Delta is Done

Back on November 16, we noted Delta's dire situation with respect to its liquidity. However, even we were shocked by this morning's bankruptcy announcement.

Delta was unable to complete a required securitization transaction upon satisfactory terms, and on December 5 received default notices from its warehouse lenders. Under these circumstances, the Company's financial obligations under these agreements may be accelerated, and it may be subject to substantial payment obligations, as well as incurring cross-default claims from its other creditors.

Delta, one of the last remaining independent subprime lenders, had reported a profit as recently as the second quarter of 2007. Unfortunately, the credit crunch closed Delta's access to the securitization market and left the company without a source of capital. Although the Company completed a $900 million securitization in September, the execution was extremely poor, with the B-notes and single A tranches pricing at 55% - 75% of par. The prospectus on the unsold 2007-4 indicates that Delta had been unable to originate much in the way of sound loans, as 90% of the pool was cash-out refinances or debt consolidation loans. No wonder buyers took a pass.

It is an unfortunate end for Delta, which had been in the business for 25 years and weathered some serious storms in the past.

Delta's Dilutive Deal

Delta Financial (DFC), which warned last week of its dire liquidity situation and need for dilutive financing, announced this morning that it had entered into a letter of intent with an affiliate of Angelo, Gordon & Co., one of the Company's principal stockholders, for an aggregate financing of $100.0 million, including amounts outstanding under the residual financing facility established in August 2007.

Angelo Gordon will provide the funding in exchange for 10% senior secured notes and 40 million newly issued shares, almost twice Delta's current outstanding shares.

The deal is subject to a number of closing conditions, including the Company not being in default under any of its material agreements and the successful execution of a securitization or sale of $500 million in loans.

It's a terribly dilutive deal for Delta shareholders, but given that the alternative may be a swift plummet into bankruptcy, Delta investors have no choice but to accept this course of action.

Dynamics Damn Delta

Delta Funding (DFC) finally reported delayed results Thursday afternoon, and it was not good news at all.

Delta reported a net loss of $39.6 million, or $1.70 per diluted share, for the quarter ended September 30, 2007. More importantly, Delta disclosed it has "been pursuing financing alternatives, and are in discussions with potential investors that may lead to a significant issuance of debt or equity securities, and may result in significant dilution for existing stockholders." That disclosure sent shares down 35% on Friday, as shareholders questioned Delta's very survival.

During the third quarter of 2007, the Company charged-off $12.5 million of loans, or 71 basis points annualized, against the allowance for loan losses. Loans delinquent greater than 90 days constituted 9.1% of the outstanding loan balance at September 30, 2007. This sort of credit performance underlines the serious deterioration of the economic profiles of subprime borrowers, as Delta claims to only originate full-doc, fixed-rate loans.

We'll see what alternatives Delta is able to find - Accredited may have been the last subprime boat to set sail.