The leading rating agencies are split on how rising interest rates will affect the creditworthiness of companies in the homebuilding sector, with Standard and Poor's taking a more cautious approach than Moody's Investors Service, according to market participants. The split was recently highlighted when Moody's put the ratings of two high-yield bonds on watch for upgrade while S&P left them stable due to concerns about rising rates.
"Moody's seems more supportive of the homebuilding sector; it takes an interest-rate independent approach. S&P is more hesitant to raise company ratings," said Ryan Bailes, associate and homebuilding analyst at Banc of America Securities.
Specifically, Moody's earlier this month signaled it may upgrade D.R. Horton and KB Home, two credits S&P and Moody's rate similarly at double-B plus/Ba1.
Lisa Sarajian, managing director in the real estate financial group at S&P, agreed it may be more conservative. "There are some soft pockets brewing in the industry that are fairly abundant," she stated, expressing concern over aggressive lending and the impact higher rates could have on these borrowers. "Companies are building to a legitimate demand, but selling to a weaker creditor," she explained.
Moody's sector outlook is stable-to-positive even in a rising-rate environment, said Joseph Snider, v.p. and senior credit officer at Moody's. "We had been expecting the homebuilding industry to peak, but for the last couple of years the industry has continued to do better," he stated. "We are looking at the possibilities of a downturn and are not spooked by it," he added.