A New Jersey home builder that has filed for bankruptcy protection owes a dozen banks $248 million, and though bankers say they are confident they will be repaid, some other observers are wondering if the filing is a sign of things to come.
Kara Homes Inc., which builds townhouses, condominiums, and single-family homes, primarily on land it owns, filed for bankruptcy last week. The East Brunswick company's creditors include large banking companies such as ING Bank FSB (which does business under the ING Direct brand), Bank of America Corp., and National City Corp., as well as small, local banks such as Magyar Bank and Amboy National Bank.
There is some question, though, about the banks' level of exposure.
In its bankruptcy filing, Kara listed all its creditors as having unsecured, nonpriority claims, but several bankers and analysts said that it was an error, and that each loan is secured by a first lien on the property.
Kara did not return a call seeking clarification.
Amboy, in New Brunswick, is owed $58.2 million, which works out to more than 26% of its tangible capital. But Amboy president George Scharpf said that it believes its losses will be minimal, since all its loans are secured by a first lien. He also pointed out that Kara plans to reorganize, not liquidate itself.
"We believe, barring lots of other things that can happen in this world, that it'll work out - for all the banks, I think," Mr. Scharpf said.
Still, Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP, said that bankers should be concerned about lending to builders.
Home sales in many high-priced markets have slowed significantly, and "many home builders like Kara have taken on a lot of debt and built a lot on spec in the last year," Mr. Fitzgibbon said. "I think we will see more home builders struggling from a cash-flow perspective, and you may see more of these kinds of filings in the days, weeks, months ahead."
Second-quarter New Jersey home sales declined 16% from a year earlier - the steepest decline in 15 years, according to the Federal Deposit Insurance Corp.'s quarterly state profiles report released last month.
Banking regulators, already concerned about exposure to developers, are likely to keep close tabs on the banks affected by Kara's filing.
This year federal regulators proposed guidelines that would require banks with high concentrations of commercial real estate or construction loans to hold more capital against them. The guidelines would consider a bank or thrift at risk if its construction, land development or other land loans make up 100% or more of its capital, or if its loans secured by multifamily and nonresidential properties and its construction, land development, and other land loans exceed 300% of capital.
The banking industry - and many members of Congress - oppose the proposed guidelines, arguing that they are too broad and could lead to a credit crunch. Regulators have yet to finalize the guidelines but have said they intend to be flexible in applying them.
Bret Ginesky, an analyst at BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc., said it is possible that other home builders would file for bankruptcy protection, though many have been around longer than Kara and have weathered down cycles before.
Though other builders started scaling back a year ago, Kara, which was started six years ago and had been on Inc. magazine's list of the 500 fastest-growing privately held companies for several years, continued to build quickly.
"If you look at the history of Kara Homes, it's kind of like an Internet stock. It had everything there to eventually blow up," Mr. Ginesky said. "They bought up a lot of land, tried to build it up as fast as they could, and then the demand was gone."
Mr. Scharpf agreed that the Kara's bankruptcy filing could be an isolated event. Home sales in central New Jersey, though slower than they were a year ago, are still "moderate," he said. "We don't see that there's weakness in general. Kara had a specific expansion problem."
However, Mr. Fitzgibbon said the filing could have a ripple effect on the New Jersey economy. Kara's debt is close to $300 million.
"I was amazed that there were literally thousands of local creditors - small businesses, contractors, plumbing supply companies - and the amount of money outstanding was, frankly, staggering," he said. "I think it has to have some ripples."
Some of the suppliers are owed over $1.5 million, according to the filing.
Magyar Bank, of New Brunswick, said Tuesday that even though losses are possible, it expects full payment on the loans it made to Kara. Magyar made four construction loans worth $7.58 million, but other banks participated in two of the loans, limiting its exposure to $5.1 million.
However, the Magyar Bancorp Inc. unit cautioned that it might incur "significant additional expenses" to resolve the situation.
Shares of Magyar Bancorp have dropped 5% since Kara's filing. They closed at $12.76 Wednesday.
Magyar also said that it has a first-lien position on the property securing the loans, and that the maximum loan-to-value ratio is 75% of the property's appraised value.
In a research note issued Monday, Mr. Ginesky maintained his "outperform" rating on Magyar Bancorp's stock but wrote that he would continue to monitor the situation.
"It is premature to assume that chargeoffs will occur," he wrote.
