Fitch Eyes Builders' Termination of Revolving Credit Facilities

Recently, several U.S. homebuilders, including DR Horton, Ryland Group and Meritage Homes, voluntarily terminated their revolving credit facilities, opting to use cash and equivalents on their balance sheets as the sole source of short-term liquidity, according to Fitch Ratings. In these cases, the actions did not result in any ratings action, but Fitch now says any future cases will be reviewed and could warrant negative ratings action as the cancellation of the revolver does raise concern about a reduction in liquidity and the removal of the bank group oversight. Fitch said in the absence of a revolving credit line, a consistently higher level of cash and equivalents than was typical should be maintained on a homebuilder's balance sheet, especially in these still uncertain times, said lead homebuilding analyst Robert Curran. Fitch expects management will be allocating a certain percentage of cash to serve as standby liquidity, in an amount comparable to a standard revolving credit requirement over and above what is needed for working capital and debt maturities. In addition to the loss of standby liquidity, Fitch said the termination of the bank facility eliminates the oversight of builder operations by bank groups, a useful check on management's appetite for risk. While certain bond indentures have financial and other covenants, the requirements under bank credit facilities are more onerous and would usually be violated in a deteriorating environment ahead of the covenants in place in bond indentures, said the rating agency. Fitch suspects that this issue, in particular, will be an area of concern to bondholders and could result in tighter covenants on new bond offerings going forward.