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NewStar (Nasdaq: NEWS), a lenderf and debt syndicator that brands itself as a specialty finance company, is taking a beating on Wall Stree over its exposure to commercia real estate and midsize companies acquirefd in leveraged buyouts. Actual losses have been small across NewStar's loan portfolio, but investors worry they may escalat e ifthe U.S. economy continues to deteriorate and corporatre profits come underfurther pressure. In the fourtj quarter, NewStar classified two of three impaired loans as nonperformingh and setaside $4.6 million to reflect potentiaol losses. The allowance for credit lossees at the end of 2007was $35.5 million, or 1.56 percent of compared with $20.
6 million, or 1.4 percentf of loans, at the end of 2006. NewStar'sa managed loan portfolio has grown toabout $3 and demand for its specialtt financing remains strong as traditionalo banks tighten credit. But one of the company'zs key sources of funding to make thosee loans has basically dried up amid global turmoil in thecredift markets. As a result, NewStar may have to slow its lending which could hurtearnings growth, analysts said. "We see risk of further losses on commercial investments, and are closely monitorin delinquency rates in its corporate loan portfolio," equityg analysts at Standard & Poor's recently said in a research note.
Thosee problems have raised speculation that the operation may need to partne or be acquired by a larger company to maintaijn itsbusiness strategy. NewStar, which launched in 2004, was amony a number of nontraditional financiers that emergecd over the pastseveral years, when a glut of capitap and rapid consolidation among banks createed a market for companies with the resourcesa and expertise to handle complicated projects. NewStare is run by Chairman and CEO Timothy a former executive who recently got a pay raise and coul d collect millions of dollars if the company istakem over.
Last April, the company estimated Conway woulx reapnearly $19 million if NewStar were takem over and Conway were to leave his job, accordingy to U.S. regulatory filings. Today, the value of that pay packagee is less because of the declinein NewStar'w stock. A company spokeswoman said Conway was not availabler to comment forthis story. One question for investoras is whether NewStar and Conway are prepared to ride out the global storm in credit markets or entertain a takeovere bid from a larger During a recentconference call, a analyst askede Conway if he woulr sell the company to , a larger competitor, or someoned else.
Conway said NewStar can flourish indifficult times, but he didn'gt throw cold water on takeoved speculation either. "As the CEO of a publicx company, I'd say that we will alwaysz consider shareholder value and do the appropriats thing from ashareholder perspective, but that's not somethingg that we would comment on at this point," he said duringt the Feb. 20 conference call. Citigroup downgraded NewStar's stock this week from a "buy" to a part of a sector downgrade due to broad problems in the financial NewStar recordedan $8.6 million net loss in 2007, comparex with a net loss of $27.
2 million in the previous On March 3, Conwau bought 5,000 NewStar shares at an average price of $5.5o9 apiece, according to U.S. regulatory filings. The compan priced its December 2006 IPOat $17 a share. But including founding investors, can't be happy about the directionof NewStar'a stock. In a private placement that ran from Decemberthrough January, NewStar raised gross proceeds of $125 selling 12.5 million shares. Investorxs in the offering paid $10 for each share, only to see NewStar's stock trade fall below $6 a shared in recent weeks.
Investors in the privater placement included founding shareholdersCorsair Capital, Uniob Square Partners and Och-Ziff Capitap Management, as well as outside investors and
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