William Lyon Homes hopes that a recently struck restructuring plan will put the Newport Beach-based company in position to more than triple revenue and return to profitability over the next four years.
The iconic homebuilder, which has been working to shore up its balance sheet for much of the year, earlier this month said it had struck a tentative deal with lenders and bondholders that will sharply reduce its near-term debt while raising nearly $85 million in cash for operations.
The deal appears to eliminate the near-term threat of a shuttering or liquidation of the company—which was valued at more than $900 million near the peak of the housing market—in a manner similar to that of Irvine-based John Laing Homes two years ago.
Instead, the new restructuring plan—which will need bankruptcy court approval—should allow William Lyon Homes to “take advantage of historic market opportunities and position itself for long-term growth,” company executives said when announcing the deal.
Land Buys
The growth plan would include spending nearly $200 million on land acquisitions from now through 2015, with most of those buys in California, according to William Lyon Homes’ tentative financial projections for the next four years, which were shared with note holders during its recent restructuring talks.
The company also is projecting that it will be able to boost its home sales by more than 150% over the next four years, increasing revenues by more than 200%.
It expects to sell about 630 homes this year, with 40% of those sales in Southern California, its largest market right now. Those sales should bring about $219 million in revenue, according to the projections.
By 2015, the company’s self-described “speculative” financial projections call for 1,620 home sales. Northern California would be the company’s biggest market that year, representing about 34% of sales.
The builder recently closed on a 27-acre site near Palo Alto that should hold about 300 homes. It’s one of several projects it has in the works for the region.
By 2015, Southern California’s share of total sales will be about 25%, according to the tentative projections. The company also sells homes in Arizona and Nevada.
Sales in 2015 could bring in nearly $684 million in revenue, according to the projections.
The last time William Lyon Homes saw sales that high was in 2007, when it closed on nearly 2,200 homes and brought in nearly $1 billion in revenue.
The company also is projecting a return to profitability beginning in 2012, with earnings before interest, taxes, depreciation and amortization rising from $16.4 million next year to a high of $84.6 million in 2015.
Cash-Strapped
The cash-strapped builder has reported losses of more than $600 million since 2007, thanks in large part to some $500 million in land-related write-downs over that time.
The company said earlier this year it had a tangible net worth—the value of its land and other assets minus its liabilities—of negative $9.7 million.
The restructuring deal reached earlier this month should boost the company’s overall value, while rectifying William Lyon Homes’ main near-term concern: finding cash to pay off its debt.
The plan calls for the builder to cut its nearly $490 million of debt by about 37%. That would help reduce the company’s annual interest expenses, which now total about $54 million, by about 45%.
Gen. William Lyon, the builder’s cofounder and chief executive, will invest $25 million into the company, in return for an initial 20% stake in the recapitalized company. Warrants and management incentives could increase Lyon’s stake.
The plan represents a big hit to the ownership stake of Lyon and his family, which paid $275 million to buy the outstanding shares of the builder and take the company private in 2006.
The company and its predecessors have sold some 72,000 homes since 1956, becoming one of the better-known builders on the West Coast over that time.
The company is slated to have a value of about $325 million after the restructuring, based on the strike price of warrants that are being issued as part of the recapitalization plan.
The Lyon family will remain in charge of the company’s operations after the restructuring. General William Lyon, his son and Chief Operating Officer William H. Lyon, and Executive Vice President Matthew Zaist will continue to manage the company, and the Lyons will remain on the board of directors.
Filing Expected
The company plans to file for bankruptcy as part of the restructuring process. That’s expected to come with a prepackaged plan of reorganization that will need both creditor and bankruptcy court approval, according to filings with the Securities and Exchange Commission.
The builder expects the plan to be confirmed and finalized by the end of the first quarter of 2012. It will be operating under an interim, $50 million financing agreement while in bankruptcy, according to SEC filings.
The terms of the interim financing deal were still being worked on as of Nov. 4, when the restructuring plan was announced, according to regulatory filings.
The company hadn’t filed for bankruptcy as of presstime, according to court records. It’s been working with bankruptcy restructuring firm Alvarez & Marsal in recent months.
Nearly two-thirds of the company’s bondholders and lenders, including its primary lender, Santa Monica-based hedge firm Colony Capital LLC, support the restructuring deal, according to the builder.
“Simply put, we view this restructuring as a very favorable development for the company, making it a less risky credit, while providing slightly improved economics on a go-forward basis,” said Richard Saltzman, chief executive of Colony Financial Inc., an affiliate of Colony Capital.
Colony and its affiliates made a five-year, $206 million senior secured term loan with William Lyon Homes in 2009.
The Colony partnership would swap out the $206 million loan, which carries an interest rate of 14%, for a $235 million note, due in three years with a 10.25% interest rate, as part of the deal with William Lyon Homes.
Factoring in other payments besides the interest payments, Colony’s investment in Lyon now carries an internal rate of return of about 17%, according to Saltzman, speaking last week on a call with analysts.
The biggest haircut seen in the proposed reorganization will be for unsecured note holders, who have agreed to replace their $284 million in senior notes for $75 million in secured notes due in five years at an interest rate of 12%. They would also get a 28.5% stake in the company after the reorganization.
Bonds
The junk bond-designated notes were already trading for a little more than 20 cents on the dollar as of last week, according to bond-price trackers, so the steep cut proposed in the restructuring plans could still prove to be money-makers for some traders.
Outside of Colony, the bondholders and the Lyon family, there should be no one seeing a hit to their finances as a result of the restructuring, according to the builder.
“All other allowed creditors and claimants of (the builder) would suffer no impairment and would be paid in full” as part of the bankruptcy, according to a company filing with the SEC.
