Fitch Affirms Toll Brothers' IDR at 'BBB'; Outlook Remains Negative
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Toll Brothers, Inc.'s (NYSE: TOL) Issuer Default Rating (IDR) and other outstanding debt ratings as follows:
--IDR at 'BBB';
--Senior unsecured at 'BBB';
--Unsecured bank credit facility at 'BBB';
--Senior subordinated debt at 'BBB-'.
The Rating Outlook remains Negative.
The affirmations reflect Toll Brothers' well-entrenched market position as the pre-eminent builder of luxury homes, its seasoned operating model that has produced often the best margins within the industry, relatively stable debt-protection measures and its consistently profitable track record through past homebuilding cycles. Risk factors include the cyclical nature of the homebuilding industry; the possible volatility in value of Toll's extensive land holdings (some of which will be developed over an extended period of time); the shift to somewhat larger land purchases/developments in some markets than in the past; and the company's primary focus on the luxury housing segment of the market which, although diversified geographically and by product type across many niches within the urban and suburban luxury market, is not as broad as the first-time and first-step trade-up segments.
The Negative Outlook for Toll Brothers 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 Outlook also reflects negative trends in Toll Brothers' 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, Toll Brothers' liquidity position provides a buffer and supports the current 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.
Leverage has typically remained within a range of 45 -55%. However, on April 30, 2008, leverage improved to 40%. Taking into account its relatively modest off balance sheet activities, Toll Brothers' adjusted debt to adjusted capital ratio was 43.5% as of April 30, 2008. These leverage ratios are appropriate for the rating category, taking into account Toll Brothers' cash flow generation and operating risk profile. Toll Brothers' inventory to net debt ratio, at present 5.0x, has consistently remained in excess of 2.0x, providing a healthy buffer during this housing downturn.
Toll Brothers' liquidity remains healthy and provides flexibility. As of April 30, 2008, Toll Brothers had $1.24 billion of cash on the balance sheet and $1.27 billion of availability under its $1.56 billion unsecured revolving credit facility. Toll Brothers' debt maturity schedule is well laddered. There are no meaningful debt maturities before 2011.