Moody's Cuts Ryland Group (RYL) CFR to 'Ba3'; Outlook Stable

Moody's Investors Service upgraded the Corporate Family Rating of Ryland Group (NYSE: RYL) to Ba3 from B1 and Probability of Default Rating to Ba3-PD from B1-PD. In the same rating action, Moody's upgraded the company's senior unsecured notes and convertible senior notes to Ba3 from B1 as well as affirmed the SGL-2 speculative-grade liquidity assessment. The rating outlook is stable.

The upgrade of Ryland's Corporate Family Rating to Ba3 from B1 reflects significant improvement in financial performance due to the company's conservative operating strategy and prudent balance sheet management combined with the ability to spot profitable opportunities while exercising tight cost control measures. The company's key credit metrics have demonstrated and are expected to continue to demonstrate substantial improvement from the 2008-2010 period. In many of the key credit metric categories Ryland ranks in the top 5 among its peers. Specifically, over the next 12-18 months, we expect Ryland's interest coverage to be above 5x whereas the average for the rated homebuilders is 3.65x. At the end of 2014, Ryland's interest coverage was 4.6x. Further, homebuilding debt to capitalization is currently projected to decline below 50% over the next 12-18 months from 54.5% in 2014.

The following rating actions were taken:

Corporate Family Rating, upgraded to Ba3 from B1;

Probability of Default Rating, upgraded to Ba3-PD from B1-PD;

Senior unsecured notes, upgraded to Ba3 (LGD4) from B1 (LGD4)

Senior convertible notes, upgraded to Ba3 (LGD4) from B1 (LGD4);

Speculative grade liquidity assessment, affirmed at SGL-2;

Stable rating outlook.

RATINGS RATIONALE

The Ba3 Corporate Family Rating also considers Ryland's size and scale as well as tight cost controls that have resulted in Ryland's ability to improve gross margins and overall operating performance. The company's national scale has provided opportunities for the negotiation of volume discounts and rebates from material suppliers. Additionally, on-site construction is performed for a fixed price by independent subcontractors that are selected through a competitive bid process. As an example, direct construction cost declined by 2.2% in the Southeast region in 2014. Furthermore, Ryland is well positioned to take advantage of the expected uptick in the job market growth that will inevitably lead to the increase in demand for new homes. Partly as a result of strategic land purchases and company acquisitions 2012-2013 (Charlotte, Phoenix, Raleigh in 2012 and Dallas, Delaware, New Jersey, Pennsylvania in 2013), Ryland now operates in most of the markets that have seen the highest job growth over the last three years and we anticipate this trend to continue. Presently, the company's land supply is around 5 years and the company's long-term objective is to keep the land supply of around 4-5 years. Thus, we don't foresee Ryland having difficulties with opening new communities in 2015 and 2016 due to land constraints. Additionally, Moody's outlook on homebuilding industry is positive.

At the same time, the Ba3 Corporate Family Rating takes into consideration the cyclical nature of the homebuilding industry. Additionally, Ryland's cash flow from operations will be negative, and cash balances will decline from land purchases and land development expenses as the company replenishes its inventory position. In 2014, the company spent $538 million on land and $375 million on land development. Moody's anticipates the company to continue to spend about $900 million on land and land development per year.

The stable rating outlook reflects our expectation that Ryland will maintain capital structure discipline even as it pursues emerging growth opportunities. Additionally, our outlook incorporates improving credit metrics over the intermediate term.

The ratings could be lowered if the company's adjusted debt leverage were to exceed 55% on a sustained basis, homebuilding interest coverage were to decline below 3x and/or if the company's gross margins were to deteriorate below 19%.

The ratings could be considered for an upgrade when the company improves debt leverage to below 45% and interest coverage above 5.5x while maintaining strong liquidity. In addition, the ratings could be considered for an upgrade if the company reduces its balance sheet debt significantly. Furthermore, continued positive performance will be considered in an upgrade decision.

The principal methodology used in these ratings was Global Homebuilding Industry published in March 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

You May Also Be Interested In

• BofA Securities Downgrades Hertz Global (HTZ) to Underperform
• Deutsche Bank Downgrades Boyd Gaming (BYD) to Hold
• Waste Management (WM) PT Raised to $228 at Oppenheimer