Beazer Homes USA announced Thursday after the market close that it has begun to tackle its heavy debt structure, its biggest challenge since the recent settlement of its legal issues related to mortgages.

The company took advantage of the fact that its bond debt has been trading at roughly half its face value by buying back $115.5 million for $58.2 million. As a result, the builder gained $55.2 million in the process of extinguishing that bond debt. 
That, and smaller impairments, boosted its bottom line and helped the company log narrower losses ($27.9 million or $0.72 per share) for the quarter ended June 20, soundly beating analysts’ estimates. (Click here for more details.)

While the bond purchase did reduce Beazer’s debt, it also affected the company's cash, diminishing it for the quarter to $464.9 million from $559.6 million.
In another move to shore up its debt situation, the company took on the restructuring of its secured revolving credit facility. Because of its diminishing net worth, Beazer had begun to violate covenants in the facility, which then threatened to trigger other debt covenants that could have required a $100 million-plus cash infusion.  
During the quarter, Beazer also addressed its revolving line of credit, reducing it to $22 million provided by one financial institution. Borrowings must be collateralized with cash or other assets. In order to maintain its existing letters of credit, the company struck deals with three banks, which require the letters be secured by cash. As a result, Beazer put $37.8 million in a restricted account.
Those were the only announcements the company is making for now related to its debt restructuring, CFO Allan Merrill told analysts during the call. But there will be more work in the future to “protect liquidity, increase net worth, and reduce total indebtedness.” Toward that end, Beazer has hired Moelis & Co. and Citigroup for advice.
Beazer reported a sound improvement in new orders with 1,537 units. That's down only 5% from the same quarter in 2008, when orders from markets the company is exiting are excluded. Closings, however, at 950 were off 33.2% year-over-year in Beazer's remaining markets and down 43.4% overall, including the exit markets. That's not dissimilar to the results seen by other builders recently.
As a result of fewer closings and an 8.7% decline in sales price, revenue fell by half to $224.7 million from $455.6 million. The company’s relatively high SG&A expenses, at 15.4% for the last nine months, have been plumped by nearly $36 million in legal and professional fees related to extricating the company from the federal investigation of its mortgage practices. Severance costs have also been a factor.
“The severance expense, we certainly hope drops off,” said Merrill. “The legal and professional fees won’t drop to zero. We will continue to cooperate with authorities.” While settling with the company, the government is continuing to investigate the actions of some individuals in the mortgage fraud case.
“The parts [of SG&A] we can control we are squeezing tighter and tighter and tighter,” Merrill said.

Teresa Burney is a senior editor at BUILDER and BIG BUILDER magazines.

Learn more about markets featured in this article: Atlanta, GA.