Faced with a liquidity crisis brought on by noncompliance with some of its debt agreements, executives at Ashton Woods have been scrambling to find a way out of its current financial mess. A possible solution surfaced late yesterday afternoon as the company announced the launch of a private debt exchange offer on $125 million in senior subordinated notes.

The offering intends to swap out any and all of the company's 9.5% senior subordinate notes due 2015 for new 11.0% senior subordinated notes due 2015 that come with a guarantee on $65.0 million of the principal amount and Class B membership interest in the company; the latter would be capped at 20% of outstanding membership interests in the company.

Management was able to sweeten the deal with the share offer after certain existing equity holders agreed to ante up another $20 million in equity. The bulk of its existing note holders--those with holdings totaling 70.8% of the aggregate principal amount of the senior notes--have agreed to support the debt swap.

In conjunction with the debt swap, management also asked existing note holders to amend, if not eliminate, the bulk of the notes' restrictive covenants, which have been at the root of the company's problems. Moreover, management negotiated critical amendments to its senior credit facility, which remedy existing defaults and secure a $95 million replacement credit line, that are contingent upon the close of the exchange offer on Feb. 11.

The company has been out of compliance on both the senior subordinated notes and credit facility agreements since the second half of 2008. In August, the company tripped a minimum tangible net worth covenant tied to its senior subordinated notes, requiring it to immediately pay back 10% of the notes' value. However, the company was unable to make even the interest payments on the notes thanks to a restriction triggered by a default on its senior credit facility agreement.

All the pieces appear nearly in place to right many of the company's financial wrongs. However, the ultimate success of the plan remains completely market dependent.

Hovnanian Enterprises attempted a similar debt exchange in October. But the market's appetite for the swap lagged executives' expectations. Management made the offer to holders of $1.5 billion in debt but ultimately issued $29.3 million in new notes.