NovaStar says near bankruptcy after default

BANGALORE, June 6 (Reuters) - NovaStar Financial Inc (NOVS.PK: Quote, Profile, Research, Stock Buzz), which quit subprime mortgage lending last year, said it would likely file for bankruptcy protection if it could not settle with creditors who have demanded the immediate repayment of $51 million of debt.

In a Thursday filing with the U.S. Securities and Exchange Commission, Kansas City, Missouri-based NovaStar said the June 4 demand came after the company defaulted on the payment of $1.7 million of interest payments.

NovaStar said creditors had given it until May 30 to make the payments, which were originally due in March and April, but it failed to meet the deadline. This triggered a default under separate agreements with Wachovia Corp (WB.N: Quote, Profile, Research, Stock Buzz), NovaStar said.

According to the filing, NovaStar is trying to restructure the debt. It said failure to do so "would have a material adverse effect on the company and its financial condition and liquidity and would likely cause the company to seek the protection of applicable bankruptcy laws."

NovaStar's business now consists mainly of managing a mortgage portfolio. The company had in 2006 made $11.2 billion of home loans, but quit lending after defaults soared and fired most of its employees.

Earlier this year, NovaStar said it lost $733.1 million, or $78.55 per share, in 2007, and its auditor expressed "substantial doubt" about the company's ability to survive.

NovaStar shares closed Thursday at $1.53 on the Pink Sheets. (Reporting by Jonathan Stempel in Bangalore; Editing by Gerald E. McCormick)