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Rating Action:

Moody's assigns a Baa3 rating to MDC's add-on notes, outlook remains negative

Global Credit Research - 08 May 2013

Approximately $1.1 billion of debt securities affected

New York, May 08, 2013 -- Moody's Investors Service assigned a Baa3 rating to MDC Holdings, Inc.'s ("MDC") proposed $100 million 6.0% senior unsecured add-on notes due 2043. In the same rating action, we affirmed the Baa3 rating on MDC's existing senior unsecured notes and the existing shelf ratings were affirmed. The rating outlook remains negative.

The following rating actions were taken:

Issuer: M.D.C. Holdings, Inc.

Proposed $100 million 6.0% senior unsecured add-on notes due 2043, assigned a Baa3;

Existing senior unsecured notes, affirmed at Baa3;

Senior unsecured shelf (domestic), affirmed at (P)Baa3;

Senior unsecured medium term note shelf (MTN, domestic), affirmed at (P)Baa3;

Senior subordinate shelf (domestic), affirmed at (P)Ba2;

Junior subordinate shelf (domestic), affirmed at (P)Ba2;

Subordinate MTN (domestic), affirmed at (P)Ba2;

Preferred shelf (domestic), affirmed at (P)Ba3;

Negative outlook.

Issuer: MDC Capital Funding Trust I

Backed preferred shelf (domestic), affirmed at (P)Ba3;

Negative outlook.

Issuer: MDC Capital Funding Trust II

Backed preferred shelf (domestic), affirmed (P)Ba3;

Negative outlook.

The proceeds from the $100 million 6.0% senior unsecured add-on notes will be designated for general corporate uses. MDC's cash balance will increase by the amount of the offering, while specific uses such as potential land investments or debt retirement going forward will be determined by management based on market conditions.

RATINGS RATIONALE

The proposed transaction results in a higher absolute debt level, and pro forma adjusted homebuilding debt to capitalization ratio rises to 55% from the 53% that it was at March 31, 2013 after the company's $250 million note offering. We note that MDC turned the corner on profitability in 2012 and increased its adjusted gross margins to 16% from 15% in 2011. These margins should be considerably higher in 2013. We can now see a path for MDC to lift its income statement metrics to near investment grade levels by the end of 2014 and to acceptable to healthy levels by year-end 2015. We also consider that the expected reversal of the deferred tax valuation allowance will help MDC's homebuilding debt leverage to decline in the intermediate term and approach investment grade levels by year-end 2014.

The Baa3 rating considers MDC's conservative land strategy and clean and transparent balance sheet, notably its lack of off-balance sheet recourse obligations such as joint venture debt and specific performance lot option contracts. Additionally the rating incorporates positive net income generation (the company generated $63 million of net income in 2012), improving gross margins, and our view that the healthy industry conditions will result in further expansion of earnings in 2013 and 2014.

At the same time, we recognize that, while improving, most of the company's traditional credit metrics remain relatively weak, coming from very low levels reached at the depth of the downturn. MDC's rating is also constrained by the accelerating land spend due to increasing volumes and the resulting negative cash flow generation.

The negative outlook reflects Moody's expectation that the company will continue underperforming on many of its key credit metrics for up to two years without having the formerly strong mitigant of a sizable net cash position. After holding a net cash position for the last five years, which had been a distinguishing strength of the company, MDC is now in a net debt position, which is likely to widen, largely because of increasing land spend.

MDC has a solid liquidity profile, supported by $876 million of unrestricted cash and investments at March 31, 2013, which will be augmented by the size of the note offering; lack of debt maturities until December 2014, when $250 million of 5.375% senior unsecured notes come due; and the absence of bank covenants with which to maintain compliance. However, the company's liquidity is likely to weaken from its increasing land spend and negative cash flow, which will burn cash and result in a growing net debt position. The liquidity is also constrained by the current lack of a revolving credit facility.

The outlook could be restored to stable if the company demonstrates that its expected cash burn is compensated for by a more rapid than expected restoration of respectable credit metrics.

The ratings could come under pressure if the company's earnings growth slows, homebuilding debt leverage does not begin to decline, and/or if liquidity weakens such that cash declines significantly without a committed revolving credit facility in place. Further, the ratings could be lowered if the company made a sizable debt-financed acquisition or instituted a material share repurchase program.

Based in Denver, Colorado, M.D.C. Holdings, Inc. ("MDC"), whose subsidiaries build homes under the name "Richmond American Homes," is a mid-sized national homebuilder. The company also provides mortgage financing, primarily for MDC's homebuyers, through its wholly owned subsidiary, HomeAmerican Mortgage Corporation. MDC has homebuilding divisions across the country, including Denver, Colorado Springs, Salt Lake City, Las Vegas, Phoenix, Tucson, California, Northern Virginia, Maryland, Philadelphia/Delaware Valley, Jacksonville and Orlando, and Seattle. Total revenues and consolidated net income in the last twelve months ended March 31, 2013 were approximately $1.3 billion and $83 million, respectively.

The principal methodology used in this rating was the Global Homebuilding Industry Methodology published in March 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Joseph A. Snider
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns a Baa3 rating to MDC's add-on notes, outlook remains negative
No Related Data.

 

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