William Lyon Homes, burdened with heavy debt, dwindling cash, and a negative net worth, is working with its lenders to restructure its debt and recapitalize, the company said in a statement responding to questions from Builder.
“Negotiations with the company’s major creditors continue to be encouraging, and we look forward to implementing a comprehensive recapitalization of the company," Gen. William Lyon, the company’s CEO and chairman, said in the statement. The company has also hired Irell & Manella as legal counsel and Alvarez and Marsal as financial advisors.
Lyon listed its tangible net worth as a negative $9.7 million at the end of June, the end of its most recent earnings report. Having a net worth that falls below $75 million for several months has begun to trigger loan covenant violations with a $206 million loan the builder took from Colony Capital and Colony Financial two years ago. So far, Colony has waived the requirement several times. On Thursday, Oct. 27, the waiver runs out again. Colony has the right to accelerate payment on that loan if Lyon defaults by not meeting the tangible net worth requirements.
It doesn’t look like the company is poised to turn a profit anytime soon. It lost $22.4 million in the first six months of the year as its home sales also fell.
The California-based Lyon is carrying more than $489 million in debt divided between the Colony term loan and three sets of senior notes. The interest payments alone on those debts total $54.4 million a year. The Colony term loan's annual interest bill is $28.8 million of that total.
Lyon has delayed payment on two of the notes recently, using the 30-day grace period before it is considered in default.
In the statement, Lyon said it is in active discussions with the Colony lender as well as a committee that represents the three senior unsecured note holders. “While the company is in discussions, it has elected to take advantage of the 30-day grace period provided under the debt’s rules.”
Lyon isn’t the only builder whose return to profitability is being hampered by heavy debt payments. A number of public builders refinanced their debts in the first few years of the housing recession, pushing due dates back often at the cost of higher interest rates. At the time the consensus was that the market would rebound more quickly than it has, giving the builders the wherewithal to make the interest payments and pay back the principal when those notes come due.
As the recovery has failed to show up, the interest payments remain, causing a considerable drag on profits for many builders, housing analyst Stephen East has pointed out in several investment notes.
“Incurred interest is 6 to 7 percent of sales for the whole group,” says East. “That’s a huge number; usually it’s only a percent or two.”
If it weren't for the heavy interest payments "a lot of these guys would be back pretty close to normal profitability," East says.
East has suggested builders with cash use it to pay off some of their debt. For those who don’t have that luxury, he suggested they might look to issue more stock to raise capital.
"I think they have got to do something," says East. "Whether investors like it or not, they will probably go out and issue new equity. That is pretty painful to do."
Teresa Burney is a senior editor for Builder magazine.
