Lear retreats; Fortress rockets; Crystallex gains; CANTV hit; New Century falls; National City in danger

By Ronda Fears

Memphis, Feb. 9 - Mortgage and banking stocks extended sharp losses Friday as Countrywide Financial Corp. warned that foreclosures and delinquencies are at or near five-year highs. Mortgage lender New Century Financial Corp. was another huge decliner, and traders said rumors began to circulate Friday that the subprime mortgage "crisis" might be its undoing.

National City Corp., however, a Cleveland-based regional bank that sold its subprime mortgage origination and servicing unit First Franklin to Merrill Lynch & Co. Inc. last year, was barely touched by the routing in the sector. But one trader said Friday that holders in National City may be in for a rude awakening, as Merrill would not touch some $7 billion of the subprime mortgage portfolio, so those are still sitting on National City's books.

Concern about holding stocks with exposure in Venezuela because of re-elected president Hugo Chavez's plans to nationalize the telecommunications, mining, utility and energy industries eased a great deal, traders said, after news that the government was buying out AES Corp.'s majority interest in Electricidad de Caracas. But, there is still skepticism about exposure in the region, particularly with regard to Compania Anonima Nacional Telefonos de Venezuela, or CANTV, and mining concern Crystallex International Corp.

In the way of new deals announced, traders said terms continue to be somewhat disappointing, such as Britain's biggest bus company, FirstGroup plc, buying Laidlaw International Inc., the Naperville, Ill., company that runs Greyhound buses, for $3.6 billion including debt. Both stocks were higher, however.

FirstGroup will pay $35.25 for each Laidlaw share in a deal that will make it the largest operator of school buses in the United States. The price is an 11% premium over the closing price of Laidlaw shares on Thursday. Laidlaw shares (NYSE: LI) on Friday advanced $2.86, or 9.02%, to $34.58. FirstGroup shares (London: FGP) added 34.5p, or 6.15%, to 595.5p.

Specialty magazine publisher Primedia Inc. also gained Friday after saying it is considering selling its enthusiast media division, which includes Motor Trend and Hot Rod magazines along with another 70 publications and 90 web sites. The news follows the sale of its hunting, fishing and outdoor titles in December to private equity firm InterMedia Partners LP for $170 million in cash. Primedia shares (NYSE: PRM) rose 28 cents, or 16.97%, to $1.93.

Fortress doubles, eases

Despite the weakness in the broader markets, there were some bright spots, such as initial public offerings.

As expected, the momentous IPO of New York-based hedge fund Fortress Investment Group LLC shot out of the gate like a rocket Friday after pricing at the top end of the range for $16.50 to $18.50. The $633 million IPO was the first hedge fund to go public in the United States, and the run-up in the immediate aftermarket somewhat surprised participants, and all were looking for a nice bounce.

Market sources said the issue was oversubscribed by 10 to 15 times, depending on whether you asked a sellsider (who pegged the books at the high end) or a buysider. Regardless, it was a huge home run, with the stock opening at $35. It traded as high as $37 - double where it priced - before easing back to close out its debut session at $31 with 26.75 million shares having changed hands. The company sold 34.4 million shares.

"Everybody knew this was going to be a slam dunk, but nobody knew what kind of premium it would have," said Sal Morreale, IPO trader at Cantor Fitzgerald.

"I thought maybe it would be a point or two but 15 or 17? No way. But the market was down as much as 88 points and the stock really didn't crumble. It hung right in there."

Lear doors still open

Lear Corp. shares managed to erase a good portion of the day's loss on news the company has accepted Carl Icahn's bid of $36 per share, with the stock ending about the offer level. It was a disappointment to many holders, however, such as Evercore Asset Management, which said Friday it would vote against that deal.

The stock was halted for most of Thursday on "news pending," but the news did not hit the wires until Friday morning. A trader said Lear shares were being verbally quoted Thursday afternoon as high as $45 on thinking the company may have gotten a better bid or that Icahn had upped his offer.

When it turned out that Lear had accepted Icahn's $36 offer, the stock was hit hard, trading as low as $37.68. But Lear shares (NYSE: LEA) came off that low to settle with a loss of 68 cents, or 1.7%, at $39.39 - still well above the Icahn offer.

