Catching up on the saga at Accredited Home, Lone Star Funds — the private equity investor who in June had agreed to purchase San Diego-based lender Accredited Home Lenders Co. for $400 million — said yesterday that it had filed an answer and counterclaims to Accredited’s recent lawsuit seeking to force completion of the purchase agreement. From the press statement:

In its answer, Lone Star categorically denies Accredited’s claims that Lone Star is in breach of its obligations under the merger agreement with Accredited and that it has repudiated the merger agreement. Lone Star also asserted that Accredited would never be entitled to an injunction enforcing the merger agreement against Lone Star in any event, because Accredited’s only possible contractual remedy is a reverse break-up fee of $12 million. Lone Star’s counterclaims seek court declarations that Accredited has not met the conditions to closing the current tender offer because it has suffered a Material Adverse Effect, as defined in the Merger Agreement, and has materially breached numerous other obligations to Lone Star. Based on these and other claims, Lone Star believes it is entitled to terminate the merger agreement at its option any time and Lone Star is seeking a court order to that effect.

Lone Star had first disclosed its intention to cancel the deal on August 10, saying it did not believe the terms of the tender offer would be met. It’s interesting to note here that while the contract may be iron-clad in Accredited’s favor, as many analysts have noted, the remedy for non-performance would seem to be a $12 million penalty — and not a forcible purchase. Meanwhile, Accredited said this morning that it traded $1 billion of whole loans in an attempt to insulate itself from margin calls, with the right to repurchase the loans within 90 days of trade. $500 million has already been transacted as part of an initial settlement, the company said:

Under the agreement, Accredited has the ability but not the obligation, in its sole discretion, to repurchase all of the loans traded through mid-November 2007 at a premium to the advance rate. If the loans are not repurchased by the Company by mid-November, the Company’s call right to repurchase the loans expires and the investor will keep the loans with limited recourse to the Company.

This is a new sort of play — a sale that might not be a sale. The loans were traded at a rate comparable to its current cost of funds, Accredited said, so this doesn’t deliver any additional liquidity. It’s more like pawning off the loans while Accredited looks to maintain operations, all the while hoping market conditions or the company’s fortunes change enough that they’ll be able to buy them back for later securitization. The bet here is that the lack of investor interest in the secondary markets is a short-term event — but that’s a bet best made knowing the sort of collateral Accredited actually put up as part of this deal. The company didn’t disclose the loans it traded — probably because it wants to avoid such scrutiny — but I’d have to bet that a large portion of this trade involves subprime loans given the company’s previous origination history. Accredited also didn’t disclose the counterparty to the trade, although there are rumors circulating this morning on that.