TEXT-Fitch rates Toll Brothers proposed notes 'BBB-'
Sept 4 - Fitch Ratings has assigned a 'BBB-' rating to Toll Brothers, Inc.'s (NYSE: TOL) proposed offering of $250 million aggregate principal amount of exchangeable senior notes due Dec. 1, 2032. The Rating Outlook is Stable. The notes will be issued by Toll Brothers Finance Corp., a wholly-owned subsidiary, and will be guaranteed on a senior basis by Toll Brothers, Inc. and certain of its subsidiaries that guarantee its current bank credit facilities. The issue will be ranked on a pari passu basis with other senior unsecured debt, including the company's $885 million unsecured revolving credit facility. Proceeds from the new debt issue will be used for general corporate purposes. Fitch expects leverage to remain within or below Toll's historic debt to capitalization range of 45 - 55%. The net debt to capitalization ratio should be meaningfully lower than its historic range. Toll's ratings and Outlook reflect the company's well-entrenched market position as the pre-eminent public builder of luxury homes, the successful execution of its operating model that has produced one of the better margins within the industry over a cycle and relatively stable debt-protection measures despite significant erosion in profitability during the extended downside of this cycle. The company's liquidity position provides a buffer and supports the current ratings. Significant insider ownership of approximately 14% aligns management's interests with the long-term financial health of Toll. Risk factors include the cyclical nature of the homebuilding industry; the volatility in the value of Toll's extensive land holdings (some of which will be developed over an extended period of time); and the company's primary focus on the luxury housing segment of the market which, although diversified geographically and by product type across many niches within the urban and suburban luxury market, is not as broad as the first-time and first-step trade-up segments. Builder and investor enthusiasm have for the most part surged so far in 2012. However, national housing metrics have not entirely kept pace. Year-over-year comparisons have been solidly positive on a consistent basis. However, month to month the national statistics (single-family starts, new home, and existing home sales) have been erratic and, at times, below expectations. In any case, year to date these housing metrics are well above 2011 levels. As Fitch has noted in the past, recovery will likely occur in fits and starts. (Toll reported contract growth of 43% for the nine months ended July 31, 2012 far exceeding national data, implying market share gain.) Fitch's housing forecasts for 2012 have been raised since early spring but still assume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderate improvement is forecast for 2013. Toll successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash as it pared down its inventory. At July 31, 2012, Toll had cash and equivalents of $601.4 million and marketable securities totaling $275.9 million. During the past three years Toll added to its land position, supported by its strong liquidity. During the third quarter (ended July 31, 2012), the company's lot count increased by 3,023 lots year-over-year. At the end of the July 2012 quarter, Toll controlled 39,208 lots, 80.4% of which are owned with the remaining 19.6% controlled through options. This represents a 13.3-year supply of total lots controlled and a 10.7-year supply of owned land based on trailing 12-month deliveries. Despite its long land position, the company continues to look for opportunities to tie-up land at attractive prices. Fitch is comfortable with this strategy given the company's 45-year track record, cash and 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 and improving liquidity as the economy and housing contract. Toll reported positive cash flow from operations in fiscal 2011 ($52.8 million, including a second quarter tax refund of $154.3 million), as the company continued its land acquisition activities. For the first nine months of 2012 cash flow was negative $234.1 million. Negative cash flow is typical in the early stages of a housing recovery for most of the large public builders. For fiscal 2012, Fitch expects the company to be cash flow negative (in excess of $250 million), reflecting substantial land and development spending during the year. Core land and development spending was approximately $525 million in 2011. Fitch estimates $725 - 775 million of land and development expenditures in 2012. In addition to its strong cash position, Toll has access to an $885 million revolving credit facility that matures in October 2014. At July 31, 2012, the company had no borrowings under the revolver, but had $65.8 million of letters of credit outstanding under the facility. Toll had borrowing availability under the revolver of $819.2 million. At the end of the third quarter, the company had sufficient room under the facility's financial covenants. Toll's debt maturities are well-laddered. $59.1 million of 6.875% senior notes mature in November 2012. The next major debt maturity is in September 2013, when $104.7 million of 5.95% senior notes become due. Leverage has typically been 46% or lower as of fiscal year end over the past eight years. At the end of its fiscal 2012 third quarter, leverage as measured by homebuilding debt to total capitalization was 41.3%. Taking into account its unrestricted cash position and marketable securities, net debt to capitalization was 27.4%. These leverage ratios are appropriate for the rating category, taking into account Toll's cash flow generation and operating risk profile. The company's inventory to net debt ratio, at present 3.7 times (x), has consistently remained in excess of 2.0x, providing a healthy buffer during this housing downturn. A positive rating action would be considered if the recovery in housing is significantly better than our current outlook and the company's credit metrics are above our current projections for 2012 and 2013. A negative rating action could be triggered if Toll's operating and financial performance for this year and next are well below Fitch's current forecasts and its cash and securities position falls below $500 million and the credit line is largely exhausted. 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. Additional information is available at 'www.fitchratings.com'. The ratings above ere solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Liquidity Considerations for Corporate Issuers' (June 12, 2007). Applicable Criteria and Related Research: Corporate Rating Methodology Liquidity Considerations for Corporate Issuers
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