Toll Delays Investment-Grade Boost With Debt for Acquisition

Toll Brothers Inc. is postponing a boost to an investment-grade rating by offering $1.7 billion of debt to make an acquisition and refinance bonds due next year.

The largest U.S. luxury-home builder will draw as much as $800 million on a revolving line of credit and plans to borrow the remainder in the bank-loan and public-debt markets, said Chief Financial Officer Martin Connor. Toll Brothers is rated Ba1 by Moody’s Investors Service and BB+ by Standard & Poor’s, one step below investment grade.

The developer agreed to buy Beverly Hills, California-based homebuilder Shapell Industries Inc. for about $1.6 billion, funded in part with $200 million from a share offering, it said in a statement. The Horsham, Pennsylvania-based company will borrow $1.4 billion for the acquisition and may also sell about $300 million in 10-year debt to refinance $268 million of 4.95 percent notes due March 2014, Connor said.

“We’re going to get temporarily leveraged for about a year, then we’ll start coming back down,” Connor said in a Nov. 8 telephone interview. “We’re taking on a lot of debt to do it. It makes the likelihood of us getting investment grade delayed.”

Toll Brothers may reach high grade in 12 to 18 months, Barclays Plc analysts Eric Gross and Alex Gennis wrote in a Nov. 8 note. Following the acquisition, the company is well positioned to capitalize on a further housing recovery, the analysts wrote.

The home builder’s $1.04 billion unsecured revolving line of credit pays 150 basis points more than the London interbank offered rate, according to data compiled by Bloomberg. Toll Brothers will borrow a second 364-day revolving line of credit of $500 million to supplement the original revolver to maintain liquidity, Connor said. Moody’s and S&P affirmed their ratings Nov. 7.

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