US CREDIT-Beazer debt prices face more weakness

By Neil Shah

NEW YORK, Oct 3 (Reuters) - Beazer Homes USA's (BZH.N) debt protection costs have fallen amid a broad home builder rally this week, but given the company's performance and legal woes, now still isn't a good time to buy its debt.

Shares of Beazer and other U.S. home builders have roared this week on investor hopes that the credit crisis may be over and that the housing market has bottomed out. For details see [ID:nN02404848].

The cost of insuring Beazer's debt with default swaps is trading at distressed levels, costing 18 percent of the amount insured paid upfront, or $1.8 million to insure $10 million in debt for five years, in addition to payments of $500,000 per year.

That is a drop from Monday when Beazer's protection costs stood at 18.75 percent or $1.875 million, and from earlier this month, when they were quoted at $1.95 million.

Protection costs for fellow junk-rated home builder Hovnanian Enterprises Inc (HOV.N) dropped by more than 50 basis points on Wednesday to around 937.5 basis points, which means it costs $937,500 annually to protect $10 million of its debt for five years.

Highly rated home builders like D.R. Horton (DHI.N), Lennar Corp (LEN.N) and Centex (CTX.N) also saw their costs fall 10 to 15 basis points.

While debt protection costs for Beazer have fallen slightly and its bonds remain relatively cheap, there may still be a good deal of downside to go, analysts say.

"We are uncomfortable with (Beazer's) legal woes and its propensity to miss performance targets," said Vicki Bryan, an analyst at New York-based Gimme Credit, in a report.

While Beazer's "bonds have fallen to yields of 12 percent to 15 percent from 9.5 percent three months ago, we continue to rate Beazer underperform," she said.

An analyst at a major Wall Street firm was similarly cautious on builders in general. "Stuff's been kind of tightening in," he said. But "there are still not a whole lot of people waving off home builder risk."

Beazer's financial results could be as bad as those from No. 2 U.S. home builder Lennar Corp, which reported its worst-ever quarterly results last week, Gimme Credit's Bryan said.

"After a horrendous July and August, and a tepid September at best, (Beazer) is on track to announce a truly dismal quarter," she said.

Meanwhile Beazer's debt investors say a delay in filing its earnings for the June 30 quarter, prompted by an internal probe, puts it in technical default on $1.5 billion in debt.

This month the company said it received default notices related to senior notes from U.S. Bank, the trustee for the company's bonds. [ID:nN07458135].

Bondholders say Beazer is in technical default because it has delayed filing its results by more than 16 days. Beazer argues it is not in default because the bond covenants only relate to the period after it files its results, but do not cover any delays in the actual filing.

The next step comes in November, when a 60-day "cure" period during which Beazer can file without a penalty expires, according to Gimme Credit's Bryan.