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S&P Places William Lyon Homes (WLH) on CreditWatch Developing Following Polygon Northwest Deal

June 27, 2014 2:15 PM EDT

Standard & Poor's Ratings Services said it placed its 'B-' corporate credit rating on William Lyon Homes Inc. (NYSE: WLH) on CreditWatch with developing implications. At the same time, we placed our 'B-' issue-level ratings on William Lyon's senior unsecured debt on CreditWatch developing. The CreditWatch developing status indicates that we may raise, lower, or affirm the rating following our review.

William Lyon is a relatively small homebuilder with a geographic concentration of operations in California, Arizona, Nevada, and Colorado. The company recently announced an agreement to acquire the residential homebuilding operations of Polygon Northwest Co. LLC for about $520 million. The acquisition expands William Lyon's geographic presence to Seattle and Portland, where Polygon retains the number 2 market position, and increases its revenue base by roughly one-half (based on full-year 2013 results). The company has secured bridge financing for the full cash amount of the acquisition, but plans to use some cash on hand (it reported $151 million at March 31, 2014) and tap the capital markets for the balance transaction.

"We plan to review the implications to leverage and covenant headroom, along with the greater scale and diversity of the combined company, when the sources of long-term financing are determined," said Standard & Poor's credit analyst Matthew Lynam.

The transaction is scheduled to close in the third quarter of 2014.

Standard & Poor's will seek to resolve the CreditWatch within the next 90 days. The developing outlook means that when we complete our review, we could raise or lower the ratings by one notch, or leave the ratings unchanged. Given the positive outlook we maintained before the acquisition announcement, we would ascribe a low probability to a near-term downgrade. However, a heavily debt-financed transaction or integration concerns could lead us to conclude that a stable outlook is more appropriate.



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