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Rating Action:

Moody's changes the outlook for Toll Brothers to positive from stable; Ba1 CFR affirmed

02 Mar 2020

Approximately $2.7 billion of debt securities affected

New York, March 02, 2020 -- Moody's Investors Service (Moody's) changed the outlook for Toll Brothers, Inc. (Toll) to positive from stable. At the same time, Moody's affirmed Toll's Ba1 Corporate Family Rating and Ba1-PD Probability of Default Rating, and the Ba1 rating on the senior unsecured notes of Toll Brothers Finance Corp. The company's Speculative Grade Liquidity Rating was upgraded to SGL-1 from SGL-2.

The positive outlook reflects Toll's significant operating scale, the value of its brand, strong cash flow generation, and the demonstrated ability to maintain leverage within a relatively narrow band through different industry cycles. Moody's believes the company's operating strategy, including its strong market position as the sole homebuilder in the niche luxury market and its growing diversification into lower price points (affordable luxury segment, which demonstrates stronger growth), its largely build-to-order approach, strong gross margins, strong cash flow and liquidity position provide considerable financial flexibility despite slightly higher leverage than some peers. Important considerations for an upgrade to a higher rating would include conservative financial policies resulting in an achievement of debt to book capitalization below 40% on a sustained basis, demonstration of a prudent approach to share repurchases, and strengthening of interest coverage credit metrics.

The upgrade of Toll's Speculative Grade Liquidity Rating to SGL-1 from SGL-2 reflects Moody's expectation that the company will maintain a very good liquidity position over the next 12 to 15 months given its strong cash flow generative capabilities, significant availability under its $1.9 billion revolving credit facility expiring in 2024, and substantial covenant compliance headroom. As of January 31, 2020, Toll had $2.1 billion in liquidity, consisting of $520 million of cash and $1.6 billion of revolver availability.

The following rating actions were taken:

Upgrades:

..Issuer: Toll Brothers, Inc.

.... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2

Affirmations:

..Issuer: Toll Brothers, Inc.

.... Probability of Default Rating, Affirmed Ba1-PD

.... Corporate Family Rating, Affirmed Ba1

..Issuer: Toll Brothers Finance Corp.

....Backed Senior Unsecured Shelf, Affirmed (P)Ba1

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba1 (LGD4)

Outlook Actions:

..Issuer: Toll Brothers Finance Corp.

....Outlook, Changed To Positive From Stable

..Issuer: Toll Brothers, Inc.

....Outlook, Changed To Positive From Stable

RATINGS RATIONALE

The Ba1 Corporate Family Rating for Toll is supported by Moody's consideration of: 1) the company's position as the sole national homebuilder with a meaningful focus on the upper-end homebuilding segment and a widely recognized brand name in the industry; 2) management's ability to stay ahead of evolving demographics and adapt to changing markets and the diversity of product categories; 3) a broad geographic reach nationwide; 4) largely build-to-order operating strategy, and therefore the lowest cancellation rates in the industry; and 5) governance considerations including conservative financial profile and financial strategy that allows for significant financial flexibility.

However, the rating also includes Moody's view of: 1) the company's active share repurchase program, which limits its deleveraging; 2) cost pressures faced by the industry with respect to land, labor and building materials; 3) potential impairment risk on owned land, which comprises about 4.5 years of land supply, if the end market weakens; 4) risks associated with the more volatile and capital intensive high-rise and high-density mid-rise business, although this segment represents only 4% of revenue; and 5) exposure to protracted declines in revenues and weakening in credit metrics inherent to the significant industry cyclicality.

Factors that could lead to an upgrade include:

» Achievement and maintenance of adjusted homebuilding debt to book capitalization below 40% together with homebuilding EBIT coverage of interest sustained in the high single digits

» Maintenance of a very good liquidity position, including strong free cash flow

» Demonstration of a commitment to attaining and maintaining an investment grade rating, both to Moody's and to the debt capital markets

» An ability to withstand a serious financial shock without having its key credit metrics sinking to low speculative grade levels

Factors that could lead to a downgrade include:

» Debt leverage approaching 50%

» Cash flow from operations becoming increasingly negative and liquidity weakening

» An economic downturn in which revenues and net income decline

The principal methodology used in these ratings was Homebuilding And Property Development Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Toll Brothers, Inc. is a national builder of luxury homes. Toll serves move-up, empty-nester, active-adult, and second-home buyers and operates in 50 markets across 24 states. The company builds an array of luxury residential single-family detached, attached home, master planned resort-style golf, and urban low-, mid-, and high-rise communities, principally on land it develops and improves. Toll also operates its own architectural, engineering, mortgage, title, land development and land sale, golf course development and management, home security, and landscape subsidiaries. The company also operates its own lumber distribution, house component assembly, and manufacturing operations. The company develops commercial and apartment properties through Toll Brothers Apartment Living, Toll Brothers Campus Living, and develops urban low-, mid-, and high-rise for-sale condominiums through Toll Brothers City Living. Revenues and net income in the LTM period ended January 31, 2020 were $7.2 billion and $535 million, respectively.

REGULATORY DISCLOSURES

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.

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

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.

Natalia Gluschuk
Asst Vice President - 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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