Moody's Cuts Rtgs Of WCI Communities
The following is a press release from Moody's Investors Service:
Moody's Lowers Ratings Of WCI Communities; Outlook Remains Negative
Approximately $650 Million of Debt Securities Affected
New York, February 01, 2007 -- Moody's lowered the ratings of WCI Communities, Inc. ("WCI"), including its corporate family rating to B2 from B1 and the ratings on its senior subordinated notes to Caa1 from B3. The ratings outlook remains negative.
The downgrade and continued negative ratings outlook were triggered by the company's persistently unfavorable performance vs. expectations in 2006 and Moody's concern that this underperformance may last for much of 2007. Moody's believes that WCI's cash collections in the fourth quarter of 2006 were adversely impacted by delays in construction, in receipt of certificates of occupancy, and in getting buyers to closings as well by higher cancellation rates. Moody's remains concerned that first quarter cash collections will similarly be short of prior expectations, with more sliding into the second and subsequent quarters. While the company may yet be able to collect on the approximately $1.3 billion of contract receivables that it had on its books at year-end, each delay worsens its ability to get reluctant buyers to closing. Moody's expects full-year cash collections to fall short of the $945 million implied by the $1.3 billion of receivables ($1.3 billion less 18% average down payment already collected less 8% company-projected default rate). Thus, the company's ability to reduce debt leverage from its unacceptably high current rate of nearly 67% to its target rate of 50% and its capacity to comply with financial covenants in its bank credit facilities will be greatly challenged.
WCI's earnings in 2007, even after excluding land impairment and option abandonment charges, will decline significantly from 2006 levels, perhaps breaking into negative territory. As a result, Moody's anticipates that WCI will have difficulty in complying with the existing interest coverage covenant of 2.0x, thus necessitating covenant relief. Finally, management's ability to build liquidity and reduce debt leverage in the face of a downturn of unknown breadth and duration is as yet unproven.
Going forward, the ratings could be reduced again if the company were unwilling or unable to reduce and maintain debt leverage below 60% after the tower closings occur, if earnings (excluding impairment and option abandonment charges) were to turn sharply negative, if covenant violations were to occur, or if interest coverage (as defined in the bank credit agreement) were to fall below 1.75x. The ratings outlook could stabilize if the company were to place greater emphasis on building liquidity and reducing outstanding debt, were to stay profitable in the coming quarters, were able to meet its debt covenant tests with some headroom, and were to generate interest coverage (as defined in the bank covenants) in excess of 2.25x.
The following ratings were affected:
Corporate family rating changed to B2 from B1
Probability of default rating changed to B2 from B1
Senior sub debt ratings changed to Caa1 from B3
LGD (Loss-given-default) assessment and rate on the senior sub debt confirmed at LGD5, 83%
Headquartered in Bonita Springs, Florida, WCI Communities, Inc. is a fully integrated homebuilding and real estate services company with 60 years of experience in the design, construction, and operation of leisure-oriented, amenity-rich master planned communities targeting affluent homebuyers. Revenues and earnings for the trailing twelve month period ended September 30, 2006 were $2.1 billion and $128million, respectively.
(END) Dow Jones Newswires
02-01-07 1452ET
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