Talinec Holdings ltd

TEXT-Fitch affirms MDC Holdings ratings

Sept 10 - Fitch Ratings has affirmed its ratings for M.D.C. Holdings, Inc. (NYSE: MDC), including the company's Issuer Default rating (IDR) at 'BBB-'. The Rating Outlook is Stable. A complete list of rating actions follows this release.

MDC's ratings are based on the company's execution of its business model in the current moderately recovering housing environment, cautious land policies and solid liquidity. During the past cycle the company noticeably improved its capital structure, pursued conservative capitalization policies, and positioned itself to withstand the recently concluded sharp, long-lasting housing correction. Significant insider ownership of 26% aligns management's interests with the long-term financial health of MDC.

MDC underperformed relative to other low investment-grade industrial companies in recent years in an admittedly very harsh housing environment and trailed its homebuilding peers for much of 2011 in certain metrics. However, the company hascome up with an effective strategy to close its relative performance gap and move to profitability. Its financial and operating execution during the past three quarters indicates clear progress in meeting its expense containment and profitability objectives.

Builder and investor enthusiasm have for the most part surged so far in 2012, but housing metrics have not entirely kept pace. Year-over-year (yoy) comparisons have been solidly positive on a consistent basis. However, month to month the statistics (single-family starts, new home, and existing home sales) have been erratic and, at times, below expectations. In any case, year to date these housing metrics are well above 2011 levels. As Fitch has noted in the past, recovery will likely occur in fits and starts.

Fitch's housing forecasts for 2012 have been raised since early spring, but still assume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderate improvement is forecast for 2013.

The company employs conservative land and construction strategies. MDC's priority is to acquire finished lots using rolling options, finished lots in phases for cash or, if the potential returns justify the risk, land for development. MDC does not typically buy more than a three-year supply of land inany market and when it acquires lots, the company currently focuses on land thatit can start building on within a short time. The long-term goal is to maintain a 2.0-2.5-year supply of land, increase land under option and reduce land owned.At the end of the June 2012 quarter, MDC controlled 10,218 lots, a 14.8% decrease from the year-ago period. Approximately 85% of the total lots are ownedwith the remaining 15% controlled through options. This represents a 3.4-year supply of total lots controlled and a 2.9-year supply of owned land based on trailing 12-month deliveries.

The company's policy of, whenever possible, purchasing predominantly finished lots and lots available for immediate development enhances balance sheet liquidity, which has been reflected in solid inventory turnover averaging 1.4x over the 2002 to 2011 period.MDC successfully managed its balance sheet during the severe housing downturn, allowing the company to accumulate cash as it pared down its inventory. As of June 30, 2012, MDC had unrestricted cash of $298.3 million and marketable securities totaling $454.8 million compared to total debt of $744.5 million.

MDC has been re-building its land position, supported by its strong liquidity. MDC spent approximately $227 million on land and development in 2009. The company purchased about $380 million of land and expended $40 million on land development in 2010, and $280 million on land and development in 2011. Fitch estimates that MDC could spend about $250 million on land and development in 2012 and could potentially invest as much as $450 million in 2013, mostly for land purchases. The average community count is currently up 8% yoy and the community count should average higher for the full year of 2012 as compared to 2011, aiding order comparisons in 2012.

MDC had negative cash flow from operations ($26.6 million) for the latest 12 months ended June 30, 2012 as the company continued with reasonably substantial land acquisition activities. For all of 2012, Fitch expects the company to be cash flow negative by $75 million-$100 million.

Fitch is comfortable with MDC's growth strategy given the company's cash position, existing land supply, debt maturity schedule and proven access to the capital markets. Even with the projected sizable land and development spending in 2012 and 2013, the company's cash (and marketable securities) position is still forecast to be similar to its debt levels. Fitch expects management to pull back on its land spending if market conditions deteriorate from current levels. Additionally, management is expected to be disciplined with the uses ofits cash, refraining from significant share repurchases or one-time dividends toits stockholders that would meaningfully deplete its liquidity position.

During 2011 the company completed a debt tender offer and redemption of its 7.00% senior notes due 2012 and 5.50% senior notes due 2013. As a result of these transactions, MDC paid $537.7 million to extinguish $500 million in debt principal with a carrying amount of $498.9 million and recorded a $38.8 million expense for loss on extinguishment of debt. The next debt maturity is $249.5 million in 2014. This is followed by $249.9 million due in 2015 and $245.1 million maturing in 2020.

Effective June 30, 2010, MDC voluntarily terminated its $50 million revolving credit facility. Consistent with Fitch's comment on certain homebuilders'termination and reduction of revolving credit facilities, in the absence of a revolving credit line a consistently higher level of cash and equivalents than was typical should be maintained on the balance sheet, especially in these still uncertain times.

Future ratings and Outlooks will be influenced by broad housing market trends aswell as company-specific activity, such as trends in land and development spending, general inventory levels, speculative inventory activity (including the impact of high cancellation rates on such activity), gross and net new orderactivity, debt levels and especially free cash flow trends and uses, and the company's cash position.

MDC's ratings are constrained in the intermediate term because of relatively high leverage metrics. However, positive rating action may be considered if therecovery in housing is significantly stronger than the agency's current outlook,if the company's operating and credit metrics are well above Fitch's expectations for 2012 and 2013, and liquidity is largely maintained. A negativerating action could be triggered if the industry recovery dissipates; MDC's operating performance for this year is well below Fitch's current forecast for revenues ($1.1 billion) and modest pretax profits; and 2013 revenues drop mid-teens while the pretax loss approaches levels of 2010 and 2011; and MDC's liquidity position falls sharply, perhaps below $500 million.

Fitch has affirmed the following ratings for MDC with a Stable Outlook:

--IDR at 'BBB-';--Senior unsecured debt at 'BBB-'.