Regions Financial Corp. had to cut the price of EquiFirst Corp. by two-thirds to sell the subprime wholesale mortgage lender to Barclays PLC, but for some observers, it was more significant that the deal got done at all.
The companies said Monday that the deal had closed, and that Barclays had paid $76 million — a third of what the London company originally agreed to pay. Market conditions have worsened significantly since the deal was announced in January.
Jeff Davis, an analyst with First Horizon National Corp.'s FTN Midwest Securities Corp., said, "There had been speculation on the Street that the deal wasn't going to happen, given issues in the sector, and the fact of the matter is that it came to fruition."
Other subprime lenders appear to be languishing on the block. H&R Block Inc., for example, missed a self-imposed March 31 deadline to find a buyer for its Option One Mortgage Corp.
Peter Truell, a spokesman for Barclays, said the price of EquiFirst was adjusted to reflect the rising delinquencies and falling market prices of subprime loans.
"As you would expect, we have appropriate protections in the contract to ensure that the credit quality of what we take on is as expected," he said. "The closing price was modified due to an adjustment of reserves to reflect net asset value at the 31st of March and the prevailing market prices for the relevant assets."
Rick Swagler, a spokesman for Regions, said EquiFirst's book value "declined due to an operating loss," but he would not identify the nature of the loss.
Against the turbulent backdrop created by Regions' ongoing integration of AmSouth Bancorp., which it bought in November, Mr. Davis said he did not expect investors to worry much about the reduced price of EquiFirst. "At the end of day, they were looking to exit the business, which they've now done."
In a research note, Sandler O'Neill & Partners LP analyst Kevin Fitzsimmons wrote that market "disappointment will be mitigated to some extent by investors' relief that the sale was actually completed and that the price tag wasn't adjusted even lower."
Richard X. Bove, an analyst with Punk, Ziegel & Co., who has taken a dim view of the subprime lending business broadly, predicted that bloody fights between buyers and sellers of subprime assets are likely to increase.
Regions "got lucky." The Birmingham, Ala., company "is out of a bad situation, and they're well off out of it," Mr. Bove said. "Barclays has the mess now."
Mr. Swagler said that Regions' "ongoing exposure" to subprime-related litigation "is not significant" now that the sale has been completed.
However, Mr. Truell said EquiFirst appealed to Barclays in part because it had been owned by "a federally regulated bank and was subject to that supervision and oversight."
Mr. Davis agreed that "EquiFirst was not playing at the very lowest rungs" of the subprime market.
According to Mr. Truell, Barclays now has "all the pieces" it needs "for a vertically integrated nonprime securitization business." Last year the British firm bought HomeEq Servicing Corp. and he said it has "a strong interest" in developing alternative-A production at EquiFirst, which does not participate in the business. Barclays has bid separately for the EquiFirst loan pipeline, he said.
EquiFirst, of Charlotte, originated $3.3 billion of mortgages in the fourth quarter and lost $984,000 on secondary sales during the period.
Mr. Bove guessed that a $150 million pretax loss on the sale would lower Regions' earnings for this year by 5%, though he offered the calculation only as a rough context for the magnitude of the price cut in the absence of more detailed disclosures from the company.
Late Friday, First NLC Financial Services LLC, a subprime lending unit of Friedman, Billings, Ramsey Group Inc., said it was closing down a "number of its wholesale operations centers" and laying off staff in reaction "to reduced origination volumes across the industry." Friedman Billings said last month that it would "explore strategic alternatives" for the business.
