Beazer Homes USA late Friday said in a filing with the Securities and Exchange Commission that it was delaying the filing of its regular quarterly earnings statement. On Monday, Fitch, the debt rating service, dumped Beazer bonds further into junk and put the company on "rating watch negative."
Fitch Ratings dumped Beazer's Issuer Default Rating (IDR) to 'BB' from 'BB+' and simultaneously placed it on the negative watch. Fitch also downgraded the company's unsecured revolving credit facility, its senior notes and its convertible senio notes to 'BB' from 'BB+.' Junior subordinated debt was downgraded to 'B+' from 'BB-.'
Fitch attributed the downgrade to "the continued challenging housing conditions in most of Beazer's markets, pressures from credit tightening, which particularly affect entry level buyers (a significant customer focus at Beazer), negative trends in operating margins and the expectation of further deterioration of its credit metrics during the balance of fiscal 2007 and into fiscal 2008." It continued, "Possible accounting restatements, an internal Board of Directors' investigation and inquiries from the U.S. Attorney's office and Securities and Exchange Commission (SEC) provide added distraction amidst this difficult housing environment. The placement of ratings on Rating Watch Negative was prompted by the company's inability to make a timely filing of its Form 10Q (for the quarter ended June 30, 2007) with the SEC and possible need to negotiate waivers with its bond holders.
In its filing with the SEC, Beazer, referring to its ongoing internal audit committee investigation of the practices of its former chief accounting officer, stated, "To assist with the investigation, the Audit Committee retained independent legal counsel, who, in turn, retained independent forensic accountants. During the course of the investigation, the Company has discovered that its former Chief Accounting Officer may have caused reserves and other accrued liabilities, relating primarily to land development costs and costs to complete houses, to have been recorded in prior accounting periods in excess of amounts that would have been appropriate under generally accepted accounting principles. These reserves and other accrued liabilities, if reversed in subsequent accounting periods, could have been used to reduce the Company's operating expenses by amounts that would not have been appropriate under generally accepted accounting principles."
The company added that "The investigation is ongoing and the Company is not, at this time, able to predict or determine whether any adjustments will be required with respect to the Company's previously issued financial statements or whether the release of any portion of these reserves or accrued liabilities will have any impact on the Company's financial results for the quarterly period ended June 30, 2007. However, at this time, the Company does not believe that the amounts at issue with respect to these reserves and accrued liabilities during the quarterly and nine month periods ended June 30, 2006 and 2007 are quantitatively material. In addition, at present, the Company does not believe that the resolution of these issues will result in an adjustment to the Company's previously reported cash position."
In a research note to investors issued Monday, the home building and building products team at J.P. Morgan Securities said, "While a negative, we do believe this appears to be separate from the broader investigation into its mortgage business and other related matters. However, we believe the overhang from these accounting issues and the company's mortgage investigation will remain."
The research note continued, "We believe BZH will continue to generate positive cash flow in 4Q and end the year with a cash balance of over $300 million. Moreover, we note the company has nothing drawn on its revolver and has $300 million of available credit, with no debt maturities until 2011. As a result, even if the company surpasses a potential 75-day window it has to file from August 9th, we do not believe its debt-holders will force any negative events onto the company."