Don't worry. The bailout is on the way in the name of immigration reform (read: flood of prospective home buyers and cheap workers). Of course that will take a few years to get going. In the mean time pick up some cheap home building stocks while you still can.
"Centex Corp. (CTX.N: Quote, Profile , Research) , D.R. Horton Inc. (DHI.N: Quote, Profile , Research) and Pulte Homes Inc. (PHM.N: Quote, Profile , Research) are three of six home builders whose debt rating outlooks were revised on Thursday to negative from stable by S&P.
The three are "all close" to breaking bond covenants, which typically require that earnings before interest, taxes, depreciation and amortization are equal to at least twice the amount of interest owed on the bonds, S&P analyst Jim Fielding said on a conference call."
What is the consequences if breaking bond covenants?
"What is the consequences if breaking bond covenants?"
Technical default.
possible scenarios if a td occurs, declaration of default, failure to cure, request for waiver, waiver given, waiver not given, demand for consent premium, payment of consent premium and waiver given, formal demand for payment, ratings action, borrowing costs rise if downgrade, etc. etc. etc
How'd you like to be one of those Pulte workers at corporate up in Bloomfield Hills Michigan... Years of giving your neighbors heck for working at GM or Ford or a tier supplier... boasting you're immune 'cause you're part of the 'new economy'... nothing to fear... Real estate only goes up...
Next challenge will be selling the home and in that part of Michigan it can't be too easy...
possible scenarios if a td occurs, declaration of default, failure to cure, request for waiver, waiver given, waiver not given, demand for consent premium, payment of consent premium and waiver given, formal demand for payment, ratings action, borrowing costs rise if downgrade, etc. etc. etc
Worse scenario yet... lenders do nothing, feign indifference or offer to 'convert' to cov-lite'...
That means the lenders are privy to the books and know the HBs are very close to breaking... and as a result the lenders try to not add additional straw to the straining camels back.
My guess is if you see lenders take action similar to what RC suggest above then the HBs aren't in critical shape... If we see/hear 'nothing' that's when I'd worry.
" A supplemental indenture for each such series of Senior Notes has been executed, the applicable consent fees have been paid, and the amendment to the indenture for each such series of Senior Notes and the waiver have become effective."
Outsider- Big home builders don't directly employ construction workers (where the undoc's would be). The lowest rung on the construction side for a builder would be a site supervisor.
Risk Capital- Based on the link you provided, it looks like the lenders took a pass on enforcing their covenants, which would qualify as "do nothing".
AZ, not true, they demanded consent, got it, and if I remember correctly, actually got more than the original offer from the co., took a pss, not hardly, if you really want me to take the time, I could draw it out for you...
"the applicable consent fees have been paid, and the amendment to the indenture for each such series of Senior Notes and the waiver have become effective."
Found on Roubini's blog, the real story behind the new home sales data:
Consensus on April new home sales is that sharp price cuts by builders (-11%) led to a big increase in units sold (up 16% MoM). However, closer inspection of data shows that the strength was in not-yet-constructed low-end units (under $200K) in the south. For example, units in the South increased 28%, and units under $150K increased 89%!!! In total, units under $200K accounted for 43% of units sold vs 32% last month. How do you explain that? Katrina re-building! Federal aid or insurance money probably came in recently, which led to this big increase in lower priced homes in the south. This also solved the puzzle that units not yet started soared 35% while completed units were flat -- one would expect builders to cut prices to sell completed units since the carrying costs are higher.
Written by cmc313 on 2007-05-29 10:28:19
"KB Home Announces Results to Date of Consent Solicitation for its Senior Notes
LOS ANGELES--(BUSINESS WIRE)--Nov. 8, 2006--KB Home (NYSE: KBH) (the "Company") announced today that it has received consents with respect to $1,190,137,000 in aggregate principal amount of its outstanding Senior Notes (72.1%) in connection with its consent solicitation to extend the time for the Company to file its Third Quarter 10-Q for the quarter ended August 31, 2006 to no later than February 23, 2007 and to waive certain defaults, as further described in the Company's consent solicitation statement dated October 25, 2006 (the "Consent Solicitation Statement") and the related Letter of Consent."
"The Company is offering a consent fee of $7.50 in cash for each $1,000 principal amount of Senior Notes, subject to the terms of the Consent Solicitation."
not a chance in hell! You must not follow these often
No I don't... the last time I sat up and really paid attention to a situation like this was in the ag crisis when I had a lot of parts in ag mfgrs (Deere, Case, IH, etc.).
