"As of September 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade," Countrywide said in the filing.
At work, we always joke: if the bank that holds my mortgage goes bankrupt--can I buy it?
Shouldn't I be given that option? When a mortgage holder goes BK, what happens to that debt? Doesn't some other company just buy it super-cheap... pennies on the dollar? Why can't I?
By the end of the third quarter of 2007, 4.9 percent of subprime loans it serviced were pending foreclosure, up from 2.9 in the year-earlier quarter. Delinquent subprime loans rose to 29.9 percent from 16.9 percent.
The foreclosure rate for all its loans in its servicing portfolio rose to 0.9 percent from 0.5 percent.
In honor of the St Street liquidation post earlier, I'd like to suggest Cake's Short Skirt/Long Jacket for Saturday rock blogging
I want a girl with a smooth liquidation
I want a girl with good dividends
at citibank, we will meet accidentally
we'll start to talk when she borrows my pen
ACA Financial Guaranty could default on insurance agreements if Standard and Poors chooses to downgrade the bond insurers rating, a credit derivatives lawyer and a market participant told Debtwire. Late on Friday S&P placed ACAs rating on negative watch.
In total, ACA Financial insures USD 69bn of asset backed and corporate bonds for 31 counterparties through the use of credit default swap contracts....
Because ACA Financial is rated A well below the industry norm of AAA its CDO CDS contracts contain a provision requiring it to post collateral in the event of a downgrade.....
In the event of a downgrade by S&P, ACA Financial would become insolvent, confirmed company Treasurer Alex Willkomm. But, he added, S&P affirmed ACAs rating as recently as 31 October....
The market value decline of the CDS contracts could force ACA Financial to post USD 1.7bn in such a scenario, based on the insurers mark down of the market value of its CDO contracts to 93% of face value as of 30 September....
If S&P...slashes its rating...payouts on insurance contracts exceeding USD 10bn - roughly 10 times the companys ability to pay....
ACA has only USD 1.1bn in claims paying resources....the existing contract counterparties would become unsecured creditors in the event of a bankruptcy....
Credit Suisse estimates ACAs current solvency margin at 1.2x-1.3x. If USD 15bn of ACAs USD 69bn of CDS exposure was downgraded to BBB from AAA blowing the insurers capital charge to 1% from 10bps it would be entirely tapped out of excess capital, according to Credit Suisse.
AP Capital One Financial Corp. on Friday reported an increase in loan charge-offs and delinquencies in October, a sign the credit card giant is feeling the effects of the housing slump.....evidence that consumers loaded up on credit card debt to make up for a loss in the purchasing power they once wielded by refinancing mortgages during the real estate boom.
Capital One said the rate of net charge-offs was 3.28 percent last month, on a managed basis. That's up from an average 2.86 percent rate during the third quarter.
For the McLean, Va.-based company's National Lending division, the delinquency rate that measures loans that are more than 30 days past due came in at 4.87 percent on a managed basis, the company said in a regulatory filing. That's up from 4.70 percent in September and 3.70 percent in September 2006....
When delinquencies started to rise in 2006, Capital One and others in the credit-card business assumed that this was related to disruptions cause by new bankruptcy legislation from 2005, Perlin said.
"Now when we look back, we see that the geographic focus of the delinquency rise in 2006 was probably more of a harbinger than we realized at the time of some of the potential distress that might occur in a down cycle in those particular markets," he explained.
It is uncommon (but not rare) in construction for quick payment to be the norm. Holding onto your money will generally get you a far larger return on your investment then the various quick pay discounts. A lot depends on the payment cycle of the projects. The smaller and quicker the contracts turn, the more likely that you would want the quick pay discount. But even there if you can float three projects, instead of two, within the 30 day billing cycle...
The statement is simply saying that Beezer is in a cash crunch, and instead of paying in 45 days and taking the quick pay discount, they will now pay in 90 days...and take the quick pay discount.
From the Bernanke-Paul video - I can't think for a moment that Bernanke believes what he said when he stated that if a US consumer spend his money in the USA the crash of the dollar doesn't cause inflation. That is pure bullshit in a global economy and he knows it better than anyone in the room. If the eurozone is willing to buy wheat, say, from farmers for prevailing global rates (more money in USD) that means the farmer is faced with selling for less to American consumers if he so chooses. That farmer will need to decide if more money is better than less. More likely, the US consumer will be paying global prices. This is globalization working in the reverse of the way we have enjoyed it in the recent past. Inflation, or should I say, Stagflation.
I don't know the homebuilder industry. The industry I am in is notorious for huge overhead, complicated layers of purchasing and billing oversite and we almost NEVER pay in less than net 30.
OT-
Well it's late and I was just taking the dogs for a walk when it occurred to me, who owns those SIVs? Not the banks, these things are off the balance sheets. Two years ago when I heard that someone was doing a lot of no-doc, stated income loans, I figured Wall Street had figured out how to tap into the pension funds (who are legally barred from direct exposure), no evidence at that time; but I was sure that's how the world works. But now, I wonder if that's the whole story. If there needs to be another bag holder it's going to be the government(s). State and Local. Again, I can't figure out how, but who else is famed for making ridiculously bad investments? I'm beginning to think the taxpayers already own the problem.
After anticipating these problems for years, it's sort of stunning how rapidly they're starting to evolve.
Everyone deserves a share of the blame. People would be viewed as fuddy-dudies if they kept sufficient reserves to cover lean times. Likewise banks should never hang on to all the loans they make... /sarcasm. The bigger the deals, the better all the wheels got greased (i.e. lubricated with cash) the faster everything was spinning and the less reaction time to a crash. I'm not surprised... just disappointed it had to happen at this precise moment.
I'm more concerned about follow on effects... municipal services and social services who are going to be squeezed like no one can imagine with increasing demands and decreasing funding.
Subcontractors don't count, remember. They aren't 'employees' in the establishment survery. Continued solid employment, no effect on the economy.
jg | 11.10.07 - 12:06 am
They are working and employed...Its the getting paid thingy thats the problem.
Standard & Poor's said that a $1.5 billion CDO called Carina CDO Ltd. managed by State Street Global Advisors had started liquidating its assets. As a result, S&P slashed the ratings on Carina's top tranches all the way from triple-A to junk double-B in one fell swoop. Subordinate tranches were cut as low as double-C.
