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Texas Equity Firm Acquires Accredited Home Lenders in $400M Deal

With the subprime lending industry in upheaval and facing increased constraints, the management of Accredited Home Lenders Inc. said they selected the best alternative in selling the company to a Dallas private equity firm.

Last week, Accredited signed an agreement to be acquired by Lone Star Funds for $15.10 per share, or an aggregate $400 million in a deal that allows the mortgage lender to survive, at least for a while.

Lone Star obviously saw some value in the purchase, offering 10 percent above the prior trading day’s stock price, and gave an optimistic outlook for the future.

“With our additional experience and capital, we are confident that Accredited can successfully manage through the current industry dynamics and leverage the platform,” said Len Allen, Lone Star’s president of U.S. operations.

Like many borrowers that are its customers, Accredited’s portfolio has its dings and blemishes in the form of defaulted and delinquent loans.

As of the first quarter it listed 9 percent in loans that are delinquent more than 30 days. That sounds bad, but compared to other subprime lenders, many of which are no longer around, Accredited was running a tight ship.

“Clearly (Lone Star) sees the company as viable and the loans in their portfolio as solid,” said Bud Leedom, editor of CaliforniaStocks.com, a San Diego online investment newsletter.

What Lone Star has in mind is unclear, but Leedom said he wouldn’t be surprised if the firm does a fairly quick turnaround in cleaning up its problems, and then selling off good loans to an investment bank, or other investors.

“I see it as arbitrage play, with them figuring out what it’s worth, getting rid of the bad loans, packaging the good loans, and selling it off,” Leedom said.

That may not portend good things for Accredited’s 2,900 employees who remain after the company trimmed 1,300 workers in the first quarter of the year. It has 718 employees at its headquarters in Carmel Mountain Ranch.

Lone Star is buying Accredited through an existing fund formed in 2004 that has more than $5 billion in capital. All of Lone Star’s private equity funds total more than $13 billion, according to the company’s Web site.

The funds are described as “closed-end, private equity limited partnerships that include corporate and public pension funds, university endowments, foundations, bank holding companies, family trusts and insurance companies.”

Lone Star also received some negative publicity last year when its offices in South Korea were raided by local authorities, who alleged that Lone Star evaded paying taxes on an earlier investment in Korea Exchange Bank, that nation’s fifth largest bank.

Lone Star denied any wrongdoing and retains its stake in the bank.

Lone Star wasn’t the only interested buyer. San Francisco-based Farallon Capital Management LLC, the nation’s fifth largest hedge fund and one of Accredited’s largest investors, stands to make a tidy $16 million-plus profit because of its $230 million loan package to Accredited in April.

That deal came with warrants to purchase 3.23 million shares stock at $10 per share.

In addition, Farallon is guaranteed a $14 million early payment loan penalty if Lone Star chooses to pay off the debt within the first year.

Another hedge fund that saw Accredited as an undervalued company won’t make out as well. Second Curve Capital LLC, a New York City hedge fund and Accredited’s largest shareholder, acquired a total of 2.8 million shares of the stock starting late last year and continuing into the beginning of this year, when the stock was trading around $25. That would translate to a net loss of about $10 per share, or $28 million.

Founded in 1990, Accredited grew along with an industry that flew high as the national housing boom surged until last year.

The business did well until home prices started dropping, and adjustable mortgage interest rates began rising, resulting in more late payments and defaults.

Large investment banks, which purchased loans from the subprime mortgage banks, legally returned them to the originators when the loans began to go bad.

Then providers of warehouse credit lines to subprime lenders cut back on their credit extensions, leaving many lenders without the cash needed to stay in business. About 50 subprime lenders have either been sold or filed for bankruptcy.

Lone Star is expected to begin its tender offer on Accredited shares 10 days after the transaction was announced, or June 14, and should complete the transaction by the third quarter, the companies said.

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