Homebuilder Bank Credit Lines and Leverage

• In Event: Research in Banking and Auditing

Abstract

This paper examines how the leverage of publicly-held, U.S. homebuilder firms responds to changes in bank revolving credit commitments over the business cycle. Prior studies suggest that revolving credit availability is reduced following a covenant violation, and covenant violations are associated with decreased leverage. However, covenant violations are required to be reported only when “uncured”. We consider credit line commitment changes for any reason, going beyond covenant violations to include binding covenants, amendments, creations, and terminations of credit agreements. This expanded set of reasons for credit line changes may directly link credit lines to leverage. We focus on homebuilders to control for shocks to cash flow and investment opportunities. Homebuilders have seasonal cash flows, a relatively long cash cycle, and widely use revolving credit lines. The data on bank revolving credit commitments are hand-collected from 10-Ks from 2002-2012. During the sample period, revolving credit lines provide an important source of liquidity for homebuilding operations such as funding land acquisition, land development, construction, general working capital, and guarantees for letters of credit. Average homebuilder revolving credit availability nearly triples from 2002-2006 and by 2010 drops nearly 100% from the 2006 peak. Empirical results suggest that leverage is positively related to revolving credit availability, but only for periods of decreasing bank credit availability.

Authors

• Christine Harrington, University of Tampa

• Walter P Smith, University of Tampa