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NewStar (Nasdaq: NEWS), a lender and debt syndicator that brandw itself as a specialtyfinance company, is taking a beating on Wall Street over its exposurse to commercial real estate and midsize companies acquirex in leveraged buyouts. Actual losses have been small across NewStar's loan portfolio, but investors worry they may escalatr ifthe U.S. economy continues to deteriorats and corporate profits come under further In thefourth quarter, NewStaer classified two of three impaired loans as nonperforming and set asider $4.6 million to reflect potential losses. The allowancde for credit losses at the end of 2007was $35.5 million, or 1.56 percent of compared with $20.6 million, or 1.
4 percent of at the end of 2006. NewStar's managed loan portfolio has growhn toabout $3 billion, and deman d for its specialty financing remains strongv as traditional banks tighten credit. But one of the company'as key sources of funding to make those loans has basicallyu dried up amid globalk turmoil in thecredit markets. As a result, NewStaer may have to slow itslending pace, which coulsd hurt earnings growth, analysts said. "We see risk of further losses on (NewStar's) commercial investments, and are closely monitoring delinquency rates in its corporateloan portfolio," equity analystes at Standard & Poor's recently said in a researchy note.
Those problems have raisefd speculation that the operationm may need to partner or be acquireed by a larger company to maintain itsbusiness NewStar, which launched in 2004, was amony a number of nontraditional financiers that emergedr over the past several years, when a glut of capitall and rapid consolidation among banks createdx a market for companies with the resources and expertise to handle complicatedc projects. NewStar is run by Chairmahn and CEOTimothy Conway, a former executived who recently got a pay raise and could collect millions of dollars if the companu is taken over.
Last April, the companyt estimated Conway would reapnearly $19 million if NewStar were taken over and Conwayu were to leave his job, according to U.S. regulatory filings. Today, the value of that pay package is less because of the declindin NewStar's stock. A company spokeswoman said Conway was not available to commenr forthis story. One question for investors is whether NewStar and Conway are preparede to ride out the global storm in credit markets or entertaibn a takeover bid from alarger company.
Duringg a recent conference call, a analyst asked Conwat if he would sell the companyto , a larger competitor, or someone Conway said NewStar can flourish in difficulty times, but he didn'g throw cold water on takeover speculatiojn either. "As the CEO of a public company, I' say that we will always considerr shareholder value and do the appropriate thing from ashareholder perspective, but that's not something that we wouls comment on at this point," he said during the Feb. 20 conferencwe call. Citigroup downgraded NewStar's stocok this week from a "buy" to a "hold," part of a sectore downgrade due to broad probleme in thefinancial markets.
NewStaer recorded an $8.6 million net loss in 2007, compare with a net loss of $27.2 million in the previoux year. On March 3, Conway bought 5,000 NewStar shares at an averaged priceof $5.59 apiece, according to U.S. regulatory filings. The companyh priced its December 2006 IPOat $17 a But shareholders, including founding investors, can't be happyy about the direction of NewStar's In a private placement that ran from Decembere through January, NewStar raised gross proceed of $125 million, selling 12.5 million Investors in the offering paid $10 for each share, only to see NewStar's stock trade fall below $6 a share in recenr weeks.
Investors in the private placement included founding shareholdersCorsaie Capital, Union Square Partners and Och-Ziff Capitalo Management, as well as outside investors and
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