Homebuilder WCI files Ch. 11

The Baltimore Sun

WCI Communities Inc., the homebuilder whose chairman is billionaire corporate raider Carl Icahn, filed for Chapter 11 bankruptcy protection after failing to obtain new financing and losing 90 percent of its value in the past year.

Chief Executive Officer Jerry Starkey will leave and Chief Operating Officer David Fry, 48, will take over as interim CEO, Bonita Springs, Fla.-based WCI said in a statement yesterday.

WCI, which has proposed building a controversial 23-story tower in Columbia, is in talks to receive $100 million in debtor-in-possession financing from several lenders, the statement said.

"Like in all distressed industries, there is a cycle, much like in the casino and energy companies of seven or eight years ago," Icahn said in a telephone interview. "In housing, there is still a bumpy road ahead."

WCI, which began developing master-planned communities in 1946, joins at least a dozen homebuilders that have sought bankruptcy protection since June 2007, as the worst housing slump since the Great Depression has battered sales.

In the company's statement, Icahn said the builder tried "with all diligence" to avoid a bankruptcy.

"The filing became necessary because of the recent failed effort to obtain financing and the recognition that the company's entire $1.8 billion of debt may soon be in default," he said in the statement.

Entities controlled by Icahn own about 6.1 million shares, or 15 percent of WCI, making him the largest shareholder, Bloomberg data show. WCI fell 60 cents, or 47.6 percent, to close at 66 cents yesterday on the New York Stock Exchange, before the filing was announced.

New York-based ratings companies Moody's Investor Service Inc. and Standard & Poor's Ratings Services lowered the builder's rating to "D" for in default.

Icahn paid an average $18.46 a share, or about $112.6 million, for his stake in WCI, which is worth about $4 million at today's share price of 66 cents, bringing his loss to $108.5 million. WCI's shares traded at a high of $35.63 on Feb. 25, 2005.

Icahn built his reputation in the 1980s as a corporate raider, targeting companies such as Texaco Inc. and Trans World Airlines Inc. He forced Time Warner Inc., the world's largest media company, to buy back more stock, add new directors and pledge to cut costs by $1 billion over two years.

Last year, he waged a campaign to win a seat on the Motorola board. He's also chairman of experimental cancer drugmaker ImClone Systems Inc., which is battling a $4.3 billion buyout offer by Bristol-Myers Squibb Co. Icahn and ImClone's board said the takeover proposal is too low.

Yahoo Inc., owner of the second-most-used Internet search engine, agreed to expand its board to 11 members and make room for two of Icahn's nominees after settling a proxy fight with him in July.

Icahn first disclosed an almost 15 percent stake in WCI in January 2007, and a month later he said he wanted to oust the company's board. In March 2007, he made a $22-a-share offer for WCI worth $956 million, which was rejected by the board as inadequate.

Icahn and two allies won seats on WCI's board in August 2007 and he was elected chairman a month later. Soon after, the company dropped plans to seek a buyer.

WCI has posted a net loss for seven straight quarters; in 2007 it lost more than $570 million. The company's shares traded as high as $35 in June 2005, as the U.S. housing market was peaking.

Before the filing, WCI reached an agreement with its principal secured lenders to give the company access to more than $50 million of cash to continue operating. It is seeking court permission to use the cash. The developer said it will continue to sell, build and deliver homes.

The homebuilder is seeking court permission to continue building and selling homes. WCI said it is party to more than 255 contracts to design, build and sell residential real estate and other real property.

WCI said it has collected about $51.7 million in deposits related to pre-bankruptcy contracts that have not yet closed and about $17.6 million remains in escrow. The homebuilder seeks permission to apply those customer deposits at closing.

It's also seeking authority to return deposits in the event it is obligated to do so under the terms of a contract. WCI says it may owe about $1.8 million of deposits that need to be returned to buyers. A deposit may be returned due to a breach or termination of a contact by the homebuilder or if a buyer is unable to obtain financing.

"The continuation of the debtors' core business - the design, construction and sale of homes and residences and the sale of other property - is critical to their efforts to reorganize," Ernest Scheidemann, WCI's chief financial officer, said in court papers.

Without the authority to return deposits when required, "the debtors' reputation in the marketplace will be damaged such that the debtors will be unable to generate sufficient funds," Scheidemann said.

WCI, named America's Best Builder in 2004 by the National Association of Home Builders and Builder Magazine, has properties in Florida, Connecticut, Maryland, New Jersey, New York and Virginia. Homes range in price from the high-$100,000s to more than $10 million.

The company listed debt of $1.9 billion and assets of $2.2 billion as of June 30 in Chapter 11 papers filed today in U.S. Bankruptcy Court in Wilmington, Del.

By debt, the company is the second-largest to file for bankruptcy. Tousa Inc., based in Hollywood, Fla., was the largest, filing Jan. 29 with debt of $2.24 billion. Kimball Hill Inc., Levitt & Sons LLC, Kara Homes Inc. and Neumann Homes Inc. also pursued protection from creditors.

WCI is the second-largest homebuilder by debt and assets to seek bankruptcy protection. About 130 WCI units also filed for bankruptcy, including Mansion Ridge Sewer Co. and Florida Lifestyle Management Co.

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