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What will Ernst and Young Say Regarding SPF?



February 23, 2008 – Comments (0)

When considering whether giving a going concern warning, the article cited in the previous post stated the following:

"Such information would include the company’s ability to meet its maturing obligations without selling operating assets, restructuring debt, revising operations based on outside pressures, or similar strategies."

 It apprears SPF likely had to do all of the above LAST YEAR.

1.  Ernst and Young KNOWS that SPF has been liquidating operating assets at HUGE losses over the past year evaporating hundreds of millions of dollars of shareholder equity.

2.  Ernst and Young KNOWS that even though SPF management gave it a plan last year forecasting it would not violate its loan covenants, less than 10 weeks after filing its 10K, SPF renegotiated its debt covenants AND was forced to renegotiate them twice more though end of 2007.

3.  Ernst and Young KNOWS that SPF offered a very dilutive convertible offering in September of last year issuing millions of new shares simply so institutions could short its stock and the cash proceeds went primarily lenders.

4.  Ernst and Young KNOWS that SPF was only able to pay down a few hundred million of debt all of last year when margins and sales were much better than this year and AFTER SPF liquidated hundreds of millions of dollars of assets.

5.  Going into this year, Ernst and Young KNOWS SPF is already in violation of its revolver and Term A and B loan covenants, has publicly stated it is likely going to take down approximately $200 million worth of land, has approximately $400 million of payables and accrued liabilities, has over $700 million of JV debt the majority of which is subject to remargin payments, has approximately 2100 homes under construction, and over $1.6 billion of senior and subordinated debt.

The issue is simple:

If an auditor fails to give a going concern warning for a company facing billions of dollars of combined spend obligations and liabilities while simutaneously liquidating assets at incredible losses(70% off of purchase price) to meet those obligations, when is the appropriate time to warn stakeholders?

Anyone think SPF's lenders are going to let SPF fire sale hundreds of millions of dollars worth assets simply to make a hundred million dollar debt payment in the fall?  Do you think Ernst and Young has an idea?

Can you believe not a single Wall Street Equity Analyst has raised this issue?

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