Global real estate brokerage and franchise company Realogy Corp. cited "credit and stock market turmoil" and a worsening economic climate in offering a debt exchange to lessen the risk of default on bank loans, according to financial filings and a Bloomberg news report.
In a Thursday filing with the U.S. Securities and Exchange Commission, Realogy noted that its franchise group reported a 9 percent year-over-year decline in home-sale transaction sides in October, with sale prices tumbling 7 percent year-over-year for transactions handled by franchisees.
And Realogy’s NRT subsidiary, which oversees company-owned brokerage operations, reported a rise in its home-sale cancellation rate to 20 percent in October "from its historical rate in the low- to mid-teens."
Realogy’s company-owned and franchise brands include Coldwell Banker, Century 21, ERA, Sotheby’s International Realty, and Better Homes and Gardens Real Estate.
The company noted that the decline in sales volume and prices for transactions will negatively impact the company’s debt-to-assets ratio and "there can be no assurance that we will not violate this or other covenants under our senior secured credit facility or that this will not result in a default under our indentures."
The company also reported in the filing, "We cannot predict how long the current volatility in the financial marketplace, decline in consumer confidence and current recessionary conditions will continue to affect home sales and prices."
Bloomberg reported that Realogy "is at risk of violating the terms of its bank loans" and is "trying to reduce debt by almost $600 million and stave off default."
According to the filing, the offering could cut debt by about $592 million and lower interest expenses by about $19 million when calculated for the first three quarters of the year. The company reported $6.5 billion in total long-term debt as of Sept. 30, 2008.
Christopher Garman, CEO for debt research firm Garman Research LLC, stated in the Bloomberg article that the move to exchange bonds at a discount for new debt "is kicking the default can further down the road," and "All parties have an interest in keeping companies away from default."
In a quarterly earnings conference call earlier this month, Realogy President and CEO Richard A. Smith said, "If the company were to be in default of the (debt) covenant, our parent company … has the right but not the obligation to cure such default through the infusion of additional equity. And of course, as you would expect, there are no guarantees."
Also, he stated that the company has not repurchased any of its debt.
The company had a net loss of $50 million in the third quarter (see Inman News), which followed a $27 million loss in the second quarter.
An affiliate of private equity firm Apollo Management LP acquired Realogy in a heavily leveraged buyout deal completed last year.
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