Standard & Poor's gives rating of BB+ to Toll Brothers' wholly owned subsidiary Toll Brothers Finance's proposed offering of US$250M exchangeable senior notes due 2032
September 4, 2012
– Standard & Poor's Ratings Services today assigned its 'BB+' issue rating and '3' recovery rating to Toll Bros. Finance Corp.'s proposed offering of $250 million of exchangeable senior notes due 2032. Our '3' recovery rating indicates our expectation for a meaningful (50%-70%) recovery in the event of a default.
The new notes will rank equally with Toll Bros. Finance Corp.'s other senior unsecured obligations. The company's indirect parent company, Toll Bros. Inc. (Toll) and all of Toll's subsidiaries that are also guarantors under its revolving credit facility will guarantee the notes. The company will be able to exchange the notes into shares of Toll's common stock and bondholders will have the right to put the notes to the company for cash on Dec. 15, 2017, Sept. 15, 2022, and Sept. 15, 2027.
Toll plans to use proceeds from the offering for general corporate purposes, which may include the repayment of debt, land acquisitions, or distressed real estate investments. From our perspective, the offering will bolster the company's cash holdings, which totaled $877 million at July 31, 2012.
Standard & Poor's Ratings Services' ratings on Pennsylvania-based Toll largely reflect the homebuilder's "satisfactory" business risk profile that is supported by a leading market position in the luxury housing segment. We believe Toll is better positioned to improve profitability relative to most of its homebuilding peers because its sizeable land position and low level of speculative inventory should support our anticipated growth in sales volumes. We expect this improvement despite our outlook for a slow and uneven near-term recovery in single-family housing demand. Furthermore, we believe Toll's strong liquidity position should enable the builder to fund sufficient investments in land and inventory to support sustained growth in revenues and EBITDA over the next two to three years, resulting in substantially improved credit measures. However, although we expect improvement over the next two years, we do not think Toll's key EBITDA-based credit measures will fully recover to the company's stronger, pre-downturn levels until 2014 at the earliest. As a result, we consider Toll's financial risk profile to be "significant."
Our stable outlook acknowledges the company's strong liquidity profile, which we expect will enable Toll to invest in new communities to develop its top line and eventually support better earnings. We would lower our rating if sale trends and profitability measures falter and debt-to-EBITDA appears unlikely to approach the 4x to 6x area by mid-2014. In our view, an upgrade is unlikely over the next 12 months because we expect housing demand, while improving, to remain below historic levels. We could upgrade Toll if the market recovers and the company maintains key credit measures at levels consistent with an "intermediate" financial risk (i.e., debt-to-EBITDA in the 2x to 3x range) profile.
RELATED CRITERIA AND RESEARCH
Issuer Ranking: U.S. Homebuilders, Strongest To Weakest, July 23, 2012
Industry Economic And Ratings Outlook: U.S. Home Buyers Return, But Can Builders Deliver?, July 20, 2012.
Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
Use Of CreditWatch And Outlooks, Sept. 14, 2009
Toll Brothers Finance Corp.
$250 mil Exchangeable sr notes due 2032 BB+
Recovery Rating 3
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