UPDATE: Moody's Upgrades Beazer Homes' (NYSE: BZH) CFR to 'B3'; Outlook is Stable

Moody's Investors Service upgraded Beazer Homes USA, Inc.'s (NYSE: BZH) Corporate Family Rating to B3 from Caa1 and its Probability of Default Rating to B3-PD from Caa1-PD. Concurrently, Moody's upgraded Beazer's senior secured notes to Ba3 from B1 and its senior unsecured notes to Caa1 from Caa2. Moody's also affirmed the Speculative-Grade Liquidity (SGL) rating at SGL-3. The rating outlook is stable.

The upgrade of Beazer's Corporate Family Rating to B3 from Caa1 reflects projected improvement in profitability and in key credit metrics as the company executes on its "2B-10" strategy plan while benefiting from the continued growth in the homebuilding industry. Further, homebuilding debt-to-capitalization is expected to decrease to 67% by the end of fiscal 2015 that ends on September 30, 2015 from 86% as of March 31, 2015 after the expected elimination of substantially all of the valuation allowance of about $426 million in deferred tax assets in the fourth quarter of fiscal 2015. Furthermore, Moody's assumes in the rating action that Beazer will pro-actively refinance its 2016 debt maturities that include $173 million senior secured 2nd lien notes due in June 2016 and a $130 million senior secured revolving credit facility expiring in September 2016. The ratings could be lowered if Beazer is unable to refinance its upcoming maturities on a timely basis.

Moody's took the following actions on Beazer Homes USA, Inc.:

Corporate Family Rating, upgraded to B3 from Caa1;

Probability of Default Rating, upgraded to B3-PD from Caa1-PD;

$300 million senior secured notes, upgraded to Ba3 (LGD2) from B1 (LGD2);

$325 million senior unsecured notes, upgraded to Caa1 (LGD4) from Caa2 (LGD4);

$200 million senior unsecured notes, upgraded to Caa1 (LGD4) from Caa2 (LGD4);

$200 million senior unsecured notes, upgraded to Caa1 (LGD4) from Caa2 (LGD4);

$173 million senior unsecured notes, upgraded Caa1 (LGD4) from Caa2 (LGD4);

$235 million senior unsecured notes, upgraded Caa1 (LGD4) from Caa2 (LGD4);

Speculative Grade Liquidity Rating, affirmed at SGL-3;

Outlook is stable (previously positive).

RATINGS RATIONALE

The B3 Corporate Family Rating reflects Beazer's high projected homebuilding debt-to-capitalization, weak interest coverage, adequate liquidity position and historical operating underperformance versus many of its peers. The homebuilding interest coverage (homebuilding EBIT/interest incurred) was slightly below 1x as of March 31, 2015 and is considered weak for the B3 rating category. However, Moody's anticipates this ratio will improve to a level above 1x over the next few of quarters and rise to about 1.5x in fiscal 2016. Furthermore, the rating takes into consideration the company's low margins -- both gross margin and EBIT margin -- when compared to the rated homebuilders.

The B3 Corporate Family Rating is supported by Beazer's improving financial results, its size and geographic diversity as it operates in 15 states spanning across the US. Beazer is in the midst of a plan to realize $2 billion in annual revenue and 10% EBITDA margins (referred to as "2B-10" and announced in 2014), which Moody's projects to be attainable by fiscal 2017. The company's revenues and EBITDA margins were $1.5 billion and 8.8%, respectively for the last twelve months ended March 31, 2015. Thus far, the company is still in early stages of executing its 2B-10 plan and Beazer has a long way to go to reach its stated targets. However, the company's community count, average sales price, sales per community, and backlog are all going up and should benefit from the ongoing housing market recovery. Part of the improvement in financial metrics is also expected to come from Beazer's capital allocation strategy as the company is redirecting capital to higher margin and higher return markets and exiting markets where the returns are not satisfactory. The housing market recovery is also allowing the company to utilize land that has been held since the downturn. An example is the recent activation of a $41 million parcel in Sacramento. The company's land held for future development has decreased to 15.4% as a percent of total inventories in fiscal 2Q15 from 20.6% a year ago. Moody's expects these factors will improve the company's asset productivity and returns.

The SGL-3 speculative-grade liquidity rating reflects Beazer's adequate liquidity position. Moody's currently expects that Beazer will pro-actively refinance its 2016 debt maturities that include $173 million senior secured 2nd lien notes due in June 2016 and $130 million senior secured revolving credit facility expiring in September 2016 (an additional $20 million expires in September of 2015). The company has some flexibility to temporarily pull back on its land purchases if it is faced with the need to redeem the 2016 notes using internally available sources only. Annual land purchases and land development expenses are currently projected to amount to around $500 million in 2015. Moody's expects Beazer's overall free cash flow to remain negative over the next 12-18 months assuming this level of investment as it continues growing its land position and developing existing land at a faster pace than selling its homes. Because of the negative cash flow generation, Beazer's cash balance will continue to decline unless it increases debt or temporarily pulls back on the level of land investment. Moody's currently projects the company's cash balance ($146 million as of 3/31/15) to be less than the $173 million of senior secured notes coming due in 2016 if the company were to invest $500 million in inventory and does not refinance the notes prior to maturity.

The stable rating outlook reflects Moody's expectation that Beazer's key credits metrics will improve over the next 12 to 18 months, that the company will continue to benefit from the strength of the homebuilding industry, and that it will proactively refinance its debt maturities at a reasonable cost.

Positive rating action could occur if Beazer is able to sustain its homebuilding debt to capitalization ratio below 60% and its Homebuilding EBIT/interest incurred above 2.0x while maintaining adequate liquidity and continuing to be profitable.

Negative rating action could be taken if Beazer's homebuilding debt-to-capitalization exceeds 70% for an extended period of time and Homebuilding EBIT/interest incurred is not improved and sustained above 1.0x. The ratings could also be downgraded if liquidity deteriorates including if Moody's believes refinancing risk related to 2016 debt maturities is increasing.

The principal methodology used in these ratings was Homebuilding and Property Development Industry published in April 2015. 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.

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