Calabasas Company to Brave Markets With IPO

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PennyMac, a controversial company started by former Countrywide Financial Corp. executives to invest in distressed mortgages, could become the first local company in more than a year and a half to debut in the public markets.

The Calabasas company, which has been criticized for profiting from the risky mortgages its founders had promoted while at Countrywide, has submitted a prospectus to the Securities and Exchange Commission for a $750 million initial public offering.

The proceeds from the sale, slated for the third quarter, will be used primarily to purchase heavily discounted, largely underperforming mortgage portfolios and revive them through loan modification programs and similar efforts.

?e believe that there are unique, current market opportunities to acquire distressed mortgage loans and mortgage-related assets at significant discounts to their unpaid principal balances,?the company said in its May 22 filing.

PennyMac executives, including founder Stanford Kurland, declined to comment for this story.

To go public, PennyMac plans to form a subsidiary that will be structured as a real estate investment trust, which provides tax advantages over an investment company structure. The subsidiary, PennyMac Mortgage Investment Trust, will effectively be the operating arm of the company.

The offering is being underwritten by Merrill Lynch, Credit Suisse and Deutsche Bank. The number of shares and the expected price have not been set.

Concurrent with the public offering, the company plans to sell as much as $40 million in stock in a private placement.

Since its founding in early 2008, PennyMac, short for Private National Mortgage Acceptance Co., has raised more than a half-billion dollars from private investors to purchase mortgages, many of which are on the brink of foreclosure.

The company recently acquired a $560 million portfolio of mostly delinquent mortgages from the Federal Deposit Insurance Corp. after the failure of First National Bank of Nevada. Under the terms of the deal, PennyMac paid the equivalent of 38 cents on the dollar.

PennyMac said it specifically intends to use proceeds from the IPO to invest in three areas: mortgage portfolios from failed banks being liquidated by the FDIC, loans acquired through the U.S. Treasury Dept.? Public-Private Investment Program and loans directly acquired from other banks.

The PennyMac IPO, if successful, could be the largest such offering in the United States in more than a year.

The IPO market has been mired in a slide in recent months as the recession has scared away many investors. There have been just seven IPOs in the United States in 2009, compared with 31 by this same time last year, according to Renaissance Capital LLC. Los Angeles County in particular has not seen an IPO since North Hollywood hospital patient management company IPC the Hospitalist Co. Inc. went public in January 2008.

But the number of new filings has crept up lately, suggesting that the market may be ready to bounce back, said Jackie Kelley, who tracks public offerings for Ernst & Young.

?? optimistic that we?e starting to see life come back to the IPO market,?said Kelley.


Market opportunities

With the backing of money manager BlackRock Inc. and hedge fund Highfields Capital Management, PennyMac was started by Kurland, who was the No. 2 executive at Countrywide behind then-Chief Executive Angelo Mozilo. The company was founded ?pecifically to address the opportunities created by the current dislocations in the markets for residential mortgage assets,?the trust said in the filing.

However, critics contend that many of those dislocations were caused by Countrywide, which popularized subprime lending and is strongly associated with risky lending practices. Countrywide was the nation? largest independent mortgage lender, but after the housing bubble burst, the company sustained catastrophic losses and was bought last year at a fire-sale price by Bank of America Corp.

While blame for Countrywide? tactics can be hard to pin on any one person, several of the top executives have taken considerable heat. Mozilo, in particular, has been named in several lawsuits brought by states and shareholders, and news reports said he is expected to be charged by the SEC with fraud and insider trading in a civil lawsuit. The FBI, too, is investigating the tanned former executive.

Kurland also has been the target of a number of lawsuits alleging that he was a champion during his 27 years at the company of a culture that encouraged brokers to push borrowers into loans they could not afford. However, in the prospectus, PennyMac simply said that Kurland ?elped grow Countrywide? loan origination and servicing capabilities.?p>Since starting PennyMac, Kurland and his company have been vilified, drawing comparisons in the press to arsonists and serial killers. One columnist on the popular Web site Huffington Post labeled Kurland the ?reep of the week?in early March.

But some have come out in support of PennyMac, pointing out that the company is dedicated to keeping borrowers in their homes, and its management team has the experience and industry knowledge to do just that.

PennyMac is ?xactly the kind of company this country needs more of right now,?Ryan Avent wrote in a March column for Conde Nast? now-defunct Portfolio magazine.

The controversy surrounding PennyMac, an otherwise unglamorous company with a bare-bones Web site and lack of advertising, may actually benefit the IPO, said USC business professor James Cameron Spindler.

?f you have these former Countrywide executives that attract a lot of attention, that? free publicity,?Spindler said. ?aving some buzz surrounding your company is helpful. It can help attract some investors that you might be interested in reaching.?enews_Column=0