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| Friday, November 20, 2009 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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June 2, 2008 12:01 AM ET
Bloomberg
GLUT FEELING Sales by builders could push prices still lower.
While the largest home builders are not yet at risk of going bankrupt, many mid-tier and smaller companies are being squeezed by banks after they took record profits made during the housing boom and invested them in land at the top of the market. “With the exception of just a handful of public home builders, most got caught with the most inventory they've ever had at the market's peak,” said Morningstar associate director Eric Landry. Last year, as land prices in many places such as Florida fell to as little as 50% of what they were in 2005, builders started selling off excess land. Nationally, land prices were down 9% in 2007, according to Real Capital Analytics. In April, Moody's reported that since the first quarter of 2006, the 19 publicly traded home builders had written off $19.3 billion in land impairments, land option abandonment charges and joint venture charges. The five largest, D.R. Horton, Pulte Homes, Lennar, Centex and Toll Brothers, said that falling land prices cost them a combined $1.47 billion in the fourth quarter last year. Accounting rules require them to write down the value of their land, and the resulting hit to shareholder equity could trip key loan covenants. Mr. Landry said that some home builders are still holding more land than they should. Compounding the problem, they're finding it difficult to sell at prices high enough to generate significant amounts of capital. In May, for example, Centex sold three properties with a book value of about $528 million to a group of hedge funds for $161 million, which will give the company a tax benefit of $294 million. Hedge funds, private opportunity funds and other distressed-assets investors have been snapping up some of the land and unfinished projects that are for sale. But Paul Prescott, leader of Deloitte Tax's national home-building practice, said the proceeds may not be enough to keep builders from violating their debt repayment requirements or their covenants, which banks are less likely to waive or amend because of the ongoing credit crunch. As a recent Moody's report on the industry put it: “We expect a number of home builders to face growing resistance when requesting covenant waivers or amendments, which could lead to a forced acceleration of debt repayment and consequent bankruptcy filings.” In the past, banks allowed clients to restructure financial covenants or negotiate waivers for a small fee. If they can't renegotiate or waive covenants to ease their payment terms, home builders may have to sell the land at almost any price. Of course, doing so will only cause prices to fall further, creating still more write-downs. But most evidently believe it's better to sell land now than see it lose value further as other sellers exit first. Also, Mr. Prescott said most of the projects or land that home builders are selling will go to distressed investors and hedge funds, and builders might be able to recoup some of their losses through fees. “Buyers might engage the seller or another home builder on a fee basis to provide the expertise to build out the project [or develop the land],” he noted. However, Mr. Landry said the investment groups “are going to sit on the land, wait for a better day and then resell it back to the home builders.” There is also the possibility that the sale of some of the land and projects might be delayed as cash-rich investors consider whether to buy now or wait to buy an entire company after a home builder files for bankruptcy. Mr. Landry said WCI Communities and Standard Pacific were the two major public builders currently at risk of filing for bankruptcy. Home builders that have already trimmed their land inventories may be tempted to pick up land from competitors when the cycle looks to be turning up again. But calling that turn in this market won't be easy.
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