Technical Olympic likely to take on additional debt in connection with Transeastern settlement

By Jennifer Lanning Drey

Portland, Ore., May 10 - Technical Olympic USA, Inc. expects to incur additional debt in connection with a possible Transeastern joint venture settlement, Stephen M. Wagman, Technical Olympics' chief financial officer, said during the company's first-quarter earnings conference call held Thursday.

He also reported that the company's homebuilding net debt to capital ratio had increased to 60.6% at March 31, up from 56.6% at Dec. 31, due to a loss for the quarter and an increase in credit facility borrowings.

At quarter end, the company had $50 million outstanding under its revolving credit facility.

"For these reasons, as well as continued challenging market conditions, we intend to continue our focus toward asset managing, reducing our level of investment in our inventories to generate cash and improving liquidity," he said.

During the quarter, Technical Olympic lowered cash outflows by nearly $100 million, to $52.4 million, compared with $146 million during the first three months of 2006.

The improvement primarily resulted from a reduction in inventory growth, partially offset by a decline in net income during the 2007 quarter, Wagman said.

The company ended the quarter with cash and cash equivalents of $23 million.

Wagman also reported Technical Olympic had letters of credit totaling $264.6 million and $250.1 million in availability, all of which could be borrowed without violating any debt covenants.

The company reported a net loss of $66 million for the quarter, compared with net income of $55 million for the same three months in 2006.

Seeking settlement

During Thursday's call, Technical Olympic's executives reiterated that the company is working toward a consensual global resolution with lenders in relation to its Transeastern joint venture.

In December, Transeastern joint venture mezzanine debt administrative agent Deutsche Bank filed suit against Technical Olympic and subsidiary Tousa Homes, LP in the Supreme Court of New York seeking repayment of the joint venture's debt.

A settlement with the joint venture's mezzanine lenders could result in the issuance of equity, the company said in a Thursday news release.

However, during the call, Technical Olympic's executives also told listeners that the company might be unable to reach a settlement with its lenders and other parties.

Lack of a settlement could have a material adverse effect on the company's business and liquidity and defaults under documents governing its existing debt, which may require the company to consider restructuring its business and capital structure, according to the release.

"Even if a settlement is reached, we cannot predict the outcome of any such settlement, including the cash contributions we may have to make in order to effectuate any such settlement, if there is one at all," Antonio B. Mon, Technical Olympic's chief executive officer, said during the call.

At Dec. 31, the Transeastern joint venture had about $625 million of bank debt outstanding, of which $400 million was senior debt, according to the release.

Technical Olympic acquired its 50% interest in the Transeastern joint venture on Aug. 1, 2005, when the joint venture acquired substantially all of the homebuilding assets and operations of Transeastern Properties, Inc. for $826.2 million.

The other member of the joint venture is an entity controlled by the former majority owners of Transeastern Properties, and Technical Olympic continues to function as the managing member of the joint venture through the company's wholly owned subsidiary Tousa Homes LP.

In a 10-Q filing with the Securities and Exchange Commission, Technical Olympic said that as part of discussions with holders of the Transeastern loans and the other member of the joint venture it has proposed a structure in which either the joint venture or the successor to some or all of its assets would become Technical Olympic's wholly or majority owned subsidiary.

The proposal also contemplates repaying the joint venture's $400.0 million of senior debt in full through the incurrence of additional indebtedness. Technical Olympic is "evaluating various financing alternatives" as part of the talks.

Third-party financing would be needed and an amendment to the company's credit facility to allow it to occur.

Dallas division sold

Technical Olympic also announced the sale of its Dallas division for net proceeds of $55.7 million. The company said the sale was executed as part of its asset management strategy.

The sale is expected to close on May 31.

Technical Olympic is a Hollywood, Fla.-based homebuilder.

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