In an unusual move, D.R. Horton management moved up its fiscal 2Q2009 earnings release by three days, releasing its financial results yesterday after market close and hosting an earnings call this morning. Analysts suspected that the decision was made to get out ahead of the first post-merger earnings releases from Pulte Homes and Centex Corp., scheduled for release today after market close, and preserve pricing on a debt issuance deal that many analysts presumed to be in the works. But for all the drama, analysts were left a little dry as Horton execs refused to comment on whether any such deal was imminent [it was announced later, see related story].
With peers such as Lennar Corp., The Ryland Group, and Toll Brothers tapping the debt markets in an effort to boost liquidity, analysts believed management's move to reduce company debt levels--particularly its termination of its unsecured credit facility, which had caveats that limited the company's ability to access additional debt--portended a strategic swap out of nearer-term debt with longer-term debt. In addition to the termination of the revolver, the company also cancelled its letter of credit subfacility, repaid $537.8 million in debt, and had $382.4 million remaining on its debt repurchase authorization at the end of the quarter.
The decision will allow the company to incur savings of roughly $3 million in non-use fees, which, as one analyst noted, could be viewed as a small price to pay to access additional liquidity. CFO Bill Wheat responded:
"One of the primary aspects in terms of liquidity was the limitation under our borrowing base. As of this quarter, our borrowing base limitation was at $275 million. And so, it was a relatively limited ability to borrow under the facility or to be able to incur additional debt. So with that limitation in front of us, that was certainly a factor in our decision because in terms of wanting to have flexibility going forward in our business, we'd like to have a bit more flexibility in our ability to borrow or incur additional debt."
He added: "And in terms of our overall cash position, we felt confident where we expect our cash going forward where we didn't expect to need to use this facility regardless over the next three years."
The company generated $161 million of free cash flow during the quarter and ended it with roughly a $1.5 billion cash balance and a total net debt-to-cap ratio of 34.3%.
But despite management's reluctance to give any color about a debt deal, many analysts are still speculating that a benchmark-type deal will be forthcoming.
As Stephen East, an analyst with Pali Capital, noted in a related research note:
"Our guess is that this will be the largest debt deal to date in the home building group, surpassing TOL's and LEN's $400M. DHI has $585M due this year, so it is likely safe to assume the deal will be at least in the $500-$600M range. We will be very intrigued to see how debt holders view the creditworthiness of DHI given that we have a couple of bookends in RYL's 8.4% and LEN's 12.25% rates. We believe the deal will be somewhere in the neighborhood of TOL's 8.9%."