TEXT-S&P rates MDC Holdings notes, affirms CCR
Overview -- Denver-based MDC Holdings Inc.'s operating performance has strengthened significantly as the housing recovery has taken hold. We expect the company to continue to grow in 2013 and improve overall profitability. -- We assigned a 'BB+' issue-level rating and a '3' recovery rating to MDC's $250 million 6% senior notes due 2043. -- We affirmed our 'BB+' corporate credit rating and existing issue-level ratings on the company. The outlook is stable. Rating Action On Jan. 8, 2013, Standard & Poor's Ratings Services assigned its 'BB+' issue-level rating and a '3' recovery rating to MDC's $250 million 6% senior notes due January 2043. At the same time we affirmed our 'BB+' corporate credit rating on the company and issue-level ratings on $750 million of debt. The outlook is stable. MDC plans to use the proceeds from the offering for general corporate purposes. The proceeds will bolster MDC's already strong liquidity that consists of cash and marketable securities, which the company could use to fund additional investments in land and prefund its 2014 debt maturity. Rationale The ratings on MDC reflect the company's "fair" business risk profile, which is supported by a homebuilding platform that operates with a shorter than average inventory position (two-three years) that is showing some operating leverage as the housing market continues to recover. MDC has invested in new communities that, in concert with improving fundamentals, have produced strengthened absorption, which is driving volume higher to support a return to profitability. However, our "significant" financial risk profile reflects improving, but still weak EBITDA-based credit metrics, and we assume the company's capital requirements will increase as the company grows in tandem with a recovering housing market. We note that until EBITDA levels can more comfortably service debt, a strong liquidity profile will remain a critical support to ratings. Denver-based MDC sells primarily entry-level and first-time move-up homes under the Richmond American Homes brand name in Colorado, Utah, Nevada, Arizona, California, Maryland, Pennsylvania, Florida, New Jersey, Virginia, and Washington. MDC has to-date reported significantly better operating results in 2012, due to better volume and pricing. Through the first nine months of 2012, MDC delivered 2,519 homes, a 28% increase in volume compared with the same period in 2011. We believe MDC is on pace to deliver roughly 3,700 homes for the full-year 2012, which compares with 2,762 in 2011. Through the third quarter, MDC had exceeded our original expectations and we estimate the company will report income for the full-year 2012 in the $50 million range, its first profitable year (exclusive of any tax benefits) since 2006. We expect MDC will end 2012 with debt/EBITDA of about 7.5x, debt/book capital around 47%, and EBITDA/interest at just over 2x. We previously expected MDC to show further improvement in 2013 resulting in debt/EBITDA within our forecasted range of 4x-5x. However, this most recent opportunistic debt raise will result in higher funded debt relative to recovering EBITDA levels, which will delay the leverage improvement we previously expected. While debt-to-EBITDA leverage will now remain elevated in 2013, we assume the recovery will continue to pick up steam, resulting in continued strong volume growth in 2014. We expect MDC to continue its conservative balance sheet stewardship and use liquidity (excess cash) to repay debt in 2014 to bring leverage metrics back in line with expectations. In the absence of a 2014 debt reduction, we would expect MDC's operating performance to be stronger than currently assumed (due to a more robust recovery) to offset a higher debt load. Our 2013 and 2014 forecast assumes 25%-30% volume growth each year along with modest price appreciation in the 2%-4% range contributing to 100-150 basis point gross margin expansion in 2013 (16.5%-17%) and 2014 (17.5%-18%). We estimate SG&A/revenues to improve to 13%-14% in 2013 and 12%-13% in 2014. These assumptions contribute to estimated EBITDA of $150 million in 2013 and $215 million-$225 million in 2014. Under this scenario, we expect debt/EBITDA to improve, but remain high at 6.5x-7x in 2013 and produce more substantial improvement to 3x-4x in 2014, assuming the $250 million 2014 debt maturity is repaid with excess cash. We would likely lower our corporate credit rating if the company falls short of our expectation for 2013 volume growth. In our view, this would drive underperformance in 2014 relative to our forecast and result in the company not meeting the more substantial improvement we are forecasting in 2014. Liquidity In our view, MDC has a strong liquidity position that is presently more than sufficient to meet its capital needs. Relevant aspects of our assessment of the company's liquidity profile include: -- We expect MDC's sources of liquidity over the next 24 months to exceed uses by 1.0x or more; -- No debt maturities until December 2014; -- The company's remaining cash balance and marketable securities provide capacity to absorb a high-impact, low probability event; and -- The company, in our view, has very prudent financial risk management. We expect MDC will end 2012 with roughly $700 million of cash and marketable securities. However, it is our assumption that MDC will be a net user of cash in 2013 and 2014 as it continues to grow its inventory and community count. We estimate MDC will run an operating cash flow deficit of about $100 million-$150 million in 2013 assuming the company invests roughly $500 million-$550 million in land and is cash neutral to modestly negative in 2014 based on estimated land investments of $550 million-$600 million. We assume, MDC will continue to fund a $47 million common dividend in 2014 (MDC paid the 2013 dividend in 2012 through a special dividend). We assume MDC repays its December 2014 $250 million senior note maturity using excess cash and that MDC maintains a $50 million mortgage repurchase agreement that supports its wholly owned captive mortgage subsidiary. The mortgage facility matures in September, 2013. We believe MDC will continue to maintain comparatively strong liquidity levels relative to its capital needs. Recovery analysis We rate the company's senior unsecured notes 'BB+', the same as our corporate credit rating on MDC Holdings Inc. The '3' recovery rating indicates our expectation for meaningful (50% - 70%) recovery. For our most recent report see "Recovery Report: MDC Holdings Recovery Rating Profile," published Aug. 3, 2012. Outlook Our stable outlook reflects our view that the company will maintain a comparatively strong liquidity position as it shifts toward more aggressive growth. We further expect the company to deliver strengthened EBITDA from its smaller, but well positioned operating platform in the coming two years. We currently see no upside to current ratings, given increasing capital needs and still weak debt-to-EBITDA credit metrics. We would lower our ratings if 2013 performance is weaker than we expect and we conclude that MDC will be unable to achieve lower debt-to-EBITDA credit metrics that are more consistent with the current rating (debt-to-EBITDA in the 3x - 4x area) over the next 24 months. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative Grade Debt, Aug. 10, 2009 Ratings List New Rating MDC Holdings Inc. Senior Unsecured US$250 mil 6.00% sr unsecd nts due BB+ 01/2043 Recovery Rating 3 Ratings Affirmed MDC Holdings Inc. Corporate Credit Rating BB+/Stable/-- MDC Holdings Inc. Senior Unsecured BB+ Recovery Rating 3 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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