Fitch Upgrades Standard Pacific Corp.'s IDR to 'BB-'; Outlook Stable
On June 16, 2015, Fitch placed the company's ratings on Rating Watch Positive following a definitive agreement designating that Standard Pacific and The Ryland Group (NYSE: RYL) will combine in a merger of equals that will create the fourth-largest homebuilder in the U.S. The shareholders of both companies approved the merger agreement on Sept. 28, 2015 and the transaction is expected to close on Oct. 1, 2015.
At the time of the merger, Standard Pacific will implement a 1-for-5 reverse stock split. After giving effect to the reverse stock split, Ryland shareholders will receive 1.0191 shares of Standard Pacific common stock for each share of Ryland common stock. Upon closing of the transaction, Standard Pacific shareholders will own approximately 59% and Ryland shareholders will own about 41% of the combined company.
At the closing of the merger, Ryland will be merged into Standard Pacific. Concurrent with the closing, the name of the combined company will be changed to CalAtlantic Group, Inc. (NYSE: CAA).
KEY RATING DRIVERS
The rating upgrade reflects the following:
--Lower leverage: Fitch projects a decrease in financial leverage (debt-to-EBITDA) for the combined company versus Standard Pacific's leverage of 4.5x on a stand-alone basis for the latest 12 months (LTM) ended June 30, 2015. Fitch estimates that initial pro forma leverage will be about 4.0x, based on the two companies' EBITDA and debt levels for the June 30, 2015 LTM period. Fitch expects leverage will be below 4.0x by the end of 2016.
--Geographic Diversity: The combination with Ryland will expand Standard Pacific's geographic presence to 10 additional states and 15 new metropolitan statistical areas (MSAs). The combined company's total MSAs served will increase from 26 to 41. More importantly, the combined company will have less reliance on the state of California. Revenues directed to this state will decline from 46% (on a stand-alone basis for Standard Pacific) to 27% pro forma for the combined company.
--Larger Size: CalAtlantic will be the fourth-largest homebuilder based on LTM revenues. For the June 30, 2015 LTM period, the pro forma combined company delivered more than 12,750 homes in the aggregate with combined pro forma revenues of almost $5.2 billion. Importantly, both management teams have had experience managing large companies in the past. In 2005, Standard Pacific delivered 11,411 homes with total homebuilding revenues of almost $4 billion. Similarly, in 2005, Ryland had revenues of $4.7 billion on 16,673 home deliveries.
--Leading Market Share: CalAtlantic will have a top 10 position in 29 MSAs, including a top five market share in 15 of the largest 25 MSAs.
--Land Supply: CalAtlantic will control roughly 76,000 lots, 72% of which will be owned and the remaining 28% will be optioned. Total land supply will decrease to 6 years for the combined company compared with 7.2 years for Standard Pacific on a stand-alone basis.
--Debt Structure: All existing senior notes and convertible notes are expected to remain in place. CalAtlantic will have total debt of about $3.5 billion. In addition, the combined company's debt maturities are well laddered, with about $280 million in 2016 and $483 million in 2017 (including $253 million of convertible senior notes).
LAND STRATEGY
During 2014, Standard Pacific spent $943 million on land and development ($586 million for land and $357 million for development activities). This compares with $808 million spent during 2013 and $711 million during 2012. For the first six months of 2015, Standard Pacific expended $350 million on land and development activities. Earlier in the year, management expected to spend between $800 million and $1.2 billion on land and development during 2015.
In the case of Ryland, land and development spending totalled $913 million ($538 million for land and $375 million for development) during 2014 and roughly $950 million during 2013. For the first half of 2015, Ryland's land acquisitions totalled $274 million while development spending was $201 million. On a standalone basis, the company expected to spend about $900 million on land and development during 2015.
For 2016, Fitch expects land and development spending will approximate 2015 projected levels of about $2 billion on a combined basis. At this level of spending, Fitch expects CalAtantic will be slightly cash flow positive for the year.
LIQUIDITY
As of June 30, 2015, Standard Pacific had unrestricted homebuilding cash of $77.1 million and $420 million of borrowing availability under its $450 million unsecured revolving credit facility that matures in July 2018. As of June 30, 2015, Ryland had $213.7 million available under its $300 million revolver that matures in 2018. Ryland also had $280 million of cash and $17.8 million of marketable securities at the end of the second quarter.
