Fitch Assigns 'BBB+' to Centex's $300MM Debt Issue

Business Wire, Oct 29, 2004

NEW YORK -- Fitch Ratings has assigned a 'BBB ' senior rating to Centex Corporation's (NYSE-CTX) $300 million, 4.55% notes due Nov. 1, 2010. The 'BBB' senior subordinated and 'F2' commercial paper ratings are affirmed by Fitch. The Rating Outlook is Stable. Proceeds from the transaction are expected to be applied toward short-term (commercial paper) debt reduction consistent with Centex's financial strategy of opportunistically extending its maturities and enhancing financial flexibility and toward working capital and pre-funding asset growth. Fitch expects leverage (excluding financial services) to remain within its stated net debt to capital target of approximately 35-45%.

The ratings for Centex are supported by the company's historically conservative financial policy, the strength and geographic diversity of its core homebuilding operations, and EBITDA generated by other business segments. Concerns relate to the cyclical nature of the company's business segments, particularly homebuilding, and the relatively rapid growth of its finance subsidiary's non-prime business, which is considered to have a higher risk profile than the company's core operations.

Centex has demonstrated financial discipline over the past several years, as leverage has remained within management's targeted range of approximately 35-45% and inventory to net debt has remained within a range of 1.6-2.5 times (x) since fiscal-year (FY) 2000, providing a healthy cushion with which to absorb a cyclical downturn.

As the company has grown, along with the upswing of the economic cycle, the conventional Homebuilding segment (which accounted for almost 81% of operating income from continuing operations so far in FY 2005) has expanded its geographic reach by improving its market penetration to 92 markets in fiscal 2005 from 44 markets in fiscal 1995, with the number of states growing moderately to 26 plus Washington DC. Centex, like many other large, national builders, operates under a presale strategy that positions management to react to weaknesses in its markets and minimize inventory accumulation in a downturn. The company controls roughly a 5.3-year supply of land based on targeted home deliveries for FY 2006, with significant volume controlled through options (approximately 62% of the total lots). Inventory turnover has typically ranged between 2.0 and 3.0x.

Centex's corporate credit profile is strengthened by moderate diversification provided by the company's commercial construction segment, conventional mortgage operations and subprime lending activities. Centex had been somewhat more diversified, but spun-off its manufactured housing operations (Cavco Industries) to Centex shareholders in April 2003 and distributed its entire equity interest in Centex Construction Products (CXP) to Centex shareholders in a tax free transaction on January 30, 2004. Centex owned approximately 65% of the outstanding CXP shares. In connection with the distribution, CXP changed its name to Eagle Materials Inc. (EXP). Also, within Home Services the company had established a portfolio of businesses (lawn care, alarm monitoring and pest control), but has now pared Home Services to pest control having sold the lawn care business, while the alarm operations are in the process of liquidation. Investment Real Estate is also being steadily wound down. On March 1, 2004, Centex completed the acquisition of 3333 Holding Corporation (Holding) and Centex Development Company, L.P. (CDCLP) through mergers with Centex subsidiaries. This transaction terminated the tandem trading relationship of Centex's common stock with Holdings and CDCLP's securities. Centex's credit profile is enhanced with the spin off of manufactured housing and CXP, which have greater earnings cyclicality and volatility than do Centex's core businesses.