While speculation continues to swirl about a pullback in the housing market, the homebuilder market is seeing slower top-line growth, ample unsecured credit agreement capacities and large cash balances. Combined, these factors have driven down debt issuance among home builders, and the trend is likely to continue, said Standard & Poor's.

After taking a look at the eighteen public conventional home builders that it rates, the rating agency noted that capital markets activity slowed noticeably among those companies since the beginning of 2006. In all, those companies under Standard & Poor's surveillance had $30 billion of publicly rated securities outstanding. In the first quarter, for example, Hovnanian Enterprises and KB Home issued $600 million in senior unsecured notes, down from the first quarter of 2005, when the homebuilder industry completed about eight ABS offerings totaling $2 billion. There is not much demand for refinancing, either, as less than $1.2 billion in deals are expected to mature in 2006.

"We expect this trend toward lower public debt issuance to continue," says the rating agency.

Reasons for slowdown

Growth rates for ABS deals cooled down especially among builders that had other financing alternatives, mainly large cash balances and ample unsecured credit agreement capacities. Further, volatile equity markets have prompted many of the home builders to use prepayable bank term loans more often.

A sharp slowdown in demand for new homes and in construction is also expected to reduce the securitization pipeline. As anxious investors took money off the table for those properties in recent months, this inflated inventories of new homes for sale.

Toll Brothers, of Horsham, Pa., reported that new orders increased by 46% for the three months that ended on January 31, 2005. In the same period this year, however, the company said that new orders fell by 29%. They were not alone. Bonita Springs, Fla.-based WCI Communities, which builds lavish homes on Florida's coastline and in other locales along the East Coast, celebrated a 62% increase in new orders during the last quarter of 2004. A year later, it saw its new business drop off by 69%. Those two companies suffered the most severe declines in new orders, but about nine of the companies that S&P assesses saw a decrease in new orders.

At least the existing MBS deals coming out of this sector look better. S&P said 60% of the outstanding securities are investment grade rather than speculative-grade, which is a first-time occurrence.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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