March 8, 2007 / 3:06 PM / 13 years ago

New Century stops lending as lenders pull credit

NEW YORK (Reuters) - New Century Financial Corp. (NEW.N), whose shares fell 25 percent on Thursday amid speculation it would seek bankruptcy protection, said it has received $265 million in financing, but stopped accepting loan applications after some lenders blocked its credit lines.

Activist hedge fund manager David Einhorn speaks at the Reuters Investment Outlook summit in New York, December 11, 2006. Einhorn quit New Century Financial Corp.'s board late Wednesday, two days after the subprime lender's stock fell 69 percent following disclosure of a federal criminal probe. REUTERS/Keith Bedford

The real estate investment trust, which offers mortgages to people with poor credit histories, also said the unidentified lender agreed to refinance $710 million of mortgage loans.

Irvine, California-based New Century has been the largest independent U.S. subprime lender, but said its ability to make loans is “substantially limited” because of restrictions by its lenders. It said it expects to again accept applications “as soon as practicable” but offered “no assurance” that it would.

“Like everyone else, they misjudged and didn’t keep track of how badly their loans were performing, and when they found out, they weren’t well capitalized enough to deal with it,” said Allan Berliant, an asset-backed portfolio manager at GMO in Boston, which owns some bonds backed by New Century loans.

New Century Chief Executive Brad Morrice said in a statement the REIT is in “active discussions” with its lenders, and adjusted its guidelines to focus on higher-quality loans.

Subprime lenders have suffered from rising defaults. More than 20 have quit lending or gone bankrupt in the past year.

Earlier this week, another large subprime lender, Santa Monica, California’s Fremont General Corp. FMT.N, stopped making loans, and put many of its 2,400 subprime workers on paid leave. It is trying to sell its subprime unit.

Shares of New Century fell 21 cents, or 5.4 percent, to $3.66 in after-hours electronic trading. That was on top of a $1.29 decline to $3.87 in regular trading after bankruptcy rumors surfaced, and after activist hedge fund manager David Einhorn quit its board on Wednesday.

Through Thursday’s close, New Century shares had fallen 74 percent since March 2, when the REIT disclosed a federal criminal probe into its accounting and trading in its securities, and said its survival might depend on help from its own lenders. It also faces many shareholder lawsuits.


New Century said it obtained the $265 million of financing by pledging its mortgage loan portfolio and other assets as collateral.

It also said that some lenders have blocked its access to financing agreements, and that it has yet to satisfy $70 million of margin calls from five lenders. New Century has said it has $17.4 billion of overall borrowing capacity.

“New Century’s future is up to its lenders and potential suitors,” said Matt Howlett, an analyst at Fox-Pitt Kelton Inc. in New York.

Mike O’Hare, head of U.S. equity cash sales and trading for JP Morgan Chase & Co., said New Century shares fell Thursday because there was talk “they may be going bankrupt.”

Laura Oberhelman, a New Century spokeswoman, said the REIT does not comment on market rumors.

Shares of subprime lenders Accredited Home Lenders Holding Co. LEND.O and NovaStar Financial Inc. NFI.N also fell on Thursday after the New Century bankruptcy rumors surfaced.


Einhorn is a principal at New York’s Greenlight Capital LLC, which owns 6.3 percent of New Century, a Thursday filing with the U.S. Securities and Exchange Commission showed.

Greenlight’s 3.49 million share stake as of Wednesday had fallen by roughly $142 million in value since Einhorn joined the board last March. The hedge fund is New Century’s second-largest shareholder, according to Thomson ShareWatch.

Einhorn joined New Century’s board after dropping a proxy fight to oust three directors. Greenlight also won the right to double its then current New Century stake to 19.6 percent.

Before the resolution, Einhorn argued that New Century shares were depressed “due to a history of capital misallocation, market anticipation of future capital misallocation and a number of other self-inflicted actions.”

Additional reporting by Daniel Burns, Tim McLaughlin, Ellis Mnyandu, Dan Wilchins and Al Yoon in New York

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