S&P affirms BB+ corporate credit rating, issue-level ratings on senior notes for Toll Brothers following announcement of acquisition of Shapell Industries; rating outlook stable
November 7, 2013
Standard & Poor's Ratings Services said today it affirmed its 'BB+' corporate credit rating on Toll Brothers Inc. and its subsidiary, Toll Brothers Finance Corp. We also affirmed our 'BB+' issue-level ratings on the company's senior notes. The recovery rating is unchanged at '3', which indicates our expectation for a meaningful (50% to 70%) recovery in the event of payment default. The outlook is stable.
The rating affirmation follows Horsham, Pa.-based Toll Brothers' recent announcement that it has agreed to acquire Shapell Industries Inc. for $1.6 billion in cash. We expect the acquisition to close in the first quarter of 2014, subject to customary closing conditions and regulatory approvals.
Our rating on Toll reflects 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 enabled it to generally achieve higher gross margins than most of its peers, in part due to higher average sales prices and lower cancellations.
"We believe the Shapell acquisition will bolster Toll's California market position, where its land position had been declining and there is significant competition for lots," said Standard & Poor's credit analyst George Skoufis.
The stable outlook reflects our expectation that the company can successfully deleverage the balance sheet through asset sales and cash flow generation to meet or exceed our base case forecast and is committed to further reducing leverage to 4.0x or lower. We would lower the rating if we believe leverage will instead remain at 5x or higher over the next 12 to 18 months, which could be the result of difficulty disposing of assets or weaker-than-expected home sales and profitability. We see limited upside to the rating at this time, given elevated debt to EBITDA metrics, particularly following the closing of the Shapell acquisition, growing capital needs, and an expanding appetite for vertical construction projects.
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