TEXT-Fitch rates D.R. Horton's proposed $350MM senior notes 'BB'

Tue Sep 11, 2012 6:59pm IST

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Sept 11 - Fitch Ratings has assigned a 'BB' rating to D.R. Horton, Inc.'s (NYSE: DHI) proposed offering of $350 million principal amount of senior notes due 2022. This issue will be rated on a pari passu basis with all other senior unsecured debt. Net proceeds from the notes offering will be used for general corporate purposes. A complete list of ratings follows this release.

The ratings for DHI reflect the company's strong liquidity position, the successful execution of its business model, geographic and product line diversity and steady capital structure. Fitch expects better prospects for the housing industry this year. That being the case, there are still challenges facing the housing market that are likely to moderate the early stages of this recovery. Nevertheless, DHI has the financial flexibility to navigate through the still somewhat challenging market conditions and continue to selectively and prudently invest in land opportunities.

Builder and investor enthusiasm have for the most part surged so far in 2012. However, national housing metrics have not entirely kept pace. Year-over-year comparisons have been solidly positive on a consistent basis. Yet, month to month the national statistics (single-family starts, new home, and existing home sales) have been erratic and, at times, below expectations. In any case, year to date these housing metrics are well above 2011 levels. As Fitch has noted in the past, recovery will likely occur in fits and starts.

Fitch's housing forecasts for 2012 have been raised since early spring but still assume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderate improvement is forecast for 2013.

DHI successfully managed its balance sheet during the housing downturn and generated significant operating cash flow. DHI had been aggressively reducing its debt over the past few years. Homebuilding debt declined from roughly $5.5 billion at June 30, 2006 to $1.95 billion as of June 30, 2012 (including $350 million of 4.75% senior notes due 2017 issued in May 2012), a 65% reduction. Debt-capitalization is 35.8%. Net debt-capitalization is 18.3%. DHI has lowered its homebuilding debt levels meaningfully in each of the last three fiscal years (as shown below):

--By $336.3 million in fiscal 2009;

--By $991.3 million in fiscal 2010; and

--By $497.2 million in fiscal 2011.

This was accomplished through debt repurchases, maturities and early redemptions. Through the first nine months of fiscal 2012 (ending June 30, 2012), DHI has repurchased an additional $10.8 million of senior notes. DHI has $172 million of senior notes maturing in May 2013. DHI's next major debt maturity is in January 2014, when $145 million of senior notes mature.

DHI currently has solid liquidity with unrestricted homebuilding cash of $884.3 million and marketable securities of $283.7 million as of June 30, 2012. On Sept. 7, 2012, DHI entered into a new $125 million five-year unsecured revolving credit facility. This facility has an uncommitted $375 million accordion feature which could increase the facility up to $500 million, subject to additional bank commitments.

DHI maintains a 7.1-year supply of lots (based on last 12 months deliveries), 68.7% of which are owned and the balance controlled through options. The options share of total lots controlled is down sharply over the past five years as the company has written off substantial numbers of options. Fitch expects DHI to continue rebuilding its land position and increase its community count.

The primary focus will be optioning (or in some cases, purchasing for cash) finished lots, wherein DHI can get a faster return of its capital. DHI's cash flow from operations during the LTM period ending June 30, 2012 was a negative $87 million. For all of fiscal 2012, Fitch expects DHI to be about $350 million cash flow negative.

The ratings also reflect DHI's relatively heavy speculative building activity (at times averaging 50%-60% of total inventory and 46% at June 30, 2012). DHI has historically built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand).

A key focus is on selling these homes either before construction is completed or certainly before a completed spec has aged more than a few months. This has resulted in consistently attractive margins. DHI successfully executed this strategy in the past, including during the severe housing downturn. Nevertheless, Fitch is generally more comfortable with the more moderate spec targets of 2004 and 2005, wherein spec inventory accounted for roughly 35%-40% of homes under construction.

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

--DHI's cash position.

Negative rating actions could occur if the recovery in housing dissipates and DHI prematurely and aggressively steps up its land and development spending. This could lead to consistent and significant negative quarterly cash flow from operations and meaningfully diminished liquidity position (below $500 million). Conversely, Fitch would consider taking positive rating actions if the recovery in housing persists, or accelerates and DHI shows continuous improvement in credit metrics (such as debt leverage below 5x by FY end 2013), while maintaining a healthy liquidity position (about $900 million to $1 billion at FY end 2012 and 2013).

Fitch currently rates DHI as follows:

--Long-term IDR at 'BB';

--Senior unsecured debt at 'BB'.

The Rating Outlook is Positive.

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