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Brea sub-prime lender auctioned

Hedge fund firm Citadel offers $180 million to buy ResMae out of Chapter 11, topping a bid by Credit Suisse.

March 06, 2007|From Bloomberg News

Citadel Investment Group agreed to buy Brea-based ResMae Mortgage Corp. for about $180 million, beating out Credit Suisse Group in a Chapter 11 auction for the mortgage lender.

The Chicago-based hedge-fund manager will pay about $20 million for ResMae's lending business and 98.5 cents on the dollar for the company's $160-million loan portfolio, said Ron Greenspan, a financial advisor for ResMae's creditors. U.S. Bankruptcy Judge Kevin J. Carey in Wilmington, Del., said Monday that he would sign an order approving the sale.

"Citadel stepped up and gave us a firm bid," said Greenspan, senior managing director in FTI Consulting's Los Angeles office. Credit Suisse, Switzerland's second-largest bank, had offered $19.1 million, plus 98 cents on the dollar for the loans, in a bid laced with conditions, he said.

The sale price is still less than half what Zurich-based Credit Suisse bid for ResMae as recently as December, illustrating the swift deterioration of finances at companies that specialize in home loans to borrowers with poor credit. Credit Suisse cut its offer from $55.3 million and rival suitors dropped out after Merrill Lynch & Co. demanded that ResMae refund more than $300 million for bad loans.

"Hooray for the good guys," Edward Resendez, ResMae's chief executive, said after Monday's court hearing in Wilmington. "We are very happy with the outcome."

ResMae was the third specialist in loans to risky, or sub-prime, borrowers to seek bankruptcy protection since late December and is one of more than 20 that have shut down, scaled back or been sold since last year as default rates have risen.

Citadel, which is run by Kenneth Griffin and oversees about $13.4 billion in assets, challenged Credit Suisse's bid last week, triggering a March 2 auction. ResMae filed for bankruptcy protection Feb. 13. Citadel is at least the third hedge-fund manager to enter the sub-prime mortgage business.

"They see it as a very good opportunity," Greenspan said. "To a certain extent, they're contrarian investors. They've analyzed the business, they've analyzed the platform and they believe it's the place they want to be."

Last year, sub-prime loans in the U.S. mortgage industry fell 3.8% to $640 billion after rising for five straight years, according to industry newsletter Inside B&C Lending. ResMae made $7.7 billion in loans during 2006, up 11% from 2005, placing it 21st among U.S. sub-prime lenders, the newsletter reported.

Sub-prime lenders earned profits by signing up home buyers and then reselling the loans to firms like New York-based Merrill Lynch, which bundled them into bond packages. The sales typically came with buyback guarantees, requiring lenders such as ResMae to repurchase a loan if the borrower defaulted in the first few months.

ResMae was founded in 2002 by three former executives of Long Beach Mortgage Co. In October 2003, the company raised $25 million in equity from a joint venture of Thomas H. Lee Partners, the Boston-based buyout firm, and mutual fund manager Putnam Investments.

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