Fitch Ratings has assigned a 'CCC+/RR5' rating to Beazer Homes USA,
Inc.'s (NYSE: BZH) proposed offering of $200 million principal amount of
senior unsecured notes due 2021. The notes issue will be ranked on a
pari passu basis with BZH's existing senior unsecured notes. Net
proceeds from the notes offering will be used for general corporate
purposes, including potential land acquisitions.
A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating for BZH is based on the company's execution of its business
model in the current moderately recovering housing environment, its land
policies, and geographic diversity. The company's rating is also
supported by its solid liquidity position. The Stable Outlook takes into
account the positive housing outlook for 2013 and 2014.
Risk factors include the cyclical nature of the homebuilding industry,
the company's high debt load and high leverage, BZH's underperformance
relative to its peers in certain operational and financial categories,
and its current over-exposure to the credit-challenged entry level
market (approximately 60% of BZH's customers are first-time home buyers).
LIQUIDITY
BZH ended the June 2013 quarter with $298.3 million of unrestricted cash
and no borrowings under its $150 million revolving credit facility. The
company's debt maturities are well-laddered, with no major maturities
until 2016, when $172.9 million of senior notes become due.
The company has taken steps over the past year to strengthen its balance
sheet and improve its liquidity position. The proposed $200 million
notes issuance further strengthens BZH's liquidity and its ability to
better participate in the housing recovery.
LAND STRATEGY
BZH maintains a 5.3-year supply of lots (based on last 12 months
deliveries), 79.4% of which are owned, and the balance controlled
through options. As is the case with other public homebuilders, the
company is rebuilding its land position and trying to opportunistically
acquire land at attractive prices. Total lots controlled as of June 30,
2013 increased 7.5% year-over-year (yoy) and grew 9.2% compared with the
previous quarter.
The company has been aggressive in its land and development spending
following the successful execution of its capital markets transactions
last year. BZH spent roughly $314.4 million on land purchases and
development activities during the first nine months of fiscal 2013
compared with $140.6 million expended during the same period last year.
BZH expects to spend about $500 million on land and development during
fiscal 2013 compared with $185.6 million spent for land and development
during 2012.
As a result, Fitch expects BZH will be cash flow negative by
approximately $200 million-$250 million during 2013. Assuming that the
company completes the proposed notes offering, BZH's unrestricted cash
position is projected to be moderately below $500 million at year-end
2013.
Fitch is comfortable with BZH's land strategy given the company's
liquidity position, debt maturity schedule, proven access to the capital
markets, and management's demonstrated discipline in pulling back on its
land and development activities during periods of distress.
THE INDUSTRY
Housing metrics have all showed improvement so far in 2013. For the
first seven months of the year, single-family housing starts improved
20.1%, while existing home sales increased 12%. New-home sales improved
21.8% for the first seven months of 2013. The most recent Freddie Mac
30-year interest rate was 4.57%, 126 basis points (bps) above the
all-time low of 3.31% set the week of Nov. 21, 2012. The NAHB's latest
existing home affordability index was 166, moderately below the all-time
high of 207.3.
Fitch's housing forecasts for 2013 assume a continued moderate rise off
the bottom of 2011. New-home inventories are near historically low
levels and affordability remains very attractive. In a slowly growing
economy with still above-average distressed home sales competition, less
competitive rental cost alternatives and low mortgage rates (on
average), the housing recovery will be maintained this year.
Fitch's housing estimates for 2013 are as follows: Single-family starts
are forecast to grow 18.3% to 633,000 while multifamily starts expand
about 19% to 292,000; single-family new-home sales should grow
approximately 22% to 448,000 as existing home sales advance 7.5% to 5.01
million.
Average single-family new-home prices (as measured by the Census
Bureau), which dropped 1.8% in 2011, increased 8.7% in 2012. Median home
prices expanded 2.4% in 2011 and grew 7.9% in 2012. Average and median
home prices should improve approximately 5% and 4%, respectively, in
2013.
As Fitch noted in the past, the housing recovery will likely occur in
fits and starts.
RISING MORTGAGE RATES
Mortgage rates have increased during the past few months. The most
recent Freddie Mac average mortgage rate was 4.57%, flat sequentially
from the previous week and about 100 bps higher than the average rate
during the month of April 2013, a recent low point for mortgage rates.
