San Diego Housing Market News and Analysis
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Submitted by TheBreeze on August 5, 2007 - 8:08pm
Since Cramer said that one or more of the homebuilders may fail within a couple of weeks, and since Beazer recently issued a media statement refuting "scurrilous and unfounded rumors" about a prospective bankruptcy filing, I decided to take a look at Beazer's financial statements to see if they gave any indication to the trouble Beazer might be in.
During the search, I was able to find a couple of items that hint at some potential trouble. The first was a couple of statements made during an April conference call.
At the beginning of the call, the Chief Accounting Officer stated that: "At March 31 net debt to total capitalizations stood at 49.1%, down slightly from the December level, and within our target of 50% or lower."
Later in the call, the CEO stated that "We have made commitments to the rating agencies and to all of our fixed debt holders that we are going to keep our debt to cap under 50% -- at or under 50%."
So, as of March 31, Beazer was just barely fulfilling one of the commitments they had made to their debt holders.
Fast forward to the July call, and we discover that the net debt to capitalization ratio stood at 52.6%. Uh-oh. I assume this means that the debt is currently callable. Thus, that may be why Cramer said that one or more of the builders is in danger of failing within a couple of days or weeks. Interestingly though, in that same call, the CFO refers to the 50% ratio as just a "target", so it's unclear from this call whether that debt can be called in based on breach of that 50% ratio.
Another interesting item that I found in the July call is that Beazer negotiated a new revolving line of credit. However, this line of credit is dependent upon Beazer maintaining a "minimum tangible net worth" of $1 billion. The CEO went on to say that the company had a tangible net worth of $1.3 billion as of June 30. However, the current market cap of the company is only $441 million. Thus, either the market is willing to give away $1.3 billion for $441 million or the market is saying that the CEO's net worth calculation is not well calculated.
In that same call, the company mentioned that they were being investigated by the SEC. Beazer may also be under investigation by the FBI for mortgage fraud.
So, it appears that Beazer is close to being at the mercy of its creditors. If Beazer can continue to renegotiate it's debt obligations, they may be able to stay in business. If not, it looks like they are kaput. Even if Beazer's creditors don't call in the loans, it looks like Beazer is still in trouble. In the July conference call, Beazer said they had $129 million of cash on hand. According to their latest 10-Q (filed on 4-26; it appears the 7-26 10-Q is late), they burnt through $100 million in selling, general and adminstrative expenses. So, assuming a similar burn rate and that Beazer can't access the revolving credit line due to violation of the net worth covenant, Beazer may be able to survive one, or at most two, quarters with the cash it has on hand. So it looks like either bankruptcy or fire sales for Beazer.
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