Standard Pacific Sinking in Debt

Of course, assuming a builder can sell homes fast enough in a horribly slumping market is a big assumption.

More and more homebuilders are offering aggressive price cuts to clear homes, and this is causing buyers who bought in previous months to cancel contracts. This makes Lee, the CreditSights analyst, skeptical that Standard Pacific can create enough cash flow to service the debt.

Many homebuilders claim they have moved units in these inventory-clearing sales, yet their cancellation rates are reaching 50% to 60%, Lee says. "They're not exactly converting these sales contracts into cash at end of day," he adds.

Cash Questions

Standard Pacific's debt maturities come at a time when it has already had trouble generating cash flow.

In the first half of this year, the builder generated $322.2 million of cash flow from operations, but only $103.8 million of that came from reducing the inventories on its balance sheet. Most of the cash flow came from selling mortgage loans and collecting receivables.

Strip out some of these non-homebuilding items, and the company barely covered the $71 million of interest payments on its debt. Forget about any pay-downs of principal.

At the end of June, the company's revolving credit facility had a balance of $257 million; in late September, the balance rose to $382 million, according to recent regulatory filings.

In Standard Pacific's third-quarter report, inventors should continue to eye the firm's cash-flow-generating ability, along with any disclosures on the credit agreements and total liabilities.

"If they continue along this path, where they can't generate cash, have problems with the joint ventures and are not able to meet covenants on the bank loan, banks might say they need to restructure that debt in Chapter 11," Lee says.

"Banks want to be supportive," he says, "but they're not stupid."