Fitch Ratings expects to assign a 'B-/RR4' rating to Standard Pacific Corp.'s (NYSE: SPF) proposed offering of $200 million of senior unsecured notes due 2018. The issue will be ranked on a pari passu basis with all other senior unsecured debt. The proceeds from the notes offering will be used to purchase through a tender offer any and all of the company's outstanding 2013 notes and to redeem any such notes that are not validly tendered and accepted for payment in the tender offer, with the remaining proceeds to be used to repay approximately $73.2 million of the company's intercompany indebtedness.
Fitch's current Issuer Default Rating for Standard Pacific is 'B-'. The Rating Outlook is Stable.
The 'RR4' Recovery Rating (RR) on the company's unsecured debt indicates average recovery prospects for holders of these debt issues. Standard Pacific'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 debt holders. Fitch applied a liquidation value analysis for these RR.
The ratings and Outlook for Standard Pacific reflect the company's healthy liquidity position, improved operating results and moderately stronger prospects for the housing sector this year.
The company generated $33.6 million of cash flow from operations during the first quarter of 2010 (1Q'10), including a tax refund of $108 million as a result of the tax legislation enacted in November 2009. The company ended the first quarter with unrestricted cash of $577.5 million. For all of fiscal 2010, Fitch expects Standard Pacific to be cash flow negative, excluding tax refunds, as the company starts to rebuild its land position (through land purchases and development spending). During the first quarter, the company spent $50.8 million on land purchases compared with $3.7 million last year. During the first quarter, Standard Pacific also approved the purchase of $105 million of land, comprised of approximately 1,800 lots, 76% of which are finished, 11% partially developed and 13% raw. As of March 31, 2010, the company had outstanding roughly $179 million of approved land purchases and option contracts, of which $113 million is expected to be purchased in 2010 and $66 million is expected to be purchased in 2011 and beyond. At a minimum, $164 million of land purchases is committed for acquisitions in 2010, with the potential for as much as $400 million of land purchases this year. By comparison, the company spent about $65 million in land purchases for all of 2009.
The company reported homebuilding revenues of $175.4 million during 1Q'10, a 16% decline compared to the same period last year. Total deliveries fell 22% while the average sales price increased 9% during the quarter. The increased average sales price was due primarily to a greater proportion of homes delivered within California during the quarter compared to last year. Gross margins, excluding impairment charges, improved 530 basis points to 22.7% during the first quarter. SG&A expenses as a percentage of sales improved to 18.7% compared with 25% last year. Standard Pacific reported a pre-tax loss of $5 million during 1Q'10 compared to a pre-tax loss of $48.7 million last year. The company did not record impairment charges during 1Q'10 and had $30.8 million of asset impairment charges last year. Net orders for the quarter increased 3% to 759 homes, and the company had 821 homes in backlog with a value of $278.3 million at the end of the first quarter. Cancellation rates continued to recede and the rate was 15% during 1Q'10 compared with 24% last year and 21% during the prior quarter.
Housing apparently bottomed during 2009, and a so far anemic recovery has begun. During the next 12-15 months off the bottom, the recovery may appear jaw-toothed as substantial foreclosures now in the pipeline present as distressed sales and as meaningful new foreclosures arise from Alt-A and option ARM resets. High unemployment rates and the tightening of certain Federal Housing Administration loan standards will be notable headwinds early in the upcycle. The continuation and expansion of the scope of the national housing credit may boost sales in spring of this year. And the Federal government's continuing efforts to modify foreclosures may finally show some success in 2010.
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 and especially free cash flow trends and uses, and the company's cash position.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include: 'Corporate Rating Methodology', dated Nov. 24, 2009.
Additional information is available at 'www.fitchratings.com'.
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