But I can't believe the lenders will do anything right now, in this climate, that will increase the risk the HBs will fail. Then it goes from covenants being blown to payments not being made... big difference there.... and the last I knew the HBs were making all their P&Is on time, in full.
My guess is you will see every attempt to work this thing out up to and until the HBs actually start missing payments - really default.
In fact I wouldn't be surprised to learn discussions are underway between some of the HBs and their larger creditors to make sure a formal default never happens... that if it even looks that way they take the firms into a pre-arranged BK... almost airline-like... in an effort to keep this thing 'orderly'.
With that in mind, tell me, are the KB consents you linked to not in effect 'bark but no bite'? How do those 'consents' materially constrain KB? Not trying to put you on the spot but actually asking the question...
Didn't mean to get you all fired up. I had just glanced thru the Edgar filing and only saw "valuable consideration." You have to admit that loosening up the covenants on $1.2B in notes in exchange for $8.9M isn't exactly strong-arming by the bondholders.
The question here is why didn't the BH's just declare default and get their money back?
I am not sure at all why the bondholders did not declare default...but I have a hunch.
There is an enormous amount of money in CDS and CDO; furthermore there are not that many players in that biz. I suspect there is something of a gentleman's agreement not to push too hard on these defaults and other forms of financial MAD.
At least not yet. One big question is how will the Chinese act once they realize that not only are lots of their MBS junk, but that we won't really let them buy anything of serious value in the states.
They play to keep over there. Recently Danone (French) got into it with their JV the Zhejiang based Wahaha water company. Something to do with an off the books "shell" or ghost made by Wahaha that was eating all their profit. Danone pushed hard and voila! Three months later it has just come out that millions of Perrier and other French specialty waters were contaminated with bacteria and had to be returned at great cost to French exporters and certain French water company's jealously guarded image.
This could get far uglier than any one here can imagine...
.
oh please, Ms Berkland...
.
don't you have a cave to crawl back to now? why don't you leave us neanderthals be. we'll be extinct soon enough...
.
go away
.
please
.
.
Interesting discussion. We've been sitting around getting popcorn hulls caught in our teeth watching the banks break the backs of the lenders over this "covenant" thing. I find it rather hard to believe that the HBs are young who cannot be eaten.
"With that in mind, tell me, are the KB consents you linked to not in effect 'bark but no bite'? How do those 'consents' materially constrain KB? Not trying to put you on the spot but actually asking the question..."
dryfly,
I think you really need to follow the sequence of events here, ratings agency actions, etc.
The MO in a few instances has been for distressed debt players to accumulate majority positions at reduced prices due to the turmoil, extract as much value as possible (ie, they see blood), collect and potentially sell out at higher prices.
These players understand the historical low spreads and my doubt is they are for the most part long-term holders. They move on, they juiced their return with the consent fee. Most often these players are hedge funds or wilbur ross types.
In effect could you argue that they were given a pass, not really, it was costly, you must remember this was a technical default due to failure to file.
Bondholders are concerned about one thing, cash flow. If the situation deteriorates to the point where covenants are breach on the financial metrics constraints in the covenants, the scenario could have potentially been much different.
Going forward, you are likely to see workouts and recaps that yes, make this look like childs play.
Covenants are in place to protect bondholders, in some cases, depending on the cure, could be at the expense of equity. If the situation becomes severely distressed, one could argue that ownership passes from the equity holders to the bondholders, ie in a bankruptcy scenario, ie what are the assets worth, the extent of the liabilities, what is left for the equity, ie tangible book value. In a situation like this maybe you cancel existing equity, issue new and wipe-out the old. The distressed debt holders buy at severe discounts in hopes of gaining some consideration and potentially an equity stake in the new co. or they may potentially do as you suggest out of court/in a debt for equity swap severely diluting the existing common. The idea being to strengthen the company to the point where the cash flow can support the debt burden.
You are seeing deals being done today which are potentially leaving companies with severe debt burdens ie debt to ebitda of 8 to 10 times, this is truly ludicrous and an accident waiting to happen.
We are entering a new phase of the credit cycle which will likely have widespread implications. Indicative of the IB's adding knowledge at an alarming pace.
The example I presented is an amicable solution, one, I might add. Things are about to change, this cov-lite shit that you reference is over, risk must be repriced and the HY spreads will move toward historical norms furhter pressuring the markets and economy.
But, sure, drink the kool-aide that some are presenting.
