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New Century’s common shares have fallen more than 22% this week to USD 1.09 per share, as rumors of a near-term bankruptcy filing intensify. The shares now look attractive as an entry point for investors in a potential bankruptcy litigation play against deep-pocketed warehouse lenders, said two buysiders.
As previously reported, New Century has been scrambling to structure a prepackaged bankruptcy filing driven by a stalking horse bid for its origination and servicing platforms. That follows warehouse lenders’ decision to discontinue financing to the company en masse earlier this month. Late last week, the company was also said to be seeking out DIP lenders for a post-petition credit facility backed by its portfolio of loans held for sale, said a source familiar.
While shareholders are not expected to share in a recovery based on a liquidation value of the company, they may have a shot at pursuing causes of action against warehouse lenders on behalf of the estate in a bankruptcy, said the legal advisor.
“There is little direct precedent to estimate the potential litigation liabilities warehouse lenders could face in a bankruptcy,” said the legal advisor. “But in these types of potentially fraudulent situations, the court generally allows for some latitude.”
Prior to the company’s decision to shut down its origination platform in early March, New Century had access to 15 separate warehouse lines totaling approximately USD 13bn. Because many of the warehouse lenders were also active in the securitization of the mortgage loans New Century underwrote, they likely had a much deeper knowledge of the company’s lax lending standards, the two buysiders said. That could expose the banks to claims from an equity committee in bankruptcy, both sources said.
“I think its naïve to believe that the warehouse lenders had no idea about the underlying credit quality and lending practices of New Century,” said the first buysider.
Morgan Stanley - one of the company’s largest warehouse lenders - may also be subject to an inquiry into its decision to offer New Century USD 265m of new asset backed financing on 8 March, said the first buysider. One day later, Morgan Stanley sent a letter to New Century notifying it that it was accelerating certain obligations under its warehouse line and discontinuing its financing, according to company filings.
A Morgan Stanley official declined comment on the situation.
Officials representing New Century’s other large warehouse lenders including Goldman Sachs, Citigroup, Credit Suisse, Deutsche Bank, Barclays and IXIS Real Estate Capital declined to comment.
Should shareholders find strong enough causes of action against warehouse lenders, they would need to net more than USD 61m in damages for the common stock to be worth considering at these levels, said a third buysider. “Given that there is no kind of precedent for this type of adversary proceeding, it is difficult to determine how much may be up for grabs,” said the buysider. “Without that kind of certainty, I’m not sure many people are willing to put their money behind such a gamble.”
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