Fieldstone changes loan covenants

Another subprime mortgage lender appears to be teetering.

Fieldstone Investment Corp., a real-estate investment trust based in Columbia, Md., told investors late Wednesday that in anticipation of downbeat fourth-quarter operating results, it has restructured its financial covenants -- or restrictions -- with three lenders in exchange for lines of credit under four lending agreements totaling as much as $1.8 billion.

The new terms with JP Morgan Chase & Co., Credit Suisse Group and Lehman Brothers Holdings Inc. require Fieldstone to maintain its tangible net worth at $365 million, as opposed to the $400 million set previously. In addition, the lenders agreed that the operating loss projected by Fieldstone for the second half of this year will not result in a breach of agreements. Fieldstone said it is continuing to negotiate with the lenders to extend the current terms beyond Jan. 31.

Shares in Fieldstone, which have more than halved year-to-date, closed down 8.8 percent, or 46 cents, to $4.79 on Thursday on the Nasdaq Stock Market. The announcement comes as higher funding costs, weakening loan demand and rising delinquencies are pressuring a growing number of mortgage lenders appealing to borrowers with checkered credit profiles.

Speculation has intensified recently that Fieldstone could be a takeover target. National Mortgage News, a trade publication, recently reported that the company has hired bankers to explore a potential sale. Mark Krebs, director of investor relations at Fieldstone, declined to comment on the report.

"When the company has to start amending covenants, it's definitely bad news," said Richard Hofmann, an analyst with independent research firm CreditSights. Financial covenants serve to protect lenders by allowing them to call loans if a company fails to meet agreed-upon conditions. In more serious scenarios, a violation of covenants can ultimately lead to bankruptcy.

Analyst Scott Valentin at Friedman Billings Ramsey viewed the change in covenants as an indication that Fieldstone continues to struggle to achieve profitability. After the market close Wednesday, Fieldstone also declared a fourth-quarter dividend of 5 cents a share, compared with the 34 cents a share for the third quarter.

At the same time, Valentin said the fact that the lenders are allowing for net losses rather than closing the credit lines appears to indicate that "they feel comfortable enough with Fieldstone's liquidity and capital." By comparison, Ownit Mortgage Solutions, a smaller and privately-held subprime lender in California, had to shut down after its lender pulled funding.

As of Nov. 15, Fieldstone had a total of $2.25 billion of lines of credit, including the $1.8 billion under the newly renewed agreements with JP Morgan Chase, Credit Suisse and Lehman Brothers and about $400 million under an agreement with Merrill Lynch & Co. "We have very good long-term relationships with our lenders," said Krebs of Fieldstone. "We're in a good shape from a liquidity standpoint. We're planning to be around for a long time."

The company posted a $45 million loss in the third quarter, blaming an increase in reserves due to "the accelerated delinquencies of the newer loans" and continued market pressures on sales margins. In a statement accompanying the results, Fieldstone Chief Executive Michael Sonnenfeld said: "We are working to lower our portfolio delinquencies, to lower our cost to originate new loans and to improve the level of our loan originations."

The company said it is slashing the number of wholesale operation centers from 16 to nine, as part of its plan to cut cost. It expects to take a one-time pre-tax charge of about $500,000 in the fourth quarter to reflect the consolidation.

Source businessweek.com