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Accredited Sale Collapsing

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The deal to acquire Accredited Home Lenders Holding Co. appears on the verge of collapse. The ailing entity has filed a lawsuit to try and force the merger.

Affiliates of Lone Star Fund V L.P. have backed out of an agreement to acquire the San Diego-based company, Accredited said today in a filing with the Securities and Exchange Commission.

Lone Star made its own SEC filing Friday indicating that Accredited wouldn’t meet the merger conditions by August 14th’s 12 a.m. deadline.

“In light of the drastic deterioration in the financial and operational condition of the company, among other things, as of today, the company would fail to satisfy the conditions to the closing of the tender offer,” Friday’s filing stated. “Accordingly, purchaser does not expect to be accepting shares tendered.”

Accredited said “it believes all conditions to the closing of the pending tender offer for Accredited’s common stock will be satisfied by the expiration of the current tender offer period, and that Accredited strongly disagrees with the statement made … that, as of today, Accredited would fail to satisfy the conditions to the closing of the tender offer,” today’s filing said. “Lone Star also said that it does not expect to accept Accredited shares tendered as of the end of the current offer period.”

Accredited said it, along with Lone Star — a $13 billion hedge fund, had entered into a memorandum of understanding Friday with the plaintiff in the case Wan vs. Accredited Home Lenders Holding Co., et al.

In the Wan case, shareholder Jean Wan was trying to block the sale to Lone Star, “unless and until the company adopts and implements a procedure or process to obtain a merger agreement providing the highest possible terms for shareholders or a tender offer that discloses all material information.”

Wan alleged the share price offered undervalued the true worth of the subprime lender.

The memorandum was structured so that tender offer could be completed prior to the court’s decision on a settlement, Accredited said.

“With the receipt of all required regulatory approvals and the resolution of the Wan litigation, Accredited believes that, assuming more than 50% of Accredited’s outstanding shares are tendered by the expiration of the current tender offer period on August 14, 2007, all conditions to closing of the tender offer will have then been satisfied,” according to the report.

The subprime lender reported in a separate SEC filing Friday that second quarter production was $1.7 billion, off from $1.8 billion during the first quarter and tumbling from $4.1 billion a year earlier. Delinquency of 30 days or more on its $8.4 billion servicing portfolio was 11.71 percent as of June 30 — soaring from prior periods.

Lone Star had proposed to purchase Accredited for $15.10 per share in cash, which was unanimously approved by its board.

But the deal appeared to be in jeopardy when Accredited issued a bleak outlook in an Aug. 2 SEC filing of its annual report. The company said in that filing that employee morale is shot, executives have been sidetracked with the integration of a recently acquired company and the prospects for its continued survival are in doubt.

Accredited said it intends to hold Lone Star fully responsible for any damages caused if it doesn’t complete the acquisition.

“The agreement and plan of merger with Lone Star expressly provides that changes generally affecting the nonprime industry in which the company operates which have not disproportionately affected the company do not provide a basis for Lone Star to walk away from its obligations,” the filing said.

In another announcement today, Accredited said it filed a lawsuit against Lone Star Fund V and two affiliates to force the merger. It is advising shareholders to tender shares by the current tender expiration date.

The mortgage firm noted the potential collapse of the merger does not place it in default on its warehouse lines. Warehouse lenders have reportedly been apprised of the situation and plan to keep funding new business through committed warehouse facilities of $1.6 billion.

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