Form 8-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
May 21, 2008
Date of Report (Date of earliest event reported)
NOVASTAR FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Maryland 001-13533 74-2830661
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(State or other jurisdiction (Commission File (I.R.S. Employer
of incorporation or Number) Identification No.)
organization)
8140 Ward Parkway, Suite 300, Kansas City, MO 64114
(Address of principal executive offices)
(Zip Code)
(816) 237-7000
(Registrant's telephone number, including area code)
Not Applicable
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act
(17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Item 1.01 Entry into a Material Definitive Agreement
On May 21, 2008, NovaStar Mortgage, Inc. ("NMI"), a wholly-owned subsidiary of
NovaStar Financial, Inc. (the "Company"), agreed to purchase trust preferred
securities of NovaStar Capital Trust II from Kodiak CDO II Ltd., having a par
value of $6.875 million, for a cash purchase price of $550,000. The purchase was
settled through a broker on May 29, 2008.
The trust preferred securities purchased by NMI were part of a $35 million
private placement of trust preferred securities in April 2006 by NovaStar
Capital Trust II. The trust preferred securities of NovaStar Capital Trust II
represent indirect interests in unsecured junior subordinated notes, due June
30, 2036, issued by NMI to NovaStar Capital Trust II, which are guaranteed by
the Company.
Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial
Obligation or an Obligation Under an Off-Balance Sheet Arrangement
As previously reported, NMI failed to make quarterly interest payments totaling
approximately $1.7 million on its unsecured junior subordinated notes
(collectively, the "Notes") issued to NovaStar Capital Trust I and NovaStar
Capital Trust II (collectively, the "Trusts") that were due on March 30 and
April 30, 2008. The Company has guaranteed NMI's obligations under these Notes.
Upon expiration of the applicable 30-day grace period, these payment failures
became defaults under the Junior Subordinated Indenture, dated March 15, 2005,
between NMI, and JPMorgan Chase Bank, National Association, as Trustee, and the
related Parent Guarantee Agreement of the same date between the Company and the
Trustee, as well as under the Junior Subordinated Indenture dated April 18,
2006, among NMI, the Company, and JPMorgan Chase Bank, National Association, as
Trustee, and the related Parent Guarantee Agreement of the same date between the
Company and the Trustee. However, also as previously reported, prior to the
expiration of the 30-day grace period, NMI, the Company, and the trustees and
security holders of the Trusts entered into Forbearance Agreements, under which
the security holders and the trustees agreed to forbear in the exercise of their
rights and remedies with respect to these payment failures until May 30, 2008.
Neither NMI nor the Company paid the delinquent interest amounts to the Trusts
prior to or upon the expiration of the forbearance period on May 30, 2008. As a
result, the trustees and holders of 25% of the outstanding trust preferred
securities of the applicable Trust (excluding the trust preferred securities
held by the Company and its affiliates) have the right to accelerate all
principal, accrued interest, and other obligations of NMI under the Notes and to
demand payment of all such amounts from the Company under the related Parent
Guarantee Agreements. The total principal and accrued interest owed under the
Notes, net of amounts owed in respect of the trust preferred securities
purchased by NMI as described above, was approximately $80.5 million as of June
5, 2008. In addition, NMI and the Company are obligated to reimburse the
trustees for all reasonable expenses, disbursements and advances in connection
with the exercise of rights under the Indentures.
On June 4, 2008, the Company and NMI received a written notice of acceleration
from the holders of the trust preferred securities of NovaStar Capital Trust I,
which declared all obligations of NMI under the related Notes and Indenture
(calculated by the trust preferred security holders to be approximately $51.0
million as of May 31, 2008) to be immediately due and payable, and stated the
intention of the trust preferred security holders to pursue all rights and
remedies available to them, including but not limited to enforcing their rights
under the related Parent Guarantee Agreement.
As of the date of this Form 8-K, no acceleration notice or payment demand has
been received by the Company or NMI under the Notes, Indenture or Parent
Guarantee Agreement related to NovaStar Capital Trust II.
While the Company intends to attempt to restructure the terms of the Indentures,
there can be no assurance that it will be able to do so. Enforcement of remedies
against NMI and the Company under the Notes, Indentures and related Parent
Guarantee Agreements would have a material adverse effect on the Company and its
financial condition and liquidity and would likely cause the Company to seek the
protection of applicable bankruptcy laws.
The default under the Indentures constitutes a cross-default under certain
Letter of Credit and Reimbursement Agreements between the Company and Wachovia
Bank, under which letters of credit have been issued to support certain surety
bonds. The surety bonds relate to certain state licenses previously held by the
Company in connection with its prior mortgage lending business. The Company has
previously posted cash collateral to secure the outstanding letters of credit in
an amount equal to 105% of the face amount of the outstanding letters of credit.
While the Company has surrendered the underlying state licenses and has
requested the cancellation of the surety bonds and related letters of credit, as
of June 5, 2008 certain surety bonds remain outstanding and, consequently,
approximately $8.3 million remains posted as cash collateral on related letters
of credit still outstanding. Absent a default, the cash collateral is to be
returned to the Company from time to time upon the expiration, replacement,
termination or return of a letter of credit, to the extent that, following such
expiration, replacement, termination or return, the aggregate amount posted
exceeds 105% of the remaining letters of credit and any other due and unpaid
amounts. However, so long as a default exists under the Letter of Credit and
Reimbursement Agreements, Wachovia Bank is not obligated to return any cash
collateral to the Company. A material delay or reduction in the Company's
receipt of the cash collateral would have a material adverse effect on the
Company's liquidity position and could force the Company to seek the protection
of applicable bankruptcy laws.
Statements in this Report on Form 8-K which are not historical facts are
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Forward looking statements are those that
predict or describe future events and that do not relate solely to historical
matters and include statements regarding intentions or beliefs with respect to
the Company's ability to renegotiate the terms of the Indentures. Some important
factors that could cause actual results to differ materially from those
anticipated include: the Company's ability to manage its business during this
difficult period for the subprime industry; the willingness of the holders of
the trust preferred securities to negotiate a restructuring of the terms of such
securities; the Company's ability to continue as a going concern; its ability to
maintain sufficient liquidity, and the risks that are from time to time included
in the Company's filings with the Securities and Exchange Commission. Other
factors not presently identified may also cause actual results to differ. This
report on Form 8-K speaks only as of its date and the Company expressly
disclaims any duty to update the information herein except as required by
federal securities laws.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NOVASTAR FINANCIAL, INC.
DATE: June 5, 2008 /s/ Rodney Schwatken
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Rodney Schwatken
Chief Financial Officer