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Challenging market conditions, liquidity concerns raised by warehouse lenders and an apparent impasse with a key noteholder led a top 20 mortgage originator to seek protection under Chapter 11 of the U.S. Bankruptcy Code on July 9.
Backed by Blackstone Group Inc's Blackstone Capital Partners VI LP private equity fund, Stearns Lending LLC, Stearns Holdings LLC and various affiliates reported $1.22 billion in total assets and $1.16 billion in liabilities in court documents filed in conjunction with the petition. The latter figure, according to a declaration by President and CFO Stephen Smith, most notably includes an outstanding balance of $183 million in 9.375% senior secured notes due Aug. 15, 2020, which became the trigger point for concerns among Stearns' warehouse lenders and, in turn, an escalating dispute with key noteholder Pacific Investment Management Co. LLC, or PIMCO.
Smith described Stearns as the No. 20 mortgage originator in the U.S. Blackstone-managed funds acquired a majority stake in the Stearns group in December 2015.
The financial challenges Stearns confronted have roots in an overall size reduction of the mortgage market and increased competition resulting from a rise in interest rates beginning in 2016. Smith said the company slashed fixed expenses in late 2017 and early 2018 to help counter the decline in origination volumes and the resulting reduction in revenues.
Smith...