New Century in a Tailspin; Will it Survive?

In a filing Friday with the Securities and Exchange Commission, New Century Financial (NYSE:NEW) disclosed a wide range of issues that have raised concerns among industry insiders about the subprime mortgage lender’s ability to continue to operate. In addition to confirming earlier reports of class-action claims of securities fraud, as first reported by Housing Wire on February 12, the company disclosed in its SEC filing that it is involved in a federal criminal probe by the U.S. Attorney’s office regarding possible violations of securities laws. New Century also acknowledged that it expects to breach numerous covenants associated with its short-term credit facilities, and warned that it had not yet obtained waivers from 5 of the company’s 16 creditors relating to profitability provisions in its credit agreements. “I’m not sure any one company can survive everything that is taking place at New Century right now,” said one industry source on condition of anonymity.

New Century acknowledged as much in its filing, saying that if it could not obtain waivers or covenant modifications from its lenders, the company’s auditor, KPMG, would render a “going concern” opinion on the troubled lender. Industry insiders that spoke with HW on the matter have classified such an opinion as “the kiss of death,” saying that such a move would surely mean the company faces an imminent shut down. Non-depository lenders such as New Century depend on credit floats to finance their operations. The company’s $17.4 billion of committed and uncommitted credit facilities require that it file timely reports with the SEC and, for 11 of the company’s 16 credit lines, also require it to report at least $1 of net income for any two-quarter rolling period. New Century said in its filing yesterday that it is likely to breach both covenants — admitting that it will report a full-year loss for 2006 when it does file its restated financials — but said that it had obtained temporary waivers on reporting requirements from its lenders. The company has been less successful, however, in modifying or obtaining waivers to its profitability covenants; industry insiders, all of whom spoke with HW on the grounds of confidentiality, have said they don’t expect the company to be able to successfully renegotiate terms associated with all of the five credit facilities in question. “Warehouse lenders in particular want to ensure they have some means of protecting their float,” said one source. “And in the best of times, lenders will work quickly and proactively to modify credit terms. That’s clearly not happening right now at New Century, and that’s not a good sign.” For its part, New Century said it “is in active dialogue with these lenders and has made progress in this regard.” Possible criminal charges Beyond its financial woes, New Century disclosed Friday that it is also the subject of a criminal investigation by the U.S. Attorney’s Office regarding possible violations of securities laws, in addition to disclosing recently-instigated probes by both the SEC and New York Stock exchange regulators. The company said it is voluntarily complying with all investigations. The criminal probes come in the wake of a series of earlier-reported class-action claims by investors who have alleged that the company violated securities laws with its revelation that it would restate earnings under the pressure of loan repurchase claims, and that it had materially mishandled accounting associated with loan repurchases. In its filing with the SEC, New Century said it has been served with notices on nine seperate claims of securities fraud, none of which have yet been certified as a class-action. Full disclosure: Sources used in this story did not include any officials at New Century, as the company will not provide comment beyond what was disclosed in its SEC filing and in its press statement. Housing Wire will always disclose the financial position of any authors or contributing writers to a story involving a publicly-held company. The author of this story owns no securities in New Century Financial, having sold his position in the company immediately after its disclosure that it would restate earnings.

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