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October 12, 2007

Comments

Jim

Many of the big builders (like SPF) finance their operations mostly with senior bond debt-not bank debt.

In the event of a bankrutpcy the senior secured creditors will control the bankrutpcy process and will not fire sale assets as you predict. I don't see a tremendous downward price spiral but at 10-15% decline is possible in some markets.

Things are bad-but not as bad as you make them seem.


Jim


Reggie

Goog to have you on the blog, Jim. The is a variety of debt in the mix: mortgage operations are funded either through special purpose entities (except when credit ratings don't allow) or warehouse credit lines. These are both done through banks. Most of the builders also have credit lines through banks as well. And yes as you have mentioned, most of the big builders also have significant senior unsecured and secured bond debt as well, but as I described above it doesn't entail all of thier debt mix.

This is all academic, though, for if there was a bankruptcy I don't see how a fire sale could be avoided. The builders have already been more aggressive than a 10-15% decline in thier pricing and they still can't move inventory in any significat amount (referencing HOV's Deal of the Century with more than 20% off many prices, DHI's auctions, Pulte's make a deal, etc.). As a matter of fact, Pulte has tried cutting prices by over 50% on some properties and I doubt if they made significant progress.

So if the builders can't get away with 20-50% haircut on retail finished housing, I don't see what makes anyone think that senior bondholders with less experience in a bankruptcy liquidtion proceeding can make a 10-15% haircut on the much less liquid wholesale raw and unfinished land market fly - not to mention the finished houses and communities. Exactly who is going to buy this stuff at a 10-15% discount wholesale that nobody currently wants at a 20-50% discount retail?

Credit Insights factors a 60% haircut in liquidation, but if that were to happen in the near future, there is no guarantee that prices will not trend down that much or more in the next year or two.

Reggie

BTW, much of the logic in the land devaluation was explained in the "Coming land recession" piece. See http://reggiemiddleton.typepad.com/reggie_middletons_perpetu/2007/10/straight-talk-5.html and http://reggiemiddleton.typepad.com/reggie_middletons_perpetu/2007/10/straight-talk-6.html

Linda

Great post! I plan on reading the rest of your blog that relates to this topic.

I'm looking to get back into the market after being chased out by the dot-com bubble. I think shorting housing stocks is the safest bet on the planet right now.

I don't have a lot of money to wager with, though, so I have to pick one "Biggest Loser." Do you have a favorite that you think will drop like a rock in short order? Which would you pick if you were me?

Reggie

I'm glad you like my work. Unfortunately, I can't (and won't) give out investment advice to the public. I feel my blog should present a lot of opinionated commentary though. I have some interesting research coming up.

Linda

OK ... I've got you bookmarked.

Linda

OK ... I've got you bookmarked.

homes for sale newport coast

I don't know what the cause of the trading halt was (potential de-listing, bankruptcy, etc.) but this company was definitely on many a watch list.

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