Private builders increasingly under duress

Recently I've been hearing increasing reports of subs and suppliers not getting paid by homebuilders. In the case of Barratt, it's been due to cash flow problems resulting from its longtime lender, Bank of America, declining to provide new financing. From a BuilderOnline.com article:

This week, Barratt American expects to have short-term loans in place, secured through the sale of “unencumbered assets,” to shore up a cash-flow problem caused by a significant decline in its business. That decline recently led Barratt’s primary lender, Bank of America, to cut off the Carlsbad, Calif.-based builder after a 28-year relationship.

“I call it ‘constructive default,’ ” says Mick Pattinson, Barratt’s president and co-owner, who spoke with BUILDER on Friday. “We’re not in default, but the bank wouldn’t renew our two loans.” He explains that his company had a $125 million credit facility with Bank of America, of which $100 million were available when the bank informed Barratt seven months ago that it would not go forward with its lending. Barratt drew another $30 million of that facility, although at higher interest rates, until Pattinson balked at the expense and found himself without a line of credit to tap...

“We’ve been stymied without cash,” Pattinson tells BUILDER. His company’s inability to pay its bills has triggered more than 40 lawsuits filed mostly by subcontractors with liens against the company’s assets that guarantee payment for labor and materials.

Pattinson confirmed he has been in London seeking private equity money, where “we’ve been getting a good reception.” (Pattinson is British and Barratt was once based there.) He is confident that he’ll find new financing from overseas sources, and can settle disputes with vendors or contractors. “They understand how we got here, and we’ve had relationships with some of them for 10, 15 years.” The bigger problem for his company, and builders in general, is that domestic capital has dried up. “Right now, you couldn’t get cash from a bank to build a house if your life depended on it,” he laments.

What irks Pattinson is how Bank of America rewarded his company’s decades-long loyalty by throwing Barratt under a bus the minute business went soft. “When times were good, we had banks lining up in our lobby for our business, but we told them we were with Bank of America. Now, when times are bad, we get screwed. The banks are a disgrace.”