TEXT-Fitch raises Beazer Homes USA ratings
Sept 6 - Fitch Ratings has upgraded the Issuer Default Rating (IDR) of Beazer Homes USA, Inc. (NYSE: BZH) to 'B-' from 'CCC'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this press release. The upgrade and the Stable Outlook reflect Beazer's operating performance so far this year, its robust cash position, and moderately better prospects for the housing sector during the remainder of this year and in 2013. The rating is also supported by the company's execution of its business model, land policies, and geographic diversity. 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's homebuilding revenues for the third quarter year-to-date (YTD) period increased 57.6% to $628.5 million as home deliveries grew 50.6% to 2,820 homes and the average selling price improved 4.6% to $222,900. The company has also reported improved quarterly net sales in each of the last five quarters, contributing to a 31% increase in homes in backlog at June 30, 2012 compared with year ago levels. The significant increase in backlog, combined with the company's strategy to grow community count, should result in moderately higher deliveries in fiscal 2013 compared with 2012. Nevertheless, Fitch does not expect BZH to be profitable in fiscal 2013. The company has taken steps to further strengthen its balance sheet and improve its liquidity position to better participate in the housing recovery. In July 2012, BZH completed underwritten public offerings of its common stock, tangible equity units and a private placement of $300 million of 6.625% senior secured notes. Net proceeds from these transactions were roughly $466 million. Concurrently with the debt offering, BZH called for redemption of all of its $250 million 12% senior secured notes due 2017 and repaid $20 million under its outstanding cash secured term loan. These transactions are projected to lower annual interest expense by approximately $15 million. After giving effect to the debt and equity offerings, the company had unrestricted cash of $417.6 million on a pro forma basis as of June 30, 2012. BZH has also negotiated a commitment letter with four financial institutions for a proposed $150 million three-year secured revolving credit agreement, which would replace the company's existing $22 million revolving credit facility. This credit agreement is expected to close during the September quarter. The improved liquidity position provides BZH with some cushion as Fitch expects the company will continue to have operating losses and negative cash flow through fiscal 2013. Fitch currently expects BZH to end fiscal 2012 with unrestricted cash of between $400 million and $450 million. With higher land and development spending expected next year, unrestricted cash could fall below $250 million by the end of fiscal 2013. BZH increased land and development expenditures in 2011 following four years of reduced spending. The company spent approximately $221.6 million on land and development during fiscal 2011 compared with $182.7 million expended in fiscal 2010. Through the first nine months of fiscal 2012 (ending June 30, 2012), BZH spent roughly $140.6 million on land and land development compared with $177.9 million spent during the first nine months of fiscal 2011. The company expects land and development spending for all of 2012 to be similar to 2011 levels. Given the improvement in the overall housing market, BZH expects to more aggressively pursue growth in new communities going forward. Fitch is comfortable with this strategy given the company's enhanced liquidity position and the fact that BZH has no major debt maturities until 2015, when $172.5 million of senior notes become due. Furthermore, management has demonstrated in the past that it is capable of pulling back on land and development spending when necessary. At June 30, 2012, the company controlled 25,088 lots, of which 84.2% were owned and the remaining lots controlled through options. Based on the latest 12-month closings, BZH controlled six years of land and owned roughly five years of land. The company's owned-lot position includes 4,207 finished lots (or 19.9% of total owned lots), giving the company some discretion and flexibility in controlling its land and development spending. 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. Yet, 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. 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. 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, especially free cash flow trends and uses, and the company's cash position. Beazer'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, and preserves a healthy liquidity position. Negative rating actions could occur if the anticipated recovery in housing does not materialize and the company prematurely steps up its land and development spending, leading to consistent and significant negative quarterly cash flow from operations and diminished liquidity position. In particular, Fitch will review the company's ratings if the company's liquidity position (unrestricted cash plus revolver availability) falls below $200 million. Fitch has upgraded the following ratings for BZH: --Long-term IDR to 'B-' from 'CCC'; --Secured revolver to 'BB-/RR1' from 'B+/RR1'; --Second lien secured notes to 'BB-/RR1' from 'B+/RR1'; --Senior unsecured notes to 'CCC+/RR5' from 'CCC/RR4'; --Convertible subordinated notes to 'CCC/RR6' from 'C/RR6'; --Junior subordinated debt to 'CCC/RR6' from 'C/RR6'. The Rating Outlook is Stable The Recovery Rating (RR) of 'RR1' on Beazer's secured credit revolving credit facility and second-lien secured notes indicates outstanding recovery prospects for holders of these debt issues. The 'RR5' on Beazer's senior unsecured notes indicates below-average recovery prospects for holders of these debt issues. Beazer'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 mandatory convertible subordinated notes and 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.
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