Accredited Home, Fremont get lift; Doral higher, too; OMI up; New Century up; Bally plunges

By Ronda Fears

Memphis, March 16 - Subprime lenders Accredited Home Lenders Holding Co. and Fremont General Corp. bounced sharply Friday on financing events, and that lifted New Century Financial Corp., although traders said there was still elevated concern about bankruptcy at the latter.

One trader speculated, however, that a "great deal" of the rise in those stocks was related to short covering as Friday marked options expirations, but some remained low enough to find real buying interest.

Distressed players who had been buying New Century since the stock fell below $3 were "raking it in" on Friday, he continued.

"There is always some BS where a company that has some assets but lots of debt is rumored to be bought out or file bankruptcy," the trader remarked. "I am a buyer [of New Century] under a dollar, because these bounces often go way past a dollar no matter how doomed the company looks to be."

New Century shares (Pink Sheets: NEWC) settled higher by 99 cents, or 73.33%, at $2.34 after trading in a band of $1.50 to $3.07. The stock had more than doubled the day before.

Doral Financial Corp., a Puerto Rico-based bank also thought to be teetering on bankruptcy if unable to refinance some debt, got a sharp spike, too, after announcing the sale of 11 branches in New York, which players reckon will help it repay the $625 million floating-rate note coming due this summer.

In another bankruptcy scare, gym operator Bally Total Fitness Holding Corp. plunged in trade Friday after saying late Thursday it may have to file Chapter 11 if it is unable to restructure its debtload of $1.1 billion.

Elsewhere, oil tanker OMI Corp. got a bounce from news it has hired Perella Weinberg Partners and Fearnley Fonds ASA to evaluate strategic options that might include the sale of the company. Potential bidders such as larger rivals Teekay Shipping Corp., General Maritime Corp., Overseas Shipholding Group Inc. and Frontline Ltd. were higher on the news, as well.

Drawing a close to a nearly four-month takeover battle, pharmacy benefits manager Caremark Rx Inc. shareholders approved a $26.5 billion acquisition by drugstore chain CVS Corp. on Friday, edging out Caremark rival Express Scripts Inc. Traders said increased antitrust scrutiny of an Express Scripts deal swung the situation in CVS' favor.

Easing on the saga's finale, Caremark (NYSE: CMS) lost 37 cents, or 0.59%, to $62.38 while CVS shares (NYSE: CVS) dropped 40 cents, or 1.2%, to $32.94. Meanwhile, Express Scripts said it is positioned for strong growth after the Caremark vote, and that stock (Nasdaq: ESRX) edged up by 7 cents to $82.48.

Bally bomb not a big surprise

The news from Bally Total Fitness was not a complete surprise, and traders said a lot of distressed players were making money covering short positions Friday as it fell nearly 75% at one point of the session.

Bally (NYSE: BFT) traded in a band of 52 cents to $1.08 before closing the session with a loss of $1.24, or 62.31%, at 75 cents. Some 2.7 million shares traded versus the norm of 372,488 shares.

Bally also said it is unable to file its annual report for 2006, which was due Friday, and that will put it in default on bond debt and mean bondholders could accelerate payments on those bonds. But the company said it expects to post a loss from continuing operations in 2006, with membership revenue falling 3% from 2005.

Trouble at Bally's has been lingering for a year or so, the trader said, and there have been lots of distressed players, including many bondholders, in the stock who used the steep slide Friday to cover short positions and pick up the stock "on the cheap."

Chicago-based Bally's said late Thursday that it has $45 million in cash and just $2.1 million available on its bank lines, against $827 million in outstanding debt on its books, plus $300 million in debt coming due in October. The company said it is exploring a broad range of options and has hired Jeffries & Co. as its financial adviser.

The trader said the list of options available to Bally seems pretty short - find a buyer for the company, refinance the debt or file bankruptcy. The company acknowledged that it may file bankruptcy to reorganize its debtload, noting coupon payments are coming up in April, July and October.

"A sale of the company doesn't seem likely," the trader said, noting the company put itself on the auction block last year to no avail.

The company also made sweeping changes in management last year, and interim chief executive Barry Elson said the company is planning layoffs this year and will close underperforming gyms. Bally stock had dropped nearly 80% over the past year, before Friday's plunge.

