Homebuilder-Bankruptcy.com

Post-petition financing is one of the most important factors in our Crash Predictor model – whether a homebuilder is able to reorganize or conduct an orderly liquidation, as opposed to going into “crash and burn” mode. Admittedly, what John Laing Homes need right now is a level of liquidity through post-petition financing. Its parent, Emaar America Corp (the Dubai corporation) has proposed a DIP lending facility of $30.8 million.

Nonetheless, this proposed financing has met with fierce opposition from other creditors, ranging from its 1st lien secured creditors (e.g., Wells Fargo and Bank of America) to unsecured creditors.  The main objection is that the proposed lending is an insider transaction which should be subject to heightened scrutiny. True enough, Emaar is an insider – it is not only the 100% equity owner of John Laing Homes, but also a creditor claiming $400 million in unsecured claims and $5.8 million in secured claims.

The Committee of Unsecured Creditors had used strong words in its court filings:

On its face, the DIP Facility is a blatant scheme by Owner to (i) extract releases from the Debtors’ estates and theircreditors, (ii) eviscerate rights of creditors to meaningfully participate in the bankruptcy process, and to (iii) destroy the Committee’s ability to serve as the only independent fiduciary on behalf of the Debtors’ estates to review the Debtors’ operations and the actions of the Owner.

WL Land Homes, party to a pooling agreement with John Laing Homes and IHP Investment, also stated that:

The extraordinary concessions granted by the Debtors in the proposed DIP Financing lead to the conclusion that the DIP Lender is attempting to inappropriately control these cases for its own benefit, at the expense of unsecured creditors.

What are these “extraordinary concessions”?

From the court filings, they appear to include:

- Roll-up of Emaar’s pre-petition claim into the DIP loan, i.e., part of the monies from the post-petition financing will be used to repay the pre-petition debt owed to Emaar – this reduces the actual liquidity received by John Laing Homes through the loan facility;

- The budget is not clear as to the assets benefiting from the loan and whether the financing provides sufficient liquidity to pay all administrative expenses incurred in bankruptcy proceedings ;

- Various broad releases and indemnifications to insiders;

- Terms of the loan facility include the right to declare a DIP default if no plan is filed in 5 months, or if no plan is confirmed in 7 months. This is one of the major pitfalls in obtaining DIP financing – there have been other homebuilder bankruptcy cases where a DIP default was easily called (due to onerous terms in the financing package) and the DIP lender takes over the reins to auction off the property to the disadvantage of other creditors.

What does this mean for home owners and buyers? If you’re a home owner and there’re common areas which are still work in progress, the outcome of this DIP financing matter will affect whether there is sufficient liquidity to complete construction and whether your estate falls within the assets which will benefit from the loan facility. Similarly for the buyer looking at partially-developed homes and developments, the question is, with the amount of liquidity they might obtain, how long might it take for the home to be completed. Or do you wait for the auction fire sales conducted after DIP default? Caveat emptor!

See our latest June’09 Analyst Research on John Laing Homes discussing the impending liquidation situation of the builder and the whole new list of real estate properties coming on the market.