American Home, MGIC, Radian, PMI plunge; Wendy's lifted; Midwest Air rises

By Ronda Fears

Memphis, July 31 - Mortgage lending pressures reversed a rally in the broader markets early Tuesday after prime lender American Home Mortgage Investment Corp. said it is unable to fund loans and may have to liquidate assets. MGIC Investment Corp. and Radian Group Inc. also fell after the mortgage insurers said they may have to write down more than $1 billion related to their joint venture, Credit-Based Asset Servicing and Securitization LLC.

The C-Bass development also sparked some noise that the MGIC merger with Radian - agreed to in February - may be in jeopardy.

Another mortgage insurer, PMI Group Inc., reported a 24% slide in second-quarter earnings Tuesday and warned it is now expecting total losses for its mortgage insurance operations of between $450 million and $550 million in 2007, or an expense ratio of 20% to 23%, while the pretax yield for the consolidated investment portfolio is expected at between 5% and 5.5%.

In buyout developments and takeover speculation, Wendy's International Inc. got a boost from remarks by billionaire investor Nelson Peltz, who owns fast-food chain Arby's through Triarc Cos. Inc., that he is prepared to offer $37 to $41 a share for the fast-food hamburger chain; he was asking for a confidentiality agreement with the company by Wednesday.

Midwest Air Group Inc., which has wrangled to fight off hostile takeover advances from AirTran Holdings Inc. for months, announced Tuesday that it has formed a committee to explore strategic alternatives that include holding discussions with AirTran and other parties that "recently expressed interest in pursuing a transaction."

American Home up after close

American Home Mortgage plunged on fears of bankruptcy after its warning, but some traders said the sell-off was overdone. The stock was slightly higher in after-hours action, and some traders expect a strong comeback on Wednesday.

"It was way oversold. The assets are worth more than where the stock is at right now," said one trader. "It was a huge over-reaction. I see fair value at $7. So, yeah, I am a buyer. You can bet there was a lot of short covering and those guys will be buying back, too."

The stock (NYSE: AHM) fell $9.43, or 90.07%, to close Tuesday at $1.04. After the close it added back 6 cents, or 5.77%, to $1.10. Volume was heavy with some 30.9 million shares traded versus the norm of 1.94 million shares.

Some traders, however, said there was a spike in fears that American Home Mortgage may file bankruptcy.

"If they go bust, there will not be much for shareholders," another trader said.

The company retained Milestone Advisors and Lazard to help it evaluate options and advise "with respect to the sourcing of additional liquidity including the orderly liquidation of its assets."

American Home, which has specialized in prime and near-prime loans, said it was unable to fund $300 million of loans on Monday and did not expect to fund $450 million to $500 million on Tuesday. It also said it could not borrow from its credit lines and had substantial unpaid margin calls pending to lenders, even after meeting very significant calls in the last three weeks.

At the end of March, it had $4.01 billion in warehouse lines of credit and $836.9 million of cash and equivalents.

MGIC, Radian, PMI fall

Mortgage insurers also are feeling great pressure from the subprime and now prime lending fallout.

After MGIC and Radian warned of the huge write-off related to C-Bass, C-Bass responded to the liquidity challenge by saying first that "nothing fundamentally has changed at C-Bass."

Still, one trader said there was a "mad dash for the exits" in the entire finance sector and he expects Wednesday will bring more of the same.

"I'd short the entire sector; it is basically free money," the trader said. "I can't find any meaningful support for MGIC, maybe $30, but then I thought it would trade down to $35 today and it didn't."

MGIC (NYSE: MTG) closed the day off with a loss of $6.78, or 14.92%, at $38.66.

Radian (NYSE: RDN) ended at $33.71 for a drop of $6.49, or 16.14%.

Both were strong in after-hours activity, but the trader said he did not expect the bounce to last, unless scuttlebutt emerges about a potential buyout of C-Bass or a White Knight investor.

C-Bass said late Monday, "Like many other firms in the industry, the current severe state of disruption in the credit markets has caused C-Bass to be subject to an unprecedented amount of margin calls from our lenders. The frequency and magnitude of these calls have adversely affected our liquidity. To address this, C-Bass is in advanced discussions with a number of investors to provide increased liquidity and is exploring all options to mitigate the liquidity risk in this difficult market."

