LGI Homes, Inc. Form 8-K Summary
Business Context and Reporting Period
This Current Report on Form 8-K was filed by LGI Homes, Inc. on May 25, 2017. The filing reports the entry into a new material definitive agreement and the termination of a prior credit agreement. The Company is an emerging growth company incorporated in Delaware.
Key Financial Metrics and Debt Structure
The filing details the terms of a new Second Amended and Restated Credit Agreement rather than reporting period-specific financial performance metrics such as revenue or net income.
- Facility Size: $600.0 million revolving credit facility, expandable to $650.0 million.
- Maturity: May 31, 2020, with an option for a one-year extension prior to each annual anniversary.
- Interest Rate: Initial rate is LIBOR (one month) plus 3.15%.
- Security Status: Unsecured unless a "Trigger Event" occurs.
- Trigger Event Thresholds: Occurs if EBITDA to Interest Expense ratio falls below 4.00 to 1.00 or if the Leverage Ratio (Total Consolidated Debt to Total Capitalization) reaches or exceeds 57.5%.
Material Changes Versus Prior Period
The Company terminated its previous Amended and Restated Credit Agreement dated May 27, 2016. The new agreement substantially restates the prior terms but establishes the specific financial covenants and facility limits detailed below.
Covenants, Risks, and Management Commentary
The Credit Agreement imposes strict financial and operational covenants. Failure to comply may result in an event of default, allowing lenders to declare all sums immediately due and payable.
Financial Covenants
- Tangible Net Worth: Must not be less than $300.0 million plus 75% of net proceeds from equity issuances after Dec 31, 2016, plus 50% of positive consolidated earnings after taxes earned in any fiscal quarter after Dec 31, 2016.
- Leverage Ratio: Must not exceed 60.0% as of the last day of each fiscal quarter.
- Liquidity: Must maintain at least $50.0 million.
- Interest Coverage: EBITDA to Interest Expense ratio for the most recent four quarters must be at least 2.50 to 1.00.
Operational Restrictions
- Land Value: Cannot exceed 145% of Tangible Net Worth.
- Speculative Housing: Speculative and Model Housing Units cannot exceed 45% of the annualized number of Housing Units sold in the preceding six months.
- Wholesale Sales: Starting the quarter ending Dec 31, 2017, limits on the proportion of sales under Wholesale Sales Contracts apply.
- Investments: Restricted, with specific limitations on investments in rental housing.
Risks and Contingencies
Events of default include failure to pay principal or interest, failure to perform covenants, material inaccuracies in representations, cross-defaults on indebtedness of $1.0 million or more, changes in control, bankruptcy, or judgments of $500,000 or more. Upon a Trigger Event, the facility becomes secured by a first priority lien on substantially all real property, including completed homes and homes under construction.
Investor Verification Checklist
- Verify the Company's current Tangible Net Worth against the $300.0 million floor plus applicable equity and earnings adjustments.
- Confirm the current Leverage Ratio is below the 60.0% covenant limit and the 57.5% Trigger Event threshold.
- Assess current liquidity levels to ensure they meet the $50.0 million minimum requirement.
- Review the ratio of Speculative and Model Housing Units to recent sales volume to ensure compliance with the 45% cap.
- Examine the Land Value relative to Tangible Net Worth to ensure it does not exceed 145%.
- Check for any pending judgments or cross-defaults that could trigger an immediate event of default.