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Tuesday, September 25, 2007 2:27 PM

Death Spiral Financing

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Last night I talked about Homebuilder Wizardry at SPF in Target Warns and Blames Florida - Lowes Blames Dry Weather

Standard Pacific Corp. (SPF) said it would offer $100 million in convertible notes, and that its board of directors has eliminated the company's quarterly cash dividend. The company expects to save about $10 million annually, with the funds to be used to pay down debt.
So SPF is eliminating its dividend to pay down debt by $10 million while at the same time announcing a new $100 million debt offering. Is this new math or just homebuilder math?

Convertible Offer Details

Today let's take a closer look at the convertible offering. As usual the devil is in the details. Standard Pacific is offering $100 Million of Convertible Senior Subordinated Notes Due 2012.
Stephen J. Scarborough, Chairman, Chief Executive Officer and President of Standard Pacific Corp.(SPF)today announced the pricing of the previously announced public offering of the Company's $100 million aggregate principal amount of 6.0% convertible senior subordinated notes due 2012.

Concurrently with the offering of the notes and the convertible note hedge transactions, the Company entered into a share lending agreement with an affiliate of Credit Suisse, pursuant to which the Company will lend 7,839,809 shares of its common stock to such affiliate. Under the share lending agreement, the share borrower will offer and sell the borrowed shares in a registered public offering and will use the short position resulting from the sale of such shares to facilitate the establishment of hedge positions by investors in the notes offered.

While the borrowed shares will be considered issued and outstanding for corporate law purposes, the Company believes that under U.S. generally accepted accounting principles currently in effect, the borrowed shares will not be considered outstanding for the purpose of computing and reporting earnings per share because the shares lent pursuant to the share lending agreement must be returned to the Company on or about October 1, 2012, or earlier in certain circumstances.
That offering specifically allows shorting and thus is in stark contrast to the Bank of America (BAC) / Countrywide Financial deal (CFC) deal that came with share restrictions to prevent shorting (see Countrywide Bailed Out by Bank of America?)

Pure Desperation

This type of financing agreement is about as desperate as one gets. Prof. Fil Zucchi was talking about it today on Minyanville.
A whole 6 days after Robert Toll was speaking about the housing crash in the past tense the Spider Homebuilders (XHB) made new lows on the back of Standard Pacific (SPF) 12% drop. The latter, one of the three horsemen of the housing apocalypse (at least based upon the current Credit Default Swap spreads), issued convertible debt which, short of a "death spiral financing", looks stunningly onerous. It also eliminated its $10M/year dividend. That's right Minyans, a publicly traded homebuilder is down to having to pull its skimpy dividend to make ends meet.
Homebuilder Credit Default Swaps

The above chart thanks to Prof. Zucchi and Minyanville.

Based on Fil's chart of Credit Default Swaps the "three horsemen of the housing apocalypse" are: Beazer Homes (BZH), Standard Pacific (SPF), and Hovnanian (HOV). For a better idea of the relative risks, pay attention to the credit spreads, not just the numerical rankings.

Disastrous Quarter At Lennar

The Financial Post is reporting Lennar results plunge as housing woes worsen.
"Heavy discounting by builders, and now the existing home market as well, has continued to drive pricing downward," Lennar Chief Executive Stuart Miller said in a statement. "Consumer confidence in housing has remained low, while the mortgage market has continued to redefine itself, creating higher cancellation rates," he added.
Article Recap
  • This was Lennar's worst ever quarterly report
  • Sales down 44%
  • Loss was $513.9 million ($3.25 per share)
  • Land writeoffs were $3.33 per share
  • Jobs slashed 35%
  • More job cuts coming
  • Incentives increased to $46,000 per home from, $35,900 per home
  • New orders fell 48%
Lennar (LEN) is #7 on the Credit default swap list. The higher up the list, the more likely the market perceives risk of default.

Get used to hearing statements like this: "confidence in housing remains low". Similar statements are starting to spread to other areas of the economy.

In Is the Fed Deflating? I noted that changes in consumer and corporate psychology (confidence) lead the market as opposed to changes in the market affecting confidence. It's an important idea that cannot be stressed enough.

Mike Shedlock / Mish

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