In what it hopes will be an uplifting step in a sinking subprime market, struggling residential mortgage provider Accredited Home Lenders agreed to be acquired by private equity fund Lone Star Fund for approximately $400 million, or $15.10 cash per share.
Accredited will join the ranks of other mortgage lenders that have been taken private at very low prices as a result of the recent subprime meltdown. Just last month, REIT iStar Financial agreed to acquire the commercial real estate lending business of Fremont General Corp. for approximately $1.9 billion in an all-cash transaction.
And sources said NovaStar Financial might be the next target. The company announced on April 10 that it had hired Deutsche Bank to explore strategic alternatives, including a possible sale of the company. Late last month, NovaStar was downgraded by Fitch Ratings out of concerns about the company's profitability, ongoing servicing program and servicing quality.
The Accredited sale should add flexibility in terms of funding recently originated or warehoused loans and increasing securitization volume, according to Richard Eckert, senior research analyst at Roth Capital Partners.
"Now that Accredited has access to permanent and diverse sources of capital, I suspect the company will be securitizing a whole lot more of their loans than it does now."
Accredited will also "have a lot more flexibility in its loan disposition policy," Eckert said. Access to alternative sources of funding will also mean that the company has more flexibility to choose between tapping into the whole loan market and taking the securitization route. "[Accredited] will continue to use warehousing lines of credit but the company will also have access to alternative sources of funds in the event that the conditions associated with those lines of credit become too onerous," he said.
The acquisition is structured as an all-cash tender offer, and the company's outstanding 9.75% series A perpetual cumulative preferred shares of Accredited Mortgage Loan REIT Trust will remain outstanding. The deal is expected to close in the third quarter.
In March, Accredited announced it would need to raise capital and would be cutting jobs (ASR, March 19, 2007). The firm then closed on a $230 million term loan facility provided by Farallon Capital Management in April. However, last month the company announced it would not file its first quarter 10-Q and predicted a significant loss in profits. Moody's Investors Service and Fitch downgraded the company's residential primary servicer rating to SQ3+' from SQ2' and to RPS3-' from RPS3+', respectively. Fitch was uncertain over whether the company would be able to maintain sufficient funding in the intermediate term. Standard & Poor's put the company on negative credit watch in March.
Accredited and Fremont join the line of subprime lenders that have been purchased recently. Private-equity firm Cerberus Capital Management announced an acquisition of H&R Block's subprime home-lending unit Option One Mortgage Corp. in April. Meanwhile, hedge fund Citadel Investment Group agreed to buy ResMae Mortgage Corp.'s lending business.
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