C-BASS surprised an already jaded market last week when the company issued a statement acknowledging that it had received a substantial number of margin calls, which would hinder the liquidity of its business.

The announcement was prompted by a revelation from parent companies MGIC Investment Corp. and Radian Group that they might need to write off the boutique shop completely. The negative news has market participants speculating that C-BASS might not be able to sustain its business.

"C-BASS will have to shut down. It is their only real option right now," a market participant said. Indeed, after Radian mentioned liquidity issues at C-BASS on its recent conference call, C-BASS received $330 million in margin calls, according to an 8-K filing by MGIC with the Securities and Exchange Commission. This is in addition to $290 million in lender margin calls during the first six months of 2007.

Further, during the first 24 days of July alone, C-BASS met an additional $260 million in margin calls, representing a reduction of more than 20% in the lender's value, the company said

As a result of these margin calls, C-BASS's ability to access the securitization market becomes questionable. In fact, the company's most recent ABS deal was pulled (see market story on p.6).

"A reduction in liquidity tends to make all the aspects of your business a bit more difficult," said Steve Stelmach, an analyst at Friedman Billings Ramsey.

C-BASS's ability to monitor its exposure to ABS CDOs amid a liquidity crunch was also a source of concern, noted a market participant. Fitch Ratings put C-BASS's investment management business on rating watch negative based on the evolving liquidity situation and its potential impact on C-BASS's ability to perform its duties as a CDO asset manager, said Vince Matsui, senior director at Derivative Fitch. "Ultimately, liquidity can speak to a manager's viability," Matsui said.

In a company release, C-BASS defended the credit quality in its portfolio, noting that of a total of 487 subprime bonds downgraded by Standard & Poor's, only four C-BASS bonds were downgraded. And Moody's downgraded a total of 399 subprime bonds, but only five were C-BASS issues. Moody's also downgraded 184 bonds from 91 CDOs, none of which were issued by C-BASS.

Bad Buy?

A question raised by the margin calls was C-BASS's acquisition of and subsequent exposure to Fieldstone Investment Corp., a subprime mortgage banking company that originates, sells and invests primarily in nonconforming single-family residential mortgage loans.

The acquisition of Fieldstone consumed approximately $75 million of C-BASS's cash resources. MGIC provided C-BASS with a $50 million unsecured credit facility, and Radian provided C-BASS with an unsecured credit facility in the same amount. Both facilities have been fully drawn, according to MGIC's 8-K filing with the SEC.

Fieldstone said last week that it would no longer be accepting new loan applications based on liquidity concerns surrounding C-BASS, its new parent company.

Fieldstone itself has also suffered from the subprime upheaval - the acquisition was rumored to have been a preventative measure against bankruptcy.

Staying Alive

The question debated in the market right now is the viability of C-BASS's servicing, a function carried out through its affiliate Litton Loan Servicing. "The question is [if Litton were to go under]: Where do the loan payments come into and where do principal and interest payments get filtered to? Without Litton, there will be some friction in the transfer of servicing," said Friedman Billing's Stelmach.

Outside of shutting down the business, the option would be to sell the company, market participants said. In fact, when Radian and MGIC disclosed their merger in February, the two companies announced that they intended to consolidate C-BASS into the merged entity and then sell enough of C-BASS to reduce their interest below 50%. "They were already looking for potential suitors when this occurred," Stelmach said. "Now the bigger question is if any equity is left to be realized by MGIC and Radian after the creditors are through with C-BASS?"

MGIC's and Radian's combined stake in C-BASS is worth approximately $1.03 billion prior to any tax benefits on the loss, according to credit research firm Credit Sights. The firm believes that both insurance companies have sufficient capital to sustain the potential losses.

However, if C-BASS can't sustain itself, MGIC and Radian have already cut their losses, announcing that they would no longer continue to put money into the company.

Calls to C-BASS were not returned by press time.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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