Fitch Rates Beazer's $140MM Secured Term Loan 'BB-/RR1'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BB-/RR1' rating to Beazer Homes USA, Inc.'s BZH new $140 million two-year secured term loan. The term loan matures at the earlier of March 11, 2018 and, solely to the extent that any of the company's 6.625% senior secured notes due 2018 remain outstanding on such date, Jan. 14, 2018. The new term loan is secured with a second-priority security interest on a pari passu basis with the collateral securing the company's existing $300 million 6.625% senior secured notes due 2018.

The term loan carries a floating interest rate based on LIBOR plus 550 basis points and amortizes with equal quarterly payments of $17.5 million starting on June 30, 2016, with the remaining balance due at maturity. In conjunction with the new term loan, the company has announced the redemption of all $143 million in aggregate principal outstanding of its 8.125% senior unsecured notes due June 2016.

DELEVERAGING STRATEGY

As of Dec. 31, 2015, the company had total debt of $1.5 billion. Leverage as measured by debt/EBITDA was 10.4x for the latest-12-months ended Dec. 31, 2015 and interest coverage was 1.3x. Beazer has accelerated its previously announced deleveraging plan and intends to reduce debt by at least $100 million during fiscal year 2016. (The company had initially expected to reduce at least $50 million of debt by the end of its fiscal year.) Fitch expects debt/EBITDA will settle below 10x and interest coverage above 1.3x by the end of fiscal 2016.

The company ended calendar year 2015 with unrestricted cash of $144.9 million and $116.4 million of borrowing availability under its $145 million secured revolving credit facility maturing on Jan. 15, 2018.

Management intends to reduce debt by aggressively selling more spec inventory, increasing the use of land banking arrangements and carefully managing the timing of its land spend. Fitch believes that Beazer's spec strategy and the use of more land banking transactions will likely compress margins in the near term.

While the new term loan does not meaningfully change the company's liquidity profile, it provides Beazer with some flexibility to reduce debt at a more measured pace and in line with its seasonal cash generation. This added flexibility should allow the company to better manage its land and development spending in the near term. Beazer's next major debt maturity is in April 2018, when its $300 million 6.625% senior secured notes become due.

KEY RATING DRIVERS

Beazer's 'B-' Issuer Default Rating (IDR) reflects the company's execution of its business model in the current moderately recovering housing environment, land policies, and geographic diversity. Risk factors include the cyclical nature of the homebuilding industry, BZH's tight liquidity position, the company's high debt load and weak credit metrics (particularly its high leverage), BZH's underperformance relative to its peers in certain operational and financial categories, and its current over-exposure to the credit-challenged entry level market (approximately 60% of BZH's customers are first-time home buyers).

The Stable Outlook takes into account the improving housing outlook for 2016 and the expected modest improvement in operating results and credit metrics during the next 12 months. Fitch believes that the housing recovery is firmly in place (although the rate of recovery remains well below historical levels and will likely continue to occur in fits and starts).

HOUSING INDUSTRY

Housing activity ratcheted up more sharply in 2015 as compared to 2014 with the support of a generally robust economy throughout the year. Considerably lower oil prices restrained inflation and left American consumers with more money to spend. The unemployment rate moved lower (5% in 2015). Credit standards steadily, moderately eased throughout 2015. Demographics were somewhat more of a positive catalyst. Single-family starts rose 10.3% to 715,000 as multifamily volume grew about 11.5% to 396,000. Total starts were just in excess of 1.1 million. New home sales increased 14.6% to 501,000. Existing home volume approximated 5.260 million, up 6.5%.

New home price inflation slimmed with higher interest rates and the mix of sales shifting more to first time homebuyer product. Average home prices increased 2.8%, while median prices rose 3.8%.

Sparked by a similarly growing economy the housing recovery is expected to continue in 2016. Although interest rates are likely to be higher, a robust economy, healthy job creation, demographics, pent-up demand, steep rent increases, and further moderation in lending standards should stimulate housing activity. More of those younger adults who have been living at home should find jobs and these 25- to 35-year-olds should provide some incremental elevation to the rental and starter home markets. First time buyers should be able to take advantage of less expensive mortgage insurance and lenders offering low downpayment programs. Housing starts should approximate 1.22 million with single-family volume of 0.80 million and multifamily starts of 0.42 million. New home sales should reach 574,000, up 14.6%. Existing home volume growth should again be mid-single digit (+4%).

Average and median home prices should rise 2% - 2.5%.

Challenges remain including the potential for higher interest rates and restrictive credit qualification standards.

KEY ASSUMPTIONS

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

--Industry single-family housing starts improve 11.5%, while new and existing home sales grow 14.6% and 4%, respectively, in 2016;

--BZH's debt to EBITDA falls below 10x and interest coverage settles above 1.3x by the end of fiscal year 2016;

--The company spends approximately $600 million on land and development activities this year;

--BZH maintains a healthy liquidity position (roughly $200 million with a combination of unrestricted 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 cash position.

Negative rating actions could occur if the recovery in housing dissipates, resulting in revenues and operating losses approaching 2011 levels, and the company maintains an overly aggressive land and development spending program. This could lead to consistent and significant negative quarterly cash flow from operations and diminished liquidity position. And, in particular, Fitch will review BZH's ratings if the company's liquidity position (unrestricted cash plus revolver availability) falls below $200 million.

Negative rating actions could also occur if the company's credit metrics do not improve much from current levels in a sustained housing recovery, including debt to EBITDA consistently remaining above 10x and interest coverage below 1x during the next 12 months.

BZH's ratings are constrained in the intermediate term due to weak credit metrics and high leverage. However, positive rating actions may be considered if the recovery in housing is maintained and is meaningfully better than Fitch's current outlook, BZH shows continuous improvement in credit metrics (particularly debt to EBITDA consistently below 8x and interest coverage above 2x), and preserves a healthy liquidity position.

FULL LIST OF RATINGS

Fitch currently rates Beazer Homes USA, Inc. as follows:

--Long-term IDR 'B-';

--Secured revolver 'BB-/RR1';

--Second lien secured notes 'BB-/RR1';

--Senior unsecured notes 'CCC+/RR5';

--Junior subordinated debt 'CCC/RR6'.

Fitch has also assigned a 'BB-/RR1' rating to Beazer's $140 million term loan.

The Rating Outlook is Stable.

The Recovery Rating (RR) of 'RR1' on BZH's secured credit revolving credit facility, second-lien secured notes and secured term loan indicates outstanding recovery prospects for holders of these debt issues. The 'RR5' on BZH's senior unsecured notes indicates below-average recovery prospects for holders of these debt issues. BZH's exposure to claims made pursuant to performance bonds and joint venture debt and the possibility that part of these contingent liabilities would have a claim against the company's assets were considered in determining the recovery for the unsecured debtholders. The 'RR6' on the company's junior subordinated notes indicates poor recovery prospects for holders of these debt issues in a default scenario. Fitch applied a liquidation value analysis for these Recovery Ratings.

Date of relevant committee: Sept. 2, 2015.

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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