Beazer Tries Po' Boy Routine

It looks like the house of cards homebuilder Beazer (NYSE: BZH  ) built for itself is in danger of collapse.

Despite denying it was in default on its loan covenants -- while engaging in a war of words with bondholders whom the builder accused of trying to profit from its precarious financial position -- Beazer finds itself now having to go hat-in-hand to them and ask for forbearance. It wants to amend the terms of its $1.53 billion debt agreements to avoid defaulting on them.

The homebuilder announced last week it would have to restate its financial results after a five-month internal investigation found that, by golly, it had engaged mortgage-lending procedures that violated federal regulations. The restatements will go back as far as eight years.

Last month, Beazer said it didn't have to file its financial reports on time to remain in good standing on its debt covenants; it just needed to notify the bondholders within 15 days of filing with the SEC. The bondholders disputed that reading of the language and nearly declared Beazer in default.

The legal view of the situation isn't clear either. History shows a decision, in the BearingPoint (NYSE: BE  ) case, that found the company in default in a similar circumstance. Another involving Cyberonics (Nasdaq: CYBX  ) said the company was not. The language in the debt agreements in all these cases is substantially the same, so Beazer's been walking a bit of a high-wire act with its derring-do of denial.

In the end, it seems Beazer decided to take the route KB Homes (NYSE: KBH  ) chose -- paying the bondholders some cash to extend its filing deadlines. It's offering to pay a consent fee for every $1,000 in principal outstanding. KB Homes ultimately paid $12 million to buy itself some time.

Beazer really had little choice but to eat crow. Home closings for the builder fell 39%, while new home orders fell 52% over last year. Cancellation rates, or people backing out of their own agreements to buy a Beazer home, rose to 68%, reflecting the tight credit markets. Beazer seems to be faring worse than other builders; Centex (NYSE: CTX  ) reported a 13% drop in orders, although it will take about $1 billion in charges against earnings.

While homebuilder stocks were bouncing like dead felines two weeks ago, there's very little Meow Mix for Beazer.


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