Fitch Rates Beazer's Proposed $200MM Sr. Notes Offering 'CCC+/RR5'
CHICAGO -- January 29, 2013
Fitch Ratings has assigned a 'CCC+/RR5' rating to Beazer Homes USA, Inc.'s
(NYSE: BZH) proposed offering of $200 million principal amount of senior notes
due 2023. This notes issue will be ranked on a pari passu basis with the
company's existing senior unsecured notes. Net proceeds from the notes
offering will be used to fund or replenish cash that is expected to be used to
fund the redemption of its 6 7/8% senior notes due 2015 and for general
The Rating Outlook is Stable. A complete list of ratings follows at the end of
The rating for BZH is based on the company's execution of its business model
in the current moderately recovering housing environment, land policies, and
geographic diversity. BZH's rating is also supported by the company's solid
Risk factors include the cyclical nature of the homebuilding industry, the
company's high debt load and high leverage, BZH's underperformance relative to
its peers in certain operational and financial categories, and its current
over-exposure to the credit-challenged entry level market (approximately 60%
of BZH's customers are first-time home buyers).
The Stable Outlook takes into account the improving housing outlook for 2013.
However, the industry growth rate this year reflects a below-trend-line
cyclical rise off a very low bottom. In a slowly growing economy with somewhat
diminished distressed home sales competition, less competitive rental cost
alternatives, and new and existing home inventories at historically low
levels, 2013 single-family housing starts should improve about 18%, while new
home sales increase approximately 22% and existing home sales grow 7%.
However, as Fitch has noted in the past, recovery will likely occur in fits
Challenges (although somewhat muted) remain, including continued relatively
high levels of delinquencies, potential of short-term acceleration in
foreclosures, and consequent meaningful distressed sales, and restrictive
credit qualification standards.
IMPROVING FINANCIAL RESULTS
BZH's homebuilding revenues for its 2013 fiscal first quarter (ended Dec. 31,
2012) increased 30.8% to $244.4 million as home deliveries grew 19.7% to 1,038
homes and the average selling price advanced 9.3% to $235,500. The company has
also reported improved quarterly net sales in each of the last seven quarters,
contributing to a 39% increase in homes in backlog at Dec. 31, 2012, compared
with year ago levels. The significant increase in backlog, combined with the
company's strategy to grow community count, should result in moderately higher
deliveries in fiscal 2013 compared with 2012. Nevertheless, Fitch does not
expect BZH to be profitable in fiscal 2013.
The company has taken steps to strengthen its balance sheet and improve its
liquidity position to better participate in the housing recovery. In July
2012, BZH completed underwritten public offerings of its common stock,
tangible equity units and a private placement of $300 million of 6.625% senior
secured notes. Net proceeds from these transactions were roughly $466 million.
Concurrently with the debt offering, BZH called for redemption of all of its
$250 million 12% senior secured notes due 2017 and repaid $20 million under
its outstanding cash secured term loan. These transactions are projected to
lower annual interest expense by approximately $15 million.
In September 2012, BZH also amended and expanded its secured revolving credit
facility from $22 million to $150 million. The credit facility matures in
BZH ended the December 2012 quarter with $396.7 million of unrestricted cash
and no borrowings under its revolving credit facility. The improved liquidity
position provides BZH with some cushion as Fitch expects the company will
continue to have operating losses and negative cash flow through fiscal 2013.
With higher land and development spending expected this year, unrestricted
cash could fall below $300 million by the end of fiscal 2013.
At Dec. 31, 2012, the company controlled 25,104 lots, of which 82% were owned
and the remaining lots controlled through options. Based on the latest
12-month closings, BZH controlled 5.3 years of land and owned roughly 4.3
years of land.
BZH spent roughly $185.5 million on land and development during fiscal 2012
compared with $221.6 million during fiscal 2011. During its 2013 fiscal first
quarter, land and development spending totaled $90 million. This compares to
$58.2 million expended during the same period last year. Management expects to
spend at least twice as much on land and development during 2013 as it did
during 2012. Fitch is comfortable with this strategy given the company's
enhanced liquidity position. Assuming that the company is able to redeem all
of its 2015 notes, BZH will not have any major debt maturities until 2016,
when $172.9 million of senior notes become due. Furthermore, management has
demonstrated in the past that it is capable of pulling back on land and
development spending when necessary.
GUIDELINES FOR FURTHER RATINGS ACTIONS
Future ratings and Outlooks will be influenced by broad housing market trends
as well as company specific activity, such as trends in land and development
spending, general inventory levels, speculative inventory activity (including
the impact of high cancellation rates on such activity), gross and net new
order activity, debt levels, especially free cash flow trends and uses, and
the company's cash position.
BZH's ratings are constrained in the intermediate term due to weak credit
metrics and high leverage. However, positive rating actions may be considered
if the recovery in housing is maintained and is meaningfully better than
Fitch's current outlook, BZH shows continuous improvement in credit metrics
(particularly debt to EBITDA consistently below 8x and interest coverage above
2x), and preserves a healthy liquidity position.
Negative rating actions could occur if the recovery in housing dissipates,
resulting in revenues and operating losses approaching 2011 levels, and the
company maintains an overly aggressive land and development spending program.
This could lead to consistent and significant negative quarterly cash flow
from operations and diminished liquidity position. In particular, Fitch will
review BZH's ratings if the company's liquidity position (unrestricted cash
plus revolver availability) falls below $200 million.
Fitch currently rates BZH as follows:
--Long-term Issuer Default Rating 'B-';
--Secured revolver 'BB-/RR1';
--Second lien secured notes 'BB-/RR1';
--Senior unsecured notes 'CCC+/RR5';
--Junior subordinated debt 'CCC/RR6'.
The Rating Outlook is Stable.
The Recovery Rating (RR) of 'RR1' on BZH's secured credit revolving credit
facility and second-lien secured notes indicates outstanding recovery
prospects for holders of these debt issues. The 'RR5' on BZH's senior
unsecured notes indicates below-average recovery prospects for holders of
these debt issues. BZH's exposure to claims made pursuant to performance bonds
and joint venture debt and the possibility that part of these contingent
liabilities would have a claim against the company's assets were considered in
determining the recovery for the unsecured debtholders. The 'RR6' on the
company's mandatory convertible subordinated notes and junior subordinated
notes indicates poor recovery prospects for holders of these debt issues in a
default scenario. Fitch applied a liquidation value analysis for these
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Aug. 14, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Robert Rulla, CPA, +1-312-606-2311
70 W. Madison Street
Chicago, IL 60602
Bob Curran, +1-212-908-0515
Craig Fraser, +1-212-908-0310
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