Lieutenant Island Views : Commentary About Finance, Politics and Baseball

Ford and Large Homebuilders: Rumors of Their Demise is Greatly Exaggerated! | May 18, 2009


To paraphrase Mark Twain, rumors of the demise of Ford and the major homebuilders is greatly exaggerated. While GM, Chrysler and a number of private builders are in or near bankruptcy, some of their larger public competitors are evidencing something even more significant than rising stock prices. They are raising significant amounts of capital!!

New capital is significant in many ways. It can allow companies to refinance maturing debt, reduce leverage and facilitate growth. Most important, it requires investor confidence. Raising new capital can only be accomplished when large groups of investors simultaneously commit to buy a company’s debt or equity securities. It is axiomatic that this is a formidable task if a company’s viability is in doubt. We are increasingly starting to see new capital commitments becoming the new “Good Housekeeping Seal of Approval”. They can signal that investors believe that a good company in a troubled industry should survive. The capital commitments often assure this inevitability and lead to post financing price increases from the abyss.

In the last few weeks we have seen the following financings for Ford and a group of large Builders:

Issuer Amount Security

Ford $1.6 bil equity
Toll $400mil bonds
Ryland $230mil bonds
Lennar $400mil bonds
Horton $450mil converts
Lennar $275mil equity

In the wake of these financings, including those who issued equity or converts that diluted existing shareholders, the newly issued debt and equity securities are trading at generally higher levels. While not necessarily a guarantee of long term success for the issuers, it has to be construed as a near term positive for both equity and debt investors. All have already registered gains in companies which the market sees as improved risks.

In a larger sense, the ability of companies in weaker industries to access the capital markets is a very positive indicator for a broad based recovery and further market advances. Six months ago Ford was a supplicant at TARP’s table. Today it is viewed as the long term winner in the US auto industry. As recently as three months ago, few would have made any bets on even one US homebuilder being able to access the capital markets for the foreseeable future. The foreseeable future is NOW!! Four builders have successfully financed and the securities issued are all trading at premiums.

Virtually all experts agree that the opening of the capital markets is essential to the end of the recession. The ability of Ford and the larger builders is a clear and significant harbinger of a major market opening. Like Mark Twain, the demise of the markets and the dire prospects for Ford and the large public builders was greatly exaggerated!

PS It is also very interesting to note that Citibank sole lead managed all of the builder financings. Their ability to execute such transactions also suggests that their demise as an underwriter may also be overstated.

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2 Comments »

  1. […] Original post by bosox4 […]

    Pingback by Ford and Large Homebuilders: Rumors of Their Demise is Greatly Exaggerated! — May 18, 2009 @ 11:48 pm

  2. thank you for this

    Comment by mixkore.com — May 19, 2009 @ 1:42 am


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About author

Mr Thaler is currently the Managing Partner of Lieutenant Island Partners, an organization providing corporate finance advice and general consulting to corporations and not-for-profit organizations. Mr Thaler retired as Vice Chairman of Deutsche Bank Securities in early 2008. His background includes experience as an investment banker, senior manager, business builder, college professor, not for profit board chair and trustee. In his thirty plus years as an investment banker for Deutsche Bank and Lehman Brothers, he has been involved in numerous significant debt and equity financings, mergers & acquisitions, leverage buyouts, restructurings and cross border transactions. Of particular note, Mr Thaler has been one of the most active participants and strategic advisors to the homebuilding industry. In a period of significant turmoil and losses, he was one of the few active bankers to the industry who did not have either a loss or credit write down. He is currently advising several public builders on strategic matters and is an adjunct professor of finance at Morehouse College in Atlanta, Georgia. Though he lives in New York, he is a life long Red Sox fan! www.LieutenantIslandPartners.com

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