Moody’s “Bottom Rung” Includes Four Homebuilders

Looking to get past criticism that it and other rating agencies have been more reactive that proactive in staying ahead of a financial mess that seems ever-likely to lurch forward in coming months, Moody’s Investors Service on Tuesday unveiled its own list of troubled companies — published in a list the agency is calling “the Bottom Rung.” The list covers 283 companies that carry either a Probability of Default Rating of Caa1 or lower, a B3 with a negative rating outlook or a B3 with a rating under review for downgrade, Moody’s said in a press statement announcing the list. “The number of companies in this low-rated tier has increased substantially, which coincides with Moody’s forecasts of a sharply higher speculative-grade default rate this year,” said David Keisman, senior vice president at Moody’s Investors Service. “There are now nearly twice as many companies on the Bottom Rung list as there would have been a year ago.” Moody’s said it expects nearly half of companies on the list, or 45 percent — which includes business from nearly every U.S. sector — to default on their obligations within the next 12 months. While some companies — Eastman Kodak (EK) most notably — have objected loudly to their inclusion on the list, Moody’s placed four U.S. homebuilders on its inaugural list: Hovnanian Enterprises, Inc. (HOV), The Rhodes Companies, LLC, Stanley-Martin Communities, LLC and William Lyon Homes. Red Bank, New Jersey-based Hovnanian — the only of the four homebuilders publicly traded on a major exchange — reported a bigger quarterly loss that missed analyst estimates on Tuesday, posting a first-quarter net loss of $178.4 million, or $2.29 per share, compared with a loss of $130.9 million, or $2.07 per share, last year. Analysts had forecast a loss of $1.58 per share, according to a Reuters report. Last Friday, Moody’s had cut Hovnanian’s corporate family ratings deeper into junk territory on concerns over weakening cash flow; meaning the builder’s inclusion on the list probalby wasn’t that surprising. Shares in the builder rallied Wednesday on hope over the banking sector in general, rising 17.74 percent but still trading at a meager $0.73. The Rhodes Companies LLC is the largest private master-planned community developer and private homebuilder Las Vegas; the company has been hit especially hard by the housing downturn. Stanley-Martin is a regional builder focused on Virginia and Maryland, and has seen revenues fall 17 percent during 2008, according to a recent SEC filing; the company has said it expects to post a full-year loss and will be in technical default under a tangible net worth requirement for some of its senior debt. William Lyon is a builder heavily centered in California, Arizona and Nevada — and given its regional focus, has been hit particular hard by housing’s collapse. The builder said last week that net new home orders in the fourth quarter of 2008 fell 53 percent, while operating revenues fell 67 percent and the company posted a net loss of $23.2 million for the quarter, and $104.1 million in losses for all of last year. Write to Paul Jackson at Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

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