Two Big Builder Failures Show We're Not Yet Out of the Woods
Just in the last few days, in a reminder of how treacherous home building remains, two of the biggest companies in the business have gone under. First, Minnesota's Rottlund Homes, during its heyday the 40th largest builder in the country, announced that it would liquidate. Then California's William Lyon Homes, a public company at one time, said it would reorganize under bankruptcy.
It's tempting to view both cases as financial anomalies, especially given that we haven't had many high-profile builder failures over the last year, after a raft of cases in 2008 and 2009. Rottlund was taken down by its dependence on doing attached for-sale housing on land bought at the top of the market. William Lyon collapsed under the weight of debt assumed to take the formerly public company private in 2006, also at the top of the market.
It's probably more accurate, though, to view these latest failures as the symptom of a home building recession that just won't quit. Thousands of home builders, though they've made it through four years of recession, are just barely holding on, sometimes through the good graces of lenders. Many builders have depleted their equity to the point where all it would take is another blip or misstep to drag them under.
But Rottlund and Lyon were certainly in high-risk situations. Rottlund's lending syndicate didn't want to continue funding attached projects, which often had to be started before they were completely sold. That's an acceptable risk in a rising market, its lenders reasoned, but not in a declining one. The company plans an orderly liquidation as it completes its last 40 homes.
In Lyon's case, financial difficulty was caused by a heavy debt load. The reorganization plan will cut its debt from $509.8 million to $327.8 million. But outside investors will wind up owning 51.5% of the equity in the company through a rights offering led by a New York-based hedge fund, Luxor. The Lyon family's ownership share will drop from 94.6% to 20%, though General William Lyon will continue to lead the company.
There will doubtless be more bankruptcies and liquidations before the great housing recession is over, and even after it's over. And when the market begins to recover in earnest, if history is any guide, companies may still overextend and find that they don't have the cash flow to fund operations.