Monday, June 4, 2007

Accredited Agrees to $400 Million Buyout by Lone Star


By Bradley Keoun (Bloomberg)

June 4 (Bloomberg) -- Accredited Home Lenders Holding Co., the subprime mortgage lender that raised doubts about its survival, will be sold to private-equity firm Lone Star Funds for about $400 million in cash.

Lone Star Fund V LP agreed to pay $15.10 a share for Accredited, the companies said in a statement. The offer for San Diego-based Accredited is 9.7 percent more than the stock's closing price last week. Lone Star, which oversees $13.3 billion, often targets distressed real estate and finance companies.

The stock tumbled as low as $3.77 in March as defaults on subprime mortgages, made to borrowers with poor payment histories, saddled Accredited with losses and led its bankers to curtail credit for new home loans. Private-equity firms and hedge funds are buying subprime lenders including ResMae Mortgage Corp. at beaten-down prices and plan to sell when the market recovers.

``Of all the subprime lenders that were growing pretty quickly over the last few years, Accredited probably had the best reputation,'' said Bose George, an analyst at KBW Inc. in New York. ``Given that this industry is going to continue in a much smaller form, these guys are probably a good management team to go with.''

The shares rose $1.54, or 11 percent, to $15.30 at 11:36 a.m. New York time in Nasdaq Stock Market trading on speculation a higher bid may emerge.

``This agreement is the best alternative available to protect shareholder value,'' Chief Executive James Konrath said in the statement. ``In Lone Star, we have found a partner who has a record of helping companies like ours successfully address financial and operational challenges.''

Riding the Cycle

Lone Star, founded in 1995 and run by John Grayken, has bought entire companies as well as non-performing loans and real estate, according to its Web site. The Dallas-based fund tries to take advantage of ``the tendency of the banking system to cyclically over-finance and then under-finance the property and other sectors.''

Lone Star has agreed to buy stakes in banks and lenders in South Korea, Japan and Germany, including a $429 million purchase of Japan's Korakuen Finance Co. announced in September. It also agreed last August to pay about $620 million for Lone Star Steakhouse & Saloon Inc., a 260-restaurant chain based in Wichita, Kansas, with no previous tie to the investment company.

Accredited operates nationwide and ranked 14th last year among U.S. subprime lenders with $15.8 billion in loans and a 2.6 percent market share, according to Inside Mortgage Finance, an industry publication.

Back From the Brink

The lender had a market value of more than $1 billion a year ago before the subprime mortgage industry began its swoon. The stock had lost half its value since the start of this year, and in March, the company said its auditing firm, Grant Thornton LLP, wasn't sure Accredited would survive.

The company still hasn't filed its annual report with regulators and last month announced that its first-quarter filing also will be delayed. Grant Thornton quit in April.

Accredited said May 11 it will report a ``significant loss'' in the first quarter because it issued about half as many mortgage loans compared with a year earlier. The company originated $1.9 billion in loans in the quarter, down 47 percent from the same period last year.

The workforce was cut 31 percent to 2,900 in a bid to reduce costs, the company said last month. Accredited employed 3,164 people as of September, according to data compiled by Bloomberg.

Bad Credit

Subprime loans are made to borrowers with the worst credit records and typically have the highest default rates.

The subprime mortgage industry faltered as late payments soared to record levels. Overdue residential mortgage loans reached 1.13 percent of the total during the first quarter, the highest level in the 17 years insured lenders have reported such data, said a May 31 report by the Federal Deposit Insurance Corp.

The sale to Lone Star means Accredited will avoid the fate of rivals such as New Century Financial Corp., the biggest independent U.S. subprime home lender last year, which went bankrupt in April and now is being liquidated. At least 50 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006.

Hedge funds have been among the buyers, with Citadel Investment Group planning to seek approval from a bankruptcy judge tomorrow for its $180 million acquisition of ResMae.

In March, trying to stave off a cash shortfall, Accredited took out a $200 million loan from the hedge fund Farallon Capital Management LLC. The loan was secured by Accredited's assets at 13 percent interest and guaranteed the hedge fund a 7 percent premium, or $14 million, if the loan was repaid within the first year.

Bear, Stearns & Co., Friedman, Billings, Ramsey Group Inc. and Houlihan Lokey Howard & Zukin advised Accredited, today's statement said. Piper Jaffray & Co. represented Lone Star.

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