Fitch Affirms Beazer's IDR at 'B-'; Outlook Revised to Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of Beazer Homes USA, Inc. BZH at 'B-'. The Rating Outlook has been revised to Stable from Negative.

Fitch has also assigned a 'B-/RR4' rating to BZH's proposed offering of $300 million senior unsecured notes due 2022. The company intends to use the net proceeds from the notes offering to fund the repayment of its $300 million 6.625% senior secured notes due 2018.

A complete list of rating actions follows at the end of this release.

TENDER OFFER

BZH has commenced a tender offer for any and all of its 6.625% senior secured notes due 2018. The company is offering a tender consideration of $988 for every $1,000 and an early tender payment of $30. The early tender offer expires on Sept. 20, 2016 and the tender offer will expire on Oct. 5, 2016, unless extended or earlier terminated by the company.

The tender offer is subject to the receipt of at least $300 million in gross proceeds from one or more offerings of senior notes on terms reasonably acceptable to the company. Notes that are not tendered and accepted for payment pursuant to the tender offer will remain obligations of the company and are expected to be redeemed as soon as practical following the early settlement date for the tender offer. The senior secured notes are callable at 101.656%.

STABLE OUTLOOK

In May 2016, Fitch revised BZH's Rating Outlook to Negative from Stable, reflecting the agency's concern regarding the company's meaningful debt maturities in 2018 and 2019 and the company's ability to refinance these maturities at reasonable terms. The proposed offering alleviates Fitch's concern regarding refinancing risk. The revision of the Outlook to Stable from Negative also reflects management's willingness to address its debt maturities well ahead of their scheduled due dates.

KEY RATING DRIVERS

The rating for BZH is based on the company's execution of its business model in the current moderately recovering housing environment, land policies, and geographic diversity. BZH's rating is also supported by the company's improving credit metrics. Risk factors include the cyclical nature of the homebuilding industry, the company's high debt load and, although improving, still 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).

DELEVERAGING STRATEGY

BZH had total debt of $1.43 billion at June 30, 2016 compared with $1.53 billion at Sept. 30, 2015. BZH has accelerated its deleveraging strategy and intends to reduce debt by about $150 million during FY16 and by an additional $100 million through FY18. Fitch projects leverage will settle around 9.0x at the end of FY16 and at or below 8.0x at the conclusion of FY17. Fitch expects interest coverage will be 1.3x - 1.8x during the next 12 - 18 months.

MEANINGFUL DEBT MATURITIES IN 2019

On a pro forma basis, the company will have no meaningful debt maturities until 2019, when $537 million of senior unsecured notes become due. With the proposed senior unsecured notes offering and the redemption of the existing senior secured notes, the company will meaningfully increase its ability to issue secured debt in the event that the unsecured debt markets are constrained.

BZH's bond indentures/credit agreements allow for a secured debt basket of the greater of $700 million or 40% of consolidated tangible assets (CTA). Fitch estimates that the secured debt basket under the company's bond indentures was roughly $900 million as of June 30, 2016. Taking into account the company's $145 million first-lien revolver and $72.5 million senior secured (2nd lien) term loan, BZH can incur up to an additional $680 million of secured debt that it can potentially use to refinance its 2019 maturities.

GENERALLY IMPROVING HOUSING MARKET

The housing recovery is expected to continue in 2016 after four years of a moderate recovery. A robust economy, healthy job creation, demographics, pent-up demand, steep rent increases, and further moderation in lending standards should stimulate housing activity. Housing starts should approximate 1.21 million with single-family volume of 0.797 million and multifamily starts of 0.413 million. New home sales should reach 574,000, up 14.6%. Existing home volume growth should be low-single digit (+3.0%). Average and median home prices should rise 3.0% - 3.5%, higher than earlier forecasts because of still-tight inventories.

Fitch believes 2017 could prove to be almost a mirror image of 2016. Real economic growth should be similar, although overall inflation should be more pronounced. Interest rates will rise further but demographics and employment growth should be at least as positive in 2017. First-time buyers will continue to gradually represent a higher portion of housing purchases as qualification standards loosen further. Land and labor costs will inflate more rapidly than materials costs. Housing starts should total 1.311 million. Single-family volume should expand 10% to 877,000, while multifamily starts grow 5% to 434,000. New home sales should reach 640,000, up 11.5%. Existing home sales should gain 4% to 5.625 million. Average and median home prices should expand 2.0% - 2.5% in 2017.

KEY ASSUMPTIONS

--BZH completes the proposed notes offering and repays its existing 6.625% senior secured notes;

--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.

--BZH's homebuilding revenues advance in the low to mid-teens during FY16;

--EBITDA margins expand 25 bps - 50 bps during FY16 compared with FY15;

--Land and development spending this year will be lower compared with FY15;

--The company generates cash flow from operations of $75 million - $125 million during FY16;

--Debt to EBITDA settles at around 9.0x and interest coverage is roughly 1.4x by the end of FY16.

RATING SENSITIVITIES

Negative rating actions may occur if BZH does not successfully execute on the proposed notes offering at reasonable terms. Negative rating actions could also occur if the company is unable to favorably refinance its 2019 debt maturities well ahead of their due dates, leading to a meaningfully diminished liquidity position. Moreover, Fitch may consider negative rating actions if the company's credit metrics deteriorate from current levels, including debt to EBITDA consistently above 10x and interest coverage below 1x.

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 the company preserves a healthy liquidity position.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings for Beazer Homes USA, Inc.:

--Long-Term IDR at 'B-';

--Secured revolver at 'BB-/RR1;

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

--Second lien secured term loan at 'BB-/RR1';

--Junior subordinated debt at 'CCC/RR6'.

Fitch has also upgraded the following ratings for BZH:

--Senior unsecured notes to 'B-/RR4' from 'CCC+/RR5'.

Fitch has also assigned a 'B-/RR4' rating to BZH's proposed offering of $300 million senior unsecured notes due 2022.

The Rating Outlook has been revised to Stable from Negative.

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 'RR4' on BZH's senior unsecured notes indicates 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.

Additional information is available on www.fitchratings.com.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and interest expense included in cost of sales and also excludes impairment charges and land option abandonment costs.

Applicable Criteria

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

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011336

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011336

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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