New Century Fire Sale

Updated from 11:30 a.m.

New Century (NEWC) filed for Chapter 11 bankruptcy protection Monday, less than a month after Wall Street cut off the struggling mortgage firm's credit.

The Irvine, Calif., lender said in a press release that it agreed to sell some assets, including its mortgage-servicing platform, for $189 million. New Century will slash 3,200 jobs, reducing its workforce by 54%. New Century said the cuts will serve "to better align the company's cost structure with the current operating environment and to properly size these businesses in preparation for possible sale."

Shares of New Century, which fetched $50 last year before being delisted from the NYSE last month, dropped a nickel Monday to $1.01.

The news comes as the business of lending to homebuyers with poor credit histories has ground to a halt amid a spike in delinquencies and defaults on recent loans.

New Century is "not the first and they certainly not the last" lender to go bankrupt, says Peter Schiff, president of brokerage firm Euro Pacific Capital in Darien, Conn. "All sorts of sort of lending institutions have been lending money to people who can't possibly pay them back."

Increased subprime borrower defaults began to upend New Century in the weeks after its March 2 announcement that its accounting was under investigation by federal prosecutors. Its warehouse lenders began squeezing the mortgage lender by asking it to cover margins of more than $150 million and then ultimately cutting its lines of credit, according to its bankruptcy documents.

As its lenders either foreclosed or took control of the cash flow from the loans New Century financed, the financial noose began to tighten, creating a liquidity crunch that ultimately pushed it over the edge.

On Monday, New Century said it agreed to sell certain loans and residual interests in certain securitization trusts to Greenwich Capital for $50 million. It also agreed to sell its servicing assets and servicing platform to Carrington Capital Management for $139 million.

"The decision to pursue the sale of the company's assets and operations through the bankruptcy process was a difficult but appropriate decision for our Board to make," said CEO Brad Morrice. "This was a very hard step for me personally and clearly not the outcome I would have preferred. However, given the sudden and significant challenges facing our industry and New Century specifically, bankruptcy is the best means available to allow the company's assets and operations to be sold through an orderly process."

The bankruptcy is meant to allow New Century to downsize its operations, reduce expenses and sell off pieces of its mortgage operation. New Century says via its adviser Lazard Freres that it attempted to "aggressively" market portions of its operations. Any sales now will be subject to bankruptcy court approval.

New Century's planned asset sales will be a critical part of its attempt to garner whatever value remains in its lending operation. New Century is pushing a rapid timetable because it believes it will exhaust its financings within a month and a half, the bankruptcy filing says.

New Century said Monday that CIT Group (CIT) and Greenwich Capital agreed to provide $50 million in debtor-in-possession financing, subject to court approval, with the potential to expand the financing to $150 million.

The financing is explicitly provided to allow New Century to it sell its business. It will be provided in two tranches: a working capital tranche A and tranche B component, which will be used, in part, to repay funds obtained from Citigroup Realty.

The debt is secured by various assets including a pool of mortgages with a face value of about $173 million as well as mortgage-backed securities, about $113 million in state and federal income tax refunds New Century is hoping to get and a limited partnership interest in Carrington Investment Partners.

Rates on the tranche A portion of the DIP are London Interbank Offering Rate plus 2.75% and will jump up to 4.75% over LIBOR, should New Century default on any payment. The mortgage lender also has to pay an additional rate of 2% if it opts to increase the CIT debt package.

The deterioration of so-called subprime credit quality has hammered shares in New Century rivals such as NovaStar (NFI) and Accredited (LEND). New Century's rivals took another hit Monday when a lender in the supposedly higher-quality Alt-A market warned of weakening results.

"This is not a subprime problem," Schiff says. "It's an [adjustable-rate mortgage] problem. It's a lax lending standard problem. As all these mortgages reset and families are seeing their largest expense go up, that means a lot of consumption that has been going on is going to have to stop."

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