Tighter Standards on Loans
May Affect Home Builders

Banks and securities firms are trimming loans, especially to companies tied to the mortgage market. But it is a balancing act: Cutting back too far could make matters worse by accelerating corporate bankruptcies and causing more turmoil in financial markets.

Banks facing the prospect of taking on billions of dollars in buyout-related debt are starting to trim lending to companies that need to refinance loans or restructure their balance sheets.

As banks rein in riskier lending, companies could find themselves unable to refinance loans coming due or to overhaul their businesses. Some companies may be forced to seek bankruptcy protection, a development that would exacerbate bond-market turbulence.

Last week, Beazer Homes USA Inc. disclosed that banks reduced the company's credit line to $500 million from $1 billion. The company said it negotiated a smaller credit line because it didn't need a line as large as the previous one, but analysts said the move likely reflects the banks' concern that Beazer's income will be hurt by both the housing downturn and the federal investigation into its mortgage unit.

Yesterday, in a sign of investors' jittery view of home builders, the stock price of Beazer fell as much as 40% at one point, before closing down 18%, amid rumors the Atlanta company would file for bankruptcy protection. The company strongly denied the rumors.

Beazer's problems are somewhat unique due to the investigation of its mortgage unit by the Federal Bureau of Investigation. The Securities and Exchange Commission also is probing the builder.

But the stock's drop, in part, reflects investors' belief that banks are getting tougher on home builders, and they are fleeing stocks of companies that are dependent on bank financing.

"We don't think the banks will be that forgiving this time around," said Joseph Snider, a senior credit officer at Moody's.

Specifically, banks are worried some builders may come close to tripping contractual agreements that limit the levels of debt in relationship to their corporate net worth, which is typically a builder's assets minus liabilities, goodwill and intangibles, such as trademarks and copyrights.

Many builders haven't been boosting debt to a great extent, but their net worth is eroding because of a decline in home prices, triggering write-downs of their assets. That makes the ratio of debt to net worth rise.

The vast majority of a builder's net worth is tied up in the value of its land and home inventory. Banks were typically comfortable with builders' debt levels because land provided safe collateral. But that collateral is eroding.

"Clearly, this is such a cyclical sector," said Sue Berliner, a credit analyst at Bear Stearns. "But what's disturbing is that some of these guys have written off 20% of their net value."

If banks get skittish, Mr. Snider said they could reduce the size of the credit lines, as they did with Beazer, or require the credit lines to be secured. Most of them are unsecured. Analysts are watching what happens when two other big home builders, Los Angeles-based KB Home and Standard Pacific Corp., of Irvine, Calif., approach their banks to renegotiate their credit lines in the coming weeks.

Banks also are stiffening lending standards and becoming more aggressive in issuing margin calls, or requests for additional cash or collateral, from borrowers.

These moves are affecting a variety of clients, according to market participants. Hedge funds that clear trades and borrow money from prime-brokerage units of Wall Street firms are encountering stricter terms, they said, as are those in "repo," or repurchase agreements, short-term loans from banks that often are used to finance bond investments.

A recent report by Sanford C. Bernstein & Co. analyst Brad Hintz said that in the event of a repeat of a 1998-style credit contraction, the major securities firms with the most at stake would be Lehman Brothers Holdings Inc., Goldman Sachs Group Inc. and Bear Stearns Cos., followed by more diversified firms such as Morgan Stanley and Merrill Lynch & Co.

Executives at major firms said that in general they haven't made big changes to their policies governing how much debt hedge-fund clients can obtain to finance any given basket of fixed-income securities. But they said market-value declines combined with a steep falloff in trading volume in the past few weeks have triggered the need for clients to post extra collateral.

Some Wall Street firms see conservative pricing as their best asset in such an uncertain market.

Lenders at Goldman Sachs, for instance, have been among some of the most careful about marking risky securities, especially those backed by the subprime mortgages that cater to home borrowers with weak credit, said firm employees. While that made Goldman unpopular in the headier days of the mortgage bubble, these people said, it has served the firm well as the subprime market weakened in recent months.

This year, Goldman stock is down 5.2%, with its shares closing up 0.4% yesterday to $189. But other investment banks, including Merrill Lynch, Morgan Stanley, Lehman Brothers and Bear Stearns, are off more than 20% on the year, largely on fears their dealings in the market for risky mortgages could take a bite out of future earnings.

Of that group, Bear has been the worst hit, and its problems have persisted in recent days. Late on Tuesday -- the same day the firm announced it had frozen investor-redemption requests in an $850 million hedge fund called Asset-Backed Securities Fund -- two other troubled funds, the High-Grade Structured Credit Strategies Fund and a sister entity that had additional leverage, filed for bankruptcy protection in a New York City federal court.

At 4 p.m. New York Stock Exchange composite trading yesterday, Bear's stock fell $2.92, or 2.4%, to $118.30.

-- David Enrich contributed to this article.

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