-- 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.
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.
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,
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
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.
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.
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,
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
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- 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
MDC Holdings Inc.
US$250 mil 6.00% sr unsecd nts due BB+
Recovery Rating 3
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