Dankdude
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Ruthie Ackerman, 08.02.07, 7:00 PM ET
One man's trash is another man's treasure or at least that's the hope of Accredited Home Lenders.
Investors seem to think Accredited Home is going to succumb to the subprime meltdown that has swept through the mortgage industry, but some are seeing the subprime misery as the perfect opportunity to pounce on the stock of the company, which is expecting to be acquired for more than three times its trading price.
On Thursday, Accredited Home (nasdaq: LEND - news - people ), which specializes in nonprime residential mortgage loans, filed its delayed 2006 annual report with the Securities and Exchange Commission, admitting that the deterioration of the mortgage market marked by key industry events such as the bankruptcy filing of New Century Financial and the announcement by American Home Mortgage Investment (nyse: AHM - news - people ) that it couldnt borrow from short-term credit lines to pay off longer-term obligations (See " AHM Shocks Investors") may affect the performance of its mortgage loans and impair its liquidity.
The nonprime lending industry is experiencing increases in mortgage-loan defaults and sharp declines in the market for mortgages originated, which have led us to experience losses on the loans we originate and significant reductions in our liquidity, and have required us to obtain waivers of compliance with certain covenants under our credit facilities, the company said in the SEC filing. In connection with the challenges facing the nonprime lending industry, several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws. Unless the values of our mortgage products cease their decline, and we are able to obtain new sources of liquidity and waivers and modification of the covenants in our credit facilities, we may suffer a similar fate.
Yet only days earlier, private-equity firm Lone Star Funds, which agreed to acquire Accredited Home in a $400 million deal, extended its $15.10 per share offer until Aug. 14. Lone Star initially agreed to purchase Accredited on June 4, but the offer expired on Friday. The original offer represented a premium of 9.7% to Accredited Homes closing price of $13.76 on June 1, the last business day prior to the announcement of the transaction. The deal is still on track to close in the third quarter.
Bose George, a Keefe, Bruyette & Woods analyst, said that he thinks American Homes statements in the SEC filing were boilerplate and that Lone Star must have been privy to the information contained in the release. I think the market reaction is pretty extreme, George said. The Lone Star deal was done with access to insider information so nothing in there should be a surprise to them. Obviously the market assumes that Accredited Home, like all the other subprime lenders, is not worth very much.
Fox-Pitt Kelton analyst Matthew Howlett said that Lone Star must have known what it was getting into when it signed a definitive merger agreement and that it wouldnt just walk away from the transaction. Clearly there is language in there surrounding their ability to operate under these conditions, Howlett said. Were in the middle of a liquidity crisis so theres clearly margin call risk. I dont think thats a surprise. But I didnt see any language in terms of the agreement with Lone Star being altered or breached. I am baffled by the sell off even in light of the language. Is there something Im missing in the regulatory filing saying that the deal wont go through? I interpret the language as if the deal doesnt go through then it will go out of business. I dont look at it as a threat to the deal.
But investors clearly do. Accredited Home shares plummeted 35.3%, or $2.90, to close at $5.31 Thursday.
The main question seems to be: Why would Lone Star want to acquire a company that is struggling to stay afloat?
Clearly, I think given the unknowns in this industry right now you wouldnt want to take on this type of asset. But Accredited Homes assets in their investment portfolio continue to outperform the industry, Howlett said. While things are imploding around them, their loans are outperforming the industry. I think theres still some value there and I think people are ignoring that. Maybe when Lone Star entered into this they werent expecting conditions to deteriorate as quickly as it did. But theyre not in this for a quick six-month turnaround. Their overall investment horizon is a bit longer than people are thinking.
A spokesman for Lone Star refused to comment. Accredited Home did not return phone calls seeking comment.
Does Lone Star Still Want Crumbling Accredited? - Forbes.com
One man's trash is another man's treasure or at least that's the hope of Accredited Home Lenders.
Investors seem to think Accredited Home is going to succumb to the subprime meltdown that has swept through the mortgage industry, but some are seeing the subprime misery as the perfect opportunity to pounce on the stock of the company, which is expecting to be acquired for more than three times its trading price.
On Thursday, Accredited Home (nasdaq: LEND - news - people ), which specializes in nonprime residential mortgage loans, filed its delayed 2006 annual report with the Securities and Exchange Commission, admitting that the deterioration of the mortgage market marked by key industry events such as the bankruptcy filing of New Century Financial and the announcement by American Home Mortgage Investment (nyse: AHM - news - people ) that it couldnt borrow from short-term credit lines to pay off longer-term obligations (See " AHM Shocks Investors") may affect the performance of its mortgage loans and impair its liquidity.
The nonprime lending industry is experiencing increases in mortgage-loan defaults and sharp declines in the market for mortgages originated, which have led us to experience losses on the loans we originate and significant reductions in our liquidity, and have required us to obtain waivers of compliance with certain covenants under our credit facilities, the company said in the SEC filing. In connection with the challenges facing the nonprime lending industry, several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws. Unless the values of our mortgage products cease their decline, and we are able to obtain new sources of liquidity and waivers and modification of the covenants in our credit facilities, we may suffer a similar fate.
Yet only days earlier, private-equity firm Lone Star Funds, which agreed to acquire Accredited Home in a $400 million deal, extended its $15.10 per share offer until Aug. 14. Lone Star initially agreed to purchase Accredited on June 4, but the offer expired on Friday. The original offer represented a premium of 9.7% to Accredited Homes closing price of $13.76 on June 1, the last business day prior to the announcement of the transaction. The deal is still on track to close in the third quarter.
Bose George, a Keefe, Bruyette & Woods analyst, said that he thinks American Homes statements in the SEC filing were boilerplate and that Lone Star must have been privy to the information contained in the release. I think the market reaction is pretty extreme, George said. The Lone Star deal was done with access to insider information so nothing in there should be a surprise to them. Obviously the market assumes that Accredited Home, like all the other subprime lenders, is not worth very much.
Fox-Pitt Kelton analyst Matthew Howlett said that Lone Star must have known what it was getting into when it signed a definitive merger agreement and that it wouldnt just walk away from the transaction. Clearly there is language in there surrounding their ability to operate under these conditions, Howlett said. Were in the middle of a liquidity crisis so theres clearly margin call risk. I dont think thats a surprise. But I didnt see any language in terms of the agreement with Lone Star being altered or breached. I am baffled by the sell off even in light of the language. Is there something Im missing in the regulatory filing saying that the deal wont go through? I interpret the language as if the deal doesnt go through then it will go out of business. I dont look at it as a threat to the deal.
But investors clearly do. Accredited Home shares plummeted 35.3%, or $2.90, to close at $5.31 Thursday.
The main question seems to be: Why would Lone Star want to acquire a company that is struggling to stay afloat?
Clearly, I think given the unknowns in this industry right now you wouldnt want to take on this type of asset. But Accredited Homes assets in their investment portfolio continue to outperform the industry, Howlett said. While things are imploding around them, their loans are outperforming the industry. I think theres still some value there and I think people are ignoring that. Maybe when Lone Star entered into this they werent expecting conditions to deteriorate as quickly as it did. But theyre not in this for a quick six-month turnaround. Their overall investment horizon is a bit longer than people are thinking.
A spokesman for Lone Star refused to comment. Accredited Home did not return phone calls seeking comment.
Does Lone Star Still Want Crumbling Accredited? - Forbes.com