New Century red in Pinks; WCI climbs; AmeriCredit, CarMax skid; discount retailers sold off

By Ronda Fears

Memphis, March 13 - All eyes continued to focus on New Century Financial Corp. in anticipation of a bankruptcy filing Tuesday, which had not transpired by the end of the day although traders and many onlookers say it appears inevitable. Accredited Home Lenders Holding Co. was the latest subprime mortgage lender to make the big dive as it disclosed a cash crunch after facing margin calls and forced loan repurchases.

Accredited Home Lenders was shed rapidly on its news, as it so closely mirrors some of the events at New Century. But one trader said there could be buyers show up if the situation does not appear to be headed to bankruptcy; indeed, the stock was higher in after-hours trade. In the regular session, however, Accredited Home Lenders shares (NYSE: LEND) fell $7.43, or 65.18%, to $3.97 after trading as low as $3.77.

In another sign of an imminent demise for New Century, the stock was delisted from the New York Stock Exchange and began trading over-the-counter (Pink Sheets: NEWC) where traders said it dipped to as low as 20 cents, versus the 52-week high of $51.97. The stock ended the session at 84.5 cents, versus Monday's close of $1.66.

Volume in New Century shares in the Pinks was massive and difficult to track, according to one bulletin board trader, but he estimated a whopping 788 million shares changed hands as a horde of players scrambled to cover short positions. He is anticipating a bounce, however, now that the stock is trading over the counter, regardless of whether the company files bankruptcy, as many people view these risky listings as bargains.

"I wouldn't touch any of them [subprime mortgage lenders] right now," the trader said. "After New Century, which not that long ago was considered a dividend play, I'd be pretty risk averse."

With the Mortgage Bankers Association reporting Tuesday that late mortgage payments shot up to a 3.5-year high in fourth quarter and new foreclosures surged to a record high, subprime lenders throughout the sector were battered again and traders said they saw few buyers. Conventional wisdom also attributed the mortgage crisis to the big slide in the broader market, but traders were not convinced.

"I think it's too easy to blame the selloff on the subprime meltdown," said a senior trader at one of the bulge bracket firms. Echoing remarks from other traders recently, he said the market was looking for a reason to pocket profits.

He admitted, however, that the subprime fallout traced some rational lines. In addition to the mortgage lenders getting hit, homebuilders - practically the entire slate - and mortgage servicing firms like Clayton Holdings Inc. were slammed with another round of selling, along with auto finance companies like AmeriCredit and car distributors like CarMax Inc.

Another trader said he would be a buyer in the car distribution group, particularly CarMax, on the day's slide. CarMax (NYSE: KMX) dropped $1.34 on the session, or 2.57%, to $50.82. Investment banks and brokerages, such as Friedman Billings Ramsey Group Inc., also are feeling the pinch, and he suggested buying there on the downturn could show some upside by midyear.

Florida-based luxury homebuilder WCI Communities Inc. got a lift, though, from a hostile buyout bid from majority stockholder Carl Icahn for roughly $924 million, or $22 per share - a 16% premium to Monday's market. Traders said there was heavy short covering on the news, noting some 50% of the float was short because of the downturn in the housing sector even though WCI has been exploring a sale.

AmeriCredit crunch light

As the subprime scare spreads into other sectors, auto finance companies were hit again Tuesday, led by the 9% decline for AmeriCredit. But, the February pool data for AmeriCredit actually showed an improvement in delinquencies.

Loan pool data released Monday by AmeriCredit showed 31- to 60-day delinquencies in February amounted to 5.28% of its securitized loans versus 6.13% in January; 61-plus day delinquencies in February amounted to 1.62% of its securitized loans versus 2.1% in January. Compared to a year ago, the data was mixed with the 31- to 60- day delinquencies rising from 5.02% in February 2006 and the 61-plus day delinquencies better than 1.72%.

AmeriCredit spokesman John Hoffmann said the company has scrutinized its portfolio rigorously and finds that only about 10% to 12% of its customers have adjustable-rate mortgages, so they feel their exposure to the subprime mortgage fallout is minimal. He also noted that only about one-third of AmeriCredit clients are homeowners.

Fort Worth, Texas-based AmeriCredit specializes in purchasing retail automobile installment sales contracts originated by franchised and select independent dealers in connection with the sale of used and new automobiles, as well as in making auto loans directly to consumers, many of which the company says have limited access to automobile financing.

Traders said the negative headline risk for finance companies targeting lower credit profiles, such as AmeriCredit, caused the big selloff Tuesday, but in the auto finance sector one trader also noted some after-hours buying.

In addition to AmeriCredit, other auto lenders caught in the finance sector's downturn were Credit Acceptance Corp. (NYSE: CACC) with a drop of $1.68, or 6.02%, to $26.24 and Consumer Portfolio Services Inc. (NYSE: CPSS), which lost 35 cents, or 5.15%, to $6.44.

FBR shopping subprime unit

Investment bank and brokerage FBR also joined the big decliners Tuesday after saying it will explore strategic alternatives to maximize the value of First NLC, its nonconforming mortgage origination business, including a possible sale of the business.

Arlington, Va.-based FBR said First NLC continues to have more than sufficient liquidity to meet all margin calls and is in compliance with all warehouse agreements.

