NEW YORK - Moody's Investors Service on Thursday lowered its ratings on Pulte Homes, Inc and Centex Corp further into junk territory, citing cash generation challenges the merged companies face through the end of 2010.
Moody's downgraded both companies by one notch to B1, placing them four notches below investment grade. The outlook is stable, meaning that Moody's is unlikely to downgrade the company within the next 18 months.
The merged company, which will be called PulteGroup Inc, will need to generate more cash flow from profitable businesses through the end of 2010, said Moody's analyst Joseph A. Snider.
But that may be difficult due to the company's large land position, lower-than-industry average gross margins, and somewhat low pro forma revenue per employee compared to its peer group.
This month shareholders of Pulte Homes Inc (PHM.N) and Centex Corp (CTX.N) approved the merger, paving the way for the creation of the No. 1 U.S. home builder to overtake D.R. Horton Inc (DHI.N). For more, click on [ID:nN18431444].
But while cash flow generation is likely to be difficult in the near term, PulteGroup will have little in the way of debt maturities until 2013, after its tender offer, and no use of a revolving credit line for at least a year, Snider said.
He said that the company also has minimal off-balance sheet obligations considering its size.
This week, Fitch Ratings upgraded Centex, saying that the combined company has a strong liquidity position, a more diversified product line, an expanded presence in top markets, and the potential for significant cost savings from operating efficiencies.
The outlook for PulteGroup is stable because the risks of such a large land position is offset by the potential benefits from operating synergies and geographic and product line diversification, said Snider. (Reporting by Tom Ryan; Additional reporting by Nick Zieminski and Ilaina Jonas; Editing by James Dalgleish)