Cerberus-backed company goes bankrupt

Cerberus portfolio company Aegis Mortgage has filed for bankruptcy – it owes the private equity firm $178 million.

Cerberus Capital Management-backed Aegis Mortgage Corporation has become the latest victim of the subprime mortgage crisis, filing Monday for bankruptcy. The Houston, Texas-based company said it had around $100 million (€74 million) in assets and owes roughly $625.5 million to creditors.

It owes Cerberus $178 million of unsecured, subordinated debt via Madeleine, a lending arm of Cerberus. The private equity firm purchased an 81 percent, $2 million stake in Aegis through Madeleine in 1999.

“Extreme changes in market conditions, coupled with the rapid decline in the secondary mortgage market severely impacted [our] operations,” Aegis chief financial officer Edward Robertson said in the company’s bankruptcy filings.

In particular, he noted that in 2007 Aegis experienced a “significant increase” in early payment defaults on its loans, and in turn an increase in the number of repurchase requests from the institutions to which Aegis sold the loans through repurchase agreements. At the same time the value of the loans declined rapidly.

The company had showed signs of distress for months. It halted its subprime activity in September 2006, and closed its retail lending business in late June.

In July, Aegis’s founder and former president filed a lawsuit against Cerberus executives, accusing the private equity firm of mismanaging the mortgage company and missing an opportunity to take the company public.

Aegis ceased all mortgage origination activity after the close of business on 3 August. The company subsequently sacked 782 of its 1,302 employees four days later.

Several large mortgage originators have failed in recent months, including American Home Mortgage Investment and New Century Financial. Others, including IndyMac Bank FSB, SunTrust Mortgage, National City Mortgage and Wells Fargo Home Mortgage, have cut back or halted subprime lending, according to MortgageDaily.com. According to the US Department of Labor, between October 2006 and June 2007, mortgage-related jobs fell from 507,000 to 458,800.

Aegis is not Cerberus’ only exposure to subprime market problems; in April, the firm agreed to buy Option One, the loss-making home loan unit of US tax firm H&R Block, for $800 million. At the time, some analysts speculated that Cerberus had overpaid significantly.

Some private equity firms view the mortgage crisis as a distressed investment opportunity. For example, Sun Capital invested $60 million in subprime mortgage originator First NLC Financial Services in July, and said it has confidence that First NLC will emerge from the industry trough.

But others are less keen to add such companies to their portfolios. Texas-based firm Lone Star indicated it may back away from a $400 million, June agreement to acquire subprime loan company Accredited Home Lenders, citing “drastic deterioration in the financial and operational condition of the company”.