Fallen subprime mortgage lender Fremont General Corp. is moving closer to emerging from bankruptcy after nearly two years of wrangling.
At month’s end, presentations are expected in U.S. Bankruptcy Court in Santa Ana by groups looking to lead the Anaheim Hills-based company out of bankruptcy.
The presentations are set to be the last steps in what’s been a lengthy process to narrow Fremont reorganization proposals, which at one point numbered more than half a dozen.
Two investment firms and a shareholder committee are scheduled to take a day apiece to present their plans for Fremont.
Each is seeking to diversify Fremont, which once was the fifth-largest U.S. subprime mortgage lender with more than 3,500 employees.
“Depending on which plan is approved, an effective date for Fremont General to re-emerge should come shortly after these final presentations,” said James McIntyre, the company’s founder and chief executive from its 1970 initial public offering until his retirement in 2004.
Fremont filed for bankruptcy in 2008. The company once ran a bank and made home loans to borrowers with imperfect credit.
It packaged loans and sold them as bonds to Wall Street. When loans started going bad in 2007 and 2008, Fremont was forced to buy them back, crushing the company.
Under threat from regulators, Fremont sold its banking unit to Maryland’s CapitalSource Inc. in 2008.
Competing bankruptcy proposals for Fremont call for returning to banking with a focus on lending to businesses, instead of homebuyers.
An early proposal from Fremont’s creditors committee called for liquidating what was left of the company. Those familiar with the case said liquidation still is an option but is less likely with an improving economy.
Fremont’s shares, which trade on the low-profile Pink Sheets exchange, are up some 200% in the past six months or so with a market value last week of about $75 million.
The company has about $355 million in cash and equivalents and about $45 million in loans, according to estimates in the bankruptcy case.
“Fremont General is definitely going to emerge from bankruptcy in a cash-positive position,” said Frank Williams, chairman of the shareholder committee. “That’s why everyone’s fighting over it.”
How much cash Fremont emerges with is uncertain. Whoever wins rights to reorganize the company has to deal with secured debt holders with claims of $180 million.
Unsecured creditors are owed about $270 million but aren’t expected to get that much.
Cash Estimates
Fremont could emerge with $37 million to $114 million in cash, according to estimates.
The competing bankruptcy groups are structuring their plans to take advantage of Fremont’s $769 million in net operating losses that can be used to offset future taxes, according to Craig Noell, managing director at Los Angeles-based distressed buyout firm Signature Group Holdings LLP.
“Essentially, the first $770 million or so the company makes won’t be taxed because its losses can be leveraged against future gains,” he said. “That makes Fremont General an even more attractive investment coming out of bankruptcy.”
Signature Group has proposed a reorganization that would pump $10.3 million into Fremont for an 11% stake, according to court filings.
The plan would put John Nickoll, cofounder and former chairman of Los Angeles-based Foothill Capital Corp.—now part of Wells Fargo & Co.—in charge at Fremont. He would lead an effort to expand into business lending.
Signature’s proposal would move Fremont into lending to midsize companies through direct loans or purchases of loans from other sources.
The plan also calls for the company to get involved with distressed debt investments.
Signature has the backing of unsecured creditors and Fremont’s largest shareholder, founder McIntyre.
“The other plans don’t have what I consider the same quality of management or the same package of complete products,” said McIntyre, who owns about 12% of Fremont.
A competing plan from New York-based New World Acquisition LLC would inject about $14.4 million into Fremont. New World would gain a 21% stake, according to a court assessment of the plans earlier this year.
Ken Grossman, a New York-based investor working with New World on its proposal, said the plan would be the “least dilutive to equity investors with the least number of shares when the company emerges.”
“That will give us more flexibility to deploy the company’s assets,” he said.
New World already owns about 4.5% of Fremont, according to Grossman.
“We’re finally in the final stretch of this case,” he said. “Whichever plan is approved by the court, Fremont General will emerge from bankruptcy with a lot of cash and resources to move forward.”
Shareholder Plan
The shareholder committee is proposing its own plan. It would use San Diego-based Ranch Capital LLC as Fremont’s management team. The distressed-investment firm is led by Larry Hershfield, a former longtime executive at New York-based Leucadia National Corp.
The shareholder plan calls for moving Fremont into community banking, buying distressed loans, making loans on fixed assets and developing loans for midsize companies.
“We’ve lined out four different investment scenarios that the board of directors can act on in a re-emerged company,” said Williams of the shareholder committee. “But the bottom line is that Ranch will be able to look at other possibilities to make money for shareholders.”
