Owens Corning bonds tumbled 15 points last week on concerns of a downturn in the housing market. The company's 7 1/2% '18 bonds fell to 83, before rebounding three-and-a-half points to 85 1/2. The bonds were trading as high as 108 June 7. Owens Corning bonds have fallen about 35 points over the past two weeks, according to a trader. Its bank debt fared better, however, trading steadily in the 156-157 context.
The downturn in the equity markets and concerns the Federal Reserve will continue to raise interest rates are hurting the bonds. Under the company's plan of reorganization, bondholders will receive cash and equity when it emerges from bankruptcy later this year. In general, investors are concerned that homebuilder stocks will not perform well, said a trader. Owens Corning makes homebuilding products, such as insulation and roofs. An Owens Corning spokesman said the company does not speculate on the reasons why its bonds trade at particular levels.
The bonds of several other homebuilders, such as Standard Pacific, Hovnanian Homes and Beazer Homes USA, also fell. The bonds of some homebuilders rebounded mid-week after Citigroup published a positive research note on the sector, predicting a rebound in homebuilders' stocks by year end. Standard Pacific's 6 1/4% '14 notes were down to 87 from 88 3/4, then rebounded to 91. Beazer Homes' 6.5% '13 bonds fell to 90 1/8 from 92 before rebounding to 93 1/2. Hovnanian Homes 6 1/2% '14 bonds were down two points to 88 1/2.
In a research report, KDP Advisors said the weakness in homebuilders' bonds was precipitated by two large U.S. homebuilders, Pulte Homes and Standard Pacific, reporting a decline in orders in April and May. Pulte Homes' orders were down 29% below the comparable two-month period in 2005. "Buyer demand through April and May has been below expectations and below prior year levels," says Richard Dugas, president and ceo, in a release. "Current demand varies by market, but overall it continues to transition after an extended period of stronger sales." Standard Pacific said new home orders for the first two months of 2006 were down 41% from the same period a year earlier. It says in a release, that this was driven mostly by an increase in its cancellation rate and continuing softening demand in its larger markets. Hovnanian also reported an 18.5% decline in February to April orders compared to the same period last year.
According to KDP, the impact of speculators trying to unload their investments is more severe than most have anticipated. Speculators buy new homes with the intention of flipping them for a profit. As a result, potential home buyers are growing more cautious and have increased cancellations. "Although our projections for several homebuilders already reflect our expectations of a slowdown in the housing market, we may need to revise our forecasts lower if the lag in orders from oversupply does not correct itself within the next few months," says the KDP report.
