Sun Capital buys into subprime mortgage market(2)

As investors race to unload their subprime mortgage based assets, distressed investor Sun Capital Partners plans to buy an 80 percent stake in First NLC Financial Services, a subprime mortgage originator.

Boca Raton, Florida-based Sun Capital Partners has agreed to buy an 80 percent stake in First NLC Financial Services, a subprime mortgage company that it sold two years ago for 10x its investment. Sun Capital will invest $60 million (€44 million) in a recapitalisation of First NLC, while First NLC’s current owner, Friedman, Billings, Ramsey Group, will invest $15 million, according to a statement released by FBR.

Sun Capital originally bought 55 percent of First NLC in November 1999, and in February 2005 sold it to Virginia financial services company FBR for $88 million. FBR will retain a 20 percent stake in First NLC after the recapitalisation.

“In 1999 the First NLC was in an industry trough,” said Richard Hurwitz, vice president of corporate communications at Sun Capital. “The conditions that we saw in 1999 were somewhat similar to the conditions that are prevailing today. No two mortgage environments are identical, but in both instances the markets were in a decline.”

The US subprime mortgage market has been in a steep decline for months. Last month, two Bear Stearns hedge funds failed after making risky investments in subprime mortgage-backed securities. Last week, US Federal Reserve Chairman Ben Bernanke acknowledged the worsening subprime credit market and said credit fears are affecting the buyout market.

During its first holding period, Sun Capital worked with First NLC’s founders, Neal and Jeff Henschel, to strengthen the company’s management team, upgrade its IT systems, and clarify and reduce the number of mortgage offerings the company marketed.

This time, Sun Capital will again be working with Neil Henschel.

“Neal was the one who put the plan together in ’99 and he’ll put a plan together now,” Hurwitz said. “We know Neil very well and we have absolute trust and confidence in him.”

Henschel said that First NLC will revamp its product offerings to be more in line with the requirements of today’s market, which means its products will now carry a coupon roughly around 9.5 percent. He said he is confident First NLC will come out of the current market downturn.

“The fact that this company survives shows that it has a strategic plan that will enable us to continue to sell products during this difficult period,” Henschel said.