It seems that financial covenants aren't the only standards home builders, especially those that are publicly held, need to be especially concerned with during the earnings season. An official at the NYSE's regulatory arm confirmed that home builders are being scrutinized regarding their compliance with quantitative listing standards. The heightened attention comes in light of the sector's continued and well-publicized struggles.
Directly in the crosshairs is Hollywood, Fla.-based TOUSA (NYSE:TOA), which was last traded officially on the NYSE Oct. 12, before its stock price fell below the Exchange's threshold of $1.05. When a stock price reaches that point, a security is subjected to a "sub-penny trading halt" and is suspended from trading on the NYSE.
Harsh as is sounds, that doesn't mean trading has stopped. It does, however, signal that the security is losing a foothold with the exchange and is under elevated scrutiny. Once the halt is enacted, orders are routed through NYSE Arca or a similar electronic exchange, and trading of the stock on the NYSE can't be resumed until the security spends a full day trading above $1.10.
Even more damning is that, given its precarious debt load and consistently weak stock price, all signs point to the fact that TOUSA is close to triggering an official review or even immediate de-listing action from the exchange as it flirts with breeching several listing requirements.
"The compliance department is working closely with the company and monitoring their progress," confirmed Scott Peterson, managing director of communications, NYSE Regulation.
Worth its Weight
A company must meet a variety of financial requirements that apply to size, revenue, and earnings in order to be granted an initial listing on either of the two main stock exchanges in the U.S.–the NYSE or the NASDAQ. Once anointed, the company must maintain certain standards in order to keep the listing. But with incredible growth posted by the sector over the last few years, the farthest thing from the mind's of industry experts, executives, or investors was whether home builders would be able to retain their exchange status.
Certainly, there is a complex variety of quantitative and corporate governance compliance issues that can trigger a delisting process or place a company's status in jeopardy. The violation most precarious for TOUSA: a stock price that closed below the $1 mark over a 30-day moving average. TOUSA's stock first dipped below $1 in trading on Oct. 19 and has not bounced back up to that level since. In this morning's trading, the company hit an all-time low of $0.31.
Also on the brink of tripping regulations is the fact that TOUSA's market cap was in the $26 million range on the morning of Nov. 9. The NYSE mandates that a company must maintain a $25 million market cap.
TOUSA's stock price has plunged more than 90% this last year, and, as a result, the low market cap is terribly off-balance with the $1 billion-plus debt load.
Though the company has not officially filed for protection under Chapter 11, many experts and industry executives speculate it is only a matter of time.
Earlier this week, the builder announced it has hired Kroll Zolfo Cooper to help in "evaluating its restructuring options." Last month, it withdrew financial guidance through 2008 and announced the retention of advisory group Lazard Freres. In anticipation of a filing, a group of TOUSA's creditors hired law firm Akin Gump to assess their rights.
What's The Process?
"Once a company falls below standards, we immediately contact the company and tell them they are in danger of de-listing," Peterson said . "The NYSE has what we refer to as a 'cure period.'"
In cases like this, the Exchange contacts the company, which may come back into compliance, sometimes simply by updating the necessary financial information.
But other times, there is no recovery event apparent on the horizon, either in the position of the company itself or the influence of a struggling sector. If the company fails to regain compliance or provide adequate reason to show that it will do so, a formal recommendation for de-listing is put into place. This typically involves official notification in writing and an opportunity to request a review. Eventually, a determination is made based on oral arguments, written briefs, and submitted material.
But being removed from an exchange is not always a patient and orderly process. "Despite all the [steps], we do reserve the right to de-list a company at any time," said Peterson. "If it is clear that a company is just not going to make it, we have de-listed companies, basically on the spot."
Case in point: New Century Financial Corp., a mortgage REIT, was suspended in March when it was considered "no longer suitable for trading in light of disclosure about severe liquidity issues."
Through the end of the third quarter, the NYSE had revoked listings on a total of 16 securities in 2007.
The biggest impact of de-listing comes from institutional investors that are prohibited from holding stocks at $1 or less. For some, an initial breakpoint comes at the $10 point. As soon as a security trips that threshold on the downside, the investors are forced to dump their shares. A larger pool of these investors have a threshold at the $5 point, and then again at the $1 mark.
Though a company certainly loses liquidity and transparency if it is excised from an exchange, it still doesn't necessarily suspend trading entirely. Usually, it transfers to over-the-counter (OTC) status, which simply means it's an equity that is not listed or traded on a national securities exchange, and winds up being traded on the OTC Bulletin Board, or Pink Sheets–regulated quotation services that display real-time quotes, last-sale prices, and volume information on OTC equity securities.
"It's not necessarily the end of the world," said one home builder investor relations specialist who experienced de-listing with a previous company in another industry. "But at the same time, it's a terrible blow to the ego."
For complete details of the NYSE criteria for continued listing section 802.01, click here.