Slightly different subject matter today. I’m not a news reported or a champion on the downtrodden. However, this story outline some useful concepts of arbitrage, borrowing and lending rates and how not to build a brand, market your company or do business.
First let me say that I don’t know all the details, and I can’t advise anybody on the basis of what I know, but I can say that I won’t be financing anything from Rudco.
Here are some facts:
Rate unrealistically low
What they’re offering is a fixed-rate homeloan at 6% in South Africa. According to the South African Reserve Bank prime is currently at 13%. ABSA, First National Bank, Standard Bank and Nedbank all have 13% as their prime rate. Home loans to the very best risks are rarely offered at less than Prime – 2%. Currently, that lower limit stands at 11% – and this is a flexible rate so the bank doesn’t have to hedge the risk of changes in interest rates. ABSA has a useful guide. SA HomeLoans have attractive deals, but nowhere at the same level as Rudco purports to.
It doesn’t require an actuarial model to figure out that Rudco is offering something that sounds too good to be true.
Website oddities and strange business practices
For a business that has already begun wooing customers, not even having a working “www.rudco.co.za” website is odd. The site was only registered in February this year. At least it has been paid up. A few other sites with more information exist under various names but seem definitely to be connected with Rudco. Interesting that they are displaying adverts by Google – to raise a little extra cash perhaps? Or maybe to fund the 6% rate offered? If the adverts on my homeloan-offering-site were advertising FNB Home Loans (it was when I visited the site) I’d be a bit concerned.
One of the affiliated sites hasn’t paid their domain registration fees. Call me old-fashioned, but I prefer to deal with financial services companies who pay their bills on time, and who deal with other companies who pay their bills on time.
Moneyweb, with a record of calling bad apples bad apples had some things to say that should be read. This wouldn’t be the first time they had highlighted some dubious dealings in the early stages to be proved right after a lot more crying than was ever necessary.
Arbitrage on this scale is a whopper of a warning bell
Credit to Moneyweb for raising this, but I think it deserves highlighting. The investors into Rudco are prepared to lend money at lower than SA government risk-free bond rates. This means two things:
- As a borrower, you could borrow as much money as you could from Rudco and invest it in Government bonds to make a profit at about to close to no risk as can be imagined. The South African government would need to default on a local currency obligations.
- The investors placing their money into Rudco could, with lower expenses, less effort, less risk and more liquidity achieve higher returns (and yes, higher risk-adjusted returns too) by purchasing South African bonds.
These scenarios are a “free lunch” or arbitrage opportunity. Nobody makes money by being on the wrong end of an arbitrage opportunity. SA HomeLoans, who have attractive rates depending on particular circumstances, tie their funding directly to the rates available in the market. Almost by definition they are providing no-arbitrage pricing (provided one appropriately values the “service” or lending money retail, repackaging and effectively borrowing at wholesale rates). The larger banks may be slightly on the receiving end of an arbitrage opportunity (which is partly the reason for the existence of SA HomeLoans in the first place.) However, the banks have different cost structures and different distribution approaches, which offsets some of the superficially apparent economic profits.
The end game
I don’t have all the info, but everything I’ve seen makes suggests that Rudco are worthwhile staying away from. I’ll wait for the tears to start. Let’s stay away from Tigon and Masterbond and Fidentia and the myriad other schemes that South Africans have been conned into over the last few decades. Let’s apply some critical thinking, some logic and a clear and cold reality-check.
Well done Alec Hogg and Moneyweb for spotting this one and drawing my attention to it.