Scott F. Hartman, NovaStar Financial Inc.'s chairman and chief executive, said he believes the $150 million capital infusion it has secured will be enough to get it through the subprime mortgage storm.
The poor conditions in the secondary market that have put some lenders out of business "are still here today," Mr. Hartman said in an interview Tuesday. "At some point the originators would have to make money, or nobody would originate the loans. We're hopeful that the market will correct itself, as it always does."
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After the transactions, MassMutual, already a large shareholder, would hold at least 9.4% of NovaStar, and Jefferies would hold at least 8.1%. Each company will get a seat on an expanded NovaStar board.
In a research note Tuesday, Scott Valentin, an analyst with Friedman, Billings, Ramsey & Co. Inc., questioned whether the capital would be enough to ensure NovaStar's survival.
Mr. Hartman said: "It's always hard to speculate, but we feel … with this capital raise, we're relatively well positioned. We've got a good servicing platform, and we think we're prepared for the future."
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In the interview, Mr. Hartman would not say if his company had received or considered specific takeover offers. "We can't get into specifics, but we went through a complete process of evaluating all of our alternatives."
When asked whether the subprime mortgage downturn cast doubt on the long-term viability of lenders with small balance sheets, Mr. Hartman said: "Everybody accesses the capital markets the same way. … Traditionally, our securities have traded as well, if not better than, our larger competitors."
He would not rule out the possibility that NovaStar would be squeezed again in future cycles. "But I would argue there are companies … both large and small, that have had trouble in this cycle."
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NovaStar's June nonconforming mortgage production of $254.5 million was a quarter of what it was a year earlier. Mr. Valentin wrote that even though the $150 million infusion would buy NovaStar "some additional time, we are not convinced the proceeds are sufficient to ensure … survival."
Market turmoil has made large asset writedowns likelier and increased the amount of capital necessary to conduct securitizations, he wrote.
Credit costs, and increasing origination costs per loan as a result of reduced volume, also pose dangers, Mr. Valentin wrote.
The shares that MassMutual and Jefferies bought Monday will pay a 9% cash dividend. The shares to be offered to current stockholders will pay a 9% dividend in the form of additional debt. Both classes are convertible at a price of $7 per common share, or an 8.3% discount to NovaStar's closing price Friday.
Speculation that a deal was imminent drove up NovaStar's shares last week, but by Tuesday afternoon they had dropped about 2.7% from Monday's close, to $7.31.