The proposed merger of Centex Corp. (NYSE:CTX) into Pulte Homes Inc.(NYSE:PHM) will create not only the nation's largest builder but the largest home building debt load, estimated at roughly $6.2 billion.

The combined entity would have a 61% ratio of debt to total capital, actually an upgrade for Centex, which at yearend 2008 was at 69.3%, but a step down for Pulte, which was at 52.8%.

The three major credit ratings agencies reacted swiftly to news of the proposed deal. Fitch was the most bullish, Standard & Poor's less so. Moody's warned of a possible downgrade. Both Pulte and Centex debt were previously rated as junk and remained so after the ratings updates.

Fitch affirmed its previous "BB+" on Pulte's Issuer Default Rating, senior unsecured notes and unsecured bank facility. Though that is a junk rating, it is the highest such rating and indicates exposure to swings in the economy.

S&P put its "BB" corporate and senior debt credit ratings on Pulte on "watch negative" but moved Centex's "BB-/negative" corporate credit and senior debt ratings up to 'BB-/watch positive." S&P left its recovery ratings, meant to indicate how much that lenders could get back in the event of default, at "3" for Pulte, meaning 50% to 70%, and "4" for Centex, meaning 30% to 50%.

Moody's, on the other hand, put both companies under review for a possible downgrade of its "Ba3" ratings on overall corporate debt, default probability and senior unsecured debt of both companies. Both Pulte and Centex were dropped from a "Ba2" to a "Ba3" last fall. A "Ba1" rating is Moody's highest level in the junk category and indicates questionable credit quality.

Joseph A. Snider, a VP and senior credit officer with Moody's, said the notice of review did not necessarily mean another downgrade. But he said the agency's concern centers around one big issue: land.

"When one home builder buys another home builder, they're essentially just buying the land," said Snider. "Pulte already has a ton of land. Too much land."

Even in light of the slightly positive news that has emanated from the housing market in recent weeks, Snider sees the deal as "somewhat risky. We've taken note of these [positive] numbers. We hope those glimmers of hope are confirmed. But it's way too premature to say that we've reached the bottom."

S&P focused on the magnitude of the leverage involved in the transaction in its report, stating "pro forma leverage will be roughly 60%, which we would consider to be weak for the current rating. In addition, the company's existing bank facility restricts leverage to 55%. As a result, Pulte will need to retire a significant amount of debt (at least $1.5 billion by our estimation) within several quarters following the closing of the transaction to reduce leverage to within its bank covenant leverage limit."

Pulte stated in its announcement of the deal that the combined company would seek to pay down at least $1 billion in debt by the end of the year. S&P pointed out that while "Pulte will have access to a substantial combined cash position of roughly $3.4 billion to pursue debt tenders or open market purchases, its "large land position, combined with still challenging housing conditions, leaves the company vulnerable to additional impairments and losses, which could erode the equity base and affect its de-leveraging efforts."

In its report on the proposed deal, Fitch pointed out possible pitfalls, saying its outlook "considers the integration risk associated with a large acquisition. Although PHM has successfully integrated large acquisitions in the past, execution risk remains in implementing a sizeable combination at a time when the operating environment is expected to remain difficult for all industry participants."

It is the Centex debt that needs the most immediate attention. Pulte's debt is far more long-term.

According to a Fitch quarterly update issued in mid-January, Centex debt consists primarily of 5.80% notes for $210.9 million maturing 9/15/09; 4.55% notes for $300 million maturing 11/1/10; 7.875% notes for $392.5 million maturing 2/1/11; 7.5% notes for $324.3 million maturing 1/15/12; 5.45% notes for $295 million maturing 8/15/12; 5.125% notes for $300 million maturing 10/1/13; 5.7% notes for $350 million maturing 5/15/14; 5.25% notes for $450.0 million maturing 6/15/15; and 6.5% notes for $480 million maturing 5/1/16.

According to the same report, Pulte's debt was comprised of 4.875% notes for $25.4 million maturing 7/15/09; 7.875% notes for $498.6 million maturing 8/1/11; 6.25% notes for $300 million maturing 2/15/13; 5.25% notes for $500 million maturing 1/15/14; 5.2% notes for $350 million maturing 2/15/15; 7.875% notes for $300 million maturing 6/15/32; 6.375% notes for $400 million maturing 5/15/33; and 6.000% notes for $300 million maturing 2/15/35.