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Accredited Sues Lone Star

The subprime mortgage lender is not giving up the private-equity firm's $400 million deal without a fight.

Updated from 6:57 a.m. EDT

Accredited Home Lenders

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on Monday sued

private-equity firm Lone Star Capital, in an attempt to keep alive a $400 million buyout of the troubled subprime mortgage player.

San Diego-based Accredited's shares toppled 31% on Monday, after Lone Star, in a regulatory filing on Friday, revealed that it didn't expect to complete the deal based on the assumption that Accredited won't be able to satisfy certain conditions. While Accredited moved aggressively to revive the deal, an analyst for a firm advising the company said Lone Star's stance could be a shrewd negotiation tactic to get the struggling lender at a lower price.

"It's a little bit of a game of chicken," says analyst Scott Valentin of Friedman, Billings, Ramsey Group, which is acting as a financial adviser to Accredited in the deal. "The value of

Accredited's assets have come down a lot since the deal was announced. What does Lone Star have to lose?"

Lone Star reiterated in a statement on Monday that because of "the drastic deterioration in the financial and operational condition of the company, among other things, the conditions to the closing of the tender offer for shares of Accredited would not be satisfied.

"Accordingly, Lone Star does not expect to be accepting shares tendered as of the end of the current offer period. Lone Star believes the facts will fully support its position. Lone Star looks forward to presenting these facts in Delaware Court of Chancery," it said.

Lone Star's move to nix the deal came after Accredited said Friday morning that state regulators had approved it. Lone Star had originally agreed in June to acquire the lender for $15.10 a share. Shares of Accredited fell $2.69 to $6.21 on Monday.

This summer the credit markets dried up after a wave of leverage buyouts fueled the M&A boom over the last few years. Since June, many deals have been postponed or canceled as the bond and loan financing markets seized.

And while there is a market for distressed assets, such as Accredited's, buyers in the sector surely don't want to be paying top dollar as the subprime mortgage crisis lingers and further problems are revealed.

Valentin suggests that Lone Star's announcement is possibly a smokescreen to renegotiate the deal at a lower price.

"Maybe they do want the deal canceled," Valentin says. "But maybe in the back of their mind the worst-case scenario is the deal is negotiated lower. They save ... money on the negotiation and the cost of doing this is minimal compared to the benefits received."

Accredited said in a statement that it believes all conditions to closing have been satisfied, as long as 50% of shareholders tender their shares by the Aug. 14 deadline. It said it sued "to hold Lone Star to its obligations, and to hold it fully responsible for any damages caused by its failure to satisfy those obligations."

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The companies' merger plan "expressly provides that changes generally affecting the non-prime industry in which the company operates which have not disproportionately affected the company do not provide a basis for Lone Star to fail to honor its obligations," Accredited added.

Valentin wrote in a note that Accredited's financial condition is no worse than that of any other subprime lender.

In a separate filing late Friday, Accredited reported preliminary second-quarter financial results in which it said it anticipates a net loss of $40 million to $60 million.

The company had originated $1.7 billion worth of loans in the second quarter, down 59% from in the year-earlier quarter. Accredited had total liquidity worth $240 million at the end of the quarter, but $175 million at the end of July.

The mortgage industry has been struggling to find footing this year as loan to customers with poor credit are seeing increases in payment delinquencies and defaults. The market to securitize the loans -- a process whereby lenders sell mortgages to banks and brokers that are then packaged into securities and then re-sold to investors -- has seized up in recent weeks.

Dozens of lenders have been put out of business this year, while others such as Accredited have sought strategic partners.

Last week alone,

American Home Mortgage


filed for Chapter 11 bankruptcy protection, and

Luminent Mortgage Capital


got notices of default from lenders.

Accredited also said last week that if any of its own lenders decides to execute a so-called margin call -- requiring the company to put up additional cash or collateral in exchange for the funding -- the company could be in deep trouble.

An outside spokesman for Lone Star declined to comment.

So far, about 33% of the shares have currently been tendered to Lone Star, according to Valentin.

Farallon Capital Management, which owns about 7% of Accredited's shares, indicated in a filing that it intends to tender its shares to Lone Star on Monday. This spring, Accredited also received a $200 million loan commitment from Farallon.