Capital Markets

Red Light for Subprime Lender

At New Century Financial, shareholder activism gives way to investor realism.
Dave Cook and Stephen TaubMarch 9, 2007

A little less than a year after his hard-fought bid to join the board of embattled subprime lender New Century Financial, David Einhorn will give up his seat.

Einhorn, a principal at hedge fund Greenlight Capital, has seen the fund’s 6 percent stake in New Century shrink in value by more than $140 million. He did not offer a reason for his departure.

Observers, however, see it as further proof that New Century is in a perilous state. In addition to a rash of delinquencies, the lender faces probes by the U.S. Attorney’s Office for the Central District of California and the Securities and Exchange Commission of its accounting and of trading in its stock.

On Thursday the lender conceded in a statement that it has been able to fund only a portion of its loans. New Century’s “capacity to fund new originations is substantially limited due to its lenders’ restrictions or refusals to allow the company to access their financing arrangements,” it added. “New Century has been in frequent discussions with its lenders to identify ways to address their concerns in order to allow a greater funding volume in the near term. However, there can be no assurance that these efforts will succeed.”

And on Friday, according to a MarketWatch account, Merrill Lynch informed investors that New Century will probably be forced to file for bankruptcy. “The fatal liquidity blow may have arrived,” Merrill reportedly wrote. New Century did receive an emergency line of credit and a refinancing line, Merrill acknowledged, but it reportedly also warned that New Century “has yet to obtain necessary covenant waivers from five lenders, and its ability to fund new loans is in grave jeopardy of another lender bowing out.”

For his part, perhaps Einhorn will devote some extra energy to his longstanding tussle with Allied Capital. The hedge-fund manager has publicly criticized Allied’s accounting practices, particularly at the company’s Business Loan Express unit, and has been shorting Allied’s stock for several years.

In a revelation reminiscent of Hewlett-Packard, last month Allied announced in a press release that an agent of the company obtained what “purport to be records of calls” made by Einhorn from Greenlight Capital during 2005.

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