The Wall Street Journal-20080116-Icahn-s WCI Reaches a Tipping Point- If Terms of Credit Line Aren-t Relaxed- Builder May Face Chapter 11
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Icahn's WCI Reaches a Tipping Point; If Terms of Credit Line Aren't Relaxed, Builder May Face Chapter 11
Billionaire investor Carl Icahn made a big bet on WCI Communities Inc. a year ago, saying he wanted to unlock the "inherent value" of the Florida condo developer.
Today, Mr. Icahn, one of WCI's largest shareholders, could learn whether or not his investment is likely to evaporate, as the company's banks decide whether to relax the terms of its credit line. If the banks balk, WCI says "it could have a material adverse effect on the solvency of the company."
If WCI is forced to seek bankruptcy protection, it would become the largest publicly traded builder to fail, sending shudders through an industry that has remained largely in the good graces of its lenders.
So far, banks have been reluctant to force many builders into bankruptcy. There have been several high-profile Chapter 11 filings by companies such as Levitt & Sons LLC and Neumann Homes Inc., and a recent Moody's Investors Service report estimates that nearly 12% of the large building and building-products companies that it rates will default on their corporate debt this year, the highest share of any industry.
But many banks so far have preferred to keep their builder borrowers on life support, partly because they don't want to have to liquidate half-sold developments, or raw land that has very few buyers.
"Lenders have exhibited an incredible amount of patience, and frankly I am a little surprised," says Perry Mandarino, a managing director at Traxi LLC, a financial-restructuring advisory firm that works with struggling builders. "The banks want to maximize value. It all comes down to whether they trust WCI operationally, or whether they think someone else can do it better."
Three times in three months, WCI's lenders have extended its revolving credit line and term-loan agreements, after the builder violated the terms of its previous agreements. WCI recently tripped an "interest coverage" test, which requires a minimum ratio of earnings before interest, taxes, depreciation and amortization to the interest it owes on its debt.
While most builders have had to ask lenders for more slack on such tests, the banks have WCI on one of the shortest leashes in the industry. On Jan. 7, its lenders said they had until today to come up with a new agreement. The banks have already secured WCI's $700 million revolving credit line and a $263 million bank loan, which typically puts them first in line in a bankruptcy scenario.
The prognosis for WCI has looked dire for months, as buyers have backed out of contracts to buy condos, depleting WCI's cash and raising concerns about whether the company can cover all of its interest payments in 2008.
Analysts and workout experts say the banks may give WCI a little more time to finish and sell a handful of condo towers, and to continue looking for buyers for golf courses and land that it owns.
The banking agent on WCI's revolving credit line is Bank of America Corp., and KeyCorp's Key Bank is the agent on the builder's term loan. Spokesmen for both banks declined to comment. WCI didn't return numerous calls seeking comment.
The banks may also want to tread carefully while WCI completes closings with buyers of units in its mammoth luxury condo and condo hotel development near Miami, One Bal Harbour. With the South Florida housing market collapsing, buyers have walked away from deposits, or sued to get out of contracts at a much higher rate than WCI expected.
"When you have closings at a high-profile building, a bankruptcy would not help," says Joe Snider, a senior credit officer at Moody's. "Cancellations could go even higher."
WCI said in November that it would have to pay about $120 million to service the interest on its debt this year. But that amount might increase because of all the concessions and fees it owes to the banks. As buyers walk from contracts, the revenue WCI needs to make these payments dwindles. Vicki Bryan, an analyst at independent bond- research firm Gimme Credit, projects WCI won't generate enough cash to pay debt service this year.
Mr. Icahn, who owned about 14% of the company as of last month and is its chairman, could prove the wild card. If WCI is pushed to the brink, Mr. Icahn or some of the hedge funds that own large shares could inject cash to keep it afloat. One big investor, Hotchkis & Wiley Capital Management, cut its share to 1.6% from 6.6% last week. Mr. Icahn couldn't be reached for comment.
Another troubled Florida-based builder, TOUSA, recently failed to make a scheduled interest payment on some of its senior notes. TOUSA has 30 days to make the payment or risk accelerating some of its debt.
Pressure may be mounting on banks to pull the plug on builders, as a recession looms and they become more risk-averse. "Our feeling is that the banks' patience will not continue," says Mr. Snider. "The sooner they take possession of something, generally the higher the value they will get, rather than waiting for values to erode further."
