CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'B+/RR4' rating to Standard Pacific Corp.'s (NYSE: SPF) proposed offering of $300 million principal amount of senior unsecured notes. The company expects that the notes will have a 10-year maturity. SPF intends to use the net proceeds of the notes offering for general corporate purposes, which may include land acquisition and development, home construction, repurchases of the company's common stock and other related purposes.
The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The rating for SPF is influenced by the company's execution of its business model, land policies, and geographic, price point and product line diversity. Risk factors include the cyclical nature of the homebuilding industry and the company's somewhat aggressive land strategy. The company's liquidity position has also weakened over the past year as the company continues to increase land and development spending.
The Stable Outlook takes into account Fitch's expectation of a continued moderate recovery for the housing sector for the remainder of 2014 and in 2015.
Housing metrics all showed improvement in 2013. However, what began as an untypically moderate housing recovery has decelerated further since late 2013. For the first nine months of 2014, existing home sales fell 4.9%, while new home sales grew 1.7%. Single-family housing starts increased 3.8% during the January-September year-to-date (YTD) period.
To reflect the subpar spring selling season, as well as the inconsistent order and production trends characteristic of the months that have followed, Fitch tapered its 2014 macro housing forecast. Single-family starts are projected to improve 3% to 636,000 and multifamily volume should grow about 17.5% to 361,000. Total 2014 starts should approximate 1 million. New home sales are forecast to advance about 1.5% to 436,000, while existing home sales volume is expected to decline 6% to 4.785 million, largely due to fewer distressed homes for sale.
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing economy throughout the year. The unemployment rate should continue to move lower (averaging 5.8% in 2015). Credit standards should steadily, moderately ease throughout next year. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25- to 35- year olds should provide some incremental elevation to the rental and starter home markets. Total housing starts are projected to expand 14% to 1.14 million as single-family starts advance 18% and multifamily volumes gain 7%. New home sales should grow 18%, while existing home sales rise 5%.
Debt to EBITDA for the latest 12 months (LTM) ending Sept. 30, 2014 was 3.9x compared with 4.9x at the end of 2013 and 8.2x at the end of 2012. EBITDA to interest coverage was 3.1x for the Sept. 30, 2014 LTM period compared with 2.7x at year-end 2013 and 1.3x at the conclusion of 2012. Fitch expects SPF's leverage will increase moderately as a result of the proposed offering. SPF's leverage is projected to be between 4.25x and 4.75x while interest coverage is expected to settle at around 3.0x at the end of 2014.
SPF's HOMEBUILDING OPERATIONS
SPF reported stronger revenues so far this year. Homebuilding revenues increased 26.7% for the first nine months of 2014 as home deliveries grew 6.8% and the average sales price advanced 18.3% compared with the same period last year. The homebuilding gross margin (including interest and excluding impairment charges) also improved during the 2014 YTD period, growing 290 basis points (bps) to 26.3% compared with 23.4% during the first nine months of 2013.
On the other hand, new home orders have been weak so far in 2014. New home orders fell 0.8% for the first nine months of the year, although orders for the third quarter of 2014 were 4% higher year-over-year (YOY) as the company's community count increased 10% compared with the third quarter of 2013. SPF ended the 2014 third quarter with 2,208 homes in backlog (up 2% YOY) with a value of $1.126 billion (up 16.8% YOY).
The company's liquidity position has weakened somewhat relative to the end of 2013 as the company continues to increase land and development spending. As of Sept. 30, 2014, SPF had unrestricted cash of $15.3 million and no borrowings under its $450 million revolving credit facility that matures in July 2018. By comparison, the company had $355.5 million of unrestricted cash and no borrowings under its $470 million credit facility as of Dec. 31, 2013. Fitch expects SPF will have continued access to its revolver as the company currently has sufficient room under the financial covenants of the credit facility.
The proposed $300 million debt offering will enhance the company's liquidity position. The company's debt maturities are well-laddered, with no major debt maturities until 2016, when $280 million of senior notes become due.
SPF is focused on growing its operations by investing in new communities, particularly in land-constrained markets. Total lots controlled increased 1.9% YOY and 1% compared with the previous quarter. As of Sept. 30, 2014, the company controlled 36,307 lots, of which 79.7% were owned and the remaining lots controlled through options and JV partnerships. Based on LTM closings, SPF controlled 7.5 years of land and owned roughly 6.0 years of land.
The company spent $687 million on land and development ($414 million for land and $273 million for development) during the first nine months of 2014 compared with $592 million ($377 million for land and $215 million for development) expended during the same period in 2013. SPF expects total land and development spending will be approximately $1 billion during 2014 and is targeting between $800 million and $1.2 billion during 2015. This compares with $808 spent during 2013 ($494 million for land and $314 million for development), $711 million during 2012, $437 million during 2011, $396 million in 2010 and $158 million during 2009.
Fitch is relatively comfortable with this strategy given the company's adequate liquidity position, well-laddered debt maturity schedule and management's demonstrated ability to manage its spending. Fitch expects management will pull back on spending if the recovery in housing stalls or dissipates.
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 liquidity position.
Positive rating actions may be considered if the recovery in housing is maintained and is meaningfully better than Fitch's current outlook, SPF shows continuous and sustained improvement in credit metrics (particularly debt-to-EBITDA approaching 4x and interest coverage exceeding 4x), and preserves a healthy liquidity position.
A negative rating action could be triggered if the industry recovery dissipates; SPF's 2015 revenues drop high-teens while the EBITDA margins decline below 15%; leverage exceeds 8x and SPF's liquidity position falls sharply, perhaps below $200 million.
Fitch currently rates SPF as follows:
--Long-term Issuer Default Rating (IDR) 'B+';
--Senior unsecured notes 'B+/RR4';
--Unsecured revolving credit facility 'B+/RR4'.
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 going concern valuation analysis for these RRs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage