Certain of Beazer Homes’ loan covenants require that the homebuilder maintain minimum levels of stockholder equity (or some variation, such as tangible net worth). After posting a devastating September-quarter loss of $12.32 a share, driven primarily by asset impairments (and lot abandonment charges) and lower net orders, the company could find itself with little borrowing capacity needed to stay afloat until industry conditions improve, according to the 2008 FORM 10-K regulatory filing:
- We expect that fiscal 2009 will pose significant challenges for us. Like many other homebuilders, we have experienced a material reduction in revenues and margins and we incurred significant net losses in fiscal 2008 and 2007…. This has resulted in a decrease in our stockholders’ equity from $1.7 billion at September 30, 2006 to $375 million at September 30, 2008. We believe that the homebuilding market will remain challenging throughout fiscal 2009 and, as a result, it is likely that we will also incur net losses in 2009, which will further reduce our stockholders’ equity.
Beazer Homes’ borrowing base under its Secured Revolving Credit Facility, which was recently restricted to $250 million from $400 million, is subject to further reduction to $100 million if its consolidated tangible net worth falls below $250 million. In addition, should tangible net worth fall below $100 million, the homebuilder would be in default under its debt incurrence covenant, and the lenders — including JPMorgan Chase, Citibank, BNP Paribas, and The Royal Bank of Scotland — could accelerate payment of $61.2 million in outstanding obligations. Breach of this facility might also result in cross defaults of senior notes and joint ventures totaling about $219 million in additional potential obligations.
At September 30, the foundation of Beazer Homes’ balance sheet was riddled with cracks: financial leverage was 82.3 percent, with unrestricted cash of approximately $445 million and total outstanding indebtedness of approximately $1.75 billion (about $1.34 billion in senior notes matures in the years between 2011 to 2016). Chief Financial Officer Allan P. Merrill acknowledged on the earnings call that management was “acutely aware of a need to reduce [the] leverage ratio.” Going forward, however, with both new orders and net worth likely to fall further — and limited access to new capital, through bank borrowings and/or common or preferred stock offerings — the company’s ability to raise funds (in my opinion) will be limited principally to land asset sales.
