Standard & Poor's Ratings Services on Friday took down debt ratings on six of the nation's largest public building companies amid the continuing slide in the market for new housing.
S&P lowered ratings on corporate credit and senior unsecured debt of Lennar Corp.; Centex Corp.; Pulte Homes, Inc.; the Ryland Group, Inc.; Standard Pacific Corp.; and D.R. Horton Inc., citing deteriorating market conditions, continued inventory overhang and the possibility that one or more of the builders may have to seek relief from the net-worth requirements of their non-secured credit covenants.
Specifically, S&P dropped Lennar from 'BB+' from 'BBB' on approximately$2.2 billion of senior unsecured notes and lowered its commercial paper rating to 'B' from 'A-3'. It kept the ratings outlook on Lennar at "negative."
"The downgrades reflect weakened credit measures, Lennar's concentration in highly competitive and oversupplied housing markets, and the company's considerable investment in off-balance-sheet joint ventures," said S&P analyst James Fielding. "Somewhat offsetting these concerns are comparably low levels of on-balance-sheet debt and a currently adequate liquidity position."
S&'P Ratings cut $3.8 billion in senior unsecured notes at Centex from 'BBB' to 'BBB-' and maintained its "negative" outlook. "The downgrades acknowledge very weak GAAP earnings as the nation's housing market continues to deteriorate," said Fielding. "Although Centex's second-quarter closings and new orders held up reasonably well compared with its peers', lower volume and increasing pricing pressures weighed heavily on profit margins."
S&P also pointed to large non-cash charges and increased reserves in Centex's finance subsidiary to cover the diminished value of loans in its portfolio in announcing the downgrade. But the ratings service said it believes Centex's financial flexibility currently remains adequate for the lower ratings, with improved cash flow in the quarter and manageable near-term maturities.
The ratings on $3.5 billion of senior unsecured notes at Pulte were dropped to 'BB+' from 'BBB-' and the outlook continued at "negative." Fielding said, "The downgrades follow recently reported weak results and anticipate continued challenging market conditions. As a consequence of fewer closings and sharply lower gross margins, Pulte's EBITDA-based credit metrics have weakened considerably. Furthermore, we believe that Pulte's larger land holdings and concentration in some of the more troublesome housing markets will lead to further large inventory impairments and will likely compel the company to seek relief under the tangible net worth covenant governing its unsecured line of credit."
Fielding did point out that Pulte is less leveraged than the average for the public group and that it reported a modest third quarter profit (before non-cash charges). He also noted that Pulte "appears poised to generate considerable free cash flow in its typically seasonally strong fourth quarter."
S& P took the outlook on Ryland down from "stable" to "negative" but, citing he company's relatively low leverage, left its rating at 'BBB-'.
"The outlook revision reflects increasingly competitive national housing market conditions and weaker-than-anticipated cash flow from home sales for Ryland," said S&P analyst Lisa Wright. "We believe these negative trends could adversely affect EBITDA-based credit measures, which have held up very well relative to most peers thus far. Moderate debt levels and minimal near-term maturities continue to support the ratings at this time."
S&P said it would consider lowering Ryland's ratings if there is no improvement in free cash flow or if EBITDA-based credit metrics deteriorate more than expected. On the other hand, if cash flow and backlog improve and there is evidence of a firming in Ryland's markets, it said it would consider revising the outlook back to stable.
Standard Pacific's ratings were taken down from a 'BB' to a 'BB- on corporate credit and senior unsecured debt and from 'B+' to 'B-' on senior subordinated debt, a total of about $1.35 billion in debt. The outlook was maintained at "negative."
"The downgrades follow the company's recent quarterly loss and anticipate further pressure on Standard Pacific's liquidity position," said S&P analyst George Skoufis. He noted that the company's bank covenants could "come under pressure if additional impairments are incurred, which would diminish the equity base." Still, the report on the downgrade stated, "In spite of these credit negatives, Standard Pacific remains well positioned in its homebuilding markets, and management is beginning to achieve some success in reducing excess inventory."
Lastly, the ratings on roughly $3.8 billion in corporate credit and senior unsecured debt were dropped from 'BBB-' to 'BB+' and in subordinated debt from 'BB+' to 'BB-'. S&P maintained its negative rating.
"The downgrades reflect our expectation that Horton's operating and financial performance are increasingly vulnerable to deteriorating housing market and macroeconomic conditions," said credit analyst Elizabeth Campbell. "The spike in cancellation rates Horton recently reported impede the company's efforts to reduce its overall and speculative inventory levels, which remain the highest of our rated builders."
S&P expressed concern over Horton's exposure to the first-time-buyer market. In its report, it stated, "Additional challenges facing the company include rising national foreclosures (which puts inventory on the market that will likely compete most directly with Horton's lower price point product aimed at an entry-level buyer base) and expected continued national home-price declines."