I have to laugh at expert after expert saying that they are 100 % invested, extremely bullish, when asked about their largets holdings, health
My hunch is everyone is going to follow what's stated in the prospectus. The debt managers don't want to be sued by the debt holders claiming they failed to act correctly. The HB's are going to do whatever they can to get back in covenants. Probably sell anything they can to increase revenue or maybe cut expenses via layoffs. If you want to know what is likely to happen, read the prospectus.
I am glad to finally read an explanation for how the sale of new homes in the South could be up so much, based on the sale of unbuilt homes priced at less than 200K. This certainly did not seem like Florida. I wonder whether the market will react when the word gets out that this increase in new home sales was due to rebuilding from Katrina. Who does this rebuilding? Is it mostly local builders, rather than the national HB's?
"The question here is why didn't the BH's just declare default and get their money back?"
The covenants didn't allow it. Basically, not all covenants are created equal. Moreover, it's very expensive for bondholders to take over a company (lawyers fees, management fees, bankers fees etc.) - usually it's only done as a last resort.
"Outsider- Big home builders don't directly employ construction workers (where the undoc's would be). The lowest rung on the construction side for a builder would be a site supervisor."
Looks like that would put the # of unemployeds now over the 2,000 (16%) of Pulte, because there's obviously a slew of workers underneath Pulte's lowest rung that will now be without work - the laborers I mean. The undocs. The self-employed who probably aren't counted in the construction unemployment #s...
Outsider, I think you are right... There are a lot of subs that cannot afford a sub...My brother in law is
an electrician that works for a large
electric co. in Fl. that does not have any work...He has worked there for 20 years...I have never heard him
scared like this.
Lets give all the public builder CEO's $1 a week salaries and a bunch of stock options for 12/31/2008.
Play with their own money!
Don't worry, using the birth/death model, construction jobs will increase monthly regardless of the constant flow of news like this.
Don't worry. The bailout is on the way in the name of immigration reform (read: flood of prospective home buyers and cheap workers). Of course that will take a few years to get going. In the mean time pick up some cheap home building stocks while you still can.
I think the builders are moving past denial, and entering the depression phase for housing (in two meanings of the word!).
5 Stages of Grief
1. Denial
2. Anger
3. Bargaining
4. Depression
5. Acceptance
Note that the anger and bargaining stages were very short-lived. D'oh!
here is my time line
David Lareah at his prime. (Last year)
Bob Toll blames the media for all the bubble talk
(Six months ago)
If I only lay off 16% of the work force maybe then I can get by. (Right now).
(still to come, maybe near end of 2007)
(2008-2011)
Homebuilder Pulte to Cut 2,000 Jobs
Expired
Probably some of you have seen this already.
"Centex Corp. (CTX.N: Quote, Profile , Research) , D.R. Horton Inc. (DHI.N: Quote, Profile , Research) and Pulte Homes Inc. (PHM.N: Quote, Profile , Research) are three of six home builders whose debt rating outlooks were revised on Thursday to negative from stable by S&P.
The three are "all close" to breaking bond covenants, which typically require that earnings before interest, taxes, depreciation and amortization are equal to at least twice the amount of interest owed on the bonds, S&P analyst Jim Fielding said on a conference call."
What is the consequences if breaking bond covenants?
http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070529/default.htm
New federal proposed guidance....
"What is the consequences if breaking bond covenants?"
Technical default.
possible scenarios if a td occurs, declaration of default, failure to cure, request for waiver, waiver given, waiver not given, demand for consent premium, payment of consent premium and waiver given, formal demand for payment, ratings action, borrowing costs rise if downgrade, etc. etc. etc
How'd you like to be one of those Pulte workers at corporate up in Bloomfield Hills Michigan... Years of giving your neighbors heck for working at GM or Ford or a tier supplier... boasting you're immune 'cause you're part of the 'new economy'... nothing to fear... Real estate only goes up...
Next challenge will be selling the home and in that part of Michigan it can't be too easy...
Good thing for them we're not in recession.
possible scenarios if a td occurs, declaration of default, failure to cure, request for waiver, waiver given, waiver not given, demand for consent premium, payment of consent premium and waiver given, formal demand for payment, ratings action, borrowing costs rise if downgrade, etc. etc. etc
Worse scenario yet... lenders do nothing, feign indifference or offer to 'convert' to cov-lite'...
That means the lenders are privy to the books and know the HBs are very close to breaking... and as a result the lenders try to not add additional straw to the straining camels back.
My guess is if you see lenders take action similar to what RC suggest above then the HBs aren't in critical shape... If we see/hear 'nothing' that's when I'd worry.
