MOODY'S ASSIGNS Ba2 RATING TO BANK CREDIT FACILITY OF WALTER INDUSTRIES, INC.
Moody's Investors Service assigned Walter Industries, Inc. a Ba2 senior implied rating, a Ba2 rating to its new $500 million bank credit facility, and a Ba3 issuer rating. The ratings outlook is stable. These are the company’s first ratings since emerging from bankruptcy in 1995.
The ratings reflect the success of Walter Industries’ business model in homebuilding and financing despite catering to a customer base possessing a below-average credit quality profile. The ratings also acknowledge that the company generates free cash flow on a regular basis and has been able to delever its balance sheet, repaying approximately $400 million of debt since 1997. Leverage ratios for the company (excluding its financing subsidiary) are strong for the rating, with year-end 2002 pro forma debt/capitalization of 48.1% and pro forma debt/EBITDA of 2.3x (when excluding the fairly uniform upstreaming of excess cash from the financing subsidiary) and 1.7x (when including the upstreamed cash). Finally, the ratings consider that the company has a clean slate with regard to asbestos liabilities.
At the same time, the ratings reflect that Walter Industries is an assortment of largely unrelated operations, some of which are generally cyclical, commodity-oriented, and subject to price volatility. Although the company hopes to pare back to three core operations that are consistently profitable—homebuilding, financing, and industrial products—the non-core businesses (natural resources and carbon and metals) have not received any satisfactory bids, in some cases going back for a number of years. Top line results have been flat for three years while bottom line results, reflecting, in part, unusual, non-recurring, extraordinary, or other charges (largely non-cash), have been erratic over the same period, although pretax income before charges has risen over the period. The company carries significant postretirement benefits obligations ($296 million at 12/31/02) and other liabilities ($117 million at 12/31/02). Further, its pension fund has moved from an overfunded to an underfunded position, and as assumptions on returns and on the discount rate are tightened, the gap may widen.
The ratings assigned are listed as follows:
Ba2 senior implied rating
Ba2 on the $250 million, five-year revolving credit facility
Ba2 on the $250 million, seven-year Term Loan B
Ba3 issuer rating
The company has generated considerable free cash flow in each year since 1997, permitting it to cut debt by more than half over the time period, from roughly $700 million to a pro forma $314 million as of year-end 2002. Moody's expects free cash flow to continue being positive over the next several years, although there could be some year-to-year volatility, depending on the timing of new CMO financings.
Walter Industries’ homebuilding and financing segments, taken together, operate a successful business model. The homebuilding operations, begun in 1946, sell partially completed homes (mostly 90% complete) on land provided by the buyer. The customer base tends to be of lower credit quality than that of buyers of traditional homes. However, this lower customer credit quality has been offset by the higher collateral in the homes (land plus sweat equity as a down payment approaching 15-20%), the company's long history of mortgage servicing with intensive customer contact from the start, an active monitoring of payment delays, an aggressive follow-up process, quick repossession, and high resale rates. In the future, the company intends to utilize some 7000 of its 47,000 acres of land to develop more traditional homebuilding communities while offering a more conventional financing product as well. While this will result, if successful, in renewed growth in homes delivered and in the installment loan portfolio, the company's ability to execute on this strategy is as yet unproven.
The bank credit facility will be secured by a first lien on all of the company's accounts receivable, inventory, and machinery and equipment as well as by a pledge of the capital stock of the company's subsidiaries and will carry the guarantees of all material domestic subsidiaries, including those of its financing subsidiaries.
Going forward, the ratings outlook will depend on the company’s success in maintaining its capital structure discipline and in executing on its growth strategies in homebuilding and financing. Moody’s would view positively the company’s continuing reduction in debt leverage, growth in its equity base, and a successful conclusion to its non-core asset sale strategy. The ratings outlook could be negatively impacted if the company were to releverage its balance sheet significantly or to stumble significantly in implementing its growth strategy in homebuilding and financing.
Headquartered in Tampa, FL, Walter Industries, Inc. is a diversified company which operates in five reportable segments: Homebuilding, Financing, Industrial Products, Carbon and Metals, and Natural Resources. Revenues and earnings before a goodwill impairment charge for 2002 were $1.94 billion and $73 million, respectively.
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