Beazer's House of Cards

Like a thumb caught between a nail and a hammer, Beazer Homes (NYSE: BZH) is feeling a lot of pain these days. As if the housing slowdown wasn't enough, it's having to fend off charges that it is in default on its loan covenants. Add in several investigations about its lending practices and you have a company -- and investors -- in a world of hurt.

It's not news any longer that Beazer, Hovnanian (NYSE: HOV), Toll Brothers (NYSE: TOL), or any of the other builders -- are reeling from the lack of buyer demand. A dearth of credit, a subprime mortgage crisis, large amounts of property in inventory contributing to a downward spiral of housing prices -- it's a wonder anyone can sell a home these days.

Yet Beazer's woes extend beyond just that. Earlier this year the homebuilder fired its chief accounting officer for what it says was an attempt to shred documents related to a federal mortgage-lending probe. That internal probe led it to delay filing its third-quarter financial statements with the SEC, which technically put it in default to its bondholders.

Bondholders typically haven't swooped in on the carcass of a troubled company that's delayed filing its financial statements. Yet as hedge funds have become more entwined in the machinations of companies, they've begun to take a hard-line approach -- particularly at a time when their own returns are sagging. Loaning money to companies is just another investment strategy and no longer a benign transaction.

For its part, Beazer says it's not in default. It claims it has only to deliver the financial statements to its bondholders after they're filed with the SEC. The bondholders naturally claim that when the homebuilder delayed the filing, it defaulted on its covenants. Now it's in the hands of the courts.

It seems likely that Beazer will have to pay the bondholders to get them off its back, at least temporarily. KB Home (NYSE: KBH) resorted to such payola last year when it missed a filing deadline and ended up paying its bondholders a $12 million "consent fee," which bought the homebuilder time to file its paperwork.

Considering the war of words being waged right now, if Beazer doesn't file its financials within the 60-day cure period, expect it to have to fork over some dough, too. There's the added risk that all this could throw the company into bankruptcy. If hedge funds have shorted the stock, they could end up winning that way, too. In its complaint against the bondholders' trustee, U.S. Bank National Association, Beazer charges "Noteholders, including various hedge funds and other opportunistic investors, have purchased Beazer's bonds at depressed prices in the market and are now improperly seeking to secure a windfall by demanding repayment in full."

There's precedent for Beazer to be found in default. Last year, technology services provider BearingPoint (NYSE: BE) was found by a court to be in default on $200 million worth of bonds after missing a filing deadline. However, this past June, a different court found that Cyberonics (Nasdaq: CYBX) had not defaulted even though the debt covenant language was substantially similar to the covenants BearingPoint lost on. It's also similar to the language Beazer says is written into its covenants: that the documents need only be given to bondholders within 15 days after they are filed with the SEC.

With so much judicial uncertainty and the vultures circling, it's little wonder that investors are feeling all thumbs with this stock -- and that they're all black-and-blue too.