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Bankruptcies Expected in Coming Months for Some of the Nation's Biggest Homebuilders

Written by Peter L. Mosca on Tuesday, 24 February 2009 6:00 pm

No matter it be read in a newspaper or an online thread, heard out of the mouth of our president or a talk-show host on the radio, or watched on your TV or PDA, the consensus is that the economy is going to get worse before it gets better. According to one industry-leading watchdog, this economic nightmare is negatively impacting our nation’s homebuilders as a review of 33 U.S. firms with more than $10M in revenue shows that more than 30 percent are in financial distress and in danger of filing for bankruptcy, according to an analysis by Grant Thornton Corporate Advisory and Restructuring Services.

“It’s striking when you see just how much cash flow has continued to decline for the better builders," said John Bittner, partner at Grant Thornton Corporate Advisory and Restructuring Services. "This year it will be all about keeping cash flow positive by cutting operating costs and liquidating assets. It'll get to a point, however, when builders get rid of the assets with the most value and expenses can’t be cut much further. After that, there’s not much they can do except wait for a turnaround in the housing market."

Records show 143 U.S. homebuilders filed for bankruptcy last year versus 80 in 2007. To remain viable, many will be forced to continue to reduce expenses and cut prices on existing inventory to increase cash flow, in contrast to their previous focus on revenue growth for the better part of this decade.

“It wouldn’t surprise me to see one or two of the top 10 homebuilders filing this year," said Bittner. "But in most cases, the current lending environment is unique in that as long as a builder has positive cash flow, the lender doesn’t want to foreclose or force a bankruptcy filing. Recovery is more likely if a bank can be patient with a borrower. Positive cash flow and ability to service interest on a credit facility provides for a better negotiation position with the lender."

According to Grant Thornton principal Tim Skillman, southern California and Florida are key markets to watch for evidence of a national turnaround.

“We won’t begin to see a recovery until these regions bottom out," he said. "The indicator will be not the quantity of sales, but the median price of homes sold."

Skillman believes expense reduction will be critical. Average revenue per homebuilder declined to $1.9M last year versus its peak at $3.7M in 2006 -- a nearly 50-percent drop. Homebuilders that significantly scale back new-land purchases and maintain both positive cash flow and maximum cash balance on hand will be in an improved position to combat distress.

“In this recession, the decline in housing starts up to this point has been largely a result of the contraction in the financing market," said Skillman. "With unemployment rates rising across the country, we could see a ‘double dip’ in housing starts and home prices."

“We will not effectively stabilize the nation’s banks and financial system until we stop the wave of foreclosures that continues to drive down the economy and harm millions of families," Michael Calhoun, President of the Center for Responsible Lending wrote in a comment to Treasury Secretary Timothy F.At least 8 million families risk losing their homes to foreclosure in the next four years. These foreclosures drive down the value of all homes, and in turn prevent a recovery of the housing and financial markets. The financial crisis will not end unless these foreclosures are reduced."

The Center for Responsible Lending notes that this year alone there will be 2.4 million foreclosures. The 75 million families who happen to live near those properties will see their home values drop an additional $435 billion. That amount could more than triple over the next four years to nearly $1.5 trillion. Declining property values means less tax revenue to support schools, police, and other essential local services - and ultimately all of these factors will result in less activity for homebuilders.

[Note: Grant Thornton’s Corporate Advisory and Restructuring Services team works with underperforming and transitional companies and their stakeholders. They evaluate the financial and operational issues adversely affecting performance, assess strategic alternatives and develop and execute comprehensive plans to address the challenges.]

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