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Rating Action:

Moody's assigns B2 rating to Taylor Wimpey and (P)B2 to new senior unsecured notes; outlook stable

24 Nov 2010

First-time rating

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 subordination.

Rating Rationale

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 of scale.

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 advance.

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.

REGULATORY DISCLOSURES

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 website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

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 and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

London
Lynn Valkenaar
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

London
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.
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United Kingdom

Moody's assigns B2 rating to Taylor Wimpey and (P)B2 to new senior unsecured notes; outlook stable
No Related Data.
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