MOODY'S RAISES RATINGS OF WILLIAM LYON HOMES, INC.
Approximately $400 Million of Debt Securities Affected
New York, April 16, 2004 -- Moody's Investors Service raised the ratings of William Lyon Homes,
including its senior implied rating to B1 from B2, its issuer rating
to B2 from B3, and the ratings on the company's senior unsecured
notes to B2 from B3. The ratings outlook is stable.
The upgrades reflect the company's healthy and growing profitability
and the substantial growth in its equity base from the nadir reached in
1997 while the ratings themselves incorporate 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 token 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 changes were made:
Senior implied rating was raised to B1 from B2
Senior unsecured issuer rating was raised to B2 from B3
$246 million of 10.75% senior unsecured notes due
4/01/2013 were raised to B2 from B3
$150 million of 7.5% senior unsecured notes due 2/15/2014
were raised to B2 from B3
The senior unsecured 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 while book net
worth has grown from a negative $5.7 million in 1997 to
$252 million as of December 31, 2003. With goodwill
at a modest $6 million, tangible net worth resembles book
net worth. Debt leverage has been reduced as a result, with
homebuilding debt/capitalization decreasing from greater than 100%
in 1997 to a pro forma 61% at year-end 2003. 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
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) and net income of
$58 million (vs. $72 million at the consolidated
company level). 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 will continue
using joint ventures for the larger projects.
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 7.5%
senior unsecured notes in February 2004, secured debt within the
company's capital structure was reduced to less than 5%,
although this will only be temporary as the company is entering its period
of peak working capital usage and borrowings under its secured bank line.
However, the days of secured obligations' comprising 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.
Despite the growth in its equity base and the gradual reduction in its
debt since 1997, William Lyon Homes remains moderately heavily leveraged,
with a year-end pro forma debt to capitalization ratio (taking
into account its February 2004 issuance of the $150 million of
7.5% senior note and repayment of $71 million of
short-term debt), was 61% and pro form debt/EBITDA
ratio was 2.4x.
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 $325 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 in 2003 were $898 million
and $72 million, respectively.
Corporate Finance Group
Moody's Investors Service
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service