Tarragon liquidity woes continue to mount; going-concern status threatened

By Caroline Salls

Pittsburgh, Aug. 11 - Tarragon Corp. said difficult market conditions could continue to negatively impact its operations, while the company's mounting debt raises substantial doubt about its ability to continue as a going concern, according to a 10-Q filed with the Securities and Exchange Commission.

According to the 10-Q, Tarragon had $972.6 million in consolidated debt as of June 30, as well as $30.2 million in guaranteed additional debt of one consolidated joint venture.

Additionally, Tarragon said $68.4 million of its consolidated debt had matured as of June 30, and the company is seeking extensions for a majority of the matured loans from lenders.

The company said it also plans to seek extensions or alternative financing for other loans maturing in the third and fourth quarters of 2008 if it cannot repay those loans from property sale proceeds.

As of June 30, the company said it did not satisfy the financial covenants for $245.9 million in consolidated debt. Of that amount, Tarragon said it has obtained waivers of financial covenants for $208.2 million of loans, and it has not requested waivers of financial covenants for three loans totaling $37.7 million.

Tarragon said it did secure a waiver in March of compliance with the notes indenture financial covenants through Sept. 30, 2009.

Under the waiver agreement, the noteholders subordinated a total of $36 million outstanding under the company's affiliate notes to the subordinated unsecured notes.

In exchange, the noteholders agreed to waive the company's compliance with the financial covenants until Sept. 30, 2009 and grant a 270-day option to president and chief operating officer Robert P. Rothenberg and chief executive officer and chairman of the board William S. Friedman to buy the subordinated unsecured notes from the noteholders at a discount.

Rothenberg and Friedman have assigned the option to Tarragon, but the company said it does not believe it will be able to obtain enough debt or equity financing to enable it to exercise the option because of its current liquidity position and industry and credit market conditions.

Tarragon said it accounted for the option and the amendments to the affiliate notes as a "troubled debt restructuring," and no gain on debt restructuring has been recognized because any gain is contingent upon exercising the option.

The company said its inability to generate sufficient liquidity to fund its operations or to obtain waivers of financial covenants and extend or refinance maturing debt would have a "material adverse affect" on its financial position, operating results and cash flow.

In addition, the company said the buyer of its Bermuda Island rental apartment community failed to close the purchase on July 31 despite receiving several extensions and the consent of the lender to assume and extend existing financing.

After Tarragon asked the escrow agent for the $250,000 contract deposit, the buyer's affiliate Northland immediately filed a lawsuit over entitlement to the deposit.

Tarragon said the dispute with Northland may hurt its ability to obtain the consent of its principal lender to form a related real estate joint venture, which could affect the company's ability to close the transaction.

Tarragon is a New York homebuilder.

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