Home Builders Buy–and Bide–Time via Debt Moves
Tell us, have we tired of the phrase “the new normal” yet?
Also, do those who favor Adam Smith policy eat more of one kind of breakfast cereal at some point in their formative years, whereas the ones who adopt John Maynard Keynes’ principles to manage through economic hard times eat, say, Lucky Charms?
The question of the moment for businesses that make a living — or try to — in new residential construction is what to do in a mixed-signals economy other than dodge the carcasses of America’s regional banks and try to convince another buyer that a new home for 25% more is still better than a used home coming out of foreclosure.
To look at how public home builders are behaving–especially in managing their near-term debt maturities–a long runway to recovery is what they’ve got in mind. They’ll comp better year-on-year when we arrive in 2010, but regaining profitability may be more likely to occur on a run-rate basis during the back half of the year rather than on a 2010 fiscal year measuring stick.
Everybody with debt due in 2010, ‘11, and ‘12, has been working hard to get terms extended, with varying success. In this environment, what collateralizes that debt as it gets extended is slippery. Everybody’s got to have more cash capital backing loans, so borrowers are performing financial acrobatics to collateralize debt that’s pushed down the road to where it’s less menacing.
Home builders are averse to have cash sitting in a bank account as collateral for their debt, so they’ll alternatively look to supply lenders with a letter of credit that would allow the lender to come after the whole amount if there’s a default.
This is all to say that 2010 looks as if it’s another year of living dangerously for home builders. With jobs ranks still shrinking and household formations in a slow-down mode, expectations around cash from home sales have more to do with keeping the lights on and the wheels turning than generating a whole lot of equity growth.
Which is fine if you’re a public company, … one that can get the runway … toward the new normal. Ok that’s the last use of that term except to take pot shots at others who’ll go on to use it to death.
Comments
Leave a Reply