Standard Pacific this morning announced that private equity firm MatlinPatterson Global Advisors was recapitalizing the company through an unusual structure that includes an equity infusion, a rights offering, and a debt exchange vehicle, according to an 8-K filed with the Securities Exchange Commission.

In a midday interview with Big Builder, Standard Pacific chairman, CEO and president Jeffrey V. Peterson described the proposed deal: "It's more than just cash. It's equity in the sense that it's enhancing our balance sheet with conversion of the debt that further reduces our leverage. It provides us with significant financial flexibility and a lot of funding for future growth opportunities. I would characterize it as our ability to go on the offense as opposed to being on the defense."

The proposal must be approved by shareholders.

Amid investor fears of bankruptcy during a scheduled quarterly investor call just two weeks ago, Peterson hinted at the impending move when he told analysts that the company was exploring a variety of strategic and financial alternatives that could include a "sale of equity, sale of debt, a merger, or a sale of the company," among other things.

While tough on existing shareholders, this move gives the company breathing room and the ability to focus on home building instead of continuing its ongoing struggle against a tenuous debt load. Standard Pacific is among the most heavily leveraged public companies in the home building space. Current net debt to cap is roughly 65%--but reflecting the transaction on a pro forma basis of the March 31 balance sheet, that percentage would be in the mid-30s, according to CFO Andy Parnes.

According to the filing, MP CA Homes LLC, an affiliate of MatlinPatterson, committed to invest more than $530 million in equity in Standard Pacific. The builder will receive $380 million in exchange for 125 million shares of stock.

In addition, MatlinPatterson will exchange $128.5 million of debt for warrants on 89.4 million shares of preferred stock. The exercise price on those shares is set at $4.10.

These actions represent the first transactional phase of implementation, which is expected to take place by July 31, 2008. However, the entire deal is predicated on Standard Pacific getting a permanent amendment to its bank agreement. "We initiated that dialogue with the banks today, and we are moving flat-out to accomplish that," said Peterson.

At the most recent quarter's end, Stan Pac was not in compliance with the consolidated tangible net worth and leverage covenants contained in its revolving credit facility, $100 million Term Loan A, and $225 million Term Loan B. Just two weeks ago, management reached an agreement to extend a previous waiver of default arising from the non-compliance. The latest extension is set to expire in August.

The company is planning a second transactional phase--a 50 million share rights offering at $3.05 per share, which could result in another $153 million of capital.

In total, Stan Pac would raise roughly $530 million in equity and eliminate $129 in debt. "Everything should be closed by the end of the third quarter," Peterson said of the timeline.

Regarding the impact on the JP Morgan/Credit Suisse $100 million convertible bond arrangement that was done earlier this year, roughly $22 million of that will be a part of the debt-for-warrant exchange. The balance will remain outstanding but convertible to stock.

Upon the purchase of the senior convertible preferred stock, the builder's board of directors will be expanded from eight members to 11, with the three new board members to be named by MatlinPatterson. "Ultimately, they will have the opportunity to nominate one less than the majority," said Peterson. "So in no instance will they have the majority of the board." In addition, MatlinPatterson will have the voting interest capped at 49%.

Regarding operations, Peterson will remain as CEO, and the company doesn't expect any significant changes. "MatlinPatterson believes in our platform and our management team and our method of execution of delivering and selling high quality homes."

MatlinPatterson is a $9 billion global private equity franchise highly regarded for spotting distressed companies and navigating them to success. This marks the second significant investment MatlinPatterson has made in the sector this year. In January, it invested seed money in the start-up operations of Americrest Homes run by Art Falcone. And it appears the sector will be seeing more of the same from MatlinPatterson.

"It's our understanding that in their latest fund--Fund III--that they want to make a substantial commitment to the home building sector," said Peterson. "We are now, on a pro forma basis, a part of that." Peterson also indicated that Fund III is a $5 billion fund.

When asked if there were integration opportunities to be expected between the two Matlin investments, Peterson commented, "We are aware that they have other investments in the home building sector, but we can't comment on what their particular objectives might be with regard to those operations at this time."

The company will call a special stockholder meeting to seek approval to authorize the issuance of the junior convertible preferred stock and to amend the company's charter in order to increase the total share authorization and remove certain anti-takeover provisions.

Wall Street greeted news of the proposed deal with a resounding yes, with Standard Pacific stock (NYSE:SPF) soaring 55.4% by 3 p.m. in six times the stock's normal trading volume. This despite the apparent fact that the deal will prove highly dilutive to holders of the 72 million shares currently outstanding. Ivy Zellman, CEO of Zellman Associates, was among the analysts who pointed this out.

"We believe that collectively these transactions are a major positive to avoid bankruptcy as they provide more flexibility with joint ventures, should permit the company to obtain better pricing from its banks and also alleviates a major distraction for corporate management and employees," Zellman wrote in a note to investors. "However, in our opinion and relative to our prior view, the transaction is more valuable to debt holders than equity holders."

Carl Reichardt, managing director and senior equity research analyst at Wachovia Securities, said, likewise in a research note, "SPF shares are rallying on this news as the company appears to have avoided a deeper liquidity crisis. However, we note current shareholders are diluted substantially; fully-diluted shares outstanding increase by approximately 243% assuming the contemplated transactions occur and without giving effect to the warrants. We expect shares to settle back later in the day after 'survival euphoria' wears off."

Michael Rehaut, the lead home building analyst at J.P. Morgan who has an 'overweight' rating on the stock, was more enthusiastic in his note to clients. "we believe this significantly reduces going concern fears and risks from its high leverage, covenant violations, and JV investments. Accordingly, we maintain our OW rating, as we believe today's share price reflects going concern fears that we do not share."

Shareholders had already approved an increase in the number of Standard Pacific shares. A majority voted Tuesday, Dec. 11, to allow the company to double the number of common shares from 100 million to 200 million. At the time, Standard Pacific said it was running short of shares available for general corporate purposes.