Prudential Securities analyst Michael P. Durante Wednesday reiterated his buy rating on Mercury Finance Co. stock, saying it appears increasingly likely that the embattled auto lender can avoid bankruptcy.
The buy recommendation comes less than two weeks after a $2.26 billion plunge in the Lake Forest, Ill., subprime lender's market valuation, which was triggered by the disclosure of accounting irregularities that had inflated the last four years' earnings.
Among the apparent losers on the stock was Fidelity Resource Management, the Boston fund company that disclosed Wednesday it held 8.1% of Mercury's shares as of Dec. 31. Fidelity declined to elaborate on the filing.
Mr. Durante, meanwhile, said a $50 million short-term credit facility granted Tuesday by a unit of BankAmerica Corp. could give Mercury "two to three weeks of breathing room."
When new audits by KPMG Peat Marwick and Arthur Andersen are completed later this month, he said, Mercury probably will stabilize outside bankruptcy court. It could eventually be sold for between $7 and $9 per share to one of a handful of companies that Mr. Durante believes will eventually dominate the subprime auto lending sector.
Mercury's liquidation value, if the company goes into bankruptcy, could be as high as $4 per share-or more than 60% above its closing price Wednesday of $2.50, said Mr. Durante.
Likely buyers include GE Capital Services Corp., Household Finance Corp., and Associates First Capital Corp., finance companies that have thus far taken only "baby steps" into the risky world of subprime auto finance.
Mr. Durante said the entire subprime finance industry will undergo a shakeout, with some companies filing for bankruptcy, as Jayhawk Acceptance Corp. did last week.
Eventually, he said, fewer than a dozen players will dominate the lucrative market, in much the same way a handful of lenders has come to dominate the credit card business.
"Whoever gets this mousetrap right is going to make a lot of money for themselves and for their investors," Mr. Durante said.
