Accredited Home Lenders, the embattled sub-prime mortgage lender, is suing Lone Star over the private equity company’s decision to withdraw its agreed takeover.

Since the $400 million (£198 million) Lone Star offer was agreed in June, Accredited has unveiled a sharp deterioration in trading. Last week, the broker admitted that it had offered 59 per cent fewer loans in the second quarter of the year compared with the same period the year before. It also said it would fall into the red with a loss of $40 million to $60 million, and conceded that the delinquency rate on its mortgages had tripled.

At the beginning of August, the lender gave warning that it might have to file for bankruptcy protection, but insisted that the takeover was still going ahead.

On Friday evening, Lone Star, the global private equity group, which splits its $13 billion financing pot across six funds, said that it had withdrawn its offer because of the “drastic deterioration in the financial and operational condition of the company, among other things”.

Accredited’s shares fell by a third on Wall Street yesterday as the mortgage lender insisted that, under the fund’s agreed offer, Lone Star “may not refuse to honour its obligations based on any deterioration in the business”. It said that Lone Star was legally obliged to honour the deal because, under the terms of the tender offer, it is not permitted to back out of the deal owing to issues “generally affecting the nonprime industry in which the company operates which have not disproportionately affected the company”.

Accredited insists in its legal filing that as long as more than half of all its shares have been tendered to Lone Star by today in favour of the deal, all conditions connected with the takeover will have been met. Lone Star has threatened that it will not accept any tendered shares from this morning.

It is thought that Lone Star will try to rely on conditions in the offer document that allow it to pull out of the deal. This may lead to a battle over when a so-called material adverse change clause is triggered, evoking memories of WPP’s vain efforts to pull out of a deal struck just before the September 11 terrorist attacks. The advertising company tried to wriggle out of a commitment to buy Tempus, a media-buying company.

Accredited’s financial performance has worsened rapidly. In 2005, the company boasted net income of $155 million over the year, with loans on its balance sheet worth $9.6 billion, up 46 per cent on the year before.

Since then, the slowdown in the US housing market and 16 consecutive interest rate rises until last summer have triggered an increase in the number of sub-prime mortgage defaults, hitting lenders’ income. More than 50 sub-prime lenders have gone bankrupt and Accredited has said that, should Lone Star walk away, it too may have to file for bankruptcy protection.

Elsewhere, NovaStar Financial, another loss-making sub-prime mortgage lender, sought to reassure the market by claiming that “right now, we’re taking the appropriate steps to be sure we’re here in the long term,” after having lost three quarters of its share price value in a month.

Accredited failed to return calls yesterday. Lone Star declined to comment.

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