Moody’s says 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.
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April 25th, 2008 at 7:10 am
[...] shot. His assessment of how bleak thinks look was also reflected in the second most-popular post, Moody’s warning that homebuilders are likely to be squeezed by banks who can no longer afford to cut them any slack [...]