Fitch assigns CCC+/RR5 rating to Beazer Homes' proposed offering of US$200M principal amount of senior unsecured notes due 2021
September 17, 2013
– 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).
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.
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.
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.
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).
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
Liquidity Considerations for Corporate Issuers