Within the next 30 days, American West Development expects to file its plan for reorganization under Chapter 11 of the U.S. Bankruptcy Code, according to the attorney representing the company in that proceeding. The builder’s president believes his company’s stay in bankruptcy will be brief and that American West will be able to pursue its growth plans this summer.
On March 1, Las Vegas-based American West—which ranked among the top 100 builders in closings in 2010—petitioned the U.S. Bankruptcy Court in Nevada for protection from its creditors. In its court documents, the company reported assets of $55.4 million and liabilities of $207.7 million, which include a $177.5 million balance on a $200.3 million term loan with seven banks that American West had negotiated in December 2009.
American West’s bankruptcy is “prepackaged,” meaning that the company filed having already addressed some of its debt issues and is now asking the court to approve the actions.
Last fall, the company paid down $22 million of that term loan. And prior to its Chapter 11 filing, American West entered into a “lock-up” agreement with lenders to settle the term loan, which is collateralized by American West’s receivables. That settlement allows the bank group to make aggregate secured claims on that term loan up to $49.6 million (which happens to be the current book value of the receivables), and unsecured claims up to $127.8 million. Each member of the bank group will receive a promissory note secured by American West’s receivables and equal to the principal value plus interest of their respective secured claims.
Brett Axelrod, an attorney with the Las Vegas-based firm Fox Rothchild, which represents the builder in its Chapter 11 case, tells Builder that by accepting this deal, the bank group would be waiving its rights against American West to receive any distribution beyond the payments laid out in the lock-up agreement, if it is approved by the court.
(Wells Fargo has the greatest financial exposure in this proceeding, with total claims of $44.4 million, of which nearly $32 million are unsecured. David DeVictor, a senior vice president for Wells Fargo, declined to comment about the case, as did Bruce Weyers, a vice president with California Bank & Trust and the administrator for the bank group.)
Revolving Credit Line In Place
American West has petitioned the court to allow it to continue paying its “critical vendors,” essentially suppliers and contractors it uses to build its homes. The company also wants to use up to $10.8 million of its cash collateral to defray operating expenses, including payroll, in the first 13 weeks after its filing. Any reorganization plan, Axelrod says, is likely to include a construction defect trust to help the builder settle current litigation that, according to court documents, involves 215 of its houses, as well as any future homeowner complaints. The builder is also asking the court to nullify price promise guarantees that American West previously made with certain home buyers.
The court has already signed off on a $10 million debtor-in-possession revolving credit line that American West has secured from AWH Ventures, an entity within the corporation that provides its internal treasury functions. (The interest rate on that revolver is 15%.) “The $10 million revolver will be more than sufficient to allow the company to effectuate its reorganization plan and quickly emerge from bankruptcy,” said Robert Evans, American West’s president, in an email to Builder.
American West has a somewhat unique operational structure in that it serves as the general contractor for the homes it builds on land it develops. It then sells those completed homes to limited liability entities that market its products. American West gets paid when the homes are sold to buyers.
Prior to its bankruptcy filing, the home-selling entities whose communities were nearly sold out liquidated and merged into the corporation. (Those entities only sold 3 homes in 2011, compared to 97 in 2010 and 75 in 2009, according to court documents.) There remain eight active home-selling entities, says Evans, with four more communities slated to open this summer.
The active home-selling entities are excluded from American West’s bankruptcy filing, as are Oakwood Homes, the Denver-based builder owned by American West Development; and the parent’s unconsolidated joint ventures.
Evans tells Builder that it is essential for his company to get out of bankruptcy quickly so that it can resume normal business activities. “The company will be able to meet its reorganized debt obligations over an extended period of time as it continues to construct new homes and recoups advanced development costs from affiliates,” he stated in his email. “The company will continue to develop land and construct homes on over 2,000 finished lots and 3,500 approved paper lots held by affiliates.” The company has retained Province Advisors as its reorganization consultant.
Seeking "Breathing Room"
Within days of its Chapter 11 petition, American West had filed over 70 motions and other documents with the bankruptcy court. That paper blizzard offers a trove of information not typically disclosed by private companies, from the $75,000 per month the builder expects to pay for utilities, to its $296,000 semimonthly payroll for 71 employees plus $28,000 in estimated commissions. Even as it anticipates a short stay in Chapter 11, American West expects to incur more than $1.5 million in Chapter 11-related costs. The builder also entered bankruptcy with nearly $20 million in surety bond debt with two insurers, Insco Dico Group and Insurance Company of the West, which still needs to be resolved.
These documents also describe the now-familiar problems that forced American West to file for bankruptcy protection: decreasing buyer demand, tightening mortgage lending, and sinking home prices. By filing Chapter 11, American West “seeks breathing room to formulate a reorganization strategy that will allow [the builder] to continue as a going concern for the benefit of all parties in interest,” one of its motions states.
Last year, American West closed 165 homes at an average selling price of $290,000, says Evans. Its recently opened Carmel Hills community features homes ranging from 1,608 to 2,995 square feet, selling for $197,500 to $256,000. American West's 2011 closings were down 33% from the previous year in a Las Vegas market whose total closings have been dropping precipitously since 2007, from 36,015 closings to 3,984 last year, according to Home Builders Research, a local market firm that tracks Vegas’s residential construction and sales.
John Caulfield is senior editor for Builder magazine.
Learn more about markets featured in this article: Las Vegas, NV.