, a companyformerly known as NovaStar Financial Inc., filed for Chapter 11 bankruptcy July 20, years after itsuspended its loanorigination activities, sold its servicing portfolio and first of its potential need toseek protection from creditors.
The petitioncomes as several legacy NovaStar entities continue to litigate certainfinancial crisis-era disputes and the holding company was unsuccessful in itsattempts to restructure three outstanding series of senior notes with aggregateprincipal balance of $85.9 million.
NovationCEO Rodney Schwatken said in a bankruptcy court declaration that , one ofseveral co-debtors in the bankruptcy case, originated more than $11 billion inmortgage loans annually at the height of its business. Since closing theorigination platform and selling the servicing portfolio "amidst thehousing collapse in 2007," he said, Novation has engaged in the businessof acquiring certain companies while retaining cash flow-generating investments.
Amongthe outstanding litigation is a class-action complaint related to alleged falsestatements made by NovaStar entities in connection with the collateralunderlying certain securitization trusts they sponsored, a National CreditUnion Administration RMBS suit, and a breach of representations and warrantiesaction filed by the Federal Housing Finance Agency in its capacity asconservator for FreddieMac. Novation said it believes the NovaStar entities havemeritorious defenses to each of the cases.
Novationreached out to managers of the unsecured debt in December 2015, but Schwatkensaid they were "generally unresponsive to these negotiation efforts."The company subsequently failed to make quarterly interest payments that hadbeen due in March and June, which triggered notices of acceleration thatdeclared all principal and unpaid interest immediately due and payable.Although Schwatken said Novation had actively pursued talks with noteholders tocure the defaults or modified the bonds outside of court, they allegedly didnot agree to any of the proposals the company made.
"Thedebtors are hopeful that they can reach agreement with the holders of theunsecured notes on a consensual repayment plan," he said."Alternatively, as the bonds do not mature until 2033 and have veryfavorable economic terms, the debtors may seek to reinstate the bonds to themaximum extent allowable under the Bankruptcy Code. The debtor Novation can easilycure the payment defaults, having significant unencumbered cash, operating cashflow, and other significant assets."
Novation'sassets include $32 million in cash; marketable securities, including retainedinterests in NovaStar securitizations; and other current assets, Schwatkensaid. It also owns overcollateralization bonds with a face amount of more than$50 million and a current level of overcollateralization of approximately $27million, as well as net operating losses of $370 million to offset future federaltaxable income. The Chapter 11 petition itself put the amount of Novation'sassets and liabilities at $33 million and $91 million, respectively.
Schwatkensaid Novation is in the process of "implementing a strategy and plan toacquire an operating business (or businesses) or making otherinvestments."
Headded that Novation plans to meet with and solicit input from all of itsstakeholders, including bondholders and litigation claimants, to develop aChapter 11 plan that maximizes the value of the estate.
Courtdocuments listed Kodiak CDO I, Taberna Preferred Funding I Ltd. and TabernaPreferred Funding II Ltd. as the company's bondholders and among its top 20unsecured creditors, but they did not assign a specific claim to thoseentities. Those entities previously brought an involuntary Chapter 7 bankruptcy petition inthe U.S. Bankruptcy Court for the District of Delaware against NovaStarMortgage in September 2008 that the parties later .
TheChapter 11 case is pending in the U.S. Bankruptcy Court for the District ofMaryland.