S&P Lowers Outlook on M.D.C. Holdings (MDC) to Negative; Affirms Corp. Rating

S&P Global Ratings said it revised its rating outlook on MDC Holdings Inc. (NYSE: MDC) to negative from stable. At the same time, we affirmed our 'BB+' corporate credit rating on the company and 'BB+' issue-level rating on its senior unsecured notes. The recovery rating on the unsecured debt is '3', indicating our expectation for a meaningful (50%-70%; high end of the range) recovery to bondholders in the event of default.

"Our negative outlook on the corporate credit rating on MDC reflects our view that we could lower our rating over the next 12 months if continued labor issues affect home closings, causing the forecasted improvement in the company's credit metrics to fall short of target and resulting in debt to EBITDA remaining above 4x," said S&P Global Ratings credit analyst Christopher Andrews.

We would likely revise the outlook back to stable if the company improves its leverage profile over the next 12 months because of better backlog conversion and some gross margin improvement relative to 2015 levels. We do not view an upgrade as likely over the next 12 months.

In the event that home closings continue to show minimal year-over-year growth and gross margin improvement fails to materialize, we would consider lowering the corporate credit rating to 'BB'. This would result from changing the financial risk profile to aggressive from significant, characterized by debt to EBITDA of 4x to 5x.

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