Dollars and Jens
Tuesday, June 12, 2007
New Century
I'm confused, and thought I'd share my confusion.
New Century Financial Corp. has warned that its effort to liquidate assets could be stymied if General Electric Capital Corp. is allowed to proceed with plans to seize computers and other equipment it leased to the bankrupt housing lender.
I'd assume New Century has DIP financing, and if they don't, I can't imagine they'd have trouble getting it, if I understand their preferred stock situation correctly. A lease is an executory contract, falling under section 365 of the bankruptcy code, and should be assumed or rejected; if they reject the lease, they need to return the equipment promptly, and if they assume it, they should be making regular payments (and, in fact, I think they have to make up any pre-petition payments they missed), and it should be worth borrowing from the DIP financing to do that.
GE Capital, arguing that New Century owes it $8.7 million on leased equipment and can't stay current on payments, has asked a judge to lift the protection normally granted to companies in Chapter 11. That would enable the firm, a unit of General Electric Co. , to repossess the equipment, which includes computer servers, and chairs.
This is a multi-billion dollar company; $8.7 million, again, is surely worth borrowing from a post-petition lender, and wouldn't threaten wiping out the preferred stock.
The committee of unsecured creditors in the bankruptcy case also has opposed GE Capital's bid to seize the computers, saying it marks the third time the company has tried to force New Century to pay more "substantially more" in cash than the value of the equipment. Previous attempts were rejected by U.S. Bankruptcy Judge Kevin Carey, the committee said.
Now this really confuses me. Why are they trying to get more than the value of the equipment? Is this a lease or a sale? (If the equipment was sold, with the debt secured by the equipment, GE's in a much less favorable situation.) Or did New Century just sign a real bummer of a lease?

If this is really a lease, New Century should borrow the money needed to cure the default, and should continue its liquidation in a responsible manner. If GE is a secured creditor, it can insist on some protections of the value of its collateral, but it largely needs to sit back and wait. If anyone who sees this knows what's actually going on here, I'd love to hear more detail.

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