Update: C-BASS Faces ‘Unprecedented’ Margin Calls

Following up on a story I posted on last night, C-BASS this morning put out a press release acknowledging liquidity challenges at the scratch-and-dent operation, and said that the company was “exploring all options” in terms of finding additional liquidity.

From the press release:

While nothing fundamentally has changed at C-BASS, like many other firms in the industry, the current severe state of disruption in the credit markets has caused C-BASS to be subject to an unprecedented amount of margin calls from our lenders. The frequency and magnitude of these calls have adversely affected our liquidity. To address this, C-BASS is in advanced discussions with a number of investors to provide increased liquidity and is exploring all options to mitigate the liquidity risk in this difficult market.

At the beginning of 2007, we had $302 million of liquidity, representing greater than 30% of our capital of $926 million. During the first 6 months of 2007, a very tumultuous time in the subprime mortgage market, C-BASS’ disciplined liquidity strategy enabled the company to meet $290 million in lender margin calls. During the first 24 days of July alone, C-BASS met an additional $260 million of margin calls, representing greater than a 20% decline in the lender’s value. We believe that nothing justifies this substantial amount of margin calls received in such a short period of time, particularly as there has been no change in the underlying fundamentals of our portfolio.

While I won’t comment on the business logic of its creditors, $260 million in margin calls during a single month would be enough to sink most mortgage operations. If C-BASS is having to absorb hits like this — the company is widely recognized by most in the industry as one of the best-run out there, from an operations perspective — then there are some other players in this market that are simply going to get slaughtered.