Builders Recap Leads To Downgrade; D.R. Horton Grows

Builders FirstSource plans to considerably increase debt in connection with a dividend recap for equity sponsor JLL Partners. UBS and Bear Stearns are in syndication with a $405 million facility, consisting of a $90 million revolver, $150 million first-lien term loan and $165 million second-lien term loan, backing the move for the building products distributor (LMW, 2/16). This has led Standard & Poor's to lower the company's senior secured bank loan rating from BB- to B.

The additional leverage increases vulnerability to economic cycles and is a more aggressive financial policy than previously expected, S&P notes. The recap leaves the company with very aggressive debt leverage and limited additional debt capacity at the current rating level, S&P says.

The ratings reflect the industry's cyclicality, narrow product and geographic diversity and the very aggressive financial profile, S&P adds. These negatives overshadow a good market position, favorable end market conditions and improved operating efficiencies, S&P adds. S&P does not expect major acquisitions until leverage is substantially lower. Charles Horn, Builders' senior v.p. and cfo, did not return calls.

* D.R. Horton's commitment to an organic growth strategy and lower leverage levels over the past year have led S&P to upgrade the company's senior debt rating from BB to BB. D.R. Horton's internal growth strategy is a meaningful departure from its historically aggressive expansion strategy, which had increased leverage levels and tempered inventory turns and coverage measures, S&P notes. The firm has demonstrated consistent profitability over the past five years. Recent deleveraging has also contributed to improved EBITDA interest coverage measures, to more than five times for the last quarter.

The liquidity position is solid. D.R. Horton's $805 million unsecured revolver provides ample capacity to pursue more moderate, internally driven growth goals, S&P says. The facility had $92 million standby letters of credit outstanding at Dec. 31, but was otherwise unused, and usage is expected to remain moderate. The outlook is stable. A D.R. Horton spokeswoman said the company is pleased with the upgrade.