Some 13 other CDOs have told S&P of default, a precursor of liquidation...
"Perhaps the most damaging aspect is the broken trust," Marta continues. One of reasons U.S. financial markets were a magnet for the world's capital was their reputation for transparency and trustworthiness.
"Now traders and investors complain that securities like CDOs have declined in value, but also no defensible value can be readily assigned. The U.S. dollar's collapse in these circumstances is not surprising," he concludes. (RBC's TJ Marta)
The top homebuilders (publicly held) constitute only 25% of the homebuilding market. Most of the pain will come to the local builders in your area. Several homebuilders I know have stopped building houses and are now into remodel work. That is normal progression - but eventually, the weakest, least capitalized, and cash poor builders will sit on houses too long and go bankrupt.
MajTom: same thing happening in my neck. One builder friend that focused on spec building said "winter will be cold"; to which I replied, better dig up those coffee cans of cash in the backyard. Another builder friend that focused on rehabs/remodels said he has never been so busy. Yet, a spec home just sold for $1.9 mill right down the street from me, on a shitty lot with practically no yard; a sister house is going up next to it but hasnt sold yet. that one will be my barometer.
Yves at naked capitalism is harshing my weekend vibe:
Now a fair question is whether the dim view of CDOs is overdone. According to Bloomberg, Morgan Stanley argued that case in a recent research note:
More than $350 billion of collateralized debt obligations comprising asset-backed securities may become ``distressed'' because of credit rating downgrades, Morgan Stanley said in a report today.
``The pace of ABS CDO downgrades will pick up significantly over the next few weeks,'' wrote analysts led by Vishwanath Tirupattur in New York. ``Given the degree of market dislocations and the potential size of the market, there is clearly an opportunity for attentive investors.''...
And let's consider an ugly factoid. In its third quarter results, Merrill wrote down its CDO holdings by an estimated 30% or more. These were reported to be almost entirely AAA rated. This does not allow for either the further deterioration, nor the fact that downgrades are proceeding, which will impair value even more.
Take $3.2 trillion in CDO outstandings. Apply a mere 25% loss to them. That's $800 billion, four times greater than a mainstream estimate of subprime losses. That back-of-the-envelope calcualtion is likely to be low by a considerable degree.
I'm wondering to what extent banks and money lenders' weakening balance sheets will influence their behaviour with respect to tolerating these builders defaulting or delaying payment on their debt.
It seems to be generally accepted that a bank holding a bunch of bad construction loans would rather try to workout some payment plan with the builder, rather than take their chances in bankruptcy court. This may be the only thing keeping BZH out of bankruptcy, for now.
However, if the creditors themselves are teetering on the brink of insolvency, how will that affect their likelihood of calling loans or refusing to allow more amendments to pre-existing covenants?
At a minimum, I'd guess that the banks will get nastier as their situation deteriorates and certainly getting access to any new credit will be difficult if not impossible for some builders.
Mish had a nice post on his blog about credit default swap (CDS) prices for the builders. BZH, HOV and SPF all have 200+ bps spreads on their swaps.
Having worked at many startups, I know that when management starts telling you to reuse the blank sides of photocopies to save money, it's time to get the old resume out. Beazer's move is the equivalent -- a stave-off-the-end move that does nothing to solve its core problems.
"Payments will be made on the first of each month for contract work performed 30 days in arrears. For example, checks dated January 1st (or next business day) would include invoices/bills/commitments from November 1st through November 30th," the letter stated.
That makes them 30-60 days... pretty typical for doing business as a supplier or contractor with a large corporation. If the contractor/supplier wants better terms than that then they need to offer 'incentives'... ask for something like 2%-10, net 30 - then they will either get paid 98% of the AR due them in less than 10 days OR get the full 100% whenever... hopefully in the 30-60 day window.
In automotive it is typically 60-90 days... at the bottom of the telecomm internet bust I was hearing stories of companies paying anywhere form 120 days to 180 days to component mfgrs supplying the major equipment makers who were offering even longer terms to the ISPs... living proof you don't need actual money to explode money supply - credit will work just fine.
If you want to see the 'operational' effects of a credit crunch and what it means to real people (not just profligate 'consumers')... ask those contractors how they plan to pay their workers.
Realize that if a contractor submits a bill dated Nov 1, it probably has labor that was done 1-2 weeks earlier... If they get paid on Jan 1... that means they've had to provide operating capital (borrow) up to ten weeks worth of payroll on a revolving basis. .. in a credit environment where lenders really don't want to lend... especially to somebody affiliated with RE.
The statement is simply saying that Beezer is in a cash crunch, and instead of paying in 45 days and taking the quick pay discount, they will now pay in 90 days...and take the quick pay discount.
I don't see anywhere in there that they will take the 'quick pay' option as well as push out for 60 days.
I mean they might try that but I don't see where the article spells that out... (If they did that would be VERY automotive of them... to become a 100% automotive they would ask for annual price downs of say 5% AND not have to pay their suppliers until they sold the car, er, house).
Automotive sucks... then so does home building now.
If the eurozone is willing to buy wheat, say, from farmers for prevailing global rates (more money in USD) that means the farmer is faced with selling for less to American consumers if he so chooses. That farmer will need to decide if more money is better than less. More likely, the US consumer will be paying global prices. This is globalization working in the reverse of the way we have enjoyed it in the recent past. Inflation, or should I say, Stagflation.
He's saying that if you want a strong dollar then buy fewer plasmas made in China and wine bottled in Europe and less oil pumped by OPEC.
In short consume less and produce more.
Or see your consumption curtailed by paying more in real terms via a weaker currency.
He can't impose tariffs or import quotas but he can lower rates and weaken the dollar. Works just as well.
This was all baked in the cake going back to a decade or more of large and growing current account deficits.
Certainly any subcontractor will be way more leery about dealing with Beazer going forward.
Bob Morris | Homepage | 11.10.07 - 9:40 am | #
So who has the guaranteed cash flows to pay better/faster than Beazer? Can you name some?
My guess is their contractors will be facing the same issues everywhere with the other builders too. If not now, soon.
These contractors had better get good at judging which builder are at higher risk vs others since they are all at risk. Let somebody else do the work for the highest at risk builders.
