As it becomes more apparent that the deterioration of the overall home building market will not be resuscitated by year-end, Scottsdale, Ariz.-based Meritage Homes joins several other public companies by proactively amending its revolving credit agreement to reduce the potential pressure on needed cash flow.
Separately, Dominion Homes, which has triggered covenants governing its credit facility, has gotten its lenders to agree to a modification of terms, according to an 8K filing with the Securities and Exhange Commission.
The Meritage amendment permanently decreases the borrowing capacity under the credit agreement, which matures in 2011, by $50 million to $800 million and modifies the applicable interest rate depending on the leverage ratio.
"We are focused on improving our balance sheet strength by reducing inventory and debt," said Steven J. Hilton, chairman and CEO of Meritage Homes. "This amendment is a pre-emptive measure that provides us additional operating flexibility as market conditions for home builders continue to be very challenging."
In order to capitalize on the reduction period, Meritage is required to provide notice to Guaranty Bank of its intention to exercise this allowance before June 30, 2008.
Specific parameters of the agreement include:
- A reduction in the minimum interest coverage ratio from 2.0 to 1.0 for a reduction period of up to nine consecutive quarters. In addition, a further reduction of the interest coverage ratio to not less than 0.5 for a period of up to three consecutive quarters during the reduction period. On June 30, 2007, the interest coverage ratio under the credit agreement was 4.95 for the trailing 12-month period.
- During the interest coverage ratio reduction period, Meritage will be prohibited from repurchasing any of its common stock, repurchasing or prepaying any senior notes or subordinated debt, or paying dividends and will receive no credit in the borrowing base for unimproved entitled land.
- Outside of the reduction period, Meritage receives borrowing base credit for 50% of the value of unimproved entitled land.
- During the reduction period, land and lots under development and unimproved entitled land in the aggregate may not comprise more than 30% of the borrowing base, compared to 40% for periods not in the reduction period.
The Dominion filing with the SEC states, "Certain unwaived Events of Default have occurred and are continuing under the Credit Agreement." Those events include the company's failure to comply with minimum EBITDA covenants; the minimum consolidated gross profit covenant , and the minimum net worth covenant , all for the quarter ended June 30. The filing also states, "There may be other Defaults or Events of Default of which the Agents and the Lenders are not currently aware."
The filing says the company's lenders have agreed to "allow the Company to borrow up to the lesser of (i) $9,000,000 in excess of the borrowing base limitation, or (ii) an amount equal to $209,000,000 minus the aggregate principal of the Company's Term Loans and Revolving Loans outstanding under the Credit Agreement. Any such overadvance borrowings must be paid in full at the earlier of (i) one business day after the Company receives written notice from the Senior Administrative Agent that the lenders have elected in their sole discretion to discontinue the availability of overadvance borrowings, or (ii) December 29, 2010."