TEXT-S&P assigns William Lyon Homes corporate credit rating

Tue Nov 6, 2012 5:31pm EST

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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. 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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