As home builder gets a lifeline, bearish traders get zinged

The hefty capital infusion announced today for battered home builder Standard Pacific Corp. was a surprise to Wall Street -- and a particularly nasty surprise to short-sellers who have been betting that the Irvine-based company was headed for bankruptcy.

Standard Pacific’s shares surged $1.07, or 48%, to $3.29 after New York private-equity firm MatlinPatterson Global Advisers agreed to pump $530 million into the firm.

The action in the stock had a "short-covering" feel to it: buying by bearish traders who had previously borrowed shares and sold them, hoping the price would drop. If their bet was correct they could replace the loaned stock at a lower price and pocket the difference. With a white knight now in Standard Pacific's camp, it looks like some of the shorts were scrambling to exit their trades today.

Short-sellers have had the home builder in their sights for the last year as the company’s earnings have dwindled and its debt problems have mounted. The number of Standard Pacific shares sold short ballooned from 17 million in May 2007 to 47 million by mid-January. And the shorts had it right: In the same period the stock plunged from $21.32 to as low as $2.06.

As the stock recovered a bit in winter some short-sellers cashed out of their bearish bets, trimming the number of shorted shares to 36.6 million by April 30.

But the bears jumped on the company again this month, boosting the shorted total to 43 million shares by May 15 -- more than half the shares outstanding. That looked smart as the stock sank from $5.06 on April 30 to $2.22 on Friday. It didn’t look quite so smart today as MatlinPatterson rode in.

The rescuer, a well-known investor in distressed companies, is buying preferred stock convertible into common shares. That will substantially dilute current investors, so Standard Pacific will have to call a shareholder meeting for approval of the deal.

Given its need for cash, "This probably was the company's only choice," wrote Vicki Bryan, senior high-yield analyst at Gimme Credit, an independent research service on corporate bonds, in a report today. She noted that Standard Pacific has had to negotiate with its lenders to avoid falling into technical default on its loans.

David Matlin, CEO of MatlinPatterson, said in a statement that the builder was a "strong franchise [that] is well-positioned for renewed profitability and success as conditions improve."

That wasn’t what the shorts wanted to hear.

Vultures see better pickings, but many are circling slowly

From Times staff writer Walter Hamilton:

Few corners of the investment world are drawing more interest these days than "distressed" assets -- the realm of so-called vulture investors.

The sub-prime mortgage crisis, credit crunch and weak economy have left plenty of companies in dire financial straits, with many more expected to join those ranks. Vulture investors pick through troubled firms in search of bargains.

At an investment conference in New York on Wednesday, managers of private-equity funds specializing in distressed investing said they're seeing loads of interest from big-money investors looking to pour cash into their funds. The conference, sponsored by The Deal, a Wall Street trade publication, attracted about 200 industry players and investors.

Raquel Palmer, a partner at KPS Capital Partners in New York, said her firm recently capped a new distressed fund after attracting $1.2 billion from investors. The fund easily could have raised four times that amount, she said.

The best opportunities, Palmer said, are in companies that papered over their problems in recent years by borrowing money during the era of free-flowing credit that ended in the middle of last year.

"We're seeing a lot of opportunities that were really born from the fact that many transactions that occurred over the past few years were highly levered companies," she said. "There was access to capital -- what we call bailout financing -- for businesses that had real operational problems. But instead of fixing the underlying business they just went out and raised more cash. We think that [will be] the single biggest improvement in our deal flow over the next few years."

Vultures often expect to buy debt or equity stakes in companies from investors who made bad bets and now just want out, even at pennies on the dollar.

But Palmer and others cautioned that a company that looks like a bargain today could be an albatross tomorrow if the economy slides further. They're picking investments carefully and proceeding slowly, she said.

"We really are being very cautious right now," she said.

Which might be good advice for individual investors who are themselves scavenging for bargains among beaten-down companies.

Photo: Associated Press