Standard & Poor's reported on April 29 that LandSource Communities Development is expected to file for bankruptcy protection within the next two to three weeks.

The ratings agency was told of the impending filing by the group's lenders following a private call, said analysts Abby Latour and Kerry Kantin in their report.

"A depletion of cash will likely prompt the filing next month," Latour and Kantin wrote. "The company's cash pile has dwindled to roughly $25 million, from about $115 million in early February."

By filing for protection from creditors in bankruptcy court, the company could preserve its remaining cash and start arranging to sell assets, sources told S&P.

LandSource's spokesperson could not immediately be reached for comment.

Last week, LandSource, a California-based land development company owned by MW Housing Partners, Lennar Corp., and LNR Properties, received a notice of default on its loan agreements.

Just over a year ago, LandSource took out $1.3 billion in loans arranged by Barclays to buy 68% of the company from Lennar and LNR, which each retained 16% interest. The first lien on the company for $1 billion is in default.

The notice came after LandSource missed a deadline to re-margin the deal made necessary because the land had lost value in the plummeting home building market.

Despite the notice, discussions on how to restructure the total of $1.3 billion in debt so the company can make the payments in the current market continued, Tamara Taylor, a LandSource spokesperson, said at the time.

S&P reported that there has been little communication between the company's sponsors and lenders recently, "raising the ire of lenders, who delivered a default notice after the most recent forbearance agreement expired on April 16."

The California Public Employees Retirement System (CalPERS), which is part of MW Partners, said it was not willing to move forward with a credit-enhancement package for LandSource that included a $550 million commitment over three years, according to S&P.

"Lenders heard in an April 15 call that CalPERS's view is that the terms are no longer tenable," Latour and Kantin wrote.

Just last year, Lennar was lauded as masterful for finding a way pull cash out of land while still retaining rights to use it later when it sold off the lion's share of LandSource. Lennar and LNR Property each received about $700 million for selling off 68% of LandSource to MW Housing Partners, an entity co-managed by McFarlane Partners on behalf of CalPERS, and Weyerhaeuser.

MW Housing got 50% of the voting rights, while Lennar and LNR retained 16% ownership each and a combined 50% of the voting rights. Lennar also maintained access to the land for future construction and, in the meantime, would be paid "significant" management fees.

The deal was heralded as a perfect partnership. CalPERS is a long-term investor, valued for its patience in receiving returns. And it fit with Lennar's ongoing strategy to move more land--and its costs and risks--off its home building books.

At the time of the deal, LandSource's properties had a book value of about $1.3 billion. To fund the sale, $1.55 billion in debt was taken on the assumption that the land had more than doubled in value during the three years since LandSource's biggest asset, Newhall Land And Farming Co.'s 15,000 acres of mixed-use property 30 miles north of Los Angeles County, was bought.

LandSource's debt is labeled non-recourse, which is said to insulate Lennar and LNR from repercussions; but if the land ends up for sale in bankruptcy court, Lennar could lose access to the lots--one of the advantages it touted when announcing the sale last year.

Pali Capital analyst Stephen East suggested in a research note there is a possibility that the LandSource partners could be sued under "Bad Boy" clauses, claiming misrepresentations were made, since the deal deteriorated so rapidly.

"The bigger question for LEN is what remains for all the other JV's sitting out there," East wrote. "LandSource is one of the largest and most visible, but it could well be a harbinger of things to come. The cash burn so readily apparent in this JV is likely not unique."

If the bankruptcy occurs and the banks come out as well or better than they would have by renegotiating the loan, "We believe it would encourage a stiffer spine at the banks in future negotiations--signaling tougher times ahead for LEN and all other aggressive users of JV's," East wrote.

Learn more about markets featured in this article: Los Angeles, CA.