Moody's: Homebuilders at the Mercy of Their Banks

Several lower-rated homebuilders survived 2007 merely because of the leniency of their lending groups. As 2008 unfolds, these same homebuilding companies will once again find themselves at the mercy of their banks, according to Moody’s.

But now the banks are facing increasing pressure to 1) take a harder line on covenants, 2) reduce their homebuilding exposure, which has not provided them with the same level of fees as in the past, and 3) deal with their own balance sheet issues. As a result, Moody’s expects to see a rising number of defaults amid this confluence of negative factors.

“As banks harden the line in 2008, we expect a number of homebuilders to face growing resistance when requesting covenant waivers or amendments, which could lead to a forced acceleration of debt repayment and consequent bankruptcy filings. This is of particular concern among homebuilders at the lower end of the rating spectrum, which have been limping along with weak liquidity and poor credit metrics.”

We believe 2008 will mark the year that banks finally begin to hold homebuilders accountable for their failure during the protracted slowdown to generate cash, maintain adequate liquidity, and reduce outstanding debt to levels more appropriate for their current revenue run rates, as would ordinarily be expected in a housing downturn.

Under a recession scenario, the pace of downgrades may exceed our prior expectations, Moody’s said. “We do not, however, anticipate downgrades matching the blistering pace seen in 2007.”

Moody’s Special Comment: Homebuilding Industry: Where’s the Cashflow? Also summarizes ratings actions in the sector and analyzes the impact of the economic slowdown on homebuilders.

Comments

[Ashley D]

Great, Moody's downgrades the homebuilders (as they should) but do nothing about the ABK and MBI. What a joke. Moody's and S&P have no shame - they are useless clowns.

[fxtrader07]

@KFF: why should they downgrade ABK and MBI? these raised capital. Oh, and please, facts, not just some general "mortgage losses will rise" blah blah.
it's funny how ackman succeeded in convincing people even though he didn't prove anything with his vast excel file