NovaStar's Days Are Numbered

NovaStar Financial (NFI) finally revealed what many had suspected all along - that a bankruptcy filing is imminent. In fact, NovaStar mentions the word "bankruptcy" over twenty times in its recently filed 10-Q. The Company also chose to suspend the dividend on its Series C and Series D-1 preferred shares. The GAAP loss for the quarter was a stunning $64.05/share, and NovaStar admitted that it had a negative net worth:

Due to the fact that we have a negative net worth, we do not currently have ongoing significant business operations that are profitable and our common stock and Series C preferred stock are likely to be delisted from the New York Stock Exchange, it is unlikely that we will be able to obtain additional equity or debt financing on favorable terms, or at all, for the foreseeable future. To the extent we require additional liquidity and cannot obtain it, we will be forced to file for bankruptcy.

NovaStar still owes Wachovia (WB) nearly $100 million, and as noted below, the Company is running out of time to satisfy its debts:

As of September 30, 2007, the Company was out of compliance with the net worth covenant in its repurchase agreements with Wachovia but has obtained a waiver to be in compliance. The waiver expires on November 30, 2007. The Company expects to be out of compliance with the net worth covenant subsequent to November 30, 2007 and there can be no assurance that the Company will be able to obtain additional waivers or amendments. If the Company cannot obtain additional waivers or amendments, there can be no assurance Wachovia would not issue an event of default and cause the outstanding borrowings to become due and payable immediately which also could cause the Company to file bankruptcy.

As noted above, NovaStar's covenant waiver with Wachovia expires on November 30. Assuming NovaStar can survive the next two weeks without a deadly margin call, the fate of NFI will be completely up to Wachovia. Even if Wachovia is willing to play nice, NovaStar must also make the payments on its trust preferred securities or face immediate repayment of those obligations.

Disclosure: none