In 2005, TOUSA's $857 million joint venture to acquire the assets of Transeastern Properties was the deal that would catapult the tier-two public company to new heights. With the addition of 22,000 lots in booming Florida to its land portfolio, the company brought its pipeline up to 10-plus years in a housing market that wouldn't quit. However, two years and a housing recession later, that's proving to be the deal that sunk the company to new depths. And by early 2008, it could be the deal that pushes the company beyond the brink, company sources say.

At press time, management had yet to post TOUSA's fourth quarter and year-end results, but it appears that nothing short of a miracle can pull the company out of its downward spiral. TOUSA's third quarter revenues, sales, and profit margins further deteriorated, dragging the balance sheet deeper into the red with a recorded net loss of $619.7 million. The loss did nothing for its stock price, and the New York Stock Exchange was forced to suspend trading of TOUSA common stock and debt securities.

Management continues to monetize assets, generate cash, and pay down its debt. The team shrunk the company's lot inventory by 35 percent since the beginning of 2007, bringing its controlled lot counts down to 39,500 home sites from 60,600 home sites. Of those, roughly 4,700 lots–800 of which are optioned–trace back to the Transeastern deal.

However, for some stakeholders, such treading water tactics come as too little, too late. "It's like rearranging deck chairs on the Titanic at this point," says Kevin Starke, an analyst with Weeden & Co.

TOUSA's re-margin obligations on the joint venture are the main force driving the company toward bankruptcy. TOUSA put little equity–roughly $100 million–into the Transeastern joint venture, leveraging most of the balance. As the investment's value has continued to be impaired through the downturn, TOUSA has had to increase its equity in the deal, mainly by securing roughly $506.8 million in first- and second-lien term facility debt. As of 3Q2007, the company's net home building debt outweighed its inventory's value $1.71 billion to $1.57 billion, respectively. The imbalance underscores the question of how much debt it can truly pay down by selling off assets.

Further clouding the picture is TOUSA's liberal use of land options to tie up lots. Like most builders, it is forfeiting its deposits rather than spending cash to exercise options. However, letters of credit secured some options, creating a balance sheet double whammy when they are abandoned. In 3Q2007 alone, the company walked away from options on 9,400 sites, sacrificing $166.9 million in cash deposits while allowing $91.2 million in letters of credit to be drawn and tacked onto its debt. The company has another $213.9 million in options backed by similar letters of credit.

A TOUSA failure could mark the downturn's second public builder casualty; Levitt and Sons filed for bankruptcy in November. Public builder stocks will undoubtedly absorb some of the shock. More significant, another failure in the sector could render banks, debt holders, and other industry stakeholders more inflexible, possibly triggering more public builder bankruptcies before the market stabilizes. –Sarah Yaussi