Risk & Compliance

The Beazer Factor

Rumors of a Beazer bankruptcy roiled the market Wednesday. The rumors were false, says the company, but its struggles continue to highlight the dif...
Stephen TaubAugust 2, 2007

Rumors that Beazer Homes USA Inc. was about to file for bankruptcy sent shares of the homebuilder tumbling as much as 40 percent Wednesday, while broader market averages went into another tailspin, fueling fears that the sub-prime mortgage crisis is worsening by the day.

However, the company quickly fired off a press release debunking the report, asserting in strident tones: “We do not know where these scurrilous and unfounded rumors started. For an accurate representation of the company’s financial position, including the company’s liquidity and near-term prospects, we encourage investors to refer to the company’s recently released third quarter earnings release and the script of our conference call with analysts and investors.”

In response, Beazer’s stock regained half its losses, although it still closed down 21 percent for the day. However, the broader markets sharply rebounded, and the Dow Industrials finished up by more than 1 percent on the day.

Last week, the company reported a net loss of $123 million for the fiscal third quarter, including pre-tax charges related to inventory impairments, abandonment of land option contracts and goodwill impairments totaling $188.5 million.

“Operating conditions in the housing industry deteriorated further in the fiscal third quarter and remain very challenging,” said President and Chief Executive Officer, Ian J. McCarthy, in a press release accompanying its earnings results. “Most housing markets across the country continue to be characterized by an oversupply of both new and resale home inventory, reduced levels of consumer demand for new homes and aggressive price competition among home builders. These factors, together with a pronounced credit tightening in the mortgage markets, particularly for credit challenged home buyers, are likely to lead to continued difficult market conditions for Beazer Homes and other home builders.”

On Wednesday, Standard & Poor’s Ratings Services lowered its corporate credit and senior unsecured ratings on Beazer to BB- from BB. It also said the outlook remains negative.

The rating actions affect $1.5 billion of senior unsecured notes.

“The downgrades reflect further deterioration in Beazer’s homebuilding operations, which prompted additional noncash charges and another quarterly earnings loss, as well as continued weakening of key credit metrics,” said credit analyst George Skoufis.

S&P also commented on the SEC’s probe of possible securities law violations; the investigation was upgraded to formal last week.

“The ongoing investigation related to the company’s mortgage operations and the potential for distractions at this very difficult juncture in the housing cycle also contributed to the rating actions,” S&P stated. “We do, however, acknowledge Beazer’s balance sheet focus, namely the company’s prudent efforts to manage inventory and generate cash to support its overall liquidity.”

Meanwhile, Gimme Credit asserted in its own report on Wednesday that while expectations were low for Beazer’s third fiscal quarter ended June 30, “actual results were lower.” It pointed to homebuilding revenue, which was down 38 percent on weakness across all markets, and consolidated EBITDA was down 68 percent. It also noted that 36 percent of existing orders were cancelled in the quarter versus 29 percent the previous quarter and 34 percent last year. New orders plunged 30 percent after falling 3 percent the prior three-month period.

Gimme Credit also expressed concerns about liquidity, which it asserted were not abated by the terms in the new credit facility the company announced the same day it reported third-quarter results. Beazer said it had entered into a new $500 million revolving credit facility. The new four-year credit arrangement, which matures in July 2011, replaces the company’s existing $1 billion revolving credit facility, which was scheduled to mature in August 2009.

Gimme Credit said the new facility may indicate more than anything how the company and its bankers assess the road ahead. It noted that the credit line was cut in half to $500 million. That, said Gimme Credit analysts, could well be due to the banks reducing exposure. On a recent conference call, Beazer management said the lower amount reflected the fact that the company needed less cushion.

“We suspect the bottom of the housing cycle is upon us, but we might not see the sector recovering before mid-2008,” said the report. “We are uncomfortable with BZH’s [Beazer’s] liquidity potential into next year and its ability to meet performance targets. We also are disturbed that BZH has introduced unnecessary and potentially significant costs and uncertainty related to the ongoing government investigations into fraud and now numerous class action and civil lawsuits.”