July 16 (IFR) - An upturn in the housing market is fuelling a land rush as builders look to lock up inventory for future construction. Beazer Homes raised capital last week through high-yield bond and equity-linked offerings, and others in the sector are seen likely to bolster liquidity by raising capital either through equity or debt.
Data are indeed pointing to a recovery in the sector. The number of unsold new homes -- at around 145,000 in May -- has been hovering around its lowest point on record while the new home inventory, at 4.7 months of supply, is the lowest since October 2005.
"Interestingly, one of the brighter points in the US economy is the housing market," said Michael Collins, senior investment officer at Prudential.
"We are getting more optimistic every day in terms of the trends we are seeing. Names in the construction sector are actually looking like good investments. A number of home builders have just issued equity to start buying land."
For Beazer Homes, one of the more distressed homebuilders, the funding exercise was more complicated than most. The company weathered the collapse in the housing markets, but remained saddled with $1.4bn of debt, 81% of its capital structure after removing cash, at March 31. (The company is rated Caa2/B- by Moody's and S&P).
Selling stock was one solution, but how much and in what form? Given a market capitalization of $335m, dilution was an obvious investor concern, as was a funding overhang.
Less apparent, but relevant to equity consideration, is that much of the company's value is tied to net operating losses (NOLs), which stood at $480.1m as of March 31. The losses are an important shield against future tax liabilities once the company turns a profit, and selling too much stock threatened a potential change of control that would jeopardize the NOLs.
The sale of 22m shares, 22.2% of outstanding, at $2.90 provided one part of the solution with $63.8m; a $100m raise from an offering of mandatory convertible bonds was another. The equity buffer subsequently paved the way for a $300m, 6.625% second-lien note offering.
Credit Suisse, Goldman Sachs, Deutsche Bank and UBS were joint bookrunners on all three offerings.
"Beazer Homes is an interesting name as it raised funds in a balanced way by tapping both the equity and the high-yield bond market, to maintain liquidity and to think about growth again," said Collins.
From a marketing perspective, the strategy to bifurcate demand by selling equity alongside a mandatory convertible bond is typical for relatively large capital raises. Investor preference for the CB is not surprising in such cases, given the dividend pick-up over the common and structural seniority.
That was highlighted in pricing of the CB at a 7.5% dividend and 22% conversion premium (toward the aggressive ends of 7.5%-8% and 17.5%-22.5% price talk), as well as the increase in size from $75m to $100m. The common originally launched at $75m.
The high-yield bond offering, meanwhile, was sold at 6.625% at par, on the tight end of its 6.75% price guidance. In the secondary market, the issue performed well, trading up a point.
Moody's has assigned a B3 rating to the new high-yield issue, which is a notch lower than its senior secured notes, a result of the changes in the size of the various debt instruments in the capital structure, which includes the upsizing of the first lien senior secured revolver.
The Caa2 corporate rating reflects the expectation that Beazer's operating and financial performance, while improving, will remain weak through fiscal 2013. This is assumed due to elevated debt leverage, ongoing operating losses and weak cash flow, Moody's said.
However, the rating agency also said it sees a path to profitability if "current order rates stay strong, margins continue to strengthen and the company can leverage its current equity offerings to accelerate its new community count." S&P assigned a B rating to the new notes.
Other homebuilders have also been active in the equity and debt markets as they repair balance sheets and prep for the future. Meritage Homes priced 2.3m shares of common stock, raising roughly US$75.7m with proceeds being used for working capital.
KB Home launched a cash tender offer for existing notes due in 2014 and 2015. The offer will be funded with a new US$250m senior unsecured notes issue that has not been officially launched yet.
Elsewhere, Hovnanian Enterprises has reduced its debt load this year by issuing Class A common stock in exchange for existing senior and senior subordinated notes.