Wednesday, February 4, 2009

Moody's Prepares to Downgrade Most Homebuilders

In the current amusing race between S&P and Moody's over who can downgrade more companies in a shorter amount of time, S&P easily has the lead. However, Moody's just slapped S&P right back, Judge Peck style, by putting most homebuilders on downgrade review which usually precedes a full downgrade within 2 to 4 weeks. The companies about to be whacked include Beazer (B3 unsecured rating), Hovnanian (Caa1 unsecured), M/I Homes (B3 unsecured) and Standard Pacific (Caa1 sub note rating).

The key text from the release:
New York, February 04, 2009 -- Moody's Investors Service placed all of the ratings of Beazer Homes USA, Inc., Hovnanian Enterprises, Inc., M/I Homes, Inc., and Standard Pacific Corp. on review for downgrade. The review was prompted by Moody's expectation that cash flow generation for these companies will weaken in 2009 and deteriorate further in 2010, that the macro environment will continue to be unsupportive, and that access to credit--both for the industry and for its customers--will tighten. The review will focus on each company's ability to generate cash flow, manage liquidity, and comply with bank covenants beyond 2009.

The easy part of cash flow generation for these four homebuilders as well as for most of the rest of the industry is largely over. From this point on, homebuilders will have to concentrate on achieving additional cost reductions, building largely to order rather than on spec, faster turnover, product differentiation that would permit them to stem the erosion in home prices, more rigorous screening and subsequent handling of potential buyers to chip away at the elevated cancellation levels, and some attention-getting incentives.

Current cash balances and borrowing capacity for the four companies appear sufficient at this time to carry them through 2009, barring another significant jolt to the economy and the financial system. Beyond 2009, the question is whether the companies can re-energize their cash flow machines, handle debt maturities without a glitch, and provide the resources to take advantage of a turn in the market when it comes.

Each of the companies has been to its bank group multiple times for covenant relief, and the current bank covenant requirements are generally nominal. However, a return trip to the banks cannot be ruled out, given the forecast of Moody's Corporate Finance Group for additional home price declines that drive large impairment charges and create additional compliance challenges. If this were to occur, there is no guarantee that the banks would be in any mood to again be cooperative.

Moody's anticipates that the review will be conducted on an expedited basis. If the determination from the review is that ratings should be changed, it is possible that the ratings of one or more of the four companies will be lowered by more than one notch.
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Anonymous said...

Homebuilder rating change is much too late as we've heard for a year now that new homes were not being sold and/or builders could not even start empty lots.