Are Hedge Funds Bailing Out Builders?

A recent Business Week article had some interesting statistics on where some builders stand with their debt.  With higher than expected inventory of homes and condos and mounting holding costs, many builders are facing bankruptcy unless lenders are willing to work with them to restructure their debt…all of this “creativity” I’m sure will come at a substantial cost.  Many companies are using tools such as credit default swaps in which bondholders hedge the risk of default.  Others are seeking out hedge funds to buy their loans and renegotiate the terms.  This is an alternative to bankruptcy and will keep many home builds afloat, but the costs will be high.

What is really coming back to bite the builders are years worth of land deals and partnerships where builders have gone in on land purchases with other companies to hold until future use.  This has led many to build up billions in debt which doesn’t appear on their balance sheets.  Many are still confused as to where the housing industry will go from here.  Everything really depends on how long the slow down will last.

NAR is saying that home sales may drop another 18% this year.  It seems at least for the large home builders that the lending institutions will be willing to help them survive the storm.  The hedge fund opportunity will lead to much higher rates and giving up large portions of stock in some cases, but may be a viable way for some builders to stay afloat. 

As I touched on before, the partnerships and joint ventures are appearing to cause a lot of risk for some builders.  In cases where the deals were not structured to protect the parties not in default, builders may be liable for the entire loan balance when their partners can’t make good on the deal.  This seems like an obvious and important part of structuring a legal agreement for purchasing millions in land, but it seems that some builders will be left holding the bag.