Asta Funding Gets Loan from Controlling Stern Family; Shares Tank

Bad debt buyer Asta Funding announced late Thursday that the family that controls the company will loan it $8.2 million so it can pay a third party collector in a payment dispute. Asta blamed the problem on lagging cash flow from a very large portfolio it purchased last year, according to a filing this morning with the U.S. Securities and Exchange Commission.

Investors did not like the news at all, sending Asta’s stock price down more than 35 percent in early trading Friday to $9.70. The stock is now at its lowest price since 2003, according to RealTimeTraders.com.

Englewood Cliffs, N.J.-based Asta (Nasdaq: ASFI) said in a press release that company Chairman Arthur Stern, CEO Gary Stern and their families, will loan the company $8.2 million to satisfy collateral obligations under Asta’s current credit facility.

The loan will be used to pay a third party collector Asta has contracted with to service a $6.9 billion debt portfolio it bought in March 2007. The large portfolio has not been performing as expected, and the servicer experienced an $8.2 million shortfall in the amount it was owed by Asta and what it collected from the large portfolio. The shortfall arose principally due to larger than expected upfront legal collections costs.

The servicer also collects on other Asta portfolios. According to the SEC filing, the servicer decided to keep $8.2 million it had collected from other portfolios to make up the shortfall from the $6.9 billion portfolio. This withholding created collateral problem for Asta’s master credit facility because Asta’s various portfolios were separately financed. Asta’s master credit facility is with a consortium of banks led by Israel Discount Bank (IDB)

Asta reported it will use the $8.2 million loan from the Sterns to pay the servicer, and the money from its other portfolios can then be used under the rules of Asta’s facility with IDB. Asta blamed a weak economy and larger upfront legal costs for the shortfall experienced by its servicer.

Mark Hughes, who covers Asta for SunTrust Robinson Humphrey, wrote today in an investment note that Asta is considering this issue and its impact on portfolio evaluations, “which could mean a large impairment charge.” Hughes has a “Reduce” rating on Asta’s shares.