Homebuilder Bankruptcies: Who Might Be Next?

In light of the WCI Chapter 11 Bankruptcy Filing this morning, inquiring minds have been asking "Who's Next?"

While that question cannot be directly answered, we can take a look at how the credit market players perceive the situation.

Homebuilder Credit Default Swaps



(Click on chart to enlarge.)

The above chart is thanks to Chris Puplava at Financial Sense.

After topping in December of 2007 and again in March of 2008, homebuilders staged a huge rally in creditworthiness terms until June 2008.

Hovnanian (HOV), Beazer Homes (BZH), and Lennar (LEN) are now the three most likely bankruptcy candidates on the above list of homebuilders (at least from a credit player's perspective). In December 2007, Standard Pacific (SPF) was far and away the most likely to go bankrupt.

Ryland (RYL), Pulte (PHM), Toll Brothers (TOL), and especially MDC Holdings (MDC) are the least likely homebuilders on the above list to head for bankruptcy.

Comments

[Trumpace:]

I think unless one has hard facts to base ones opinion on, one should never yell fire in a theater. By saying a company is likely to go into bankruptcy, one is doing the markets and these companies an injustice and causing harm. If a company will go into bankruptcy let them be the one to make that announcement, unless one wants to come off as doing the biding for the shorts. Saying something like "there may be other builders close to bankruptcy" without naming any is one thing, but when someone names a name of a company, one better have ones ducks in order and know what one is talking about, or face that company taking one to court if one causes harm.

2008 Aug 04 04:34 PM

[Clone:]

Dear Hovnanian,

Boom, outta here.

Regards,

MDC Holdings

2008 Aug 04 05:17 PM

[tomyris:]

My take on the chart is that none will go bankrupt . Thanks for pointing this out .

2008 Aug 04 07:03 PM

[singh:]

TARR??

2008 Aug 04 07:27 PM

[Doug Poretz:]

Among the most likely to go Chapter 11 -- CHCI -- smaller than other homebuilders and already on the brink.

Least likely to go Chaper 11/most likely to succeed: NVR. Virtually no land position (options only), great market positions, very smart management who went Chapter 11 in earluy 1990s, learned major lessons, not going there again.

(Fair disclosure: i was vp at NVR from 1986-1990)

2008 Aug 05 08:09 AM

[notsosmart:]

im not a lawyer but i thought in this country one could still give an opinion or has the nuttiness of short selling changed this?

2008 Aug 05 10:53 AM

[maeve3333:]

For Doug Poretz: I was at a due diligence meeting before NVR went public the first time.I recall Mr. Schaar say that after watching U.S.Homes go out of business in the 80-82 recession;NVR would limit their risk by not taking land through subdivision.So as to avoid the undue carrying risk.Which I believe he did for a few years and then loaded up and sank the ship.I take it that was just greed?And how did he exit bankruptcy with such a large personal ownership in the new company.I would appreciate it you could shed some light on the above.Thank you.

2008 Aug 05 04:47 PM

[Old Trader:]

Trumpace,

The author was merely pointing out what the credit default swaps indicated. Just another piece of info to throw into the hopper, and digest, should one be inclined to go long on any of these, or even (gasp) go short 1 or 2.

old trader

2008 Aug 05 07:29 PM

[User 238937:]

Dear Clone,

Do you think he crushed 'em?

Regards,

Brett

2008 Aug 05 08:32 PM

[spragus:]

maeve3333 has what one would say, is an "interesting question", for poretz. I'd love to see his answer.

2008 Aug 05 11:43 PM

[paulmars:]

Trumpace wrote:>>But when someone names a name of a company, one better have ones ducks in order and know what one is talking about, or face that company taking one to court if one causes harm.<<

More censorship of opinions by those who have lost their asses and now want to take it out on those that are smarter than they were!
F**K you!

2008 Aug 08 01:26 PM

[Doug Poretz:]

I joined NVR after the IPO, shortly after they (NVHomes at the time) launched the acquisition of Ryan. So, I was not involved in what was being said at that time. However, using options instead of buying land was a core feature of NVR prior to the troubles in the late 1980s and, of course, subsequent to them coming out of Chapter 11 -- and it is still apparently a core operating premise. So what happend? Basically two things, in my opinion -- others may disagree with justification but this is the way i saw it. First of all, when NVHomes went after Ryan Homes in a classic minnow swallowing the whale case history it was a small company with a small administrative staff -- bright, adept, entrepreneurial, but not with the Wall Street "creds" that the executive staff of Ryan had. When the two companies began to merge there was the traditional issue of how the administrative staff would be re-established, and no position was more debated than the role of CFO. The CFO of Ryan became the CFO of the new NVRyan (later renamed NVR). He brought the creds we needed to get the right banking relationships and do two major bond deals and an equity deal that was necessary to close the acquisition and then operate the new company. The former CFO of NVHomes needed a significant job, so in the process he became head of a new entity that was called NVR Development, which would invest in land -- the idea was that they would use off balance sheet non-recourse loans. Speaking very personally, I believe that if there was never the issue of creating a job for the "second" CFO, there never would have been NVR Development and thus there never would have been land acquisitions. But there was a second reason as well -- land positions that the company bought at the operating level were escalating in value so high and so fast that the margins increased on home sales, boosting the results and hence the bonuses for the operating entities. It really wasnt a problem when the market was super hot at the end of the '80s -- you'd use your operating LOC to buy a land position and you'd sell it shortly thereafter in the form of a house sale. These were land positions not acquired at the corporate level or even at NVR Development, but at a limited number of homebuilding operations, using short term operating lines of credit from the banks. I guess the moral of the story is that you can use short term borrowings to buy long term assets as long as you can flip those assets (land positions) quickly. But those assets weren't turned around quickly or even at all when the market quickly went to ruin. And that gave rise to problems with the banks -- but that policy produced great margins while the system worked. By the way, that was not Dwight's policy but it was done by homebuilding operating execs and squeeked through corporate controls, which i think became an easier task when the results were so positive. Also, the first person I saw call the real estate crash of the late 1980s was Dwight Schar himself -- he was presceint then and i think he remains a brilliant businessman -- take a look at the record he has produced over the past almost two decades since coming out of Chapter 11 for each of his constituents: shareholders, employees, customers, suppliers, and the communities where they do business and where NVR and its operations are major contributors to charitable and related efforts.

As to Dwight's large position in the company subsequent to the emergence from Chapter 11: I do not believe you are right -- i do not think he had a very large position at that time, at least compared to his enormous position prior to the debt-for-equity cram down. There was a reverse split after the debt-for-equity swap and that caused bondholders to become the major equity holders. But as the equity began to recover, the company started buying back its own stock (something it has done for years). The former bondholders, largely vulture investors who bought the bonds at dramatically depressed prices, were thrilled with the ability to sell back their equity to the company in big orderly blocks. And, in the process, it was an anti-dilutive event for all shareholders, including Dwight. Hope that helps. I haven't been involved with NVR for over 15 years or so, so these are memories that may be somewhat faded and inaccurate. But that is how i would answer your questions -- and I think these are fairly accurate.

2008 Aug 11 09:56 PM

[User 34323:]

I would'nt touch any of these homebuilder stocks with a 50 foot pole!! Only a sucker would buy them. A fool and his money are soon parted!

2008 Sep 02 12:20 PM