Fitch Assigns 'BBB' Rating to Toll Brothers' $300MM Debt Issue

Business Wire, May 26, 2005

NEW YORK -- Fitch Ratings has assigned a 'BBB' rating to Toll Brothers, Inc.'s (NYSE:TOL) $300 million, 5.15% senior notes due May 2015, that the company intends to sell in a private placement. The Rating Outlook is Stable.

The notes will be issued by Toll Brothers Finance Corp., a wholly-owned subsidiary, and will be guaranteed on a senior basis by Toll Brothers, Inc. and all of its subsidiaries that guarantee its current bank credit facilities, its senior notes due 2012, its senior notes due 2013 and its senior notes due 2014. The issue will be ranked on a pari passu basis with all other senior unsecured debt, including the company's $1.18 billion unsecured bank credit facility. Proceeds from the new debt issue will be used to retire all of the company's existing $100 million 8% senior subordinated notes due 2009. The balance will be used to retire a portion of Toll's $222.5 million bank term loan due July 2005. Fitch expects leverage to remain within Toll's stated debt to capital target of 45-55%.

The ratings reflect Toll Brothers' well-entrenched market position as the pre-eminent builder of luxury homes, its seasoned operating model that has produced among the best margins within the industry, relatively stable debt-protection measures and its consistently profitable track record through past homebuilding cycles. Risk factors include the cyclical nature of the homebuilding industry; the possible volatility in value of Toll Brothers' extensive land holdings (some of which will be developed over an extended period of time); the shift to somewhat larger land purchases/developments than in the past; and the company's primary focus on the luxury housing segment of the market, which is not as broad as the first-time and first-step trade-up segments.

Toll Brothers has achieved rapid growth during the favorable housing environment of the past decade without compromising balance sheet quality. Over this period Toll Brothers has considerably extended its product line within the high end segment, with a growing emphasis on 'empty-nester' homes, active adult communities and golf club communities. Toll Brothers also has been generating revenues from ancillary homeowner services, broadband communications and a partial ownership interest in Toll Brothers Realty Trust Group, a commercial real estate entity. Its presale strategy, long build-out times (approximately nine months on average) and low cancellation rates provide cash flow visibility and enable management to adapt to changing market conditions.

Toll Brothers has expanded EBITDA margins on steady price increases and volume improvements. EBITDA margins have increased from 14.1% in fiscal year 1999 to 21.7% currently. Although Toll has benefited from strong economic conditions, a degree of margin enhancement is also attributable to purchasing, access to capital and other scale economies that have been captured by the large public homebuilders in relation to smaller builders. These economies, greater geographic diversification (than in the past), consistency of performance over an extended period of time and a return-on-capital focus provide the framework to soften the margin impact of declining market conditions when they occur.

Leverage has remained uniformly within a range of 45-55%. This is appropriate for the rating category, taking into account Toll's cash flow generation and operating risk profile. Year-end debt to EBITDA has ranged between 2.6 times (x) and 3.6x and was 1.6x as of April 30, 2005. Its inventory to net debt ratio, currently 4.0x, has consistently remained in excess of 2.0x, providing a healthy buffer should a housing downturn occur.