Fitch Rates CalAtlantic's $300MM Sr. Unsecured Notes Offering 'BB-'/'RR4'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BB-'/'RR4' rating to CalAtlantic Group, Inc.'s (NYSE: CAA) offering of $300 million aggregate amount of senior unsecured notes maturing in 2026. The new issue will be equal in right of payment with all other senior unsecured debt.

CAA intends to use a portion of the proceeds to redeem the Company's 10 3/4% Senior Notes due September 2016 and, pending the use for such purpose, for general corporate purposes.

KEY RATING DRIVERS

The rating for CAA is based on the company's execution of its business model in the current moderately recovering housing environment, its land policies, and geographic diversity. CAA's rating is also supported by the company's improving credit metrics following the merger with The Ryland Group (Ryland) in 2015. Risk factors include the cyclical nature of the homebuilding industry as well as the ongoing integration of the merger with Ryland.

IMPROVING CREDIT METRICS

Leverage as measured by debt-to-EBITDA declined from 6.0x at the end of 2015 to 5.5x for the latest-12-months (LTM) ending March 31, 2016. Interest coverage remained flat at 3.4x at the close of 2015 and for the LTM March 31, 2016. The full year results include one quarter of Ryland's operations and the LTM metrics include six months of operating results.

Fitch expects leverage will be below 4.0x by the end of 2016 and interest coverage will be above 4.5x.

GEOGRAPHIC DIVERSITY

CAA is geographically diversified with active operations in 17 states across the country and the District of Columbia and is in over 40 metropolitan statistical areas (MSAs). Home prices

range from approximately $165,000 to over $2 million. As of March 31, 2016, CAA controlled 68,892 homesites including joint ventures.

CAA has a top 10 position in 25 MSAs, including a top five market share in 14 of the largest 25 MSAs.

INTEGRATION RISK

The merger with Ryland created the fifth-largest homebuilder based on pro forma 2015 deliveries. During 2015, the pro forma combined company delivered 12,560 homes in the aggregate with combined pro forma revenues of about $5.28 billion. The integration risk is somewhat lessened as both management teams have had experience managing large companies in the past. In 2005 at the peak of the cycle, 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.

LAND STRATEGY

During 2015, CAA spent over $1.6 billion (proforma) on land and development. This compares with $943 million spent during 2014 and $808 million during 2013 for Standard Pacific. For the first three months of 2016, CAA expended $372 million on land and development activities.

For 2016, CAA has committed approximately $1.4 billion for land and development spending. At this level of spending, Fitch expects CalAtantic will be slightly cash flow positive for the year.

LIQUIDITY

As of March 31, 2016, CAA had unrestricted homebuilding cash of $169.5 million and $373 million of borrowing availability under its $750 million unsecured revolving credit facility that matures in October 2019.

Fitch expects CAA will have liquidity of at least $500 million from a combination of unrestricted homebuilding cash and equivalents and revolver availability in the near to intermediate term.

MODERATE HOUSING RECOVERY CONTINUES

Housing activity ratcheted up more sharply in 2015 than in 2014 with the support of a steadily growing, relatively robust economy. Total housing starts grew 10.9% versus 2014, while existing and new home sales were up 6.3% and 14.6%, respectively. After four years of a moderate recovery and with land and labor constraints, it is unlikely that housing will accelerate into a V-shaped recovery. But a continuation of a multi-year growth is in the offing, and is supported by demographics, pent-up demand and attractive affordability as well as steady, albeit modest, easing in credit standards.

Fitch is projecting single-family starts to expand 11.5% in 2016 and multifamily volume to gain about 4%. Total starts would be roughly 1.2 million (up 8.8%). New home sales should improve about 14.6%, while existing home sales rise 3%. Fitch expects the housing upcycle to continue in 2017, with single-family starts forecast to improve 10% and multifamily volume to grow 5.1%. Total starts would be in excess of 1.3 million (up 8.3%). Fitch also expects new and existing home sales will increase about 11.5% and 4%, respectively.

KEY ASSUMPTIONS

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

--Industry single-family housing starts improve 11.5%, while new and existing home sales grow 14.6% and 3%, respectively, in 2016; Fitch expects the housing upcycle to continue in 2017, with single-family starts forecast to improve 10% and new and existing home sales increase 11.5% and 4%, respectively;

--Debt-to-EBITDA falls below 4.0x by the end of 2016;

--Interest coverage above 4.5x in 2016;

--CalAtlantic maintains at least $500 million of liquidity during 2016 from a combination of cash and revolver availability.

RATING SENSITIVITIES

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 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, and the combined company shows continuous improvement in credit metrics (particularly debt to EBITDA consistently below 3.5x and interest coverage above 5x). The company would be expected to maintain a healthy liquidity position consisting of unrestricted homebuilding cash and revolver availability (above $500 million) through the cycle with a bias towards unrestricted homebuilding cash component into the next downturn.

A negative rating action could be triggered if the industry recovery dissipates; 2016/2017 revenues each drop at roughly a mid-teens pace while EBITDA margins fall below 12% and debt to EBITDA consistently remains above 5.0x; and the company's liquidity position falls sharply, perhaps below $300 million as the company maintains an overly aggressive land and development spending program.

FULL LIST OF RATING ACTIONS

Fitch currently rates CAA as follows:

--Long-Term IDR 'BB-';

--Senior unsecured notes 'BB-/RR4';

--Unsecured revolving credit facility 'BB-/RR4'.

The Recovery Rating of '4' for CAA's unsecured debt supports a rating of 'BB-', and reflects average recovery prospects in a distressed scenario.

Date of relevant committee: April 21, 2016

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Monica Delarosa
Associate Director
+1-212-908-0525
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
or
Committee Chairperson
Michael Weaver
Managing Director
+1 312-368-3156
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Monica Delarosa
Associate Director
+1-212-908-0525
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
or
Committee Chairperson
Michael Weaver
Managing Director
+1 312-368-3156
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com