And then not do work for ANY of them once they get out more than say 60 days. Better to not do it at all than do it - burn cash - then not get paid. That's a sure way to end up in BK.
30-60 days... pretty typical for doing business as a supplier or contractor with a large corporation.
Okay, construction is most definitely NOT a "typical" business. If the subs aren't paid, they file liens and in most states those liens will prime even the most senior debt on the property. Even in states where the senior note isn't primed, the liens mean that the builder CANNOT sell the houses (okay, they can be "sold" but they cannot close).
I take this as a public "shot across the bow" to their subs that all contracts need to be repriced for the new reality. Beazer knows that liens would effectively shut down their business, which means no one gets paid. This announcement is so that they can go to their subs and say, See, this is serious!
But the important point is that construction is not like any other industry you've seen. Failing to pay your workers in construction means you cannot sell your product. What other industry is like that?
Okay, construction is most definitely NOT a "typical" business. If the subs aren't paid, they file liens and in most states those liens will prime even the most senior debt on the property.
Price Stout - I somewhat disagree. Yes liens are different but not THAT different. Suppliers in automotive have leverage too but its sort of 'nuclear' - use it and you die also.
And if the homes tied to the billing aren't selling within a 60 day window, does it matter if they have liens? As long as Beazers cleaning up the payments BEFORE the houses move they can stretch the payments out within that window... right?
And if the houses move sooner - HURRAY - they have cash to pay anyway. Automotive has been pushing for that for decades - pay when the car sells.
And any supplier that puts a lien on a home that was done a long time ago and ready to sell due to work on a DIFFERENT home they've just worked on and not got paid for as quickly as they'd like... well let's just say that supplier/contractor just might not be asked back to bid again.
And from my buddies in the contractor business there isn't a shortage of competition nor an over supply of projects to work on. They'll knuckle under or 'find something else to do with their time'.
I'm sure you are right about the shot across the bow thing - but I doubt its about 'pricing' only - its more about terms & conditions & 'supply chain structure' and these folks are going to learn what everyone else understands about doing contract work for large corporations. You plays the game and you takes's your chances.
Failing to pay your workers in construction means you cannot sell your product.
There is the key - they aren't Beazers workers. They are the sub-contractor's workers. They can still file liens but from Beazers perspective they aren't their workers.
If Beazer really wants to play hard ball they make sure they only sign contracts to have work done by sub-contractors who are also CORPORATIONS... might be a corporation of 'one' buy its still a corporation and that 'company' has the problem to pay the worker(s).
These sub-contractors better have enough operating capital to cover the increased pay cycle. I doubt many do.
As long as Beazers cleaning up the payments BEFORE the houses move they can stretch the payments out within that window... right?
And if the houses move sooner - HURRAY - they have cash to pay anyway.
Dryfly - you don't have it quite right. A development is originally financed with one note against one piece of property.
The developer subdivides the property, does sitework and then builds houses. When it comes time to close on a house sale, the lenders grant a partial release of their rights on one of the new lots in exchange for being paid back part of the overall loan amount.
Liens block this process, unless they are paid off.
To make this more clear, let's say Beazer is building Phase II of the Woods at Lake River Golf Estates. There are 100 houses in Phase II. 20 houses are completed and ready for sale, but due to the downturn, only 1 house has sold. That leaves 19 houses that Beazer is trying to sell by lowering price and increasing incentives. Meanwhile Plumber Joe and his crew have done the plumbing work for houses still under construction #s 21-40. If Plumber Joe isn't paid on a timely basis when his crew's work is completed, he files a mechanic's lien on the entire project, which, remember, is only one property until the partial release/partial reconveyance happens at closing.
Beazer cannot close on homes 2-20 without getting the liens released either through payoff, settlement or bonding (guaranteeing payment while disputing the lien claim). For whatever reason, most states lien laws are incredibly favorable to the subcontractor. In some states, a lender can foreclose on the property and wipe out the liens, but in other states the liens prime even the senior-most mortgage. In short, you gotta pay the subs, or the business completely shuts down.
It really is unlike any other industry.
The corporate governance structure of the subs (corporation, LLC, LLP, etc.) makes no difference. I'm not sure what you are driving at. The contractors and subs are due to be paid timely once the work is completed. It really is as simple as that.
I'm not sure what you are driving at. The contractors and subs are due to be paid timely once the work is completed. It really is as simple as that.
There are a number of ways for Beazer to break the existing payment terms going forward regardless of liens:
The easiest way is to make Joe the Plumber Inc sign a contract agreeing to the longer payment terms - going forward AND RETROACTIVELY on previous projects. Hold back new work until he signs and especially if he files liens. Make that known around the area as the kiss of death. In a tight market with no where near enough work to go around it is a de facto and very legal way to bring Joe back to Jesus.
The lien threat only works in a market with tight labor supply & rapidly moving homes OR once a contractor believes he will never get any more work from the prime regardless AND fears he won't get paid without the lien. Then F them.
If the contractors think they'd like more work from Beazer someday and there isn't enough other work elsewhere they won't lien against Beazer even if Beazer is 'late'... that's 'nuclear'.
Again unless they think Beazer is already toast in which case they are better off placing liens EVERYWHERE IMMEDIATELY and having the homes go into Beazers imminent BK settlement than see Beazer turn the homes into cash which later may or may not be available to the contractor once in Beazer is in BK.
Its really not that different than other industries...
Robert: "The only reason Beazer has $85m in cash on the books was because they drew down $117m in credit."
All the builder have been running on debt for years. First to buy land & land options and finance building. Now they borrow just to pay the interest on their enormous debt and fund operations. The easy money is gone.
Honestly, I don't know if ANY of the top 10 builders will survive this -- they are all so horribly burdened with debt and no one going to buy them.
Its really not that different than other industries...
At this point, there's nothing much to say to you besides, "You're wrong." Oh, well.
You cannot point to another industry that has similar rights to stop the transfer of property/goods. You can make up scenarios all you like, but that doesn't make them so.
You cannot point to another industry that has similar rights to stop the transfer of property/goods. You can make up scenarios all you like, but that doesn't make them so.
Price I have good friends who are in siding, roofing and pour concrete for large builders and small inde's alike. What you say is technically correct and works with small inde's EXCEPT the big builders are pretty much immune in a declining market... if these guys put ONE lien... just one... on any home in any development... they'd never get another contract. They know it - everyone knows it.
