Following is a short synopsis.
- On 9/13/06 Kara was bragging about completing "two most profitable quarters in the history of our company".
- On 10/06/06 Less than one month later Kara filed for bankruptcy protection.
The reason why I am talking about a cascade effect is because Kara bankruptcy deals another blow to bank owed millions by Dwek.
Amboy National Bank has suffered its second blow this year after a home building company filed for bankruptcy Thursday.You may also wish to consider Bankruptcy is met with uncertainty Builder's woes affect others.
Amboy holds $58.2 million in loans with Kara Homes Inc., one of the largest home builders in Monmouth and Ocean counties. According to the bankruptcy filing, it is the largest creditor to Kara Homes.
A bank analyst said the bankruptcy puts Amboy in a difficult financial position, and could be a harbinger of things to come for local and regional banks if the real estate market continues to decline.
"That's not good to have that kind of exposure to troubled real estate,'' said Gerard Cassidy, a bank analyst for RBC Capital Markets of Toronto. "It's manageable, but it will be very painful. These problems do not go away quickly. (Amboy) started out this year with a cold. It's now turning into pneumonia.''
Kara's bankruptcy comes only five months after real estate mogul Solomon Dwek of Ocean Township bounced a $25.2 million check and had his assets frozen by a Superior Court judge. Amboy says Dwek owes it $49.7 million, which makes it the
largest bank creditor in that case.
Cassidy said he was monitoring the Dwek situation and the Kara bankruptcy to gauge the health of regional banks. RBC has advised clients to review holdings of bank stocks with large amounts in real estate development loans.
Amboy, which is privately held, has $1 billion in loans for construction and land development, according to its federal reports on file with the Federal Deposit Insurance Corp. It has $257.6 million in capital.
According to its June 30 report, Amboy had $47.1 million in nonperforming loans. It was not clear if those included the Kara or Solomon Dwek's loans.
Amboy was not the only bank included in the Kara bankruptcy filing.
National City Bank of Philadelphia holds $48.2 million on loans to Kara. North Fork Bank of Edison holds $21.3 million; TD Bank North of Portland, Ore., holds $15.9 million; Yardville National Bank holds $7.8 million; Magyar Bank of North Brunswick holds $7.5 million; and Park Avenue Bank of New York holds $3 million in loans to Kara.
Kara Homes' bankruptcy filing has left scores of customers and creditors wondering if the troubled builder is going to complete the developments it has under construction and make good on its debts.Questions Questions Questions
In Marlboro, Peter Rallis, owner of All About Construction Inc., said he was forced to lay off 35 of his 50 employees because Kara has not paid him $239,500 it owes him.
Experts, said Kara is an example of what can go wrong to an aggressive builder when the real estate industry collapses. After paying top dollar for land, it is not able to sell its homes at a high enough price to pay off its debts, they said.
Kara's bankruptcy marks a dramatic turnaround. The company built 590 homes and had $288 million in sales in 2005, making it the 127th biggest builder nationwide, according to Builderonline.com. It was named the fastest-growing builder in the nation as recently as 2002 by Builder Magazine.
The fallout from Kara's bankruptcy is far-reaching. The filing lists thousands of creditors. Among the largest unsecured creditors — those with no collateral to rely on — in Monmouth and Ocean counties are: RWZ Inc. Stairs & Rails of Lakewood, which is owed $890,654; Benchmark Inc., also of Lakewood, owed $876,585; and Michael J. Wright Construction Co. Inc. in Dover Township, owed $780,309.
Among the other creditors: Kara's laid-off employees who are owed back wages.
What happens to all those laid off because of this disaster?
What about the down payments lost if projects are not completed?
Can Stairs & Rails afford a $890,654 hit?
Can Benchmark afford a $876,585 hit?
Can Michael J. Wright Construction Co. afford a $780,309 hit?
Can anyone answer those questions?
I can't but I still have more.
What happens to those companies and their employees if the above companies can not afford those hits?
How many people are directly affected so far?
What companies are next?
Hovnanian vs. Kara
While we are all pondering that I see that a Housing slide prompts Hovnanian to cut jobs.
