Fitch Ratings today downgraded debt ratings on most of TOUSA Inc.'s commerical paper and dropped the company to a negative outlook.
Fitch, based in New York, said it was taking the ratings action due to "continued challenging housing conditions in most of TOUSA's markets, negative trends in operating margins and the expectation of further deterioration in its credit metrics with the significant debt burden from the completion of the Transeastern JV global settlement." The ratings agency noted that Transeastern deal has left TOUSA with a 68.2% debt-to-capital ratio.
The global settlement ends all litigation involving Transeastern creditors and made it a wholly owned unit of TOUSA. The settlement was financed with $637.5 million in new equity and debt securities, according to Fitch. The settlement was consummated on July 31.
Fitch also noted that the company recently amended its revolver, reducing it from $800 million to $700 million and establishing new performance covenants that allow higher leverage and reduced interest coverage ratios to reflect the Transeastern settlement and market conditions. Fitch said, "This provides the company with some flexibility in terms of navigating through the difficult current market conditions, while also tightening the covenant thresholds starting in 2009 as TOUSA executes is deleveraging strategy. On a pro forma basis using TOUSA's March 31, 2007 borrowing base, the company would have $385 million of availability under the credit facilities, which includes assets and debt associated with the acquisition of...Transeastern."
Specifically, Fitch dropped TOUSA from a negative ratings watch to a negative rating, downgraded its Issuer Default Rating (IDR) to CCC from B- and its Recovery Rating from RR2 to RR1. It also took down the company's $700 million secured revolver from B+ to B-, but assigned a recovery rating of RR2 to both the revolver and its $200 million first-lien term loan, which indicates superior (70%-90%) recovery prospects in the event of default. Fitch assigned a lesser recovery rating of RR5 to TOUSA's $300 million secured second-lien term loan, indicated below average recovery prospects (10% to 30%). It rated the company's unsecured notes and preferred stock issuance with an RR6, meaning poor recovery prospects (0%-10%).