MOODY'S ASSIGNS B3 RATING TO SENIOR UNSECURED NOTES OF WILLIAM LYON HOMES
Approximately $200 Million of Debt Securities Affected.
New York, August 21, 2002 -- Moody's Investors Service took the following rating actions with regard
to William Lyon Homes:
Senior Implied Rating is confirmed at B2
$200 million proposed senior unsecured notes due 2012 is assigned
a B3 rating
Senior Unsecured Issuer Rating is raised to B3 from Caa2
The outlook is stable.
Proceeds of the proposed new senior unsecured notes will be used to retire
the remaining balance of $70.3 million on the 12.5%
senior unsecured notes due 2003 (whose rating of Caa1 will be withdrawn)
and to repay nearly $125 million of senior secured debt (bank debt,
construction notes, and seller financing).
The rating actions reflect a shift in the company's capital structure
away from one top heavy with secured debt, the substantial growth
in the company 's equity base since 1997, its strong shares in key
California markets, and its healthy profitability.
At the same time, the ratings incorporate William Lyon Homes' geographic
concentration in California, the rising number of top 20 national
homebuilders in its markets, the heavy debt leverage employed,
and the historical record of frequent impairment losses (although none
have been taken in recent years).
Pro forma for the proposed new senior unsecured note offering as of June
30, 2002, secured debt within the company's capital structure
drops from 74% of total debt to 36%, and from 49%
of total capitalization to 24%. In addition, the new
notes will be issued at the operating company level (William Lyon Homes,
Inc., a California corporation). By contrast,
the existing 12.5% senior unsecured notes due 2003 were
issued at the parent holding company level (William Lyon Homes,
a Delaware corporation).
Since 1997, the company's book net worth has grown from a negative
$5.7 million to nearly $156 million as of June 30,
2002, largely from more than four years of solid, albeit uneven,
profitability and earnings retention. With goodwill at a modest
$6 million, tangible net worth resembles book net worth.
William Lyon Homes has been building in California for over 45 years and
is currently one of the top five homebuilders in Southern California,
the second largest homebuilder in Orange County in 2001, and the
largest homebuilder currently in Ventura County.
The company has been generating strong returns for the last three 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.
Despite expansion into Arizona and Nevada, the company remains heavily
concentrated in California. For the trailing twelve months ended
March 31, 2002, more than 80% of consolidated company
revenues and substantial 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 was among the top five 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.
Despite the growth in its equity base and the gradual reduction in its
debt since 1997, William Lyon Homes remains heavily leveraged,
with a total debt to capitalization ratio of 66.2% at June
30, 2002. Pro forma for the proposed new senior unsecured
notes, total debt to capitalization rises modestly, to 66.7%,
with pro form debt/EBITDA coming in at 4.3x.
Although the company has not had a significant land impairment charge
since 1997, it had four large charges between 1992 and 1997.
The 1997 charge was for $74 million and plunged the company's tangible
net worth below a certain threshold, which triggered mandatory $20
million semi-annual prepayments of the 12.5% notes.
This also had the effect of restricting the company's ability to acquire,
hold, and develop real estate projects, especially the larger
ones or those involving higher priced homes. As a result,
the company began forming joint ventures in 1997 with well-capitalized
joint venture partners which provided the capital upfront. By year-end
2001, William Lyon Homes was involved in 25 unconsolidated joint
ventures that had revenues for the year of $321 million (vs.
$468 million of consolidated company revenues) and net income of
$48 million (vs. $48 million at the consolidated
company level). These ventures were conservatively capitalized,
with $199 million of equity capital (of which the company had a
$55 million share) supporting only $72 million of debt.
Going forward, the company intends to retain more of the development
projects on its own books but will continue using joint ventures for the
Because the proposed new senior notes are unsecured, they are both
structurally and effectively 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 joint ventures.
This accounts for the notching off the senior implied debt rating of the
Future events that could potentially stress William Lyon Homes' senior
implied rating include its taking another significant land impairment
charge, further leveraging its capital structure, and having
relatively poorer performance than its peers during any industry downturn.
Future events that could adversely impact the rating on the proposed new
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 facility, which is currently sized
at $215 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 maintain its strong
financial performance throughout the next industry downturn and growing
its equity base considerably 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.
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service