Bangkok--10 Mar--Standard & Poor's
NEW YORK (Standard & Poor's) March 9, 2015--Standard & Poor's Ratings Servicessaid today it raised its corporate credit rating on Shea Homes L.P. to 'B+'from 'B'. The outlook is stable. At the same time, we assigned our 'B+'issue-level rating to the company's proposed senior unsecured notes. The
recovery rating is '3', indicating our expectation of meaningful (50% to 70%)recovery for lenders in the event of a payment default. Our recoveryexpectations are in the upper half of the 50% to 70% range.
The upgrade reflects the company's outperformance relative to our priorexpectations, notably lower leverage, and stronger coverage measures. Sheaplans to refinance its single bullet secured notes by splitting the debt intotwo separate unsecured tranches. The refinancing will significantly reduceannual interest costs, enhance financial flexibility, increase liquidity, andextend/stagger the debt maturity profile. We have also revised our assessmentof Shea Homes' financial risk profile to "significant" from "aggressive."
"The stable outlook incorporates our view that Shea Homes will continue toincrease EBITDA in a slowly recovering housing market through an expandingcommunity count that will drive further improvement in its credit measures,"said Standard & Poor's credit analyst Thomas O'Toole.
We would consider lowering the rating by one notch if leverage exceeded ourexpectations, such that debt to EBITDA trended above 4x and debt to capitalwere sustained materially above the low-50% area. We would also considerlowering the rating if an outcome to the potential CCM tax liability required
a large cash outlay that strained liquidity or required additional debtfunding.
Given the company's size, scale, and book leverage relative to larger builderpeers, we view an upgrade as unlikely in the near term. Longer-term, we couldconsider raising the rating one notch if Shea could sustain book leverage tothe low 40% area, better diversify its market exposure, and demonstrate lessvolatility in its cash flow measures.