Rhg Letter Nov09

Important notice to all RHG Group shareholders Please head to www.rhgshareholders.com/ for more information

Dear Fellow Shareholder,

Important resolutions at the RHG Annual General Meeting on 12 November This document explains why certain shareholders, including those interests associated with The Intelligent Investor, strongly believe it is in the interests of all shareholders to remove David Coe from the Board of RHG Ltd and appoint Steven Johnson and Gregory Hoffman. In short; 1. These are modest but substantive and beneficial improvements to the board. 2. They are justified because; a. The RHG share price has fallen precipitously since listing at $2.50 in July 2007; b. The board has not been responsive to minority shareholder interests; c. The proposed new directors have the skills, experience and desire to enhance the current board and assist in a return of capital to shareholders. 3. RHG shareholders—the owners of this business—should decide these matters. What you decide to do will affect what happens to your Company and the value of your holding in RHG. We strongly urge you to vote FOR a reformed board with the election of Steven Johnson (resolution 3) and Greg Hoffman (resolution 4) and AGAINST the re-election of David Coe (resolution 2).

RESOLUTION

FOR AGAINST ABSTAIN

1 — To adopt the Remuneration Report for the year X ended 30 June 2009 2 — To re-elect Mr David Coe as a Director 3 — To elect Mr Steven Johnson as a Director X 4 — To elect Mr Gregory Hoffman as a Director X

X

Further details are set out overleaf but if you have any questions about this document or your investment in RHG, please visit www.rhgshareholders.com or call us toll free on 1800 620 414.

PO Box 1158 Bondi Junction NSW 1355  Tel (02) 9388 0042  Fax (02) 9387 8674  Email [email protected]  Website www.intelligentinvestor.com.au All newsletters are published by The Intelligent Investor Publishing Pty Ltd  ABN 12 108 915 233  Australian Financial Services Licence Number: 282288

Requisition of meeting On 7 September 2009, RHG shareholders holding more than 5% of RHG’s issued shares, including interests associated with The Intelligent Investor, requested RHG convene a general meeting. As a result of discussions with the Company, the resolutions that were to be heard at a General Meeting will now be put to shareholders at the Annual General Meeting on 12 November 2009. We are proposing to remove one of the current directors and replace him with two directors more representative of the Company’s diverse shareholder base. If the proposal is successful, the two new directors intend to work with RHG’s three remaining directors to develop and communicate a clear plan for the maximisation of shareholder value. This will include, where possible, the return of excess cash to shareholders in the form of fullyfranked dividends. The proposed changes could have a significant impact on the Company so you should give careful consideration to the merits of the proposal.

Background When RHG (formerly RAMS Home Loans) originally listed in June 2007, the Company was a mortgage origination business. Less than a month after listing, the overseas debt markets from which the Company obtained the majority of its funding collapsed1. RHG was no longer able to source new funding, which meant it could no longer write new loans. In November 2007, RHG sold the RAMS brand to Westpac and RHG shareholders were left with a $15.0bn mortgage book2 . These mortgages are held in special purpose vehicles (SPV) which are not owned by RHG. RHG has a right (Future Servicing Right or FSR) to keep the difference between what these vehicles collect from their customers and what they must pay to lenders who provide the funding to these SPVs. As it is in run-off mode, the mortgage book decreases as the loans are repaid and will, one day, cease to be profitable for RHG. In the interim, this FSR is a valuable asset. As at 30 June 2009, the mortgage portfolio had been paid down to $7.7bn. But the profits generated have increased the net tangible assets on RHG’s balance sheet from less than zero as at 30 June 2007 to $233.5m as at 30 June 2009, the last reporting date. This represents 72 cents per share based on the existing capital structure of the Company. This does not attribute any additional value to the $48m of franking credits that have also been accrued3. This increase in NTA as the mortgage book is run-off is illustrated in the following graph:

RHG’s assets NTA (cents per share) LHS

Loan book ($bn) RHS

80

16

70

14

60

12

50

10

40

8

30

6

20

4

10 0 –10

Source: RHG ASX announcements

I 30 Jun 07

I 31 Dec 07

I 30 Jun 08

I 31 Dec 08

I 30 Jun 09

2 0

1Source: 14 August 2007 ASX announcement: Impact of global debt market on RHG funding. 2Source: Explanatory Memorandum B released to the ASX 26 Oct 2007. 3Source: RHG profit guidance provided to the ASX 24 August 2009, audited financial statements for the year ended 30 June 2009, financial statements for the half year ended 31 December 2007.

During the next five years, there is the potential for a further $120m of value, not including any return on the existing assets or attributing any value to franking credits. This calculation is based on the directors’ forecast profit of $55m–$65m for the 2010 financial year, and correspondingly lower profits in future years as the loan book amortises.