My buddies do half to three quarters of their work for large builders like Beazer. Are they going to nuke their business? Their best customers?
I've had these conversations with them - they asked me because I deal with these same issues in automotive supply chain. If you piss off your largest customer - even if your customer is wrong and you are right - you never get another contract from that customer. Not as long as they have the option to buy those services from somebody else.
That my friend is the fact of life in every business. These subs have to make a choice of one out of three options... (1) either they go along and accept the delayed payments or (2) find other customers or (3) go out of business now.
Sucks to be them. Been there. When they get to 120 days I'll just begin to feel their pain.
Dry, I can't believe you're missing the fundemental point: Beazer can't play hardball because they need the cashflow to survive.
A lien on the property means nothing gets sold, cashflow goes bye bye, and we know how you feel about cashflow.
This is a last chance, throwing off the back foot hail mary attempt to count on the munificence of their contractors and subs, the hope being that getting paid late beats not getting paid at all, because the job market has fallen off a cliff.
The Nashville market is a train wreck that started way later than anyplace else but has gone farther, faster than anybody could imagine. Nissan was bringing in 1200 jobs, with a multiplier you could say it creates 5k jobs(and that's being generous) and lets be even more generous and say all those jobs create a new household.
The 3 counties that people call Nashville(Davidson, Sumner & Williamson) issued 12,146M housinging permits the last 2 years.
At this point, there's nothing much to say to you besides, "You're wrong." Oh, well.
You cannot point to another industry that has similar rights to stop the transfer of property/goods. You can make up scenarios all you like, but that doesn't make them so.
Price Stout | 11.10.07 - 4:07 pm | #
Well,I for one appreciate the both of you (Price Stout / dryfly) delving into this matter, as you have done. My knowledge in this area is minimal, so all this is food for thought.
The common place, every day use of bonding around liens is mentioned to show that your contention that sub liens are some sort of unique silver bullet which stops progress cold is simplistic and untrue.
Obviously, any builder without bonding capacity becomes, by definition, dead in the water with or without liens!
Dry, I can't believe you're missing the fundemental point: Beazer can't play hardball because they need the cashflow to survive.
A lien on the property means nothing gets sold, cashflow goes bye bye, and we know how you feel about cashflow
The houses aren't selling anyway... so wtf? If Beazer is serious they can make the 60 days stick...
Listen if a sub liens them - they pay up the AP and wipe the lien and then NEVER quote that guy again on any job. Not one time ever. He's de facto black balled.
So the sub gets paid but never works another Beazer job. And you don't have to advertise - the others all know what happened. Its a one time hit that makes sure nobody else does it.
If Beazer were small fish and there was lots of other work it wouldn't work - then who cares, the sub has more and maybe better work somewhere else by the end of that same afternoon.
That's not how it is today and tomorrow is going to be worse. Beazer knows it, the subs know it, the banks know it - everyone knows it.
So they all play nice, sorta. Beazer is already putting off the banks, probably their material suppliers too and now their sub-contractors. Get in line, whatever our agreement WAS the new terms are 60 days.
So ya a sub can lean on Beazer with a lien and probably get paid 'on time'. That one time. After that they better find a new customer 'cause Beazer won't be using them anymore.
Meanwhile subs who do knuckle under - those who agree to shitty terms & are 'co-operative' and 'supportive'... get the remaining work, what little there is.
And Beazer is big... try to find a replacement for all that lost work in a bust like this.
My friends in the biz tell me this was happening around the Twin Cities 12-18 months ago already. First it was price then not too long after that it was terms... I don't know the average age of their accounts are but it is growing... but then their sales are declining now too.
They've already laid off about half of what they had employed around the peak. Their ex-workers are calling saying they'll work for less than they did 3-4 years ago - they need work now.
I understand what you all are saying - what I'm saying is I've seen all this before in automotive. Cash strapped companies still have a lot of leverage if they are intent on playing hard ball, even in tough times.
The subs better plan on a long payment cycle - that's all I'm saying.
Wow. Who is next?
Shame! even can't pay in worthless currency.
damn, just second? What, I gotta watch this thing like a hawk or something?
geez...
"I've never had a problem with them," she said, "and I can't imagine they'd send a letter like that."
Dude must be living in a cave.
Countrywide says downgrade could weaken business
Countrywide says downgrade could weaken business
| Reuters
"As of September 30, 2007, up to $5.5 billion of our custodial deposits may be subject to placement with another bank if our credit ratings were reduced below investment grade," Countrywide said in the filing.
Subcontractors don't count, remember. They aren't 'employees' in the establishment survery. Continued solid employment, no effect on the economy.
Ya. Ever look to see the ratio of contractors to employment in residential construction. If I recall, it is about 3 to 1.
OT: I am getting really worried about my TDAmeritrade account now? Does anyone know how sound they are, say compared to ETrade?
At work, we always joke: if the bank that holds my mortgage goes bankrupt--can I buy it?
Shouldn't I be given that option? When a mortgage holder goes BK, what happens to that debt? Doesn't some other company just buy it super-cheap... pennies on the dollar? Why can't I?
After anticipating these problems for years, it's sort of stunning how rapidly they're starting to evolve.
Looks like the music stopped, the record player broke, and nobody bothered to bring a banjo.
Anyone have a set of spoons they can play?
more from Countrywide Article:
By the end of the third quarter of 2007, 4.9 percent of subprime loans it serviced were pending foreclosure, up from 2.9 in the year-earlier quarter. Delinquent subprime loans rose to 29.9 percent from 16.9 percent.
The foreclosure rate for all its loans in its servicing portfolio rose to 0.9 percent from 0.5 percent.
In honor of the St Street liquidation post earlier, I'd like to suggest Cake's Short Skirt/Long Jacket for Saturday rock blogging
I want a girl with a smooth liquidation
I want a girl with good dividends
at citibank, we will meet accidentally
we'll start to talk when she borrows my pen
FT, today:
ACA Financial Guaranty could default on insurance agreements if Standard and Poors chooses to downgrade the bond insurers rating, a credit derivatives lawyer and a market participant told Debtwire. Late on Friday S&P placed ACAs rating on negative watch.
In total, ACA Financial insures USD 69bn of asset backed and corporate bonds for 31 counterparties through the use of credit default swap contracts....
