You need a realistic business plan that includes a minimum 36-month cash flow, a plan to work with your banks if possible to reprice assets to market values, legal and financial advisors to ensure your personal and business assets are protected, and a plan to find and use alternative nonbank financing. You also need to consider bankruptcy as an option and be prepared to use it. In fact, bankruptcy may be the only way to get banks to reprice your assets to competitive levels.
Many banks can't make decisions; many are being restructured; builder lines are being cut or pulled; special assets departments are managing loans; regulatory pressures on banks are growing; more community banks are going to fail; others will merge or restructure; and you probably already are in technical default on one or more of your loan covenants. Most important, you probably have a problem with your balance sheet because your assets are worth less than the loan.
What is the right strategy to fix your capital structure? First, you need to ask yourself, “Can my company survive until the recovery?” If your honest answer is “no,” then bankruptcy is the strategy that may achieve the best possible outcome. If your answer is “yes,” then you must already have the cash and resources to fund the next 36 months, and your land and assets are competitively priced to today's market—making you part of a small and fortunate home builder elite. If your answer is “not sure,” you need a strategy that includes a bankruptcy plan.
If your debt is nonrecourse and your assets are overvalued based on current market conditions, you should consider bankruptcy—an action that can position you to become a long-term industry success story. Even if your debt is recourse, as long your personal assets are protected, Chapter 11 is a solid strategy. In any case, you need to implement a plan that has realistically evaluated every part of your business and included professional legal and financial advice to ensure that you, your family, and your personal assets are protected.
The purpose of fixing your capital structure is to allow you to compete in the future. We don't believe equity or debt financing will be readily available except for new projects or existing projects that have been repriced.
The builders in business at the start of the recovery will be those with assets competitively priced to the market, cash, and access to capital to take advantage of the land, lot, and other opportunities that will be available. Many of them will have restructured or formed new companies out of bankruptcy. Debt and equity capital will be available to proven operators who have dealt with their banks and aren't burdened by assets at old valuations. Those with assets at old valuations will find it hard to attract capital. That is why implementing a strategy to fix your capital structure is the most important thing you can do now.
Larry Comegys is managing director of Algon Group. He may be reached via e-mail at email@example.com.
Real Estate Delinquencies and Charge-Offs With every hit the housing market takes, more builders are unable to meet their loan obligations. However, many banks have been reluctant to modify real estate loans to reflect the underlying assets' depreciation, leading to increased default rates on real estate loans and loan charge-offs by the banks. But builders can potentially put an end to a losing battle by filing for bankruptcy. It's a chance to press reset on troubled capital structures and underwater assets.
|3Q2008||All FDIC-Insured Institutions||Commercial Banks||Savings Institutions|
|Non-Current Real Estate Loan Rate* %||3.12||3.12||3.13|
|YOY Change (bps)||+185||+190||+171|
|Net Charge-Off Rate, Real Estate Loans %||1.18||1.21||1.03|
|YOY Change (bps)||+96||+100||+77|
|*NON-ACCRUING LOANS AND LOANS PAST DUE 90+ DAYS|
SOURCE: FEDERAL DEPOSIT INSURANCE CORP.