Homebuilding in Uncertain Times

While it is too soon to draw any parallels between the coronavirus pandemic and prior recessions, it is prudent to recognize the potential risks for the economy and homebuilders. In prior downturns, quick and decisive action was critical to navigate challenging markets and position for the eventual recovery.

There are many strategic alternatives available to homebuilders that are experiencing the impact of coronavirus. Defensive strategies are likely to be more appropriate for those deeply impacted by the virus, while offensive strategies may be prudent for those with stronger balance sheets or that have been less impacted by the virus.

Click below to access the full report or read on for selected strategies.

Defensive Strategies:

Maximize Liquidity

• Draw down revolving credit facility

• Defer land acquisition and development

• Raise new junior capital

• Raise capital from existing investors

• Extend maturities of existing debt

• Sell land & lots

• Reduce headcount

  Covenant Relief

• Pursue waivers for covenant violations

• Amend agreements

  Deleverage

• Raise equity from new investors

• Rights offering from existing investors

• Convert debt to equity

• Sell land & lots or divisions

  Strategic Mergers

• Merge with competitors to gain efficiencies of scale, rationalize expenses, etc.

• Merge with a peer with a stronger balance sheet, liquidity, and access to capital

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Offensive Strategies

Acquire Distressed Land and Lots

• Acquire land and lots from builders and developers (earlier in cycle)

• Acquire from banks (later in cycle)

  Invest in Struggling Builders

• Invest to provide liquidity and / or deleverage the balance sheet

• Invest senior equity or debt to generate a sufficient return for the risk

• Invest in “fulcrum” to gain effective control

  Acquire Builders

• Acquisition of stock or assets to consolidate market share or enter new markets

• Acquisition through a bankruptcy court (i.e. a Section 363 sale process)

  Strategic Mergers

• Merge with competitors to gain efficiencies of scale, rationalize expenses, etc.

• Merge with or acquire competitors to gain market share and accelerate growth

Navigating the Market During the Covid—19 Crisis and Beyond

In the current environment, public companies are following similar playbooks to preserve cash and position themselves for long-term success. Their actions offer some lessons for private and family owned businesses struggling in the current environment.  In the great recession, quick decisive action was critical for companies to survive the downturn and thrive in the recovery.  At Keene Advisors, we expect quick decisive action to be critical for companies in this environment too. 

Public companies, executives and Boards are taking decisive action, including to:

1.      Maximize liquidity

a.      Drawing down on their revolving credit facilities

b.      Temporarily pausing share repurchase programs

c.      Pursuing divestitures of non-core assets

d.      Considering changes to dividend policies

e.      Extending trade payables

f.       Accelerating collection of receivables and liquidation of inventory

2.      Reduce costs

a.      Cutting executive compensation and/or discretionary compensation

b.      Cutting Board of Directors cash retainers / compensation

c.      Closing offices, retail stores, distribution centers, etc.

d.      Furloughing or laying-off employees

3.      Develop processes and procedures to keep employees safe

a.      Implementing processes and procedures to promote social distancing

b.      Implementing remote work and telecommuting programs

c.      Increasing direct employee communications

d.      Providing additional PTO

4.      Develop new solutions and delivery methods for customers

a.      Developing alternative distribution models to meet customers emerging needs and promote healthy and safe interactions between customers and employees

b.      Adding additional customer support (call centers, etc.)

5.      Others

a.      Rescheduling investor meetings

b.      Eliminating forward guidance

c.      Updating risk disclosures

d.      Announcing donations to charities

If the market downturn is protracted, public companies will likely pursue more dramatic measures, including:

1.      Debt relief

a.   Pursuing waivers for covenant violations

b.   Amending credit agreements and bond indentures agreements

c.   Extending maturities of existing debt

d.   Tendering for debt trading at a discount

2.      Deleveraging

a.   Raising equity from new investors (registered offerings, PIPEs, etc.)

b.   Selling non-core assets and businesses

3.      Strategic mergers and acquisitions

a.   Merging with or acquiring competitors to gain efficiencies of scale, rationalize expenses, etc.

b.   Merging with companies with stronger a balance sheet to secure liquidity and access to capital

4.      Sale transaction

a.   Sell to a larger, better capitalized company to preserve value for stakeholders

5.      Out-of-court restructuring

a.   Negotiating deals / workout among creditors and the company typically utilizing exchange offers, rights offerings and other tools

6.      Bankruptcy – Chapter 11 and Chapter 7

a.   Plan of Reorganization

b.   Section 363 Sale Process

As the economy begins to recover, companies will begin exploring strategies to grow and enhance value for stakeholders, including:

1.      Raising growth capital

a.      Raising junior capital (debt and equity) to capitalize on organic and acquisition-driven market opportunities

2.      Strategic acquisitions

a.      Acquiring competitors to gain market share and accelerate growth

3.      Returning capital to shareholders

a.      Reinstating / initiating share buybacks to capitalize on lower prices

b.      Reinstating / increasing dividends

Our team at Keene Advisors combines investment banking, consulting and operating experience to help you navigate strategies through any economic environment or business cycle.  If you would like to discuss how COVID-19 is impacting your business and how to position your company to thrive, please contact us at 617-765-2054 or Info@KeeneAdvisors.com.