Friday, January 11, 2008

Standard Pacific (SPF) - The First Major Homebuilder to Go?

Well one of my '13 Outlier Predictions' could be starting quicker than I imagined - what are we in, week 2 of the year?

#9 Not 1, not 2, but 3 of the top 12 homebuilders file for bankruptcy after the spring and summer of 2008 see no serious rebound in the real estate market. Bankers, finally seeing the light, stop extending life support to these homebuilders who just continue to build homes no one needs, to create cash flow. This creates a major tradeable low in the homebuilders in the fourth quarter and massive rallies on order of 50% are seen in the remaining players. While the ultimate bottom is still a year away, a great trading opportunity is created.

Standard Pacific (SPF) was one of the 3 I was targeting (and in fact the easiest to identify), but the folks over at have a good view (by looking at the bond action for each company) whom the next 2 should be - another on the probable list rhymes with Teaser. So I am just incorporating their work into my framework (remember I own 2 companies very involved in 'restructurings' in the fund now). Keep in mind folks, 3-4 of these home builders are technically bankrupt already - they are only "alive" because the banks keep changing the terms of their lines of credit and covenants. These are all great short candidates as well (there is no homebuilder short ETF either) and this time I'd ride a few of these to $0. Because that's where they are heading, short of some white knight acquisition. weighs in
  • Liquidity worries continue to circle homebuilder Standard Pacific (SPF). Shares were plunging 33% Friday to $1.79 after Debtwire reported that Standard Pacific hired Miller Buckfire -- a restructuring and bankruptcy specialist -- as financial adviser. The story cited unnamed sources.
  • Standard Pacific, I believe, is one of the prime homebuilding candidates for a restructuring or bankruptcy this year. The builder carries some of the largest joint-venture risk of any other homebuilder, with significant exposure to the California housing market (one of the worst in the country).
  • Already, Standard Pacific has been forced in recent quarters to supply capital to weak joint ventures in California. The builder is on the hook for $500 million of recourse exposure to joint venture debt, according to the company's regulatory filings.
  • The company remains at the mercy of its banks, as it has already violated several debt covenants. The final piece of the puzzle is whether Standard Pacific is actually solvent -- can its assets cover its liabilities?
While this is bad for the humans involved, especially the innocent ones not working in the management suite who made dumb decisions to overbuild and overextend themselves, these are the steps necessary to make a bottom. When the first builders officially go I will move us forward from the bottom of the 1st inning to perhaps the bottom of the 2nd or top of the 3rd inning in the 'correction'. (TV pundits already telling us the bottom is here and to start buying this spring - oh boy). Other positive steps:
  1. We also have been seeing homebuilders finally start "giving away" homes at cost [What Happens When New Home Prices are $100K less than Existing Homes?]
  2. Sell land to investment banks @ 60% off for cash flow [How Overpriced is Land in the US? 60%?]
  3. And finally begin to curtail future building plans.
All good things. Unfortunately median home prices still remain high [What Should Median Home Prices Be Today?] and the real problem is current home owners - they still live in fantasy world of 2005/2006 prices and think they can sell their homes for "5% off" peak values. When those prices on existing homes start wooshing down we can begin to really move through the middle innings. We are already seeing reports of new homes priced 20-30% below existing homes a neighborhood over in CA. But at this point existing home owners still seem to think its a short term issue and these "new home discounts" will go away in a few months. Kool Aid. Maybe this spring when people are out in force and refusing to pay bubble prices, will bring a reality to current home owners in these states that saw massive bubble price increases. Median Home prices, by my analysis above probably need to fall 20% in many parts of the country who enjoyed the bubble. Then we bring in the relief pitcher/closer.

Position? Short if I could

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