Fitch Ratings today dropped its rating outlook to negative for the debt of M/I Homes, signaling the ratings service's concern that the company could "challenge its interest-coverage covenant late this year (and-or in 2008)."

At the same time, Fitch reaffirmed its current ratings on M/I Debt, which include "BB"s for the Issuar Default Rating, Senior Unsecured Debt and Unsecured Bank Credit Facility. It also reaffirmed its rating of "B+" on the company's series-A non-cumulative perpetual preferred stock. Fitch's rating affirmation applies to approximately $478.7 million in senior unsecured debt.

In dropping its outlook rating from "stable" to "negative," Fitch cited "the more challenging outlook for homebuilders, the current and expected near term deterioration in certain credit metrics for the company, and pressures from credit tightening, which particularly affect the entry level buyer (a targeted customer at M/I Homes), and high cancellation rates, which add to speculative inventory totals."

Fitch did cite the company for agressively cutting land purchases and debt, but it also noted the company's exposure to Midwest markets such as Columbus, Cincinnati and Indianapolis, where economic growth is sluggish at best.

"The housing sector is in the midst of a meaningful, multi-year downturn," Fitch stated. M/I "has been increasing its sales and marketing efforts, focusing on reducing speculative inventory (enlarged by unusually high cancellation rates), reducing its lot supply, reassessing its land positions, renegotiating option contracts and, where possible, reducing overhead and direct construction costs. During this current downturn [M/I], like most builders, has leveraged the financial flexibility of land options, walking away from overpriced lots (forfeiting its deposits). These builders also have reported meaningful charges associated with write downs of land values."

Fitch noted that M/I's year-end homebuilding debt-to-capital had declined in recent years, from 53.7% in 1997 to 15.6% in 2002. But it was back up to 49.9% in 2006 (slightly below M/I's leverage target of 50% or less). It said the debt-to-capital ratio was down to 37.3% by the end of March 2007. It said M/I maintains a $650 million revolving credit agreement of which $203.9 million was available at the end of first quarter-2007.