New Century Financial Corp. filed for Chapter 11 bankruptcy protection this morning in the U.S. Bankruptcy Court for the District of Delaware. The filing puts to an end weeks of market speculation as to when the top-three subprime lender -- which has been running on fumes for some time -- would assent to bankruptcy.
The CIT Group and Greenwich Capital Financial Products agreed to provide New Century with as much as $150 million in debtor-in-possession financing, subject to court approval. New Century is allowed $50 million at the close of the agreement.
Carrington Capital Management emerged as a potential buyer of New Century's servicing assets and servicing platform. Carrington offered $139 million, although a higher bidder could emerge in bankruptcy proceedings. Greenwich Capital Financial is looking to buy New Century loans and residual interests for $50 million.
New Century for weeks has teetered on the edge of bankruptcy, as loan buyback requests, legal problems and evaporating liquidity strangled the once high-flying lender. A bankruptcy filing was widely expected by the end of last week, as New Century's executives had failed to secure additional financing that would allow it to continue operating. Market participants noted an increase in New Century resumes being sent out to other firms, as executives at the Irvine, Calif.-based lender is helping their employees find work elsewhere.
New Century's descent began in late February, when it announced plans to restate earnings for the first three quarters of 2006. The lender ultimately failed to secure its warehouse lines of cash, which were contingent on the company's profitability. One analyst likened the company's financial condition to a "death spiral," as it ceased accepting mortgage applications and entertained heated discussions with its warehouse lenders and other liquidity providers.
The departure of New Century from the subprime lending industry means a substantial decline in subprime origination capacity and an expected ripple effect throughout the cash and synthetic home equity markets this week, as short speculators and regulators pursue their activities in the market with renewed vigor. Without funding from New Century, some borrowers might not be able to refinance their lower-rate mortgages once those loans reset to higher rates, and they could end up saddled with burdensome mortgage payments, sources say.