MOODY'S ASSIGNS B2 RATING TO SENIOR NOTES OF WILLIAM LYON HOMES, INC.
Approximately $550 Million of Debt Securities Affected
New York, November 24, 2004 -- Moody's Investors Service assigned a B2 rating to the recent issue of
$150 million of 7.625% Senior Notes of William Lyon
Homes, Inc.. At the same time, Moody's
confirmed the company current ratings, including its B1 senior implied
rating, B2 issuer rating, and B2 ratings on the company's
existing issues of senior unsecured notes. The ratings outlook
The stable outlook is based on Moody's expectation that William
Lyon Homes will exercise capital structure discipline as it takes advantage
of growth opportunities in California and elsewhere. The repurchase
of 1,275,000 shares of its common stock, of which approximately
$70 million of the net proceeds of this offering were used to fund,
represents a departure from this expected discipline but the company's
balance sheet and ratings can accommodate this transaction.
The ratings reflect the company's healthy and growing profitability and
the substantial growth in its equity base from the nadir reached in 1997;
the company's successful strategy of forming very profitable joint ventures
in California, particularly for high-priced homes,
in which it has to put up only minimal equity; its strong shares
in key California markets; and the shift in its capital structure
away from one that was top-heavy with secured debt.
At the same time, the ratings acknowledge William Lyon Homes' heavy
geographic concentration in California, the rising number of top
20 national homebuilders in its markets, the moderately heavy debt
leverage employed, and the continued presence of secured debt,
albeit reduced, in the capital structure.
The following ratings actions were taken:
B2 assigned on $150 million of 7.625% Senior Notes
B1 senior implied rating confirmed
B2 senior unsecured issuer rating confirmed
B2 confirmed on the $246 million of 10.75% Senior
Notes due 4/01/2013
B2 confirmed on the $150 million of 7.5% Senior Notes
The senior notes are senior unsecured obligations of William Lyon Homes,
Inc. (a California operating company) and are unconditionally guaranteed
on a senior unsecured basis by William Lyon Homes (a Delaware corporation,
which is the parent company) and all of its existing and certain of its
future restricted subsidiaries.
Because the senior notes are unsecured, they are both contractually
and structurally subordinated to William Lyon Homes' bank credit facilities,
which are secured (and are not rated by Moody's), and to the off-balance
sheet debt at the company's joint ventures. This accounts for the
notching of the senior notes below that of the senior implied debt rating
of the company.
The company's operating results and financial profile have shown marked
improvement in recent years. The company has been profitable each
year since 1997, with net income ranging between $39 million
and $72 million for the last five years through year-end
2003, while net income for the nine months of 2004 climbed to $91.5
million. Book net worth has grown from a negative $5.7
million in 1997 to $348 million as of September 30, 2004,
although the recent share repurchase, offset in part by expected
fourth quarter earnings, will reduce that figure by year-end.
With goodwill at a modest $6 million, tangible net worth
resembles book net worth.
As a result, debt leverage has been reduced, with homebuilding
debt/capitalization decreasing from greater than 100% in 1997 to
a pro forma 72% as of the nine months ended September 30,
2004. Pro forma homebuilding debt/LTM adjusted EBITDA as of the
end of the same time period was 2.4x. The company has been
generating strong returns for the last five years, with mid-to-high
double-digit returns on equity (even after excluding a healthy
income contribution from unconsolidated joint ventures). Return
on assets (EBIT/assets) has run at the low to mid-double digit
range. These are healthy profitability metrics for a B1 credit
and help mitigate the moderately heavy debt leverage employed.
In 1997, the company's ability to acquire, hold, and
develop real estate projects on its own, especially the larger ones
or those involving higher priced homes, became restricted as a result
of financial covenant violations. Consequently, it began
forming joint ventures with well-capitalized joint venture partners
that provided the bulk of the required capital, usually upfront.
By year-end 2003, William Lyon Homes was involved in 14 unconsolidated
joint ventures that had revenues for the year of $326 million (vs.
$898 million of consolidated company revenues). These ventures
were conservatively capitalized as well, with $94 million
of equity capital (of which the company had a $43 million share)
supporting $111 million of debt. Going forward, the
company has the flexibility of keeping more of the development projects
on its own books but may continue using joint ventures for the larger
The company has been building in California for over 45 years and continues
to hold strong shares in key markets. It currently is number eight
overall in Southern California, number four in Orange County,
number seven in San Diego (for single-family homes), and
number 11 overall in Northern California.
Pro forma for the issuance of the $150 million of 7.625%
senior notes and repayment of approximately $78 million of secured
bank debt, secured debt within the company's capital structure will
be less than 20%. This figure fluctuates during the year
with peak borrowings in the summer months and much lower levels by year-end.
However, the days when secured obligations comprise 50-100%
of the debt portion of the capital structure should be behind the company.
On the flip side, despite expansion into Arizona and Nevada,
the company remains heavily concentrated in California. For the
year ended December 31, 2003, approximately 80% of
company's revenues (including that of its joint ventures) and a substantial
proportion of its gross profits were derived from California.
In 1991, The William Lyon Co. (a predecessor affiliate) was
the largest Southern California homebuilder and The Presley Cos.
(a predecessor company) was number 12. By 2001, William Lyon
Homes had dropped to among the top ten homebuilders in Southern California
and among the top ten in California as a whole in markets that now included
a rising number of top 20 national homebuilders.
Future events that could potentially stress William Lyon Homes' senior
implied rating include its taking another significant land impairment
charge (it took four between 1992 and 1997), further leveraging
its capital structure, or having relatively poorer performance than
that of its peers during any industry downturn. Future events that
could adversely impact the rating on the senior unsecured notes include
the addition of a new permanent wedge of senior secured debt to the capital
structure. Moody's anticipates that the secured bank credit facilities,
which are currently sized at $395 million, will be used largely
for seasonal working capital needs. Consideration for further improvement
in the company's ratings will include the ability of the company to reduce
its California concentration considerably, maintain its strong financial
performance throughout the next industry downturn, and grow its
equity base substantially while reducing debt leverage below the current
Begun in 1956 and headquartered in Newport Beach, California,
William Lyon Homes designs, builds, and sells single family
detached and attached homes in California, Arizona and Nevada.
Consolidated revenues and net income for the last twelve months ended
September 30, 2004 were $1.6 billion and $130
Corporate Finance Group
Moody's Investors Service
Joseph A. Snider
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service