A Citigroup fund's $50 million investment in a subprime mortgage company last summer culminated this week in a deal to acquire the failing lender. The deal could wind up costing the fund several times its original cash outlay.
Greenwich Street Capital Partners II, a Citigroup-owned fund, will merge IMC Mortgage Corp. into a subsidiary and hand the troubled subprime lender another $40 million in working capital, IMC said Monday.
This is in addition to Greenwich's December investment of more than $25 million, and the fund's assuming an undisclosed portion of IMC's more than $2 billion in bank loans and warehouse lines.
This week's announcement caps an eight-month series of deals between Tampa-based IMC, once one of the most well-respected lenders to consumers with bad credit, and the Citigroup fund.
In July, Greenwich and Travelers Investment Group jointly announced that they were investing $50 million in IMC, sending the company's stock up more than 35%. The company had "tremendous potential," Travelers said when announcing the deal.
Since then, IMC has been battered by a faltering asset-backed securities market and increased competition. The company's shares, which traded for as much as $18.25 in April, have been at less than $1 since late November.
IMC will not meet earnings expectations for the fourth quarter or for 1998, the company said in its statement Monday, and it anticipates taking losses for those periods. Its earnings statements are due in mid-March.
A banker close to the deal, who did not want to be named, said IMC is in violation of its lending agreements.
Monday's deal allows IMC to avert a bankruptcy filing, observers said. The merger announcement includes restructured agreements with IMC's major warehouse lenders, IMC said.
"The lenders agree to keep their respective facilities in place for a period of up to 17 months if the merger is consummated within five months," the IMC statement said.
As of IMC's third-quarter filing with the SEC, it had $2.25 billion in warehouse lines available from PaineWebber Inc., Bear, Stearns & Co., and a subsidiary of Deutsche Bank North America. In addition, IMC had a $92.5 million credit facility with BankBoston.
Monday's statement also said Greenwich had bought "from IMC's revolving credit bank facility lender its interests in the revolving credit facility"-a statement analysts took to mean that Greenwich had taken over the BankBoston facility.
IMC officials did not return calls for comment, and voice mail in the company's investor relations department referred callers to upcoming Securities and Exchange Commission filings for details of the Greenwich transaction.
Citigroup public relations officials said that they could not reach anyone close to the deal for comment.
Greenwich Street Capital Partners II is owned by Travelers Investment Group, and is managed by Marc Weill, son of Citigroup co-chairman Sandford Weill. The fund has made numerous investments in the subprime lending sector in recent years.
