SoCalsurfbum

Standard Pacific’s Fiscal House Needs Restructuring

Why do you think they would do Ch 11 and not Ch 7 bankruptcy? Usually, Ch 11 happens when the underlying business is still good, but the operational cost structure was managed poorly.

The problem with StanPac is not that their operational cost structure is broken… The problem with StanPac is that they loaded themselves up with assets that are only worth a fraction of what they paid for them... this cannot be solved with a contract re-negotiation or a debt restructure. The situation that this has caused is that StanPac is selling houses and land for less than they paid for them. Even if all debt is forgiven tomorrow, Standard Pacific’s continuing operations are running cash-flow negative.

And entering bankruptcy the creditors have a decision to make…

1. Liquidate the company (Ch 7) who’s only real value is in the assets, (especially in this market… the ability to build homes is not a unique, desirable, or profitable skill in the foreseeable future) and be the first ones out before other companies go bankrupt and flood the market and depress prices even more. If they close shop and sell the assets they do not have to fund the on-going operations and overhead which just keeps burning more of their money… and with negative margins and falling housing prices, recovering any of the cost of overhead looks like a long-shot at best…

Or

2. The creditors take control of the operations from the current shareholders (Ch 11) and then sell off the company assets in a less “liquidation sale” type way and hopefully recuperate more money... after drastically reducing overhead. This only works if the company can find a way to get positive gross margins. I would think this approach is less likely because it is riskier. The Ch 11 proceedings take a long time and if they finally decide to liquidate a year or two from now… who knows how much the asset prices will have fallen. And you are still paying overhead.