Meritage Homes amends, restates credit facility, cuts borrowing capacity

By Jennifer Chiou

New York, Sept. 28 - Meritage Homes Corp. entered into the third amendment to its credit facility, decreasing the borrowing capacity to $800 million from $850 million and allowing for a reduction of the interest coverage ratio below 2 to 1 for a reduction period of up to nine consecutive quarters, according to an 8-K filing with the Securities and Exchange Commission.

The company said that if and when the interest coverage ratio falls below 2, the interest rates applied to borrowings and letters of credit under the credit agreement will increase. The permitted maximum leverage ratio, currently 2.25, would also be reduced, adjusted based on the level of the interest coverage ratio.

The Scottsdale, Ariz., homebuilder said that the amendment also modifies the applicable interest rate by 20 basis points to 27.5 bps, depending on its leverage ratio.

Guaranty Bank was administrative agent and swingline lender.

"We are focused on improving our balance sheet strength by reducing inventory and debt," chairman and chief executive officer Steven J. Hilton said in a news release.

"This amendment is a pre-emptive measure that provides us additional operating flexibility as market conditions for homebuilders continue to be very challenging. We appreciate the support of Guaranty Bank and JPMorgan Chase Bank as lead arrangers, as well as the others in our credit facility who cooperated with us to complete this amendment."

The amendment also allows for a further reduction of the interest coverage ratio requirement of less than 1 to 1, but not less than 0.5 to 1, for a period of up to three consecutive quarters. During this period, the company must maintain a borrowing base capacity of at least $75 million.

During the reduction period, Meritage will be prohibited from repurchasing any of its common stock, repurchasing or prepaying any senior notes or subordinated debt and paying dividends, and will receive no credit in the borrowing base for unimproved entitled land. Also, land and lots under development and unimproved entitled land in total may not comprise more than 30% of the borrowing base.

At any other time, the company receives borrowing base credit for 50% of the value of unimproved entitled land.

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