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Related Issuers
Rating Action:

Moody's assigns B3 rating to DSLD Homes' senior unsecured notes, outlook stable

03 Aug 2020

New York, August 03, 2020 -- Moody's Investors Service (Moody's) assigned a B3 rating to the prospective $225 million senior unsecured notes issuance of STL Holding Company, LLC (dba DSLD Homes). In addition, Moody's assigned a B3 corporate family rating and a B3-PD probability of default rating to DSLD Homes. The outlook is stable.

The proceeds from the note offering will be used to repay borrowings on the company's revolving credit facility of approximately $195 million, with the remainder used for transaction fees and expenses and general corporate purposes. Following the completion of the notes offering, the company expects to put in place a $75 million unsecured revolving credit facility.

This is the first time Moody's has assigned a rating to DSLD Homes.

Assignments:

Issuer: STL Holding Company LLC

Corporate Family Rating, Assigned B3

Probability of Default Rating, Assigned B3-PD

Gtd Senior Unsecured Notes, Assigned B3 (LGD4)

Outlook Actions:

Issuer: STL Holding Company LLC

Outlook, Assigned Stable

RATINGS RATIONALE

DSLD Homes' B3 corporate family and senior unsecured ratings reflect Moody's expectation that the company will experience modest margin contraction coupled with a decline in revenue over the next 12 months, followed by a subsequent recovery. Moody's forecast considers the significant measures taken by the federal and local governments to contain the coronavirus, including social distancing recommendations and mandatory shelter-in-place orders, which will reduce foot traffic and increase cancellations for homebuilders. While DSLD's operations were only modestly affected by the coronavirus pandemic through the first half of the year, the company operates in states with increasing coronavirus infection rates that could result in increased social distancing measures by local governments. The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. DSLD's high exposure to Louisiana, which represents over 70% of total revenues, has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.

Moody's ratings also reflect the company's relatively small size and scale, modest amount of tangible net worth and expected negative free cash flow over the next 12 months. Moody's expects that the company will maintain a measured approach to its financial policy and not aggressively increase leverage. The company pays out a regular dividend to cover taxes incurred by shareholders due to their ownership interest in the company as well as a discretionary distribution of approximately $10 million annually. Due to the COVID-19 pandemic the discretionary portion of the dividend was temporarily suspended at the end of March 2020.

However, the rating is supported by the company's successful asset-lite business model, which minimizes land impairment risk associated with long land exposure. Furthermore, the rating incorporates DSLD's high mix of affordable, entry-level homes, a segment that Moody's expects will grow faster than other housing categories. Pro forma for the unsecured debt issuance, DSLD Homes will have leverage, as defined by adjusted homebuilding debt to capitalization, between 46-48%.

Moody's regards DSLD Homes' liquidity as adequate over the next 12 to 18 months. DSLD Homes' pro forma cash position of $97.8 million will more than cover the company's expected negative free cash flow while the undrawn and fully available $75 million unsecured revolver will provide additional liquidity. Covenant compliance is expected to be healthy, and the company's unsecured capital structure provides it with an unencumbered asset base.

The stable outlook reflects Moody's expectation of improvement in new homes sales, particularly within the entry-level home segment, while maintaining adequate liquidity.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's indicated that a rating upgrade would likely reflect a reduction in geographic concentration within the state of Louisiana, tangible net worth exceeding $500 million, adjusted gross homebuilding debt to book capitalization below 50% and EBIT to interest coverage maintained above 3x. A rating downgrade could result from debt to book capitalization sustained above 65%, EBIT to interest coverage below 1.0x or a deterioration in the company's liquidity profile.

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108031. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

STL Holding Company, LLC (dba DSLD Homes) is a private homebuilder focused on the construction of entry-level homes predominantly in the Gulf Coast region of the United States. The company operates in Louisiana, Alabama, Mississippi and Florida. Total revenues for the twelve month period ended March 31, 2020 was approximately $742 million.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Griselda Bisono
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Dean Diaz
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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​
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