Sub-Prime Update: New Century

All in all, the death toll of sub prime lenders is 31. That's 31 sub-prime lenders that have declared bankruptcy. I'm going to give you a short list of some of the big ones:

Freemont Gerneral, 5th largest lender
First Franklin, 11th largest lender
Ownit, 17th largest lender
MLN, 19th largest lender
ResMAC, 21st largest lender
ECC/Encore, 24th largest lender
Fieldstone, 25th largest lender

Now it looks like New Century is on the chopping block. They are the 3rd largest lender of sub prime mortgages, and it's looking like we will be singing Queen's, "Another One Bites the Dust." This is a HUGE company that is in the process of tanking.

Bloomberg has compiled a list of their debts among other statistics that I would like to share with you. Also, I have a contradiction. Bloomberg has them listed as the number one sub prime lender. Either way its a big deal. Bloomberg reports (not exact quotes, but a summary):

New Century reported on March 2nd that it faces criminal probe and will need waivers from its own lenders to stay in business. The company will probably be forced to declare bankruptcy. Bankruptcy is "more likely than not." They are running on fumes and the only way they can stay above water is if they can find a large company to provide capital in exchange for a majority ownership. In other words, a buy out.

At the end of this past September, New Century owed $1.5 billion dollars to Morgan Stanley and UBS AG. In all, New Century is said to have 16 credit lines totaling $17.4 billion. The terms of those credit lines stated that New Century had to have timely and accurate financial results. New Century failed to meet this term as it didn't produce an annual report by March 1.

They did receive some credit line extensions, because of there obvious inability to repay the money. Goldman Sachs Group Inc. and Credit Suisse Group gave New Century extensions. Some of the other creditors that gave extensions include, but are not limited to: Bank of America Corp., Barklays Plc., Bear Stearns Cos., Citigroup Inc., and Deutsche Bank AG. This is a text book example of how Chairman Bernanke was dead wrong when he said that he didn't expect sub prime problems to have a spill over into the prime sector. All of these companies denied comment or didn't return phone calls.

The company is facing criminal probe regarding its accounting and trading in securities. S&P down graded New Century's credit rating from B to BB-. Today, the stock is currenty down over $9.50, which is a 65%+ decline.

KPMG LLP, the companies auditor, stated that, "substantial doubt exists as to the companies ability to continue."

You have to look beyond the numbers and two steps ahead to really realize the implications of sub prime spill over into the prime sector. New Century is going to be delinquent on $17.4 billion dollars of debt. All of it credited by prime lenders. Those losses directly effect the lending standards of the prime market. As these companies tighten the noose on lending standards, the economy will begin to feel the strangle hold. The housing sector will be hit harder and harder as lenders make it more difficult for folks to buy a new home. The feed back loop will just be more dramatic as time passes. See the post entitled "Feedback Loop," if you need a better explanation.