Because ACA Financial is rated A well below the industry norm of AAA its CDO CDS contracts contain a provision requiring it to post collateral in the event of a downgrade.....
In the event of a downgrade by S&P, ACA Financial would become insolvent, confirmed company Treasurer Alex Willkomm. But, he added, S&P affirmed ACAs rating as recently as 31 October....
The market value decline of the CDS contracts could force ACA Financial to post USD 1.7bn in such a scenario, based on the insurers mark down of the market value of its CDO contracts to 93% of face value as of 30 September....
If S&P...slashes its rating...payouts on insurance contracts exceeding USD 10bn - roughly 10 times the companys ability to pay....
ACA has only USD 1.1bn in claims paying resources....the existing contract counterparties would become unsecured creditors in the event of a bankruptcy....
Credit Suisse estimates ACAs current solvency margin at 1.2x-1.3x. If USD 15bn of ACAs USD 69bn of CDS exposure was downgraded to BBB from AAA blowing the insurers capital charge to 1% from 10bps it would be entirely tapped out of excess capital, according to Credit Suisse.
(end quote)
ACA, the one to watch.
Bob Dylan "Corinna, Corrina" gets my SatRockBlogVote. Enjoy & good night.
YouTube
- Broadcast Yourself.
Pope and Talbot, wood products company:
(quote)
Pope & Talbot had $682 million in assets at the time of its last regulatory filing.
The company has been hampered by a crushing housing slowdown, a strong Canadian dollar and high debt.
Pope & Talbot is dangerously short on the cash it needs to continue operating while in bankruptcy.
(end quote)
AP Capital One Financial Corp. on Friday reported an increase in loan charge-offs and delinquencies in October, a sign the credit card giant is feeling the effects of the housing slump.....evidence that consumers loaded up on credit card debt to make up for a loss in the purchasing power they once wielded by refinancing mortgages during the real estate boom.
Capital One said the rate of net charge-offs was 3.28 percent last month, on a managed basis. That's up from an average 2.86 percent rate during the third quarter.
For the McLean, Va.-based company's National Lending division, the delinquency rate that measures loans that are more than 30 days past due came in at 4.87 percent on a managed basis, the company said in a regulatory filing. That's up from 4.70 percent in September and 3.70 percent in September 2006....
When delinquencies started to rise in 2006, Capital One and others in the credit-card business assumed that this was related to disruptions cause by new bankruptcy legislation from 2005, Perlin said.
"Now when we look back, we see that the geographic focus of the delinquency rise in 2006 was probably more of a harbinger than we realized at the time of some of the potential distress that might occur in a down cycle in those particular markets," he explained.
(end quote)
It is uncommon (but not rare) in construction for quick payment to be the norm. Holding onto your money will generally get you a far larger return on your investment then the various quick pay discounts. A lot depends on the payment cycle of the projects. The smaller and quicker the contracts turn, the more likely that you would want the quick pay discount. But even there if you can float three projects, instead of two, within the 30 day billing cycle...
The statement is simply saying that Beezer is in a cash crunch, and instead of paying in 45 days and taking the quick pay discount, they will now pay in 90 days...and take the quick pay discount.
From the Bernanke-Paul video - I can't think for a moment that Bernanke believes what he said when he stated that if a US consumer spend his money in the USA the crash of the dollar doesn't cause inflation. That is pure bullshit in a global economy and he knows it better than anyone in the room. If the eurozone is willing to buy wheat, say, from farmers for prevailing global rates (more money in USD) that means the farmer is faced with selling for less to American consumers if he so chooses. That farmer will need to decide if more money is better than less. More likely, the US consumer will be paying global prices. This is globalization working in the reverse of the way we have enjoyed it in the recent past. Inflation, or should I say, Stagflation.
I'm not so sure I'd read too much into this.
I don't know the homebuilder industry. The industry I am in is notorious for huge overhead, complicated layers of purchasing and billing oversite and we almost NEVER pay in less than net 30.
Our suppliers price that into bids.
OT-
Well it's late and I was just taking the dogs for a walk when it occurred to me, who owns those SIVs? Not the banks, these things are off the balance sheets. Two years ago when I heard that someone was doing a lot of no-doc, stated income loans, I figured Wall Street had figured out how to tap into the pension funds (who are legally barred from direct exposure), no evidence at that time; but I was sure that's how the world works. But now, I wonder if that's the whole story. If there needs to be another bag holder it's going to be the government(s). State and Local. Again, I can't figure out how, but who else is famed for making ridiculously bad investments? I'm beginning to think the taxpayers already own the problem.
The extent of the rot is unimaginable. It goes on and on and on........
Yahoo says Beazer is selling for 26% of book. Timberrrrrrrrrrrrrrrrrrrr.
My Poor Savings Account-
I do believe you have hit on the perfect solution to the whole mess! Brilliant!
Contact Schummer, Hillary and Dodd, since they are so anxious to help the average American, and tell them that, alas, we HAVE AN ANSWER!!!
And make sure that part of the plan is that the new value is written into neighborhood comps. That's my (very important) contribution to the plan.
It'll get these obscene amounts of useless debt out of houses and put real money back in the community and peoples pockets, where it belongs.
At last we have a solution that works for everyone who matters.
I'm serious, I like that idea.
This is good news..........if you are in the market for used pickup trucks and construction tools in Nashville, TN.
Otherwise I think that this is just leaves shaking off the tree that is leaning over farther and farther in a very strong wind.
After anticipating these problems for years, it's sort of stunning how rapidly they're starting to evolve.
Everyone deserves a share of the blame. People would be viewed as fuddy-dudies if they kept sufficient reserves to cover lean times. Likewise banks should never hang on to all the loans they make... /sarcasm. The bigger the deals, the better all the wheels got greased (i.e. lubricated with cash) the faster everything was spinning and the less reaction time to a crash. I'm not surprised... just disappointed it had to happen at this precise moment.
I'm more concerned about follow on effects... municipal services and social services who are going to be squeezed like no one can imagine with increasing demands and decreasing funding.
Watch out below indeed.
I heard Warren Buffet is gonna buy Beazer.
Subcontractors don't count, remember. They aren't 'employees' in the establishment survery. Continued solid employment, no effect on the economy.
jg | 11.10.07 - 12:06 am
They are working and employed...Its the getting paid thingy thats the problem.
