Distress Expected to Increase in Next Six Months for U.S. Homebuilding Industry

More distress is expected in the next six months for the $700 billion U.S.
homebuilding industry, which has been hit hard by economic issues. Particularly
at risk are small- to medium-sized builders, according to experts at Grant
Thornton Corporate Advisory and Restructuring Services. National builders will
continue to acquire sizeable local and regional builders, and the latter will
consolidate among themselves to make them more attractive acquisition

According to a Grant Thornton analysis, all major homebuilders
have faced declines in revenue and margins, and the stock prices of publicly
traded building companies have fallen by more than 60% over last

"Homebuilders are unique from a restructuring standpoint," said
John Bittner, partner at Grant Thornton’s CARS practice. "It’s not like a
manufacturing company that can quickly cut costs to improve operations and
increase profitability. When a builder finds itself in distress, there are fewer
options to improve cash flow short of having a fire sale on existing

"Land has become a liability versus an asset," said Ken
Malek, partner at Grant Thornton’s CARS practice.

If one of the top 10
homebuilders goes into bankruptcy, Malek believes the company will most likely
reorganize under a debt-for-equity swap, meaning lenders will own the business
once it comes out of bankruptcy. Whether the company will survive will be driven
by its size before filing.

"In most cases, banks will foreclose and
sell, and the company dissolves," said Bittner. "However, a trend we’re seeing
is lenders are leaving the structure in place, taking ownership of the assets
and allowing builders to complete ongoing contracts. This way, the employment
base remains intact and can return when the housing economy recovers. The lender
doesn’t need to have a fire sale because there’s a structure in place for
monetizing the assets.

"Lenders don’t want to sell at the bottom of the
market," Bittner added. "As long as the lender isn’t under regulatory pressure,
it would be better to foreclose and leave the operating structure in

To combat issues facing the industry and remain stable, many
homebuilders are focusing on providing credit to consumers, reducing inventory
by marking prices to market value and reducing development efforts or shelving
projects altogether.

"From a more macro viewpoint, the decline in the
housing market is more protracted than most anticipated," said Bittner. "The
housing downturn is becoming more widespread geographically than anyone expected
a year ago. With more homeowners facing foreclosure, the contagion is spreading
to other economic areas, making the trough deeper and more sustained than it
otherwise would be."

Source: Grant Thornton

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