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alstry (< 20)




March 15, 2008 – Comments (1)

Two massive housing developments in Las Vegas, involving several of the nation's largest home      builders, have received default notices on about $765 million in debt, according to one of the partners in the projects.

Some HBs have over $1 Billion dollars worth of Joint Ventures.  These JVs are off balance sheet and not readily observable to the casual investor.  The WSJ indicates the above to JVs involve KBH and Toll.  Joint venture lenders know that they have limited recourse when the projects default.

However, they are a few home builders that signed RECOURSE agreements in a number of their JV projects. A recourse loan allows a lender to go after the parent company directly in event of default.  Parent companies guaranteed such loans because often they were given better terms at the time of the deal.   It appears that LEN and SPF have the greatest exposure of any HB for JV recourse debt. 

Here is where the tension comes to builders with recourse debt.  The JV lenders want their money.  They know that the land is likely not sufficient collateral for the amount.  If they don't force the HB to pay off a default now, there is a good chance they may never get paid before the HB goes BK.

Expect to be hearing about Billions in JV defaults in the upcoming weeks as bankers and lenders start demanding their money back.  The tension is rising between builders, consolidated  lenders, and JV lenders as the honey pot gets smaller and smaller.

Some builders could be in VERY SERIOUS trouble in the upcoming weeks.

Mommy, why are those two men wearing ties ripping that builder's arms apart?

1 Comments – Post Your Own

#1) On March 15, 2008 at 11:00 AM, alstry (< 20) wrote:

More from the WSJ Article:

The default notices renew concerns about the risks that joint ventures pose to home builders. Many companies created these arrangements in order to spread the cost of buying land during the housing boom. But builders disclose very little about such ventures, stoking investors' fears that these deals could hurt builders in unanticipated ways.

At the end of the year, SPF ended with only a little over $200 million in cash and about $700 million of  JV debt.  This $700 million of debt is in addition to the $2 Billion on the balance sheet.  Not only that, of the seven hundred million in debt, $400 million is subject to remargin payments. (margin calls as the land falls in value and we all know land is falling in value fast-OUCH!!!!!).

It was SPF's current management that made SPF liable for most of this JV debt, much of which is recourse AND subject to remargin payments.  Many builders did not enter recourse relationships. 

Do you think they killed the shareholder's dividend and gave themselves millions in bonuses recently becasue they know they are going bankrupt soon?

Not only that, IVY ZELMAN recommends investors BUY SPF's stock.  SPF is one of the HBs with the greatest JV exposure.  Is IVY drinking the same Kool-Aid she accused Bob Toll of drinking sometime back?


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