April 26 (Bloomberg) -- U.S. homebuilders are in jeopardy of violating their lending agreements in coming months because of a drop in sales, according to Moody's Investors Service.
More than half, or 11, of the 21 builders that Moody's rates failed to generate more cash than they spent in 2006, analyst Joseph Snider in New York said in a report today. Homebuilders often have to promise banks that they will have twice as much operating revenue as interest expenses over a given time or the bank can demand immediate repayment of a loan, Snider said.
The homebuilders' situation is especially dire because cash flows usually turn positive during a slump as they cut back on starts and sell existing inventory, according to the analyst. The housing market is so weak that homebuilders haven't been able to cut their inventories, leading many to ask their bankers for so- called covenant relief, Snider said in an interview. Ratings may also be in jeopardy, he said.
``The next year or so for them is going to be pretty grim,'' Snider said. Some of the requests being asked of lenders are to relax rules that govern the amount of cash flow they must have in relation to interest expense.
The Commerce Department yesterday said new homes sales totaled 858,000 in March. Sales were expected to be 890,000, according to the median of 71 projections in a Bloomberg News survey of economists. The number of homes for sale in February reached 8.1 months of inventory, the highest in 16 years.
Bloomfield Hills, Michigan-based Pulte Homes Inc., Atlanta- based Beazer Homes USA Inc. and Calabasas, California-based Ryland Group Inc. this week reported quarterly losses as the deteriorating housing market forced them to write down the value of property and abandon land purchases.
Moody's figures the housing market has been shrinking for the past year and a half and the ratings company has taken 16 negative rating actions on homebuilders since mid-2006.
``More will undoubtedly follow,'' Snider said in the report.
The outlook for Pulte's credit rating was lowered to ``negative'' from ``stable'' today. The move reflected Pulte's weak operating performance, its inability to generate positive cash flows and the expectation that compliance with its current interest coverage covenant may become problematic in the latter part of 2007, Moody's said. Its Baa3 rating, the lowest level of investment grade, wasn't changed.
Pulte was one of three investment-grade companies generating negative cash flow for the previous 12 months at the end of the year, Snider said. The other two are Dallas-based Centex Corp. and Toll Brothers Inc. in Horsham, Pennsylvania.
Speculative-grade companies losing cash at the end of 2006 were: Red Bank, New Jersey-based Hovnanian Enterprises Inc.; Standard Pacific Corp. in Irvine, California; Technical Olympic USA Inc. of Hollywood, Florida; M/I Homes Inc. in Columbus, Ohio; WCI Communities Inc. in Bonita Springs, Florida; Reston, Virginia-based Stanley-Martin Communities LLC; William Lyon Homes Inc. in Newport Beach, California; and Meritage Homes Corp. of Scottsdale, Arizona.
Debt sold by junk-rated homebuilders returned about 1.46 percent this year, compared with a 3.95 percent for high-yield, high-risk bonds on average, according to Merrill Lynch & Co. index data, and a 13.7 percent drop for the Standard & Poor's 500 Homebuilders Index of share prices, which includes Fort Worth, Texas-based DR Horton Inc., Pulte and Centex.
Houses started by U.S. homebuilders will fall to a 10-year low in 2007, according to the National Association of Home Builders, which released the forecast at a housing conference they sponsored today in Washington. Single-family housing starts will decline to 1.16 million this year, the lowest since 1.13 million in 1997.
``The failure of a strong spring selling season to materialize, the unraveling of the subprime mortgage market, and the weakening of the alternative-A, or Alt-A, market will also carry a significant toll,'' Snider said in his report.
Alt A mortgages represent loans that are considered a credit level above subprime, and are made to people with generally good credit histories who opt for atypical underwriting or loan terms.
Housing is unlikely to show any signs of stabilization until 2008 at the earliest, Snider said, ``given the oversupply of homes for sale, their diminished affordability, declining prices, excess land inventory, and weak consumer sentiment.''
