A firm that specializes in working with “underperforming” companies reported this week that more than 30% of home builders doing more than $10 million in sales are “in financial distress and in danger of filing for bankruptcy.”
The firm, Grant Thornton Corporate Advisory and Restructuring Services, searched bankruptcy records to find that 143 home builders filed for Chapter 11 last year, versus 80 in 2007. Click here to see our list of major home builders that have gone bust.
The firm says that home builders, to remain in business, will need to continue to reduce expenses and cut prices on existing inventory. It concluded that builders who sold land holdings early in the home building recession and found a way to hold more cash on hand will be in a better position to survive.
“It’s striking when you see just how much cash flow has continued to decline for the better builders,” John Bittner, a partner at Grant Thornton Corporate Advisory and Restructuring Services, said in a press release. “This year, it will be all about keeping cash flow positive by cutting operating costs and liquidating assets. It’ll get to a point, however, when builders get rid of the assets with the most value and expenses can’t be cut much further. After that, there’s not much they can do except wait for a turnaround in the housing market.”
Bittner says he wouldn’t be surprised if one or two of the top 10 builders went under. He believes the key to continued builder survival is lenders not calling loans. Builders are better off working with their banks than filing for bankruptcy protection.
“The current lending environment is unique in that as long as a builder has positive cash flow, the lender doesn’t want to foreclose or force a bankruptcy filing. Recovery is more likely if a bank can be patient with a borrower,” Bittner says. “Positive cash flow and ability to service interest on a credit facility provides for a better negotiation position with the lender.”
Boyce Thompson is editorial director of BUILDER magazine.