Fitch Ratings: Assigning a BBB- rating to Toll Brothers' US$300 million debt issue; outlook stable
January 31, 2012
– Fitch Ratings has assigned a 'BBB-' rating to Toll Brothers Inc.'s (TOL) $300 million senior unsecured notes due February 2022. The Rating Outlook is stable.
The notes will be issued by Toll Brothers Finance Corp., a wholly-owned subsidiary, and will be guaranteed on a senior basis by Toll Brothers, Inc. and certain of its subsidiaries that guarantee its current bank credit facilities and its senior notes. The issue will be ranked on a pari passu basis with other senior unsecured debt, including the company's $885 million unsecured revolving credit facility. Proceeds from the new debt issue will be used for general corporate purposes, which may include the repayment or repurchase of certain of Toll's outstanding indebtedness. Fitch expects leverage to remain within or below Toll's stated debt to capitalization target range of 45%-55%. The net debt to capitalization ratio should be meaningfully lower than its target range.
Toll's ratings and Outlook reflect the company's well-entrenched market position as the pre-eminent public builder of luxury homes, the successful execution of its operating model that has produced one of the better margins within the industry over a cycle and relatively stable debt-protection measures despite significant erosion in profitability during the extended downside of this cycle. The company's liquidity position provides a buffer and supports the current ratings. Significant insider ownership of approximately 14% aligns management's interests with the long-term financial health of Toll.
Risk factors include the cyclical nature of the homebuilding industry; the volatility in the value of Toll's extensive land holdings (some of which will be developed over an extended period of time); and the company's primary focus on the luxury housing segment of the market which, although diversified geographically and by product type across many niches within the urban and suburban luxury market, is not as broad as the first-time and first-step trade-up segments.
As expected, the housing recovery has been irregular so far and to date quite anemic. Various housing and related statistics appear to have bottomed in early to mid-2009. Since then the on, then off, then on again federal housing credit at times spurred or at least pulled forward housing demand. With the U.S. economy moving from recession to expansion in the third quarter of 2009, plus very attractive housing affordability and government incentives, housing was jump-started. However, faltering consumer confidence, among other issues, has restrained the recovery so far. New home sales and single-family starts retested the bottom during the summer of 2010 and in February 2011.
Despite its long land position, the company continues to look for opportunities to tie-up land at attractive prices. Fitch is comfortable with this strategy given the company's 45-year track record, cash and 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 and improving liquidity as the economy and housing contract.
Toll reported positive cash flow from operations in fiscal 2011 ($52.8 million, including a second quarter tax refund of $154.3 million), as the company continued its land acquisition activities. Negative cash flow is typical in the early stages of a housing recovery for most of the large public builders. For fiscal 2012, Fitch expects the company to be moderately cash flow negative, reflecting substantial land and development spending during the year. Core land and development spending was approximately $500 million in 2011 and a similar level of expenditures is probable in 2012, excluding the recently concluded CamWest Development LLC acquisition.
In addition to its strong cash position, Toll has access to an $885 million revolving credit facility that matures in October 2014. At Oct. 31, 2011, the company had no borrowings under the revolver, but had $100.3 million of letters of credit outstanding under the facility. Toll had borrowing availability under the revolver of $784.7 million. At the end of the fourth quarter, the company had sufficient room under the facility's financial covenants.
Toll's debt maturities are well-laddered. $139.8 million of 6.875% senior notes mature in November 2012. The next major debt maturity is in September 2013, when $141.6 million of 5.95% senior notes become due.
Leverage has typically been 46% or lower as of fiscal year-end over the past eight years. At the end of its fiscal 2011 fourth quarter, leverage as measured by homebuilding debt to total capitalization was 38.1%. Taking into account its unrestricted cash position and marketable securities, net debt to capitalization was 15.0%. These leverage ratios are appropriate for the rating category, taking into account Toll's cash flow generation and operating risk profile.
The company's inventory to net debt ratio, at present 4.9 times (x), has consistently remained in excess of 2.0x, providing a healthy buffer during this housing downturn.
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.