TEXT - S&P rates Mattamy Group
Overview -- Mattamy Group Corp. is a privately-held homebuilder that ranks among the largest in Canada and has a smaller presence in the U.S. -- We assigned a 'BB' corporate credit rating to Mattamy Group Corp. -- We also assigned a 'BB' issue-level rating and '3' recovery rating to the company's proposed $450 million senior unsecured notes due 2020. The notes are expected to be tranched between U.S. and Canadian denominated notes. -- Our stable outlook reflects our expectations for stable housing conditions in Canada that have supported Mattamy's profitability and modestly improving conditions in the U.S. Credit metrics will deteriorate due to higher debt following the proposed debt issuance but to levels that remain acceptable for the rating Rating Action On Oct. 29, 2012, Standard & Poor's Ratings Services assigned its 'BB' corporate credit ratings on Mattamy Group Corp. At the same time, we assigned a 'BB' issue-level rating and '3' recovery rating to the proposed $450 million senior unsecured notes due 2020. The '3' recovery rating indicates our expectation for a meaningful (50%-70%) recovery in the event of a payment default (see recovery analysis section below). The outlook is stable. Rationale Our ratings on Mattamy reflect the company's "significant" financial risk profile underpinned by comparatively low leverage (albeit higher following the proposed debt issue) that is in-line with the rating, extended debt tenor, and adequate liquidity. We view Mattamy's business risk profile as "fair". Mattamy is well positioned in the healthier Canadian housing market, most notably the Greater Toronto area (GTA), which has supported steady profitability, but does result in geographic concentration. Additionally, Mattamy's more challenged U.S. housing markets are beginning to recover, which should bolster overall diversification and profitability. Ontario-based Mattamy is one of the largest homebuilders in North America, having delivered approximately 3,000 homes in its fiscal year ended May 31, 2012, at an average price of roughly C$352,000. Deliveries were heavily concentrated in Mattamy's Canadian markets (79%). The GTA accounted for 59% of total deliveries, 12% were from Ottawa, and another 7% from Calgary. The U.S. accounted for 21% and we think the U.S. share will grow modestly as the U.S. housing market slowly recovers. Mattamy's 2012 results benefited from stable performance in the GTA, as well as unit growth in Ottawa and higher prices in Calgary. These markets have exhibited healthier supply/demand fundaments than the U.S. We have some concerns regarding home affordability in Canada due to upward pressure on home prices, but low mortgage rates and household growth due to strong immigration support our view that the Canadian market will remain stable. We also view the more stringent mortgage rules in Canada as a benefit to the overall health of the Canadian housing market. However, should unemployment increase or mortgage rates rise materially (Canadian mortgages reset every five years), we would expect demand and prices to soften. Mattamy's homebuilding operations have proven to be relatively stable and profitable over the past five years, unlike its U.S. peers that have operated through a very severe downturn that caused significant losses. In the recently completed fiscal 2012, an increase in home deliveries and modestly higher average prices contributed to improvement in gross margins. Selling, general, and administrative (SG&A) expenses relative to revenues remained low. For the last 12 months ended Aug. 31, 2012, Mattamy reported net income of C$139 million. Mattamy ended 2012 with a healthy backlog of more than 3,000, which provides good visibility into fiscal 2013. As noted, we expect the contribution from the company's U.S. market to increase over the next one to two years, which we think will weigh on gross margin improvement. However, the higher expected volume within the U.S. segment should provide operating leverage, which would enhance Mattamy's overall profitability. The company will use proceeds from the debt offering to repay a C$185 million secured U.S. term loan and add roughly C$230 million to Mattamy's cash balance. While we have not factored new investments into our assumptions, we assume the company will invest in new communities in Canada and the U.S. over time, including potential new markets to expand its footprint. Mattamy's strategy in Canada is to invest in and develop master planned communities. The company may export this strategy to the U.S., which would require more meaningful capital and is dilutive initially until communities open and build up a critical mass to generate a return on invested capital. These communities can also be riskier due to the long lead time between investment and harvest. Mattamy has a good track record to date managing its master planned community investments in Canada, and we will monitor the company's