Fitch Places Standard Pacific Corp. on Rating Watch Positive on Ryland Group Merger Announcement

CHICAGO--()--Fitch Ratings has placed its ratings for Standard Pacific Corp. (NYSE: SPF), including the company's Issuer Default Rating (IDR) of 'B+', on Rating Watch Positive following a definitive agreement designating that Standard Pacific and The Ryland Group (NYSE: RYL) will combine in a merger of equals that will create the fourth-largest homebuilder in the U.S.

At the time of the merger, Standard Pacific will implement a 1-for-5 reverse stock split. After giving effect to the reverse stock split, Ryland shareholders will receive 1.0191 shares of Standard Pacific common stock for each share of Ryland common stock. Upon closing of the transaction, Standard Pacific shareholders will own approximately 59% and Ryland shareholders will own about 41% of the combined company.

KEY RATING DRIVERS

Fitch views the merger agreement positively. The Positive Watch reflects the following:

--Lower leverage: Fitch projects a decrease in financial leverage (debt-to-EBITDA) for the combined company versus Standard Pacific's leverage of 4.6x on a stand-alone basis for the latest 12 months (LTM) ended March 31, 2015. Fitch estimates that initial pro forma leverage will be about 4.2x, based on the two companies' EBITDA and debt levels for the March 31, 2015 LTM period.

--Geographic Diversity: The combination with Ryland will expand Standard Pacific's geographic presence to 10 additional states and 15 new metropolitan statistical areas (MSAs). The combined company's total MSAs served will increase from 26 to 41. More important, the combined company will have less reliance on the state of California. Revenues directed to this state will decline from 46% (on a stand-alone basis for Standard Pacific) to 27% pro forma for the combined company.

--Larger Size: The combined company will be the fourth-largest homebuilder based on LTM revenues. For the March 31, 2015 LTM period, the pro forma combined company delivered more than 12,600 homes in the aggregate with combined pro forma revenues of $5.1 billion. It is important to note that both management teams have had experience managing large companies in the past. In 2005, Standard Pacific delivered 11,411 homes with total homebuilding revenues of almost $4 billion. Similarly, in 2005, Ryland had revenues of $4.7 billion on 16,673 home deliveries. More important, the combined company will have a top 10 position in 29 MSAs, including a top 5 market share in 15 of the largest 25 MSAs.

--Land Supply: The combined company will control roughly 74,000 lots, 74% of which will be owned and the remaining 26% will be optioned. Total land supply will decrease to 5.9 years for the combined company compared with 7.1 years for Standard Pacific on a stand-alone basis.

--Debt Structure: All existing senior notes and convertible notes are expected to remain in place. The combined company will have total debt of about $4.5 billion. In addition, the combined company's debt maturities are well laddered, with about $30 million maturing in 2015, $280 million in 2016, and $483 million in 2017.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Standard Pacific include:

--Merger agreement is consummated in 2015;

--No incremental debt from the merger and pro forma debt-to-EBITDA of about 4.2x for the combined company;

--Industry single-family housing starts improve about 17%, while new and existing home sales grow 18% and almost 4.5%, respectively, in 2015.

RATING SENSITIVITIES

Fitch expects the Positive Watch will be resolved upon the agency's further review of the merger agreement. Key considerations include the ultimate capital structure, management's financial policy, and expected credit metrics of the combined company over the intermediate to long term. Fitch will also review the combined company's land strategy, liquidity profile and projected cash flow generation capabilities, as well as uses of cash and cash flow.

If the merger agreement is not completed, Fitch expects to affirm the company's current ratings, or re-evaluate the ratings if industry conditions and Standard Pacific's operating performance changes substantially.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Positive:

Standard Pacific Corp.

--Long-term IDR 'B+';

--Senior unsecured notes 'B+/RR4';

--Unsecured revolving credit facility 'B+/RR4'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=986470

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Delarosa
Associate Director
+1-212-908-0525
or
Committee Chairperson
Jason Pompeii
Senior Director
+1-312-368-3210
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Monica Delarosa
Associate Director
+1-212-908-0525
or
Committee Chairperson
Jason Pompeii
Senior Director
+1-312-368-3210
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com