While the current rates are still well below historical averages, the
sharp increase in rates and rising home prices are moderating
affordability. In the case of BZH, whose average home price is roughly
$248,000, assuming a 20% down payment, a 100 bps rise in mortgage rates
will increase principal and interest payment by about $120 each month or
a 12.5% impact.
A couple of July housing metrics showed some weakness following the
increase in interest rates during the past few months. The Pending Home
Sales Index declined 1.3% to 109.5 in July from 110.9 in June, although
it is still 6.7% above the July 2012 level of 102.6. New home sales in
July also fell 13.4% on a seasonally-adjusted basis to 394,000, compared
with 455,000 during the previous month. However, the July 2013 estimate
was 6.8% above the July 2012 sales level of 369,000. While Fitch does
not expect the current higher mortgage rates to derail the housing
recovery, continued sharp increases in rates could moderate it.
OPERATING ENVIRONMENT
BZH's revenues for the first nine months of its 2013 fiscal year (ending
June 30, 2013) increased 33.8% to $849.2 million as home deliveries grew
20.5% to 3,399 homes and the average selling price advanced 11.3% to
$248,000.
Gross profit margins (excluding inventory impairments and lot option
abandonments) also showed strong improvement, growing 460 bps to 16%
during the first nine months of fiscal 2013 compared with 11.4% during
the same period last year. SG&A as a percentage of sales declined to
14.1% during the nine-month period in fiscal 2013 from 17.3% last year.
Despite the strong results for the first nine months of the year, BZH
reported a pre-tax loss of $44.5 million during the period. Fitch
currently expects BZH to remain unprofitable during all of fiscal 2013.
New home orders improved 1.1% during the nine-month period but fell
11.2% yoy during the third quarter of 2013 (3Q'13). The decline in net
new orders was due primarily to lower community count, which decreased
19.1% to 144 average active communities during 3Q'13 compared with 178
during 3Q'12. However, the company reported 3.2 sales per community per
month during 3Q'13 compared with 2.9 sales per community per month last
year. Cancellation rates also improved 450 bps to 20% during 3Q'13
compared with 24.5% during 3Q'12. BZH ended 3Q'13 with 2,358 homes
(-2.6% yoy) in backlog with a value of $646.1 million (+12.8% yoy).
RATING SENSITIVITIES
Future ratings and Outlooks will be influenced by broad housing market
trends as well as company-specific activity, such as trends in land and
development spending, general inventory levels, speculative inventory
activity (including the impact of high cancellation rates on such
activity), gross and net new-order activity, debt levels, free cash flow
trends and uses, and the company's cash position.
BZH's ratings are constrained in the intermediate term due to weak
credit metrics and high leverage. However, positive rating actions may
be considered if the recovery in housing is maintained and is
meaningfully better than Fitch's current outlook, BZH shows continuous
improvement in credit metrics (particularly debt-to-EBITDA consistently
below 8x and interest coverage above 2x), and preserves a healthy
liquidity position.
Negative rating actions could occur if the recovery in housing
dissipates, resulting in BZH's revenues and operating losses approaching
2011 levels, and the company maintains an overly aggressive land and
development spending program. This could lead to consistent and
significant negative quarterly cash flow from operations and diminished
liquidity position. In particular, Fitch will review BZH's ratings if
the company's liquidity position (unrestricted cash plus revolver
availability) falls below $200 million.
Fitch currently rates BZH as follows:
--Long-term Issuer Default Rating 'B-';
--Secured revolver 'BB-/RR1';
--Second lien secured notes 'BB-/RR1';
--Senior unsecured notes 'CCC+/RR5';
--Junior subordinated debt 'CCC/RR6'.
The Rating Outlook is Stable.
The Recovery Rating (RR) of 'RR1' on BZH's secured credit revolving
credit facility and second-lien secured notes indicates outstanding
recovery prospects for holders of these debt issues. The 'RR5' on BZH's
senior unsecured notes indicates below-average recovery prospects for
holders of these debt issues. BZH's exposure to claims made pursuant to
performance bonds and joint venture debt and the possibility that part
of these contingent liabilities would have a claim against the company's
assets were considered in determining the recovery for the unsecured
debtholders. The 'RR6' on the company's junior subordinated notes
indicates poor recovery prospects for holders of these debt issues in a
default scenario. Fitch applied a liquidation value analysis for these
recovery ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802253
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