Investing in Sub-Prime: The End is Nigh for New Century
By Ian Cooper
New Century (NEW) is done, toast, kaput… Here was a $22 billion company that watched its stock plummet more than 90 percent from $30+ to less than $2 on a federal inquiry into accounting and stock trading, fears of bankruptcy, yesterday’s disclosure that all of its lenders are pulling funding to the company, and the news that it doesn’t expect to meet repayment demands.
Relied upon short-term financing from Street banks and other commercial banks is the lifeblood for companies like NEW. Without it, bankruptcy or liquidation can’t be too far behind.
Worse yet, some of the lenders are “accelerating their requests for it to buy back from them all outstanding mortgage loans financed under their respective funding agreements after the lender defaulted on those loans,” according to the Wall Street Journal.
Should all of the lenders demand repayment, NEW’s burden would be $8.4 billion, an unaffordable figure for the beleaguered company.
Note: Death Cross Trader readers are holding NEW puts since the underlying traded above $30.
Investing in Subprime: Most housing bulls’ opinions are, well… bull.
Some would have you believe in this mythical housing bottom or the ideology that sub-prime problems won’t spill over into the broader lending market.
But it’s just not true.
The fact is sub-prime is just the top of the credit nightmare for lenders. Once the sub-prime meltdown is finished demolishing companies like New Century, Alt-A, and prime lenders, where borrowers also took out ARMs to buy expensive and realistically unaffordable homes, are next, especially if a projected 22 million Americans lose their homes.
Truth be told, things are going to get a lot worse. We don’t see a turnaround in housing or lending until, at least, spring 2008. Remember where you heard that.
Take care,
Ian L. Cooper, Editor, Death Cross Trader