O.C. Builder’s Bonds Go Over Big on Wall St. : Finance: Enthusiastic response to $155-million Baldwin issue is regarded by industry insiders as a show of faith in the future of Southland residential real estate.
In what industry insiders say is a show of faith in the Southland’s recession-ravaged residential real estate market, investors have gobbled up $155 million in high-risk, 10-year notes in a private offering by an Orange County home builder.
Officials of Baldwin Co., the Newport Beach developer that issued the bonds, were not available for comment Thursday. One company insider said late last week, however, that the offering initially was pegged at $125 million but was oversubscribed by eager investors.
The bonds were acquired and resold to private investors by Bear, Stearns & Co., a New York brokerage, and Libra Investments Inc., a Los Angeles investment bank specializing in high-risk deals.
“The sale is Wall Street’s endorsement of the belief that California’s real estate market has fallen too far and that the future must be better,” said Ken Agid, an Irvine marketing consultant.
A national recession, regional economic troubles spurred by federal defense spending cuts, and the collapse of the savings and loan industry--once a major source of construction funds for home builders--have turned Southern California into a financial desert for most home builders in the last few years.
“We have been waiting for new forms of financing to replace the S&Ls; and the banks,” Agid said. The success of the Baldwin bond sale “makes it seem like maybe Wall Street is betting that California is due for a rebound in the not-too-distant future.”
A bond is a corporate IOU backed by the company’s promise that it will be able to repay the debt. The Baldwin bonds are so-called senior notes, meaning that the company has promised to give the bondholders priority over other unsecured creditors. Banks and other lenders are usually secured creditors, with a legal claim to a borrower’s property in the event of a default.
In a written statement issued late Thursday, Baldwin Co. President Al Baldwin said proceeds from the bond offering will be used to repay some of the 37-year-old private company’s existing bank debt.
Concurrent with the offering, Baldwin Co. obtained a new revolving credit agreement with General Electric Capital Corp. enabling it to borrow as much as $60 million over the next three years for home construction and working capital.
Standard & Poor’s credit-rating service gave the Baldwin notes a B minus grade Thursday, classifying the debt as speculative and relatively risky.
“But the best rating I’ve heard of for any (private) California builder’s bond in a long time is a B, so B minus isn’t all that bad,” said Larry Webb, president of Greystone-AM Homes in Newport Beach.
Baldwin, like many private regional builders, has been strapped for cash in the last year. It was in default briefly this month on a $619,000 payment to Orange County on a development bond for one of its south Orange County projects and reportedly has missed payment deadlines on other loans in recent months.
“Wall Street analysts have a pretty poor outlook about the Southern California market,” Webb said. A B minus rating for Baldwin’s bonds “is better than I would have expected.”
By comparison, publicly traded Kaufman & Broad Home Corp. of Los Angeles, one of the nation’s largest and most profitable home builders, recently issued $175 million worth of 10-year notes at 9.375% and received a BB minus from Standard & Poor’s--the strongest of the “speculative” ratings and three levels above the Baldwin Co.’s classification.
The Baldwin notes pay a 10.375% interest rate, which Webb called “a good deal for the investors and the company.”
Southern California builders today are paying from 7.5% to 13% for bank and private loans, industry sources say. “For most of the past three years the concern hasn’t been what you pay to get the money,” Webb said, but “whether you could get any money at any price.”
Especially encouraging to local builders are reports that the Baldwin offering was oversubscribed--more bonds were sold than were initially offered.
One industry consultant who is working with Bear, Stearns on an unrelated matter said officials of the company told him that Baldwin initially wanted to sell $125 million worth of bonds and that Bear, Stearns arbitrarily capped the offering at $155 million. “They said they could have sold more,” the consultant said.
News like that gives hope to builders like E. James Murar, chairman of RGC in Newport Beach. His company has just launched sales in a 111-home luxury development overlooking Newport Harbor but has seen plans for a series of affordable single-family detached home projects in Orange County stymied by balky bankers.
During a private showing Wednesday evening of the luxury homes--priced from $590,000 to $900,000--Murar said he was thrilled by word that the Baldwin bonds had been well received. That sale, he said, could help break the industry’s financial logjam.
In its rating statement, Standard & Poor’s said it thinks Southern California’s economy, while expected to remain weak for a year or more, has stabilized.
