September 18, 2007
Accredited Home Files 10-Q
Accredited Home Lenders filed its quarterly report on Form 10-Q yesterday. The filing comes in advance of next week's trial in Delaware Chancery Court to determine if there has been a material adverse effect under Accredited Home Lender's agreement to be acquired by Lone Star. I'm going to leave the number-crunching on the 10-Q to others, but the filing did have some interesting tid-bits for those following the company and its travails. AHL is clearly going out of its way to show that the changes effecting it are not disproportional as those in its industry as a whole -- a key requirement for it to avoid Lone Star establishing that a MAC has occurred. And so, in its form 10-Q it provides a list of thirty other recent, significant events in the industry affecting other lenders such as bankruptcy, liquidation, etc. The list provides good support for AHL's case. Beyond that, there is this fun risk factor disclosure:
We face steeply declining employee morale, and our inability to retain qualified employees could significantly harm our business.
As a result of the ongoing turbulence in the non-prime mortgage industry, our headcount has declined from approximately 4,200 at December 31, 2006 to approximately 1,000 following the completion of the restructuring we have implemented in September 2007. In light of the decision to suspend substantially all U.S. lending as part of the restructuring, it will be very difficult to motivate and retain the remaining sales personnel who expect to derive significant income from commissions and bonuses on closed loans. It will also be difficult to motivate and retain non-commissioned personnel who are faced with great uncertainty regarding their future employment and advancement prospects with the Company. The inability to retain or replace sufficient qualified personnel may jeopardize our ability to run our downsized operations or successfully resume U.S. lending operations should the opportunity arise.
Another issue with AHL is what the company would be worth without its current litigation claim against Lone Star. In other words, how is the market pricing this stock. Is there still any value in AHL or has the stock simply become the right to a litigation claim? Here, AHL has disclosed that it may not be able to continue as a going concern if it is not acquired by Lone Star. But, perhaps the canary in the mine-shaft is whether AHL has defaulted on its debt covenants. Such a default on any of its instruments would create cross-defaults on the remainder and likely send it into a death spiral similar to what is happening with Movie Gallery. AHL made what appears to be very careful disclosure on this point in the 10-Q, not commenting upon it either way. AHL's banks and debt-holders have incentives to take a similar course, as they would much prefer AHL to be acquired and do not want to create further issues for Lone Star to support its MAC claim. Nonetheless, I would expect Lone Star to raise this issue at trial -- tripping your debt covenants is clearly a MAC though maybe not disproportional in this environment. For those attending next week, it's going to be the trial of the year in Delaware Chancery (if there is not a settlement before then).
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