Predicting that WCI Communities will fall short of its goal to raise $1 billion to help pay down its debt and will have trouble complying with its debt covenants this year, Moody's Investors Service downgraded the company's debt further into junk territory Wednesday (August 1).
It was the second ratings service in a week to lower WCI's ratings. Standard & Poor's lowered its ratings July 27.
Moody's cut the company's senior unsecured debt down one notch to Caa2 from Caa1, eight levels below investment grade, and indicated there could be more cuts over the next 12 to 18 months if WCI is unable to generate enough cash to reduce its debts and its earnings plunge further. It also said the company's ability to do that depends in large part on getting its troubled tower developments closed and cutting the default rates.
Moody's also adjusted other WCI ratings, changing its corporate family rating from to B3 from B2 and its probability of default rating to B3 from B2.
Standard & Poor's downgraded WCI's credit and debt by three notches last week in the wake of the company's announcement that the deteriorating home building and credit markets have sent potential company buyers packing.
The ratings company lowered WCI's corporate debt rating from a B+ to CCC+ and $650 million worth of its senior subordinated notes from B- to CCC-.
"The downgrades reflect worsening trends in WCI's key Florida housing markets and anticipate that the same negative macro pressures that have hampered efforts to sell the company outright will make it increasingly difficult for the company for the company to market its homes," said S&P's announcement of the downgrade. "As a consequence, we expect that weaker-than-anticipated GAAP earnings and operating cash flow will exacerbate liquidity pressures and make it unlikely that WCI will achieve its previously announced leverage targets."
Of similar concern to S&P's raters is the company's upcoming Aug 30 annual meeting where shareholders will vote on a new slate of directors nominated by financier Carl Icahn. A change in company control will trigger repurchase of the company's senior subordinated notes.
"Given the current volatility in the debt markets, there is no assurance that WCI would have the capacity to repurchase these notes before they mature," S&P's raters wrote.
WCI's Florida-heavy market focus as well as on high-end tower development have contributed to weak sales and share price. Earlier this year activist shareholders, led by Icahn who bought about 14% of the company's shares, began pressuring the company for changes.
In response, WCI hired Goldman Sachs to assess its options. As Icahn tendered an offer to buy up all the company's shares for $22 each, slightly higher than its stock was trading at the time, company executives decided to launch a formal sale process, saying there were a number of strong other suitors in the wings. Icahn then withdrew his tender offer. Then last week WCI announced that it had not received a definitive sale offer and that it would pursue other alternatives.