US CREDIT-Standard Pacific offers high returns, high risk

By Karen Brettell

NEW YORK, May 13 (Reuters) - Home builder Standard Pacific
Corp's (SPF.N: Quote, Profile, Research, Stock Buzz) debt is trading at distressed levels and with
the housing market continuing to weaken and the company
dependent on banks increasingly hesitant to lend, its bonds are
likely to remain highly risky.

Standard Pacific, which builds homes chiefly in the western
United States, on Monday posted a first-quarter loss of $216.4
million due to the continuing market slowdown and the use of
incentives to move inventory. For details, see [ID:nN12528112]

The company also said it has reached a preliminary
agreement with its bank group to extend a waiver of default on
its bank debt to Aug. 14, from May 14.

"While Standard Pacific's current bond prices could appear
attractive for bottom fishers, we continue to maintain an
underweight recommendation for the credit," analysts at
CreditSights said in a report on Tuesday. "Standard Pacific's
liquidity fate remains fluid over the next 90 days."

The builder's 6.5 percent bond due 2010 fell to 80.5 cents
on the dollar on Tuesday to yield 17.36 percent, according to
MarketAxess. The bond has dropped from 82.87 cents last
Tuesday, the last recorded trade before its earnings.

The cost to insure the company's debt for five years with
credit default swaps is 22.5 percent the sum insured as an
upfront payment, or $2.25 million to insure $10 million, in
addition to annual payments of 500 basis points, according to
Markit Intraday. Swaps trade upfront when a company is
considered distressed.

"Standard Pacific's suffocating debt maturity schedule,
distressed joint venture projects, disappearing margin and
increasingly wary banks could prove insurmountable,"
CreditSights said.

Under the proposed amendment to its revolving credit
facility its availability will be reduced to $500 million, from
$700 million, and new borrowings from the facility will be
backed by assets. The company will also be unable to withdraw
from the facility when its cash position exceeds $300 million.

Key to the company's fate will be its ability to extend its
bank agreements beyond August.

"A decision by the banks not to extend or amend by Aug. 14
would be devastating and would be precipitated by further
deterioration in Standard Pacific's operations and the housing
market in general," CreditSights said.

Though the builder generated cash from operations it was
absorbed by debt payments and joint venture obligations.

"Standard Pacific's cash obligations are increasingly with
near-term debt maturities and joint ventures that continue to
sap precious resources," Gimme Credit analyst Vicki Bryan said
in a report.

For the first time, Standard Pacific also said on Monday it
was exploring alternatives to reduce its joint venture
obligations, which may include amending terms of its debt,
selling equity or exchanging debt for equity.

The company may soon approach bondholders to offer a fee in
order to modify some conditions on its debt, or offer to
exchange bonds for equity, Bryan said. "While the company may
indeed repurchase the notes this year, we remain uncomfortable
with Standard Pacific's waning prospects."

Analysts at KDP Investment Advisors meanwhile were
comforted by the builder's ability to negotiate a preliminary
agreement with its bank group.

"Overall, we continue to expect that Standard Pacific's
focus on inventory reduction and cash flow generation will
provide the company with the necessary liquidity through this
cyclical downturn," analyst Matthew Wilcox said.
(Editing by Leslie Adler)