As home builder gets a lifeline, bearish traders get zinged
The hefty capital infusion announced today for battered home builder Standard Pacific Corp. was a surprise to Wall Street -- and a particularly nasty surprise to short-sellers who have been betting that the Irvine-based company was headed for bankruptcy.
Standard Pacific’s shares surged $1.07, or 48%, to $3.29 after New York private-equity firm MatlinPatterson Global Advisers agreed to pump $530 million into the firm.
The action in the stock had a "short-covering" feel to it: buying by bearish traders who had previously borrowed shares and sold them, hoping the price would drop. If their bet was correct they could replace the loaned stock at a lower price and pocket the difference. With a white knight now in Standard Pacific's camp, it looks like some of the shorts were scrambling to exit their trades today.
Short-sellers have had the home builder in their sights for the last year as the company’s earnings have dwindled and its debt problems have mounted. The number of Standard Pacific shares sold short ballooned from 17 million in May 2007 to 47 million by mid-January. And the shorts had it right: In the same period the stock plunged from $21.32 to as low as $2.06.
As the stock recovered a bit in winter some short-sellers cashed out of their bearish bets, trimming the number of shorted shares to 36.6 million by April 30.
But the bears jumped on the company again this month, boosting the shorted total to 43 million shares by May 15 -- more than half the shares outstanding. That looked smart as the stock sank from $5.06 on April 30 to $2.22 on Friday. It didn’t look quite so smart today as MatlinPatterson rode in.
The rescuer, a well-known investor in distressed companies, is buying preferred stock convertible into common shares. That will substantially dilute current investors, so Standard Pacific will have to call a shareholder meeting for approval of the deal.
Given its need for cash, "This probably was the company's only choice," wrote Vicki Bryan, senior high-yield analyst at Gimme Credit, an independent research service on corporate bonds, in a report today. She noted that Standard Pacific has had to negotiate with its lenders to avoid falling into technical default on its loans.
David Matlin, CEO of MatlinPatterson, said in a statement that the builder was a "strong franchise [that] is well-positioned for renewed profitability and success as conditions improve."
That wasn’t what the shorts wanted to hear.