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C-BASS Facing Liquidity Crisis

MGIC, Radian warn of possible $1 billion loss

July 31, 2007
(revised 9:25 p.m.)


A rapid deterioration this month in the credit markets have investors in Credit-Based Asset Servicing and Securitization LLC warning that they could lose more than $1 billion invested in the company. The cash crisis has emerged just as the company completed the acquisition of another ailing subprime company.

Blaming the current state of the credit markets, the New York-based company announced today it is facing "an unprecedented amount of margin calls from" its lenders.

"The frequency and magnitude of these calls have adversely affected our liquidity," the statement said. "To address this, C-BASS is in advanced discussions with a number of investors to provide increased liquidity and is exploring all options."

The announcement was prompted by statements yesterday issued by MGIC Investment Corp., which has $516 invested in C-BASS LLC, and Radian Group Inc., which has a $518 million investment, indicating their interest could be completely wiped out.

Since February, the market for subprime mortgages has experienced significant turmoil, "with market dislocations accelerating to unprecedented levels" beginning in mid-July 2007, MGIC and Radian said in their respective statements.

As a result of nearly $300 million in margin calls this year -- $260 million in July only, C-BASS, which invests in subprime mortgages, said it wiped out much of the $302 million in liquidity it had at the beginning of this year.

"We believe that nothing justifies this substantial amount of margin calls received in such a short period of time, particularly as there has been no change in the underlying fundamentals of our portfolio," the press release said. "Out of a total of 487 subprime bonds downgraded by Standard & Poor's, only 4 C-BASS bonds were downgraded. Moody's downgraded a total of 399 subprime bonds, only 5 of which were C-BASS issued. In addition, Moody's downgraded 184 bonds from 91 CDOs, none of which were C-BASS issued."

The company reported it has completed 2 CBO's and 11 residential mortgage-backed securities this, with its deals being priced at some of the tightest spreads in the market.

The current liquidity crisis has "had no impact on the loan servicing activities" on its Litton Loan Servicing subsidiary, C-BASS said.

But it is not clear what impact the margin calls will have on the company's July 17th acquisition of Fieldstone Investment Corp.

"While this action clearly reflects the continuing credit challenges in today's mortgage market, we are moving forward, as planned, with our proposed merger with MGIC, which we expect to close late in the current quarter, or early in the next," Radian CEO S.A. Ibrahim said in the announcement.

Fitch Ratings issued a statement about both mortgage insurers shortly after the C-BASS disclosure.

"Fitch believes that absent a merger with MGIC Investment, the ratings for Radian and its insurance subsidiaries will be downgraded by one notch," the announcement said. "Fitch believes today's downgrade of MGIC Investment and its subsidiaries reflects the reduced financial and earnings strength of the company following the C-BASS impairment."

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of

e-mail: [email protected]

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