O/T from Forsyth at Barrons:
Standard & Poor's said that a $1.5 billion CDO called Carina CDO Ltd. managed by State Street Global Advisors had started liquidating its assets. As a result, S&P slashed the ratings on Carina's top tranches all the way from triple-A to junk double-B in one fell swoop. Subordinate tranches were cut as low as double-C.
Some 13 other CDOs have told S&P of default, a precursor of liquidation...
"Perhaps the most damaging aspect is the broken trust," Marta continues. One of reasons U.S. financial markets were a magnet for the world's capital was their reputation for transparency and trustworthiness.
"Now traders and investors complain that securities like CDOs have declined in value, but also no defensible value can be readily assigned. The U.S. dollar's collapse in these circumstances is not surprising," he concludes. (RBC's TJ Marta)
The top homebuilders (publicly held) constitute only 25% of the homebuilding market. Most of the pain will come to the local builders in your area. Several homebuilders I know have stopped building houses and are now into remodel work. That is normal progression - but eventually, the weakest, least capitalized, and cash poor builders will sit on houses too long and go bankrupt.
MajTom: same thing happening in my neck. One builder friend that focused on spec building said "winter will be cold"; to which I replied, better dig up those coffee cans of cash in the backyard. Another builder friend that focused on rehabs/remodels said he has never been so busy. Yet, a spec home just sold for $1.9 mill right down the street from me, on a shitty lot with practically no yard; a sister house is going up next to it but hasnt sold yet. that one will be my barometer.
Does anyone know why they didn't name that CDO Katrina? Seems like that would have been a better name.
Certainly any subcontractor will be way more leery about dealing with Beazer going forward.
Yves at naked capitalism is harshing my weekend vibe:
Now a fair question is whether the dim view of CDOs is overdone. According to Bloomberg, Morgan Stanley argued that case in a recent research note:
More than $350 billion of collateralized debt obligations comprising asset-backed securities may become ``distressed'' because of credit rating downgrades, Morgan Stanley said in a report today.
``The pace of ABS CDO downgrades will pick up significantly over the next few weeks,'' wrote analysts led by Vishwanath Tirupattur in New York. ``Given the degree of market dislocations and the potential size of the market, there is clearly an opportunity for attentive investors.''...
And let's consider an ugly factoid. In its third quarter results, Merrill wrote down its CDO holdings by an estimated 30% or more. These were reported to be almost entirely AAA rated. This does not allow for either the further deterioration, nor the fact that downgrades are proceeding, which will impair value even more.
Take $3.2 trillion in CDO outstandings. Apply a mere 25% loss to them. That's $800 billion, four times greater than a mainstream estimate of subprime losses. That back-of-the-envelope calcualtion is likely to be low by a considerable degree.
Houston, we have a problem. [snip]
Anybody who didn't see this coming? Anyone? Anyone? Bueller? Bueller?
The only reason Beazer has $85m in cash on the books was because they drew down $117m in credit.
I'm wondering to what extent banks and money lenders' weakening balance sheets will influence their behaviour with respect to tolerating these builders defaulting or delaying payment on their debt.
It seems to be generally accepted that a bank holding a bunch of bad construction loans would rather try to workout some payment plan with the builder, rather than take their chances in bankruptcy court. This may be the only thing keeping BZH out of bankruptcy, for now.
However, if the creditors themselves are teetering on the brink of insolvency, how will that affect their likelihood of calling loans or refusing to allow more amendments to pre-existing covenants?
At a minimum, I'd guess that the banks will get nastier as their situation deteriorates and certainly getting access to any new credit will be difficult if not impossible for some builders.
Mish had a nice post on his blog about credit default swap (CDS) prices for the builders. BZH, HOV and SPF all have 200+ bps spreads on their swaps.
"I heard W-a-r-r-e-n B-u-f-f-e-t is gonna buy Beazer."
Really? I heard he was going to buy me a pony.
Hope you can unload your Beazer position Monday.
Ever since the tide has started going out all I have seen is naked butts. Lot of people swimming naked the last few years.
Having worked at many startups, I know that when management starts telling you to reuse the blank sides of photocopies to save money, it's time to get the old resume out. Beazer's move is the equivalent -- a stave-off-the-end move that does nothing to solve its core problems.
F. Frederson,
Hahaha, that's quality.
Really? I heard he was going to buy me a pony.
Damn. OT, but does anyone know of a double-leveraged pony ETF?
From the article...
"Payments will be made on the first of each month for contract work performed 30 days in arrears. For example, checks dated January 1st (or next business day) would include invoices/bills/commitments from November 1st through November 30th," the letter stated.
That makes them 30-60 days... pretty typical for doing business as a supplier or contractor with a large corporation. If the contractor/supplier wants better terms than that then they need to offer 'incentives'... ask for something like 2%-10, net 30 - then they will either get paid 98% of the AR due them in less than 10 days OR get the full 100% whenever... hopefully in the 30-60 day window.
In automotive it is typically 60-90 days... at the bottom of the telecomm internet bust I was hearing stories of companies paying anywhere form 120 days to 180 days to component mfgrs supplying the major equipment makers who were offering even longer terms to the ISPs... living proof you don't need actual money to explode money supply - credit will work just fine.
If you want to see the 'operational' effects of a credit crunch and what it means to real people (not just profligate 'consumers')... ask those contractors how they plan to pay their workers.
Realize that if a contractor submits a bill dated Nov 1, it probably has labor that was done 1-2 weeks earlier... If they get paid on Jan 1... that means they've had to provide operating capital (borrow) up to ten weeks worth of payroll on a revolving basis. .. in a credit environment where lenders really don't want to lend... especially to somebody affiliated with RE.
These stories have real human consequences.
The statement is simply saying that Beezer is in a cash crunch, and instead of paying in 45 days and taking the quick pay discount, they will now pay in 90 days...and take the quick pay discount.
I don't see anywhere in there that they will take the 'quick pay' option as well as push out for 60 days.
I mean they might try that but I don't see where the article spells that out... (If they did that would be VERY automotive of them... to become a 100% automotive they would ask for annual price downs of say 5% AND not have to pay their suppliers until they sold the car, er, house).
Automotive sucks... then so does home building now.