In My Humble Ignorant Opinion.
dryfly,
"lenders do nothing, feign indifference or offer to 'convert' to cov-lite'... "
not a chance in hell! You must not follow these ofte
dryfly, fairly recent-
" A supplemental indenture for each such series of Senior Notes has been executed, the applicable consent fees have been paid, and the amendment to the indenture for each such series of Senior Notes and the waiver have become effective."
KB homes by KB Home - News Release
Think the undocumented workers are included in that 16%?
Outsider- Big home builders don't directly employ construction workers (where the undoc's would be). The lowest rung on the construction side for a builder would be a site supervisor.
Risk Capital- Based on the link you provided, it looks like the lenders took a pass on enforcing their covenants, which would qualify as "do nothing".
AZ, not true, they demanded consent, got it, and if I remember correctly, actually got more than the original offer from the co., took a pss, not hardly, if you really want me to take the time, I could draw it out for you...
"the applicable consent fees have been paid, and the amendment to the indenture for each such series of Senior Notes and the waiver have become effective."
Found on Roubini's blog, the real story behind the new home sales data:
Consensus on April new home sales is that sharp price cuts by builders (-11%) led to a big increase in units sold (up 16% MoM). However, closer inspection of data shows that the strength was in not-yet-constructed low-end units (under $200K) in the south. For example, units in the South increased 28%, and units under $150K increased 89%!!! In total, units under $200K accounted for 43% of units sold vs 32% last month. How do you explain that? Katrina re-building! Federal aid or insurance money probably came in recently, which led to this big increase in lower priced homes in the south. This also solved the puzzle that units not yet started soared 35% while completed units were flat -- one would expect builders to cut prices to sell completed units since the carrying costs are higher.
Written by cmc313 on 2007-05-29 10:28:19
"KB Home Announces Results to Date of Consent Solicitation for its Senior Notes
LOS ANGELES--(BUSINESS WIRE)--Nov. 8, 2006--KB Home (NYSE: KBH) (the "Company") announced today that it has received consents with respect to $1,190,137,000 in aggregate principal amount of its outstanding Senior Notes (72.1%) in connection with its consent solicitation to extend the time for the Company to file its Third Quarter 10-Q for the quarter ended August 31, 2006 to no later than February 23, 2007 and to waive certain defaults, as further described in the Company's consent solicitation statement dated October 25, 2006 (the "Consent Solicitation Statement") and the related Letter of Consent."
KB homes by KB Home - News Release
"The Company is offering a consent fee of $7.50 in cash for each $1,000 principal amount of Senior Notes, subject to the terms of the Consent Solicitation."
KB homes by KB Home - News Release
not a chance in hell! You must not follow these often
No I don't... the last time I sat up and really paid attention to a situation like this was in the ag crisis when I had a lot of parts in ag mfgrs (Deere, Case, IH, etc.).
But I can't believe the lenders will do anything right now, in this climate, that will increase the risk the HBs will fail. Then it goes from covenants being blown to payments not being made... big difference there.... and the last I knew the HBs were making all their P&Is on time, in full.
My guess is you will see every attempt to work this thing out up to and until the HBs actually start missing payments - really default.
In fact I wouldn't be surprised to learn discussions are underway between some of the HBs and their larger creditors to make sure a formal default never happens... that if it even looks that way they take the firms into a pre-arranged BK... almost airline-like... in an effort to keep this thing 'orderly'.
With that in mind, tell me, are the KB consents you linked to not in effect 'bark but no bite'? How do those 'consents' materially constrain KB? Not trying to put you on the spot but actually asking the question...
Risk-
Didn't mean to get you all fired up. I had just glanced thru the Edgar filing and only saw "valuable consideration." You have to admit that loosening up the covenants on $1.2B in notes in exchange for $8.9M isn't exactly strong-arming by the bondholders.
The question here is why didn't the BH's just declare default and get their money back?
I am not sure at all why the bondholders did not declare default...but I have a hunch.
There is an enormous amount of money in CDS and CDO; furthermore there are not that many players in that biz. I suspect there is something of a gentleman's agreement not to push too hard on these defaults and other forms of financial MAD.
At least not yet. One big question is how will the Chinese act once they realize that not only are lots of their MBS junk, but that we won't really let them buy anything of serious value in the states.
They play to keep over there. Recently Danone (French) got into it with their JV the Zhejiang based Wahaha water company. Something to do with an off the books "shell" or ghost made by Wahaha that was eating all their profit. Danone pushed hard and voila! Three months later it has just come out that millions of Perrier and other French specialty waters were contaminated with bacteria and had to be returned at great cost to French exporters and certain French water company's jealously guarded image.
