Moody's Investors Service late this morning took down its credit ratings on a half-dozen of the nation's largest home building companies, citing the continuing deterioration of their balance sheets and of the housing market in general.
Moody's dropped D.R. Horton, Centex, Pulte, KB Home and Ryland down one notch to Ba2, its second highest junk category, and it took Lennar down two levels to a Ba3, citing concern over the latter's exposure to joint ventures, its land position, its debt-to-capital ratio and its ability to generate cash going forward.
"The negative ratings outlook reflects Moody's expectation that many of [Lennar's] credit metrics will continue eroding as homebuilding industry conditions remain challenging into next year, with any recovery likely to be sluggish at first, thus prolonging underperformance until early in the next decade," wrote Joseph A. Snider, a Moody's VP and a senior credit officer.
Regarding D.R. Horton, Snider wrote, "The downgrades reflect that the company has begun to generate quarterly losses before impairments and other charges, and Moody's expects this trend to continue into next year, as the rate of expected revenue decline exceeds the pace at which the company can continue to pare costs. When large and continuing impairment charges are folded in, the company's debt leverage will continue to edge up while covenant compliance will become, and remain, very challenging."
The comments were similar for KB, Centex, Pulte and Ryland, in each case centering around continuing generation of losses before impairments and the erosion of debt-to-equity ratios that is likely to make covenant compliance difficult going forward. Snider cited KB for its joint-venture exposure and "already high lease-adjusted debt leverage of 59.2%," and chided Pulte for poor performance relative to its peers in reducing inventory and lot supply.
The entire public builder group was down in mid-afternoon trading, with the exception of NVR (NYSE:NVR), which was up marginally to $552.42. The S&P Home Builders ETF (AMEX:XHB) was off 2.2% at $18.39, nearing its three-month low.