Will Most HBs go BK in 2008?
FloridaBuilder and I have a couple of side bets running. One formally one informally. The former is whether SPF or WCI will go BK first. The latter whether most public HBs go BK or near BK in 2008?
This blog deals with the second issue and the likelihood of builder BKs in 2008. First, let's make one point clear....FB is one of the most informed and best bloggers on CAPs. Plain and simple. Second, I have little desire to aspire to his level of popularity, although the comments back and forth with a number you has been enjoyable, informative, and fun.
As ususal, FB thinks I am cracked about most public HBs going bankrupt in 2008. For that to happen we need ten to leave the pen. At this point I think 10 is in the bag.
Up until now, HB executives and analysts have been lying to shareholders about the book value. Many HBs are leveraged over 40% debt to equity. Some much more. Most of the value of HBs equity is land and land is bascially worthless or near worthless.
Up until now, banks have been easy on builders because banks loans and balance sheets have been tied to those assets. And we are talking about a very large amount of dollars and a very big percentage of bank assets and loans. So it was in the banks, and their analysts interest to lie to you. Now the world is changing because regulators are forcing banks to mark their real estate assets to fair value and dump the portfolios.
The writing has been on the wall for about nine months. Banks are NOW willing to liquidate their junk holdings and take their lumps.
Here is a little snipit from BigBuilderOnline:
As we speak, banks are packaging up their real estate loan portfolios and trying to create a trade value for them. Word is, one bank deal that occurred in the Phoenix market in the past few weeks priced a bank's real estate loan package at about 25 cents on the dollar; afterwards, many observers familiar with the terms felt that 25 cents was too high a price to pay.
These bank packages, ranging from $500 million to $700 million, will proliferate during the next several months, each one of them being "marked to market" and sold. This is part of the wave of pain that will tell home builders a lot about what their holdings are now worth--and what they owe for them.
This will cause banks to be less indulgent with dilinquent builders forcing builders to liquidate and mark their assets to fair value. Once that happens, many builders will have a negative net worth with little chance of profits for the foreseeable future.
With builders shrinking their operations to a fraction of its former size, many of the liabilities and expenses remain. With shrinking revenues and expanding expenses, you have a recipie for disaster....all over the place.
As banks are now willing to to lift up their dresses, builders will be forced to lift up their mini skirts. The problem is that hot babe you have been dating for the past few years may not be a babe after all once you see what's underneath in the daylight.
Why do you think RYL's CEO is dumping shares faster than a dime store hooker. Check out his recent sale a few days ago for 80,000 more shares. RYL has little cash and a growing backlog that will not generate cash for a number of months and susceptible to canceling. RYL will likley need to raise cash very soon....can't wait to hear what Chadepoo says....maybe he could give back a few bucks from the millions in profits he just made selling company shares.
10 public HBs bankrupt or near BK by the end of the year? Looks like a two foot putt to me.