Fitch Downgrades D.R. Horton's IDR to 'BB+'; Outlook Remains Negative

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded D.R. Horton, Inc.'s (NYSE: DHI) Issuer Default Rating (IDR) and other outstanding debt ratings as follows:

--IDR to 'BB+' from 'BBB-';

--Senior unsecured to 'BB+' from 'BBB-';

--Unsecured bank credit facility to 'BB+' from 'BBB-';

--Senior subordinated debt to 'BB-' from 'BB+'.

The Rating Outlook remains Negative.

The downgrade reflects the current difficult housing environment and Fitch's expectations that housing activity will be even more challenging than previously anticipated during the balance of calendar 2008 and that new home activity will still be on the decline well into 2009. The anemic economy and impaired mortgage markets are, of course, contributing to the housing shortfall. The ratings changes also reflect negative trends in D.R. Horton's operating margins, further deterioration in credit metrics (especially interest coverage and debt/EBITDA ratios) and erosion in tangible net worth from non-cash real estate charges. However, D.R. Horton's liquidity position provides a buffer and supports the new ratings.

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.

Ratings for D. R. Horton are based on the company's execution of its business model in the current housing correction, steady capital structure, geographic and product line diversity, and the company's above average growth during this past housing expansion. D.R. Horton had been an active consolidator in the homebuilding industry, which had kept debt levels a bit higher than its peers. But management also exhibited an ability to quickly and successfully integrate its many acquisitions. During fiscal 2002 the company completed its largest acquisition in absolute size (Schuler Homes). However, D.R. Horton made no acquisitions in fiscal 2003 through fiscal 2007 or so far in fiscal 2008. It also appears that D.R. Horton may be less acquisitive in the future as it primarily focuses on harvesting the opportunities within its current and adjacent markets.

D.R. Horton maintains a 5.2-year supply of lots (based on last 12 months deliveries), 78% of which are owned and the balance controlled through options. (The options share of total lots controlled is down sharply over the past two years as the company has written off substantial numbers of options.)

The ratings also manifest the D.R. Horton's historic aggressive, yet controlled growth strategy and its relatively heavy speculative building activity (which had lessened late in the last up-cycle). D.R. Horton has historically built a significant number of its homes on a speculative basis (i.e. begun construction before an order was in hand). D.R. Horton successfully executed this strategy in the past. Nevertheless, Fitch was more comfortable with the more modest 'spec' targets of 2004 and 2005. At present 'spec' counts are high for D.R. Horton as with certain other builders because of unusually elevated cancellation rates.

D.R. Horton ended the March 2008 quarter with $518.9 million of cash on the balance sheet and $1.3 billion of availability under its $2.25 billion unsecured revolving credit facility. As of March 31, 2008, D.R. Horton was in compliance with all the covenants under its revolving credit facility. However, the cushion under its tangible net worth covenant has declined to approximately $290 million. Management indicated that it intends to seek an amendment to its revolving credit facility to modify the covenant provisions by the end of its current fiscal year (ending Sept. 30, 2008). The revolving credit facility matures in December 2011.

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.