Fitch Ratings has assigned a 'BB' rating to D.R. Horton's (NYSE:DHI) proposed $400 million in convertible senior notes due 2014. The Rating Outlook is Negative. Proceeds will be used for general corporate purposes, including repayment or repurchase of outstanding indebtedness. This offering was an opportunistic access of the capital markets which might not be as accessible to homebuilders in the future. Liquidity was enhanced at a lower cost than the debt it is likely to replace with limited constraints from covenants. The debt- to-capital ratio as of March 31, 2009 rose to 55.1% on a pro forma basis, but the pro forma net debt-to-capital ratio is only 34.3%. DHI's long-term net debt-to-capital ratio is expected to remain below 45%.
Fitch lowered DHI's Issuer Default Rating (IDR) and senior unsecured rating in mid-December 2008 from 'BB+' to 'BB'. The senior subordinated debt rating was lowered from 'BB-' to 'B+'. The downgrades reflected the very difficult housing environment and Fitch's expectations that housing activity will be more challenging than previously anticipated throughout calendar 2009. The recessionary economy and impaired mortgage markets are, of course, contributing to the housing shortfall. The ratings changes also reflected negative trends in DHI's operating margins, further deterioration in credit metrics (especially interest coverage and debt/EBITDA ratios), erosion in tangible net worth from non-cash real estate charges and operating losses, which have led to atypically high leverage. DHI's liquidity position provides a buffer and supports the current ratings. Fitch notes that it is likely there will be positive operating cash flow generation in Fiscal 2009, excluding income tax refunds of $621.7 million received in the fiscal 2009 first quarter and an estimated $55 million to be realized in the fourth quarter. Fitch projects cash flow generation of $400-500 million, excluding refunds, in fiscal 2009.
Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as 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 and free cash flow trends and uses.
DHI's ratings are based on the company's execution of its business model in the current housing correction, steady capital structure, geographic and product line diversity, and the company's above average growth during the past housing expansion. DHI had been an active consolidator in the homebuilding industry, which had kept debt levels a bit higher than its peers. But management also exhibited an ability to quickly and successfully integrate its many acquisitions. During fiscal 2002 DHI completed its largest acquisition in absolute size (Schuler Homes). However, DHI made no acquisitions in fiscal 2003 through the first quarter of fiscal 2009. It also appears that DHI may be less acquisitive of companies in the future as it primarily focuses on harvesting the opportunities within its current and adjacent markets.
DHI maintains a 5.7-year supply of lots (based on last 12 months deliveries), 80.5% of which are owned and the balance controlled through options. (The options share of total lots controlled is down sharply over the past three years as the company has written off substantial numbers of options.) The company maintains a 4.6-year supply of owned lots.
The ratings also manifest DHI's historic aggressive, yet controlled growth strategy and its relatively heavy speculative building activity (which had lessened late in the last up-cycle). The company has historically built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand). DHI successfully executed this strategy in the past. Nevertheless, Fitch was more comfortable with the more modest 'spec' targets of 2004 and 2005. At present 'spec' counts are somewhat high for DHI as with certain other builders because of higher than normal cancellation rates and market conditions that favor 'spec' building.
DHI ended the March 2009 quarter with $1.48 billion of cash on the balance sheet and $275 million of availability under its $1.65 billion unsecured revolving credit facility. As noted earlier, the company expects to receive a tax refund of $55 million in its fiscal 2009 fourth quarter. As of March 31, 2009, DHI was in compliance with all the covenants under its revolving credit facility, which matures in December 2011. However, with its substantial cash balance and expected future cash position, the company does not anticipate a need to borrow from the facility for the remainder of its term. Therefore, DHI has chosen to terminate the facility. The company has provided notice to its lenders participating in the facility and expects the termination to be effective May 11, 2009. DHI expects to save over $3 million annually in non-use fees as a result of terminating its revolving credit facility. Perhaps, more importantly, this strategy provides more flexibility for DHI in its efforts, as needed, to access meaningful capital.
During the fiscal 2009 second quarter, DHI repaid the outstanding principal of $460 million of its 5% and 8% senior notes, which became due on Jan. 15, 2009 and Feb. 1, 2009, respectively. Also during the quarter, the company repurchased $77.8 million principal amount of its outstanding notes with maturities beyond 2009 for a total purchase price of $75.3 million, plus accrued interest. Subsequent to March 31, 2009, DHI repurchased a total of $25.2 million principal amount of its outstanding notes for a total purchase price of $23.7 million, plus accrued interest.
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