How Homebuilders Are Surviving Deleveraging

Overview

Small and large homebuilders' main struggle in this downturn (aside from no sales), is that many can't pay back construction loans or deleverage in the current market environment.

Some smaller builders fail, while the larger, public ones face ratings downgrades and margin calls. Some banks (like Wachovia) are suing to get their money back, or the guarantee that they will get their money back. Interestingly, Deutsche Bank's Nishu Sood says Pulte Homes has remarkably less leverage than its peers and should survive the downturn well as a result.

Moody's Downgrades Champion Enterprises 2 Notches. “Moody's Investors Service downgraded modular housing company Champion Enterprises Inc. (CHB) two notches further into junk territory Tuesday, citing continued weakness in the company's U.S. operations and the outlook for further softening. The ratings agency said it expects Champion to be under pressure well into next year, and it expressed concern about financial covenants on some of its borrowing.” (AP via CNN, Oct. 21) 

Home Builders Squeezed By Bank Loans. Michigan: Fifth Third Bancorp (FITB) is scaling back on… residential construction loans: "We remain committed to the residential real estate market. We have scaled back our exposure to the industry. Given the current credit environment, we must make prudent decisions to ensure we remain well-positioned in the marketplace for long-term success. We also have an obligation to our shareholders to protect the bank from unnecessary losses." FDIC: US residential construction activity has fallen 10 consecutive quarters. Other banks are tightening construction loans, too.” (Wood TV8, Oct. 21) 

Wachovia Sues Builders, Developer Over Nev. Project. “Wachovia Corp. (WB) has sued a group of homebuilders… seeking guaranteed payments by [them] as a result of defaults on credit facilities used for the acquisition and development of more than 1,700 acres near Las Vegas… Wachovia had arranged $565 million in credit facilities for the project… The complaint names homebuilders KB Home (KBH), Lennar Corp. (LEN), Meritage Homes Corp. (MTH), Pulte Homes Inc. (PHM), Ryland Group Inc. (RYL) and Toll Brothers Inc. (TOL) and Las Vegas developer Focus Kyle Group LLC as defendants.” (Dow Jones via CNN Money, Oct. 21) 

Pulte Homes Surprisingly Near Top Of S&P 500. “Pulte has set aside $1 billion in cash reserves [and] will close the year with upward of $1.8 billion in reserves. Furthermore, the company has paid down about $300 million in term debt that was going to be due next year, so they don't have any term debt obligations due until 2011… Deutsche Bank: The company reiterated that it has plenty of cash ... and that it is comfortable with most of its land positions.” (CNN Money, Oct. 20) 

Pacific Lifestyle Seeks Bankruptcy. “Pacific Lifestyle Homes, a builder of houses in southwestern Washington and northern Oregon, sought bankruptcy protection, citing turmoil in financial markets. The company, based in Vancouver, Washington, listed debt of $60.9 million and assets of $71.5 million in Chapter 11 documents filed in U.S. Bankruptcy Court in Tacoma, Washington.” (Turkish Daily News, Oct. 20) 

End of the Office Party Is Coming. “Financial institutions have already taken more than $15 billion in commercial property-related write-downs this year. [In terms of] construction loans to single-family homebuilders and condo developers: As of Q2, about $51B of the $627B construction loans outstanding -- or 8.1% -- were at least 30 days past due. That compares with 2.4% in the year-earlier period.” (WSJ, Oct. 17)

Builders FirstSource To Exit New Jersey. “SEC filing: Builders FirstSource, the Dallas-based pro dealer… will leave the New Jersey market. The dealer said it operated a distribution center, manufacturing facility, and three cabinet showrooms in the state… It said it should have facility closure costs and possible additional asset impairments related to the costs in Q4’08. Cash savings over the next two years, following the closings, are expected to be between $5M-$7M.” (Builder Online, Oct. 16)

Sacramento Home Builder Files For Chapter 11. “Another major Sacramento homebuilder and land developer, Christo Bardis, co-founder of Sacramento-based Reynen & Bardis Communities, filed for Chapter 11 protection in U.S. Bankruptcy Court in Sacramento, the development firm announced. He listed liabilities of $100M-$500 million and assets between $10M-$50M.” (Sacramento Bee, Oct. 16)

                                                                     

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Comments

[markettaker:]

I don't know if they will survive.

Check this site about deleveraging...

www.gotoguy.com/?p=607

2008 Dec 04 07:38 PM