There had been some concern about subprime exposure at FBR ahead of its earnings, but the company calmed much of that anxiety until the development Tuesday. The bank had said First NLC had recently undertaken additional cost restructuring initiatives and has modified its loan guidelines to mitigate exposure in the subprime region.

FBR shares (NYSE: FBR) plunged 90 cents on Tuesday, or 16.25%, to $4.64.

WCI to review Icahn bid

Billionaire investor activist Icahn said Tuesday his affiliates plan to launch an unsolicited tender offer of $22 per share for WCI, and while traders said that while the offer might be somewhat of a disappointment they think it should be accepted given the current market trends.

WCI shares (NYSE: WCI) traded as high as $22.75 but settled under the bid level at $21.80, marking a gain of $2.83 on the day, or 14.92%. Some 10.8 million shares traded, versus the norm of 1.74 million shares, which traders attributed to heavy short covering.

"The way I see it, the company has begun the exercise to look for a deal and if Icahn thought there would be a better offer coming along he wouldn't make this one; he's holding almost 15% of WCI," one trader remarked.

Icahn himself acknowledged it was not a friendly climate to be looking for a transaction.

"While clearly now is not the right time to sell, in my opinion Mr. Starkey [WCI chief Jerry Starkey] and the current board are not qualified to navigate WCI through the difficult industry conditions that lie ahead," Icahn said in a statement.

The offer, to be in the form of a tender offer, by High River LP and entities managed by Icahn Management LP is not subject to any minimum condition, due diligence or financing. It is, however, subject to the company rescinding its recently adopted poison pill designed to ward off hostile takeovers, namely from the likes of Icahn.

WCI said late Tuesday it will review the offer when it is formally made. Meanwhile, the Bonita Springs, Fla.-based homebuilder said it will move forward with its review of strategic options to maximize shareholder value. The company has engaged Goldman Sachs to explore strategic alternatives, including a potential sale of some or all of the company, chiefly at the behest of Icahn.

Icahn has been planning to run his own slate of candidates for WCI's board. In January, Icahn reported in a Securities and Exchange Commission filing that he had amassed a 14.6% stake in WCI, up from 4% in November.

If the current board tries to block the transaction, Icahn said he plans to leave the bid open and launch a proxy fight to have his proposed board nominees elected, remove the poison pill and, thus, clear a path for its approval.

Caremark reviewers rivaled

In another twist in the saga to wrangle control of Nashville-based pharmacy benefits manager Caremark Rx Inc., on Tuesday warring bidders CVS Corp. and Express Scripts Inc. presented rival recommendations for their respective offers from two independent proxy advisory firms.

The stocks were all higher early in the session, but traders said the downturn in the broader markets eventually weighed on the situation.

Express Scripts touted a recommendation for its bid from Proxy Governance Inc. while CVS said Institutional Shareholders Services Inc. had reversed a previous position to support its offer. Both offers have been sweetened repeatedly, to as much as $27.3 billion from $21 billion, since the ordeal began in November.

Caremark management has sided with CVS, which had boosted its offer to an equivalent of $53.66 per share. Express Scripts' latest bid is for an equivalent of $63.69 per share. Both are cash and stock offers, with the equivalent prices based on Monday's market.

On Tuesday, Caremark shares (NYSE: CMX) ended off by 32 cents at $60.38. CVS (NYSE: CVS) slipped 8 cents to $31.90. Express Scripts (Nasdaq: ESRX) managed a gain of 78 cents to $81.37.

Caremark shareholders are slated to vote on the matter Friday.

Discounters eyed for deals

On the Dollar General Corp. buyout by private equity firm Kohlberg Kravis Roberts on Monday at a nice premium, the field of discount retailers got a bounce but was in retreat Tuesday with the broader market. Yet, traders and analysts still think the group is ripe for consolidation.

"I would be a buyer for any of these on the slump we saw today," one trader said, specifically mentioning Fred's Inc. and Big Lots Inc.

Big Lots (NYSE: BIG) dropped $1.52, or 5.1%, to close Tuesday at $28.29.

Fred's (Nasdaq: FRED) lost 48 cents, or 3.24%, on Tuesday to end at $14.34.

99 Cents Only Stores and Family Dollar Stores Inc. also were in retreat after big gains on the Dollar General news Monday, the trader said, but he was not a big fan of those discounter because of trouble at both companies related to stock options and declining same-store sales at Family Dollar.

99 Cents Only has been speculated as a takeover target for a while, he added, but nothing has transpired. That stock (NYSE: NDN) fell Tuesday by 60 cents, or 3.94%, to $14.63.

Family Dollar (NYSE: FDO) declined 89 cents, or 2.93%, to $29.53 on Tuesday.

Bear Stearns analyst Christine Augustine said in a report Tuesday that she does not believe Dollar Tree will make a run for Dollar General with a rival bid to KKR's $22-per-share cash offer - a 31% premium to Friday's close before the stock ran up on rumors of a buyout offer.

"That said, we believe the dollar store industry will consolidate in the long-term and that such a transaction would jump start Dollar Tree's foray into a multiple price point format," Augustine said in a report Tuesday.

As for Dollar General, the analyst said investors should "take the money and run."

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