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Global Credit Research - 24 Nov 2010
London, 24 November 2010 -- Moody's Investors Service has today assigned to Taylor Wimpey plc ("Taylor
Wimpey", "the company") a first-time Corporate
Family Rating (CFR) and Probability of Default Rating (PDR) of B2 with
a stable outlook. Moody's has also assigned a provisional
(P)B2 senior unsecured rating to the proposed GBP250 million senior unsecured
notes due 2015, with a loss given default assessment of LGD4.
Taylor Wimpey is a leading, publicly quoted UK homebuilder with
operations in the US, Canada and Spain.
Moody's issues provisional ratings in advance of the final sale of securities
and these ratings reflect Moody's preliminary credit opinion regarding
the transaction only. Upon a conclusive review of the final documentation,
Moody's will endeavour to assign a definitive rating to the notes.
A definitive rating may differ from a provisional rating.
The notes will be issued by Taylor Wimpey plc and will be guaranteed by
Taylor Wimpey UK Ltd on a shortfall basis to the extent of any shortfall
on the amounts due to the noteholders after taking into account all recoveries
that the noteholders receive or are entitled to receive from the issuer
and any other guarantor. The guarantor(s) must own at least 90%
of the gross assets of the consolidated UK business at all times.
Upon completion of the current refinancing transactions, the shortfall
guarantee will protect the noteholders' senior unsecured pari passu
ranking to all other senior unsecured debt which will have been issued
by Taylor Wimpey plc with the same shortfall guarantee, including
a GBP950 million credit facility and a GBP100 million private placement
fund facility at Taylor Wimpey plc. According to the company,
the rationale for this shortfall guarantee is to satisfy all parties,
including the UK pension trustees, that no one creditor is able
to gain priority over the others by trying to enforce their claim ahead
of the others. Therefore, it is Moody's understanding
that the notes will represent senior unsecured obligations and rank pari
passu with all other unsecured and unsubordinated debts of the issuer
and the guarantor(s) (subject, in the case of the guarantee from
Taylor Wimpey UK Ltd, to the aforementioned shortfall nature of
such guarantee). Future incurrence of any secured financial debt
by the company or the guarantor(s) that could rank in priority to the
noteholders is limited (subject to certain exceptions) to a maximum of
GBP50 million under the indenture save that an additional GBP100 million
of such debt may be incurred in the North American subsidiaries provided
there is no recourse to the issuer or its subsidiaries other than the
North American Subsidiaries. No secured financial debt will be
outstanding at the time of completion of the refinancing and the company
does not intend to incur any further financial debt with recourse to the
issuer or its subsidiaries other than on a senior unsecured basis.
The instrument rating has not been notched down from the CFR at this point
because, although the nature of the guarantee introduces an element
of potential delay in the recovery process, the rating agency understands
that senior unsecured creditors are protected by the restrictions in the
documentation and by their pari passu ranking to other senior unsecured
debtholders and the UK pension funds, which limit the risk of effective
Moody's says the key strengths that support the B2 rating with stable
outlook are Taylor Wimpey's solid competitive position, diversity
and scale, as measured by number of houses sold, total revenues
and tangible net worth. The company is the second largest homebuilder
in the UK by sales volume and lies in the top 10 in United States.
Its operations are broadly diversified and it benefits strongly from economies
The rating is constrained by the company's poor profit performance
in the recent past - it has not returned a profit in any of the
past three years - which is directly related to a collapse in demand
from homebuyers as mortgage lending dried up in the UK and foreclosures
soared in the US. The company may have turned the corner on profitability
in H1 2010 with operating margins rising and positive net income of GBP7
million; however, Moody's believes a recovery in the
homebuilding industry in the UK and the US is likely to be slow and uneven.
The company's financial strength is in line with the overall rating
and underpinned by its having produced positive free cash flow in all
but one of the years from 2006 through 2009 and H1 2010. This was
achieved by reducing inventory levels, controlling expenditure and
growing margins. However, the amount of debt carried is large
relative to cash flows and the three-year average FCF/adjusted
debt and FFO/adjusted debt metrics for 2007-2009 are relatively
weak compared to its rated peers at 2.2% and 0.8%
respectively. Note that Moody's adjusts debt to include the
capitalisation of any operating leases and the company's substantial
pension fund deficit, which was GBP421 million at H1 2010.
The company's capital structure provides some support to the rating.
The three-year (2007-2009) average leverage ratio,
defined as adjusted debt/total capitalisation was 45.6%.
Taylor Wimpey raised new equity in May 2009, in conjunction with
renegotiating its bank debt, to strengthen the balance sheet.
The company has applied new equity raised in 2009 and free cash flow towards
a reduction of debt levels to improve H1 2010 leverage and financial strength
metrics compared to H1 2009.
Moody's assessment of Taylor Wimpey's liquidity risk indicates
a reliance on its revolving credit facilities for seasonal shifts in working
capital, but the company has adequate sources of funds to meet outgoings
over the next twelve months. At H1-2010 the company was
in compliance with its financial bank covenants and had sufficient headroom
thereunder. The current ratings and outlook assume that Taylor
Wimpey will maintain an adequate liquidity profile, including ample
covenant headroom at all times; they also assume a successful refinancing
of all of its existing debt by year-end 2010 and that the company
will address any future upcoming maturities at least twelve months in
The rating's stable outlook takes into account positive developments
since H2 2009, such as the company's improved gross margins
and overall profitability as well as the reduction of debt levels from
equity issuance and free cash flow over the past two and a half years.
However, the outlook for the homebuilding industry remains uncertain,
particularly in light of consumer confidence returning to a downward path
in light of the cuts announced in the government's recent spending
review, which will make further improvements difficult to achieve.
The current ratings and outlook assume a steady corporate state and do
not factor in the impact of transforming acquisitions or any material
disposals. Positive pressure on the ratings could occur if Taylor
Wimpey were to improve its credit metrics with, inter alia,
adjusted debt/book capitalisation to remain sustainably below 50%
and interest cover (EBIT/interest expense + capitalized interest)
to rise sustainably above 2.5x. Conversely, downward
pressure on the ratings could arise from: (i) a failure to maintain
an adequate liquidity risk profile; (ii) adjusted debt/book capitalisation
to trend above 60%; or (iii) the company were to experience
negative free cash flow generation for an extended period of time.
The principal methodology used in rating Taylor Wimpey was Moody's
Global Homebuilding Industry rating methodology, published in March
2009 and available on www.moodys.com in the Ratings Methodology
subdirectory under the Research & Ratings tab. Other methodologies
and factors that may have been considered in the process of rating this
issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
Taylor Wimpey plc, headquartered in London, England,
reported consolidated revenues and net income of GBP2.68 billion
and GBP49 million respectively for the trailing twelve-month
period ending 4 July 2010.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
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Moody's adopts all necessary measures so that the information it uses
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Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
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Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Paloma San Valentin
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's Investors Service Ltd.
Moody's assigns B2 rating to Taylor Wimpey and (P)B2 to new senior unsecured notes; outlook stable
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