Sherman Stake Could be Potential Capital Source for Minority Owners

Mortgage insurer Radian Group is considering selling its 21 percent stake in debt purchasing giant Sherman Financial as it seeks capital to shore up its finances in the wake of the mortgage market meltdown. Radian’s leaders disclosed the option during a quarterly conference call with analysts.

Philadelphia-based Radian said it lost $618 million in the fourth quarter and recorded a net loss of $1.2 billion for the full year. Radian CEO S.A. Ibrahim said at the end of his opening remarks that the firm was undertaking “capital raising initiatives,” but did not specify what steps the company was taking to raise cash.

The company’s Chief Financial Officer Robert Quint however specifically mentioned that the Sherman stake was a “potential source of additional capital.” Quint also said that Sherman had performed well in a difficult environment in 2007, but did not provide financial or operational details.

Radian last fall sold a significant portion of its stake to Sherman management last fall (“Sherman Management Pays $519 million for 37% of Firm,” Sept. 24, 2007). The deal, which saw Sherman’s management fork over $519 million for majority interest in the debt purchaser, also included an option for Radian to sell its remaining share within a year.

Radian’s sometimes-rival and sometimes-partner mortgage insurer MGIC also holds a significant stake in Sherman. MGIC also part of the deal last September. After the transaction, MGIC held a 24 percent stake in Sherman, Radian 21 percent, and Sherman management held the rest.

Like Radian, Mortgage Guaranty Insurance Corporation (MGIC) has been badly wounded by the subprime mortgage turbulence. Last week, it too reported massive losses for the year — $1.67 billion – and provided guidance that told investors not to expect positive net income in 2008.