New Century Clawing to Stave Off Bankruptcy

I have written a series of articles on New Century Financial. The first back on March 4th, another on March 8th and yet another on March 13th calling for New Century's bankruptcy. All of these articles relate to my feeling that subprime lending will not be sustainable in a declining real estate market. Well here is an update on the company's status. Today they successfully convinced Barclays Bank to not dump $900mm of loans back on the company. This was a marginally positive development for the company and by my sophisticated calculations the probability that New Century Financial (NEW) will avoid declaring Chapter 11 just went from 98% all the way down to 95%.

Clearly the outlook for this "New Shade of Blue Chip" is not good. New Century is in way over its head. The company is running precipitously low on cash and there are still roughly $7.1bb loans outstanding the banks could send back to New Century. The company is doing all it can to convince the banks that it is not in their best interest to force the company into bankruptcy, but the process is slow and isn't yielding much fruit. To make matters worse, the cash the company needs won't come from operations. Most of their funding sources have dried up and roughly a dozen states have demanded that the company cease operations, including New Century's home state of California. Even if they were to secure funding and operate in whatever states still allow them, they face a class action lawsuit from shareholders and the very real potential of additional legal action resulting from predatory lending allegations.

A few weeks ago Tom Brown of Second Curve had this to say about the subprime companies, including NEW and LEND which he had positions in:

"But I’ve been through this before. If history is any guide, the next few months are going to be a bumpy pain in the neck. But I continue to believe that the long-term reward will be substantial. This is the stock market. A bell doesn’t go off that tells investors when the risk has passed--and when the outlook does finally seem positive, the stocks will have already soared. But to me, the fundamentals are pretty clear, and bullish."

Well, Tom I hate to say this that bell you are waiting for may never go off. In my mind the fundamentals on New Century are pretty clear, and bearish.