Builders Exit Revolving Credit Doors

US home builders in recent months began walking away from their revolving credit facilities, choosing to rely instead on cash and other equivalents held on their balance sheets for short-term liquidity, according to a study by Fitch Ratings. Builders snubbing short-term credit and voluntarily exiting their revolving credit lines indicates a general move toward conservative borrowing practices as the US banking and financial system continues to reel with loan-related losses. The ratings agency in recent months saw DR Horton (DHI), Ryland Group (RYL) and Meritage Homes Corp. (MTH) terminate or announce planned termination of revolving credit lines in advance of their scheduled maturity dates. Fitch said it has not yet taken action on three builders that recently ducked out the revolving credit doors, but future cases may warrant negative ratings action due to liquidity constraints in the absence of the facilities. Action taken by the builders to exit revolving facilities not only reduces standby liquidity, but eliminates oversight of builder operations by bank groups, “a useful check on management’s appetite for risk,” the ratings agency said. Fitch noted the builders saved a “few million dollars” on non-use fees on certain facilities they had no need of, and in one case the existing facility constrained the management’s ability to raise capital. “This strategy may also reflect managements’ views that a bottom has been reached or is near for new construction and an upturn is on the horizon,” Fitch said in a statement on the trend. The builders’ move to rely on cash for short-term liquidity comes in the midst of CIT Group‘s (CIT) financial struggles. The lender last week confirmed a group of its bondholders agreed to lend up to $3bn in private capital so it can continue to extend credit to commercial businesses. But the shake-up at CIT — beginning when the firm learned it would not receive a second federal bailout and culminating in discussion of potential bankruptcy among major media — may have spooked businesses that rely on credit extended by such lenders to make payroll and other expenses. Industry sources, like the National Association of Home Builders, see a different solution to the lending crisis felt by home builders. The association last week urged Congress to increase the funding and loan size under the Small Business Administration’s America’s Recovery Capital loan program, which offers small businesses guaranteed deferred-payment, interest-free loans up to $35,000. NAHB also urged the establishment of a supplemental loan assistance program to target businesses with capital needs in excess of $10m. Write to Diana Golobay. Disclaimer: The author held no relevant investments when this story was published.