TEXT-S&P rates Lennar Corp proposed notes 'B+'
Oct 18 - Standard & Poor's Ratings Services today assigned its 'B+' issue-level rating and '4' recovery rating to Lennar Corp.'s proposed offering of $350 million of senior notes due 2022. Our '4' recovery rating indicates our expectation for an average (30%-50%) recovery in the event of default. Lennar plans to use proceeds from the offering for working capital and general corporate purposes, which may include acquisitions or debt repurchases. From our perspective, the offering will bolster the company's cash balances, which totaled roughly $845 million at Aug. 31, 2012. This balance provides sufficient capital to fund land investment needed to support the meaningful revenue growth that we expect over the next two years. The new notes will rank equally with Lennar's other senior unsecured obligations and will be guaranteed by substantially all of Lennar's homebuilding subsidiaries for as long as these subsidiaries guarantee at least $75 million of parent company obligations. The guarantees can be released under certain circumstances. Our ratings on Miami-based Lennar reflect our expectation that higher sustained revenue growth and improved profitability over the next 12 to 18 months could result in substantial improvement in Lennar's EBITDA-based credit measures. In our view, proceeds from the proposed note offering, along with availability under a $525 million unsecured revolving credit facility executed in May 2012 ($500 million of which is currently committed) should enable Lennar to readily finance near term growth. Given our expectations for community count growth of roughly 20% over the next 18 months and the continuation of higher absorption trends (which totaled 3.2 homes per month during the third quarter of 2012), we believe Lennar could potentially increase revenues by 25% in fiscal 2013. We also believe Lennar's operating margin, which totaled 11.2% for the third quarter of 2012 (among the highest of its peers), will continue to strengthen modestly over our forecast period as Lennar continues to drive more sales from newer, more profitable communities and leverage its operating platform. Under our base-line scenario, we expect adjusted debt-to-EBITDA to approach the high-6x area by the end of 2013, down substantially from 10x at Aug. 31, 2012. This scenario also assumes that funded debt (including recourse debt at Rialto) does not change materially from $4 billion at Aug. 31, 2012, pro forma for the proposed note offering. The substantial reversal of Lennar's deferred tax asset allowance (DTA) over the past two quarters improves balance sheet metrics such as debt-to-total book capitalization, but perhaps more importantly, provides additional support for our expectation that Lennar is likely to post consistent net operating profits over the next two years. Our positive outlook acknowledges our expectation that Lennar's EBITDA-based credit metrics will improve materially over the next 12 to 18 months. We could raise our corporate credit rating to 'BB-' if we think Lennar will continue to post revenue gains in the high 20% area through 2013, while modestly expanding adjusted EBITDA margins to about 11%. Under this scenario, we would expect debt-to-EBITDA to decline to the high-6x area by year-end 2013. However, we could revise the outlook back to stable if sales growth is more moderate than we currently expect and key EBITDA-based credit metrics do not improve to levels more commensurate with similarly rated industrial peers by the end of 2013. We would also lower the rating if liquidity weakens significantly in the absence of a sustainable recovery. RELATED CRITERIA AND RESEARCH -- Industry Report Card: U.S. Homebuilders Pivot Toward Growth, Oct. 17, 2012 -- Issuer Ranking: U.S. Homebuilders, Strongest To Weakest, Oct. 12, 2012 -- Industry Economic And Ratings Outlook: U.S. Home Buyers Return, But Can Builders Deliver?, July 20, 2012. -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011 -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 Ratings List Lennar Corp. Corporate credit rating B+/Positive/-- New Rating Lennar Corp. $350 mil sr nts due 2022 B+ Recovery rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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