Kimball Hill Homes, the Rolling Meadows, Illinois builder, on Feb. 14 disclosed nearly 30 covenant violations in a 10-Q filing with the Securities and Exchange Commission and said it was considering a Chapter 11 bankruptcy filing.
In the 10-Q, the company said it has hired New York-based restructuring firm Alvarez & Marsal and "is considering a number of alternatives, including the appointment of a chief restructuring officer and whether to seek a complete restructuring under Chapter 11."
The company delivered homes in 80 communities during the fiscal year, with Houston being its strongest market, and since that time, the once-stable Texas market has fallen sharply in terms of permitting. Souring the outlook further is Kimball Hill' s exposure to the volatile markets in Florida, California and Las Vegas. Though Kimball Hill has been cutting costs, selling off land, and dropping home prices, in its fiscal first quarter, which ended December 31, 2007, the company lost $46 million, more than double its loss in the same period the year prior. The company posted $152 million in home building revenue, off 36% from last year. Home building gross margins fell to (6.1)% of revenue.
Management has been struggling to contain covenant violations. In January, CEO Ken Love obtained a limited duration waiver and amendment in January that bought a little extra time and money: lenders agreed to allow access to an additional $10 million of credit and permission to seek another $5 million to satisfy cash flow needs until March 14 while additional financing was being negotiated.
However, according to the latest filing, those terms have already been violated. The company recorded additional impairment charges--$13 million related to inventory and another $17 million in joint-venture investments--as it prepared financial statements for the latest reporting period and has triggered additional non-compliance.
The company also is tangled in two failing joint venture arrangements in Nevada--those which contributed to the write-downs. In combining the two, Kimball Hill is not only responsible for more than $60 million in debt, but take-down arrangements require the builder to buy another $59 million in land by May. According to the company's 10-Q, "there is a substantial likelihood that its liquidity will be insufficient to support these purchase obligations. Failure to make either purchase could, among other things, result in an event of default under the applicable joint venture's secured credit facility."
In December, the global professional services firm of Alvaraz & Marsal formed a dedicated group focused on home building industry restructurings. The firm has been working with a number of public and private builders, including Dunmore Homes. Managing Directors Andrew Hede and Scott Brubaker told Big Builder that there is an increasing level of "lender fatigue" as builders are repeatedly negotiating short-term covenant amendments. "Companies are struggling to deal with liquidity shortfalls as asset levels drop below debt levels," said Hede in a prepared statement. "More and more home building companies are pursuing financial and operational restructuring, and there's likely to be more pain before the industry hits bottom."
Separately, the company announced Feb. 18 that Wells Fargo Home Mortgage, a division of Wells Fargo Bank, N.A., and Kimball Hill Homes have agreed to the terms of a joint venture to originate, process and fund mortgage loans for Kimball Hill Homes customers. The joint venture, KH Mortgage, LLC, is co-owned by Wells Fargo Home Mortgage and Kimball Hill Homes. Terms of the agreement were not disclosed.
In an agreement struck in December 2007, William Long, president and CEO of the company's previous mortgage arm, KH Financial, agreed to "retire and resign" from his position on January 31. As of Feb 1, he entered into an arrangement as a non-exclusive consultant through Sept 30. According to public documents, Long's total annual compensation was $705,000.