S&P assigns BB+ rating to Toll Brothers subsidiary's proposed offering of US$300M of senior notes due 2023, recovery rating of 3
April 3, 2013
– Standard & Poor's Ratings Services today assigned its 'BB+' issue rating and '3' recovery rating to Toll Brothers Finance Corp.'s proposed offering of $300 million of senior notes due 2023. 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 Brothers Finance Corp.'s other senior unsecured obligations. The company's indirect parent company, Toll Brothers Inc. (Toll), and all of Toll's subsidiaries that are also guarantors under its revolving credit facility will guarantee the notes. Toll plans to use proceeds from the offering for general corporate purposes, which may include the repayment or repurchase of debt.
Standard & Poor's ratings on Pennsylvania-based Toll largely reflect the homebuilder's "satisfactory" business risk profile, which is supported by a leading market position in the luxury housing segment. Toll's emphasis on move-up and luxury new home buyers has historically enabled it to generally achieve higher gross margins (adjusted for interest in cost of goods sold) than most of its homebuilding peers. This is, in part, due to higher average sales prices and lower cancellation rates. We view Toll's financial risk profile as "significant." Key EBITDA-based credit metrics are currently weak for the rating, but we believe Toll is well positioned to improve profitability because its sizeable land position and low level of speculative inventory should enable the company to significantly grow sales volumes and increase margins over the next two to three years. As a result, we expect credit metrics will improve substantially over this time frame, approaching stronger, predownturn levels by year-end 2014.
The stable outlook reflects our expectation that the company's well-positioned operating platform in the luxury U.S. housing segment will drive strong growth in sales volumes and revenue over the next two years. We also believe that Toll's strong liquidity position will enable the company to continue to maintain substantial investments in land and inventory needed to sustain profitable growth over the next two to three years. As a result, we believe key credit metrics will improve, with debt to EBITDA declining to about 4x by year-end 2014 and debt to total capital approaching the mid-30% area.
RELATED CRITERIA AND RESEARCH
Toll Brothers Inc.
Toll Brothers Finance Corp.
Corporate Credit Rating BB+/Stable
Toll Brothers Finance Corp.
$300 mil. senior notes due 2023
Senior Unsecured BB+
Recovery Rating 3
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