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Rating Action:

MOODY'S UPGRADES SENIOR NOTES OF M.D.C. HOLDINGS, INC. TO Baa3

16 Jan 2003
MOODY'S UPGRADES SENIOR NOTES OF M.D.C. HOLDINGS, INC. TO Baa3

Approximately $325 Million of Debt Securities Affected

New York, January 16, 2003 -- Moody's Investors Service raised M.D.C. Holdings, Inc.'s senior implied rating, issuer rating, and the rating on its senior notes to Baa3 from Ba1. The ratings outlook is changed to stable from positive.

The upgrades reflect the company's success in diversifying its profit base away from Colorado, its consistent generation of some of the strongest financial ratios within the homebuilding industry, its conservative accounting and cautious land position, the strong, largely organic growth rate, the growing equity base, and significant management ownership. At the same time, the ratings consider the company's still large concentration in the Colorado market, its smaller equity base relative to those of its peer group, the intense competition it faces in each of its markets, and the cyclical nature of the homebuilding industry. In addition, the ratings reflect the rapid expansion in new and existing markets, which is leading to an unaccustomed debt build up. Further, Moody's believes the possibility exists that the senior notes due 2008 may be refinanced, which would lead to the absence of any provisions in its remaining note indentures that would protect note holders against a potential decapitalization.

The rating changes for M.D.C. Holdings, Inc. ("MDC") are listed as follows:

Senior implied rating raised to Baa3, from Ba1

Senior unsecured issuer rating raised to Baa3, from Ba1

$175 million of 8.375% senior notes due 2/01/2008 raised to Baa3, from Ba1

$150 million of 7% senior notes due 12/01/2012 raised to Baa3, from Ba1

Although MDC derived 38% of its home closings in Colorado in 2000, its profits from Colorado constituted a significantly greater proportion of its homebuilding total. In 2001, Colorado accounted for a still substantial, but reduced, percentage of homebuilding profits, and in 2002 and beyond, the profit contribution from Colorado is projected to continue declining steadily -- from more rapid growth in several other markets and from entry into new markets. MDC's geographic diversification outside of Colorado continues to evolve.

The company has produced some of the strongest financial ratio performance in the industry. Among its peer group, MDC generated over the three-year period 2000-2002 the highest EBIT and EBITDA margins, the strongest interest coverage, and the best returns (ROA and ROE) despite carrying the lowest debt leverage (debt/cap and debt/EBITDA). This performance was achieved with some of the most conservative financial policies and practices in the industry as well. The company has no joint ventures or off-balance sheet partnerships, no specific performance land options, and miniscule goodwill, with the latter resulting from the company's practice of pursuing largely organic growth. MDC's land inventory practices are also among the industry's most conservative, with owned land typically representing less than a two-year supply.

MDC's equity base has grown to $801 million as of the end of the year ended December 31, 2002 and could approach $1 billion by year-end 2003. Management owns 30% of the common shares outstanding.

The company's ratings also reflect its continued large concentration in the Colorado market, despite the more rapid growth it is seeing in newer markets. The Colorado concentration, while significantly reduced, still represents a big share of the company's operating profits. A regional downturn could have a significant impact on the company's bottom line.

Like the rest of the homebuilding industry, MDC faces intense competition in each of its markets. Although still number one overall in Colorado, the company is no longer number one in Denver. Although it is still likely to maintain one of the industry's strongest balance sheets going forward, MDC is adding to its debt levels to fund its rapid expansion in faster growing existing and newer markets. As a result, leverage is likely to increase from its three-year average of 28% (debt/cap) and 0.9x (debt/EBITDA) to 35-40% and above 1.25x, respectively, in 2003.

The company's equity base, while growing steadily, is the smallest within its peer group and is exceeded by a significant amount by those of some of its larger competitors.

Of MDC's two existing note indentures, only the indenture for the senior notes due 2008 contain a restricted payments baskets. Moody's believes that these notes could be refinanced in the near term, which would leave the company free to engage in share repurchases virtually without limitation. Although the company has been very conservative in this regard in the past, which has helped produce one of the industry's strongest balance sheets, Moody's is concerned that once an industry downturn does occur, share repurchases may possibly become more of a priority use of the excess cash that the company will likely generate.

Going forward, the ratings outlook will depend on MDC's maintaining its capital structure discipline, growing its equity base, and continuing to reduce its Colorado concentration. Moody's believes that the capital base of an investment grade company cannot be subject to management actions that decapitalize or unduly stress the balance sheet.

Based in Denver, Colorado, M.D.C. Holdings, Inc., sells homes to the first-time and move-up buyer. The company is the largest homebuilder in Colorado; among the top five homebuilders in Northern Virginia, Phoenix, Tucson, and Las Vegas; among the top 10 homebuilders in suburban Maryland, Northern California, and Southern California; and has recently entered the Salt Lake City and Dallas markets. The company also provides mortgage financing, primarily for MDC's home buyers, through its wholly-owned subsidiary, HomeAmerican Mortgage Corporation.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Joseph A. Snider
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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