Stocks in the News February 21, 2007, 1:33PM EST NovaStar Reignites Worries for Subprime Lenders
The company warns it expects to recognize little, if any, taxable income for the next five years
When NovaStar Financial (NFI) announced a loss for the December quarter and warned that it might not keep its status as a real estate investment trust (REIT), worries about the subprime mortgage lending market reignited on Feb. 21. As borrowing costs rise and the housing market slows, selling loans to people with poor credit histories has become a shakier business.
For the quarter ended Dec. 31, 2006, the Kansas City, (Mo.) company reported a net loss of $14.4 million, compared to earnings of $26.4 million during the same period of 2005. "The credit performance of our portfolio, and specifically our 2006 originations, deteriorated during the fourth quarter," CEO Scott Hartman said in a press release Feb. 20. NovaStar's earnings took hits from things like lower loan prices and losses on its investments.
What's more, the company expects to recognize little, if any, taxable income between 2007 and 2011. REITs must distribute most of their taxable income to shareholders every year. Now NovaStar management is evaluating whether to retain the company's status as a REIT beyond 2007.
"While NovaStar's results were disappointing, the guidance of little to no taxable income from 2007 until 2011 was unexpected," Deutsche Bank analyst Stephen Laws said in a research note dated Feb. 21. Laws slashed his $29 price target on the stock to $8 per share and downgraded NovaStar to hold from buy. (Deutsche Bank does business with NovaStar.)
Investors dumped NovaStar's shares, which plummeted 41% to $10.36, a new 52-week low, in afternoon trading on the New York Stock Exchange Feb. 21.
The market has already gotten warning that more of NovaStar's customers are failing to make their payments on loans as agreed. On a pool of mortgages NovaStar securitized in September 2006, more than 3% are more than 30 days past due, Morningstar reported Feb. 9. "If delinquencies in NovaStar's mortgages continue to rise, pullback from investors in its securities could create a liquidity crunch, limiting NovaStar's ability to originate new loans in the future," analyst Ryan Lentell wrote Feb. 9. After NovaStar's news on Feb. 21, Lentell added that "liquidity remains our number-one concern associated with the firm."
The market has been fretting about the state of subprime lenders recently, consequently making it tougher for those companies to raise funds. On Feb. 8, the group got hit after HSBC Finance, the Prospect Heights (Ill.)-based consumer lending unit of British banking giant HSBC Holdings (HBC), said it was setting aside 20% more than analysts had estimated for bad loans in 2006.
The same day, New Century Financial (NEW) shares skidded 30%, after the Irvine (Calif.)-based lender announced it would restate results for the first three quarters of 2006 to correct accounting errors related to loan repurchase losses. The company expects to see a loss for the fourth quarter of 2006 due to early payment defaults (see BusinessWeek.com, 2/9/07, "Subprime Time Bomb")
HSBC's shares slipped 0.2% to $89.44 in afternoon trading on the New York Stock Exchange Feb. 21, while New Century's shares lost 6.9% to $17.48. If misery loves company, NovaStar can take heart.
Quelle: Business Week, USA
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