The stock was largely propped up by a feature of the Icahn agreement whereby the door remains open for Lear to get a better offer, the trader said. Lear can solicit and consider unsolicited offers for 45 days under the Icahn pact.

If Lear does not get a better offer, the Icahn deal is expected to close by the end of second quarter.

Aquila protestors growing

Deal resistance also continued to accumulate for the discount-priced merger announced earlier in the week by Aquila Inc. with 3V Capital Management joining Pirate Capital Management in protest of the buyout by Great Plains Energy Inc. and asset sale to Black Hills Corp.

On Friday, Aquila shares (NYES: ILA) closed with a penny gain to $4.20 but in after-hours trade were seen plunging 23 cents to $3.99.

In a stock-and-cash deal, Aquila on Wednesday agreed to be acquired by Great Plains for $1.80 in cash plus 0.0856 share of Great Plains, or the equivalent of $4.54 per share based on Tuesday's market. Aquila shares closed Tuesday at $4.67.

In a separate transaction, Aquila agreed to sell certain utility assets to Black Hills for $940 million.

Both transactions hinge on the other getting consummated.

Because of the discount price tag in the Great Plains acquisition, the deal has drawn severe criticism from Aquila holders like 3V and Pirate. Otherwise, traders said there is concern about multiple state regulatory bodies having to approve the merger, as well as federal energy regulators. Too, it must pass antitrust scrutiny.

Still, traders have said there is growing interest in regional utility stocks as takeover targets as electricity demand grows in the United States.

New Century woes mount

Back to the mortgage industry situation, which a couple of traders referred to as a bona fide crisis, New Century was considered in the greatest jeopardy, and one trader said there were rumors Friday that its exposure to subprime loans may render it defunct.

"There are rumors New Century may fail soon," the trader said.

After trading down to $16.15, New Century shares (NYSE: NEW) on Friday settled the session with a loss of another $1.02, or 5.3%, to $18.22. That followed a 36% slide the day before when the Irvine, Calif.-based mortgage real estate investment trust said it expects 2007 originations to decline by as much as 20% or more.

New Century also disclosed accounting errors that neglected how frequently loans were going bad and how seriously those have depreciated. Even though defaults rose throughout 2006 and investors sold back the mortgage-based loan packages with increasing frequency, New Century didn't assume it would have to buy back more loans; and, it didn't assume the loans it would have to buy back would be worth less than par.

Additionally, the company said it will be restating results for second, third and fourth quarters in 2006 to correct the errors, which it noted escalated in December because of deteriorating industry fundamentals. The company said it is still determining the magnitude of the adjustments but expects the combined impact to result in a net loss for fourth quarter.

New Century originated $59.8 billion mortgages in 2006 but said this week it now expects 2007 originations to decline by about 20% versus its previous forecast of a flat year.

The company said it hopes to file the restatements by March 31.

Countrywide widens alarm

The nation's biggest subprime lender, Countrywide, added to the increasing anxiety in the sector with its pronouncement Friday that foreclosures hit their highest since at least 2002, while delinquencies hovered at a five-year high.

Countrywide shares (NYSE: CFC) dropped $1.38, or 3.17%, to $42.21.

Novastar Financial Inc. also continued in a freefall, losing $1.95, or 10.65%, to $16.36 after a similar loss on Thursday.

MGIC Investment Corp. and Radian Group Inc., which agreed to a $5.5 billion all-stock merger on Tuesday, both continued to decline, as well. Radian shares (NYSE: RDN) ended off by 73 cents, or 1.16%, to $62.22, and MGIC (NYSE: MTG) settled lower by $1.22, or 1.83%, at $65.54.

National City trouble looms

But one trader said he thinks National City is perhaps the biggest ticking time bomb because of an unseen or forgotten exposure to some $7.3 billion of subprime mortgages. The stock totally missed the routing of the mortgage sector and even marked a slight gain Thursday when it was most severe.

National City shares (NYSE: NCC) on Friday ended off by 3 cents at $38.08.

In September, National City sold its First Franklin mortgage origination franchise and related servicing platform to Merrill Lynch for $1.3 billion. When that transaction was announced, National City said it hoped in a separate transaction to sell to Merrill the portfolio of First Franklin's originated mortgage loans, then estimated at $5.6 billion.