If the eurozone is willing to buy wheat, say, from farmers for prevailing global rates (more money in USD) that means the farmer is faced with selling for less to American consumers if he so chooses. That farmer will need to decide if more money is better than less. More likely, the US consumer will be paying global prices. This is globalization working in the reverse of the way we have enjoyed it in the recent past. Inflation, or should I say, Stagflation.
He's saying that if you want a strong dollar then buy fewer plasmas made in China and wine bottled in Europe and less oil pumped by OPEC.
In short consume less and produce more.
Or see your consumption curtailed by paying more in real terms via a weaker currency.
He can't impose tariffs or import quotas but he can lower rates and weaken the dollar. Works just as well.
This was all baked in the cake going back to a decade or more of large and growing current account deficits.
Certainly any subcontractor will be way more leery about dealing with Beazer going forward.
Bob Morris | Homepage | 11.10.07 - 9:40 am | #
So who has the guaranteed cash flows to pay better/faster than Beazer? Can you name some?
My guess is their contractors will be facing the same issues everywhere with the other builders too. If not now, soon.
These contractors had better get good at judging which builder are at higher risk vs others since they are all at risk. Let somebody else do the work for the highest at risk builders.
And then not do work for ANY of them once they get out more than say 60 days. Better to not do it at all than do it - burn cash - then not get paid. That's a sure way to end up in BK.
I don't know the homebuilder industry.
and
30-60 days... pretty typical for doing business as a supplier or contractor with a large corporation.
Okay, construction is most definitely NOT a "typical" business. If the subs aren't paid, they file liens and in most states those liens will prime even the most senior debt on the property. Even in states where the senior note isn't primed, the liens mean that the builder CANNOT sell the houses (okay, they can be "sold" but they cannot close).
I take this as a public "shot across the bow" to their subs that all contracts need to be repriced for the new reality. Beazer knows that liens would effectively shut down their business, which means no one gets paid. This announcement is so that they can go to their subs and say, See, this is serious!
But the important point is that construction is not like any other industry you've seen. Failing to pay your workers in construction means you cannot sell your product. What other industry is like that?
Okay, construction is most definitely NOT a "typical" business. If the subs aren't paid, they file liens and in most states those liens will prime even the most senior debt on the property.
Price Stout - I somewhat disagree. Yes liens are different but not THAT different. Suppliers in automotive have leverage too but its sort of 'nuclear' - use it and you die also.
And if the homes tied to the billing aren't selling within a 60 day window, does it matter if they have liens? As long as Beazers cleaning up the payments BEFORE the houses move they can stretch the payments out within that window... right?
And if the houses move sooner - HURRAY - they have cash to pay anyway. Automotive has been pushing for that for decades - pay when the car sells.
And any supplier that puts a lien on a home that was done a long time ago and ready to sell due to work on a DIFFERENT home they've just worked on and not got paid for as quickly as they'd like... well let's just say that supplier/contractor just might not be asked back to bid again.
And from my buddies in the contractor business there isn't a shortage of competition nor an over supply of projects to work on. They'll knuckle under or 'find something else to do with their time'.
I'm sure you are right about the shot across the bow thing - but I doubt its about 'pricing' only - its more about terms & conditions & 'supply chain structure' and these folks are going to learn what everyone else understands about doing contract work for large corporations. You plays the game and you takes's your chances.
Failing to pay your workers in construction means you cannot sell your product.
There is the key - they aren't Beazers workers. They are the sub-contractor's workers. They can still file liens but from Beazers perspective they aren't their workers.
If Beazer really wants to play hard ball they make sure they only sign contracts to have work done by sub-contractors who are also CORPORATIONS... might be a corporation of 'one' buy its still a corporation and that 'company' has the problem to pay the worker(s).
These sub-contractors better have enough operating capital to cover the increased pay cycle. I doubt many do.
As long as Beazers cleaning up the payments BEFORE the houses move they can stretch the payments out within that window... right?
And if the houses move sooner - HURRAY - they have cash to pay anyway.
Dryfly - you don't have it quite right. A development is originally financed with one note against one piece of property.
The developer subdivides the property, does sitework and then builds houses. When it comes time to close on a house sale, the lenders grant a partial release of their rights on one of the new lots in exchange for being paid back part of the overall loan amount.
Liens block this process, unless they are paid off.
To make this more clear, let's say Beazer is building Phase II of the Woods at Lake River Golf Estates. There are 100 houses in Phase II. 20 houses are completed and ready for sale, but due to the downturn, only 1 house has sold. That leaves 19 houses that Beazer is trying to sell by lowering price and increasing incentives. Meanwhile Plumber Joe and his crew have done the plumbing work for houses still under construction #s 21-40. If Plumber Joe isn't paid on a timely basis when his crew's work is completed, he files a mechanic's lien on the entire project, which, remember, is only one property until the partial release/partial reconveyance happens at closing.
Beazer cannot close on homes 2-20 without getting the liens released either through payoff, settlement or bonding (guaranteeing payment while disputing the lien claim). For whatever reason, most states lien laws are incredibly favorable to the subcontractor. In some states, a lender can foreclose on the property and wipe out the liens, but in other states the liens prime even the senior-most mortgage. In short, you gotta pay the subs, or the business completely shuts down.
It really is unlike any other industry.
The corporate governance structure of the subs (corporation, LLC, LLP, etc.) makes no difference. I'm not sure what you are driving at. The contractors and subs are due to be paid timely once the work is completed. It really is as simple as that.
I'm not sure what you are driving at. The contractors and subs are due to be paid timely once the work is completed. It really is as simple as that.
There are a number of ways for Beazer to break the existing payment terms going forward regardless of liens:
The easiest way is to make Joe the Plumber Inc sign a contract agreeing to the longer payment terms - going forward AND RETROACTIVELY on previous projects. Hold back new work until he signs and especially if he files liens. Make that known around the area as the kiss of death. In a tight market with no where near enough work to go around it is a de facto and very legal way to bring Joe back to Jesus.
The lien threat only works in a market with tight labor supply & rapidly moving homes OR once a contractor believes he will never get any more work from the prime regardless AND fears he won't get paid without the lien. Then F them.
If the contractors think they'd like more work from Beazer someday and there isn't enough other work elsewhere they won't lien against Beazer even if Beazer is 'late'... that's 'nuclear'.