At the beginning of 2007, C-Bass said it had $302 million of liquidity, representing greater than 30% of capital totaling $926 million. During the first six months of 2007, the company met $290 million in lender margin calls, but in just the first 24 days of July alone, it met an additional $260 million of margin calls, representing greater than a 20% decline in the lender's value.

"We believe that nothing justifies this substantial amount of margin calls received in such a short period of time, particularly as there has been no change in the underlying fundamentals of our portfolio," C-Bass said in a news release.

MGIC and Radian provided C-BASS with $100 million of liquidity last week.

"We expected that infusion [from MGIC and Radian] would protect C-Bass against a liquidity crisis, but it appears that market conditions deteriorated very rapidly over the past several days and MGIC and Radian were not willing to provide additional liquidity to halt margin calls and the forced liquidation of C-Bass' assets," said Bear Stearns analyst David Hochstim.

Radian deal in jeopardy?

Radian's entire $518 million investment in C-Bass may be wiped out, as C-Bass faces a wave of margin calls from its lenders and the potential loss - a meaningful percentage of book equity that amounted to $4.1 billion at June 30 - could threaten its merger with MGIC.

"Even before C-Bass, Radian's second-quarter earnings were anemic, reflecting deteriorating fundamentals in the mortgage sector and losses on NIM securities," said Gimme Credit analyst Kathleen Shanley.

The "proposed merger with MGIC, if completed, will give the combined company the leading market share in mortgage insurance. But the deal may be at risk following recent disclosures about losses at C-Bass."

Bear Stearns' Hochstim said he still expects the MGIC merger with Radian to proceed and be consummated, but the write-down of most or all of C-Bass' value will likely limit MGIC's ability to repurchase shares. But, he added that the loss of C-Bass income makes the expense reductions enabled by the MGIC/Radian merger "even more attractive."

Midwest Air bid war expected

Midwest Air's move to explore strategic alternatives, after more than six months of fighting off AirTran, was a signal that a bidding war may be in the offing, traders said, as Midwest Air acknowledged other interested parties.

"I did not hear any specific names mentioned about being interested in Midwest Air, but it should make the situation more interesting," one trader said.

Midwest Air (Amex: MEH) ended with an advance of $1.33, or 10.55%, to $13.94.

The low-cost carrier said the board of directors has not changed its recommendation to reject the latest hostile buyout offer from Orlando, Fla.-based AirTran - $15 per share in cash and stock made in mid-April. The committee intends to execute confidentiality agreements with each of the unidentified interested parties in order for them to conduct due diligence.

"This company has a very enviable balance sheet that most airlines drool over," the trader continued.

"In the second quarter, Midwest retired all remaining long-term debt. It spent money to service the fuel hedges going into the thick of the hurricane season - a good idea. The SkyWest project is paying off but a lot of naysayers think a deal between them two would be a failure because AAI couldn't make it work."

AirTran shares (NYSE: AAI) were flat for much of the session before settling off by 8 cents, or 0.81%, at $9.84.

Wendy's waffles on bid range

Peltz indicated he is prepared to bid $37 to $41 a share for the Wendy's hamburger chain, but since there has not been a formal offer made, traders were holding back on pushing the stock up to that area.

Wendy's (NYSE: WEN) traded in a band of $34.97 to $36.71 before closing at $35.03 for a gain of $1.34 on the day, or 3.98%.

"He has mentioned some numbers but an offer is not on the table," one trader remarked.

"When he really puts his money where his mouth is, then you'll see the stock get a significant spike. But I don't think even then it will reach the bid amount until the deal comes close to getting done. There is some lost faith in Peltz on this story; people don't trust him a lot on the Wendy's situation."

Peltz said in a letter to Wendy's chairman James Pickett, filed with the Securities and Exchange Commission, that Arby's parent Triarc would be willing to pay between $37 and $41 a share for Wendy's - a roughly 10% to 20% premium to Monday's market for the stock.

But Peltz said if Wendy's did not agree to a confidentiality agreement by the end of the day on Wednesday, Triarc would consider other alternatives.

In his letter, Peltz said Triarc had made repeated efforts to reach a friendly deal in the last month but had not been able to reach an agreement with Wendy's committee exploring strategic alternatives.

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