Despite having more than $60 million in cash, Rolling Meadows, Ill.-based Kimball Hill Homes filed voluntary Chapter 11 petitions for reorganization in the United States Bankruptcy Court in the Northern District of Illinois on Wednesday, April 23.

Less than two weeks ago, the company secured a wavier from lenders extending forbearance on its debt until May 9. The previous wavier, which was secured on March 14, expired April 10.

“Filing for Chapter 11 will allow us to restructure our debt and other obligations, bringing our capital structure in line with current market realities,” said Ken Love, president and CEO, in a statement. During the process, the company plans to continue to sell, build, and deliver homes without interruption.

“The next step in our restructuring is to strengthen our capital structure and position our company to weather the current storm that has hit the housing and capital markets,” Love explained. “We have had significant discussions with potential plan sponsors and our senior lenders already, and we hope to agree on a reorganization plan in the next 90 days.”

Unlike many companies that file for Chapter 11, Kimball Hill has the advantage of $60 million in liquidity, which eliminates the immediate pressure to secure first-priority, Debtor In Possession (DIP) incremental financing necessary to continue daily operations.

According to court documents, the company is listing between 10,001 and 25,000 creditors. Assets as of Dec. 31, 2007 were roughly $795 million, and debt totaled nearly $632 million. Chairman of the board David Hill, whose father founded the company, is listed as controlling 64% of the business’s voting securities. Hill’s spouse, Diane Hill, controls another 6%, and Equity Investments, III., controls another 22%.

In addition to Kimball Hill, another 29 affiliated debtors also filed Chapter 11. The company’s financial service businesses are excluded from the filing.

The announcement is just another blow for the Chicago area market that has already sent Neumann Homes into bankruptcy and Kennedy Homes into serious financial distress and a lawsuit against its lenders.

According to Lance Ramella, a principal at Meyers Building Advisors, Kimball Hill’s lead banker is Harris Bank, a large local institution in the Chicago area. Harris was also the lead bank in a lawsuit filed in March by Kennedy Homes. The builder sued a group of banks led by Harris, alleging that its firm became insolvent after Harris’s errors in tabulating its loan balance led it to overdraw on its line of credit.

Like most Chicago area home builders trying to buy sizeable parcels of land during 2005, Kimball Hill found itself acquiring lots in the far-flung suburbs where sales are now difficult to come by. One of the company’s more high-profile developments is Settler’s Ridge in Sugar Grove.

“With the exodus of KB and then Neumann disappearing and putting all their land on the market, there is some land out there that is close to free,” said Ramella. “Kimball Hill does have some challenging land positions. It doesn’t mean they are worthless; it just means they need to find a buyer that is going to be willing to go long on land and sit on it.”

Kimball Hill, which is active in five states, has been scrambling to improve operating performance during the downturn. By using aggressive marketing tactics and incentives, it reduced inventory in 2006. That same year, the company pulled out of the depressed Cleveland market to redeploy assets. Management cut cycle time, tightened inventory management, and scrutinized its urban projects in an effort to reduce costs.

But by last fall, when the company delayed filing its 10-K for the 2007 fiscal year-end of Sept. 30, it became clear that the Chicago area institution built by the Hill family was in dire straits. At the time, the company disclosed it was out of compliance with several covenants of its senior credit facility. Although Kimball Hill is a private builder, it carries some public debt, which carries with it an obligation to report financial results with the Securities and Exchange Commission.

nitial negotiations advanced slowly. At the time, company CFO Ed Maddel provided Big Builder with insight into the process. He said his biggest challenge was providing his lenders with any kind of guidance for future performance. "It's very difficult for us to project what we expect to have in sales and revenue," he said. "That's going to tell me how much debt I'm likely to have, how much I'm going to have to service debt, and what decisions I'm likely to make to potentially reduce debt."

In January, management obtained an initial limited duration waiver and amendment that bought a little time and money; lenders agreed to allow the company to access an additional $10 million in credit and had permission to seek another $5 million to satisfy cash flow needs until March 14 while additional financing was negotiated.

But as the talks continued, business conditions deteriorated further. The company recorded a fiscal year 2007 loss of $220.5 million. And then, despite diligently cutting costs, selling off land, dropping home prices, and exiting less profitable markets, in its fiscal first quarter of 2008, which ended Dec. 31, 2007, the company lost $46 million--more than double its loss in the same period the previous year.

The company's worsening position led management to hire Andrew Hede, a managing director of New York-based restructuring firm Alvarez & Marsal, as Kimball Hill's chief restructuring officer in February. The decision was made to exit the Florida market by the end of 2008.

Still, with complicated financial obligations on the immediate horizon, it appears the efforts of the past 18 months were not enough. The company is entangled in two failing joint venture arrangements in Nevada. Between the two, Kimball Hill is not only responsible for more than $60 million in debt, but take-down arrangements require the builder to buy another $59 million in land by May.
“Our issues are financial, not operational,” said Love about the company’s struggle.

Learn more about markets featured in this article: Chicago, IL.