Hedge Fund Lends Accredited a Costly Hand

The subprime mortgage outfit received $200 million in financing Tuesday -- at an eye-popping rate of 13%

Accredited Home Lenders (LEND) announced on March 20 that it managed to get a $200 million loan, in spite of the financial difficulties it faces from its business lending mortgages to high risk borrowers. Investors sighed with relief and bid up the San Diego company's stock after the news.

Accredited said one or more entities managed by the San Francisco hedge fund Farallon Capital Management have agreed to loan money that will be due back in five years. In return, Accredited will pay 13% annual interest on the loan and give Farallon the right to buy around 3.3 million of its shares at $10 apiece for ten years, among other things.

"This capital infusion comes at a high price," Morningstar analyst Erin Swanson said in a research note. "While we continue to be encouraged by Accredited's ability to keep its head above water, we believe the road ahead is very long and caution that shareholders could still lose everything."

It's not the first sign that Accredited's executives have been making headway in their battle to raise cash. On Mar. 16 the company said it managed to ink an agreement to sell $2.7 billion of loans at a substantial discount in order to help meet margin calls from lenders, resulting in a pre-tax loss of around $150 million on its balance sheet. Accredited hopes the cash raised from the sale will help it continue in its effort to find solutions to its financing troubles.

The recent announcements are already bolstering the investor confidence that will help Accredited survive financially. Accredited's stock surged 21.3% to $10.86 per share in early afternoon New York trading on the Nasdaq March 20. This comes after the company's shares have already shed more than 58% of their value so far this year, and after the company received notification from the Nasdaq Stock Market on Mar. 19 that its common stock is subject to delisting in connection with Accredited's failure to file its 2006 10-K with the Securities and Exchange Commission prior to expiration of Mar. 15 deadline (see BusinessWeek.com, 3/19/07, "New Troubles in Subprime City").

By contrast, woes at another subprime lender, New Century Financial (NEWC.PK), appeared to have deepened on Mar. 20. Housing agency Fannie Mae has filed a "notice of breach and termination of contract," which will bar New Century from selling loans to the agency, according to reports cited by Action Economics. New Century lender also confirmed similar notices from California and New York, though it has reached consent agreements in Florida and Washington.

New Century, the most visible exemplar of the subprime sector's difficulties, has stopped making new loans as it endures a liquidity crunch and faces a criminal probe into its accounting practices and the prospect of bankruptcy.

New Century's stock fell 11% to $1.94 in OTC bulletin board trading Mar. 20

Also on Mar. 20, Reuters reported that People's Choice Home Loan, a California-based subprime mortgage lender, filed for Chapter 11 bankruptcy protection on Tuesday, according to court papers.

Investors have been increasingly reluctant to put their money to work in mortgage companies' securities amid a barrage of bad news during recent weeks. On Mar. 13, for example, the Mortgage Bankers Assn. reported a record percentage of mortgages entering foreclosure in the fourth quarter-news that sent the Standard & Poor's 500-stock index tumbling 2% (see BusinessWeek.com, 3/15/07, "Making Sense of the Mortgage Mess").

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