Amresco Inc., which acknowledged last week that it is seeking a buyer, could face the same problems as other specialty lenders that have tried to recapitalize.
"Somebody looking to pick up a commercial mortgage originations and servicing platform might be interested in Amresco," said Moody's senior analyst and vice president Steven C. Nelson. "But anyone who is going to acquire their stock is also stepping into their debt shoes."
Amresco has more than $1.7 billion of debt. It is among the specialty finance firms that ran into trouble last year when customers were prepaying loans faster than expected and liquidity dried up in the capital markets. Several other companies sought investors, and when none materialized, they filed for bankruptcy protection.
The Dallas company said in its second-quarter earnings statement that "one party is currently conducting due diligence with respect to the possible acquisition of Amresco."
Analysts listed General Motors Acceptance Corp., GE Capital Corp., and Transamerica Corp. as possible buyers. A spokesman for GE declined to comment on a possible deal. GMAC and Transamerica did not return phone calls seeking comment.
Analysts have said that bigger, more diversified finance firms would survive where single-product companies have failed. But Amresco has diversified into many divisions since it was formed in 1994 by the former NCNB Corp. to invest in troubled real estate assets and still faces an uphill battle, analysts said.
Though some units might be attractive, analysts said the entire company is tainted by its subprime and home equity units.
The company's shares have been trading at about $6, which would make it worth $2 billion. But analysts noted that a buyer would have to assume $1.7 billion of debt as well.
Amresco said it earned $12 million in the second quarter, up 18% from the first quarter, but that losses continued in its subprime, home equity, and VA-refinancing units. The home equity business took a $9.2 million writedown in the second quarter primarily due to "increased prepayment speeds," Amresco said.
Michael Vinciquerra, an analyst at Raymond James & Associates, said potential buyers have been looking at Amresco's books since last fall when the company was turning down offers in the $11 to $13 per share range.
Mr. Nelson, the Moody's analyst, said that the company could sell some of its more viable pieces but may have difficulty getting approval to do so from its creditors. He added that one positive for the company is that it is not heavy on near-term debt.
"The company experienced very significant losses last fall during the liquidity crisis and has had a tough time recovering," Mr. Nelson said. Its "subprime and home equity businesses continue to lose money and have been a real drain on the company's liquidity."
Amresco hired Goldman, Sachs & Co. in April to advise it on purchase offers and "to assist in analyzing various strategic alternatives, including raising capital," the company said.
Amresco expanded very quickly during the last two years, incurring high costs and creating a negative cash flow, said Evan Dreyfuss, an analyst at BancBoston Robertson Stephens. "In 1998, they held quite a bit of assets on their balance sheets in order to make lots of investment acquisitions," he said. "All this was done without access to capital."
Mr. Vinciquerra said that a residential mortgage unit, Mortgage Investors Corp., had been a meal ticket for the company since Amresco bought it last July but lately has become a headache.
Because its share price has fallen since it agreed to buy Mortgage Investors, Amresco must pay more shares than expected to the unit's former owners. At the time of the deal, Amresco's stock was trading at about $30 a share. Consequently, a payment due by September 2000 could markedly change Amresco's ownership.
"Amresco's creditors will not allow them to pay off this debt in cash," Mr. Vinciquerra said.
He added that Amresco has been trying to sell its home equity unit for six to nine months but has received few offers, reflecting a market cluttered by other specialty finance companies also trying to sell out.
Last week the company also announced that it has merged its home equity subsidiary, Amresco Residential Mortgage Corp., with Lehman ALI Inc., a division of Lehman Brothers. The merger formed Finance America, a limited liability company that is to originate, purchase, sell, and securitize subprime residential and home equity loans.
Mr. Vinciquerra said the joint venture is an attempt to keep Amresco's home equity business afloat.
"The capital for the home equity business dried up last fall," he said. "They have to be able to fund the loans and move them off the balance sheets by letting Lehman sell them off in the secondary market."
Mr. Vinciquerra said that Amresco got into consumer residential funding to diversify its income sources, a move that has come back to haunt it.