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Announcement:

MOODY'S AFFIRMS WALTER INDUSTRIES' Ba2 SENIOR IMPLIED RATING; OUTLOOK REMAINS STABLE

18 Mar 2005
MOODY'S AFFIRMS WALTER INDUSTRIES' Ba2 SENIOR IMPLIED RATING; OUTLOOK REMAINS STABLE

Approximately $420 million of rated debt affected

New York, March 18, 2005 -- Moody's affirmed the debt ratings for Walter Industries, Inc. and maintained the company's stable rating outlook. Continued maintenance of the stable outlook is subject to an improvement in the company's homebuilding business. Moody's notes that the ratings benefit from extremely high metallurgical coal prices, which have helped bolster the company's operating income and cash flow.

The affirmed ratings are:

Senior Implied, rated Ba2;

$245 million senior secured revolving credit facility, due 2008, rated Ba2;

$175 million senior subordinated notes, due 2024, rated B1;

Issuer Rating, rated Ba3.

The rating outlook is stable.

Moody's affirmation of Walter Industries' ratings reflects the company's improved financial performance as a result of the improvement in its Natural Resources and Industrial Products segments. The improvements in these segments helped offset increased weakness in the company's Homebuilding segment. The increase in coal prices during 2004 allowed the company to generate significantly higher free cash flow even though its homebuilding business deteriorated. The performance of the company's coal operations should be stronger in 2005, since the prices for a large percentage of its coal sales are already fixed at much higher levels than in 2004. However, the risks associated with the coal operations, the high capital investment required to maintain production, and the potential for coal prices to decline from today's unprecedented levels, underscore the importance Moody's places on Walter Industries' restoring the financial performance of the homebuilding operations.

Walter Industries' financial performance has benefited greatly from the diversity of its largely unrelated operations. In particular, its 2004 performance was shored by strength in its Natural Resources and Industrial Products segments. For 2004, the company's Natural Resources segment reported a contribution to operating income of $69.7 million vs. a $26.4 million loss in 2003. The company's Industrial Products segment also reported a significant improvement in 2004, with operating income of $7.6 million versus a $13.5 million operating loss in 2003. The company's financing business was relatively stable with a 2004 contribution to operating income of $54.8 million vs. $52.4 million the previous year. However, the company's Homebuilding segment, which has historically been its core business, reported a $33.3 million operating loss vs. a small loss in 2003 of $0.5 million. The company's homebuilding operations have weakened due to weak demand for build on-your-lot homes, labor scheduling problems, outdated models, poor weather, and a less-than-successful attempt to compete with the larger homebuilders directly by building developments. Furthermore, the low interest rate environment has enabled potential customers to afford housing beyond the $50,000 to $150,000 price range of Jim Walter Homes. Various initiatives are being pursued to improve the performance of the homebuilding operations, including new models, marketing campaigns, remodeling display parks, enhancing purchasing and construction displays to reduce cost overruns, and other efficiency based initiatives.

Walter Industries' reliance on its coal operations for its improved cash flows is an important risk given the possibility of future price declines, normal reserve depletion, ongoing cost pressures, and the company's decision to invest $135 million to expand met coal production at its Mine No 7. The expansion requires considerable development work and, as a result, full production will not begin until late 2008. Mining costs may be quite high, especially if post-2008 production targets are not reached. Therefore, the return on this project depends heavily on future met coal prices.

The ratings and or outlook may deteriorate if coal prices decline, if investments to increase production at Mine No. 7 are greater than anticipated, if homebuilding does not improve significantly, or if the company's mortgage operation experiences a material increase in its loss ratios. Although the company's ratings are considered weakly positioned for the rating category, they may improve if the company is able to build a business model that leads Moody's to anticipate lower business risk and higher stability in its cash flow generation.

Although Walter has little leverage, the company has an underfunded pension liability that totaled $88 million as of September 30, 2004. EBITDA to interest, excluding the financial services business, for FY2004 was around 7 times and is expected to improve to over 10.5 times in FY2005. Total debt less financial services obligations to EBITDA for FY 2004 is expected to be approximately 1.3 times and to improve to below 1 time in FY 2005. The company's fiscal year 2004 EBITDA is expected to be around $131 million. The company's free cash flow to total debt ratio for 2004 was above 30% and expects the company to maintain the ratio above the 20% range for FY2005.

Headquartered in Tampa, FL, Walter Industries, Inc. is a diversified company that operates in five reportable segments: Homebuilding, Financing, Industrial Products, Natural Resources, and Other. Revenue was approximately $1.5 billion in FY2004.

New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Paul Aran
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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