This could get far uglier than any one here can imagine...
.
oh please, Ms Berkland...
.
don't you have a cave to crawl back to now? why don't you leave us neanderthals be. we'll be extinct soon enough...
.
go away
.
please
.
.
.
troll
.
Interesting discussion. We've been sitting around getting popcorn hulls caught in our teeth watching the banks break the backs of the lenders over this "covenant" thing. I find it rather hard to believe that the HBs are young who cannot be eaten.
"With that in mind, tell me, are the KB consents you linked to not in effect 'bark but no bite'? How do those 'consents' materially constrain KB? Not trying to put you on the spot but actually asking the question..."
dryfly,
I think you really need to follow the sequence of events here, ratings agency actions, etc.
The MO in a few instances has been for distressed debt players to accumulate majority positions at reduced prices due to the turmoil, extract as much value as possible (ie, they see blood), collect and potentially sell out at higher prices.
These players understand the historical low spreads and my doubt is they are for the most part long-term holders. They move on, they juiced their return with the consent fee. Most often these players are hedge funds or wilbur ross types.
In effect could you argue that they were given a pass, not really, it was costly, you must remember this was a technical default due to failure to file.
Bondholders are concerned about one thing, cash flow. If the situation deteriorates to the point where covenants are breach on the financial metrics constraints in the covenants, the scenario could have potentially been much different.
Going forward, you are likely to see workouts and recaps that yes, make this look like childs play.
Covenants are in place to protect bondholders, in some cases, depending on the cure, could be at the expense of equity. If the situation becomes severely distressed, one could argue that ownership passes from the equity holders to the bondholders, ie in a bankruptcy scenario, ie what are the assets worth, the extent of the liabilities, what is left for the equity, ie tangible book value. In a situation like this maybe you cancel existing equity, issue new and wipe-out the old. The distressed debt holders buy at severe discounts in hopes of gaining some consideration and potentially an equity stake in the new co. or they may potentially do as you suggest out of court/in a debt for equity swap severely diluting the existing common. The idea being to strengthen the company to the point where the cash flow can support the debt burden.
You are seeing deals being done today which are potentially leaving companies with severe debt burdens ie debt to ebitda of 8 to 10 times, this is truly ludicrous and an accident waiting to happen.
We are entering a new phase of the credit cycle which will likely have widespread implications. Indicative of the IB's adding knowledge at an alarming pace.
The example I presented is an amicable solution, one, I might add. Things are about to change, this cov-lite shit that you reference is over, risk must be repriced and the HY spreads will move toward historical norms furhter pressuring the markets and economy.
But, sure, drink the kool-aide that some are presenting.
I have to laugh at expert after expert saying that they are 100 % invested, extremely bullish, when asked about their largets holdings, health
My hunch is everyone is going to follow what's stated in the prospectus. The debt managers don't want to be sued by the debt holders claiming they failed to act correctly. The HB's are going to do whatever they can to get back in covenants. Probably sell anything they can to increase revenue or maybe cut expenses via layoffs. If you want to know what is likely to happen, read the prospectus.
I am glad to finally read an explanation for how the sale of new homes in the South could be up so much, based on the sale of unbuilt homes priced at less than 200K. This certainly did not seem like Florida. I wonder whether the market will react when the word gets out that this increase in new home sales was due to rebuilding from Katrina. Who does this rebuilding? Is it mostly local builders, rather than the national HB's?
"The question here is why didn't the BH's just declare default and get their money back?"
The covenants didn't allow it. Basically, not all covenants are created equal. Moreover, it's very expensive for bondholders to take over a company (lawyers fees, management fees, bankers fees etc.) - usually it's only done as a last resort.
Schahrzad - said it here already 3 days earlier 5/24 7:33pm
"Outsider- Big home builders don't directly employ construction workers (where the undoc's would be). The lowest rung on the construction side for a builder would be a site supervisor."
Looks like that would put the # of unemployeds now over the 2,000 (16%) of Pulte, because there's obviously a slew of workers underneath Pulte's lowest rung that will now be without work - the laborers I mean. The undocs. The self-employed who probably aren't counted in the construction unemployment #s...
Unless they were the first to lose work...
Risk Capital,
What makes you so sure we're on to a new phase of the credit cycle?
Outsider, I think you are right... There are a lot of subs that cannot afford a sub...My brother in law is
an electrician that works for a large
electric co. in Fl. that does not have any work...He has worked there for 20 years...I have never heard him
scared like this.