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Time to Watch Homebuilders' Debt

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Housing stocks have suffered for obvious reasons. But now there are other things to watch out for!

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We all know the treatment housing stocks have received, and I offered last week that at this point few seem to offer decent risk/reward on the downside. The thing to watch carefully now is the debt of these companies, and the news flow around it.

Over the weekend I read several pieces regarding homebuilders' bonds, and while the analysts continue to reassure readers that most companies are still cash flow positive and they will come out stronger when the market turns, one can't help but get that funny feeling that the real message of those notes lies not in the "all is well" boilerplate, but in the passing mention that technical violations of debt covenants are not a big deal because the lenders will undoubtedly wave those covenants.

Perhaps they are correct. However, we are often told that bond investors are the "smart" money because they are closer to the financials of the company than equity investors. After all, bond holders are not in the business of taking principal risk.

Yet Standard Pacific (SPF) is renegotiating its debt terms, Lennar (LEN) just announced it has renegotiated its loans, Beazer Homes (BZH) won't say where its debt stands until its internal investigation on accounting issues is concluded, Comstock Homes (CHCI) has already gone through one restructuring and its faith hangs on the future sales at a project in Alexandria, VA, and... well, you get the picture. Furthermore, considering how frothy things used to be for homies, one would think that the covenants were probably loose enough already.

Are these covenant workouts a sign that bondholders want to avoid defaults at least as much as the debtors? Isn't this the same movie we saw in the late 1980s with respect to commercial loans, before everything hit the fan? Will the daily new lows in the stocks of these companies create their own set of technical defaults?

Most eyes are fixated on mortgage debt, derivatives, and the likes, but few for now dare speak of actual defaults in plain vanilla corporate obligations, especially the kind still rated BB or better (how is that possible?). If that were to happen, Minyans, that is what you can call "the other shoe".
No positions in stocks mentioned.
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