MOODY'S ASSIGNS B3 RATING TO SENIOR UNSECURED NOTES OF WILLIAM LYON HOMES, INC.
Approximately $400 Million of Debt Securities Affected
New York, January 30, 2004 -- Moody's Investors Service assigned a B3 rating to the new issue of $150
million of senior unsecured notes of William Lyon Homes, Inc.
(a California operating company) and confirmed the B2 senior implied rating
and B3 senior unsecured issuer rating of William Lyon Homes (the Delaware
parent company). The ratings outlook is stable.
The ratings reflect William Lyon Homes' heavy geographic concentration
in California, the rising number of top 20 national homebuilders
in its markets, and the moderately heavy debt leverage employed.
At the same time, the ratings acknowledge the shift in the company's
capital structure away from one that was 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 and growing profitability.
Proceeds of the proposed new senior unsecured notes will be used to retire
existing short-term debt and to prefund a portion of the company's
2004 working capital requirements.
The following rating actions were taken:
Senior implied rating was confirmed at B2
$150 million of 7.5% senior unsecured notes due 2/15/2014
was assigned a B3
$246 million of 10.75% senior unsecured notes due
4/01/2013 was confirmed at B3
Senior unsecured issuer rating was confirmed at B3
The new 7.5% notes as well as the existing 10.75%
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.
Despite expansion into Arizona and Nevada, the company remains heavily
concentrated in California. For the year ended December 31,
2003, more than 70% of consolidated company revenues and
a greater percentage of profits were expected to be 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 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.
Despite the growth in its equity base and the gradual reduction in its
debt since 1997, William Lyon Homes remains moderately heavily leveraged,
with an estimated pro forma total debt (excluding mortgage company debt)
to capitalization ratio exceeding 60% and an estimated pro form
debt/EBITDA ratio in the mid-2x as of December 31, 2003.
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 on an old issue of 12.5%
notes. This also had the effect of restricting 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. Going forward, the company intends to retain more
of the development projects on its own books but will continue using joint
ventures for the larger projects.
On the plus side, pro forma for the proposed new senior unsecured
note offering as of December 31, 2003, secured debt within
the company's capital structure will be reduced considerably, although
this will only be temporary as the company will shortly be entering its
period of peak working capital usage and borrowings under its secured
Since 1997, the company's book net worth has grown from a negative
$5.7 million to approximately $210 million as of
September 30, 2003, largely from more than six 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 ten homebuilders in Southern California,
the fifth largest homebuilder in Orange County in 2003, and the
seventh largest homebuilder in San Diego County in 2003.
The company has been generating strong returns for the last four 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.
Because the proposed new senior notes are unsecured, they are both
contractually 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 of the senior notes below
that of the senior implied debt rating of the company.
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 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 $275
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,
maintain its strong financial performance throughout the next industry
downturn, and grow its equity base considerably while reducing debt
leverage below the current levels.
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.
Corporate Finance Group
Moody's Investors Service
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service