By agreeing to buy Fieldstone Investment Corp. for about $259 million, C-Bass LLC, a New York buyer and servicer of "scratch and dent" mortgages, is making its first foray into originations at a time when some subprime lenders are shutting down or declaring bankruptcy.
The deal was announced Friday, just three days after ResMae Mortgage Corp., a Brea, Calif., subprime lender, agreed to sell its assets - but not the liability for repurchasing bad loans - to Credit Suisse Group in a prepack aged Chapter 11 bankruptcy.
Mark Krebs, the treasurer of Fieldstone's mortgage unit, said C-Bass will take on the troubled Columbia, Md., subprime lender's repurchase risk, because it is buying all the stock, not just assets.
C-Bass did not return calls Friday.
Though the price, $5.53 a share, is more than double Fieldstone's closing stock price Thursday, analysts said it is also well below book value. And if Fieldstone does not resolve a shareholder suit before the deal closes, C-Bass can cut the price by 4%.
C-Bass, whose name stands for Credit-Based Asset Servicing and Securitization, "is a bottom fisher with a history of picking companies up on the cheap and turning them around," said Matthew Howlett, an analyst at Fox-Pitt, Kelton Inc. in New York.
Fieldstone's mortgage banking platform has been unprofitable for the last three quarters, Mr. Howlett said, but C-Bass has an opportunity to improve the performance of Fieldstone's $180 million to $185 million of residuals.
"Because Fieldstone was acquired, and not just certain assets, it improves the likelihood of more one-off transactions like this," he said. "Despite business turmoil, demand for subprime paper remains strong today, and this deal is a validation of that."
Matthew Roswell, an analyst at Stifel, Nicolaus & Co. Inc., said Fieldstone's mortgages have deteriorated dramatically in the past few months.
"This is what C-Bass does for a living - they buy distressed assets at pennies on the dollar, they service them, clean up the portfolio, and securitize them," he said. "Everybody else is trying to sell the assets."
C-Bass is owned by two mortgage insurers that have agreed to merge with each other: MGIC Investment Corp. of Milwaukee and Radian Group Inc. of Philadelphia. The insurers have said they plan to sell some of their equity in C-Bass to preserve their debt ratings.
Michael Grasher, an analyst at Piper Jaffray Cos. in Minneapolis, said the deal to buy Fieldstone is "very important for C-Bass," which has a history of buying companies during tough times.
In 2004 it bought the $8 billion servicing operation of PCFS Mortgage Resource from National City Corp.'s Provident Bank.
"C-Bass adds value with their strong reputation, particularly on the risk-analytics side," Mr. Grasher said. "They're seizing on what they perceive to be an opportunity by picking up these liabilities."
Mr. Howlett said the price represented roughly 70% of Fieldstone's book value and breaks down to $180 million to $185 million for the investment portfolio, $38 million for servicing, and $30 million for the origination platform, plus $5 million to $10 million for the pipeline of loan applications in process.
The deal is expected to close next quarter.
Fieldstone was the 25th-largest subprime lender last year, according to National Mortgage News. In December the company restructured its financial covenants with three lenders - JPMorgan Chase & Co., Credit Suisse, and Lehman Brothers - because a projected fourth-quarter loss would have put it in technical default.
