How in the world is Accredited Home Lenders (Nasdaq: LEND ) trading anywhere near $10 per share? How is it possible that the market is valuing this firm's equity at nearly $250 million?
Accredited Home Lenders posted a $260 million quarterly loss yesterday, as the subprime mortgage lender said that market conditions in housing put its survival in doubt. Net revenue equaled negative $136 million, and losses from the sale of mortgage loans came to $178 million. Earlier this month, the company shut down most of its lending operations, retaining a skeleton staff that basically oversees its money-incinerating loan portfolio.
You have Impac Mortgage (NYSE: IMH ) essentially going into runoff, and NovaStar (NYSE: NFI ) de-REITing retroactively to Jan. 1, 2006. In the U.K., Northern Rock should be renamed Northern Quicksand, as a Bank of England bailout hasn't stopped a good old fashioned run on the bank. And here in the U.S., Accredited Home Lenders' equity sits at $250 million. Luminent Mortgage Capital (NYSE: LUM ) had to sell a huge chunk of itself, Thornburg Mortgage (NYSE: TMA ) unloaded AAA-rated paper at a discount to stay solvent. Meanwhile, Lehman Brothers (NYSE: LEH ) seems to have dodged a bit of a bullet, helped immensely by tax savings.
In short, the market in which Accredited Home Lenders operates is eating its young. Its equity isn't worth $250 million, $250,000, or $2.50.
Oh, I know what you're going to say. The company has an agreement with Lone Star Funds to sell the firm at $15.10 per share in cash. The current share price thus represents an adequate discount, representing the market's doubt that the deal gets done at that price. Lone Star already tried to change the deal, offering $8.50 late last month -- a price that Accredited Home Lenders management rejected.
This deal reminds me of M. Night Shyamalan's most famous line: "I see dead people."
I put very low probabilities on Lone Star ponying up one red cent for Accredited Home Lenders' equity. This morning's results announcement clinches it. Why would Lone Star pay for something that's worthless?
Because they have a contract? No, I don't think so. The contract contains conditions for cancellation, including "material adverse changes" language. Of course, Accredited Home Lenders will argue -- as it should -- that there is specific language stating that decaying market conditions don't count as a "material adverse change" in the contract. And Lone Star will then say -- as it should -- "See you in court."
And somewhere in the distance, a dog barked. Because a company whose "survival is in doubt" doesn't have the resources to mount a big legal battle. Lone Star can afford to be patient. Accredited Home Lenders? Not so much.
A few years from now, some plaintiff will argue on behalf of Accredited Home Lenders that Lone Star acted in bad faith, that the two had a contract, and that this contract prevented Accredited from seeking other sources of capital when it desperately needed them. Lone Star will then settle for a few cents on the dollar. A legal battle is actually Lone Star's cheapest way to get out of this deal. If I were an investor in Lone Star, it's exactly what I'd demand they do.
At any rate, buying LEND shares at $10, counting on a $15 deal when the company says it's on life support, seems like the worst kind of faith-based initiative. It's like a game of chicken. Except that one side is in a car, while the other is riding an actual chicken.