Fitch expects the combined company will increase its unsecured revolving credit facility to $750 million to provide additional liquidity. Fitch expects CalAtlantic will have liquidity of at least $500 million from a combination of unrestricted homebuilding cash and equivalents and revolver availability.
IMPROVING HOUSING MARKET
Housing metrics increased in 2014 due to more robust economic growth during the last three quarters of the year (prompted by improved household net worth, industrial production and consumer spending), and consequently acceleration in job growth (as unemployment rates decreased to 6.2% for 2014 from an average of 7.4% in 2013), despite modestly higher interest rates, as well as more measured home price inflation. Single-family starts in 2014 improved 4.8% to 648,000 as multifamily volume grew 15.6% to 355,000. Thus, total starts in 2014 were 1.003 million. New home sales were up a modest 1.6% to 436,000, while existing home volume was off 2.9% to 4.940 million largely due to fewer distressed homes for sale and limited inventory. New home price inflation moderated in 2014, at least partially because of higher interest rates and buyer resistance. Average new home prices, as measured by the Census Bureau, rose 6.4% in 2014, while median home prices advanced approximately 5.4%.
Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing, relatively robust economy throughout the balance of the year. Considerably lower oil prices should restrain inflation and leave American consumers with more money to spend. The unemployment rate should continue to move lower (average 5.3% in 2015). Credit standards should steadily, moderately ease throughout 2015. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25-35 year olds should provide some incremental elevation to the rental and starter home markets. Through the first eight months of the year, total housing starts are 11.3% higher versus the same period last year, while existing home sales and new home sales are up 7.8% and 21.1%, respectively.
Single-family starts are forecast to rise about 12.5% to 729,000 as multifamily volume expands 7.3% to 381,000. Total starts would be in excess of 1.1 million (up 10.7%). New home sales are projected to increase 20% to 523,000. Existing home volume is expected to approximate 5.152 million, up 4.3%. New home price inflation should further taper off with higher interest rates and the mix of sales shifting more to first time homebuyer product. Average and median home prices should increase 3%-3.5%.
Fitch expects further improvement in 2016, with total housing starts projected to rise 12.2%, new home sales to advance 18%, and existing home sales to grow 5% for the year.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Standard Pacific include:
--The merger agreement between Standard Pacific and Ryland is consummated;
--Debt-to-EBITDA falls below 4.0x for the combined company by the end of 2016;
--Interest coverage above 4.5x in 2016;
--CalAtlantic expends approximately $2 billon on land and development activities during 2016;
--The combined company will be cash flow neutral to slightly cash flow positive during 2016;
--CalAtlantic maintains at least $500 million of liquidity from a combination of cash and revolver availability;
--Industry single-family housing starts improve 12.5%, while new and existing home sales grow 20% and 4.3%, respectively, in 2015. Housing metrics continue to improve in 2016.
RATING SENSITIVITIES
Future ratings and Outlooks will be influenced by broad housing market trends as well as company specific activity, such as trends in land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new order activity, debt levels, free cash flow trends and uses, and the company's cash position.
Further positive rating actions may be considered if the recovery in housing is maintained and is meaningfully better than Fitch's current outlook, the combined company shows continuous improvement in credit metrics (particularly debt to EBITDA consistently below 3.5x and interest coverage above 5x). The company would be expected to maintain a healthy liquidity position consisting of unrestricted homebuilding cash and revolver availability (above $500 million) through the cycle with a bias towards unrestricted homebuilding cash component into the next downturn.
A negative rating action could be triggered if the industry recovery dissipates; 2016/2017 revenues each drop at roughly a mid-teens pace while EBITDA margins fall below 12% and debt to EBITDA consistently remains above 5.0x; and the company's liquidity position falls sharply, perhaps below $300 million as the company maintains an overly aggressive land and development spending program.
FULL LIST OF RATING ACTIONS
Fitch has upgraded the following ratings with a Stable Outlook:
Standard Pacific Corp.
--Long-term IDR to 'BB-' from 'B+';
--Senior unsecured notes to 'BB-/RR4' from 'B+/RR4';
--Unsecured revolving credit facility to 'BB-/RR4' from 'B+/RR4'.
In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs to issuers with IDRs in the 'BB' category. The Recovery Rating of '4' for Standard Pacific's unsecured debt supports a rating of 'BB-', and reflects average recovery prospects in a distressed scenario.
Following the closing of the merger, Fitch also expects to assign a 'BB-/RR4' rating to Ryland's existing senior unsecured and senior convertible notes.
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