October 11, 2007 / 2:31 PM / 12 years ago

UPDATE 3-Moody's cuts Centex, Lennar, Pulte to junk status

(Adds Fitch statement on home builders)

NEW YORK, Oct 11 (Reuters) - Moody’s Investors Service on Thursday cut its ratings on home builders Centex Corp CTX.N, Lennar Corp (LEN.N) and Pulte Homes (PHM.N) to junk status, saying it expects bleak housing industry conditions to linger at least until 2009.

Separately, Fitch Ratings said in a report that pressures on home builders are likely to get worse as the housing downturn proves more severe than previously thought.

Moody’s downgrades affect about $9.4 billion of debt and $3.25 billion of commercial paper authorizations, the agency said.

Key problems facing home builders include rapidly declining orders, high housing inventories, disruptions in the mortgage market and heavy cancellations, Moody’s said in a statement.

Affordability issues are also weighing on key markets while confidence is ebbing among potential home buyers, it added.

It will be challenging for the three companies, as well as for much of the entire industry, to stay in compliance in the coming year with debt leverage covenants, the rating agency said. Covenants are restrictions in borrowing agreements.

Moody’s lowered Lennar’s senior unsecured rating by two notches to “Ba1,” the highest junk rating, from “Baa2,” Pulte’s senior unsecured rating by one notch to “Ba1” from “Baa3” and Centex’s senior unsecured rating by two notches to “Ba1” from “Baa2.” The outlook on all three companies is negative, meaning another rating cut is likely over the next 12 to 18 months.

The cost to insure the home builders’ debt rose on the downgrade. Centex and Lennar’s credit default swaps spreads widened 10 basis points each to 277 basis points and 293 basis points respectively. Pulte’s default swap spreads were around 13 basis points tighter at around 320 basis points, or $320,000 per year for five years to insure $10 million in debt.

“A lot of people have been playing the bad news. I think there was a little short-covering — that’s why it didn’t widen as much as you might expect,” said Christopher Brown, analyst at Bank of America in New York.

Moody’s had said it might cut Lennar and Centex two notches to junk territory when it placed the ratings on review in August.

“I think the market was thinking 50/50 whether they went one notch or two notches, so it’s a bit of a surprise they went down right away,” Brown said.

Centex’s 6.5 percent notes due in 2016 fell 2.78 cents to 90.35 cents on the dollar, according to MarketAxess.

Fitch said it expects housing weakness to persist through 2008 or even longer if the economy slips into a recession.

A negative psychology “seems to have become pervasive,” Fitch said. “The expectation or fear is that home prices have peaked and buying now would be a mistake.”

Thirteen of the 15 home builders that Fitch publicly rates have negative outlooks, meaning downgrades are likely over the next one to two years, while one, Beazer Homes USA (BZH.N), is on review for a downgrade. (Additional reporting by Karen Brettell in New York)

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