WCI Communities not likely to have cash to meet put of 4% convertibles in August

By Jennifer Lanning Drey

Portland, Ore., March 17 - WCI Communities Inc. will begin discussions immediately with holders of $125 million of its 4% convertible notes in an effort to either extend the put date, exchange the notes or find another mutually agreeable solution to problems related to the company's limited ability to meet possible upcoming put demands from the noteholders, Jerry Starkey, chief executive officer of WCI, said Monday during the company's fourth-quarter earnings conference call.

The noteholders have the option of redeeming their notes for par in cash on Aug. 5. However, WCI executives said liquidity requirements and cash restrictions related to amendments the company made in January to its revolving credit agreement and term loan agreement make it unlikely that the company will be able to use cash on hand to make the payments. The amendments were made to the credit agreements as a result of the company's breach of compliance with the modified fixed charge coverage covenant related to the credit agreements.

"Such limitations as required by these bank amendments result in a low likelihood that the company will have adequate cash on hand in August and will likely require the put to be addressed in a different manner," Ernest Scheidemann, chief financial officer of WCI, said during the call.

Management refused to get into the specifics of the strategic discussions likely to occur between the company and the holders of the convertibles.

As a result of the questions surrounding WCI's ability to satisfy the convertible noteholder demands, the company also breached compliance of a requirement under its credit facility, term loan and revolving tower construction loan to provide annual financial statements accompanied by an opinion from its independent auditors not subject to any "going concern" or like qualification.

However, the lenders in each of the three facilities subsequently provided the company with a waiver of the requirement.

At Dec. 31, the balance on the company's credit facility was $546.0 million, the balance on the term loan was $262.5 million and the balance on the revolving tower construction loan agreement was $292.0 million.

$342.8 million liquidity

WCI had total liquidity of $342.8 million and outstanding letters of credit of $53.7 million at Dec. 31. The company's cash balance was $188.8 million, which was approximately $147 million higher than at the end of 2006 due to closings at the One Bal Harbour property in Miami.

Cash flow from operating activities and investing activities came in at $229.0 million for the year, which was at the low end of the company's most recently provided target range of $210 million to $460 million. The primary reason was previous delays in the closing of One Bal Harbour and the Watermark property in North Bergen, N.J.

WCI expects to generate cash flow between $300 million and $450 million in 2008, primarily through closings at the One Bal Harbour and Watermark properties. The company has currently closed 157 of the 185 condominiums and 48 of the 115 hotel condominium units at One Bal Harbour. Closings are expected to begin this week at the Watermark.

During the question-and-answer portion of the call, WCI management expressed that the company's principal objectives are to generate cash and pay down debt.

Poor operating conditions continue

WCI's fourth-quarter and full-year earnings continued to reflect poor operating conditions, low demand and higher-than-normal cancellation and default rates in both its traditional homebuilding and tower homebuilding segments.

The company reported a $459.8 million net loss for the fourth quarter and a $578.5 million net loss for the full year. The figures compare with a fourth-quarter net loss of $64.6 million in 2006 and full-year net income of $9.0 million.

During the fourth quarter, the company wrote down traditional and tower inventory to reflect impairments caused by expected lower prices and slower absorption in some product lines and also wrote down certain amenities, goodwill and other assets, which together resulted in impairment charges totaling $339.2 million.

WCI is a Bonita Springs, Fla., builder of master-planned lifestyle communities.

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