But Merrill could "not stomach" them, the trader said, and, thus, they remain on National City's books.

"National City had horrible quarter numbers but decided to do a one-time leverage-up balance sheet stock buyback. The stock moved up 2 points but smart portfolio managers are shorting this into the strength," the trader said.

"It could be ugly. National City will be the big problem."

Last year National City was on an acquisition spree, buying Fidelity Bancshares Inc. for $1 billion and Harbor Florida Bancshares Inc. for $1.1 billion, on the flipside of selling First Franklin to Merrill. It also staged an aggressive stock buyback program.

The bank said in its fourth-quarter earnings that it still holds about $7.3 billion in mortgage loans made through First Franklin, which are maturing at a rate of $300 million to $400 million per month. Non-performing assets were up 23% over the year at Dec. 31 to $732 million from $596 million, mostly from defaults related to two residential real estate developers, the company said.

"The stress in the subprime sector is fairly well advertised and we've not been immune from that stress," National City president Peter Raskind was quoted after the company's earnings were released.

"We're sanguine about credit quality looking ahead. We see no sign for alarm."

CANTV slides

Stocks with exposure to Venezuela were improving Friday because of news late Thursday that the government had agreed to a buyout of AES' interest in the regional electric utility Electricidad de Caracas. But traders were skeptical when it came to the news boosting CANTV and Crystallex.

CANTV shares (NYSE: VNT) traded up to $16.60 before dropping back to end the session with a loss of 2 cents to $15.92.

CANTV was better until shortly after noon ET when a warning from Micron Technology Inc. about chip demand sent the tech sector into a tailspin. Thus, traders attributed the reversal in CANTV to the negative trend in the overall tech sector, but after the close it was learned that Telmex and America Movil had backed out of their $600 million-plus offer to buy out Verizon Communication Inc.'s 28.5% share of CANTV, which portends badly for the venture getting a good price from Chavez's government.

Telmex and America Movil said they did not expect to receive the governmental approvals necessary to complete the acquisition of Verizon's interest in CANTV, according to a news release. The transaction was originally inked in April 2006.

As for Crystallex, a Toronto-based gold mining concern whose operations are largely concentrated in Venezuela, traders were still skeptical that the AES deal bodes well for its necessary approvals, which are still pending. Crystallex shares (Amex: KRY) gained 33 cents, or 11.74%, to $3.33 with 7.4 million shares traded versus the norm of 3.95 million shares.

One trader, however, said the advance in Crystallex could very well be short covering.

Arlington, Va.-based AES gained modestly on news from late Thursday that the Venezuela government had agreed to a buyout of its 82.14% stake in Electricidad de Caracas, the utility which supplies power to the capital city and the surrounding region, for $739.26 million plus the 2007 dividend. The agreement runs through March 31.

AES shares (NYSE: AES) marked a gain of 25 cents, or 1.12%, to $22.61.

Scottish Re slips on angst

Back to disappointing deals, Scottish Re Group Ltd. was lower Friday amid rising concern that it will be chalking up more write-offs, which could trigger more discounted stock transactions with equity investors MassMutual Capital Partners LLC and Cerberus Capital Management LP.

In November, Scottish Re inked an agreement with MassMutual and Cerberus affiliates whereby they will inject $300 million each into Scottish Re via 1 million convertible preferred shares that may be converted at any time into 150 million shares, giving them 68.8% ownership.

Brandes Investment Partners, LP and Chicago-based hedge fund Grace Brother Ltd. have protested the MassMutual/Cerberus deal.

Scottish Re shares (NYSE: SCT) slid as low as $4.25 before closing at $4.37, down 5 cents on the day, or 1.13%.

"Deeply hidden in the agreement with Cerberus, and never publicly mentioned, is the provision that if Scottish Re takes an additional $100 million in hits then the group gets to buy shares at $2," a trader said.

"I am hearing management is being urged to take additional write-downs."

Scottish Re shares have lost about 50% from around $9 since mid-November, when the MassMutual/Cerberus agreement was inked.

Bermuda-based Scottish Re's board unanimously approved the transaction, which is expected to close as early as the second quarter of 2007. Two-third of Scottish Re stockholders also much approve the transaction.

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