Overseas a top OMI bidder

The top candidate to buy OMI is considered cash-rich Overseas Shipholding, according to one trader, who said Teekay Shipping was the next best guess on the Street. He said there was a rumor in circulation that OMI has received an offer and is fishing for a bigger bid by launching an auction process.

Regardless, the trader said there has been anticipation of consolidation in the oil shipping sector and players expect aggressive bidding for OMI even though the stock was trading near its 52-week high before the announcement.

Hitting a new high, OMI shares (NYSE: OMM) on Friday advanced $3.33, or 14.52%, to end at $26.26, close to the session high of $26.50.

Overseas Shipholding has been a recurrent name in rumors concerning an OMI acquisition, dating back several years, the trader said. Overseas Shipholding is known to have approached OMI within the past two years with an offer, he continued, but nothing came of it. Overseas shares (NYSE: OSG) advanced $1.76, or 2.93%, to $61.80.

Teekay is considered a strong contender, as well, he said, but does not have as much free cash flow available so "they would probably need some strong backing." Teekay shares (NYSE: TK) rose similarly, adding $1.53 on the day, or 2.99%, to $52.75.

Accredited eases off day's high

A sign that a lot of the rise in Accredited Home Lenders' shares was due to short covering was it coming so sharply off the day's high at the close, another trader said. The stock (Nasdaq: LEND) traded up to $13.75 before coming in to close at $10.90., a gain of $1.47 on the day, or 15.59%.

Largely from the pressure of margin calls, Accredited Home Lenders said it has reached a deal to sell $2.7 billion of loans to an unidentified buyer at a sizable discount. The sale, which should be completed over the next two days, is expected to result in a pre-tax charge of about $150 million.

San Diego-based Accredited said it will hold onto about $120 million of loans, most of which were originated on or after March 7.

The company's shares have more than doubled over the past two trading sessions on rumor that Accredited was about to get either a capital injection or a takeover offer. The transaction announced Friday will give the company enough liquidity to continue pursuing such strategic options.

But the trader said he doesn't think Accredited Home Lenders would even consider going on the auction block at this time, unless it got a "primo offer," which isn't likely in the current market.

Fremont gets a 'breather'

Fremont General also got a shot in the arm Friday on news that Credit Suisse increased its credit line to $1 billion, as well as various proposals for additional credit if needed to supplement its current liquidity position of $1.3 billion in cash and short-term investments.

The stock (NYSE: FMT) ended higher by $1.50, or 20.27%, at $8.90 after trading as high as $9.80.

"This is a breather," one trader said. "They are not out of the woods yet."

The company also said it will not file its 2006 annual 10-K report by Friday's extended deadline, and that could trigger more trouble with its warehouse lenders.

The Santa Monica, Calif., company said because of recent turmoil in the subprime sector, its accountants are "continuing to evaluate various issues" related to its financial statements, including the impact of events subsequent to Dec. 31 on the appropriate carrying value of assets as of Dec. 31.

Fremont said it believes this balance sheet strength and funding capacity will enable it to execute its previously announced plan to exit the subprime residential loan origination business in an orderly and disciplined way.

Doral delivers, but refi looms

Doral Financial also appears to have a bead on measures to refinance its bonds coming due in July, but traders said the lack of any clarity on that effort was cause for concern amid the ongoing turmoil in the mortgage lending sector.

"Net to them, as I read it, is just $10 million; that doesn't go very far against a $625 million bond," another trader said.

But, he noted that there have been rumors for months of negotiations with bondholders involving a debt-for-equity swap to take out the debt. The talks also have included some level of cash payment, most recently in the neighborhood of about $275 million, according to market sources. The value of the equity involved has been a major sticking point, sources have said, as bondholders want to tag the stock in the $1 per share area.

Doral shares (NYSE: DRL) on Friday traded in a band of $1.56 to $1.90 but closed at $1.68, better by 37 cents on the session, or 28.24%. The 52-week range on the stock is $1.19 to $11.79.

The company is selling 11 branches in New York to New York Community Bancorp Inc., the holding company for New York Community Bank and New York Commercial Bank. The purchase price will be equal to the difference between the value of the assets sold and the liabilities assumed as of the closing date, expected in third quarter, plus a deposit premium of about 4%.

Doral said the transaction is expected to result in a pretax profit of about $10 million.

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