MOODY'S DOWNGRADES THE PRESLEY COMPANIES B3 SR. NOTES TO Caa3
New York, 09-15-97 -- Moody's Investors Service downgraded the 12.5% senior notes of the Presley Companies, a California based homebuilder to Caa3 from B3. The outlook for the rating remains negative. The downgrade reflects an erosion of equity as a result of a large $74 million impairment loss; possible covenant violations on September 30, 1997; and a 37% decline in backlog of homes as of June 1997 compared to June 1996.
The rating outlook continues to be negative, as Moody's is concerned about the company's continuous write-offs. Over the past five years, Presley has written down inventory each year between 1992 and 1997 with the exception of 1994 and 1996 of $26 million, $46.6 million, $16.8 million, and $74 million, respectively, contributing to the reduction of its equity to $5 million as of June 1997. The $74 million impairment loss is related to two master-planned communities in the Inland Empire area of Southern California and one in the East San Francisco Bay area of Northern California.
Under the bond indenture, if the company's consolidated tangible net worth falls below $60 million in two consecutive quarters, Presley would be required to make an offer to repurchase 10% of the company's 12.5% senior notes at par plus interest, 65 days after the deficiency date. Moody's believes this covenant will be violated on September 30, 1997 and hence effective December 4, 1997 the company would be required to make an offer to purchase $20 million of the senior notes.
In addition to the 12.5 percent note issuance, Presley also has a $72 million secured bank facility for working capital. Outstandings as of June 30, 1997 were $19 million leaving $53 million of liquidity. This facility was extended for one more year to May 1998 and certain financial covenants have been eliminated, keeping the company in compliance with this loan agreement.
Despite the California economy rebounding it seems Presley has not turned the corner yet. Second quarter 1997 results were disappointing with closings down 5% and new home orders down 10% as compared to second quarter 1996. The backlog of homes sold but not closed as of June 30, 1997 was 330 units, down 37 percent from 526 units a year earlier and fell 44% in dollar amount. These results do not measure up with its industry peers, in California.
Moody's believes based on historical performance, Presley's financial strength is weak and will further diminish based on imminent covenant violations that could cause its liquidity to become impaired.
The Presley Companies., headquartered in Newport Beach, California, is engaged principally in the design, construction, marketing and sale of single-family homes, in California, Arizona, New Mexico and Nevada.
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