Fitch Rates Beazer's Proposed $200MM Sr. Notes Offering 'CCC+/RR5'
CHICAGO -- September 17, 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
unsecured notes due 2021. The notes issue will be ranked on a pari passu basis
with BZH's existing senior unsecured notes. Net proceeds from the notes
offering will be used for general corporate purposes, including potential land
A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating for BZH is based on the company's execution of its business model
in the current moderately recovering housing environment, its land policies,
and geographic diversity. The company's rating is also supported by its solid
liquidity position. The Stable Outlook takes into account the positive housing
outlook for 2013 and 2014.
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).
BZH ended the June 2013 quarter with $298.3 million of unrestricted cash and
no borrowings under its $150 million revolving credit facility. The company's
debt maturities are well-laddered, with no major maturities until 2016, when
$172.9 million of senior notes become due.
The company has taken steps over the past year to strengthen its balance sheet
and improve its liquidity position. The proposed $200 million notes issuance
further strengthens BZH's liquidity and its ability to better participate in
the housing recovery.
BZH maintains a 5.3-year supply of lots (based on last 12 months deliveries),
79.4% of which are owned, and the balance controlled through options. As is
the case with other public homebuilders, the company is rebuilding its land
position and trying to opportunistically acquire land at attractive prices.
Total lots controlled as of June 30, 2013 increased 7.5% year-over-year (yoy)
and grew 9.2% compared with the previous quarter.
The company has been aggressive in its land and development spending following
the successful execution of its capital markets transactions last year. BZH
spent roughly $314.4 million on land purchases and development activities
during the first nine months of fiscal 2013 compared with $140.6 million
expended during the same period last year. BZH expects to spend about $500
million on land and development during fiscal 2013 compared with $185.6
million spent for land and development during 2012.
As a result, Fitch expects BZH will be cash flow negative by approximately
$200 million-$250 million during 2013. Assuming that the company completes the
proposed notes offering, BZH's unrestricted cash position is projected to be
moderately below $500 million at year-end 2013.
Fitch is comfortable with BZH's land strategy given the company's liquidity
position, debt maturity schedule, proven access to the capital markets, and
management's demonstrated discipline in pulling back on its land and
development activities during periods of distress.
Housing metrics have all showed improvement so far in 2013. For the first
seven months of the year, single-family housing starts improved 20.1%, while
existing home sales increased 12%. New-home sales improved 21.8% for the first
seven months of 2013. The most recent Freddie Mac 30-year interest rate was
4.57%, 126 basis points (bps) above the all-time low of 3.31% set the week of
Nov. 21, 2012. The NAHB's latest existing home affordability index was 166,
moderately below the all-time high of 207.3.
Fitch's housing forecasts for 2013 assume a continued moderate rise off the
bottom of 2011. New-home inventories are near historically low levels and
affordability remains very attractive. In a slowly growing economy with still
above-average distressed home sales competition, less competitive rental cost
alternatives and low mortgage rates (on average), the housing recovery will be
maintained this year.
Fitch's housing estimates for 2013 are as follows: Single-family starts are
forecast to grow 18.3% to 633,000 while multifamily starts expand about 19% to
292,000; single-family new-home sales should grow approximately 22% to 448,000
as existing home sales advance 7.5% to 5.01 million.
Average single-family new-home prices (as measured by the Census Bureau),
which dropped 1.8% in 2011, increased 8.7% in 2012. Median home prices
expanded 2.4% in 2011 and grew 7.9% in 2012. Average and median home prices
should improve approximately 5% and 4%, respectively, in 2013.
As Fitch noted in the past, the housing recovery will likely occur in fits and
RISING MORTGAGE RATES
Mortgage rates have increased during the past few months. The most recent
Freddie Mac average mortgage rate was 4.57%, flat sequentially from the
previous week and about 100 bps higher than the average rate during the month
of April 2013, a recent low point for mortgage rates. While the current rates
are still well below historical averages, the sharp increase in rates and
rising home prices are moderating affordability. In the case of BZH, whose
average home price is roughly $248,000, assuming a 20% down payment, a 100 bps
rise in mortgage rates will increase principal and interest payment by about
$120 each month or a 12.5% impact.
A couple of July housing metrics showed some weakness following the increase
in interest rates during the past few months. The Pending Home Sales Index
declined 1.3% to 109.5 in July from 110.9 in June, although it is still 6.7%
above the July 2012 level of 102.6. New home sales in July also fell 13.4% on
a seasonally-adjusted basis to 394,000, compared with 455,000 during the
previous month. However, the July 2013 estimate was 6.8% above the July 2012
sales level of 369,000. While Fitch does not expect the current higher
mortgage rates to derail the housing recovery, continued sharp increases in
rates could moderate it.
BZH's revenues for the first nine months of its 2013 fiscal year (ending June
30, 2013) increased 33.8% to $849.2 million as home deliveries grew 20.5% to
3,399 homes and the average selling price advanced 11.3% to $248,000.
Gross profit margins (excluding inventory impairments and lot option
abandonments) also showed strong improvement, growing 460 bps to 16% during
the first nine months of fiscal 2013 compared with 11.4% during the same
period last year. SG&A as a percentage of sales declined to 14.1% during the
nine-month period in fiscal 2013 from 17.3% last year. Despite the strong
results for the first nine months of the year, BZH reported a pre-tax loss of
$44.5 million during the period. Fitch currently expects BZH to remain
unprofitable during all of fiscal 2013.
New home orders improved 1.1% during the nine-month period but fell 11.2% yoy
during the third quarter of 2013 (3Q'13). The decline in net new orders was
due primarily to lower community count, which decreased 19.1% to 144 average
active communities during 3Q'13 compared with 178 during 3Q'12. However, the
company reported 3.2 sales per community per month during 3Q'13 compared with
2.9 sales per community per month last year. Cancellation rates also improved
450 bps to 20% during 3Q'13 compared with 24.5% during 3Q'12. BZH ended 3Q'13
with 2,358 homes (-2.6% yoy) in backlog with a value of $646.1 million (+12.8%
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, 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 BZH's 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 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 recovery ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Liquidity Considerations for Corporate Issuers
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Robert Rulla, CPA, +1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Robert Curran, +1-212-908-0515
Craig Fraser, +1-212-908-0310
Brian Bertsch, +1-212-908-0549
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