Moody’s changes PulteGroup outlook due to construction slowdown

Moody’s Investors Service revised the ratings outlook for PulteGroup Inc. (PHM) from positive to stable this week over concerns the homebuilder’s operating performance and the industry’s return to a more stable environment will take more than a year. The ratings agency affirmed all other existing ratings, including Pulte’s B1 corporate family rating, B1 probability of default rating, B1 rating on senior unsecured notes and its speculative grade liquidity rating of SGL-2. Moody’s suggested a ratings upgrade doesn’t look possible for Pulte in the near future considering all of the factors currently weighing down the home building industry. Moody’s said, “The B1 corporate family rating balances Pulte’s large cash position and track record of positive cash flow generation against Moody’s expectations that 2011 may be the first year in five years that the company will be cash flow negative at the same time as it continues to be unprofitable on a bottom line basis.” Moody’s also noted that the company’s gross margins, which are improving, still fall behind the builder’s peer group. In addition, debt leverage at the firm is expected to remain elevated in the near future, the ratings agency suggested. The good news is Pulte’s liquidity position provides them with enough flexibility to continue investing in the business and to focus on improving the company’s margins, Moody’s said. The company’s merger with Centex more than two years ago also created a platform that will provide the firm with enough diversification to reap rewards when the home building industry returns, Moody’s said. Moody’s said the homebuilding debt of PulteGroup and the remaining debt of Centex is guaranteed by the principal operating subsidiaries of both divisions. The ratings could turn profitable if the company’s debt leverage and gross margins improve and the company maintains its liquidity, Moody’s said. However, the rating could also be lowered if PulteGroup loses its liquidity position, experiences a material erosion to its operating performance or allows its debt leverage to remain above 60% for a long period of time, the ratings agency asserted. Write to Kerri Panchuk. ()