Fitch Downgrades Standard Pacific's IDR to 'B-'; on Rating Watch Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded Standard Pacific Corp.'s (NYSE:SPF) ratings as follows:

--Issuer Default Rating (IDR) to 'B-' from 'B+';

--Senior unsecured to 'B-/RR4' from 'B+/RR4';

--Unsecured borrowings under its bank revolving credit facility to 'B-/RR4' from 'B+/RR4';

--Senior subordinated debt to 'CCC/RR6' from 'B-/RR6'.

Fitch has also rated the secured borrowings under the company's revolving credit facility 'BB-/RR1.'

Standard Pacific's ratings have also been placed on Rating Watch Negative.

Fitch's Recovery Rating (RR) of '1' on the secured advances under Standard Pacific's revolving credit facility indicates outstanding (90%-100%) recovery prospects for holders of this debt issue. The 'RR4' on Standard Pacific's unsecured notes and the unsecured advances under its revolving credit facility indicate average (30%-50%) recovery prospects for holders of these debt issues. Standard Pacific's exposure to claims made pursuant to performance bonds and joint venture (JV) debt and the possibility that a portion of these contingent liabilities would have a claim against the company's assets were considered in determining the recovery for the unsecured debt holders. The 'RR6' on Standard Pacific's senior subordinated notes indicate poor recovery prospects (0%-10%) in a default scenario. Fitch applied a liquidation value analysis for these RRs.

The downgrade reflects the current difficult U.S. housing environment (especially in Standard Pacific's key California and Florida markets), current and expected negative trends in Standard Pacific's operating margins and meaningful deterioration in credit metrics (particularly interest coverage, debt/EBITDA ratios and tangible net worth). Furthermore, Standard Pacific's liquidity may be negatively impacted by credit enhancements provided by the company to its unconsolidated JVs, which may require re-margining contributions if the underlying collateral securing the debt of these JVs falls in value.

The Rating Watch Negative reflects Standard Pacific's exposure to liquidity risk given ongoing negotiations with its bank group regarding modifications to its credit agreements. At the end of the first quarter, Standard Pacific was not in compliance with the consolidated tangible net worth and leverage covenants contained in its bank credit agreements. The company sought and received a waiver from March 2008 to mid-May and then received an extension of the waiver to Aug. 14, 2008 and expanded the scope of the proposed amendments. In exchange for the waiver extension and the expanded scope, Standard Pacific agreed to collateralize new advances made under the revolving credit facility, reduce the revolving credit facility commitment from $700 million to $500 million, and not borrow under the facility when its cash position exceeds $300 million. While Standard Pacific's bond indentures limit the amount of secured indebtedness, the company is able to use certain carve-outs (permitted liens) to secure revolver advances going forward.

Standard Pacific and its JV partners generally provide credit enhancements in connection with JV borrowings in the form of loan-to-value maintenance agreements. During the three months ended March 31, 2008, Standard Pacific made one loan remargin payment in the amount of $15.7 million. At March 31, 2008, approximately $352.2 million of its unconsolidated JV borrowings were subject to these credit enhancements. Standard Pacific is solely responsible for $69.3 million and the company is jointly and severally responsible (with its JV partners) for $282.9 million of debt.

Under the provision of its most restrictive bond indenture, Standard Pacific is currently prohibited from making restricted payments, which include investments in JVs. However, investments in JVs (and other restricted payments) may continue to be made from funds held in its unrestricted subsidiaries. Based on current estimated funding requirements and assuming that the company is successful in unwinding the JVs that have been targeted for termination and in extending certain JV maturities, the company believes that the funds in its unrestricted subsidiaries are sufficient to fund its JV obligations for the foreseeable future.

Subsequent to March 31, 2008, the company purchased and/or unwound two JVs with total assets and debt as of March 31, 2008 totaling approximately $143.1 million and $61.4 million, respectively. Management also said that it is targeting to unwind three other JVs. Since these unwindings are essentially acquisition of JV assets, these are not considered restricted payments and are not prohibited under the bond indentures.

While the company has generated substantial cash flow from operations during the past six quarters, Standard Pacific's liquidity may be somewhat constrained as the company directs some of its cash to potential JV remargining contributions as well as targeted termination of certain JV partnerships.

To provide the company with flexibility to respond to unanticipated JV capital needs, Standard Pacific is currently evaluating a number of alternatives for reducing JV investment obligations and enhancing the company's ability to make restricted payments. These alternatives include: modifying JV cash flows to reduce peak capital requirements; accelerating land purchases from land development JVs to reduce JV capital requirements; exiting a JV by buying out a partner's interest or selling its interest; increasing JV distributions; obtaining noteholder consent to modify the restricted payments covenant; and raising equity. To help position the company to weather the current housing downturn, management is also exploring alternative financial and strategic alternatives, including sale of additional non-core assets, a merger or business combination or the sale of the company.

Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as 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 free cash flow trends and uses.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.