NovaStar says market conditions force it to cancel rights offering

By Lisa Kerner

Charlotte, N.C., Sept. 4 - NovaStar Financial, Inc. canceled its planned rights offering citing management's belief that the company is unable to satisfy certain conditions. The offering was set to expire Sept. 27.

The rights offering would have allowed holders of its common stock and 9% series D-1 mandatory convertible preferred stock to purchase shares of its 9% series D-2 mandatory convertible preferred stock with an initial conversion price of $28 per share.

MassMutual Capital Partners LLC and funds managed by Jefferies Capital Partners IV LLC are not willing to extend their standby purchase agreement to purchase the series D-2 preferreds not subscribed for in the rights offering, up to the total of $101.175 million of preferreds.

NovaStar, in a form 10-Q filed for the quarter ended June 30, noted conditions and events that have adversely impacted the subprime mortgage industry as well as the company's operations, liquidity and financial condition during 2007.

The Kansas City, Mo., specialty finance company had disclosed a downgraded rating by Moody's Investor Services as well as litigation in California involving a NovaStar subsidiary. In addition, NovaStar had suspended its wholesale originations and cut back its retail originations, a company news release stated.

Independent auditors Deloitte & Touche LLP will not issue a consent or "otherwise be associated with the rights offering unless the company reissued its 2006 financial statements to include footnote disclosures" regarding recent matters, according to the release.

NovaStar, in an effort to restructure its operations, plans to focus on managing its portfolio of securitized residential loans totaling some $15.45 billion and downsize its retail lending organization to 125, from 400, employees.

"We expect significantly lower loan originations in the second half of 2007, and we intend to proceed cautiously until we see signs of improvement from this distressed phase of the mortgage cycle," president and chief executive officer Lance Anderson explained.

"The size of NovaStar's portfolio of securitized residential loans can be expected to decline gradually as older loans and securities mature and are not replaced with new mortgage assets. Our goal is to preserve and maximize the value of the portfolio through this difficult period for the industry, and we will continue to evaluate developments closely and consider all necessary or appropriate changes or strategies."

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