The predators' subprime ball

20 March 2007 By Antony Currie Follow @AntonyMCurrie

Why would a hedge fund lend to a mortgage firm that has been cut off by its banks, selling loans on the cheap and burning through cash? Because it gets a juicy interest rate and a slug of stock in return. And if the company fails, the fund can still benefit. Sound familiar?

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Subprime mortgage firm Accredited Home Lenders said it received a $200m loan from hedge fund Farallon Capital. The fiveyear facility is secured and bears a 13% interest rate.

Farallon has also been granted about 3.3m warrants in a private placement with an exercise price equal to $10 a share. Farallon has also been granted certain preemptive rights to purchase additional equity securities in the Company and certain registration rights with respect to its equity securities in the company.

Last week Accredited announced that it had sold $2.7bn of loans at a substantial discount, and would record a pretax loss of $150m on the sale.

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