Sunday, 14 October 2007

Beazer Home- front runner for chapter 11

About three weeks ago I posted that the only thing missing from the US housing crisis is a major homebuilder going bust. That is still the case, however Beazer Homes USA Inc. (BZH) have thrust themselves forward as the most likely candidate in recent days.

An enquiry by the Securities Exchange Commission will require the company to restate earnings going back to 1999 after an internal probe found its mortgage unit violated federal regulations.

That news couldn't come at a worse time for Beazer as they issued preliminary financial results for 4Q07 showing home closings fell 39% to 3,940. New orders plunged 52% percent to 990 homes as the cancellation rate surged to 68% due "in large part to the pronounced tightening in the mortgage markets in August and September.''

If that wasn't enough, on Friday Fitch Ratings and Standard & Poor's cut their ratings on Beazer deeper into junk territory and said they may cut the ratings again as the company's balance sheet continues to deteriorate in a weak housing market.

"The downgrades acknowledge significant internal and external challenges confronting Beazer's management team and the uncertain economic impact stemming from accusations of fraud in the Beazer Mortgage Co. subsidiary," S&P said in a statement.

S&P cut Beazer one notch to "B-plus," four levels below investment grade, from "BB-minus," and kept the company on watch for a further downgrade.

Fitch cut Beazer one notch to "BB-minus," three levels below investment grade, from "BB."

The company remains on review for a further downgrade due to its inability to report earnings for the quarter ended June 30 in a timely manner and because Beazer may be required to negotiate some consent waivers with its bondholders, Fitch said in a statement.

"There is uncertainty as to the financial impact of Beazer's potential liability as well as regulatory fines related to the violations found in its mortgage subsidiary," Fitch said.

Noone can stay in business with a 68% cancellation rate, that is just unsustainable. That's not to say that cancellation rates will stay that high. They will most likely improve going forward.

However, they are losing money hand over fist, a securities commission probe has shown some of their practices to be criminal, the rating agencies are calling their credit junk (and we know how far behind the 8-ball they are) and for the percentage of the public that pay attention to such news their name is now Mud. I think we have a new front-runner.