Some Subprime Investors
Stay Upbeat, Fear Fire Sales

Most investors are scrambling to try to figure out just how bad things will get in the market for risky mortgages.

But a different argument has broken out at Accredited Home Lenders Holding Co., where investors and management are battling over just how rosy the future actually is for the San Diego subprime lender and whether a proposed acquisition of the company amounts to too sweet a deal for a private-equity buyer.

The fight shows that there is still interest in the subprime market, despite its myriad problems. There are investors who eventually will be willing to pick through the subprime rubble in the hope of snaring bargains. Just a few months ago, Goldman Sachs Group Inc. paid about $20 million for a small, two-year-old subprime lender, Senderra Funding LLC, in Charlotte, N.C.

Accredited agreed in early June to be bought for $15.10 a share by private-equity firm Lone Star Partners. Accredited, whose stock traded at nearly $50 a year ago, had seen its shares fall to $3.77 in early March, after it said it wouldn't be able to file annual results on time, and fears mounted that it would founder.

Now, the shares are at $13.48 on the Nasdaq Stock Market, even though Accredited has yet to file 2006 results, following the resignation of its auditor.

Some investors are suing in California state court to block the Lone Star deal, saying it amounts to a fire sale that will benefit management while shortchanging shareholders. A spokesman for Accredited said that the company believes the suit is without merit, and that the company will defend itself. A spokesman for Lone Star declined to comment.

The judge overseeing the California suit has scheduled an Aug. 24 hearing for arguments on whether he should issue an injunction to block the transaction from going through. The investors suing to block the deal either want a new bidding process for the company, or to see Lone Star pay a higher price.

Lone Star announced Tuesday that it was extending to midnight July 31 its tender offer for Accredited's shares, which was due to close Tuesday. Lone Star said in a regulatory filing that Accredited had yet to receive all the necessary state regulatory approvals for the deal. The firm also said that investors had so far tendered only 21% of the company's shares.

In many mergers, big investors don't tender their stock until the last moment, so that could explain the so-far low level of acceptance of Lone Star's offer. But it may also show that some investors are still undecided over whether this is a good deal or not.

One indication on that score may come from whether Farallon Capital Management LLC, a big hedge-fund operator and major Accredited shareholder, decides to sell its stock to Lone Star. Farallon held 1.7 million Accredited shares, or about 7% of the company, as of June, according to Thomson Financial. Additionally, Farallon in March extended Accredited a $200 million loan and received warrants for 3.3 million shares with an exercise price of $10 a share. The firm had also explored the possibility of purchasing Accredited, though those talks didn't go far. A spokesman for Farallon declined to comment.

The recent crash in the subprime market has brought many lenders to their knees. Subprime borrowers are people with poor credit histories and sometimes lack the means to verify their income. Following the recent bubble in home prices, along with what have turned out to be lax lending standards, subprime borrowers have defaulted at unprecedented rates.

This has forced subprime lenders to take back loans sold on to other investors, leaving the lenders scrambling for cash and unable to sell new loans. At least six big subprime lenders have sought bankruptcy-court protection this year, and more than a dozen have closed or been sold.

Room to Breathe

But the Accredited investors opposing the current deal say this is good news. They argue that recent capital infusions, along with the sale of some of Accredited's loan book, have given it room to breathe.

"With few competitors, the surviving companies will be able to quickly gain market share and dominate the subprime market when it recovers," investors said in a legal filing.

Possibly true, say some analysts. Eventually, the subprime market will recover, profit margins will improve, and those companies still standing should reap the benefits. The catch? No one knows how long that will take to happen. Meanwhile, Accredited is unlikely to survive if it isn't bought by someone with financial firepower.

"A few years from now, it's going to look like Lone Star got a bargain," said Matthew Howlett, a mortgage analyst with Fox-Pitt, Kelton, who has an "in-line" rating on Accredited's shares. "But right now, most people's thinking is along the lines that Accredited is lucky it didn't go out of business."

Mr. Howlett doesn't agree with the suing investors that Accredited has weathered the worst of the storm, or that it can ride out the problems in the sector. "I don't think anyone is comfortable about a company like this going on its own," he added.

The performance of Accredited's stock since the Lone Star deal was announced has shown this; the shares have consistently traded below the $15.10-a-share deal price. This underscores what may be a bigger fear for some investors than Lone Star snatching the company: that the firm walks away.

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