Our concerns with the existing board The board has not consistently communicated a strategy for returning this wealth to shareholders. At the 2007 annual general meeting, just after the announcement of the sale of the RAMS brand to Westpac, Chairman John Kinghorn stated that ‘After meeting all liabilities and subject to its ability to refinance some of all of its warehouse and XCP programs, the directors intend to return all net income and surplus cash to shareholders over time’. Despite refinancing all of its funding facilities (with the exception of $1bn of loans sold to NAB in 2008) and generating a substantial amount of surplus cash, nothing has been returned to shareholders. As at 30 June 2009, the Company had $47.9m in franking credits and $133.8m in unencumbered cash. RHG has enough resources to pay a $65m fully franked dividend (20 cents per share) and still have almost $70m to meet its tax liabilities and support the remaining credit facilities. At the 2008 annual meeting, Kinghorn didn’t mention returning excess cash to shareholders but did indicate that the Company may re-enter the Australian home loan market after November 2010. Since our meeting requisition of meeting was put to the board on 7 September 2009, the directors have provided shareholders with more information. In his Chairman’s letter in the 2009 Annual Report, John Kinghorn confirmed that the directors are definitely going to seek a ‘superior alternative investment opportunity’ but that this opportunity would be ‘submitted to shareholders for their consideration’. He also said that ‘if, by 2011, the company has not identified a superior investment alternative, then your directors intend to distribute to company’s surplus funds to shareholders in a [sic] optimal manner.’ The existing board is not representative of the company’s diverse shareholder base. The RHG board only has four directors. Despite being paid a total of $403,500 in directors’ fees, the board only held four (4) meetings in the 2009 financial year. Only one director, John McGuigan, managed to attend all four meetings and David Coe made it to half - a total of two board meetings in a full financial year. Details of attendances at RHG board meetings in the year ended 30 June 2009 are as follows:

Director No. of meetings held while a director No. of meetings attended Remuneration

JA Kinghorn DR Coe GK Jones JV McGuigan

4 4 4 4

3 2 3 4

$163,500 $80,000 $80,000 $80,000

It is very rare for the board of a publicly listed company with a market capitalisation of more than $200m to attend so few directors’ meetings; a crucial aspect of their duties as stewards of shareholders’ capital. David Coe was also on the board of Allco Finance Group, which is currently in liquidation, and sold all of his shares in RHG in January of this year.

The proposed solution We are proposing a reconstruction of the RHG board by: 1.

Removing David Coe as a director;

2.

Appointing Steven Johnson and Gregory Hoffman as new directors to the board.

See Appendix A for more information on the two new proposed directors. The two new directors would work with the rest of the board to develop a clear strategy for the maximisation of shareholder wealth including, where possible, the return of surplus cash to shareholders in the form of fully-franked dividends or return of capital. Once developed, this strategy would be clearly communicated to shareholders, enabling you to make a fully informed decision about your investment in RHG. It would seem that the move to call a general meeting has already resulted in the board substantially improving its communication with shareholders. You can expect substantial further improvement if we are elected to the board. The new five-member board would also be more representative of the RHG’s diverse shareholder base and more appropriate for a company of this size and level of profitability.

RHG Information Line Please call our toll free Information Line on 1800 620 414, if you wish to discuss this matter further. Our team will be able to assist you in understanding your options so you can make an informed decision. We’ve also created a website, www.rhgshareholders.com, which we have been using to communicate with fellow RHG shareholders. Please take a look at the site and feel free to add your own comments. Yours sincerely,

Steven Johnson



Gregory Hoffman 

APPENDIX A: PROPOSED DIRECTORS Steven Johnson—B. Economics, Econometrics and Finance (UNSW) Steve is the Managing Director and Company Secretary of The Intelligent Investor Publishing Pty Ltd (AFSL 282288). He is also a Responsible Manager for the company’s Australian Financial Services Licence and sits on the compliance committee. Steve has managed the day to day operations of the business, developed the company’s business plans, managed staff and been a key driver of The Intelligent Investor’s development. In addition to these management duties, he has played a key role in the company’s value-based research, with primary responsibility for infrastructure and finance stocks. Prior to joining The Intelligent Investor in 2003, Steve worked for Macquarie Group in Sydney, Vienna and London and worked on a number of large project finance and cross-border leasing transactions. Gregory Hoffman—B. Business (UTS) Greg is The Intelligent Investor Pty Ltd’s Research Director. He is also a Responsible Manager for the company’s Australian Financial Services Licence and sits on the compliance committee. Greg manages The Intelligent Investor’s research team and is responsible for analyst development, the company’s research framework and has ultimate responsibility for recommendations. He has worked for The Intelligent Investor for nine years and has a wealth of experience in security analysis.