Oct. 15–American Business Financial Services said yesterday it completed $450 million in borrowings, easing a cash crunch at the lender specializing in high-risk mortgage loans.
“We’re breathing easier this afternoon,” said Albert Mandia, the Center City company’s executive vice president and chief financial officer.
American Business Financial is paying dearly for the loans, which include $250 million from an investment group led by Lubert-Adler Management, a Philadelphia hedge fund.
“We ran that through our new business model,” Mandia said of the loans. “While it is expensive, we expect it to work.”
American Business Financial reported a $34.1 million loss for the quarter ended June 30 and laid off 153 workers after its former bankers backed out of loan arrangements in July.
Credit Suisse First Boston and Bear Stearns withdrew in part because of a civil inquiry begun by the U.S. Attorney’s office in Philadelphia, according to a Securities and Exchange Commission filing.
The Justice Department is examining how the company handled delinquent loans, and how it accounted for them on its books.
The bankers’ withdrawal cut off American Business Financial’s principal source of funds by preventing it from selling securities backed by packages of its loans.
The company temporarily halted its sale of unsecured notes to individual investors, interrupting another crucial source of cash. These notes amounted to $673 million in debt as of June 30.
American Business Financial lives on borrowed cash; without it, the company cannot make its mortgage loans.
The company resumed selling the notes after mailing these investors accounts of the company’s recent troubles, said Stephen Giroux, vice president and general counsel.
The new loans leave the company with little margin for error. In addition to the Lubert-Adler group, J.P. Morgan Chase is lending the company $200 million in a one-year loan.
The Lubert-Adler group is to receive fees of $41 million, or 16.4 percent of its $250 million commitment, with $9.75 million due immediately and $31.75 million due over the three-year term of the loan, according to preliminary SEC documents.
Mandia said the final terms will be similar.
As security, the investment group is to receive a pledge of the company’s interest in its loan packages as a repayment, effectively moving ahead of the unsecured claims on the company held by the individual investors.
The J.P. Morgan loan, which has lower fees, is secured by the mortgages funded by its advances.
Under the terms of the loans, American Business Financial faces stiff requirements, such as net-worth targets, low ceilings on delinquencies in its loan portfolio and minimum renewal rates on the investor notes.
In recent note sales, American Business Financial is paying investors 10 percent for commitments on notes with terms of 30 months or more.
In its new business model, the company will sell individual loans to investors as it originates them, easing its need for cash. However, the company said it expects these sales to be less profitable than sale of loan-backed securities.
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