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Technical Olympic Debt Plummets Amidst Housing Downturn

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Technical Olympic USA's term loan fell 15-20 points to 68 as the homebuilder continued to grapple with poor conditions in the Florida housing sector.

Technical Olympic USA's term loan fell 15-20 points to 68 as the homebuilder continued to grapple with poor conditions in the Florida housing sector. The bank debt has fallen 32 points over the past two weeks after the company warned of revised sales and delivery projections for a joint venture. Technical Olympic's 7 1/2% '15 notes also slid a further four points to 75 1/2, rounding off a six point drop since Sept. 26.

The homebuilder's problems stem from poor sales at its joint venture, Transeastern Homes, a Florida homebuilder. Transeastern has been hit by a slowdown in the Florida housing market, where its business is concentrated. In a release, Technical Olympic said it has $141 million of exposure to Transeastern. This consists of $92.6 million of Technical Olympic's investment account in the joint venture, $31.3 million in loans made to the joint venture and $17.2 million in fees and interest receivables. The homebuilder's debt is secured solely by its assets, which totaled $963.8 million as of July 31. It has $600 million in debt.

Technical Olympic is in talks with its lenders to discuss the venture's future prospects. It said the worst case scenario will be the loss of Technical Olympic's $92.6 million investment in Transeastern. It added there is a risk it may not be able to recover $48.5 million of loans and receivables. This could hit Technical Olympic with an $89 million after-tax charge. Calls to Randy Kotler, interim cfo, were not returned.

Florida is not the only region to suffer a downturn. Other areas that have been hit include California, Washington, D.C., and Phoenix--areas where house prices have appreciated the most. Florida has been hit particularly hard because many investors bought properties in the state with the intention of selling them later for a profit. Now due to the housing downturn, many investors have put the properties up for sale, flooding the market with inventory.

Moody's Investors Service's Economy.com division predicted in a recent report a high probability of national house prices declining in 2007; the first decline in nominal national house prices since the Great Depression. It predicts the worst of the housing downturn will occur early next year. Brian Carey, economist at Moody's Economist.com, said he expects conditions to improve in the middle of next year. "By then prices will have fallen enough that people will start to come back into the market," he said. "Then we'll see prices start to stabilize."

Homebuilders that have seen their ratings come under review include Ply Gem Industries and WCI Communities. Last week, Moody's downgraded Ply Gem Industries' corporate family rating to B2 from B1 to reflect the weakened outlook for the new home construction business and the company's high leverage. It also lowered WCI Communities' ratings to Ba3 from Ba2. Last week, WCI warned its earnings per share for the third quarter of 2006 is expected to be much lower than its prior guidance of $0.52. Calls to a WCI Communities' spokesman and Shawn Poe, cfo of Ply Gem, were not returned.

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