Fitch Assesses U.S. Homebuilders' Termination of Revolving Credit Facilities.
NEW YORK New York, state, United States
New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of -- Recently, several U.S. homebuilders have voluntarily terminated their revolving credit Revolving Credit
A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is usually used for operating purposes, fluctuating each month depending on the customers current cash flow needs. facilities, opting to use cash and equivalents on their balance sheets as the sole source of short-term liquidity, according to according to
1. As stated or indicated by; on the authority of: according to historians.
2. In keeping with: according to instructions.
3. Fitch Ratings Fitch Ratings
An international rating agency for financial institutions, insurance companies, and corporate, sovereign, and municipal debt. Fitch Ratings has headquarters in New York and London and is wholly owned by FIMALAC of Paris. . In the three recent cases, such actions did not rise to the level of a ratings action, but any future cases will also be reviewed and could warrant a negative ratings action as the cancellation of the revolver does raise concern about a reduction in liquidity and the removal of the bank group oversight. Fitch will require offsetting, alternative liquidity, which in these cases is cash, and new standby letter of credit Standby Letter of Credit
A stipulation that states a letter of credit will be called back if the payer defaults.
A letter of credit is typically used in international transactions. capacity. Fitch will continue to closely monitor these companies' total liquidity positions going forward. For more on homebuilder liquidity, please see the special report 'Liquidity Update: U.S. Homebuilders' published July 8, 2009.
In the absence of a revolving credit line, a consistently higher level of cash and equivalents than was typical should be maintained on a homebuilder's balance sheet, especially in these still uncertain times. Fitch expects managements will be allocating a certain percentage of cash to serve as standby liquidity, in an amount comparable to a standard revolving credit requirement over and above what is needed for working capital, debt maturities, etc.
In addition to the loss of standby liquidity, the termination of the bank facility eliminates the oversight of builder operations by bank groups, a useful check on management's appetite for risk. While certain bond indentures Bond indenture
Contract that sets forth the promises of a bond issuer and the rights of investors.
See indenture. also have financial and other covenants (i.e. limitations on asset sales, limitations on secured indebtedness, etc.), the requirements under bank credit facilities credit facilities npl → facilidades fpl de crédito
credit facilities npl → facilités fpl de paiement
credit facilities are, in most cases, more onerous and would usually be violated in a deteriorating environment ahead of the covenants in place in bond indentures. Fitch suspects that this issue, in particular, will be an area of concern to bondholders and could result in tighter covenants on new bond offerings going forward.
Over the past few months three homebuilders have voluntarily terminated their revolving credit facilities in advance of the scheduled maturity dates. D.R. Horton, Inc. (DHI DHI
see dairy herd improvement. ) terminated its revolving credit facility on May 11, 2009. Ryland Group, Inc. (RYL) terminated its revolving credit facility on June 26, 2009. On July 27, 2009 Meritage Homes Corp. (MTH mth abbr (= month) → m
mth abbr (= month) → m
mth abbr (= month) → m ) announced it would be terminating its revolving credit facility.
Their motivation includes the savings of a few million dollars from non-use fees on facilities that were scheduled to mature in 18-30 months and which they were not currently utilizing or planned to employ during the remaining lives of the facilities. Also, in at least one situation the existing facility constrained the ability of management to raise capital. This strategy may also reflect managements' views that a bottom has been reached or is near for new construction and an upturn is on the horizon. In any case, none of these companies were in violation of covenants at the time of the facility termination. And each of these companies has experienced a strong upsurge in cash on hand and cash from operations in recent quarters resulting in strong liquidity for the rating, thereby compensating for the reduction in standby liquidity.
Although the companies did not have debt outstanding under the credit lines, there were letters of credit backed by the facilities. Following the termination of the credit facility, the companies typically entered into secured letter of credit agreements which require the builder to deposit cash, in an amount approximating the balance of the letters of credit outstanding, as collateral with the issuing banks Issuing bank
Bank that issues a letter of credit. . As of March 31, 2009, DHI had $61.7 million letters of credit outstanding. RYL had $75.1 million letters of credit outstanding on March 31, 2009. MTH had approximately $22 million letters of credit outstanding as of June 30, 2009.
These companies and, perhaps, other builders that will terminate their facilities may be capable of functioning without their revolvers by utilizing cash and equivalents on hand, generation of cash flow from operations Cash flow from operations
A firm's net cash inflow resulting directly from its regular operations (disregarding extraordinary items such as the sale of fixed assets or transaction costs associated with issuing securities), calculated as the sum of net income plus noncash expenses and capital markets activities. But this does result in a reduction in standby liquidity. In general, bank facilities are an important source of operating liquidity to finance working capital, seasonal requirements, one-off needs, short-term risks and other purposes, both in the normal course of business and due to unforeseen events. Fitch notes, as was witnessed last fall and winter, capital markets may not always be accessible. Barring changes in the tax law, tax refunds are largely over for the builders. And generation of cash flow from operations will be trending downward until the land pipeline is refilled with lower cost lots, which will support profitable home sales.
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