Subprime lenders have been buried in a landslide of analyst downgrades, and several analysts have ended coverage in the past week, suggesting that the equity market may be closing for the companies.
CIBC Oppenheimer analysts Stephen Eisman and Vincent Daniel dropped coverage of Aames Financial Corp., IMC Mortgage Corp., and United Companies Financial Corp. on Oct. 13. These companies are suffering from lack of liquidity, a flat yield curve, and rising prepayments, an Oppenheimer report said.
"We doubt that any of these companies represent long-term value," Mr. Eisman and Mr. Daniel wrote, predicting that many other subprime lenders may follow Southern Pacific Funding into bankruptcy. "We see no point in covering the group any longer."
Oppenheimer will continue to cover BNC Mortgage Corp. and Advanta Corp.- though it will drop coverage of Advanta if it does not change its accounting methods by yearend, the report said.
Mr. Eisman and Mr. Daniel are longtime critics of gain-on-sale accounting, in which lenders estimate profits on future loan sales. The Oppenheimer report called for the elimination of gain-on-sale, saying "it should be consigned to the dustbin of accounting history."
Bear Stearns analysts Michael Diana and Craig Peckham downgraded Aames Financial Corp., First Alliance Corp., IMC Mortgage Corp., and United Companies Financial Corp. to "neutral," citing liquidity concerns and lack of information.
Commercial banks, investment banks, and investors in asset-backed securities, which home equity lenders rely on for funding, have pulled back from the market, Bear Stearns noted.
Bear Stearns said it is maintaining its "buy" rating on Rock Financial, because Rock does not securitize loans and therefore does not use gain-on- sale accounting, and its "attractive" rating on Contifinancial Corp., because its parent company, Continental Grain, has pledged capital.
Prudential Securities Inc. analysts Jennifer Scutti and J.D. Miller downgraded the home equity sector, citing continuing difficulties with the asset-backed securities market, higher loss rates, and liquidity pressures.
Prudential downgraded Aames Financial Corp. and United Companies Financial Corp. to "sell," from "hold," saying talk that the companies could be sold are too "vague" to warrant keeping the stock.
FirstPlus Financial Group was downgraded to "hold," from "accumulate," despite an impending deal. "Even if the company does find a suitor, we believe the premium paid over the current stock price could be limited," the Prudential analysts said.
Prudential is also maintaining a positive rating on Rock Financial, citing the company's positive cash flow and expansion into conventional lending.