Time appears to be running out for Contifinancial Corp., a onetime leader in the subprime mortgage sector.
After GMAC-Residential Funding Corp. pulled the plug on negotiations to buy the company last week, "everyone realizes that there are not a lot of buyers," said Reilly E. Tierney, a vice president and analyst at Fox-Pitt, Kelton.
A series of failures in the past year showed that firms of Conti's ilk "are worth more dead than alive," he said. "They have so much debt on their balance sheets that it's easier to let them go bankrupt and then buy their assets."
If Conti, which did not respond to phone calls, were to file for bankruptcy protection, it would wrap up a surprisingly fast burnout for what had been the hottest sector of the mortgage market.
Conti, seen by some as the strongest of the subprime mortgage lending specialists, fell into the same traps that claimed most of its brethren: a lack of diversity, an overreliance on capital markets, and an overcrowded market.
Steve Nelson, a senior analyst at Moody's Investors Service, said Conti's story is a familiar one in financial services: A pack of upstart companies suddenly pops up to blaze a trail in an underserved niche, then just as suddenly blows up and fizzles away.
"Conti grew very rapidly through aggressive pricing and loan origination, and it has come back to haunt them today," Mr. Nelson said. "I think we are going to see larger, more diversified consumer finance companies like Associates (First Capital) and Household (International) stepping up."
Mr. Nelson said that the larger competitors who also served the subprime market were able to maintain "more rational pricing and prudent underwriting standards" while the specialists went belly-up one by one.
Falling interest rates and stiff competition for borrowers meant many more loans were prepaid much faster than expected, and the specialists had to take hits to earnings because loan sales they had already booked never occurred. And the meltdown in the capital markets last fall made it impossible for the firms to raise money by securitizing loans.
United Companies Financial Corp., FirstPlus Financial Inc., MCA, Wilshire Financial Services Group, Cityscape Financial Corp., and Southern Pacific Funding Corp. all filed for bankruptcy in the past year after attempts to raise new capital failed.
With the demise of Conti's peers fresh in investors' minds, the New York company now "has limited alternatives," according to Ted H. Hu, an analyst at Williams Capital Group.
Conti reported a $247 million loss for the quarter ended March 31 and a $58.8 million loss for its third fiscal quarter. At March 31 it had a servicing portfolio of $13 billion.
GMAC-RFC, a unit of General Motors Corp., "looked at Conti's books, and they were just full of losses, and they had just announced substantial losses in their fourth quarter," Mr. Hu said. "GMAC-RFC must have thought that the losses would wipe out Contifinancial's equity."
Mr. Tierney said that Contifinancial's assets were probably outweighed by its approximate $1.7 billion of debt. GMAC-RFC declined to comment.
Mr. Tierney said "Band-Aid" financing would be especially ineffective for Conti because of the size of its debt.
"With Aames Financial, investors tried to do a $75 million Band-Aid-and it didn't work," Mr. Tierney said, noting that Capital Z Partners this week agreed to pour an additional $25 million into the Los Angeles lender. "With Conti," he said, "nobody is willing to step up with at least 300 million to $500 million to keep it running, plus assume its debt."
Contifinancial's warehouse lines are due to expire this month, and lenders have suspended covenants on more than $500 million of unsecured loans due Aug. 20. A Moody's report said that Contifinancial "does not have the financial resources available to it to satisfy the total obligation."
Conti has said it is negotiating to extend these debt facilities, but Mr. Tierney was skeptical. "I can't see why the banks would want to keep this going. Banks want to avoid another meltdown. I think the banks are just going to want to get their money out of it."
Southern Pacific Funding Corp.'s assets were eventually bought for $35 million by Goldman, Sachs & Co. after the company filed for bankruptcy protection with $1.3 billion of loans outstanding. Mr. Tierney argued that anyone interested in acquiring Conti's assets would probably wait for a bankruptcy sale rather than assume its debts.
An alternative for Contifinancial may be an infusion from its parent, agricultural commodity company Continental Grain. The company agreed to sell its grain trading operation to its chief competitor, Cargill Inc., creating a large cash hoard.
But as one analyst put it, Conti's stock price-$1.25 a share on Tuesday- "indicates that most people think it is going under."
