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NovaStar on the Block

Laurie Kulikowski

NovaStar Financial (NFI) surged 15% in late trading after putting itself on the block.

The Kansas City, Mo.-based subprime lender said it hired Deutsche Bank as its financial adviser to consider "a range of strategic alternatives, including without limitation a potential sale or other change of control transactions." NovaStar added that it got $100 million in financing from Wachovia.

NovaStar also said in a Securities and Exchange Commission filing that its loan production fell 58% from a year ago in March.

"It's clear that they're having the same problems that New Century and Accredited (LEND) were having, but this is the first we've heard about it," says Chris Brendler, an analyst at Sitfel Nicolaus. "Fortunately for them they found $100 million, but it seems like it's a temporary solution as they put together a more comprehensive package."

Accredited agreed last month to sell much of its subprime loan portfolio at a discount to raise cash for margin calls. It later got a $200 million infusion from hedge fund Farallon Capital.

NovaStar is "certainly not out of the woods, but it definitely buys them time," Brendler adds.

The news comes as the business of making loans to homebuyers with poor credit histories has ground to a halt following a spike in defaults and delinquencies on 2005 and 2006 loans. The plunge in subprime credit quality drove NovaStar rival New Century (NEWC) into bankruptcy and has threatened the financial health of countless other mortgage players.

Meanwhile, regulators and government-sponsored mortgage companies such as Freddie Mac (FRE) have said they will tighten standards on subprime loans, further pressuring the market.

NovaStar said the financing commitment comes from Wachovia Capital Markets. The deal also provides for the parties to commence negotiation on a comprehensive financing facility which would replace and expand existing facilities.

In such a situation, "The lender is frequently acting as almost a restructuring counselor and requiring that the company take prudent steps to assure its survival," says Martin Bienenstock, co-chair of the Business Finance & Restructuring department at Weil Gotshal & Manges. "In distressed situations lenders can do a lot of things," including calling for cost reductions and the like, he says.

A NovaStar spokesman declined to comment beyond the press release on Wednesday.

Shares rose 73 cents late Wednesday to $5.76.