ResMae Looks to Emerge from Chapter 11

Like a Phoenix rising from the ashes, subprime wholesale lending giant ResMae is looking today as if it is close to emerging from Chapter 11 and into the waiting arms of private equity investors. The company issued a press release yesterday noting that the Court had approved its reorganization plan, which it said “clears the way” for it to become a subsidiary of Citadel Investment Group.

Citadel, a $14 billion hedge fund, purchased the lender for $180 million.

Bloomberg ran an article earlier this week that took a new look at Citadel’s acquisition, with Credit Suisse analysts saying the “market isn’t dead” - yet:

“The fact is that somebody came in and saw value,” [vice president of asset-backed securities research for Credit Suisse Group Sharon] Greenberg said. “It is definitely a good sign.”

ResMae is one of six subprime mortgage lenders that went bankrupt after investment banks began pulling support for the $600 billion industry amid rising default rates in late 2005. Hedge funds and investment banks have since snapped up subprime loans, which are riskier than the so-called prime mortgages that carry lower interest rates, for as little as 34 cents on the dollar.

I’m not yet the kind of guy that gets quoted in Bloomberg articles (although perhaps I should be), but I’m not sure I’d interpret purchases at 34 cents on the dollar as a “good sign,” or a sign that the subprime market still “has value.” It really depends on your definition of value — would there have been “value” at 20 cents? 50 cents? (I’m pretty sure that a 66 percent discount on the par value of a loan isn’t “value” to the company that had to sell at that price.)

I also find it disconcerting that Credit Suisse is pumping up subprime in the financial media again, given that it has a strong incentive to do so (hint: Select Portfolio Servicing, among others).

The bare truth of what current market conditions are lies in looking at actual market transactions, and not in listening to analysts opine on their hazy idea of whatever “value” a market has. Case in point, as cited towards the bottom of the same Bloomberg article:

Lehman Brothers Holdings Inc. today sold $480 million of securities backed by ResMae loans. A pricing announcement didn’t list final spreads for the $5.9 million of BBB- bonds created. About $6.2 million of BBB+ rated bonds created were priced at a spread of 175 basis points; similar BBB+ bonds Credit Suisse Group sold in late April were priced at a spread of 250 basis point.

A batch of $5.5 million bonds with a BB+ rating was listed as “not offered,” reflecting underwriters’ view that the market is still reluctant to buy the riskiest subprime debt.

The proof is in the pudding.