TEXT-S&P assigns William Lyon Homes corporate credit rating
Nov 6 () - Overview -- William Lyon Homes Inc.'s successful exit from Chapter 11 bankruptcy on Feb. 25, 2012, has allowed it to improve its balance sheet through debt reduction and new equity contributions. -- We are assigning a 'B-' corporate credit rating to the company and a 'B-' issue-level rating to the company's proposed $300 million senior unsecured notes. -- We also are assigning a '4' recovery rating on the senior unsecured notes. -- The stable outlook reflects our view that the company's operating performance will continue to improve as a result of a relatively stronger housing market and adequate liquidity position. Rating Action As Standard & Poor's Ratings Services previously announced, on Oct. 31, 2012, Standard & Poor's assigned a 'B-' corporate credit rating to William Lyon Homes Inc. and a 'B-' issue-level rating to the company's proposed $300 million senior unsecured notes. We also assigned a '4' recovery rating on the senior unsecured notes, indicating our expectation for an average (30%-50%) recovery in the event of a payment default. The outlook is stable (see list). Rationale Our ratings on William Lyon reflect the company's "highly leveraged" financial profile, marked by low interest coverage and debt leverage metrics that remain high following its reorganization. We consider the company's business profile as "vulnerable", given William Lyon's relatively small homebuilding platform and its uncertain ability to generate the necessary level of new home sales to reach sustained profitability in the near-term. Newport Beach, Ca.-based William Lyon is a privately-held, regional homebuilder with operations concentrated in Nevada, Arizona, and California. It engages in the design, construction, marketing, and sale of single-family detached homes, attached townhomes, and condominiums. The company's core market consists primarily of entry-level and first-time move-up buyers. During the trailing-12-months ended Sept. 30, 2012, William Lyon closed on 811 homes with an average selling price of $273,000 and generated roughly two-thirds of revenue from its California markets. William Lyon successfully exited bankruptcy on Feb. 25, 2012, after filing a prepackaged plan under Chapter 11 of the U.S. bankruptcy code on Dec. 19, 2011. As a result of the restructuring, the successor company reduced outstanding debt to $381 million from $563 million and raised $85 million of cash equity in the process. Since its exit from bankruptcy, William Lyon has raised an additional $30 million of cash and $10.5 million of inventory in exchange for new equity through October 2012. Leverage is improved as a result of the restructuring process and recent equity contributions, but remains elevated in our opinion. Debt-to-total capitalization is projected to be 68% pro forma for the new $30 million equity investment and proposed note issuance, down from 74% at the end of the third quarter 2012 and 143% prior to the restructuring process. Homebuilding debt-to-EBITDA on a trailing-12-month basis was close to 17x (excluding land sales). While we expect this measure to decline as volume strengthens, it should remain above that of most rated builders over the next year. In the first two full quarters since its emergence, the company's new home deliveries were up 56%, backlog has doubled, and adjusted gross margins expanded by 440 basis points over those of the prior year. Our base-case scenario analysis assumes that the company continues to report operational improvements as a result of a relatively stronger housing market and increased flexibility from recent equity investments. We also expect William Lyon to invest the new capital and utilize existing land holdings to expand its relatively modest homebuilding platform over the next two years. Consequently, we project debt-to-EBITDA to fall to the 13x-14x range in 2013. We do not forecast EBITDA to fully cover interest incurred for the full year 2013. Liquidity William Lyon's liquidity is adequate to meet its existing working capital needs over the next 12 months, in our view. We base our liquidity assessment on the following factors: -- We expect the company's liquidity sources (including cash and EBITDA) over the next year to exceed its uses by over 1.2x; and -- There are no material debt maturities until November 2020. William Lyon's sources of liquidity, pro forma, for the note issuance and equity raise included $77 million of unrestricted cash and any proceeds from the potential future sale of land. The company is also pursuing commitments of up to $75 million for a new first lien revolving credit facility and our current ratings incorporate the expectation that it will be fully available at closing. Identified uses of cash over the next 12 months include land development funding on existing projects for regular working capital purposes, any discretionary spending on new land and development, and a projected $25 million to $30 million of interest expense. We project operating cash flow to be modestly negative over the next year. Recovery analysis The '4' recovery rating on William Lyon's proposed senior unsecured notes indicates our expectation for an average (30%-50%) recovery in the event of a payment default. Outlook The stable outlook reflects our expectation that William Lyon's operating performance will continue to improve as a result of a relatively stronger housing market and increased flexibility from recent equity investments and debt reduction. We would consider a downgrade if the company's liquidity becomes constrained, covenant cushions materially decline, or macroeconomic conditions cause the housing market to take another sharp turn downward. We view an upgrade as less likely in the next 12 months given the smaller size of the company's homebuilding operations and its still elevated leverage position. Related Criteria And Research -- U.S. Homebuilders Pivot Toward Growth, Oct. 17, 2012 -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 8, 2011 Ratings List Ratings Assigned William Lyon Homes Inc. Corporate credit B-/Stable/-- $300 million notes B- Recovery rating 4 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. 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