Sep 11 2008
More distress is expected in the next six months for the $700 billion U.S. homebuilding industry, which has been hit hard by economic issues. Particularly at risk are small- to medium-sized builders, according to experts at Grant Thornton Corporate Advisory and Restructuring Services. National builders will continue to acquire sizeable local and regional builders, and the latter will consolidate among themselves to make them more attractive acquisition targets.
According to a Grant Thornton analysis, all major homebuilders have faced declines in revenue and margins, and the stock prices of publicly traded building companies have fallen by more than 60 percent over last year.
"Homebuilders are unique from a restructuring standpoint," said John Bittner, partner at Grant Thornton's CARS practice. "It's not like a manufacturing company that can quickly cut costs to improve operations and increase profitability. When a builder finds itself in distress, there are fewer options to improve cash flow short of having a fire sale on existing inventory."
"Land has become a liability versus an asset," said Ken Malek, partner at Grant Thornton's CARS practice.
If one of the top 10 homebuilders goes into bankruptcy, Malek believes the company will most likely reorganize under a debt-for-equity swap, meaning lenders will own the business once it comes out of bankruptcy. Whether the company will survive will be driven by its size before filing.
"In most cases, banks will foreclose and sell, and the company dissolves," said Bittner. "However, a trend we're seeing is lenders are leaving the structure in place, taking ownership of the assets and allowing builders to complete ongoing contracts. This way, the employment base remains intact and can return when the housing economy recovers. The lender doesn't need to have a fire sale because there's a structure in place for monetizing the assets.
"Lenders don't want to sell at the bottom of the market," Bittner added. "As long as the lender isn't under regulatory pressure, it would be better to foreclose and leave the operating structure in place."
To combat issues facing the industry and remain stable, many homebuilders are focusing on providing credit to consumers, reducing inventory by marking prices to market value, and reducing development efforts or shelving projects altogether.
"From a more macro viewpoint, the decline in the housing market is more protracted than most anticipated," said Bittner. "The housing downturn is becoming more widespread geographically than anyone expected a year ago. With more homeowners facing foreclosure, the contagion is spreading to other economic areas, making the trough deeper and more sustained than it otherwise would be."