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Rating Action:

MOODY'S RATES M.D.C. HOLDINGS' SR. DEBT Ba3, SUB. DEBT B2, AND UNSECURED BANK FACILITY Ba2

06 May 1997
MOODY'S RATES M.D.C. HOLDINGS' SR. DEBT Ba3, SUB. DEBT B2, AND UNSECURED BANK FACILITY Ba2 New York, 05-06-97 -- Moody's Investors Service assigned a Ba3 rating to M.D.C. Holdings, Inc.'s 11.125% senior notes, and B2 ratings to its 8.75% and 6.64% convertible and fixed subordinated notes, respectively. A Ba2 rating was also assigned to M.D.C.'s $175 million senior unsecured bank facility due 2001. The Denver-based company is the ninth-largest homebuilder in the U. S.

The ratings reflect, lower gross margins than peers but improving; marginal EBIT growth; the housing buildup in the West, where it is now focusing its expansion efforts; historical dependence on the financial services segment to bolster somewhat weaker, but improving, housing profits; and the intense competition that M.D.C. faces in all its markets. However the ratings are supported by M.D.C.'s record of strong sales and profitability over the past few years; its declining leverage and land holdings; and its continuing expansion into regions outside of Colorado, its major market.

The company has amended its senior unsecured credit agreement with a syndicate of banks headed by Bank One, providing for an increase from $150 million to $175 million and extending the maturity to June 2001. The revolver was drawn down $11.8 million at March 31, 1997. The senior note rating is notched lower as a result of the senior notes having a subordinate guarantee.

M.D.C.'s homebuilding gross profit margins are improving but still below the high in 1994 of 15.4%. Gross margins had declined from 15.4% in 1994 to 13.7% in 1996 but have regained strength the last two quarters. This decline reflected its continued incentive offers to reduce its inventory of older unsold homes under construction; increased incentives in the second half of 1994 and the first quarter of 1995 due to higher interest rates, and in 1996 due to increased costs associated with severe weather conditions in the Mid-Atlantic. Gross margins have improved the last two quarters to 14.1% and 14.7% as a result of stronger market conditions in Colorado and relatively larger contribution from profitable projects in Las Vegas, Phoenix and California.

The company's EBIT has remained flat over the past two years increasing marginally from $71.8 million in fiscal 1994 to $72.2 million in fiscal 1996. While the company may use EBITDA for measurement purposes Moody's believes EBIT is a better measurement for homebuilder financial comparisons.

Its home sales grew from $417 million in 1992 to $880 million in 1996. During the same period Colorado sales fell from 51% to 37% of the total, reducing M.D.C.'s dependence on that market. The Mid-Atlantic states, which accounted for close to 30% of sales in 1994, provided 21% in 1996, and M.D.C. has redeployed capital to its growing operations in California, Arizona and Nevada. By strengthening its market position in other geographic markets, M.D.C. will reduce its exposure to the future downturns of Colorado. However, as Mid-Atlantic closings make up less of the total closings, M.D.C. faces a housing buildup in the West.

M.D.C. divides its operating profits into two categories. Homebuilding contributed 60% of operating profit in 1996; and financial services-- mortgage lending and asset management--contributed 40%. The financial services segment boosted overall earnings in 1996 primarily due to a $4 million gain recognized on the sale of FAMC and record profits from the mortgage lending operations as a result of servicing rights sales.

Going forward reliance on the financial services segment for operating profit is expected to lessen as demonstrated in the first quarter 1997 where only 20% of operating profits were generated from the financial services segment, primarily from mortgage lending operations, which the company considers to be an integral part of its homebuilding business. The company does not expect future operating results related to asset management to be material.

M.D.C. has strengthened its balance sheet over the past few years with total debt of approximately $253 million at year-end 1996, down from $348 million at year-end 1994. The debt to book capitalization ratio was 54% for 1996, a decrease from 64% from 1994. Interest coverage has improved to 2.4 times in 1996 from 2.0 times in 1994, while debt to EBIT has improved from 4.8 times in 1994 to 3.5 times in 1996.

Equity has increased only modestly to $214 million at year end 1996 from $192 million at year end 1994. The impact of increased profitability on the company's equity account was offset by common stock buybacks in 1995 and 1996 of $5.5 million and $13 million, respectively.

In addition, M.D.C. announced on April 2, 1997 the repurchase of $38 million of its 11.125% senior notes due 2003. This should reduce the company's fixed charges by approximately $1.3 million in 1997 and $1.8 million in future years. As most homebuilders are using cash to buy back stock we are also pleased to see M.D.C. using cash to partially reduce debt of the bondholders.

Through options M.D.C. owned or controlled 16,762 home sites as of March 31, 1997, giving it a land supply of approximately 3.4 years based on 1996 deliveries. This represented a dramatic reduction since 1993, when it controlled 24,613 home sites and a land supply of over 7 years (based on 1993 deliveries).

Through land sales and delivery growth the company has modestly reduced the percentage of its owned land vs. total lots controlled from 66% in 1993 to 63% in the first quarter ended March 1997. Revenue from land sales totaled $8.3 million in 1994, $10.4 million in 1995, and $9.5 million in 1996.

However, impairment losses due to its large land supply were $4 million in 1994, $3.7 million in 1995, $9.2 million in 1996, and $1.3 million in the first quarter of 1997. Thus although M.D.C. has been proactive in reducing its land supply, continued impairment losses remain a concern.

M.D.C. Holding, Inc. based in Denver, Colorado, is the ninth largest homebuilder in the United States building homes under the name "Richmond American Homes."

No Related Data.
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