Bankruptcy rumors swirled around top-three subprime lender New Century Financial Corp. last week - with one analyst likening 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. As of press time, New Century had secured amended warehouse agreements with six of its lenders, although its fate was largely contingent on the funding decisions of the five additional lenders in contracts with the company.
New Century has been hit with $150 million in margin calls over the past week, about $80 million of which was still outstanding from five lenders. An undisclosed lender stepped in extending $265 million intended for refinancing or satisfying existing debts. The loan was collateralized by New Century's REIT mortgage portfolio and residual assets - an arrangement described by JPMorgan Securities analyst Andrew Wessel as "essentially mortgag[ing] its last unencumbered assets in order to stave off immediate bankruptcy."
The lender also provided funds to refinance the remaining balance of $710 million in mortgage loans held in a separate lending facility, which was in jeopardy of a repurchase request. New Century further disclosed in a filing with the SEC that it was in conversations with lenders regarding refinancing and other alternatives to gaining liquidity, but warned that "no assurance can be given that any of these discussions will be successful."
Funding options tossed around by executives at the company last week appeared at times to replicate those of debtor-in-possession financing, sources close to the conversations said. As early as Monday of last week, mortgage brokers were complaining of a lack of funding for loans the lender had approved for closing, and New Century confirmed in its filing it was only able to fund a portion of loans in its pipeline this week because of liquidity constraints.
The increasingly negative reports from New Century, along with last week's news that Fremont Investment & Loan had exited the subprime lending business, brought ABX trading to a standstill and caused a subsequent decline late on Thursday, according to traders. Both the ABX and subprime equities had been rallying from previous lows, although both were described by some sources as little more than short covering.
The departure of New Century from the subprime lending industry would mean a substantial decline in origination capacity and most likely a ripple effect through the cash and synthetic home equity markets. Perhaps most significantly in the longer-term, the lack of New Century funding could cripple some borrowers' ability to refinance out of mortgage loans because of a reset to higher rates and subsequently higher payments.
New Century needs to obtain waivers of the net income covenant within its warehouse lending agreements in order to continue operating. The lender announced last month it would restate earnings for the first nine months of 2006 and delay its fourth- quarter and annual filings with the SEC. A net loss at the company is expected for the fourth quarter, and also potentially the third, because it did not mark down the value of its repurchased loans held for sale, among other things.
Some analysts are expecting a net loss for the entire year. Additionally, U.S. prosecutors are probing securities trades and the company's accounting, and several shareholder lawsuits have been filed. David Einhorn, founder of hedge fund Greenlight Capital LLC, quit the company's board last week. Greenlight holds a 6.3% stake in New Century.
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