NovaStar Auditor Raises Doubt About Lender's Survival (Update3)
By Elizabeth Hester
Sept. 4 (Bloomberg) -- NovaStar Financial Inc., the home lender trying to outlast an industry shakeout by conserving cash, abandoned plans to raise more than $100 million after its auditor said the company may not survive. The shares fell 18 percent.
NovaStar, one of more than 100 companies that have curtailed lending or sought buyers, said in a statement today that accounting firm Deloitte & Touche LLP wouldn't approve the plan as written. Deloitte wanted the Kansas City, Missouri-based subprime lender to add disclosures including ``the uncertainty of NovaStar's ability to continue as a `going concern,' '' a phrase used to warn investors that a firm may soon fail.
``They're having trouble with cash flows to keep it operational,'' said Christopher Brendler, an analyst at Stifel Nicolaus & Co. who has a ``sell'' rating on NovaStar. ``They had this financing deal, it's fallen through and that's put more pressure on liquidity.''
Mortgage companies are running short on cash because demand for loans is dropping, defaults are rising and bids from investors who buy the riskiest subprime mortgages have dried up. NovaStar responded by lining up Jefferies Capital Partners and MassMutual Capital Partners in July to provide new capital, and curtailing mortgages made by brokers last month.
NovaStar fell $1.55 to $6.94 at 1:42 p.m. in New York Stock Exchange composite trading. The shares have lost more than 90 percent this year.
Staff Cuts
The company will cut its retail lending staff to about 125 people from 400 and close 12 offices, today's statement said. NovaStar expects an unspecified pretax charge related to the job cuts, which will not affect the servicing business. The cuts are scheduled to begin immediately and end in the fourth quarter.
The lender's staff, which totaled about 3,500 in 2004, will fall to about 600 people after the cuts.
NovaStar also plans to explore ``strategic alternatives,'' such as partnering with other companies, for its billing and collections business.
``We are pulling back to focus on NovaStar's core strengths and preserve liquidity,'' said Chief Executive Officer Scott Hartman in the statement.
The canceled offering involved affiliates of Jefferies Capital and MassMutual Capital, which bought $48.8 million of convertible preferred stock July 16. They also agreed to buy as much as $101.2 million of a rights offering, NovaStar said at the time. The offering would have given all shareholders the right to buy convertible preferred shares at $25 each, raising more cash for NovaStar.
Delayed Filing
The company couldn't make changes to 2006 financial statements requested by Deloitte in time for filing deadlines, and MassMutual and Jefferies weren't willing to wait longer, today's statement said.
Deloitte and a unit of Citigroup Inc. are being sued by an investor for helping American Home Mortgage Investment Corp. sell stock 14 weeks before the Melville, New York-based lender went bankrupt. Deloitte spokeswoman Deborah Harrington said last week the firm didn't do anything wrong and Citigroup declined comment. Harrington wasn't available today to comment on NovaStar.
NovaStar now plans to focus on managing its portfolio of securitized residential loans, which was $15.5 billion as of June 30, the statement said.
Thornburg Mortgage Inc., a home lender focused on borrowers with good credit, bolstered its finances today by completing a $1.44 billion sale of mortgage-backed bonds. The Santa Fe, New Mexico-based company stopped taking loan applications last month after running short of cash.
Overdue payments on U.S. subprime mortgages rose to the highest level since 2002 during the first quarter of this year, according to the Mortgage Bankers Association. That's made investors who buy mortgages reluctant to bid, driving down prices and cutting into the profit of home lenders.
``The secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs,'' Hartman said.
To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net .
Last Updated: September 4, 2007 14:09 EDT |
