Orleans Homebuilders swaps new notes for $75 million trust preferreds

By Angela McDaniels

Tacoma, Wash., Aug. 4 - Orleans Homebuilders, Inc. said it completed a private exchange offer for the $75 million of unsecured junior subordinated trust preferred securities issued by one of its affiliates in November 2005.

The exchange was completed Aug. 3, according to a company news release.

The company is no longer required to post an additional $2.5 million financial letter of credit that would have been due on July 30 under the old securities. However, the $5 million letter of credit issued in August 2007 for the benefit of the trust preferreds has been canceled and replaced with a new $5 million letter of credit.

Subsidiary OHI Financing, Inc. issued $93.75 million of new unsecured junior subordinated notes in exchange for the trust preferreds. The maturity date of the new notes is the same as that of the trust preferreds, Jan. 30, 2036.

The new notes carry a reduced interest rate of 1% per year through July 30, 2014, 8.61% per year from July 31, 2014 through Jan. 30, 2016 and Libor plus 360 basis points after that. Interest is payable quarterly.

The quarterly interest coupon due July 30 under the trust preferreds was paid at a rate of 1% per year rather than the original rate.

The new notes are callable at par at any time. They can also be called at a discount if a change of control occurs.

Orleans can call the notes in whole for $17.58 million if the change of control occurs on or before Dec. 31, 2012 or $21,975,000 if the change of control occurs after that time. In either case, the purchase price would also include the $5 million letter of credit plus 0.17857 times the amount paid or distributed to the equity interests of the company, subject to a cap of par.

A change of control means a sale of all or substantially all of the assets of the company or an acquisition by any person or group of securities representing more than 80% of the equity interests and more than 50% of the ordinary voting power in the company.

The terms of the new notes eliminated the minimum interest coverage ratio and consolidated tangible net worth covenants in the trust preferreds related to a 3% additional interest provision as well as the minimum interest coverage ratio covenant in the third and fourth quarters of fiscal 2010 and the first quarter of fiscal 2011.

The new notes do not have any such minimum interest ratio or consolidated tangible net worth covenants.

The company will generally be restricted from declaring or paying any dividends or distributions on equity until July 30, 2014.

The new notes also contain a provision that the company cannot, without the consent of the holders of a majority of the outstanding notes, enter into an exchange offer, amendment, supplement or similar transaction for the company's $30 million of 8.52% trust preferreds unless the terms of any such transaction are substantially similar to and not more favorable to the holders of those securities than those set forth under the new notes.

The closing of the exchange offer was conditioned on the receipt of consent from the company's bank lender group, the replacement of the existing $5 million letter of credit as described above and the payment of $750,000 for fees and expenses.

In exchange for bank lender group consent, Orleans provided the bank group a mortgage on about 60 lots previously included in the borrowing base calculations.

Possible offer for 8.52% trust preferreds

The lender consent also included a provision to generally permit the company to complete an exchange offer, amendment, supplement or similar transaction for the 8.52% trust preferreds by Sept. 30.

Orleans said it plans to enter into negotiations with the holders of the 8.52% trust preferreds, but it gave no assurance that any transaction will be entered into or, if one is entered into, that it will be on terms favorable to the company.

More savings needed

The company said the cash flow savings and enhanced liquidity brought about through the exchange are not enough to meet its current liquidity needs.

Orleans anticipates that without an amendment to its revolving credit facility to increase the borrowing base availability by Aug. 15, the availability will be significantly less than the outstanding borrowings, and the company will likely not have enough liquidity to continue its normal operations and will be in breach of its minimum liquidity covenant under the revolver at that time or within approximately a week.

Aug. 15 is the date the borrowing base certificate as of July 31 is due.

The company said it continues to work with its lenders to obtain an amendment and remains hopeful that such an amendment can be obtained.

Orleans is a homebuilder based in Bensalem, Pa.

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