A fly on the wall - straight talk from the homebuilder CFO

Imagine if you had a CFO from one of the major homebuilders give straight talk about what's going on in the industry today. Interesting stuff, huh? Well, I have come up with the next best thing. My imaginary CFO... To come in a mult-part series. Don't laugh, this may very well be educational and enlightening to many, if not most. This is commentary from an industry insider. Here we go:

if you look at pulte homes and dr horton, two of the largest builders in the US you will notice something missing... cash....

cash positions are around 60-70 million, inventory a whopping 9-10 billion, and long term debt around 3.5b-4.9 billion respectively for the two builders.

when does a company go bankrupt?  crappy product, nope lots of companies building crappy products... losing money? nope lots of companies lose money... run out of cash... bingo, we have a winner.... when you run out of cash and no one will give you cash then you are officially out of business...

so the 2 biggest hogs at the trough are pulte and dr horton... both were growth crazy and now both are paying for their piggish ways... oink.

you are thinking, "but bill" these are two of the largest homebuilders, they can't go bankrupt and run out of cash... can they?  no, i doubt it, but they can get the ever living $@#@#$% kicked out of them over the next 6 months... here is why

avenues of raising cash

issue debt - who wants to buy homebuilder junk debt? this is almost as bad as buying a mortgage backed security... the cost of capital is huge to go this route, plus no one wants it

issue stock - whether it is a shelf offering below market prices, or just throwing shares out there.. the cost of capital again is steep... plus aren't these the same homebuilders that were doing stock buybacks within the last year?  i don't think shareholders would be too happy with an offering 50% below a buyback price within 12 months

tap credit lines - that one billion credit line is a mirage.. let me make it clear that banks examiners have already reappraised the land assets of their clients... it is funny how pulte or dr horton hasn't mentioned the fine print in those huge credit lines... realistically, if you tap the credit lines, your going to get hammered by the credit agencies, your stock will get hammered and the bank might let you tap 20c on the dollar of line... a private builder has covenants on a project by project basis... publics have bank covenants based on financial statements ratios, etc... if you start tapping that line your going to break covenants real fast... not to mention that you already have broken covenants and the banks have changed it for you.. the banks only have so much patience

sell/close homes - great way of generating cash since this is your line of business... but with the huge hit in subprime and alt-a a lot of your backlog is about to vanish.. which means more spec inventory and less closings.. your only closing homes to cover your overhead and the interest carry on your long term debt brother!!!

land sale - my favorite... this is the only way that they can dig themselves out.. last year the big builders laughed at hedge funds, and private equity that offered 70c on book.. the said "F off".... fast forward now the big builders have written down their book by 30 cents and they are at 70c on a dollar... but now private equity is only willing to pay 50c on their book... so if you sell 1 billion in land, you will take 500 million hit (loss) even though you raised 500 million in cash...

my point, the publics need to sell massive quantities of land at 50 cents on the book, raise the cash and live to fight another day... if they continue their piggish ways they will end up in the bankruptcy ditch... kb homes an NVR are the most aggressive at selling land per industry insiders.