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Rating Action:

Moody's downgrades MDC to Ba2; concludes review; outlook stable

05 Nov 2015

Approximately $847 million of debt securities affected

New York, November 05, 2015 -- Moody's Investors Service downgraded the ratings of M.D.C. Holdings, Inc. ("MDC"), including its Corporate Family Rating to Ba2 from Ba1, Probability of Default to Ba2-PD from Ba1-PD, and the ratings on its three issues of senior unsecured notes to Ba2 from Ba1. This concludes the review for downgrade that Moody's initiated on September 22, 2015. The rating outlook is stable.

The downgrades reflect Moody's assessment that MDC's underperformance vs. its peer group with regard to revenues, earnings, and key credit metrics will persist for at least the next two years, continuing the trend that has endured for the prior two years. While Moody's still expects MDC to show revenue and earnings growth and improvement in key credit metrics, aided in large part by Moody's belief that the homebuilding industry will continue to expand in 2016 and 2017, the gains will simply not be fast enough or strong enough to restore them to Ba1 levels or to close the gap with its peers within the ratings horizon.

The following ratings were affected by this action:

Corporate Family Rating downgraded to Ba2 from Ba1;

Probability of Default downgraded to Ba2-PD from Ba1-PD;

Senior Unsecured Shelf downgraded to (P)Ba2 from (P)Ba1;

Senior Unsecured Ratings downgraded to Ba2 (LGD4) from Ba1 (LGD4)

SGL-2 Speculative Grade Liquidity Rating affirmed;

RATINGS RATIONALE

The Ba2 Corporate Family Rating considers MDC's conservative financial policy, history of strong creditor protection, cautious land strategy, and clean and transparent balance sheet, notably MDC's lack of off-balance sheet recourse obligations such as joint venture debt and specific performance lot option contracts. Additionally, the rating incorporates Moody's view that positive industry conditions will result in further expansion of MDC's revenues and earnings and improvement in credit metrics in 2016 and 2017.

At the same time, Moody's recognizes that while improving, many of the company's key credit metrics, other than debt leverage, will remain weak for a Ba2 homebuilder. The ratings also reflect Moody's concern that MDC's near-flawless execution track record prior to the homebuilding downturn has morphed into a continuing series of missteps and inability to overcome industry problems. Examples of the former include MDC's overpaying for land in 2009, 'drywall hold' strategy, and bloated spec counts. Examples of the latter include delays in deliveries and in opening new communities.

MDC's good liquidity profile is reflected in its SGL-2 speculative-grade liquidity rating, which balances the company's unrestricted homebuilding cash and investments position of approximately $175 million at September 30, 2015 and the availability of approximately $513 million under its $550 million senior unsecured revolving credit facility due December 13, 2019 against Moody's expectation for modestly negative cash flow generation, the need for the company to maintain covenant compliance, and its somewhat limited opportunities to monetize excess assets quickly. The revolver has an accordion feature that would allow its total capacity to be increased to $1.0 billion. The financial covenants with which MDC will need to maintain compliance include a tangible net worth test, leverage ratio, and interest coverage ratio. In Moody's view, the company's liquidity is likely to weaken somewhat from its increasing land spend and negative cash flow, which will result in a growing net debt position. Nevertheless, Moody's still expects MDC to maintain its covenant compliance relatively easily over the next 12 to 18 months.

The stable rating outlook is based on Moody's expectations of improving financial performance, driven primarily by industry growth and moderate company debt leverage. The outlook also assumes that the company will maintain adequate liquidity and prudently manage its land spend.

The outlook could be changed to positive if the company demonstrates significantly stronger than expected progress in restoring key credit metrics to Ba1 levels while maintaining strong liquidity.

The ratings could come under pressure if the company's earnings growth slows, homebuilding debt leverage does not continue to remain in the low 40% range, EBIT interest coverage remains below 4.0x, gross margins remain below 20%, and/or if liquidity weakens significantly. Further, the ratings could be lowered if the company made a sizable debt-financed acquisition or instituted a material share repurchase program.

The principal methodology used in these ratings was Homebuilding and Property Development Industry published in April 2015. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Based in Denver, Colorado, MDC, whose subsidiaries build homes under the name "Richmond American Homes," is a mid-sized national homebuilder. The company also provides mortgage financing, primarily for MDC's home buyers, through its wholly owned subsidiary, HomeAmerican Mortgage Corporation. MDC has homebuilding divisions across the country, including Denver, Colorado Springs, Salt Lake City, Las Vegas, Phoenix, Tucson, California, Northern Virginia, Maryland, Jacksonville and Orlando, South Florida, and Seattle. For the trailing 12 months ended September 30, 2015, total revenues were approximately $1.8 billion and consolidated net income was $58 million.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Joseph A. Snider
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's downgrades MDC to Ba2; concludes review; outlook stable
No Related Data.
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