Debt Moves

Public builders begin to bulk up on debt to improve liquidity.

In an unusual move in early May, D.R. Horton management moved up its fiscal 2Q2009 earnings release by three days, releasing its financial results May 4 after market close. Analysts suspected that the decision was made to get out ahead of the first post-merger earnings releases from Pulte Homes and Centex Corp., and preserve pricing on a debt issuance deal that many analysts presumed to be in the works.

Many public builders are seeing this as a good time to bulk up on debt, infusing their balance sheets with additional liquidity. The debt markets, particularly the bond market, have opened up once again as investors—most notably hedge funds—have begun investing once again in corporate bonds, coupling those investments with credit-default swaps to earn extra return.

Analysts' suspicions were confirmed when Horton management announced it would offer $450 million aggregate principal amount of 2 percent convertible senior notes due in 2014, with an option for the underwriters to purchase up to an additional $50 million. The offer was expected to close May 13.

Horton's convertible notes offering came on the heels of three other public home builders' debt deals.

Late April 23, Lennar Corp. announced it had sold $400 million worth of 12.25 percent senior notes due in 2017. The move followed fast an announcement earlier in the week that it was beefing up its shelf supply of stock by $275 million.

Toll Brothers, too, further liquefied itself that same week, selling $400 million in 8.91 percent bonds. At the time, Toll's CFO Joel Rassman said he thought the deal could signal a return of available capital to the market for borrowers with good balance sheets.

“The markets have primarily been closed to our industry for three years,” Rassman told BIG BUILDER, “particularly since Lehman [Brothers] in September.”

Executives at The Ryland Group sounded a similar note. They kicked off the company's first quarter earnings call April 30 with the announcement that the company sold $230 million in 8.4 percent senior notes due in 2017, a move that would up the company's cash count to $750 million compared to $213 million at the end of 1Q2008.

CFO Gordon Milne noted, “It's better to secure financing when you don't need it.”

He went on to add that essentially swapping out short-term maturities for longer-term maturities gives the company flexibility, allowing it to better deal with whatever the market may be down the road. “It's good capital planning,” he said.

The big question, though, is to what end will the money be used? Ryland executives noted, because the money was unrestricted, it could be used for land purchases or investment in its joint venture with Oaktree Capital.

Both Lennar and Toll could use the funds to pay off existing debt coming due in the next couple of years with debt with a longer maturity rate. Lennar execs also said it could use the proceeds to pay off joint-venture obligations.

Pali Capital analyst Stephen East pointed out in a research note that Lennar's bond sale could provide more than enough cash to service nearly two-thirds of debt maturities due in 2009 and 2010. —Teresa Burney and Sarah Yaussi