potential future investments, particularly if it enters new Canadian markets and export this strategy to its U.S. operations. Mattamy ended the first quarter of fiscal 2013 (ended Aug. 31) with C$651 million of debt. Debt has risen each year since fiscal 2010, but EBITDA has kept pace, resulting in stable credit metrics. Debt-to-EBITDA has remained in the low 3x, debt-to-total book capital was 37%, and interest coverage was strong at 7x, which support our financial risk assessment. Our baseline forecast for fiscal 2013 and 2014 assumes that deliveries grow 8%-9% each year, average prices hold flat, gross margins hover around 20%, and SG&A/revenues are 6.5%-7%. Our base-line delivery growth rate for Mattamy is lower than what we are forecasting for rated U.S. homebuilders (around 20%). This reflects the comparatively more stable Canadian housing market, which results in a more moderate growth rate over our forecast period. Based on these assumptions, we expect EBITDA will increase 11% and 9%, in fiscal 2013 and 2014, respectively. We also factor in the proposed debt offering and related debt repayment. Taken together, we expect debt-to-EBITDA and interest coverage to rise to the mid-4x area and interest coverage to weaken to 5.0x-5.5x in 2013 and 4.0x-4.5x in 2014. Debt-to-capital would increase to the mid-40% area. Liquidity In our opinion, Mattamy's liquidity position is "adequate", as its current capital sources are more than sufficient relative to its capital needs over the next 12-24 months. Our assessment of Mattamy's liquidity profile incorporates the following expectations and assumptions: -- We expect that the company's sources of liquidity over the next 12-24 months will exceed uses by 2x or more; -- Mattamy does not face any meaningful debt maturities through fiscal 2014; -- We expect liquidity sources to exceed uses even if EBITDA declines by 20%; Sources of cash include C$348 million of cash, including excess proceeds from the proposed offering. Mattamy also has an undrawn revolving credit facility that matures in October 2013. Uses of liquidity include debt maturities in 2013 and 2014 and distributions (which are discretionary and are also capped under the bond indenture). We also estimate that funds from operation and working capital will result in a net C$50 million-C$100 million reduction to operating cash flow in fiscal 2013 (including recent investments completed subsequent to year end) and roughly flat operating cash flow in fiscal 2014.We have not factored in land investments that aim to expand the company's footprint, which could potentially be more meaningful use of the cash. Recovery analysis Our rating on the company's senior unsecured notes is 'BB' (the same as Mattamy's corporate credit rating). The '3' recovery rating indicates our expectation for a meaningful (50%-70%) recovery in the event of a payment default. According to our criteria, we cap recovery ratings on unsecured debt issued by corporate entities with corporate credit ratings of 'BB-' or higher, due to the risk that their recovery prospects could be impaired by the issuance of additional priority or pari passu debt prior to a default. For the complete recovery analysis, see our recovery report on Mattamy to be published after this report. Outlook The stable outlook reflects our expectations for Mattamy's Canadian housing operations to be relatively stable, as its U.S. operations slowly recover, which leads to improved EBITDA that tempers the higher debt burden from Mattamy's debt refinancing. We expect credit metrics to weaken but remain at levels that support the current rating. We are unlikely to raise our corporate credit rating over the next 12 months because based on our base-case expectations, we do not expect Mattamy's credit metrics to materially improve such that it would support a higher rating. However, should the company continue to outperform peers and prudently invest cash, while maintaining adequate liquidity and reduce leverage to the 2x-3x range and 35% debt-to-capital area, we would consider raising the rating. Conversely, we would lower our rating if the Canadian housing market deteriorates materially, putting pressure on profitability and liquidity (if Mattamy invests in land too aggressively, for example), or if leverage rises to 5x or more. Related Criteria And Research -- Key Credit Factors: Global Criteria For Single-Family Homebuilders, Sept. 27, 2011 -- Industry Report Card: U.S. Homebuilders Pivot Toward Growth, Oct. 17, 2012 -- Issuer Ranking: U.S. Homebuilders, Strongest To Weakest, Oct. 12, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, published Sept. 8, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative Grade Debt, Aug. 10, 2009 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012. Ratings List Ratings Assigned Mattamy Group Corp. Corporate credit rating BB/Stable/-- Senior unsecured notes BB Recovery rating 3
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