And the hits keep coming. Per a press release from Moody's Investors Service today, Lennar, Centex and Pulte were downgraded to junk, with all three companies seeing senior unsecured debt ratings dropped to 'Ba1' on the assessment that the housing downturn will last longer and be stronger than earlier expected. Moody's said it now does not expect to see housing recover before 2009 "at the earliest, with any recovery likely to be very measured at first, thus prolonging the companies' underperformance on key financial metrics vs. prior expectations." The agency cited a wide range of factors behind it's bleak assessment for each of the builders, including elevated new and existing housing inventory levels, disruptions in the mortgage market, diminishing consumer homebuying confidence,affordability issues in key markets, declining home prices and increased buyer incentives being offered, lofty spec housing levels, rapidly declining orders and backlogs and high cancellation rates. (Talk about throwing the kitchen sink at someone.) But perhaps the most damning of all is a discussion of debt covenants:
Moody's believes that it will be challenging for the three companies, as well as for much of the entire industry, to remain in compliance in the coming year with the debt leverage covenant. Since Moody's believes that the denominator in the debt leverage test (which either consists of or includes tangible net worth) will remain under continued assault from impairment and option abandonment charges, compliance with the covenant may well hinge on substantial debt reduction. In addition, Moody's notes that while the three companies may soon be operating at run rates of approximately half of their prior size, they continue to maintain debt burdens scaled to a substantially larger run rate.
Fitch weighed in briefly on builders today as well, saying that the agency expects credit pressures to continue into 2008.