Fulton Homes’ latest reorganization plan, which the Arizona-based builder filed last month with the U.S. Bankruptcy Court in Phoenix, calls for repaying in full the $164.7 million it owes its unsecured bank creditors over the next five years.
That is a significant increase over the $85 million that Fulton Homes offered to pay back in either its initial plan or subsequent offers of $120 million and $125 million, which it made as its sales of homes and lots have improved. (In the first four months of 2010, the company closed 189 homes, which to that point outpaced its closing rate in 2009, when Fulton Homes ranked No. 49 on the BUILDER 100.)
It remains to be seen, though, whether Fulton’s latest plan is enough to stave off court-ordered liquidation, which is what the builder’s lenders, led by Bank of America, have advocated in competing reorganization plans that they've submitted.
In the disclosure statement for its latest reorganization plan, Fulton Homes said that it generated $153.6 million in revenue and $9.29 million in profit from Jan. 27, 2009 (the date it filed for Chapter 11 protection) to April 30, 2010. During that period, the builder amassed more than $60 million in cash from the sale of homes and other assets.
As of May 1, the builder was active in 12 communities, in which it had 106 completed homes in inventory (27 of which are being used as models), 223 homes under construction (143 of which had buyers), 693 finished lots, and 592 lots under development. It also had 1,451 platted lots.
Under Fulton's amended reorganization plan—the third it has submitted since filing Chapter 11—the builder would repay 80% of all secured claims, which are primarily mechanics liens against its horizontal and vertical construction totaling roughly $1.15 million. It would also pay in full the $1.07 million in back taxes it owes Arizona’s Pinal and Maricopa counties, with 2% interest.
Since filing for court protection from its creditors, Fulton has paid down about $85 million of its $250 million in unsecured bank debt. (The company went into Chapter 11 primarily to ward off the banks that were demanding that the status of their debt be converted to secured, which Fulton Homes contended would have put its assets at risk.) This debt amount does not include $25 million that Fulton Sales, the builder’s sales unit, owes company owner Ira Fulton, who is waiving repayment.
If lenders and the court sign off on its reorganization proposal, Fulton Homes would pay the banks $35 million by the effective date of the plan, and $15 million per year over the proceeding five years, plus 6% interest per year. It would pay the balance of what it owes the banks by Dec. 31, 2015.
That payout schedule would allow Fulton Homes to maintain a working capital reserve of just less than $20 million. Over that five-year period, the company projects that it would sell an average of 303 homes and 66 unfinished lots per year. (That projection reflects a bulk sale of 369 lots in 2013.)
One of the ironies of this recession is that while it has been in Chapter 11, Fulton Homes actually increased its market share to 7%, from 3% when it filed. The company attributes that gain, in part, to its decision to move away from building luxury homes and towards building homes for first-time buyers. Its attorneys assert that the banks will get a better deal by allowing the company to continue to operate than they would if Fulton Homes were forced to liquidate.
But despite the builder’s market-share gain and recent positive financial performance, the lenders—primarily Bank of America—remain skeptical of Fulton’s ability to pay back its debt.
Shirley Norton, a Bank of America spokesperson, stated in an email to BUILDER that the lenders, known as the "Bank Group," want more documentation from Fulton Homes to support its estimates and assumptions. She adds that the Bank Group is neither satisfied with the “under-market” interest rate Fulton would pay on its debt nor the five-year timeframe of the payout, given a still “uncertain” economy.
“While [the Bank Group] is pleased that the borrower has finally recognized that it should and can pay its debt in full to the banks, the banks remain concerned under the latest plan about how [Fulton Homes] proposes to do so and the length of time the Bank Group is expected to wait for this to happen,” writes Norton. The current plan, she continues, “tries to shift the risk of repayment from the borrower and the owner, the Fulton Family Trust, to the Bank Group.”
John Caulfield is senior editor for BUILDER magazine.
Learn more about markets featured in this article: Phoenix, AZ.