Faced with rising inventories of unsold homes, Hovnanian Enterprises said it plans to ax executive and field jobs to improve its bottom line and weather what the Red Bank-based home builder describes as "the steepest decline in new-home sales in our memory."Well it seems that Vintage Contracting is able to weather this storm but questions still remain on the others. As for believing Larry Sorsby, Hovnanian's chief financial officer, a more serious question is why should we? OK as of right now Hovnanian is in better shape but for the CFO to say that "no comparisons should be drawn" while making comparisons in the next breath seems a bit disingenuous at best. Yes comparison can be made if for no other reason than Larry Sorsby, Hovnanian's chief financial officer, made them. Getting a little spooked are we?
In an internal memo to employees dated Oct. 3, Chief Executive Ara K. Hovnanian said an unspecified number of staff reductions were necessary in order "to remain healthy," as the nation's eighth-largest U.S. home builder grapples with the broad downturn plaguing its industry.
"In many locations, including corporate headquarters, we have been forced to face the fact that we no longer have enough work for all of our Associates," Hovnanian wrote. "We consider this action to be a last resort, but business realities demand action in order for our company to remain healthy and to maximize our performance in a difficult market environment."
Larry Sorsby, Hovnanian's chief financial officer, said yesterday no comparisons should be drawn between his company's decision to tighten its belt and Kara Home's financial troubles.
"We are still in very good shape financially and are still very solidly profitable," Sorsby said. "No one knows for sure (how long the housing slump might last), but we want to prepare the company and our associates as if this is not going to be short term in duration."
Anthony Garofalo, president of Vintage Contracting of NJ in Belmar, has been working with Kara Homes since it started in the mid'90s. He said he has filed about $650,000 in liens against the homebuilder, but because of the size of his business, it shouldn't affect operations.
Ground Zero
Let's now turn our attention to Ground Zero of the housing bubble bust which of course means Florida Condos. Please consider Moody's Cuts Rtgs Of WCI.
tick, tock, tick, tock..... watch the other rating agencies follow..Going forward I expect this is what I expect:
The following is a press release from Moody's Investors Service:
Moody's Lowers Ratings Of Wci Communities; Outlook Negative
Approximately $650 Million of Debt Securities Affected
New York, October 06, 2006 -- Moody's lowered the ratings of WCI Communities, Inc. ("WCI"), including its corporate family rating to Ba3 from Ba2 and the ratings on its senior subordinated notes to B1 from Ba3. This concludes the review that was commenced on July 24, 2006. The ratings outlook is negative.
The downgrade was triggered by a series of increasingly unfavorable developments regarding WCI's new orders, cancellation rates, and revenue and earnings generation, which could be exacerbated if the company's additional share repurchases are not balanced with sizable reductions in outstanding debt to address appropriately its relatively high current debt leverage--now in the mid-60% area.
Going forward, the ratings could be reduced again if the company were unwilling or unable to reduce debt leverage at year end to the mid-to-high 50% range, if earnings turned sharply negative, or if covenant compliance became problematic.
- Ratings to be reduced
- WCI unwilling or unable to reduce debt leverage
- Earnings turning sharply negative
- Covenant compliance becoming problematic
*DJ WCI Communities Updates Third Quarter Earnings Guidance>WCI
*DJ WCI Communities Inc. Lowers 3Q Earnings Guidance >WCI
*DJ WCI Communities Sees 3Q EPS 'Significantly Below' Prior View Of 52c
*DJ WCI Communities Says Still Expects To Report Positive 3Q Net Income
*DJ WCI Communities Cites $13M Write-Off Tied To Land Options
*DJ WCI Communities: Write-Off Cost Co 18c/Shr
*DJ WCI Communities Sees 3Q Combined Tower, Traditional New Orders To Fall 80%
Questions Questions Questions
WCI still "expects" to report positive 3Q income.
Is that a plus or a minus or just plain funny?
What about Q4?
What if they don't?
Who will take a hit and how big will it be?
How many dominoes need to collapse before it dawns on the stock market that there just might be a problem?
Answer the last one and you answer the 64 million dollar question.
Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/
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