Casting a vote of confidence for the embattled subprime lending sector, renowned investors Ronald Perelman and Gerald J. Ford have agreed to buy a 9.9% stake in Aames Financial Corp.
Analysts said the deal is a characteristically well-timed move by the duo, who are known for their opportunistic investments in the bank and thrift sector. Mr. Perelman and Mr. Ford, who have been eyeing the company for months, could ultimately buy Aames outright, some observers said.
They announced late Thursday that they would sink $38 million of their own capital to buy 2.78 million newly issued shares in the Los Angeles- based company. The deal is expected to close April 30.
"There are not a lot of people who have an appetite for this," Mr. Ford said in a telephone interview Friday. "The nature of the business is (that) there is an attendant risk, but you are paid for that risk."
Aames Financial was trading at more than $22 a share when it put itself on the block in late August, but the investors paid only $13.7625 a share, analysts noted.
Some banks and thrifts have been warily eyeing the subprime market since a sectorwide slide in stock values has cut stock prices in half for many companies. First Union Corp. recently agreed to buy Money Store Inc. for $2.1 billion, but other deals have been slow to materialize.
Some value investors have been badly burned in the sector. Michael Price's Franklin Securities lost nearly $80 million on an investment in Cityscape Financial Corp., Elmsford, N.Y., in November 1996.
California Federal Bank and Golden West Bancorp-two merging thrifts controlled by Mr. Ford and Mr. Perelman-are known to have been considering subprime investments for some time.
Capital markets and equity investors have shunned subprime lenders in recent months because of fears that reported earnings may be inflated. This has created a bargain-basement atmosphere for banks and thrifts willing to take on the sector's risk.
Mr. Ford, who is chief executive of California Federal, San Francisco, said he and Mr. Perelman have looked at several subprime companies in the past year. Six months ago, he said, they looked at Aames and were impressed by its management.
Since then, the company's stock has dropped almost 50%, and Aames has reduced its reliance on controversial gain-on-sale accounting, which lets companies book profits in advance. All of these things made the deal more attractive, Mr. Ford said.
Mr. Ford was cagey about speculation that the move is a precursor to an outright purchase. "We'll have a chance to look at it and get to know it better," he said. But, he said "there are still some questions to be answered."
The deal includes warrants to purchase an additional 9.9% of the company at 125% of the original stock price, which expire in three years.
Others in the subprime sector didn't greet the deal with enthusiasm. Aames is selling out because it is cash starved, said the chief executive of a subprime company who asked not to be named.
"First you sell off 10%, and then another 10%-and pretty soon you've sold the company off for nothing," he added.
Mr. Perelman provided 80% of the financing, and Mr. Ford 20%. The deal is expected to close on April 30.
In a separate deal announced at the same time, Aames Financial Corp. sold off $273 million in subprime mortgage loans to an undisclosed investment bank, which was said to be Lehman Brothers.
Ocwen Financial Corp., a distressed-asset specialist in West Palm Beach, Fla., purchased the $14.3 million subordinate tranches from the securities.