Moody's ups Lennar into investment grade territory

Moody's Investors Service raised most of Lennar Corp.'s term loan and senior notes into investment-grade territory, including the 0% convertible senior debentures due 2018 to Baa3 from Ba1.

However, the 0% convertible senior subordinated notes due 2021 were raised to Ba2 from Ba3, leaving the issue below investment-grade. All of Lennar's public notes are guaranteed by operating subsidiaries with the exception of converts due 2021, Moody's noted, which accounts for the two-notch ratings difference.

Also, the outlook was changed to stable from positive.

The upgrades reflect improving financial results and strong liquidity, among other things.

At the same time, the ratings consider financial and integration risks of an active acquisition policy, ongoing share repurchase program, substantial off-balance sheet debt and larger-than-industry-average lot position.

Going forward, the ratings outlook will depend largely on Lennar's capital structure discipline, Moody's said.

Despite an energetic acquisition strategy, Lennar lowered its debt leverage to 42% and 1.5x as of Nov. 30. Similarly, even in the face of the large jump in debt and in total capitalization in 2000, Lennar's returns and interest coverage advanced strongly over the period and ranked at the high end of its peer group.

At the same time, Lennar's ratings also acknowledge the company's higher-than-average business risk profile given its acquisition-based growth strategy.

Lennar has very strong liquidity and generated five successive years of positive free cash flow.

Despite spending some $600 million on acquisitions in fiscal 2002, the company finished the fiscal year with $731million in cash. No significant debt repayments come due before 2007, and it is very comfortably in compliance with debt covenants, Moody's added.

S&P cuts Crown Castle

Standard & Poor's lowered its ratings for Crown Castle International Corp., including the convertible preferreds to CCC- from CCC+, due to concerns that weak tower industry fundamentals will make it unlikely for Crown Castle to reduce its heavy debt burden in the foreseeable future and contribute to increased liquidity risk starting in 2004.

The outlook is negative. At the end of September, Crown Castle has consolidated debt of about $3.4 billion.

Based on assumptions of weak performance and noting substantially higher interest and dividend payments starting in 2003 due to two debt issues and an exchangeable preferred becoming cash pay, S&P projects the company will not be in a position to generate sustainable free cash flows and start to reduce debt for several years.

Liquidity may also become an increasing concern starting in 2004, although the company has adequate financial flexibility in the near term. However, currently adequate liquidity does not provide significant safety margin against any further deterioration in industry fundamentals, a prolonged industry slump or major execution missteps.

In the event of a prolonged industry slump or serious execution missteps, currently adequate liquidity could rapidly become insufficient and lead to increased potential for financial restructuring.

Should industry fundamentals and cash flow metrics not show signs of improvement as 2003 progresses, the ratings could be lowered, S&P said.

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