NovaStar Nixes Offering

Shares plunge on an auditor's 'going concern' warning.
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NovaStar Financial

(NFI)

plunged 18% as the troubled subprime lender cut more jobs after a plan to raise money fell apart.

The Kansas City, Mo., mortgage company canceled a $101 million shareholder rights offering. The offering had been planned as part of a liquidity injection earlier this summer by investors led by MassMutual and Jefferies.

But NovaStar yanked the convertible preferred stock offering after auditor Deloitte & Touche told NovaStar it would first need to reissue 2006 financial statements. The auditor told NovaStar it would add a "going concern" clause, reflecting doubt as to the company's financial footing, to any revised 2006 report.

"As a result and given market conditions and the current market price of NovaStar's common stock," the company said, "NovaStar decided it was in the best interests of shareholders not to spend the resources to pursue the offering."

NovaStar also said on Tuesday that cut 275 positions at 12 offices in its direct-to-consumer loan origination business. The move will reduce NovaStar's retail business to about 125 employees at four locations.

All told, NovaStar expects to have about 600 employees after the cuts.

The firings come less than three weeks after NovaStar said it was firing 500 workers in its wholesale mortgage lending operations and "temporarily stepping away" from making loans through the wholesale channel.

The company said Tuesday that it will focus on managing its $15.5 billion portfolio of securitized residential loans and only make loans "on a limited basis" through its retail franchise. NovaStar is also planning to evaluate strategic alternatives for its servicing business.

"With today's actions, we are pulling back to focus on NovaStar's core strengths and preserve liquidity," said CEO Scott Hartman. "Suspending wholesale lending and shrinking the retail operation are painful decisions, but we believe it is best, at this point, to concentrate on serving our current customers and managing our portfolio for the benefit of NovaStar shareholders."

NovaStar's further restructuring comes as the environment for mortgage lenders soured even further last month. The secondary market for mortgages has seized up as investors flee risky mortgage-backed securities.

As a result, lenders including

Countrywide Financial

(CFC)

and

Thornburg Mortgage

(TMA)

have had to find new funding methods to continue making loans.

Thornburg said on Tuesday that it had entered into a $1.4 billion collateralized mortgage debt transaction. Last month,

Bank of America

(BAC) - Get Report

agreed to purchase $2 billion in Countrywide's preferred stock.

NovaStar, which primarily lends to borrowers who have less than pristine credit, has been among the firms hit the hardest. In July, MassMutual and Jefferies agreed to inject a $49 million equity infusion into NovaStar by purchasing its 9% Series D-1 preferred stock.

In conjunction with the transaction, NovaStar had planned to complete a $101 million offering of 9% Series D-2 mandatory convertible preferred stock, which was to be converted into common stock at a price of $28 a share. Under the agreement, MassMutual and Jefferies would purchase unsubscribed shares in the offering.

But the company canceled the offering as the mortgage market deteriorated further last month. Two weeks ago, Moody's Investors Service downgraded NovaStar Mortgage's servicer ratings over concerns about its ability to service loans. There are additional concerns over NovaStar's ability to remain in compliance with certain covenants contained in its financing agreements, Moody's said.

Shares of NovaStar fell $1.49 to $7 on Tuesday.