LGI Homes, Inc. Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K, dated June 2, 2016, reports on events occurring on May 27, 2016. LGI Homes, Inc. entered into an Amended and Restated Credit Agreement (A&R Credit Agreement) with a syndicate of lenders led by Wells Fargo Bank, National Association. This agreement replaces the company's 2015 Credit Agreement.
Key Financial Metrics and Debt Structure
- Facility Size: $360.0 million revolving credit facility, with an accordion feature allowing an increase to $400.0 million.
- Maturity: May 27, 2019, with an option to extend by one year prior to each annual anniversary.
- Interest Rate: Initial rate is LIBOR (one month) plus 3.50%.
- Security Status: Unsecured unless a "Trigger Event" occurs. If triggered, the facility becomes secured by a first priority lien on substantially all real property.
- Trigger Events: Occur if the EBITDA to Interest Expense ratio falls below 4.00 to 1.00 or if the Leverage Ratio (Total Liabilities to Total Capitalization) reaches or exceeds 65.0%.
Material Changes and Covenants
The A&R Credit Agreement imposes specific financial maintenance covenants and restrictions:
- Tangible Net Worth: Must not be less than $202.5 million plus 75% of net proceeds from equity issuances after Dec 31, 2015, plus 50% of positive consolidated earnings after taxes earned in any fiscal quarter after Dec 31, 2015.
- Leverage Ratio: Must not exceed 67.5% as of the last day of each fiscal quarter.
- Liquidity: Must maintain at least $40.0 million.
- Interest Coverage: EBITDA to Interest Expense ratio must be at least 2.50 to 1.00 for the most recent four quarters.
- Land Value Restrictions: Land Value cannot exceed 160% of Tangible Net Worth through Dec 21, 2016, and 150% thereafter.
- Inventory Restrictions: Speculative and Model Housing Units cannot exceed 45% of the annualized number of housing units sold in the preceding six months.
Outlook, Risks, and Contingencies
The filing outlines significant risks associated with the credit facility. If a default occurs, the company may be unable to borrow, and lenders may declare all sums immediately due and payable. Events of default include failure to pay principal or interest, failure to perform covenants, inaccuracy in representations, cross-acceleration of indebtedness of $1 million or more, changes of control, bankruptcy, or material adverse effects. The filing does not provide specific forward-looking guidance on revenue or earnings, focusing instead on the terms of the financing arrangement.
Key Facts for Investor Verification
- Verify the company's current compliance with the new 67.5% Leverage Ratio and $40.0 million Liquidity covenants.
- Monitor the EBITDA to Interest Expense ratio to ensure it remains above the 4.00 to 1.00 threshold to avoid the facility becoming secured by all real property.
- Review the company's land inventory levels against the 150% (post-Dec 2016) Tangible Net Worth cap.
- Confirm the status of the $360.0 million facility drawdown and outstanding balances.