Newport Beach-based William Lyon Homes is said to be in restructuring talks with lenders amid increased attention on the iconic homebuilder’s debt.
New York-based ratings agency Standard & Poor’s last week downgraded the corporate credit rating of William Lyon Homes to its lowest possible “junk” level. The downgrade came after the company missed another scheduled interest payment on its unsecured notes.
The homebuilder said earlier this this month it didn’t make a $7.5 million interest payment tied to a 10.75% senior note that was due Oct. 1.
The notes have about $139 million of principal outstanding, and are set to mature in 2013.
In August, the builder missed a $2.9 million semi-annual payment tied to a 7.5% senior note that counts about $78 million of outstanding principal. It took advantage of a 30-day grace period before eventually making the $2.9 million payment last month, avoiding default on the note.
A 30-day grace period also is available for the $7.5 million interest payment that is now delinquent; the builder has until the end of this month to make the payment without going into default.
Standard & Poor’s isn’t giving William Lyon Homes a similar grace period in regard to its ratings on the company and its unsecured notes.
The ratings agency last week cut its corporate credit rating on William Lyon Homes to “D.” The builder previously had a “CC” rating.
A “D” rating is assigned when Standard & Poor’s believes that a company will fail to pay all or substantially all of its debt as it comes due, and that a default is likely.
The ratings agency also cut its ratings on the builder’s unsecured notes to the lowest possible junk status.
For the 10.75% notes, the agency now estimates “negligible recovery” is likely for debt holders.
As of last week, the notes were reported to be trading for about 18 cents on the dollar, according to Trace, a bond-price reporting system of the Financial Industry Regulatory Authority.
The downgrade and missed payments has resulted in William Lyon Homes being added to several national trade publications’ distressed-debt and bankruptcy watch lists over the past month.
The builder, which was taken private in 2006, near the peak of the housing boom, lost about $22.4 million in the first six months of the year, on revenue of $102 million.
The company still reports financial results for its bondholders.
One company that’s not expressing too much concern about the builder’s financial health is Santa Monica-based hedge fund Colony Capital LLC.
Colony Capital and its affiliates made a five-year $206 million senior secured term loan with William Lyon Homes in 2009. Colony still holds the loan and would get first priority over other large debt holders on recovering its investment in the company in the event of a default or bankruptcy.
The hedge fund has granted the builder several waivers on certain aspects of the loan—which carries an interest rate of 14%—including a covenant that requires William Lyon Homes to have a tangible net worth of at least $75 million.
That covenant hasn’t been met for much of this year. The builder recently got another waiver from Colony on that specific requirement.
The latest waiver is good through October and will “provide additional time to (William Lyon Homes) for ongoing restructuring discussions,” according to a regulatory filing made last week by Colony Financial Inc., an affiliate of the hedge fund.
The builder said earlier this year that it hired a consulting firm to help refinance and restructure its existing debt.
Colony officials continue to believe “that the value of the collateral securing the ($206 million loan) is significantly in excess of the entire unpaid principal balance,” according to last week’s filing with the Securities and Exchange Commission. It hasn’t taken a write-down in its investment.
William Lyon Homes and it partners owned more than 10,100 lots and had options to purchase an additional 417 as of the end of 2010.
Southern California is the company’s largest market; the company said in its last quarterly report that the balance of real estate it owned at the end of June was $493.5 million.
