Struggling home builders find unexpected saviors

Date: Tuesday, May 27, 2008
Author: Chelsea Emery - Analysis, Reuters.com

NEW YORK (Reuters) - The precipitous slide in home values and a glut of unsold properties are pushing U.S. home builders to the brink of insolvency, but a posse of unexpected saviors could help keep the companies out of bankruptcy court until home buyers return.

Hedge funds, private investors and even larger cash-flush home builders are eyeing valuable swathes of land held by troubled companies, according to bankruptcy attorneys and restructuring specialists. As long as private firms have the cash to keep a struggling home builder running, they think they can profit when the real estate market picks up again.

"I don't think we'll see as many free-fall bankruptcies as in past crises, due to the presence of distress investors willing to take control, restructure and work with undervalued companies," said Corinne Ball, a partner at law firm Jones Day and co-head of the firm's New York restructuring and reorganization practice.

Restructuring specialists Alvarez & Marsal recently formed a group focused on home builders and their constituents and company directors say their focus is on helping companies find alternatives to bankruptcy. The group has received a slew of calls from hedge funds and other investors, who believe there is value in companies battered by the current housing crunch.

Troubled home builder Standard Pacific Corp (SPF.N: Quote, Profile, Research), which builds homes in Florida, California and other major metropolitan areas, may be catching the eye of hedge funds. Hedge fund Tiger Global Management LLC has taken a 3.55 million share stake in the company, making it the fifth-largest institutional shareholder, according to Reuters. The firm declined to confirm the data or comment further.

Hedge funds are finding they can offer operating cash or long-term equity financing to distressed companies.

"If there's a home builder who has a project that is partially built, with the infrastructure and amenities in and homes in construction ... if you can get the price low enough, a hedge fund might be interested," said Harvey Miller, a senior partner at law firm Weil, Gotshal & Manges LLP.

And some larger home builders with cash to spare can snap up land at fire sale prices, a deal that can offer a lifeline to a smaller peer.

"We haven't purchased any (distressed land) yet, but we certainly will before this cycle is over," said Ara Hovnanian, chief executive officer of Hovnanian Enterprises Inc (HOV.N: Quote, Profile, Research) at the Reuters Housing Summit in February.

Still, it is risky for investors to bet on home builders or related companies. Declines in U.S. home prices accelerated in the first quarter, falling a record 1.7 percent from the end of 2007, according the national house price index of the Office of Federal Housing Enterprise Oversight (OFHEO), which covers home purchases.

As home values fall, builders are slashing plans for new developments and allowing land to lay fallow, cutting off their revenue stream.

Debt for companies, including Standard Pacific, is trading at distressed levels and banks are increasingly unwilling to lend to many home builders as the housing market weakens.

A Chapter 11 bankruptcy could protect some companies from creditors, while they restructure, but with analysts saying the housing market is unlikely to regain strength soon, liquidation may be their only option.

According to Jerry Mozian, director of restructuring at consultancy Tatum LLC, "there is a constant flow of construction companies coming through. They, for the most part, are probably not going to get reorganized. They are going to sell assets."

Tousa Inc TOUSQ.PK, which builds single-family homes and condominiums in metropolitan markets including Florida, filed for Chapter 11 bankruptcy protection in January and said later it had received permission to continue selling off a backlog of homes.

But the desperate and expedient measures required by bankruptcy and liquidation can cause much more pain for a company and its stakeholders. With a cash infusion from hedge funds or private equity, the company may be able to wait out the housing slump and its investors can reap the rewards, restructuring experts say.

"Distressed investors are changing the world," said Jones Day's Ball.

(Additional reporting by Emily Chasan in New York; Editing by Andre Grenon)