Fitch assigns CCC+/RR5 rating to Beazer Homes' offering of US$325M principal amount of 5.75% senior unsecured notes due 2019, based on company's execution of its business model in current housing environment, land policies, geographic diversity, liquidity
Audrey Dixon
CHICAGO
,
April 4, 2014
(press release)
–
Fitch Ratings has assigned a 'CCC+/RR5' rating to Beazer Homes USA, Inc.'s (NYSE: BZH) offering of $325 million principal amount of 5.75% senior unsecured notes due 2019. 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 to fund or replenish cash that is expected to be used to fund the redemption of its 9.125% senior notes due 2018 ($298 million outstanding as of Dec. 31, 2013).
KEY RATING DRIVERS The rating and Outlook 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 and Outlook is also supported by its solid liquidity position. 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). LIQUIDITY BZH ended the December 2013 quarter with $382.6 million of unrestricted cash and no borrowings under its $150 million secured 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. LAND STRATEGY BZH maintains a 5.7-year supply of lots (based on last 12 months deliveries), 79% 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 Dec. 31, 2013 increased 15.4% year-over-year (yoy) and grew 3.5% 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 in 2012. BZH spent roughly $475.2 million on land purchases and development activities during fiscal 2013 (ending Sept. 30, 2013) compared with $185.6 million expended during fiscal 2012. During the first quarter of fiscal 2014, the company spent $123.8 million on land and development, up from the $90 million expended during the same period last year. BZH expects to spend about $500 million on land and development during fiscal 2014. As a result, Fitch expects BZH will be cash flow negative by about $100 million - $150 million this fiscal year. 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. THE INDUSTRY Housing metrics showed improvement in 2013. Single-family housing starts grew 15.4%, while new-home sales increased 16.3%. Existing home sales advanced 9.2% in 2013. The most recent Freddie Mac 30-year interest rate was 4.40%, 109 bps above the all-time low of 3.31% set the week of Nov. 21, 2012. The NAR's latest monthly existing home affordability index was 174.2, well below the all-time high of 213.6, but still meaningfully above the 20-year average. Housing metrics should increase in 2014 due to faster economic growth (prompted by improved household net worth, industrial production and consumer spending), and consequently, some acceleration in job growth (as unemployment rates decrease to 6.9% for 2014 from an average of 7.5% in 2013), despite somewhat higher interest rates as well as more measured home price inflation. Fitch's housing estimates for 2014 are as follows: Single-family starts are forecast to grow almost 20% to 741,000, while multifamily starts expand about 8% to 333,000; single-family new-home sales should grow approximately 20% to 513,000 as existing home sales advance 2.0% to 5.19 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 new-home prices expanded 2.4% in 2011 and grew 7.9% in 2012. Average and median new-home prices improved 9.8% and 8.4%, respectively, in 2013. New-home price inflation should moderate in 2014, at least partially because of higher interest rates. Average and median new-home prices should rise about 3.5% this year. OPERATING ENVIRONMENT There has been some short-term volatility in certain housing metrics following the increase in interest rates (and higher home prices) during the past nine months as well as harsh winter weather conditions in some parts of the country. For the public homebuilders in Fitch's coverage, net order gains substantially slowed or turned negative during the second half of 2013 following strong gains in the first half of the year. On average, net orders for these builders fell 2.1% during the fourth quarter of 2013 (4Q'13) compared with a 1.5% increase during 3Q'13, a 16.8% improvement during 2Q'13, and a 28.2% growth during 1Q'13. Fitch expects weak order comparisons continued during the 1Q'14. The company's new home orders fell 9% during the 2Q'14 (ending March 31, 2014) following a 4% decline during 1Q'14 and a 7.4% improvement during 4Q'13. The drop in net new orders was due primarily to lower community count, which decreased 6% and 8.6% during 2Q'14 and 1Q'14, respectively. The company reported 3.3 sales per community per month during 2Q'14 compared with 3.4 sales per community per month last year. BZH ended the 2Q'14 with 2,163 homes in backlog, a 2.2% decline compared with the same period last year. While there has been some weakness in housing activity so far this year, Fitch expects the housing recovery will continue during 2014. As Fitch noted in the past, the housing recovery will likely occur in fits and starts. RATING SENSITIVITIES 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.
A complete list of ratings follows at the end of this release.
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