The clock is ticking for Roswell, Ga.-based Ashton Woods Homes, which continues to negotiate with lenders to keep from defaulting on a $125 million senior subordinated note. If it doesn’t reach an agreement within the 30-day “grace period” that ends Oct. 31, and defaults, the builder would be prohibited from borrowing more money.

Missing this deadline might also cause Ashton Woods’ debt to become due and payable earlier than its maturity.

Last week, Ashton Woods disclosed that lenders with higher creditor status continue to restrict the builder from paying interest payment on that note. The builder can’t make that payment because it is in default on its senior credit facility. It is in that situation because that the terms of that facility require the company’s net worth to stay above $110 million, which is no longer the case for Ashton Woods.

The builder fell below that level in its fiscal year ended May 31, during which it reported $116.9 million in write downs against its inventories, according to a 10K report filed by Ashton Woods in August.

That document says that if the company’s net worth was still below the required level as of Aug. 31, Ashton Woods must offer to purchase 10 percent of that subordinated note. The paradox is that is Ashton Woods' current senior credit facility, which at the end of its latest fiscal year was $22.8 million, prohibits such a buyback.

The senior lenders are blocking any interest payments or repurchases because “they don’t want us making any payments to lenders below them,” on the pecking order, explains Jerry Patava, president and CEO of Toronto-based Great Gulf Group, Ashton Woods’ parent company.

Patava has been acting as the builder’s interim CFO since February, when its previous CFO Robert Salomon resigned.

Patava remains optimistic that Ashton Woods can resolve its financial impasse with lenders by the end of October, either through a restructuring of the credit facility or a waiver that would allow it to make the interest payment on the subordinated note. Patava points out that the builder’s bank debt, at around $31 million, is small compared to other builders its size. (Its 10K states that Ashton Woods’ total indebtedness for its latest fiscal year was $149.4 million, and its debt to capitalization ratio was 71.8 percent.)

“Plus,” Patava adds, “we are still selling houses.”

While the company has not released data about its home sales for the past five months, its closings as of May 31 for the latest fiscal year were 1,393 units, down 30.1 percent from its previous fiscal year.

For its latest fiscal year, Ashton Woods generated $408.5 million in revenue, which was down 29.8 percent year-over year, and reported a $113.5 million loss. It also noted negative cash flow of $91.7 million.

John Caulfield is senior editor at BUILDER magazine.

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