Again unless they think Beazer is already toast in which case they are better off placing liens EVERYWHERE IMMEDIATELY and having the homes go into Beazers imminent BK settlement than see Beazer turn the homes into cash which later may or may not be available to the contractor once in Beazer is in BK.
Its really not that different than other industries...
Robert: "The only reason Beazer has $85m in cash on the books was because they drew down $117m in credit."
All the builder have been running on debt for years. First to buy land & land options and finance building. Now they borrow just to pay the interest on their enormous debt and fund operations. The easy money is gone.
Honestly, I don't know if ANY of the top 10 builders will survive this -- they are all so horribly burdened with debt and no one going to buy them.
Its really not that different than other industries...
At this point, there's nothing much to say to you besides, "You're wrong." Oh, well.
You cannot point to another industry that has similar rights to stop the transfer of property/goods. You can make up scenarios all you like, but that doesn't make them so.
You cannot point to another industry that has similar rights to stop the transfer of property/goods. You can make up scenarios all you like, but that doesn't make them so.
Price I have good friends who are in siding, roofing and pour concrete for large builders and small inde's alike. What you say is technically correct and works with small inde's EXCEPT the big builders are pretty much immune in a declining market... if these guys put ONE lien... just one... on any home in any development... they'd never get another contract. They know it - everyone knows it.
My buddies do half to three quarters of their work for large builders like Beazer. Are they going to nuke their business? Their best customers?
I've had these conversations with them - they asked me because I deal with these same issues in automotive supply chain. If you piss off your largest customer - even if your customer is wrong and you are right - you never get another contract from that customer. Not as long as they have the option to buy those services from somebody else.
That my friend is the fact of life in every business. These subs have to make a choice of one out of three options... (1) either they go along and accept the delayed payments or (2) find other customers or (3) go out of business now.
Sucks to be them. Been there. When they get to 120 days I'll just begin to feel their pain.
Honestly, I don't know if ANY of the top 10 builders will survive this -- they are all so horribly burdened with debt and no one going to buy them.
I agree - the cash burn has to be horrendous. I've tried to look at a few of their financials and none look good.
How long until some of these top 10 go under? Anyone care to guess?
Dry, I can't believe you're missing the fundemental point: Beazer can't play hardball because they need the cashflow to survive.
A lien on the property means nothing gets sold, cashflow goes bye bye, and we know how you feel about cashflow.
This is a last chance, throwing off the back foot hail mary attempt to count on the munificence of their contractors and subs, the hope being that getting paid late beats not getting paid at all, because the job market has fallen off a cliff.
The Nashville market is a train wreck that started way later than anyplace else but has gone farther, faster than anybody could imagine. Nissan was bringing in 1200 jobs, with a multiplier you could say it creates 5k jobs(and that's being generous) and lets be even more generous and say all those jobs create a new household.
The 3 counties that people call Nashville(Davidson, Sumner & Williamson) issued 12,146M housinging permits the last 2 years.
sorry don't know why that bold M is there, 12,176 permits.
Pffft.
Even solvent builders in good times (neither applies here) get liened and simply BOND AROUND THOSE LIENS all the time.
gng,
Right, almost forgot. It's
one week before options expiration,
time to bring out the Buffett.
12,176 million permits is a lot of permits... Two houses for every man, woman and child
At this point, there's nothing much to say to you besides, "You're wrong." Oh, well.
You cannot point to another industry that has similar rights to stop the transfer of property/goods. You can make up scenarios all you like, but that doesn't make them so.
Price Stout | 11.10.07 - 4:07 pm | #
Well,I for one appreciate the both of you (Price Stout / dryfly) delving into this matter, as you have done. My knowledge in this area is minimal, so all this is food for thought.
Even solvent builders in good times (neither applies here) get liened and simply BOND AROUND THOSE LIENS all the time.
That works precisely as you say: in good times.
You can't bond around the liens if you have no cash, no further credit from your lenders and no one thinks you're credit worthy.
Bonding works in good markets. but if you're a broke builder, and you're not paying off your lender, you can't bond around them.
Price,
Thats true.
The common place, every day use of bonding around liens is mentioned to show that your contention that sub liens are some sort of unique silver bullet which stops progress cold is simplistic and untrue.
Obviously, any builder without bonding capacity becomes, by definition, dead in the water with or without liens!
Nice argument, folks! Being originally from Detroit, and having worked on a schlep paint crew, these discussions bring a tear to my eye...
Dry, I can't believe you're missing the fundemental point: Beazer can't play hardball because they need the cashflow to survive.
A lien on the property means nothing gets sold, cashflow goes bye bye, and we know how you feel about cashflow
The houses aren't selling anyway... so wtf? If Beazer is serious they can make the 60 days stick...
Listen if a sub liens them - they pay up the AP and wipe the lien and then NEVER quote that guy again on any job. Not one time ever. He's de facto black balled.
So the sub gets paid but never works another Beazer job. And you don't have to advertise - the others all know what happened. Its a one time hit that makes sure nobody else does it.
If Beazer were small fish and there was lots of other work it wouldn't work - then who cares, the sub has more and maybe better work somewhere else by the end of that same afternoon.
That's not how it is today and tomorrow is going to be worse. Beazer knows it, the subs know it, the banks know it - everyone knows it.
So they all play nice, sorta. Beazer is already putting off the banks, probably their material suppliers too and now their sub-contractors. Get in line, whatever our agreement WAS the new terms are 60 days.
So ya a sub can lean on Beazer with a lien and probably get paid 'on time'. That one time. After that they better find a new customer 'cause Beazer won't be using them anymore.
Meanwhile subs who do knuckle under - those who agree to shitty terms & are 'co-operative' and 'supportive'... get the remaining work, what little there is.
And Beazer is big... try to find a replacement for all that lost work in a bust like this.
My friends in the biz tell me this was happening around the Twin Cities 12-18 months ago already. First it was price then not too long after that it was terms... I don't know the average age of their accounts are but it is growing... but then their sales are declining now too.
They've already laid off about half of what they had employed around the peak. Their ex-workers are calling saying they'll work for less than they did 3-4 years ago - they need work now.
I understand what you all are saying - what I'm saying is I've seen all this before in automotive. Cash strapped companies still have a lot of leverage if they are intent on playing hard ball, even in tough times.
The subs better plan on a long payment cycle - that's all I'm saying.