NovaStar Financial announced it has canceled a $101 million convertible preferred stock offering after its auditor, Deloitte & Touche, would not agree to the plan unless specific parts were changed to reflect the increase in risk since the credit crunch began. Deloitte would not approve NovaStar's original plan, and insisted the mortgage lender reissue its 2006 financial report and include a "going concern" clause, a phrase that is seen as a warning to investors about the company's financial stability. "They're having trouble with cash flows to keep it operational," said Christopher Brendler, an analyst at Stifel Nicolaus on NovaStar. The company was leaning on the deal to survive the recent downturn. "They had this financing deal, it's fallen through and that's put more pressure on liquidity," added Brendler. With the deal canceled, the company announced it would close 12 offices and cut about 275 jobs in the retail lending area. CEO Scott Hartman talked about the restructuring: "The secondary market has deteriorated substantially, so we are modifying our business model and further reducing costs." The lender has laid off 83% of its workforce since 2004. NovaStar stock was down 18% to $6.96 in early-afternoon trading on Tuesday.
Sources: Press release, TheStreet.com, Bloomberg
Commentary: NovaStar Shares Rally on Resumption of Originations • NovaStar's Dividend Woes • Novastar Financial Up 22%: Why Doesn't Anyone Care?
Stocks/ETFs to watch: NFI. Competitors: CFC, BAC. ETFs: KBE
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