Approximately $155 million of bank loans affected
New York, January 19, 2011 -- Moody's Investors Service assigned a B3 rating to the $155
million first-lien senior secured bank credit facility of Orleans
Homebuilders, Inc. (Orleans). At the same time,
Moody's assigned a Caa1 corporate family rating ("CFR")
and Caa2 probability of default rating. The rating outlook is stable.
This is the first time Moody's has rated the company.
RATINGS RATIONALE
The homebuilding industry is volatile, highly cyclical, and
requires substantial capital to support expansion in either a steady state
or growth environment or to permit survival in a prolonged and extensive
downturn such as we are currently experiencing. Uncertainties continue
to abound in housing's potential recovery, from the stubbornly
high level of unemployment to the risk of a double-dip economic
downturn to the large shadow inventory of foreclosed homes weighing down
home prices. While a case for a modestly improved 2011 can be made,
the macro drivers for a recovery remain somewhat elusive as well,
and major risks can still either delay the recovery for another year,
until 2012, or even cause homebuilding to turn down again (as a
result of a double-dip economic scenario).
The Caa1 CFR reflects Orleans' small size relative to its publicly
rated competitors, thin equity cushion (which received a boost from
fresh start accounting), brittle unrestricted cash position,
net losses that are expected to persist for at least another two years,
concentration in the upper end price range of the homebuilding industry
which has not exhibited any particular strength during the current downturn,
an uncertain collateral value, a new management team that has not
worked together before, and underpinning all of this, the
shaky homebuilding and macroeconomic environment.
At the same time, Moody's recognizes that Orleans will be
emerging from bankruptcy with what should be a manageable debt load with
very modest amortization requirements for nearly five years, a long
land position that should permit the company to harvest cash flow if it
can resist the temptation to load up on distressed land or to engage in
more than very modest spec construction, a moderately leveraged
capital structure, and markets that should participate in any homebuilding
recovery.
The stable outlook reflects the considerable financial flexibility provided
by the greatly reduced debt load and very modest debt amortization requirements
over the next 4 ¾ years and the company's opportunity to
capitalize on inventory liquidation for two or more years to generate
some needed cash.
The following ratings were assigned:
B3 rating (LGD2, 28%) on the $155 million first-lien
senior secured bank credit facility
Caa1 corporate family rating
Caa2 probability of default rating
The first-lien senior secured term loan and revolver, $125
million and $30 million in size, respectively, share
a first priority secured lien on all tangible and intangible assets of
the company as well as benefit from upstream guarantees by all material
operating subsidiaries of Orleans. All other liabilities of the
company except for 20 days of payables, which enjoy Administrative
and Priority Claims status, are structurally and contractually subordinated
to the first-lien senior secured bank credit facility and provide
support for the latter's upnotching to B3.
Orleans would need to begin generating strong revenue growth and more
than modestly positive net income, grow its equity base to over
$200 million, keep debt leverage below 50%,
and substantially improve its liquidity position to be considered for
a B3 CFR.
A return trip to the banks for covenant relief, continued operating
losses, a resumption in quarterly impairment charges, debt
leverage above 65%, and/or reduced liquidity could prompt
a rating reduction.
The principal methodologies used in this rating were Global Homebuilding
Industry published in March 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Headquartered in Bensalem, PA and dating back 92 years, Orleans
Homebuilders, Inc. builds and sells single-family
and townhouse products to buyers in the active adult, first-time,
first and second move-up, and luxury segments of the homebuilding
market. As of its fiscal year that ended June 30, 2010,
the company owned 4,166 lots and operated 79 active communities
in 11 markets across eight states in the northeast, southeast,
and Midwest. Estimated revenue and net income in fiscal 2010,
ended June 30, 2010, were $226 million and $(156)
million, respectively. The company filed under Chapter 11
of the Bankruptcy Code on March 1, 2010 and had its Plan of Reorganization
approved by the Bankruptcy Court on December 1, 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics 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.
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.
New York
Joseph A. Snider
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Steven Oman
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns B3 to bank credit facility of Orleans Homebuilders, Inc; stable outlook
