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  • ethison ethison Oct 7, 2008 9:21 PM Flag

    OT - RSO Plunges to 3.50

    I think these are not cash flow.

    Look at the amount of cash being generated from each of the CMOs, CLOs, and CDOs and evaluate which are likely to continue to throw off cash for the near term.

    RAS needs to repay $400MM of recourse debt by 2012.

    There are more opportunities for RAS to generate cash than with AFN, but RAS has less unencumbered cash and more debt.

    Book value and economic value have little value if the cash flow isn't there to retire the debt. Rolling it doesn't look like an option.

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    • First, the story of RSO is the story of the rest of the market right now. There is nothing wrong with RSO. It has a steady cash flow, a strong and sustainable dividend, a great portfolio, and a good model that includes a history of managing defaulted properties into profitability. There are risks in this market, but at a 44% yield, there is lots of room for things to go wrong without threatening your investment.

      The biggest problem at RSO right now is an irrationally low share price based on the same things that that have created irrationally low prices across this sector and the market in general. There are a lot of bargains right now. RSO is certainly one of them.

      As for Ethison's statement of RAS having to repay $400M in debt by 2012, that is simply inaccurate, and at several levels:

      1 - While RAS does not have the right to repay principal on these bonds until 2012, RAS has the right to buy these notes on the open market at prevailing prices and has been doing so. The balance on these notes was $425M at the end of 1Q. It was reduced by 5%, to $404M, by the end of 2Q at a substantial discount. It can presumed that RAS is opportunistically buying these bonds as the become available at discounted prices. If RAS continues to buy back bonds at that rate between now and 2012, the remaining balance will be less than $85M at the first "optional repayment date" in 2012.

      2 - 2012 is an "optional repayment date". Holders who are content to continue receiving payments on the bonds are likely to continue to hold them. Even if RAS does not buy back a significant number of notes by 2012 at a discount, it is entirely likely that holders will not request the optional repayment.

      3 - These are convertible notes and we are still three and a half of years away from the optional repayment date. Almost any persistent and significant rise in price is likely to result in conversions to common based on the prevailing formula.

      4 - The only special circumstances that would result in cash redemption involve bankruptcy, default, and change in ownership.

      This can be checked. Here's a pointer to the most recent filing on the notes with the SEC, which includes the detailed terms and conditions:

      It has also been discussed here before. See and .

    • Hi Ethinson,

      I was talking about RSO not RAS.

      PS regarding RAS debt. The way things are changing at warp speed, 2012 seems like forever off in the future. You won't see the credit crunch by than. I hope.

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