working capital for the securitisation servicer/trust manager business.

The group continued: “YBR has begun planning the sourcing of this capital but has not yet begun to implement these plans.

“It is noted that there is no guarantee that any definitive transaction documentation for any warehouse facility will be executed, nor that any or all capital required for the intended securitisation program will be raised.”

YBR concluded: “While none of the above is included in any valuation of YBR, in the view of the YBR directors, it adds further support to their recommendation that now is not the time to sell your YBR shares.”

[Related: Lender halts trading ahead of ‘possible’ takeover]