Moody's Investors Service downgraded the rating of Beazer Homes late last week and announced that Centex Corp., Pulte Homes, and Lennar Corp. were all under review. In an interview with BUILDER Online, Joe Snider, a Moody's Investors Service vice president and senior credit officer, declined to name other public builders in danger of being reviewed but did reveal that "everybody is feeling the pinch" of current market conditions that are "grim and getting bleaker."
"All of the companies are feeling the pressure," Snider said Monday in a telephone interview. "And some, not all, will see their ratings reduced."
Moody's Investors Service is a New York-based company that provides financial research and analysis on commercial and government entities. The company also ranks the credit-worthiness of borrowers using a standardized ratings scale.
Although it was just downgraded, Beazer Homes may see its ratings lowered again. Snider said because of litigation against the company, SEC and U.S. Attorney's Office investigations, and the company's inability to file its fiscal third-quarter 10-Q by the filing deadline, the Atlanta-based company remains under review.
According to Moody's, reviews of Centex, Pulte, and Lennar will hinge on the following criteria:
- The ability of the three companies to reduce physical inventories going forward. To date, the bulk of their inventory reduction has been reflected in their financial statements through accounting charges, such as impairments, option abandonments, and other write-downs. As industry cancellation rates seem now to be spiking up for the second time, these physical inventory reductions will be harder to achieve.
- The companies' ability to continue generating positive cash flow, in part because of their limited success to date in reducing physical inventory and in part from the recent resurgence of cancellation rates. Other factors necessitating the examination include Centex and Pulte's lag in generating positive cash flow compared to prior expectations and the impact of a significant level of off-balance sheet activity on Lennar's cash flow.
- Whether the companies will be able to reduce costs sufficiently to once again sustain profitable operations, excluding the impact of impairments, option abandonments, and other charge-offs. In recent quarters, the three companies have generated modest quarterly losses, even after excluding the aforementioned charges. Moody's generally does not expect investment-grade companies to generate even modest quarterly losses for a lengthy period.
- Whether the companies will take the necessary steps to conform their debt structures to the currently frail business environment.
- Whether the companies will be able to substantially reverse their current underperformance on key credit metrics before 2009.
All three builders are in danger of dropping at least one grade level, with Centex and Lennar possibly facing a similar fate to Beazer; dropping one grade and remaining under review. All three companies' grades would drop from investor to non-investor grade if they are downgraded.
Learn more about markets featured in this article: Atlanta, GA.